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FUNDAMENTAL PRINCIPLES OF TAXATION

Taxation
1. As a power – refers to the inherent power of the state to demand enforced contribution for public purpose to
support the government.
2. As a process – the legislative act of laying a tax to raise income for the government to defray its necessary
expenses
3. As a mode of cost allocation – taxation is a means of allocating government burden to the people

Purpose of Taxation
1. Primary – to raise revenue
2. Secondary
a. Regulatory
b. Compensatory

The Life Blood Doctrine

Taxes are indispensable to the existence of the state. Without taxation the state cannot raise revenue to support
is operations

Nature or Characteristics of the Power of Taxation

1. for public purpose 5. exaction payable in money
2. inherently legislative in nature 6. territorial
3. subject to international comity or treaty
4. not absolute being subject to constitutional and inherent limitations

How exercised:
- Legislation of laws by Congress and tax ordinances by the Local Sangguanian
- Tax collection by the administrative branch of the government

Scope of the Power of Taxation

Taxation is supreme, comprehensive, unlimited and plenary. It includes the power to destroy

Discretion of the Taxing Power- this extends to:

1. amount or rate of the tax 5. situs of taxation
2. kinds of tax to be collected 6. method of collection
3. apportionment of the tax 7. purposes for its levy, provided for public purpose
4. the person, property and excises to be taxed, provided within it jurisdiction

Underlying principles behind the power of taxation

1. Principles of Necessity – the existence of the government is a necessity and it cannot continue without
means to support itself – this is the Theory of Taxation
2. Benefit Received Theory – the government and the people have the reciprocal and mutual duties of support
and protection – this is the Basis of Taxation

Objects of Taxation
1. businesses 5. acts
2. interests 6. persons
3. transactions 7. properties
4. rights 8. privileges

Phases of Stages of Taxation

a. Levy or Imposition Impact of taxation Aspects of
b. Assessment of tax
c. Collection of the tax Incidence of Taxation Taxation
- these all comprise the taxation system

Principles of a sound tax system

a. Fiscal Adequacy – sources of revenue should be sufficient to meet the demand for public expenditure
b. Administrative Feasibility- tax laws must be capable of convenient, just and effective administration
Examples:
1. Establishment of Revenue District Offices
2. Introduction of electronic Filing (Electronic Filing and Payment System (EFPS) or e-BIR Forms
Package)
3. Accreditation of Authorized Agent Banks
4. Substituted Filing of Qualified Compensation Income Earners
5. Payment of tax thru credit/debit/prepaid cards/G-Cash
6. Electronic Tax Payment System (eTPS)/Land Bank Remittance System (LBRS)
c. Theoretical Justice- tax must be imposed with equity and certainty and must consider the taxpayers ability to
pay and benefits received
- Non-observance of the principles does not necessarily render a tax levy unconstitutional.

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The Inherent Powers of the Government

1. Power of Taxation – the power to take property for the support of the government and for public purpose
2. Police Power – the power to enact laws to promote the general welfare of the people. It is wider in
application because it is the general power to make laws.
3. Power of Eminent Domain – the power to take private property for public use upon payment of just
compensation
Elements:
a. Permanent taking of private property (not temporary)
b. Payment of Just Compensations (Market value / zonal / assessed)
c. Public use

Point of Differences of the Inherent Powers of the State

Point of Difference Taxation Police Power Eminent Domain
Exercising Authority Government Government Government or private
entities (quasi-public
corporations)
Necessity of Delegation Delegation is not There must be There must be due
necessary since it is delegation before local delegation before local
inherent governments could government or private party
exercised it may exercise it
Purpose Revenue and support of Protection of well-being Property is taken for public
the government of the people use
Persons affected Community or class of Community or class of Operates on the owner of the
individuals individuals property

Effect of transfer of Money paid as taxes There is no transfer of There is transfer of right to
property rights becomes part of the title, at most there is property whether it be of
public fund restraint on the injurious ownership or lesser right
use of property
Amount of Imposition Unlimited Sufficient to cover the No imposition, the owner is
costs of regulation paid the fair market value of
his property
Importance Most important of the Most superior
three
Relationship with the Inferior to the “Non- Superior to the “Non- Superior and may override
Constitution Impairment Clause” of Impairment Clause” of the “Non-Impairment Clause”
the Constitution the Constitution because the welfare of the
state is superior to private
contracts
Limitation Constitutionally and Public interest and the Public purpose and just
inherently restricted requirement of due compensation
process

Similarities of the Three Powers

1. All three powers are necessary attributes of sovereignty, resting upon necessity
2. all are inherent powers of the State
3. All are legislative in nature
4. They are ways in which the State interferes with private rights and property
5. They exist independently with the Constitution although the condition for their exercise may be prescribed or
limited by the Constitution
6. They all presuppose an equivalent compensation received by the persons affected by the exercise of the
power, whether directly, indirectly or remote.
7. The exercise of these powers by the local government units may be limited by national legislature
*Police power can be used to raise revenue for the government (ex: license fee)

LIMITATIONS OF TAXATION POWER

A. Constitutional Limitation
1. observance of due process of law – notice and hearing
2. equal protection of the law –equality among equals
3. uniformity in taxation – taxation of same class
4. progressive scheme of taxation – use of graduated tax table
5. non-imprisonment for non-payment debt or poll tax
6. non-impairment of obligation and contract
7. free exercise of religion – free worship rule
8. non-appropriation of public funds or property for the benefit of any church, sect or system of religion
9. exemption of religious, charitable or educational entities, non-profit cemeteries, churches and mosque
from property taxes
10. exemption from taxes of the revenues and assets of non-profit, non-stock educational institutions
including grants, endowments, donations or contributions for educational purposes
11. concurrence of a majority of all members of Congress for the passage of a law granting tax exemption
(voting separately)
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12. non-diversification of tax collections

13. non-delegation of the power of taxation
Exceptions:
a. power to tax was delegated to the President under the Flexibility Clause of the Tariff and Customs
Code (amended by R.A. 10863 or the Customs Modernization and Tariff Act)
b. power to tax was delegated to the local government units thru respective Sanggunian under the Local
Government Code (R.A.7160)
c. matters involving the expedient and effective administration and implementations of assessment and
collection of taxes or certain aspects of taxing process that are not legislative in character
14. non-impairment of the jurisdiction of the Supreme Court to review tax cases – final arbiter
15. appropriations, revenue or tariff bills shall originate exclusively in the House of Representatives but the
Senate may propose or concur with amendments
16. each local government unit shall exercise the power to create its own sources of revenue and shall have
a just share in the national taxes

B. Inherent Limitation
1. territoriality of taxation
2. subject to international comity or treaty
3. tax exemption of the government
4. tax is for public purpose
5. non-delegation of the power of taxation
*The last 2 limitations are also Constitutional limitations

SITUS OF TAXATION
The place of taxation

Factors that determine the situs of taxation

1. nature, kind or classification of the tax 5. sources of income
2. subject matter of the tax 6. place of exercise, business or occupation being taxed
3. citizenship of the taxpayer 7. place where income-producing activity was held or done
4. residence of the taxpayer

Applications
1. persons – residence of the taxpayer
2. community development tax – residence or domicile of the taxpayer
3. business taxes – where the business was conducted or place where the transaction took place
4. privilege or occupation tax – where the privilege is exercised
5. real property tax – where the property is located
6. personal property taxes –
a. tangible – where they are physically located
b. intangible – domicile of the owner unless the property has acquired a situs elsewhere
7. Income – place where the income is earned or residence or citizenship of the taxpayer
8. Transfer Taxes – residence or citizenship of the taxpayer or location of the property
9. Franchise Taxes – State that grants the franchise
10. Corporate Taxes – depend on the law of incorporation

DOUBLE TAXATION
Taxing the object or subject within the territorial jurisdiction twice, for the same period, involving the same kind of
tax by the same taxing authority

Kinds:
1. Direct Double Taxation/Direct Duplicate/Taxation in Strict Sense –
Elements:
a. Same object/subject (taxpayer)
b. Same type of tax
c. Same purpose
d. Same taxing authority
e. Same period
Note: If one of the elements is missing, then there is Indirect Double Taxation
2. Indirect Double Taxation/Indirect Duplicate/Taxation in Broad Sense –

International Double Taxation –a double taxation caused by two different taxing authorities, one domestic and
one foreign

Remedies to Double Taxation

1. provision for tax exemption
2. allowance for tax credit
3. allowance for principle of reciprocity
4. enter into treaties with and agreement with foreign government

Forms of Escape from Taxation (ESCAPES = ESCATE)

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A. Those that will not result in loss of revenue to the government

1. Shifting –the process of transferring the tax burden from the statutory taxpayer to another without
violating the law.
2. Capitalization – the seller is willing to lower the price of the commodity provided the taxes will be
shouldered by the buyers / increase in capitalization
3. Transformation – the manufacturer absorbs the additional taxes imposed by the government without
passing it to the buyers for fear of lost of his market. Instead, it increases quantity of production, thereby
turning their units of production at a lower cost resulting to the transformation of the tax into a gain
through the medium of productions.

B. Those that will result to loss of revenue to the government

1. Tax Evasion – tax dodging – resorting to acts and devices that illegally reduces or totally escape the
payment of taxes that are due to the taxpayer. They are prohibited and are therefore are not subject to
penalties.
2. Tax Avoidance –tax minimization scheme – the reduction or totally escaping payment of taxes through
legally permissible means, that are not prohibited and therefore are not subject to penalties.
3. Tax Exemption- an immunity, privilege or freedom from payment of a charge or burden to which others
are obliged to pay.

Distinction between tax evasion and tax avoidance

Tax Evasion Tax Avoidance
It is a scheme used outside of those lawful means It is a tax saving device within the means sanctioned by
and when availed of, it usually subjects the taxpayer law
to penalties
It is accomplished by breaking the law (criminal in Accomplished by legal procedures and do not violate
nature) the law
It connotes fraud, deceit and malice No fraud is involved. Loophole in law is taken advantage

Tax Exemptions:

is not automatic

is non-transferable

is revocable by the government (except when granted under a valid contract or by the Constitution)

rule shall be uniform

does not contravene the LifeBlood Doctrine

is always disfavored

is allowed only under a clear and unequivocal provision of the law

on real property tax will be based on the Doctrine of Usage and not Doctrine of Ownership, except for real
properties owned by the government which is absolutely exempt form taxation

on real property tax cannot be granted by local governments but can condone real property tax liabilities in
special cases

on local taxes can be granted by local governments but they cannot condone existing liabilities on local taxes

Strictly construed against the taxpayer and liberally in favor of taxing authority

Incumbent upon the taxpayer to prove exemption

Fundamental Doctrine in Taxation

1. G.R. No court may enjoin the collection of taxes. Exception: Court of Tax Appeals
2. Claim for exemptions shall be interpreted strictly against the taxpayer
3. A law that permit deduction from the tax base is strictly construed against the taxpayer
4. Deductions partake the nature of an exemption
5. Tax assessment are presumed to be correct and done in good faith (presumption of regularity, i.e.
disputable presumption only which can be overcome by evidence)
6. Tax laws are generally prospective in application. Exception: If the law so provides (e.g. Tax Amnesty Law)
7. Tax are not subject to compensation or set-off (excess payments can be carried-over and credit on same tax
type, e.g. income tax to income tax and not income tax to VAT. If the excess payment is converted to Tax
Credit Certificate, the taxpayer can use the TCC to pay internal revenue taxes except withholding taxes
(expanded withholding tax (EWT)/Withholding Tax on Compensation (WTC)/Final Withholding Taxes (FWT or
FT)
8. Refund of taxes do not earn interest because interest do not run against the government

Distinction between Tax Amnesty and Tax Condonation

Tax Amnesty – a general pardon or intentional overlooking by the state of its authority to impose penalties on
persons otherwise guilty of tax evasion or violation of tax laws. The purpose is to give the erring taxpayer a
chance to reform and become part of the society with a clean slate.

Tax Condonation – means to remit or to desist or refrain form exacting or imposing a tax. It cannot extend to
refund of taxes already paid when obtaining condonation.

Tax Exemption Tax Amnesty

There is no tax liability at all Connotes condonation from payment of existing tax liability
The grantee need not pay anything The grantee pays a portion

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Can be availed of by any qualified taxpayer Not always available

Tax
- An enforced proportionate contribution imposed upon persons, properties, businesses, rights, interests,
privileges, transactions and acts within the territorial jurisdiction of the taxing authority exercise by the
legislature for a public purpose and generally payable in money.
- It is a compulsory contribution to state revenue, levied by the government on workers' income and business
profits or added to the cost of some goods, services, and transactions.
- The enforced proportional contributions from persons and property levied by the lawmaking body of the State
by virtue of its sovereignty for the support of the government and all public needs:
- It is a sum of money demanded by a government for its support or for specific facilities or services, levied
upon incomes, property, sales, etc.
- An involuntary fee levied on corporations or individuals that is enforced by a level of government in order to
finance government activities.
- A contribution for the support of a government required of persons, groups, or businesses within the domain
of that government.

Taxation
- It is the process or means by which the sovereign, through its lawmaking body, raises income to defray the
necessary expenses:
- A means by which governments finance their expenditure by imposing charges on citizens and corporate
entities.
- It is the process or means by which the sovereign through its law-making body, imposes burdens upon
subjects or objects within its jurisdiction for the purpose of raising revenues to carry out the legitimate objects
of the government.
- It refers to the act of a taxing authority actually levying tax.
- It is the practice of collecting taxes (money) from citizens based on their earnings and property.

Elements of a Valid Tax:

1. must not violate the constitutional, inherent and or contractual limitation of the power of taxation
2. must be uniform and equitable, not unjust, excessive, oppressive, confiscatory or discriminatory
3. must be for a public purpose
4. must be levied by the taxing power (legislature) having jurisdiction over the object of taxation
5. must be proportionate in character
6. generally payable in money, at regular interval (not regular in payment)

Classification of Taxes
A. As to purpose (P-FRS)
1. Fiscal – general, fiscal or revenue- tax imposed for the general purpose of the government or to raise
revenue for government needs ex: income tax
2. Regulatory – for purposes of regulation (exercise of police power), e.g. PRC and driver’s license
3. Special or sumptuary – tax imposed for a special purpose or to achieve some social or economic ends
ex: Road User’s Tax / Special Education Fund

B. As to subject matter (SM-PPE)

1. Personal, poll or capitation – tax of a fixed amount imposed on individuals residing within a specified
territory without regard to their property or the occupation in which they be engaged in. ex: community tax
certificate/cedula
2. Property tax – tax imposed on property, whether real or personal, in proportion, either to its value or in
accordance with some other reasonable method of apportionment. Ex: real estate tax / factory
machinery
3. Excise tax – tax on commodities/excisable articles e.g. sin products
(alcohol/cigarettes/automobiles/minerals/jewelries)
4. Privilege tax – tax imposed upon the performance of an act, the enjoyment of a privilege or the engaging
in an occupation. Ex: Professional tax (issued PTR)

C. As to incidence (I-DI)
1. Direct – the tax is demanded from one person in who is intended to pay it. Example: income tax
(taxpayer himself to pay), estate tax (estate to pay), donor’s tax (donor to pay)
2. Indirect – the tax is demanded from one person in the expectation and intention that he shall indemnify
himself at the expense of another by shifting the tax to another taxpayer. Example: Value-Added Tax,
customs duties and some percentage taxes

D. As to amount (ASA)
1. Specific tax – a tax of a fixed amount imposed by the head or number. Example: excise tax on distilled
spirits, cigars and wines (PX/piece)
2. Ad valorem – tax is imposed for a fixed proportion of the amount or value of the property to which the tax
is assessed. Examples: excise taxes on cigarettes and gasoline/petroleum, real property taxes and
certain customs duties (X% of selling price)

E. As to rate (MR-PP)

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1. Proportional or flat rate – the tax is based on a fixed percentage of the amount of the property, income
or other basis to be taxed.
Example:
a. VAT (12%) and percentage taxes.
b. Regular corporate income tax (30%)
c. Under TRAN: Donor’s tax and Estate tax (6%)
d. Capital gains tax on sale of real property classified as capital asset or creditable withholding tax
on sale of ordinary asset (6%)
e. Capital gains tax on sale of shares of stocks not listed in Stock Exchange (15%)
2. Progressive or graduated tax – the tax rate increases as the tax base increases. Progressive rate is
preferred in achieving vertical equity.
Example:
a. Income tax for individual taxpayers (retained under TRAIN)
3. Regressive tax – the tax the rate of which decreases as the tax base increases. The Philippines has no
regressive tax, but some indirect taxes manifest a regressive effect.
4. Mixed tax- mixture of proportional, progressive or regressive.
Example: Income tax for individuals (progressive/graduated) and for corporation (proportional/flat)

F. As to imposing authority
1. National tax – imposed by the National Government. National internal revenue taxes (DIVE-PESO)
Examples:
a. income taxes c. value-added tax e. other percentage taxes g. other taxes
b. estate and donors tax d. excise tax f. documentary stamp tax
2. Local tax – tax imposed municipal or local governments.
Examples:
a. real property tax d. community tax; and
b. professional tax e. tax on banks and other financial institutions
c. business taxes, fees and charges

DISTINCTION OF TAX WITH SIMILAR ITEMS

TAX VS. REVENUE

Tax Revenue
Refers to the amount imposed Refers to the amount collected
Only one of the sources of government The product of taxation. It refers to tall the funds
revenues derived by the government whether from tax or
from other sources

TAX VS. LICENSE*

Point of distinction Tax License
Purpose For revenue For regulation
Amount No limit Limited
Subject of Imposition Person, properties, business Required for the
rights, interests, privilege, acts commencement of a business
and transactions profession
Effect of non-compliance Does not necessarily make the Makes the business illegal
act, business or profession illegal
Revocability Has a nature of permanence Always revocable
Scope The power to tax includes the Power to license does not
power to license include the power to tax
When imposed Post-activity Pre-activity
Basis of imposition Current data Preceding year or quarter date.
If new business, based on
capitalization
Sources of Power Taxing power of the government Police power of the
government

TAX VS. TOLL*

Tax Toll
Demand of sovereignty Demand of ownership
One’s support for the government Compensation for the use of somebody else’s
property (road or bridge and the like)
Imposed only by the government May be imposed by the government or by private
individuals
Based on government needs Determined by the cost of the property or
improvements thereon

TAX VS. DEBT*

Tax Debt
Basis Law Contract

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Effect of non-compliance May involved imprisonment, except No imprisonment

for poll tax
Assignable? No Yes
Mode of settlement Generally money Cash or In kind
Set-off? Generally not subject to set-off Subject to set-off
Interest Does not earn interest except when Draws interest when stipulated or
delinquent when in default

TAX VS. SPECIAL ASSESSMENT*

Tax Special Assessment
Subject of the imposition business, interests, transactions, Land
rights, persons, properties or
privileges
Effect on the person May be made a personal liability of Cannot be made the personal
owning the subject the person assessed liability of the person assessed,
because it is the land that answers
for the liability
Basis of Imposition Necessity with no hope of direct or Entirely on benefits received
immediate benefit to the taxpayer
Coverage of application General application Exceptional in application

TAX VS. TARIFF

Tariff refers to a book of rates containing names of merchandises with corresponding duties to be paid for the
same. Tariff refers to the duties payable on goods imported or exported. It is a system or principle of imposing
duties on the importation or exportation of goods. *Customs duties and tariffs are used interchangeably

TAX VS. PENALTY

Tax Penalty
to regulate conduct through
Purpose to raise revenue punishment and suppression
of injurious act
Exercising authority the government the government or by private
individuals
Source Law Law or contract
Mode of settlement in money in money or in kind

Note:
• Payment of tax is compulsory to those who are covered by imposition
• Taxes are important because they are the lifeblood of the government.
• Taxes are personal. The burden of taxation cannot be transferred from one person to the other by private
agreement as this is determined by law
• While the power of taxation includes the power to destroy, it is not absolute. It is subject to limitation or
restrictions.

TAX LAW
Any law that provides for the assessment and collection of taxes for the support of the government and other
public purposes

Sources of Tax Laws:

1. Constitution 5. Revenue Regulations issued by the DoF
2. Statutes and Presidential Decrees 6. Judicial Decisions
3. Executive Orders and Batas Pambansa 7. Local Ordinances
4. Tax Treaties and conventions with foreign countries

Revenue Regulations
Issuances signed by the Secretary of Finance, upon recommendation of the Commissioner of Internal Revenue
that specify, prescribe or define rules and regulations for the effective enforcement of the provisions of the
National Internal Revenue Code (NIRC) and related statutes.

They have the force and effect of law. Generally, prospective in application. Also called Implementing Rules and
Regulations.

Revenue Memorandum Order

Issuances that provide directives or instructions; prescribe guidelines; and outline processes, operations,
activities, workflows, methods and procedures necessary in the implementation of stated policies, goals,
objectives, plans and programs of the Bureau in all areas of operations, except auditing.

Generally pertain to internal rules of the BIR. Issued by the CIR. Prospective in application.

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Revenue Memorandum Circular

Issuances that publish pertinent and applicable portions, as well as amplifications
(clarifications/explanations/interpretations), of laws, rules, regulations and precedents issued by the BIR and other
agencies/offices.

Issued by the CIR. Generally, retroactive in application.

Revenue Administrative Orders (RAOs)

Issuances that cover subject matters dealing strictly with the permanent administrative set-up of the Bureau,
more specifically, the organizational structure, statements of functions and/or responsibilities of BIR offices,
definitions and delegations of authority, staffing and personnel requirements and standards of performance.
Revenue Delegation of Authority Orders (RDAOs)
Refer to functions delegated by the Commissioner to revenue officials in accordance with law.

BIR Rulings – these are the less general interpretations of the tax laws at the administrative levels, being issued
upon the request of the taxpayer. They are merely advisory or sort of an information service to the taxpayer such
that, none of them are binding except to the addressee and may be reversed by the BIR at anytime. Personal to
the taxpayer.

NATURE OF PHILIPPINES TAX LAWS

Philippine Tax Laws are civil and nature and character. They remain effective even in times of war. They are not
penal in nature although penalties are provided for their violation because they do not define crimes and provide
for their punishment. (Civil, Not Penal, Not criminal)

FUNDAMENTAL DOCTRINES IN TAXATION

A. Marshall Dictum – “The power to tax includes the power to destroy” – US Justice John Marshall
- Constitutional if taxation power is used validly as an implement of police power in discouraging certain
acts and enterprises inimical to public welfare.
- Unconstitutional if in raising revenue, taxation is allowed to confiscate or destroy properties
B. Holmes Doctrine – “Taxation power is the power to build”, “The power to tax is not the power to
destroy while this court sits”– US Justice Oliver Wendell Holmes
The power to tax should not be the power to destroy. The power to destroy is merely a consequence of
taxation.
C. Doctrine of Judicial Non-interference
General Rule: The courts cannot inquire into the wisdom of a taxing act or the advisability or expediency of at
ax. The impracticability and absurd consequences of a tax law should be addressed to the legislature and
administrative authorities and not the courts. Exception: Court of Tax Appeals where the collection of tax will
cause undue hardship to the government or taxpayer.
D. Prospectivity of Tax Laws – tax laws are prospective in character and application
Exceptions:
1. The law so provides
2. the retroactive application is necessarily implied from the provisions of the law
3. it involves income tax
4. the retroactive application is clearly the intent of the Congress
E. Imprescriptibility in Taxation – Taxes are imprescriptible unless the law itself provides for such prescription.
F. Principle of “Strictissimi Juris” – “Taxation is the rule and exemption is the exception”
Tax exemption must be strictly construed against the taxpayer and liberally in favor of the government.
G. Doctrine of Equitable Recoupment
- Where the refund of taxes are barred by prescription which can no longer be claimed by a taxpayer but
there is a present tax being assessed against the said taxpayer, such present tax may be recouped or
set-off against the tax, the refund of which has been barred.
- Basis: The government cannot enrich itself at the expense of the taxpayer.
*This doctrine is not applicable in the Philippines as it conflicts with prescription laws.
H. Non-compensation or Set-off Rule
The government and the taxpayer are not creditor and debtor to each other. Taxes are not in the nature of
contracts between the parties but grew out of a duty arising from law; hence, they cannot be set-off.
Exception: Excess payment of same tax type can be credited to succeeding period or when excess is
converted to tax credit certificate, the TCC can be used to pay other internal revenue taxes except CWT/FWT
I. Doctrine of Estoppel
The State cannot be estopped by the neglect, errors, or mistakes of its agents or officers. Thus, the erroneous
application and enforcement of law by public officials do not block the subsequent correct application of the
statutes. The doctrine of estoppel operates only against the taxpayer.

TAX ADMINISTRATION

The Bureau of Internal Revenue

The Bureau of Internal Revenue is tasked with tax administration function of the government. Together with the
Bureau of Customs, they are under the supervision and control of the Department of Finance.

Chief Officials of the Bureau

1. 1 chief officer: The Commissioner of Internal Revenue

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2. 4 assistant chief: LINE Deputy Commissioners

3. 2 staff deputy commissioners (creation of Executive Orders)
Note: Tax Code mentioned 1 CIR and 4 Deputy Commissioners. The CIR and Line Deputy Commissioners are
members of the National Evaluation Board (NEB) who is responsible in application for compromise settlement.

Powers of the Bureau

1. Assessment and collection of taxes
2. Enforcement of all forfeitures, penalties, and fines and judgments in all cases decided in its favor by the
courts
3. Giving effects to and administering the supervisory and police powers conferred to it by the NIRC and or other
laws
4. Assignment of internal revenue officers and other employees to other duties
5. Provisions and distribution to proper officials of forms, receipts, certificates, stamps; etc
6. Issuances of receipts and clearances
7. Submit annual report, pertinent information to Congress and reports to the Congressional Oversight
Committee in matters of taxation

Powers of the Commissioner of Internal Revenue*

1. To interpret the provisions of the NIRC (subject to review by the Secretary of Finance)
2. To decide tax cases (subject to the exclusive appellate jurisdiction of the Court of Tax Appeals)
3. To obtain information and to summon, examine and take testimony of persons to effect tax collection
a. Summon:
i. Sub poena duces tecum (SDT) – compels the taxpayer to produce the documents
ii. Sub poena ad testificandum – compel the taxpayer to produce documents and testify why
there is a failure to comply with the request to produce
b. Examination (when the BIR makes the audit, it issues notice of audit):
i. Electronic Letter of Authority (e-LOA) – formal document authorizing Revenue Officers
(Assessment) to examine taxpayer records.
ii. Tax Verfication Notice (TVN) – BIR authority to audit taxpayer records but is lower than
eLOA
iii. Letter Notice (LN) – third party information. Result of computerized matching of income and
expense. Not equivalent to eLOA or TVN but has the effect of barring taxpayer to amend
return. If issued, the LN if protested must be converted to eLOA
Note: If taxpayer is served with notice of audit, taxpayer is barred from amending returns
4. To make assessment and prescribe additional requirement for tax administration and enforcement. (Note:
The BIR can issue assessment GR: 3 years from date of filing or deadline whichever is later, Exception: 10
years if there is fraud reckoned from date of discovery). If already elapsed, the right of the BIR to collect has
prescribed)
5. To make or amend a return for and in behalf of a taxpayer; or to disregard one filed by the taxpayer
6. To change a tax period
7. To compromise a tax liabilities of taxpayers
a. Doubtful validity – 40% of basic tax (the rate may be lower but with prior approval by the CIR)
b. Financial incapacity – 10% of basic tax (with required documentary requirements)
8. To conduct inventory-stock taking or surveillance (BIR to issue Mission Order(MO)
a. Covert surveillance – secret/posing as taxpayer/not known initially by taxpayer
b. Overt surveillance – known to the taxpayer
Note: The BIR also issues MO during tax mapping operations or Tax Compliance Verification Drive (TCVD)
9. To prescribe presumptive gross sales or receipts (Benchmarking)
10. To prescribe real estate values (zonal valuation)
The CIR is authorized to divide the Philippines into zones or areas and determine the fair market value of the
real properties located in each zones or area.
TRAIN: In exercising this authority, the following shall be observed:
a. Mandatory consultation with both private and public competent appraisers before division of the
Philippines into zones.
b. Prior notice to affected taxpayers before the determination of fair market values of the real properties.
c. Publication or posting of adjustments in zonal value in a newspaper of general circulation in the province,
city or municipality concerned.
d. The basis of valuation and records of consultation shall be public records open to the inquiry of any
taxpayer.
e. Zonal valuations shall be automatically adjusted once every three years.

11. To accredit tax agents

Individuals or general professional partnerships who have been denied their accreditation may appeal to the
Secretary of Finance who shall act on the appeal within 60 days from the receipt of such appeal. Failure by
him to rule on the appeal within the prescribed period shall be deemed approval of the application for
accreditation.
12. To inquire into bank deposits under certain cases:
a. Estate tax purposes to determine gross estate
b. Application of compromise settlement based on financial incapacity
13. To prescribe additional procedures or documentary requirements
14. To delegate his powers to any subordinate officer with rank equivalent to a division chief of an office

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15. To refund or credit internal revenue taxes

16. To abate or cancel tax liabilities in certain cases
a. Unjustly or excessively assessed (arbitrary, capricious and whimsical)
b. Cost of collection is higher than the amount to be collected (cost-benefit principle)
17. To examine tax returns and determine tax due thereon (must have an eLOA)
18. To cause revenue officers and employees to make a canvass from time to time of any revenue district or
region concerning taxpayers.

Powers of the CIR that cannot be delegated* (RR-CAAR)

1. The power to recommend the promulgation of rules and regulations to the Secretary of Finance.
2. The power to issue rulings of first impression or to reverse, revoke or modify any existing rulings of the
Bureau.
3. The power to compromise or abate any tax liability
Exception: Compromise by Regional Evaluation Boards under the following requisites:
a. assessments are issued by the regional offices involving basic deficiency tax of P500,000.00, and
b. involves minor criminal violations as may be determined by rules and regulations to be promulgated by
the Secretary of Finance, upon recommendation of the CIR, discovered by regional and district officials
4. The power to assign and reassign internal revenue officers to establishment where articles subject to excise
tax are produced or kept. Revenue officers assigned to any such establishments shall in no case stay in his
assignment for more than 2 years.

Rules in assignments to other duties

Revenue officers assigned to perform assessment and collection function shall not remain in the same
assignment for more than 3 years. Assignment of internal revenue officers and employees of the Bureau to
special duties shall not exceed 1 year.

Agents and Deputies for Collection of National Internal Revenue Taxes

1. The Commissioner of Customs and his subordinates with respect to collection of national internal revenue
taxes on imported goods.
2. The head of appropriate government offices and his subordinates with respect to the collection of energy tax.
3. Banks duly accredited by the Commissioner with respect to receipts of payments of internal revenue taxes
authorized to the made thru banks.

TAX ACCOUNTING PERIODS

Taxable year can be calendar or fiscal year

1. Calendar year – the 12-month period ending December 31 and is applicable to:
a. Individuals
b. taxpayers who do not keep books d. taxpayers with accounting periods other than the fiscal year
c. taxpayers with no annual accounting period
st
2. Fiscal period – any 12 months period ending the last day of any month other than December 31 . This is Not
available to non-corporate taxpayers.

Normally, accounting period are uniformly 12 months, however, short accounting period may arise in the following
cases:
1. death of a taxpayer 3. dissolution of a business
2. newly organized business 4. changes in accounting period

TAX PAYMENTS
ANNUAL:
Individual taxpayers – on or before April 15 of each year covering income for the preceding taxable year (TRAIN)
th
Non-individual/corporate taxpayers – Return to be filed and tax paid on the 15 day of the fourth month following
the close of the taxpayer’s taxable year.

QUARTERLY
Individual
 First – May 15
 Second – August 15
 Third – November 15
 Fourth – on or before April 15 of the following calendar year when the final adjusted income tax return is
due to be filed.

Non-individual/Corporation (60 days after the close of quarter

 First – May 30
 Second – August 29
 Third – November 29

TAX ACCOUNTING METHODS

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A. Principal Methods
1. Cash Basis Method – income is recorded in the year it is actually or constructively received; expenses are
generally reported in the year it is paid
2. Accrual Method – income is reported in the year it is earned and expenses are deducted in the year
incurred
3. Hybrid method – combination of both cash basis and accrual basis method
B. Deferred Payment Sales
1. Installment method – applicable in the following three cases only:
a. Sale of personal property by a dealer
b. Casual sale of personal property where:
a. selling price is over P1,000.00
b. initial payment do not exceed 25% of the selling price
c. property is of a kind which would be included in the taxpayer’s inventory if on hand at the close of
the taxable year
c. Sale of real property where the initial payment do not exceed 25% of the selling price
Initial Payment – refers to payments which the seller receives upon the execution of the instruments
of sale and those scheduled to be received in the year of sale or disposition. It simply means “total
first year payments” but do not include receipts of evidence of indebtedness of the buyer such as
notes.
2. Deferred payment basis – applicable when the buyer has issued evidence of obligation (notes). The notes
shall be valued at its market value at the date of receipt. The difference between the fair value and the
face value is reported as interest income in future taxable period. This is an alternative to delaying tax
payments when the installment method is not available.
C. Long-term Construction Contracts
1. Percentage of completion – this is applicable only to long-term construction contracts covering a period in
excess of one year (Architect or engineer’s certification is required)
2. Completed contract basis – gross income is recognized upon completion of construction contract
D. Farming income
Crop year basis – applicable only to farmers engaged in the production of crops which takes more than a year
from the time of planting to the process of gathering and disposal. Expenses paid or incurred are deductible in
the year the gross income from the sale of the crops is realized.
E. Leasehold improvement
1. Outright method – the value of the leasehold improvement attributable to the lessor is reported in taxable
income at the time of completion of the leasehold
2. Spread-out method – the value of the leasehold improvement attributable to the lessor is recognized in
taxable income over the lease term

Change of Accounting Method

- Prior BIR approval is required

MULTIPLE CHOICE

1. They exist independent of the Constitution being fundamental powers of the State, except:
a. Taxation c. Police Power
b. Eminent Domain d. People Power

2. The process or means by which the sovereign, through its law-making body raises income to defray the necessary
expenses of the government:
a. Toll c. Taxation
b. License Fee d. Assessment

3. Which of the following inherent powers of the government is inferior to the non-impairment clause of the constitution?
a. Taxation c. Eminent Domain
b. Police Power d. A and C

4. The religious congregation was organized as a corporation sole. It owns a 5,000 sq. m. Lot, registered in the name of
the rector and rented out for use as a school site of an educational institution organized for profit. The sect used the rentals
for the support and unkeep of its priests. Choose the most appropriate ruling about real property tax (RPT) exemption of
the 5,000 sq. m. Lot.
a. Exempt from the payment of RBT because it is actually, directly and exclusively used for religious purposes.
b. Not exempt from the payment of RPT because it is the proceeds, and not the property, that is actually, directly and
exclusively used for religious purposes.
c. Not exempt from the payment of RPT because the user is organized for profit.
d. Exempt from the payment of RPT because it is actually, directly and exclusively used for educational purposes.

5. The power to acquire private property upon payment of just compensation for public purpose:
a. Taxation c. Eminent Domain
b. Police Power d. Power of recall

6. Which of the following may not raise money for the government?
a. Power of Taxation
b. Police Power
c. Power of Eminent Domain

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d. Privatization of government’s capital assets

7. The power to regulate liberty and property to promote the general welfare:
a. Taxation c. Eminent Domain
b. Police Power d. Power of recall

8. The power to demand proportionate contributions from persons and property to defray the necessary expenses of the
government:
a. Taxation c. Eminent Domain
b. Police Power d. Power of recall

9. Which statement is wrong?

a. The power of taxation is an inherent power of the State;
b. The power of taxation cannot be delegated as a rule;
c. License Fees may discriminate against not-useful activities;
d. Eminent domain can be made to apply to all properties within the State.

10. The power to tax is the power to destroy. Is this always so?
a. Yes. The tax collectors should enforce a tax law even if it results to the destruction of the property rights of a taxpayer.
b. Yes. The tax laws should always be enforced because, without taxes, they very existence of the State is endangered.
c. No. The Supreme Court may nullify a tax law. Hence, property rights are not affected.
d. No. The Executive Branch may decide not to enforce a tax law which it believes to be confiscatory.

11. Police power as distinguished from eminent domain.

a. Just compensation is received by the owner of the property.
b. May be exercised by private individuals.
c. Superior to non-impairment clause of the institution.
d. Property is taken by the government for public purposes.

12. The following are common to the inherent power of taxation, power of eminent domain and police power, except for
which of the following?
a. They are necessary attributes of sovereignty.
b. They interfere with public rights and property.
c. They affect all persons or the public.
d. They are legislative in implementation.

13. The principal purpose of taxation is:

a. To encourage the growth of home industries through the proper use of tax incentives
b. To implement the police power of the state
c. To reduce excessive inequalities of wealth
d. To raise revenue for the governmental needs

14. Which of the following is not a secondary purpose of taxation?

a. To serve as key instrument of social control
b. To effect a more equitable distribution of wealth among people
c. To achieve social and economic stability
d. To raise revenue to defray the necessary expenses of the government

15. Which of the following is not a characteristic of the State’s power to tax?
a. It is inherent in sovereignty.
b. It is legislative in character.
c. It is based on the ability to pay.
d. It is subject to constitutional and inherent limitations.

16. Statement 1: The power of taxation is inherent in sovereignty being essential to the existence of every government.
Hence, even if not mentioned in the Constitution, the State can still exercise the power.

Statement 2: Taxation is essentially a legislative function. Even in the absence of any constitutional provision, taxation
power falls to Congress as part of the general power of lawmaking.
a. Both statements are false c. Both statements are true
b. Only statement 1 is false d. Only statement 1 is true

17. The power of taxation proceeds upon what theory?

a. Government is a necessity theory c. Benefits received theory
b. Ability to pay d. Severance Test

18. That taxation is based on the principle of reciprocal duties of protection and support between the State and its
inhabitants.
a. Government is a necessity theory c. Benefits received theory
b. Ability to pay d. Severance Test

19. It is an enforced contribution levied by the State by virtue of the sovereignty on persons and property within its
jurisdiction for the support of the government and all public needs.
a. Tax c. Special Assessment
b. Toll d. License

20. One of the following is not a characteristic or an element of tax:

a. It is levied by the legislature
b. It is proportionate in character
c. It is payable in money or in kind
d. It is an enforced contribution

21. One of the characteristics of tax is that:

a. It is generally based on contract
b. It is generally assignable
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c. It is generally payable in money

d. Answer not given

22. All of the following, except one, are basic principles of a sound tax system:
a. Fiscal Adequacy
b. Theoretical Justice
c. Administrative Feasibility
d. Inherent in Sovereignty

23. Under this basic principle of a sound tax system, the government should not incur a deficit:
a. Theoretical justice
b. Fiscal Adequacy
c. Administrative Feasibility
d. None of the above

24. The basic principle of a sound tax system, where, “Taxes must be based on the taxpayer’s ability to pay” is called:
a. Equality in Taxation
b. Theoretical Justice
c. Ability to pay Theory
d. Equity in Taxation

25. These are part and parcel of the power of taxation and originate from the very nature of taxation.
a. Inherent Limitations c. Canons of Taxation
b. Constitutional Limitations d. None of the choices

26. The following constitute double taxation except one:

a. Both taxes are imposed in the same amount
b. Both taxes are levied for the same purpose
c. Both taxes are imposed by the same taxing authority
d. Both taxes are imposed upon the same person

27. A tax must be imposed for a public purpose. Which of the following is not a public purpose?
a. National Defense c. Improvement of Sugar Industry
b. Public Education d. None of the choices

28. A fundamental rule in taxation is that “the property of one country may not be taxed by another country”. This is
known as:
a. International Law c. International Comity
b. Reciprocity d. International Inhibition

29. Being legislative in nature, the power to tax may not be delegated, except:
a. To local governments or political subdivisions
b. When allowed by the Constitution
c. When delegation relates merely to administrative implementation that may call for some degree of discretionary powers
under a set of sufficient standards expressed by law or implied from the policy and purpose of the Act
d. All of the choices

30. “Government agencies performing governmental functions are exempt from tax unless expressly taxed while those
performing propriety functions are subject to tax unless expressly exempted” refers to:
a. The tax imposed should be for public purpose
b. There should be no improper delegation of the taxing power
c. The power to tax is limited to the territorial jurisdiction of the taxing government
d. Exemption of government entities from taxation

31. This stems from the principle that we pay taxes for the protection and services provided by the taxing authority which
could not be provided outside the territorial boundaries of the taxing state.
a. The tax imposed should be for public purpose
b. There should be no improper delegation of the taxing power
c. The power to tax is limited to the territorial jurisdiction of the taxing government
d. Exemption of government entities from taxation

32. These are restrictions imposed by the Constitution.

a. Inherent Limitations
b. Basic principles of sound tax system
c. Constitutional Limitations
d. None of the choices

33. No law granting any tax exemption shall be passed without the concurrence of
a. Majority of all member of the Congress
b. ¾ vote of all members of the Congress
c. 2/3 vote of all members of the Congress
d. Unanimous vote of all members of the Congress

34. Compliance with procedural requirements must be followed strictly to avoid collision course between the state’s power
to tax and the individual’s recognized rights.
a. Due process of law
b. Non-infringement of religious freedom
c. Equality in Taxation
d. Non-impairment of obligations and contracts

35. No person shall be imprisoned for non-payment of this

a. Property Tax
b. Poll Tax
c. Excise Tax
d. Income Tax
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36. Which statement is WRONG? A revenue bill:

a. Must originate from the House of Representatives and on the same bill the Senate may propose amendments.
b. May originate from the Senate and on which same bill the House of Representatives may propose amendments.
c. May have a House version and a Senate version approved separately.
d. May be recommended by the President to Congress.

37. This requires that all subjects or objects of taxation, similarly situated are to be treated alike or put on equal footing
both in privileges and liabilities.
a. Due process c. Progressive Taxation
b. Uniformity d. None of the Choices

38. The basis or test of exemption of real properties owned by religious, or charitable entities from real property taxes is:
a. Use of the real property
b. Ownership of the real property
c. Location of the real property
d. Ownership or location real property at the option of the government

39. Which of the following statements is not correct?

a. Taxes may be imposed to raise revenue or provide disincentives to certain activities within the state.
b. The state can have the power of taxation even if the Constitution does not expressly give it the power to tax.
c. For the exercise of the power of taxation, the state can tax anything at anytime.
d. The power of taxation in the Philippine Constitution are grants of power and not limitations on taxing powers.

40. A taxpayer gives the following reasons for refusing to pay a tax. Which of his reasons is not acceptable for legally
refusing to pay the tax?
a. That he has been deprived of due process of law.
b. That there is lack of territorial jurisdiction
c. That the prescriptive period for the tax has elapsed
d. That he will derive no benefit from the tax

41. Which of the following has no power of taxation?

a. Provinces c. Barangays
b. Cities d. Barrios

42. One of the characteristics of our internal revenue laws is that they are:
a. Political in nature
b. Penal in nature
c. Generally prospective in operation although the tax statute may nevertheless operate retrospectively, provided it is
clearly the legislative intent.
d. Criminal in nature

43. In case of conflict between tax laws and generally accepted accounting principle (GAAP):
a. Both tax laws and GAAP shall be enforced
b. GAAP shall prevail over tax laws
c. Tax laws shall prevail over GAAP
d. The issue shall be resolved by the court

44. All of the following, except one, are sources of tax laws:
a. Legislations, tax treaties and tax ordinances
b. Judicial decisions
c. Opinion of Authors
d. Administrative rules and regulations

45. Which of the following is not an example of Excise Tax?

a. Transfer Tax c. Sales Tax
b. Real Property Tax d. Income Tax

46. One is not a Direct Tax

a. Immigration Tax c. Transfer Tax
b. Income Tax d. Value-added Tax

47. A tax in business is:

a. Direct Tax
b. Property Tax
c. Indirect Tax
d. None of the choices

48. Guiller is a mining operator. His mineral lands are not covered by any lease contract. The tax Guiller has to pay based
on the actual value of the gross output or mineral products extracted is
a. Mining Tax c. Rental
b. Royalties d. Ad Valorem Tax

49. Tax levied for particular or specific purpose irrespective of whether revenue is actually raised or not
a. Revenue Tax c. Specific Tax
b. Regulatory Tax d. Ad Valorem Tax

50. Taxes imposed by a political subdivision of the state and is effective only within the territorial boundaries thereof
a. National Tax c. Progressive Tax
b. Local tax d. Regressive Tax

51. Under the TRAIN LAW, which of the following taxes is not proportional?
a. Value-added Tax c. Estate tax
b. Income Tax d. Donor’s Tax

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52. Tax is distinguished from License Fee

a. Non-payment does not necessarily render the business illegal
b. A regulatory measure
c. Imposed in the exercise of Police Power
d. Limited to cover cost of regulation

53. The distinction of a tax from permit or license fee is that a tax is
a. Imposed for regulation
b. One which involves exercise of police power
c. One in which there is generally no limit on the amount that may be imposed
d. Answer not given

54. Which of the following terms describes this statement: “that the state has complete discretion on the amount to be
imposed after distinguishing between a useful and non-useful activity?
a. Tax c. Toll
b. License fee d. Customs Duty

55. Which of the following is not a distinction or similarity of license fee from tax?
a. Imposed for regulation
b. Involves exercise of police power
c. Non-payment makes the business illegal
d. Legal compensation or reward of an officer for services

56. This is a demand of ownership

a. License Fee c. Toll
b. Tax d. Franchise

57. Toll as distinguished from tax.

a. Demand of sovereignty
b. Imposed by government only
c. Amount is based on the cost of construction of public improvement used
d. Paid for the support of the government

58. Which statement is wrong?

a. A tax is a demand of sovereignty
b. A toll is a demand of ownership
c. A special assessment is a tax
d. Customs duty is a tax

59. Which of the following is not a characteristic of Debt?

a. Generally arises from contract
b. Payable only in money
c. Assignable
d. Imprisonment is not a sanction for non-payment

60. Debt as distinguished from tax.

a. Based on law
b. May be paid in kind
c. Does not draw interest except when delinquent
d. Generally not subject to set-off or compensation

61. Which of the following is designed to regulate conduct?

a. Tax c. Penalty
b. Toll d. Special Assessment

62. “Schedular system of income taxation” means:

a. All types of income are added together to arrive at gross income.
b. Separate graduated rates are imposed on different types of income.
c. Capital gains are excluded in determining gross income.
d. Compensation income and business/professional income are added together in arriving at gross income.

63. When the refund of a tax supposedly due to the taxpayer has already been barred by prescription, and the said
taxpayer is assessed with a tax at present, the two taxes may be set-off with each other. This doctrine is called:
a. Set-off Doctrine c. Tax sparring Doctrine
b. Doctrine of Reciprocity d. Equitable Recoupment

64. Transfer of the tax burden by one whom the tax is assessed to another.
a. Shifting c. Transformation
b. Capitalization d. Tax Exemption

65. Which of the following is not a scheme of shifting the incidence of tax burden?
a. The manufacturer transfers the tax to the consumer by adding the tax to the selling price of the goods sold.
b. The purchaser asks for a discount or refuses to buy at regular price unless it is reduced by an amount equal to the tax
he will pay.
c. Changing the terms of the sale like FOB shipping point in the Philippines to FOB Destination abroad, so that the title
passes abroad instead of in the Philippines.
d. The manufacturer transfers the sales tax to the distributor, then in turn to the wholesaler, to the retailer and finally to
the consumer.

66. The method by which the manufacturer or producer upon whom the tax is imposed pays the tax and strives to recover
such expense through lower production cost without sacrificing the quality of his product.
a. Shifting c. Transformation
b. Capitalization d. Tax exemption

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67. The reduction in the selling price of income producing property by an amount equal to the capitalized value of future
taxes that may be paid by the purchaser
a. Shifting c. Transformation
b. Capitalization d. Tax exemption

68. In case of ambiguity, tax laws shall be interpreted

a. Strictly against the taxpayer
b. Liberally in favor of the taxpayer
c. Liberally in favor of the government
d. None of the choices

69. In cases of deductions and exemptions, doubts shall be resolved

a. Strictly against the taxpayer
b. Strictly against the government
c. Liberally in favor of the taxpayer
d. None of the choices

70. The use of illegal or fraudulent means to avoid or defeat the payment of tax.
a. Exemption c. Avoidance
b. Shifting d. Evasion

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