DON HONORIO VENTURA STATE UNIVERSITY

GRADUATE SCHOOL
Villa de Bacolor, Pampanga
Main Campus

TAXATION FOR DEVELOPMENT

_________________________

A Report Submitted to

DR. LUIS LANSANG

Professor

In Partial Fulfillment
Of the Requirements for the subject course
Public Fiscal Administration

_________________________

by:

Angelica B. Bonifacio
Jackelene Claire N. De Jesus
Princess Aileen Z. Diaz
MPA Students

July 22, 2019

st
1 Trimester A.Y 2019-2020

1
 TABLE OF CONTENTS

Page No.

I. INTRODUCTION ----------------------------------------------------- ------------------1

II. THEORY AND CONCEPT OF TAXATION----------------------------------------1

A. Definition and Essential Characteristics

B. Bases and Purposes
C. Classification of Taxes

III. DEVELOPMENT REQUIREMENTS AND TAXATION-------------------------5

A. Capital Formation
B. Redistribution of Income and Wealth
C. Allocation of Resources
D. Economic Stability

IV. THE PHILIPPINE TAX SYSTEM----------------------------------------------------6

A. The Constitutional Mandate

B. The Organizational Set-up of Major Revenue Agencies
C. Major Taxes

V. RECENT DEVELOPMENTS---------------------------------------------------------25

A. Development Under the Martial Law Regime

B. Post EDSA Revolution Developments
C. Growth in Revenue Collection

VI. ISSUES AND PROBLEMS-----------------------------------------------------------35

A. Revenue Administration
B. Tax Structure

2
I. INTRODUCTION

Taxes as defined are involuntary fees levied on individuals or corporations and enforced by a
government entity — whether local, regional or national — in order to finance government
activities. Tax policies varies from country to country but are considered as a significant part of
most governments in industrialized countries.

Taxation can be used by the government for the following purposes: (a) raise revenues for
operation, infrastructure, welfare, education and defense, (b) discourage people from anti-social
behavior which is often done by heavily taxing the commodity resulting to the increase in price,
(c) serve the less fortunate through the delivery of social welfare programs, (d) transfer of
resources from one section of society to another, and (e) protect local industries through the
imposition of heavy import tariffs.

Given the foregoing, it can be deduced that taxes are considered essential to the growth of the
economy and to the improvement of Filipinos’ lives, hence, it is imperative to closely examine
and fully understand how the Philippine taxes operate and how they are imposed to aid and help
in the effective collection and consequent increase in tax revenues.

The theories, concept, bases, purposes, classification of taxes, major agencies together with the
issues and problems encountered by Philippine tax system are hereby discussed in this report.

II. THEORY AND CONCEPT OF TAXATION

A. Definition and Essential Characteristics

Tax is a compulsory financial charge imposed upon a person in order to fund various public
expenditures. Failure to pay, along with evasion or of resistance to taxation is punishable by the
law.

Taxation is the act of imposing taxes and the fact of being taxed. An important tool which the
government employs to keep overall money expenditures balanced.
Features of Taxation

1. It is an enforced contribution

- As the definition of tax states it a “compulsory” financial charge which means that
every person is subjected pay taxes.
2. It is generally payable in money;
- Tax is imposed in goods or services which a person avails using cash.
3. It is proportionate in character

3
 - Tax is imposed so that the tax rate is fixed, with no change as the base amount
increases or decreases.
4. It is levied on persons, properties or transactions.
5. It is levied by the state which has jurisdiction over the person, property or transaction.
6. It is levied for public purpose or purposes.

Classification of taxes as viewed in economics

1. Those imposed in the product or factor markets;
2. Those imposed on the seller’s or the buyer’s side of the market;
3. Those imposed on households or firms;
4. Those that enter on the sources or uses side of the taxpayer’s account.

B. Bases and Purposes

The existence of the government plays a vital role since it is considered as the ultimate
socioeconomic and political human organization. It is responsible in providing the common
needs or resources which a common individual cannot attain on their own. Such resources are
highways, parks, construction of roads, fire stations etc. Taxes are considered as the lifeblood of
these resources since they are used to sustain these resources. Since most people are not willing
voluntarily share what they have, the government ensures that contribution is compulsory
through taxation.

Taxation for development.-Taxation has been used as a tool to direct the state of prosperity of a
country more specifically in equitable distribution of wealth and stability of the country.

To developing countries such as the Philippines, taxation is used to hasten the economic growth
and development. Tax polies and systems are formulated to support the development plans the
country. Taxation for development is aligned to the strategies for development which includes
generation of capital for economic growth, the efficient allocation of resources for balanced
socioeconomic growth, and the preservation of economic independence and self –sufficiency of
the country.

In the Philippines, President Duterte signed the Package 1 of the Comprehensive Tax Reform
Program (CTRP) also known as Tax Reform Acceleration and Inclusion or RA. 10963 and was
implemented in January 2018. TRAIN Law aims to make Philippines tax system simpler, fairer,
more efficient to promote for investments, create jobs and reduce poverty.

There are four (4) complementary measures undertaken to ensure the income from the TRAIN
Law will be properly allocated for the development of the Philippines as a nation. These are
the Tax Administration, Ear Making, Infrastructure Projects, and Social Programs. For 5
years from the law's enactment, all revenues will be set aside for infrastructure and social
programs only, with a 70% and 30% portion respectively.

4
Adam’s Smith’s 4 Principles of Ideal tax system has been the basis of most modern theories
and principles of taxation. A good tax system must fulfil certain principles if it is to raise
adequate revenue and fulfil certain social objectives. Adam Smith has explained four canons of
taxation that he thought a good tax system must fulfil.

1. Equity emphasizes that every person should pay to the Government according to his
ability to pay that is in proportion of the income or revenue. This principle is especially
important to societies where income and wealth are unevenly distributed and a disparity
of opportunities is common, this is imperative to achieve equal allotment of the benefits
and efforts. Thus under the tax system based on the principle of equity the richer persons
in the society will pay more that the poor. An equitable taxation should be based not on
the ground of height or weight differences, but rather on valid criteria such as size of
wealth and income.

2. Certainty empathizes that a good tax system should have a clear and definite time of
payment, the manner of payment, the quantity to be paid ought all to be clear and plain to
the contributor and to every other person. This is necessary to avoid overpayment or
underpayment of taxes, evasions, or discouragement on the part of the taxpayer to pay. A
successful function of an economy requires that the people, especially business class,
must be certain about the sum of tax that they have to pay on their income from work or
investment. To summarize, as quoted by Adam Smith, “the tax which each individual is
bound to pay ought to be certain and not arbitrary”.

3. Convenience, this principle takes into account the convenience of the place, time and
manner of payment. This principle demands that the government must locate its
collection offices at places where they are easily and conveniently accessible to taxpayers.
Procedures of payment must also be simple and understandable.

4. Economy, The Government has to spend money on collecting taxes levied by it- Since
collection costs of taxes add nothing to the national product, they should be minimized as
far as possible. If the collection costs of a tax are more than the total revenue yielded by it,
it is not worthwhile to levy it.

C. Classification of Taxes

1. As to purpose. A tax may be fiscal, designed solely for raising revenues. It may also be
regulatory, intended to achieve social or economic goals regardless of whether revenue is
actually raised or not.

a. The General, Fiscal or revenue tax is the tax that is intended for the general purposes
or expenses of the government.

5
 b. The Special or regulatory tax is the tax that is intended for a specific purpose.

2. As to incidence. This has reference to the point at which the burden of the tax is actually
borne. This is concerned with who bears the burden of the tax. Income Tax is a direct
tax while Value Added Tax (VAT) is an indirect tax. Direct and indirect taxes include
all the different types of taxes levied by the government.

a. Direct tax- 1. Direct Taxes A direct tax is one whole impact and incidences are on
the same person. The impact of a tax is its money burden. A tax has impact on
the person on whom it is legally imposed. The incidence of a tax is on the person
who ultimately pays the tax whether or not it was legally imposed on him.
Therefore a direct tax is one which is paid (incidence) by the person on whom
it is legally imposed (impact).

b. Indirect Tax-Indirect tax is not held to be indirect merely because it is collected

form one person and paid by another.

3. As to rate. A tax may be proportional, progressive or regressive.

a. Progressive tax is a tax in which the average tax rate increases as the taxable amount
increases. The term progressive refers to the way the tax progresses from low to high.

b. Proportional Tax is a tax that is based upon the fixed percentage vis-à-vis the amount
of the property or other bases on which to be taxed.

c. The Regressive tax is the tax rate decrease upon the increase of the base rate.

4. As to authority. A tax may be imposed by the national government as in the case of the
income tax, or by the local or by the governments (city, municipal or barangay) as in the
case of real estate tax.

5. As to object. Taxes are either Personal, Poll or Capitation, Property and Excise.

a. The Personal, Poll or Capitation tax is the fixed amount that is imposed to a person that is
residing within a specific territory. This is regardless to their property, occupation or
business.

b. The Property tax is the tax that is imposed on one’s property; whether with is a real
property or personal property in proportion with the property’s value.

6
 c. The Excise Tax is a tax that is imposed upon the performance of an act as well as the
enjoyment of a privilege or the engaging in a particular occupation.

6. As to scope. The taxes are classified to either National or municipal or Local.In the
National scope, the taxes are imposed by the National Government itself while in the
municipal or local, the taxes are imposed by the local government.

7. As to amount paid. Taxes are further classified to specific and Ad valorem.

a. The Specific Tax is the tax that is of fixed amount that is imposed by the head or
number, or by some of the standard of the weight and measurement

b. The Ad valorem Tax is the Tax that is of fixed proportion in relation with the value of
the property in respect to which the tax is assed.

III. DEVELOPMENT REQUIREMENTS AND TAXATION

A responsive tax system must be able to support and promote a nation’s economic and social
objectives. In the case of developing countries such as the Philippines, taxation is a tool for
development namely:

1. The generation of capital and saving necessary to economic growth;

2. The reduction of inequalities in income and wealth for social justice and equity;

3. The proper allocation and utilization of resources for balanced development;

4. The protection of the exposed economy from external forces so as to attain stability and
unimpeded economic growth.

A. Capital Formation

Capital formation is the net capital accumulation during an accounting period for a particular
country. This is addition of capital goods, such as equipment, tools, transportation assets, and
electricity. Countries need capital goods to replace the older ones that are used to produce goods
and services. Taxation is increasingly assigned the role of generating capital savings in an
economy where capital resources are scarce. Taxation for capital formation should maximize
savings, mobilize them for productive socioeconomic investment and provide, where the private
sector fails or refuses, the necessary revenues for social and economic infrastructures needed for
developments

7
B. Allocation of Resources

Capital formation is the net capital accumulation during an accounting period for a particular
country. This is addition of capital goods, such as equipment, tools, transportation assets, and
electricity. Countries need capital goods to replace the older ones that are used to produce goods
and services. Taxation is increasingly assigned the role of generating capital savings in an
economy where capital resources are scarce. Taxation for capital formation should maximize
savings, mobilize them for productive socioeconomic investment and provide, where the private
sector fails or refuses, the necessary revenues for social and economic infrastructures needed for
developments

C. Redistribution of Income and Wealth

It is the transfer of income and wealth from some individuals to others by means of a social
mechanism such as taxation, charity, welfare, public services etc. Among developing countries,
there is a wide disparity in income and wealth among social classes becoming an urgent focus of
development efforts. Such case is applicable in the Philippines where it is policy of the state to
reduce the disparity by the principle of social equity.

Taxation for development aims to narrow the gaps of resources and opportunities. Designing a
progressive tax structure redistributes income and wealth wherein it taxes more those who
possess greater wealth. Redirection of tax structure from indirect to direct taxation eliminates the
indiscriminate shifting tax burden even to the poor under indirect taxes. Taxes which are raised
through progressive tax structure are channelled towards expenditures which improve the income
generating capacities of the disadvantaged.

D. Stability

A development oriented tax system must be able must be able to contend with the instabilities of
the “exposed” economy. As a fiscal measure for economic stabilization, taxation should be able
to shield the economy from negative impact of the world market forces in the short-run and
promote diversification of economy in the long-run.

IV. THE PHILIPPINE TAX SYSTEM

The Philippine tax system underwent radical reforms to align in order to align the goals and
policies of taxation to national development and to generate more revenues for development
projects.

A. The Constitutional Mandate

8
The rule of taxation shall be uniform and equitable and that the Congress shall evolve a
progressive system of taxation wherein tax rates imposed must be based on the person’s ability
pay.

B. The Major Revenue Agencies

1. Department of Finance

The Department of Finance is the government’s steward of sound fiscal policy. It formulates
revenue policies that will ensure funding of critical government programs that promote
welfare people and accelerate economic growth and stability. The Department has under it
several operating bureaus which include the Bureau of Internal Revenue (BIR), Bureau of
Customs (BOC), Bureau of Treasury and the Securities and Exchange Commission.

2. Bureau of Internal Revenue

The Bureau of Internal Revenue (BIR) being the prime tax collection agency of the
government is mandated by the law to assess and collect all national internal revenue taxes,
fees and charges, and to enforce all forfeitures, penalties and fines connected therewith,
including the execution of judgements in all cases decided in its favor by the Court of Tax
appeals and the ordinary courts. It collects more than half of the total revenues of the
government.

Powers of the BIR

a. Assessment and collection of all national internal revenue, taxes, fees and charges.

b. Enforcement of all forfeitures, penalties and fines connected to collection of

revenues etc.

c. Execution of judgements in all cases decided in its favor by the courts.

d. Giving effect and administering the supervisory and police power conferred to it
bylaw

e. Recommend to the Secretary of finance all needful rules and regulations for the
enforcement of the provisions of the National internal revenue code.

f. And through the Commissioner, the BIR has the following functions

 Accounting for all revenues collected;

9
  Exercising all legal requirements that are appropriate;

 Preventing and prosecuting tax evasions and other illegal economic

activities;

 Exercising supervision and control over its constituent units; and

 Performing such other functions as may be provided by law.

Taxes collected by BIR under Sec. 19 of the National Internal Revenue Code (NIRC).

 Income tax

 Estate and gift taxes

 Excise Taxes

 Taxes on Business

 Documentary Stamp tax

 Mining taxes

 Miscellaneous taxes, fees and charges imposed by NIRC.

3. Bureau of Customs (BOC)

The Bureau of Customs (BOC) is an attached agency of the Department of Finance. It is

charged with assessing and collecting customs revenues, curbing illicit trade and all
forms of customs fraud, and facilitating trade through an efficient and effective customs
management system.

The Bureau of Customs has the following duties and functions under the RA 10863 or
“Customs Modernization and Tariff Act (CMTA)”:
a. Assessment and collection of customs revenues from imported goods and other
dues, fees, charges, fines and penalties accruing under the CMTA;
b. Simplification and harmonization of customs procedures to facilitate movement
of goods in international trade;
c. Border control to prevent entry of smuggled goods;

10
 d. Prevention and suppression of smuggling and other customs fraud;
e. Facilitation and security of international trade and commerce through an informed
compliance program;
f. Supervision and control over the entrance and clearance of vessels and aircraft
engaged in foreign commerce;
g. Supervision and control over the handling of foreign mails arriving in the
Philippines for the purpose of collecting revenues and preventing the entry of
contraband;
h. Supervision and control on all import and export cargoes, landed or stored in piers,
airports, terminal facilities, including container yards and freight stations for the
protection of government revenue and prevention of entry of contraband;
i. Conduct a compensation study with the end view of developing and
recommending to the President a competitive compensation and remuneration
system to attract and retain highly qualified personnel, while ensuring that the
Bureau remains financially sound and sustainable;
j. Exercise of exclusive original jurisdiction over forfeiture cases under the CMTA;
and
k. (k) Enforcement of the CMTA and all other laws, rules and regulations related to
customs administration.

C. Major Philippine Taxes

According to the law, there are two basic types of taxes: national and local. National taxes
include those taxes imposed and collected through the Bureau of Internal Revenue (BIR) and
those import and export tariffs levied by the Bureau of Customs. Local taxes, on the other hand,
are those taxes levied and collected by local government units (LGUs), such as provinces, cities,
municipalities, and barangays.

1. National Internal Revenue Taxes

A. Income Tax

As defined, income tax is a tax on a person’s income, emoluments, profits arising from property,
practice of profession, conduct of trade or business or on the pertinent items of gross income
specified in the Tax Code of 1997 (Tax Code), as amended, less the deductions if any, authorized
for such types of income, by the Tax Code, as amended, or other special laws.

11
The imposition of taxes on income is lodged on the Ability-to-pay principle, a progressive
taxation principle that maintains that taxes should be levied according to a taxpayers’ ability to
pay. This progressive taxation approach places an increased tax burden on individuals,
partnerships, companies, corporations, trusts and certain estates with higher income.

The following persons are required to file income tax returns:

 Income Tax on Individuals.

 Resident citizens receiving income from sources within or outside the Philippines

• Employees deriving purely compensation income from two or more employers,

concurrently or successively at any time during the taxable year.
• Self-employed individuals receiving income from the conduct of trade or business
and/or practice of profession
• Individuals deriving mixed income (i.e. compensation income and income from
the conduct of trade or business and/or practice of profession)
• Individuals deriving other non-business, non-professional related income in
addition to compensation income not otherwise subject to a final tax

 Non-resident citizens receiving income from sources within the Philippines.

 Aliens, whether resident or not, receiving income from sources within the Philippines.

In general, the income tax on the individual’s taxable income is computed based on the rates and
figures presented in the schedules provided under Section 24(A)(2)(a) of the Tax Code, to wit:

A. Effective January 1, 2018 until December 31, 2022:

RANGE OF TAXABLE
TAX DUE = a + (b x c)
INCOME
BASIC ADDITIONAL OF EXCESS
OVER NOT OVER AMOUNT RATE OVER
(a) (b) (c)
- 250,000.00 - - -
250,000.00 400,000.00 - 20% 250,000.00
400,000.00 800,000.00 30,000.00 25% 400,000.00
800,000.00 2,000,000.00 130,000.00 30% 800,000.00
2,000,000.00 8,000,000.00 490,000.00 32% 2,000,000.00
8,000,000.00 - 2,410,000.00 35% 8,000,000.00

B. Effective January 1, 2023 and onwards:

12
 Table 2
RANGE OF TAXABLE
TAX DUE = a + (b x c)
INCOME
BASIC ADDITIONAL OF EXCESS
OVER NOT OVER AMOUNT RATE OVER
(a) (b) (c)
- 250,000.00 - - -
250,000.00 400,000.00 - 15% 250,000.00
400,000.00 800,000.00 22,500.00 20% 400,000.00
800,000.00 2,000,000.00 102,500.00 25% 800,000.00
2,000,000.00 8,000,000.00 402,500.00 30% 2,000,000.00
8,000,000.00 - 2,202,500.00 35% 8,000,000.00

Furthermore, the following provisions and considerations were established in order to spread the
burden of taxation equitably among persons with different financial resources, to wit:

• Imposition of higher tax rates on higher income brackets as can be seen on the foregoing
schedules.
• Exemption of Minimum Wage Earners (MWEs) and individual taxpayers with taxable
income not exceeding ₱250,000 annually from the payment of income tax.
• Exclusion of Thirteenth (13th) month pay and other benefits such as productivity
incentives and Christmas bonuses within the ₱90,000.00 threshold from the computation
of the gross income subject to tax.

A. Individuals Earning Purely Compensation Income

Income tax of employees earning purely compensation income shall be taxed based on the
graduated rates under Section 24(A)(2)(a) of the Tax Code, as amended.

B. Self-Employed Individuals Earning Income Purely from Self-Employment or Practice of

Profession

Individuals earning income purely from self-employment and/or practice of profession whose
gross sales/receipts and other non-operating income does not exceed the value-added tax (VAT)
threshold of ₱3,000,000.00 shall have the option to avail of:

i. The graduated rates under Section 24(A)(2)(a) of the Tax Code, as amended; or
ii. An eight percent (8%) tax on gross sales or receipts and other non-operating
income in excess of two hundred fifty thousand pesos (₱250,000.00) in lieu of the
graduated income tax rates and the percentage tax.

13
In order to avail of the 8% income tax rate, the taxpayer shall signify an intention to elect the 8%
in the 1st Quarter Percentage and/or Income Tax Return, or on the initial quarter return of the
taxable year after the commencement of a new business/practice of profession. Such election
shall be irrevocable and no amendment of option shall be made for the taxable year.

However, in case the taxpayer's gross sales/receipts and other non-operating income exceeded
the VAT threshold during the taxable year, the taxpayer shall automatically be subject to the
graduated rates even if the flat 8% income tax rate option is initially selected.

C. Individuals Earning Income Both from Compensation and Self-Employment (business

or practice of profession)

The following income tax rates are applicable for individuals earning income from both
compensation and self-employment which can either be from owning a business or from the
practice of profession:

i. The compensation income shall be subject to the graduated tax rates prescribed under
Section 24(A)(2)(a) of the Tax Code; and

ii. The income from business or practice of profession shall be subject to the following:

a. If the gross sales/receipts and other non-operating income do not exceed the VAT
threshold, the individual has the option to be taxed at:

 Graduated income rates prescribed under Section 24(A)(2)(a) of the Tax Code; or
 Eight percent (8%) tax on gross sales or receipts and other non-operating income in
lieu of the graduated income tax rates and the percentage tax.

b. If the gross sales/receipts and other non-operating income exceeds the VAT threshold,
the individual shall be subject to the graduated income tax rates.

The provision of the Tax Code which allows an option of 8% income tax rate on gross
sales/receipts and other non-operating income in excess of ₱250,000.00 is available only to
purely self-employed individuals and/or professionals. The ₱250,000.00 mentioned is not
applicable to mixed income earners since it is already incorporated in the first tier of the
graduated income tax rates applicable to compensation income. Under the said graduated rates'
the excess of the ₱250,000.00 over the actual taxable compensation income is not deductible
against the taxable income from business/practice of profession under the 8% income tax rate
option.

14
The total tax due shall be the sum of: (1) tax due from compensation, computed using the
graduated income tax rates; and (2) tax due from self-employment/practice of profession,
resulting from the multiplication of the 8% income tax rate with the total of the gross
sales/receipts and other non-operating income.

Mixed income earner who opted to be taxed under the graduated income tax rates for income
from business/practice of profession' shall combine the taxable income from both compensation
and business/practice of profession in computing for the total taxable income and consequently,
the income tax due.

D. Income Tax Rates on Certain Passive Income

Passive income refers to cash flows received which requires minimal to no effort on the part of
the recipient to maintain it. Examples of passive income together with their corresponding
income tax rates are listed below:

a. Interests from any currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements – 20%
b. Interest income received by an individual taxpayer (except a non-resident individual)
from a depository bank under the expanded foreign currency deposit system – 15%
c. Proceeds of pre-terminated long-term deposit or investment in the form of savings'
common or individual trust funds, deposit substitutes, investment management accounts
and other investments evidenced by certificates in such form as prescribed by the Bangko
Sentral ng Pilipinas (BSP) -the final tax shall be based on the remaining maturity of the
investment

Four (4) years but less than five (5) years – 5%

Three (3) years but less than four (4) years – 12%; and
Less than three (3) Years – 20%

d. Royalties (except royalties on books and other literary works and musical compositions) -
20%
e. Royalties on books and other literary works and musical compositions – 10%;
f. Prizes (except prizes amounting to ₱10,000 or less) – 20%
g. Winnings (except Philippine Charity Sweepstakes and Lotto winnings amounting to
₱10,000 or less) – 20% ;
h. Cash and Property Dividends – 10%;
i. Capital Gains from Sale of Shares of Stocks not Traded in the Stock Exchange - 15%;
j. Capital Gains from Sale of Real Property located in the Philippines – 6%

15
 Income Tax on Non-Individuals

 Corporations including partnerships, no matter how created or organized.

 Domestic corporations receiving income from sources within and outside the Philippines
 Foreign corporations receiving income from sources within the Philippines
 Estates and trusts engaged in trade or business

Corporate Income Tax

Corporations encompasses partnerships, joint accounts, associations and insurance companies

are taxed in the same manner as an individual who earns income solely from business.

Corporations, however, are not entitled to personal deductions because all its operating expenses
are necessarily business expenses which are covered by itemized deductions. It is also apparent
that the rate is comparably higher than that of an individual. The reason for the difference is that
corporations, unlike individuals, exists primarily for generation of profit and that their being
necessarily possessed with business assets make them more financially capable to pay the tax in
contrast to an individual who has to spend much of his earnings to non-income generating,
though necessary, expenses.

The following are the applicable corporate income tax rates for domestic corporations, resident-
foreign corporation and non-resident foreign corporations:

 Domestic Corporations

Income CIT Rate (%)

1. In general, on net income from all sources. 30
2. Minimum corporate income tax (MCIT) on gross income, beginning in the
fourth taxable year following the year of commencement of business operations. 2
MCIT is imposed where the CIT at 30% is less than 2% MCIT on gross income.
3. Proprietary educational institutions and non-profit hospitals, on net income if
gross income from unrelated trade, business, and other activities does not exceed 10
50% of the total gross income from all sources.
4. Non-stock, non-profit educational institutions (all assets and revenues used
actually, directly, and exclusively for educational purposes) and other non-profit Exempt
organizations.

 B. Resident foreign corporation

 Resident foreign corporations (i.e. foreign corporations engaged in trade or business

in the Philippines through a branch office) are taxed in the same manner as domestic

16
 corporations (except on capital gains on the sale of buildings not used in business,
which are taxable as ordinary income), but only on Philippine-source income.

 International carriers are subject to an income tax of 2.5% on their gross Philippine
billings unless a lower rate is available under an existing tax treaty. Exemption from
this tax is also available under international agreements to which the Philippines is a
signatory or on the basis of reciprocity in cases where the home country of the
international carrier grants income tax exemption to Philippine carriers.

 Income of offshore banking units (OBUs) and foreign currency deposit units
(FCDUs) of depository banks from foreign currency transactions with non-residents,
other OBUs, or FCDUs and local commercial banks (including branches of foreign
banks) authorised by the Bangko Sentral ng Pilipinas (BSP; central bank) to transact
business with OBUs and FCDUs are exempt from all taxes except net income
specified by the Secretary of Finance upon recommendation of the Monetary Board.
Interest income from foreign currency loans granted to residents other than OBUs or
local commercial banks shall be subject to a 10% final income tax.

 Regional or area headquarters of multinational corporations that do not earn or

derive income from the Philippines, and that act as supervisory, communications,
and coordinating centres for their affiliates, subsidiaries, or branches in the Asia-
Pacific region and other foreign markets are not subject to CIT.

 Regional operating headquarters (ROHQ) pay a tax of 10% on their taxable income.
An ROHQ is a branch established in the Philippines by a multinational company that
is engaged in any of the following services: general administration and planning,
business planning and coordination, sourcing and procurement of raw materials and
components, corporate finance advisory services, marketing control and sales
promotion, training and personnel management, logistic services, research and
development services and product development, technical support and maintenance,
data processing and communication, or business development.

 Non-resident foreign corporations

In general, non-resident foreign corporations are taxed on gross income received from
sources within the Philippines at 30%, except for reinsurance premiums, which are
exempt. Interest on foreign loans is taxed at 20%. Dividends from domestic corporations,
however, are subject to a final withholding tax (WHT) at the rate of 15% if the country
in which the corporation is domiciled does not impose income tax on such dividends or
allows a tax deemed paid credit of 15%.

17
 Lower rates or exemption on the above income may be available under an applicable tax
treaty.

Rentals and charter fees payable to non-resident owners of vessels chartered by

Philippine nationals are subject to a final tax of 4.5%. Rentals, charters, and other fees
derived by non-resident lessors of aircraft, machinery, and other equipment are subject
to a final tax of 7.5%.

Be it noted, however, that not all corporations are created for profit, hence, some of them are
exempt from income tax, to wit:

1) Labor, agricultural or horticultural organization not organized for profit;

2) Mutual savings bank not having capital stock represented by shares, and cooperative bank
without capital stock organized and operated for mutual purposes and without profit;

3) Fraternal beneficiary society, order or association, operating under the lodge system or for
the exclusive benefit of the members of a fraternity itself operating under a lodge system
and providing for the payment of life, sickness, accident, or other benefits to the members
of such society, order or association, or their dependents;

4) Cemetery company owned and operated exclusively for the benefit of its members;

5) Corporation or association organized and operated exclusively for religious, charitable,

scientific, athletic, or cultural purpose or for the rehabilitation of veterans, no part of the net
income of which inure to the benefit of any private stockholder or individual;

6) Business league, chamber of commerce, or board of trade, not organized for profit and no
part of the net income of which inure to the benefit of any private stockholder or individual;

7) Civic league, or organization not organized for profit but operated exclusively for the
promotion of social welfare;

8) Club organized and operated exclusively for pleasure, for recreation and other non-
profitable purposes, no part of the net income of which inure to the benefit of any
stockholder or member;

9) Farmers or other mutual typhoon or fire insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone company, or like organization of a purely local
character, the income of which consists solely of assessments, dues and fees collected from
members for the sole purpose of meeting its expenses;

18
 10) Farmers’ fruit growers, or like associations organized and operated as a sales agent for the
purpose of marketing the products of its members and turning back to then the proceeds of
the sales, less the necessary selling expenses, on the basis of the quantity of produced
finished by them;

11) Corporation or association organized for the exclusive purpose of holding title to property,
collecting income therefrom, and turning over the extra amount thereof less expenses, to an
organization which is itself exempt from the tax imposed by this Title;

12) Government educational institution.

B. Transfer Taxes

A transfer tax is any kind of tax that is levied on the transfer of ownership or title to property
from one entity to another. Transfer taxes are classified into two (2) types namely: (a) estate tax
and (b) gift tax.

 Estate tax

A tax on the right of the deceased person to transmit his/her lawful heirs and beneficiaries at the
time of death and on certain transfers. It is not a tax on property but a tax imposed on the
privilege of transmitting property upon death of the owner.

Philippine jurisprudence provides three (3) reasons for the imposition of estate tax, to wit: (i) to
generate revenues, (ii) to limit fortunes thru taxation and (iii) to attain, as much as possible,
equitable distribution of wealth.

Effective January 1, 2018 to present as per the provisions of Republic Act No. 10963, there shall
be an imposed rate of six percent (6%) based on the value of NET ESTATE (Gross Estate less
allowable deductions) determined as of the time of death of decedent composed of all properties,
real or personal, tangible or intangible less allowable deductions.

In relation thereto, the properties comprising the gross estate shall be valued based on their fair
market value as of the time of the decedent’s death. If the property is a real property, the
appraised value thereof as of the time of death shall be, whichever the higher is of: (a) The fair
market value as determined by the Commissioner, or (b) The fair market value as shown in the
schedule of values fixed by the provincial and city assessors.

 Donor’ tax.

19
A tax on a donation or gift, and is imposed on the gratuitous transfer of property between two or
more persons who are living at the time of the transfer. It shall apply whether the transfer is in
trust or otherwise, whether the gift is direct or indirect and whether the property is real or
personal, tangible or intangible. Also, the relationship between the donor and the recipient shall
not be considered.

Effective January 1, 2018 and onwards, the donor’s tax for each calendar year shall be six
percent (6%) computed on the basis of the total gifts in excess of Two Hundred Fifty Thousand
Pesos (₱250,000) exempt gift made during the calendar year. When the gifts are made during the
same calendar year but on different dates, the donor's tax shall be computed based on the total
net gifts during the year.

C. Value Added Tax (VAT)

Value-Added Tax (VAT) is a form of sales tax. It is a tax on consumption levied on the sale,
barter, exchange or lease of goods or properties and services in the Philippines and on
importation of goods into the Philippines. It is an indirect tax, which may be shifted or passed on
the buyer, transferee or lessee of goods, properties or services.

The following persons are required to file VAT returns:

 Any person or entity who, in the course of his trade or business, sells, barters, exchanges,
leases goods or properties and renders services subject to VAT, if the aggregate amount
of actual gross sales or receipts exceed Three Million Pesos (₱3,000,000.00)
 A person required to register as VAT taxpayer but failed to register
 Any person, whether or not made in the course of his trade or business, who imports
goods

The rates for the computation of VAT returns, on the other hand, were as follows:

 On sale of goods and properties - twelve percent (12%) of the gross selling price or gross
value in money of the goods or properties sold, bartered or exchanged
 On sale of services and use or lease of properties - twelve percent (12%) of gross receipts
derived from the sale or exchange of services, including the use or lease of properties
 On importation of goods - twelve percent (12%) based on the total value used by the
Bureau of Customs in determining tariff and customs duties, plus customs duties, excise
taxes, if any, and other charges, such as tax to be paid by the importer prior to the release
of such goods from customs custody; provided, that where the customs duties are
determined on the basis of quantity or volume of the goods, the VAT shall be based on
the landed cost plus excise taxes, if any.
 On export sales and other zero-rated sales - 0%

20
2. Customs Duties

Customs duties are levied on the exportation and importation of goods. All imported articles
when imported from any foreign country into the Philippines are subject to duty upon each
importation, even though previously exported from the Philippines.

A. Import Duties

There are two classifications of import duties namely: (a) ordinary import duties and. (b) special
duties.

 Ordinary Import Duties

Tariff duties are levied on imported goods as either as a revenue generating measure or a
protective scheme to artificially or temporarily inflate prices to support the local industries of a
particular country and protect its domestic output from their foreign counterparts.

In the Philippines, import duties are imposed, generally in ad valorem form, on articles entering
the country in accordance with their corresponding schedules and classifications as provided
under Section 104 of the Tariff and Customs Code of the Philippines (TCCP) of 1978, as
amended. With the exception of certain articles which can be imported duty-free, upon
compliance with certain prescribed conditions or formalities, goods are levied import duties
depending on the trade agreements, regional groupings, among others.

The President, upon recommendation of the National Economic and Development Authority
(NEDA), in the interest of national economy, general welfare, and/or national security, is
empowered to increase, reduce, or remove existing protective tariff rates (including any
necessary change in classification) but in no case shall the increased rate of duty be higher than a
maximum of one hundred (100) per cent ad valorem; establish import quota and/or ban
importation of any commodity, as may be necessary; and impose an additional duty on all
imports not exceeding ten (10) per cent ad valorem whenever necessary. The President may also
gradually reduce the said protection levels upon periodic investigations by the Tariff
Commission (TC) and as recommended by the NEDA.

 Special Duties

According to the 2016 Guide to Philippine Taxes of the National Tax Research Center, the
following special duties are levied in addition to the ordinary import duties, taxes and charges
imposed by law on imported products:

21
 Anti-Dumping Duty

The anti-dumping duty is a trade remedy measure adopted by the government to protect a
domestic industry against the unfair trade practice of dumping. It is a special duty
imposed in the event that a specific kind or class (any product, commodity, or article of
commerce) of foreign article, is being imported into, sold or is likely to be sold in the
Philippines, at an export price less than its normal value in the ordinary course of trade
for a like product, commodity or article destined for consumption in the exporting
country which is causing or threatening to cause material injury to a domestic industry, or
materially retarding the establishment of a domestic industry producing similar product.

 Countervailing Duty

The countervailing duty is a special duty charged whenever any product, commodity or
article of commerce is granted directly or indirectly by the government in the country of
origin or exportation, any kind or form of specific subsidy upon the production,
manufacture or exportation of such product, commodity or article, and the importation of
such subsidized product, commodity or article has caused or threatens to cause material
injury to a domestic industry or has materially retarded the growth or prevents the
establishment of a domestic industry.

 Marking Duty

The marking of articles (or its containers) is a prerequisite for every article or container
of foreign origin which is imported into the Philippines in accordance with Section 303 of
the TCCP. The marking shall be done in any official language of the Philippines and in a
conspicuous place as legibly, indelibly and permanently as the nature of article (or
container) may permit to indicate to an ultimate purchaser in the Philippines the country
of origin of the article.

In case of failure to mark an article or its container at the time of importation, unless
otherwise excepted from the requirements of marking, there shall be levied upon such
article a marking duty of 5% ad valorem.

 Discriminatory Duty

As stipulated under Section 304 of the TCCP, the discriminatory duty is a new or
additional duty in an amount not exceeding 100% ad valorem, imposed by the President
by proclamation upon articles of a foreign country which discriminates against Philippine
commerce or against goods coming from the Philippines in such manner as to place the

22
 commerce of the Philippines at a disadvantage compared with the commerce of any
foreign country.

 General Safeguard Measure

A general safeguard measure is applied by the Secretary of Trade and Industry (for non-
agricultural products) or the Secretary of Agriculture (for agricultural products) upon
positive final determination of the Tariff Commission that a product is being imported
into the country in increased quantities, whether absolute or relative to domestic
production, as to cause or threaten to cause serious injury to the domestic industry. In the
case of non-agricultural products, however, the Secretary of Trade and Industry shall first
establish that the application of such safeguard measures will be in the public interest.
Upon positive determination, the Tariff Commission shall recommend to the concerned
Secretary an appropriate definitive measure, in the form of:

1) An increase in, or imposition of, any duty on the imported product;

2) A decrease in or the imposition of a tariff-rate quota (Minimum Access Volume)
on the product;
3) A modification or imposition of any quantitative restriction on the importation
of the product into the Philippines;
4) One or more appropriate adjustment measures, including the provision of trade
adjustment assistance; and
5) Any combination of actions described in subparagraphs (1) to (4).

 Special Safeguard Duty

An additional special safeguard duty is imposed on an agricultural product, consistent

with Philippine international treaty obligations, whenever the cumulative import volume
in a given year exceeds its trigger volume and when the actual c.i.f. (Cost, Insurance and
Freight) import price falls below its trigger price. The special safeguard duty is imposed
by the Commissioner of Customs, through the Secretary of Finance, upon request by the
Secretary of Agriculture.

B. Export Duties

Logs are the only remaining products subject to the duty under Section 514 of the TCCP, as
amended. The export duty imposed on logs is 20% of the gross Free on Board (F.O.B.) value at
the time of shipment based on the prevailing rate of exchange. However, only planted trees are
subject to the export duty, since all naturally grown trees are banned from being exported under

23
Ministry of Environment and Natural Resources Memorandum Order No. 8 (issued June 20,
1986).

3. Local Taxes

As mandated in Section 129 of Republic Act No. 7160, otherwise known as the Local
Government Code of 1991, the LGUs shall have the power and authority to create their own
sources of revenues and to levy taxes, fees, and charges which shall accrue exclusively for their
use and disposition and which shall be retained by them. The power to impose a tax, fee, or
charge or to generate revenue under this Code shall be exercised by the sanggunian of the local
government unit concerned through an appropriate ordinance.

A. Real Property Taxes

 Basic Real Property Tax

Section 38 of Presidential Decree No. 464 which enacted the Real Property Tax Code provides
that there shall be levied, assessed and collected in all provinces, cities and municipalities, an
annual ad valorem tax on real property, such as land, buildings, machinery and other
improvements affixed or attached to real property.

The appraisal and assessment of real property for taxation purposes shall be guided by the
following fundamental principles

(1) Real property shall be appraised at its current and fair market value;

(2) The appraisal of real property shall be uniform in each local political subdivision;

(3) Real property shall be classified for assessment purposes on the basis of its actual use;

(4) Real property shall be assessed on the basis of a uniform standard of value within each
local political subdivision;

(5) In no case shall the appraisal and assessment of real property for taxation purposes and
the collection of the real property tax be let to any private person; and

(6) The goal of property assessment shall be the equitable distribution of the tax burden.

Whereas, in the computation of real property taxes, the following uniform rates shall be the basis:

24
 (1) In the case of a province, the tax shall be fixed by ordinance of the provincial board at the
rate of not less than one fourth of one percent but not more than one-half of one percent of
the assessed value of the real property.
(2) In the case of a city, the tax shall be fixed by ordinance of the municipal board or city
council at the rate of not less than one-half of one percent but not more than two percent of
the assessed value of the real property.

Nevertheless, the following properties are exempted from the imposition and payment of real
property taxes:

(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions-owned corporation so exempt by its charter; Provided, however, That this
exemption shall not apply to real property of the above-named entities the beneficial use of
which has been granted, for consideration or otherwise, to a taxable person;

(b) Non-profit cemeteries or burial grounds;

(c) Charitable institutions, churches, personages or convents appurtenant thereto, mosques,

and all land, buildings and improvements actually, directly and exclusively used for religious
or charitable purposes;

(d) Real property in any one city or municipality belonging to a single owner the entire
assessed valuation of which is not in excess of five hundred pesos: Provided, however, That
the so exempt shall be assessed and records thereof kept as in other cases;

(e) Land acquired by grant, purchase or lease from the public domain for conversion into
dairy farms for a period of five years from the time of such conversion; and machinery of a
new and preferred industry as certified by the Board of Investments used or operated for
industrial, agricultural, manufacturing or mining purposes, during the first three years of the
operation of the machinery;
(f) Perennial trees and plants of economic value, except where the land upon which they
grow is planted principally to such growth; and

(g) Real property exempt under other laws.

May it be emphasized that the real property tax is not necessarily levied on the registered owner
of the property but on the individual who actually uses it. Hence, even if the law exempts the
owner from paying the real property tax, the actual possessor may still be compelled to pay the
tax and vice versa.

25
 Special Levies on Real Property

 Special Education Fund Tax

In addition to the basic RPT, a province or city, or a municipality may levy and collect an
annual tax of 1% on the assessed value of real property. The proceeds thereof shall
exclusively accrue to the Special Education Fund to support public education.

 Idle Lands Tax

A province or city, or a municipality may levy an annual tax on idle lands at a rate not
exceeding 5% of the assessed value of the real property.

 Special Levy

A province, city or municipality may impose a special levy on the lands within its
territorial jurisdiction specially benefitted by public works projects or improvements
funded by the LGU concerned. The special levy shall not exceed 60% of the actual cost
of such projects and improvements, including the costs of acquiring land and such other
real property in connection therewith.

D. Exemption and Taxation

Tax exemption is basically the monetary exclusion of persons, people, property, income or
transactions from the payment of taxes supposedly levied on them which may result from the
presence of pre-existing contracts and reason of public policy.

A. Presence of existing contracts

When the state enters into a contract, it diverts itself of its sovereign personality and assumes the
character of an ordinary corporation, hence, the state is bound by the provisions of the contract
regardless of subsequent issuance of laws to the contrary, pursuant to the provisions of Article III,
Section 10 of Constitution which provides that, “No law impairing the obligation of contracts
shall be passed.”

B. Reason of public policy

Unlike the exemption arising from the contracts, the exemption derived from the reason of public
policy is extended without any valuable consideration and may be validly revoked at will, with
or without cause.

26
As a general rule, tax exemption should be regarded strictly against the taxpayer and in favor of
the government. This is because exemptions reduce government revenue and will result to the
decrease in the funding of projects and programs essential for the development of the state.

Ideally, the loss of revenue from the grant of exemptions must approximate the gains such as in
the case of granting exemptions to improve the country’s foreign investment environment.

The following are exceptions to taxability:

a) Incentives granted to Board of Investments (BOI) promoted enterprises under BP 391;

b) Incentives granted to Export Processing Zone Authority (EPZA) promoted enterprises
under PD 66, as amended;
c) Incentives arising out of international agreements to which the Philippines is a signatory;
d) Incentives protected by the non-impairment clause of the Constitution
e) Incentives granted under the four basic tax codes (National Internal Revenue Code, Tariff
and Customs Code, Real Property Tax Code and Local Tax Code)
f) Suspension of taxes and duties from distressed copper mines under LOI 1416.

V. RECENT DEVELOPMENTS

The frequency, credibility and quality of tax reforms and developments in the Philippines have
often been shaped by the times, institutions, people and authority implementing them. Tax
reforms were restructured and rationalized in the past as bases to achieve the economic and
political motives of policymakers and legislators to improve the efficiency and equity of the
Philippine tax system.

A. Developments Under the Martial Law Regime

1. Organizational Reforms

The very first Presidential Decree issued under the New Society (P.D. No. 1) enjoined the major
revenue agencies to gear their efforts towards development objectives. The Decree updated and
streamlined the operation of tax collection agencies and provided for a new staffing pattern,
intensified and expanded tax functions, abolished obsolete divisions and streamlined the agency
into two major functional areas, that is, administration and operations functions.

Under this Integrated Reorganization Plan, personnel reforms were made and were directed
towards the separation of unfit and erring employees from the service, the adoption of new
staffing pattern with higher salary scales, and the adoption of an intensified training program.

27
The Bureau of Internal Revenue and Bureau of Customs being the tax and revenue collection
agencies of the government also underwent restructuring. Both bureaus were reorganized due to
the employees’ low morale and rampant graft and corruption. The BOC had some staffing
patterns innovations such as: the creation of the Tax Exempt Division to pass upon the
importation of BOI-registered firms and other tax exempt duties, the integration of the national
customs police, the installation of a computer system to monitor processing of documents and
assignments, and the streamlining of the Manila International Airport operations.

On the other hand, the BIR created the so-called package audit system which facilitated
investigation of tax returns. The BIR also launched a positive recruitment program for
operational positions to augment and reinforce the existing staff which was earlier reduced by the
separation of unfit and erring personnel. Some major changes were also introduced in the
Bureau of Internal revenue which included: the creation of the special audit teams by industry
group, the conversion of the tax fraud unit into a division, creation of the Tax Incentive Division
to facilitate the processing of the tax exempt industries, elevation of the Data Processing Center
into a department, the creation of revenue attached positions, and the reduction of the number of
regional offices.

The BIR also put emphasis on the monitoring of the taxpayers records and tax returns. Proper
monitoring of tax compliance were made in determining and identifying taxpayers subject to
withholding tax and in checking the remittance of taxes withheld at source by the withholding
agent.

2. Substantive Reforms

Under the Martial Law Regime, substantive reforms were introduced. These reforms included
the Tariff and Custom Code (P.D. No. 34), and the National Internal Revenue Code (P.D. No.
69).

The government introduced innovations in order to ensure more efficient revenue administration
procedures and systems such as follows:

a. Tax Amnesties

There were two Presidential Decrees on Tax Amnesty: PD 1740 and PD 1840. Under
PD 1740, amnesty was extended to resident and non-resident citizens, resident aliens,
estates and trusts, who failed to file income tax returns, and who filed erroneous, false or
fraudulent returns for taxable year 1974 to 1979. The amnesty provided immunity of
taxpayers from civil and criminal penalties.

28
 Under PD 1840 was grant of full tax amnesty on previously untaxed income earned
between 1974 to 1980. The decree granted amnesty to residents, citizens or aliens upon
payment of 20 percent tax.

b. Revision of the Tariff and Customs Code

The system of classification and structure rates were simplified under the revised Custom
Code. The number of classifications and the rates to be applied on them were reduced
resulting in the decrease of conflicts, thereby facilitating effective administration.

c. Real Property Tax Developments

The Marcos government passed decrees to improve real property taxation system under
PD No. 76 and PD No. 231.

The introduction of some progressivity in real property taxation by providing graduated

levels of assessment relative to current and fair market value was also some of the
innovations.

d. Measures to increase revenue and improve tax systems

1. Tax measures to increase revenues include:

a. Amendment of Section 192 (3) of the NIRC on: dealers of gasoline and petroleum
products (P.D. No. 1671, February 7, 1980); and Section 193 of the NIRC on:
increasing the rates of specific tax on petroleum products (P.D. No. 1671,
February 7, 1980).

b. Imposition of tax on motor vehicles with air conditioning units (P.D. 1686, March
16, 1980).

c. Surtax on extraordinary gains realized by oil companies on petroleum products

(P.D. No. 1709, August 13, 1980).

d. Increase in specific tax on distilled wines and compound liquors (P.D. No. 81,
September 17,1980) and on cigarettes except in case of those packed in 30’s (B.P.
Blg. 81, September 17, 1980).

e. Amendments of the provisions on taxation of forest products (B.P. 83, September

17, 1980) and on taxation of minerals and mineral products (B.P. 84, September
19, 1980).

29
 2. Tax measures to improve tax administration and enforcement which included the
Omnibus Amendment to the NIRC (P.D. 1705 March 19, 1980) and the Declaration
of the Banking Industry as indispensable to the growth of the National Economy (P.D.
1737, September 17, 1980).

3. Tax measures for promotion of investments and achievement of equity in taxation

which comprised the provision for computation of internal revenue allotments to local
governments (P.D. No. 1741, October 31, 1980), benefits to sugar businessmen-
exemption from payment of customs and tariff duties, special import tax
compensating tax covering importation of sugar mills machinery, spare parts and
equipment for a limited period (P.D. 1910, August 13, 1980), amendment of several
sections of the NIRC on Petroleum Organizations in the Philippines (P.D. No. 1862,
February 1980), granting fiscal incentives (P.D. 1739, September 17, 1980), and
condoning penalties of certain violations of the Income Tax Law upon voluntary
disclosure of income tax purposes and requiring periodic submission of net worth
statement (P.D. No. 1740, October 31, 1980).

e. Gross Income Taxation or GIT- Batas Pambansa No. 135

The new tax scheme otherwise known as the Modified Gross Income Tax Law was
introduced. It departed from the old system of the net income taxation by adopting a
new tax concept based on schedular approach; incomes from different sources are
taxed at different schedules.

Under the gross taxation structure, personal incomes are classified into compensation
income, business income and income from profession, and passive and other income.

The Modified Gross Income Taxation aided in eliminating discretion between tax
payers and tax officials, simplified the administration of income tax, and granted the
much needed relief in terms of higher exemption allowance. On the other end, the
new tax scheme lessened the government revenue from taxation due to the diminished
tax rates for compensation and increase in exemption allowances.

B. Post EDSA Revolution Developments

When President Corazon Aquino assumed power during 1986, personnel reforms were also
implemented. Although the Philippines was in a fiscal crisis, after having through successive
years of economic contraction from 1984 to 1985 owing to structural problems with the tax
system, the lingering effects of debt, exchange rate issues, financial and political crises that
occurred during the latter part of the Marcos presidency, Aquino administration also gave

30
attention on organizational reforms mostly on changes of personnel with the existing
organizational set-up substantially retained. Personnel reorganization was implemented in 1986
to weed out grafters which is considerably the same kind of personnel problems the country
encountered now and then.
The severe macroeconomic and fiscal realities in 1986 did not leave President Corazon Aquino
any option. With the country still heavily indebted, the best way to rebuild the country’s finances
and also to resume access to concessional credit was to undertake a reform of the country’s
complicated, unfair, inefficient, and low yielding tax system. This lead to the implementation of
the 1986 Tax Reform Package. The aim of the 1986 TRP was to fix the inherent weaknesses of
the tax system that the Aquino administration inherited. More specifically, the objectives of the
1986 TRP were as follows:

• Improve the responsiveness (elasticity) of the tax system.

• Promote equity by ensuring that similarly situated individuals and firms bear the
same tax burden.

• Promote growth by withdrawing or modifying taxes that reduce incentives to

work or produce, and

• Improve tax administration by simplifying the tax system and promoting tax
compliance.

The formulation and approval of the 1986 TRP took place under a unique policy regime. For 18
months, President Corazon Aquino led a revolutionary government and exercised both Executive
and Legislative powers. There was no Congress, hence no need for tedious and time consuming
executive-legislative coordination. This made possible the approval of twenty-nine (29) tax
measures (all in the form of Executive Orders, EOs), including the introduction of the value
added tax (VAT) into the Philippine tax laws, in one Cabinet meeting on June 28, 1986. The
sweeping reforms included changes in the direct and indirect taxation.

a. 1986 Reforms in Direct Taxation

On personal income taxation (PIT), the dual tax schedules for compensation and
professional income earners were unified with a 0-35 percent schedule adopted for both
types of taxpayers to minimize revenue loss and preserve the relative tax burden of
individuals, ceilings on allowable business deductions were proposed and adopted.
Personal tax exemptions were increased to adjust for inflation and to exempt from
taxation those earning below the poverty threshold. Married couples, where both wife and
husband worked, were given an option to file separate returns which lowered the tax

31
 burden on married couples by removing the effect of progressive rates on their combined
incomes.

Passive income were taxed at uniform rate of 20%, which rendered passive income
taxation neutral with respect to investment decisions involving bank deposits and royalty
generating ventures.

On corporation income taxation, a uniform 35% rate replaced the two-tiered corporate tax
structure.

For travel tax under Executive Order No. 25, Overseas Filipino Workers were
exempted from travel tax payment in recognition of their dollar earning contribution
to the country.

b. 1986 Reforms in Indirect Taxation

The Value-Added Tax System (VAT), pursuant to Executive Order (EO) 273, was
introduced to simplify the tax structure and its administration.
The new system had the following features:

• A uniform destination principle VAT rate of 10% on the gross selling price of domestic
and imported goods and services and 0% on exports and foreign currency denominated
sales (zero-rating).

• 10% in lieu of various rates applicable to fixed taxes (with 60 nominal rates), advance
sales tax, tax on original sale, subsequent sales tax, compensating tax, miller’s tax,
contractor’s tax, broker’s tax, film lessor and distributor’s tax, excise tax on solvents and
matches, and excise tax on processed videotapes.

• A 2% tax on entities with annual sales or receipts of less than PHP 200,000.

• Adoption of tax credit method of calculating tax by subtracting tax on inputs (input
VAT) from tax on gross sales (output VAT).

• Exemption of the sale of basic commodities such as agriculture and marine food
products in their original state, price-regulated petroleum products and fertilizer, and

• An additional 20% tax on non-essential articles such as jewelry, perfumes, toilet waters,
yacht and other vessels for pleasure and sports.

32
 The VAT was signed into law during 1986 and fully implemented during 1988. It
provided new avenues for indirect taxation to raise revenue. As cumulative experience
with the VAT suggested that it would be a reliable source of revenue growth, its rate
would be subsequently adjusted upwards and its base broadened. However, beyond the
Corazon Aquino administration, numerous new tax laws would reduce the reliability of
the VAT, as legislated exemptions of various groups of final consumers grew in number,
resulting in growing revenue losses.

C. The Start of the Fidel Ramos Presidency (1992 – 1997)

In 1992 marked a transition into a period marked by greater political normalcy and stability for
the Philippines. Succession took place constitutionally, and the new government set out to more
clearly define the country’s economic thrusts and priorities. The desire to follow its neighbors
along the path of export-led growth led lawmakers to legislate more generous tax incentives for
exporters.

1. The PEZA Law

In an effort to stimulate foreign investment and export-led growth, the PEZA Law was
passed in 1995. With this law, Congress restructured the old Export Promotion Zone
Authority (EPZA) and renamed it the Philippine Economic Zone Administration (PEZA)
and conferred on it more powers to develop special economic zones. This included the
ability to grant tax incentives to encourage investment by private developers in special
economic zones. The former US military bases in Subic and Clark, as well as two other
large tracts of land in Zamboanga and Cagayan provinces, were converted by law into
freeports, where consumables were also sold duty free (effectively distinguishing them
from special economic zones, in which only capital is tax free). The new laws enabled
registered exporters to receive the most generous preferential tax treatment. This included
income tax holidays at the start of operations for PEZA registered investors, a low 5% tax
on gross income earned after expiry of the income tax holiday, VAT zero rating and duty
free status on imported inputs. Freeport registered investors would be eligible for the
same incentives enjoyed by PEZA locators except the income tax holiday.

2. The 1997 Comprehensive Tax Reform Program (CTRP)

The 1997 Comprehensive Tax Reform Program (1997 CTRP) was implemented to
broaden the tax base, which would allow lower tax rates, and to plug the perceived
loopholes in the indirect tax system. Other motivations included simplification of the tax
structure, minimization of leakages from undeclared revenues, overstated deductions and
corruption and to make the tax system more elastic and ease tax administration and

33
 enhancement of the progressivity of income taxes to achieve better income redistribution.
Officially, the objectives of the 1997 CTRP were:

• Make the tax system broad-based, simple and with reasonable tax rates,

• Minimize tax avoidance allowed by existing flaws and loopholes in the system,

• Encourage payments by increasing tax exemptions levels, lowering the highest tax
rates, and simplifying procedure, and

• Rationalize the grant of tax incentives, which at that time was estimated in 1994 to be
worth equal to P31.7 billion. The 1997 CTRP was also one of the important
requirements for the Philippines’ exit from the International Monetary Fund’s
supervision.

The 1997 CTRP included the following:

1. 1997 Tax Reform Formulation and Legislative Strategy

On February 10, 1994, President Ramos issued Administrative Order 112 creating
the Presidential Task Force on Tax and Tariff Reforms. The task force was multi-
sector in composition and chaired by the Secretary of Finance. A technical
secretariat headed by an Undersecretary of Finance was likewise created.

2. 1997 Reforms in Income Taxation

The personal income tax system reverted to a uniform rate schedule for both
compensation and business and professional income. This came after a brief
experiment with the 1992 legislated Simplified Net Income Taxation System. The
rate structure was reduced to seven brackets. Personal and additional exemptions
were increased and it allowed deduction of premium payments for health and/or
hospital insurance from gross income. The corporate income tax rate was reduced
from 35% to 34%. Additionally, on 1 January 1999, it was reduced to 33% and on
1 January 2000 it was reduced to 32%. A minimum corporate income tax was
imposed on the fourth year from the time a corporation starts its business
operations. Fringe benefits granted to supervisory and managerial employees were
taxed, equivalent to the applicable company income tax rate of the grossed-up
monetary value of the fringe benefits.

3. 1997 Reforms in Indirect Taxation

34
 The VAT base was broadened to include services including those rendered by
professionals by RA 7716. The Expanded VAT was subjected to a Temporary
Restraining Order for one year. To minimize opposition, the Improved VAT law was
enacted with the following features:

o Restored the VAT exemptions for all cooperatives (agricultural, electric, credit or
multi-purpose, and others provided that the share capital of each member does not
exceed P15,000.

o Expanded the coverage of the term “simple processes” by including broiling and
roasting, effectively narrowing the tax base for food products

o Expanded the coverage of the term ‘original state’ by including molasses, and

o Exempted from the VAT the following: – Importation of meat – Sale or importation
of coal and natural gas in whatever form or state – Educational services rendered by
private educational institutions duly accredited by the Commission on Higher
Education (CHED).

D. The Estrada (1998-2001) and Arroyo (2001-2010) Administrations

By 1998 when Joseph Estrada assumed presidency, the Philippine Government had accumulated
large amounts of fiscal liabilities. The government quickly inventoried existing public-private
partnership contracts and over time, renegotiated terms with investors, occasionally buying out
some. The Estrada government did not last for long as public protests forced the president out of
office during 2001. In January 2001, then Vice President Gloria Macapagal Arroyo was swept
into power when then President Joseph Estrada was extra-constitutionally ousted. The Arroyo
administration increased government spending without any adjustment to tax collections. This
resulted in large deficits from 2002 to 2004.

To prevent further undesirable effects of budget deficits, President Arroyo had to look for
additional sources of revenues to sustain basic social services. This gave birth to the November
2005 E-VAT (Expanded VAT) Reform, RA 9337. The measure broadened the VAT base, by
subjecting to VAT energy products (for sales of coal and petroleum products and electricity
generation, transmission, distribution) and select professional services. It also increased the VAT
tax rate from 10 to 12 percent in February 2006. The E-VAT law also tweaked other tax laws. It
raised the corporate income tax from 32% to 35% to be applied until 2009 and thereafter it was
reduced to 30%.

E. The Administration of Benigno Aquino Jr. (2010-2016)

President Benigno Aquino had promised that he would not impose new taxes so additional
revenue would have to result from adjusting existing taxes. Highlight of his administration is the

35
2012 Tax Reform. In 2012, excise tax on liquor and cigarettes (referred to as sin taxes) was
adjusted upward. The motivations for the adjustment of sin taxes were fiscal and public health
and social order-related considerations. The Department of Finance sought to restructure the sin
taxes by addressing their structural issues.

• Removing the price classification freeze where older brands are subject to different tax rates
than new ones – this encouraged consumers to shift to cheaper cigarette and alcohol brands
(which did not discourage consumption);

• Migrating into a unitary tax structure by 2017;

• Leveling the playing field by removing grandfathering provisions for certain brands;

• Reducing the number of tiers of products; and

• Indexing tax rates to inflation (based on price indices for both alcoholic products and tobacco
products) starting 2017, to stem the reduction in real tax burdens.

F. The Administration of Rodrigo Roa Duterte (2016- present)

The Duterte administration is committed to aggressively pursue lower tax rates towards a simpler,
more equitable and more efficient tax system that can foster investment and job creation. On
December 19, 2017, he signed into law the Tax Reform for Acceleration and Inclusion (TRAIN)
Act, officially cited as Republic Act No. 10963, the initial package of the Comprehensive Tax
Reform Program (CTRP).

This package introduced changes in personal income tax (PIT), estate tax, donor's tax, value
added tax (VAT), documentary stamp tax (DST) and the excise tax of tobacco products,
petroleum products, mineral products, automobiles, sweetened beverages, and cosmetic
procedures. The prominent features of the tax reform are lower personal income tax and higher
consumption tax.

In his recent State of the Nation Address on July 22, 2019, President Duterte urged the Congress
to immediately pass the Package 2 of the Comprehensive Tax Reform Program (CTRP), the Tax
Reform for Attracting Better and High-Quality Opportunities (Trabaho) bill. The Trabaho bill
aims to:

o reduce the corporate income tax rate from 30% to 20%

o broaden the tax base by removing some of the preferential or lower corporate tax
rates

36
 o Rationalize tax incentives by making them performance-based, targeted, time-bound,
and transparent.

The government’s near term goal is to generate an additional 400 billion in revenues out of this
tax policy and administration reform. With President Duterte enjoying broad support among the
members of Congress, it is expected that the proposed reform will pass be passed immediately.
Politics usually come into play in legislation but our sincere aspiration for true prosperity will
hopefully prevail.

VI. ISSUES AND PROBLEMS

A. Revenue Administration

1. Lack of Tax “handles”

Tax handles refer to the sets of information on the tax subject which are used as bases for tax
assessment and collection. The lack of such information can be attributed to the high costs of
data collection and analysis, the lack of records pertaining to the object or person’s
socioeconomic profile, negative public attitude and low compliance on certain taxes, and the
nature and business structures of the economy.

The problem of tax handles is partly due to the inability of the accounting field of study and
practice to meet the needs of tax administration. Either there is a lack of accounting information
or there is an inadequate supply of information actually needed by tax assessment and collection.
In addition, willful neglect or evasion on the part of the business in question, sometimes in
collusion with members of the accounting profession, makes the job of tax assessment more
problematic.

Another problem as regards to tax handles is the lack of socioeconomic data which can provide a
valuable basis for the design of tax system and schemes.

2. Assessment of Revenue Administration

An important part of revenue administration which remains inadequately performed is the

conduct of fiscal and performance audits to assess revenue administration. Audit of agency
operations, if done objectively and oriented towards problem-solving, can provide useful
information as a basis for the improvement of revenue administration. Revenue audit examines
all income derived from the regular system of taxation including cash inflows realized from the
operations and activities of the government or received by it in the exercise of its corporate
functions (receipts). Approached on post audit basis, revenue audit will look at the regularity and

37
complete of collection, their proper classification, and the adequacy of controls over revenue
accounts.

The function of conducting this type of audit rests in the Commission of Audit (COA). Thus, far
revenue audit has not been substantially performed to the extent that it has maximally benefitted
our tax system. Partly due to the overemphasis on audit of disbursement and pre-audit, revenue
audit was not given enough attention by COA.

B. Tax Structure

1. Capital Formation and Allocation of Resources

A tax structure for generation of resources encounters the problem of reconciling tax efforts and
performance with the capacity of the taxpaying public.

The Philippines, like all other developing countries, the government has to compensate for the
low level of capital formation in the private sector by utilizing tax revenue to capitalize major
projects. Either due to the problems attendant to tax administration or to more important
considerations like the perceived urgency of development spending, the government has
difficulties in generating resources from within.

Tax efforts have had some success as evidenced by the expansion of the tax base and resulting
dramatic increase in revenue collections since 1972. However, the revenues generated when
compared to actual expenditures remain inadequate resulting to fiscal deficit. The gap between
revenues and expenditures is a perennial problem. To increase revenues, however, the usual tax
strategy has been to raise the indirect taxes.

The efficiency of the allocation of resources for maximum utilization and balanced
socioeconomic development lie in the present structure of tax incentives and disincentives. A
most urgent issue is the granting of tax incentives to foreign investments. The structure of tax
incentives is always confronted by the problem of striking a proper balance between over-all
benefits of capital formation and the attendant disadvantages from the effects of economic
growth and stability. One problem is the fact that the tax incentives granted to foreign investors
reduced the country’s share in the profits generated by foreign capitals. Another problem that
arises is the competition among less developed countries for foreign capital participation to the
extent that developing countries try to outbid among each other by offering greater tax incentives.

2. Redistribution of Income and Wealth

In the Philippine experience, the evolution of the tax structure towards the redistribution of
income and wealth is characterized by efforts to institute progressivity by strengthening the
38
direct income system taxation. But even the scheme suffers from deficiencies as to redistributing
the tax burden on equitable basis. Many feel that the redistributive effects of taxation should be
directed more towards checking the alarming growth of indirect taxation.

3. Economic Stability

A major problem concerns the need for revenues from trade activities. The government imposes
import and export taxes in order to generate revenues. At the same time, it has to set rates at a
level which is consistent with other economic objectives. Thus, it has to protect the home
industries by imposing high import tariffs. The government may also impose high export taxes in
order to discourage underutilization of inefficiency in the export industries or build up its foreign
exchange resources. It may also lower export taxes in order to make its exports more
competitive in the world market. The occasion for the lowering and increasing of tariffs depend
upon external forces. Thus, an important feature of a tax structure should be its ability to take
advantage of opportunities and to protect the economy during instabilities.

VII. Recommendations

In order to address the deficiencies and structural weaknesses of the Philippine tax system and to
increase the tax revenues to incur additional funding for development projects, we encourage the
consideration of the following recommendations:

a) Expand the tax base, or the set of goods and services which are taxed. Ensure that
exemptions are limited to essential goods like raw food and medicines;

b) Identify the problems that face the real property tax collection of various Local
Government Units (LGUs) and consider additional measures to ensure collection of
delinquent taxes such as availment of remedies as provided by the provisions of RA No.
7160 to improve revenue collection;

c) Devise effective ways to detect, eradicate, if possible cases of tax fraud and tax evasion;

d) Impose heavier fines and penalties for violators of set guidelines and policies; and

e) Enhance audit and verification programs. A risk-based audit is most likely the most
effective type in terms of encouraging compliance and dissuading corrupt practices.

39
 VII. References

http://www.ntrc.gov.ph/images/Publications/guide-to-philippine-taxes-2016/local-taxes.pdf

https://taxacctgcenter.ph/overview-of-donors-tax-in-the-philippines/

http://www.ntrc.gov.ph/images/Publications/guide-to-philippine-taxes-2016/tariff-and-customs-
duties.pdf
http://taxsummaries.pwc.com/ID/Philippines-Corporate-Taxes-on-corporate-income
https://www.imf.org/external/pubs/ft/fandd/2018/03/akitoby.htm

https://businesstips.ph/different-kinds-of-taxes-in-the-philippines/

https://richardkleincpa.com/importance-of-taxes/
Essays, UK. (November 2018). The Role Of Taxation In An Economy Economics Essay.
Retrieved from https://www.ukessays.com/essays/economics/the-role-of-taxation-in-an-
economy-economics-essay.php?vref=1

40