Part VI Taxation

• Taxation


  • Taxation occurs when a government or other authority requires that a fee be paid by citizens and corporations, to that authority.
  • The fee is involuntary, and as opposed to other payments, not linked to any specific services that have been or will be provided.
  • Tax occurs on physical assets, including property and transactions, such as a sale of stock, or a home. 
  • Types of taxes may include income, corporate, capital gains, property, inheritance, and sales.
• Taxation


  As a government mechanism to raise funds, developed and evolved through time, and in the context of the Philippines, we must understand that it came with our colonial experience.
• Taxation


  • In the contemporary world, taxation is a reality that all citizens must contend with for the primary reason that governments raise revenue from the people they govern to be able to function fully.
  • In exchange for the taxes that people pay, the government promises to improve the citizens' lives through good governance.
• Evolution of Philippine Taxation

  1. Pre-Colonial Period - Buhis, buwis, handog
  2. Spanish Period - Tributos/fallas, cedula personal, situado real, urbana/industria, monopoly income, Forced Labor
  3. American Period - Real estate tax, land tax, Internal Revenue Law (1904), cedula, industria, Underwood-Simons Tariff Act, income tax, lottery tax, inheritance tax, residence tax, National Internal Revenue Code (1939)
• Evolution of Philippine Taxation

  4. Japanese Period - Income from amusements, manufactures, professions, and business licenses, sales of the National Sweepstakes and sale of government bonds.

  5. Contemporary Period - Tax Commission (1959), Omnibus Tax Law (1969), 1986 Tax Reform  Program, value-added tax (VAT), Comprehensive Tax Reform Program (1997), Republic Act 7716, Expanded Value-Added Tax (E-VAT), Sin Tax Reform, Republic Act 10351, TRAIN Law
• Taxation in the Philippines


  • The Philippines may have abundant natural resources even before the encroachment of the Spaniards, but our ancestors were mainly involved in a subsistence economy.
  • The payment of buhis/ buwis/handug or the obligation to provide labor services to the Datus in some early Filipino communities in the Philippines may resemble taxation, it is essentially different from the contemporary meaning of the concept.
• Subsistence Economic Model


  Jimenez (2024)

  
• Imposition of Tributes


  The arrival of the Spaniards altered the subsistence economic system because they imposed the payment of tributos (tributes) from the Filipinos, similar to what had been practiced in all colonies in America with the purpose of generating resources to finance the maintenance of the islands, such as salaries of government officials and expenses of the clergy.
• Imposition of Tributes

  Exempted from  payment of tributos were the principals which include alcaldes, gobernadores, cabezas  de barangay, soldiers, members of the guardia civil (civil guard), government officials, and  vagrants.
• Imposition of Tributes

  Revenue collection due to dispersed nature of native settlements is very difficult for the Spaniards prompting them to introduce the system of reduccion through the creation of pueblos (towns) where Filipinos were gathered and awarded plots of  land to till; such will be later handled by encomenderos who  received rewards from the Spanish crown for their services.
• The Galleon Trade

  • The Manila-Acapulco Trade  was established by the Spaniards toward the end of the 16th century through the galleons to make sure that European presence would be sustained.
  • This annual economic activity helped improve the economy of the Philippines and  reinforced the Spanish control of the country.
  • Tax collection was still very poor and subsidy from the Spain would be needed through the  situado real delivered from the Mexican treasury to the Philippines through the galleons which only stopped when Mexico gained its independence in 1820.
• Cedula Personal


  • The payment of tribute was replaced by a poll tax collected through a certificate of identification called the cédula personal in 1884 which is a requirement from every resident and must be carried while traveling.
  • The payment of cédula personal is by person, not by family; its payment is progressive and according to income categories.
• Additional Direct Taxes


  • Two direct taxes were added in 1878 and imposed on urban incomes – Urbana (a tax on the annual rental value of an urban real estate) and Industria (a tax on salaries, dividends, and profits).
  • These taxes were universal and affected all kinds of economic activity except agriculture, which was exempt to encourage growth.
• Indirect Taxes and Income From Monopolies


  • Indirect taxes such as customs duties were imposed on exports and imports to further raise revenue, especially during the nineteenth century  when economic growth increased exponentially; there were no excise taxes  collected by the Spaniards throughout the years of colonialism.
  • Other income are gained from monopolies, such as  the sale of stamped paper, manufacture and sale of liquor, cockpits, and opium; tobacco was the biggest of the state monopolies which began  in 1781 and halted in 1882.
• Forced Labor


  • Forced labor was a character of Spanish colonial taxation in the  Philippines and was required from the Filipinos which proved to be useful in defending the territory of the colony and augmenting the labor required by woodcutting and shipbuilding especially during the time of the galleon trade.
  • Through the polo system, male Filipinos were obliged to serve, a burden that resulted in an increase in death rate and flight to the mountains, which led to a decrease in population in the seventeenth century.
• Impression on Spanish Taxation


  Taxation in the Philippines during the Spanish colonial period was characterized by the heavy burden placed on the Filipinos, and the corruption of the principales, or the former datus and local elites who were co-opted by the Spaniards to subjugate and control the natives on their behalf.
• Impression on Spanish Taxation


  • The principales who were given positions such as cabezas de barangay or alcaldes in the local government were able to enrich themselves by pocketing tributos  and/or fallas, while the peasants were left to be abused.
  • Taxation appeared  progressive but the disparity between the less taxed principales and the  heavily taxed peasants made the rich richer and the poor poorer.
• Spanish Government in the Philippines

  
  

  Sources of Revenues During Spanish Era

  
• Taxation During the Americans


  • The Americans who acquired the Philippines aimed to make the economy self-sufficient by running the government with the smallest possible sum of revenue and create surplus in the budget.
  • From 1898 to 1903, the Americans followed the Spanish system of taxation with some modifications, noting that the system introduced by the Spaniards were outdated and regressive.
• Reforms and Challenges in Taxation


  Introduced Reforms

  • Military government suspended the contracts for the sale of opium, lottery, and mint charges for coinage of money.
  • Urbana was replaced by tax on real estate that later became land tax – applies to both urban and rural real estates.
  • Internal Revenue Law of 1904 was passed as a reaction to the problems of collecting land tax and prescribed 10 sources of revenue.
  • Cedula rate was fixed per adult male.
• Reforms and Challenges in Taxation

  Introduced Reforms

  • Problem in land tax due to very disorderly titling in the rural areas.
  • Appraising the land value was influenced by political and familial factors.
  • Introduction of a taxation system on agricultural land faced objections from the landed elite.
  • Tax evasion was prevalent, especially among the elites.
  • Decline in revenues where some provinces were authorized to double cedula fees to support the construction and maintenance of roads.
• Reforms and Challenges in Taxation


  Introduced Reforms

  • Industria tax on the business community and to an industrial or commercial activity according to their profitability; percentage tax on sales payable quarterly.
  • Income tax was introduced in 1914 and inheritance tax was created in 1919.
  • A national lottery was established to create more revenue for the government.
• Reforms and Challenges in Taxation

  Introduced Reforms

  • Increased in tax receipts was increased  to make up for the losses from Underwood-Simmons Tariff Act.
  • Minor changes in 1904 Internal  Revenue Act i.e. taxes on mines, petroleum products,  and dealers of petroleum products and tobacco.
• Reforms and Challenges in Taxation


  Introduced Reforms

  • The passage of Underwood-Simmons Tariff Act of 1913 resulted in the decline of revenue of the government as export taxes levied on sugar, tobacco, hemp, and copra were lifted.  
  • Newly created taxes were not enough to increase the government revenues.
• Commonwealth Taxation


  Commonwealth Government

  • Equitable taxation system
  • Increased income tax rate (1936)
  • Surtax rate on individual net income (in excess of 10,000)
  • Increased income tax rates on corporations
  • Abolished cedula tax (1940)
  • Imposed residence tax (18 years old and above and on corporations)
• Drafted National Internal Revenue Code (1939)


  • Single tax replaced normal tax (3%) and the surtax on income at a progressive rate
  • Reduced personal exemptions
  • Slight increased in corporation income tax, taxes on inherited estates or gifts donated in the name of dead persons was introduced
  • Cumulative sales tax replaced by a single turnover tax of 10% on luxuries.
  • Increased taxes on liquors, cigarettes, forestry products and mining.
  • Dividends were made taxable
• World War II and Japanese Era Taxation


  Japanese Military Administration and the Second Philippine Republic

  • Continued the tax collection introduced by the Commonwealth, articles belonging to Japanese armed forces were exempted.
  • Main sources of taxation came from amusements, manufactures, professions, and business licenses
  • Additional incomes of the government were derived from the sales of the National Sweepstakes and sale of government bonds.
• Fiscal Policy from 1946 to Present


  • The highly agriculture-based economy was disrupted; dependence from the former colonial administration for rehabilitation was taken advantage by the US.
  • Severe lack of funds in the 1949 led US to propose for the imposition of direct taxes but Pres. Roxas declined the proposal to avoid alienation from Congress.
  • Implementation of import and exchange controls led to import substitution development during Pres. Quirino that allowed the expansion of viable manufacturing sector reducing economic dependence in imports.
• Fiscal Policy from 1946 to Present


  • Higher corporate taxes as a new measure increased government revenues in 1953.
  • RA 2011 created Tax Commission in 1959 for more robust and efficient tax collection scheme but tax policy remained regressive, landed elite in Congress make sure that taxes will not be levied on them, overburdening the marginalized sectors. 
• Fiscal Policy from 1946 to Present

  • Rampant corruption is on the rise; no tax legislation despite of important economic changes; taxes on imports are rejected; indirect taxation contributed to three quarters of tax revenues; Omnibus Tax Law (1969)  did not increase the ratio of income tax to general tax revenue.
  • Tax collection is poor and structure is problematic while much of the funds are lost in corruption.
• Fiscal Policy from 1946 to Present


  • Tax system remained regressive and unresponsive during the Marcos regime – 70% of tax collection was from indirect taxes.
  • Generated low tax yield; average annual taxes growth rate is only  15%, and tax effort (defined as the ratio between the share of the actual tax collection in gross domestic product and predictable taxable capacity) was at a low of 10.7%
• Fiscal Policy from 1946 to Present


  1986 Tax Reform Program under Pres. Corazon C. Aquino was introduced to improve the responsiveness of the tax system, promote equity (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.
• Fiscal Policy from 1946 to Present


  • Value Added Tax (VAT) was the major reform introduced in the tax system with the following features:
  • 10% uniform rate, on sale of domestic & 'imported goods  and services
  • 0% on exports and foreign-currency denominated sales;
  • 10% in lieu of varied rates applicable to fixed taxes (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 lessors and distributor's tax, excise tax on solvents and matches, and excise tax on processed videotapes
• Fiscal Policy from 1946 to Present


  Value Added Tax (VAT) was the major reform introduced in the tax system with the following features:

  • 2% tax on entities with annual sales or receipts of less than 5,200.
  • adoption of tax credit method (tax less tax on inputs from tax on gross sales
  • exemption on the sales of basic commodities
  • 20% additional tax on non-essential articles (such as jewelry, perfumes, etc.)
• Fiscal Policy from 1946 to Present


  • VAT Law signed in 1986, took effect in 1988 but new tax laws legislated increasing tax exemptions reduced its reliability.
  • Tax Reform was coupled with Administrative Reform through Executive Order No. 127 (restructured Department of Finance and Bureau of Internal Revenue (BIR), its attached agency.
• Fiscal Policy from 1946 to Present

  • Tax collection and tax audits were intensified; computerization was introduced leading to reduced corruption and improved trust with BIR; tax reform resulted to tax and revenue effort increase (10.7 % in 1985 to 15.4% in 1992).
  • Pres. Ramos ventured on Comprehensive Tax Reform Program (1997).
• Fiscal Policy from 1946 to Present

  • Aims of Comprehensive Tax Reform Program (1997):

  1. Make the tax system broad-based, simple, and with reasonable tax rates;
  2. Minimize tax avoidance allowed by existing flaws and loopholes in the system;
  3. Encourage payments by increasing tax exemptions levels, lowering the highest tax rates, and simplifying procedure; and
  4. Rationalize the grant of tax incentives, which was estimated to be worth 531.7 billion pesos in 1994.
• Fiscal Policy from 1946 to Present

  • VAT base was broadened through RA 7716 to include services.
  • Features of the Expanded VAT include the following:
  • Restored the VAT exemptions for all cooperatives (agricultural, electric, credit or multipurpose, and others) provided that the share capital of each member does not exceed 515,000 pesos.
• Fiscal Policy from 1946 to Present

  Features of the Expanded VAT include the following:

  • Expanded the coverage of the term "simple processes" by including broiling and roasting, effectively narrowing the tax base for food  products.
  • Expanded the coverage of the term "original state" by including molasses.
• Fiscal Policy from 1946 to Present

  Exempted from the VAT are the following;

  • importation of meat;
  • sale or importation of coal and natural gas in whatever form or state;
  • lease of residential units with monthly rental;
  • sale, importation, printing or publication of books and any newspaper.