SYSTEM OF TAXATION IN THE PHILIPPINES

Objectives:
The study aims to determine the following:
- Taxation in the Philippines
- Condition of the past tax system in the Philippines
- Roles of tax system in the progress of the Philippines

Introduction
Taxes are the lifeblood of the goverment, it is the proportional contribution of a
person and property used by the government to finance basic social services that are vital to
the lives of citizen and economic growth. Every year, individuals and corporation pay
government taxes, which are used to fund expenditures. But in a more realistic sense, it's the
root of corruption among the higher ups and results a negative effect to the common people
of the country including the growth of the economy. Taxpayers decribes tax as a burden
because it limits the capability of them to improve their lives.But we can never hide the fact
that without taxes, government would be paralyzed which means unable to meet the
demands of their citizens. This includes funding health services, education, infrastructure
development, and many more. Taxes is also important to businesses, with the development
of this social projects this will promotes economic activity throughout the country. This is why
it is important that citizens should pay taxes and understand its outcome in a long term basis.

If we looked back about three century ago, taxes were already imposed to resident of the
Philippines under the the Spanish regime in order to support the government and church
operation. And even before, resident who belongs to the lower social class bears the burden
and only the higher ups bears the benefits of this funds. Equitable taxation was never been
achieved by the Filipinos where in taxes should be collected depending on the social class or
income bracket of a taxpayer.
The government has a central role to play in creating the conditions for sustained develop-
ment not just through the provision of infrastructure and basic services but by establishing
entitlements that allow all citizens, especially the poor, to develop their capabilities.

Taxation in the Philippines

Taxation power by which the sovereign through its law-making body raises revenue to defray
the necessary expenses of government from among those who in some measure are
privileged to enjoy its benefits and must bear its burden.Simply stated that it is the power of
the government to collect revenues for the public purposes. The nature of the power of
taxation is that it is an inherent attribute of sovereignty, it is important to the existance of
every government because it is the source of funds that is being used to finance public
establishment and services. Therefore, even though there is no enacted law about the
taxation, the government can still impose taxes. Another is that it is legislative in character.
But if the taxation is implemented by the constitution the power of taxation is legislative in
character. It cannot be exercised by the executive or judicial branch of the government. Which
SYSTEM OF TAXATION IN THE PHILIPPINES

means only legislative branch of the government can impose the taxes and it is the congress.
The power to tax is also granted by the constitution to local government subject to guidelines
and limitations as provided by the law.

In the modern world, taxation is used as an instrument of economic policy. The Philippines
tax system has continued to suffer from chronic weaknesses. Tax rates continue to be high,
discouraging investment and also work effort. Considering that the current tax system is a
product of cumulative legislation and reforms that have always been influenced by the past
administration.

CONDITION OF THE PAST TAX SYSTEM IN THE PHILIPPINES

Spanish era
Taxes during the Spanish period was compulsory.To support the colony, several forms of taxes
and monolopies were imposed. Spanish first 100 years exercised a type of tax farming
originally from the American known as “encomienda”.It is a land ownership system with the
use of titulo as proof of ownership. These are the lands given by the King of Spain – King Philip
II to its soldier who joined the military expeditions. The landlord are called “encomendero”.
They are the ones who collect the taxes or rent from the residents of their land. It is his
obligation to protect the resident from any danger or threat like invaders.But at the end 17 th
century the Spanish abandon the system.
Manila-Acapulco Galleon Trade the main source of income during the Spanish regime. Service
was inagurated in 1565 and continued into the early 19th century. The Galleon trade brought
silver from New Spain (Mexico) and silk from China by way of Manila. This way, the Philippines
earned its income through buy and sell. The trading was prosperous but it neglected the
development of the local industries which affected the Indios since agriculture was their main
source of income. The trade lasted over 2 century.
Tribute “tributo o buwis” was form of taxation implemented by the Spanish Government in
the Philippines in order to support government and church operation. Filipinos were required
to pay the tributo amounting to 8 reales and those who are obliged to pay were resident
ranging from 18 to 50 years old, workers like carpenters, bricklayers, blacksmith, shoemakers,
and those in public.
 Sactorum was a tax in the amount of 3 reales, required for the cost of Christianization,
including the construction of the churches and the purchase of materials for religious
celebration.
 Donatilyo was the tax in the amount of half real for the military campaign of the
goverment against the Muslims.
 Caja De Communidad was a tax collected in the amount of 1 real for the incurred
expenses of the town in the construction of roads, repair of bridges and improvement
of public building.
SYSTEM OF TAXATION IN THE PHILIPPINES

 Polo y servicio is the system of forced labor for 40 days of men ranging from 16 to 60
years old who were obliged to render personal services to the community projects.
By 1884, the tribute was replaced by cedula personal, wherein colonist were required to pay
for personal identification commonly known as the community tax certificate(ctc) was
introduced as a form of compulsory tax collection that shows evidence and proof of the
sovereignty of an imperial government.

In the Philippines taxes were levied and collected to enrich the royal monarch, although
pretensions were made that they were solely for public purposes. To collect revenue was one
thing and its use was another. Originally, a tribute was levied upon all native inhabitants as a
recognition of their allegiance to the King. The system of taxation as employed by the Spanish
government was honeycombed by corruption and dishonesty on the part of administrative
officials who knew as little of the law as the tax- payers themselves. Their appointments made
for political reasons as favorites of the governor-general, and their compensation was too
small to give them the average livelihood. Consequently, the officials had to rely on “caidas”
(“droppings”) which they always collected in the performance of duty. It was a belief that
officials were entitled to “tipe” and its application received the approbation of the public and
doubly so by the officials themselves. This was the nature of the official conscience of the
times. Some taxes never found their way into the public treasury. The decrease which were
proclaimed on the subject of taxation were never compiled until about 1867, some thirty
years before the capture of Manila Bay. This fact explained the ignorance of the tax payers
about the law on taxation. To be true some laws were posted but they were in the language
little understood by the greater mass of population. The home government itself was ignorant
of Philippine conditions and many decree was innocently proclaimed which was not suited to
existing conditions.

American Era
In the early American regime from the period 1898 to 1901, the country was ruled by
American military governors. In 1902, the first civil government was established under
William H. Taft. However, it was only during the term of second civil governor Luke E. Wright
that the Bureau of Internal Revenue (BIR) was created through the passage of Reorganization
Act No. 1189 dated July 2, 1904. On August 1, 1904, the BIR was formally organized and made
operational under the Secretary of Finance, Henry Ide (author of the Internal Revenue Law of
1904), with John S. Hord as the first Collector (Commissioner). The first organization started
with 69 employees, which consisted of a Collector, Vice-Collector, one Chief Clerk, one Law
Clerk, one Records Clerk and three (3) Division Chiefs.

Following the tenure of John S. Hord were three (3) more American collectors, namely: Ellis
Cromwell (1909-1912), William T. Holting (1912-1214) and James J. Rafferty (1914-1918).
They were all appointed by the Governor-General with the approval of the Philippine
Commission and the US President.
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During the term of Collector Holting, the Bureau had its first reorganization on January 1, 1913
with the creation of eight (8) divisions, namely: 1) Accounting, 2) Cash, 3) Clerical, 4)
Inspection, 5) Law, 6) Real Estate, 7) License and 8) Records. Collections by the Real Estate
and License Divisions were confined to revenue accruing to the City of Manila.
In line with the Filipinization policy of then US President McKinley, Filipino Collectors were
appointed. The first three (3) BIR Collectors were: Wenceslao Trinidad (1918-1922); Juan
Posadas, Jr. (1922-1934) and Alfredo Yatao (1934-1938).

On May 1921, by virtue of Act No. 299, the Real Estate, License and Cash Divisions were
abolished and their functions were transferred to the City of Manila. As a result of this
transfer, the Bureau was left with five (5) divisions, namely: 1) Administrative, 2) Law, 3)
Accounting, 4) Income Tax and 5) Inspection. Thereafter, the Bureau established the
following: 1) the Examiner’s Division, formerly the Income Tax Examiner’s Section which was
later merged with the Income Tax Division and 2) the Secret Service Section, which handled
the detection and surveillance activities but was later abolished on January 1, 1951. Except
for minor changes and the creation of the Miscellaneous Tax Division in 1939, the Bureau’s
organization remained the same from 1921 to 1941.

In 1937, the Secretary of Finance promulgated Regulation No. 95, reorganizing the Provincial
Inspection Districts and maintaining in each province an Internal Revenue Office supervised
by a Provincial Agent.

Japanese era
After Japan conquered Philippines, all hard currency was withdrawn physically at federal as
well as individual levels. Locally printed Japanese Invasion Money featuring “The Japanese
Government” was circulated. Other local notes called “Mickey Mouse Money” came with the
words “promises to pay the bearer on demand”. They were issued in so much excess that
they were considered valueless and burned down completely. The Japanese troops also
destroyed bank records.
Japanese invasion money was issued in countries like Philippines, Burma (now Myanmar),
Malaya, North Borneo and Sarawak (now Malaysia), Singapore, Brunei, the Dutch East Indies
(now Indonesia) and some areas of Oceania (New Guinea and the Solomon and Gilbert
islands).
After Japan took over Philippines, $20.5 Million worth U.S money and local cash was looted.
The first issue of Japanese invasion money in Philippines was launched in 1942 of
denominations 1, 5, 10 and 50 centavos and 1, 5, and 10 Pesos. “Replacement notes” of the
1, 5 and 10 Pesos were introduced in 1943. 100 and 500 Peso notes were introduced in 1944.
When the war was almost ending in 1945, 1,000 Pesos notes were issued.
Over all Japanese regime is how Japanese had make hard for Filipinos to live on a situation
they given. And its situation on continue in to changes of money value of both goods and
money.
SYSTEM OF TAXATION IN THE PHILIPPINES

Direct Tax System

In 1940, overall reform of the tax system was carried out to meet the re-quirements of the
wartime economy and to refine the tax system as a whole. The main characteristics of this
reform were as follows: The direct national tax system was rearranged. The former income
tax was levied not only on individuals but also on corporations. The new income tax, as a rule,
applied only to individuals and consisted of two parts; namely, scheduler income tax and a
comprehensive income tax. With the scheduler income tax, income was divided into six
schedules according to the nature of income; real property income, dividends and interest
income, business income, employment income, timber income, and retirement income.
Different rates were used with each schedule in calculating income tax liability. The idea of a
basic exemption was introduced for business income and employment income.
Comprehensive income tax aggregate income was imposed at progressive rates (10%-65%).
With respect to corporate income, the Corporation Tax Law was introduced. Corporate
income was taxed at the rate of 18%. And with respect to employment income, withholding
tax at rate of 6% was introduced.

Indirect Tax System

Main reforms of the indirect tax system during this period involved: the number of
commodities that were subject to the commodity tax increased and rates were differentiated
according to commodity. The liquor tax, which had been the leading item of indirect taxes,
was simplified in 1940.

As a result of the tax reform of 1940, Japanʼs tax system came to rely mainly on direct taxes.
The share of direct taxes, 67% of which was income tax and corporation tax, reached 64% of
total tax revenue in 1941.

Post war era

July 4, 1946, when the Philippines gained its independence from the United States, the
Bureau was eventually re-established separately. October 1, 1947, this led to a
reorganization, by virtue of Executive Order No. 94, wherein the following were undertaken:
1) The Accounting Unit and the Revenue Accounts and Statistical Division were merged
into one; 2) all records in the Records Section under the Administrative Division were
consolidated; 3) all legal work were centralized in the Law Division. October 23, 1947,
Revenue Regulations No. V-2 dated divided the country into 31 inspection units, each
of which was under a Provincial Revenue Agent (except in certain special units which
were headed by a City Revenue Agent or supervisors for distilleries and tobacco
factories). January 1, 1951, The second major reorganization of the Bureau took place
on through the passage of Executive Order No. 392. Three (3) new departments were
created, namely: 1) Legal, 2) Assessment 3) Collection
SYSTEM OF TAXATION IN THE PHILIPPINES

On the latter part of January of the same year, Memorandum Order No. V-188 created the
Withholding Tax Unit, which was placed under the Income Tax Division of the Assessment
Department. Simultaneously, the implementation of the withholding tax system was adopted
by virtue of Republic Act (RA) 690. This method of collecting income tax upon receipt of the
income resulted to the collection of approximately 25% of the total income tax collected
during the said period.
March 1, 1954 ,The third major reorganization of the Bureau took effect, through Revenue
Memorandum Order (RMO) No. 41. This led to the creation of the following offices: 1) Specific
Tax Division 2) Litigation Section, 3) Processing Section 4) Office of the City Revenue Examiner
September 1, 1954, a Training Unit was created through RMO No. V-4-47. The Bureau’s
organizational set-up expanded beginning 1956 in line with the regionalization scheme of the
government. Consequently, the Bureau’s Regional Offices increased to (8) eight and later into
ten (10) in 1957. The Accounting Machine Branch was also created in each Regional Office.
January 1957, the position title of the head of the Bureau was changed from Collector to
Commissioner. The last Collector and the first Commissioner of the BIR was “Jose
Aranas.1958, a significant step undertaken by the Bureau. The establishment of the Tax
Census Division and the corresponding Tax Census Unit for each Regional Office. This was
done to consolidate all statements of assets, incomes and liabilities of all individual and
resident corporations in the Philippines into a National Tax Census. June 19, 1959 ,To strictly
enforce the payment of taxes and to further discourage tax evasion, RA No. 233 or the
Rewards Law was passed, whereby informers were rewarded the 25% equivalent of the
revenue collected from the tax evader. 1964, the Philippines was re-divided anew into 15
regions and 72 inspection districts. The Tobacco Inspection Board and Accountable Forms
Committee were also created directly under the Office of the Commissioner.

The Administration of Ferdinand Marcos (1981-1985)

During President Ferdinand Marcos administration the tax system used regressive tax being
dependent on indirent taxes.Indirect taxes and internationa trade taxes accounted for about
35% of the total ta revenue, while direct taxes only accounted for 25%. Government
expenditure fir economic services peaked during this period, focusing mainly on infastracture
development, with about 33% of the budget spent on capital outlays. In response to the
higher global interest rates and to the depreciation of the peso, the government also started
liberalizing tariff policy during this period by enacting the initial Tariff Reform Program, which
narrowed the tariff structure from the range of 100%-0% to 50%-10%, and the Import
Liberalization Program, which aimed at reducing or eliminating tariffs and realigning indirec
taxes.

Income Tax System

Individual income tax system was schedular in nature. Two schedules existed. The first
schedule was for compensation income a modified gross income scheme which consisted of
nine tax brackets, with tax rates starting from 1% to 35%. The second schedule was for
SYSTEM OF TAXATION IN THE PHILIPPINES

business and professional income, with five tax brackets and marginal tax rates ranging from
5% to 60%. Passive income (interest income, royalties and dividends) was subject to 17.5%
and 15.0% withholding tax rates. Corporate net profits were subjected to dual rates of 25%
and 35%, where corporations with higher incomes were subjected to the higher corporate
income tax rate of 35%. Relatively high marginal tax rates contributed to the practice of
business and professional income tax filers understating their incomes. The result was that
they generally experienced much lower effective tax rates, usually around lower 20s.

The Administration of Cory Aquino (1986-1992)

When President Corazon Aquino assumed power during 1986, the Philippines Government
was in a fiscal crisis, after having gone 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.

The 1986 Tax Reform Program (1986 TRP)

The harsh 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 lowyielding tax system.

Objectives of the 1986 Tax Reform Program (1986 TRP)

Considering the urgent need to sustain fiscal balances as an aid to macroeconomic
stabilization and poverty alleviation, 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 timeconsuming
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.
SYSTEM OF TAXATION IN THE PHILIPPINES

1986 Reforms in Income 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. Unfortunately, due to
a strong lobby by various professional groups, this complementary proposal was not fully
implemented by tax administrators. 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 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. The tax on inter-corporate dividends
was eliminated and the tax on dividends was phased out gradually over a period of three
years. The exemptions from income taxes of franchise grantees were withdrawn. The
imposition of an income tax on franchise grantees put this previously favored group on an
equal footing with similarly situated individuals or firms. Uniform franchise taxes were
imposed on similar types of utilities.

In the years following the implementation of the 1986 TRP, both tax effort and revenue effort
rose steadily.This was partly due to the simplification of the tax system. Administrative
reforms complemented the policy reforms, as the Tax Identification Number was also
launched. The number of registered taxpayers doubled during the Corazon Aquino
administration and the level of tax compliance also grew, influenced in part by greater
confidence in the government. The overall responsiveness of the tax system to changes in
economic activity improved from an average of 0.9% from 1980 to 1985 to an average of 1.5%
from 1986 to 1991. The buoyancy coefficient for import duties rose from 0.5% before the
reform to an average of 1.89% from 1986 to 1991. The success of the 1986 TRP can be
attributed to several factors. It was crafted by a team of experts, was fully supported by the
president and was the result of a credible process free from undue external influence.
Furthermore, the tax reforms were complemented by stability and continuity of the top
executives at the BIR. The 1986 TRP succeeded in simplifying the system of taxation and
making it more buoyant and more responsive to the changing times.

The Administration of Fidel Ramos (1993-1998)

The start of the Fidel Ramos presidency in 1992 marked a transition into a period with a
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.In the years immediately preceding tax reforms during the
Ramos administration, the government embarked on a vision to pursue export-led growth.
SYSTEM OF TAXATION IN THE PHILIPPINES

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 enhancement of
the progressivity of income taxes to achieve better income redistribution (DBM, 1996). Apart
from changes to the marginal tax rates for the personal and corporate income tax, the 1997
CTRP also included the restructuring of excise tax rates on oil products (RA8184), as well as
on alcohol and tobacco products (RA8240). The excise tax on alcohol and tobacco products
was changed from ad valorem to specific. However, inflation indexation was left out of the
law, making the tax less elastic (Manasan, 1997).
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.

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.

The 1997 CTRP marginally increased the contribution of taxes on fuels, tobacco and alcohol
to total taxes. It rose from 12.0 percent (from 1992-97) to 12.5 percent (from 1998 to 2003).
While the effect of the 1997 CTRP on tobacco products was positive, its effects on alcohol
products and fuels and oils were negative.

The Administration of Joseph Estrada (1999-2000)

By 1998 when Joseph Estrada assumed presidency, the Philippine Government had
accumulated large amounts of fiscal liabilities. The Asian financial crisis in 1997 triggered
much of these contingent liabilities’ conversions into actual fiscal liabilities as the discrete
SYSTEM OF TAXATION IN THE PHILIPPINES

depreciation of the exchange rate and the ensuing contraction in aggregate demand triggered
claims from public-private partnership investors whose risks were contractually assumed by
government. The government quickly inventoried existing public-private partnership
contracts and over time, renegotiated terms with investors, occasionally buying out
some.Under his administration, measures that would enhance taxpayer compliance and deter
tax violations were prioritized. The most significant of these measures include: full utilization
of tax computerization in the Bureau's operations; expansion of the use of electronic
Documentary Stamp Tax metering machine and establishment of tie-up with the national
government agencies and local government units for the prompt remittance of withholding
taxes; and implementation of Compromise Settlement Program for taxpayers with
outstanding accounts receivable and disputed assessments with the BIR. Memoranda of
Agreement were also forged with the league of local government units and several private
sector and professional organizations (i.e. MAP, TMAP, PCCI, FFCCCI, etc.) to help the BIR
implement tax campaign initiatives. September 1, 2000, the Large Taxpayers Service (LTS)
and the Excise Taxpayers Service (ETS) were established under EO No. 175 to reinforce the
tax administration and enforcement capabilities of the BIR. Shortly after the establishment of
said revenue services, a new organizational structure was approved on October 31, 2001
under EO No. 306 which resulted in the integration of the functions of the ETS and the LTS. In
line with the passage of the Electronic Commerce Act of 2000 on June 14, the Bureau
implemented a Full Integrated Tax System (ITS) Rollout Acceleration Program to facilitate the
full utilization of tax computerization in the Bureau's operations. Under the Program, seven
(7) ITS back-end systems were released in stages in RR 8 - Makati City and the Large Taxpayers
Service.
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.

The Administration of Gloria Arroyo (2002-2009)

After winning the 2004 presidential elections, President Arroyo realized that her
administration’s pattern of expenditure was not sustainable. The inadequacy of revenues led
to episodes of expenditure compression, as spending was deliberately curtailed to keep
budget deficits under control. Academics identified the unsustainability of the country’s
tenuous fiscal position and suggested tax reform as a way to address fiscal pressures (De Dios,
et al, 2004).

2005 Expanded Value Added Tax (E-VAT)

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
SYSTEM OF TAXATION IN THE PHILIPPINES

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. To mitigate the potential
effects on the poor and on key transport prices and fares, and increase the progressivity of
the reform, select exemptions from VAT were also legislated (although some exemptions
were nonstandard) and some petroleum excise taxes were reduced. In addition, 50% of the
incremental VAT revenues would be earmarked for infrastructure and (targeted) social
services expenditures, mostly in education and health. Furthermore, VAT minimum marginal
thresholds for exemption were also increased.
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%. It also raised the gross
receipts tax on select income items and eliminated income tax exemptions of many
government- owned and controlled corporations.
The effects of the E-VAT reform suggest that while the mitigating measures and the overall
effects of the reform were progressive, without large adverse distributional consequences, a
large amount of benefit also accrued to richer households (International Monetary Fund,
2007). This was particularly true for the cuts on excise taxes on diesel products where benefits
were expected to be shared by richer households. This notwithstanding, the incremental
proceeds of the VAT were spent to kick-start the government’s flagship antipoverty
conditional cash transfer program, the Pantawid Pamilyang Pilipino Program (4Ps) of the
Department of Social Welfare and Development.

The Administration of Benigno Aquino Jr (2010-2016)

By the time President Benigno Aquino, Jr. succeeded President Arroyo in 2010, tax effort was
still very low by international standards. The adverse effects of the recent global financial
crisis on tax collections meant that additional revenues were necessary to improve the quality
of the country’s infrastructure and to expand existing or develop new social service programs.
However, President Benigno Aquino had promised that he would not impose new taxes so
additional revenue would have to result from adjusting existing taxes.

2012 Sin 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. Excise taxes on these products had not been updated since the 1997
CTRP. As a result, government revenues from these products resulted in an erosion in real
value over time. Furthermore, the country’s tax regime for distilled spirits was at the time
non-compliant with World Trade Organization rules.

Government revenues from alcohol and tobacco excise taxes raised significantly while at the
same time simplifying tax collection. By 2015, combined excise collections from tobacco and
alcohol totaled 1.1% of GDP, with tobacco accounting for close to 80% of the total collected.
SYSTEM OF TAXATION IN THE PHILIPPINES

The increased collections contributed to the Philippines’ attainment of a credit rating upgrade
(to investment grade status). Meanwhile the budget for the Department of Health tripled
between 2012 and 2015 and the national government dramatically increased its allocation
for free health insurance premiums for the poor, as the number of poor people enrolled in
PhilHealth increased from 5.2 million to 15.4 million from 2012-2015. The sin tax reform also
enabled the government to expand the coverage of the conditional cash transfer program
which had been initiated by the previous Arroyo administration. However, the abrupt
increase of tax rates saw the rise in popularity of low price cigarettes and increased
observations of illegal cigarettes. To counter this, the Administration introduced tax stamps
on cigarettes in 2014 to provide physical proof of taxpayer compliance.

The Administration of Rodrigo Duterte (2017-Present)

Pres. Duterte signed the Republic Act 10963 or the Tax Reform for Inclusion and Acceleration
Act of 2017, which lowered personal income tax rates but increased taxes on certain goods,
leading to a net increase in revenue. This excess revenue will be used to fund the major
expansion in the public infrastructure in the country.
Specifically, TRAIN corrects the longstanding inequity of the tax system by reducing income
taxes for 99 percent of income taxpayers, thereby giving them much-needed relief after 20
years of non-adjustment. It also raises significant revenues to fund the President’s priority
infrastructure programs to reduce poverty incidence from 21.6 percent in 2015 to 14 percent
by 2022. Seventy percent of the incremental revenues of TRAIN will go to infrastructure and
the Build, Build, Build program, while the balance will go to social services programs.

Under TRAIN, those with annual taxable income below PHP 250,000 are now exempt from
paying personal income tax, while the rest of taxpayers, except the richest, will see lower tax
rates ranging from 15 percent to 30 percent by 2023. To maintain progressivity, the top
individual taxpayers whose annual taxable income exceeds PHP 8 million face a higher tax
rate of 35 percent from the current 32 percent.

Small and micro SEPs now have the option to pay a simpler, flat tax of eight percent on gross
sales in lieu of the income and percentage tax. Taxpayers can save time falling in line and filing
and paying eight times a year to just four times a year.
The ten million poorest households and individuals receive cash transfers of PHP 200 per
month in 2018 and PHP 300 per month in 2019 and 2020. The amount is enough to offset the
moderate but temporary increase in prices due to TRAIN.
Estate tax is lowered from 20 percent to a single rate of six percent for net estate with
standard deduction of PHP 5 million as well as exemption for the first PHP 10 million for the
family home.
On the other hand, donor’s taxes are lowered from up to 15 percent to a single rate of six
percent of net donations above PHP 250,000 percent yearly.
SYSTEM OF TAXATION IN THE PHILIPPINES

EXPANDED THE VALUE-ADDED TAX (VAT) BASE

Fifty-four special laws with non-essential VAT exemptions were repealed, thereby making the
VAT system fairer. For the average Filipino, this does not have an impact on them, as the VAT
exemption removal only affects groups enjoying exemption.

ROLES OF TAX SYSTEM IN THE PROGRESS OF THE PHILIPPINES

The shortcomings of the past administrations have greatly weaken the system of tax as
well as the increasing liabilities the country owed in a form of investment in other countries.
Every administration often undergoes huge changes speficially on tax rates which greatly
affects the common people and hindering the country’s competitiveness.

Assessing the tax system of the Philippines from the recent administration up to the present,
will help us come up with the roles of the issue in the progress of the Philippines;

 To be able to ensure reliability of the flow of government financing over a long term
basis.
 Comparison of every tax reform enacted, would result with efficient reform today and
in the future.
 Being able to track down how the Philippines weaken it’s economic status will suggest
that the implemented law was inappropriate in the condition of the coutry.
 A successful tax reform is when it was crafted by a team of experts, was fully
supported by the President and resulted to a complemented and stable system. This
was proven during the Administration of Former President Cory Aquino.
 Political involvement is important on building a strong system.

ANALYSIS
With these most recent developments in mind, it’s clear that the history of tax in the
Philippines is one that’s still being written and constantly revised and evolved from a practical
necessity to a signifier for political and social identity. Even though history is full of tax
rebellions, the collection of taxes remains one of the primary undertakings of any government
in order to provide sufficient funds with which a nation’s economy may be sustained and
developed. The ultimate beneficiaries in the process are both the government and the
citizens. The state collects taxes in the exercise of its sovereign rights for the support of the
government, for the administration of the laws, and as a means for the continued operation
of the various legitimate functions of the state. Taxation is much more than just a means of
raising revenue for the government. It also attemps to achieve various economic and social
objectives. These objectives include shifting wealth from the rich to the poor, maintaining
price stability, stimulating economic growth, and encouraging full employment. With the past
decadesTaxation has emerged from a practical financial issue to one with myriad political and
social implications. If taxes are here to stay, there is no doubt that debates and discussion on
the subject will continue to exist as a focal point of global society.
SYSTEM OF TAXATION IN THE PHILIPPINES

RECOMMENDATIONS
The student come up with the following recommendations regarding the said topic;
 The BIR should strive for high ethical standards and prevent opportunistic behavior.
 The BIR should be open and transparent in its tax administration processes, support
and educate taxpayers for to voluntarily comply and effectively deal with tax evasion
and avoidance.
 A transparent tax system should allow the public to assess whether taxes collected
and allocated for particular causes are properly utilized and accounted.
 The government should further enhance transparency by investing in good
information technology (IT) systems and good field information collecting systems in
implementing, screening and monitoring agencies.
 The government must make their taxpayers feel that they get value from the money
(tax) that they pay.
 The system of tax of the country needs a lot of reforms. The taxation system should
be based on the taxpayer’s ability to pay and should not be confiscatory in nature.

REFERENCES
 For the basic law, see Sin Tax, GovPH: http://www.gov.ph/
 https://www.imf.org/external/pubs/ft/wp/2007/wp07153.
 http://dirp3.pids.gov.ph/ris/eid/pidseid0601.pdf
 http://www.who.int/health_financing/topics/public-
 www.econstor.eu
 http://hdl.handle.net/10419/162636
 https://prezi.com/m/c_qyy4o9mc35/taxation-during-the-spanish-
period/https://prezi.com/m/c_qyy4o9mc35/taxation-during-the-spanish-period/
 https://en.m.wikipedia.org/wiki/Fiscal_policy_of_the_Philippines
 https://en.m.wikipedia.org/wiki/Bureau_of_Internal_Revenue_(Philippines)
 https://www.google.com/amp/s/amp.rappler.com/business/governance/105837-aquino-
no-income-tax-cut
 https://www.google.com/amp/s/business.inquirer.net/278873/cabinet-team-to-study-
duterte-idea-on-gross-taxation/amp
 https://www.google.com/amp/s/amp.rappler.com/newsbreak/iq/165365-fast-facts-taxes-
philippines
 https://www.britannica.com/topic/taxation
 http://www.slideshare.net/JRLopezGonzales/taxation-101-basic-rules-and-
 http://www.slideshare.net/Kate_JRG/pre-spanish-period-in-the-philippine
 Renato E.; Burns, Lee (2016) : Comprehensive tax reform in the Philippines:
Principles, history and recommendations, UPSE Discussion Paper, No. 2016-10,
University of the Philippines, School of Economics (UPSE), Quezon City