Module 14 (3 hours)

Title: Taxation

Introduction:

The very reason why does government exists is because of taxes. We can
finance our governmental activities though revenues and for this reason, it is
incumbent on our part to know the origin and nature of our taxing system in the
Philippines.
Learning Outcomes:
At the end of the topic, you are expected to:
1. analyze the issues in Philippine taxation through history.
2. propose recommendations or solutions to present-day problems.
3. trace the root causes and how we anticipate future scenarios in Philippine
setting.

Learning Content:
What is Taxation?
Taxation refers to compulsory or coercive money collection by levying
authority, usually a government. The term “taxation” applies to all types of
involuntary levies, from income to capital gains to estate taxes. Though taxation can
be a noun or verb, it is usually referred to as an act; the resulting revenue is usually
called “tax.”
Taxation is a means by which government finance their expenditure by
imposing charges on citizens and corporate entities.
Taxation refers to the practice of a government collecting money from its
citizens to pay for public services. Without taxation, there would be no public
libraries or parks, bridges government building or schools, etc.
Taxation is different from other forms of payment, like payment for purchase
of goods and services, because taxation does not require consent from the payor and
the payment is not directly tied to goods bought or services rendered.
What are taxes?
Taxes are mandatory contributions of everyone to raise revenue for nation-
building. The revenue is used to pay for our doctors, teachers, soldiers, and other
government personnel and officials, as well as for building schools, hospitals, roads,
and other infrastructure.
Legal Bases of Philippine Taxation
1. Constitution
 Article VI, section 28 of the Constitution states that “the rule of taxation
shall be uniform and equitable” and that “Congress shall evolve a progressive
system of taxation.

1. National Law

a. National Internal Revenue Code - enacted as Republic Act No. 8424 or

the Tax Reform Act of 1997.
b. Republic Act No. 10963 or the Tax Reform for Acceleration and
inclusion Act of 2017.
c. Republic Act No. 7160 or the Local Government Code of 1991, and
those sourced from proceeds collected by virtue of a local ordinance.
Taxes imposed by the national level are collected by the Bureau of Internal
Revenue (BIR), while those imposed at the local level are collected by a local
treasurer’s office.
The Powers and Duties of the Bureau of Internal revenue (BIR)
1. Reduction and collection of all internal revenue taxes, fees and charges.
2. Enforcement of all forfeitures, penalties, and fines connected therein,
including the execution of judgements in all cases decided in its favor by
the Court of Tax Appeals and the ordinary courts.
3. It shall also give effect to the administer supervisory and police powers
coferred to it by the National Internal Revenue Code and special laws.
Kinds of Taxes:
Taxes can either be direct or indirect.
Direct taxes are those that are paid from income and properties. Examples
include personal and corporate income taxes, property and capital taxes.
Indirect taxes are collected based on consumption. Example include
excise taxes, VAT, percentage tax, and documentary stamp tax (DST).
a. Direct Taxes
Income tax- is a direct tax paid by an individual or organization imposed on:
 Compensation Income - Salaries, wages, taxable bonuses, fringe –
 Business Income - Practice of profession, trades, gains from sale
and assets, and other income not covered by compensation
 Passive Income – Tax on deposits, royalties, and dividend
b. Indirect Taxes

1. Value–Added Tax is a type of indirect tax imposed on goods and

services. The VAT rate since 2006 is 12%. Both imported and domestic
goods and services are covered by VAT, but there are many exemptions.
Imposed on persons or entities/transactions: who sell or lease goods,
 properties or services in the course of trade or business and are the list of
exemption can be found in Section 109 of the Tax Code.
2. Percentage Tax is a business tax imposed on persons or
entities/transactions: who sell or lease goods, properties or services in the
course of trade or business and are exempt from VAT under Section 109
of the National Internal Revenue Code, as amended, whose gross annual
sales and/or receipts do not exceed Php 1,919,500 and who are not VAT-
registered; and, engaged in business specified in Title V of the National
Internal Revenue.

3. Excise Tax is an indirect tax on selected goods that have negative

externalities and are non-essentials. Excise tax can be either specific or ad
valorem.
 Specific is based on weight, volume capacity, or any other physical
unit of measurement.
 Ad valorem (literally meaning “according to value’) is based on
selling price or other specified value. This is a measure to
discourage too much consumption of scarce resources and limit the
bad effects of some products.
These are the commodities subject to excise taxes: Sin products
(alcohol and tobacco), petroleum, miscellaneous articles
(automobiles, jewelry, perfume, and toilet waters, yachts, and other
vessels intended for pleasure or sports), and mineral products.
Brief History of Philippine Taxation
Taxation in Spanish Philippines
The mark of the start of the initial existence of taxation in the Philippines
started with the imposition of tributes. There were problems faced by government
officials in its collection due to the nature of settlements in the Philippines. This calls
for the creation of pueblos where Filipinos were gathered and awarded plots to till.
Later on, these settlements were placed under the management of encomenderos.
To meet the demands of the payment of tributes, Filipinos increased their
production. They were able to pay the tribute partly in cash and partly with their
produce. Out of this transaction, the conquest of the Philippines was financed.
The economy of the Philippines was improved through the Galeeon Trade. On
the other hand, tax collection was still poor and to subsidized the finances in the
Philippines, different goods were delivered in the Philippines through the galleon
trade.
In 1884, the payment of tribute was stopped and a poll tax through cedula
personal was collected. The payment of cedula was progressive, thus making it
cumbersome on the part of peasants to pay. Through the payment of cedula, tax
collection greatly increased and was considered to be the main source of income.
Direct and indirect taxes were also imposed. Another source of income by the
government is monopoly. This made it possible for the colony to create a surplus of
income that made it self-sufficient without the need for the situado real and even
contributed to the Treasury of Spain. (Candelaria, 2018)
Income tax is also present in the form of forced labor. However, in the end of
17th century, the collection of income taxes became lighter because of increase in
death rate and flight to mountains. By the end of 19th century, this tax was reduced to
a personal service that lessen the burden of what is to be paid. This will give us a
notion that taxation system during this period can be summed up to a situation where
peasants are heavily burdened by it and the co-elites as principals being less burdened
by it.
It is mindful to include in our discussion a primary source, particularly the
account of Mariano Herbosa when he wrote to Rizal about taxes.
Taxation under 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. (Candelaria, 2018)
Few changes were incorporated like the introduction of real estate tax which has
been considered as land taxes. This faced a lot of criticisms specially on the part of
landed elite who took means to evade their taxes. To solve the problem relating to the
collection of land taxes, the Internal Revenue Law of 1904 was introduced.
Accordingly, it prescribed ten major sources of revenue, like SIN taxes, income tax
imposed to corporations like banks, and the like.
The cedula went through a lot of changes with the new law. other taxes were also
introduced such as industria tax for transactions or activities. Underwood-Simmons
Tariff Act was passed but this reduces the revenue derived from export taxes. To cope
up with this, tax receipts were increased. With all of the succeeding introduction of
other sources of revenue, the same problem remains, that is, we cannot still support
the expenditures of the government.
Taxation during the Commonwealth
Under this, surtax rate was added to income taxes. Cedula taxes were actually
abolished and later a residence tax was imposed. The drafting of the National Internal
Revenue Code took place. However, despite several efforts to solve the issues
regarding the tax burden shouldered by the peasant, the same remains and at the
outbreak of World War II, economic development is still far-fetched.
Fiscal Policy from 1946 to Present
After the war, rehabilitation funds is needed to cope up with the result of it. Despite
the fact that independence of the country has been declared, dependency towards the
Americans is imminent since we need to rehabilitate what has been destroyed. The
regressive nature of tax system was still present even up to the time of Marcos
administration despite numerous efforts to cater economic development. However,
during the time of Corazon Aquino, tax reform programs were initiated. Hence, VAT
is introduced. This was signed in 1986 and was put into effect in 1988. Economic
growth was somehow seen during the time of Ramos administration. The short-lived
administration of Estrada did not constitute any change in the tax system. Large
deficits were felt during Arroyo administration due to the fact that large expenditure
was allowed without increasing tax collection. Hence, this prompted the government
to devise new source of revenue, thus, the E-VAT. Under the time of Benigno Aquino
III, excise taxes were the main focus thereby strengthening the cause for SIN taxes.
Now, with the present administration promising for tax reform, it is hoped that the
same will result in the much-desired economic development.
Suggested Readings:
Source: Mariano Herbosa to Jose Rizal, Calamba, 29 August 1886, Letters Between
Rizal and Family Members (Manila: National Heroes Commission, 1964), 239-241.
Brief History of Taxation in the Philippines, [Link] UffHo_g
Learning Activities:
Exercise 1
Essay.
1. Evaluate the law relating to taxation that governs banking institution or
corporations. Are you favorable or not to the economic progress of the country?
Justify your answer

Scoring Rubrics for Essay

Category Exemplary Superior Satisfactor Unsatisfactor

y y
Knowledge/ Demonstrates Demonstrate Demonstrate Demonstrates
Comprehensio thorough s s limited
n 25% understanding considerable understandin understanding
of topic. understandin g of topic
g of the topic
of the topic.
Content 25% Response Response Response Response is
indicates depth indicates lacks focus unclear,
& complexity of simplistic or or illogical or
thought in answering repetitive demonstrates incoherent.
the essay. thoughts in confused or
answering conflicting
the essay thinking.
question.
Quality of Response was Response Response Response had
Writing written in an was written had a little no style or
25% extraordinary style in an style or voice voice.
& voice. interesting
style.
Gives some
Very information & Somewhat new Gives no new
 well organized. informative
information information &
& organized.
but poorly very poorly
organized. organized.
Grammar, Almost no spelling, Few spelling A number of So many
Punctuation & punctuation or & spelling, spelling,
Spelling grammatical errors. punctuation punctuation punctuation &
25% errors, minor or grammatical
grammatical grammatical errors that it
errors. errors. interferes with
the meaning.
Sub Totals
100%
Over-all-
Score
100%

Exercise 2
Show the similarities and differences of the taxation system from the Spanish period
to American period.

Spanish Period American Period

Similarity Difference Similarity Difference

Evaluation:
Name: ___________________________ Course & Curriculum Year/ Section: ______
Date: ____________________________ RATING:
___________________________
Test l. Read each question carefully, and then write the answer that best fits the question
on the blank.
____1. It is the imposition of duties or contributions from the people’s income, property,
business practice of profession and purchase of commodities.
A. customs B. duties C. income D. taxation
____2. The sum of money collected for our use of a road, bridge, and highway?
A. assessment B. tax C. toll D. tour fees
____3. Which term refers to duties payable on goods, whether imported or exported?
A. assessment B. revenue C. subsidiary D. tariff
____4. Interest income from bank deposits, deposit substitutes, trust funds, and other similar
products is taxed at the rate of:
A. 10% B. 15% C. 20% D. 25%
____5. It is the use of illegal means to defeat or lessen the payment of tax.
A. Tax Avoidance B. Tax Evasion C. Tax Exemption D. Tax Form
____6. A tax according to subject matter or object which is imposed on property, whether real
or personal, in proportion either to its value, or in accordance with some other reasonable
methods of appointment.
A. customs B. duties C. property D. taxation
____7. A tax according to graduation or rate based on the rate of which increases as the tax
base or bracket increases. Example are income tax, donor’s tax and estate tax.
A. Municipal B. National C. Progressive D.
Proportional
____8. A progressive tax takes the largest percentage of income from which group?
A. high- income B. low-income C. middle-income D. no –
income
____9. Royalties, except on books, literary works and musical compositions, are taxed at the
rate of:
A. 10% B. 15% C. 20% D. 25%
____10. It is the use of illegal permissible means to reduce tax liability.
A. Tax Avoidance B. Tax Evasion C. Tax Exemption D. Tax
Form
Test ll. True or False. Read the sentence before you answer. Write true if the statement
is correct, false if the statement is wrong.
________ 1. A flat tax can be considered regressive because it takes a greater portion of
income from
those in lower income group.
________ 2. Agricultural income is an exempted income.
________ 3. The Philippine income tax system is a proportional tax.
________ 4. Gift is not taxable at all.
________ 5. A proportional income tax takes the same percentage of income from all income
groups.
________ 6. Tax exemption is the use of illegal reduce of tax liability.
________ 7. A regressive tax takes a smaller share of income from low-income groups that
from high-income groups.
________ 8. A proportional income tax takes the same percentage of income from all income
groups.
________ 9. The Philippine income tax system is a proportional tax.
________ 10. A flat tax can be considered regressive because it takes a greater portion of
income from those in lower income groups.

References:
Candelaria, John Lee, [Link].,2018. Readings in Philippine History. Rex Bookstore, Inc.
Manapat, Carlos, [Link].,2015. Economics, Taxation and Agrarian Reform. C&E
Publishing Inc.
Solminero, Ernesto Thaddeus, [Link].,2016. Readings in Philippine Histor