Government Revenue Sources

Government Revenues

• Public finance is the financial activities of the government which maximize the economic welfare of society.
• A key principle of the financial activities is to maximize social advantage, whereby the government collects and spends money to maximize welfare.
• Imposing taxes causes dis-utility, while government expenditure creates utility.
• Governments need to adjust revenues and expenditures to maximize utility while minimizing dis-utility.

Categories of Government Revenue

• Government income comes from taxes and other compulsory source.
• Income is generated from services rendered to the public, which is a voluntary exchange.
• Income also comes from other sources which don't fall into the above two categories.

Sources of Revenue

• Governments collect revenue via taxation, fees, charges, and penalties.
• Foreign aid, donations, investments, and financial instruments are also sources of revenue.
• Public debt and borrowings, both domestic and international, provide further income.

Taxation

• Taxation is how a sovereign state, through its lawmaking body, imposes burdens on subjects/objects within its jurisdiction to fund legitimate government objectives.
• Taxes are mandatory contributions enforced by the state's law-making body to support of the government and public needs.
• Taxation entails inherent power and legislative authority.
• It involves enforced contributions, is proportionate/progressive, and has territorial application.
• Taxation is subject to constitutional and legal limitations.

Effective Tax Systems

• Fiscal adequacy, or sufficiency, is needed in an effective tax system.
• Theoretical justice and equity, are part of the ability to pay principle and affordability are also imperative.
• Administrative feasibility and efficiency make up the final principle.

Direct Taxes

• Direct taxes are imposed on income and wealth, where the tax burden and payment fall on the same entity.
• Income tax on individuals and corporations is an example of direct taxation.
• Other examples include capital gains tax, estate tax, donor’s tax, and documentary stamp tax.

Indirect Taxes

• Indirect taxes apply to goods and services, where the tax burden and payment fall on different entities.
• Value Added Tax (VAT) at 12% is an example of indirect tax.
• Other examples include percentage tax for non-VAT businesses, excise tax, and customs duties.

Income Taxes

• Income taxes are government-imposed levies on an individual's or entity's income, being structured with a progressive tax system.
• Taxable income includes salaries, wages, business profits, and professional fees.

Income Tax Collection Figures

• In 2024, the BIR collected over PhP2.85 trillion, exceeding 2023's PhP2.52 trillion.
• President Marcos said these revenues could fund 1,140,800 new schools, 190,133 km of roads, and 167,014 rural health facilities.
• The total revenue collection for 2024 is projected to reach PHP 4.42 trillion, surpassing the PHP 4.27 trillion target.
• Emergent revenues are increasing to 16.7% of the GDP, marking the highest in 27 years since 1997.
• DOF increased the government's 2024 budget without increasing taxes.
• The BIR and BOC improved revenue administration efficiency through digitalization and ease of tax payments.
• In the first 10 months of the year, the DOF collected PHP 3.77 trillion in total revenues, a 16.8% increase.
• Tax collections grew by 11.4% to PHP 3.23 trillion from January-October 2024.
• Non-tax revenues increased by 64.9%, reaching PHP 539.40 billion.
• The revenue effort for the first three quarters of the year grew to 17.5% of GDP, up from 16.4% the previous year.

Tax Reform for Acceleration and Inclusion (TRAIN) Law (Republic Act No. 10963)

• It aimed to create a simpler, more effective tax system.
• It aimed to generate infrastructures and social services.
• Individuals earning an annual taxable income of ₱250,000 or less are income tax-exempt.
• The law introduced new tax brackets with lower rates for middle-income earners and higher rates for high-income earners.
• 13th-month pay and bonuses are tax-exempt up to ₱90,000 for further benefits.
• As a result, disposable incomes increased, stimulating consumer spending and encouraging economic growth.

Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act

• The act aimed to improve competitiveness and attract investment while boost businesses after economic events.
• CIT rates reduced for large corporations from 25% to 20%.
• The CIT rate for MSMEs with taxable income up to ₱5 million and assets not exceeding ₱100 million reduced to 20%.
• Businesses in priority sectors may receive Income Tax Holidays (ITHs) for 4-7 years.
• Following the ITH period, businesses may opt for a 5% tax on gross income earned (SCIT) for up to 10 years.
• Enhanced deductions included training, research, development, and infrastructure development expenses.
• It has the impact of aligning tax rates with regional standards to make the Philippines more attractive to Investors.

Ease of Paying Taxes (EOTP) Act (Republic Act 11976)

• This act sought to streamline tax compliance, encourage timely payments, and boost compliance overall.
• Simplified tax filing processes reduce the burden on individual taxpayers.
• Enhanced electronic systems were promoted to increased taxpayer experience, increase compliance rates, and increase tax collections.

Estate Tax Defined

• Estate tax applies to the transfer of property ownership after death.
• In the Philippines, estate tax is separate from inheritance tax, applying to the total estate before distribution, not to individual beneficiaries.
• Before the TRAIN Law, estate tax rates ranged from 5% to 20% based on the net estate value.
• The TRAIN Law introduced a flat rate of 6% on the net estate, increased the standard deduction to P5 million and the family home exemption to P10 million.

Estate Tax: Gross Estate

• Gross Estate is the total value of assets owned by the decedent at the time of death.
• These assets can include real estate, personal properties, business shares, investments, and life insurance proceeds where the decedent owned the policy.

Estate Tax: Allowable Deductions

• Deductions reduce the taxable estate.
• Allowable deductions include funeral expenses, medical expenses before death (subject to limits), outstanding debts, and obligations.
• A standard deduction of ₱5 million applies as per the TRAIN Law.
• There are exemptions for family homes (up to ₱10 million) and transfers for public use.

Estate Tax Collection

• As of December 31, 2023, the BIR reported ₱8,862,687,633.64 in total estate tax collection from 173,099 taxpayers.
• Increased compliance came about because of the amnesty program which allowed for unpaid estate taxes to be settled without penalties
• A lot of estates could not be settled previously due to financial constraints or bureaucratic hurdles.
• Filipinos generally prefer to legally settle estates without excessive penalties.

VAT (Value Added Tax)

• VAT is an indirect consumption tax on the sale, barter, exchange, and lease of goods, properties, and services nationwide.
• The tax burden is transferable because the seller can legally shift or pass the obligation to the buyer, transferee, or lessee.
• VAT registration is mandatory for anyone selling, bartering, exchanging, or leasing goods/properties, or providing services in the course of business if total sales exceed ₱3 million.

VAT Rates

• VATable transactions are taxed at 12%.
• Zero-rated transactions have no applied VAT but input VAT can be refunded.
• Exempt transactions normally involve basic necessities.

VAT Updates

• As of VAT law updates beginning June 1, 2025, a 12% VAT will be imposed on foreign digital services provided to consumers and businesses in the Philippines.
• Digital services include online search engines, marketplaces/e-marketplaces, cloud services, online media, advertising, and platforms.
• Education services are exempt, as are government institutions, and DepEd, CHED, and TESDA online courses.

Percentage Tax

• Percentage tax is for persons/entities selling or leasing goods, properties, or services whose gross annual sales/receipts do not exceed ₱550,000 and are not VAT-registered.
• On July 1, 2023, the Percentage Tax rate went back to 3% once the temporary reduction ended under Republic Act No. 11534.
• Anyone not VAT-registered with gross annual sales and/or receipts not exceeding ₱3,000,000 is required to file, as are domestic carriers, keepers of garages, and operators of international air/shipping carriers.
• Grantees of electric, gas, or water utilities, and radio/TV broadcasting companies with gross annual receipts not exceeding PhP 10M in the prior year are also obliged to file.

Percentage Tax: Revenue Contribution

• Percentage taxes were 18.4% of total tax revenue in 2022.
• This affects small and micro businesses.

TRAIN Law & Percentage Tax

• TRAIN Law provided an 8% flat tax option for small businesses.
• A flat 8% tax substitutes graduated income tax plus 3% Percentage Tax.
• Applies to earnings above PHP 250,000.

Donor's Tax

• A donation is a gratuitous transfer of ownership or rights to a donee, accepted voluntarily without compensation.
• Donor's Tax applies to property transfers via gift, whether in trust, direct, indirect, real, personal, tangible, or intangible as per Sec. 98 (B), NIRC.

Capital Gains Tax Simplified

• Capital Gains are profits from selling an asset/investment for more than its purchase price.
• Capital Gains Tax is imposed on the profit from transferring certain types of assets.
• A Capital Asset means any property or investment held for the long term and sold for a profit, including real estate, stocks, and bonds.

Capital gains Tax Implications

• Capital Gains on Real Property is taxed at 6% of the gross selling price or fair market value, whichever is higher.
• The capital gains tax on shares of stock listed in the stock exchange is 15% of the net capital gain from the sale of shares.
• The capital gains tax on shares of stock that are not listed on the stock exchange is also 15% based on the selling price or fair market value.
• Primary residences and transfers between family members are exempt.

Excise Tax Defined

• Excise is an internal tax or duty on certain commodities like liquor or tobacco, levied on manufacture, sale, or consumption within the country.
• Excise tax is defined by the BIR as a tax on the production, sale, or consumption of a commodity as well as services performed in the Philippines.

Excise Tax: Classification

• Specific Excise Tax is imposed based on weight, volume, capacity, or any other physical unit of measurement.
• Ad-Valorem is excise tax imposed based on a fixed percentage of selling price.

Current Information

• In 2023, a total of P292.98 billion excise taxes were collected by the BIR.
• Reasons are down to a decline in the tobacco demand.
• Additionally, there was a shift to smaller bottles in sweetened beverages, depletion if Mineral Products and importation of automobiles.

Documentary Stamp Tax (DST)

• The DST is imposed on documents, instruments, loan agreements and papers that evidence acceptance
• It's also imposed on assignment, sale or transfer of anything.
• It's an excise tax on conducting certain transactions through formal documents.
• Any written agreement, contract, or paper that serves as evidence of a transaction counts as a Document or Instrument.
• Excise Tax on certain privileges and ensures transactions are properly documented and generates government funds for public services.
• It is a significant Philippine revenue source, with the BIR collecting approximately PHP 179.47 billion in 2023.

Documentary Stamp Tax Examples

• As of 2024, the tax is PHP 1.50 for every PHP 200 of share sales/transfers.
• It costs PHP 3.00 per bank check, draft, or certificate.
• In life insurance policies, the tax is exempt up to PHP 100,000 or costs from PHP 20.00 to PHP 200.00 based on the amount of insurance.
• Tax is PHP 6.00 for the first PHP 2,000 and PHP 2.00 for every PHP 1,000 for leasing and hiring agreements.
• PHP 15,00 for every PHP 1,000 of the consideration on donations.

Amusement Tax

• An amusement Tax is charged on admission fees for cinemas, concerts, amusement parks (10%-30% set by LGUs).

Local Business Tax (LBT)

• LBT is imposed by LGUs on business revenue, its rate varies by location and business type (0.5%-3%) and is paid quarterly or annually.

Custom Duties

• Custom duties are taxes imposed on imported goods to regulate trade and generate revenue.
• They vary based on product type and origin, and protect local industries.

Tariffs

• Tariffs are government-imposed taxes on specific imports/exports.
• Tariffs serve to control trade flows, generate revenue, and support domestic industries against competition.
• They directly affect product prices, influencing consumer behavior, and are a key factor in trade policies and economic stability.

Comparison of Customs & Tariffs

• Custom Duties are categorized as indirect taxes being paid by importers however, they typically get transferred to customers through price mark ups.
• Tariffs get categorized as direct taxes and placed on certain imported or exported goods directly affecting businesses.

Special Custom Duties

• Anti-Dumping Duties are imposed on sale of goods are sold lower that their normal cost of origin.
• Counterveiling duties can benefit subsidized taxes from other nations and ensure local businesses.
• Market Duty helps to stabilise domestic markets and prevent negatively impacting local markets.
• Regulatory duties are used to address economic conditions.

Types of Tariffs

• Ad Valorem Duties are charged as a percentage of the item's value.
• Specific duty is a fixed fee per unit.
• Compound Duty combines ad valorem and specific duties.

Fees, Charges and Penalties

• Fees compensate for government services or privileges.
• Charges are used to regulate operations and are frequently paid for by taxpayers in exchange for a certain service.
• Penalties are sanctions or fines that are imposed for violating laws.

Examples of Fees and Penalties

• Clearance & Certification Fees: Barangay, Fire Safety Inspection, NBI, Police, Birth/Marriage/Death Certificate, Tax Clearance, Environmental Compliance, and Good Standing.
• Franchising Fees: Public Utility Vehicle, telecommunications, broadcast, and energy/power distribution franchises.
• Fines &Penalties: Traffic violations, unregistered vehicles, and colorum practices with a franchise.
• Local Ordinance Violations: Littering and smoking/vaping.

Fees and Charged

• Total collected Bureau of the Treasury collecting fees and charges for CY 2023 was 68,554.77 million.
• The Department of Environment & Natural Resources collected 16,233.10 million that year.

Income from Malampaya

• Fees and Charge total for October 2024 27.1 billion.
• Highest collection came from the Department of Transport from land transport revenues.

Foreign Aid

• Foreign aid is voluntary support, involving money, food, military aid, humanitarian help, and services from one nation to another, promoting economic growth, investment, and poverty reduction.
• Bilateral aid refers to the process of financial support from a government to another.
• Multilateral aid refers to pooled contribution to hunger programs.

Organizations that provide Foreign Aid

• International Monetary Fund (IMF) maintains global financial stability via loaning.
• The World Bank works to reduce poverty and offers funding.
• The United Nations (UN) works to promote human rights.
• The majority is contributed by ADB, World Bank, Japan.

Sectors that benefit from foreign aid

• Most funding is given to Civic society.
• Funding gets focused to water projects.
• Humanitarian efforts get some of the lowest aid.

Government Investment

• Government investments through bonds help to raise their funds.

Bonds Instruments

• Treasury bonds or t-bonds are one form of long-term government debt.
• Treasury bills are short term debt and often sold at discount.
• Retail treasury bonds are issued for individual investors.

Stocks

• Stock can be revenue for the Philippine government.
• GOCCs are state operated and dividend givers.
• Land Bank, PGAGCOR is a good starting point.

Funds

• Sovereign wealth funds are the governments assets.
• Maharlika Investment Fund exemplifies economic development.

GOCCs

• Land Bank of the Philippines had PHP 32.1 billion.
• National Transmission Corporations had PHP 2.2 billion

Maharlika Investment Fund

• It is expected to enhance the country's infrastructure development.

Domestic Borrowings

• T-bills are short-term.
• T-bonds are long-term.
• RBTs for individual investors.

Domestic Advantages

• Reduced Exchange Risk.
• Good for market economy.
• Lower transaction cost than foreign borrowing.

Instruments of Domestic Borrowings

• As of December 2024 the domestic debt reached P10.93 trillion
• Depreciation increased the amount of valuation.

Foreign Borrows

• Public debt constitutes domestic and external credits.
• Foriegn borrowing is important for internal stability.

Considerations for Foreign Borrowings

• Currency risks.
• Restructuring debt.
• Global institutions to support borrowings.
• The economic development impact.
• The dependency of debt.

Instruments of Foreign Borrowings

• Loans from bilateral and multilateral.
• Bonds for wealth creation.

Tax Incidence

• Tax incidence refers to the distribution of the burden of a tax firms and consumers.
• Consumer burden reflects market price rise.
• Producer burden reflects revenue decline.

Elastic v Inelastic tax

• If there is more then producers will burden the cost.
• When more elastic and jewelry price increases then producers will suffer because there's a price impact.

Tax Buoyancy

• Tax buoyancy is a tax system's to raise revenue without raising tax.
• Buoyancy depends on economic conditions, tax structure and rate.

Tax Structure

• Efficacy is dependant on efficient administrators.

Tax Bouyancy formula Formula of tax buoyancy = [Percentage change in tax collection] / [Percentage change in the economy's GDP]