Taxation in the Philippines PDF

TAXATION IN THE PHILIPPINES  The State is a political unit WHAT IS A with the power to make laws and enforce them by a group living STATE ? within an expressly determined territory. Therefore, it is a territorially delimited sovere...

TAXATION IN THE PHILIPPINES  The State is a political unit WHAT IS A with the power to make laws and enforce them by a group living STATE ? within an expressly determined territory. Therefore, it is a territorially delimited sovereign system of government governed on behalf of a community of citizens who identify as a nation. IMPORTANT POPULATION- is the total number of people living in a specific area, such as a country, city, or region. Total number of individuals FACTORS that make up a whole or occupy an area TERRITORY- is a geographical area subject to OF A STATE the sovereignty, control, or jurisdiction of a state or other entity. SOVEREIGNTY- is the supreme power that a nation or state holds to govern itself and make decisions without external interference. GOVERNMENT- is a system of social control under which the right to make laws and enforce them is vested in a particular group in society. POWERS OF THE STATE  3 POWERS OF THE STATE POLICE POWER– The power to make laws that protect the welfare, health, and safety of the state's citizens. It's considered the most comprehensive of the three powers. POWER OF EMINENT DOMAIN – The power to use property for public use. POWER OF TAXATION– The power to establish taxes on goods and services to raise money for the government.  CHARACTERISTICS OF TAXES TAX IS COMPULSORY – The law imposes taxes. Taxes are therefore payments that citizens must make to their governments. Every person has a responsibility to pay his fair share of taxes to support the government. TAX IS CONTRIBUTION – To contribute is to assist or offer anything. Taxes are community contributions made to the government. Every citizen has a responsibility to pay their fair share of taxes to support the government and assist it in covering it’s expenses. TAX IS FOR PUBLIC BENEFIT – Taxes are collected for the benefit of society as a whole, not to benefit any particular person. NO DIRECT BENEFIT – All taxes are required to be paid, and the government does not directly reward tax payers for their contributions.  CHARACTERISTICS OF TAXES TAX IS PAID OUT OF THE INCOME OF THE TAXPAYER –Income is defined as money received for employment or from investments, especially on a regular basis. As long as the revenue is recognized in this case, the tax must be paid out of it. Any business owner who makes money should give the government his fair share as support. GOVERNMENT HAS THE POWER TO IMPOSE TAX – Through the collection of taxes, governments exercise sovereign control over their constituents. People’s taxes can only be collected by the government.  CHARACTERISTICS OF TAXES TAX IS NOT THE COST OF THE BENEFIT – Taxes do not represent the price of the benefits that the state provides to the populace. Benefit and taxpayers are independent of one another, and the purpose of paying taxes is of course to provide benefits to the broader public. TAX IS FOR ECONOMIC GROWTH AND WELFARE– Maximizing social welfare and economic prosperity is a key government goal. TAXES IS NOT A FORM OF PENALTY TAXES IS NOT A DEBT TAXES MUST BE EQUAL TAXES MUST BE EQUITABLE BIR REVENUE REGULATION NO. 1-2011  Section 1: Objective This section establishes that the regulations aim to define who qualifies as an Overseas Contract Worker (OCW) or Overseas Filipino Worker (OFW) for tax purposes and clarify the tax treatment of income earned both within and outside the Philippines. Section 2: Definition of an OCW OCWs or OFWs are Filipino citizens working abroad and earning salaries from foreign employers, not funded by any Philippine entity. Section 3: Tax Treatment Income Tax Business Tax Other Taxes and Fees DUTY AND TAX-FREE PRIVILEGES  These privileges are granted under Section 105 of the Tariff and Customs Code of the Philippines (TCCP), as amended by Executive Order No. 206, to certain individuals, allowing them to bring personal effects and household goods into the Philippines duty-free under specified conditions. Who Are Entitled to Duty and Tax-Free Privileges? Returning Residents: Filipino nationals who return to the Philippines after working or residing abroad. OFWs must have stayed abroad continuously for over six months to qualify. Former Filipinos: Individuals who were previously Filipino citizens but have acquired foreign citizenship.  Extent of Duty and Tax-Free Privileges 1. Returning Residents: Personal effects and household items used abroad for at least six months, with a total value not exceeding ₱10,000, are exempt from duties and taxes. If the value exceeds ₱10,000, a 50% duty applies to the excess amount. 2. Overseas Filipino Workers (OFWs): In addition to the privileges granted to returning residents, OFWs can bring in up to ₱10,000 worth of used home appliances duty and tax-free, subject to the following conditions: Limited to one unit per type of appliance. The privilege can only be used once per calendar year and must be declared under oath. The OFW must present their passport at the port or airport of entry.  PREVIEW Taxation has become an essential mechanism for governments to raise revenue and improve citizens’ lives through good governance, In the Philippines, taxation evolved through the colonial period, forming part of the country’s historical development. WHAT IS TAXATION? Taxation is the practice of collecting taxes( money) from citizens based on their earnings and property. Government mechanism to raise funds. A charge or fee that a government imposes on a citizen of a business is called a TAX.  Taxes are mandatory contributions from THEORY AND 1 persons and property levied by the government virtue of its sovereignty, it is used to cover public expenses that benefit all citizens. PURPOSE OF 2 Taxes became compulsory as societies and government roles expanded. In developing TAXES? countries, taxation is vital for promoting economic growth. TAX POLICIES ARE CRAFTED TO: Generate capital for development Allocate resources efficiently Ensure fair distribution of economic effort Maintain economic difference TAX COMPLIANCE It ensures that taxpayers are paying the right amount of tax at the right time and securing the correct tax allowances and tax reliefs. TAX NON-COMPLIANCE A failure to pay in a timely manner (non-compliance) along with evasion or resistance to taxation is punishable by the law.  PAYROLL TAX 1  GROCERY TAX/ SALES TAX 2  TRAVEL TAX 3 PRE-COLONIAL TAXATION  PRE COLONIAL ERA (900-1521) Government were called “Barangays” Ancient Filipinos practice paying taxes for the protection from their datu. There was no “datu” strong enough to unite the archipelago into one nation. Some barangays however united to form confederation. It as headed by a ruler called “datu” or “raja”. The collected tax or tribute was called “buwis” or “handug”. (It could be in terms of food (ani) or pagtatabaho) The chieftain’s family members were enjoying exemption from paying taxes. Non-payment of taxes was already punishable during this period.  PRE COLONIAL ERA (3 CLASSES) 1- TUMA0 (Includes the Datu), where the nobility of pure royal descent. 2- TIMAWA Warrior class, “ third rank of nobility”,and free men. 3- ALIPIN Slaves, do not pay taxes. SPANISH PERIOD  SPANISH PERIOD (1521-1821) The Philippines had abundant To address this, they natural resources, but the pre- introduced the reducion colonial economy was primarily system, creating pueblos subsistence-based. The arrival of where Filipinos were gathered the Spaniards transformed this and assigned land to system as they imposed tributos cultivate. These settlements (tributes) on Filipinos to were managed by encomenderos, generate revenue for maintaining who were rewarded by the the islands, including paying Spanish crown. Notably, government officials and clergy. principales (local elites) The Spaniards faced challenges in such as alcaldes, collecting these tributes due to gobernadores, and soldiers the dispersed nature of were exempt from paying settlements. tributos  SPANISH PERIOD (1521-1821) CEDULA PERSONAL In 1884, payment of tribute was put to stop and cedula personal took over. This tax is based on income rather than household. It is a personal identification that is required to obtain.  SPANISH PERIOD (1521-1821) As a result of these changes, Filipinos, once focused on subsistence agriculture, had to intensify production to meet tax demands, with tributes eventually split equally between cash and produce, financing the conquest of the Philippines. By the late 16th century, the Manila- Acapulco trade via galleons was established, improving the economy and reinforcing Spanish control. MANILA ACAPULCO GALLEON TRADE A ship trade going back and forth yearly between Manila and Acapulco. Fundamental income generating business for the Spanish. The Galleon trade brought silver from Nueva Castilla and silk from China by way of Manila.  SPANISH PERIOD (1521-1821) In 1878, two direct taxes on urban incomes were introduced: Urbana Taxing- rental value of urban real estate, and Industria taxing - salaries, dividends, and profits. Additionally, indirect taxes like customs duties on exports and imports further boosted revenue. These are taxes that levied on goods and services rather than individual's income and property.  SPANISH PERIOD (1521-1821) The colonial government also profited from monopolies, notably the tobacco monopoly from 1781 to 1882, which enabled financial self-sufficiency and contributed to Spain’s treasury. Spaniards specifically imposed Filipinos to purchase tobaccos on solely on chosen government outlets.  SPANISH PERIOD (1521-1821) Forced labor was a major element of Spanish colonial taxation in the Philippines, requiring Filipino males to work for 40 days a year, which was later reduced to 15 days in 1884. This labor was necessary for defense and woodcutting during the galleon trade. Those who wanted to opt out could pay three pesos annually, but the system was often corrupt. Taxation heavily burdened Filipinos, made worse by the corruption of the principales, local elites who profited by pocketing tributos and fallas, while ordinary peasants suffered. Although taxation seemed fair, the disparity between the lightly taxed principales and the heavily burdened peasants widened the gap between the rich and poor. POLO Y SERVICIO (FORCED LABOR) Evolved within the framework of the Encomienda System. 40 days, of men ranging from 16 to 60 years of age who were obligated to give personal services to community projects. One could be exempted from the polo by paying a fee called falla/multa which was worth one and a half real. Construction of churches, buildings and logs.  SPANISH PERIOD (1521-1821) Diezmos Prediales: This was a tax amounting to one-tenth (1/10) of agricultural produce, paid to the viceregal government. It was meant to provide revenue for colonial administration. Sanctorum: This tax was paid directly to the local church, contributing to its upkeep and the support of clergy in the community. Vinta: A local tax imposed on coastal provinces in Western Luzon, intended for defense against Muslim pirates, who were a significant threat at the time. Donativo de Zamboanga: This was a specific tax allocated for military efforts and the conquest of Jolo, highlighting the colonial government's focus on territorial expansion and security.  TRIBUTO ENCOMIENDA ( TAX) : 10 REALES DIEZMOS PREDIALES (GOVERNMENT TAX) : 1 REAL SANCTORUM : 3 REALES AMERICAN PERIOD  AMERICAN PERIOD (1898-1901) Under American rule, the goal was to make the Philippine economy self-sufficient with minimal spending and a budget surplus. From 1898 to 1903, the Americans kept the Spanish taxation system but made some changes, recognizing it as out dated. The military government stopped the contracts for opium sales, the lottery, and mint charges. The "urbana" tax on the annual rental urban real estate was replaced by a land tax payable annually by virtue of ownership of land and covering both urban and rural estate. However, rural LAND TITLING was disorganized, and land value appraisals were influenced by political connections, leading to TAX EVASION, especially among the wealthy elite.  AMERICAN PERIOD (1898-1901) To address issues with land tax collection, the Internal Revenue Law of 1904 was enacted, outlining ten major revenue sources: 1. Licensed taxes on firms dealing in alcoholic beverages and tobacco 2.Excise taxes on alcoholic beverages and tobacco products 3.Taxes on books and bankers 4.Document stamp taxes 5.The cedula 6.Taxes on insurance and insurance companies 7.Taxes on forest products 8.Mining concessions 9.Business and manufacturing taxes 10.Occupational licenses  AMERICAN PERIOD (1898-1901) EXCISE TAX taxes required on specific goods and services like alcohol, tobacco, and cigarettes. DOCUMENT STAMP TAXES AND CEDULA an excise tax imposed on documents, loan agreements or papers evidence in transfer or sale of an obligation rights and property. CEDULA OR COMMUNITY TAX CERTIFICATE document issued by Philippine government to individuals and corporations upon payment of community tax. In 1907, some provinces were authorized to double the fee for cedula to support the construction of buildings and road maintenance.  AMERICAN PERIOD (1898-1901) The INDUSTRIA TAX was applied to businesses based on their profitability, and a percentage tax on sales(SALES TAX) was introduced, payable quarterly. In 1913, the Underwood-Simmons Tariff Act removed export taxes on sugar, tobacco, hemp, and copra, reducing government revenue. To compensate, the government pushed for increased tax receipts. Minor changes to the 1904 law included new taxes on mines, petroleum products, and tobacco dealers. New tax sources were later introduced: income tax in 1914, inheritance tax in 1919, and a national lottery in 1932. However, these additions were not enough to significantly boost government revenue. TAXATION DURING THE COMMONWEALTH PERIOD During the Commonwealth period, several tax reforms were introduced for a more equitable system. In 1936, income tax rates were increased, with a surtax on individual incomes over 10,000 pesos. Corporate income taxes were also raised. In 1937, the cedula tax was abolished, but it was replaced in 1940 by a residence tax, applicable to citizens aged 18 and above and to corporations. These changes aimed to improve revenue collection while adjusting the tax burden. In 1939, the Commonwealth government introduced the National Internal Revenue Code, which brought key changes: 1.Replaced the normal and surtax on income with a single progressive tax. 2. Reduced personal exemptions. 3.Slightly increased corporate taxes, including taxes on inherited estates and gifts. 4. Replaced the cumulative sales tax with a 10% turnover tax on luxuries. 5. Increased taxes on liquor, cigarettes, forestry products, and mining. 6. Made dividends taxable Despite reforms, the tax system during the Commonwealth period remained inequitable, with the lower class bearing the most burden while the elites manipulated it to their advantage. The agricultural sector was lightly taxed to promote growth, but industrial development lacked incentives. During World War II, under Japanese occupation, the existing tax system continued, exempting Japanese military items. With foreign trade collapsing, taxes were primarily collected from amusements, manufacturing, professions, and business licenses. As tax collection became harder, revenue came from the National Sweepstakes and government bond sales, and military notes were issued to cover war costs. FISCAL POLICY FROM 1946 TO PRESENT World War II had a mixed effect on the Philippine economy. Manila was heavily damaged, but other parts of the country were less affected. Although the Philippines became independent, it still depended on U.S. aid for recovery. By 1949, this reliance resulted in serious funding shortages for important areas like the military and education. The U.S. recommended implementing direct taxes to help raise funds, but President Manuel Roxas turned it down, worried it might upset political allies  ECONOMIC GROWTH INITIATIVES President Elpidio Quirino: Implemented import and exchange controls that boosted local manufacturing and increased tax revenues through higher corporate tax rates. TAX STRUCTURE ISSUES Tax Reforms Efforts: Successive presidents (Magsaysay, Garcia, Macapagal) created a Tax Commission in 1959 to improve the unfair post- war tax system. However, corruption and powerful elite interests blocked real change, with indirect taxes making up three-quarters of total revenue. MARCOS ADMINISTRATION AQUINO REFORMS RAMOS ADMINISTRATION Tax Dependence: During Post-Revolution Changes: Further Reforms: Under Ferdinand Marcos's After the EDSA President Fidel Ramos, time, the tax system Revolution, President political stability relied heavily on Corazon Aquino launched allowed for more tax indirect taxes, which the 1986 Tax Reform reforms in 1997, accounted for 70% of Program, introducing a broadening the VAT total collections, Value-Added Tax (VAT) at base to include resulting in low a 10% rate on goods and services and revenue and a tax services. This reform simplifying tax effort of only 10.7% improved tax revenue incentives. of GDP. effort from 10.7% in 1985 to 15.4% in 1992.  ESTRADA AND ARROYO PERIODS Limited Changes and Deficits: President Joseph Estrada's term didn't bring major tax changes. President Gloria Macapagal-Arroyo increased government spending without raising taxes, leading to budget deficits. In 2005, the Expanded Value-Added Tax (E-VAT) was introduced, raising the VAT from 10% to 12% and widening the tax base. AQUINO III AND SIN TAX REFORM Adjusting Existing Taxes: President Benigno Aquino III focused on adjusting current taxes rather than introducing new ones. He notably increased excise taxes on alcohol and cigarettes (Sin Tax Reform), which improved revenue collection and funded health services, significantly raising the Department of Health's budget.  DUTERTE ADMINISTRATION TRAIN Law: In 2018, President Rodrigo Duterte introduced the Tax Reform for Acceleration and Inclusion (TRAIN) Law, exempting those earning P250,000 or less from personal income tax while adding new taxes on cars, fuel, and sugary drinks. Overall, the Philippine fiscal policy from 1946 to the present has been marked by attempts at reform, structural issues, and a continuous struggle against corruption and elite influence, aiming for a more equitable tax system and sustainable economic growth  PRESENT DAY: MARCOS JR. ADMINISTRATION President Ferdinand R. Marcos Jr. signed the CREATE MORE Act to enhance job creation, economic growth, and investment. Building on the CREATE Act, the law broadens VAT and duty incentives, simplifies tax refund processes, and adjusts local taxation during the Income Tax Holiday. It also raises the capital threshold for investment approvals to streamline processes and expands tax relief for registered enterprises. Additionally, it exempts donations of equipment and materials to the government and educational institutions from taxes. The law aims to create a business-friendly environment and strengthen the Philippines' economic competitiveness. TYPES OF TAXES IN THE PHILIPPINES  LOCAL TAXES 1. Tax on Transfer of Real Property Ownership: Tax on selling or donating real property. 2.Tax on Business of Printing and Publication: Tax on printing businesses for items like books and leaflets. 3.Franchise Tax: Tax on businesses operating under a franchise, based on gross annual receipts. 4. Tax on Sand, Gravel, and Other Quarry Resources: Tax on resources extracted from public lands. 5. Professional Tax: Annual tax on individuals practicing regulated professions.  LOCAL TAXES 6. Amusement Tax: Tax collected from entertainment venues like theaters and concert halls. 7. Annual Fixed Tax for Delivery Vehicles: Tax on vehicles used for distributing certain products. 8. Tax on Business: Tax imposed by localities on businesses before they can operate. 9. Fees for Sealing and Licensing Weights and Measures: Fees for regulations on weights and measures. 10. Fishery Rentals, Fees, and Charges: Fees for fishing privileges in municipal waters.  THE PHILIPPINE TAX SYSTEM MAJOR REVENUE AGENCIES BUREAU OF INTERNAL REVENUE (BIR) BUREAU OF CUSTOMS Income Tax Import and export entries Estate and Donor’s Tax Internal revenue entries Specific taxes on Bonded warehouse certain articles withdrawals Business taxes Transaction approvals and Documentary Stamp Tax certificates Mining Tax  NATIONAL TAXES 1.Capital Gains Tax: Tax on profits from selling capital assets in the Philippines, including conditional sales. 2.Documentary Stamp Tax: Tax on documents like loan agreements and deeds, indicating transfer of rights or properties. 3. Donor's Tax: Tax on gifts or donations, applicable to the transfer of property between living individuals. 4. Estate Tax: Tax on the privilege of transferring a deceased person’s estate to heirs, not a tax on the property itself. 5. Income Tax: Tax on annual profits from property, professions, and trades, with rates differing for individuals and corporations.  NATIONAL TAXES 6. Percentage Tax: Tax on businesses with gross sales below the VAT threshold, typically paid monthly or quarterly. 7. Value-Added Tax (VAT): Tax on the sale of goods and services, passed on to consumers, filed monthly or quarterly. Governed by the Expanded Value-Added Tax (RA 9337). 8. Excise Tax: Tax on goods produced for domestic sale or consumption and on imports. 9. Withholding Tax on Compensation: Tax withheld from employee salaries, remitted to the government. 10. Expanded Withholding Tax: Tax on specific payments, like rental and professional income, creditable against income tax.  NATIONAL TAXES 11. Final Withholding Tax: Tax withheld on certain payments (e.g., bank interest), not creditable against income tax. 12. Withholding Tax on Government Payments: Tax withheld by government entities before making payments to individuals or corporations. END