The Philippine Tax System and Double Taxation

There is said to be double taxation when the same taxable item is taxed more than once by
different government agencies. Double taxation or direct duplicate taxation as described in
Philippine jurisprudence exists when the same property is taxed twice when it should be taxed
just once, or the same person is taxed more than once by the same jurisdiction for the same
reason.

The Philippine government’s imposition of the value added tax (VAT) on professionals in
January 2003 has made double taxation an even more interesting issue. Among the questions that
have been raised include the legality and fairness of subjecting a professional employee’s gross
income to two taxes.

There are two forms of double taxation --juridical and economic. The first type, juridical, arises
when comparable taxes are imposed by two or more taxing jurisdictions on the same taxpayer in
respect of the same taxable income or capital. Economic double taxation, on the other hand,
happens when more than one person is taxed on the same item of income. A good example of
this is the taxation of corporate income at the level of the corporation and at the level of the
shareholder when distributed in the form of dividend.

Our fundamental law does not specifically forbid double taxation. The 1986 Philippine
Constitution, however, implies that double taxation if allowed may violate public policy against
excessive taxes. When double taxation is not generally applied to all subjects, it would go against
the constitutional guarantees of uniformity of taxation and equal protection.

The Philippine Tax System

The National Internal Revenue Code contains the laws governing taxation in the country.
Taxation is administered through the Bureau of Internal Revenue (BIR), an agency under the
Department of Finance. The BIR’s chief, the Commissioner, has the exclusive and original
jurisdiction to interpret the provisions of the code and other tax legislation. The country’s
primary types of taxation are individual income tax, passive income tax, corporation tax, and
VAT. Other taxes include percentage tax (primarily for non-VAT registered entities), excise tax,
documentary stamp tax, and estate and donor’s (gift) tax. In order to maximize the effects of
double taxation, the Philippine government has tax treaties with many countries, including the
US. The business profits earned by a resident of another country with whom the Philippines has
a tax treaty are taxable only in the Philippines and only if the resident has a permanent
establishment in the Philippines to which the earnings are attributable.

There have been two highly visible tax reform programs in the country in the last two decades.

The 1986 tax reform program was designed to address the major weaknesses of the existing tax
system of that time; weaknesses such as its unresponsiveness to changes in income aggregates,
low tax yield, heavy dependence on indirect taxes, and a complicated administration structure.
The program’s primary purpose was to obtain a simpler, fairer and more efficient tax system.
From 1992 to 1998, though, Congress passed into law, measures that narrowed the tax base
through the grant of tax incentives or increasing the level of personal and additional exemptions.
Thus, in 1997, the country was again in need of a fresh tax program. Among the specific
objectives of the 1997 tax reform program were to make the tax system more broad-based,
simple and with reasonable tax rates, minimize tax avoidance allowed by existing flaws and
loopholes in the system, and encourage payment by increasing the exemption levels, lowering
the tax rate, and simplifying procedures.

Double Tax

In the present tax system, there are a number of instances where the national and local
governments seem to practice and tolerate double taxation, specifically in relation to VAT,
professional tax and the local business tax. A professional is liable to pay VAT to the national
government and, at the same time, professional tax to the province. Businesses, meanwhile, are
subjected to VAT at the national level and to a local business tax that is payable to the
municipality or city. In these two examples, a tax is imposed on the same taxable base, for the
same reason, and by two sovereign levels of government.

The community tax is another example of double taxation. This type of tax is imposed on income
or property value that is also subject to other forms of taxes such as the income tax and VAT at
the national level, and the local business tax and real property tax at the sub-national level.

It is also argued that the taxes imposed on property such as estate tax, gift tax, capital gains tax
and real property tax result in double taxation. Observers contend that the assets belonging to an
estate have already been subject to income tax before and therefore, should not be taxed again.

Another instance of alleged double taxation is on dividends. The tax on dividends was
reintroduced in the 1997 income tax system after it was abolished in 1986 together with the
intercorporate dividends tax. It was earlier argued that there was only one income stream being
subjected to both the corporate tax and the tax on dividends. The Department of Finance,
however, maintains that a tax on dividend promotes progressivity of the tax system since
individuals belonging to the two topmost income classes receive dividend income.

The imposition of a VAT on the sale of services by professionals like doctors, accountants and
lawyers, is also deemed as an instance of double taxation. To professionals, their "value-added"
upon which the VAT is levied, is measured by their gross income that is likewise subject to the
income tax. Some believe that this practice of taxing the same income twice is excessive and
burdensome.

The 1986 Philippine Constitution requires that the rule of taxation be uniform and equitable to
prevent undue discrimination and the imposition of excessive taxes.