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DEFINITION OF TERMS
Taxation
A means by which governments finance their expenditure by imposing charges on citizens
and corporate entities.
Economics
Economics is the social science that studies the production, distribution, and consumption
of goods and services.
Principles of a Good Tax System
 Economic efficiency
 The ability-to-pay principle
 Horizontal equity
 Benefit Principle
Classes of taxes
 Direct taxes - paid by taxation on the income of the wage earner.
 Indirect taxes - often unavoidable and is not taken from wages.
Taxation Structure
 Proportional Taxation - MRT = ART
means that Marginal rate of tax (MRT) = Average rate of tax (ART), so if a low-income
earner is taxed at 20%, so is a higher income earner. The proportion of tax paid is always
the same, though in absolute terms it goes up the higher your income.

 Progressive Taxation - MRT > ART

means that Marginal rate of tax (MRT) > Average rate of tax (ART) (with MRT and ART > 0).
The higher income earners pay a greater proportion of their income in tax than the low earners.
 Regressive Taxation
This is very rarely done intentionally by a government, as it would be extremely
unpopular and would be seen as supporting wealthy, high income individuals over more
needy households. However, indirect taxation could be said to partly support this. Very
high-income earners may spend a lower proportion of their income on goods and services,
and so pay proportionally a fewer taxes as a percentage of their income.
4 General Requirements for the Efficient administration of tax laws
 Clarity
 Stability
 Cost-effectiveness
 Convenience
TAXATION IN THE PHILIPPINES
The policy of ‘’taxation in the Philippines’’ is governed chiefly by the Constitution of the
Philippines and three Republic Acts.
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: National Internal Revenue Code/ Tax Code—enacted as Republic
Act No. 8424 or the ‘’Tax Reform Act of 1997’’
2. subsequent laws amending it; the law was most recently amended by Republic Act
No. 10963 or the ‘’Tax Reform for Acceleration and Inclusion Act(TRAIN
Law) ‘’;
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3. local laws: major sources of revenue for the local government units (LGUs) are the
taxes collected by virtue of Republic Act No. 7160 or the ‘’Local Government
Code of 1991’’,
4. and those sourced from the proceeds collected by virtue of a local ordinance.
Taxes imposed at the national level are collected by the Bureau of Internal Revenue
(BIR), while those imposed at the local level (i.e., provincial, city, municipal, barangay)
are collected by a local treasurer’s office.
National taxes
The taxes imposed by the national government of the Philippines include, but are not
limited to:
income tax; percentage tax;
estate tax; excise tax; and
donor’s tax; documentary stamp tax.
value-added tax;

Income tax
Income tax for individuals
Citizens of the Philippines and resident aliens must pay taxes for all income they have
derived from various sources, which include, but are not limited to:
compensation income capital gains; royalties; prizes and
(e.g., salary and interests; dividends; winnings;
wages); rents; annuities; pensions; and,
income of self- partner’s
employed individuals share from the
and/or professionals; profits of
partnership.

Compensation and self-employment income

Individuals, including nonresident aliens, earning compensation income are taxed based
only on the income tax schedule for individuals. On the other hand, self-employed
individuals and professionals are taxed based on the income tax schedule for individuals,
applicable percentage taxes, and value-added tax (VAT). However, if their gross sales (or
gross receipts plus other non-operating income) does not exceed the VAT threshold, they
have the option to be taxed either on the basis of the income tax schedule for individuals
and the applicable percentage taxes, or just with a flat tax rate of 8% on their gross sales
(or gross receipts plus other non-operating income).
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Income tax schedule for individuals Income tax schedule for individual's
effective FY 2018 until FY 2022 effective FY 2023 and onwards
Annual Tax to pay Annual Tax to pay
taxable taxable
income income
Over But not over Over But not over
P0 P250,000 0% P0 P250,000 0%
P250,000 P400,000 20% of the P250,000 P400,000 15% of the
excess over excess over
P250,000 P250,000
P400,000 P800,000 P30,000 + P400,000 P800,000 P22,500 +
25% of the 20% of the
excess over excess over
P400,000 P400,000
P800,000 P2,000,000 P130,000 + P800,000 P2,000,000 P102,500 +
30% of the 25% of the
excess over excess over
P800,000 P800,000
P2,000,000 P8,000,000 P490,000 + P2,000,000 P8,000,000 P402,500 +
32% of the 30% of the
excess over excess over
P2,000,000 P2,000,000
P8,000,000 P2,410,000 P8,000,000 P2,202,500 +
+ 35% of the 35% of the
excess over excess over
P8,000,000 P8,000,000

Interests, royalties, prizes and other winnings

Interest income from bank deposits, deposit substitutes, trust funds, and other similar
products (except for its long-term variants) is taxed at the rate of 20%.
Royalties, except on books, literary works and musical compositions, are taxed at the rate
of 10%.
Prizes and winnings from Philippine Charity Sweepstakes Office (PCSO) Lotto in excess
of P10,000 (upon which individual prizes and winnings P10,000 or below are taxed on the
basis of the income tax schedule for individuals) are taxed at the rate of 20%.
Interest income from a depository bank under the expanded foreign currency deposit
system is taxed at the rate of 15%.
Income from long-term deposits and investments, when pre-terminated in less than three
years after making such deposit or investment, is taxed at the rate of 20%; less than four
years, 12%; and, less than five years, 5%.
Dividends
Cash and property dividends are taxed at the rate of 10%.
Capital gains
Capital gains from the sale of shares of stock not traded in stock exchange are taxed at the
rate of 15%.
Capital gains from the sale of real property are taxed at the rate of 6%, except when such
proceeds would be used to construct a new principal residence within eighteen months after
the sale of a previous principal residence had occurred.
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Value-added tax/ Sales Tax

The value-added tax (VAT) rate since 2006 is 12%. A 12% value added tax (VAT) of the
gross selling price is imposed to all importation, sale, barter, exchange or lease of goods or
properties and sale of services. The term 'Gross selling price' means the total amount of
money or its equivalent that the purchaser pays or is obligated to pay to the seller in
consideration of the sale, barter or exchange of the goods or properties, excluding the value
added tax.
The new VAT threshold was changed from Php 1,919,500 to Php 3,000,000 as a result of
the passage of the Tax Reform for Inclusion and Acceleration (TRAIN) Law.

Exempt transactions
The following goods, services and transactions are exempted from the VAT:
agricultural and marine food products in their
original state;
fertilizers, seeds, seedlings, fingerlings, and
feeds and feed ingredients;
importation of personal and household effects
of persons resettling in the Philippines;
importation of professional instruments,
wearing apparel, and domestic animals;
services subject to percentage tax;
agricultural contract growers and millers;
health care services;
educational services;
agricultural cooperatives, and cooperatives
that are non-agricultural and non-electric in
nature;
residential lots worth at most
P1,500,000, or house and lots worth at
most P2,500,000
monthly lease of residential units at
most P15,000;
books and mass media publications
(e.g. the newspaper and magazine);
transport services by non-Philippine
carriers;
cargo vessels and aircraft;
financial services;
sales to senior citizens and persons
with disability;
from 2019, drugs prescribed for
diabetes, high cholesterol and
hypertension; and,
annual sales of any other goods or
services not exceeding P3,000,000.

Percentage tax
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 value-added tax (VAT) under Section 109 (w) of the National Internal
Revenue Code, as amended, whose gross annual sales and/or receipts do not exceed Php
3,000,000 and who are not VAT-registered; and,
engaged in businesses specified in Title V of the National Internal Revenue Code.
Excise taxes
Excise taxes apply to goods manufactured or produced in the Philippines for domestic sales
or consumption or for any other disposition and to things imported.
Local taxes
local taxes are what we pay to the local government units, which include the provinces,
municipalities, cities, and barangays. The local government taxation in our country is based
on Republic Act 7160 or otherwise known as the Local Government Code of 1991, as
amended.
Example: Real property tax
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One of main sources of revenues of the local government units is the real property tax,
which is a tax imposed on all types of real properties including lands, buildings,
improvements, and machinery.

Income tax for corporations

In general, the income tax rate for corporations is 30%. However, nonprofit educational
institutions and hospitals enjoy a much lower rate of 10%.
Corporate Tax
The corporate income tax rate both for domestic and resident foreign corporations is 30%
based on net taxable income. Excluded from the income tax are dividends received from
domestic corporations; interest on Philippine currency bank deposit and yield from trust
funds. It is important to note that foreign corporations, whether resident or nonresident, are
taxable only on income derived from sources within the Philippines.
Withholding Tax
 All other taxable income earned by domestic and resident foreign corporations is
subject to a 20% final withholding tax. However, Regional operating headquarters
are taxed at 10% on taxable income. Special economic zone enterprises duly
registered with the Philippines Economic Zone Authority are taxed at the rate of
5% on gross income.
 The net capital gains from the sale of shares of stock of a domestic corporation are
taxed on a per transaction basis at the rate of 5% on the first PhP 100,000 and 10%
in excess of said amount. On the other hand, the sale of shares of stock of a domestic
corporation through the Philippine Stock Exchange or through the initial public
offering is subject to a percentage tax on the transaction at the rate of 0.5% of the
selling price.
 The sale of land, building and other real properties classified as capital asset is
subject to 6% final capital gains tax based on the gross selling price.
 Any branch profit to be remitted to the Head Office is additionally taxed at the
rate of 15%.
Tax Treaties with the Philippines
The Philippines has existing tax treaties with various countries including the United States,
Canada, UK, Canada, Singapore, China, and Malaysia which provide for tax relief on
income derived by foreign or local residents of the Philippines and the foreign country from
sources within their respective territories. The tax relief includes tax exemption or
entitlement to preferential tax rates on certain types of income such as interest, royalties,
and dividends.
Availment of tax treaty relief is not simply automatic in the sense that taxpayers are
required under existing BIR rules and regulations to comply with certain formalities before
the said tax relief can be availed.
Securing a tax treaty relief ruling requires the filing of a formal request with the
International Tax Affairs Division (ITAD) of the BIR stating the nature, mechanics, and
conditions of the specific transaction applied for together with various supporting
documents which include documents executed abroad and thus requires certification and
authentication of the concerned Philippine consulate abroad.
List of Countries with Tax Treaty with the Philippines
Australia Austria Bahrain Bangladesh Belgium Brazil Canada China Czech
Denmark Finland France Germany Hungary India Indonesia Israel Italy Japan
Korea Kuwait Malaysia Netherlands New Zealand Nigeria Norway Pakistan Poland
Qatar
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Romania Russia Singapore Spain Sweden Switzerland Thailand Turkey United Arab
Emirates United Kingdom of Great Britain and Northern Ireland
United States of America Vietnam

IMPORTANCE OF TAXES
Governments impose charges on their citizens and businesses as a means of raising
revenue, which is then used to meet their budgetary demands. This includes financing
government and public projects as well as making the business environment in the country
conducive for economic growth.

Importance of Taxes in Society

Without taxes, governments would be unable to meet the demands of their societies. Taxes
are crucial because governments collect this money and use it to finance social projects.
Some of these projects include:
• Health
Without taxes, government contributions to the health sector would be impossible. Taxes
go to funding health services such as social healthcare, medical research, social security,
etc.
• Education
Education could be one of the most deserving recipients of tax money. Governments put a
lot of importance in development of human capital and education is central in this
development. Money from taxes is channeled to funding, furnishing, and maintaining the
public education system.
• Governance
Governance is a crucial component in the smooth running of country affairs. Poor
governance would have far reaching ramifications on the entire country with a heavy toll
on its economic growth. Good governance ensures that the money collected is utilized in a
manner that benefits citizens of the country. This money also goes to pay public servants,
police officers, members of parliaments, the postal system, and others. Indeed, with a
proper and functioning form of government, there will be no effective protection of public
interest. Other important sectors are infrastructure development, transport, housing, etc.
Apart from social projects, governments also use money collected from taxes to fund
sectors that are crucial for the wellbeing of their citizens such as security, scientific
research, environmental protection, etc.
Some of the money is also channeled to fund projects such as pensions, unemployment
benefits, childcare, etc. Without taxes it would be impossible for governments to raise
money to fund these types of projects.
Furthermore, taxes can affect the state of economic growth of a country. Taxes generally
contribute to the gross domestic product (GDP) of a country. Because of this contribution,
taxes help spur economic growth which in turn has a ripple effect on the country’s
economy; raising the standard of living, increasing job creation, etc.
Governments also use taxes as a deterrent for undesirable activities such as the
consumption of liquor, tobacco smoking, etc. To achieve this, governments impose high
excise levies on these products and as a result, raise the cost of these products to discourage
people from buying or selling them.
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Importance of Tax to Businesses

For business to flourish in the country, there has to be good infrastructures such as roads,
telephones, electricity, etc. This infrastructure is developed by governments or through
close involvement of the government. When governments collect money from taxes, it
ploughs this money into development of this infrastructure and in turn promotes economic
activity throughout the country.
The concept of taxation is also important to businesses because governments can fund this
money back into the economy in the form of loans or other funding forms.
Taxes help raise the standard of living in a country. The higher the standard of living, the
stronger and higher the level of consumption most likely is. Businesses flourish when there
is a market for their product and services. With a higher standard of living, businesses
would be assured of a higher domestic consumption as well. Taxes are essential and every
citizen is meant to reap benefits of these taxes. This is why it is important that citizens
endeavor to pay taxes and understand that it is meant to be more than just a “money grab”
from the government.

ECONOMICS
Economics focuses on the behavior and interactions of economic agents and how
economies work. Microeconomics analyzes basic elements in the economy, including
individual agents and markets, their interactions, and the outcomes of interactions.
Individual agents may include, for example, households, firms, buyers, and sellers.
Macroeconomics analyzes the entire economy (meaning aggregated production,
consumption, saving, and investment) and issues affecting it, including unemployment of
resources (labor, capital, and land), inflation, economic growth, and the public policies that
address these issues (monetary, fiscal, and other policies). See glossary of economics.
Other broad distinctions within economics include those between positive economics,
describing "what is", and normative economics, advocating "what ought to be"; between
economic theory and applied economics; between rational and behavioral economics; and
between mainstream economics and heterodox economics.
Economic analysis can be applied throughout society, in business, finance, health care, and
government. Economic analysis is sometimes also applied to such diverse subjects as
crime, education, the family, law, politics, religion, social institutions, war, science, and
the environment.
Economic goals
The primary goal of a national tax system is to generate revenues to pay for the
expenditures of government at all levels. Because public expenditures tend to grow at least
as fast as the national product, taxes, as the main vehicle of government finance, should
produce revenues that grow correspondingly. Income, sales, and value-added taxes
generally meet this criterion; property taxes and taxes on nonessential articles of mass
consumption such as tobacco products and alcoholic beverages do not.

Related Literature, current administrations’ approach on the economy and taxation.

The problem with our tax system and how it affects us
Not only do our taxes disproportionately burden the poor and benefit the rich, but they also
yield too little revenue given the distortions they create. Needless to say, both problems
need to be resolved soon.
President Duterte’s plan to overhaul our tax system is arguably his most highly-anticipated
and consequential policy thus far into his term.
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The plan, originally crafted by the Department of Finance, aims for a "simpler, fairer, and
more efficient" tax system that will promote investments, create jobs, and reduce poverty.
Many sectors have expressed support for it, including a group of former DOF and NEDA
secretaries.
But some lawmakers have branded the tax proposal as "heartless" and "anti-poor" because
of, say, the planned increase on fuel taxes. Others have also questioned certain spending
items in the General Appropriations Act of 2017 that do not merit the additional revenues
that tax reform will yield.
In this article, we step back from the politics of it all and look at the current state of the
Philippines tax system. We focus on 5 issues which, to our mind, demonstrate best the
present deficiencies (or "structural weaknesses") of our tax system. In each, we show how
the current state of things deviates from well-known principles of taxation.

1. We have some of the highest income tax rates in the region.

Principle of taxation: High income taxes could discourage firms from producing more
goods or employees from working more hours. Hence, a good tax system makes sure that
income tax rates are not too high so as to discourage economic activity.

The problem: The Philippine tax system currently has some of the highest income tax rates
in this region. Compared to our major ASEAN counterparts, our corporate income tax is
the highest at 30%, a rate that "turns off" foreign investors who prefer to do business in our
low-tax neighbors.
Meanwhile, our maximum personal income tax rate of 32% is not the highest (it’s 35% in
Vietnam and Thailand), but we certainly don’t want the government to eat away P32 for
every P100 earned by ordinary workers.

2. Too many goods and services are not being taxed.

Principle of taxation: A good way to reduce high tax rates is to expand the tax base, or the
set of goods and services which are taxed. The same (or even a larger) tax revenue can be
collected as before by imposing a lower tax rate on as many goods and services as possible.

The problem: In the Philippines, too many goods and services are exempted from taxes.
For instance, our value-added tax (VAT) law has 59 lines of exemptions – more compared
with the VAT laws of our neighbors. The plethora of exemptions partly explains the
relatively low tax revenues we get. If only fewer goods were exempted – or if only the
exemptions were limited to essential goods like raw food and medicines – then the
government could boost its revenues.

3. Too many people are evading the tax system.

Principle of taxation: Another way to widen the tax base (in order to reduce tax rates) is to
tax as many people as possible. But the more people can get away with not paying their
taxes (or otherwise hide their income), the more difficult it will be to reduce tax rates.
The problem: Too many Filipinos can get away with not paying taxes. Obviously, there are
the tax evaders who are nearly impossible to catch and prosecute given our overly strict
bank secrecy law. In addition, "compensation earners" or those who earn salaries or wages,
end up paying more in taxes than the self-employed and the professionals (who have some
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ability to hide part of their incomes). As a result, from 2010 to 2013, compensation earners
earned 60% of total incomes in the country but paid as much as 80% of all taxes.

4. Our tax system is too complicated.

Principle of taxation: The rules of the tax system should be as plain and simple as possible.
Not only will it be easier for taxpayers to understand their liabilities and to comply, but it
will also minimize the administrative costs of collection.

The problem: Our tax system is overly complicated and burdensome, especially for small
taxpayers. A 2015 study found that the Philippines ranked 127th out of 189 economies in
terms of ease of paying taxes (we ranked below Iraq and Afghanistan). Another study
revealed that the “complexity of tax regulations” and our “high tax rates” are some of the
most problematic factors for doing business in the country.

5. Rich Filipinos are not paying their fair share of taxes.

Principle of taxation: Finally, a good tax system levies more taxes to people who can afford
to pay more. One way to do this is to make the rich pay for a larger fraction of their income
than the poor; that is, by making the tax system "progressive."
The problem: The Philippine tax system is only "mildly" progressive, and even borderline
"regressive" – in many instances, poor Filipinos effectively pay a larger fraction of their
income in taxes.
For example, tax rates on dividends and other forms of capital incomes (which are earned
mostly by the rich) are so low compared to the tax rates of ordinary workers. Increasing
these capital income tax rates will certainly help make the rich pay more in taxes.
Also, taxes on petroleum products have been constant for many years. Aside from being a
lost opportunity to combat pollution and congestion, it’s also a lost opportunity to tax the
rich who consume petroleum products more.

Conclusion: The time is ripe for tax reform

Tax policy is essentially a balancing act between efficiency and equity. We want to impose
progressive taxes to make society a fairer place to live in. But at the same time, we want to
make sure that such taxes do not reduce economic activity so much.
Unfortunately, the Philippine tax system is currently deficient in both respects. Not only
do our taxes disproportionately burden the poor and benefit the rich, but they also yield too
little revenue given the distortions they create. Needless to say, both problems need to be
resolved soon. Comprehensive tax reform in the country is long overdue.
It so happens that the early days of the Duterte administration – when political capital is
fresh and popular support is robust – offer a crucial window of opportunity to pursue tax
reform. That is why the filing of House Bill 4774, or the proposed "Tax Reform for
Acceleration and Inclusion Act," could not have been timed better.
But while most would agree that the time is ripe for tax reform, there is currently no
consensus yet as to how exactly to pursue it. This in itself is a fascinating discussion that
deserves another article.

Expected Impacts of the current Tax and Economic Reform in the Philippines
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 This increased economic potential of the Philippines is what often occupies

talks with Malaysian, Indonesian, and Singaporean business people, who see our
economy as a big and still growing market for their products.
 They particularly monitor developments in Mindanao with which we have a
shared border. A stronger Mindanao economy in 2018 and prospects for the
Bangsamoro government fostering peace and development means that poverty
rates can go down. That means that the local economy, and yes, Mindanao’s own
per capita income and purchasing power will rise.
 This boosted their purchasing power and increased demand so much that
supply could not keep up, resulting in a short-term spike in inflation last year.
 Apart from allowing more Filipinos to keep and spend their money, the higher tax
collections recently experienced show the ability of this population to pay taxes
as it grows.
 The government can now better afford to fund the infrastructure needed for
it to keep on growing. It can also help keep inflation and the budget deficit within
manageable levels, since it can generate cash to do so when needed.
 This also means that having enough cash and the ability to generate cash allows
us the footing to choose the kind of debt it wants to engage and negotiate
better terms for loans.
 We retain the hope that as the rice tarrification law comes into effect, lower prices
will enable families to spend less for food, which is about 2/3 of their income.
This can lower inflation more and increase their purchasing power further,
boosting consumption.
 The second package of the tax reform program includes lower Corporate Income
Tax (CIT) rates from 30 percent to 20 percent. A Corporate Income Tax rate
higher than those of our neighboring economies (Malaysia and Indonesia, for
reference, only charge about 25%,) deters investments. We may hit a new all-
time-high Foreign Direct Investment (FDI), this year, perhaps more than last
year’s 10 B US$. Lowering this may increase FDIs since it makes them more
profitable.
 Equally important is that lower taxes on businesses will boost small enterprises.
What they will not pay they are likely to spend and invest to expand. That will
mean well for more businesses.