CHAPTER II

REVIEW OF RELATED LITERATURE

This chapter presents a review of related literature and studies relating to the

Barangay Micro Business Enterprise Act of 2002, its history, significance and

benefits to the micro businesses in the Philippines. This chapter also contains a

discussion on the overview of micro and small businesses in and outside the

Philippines. Lastly, this chapter includes relevant studies regarding tax incentives

and its role in the empowerment of micro, small and medium-scale enterprises.

Barangay Micro Business Enterprise Act of 2002 (BMBE)

A. History and Significance of BMBE

Micro Businesses are essential to the growth of the Philippine economy.

Micro Businesses provide an avenue for job creation, employment opportunities and

possible alleviation from poverty. This now leads to the creation of the Barangay

Micro Business Enterprise Act of 2002. This act is penned by former senator Juan

Flavier. According to dti.gov.ph, the act was signed into law by the former president

Gloria Macapagal-Arroyo on the 13th of November 2002. Moreover, the

implementing rules and procedures of such act were issued on February 7, 2003 as

DTI Administrative Order No. 1 Series of 2003. Such was published in February 11

and 26 of the same year in the issues of Manila Bulletin.

 According to the law, BMBEs are critical to the economic development

because they are the stepping stone in the formulation of the development of Filipino

entrepreneurial talent. This act also aims to incorporate the informal sector through

granting specific incentives to these firms therefore giving them a chance to be part

of the mainstream of the economy. Given these, the law endeavours to strengthen

the BMBEs because in doing so, it is tantamount to having more jobs and livelihood

for the people and more so better quality of life for the Filipino people. (unknown)

According to Reyes (2012) in her study entitled “Rural Micro-Enterprise

Promotion Program: An Assessment on the Impact of the Financing Delivery Role of

Small Business Corporation to MSMEs in Albay, Ragay and Sipocot Camarines

Sur”, R.A. 9178 otherwise known as the Barangay Micro Business Enterprise Act of

2002 provided assistance to the micro businesses through offering incentives and

benefits for these firms. One major incentive is the income tax exception awarded to

the registered BMBEs. The aim of the law is to incorporate the micro enterprises to

the mainstream economy since they contribute a lot to the economic growth. Also,

its aim is to strengthen the said sector thus leading to job creation, livelihood and

better quality of life of Filipinos. (Reyes, 2012)

Micro and Small Enterprises: An Overview

A. Definition

According to Shaper and Voley (2007), creating a clear cut definition of a

small business is very difficult. They said that since small businesses are located in

almost all places in the world, they vary in their definition and characteristic. The
small businesses all over the world and in almost all industries vary in their

organizational, legal and operating forms (Shaper and Volery 2007). In addition, a

business may be categorized as small provided that they conform to the qualitative

and quantitative criteria. The qualitative criteria, according to the book, are that small

businesses are those that are owned by just one or two individuals who therefore

provides for the financing, those that have a limited market share and limited life

span, those that are sometimes run on a part-time basis, those that have low levels

of net profit, those with limited product or service offering, those that are

geographically limited to one or two locations (branches or outlets) , those that are

often home based and family based business, and those that are located only in the

private sector. These qualitative characteristics are very helpful in better

understanding the life of these small scale businesses. Conversely, these are hard

to measure and evaluate since these are based on subjective perceptions.

On the other hand, quantitative criteria include the number of staff that works

in the firm, the annual wages and salaries expenses, total annual revenue that the

business produce, the value of the assets of the business which involve their

materials, equipments, properties and the like, and the share of ownership that is

held by the owner-manager. (Shaper and Volery 2007) Moreover, Australia was able

to come up with four major categories of enterprises namely, micro, small, medium

and large enterprise based on the number of workers a firm employs. Micro

enterprises employ less than five (5) workers including those who are self-employed,

small enterprises are those which have between five to nineteen (5-19) workers,

medium enterprises include firms having more than 19 staffs but less than 199
people while large firms consist of more than 200 employees. Although they gave

these categories, they stated that often times, micro, small and medium enterprises

are collectively referred to as small and medium enterprises (SMEs).

Even with these qualitative and quantitative definitions, it is still difficult to give

a standard and clear definition of what characterizes a small enterprise. The

challenge here is that there has to be a balance in qualitative and quantitative aspect

so that the definition may be unambiguous. Given such, the writers gave a general

definition of a small business. Their definition of a “small business is a small-scale

independent firm usually managed, funded and operated by its owners and whose

staff size, financial resources and assets are comparatively limited in scale”. (Shaper

and Volery 2007)

According to Megginson, normally, those that are within the neighbourhood

vicinity are the ones considered as small businesses. The definition as to what are

the classifications of a small business remains vague and unclear. The Small

Business Administration of the United States classified the four categories of

businesses namely “very small”, ”small”, “medium”, “large” according to the number

of their employees: very small firms are those under 20 employees, small firms with

20-99 employees, medium firms with 100-499 employees and lastly, large firms with

500 or more. However, Megginson, et.al. cited an example inconsistent with the

previous data showing that American Motors having 8500 employees was once

considered as a small business for the reason that it was relatively small compared

to its main competitors like General Motors, Ford and Chrysler. It was later on

bought by Chrysler. Aside from the quantitative descriptions of these categories of

businesses, qualitative factors were also mentioned. The authors said that a small

business must at least possess two of the following features: (1) Management is

independent, since the manager usually owns the business (2) Capital is supplied

and ownership is held by an individual or a few individuals (3) the area of operations

is primary local, although the market isn’t necessarily local (4) the business is small

in comparison with the larger competitors in its industry. The definition considered

and used by the Congress of the U.S. which was defined in the Small Business Act

of 1953 was considered the best definition for a small business: A small business is

one that is independently owned and operated and is not dominant in its field of

operation. (unknown)

A business journal written by Jamak, Ali and Salleh from Malaysia focused on micro

businesses owned by the Orang Asli Aborigines, “a minority group in the multi-ethnic

Malaysian society”. They conducted a survey and found out that 56% of their

respondents engage in small scale retail businesses though almost all are

uneconomic because they usually have their businesses located at settlement areas

and the operation of the business is customarily because of social obligation and not

really about gaining profit. The most common reason why majority of the businesses

fail is because of uncollected debts from their customers. Micro businesses in this

part of Malaysia usually engage in retailing although some do “odd jobs” or take up

contract work within the settlement area.

The Orang Asli aborigines still hope and seek the help of the government in

terms of monetary and skill training for them to atleast progress. The researchers

suggest that assistance by the government should not only target these indigenous
entrepreneurs and village chiefs but more importantly, the aide must also reach all

interested level of Orang Asli of smaller rank. Entrepreneurial trainings and seminars

are a good idea because the aborigines of Malaysia did not receive a high formal

education to help them in business strategies and decision-making processes

necessary for the survival and growth of their businesses. (unknown)

B. Difference from other Types of Business

In a book entitled “Small & Medium Industries in the Philippines: An

Overview” published by the Institute for Small-Scale Industries, University of the

Philippines Diliman, everything about SMEs from its definition, to the business

aspects and even to the government assistance programs given to these SMEs was

thoroughly discussed.

The book also presented the differentiation between a small industry from a

“cottage industry”; the latter defined as “manufacturing and/or industrial service

enterprises with employment of less than five and with total assets not exceeding

250,000”. Cottage industry also possesses some or sometimes even all of the

characteristics of a small business. These businesses are mainly situated at the

home of the owner and subsequently, the members of the family are the ones who

help in the operations of the business. Having said this, however, small industries do

not cover cottage industries in general. This is because of the qualifying

characteristic of small businesses that is: the owner does not participate in the actual

production process. Cottage industry merely provides an efficient entrepreneurial

base for SMEs. (unknown)

 Clark and Douglas (2010) said that although micro businesses in New

Zealand, representing 89% of New Zealand firms thus a significant sector in the

economy of the country, have rarely been studied and as a matter of fact, it was not

focused in any academic research, government policy or even business support

programs in New Zealand. In their journal entitled “Micro Business Characteristics of

Home-Based Business in New Zealand”, they listed some factors that contributed to

the continuous increase in popularity of home based businesses. They emphasized

however the two kinds of home based business: (1) firms generating at home, where

all business operations are done at the residence of the owner; and (2) firms

operating from home, where only administration, record-keeping and supplies

management are maintained at home. The factors include improvements in

information and communication technologies, changes in cultural attitude towards

self-employment, societal attitudes towards flexible work and lifestyle as well as

economic cycles driving business restructuring and redundancies. Clark and

Douglas defined home-based businesses as “enterprises which operate at or from

the owner’s home residence. The business owner is self-employed and uses his/her

home residence for some of the core business activities to generate income”. Their

study specifically examined the characteristics and basic activities of home based

businesses in New Zealand. Results showed that a home based business owner

may work full time or part-time on his/her business or work part-time and at the

same time be affiliated with other businesses or even work part-time and be an

employee in another organization. Their study also yielded to the result that majority

of home based businesses were under 10 years old although a significant

percentage of 14% represents businesses that had been operating for 15 years or

more. In addition to this result, the study showed that a very small ration of one-third

of home based businesses were sole proprietors while a majority of 56% were

limited liability companies and the remainder are registered as partnerships.

Generally, home based businesses are relatively small but these firms have strong

passion and commitment to growth and progress. (unknown)

According to a study undergone by three researchers from Victoria University

in Australia, home-based businesses comprise 67% of the total number of

microbusinesses in the country. It can be expected that since they are small and

cater to minor markets, they would initially make contact with the local government.

Basing from the data gathered by Ali, Paguio & Breen, home based businesses

prefer to be anonymous and they do not usually coordinate with the local

government because of the fear that this might lead to a negative effect on their

business. Given this, the local government goes through a hard time reaching out to

these home-based businesses. (unknown)

Storey and Greene (2010) in their book entitled “Small Business and

Entrepreneurship” presented the difference between small and large firms. These

differences, among others, are:

Aspect Small Firms Large Firms

1. Risk of Failure According to the book, Although large firms do

small firms are more likely fail, the risk of failure is

 to cease operations than not that high compared to

the large businesses. This the small businesses.

risk of failure is the

primary factor that

differentiates small from

large enterprises. This is

due to the reason that

small businesses focus on

the short term goals and

short term survival.

2. Market Power They have no market More likely to have the

power as to set prices. power to set prices.

Small firms compete

through service, quality

and responsiveness.

3. Management Most small firms are Owners are commonly

generally owned and private stakeholders or

managed by the same financial institutions. The

person(s). management

responsibility are given to

professionals are only

modest owners of shares.

4. Motivation of Owner The purpose of The owners usually have

establishing small the objective of

businesses for most cases maximizing the potential

is to obtain a comfortable value of the firm.

living to themselves and/or

to their family members.

5. Brand No brand value Brand is an important

factor for large firms. It

can increase or decrease

profitability since the

brand provides awareness

resulting to confidence

and later on loyalty to the

firm.

6. Strategy The strategy has to be Large firms seek to exploit

flexible because small its price, advantages and

enterprises are deficient in advantages through labor

opportunities to reap scale resource, plant or

economies. research and

development.

7. Source of Finance Small firms are founded Large businesses have

primarily from the personal vast choices of finance

 savings and retained sources.

profits of the owners.

(Storey & Greene, 2010)

C. Significance to the Economy

Shaper and Volery (2007) stated that small firms are essential in the growth

of the national economy. Small enterprises are very crucial components in the

economic structure of any country. The book enumerated the potential and

significant contribution that a small firm may give the economy. First, small firms

provide employment opportunities for people. Not only does the owner have

employment (self employment) but also their staff or workers. Second, the small

enterprises are the next generation of large firms. It is customary that large firms are

not going to exist forever so having small firms will enable new potential large

businesses in the future if the small firms survive and succeed. Third, they provide

competition in the market. If the market is monopolized by one or two firms, the

customers will be experiencing over pricing and that they will have no other choice

but to avail of their product or service even if it is over-priced, low in quality and with

poor service. Fourth, small firms provide innovative ideas and specialized products

and services that will allow the market to have new and fresh products or ideas.

Lastly, they aid in having exports and they provide an outlet for entrepreneurial

activities for the growth of the economy. The important contributions are not limited

to those that are given above. There may be other possible contribution that small

firms may give to the growth of the economy. (Shaper and Volery 2007)
 In the study entitled “SME Development and Technology Upgrading in

Malaysia: Lessons For The Philippines” by Habaradas (2008), it stated that small

and medium enterprises are the backbone of vibrant economies since they provide

significant contributions in addressing the poverty crisis by creating jobs and

increase employment opportunities, in scattering economic activities in rural and

urban areas and providing broadbased sources of growth, in serving as a top

supplier or provider of support services for large enterprises, in stimulating

entrepreneurial skills among the people and lastly, in acting as seedbeds for

developing domestic enterprises into large corporations. (Habaradas, 2008)

A study made by John V. Mensah entitled “Small-Scale Industry as a Sponge? An

Empirical Survey in the Central Region, Ghana” stated that small scale industries

are beneficial to developing nations having abundance in the supply of labor. This

study mentioned that small scale enterprises provide broad employment

opportunities for the excessive labor force and that they have potential in income

opportunities thus aiding in alleviating poverty. This study stated that economic

growth can have a dual effect, it can either be good or bad. Small scale industries

sponge up excess labor when the economy is tight and let go of this surplus when

the economy is at ease (Liedholm & Mead, 1999).

This study used three questionnaire surveys, observation and library research

as their method in gathering data. The researchers found out that engaging in

numerous occupations is the only strategy these small scale proprietors to minimize

economic risks and to survive low income from their individual firms. Moreover,

results showed that only a small portion of small scale owners wanted to close their
firms however, most of them declared that they cannot carry on with their operations

and that they could not offer better work conditions because of their limited

resources. The study suggested that there is an urgent and great demand for

devising strategies that would be beneficial in improving national and regional

economy, in reducing the population’s growth rate and improving the profitability of

small and micro enterprises and the like. (Mensah, 2005)

Megginson, et.al wrote a comprehensive discussion on the basic and

essential pieces of information necessary for the success of a small business.

Americans believe that the best way to achieve the American dream is by means of

owning and operating a small firm or business. As a matter of fact, a study showed

that 40% of the top 1% of the wealthiest people in America started from a small

business. The authors presented six reasons why there is a significant increase in

the interest for the establishment of a small business and the three most important of

these are (1) there is a rapid growth in number of small businesses (2) they create

new jobs and increase employment and (3) course offerings in high school and

college levels include entrepreneurship and small business management. While it is

true that the first five years of a business are the most crucial years of its operations,

facts show that out of 10 firms, a ratio of 9:1 was found to be the proportion of newly-

established firms as to those who fail and close, respectively. In addition to this,

small firms generate the most job openings and greatly contribute to the rate of

employment of the United States. Larger firms for the past years increased their

revenues by an estimate of 3.5% but employment in these firms significantly

declined. The authors also pointed out that these smaller firms provide good

opportunities for older members of the work force. (unknown)

Micro businesses, among others, are the least profitable types of businesses.

They often include service firms like beauty shops and repair shops and most of the

time, these firms provide minimal return to the owner.

There has been a significant increase in the percentage of women’s share of

total self-employment from 22% to 38%. Even the revenues received by these

businesses owned by women increased. They are also engaging themselves in

industries that are unusual to them like construction firms. Unlike before, majority of

the businesses they start are engaged in service. Just because compared to men,

women are inferior atleast in experience; there are common problems that face

these women entrepreneurs. They face the disadvantage in access to credit

although the most prevalent problem that remains and continually faces women is

still discrimination. As years pass, however, women have finally proven their

effectiveness as competitive entrepreneurs of this generation and a lot of these

women contest that the business climate for them improved throughout the years.

(unknown)

Corporate Social Responsibility has been a trend in the business world for the

past years. Basically, as defined by Hershey Panelo Coralde in her thesis entitled

“Contributions of Business Social Responsibility to Micro, Small and Medium

Enterprise: Begy. Angio San Fabian Pangasinan”, it is a self-regulating approach to

give something in return to the community. The researcher presented the significant
positive effects of MSMEs (micro, small and medium enterprises) in our country not

only economically but also in terms of empowering the community. The study

primarily focused on determining if the six respondents succeeded in improving the

quality of life in Brgy. Angio San Fabian, Pangasinan through Business Social

Responsibility. Results showed that 100% of the total employees of the six

establishments were fully aware of their employer’s community service. In addition to

this, 98% said that they were able to feel that they were fully helped by the programs

while 2% said that they were partially helped. 28 of the total 38 respondents said

that their employer’s community programs helped in their livelihood while 6 said it

helped in family assistance and 4 others said it helped in education aspect of the

employees and their families. All of the employees, here treated as the respondents

of the study, and the whole community appreciated the programs of the six

establishments. And lastly, 100% felt that their current employer created a difference

in the lives of the community. (Coralde, )

A more thorough discussion on micro-enterprises especially on their

growth and efficiency was presented in a thesis study by Genevieve P. Yanga

entitled, “Evaluation Micro-Enterprises in Aurora Province Based on Growth and

Efficiency”. This study aimed to determine the characteristics of micro-enterprises in

Aurora, the inputs that contributed to their total sales and income, the causes of

success or failure of micro-businesses, and the effects of different variables to micro

enterprises productivity and efficiency in Aurora. Results showed that, in general, the

labor productivity with respect to sales was 90.6% and with respect to income, a

percentage 85.8% for years 2000-2004. In addition to this, the year 2004 increased
returns on operations and growth rates of inputs as well as outputs as the net

income increased. This particularly resulted to a high efficiency in operations. On a

slight contrary, the manufacturing sector of micro enterprises in Aurora experienced

a substantial a decrease in productivity because of factors like frequent brownout,

poor road condition, inconsistent policies and lack of support. Generally, the study

showed that micro-enterprise in Aurora Province achieved productivity and growth

from 2000-2004 although they were also hindered by outside factors that affected

the condition of the business workplace. The primary cause of the increase in

productivity among MEs in Aurora is their innovation. Hence, MEs helped in

economic development in terms of job creations, revenue generation and

improvement in the condition of life in Aurora Province. (Yanga, )

D. Challenges Encountered

The book entitled Small Business Management, Entrepreneurship and

Beyond by Hatten (2012), stated that operating a small business involves certain

risks that entrepreneurs may encounter. Operating one’s own business is not simple

and easy, it is not simply creating concepts, ideas and strategies that once can apply

overnight for the betterment of the business. Running a small firm is complex and

difficult. A research firm named Dan and Bradstreet defined business failure as:

“A business that closes as a result of either (1) actions such as

bankruptcy, foreclosure, or voluntary withdrawal from the business with

a financial loss to a creditor; or (2) a court action such as receivership

 (taken over involuntarily) or reorganization (receiving protection from

creditors.” (Hatten, 2012)

According to a study conducted by National Federation of Independent Business

(NFIB), stated that more than 10% of the businesses stop their operations at their

first year while roughly 25% ceased operations at their second or third year or in

between those given. Moreover, 20% closed between their third and fifth year of

existence and only 13% percent were able to survive for more than 21 years.

Businesses fail because of many factors: type of ownership, size of business

and expertise of the owner. However, the two major factors are inadequate financing

and inadequate management. In terms of inadequate financing, some small firms do

not have enough finances to continue with the business and to support the cost of

operations. On the other hand, inadequate management results from the lack of

experience of the owner-manager of the firm since in these kinds of firms,

management skills are desirable. Another reason is that since these small

enterprises have limited funds and resources, they are not able to hire full-time

experts who could help lessen their expenses and costs. (Hatten, 2012)

Small firms have a high mortality rate in the business world. Small firms are

lucky enough to survive more than five (5) years of existence due to many

difficulties. According to Birch (2006), an estimated number of eight million

enterprises operating in America closed every year. The book entitled “The

Complete Small Business Guide” by Colin Barron (2006) enumerated the reasons

behind business failure in th small enterprises field. It was stated that eventhough
there have been impressive increase in new enterprise establishment, failure rates

remain depressingly high. According to Colin (2006), the major factors contributing

to the business failure are the lack of management expertise and under-

capitalization. Aside from these two factors, Colin also stated that insufficient

turnover, poor management supervision, lack of proper accounting, competition, not

enough capital, bad debts and excessive renumeration to the owners. It was

indicated that lack of management and lack of expertise on the part of the owners

can be traced to having scarce capital resources. Since according to the book, all

learning has its equivalent price. Moreover, enterprises also experience cash flow

crisis since the resources are low and the cost of operations are high. (Barron,

2006)

Another disadvantage of entering small business is the ambiguity and

constant change in the market. There may be instant rise and fall in the sales

income, profitability, government regulations, competitors and market dynamics from

one time to another. Moreover, another disadvantage given by the book entitled

“Entrepreneurship and Small Business” written by Shaper and Volery (2007), is

having potential financial loss. Since the small business are solely owned by an

individual, if the business collapses, then the owner might loose his starting capital

and also some of his own personal assets, in some cases ie use of personal asset to

satisfy a withstanding bank loan.

Moreover, Shaper and Volery (2007) enumerated the potential problems that

might be encountered by the small firms obtained through research in three

countries namely UK, Singapore and Malaysia. First, in terms of finances, problems
are lack of funds, cash flow difficulties, lack of working capital and problem of getting

paid. Also, small firms face crises in the marketing field. These problems include

having difficulty in obtaining sufficient sales, pricing, distribution, competition, lack of

marketing skills and knowledge. In terms of production, there problems include their

business premise, getting supplies, low-quality of product and/or service. More so, in

the case of personnel management, problems are having difficulties in hiring

competent and good staff, interpersonal problems and the problem of laying off

employees. Lastly, in the case of personal dillemma, stress, immersion in the

business, long hours of work, no family support, prejudice and distrust, lack of

respect, tension between personal life and career are evident in the lives of small

firms owners. (Shaper & Volery, 2007)

According to the book entitled “Small business Management: An

Entrepreneur’s Guide to Success” by Meggison et al, despite the emergence and

rapid growth of small businesses all around the world, there are still difficulties that

the owners of these firms face. Megginson, et.al. listed six common problems small

businesses face and taxes rank number one in the list being 25% in severity.

Regulation/red tape, insurance costs, weak sales, competition from large

companies, finding good workers follow, in this particular order. National Federation

of Independent Business reported this list and was reported in USA Today.

(unknown)

Robert S. Frey, in his book entitled “Successful Proposal Strategies for Small

Businesses”, listed constraints as well as advantages over bigger firms. He said that

small businesses tend to fill the areas or markets that large corporations cannot
cater to. In addition to this, since smaller firms have fewer layers of management,

decision-making is faster. As a result, policies and business operations can be made

flexible to efficiently meet the customers’ demands. Small firms are also at an

advantage when penetrating new market sectors. They are, however, at risk

because of (1) very limited B&P funds (2) lack of depth in human resources (3) small

business base (4) a contract backlog deficit (5) low level of contractual experience

(6) lack of name recognition in the marketplace (7) line of credit challenges.

(unknown)

According to an article entitled “Help for Small Business” written by Goldstein,

there has been wants to change some of the state’s business incentive program

such that small firms may be able to qualitfy to avail of the given incentives. Many

small business owners said that Garden State is a difficult place to start businesss

because of expensive starting costs, high taxes and precipitous health insurance

benefits. This leads to the idea that the current policies regarding these should be

altered to fit the small business and be able to provide assistance for them too.

Kosci (2007) stated that small business had been neglected by the current

policies since most business incentives had been focused on the large enterprises.

Kosci tried to include a state tax credit to reimburse small firms foor bank fees that

they incur when closing small business administration-guaranteed loans. He further

argues that this inclusion would be a small project as compared to those programs

alloted for the benefits of the larg firms. Moreover, he further contends that

eventhough this project may seem less, it will enable to show that the state is willing

to give assistance and work with the small firms which are also essential to their
economy. Moreover, he states that this inclusion will be able to create more or less

two jobs that would last for more than a year.

The article concluded by saying that New Jersey is harsh place for small

businesses to survive because of high tax rates and high cost of living. (Goldstein,

2007)

E. Assistance Provided

An article entitled “How Could a Development Policy be Based on Small and

Medium-Scale Business in Latin America” by Marc Labie stated the foundations of

creating a developmental policy on small and medium-scale businesses. This article

laid down the steps that are needed in order to create an effective and beneficial

developmental policy. Labie stated that before a developmental policy be conducted,

one must first identify three points.

First, identify the kind of development the policy interested in. Many theories

can be used to categorize the development and that three major aspects of

development must be covered namely growth policy, income distribution and the

focus or non-focus on individuals. Second, a characterization of small and medium-

scale firms are of high importance. Also, the identification of the pros and cons,

including its social role, town planning challenge and emplyment issues and the

speed of adaptation, of these type of businesses are of high essence in creating

development policies. Lastly, identification of the issues on hand are essential in

creating a developmental policy. It would allow the creators to frame the

developmental policy suitable and effective in the issue they are planning to tackle

and eventually solve. (Labie, 2001)

According to the book entitled Entrepreneurship and Small Business written

by Shaper and Thierry, the state recognizes the potential of these small businesses

so they exert effort in encouraging entrepreneurship. Moreover, “The state sees

entrepreneurship as a way to create job opportunities, increase productivity and

competitiveness, alleviating poverty and achieving other societal goals” (Shaper and

Volery 2007). In the book, it was stated that in almost every country, there are

programs aiming the promotion and encouragement of the entrepreneurship of small

and medium enterprises (SMEs). Amongst the countries, Singapore is one of the

earliest to develop a program to encourage SMEs. They created a package that

provides tax incentives and financial assistance, also technological adaptation,

business development and international marketing.

Since the government recognizes the role of small firms in the growth of the

economy, they offer assistance to these small firms in the many forms. They offer

business start-up assistance, a package that provides starting small firms training

method for potential business formulation, consulting low-cost or free business

experts that will aid in the preparation and operation of a potential business. Also,

they provide business development and improvement programs wherein the

government afford subsidies to employ consultants for better operation of business

as well as trainings for the entrepreneurs and staffs. Giving infrastructure support is

also a way of the government in encouraging SMEs. Likewise, government provides

tax concessions wherein they give tax reduction for cost related activities of the
business whether in the start-ups, growth or expansion of these small firms.

(Shaper and Volery 2007)

Many organizations are geared towards the empowerment of small

enterprises. These organizations provide a aid in the business as well as give

essential and critical advice to the firms. These helping institutions are often those

that are directly or indirectly linked to the government for two obvious reasons; the

government sees this as a stepping stone to get votes from the people and also the

government sees these small firms as vital in the incease of employment in the

United States (Birch, 2006). In the book entitled “The Complete Small Business

Guide” by Colin Barron (2006) stated that in the study of Birch, it was confirmed

through statistics that small enterprises are vital in the increase in employment not

only in US but also to most of the developing countries. Moreover, according to

Barron (2006), it was these small firms, having less than 20 employees, that were

behind the increase of almost two-thirds in the employment in the United States.

Also, another contribution of these small firms is that they increase prosperity for

nations thus achieving another primary goal of the government. Due to this, it has

been stated that the government should improve govermental programs that

empower and encourage this small firms. (Barron, 2006)

President Barack Obama and Iowa Secretary of State Matt Schultz both laid

down two different proposals on how the government can help small businesses.

The president wanted to join some federal departments while Secretary Schultz

wanted to propose a couple of incentives for companies that are on the process of

starting up in the industry. Although both proposals intend to aid small businesses,
there is an uncertainty as to whether there will be much of help to them and not to

mention some consequences that might arise due to these two federal proposals. It

can be contested that the merging of some federal departments like the Commerce

Department’s core business related functions to smaller agencies like Small

Business Administration will leave business owners less because burdened in

navigating the federal bureaucracy. However, because this plan, the Small Business

Administration, a government agency genuinely concerned and helpful towards

small business, will receive a negative impact. Regarding the second proposal made

by Secretary Schultz, however bearing a good intention, is insufficient. The journal

article therefore suggests that a better way instead is for Mr. Schultz to coordinate

with the legislative body to make it easier and cheaper for would-be entrepreneurs to

file with the office of the Secretary of State. (unknown)

In Virginia, USA, the government wanted businesses to pay fewer taxes from

the export sales than on domestic sales. Through this, the US government aimed to

give a trade subsidy to manufacturers. These tax incentives have been existent for

many decades now but before it was only directed towards large companies and

small firms were neglected. In the present time, the tax incentive allowed both large

and small firms to be benefitted. The author of the journal article cited two kinds of

incentives applicable to export sales: Extraterritorial Income Exclusion (EIE) and

Interest Charge Domestic International Sales Corporation (IC-DISC). The former

almost works automatically and requires very little of the taxpayer. The only thing

required of the taxpayer is the completion of a form to be attached to the company’s

annual tax return. This incentive is basically a reduction to the taxpayer’s income
equal to 15% of the company’s qualifying export profits. These profits include goods

produced in the US and shipped out of the country or it also includes imported goods

that later on shipped out of the country. The second incentive, IC-DISC, converts

half of a business’s export profits from income taxed at 35% to income taxed at 15%.

IC-DISC is a domestic corporation established in each state in the United States. It

was established since 1983. (unknown)

An article in the Buffalo Law Journal entitled “Federal Tax Incentives Benefit

Small Business” written by Kline (2009) discussed three major programs that can be

applicable to most small businesses in terms of tax cuts. These tax cuts programs

are the five-year carryback of net operating losses, extension of the small-business

expensing allowance and an extension of bonus depreciation.

According to the article, in the five-year carryback program, businesses with

net operating losses could carry back those losses up to two years before the loss

year. The impact of this program is that it can put more money in hand. As Peter

Bellanti, senior tax manager at Arnato Fox & Co. said it will be helpful to the cash

flow of the firms. Moreover, another program is the extension of expensing

allowance. In this program, businesses can write off up to 250,000 dollars spent on

business assets like office furniture and equipments, machinery and fixtures. Lastly,

in the program called extension of bonus depreciation, it allows companies who buy

a piece of equipment or invest in an asset of 20 years or less to make an election to

take 50% of that depreciation in the first year thus enabling them to have tax cuts.

(Kline, 2009)
 It is given that the SMEs have significant roles in the economic development

of a country. Due to this, the government provides services and assistance to these

SMEs to ensure their growth, survival and competitiveness. This leads to the

creation of a study entitled “The Government Business Support Services in

Malaysia: The Evolution and Challenges in the New Economic Model” conducted by

Bin Yusoff and Bin Yaacob (2010) which assessed the effectiveness of the

Government Business Support Services (GBSS) in Malaysia. This study tried to

investigate the roles of GBSS and SMEs in the current status quo of Malaysia. It was

stated that GBSS is recognized as very essential in the development of the small

and medium-enterprises. According to Bin Yusoff and Bin Yaacob (2010), the

challenges faced by GBSS intervention are entrepreneurs/owners support and

participation, GBSS stringent and rigid conditions, problems with the bureaucracy,

problem with GBSS representatives and the lack of awareness of the SMEs as

regards to the existence and programs of GBSS.

One of the challenges encountered by GBSS in carrying out their program is

the difficulty in obtaing the entrepreneurs’ participation and support. Bin Yusoff and

Bin Yaacob (2010) stated that SMEs are usually owned and managed by the owner

per se. Owners are often the sole decision makers in the business and that the

owners are those who are most capable of understanding and knowing what their

business needs without the need of relying to external advice or intervention. Thus,

most of the entrepreneurs are reluctant in obtaing advice from external advisers

provided by the GBSS. Moreover, in terms of trainings, SMEs are unwilling to attend

trainings since they perceive that trainings are a waste of time and that these
training do not affect positively in their business operations. Moreover, GBSS

encountered problems arising from their stringent and rigid conditions, their

beureaucracy and their representatives. Having stringent and rigid conditions in

terms of giving financial assistance is one factor why SMEs are not able to fully

benefit in their services provided. The need for the collateral is one factor why SMEs

cannot avail of this benefit. Furthermore, Having lenghtly and time consuming

process results to SMEs turning to private support porviders instead. Time is

essential for these SMEs so they are unwilling to apply and participate with the

system since it requires more time consumed. Likewise, the low usage of the

services of GBSS is caused by the negative perception of SMEs about the advising

capabilities of their representatives. Lastly, another factor that caused the low rate of

usage of GBSS services is the lack of awarness of the SMEs as to the projects,

programs, services and assistance offered by GBSS and worst, they are not even

aware that GBSS exists. (Bin Yusoff & Bin Yaacob, 2010)

An endevour to achieve better economic competitiveness in the global

business arena is one of the primary goals of developing countries like Malaysia and

Philippines. A study made by Habaradas (2008) entitled “SME Development and

Technology Upgrading in Malaysia: Lessons For The Philippines” provided an

analysis of the programs and mechanicms used by Malaysia to empower small and

medium-scale enterprises in their country. It also provided some of the programs

ventured into by Malaysia that became very effective in the empowerment of small

and medium firms. Likewise, the study presented ways on how the Philippine
government can implement to encourage, promote and empower the SMEs in the

Philippines.

In the study, it stated that small and medium enterprises are the backbone of

vibrant economies since they provide significant contributions in addressing the

poverty crisis by creating jobs and increase employment opportunities, in scattering

economic activities in rural and urban areas and providing broadbased sources of

growth, in serving as a top supplier or provider of support services for large

enterprises, in stimulating entrepreneurial skills among the people and lastly, in

acting as seedbeds for developing domestic enterprises into large corporations.

Moreover, according to the study, SMEs comprise most of the volume of the

business enterprises in both developed and developing countries. Due to this, it is

evident that governments put an emphasis in this topic. Governments create policies

and mechanicms to support and empower the SMEs because SMEs prove to help

attain the two major goals of the government: poverty alleviation and employment

generation.

The study of Habaradas (2008) discussed the policy of Malaysia regarding

SME development and empowerment. According to him, the chief SME policy of

Malaysia is “the development of a competitive, innovative and technologically strong

SME sector that is able to contribute to the domestic economy and to complete

globally.” (SME Annual Report, 2006). In order to fulfill such, the government of

Malaysia came up with many interesting programs and mechanicms to insure the

attainment of such vision. Despite the many programs, the study of Habaradas

focused only on three major areas: financial assistance for technological upgrading,
strengthening SME linkages with large firms and universities and, developing human

capital (Habaradas, 2008).

Since the government of Malayia is aware of the limitations and constraints

faced by the SME sector in terms of financial resources, the government offers

financial assistance and incentives in the form of grants and soft loans that are given

by many ministries and their agencies (Habaradas, 2008). These financial aid can

help in the mission of these small and medium-scale enterprises to have a

technological advancement venture. Moreover, the government encourages SME

linkage through strengthening SME connections by having programs such as linkage

with large firms. In this program, it is beneficial to the SMEs since they will have

technological assistance, training, and information given by the large companies.

Likewise, the government of Malaysia encourages connections between the

universities and public research institutions, the provider of knowledge, and the

SMEs, users of knowledge, to allow both parties to influence on both the physical

and human resources of each other. Lasty, the government encourages the

development of the human capital by providing training to enhance their skills and

capabilities that will yield to the empowerment of SMEs.

Habaradas (2008) provided insights patterned in the policy of Malaysia for the

Philippines to better empower and support the SMEs in such country. These insights

include linking SME development efforts to over-all socio-economic goals, adjusting

programs and policies to fit environmental realities, designing support programs and

incentives to fit the specific needs of the SMEs, strengthening the formal education

system in the Philippines and encouraging the participation of the private sector in
the quest to empower and support the SME development in the country.

(Habaradas, 2008)

Micro Businesses in the Philippines

A. Definition and Significance to Philippine Economy

Abion (2012) classified and defined the categories of the business firms

according to the number of staff and to the amount of capitalization. According to

Abion (2012), those having less than 10 employees are considered as micro

enterprises while those having at least 10-199 staffs belong to the small and medium

classification. More so, those firms having at least 200 and above employees belong

to the large enterprises strata. (Abion, 2012)

According to Abion (2012), a recent statistics presented by the House of

Representatives provided that micro, small and medium enterprises include about

99% of the total business enterprise in the Philippines. This links to the conclusion

that MSMEs have a vital role in the national development and national growth of the

Philippines. It was also mentioned that the MSMEs contributes to the advancement

of the Philippines through job creation and provider of economic activity. Moreover, it

was also stated that alleviation of poverty had been one of the major contributions of

these MSMEs to the Philippines.

A thesis written by Reyes (2012) entitled “Rural Micro-Enterprise Promotion

Program: An Assessment on the Impact of the Financing Delivery Role of Small

Business Corporation to MSMEs in Albay, Ragay and Sipocot Camarines Sur”

discussed the definition and role of micro, small and medium enterprises (MSMEs)

in the economy as well as its role in poverty alleviation.

According to the Small and Medium Development Council (2003), micro and

small enterprises are those who are engaged in industry, agricultural business and

services, whether single proprietorship, cooperative, partnership and corporations

whose total assets inclusive of the loans availed but exclusive of the land where the

business is located, do not exceed:

 For micro enterprises: asset size should only be up to 3,000,000.00

and that there employees must be from 1-9 staffs only.

 For small enterprises: asset size should be from 3,000,001-

15,000,000.00 only and that the number of employees must be 10-99

individuals. (Reyes, 2012)

In terms of poverty alleviation, micro and small businesses are of critical

importance to the developing countries. It has been recognized as a major source of

employment especially in Third World countries. It has been established that it may

its potential for helping the working poor, the unemployed and those who receive

public assistance through the many contributions these small and micro firms have.

Moreover, not only do they provide employment opportunities but also they are a

source of job creation and livelihood for the Filipino people. As a result, this may

lead to poverty alleviation and betterment of the lives of the Filipinos.

Through their income generation in both rural and urban areas, rural

development and employment generation, sources said that MSMEs play a vital role
in the economic development of the Philippines. Since it is given that the Philippines

is rich in labor resources, the problem now arises since if less firms or corporations

employ them, it will result to high unemployment rate. In this scenario, MSMEs play

a vital role. According to the National Statistics Office (NSO), 68% of the total

number of employed individuals are employed by MSMEs and only 32% of the total

are employed by large firms. (Reyes, 2012)

B. Condition

The writer of a thesis entitled “Assessing the Legal Rescue: Critical Issues on

the Rehabilitation Process for Micro, Small and Medium Enterprise (MSMEs)”

described the condition of the MSMEs in the Philippines. Abion stated that many of

these enterprises experience financial crisis and are nearing the point where such

enterprises will foreclose their business. According to Abion, this now becomes

detrimental. If their firms foreclose, many families could lose their source of income

and people will lose employment thus, aggravating poverty in the Philippines.

(Abion, 2012)

In a book entitled “Small & Medium Industries in the Philippines: An

Overview” published by the Institute for Small-Scale Industries, University of the

Philippines Diliman, it was stated that SMEs, being a minority in terms of size and

capital, face problems in different aspects of the business. In the operations aspect,

the first constraint is the shortage in the supply of raw materials because some

suppliers tend to be biased against smaller businesses and cling toward the larger

ones. Scheduling, inventory control and quality control are usually taken for granted
and this is the second problem of SMEs. Third is the inadequacy of machineries and

the inferiority on technological advancements. Other problems consist of small

factory sites, lack of cost control, high labor cost and machine breakdowns.

The second aspect of the business to encounter difficulties is the financial

aspect. Shortage on investments on plant and equipment/machineries counts as one

of the problems but worse is the inadequate working capital. Studies show that this

ranks as the top problem among the financial problems of small firms. Moreover,

most of these businesses find most difficult to borrow money from the bank only

followed by relatives and usurers, respectively. The author of the book thinks that

this problem arises because banks have the reluctant attitude toward lending money

to smaller firms. Banks think that there is a higher risk in lending money to them.

A study entitled “Small-Scale Business Enterprises in The Philippines: Survey

and Empirical Analysis” conducted by Ruane (2007) tried to determine the factors

that contribute to entrepreneurial motivations and success in the Philippines.

Moreover, this study aimed to identity the extent of sacrifices made and challenges

faced by Filipino entrepreneurs. This study involves entrepreneurial intensity,

sacrifice, motivation, business plans, the effect of the business to the entrepreneur’s

quality of life, the businessman’s personal beliefs and attitudes and challenges and

difficulties faced by the owner at the different stages of operating the firm.

As to the entrepreneurial intensity, the study found out that owners prioritize

their families over the management of the firm. They spend less time managing the

business while more time is allocated for family related activities. Moreover, in the
case of entrepreneur’s sacrifices, the extent of this involves acquiring additional

skills at their own expense and performing tasks that are beneficial to their business.

However, the entrepreneurs are most likely not willing to sacrifice their marriage,

family and friends for their business operations. Most of the respondents when

asked what motivated them to start business answered that they believe that their

business will be a source of higher income and better financial status for them and

their families. Also, they answered that starting their business is caused by its

benefit of having a flexible schedule to balance work and family life. This study also

showed that the business positively affects the quality of life of the entrepreneurs.

The business provided sufficient source of income and financial stability to the

entrepreneurs and their families. Also, having small businesses lead them to a better

quality of life and achivement of personal goals. (Ruane, 2007)

A local study by Eric S. Parilla of Northwestern University, Laoag City

Philippines presented a very comprehensive discussion on micro business in Laoag

City from demographics, qualitative and quantitative assessments of products and

services to the effect of those to the Socio Economic Development in the city. He

arrived with the following conclusions: (1) Micro-business owners in Ilocos Norte are

majority young, college graduates and are mostly women. Most of the respondents

have not attended previous seminars on business and they are also not members of

professional organizations. (2) Most micro businesses in the city have existed for

only less than 5 years and majority of them are sole proprietors and into retailing/

merchandising. (3) Majority have started their operations with a starting capital of

less than ₱500,000 usually from the owner’s savings. Most businesses have only 1-
2 employees who are usually family members. Moreover, majority have an average

annual sale of below ₱150,000. (4) Microbusiness owners in Ilocos Norte are

responsible towards their employees and customers, highly competent to handle

and manage their respective businesses and that they observe a high level of

management practice. Lastly, (5) Microbusinesses play a significant role in the

economic and social development in the province of Ilocos Norte. (unknown)

In the present generation of world trade liberalization and fast technological

changes, the government through its legislative department enacted laws that paved

way for the declaration of programs that help and encourage the increase in number

of micro to small enterprises. In a thesis entitled “Success Factors of the Selected

Micro Chicharon Ventures in Bulacan”, the researcher cited that according to the

data as of 2007 by the National Statistics Office (NSO), micro businesses comprise

91.36% of the total establishments in the Philippines and basing from the

researcher’s presented data, a high percentage of 93.2% employment rate in

Bulacan was due to the high number of micro businesses in the province.

Wholesaling/Retailing also ranks as the top industry in Bulacan. The research

undergone by Gravador covered four business variables namely marketing, finance,

human resources and production to determine the perceived success factors of the

micro chicharon enterprises in Bulacan, particularly in San Miguel and Santa Maria.

Results showed that marketing is the number one perceived success variable in the

micro business ventures having a grand mean of 3.20. This was followed by human

resource, production and lastly, finance. (Unknown)

 A study on management practices of small businesses in selected industries

in Greater Manila, showed that in terms of accounting or financial management they

are effective in the practice of summarizing and balancing book of accounts; they

conduct frequent physical inventory count and lastly, they extend credit to regular

customers. These three practices made a significant contribution in the success of

small businesses in Greater Manila in terms of financial aspect of the business.

However, there are also practices that are weak and ineffective. These include, lack

of adequate accounting records and financial statements, inability of making periodic

estimates of income and expenses to compare to actual performance, weakness in

hiring external auditors to do the job of checking accounting records and lastly, the

use of perpetual inventory record system. With regard to operations or production

management, the factors that greatly contribute to the profitability of the business

are (1) choice of business location (2) right delegation of responsibility (3) number of

supplies (4) separate storeroom facilities. (unknown)

C. Philippine Government Assistance

A book entitled “Small & Medium Industries in the Philippines: An Overview”

published by the Institute for Small-Scale Industries, University of the Philippines

Diliman stated that the government, in the adoption of the 1983-1987 Five Year

Development Plan, gave attention towards SMEs. The plan included the promotion

of SMEs by providing a greater access to institutional finance, intermediate

technology and marketing schemes for these small and medium industries. Some of

the institutions tasked to give aide to SMEs in terms of financing are DBP and other

development banks, commercial banks and specialized government banks. For

production, National Science and Technology Authority aims to guide engineering

and technological efforts of the people (i.e. SMEs). Lastly, R.A. 6041 was enacted in

1969 to participate in training and research for the benefit of small and medium

industries. This Act mandated the University of the Philippines Institute for Small

Scale Industries (UP ISSI) to be the “national government training institute for

Philippine small-scale industries”. Up to this time, the UP ISSI continues to seek the

help of foreign institutions for its different goals and activities. (unknown)

A book entitled “Promoting Philippine Enterprise Development” written by

Santiago (2011) presented a study that was conducted by Emilina R. Sarreal which

determined the factors that causes the growth of selected small and medium

enterprises in the National Capital Region. The researcher used variables such as

the owner’s personality, firm’s attributes, formal assistance and training provided by

the government, and other macroeconomic factors to access which of the

abovementioned significantly affect the firm’s performance, the personal growth of

the entrepreneur and economic growth. The research concluded that entreprenuerial

capability in terms of the SME owners’ non managerial activities and their firms’ form

of ownership had direct impact on sales growth.

This study also assessed the aid of SME services provided by the

government through the Department of Trade and Industry to the small and medium

enterprises in NCR. This research presented two paradigms by having two kinds of

respondents: those availing of SME services and the other who are those who do

not avail of SME services. According to the research, SME services exerted

moderating influence on the sales growth of firms that availed of these services. In
this study, the researcher concluded that formal assistance (SME services) does not

have any significant impact on a firms growth (Sarreal, 2011). The reason behind

this finding is that the government was unable to understand how the external

factors and limitations affect the growth of a firm. (Santiago, 2011)

Agnes A. Cosme, in her thesis entitled “An Analysis of the Small and Medium

Enterprise Credit Program I Philippine Business for Social Progress”, said that in

order for SMEs to grow and expand, they should rely on productivity and resources.

This, however, is often not achieved because of the limitation of their working

capital. SME owners usually depend on their own money to fund the operations of

their business. Some resort to commercial banks as a source of credits though most

entrepreneurs do not prefer this alternative because of the strict lending policies and

requirements. The study primarily focused on Philippine Business for Social

Progress- Small and Medium Enterprise Credit Program to measure the effectivity of

traditional and non-traditional ways of lending in helping small and medium scale

industries. Results showed that PBSP through its SMEC program effectively served

its purpose and was able to help SMEs in their financial as well as technical needs.

The funds released to the businesses that availed of such program were able to help

in the addition of employees and they were able acquire additional fixed assets and

working capital. (Cosme, )

Effects of Tax Incentives

Sole Proprietorship is one of the most common forms of doing business, apart

from partnerships and corporations. This form is where only one individual serves as

the only “driving force behind the business”. Richards presented a U.S. scenario of

the tax aspect of sole proprietorship that is whether it is advantageous or not. He

explains that sole proprietorship, compared to a corporation, does not have the

advantage of a flexible tax planning. So Richards suggests that a sole proprietor

should carefully analyze important matters with his or her legal counsel or account

unless the owner is extremely and extensively knowledgeable about these matters.

If not, there is a great possibility that this tedious process may be the reason for the

failure of the business because the proprietor cannot distance himself very well from

the business itself. He may pave his way to bankruptcy together with the downfall of

the business. The income or loss of a business is reported in the Individual Income

Tax Return of the sole proprietor so subsequently, when the profitability of the

business increases, the tax rates applied to the proprietor goes up as well.

(Richards, 1977)

A study conducted by Marinas (1995), tried to assess the influence of tax

incentives to the Non-government organizations (NGOs) in the Philippines through

the use of survey and other statistical methods. Marinas, as part of her study, tried to

identify the types of tax incentives NGOs are availing of and how these tax

incentives affect their operations. Moreover, in her study, she tried to name the
problems encountered by these NGOs as regards to these tax incentives given and

what can be the remedies to improve the system of granting tax exclusions.

According to Hamid et al (2011), several past studies claimed that tax

incentives are ineffective and it has deviated from the real purpose of tax incentives

and that is to trim down tax liabilities and fuel SMEs investment project. Moreover, it

was stated that tax incentives were found to be frail policy mechanisms in either

attracting entrepreneurs to start their businesses within the promoted areas or in

drawing businessmen into the industries promoted by special tax privilege. Hamid et

al (2011) tried to negate the previous findings of past studies through their study

entitled “Factors Affecting SMEs Successful Utilization of Tax Incentives in

Manufacturing Sectors”. According to them, the purpose of their study is to allow

both SMEs and the policy makers to re-examine the significance of tax incentives in

line with their aptness in attaining the marked productivity level and their usefulness

in achieving competitive advantage.

This study conducted by Hamid et al (2011), tried to determine factors which

contribute to the successful utilization of the tax incentive given to SMEs. Also, not

only did the study want to determine the key factors but also the paper tried to

access which of the factors are significant in the successful utilization of tax

incentives. The result of the study showed that the four key factors were capital

investment, business strategies, governmental support and environment.

In terms of capital investment, venture in a more highly developed machinery

and equipment and use of automated manufacturing process would pilot to an

increase in the productivity level which therefore allow SMEs to meet the growing

demand. Meeting the growing demand therefore means that the SMEs will improve

sales revenue and enhance the profitability level of these SMEs. On the other hand,

business strategies affect the successful utilization of tax exemptions since these

strategies are essential in achieving organizational success to guarantee the survival

of the firm and continuous growth as well. Third, in the case of governmental

support, “reduction in tax liability, roles of government agencies in promoting support

programs for SMEs, promotional effort to encourage other eligible SMEs to apply for

tax incentives and professional assistance to simplify the tax incentives application

process are the key factors that contribute to the success of the utilization as well as

the survival and growth of SMEs” (Hamid, Noor, & Zain, 2011). Lastly, the

environment is also an important factor in achieving the success of the utilization of

tax incentives by the SMEs. The environment affects the successful utilization

through the factor of giving subcontracts to other companies, developing networking

and having access to government agencies’ monitoring report. (Hamid, Noor, &

Zain, 2011)

A study entitled “Distinguishing Community Benefits: Tax Exemptions Versus

Organizational Legitimacy” conducted by James D. Byrd and Amy Landry examines

community bnefits through understanding regulative, normative and cultural-

cognitive foundation. Furthermore, this study also stated that tax exemptions for

hospitals had been a major debate over the years and that policymakers have

continualy question this specific status given to Hospitals. Many critics state that the

many hospitals did not meet the standard for community benefit. The problem arises
since community benefit had not be clearly determined and defined. The definition of

community benefit is vague and loose.

According to Byrd and Landry (2012), tax incentives can be perceived as a

means of granting indirect financial assistance to these organizations who operate

and offer services which they do not receive profit and compensation. Tax incentives

allow these hospitals to operate and survive since most of them operate in thin limits

due to their resources being limited. These tax exemptions allow these hospitals to

continue operations and offer their services to the community even if the community

cannot afford to pay all costs. (Byrd & Landry, 2012)

According to the study, since the government recognizes the role of NGOs in

the national development, they provide aid for them in the form of tax incentives thus

enhancing their involvement to national development. In the study, it was stated that

tax incentives have an affirmative influence on the operations of NGOs. From their

programs and projects, their beneficiaries to the benefits derived from their

operations were greatly affected by these tax incentives. However, on the part of the

NGOs’ financing opportunities, tax incentives had only minimal effect. It was stated

that their savings were only 10%, some have none at all. Also, there is scarcity in

funding still thus causing impediments in doing their work.

Not only are the abovementioned the difficulties encountered by these NGOs,

there also problems in terms of applying for the privilege. Most of the respondents

complained that the institutions concerned are compelling too many requisites

before such NGOs can be granted exceptions from taxes. Aside from having too
many requirements, they also complain about the long period of time it takes before

one can be granted such tax incentive.

To answer such crisis, Marinas recommended that the governmental

agencies should simplify the process of approving tax incentives and that such

agencies should improve the information dissemination regarding these tax privilege.

(Marinas, 1995)

A study conducted by Henriette Houben and Ralf Maiterth entitled

“Endangering of Usinesses by the German Inheritance Tax?- An Empirical Analysis”

had an objective of accessing whether or not tax privileges for businesses in the

current German Inheritance Tax Law can be defensible. Likewise, this study aimed

to evaluate Inheritance Tax and its effect in the family businesses. According to

Houben and Maiterth (2011), the Inheritance tax burdens the firm because of

liquidity issues. It stated that the firms should linger within the family for welfare

benefits hence, tax incentives are reasonable and necessary. More so, it evaluated

the necessity of these tax exemptions for the survival of these businesses. The

study concluded that even though the massive tax privileges created for businesses

is the result of successful lobbying, it cannot, however, be justified as a protection of

businesses. (Houben & Maiterth, 2011)

Even though tax incentives are generally beneficial to business, there are

those who are not willing to avail of these benefits. Evidence from an International

Journal in Business and Management expressed that tax compliance among small

and medium enterprises is need improvement. This particularly study entitled

“Factors That Affect Tax Compliance among Small and Medium Enterprises (SMEs)

in North Central Nigeria” aimed to determine specific factors that affect and

encourage compliance among theses SMEs. The researchers found out that the two

most common factors why there is non-compliance are high tax rates and complex

filing procedures. Atawodi and Ojeka, therefore, recommend that the government

should impose lower taxes on small and medium enterprises to encourage growth

and potential success of these firms and more specifically to give opportunity to

these businesses for them to allocate more funds in their operations, finances and

other core activities. Furthermore, tax incentives and exemptions should be

considered by the government to promote not only the increase in number of

investors but also more importantly to encourage business owners to faithfully

comply with their tax duties. (unknown)

According to the article entitled “Apply These Breaks” by Marielle Segarra,

few small and midsize companies actually take advantage of using tax incentives.

Many often do not avail of the tax incentives because they see these tax incentives

as a tedious and complex process. They view is as too costly and too complicated.

They think that since it is too costly, they don’t have enough internal resources to

fund such process. Moreover, they believe that the process is too complicated.

Hence, they perceive that they don’t have the luxury of devoting time and attention

to it.

The author believes that having these principles, they prohibit themselves

from gaining an advantage. These tax incentives are actually beneficial to them and

that when they choose to rely on their notion of tax incentives it becomes a limitation
to them. They could actually improve more when they engage into the tax incentives

given. Segarra (2012) mentioned three given tax regulations that could help these

small and midsize businesses in numerous ways. The first one given is The

Research-and-Experimentation Tax Credit. She mentioned that companies could

trim down their cost due to this R&E Tax Credit. According to Zerbe (2012), small

and midsized companies overlook this credit since they believe that their line of

business is not involved with research and experimentation. They have a wrong

notion regarding research and experimentation. They fail to understand that

improving a product or a process is also part of the research and experimentation.

Another mentioned tax regulation is the Interest charge-domestic international sales

corporation. This could actually help these companies have a 20% increase in their

income from exports. The last tax regulation mentioned in this article is the Energy-

Efficient Commercial Building Deduction. This is beneficial when they build or modify

their warehouses, offices and the like. It would allow them to have 50% lower energy

and power costs. (Segarra, 2012)

The debate as to whether having tax cuts and putting up a few trade barriers

will be able to bring back manufacturing jobs in America is answered in an article

written by De Matta (2012) entitled “Tax cuts are not always the solution”. In this

article De Matta (2012) stated that eventhough taxes are essential in the operations

of a business, its decisions are not primarily and based soley on taxes.

Considerations that businesses need to think about before they set up or locate their

business are not only limited to taxes deliberation. Factors such as location of their
suppliers, labor force and politics are also part of the things to be considered by

firms before venturing in a location or country where they would set up or put their

business. According to De Matta (2012), aside from creating policies implementing

tax cuts, political leaders should come up with a much complex approach to public

policy for improvements to happen in reality. (De Matta, 2012)