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Final RRL
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.
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
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
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)
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
A. Definition
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
understanding the life of these small scale businesses. Conversely, these are hard
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
Even with these qualitative and quantitative definitions, it is still difficult to give
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
independent firm usually managed, funded and operated by its owners and whose
staff size, financial resources and assets are comparatively limited in scale”.
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
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
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
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
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
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
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
characteristic of small businesses that is: the owner does not participate in the actual
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
Home-Based Business in New Zealand”, they listed some factors that contributed to
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
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
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
Generally, home based businesses are relatively small but these firms have strong
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
Storey and Greene (2010) in their book entitled “Small Business and
Entrepreneurship” presented the difference between small and large firms. These
and responsiveness.
person(s). management
resulting to confidence
firm.
development.
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)
Malaysia: Lessons For The Philippines” by Habaradas (2008), it stated that small
and medium enterprises are the backbone of vibrant economies since they provide
entrepreneurial skills among the people and lastly, in acting as seedbeds for
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
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
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
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
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
declined. The authors also pointed out that these smaller firms provide good
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
total self-employment from 22% to 38%. Even the revenues received by these
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
although the most prevalent problem that remains and continually faces women is
still discrimination. As years pass, however, women have finally proven their
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
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
quality of life in Brgy. Angio San Fabian, Pangasinan through Business Social
Responsibility. Results showed that 100% of the total employees of the six
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
Aurora, the inputs that contributed to their total sales and income, the causes of
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
poor road condition, inconsistent policies and lack of support. Generally, the study
the condition of the business workplace. The primary cause of the increase in
D. Challenges Encountered
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:
(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
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
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
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
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)
constant change in the market. There may be instant rise and fall in the sales
one time to another. Moreover, another disadvantage given by the book entitled
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
Moreover, Shaper and Volery (2007) enumerated the potential problems that
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
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
competent and good staff, interpersonal problems and the problem of laying off
respect, tension between personal life and career are evident in the lives of small
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.
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,
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
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
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
laid down the steps that are needed in order to create an effective and beneficial
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
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
developmental policy suitable and effective in the issue they are planning to tackle
by Shaper and Thierry, the state recognizes the potential of these small businesses
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
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
experts that will aid in the preparation and operation of a potential business. Also,
as well as trainings for the entrepreneurs and staffs. Giving infrastructure support is
tax concessions wherein they give tax reduction for cost related activities of the
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
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
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
navigating the federal bureaucracy. However, because this plan, the Small Business
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
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
almost works automatically and requires very little of the taxpayer. The only thing
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%.
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
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
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
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
Malaysia: The Evolution and Challenges in the New Economic Model” conducted by
Bin Yusoff and Bin Yaacob (2010) which assessed the effectiveness of the
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
participation, GBSS stringent and rigid conditions, problems with the bureaucracy,
problem with GBSS representatives and the lack of awareness of the SMEs as
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
encountered problems arising from their stringent and rigid conditions, their
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
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)
business arena is one of the primary goals of developing countries like Malaysia and
analysis of the programs and mechanicms used by Malaysia to empower small and
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
economic activities in rural and urban areas and providing broadbased sources of
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.
SME development and empowerment. According to him, the chief SME policy of
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
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
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.
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
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
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)
Abion (2012) classified and defined the categories of the business firms
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
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
discussed the definition and role of micro, small and medium enterprises (MSMEs)
According to the Small and Medium Development Council (2003), micro and
small enterprises are those who are engaged in industry, agricultural business and
whose total assets inclusive of the loans availed but exclusive of the land where the
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
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
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)
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
factory sites, lack of cost control, high labor cost and machine breakdowns.
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.
and Empirical Analysis” conducted by Ruane (2007) tried to determine the factors
Moreover, this study aimed to identity the extent of sacrifices made and challenges
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
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
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
and manage their respective businesses and that they observe a high level of
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
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
Bulacan was due to the high number of micro businesses in the province.
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
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
However, there are also practices that are weak and ineffective. These include, lack
hiring external auditors to do the job of checking accounting records and lastly, the
are (1) choice of business location (2) right delegation of responsibility (3) number of
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
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
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)
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 entrepreneur and economic growth. The research concluded that entreprenuerial
capability in terms of the SME owners’ non managerial activities and their firms’ form
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
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
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
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
explains that sole proprietorship, compared to a corporation, does not have the
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)
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.
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
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
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
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
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
of the firm and continuous growth as well. Third, in the case of governmental
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
and having access to government agencies’ monitoring report. (Hamid, Noor, &
Zain, 2011)
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
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
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
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
agencies should simplify the process of approving tax incentives and that such
agencies should improve the information dissemination regarding these tax privilege.
(Marinas, 1995)
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
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
“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
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
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
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
The debate as to whether having tax cuts and putting up a few trade barriers
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
tax cuts, political leaders should come up with a much complex approach to public