CHAPTER 1

INTRODUCTION
Economic growth in every month is defined by the

performance of its private sector. Tax is mandatory financial charge

or some other type of levy imposed upon a taxpayer. And it’s

punishable by law when a tax payer fail to pay. There are also

businesses that are paying taxes, but not all of them pays correctly

or in time. The development of small enterprises is affected by the

level of taxation, its administration and compliance. The problem of

tax on small scale business in the Philippines is that the taxes are

eating up the profits of the business, so that’s why there are some

business owners don't declare properly the income of their

business.
Today, its importance seems to be overlooked and is viewed

more negatively specially for those people who had their small

scale business. It is important to understand taxation and to

determine how well it it’s the economy of a country for it is a key

factor on its growth. The taxation system in the Philippines has

been a hot issue. Clearly, it is a national issue that need immediate

action and attention. This could lead to the same thing that seem

the limit of capability of the people to improve their own live. A

huge tax problem in a small scale is instead of buying your

business needs, the business owner’s priority is to pay their taxes.

 BACKGROUND OF THE STUDY

As a small scale business owner, they are also paying taxes but

different amount as well as medium scale businesses. The small scale

businesses don’t gain profit in a large amount, its profits is just enough to

fulfill the business’ expenses. Taxes is one of the expenses. But in

everyday life they are not sure in reaching their quotas. So sometimes the

profit is directly paid to the excise man and the money left is not enough

and sometimes there’s nothing left for the business.

The business owners chose small scale businesses to gain an

enough profits for their needs but because they are a small scale

business, as sole proprietorship. The owners shoulder the whole

expenses of the business. The business owned by one person or owner

who is responsible for the all profits and expenses.

 REVIEW OF RELATED LITERATURE

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 13 th 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.

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.

A business journal written by Jamak, Ali and Salleh (DATE) 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.

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.

A study made by Clark and Douglas (2010) stated that although

small businesses in New Zealand, depict 89% of New Zealand firms thus

a important sector in the economy of the country, have not often/seldom

been studied as a matter of fact, it was not purpose in any academic

research, government policy or business support programs in New

Zealand. In their journal entitled, “Micro Businesses Characteristics of

Home-Based Business in New Zealand”, they listed some factors that can
help to the continuous increase in popularity of home based business. (1)

business generating at home, where all business organization are done

at the residence of the owner; and (2) firms operating form home, where

only authority group of people, record-keeping and supplies management

are maintained at home. The factors include enhancement in information

and communication technologies, to move different in cultural attitude

towards self-employment, societal attitudes towards flexible work and

lifestyle as well as economic cycles driving restructuring and differences.

Clark and Douglas describe home-based business as “enterprises which

operate at or from the owner’s home residence. The owner of the

business is self-employed and uses his/her home residence for some of

the core business activities to generate income/profit. “Their study

specifically test the attributes and basic activities of home based business

owners 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 business. Their study also

provide to the result that majority of home based businesses were under

10 years old although an important.

In a study pass by three researchers from Victoria University in

Australia, home-based businesses form 67% of the total number of small

business in the country. It can be certainly happen that since they are

small and to provide to minor markets, they would initially make contact
with the local government. Basing from the data gathered by Ali, Paguio &

Breen, home based businesses lean toward to be anonymous and they

do not usually coordinate with the local government because of the worry

that this might way to a negative effect on their firms. Given this, the local

government goes through a hard time reaching out to these home-based

businesses.

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

small firms are more do fail, the risk of

likely to cease failure is not that high

operations than the compared to the small

large businesses. This 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

power as to set prices. the power to set

Small firms compete prices.

through service, quality

and responsiveness.
3. Management Most small firms are Owners are

generally owned and commonly private

managed by the same stakeholders or

person(s). financial institutions.

The management

responsibility are

given to professionals

are only modest

owners of shares.
4. Motivation of The purpose of The owners usually

Owner establishing small have the objective of

businesses for most maximizing the

cases is to obtain a potential value of the

comfortable living to firm.

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

flexible because small exploit its price,

enterprises are advantages and

deficient in advantages through

opportunities to reap labor resource, plant

scale economies. or research and

development.
7. Source of Finance Small firms are Large businesses

founded primarily from have vast choices of

the personal savings finance sources.

and retained profits of

the owners.
(Storey & Greene, 2010)
C. Significance to the Economy

As stated by Shaper and Volery (2007) small firm business is

needed to the growth of the national economy. Small enterprises are very

significant in the economic structure of any country. The book

enumerated the possible and significant contribution that a small

firms/business may give in the economy. The first small business prepare

employment opportunities for people. Not only does the owner have self-

employment but also the personnel and workers. Second, the small

business are the next generation of large business. It is conventional that

large firms/business are not going to exist forever so having small

business will allow new potential large business in the future, if the small

business make it through and be a successful one. Third, they provide

competition in merchandise/market. If the market is sew up by one or two

business, the costumer will be experiencing over pricing and that they will

have no choice but to avail of their product or service even if it is over-

priced, low in quality and poor service . Fourth, small business provide

creative ideas and specialized products/output and services that will allow

the market to have a new and fresh products and plans. Lastly, they

assist in having exports and they give on outlet for entrepreneurial

extortion for the growth of economy. The significant beneficence are not

limited to those that are given above. There may be other possible
contribution that small business may give to the growth of the economy.

(Shaper and Volery 2007)

As said by Habarradas (2008) in the study entitled "SME

Development and Technology Upgrading in Malaysia: Lessons for the

Philippines", it stated that small and medium enterprises are the

backbone of vibrant economy since they provide significant contributions

in addressing the poverty crisis by making jobs and enrich employment

opportunities, in many economic activities both in rural and urban areas

and providing broad-based sources of growth in servicing as the highest

supplier or provider of services for large enterprises in provoking

entrepreneurial skills among the people and lastly, in acting as breeding

ground for developing domestic enterprises into large business.

(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.

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.

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, )

C. 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.

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.
 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)

 D. 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.
 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.

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.

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.

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.

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.

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.

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)

 THEORETICAL FRAMEWORK

Adam Smith in The Wealth of Nations (1776) wrote:

"Such things as defending the country and maintaining the

institutions of good government are of general benefit to the public.

Thus, it is reasonable that the population as a whole should

contribute to the tax costs. It is also reasonable to demand certain

other things of a tax system – for example, that the amounts of tax

individuals pay should bear some relationship to their abilities to

pay… Good taxes meet four major criteria. They are (1)

proportionate to incomes or abilities to pay (2) certain rather than

arbitrary (3) payable at times and in ways convenient to the

taxpayers and (4) cheap to administer and collect."

Smith argued that taxes should be proportional to how

much a person benefits from living in society. There should be

proportionality across levels of income and sources of income

such as rent, profit, and wages. At one point Smith does mention

how having some taxes fall disproportionately on the wealthy, such

as taxes on luxuries, is not so bad.

 RESEARCH PARADIGM

Research Paradigm

To conceptualize better relevance of the independent and

dependent variable, the research paradigm is constructed.

Independent Variable Dependent Variable

Taxes Small Scale Business

 Value Added Tax  Profit
 Income Tax  Expenses
 Percentage tax

Figure 1. Relationship between Independent and Dependent

Variables
 STATEMENT OF THE PROBLEM

The study aimed to determine the perception of students on the

use of PowerPoint presentation and the students’ grammatical

competence.

Specifically, it sought answers to the following questions:

1. What is the perception of the business owners in taxes in terms of:

1.1 Value Added Tax;

1.2 Income Tax; and

1.3 Percentage Tax?

2. What is the effect of the taxes in the business in terms of:

2.1 Profit; and

2.2. Expenses?

3. Are the taxes paid significantly related to the small scale business?
 HYPOTHESIS

There is no significant relationship between the taxes and the small scale

business.

SCOPE AND LIMITATION

This research is limited only to the perception of the (no of

respondents) owners of small scale business. The owners are

residents of San Pablo city, Laguna. This study is to be conducted

outside the perimeter of the campus.

SIGNIFICANCE OF THE STUDY

STUDENTS. The results will provide the students with some

knowledge about taxes. It will give the student’s a realization that

tax is useful to the government and society. At the end of this study

students would finally know taxes effect in small scale business.

They can use their knowledge about the taxes that they will

encounter in the future.

TEACHERS. The given data would guide the teachers if they are

planning to build a small business. They can also share this

knowledge about the taxes to their students, especially ABM

Students.
PARENTS. Like the teachers, the parents too will understand how

taxes run in their businesses. The findings would also help them if

they want to build a small business.

FUTURE RESEARCHERS. They can base on this study, and this

study will serve as guide for them especially in ABM Students.

DEFINITION OF TERMS
PROFIT. It is regard to the income of sellers.
EXPENSES. Cash outflow of the sellers by paying rent, utilities

etc. .
INCOME TAX. The tax that is imposed in their personal income.
VALUE ADDED TAX. A tax that is inquired in the product in the

product or services.
PERCENTAGE TAX. A business tax that is charged on persons or

entities who sells provides goods, properties or services.

 CHAPTER II
RESEARCH METHODOLOGY
This chapter presents the research design, participants of

the study, research instrument used, data gathering and data

analysis.
RESEARCH DESIGN
The study used the descriptive method of research. It is a

descriptive - correlational research that seeks the relationship

between variables. This method was used to determine whether

the taxes have a relationship to the respondents of small scale

business with this type of research, it is essential that the

researcher already has a clear view or picture of the phenomena

being investigated before the data collection procedure is carried

out.
POPULATION SAMPLING
The study involved (no. of participants) – participants who

had small scale business in San Pablo City, Laguna.

RESEARCH PROCEDURE
Before the data gathering procedure. The study required

proper orientation and conduct of administration.

RESEARCH INSTRUMENT
The research was done with the use of a self-made

questionnaire of ( ) statements based on a five – point likert scale

ranging from 1 (strongly disagree) to 5 (strongly agree)

STATISTICAL TOOL