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The Tax System of The Philippines and Development Experience

The document discusses the tax system and tax policy reforms in the Philippines over the last few decades. It describes two major episodes of tax reform in 1986 and 1997 that aimed to promote a fairer and more efficient tax system. The 1986 reforms simplified the income tax system and sales tax structure, which increased tax revenue substantially. The 1997 reforms further restructured income taxes and various other taxes through several laws passed between 1996-1997. The current Philippine tax system is outlined, including corporate income tax, individual income tax, VAT, excise taxes, and customs duties.

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3K views3 pages

The Tax System of The Philippines and Development Experience

The document discusses the tax system and tax policy reforms in the Philippines over the last few decades. It describes two major episodes of tax reform in 1986 and 1997 that aimed to promote a fairer and more efficient tax system. The 1986 reforms simplified the income tax system and sales tax structure, which increased tax revenue substantially. The 1997 reforms further restructured income taxes and various other taxes through several laws passed between 1996-1997. The current Philippine tax system is outlined, including corporate income tax, individual income tax, VAT, excise taxes, and customs duties.

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lee nicolas
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THE TAX SYSTEM OF THE PHILIPPINES AND DEVELOPMENT EXPERIENCE

In the last two decades, developing countries like the Philippines liberalized their policies to
attract foreign direct investment (FDI) inflows. Countries viewed FDI as a potential source of
employment and exports along with spillover benefits from the knowledge and technology that FDI
inflows bring. Thus, governments have competed in offering various investment incentives to influence
the investors’ location decisions. These investment incentives include fiscal measures such as reduced tax
rates on profits, tax holidays, import duty exemptions and accounting rules allowing accelerated
depreciation and loss carry forwards for tax purposes.

Tax Policy Reforms in the Philippines: mid-1980s to the present


In the last two decades, the Philippines has witnessed two major episodes of tax policy reforms,
first in 1986 and another in 1997.

 1986 - Tax Reform Package (TxRP) - designed to promote a fair, efficient, and simple tax
system. Prior to 1986, the income tax system had two tax schedules for:
1. compensation and income (salaries and wages) category under a gross income
scheme of nine steps from one percent to 35 %;
2. business and professional income on a net basis of five steps from five percent to
60%.
A complicated sales tax structure existed consisting of sales/turnover tax along with a host of
other indirect taxes such as compensating tax, miller’s tax, contractor’s tax, broker’s tax, and film lessor
and distributor’s tax. Excise taxes were imposed on petroleum products, alcoholic beverages, cigars and
cigarettes, fireworks, cinematographic films, automobiles, and other products classified as non-essential
goods.
There is broad consensus that the 1986 TxRP had a significant positive impact on the Philippine
tax system. This is indicated by improvements in the tax effort, measured by the ratio of total tax revenue
to gross national product (GNP), which rose sharply from an average of 11.3% of GNP during the period
1975-1985 to 16.2% in 1986. The share of taxes on income and profits expanded substantially from an
average of 25.2% in 1975-1985 to 37.1% in 1996. This represented a positive development from the
viewpoint of equity.

Comprehensive Tax Reform Program (CTRP) - was presented before Congress in February 1996.
While it was conceived to be legislated as a comprehensive measure, its actual legislation was carried out
in a piecemeal fashion spanning over nearly two years of discussion and debate.
“ reforming the tax system is controversial in nature. Vested political and economic
groups are expected to lobby hard in protecting their interests. Powerful lobbying can result in the
insertion of provisions that allow exemptions and uneven tax treatment for certain groups, services, and
taxpayers.” –(Department of Finance (2003)
The major components of the CTRP were enacted into various laws beginning in June 1996 with
the passing of Republic Act (RA) 8184. This allowed the restructuring of the excise tax on petroleum
products (from ad valorem to specific) together with tariff restructuring. In November 1996, RA 8240
was legislated to shift the excise tax on fermented liquor, distilled spirits and cigarettes from the ad
valorem scheme (taxes are computed based on factory price) back to the specific tax system (taxes are
based on volume of product sold).

 1997 - RA 8424 or the Tax Reform Act of 1997, was legislated in December 1997. RA 8424
restructured individual and corporate income tax through the following major provisions.

Current Philippine Tax Structure


The National Internal Revenue Code contains the laws governing taxation in the Philippines. This
code underwent substantial revision with passage of the Tax Reform Act of 1997 and which took effect
on January 1, 1998. The Bureau of Internal Revenue, which is under the Department of Finance,
administers taxation. Its main functions consist of assessment, collection, processing, and taxpayer
assistance. The BIR is headed by a Commissioner who has exclusive and original jurisdiction to interpret
the provisions of the code and other tax laws. The commissioner also has the powers to decide disputed 4
assessments, grant refunds of taxes, fees and other charges and penalties, modify payment of any internal
revenue tax and abate or cancel a tax liability. Taxpayers can appeal decisions by the Commissioner
directly to the Court of Tax Appeals.
The primary types of taxation are: corporate income tax, individual income tax, value added tax,
excise tax, and customs duties.

A. Corporate Income Tax - rate both for domestic and resident foreign corporations is 30% based
on net taxable income.
 Regular Corporate Income Tax
 Minimum Corporate Income Tax (MCIT)
 Capital Gains
 Fringe Benefits
 Branch Profits
 Improperly Accumulated Earnings
 Calculation of Taxable Income
B. Individual Income Tax - is a tax levied on the wages, salaries, dividends, interest, and
other income a person earns throughout the year. The tax is generally imposed by the state in which
the income is earned.
 Compensation Income
 Business Income
 Personal and Additional Exemptions
 Passive Income
C. Value Added Tax - known as a goods and services tax, is a type of tax that is assessed
incrementally. It is levied on the price of a product or service at each stage of production, distribution,
or sale to the end consumer.
D. Excise Taxes - are imposed on certain goods (such as cigarettes, liquor, and motor vehicles)
manufactured or produced in the Philippines for domestic sale or consumption or for any other
disposition. Excise taxes are also imposed on certain imported goods, in addition to the VAT and
customs duties.
E. Customs Duties - Goods are subject to customs duties upon importation except as otherwise
provided for under the Tariff and Customs Code or special laws.

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