APPLIED ECONOMICS

Philippine Taxation

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Objectives
At the end of the lesson, the learner is expected
to:
 discuss the basic principles of Taxation
 describe the taxation system in the Philippines;

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Start Up

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Don’t be anxious, smile.

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What is Taxation?
It is the inherent power by which the sovereign
state imposes financial burden upon persons and
property as a means of raising revenues in order to
defray the necessary expenses of the government
(Tax Digest by Crescencio Co Untian, 2002).

Taxation is the imposition of financial charges or

other levies, upon a taxpayer (an individual or legal
entity) by a state such that failure to pay is
punishable by law.

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It is a mode by which government make exactions for

revenue in order to support their existence and carry out
their legitimate objectives (Tax Law and Jurisprudence by
Justice Vitug, 2000).

It is the most pervasive and the strongest of all the powers of

the government. Taxes are the lifeblood of the government,
without which, it cannot subsist.

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History of Taxation
• The first known system of taxation was in Ancient
Egypt around 3000 BC - 2800 BC in the first dynasty
of the Old Kingdom.

• In Biblical times, tax is already prevalent. According to

Genesis 47:24:
"But when the crop comes in, give a fifth of it to Pharaoh. The
other four-fifths you may keep as seed for the fields and as
food for yourselves and your households and your children".

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History of Taxation
• Earliest taxes in Rome are called as portoria
were customs duties on imports and exports

• Augustus Caesar introduced the inheritance tax

to provide retirement funds for the military.
The tax was five percent on all inheritances
except gifts to children and spouses .

• In England, taxes were first used as emergency

measures.
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History of Taxation in the Philippines

The pre-colonial society, being communitarian,
did not have taxes.

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History of Taxation in the Philippines

During the Spanish Period, new income-generating
means were introduced by the government such as
the :

• Manila-Acapulco Galleon Trade

• Polo Y Servicio (Forced Labor)
• Bandala
• Encomienda System
• Tribute
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History of Taxation in the Philippines

Manila-Acapulco Galleon Trade
was the main source of income
for the colony during its early
years.

The Galleon trade brought silver

from Nueva Castilla and silk from
China by way of Manila.

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History of Taxation in the Philippines

Polo Y Servicio is the forced labor for 40 days, of
men ranging from 16 to 60 years of age who were
obligated to give personal services to community
projects. One could be exempted from the polo by
paying a fee called falla (which was worth one and a
half real).

Bandala is one of the taxes collected from the

Filipinos. It comes from the Tagalog word mandala,
which is a round stock of rice stalks to be threshed.
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History of Taxation in the Philippines

Encomienda are large tracts of land given to a person as reward
for a meritorious act. The encomenderos were given full authority
to manage the encomienda by collecting tribute from the
inhabitants and govern people living on it.

Tribute was the residence tax during the Spanish times. It may be
paid in cash or kind, partly, or wholly.

But in 1884, the tribute was replaced by the cedula personal or

personal identity paper, equivalent to the present community tax
certificate.

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Did you know?

That in the 19th century, the “cedula” served as
an identification card that had to be carried at
all times. A person who could not present his or
her cedula to a guardia civil could then be
detained for being “indocumentado”.
Andres Bonifacio and other Katipuneros tore
their cedulas in August 1896, signaling the start
of the Philippine Revolution.

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The Development of the Community Tax

The cédula was imposed by the Americans on
January 1, 1940, when Commonwealth Act No.
465 went into effect, mandating the imposition
of a base residence tax of fifty centavos and an
additional tax of one peso based on factors such
as income and real estate holdings.

The payment of this tax would merit the issue of

a residence certificate. Corporations were also
subject to the residence tax.

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A sample cedula in the 1920s.

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The Four R’s of Taxation

Taxation has four main purposes or effects:

1. Revenue
2. Redistribution
3. Repricing
4. Representation

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Revenue
The taxes raise money
to spend on armies,
roads, schools and
hospitals, and on more
indirect government
functions like market
regulation or legal
systems.

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Redistribution
This refers to the transferring
wealth from the richer sections of
society to poorer sections.

Repricing
Taxes are levied to address
externalities; for example, tobacco
is taxed to discourage smoking, and
a carbon tax discourages use of
carbon-based fuels.

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Representation
As what goes with the
slogan "no taxation
without representation" ,
it implies that: rulers tax
citizens, and citizens
demand accountability
from their rulers as the
other part of this bargain.

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Why Tax?
The main purpose of taxation is to accumulate funds for the
functioning of the government machineries. No government in
the world can run its administrative office without funds and it
has no such system incorporated in itself to generate profit from
its functioning.

The government’s ability to serve the people depends upon the

taxes that are collected. Taxes are indispensable in the
government operation and without it, the government will be
paralyzed.

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The Philippine Tax System

Tax law in the Philippines covers national and local
taxes. National taxes refer to national internal revenue
taxes imposed and collected by the national
government through the Bureau of Internal Revenue
(BIR) and local taxes refer to those imposed and
collected by the local government. The 1987
Philippine Constitution sets limitations on the exercise
of the power to tax. The rule of taxation shall be
uniform and equitable. The Congress shall evolve a
progressive system of taxation. (Article VI, Section 28,
Paragraph 1).

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What is Tax Evasion?

Tax evasion happens when there is fraud
through pretension and the use of other
illegal devices to lessen one’s taxes, there
is tax evasion, under-declaration of
income, and non-declaration of income
and other items subject to tax, Under-
appraisal of goods subject to tariff , and
over-declaration of deductions

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The Branches of Government vis-à-vis the Tax Law

The Congress may, by law, authorize the President to fix

within specified limits, and subject to such limitations
and restrictions as it may impose, tariff rates, import
and export quotas, tonnage and wharfage dues, and
other duties or imposts within the framework of the
national development program of the Government
(Article VI, Section 28, Paragraph 2).

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The Branches vis-à-vis the Tax Law

The President shall have the power to veto any particular item or
items in an appropriation, revenue, or tariff bill, but the veto shall
not affect the item or items to which he does not object (Article VI,
Section 27, Paragraph 2).
The Supreme Court has the power to: review, revise, reverse, modify,
or affirm on appeal or certiorari, as the law or the Rules of Court may
provide, final judgments and orders of lower courts in “all cases
involving the legality of any tax, impost, assessment, or toll, or any
penalty imposed in relation thereto” (Article VIII, Section 5,
Paragraph 2b).

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The Forms of Taxes Imposed on Persons and Property

A) Personal, capitation or poll taxes
These are taxes of fixed amount upon residents or
persons of a certain class without regard to their property or
business
B) Property taxes
1. Real Property Tax - an annual tax that may be imposed by a
province or city or a municipality on real property such as
land, building, machinery and other improvements affixed or
attached to real property.

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The Forms of Taxes Imposed on Persons and Property

2. Estate Tax (Inheritance Tax) - a tax on the right of
transmitting property at the time of death and on
the privilege that a person is given in controlling to a
certain extent the disposition of his property to take
effect upon death.
3. Gift or Donor’s Tax - a tax on the privilege of
transmitting one’s property or property rights to
another or others without adequate and full
valuable consideration.

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The Forms of Taxes Imposed on Persons and Property

4. Capital Gains Tax - tax imposed on the sale or

exchange of property . Those imposed are
presumed to have been realized by the seller for
the sale, exchange or other disposition of real
property located in the Philippines, classified as
capital assets.
C. Income Taxes - Taxes imposed on the income of the
taxpayers from whatever sources it is derived. Tax on
all yearly profit arising form property, possessions,
trades or offices.

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The Forms of Taxes Imposed on Persons and

Property
D. Excise or License Taxes - Taxes imposed on
the privilege, occupation or business not falling
within the classification of poll taxes or property
taxes. These are imposed on alcohol products;
on tobacco products; on petroleum products
like lubricating oils, grease, processed gas etc;
on mineral products such as coal and coke and
quarry resources; on miscellaneous articles such
as automobiles.
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Under these lies two other taxes:
1.Documentary Stamp Tax - a tax imposed upon
documents, instruments, loan agreements and
papers and upon acceptance of assignments, sales
and transfers of obligation and etc.
2. Value added tax- is imposed on any person
who, in the course of trade or business sells,
barters, exchanges, leases, goods or properties,
renders services, or engages in similar
transactions.
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Products like Papawash have value-added taxes, too.

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Who Should Pay Taxes?

1. Individuals
a. Resident Citizen
b. Non-resident Citizen
c. Resident Aliens
d. Non-resident Aliens
2. Corporations
a. Domestic Corporations
b. Foreign Corporations
3. Estate under judicial settlement
4. Trusts irrevocable both as to the trust
property and as to the income.
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Who (or What) are those exempted in

paying taxes?
The Constitution expressly grants tax exemption
on certain entities/institutions such as:

1. Charitable institutions, churches, parsonages

or convents appurtenant thereto, mosques, and
nonprofit cemeteries and all lands, buildings and
improvements actually, directly and exclusively
used for religious, charitable or educational
purposes (Article VI, Section 28, Paragraph 3).

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Who (or What) are those exempted in paying taxes?

2. Non-stock non-profit educational institutions used actually, directly, and

exclusively for educational purposes. (Article XVI, Section 4 (3)).
Exempted to tax as stated in the Article 283 of Rules and Regulations
Implementing Local Government Code of 1991 (RA 7160):
• Local water districts
• Cooperatives duly registered under RA 6938, otherwise known as the
Cooperative Code of the Philippines
• Non-stock and non-profit hospitals and educational institutions
• Printer and/or publisher of books or other reading materials prescribed by
DECS (now DepEd) as school texts or references, insofar as receipts from the
printing and / or publishing thereof are concerned.

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Top Celebrity Taxpayers in 2010

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Activity:
Conduct a debate in class on the proposition that
senior citizens should be exempted from paying
the value added tax (VAT).

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Quiz:
1. It is the inherent power by which the sovereign state imposes
financial burden upon persons and property as a means of raising
revenues in order to defray the necessary expenses of the
government.
2. This refers to the transferring wealth from the richer sections of
society to poorer sections.
3. The main purpose of tax.
4. It refers to national internal revenue taxes imposed and collected by
the national government through the Bureau of Internal Revenue
(BIR)
5. It refers to those imposed and collected by the local government.
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Quiz:
6. Its under-declaration of income, and non-declaration of income and
other items subject to tax.
7. It may authorize the President to fix within specified limits, and subject
to such limitations and restrictions the taxes according to the national
development.
8. Taxes imposed on the income of the taxpayers from whatever sources it
is derived.
9. Taxes imposed on the privilege, occupation or business not falling
within the classification of poll taxes or property taxes.
10. imposed on any person who, in the course of trade or business sells,
barters, exchanges, leases, goods or properties, renders services, or
engages in similar transactions.
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Reference:
• Tullao Jr., Tereso S. Applied Economics For A
Progressive Philippines. Phoenix Publishing House;
927 Quezon Ave., Quezon City. 2016
• Pagoso, Cristobal M. Philippine Economics (Macro
Approach). NELSON PUBLICATION; Marimar
Village Paranaque City. 2003
• Carnaje, Gideon P. Applied Economics. Vibal Group
Inc, Araneta Avenue, Quezon City. 2016

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