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GROUp 5
Evolution of Philippine Taxation
In today's world, taxation is a reality that all citizens must contend
with for the primary reason that governments raise revenue from the people
they govern to be able to function fully. In exchange for the taxes that people
pay, the government promises to improve the citizens' lives through good
governance. Taxation, as a government mechanism to raise funds,developed
and evolved through time, and in the context of the Philippines, we must
understand that it came with our colonial experience.

Taxation in Spanish Philippines

The Philippines may have abundant natural resources even before the
encroachment of the Spaniards, but our ancestors were mainly involved in
a subsistence economy, and while the payment of tribute or taxes (buhis!
buwis/handug) or the obligation to provide labor services to the datus in
some early Filipino communities in the Philippines may resemble taxation,
it isessentially different from the contemporary meaning of the concept.
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The arrival of the Spaniards altered this subsistence system because

they impsed the payment of tributos (tributes) from the Filipinos, similar
to what had been practiced in all colonies in America. The purpose is to
generate resources to finance the maintenance of the islands, such as salaries
of government officials and expenses of the clergy. The difficulty faced by the
Spaniards in revenue collection through the tribute was the dispersed nature
of the settlements, which they solved by introducing the system of reduccion
by creating pueblos, where Filipinos were gathered and awarded plots of
land to till. Later on, the settlements will be handled by encomenderos who
received rewards from the Spanish crown for their services. Exmpted from
payment of tributos were the principales: alcaldes, gobernadores, cabezas
de barangay, soldiers, members of the civil guard, government officials, and
vagrants.
The Filipinos whowere once satisfied with agricultural production for
subsistence had to increase production to meet the demands of payments
on,
and a more intensive agricultural system had to be introduced. Later
half of the tribute was paid in cash and the rest with produce. This financed
theconquest of the Philippines.
Toward the end of the sixteenth century, the Manila-Acapulco trade
was established through the galleons, a way by which the Spaniards could
a year, the
make sure that European presence would be sustained. Once
sent to New
galleon would be loaded up with merchandise from Asia and
economy of the Philippines and
Spain (Mexico), and back. This improved the
over the country. Tax collection
reinforced the control of the Spaniards all
was stillvery poor and subsidy from the Spain would be needed through the
situado real delivered from theMexican treasury tothe Philippines through
as independent in 1820.
the galleons. Thissubsidy stopped Mexico became
a was replaced by
In 1884. the payment of tribute was put to stop and
a poll tax collected through a certificate of identification called the
cédula
every resident and must be carried while
personal. This is required from person, not
traveling. Unlike the tribute, the payment of cédulas is by
according to income
by family. Payment of the cédula is, progressive and
was a heavy burden for the peasants and
categories. This system, however, revenue collection greatly
wOs easv for the wealthy. But because of this,
source of government income. The Chinese
increased and became the main
to pay their discriminatory cédula which
in the Philippines were alsomade
paid.
was bigger than what the Filipinos

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imposed on urban incomes.

Two direct taxes were added in 1878 and
Urbana is tax
a on the annual rental value of an urban real estev were cu
nroffts, These taxes.
Undusiria is a, tax on salaries, dividends gnd
except agriculture,
universal and affected all kinds of economic activity
which was exempt to encourage growth.
on exports and
Indirect taxes such as customs duties were imposed
nineteenth century
lmports to further raise revenue, especially during thewere no
exc1Se taxesS
when economic growth increased exponentially. There
collected by the Spaniards throughout the'years of colonialism.
colonial government also gained income from monopolies, such as
The
and
the sale of stamped paper, manufacture and sale of liquor, cockpts,
was tobacco, which began
opium, but the biggest of the state monopolies
were assigned t0 cultivate
in 1781 and halted in 1882, Only certain' areas
tobacco, which the government purchased at a price dictated to the
growers.
a
This monopoly made it possible for the colony to creatè surplus of income
even
that made it self-sufficient without the need for the situado real and
contributed to the Treasury of Spain.
Forced labor was a character of Spanish colonial taxation in the
Philippines and was required from the Filipinos. It proved useful in defending
the territory of the colony and augmenting the labor required by woodcutting
and shipbuilding especially during the time of the galleon trade. Through
the polo system,male Filipinos were obliged toserve, a burden that resulted
in an increase in death rate and flight to the mountains, which led to a
decrease in population in the seventeenth century. This changed later on, as
polosand servicios became lighter, and was organized at the municipal level.
Labor provided was used in public works, such as the building of roads and
bridges. Some were made to serve the municipal office or as night guards.
Males were required to provide labor for 40 daysa year (reduced to 15
days a year in 1884). They may opt out by paying the fallas of three pesos
per annum, which was usually lost to corruption because it was collected at
the municipal level and were known as caidas or droppings. The polos would
be called prestación personal (personal services) by the second half of the
nineteenth century.
Taxation in the Philippines during the Spanish colonial period was
characterized by the heavy burden placed on the Filipinos,and the corruption
of the principales, or the former datus and local elites who were co-onted
by the Spaniards to subjugate and control the natives on their behalf The
principales who were given positions such as cabezas de barangay or alcaldes

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in the local government were able to enrich themselves by pocketing

tributos
and/or fallas, while the peasants were left to be abused.
Taxation appeared
progressive but the disparity between the less taxed
principales and the
heavily taxed peasants made the rich richer
and the poor poorer.
Primary Source: Mariano Herbosa Writes to Rizal About
Taxes
Source: Mariano Herbosa to Jose Rizal, Calamba, 29
•
August 1886,
Letters Between Rizal and Family Members (Manila: National Heroes
Commission, 1964), 239-241.
The tax! With regard to your auestion on this, the answer is very long,
as it is the cause of the prevailing misery here. What Ican write you will
be only one-half of the story and even Dumas, senior, cannot exhaust
the subject. Nevertheless, I'll try to write what Ican, though I may not
be able togive a complete story, you may at least know half of it.
Here, there are many kinds of taxes. What they call irrigated rice land,
even if it has no water, must pay a tax of 50 cavanes of palay (unhusked
rice) and land with six cavanes of seed pay 5 pesos in cash. The land
they calldry land that is planted to sugar cane, maize, and others pay
different rates. Even if the agreed amount is 30 pesos for land with
six cavanes of seed, if they see that the harvest is good, they increase
the tax, but they don't decrease it, if the harvest is poor. There is land
whose tax is 25 pesos or 20 pesos, according to custom.
The most troublesome are the residential lots in the town. There is no
fixed rule that is followed, only their whim. Hence, even if it is only one
span in size, if a stone wall is added, 50 pesos must be paid, the lowest
being 20 pesos. But a nipa or cogon house pays only one peso for an
area of ten fathoms square. Another feature of this system is that on
the day you accept the conditions, the contract will be written which
cannot be changed for four years, but the tax is increased every year.
For these reasons, for two years now the payment of tax is confused
and little by little the fear of the residents here of the word "vacant"
is being dispelled, which our ancestors had feared so much. The result
is bargaining, likethey do in buying fish. It is advisable tooffer a low
fgure and payment can be postponed, unlike before when people were
very much afraid to pay after May.
T'm looking for a receipt to send you, but I cannot find any, because we
don't get a receipt every time we pay. Anyway it is value-less as it does
not state the amnount paid; it only says that the tax for that year was

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paid, without stating whether it is fve centavos, twenty-five centavOS,

oT get the
One hundred, or one thousand pesos. The residents who ask
no signature in
Said receipt accept it with closed eves, The receipt has
he place where the amount paid ought to be., although it bears their
name. Until now I cannot comprehend whysome are signed and others
are not. This is more or less what is happening here in the payment of
manyvears since Ican remember.
the land tax and it has been so for
are far from
Besides this, the taxes on the plants in the fields that
on the palay is
the town, like the land in Pansol. are various. The tax
no to this
Separate from the tax on maize, mongo. or garlic. There is limit
tax, for they fix it themselves. Since July no one buys sugar and since
June locusts are all over the town and they are destroying palay and
Sugar cane, which is what we regret here. The goveror
gave b0 pes0S
the town hall
topay the catchers of locusts, but when thev took them toseems
a
Uney were paid only 25 cents a cavan and half: and it that the
guess of the residents here
locusts are not decreasing. According to the
only 300cavanes of locusts have been caught in this town. Many still
remain. Though the governor has not sent any more money, the people
have not stopped catching them.

Taxation under the Americans

The Americans who acquired the Philippines aimed to make the economy
self-sufficient by running the government with the smnallest possible sum of
revenue and create surplus in the budget. From 1898 to 1903, the Americans
followed the Spanish system of taxation with some modifications, noting
that the system introduced by the Spaniards were outdated and regressive.
The military government suspended the contracts for the sale of opium,
lottery, and mint charges for coinage of money. Later on, the urbana would
be replaced by tax on real estate, which became known as the land tax. The
land tax was levied on both urban and rural real estates.
The problem with land tax wasthat land titling in the rural area was
very disorderly: the appraising of land valuewas infuenced by political and
familial factors and the introduction of a taxation system on agricultural.
land faced 'objections from the landed elite. Tax evasion was prevalent,
especially among the elites,
The Internal Revenue Law of 1904 was passed as a reaction to the
problems of collecting land tax. It prescribed ten major sources of revenue:
(1) licensed taxes on firms dealing in alcoholhc beverages and tobacco.

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(2) excise taxes on alcoholic beverages and tobacco products, (3) taxes On
banks and bankers, (4) document stamp taxes, (5) the cédula, (6) taxes on
insurance and insurance companies. (7) taxes on forest products, (8) mining
concessions, (9) taxes on business and manufacturing, and (10) occupational
licenses.
The cédula went through changes in the new law as the rate was fixed
per adult male, which resulted in a great decline in revenues. In 1907, some
provinces were authorized to double the fee for the cédula to support the
construction and maintenance of roads. The industria tax was levied on the
business community and became a highly complex system that assigned
a certain tax to an industrial or commercial activity according to their
profitability. The new act also imposed a percentage tax on sales payable
quarterly. COLLLEGt

In 1913, the Underwood-Simmons Tariff Act was passed, resulting in a

reduction in the revenue of the government as export taxes levied on sugar, CITY
LIBRARY

tobacco, hemp, and copra were lifted. To make up for the loss, then Governor
General Francis Burton Harrison urged that tax receipts be increased BICoL
MASBATE

to make up for the loss. Minor changes were made to the 1904 Internal
Revenue Act such as the imposition of taxes on mines, petroleum products, SOUTHERN

and dealers of petroleum products and tobacco.

New sources of taxes were introduced later on. In 1914, an income tax
was introduced; in 1919, an inheritance tax was created; and in 1932, a
national lottery was established tocreate more revenue for the government.
However, these new creations were not enough to increase government
revenues.

Taxation during the Commonwealth Period

New measures and legislation were introduced to make the taxation
system appear more equitable during the Commonwealth. Income tax rates
were increased in 1936, adding a surtax rate on individual net incomes in
excess of 10,000 pesos. Income tax rates of corporations were also increased.
In 1937. the cédula tax was abolished, which appeared to be a progressive
move: but in 1940, a residence tax was imposed on every citizen aged 18
years old and on every corporation,
In 1939, the Commonwealth government drafted the National Internal
Revenue Code, introducing major changes in the new tax system, as follows:

1. The normal tax of three percent and the surtax on income was
replaced by a single tax at a progressive rate.
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2. Personal exemptions were reduced.

3. Corporation income tax was slightly increased by introducing taxes
on inherited estates or gifts donatod in the name of dead person8.
4. The cumulative sales tax was replaced by a single turnover tax or
10% on luxuries.
5. Taxes on liquors, cigarettes, forestry products, and mining ere
increased.
6. Dividends were made taxable.
The introduced tax structure was an improvement of the earlier system
introduced by the Americans, but still remained inequitable. The lower class
still felt the bulk of the burden of taxation, while the upper class, the landed
elhte or the people in political positions. were able to maneuver the situation
that would benefit them more. The agriculture sector was still taxed low to
promote growth, but there was no incentive for industrial investment to take
root and develop.
Finally, a common character of taxation during the American occupation
in the Philippines was not used to diversify the economy or direct economic
development as some sectors still carried the disproportionate share of the
tax burden.
As World War II reached the Philippine shores, economic activity was
put to a stop and the Philippines bowed to a new set of administrators, the
Japanese. The Japanese military administration in the Philippines during
World War II immediately continued the system of tax collection introduced
during the Commonwealth, but exxempted the articles belonging to the
Japanese armed forces. Foreign trade fell and the main sources of taxation
came from amusements, manufactures, professions, and business licenses.
As the war raged, tax collection was a difficult task and additional incomes
of the government were derived from the sales of the National Sweepstakes
and sale of government bonds.
The expenditure of the Japanese military government grew greatly,
and they issued military notes in order to cover the costs of the war.

Fiscal Policy from 1946 to Present

The impact of the war on the Philippine economy was effectively
disparate, as Manila, the capital, was razed to the ground while the rest
of the Philippines was relatively untouched. But the highly agriculture

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based economy was disrupted. The United States may have declared
the
Philippnes independent, but as the country needed rehabilitation funds
from the United States, the dependency of the Philippines to
the Americams
was an opportunity to be taken advantage
of by the former colonial
administrators. The economic situation was so problematic
that by 1949,
there was a severe lack of funds in many aspects of governance, such as
the military and education sectors. No efforts were made to improve tax
collection and the United States advised the adoption of direct taxation.
The
administration of President Manuel Roxas declined the proposal because it
did not want to alienate its allies Congress.
in
The impetus for economic growth came during the time of President
Elpidio Quirino through the implementation of import and exchange
controls that led to import substitution development. This policy allowed
Tor the expansion of a viable manufacturing sector that reduced economic
dependence on imports. New tax measures were also passed, which included
higher corporate tax rates that increased government revenues-tax revenue
in 1953 increased twofold compared to 1948, the year when Quirino first
assumed presidency.
While the succeeding presidencies of Magsaysay,Garcia, and Macapagal
promised to study the tax structure and policy of the country (through the
creation of a Tax Commission in 1959 by means of Republic Act No. 2211)
to make way for a more robust and efficient tax collection scheme, post-war
fiscal policy remained regressive, characterized by the overburdening of the
lowest classes while the landed elite who held business interests were in
Congress to ensure that taxes would not be levied tothem whobelonged to the
higher classes of society. The period of the post-war republic also saw a rise.
in corruption. From 1959 to 1968, Congress did not pass any tax legislation
despite important changes in the economy and the vested interests of
Filipinobusinessmen in Congress would manifest in many instances such as
the rejection of taxes on imports. Indirect taxation still contributed to three
quarters of tax revenues and the Omnibus Tax Law of 1969 did not increase
theratio of income tax to general tax revenue. Collection of taxes remained
poor: tax structure was still problematic; and much of public funds were
lost to corruption, which left the government incapable of funding projects
geared toward development.
Under the Marcos authoritarian regime, the tax system remained
regressive. During the latter part of the Marcos's years (1981-1985), the tax
system was stillheavily dependent 'on indirect taxes, which made up 70% of
total tax collection. The tax system also remained unresponsive. Taxes grew

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verage aNnual rate of 150% 9nd cenerated

a low tax yield. Taxinefiort,
collection gross
defined as the ratio between the share of the actual tax
was at a low 10.7%.
domestie product and predictable taxable capacity,
As Corazon Aquino took the helm government after the EDSA
of
the 1986 Tax Reform
nevonution, she reformed the tax system through the
rogram. The aim was to improve the responsiveness of the taX System,
Ppromote equity by ensuring that similarly situated
individuals and firms bear
promote growth by withdrawing or modifying taxes
ne samne tax burden,
tax administration
that reduce incentives to work produce. and improve
or
by simplifying the tax system and promoting tax complhance.
A major reform in the tax SYstem introduced
under the term of Aquino
(VAT), with the following
Was the introduction of the value-added tax
features:
goods
1 uniform rate of 10% on sale of domestic and imported
on exports and foreign-currency
and services and zero percent
denominated sales;
ten (10) percent in lieu of varied rates applicable to fixed taxes
2
(60

nominalrates), advance sales tax, tax on original sale, subsequent

sales tax, compensating tax, miller's tax, contractor's tax, broker's
tax, film lessors and distributor's tax, excise tax on solvents and
matches, and excise tax on processed videotapes;
3 two percent tax on entities with annual sales or receipts of less
than 5,200,000;
4. adoption of tax credit method of calculating tax by subtracting tax
on inputs from tax on gross sales;

5. exemption of the sale of basic commodities such as agriculture

and marine food products in their original state, price-regulated
petroleum products and fertilizers; and
6. additional 20% tax on non-essential articles such jewelry, perfumes,
toilet waters, yacht, and other vessels for pleasure and sports.
The VAT law was signed in 1986 and put to effect in 1988. While it was
a reliable source of revenue for the government, new tax laws would reduce
its reliability as legislated exemptions grew.
Along with tax reform came the administrative reforms, such as the
restructuring of the Department of Finance and its attached agency, the
Bureau of Internal Revenue (BIR) through the Executive Order 127. Tax

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collection and tax audits were intensified; computerization was introduced;

and corruption was relatively reduced, which improved the trust in the BIR
in general. As a result of the tax reform of the Aguino administration, both
tax and revenue effort rose, increasing from 10.7% in 1985 to 15.4% in 1992.
i Greater political stability during the administration of Fidel Ramos
in 1992 allowed for continued economic growth. The Ramos administration
ventured into its own tax reform program in 1997 through the Comprehensive
Tax Reform Program, which was implemented to (1) make the tax system
broad-based, simple, and with reasonable tax rates; (2) minimize tax
avoidance allowed by existing flaws and loopholes in the system; (3)
encourage payments by increasing tax exemptions levels, lowering the
highest tax rates,and simplifying procedure; and (4) rationalize the grant of
tax incentives, which was estimated to be worth 531.7 billion pesos in 1994.
The VAT base was also broadened in 1997 to include services, through
Republic Act 7716. The features of the improved VAT law were as follows:
1: Restored the VAT exemptions for all cooperatives (agricultural,
electric, credit or multipurpose, and others) provided that the
share capital of each member does not exceed 515,000 pesos.
2. Expanded the coverage of the term "'simple processes" by including
broiling and roasting, effectively narrowing the tax base for food
products.
3. Expanded the coverage of the term "original state" by including
molasses.
4. Exempted from the VAT are the following:
Importation of meat
Sale or importation of coal and natural gas in whatever form
or state
Educational services rendered by private educational
institutions duly accredited by the Commission on Higher
Education (CHED)
House and lot and other residential dwellings valued at 51
million and below, subject to adjustment using the Consumer
Price Index (CP)
Lease of residential units with monthly rental per unit of not
more than 58,000, subject to adjustment using CPI

Chapter 4| Social, Political, Economic, and Cultural Issues in Philippine History 101
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of books and any

or publication
Sale, importation, printing,
newspaper
Estradain 1998 was too short
Joseph President Gloria
The succeeding term of President Then Vice
system. EDSA Revolution.
to constitute any change in the tax another
through
Macapagal-Arroyo was swept to power government spending
without
As president, she 'undertook increased deficits from
2002 to 2004,
adjusting tax collections. This resulted in large of
revenue, and in 2005,
SOurces
The government had to look for additional into. law as Republic Act
was signed
the Expanded Value-Added Tax (E-VAT) subiecting to VAT energy products such
9837. This expanded the VAT base. transmission, and
as coal and petroleum products and electricity generation,
were also taxed. In
February 2006,
distribution. Select professional services
10% to 12%.
the VAT tax rate was also increásed from
succeeded President Arroyo in 2010, he
As President Benigno Aquino III revenue would
no new taxes would be imnosed and additional
promised that
to come from adjusting existing taxes. The administration ventured into
have
of excise tax on liguor and cigarettes or the Sin Tax Reform,
the adjustment
health, and social order
motivations for which was primarily fiscal., public
was passed, and government
related considerations. Republic Act 10351
revenues from alcohol and tobacco excise taxes increased. Collections from
up 1.1% of the Gross Domestic Product
tobacco and alcohol in 2015 made
and the improvement in tax collection resulted in the
Philippines receiving
a credit rating upgrade into investment grade status. The Sin Tax Reform
was an exemplar on how tax reform could impact social services as it allowed
for the increase of the Department of Health budget (triple in 2015) and
free health insurance premiums for the poor people enrolled in PhilHealth
increased (from 55.2 million in 2012 to 515.4 million in 2015).
The administration of the new President Rodrigo Duterte promised
tax reform, particularly in income taxes as it vowed to lower income tax
rates shouldered by working Filipinos. The present income tax scheme of
the country is the second highest in Southeast Asia and the current laws
on income taxes were outdated as they were. drafted two decades ago., The
proposed tax reform also seeks to limit VAT exemptions and increase excise
taxes on petroleum products and automobiles. It is hoped that reforms in the
country's tax policy will result in the much-desired economic development
that will befelt even by the lowest classes in society.

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