Lesson 9: Taxation in the

Philippines

I. Intended Learning Outcomes:

II. Introduction

A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an
individual or legal entity) by a governmental organization in order to fund government spending and
various public expenditures. A failure to pay, along with evasion of or resistance to taxation, is punishable
by law. In economic terms, taxation transfers wealth from households or businesses to the government.
Taxes are levied in almost every country of the world, primarily to raise revenue for government
expenditures, although they serve other purposes as well. This lesson will guide the students on the taxation
of the Philippines.

III. Discussion

A. Taxation in the Philippines

Taxes are any payment on behalf of the individual for the government which in return are used to pay
for all government services. Without taxes, the government would not have money to operate. It is the life blood
of government.

Taxation is anchored on two principles, First, the benefit principle which is based on two ideas, i.e.,
those who benefit from services should be the ones who pay for them. People should pay taxes in proportion to
the amount of services they get or receive. The second principle is the ability to pay. It means that people
should be taxed to their ability regardless of the benefits they receive.

1. Philippine Taxation: Pre-colonial to Colonial Period

During the pre-colonial period (900-1521) the government was called barangay, headed by datus. There
was no national government. No datu was strong enough to unite the archipelago into a nation. There was no
idea of a nation to the pre-colonial people. Some datus, however, were able to form confederation. They paid
taxes for the protection of the datus. The collected tax was called buwis or handog.

Exempted from paying the handog or taxes were members of the chieftain’s family. Even during this
period, non-payment of taxes was already punishable. Judicial process was influenced by religion and by
waiting the intervention of the deities. The datu served as the chief judge assisted by a group of elders known
as the Council of Elders. They acted as jury.

There were three classes of people in the pre-colonial society – the tumano, timawa and oripun. The
tumao were of pure royal descent. Included in this group were the datus. The timawa class was composed of
the warriors and the freemen. They were neither chief nor slaves but rendered military service to the datus when
ROBELYN G. SORIANO
Instructor, College of Teacher Education
the latter went hunting, during wars on land, and sea raids. They could acquire property; chose any job they
wanted and could have their own wives as well as acquire slaves. The commoners and slaves belonged to the
oripun class. They were required to serve the tumao and timawa for debts and favors. They were not paid for
their services; thus, they did not pay taxes.

There were also the priestly class who were required to record history, and keep track of tributes and
taxes expected from the governed.

When the Spaniards colonized the archipelago, they introduced the encomienda system. The
encomienda, a trust given to, and accepted by the encomendero for the custody of a community of conquered
people which in return gave the encomendero the right to collect the tributes, exploit the labor, and impose
quotas on the produce of the people assigned to him.

The concept of encomienda was ethical based on the condition spelled out in the document of award to
the encomendero, stating that the natives would be instructed in “the matters of our holy faith”, which meant
that religious instruction should be given to the people under the care of the religious instruction. He collected
the payment for the priest or friar assigned to the pueblo from the natives. A tribute (two reals) was collected
from the natives for the friar providing the instruction on the faith.

The first collections of the tribute were accompanied by brutish cruelty. This prompted Fr. Domingo
Salazar to send a letter t the king of Spain in 1583, a part of which reads:

Here many powers fail me. I lack the courage and I can find no words to express to your majesty the
misfortunes, injuries and vexations, the torment and miseries which the Indians are made to suffer in the
collection of tribute… But if it is true, most Christian King, that the intent of your Majesty in sending Spaniards
to this island is that God may be known, His faith preached, and His holy law received here; and that these
Indians by love, good works, and example, may be held to the knowledge of God and obedience to your Majesty
– what law or right permits individuals to transgress in this matter by their greed and self-interest, and to do the
opposite of that for which your Majesty sent them?

In order to address the brutish way of tribute collection, the Spanish king issued an instruction to the
governor-general with regards to the collection of tributes.

Reading No. 10

INSTRUCTION OF THE SPANISH KING TO THE GOVERNOR-GENERALON THE COLLECTION

I have also been informed that. in collecting the tributes from the Indians, there has been in the past, and
is at present, great disorder, because the former governors of the said islands have done things very confusedly and
haphazardly. Because the tribute of each Indian is of the value of eight real, paid in what the Indian might possess,
some persons take advantage of certain words of the said assessments, and of the articles in which tributes are
designed-such as cotton, cloth, rice, and other products of the country - to cause the said lawlessness. The disorder
has consisted in each one collecting whatever he wished, to the great offense and injury of the said Indians; for
when gold is abundant, their encomenderos demand coin from the Indians, and when coin is abundant and gold
scarce, they demand gold, although the said Indians have to search for and buy it.

In short, they always demand their tributes in those things which are scarce, by reason of which, for the
worth eight reals, some collect fifteen, and others twenty, twenty-five, thirty, and more, according to the value of
those things that are demanded. They cause the Indians to seek them and bring them from other parts, to their great
vexation and affliction. It is advisable to check this lawlessrness and excess. Therefore, I charge you to ordain that,
in the payment of said tributes, the order referred to in section six of these instructions shall be observed. That
section treats of the Indians being allowed to pay their tributes in coin, gold, or products, as they may choose.

ROBELYN G. SORIANO
Instructor, College of Teacher Education
In 1589, Francisco Ortega sent a letter to the Viceroy expressing concern on the way the Spanish collective
tributes from the natives.

Reading No. 11

LETTER FROM FRANCISCO ORTEGA TO THE VICEROY ON THE COLLECTION OF TRIBUTES

The first thing they do when they reach any village or province is to send them an interpreter or two, not
with gifts or presents, not to preach to them or to speak to them of the things of God, but to order them to bring
tribute immediately and to be friendly to the Castillians. Since this is a very new and strange thing for them, as
being something to which they have not been accustomed, as they have not been either subjects or vassals of any
native king or lord (of whom they have none in any part of these islands, as was written to my other letter to your
Excellency), all this is confusing to them and causes them much evil by forcing them to give as tributes the
necklaces which they wear about their necks and the bracelets which they and their women wear on their arms.
For few or none of them have property but what they wear on their persons.

When these very evil abuses are inflicted upon them, some of them refuse tribute or do not give as liberally
as those who ask it desire. Others, on account of having to give this, and of the fear of seeing strange and new
race of armed people, abandon their houses and flee to the tinguest (i.e., hills) and mountains. When the Spaniards
see this, they follow them, discharging their arquebuses at them and mercilessly as many as they can do. Then
they go back to the village and kill all the fowls and swine there and carry on all the rice which poor wretches had
for their support. After this and after they have robbed them or everything they have in their miserable houses,
they set fire to them. In this way, they burned and destroyed more than Four thousand houses in this expedition
to Ilocos, and killed more than Five hundred Indians, they themselves confessing that they committed that exploit.
Your Excellency may infer how desolate and ruined this will make the country, for those who have done the
mischief say that it will not reach its former state within six years and others say, not in a lifetime.

Every male starting at age twenty paid tribute. Women started the payment of tribute at age twenty-five.
Both paid it until they reached the age of sixty. Exempted from paying the tribute were the cabezas and
gobernadorcillos, other employed in the colonial service, the sick and the firm, or whose crops had failed. Extra
legal exemptions were given by the alcaldes and friars to their aids and servants. In the early years of the Spanish
occupation, the natives were given a grace period of ten years in paying the tribute.

The Spanish government later introduced the “new income-generating means scheme”. Through the
Manila-Acapulco galleon trade which started in 1565 and ended in 1815, the government acquired its
fundamental income and generated business for the Spaniards. The trade brought silver from Nueva Castilla
and silk from China by way of Manila. Within the framework of the encomienda system, the polo y servicio
evolved. Men ranging from 16 to 60 years old were obligated to render the service, they had to pay a fee known
as falla, which was worth one and a half real. Another system implemented by the Spanish government was
bandala which required the natives to sell their produce to the government.

In 1884, the cedula system of taxation was introduced in the archipelago. All natives aged eighteen
years old to sixty were to pay eight reales or its equivalent; this should be paid within a year. It was later
increased to fifteen reales.

The cedula tax was replaced by the residence certificate during the American period.

2. Bases of the Philippines Taxation System

The policy of taxation in the Philippines is governed chiefly by the Constitution and three republic acts.
First, Article VI, Section 28 of the Philippine Constitution states that the rule of taxation shall be uniform and
equitable and that Congress shall evolve a progressive system of taxation.

Second, the National Internal Revenue Code, enacted as RA Act No. 8424 or the Tax Reform Act of
1997 and the subsequent laws amending it. The most recent amendment RA 8494, is the Tax Reform for
Acceleration and Inclusion Act.
ROBELYN G. SORIANO
Instructor, College of Teacher Education
 Third, RA 7160 or the Local Government Code. The major sources of revenues of local government
units are the taxes collected by virtue of this act.

Income of residents in the Philippines is taxed progressively up to 32 percent. Resident citizens are
taxed on all their net income derived from sources within and without the Philippines. For nonresident, whether
an individual or not of the Philippines, is taxable only on income derived from sources within the Philippines.

3. RA 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN LAW)

The Tax Reform for Acceleration and Inclusion (TRAIN) is the first package in the Comprehensive
Tax Reform Program which the administration of President Rodrigo Duterte is determined to implement in
order to make the tax system simpler, fairer, and more efficient. This will also correct some deficiencies in the
Philippine Tax System.

The goal of the first package of the Comprehensive Tax Reform Program (CTRP) or TRAIN is to create
a more just, simple, and more effective system of tax collection, as provided for under the Philippine
Constitution, where the rich will have a bigger contribution and the poor will benefit more from the
government’s programs and services.

The tax reform envisions to achieve the following by 2040:

*Poverty rate reduced from 22% to 14% (uplifting some six million Filipino from poverty);
*Law abiding country; *Peace within the country and with our neighbors *To
graduate to upper-middle country status from current low-middle income country status; *Eradicate
extreme poverty

*Inclusive economic and political institutions where everyone has equal opportunities; and *Achieve
high-income country status.

However, the vision of the tax reform could only be attained if there is growth in investment targeted
at from 7 percent to 10 percent which can be done through sustainable borrowings, budget reforms, tax and
custom administrative reforms, and tax policy reform which should be complimented with economic reforms,
enhanced competition, improved food security, and simplified regulations.

Under the TRAIN Law the personal income tax (PIT) is lowered; the estate and donor’s tax are
simplified; the value-added tax base is expanded; the exercise tax of petroleum products, automobiles, and
sweetened beverages is increased.

3.1. Salient Features of the TRAIN Law

1. Removal of personal and additional exemptions. The personal exemption of P50,000.00 and
additional exemption of P25,000.00 per dependent enjoyed by the tax payers in the old tax system had been
removed. Under the TRAIN Law, the exemption is simplified and made more straightforward, i.e., if the gross
income of the taxpayers is P250,000.00 and below, he/she is automatically be exempted from paying the
income tax. In addition, the P2,400.00 premiums for health and hospitalization insurance was previously
deductible from taxable income has also been removed.
2. Tax on lotto winnings and PCSO prizes are taxed 20% of the amount of the prize or winnings
is above P10,000.00
3. Tax on pre-terminated long-term deposit is increased to a fixed 20% from the old rate 5-20%.
Long-term deposits (TD) of time deposits with duration of five years and one day will continue to be tax-
exempt.
4. Tax on interest income of foreign currency deposits in Philippine banks is increased from 7.5%
to 15%.
5. Tax on stock transactions. The sale of stocks not traded in Philippine Stock Exchange (PSE) is
increased from 15% to 5-10%. Sale of stocks traded in the Philippine Stock Exchange is taxed at 0.6% of the
gross trade amount from 0.5%.
6. Documentary stamps tax is doubled from P1.50 to P3.00.
7. Donor’s tax was revised to a flat rate of 6% regardless of the relationship between the donor
and the done from 2% to 15% if the donor and the done are related and 30% of the donation was to a stranger

ROBELYN G. SORIANO
Instructor, College of Teacher Education
and donation or gifts below P250,000.00 are tax exempt. Under the new tax system, donations with value of at
least P250,000.00 are taxed 6% on the amount in excess of P250,000.00.
8. Estate tax is at 6% flat rate on the amount in excess of P5 million. Estates with a net value of
P5 million and below is tax exempt. Family homes is valued at no more than P10 million is also exempted from
tax. Under the current tax laws, only family homes worth P1 million are tax exempt.
9. Cosmetic Surgery tax. All cosmetic surgeries, aesthetic procedures, and body enhancements
intended to improve, alter, or enhance a person’s appearance is taxed at 5%.
10. The deadline to file BIR Form 1701Q, the quarterly ITR, for the first quarter every year is
moved from April 15 to May 15, beginning the year 2018.

ROBELYN G. SORIANO
Instructor, College of Teacher Education