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Metro Manila (CNN Philippines) Poor and middle-class Filipinos could

stand to gain the most from a long-delayed reform of the income tax
system, studies have shown.
The primary reason for the reform to be undertaken by President Rodrigo
Dutertes administration is to update the tax brackets, PwC Philippines tax
partner Lawrence Biscocho told CNN Philippines in an interview. Duterte
promised to review and reform the tax system when he campaigned for
president.
Tax reform is a crucial way of empowering poor and middle-class
Filipinos, Biscocho said. It increases their take-home money, even when
their gross pay stays the same.
The outdated brackets effectively tax Filipinos even when they fall below
the poverty line, an Isla Lipana & Co. report said. Worse, they are taxed at
rates much higher than what other Asian countries levy.
These were set nearly two decades ago, when the National Internal
Revenue Code was passed in 1997. It scales the tax rates, depending on
how much money a taxpayer earns.
Annual income tax rates are as follows:

0-10,000 Exempted

10,000-30,000 10%

30,000-70,000 15%

70,000-140,000 20%

140,000-250,000 25%

250,000-500,000 30%

500,000 or more 32%

Biscocho pointed out that the prices of consumer goods have increased
over the past 20 years, and the value of that income has gone down
significantly.
Taxpayers who earn an annual income of 10,000-30,000, for example,
already qualify for 10% income tax. But that annual income equates to only
800-2,500 a month well below the poverty threshold set by the
government.
As of the first half of 2015, it was estimated that a family needed a monthly
income of 9,140 to meet its basic needs.
Even those two bands up, earning 70,000-140,000 a year or 5,80011,700, will mostly be considered poor. And yet, a fifth of their income is
taken from them.
The law exempts minimum wage workers from income taxes, the Isla
Lipana& Co. report noted. But the law does not extend that protection to
small entrepreneurs and the like who may be earning just as little.
Sally Taorda, for example, is a seamstress who runs a modest shop in
Quezon City. Despite making only 3,000-4,000 a month, she isnt
exempted from taxes.
She said about 10% of her earnings go to taxes money she could have
spent for food, electricity and water for her family.
Medyo malaki din ang nababawasan. Pero yun kasi ang patakaran eh,
she said.

[Translation: "Its a pretty large cut from my earnings. But those are the
rules, I suppose."]

Middle-class or millionaires?
The highest band, meanwhile, is typically meant for the wealthiest in
society. That is why they are also charged the highest tax rate.
It may seem like 500,000 is a lot of money and it was, back in 1997.
But in 2016, its not. Thats just about 40,000, which is what many midlevel employees will make, Biscocho said.
In Indonesia, the highest tax band covers those earning the equivalent of
1.8 million and above a year, he pointed out. Thats a difference of 1.3
million.
Moreover, only 25% of their income is collected by the Indonesian
government, he said. In the Philippines, a taxpayer earns much less and
yet loses as much as one-third of his or her salary to taxes.
As Sonny Dominguez, the new Finance Secretary, begins to put together
the income tax reform proposals, Biscocho said the government must focus
on adjusting the tax bands to inflation and reducing the overall tax rates.
Dominguez has said he aims to submit the proposals to Congress by
September. He declined to give specific figures for the tax bands and rates
he was eyeing. But an earlier study conducted by the Department of
Finance backed a reduction of the top tax rate to 25% from 32%.
This will result in immediate savings, Biscocho said. A taxpayer earning 1
million a year currently has to pay 320,000 in taxes. This could fall to as
low as 250,000 under the new system saving as much as 70,000
annually.

While the government will lose out on revenues, that money will end up
feeding into the economy just the same, he explained.
With more disposable income, people can get to buy more of their
necessities, Biscocho said.This is good for the taxpayers and also for the
economy. The GDP (gross domestic product) will benefit from increased
consumption.
High up in the Duterte administrations 10-point economic agenda is tax reform, second to
continuing and maintaining current macroeconomic (fiscal, monetary, and trade) policies. Here, the
intent is to institute progressive tax reform and more effective tax collection, indexing taxes to
inflation. What exactly do these mean? What do these imply for the ordinary Filipino?
Progressive, in the context of taxation, means that the higher ones income, the larger the
percentage of that income that is paid in taxes. This is based on the notion of vertical equity: Those
with higher capacity to pay must pay more, in both absolute and proportionate terms. In reality, the
opposite has long been the case in our country. For the longest time, the Philippine tax system has
on balance been regressivei.e., favoring the rich more than the poor. Due to both our tax laws and
the way they are enforced, rich Filipinos have ended up paying a lower percentage of their total
income in various taxes than those with lower incomes do. This is an injustice the government hopes
to change.
More effective tax collection means that our revenue agencies, most prominently the Bureau of
Internal Revenue and the Bureau of Customs, ought to collect as much of what is due the
government as our tax laws provide. Tax compliance must increase, or equivalently, tax evasion and
tax avoidance must be curbed. More than 10 years ago, it was estimated that the government was
losing P250 billion in uncollected taxes annually. The number is likely to be much higher now.
Indexing taxes to inflation has two elements to it. On one hand, the income tax burden has become
unjustly onerous to middle- and lower-income taxpayers due to so-called bracket creep resulting
from inflation. The top income bracket taxed at the highest rate of 32 percent starts at an annual
income of P500,000, considered high in 1997 when the rates and brackets were last set. But
because of inflation over the years, that income at todays prices would be that of a middle-income
earner, certainly far from being among the richest in society deserving of the highest tax rate. Unless
income tax brackets are periodically pegged or indexed to inflation, an ordinary income earner is
penalized with higher tax rates as monetary income goes up with inflation, even if actual purchasing
power remains the same, or even declines. In fact, the lowest income brackets paying 10-15 percent

in income taxes correspond to monthly incomes of P800-P5,800, well below the poverty threshold of
P9,000 monthly family incomecontrary to the intent of exempting the poor from income tax.
The other aspect to inflation indexing is in the way certain taxes, fees and charges, particularly those
set at an absolute value rather than as a percentage, have become unrealistically low due to inflation
over the years. The foremost example is the excise tax on petroleum products, ranging from P3.67
(aviation fuel) to P5.35 (leaded premium gasoline) per liter since 1997. With petroleum price
increases over the years, these should have more than doubled by now to catch up with inflation. As
a result, the real value of government revenues from petroleum taxes has been substantially eroded
over time. Similar adjustments for inflation would be in order for fixed fees paid for passports, drivers
licenses, airport landing fees, and many more.
At the Senate last week, Finance Secretary Carlos Dominguez unveiled several tax packages that
will be introduced as separate legislative measures over the next few years. The first package to be
submitted in September will address the bracket creep in personal income taxes by adjusting the tax
brackets to realistic levels, and lowering the tax rate to 25 percent for annual incomes beyond
P800,000 up to P2 million. However, for the rich earning P5 million and above, the top rate will be
raised to 35 percent, while those earning P2-5 million will see their rate reduced to 30 percent.
Meanwhile, those earning the minimum wage up to about P20,000 a month will pay only a token
P500. There will also be a shift to a modified gross income tax to simplify tax administration and
avoid the complexities of reckoning with various types of deductions. To offset the projected revenue
loss of P159 billion from this income tax reduction, the package also includes limiting exemptions
from the value-added tax, a proposed tax on sugary products, and an increase in the outdated
petroleum excise taxes. Included under the package is relaxation of bank secrecy for fraud and tax
evasion cases. All together, a net revenue increase of P200 billion is expected from the package.
To be pushed next year is reduction of the corporate income tax rate to 25 percent and simplifying
other corporate income tax provisions, aimed at improving tax compliance. While this is projected to
lead to a loss of P34.8 billion in revenues, the government expects to offset this with P33.8 billion
gained from rationalizing fiscal incentives currently given to various corporations. Further packages
will centralize and update valuation of properties for the purpose of the real property tax; reduce
estate and donor taxes, which will help unlock the land market and encourage more efficient land
use; and harmonize taxes on capital income that includes interest earnings on deposits and other
financial instruments.
There will be much discussion in the months and years ahead on new tax directions the government
is taking. It is welcome that such a comprehensive review of our tax system is now being
undertaken. Its been almost 20 years since we last did it.

This research guide summarizes the sources of Philippine tax law.


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 Tax Code of 1997, Revenue Issuances and
BIR Rulings pertaining to national taxes are posted at the BIR website.
National Tax Law
I. 1987 Constitution
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)
All money collected on any tax levied for a special purpose shall be treated as a special
fund and paid out for such purpose only. If the purpose for which a special fund was
created has been fulfilled or abandoned, the balance, if any, shall be transferred to the
general funds of the Government. (Article VI, Section 29, paragraph 3)
The Congress may, by law, authorize the President to fix within specified limits, and
subject to such limitations and restriction 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) 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, second paragraph)
The Supreme Court shall have 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 x x x all cases involving the legality of any tax, impost,
assessment, or toll or any penalty imposed in relation thereto. (Article VIII, Section 5,
paragraph)
Tax exemptions are limited to those granted by law. However, no law granting any tax
exemption shall be passed without the concurrence of a majority of all the members of
the Congress. (Article VI, Section 28, par. 4). 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); (2)
non-stock non-profit educational institutions used actually, directly and exclusively for
educational purposes. (Article XVI, Section 4(3))
In addition to national taxes, the Constitution provides for local government taxation.
(Article X, Section 5) (Article X, Section 6) Parenthetically, the Local Government Code
provides that all local government units are granted general tax powers, as well as other
revenue-raising powers like the imposition of service fees and charges, in addition to
those specifically granted to each of the local government units. But no such taxes, fees
and charges shall be imposed without a public hearing having been held prior to the
enactment of the ordinance. The levy must not be unjust excessive, oppressive,
confiscatory or contrary to a declared national economic policy (Section 186 and 187)
Further, there are common limitations to the grant of the power to tax to the local
government, such that taxes like income tax, documentary stamp tax, etc. cannot be
imposed by the local government.
II. Laws
The basic source of Philippine tax law is the National Internal Revenue Law, which
codifies all tax provisions, the latest of which is embodied in Republic Act No. 8424
(The Tax Reform Act of 1997). It amended previous national internal revenue codes,
which was approved on December 11, 1997. A copy of the Tax Reform Act of 1997,
which took effect on January 1, 1998, can be found here.

Local taxation is treated separately in this Guide. There are, however, special laws that
separately provide special tax treatment in certain situations. (See attached matrix on
special laws)
III. Treaties
The Philippines has entered into several tax treaties for the avoidance of double taxation
and prevention of fiscal evasion with respect to income taxes. At present, there are 31
Philippine Tax Treaties in force.

Copies are available at the BIR Library and the

International Tax Affairs Division of the BIR, which is under the Deputy Commissioner
for Legal and Inspection Group.
The Philippine Treaty Series, edited and annotated by Haydee Yorac and published by
Law Publishing House, University of the Philippines, is available in seven (7) volumes,
covering the years 1944 to 1978 . The Philippine Treaty Index, by Benjamin Domingo,
covers the years 1978 to 1982. A copy of the Philippine Treaty Index is available in the
Department of Foreign Affairs (DFA) Library. These publications contain treaties entered
into by the Philippines. Tax privileges and exemptions granted under treaties to which
the Philippines is a signatory are recognized under Philippine tax law. Copies of treaties
entered into by the Philippines with other countries and/or international organizations,
from 1983 up to the present, are available at the DFA Library.
IV.

Administrative Material

The Secretary of Finance, upon the recommendation of the Commissioner, promulgates


needful rules and regulations for the effective enforcement of the provisions of the Tax
Code (Section 244, Tax Code of 1997). The Commissioner of Internal Revenue,
however, has the exclusive and original power to interpret the provisions of the Tax
Code, but subject to review by the Secretary of Finance.
Administrative issuances which may be relied upon in interpreting the provisions of the
Tax Code, which are signed by the Secretary of Finance, or the Commissioner of
Internal Revenue, or his duly authorized representative, come in the form of Revenue

Regulations, Revenue Memorandum Orders, Revenue Memorandum Rulings, Revenue


Memorandum Circulars, Revenue Memorandum Rulings, and BIR Rulings.
Revenue Regulations (RRs) are issuances signed by the Secretary of Finance, upon
recommendation of the Commissioner of Internal Revenue, that specify, prescribe or
define rules and regulations for the effective enforcement of the provisions of the
National Internal Revenue Code (NIRC) and related statutes.
Revenue Memorandum Orders (RMOs) are issuances that provide directives or
instructions; prescribe guidelines; and outline processes, operations, activities,
workflows, methods and procedures necessary in the implementation of stated policies,
goals, objectives, plans and programs of the Bureau in all areas of operations, except
auditing.
Revenue Memorandum Rulings (RMRs) are rulings, opinions and interpretations of the
Commissioner of Internal Revenue with respect to the provisions of the Tax Code and
other tax laws, as applied to a specific set of facts, with or without established
precedents, and which the Commissioner may issue from time to time for the purpose of
providing taxpayers guidance on the tax consequences in specific situations. BIR
Rulings, therefore, cannot contravene duly issued RMRs; otherwise, the Rulings are null
and void ab initio.
Revenue Memorandum Circular (RMCs) are issuances that publish pertinent and
applicable portions, as well as amplifications, of laws, rules, regulations and precedents
issued by the BIR and other agencies/offices.
BIR Rulings are the official position of the Bureau to queries raised by taxpayers and
other stakeholders relative to clarification and interpretation of tax laws.
Revenue Regulations, Revenue Memorandum Orders, Revenue Memorandum Rulings,
Revenue Memorandum Circulars, Revenue Memorandum Rulings, and BIR Rulings are
found here.
V. Case Law

In the Philippines, Supreme Court decisions form part of the law of the land. As such,
decisions by the Supreme Court (sc.judiciary.gov.ph) in the exercise of its 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 cases involving the
legality of any tax, impost, assessment, or toll or any penalty imposed in relation thereto
are adhered to and recognized as binding interpretations of Philippine tax law. Court of
Appeals and Court of Tax Appeals decisions which have become final and executory
are also recognized interpretations of Philippine tax law.
VI. Treatises and other books
There are no Philippine treatises exclusively devoted to Philippine Tax law but various
Philippine authors have come up with annotated versions of the Tax Code. These books
can be purchased from Rex Bookstore and Central Law Publishing, Inc.
VII. Periodicals
Periodicals on Philippine tax law are the:
(1) Philippine Revenue Service (copies available in the BIR Library), published by the
BIR from 1969-1980;
(2) Philippine Revenue Journal (copies available in the BIR Library) which was both
published by the Bureau of Internal Revenue from 1969 to 2000; and
(3) the Tax Monthly, published by the National Tax Research Center (NTRC) (copies
available in the BIR Library and the NTRC).
VIII. Local Government Tax Law
Local government taxation in the Philippines is based on the constitutional grant of the
power to tax to the local governments.
Local taxes may be imposed, as the Constitution grants, to each local government unit,
the power to create its own sources of revenues and to levy taxes, fees, and charges

which shall accrue to the local governments (Article X, Section 5). With respect to
national taxes, local Government units shall have a just share, as determined by law, in
the national taxes which shall be automatically released to them (Article X, Section 6).
However, certain taxes, such as the following, may not be imposed by local government
units: (Section 133, Local Government Code and Tax Law and Jurisprudence by Vitug &
Acosta, copyright 2000)
(1) Income tax, except when levied on banks and other financial institutions;
(2) Documentary stamp tax;
(3) Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa,
except as otherwise provided in the Local Government Code (Code) (except taxes
levied on the transfer of real property ownership under Section 135, and Section 151 of
the Code);
(4) Customs duties, registration fees of vessels (except license fees imposed under
Section 149, and Section 151 of the Code), wharfage on wharves, tonnage dues and all
other kinds of customs fees, charges and dues except wharfage on wharves
constructed and maintained by the local government unit concerned;
(5) Taxes, fees, charges and other impositions upon goods carried into or out of, or
passing through, the territorial jurisdictions of local governments in the guise of charges
for wharfage, tolls for bridges or otherwise, or other taxes in any form whatever upon
such goods or merchandise;
(6) Taxes, fees or charges on agricultural and aquatic products when sold by marginal
farmers or fishermen;
(7) Taxes on business enterprises certified by the Board of Investments as pioneer or
non-pioneer for a period of six and four years, respectively, from the date of registration;

(8) Excise taxes on articles enumerated under the National Internal Revenue Code and
taxes, fees, or charges on petroleum products, but not a tax on the business of
importing, manufacturing or producing said products (Patron vs. Pililla, 198 SCRA 82);
(9) Percentage tax or value-added tax on sales, barters or exchanges of goods or
services or similar transactions thereon (but not fixed graduated taxes on gross sales or
on volume of production);
(10) Taxes on the gross receipts of transportation contractors and persons engaged in
the transportation of passengers or freight by hire and common carriers by air, land or
water except as provided by the Code;
(11) Taxes on premiums paid for reinsurance or retrocession;
(12) Taxes, fees or charges for the registration of motor vehicles and for the issuance of
all kinds of licenses or permits for the driving thereof, except tricycles;
(13) Taxes, fees, or other charges on Philippine products actually exported except as
provided by the Code (the prohibition applies to any local export tax, fee, or levy on
Philippine export products but not to any local tax, fee, or levy that may be imposed on
the business of exporting said products);
(14) Taxes, fees or charges on duly organized and registered Countryside and
Barangay Business Enterprises (R.A. No. 6810) and on cooperatives (R.A. No. 6938);
and
(15) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities, and local government units (Section 133, LGC)
The Local Government Code (www.comelec.gov.ph) or (www.dilg.gov.ph/) contains
provisions on the scope and limitation on the exercise of local government taxing power.
IX. National Tax Research Center (NTRC)

Constituted under Presidential Decree 74, the NTRC is mandated to conduct continuing
research in taxation to restructure the tax system and raise the level of tax
consciousness among the Filipinos, to achieve a faster rate of economic growth and to
bring about a more equitable distribution of wealth and income. Specifically, the NTRC
performs the following functions:
1. Undertake comprehensive studies on the need for additional revenue for accelerated
national development and the sources from which this might most equitably be derived;
2. Re-examine the existing tax system and tax policy structure;
3. Conduct researches on taxation for the purpose of improving the tax system and tax
policy;
4. Pass upon all tax measures and revenue proposal;
5. Recommend of such reforms and revisions as may be necessary to improve revenue
collection and to formulate sound tax policy and a more efficient tax structure.