OBJECTIVES: 1. 2.

To know what is the responsibility or role of the DOF and BIR in the tax system To know the powers of the BIR and the different taxes that they collected

I. The Philippine Tax System With the acceleration of development financing activities of the government, fiscal reforms involving the tax system became imperative. The Philippine Tax System underwent radical reforms, both organizational and substantive. A.The Constitutional Mandate 1. The Constitution contains one basic principle of taxation which embodies the desired correlation of taxation to development goals and strategies. 2. It expressly provides that the rule of Taxation shall be uniform and equitable and mandates Congress to evolve a progressive system of taxation. a. A progressive tax system is in consonance with the policy of the state to equitably redistribute income and wealth. 3. The Constitution aims to institute a system of taxation based on direct taxation and a decreasing reliance on indirect taxation. a. The main thrust of tax reforms should be towards improving social equity by a sharp rise in direct taxation. b. Higher indirect taxation of goods and services consumed by the upper income groups. B. The Major Revenue Agencies 1. The Department of Finance The principal and administrative arm of the government is the Department of Finance. Its id responsible for the judicious and effective management of the governments tax programs and borrowings to achieve national development goals. The Department is headed by a Secretary who is a member of the Cabinet. The secretary is appointed by the President subject to confirmation by the Commission of Appointments. The secretary of Finance is assisted by 5 undersecretaries and 5 assistant secretaries.

 The Department has under it several operating bureaus, which include the Bureau of Internal Revenue (BIR), the Bureau of Customs (BOC), the Bureau of Treasury (BOT), the Securities and Exchange Commission (SEC), among others.

The Bureau of Internal Revenue (BIR) a. Organizational set up The BIR is premier agency in charge of all matters pertaining to internal national taxation. It is headed by a Commissioner who is assisted by two Commissioners. 2 Deputy Commissioners Assessment & Collection Group Legal & Administrative Group

2.

The BIR is made up of the following offices: Assessment Service (AS), Collection Service (CS), Excise Tax Service (ETS), Special Operations Service (SOS), Legal Service (LS), Financial Service (FS), Administrative Service (AS), Planning and Research Service (P&RS), and, Inspection Service (IS). The first four offices are placed under the Assessment and Collection Group while the rest belong to the Legal and Administrative Group. Each Group is under a Deputy Commissioner.

b.

The Powers of BIR 1) Assessment and collection of all national internal revenue, taxes, fees and charges 2) Enforcement of all forfeitures, penalties, and fines connected with item 3) Execution of judgments in all cases decided in its favor by the courts 4) Giving effect and administering the supervisory and police power conferred to it by law 5) Recommend to the Secretary of Finance all needful rules and regulations for the enforcement of the provisions of the National Internal Revenue Code 6) And through the Commissioner, the BIR ha the following functions: - Accounting for all the revenues collected - Exercising all legal requirements that are appropriate - Preventing and prosecuting tax evasions and other illegal economic activities - Exercising supervision and control over its constituent units - Performing such other functions as may be provided by law Taxes Collected by the BIR 1) Income Tax 2) Estate and Gift Taxes 3) Excise Taxes

c.

4) Taxes on Business 5) Documentary Stamp Tax 6) Mining Taxes 7) Miscellaneous Taxes, Fees and Charges Imposed by NIRC, namely - Taxes on banks, finance companies and insurance companies - Franchise taxes - Taxes on amusement - Charges on forest product - Tobacco inspection fees - Other taxes as are hereafter may be imposed and collected by the BIR 8) Other special taxes placed under the administration of the BIR - Residence taxes - Sugar Adjustment Taxes - Energy Taxes

CONCLUSION The Philippine Tax System underwent reforms in order to align the goals and policies of taxation to national development and to generate more revenues for development projects. The Constitution expressly provides that the rule of taxation shall be uniform and equitable and mandates Congress to evolve a progressive system of taxation. A progressive tax system is in consonance with the policy of the state to equitably redistribute income and wealth. In line with this, the Philippine Tax System also includes major revenue agencies that help implementing such tax system and other policies. The fiscal and administrative arm of the government is the Department of Finance. It is responsible for the judicious and effective management of the governments tax programs and borrowings to achieve national development goals. We also have Bureau of Internal Revenue which is the premier agency in charge of all matters pertaining to internal national taxation. There are certain powers and duties exercising by the BIR and also they have taxes collected under the National Internal Revenue Code (NIRC).

OBJECTIVE: This topic deals with Bureau of Customs aimed to help you fully understand more about the features together with its organizational set up, its operation, its mission and its purpose as one of the agency of national government. 3. The Bureau of Customs (BOC) A. Organizational Set-up y y y y Second major agency in the National Government It is placed under the supervision of the Department of Finance Responsible for the control and monitoring of export and import of weapons in the The BOC Apportioned the country into 17 districts

Philippines

y The collector does not only enforce tariff and customs law but also as BIR Collector Bureau of Customs consist of the following: 1. 2. 3. y y y 4. y y y y y y Commissioner Deputy Commissioners Head and Supervise Major Groups under Deputy Commissioners Customs Revenue Collection Monitoring Group Customs Assessment and Operations Coordinating Group Intelligence and Enforcement Group Chief Service Offices under Office of the Commissioner Legal and Intelligence Service Administrative Services Customs and Computer Center Financial Management Service Economics Intelligence and Investigation Service

B. Power of the BOC 1. Under Tariff and Customs Code, BOC is charged with: a. assessment and collection of the lawful revenue from imported articles

b. prevention and suppression of smuggling and other frauds c. Supervision and control over the entrance and clearance of vessels and aircrafts engaged in foreign commerce d. enforcement of the tariff and customs laws relating to tariff ands customs administration e. supervision and control over the handling of foreign mails arriving in the Philippines f. supervision and control over all import and export cargoes g. exclusive jurisdiction over seizure and forfeiture cases under tariff and customs laws h. the following, through the commissioner: y y y y y Accounting for all customs revenue collection Exercising police authority for the enforcement of tariff and customs law Prosecuting smuggling and other illegal activities in all ports under its jurisdiction Supervision and control over its constituent units Performing other functions as may be provided by law

2. The operation of BOC consists of: a. Revenue collection b. Law enforcement c. Public service 3. Law Enforcement Mission of BOC a. issuance of entrance and exit clearance vessels and aircrafts engaged in foreign trade b. Regulates processing of all articles imported or exported out of the country c. Oversees warehousing operations, cargo transfer operation and customs police operation 4. The BOC is empowered to collect fees for the following: a. each original import and export entry b. each entry for immediate transportation in bond c. each original internal revenue entry

d. e. f. g.

each original withdrawal entry for bonded warehouse each bond accepted and receive each approval and application in respect to transaction covered by general bond each certificate made in the routine administration of the bureau

Conclusion: The Bureau of Customs is the second major agency in the National Government placed under the supervision of the Department of Finance. It is responsible for the control and monitoring of export and import of weapons in the Philippines and apportioned the country into 17 districts. The collector also acts as BIR Collector. It consists of the following: Commissioner, Deputy Commissioners, Head and Supervise Major Groups under Deputy Commissioners and Chief Service Offices under Office of the Commissioner. The operation of BOC consists of: Revenue collection, law enforcement and Public service. It is considered as the first and the last line of defense in the enforcement of export control law in the Philippines.

OBJECTIVES: 1. Understand the basic concepts & definitions concerning income tax. 2. Know how to compute tax in accordance with the income and the rate established by the BIR. 3. Know when the deduction is and exemption of income tax happens. C. Major Philippine Taxes 1. Income Tax Income tax is a tax on all incomes earned by individuals and corporations. Income includes salaries and wages, honoraria and commissions, winnings in gambling ang lotteries, dividends, bank interests and profits from business. a. Income Tax of Individuals In levying income tax on a person, the law classifies income into three categories: 1.1 Compensation Income Refers to earnings from employment, whether regular or casual, and regardless of whether the employer is the government or a private entity. It includes salaries, wages, honoraria, bonuses, pensions, allowances for transportation, representation and entertainment fees.

The tax shall be computed in accordance with and at the rates established in the following schedule:

Not over P10,000 5% Over P10,000 but not over P30,000 P500+10% of the excess over P10,000 Over P30,000 but not over P70,000 P2,500+15% of the excess over P30,000 Over P70,000 but not over P140,000.. P8,500+20% of the excess over P70,000 Over P140,000 but not over P250,000 P22,500+25% of the excess over P140,000 Over P250,000 but not over P500,000 P50,000+30% of the excess over P250,000 Over P500,000 P125,000+34% of the excess over P500,000 1.2 Business Income Refers to profits from business operations. While the tax rate is the same as in compensation income, the law, however, allows more deduction advantages to business incomes. Consequently only business income earners are allowed to deduct expenses incurred to generate profits. These deductions are: 1.2.1 Business expenses 1.2.2 Interests paid on indebtedness 1.2.3 Taxes, except certain taxes like income tax 1.2.4 Losses to the extent which is not compensated for by insurance 1.2.5 Bad debts 1.2.6 Depreciation of property 1.2.7 Depletion of natural resources, like mines and gas wells 1.2.8 Charitable and other contributions 1.2.9 Pension trust contributions of employees 1.2.10 Personal exceptions allowable to individuals 1.3 Passive Incomes Refer to royalties, prizes worth over P3,000, other kinds of winnings and interests of bank deposits, inter alia. Unlike compensation and business incomes, passive incomes are not subject to a graduated tax rates schedule. A fixed rate of income tax is imposed regardless of the amount of the income (except of prizes). b. Corporate Income Tax

Corporations, for purposes of income taxation also refer to partnerships, joint accounts, associations and insurance companies. Since they are primarily established for making profits, corporations are taxed in the same manner as an individual who earns income solely from business. Corporations are, however, not entitled to personal deductions clearly because all its operating expenses are necessarily business expenses which are covered by itemized deductions. Since not all corporations are created for profit, some of them are exempt from income tax. They are: 1.1 Labor, agricultural or horticular organization not organized for profit. 1.2 Mutual savings bank not having capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit. 1.3 Cemetery company owned and operated exclusively for the benefit of its members 1.4 Government educational institution. 1.5 Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare. CONCLUSIONS: Income tax is collected on a pay-as-you-earn basis. A strongly progressive income tax does not take away from the economy or diminish incentive for honest work and creativity. The strongly progressive tax rates have been in effect for years and have served the public well. It has enhanced our freedoms and allowed the lower classes to advance rapidly. It funded important government programs and services which serve us all. Objectives: 1. Explain the meaning of transfer taxes and enumerate several reasons for the imposition of transfer taxes. 2. Understand what value added tax and customs duty is and discuss several kinds of customs duty. 3. Absorb fully the significance of paying taxes and to instill in the minds of the students to be responsible in abiding rules and regulations of the Philippines. 2. Transfer Taxes y Estate Tax- property passes to another by inheritance y Gift Tax- transfer of belongings through donation A. Reasons for the imposition of Transfer Taxes:

1. To limit a persons right to acquire wealth by way of bequests. 2. To moderate inequality in the distribution of wealth. 3. To use as a supplement in income taxation. 4. To limit a persons right to dispose of his or her property at death. 5. To place increasing limitations on a persons right to pass on wealth as subsequent generations are reached. B. Three(3) reasons for the imposition of Estate Tax: 1. To generate revenue 2. To limit fortunes by taxation 3. To attain equitable distribution of wealth C. Donors tax is imposed on the donor for transmitting property to another during his lifetime. y its basic purpose is to prevent the avoidance of state tax through lifetime transfers of property which property would otherwise transfer by will or through the death of the owner 3. Value Added Tax This is a tax on the privilege of selling merchandise and of importation 4. Customs Duties is levied on the exportation and importation of goods and is imposed to implement economic and political policies of the estate.

A. Several kinds of customs duties: 1. Ad valorem duty- is based on the market value or price of the imported article. 2. Specific duties- are those based on the weight or the volume of the imported article. 3. Alternate duties- based either on the weight or volume or on the value of the imported articles. 4. Compound duties- are based both on the weight or volume and the value of imported article. B. Special Customs Duties: 1. Dumping customs duty- is imposed on a specific kind or class of foreign article which is being imported at a price less than the fair value. 2. Countervailing customs duty- is imposed upon the production, manufacture or export of which subsidy is directly or indirectly granted in the country of origin and/or exportation.

3. Marking customs duty- is imposed on articles or their containers which have not been properly marked in any official language of the Philippines. 4. Retaliatory/Discriminatory duty- is imposed on articles of a foreign country which discriminates against Philippine commerce with that of another foreign country. Conclusion: Different taxes of the Philippines such as transfer taxes, value added tax and customs duty are therefore important in attaining the needs of a country not to impose so many burdens but to promote equality among citizens. Taxes as it may seem is not totally bad at all, it is a way to protect and to safeguard the welfare of every citizens of the Philippines.

Objectives: This segment introduces the continuation of the Major Philippine Taxes. At the end of this report, the students are expected to: (1) Learn about the Local Government Taxes levied by provinces, municipalities, barangays and revenue raising powers common to all local government units. (2) Know the characteristic, scope and system of assessment of Real Property Taxes. (3) Identify the assessment levels of cities and municipalities which are categorized into residential, agricultural, commercial, industrial, mineral, and timberland. (4) Determine the grounds for exemption on taxation/exceptions to taxability.

5. Local Taxes A. Under the Local Government Code pursuant to the mandate of the Constitution, local government units are empowered to levy a variety of taxes and other fees. Local Government Tax The following are levied by provinces: (a) Tax on transfer of ownership (donation, sale, barter) over real property; (b) Tax on business of printing and publication; (c) Franchise tax

(d) Tax on gravel and sand and other quarry resources but proceeds distributed as follows: Province 30%; City/Municipality 30%; Barangay 40%; (e) Annual professional tax (practice of profession requiring government examination); (f) Amusement tax, to be divided equally by the province and municipality; and (g) Annual fixed tax for delivery truck or van of manufacturers or producers, wholesalers, dealers or retailers of distilled spirits, fermented liquors, soft drinks, cigars, cigarettes, and products determined by the Sangguniang Panlalawigan.

The following are levied by municipalities: (a) Business tax on wholesalers, distributors, dealers, manufacturers, assemblers, repackers, processors, brewers, distillers, rectifiers, compounders, exporters, millers, contractors, banks, financial institutions, peddlers and others; (b) Fees and charges on business and occupation or practice of profession not reserved to the province; (c) Fees for sealing and licensing of weights and measures; (d) Fishery rentals, fees and charges; and (e) Community tax paid by every resident at least 18 years old. Barangays levy the following: (a) Taxes on stores and retailers with fixed business establishments with gross receipts not exceeding P50,000 in cities and P30,000 in municipalities; (b) Fees and charges for services rendered in connection with regulation or use of barangayowned properties or service facilities like palay, copra or tobacco dryers; (c) Clearance fees on license permit issued by city or municipality for business or any activity; (d) Fees and charges on commercial breeding of fighting cocks and cockpits. (e) Fees and charges on places of recreation which charge admission fees; and (f) Fees and charges on billboards, signboards, neon signs, and outdoor advertisements. Revenue raising powers common to all local government units are the following: (a) Fees and charges for services rendered;

(b) Charges for operation of public utilities owned, operated and maintained by them within their jurisdiction; (c) Toll fees and charges for use of public road, pier, wharf, waterway, bridge, ferry or telecommunications system funded and constructed by them; and (d) Any tax, fee or charge on any base not mentioned by laws

6. Real Property Tax A. Real properties are categorized into residential, agricultural, commercial, industrial, mineral, timberland or special for the purpose of fixing proportionately higher assessment levels for properties put into more productive use. 1. Assessment levels which are fixed by the Sangguniang Panlalawigan and respective sanggunian of cities and municipalities of Metro Manila should not exceed the following ceilings: (a) On Lands: CLASS Residential Agricultural Commercial Industrial Mineral Timberland 50% 50% 20% ASSESSMENT LEVELS 20% 40% 50%

(b) On Buildings and Other Structures: (1) Residential. Minimum of 0% if fair market value (FMV) is lower than P175,000 to maximum of 60% if FMV is over P10 Million. (2) Agricultural. Minimum of 25% if FMV is below P300,000 to maximum of 50% if FM is over P2 Million. (3) Commercial/Industrial. Minimum of 30% if FMV is below P300,000 to maximum of 80% if FMV is over P10 Million.

(4) Timberland. Minimum of 45% if FMV is below P300,000 to maximum of 70% if FMV is over P2 Million. (c) On machineries: 40% for agricultural, 50% for residential, and 80% for commercial and industrial. (d) On Special Classes: Assessment level for all kinds of real properties are uniform if actual use is for any of the following considerations:

PURPOSE Cultural Scientific Hospital Local Water Districts Govt Operations engaged

ASSESSMENT LEVEL 15% 15% 15% 10%

in Water and Electric Power Supply 10% B. Special Levies 1. Levy for Special Education Fund

(a) It is 1% of the assessed value of the real property which is paid in addition to the basic real property tax. 2. Ad Valorem Tax on Idle Lands

(a) This tax is imposed at a rate not exceeding 5% of the assessed value of the property. 3. Special Levy

(a) It is imposed on all lands specially benefited by public works or improvements funded by the local government. 7. Exemption and Taxation A. Grounds for grant of exemptions: 1. Contract (a) The exemption to tax will be binding upon succeeding legislatures because the latter has become a party to it.

(b) The state is bound by the stipulations of the contract not withstanding subsequent passage of laws to the contrary. b. Public Policy (a) (b) Extended gratuitously or without valuable consideration. The state may validly [revoke it] at will, with or without cause.

(c) It includes a well-settled principle that a special privilege or exemption claimed under a statute, charter, or articles of incorporation is construed strictly against the taxpayer and in favor of the government. (d) The loss of revenue from the grant of exemptions must approximate the gains. (Some governmental goals sought to be achieved by way of tax exemptions ar incapable of being measured in monetary terms.) B. As part of Philippine fiscal policy geared towards economic development, tax exemptions are seen as a good incentive for foreign investors. C. As regards government entities, extra government time and effort are incurred by their nonexemption from payment of taxes. Interestingly, there are exceptions to taxability: Incentives granted to Board of Investments (BOI)- promoted enterprises under BP 391;

Incentives granted to export Processing Zone Authority (EPZA)- promoted enterprises under PD 66, as amended; Incentives protected by the non-impairment clause of the Constitution; Incentives granted under the four basic tax codes (National Internal Revenue Code, Tariff and Customs Code, Real Property Tax Code and Local Tax Code); Suspension of taxes and duties due from distressed copper mines under LO1 1416.

Conclusions: Local governments are empowered to finance local infrastructure and socio-economic development projects; therefore they also have the authority on the imposition of local taxes and real property taxes. We were able to see a never-ending cycle of granting and withdrawal of exemptions due to creations and even through the reenactment of laws or PDs granting new tax privileges and restoring previously withdrawn exemptions.

On the basis of the topics and information presented, it is advisable considering the following policy schemes: (1) The augmented share for barangays would reassure them to apply more tax collection effort. (2) The lifting of real property tax exemptions of government corporations may collide with the government policy of encouraging corporations to engage in assessment of alternative foundations of vitality.

Objective: To learn about the organizational and substantive reformation of the taxation in our country under the Martial Law Regime. IV. RECENT DEVELOPMENTS A. Developments under the Martial Law Regime

1. Organizational Reform At the Bureau of Customs, some of the innovations in the staffing patterns were:  yThe creation of the Tax Exempt Division to pass upon importation of BOI-registered firms and other tax exempt industries  yThe integration of the national customs police  yThe installation of a computer system to monitor processing of documents and assignments  yThe streamlining of the Manila International Airport operations

The BIR launched a positive recruitment program for operational position to augment and reinforce the existing staff which was earlier reduced by the separation of unfit and erring personnel. Some specific major changes introduced in the Bureau of Internal Revenue included:   yThe creation of the special audit teams by industry group. yThe conversion of the tax fraud unit to a division.

 yCreation of the Tax Incentive Division to facilitate the processing of the tax exempt industries.

 yThe elevation of the Data Processing Center into a department to provide an integrated system of data collection and information for policy making and effective tax administration.   yThe creation of revenue attache paositions. yThe reduction of the number of regional offices.

Other innovations included the proper monitoring of tax compliance with the following:   yTaxpayers subject to the withholding tax were to be determined and identified. yRemittance of taxes withheld at source by withholding agent were monitored.

2. Substantive Reforms A. Tax Amnesties There were two latest Presidential Decrees on Tax Amnesty: PD 1740 and PD 1840. Under PD 1740, the amnesty was extended to resident and non-resident citizens, resident aliens, estates and trust, who fail to file income tax returns, and who filed erroneous false and fraudulent returns for any of the taxable years from 1974 to 1979. Under PD 1840, there was grant of full tax amnesty and previously untaxed income earned between 1974 and 1980. The decree granted amnesty to residents, citizens or aliens upon payment of 20% tax. In the case of non-resident citizens who earned income abroad, the tax was 2% converted into US dollars. It provided that payment of the amnesty tax would terminate all cases whether pending investigation or being litigated by BIR or other agencies of the government. &Revision of the Tariff and Customs Code The revised Customs Code simplified the system of classification and structure rates. It reduced the number of classification as well as the rates to be applied on them. This resulted in the lessening of conflicts, thereby facilitating effective administration. Further, the Code reduced the catch-all category of others which was vague and which provided room for evasion of taxes with higher rates applicable to specific categories. This resulted in the reduction of opportunity for graft which entailed heavy losses of potential tariff revenue to the government. Conclusions: Under the Organizational reform, there are innovations at the Bureau of Customs and Bureau of Internal Revenue which provides logistical support to governments expanded functions and financing requirements. These reorganizations are written above.

There are also innovations to ensure more efficient revenue administration procedures and systems. The first two significant were the grant of a series of tax amnesties and the revision of the Tariff and Custom code. Objectives: 1. To know some real property tax developments done by the government 2. To know some measures by the government to increase revenue and improve tax system 3. To discuss Gross Income Taxation 4. To identify the first two categories under Personal Income, the Category I and II.

C. Real Property Tax Developments Decrees passed to improve the system of taxation on real properties: a. P.D. 76 - provides the filling of taxpayers of self-assessed value of their lands and other real properties to enable the government to get an updated listing of property and its current market value. b. P.D. No.464 codifies existing real property laws. c. P.D. No.231 provides for more taxing powers for local governments. This decree enacts a local tax code for provinces, cities, municipalities and barrios.

D. Measures to increase revenue and Improve Tax system 1. Tax measures to increase revenues include: a. P.D. 1671 - amendment of Sec. 192 of the NIRC on dealers of gasoline and petroleum products and . Sec. 193 of the NIRC on increasing the rates of specific tax on petroleum products. b. P.D. 1686 imposing a tax on every motor vehicle equipped with air conditioning unit. c. P.D. 1709 - levying a surtax on extraordinary gains realized by oil companies on petroleum products. d. P.D. 81 increasing specific tax on distilled wines and compound liquors.

e. B.P. 81 levying tax on cigarettes except in cases on those packed in 30s. f. B. P. 83 , 84 - an act amending certain provisions of the National Internal Revenue Code of 1977, as amended, governing the taxation of forest products; minerals and minerals products respectively. 2. Tax measures to improve tax administration and enforcement comprehended declaration of the Banking Industry as indispensible to the growth of the National Economy (P.D. 1737) and those contained in the omnibus amendment to the NIRC. (P.D. 1705) 3. Tax measures for promotion of investments and achievement of equity in taxation comprised: a. P.D. 1741 an act governing the computation of national internal revenue allotments to local government units. b. P. D. 1910 an act supporting for sugar businessmen in the form of exemption from payment of customs and tariff duties, special import tax compensating tax covering importation of sugar mills machinery, spare parts and equipment for limited period. c. P.D. 1682 - amendment of several sections of the NIRC on petroleum organizations. d. P.D. 1739 - granting fiscal incentives by amending certain provisions of the National Internal Revenue Code, and for other purposes. e. P.D. 1740 - condoning penalties of certain violations of the Income Tax Law. E. GROSS INCOME TAXATION (GIT) A very significant reform in tax system which was embodied in the Batas Pambansa (BP) 135, otherwise known as the Modified Gross Income Tax Law. It departed from the old system of the net income taxation by adopting a new tax concept based on scheduler approach. Under this, Personal income is classified into three (3) categories: 1. CATEGORY I Compensation Income It includes incomes gained from employment such as salaries, wages, compensation, emoluments and honoraria; bonuses; allowances; non-monetary compensation; fees (including directors fee); taxable pensions; amounts drawn as salaries by partners of partnerships taxable as corporations; commissions; and other incomes of similar of nature.

Personal and additional exemptions y For single individual or married individual judicially decreed as legally separated with no qualified dependents .. P50,000 y For head of family P50,000 y For each married individual P50,000 y For each qualified dependent, an P25,000 additional exemption can be claimed but not only up to 4 qualified dependents. Note: In case of married individuals where only one of the spouses is deriving gross income, only such spouse will be allowed to claim the personal exemption. These exemptions were provided for under P.D. 1773 but were retained with the implementation of the new tax scheme. Under GIT scheme, an adjustment for the levels of personal and additional exemptions may be done by the President every three years upon the recommendation of the Secretary of Finance and after taking into consideration certain variables such as consumer price indices, level of minimum wages and others. 2. CATEGORY II Business Income and Income from Profession It includes business incomes and/or trade incomes; fees for the exercise of profession, gains from sale of exchange of capital assets (except gains arising from sale of real property under BP 37) and gains from stock transaction; rental incomes; and all other incomes not covered by category 1. Personal and additional exemptions under Category 1 are also applicable under Category II. However, for taxpayers with mixed incomes like for example those receiving compensation aside from other income, the amount of exemptions are deducted first form the gross compensation and the excess deducted from other income. TAX RATE SCHEDULE For Individual Earning Purely Compensation Income and Individuals Engaged in Business and Practice of Profession Amount of Net Taxable Income Over But not over P10,000 P10,000 P30,000 P30,000 P70,000 P70,000 P140,000 P140,000 P250,000 P250,000 P500,000 P500,000 Rate 5% P500 + 10% of the excess over P10,000 P2,500 +15% of the excess over P30,000 P8,500 + 20% of the excess over P70,000 P22,500 + 25% of the excess over P140,000 P50,000 + 30% of the excess P250,000 P125,000 + 32% of the excess over P500,000

Conclusion: The Government passed some decrees to improve the system of taxation on real properties like providing more power taxing powers to Local government and others. They also find ways to increase our revenue and improve the tax systems used. They improve tax administration and they have tax measures in promoting investments and achievements of equity in taxation. With the use of the new tax scheme the so called Modified Income Tax Law, they adopt a new tax concept based on a scheduler approach. The government will raise revenue through the efficient collection of taxes; provide quality service to taxpayers and to ensure impartial and uniform enforcement of tax laws. There are three categories of Personal income. The first and second categories of personal income are Compensation Income and Corporate Income respectively. Compensation income includes incomes gained from employment while corporate income includes business incomes and/or trade incomes.

Objectives:

1. To understand the meaning of passive income and its taxation changes over the years in the Philippines.

2. To learn about the tax schemes and its effects in gross income taxation in the country.

3. To know about the changes in the condition of revenue agencies in the country after the EDSA Revolution.

4. To have an insight about the income taxation system in the Philippines and its changes.

5. To gain knowledge about the personal exemptions, additional exemptions, and the Optional Standard Deduction that are all connected to income taxation.

A. Category III: Passive and Other Incomes

The third category covers incomes from interest, dividends, royalties, prizes, and other winnings and share of individual partners in the net profits of partnerships taxable as corporations. Passive income is an income received on a regular basis, with little effort required to maintain it.

Passive Income 1. Interest from currency deposits, trust funds and deposit substitutes Holding Period - Four (4) years to less than five (5) years - Three (3) years to less than four (4) years - Less than three (3) years 2. Royalties (on books as well as literary & musical composition) - In general 3. Prizes (P10,000 or less ) - In excess of P10,000 4. Winnings (except from PCSO and lotto) 5. Interest Income of Foreign Currency Deposit 6. Cash and Property Dividends - To individuals from Domestic Corporations 10 % 5% 12% 20% 10% 20% 5% 20% 20% 7.5% 20%

- To Domestic Corporations from Another Domestic Corporations 7. On capital gains presumed to have been realized from sale, exchange or other disposition of real property (capital asset) 8. On capital gains for shares of stock not traded in the stock exchange - Not over P100,000

0%

6%

5%

- Any amount in excess of P100,000

SOURCE: Bureau of Internal Revenue Official Website

B. Effects of Tax Schemes in Gross Income Taxation

a. It eliminates discretion between taxpayers and tax officials. While the old system of net income taxation presented a wide latitude of discretion to both taxpayers and the tax authority, gross income taxation deviates from the old scheme by limiting certain deductions to business income, like expenses incurred in connection with business.

b. It simplifies the administration of income tax. The new scheme facilitates collection of taxes as it departs from the more complicated manner of payment simply by placing taxpayers under a final withholding tax system.

c. It grants the much needed relief in terms of higher exemption allowance. Gross income taxation provides higher amounts for personal and additional exemption allowances which may be subjected to future adjustments depending on certain economic variables like consumer price indices, minimum wages, and others.

d. The new tax scheme lessens government revenue from taxation.

Because tax rates for compensation are diminished, and exemption allowances are increased under B.P. 135 (the law embodying gross income taxation), the government, consequently will lose some of its revenue from taxation.

C. Post EDSA Revolution Developments

a. Personnel-oriented Enhancements Along with the changes in the persons of the employees of revenue agencies were the personnel-oriented enhancements. In Martial Law Philippines, this included increase in the salaries of revenue personnel faster than those of other bureaus, yearly increase in appropriations for the maintenance and operations of the BIR, and, in general, provision of facilities for wholesome environment for efficient revenue administration.

b. Personnel Reorganization Personnel reorganization was implemented with the change of administration in 1986 based on similar reasons for the 1972 reorganizations to weed out grafters. But up to the present, the same kind of personnel problems were encountered in the past as news of dismissal of corrupt revenue officials appear now and then.

D. Income Tax

Income Tax is a tax on a person's income, emoluments, profits arising from property, practice of profession, conduct of trade or business or on the pertinent items of gross income specified in the REPUBLIC ACT NO. 8424: TAX REFORM ACT OF 1997 (Tax Code), as amended, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income, by the Tax Code, as amended, or other special laws.

a. Who are required to file income tax returns?

Individuals The most significant development was the shift from scheduler to partial global income tax system as a step into full globalization.

I.

This individual income taxation is divided into three categories: i. ii. iii. Resident citizens receiving income from sources within or outside the Philippines Non-resident citizens receiving income from sources within the Philippines Aliens, whether resident or not, receiving income from sources within the Philippines

II. i. ii. iv.

Corporations Domestic corporations receiving income from sources within and outside the Philippines Foreign corporations receiving income from sources within the Philippines Taxable partnerships

III.

Estates and trusts engaged in trade or business

b. Personal Exemptions

Personal exemptions were raised supposedly to avoid taxing income below the poverty line. The figures, however, are practically unrealistic because of its drastic change through the years.

Increase in Basic personal Exemptions Under RA 7167 (1991), RA 8424 (1997) and its latest amendment.

RA 7167

RA 8424

RA 8424 As ammended

For single individual or married individual judicially decreed as legally separated with no qualified dependents P 9,000 P 20,000 P 50,000

For Head of Family

P 12,000

P 25,000

P 50,000

For each married individual

P 18,000

P 25,000

P 50,000

Note: In case of married individuals where only one of the spouses is deriving gross income, only such spouse will be allowed to claim the personal exemption.

SOURCE: Bureau of Internal Revenue Official Website

c. Additional Exemptions

For each qualified dependent, an P 25,000 additional exemption can be claimed but only up to 4 qualified dependents. The additional exemption can also be claimed by the following:

The husband who is deemed the head of the family unless he explicitly waives his right in favor of his wife. The spouse who has custody of the child or children in case of legally separated spouses. Provided, that the total amount of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions allowed by the Tax Code. The individuals considered as Head of the Family supporting a qualified dependent.

d. Optional Standard Deduction

Both individual taxpayers and corporations have the option to claim optional standard deductions (OSD in lieu of itemized deductions. The following are OSD for individuals and corporations:

I. Individuals For individual taxpayers, a maximum of 40% of their gross sales or gross receipts shall be allowed as deduction instead of the itemized deduction. This type of deduction shall not be allowed for non-resident aliens engaged in trade or business.

II. Corporations RA 9504, which was approved effective July 2008, gives corporate taxpayers an option to claim optional standard deduction (OSD) instead of itemized deductions. OSD is equivalent to 40% of gross income. Once the option to use OSD is made, it shall be irrevocable for the taxable year for which the option was made. A corporation who availed and claimed this deduction is still required to submit its financial statements when it files its annual tax return and to keep such records pertaining to its gross income.

CONCLUSION

As the readers know, it is through taxing that the government get to have most of the public funds to make the country run. And so, it is not a shock that we get to witness a drastic change when it comes to things that are related to taxing in our country. In the last two decades, the Philippines has witnessed two major episodes of tax policy reforms, first in 1986 and another in 1997. The 1986 Tax Reform Package (TxRP) was designed to promote a fair, efficient, and simple tax system. But as the need to change it arises, the government created the Tax Code of 1997 which is the one that we use today together with its amendments.

As to the passive income, interest on any currency bank deposit and yield or other monetary benefit from deposit substitutes and from trust fund and similar arrangements is subject to a 20% final tax. Royalties are generally taxed at 20%; 10%, if from books, literary works, and musical compositions. Prizes exceeding P10,000 and other winnings (except Philippine Charity Sweepstakes and Lotto winnings) are taxed at 20%. A final tax of 10% is imposed on dividends received from domestic corporations. Net capital gains from the sale of capital asset held by an individual are fully taxable if the capital asset was held for 12 months or less, and 50% taxable if it was held for more than 12 months.

Net capital gains from the sale of stocks in a domestic corporation are taxed at rates depending on whether the stocks are listed and traded in the stock exchange. If the stocks are unlisted or listed but not traded in the stock exchange, the tax is 5% for the first P100, 000 of net capital gains and 10% for the excess over P100, 000. If the stocks are listed and traded in the stock exchange, the presumed gain is taxed at 1/2 of 1% of the gross selling price of such shares, and a lot more. In this part, the readers have also learned about the effects of tax schemes in the country like how they can eliminate discretion between taxpayers and tax officials, simplify the administration of income tax, lessen government revenue from taxation and its granting of much needed relief in terms of higher exemption allowance.

And through this, we get to see the transition of income taxation that has also changed drastically over the years because of many factors that affected our economy. But even it has changed to dramatically heights, the government does not forget to still ensure the welfare of the public who will surely find it hard to live with their income after tax if the administrators will not include the exemptions and the Optional Standard Deductions to income taxes of those tax payers. Objectives: 1. To identify what travel tax is. 2. Identify what the export duties are. 3. Define the Value Added Tax System and its advantage and disadvantages. 3. Know what excisable articles are. 4. Show the increase in revenue collection on taxes

2. Travel Tax The travel tax is imposed by the Philippine government on individuals who are leaving the country irrespective of the destination. Executive Order No. 25 exempts qualified Filipino overseas workers from the payment of travel tax. 3. Export Duties Export duties imposed on all export products under Section 514 of the Tariff and Customs Code were abolished pursuant to Executive Order No. 26 as a step towards trade liberalization.

4. The Value Added Tax System (Executive Order No. 273) The Value-Added Tax system is considered as one major component of the 1986 tax reform program. According to the administration "it is the most aggressive step ever taken to effectively source revenues for the government, by completely overhauling the old sales tax system." Weaknesses: a.) regressivity b) blas against labor and employment c) inflationary at turnover d) costly to comply and administer e) requirement for massive information Advantages: a) has a self-checking feature b) it is hoped to increase tax consciousness, compliance and greater fiscal flexibility c) removes discretion d) favors export of goods and services. Exporters who buy capital equipment can apply for cash refunds on taxes passed on them. e) It is only the principal place of business or head office that files the consolidated return and pays the tax still due. f) The recording of transactions is more comprehensive as it requires mandatory registration of subsidiary books in addition to the general journal and ledger. The Commissioner of Internal Revenue is authorized to impose penalties like suspension of business operations and temporary closure of business establishments for failure to issue receipts or invoices, failure to file VAT return, understatement of sales or receipts by 30% or more of the correct taxable sales or receipts, and, failure of a person to register as VAT taxpayer as required. 5. Reclassification of Excisable Articles (Executive Order No. 273) Many articles were declassified as excisable and were only subjected to VAT, such as watches, video tapes, solvents and compounded liquor. However, other articles were transferred to the excise tax system such as non-essential goods, mineral products and automobiles.

6. Transfer of Collection (Executive Order No. 273) EO 273 transferred the collection of fees and charger to other government agencies and instrumentalities; as in the imposition of occupation fees and rentals on mining claims by the

municipality or city where the claim is situated and charges on forest products by the Forest Management Bureau of the Department of Environment and Natural Resources.

C. Increase in Revenue Collections In view of the reforms introduced in the BIR and in the BOC, it can be noted that revenue collections have been increasing. It was observed that in the BIR, a substantial portion of the additional tax revenue was due to stricter administration of existing taxes and duties. Conclusions: Travel Tax are taxes imposed on the people who are coming in and out of the country except the Filipino overseas workers. Export duties are imposed on all export products were abolished as a step towards trade liberalization. The Value Added Tax System is considered as one major component of the 1986 tax reform program. It has many advantages and disadvantages. The weakness are: regressivity; blas against labor and employment; inflationary at turnover; costly to comply and administer and requirement for massive information. While its advantages are: it has a self-checking feature; there is visibility and neutrality of the tax and many more. Articles that are declassified as excisable are watches, video tapes, solvents and liquor. It was observed that in the BIR, collections in tax revenue has increase because of stricter administration on existing taxes and duties.

Objectives:

1) To identify the different issues and problems of Revenue administration. 2) To know the causes of those problems. 3) To know the moves made by the government to solve those problems in tax system.

IV. ISSUES and PROBLEMS A. Revenue Administration - complements the tax policy and structure - ineffective, it weakens the entire tax system - renders tax reforms impractical Urgent Problems in Revenue Administration 1) The lack of tax "handles" * Tax handles- are the sets of information on the tax subject which are used as bases for tax assessment and collection. * The lack of such information can be attributed of high costs of data collection of analysis, the lack of record pertaining to the objects or persons socio-economic profile, negative public attitude and low compliance on certain taxes, and the nature and business structure of the economy. * The problem of tax handles is partly due to the inability of the accounting field of study and practice to meet the needs of tax administration. * Another problem as regards tax handles is the lack of socio-economic data which can provide a valuable basis for the design of tax system schemes. - Among the information desired but inadequately gathered are: the assets and liabilities, per capital income, expenses and disabilities and others. 2) Assessment of Revenue Administration * Important part of revenue administration which means inadequately performed is the conduct of fiscal and performance and it s to assess revenue administration. * Audit of agency operations can provide useful information as a basis for the improvement of revenue administration if done properly. * Revenue audit- special type of external audit that can assist the tax administration in the identification, analysis and solution of the problems behind the administration of tax policies and systems. - examines all income derived from the regular system of taxation (revenue) including the cash inflows realized from the operations and activities of the government or received by it in exercise of its corporate functions (receipts).

B. Tax Structure 1) Capital Formation and Allocation of Resources * A tax structure for generation of resources encounters the problem of reconciling tax efforts and performance with the capacity of the taxpaying public. * The ideal rate of capital formation is 12% of the gross national product, according to experts. This is usually a tall order for societies where the usual rate of savings generation is around 5 to 6 percent. * Like all other developing countries the government has to compensate for the low level of capital formation in the private sector by utilizing tax revenue to capitalize major projects. * It is believed that some taxable sector have not been contributing what is due from them. * Tax efforts have had some success as evidenced by the expansion of the tax base and the resulting dramatic increase in revenue collections since 1972. * The gap between revenues and expenditures is a perennial problem. * It is worth reiterating that indirect taxes like sales and excise taxes have indiscriminate effects on the population, hence the poor segments of the tax population have to pay the same amount as the rich. * Problems of efficient allocation of resources for maximum utilization and balanced socioeconomic development lie in the present structure of tax incentives and disincentives. The ideal situation is complicated by several problems: 1) There is always the fact that the tax incentives granted to foreign investors reduce the country's share in the profit generated my foreign capital. 2) The design of tax incentives must prevent the foreign capital from exploiting local domestic savings. 3) The tax structure should encourage reinvestment and permanent operation. 4) Final problem arises in connection with the competition among less develop countries for foreign capital participation. 2) Redistribution of Income and Wealth The problem of redistributing income and wealth through the various measure like the gross income taxation scheme or tax incentives for investments in lagging areas and sectors, poses the question of how and to what extent is the present tax structure equitable and progressive.

* The prospects of implementing such efforts however are not exactly feasible. 1) Consideration of priorities 2) Urgency of development spending fuelled by anxiousness over the uncertainties of future global economic conditions. 3) Indirect strategy and redistribution, through tax privileges like incentives, tax subsidies, exemption, and the like. 3) Economic Stability A tax structure that can promote economic stability is ideally that which can respond swiftly to the impact of world market forces in the short-run, and enhance the long-run efforts to diversity in the economy, and realize the maximum socioeconomic benefits from the participation of foreign investment. * A major problem concerns the need for revenues from trade activities. The government imposes import and export taxes in order to generate revenues. * Tariff structure must be flexible enough to permit skilful manipulation of import and export taxes. * The World bank-IMF, for instance has been pressuring the Philippine government, through "agreements" built into loans granted to the country, into adopting "free trade" measures, one of which is the reduction of tariffs on import. Conclusion:

I therefore conclude that:

The different problems of the revenue administration are: 1) Lack of tax handle 2) Assessment of Revenue Administration

The causes of these problems are:

1) Inability of the accounting field 2) Lack of socio-economic data 3) Audit of agency operations were not done properly 4) Revenue audit has not been substantially performed to the extent that it has maximally benefited our tax system. 5) COA not give enough attention

The different moves made by the government to these problems are: 1) Capital formation and Allocation of Resources 2) Redistribution of Income and Wealth 3) Economic Stability