Tax Structure in Philippines

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. Prior to 1986, the income tax system had two tax schedules for:

A complicated sales tax structure existed consisting of sales/turnover tax along with a host of other indirect taxes such as compensating tax, miller’s tax, contractor’s tax, broker’s tax, and distributor’s tax. Excise taxes were imposed on petroleum products, alcoholic beverages, cigars and cigarettes, fireworks, cinematographic films, automobiles, and other products classified as non-essential goods.

 

The 1986 TxRP unified the dual tax schedules applicable to individual income by adopting the lower zero to 35% tax schedule for both compensation and profit incomes. It also increased personal and additional exemptions to adjust for inflation and eliminated the taxation of those earning below the poverty threshold. To improve the fairness of the individual income tax system, the TxRP allowed the separate treatment of the incomes of spouses. Moreover, it increased the final withholding tax rate on interest income (from17.5%) and royalties (from 15%) to a uniform rate of 20%. The final withholding tax previously imposed on dividends was phased out.

 

With respect to corporate income tax, the TxRP unified the earlier dual rate of 25% and 35% levied on corporate income to 35%. In the area of indirect taxes, it introduced a value added tax (VAT) rate of 10% to replace sales tax and other taxes. It also converted the unit rates formerly used for excise taxes to ad valorem rates. With regard to international trade taxes, the TxRP abolished export taxes and allowed further reduction in tariff rates.

 

There is broad consensus that the 1986 TxRP had a significant positive impact on the Philippine tax system. This is indicated by improvements in the tax effort, measured by the ratio of total tax revenue to Gross National Product (GNP), which rose sharply from an average of 11.3% of GNP during the period 1975-1985 to 16.2% in 1986.

 

After 1987, the government legislated more tax policy changes, although it should be noted that some of these were not consistent with the earlier reforms implemented under the TxRP. For instance, the Simplified Net Income Taxation Scheme (SNITS), passed in 1992, reverted the individual income tax system to the scheduler approach. This imposed different rate schedules to income from different sources, thus allowing non-uniform effective tax rates to be applied to waged, non-waged, and mixed income earners. During the years 1992-1998, the Philippine Congress legislated ten new tax measures that affected revenues positively and 28 tax measures that negatively affected revenues as they eroded the tax base by granting tax incentives and higher personal and additional exemptions.

 

To remove incentive distortions and boost taxation, the government embarked on another round of structural reform through the Comprehensive Tax Reform Program (CTRP).The major components of the CTRP was enacted into various laws beginning in June 1996 with the passing of Republic Act (RA) 8184. This allowed the restructuring of the excise tax on petroleum products (from ad valorem to specific) together with tariff restructuring.