GEC 2: Readings in Philippine History 1

LEARNING GUIDE

Week No.: __12__

TOPIC: Evolution of Philippine Taxation

EXPECTED COMPETENCIES

By the end of the lesson, the students should be able to:

1. Trace the evolution of the taxation system of the Philippines by identifying
important policies from different historical periods; and
2. Discuss the importance of taxation in the development of a country.

CONTENT

Taxation in Today’s World

 Taxation is a term for when a taxing authority, usually a government, levies

or imposes a tax. It applies to all types of involuntary levies, from income to
capital gains to estate taxes (Kagan, 2020).
 It occurs when a government or other authority requires citizens and
corporations to pay a fee to that authority.
 The fee is involuntary and is not linked to any specific services that have
been provided.
 It is a reality that all citizens must contend with this for the primary reason
that governments raise revenue from the people they govern to be able to
function fully (Candelaria & Alporha, 2016).
 Tax occurs on physical assets, including property and transactions, such as a
sale of stock or a home.
 Types of taxes include income, corporate, capital gains, property, inheritance,
and sales.
 In exchange for the taxes paid by the people, the government promises to
improve the citizen’s lives through good governance.
 Taxation developed and evolved through time. In the Philippines, it came
with our colonial experience.

Taxation in Spanish Philippines

o The obligation to provide labor services to the datus in some early

pre-colonial Filipino communities may resemble taxation. The same
concept may apply to the payment of tributes called handug.
o It, however, differs from the contemporary meaning of the concept of
taxation.
o When the Spaniards arrived, they imposed the payment of tributos from
the Filipinos in order to generate resources to finance the maintenance of
the islands which would also include the salaries of government officials
and the expenses of the clergy (Candelaria & Alporha, 2016).

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GEC 2: Readings in Philippine History 2

o Because of the difficulties in revenue collection, they introduced the

system of reduccion by creating pueblos where Filipinos are gathered and
awarded plots of land to till.
o These settlements will later on be handled by encomenderos who received
rewards from the Spanish crown for their services.
o Exemptions from payment of tributos were given on the following:
principals, gobernadores, cabezas de barangay, soldiers, members of the
civil guard, government officials, and vagrants.
o Filipinos, who were used to the subsistence economy prior to the arrival of
the Spaniards had to increase agricultural production to meet the demands
of payments.
o Later on, half of the tribute was paid in cash and the rest with produce.
This financed the conquest of the Philippines (Candelaria & Alporha,
2016).
o Toward the end of the 16th century, the Manila-Acapulco trade was
established through the galleons, a way by which the Spaniards could
make sure that European presence would be sustained. Even though this
only happened once a year, this improved the economy of the Philippines
and reinforced the control of the Spaniards all over the country.
o Tax collection was still very poor and subsidy from Spain would be
needed through the situado real delivered from the Mexican treasury to the
Philippines through the galleons. This only stopped when Mexico became
independent in 1820.
o In 1884, the payment of tributes was stopped and was replaced by a poll
tax collected through a certificate of identification called the cedula
personal. This was required from every resident who must carry it while
travelling. This was payment by person, not by family, so it was a heavy
burden for the peasants and an easy thing for the wealthy. However,
revenue collection increased significantly and became the main source of
government income. The Chinese in the Philippines also paid their
discriminatory cedula which was bigger than what the Filipinos paid.
o Two direct taxes were added and imposed in 1878 on urban incomes.
Urbana is a tax on the annual rental value of an urban real estate while
industria is a tax on salaries, dividends, and profits. These taxes were
universal and affected all kinds of economic activity except agriculture
which was excluded to encourage growth.
o Indirect taxes such as custom duties were imposed on exports and imports
to further raise revenue, especially during the 19th century, a time when the
economic growth increased exponentially.
o The colonial government also gained income from monopolies such as the
same of stamped paper, manufacture and sale of liquor, cockpits, and
opium. The biggest of these monopolies however was tobacco which
began in 1781 and stopped in 1882. This monopoly brought a surplus of
income to the colony and contributed to the Treasure of Spain.
o Forced labor was a character of Spanish colonial taxation in the
Philippines and was require from the Filipinos. Through the polo system,
male Filipinos were obliged to serve. This led to an increase in death rate,
as well as many fleeing to the mountains, decreasing the population in the
17th century. This changed when polo and servicios became lighter and
was organized at the municipal level. The labor provided was used in

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for EDUCATIONAL PURPOSES ONLY and is NOT FOR SALE NOR FOR REPRODUCTION.
GEC 2: Readings in Philippine History 3

public works. Some were made to serve the municipal office or as night
guards.
o Males were required to provide labor for 40 days a year but was reduced to
15 days a year in 1884. They may also opt out by paying fallas of three
pesos per annum, which was usually lost to corruption because it was
collected by the municipal level and were known as caidas or droppings.
The polos would be called prestacion personal (personal services) by the
second half of the 19th century.
o Taxation in the Philippines during the Spanish colonial period was
characterized by the heavy burden placed on the Filipinos, and the
corruption of the principales, or the former datus and local elites who
chose to cooperate with the Spaniards to control the natives on their behalf.
These principals were able to enrich themselves by pocketing fallas and
tributos while abusing the peasants.
o Taxation appeared progressive but it revealed the disparity between
the wealthy and the poor.

PRIMARY SOURCE: Mariano Herbosa Writes to Rizal About Taxes

Source: Mariano Herbosa to Jose Rizal, Calamba, 29 August 1886, Letters
Between Rizal and Family Members (Manila National Commision, 1964),
239-241.

“The tax! With regard to your question on this, the answer is very long, as it is
the cause of the prevailing misery here. What I can write you will be only
one-half of the story and even Dumas,

senior, cannot exhaust the subject. Nevertheless, I’ll try to write what I can,
though I may not be able to give a complete story, you may at least know half
of it.

“Here, there are many kinds of taxes. What they call irrigated rice land, even if
it has no water, must pay a tax of 50 cavanes of palay (unhusked rice), and
land with six cavanes of seed pay 5 pesos in cash. The land they call dry land
that is planted to sugar cane, maize, and others pay different rates. Even if the
agreed amount is 30 pesos for land with six cavanes of seed, if they see that
the harvest is good, they increase the tax, but they don’t decrease it, if the
harvest is poor. There is land whose tax is 25 pesos or 20 pesos, according to
custom.

“The most troublesome are the residential lots in the town. There is no fixed
rule that is followed, only their whim. Hence, even if it is only one span in
size, if a stone wall is added, 50 pesos must be paid, the lowest being 20 pesos.
But a

nipa or cogon house pays only one peso for an area of ten fathoms square.
Another feature of this system is that on the day you accept the conditions, the
contract will be written which cannot be changed for four years, but the tax is
increased every year. For these reasons, for two years now the payment of tax
is confused and little by little the fear of the residents here of the word

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GEC 2: Readings in Philippine History 4

“vacant” is being dispelled, which our ancestors had feared so much. The
result is bargaining, like they do in buying fish. It is advisable to offer a low
figure and payment can be postponed, unlike before when people were very
much afraid to pay after May.

“I’m looking for a receipt to send you, but I cannot find any, because we don’t
get a receipt every time we pay. Anyway it is value-less as it does not state the
amount paid; it only says that the tax for that year was paid, without stating
whether it is five centavos, twenty-five centavos, one hundred, or one
thousand pesos. The residents who ask or get the said receipt accept it with
closed eyes. The receipt has no signature in the place where the amount paid
ought to be, although it bears their name. Until now I cannot comprehend why
some are signed and others are not. This is more or less what is happening
here in the payment of the land tax and it has been so for many years since I
can remember.

“Besides this, the taxes on the plants in the fields that are far from the town,
like the land in Pansol, are various. The tax on the palay is separate from the
tax on maize, mongo, or garlic. There is no limit to this tax, for they fix it
themselves. Since July no one buys sugar and since June locusts are all over
the town and they are destroying palay and sugar cane, which is what we
regret here. The governor gave 50 pesos to pay the catchers of locusts, but
when they took them to the town hall they were paid only 25 cents a

cavan and a half; and it seems that the locusts are not decreasing. According to
the guess of the residents here only 300 cavanes of locusts have been caught in
this town. Many still remain. Though the governor has not sent any more
money, the people have not stopped catching them.”

(Ocampo, 2015)

Taxation under the American

 The Americans who acquired the Philippines aimed to make the economy
self-sufficient by running the government with the smallest possible sun of
revenue and create surplus in the budget (Candelaria & Alporha, 2016).
 From 1898 to 1903, the Americans followed the Spanish system of taxation
with some modifications:
o Contracts for the sale of opium, lottery, and mint charges for coinage of
money were suspended by the military government.
o Urbana was replaced by tax on real estate which became known as the
land tax.
o The land tax was levied on both urban and rural real estates.
 Issues: Land titling was disorderly in the rural area because the
appraisal of land value was influenced by political and familial factors
and the introduction of a taxation system on agricultural land faced
objections from the landed elite. Tax evasion was prevalent especially
among the elites.
 The Internal Revenue Law of 1904 was passed as a reaction to the problems of
collecting land tax. It prescribed ten (10) major sources of revenue:

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GEC 2: Readings in Philippine History 5

1. Licensed taxes on firms dealing with alcoholic beverages and tobacco

2. Excise taxes on alcoholic beverages and tobacco products
3. Taxes on banks and bankers
4. Document stamp taxes
5. Cedula
6. Taxes on insurance and insurance companies
7. Taxes on forest products
8. Mining concessions
9. Taxes on business and manufacturing
10. Occupational licenses
 The cedula changed in the new law as the rate was fixed per adult male. This
resulted in a great decline in revenue.
 In 1907, some provinces were authorized to double the fee for the cedula to
support the construction and maintenance of roads.
 The industria tax was levied on the business community and became a highly
complex system that assigned a certain tax to an industrial or commercial
activity according to their profitability. The new act also imposed a percentage
tax on sales payable quarterly.
 In 1913, the Underwood-Simmons Tariff was passed, resulting in a reduction
in the revenue of the government as export taxes levied on sugar, tobacco,
hemp, and copra were lifted. Then Governor General Francis Burton Harris
urged that tax receipts be increased to make up for the loss.
 Minor changes were made to the 1904 Internal Revenue Act such as the
imposition of taxes on mines, petroleum products, and dealers of petroleum
products and tobacco.
 New sources of taxes were introduced starting in 1914. Income tax was
introduced. In 1919, inheritance tax was created. In 1932, a national lottery
was established to create more revenue for the government. But still, there
were not enough to increase government revenues.

Taxation during the Commonwealth Period

 New measures and legislation were introduced to make the taxation system
appear more equitable during the Commonwealth.
 In 1936, income tax rates were increased. It also added a surtax on individual
net incomes in excess of 10,000 pesos. Income tax rates of corporations were
also increased (Candelaria & Alporha, 2016).
 In 1937, the cedula tax was abolished, but in 1940, a residence tax was
imposed on every citizen aged 18 years old and on every corporation.
 In 1939, the National Internal Revenue Code was drafted by the
Commonwealth government. This introduced major changes in the tax system
as follows:
1. The normal tax of three percent and the surtax on income was replaced
by a single tax at a progressive rate.
2. Personal exemptions were reduced.
3. Corporation income tax was slightly increased by introducing taxes on
inherited estates or gifts donated in the name of dead persons.
4. The cumulative sales tax was replaced by a single turnover tax of 10%
on luxuries.

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for EDUCATIONAL PURPOSES ONLY and is NOT FOR SALE NOR FOR REPRODUCTION.
GEC 2: Readings in Philippine History 6

5. Taxes on liquors, cigarettes, forestry products, and mining were

increased.
6. Dividends were made taxable.
 The introduced tax structure was an improvement of the earlier system
introduced by the Americans. Yet, it remained inequitable or unbalanced. The
lower class still felt the burden of taxation while the upper class and political
people were able to maneuver the situation to their advantage.
 The agricultural sector was still taxed low to promote growth, but there was no
incentive for industrial investment to take root and develop.
 A common character of taxation during the American occupation in the
Philippines was not used to diversify the economy or direct economic
development as some sectors still carried the disproportionate share of the tax
burden (Candelaria & Alporha, 2016).
 When World War II reached the Philippines, economic activity was halted as
the country was subjected to a new set of colonizers, the Japanese who
immediately continued the tax collection system introduced during the
Commonwealth. They, however, exempted the articles belonging to the
Japanese armed forces.
 Foreign trade fell and the main source of taxation came from amusements,
manufactures, professions, and business licenses.
 Tax collection became difficult as the war raged on and the government
imposed additional incomes from the sales of the National Sweepstakes and
sale of government bonds.

Fiscal Policy from 1946 to Present

 The war affected the Philippines in a distinct way. Manila, the capital of the
country, was razed to the ground but the rest of the Philippines was rather
untouched. However, the highly agricultural-based economy was disrupted.
The United States may have declared the Philippines independent, but the
country ended up depending on the Americans for funds to rehabilitate and
recover from the destruction caused by the war. This led to the former
colonizers to take advantage of the Filipinos.
 There was a severe lack of funds in many aspects of governance including the
military and education sectors. No efforts were made to improve tax collection
and the United States advised the adoption of direct taxation. But President
Manuel Roxas declined the proposal because it did not want to alienate its
allies in Congress (Candelaria & Alporha, 2016).
 Economic growth resumed during the time of President Elpidio Quirino
through the implementation of import and exchange controls that led to import
substitution development. This allowed for the expansion of a viable
manufacturing sector, reducing economic dependence on imports. New tax
measures were also passed, which included higher corporate tax rates that
increased government revenues twofold since Quirino assumed presidency.
 Post-war fiscal policies remained regressive during the terms of Presidents
Magsaysay, Garcia, and Macapagal even with the promise to study the tax
structure and policy of the country. The lower classes continued to be
overburdened while the landed elites made sure that taxes would not be levied
to them.

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GEC 2: Readings in Philippine History 7

 The post-war republic also saw a rise in corruption (Candelaria & Alporha,
2016).
 From 1959-1968, Congress did not pass any tax legislation despite important
changes in the economy and the vested interests of Filipino businessmen in
Congress would manifest in many instances such as rejection of taxes on
imports.
 Indirect taxation still contributed to three quarters of tax revenues and the
Omnibus Tax Law of 1969 did not increase the ratio of income tac to general
tax revenue. Collection of tax remained poor, tax structure was still
problematic, and public funds were lost to corruption.
 Under the Marcos regime, the tax system remained regressive. It remained
dependent on indirect taxes which made up to 70% of total tax collection
during the latter part of Marcos’s years. It also remained unresponsive and
taxes grew at an average annual rate of 15% and generated a low tax yield.
Tax effort, defined as the ratio between the share of the actual tax collection in
gross domestic product and predictable taxable capacity, was at a low at
10.7%.
 A major reform in the tax system was introduced under the term of Corazon
Aquino, the value-added tax (VAT). It has the following features:
1. Uniform rate of 10% on sale of domestic and imported goods and
services and zero percent on exports and foreign-currency denominated
sales;
2. Ten (10) percent in lieu of varied rates applicable to fixed taxes (60
nominal rates), advance sales tax, tac on original sale, subsequent sales
tax, compensating tax, miller’s tax, contractor’s tax, broker’s tax, film
lessors and distributor’s tax, excise tax on solvents and matches, and
on processed videotapes;
3. Two percent tax on entities with annual sales or receipts of less than
5,200,000;
4. Adoption of tax credit method of calculating tax by subtracting tax on
inputs from tax on gross sales;
5. Exemption of the sale of basic commodities such as agriculture and
marine food products in their original state, price-regulated petroleum
products and fertilizers; and
6. Additional 20% tax on non-essential articles such as jewelry, perfumes,
toilet waters, yacht, and other vessels for pleasure and sports.
 The VAT law was signed in 1986 and put to effect in 1988. It was a reliable
source of revenue for the government, but new tax laws would reduce its
reliability as legislated exemptions grew.
 Administrative reforms also took place such as the restructuring of the
Department of Finance and its attached agency, the Bureau of Internal
Revenue (BIR) through Executive Order 127. Tax collection and tax audits
were intensified, and computerization was introduced. Corruption was
relatively reduced which improved the trust in the BIR in general. Both tax
and revenue rose from 10.7% to 15.4% during Aquino’s term.
 When Fidel V. Ramos became president in 1992, there was a greater political
stability that allowed continued economic growth. The administration
ventured into its own tax reform program in 1997 through the Comprehensive
Tax Reform Program which implemented the following: 1) a simple,
broad-based tax system with reasonable rates; 2) minimized tax avoidance; 3)

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GEC 2: Readings in Philippine History 8

encouragement of payments by increasing tax exemption levels; and 4)

rationalized grant of tax incentives which was estimated to be worth 531.7
billion pesos in 1992.
 The VAT base was also broadened in 1997 to include services, through
Republic Act 7716.
1. Restored the VAT exemptions for all cooperatives (agricultural,
electric, credit, or multipurpose, and others) provided that the share
capital of each member does not exceed 515,000 pesos.
2. Expanded the coverage of the term “simple processes” by including
broiling and roasting, effectively narrowing the tax base for food
products.
3. Expanded the coverage of the term “original state” by including
molasses.
4. Exempted from the VAT are the following:
a. Importation of meat
b. Sale or importation of coal and natural gas in whatever form or
state
c. Education services rendered by private schools duly accredited by
the Commission on Higher Education (CHED)
d. House and lot and other residential dwellings valued at 51 million
and below, subject to adjustment using the Consumer Price Index
(CPI)
e. Lease of residential units with monthly rental fee per unit of not
more than 58,000 subject to adjustment using CPI.
f. Sale, importation, printing, or publication of books and any
newspaper
 The succeeding term of President Joseph Estrada in 1998 was too short to
constitute any change in the tax system.
 Vice President Gloria Macapagal Arroyo was then swept to power through
another EDSA Revolution. As president, she undertook increased government
spending without adjust tax collections. This resulted in large deficits from
2002 to 2004. The government had to look for additional sources of revenue,
and in 2005, the Expanded Value-Added Tax (E-VAT) was signed into law as
Republic Act 9337. This expanded the already existing coverage of the VAT
to the inclusion of energy products such as coal and petroleum, electricity
generation, transmission, and distribution. Select professional services were
also taxed. The VAT tax rate was increased from 10% to 12% in February
2006.
 As President Benigno Aquino III succeeded President Arroyo in 2010, he
promised no new taxes would be imposed and additional revenue would have
to come from adjusting existing taxes. The administration ventured into
adjusting tax on liquor and cigarettes or the Sin Tax Reform. This reform was
an exemplar on how to tax reform could impact social services as it allowed
for the increase of the Department of Health budget and free health insurance
premiums for the poor people enrolled in PhilHealth.
 The administration of the current President Rodrigo Duterte promised tax
reform, particularly income taxes as it vowed to lower income tax rates
shouldered by working Filipinos (Candelaria & Alporha, 2016).
 The present income tax scheme of the country is the second highest in
Southeast Asia and the current laws on income taxes were outdated as they

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for EDUCATIONAL PURPOSES ONLY and is NOT FOR SALE NOR FOR REPRODUCTION.
GEC 2: Readings in Philippine History 9

were drafted two years ago. The prosed tax reform also sought to limit VAT
exemptions and increase excise taxes on petroleum products and automobiles.
 There is still hope that reforms in the country’s tax policy will result in the
much-desired economic development that will also be felt by the lower
classes.

REFERENCES

Candelaria, J. L. P. & Alporha, V.C. (2016). Readings in Philippine History. Rex

Book Store.
Kagan, J. (2020, January 29). Taxation.
https://www.investopedia.com/terms/t/taxation.asp
Ocampo, A. (2015). Taxes and tax collection in the time of Rizal. INQUIRER.net.
https://opinion.inquirer.net/86148/taxes-and-tax-collection-in-the-time-of-rizal

This module is a property of Technological University of the Philippines Visayas intended

for EDUCATIONAL PURPOSES ONLY and is NOT FOR SALE NOR FOR REPRODUCTION.