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Introduction

Fiscal policy refers to the "measures employed by governments to stabilize the economy,
specifically by manipulating the levels and allocations of taxes and government expenditures.
Fiscal measures are frequently used in tandem with monetary policy to achieve certain goals."1

In the Philippines, this is characterized by continuous and increasing levels of debt and
budget deficits, though there have been improvements in the last few years.2

The Philippine government’s main source of revenue are taxes, with some non-tax
revenue also being collected. To finance fiscal deficit and debt, the Philippines relies on both
domestic and external sources.

The fiscal policy of the Philippine Government is dependent on its incumbent

administration. As a broad overview, the fiscal policy during the Marcos administration was
primarily focused on indirect tax collection and on government spending on economic services
and infrastructure development. The first Aquino administration inherited a large fiscal deficit
from the previous administration, but managed to reduce fiscal imbalance and improve tax
collection through the introduction of the 1986 Tax Reform Program and the value added tax.
The Ramos administration experienced budget surpluses due to substantial gains from the
massive sale of government assets and strong foreign investment in its early years. However, the
implementation of the 1997 Comprehensive Tax Reform Program and the onset of the Asian
financial crisis resulted to a deteriorating fiscal position in the succeeding years and
administrations. The Estrada administration faced a large fiscal deficit due to the decrease in tax
effort and the repayment of the Ramos administration’s debt to contractors and suppliers.
Through the Arroyo administration, the Expanded Value Added Tax Law was enacted, national
debt-to-GDP ratio peaked, and under spending on public infrastructure and other capital
expenditures was observed. Finally, during the early tenure of Philippine President Benigno
Aquino, most development projects were shelved or deferred, which resulted in an anemic GDP
growth rate of the country in 2011. In response, he instituted fiscal stimulus package consisting
of cash transfers (called Conditional Cash Transfer program) to boost the weak economy and
stagnant consumer spending. The government had a budget surplus in 2011 due to deferrals in
infrastructure spending. This policy contributed to the decline in GNP during the year. The
Aquino administration’s fiscal policy revolves around it proactive liability management agenda.
This meant more prudence and control in government borrowing. The Duterte Administration
through TRABAHO (Tax Reform for Attracting Better and High Quality Opportunities) aids the
Bureau of Internal Revenue (BIR) in going after tax evaders, and more importantly, modernizing the
revenue collection agency. TRABAHO implements provisions that authorize electronic record keeping
for receipts and sales reports, filing via electronic channels, and implementation of electronic sales
reporting. These modernization measures ensure that taxpayers will find it easier to file and pay their
taxes. Simply put, the taxpayers are required to use a system that is capable of issuing electronic receipts

1
"Fiscal Policy."Britannica Academic Edition. n.d.. Web. 19 May 2011
2
"Fiscal Rules: The Way Forward?." Senate Economic Planning Office. Senate Economic Planning Office; August
2005. Web. 20 May 2011.
“Revenue Administration in the Philippines: Significant Collection Reforms, TRAIN law, Fiscal Incentives, Exercise
Tax, and Rice Tariffication Law by Alipio Mark (2020), https://mpra.ub.uni-
muenchen.de/99414/1/MPRA_paper_99414.pdf
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or invoices, collecting transaction records and transmitting these records to the BIR. The TRAIN Law
addresses several weaknesses of the tax system by lowering and simplifying personal income taxes,
simplifying estate and donor’s taxes, expanding the value-added tax base, adjusting oil and automobile
excise taxes, and introducing excise tax on sugar-sweetened beverages.

In this paper, it aims to define and explain major issues that have confronted and have
been continuously confronting Philippine fiscal Administration.

Corporate Tax Evasion

We have already mentioned that one of the main sources of revenue of the government
are taxes. Because of the certainty of its existence and its permanence in our government, so are
ways and means to minimize if not eliminating altogether one's tax liabilities. One of which is
tax evasion. Fortunately, the Bureau of Internal Revenue (BIR) appears to have stepped up its
filing of tax evasion charges.

In the case of Commissioner v. Estate of Toda, Jr., G.R. No. 147188, 14 September 2004,
tax evasion was defined as a scheme used outside of lawful means to avoid the payment of taxes,
and when employed, it subjects the taxpayer to civil or criminal liabilities. Tax evasion connotes
the integration of three factors: (1.) the end to be achieved, i.e., the payment of less than that
known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is
due; (2.) an accompanying state of mind which is described as being “evil,” in “bad faith,”
“willful,” or “deliberate and not accidental”; and (3.) a course of action or failure of action which
is unlawful.

Common practices of tax evasion include: under-reporting of income, over-statement of

expenses, use of fictitious receipts, the keeping of double sets of books, false or fictitious entries
in books, fictitious transactions in the name of dummies, non-recording of sales, and others.

The law has already laid down the legal consequences of tax evasion on a professional
taxpayer on top of his basic tax liabilities, namely: (1.) the period to assess the taxpayer is 10
years from the discovery of fraud; (2.) a surcharge of 50% of the tax or of the deficiency tax; (3.)
20% per annum interest; and (4.) jail term in case of conviction plus fine.

Evidently, the impacts of tax evasion are, increase in taxpayer's after-tax income, and
perverse effects on the equity and efficiency goals of the tax system and most importantly, loss
of government revenue. From the administrative and policy perspective, determining the
magnitude of tax evasion and an analysis of tax evasion levels are imperative, particularly if
undertaken in a disaggregative fashion where the type of tax evaded as well as the group of
taxpayers with high propensity to evade are identified. This exercise will be useful in evaluating
the success or failure of the enforcement mechanism. It may indicate to the policy-maker the
manner by which tax evasion impairs the distributional quality of the tax system, skew the
allocation of resources towards less productive activities in the economy, decrease tax revenue
and, consequently, undermine fiscal and monetary policy.
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The top 5 most controversial cases of Corporate Tax Evasion for the year 2012 with their
corresponding liabilities were Gammon Metal Products Inc. (1693.5M), JDBec Inc. (1465.1 M),
Abante Industries (1278.5 M), China State Engineering Corp. (712.7M) and All P Drugstore and
General Merchandise (516.9 M). According to the report, the top 10 developing countries with
the highest illicit financial outflows were China ($2.74 trillion), Mexico ($476 billion), Malaysia
($285), Saudi Arabia ($210 billion), Russia ($152 billion), Philippines ($138 billion), Nigeria
($129 billion), India ($123 billion), Indonesia ($109 billion ) and the United Arab Emirates
($105 billion). The same report also said that of these illicit cash flows, 60%-65% was for tax
avoidance and 30%-35% from criminal activities. Illicit cash flows from corruption, bribery and
theft among government officials accounted for 3%-5%. The most depressing news for us is that
the Philippines ranked 6th in the list of developing countries in terms of illicit cash flows. We
can only dream of the positive effect on our economy and on the number of jobs that would have
been created if the Philippine elite had decided to keep and invest the $135 billion here instead of
stashing them abroad.

Taxes are the charges that the government imposes on citizens and corporate businesses.
The charges collected by the government are used to fund different government projects that
would in the end benefit the citizens of the country as a whole. It also plays a key role in building
up institutions, markets and democracy through making the state accountable to its taxpayers.
Paying taxes plays an important role for the benefit of the society and businesses by providing
funds for the projects of the government and unexpected events like recession and turmoil.

In the view of economics, tax evasion take away money that could be invested in
productive resources needed to diversify the economy and address urgent social problems. Tax
evaded money is not spent on productive investments that can have a multiplier effect on an
economy and benefit the significant majority of a population, rather than just a select few. The
government must spend resources attempting to recoup taxes it is owed, which is wasteful to
society. If no one underpaid taxes, more money could be attributed toward beneficial programs
instead of being spent on collecting it. Also compare a corporation that pay its tax liability
correctly to the one that evade taxes, it creates an artificial advantage for the company evading
taxes. This could lead to companies with less business practices outlasting those with more
efficient practices, which would be detrimental to the economy because those companies that
evade taxes outlasted which means lower national funds and the companies closed would result
to unemployment.3

3
http://blogs.worldbank.org/governance/how-corruption-and-tax-evasion-distort-development
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Malversation of Public Funds – this is under the expenditure administration

Malversation of public funds is defined and penalized in Article 217 of the Revised Penal
Code, which reads:
“Art. 217. Malversation of public funds or property; Presumption of
malversation. - Any public officer who, by reason of the duties of his office, is
accountable for public funds or property, shall appropriate the same, or shall take or
misappropriate or shall consent, or through abandonment or negligence, shall permit any
other person to take such public funds or property, wholly or partially, or shall, otherwise,
be guilty of the misappropriation or malversation of such funds or property…”
In all cases, persons guilty of malversation shall also suffer the penalty of imprisonment
and a fine equal to the amount of the funds malversed or equal to the total value of the property
embezzled.

The failure of a public officer to have duly forthcoming any public funds or property with
which he is chargeable, upon demand by any duly authorized officer, shall be prima facie
evidence that he has put such missing funds or property to personal use.

Malversation may be committed by appropriating public funds or property; by taking or

misappropriating the same; by consenting, or through abandonment or negligence, by permitting
any other person to take such public funds or property; or by being otherwise guilty of the
misappropriation or malversation of such funds or property. The essential elements common to
all acts of malversation under Article 217 of the Revised Penal Code are:

a. That the offender be a public officer;

b. That he had the custody or control of funds or property by reason
of the duties of his office;
c. That those funds or property were public funds or property for
which he was accountable; and
d. That he appropriated, took, misappropriated or consented, or
through abandonment or negligence, permitted another person to take them.

The recent pork barrel scandal of P10B (the amount involved could be much more) has
rocked the nation and exposed the extent of the systemic nature of corruption and its various
modalities in the various levels of government bureaucracy. The demand for transparency and
accountability was so potent as to draw millions of people to the streets demanding the
rechanneling of the pork barrel allocation or the outright abolition of the pork barrel system.

Added to this is the latest scandal involving the unconstitutional Disbursement

Acceleration Fund (DAF). With the ongoing government investigation and the progress of the
plunder cases already filed against the initial list of accused legislators, every Filipino hopes for
the restoration of transparency, accountability, decency, and rationalized use of peoples‟ money
as pillars in public governance and to breathe more life and meaning to the Constitutional
provision that a “Public office is a public trust.” (Gamela, 2013).
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The Philippine Center for Investigative Journalism (PCIJ) reported that according to Sen.
Panfilo Lacson the pork barrel fund is a “…big, big mafia or syndicate involving the executive
and legislative branches of the government.” This grand conspiracy of executive and legislative
agencies, according to Lacson, has involved various agencies “in circles of kickbacks,
corruption, patronage politics, and wasteful spending.” (Gamela, 2013)

In the same PCIJ report, Malou Mangahas also mentioned that Sen. Lacson said that “less
than 50 percent actually went to the programs of work. And more than 50 percent went to the
many deep pockets of corruption.” Based on his personal experience, Lacson said that “the
standard commission of a legislator is 20 percent. Depending on the insatiability of the legislator
concerned, it could go as high as 50 percent, that is, for the greediest really.” The only portions
of pork barrel funds that are perfectly legally applied, according to Lacson, are the taxes and
profit due the project contractor which do not go beyond 14 percent. He further emphasized that
in a worst-case scenario, all the taxpayers get are ghost projects because everything else is just
paper work. (Gamela, 2013)

The legislators‟ pork is used for both “soft” and “hard” projects. “Hard” projects refer to
infrastructure, while “soft” projects include, among others, the purchase of school and health
supplies, livelihood assistance, scholarships and the like. Under the present pork barrel system,
according to the Lacson experience with “hard” projects,“ at least half goes to the lawmaker” as
commission while “soft” projects are “the worst…. The commission (is) from here to eternity,
without limits.” Lacson estimates that only 50 percent of the legislators‟ pork barrel is translated
into projects, the good portion of the pork. The recent revelations on the Janet Lim-Napoles
transactions with some government agencies confirm this figure is confirmed. In fact, the sharing
formula is 50-40-10, in which 50 percent goes to the legislator against whose PDAF a certain
project shall be charged, 40 percent to the JLN-owned bogus NGOs, and 10 percent to the
implementing agency. (Gamela, 2013)

In summary, an estimated 10 Billion pesos was lost which were supposed to be used in
improving the economy. Malversation which is technically a form of corruption has a
overwhelming effect on the fiscal administration of the Government and the issue needs to be
addressed head on. Corruption destroys the hope of progression and development in a certain
institution. It does not create betterment but downfall and extreme poverty.

High Taxes and E-VAT

The Philippine government generates revenues mainly through personal and income tax
collection, but a small portion of non-tax revenue is also collected through fees and licenses,
privatization proceeds and income from other government operations and state-owned
enterprises.

Tax collections comprise the biggest percentage of revenue collected. Its biggest
contributor is the Bureau of Internal Revenue (BIR), followed by the Bureau of Customs (BOC).
Tax effort as a percentage of GDP has averaged at roughly 13% for the years 2001-2010.
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Income tax is a tax on a person's income, wages, profits arising from property, practice of
profession, conduct of trade or business or any stipulated in the National Internal Revenue Code
of 1997 (NIRC), less any deductions granted. Income tax in the Philippines is a progressive tax,
as people with higher incomes pay more than people with lower incomes.

In 2008, Republic Act No. 9504 (passed by then-President Gloria Macapagal-Arroyo)

exempted minimum wage earners from paying income taxes.

The Expanded Value Added Tax (E-VAT), is a form of sales tax that is imposed on the
sale of goods and services and on the import of goods into the Philippines. It is a consumption
tax (those who consume more are taxed more) and an indirect tax, which can be passed on to the
buyer. The current E-VAT rate is 12% of transactions. Some items which are subject to E-VAT
include petroleum, natural gases, indigenous fuels, coals, medical services, legal services,
electricity, non-basic commodities, clothing, non-food agricultural products, domestic travel by
air and sea.4

The E-VAT has exemptions which include basic commodities and socially sensitive
products. Exemptible from the E-VAT are:
1. Agricultural and marine products in their original state (e.g. vegetables, meat,
fish, fruits, eggs and rice), including those which have undergone preservation
processes (e.g. freezing, drying, salting, broiling, roasting, smoking or
stripping);
2. Educational services rendered by both public and private educational
institutions;
3. Books, newspapers and magazines;
4. Lease of residential houses not exceeding P10,000 monthly;
5. Sale of low-cost house and lot not exceeding P2.5 million
6. Sales of persons and establishments earning not more than P1.5 million
annually.

In an article posted by the Rapler,5 according to the principles of Taxation, high income
taxes could discourage firms from producing more goods or employees from working more
hours. Hence, a good tax system makes sure that income tax rates are not too high so as to
discourage economic activity.

The problem is - the Philippine tax system currently has some of the highest income tax
rates in this region. Compared to our major ASEAN counterparts, our corporate income tax is the
highest at 30%, a rate that "turns off" foreign investors who prefer to do business in our low-tax
neighbors.

Meanwhile, our maximum personal income tax rate of 32% is not the highest (it’s 35% in
Vietnam and Thailand), but we certainly don’t want the government to eat away P32 for every
P100 earned by ordinary workers.

4
"Impact of RA9337 (RVAT) Actual." Department of Finance (DoF). Department of Finance; n.d.. Web. 10 May
2011. Web.
5
http://www.rappler.com/thought-leaders/159027-philippine-tax-system-problems-effects-filipinos
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A good way to reduce high tax rates is to expand the tax base, or the set of goods and
services which are taxed. The same (or even a larger) tax revenue can be collected as before by
imposing a lower tax rate on as many goods and services as possible. However, in the
Philippines, too many goods and services are exempted from taxes. For instance, our value-
added tax (VAT) law has 59 lines of exemptions – more compared with the VAT laws of our
neighbors. The plethora of exemptions partly explains the relatively low tax revenues we get. If
only fewer goods were exempted – or if only the exemptions were limited to essential goods like
raw food and medicines – then the government could boost its revenues.

Tax policy is essentially a balancing act between efficiency and equity. We want to
impose progressive taxes to make society a fairer place to live in. But at the same time, we want
to make sure that such taxes do not reduce economic activity so much. 6

Unfortunately, the Philippine tax system is currently deficient in both respects. Not only
do our taxes disproportionately burden the poor and benefit the rich, but they also yield too little
revenue given the distortions they create. Needless to say, both problems need to be resolved
soon. Comprehensive tax reform in the country is long overdue.It so happens that the early days
of the Duterte administration – when political capital is fresh and popular support is robust –
offer a crucial window of opportunity to pursue tax reform.

Currently, Duterte Administration has address this problem by implementing the TRAIN law.

The TRAIN Law addresses several weaknesses of the tax system by lowering and simplifying
personal income taxes, simplifying estate and donor’s taxes, expanding the value-added tax base,
adjusting oil and automobile excise taxes, and introducing excise tax on sugar-sweetened
beverages.

TRAIN Law has put more money in the pockets of the consumers and ensured strong domestic
demand in the economy. The revenue measure also raised much-needed additional funds for the
government’s extensive spending on its build, build, build program and on human capital
development.

Conclusions and Recommendations

As practitioners, addressing these crucial issues head on – be it corruption, tax evasion or

a bloated public sector—is our responsibility. Just imagine that the failure of government to curb
smuggling and tax evasion could be something more than depriving the national treasury with
funds for the country’s development needs. It could be a serious security threat and may end
democracy as we know it. We proposed probable solutions to the issue of corporate tax evasion.
First, is the revision of the tax code that could address to the issue of the loopholes on the law
and a much stricter penalty on those people who attempt to evade their taxes. In line with this,
proper and stricter implementation of the tax code should be maintained. Also, the system should
6
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be free from corruption. Government has a special responsibility to make proper rules and
promote good governance. Increased transparency could also contribute to encourage citizens
and businesses to pay their taxes correctly. Let them know the budget allocation percentage and
the evident projects that their money spent on taxes were used for. Fair taxes not necessarily
lower tax rates should be implemented in our country. This could lessen the number of tax
evaders and could also entice investors to come in our country. Private enterprise drives growth,
reduces poverty and creates jobs and prosperity for people around the world. Fair taxes, and open
trade are vital drivers of this.7

References:

M. Mangahas.(2013).Scam,no! PDAF a “mafia” of executive & legislative.

https://old.pcij.org/. https://old.pcij.org/stories/scam-no-pdaf-a-mafia-of-executive-legislature/

https://www.doj.gov.ph/news_article.html?newsid=481

https://www.manilatimes.net/2018/01/16/legal-advice/dearpao/malversation-through-
negligence/374649/

Revenue Administration in the Philippines: Significant Collection Reforms, TRAIN Law,

Fiscal Incentives, Excise Tax, and Rice Tariffication Law. https://mpra.ub.uni-
muenchen.de/99414/1/MPRA_paper_99414.pdf

7
http://blogs.worldbank.org/governance/how-corruption-and-tax-evasion-distort-development