Shifting of Tax Burden under Philippine Taxation Law

Shifting of tax burden refers to the process where the economic burden of a tax is transferred from the individual or entity legally responsible for paying it to another party. In Philippine taxation law, the principle of tax shifting recognizes that while the statutory incidence of taxation might rest on one party, the actual burden may be borne by another, depending on market dynamics and the nature of the tax itself. This can occur through pricing strategies or cost absorption and is especially prevalent in indirect taxes, such as the Value-Added Tax (VAT) and excise taxes.

1. Concept and Mechanisms of Shifting Tax Burden

Tax burden shifting involves the transfer of the financial weight of a tax from the taxpayer mandated by law to pay it (statutory incidence) to another party who ultimately absorbs the cost (economic incidence). The transfer occurs primarily through two mechanisms:

Forward Shifting: This occurs when the taxpayer, usually a seller or service provider, passes the tax burden onto the consumer by increasing the price of goods or services. This is common in consumption-based taxes, where the cost of tax is integrated into the product price.
Backward Shifting: Here, the tax burden is transferred from the taxpayer to suppliers or factors of production, like employees or raw material providers. This may involve reducing wages, cutting input costs, or renegotiating supplier prices.

The feasibility of shifting the tax burden depends on the price elasticity of demand and supply:

If demand is inelastic, consumers are less sensitive to price changes, enabling forward shifting.
If supply is inelastic, producers or suppliers may bear the tax burden when backward shifting.

2. Legal Framework and Types of Taxes Involving Shifting in the Philippines

Under the Philippine tax system, not all taxes are designed or intended to be shifted. Generally, indirect taxes, like VAT and excise taxes, are more conducive to shifting than direct taxes (e.g., income taxes).

a. Indirect Taxes

Value-Added Tax (VAT): The VAT is an indirect tax applied at every stage of the production and distribution process but ultimately borne by the final consumer. Philippine VAT law mandates a 12% tax on the sale of goods, services, and properties. VAT is inherently shifted forward to the consumer by being embedded in the retail price, making it a classic example of forward-shifting taxation.
Excise Taxes: Excise taxes on specific goods (such as alcohol, tobacco, and petroleum products) are also designed to be passed forward to the end consumer. The excise tax raises the cost of these goods, which businesses commonly offset by raising prices.
Customs Duties and Import Taxes: Import taxes on goods are also typically shifted forward. Importers include these taxes in their pricing, making consumers effectively bear the economic burden.

b. Direct Taxes

Income Tax: Income taxes are direct taxes intended to be borne by the person or entity upon whom they are imposed. While theoretically, these taxes are not supposed to be shifted, the practical reality may differ. For example, a business might adjust prices upward to maintain profit margins, indirectly transferring the economic incidence to consumers. However, this is more an incidental effect rather than a legal mechanism for tax shifting.
Property Tax: Theoretically, property taxes are borne by the property owner. However, in cases where property is rented out, landlords may increase rental prices to offset property tax expenses, shifting the burden onto tenants.

3. Judicial and Administrative Interpretation

The concept of tax burden shifting is widely acknowledged in Philippine case law, especially for VAT and excise taxes. The Supreme Court of the Philippines has often discussed the nature of VAT as a consumption tax, emphasizing its characteristic of being borne by the end consumer.

Notable cases and interpretations include:

Commissioner of Internal Revenue v. Seagate Technology (Philippines) (2004): The Court clarified that VAT is a consumption tax designed for the final consumer, although collected at each stage in the production and distribution chain. This case underscores VAT as a forward-shifting tax.
People v. De Lara (2016): In a case regarding excise taxes on tobacco, the Court held that excise taxes are “consumption taxes” and that the law assumes they will be transferred to the consumer by increasing retail prices.

Additionally, administrative interpretations by the Bureau of Internal Revenue (BIR) echo these principles, particularly in Revenue Regulations and Memoranda interpreting VAT and excise tax laws. These regulations often outline the proper computation of tax inclusions in pricing, further supporting the structure for forward tax shifting.

4. Economic Implications and Policy Considerations

The ability to shift tax burdens has significant economic and social implications:

Inflationary Effects: Forward shifting of taxes, particularly on essential commodities, can lead to price inflation, affecting lower-income households disproportionately. Policymakers often consider this when deciding tax rates for staple goods or providing exemptions.
Tax Incidence and Equity: While statutory incidence falls on taxpayers (e.g., businesses), the economic incidence often affects consumers, raising concerns about the regressive nature of consumption-based taxes. As lower-income households spend a larger proportion of their income on consumables, they may bear a disproportionate share of the tax burden.
Competitiveness: Industries with high tax rates may find it difficult to shift the entire tax burden forward due to market competition. In such cases, businesses may absorb part of the tax to remain competitive, affecting profit margins and potentially impacting investment and employment within the sector.

5. Limitations and Constraints on Shifting

While shifting of taxes is a prevalent practice, it is not without limitations:

Elasticity of Demand: As discussed, the ability to shift the tax forward depends on demand elasticity. For goods with elastic demand, price increases resulting from tax shifting could lead to reduced demand, constraining the taxpayer’s ability to pass on the burden.
Market Competition: In highly competitive markets, businesses may not fully transfer tax costs to avoid losing customers to competitors with lower prices. This is evident in the retail sector, where pricing power may be limited.
Regulatory Restrictions: Certain industries may face regulatory price controls that restrict their ability to increase prices. For example, utilities and essential services often have regulated pricing structures, limiting their ability to forward-shift tax burdens directly to consumers.

6. Conclusion

In Philippine taxation law, the shifting of tax burden is a well-established principle, primarily associated with indirect taxes like VAT and excise taxes. This shifting mechanism transfers the economic incidence of tax from businesses to consumers, who ultimately bear the financial weight of these taxes through increased prices.

However, the practice of shifting the tax burden is influenced by various economic factors, including demand and supply elasticity, market competition, and regulatory constraints. While effective for revenue generation, the shifting mechanism raises equity considerations, as consumption taxes may disproportionately impact lower-income consumers, leading to calls for mitigating measures like tax exemptions or targeted subsidies.

Understanding the shifting of tax burden is crucial for grasping the broader impacts of taxation policies on both the economy and individual taxpayers. As such, policymakers must weigh these implications carefully to balance revenue needs with considerations of fairness and economic equity.