Abstract
While the Philippines has improved its tax-to-GDP ratio over the past decade, its tax revenue collection remains modest compared to its level of development. In 2018, the Philippines initiated a Comprehensive Tax Reform Program (CTRP) to provide a more sustainable stream of revenues, but progress has been limited due to offsetting measures included in subsequent packages. The narrowing of the fiscal space due to the COVID-19 pandemic has also added to the urgency of identifying new tax revenue measures. This paper shows that the Philippines has the scope to increase revenue collection from all major categories of taxes, including VAT, PIT and CIT. It also discusses specific tax measures that could mobilize revenues in the near-to-medium term to help secure resources for the authorities’ development plans.
Revenue Mobilization in the Philippines1
While the Philippines has improved its tax-to-GDP ratio over the past decade, its tax revenue collection remains modest compared to its level of development. In 2018, the Philippines initiated a Comprehensive Tax Reform Program (CTRP) to provide a more sustainable stream of revenues, but progress has been limited due to offsetting measures included in subsequent packages. The narrowing of the fiscal space due to the COVID-19 pandemic has also added to the urgency of identifying new tax revenue measures. This paper shows that the Philippines has the scope to increase revenue collection from all major categories of taxes, including VAT, PIT and CIT. It also discusses specific tax measures that could mobilize revenues in the near-to-medium term to help secure resources for the authorities’ development plans.
A. Overview of Tax Revenue Performance
1. The Philippine authorities are committed to undertaking fiscal consolidation to rebuild fiscal space and bring debt below their indicative threshold of 60 percent of GDP. Boosting tax revenue would be an important part of this medium-term fiscal strategy without having to reduce productive infrastructure investment and expenditure on priority development areas. While the national government tax-to-GDP ratio has significantly improved over the last decade—by almost 3 percentage points of GDP in 2010–19 to 14 percent in 2020 and 14.1 percent in 2021—it remains below the average for the Asia-Pacific countries and lower middle-income countries. Its tax effort is estimated to be only 75 percent as of 2021, among the lowest in Southeast Asia.2 There is room for the Philippines to increase its tax-to-GDP ratio by at least 3 percentage points in the near to medium-term to realize its tax potential.3 In the medium to long term the Philippines should work towards raising at least 20 percent of GDP through taxes to meet the UN Social Development Goals by 2030.4
2. The Philippines has undertaken several important reforms through the Comprehensive Tax Reform Program (CTRP). Those that are most notable include: 1) restoring the efficiency of excise taxation through higher tax rates on alcohol, tobacco and fuels (including coal), revamping the taxation of passenger cars and new taxes on sugar-sweetened beverages; 2) reducing the labor income tax while improving its progressivity due to a higher threshold (basic personal allowance) and revised tax rates schedule; 3) increasing the taxation of capital income; 4) reducing the CIT rate and improving the governance of investment tax incentives; and 5) improving the VAT design, importantly through allowing for immediate crediting of input tax on capital goods and some base broadening.
Tax-to-GDP Ratio, 2010–2020
(In percent)
Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A002
Source: WEO, IMF Internal World Revenue Longitudinal Database (WoRLD).Tax-to-GDP Ratio, 2010–2020
(In percent)
Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A002
Source: WEO, IMF Internal World Revenue Longitudinal Database (WoRLD).Tax-to-GDP Ratio, 2010–2020
(In percent)
Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A002
Source: WEO, IMF Internal World Revenue Longitudinal Database (WoRLD).
Asia: Tax Capacity and Tax Revenue
(In percent of GDP and in percent, latest available year)
Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A002
Source: Gupta and Jalles 2022Note: Trie chart include? social security contributions.Asia: Tax Capacity and Tax Revenue
(In percent of GDP and in percent, latest available year)
Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A002
Source: Gupta and Jalles 2022Note: Trie chart include? social security contributions.Asia: Tax Capacity and Tax Revenue
(In percent of GDP and in percent, latest available year)
Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A002
Source: Gupta and Jalles 2022Note: Trie chart include? social security contributions.3. The first three CTRP packages were aimed at improving the Philippines’ tax revenue efficiency, and had a marginal impact on revenue mobilization.5 The first package, TRAIN (2018), simplified the personal income tax, broadened the VAT base; the second package, TRAIN 2+ (2020) or the sin tax reform laws, increased excise taxes for selected products; and the third package CREATE (2021) reduced the corporate income tax rate from 30 percent to 20 percent for micro, small, and medium enterprises (MSMEs) and to 25 percent for other types of companies. The reduction in tax revenue from CREATE, though having made the Philippines more regionally competitive, has somewhat offset the increase in tax revenue from TRAIN, reducing the efficacy of the CTRP in generating a sustainable revenue stream. Further reforms—focusing on improvements to property taxes and capital income taxation—have been prepared and await parliament’s approval and implementation.6 The tax yield from these measures is expected to be limited.
B. Room for Revenue Mobilization
4. A thorough assessment of the Philippine tax system will be required to identify further avenues for improving its efficiency, equity, and simplicity. In this respect, an in-depth diagnostic exercise conducted by an IMF Technical Assistance mission could provide guidance on tax reforms measures at a more granular level, including a detailed analysis of measures to improve tax administration and their impacts on revenue collection. While awaiting such analysis, several high-level recommendations to boost revenue mobilization can be made, mostly building on cross-country comparisons. The following section discusses major weaknesses and areas for improvement with regards to key components of the Philippine tax system: Personal Income Tax, Corporate Income Tax, Value Added Tax, and excise taxes.7
Personal Income Tax
5. The revenue yield from PIT can be enhanced through a further broadening of the tax base and improving compliance. With a top marginal rate of 35 percent, at par with Thailand and Vietnam, the Philippine PIT appears more productive, implying a more progressive rate structure, broader base and/or better compliance and administration.8, The PIT base could be further broadened through the removal of various exemptions including (i) certain emoluments, e.g., bonuses, 13th salary, loyalty awards, in-kind benefits, etc.; (ii) pensions and various social security and health benefits9 and, (iii) limiting certain deductions e.g., on donations and credits.10 Expanding the base of business income, for example through enhanced enforcement of the 8-percent flat tax available to small and micro businesses, would also improve PIT revenue efficiency by ensuring that good anti-avoidance measures are in place prohibiting movement_ between different tax regimes. Tax collection of capital income can be improved by harmonizing and reducing the tax rates across all categories of income including dividends, interests, capital gains, rental income, and royalties among others, as planned and awaiting parliamentary approval. Removing unnecessary exemptions (e.g., long term government securities) and reduced rates (e.g., dividends from resident companies) would further boost revenues.
Personal Income Tax Revenue, 2010–2020
(In percent of GDP)
Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A002
Source: IMF, Internal World Revenue Longitudinal Database (WoRLD).Personal Income Tax Revenue, 2010–2020
(In percent of GDP)
Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A002
Source: IMF, Internal World Revenue Longitudinal Database (WoRLD).Personal Income Tax Revenue, 2010–2020
(In percent of GDP)
Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A002
Source: IMF, Internal World Revenue Longitudinal Database (WoRLD).6. While the Philippines has one of the most progressive PIT in ASEAN, there is room for further improvement. The 2018 TRAIN reform reduced the effective PIT rates for individuals (except for those with income exceeding 12 million pesos.)11 Personal allowance and additional exemptions for dependents were also replaced with a zero-rate band for taxable income (deduction method). PIT’s progressivity could be further improved by switching its computation from a deduction to a credit method, where the value of the basic exemption (zero-rate band) does not increase with income and remains equal for all taxpayers. Such a switch would be a revenue boosting measure without any need to adjust headline rates.
PIT Revenue and Top Combined Rate, 2020
(In percent of GDP and in percent)
Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A002
Sources: World IMF and IBFDNote: PIT Tax revenue is not available for all countries.PIT Revenue and Top Combined Rate, 2020
(In percent of GDP and in percent)
Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A002
Sources: World IMF and IBFDNote: PIT Tax revenue is not available for all countries.PIT Revenue and Top Combined Rate, 2020
(In percent of GDP and in percent)
Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A002
Sources: World IMF and IBFDNote: PIT Tax revenue is not available for all countries.
Personal Income Tax: Progressivity
Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A002
Personal Income Tax: Progressivity
Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A002
Personal Income Tax: Progressivity
Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A002
Corporate Income Tax
7. The CIT is characterized by low revenue productivity and revenue collection. In 2020, before the CREATE reform package reduced the CIT rate to 20 percent for MSMEs and 25 percent for other types of companies, CIT raised revenues of less than 0.1 percent of GDP per each percentage point of the rate. This level of CIT productivity compares unfavorably with some countries in the region. The low revenue productivity could be indicative of a relatively narrow tax base and other generous tax incentives. Heightened base erosion and profit shifting practices can be another contributing factor, where enhanced anti-avoidance measures and improved enforcement can further increase the CIT productivity.
CIT Revenue, Top Combined Rates and Productivity, 2020
(In percent of GDP and in percent)
Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A002
Sources: WoRLD; IMF; and IBFD.CIT Revenue, Top Combined Rates and Productivity, 2020
(In percent of GDP and in percent)
Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A002
Sources: WoRLD; IMF; and IBFD.CIT Revenue, Top Combined Rates and Productivity, 2020
(In percent of GDP and in percent)
Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A002
Sources: WoRLD; IMF; and IBFD.
Corporate Income Tax Revenue, 2010–2020
(In percent of GDP)
Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A002
Source: IMF, Internal World Revenue Longitudinal Database (WoRLD).Corporate Income Tax Revenue, 2010–2020
(In percent of GDP)
Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A002
Source: IMF, Internal World Revenue Longitudinal Database (WoRLD).Corporate Income Tax Revenue, 2010–2020
(In percent of GDP)
Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A002
Source: IMF, Internal World Revenue Longitudinal Database (WoRLD).8. Rationalizing investment tax incentives will be a critical step towards improving CIT revenue efficiency. According to the Global Tax Expenditure Database, the Philippines’s investment tax incentives (tax holiday) cost on average 0.7 percent of GDP in revenue foregone during 2013–2019. The 2021 CREATE reform improved the overall governance of granting tax incentives (by consolidating the power of granting them to the Fiscal Incentives Review Board chaired by the Department of Finance and Department of Trade and Industry) but more can be done to limit its generosity. In fact, the reform extended the duration of tax holidays from six to seven years. In addition, while the availability of the preferential 5-percent gross income tax (offered after the expiry of tax holidays) was reduced from infinity to ten years, investors were offered enhanced deductions after that period.12 The reform of tax incentives should focus on abolishing tax holidays and incentivizing investment through cost-based mechanisms, e.g., expensing of capital spending.
Tax Expenditures, 2013–2019
(In percent of GDP)
Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A002
Source: Global Tax Expenditure DatabaseTax Expenditures, 2013–2019
(In percent of GDP)
Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A002
Source: Global Tax Expenditure DatabaseTax Expenditures, 2013–2019
(In percent of GDP)
Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A002
Source: Global Tax Expenditure Database9. Improving cross-border tax architecture will be important, too. The priorities among the list of measures recommended by the Base Erosion and Profit Shifting (BEPS) Final Reports and the Two Pillar Solution include introducing rules that enable the Bureau of Internal Revenue (BIR) to counter base erosion and profit shifting—including through an anti-earning stripping rule and strengthening BIR’s capacity to implement transfer pricing rules—can help deter tax avoidance by multi-national enterprises and improve CIT revenue efficiency.
Value Added Tax
10. There is significant scope to improve revenue collection from VAT as well as increase its efficiency. The Philippines’ revenue collection from VAT remains significantly below averages for emerging market economies and lower middle-income countries. Accounting for the fact that the VAT rate in the Philippines (12 percent) is higher than the ASEAN average (9 percent), points to major weaknesses in the VAT design. It also has one of the lowest C-efficiency in the region, where the C-efficiency denotes, the extent to which final consumption is taxed.13 In 2020, the Philippines’ C-efficiency was 0.35 (compared to 0.66 in Cambodia and 0.71 in Thailand), implying that the VAT captures only a third of its potential tax base. Domestic VAT collections are especially weak—while the VAT effective rate on imports is 7.8 percent (65 percent efficiency), little is collected domestically relative to the underlying base.
11. Improving VAT efficiency offers an efficient tool for boosting government revenue. Bringing its C-efficiency to the worldwide average for upper middle-income countries (of around 0.6) would nearly double VAT collections (over 7 percent of GDP). This can be achieved by eliminating widespread exemptions and zero-ratings, including those for businesses, senior citizens, and the public, and extending VAT to new, so far untapped, tax bases: digital goods and services (see section C and Text Table therein), real property, and financial services. Improving the general design of the VAT, including through adopting modern anti-avoidance rules, and enhancing VAT administration and compliance would further improve revenue efficiency. Base-broadening measures should be favored over any rate increases because of their less adverse impact on efficiency and drag on economic growth. In particular, taxing digital goods and services would boost revenue and improve VAT equity.
VAT Revenue, Standard Rate and C-Efficiency, 2020
(In percent of GDP and in percent)
Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A002
Sources: WoRLD; IMF; and IBFD.VAT Revenue, Standard Rate and C-Efficiency, 2020
(In percent of GDP and in percent)
Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A002
Sources: WoRLD; IMF; and IBFD.VAT Revenue, Standard Rate and C-Efficiency, 2020
(In percent of GDP and in percent)
Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A002
Sources: WoRLD; IMF; and IBFD.
VAT Revenue, 2010–2020
(In percent of GDP)
Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A002
Source: IMF Internal World Revenue Longitudinal Database (WoRLD).VAT includes both VAT and Goods and Service Tax that effectively works like a VAT.VAT Revenue, 2010–2020
(In percent of GDP)
Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A002
Source: IMF Internal World Revenue Longitudinal Database (WoRLD).VAT includes both VAT and Goods and Service Tax that effectively works like a VAT.VAT Revenue, 2010–2020
(In percent of GDP)
Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A002
Source: IMF Internal World Revenue Longitudinal Database (WoRLD).VAT includes both VAT and Goods and Service Tax that effectively works like a VAT.12. The high level of remittance flows in the Philippines underlines the need for more reliance on consumption taxes, including VAT. The VAT serves as a proxy tax for taxing otherwise not taxed remittances. It is also an efficient tool in taxing informal consumption14 A broad-based VAT would greatly serve these goals. Concerns related to its adverse impact on the poor should be addressed through progressive income taxation and expenditure measures (direct transfers). On balance it is a more efficient approach to collect VAT from all consumers and direct a portion of these collections towards social assistance. Any VAT exemption benefits more—in nominal terms— the richer households for they spend more on the exempt goods and services than those worse-off. Strengthening social safety nets will also provide the Philippines the means to subsidize the poor outside the VAT system (see IMF 2019, Chapter I).
Excise Taxation
13. The Philippines has significantly increased its excise tax revenue, in part due to the 2018 TRAIN and 2020 sin tax reform laws. These laws increased the excise tax rates of several products including petroleum, coal, alcohol, tobacco, and cigarettes, and introduced excise taxes on sweetened beverages and electronic cigarettes. As a result, the excise tax collection has reached the Asia-Pacific average in recent years.
Excise Tax revenue, 2010–2020
(In percent of GDP)
Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A002
Source: IMF Internal World Revenue Longitudinal Database (WoRLD).Excise Tax revenue, 2010–2020
(In percent of GDP)
Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A002
Source: IMF Internal World Revenue Longitudinal Database (WoRLD).Excise Tax revenue, 2010–2020
(In percent of GDP)
Citation: IMF Staff Country Reports 2022, 370; 10.5089/9798400227561.002.A002
Source: IMF Internal World Revenue Longitudinal Database (WoRLD).14. Despite many commendable reforms under TRAIN, the changes in the taxation of passenger vehicles should be revisited. From 2003 the Philippines moved away from taxing passenger cars based on the engine size (a proxy of negative externalities related to the adverse impact on the environment and roads’ wear and tear) towards a tax on the value of cars. While such a tax is more aligned with ability to pay (and thus adding to the overall tax system progressivity), it compromises the main objective of a Pigouvian tax—reducing consumption of goods with negative externalities, and the ease of enforcing an excise tax which is usually based on objective and easily measured criteria (engine size and/or age of car cannot be as easily manipulated as its value, especially for used imported cars). Importantly, cars of low value (typically old cars) might be more damaging to environment, infrastructure, and traffic safety than newer cars. In addition, pick-ups and motorcycles are not taxed under the ad valorem excise tax (see next section on proposed tax measures to remedy this shortcoming). A thorough review of tax treatment of vehicles is warranted. Moving away from a luxury tax (like the long phased out VAT on luxury goods) to an environment tax (one-off registration tax or excise, potentially coupled with recurrent circulation tax, akin to the current motor vehicle road user charge), ideally taking into account both CO2 emissions and road congestion, should be favored.15 An assessment, including on the revenue impact of such a policy change, would be needed before implementation.16
15. The Philippines should also explore options for using excise taxes on telecommunication services. In the absence of any other tax measures that capture excess profits in the telecommunication sector, excise taxes offer a relatively straightforward and efficient mechanism to tap into a large and relatively inelastic tax base to help mobilize additional revenue (Matheson and Petit, 2017).17
C. Specific Proposals for Revenue Mobilization
16. The authorities have significant scope to raise additional tax revenue through specific measures. The authorities have selected several new tax reform measures for implementation in 2023. They include adjustments to the mining fiscal regime18, extending the VAT to digital goods and services (text table on design challenges and country experiences), a new excise tax on single use plastic bags, and adjusting the tax on pre-mixed alcoholic beverages—altogether estimated to raise 20.3 bn peso (or 0.08 percent of GDP) annually in additional revenue. The authorities also aim to proceed with the remainder of the CTRP reform (proposals tabled in the Legislature by the previous administration), i.e., streamlining capital income taxation (a single 15-percent tax on passive income) and enhanced valuation rules for property tax purposes.19 They will also continue implementing measures already enacted under the TRAIN, notably further rate increases of sin taxes (excise taxes on alcohol and tobacco, including heated tobacco and vapor products). They have also taken digitalization and modernization initiatives to raise additional revenues.
17. There are many commendable tax measures proposed by the previous administration that the authorities could consider for implementation. The measures include those related to VAT base broadening, upward adjustment of traditional excises, and potential plans to adopt carbon taxation.20 Further refining of excise taxation, including on energy products, eliminating exemptions on motorcycles, and introducing a recurrent motor vehicle tax are viable options for revenue mobilization and improved efficiency. Improving tax administration and tax compliance, including through enhanced transfer pricing rules, fuel marking and e-receipts, is also a commendable action. Nevertheless, without ensuring a broad VAT base, a meaningful revenue mobilization effort will be difficult to achieve. While the authorities will continue exploring avenues for further revenue mobilization it is important to avoid measures that adversely impact economic efficiency, raise negligible amounts of revenue or are difficult to enforce.
Philippines: Tax Reform Measures
The numbers shown in the table are estimates by the previous administration except for the repeal of excise tax exemption for pick-ups which is revised. IMF staff estimate for 2023 GDP is used to calculate the percentage of GDP.
Philippines: Tax Reform Measures
| PHP billions | Percent of GDP | |
|---|---|---|
| Baseline: New Measures in 2023 | 20.1 | 0.08 |
| Mining Regime | 7.9 | 0.03 |
| VAT on digital services | 9.6 | 0.04 |
| New excise tax on plastic bags | 2.4 | 0.01 |
| Tax on pre-mixed alcoholic beverages | 0.4 | 0.002 |
| Pending CTRP Measures | ||
| Enhanced property valuation (for property tax) | + | + |
| Streamlined tax on capital income and financial transactions | + | + |
| Potential Additional Tax Measures 1/ | ||
| VAT base broadening (zero-rating and exemptions) | 142.5 | 0.60 |
| PIT base broadening and improved capital income taxation | + | + |
| CIT streamlined investment incentives | + | + |
| CIT cross-border taxation | + | + |
| Motor vehicle user charge | 38.3 | 0.16 |
| Increased excise tax on coal | 35.4 | 0.15 |
| Repeal excise tax exemption for pickups | 8.2 | 0.03 |
| Impose excise tax on motorcycles | + | + |
| Additional (excise) tax on gaming | 13.1 | 0.06 |
| New excises on cigarettes, e-cigarettes, and SSBs (health tax) | 91.0 | 0.39 |
| Increased excise tax on petroleum | + | + |
| Excise tax on telecommunication | + | + |
| Carbon taxation | + | + |
| Crypto currencies (tackling evasion) | + | + |
| Enhanced transfer-pricing rules | + | + |
| Tax administration and compliance enhancement | + | + |
| Total, Potential New Measures | 328.5 | 1.4 |
The numbers shown in the table are estimates by the previous administration except for the repeal of excise tax exemption for pick-ups which is revised. IMF staff estimate for 2023 GDP is used to calculate the percentage of GDP.
Philippines: Tax Reform Measures
| PHP billions | Percent of GDP | |
|---|---|---|
| Baseline: New Measures in 2023 | 20.1 | 0.08 |
| Mining Regime | 7.9 | 0.03 |
| VAT on digital services | 9.6 | 0.04 |
| New excise tax on plastic bags | 2.4 | 0.01 |
| Tax on pre-mixed alcoholic beverages | 0.4 | 0.002 |
| Pending CTRP Measures | ||
| Enhanced property valuation (for property tax) | + | + |
| Streamlined tax on capital income and financial transactions | + | + |
| Potential Additional Tax Measures 1/ | ||
| VAT base broadening (zero-rating and exemptions) | 142.5 | 0.60 |
| PIT base broadening and improved capital income taxation | + | + |
| CIT streamlined investment incentives | + | + |
| CIT cross-border taxation | + | + |
| Motor vehicle user charge | 38.3 | 0.16 |
| Increased excise tax on coal | 35.4 | 0.15 |
| Repeal excise tax exemption for pickups | 8.2 | 0.03 |
| Impose excise tax on motorcycles | + | + |
| Additional (excise) tax on gaming | 13.1 | 0.06 |
| New excises on cigarettes, e-cigarettes, and SSBs (health tax) | 91.0 | 0.39 |
| Increased excise tax on petroleum | + | + |
| Excise tax on telecommunication | + | + |
| Carbon taxation | + | + |
| Crypto currencies (tackling evasion) | + | + |
| Enhanced transfer-pricing rules | + | + |
| Tax administration and compliance enhancement | + | + |
| Total, Potential New Measures | 328.5 | 1.4 |
The numbers shown in the table are estimates by the previous administration except for the repeal of excise tax exemption for pick-ups which is revised. IMF staff estimate for 2023 GDP is used to calculate the percentage of GDP.
D. Concluding Remarks
18. While the Philippines have implemented commendable reforms under the CTRP, there remains ample scope to enhance revenue mobilization. The national government tax-to-GDP ratio, at 14.1 percent of GDP in 2021, is relatively low, with scope to raise revenues—by at least 3 percentage points in the medium-term—under VAT, corporate and personal income taxes, and excise taxes:
Reforms under the PIT could include base broadening by removing various exemptions. These measures can be reinforced, as planned, by improving the tax collection of capital income through better harmonizing of tax rates across all categories of income.
Reforms under CIT include the 2021 CREATE tax package that aimed to improve the overall governance of granting tax incentives. Further reform of investment incentives should focus on abolishing tax holidays, incentivizing investment through cost-based mechanisms, and improving cross-border tax architecture.
Improving VAT efficiency can be achieved by eliminating widespread exemptions and zero-ratings and extending VAT to new, and so far untapped, tax bases. Base-broadening measures should be favored over any rate increases.
The TRAIN packages have improved revenue collection from excise taxes. Further reforms could include taxing new products (for example, plastic and telecommunication services) and increasing the breadth of the tax base to avoid unnecessary exemptions. Any reform should exclude policies that are difficult to implement and administer, or that have a negligible revenue impact.
VAT on Digital Services: Design Challenges and Country Experiences
The Philippines is considering expanding its VAT base to include taxation of digital services. This is a move in the right direction, and Fund staff — (IMF, 2021) estimate the revenue potential in Asia at around 0.04–0.11 percent of GDP. The overall VAT efficiency improved, ensuring a level playing field between various suppliers and households. Countries around the world, including many in the Asia-Pacific region, have implemented reforms allowing for comprehensive taxation of e-commerce, including digital services by online providers and platforms (see Table below with country experiences in Asia).
While the intention and objectives are clear, it will be of utmost importance for the Philippines to ensure the expanded VAT captures the ‘digital’ base in a comprehensive way and is easy to administer. While the VAT on digital services does not involve any fundamental change in taxing rights, it requires certain adjustments, typically with respect to the destination principle and the mechanism used to capture services provided by non-residents. In this respect, critical design choices will need to be made, especially with regard to the scope of services subject to VAT and the collection method used (see Brondolo, 2021 for details).
| Country/Year of adoption | Threshold | Scope of Services | Collection Method | Reverse Charge for B2B |
|---|---|---|---|---|
| Australia (2017) | AUS$75,000 | Intangible supplies, anything other than goods or real property | Vendor Collection Model | Yes |
| Bangladesh (2019) | BDT 30 million | Streaming or download media and web-based services | Collection by local payment provider | Yes |
| India (2017) | No threshold for nonresidents For Indian residents: INR-10 lakh in annual sales | A service is mediated over the internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention, and impossible to ensure in the absence of information technology Includes streaming/downloads of music, e-books, films; cloud-based or downloadable software; membership fees to online sites, dating portals; online gambling services; online advertising | Vendor Collection Model | Yes |
| Indonesia (2020) | Annual revenue 600m IDR, or 50m monthly revenue; and 12,000 users annually/1000 users monthly | Foreign digital service providers and intermediaries included on a government list | Vendor Collection Model | Yes |
| Japan (2015) | JYP 10 million per annum | E-books, streaming media, apps, cloud-based services and online gaming, services that post online ads; voice and data telephony services are excluded | Vendor Collection Model | Yes |
| Singapore (2020) | Global annual turnover of at least SDG 1 million, making B2C supplies of digital services to non-GST registered customers in Singapore ex | Supplies of downloadable digital content, subscription-based media, software programs, electronic data management services, support services performed via electronic means to arrange or facilitate transactions, which may not be digital in nature (for example, service or booking fee charged to the suppliers or customers) | Vendor Collection Model | Yes |
| Thailand (September 2021) | THB 1.8m (more than €60,000) per annum | A service that includes incorporeal property delivered through the internet or other electronic means, where the service is, in essence, performed automatically, and where the service cannot be performed without information technology; focus on streaming services and online games | Vendor Collection Model | Yes |
| Vietnam (2020) | None | Download or streaming media, apps, e-books and online journals, e-learning, software-as-a-service provisions, gaming, and online gambling | Collection by local payment provider | Yes |
| Country/Year of adoption | Threshold | Scope of Services | Collection Method | Reverse Charge for B2B |
|---|---|---|---|---|
| Australia (2017) | AUS$75,000 | Intangible supplies, anything other than goods or real property | Vendor Collection Model | Yes |
| Bangladesh (2019) | BDT 30 million | Streaming or download media and web-based services | Collection by local payment provider | Yes |
| India (2017) | No threshold for nonresidents For Indian residents: INR-10 lakh in annual sales | A service is mediated over the internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention, and impossible to ensure in the absence of information technology Includes streaming/downloads of music, e-books, films; cloud-based or downloadable software; membership fees to online sites, dating portals; online gambling services; online advertising | Vendor Collection Model | Yes |
| Indonesia (2020) | Annual revenue 600m IDR, or 50m monthly revenue; and 12,000 users annually/1000 users monthly | Foreign digital service providers and intermediaries included on a government list | Vendor Collection Model | Yes |
| Japan (2015) | JYP 10 million per annum | E-books, streaming media, apps, cloud-based services and online gaming, services that post online ads; voice and data telephony services are excluded | Vendor Collection Model | Yes |
| Singapore (2020) | Global annual turnover of at least SDG 1 million, making B2C supplies of digital services to non-GST registered customers in Singapore ex | Supplies of downloadable digital content, subscription-based media, software programs, electronic data management services, support services performed via electronic means to arrange or facilitate transactions, which may not be digital in nature (for example, service or booking fee charged to the suppliers or customers) | Vendor Collection Model | Yes |
| Thailand (September 2021) | THB 1.8m (more than €60,000) per annum | A service that includes incorporeal property delivered through the internet or other electronic means, where the service is, in essence, performed automatically, and where the service cannot be performed without information technology; focus on streaming services and online games | Vendor Collection Model | Yes |
| Vietnam (2020) | None | Download or streaming media, apps, e-books and online journals, e-learning, software-as-a-service provisions, gaming, and online gambling | Collection by local payment provider | Yes |
References
Brondolo, John (2021). Administering the Value Added Tax on Imported Digital Services and Low-Value Imported Goods. Technical Notes and Manuals No. 2021/004, International Monetary Fund, available at: https://www.imf.org/-/media/Files/Publications/TNM/2021/English/TNMEA2021004.ashx
Fenochietto, Richardo and Carola Pessino (2013). Understanding Countries’ Tax Effort. IMF Working Paper WP/13/244, available at: https://www.imf.org/external/pubs/ft/wp/2013/wp13244.pdf
Gaspar, Vitor, David Amaglobeli, Mercedes Garcia-Escribano, Delphine Prady and Mauricio Soto (2019). Fiscal Policy and Development: Human, Social and Physical Investments for the SDGs. Staff Discussion Note No. 2019/003, IMF, available at: https://www.imf.org/-/media/Files/Publications/SDN/2019/SDN1903.ashx
Gupta, Sanjeev and Joao Tovar Jalles (2022). Priorities for Strengthening Key Revenue Sources in Asia. Working Paper 612, Center for Global Development, available at: https://www.cgdev.org/sites/default/files/priorities-strengthening-key-revenue-sources-asia.pdf
International Monetary Fund (2019). Macroeconomic Developments and Prospects in Low-Income Developing Countries—2019. IMF Policy Paper, available at: https://www.imf.org/-/media/Files/Publications/PP/2019/PPEA2019039.ashx
International Monetary Fund (2021). Digitalization and Taxation in Asia, Departmental Paper DP/2021/017, available at: https://www.imf.org/-/media/Files/Publications/DP/2021/English/DTAEA.ashx
Matheson, Thornton and Patrick Petit (2017). Taxing Telecommunications in Developing Countries. Working Paper No. 2017/247, International Monetary Fund, available at: https://www.imf.org/-/media/Files/Publications/WP/2017/wp17247.ashx
Prepared by Sarwat Jahan and Artur Swistak. We would like to thank the Philippine authorities for their constructive comments.
Tax effort is the actual tax revenue collections as a share of tax capacity, which is the maximum theoretical level of tax revenues that a country can mobilize given its structural characteristics. This is also known as the tax frontier. Tax effort and tax capacity calculations in this SIP include social security contributions. In the Philippines, social security contributions account for around 2.6 percent of GDP (2019–2021 average). For further details of revenue collection composition please see Table 3 in the Staff Report.
Gaspar et al. (2019) find that emerging market economies will require, on average, an additional 4 percentage points of GDP in spending to achieve SDGs. In this context, they note that for many countries an ambitious but reasonable target would be to increase the tax to GDP ratio by 5 percentage points of GDP in the next decade.
For a detailed description of 2018–21 tax reforms in the Philippines please consult SIP 2021 (Philippines’ fiscal space after responding to COVID-19 pandemic), p.19.
These are the Passive Income and Financial Intermediary Taxation Act (PIFITA), and Real Property Valuation and Assessment Reform Act.
These recommendations are neither final nor exhaustive and can be further explored through the technical assistance mission, if requested. Additionally, the Philippines’ tax system encompasses a myriad of other taxes (e.g., turnover taxes for small and micro businesses, bank and insurance premium taxes, estate and donors’ taxes, etc.) that need further analysis too.
The 2018 TRAIN reform simplified the PIT rate schedule while increasing the top marginal PIT rate from 32 to 35 percent. Productivity refers to the amount of revenue produced by 1 percentage point of tax.
The Philippines appears to impose an EEE system, where pensions are not taxed at all—neither at the contribution stage (TEE), nor payment stage (EET). Further analysis is required in this regard.
Credit refers to contributions to Personal Equity and Retirement Account (up to 5 percent of contribution can be taken as PIT credit, i.e., deduction against tax liability).
The effective PIT rate would reach the pre-TRAIN level only for individuals earning more than 12 million pesos annually. While the statutory top rate—increased from 32 to 35 percent—applies to income exceeding 8 million pesos, the effective rate dropped by 1.6 percentage points (due to much lower taxation of income below the 8 million peso threshold) and reaches pre-TRAIN level only at income level greater than 12 million pesos.
Companies that were granted income tax holiday and 5 percent tax on gross income prior to the implementation of the CREATE law are allowed to continue the tax holiday for the period specified in the terms and conditions for their registration and avail the 5 percent tax incentives for 10 years. After this transitory period, existing companies have the option to reapply for tax incentives (5 percent special tax rate or enhanced deduction), provided that their businesses activity is listed under the Strategic Investment Priority Plan (SIPP), and there is a qualified expansion, entirely new project, or additional investment.
C-efficiency is calculated as a ratio of actual VAT revenues to the product of the standard VAT rate and final consumption.
Informal consumption refers to Consumers’ purchases from informal /non-VAT registered establishments (e.g., various markets, directly from small agriculture producers, etc.)
The TRAIN law provides for lower excise tax rates for hybrid and electric vehicles.
See discussion on transportation mitigation measures in Chapter III—Selected Issues Paper on Addressing Climate Change Mitigation in the Philippines: Role of Carbon Pricing.
The various fees and charges, imposed on companies operating in telecommunication sector for regulatory reasons, should not be seen as a proxy for taxing rates.
The House of Representatives’ Committee approved in August 2022 a bill introducing several changes to the mining tax regime, including: (i) an increase in royalty rate to 5 percent, (ii) a new 10-percent export tax on unprocessed ores, and (iii) ring-fencing by a mining project. The reform package would benefit from further review to ensure efficiency and progressivity of the mining regime, including through more reliance on profit-based instruments and moving away from export taxes.
Both bills have been approved by the House of Representatives and are pending in the Senate. While the revenue impact of streamlining capital income taxation (and phasing out the stock exchange tax and the IPO tax) is expected to be revenue neutral, the enhanced valuation of property is estimated to yield 18–26bn pesos (0.8–0.11 percent of GDP). The latter would accrue to local governments and have no direct impact on the national government revenue. However, it might alleviate pressure on transfers to local governments.
See Chapter III—Selected Issues Paper on Addressing Climate Change Mitigation in the Philippines: Role of Carbon Pricing—for more details.
