Efficiency in collecting the 12-percent value-added tax (VAT) in the Philippines remained the lowest in the Asia-Pacific mainly due to the exemptions still in place despite recent moves to widen the VAT base.
The Organization for Economic Co-operation and Development’s (OECD) Revenue Statistics in Asia and the Pacific 2021 report released on Wednesday showed the Philippines’ VAT revenue ratio (VRR) in 2019 at only 0.2, with 1 being the highest, which meant no VAT losses due to evasion, exemptions, fraud, reduced rates, or tax planning.
“Our low VRR is largely explained by the number of exemptions the VAT system has, including the exemptions for certain purchases of senior citizens and persons with disabilities (PWDs),” Finance Assistant Secretary Maria Teresa Habitan told the Inquirer.
Broadening reforms
“Despite the Department of Finance’s (DOF) efforts to pursue VAT broadening reforms under the Tax Reform for Acceleration and Inclusion (TRAIN) Law, the system is still riddled with unnecessary exemptions,” Habitan said.
The DOF’s original proposal under the early versions of the then TRAIN bill included dismantling the VAT perks for senior citizens and PWDs, and certain sectors. However, lobby to keep these exemptions prevailed in Congress. The OECD attributed the Philippines’ low VRR “partly to missing VAT revenue collected at customs as this could not be distinguished from import duties.” However, Habitan said the Bureau of Customs’ (BOC) collections data reported VAT as a separate line.
Based on OECD data, the Philippines’ VAT collections from goods and services rose to P406.1 billion in 2019 from P358.2 billion in 2018, even as their share to total tax revenue declined by less than 2 percentage points to 11.5 percent.
The DOF was currently preparing a “playbook” of fiscal policies which it will pitch to the next administration in 2022, including tax reforms to recover from the pandemic-induced revenue decline. It was not certain, however, if VAT reforms will be part of it.
The Philippines was nonetheless moving to further shore up its VAT take as Finance Secretary Carlos Dominguez III, for instance, had asked Russia’s Federal Tax Service to assist the Bureau of Internal Revenue in establishing a VAT data-capture system given the latter’s “highly efficient” collection technology.
House ways and means committee chair and Albay Rep. Joey Salceda told the Inquirer that the concern about the VAT gap was valid.
Uncollected potential
“When my office worked on a tax-gap study across various taxes, we found that VAT is the tax with the second-largest uncollected potential, as a share of how much we are supposed to collect. Our study found that on average, we fail to collect 31 percent of VAT potential,” Salceda said.
“Much of this comes from arbitrage. Before the comprehensive tax reform program, we had 56 lines of exemptions in the Tax Code and 84 additional exemptions in special laws. As a result, we have a very low tax-efficiency ratio for VAT relative to the region. We collect 4.3 percent of GDP (gross domestic product) with our 12-percent VAT rate. Thailand collects 4.1 percent of GDP but with only a 7-percent VAT rate. The major difference is that Thailand only has 35 lines of exemptions compared to 56 lines in our Tax Code. The more exemptions the tax system has, the more complicated it is to administer taxes, and the larger the opportunities for leakages are. We lowered these exemptions to just 90 under TRAIN,” he said.
“There are also about 550 ecozones and free ports, although under CREATE (Corporate Recovery and Tax Incentives for Enterprises Act), we removed the need for ecozones where it is harder to enforce tax laws by allowing registered enterprises to enjoy incentives anywhere in the country. “
“I predict we will be able to further reduce leakage with the Ease of Paying Taxes Act, where we streamline the VAT system by requiring just invoices … In the meantime, I will ask the BOC whether they have adequate mechanisms to disaggregate VAT dues from customs duties in their accounting,” he added. INQ