Philippines: Lower VAT rate possible after tax overhaul — DOF

MANILA, Philippines – The Department of Finance (DOF) said over the weekend it is possibile to lower the value-added tax (VAT) rate in the Philippines from the current 12 percent once the government is able to clean up the tax system and plug leakages caused by the numerous VAT exemption privileges under the law.   

“Our proposal really is to clean up the VAT system. Over time, once we have addressed the exemptions, we may reduce the VAT rate. We will do it step by step,” Finance Undersecretary Karl Kendrick Chua said in a statement.

 “Our strong belief is that the moment we have exemptions and a multitude of exemptions, it multiplies the opportunity for discretion, and therefore corruption and tax evasion,” he said.

In an earlier statement, the DOF said the 59 lines of VAT exemptions and the 84 special VAT-related laws provided in the tax code have resulted in an estimated P90.7 billion annual losses for the government.

The DOF seeks to overhaul this system and broaden the VAT base through the removal of these exemptions through the first package of the Comprehensive Tax Reform Program (CTRP), as contained in House Bill 5636 or the Tax Reform for Acceleration and Inclusion Act (TRAIN).

According to Chua, Thailand collects the same amount of revenues from VAT as the Philippines despite imposing a lower rate of seven percent due to fewer exemptions.

Thailand, he said, only has 35 lines of exemptions as compared to the Philippines.

Chua said the share of Thailand’s VAT revenue in its gross domestic product (GDP) is the same as the country’s 4.2 percent despite the latter’s higher tax rate.

“Thailand can afford this because it has done the basics many years ago, but we have not,” Chua said.

“We have a dual system, we have high tax rates for half of the population and half of the population pay very little (because) of incentives and exemptions. So our tax system really is very inequitable in that sense. What we want to do with the VAT is really to broaden the base,” he said.

Chua also said the Philippines remains behind Thailand in terms of gross national income per capita because fundamentals, including good governance, adequate infrastructure and public service efficiency, remain lacking in the country.

“And that is I think, very linked to the fact that as of today, we have only collected 13.8 percent of our GDP in taxes while in Thailand, its 17 percent,” he said.

House Bill 5636 or TRAIN aims to make the country’s tax system simpler and more efficient by lowering personal income tax rates, unifying estate and donor’s taxes at a flat rate of six percent, and broadening the tax base by removing VAT exemptions.

It also seeks to adjust the excise taxes on petroleum products and automobile, and impose excise tax on sugar-sweetened beverages. 

According to the DOF’s estimates, House Bill 5636 is seen to bring in P133.8 billion in additional revenue for the government in its first year of implementation.

The Senate version of the bill is currently being deliberated.