World Bank: Philippines can boost revenues by expanding VAT base

The Philippines can boost its revenue collections by expanding its value-added tax (VAT) base and improving tax administration, the World Bank said.

In an e-mail interview with BusinessWorld, World Bank Country Director for the Philippines, Malaysia, and Brunei Zafer Mustafaoğlu said the Philippine government has “substantial space to increase VAT revenues by improving compliance and reducing exemptions and special rates.”

“The government could generate significant reforms by improving tax administration and taking steps to broaden the VAT base, through amendments in tax policy,” Mr. Mustafaoğlu said on Feb. 18.

VAT, an indirect tax that can be passed on to buyers, is a form of sales tax imposed on sale, barter, exchange, or lease of goods or properties and services.

Mr. Mustafaoğlu said the country should also address tax policy gaps and opportunities to improve tax administration.

Sought for comment, Department of Finance (DoF) Secretary Ralph G. Recto told BusinessWorld: “We are looking for ways to expand VAT base and that includes VAT on digital services among others.”

President Ferdinand R. Marcos, Jr. last October signed Republic Act No. 12023, which imposes a 12% VAT on digital services providers (DSPs), both resident and nonresident.

About PHP 7.25 billion is expected to be collected from this law this year, and another PHP 21.37 billion in 2026, and PHP 26.27 billion in 2029, the DoF said.

“Yes, we’re improving tax administration. Tax administration also includes our digitalization program. I don’t agree with the International Monetary Fund to VAT senior citizens. It is not in our value system,” Mr. Recto said.

In a 2022 report, the IMF had suggested the Philippine government increase VAT revenue by removing exemptions and zero-ratings, including those for senior citizens, who are entitled to a 12% VAT exemption granted by the Expanded Senior Citizens Act.

Meanwhile, Minimal Government Thinkers (Manila) President Bienvenido S. Oplas, Jr. said that while he agrees with the World Bank that the Philippines should broaden the tax base, he believes that the VAT rate should be reduced instead.

“But for me, broaden the VAT base by reducing the rate from 12% with plenty of exempted sectors to 7-8% with zero exempted sector except raw agriculture and fishery products,” Mr. Oplas said.

The Philippines’ 12% VAT rate is relatively higher compared with Southeast and East Asian countries, he said.

China imposes 13% VAT for general goods sales and imports, this was followed by Indonesia, which is at 12%, and Cambodia, Malaysia, Vietnam (standard rate), and Laos at 10%. Singapore’s VAT is at 9%, while Thailand has a 7% rate.

Myanmar has no VAT but imposes a commercial tax ranging from 0-15% as a turnover tax on goods and services.

Other countries such as South Korea levy a 10% VAT on goods and services, while Japan’s VAT is at 10%. Hong Kong does not have VAT, goods and services tax or sales tax.

Eleanor L. Roque, tax principal of P&A Grant Thornton, said almost all the transactions are already subject to VAT, and increasing taxes affects the most vulnerable.

“Other exempt transactions like sale of certain food items are exempted because increasing their cost due to VAT is detrimental to our vulnerable population,” she told BusinessWorld via an e-mailed statement.

Ms. Roque suggested that regulators should focus on improving taxpayer compliance and simplifying tax rules.

She also argued that the Philippines is not “lesser taxed” compared with its Association of Southeast Asian Nations neighbors.

Meanwhile, Jose Enrique “Sonny” A. Africa, executive director at think tank IBON Foundation, said expanding the VAT base would distort consumption patterns of the low-income households.

“Especially in the context of the Philippines with such wide gaps in income and wealth, the design of the tax system should be rigorously guided by equity considerations and not just by revenue collection,” he said.

He noted that the government’s reliance on VAT has significantly increased as it accounts for 18.9% of BIR revenues in 2023 from 7.9% in 1989.

Mr. Africa said the government should instead impose higher tax rates on luxury goods like luxury cars, jewelry, designer goods and other high-end products in the “inherently regressive VAT system.”

However, he noted the government should grant VAT exemptions for food and agricultural products, educational services, healthcare, specific goods for seniors and persons with disability, and reading materials. – Aubrey Rose A. Inosante, Reporter