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Filipino Tax Reform Would Plug VAT Leakages, DoF Says

by Mary Swire, Tax-News.com, Hong Kong Friday, May 19, 2017

The Philippines hopes to rein in value-added tax breaks, which are costing the Government an estimated PHP90.7bn (USD1.82bn) a year, the Department of Finance has said.

Speaking at a recent tax forum, Finance Undersecretary Karl Kendrick Chua said the Philippines' antiquated tax code, which contains 59 lines of exemptions from VAT and 84 special VAT-related laws, has led to massive revenue leakages. He said overhauling the country's outdated tax system by broadening the VAT base through the removal of many of these multiple exemptions will hit affluent or well-connected sectors, saying these are the primary beneficiaries of such tax privileges.

"In general, most consumption of the poor, such as raw food and purchases from small stores, is exempt from VAT already. Broadening the VAT base will make the rich pay more, because the VATů [is paid] proportional to one's income and consumption," he said.

The VAT exemptions that account for the biggest annual losses for the Government include those for cooperatives, housing, and special economic zones. To protect the poor and other vulnerable sectors, House Bill 4774 will retain the VAT exemptions for seniors and persons with disabilities, and for raw food purchases as well as health and education expenses. In addition, all purchases from stores with sales below PHP3m would be exempt.

HB 4774 is the DOF-endorsed version of Package One of the Duterte administration's Comprehensive Tax Reform Program (CTRP). Besides lowering personal income tax rates and broadening the VAT base, the bill contains provisions adjusting the excise tax rates for fuel and automobiles, among other measures.

The House Ways and Means Committee approved the final substitute bill that consolidated HB 4774 with 54 other similar tax reform proposals on May 15. The final version of the substitute bill contains moderate modifications to the original measure and earmarking provisions for the additional revenues to be collected from the fuel excise tax adjustments.

Chua noted that, although the Philippines' VAT rate is the highest in the ASEAN region at 12 percent, the VAT regime's efficiency and collection rates are far lower than those of other Southeast Asian economies, with collections equivalent to an average of only 4.2 percent of gross domestic product.

"In contrast, Thailand's VAT rate is a lower seven percent, but its efficiency and revenue collection is also equivalent to about 4.2 percent of its GDP because its VAT exemptions are limited to only 35 items," Chua said.

Chua said that in reforming the country's VAT system "those who are unfairly subsidized or who take advantage of this tax system's complexity are the ones who will pay more and provide the money to fund more government services for the poor."

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