The Marcos administration is working with the International Monetary Fund (IMF) on a study aimed at addressing the low value-added tax (VAT) efficiency in the country, the Finance Department said on Tuesday.
“We actually talked with the IMF and we asked them to conduct a study on where we can improve on broadening the tax base,” Finance Secretary Benjamin Diokno said in a press briefing in Malacañang when asked about government measures to tackle low VAT efficiency.
Citing a World Bank study, he said the policy gap or the supposed tax to be collected and what is actually collected could reach as high as P539 billion.
“Meaning, maybe we find areas where we can recover those too many exemptions. For example: one exemption is really the cooperatives – that’s right, there are a lot of people who don’t pay VAT because of the cooperatives. So, the IMF study will tell us how do we recover because 0.4, that’s really poor … poor performance,” he said.
With VAT being the best tax in the world, with 90 percent of the countries around the world imposing such tax, Diokno said, “it is in our interest to improve on the efficiency of the VAT.”
Meanwhile, Diokno said the approval of the estate tax amnesty extension until 2025 by the Senate would mean stronger compliance by taxpayers and additional revenue collections for the government.
“The Department of Finance welcomes the renewed extension of the estate tax amnesty period. This will allow errant taxpayers to settle their estate tax liabilities affordably, enable the government to collect additional revenues, and strengthen tax compliance,” he said in a statement.
“The timely enactment of this measure is crucial, as it will provide much-needed relief to individuals and families facing extraordinary circumstances while supporting the national government’s efforts to spur development by incentivizing the regularization of assets,” he said.
Although the Philippines has the highest VAT rate compared to other countries, Diokno said its VAT collection is the most inefficient at only 40 percent as a result of many exemptions.
Prior to the passage of the reforms, the Philippine Tax Code contained many exemptions – some 56 lines of exemptions and 84 additional exemptions in special laws, he explained.
“So, from 2016 to 2020, the Philippines collected an average of P723 billion from VAT which is only 40 percent of the expected VAT collections,” Diokno said.
“We, what we only collect is 40 percent and that’s because of a lot of exemptions. So, the various incentives and exemptions granted outside the Philippine Tax Code erode the revenue base and this requires the establishment of safeguards in tax administration to prevent abuse which further inflates the true cost of granting incentives.”
He added that when they made the distinction between export and domestic market enterprises, the government favors giving incentives to export-oriented firms because they are competing with the rest of the world and should not be put at a disadvantage.
“Whereas if you are locally-based, then you are competing with other local domestic industries and therefore you should not be given a lot of incentives,” he pointed out.
“So, to sum up, the distinction between registered exporters and domestic market-oriented enterprises must remain to preserve the integrity of our tax framework. So, these are the arguments why we need to help those who are export-oriented and why we need to tax the domestic firms.”
The revenue impact is significant with an annual average of P34 billion or P409 billion in one incentive cycle or the incentives that are being given away, he said.
Because the administration wants to maintain fiscal discipline and carry out consolidation until 2028, there is a need to preserve the existing tax system.
“It’s not perfect but we continue to review it – if there are some areas we can improve on, we will improve on it,” Diokno said. Senate Bill No. 2219 was passed unanimously on third reading on May 29, 2023 with 24 affirmative votes and no negative votes or abstentions.
It is expected to be signed into law by the President before his second State-of-the-Nation Address on July 24, 2023. The bill further extends the availment period of the estate tax amnesty for another two years or until June 14, 2025, past the original expiration of June 14, 2023.
Additionally, the measure amends the original law to also cover the unsettled estates of decedents who died on or before May 31, 2023. The bill also allows those who avail of the amnesty program to file estate tax returns electronically or manually.
Taxpayers may settle the tax due through any authorized agent bank, revenue district office, or authorized tax software provider.
Furthermore, the bill streamlines documentary requirements that should be submitted to the Bureau of Internal Revenue and allows payment of outstanding liabilities in two-year installments without civil penalty or interest.
From the enactment of the Tax Amnesty Law in 2019 until March 31, 2023, the national government collected P7.41 billion from 133,860 beneficiaries who availed of the estate tax amnesty.