[PDF] - Tax Reform for Acceleration and Inclusion Package 1 Value added PDF Document

SLIDE 1

Tax Reform for Acceleration and Inclusion

Package 1 – Value added tax (VAT)

As of September 13, 2017 9:15 PM

DR DRAFT FOR DI

DISCUSSION. SUBJECT TO CHANGE.

Key messages and highlights

9/13/17 DEPARTMENT OF FINANCE 3

Key messages

9/13/17 DEPARTMENT OF FINANCE 4

1. The proposed VAT reform must be seen as part of the entire tax reform package.
2. The present VAT system has a high rate (12%) and 143 lines of exemptions, making it very
complex. This encourages discretion, negotiation, corruption, and tax evasion.
3. Since the VAT reform in 2005, 89 revenue eroding measures were passed. This eroded

most of the gains from the RVAT reform.

4. The goal of the reform is to make the VAT system simpler, fairer, and more efficient

characterized by a lower rate and a broader base so that it encourages investment, job creation, and poverty reduction.

Simpler: Low-rate and broad-base, few exemptions, and no break in the chain.
Fairer: Everyone who consumes pay VAT based on ability to pay.
More efficient: Minimize leakage and distortions.
5. The reform seeks to achieve the following:
Generally limit exemptions to raw food, agriculture, education, and health.
Limit zero rating to direct exporters and provide timely cash refund.
Increase VAT threshold from 1.9 to 3 million pesos to protect the poor.

SLIDE 3

Key messages

9/13/17 DEPARTMENT OF FINANCE 5

6. When seen as a package, the removal of VA

VAT exemptions does not necessarily lower we welfare given the following:

VAT threshold is increased from 1.9 to 3 million pesos to protect purchases of low

income families.

VAT exemption will be replaced by targeted subsidies to the poor and vulnerable.
Housin

ing:

In general, house prices will increase by just 6.9% and not 12% due to input VAT

crediting.

Low interest rates will continue to make house financing affordable.
Those who cannot afford will be provided with free housing, vouchers, or targeted

subsidies.

Socialized housing: those falling below the minimum wage can be provided

targeted subsidies (21%). The rest (79%) will benefit from lower income tax and this is enough to help them purchase houses.

Economic and low-cost housing: all buyers are beneficiaries of lower income taxes

so they can afford to buy house.

Leasing: no impact if lessee has gross sales at or below the VAT threshold. This will

not affect the far majority of small renters.

Key messages

9/13/17 DEPARTMENT OF FINANCE 6

7. Limiting ze

zero-ra rating to direct exporters is only fair and efficient. In return, they will receive prompt cash refund within 90 days.

Less leakage if 3,000 exporters avail of zero-rating rather than its multiples of suppliers.
Leakage come from transferring cost from VATable to zero-rated to claim refund.
Di

Direct e expo porters (e.g., BPO): no change in the VAT regime

Domestic BPO: Still VATable.
Export BPO inside SEZ: Still VAT exempt since outside customs territory.
Export BPO outside SEZ: Still zero-rated and can get a refund.
Indir

irect exporters

Supplying to domestic firms: VATable.
Supplying to exporting firm in SEZ: Zero rated since customers are effectively
utside customs territory. They can get a VAT refund.
Supplying to exporting firm outside SEZ: VATable.
VA

VAT refund

Cash basis within 90 days.
To achieve this, need to radically change the system: i) special trust fund, ii) risk-

based audit instead of pre-audit, and iii) net revenue basis so BIR/BOC will not hold back refund when collections are low.

The zero-rating reform will only kick in if the VAT refund system is in place.

Estimated in Jan 2019.

SLIDE 4

Key messages

9/13/17 DEPARTMENT OF FINANCE 7

6. When seen as a package, the removal of VAT exemptions does not necessarily lower

welfare given the following:

Co

Cooper eratives es: Agriculture coops and coops with sales below the VAT threshold will remain exempt from VAT. All other coops incentives will not be touched.

Po

Power transmission: As this comprises less than 8% of total power, cost, a 12% VAT will increase power rate by less than 1%.

Re

Renewable energy:

Since the sector does not export electricity, there is little basis to grant it zero-

rated status.

As dirtier fossil fuel will be taxed higher, the renewable energy sector will see an

increase in demand.

All other incentives and the feed-in-tariff will not be removed.
SU

SUCs and GOCCs: their VAT liability can be covered by the tax expenditure fund.

Key messages

9/13/17 DEPARTMENT OF FINANCE 8

8. Increase in the VA VAT threshold

This means the poor can be shielded from the full impact of the VAT when they

buy from marginal stores, like sari-sari stores and carinderia.

However, VAT exemptions are an illusion as input VAT that cannot be credited

are passed on to consumers in the form of artificially higher prices.

This also means that removing exemptions does not mean 12% increase in
prices. It is typically lower, as low as 4%.

SLIDE 5

9/13/17 DEPARTMENT OF FINANCE 9 9/13/17 DEPARTMENT OF FINANCE 10

SLIDE 6

9/13/17 DEPARTMENT OF FINANCE 11

Revenue eroding measures

11 12 13 14 15 16

Percent of GDP

Revenue eroding measures (Republic acts [RAs]) enacted annually

Tax effort 4

RA 8479 8492 8502 8525 Sources: DOF, BTr, and PSA Note:The major revenue eroding measures are highlighted in bold red. In 2007, RA 9337 was enacted. This increased the VAT from 10 to 12 percent, but it also came with some revenue eroding measures such as the reduction of the corporate income tax rate from 35 to 30 percent.

4

RA 8550 8748 8749 8756

1

RA 8763

14

RA 9003 9010 9029 9040 9045 9054 9055 9064 9083 9136 9138 9146 9147 9157

3

RA 9174 9178 9182

1

RA 9207

10

RA 9238 9243 9257 9267 9275 9281 9290 9294 9295 9301

1

RA

9337*

2

RA 9343 9361

5

RA 9367 9369 9400 9442 9490

7

RA 9497 9500 9501 9504 9505 9511 9513

15

RA 9519 9520 9521 9576 9593 9640 9647 9648 9679 9728 9746 9832 9852 9854 9856

16

RA 9904 9966 9994 9999

10001 10002 10026 10028 10066 10068 10072 10073 10083 10085 10086 10142

11

RA

10742 10744 10747 10752 10754 10771 10800 10816 10817 10846 10919

6

RA

10653 10654 10659 10687 10693 10699

5

RA 10638 10641 10644 10646 10650

14

RA

10368 10378 10390 10583 10584 10585 10591 10594 10595 10596 10597 10598 10599 10600

7

RA

10165 10174 10228 10229 10230 10231 10349

RA 8748 - Special economic zone act RA 8756 - Preferential tax rates for ROHQs RA 9136 - VAT zero- rating for electricity generators RA 9178 - BMBEs exemption from all taxes RA 9257 - SC tax exemption (i.e., PIT) RA 9442 - PWD additional tax deductions RA 9504 - Min wage PIT exemption, increased personal exemption for all CE RA 9513 - Tax exemptions for renewable energy producers RA 9520 - Total tax exemption for all coops RA 9994 - VAT exemption for SCs RA 10653 - Expansion

f 13th

month and

ther

bonus tax exemption to PHP 82,000

1

RA 8407 RA 9337 R-VAT reform

Total before R-VAT reform: 38 RAs Total after R-VAT reform: 89 RAs

Low tax efficiency relative to the region

For instance, in 2015, the Philippines has a 12% VAT rate while Thailand has a 7% VAT rate, yet both collect roughly the same VAT revenues as share of GDP, since Thailand has a broader VAT base (35 lines of exemptions only compared to 59 lines in the Philippines by NIRC provisions plus 84 special laws with VAT exemption).

9/13/17 DEPARTMENT OF FINANCE 12

Philippines Indonesia Thailand Vietnam Malaysia East Asia and Pacific Low-Mid Income World Total Tax Revenues/GDP 13.6 12.0 17.2 24.3 15.3 16.3 17.3 17.9 Value Added Tax (VAT) Tax rate 12.0 10.0 7.0 10.0 6.0 8.4 14.0 13.8 Revenue as share of GDP 4.3 3.9 4.1 6.1 1.0 5.2 6.6 6.1 Tax efficiency** 35.7 38.8 59.0 61.0 16.7 62.0 47.1 44.2 Source: USAID, KPMG, IMF World Revenue Longitudinal data, PWC, BIR, and Botman, Klemm and Baqir ** Tax efficiency is calculated as the ration of tax revenue as a share of GDP divided by the tax rate.

SLIDE 7

9/13/17 DEPARTMENT OF FINANCE 13

Expanding the VAT base by limiting exemptions and using the budget to provide subsidies to the poor

Ex

Exempti tions s will be removed, unless sold by firms whose gross sales fall below the VAT threshold. Examples are:

Se Sectors/Institutions No

No. of VAT

Ex Exem empt Sp Special al Laws No

No. of VAT

Ze Zero-ra rating La Laws Agriculture 4 1 Education (SUCs and High Schools) 14 MSMEs/Cooperatives 2 Govt Agencies and GOCCs 18 Entrepreneurship 10 Power Sector 5 Housing Sector 1 Health 3 Others 7 To Total 64 64 1

Note: Under the 2017 GAA, there are 114 SUCs, of which 12 are already enumerated in the special laws under education, whose VAT exemptions

n purchases will be repealed and replaced through the tax expenditure

fund under the annual budget.

Exemptions of senior r citizens (S (SC) ) and PWDs will NOT be removed in the ta tax re reform proposal, even though it is re regre

ressive. For insta

tance, SCs who ta take advanta tage ge

f
f the exemption
n are the richer SCs who
eat ou
ut in restaurants, watch movies, etc.

9/13/17 DEPARTMENT OF FINANCE 14

Expanding the VAT base by limiting exemptions and using the budget to provide subsidies to the poor

Limit t

the V VAT z zero-ra rating to direct ex exporters who actually export goods out of the country. This will be implemented together with the VAT refund starting 2019.

Low-income and vulnerable

households can be protected through a a higher er VAT thresh eshold

f
f 3 million
n pesos
s (i.e., sales of

business with gross sales below 3 million pesos, such as sari-sari stores, will be exempt from VAT).

Ta

Targeted transfers to poor and vulnerable households.

* Note: VAT Exemptions are not always pro-poor, as marginal businesses, which cannot claim input VAT typically pass this on in the form of higher prices.

SLIDE 8

Protecting the poor and low income Filipinos: VAT

VA

VAT threshold for marginal establishment will be increased from 1.9 to around 3 million pesos, thereby exempting the poor’s purchases from the full impact of the VAT.

Cooperatives below the threshold will still be exempt.
Raw agricultural products will continue to be VAT exempt.
To mitigate the impact:
Ta

Targeted transfers: 200 pesos per month for 1 year to the poorest 50% of households (10 million households) to mitigate the temporary and moderate increase in prices.

Ho

Housing voucher/subsidy system to those who cannot afford housing.

9/13/17 DEPARTMENT OF FINANCE 15

To use the tax system to protect the poor and low income earners results into massive leakages. A better system is to use budget subsidies.

What is VAT?

9/13/17 DEPARTMENT OF FINANCE 16

SLIDE 9

9/13/17 DEPARTMENT OF FINANCE 17 9/13/17 DEPARTMENT OF FINANCE 18

SLIDE 10

Overview of the reform: broadening the VAT base by reducing exemptions

9/13/17 DEPARTMENT OF FINANCE 19 9/13/17 DEPARTMENT OF FINANCE 20

SLIDE 11

9/13/17 DEPARTMENT OF FINANCE 21 9/13/17 DEPARTMENT OF FINANCE 22

Expanding the VAT base by limiting exemptions and using the budget to provide subsidies to the poor

Ex

Exempti tions s will be removed, unless sold by firms whose gross sales fall below the VAT threshold. Examples are:

Se Sectors/Institutions No

No. of VAT

Ex Exem empt Sp Special al Laws No

No. of VAT

Ze Zero-ra rating La Laws Agriculture 4 1 Education (SUCs and High Schools) 14 MSMEs/Cooperatives 2 Govt Agencies and GOCCs 18 Entrepreneurship 10 Power Sector 5 Housing Sector 1 Health 3 Others 7 To Total 64 64 1

Note: Under the 2017 GAA, there are 114 SUCs, of which 12 are already enumerated in the special laws under education, whose VAT exemptions

n purchases will be repealed and replaced through the tax expenditure

fund under the annual budget.

Exemptions of senior r citizens (S (SC) ) and PWDs will NOT be removed in the ta tax re reform proposal, even though it is re regre

ressive. For insta

tance, SCs who ta take advanta tage ge

f
f the exemption
n are the richer SCs who
eat ou
ut in restaurants, watch movies, etc.

SLIDE 12

9/13/17 DEPARTMENT OF FINANCE 23

Expanding the VAT base by limiting exemptions and using the budget to provide subsidies to the poor

Limit t

the V VAT z zero-ra rating to direct ex exporters who actually export goods out of the country. This will be implemented together with the VAT refund starting 2018.

Low-income and vulnerable

households can be protected through a a higher er VAT thresh eshold

f
f 3 million
n pesos
s (i.e., sales of

business with gross sales below 3 million pesos, such as sari-sari stores, will be exempt from VAT).

Ta

Targeted transfers to poor and vulnerable households.

* Note: VAT Exemptions are not always pro-poor, as marginal businesses, which cannot claim input VAT typically pass this on in the form of higher prices.

9/13/17 DEPARTMENT OF FINANCE 24

Revenue eroding measures

11 12 13 14 15 16

Percent of GDP

Revenue eroding measures (Republic acts [RAs]) enacted annually

Tax effort 4

RA 8479 8492 8502 8525 Sources: DOF, BTr, and PSA Note:The major revenue eroding measures are highlighted in bold red. In 2007, RA 9337 was enacted. This increased the VAT from 10 to 12 percent, but it also came with some revenue eroding measures such as the reduction of the corporate income tax rate from 35 to 30 percent.

4

RA 8550 8748 8749 8756

1

RA 8763

14

RA 9003 9010 9029 9040 9045 9054 9055 9064 9083 9136 9138 9146 9147 9157

3

RA 9174 9178 9182

1

RA 9207

10

RA 9238 9243 9257 9267 9275 9281 9290 9294 9295 9301

1

RA

9337*

2

RA 9343 9361

5

RA 9367 9369 9400 9442 9490

7

RA 9497 9500 9501 9504 9505 9511 9513

15

RA 9519 9520 9521 9576 9593 9640 9647 9648 9679 9728 9746 9832 9852 9854 9856

16

RA 9904 9966 9994 9999

10001 10002 10026 10028 10066 10068 10072 10073 10083 10085 10086 10142

11

RA

10742 10744 10747 10752 10754 10771 10800 10816 10817 10846 10919

6

RA

10653 10654 10659 10687 10693 10699

5

RA 10638 10641 10644 10646 10650

14

RA

10368 10378 10390 10583 10584 10585 10591 10594 10595 10596 10597 10598 10599 10600

7

RA

10165 10174 10228 10229 10230 10231 10349

RA 8748 - Special economic zone act RA 8756 - Preferential tax rates for ROHQs RA 9136 - VAT zero- rating for electricity generators RA 9178 - BMBEs exemption from all taxes RA 9257 - SC tax exemption (i.e., PIT) RA 9442 - PWD additional tax deductions RA 9504 - Min wage PIT exemption, increased personal exemption for all CE RA 9513 - Tax exemptions for renewable energy producers RA 9520 - Total tax exemption for all coops RA 9994 - VAT exemption for SCs RA 10653 - Expansion

f 13th

month and

ther

bonus tax exemption to PHP 82,000

1

RA 8407 RA 9337 R-VAT reform

Total before R-VAT reform: 38 RAs Total after R-VAT reform: 89 RAs

SLIDE 13

Value-added tax: 59 lines of exemptions in tax code that lead to large leakages

agricultural and marine food

products in their original state

livestock and poultry of a

kind generally used as, or yielding or producing foods for human consumption;

and breeding stock and

genetic materials thereof;

fertilizers;
seeds, seedlings and

fingerlings;

fish, prawn, livestock and

poultry feeds,

ingredients, whether locally

produced or imported, used in the manufacture of finished feeds

Importation of personal and

household effects belonging to residents of the Philippines returning from abroad and non-resident citizens coming to resettle in the Philippines

Importation of professional

instruments and implements,

wearing apparel,
domestic animals,
Services by agricultural

contract growers and milling for others of palay into rice, corn into grits, and sugar cane into raw sugar;

Services rendered by regional
r area headquarters

established in the Philippines by multinational corporations which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia Pacific Region and do not earn or derive income from the Philippines;

Transactions which are

exempt under international agreements to which the Philippines is a signatory or under special laws except those granted under P.D. No. 529

Sales by agricultural

cooperatives duly registered and in good standing with the Cooperative Development Authority (CDA) to their members, as well as of their produce, whether in its

riginal state or processed

form, to non-members,

their importation of direct

farm inputs,

machineries and equipment,

including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce;

Gross receipts from lending

activities by credit or multi- purpose cooperatives duly registered and in good standing with the Cooperative Development Authority;

Sales by non-agricultural,

non-electric and non-credit cooperatives duly registered with and in good standing with CDA;

Export sales by persons who

are not VAT-registered;

Sale of real properties not

primarily held for sale to customers or held for lease in the ordinary course of trade

r business;
Sale of real properties utilized

for low-cost housing as defined by RA No. 7279, and

ther related laws
Sale of real properties utilized

for specialized housing as defined under RA No. 7279, and other related laws wherein price ceiling per unit is P225,000.00

Sale of residential lot valued

at One Million Five Hundred Thousand Pesos (P1,500,000.00) and below,

r house and lot and other

residential dwellings valued at Two Million Five Hundred Thousand Pesos (P2,500,000.00) and below where the instrument of sale/ transfer/ disposition was executed on or after July 1, 2005;

Sale or lease of goods or

properties or the performance of services

ther than the transactions

mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of One Million Five Hundred Thousand Pesos (P1,500,000.00)

Importation of fuel, goods

and supplies engaged in international shipping or air transport operations;

Services subject to

percentage tax under Title V

f the Code, as amended;
Services of banks, non-bank

financial intermediaries performing quasi-banking functions, and other non- bank financial intermediaries, such as money changers and pawnshops

9/13/17 DEPARTMENT OF FINANCE 25

Ex Exampl mples of VAT-ex exempt transactions

Source: National Internal Revenue Code (NIRC)

In general, removing VAT exemptions will not lead to a 12 percent increase in prices

9/13/17 DEPARTMENT OF FINANCE 26

Consider a VAT-exempt good with total input costs of 100 pesos, excluding VAT paid.
Assuming a 30 percent markup, the final selling price of the good should be 130 pesos. However, the producer/manufacturer

cannot recover the input VAT on his costs. Therefore, he will need to add 12 pesos (VAT component of the 100 peso input cost) to his selling price, making the final selling price 142 pesos.

If the good loses its VAT-exemption, the 12 percent VAT will be levied on the selling price. However, since the producer can

recover the full input VAT on his costs, he does not need to add the 12 peso input VAT on the selling price, making the final selling price only 146 pesos = (130 [selling price] + 16 [VAT]).

This represents a price increase of only 2.5 percent, which is very far from the 12 percent price increase which does not consider

input VAT recovery.

Sample computation is provided below:

VAT exempt VATable

1. Total input costs of a good (PHP)

100 100

2. Input VAT paid (PHP)

12 12

3. Markup (percent)

30 30

3a. Markup (PHP)

30 30

4. Input costs + markup (PHP) [1+3a]

130 130

5. Final VAT to be paid by customer (PHP)

16

5a. Input VAT that cannot be recovered (PHP)

12

6. Final price (PHP) [4+5+5a]

142 146 Price difference (PHP) Percent difference

Source: DOF staff estimates

Why removing VAT exemptions will NOT increase prices by 12% 4 2.5

SLIDE 14

In general, removing VAT exemptions will not lead to a 12 percent increase in prices

9/13/17 DEPARTMENT OF FINANCE 27 All figures in PHP Manufacturer Wholesaler Retailer Total VAT remitted to the government (row total of 6) Sales price (including VAT) to the final consumer (1 + 3 + 5) Price increase (decrease) from base case) Remarks

A. All businesses subject to tax (base case)
1. Sales (excluding VAT)

100 200 300

2. Purchases (excluding VAT)

100 200

3. VAT on sales (12 percent of [1])

12 24 36

4. Input VAT credit (12 percent of [2])

12 24

5. Input VAT that cannot be credited
6. Net VAT payments ([3] - [4])

12 12 12

C. Retailer is exempt
1. Sales (excluding VAT)

100 200 300

2. Purchases (excluding VAT)

100 200

3. VAT on sales (12 percent of [1])

12 24

4. Input VAT credit (12 percent of [2])

12

5. Input VAT that cannot be credited

24

6. Net VAT payments ([3] - [4])

12 12 Sources: IMF and DOF staff estimates 36 336 24 324

3.7

The input VAT cannot be recovered and is passed on to consumers, so price decrease is only a fraction of the full 12 percent.

In fact, markup is the main determinant of the price increase: the higher the markup, the higher the increase in price

9/13/17 DEPARTMENT OF FINANCE 28 Total input costs of a good (PHP) 100 100 100 100 100 100 100 100 100 100 100 100 Markup (percent) 10 20 30 40 50 60 70 80 90 100 200 Final price in non VAT exempt (PHP) 112 123 134 146 157 168 179 190 202 213 224 336 Final price if VAT exempt (PHP) 112 122 132 142 152 162 172 182 192 202 212 312 Price difference (PHP) 1 2 4 5 6 7 8 10 11 12 24 Percent difference 0.0 1.0 1.8 2.5 3.2 3.7 4.2 4.6 5.0 5.3 5.7 7.7

Source: DOF staff estimates

Markup is the main determinant of the price increase

0% 2% 4% 6% 8% 10% 12% 0% 50% 100% 150% 200% Percent increase in price Mark up

Increase in price if VAT is levied, by markup amount

SLIDE 15

Special laws with VAT exemptions

9/13/17 DEPARTMENT OF FINANCE 29 9/13/17 DEPARTMENT OF FINANCE 30

Section No./Republic Act (RA) No./ Executive Order (EO) No./Title 1 Section 5 of Presidential Decree No. 1972 – An Act to finance the coconut replanting program 2 Section 18 of RA No. 7884 – National Dairy Development Act of 1995 3 Section 9 of RA No. 7900 – High Value Crops Development Act of 1995 4 Section 24 of RA No. 10068 – Agriculture and Fisheries Modernization Act of 1997 5 Section 10 of RA No. 10659 – VAT zero-rating of raw sugar

Agriculture

SLIDE 16

9/13/17 DEPARTMENT OF FINANCE 31

Section No./Republic Act (RA) No./ Executive Order (EO) No./Title 1 Section 10 of RA No. 6807 – An Act Converting the Mati Community College to Davao Oriental State College

f Science and Technology

2 Section 7 (f) of RA No. 7371- Aklan State College of Agriculture 3 Section 12 of RA No. 7373- Establishing the Eastern Visayas Science High School 4 Section 1 of RA No. 7605 - Philippine State College of Aeronautics 5 Section 8 of RA No. 8160 – An Act Granting the University of the Philippines a Franchise to Construct, Install, Operate and Maintain for Educational and Other Related Purposes, Radio and Television Broadcasting Stations 6 Section 4 (c) and (f) of RA No. 8292 – Higher Education Modernization Act of 1997 7 Section 7 (c) of RA No. 9045 – Creation of Batangas State University 8 Section 7 (c ) of RA No. 9055 – An Act Converting the Aklan State College of Agriculture into the Aklan State University 9 Section 13 of RA No. 9083 – Creation of the Sta. Rosa Science and Technology High School 10 Section 7 (c) and (f ) RA No. 9138 – Establishment of the Guimaras State College 11 Section 7 (c ) RA No. 9141 – Creation of the Negros Occidental Agricultural College 12 Section 25 (a) and (d) RA No. 9500 – University of the Philippines Charter of 2008 13 Section 20 (a) and (d) RA No. 9519 – An Act Converting Mindanao Polytechnic State College to Mindanao University of Science and Technology 14 Section 7 (a) and (d) RA No. 9647 – Philippine Normal University Modernization Act of 2009

Education

9/13/17 DEPARTMENT OF FINANCE 32

Section No./Republic Act (RA) No./ Executive Order (EO) No./Title 1 Section 3 of RA No. 6810 - Magna Carta for Countryside and Barangay Business Enterprises 2 Section 6 ( c) and (d) of RA No. 7103- Iron and Steel Industry Act 3 Section 14 (b) (5) of RA No. 7308 – Seed Industry Development Act of 1992 4 Section 10 of RA No. 7718 – Amending RA No. 6957 (BOT Law) 5 Section 3 (h) of RA No. 8502 – Jewelry Industry Development Act of 1998 6 Section 35 of RA No. 8550 – Philippine Fisheries Code 7 Section 45 of RA No. 9003 – Ecological Solid Waste Management Act of 2000 8 Section 86 of RA No. 9593- The Tourism Act of 2009 9 Section 5 (b) of RA No. 10771 – Philippine Green Jobs Act of 2016 10 Section 13, 2nd paragraph of RA No. 10817 – Philippine Halal Export Development And Promotion Act of 2016

Enterprises

Section No./Republic Act (RA) No./ Executive Order (EO) No./Title 1 Sections 60 and 61 of RA No. 6938- An Act to Ordain a Cooperative Code of the Philippines Article 60 and Section 5 Article 61 of RA No. 9520- Philippine Cooperative Code of 2008 2 Section 9 of RA No. 10744- Credit Surety Fund Cooperative Act of 2015

Cooperatives

SLIDE 17

9/13/17 DEPARTMENT OF FINANCE 33

Government Owned and Controlled Corporations

Section No./Republic Act (RA) No./ Executive Order (EO) No./Title 1 Sections 13 (1) and (2) of Presidential Decree No. 1869 - PAGCOR 2 Sections 18 and 19 of RA No. 6847- The Philippine Sports Commission Act 3 Section 8 (d) last paragraph of RA No. 7278 – Boys Scout of the Philippines 4 Section 21 of RA No. 7306- Charter of the People’s Television Network, Inc. 5 Section 14 of RA No. 7354- Postal Service Act of 1992 6 Section 21 of RA No. 7356 – Law Creating the National Commission for Culture and the Arts 7 Section 126 Republic Act 7653- The New Central Bank Act 8 Section 13 of RA No. 7820 – Partido Development Administration Act of 1994 9 Section 15 of RA 7875- National Health Insurance Act of 1995

9/13/17 DEPARTMENT OF FINANCE 34

Government Owned and Controlled Corporations (cont’d)

Section No./Republic Act (RA) No./ Executive Order (EO) No./Title 10 Section 16 of RA No. 8282 – The Social Security Act of 1997 11 Section 39 of RA No. 8291 – The Government Service Insurance System Act of 1997 12 Section 25 of RA No. 8492 – National Museum Act of 1998 13 Section 8 of RA No. 9576 – An Act Increasing the Maximum Deposit Insurance Coverage, and in Connection Therewith, to Strengthen the Regulatory and Administrative Authority, and Financial Capability of the Philippine Deposit Insurance Corporation (PDIC), Amending for this Purpose RA No. 3591, as Amended, Otherwise Known as the PDIC Charter, and for Other Purposes 14 Section 19 of RA No. 9679 – An Act Further Strengthening the Home Development Mutual Fund, and for Other Purposes 15 Section 11 of RA No. 10073- Girl Scouts of the Philippines Charter of 2009 16 Sections 23 of RA No. 10086 – National Historical Commission of the Philippines 17 Section 10 RA No. 10349 - An Act Amending Republic Act No. 7898, Establishing The Revised AFP Modernization Program And For Other Purposes 18 Section 56 RA NO. 10801 - "Overseas Workers Welfare Administration Act"

SLIDE 18

9/13/17 DEPARTMENT OF FINANCE 35

Section No./Republic Act (RA) No./ Executive Order (EO) No./Title 1 Section 20 of RA No. 7279 - Urban Development and Housing Act of 1992 Section 20 of RA No. 10884 - An Act Strengthening the Balanced Housing Development Program , Amending for the Purpose RA No. 7279, as Amended , Otherwise Known as the Urban and Development Housing Act Of 1992

Housing

Section No./Republic Act (RA) No./ Executive Order (EO) No./Title 1 Section 14 of RA No. 8423 – Traditional and Alternative Medicines Act (TAMA) of 1997 2 Section 5 of RA No. 10072 - Philippine Red Cross Act of 2009 3 Section 22 Article VII of RA No. 10747 - Rare Diseases Act of the Philippines

Health

9/13/17 DEPARTMENT OF FINANCE 36

Section No./Republic Act (RA) No./ Executive Order (EO) No./Title 1 Sections 16 (a) and (b), and 17 (a) of Presidential Decree No. 972 – Coal Development Act 2 Section 10 of RA No. 7156 - Mini-Hydro Electric Power Incentives Act 3 Section 9 of RA No. 8479 – Downstream Oil Industry Deregulation Act of 1998 4 Section 9 of RA No. 9511 - An Act Granting the National Grid Corporation of the Philippines a Franchise to Engage in the Business of Conveying or Transmitting Electricity Through High Voltage Back-Bone Systems

f Interconnected Transmission Lines, Substations and Related Facilities

5 Section 15 of RA No. 9513 - Renewable Energy Act of 2008

Power Others

Section No./Republic Act (RA) No./ Executive Order (EO) No./Title 1 Sections 23 and 24 of RA No. 2067 – Science Act of 1958 2 Section 1 of RA No. 7291 – Restoring the tax and Duty Incentives Previously Enjoyed by the Veterans Federation of the Philippines under RA 2640 3 Section 9 of RA No. 7355 – Manlilikha ng Bayan Act 4 Section 6 of RA No. 7459 – Investors and Inventions Incentives Act of the Philippines 5 Articles 65 and 67 of RA No. 8756 – Regional / Area Headquarters 6 Section 26 of RA No. 9275 - Philippine Clean Water Act of 2004 7 Section 16 of RA No. 9497- Civil Aviation Authority Act of 2008

SLIDE 19

Overview of the reform:

VAT zero-rating

9/13/17 DEPARTMENT OF FINANCE 37

Key messages

9/13/17 DEPARTMENT OF FINANCE 38

7. Limiting ze

zero-ra rating to direct exporters is only fair and efficient. In return, they will receive prompt cash refund within 90 days.

Less leakage if 3,000 exporters avail of zero-rating rather than its multiples of suppliers.
Leakage come from transferring cost from VATable to zero-rated to claim refund.
Di

Direct e expo porters (e.g., BPO): no change in the VAT regime

Domestic BPO: Still VATable.
Export BPO inside SEZ: Still VAT exempt since outside customs territory.
Export BPO outside SEZ: Still zero-rated and can get a refund.
Indir

irect exporters

Supplying to domestic firms: VATable.
Supplying to exporting firm in SEZ: Zero rated since customers are effectively
utside customs territory. They can get a VAT refund.
Supplying to exporting firm outside SEZ: VATable.
VA

VAT refund

Cash basis within 90 days.
To achieve this, need to radically change the system: i) special trust fund, ii) risk-

based audit instead of pre-audit, and iii) net revenue basis so BIR/BOC will not hold back refund when collections are low.

The zero-rating reform will only kick in if the VAT refund system is in place.

Estimated in Jan 2019.

SLIDE 20

Value-added tax: many zero- ratings that lead to large leakages

The sale and actual shipment
f goods from the Philippines

to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported, paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulations of the (BSP);

ii) The sale of raw materials
r packaging materials to a

non-resident buyer for delivery to a resident local export-

riented enterprise to be used

in manufacturing, processing, packing or repacking in the Philippines of the said buyer’s goods, paid for in acceptable foreign currency, and accounted for in accordance with the rules and regulations

f the BSP;
iii) The sale of raw materials
r packaging materials to an

export-oriented enterprise whose export sales exceed 70 percent of total annual production;

iv) Sale of gold to the BSP;
v) Transactions considered

export sales under Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987, and

ther special laws; and
vi) The sale of goods, supplies,

equipment and fuel to persons engaged in international shipping or international air transport operations; provided, that the same is limited to goods, supplies, equipment and fuel pertaining to or attributable to the transport of goods and passengers from a port in the Philippines directly to a foreign port without docking or stopping at any other port in the Philippines; provided further, that if any portion of such fuel, goods or supplies is used for purposes other than that mentioned in this paragraph, such portion of fuel, goods and supplies shall be subject to 10 percent VAT

i) The sale to a non-resident of

goods, except those mentioned in Sections. 149 and 150 of the Tax Code, assembled or manufactured in the Philippines for delivery to a resident in the Philippines, paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP

Processing, manufacturing or

repacking goods for other persons doing business outside the Philippines, which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP;

Services other than processing,

manufacturing or repacking rendered to a person engaged in business conducted outside the Philippines or to a non- resident person not engaged in business who is outside the Philippines when the services are performed, the consideration for which is paid for in acceptable currency and accounted for in accordance with the rules and regulations

f the BSP;
Services rendered to persons
r entities whose exemption

under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent rate;

Services performed by

subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed 70 percent

f the total annual production;
Transport of passengers and

cargo by domestic air or sea carriers from the Philippines to a foreign country. Gross receipts of international air carriers doing business in the Philippines and international sea carriers doing business in the Philippines are still liable to a percentage tax of 3 percent based on their gross receipts as provided for in Sec. 118 of the Tax Code but shall not be liable to VAT

Services to persons engaged in

international shipping or air transport operations, including leases of property for use thereof; provided that the services referred to herein shall not pertain to those made to common carriers by air and se relative to their transport of passengers, goods

r cargoes form one place in

the Philippines to another place in the Philippines

9/13/17 DEPARTMENT OF FINANCE 39

Ex Exampl mples of VAT zero-ra rated tra ransactions

Source: National Internal Revenue Code (NIRC)

Impact on BPOs and electronics industry

Type of firm Current Proposed in Package 1 Impact IT-BPO / electronics catering to domestic market VATable VATable No impact IT-BPO / electronics exporter within special economic zone (thus outside customs territory) VAT exempt VAT exempt No Impact IT-BPO / electronics exporter

utside special economic zone

(thus within customs territory) VAT zero-rated VAT zero-rated No impact

9/13/17 DEPARTMENT OF FINANCE 40

SLIDE 21

Impact on indirect exporters*

Type of firm Current Proposed in Package 1 Impact Supplier catering to domestic market VATable VATable No impact Supplier to exporter within special economic zone (customers are effectively outside customs territory ) VAT exempt VAT zero-rated Transactions of supplier will be VAT zero-rated. They are entitled to a VAT refund on their inputs. Supplier to exporter outside special economic zone VAT zero- rated VATable Transactions of supplier subject to VAT, but exporters remain zero-rated and therefore entitled to a VAT refund on their inputs.

9/13/17 DEPARTMENT OF FINANCE 41

*The zero-rating reform will only be effective once a cash refund system is in place that can refund within 90 days. This is expected in Jan 2019.

9/13/17 DEPARTMENT OF FINANCE 42

Proposed new VAT refund system

Objective: Cash basis within 90 days Proposed VAT refund system:

1. Special trust fund.
2. Risk-based audit instead of pre-audit.
3. Net revenue basis so BIR/BOC will not hold back

refund when collections are low. The zero-rating reform will only kick in if the VAT refund system is in place. Estimated in 2019.

SLIDE 22

Revenue impact

9/13/17 DEPARTMENT OF FINANCE 43

Estimated revenue impact, DOF amended and SB 1408

9/13/17 DEPARTMENT OF FINANCE 44

Revised package 1 proposal Details 2018 2019 2020 2021 2022 Value-added tax (VAT) 89.3 128.7 141.4 155.3 170.7 Removal of other VAT exemptions 90.7 103.8 114.0 125.2 137.5 Senior citizens and PWD leakage after implementing national ID 0.0 4.2 4.6 5.0 5.5 Cooperatives 5% GRT from lending/credit coops 1.1 1.2 1.3 1.5 1.6 VAT from non-agri coops with 3m above sale 4.1 4.5 4.9 5.4 6.0 Electric coops with more than 3m gross receip 0.2 0.3 0.3 0.3 0.3 Others 75.9 83.4 91.6 100.6 110.6 Mining 0.1 0.1 0.1 0.1 0.1 Metallic ore mining 0.1 0.1 0.1 0.1 0.1 Non-metallic mining and quarrying 0.0 0.0 0.0 0.0 0.0 Manufacturing 44.4 48.7 53.6 58.8 64.7 Manufacture of food, products and beverage 23.0 25.2 27.7 30.4 33.4 Manufacture of tobacco products 0.0 0.0 0.0 0.0 0.0 Manufacture of coke, refined petroleum & fuel products 0.0 0.1 0.1 0.1 0.1 Manufacture of chemicals & chemical products 1.7 1.9 2.1 2.3 2.5 Manufacture of basic metals 7.5 8.3 9.1 10.0 11.0 Manufacture of fabricated metal products except machinery and equipm 0.5 0.5 0.6 0.6 0.7 Manufacture of machinery & equipment n.e.c. 0.3 0.3 0.3 0.4 0.4 Manufacture of electrical machinery & apparatus n.e.c. 0.0 0.0 0.0 0.0 0.0 Manufacture of radio, tv & communication equip/apparatus 2.6 2.8 3.1 3.4 3.7 Manufacture of medical, precision, optical instruments 0.8 0.9 1.0 1.1 1.2 Manufacture of motor vehicles, trailers & semi-trailers 3.7 4.0 4.4 4.9 5.4 Manufacture of other articles, n.e.c 3.4 3.7 4.1 4.5 4.9 Manufacture of other transport equipment 0.9 1.0 1.1 1.2 1.3 Wholesale trade and commission trade, except motor vehicles & motorc 4.8 5.3 5.8 6.4 7.0 Hotels & restaurants 5.2 5.7 6.3 6.9 7.6 Research & development 0.6 0.6 0.7 0.7 0.8 Collection, purification & distribution of water 0.0 0.0 0.0 0.0 0.0 Sale, maintenance and repair of motor vehicle and motorcycle retail 0.0 0.1 0.1 0.1 0.1 Retail trade except of motor vehicles & motorcycles repair of person 7.9 8.7 9.6 10.5 11.6 Miscellaneous business activities 12.9 14.2 15.6 17.1 18.8 Power transmission 3.1 3.4 3.7 4.0 4.5 Housing Socialized housing to remain exempt until 6.2 6.9 7.5 8.3 9.1 Limit VAT zero-rating to direct exporters Implement only together with VAT refund 0.0 26.5 29.1 32.0 35.2 Services 0.0 7.5 8.2 9.0 9.9 Goods 0.0 19.0 20.9 23.0 25.2 VAT threshold increase Increase from 1.9 to 3 million pesos (since those below VAT threshold will pay 8% on gross sales, their input VAT will not be credited)

1.4
1.5
1.7
1.8
2.0

Source: DOF staff estimates

SLIDE 23

Estimated revenue impact, HB 5636

9/13/17 DEPARTMENT OF FINANCE 45

Revised package 1 proposal Details 2018 2019 2020 2021 2022 Value-added tax (VAT) 81.0 123.1 135.2 148.5 163.1 Removal of other VAT exemptions 82.4 98.1 107.7 118.3 130.0 Senior citizens and PWD leakage after implementing national ID 0.0 4.2 4.6 5.0 5.5 Cooperatives 5% GRT from lending/credit coops 0.0 0.0 0.0 0.0 0.0 VAT from non-agri coops with 3m above sale 0.0 0.0 0.0 0.0 0.0 Electric coops with more than 3m gross receip 0.2 0.3 0.3 0.3 0.3 Others 75.9 83.4 91.6 100.6 110.6 Mining 0.1 0.1 0.1 0.1 0.1 Metallic ore mining 0.1 0.1 0.1 0.1 0.1 Non-metallic mining and quarrying 0.0 0.0 0.0 0.0 0.0 Manufacturing 44.4 48.7 53.6 58.8 64.7 Manufacture of food, products and beverage 23.0 25.2 27.7 30.4 33.4 Manufacture of tobacco products 0.0 0.0 0.0 0.0 0.0 Manufacture of coke, refined petroleum & fuel products 0.0 0.1 0.1 0.1 0.1 Manufacture of chemicals & chemical products 1.7 1.9 2.1 2.3 2.5 Manufacture of basic metals 7.5 8.3 9.1 10.0 11.0 Manufacture of fabricated metal products except machinery and equipm 0.5 0.5 0.6 0.6 0.7 Manufacture of machinery & equipment n.e.c. 0.3 0.3 0.3 0.4 0.4 Manufacture of electrical machinery & apparatus n.e.c. 0.0 0.0 0.0 0.0 0.0 Manufacture of radio, tv & communication equip/apparatus 2.6 2.8 3.1 3.4 3.7 Manufacture of medical, precision, optical instruments 0.8 0.9 1.0 1.1 1.2 Manufacture of motor vehicles, trailers & semi-trailers 3.7 4.0 4.4 4.9 5.4 Manufacture of other articles, n.e.c 3.4 3.7 4.1 4.5 4.9 Manufacture of other transport equipment 0.9 1.0 1.1 1.2 1.3 Wholesale trade and commission trade, except motor vehicles & motorc 4.8 5.3 5.8 6.4 7.0 Hotels & restaurants 5.2 5.7 6.3 6.9 7.6 Research & development 0.6 0.6 0.7 0.7 0.8 Collection, purification & distribution of water 0.0 0.0 0.0 0.0 0.0 Sale, maintenance and repair of motor vehicle and motorcycle retail 0.0 0.1 0.1 0.1 0.1 Retail trade except of motor vehicles & motorcycles repair of person 7.9 8.7 9.6 10.5 11.6 Miscellaneous business activities 12.9 14.2 15.6 17.1 18.8 Power transmission 3.1 3.4 3.7 4.0 4.5 Housing 3.1 6.9 7.5 8.3 9.1 Limit VAT zero-rating to direct exporters Implement only together with VAT refund 0.0 26.5 29.1 32.0 35.2 Services 0.0 7.5 8.2 9.0 9.9 Goods 0.0 19.0 20.9 23.0 25.2 VAT threshold increase Increase from 1.9 to 3 million pesos (since those below VAT threshold will pay 8% on gross sales, their input VAT will not be credited)

1.4
1.5
1.7
1.8
2.0

Source: DOF staff estimates

9/13/17 DEPARTMENT OF FINANCE 46

Estimated TEF for SUCs 2017, all in PHP thousands

State Universities and Colleges (SUCs)

Infrastructure Outlay

Buildings and other Structures Machinery and Equipment Outlay

Transportation Equipment Outlay

Furniture, Fixtures and Books Outlay Total MOOE Batangas State University 10,000 32,429 42,429 Aklan State University 60,538 17,674 1,242 79,454

Sta. Rosa Science and Technology High School1

Guimaras State College 14,864 14,864 Central Philippines State University2 24,480 263 1,655 26,398 University of the Philippines 58,544 1,356,154 1,375,122 2,789,820 Mindanao University of Science and Technology 40,812 40,812 Philippine Normal University 31,042 53,283 84,325 Total 3,078,102 Estimated TEF 329,808

Source: DOF staff estimates Notes: 1 Not included in the GAA 2 Formerly Negros Occidental Agricultural College

SLIDE 24

Overall impact

n the people

9/13/17 DEPARTMENT OF FINANCE 47

Decile/ percentile Description (assumes a family of 5 members) 2018 projected monthly household total income* Personal income tax Value- added tax Petrol and transportation Automobile** SSB Net tax due Inflationary effect*** Change in take home pay Transfer (full year) Change in take home pay after transfer D1 Subsistence poor 5,106 2

210
102
197
506
298
804

2,400 1,596 D2 Subsistence poor 8,250 84

312
161
335
725
456
1,180

2,400 1,220 D3 Poor 10,652 404

423
217
406
641
555
1,197

2,400 1,203 D4 Near poor 12,987 1,063

563
276
507
283
639
922

2,400 1,478 D5 Near poor 15,760 2,377

895
365
595

522

744
223

2,400 2,177 D6 Unskilled 19,335 4,127

1,372
446
1,129

1,179

847

332 332 D7 Partly skilled 24,524 7,684

1,650
581
1,294

4,159

992

3,167 3,167 D8 Skilled 32,565 13,539

2,261
771
1,418

9,089

1,183

7,906 7,906 D9 Professional 47,710 25,494

4,618
1,091
2,283
2,007

15,495

1,468

14,027 14,027 D10 Middle class 115,428 61,738

8,835
2,887
10,931
2,670

36,415

2,620

33,795 33,795 P100 Executive 303,059 118,538

16,525
6,284
87,360
3,278

5,090

3,879

1,212 1,212 T1000 CEO 706,017 146,575

20,672
7,801
131,533
1,962
15,394
5,301
20,695
20,695

Top taxpayer A 1,376,147

470,879
57,562
15,206
271,488
1,505
816,640
8,241
824,881
824,881

Top taxpayer B 2,752,294

1,495,740
120,279
30,411
271,488
1,062
1,918,980
12,361
1,931,341
1,931,341

***The inflationary effect was computed as a function of income, marginal propensity to consume (MPC), and estimates on the price effect of the increased oil excise on food. * Total household income includes compensation income, income from entrepreneurial activities (i.e. businesses), and other sources of income (i.e. cash transfers). **Automobile excise tax impact were computed using 2016 prices, assuming 3 to 5 years of amortization. Combined effect Package 1 change in annual take home pay (in pesos) Source: DOF staff estimates using the preliminary Family Income and Expenditure Survey - Labor Force Survey 2015 Notes: This table is updated as of July 29, 2017. Each household has about two income earners.

Combined tax-transfer effect*

9/13/17 DEPARTMENT OF FINANCE 48

DR DRAFT FOR DI

DISCUSSION. SU

SUBJECT TO CHANG NGE.

Targeted transfers will be crucial in protecting the poor from shocks and can help improve the progressivity of the tax reform.

SLIDE 25

After the tax-transfer reform, the poor benefits the most.

9/13/17 DEPARTMENT OF FINANCE 49

DR DRAFT FOR DI

DISCUSSION. SU

SUBJECT TO CHANG NGE.

Note: D1 refers to the first deciles or the poorest 10% of households based on the preliminary 2015 Family Income and Expenditure Survey (FIES). Each succeeding decile consists of the next 10% of households based

n total household income. The figures above are averages for each decile.

2.6 1.2 0.9 0.9 1.2 0.1 1.1 2.0 2.5 2.4 0.0

0.2
5.0
5.8
10
8
6
4
2

2 4

Percent Average household

Percent increase in household income

Sources: PSA and DOF staff estimates

VAT on housing

9/13/17 DEPARTMENT OF FINANCE 50

SLIDE 26

Key messages

1. The government fully recognizes the right of all

Filipinos to decent housing and seeks to ensure that the people’s access to quality housing is provided efficiently.

2. For decades, the government has been supporting

the housing industry through income tax exemption and VAT exemptions, among others.

3. In fact, housing has been one of the mainstays in the

investment priority program (IPP) list for 18 years

already. In 1994, only socialized housing was
included. From 2000 up to the present, the scope has

been widened to cover low-cost housing, including vertical structures.

9/13/17 DEPARTMENT OF FINANCE 51

Key messages

4. However, the VAT exemption is not the best way to help those in need of housing because its leads to large leakages that only erode revenues that could have been used to provide housing for the poor.

The Philippines currently has a 12 percent VAT rate, yet there are 143 lines of

exemptions in the tax code and in special laws, including exemptions for

housing. This yields a very low VAT efficiency despite having the highest VAT rate

in the region. As a result, this complexity of the tax system encourages discretion and negotiation, and therefore corruption and tax evasion.

These leakages come in the form of tax avoidance, such as splitting of lots and

condo units to avail of exemptions, or tax evasion, such as non-payment of input VAT/non-issuance of receipts by suppliers and contractors, and transfer pricing

f revenues and cost to reduce VAT liability.

5. The best tax system is a low-rate and broad-base tax system where more revenues can be generated and redistributed back to the poor using targeted means. Exempting an industry means someone else has to pay for the growing needs of the country, and this is not fair to others who pay the right amount of taxes. Moreover, it is often the poor who pays when services do not reach them.

9/13/17 DEPARTMENT OF FINANCE 52

SLIDE 27

Key messages

6. Instead of providing a producer subsidy in the form of a VAT exemption, a better way to help the poor avail of housing is to provide a targeted consumer subsidy in which the poor and low income are directly given cash, vouchers, or lower borrowing terms to acquire decent housing. This is far most cost effective and better targeted that the current system that incentives leakages. 7. For taxpayers, they can still find housing affordable as personal income tax is being reduced. In fact, for 99 percent of taxpayers, their higher take home pay due to lower income taxes is more than enough to offset the slight increase in consumption taxes, including the slight increase in housing prices.

Cannot afford: they will be provided free housing/vouchers/subsidies.
Socialized housing: those falling below the minimum wage can be provided
subsidies. The rest will benefit from lower income tax and this is enough to help

them purchase houses.

Economic and low-cost housing: buyers are beneficiaries of lower income taxes

so they can afford to buy house.

Leasing: no impact if lessee has gross sales at or below the VAT threshold. This

will not affect the far majority of small renters.

9/13/17 DEPARTMENT OF FINANCE 53

Key messages

8. At the same time, government can also help the housing sector by

Reducing red tape in securing permits and licenses (e.g., construction,

electricity, building), which reportedly takes up to three years.

Securing property rights, such as through an efficient titling and registration

system.

Enhancing financial inclusion.
Strengthening urban planning.
Unlocking government land.
Pursuing institutional reforms in the housing sector.
Improving infrastructure to spur housing development.

These core problems should be resolved rather than using tax exemptions as band aid solutions that clearly have not had a major impact on reducing the 5.6 million housing backlogs.

9/13/17 DEPARTMENT OF FINANCE 54

SLIDE 28

Key messages

9. The claim the housing prices will rise by 12 percent is

not founded at all. At most it is around 6.9 percent.

As housing developers have to pay VAT for inputs, such as for

cement, fixtures, tiles, and steel, the stranded input VAT that cannot be passed on to buyers is typically passed on to buyers in the form of artificially higher prices. Rarely do developers absorb the input VAT as this would cut their margin and business feasibility.

Based on average cost structure, housing prices are expected

to increase by around 6.9 percent. This amount can be funded by housing vouchers, direct subsidy programs, or the lower personal income taxes.

Tax compliant housing developers should find the reform to

their advantage, as they can properly credit the input VAT.

However, for developers who do not pay input VAT to save

cost, then this becomes a problem for them and a source of resistance.

9/13/17 DEPARTMENT OF FINANCE 55

Housing is a basic need and right

1. Housing is basic need and right of all Filipinos. 2. Yet housing is highly correlated with income and wealth. 3. To exempt housing is also to favor the rich who can use tax avoidance and evasion to game the system. It also penalizes the rest

f the value chain whose input VAT become stranded.

4. A better way to provide housing to the poor is through a targeted voucher or subsidy system as approved by the President in chapter 12 of the Philippine Development Plan. 5. In summary, we are simply changing the manner in which we provide a basic need for the poor through the proposed targeted voucher or subsidy system.

9/13/17 DEPARTMENT OF FINANCE 56

SLIDE 29

Is housing an investment

r consumption item?
It is both an investment and a consumption item.
Anything can be an investment (e.g., house, laptop,

cellphone, cash, cars, friendship, etc.).

However, under a VAT system, all final consumption by

households outside raw food, education, and health are

VATable. This covers all items stated above, including

housing.

This is in contrast to a business investment that is

intended to generate income streams.

9/13/17 DEPARTMENT OF FINANCE 57

VAT on housing: current system

9/13/17 DEPARTMENT OF FINANCE 58

SLIDE 30

9/13/17 DEPARTMENT OF FINANCE 59 9/13/17 DEPARTMENT OF FINANCE 60

SLIDE 31

VAT treatment on housing

9/13/17 DEPARTMENT OF FINANCE 61

VAT on housing: the reform

9/13/17 DEPARTMENT OF FINANCE 62

SLIDE 32

Impact of the housing VAT reform by provision (1/2)

9/13/17 DEPARTMENT OF FINANCE 63

Impact of the housing VAT reform by provision (2/2)

9/13/17 DEPARTMENT OF FINANCE 64

SLIDE 33

Leakages from VAT exemption on housing

9/13/17 DEPARTMENT OF FINANCE 65 9/13/17 DEPARTMENT OF FINANCE 66

SLIDE 34

9/13/17 DEPARTMENT OF FINANCE 67 9/13/17 DEPARTMENT OF FINANCE 68

SLIDE 35

9/13/17 DEPARTMENT OF FINANCE 69

Sample audit case of developer

Real Estate Developer - Taxpayer A VAT Assessment (Violation of Intent of Law on Incentives to Developer of Low Cost Housing) For the Years 2010 to 2012 Total Tax Due 2010 2011 2012 Legal Basis Sale of 2 or more housing units to a sin 2,800,905,857.10 1,513,532,586.57 622,326,924.38 665,046,346.15 Sales to corporation 113,458,789.83 105,785,607.63 7,673,182.20 2,914,364,646.93 1,513,532,586.57 728,112,532.01 672,719,528.35 Basic Tax 349,723,757.63 181,623,910.39 87,373,503.84 80,726,343.40 Surcharge

Interest

388,447,094.67 227,602,127.70 92,017,465.42 68,827,501.55 Compromise

Total Tax Due

738,170,852.30 409,226,038.09 179,390,969.26 149,553,844.95 Value Added Tax a) Violation of Sec. 109 (P)

f the NIRC . The practice

is a circumvention of the intent of the law allowing low income earners afford and obtain low cost housing units.

VAT on housing: price impact

9/13/17 DEPARTMENT OF FINANCE 70

SLIDE 36

9/13/17 DEPARTMENT OF FINANCE 71

According to the cost structure of construction and real estate firms,

nly 43 percent of all inputs are VATable

Sources: PSA, 2006 input-output table

9/13/17 DEPARTMENT OF FINANCE 72

Removing VAT exemptions will not lead to a 12 percent increase in prices for housing

The average VATable inputs for housing is 43 percent, which means that they can recover the

input VAT if the VAT exemption is removed.

With proper crediting of input VAT, the estimated price increase is only 6.9 percent, and not

12 percent.

It can be 12 percent if the developer does not pay input VAT/suppliers and contractors don’t

’t issue receipt, , but this is tax evasion.

This means that developers of low cost housing, and even cooperatives, with supposedly low

markup can see price increase way below 12 percent.

SLIDE 37

VAT for low cost housing

9/13/17 DEPARTMENT OF FINANCE 73

Socialized housing will remain VAT-exempt until a housing voucher system is instituted (per

HB 5636).

For low cost housing, assuming a 28 percent markup for developers, the price increase for 1

million peso house will be 69 thousand, which is 6.9 percent of 1 million.

0.03 0.07 0.10 0.14 0.19 0.0 0.5 1.0 1.5 2.0 2.5 3.0

Millions of pesos Selling price of property (millions)

Proposed VAT for low-cost housing

Price of property Proposed VAT Sources: DOF staff estimates Note: Currently, properties with a selling price of PHP 3.2 million or under are VAT exempt. These scenarios show the potenti al VAT payable for various prices of properties.

VAT on housing: profile of borrowers

9/13/17 DEPARTMENT OF FINANCE 74

SLIDE 38

Impact on the people

1. Those whose income is above PHP 40,000 have access to bank financing and will benefit from lower income taxes and low borrowing cost. In fact, passage of the tax reform is crucial in improving our investment-grade credit rating to keep interest rates low. 2. Those whose income fall between PHP 12,000 and PHP 40,000 can access Pag-IBIG concessional borrowing rates of as low at 3 percent. The majority of borrowers are also beneficiaries of lower income taxes and thus can easily afford to pay for housing, even for socialized housing. 3. Those whose income is below PHP 12,000 will be provided support through the targeted voucher or subsidy program.

9/13/17 DEPARTMENT OF FINANCE 75

Number of borrowers for socialized housing

9/13/17 DEPARTMENT OF FINANCE 76

Below Official Between Minimum Wage Official Minimum Wage and Pag-IBIG Defined Minimum Wage (b)

(c) (d) = (b) + (c)

(e) (f) 2,566 3,950 6,516 4,249 10,765 2,018 4,259 6,277 4,742 11,019 2,543 6,020 8,563 6,204 14,767 3,701 7,797 11,498 8,529 20,027 5,723 7,745 13,468 11,325 24,793 2,416 3,330 5,746 4,999 10,745 18,967 33,101 52,068 40,048 92,116 20.6 35.9 56.5 43.5 100.0 Share to total 2013 2014 2015 2016 Jan - June 2017 Total

Pag-IBIG Defined Minimum Wage and Below

Above Pag-IBIG Defined Minimum Wage Total (a) 2012 Year

SLIDE 39

Number of borrowers for low-cost housing

9/13/17 DEPARTMENT OF FINANCE 77 9/13/17 DEPARTMENT OF FINANCE 78

Maximum loanable amount

Region Minimum wage (regional maximum) Monthly minimum wage (assuming 26 working days/month) Maximum loanable amount (PHP) I 280 7,280 317,494 II 300 7,800 340,172 III 364 9,464 412,742 IVA 379 9,841 429,184 IVB 285 7,410 323,163 V 265 6,890 300,485 VI 299 7,761 338,471 VII 353 9,178 400,269 VIII 285 7,410 323,163 IX 296 7,696 335,636 X 318 8,268 360,582 XI 340 8,840 385,528 XII 295 7,670 334,502 NCR 491 12,766 556,748 CAR 285 7,410 323,163 ARMM 265 6,890 300,485 CARAGA 280 7,280 317,494 Current regional daily minimum wage rates and maximum loanable amount

Source: National Wages and Productivity Commission, Pag-ibig Fund, DOF staff estimates Note: The Pag-ibig loan calculator was used to estimate the maximum loanable amount. It assumes a loan term

f 20 years at a 5.5 percent annual interest.

SLIDE 40

9/13/17 DEPARTMENT OF FINANCE 79

With the VAT on housing, additional monthly amortization will be minimal

Current Price Increased Price 450,000.00 481,050.00 5 8,085.91 8,643.84 557.93 6.900% 10 4,345.23 4,645.05 299.82 6.900% 15 3,107.62 3,322.04 214.43 6.900% 20 2,495.69 2,667.89 172.20 6.900% 25 2,133.95 2,281.19 147.24 6.900% 30 1,897.22 2,028.13 130.91 6.900% Source: Pag-IBIG 3.000% Percentage Increase Loanable Amount Interest Rate Loan Term (in years) Monthly Amortization Difference

9/13/17 DEPARTMENT OF FINANCE 80

With the VAT on housing, additional monthly amortization will be minimal

Current Price Increased Price 750,000.00 801,750.00 5 14,674.61 15,687.16 1,012.55 6.900% 10 8,516.10 9,103.71 587.61 6.900% 15 6,533.31 6,984.10 450.80 6.900% 20 5,591.80 5,977.63 385.83 6.900% 25 5,064.05 5,413.47 349.42 6.900% 30 4,740.51 5,067.61 327.10 6.900% Source: Pag-IBIG 6.500% Interest Rate Loan Term (in years) Loanable Amount Difference Percentage Increase Monthly Amortization

SLIDE 41

9/13/17 DEPARTMENT OF FINANCE 81

Indicative salary grade and take home pay increment

Net taxable income Tax due Net take home pay3 Effective tax rate (percent)4 Net taxable income Tax due Net take home pay3 Effective tax rate (percent)4 1 10,510 191,140 175,767 110,747 175,767 2 11,200 200,800 184,366 117,966 184,366 3 11,914 210,796 193,420 125,592 193,420 4 12,647 221,058 202,564 133,270 202,564 5 13,481 232,734 212,989 142,027 212,989 6 14,340 244,760 223,731 151,051 223,731 7 15,254 257,556 60,663 7,099 228,071 12 160,663 235,171 7,099 8 16,282 271,948 71,492 8,798 239,257 12 171,492 248,056 8,798 9 17,473 288,622 84,062 11,312 251,695 13 184,062 263,008 11,312 10 18,718 306,052 97,208 13,942 264,703 14 197,208 278,644 13,942 11 20,179 326,506 112,512 17,002 279,867 15 212,512 296,870 17,002 12 22,149 354,086 133,251 21,150 300,399 16 233,251 321,549 21,150 13 24,224 383,136 155,112 26,278 321,282 17 255,112 1,022 346,538 25,256 14 26,494 414,916 179,056 32,264 343,780 18 279,056 5,811 370,233 2 26,453 15 29,010 450,140 205,477 38,869 368,628 19 305,477 11,095 396,401 4 27,774 16 31,765 488,710 234,600 46,150 395,980 20 334,600 16,920 425,210 5 29,230 17 34,781 530,934 266,361 54,908 425,015 21 366,361 23,272 456,651 6 31,636 18 38,085 577,190 305,668 66,700 454,967 22 405,668 31,417 490,251 8 35,283 19 42,099 633,386 356,565 81,970 490,596 23 456,565 44,141 528,424 10 37,828 20 47,037 702,518 419,179 100,754 534,425 24 519,179 59,795 575,384 12 40,959 Current Change in annual take home pay Proposed Salary grade Monthly income1 Annual gross income2

9/13/17 DEPARTMENT OF FINANCE 82

Indicative salary grade and take home pay increment

Net taxable income Tax due Net take home pay3 Effective tax rate (percent)4 Net taxable income Tax due Net take home pay3 Effective tax rate (percent)4 21 52,554 779,756 489,135 121,740 583,394 25 589,135 77,284 627,851 13 44,457 22 58,717 866,038 567,282 146,530 636,751 26 667,282 96,820 686,461 15 49,710 23 65,604 962,456 654,609 174,475 696,134 27 754,609 118,652 751,957 16 55,823 24 73,299 1,070,186 752,181 205,698 762,483 27 852,181 145,654 822,527 17 60,044 25 82,439 1,198,146 868,077 242,784 841,292 28 968,077 180,423 903,654 19 62,362 26 92,108 1,333,512 990,679 282,017 924,662 28 1,090,679 217,204 989,476 20 64,814 27 102,910 1,484,740 1,127,649 325,848 1,017,801 29 1,227,649 258,295 1,085,354 21 67,553 28 114,981 1,653,734 1,280,709 374,827 1,121,882 29 1,380,709 304,213 1,192,496 22 70,614 29 128,467 1,842,538 1,451,712 429,548 1,238,164 30 1,551,712 355,513 1,312,198 23 74,034 30 143,534 2,053,476 1,642,761 490,684 1,368,078 30 1,742,761 412,828 1,445,933 24 77,855 31 198,168 2,818,352 2,335,520 712,366 1,839,154 31 2,435,520 629,366 1,922,154 26 83,000 32 233,857 3,317,998 2,788,057 857,178 2,146,879 31 2,888,057 774,178 2,229,879 27 83,000 33 289,401 4,095,614 3,492,355 1,082,553 2,625,801 31 3,592,355 999,553 2,708,801 28 83,000 Notes: 1. Monthly basic salary is based on the third tranche (2018) of the Salary Standardization Law of 2015.

2. Annual Gross income includes basic salary, 13th and 14th month pay, de minimis (P10,000), PERA (P24,000) and PBB (minimum amount of

P10,000 for conservative computation).

3. Net take home pay is equal to annual gross income less mandatory contributions (GSIS, PHILHEALTH and Pag-ibig) and tax due.
4. ETR is computed as: Tax Due/Net Taxable Income.

Source: DOF staff estimates Current Change in annual take home pay Proposed Salary grade Monthly income1 Annual gross income2

SLIDE 42

VAT on housing: leasing

9/13/17 DEPARTMENT OF FINANCE 83

VAT for leased residential properties

9/13/17 DEPARTMENT OF FINANCE 84

A monthly rent of PHP 10,000 implies that a property owner needs at least a 25 door

property to breach the proposed VAT threshold of PHP 3 million.

Given how rare this is, lessees who rent low-cost properties are unlikely to be covered by the

VAT.

Monthly rent (PHP) Units to breach the VAT threshold 5,000 50 6,000 42 7,000 36 8,000 31 9,000 28 10,000 25 Source: DOF staff estimates

SLIDE 43

9/13/17 DEPARTMENT OF FINANCE 85

Even if rental will be VATable, most households can afford due to higher take home pay

VAT on housing: more budget and subsidy for housing

9/13/17 DEPARTMENT OF FINANCE 86

SLIDE 44

Strategies identified under the Philippine Development Plan (PDP) 2017-2022 to address the housing needs of lower income classes and vulnerable sector

9/13/17 DEPARTMENT OF FINANCE 87

Below are the two identified strategies under Chapter 12 of the PDP that aims to give direct subsidy to buyers of socialized and economic housing:

1. Intensify implementation of alternatives and innovative solutions

in addressing the housing needs of the lower income classes and vulnerable sector.

2. Mainstream program convergence budgeting in housing and

settlement, and innovative housing finance modalities.

9/13/17 DEPARTMENT OF FINANCE 88

SLIDE 45

9/13/17 DEPARTMENT OF FINANCE 89 9/13/17 DEPARTMENT OF FINANCE 90

Appropriations for housing sector

SLIDE 46

Why a voucher system is better than VAT exemption (1/2)

1. There are two ways to help the poor.

Producer subsidy: VAT exemption.
Consumer subsidy: targeted cash voucher/subsidy/financing.

2. Problem with the producer subsidy

Leakage: transfer cost and pricing especially those who cater to all

spectrum of buyers (from socialized to high end).

Transfer of stranded input VAT from socialized segment to

VATable segment to claim more credit.

Non-issuance of receipts by suppliers and contractors.
This promotes tax evasion and corruption.
Promotes tax avoidance.
For example, adjacent units in condos are sold separately, even if

it will ultimately be used by a single owner (see examples in the previous slides).

9/13/17 DEPARTMENT OF FINANCE 91

Why a voucher system is better than VAT exemption (2/2)

3. Given large leakages, the better option is help the

poor via a targeted consumer subsidy.

4. With a better targeting system (e.g., Listahanan

2015), we know the poor by name and address, and we have an improving track record in implementing the cash transfers.

5. These suggest that moving to a consumer-based

subsidy that is targeted is more efficient and effective.

9/13/17 DEPARTMENT OF FINANCE 92

SLIDE 47

VAT on housing: impact on OFW

9/13/17 DEPARTMENT OF FINANCE 93

Why OFW demand for housing will not be affected

OFW dollar remittances have been increasing by

more than 5 percent annually in the past decade.

The recent depreciation of the peso increases the

purchasing power of OFW families by about 10 percent.

OFWs have always been exempted from PIT.
OFWs are taxed lower in host countries.
OFW deployment remain robust.
All these mean OFW have higher disposable income

and can afford housing.

9/13/17 DEPARTMENT OF FINANCE 94

SLIDE 48

OFW remittances has been increasing

9/13/17 DEPARTMENT OF FINANCE 95 4.7 6.3 10.2 7.3 7.5 7.9 8.5 9.0 9.4 10.4 10.4 9.7 9.5 11.3 10.3 9.8 9.3 9.3 9.6 9.7 9.7

4 5 6 7 8 9 10 11 12 5 10 15 20 25 30 35 Percent of GDP USD billions

Remittances

Remittances, left Remittances (percent of GDP), right

Sources:PSA, BSP, DOF staff estimates

9/13/17 DEPARTMENT OF FINANCE 96

Depreciation of the PHP against USD, increases the purchasing power of OFWs and their families

40 42 44 46 48 50 52 54 56 58

USD/PHP exchange rate

Exchange rate (reverse scale) Source: BSP Note: The USD/PHP exchange rate is plotted on a reverse scale, meaning an upward (downward) movement represents an appreciation (depreciation).

SLIDE 49

Movement of the PHP against USD

1996 1996 1997 1997 1998 1998 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 Exchange rate (PHP/USD) 26.22 29.47 40.89 39.09 44.19 50.99 51.60 54.20 56.04 55.09 51.31 Depreciation (-) / Appreciation (+)

1.91
11.04 -27.93

4.62

11.55 -13.33
1.18
4.80
3.28

1.73 7.35

9/13/17 DEPARTMENT OF FINANCE 97

2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 Exchange rate (PHP/USD) 46.15 44.47 47.64 45.11 43.31 42.23 42.45 44.40 45.50 47.49 Depreciation (-) / Appreciation (+) 11.19 3.76

6.64

5.60 4.15 2.57

0.51
4.39
2.43
4.19

OFW deployment is robust

9/13/17 DEPARTMENT OF FINANCE 98

SLIDE 50

OFW deployment

2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 Land-based 704,417 740,360 788,070 811,070 974,399 1,092,162 Sea-based 229,002 247,983 274,497 266,553 261,614 330,424 Total 933,588 988,615 1,062,567 1,077,623 1,236,013 1,422,586

9/13/17 DEPARTMENT OF FINANCE 99

2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 Land-based 1,123,676 1,318,727 1,435,166 1,469,179 1,430,842 1,437,875 Sea-based 347,150 369,104 366,865 367,166 401,826 406,531 Total 1,470,826 1,687,831 1,802,031 1,836,345 1,832,668 1,844,406

Source: Philippine Overseas Employment Administration

Removing the VAT exemptions of cooperatives

9/13/17 DEPARTMENT OF FINANCE 100

SLIDE 51

Removing VAT of coops

Ke

Key messages

We value coops as agents of social justice and development.
But tax exemption is not the best way to help them as this

creates a lot of leakages and inequity among the far majority

f non-coop members.
When we give someone an exemption, someone else has to

pay for it, and this is often the poor who are deprived of social services.

Instead, we can use the budget side to give targeted support

to coops members.

It is high time some coops contribute more to the country

after being supported all these years by blanket tax exemptions.

9/13/17 DEPARTMENT OF FINANCE 101

Removing VAT on coops

Ra

Ration

nale for
r removing coop
op exemption
n
Currently, 9,432 compliant coops with some 7 million members are

exempted from almost all types of taxes, while some 13 million non-coop families pay their fair share of taxes.

There are many ways to help coops, but VAT exemption is not the right way

as it goes against the principle of a VAT and leads to massive leakage across

sectors. The VAT is a consumption tax and is not meant to be a redistributive

tax or serve as a tax incentive. It is not a tax on profit. That is for the income tax and the budget to do. If we agree to exempt coops, then we also have to agree to exempt 140 other non-essential sectors from the VAT, to be fair. Clearly this is not right.

Leakage is potentially large as CDA cannot audit properly the coops and

distinguish sales between members and to non-members. BIR cannot even audit coops without first seeking permission from CDA. This is absurd.

There are also many “fake” coops that take advantage of the system. These

fake coops hardly fit in the core principles of cooperativism. They include coops in insurance, housing, aviation, medical service, labor only contracting, among others.

Only Philippines and Kazakhstan have such exemptions. This is too generous

and a waste of scarce resources. Not all coops are poor. Some can be very

rich. Why baby them forever with tax exemptions?

9/13/17 DEPARTMENT OF FINANCE 102

SLIDE 52

9/13/17 DEPARTMENT OF FINANCE 103

Exemptions given to cooperatives when transacting with members

1.

1. In

Income tax imposed by Title II of the NIRC, as amended; 2.

2. Va

Value-adde added d tax x imposed under Title IV of the NIRC, as amended; 3.

3. Pe

Percentage tax imposed under Title V of the NIRC, as amended; 4.

4. Do

Donor’s s tax imposed under Title III of the NIRC, as amended; 5.

5. Do

Documentary stamp tax (DST) imposed under Title VII of the NIRC, as amended; 6.

6. An

Annual registration

n fee of
f PHP 500 under Section 236 (B) of the NIRC of

1997, as amended; 7.

7. Al

All taxes on

n transaction
ns with insurance com
mpanies and banks, including

but not limited to 20 percent final tax on interest deposits and 7.5 percent final tax on interest income derived from a depository bank under the expanded foreign currency deposit system.

9/13/17 DEPARTMENT OF FINANCE 104

Exemptions given to cooperatives when transacting with both members and non-members

Under Article 61 of RA 6938, as amended, the taxability of cooperatives dealing with both members and non-members, depends on whether

r not the accumulated reserves and undivided net savings exceeds Php10 million:

Fo For cooperatives with accumulated reserves and undivided net savings of not more than PhP10 million - ex exempt from all national, ci city, pr provinc ncial, muni municipa pal or ba barang ngay taxes of wha hatever na name me and nd na natur

ure. Such cooperatives shall be exempt from customs duties, advance sales
r compensating taxes on their importation of machineries, equipment and spare parts used by them and which are not available locally as

certified by the Department of Trade and Industry. All tax-free importations shall not be transferred to any person until after five (5) years,

therwise, the cooperative and the transferee or assignee shall be solidarily liable to pay twice the amount of the tax and/or duties thereon.

For cooperatives with accumulated reserves and undivided net savings of more than Php10 million: Business transactions with members – shall be exempt from all national internal revenue taxes for which it is liable (See A. Transacting with members only) Business transactions with non-members – cooperatives under this category shall pay the following at the full rate: 2.1 Income Tax - on the amount allocated for interest on capitals, provided, that the same tax is not consequently imposed on interest individually received by members and that cooperatives, regardless of classification, are exempt from income tax from the date of registration with the CDA. VAT – on transactions with non-members except for the following VAT-exempt transactions under the NIRC, as amended, viz: 2.2.1 Section 109 (L) – Sales by agricultural cooperatives duly registered with the CDA to their members as well as sale of their produce, whether in its original state or processed form, to non-members; their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce. 2.2.2 Section 109 (M) – Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the CDA.

SLIDE 53

9/13/17 DEPARTMENT OF FINANCE 105

Exemptions given to cooperatives when transacting with both members and non-members

2.2.3 Section 109 (N) – Sales by agricultural, non-electric and non-credit cooperatives duly registered with the CDA: Provided, That the share capital contribution of each member does not exceed Fifteen thousand pesos (PhP15,000) and regardless of the aggregate capital and net surplus ratably distributed among the members. Percentage Tax – all sales of goods and/or services rendered to non-members shall be subject to the applicable percentage taxes imposed by Title V of the NIRC, as amended, except sales made by producers, marketing or services cooperatives; 2.4 All other internal revenue taxes unless otherwise provided by the law. Accumulated reserves refers to the accumulated amount of money annually deducted from the net surplus, which shall be less than fifty (50%) for the first five years of operation after resignation and at least ten per centum (10%) of the net surplus thereafter, intended not for the allocation or distribution to the members but for the protection and stability of the cooperative, commonly referred to as the Reserve Fund. Undivided Net Surplus/ Undivided Net Savings refers to the net amount arising from the operations of the cooperative after deducting the

perational expenses from revenue generated, not construed as profits, but as excess of payments made by the members for the loans

borrowed or the goods and services bought- from the cooperative including other inflows of assets resulting from its other operating activities and which shall be deemed to have been returned to them if the same is distributed as prescribed in accordance with Article 86 of RA 9520 and the by-laws of the cooperative. Under Section 8 of the Joint Rules and Regulations Implementing Articles 60, 61 and 144 of RA 9520 (February 5, 2010), sale by agricultural cooperatives to non-members can only be exempted from VAT if the producer of the agricultural products sold is the cooperative itself. If the cooperative is not the producer (e.g. trader), only the sales to its members shall be exempted from VAT.

9/13/17 DEPARTMENT OF FINANCE 106

Exemptions given to cooperatives when transacting with both members and non-members

In addition to the foregoing, Article 61 (d) of RA 6938, as amended, pr provide des tha hat do dona nations ns to cha haritabl ble, research h and nd educ ducationa nal in instit itutio ions s and rein investment to so socio ioeconomic ic proje jects within the area of operation of

f the coop
operative may be tax deductible.

Moreover, it may be noted that under Article 61 (3) of the said Code, al all cooperatives, regar ardless of the am amount of ac accumulated reserves an and undi undivide ded d ne net saving ngs, sha hall be be exemp mpt from m the he pa payme ment of local taxes and nd taxes on n trans nsactions ns with h ba banks nks and nd ins nsur uranc nce compa panie ies. s. However, all sales or services rendered for non-members are subject to the applicable percentage taxes sales made by producers, marketing

r service cooperatives.

Furthermore, as provided under Section 30 (B) of the NIRC, as amended, mut mutua ual saving ngs ba bank nk no not ha having ng a capi pital stock repr presented d by sh shares, s, and cooperativ ive bank wit ithout capit ital l stock organiz ized and operated for mutual l purpose ses s and wit ithout profit it sh shall ll be exemp mpt fr from pa payme ment of the he 30% tax on n inc ncome me. In addition, Section 133 (n) of th the LGC, in general, exempts ts cooperati tives registered under RA A 6938, as amended, from th the payment t of taxes, fe fees and charges imposed by provinces, cities, municipalities and barangay; and real property taxes imposed by cities/municipal aliti ties under Section 234 (d) of the LGC, subject to certain conditions. It should be emphasized that, all types of cooperatives, whether dealing exclusively with members or both members and non-members, shall be subject to all the appropriate taxes under the NIRC, as amended, for all income generated that is not related to main/principal business/es under its Articles of Cooperation. Cooperatives transacting business with both members and non-members are still required to do the following, viz: 1. Obtain or secure a Mayor’s permit and pay the commensurate cost of regulation, inspection and surveillance of the operation of its business but not exceeding One Thousand Pesos (PhP1,000.00); 2. Secure a Community Tax Certificate, as a juridical and pay the basic tax of Five Hundred Pesos (PhP500.00); and 3. Pay service charges or rentals for the use of property and equipment or public utilities owned by the local government such as charges for actual water consumption, electric power, toll fees for the use of public roads and bridges, and the like.” (S (See Bureau of Lo Local Govern rnment Finance Memorandum Circular r No. 31-2009) 2009)

SLIDE 54

9/13/17 DEPARTMENT OF FINANCE 107 9/13/17 DEPARTMENT OF FINANCE 108

SLIDE 55

9/13/17 DEPARTMENT OF FINANCE 109

Electric cooperatives registered with the CDA (VAT exempt) and NEA (VATable)

Ty Type of registration No

No. of
f elect

ctric c co cooperatives Sh Share to to total (%) VA VAT treatment Cooperative Development Authority (CDA) registered 13 10 Exempt National Electrification Administration (NEA) registered 119 90 VATable To Total 132 132 100 100

Sources: CDA and NEA

9/13/17 DEPARTMENT OF FINANCE 110

The 13 electric cooperatives registered with the CDA

Name Name of ele lectric ic cooperativ ive Re Region Philippine Federation of Electric Cooperatives NCR Pangasinan Electric Cooperative I Region 1 Pangasinan Electric Cooperative III Region 1 Quirino Electric Cooperative Region 2 Isabela II Electric Cooperative Region 2 Ganano Energy and Environment Electric Coop Region 2 Nueva Viscaya Electric Cooperative Region 2 San Jose City Electric Cooperative Region 3 Palawan Electric Cooperative Region 4B Sorsogon II Electric Cooperative Region 5 Negros Occidental Electric Cooperative Region 6 Negros Oriental Electric Cooperative Region 7 Davao del Norte Electric Cooperative Region 11 Source: CDA

SLIDE 56

VAT on power transmission

9/13/17 DEPARTMENT OF FINANCE 111

VAT on power transmission

In 2009, the VAT on power transmission was

removed in favor of a franchise tax to NGCP.

The franchise tax is in lieu of all taxes.
This is not efficient and fair. It also disrupts the

value-chain and takes away substantial revenue from the government.

The proposal is to reimpose the VAT on

transmission on top of the very generous franchise tax.

9/13/17 DEPARTMENT OF FINANCE 112

SLIDE 57

9/13/17 DEPARTMENT OF FINANCE 113

Additional VAT on transmission fees will be muted (Meralco areas)

Transmission cost in Meralco areas is only around 8 percent of the total power

cost, so the price effect will be minimal.

15 53 139 305 494 658 822 4.5 9.1 18.1 36.3 54.4 72.5 90.7 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000

PHP kWh consumption

Electricity charges with the proposed VAT (Meralco)

Base charges Current VAT Proposed VAT Sources: Meralco, DOF staff estimates

9/13/17 DEPARTMENT OF FINANCE 114

Source: NGCP

Transmission charges are even lower outside Meralco areas, so the price increase is much lower

SLIDE 58

9/13/17 DEPARTMENT OF FINANCE 115

Additional VAT on transmission fees will be muted (non-Meralco areas)

Transmission cost in non-Meralco areas is only around 5 percent of the total

power cost, so the price effect will be minimal.

30 61 122 243 365 486 608 2 4 7 14 22 29 36 1,000 2,000 3,000 4,000 5,000 6,000 7,000

PHP kWh consumption

Electricity charges with the proposed VAT (Non-Meralco areas)

Base charges Current VAT Proposed VAT Sources: NGCP, DOF staff estimates

VAT exemption of renewable energy

9/13/17 DEPARTMENT OF FINANCE 116

SLIDE 59

9/13/17 DEPARTMENT OF FINANCE 117

Incentives for renewable energy (RE) projects and activities

1. Income tax holiday (ITH) for the first seven (7) years of commercial
perations.
2. Duty-free importation of RE machinery, equipment and materials within the

first ten years.

3. Special realty tax rates on equipment and machinery, not exceeding 1.5

percent.

4. Net operating loss carry-over.
5. Corporate tax rate of 10 percent after the ITH period.
6. Accelerated depreciation.

7.

7. Ze

Zero perc rcent VAT rate te (only this will be touched)

8. Cash incentive of renewable energy developers for missionary

electrification, equivalent to 50 percent of the universal charge for power needed to service missionary areas.

9. Tax exemption of carbon credits.

10.Tax credit on domestic capital equipment and services.

LTS VAT refunds from renewable energy

9/13/17 DEPARTMENT OF FINANCE 118

Ag Agenc ncy

Year ar No

No. of taxpayers

Ze Zero ro-ra rated sa sales s (PHP bi billion) n) VA VAT refund claimed (P (PHP bi billion) n) BIR 2010 10 71.2 1.6 2011 10 75.2 2.0 2012 13 85.6 1.9 2013 17 70.8 1.3 2014 21 85.6 2.3 2015 21 88.1 0.8 BOC 2015* 7 .. 0.9

Sources: BIR and BOC *BOC figures were estimated from the individual list of tax credit certificate issuances.

SLIDE 60

Potential impact on

ther sectors

9/13/17 DEPARTMENT OF FINANCE 119

State universities and colleges

9/13/17 DEPARTMENT OF FINANCE 120

Cu Curren ent system em Pr Proposed system

There are several laws creating state

colleges and universities and along with it is the grant of VAT exemption

n their imports.
The proposal under Package 1 is to

VAT imports of SUC and then give them a subsidy through the tax expenditure fund or TEF. This is more transparent while retaining their benefits.

SLIDE 61

GOCCs

9/13/17 DEPARTMENT OF FINANCE 121

Cu Curren ent system em Pr Proposed system

Charters of several GOCCs exempt

them from the VAT.

The proposal under Package 1 is to

VAT purchases of GOCCs and then give them a subsidy through the tax expenditure fund or TEF. This is more transparent while retaining their benefits.

9/13/17 DEPARTMENT OF FINANCE 122

Boy and girl scouts

Current system Proposed system Girl scouts

On all income derived from it operations

including use, lease or sale of its real properties and provision of services

Importations and purchases for its

exclusive use

Transactions of boy and girl scouts

shall be subject to VAT.

VAT exemption is not the best way

to achieve the objectives of BSP and GSP but via the education system.

Boy scouts

No explicit statement as the VAT

exemption except that it says, “Any other provisions of law to the contrary notwithstanding, there shall be no discrimination in tax treatment of the Boy and Girl Scouts of the Philippines."

SLIDE 62

VAT base and revenues

9/13/17 DEPARTMENT OF FINANCE 123 9/13/17 DEPARTMENT OF FINANCE 124

Number of VAT registered taxpayers and filers, 2014 - 2016

Source: BIR

Year 2014 2015 2016 Individual Non- individual Total Individual Non- individual Total Individual Non- individual Total Registered 288,210 198,588 486,798 288,023 211,642 499,665 284,901 221,202 506,103 Filers* 120,861 125,615 246,476 125,110 131,743 256,853 123,270 131,498 254,768 Total collection (in billion PHP) 278.8 295.5 331.4

SLIDE 63

VAT revenue collection

9/13/17 DEPARTMENT OF FINANCE 125

1 1.5 2 2.5 3 3.5 4 4.5 5 100 200 300 400 500 600 700

Percent Php billions

VAT collection

Total VAT collection, left Percent of GDP, right

Sources: BIR, BOC, and PSA

RVAT reform

VAT revenue collection

9/13/17 DEPARTMENT OF FINANCE 126

Sources: BIR, BOC, and PSA

1988 1988 1989 1989 1990 1990 1991 1991 1992 1992 1993 1993 1994 1994 1995 1995 1996 1996 1997 1997 Total collection (PHP billion) 14.3 20.2 25.9 26.8 32.1 44.2 46.8 58.5 75.9 89.8 Nominal GDP (PHP billion) 885.5 1,025.3 1,193.5 1,382.7 1,497.5 1,633.6 1.875.7 2,111.7 2,406.4 2,688.7 Percent to GDP (%) 1.6 2.0 2.2 1.9 2.1 2.7 2.5 2.8 3.2 3.3 1998 1998 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 Total collection (PHP billion) 79.5 91.8 96.1 106.5 115.3 135.3 139.1 156.7 259.8 274.0 Nominal GDP (PHP billion) 2,952.8 3,244.2 3,580.7 3,888.8 4,198.3 4,548.1 5,120.4 5,677.7 6,271.2 6,892.7 Percent to GDP (%) 2.7 2.8 2.7 2.7 2.7 3.0 2.7 2.8 4.1 4.0 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 Total collection (PHP billion) 296.7 302.2 330.8 383.3 450.4 490.0 557.8 570.2 623.1 Nominal GDP (PHP billion) 7,720.9 8,026.1 9,003.5 9,708.3 10,561.1 11,538.4 12,634.2 13,322.0 14,480.7 Percent to GDP (%) 3.8 3.8 3.7 3.9 4.3 4.2 4.4 4.3 4.3

SLIDE 64

Share to total tax collection

9/13/17 DEPARTMENT OF FINANCE 127

1988 1988 1989 1989 1990 1990 1991 1991 1992 1992 1993 1993 1994 1994 1995 1995 1996 1996 1997 1997

Total VAT collection (PHP billion) 14.3 20.2 25.9 26.8 32.1 44.2 46.8 58.5 75.9 89.8 Total tax collection (PHP billion) 88.7 120.4 149.9 180.6 206.8 227.9 269.1 307.8 365.3 409.5 Share to total collection (%) 16.2 16.8 17.3 14.8 15.5 19.4 17.4 19.0 20.8 21.9 1998 1998 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 Total VAT collection (PHP billion) 79.5 91.8 96.1 106.5 115.3 135.3 139.1 156.7 259.8 274.0 Total tax collection (PHP billion) 413.2 427.8 455.8 488.7 493.9 543.2 595.4 697.3 850.9 923.0 Share to total collection (%) 19.2 21.5 21.1 21.8 23.3 24.9 23.4 22.5 30.5 29.7 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 Total VAT collection (PHP billion) 296.7 302.2 330.8 383.3 450.4 490.0 557.8 570.2 623.1 Total tax collection (PHP billion) 1,038.8 970.6 1,081.9 1,189.3 1,347.8 1,521.6 1,704.0 1,809.1 1,974.2 Share to total collection (%) 28.6 31.1 30.6 32.2 33.4 32.2 32.7 31.5 31.6

BIR VAT revenue collection

9/13/17 DEPARTMENT OF FINANCE 128

0.5 1.0 1.5 2.0 2.5 50 100 150 200 250 300 350

Percent Php billions

BIR VAT collection

Total BIR VAT collection, left Percent of GDP, right

Sources: BIR and PSA

RVAT reform

SLIDE 65

BIR VAT revenue collection

9/13/17 DEPARTMENT OF FINANCE 129

1988 1988 1989 1989 1990 1990 1991 1991 1992 1992 1993 1993 1994 1994 1995 1995 1996 1996 1997 1997 Total collection (PHP billion) 7.1 10.1 13.1 15.1 18.1 22.8 25.5 29.6 40.9 47.3 Percent to GDP (%) 0.8 1.0 1.1 1.1 1.2 1.4 1.4 1.4 1.7 1.8 1998 1998 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 Total collection (PHP billion) 47.5 55.2 53.9 59.2 65.9 82.6 80.2 87.9 140.9 145.0 Percent to GDP (%) 1.6 1.7 1.5 1.5 1.6 1.8 1.6 1.5 2.2 2.1 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 Total collection (PHP billion) 140.3 168.3 173.3 183.1 229.6 250.1 278.7 295.5 331.4 Percent to GDP (%) 1.8 2.1 1.9 1.9 2.2 2.2 2.2 2.2 2.3 Sources: BIR and PSA

LTS VAT collection by major industry group

9/13/17 DEPARTMENT OF FINANCE 130

Large taxpayers service (VAT collection for 2016) PHP billions

A. Agriculture, hunting, and forestry

0.4

B. Fishing

0.0

C. Mining and quarrying

0.2

D. Manufacturing

78.5

E. Electricity, gas, and water

20.7

F. Construction

3.4

G. Wholesale and retail trade, repair of motor vehicles

22.7

H. Hotels and restaurants

6.2

I. Transport, storage, and communications

20.6

J. Financial intermediation

9.3

K. Real estate, renting, and other business activities

18.8

L. Compulsory social security public administration

1.6

M. Education

0.0

N. Health and social work

1.7

O. Other community social and personal service

4.6

P. Extra-territorial organizations and bodies

0.1 Total 188.8 Source: BIR

SLIDE 66

VAT collection on locally manufactured and imported petroleum products

S

urce of basic data: BIR

and BOC Total VAT Collection on Locally Manufactured and Imported Petroleum Products and Ratio to GDP 2003-2015

9/13/17 DEPARTMENT OF FINANCE 131

BOC VAT revenue collection

9/13/17 DEPARTMENT OF FINANCE 132

0.5 1.0 1.5 2.0 2.5 50 100 150 200 250 300 350

Percent Php billions

BOC VAT collection

Total BOC VAT collection, left Percent of GDP, right

Sources: BOC and PSA

RVAT reform

SLIDE 67

BOC VAT revenue collection

9/13/17 DEPARTMENT OF FINANCE 133

1988 1988 1989 1989 1990 1990 1991 1991 1992 1992 1993 1993 1994 1994 1995 1995 1996 1996 1997 1997 Total collection (PHP billion) 7.2 10.1 12.9 11.7 14.0 21.4 21.3 28.9 35.0 42.5 Percent to GDP (%) 0.8 1.0 1.1 0.8 0.9 1.3 1.1 1.4 1.5 1.6 1998 1998 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 Total collection (PHP billion) 32.0 36.6 42.3 47.2 49.4 52.7 58.9 68.8 118.9 129.0 Percent to GDP (%) 1.1 1.1 1.2 1.2 1.2 1.2 1.1 1.2 1.9 1.9 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 Total collection (PHP billion) 156.4 133.9 157.5 200.2 220.8 239.8 279.1 274.7 291.7 Percent to GDP (%) 2.0 1.7 1.7 2.1 2.1 2.1 2.2 2.1 2.0 Sources: BOC and PSA

VAT efficiency and share to total tax collection

9/13/17 DEPARTMENT OF FINANCE 134

10 15 20 25 30 35 40

Ratio

VAT efficiency

Sources: BIR, BOC, and PSA

RVAT reform

10 15 20 25 30 35

Percent

VAT collection share to total tax collection

Sources:BIR, BOC, and PSA

RVAT reform

SLIDE 68

VAT efficiency

9/13/17 DEPARTMENT OF FINANCE 135

1988 1988 1989 1989 1990 1990 1991 1991 1992 1992 1993 1993 1994 1994 1995 1995 1996 1996 1997 1997 Total VAT collection (PHP billion) 14.3 20.2 25.9 26.8 32.1 44.2 46.8 58.5 75.9 89.8 VAT collection

ver GDP (%)

1.6 2.0 2.2 1.9 2.1 2.7 2.5 2.8 3.2 3.3 Efficiency (%) 13.5 16.4 18.1 16.1 17.9 22.5 20.8 23.1 26.3 27.8 1998 1998 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 Total VAT collection (PHP billion) 79.5 91.8 96.1 106.5 115.3 135.3 139.1 156.7 259.8 274.0 VAT collection

ver GDP (%)

2.7 2.8 2.7 2.7 2.7 3.0 2.7 2.8 4.1 4.0 Efficiency (%) 22.4 23.6 22.4 22.8 22.9 24.8 22.6 23.0 34.5 33.1 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 Total VAT collection (PHP billion) 296.7 302.2 330.8 383.3 450.4 490.0 557.8 570.2 623.1 VAT collection

ver GDP (%)

3.8 3.8 3.7 3.9 4.3 4.2 4.4 4.3 4.3 Efficiency 32.0 31.4 30.6 32.9 35.5 35.4 36.8 35.7 35.9

Estimated VAT gap, (PHP billions unless otherwise specified)

9/13/17 DEPARTMENT OF FINANCE 136

SLIDE 69

9/13/17 DEPARTMENT OF FINANCE 137

BIR data on VAT refund

Stock as of Dec. 31, 2015 2016 2017

No. of

availers Amount (PHP million)

No. of

availers Amount (PHP million)

No. of

availers Amount (PHP million) Ta Tax credit certificate (TCC) BIR solely issued ¹ 240 3,624.8 158 2,560.6 54 2,155.4 DOF-One stop shop / BIR jointly issued¹ 200 652.3 Notice of Payment Schedule (NPS) (E.O.68)¹ & ² 24 242.1 Mo Monet etized TCC (Cash Conversion)² 103 3,372.4 18 243.7 NPS² 8 51.5 3 4.2 Note: Based on the reports as of May 31, 2017 ¹ Data from Miscellaneous Operations Monitoring Division (MOMD) under the Collection Service ² Data from Accounting Division under the Finance Service

9/13/17 DEPARTMENT OF FINANCE 138

Stock as of Dec. 31, 2015 2016 2017

No. of

availers Amount (PHP million)

No. of

availers Amount (PHP million)

No. of

availers Amount (PHP million) Not monetized TCC2 495 3,465.3 531 5,377.0 NPS

2

16 190.6 13 186.5 Cash refund availment BIR² 50 1,784.0 12 985.8 Cash refund budget (for all taxes) BIR 8,500.0 8,500.0 8,500.0

Note: Based on the reports as of May 31, 2017 ² Data from Accounting Division under the Finance Service

BIR data on VAT refund (cont.)

SLIDE 70

9/13/17 DEPARTMENT OF FINANCE 139

BOC data on VAT refund1

2015 2016 20172

No. of

availers Amount (PHP million)

No. of

availers Amount (PHP million)

No. of

availers Amount (PHP million) Outstanding VAT TCCs (Jan. 2015) 19 173.8 Total issued TCCs 69 17, 210.1 89 8,955.0 20 176.4 Cash conversion

23

396.9 43 1,295.4 TCC not converted to cash 69 17,383.9 135 25,941.9 112 24,822.9 Cash refund availment

30

1,622.2 18 588.5 Cash refund budget 6,500.0 6,500.0 6,500.0

Notes:

1Section 112a of the Tax Code of 1997 2Jan to June

Cross-country comparisons

9/13/17 DEPARTMENT OF FINANCE 140

SLIDE 71

9/13/17 DEPARTMENT OF FINANCE 141

VAT/GST rates, alphabetical

9/13/17 DEPARTMENT OF FINANCE 142

Country VAT rate (percent) Country VAT rate (percent) Country VAT rate (percent) Country VAT rate (percent) Albania 20 France 20 Malaysia 6 Saudi Arabia 5 Argentina 21 Georgia 18 Malta 18 Serbia 20 Armenia 20 Germany 19 Mauritius 15 Seychelles 15 Australia 10 Ghana 15 Mexico 16 Singapore 7 Austria 20 Greece 24 Moldova 20 Sint Maarten 5 Azerbaijan 18 Guatemala 12 Mongolia 10 Slovak Republic 20 Bahamas 7.5 Honduras 15 Morocco 20 Slovenia 22 Bahrain 5 Hungary 27 Myanmar 5 South Africa 14 Barbados 17.5 Iceland 24 Namibia 15 Spain 21 Belarus 20 India 15 Netherlands 21 Suriname 10 Belgium 21 Indonesia 10 New Zealand 15 Sweden 25 Botswana 12 Ireland 23 Nicaragua 15 Switzerland 8 Bulgaria 20 Isle of Man 20 Nigeria 5 Taiwan 5 Canada 5 Israel 17 Norway 25 Tanzania 18 Chile 19 Italy 22 Oman 5 Thailand 7 China 17 Japan 8 Pakistan 17 Trinidad and Tobago 12.5 Colombia 19 Jersey 5 Panama 7 Tunisia 18 Costa Rica 13 Jordan 16 Papua New Guinea 10 Turkey 18 Croatia 25 Kazakhstan 12 Paraguay 10 Uganda 18 Curaçao 6 Kenya 16 Peru 18 Ukraine 20 Cyprus 19 Korea 10 Philippines 12 United Arab Emirates 5 Czech Republic 21 Kosovo 18 Poland 23 United Kingdom 20 Denmark 25 Kuwait 5 Portugal 23 United States 7.5 Dominican Republic 18 Latvia 21 Puerto Rico 10.5 Uruguay 22 Ecuador 14 Lebanon 10 Qatar 5 Venezuela 12 Egypt 13 Lithuania 21 Romania 19 Vietnam 10 El Salvador 13 Luxembourg 17 Russian Federation 18 Zambia 16 Estonia 20 Macedonia 18 Rwanda 18 Zimbabwe 15 Finland 24 Madagascar 20 Saint Lucia 15 Source: Ernst and Young

SLIDE 72

VAT/GST rates, ascending

9/13/17 DEPARTMENT OF FINANCE 143 Country VAT rate (percent) Country VAT rate (percent) Country VAT rate (percent) Country VAT rate (percent) Bahrain 5 Vietnam 10 Luxembourg 17 Madagascar 20 Canada 5 Puerto Rico 10.5 Pakistan 17 Moldova 20 Jersey 5 Botswana 12 Barbados 17.5 Morocco 20 Kuwait 5 Guatemala 12 Azerbaijan 18 Serbia 20 Myanmar 5 Kazakhstan 12 Dominican Republic 18 Slovak Republic 20 Nigeria 5 Philippines 12 Georgia 18 Ukraine 20 Oman 5 Venezuela 12 Kosovo 18 United Kingdom 20 Qatar 5 Trinidad and Tobago 12.5 Macedonia 18 Argentina 21 Saudi Arabia 5 Costa Rica 13 Malta 18 Belgium 21 Sint Maarten 5 Egypt 13 Peru 18 Czech Republic 21 Taiwan 5 El Salvador 13 Russian Federation 18 Latvia 21 United Arab Emirates 5 Ecuador 14 Rwanda 18 Lithuania 21 Curaçao 6 South Africa 14 Tanzania 18 Netherlands 21 Malaysia 6 Ghana 15 Tunisia 18 Spain 21 Panama 7 Honduras 15 Turkey 18 Italy 22 Singapore 7 India 15 Uganda 18 Slovenia 22 Thailand 7 Mauritius 15 Chile 19 Uruguay 22 Bahamas 7.5 Namibia 15 Colombia 19 Ireland 23 United States 7.5 New Zealand 15 Cyprus 19 Poland 23 Japan 8 Nicaragua 15 Germany 19 Portugal 23 Switzerland 8 Saint Lucia 15 Romania 19 Finland 24 Australia 10 Seychelles 15 Albania 20 Greece 24 Indonesia 10 Zimbabwe 15 Armenia 20 Iceland 24 Korea 10 Jordan 16 Austria 20 Croatia 25 Lebanon 10 Kenya 16 Belarus 20 Denmark 25 Mongolia 10 Mexico 16 Bulgaria 20 Norway 25 Papua New Guinea 10 Zambia 16 Estonia 20 Sweden 25 Paraguay 10 China 17 France 20 Hungary 27 Suriname 10 Israel 17 Isle of Man 20 Source: Ernst and Young

Summary of VAT exemptions

9/13/17 DEPARTMENT OF FINANCE 144

Item PHL IND THA VNM MYS

A. VAT Exempt under Section 109, NIRC
Agricultural food products in their original state

Exempt Exempt

Marine food products in their original state

Exempt Exempt

Exempt

Livestock and poultry

Exempt Exempt

Breeding stock

Exempt Exempt

Rice

Exempt Exempt

Corn grits

Exempt Exempt

Raw cane sugar

Exempt Exempt

Molasses

Exempt Exempt

Exempt

Ordinary salt

Exempt Exempt

Copra

Exempt Exempt

Fertilizers

Exempt Exempt

Exempt

Seeds and seedlings

Exempt Exempt

Fingerlings

Exempt Exempt

Exempt

Fish, prawn, livestock and poultry feeds

Exempt Exempt

Exempt

Personal and HH effects of returning residents to the Philippines and nonresidents coming to resettle in the

Philippines Exempt Exempt

Exempt

Professional instruments and implements, and personal HH effects of persons coming to settle in the

Philippines Exempt Exempt

Exempt

Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar

cane into raw sugar Exempt

Medical, veterinary, dental and hospital services, except rendered by professionals

Exempt Exempt

Exempt Exempt Exempt except veterinary services

Educational services rendered by public and private educational institutions

Exempt Exempt

Exempt Exempt Exempt

Services rendered by individuals pursuant to an employer-employee relationship

Exempt Exempt

Exempt

Services rendered by regional or area HQ of MNCs

Exempt ?

Agricultural cooperatives duly registered with the Cooperatives Development Authority (CDA)

Exempt

Credit or multi-purpose cooperatives duly registered with the CDA

Exempt

Exempt Exempt

Non-agricultural, non-electrical and non-credit cooperatives registered with the CDA under certain conditions

Exempt

Export sales by persons who are not VAT-registered

Exempt

Real property not primarily held for sale to customers or held for lease in the ordinary course of trade or

business Exempt

Exempt if sale is through National Housing Authority

SLIDE 73

Summary of VAT exemptions

9/13/17 DEPARTMENT OF FINANCE 145

Item PHL IND THA VNM MYS

Real property utilized for low-cost and socialized housing as defined in RA 7279

Exempt Exempt

Ø Beneficiaries under RA 7279 are underprivileged and homeless citizens within the poverty threshold of NEDA

Exempt

Residential lot valued at PhP1,919,500 and below

Exempt

Exempt if raw Exempt

House and lot and other residential dwellings valued at PhP3,199,200 and below

Exempt Exempt

Lease of a residential unit with a monthly rental not exceeding P12,800

Exempt

Exempt Exempt

Books and any newspaper, magazine , review or bulletin

Exempt Except textbooks and music books

Exempt Exempt

Transport of passengers by international air and sea carriers

Exempt Exempt

Exempt

Passenger or cargo vessels and aircraft including engine, equipment and spare parts thereof for domestic or

international transport operations Exempt Exempt

Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations

Exempt Exempt

Banks, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial

intermediaries Exempt Exempt

Exempt Exempt

Other goods or properties or performance of services the gross annual sales and/or receipts of which do not

exceed PhP1,919,500. Exempt Exempt

Exempt if annual turnover is less than 1.8 million baht (2.5 million pesos (conversion as

f Dec. 20,

2016) Exempt

B. VAT Exempt but Subject to Percentage Tax
Persons who are not VAT-registered and whose gross sales/receipts do not exceed PhP1,919,500

Exempt Exempt

Exempt if annual turnover is less than 1.8 million baht (2.5 million pesos (conversion as

f Dec. 20,

2016) Exempt

Domestic carriers and keepers of garages

Exempt Exempt

Exempt

Transport of cargo by international carriers

Exempt Exempt

Franchises

Exempt ?

Summary of VAT exemptions

9/13/17 DEPARTMENT OF FINANCE 146

Item PHL IND THA VNM MYS

Overseas dispatch, message or conversation originating from the Philippines

Exempt

Banks and Non-Bank Financial Intermediaries Performing Quasi-Banking Functions

Exempt Exempt

Non-Bank Financial Intermediaries

Exempt Exempt

Life insurance premiums

Exempt Exempt

Exempt Exempt Exempt

Agents of foreign insurance companies

Exempt Exempt

Proprietors, lessees or operators of amusement places/activities

Exempt Exempt Ø Cockpits Ø Cabarets, night or day clubs Ø Boxing exhibitions Ø Professional basketball games Ø Jai-alai and racetracks

Winnings in horse races

Exempt

Sale of shares of stocks listed and traded through local stock exchange

Exempt

C. VAT Exempt under Special Laws
Power transmission- NGCP (RA 9511)

Exempt

PWDs (RA 10754)

Exempt

Exempt Exempt

Senior citizens (RA 9994)

Exempt

Boy Scouts of the Philippines (RA 7285)

Exempt

Girl Scouts of the Philippines (RA 10073)

Exempt

Biofuels (RA 9367)

Exempt Ø Only the sale of raw material used in the production of biofuels such as, but not limited to, coconut, jatropha, sugarcane, cassava, corn, and sweet sorghum is exempt from VAT.

Cooperatives (RA 9520)

Exempt

Credit Surety Fund Cooperative (RA 10744)

Exempt

Philippine Red Cross (RA 10072)

Exempt Exempt

Orphan drugs and products for use solely by patients with rare diseases (RA 10747)

Exempt

Socialized housing (RA 7279, as amended by RA 10884)

Exempt Exempt

Exempt

Total

59 37 35 25 14

SLIDE 74

VAT threshold in ASEAN countries, current

9/13/17 DEPARTMENT OF FINANCE 147

Country VAT threshold (in equivalent million PHP) Country VAT threshold (in equivalent million PHP) Netherlands 0.1 Ireland 2.2 Vietnam 0.2 New Zealand 2.2 Denmark 0.4 Lithuania 2.6 Cambodia 0.5 Thailand 2.7 Finland 0.6 Slovakia 2.9 Greece 0.6 Latvia 2.9 Myanmar 0.7 Slovenia 2.9 Portugal 0.7 Australia 2.9 Belgium 0.9 Philippines (proposed) 3.0 Cyprus 0.9 Italy 3.5 Norway 0.9 Japan 4.4 Estonia 0.9 Switzerland 5.2 Germany 1.0 United Kingdom 5.4 Austria 1.7 Malaysia 5.9 Luxembourg 1.7 China 6.0 France 1.9 Indonesia 18.2 Philippines (current) 1.9 Singapore 35.6 Sources: KPMG, and Ernst and Young

Low tax efficiency relative to the region

For instance, in 2015, the Philippines has a 12% VAT rate while Thailand has a 7% VAT rate, yet both collect roughly the same VAT revenues as share of GDP, since Thailand has a broader VAT base (35 lines of exemptions only compared to 59 lines in the Philippines by NIRC provisions).

9/13/17 DEPARTMENT OF FINANCE 148

Philippines Indonesia Thailand Vietnam Malaysia East Asia and Pacific Low-Mid Income World Total Tax Revenues/GDP 13.6 12.0 17.2 24.3 15.3 16.3 17.3 17.9 Value Added Tax (VAT) Tax rate 12.0 10.0 7.0 10.0 6.0 8.4 14.0 13.8 Revenue as share of GDP 4.3 3.9 4.1 6.1 1.0 5.2 6.6 6.1 Tax efficiency** 35.7 38.8 59.0 61.0 16.7 62.0 47.1 44.2 Source: USAID, KPMG, IMF World Revenue Longitudinal data, PWC, BIR, and Botman, Klemm and Baqir ** Tax efficiency is calculated as the ration of tax revenue as a share of GDP divided by the tax rate.

SLIDE 75

Financial position

f potentially

affected industries

9/13/17 DEPARTMENT OF FINANCE 149

Gross revenues of housing developers, 2013

9/13/17 DEPARTMENT OF FINANCE 150 30.5 27.8 27.3 19.6 15.9 12.712.611.910.5 9.3 8.7 8.0 7.3 7.0 6.7 6.5 6.4 6.2 6.0 6.0 4.1 4.0 3.9 2.7 2.0

5 10 15 20 25 30 35

PHP biliions

Gross revenues of top housing companies

Source: SEC

SLIDE 76

Net profit of housing developers, 2013

9/13/17 DEPARTMENT OF FINANCE 151 6.5 8.7 6.3 3.8 4.4 3.4 2.5 0.3 3.9 1.6 8.4 1.3 2.5 2.1 2.0 1.3 0.6 3.8 1.9 0.7 1.0 2.3 1.4 0.0 1.3

2 4 6 8 10

PHP billions

Net profit of top housing companies

Source: SEC

Gross revenues of BPO firms, 2015

9/13/17 DEPARTMENT OF FINANCE 152

23.3 13.7 13.7 12.7 11.5 10.8 8.0 8.0 6.8 6.8 6.6 6.0 5.3 4.7 4.6 3.8 3.6 3.6 3.5 3.4 3.4 3.1 3.1 2.9 2.9 2.8 2.7 2.5 2.5

5 10 15 20 25

PHP billions

Gross revenues of top BPO companies

Source: SEC

SLIDE 77

Net profit of BPO firms, 2015

9/13/17 DEPARTMENT OF FINANCE 153

2.7 3.9

0.3

1.3 1.9 1.0 0.3 0.5 1.1 1.3 1.3 0.6 1.3 0.5 0.3 1.1 0.4 0.4 0.2

0.1

0.3 0.4 0.1 0.1 0.8 0.3 0.1 0.0 0.2

1

1 2 3 4 5

PHP billions

Net profit of top BPO companies

Source: SEC

Gross revenues of electronics firms, 2013

9/13/17 DEPARTMENT OF FINANCE 154

30.5 27.1 25.1 22.7 18.0 8.2 2.2 2.0 1.9 1.9

5 10 15 20 25 30 35

PHP billions

Gross revenues of top electronics companies

Source: SEC

SLIDE 78

Net profit of electronics firms, 2013

9/13/17 DEPARTMENT OF FINANCE 155

0.5

0.3 0.4 0.4 0.9 0.0 0.1

0.3
0.2
0.2
0.6
0.4
0.2

0.0 0.2 0.4 0.6 0.8 1.0

PHP billions

Net profit of top electronics companies

Source: SEC

Tax Reform for Acceleration and Inclusion

Package 1 – Value added tax (VAT)

Table of contents

Key messages and highlights

Key messages

Key messages

Key messages

Key messages

Key messages

Revenue eroding measures

Low tax efficiency relative to the region

Expanding the VAT base by limiting exemptions and using the budget to provide subsidies to the poor

Expanding the VAT base by limiting exemptions and using the budget to provide subsidies to the poor

Protecting the poor and low income Filipinos: VAT

What is VAT?

Overview of the reform: broadening the VAT base by reducing exemptions

Expanding the VAT base by limiting exemptions and using the budget to provide subsidies to the poor

Expanding the VAT base by limiting exemptions and using the budget to provide subsidies to the poor

Revenue eroding measures

Value-added tax: 59 lines of exemptions in tax code that lead to large leakages

In general, removing VAT exemptions will not lead to a 12 percent increase in prices

In general, removing VAT exemptions will not lead to a 12 percent increase in prices

Special laws with VAT exemptions

Agriculture

Education

Enterprises

Cooperatives

Government Owned and Controlled Corporations

Government Owned and Controlled Corporations (cont’d)

Housing

Health

Power Others

Overview of the reform:

VAT zero-rating

Key messages

Value-added tax: many zero- ratings that lead to large leakages

Impact on BPOs and electronics industry

Impact on indirect exporters*

Proposed new VAT refund system

Objective: Cash basis within 90 days Proposed VAT refund system:

refund when collections are low. The zero-rating reform will only kick in if the VAT refund system is in place. Estimated in 2019.

Revenue impact

Estimated revenue impact, DOF amended and SB 1408

Estimated revenue impact, HB 5636

Estimated TEF for SUCs 2017, all in PHP thousands

Overall impact

Combined tax-transfer effect*

After the tax-transfer reform, the poor benefits the most.

VAT on housing

Key messages

Key messages

Key messages

Key messages

Key messages

Housing is a basic need and right

Is housing an investment

cellphone, cash, cars, friendship, etc.).

households outside raw food, education, and health are

housing.

intended to generate income streams.

VAT on housing: current system

VAT treatment on housing

VAT on housing: the reform

Impact of the housing VAT reform by provision (1/2)

Impact of the housing VAT reform by provision (2/2)

Leakages from VAT exemption on housing

Sample audit case of developer

VAT on housing: price impact

According to the cost structure of construction and real estate firms,

Removing VAT exemptions will not lead to a 12 percent increase in prices for housing

VAT for low cost housing

VAT on housing: profile of borrowers

Impact on the people

Number of borrowers for socialized housing

Number of borrowers for low-cost housing

Maximum loanable amount

With the VAT on housing, additional monthly amortization will be minimal

With the VAT on housing, additional monthly amortization will be minimal

Indicative salary grade and take home pay increment

Indicative salary grade and take home pay increment