DR DRAFT FOR DI DISCUSSION. SUBJECT TO CHANGE. Tax Reform for Acceleration and Inclusion Package 1 – Value added tax (VAT) As of September 13, 2017 9:15 PM Table of contents 1. Key messages and highlights 2. What is VAT? 3. Overview of the reform 4. Special laws with VAT provisions 5. VAT zero rating provisions 6. Revenue impact 7. Impact on the people 8. Key sectors potentially affected • Housing and leasing • Cooperatives • Power transmission • Renewable energy • Other sectors 9. VAT base and revenue collection 10. Cross country comparison 11. Financial position of potentially affected industries 9/13/17 DEPARTMENT OF FINANCE 2
Key messages and highlights 9/13/17 DEPARTMENT OF FINANCE 3 Key messages 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. 9/13/17 DEPARTMENT OF FINANCE 4
Key messages 6. When seen as a package, the removal of VA VAT exemptions does not necessarily lower welfare given the following: we 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. 9/13/17 DEPARTMENT OF FINANCE 5 Key messages 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 outside 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. 9/13/17 DEPARTMENT OF FINANCE 6
Key messages 6. When seen as a package, the removal of VAT exemptions does not necessarily lower welfare given the following: es: Agriculture coops and coops with sales below the VAT threshold will • Co Cooper eratives remain exempt from VAT. All other coops incentives will not be touched. Power transmission: As this comprises less than 8% of total power, cost, a 12% VAT • Po will increase power rate by less than 1%. • Renewable energy: Re 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. • • SUCs and GOCCs: their VAT liability can be covered by the tax expenditure fund. SU 9/13/17 DEPARTMENT OF FINANCE 7 Key messages 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%. 9/13/17 DEPARTMENT OF FINANCE 8
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Revenue eroding measures Revenue eroding measures (Republic acts [RAs]) enacted annually 15 16 14 RA RA RA 9519 9904 14 9003 9520 9966 9010 RA 9521 9994 Total after Total before 10 9029 10368 11 9576 9999 R-VAT reform: 9040 R-VAT reform: 10378 RA 9593 10001 10390 RA 9045 38 RAs 9238 89 RAs 9640 10002 7 10583 10742 9054 10026 9243 9647 10584 10744 7 9055 10028 9257 RA 9648 10585 6 10747 5 10066 9064 RA 4 4 9267 9497 9679 10591 10752 5 10068 9083 RA 10165 10594 10754 9275 RA 9500 9728 10072 RA RA 3 10174 10653 10771 9136 10595 RA 9281 9367 9501 9746 10073 8479 8550 2 10228 10596 10654 10800 9138 10638 1 1 RA 9290 9369 9504 9832 10083 8492 8748 1 10659 1 10229 10597 10641 10816 9146 9174 9294 RA 9505 10085 9400 9852 10230 10598 10687 RA 8502 8749 RA 10644 10817 9147 9178 RA 9295 9343 9511 10086 RA 9442 9854 10231 10693 10599 10846 8525 8756 10646 8407 8763 9157 10142 9182 9207 9301 9337 * 9361 9490 9513 9856 10349 10699 10919 10600 10650 16 RA 9520 - RA 9337 RA 9136 - RA 9178 - Total tax R-VAT RA 9504 - RA 8748 - VAT zero- BMBEs exemption reform Min wage Special rating for exemption for all PIT economic electricity from all coops exemption, 15 zone act generators taxes increased personal RA 8756 - exemption Preferential for all CE tax rates Percent of GDP for ROHQs RA 9257 - 14 SC tax exemption (i.e., PIT) RA 9994 - VAT RA 10653 - RA 9442 - exemption Expansion for SCs of 13th PWD 13 month and additional tax other deductions bonus tax exemption to PHP RA 9513 - 82,000 12 Tax exemptions for renewable energy Tax effort producers 11 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. 9/13/17 DEPARTMENT OF FINANCE 11 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). East Asia Low-Mid Philippines Indonesia Thailand Vietnam Malaysia World and Pacific Income 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. 9/13/17 DEPARTMENT OF FINANCE 12
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