The Philippines’ low tax-efficiency rate compared to those of other Southeast Asian economies highlights the need to reconfigure its revenue-generation system through reforms in tax policy and administration.
Department of Finance (DOF) spokesperson Paola Alvarez cited as an example the value added tax (VAT), which the Philippines imposes at 12 percent while Thailand’s rate is only 7 percent, yet both collect the same amount of VAT revenues at 4.2 percent as share of the Gross Domestic Product (GDP).
“This example demonstrates the gross inefficiency of our system which we need to correct through tax reforms designed to broaden the tax base and collect more revenues,” Alvarez said.
Alvarez noted that when it comes to tax efficiency of the VAT system, the Philippines is only slightly better than Malaysia, which collects only 1 percent of VAT revenues as share of the GDP despite a 10 percent VAT rate. This translates into a tax efficiency rate of only 9.7 percent.
Vietnam, which imposes a 10 percent VAT, has a 61 percent tax efficiency rate, while Thailand’s tax efficiency is at 60 percent. Indonesia, with 10 percent VAT, is better with a 37.5 percent tax efficiency rate, compared to the Philippines’ 35 percent rate.
In terms of personal income taxes, the Philippines’ tax efficiency rate is at 6.2 percent, only higher than Indonesia’s 0.1 percent. Vietnam has the best tax efficiency rate among Southeast Asian economies at 25.1 percent.
The Philippines also did not fare any better when it comes to collecting corporate income taxes as it has a tax efficiency of only 11.6 percent, despite a high 30 percent tax rate.
Thus, revenues from corporate tax accounts for only 3.5 percent as share of GDP, compared to Malaysia’s, which has a corporate tax collection efficiency rate of 34 percent and corporate revenues as share of GDP at 8.5 percent, with a tax rate of only 25 percent.
Singapore, which has the lowest corporate income tax rate of 17 percent, gets revenues from this tax that account for 4.1 percent as share of its GDP.
Despite a relatively low corporate income tax, Singapore’s tax efficiency rate is 24.1percent, one of the highest in the region.
These figures are based on studies done by the United States Agency for International Development (USAid); the global audit firm KPMG; economists Dennis Botman, Alexander Klemm and Reza Baqir; and audit firm Pricewaterhouse Coopers (PwC).
In line with the Duterte administration’s 10-point socioeconomic agenda, the government’s vision in the medium term is to reduce the poverty rate by 1.5 percent annually from today’s 26 percent to 17 percent of the population by 2022, along with attaining high-middle income status for many of its citizens, making the Philippines a law abiding country and ensuring peace within and with its neighbors, according to Alvarez.
“With the reforms put in place by the Duterte administration, it hopes that by 2040—one generation from now—extreme poverty in the country would be a thing of the past, with inclusive economic and political institutions offering equal opportunities for everyone and the country attaining high-income status,” Alvarez said.
She said that to realize this vision, the Philippines needs to sustain its GDP growth rate of at least 7 percent every year for the next two decades and shift the source of economic expansion from consumption to investments.
“We also need to massively invest in our people and in infrastructure to realize this vision. We should focus our spending on infrastructure, research and development, health, education, lifelong training for our labor force and social protection for the poorest of the poor,” Alvarez said.
Funding all these investments, she said, would require an additional P1 trillion per year on top of the current P1.3 trillion expected to be spent by the government in 2016 on these priorities.
Based on projections in ongoing discussions on the comprehensive tax reform plan, the government expects to lose P193.8 billion from the proposed cuts in personal income and corporate taxes, but it aims to offset the foregone revenues by generating about P368.1 billion from the proposed broadening of the tax base and reconfiguring or adjusting to inflation of other taxes, the final list of which is still being harmonized by the DOF with those filed by legislators in Congress.
The additional P1 trillion funding requirement would be sourced from the implementation of a fairer, simpler and more efficient tax system with low rates and a broad base that aims to promote investments, create jobs and reduce poverty.
Alvarez said the government also needs to institute tax administration reforms in its top revenue-generating agencies, which are the Bureau of Customs and Bureau Internal Revenue.
Budget reforms should also be carried out to improve spending, ensure transparency and generate savings efficiently, Alvarez added.
She said President Duterte’s promise of real change (tunay na pagbabago) envisions a society where all Filipinos enjoy inclusive growth, improved public services, safe, healthy and peaceful communities, more money in their pockets, and more comfortable lives.
