Finance Secretary Benjamin E. Diokno shared during a briefing with the Malacañang Press Corps on May 30, 2023 that the government is conducting a review of value-added tax (VAT) exemptions to further broaden the tax base and enhance collection efficiency.
“While we [have] the highest VAT rate compared to the other countries in this part of the world, [our] VAT collection is the most inefficient at only 40 percent,” Secretary Diokno said to reporters.
A 2018 study by the World Bank showed that forgone revenues from VAT exemptions and incentives or the ‘policy gap’ could reach as high as PHP539 billion. These exemptions that are outside of the tax code further complicate tax administration and dilute the tax base.
To address this, Secretary Diokno shared that the government is conducting a study on how the country can further broaden the tax base and look into areas that have too many exemptions.
“Consumption taxes are more progressive. This indicates that as income increases, households tend to spend a smaller proportion of their income on goods and services from the informal sector. Consumption taxes are also more neutral than income taxes, since consumption taxes are based on spending rather than income or wealth,” Secretary Diokno said.
The Tax Code listed 29 transactions exempt from VAT to mitigate the VAT burden. These items are mostly social goods and services consumed by individuals such as agricultural and marine food products in their original state, education, health services, financial services, among others.
The Finance Secretary presented the Department of Finance’s (DOF) position during a sectoral meeting with the President in response to his request for a study on the distinction between registered export enterprises (REEs) from domestic market-oriented enterprises (DMEs) in the grant of fiscal incentives under the Corporate Recovery and Tax Incentives for Enterprises (CREATE) law.
“The distinction between registered exporters and domestic market-oriented enterprises must remain to preserve the integrity of our tax system,” Secretary Diokno said.
CREATE modernized the fiscal incentives regime by enacting a targeted, transparent, time-bound, and performance-based system. It also provided a systematic assessment of fiscal costs and benefits, which was lacking prior to CREATE.
In recognition of the different needs, markets, and profitability of REEs and DMEs, the CREATE Act provides for more favorable fiscal incentives for REEs and discontinued VAT incentives for DMEs.
Secretary Diokno stressed that because VAT is a tax on consumption, exporting firms are not subject to VAT since the goods produced are consumed outside the country. Meanwhile, DMEs should be subject to VAT because they produce goods for local consumption.
“[If] you’re an export-oriented firm, you are competing with the rest of the world. Therefore, you should not be put at a disadvantage. Whereas if you’re locally based, then you are competing with other local domestic industries,” Secretary Diokno explained.
