UP School of Economics

Discussion Papers

Discussion Paper No. 2016-10 September 2016

Comprehensive Tax Reform in the Philippines

Principles, History and Recommendations

by

Renato E. Reside, Jr.1 and Lee Burns2

1
University of the Philippines, School of Economics, Diliman, Quezon City
2
University of Sydney, Australia

UPSE Discussion Papers are preliminary versions circulated privately

to elicit critical comments. They are protected by Republic Act No. 8293
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 Comprehensive Tax Reform in the Philippines
Principles, History and Recommendations

Renato E. Reside, Jr.1

Lee Burns2

Abstract

The new Duterte administration is planning to undertake a reform of the Philippine tax system.
This paper provides a background to options available to the government moving forward,
starting with basic principles of taxation, criteria for evaluation, tax instruments and mix of
instruments. The background is complemented by a review of the history of past tax reforms in
the Philippines, from the end of the Marcos regime to the Aquino administration. The historical
and episodic assessment ends with a list of lessons learned from the past. Finally,
recommendations are made for both tax policy and tax administration.

Key words: tax reform, taxation, Philippines

JEL Codes: H2, 023

1
University of the Philippines, School of Economics, Diliman, Quezon City. Email: renato_reside@hotmail.com
2
University of Sydney, Australia
The authors wish to acknowledge assistance from the International Tax and Investment Center in Washington, DC
and the University of the Philippines School of Economics. This paper benefited greatly from comments from Felipe
Medalla, Romeo Bernardo, Joel Tan-Torres and Wayne Barford (who also provided tremendous editorial assistance)
as well as from comments from participants in a stakeholder meeting on tax reform held at the UP School of
Economics.
Table of Contents
About the Authors 4

Expert Peer Review Panel 5

Foreword 6

Section 1. Principles of Tax Systems 7

1.1. Introduction 7

1.2. Criteria for Evaluation of Tax Systems 7

1.3. Mix of Tax Instruments 8

1.4. Drivers of Tax Reform 9

1.5. Overview of the Main Tax Instruments 9

1.6. Income Tax 9

1.7. Consumption Tax 10

1.8. Turnover Tax 11

1.9. VAT vs. RST vs. Turnover Tax 11

1.10. Selective Consumption Taxes 11

1.11. Taxation of Small Business 12

1.12. Property Taxation 12

Section 2. Tax Reforms in Recent Philippine History 13

2.1. Background 13

2.2. Conditions Prior to the 1986 Aquino Tax Reform Program: The Late Marcos Regime 13

2.3. The 1986 Tax Reform Program (1986 TRP) 15

2.4. 1992 - 1997 17

2.5. The 1997 Comprehensive Tax Reform Program (CTRP) 18

2.6. Fiscal Issues Faced by the Estrada (1998-2001) and Arroyo (2001-2010) Administrations 20

2.7. The Administration of Benigno Aquino Jr (2010-2016) 22

2.8. Lessons Learned from Tax Reform Programs in the Philippines 24

Appendix A 26
Section 3. Recommendations 28

1. Personal Income Taxes (PIT) 28

2. Corporate Income Taxes (CIT) 28

3. Value-Added Taxes 30

4. Excise Taxes 30

5. Property Taxes 31

6. Taxes on Financial Instruments 32

7. Bank Secrecy Provisions 32

8. Legislation Giving Rise to Tax Expenditures 32

9. Sequencing and Credibility of Tax Reforms 32

10. Administration of Tax Laws and the Process of Formulation of Tax Policy 32

Addendum: Recommendations for Improvements of Administration of the Tax System 33

1. Ethics 33

2. Tax Expenditures 33

3. Tax Incentives 33

4. Non-Stock, Non-Profit Organizations and Other Special Laws 33

5. Information Technology 34

6. Designing Safety Nets in Lieu of Granting Special Tax Treatment 35

7. Electronic Transactions 35

8. Excise 35

9. Tax Amnesties 35

10. Partnerships with Industry and Business Groups and Government Regulators 35

Section 4. ASEAN Tax Rates 36

Endnotes 37

References 37
About the Authors
Professor Renato E. Reside, Jr. spent several years working on fiscal policy issues at the
Department of Finance (DoF) of the Philippines before devoting more time teaching at the
University of the Philippines, School of Economics (UPSE), where he also concurrently serves
as the Director of Graduate Studies and Fellowships. Over the years, Professor Reside has
worked with international multilateral organizations and provided advice to policymakers and
legislators over various public policy issues, including tax incentives, government expenditures
and infrastructure policy. He has conducted research and authored papers on tax incentives,
expenditure and infrastructure policy.

Lee Burns is Honorary Professor, Graduate School of Government, University of Sydney, Australia.
Lee specializes in international and comparative tax law. Lee was a contributor to one of the
leading comparative tax works - Tax Law Design and Drafting. Lee has authored many papers and
articles on international tax and has advised the Australian Treasury and the Board of Taxation
on the reform of Australia’s controlled foreign company rules. 
Since 1991, Lee has provided assistance on the design and drafting of tax laws under the
technical assistance programs of international organizations to over 30 countries, including in Africa, the Middle
East, Asia and the Pacific. This work has involved providing assistance in the design and drafting of income tax,
VAT, excise and tax administration laws. In recent years, Lee’s development work has particularly focused on the
design of tax systems for extractive industries. Lee has taught in training workshops for finance officials and tax
administrators under projects funded by aid agencies.

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Expert Peer Review Panel
Romeo Bernardo is Managing Director of Lazaro Bernardo Tiu and Philippine Partner, GlobalSource
Partners. He also sits on the boards of leading publicly listed companies in banking, power,
telecom, insurance and retail.
He was previously a career public servant in the Department of Finance, where he rose to the
position of Undersecretary.

Felipe Medalla serves as a Monetary Board Member of Bangko Sentral Ng Pilipinas. He was
formerly the Secretary of Socio Economic Planning and a Professor and Dean of the School of
Economics, University of the Philippines.
He has published extensively in public finance, regulatory and monetary economics, and on
development.

Joel L. Tan-Torres is the Chairman of the Board of Accountancy of the Professional Regulatory
Commission and a Partner of Tax Services of Reyes Tacandong & Co.
Joel was the Commissioner of the Bureau of Internal Revenue (“BIR”) from 2009 to July 2010, and
held various positions in the BIR as Senior Deputy Commissioner and Assistant Commissioner.
The BIR, the Department of Finance and Congress have regularly consulted with him in the
drafting of the revenue regulations for the R-VAT Law, the Comprehensive Tax Reform Program
and other tax measures.

The expert peer review panel provided very helpful comments and insights. We would like to thank the expert panel
for their important contribution to this report. However, all errors and omissions are those of the authors, who
enjoyed full academic freedom and independence.

5
Foreword
For the past several years, the Philippines has enjoyed employment and savings to achieve the Sustainable
strong economic growth which has been validated Development Goals. We hope the recommendations in
by improved credit ratings. However, in spite of the this report will assist the new Administration (under the
Government’s successful economic management and leadership of President Rodrigo Duterte) and Congress
strong performance, a large tax gap continues. The in developing a pro-growth, revenue raising tax regime
Philippines’ tax regime continues to be overly complex and also support the BIR with their implementation and
and this is contributing to the tax gap. enforcement of a new regime.
There have been numerous attempts to reform taxes We hope stakeholders will carefully consider the
over the past 30 years, as outlined in Section 2 of our recommendations contained in Section 3 of this report.
report. Rather than incremental tinkering with small Our recommendations cover personal income taxes,
tax amendments, a comprehensive fundamental tax company income taxes, the value-added tax (VAT), excise
reform is needed. As experienced with the fundamental taxes, property taxes, taxes on financial instruments,
and successful Sin Tax Reform of 2012, a similar reform bank secrecy provisions, legislation given rise to taxes
of income taxes, other excise taxes and VAT is needed expenditure and the administration of tax laws.
in the Philippines. Moreover, administrative reforms are
Our co-authors, Professor Renato Reside (University
also required. Such fundamental tax reform will protect
of the Philippines School of Economics) and Honorary
and grow the domestic tax base, enhance efficiency and
Professor Lee Burns (University of Sydney Law School),
equity of the tax system and spur economic growth.
represent a unique combination of experience
ITIC has had the privilege and pleasure of working in working on domestic tax reforms around the world
the Philippines since 2005. Our inaugural Asia- Pacific and an understanding of the Philippines’ experience
Tax Forum was hosted by the Department of Finance and cultural, political and social realities. We hope
in Manila in October 2005, and again in 2012. Our Professors Reside and Burns provide a useful roadmap
programs and engagement with Government and for the economic leaders in the Philippines.
Congressional tax policymakers, lawmakers and
We also acknowledge and thank Wayne Barford, ITIC
administrators have continued over the years.
Senior Advisor and former Assistant Commissioner
The objective of this report is to benchmark the of the Australian Taxation Office, for his superb job
Philippines’ tax regime with best international practices managing this project.
and provide a series of recommendations to assist tax
We hope that the beneficiaries of our recommendations
policymakers, legislators and administrators to embark
and tax reform will be the people of the Philippines, who
upon a major tax reform.
will enjoy enhanced prosperity and equity.
As outlined in the recent United Nations Conference
Daniel A. Witt
on Trade and Development report, private sector
President, ITIC
investment is essential to create economic growth,

6
Section 1. Principles of Tax Systems
1.1. Introduction tax base. If certain types of income are untaxed or lowly
taxed, or certain expenditures are treated preferentially,
The term “tax system” as used in this report refers then individuals with similar capacities to pay tax will
to the collection of taxes that a government uses to be taxed differently. Vertical equity requires that those
raise revenue to support its expenditure programs. individuals with a greater ability to pay tax should have
Tax systems are usually judged against the standard a greater tax burden. This is most clearly reflected in
criteria of equity (or fairness), efficiency (or neutrality) the progressive marginal rate scale that applies to
and simplicity. Further, tax systems must raise sufficient individuals under the personal income tax. Under a
revenue to meet the needs of government and be progressive marginal rate scale, as the income of an
sufficiently flexible to deal with short-term economic individual increases, the individual pays proportionately
fluctuations. more of their income as tax. Further, defining the tax
Globalization has put additional pressure on tax base comprehensively is also necessary to achieve
systems so that they are attractive to foreign investors. vertical equity as gaps in the tax base (such as for
Tax systems should foster economic growth through capital gains) tend to favor high income earners.
efficient design that limits distortions and attracts The extent of equity in the tax system will depend on
foreign investment. ethical choices made by the government and the
The focus of this report is on the revenue side of the impact on other aspects of the tax system, and cash
government’s budget. However, there are two aspects transfers that may be made by the government to low
of the expenditure side of the budget that are relevant income earners. There are limits on the level of vertical
to this report. First, tax concessions provided to a equity that can be achieved through the tax system. A
particular taxpayer or class of taxpayers can be properly tax system that is too steeply progressive marginal rate
classified as the equivalent of expenditure measured scale may result in an increase in tax avoidance and
by reference to the revenue foregone as a result of evasion activity as taxpayers seek to find ways to limit
the tax concession. Tax concessions are referred to the impact of the progressive marginal rate scale on
as “tax expenditures” and some countries (including them.
the Philippines) now produce a separate budget (“tax
expenditure budget”) that reports the revenue cost of 1.2.2. Efficiency
tax expenditures. As the Philippines has a long history of In a market economy, taxation involves the transfer of
using tax expenditures to support particular economic resources from the private sector to the public sector.
activities, this report includes consideration of tax Efficiency relates to the transfer of such resources and
concessions. Second, the level of cash transfers to has two broad aspects. First, in a narrow sense, efficiency
individuals under the targeted conditional cash transfer requires that the “resources available for public use be
program will have an impact on equity of the system. For as nearly as possible equal to the resources withdrawn
example, transfer payments to low-income individuals from the private sector”.1 This primarily relates to
will offset some of the inequity of consumption taxation. the cost of administering and complying with the tax
This is mentioned only briefly in this report. laws, and is also an aspect of the simplicity criterion
discussed below.
1.2. Criteria for Evaluation of Tax In a broader sense, efficiency relates to the impact of tax
Systems on decision-making. In particular, tax should not result
in resources being directed into less efficient uses than
1.2.1. Equity would otherwise have been the case in the absence of
The notion of “ability to pay” tax underlies the tax taxation. This operates at many levels. Tax should not:
concept of equity or fairness. Equity is usually defined • Distort the relative prices of goods and services
by reference to horizontal and vertical equity. Horizontal that consumers acquire
equity requires that those individuals with the same
ability to pay tax should have the same tax burden. • Distort the wage rates for different forms of work
Achieving horizontal equity requires a comprehensive that may be undertaken

7
 • Influence the choice between work and leisure tax concession. The fewer the gaps in the tax base, the
fewer the opportunities for tax avoidance.
• Distort the returns from different forms of
investment The OECD’s Base Erosion and Profit Shifting (BEPS)
project has highlighted the need for countries to protect
• Distort the relative prices of productive assets
their tax systems from international tax planning. The
or discriminate as between different forms of
reform of the Philippines tax system should include
production
measures to limit BEPS practices. This includes:
The efficiency criterion also implies a comprehensive measures to counter cross-border tax arbitrage,
tax base to avoid these distortions. excessive use of debt financing, planning to avoid a
permanent establishment; transfer pricing abuses, and
1.2.3. Simplicity tax treaty shopping. It should also include measures to
The tax system should be simple to administer and strengthen the income tax and VAT taxation of cross-
comply with. The more complex the tax system, the border services.
greater the loss of certainty in determining tax liabilities
and the higher the administrative and compliance costs 1.3. Mix of Tax Instruments
for the tax administration and taxpayer. For taxpayers, There is no single tax instrument that achieves all the
in particular, complex tax systems result in the diversion goals of a good tax system. For example, a broad-based
of productive resources into unproductive activities consumption tax, such as value added tax (“VAT”),
like tax advice, restructuring transactions, and even with few exemptions and a single rate, can be a highly
litigation. efficient and simple tax, but, because low income
Complexity can arise from different sources. It may arise earners pay proportionately more of their income as
from poorly drafted tax laws that cause uncertainty in tax, it does not satisfy the vertical equity criterion.
interpretation. Importantly, though, it can arise when the Attempts to include some equity in the design of a
tax system differentiates between different products, broad-based consumption tax through exemptions or
activities, or investments. The tax administration multiple rates (i.e. the treating of some goods such as
incurs costs in “policing” any artificial borders between goods or services differently [such as basic foodstuffs])
products, activities, or investments that the tax system will inevitably involve a loss of efficiency and simplicity,
may create and taxpayers incur compliance costs in as administrative and compliance resources must be
obtaining advice as to the appropriate tax treatment of devoted to managing the “border” between taxable
products, activities, or investments.2 and exempt, or low rate and standard rate, goods or
services.3 Further, differential treatment of some goods
1.2.4. Flexibility and services will result in business resources being
diverted into unproductive tax planning activities to take
The tax system must include some instruments that
advantage of exemptions or preferential rates.
can be adjusted quickly to stabilize the economy when
economic circumstances require. At its simplest, this Similarly, while the personal income tax can be readily
requires that there are some taxes the rates of which adapted so that the burden of tax varies with the
can be lowered or increased quickly in light of short-run personal circumstances of individual taxpayers so as to
economic fluctuations. The rate changes must be able achieve equity goals, this comes at the cost of greater
to be implemented so as to alter government revenue complexity. Further, individual taxpayers may attempt
and influence taxpayer behavior with immediate effect. to “adjust” their personal circumstances so as to either
Further, given the politics, small rate increases must be maximize benefits or avoid detriments under such taxes.
able to generate significant revenue impacts. For example, the most obvious way that vertical equity
is achieved under the personal income tax is through
1.2.5. Countering Tax Avoidance and the application of a progressive marginal rate structure,
Evasion but this can encourage tax planning (such as income
splitting) by taxpayers seeking to limit the impact of the
Tax systems must be designed so as to limit tax rate structure. The inclusion of anti-abuse measures
avoidance and evasion. A comprehensive tax base is further increases complexity, and administrative and
the best counter to tax avoidance activity. The reality is compliance costs.
that taxpayers will attempt to take advantage of gaps
in the tax base whether the gap is structural (such as Ultimately, the design of the tax system will involve a
no or low taxation of capital gains) or as a result of a trade-off between equity, efficiency, and simplicity,
and this is achieved through a mix of instruments. It
8
is important that each component of the tax system 1.6.1. Personal Income Tax
is designed to its best advantage and allows the
interactions between the taxes to achieve overall goals As indicated above, the personal income tax is the main
relating to equity, efficiency, and simplicity. For example, taxing instrument to achieve horizontal and vertical
the VAT should be broad-based and imposed at a single equity. This is achieved through a broad base and a
rate to maximize efficiency with equity achieved through progressive marginal rate scale. Gaps in the tax base
personal income tax. It is also observed that equity lead to a loss of equity as persons with the same capacity
goals can be achieved through the expenditure side of to pay tax may pay significantly different levels of tax.
the budget, particularly social welfare and other transfer For example, if capital gains are untaxed or benefit from
payments to low income earners. This will depend on a concessionary taxation, then this is likely to benefit
country’s budgetary capacity to make such payments high income earners as they are more likely to derive
and there will often be less capacity to make such capital gains. Further, gaps in the tax base encourage
payments in developing and emerging economies than tax planning as individuals re-characterize their income
in developed economies. as a tax-preferred category. For example, if there is
not full taxation of fringe benefits, then employees
1.4. Drivers of Tax Reform will substitute taxable cash salary for untaxed fringe
benefits. Similarly, if capital gains are untaxed or lowly
There are some key drivers of tax reform. First, the taxed, then individuals will seek to re-characterize
impact of trade agreements, falls in commodity prices, income as capital gains.
and financial crises have highlighted the need for
revenue diversification, particularly ensuring that there While in the past, marginal rate scales were often
is proper mix of taxes. Relying too heavily on one main steeply progressive with many rates, the trend has been
revenue source can give rise to revenue shocks. to adopt flatter marginal rate scales with a tax free-
threshold and no more than two or three positive rates.
Second, changes in the global economy have seen The flattening of the marginal rate scale has often been
countries seek to attract foreign investment to grow the “financed” by a broadening of the tax base, i.e. broaden
economy. Countries have been revising their tax systems the base and lower the rates. This has put greater focus
to ensure that they are attractive to foreign investors. on horizontal equity and reflects the fact that a steeply
Third, improving revenue to reduce reliance on debt progressive marginal rate structure can encourage tax
and aid. The need to service government debt can be planning.
a serious constraint on productive expenditure. Further,
external debt exposes the government to currency
1.6.2. Corporate Tax
exchange risk. The main issue today with the corporate income tax is
the relationship between financial accounting and tax
Finally, providing funding for new government projects,
and, in particular, whether greater alignment is possible
particularly infrastructure projects.
with resultant savings in administrative and compliance
1.5. Overview of the Main Tax costs.
Companies are required to keep financial accounts for
Instruments the information of their owners, managers, and creditors,
The two broad bases for taxation are income and and also future investors and creditors. Profit is a
consumption. A tax system may also include wealth or temporal concept requiring measurement for a defined
property taxes. While such taxes may improve the equity period, namely the company’s financial accounting year.
of the tax system, generally, they are not large revenue For financial accounting purposes, financial accounting
raisers. The broad design issues with income and standards provide rules for allocating income and
consumption taxes are discussed below. The discussion expenditure to accounting periods. Taxable income is
is only brief and is intended to provide an introduction to also a temporal concept requiring measurement by
the discussion that follows on reform options. reference to the taxpayer’s tax year. The calculation of
a taxpayer’s taxable income also involves the allocation
1.6. Income Tax of income and expenditure to tax years.
The income tax can be divided into the personal income Although the basic reason of measuring profit is shared
tax and corporate income tax. Special issues arise with by financial accounting and tax, the purposes of tax and
the taxation of small business, which are discussed financial accounting are not exactly the same. Because
separately below. financial accounting is concerned with presenting

9
owners, creditors, and investors (and future investors 1.7.1. VAT
and creditors) with an accurate reflection of the
ongoing profitability of an entity, financial accounting While VAT is imposed on final consumption, it is
has developed rules to ensure that the calculation collected progressively at each stage in the production
of profit does not present a distorted view of the true and distribution of goods and services. Cascading of
long-term profitability of a company when, for example, tax is avoided under VAT through the input tax credit
a company’s right to retain income is contingent on mechanism so that a VAT-registered person charges
the provision of goods or services in the future or the VAT on their outputs but claims a credit for VAT paid on
company has potential future liabilities. These financial their inputs. The input tax credit mechanism, therefore,
accounting rules may defer the recognition of income is a critical feature of VAT that ensures that the tax is
or require the creation of reserves (or provisions) to not imposed on investment. However, some businesses
recognize future expenditure or losses thereby reducing will incur more input tax than the output tax collected.
the current year profitability of the company. This will always be the case with businesses that
primarily make zero-rated supplies (mainly exporters)
Tax, on the other hand, is concerned only with the but can also be the case on a short-term basis for some
current year financial performance of companies with businesses, such as when a large capital purchase is
a view to collecting a portion of the current year profit made. A properly functioning VAT system requires that
as tax. Generally, tax is not concerned with deferring businesses are able to claim a refund of excess input
recognition of income that a taxpayer has derived or in tax credits to avoid VAT being a tax on investment.
providing currently for possible future expenditure or
losses. In particular, tax will deal with future financial The refund of excess input tax, however, leaves the VAT
events if or when they occur. For this reason, it is not vulnerable to fraud. Fake invoices and fictitious entities
appropriate for the tax rules to give complete sovereignty may be used to inflate refund claims. Further, sales may
to financial accounting as expressed in the accounting be under-reported or under-valued, or domestic sales
standards. may be disguised as zero-rated exports. The experience
of some countries, particularly, in the European Union,
The advent of an internationally agreed set of financial has been that VAT fraud arrangements have been
accounting standards (the International Financial highly sophisticated. The incidence of VAT fraud has
Reporting Standards (“IFRS”)), however, offers an prompted some countries to consider consumption tax
opportunity to more closely align taxable income alternatives to VAT, particularly a sales tax or turnover
with financial accounting profit, but still recognize tax.
the fundamental differences in the calculation. In
particularly, IFRS resolves some long-standing tax 1.7.2. Retail Sales Tax
concerns with financial standards by, for example,
In contrast to the VAT (a multi-stage tax), a sales tax
excluding the last-in-first out (LIFO) inventory valuation
is a single stage tax imposed at the retail, wholesale,
method and the completed contract method for
or manufacturer level. While the input tax credit
accounting for long-term construction contracts.
mechanism under the VAT avoids cascading of tax,
Further, unless accelerated depreciation is to apply
cascading under a sales tax is usually avoided through
for tax purposes, tax depreciation should simply follow
an exemption system. Under sales tax, a “ring” is
effective life depreciation under financial accounting.
placed around registered producers/suppliers and all
transactions between registered persons within the
1.7. Consumption Tax ring are treated as exempt. A transaction by a registered
Consumption taxes can be broad-based or selective. As person with a person outside the ring is subject to tax.
stated above, a broad-based consumption tax on goods
In theory, the same revenue should be collected under
and services imposed at a single rate can be a highly
a VAT or retail sales tax (“RST”); however, in practice,
efficient and simple tax. A broad based consumption tax
RST is likely to raise less revenue. Initially, it is observed
can be either a multi-stage tax (VAT) or single stage tax
that, as the retail level will often have a large number
(sales tax).
of small businesses, the RST registration threshold
Selective consumption taxes can be both inefficient and will need to be much lower than under the VAT so as to
inequitable, particularly as they may discriminate against capture similar revenue levels. Indeed, it may be that
individuals with different tastes and can favor one all retailers must be registered under RST to ensure
product over a competing product. They can, however, an equivalent revenue collection to that under VAT. A
be an important source of revenue and achieve policy higher registration threshold is possible under the
objectives, particularly correcting negative externalities. VAT because VAT is collected progressively as goods
10
and services pass through the distribution chain. This tax of the exporter and not the embedded tax in the
means that even goods supplied by small unregistered exporter’s costs that exists because of cascading.
retailers will bear some level of VAT. This will mean that Philippines’ exports will be more
expensive in world markets as their cost will include
RST poses two revenue risks. First, goods may leak
both embedded Philippines tax and import VAT in the
out of the ring of exempt producers through RST
country of import. The advantage of the VAT is that, on
fraud. The longer the supply chains, the greater is the
export, it removes all local tax up to the point of export.
exposure to RST fraud because of the large number of
Consequently, the only tax on the exported goods or
points where goods may leak out of the ring of exempt
services will be the import VAT in the country of import
producers. Second, the RST imposes tax at the point in
and, therefore, the goods and services can compete
the distribution chain that is most vulnerable to non-
equally with other goods and services in the import
compliance because of the cash economy in which
market.
many small retailers operate. Importantly, the single
stage nature of RST means that any revenue leakage As explained below, a turnover tax may be used to
will involve the loss of the whole of the tax. In fact, the replace both the income tax and VAT for small business.
fraud risk may be even greater under RST than VAT.
Further, the single stage nature of RST limits flexibility 1.9. VAT vs. RST vs. Turnover Tax
in setting the tax rate, as the higher the rate, the greater
The VAT is used in a very large number of countries and
is the incentive for fraud.
is well established in the Philippines. It has advantages
over alternatives. The focus of tax reform should be on
1.8. Turnover Tax improving the functioning of VAT, including reviewing
Another alternative to VAT is a turnover tax. In broad exemptions. In particular, options to limit VAT fraud
terms, a turnover tax is a tax imposed on a periodic basis within the existing VAT framework should be explored
(such as monthly or quarterly) on the gross turnover of rather than moving to a completely new system of
businesses without deduction of expenditure. It differs taxation that may not necessarily fully solve the fraud
from a VAT and RST as it is not formerly imposed on problem (particularly in the cash economy) and create
individual transactions, although businesses are other problems through the cascading of tax.
likely to add the tax to the price of goods or services
sold or supplied so that they recover the tax from 1.10. Selective Consumption Taxes
their customers. A turnover tax can be imposed on all
As stated above, selective consumption taxes can be
businesses regardless of whether they supply goods or
both inefficient and inequitable. There is, however,
services, and also on whether they are small, medium,
a role for selective consumption taxes, in the form of
or large (although a registration threshold may exclude
excises, to play in correcting the negative externalities
micro-businesses).
caused by the consumption of certain goods. In broad
As all businesses in the distribution chain of goods and terms, a negative externality is a cost of consumption
services are subject to turnover tax, the tax operates that is not reflected in the price of goods and, therefore,
as a de facto multistage tax and, therefore, overcomes may be borne by society generally. The main examples
the major weakness of the RST as a single stage tax. of negative externalities are health and environmental
However, a major disadvantage of a turnover tax is that costs. This is why excise taxes are commonly imposed
there is cascading of tax (i.e. tax on tax). This is because on tobacco, alcohol, petroleum products, and motor
there is no credit (VAT) or exemption (RST) mechanism vehicles. Excise taxes imposed on these products are,
to allow goods to pass through a chain of registered in general terms, non-distortionary because of the
persons tax-free. The longer the supply chain, the absence of untaxed substitutes. The choice is generally
greater the level of cascading. Importantly, unless the as between consumption or no consumption of the
rate is set very low, the cascading under a turnover tax excised product.
is likely to significantly increase the cost of goods and
Excise taxes may also be imposed on products the
services.
demand for which is relatively inelastic simply to raise
Another disadvantage of turnover tax is that it is not revenue. For example, some countries have imposed
possible to ensure that exports leave the Philippines excise taxes on telecommunication services (particularly
completely free of tax. Any attempt to do so is not likely mobile phone services) and banking services. The latter
to be accurate and will come at increased compliance may also be as a substitute for VAT, as financial services
and administrative costs. While no turnover tax would are generally exempt from VAT for administrative
be charged on exports, this only eliminates the turnover reasons.
11
Any proposals to extend excise taxes beyond the and, in other countries, it is negligible. However, there
standard excisable goods must be based on clear is increased interest in property taxation, particularly
evidence of the negative externality that the tax is in developing countries, as a new or improved revenue
correcting and absence of highly substitutable products. source.
This is particularly relevant to the current discussion
Property taxation can improve the equity of the tax
around the imposition of excise tax on sugary drinks
system as tax is borne mainly by middle and high income
and snack foods.
earners. Progressivity can be included in the design of
the tax through a threshold. Property taxation is also
1.11. Taxation of Small Business efficient because land and buildings are largely immobile.
The small business sector is the most difficult sector This also means that there is limited opportunity for
to tax under accounts-based taxes, such as the income avoidance and evasion. It is more efficient when levied
tax or VAT. This is the case for both developed and on residential property than commercial property. This
developing countries, although the problem is more is because there is greater burden of the tax on those
acute in developing countries because of the greater businesses that require more commercial property as a
percentage of businesses that are likely to be categorized factor input, such as agriculture. Property taxation can
as “small” and the fewer resources available to the tax be used to fund subnational governments. Because of
administration to enforce the tax. its advantages, some commentators describe property
tax as the “perfect” tax.
There has been a trend to having turnover tax replace
both income tax and VAT for small businesses. Other However, property taxation has not been widely used for
businesses are subject to both the VAT and income tax. two main reasons. First, property taxation is often seen
This system has the advantage of retaining the benefits as politically unpopular. The unpopularity stems from
of VAT for larger businesses, including the input tax credit the advantages of the tax, namely its greatest impact
mechanism to avoid cascading of tax and zero-rating of is on the wealthy, it is transparent, and hard to avoid.
exports, and also the administrative benefits for the tax Second, property taxation can be difficult to implement.
administration of VAT record-keeping obligations (which There is a need for very significant investment in
will also assist with administration of the income tax). administrative infrastructure to carry out regular market
It also ensures that revenue is collected from the small based valuations of land and buildings. In particular,
business sector but with simplified administrative and the system requires a computer-assisted appraisal
compliance burdens. system. Further, the tax is data-intensive and requires
cooperation between government agencies (tax
1.12. Property Taxation administration, local government, and lands ministry).
Property taxation in the form of regular taxation of real If these political and administrative difficulties can
property, such as land tax or rates, has not been a be overcome, property taxation has strong revenue
significant revenue raiser. In OECD countries, property potential.
tax amounts to little more than 1% of total revenues

12
Section 2. Tax Reforms in Recent
Philippine History
2.1. Background Considering that the current tax system is a stock
product of cumulative legislation and that reforms
The frequency, pace, credibility and quality of recent tax have always been influenced by the past, the events
reforms in the Philippines have often been shaped by and reforms shaping the Philippine tax system will be
the times, institutions and people implementing them. reviewed in sequence with emphasis on occasions
Sometimes, reforms have been sweeping, dictated where change was more sweeping. Two major tax
by fiscal exigencies in the aftermath of presidential reform programs have taken place since the end of the
transitions in need of financing for new programs, or Marcos regime: the 1986 tax reform program (TRP) and
in the aftermath of external or self-inflicted economic the 1997 comprehensive tax reform program (CTRP).
shocks. At other times, reforms have been piecemeal, Other notable occasions include the implementation
subjected to the vetting within and the idiosyncrasies of the value-added tax in 1988 (although it had been
of the legislative process and/or other political approved during the TRP), subsequent efforts to broaden
considerations. Reforms have targeted both tax and narrow the VAT base, the efforts to broaden and
policy and tax administration either separately or as enhance tax incentives (especially to promote export-
complementary components of a broader package. oriented growth and domestic investments) and then
Tax reform has been rationalized in the past as a to rationalize them and enhance their transparency,
basis for achieving the economic and political motives through to more recent reform of ‘sin taxes’. Table A in
of policymakers and legislators, be they to enhance the Appendix lists the specific episodes of reform and
the equity, efficiency and simplicity of the tax system. other factors influencing the current tax system.
For example, to reduce tax burdens for or encourage The roots of the present system of taxation can be
desirable or discourage undesirable behavior on the found in the system formulated under the revolutionary
part of taxpayers, or to induce investment and positive government of President Corazon Aquino, whose term
spillovers from corporations. Where political and ran from 1986 to 1992. To understand the basis for
economic motives might also coincide is the use of tax reform during that era, one must take stock of the
tax policy to support industrial policy. The Philippines circumstances that existed before she rose to power
has had a dominantly tax preference-based industrial – the troubled latter years of the regime of Ferdinand
policy since the 1960s with increasingly generous tax Marcos.
preferences.
This section reviews the history of recent tax reforms
Regardless of the tax reforms that have occurred, the in the Philippines and uses the lens of economic
Philippines tax system has continued to suffer from principles to assess the events that have shaped the
chronic weaknesses. Tax rates continue to be high, recent history of the Philippine tax system.
discouraging investment and perhaps also work effort.
Meanwhile, tax effort levels are low and there are 2.2. Conditions Prior to the 1986
persistent calls to reduce corporate and personal tax
rates to levels more consistent with comparative nations. Aquino Tax Reform Program: The
Furthermore, administrative efficiency is low and Late Marcos Regime
leakages are high. Tax policy combined with industrial
policy has also not encouraged investment. In the last When President Corazon Aquino assumed power during
four decades, the outcomes of reforms have been 1986, the Philippines Government was in a fiscal
mixed - there have been some victories but also serious crisis, after having gone through successive years of
setbacks. On net basis, the tax system has persistently economic contraction from 1984 to 1985 owing to
been unable to raise revenues to levels consistent with structural problems with the tax system, the lingering
known benchmarks. This has constrained its ability to effects of debt, exchange rate issues, financial and
finance and sustain inclusive development. It is time to political crises that occurred during the latter part of
take stock, learn from the past and plan for future best the Marcos presidency. Tax effort, defined as taxes as
practice tax reform. percent of GDP, was at rock bottom having fallen from

13
12.8% of GDP in 1979 to 10.71% of GDP in 1985. specific and sales tax rates on imported and domestic
Expenditures net of interest payments were 11.45% cigarettes and alcoholic products. 4
of GDP, the national government fiscal balance was in
In October 1985, Presidential Decree 1991 imposed
deficit (-1.94% of GDP) while the consolidated public
a unified sales tax rate of 3% on essential and non-
sector deficit was significantly higher than the accepted
essential article. The sales tax rate was subsequently
norm (-5.61% of GDP).
lowered to 1.5% in January 1986. Specific taxes were
The structure of the tax system prior to 1986 contributed imposed on certain locally produced and imported
to the severity of the fiscal crisis goods.
• The tax system was relatively unresponsive 2.2.3. International Trade Taxation:
(inelastic). From 1981 to 1985, taxes grew at an
average annual rate of 15% as against the 18% 1981-85
growth of nominal GDP. The ad valorem peak rate of 100% was reduced to
• The tax system generated a low tax yield: tax 50%, and tariff rates on other goods were revised to
effort was a low 10.7% of GDP in 1985. Given conform to a more uniform tariff structure. In 1982, an
the country’s expenditure needs at that time, tax additional duty of 3% was imposed on oil imports, and
effort should have been at least 15.0%. at the height of the political crisis brought about by the
assassination of former Senator Benigno Aquino, this
• The country was heavily dependent on indirect was raised to 5% in 1983 and to 10% in 1984. These
taxes. About 70% of total taxes were derived from additional duties were reduced gradually until they were
domestic indirect taxes and international trade finally phased out in 1986.
taxes, and
Export taxes on particular products were alternatively
• The tax structure was immensely complicated lifted, re-imposed, raised and decreased according to
and difficult to administer. the performance of each product in the world market.
Tax rates differed: logs, 15%; copra, 15%; coconuts,
2.2.1. Income Tax System: 1981-85 9%; copra meal and desiccated coconut, 8%; lumber,
The pre-1986 individual income tax system was veneer, abaca, pineapple, 4%; and banana, 2%.
schedular in nature. Two schedules existed. The first
schedule was for compensation income – a modified 2.2.4. Tax Incentives: 1981-85
gross income scheme which consisted of nine tax In January 1981, up-front incentives (such as duty-
brackets, with tax rates starting from 1% to 35%. The free importation of machineries) were replaced by
second schedule was for business and professional performance-based incentives such as tax credits on
income, with five tax brackets and marginal tax rates value added earned and net local content of exports.
ranging from 5% to 60%. Passive income (interest
income, royalties and dividends) was subject to 17.5% In 1984, all tax exemptions enjoyed by government
and 15.0% withholding tax rates. Corporate net profits corporations and private firms were abolished. But
were subjected to dual rates of 25% and 35%, where a large number of exemptions were subsequently
corporations with higher incomes were subjected to the restored. Tax incentives for investors consisted of
higher corporate income tax rate of 35%. Relatively high performance-based tax credits and deductions. These
marginal tax rates contributed to the practice of business incentives were made available to domestic market
and professional income tax filers understating their oriented corporations via the Board of Investments
incomes. The result was that they generally experienced (BoI) and to exporters registered with the Export
much lower effective tax rates, usually around lower Processing Zone Authority (EPZA) and located in any of
20s. the four special economic zones in existence at the time
(Bataan, Cavite, Cebu, Baguio). Despite the existence of
2.2.2. Domestic Indirect Taxation: these incentives, the country was not able to generate
sufficient investment, primarily because of the severe
1981-early 1986 political and macroeconomic crises prior to the fall of
Most imported and locally produced goods were levied the Marcos regime.
with an ad valorem sales tax. From 1983 to 1985,
successive Executive Orders were issued to unify

14
2.3. The 1986 Tax Reform Table 1. Fiscal Indicators Upon Assumption to Office
Program (1986 TRP) of President Corazon Aquino: Reform or Perish

The harsh macroeconomic and fiscal realities in 1986 Years immediately before and during tax reform
did not leave President Corazon Aquino any option. With In percent of GDP 1985 1986
the country still heavily indebted, the best way to rebuild
the country’s finances and also to resume access to Revenues (R) 10.9 11.7
concessional credit was to undertake a reform of the Taxes 9.7 9.7
country’s complicated, unfair, inefficient, and low- Expenditures (G) 12.6 16.4
yielding tax system. The low revenues, compounded Interest payments (IP) 2.3 3.6
by the high cost of borrowing money at home and
Primary surplus [R- (G-IP)] 0.6 (1.1)
abroad, would not allow the administration to finance
public infrastructure, invest in human resources and National government fiscal (1.7) (4.7)
social programs (the increasing emphasis of the Aquino balance
administration) and service its huge and rising public Consolidated public sector deficit -5.61 -6.50
debt. Figure 1 below charts the trajectory of government (CPSD)
expenditures, tax effort, revenue effort and deficit Public sector borrowing -2.73 -4.20
starting in 1984. Table 1 below shows the dire statistics requirements (PSBR)
which describe the fragile state of fiscal affairs at the
time. Both figure and table show the alarming rise in the Source: Department of Budget and Management
budget deficit in 1986 and the inconsistency between
low tax effort and simultaneous rising government 2.3.1. Objectives of the 1986 Tax
expenditures. Hopes for fiscal sustainability rested
on the competency and credibility of the president’s
Reform Program (1986 TRP)
revolutionary government to restore confidence so that Considering the urgent need to sustain fiscal balances
individual and corporate taxpayers would jump-start the as an aid to macroeconomic stabilization and poverty
economy along with revenues. alleviation, the aim of the 1986 TRP was to fix the
inherent weaknesses of the tax system that the Aquino
Figure 1. Perspective on Public Finance in Recent administration inherited. The tax system was so bad that
Philippine History: 1994-2014 the authors of the reform dubbed the 1986 TRP as ‘tax
reform without tears’. More specifically, the objectives
Size of Government, Sources of Financing, Size of of the 1986 TRP were as follows:
Deficits
• Improve the responsiveness (elasticity) of the tax
In percent of gross domestic product system.
20 • Promote equity by ensuring that similarly situated
15
individuals and firms bear the same tax burden.

10 • Promote growth by withdrawing or modifying

taxes that reduce incentives to work or produce,
5
and
0
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 • Improve tax administration by simplifying the tax
-5 system and promoting tax compliance.
-10
The formulation and approval of the 1986 TRP took place
G/GDP T/GDP R/GDP Def/GDP
under a unique policy regime. For 18 months, President
Corazon Aquino led a revolutionary government and
Legend:
G = government spending, T = tax collections, exercised both Executive and Legislative powers. There
R = total revenues, D = deficit was no Congress, hence no need for tedious and time-
consuming executive-legislative coordination. This
made possible the approval of twenty-nine (29) tax
measures (all in the form of Executive Orders, EOs),
including the introduction of the value added tax (VAT)
into the Philippine tax laws, in one Cabinet meeting on

15
June 28, 1986. The sweeping reforms included changes excise tax on solvents and matches, and excise
in the direct and indirect taxation. tax on processed videotapes.

2.3.2. 1986 Reforms in Direct Taxation • A 2% tax on entities with annual sales or receipts
of less than PHP 200,000.
On personal income taxation (PIT), the dual tax schedules
for compensation and professional income earners • Adoption of tax credit method of calculating tax
were unified with a 0-35 percent schedule adopted for by subtracting tax on inputs (input VAT) from tax
both types of taxpayers to minimize revenue loss and on gross sales (output VAT).
preserve the relative tax burden of individuals, ceilings • Exemption of the sale of basic commodities such
on allowable business deductions were proposed and as agriculture and marine food products in their
adopted. Unfortunately, due to a strong lobby by various original state, price-regulated petroleum products
professional groups, this complementary proposal was and fertilizer, and
not fully implemented by tax administrators.
• An additional 20% tax on non-essential articles
Personal tax exemptions were increased to adjust for such as jewelry, perfumes, toilet waters, yacht
inflation and to exempt from taxation those earning and other vessels for pleasure and sports.
below the poverty threshold. Married couples, where
The VAT was signed into law during 1986 and fully
both wife and husband worked, were given an option to
implemented during 1988. It provided new avenues
file separate returns which lowered the tax burden on
for indirect taxation to raise revenue. As cumulative
married couples by removing the effect of progressive
experience with the VAT suggested that it would be a
rates on their combined incomes. Passive income were
reliable source of revenue growth, its rate would be
taxed at uniform rate of 20%, which rendered passive
subsequently adjusted upwards and its base broadened.
income taxation neutral with respect to investment
However, beyond the Corazon Aquino administration,
decisions involving bank deposits and royalty generating
numerous new tax laws would reduce the reliability of
ventures.
the VAT, as legislated exemptions of various groups of
On corporation income taxation, a uniform 35% rate final consumers grew in number, resulting in growing
replaced the two-tiered corporate tax structure. The tax revenue losses.
on inter-corporate dividends was eliminated and the tax
on dividends was phased out gradually over a period 2.3.4. 1986 Tax Incentives
of three years. The exemptions from income taxes of At around the same time that the 1986 TRP was being
franchise grantees were withdrawn. The imposition of passed into law, the Corazon Aquino regime broadened
an income tax on franchise grantees put this previously and intensified the use of tax incentives as a tool for
favored group on an equal footing with similarly situated investment promotion. With the country emerging
individuals or firms. Uniform franchise taxes were from deep economic crises, it was thought that tax
imposed on similar types of utilities. incentives could help stimulate aggregate demand
by attracting foreign and domestic investment and
2.3.3. 1986 Reforms in Indirect Taxation generate needed employment and other spillovers. At
The value-added tax (VAT), pursuant to Executive Order that time, neighboring countries were already using
(EO) 273, was introduced to simplify the tax structure tax incentives to fuel industrialization, investment-
and its administration. The VAT was meant to replace and export-led growth. While the tax code and several
various sales and turnover taxes. The new system had existing special laws already reduced tax burdens for
the following features: select investors, it was thought that a more aggressive
• A uniform destination principle VAT rate of 10% on stance was needed, considering the economic jump-
the gross selling price of domestic and imported starting that was desired in light of the economic crises
goods and services and 0% on exports and that the country had gone through.
foreign currency denominated sales (zero-rating). While the latter part of the Marcos regime relied
• 10% in lieu of various rates applicable to fixed primarily on performance-based tax incentives such as
taxes (with 60 nominal rates), advance sales tax credits and tax deductions to stimulate investment,
tax, tax on original sale, subsequent sales tax, President Corazon Aquino’s industrial policy focused
compensating tax, miller’s tax, contractor’s tax, on a ratcheting up of the generosity of tax preferences,
broker’s tax, film lessor and distributor’s tax, with non-performance-based income tax holidays

16
replacing tax credits and deductions as the tax policy of the VAT and general economic growth during that
tools of industrial policy. Still using her revolutionary period. Administrative reforms complemented the
powers, President Corazon Aquino signed into law EO policy reforms, as the Tax Identification Number was
226, the Omnibus Investments Code, which endowed also launched. The number of registered taxpayers
the BoI with power to grant income tax holidays at its doubled during the Corazon Aquino administration and
discretion. The BoI would target their discretionary the level of tax compliance also grew, influenced in part
incentives towards pre-identified industries in the by greater confidence in the government.
annual Investments Priorities Plan. The Investment
The overall responsiveness of the tax system to changes
Priorities Plan represented BoI’s effort to assemble a
in economic activity improved from an average of 0.9%
list of industries thought to have the greatest potential
from 1980 to 1985 to an average of 1.5% from 1986 to
to lift the country’s competitiveness and generate the
1991. The buoyancy coefficient for import duties rose
greatest positive externalities. Through the passage of
from 0.5% before the reform to an average of 1.89%
other laws, Congress would also make BoI tax incentives
from 1986 to 1991.
available on a mandatory basis to other favored
industries. The practice of extensively targeting income The success of the 1986 TRP can be attributed to
tax holidays to select industries would play a role in later several factors. It was crafted by a team of experts, was
reducing the efficiency of the tax system as it marked fully supported by the president and was the result of
a shift towards using non-performance-based tax a credible process free from undue external influence.
incentives as the primary tool for investment promotion. Furthermore, the tax reforms were complemented
This resulted in the quantum of the tax relief benefit the by stability and continuity of the top executives at
investor not being tied to the size of the investment. It the BIR. The 1986 TRP succeeded in simplifying the
also contributed to a gradual weakening of the control system of taxation and making it more buoyant and
by authorities responsible for fiscal policy over revenue more responsive to the changing times. It could have
generation, as it intensified the ability of investment been improved, and the tax fairness enhanced, if the
promotion agencies to influence the revenue collection BIR had fully implemented the approved reform that
system. Subsequent destabilization plots and other would have imposed ceilings on allowable deductions.
extra-constitutional challenges that occurred during the Furthermore, the introduction of income tax holidays
latter part of President Corazon Aquino’s term in office and other targeted tax preferences towards select
also undermined the efficacy of the tax incentives in industries would later undermine the efficiency and
spurring capital formation as investors generally shied buoyancy of the tax system. Despite the misgivings of
away from a politically unstable country. the DoF about the tax incentives’ inability to encourage
investment, the system has been generally tolerated
Along with tax policy reforms, a number of important
and has remained part of the law. Their continued
administrative reforms were also implemented during
existence was rationalized on the basis of not further
the Corazon Aquino administration.5 The Department of
undermining investor confidence in the country.
Finance (DoF) along with its attached agencies, including
the Bureau of Internal Revenue (BIR), were restructured
under EO 127. The BIR was restructured to implement
2.4. 1992 - 1997
the changes in the tax system and improve service and The start of the Fidel Ramos presidency in 1992 marked
efficiency. This was accompanied by a tax amnesty and a a transition into a period marked by greater political
reduction in arrears. Employee compensation at the BIR normalcy and stability for the Philippines. Succession
was enhanced and efforts to improve the quality of tax took place constitutionally, and the new government
audits were intensified. Along with increased efforts to set out to more clearly define the country’s economic
improve the level of computerization in the organization, thrusts and priorities. In the context of an increasingly
reduce corruption and restore trust in the organization, competitive regional and global market place for capital,
BIR commissioners attempted to implement reforms to tax policy would serve the needs of industrialization
increase compliance. based on models thought to reflect best practice.
In the years immediately preceding tax reforms during
2.3.5. Analysis of the 1986 TRP the Ramos administration, the government embarked
In the years following the implementation of the 1986 on a vision to pursue export-led growth. In the early- to
TRP, both tax effort and revenue effort rose steadily. mid-1990s, a slew of new laws were passed to enhance
The latter increased from 10.7% in 1985 to 15.4% in the country’s investment and export competitiveness.
1992, peaking at 17.0% in 1997. This was partly due Although the Marcos regime helped develop the
to the simplification of the tax system, the introduction country’s first special economic zone in the late 1960s
17
and four other zones devoted to export production, incentives, higher personal exemptions for individual
the country still lagged behind its more export-led taxpayers and falling import duty revenues given
neighbors. The desire to follow its neighbors along the intensified trade liberalization, some policy adjustments
path of export-led growth led lawmakers to legislate needed to be made. It was decided that tax incentives
more generous tax incentives for exporters. would have to be reviewed and perhaps rationalized
(selectively eliminated or reduced in scope or intensity)
1995 marked a year in which much landmark legislation
as they might be reducing the buoyancy and increasing
was passed with the aim of promoting further capital
the complexity of the tax system and possibly also being
formation in the country. In an effort to stimulate
abused by taxpayers.
foreign investment and export-led growth, the PEZA
Law was passed in 1995. With this law, Congress Not lost during the transition from the Corazon Aquino
restructured the old Export Promotion Zone Authority to the Ramos regime was the recognition of these new
(EPZA) and renamed it the Philippine Economic Zone and related sources of fiscal fragilities. High regular
Administration (PEZA) and conferred on it more powers tax rates discouraged investment and encouraged tax
to develop special economic zones. This included the evasion and avoidance. Meanwhile, the high tax rates
ability to grant tax incentives to encourage investment also led to political pressure to pass laws that would
by private developers in special economic zones. lead to tax expenditures. Tax expenditures are defined
The law continued the practice of granting registered as laws which confer special tax status and deliberately
exporters preferential tax treatment on corporate reduce the cost of production (or consumption) of
income and imports of capital goods and raw materials certain goods and services and reduce the tax burden
and greatly reduced their tax burdens by providing on designated taxpayers and therefore creates a legal
some of the most generous tax incentives in the deviation from normal tax treatment (DBM, 2011).
region that greatly reduced the impact of direct and Tax expenditures are called such because such laws
indirect taxation. The former US military bases in Subic delivering targeted assistance through the tax system
and Clark, as well as two other large tracts of land in have a similar budgetary impact as actual expenditures
Zamboanga and Cagayan provinces, were converted by and also shrink the tax bases. Contingent liabilities
law into freeports, where consumables were also sold meant that government exposures necessitated more
duty free (effectively distinguishing them from special tax revenues. Furthermore, the country was also further
economic zones, in which only capital is tax free). The liberalizing trade, meaning that the country would have
new laws enabled registered exporters to receive the to rely less on trade taxes and more on other sources of
most generous preferential tax treatment. This included tax revenues to finance expenditures. New tax measures
income tax holidays at the start of operations for PEZA- were needed to address the need for national financing.
registered investors, a low 5% tax on gross income
earned after expiry of the income tax holiday, VAT zero- 2.5. The 1997 Comprehensive Tax
rating and duty free status on imported inputs. Freeport-
registered investors would be eligible for the same
Reform Program (CTRP)
incentives enjoyed by PEZA locators except the income Compared to the circumstances facing President
tax holiday. After legislation on freeports and the PEZA, Corazon Aquino, President Ramos faced a very different
the domestic tax regime even more ostensibly favored fiscal regime at the time of his tax reform program given
exporters over other investors. that both tax and expenditures were relatively sound as
a percent of GDP. The primary surplus was high and the
Tax incentives continued to be granted to domestic
budget deficit was close to zero.
market-seeking investors. The Board of Investments
(BoI) tax package consisted of income tax holidays but The consolidated public sector deficit, as percent of
no other preferential treatment for registered investors GDP, was slightly positive (0.3%) in 1996 and was less
after the tax break beyond tax and duty free importation than one percent in 1997. The public sector borrowing
of capital equipment and other minor incentives. requirement (PSBR), the amount needed to finance
national government deficit was 0.5 in 1996 and 1.5
The gradual opening up of more areas granting location-
in 1997, both tame by international standards. The tax
and non-performance based tax incentives along with
system wasn’t broken, so what was the rationale for
the continuation of BoI incentives with little or no
reform?
influence from the fiscal authorities was increasingly
viewed with concern by the Department of Finance. The 1997 Comprehensive Tax Reform Program (1997
Policymakers at the time recognized that to prevent CTRP) was implemented to broaden the tax base,
tax effort from declining in the long run due to the tax which would allow lower tax rates, and to plug the

18
perceived loopholes in the indirect tax system. Other 2.5.2. 1997 Reforms in Income
motivations included simplification of the tax structure,
minimization of leakages from undeclared revenues,
Taxation
overstated deductions and corruption and to make the The personal income tax system reverted to a uniform
tax system more elastic and ease tax administration rate schedule for both compensation and business and
and enhancement of the progressivity of income taxes professional income. This came after a brief experiment
to achieve better income redistribution (DBM, 1996). with the 1992 legislated Simplified Net Income Taxation
System.
Apart from changes to the marginal tax rates for the
personal and corporate income tax, the 1997 CTRP The rate structure was reduced to seven brackets.
also included the restructuring of excise tax rates Personal and additional exemptions were increased
on oil products (RA8184), as well as on alcohol and and it allowed deduction of premium payments for
tobacco products (RA8240). The excise tax on alcohol health and/or hospital insurance from gross income.
and tobacco products was changed from ad valorem
The corporate income tax rate was reduced from 35%
to specific. However, inflation indexation was left out of
to 34%. Additionally, on 1 January 1999, it was reduced
the law, making the tax less elastic (Manasan, 1997).
to 33% and on 1 January 2000 it was reduced to
While the motive for the change into specific taxes may
32%. A minimum corporate income tax was imposed
have been driven by perceptions of the weak state of
on the fourth year from the time a corporation starts
tax administration, the non-indexation would also prove
its business operations. Fringe benefits granted to
costly over time. It would take more than 15 years for
supervisory and managerial employees were taxed,
these excise taxes to be updated by Congress.
equivalent to the applicable company income tax rate
Officially, the objectives of the 1997 CTRP were: of the grossed-up monetary value of the fringe benefits.
• Make the tax system broad-based, simple and 2.5.3. 1997 Reforms in Indirect
with reasonable tax rates,
Taxation
• Minimize tax avoidance allowed by existing flaws
and loopholes in the system, The VAT base was broadened to include services
including those rendered by professionals by RA 7716.
• Encourage payments by increasing tax The Expanded VAT was subjected to a Temporary
exemptions levels, lowering the highest tax rates, Restraining Order for one year. To minimize opposition,
and simplifying procedure, and the Improved VAT law was enacted with the following
• Rationalize the grant of tax incentives, which at features:
that time was estimated in 1994 to be worth • Restored the VAT exemptions for all cooperatives
equal to P31.7 billion. (agricultural, electric, credit or multi-purpose,
The 1997 CTRP was also one of the important and others provided that the share capital of
requirements for the Philippines’ exit from the each member does not exceed P15,000.
International Monetary Fund’s supervision. • Expanded the coverage of the term “simple
processes” by including broiling and roasting,
2.5.1. 1997 Tax Reform Formulation effectively narrowing the tax base for food
and Legislative Strategy products
On February 10, 1994, President Ramos issued • Expanded the coverage of the term ‘original
Administrative Order 112 creating the Presidential state’ by including molasses, and
Task Force on Tax and Tariff Reforms. The task force
• Exempted from the VAT the following:
was multi-sector in composition and chaired by the
Secretary of Finance. A technical secretariat headed by – Importation of meat
an Undersecretary of Finance was likewise created.
– Sale or importation of coal and natural gas
in whatever form or state
– Educational services rendered by private
educational institutions duly accredited
by the Commission on Higher Education
(CHED)

19
 – House and lot and other residential 2.6. Fiscal Issues Faced by the
dwellings valued at P1 million and below,
subject to adjustment using the Consumer Estrada (1998-2001) and Arroyo
Price Index (CPI) (2001-2010) Administrations
– Lease of residential units with monthly By 1998 when Joseph Estrada assumed presidency,
rental per unit of not more than P8,000, the Philippine Government had accumulated large
subject to adjustment using CPI amounts of fiscal liabilities. The Asian financial crisis
– Sale, importation, printing or publication in 1997 triggered much of these contingent liabilities’
of books and any newspaper. conversions into actual fiscal liabilities as the discrete
depreciation of the exchange rate and the ensuing
The tax on the downstream oil industry was restructured
contraction in aggregate demand triggered claims from
from ad valorem to specific taxation. In general, taxes
public-private partnership investors whose risks were
on oil products were lowered and the tax on liquid
contractually assumed by government. The government
petroleum gas (LPG) for cooking was set to zero.
quickly inventoried existing public-private partnership
The tax on cigarettes and liquor was restructured from contracts and over time, renegotiated terms with
ad valorem to specific. The proposed law provided investors, occasionally buying out some. The Estrada
for indexation to take care of inflation. Unfortunately, government did not last for long as public protests
Congress, which was supposed to initiate the indexation forced the president out of office during 2001.
process never did so.
In January 2001, then Vice President Gloria Macapagal
2.5.4. Assessment of the 1997 CTRP Arroyo was swept into power when then President
Joseph Estrada was extra-constitutionally ousted. The
Congress failed to act on the proposed rationalization Arroyo administration increased government spending
of fiscal incentives, arguably the best part of the without any adjustment to tax collections. This resulted
1997 CTRP. The situation was made worst by the in large deficits from 2002 to 2004. After winning the
Tenth Congress approving nine new tax laws granting 2004 presidential elections, President Arroyo realized
incentives and increasing exemptions. As use of income that her administration’s pattern of expenditure was
tax holidays persisted, this impaired the efficiency of not sustainable. The inadequacy of revenues led to
the tax system and reduced its buoyancy for moving episodes of expenditure compression, as spending
forward. Studies would show several years later that tax was deliberately curtailed to keep budget deficits under
incentives also impaired economic efficiency in other control. Academics identified the unsustainability of
ways beyond the inefficiencies associated with income the country’s tenuous fiscal position and suggested tax
tax holiday (Reside, 2006, Medalla, 2006). reform as a way to address fiscal pressures (De Dios, et
Several aspects of the 1997 CTRP were passed but not al, 2004).
implemented such as
2.6.1. 2005 Expanded Value Added Tax
• The minimum corporate income tax, and
(E-VAT)
• The VAT on banks and financial intermediaries
To prevent further undesirable effects of budget
was not implemented at all. It was subsequently
deficits, President Arroyo had to look for additional
repealed and replaced by the Gross Receipts Tax.
sources of revenues to sustain basic social services.
This did not result in serious economic damage
This gave birth to the November 2005 E-VAT (expanded
since it was considered to be a mindless proposal
VAT) reform, RA 9337. The measure broadened the VAT
in the first place.
base, by subjecting to VAT energy products (for sales of
The 1997 CTRP marginally increased the contribution coal and petroleum products and electricity generation,
of taxes on fuels, tobacco and alcohol to total taxes. It transmission, distribution) and select professional
rose from 12.0 percent (from 1992-97) to 12.5 percent services. It also increased the VAT tax rate from 10 to
(from 1998 to 2003). While the effect of the 1997 CTRP 12 percent in February 2006.
on tobacco products was positive, its effects on alcohol
To mitigate the potential effects on the poor and
products and fuels and oils were negative.
on key transport prices and fares, and increase the
progressivity of the reform, select exemptions from
VAT were also legislated (although some exemptions
were nonstandard) and some petroleum excise taxes

20
were reduced. In addition, 50% of the incremental share. As a revenue-raising measure, the E-VAT had
VAT revenues would be earmarked for infrastructure succeeded. Figure 1 suggests that E-VAT law changes
and (targeted) social services expenditures, mostly resulted in increases in overall tax effort and reduction
in education and health. Furthermore, VAT minimum in the national government deficit.
marginal thresholds for exemption were also increased.
The E-VAT law also changed the rules for claiming VAT Table 2. Growth Rate of VAT Collections 2006-2010
credits. After passage of the E-VAT Law, firms could no Years immediately before and during tax reform
longer immediately claim full credit for the VAT they
paid on capital goods. Instead, claims on capital good- Year BIR BOC Growth Peso
related credits would have to be spread over five years. rate of Total (in
Apart from this, the E-VAT law also placed a limit on the aggregate billions)
amount of claimable VAT input credits to 70% of output collections
VAT (abolished in 2009). Both of the rule changes
2005 9.52% 16.86% 12.63% 156.67
would have potential distortionary effects on production
decisions of producers with high levels of intermediate 2006 60.40% 72.75% 65.83% 259.80
inputs, especially capital goods (the cost of capital 2007 2.90% 8.54% 5.48% 274.03
having effectively risen). 2008 -3.23% 21.17% 8.25% 296.65
The E-VAT law also tweaked other tax laws. It raised the 2009 19.93% -14.35% 1.87% 302.19
corporate income tax from 32% to 35% to be applied 2010 2.97% 17.63% 9.46% 330.78
until 2009 and thereafter it was reduced to 30%. It also
raised the gross receipts tax on select income items and Source: NTRC
eliminated income tax exemptions of many government-
owned and controlled corporations. Although the E-VAT enabled the government to raise
more tax revenue, VAT efficiency (e.g., the ratio of VAT
Analysis of the effects of the E-VAT reform suggest that revenue to the VAT base divided by the standard VAT rate)
while the mitigating measures and the overall effects statistics would suggest that the post-E-VAT VAT base
of the reform were progressive, without large adverse (consumption) commenced being compromised after
distributional consequences, a large amount of benefit 2006 because of the increasing number of legislated
also accrued to richer households (International non-standard exemptions in subsequent years (i.e., for
Monetary Fund, 2007). This was particularly true for the power transmission, for cooperatives, senior citizens
cuts on excise taxes on diesel products where benefits purchases, etc.). Such exemptions are inconsistent with
were expected to be shared by richer households. This international practice, and hence, non-standard. Rough
notwithstanding, the incremental proceeds of the VAT estimates of the cooperative and seniors’ VAT-related
were spent to kick-start the government’s flagship anti- tax expenditures amounted to close 0.20 percent of
poverty conditional cash transfer program, the Pantawid GDP in 2009, with the senior citizens’ and cooperatives
Pamilyang Pilipino Program (4Ps) of the Department of VAT exemptions being among the largest VAT-related
Social Welfare and Development. exposures for government (Reside, 2011). While the
In 2006, the first full year of implementation after the original motivation for the E-VAT reform was to broaden
expanded VAT was passed, BIR VAT collections rose by the tax base, which is consistent with best practice,
60.40% (NTRC, 2011). Bureau of Customs collections the additional legislated non-standard exemptions post
rose by 72.75%. By 2010, aggregate VAT collections E-VAT undermined the buoyancy of the VAT, created
had more than doubled pre-E-VAT VAT collections. This distortions and also led to undesirable cascading effects
was despite the effects of the global financial crisis on on tax burdens along the VAT chain as the inability to
trade- and consumption related collections in 2009. The deduct input taxes down the line becomes incorporated
growth in revenues also contributed to increasing the into selling prices and cannot be recovered by taxpayers
share of the VAT to total revenue collections. By 2010, in subsequent parts of the chain.
VAT revenues had gone from 22.20% share to 30.25%

21
2.6.2. Efforts to Rationalize Tax government’s credit risk. Persistent exporter opposition
to the provision effectively led to non-passage of the Bill
Incentives Since 2006 and rationalization stalled again.
In 2006, the Arroyo administration recognized the
Despite the political setback, this episode to reform tax
need for additional reforms in the tax system beyond
incentives would sow the seeds for future reform. The
the 2005 E-VAT reform. This was to further fortify the
Department of Finance (DoF), BIR and the investment
government’s fiscal position and sustain increases in
promotion agencies agreed to a Memorandum of
tax effort. This led to renewed efforts to rationalize tax
Agreement for information exchange regarding the
incentives, as previous attempts in the past had been
provision of incentives. Under the Memorandum of
stalled by lobbies and a lack of rational approaches for
Agreement, which commenced in 2006 and ended in
such a reform. A study by Reside (2006) argued that
2010, the DoF would receive select detailed information
many of the tax incentives were redundant (i.e., investors
regarding individual applications for investor registration
would have invested anyway even without them) and
at the BoI. This would allow the DoF to review some
hence inefficient. He estimated the cost of redundant
applications for BoI incentives and comment on them.
income tax holidays at around 1 percent of 2004 GDP in
The Memorandum of Agreement also required for the
the BoI alone, which bolstered the push for reform. The
Investment Promotion Agencies to provide the BIR a
same study argued that the current incentives provision
detailed list of investors enjoying tax incentives, giving
system was inefficient, that many investors were not
the BIR better basis for tax audits and the DoF access
very sensitive to them, that investors were instead more
to more detailed taxpayer information to allow more in-
sensitive to access to markets and political and legal
depth studies regarding the incentives. The DoF also
stability and suggested that a reasonable approach to
began to exert much greater effort into gathering, and
rationalizing tax incentives would be to:
analyzing information about tax expenditures from both
• Classify investors by primary motive and base the the BIR and the Bureau of Customs. Deeper analysis
grant of incentives on such a system and hence of the administrative process for tax incentives and
emphasize the grant of tax incentives to (mostly all other forms of tax relief were conducted. The effort
efficiency-seeking) exporters even extended to the of analysis information about tax
expenditures not related to investment (Reside, 2011).
• Reduce, if not eliminate the role played by the BoI
The DoF also renewed its push to exert pressure on the
in providing tax incentives to domestic market-
BIR to enforce its own ruling requiring investors benefiting
seeking non-exporters;
from incentives to file tax returns electronically, part of
• Shift primarily out of non-performance-based a broader effort to encourage e-filing by most taxpayers.
tax incentives, such as the income tax holidays The efforts to ensure greater transparency of tax
towards performance-based tax incentives incentives and tax expenditures would bear fruit later
such as tax credits, allowances, deductions with passage of a law in 2013 requiring vetting of the
and similar instruments (also emphasized by tax incentives by the economic planning department
Medalla, 2006); and and regular publication of the tax expenditure report as
• Enhance the role played by the Department of part of the annual budgetary process.
Finance in vetting and providing a check on tax
incentives. 2.7. The Administration of Benigno
Senator Ralph Recto, head of the Ways and Means Aquino Jr (2010-2016)
Committee at the Senate, introduced a Senate Bill to By the time President Benigno Aquino, Jr. succeeded
rationalize tax incentives, which was based on many President Arroyo in 2010, tax effort was still very low
of the suggestions of the study. Initially, the Recto by international standards. The adverse effects of the
Bill showed promise of passage, as deliberations on recent global financial crisis on tax collections meant
the structure of the Bill reached advanced stages. that additional revenues were necessary to improve the
However, during the latter part of the process of quality of the country’s infrastructure and to expand
pushing the Bill, provisions were also introduced which existing or develop new social service programs.
greatly undermined VAT privileges exporters had been However, President Benigno Aquino had promised that
enjoying. Recto’s version of the rationalization Bill he would not impose new taxes so additional revenue
would require all exporters to pay VAT on imports first, would have to result from adjusting existing taxes.
then get reimbursed later, exposing exporters to the

22
2.7.1. 2012 Sin Tax Reform collections from tobacco and alcohol totaled 1.1% of
GDP, with tobacco accounting for close to 80% of the
In 2012, excise tax on liquor and cigarettes (referred total collected. The increased collections contributed to
to as sin taxes) was adjusted upward. The motivations the Philippines’ attainment of a credit rating upgrade (to
for the adjustment of sin taxes were fiscal and public investment grade status). Meanwhile the budget for the
health and social order-related considerations. Excise Department of Health tripled between 2012 and 2015
taxes on these products had not been updated since and the national government dramatically increased
the 1997 CTRP. As a result, government revenues from its allocation for free health insurance premiums for
these products resulted in an erosion in real value over the poor, as the number of poor people enrolled in
time. Furthermore, the country’s tax regime for distilled PhilHealth increased from 5.2 million to 15.4 million
spirits was at the time non-compliant with World Trade from 2012-2015. The sin tax reform also enabled the
Organization rules. government to expand the coverage of the conditional
The Department of Finance sought to restructure the cash transfer program which had been initiated by
sin taxes by addressing their structural issues. the previous Arroyo administration. However, the
abrupt increase of tax rates saw the rise in popularity
• Removing the price classification freeze where
of low price cigarettes and increased observations of
older brands are subject to different tax rates
illegal cigarettes. To counter this, the Administration
than new ones – this encouraged consumers
introduced tax stamps on cigarettes in 2014 to provide
to shift to cheaper cigarette and alcohol brands
physical proof of taxpayer compliance.7
(which did not discourage consumption);
• Migrating into a unitary tax structure by 2017; 2.7.2. 2016 Tax Incentive Management
• Leveling the playing field by removing and Transparency Act and Efforts
grandfathering provisions for certain brands; to Enhance the Transparency of Tax
• Reducing the number of tiers of products; and Expenditures
• Indexing tax rates to inflation (based on price Recognition of the need to rationalize tax incentives
indices for both alcoholic products and tobacco during the 1997 CTRP brought with it a need to also
products) starting 2017, to stem the reduction in quantify government’s exposure to them in more
real tax burdens. transparent manner. Earlier estimates of the cost of
tax incentives, such as those of Reside (2006) relied
The resulting law, RA 10351, preserved allocations to
on making many assumptions about firm profitability
and introduced safety nets for tobacco farmers, with
and the cost of investments to determine taxes that
the balance earmarked for health and split into 80% for
should have been paid but for the incentives because
the National Health Insurance Program (for enhancing
the data on individual registered investors was either
universal health care), attainment of Millennium
kept in confidence by some agencies or simply not
Development Goals and health programs and 20%
available from tax returns at the time. Hence, data-
for medical assistance and the health enhancement
sharing protocols for tax incentives from 2006 – 2010
facilities program. Despite strong lobbies against it,
embedded in the Memorandum of Agreement between
the law updating sin taxes narrowly passed legislative
agencies were very helpful in allowing incentives policy
approval. In its first year (as an adjustment for non
to further be analyzed. In 2013, the move to enhance
indexing since 1997), the excise tax on cigarettes in
the transparency of the exposure of government to tax
the low tier alone was increased by 341%, with annual
incentives led the BIR to redesign the income tax returns
increases thereafter until 2017 ranging between 20%
for corporations, making taxpayers claim explicitly the
and 40%. The next increase of 20% in the low tier is
peso value of any tax incentives on their tax returns
effective January 2017. Beyond that, the stipulated
and state the laws that form the bases for their claims.
annual increase of 4% is above expectations for inflation
The information available from corporate taxpayers filed
and consistent with World Bank recommendations for
under the new BIR tax returns in 2011, as well as from
increases on specific excise taxes to be linked to the
the new computerized database created by the Bureau
consumer price index. This would void the need for
of Customs pooling together information from import
discrete changes to tax rates in the future.
and export declarations enabled the DoF to finally have
Government revenues from alcohol and tobacco a clearer picture of the extent of tax expenditures, as
excise taxes raised significantly while at the same time well as their breakdown by sector, by type of taxpayer,
simplifying tax collection. By 2015, combined excise by investment promotion agency, etc., all without

23
prejudicing taxpayer anonymity. The redesign of the lessons drawn from the tax reform experience in the
tax forms however, introduced additional complexity Philippines.
in the filing process. Notwithstanding this, it was clear
Based on its ability to achieve some or many of the goals
from this episode that efforts at computerizing records
of a good tax system, it would appear that the most
facilitated data gathering to create the tax expenditure
major successful tax reform in recent Philippine history
report and sectoral analysis immensely.
has been the 1986 TRP. The 1997 CTRP fell short of
Beyond the information gleaned from estimating generating sufficient revenues over time and failed to
the value of tax expenditures, it was recognized that rationalize tax incentives. Other reforms had relatively
the setting up a system to monitor tax expenditures lesser and varying degrees of success. This includes
and to provide enhanced taxpayer information from the opportunities to update existing taxes, such as the
individual tax returns would be useful as a policy tool broadening of the VAT in 2005 and the indexation of sin
for estimating future gaps in tax collection and for taxes in 2012.
micro-simulation purposes on the effects of future tax
The common aspects of successful tax reforms in the
policy and as a legislative tool for allowing Congress as
Philippines from the Marcos era to the present include
a means of comparing alternative means of government
the following:
support (visible vs. invisible) and providing some sort
of a check on their provision by institutions and their • To ensure the best outcomes, tax reform should
use by recipients. It could also potentially help tax be done at the start, instead of towards the end, of
administrators more effectively deal with increasingly any administration. With a fresh mandate from the
aggressive and sophisticated forms of transfer pricing, voters, bolder rather than watered-down versions
tax arbitrage, tax planning and tax avoidance and tax of the reform bills have a higher probability of
incentive abuse. being approved by Congress. The implication for
the new administration is that it should be ready
The legal basis for developing a system to account for
with a core of tax reform proposals within months
tax incentives was addressed by the passage of the Tax
of its assumption to office. The experience with
Incentive Management and Transparency Act (TIMTA)
the reforms in the last few decades is that they
in 2016. The TIMTA law mandated the DoF to annually
are predictable. Every administration will require
publish estimates of the country’s tax expenditures,
at least one structural change to the tax system
based on tax returns and which reflect the government’s
to generate revenues because past reforms often
fiscal exposure to tax incentives and other laws seeking to
lack buoyancy and new and envisioned programs
exempt, eliminate, defer tax payments by taxpayers. The
often require incremental tax financing as the
annual tax expenditure statement would henceforth be
country continues to reduce its debt stock and
published as part of the annual Budget of Expenditures
upgrade or maintain its investment grade credit
and Sources of Financing of the Department of Budget
rating.
Management. The TIMTA also mandated the National
Economic Development Authority, the country’s • The economics of tax reform can also be correlated
economic planning ministry, to regularly evaluate the with the politics. The stronger the political
costs and benefits of granting tax incentives. positions of the personalities involved, the more
likely have been for tax reforms in the past to be
2.8. Lessons Learned from more efficient and equitable. Conversely, weaker
administrations have allowed more nonstandard
Tax Reform Programs in the revenue-eroding measures to pass legislation as
Philippines has been true for many of the recent VAT-related
exemptions. This has led to distortions in the VAT
Tax reforms in the Philippines have always been exercises system as well as inequities in other taxes.
colored by both the politics and the economics of the
time period. While economics has usually provided • Strong support from the president and top
the rationale for reform, politics has often shaped the executives in the cabinet and the legislature is a
outcomes. Unfortunately, a review of recent experiences critical component of any tax reform.
with tax reforms suggests that incoming administrations • The probability of success of a tax reform
often cannot rely on previous tax reforms in order to program is enhanced if it is presented as a
finance new programs. Tax reforms have generally not critical component of a comprehensive public
generated sufficiently persistent increases in revenues sector reform program. This includes using the
over time for various reasons. This section identifies the

24
 incrementally generated revenues for expansion • It is important to legislators to codify all laws that
of social programs and critical infrastructure. lead to tax expenditures to enhance transparency
and to continue to provide for competent bodies
• Reform will be more effective with a reduction,
to vet new proposals for and review the outcomes
if not offsetting of external influence on reforms
of current tax laws on a regular basis, to set end
by organized lobby groups whose positions are
dates for laws providing tax exemptions and
inconsistent with best global practice or first
incentives (to force congress to vet updates on
principles. Lobbies have tended to undermine all
such laws).
or portions of past reforms. Future tax reforms
will benefit from more effective organization and The shortcomings of some of the past tax reforms
more sophisticated use of media and civil society owe as much to political considerations as they do
to build alliances to push for the correct reforms to the failings of tax administration. But where tax
to be legislated. administration has been strong and the leadership
stable, it has complemented reform.
• Future tax reforms will have to rely on more
creative and refined development of approaches The time path of past tax reforms has not been smooth and
to and conceptualization of the process and often been discrete. Congressional neglect and inertia
sequencing of reform, with the rationale for and in the Philippines has often led to the postponement
aspects of reform carefully vetted by experts. of adjustments to important tax rates, leading to
the buildup of fiscal pressures over time, even at the
• To ensure greater buoyancy and efficiency of
expense of hindering the country’s competitiveness.
the tax system and to ensure the reliability and
Hence, the tax system often undergoes large discrete
adequacy of the flows of government financing
changes, and only when there is the political will to do
over the long run, future reforms must be designed
so. Legislation should be more responsive and timely in
to include provisions for annual indexation
the future, without waiting for fiscal emergencies before
for inflation (especially for excise taxes). Also,
acting on them.
nonstandard exemptions (from direct taxation
and the VAT system) and incentives should be
minimized or avoided. This again enhances
buoyancy of the tax system.
• Reforms must be backed up with concomitant
enhancement of and support from tax
administration to provide education to the
taxpayer community on changes in tax laws,
implementing cultural/behavior changes within
government and the taxpayer community that
will result in good voluntary compliance and
improving technologies for supporting taxpayers
and addressing poor or deliberate compliance.

25
Appendix A

Year Tax Reform or Significant Law or Event

1981 Tax Incentives Tax and duty-free import privileges replaced by tax credits based on value-
added earned and net local content on exports
1984 Tax Incentives Tax exemptions enjoyed by government corporations and private firms
abolished
1986 General Tax Reform Program (TRP) enacted; dual tax schedules for individual
taxpayers adopted with 35% as the top marginal rate; dual corporate rate
was also unified at 35%
1986 General Many duties on imports (e.g., oil) phased out

1986 Executive Order (EO) 226 Provides the rules by which foreign investments in the Philippines may
Omnibus Investments Code avail of incentives.
1988 VAT VAT Law introduced; VAT rate set at 10%

1990 BOT Law

1991 RA 7042 Foreign Investments Governs the entry of foreign investments without incentives decreasing
Act the minimum paid-in equity from Five Hundred Thousand dollars
(US$500,000.00) to Two Hundred Thousand dollars (US$200,000).
1992 RA 7227 Bases Conversion Provides for incentives to enterprises located within the Subic Bay
Development Act Freeport Zone.
1994 RA 7844 Export Development Provides for incentives to enterprises in export business.
Act
1994 VAT Restructured VAT Law to broaden the VAT base

1995 RA 7903 Zamboanga City Provides for incentives to enterprises located within the Special Economic
Special Economic Zone (CSEZ) Zones.
1995 RA 7916 PEZA Law Provides for incentives to enterprises located within the Special Economic
Zones.
1995 RA 7917 Amendment to Bases
Conversion and Development
Act
1995 RA 7918 Amendments to Provides for incentives to enterprises located within the Special Economic
Omnibus Investments Code Zones.
1995 RA 7922 Cagayan SEZ Provides for incentives to enterprises located within the Special Economic
Zones.
1995 RA 7888 Amendment to Allows the President of the Philippines to suspend the nationality
Omnibus Investments Code requirements under the Omnibus investments Code in the case of equity
investments by multilateral financial institutions such as the International
Finance Corporation and the Asian Development bank.
1996 VAT VAT exemptions introduced

26
1996 RA 8179 Amendment to Foreign
Investments Act
1997 NIRC (Net Operating Loss
Carryover)
1998 PIT CTRP set PIT tax brackets; top marginal tax rate set at 34%

1998 Downstream Oil Industry

Deregulation Act
1999 PIT, CIT Top marginal tax rate set at 33%

1999 RA 8748 Amendment to PEZA

Law
2000 PIT, CIT Top marginal tax rate set at 32%

2004 E.O. 313 signed Exempts BOI-registered firms from paying taxes and duties on imported
raw materials and capital goods
2005 VAT Reformed VAT (RVAT) Law expanded the VAT base and raised the VAT
rate from 10% to 12%; this reform helped generate an additional 1.5% in
revenues
2005 CIT CIT rate raised to 35%

2006 Administration MOA between DoF/BIR and BOI

2006 E.O. 528 Extended and amended the effectivity of EO 313

2007 Republic Act No. 9490 The Aurora Special Economic Zone Act of 2007

2008 PIT Minimum wage earners exempted from PIT

2012 VAT Sales of residential lots valued below 1,919,500 exempt from VAT

2012 VAT Sales of houses and lots valued below 3,200,000 exempt from VAT

2012 Excise Sin taxes indexed

2014 VAT VAT threshold 1,919,500 gross sales not required to register for VAT

2015 Administration Tax Incentive Management and Transparency Act passed by Congress

2016 PIT Personal Income Tax free bonus threshold increased from 30K to 82K

27
Section 3. Recommendations
Tax reform is most effective when it is founded on a clear be addressed through the progressive income
understanding of the first principles of the economics tax which includes the tax-free threshold. This
of taxation. As a prerequisite to crafting tax policy, this ensures that vertical and horizontal equity is
includes keeping in mind the traits of a good tax system maintained among rank and file employees.
of equity (fairness), efficiency, simplicity, flexibility that
• Full taxation of capital gains on disposal of
should be designed to limit tax evasion, and avoidance
shares in resident companies. This aligns with
(as detailed in Section 1) and identifying the incidence
the recommendation in the “property taxes”
of proposed measures, market failures, and public
section below for taxation of dividends otherwise
and merit goods, as well as the circumstances that
there would be an incentive to realize the profits
justify and guide government interventions in markets.
in a company through sale of shares rather than
This also includes the use of empirical methods and
dividends. This will provide greater equity as the
evidence-based estimation and analysis of the potential
current concessionary treatment of dividends
impacts of proposed changes in tax policy on society,
and capital gains is likely to mainly benefit high
which should be the basis for crafting tax reform.
income earners.
1. Personal Income Taxes (PIT) • Introduce a simplified tax system for small
business and align with changes in the VAT
• Taking account of the personal exemption as the
registration threshold recommended in the
equivalent of a zero rate, there are 8 brackets
“value added taxes” section below. Under the
in the marginal rate scale. Consistent with
simplified system, those taxpayers that are below
international norms, the existing brackets for PIT
the VAT registration threshold (micro businesses)
should be rationalized, with no more than 3 rates
may be subject to either a flat amount of tax
in addition to the personal exemption.
payable annually or a turnover based tax (say 2%
• A program for regular review of the marginal of turnover). Those taxpayers who are registered
rate structure should be implemented to limit for VAT but with an annual turnover below PHP15
the impact of bracket creep. The period of million are subject to cash accounting (same for
review depends on inflation levels, but could be VAT) and outright deduction of the cost of capital
undertaken every 3 years. assets.
• Align existing top marginal PIT rate of 32% with
the corporate rate so as to limit the impact of tax
2. Corporate Income Taxes (CIT)
planning through personal income companies. • Reduce the CIT rate from 30% to 25% to
The other brackets adjusted accordingly. The better align with the CIT rate in neighboring
reduction in marginal rates is to be financed by countries and enhance the country’s investment
the base broadening measures in (4) and (5) competitiveness. As with personal income tax
below, an increase in the tax on petroleum fuels, cuts, it is important to prepare modeling and
a tax on diesel fuel and the fiscal dividend from costings to ensure that any reduction in the
improved administration discussed below. It is corporate tax rate is affordable.
important to prepare modeling and costings to
• Greater alignment of the CIT base with financial
ensure that any revised tax free threshold and
accounting profit determined under IFRS. This
reductions in marginal rates are affordable.
will reduce compliance and administrative costs,
• As it is not consistent with global standard tax and ensure full recognition of capital expenditure
treatment, remove exemptions from fringe by companies.
benefits tax (FBT) for rank and file employees.
• Introduce tax-free reorganizations and loss
This would counter planning that converts
transfers within wholly owned corporate groups.
the remuneration of rank and file employees
from cash salary to benefits in kind. Instead, • In line with best global practice of base-
compensation of rank and file employees should broadening, rationalize tax incentives, improve
be subject to income taxes. Equity concerns can the process of industry and firm-level selection

28
 for incentives, introduce or intensify the use of • Abolish the system of two income tax bases used
economic criteria for granting tax incentives (e.g., to calculate taxable income: gross income earned
reducing redundancy and addressing market (GIE) for exporters and net income for non-
failures). Impose greater checks and balances exporters and other regular taxpayers. Instead,
on their provision and administration. Provide all corporate taxpayers should be taxed on basis
DoF, NEDA and DBM with greater roles to play in of taxable income. Exporters could be given a
investment promotion agency decision-making. lower preferential rate on net taxable income.
Broadening their roles in incentives provision is Withholding taxes (apart from non-resident
consistent with global best practice. withholding taxes) paid on business income
should be non-final and creditable against the tax
• Tax law should clarify the distinction between
payable on net taxable income. This will eliminate
non-profit organizations (subject to a 10%
the arbitrages that exist with final withholding
income tax rate) and non-stock, non-profit
on some items of business income through the
charitable institutions (exempt from income
payer being allowed a deduction for the payment
tax). To ensure that exemptions are properly
at the corporate rate but the payee being taxed
targeted, the tax treatment of such organizations
on the payment at the lower withholding tax.
should be reviewed and the government should
consider granting income tax exemptions only • The current system of using GIE as the exporter
to those charitable institutions registered with tax base is also very generous (the tax rate on
the Philippine Council on NGO Certification GIE is 5%) and is perpetual, since there are no
(PCNC), a service organization whose main sunset clauses. Hence, if recommendation (7)
function is to certify non-profit organizations that is not accepted the GIE rate should be raised.
meet established minimum criteria for financial Furthermore, tax administrators should improve
management and accountability in the service to monitoring of the sector to prevent abuse of
underprivileged Filipinos. In particular, introduce conditions for gaining eligibility for exporter tax
taxation of the business or other income that preferences.
is beyond the core purpose of the non-profit
• All forms of preferential treatment should have
organizations. This will prevent abuse through
a definitive sunset period, to allow for review of
disguising real business activity through the
performance of laws and programs.
use of a non-profit organization. Also, it ensures
equitable treatment of all those conducting the • All proposed changes affecting registered export
same business activity. The BIR must enhance locators currently operating in special economic
audits for this sector which is very much zones overseen by the Philippine Economic Zone
unmonitored and subject to less oversight from Authority (PEZA), should be subjected to a careful
authorities. The BIR must expand the scope for review in consideration of existing agreements
regular review of such corporations and impose between the government and the investors so as
penalties for deliberate non-compliance. not to unfairly prejudice the latter. Alternatively,
existing locators could be grandfathered under
• Implement performance-based tax incentives
the new law, so that only new locators coming
based on tax deductions, tax credits and
in after the passage of the new law would be
allowances rather than current dependence on
covered by changes.
income tax exemptions and income tax holidays,
which reduce the buoyancy of the tax system and • Implement international tax reforms
potentially lead to greater complexity and abuse recommended in the Final Reports on the
in the tax system. Base Erosion and Profit Shifting (BEPS) Actions,
particularly in relation to tax arbitrage, limitation
on the use of tax havens, thin capitalization, treaty
shopping, permanent establishment definition,
transfer pricing in relation to intangibles, and
transfer pricing record keeping. This will limit the
opportunity for MNEs to extract profits from the
Philippines with little or no Philippines tax.

29
3. Value-Added Taxes policy which leads to revenue losses). Although
some legal remedies have been implemented in
• While 12% VAT rate is not high by international recent years to monetize refund-related claims,
standards, it is high by ASEAN standards where the government should continue to address
VAT rates are generally in the 7% - 10% range and, persistent concerns and problems faced by
therefore, the VAT rate should not be increased. enterprises entitled to claim VAT refunds, such
Rather, expand the base for the levying of VAT by as zero-rated enterprises claiming input VAT. Not
reducing exemptions as recommended below. doing so erodes the credibility of the legal system
• In line with base-broadening, repeal VAT and the investment climate.
exemptions for senior citizens and many • Align the imposition of VAT of sale of services
other special laws (cooperatives, low-cost from that based on cash receipts to that based
and socialized housing which legislate VAT tax on the accrual method. This will be consistent
expenditures not consistent with global standards with the general method of recognizing revenues
or best practice). Other modalities are already in for income tax purposes and also similar to the
place to direct social assistance to these groups. method for imposing VAT on sale of goods. In
Impact of expanding the VAT base will be offset the process, the complications arising from the
by PIT cuts. compliance by taxpayers and enforcement of
• Repeal exempt supply treatment for supplies of the BIR that are being encountered under the
any intermediate goods and services as this can present method will be avoided.
lead to cascading of tax as well as potentially
significant revenue losses. 4. Excise Taxes
• Investigate the expansion of the VAT base to • Introduce annual indexation of all specific excises
include financial services (at least when an for inflation.
explicit fee is charged) and gambling services. • Restore excise taxes on diesel and selected fuel
As gambling is regarded solely as a recreational products, such as LPG.
activity, gamblers will not be allowed input tax
credits and, therefore, the VAT can be collected • Increase excise taxes on other fuel products.
on a periodic net margin basis. This will go some • Strengthen tax administration for excise tax
way to rationalizing the many gross receipts taxes collections and publish collections by taxpayer to
currently imposed in the Philippines. ensure compliance.
• Increase the VAT threshold to PHP3 million, • Institute sophisticated fuel marking programs to
as the current threshold is low by international control illegal fuel products.
standards. This ensures that micro businesses
are not registered for VAT and aligns with the • Enhance efforts to control smuggling of alcohol,
recommendation in the “personal income taxes” tobacco and fuel products. This should include
section above for the income taxation of micro strategic enforcement at ports and in the
businesses. The VAT registration threshold should marketplace together with increased monitoring
be regularly reviewed (say every three years) to of raw material imports and declared import
take account of inflation. prices.

• Implement the BEPS Action 1 recommendations • Impose user fees for motor vehicles with due
for taxation of imported services and digital consideration for desired effects on road
products, particularly facilitating electronic congestion, fuel efficiency and air quality.
registration and compliance by leading suppliers • Any proposals to extend excise taxes beyond the
of digital products. standard excisable goods must be based on clear
• The absence of a credible refund mechanism evidence of the negative externality that the tax
for VAT has led to nonstandard VAT policy with is correcting and absence of highly substitutable
leakages. In principle, standard VAT zero-rating products. If the externality is identified, then
of exporters allows them to claim input VAT, but furthermore, the tax must be imposed in a way
lacking such a refund mechanism, the government that limits distortions in the market place.
zero-rates their input suppliers (nonstandard

30
5. Property Taxes taxes and especially capital gains taxes on property.
From an efficiency standpoint, it is fundamental that
• Adopt a unified national tax on property and taxes related to transfers should not be prohibitive as to
update and adopt uniform standards for discourage actual transfer or to encourage avoidance
determining zonal values on properties. and evasion.
• Mandate the regular update at specified intervals In recent years, several laws have been introduced
of the zonal values to ensure that current values in Congress that seek to adopt a uniform method
are being used for taxation purposes. for determining zonal values on properties that is
• Levy positive transfer taxes at sustainable levels administratively feasible given current technology.
calibrated to ensure efficiency and equitable tax In light of the potential for a national tax on property
treatment across modes of transfer. to generate revenues and also be progressive, the
government should revisit such laws and finally legislate
• To enhance efficiency yet retain equity in the such a system, paving the way for a national tax on
transfer system, reduce the highest marginal property.
tax rates for the estate tax from the current
20% to 6% and the donor’s tax from the current The economic literature providing normative guidance
15% to 6%, to equal the capital gains tax that on transfer taxes is sparse, yet provides some guidance
is imposed on transfers of properties between on the design of such taxes, some of which runs counter
buyers and sellers. The government should keep to the unpopularity of such taxes.
the progressive nature of these taxes by raising The efficiency of taxing bequests depends on the nature
the tax-free threshold and simplifying the tax by (unplanned versus planned) and motive underlying
reducing the number of brackets. Consistent with planned bequests (purely altruistic, paternalistic or
the literature, gifts to people considered legally strategic). However, it is likely that bequests in reality
as minors should be taxed less. will be motivated by a mix of such factors. Hence, the
• Tax-free thresholds for transfer taxes should be optimal transfer tax should not be equal to zero. The
subject to regular review. The process of settling literature suggests taxing unplanned bequests and
estates of the deceased and taxes on donations purely altruistic planned bequests at higher rates, as
should be simplified. However, tax administration doing so will not necessarily affect the pattern of life
must be strengthened to guard against undue cycle savings. Inter vivos gifts (made between the
arbitrage and abuse (for example against living) and in particular, gifts made to children or young
violations of standard inurement and benefit donees, should be taxed at lower rates (Cremer, 2007,
legal principles applicable to donations (see next Cremer and Pestieau, 2009).
section below)). With the above guidance in mind, the government
• In time, a deeper analysis of the need to further should levy positive transfer taxes at sustainable levels
differentiate tax treatment across bequest and that consider the differences between bequest types.
donor motives should be made (balancing the Also, the government should reduce the highest
costs of introducing additional complexities into marginal tax rate for the estate tax from the current 20%
the tax system and the enhanced efficiencies of to 6%, to equal the capital gains tax that is imposed on
such differentiation). transfers of properties between buyers and sellers. This
Taxes related to transfer of properties are levied at would encourage greater frequency of transfers from
different levels of government. These include estate the deceased to heirs and perhaps also less evasion
taxes, donor’s taxes, transfer taxes and capital gains and avoidance, enhancing the efficiency of the tax
taxes, among others. These taxes all benefit from system. The government should keep the progressive
having a reliable tax base from which computations of nature of the estate tax by raising the tax-free threshold
tax liabilities are made. Hence, a fundamental reform and simplify the tax by reducing the number of brackets.
of property taxation involves mandating that zonal Thresholds should be subject to regular review. The
values be regularly updated at specified Intervals to process of settling estates of the deceased should be
ensure that current values are being used for taxation simplified.
purposes and ensure greater buoyancy of property

31
6. Taxes on Financial Instruments • The above recommendations to dispense with
bank secrecy for administration of tax laws will
• Eliminate the distortions that arise when savings make a considerable contribution to revenue
instruments with similar attributes are taxed at and is recommended for full implementation.
differential rates e.g., government securities, Alternatively, there could be a phased
mutual funds comprised of the same securities implementation period.
and ordinary bank deposits.
• For dividend income, where company tax is paid 8. Legislation Giving Rise to Tax
on profits of a company then a withholding tax of, Expenditures
say, 10% should be levied on the dividend paid to
individuals by the company. All subsequent legislation granting tax incentives
and/or leading to tax expenditures should be codified
7. Bank Secrecy Provisions (i.e., made part of the tax code), in order to facilitate
reference and analysis.
• BIR to have full and free access to bank records
for the purpose of administration of tax laws – 9. Sequencing and Credibility of
retrospective and prospective. This will align the
Philippines with most other economies. Tax Reforms
• Misuse by a BIR officer of access to bank records • To maximize the chances of reforms succeeding,
for administration of tax laws to be a criminal every effort must be exerted to encourage top
offense. officials, Including and especially the President,
to buy into the reform process. The effort can
• Give taxpayers an opportunity to voluntarily also benefit from positive use of media, non-
disclose income and bank account information government organizations and building of
without penalty before the BIR secures access to alliances across agencies of the type cited in
bank records. section 2.
• Every interest or dividend payment must be • Consistent with global best practice, pursue
assigned to an account holder’s Taxpayer tax rate reductions concurrently with base-
Identification Number (TIN) and reported to the broadening measures and not the former
BIR. If no Taxpayer Identification Number (TIN) followed by the latter, as political pressures often
is assigned, then tax should be deducted at the delay or undermine the latter, which weakens or
time of payment of the interest or dividend at the stops the overall reform effort. A phased process
CIT rate or highest marginal PIT rate. Interest and of reform with elements of rate reductions and
dividend payments to be electronically reported base-broadening in each phase should be
to the BIR. designed to reduce and manage sources of delay
• The above recommendations to dispense with and opposition.
bank secrecy for administration of tax laws will
make a considerable contribution to revenue 10. Administration of Tax Laws
and is recommended for full implementation.
Alternatively, there could be a phased
and the Process of Formulation of
implementation period. Tax Policy
• Every interest or dividend payment must be The BIR needs to significantly improve its administration
assigned to an account holder’s Taxpayer of the tax system and the DoF and its allied institutions
Identification Number (TIN) and reported to the need to improve the process of formulating tax policy.
BIR. If no Taxpayer Identification Number (TIN) The following appendix includes recommendations
is assigned then tax should be deducted at the for improvements along those lines and strengthens/
time of payment of the interest or dividend at the augments tax reforms. They may be implemented
CIT rate or highest marginal PIT rate. Interest and without need for legislation.
dividend payments to be electronically reported
to the BIR.

32
Addendum: Recommendations for Improvements of
Administration of the Tax System

1. Ethics 3. Tax Incentives

The BIR should strive for high ethical standards and • Implement proper processes for analyzing and
prevent opportunistic behavior. The BIR should be open reviewing tax incentives and tax expenditures
and transparent in its tax administration processes, to enhance their targeting and efficiency. This
support and educate taxpayers to want to voluntarily should involve:
comply and effectively deal with tax evasion and
(i) clear policies for identifying the market
avoidance.
failures or industry polices that tax
Areas where ethical indiscretions should be addressed incentives are intended to address; and
include the tax audit and assessment processes,
(ii) implementation of processes for regular
the rule making procedures and the inspection of
review of incentives to determine whether
establishments. The enhancements that can be made
they have been successful in achieving
are clarification of the burden of evidence and proof
their goals.
on assessment issues, instituting an administrative
tax dispute resolution system, adopting an effective • Review current policy on identifying appropriate
Whistleblower program in collaboration with private merit goods, and whether they are best delivered
tax advocacy groups, instituting a post tax audit through the tax system.
oversight review process, prescribing clearer and more • To improve screening of taxpayers applying for
detailed rules and procedures, putting in place an exemptions, implementing agencies should
industry benchmarking process to pinpoint levels of tax refine administrative rules to prevent up-front,
compliance and for audit selection. needless and outright grant of income tax
The BIR needs to review the effectiveness of the attrition benefits without subjecting taxpayers to more
law to prevent situations where tax auditors prioritize rigorous performance tests.
revenue generation (to meet their targets) over ensuring
that taxpayers are compliant. 4. Non-Stock, Non-Profit
2. Tax Expenditures Organizations and Other Special
• Enhance the Tax Expenditure Statement
Laws
as published by the Department of Budget • When dealing/auditing non-stock, non-profit
Management in its annual Budget of Expenditures corporations and other taxable institutions
and Sources of Financing by including VAT-related eligible for exemptions, revenue collection
tax expenditures. Make it standard practice to officers are also encouraged not to presume tax
require an estimate of the extent of potential tax exemption of institutions at the outset.
expenditures and fiscal risk associated with each
• To prevent abuse, the BIR should implement a
new law being introduced or being considered, as
regular program for audit of foundations, non-
well as potential costs and benefits of alternative
profit organizations (including church-related
means of financing social benefits.
organizations) and cooperatives, and revoke
• A transparent tax system should allow the public licenses for violators and non-reporters. Hence, it
to assess whether taxes collected and earmarked should incorporate into its annual audit program:
for particular causes are properly utilized and
(i) a clear definition of public benefit;
accounted for.
(ii) avoidance of private inurement;
(iii) penalties for excess benefit; and
(iv) taxation of unrelated business income.

33
 • In the medium term, the BIR, SEC, BOC and • The BIR, BOC, SEC and DoF should establish
other implementing institutions should enhance a working group to establish a viable taxpayer
their minimum annual reporting and disclosure data and information transparency policy.
requirements. While gaps in auditing must be Development of protocols for proper and ethical
addressed, regular disclosure requirements tax data sharing across agencies, without
from taxpayers also need to be improved. undermining the anonymity of taxpayers should
The BIR needs to have a better idea of, for pave the way for improved and more granular
example, whether nonprofit corporate taxpayers analysis of the tax system.
fulfill their primary mission, so more concrete
• Once systems are in place for collecting and
and timely information has to be culled from
processing better taxpayer information, the
taxpayers themselves regarding their activities.
government should ease taxpayer compliance
This entails requiring all exempt institutions to
and improve risk profiling by developing criteria
e-file and considering the enhancement of BIR
for classifying taxpayers, taking care to identify
forms (annual information report and/or ITR –
those taxpayers that are well- (and not well-
and drafting clearer guidelines for submission
) behaved. Once taxpayers are better profiled,
of these) and timely submission of minutes of
implementing institutions can adopt the practice
meetings or else risk losing their tax-exempt
seen in other countries of classifying taxpayers by
privileges.
criteria such as asset size and number of donors
• The government should consider long-run reform (or members or patrons) then base compliance
of architecture of the sectors benefiting from tax and audit rules on these criteria. Implementing
expenditures, such as establishing a commission institutions, such as the BIR, may also classify by
similar to the UK’s Charity Commission, to type, for example:
regulate nonprofits. But given its issues with
– Independent or public charities (less risk)
all other institutions granting tax expenditures,
such as investment-related tax incentives, – Corporate or private foundations (more
the DoF should consider a larger institution to risk)
oversee all institutions receiving tax benefits. – Political organizations (more risk)
The DoF should amend the cooperatives law to
put in place stronger incentives for patronage – Religious organizations (less risk)
and genuinely collective decision-making in – Private schools, hospitals, NGOs (develop
cooperatives. Meanwhile, the Cooperative criteria)
Development Authority (CDA) should immediately
allow cooperatives to be audited for tax purposes – Trade associations and social clubs
and should improve reporting forms, creating (develop criteria)
the same level of transparency expected of • Implementing agencies must introduce risk-based
nonprofits. and performance-based criteria in claiming tax
benefits and charge risk-based (higher/nonzero)
5. Information Technology user fees for beefing up regulatory capacity at
• The government should further enhance point of registration and renewal of licenses.
transparency by: They should also enforce automatic revocation
of exemption and other benefits for failing to
– Investing in good information technology satisfy reporting requirements and for engaging
(IT) systems and good field information in criminal activity and enforce automatic
collecting systems in implementing, suspension of operations upon suspicion of use
screening and monitoring agencies. in money laundering.
– Immediately setting up information sharing • To tighten tax administration efforts, effective
protocols among institutions possessing administrative data gathering mechanisms must
and requiring data on tax expenditures and be established or enhanced to check taxpayer
eliminating inter- and intra-agency frictions compliance, curb illicit trade and tax evasion, as
in the flow of data regarding taxpayers and well as plug tax leakages.
tax expenditures.

34
 • The furnishing of a Taxpayer Identification Number 8. Excise
(TIN) by all parties transacting with government
must be mandated. The use of this universal • Strengthen tax administration for excise tax
TIN will be able to capture in the taxable net a collections and publish collections by taxpayer to
significant amount of transactions of taxpayers ensure compliance.
dealing with government. • Institute sophisticated fuel marking programs to
control illegal fuel products.
6. Designing Safety Nets in Lieu of
• Enhance efforts to control smuggling of alcohol,
Granting Special Tax Treatment tobacco and fuel products. This should include
• Since efficiency and equity are important strategic enforcement at ports and in the
criteria of taxation, it follows that the notion marketplace together with increased monitoring
of means testing should be incorporated as of raw material imports and declared import
much as possible in the design of tax laws and prices.
administrative procedures. Means testing is a
further check and containment against the costs 9. Tax Amnesties
of potential mis-targeting of benefits. For this Do not rely on tax amnesties as these can have the
purpose, future tax laws may wish to consider effect of increasing non-compliance as compliant
means-testing mechanisms currently being taxpayers will decide to be non-compliant and wait for
employed by the Department of Social Welfare the next amnesty.
and Development for their subsidy programs.
• To protect entitlements and to provide safety nets 10. Partnerships with Industry and
for poorer seniors and other special groups (e.g., Business Groups and Government
persons with disabilities), the government should
consider increasing the scope of pension and Regulators
health coverage. Such efforts could have positive • Establish partnerships with industry and
spillovers as they may facilitate the conversion business groups to encourage “community” or
of informal businesses into formal business industry based tax compliance and payments.
and increase business compliance with formal
pension and health contributions and ultimately • Enhance the collaboration and information
also broaden the tax base. sharing between the various regulators, including
the Bureau of Customs, the local government
7. Electronic Transactions tax collecting units, the Securities Exchange
Commission, the Board of Accountancy, the
• Legislatively mandate electronic filing (e-filing) Bangko Sentral ng Pilipinas, and the various
of tax returns for all large taxpayers (using the license or permit granting government offices.
VAT registration threshold as the test of a large These government offices are responsible for
taxpayer) and enforce penalties on those who regulating their constituents who or which
insist on manual filing. This ensures that e-filing are engaged in doing business and hence are
has the intended effect of reducing administration expected to be registered with the BIR and
costs. reporting the appropriate tax returns.
• Implement electronic payments direct into the BIR
bank account. Besides reducing compliance and
administrative costs, it also reduces opportunities
for corruption and lost tax payments that could
occur under a manual system.

35
Section 4. ASEAN Tax Rates
Country Standard Corporate Income Top Personal Income Tax Indirect Tax (i.e. VAT/GST)
Tax Rate Rate Standard Rate
Brunei 18.5 percent -- --
Darussalam
Cambodia 20 percent 20 percent 10 percent

Indonesia 25 percent 30 percent 10 percent

Laos 24 percent 24 percent 10 percent

Malaysia 24 percent 26 percent 6 percent

Myanmar 25 percent 25 percent Commercial Tax rate. On April

1, 2016, Myanmar passed
the Union Tax Law to intro-
duce a Special Goods Tax
Philippines 30 percent 32 percent 12 percent

Singapore 17 percent 22 percent 7 percent

Thailand 20 percent 30 percent 10 percent, although a re-

duced 7 percent rate applies
to 30 September 2016
Vietnam 20 percent 35 percent 10 percent

36
Endnotes References
1
Asprey Committee, at para 3.24 Bernardo, Romeo and Christine Tang, Chapter 2: “Political
Economy of the Reformed Value –Added Tax in the Philippines”
2
For example, sunscreens may be exempt from consumption
in George Abonyi, Romeo Bernardo, Richard Bolt, Ronald
tax for medical reasons. This requires the tax administration
Duncan and Christine Tang, edited by Jonathan Aspin and
to police the border between sunscreens and other products.
Richard Bolt, Political Economy of Reforms and Policy-Based
Further, it may encourage taxpayers to engage in tax planning
Lending Case Studies, Asian Development Bank, 2013.
by including sunscreens in other products, such as make-up,
creating uncertainty as to whether the product is taxable as Manasan, Rosario G. and Kristel C. Parel Danileen, “Amending
make-up or exempt as a sunscreen. the Sin Tax Law”, Philippine Institute of Development Studies,
Discussion Paper Series No. 2013-19.
3
For example, if bread is exempt or subject to a lower tax rate
as a basic foodstuff and confectionary is fully taxable, then is Paul, Jeremias (2013), “Earmarking Revenues for Health: A
a bread roll with icing on top basic foodstuff or confectionary? Finance Perspective on the Philippine Sin Tax Reform” World
Health Organization
4
These Executive Orders were: EO 924 (November 1983), EO
928 (December 1983), EO 947 (June 1984) Reside, Renato. (2001) “Estimation of the Contingent
Liabilities of the Philippine Government.” United States
5
This paragraph is based on the narrative in Fabella and
Agency for International Development. May, 2001.
Chua ().
Reside, Renato. (2006) Towards Rational Fiscal Incentives
6
In the World Bank Economics of Tobacco Toolkit, it was
(Good investments or wasted gifts?) University of the
suggested that “[s]pecific taxes should be automatically
Philippines School of Economics (UPSE) Discussion Paper
adjusted by reference to the consumer price index (CPI) to
No. 0601, June 2006.
keep pace with inflation. It is critical that the adjustment
be automatic—by administrative order—and not require a The Deepening Crisis: The Real Score on Deficits and the
decision of an executive agency or approval of a legislative Public Debt. UPSE Discussion Paper No. 0409, August 2004.
body. Countries may suspend automatic adjustments in
Reside Renato. (2012), “An Analytical Study of the Non-
periods of high inflation.” (Ayda Yurekli and Joy de Beyer,
Investment Related Tax Incentive Laws of the Philippines”
World Bank Economics of Tobacco Toolkit, Toll 4: Design and
February, 2012, for Department of Finance and Japan
Administration, p. 27),
International Cooperation Agency, Manila.
7
Quimbo, Stella, “Does Taxing Sin Deliver us from Disease:
http://www19.iadb.org/intal/intalcdi/pe/2013/11631.pdf
An Initial Assessment of the Health Impact of Sin Taxes in the
Philippines.” http://dirp4.pids.gov.ph/ris/dps/pidsdsp1319.pdf
8
BIR Revenue Regulations Nos. 7-2014 and 9-2014. For the basic law, see Sin Tax, GovPH: http://www.gov.ph/
sin-tax/
https://www.imf.org/external/pubs/ft/wp/2007/wp07153.
pdf
http://dirp3.pids.gov.ph/ris/eid/pidseid0601.pdf
http://www.who.int/health_financing/topics/public-
financial-management/D2-S4-JPaul-earmarking.pdf

37