Tax Reform for Acceleration and Inclusion - Comprehensive Tax Reform Program

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Tax Reform for Acceleration and Inclusion - Comprehensive Tax Reform Program
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.

          Tax Reform for
     Acceleration and Inclusion
      Package 1 – Value added tax (VAT)
                      As of September 13, 2017 9:15 PM

                        Table of contents
1.     Key messages and highlights
2.     What is VAT?
3.     Overview of the reform
4.     Special laws with VAT provisions
5.     VAT zero rating provisions
6.     Revenue impact
7.     Impact on the people
8.     Key sectors potentially affected
      • Housing and leasing
      • Cooperatives
      • Power transmission
      • Renewable energy
      • Other sectors
9.     VAT base and revenue collection
10. Cross country comparison
11. Financial position of potentially affected industries

 9/13/17                            DEPARTMENT OF FINANCE                                2
Tax Reform for Acceleration and Inclusion - Comprehensive Tax Reform Program
Key messages
                            and highlights

      9/13/17                         DEPARTMENT OF FINANCE                            3

                               Key messages
1. The proposed VAT reform must be seen as part of the entire tax reform package.

2. The present VAT system has a high rate (12%) and 143 lines of exemptions, making it very
   complex. This encourages discretion, negotiation, corruption, and tax evasion.

3. Since the VAT reform in 2005, 89 revenue eroding measures were passed. This eroded
   most of the gains from the RVAT reform.

4. The goal of the reform is to make the VAT system simpler, fairer, and more efficient
   characterized by a lower rate and a broader base so that it encourages investment, job
   creation, and poverty reduction.
    • Simpler: Low-rate and broad-base, few exemptions, and no break in the chain.
    • Fairer: Everyone who consumes pay VAT based on ability to pay.
    • More efficient: Minimize leakage and distortions.

5. The reform seeks to achieve the following:
     • Generally limit exemptions to raw food, agriculture, education, and health.
     • Limit zero rating to direct exporters and provide timely cash refund.
     • Increase VAT threshold from 1.9 to 3 million pesos to protect the poor.

      9/13/17                         DEPARTMENT OF FINANCE                            4
Tax Reform for Acceleration and Inclusion - Comprehensive Tax Reform Program
Key messages
6. When seen as a package, the removal of VAT exemptions does not necessarily lower
   welfare given the following:
    • VAT threshold is increased from 1.9 to 3 million pesos to protect purchases of low
        income families.
    • VAT exemption will be replaced by targeted subsidies to the poor and vulnerable.
    • Housing:
          • In general, house prices will increase by just 6.9% and not 12% due to input VAT
            crediting.
          • Low interest rates will continue to make house financing affordable.
          • Those who cannot afford will be provided with free housing, vouchers, or targeted
            subsidies.
          • Socialized housing: those falling below the minimum wage can be provided
            targeted subsidies (21%). The rest (79%) will benefit from lower income tax and
            this is enough to help them purchase houses.
          • Economic and low-cost housing: all buyers are beneficiaries of lower income taxes
            so they can afford to buy house.
          • Leasing: no impact if lessee has gross sales at or below the VAT threshold. This will
            not affect the far majority of small renters.

      9/13/17                           DEPARTMENT OF FINANCE                                5

                                Key messages
7. Limiting zero-rating to direct exporters is only fair and efficient. In return, they will receive
   prompt cash refund within 90 days.
    • Less leakage if 3,000 exporters avail of zero-rating rather than its multiples of suppliers.
    • Leakage come from transferring cost from VATable to zero-rated to claim refund.
    • Direct exporters (e.g., BPO): no change in the VAT regime
         • Domestic BPO: Still VATable.
         • Export BPO inside SEZ: Still VAT exempt since outside customs territory.
         • Export BPO outside SEZ: Still zero-rated and can get a refund.
    • Indirect exporters
         • Supplying to domestic firms: VATable.
         • Supplying to exporting firm in SEZ: Zero rated since customers are effectively
           outside customs territory. They can get a VAT refund.
         • Supplying to exporting firm outside SEZ: VATable.
    • VAT refund
         • Cash basis within 90 days.
         • To achieve this, need to radically change the system: i) special trust fund, ii) risk-
           based audit instead of pre-audit, and iii) net revenue basis so BIR/BOC will not hold
           back refund when collections are low.
         • The zero-rating reform will only kick in if the VAT refund system is in place.
           Estimated in Jan 2019.

      9/13/17                           DEPARTMENT OF FINANCE                                6
Tax Reform for Acceleration and Inclusion - Comprehensive Tax Reform Program
Key messages
6. When seen as a package, the removal of VAT exemptions does not necessarily lower
   welfare given the following:
    • Cooperatives: Agriculture coops and coops with sales below the VAT threshold will
        remain exempt from VAT. All other coops incentives will not be touched.
    • Power transmission: As this comprises less than 8% of total power, cost, a 12% VAT
        will increase power rate by less than 1%.
    • Renewable energy:
         • Since the sector does not export electricity, there is little basis to grant it zero-
              rated status.
         • As dirtier fossil fuel will be taxed higher, the renewable energy sector will see an
              increase in demand.
         • All other incentives and the feed-in-tariff will not be removed.
    • SUCs and GOCCs: their VAT liability can be covered by the tax expenditure fund.

      9/13/17                          DEPARTMENT OF FINANCE                              7

                              Key messages
8.   Increase in the VAT threshold
     • This means the poor can be shielded from the full impact of the VAT when they
       buy from marginal stores, like sari-sari stores and carinderia.
     • However, VAT exemptions are an illusion as input VAT that cannot be credited
       are passed on to consumers in the form of artificially higher prices.
     • This also means that removing exemptions does not mean 12% increase in
       prices. It is typically lower, as low as 4%.

      9/13/17                          DEPARTMENT OF FINANCE                              8
Tax Reform for Acceleration and Inclusion - Comprehensive Tax Reform Program
9/13/17   DEPARTMENT OF FINANCE   9

9/13/17   DEPARTMENT OF FINANCE   10
Tax Reform for Acceleration and Inclusion - Comprehensive Tax Reform Program
Revenue eroding measures
                                                                           Revenue eroding measures (Republic acts [RAs]) enacted annually

                                                                                                                                                          15         16
                                                                         14                                                                                RA         RA
                                                                         RA                                                                               9519       9904
                                                                        9003                                                                              9520       9966
                                                                                                                                                                                           14
                                                                        9010                                                                              9521       9994                  RA
                                          Total before                  9029                            10                 Total after                                                    10368
                                                                                                                                                          9576       9999                                              11
                                         R-VAT reform:                  9040                            RA               R-VAT reform:                    9593       10001
                                                                                                                                                                                          10378
                                                                                                                                                                                          10390                         RA
                                                                        9045                           9238                                                          10002
                                            38 RAs                      9054
                                                                                                                            89 RAs              7
                                                                                                                                                          9640
                                                                                                                                                                     10026
                                                                                                                                                                                          10583                        10742
                                                                                                       9243                                               9647                            10584                        10744
                                                                        9055                           9257                                     RA        9648
                                                                                                                                                                     10028       7        10585                        10747
                                                                        9064                                                          5                              10066
                                                                                                                                                                                 RA                             6
                                          4            4                9083
                                                                                                       9267                                    9497       9679       10068
                                                                                                                                                                                10165
                                                                                                                                                                                          10591
                                                                                                                                                                                          10594       5         RA
                                                                                                                                                                                                                       10752
                                                                                                                                                                                                                       10754
                                                                                                       9275                           RA       9500       9728       10072
                                          RA          RA                9136        3                  9281                          9367      9501       9746       10073
                                                                                                                                                                                10174     10595       RA       10653   10771
                                         8479        8550               9138                                                2                                                   10228     10596      10638     10654   10800
                                                                                   RA                  9290                          9369      9504       9832
                                   1     8492        8748       1       9146      9174       1         9294       1         RA                 9505
                                                                                                                                                                     10083
                                                                                                                                                                     10085
                                                                                                                                                                                10229     10597      10641     10659   10816
                                         8502        8749                                                                            9400                 9852                  10230     10598      10644     10687   10817
                                   RA                           RA      9147      9178       RA        9295                9343                9511                  10086
                                         8525        8756                                                         RA                 9442                 9854                  10231     10599      10646     10693   10846
                                  8407                         8763     9157      9182      9207       9301                9361                9513                  10142                                     10699
                                                                                                                 9337*               9490                 9856                  10349     10600      10650             10919

                         16
                                                                                                                RA 9337                                  RA 9520 -
                                                                  RA 9136 -     RA 9178 -                                                                Total tax
                                                RA 8748 -         VAT zero-       BMBEs                          R-VAT                       RA 9504 -
                                                                                                                                                        exemption
                                                  Special         rating for   exemption                        reform                      Min wage
                                                                                                                                                          for all
                                                economic         electricity     from all                                                       PIT
                                                                                                                                                          coops
                                                                                                                                            exemption,
                         15                      zone act        generators        taxes
                                                                                                                                            increased
                                                 RA 8756 -                                                                                   personal
                                                Preferential                                                                                exemption
                                                 tax rates                                                                                   for all CE
       Percent of GDP

                                                for ROHQs                                         RA 9257 -
                         14                                                                         SC tax
                                                                                                 exemption
                                                                                                  (i.e., PIT)                                                     RA 9994 -
                                                                                                                                                                     VAT                                  RA 10653 -
                                                                                                                                   RA 9442 -                     exemption                                Expansion
                                                                                                                                     PWD                           for SCs                                 of 13th
                         13                                                                                                       additional                                                              month and
                                                                                                                                      tax                                                                    other
                                                                                                                                  deductions                                                              bonus tax
                                                                                                                                                                                                          exemption
                                                                                                                                                                                                            to PHP
                                                                                                                                              RA 9513 -
                                                                                                                                                                                                           82,000
                         12                                                                                                                     Tax
                                                                                                                                            exemptions
                                                                                                                                                 for
                                                                                                                                             renewable
                                                                                                                                               energy
                                                                                                                                             producers                                  Tax effort
                         11
      Sources: DOF, BTr, a nd PSA
      Note: The major revenue eroding measures a re highlighted in bold red. In 2007, RA 9337 wa s enacted. This i ncreased the VAT from 10 to 12 percent, but it also ca me wi th some revenue eroding measures s uch as the
      reducti on of the corporate income tax ra te from 35 to 30 percent.

                        9/13/17                                                                      DEPARTMENT OF FINANCE                                                                                                11

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

                                                                                                                                                                               East Asia             Low-Mid
                                                           Philippines Indonesia                             Thailand               Vietnam                 Malaysia                                                           World
                                                                                                                                                                              and Pacific             Income
Total Tax Revenues/GDP                                         13.6                     12.0                    17.2                    24.3                     15.3            16.3                   17.3                   17.9

Value Added Tax (VAT)
Tax rate                           12.0          10.0         7.0           10.0         6.0            8.4                                                                                                  14.0              13.8
Revenue as share of GDP             4.3           3.9         4.1            6.1         1.0            5.2                                                                                                  6.6               6.1
Tax efficiency**                   35.7          38.8         59.0          61.0        16.7          62.0                                                                                                   47.1              44.2
Source: USAID, KPMG, IMF World Revenue Longitudinal data, PWC, BIR, and Botman, Klemm and Baqir
** Tax efficiency is calculated as the ration of tax revenue as a share of GDP divided by the tax rate.

                        9/13/17                                                                      DEPARTMENT OF FINANCE                                                                                                12
Tax Reform for Acceleration and Inclusion - Comprehensive Tax Reform Program
Expanding the VAT base by limiting exemptions and
 using the budget to provide subsidies to the poor
  • Exemptions will be removed, unless                                                  No. of VAT         No. of VAT
    sold by firms whose gross sales fall           Sectors/Institutions                  Exempt            Zero-rating
    below the VAT threshold. Examples                                                  Special Laws           Laws
    are:
                                                   Agriculture                                4                 1
                                                   Education (SUCs and High
                                                                                             14
                                                   Schools)
                                                   MSMEs/Cooperatives                         2
                                                   Govt Agencies and GOCCs                   18
                                                   Entrepreneurship                          10
                                                   Power Sector                               5
                                                   Housing Sector                             1
                                                   Health                                     3

                                                   Others                                     7

                                                   Total                                     64                 1
                                                   Note: Under the 2017 GAA, there are 114 SUCs, of which 12 are already
                                                   enumerated in the special laws under education, whose VAT exemptions
                                                   on purchases will be repealed and replaced through the tax expenditure
                                                   fund under the annual budget.

              Exemptions of senior citizens (SC) and PWDs will NOT be removed in the
      tax reform proposal, even though it is regressive. For instance, SCs who take advantage
        of the exemption are the richer SCs who eat out in restaurants, watch movies, etc.
  9/13/17                              DEPARTMENT OF FINANCE                                                          13

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

  • Limit the VAT zero-rating to direct            • Low-income and vulnerable
    exporters who actually export                    households can be protected
    goods out of the country. This                   through a higher VAT threshold
    will be implemented together                     of 3 million pesos (i.e., sales of
    with the VAT refund starting                     business with gross sales below 3
    2019.                                            million pesos, such as sari-sari
                                                     stores, will be exempt from VAT).
                                                   • Targeted transfers to poor and
                                                     vulnerable households.

* Note: VAT Exemptions are not always pro-poor, as marginal businesses, which cannot
claim input VAT typically pass this on in the form of higher prices.
  9/13/17                              DEPARTMENT OF FINANCE                                                          14
Tax Reform for Acceleration and Inclusion - Comprehensive Tax Reform Program
Protecting the poor and
               low income Filipinos: VAT
• VAT threshold for marginal establishment will be increased from 1.9 to
  around 3 million pesos, thereby exempting the poor’s purchases from
  the full impact of the VAT.
   o Cooperatives below the threshold will still be exempt.
   o Raw agricultural products will continue to be VAT exempt.
• To mitigate the impact:
   o Targeted transfers: 200 pesos per month for 1 year to the poorest 50% of
     households (10 million households) to mitigate the temporary and moderate
     increase in prices.
   o Housing voucher/subsidy system to those who cannot afford housing.

      To use the tax system to protect the poor and low income earners results
          into massive leakages. A better system is to use budget subsidies.
     9/13/17                     DEPARTMENT OF FINANCE                       15

                        What is VAT?

     9/13/17                     DEPARTMENT OF FINANCE                       16
Tax Reform for Acceleration and Inclusion - Comprehensive Tax Reform Program
9/13/17   DEPARTMENT OF FINANCE   17

9/13/17   DEPARTMENT OF FINANCE   18
Tax Reform for Acceleration and Inclusion - Comprehensive Tax Reform Program
Overview of the reform:
          broadening the VAT base
          by reducing exemptions

9/13/17      DEPARTMENT OF FINANCE   19

9/13/17      DEPARTMENT OF FINANCE   20
9/13/17                              DEPARTMENT OF FINANCE                                                          21

Expanding the VAT base by limiting exemptions and
 using the budget to provide subsidies to the poor
 • Exemptions will be removed, unless                                                  No. of VAT         No. of VAT
   sold by firms whose gross sales fall           Sectors/Institutions                  Exempt            Zero-rating
   below the VAT threshold. Examples                                                  Special Laws           Laws
   are:
                                                  Agriculture                                4                 1
                                                  Education (SUCs and High
                                                                                            14
                                                  Schools)
                                                  MSMEs/Cooperatives                         2
                                                  Govt Agencies and GOCCs                   18
                                                  Entrepreneurship                          10
                                                  Power Sector                               5
                                                  Housing Sector                             1
                                                  Health                                     3

                                                  Others                                     7

                                                  Total                                     64                 1
                                                  Note: Under the 2017 GAA, there are 114 SUCs, of which 12 are already
                                                  enumerated in the special laws under education, whose VAT exemptions
                                                  on purchases will be repealed and replaced through the tax expenditure
                                                  fund under the annual budget.

             Exemptions of senior citizens (SC) and PWDs will NOT be removed in the
     tax reform proposal, even though it is regressive. For instance, SCs who take advantage
       of the exemption are the richer SCs who eat out in restaurants, watch movies, etc.
 9/13/17                              DEPARTMENT OF FINANCE                                                          22
Expanding the VAT base by limiting exemptions and
 using the budget to provide subsidies to the poor

                  • Limit the VAT zero-rating to direct                                                                     • Low-income and vulnerable
                    exporters who actually export                                                                             households can be protected
                    goods out of the country. This                                                                            through a higher VAT threshold
                    will be implemented together                                                                              of 3 million pesos (i.e., sales of
                    with the VAT refund starting                                                                              business with gross sales below 3
                    2018.                                                                                                     million pesos, such as sari-sari
                                                                                                                              stores, will be exempt from VAT).
                                                                                                                            • Targeted transfers to poor and
                                                                                                                              vulnerable households.

* Note: VAT Exemptions are not always pro-poor, as marginal businesses, which cannot
claim input VAT typically pass this on in the form of higher prices.
                  9/13/17                                                                      DEPARTMENT OF FINANCE                                                                                              23

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

                                                                                                                                                    15         16
                                                                   14                                                                                RA         RA
                                                                   RA                                                                               9519       9904
                                                                  9003                                                                              9520       9966
                                                                                                                                                                                   14
                                                                  9010                                                                              9521       9994                RA
                                    Total before                  9029                            10                 Total after                                                  10368
                                                                                                                                                    9576       9999                                            11
                                   R-VAT reform:                  9040                            RA               R-VAT reform:                    9593       10001
                                                                                                                                                                                  10378
                                                                                                                                                                                  10390                         RA
                                                                  9045                           9238                                                          10002
                                      38 RAs                      9054
                                                                                                                      89 RAs              7
                                                                                                                                                    9640
                                                                                                                                                               10026
                                                                                                                                                                                  10583                        10742
                                                                                                 9243                                               9647                          10584                        10744
                                                                  9055                           9257                                     RA        9648
                                                                                                                                                               10028     7        10585                        10747
                                                                  9064                                                          5                              10066
                                                                                                                                                                         RA                             6
                                    4            4                9083
                                                                                                 9267                                    9497       9679       10068
                                                                                                                                                                        10165
                                                                                                                                                                                  10591
                                                                                                                                                                                  10594       5         RA
                                                                                                                                                                                                               10752
                                                                                                                                                                                                               10754
                                                                                                 9275                           RA       9500       9728       10072
                                    RA          RA                9136        3                  9281                          9367      9501       9746       10073
                                                                                                                                                                        10174     10595       RA      10653    10771
                                   8479        8550               9138                                                2                                                 10228     10596      10638    10654    10800
                                                                             RA                  9290                          9369      9504       9832
                             1     8492        8748       1       9146      9174       1         9294       1         RA                 9505
                                                                                                                                                               10083
                                                                                                                                                               10085
                                                                                                                                                                        10229     10597      10641    10659    10816
                                   8502        8749                                                                            9400                 9852                10230     10598      10644    10687    10817
                             RA                           RA      9147      9178       RA        9295                9343                9511                  10086
                                   8525        8756                                                         RA                 9442                 9854                10231     10599      10646    10693    10846
                            8407                         8763     9157      9182      9207       9301                9361                9513                  10142                                  10699
                                                                                                           9337*               9490                 9856                10349     10600      10650             10919

                   16
                                                                                                          RA 9337                                  RA 9520 -
                                                            RA 9136 -     RA 9178 -                                                                Total tax
                                          RA 8748 -         VAT zero-       BMBEs                          R-VAT                       RA 9504 -
                                                                                                                                                  exemption
                                            Special         rating for   exemption                        reform                      Min wage
                                                                                                                                                    for all
                                          economic         electricity     from all                                                       PIT
                                                                                                                                                    coops
                                                                                                                                      exemption,
                   15                      zone act        generators        taxes
                                                                                                                                      increased
                                           RA 8756 -                                                                                   personal
                                          Preferential                                                                                exemption
                                           tax rates                                                                                   for all CE
 Percent of GDP

                                          for ROHQs                                         RA 9257 -
                   14                                                                         SC tax
                                                                                           exemption
                                                                                            (i.e., PIT)                                                     RA 9994 -
                                                                                                                                                               VAT                                RA 10653 -
                                                                                                                             RA 9442 -                     exemption                              Expansion
                                                                                                                               PWD                           for SCs                               of 13th
                   13                                                                                                       additional                                                            month and
                                                                                                                                tax                                                                  other
                                                                                                                            deductions                                                            bonus tax
                                                                                                                                                                                                  exemption
                                                                                                                                                                                                    to PHP
                                                                                                                                        RA 9513 -
                                                                                                                                                                                                   82,000
                   12                                                                                                                     Tax
                                                                                                                                      exemptions
                                                                                                                                           for
                                                                                                                                       renewable
                                                                                                                                         energy
                                                                                                                                       producers                                Tax effort
                   11
Sources: DOF, BTr, a nd PSA
Note: The major revenue eroding measures a re highlighted in bold red. In 2007, RA 9337 wa s enacted. This i ncreased the VAT from 10 to 12 percent, but it also ca me wi th some revenue eroding measures s uch as the
reducti on of the corporate income tax ra te from 35 to 30 percent.

                  9/13/17                                                                      DEPARTMENT OF FINANCE                                                                                              24
Value-added tax: 59 lines of exemptions
             in tax code that lead to large leakages
                                             Examples of VAT-exempt transactions
    •      agricultural and marine food      •    wearing apparel,                      Cooperative Development          •   Sale of real properties not          mentioned in the preceding
           products in their original                                                   Authority (CDA) to their             primarily held for sale to           paragraphs, the gross annual
           state                             •    domestic animals,                     members, as well as of their         customers or held for lease in       sales and/or receipts do not
                                                                                        produce, whether in its              the ordinary course of trade         exceed the amount of One
    •       livestock and poultry of a       •    Services by agricultural              original state or processed          or business;                         Million Five Hundred
           kind generally used as, or             contract growers and milling          form, to non-members,                                                     Thousand Pesos
           yielding or producing foods            for others of palay into rice,                                         •   Sale of real properties utilized     (P1,500,000.00)
           for human consumption;                 corn into grits, and sugar                                                 for low-cost housing as
                                                                                    •   their importation of direct          defined by RA No. 7279, and      •   Importation of fuel, goods
                                                  cane into raw sugar;
    •      and breeding stock and                                                       farm inputs,                         other related laws                   and supplies engaged in
           genetic materials thereof;                                                                                                                             international shipping or air
                                             •    Services rendered by regional                                          •   Sale of real properties utilized     transport operations;
                                                  or area headquarters           •      machineries and equipment,
    •      fertilizers;                                                                                                      for specialized housing as
                                                  established in the Philippines        including spare parts thereof,
                                                                                                                             defined under RA No. 7279,       •   Services subject to
                                                  by multinational corporations         to be used directly and
    •      seeds, seedlings and                                                                                              and other related laws               percentage tax under Title V
                                                                                        exclusively in the production
           fingerlings;                           which act as supervisory,                                                  wherein price ceiling per unit       of the Code, as amended;
                                                                                        and/or processing of their
                                                  communications and                                                         is P225,000.00
                                                                                        produce;
                                                  coordinating centers for their                                                                              •   Services of banks, non-bank
    •      fish, prawn, livestock and             affiliates, subsidiaries or
           poultry feeds,                                                                                                •   Sale of residential lot valued       financial intermediaries
                                                  branches in the Asia Pacific   •      Gross receipts from lending          at One Million Five Hundred          performing quasi-banking
                                                  Region and do not earn or             activities by credit or multi-       Thousand Pesos                       functions, and other non-
    •      ingredients, whether locally           derive income from the
           produced or imported, used                                                   purpose cooperatives duly            (P1,500,000.00) and below,           bank financial intermediaries,
                                                  Philippines;                          registered and in good               or house and lot and other           such as money changers and
           in the manufacture of
                                                                                        standing with the                    residential dwellings valued         pawnshops
           finished feeds
                                                                                        Cooperative Development              at Two Million Five Hundred
                                             •    Transactions which are                                                     Thousand Pesos
                                                                                        Authority;
    •      Importation of personal and            exempt under international                                                 (P2,500,000.00) and below
           household effects belonging            agreements to which the
                                                                                    •   Sales by non-agricultural,           where the instrument of sale/
           to residents of the Philippines        Philippines is a signatory or
                                                                                        non-electric and non-credit          transfer/ disposition was
           returning from abroad and              under special laws except
                                                                                        cooperatives duly registered         executed on or after July 1,
           non-resident citizens coming           those granted under P.D. No.
                                                                                                                             2005;
                                                  529                                   with and in good standing
           to resettle in the Philippines
                                                                                        with CDA;
                                                                                                                         •   Sale or lease of goods or
    •      Importation of professional
                                             •    Sales by agricultural         •       Export sales by persons who          properties or the
           instruments and implements,
                                                  cooperatives duly registered          are not VAT-registered;              performance of services
                                                  and in good standing with the                                              other than the transactions

          Source: National Internal Revenue Code (NIRC)

    9/13/17                                                                        DEPARTMENT OF FINANCE                                                                                      25

        In general, removing VAT exemptions will
         not lead to a 12 percent increase in prices
•       Consider a VAT-exempt good with total input costs of 100 pesos, excluding VAT paid.
•       Assuming a 30 percent markup, the final selling price of the good should be 130 pesos. However, the producer/manufacturer
        cannot recover the input VAT on his costs. Therefore, he will need to add 12 pesos (VAT component of the 100 peso input cost) to
        his selling price, making the final selling price 142 pesos.
•       If the good loses its VAT-exemption, the 12 percent VAT will be levied on the selling price. However, since the producer can
        recover the full input VAT on his costs, he does not need to add the 12 peso input VAT on the selling price, making the final
        selling price only 146 pesos = (130 [selling price] + 16 [VAT]).
•       This represents a price increase of only 2.5 percent, which is very far from the 12 percent price increase which does not consider
        input VAT recovery.
•       Sample computation is provided below:
                                                     Why removing VAT exemptions will NOT increase prices by 12%
                                                                                            VAT exempt VATable
                                             1. Total input costs of a good (PHP)               100            100
                                               2. Input VAT paid (PHP)                           12             12
                                             3. Markup (percent)                                 30             30
                                               3a. Markup (PHP)                                  30             30
                                             4. Input costs + markup (PHP) [1+3a]               130            130
                                             5. Final VAT to be paid by customer (PHP)           0              16
                                               5a. Input VAT that cannot be recovered (PHP)      12             0
                                             6. Final price (PHP) [4+5+5a]                      142            146

                                             Price difference (PHP)                                                                     4
                                             Percent difference                                                                        2.5
                                             Source: DOF s taff es ti ma tes

    9/13/17                                                                        DEPARTMENT OF FINANCE                                                                                      26
In general, removing VAT exemptions will
                  not lead to a 12 percent increase in prices
                                                                                                                                                            Sales price
                                                                                                                                           Total VAT
                                                                                                                                                         (including VAT) Price increase
                                                                                                                                        remitted to the
                   All figures in PHP                                                 Manufacturer     Wholesaler            Retailer                       to the final   (decrease)             Remarks
                                                                                                                                          government
                                                                                                                                                          consumer (1 + from base case)
                                                                                                                                        (row total of 6)
                                                                                                                                                               3 + 5)
A. All businesses subject to tax (base case)
 1. Sales (excluding VAT)                                                                 100              200                 300
 2. Purchases (excluding VAT)                                                              0               100                 200
 3. VAT on sales (12 percent of [1])                                                      12               24                  36
                                                                                                                                              36             336
 4. Input VAT credit (12 percent of [2])                                                   0               12                  24
 5. Input VAT that cannot be credited                                                      0                0                   0
 6. Net VAT payments ([3] - [4])                                                          12               12                  12

C. Retailer is exempt
 1. Sales (excluding VAT)                                                                 100              200                 300                                                          The input VAT cannot
 2. Purchases (excluding VAT)                                                              0               100                 200                                                           be recovered and is
                                                                                                                                                                                                passed on to
 3. VAT on sales (12 percent of [1])                                                      12               24                   0
                                                                                                                                              24             324               -3.7          consumers, so price
 4. Input VAT credit (12 percent of [2])                                                   0               12                   0                                                             decrease is only a
 5. Input VAT that cannot be credited                                                      0                0                  24                                                           fraction of the full 12
 6. Net VAT payments ([3] - [4])                                                          12               12                   0                                                                  percent.
Sources: IMF and DOF staff estimates

              9/13/17                                                                                  DEPARTMENT OF FINANCE                                                                   27

             In fact, markup is the main determinant of the price
       increase: the higher the markup, the higher the increase in price
                                                                                             Markup is the main determinant of the price increase
     Total input costs of a good (PHP)                                         100        100      100        100      100        100        100      100       100      100          100           100
     Markup (percent)                                                           0          10       20         30       40         50         60       70        80       90          100           200
     Final price in non VAT exempt (PHP)                                       112        123      134        146      157        168        179      190       202      213          224           336
     Final price if VAT exempt (PHP)                                           112        122      132        142      152        162        172      182       192      202          212           312
     Price difference (PHP)                                                     0          1         2         4         5         6           7       8         10       11           12            24
     Percent difference                                                        0.0        1.0      1.8        2.5       3.2       3.7         4.2     4.6       5.0      5.3          5.7           7.7
     Source: DOF s ta ff es ti ma tes

                                                                                     Increase in price if VAT is levied, by markup amount
                                                                    12%

                                                                    10%

                                                                    8%
                                        Percent increase in price

                                                                    6%

                                                                    4%

                                                                    2%

                                                                    0%
                                                                          0%                    50%                   100%                 150%                200%
                                                                                                                    Mark up

              9/13/17                                                                                  DEPARTMENT OF FINANCE                                                                   28
Special laws with
                       VAT exemptions

9/13/17                          DEPARTMENT OF FINANCE                            29

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

9/13/17                          DEPARTMENT OF FINANCE                            30
Education
                               Section No./Republic Act (RA) No./ Executive Order (EO) No./Title
1      Section 10 of RA No. 6807 – An Act Converting the Mati Community College to Davao Oriental State College
       of Science and Technology
2      Section 7 (f) of RA No. 7371- Aklan State College of Agriculture
3      Section 12 of RA No. 7373- Establishing the Eastern Visayas Science High School
4      Section 1 of RA No. 7605 - Philippine State College of Aeronautics
5      Section 8 of RA No. 8160 – An Act Granting the University of the Philippines a Franchise to Construct, Install,
       Operate and Maintain for Educational and Other Related Purposes, Radio and Television Broadcasting
       Stations
6      Section 4 (c) and (f) of RA No. 8292 – Higher Education Modernization Act of 1997
7      Section 7 (c) of RA No. 9045 – Creation of Batangas State University
8      Section 7 (c ) of RA No. 9055 – An Act Converting the Aklan State College of Agriculture into the Aklan
       State University
9      Section 13 of RA No. 9083 – Creation of the Sta. Rosa Science and Technology High School
10     Section 7 (c) and (f ) RA No. 9138 – Establishment of the Guimaras State College

11     Section 7 (c ) RA No. 9141 – Creation of the Negros Occidental Agricultural College
12     Section 25 (a) and (d) RA No. 9500 – University of the Philippines Charter of 2008
13     Section 20 (a) and (d) RA No. 9519 – An Act Converting Mindanao Polytechnic State College to Mindanao
       University of Science and Technology
14     Section 7 (a) and (d) RA No. 9647 – Philippine Normal University Modernization Act of 2009

     9/13/17                                      DEPARTMENT OF FINANCE                                        31

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

                                                Enterprises
               Section No./Republic Act (RA) No./ Executive Order (EO) No./Title

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

     9/13/17                                      DEPARTMENT OF FINANCE                                        32
Government Owned
                   and Controlled Corporations
                         Section No./Republic Act (RA) No./ Executive Order (EO) No./Title

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

9/13/17                                   DEPARTMENT OF FINANCE                                       33

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

9/13/17                                   DEPARTMENT OF FINANCE                                       34
Health
           Section No./Republic Act (RA) No./ Executive Order (EO) No./Title
    1      Section 14 of RA No. 8423 – Traditional and Alternative Medicines Act (TAMA) of 1997
    2      Section 5 of RA No. 10072 - Philippine Red Cross Act of 2009
    3      Section 22 Article VII of RA No. 10747 - Rare Diseases Act of the Philippines

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

9/13/17                                      DEPARTMENT OF FINANCE                                           35

                                                Power
        Section No./Republic Act (RA) No./ Executive Order (EO) No./Title
1       Sections 16 (a) and (b), and 17 (a) of Presidential Decree No. 972 – Coal Development Act
2       Section 10 of RA No. 7156 - Mini-Hydro Electric Power Incentives Act
3       Section 9 of RA No. 8479 – Downstream Oil Industry Deregulation Act of 1998
         Section 9 of RA No. 9511 - An Act Granting the National Grid Corporation of the Philippines a Franchise to
4        Engage in the Business of Conveying or Transmitting Electricity Through High Voltage Back-Bone Systems
         of Interconnected Transmission Lines, Substations and Related Facilities
5       Section 15 of RA No. 9513 - Renewable Energy Act of 2008

                                                Others
                             Section No./Republic Act (RA) No./ Executive Order (EO) No./Title

1        Sections 23 and 24 of RA No. 2067 – Science Act of 1958
2         Section 1 of RA No. 7291 – Restoring the tax and Duty Incentives Previously Enjoyed by the Veterans
          Federation of the Philippines under RA 2640
3        Section 9 of RA No. 7355 – Manlilikha ng Bayan Act
4        Section 6 of RA No. 7459 – Investors and Inventions Incentives Act of the Philippines
5        Articles 65 and 67 of RA No. 8756 – Regional / Area Headquarters
6        Section 26 of RA No. 9275 - Philippine Clean Water Act of 2004
7        Section 16 of RA No. 9497- Civil Aviation Authority Act of 2008
9/13/17                                      DEPARTMENT OF FINANCE                                           36
Overview of
                             the reform:
                             VAT zero-rating

      9/13/17                           DEPARTMENT OF FINANCE                               37

                                Key messages
7. Limiting zero-rating to direct exporters is only fair and efficient. In return, they will receive
   prompt cash refund within 90 days.
    • Less leakage if 3,000 exporters avail of zero-rating rather than its multiples of suppliers.
    • Leakage come from transferring cost from VATable to zero-rated to claim refund.
    • Direct exporters (e.g., BPO): no change in the VAT regime
         • Domestic BPO: Still VATable.
         • Export BPO inside SEZ: Still VAT exempt since outside customs territory.
         • Export BPO outside SEZ: Still zero-rated and can get a refund.
    • Indirect exporters
         • Supplying to domestic firms: VATable.
         • Supplying to exporting firm in SEZ: Zero rated since customers are effectively
           outside customs territory. They can get a VAT refund.
         • Supplying to exporting firm outside SEZ: VATable.
    • VAT refund
         • Cash basis within 90 days.
         • To achieve this, need to radically change the system: i) special trust fund, ii) risk-
           based audit instead of pre-audit, and iii) net revenue basis so BIR/BOC will not hold
           back refund when collections are low.
         • The zero-rating reform will only kick in if the VAT refund system is in place.
           Estimated in Jan 2019.

      9/13/17                           DEPARTMENT OF FINANCE                               38
Value-added tax: many zero-
                   ratings that lead to large leakages
                                      Examples of VAT zero-rated transactions
   •   The sale and actual shipment        •   iv) Sale of gold to the BSP;             and 150 of the Tax Code,                under special laws or                 made to common carriers by
       of goods from the Philippines                                                    assembled or manufactured in            international agreements to           air and se relative to their
       to a foreign country,               •   v) Transactions considered               the Philippines for delivery to a       which the Philippines is a            transport of passengers, goods
       irrespective of any shipping            export sales under Executive             resident in the Philippines,            signatory effectively subjects        or cargoes form one place in
       arrangement that may be                 Order No. 226, otherwise                 paid for in acceptable foreign          the supply of such services to        the Philippines to another
       agreed upon which may                   known as the Omnibus                     currency and accounted for in           zero percent rate;                    place in the Philippines
       influence or determine the              Investments Code of 1987, and            accordance with the rules and
                                                                                                                            •   Services performed by
       transfer of ownership of the            other special laws; and                  regulations of the BSP
                                                                                                                                subcontractors and/or
       goods so exported, paid for in
                                                                                    •   Processing, manufacturing or            contractors in processing,
       acceptable foreign currency or      •   vi) The sale of goods, supplies,
       its equivalent in goods or                                                       repacking goods for other               converting, or manufacturing
                                               equipment and fuel to persons            persons doing business outside          goods for an enterprise whose
       services, and accounted for in          engaged in international
       accordance with the rules and                                                    the Philippines, which goods            export sales exceed 70 percent
                                               shipping or international air            are subsequently exported,              of the total annual production;
       regulations of the (BSP);               transport operations;                    where the services are paid for
                                               provided, that the same is                                                   •   Transport of passengers and
                                                                                        in acceptable foreign currency
   •      ii) The sale of raw materials        limited to goods, supplies,                                                      cargo by domestic air or sea
                                                                                        and accounted for in
       or packaging materials to a             equipment and fuel pertaining                                                    carriers from the Philippines to
                                                                                        accordance with the rules and
       non-resident buyer for delivery         to or attributable to the                                                        a foreign country. Gross
                                                                                        regulations of the BSP;
       to a resident local export-             transport of goods and                                                           receipts of international air
       oriented enterprise to be used          passengers from a port in the        •   Services other than processing,         carriers doing business in the
       in manufacturing, processing,           Philippines directly to a foreign        manufacturing or repacking              Philippines and international
       packing or repacking in the             port without docking or                  rendered to a person engaged            sea carriers doing business in
       Philippines of the said buyer’s         stopping at any other port in            in business conducted outside           the Philippines are still liable to
       goods, paid for in acceptable           the Philippines; provided                the Philippines or to a non-            a percentage tax of 3 percent
       foreign currency, and                   further, that if any portion of          resident person not engaged in          based on their gross receipts
       accounted for in accordance             such fuel, goods or supplies is          business who is outside the             as provided for in Sec. 118 of
       with the rules and regulations          used for purposes other than             Philippines when the services           the Tax Code but shall not be
       of the BSP;                             that mentioned in this                   are performed, the                      liable to VAT
                                               paragraph, such portion of               consideration for which is paid
                                                                                                                            •   Services to persons engaged in
   •      iii) The sale of raw materials       fuel, goods and supplies shall           for in acceptable currency and
                                                                                                                                international shipping or air
       or packaging materials to an            be subject to 10 percent VAT             accounted for in accordance
                                                                                        with the rules and regulations          transport operations, including
       export-oriented enterprise                                                                                               leases of property for use
       whose export sales exceed 70        •   i) The sale to a non-resident of         of the BSP;
                                                                                                                                thereof; provided that the
       percent of total annual                 goods, except those                  •   Services rendered to persons            services referred to herein
       production;                             mentioned in Sections. 149               or entities whose exemption             shall not pertain to those

       Source: National Internal Revenue Code (NIRC)

   9/13/17                                                                         DEPARTMENT OF FINANCE                                                                                          39

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

IT-BPO / electronics exporter                                                      VAT zero-rated                               VAT zero-rated                              No impact
outside special economic zone
(thus within customs territory)

   9/13/17                                                                         DEPARTMENT OF FINANCE                                                                                          40
Impact on indirect exporters*
              Type of firm                    Current        Proposed in                Impact
                                                              Package 1
Supplier catering to domestic              VATable          VATable            No impact
market
Supplier to exporter within special        VAT exempt       VAT zero-rated Transactions of
economic zone (customers are                                               supplier will be VAT
effectively outside customs                                                zero-rated. They are
territory )                                                                entitled to a VAT
                                                                           refund on their inputs.
Supplier to exporter outside               VAT zero-        VATable        Transactions of
special economic zone                      rated                           supplier subject to
                                                                           VAT, but exporters
                                                                           remain zero-rated and
                                                                           therefore entitled to a
                                                                           VAT refund on their
                                                                           inputs.
*The zero-rating reform will only be effective once a cash refund system is in place that can
refund within 90 days. This is expected in Jan 2019.
    9/13/17                               DEPARTMENT OF FINANCE                                  41

              Proposed new VAT refund system

   Objective: Cash basis within 90 days
    Proposed VAT refund system:
    1. Special trust fund.
    2. Risk-based audit instead of pre-audit.
    3. Net revenue basis so BIR/BOC will not hold back
       refund when collections are low.

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

    9/13/17                               DEPARTMENT OF FINANCE                                  42
Revenue impact

   9/13/17                                                         DEPARTMENT OF FINANCE                                                                        43

Estimated revenue impact, DOF amended and SB 1408
                           Revised package 1 proposal                                         Details                     2018   2019    2020    2021    2022
  Value-added tax (VAT)                                                                                                  89.3    128.7   141.4   155.3   170.7
   Removal of other VAT exemptions                                                                                       90.7    103.8   114.0   125.2   137.5
     Senior citizens and PWD leakage                                       after implementing national ID                 0.0      4.2     4.6     5.0     5.5
     Cooperatives                                                          5% GRT from lending/credit coops               1.1      1.2     1.3     1.5     1.6
                                                                           VAT from non-agri coops with 3m above sales 4.1         4.5     4.9     5.4     6.0
                                                                           Electric coops with more than 3m gross receipts0.2      0.3     0.3     0.3     0.3
     Others                                                                                                              75.9    83.4    91.6    100.6   110.6
     Mining                                                                                                               0.1      0.1     0.1     0.1     0.1
      Metallic ore mining                                                                                                 0.1      0.1     0.1     0.1     0.1
      Non-metallic mining and quarrying                                                                                   0.0      0.0     0.0     0.0     0.0
     Manufacturing                                                                                                       44.4    48.7    53.6     58.8    64.7
      Manufacture of food, products and beverage                                                                         23.0    25.2    27.7     30.4    33.4
      Manufacture of tobacco products                                                                                     0.0      0.0     0.0     0.0     0.0
      Manufacture of coke, refined petroleum & fuel products                                                              0.0      0.1     0.1     0.1     0.1
      Manufacture of chemicals & chemical products                                                                        1.7      1.9     2.1     2.3     2.5
      Manufacture of basic metals                                                                                         7.5      8.3     9.1    10.0    11.0
      Manufacture of fabricated metal products except machinery and equipm                                                0.5      0.5     0.6     0.6     0.7
      Manufacture of machinery & equipment n.e.c.                                                                         0.3      0.3     0.3     0.4     0.4
      Manufacture of electrical machinery & apparatus n.e.c.                                                              0.0      0.0     0.0     0.0     0.0
      Manufacture of radio, tv & communication equip/apparatus                                                            2.6      2.8     3.1     3.4     3.7
      Manufacture of medical, precision, optical instruments                                                              0.8      0.9     1.0     1.1     1.2
      Manufacture of motor vehicles, trailers & semi-trailers                                                             3.7      4.0     4.4     4.9     5.4
      Manufacture of other articles, n.e.c                                                                                3.4      3.7     4.1     4.5     4.9
      Manufacture of other transport equipment                                                                            0.9      1.0     1.1     1.2     1.3
     Wholesale trade and commission trade, except motor vehicles & motorc                                                 4.8      5.3     5.8     6.4     7.0
     Hotels & restaurants                                                                                                 5.2      5.7     6.3     6.9     7.6
     Research & development                                                                                               0.6      0.6     0.7     0.7     0.8
     Collection, purification & distribution of water                                                                     0.0      0.0     0.0     0.0     0.0
     Sale, maintenance and repair of motor vehicle and motorcycle retail                                                  0.0      0.1     0.1     0.1     0.1
     Retail trade except of motor vehicles & motorcycles repair of person                                                 7.9      8.7     9.6    10.5    11.6
     Miscellaneous business activities                                                                                   12.9    14.2    15.6     17.1    18.8
     Power transmission                                                                                                   3.1      3.4     3.7     4.0     4.5
     Housing                                                               Socialized housing to remain exempt until      6.2      6.9     7.5     8.3     9.1
   Limit VAT zero-rating to direct exporters                               Implement only together with VAT refund        0.0    26.5    29.1     32.0    35.2
                                                                           Services                                       0.0      7.5     8.2     9.0     9.9
                                                                           Goods                                          0.0    19.0    20.9     23.0    25.2
   VAT threshold increase                                                  Increase from 1.9 to 3 million pesos          -1.4     -1.5    -1.7    -1.8    -2.0
                                                                            (since those below VAT threshold will pay
                                                                            8% on gross sales, their input VAT will not
                                                                            be credited)
  Source: DOF staff estimates
   9/13/17                                                         DEPARTMENT OF FINANCE                                                                        44
Estimated revenue impact, HB 5636
                                  Revised package 1 proposal                                         Details                     2018   2019    2020      2021   2022
         Value-added tax (VAT)                                                                                                  81.0    123.1   135.2    148.5   163.1
          Removal of other VAT exemptions                                                                                       82.4    98.1    107.7    118.3   130.0
            Senior citizens and PWD leakage                                       after implementing national ID                 0.0      4.2     4.6      5.0     5.5
            Cooperatives                                                          5% GRT from lending/credit coops               0.0      0.0     0.0      0.0     0.0
                                                                                  VAT from non-agri coops with 3m above sales 0.0         0.0     0.0      0.0     0.0
                                                                                  Electric coops with more than 3m gross receipts0.2      0.3     0.3      0.3     0.3
            Others                                                                                                              75.9    83.4    91.6     100.6   110.6
            Mining                                                                                                               0.1      0.1     0.1      0.1     0.1
             Metallic ore mining                                                                                                 0.1      0.1     0.1      0.1     0.1
             Non-metallic mining and quarrying                                                                                   0.0      0.0     0.0      0.0     0.0
            Manufacturing                                                                                                       44.4    48.7    53.6      58.8    64.7
             Manufacture of food, products and beverage                                                                         23.0    25.2    27.7      30.4    33.4
             Manufacture of tobacco products                                                                                     0.0      0.0     0.0      0.0     0.0
             Manufacture of coke, refined petroleum & fuel products                                                              0.0      0.1     0.1      0.1     0.1
             Manufacture of chemicals & chemical products                                                                        1.7      1.9     2.1      2.3     2.5
             Manufacture of basic metals                                                                                         7.5      8.3     9.1     10.0    11.0
             Manufacture of fabricated metal products except machinery and equipm                                                0.5      0.5     0.6      0.6     0.7
             Manufacture of machinery & equipment n.e.c.                                                                         0.3      0.3     0.3      0.4     0.4
             Manufacture of electrical machinery & apparatus n.e.c.                                                              0.0      0.0     0.0      0.0     0.0
             Manufacture of radio, tv & communication equip/apparatus                                                            2.6      2.8     3.1      3.4     3.7
             Manufacture of medical, precision, optical instruments                                                              0.8      0.9     1.0      1.1     1.2
             Manufacture of motor vehicles, trailers & semi-trailers                                                             3.7      4.0     4.4      4.9     5.4
             Manufacture of other articles, n.e.c                                                                                3.4      3.7     4.1      4.5     4.9
             Manufacture of other transport equipment                                                                            0.9      1.0     1.1      1.2     1.3
            Wholesale trade and commission trade, except motor vehicles & motorc                                                 4.8      5.3     5.8      6.4     7.0
            Hotels & restaurants                                                                                                 5.2      5.7     6.3      6.9     7.6
            Research & development                                                                                               0.6      0.6     0.7      0.7     0.8
            Collection, purification & distribution of water                                                                     0.0      0.0     0.0      0.0     0.0
            Sale, maintenance and repair of motor vehicle and motorcycle retail                                                  0.0      0.1     0.1      0.1     0.1
            Retail trade except of motor vehicles & motorcycles repair of person                                                 7.9      8.7     9.6     10.5    11.6
            Miscellaneous business activities                                                                                   12.9    14.2    15.6      17.1    18.8
            Power transmission                                                                                                   3.1      3.4     3.7      4.0     4.5
            Housing                                                                                                              3.1      6.9     7.5      8.3     9.1
          Limit VAT zero-rating to direct exporters                               Implement only together with VAT refund        0.0    26.5    29.1      32.0    35.2
                                                                                  Services                                       0.0      7.5     8.2      9.0     9.9
                                                                                  Goods                                          0.0    19.0    20.9      23.0    25.2
          VAT threshold increase                                                  Increase from 1.9 to 3 million pesos          -1.4     -1.5    -1.7     -1.8    -2.0
                                                                                   (since those below VAT threshold will pay
                                                                                   8% on gross sales, their input VAT will not
                                                                                   be credited)
         Source: DOF staff estimates
         9/13/17                                                          DEPARTMENT OF FINANCE                                                                          45

                            Estimated TEF for SUCs
                           2017, all in PHP thousands
                                                                                                               Machinery                 Furniture,
                                                                                         Buildings                       Transportation
                                                                   Infrastructure                                 and                   Fixtures and
    State Universities and Colleges (SUCs)                                               and other                         Equipment                 Total MOOE
                                                                       Outlay                                  Equipment                   Books
                                                                                         Structures                          Outlay
                                                                                                                 Outlay                    Outlay
Batangas State University                                                  0                10,000               32,429                 0                0               42,429
Aklan State University                                                     0                60,538               17,674                 0               1,242            79,454
                                                               1
Sta. Rosa Science and Technology High School                               0                    0                    0                  0                0                    0
Guimaras State College                                                     0                14,864                   0                  0                0               14,864
Central Philippines State University2                                      0                24,480                  263                 0               1,655            26,398
University of the Philippines                                          58,544             1,356,154            1,375,122                0                0          2,789,820
Mindanao University of Science and Technology                              0                    0                40,812                 0                0               40,812
Philippine Normal University                                               0                31,042               53,283                 0                0               84,325
Total                                                                                                                                                               3,078,102
Estimated TEF                                                                                                                                                        329,808
Source: DOF staff estimates
Notes:
1 Not included in the GAA
2 Formerly Negros Occidental Agricultural College

         9/13/17                                                          DEPARTMENT OF FINANCE                                                                          46
Overall impact
                                                                   on the people

                9/13/17                                                                  DEPARTMENT OF FINANCE                                                                                         47

                                                                                                                                                          DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.

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

                        Combined effect                                                                Package 1 change in annual take home pay (in pesos)

                                                 2018 projected                                                                                                                                                   Change in
                         Description                                                                                                                                                  Change in
  Decile/                                           monthly            Personal      Value-       Petrol and                                                          Inflationary                  Transfer     take home
                    (assumes a family of 5                                                                          Automobile**           SSB         Net tax due                   take home
 percentile                                      household total     income tax    added tax    transportation                                                         effect***                   (full year)    pay after
                         members)                                                                                                                                                       pay
                                                    income*                                                                                                                                                        transfer
     D1        Subsistence poor                       5,106               2          - 210           - 102                                 - 197           - 506         - 298           - 804       2,400           1,596
     D2        Subsistence poor                       8,250              84          - 312           - 161                                 - 335           - 725         - 456         - 1,180       2,400           1,220
     D3        Poor                                  10,652             404          - 423           - 217                                 - 406           - 641         - 555         - 1,197       2,400           1,203
     D4        Near poor                             12,987            1,063         - 563           - 276                                 - 507           - 283         - 639           - 922       2,400           1,478
     D5        Near poor                               15,760             2,377      - 895           - 365                                  - 595             522          - 744        - 223        2,400         2,177
     D6         Unskilled                              19,335             4,127     - 1,372          - 446                                - 1,129            1,179         - 847          332                         332
     D7         Partly skilled                         24,524             7,684     - 1,650          - 581                                - 1,294            4,159         - 992         3,167                       3,167
     D8         Skilled                                32,565            13,539     - 2,261          - 771                                - 1,418            9,089       - 1,183         7,906                       7,906
     D9         Professional                           47,710            25,494     - 4,618        - 1,091             - 2,283            - 2,007           15,495       - 1,468        14,027                      14,027
    D10         Middle class                          115,428            61,738     - 8,835        - 2,887            - 10,931            - 2,670           36,415       - 2,620        33,795                      33,795
   P100         Executive                             303,059           118,538    - 16,525        - 6,284            - 87,360            - 3,278            5,090       - 3,879         1,212                       1,212
   T1000        CEO                                   706,017           146,575    - 20,672        - 7,801           - 131,533            - 1,962          - 15,394      - 5,301       - 20,695                    - 20,695
                Top taxpayer A                       1,376,147         - 470,879   - 57,562       - 15,206           - 271,488            - 1,505         - 816,640      - 8,241      - 824,881                   - 824,881
                Top taxpayer B                       2,752,294       - 1,495,740 - 120,279        - 30,411           - 271,488            - 1,062       - 1,918,980     - 12,361     - 1,931,341                 - 1,931,341
Source: DOF staff estimates using the preliminary Family Income and Expenditure Survey - Labor Force Survey 2015
Notes:
 This table is updated as of July 29, 2017. Each household has about two income earners.
 * Total household income includes compensation income, income from entrepreneurial activities (i.e. businesses), and other sources of income (i.e. cash transfers).
 **Automobile excise tax impact were computed using 2016 prices, assuming 3 to 5 years of amortization.
 ***The inflationary effect was computed as a function of income, marginal propensity to consume (MPC), and estimates on the price effect of the increased oil excise on food.

                9/13/17                                                                  DEPARTMENT OF FINANCE                                                                                         48
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.

                 After the tax-transfer reform,
                  the poor benefits the most.
                                             Percent increase in household income
             4       2.6                                                          2.5   2.4
                                                                        2.0
             2             1.2   0.9   0.9     1.2               1.1
                                                        0.1                                    0.0
             0
                                                                                                      -0.2
 Percent

            -2
            -4
            -6                                                                                                 -5.0
                                                                                                                       -5.8
            -8
           -10

                                                              Average household

Sources: PSA and DOF staff estimates
       Note: D1 refers to the first deciles or the poorest 10% of households based on the preliminary 2015 Family
       Income and Expenditure Survey (FIES). Each succeeding decile consists of the next 10% of households based
       on total household income. The figures above are averages for each decile.
           9/13/17                                   DEPARTMENT OF FINANCE                                            49

                                       VAT on housing

           9/13/17                                   DEPARTMENT OF FINANCE                                            50
Key messages
     1. The government fully recognizes the right of all
        Filipinos to decent housing and seeks to ensure that
        the people’s access to quality housing is provided
        efficiently.
     2. For decades, the government has been supporting
        the housing industry through income tax exemption
        and VAT exemptions, among others.
     3. In fact, housing has been one of the mainstays in the
        investment priority program (IPP) list for 18 years
        already. In 1994, only socialized housing was
        included. From 2000 up to the present, the scope has
        been widened to cover low-cost housing, including
        vertical structures.

     9/13/17                        DEPARTMENT OF FINANCE                           51

                           Key messages
4.    However, the VAT exemption is not the best way to help those in need of housing
      because its leads to large leakages that only erode revenues that could have been
      used to provide housing for the poor.
     • The Philippines currently has a 12 percent VAT rate, yet there are 143 lines of
       exemptions in the tax code and in special laws, including exemptions for
       housing. This yields a very low VAT efficiency despite having the highest VAT rate
       in the region. As a result, this complexity of the tax system encourages discretion
       and negotiation, and therefore corruption and tax evasion.
     • These leakages come in the form of tax avoidance, such as splitting of lots and
       condo units to avail of exemptions, or tax evasion, such as non-payment of input
       VAT/non-issuance of receipts by suppliers and contractors, and transfer pricing
       of revenues and cost to reduce VAT liability.
5.    The best tax system is a low-rate and broad-base tax system where more revenues
      can be generated and redistributed back to the poor using targeted means.
      Exempting an industry means someone else has to pay for the growing needs of
      the country, and this is not fair to others who pay the right amount of taxes.
      Moreover, it is often the poor who pays when services do not reach them.

     9/13/17                        DEPARTMENT OF FINANCE                           52
Key messages
6.   Instead of providing a producer subsidy in the form of a VAT exemption, a better
     way to help the poor avail of housing is to provide a targeted consumer subsidy in
     which the poor and low income are directly given cash, vouchers, or lower
     borrowing terms to acquire decent housing. This is far most cost effective
     and better targeted that the current system that incentives leakages.
7.   For taxpayers, they can still find housing affordable as personal income tax is
     being reduced. In fact, for 99 percent of taxpayers, their higher take home pay due
     to lower income taxes is more than enough to offset the slight increase in
     consumption taxes, including the slight increase in housing prices.
          • Cannot afford: they will be provided free housing/vouchers/subsidies.
          • Socialized housing: those falling below the minimum wage can be provided
            subsidies. The rest will benefit from lower income tax and this is enough to help
            them purchase houses.
          • Economic and low-cost housing: buyers are beneficiaries of lower income taxes
            so they can afford to buy house.
          • Leasing: no impact if lessee has gross sales at or below the VAT threshold. This
            will not affect the far majority of small renters.

     9/13/17                           DEPARTMENT OF FINANCE                             53

                             Key messages
8.   At the same time, government can also help the housing sector by
     o Reducing red tape in securing permits and licenses (e.g., construction,
       electricity, building), which reportedly takes up to three years.
     o Securing property rights, such as through an efficient titling and registration
       system.
     o Enhancing financial inclusion.
     o Strengthening urban planning.
     o Unlocking government land.
     o Pursuing institutional reforms in the housing sector.
     o Improving infrastructure to spur housing development.

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

     9/13/17                           DEPARTMENT OF FINANCE                             54
Key messages
     9. The claim the housing prices will rise by 12 percent is
        not founded at all. At most it is around 6.9 percent.
          • As housing developers have to pay VAT for inputs, such as for
            cement, fixtures, tiles, and steel, the stranded input VAT that
            cannot be passed on to buyers is typically passed on to
            buyers in the form of artificially higher prices. Rarely do
            developers absorb the input VAT as this would cut their
            margin and business feasibility.
          • Based on average cost structure, housing prices are expected
            to increase by around 6.9 percent. This amount can be
            funded by housing vouchers, direct subsidy programs, or the
            lower personal income taxes.
          • Tax compliant housing developers should find the reform to
            their advantage, as they can properly credit the input VAT.
          • However, for developers who do not pay input VAT to save
            cost, then this becomes a problem for them and a source of
            resistance.

     9/13/17                      DEPARTMENT OF FINANCE                       55

      Housing is a basic need and right
1.      Housing is basic need and right of all Filipinos.

2.      Yet housing is highly correlated with income and wealth.

3.      To exempt housing is also to favor the rich who can use tax
        avoidance and evasion to game the system. It also penalizes the rest
        of the value chain whose input VAT become stranded.

4.      A better way to provide housing to the poor is through a targeted
        voucher or subsidy system as approved by the President in chapter
        12 of the Philippine Development Plan.

5.      In summary, we are simply changing the manner in which we
        provide a basic need for the poor through the proposed targeted
        voucher or subsidy system.

     9/13/17                      DEPARTMENT OF FINANCE                       56
Is housing an investment
              or consumption item?
• It is both an investment and a consumption item.
• Anything can be an investment (e.g., house, laptop,
  cellphone, cash, cars, friendship, etc.).
• However, under a VAT system, all final consumption by
  households outside raw food, education, and health are
  VATable. This covers all items stated above, including
  housing.
• This is in contrast to a business investment that is
  intended to generate income streams.

  9/13/17             DEPARTMENT OF FINANCE         57

                VAT on housing:
                current system

  9/13/17             DEPARTMENT OF FINANCE         58
9/13/17   DEPARTMENT OF FINANCE   59

9/13/17   DEPARTMENT OF FINANCE   60
VAT treatment on housing

9/13/17           DEPARTMENT OF FINANCE   61

              VAT on housing:
              the reform

9/13/17           DEPARTMENT OF FINANCE   62
Impact of the housing VAT reform by provision (1/2)

  9/13/17           DEPARTMENT OF FINANCE       63

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

  9/13/17           DEPARTMENT OF FINANCE       64
Leakages from VAT
          exemption on housing

9/13/17      DEPARTMENT OF FINANCE   65

9/13/17      DEPARTMENT OF FINANCE   66
9/13/17   DEPARTMENT OF FINANCE   67

9/13/17   DEPARTMENT OF FINANCE   68
Sample audit case of developer
Real Estate Developer - Taxpayer A
VAT Assessment (Violation of Intent of Law on Incentives to Developer of Low Cost Housing)
For the Years 2010 to 2012

                                             Total Tax Due           2010               2011             2012                 Legal Basis
   Value Added Tax
   Sale of 2 or more housing units to a single2,800,905,857.10
                                               buyer             1,513,532,586.57   622,326,924.38    665,046,346.15 a) Violation of Sec. 109 (P)
   Sales to corporation                         113,458,789.83                      105,785,607.63      7,673,182.20 of the NIRC . The practice
                                              2,914,364,646.93   1,513,532,586.57   728,112,532.01    672,719,528.35 is a circumvention of the
                                                                                                                     intent of the law allowing
   Basic Tax                                  349,723,757.63      181,623,910.39      87,373,503.84    80,726,343.40 low income earners afford
   Surcharge                                             -                                                           and obtain low cost
   Interest                                   388,447,094.67      227,602,127.70      92,017,465.42    68,827,501.55 housing units.
   Compromise                                            -
   Total Tax Due                              738,170,852.30      409,226,038.09    179,390,969.26    149,553,844.95

       9/13/17                                               DEPARTMENT OF FINANCE                                                  69

                                           VAT on housing:
                                           price impact

       9/13/17                                               DEPARTMENT OF FINANCE                                                  70
According to the cost structure of
          construction and real estate firms,
       only 43 percent of all inputs are VATable

 Sources: PSA, 2006 input-output table

      9/13/17                          DEPARTMENT OF FINANCE                             71

      Removing VAT exemptions will not lead to
      a 12 percent increase in prices for housing
• The average VATable inputs for housing is 43 percent, which means that they can recover the
  input VAT if the VAT exemption is removed.
• With proper crediting of input VAT, the estimated price increase is only 6.9 percent, and not
  12 percent.
• It can be 12 percent if the developer does not pay input VAT/suppliers and contractors don’t
  issue receipt, but this is tax evasion.
• This means that developers of low cost housing, and even cooperatives, with supposedly low
  markup can see price increase way below 12 percent.

      9/13/17                          DEPARTMENT OF FINANCE                             72
VAT for low cost housing
• Socialized housing will remain VAT-exempt until a housing voucher system is instituted (per
  HB 5636).
• For low cost housing, assuming a 28 percent markup for developers, the price increase for 1
  million peso house will be 69 thousand, which is 6.9 percent of 1 million.
                                                            Proposed VAT for low-cost housing
                                    3.0

                                                                Price of property                   Proposed VAT
                                                                                                                                   0.19
                                    2.5

                                    2.0                                                                       0.14
                Millions of pesos

                                    1.5                                               0.10

                                    1.0                      0.07

                                    0.5    0.03

                                    0.0

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

      9/13/17                                                   DEPARTMENT OF FINANCE                                                              73

                                                  VAT on housing:
                                                  profile of borrowers

      9/13/17                                                   DEPARTMENT OF FINANCE                                                              74
Impact on the people
 1. Those whose income is above PHP 40,000 have access to
    bank financing and will benefit from lower income taxes
    and low borrowing cost. In fact, passage of the tax reform
    is crucial in improving our investment-grade credit rating to
    keep interest rates low.
 2. Those whose income fall between PHP 12,000 and PHP
    40,000 can access Pag-IBIG concessional borrowing rates of
    as low at 3 percent. The majority of borrowers are also
    beneficiaries of lower income taxes and thus can easily
    afford to pay for housing, even for socialized housing.
 3. Those whose income is below PHP 12,000 will be provided
    support through the targeted voucher or subsidy program.

   9/13/17                          DEPARTMENT OF FINANCE                               75

                    Number of borrowers
                    for socialized housing
                   Below Official       Between
                                   Official Minimum Pag-IBIG Defined Above Pag-IBIG
                  Minimum Wage
     Year                             Wage and         Minimum Wage Defined Minimum     Total
                                   Pag-IBIG Defined      and Below        Wage
                                   Minimum Wage
       (a)             (b)                 (c)          (d) = (b) + (c)    (e)           (f)
      2012                  2,566               3,950              6,516       4,249           10,765
      2013                  2,018               4,259              6,277       4,742           11,019
      2014                  2,543               6,020              8,563       6,204           14,767
      2015                  3,701               7,797            11,498        8,529           20,027
      2016                  5,723               7,745            13,468       11,325           24,793
Jan - June 2017             2,416               3,330              5,746       4,999           10,745
      Total                18,967              33,101            52,068       40,048           92,116
 Share to total               20.6                35.9               56.5        43.5            100.0

   9/13/17                          DEPARTMENT OF FINANCE                               76
Number of borrowers
                             for low-cost housing

9/13/17                                             DEPARTMENT OF FINANCE                                                           77

                       Maximum loanable amount
                 Current regional daily minimum wage rates and maximum loanable amount
                                              Monthly minimum wage
                      Minimum wage                                         Maximum loanable
 Region                                         (assuming 26 working
                   (regional maximum)                                         amount (PHP)
                                                    days/month)
 I                          280                        7,280                     317,494
 II                         300                        7,800                     340,172
 III                        364                        9,464                     412,742
 IVA                        379                        9,841                     429,184
 IVB                        285                        7,410                     323,163
 V                          265                        6,890                     300,485
 VI                         299                        7,761                     338,471
 VII                        353                        9,178                     400,269
 VIII                       285                        7,410                     323,163
 IX                         296                        7,696                     335,636
 X                          318                        8,268                     360,582
 XI                         340                        8,840                     385,528
 XII                        295                        7,670                     334,502
 NCR                        491                        12,766                    556,748
 CAR                        285                        7,410                     323,163
 ARMM                       265                        6,890                     300,485
 CARAGA                     280                        7,280                     317,494
 Source: Na ti ona l Wa ges a nd Producti vi ty Commi s s i on, Pa g-i bi g Fund, DOF s taff es ti ma tes
 Note: The Pa g-i bi g l oa n ca l cul a tor wa s us ed to es ti ma te the ma xi mum l oa na bl e a mount. It a s s umes a l oa n term
 of 20 yea rs a t a 5.5 percent a nnua l i nteres t.
9/13/17                                             DEPARTMENT OF FINANCE                                                           78
With the VAT on housing, additional
                 monthly amortization will be minimal
                                          Loanable Amount
                  Loan Term     Current Price         Increased Price                    Percentage
Interest Rate                                                              Difference
                   (in years)    450,000.00             481,050.00                        Increase
                                       Monthly Amortization
                      5                  8,085.91               8,643.84        557.93          6.900%
                      10                 4,345.23               4,645.05        299.82          6.900%
                      15                 3,107.62               3,322.04        214.43          6.900%
   3.000%
                      20                 2,495.69               2,667.89        172.20          6.900%
                      25                 2,133.95               2,281.19        147.24          6.900%
                      30                 1,897.22               2,028.13        130.91          6.900%
Source: Pag-IBIG

       9/13/17                           DEPARTMENT OF FINANCE                             79

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

       9/13/17                           DEPARTMENT OF FINANCE                             80
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