Tax Reform for Acceleration and Inclusion - Comprehensive Tax Reform Program
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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
Key messages
and highlights
9/13/17 DEPARTMENT OF FINANCE 3
Key messages
1. The proposed VAT reform must be seen as part of the entire tax reform package.
2. The present VAT system has a high rate (12%) and 143 lines of exemptions, making it very
complex. This encourages discretion, negotiation, corruption, and tax evasion.
3. Since the VAT reform in 2005, 89 revenue eroding measures were passed. This eroded
most of the gains from the RVAT reform.
4. The goal of the reform is to make the VAT system simpler, fairer, and more efficient
characterized by a lower rate and a broader base so that it encourages investment, job
creation, and poverty reduction.
• Simpler: Low-rate and broad-base, few exemptions, and no break in the chain.
• Fairer: Everyone who consumes pay VAT based on ability to pay.
• More efficient: Minimize leakage and distortions.
5. The reform seeks to achieve the following:
• Generally limit exemptions to raw food, agriculture, education, and health.
• Limit zero rating to direct exporters and provide timely cash refund.
• Increase VAT threshold from 1.9 to 3 million pesos to protect the poor.
9/13/17 DEPARTMENT OF FINANCE 4
Key messages
6. When seen as a package, the removal of 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
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
9/13/17 DEPARTMENT OF FINANCE 9 9/13/17 DEPARTMENT OF FINANCE 10
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
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
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
9/13/17 DEPARTMENT OF FINANCE 17 9/13/17 DEPARTMENT OF FINANCE 18
Overview of the reform:
broadening the VAT base
by reducing exemptions
9/13/17 DEPARTMENT OF FINANCE 19
9/13/17 DEPARTMENT OF FINANCE 209/13/17 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 22Expanding 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 24Value-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 26In 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 28Special 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 30Education
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 32Government 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 34Health
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 36Overview 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 38Value-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 40Impact 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 42Revenue 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 44Estimated 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 46Overall 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 48DRAFT 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 50Key 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 52Key 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 54Key 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 56Is 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 589/13/17 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 62Impact 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 669/13/17 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 70According 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 72VAT 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 74Impact 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 76Number 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 78With 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 80You can also read
