## 1. Philippines Revenue Trends, 1997–2003

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---

### I. Introduction — fiscal context and motivation
- National government tax revenue declined sharply by about 5 percentage points of GDP between 1997 and 2002.
- Drivers of the revenue decline:
  - Weakened tax administration.
  - Failure to index excises to inflation.
  - Failure to offset trade liberalization with higher domestic taxes such as the VAT.
- Fiscal consequences:
  - National government deficit expanded to 4¾ percent of GDP in 2003 (from balance in 1997).
  - National government debt rose from 56 percent of GDP at end-1997 to 78 percent of GDP at end-2003.
  - Losses at the state-owned National Power Corporation (NPC) due to electricity rates below cost recovery further weakened public finances.
- Policy challenge:
  - Primary spending was compressed by about 2¼ percent of GDP over 1999–2003, limiting scope for further deficit reduction by spending cuts.
  - Majority of deficit reduction likely needs to come from revenue measures to ensure debt sustainability and to fund targeted increases in social sectors and infrastructure.
- Scope and focus:
  - Examines efficiency, equity, and revenue implications of increasing excises and indexing them to inflation, raising the VAT rate and broadening its base, raising electricity rates, and rationalizing tax incentives.
  - Tax administration improvements are critical but not the primary focus of this paper.
- Incidence methodology for indirect taxes:
  - Initial assumption: demand is perfectly price inelastic (or supply perfectly price elastic), so burden of indirect taxes is passed on to consumers.
  - Progressivity assessment based on how spending on a good varies with total household spending using the 2000 Family Income and Expenditure Survey (FIES).
    - If the share of spending on the good increases with total household spending → tax on the good is progressive.
    - If the share decreases with total household spending → tax on the good is regressive.
  - Paper also discusses likely incidence under alternative tax-shifting assumptions.

### Key statistics (Table 1: Philippines: Revenue Trends, 1997–2003; In percent of GDP)
- Total revenue and grants:
  - 1997: 19.4; 1998: 17.4; 1999: 16.1; 2000: 15.3; 2001: 15.5; 2002: 14.3; 2003: 14.6
- Tax revenue:
  - 1997: 17.0; 1998: 15.6; 1999: 14.5; 2000: 13.7; 2001: 13.5; 2002: 12.5; 2003: 12.5
- Bureau of Internal Revenue (BIR) total and components:
  - BIR total: 1997: 13.0; 1998: 12.7; 1999: 11.5; 2000: 10.8; 2001: 10.7; 2002: 10.0; 2003: 9.9
  - Income taxes (BIR): 1997: 6.8; 1998: 6.9; 1999: 6.2; 2000: 6.1; 2001: 6.2; 2002: 5.7; 2003: 5.7
    - Corporate income tax: 1997: 3.4; 1998: 2.8; 1999: 2.6; 2000: 2.6; 2001: 2.7; 2002: 2.5; 2003: 2.6
    - Personal income tax: 1997: 2.5; 1998: 2.5; 1999: 2.4; 2000: 2.4; 2001: 2.2; 2002: 2.2; 2003: 2.1
    - Other income taxes: 1997: 0.9; 1998: 1.6; 1999: 1.1; 2000: 1.1; 2001: 1.2; 2002: 1.0; 2003: 0.9
  - Excises (BIR): 1997: 2.6; 1998: 2.4; 1999: 2.1; 2000: 1.8; 2001: 1.6; 2002: 1.4; 2003: 1.3
    - Alcohol: 1997: 0.6; 1998: 0.5; 1999: 0.4; 2000: 0.4; 2001: 0.3; 2002: 0.3; 2003: 0.3
    - Tobacco: 1997: 0.6; 1998: 0.6; 1999: 0.6; 2000: 0.5; 2001: 0.5; 2002: 0.5; 2003: 0.5
    - Fuels: 1997: 1.2; 1998: 1.2; 1999: 1.0; 2000: 0.8; 2001: 0.7; 2002: 0.6; 2003: 0.5
    - Autos: 1997: 0.2; 1998: 0.1; 1999: 0.1; 2000: 0.1; 2001: 0.1; 2002: 0.0; 2003: 0.0
  - VAT (BIR): 1997: 1.9; 1998: 1.8; 1999: 1.9; 2000: 1.6; 2001: 1.6; 2002: 1.7; 2003: 1.9
  - Other domestic taxes (BIR): 1997: 1.7; 1998: 1.6; 1999: 1.4; 2000: 1.3; 2001: 1.3; 2002: 1.1; 2003: 1.0
- Bureau of Customs:
  - 1997: 3.9; 1998: 2.9; 1999: 2.9; 2000: 2.8; 2001: 2.6; 2002: 2.4; 2003: 2.5
  - Tariffs: 1997: 2.6; 1998: 1.8; 1999: 1.4; 2000: 1.4; 2001: 1.1; 2002: 0.9; 2003: 1.0
  - Import VAT: 1997: 1.3; 1998: 1.0; 1999: 1.2; 2000: 1.3; 2001: 1.3; 2002: 1.2; 2003: 1.2
  - Excises (customs): 1997: 0.1; 1998: 0.1; 1999: 0.1; 2000: 0.1; 2001: 0.2; 2002: 0.2; 2003: 0.3
- Nontax revenue and grants:
  - 1997: 2.5; 1998: 1.7; 1999: 1.6; 2000: 1.6; 2001: 2.0; 2002: 1.8; 2003: 2.1
- Expenditure and net lending:
  - 1997: 19.4; 1998: 19.2; 1999: 19.8; 2000: 19.3; 2001: 19.6; 2002: 19.6; 2003: 19.2
- Deficit:
  - 1997: 0.1; 1998: -1.9; 1999: -3.8; 2000: -4.0; 2001: -4.0; 2002: -5.3; 2003: -4.6
- Note: Authorities' presentation. Includes privatization receipts as revenue and excludes operations of the Central Bank–Board of Liquidators (CB-BOL).

### II. Excises — real-value erosion and revenue impact
- Mechanism of leakage:
  - Alcohol, tobacco, and petroleum excises are set in specific (per unit) terms and are not indexed to inflation.
  - Specific rates are used to reduce incentives for tax evasion via undervaluation.
- Real-value declines over 1997–2004:
  - Real value of tobacco and alcohol excise tax rates fell by about 44 percent.
  - Real value of petroleum excises fell by about 56 percent.
- Fiscal outcome:
  - Domestic revenue from these sources fell from 2.4 percent of GDP in 1997 to lower levels by 2003 (Excises (BIR) 1997: 2.6; 2003: 1.3).
- Recent policy action and parameters:
  - In December 2004, President Arroyo signed into law increases in alcohol and tobacco excises expected to yield about 0.2 percent of GDP in annual revenue.
  - The excise law provides for increases of 6-8 percent every two years until 2011; excises are still not indexed.
- Petroleum excise elasticity and revenue potential:
  - Each 20 percent increase in petroleum excise rates could raise an additional 0.1–0.15 percent of GDP.
  - Each 20 percent increase in gasoline excises would increase retail prices by only about 4 percent (assuming a current retail price of P 23/liter).
- Excise tax levels (Petos per liter, 2004; Bureau of Internal Revenue):
  - Leaded premium gasoline 5.35
  - Regular gasoline, naphta 4.80
  - Unleaded premium gasoline 4.35
  - Jet fuel 3.67
  - Diesel 1.63
  - LPG for motive power 1.63
  - Kerosene 0.60
- Cross-country and VAT interactions:
  - Gasoline excises in the Philippines are significantly below those in Thailand and Malaysia.
  - Petroleum products in the Philippines are exempt from the VAT.
- Distributional impacts:
  - Alcohol and tobacco are consumed disproportionately by lower-income groups.
  - Tax shifting to producers is possible, which could make alcohol and tobacco excises significantly more progressive than direct-consumer incidence implies.
  - Petroleum excises are generally progressive due to differentiated tax rates; kerosene excises are regressive.
  - If one assumes that a third of transport fares reflect gasoline/diesel costs, then the richest 1 percent of families spends six times as much on gasoline and diesel than the poorest 10 percent of families as a share of their total spending.
  - Studies accounting for general equilibrium effects still find total excises (alcohol, tobacco, and petroleum) to be moderately progressive.

### Value-added tax (VAT): revenue potential and distributional effects
- Current rate and potential:
  - Current VAT rate: 10 percent.
  - A 1 percentage point increase in the VAT rate could generate 0.2–0.3 percent of GDP in revenue, depending on behavioral responses and compliance.
- International context and revenue-maximizing estimates:
  - China VAT rate: 17 percent.
  - Latin American average VAT rate: 15 percent.
  - Matthews and Lloyd-Williams (2000) estimate a revenue-maximizing VAT rate around 20 percent (based on OECD sample).
- Nonstandard exemptions and revenue opportunities:
  - Nonstandard exemptions include legal services, coal, natural gas, petroleum products, importation of vessels of more than 5,000 tons, and sales by certain cooperatives.
  - Repealing the exemption for petroleum products alone could raise roughly 0.2 percent of GDP in revenue.
- Distributional assessment and caveats:
  - Calculations indicate the VAT appears to be progressive, primarily due to agricultural exemptions (unprocessed agricultural goods and agricultural inputs).
  - Standard exemptions include medical services, educational services, monthly rent less than P8,000, sale of residential property valued at P1,000,000 or below, and sales by small businesses (annual gross receipts less than P550,000).
  - Caveats: (i) the effect of the exemption for small businesses is not fully taken into account and would likely make the VAT appear more progressive; (ii) calculations assume perfect compliance—weaknesses in tax administration could alter actual incidence.
- Relative incidence versus excise policy:
  - Repeal of the VAT exemption for petroleum products would likely be more progressive than increasing petroleum excises, especially if the exemption on kerosene is retained, because producers can claim input credits for VAT on intermediate use.

### Electricity rates: quasi-fiscal losses and revenue options
- NPC fiscal position and recent measures:
  - NPC losses are estimated to have reached about 1.5 percent of GDP in 2004.
  - A provisional tariff increase granted in September 2004 is expected to yield 0.7 percent of GDP, but NPC is projected to still have substantial deficits.
- Revenue potential from further rate increases:
  - Each 10 percent increase in end-user rates could increase NPC’s revenue by roughly ½ percent of GDP (rough estimate; relationship varies by region).
- Efficiency and investment considerations:
  - Electricity prices should reflect the social cost of production.
  - Much of NPC’s losses derive from costly supplier contracts signed in earlier years (considered sunk costs); some costs might be better covered by general taxes rather than electricity-specific charges.
  - Higher rates are needed to attract investment because electricity demand is expected to exceed currently-installed supply capacity beginning around 2008–2010.
- Distributional impacts:
  - Increasing electricity rates on households is progressive: share of consumption on electricity generally increases with total spending through the upper middle income groups (75–90 percentiles).
  - Incidence for commercial and industrial users is uncertain without sectoral consumption details.

### Tax incentives: rationalization and revenue gains
- Systemic problems:
  - Broad system of special tax incentives, with tax holidays as a cornerstone, creates distortions, discrimination across businesses, complexity, and opportunities for avoidance and corruption.
- Revenue potential from reform:
  - Phasing out the most distortionary incentives (such as tax holidays) could significantly boost revenue; some studies suggest gains could be as high as 1–2 percent of GDP (Manasan 2002).
- Design considerations:
  - Part of revenue gains could be used to lower the corporate income tax rate or increase provisions for accelerated depreciation to avoid making the corporate tax system too onerous.
  - Well-crafted reform could produce net revenue gains through efficiency improvements.
- Distributional ambiguity:
  - The distributive impact of rationalizing tax incentives is unclear; differential sectoral impacts are likely.
  - Some foreign companies may claim foreign tax credits for higher tax burdens, shifting the ultimate incidence to other countries’ treasuries in some cases.

### Other revenue measures, risks, and mitigation
- Trade taxes:
  - Raising trade taxes would likely be no more equitable and less efficient than raising the VAT; scope is limited by trade agreements.
- Personal income tax:
  - Top statutory rate: 32 percent.
  - Increasing the top personal income tax rate may have limited revenue effect due to low compliance.
  - For households with expenditure in excess of P600,000 (the top 1 percent), income tax payments constitute only 4.7 percent of their total spending despite statutory average taxation of over 20 percent.
  - Improving tax administration may be more effective than raising the top statutory rate.
- Risks of inaction:
  - Failure to raise revenue likely results in cuts in real spending, with significant cuts likely falling on capital spending and nonwage goods and services (school supplies, medicines), potentially harming growth and being more regressive than tax measures.
  - Another risk is debt monetization, leading to high inflation, adverse economic effects, and disproportionate burden on the poor.
- Mitigating distributional impacts:
  - Consider using part of revenue proceeds to strengthen social safety nets.
  - National Food Authority subsidization of low quality rice is targeted at poor households but shows some leakage.
  - Exploring conditional cash transfers (e.g., Progresa-style programs) could be useful.

### Key quantitative points and scenarios (selected figures preserved)
- 1.3 percent of GDP in 2003 (Excises (BIR), Table 1).
- Excises:
  - Alcohol and tobacco excise increases expected to yield about 0.2 percent of GDP.
  - Excise increases of 6-8 percent every two years until 2011 (per law).
  - Each 20 percent increase in petroleum excise rates could raise an additional 0.1–0.15 percent of GDP.
  - Example price effect: 20 percent gasoline excise rise → retail price up ~4 percent (assuming P 23/liter).
- VAT:
  - Current VAT rate: 10 percent.
  - A 1 percentage point VAT increase could generate 0.2–0.3 percent of GDP.
  - Repealing VAT exemption for petroleum products could raise roughly 0.2 percent of GDP.
- Electricity:
  - NPC losses estimated at about 1.5 percent of GDP in 2004.
  - September 2004 provisional tariff increase expected to yield 0.7 percent of GDP.
  - A 10 percent increase in end-user electricity rates could raise roughly ½ percent of GDP in NPC revenue.
- Tax incentives:
  - Potential revenue gain from phasing out distortionary incentives: 1–2 percent of GDP (Manasan 2002).
- Personal income tax:
  - Top statutory rate: 32 percent.
  - Top 1 percent households: income tax payments = 4.7 percent of total spending under the assumptions cited.

### Policy recommendations and trade-offs emphasized
- Revenue package approach:
  - Given the magnitude of the fiscal problem, it is likely that virtually all main measures discussed (increasing excise, VAT, and electricity rates, and rationalizing tax incentives) will need to be adopted in some form; the precise balance depends on policy trade-offs and policymakers' weighting of equity, efficiency, and political feasibility.
- Equity and efficiency considerations:
  - Most proposed measures would raise revenue relatively efficiently and, in many cases, be progressive—especially if part of proceeds strengthen social safety nets or avoid cuts in pro-poor spending.
- Implementation notes:
  - Design excise and VAT reforms to account for incidence, producer pass-through, VAT credit mechanisms, and sectoral intermediate use.
  - Improve tax administration (particularly for top personal income tax) to complement statutory changes.
  - Consider targeted social spending (including possible conditional cash transfers) to offset adverse distributional effects and to enhance political feasibility.

*Source: Excerpt from IMF staff paper, "Philippines Revenue Trends, 1997–2003."*

### 1. Philippines Revenue Trends, 1997–2003 ..............................................................................4

### 1. Philippines Revenue Trends, 1997–2003

### I. Introduction — fiscal context and motivation
- National government tax revenue declined sharply by about 5 percentage points of GDP between 1997 and 2002.
- Drivers of the revenue decline noted:
  - Weakened tax administration.
  - Failure to index excises to inflation.
  - Failure to offset trade liberalization with higher domestic taxes such as the VAT.
- Fiscal consequences:
  - National government deficit expanded to 4¾ percent of GDP in 2003 (from balance in 1997).
  - National government debt rose from 56 percent of GDP at end-1997 to 78 percent of GDP at end-2003.
  - Losses at the state-owned National Power Corporation (NPC) due to electricity rates below cost recovery further weakened public finances.
- Policy challenge:
  - Primary spending was compressed by about 2¼ percent of GDP over 1999–2003, limiting scope for further deficit reduction by spending cuts.
  - Majority of deficit reduction likely needs to come from revenue measures to ensure debt sustainability and to fund targeted increases in social sectors and infrastructure.
- Scope of the paper:
  - Examines efficiency, equity, and revenue implications of key revenue measures: increasing excises and indexing them to inflation, raising the VAT rate and broadening its base, raising electricity rates, and rationalizing tax incentives.
  - Focus is on tax policy measures; improving tax administration is acknowledged as critical but is not the primary focus.
- Incidence methodology for indirect taxes:
  - Initial assumption: demand is perfectly price inelastic (or supply perfectly price elastic), so burden of indirect taxes is passed on to consumers.
  - Progressivity assessment: based on how spending on a good varies with total household spending using the 2000 Family Income and Expenditure Survey (FIES).
    - If the share of spending on the good increases with total household spending → tax on the good is progressive.
    - If the share decreases with total household spending → tax on the good is regressive.
  - The paper also discusses likely incidence under alternative tax-shifting assumptions given producers are unlikely to shift the entire tax to consumers.
- Overall conclusion preview:
  - Many proposed revenue measures have both efficiency and equity advantages.
  - Given the magnitude of the fiscal problem, it is likely that virtually all key measures discussed (increasing excise, VAT, and electricity rates, and rationalizing tax incentives) will need to be adopted in some form.
  - The balance among measures depends on policymakers' weighting of the considerations discussed.

### Key statistics from Table 1: Philippines: Revenue Trends, 1997–2003 (In percent of GDP)
- Total revenue and grants: 1997: 19.4; 1998: 17.4; 1999: 16.1; 2000: 15.3; 2001: 15.5; 2002: 14.3; 2003: 14.6
- Tax revenue: 1997: 17.0; 1998: 15.6; 1999: 14.5; 2000: 13.7; 2001: 13.5; 2002: 12.5; 2003: 12.5
- Bureau of Internal Revenue (BIR): 1997: 13.0; 1998: 12.7; 1999: 11.5; 2000: 10.8; 2001: 10.7; 2002: 10.0; 2003: 9.9
  - Income taxes (BIR): 1997: 6.8; 1998: 6.9; 1999: 6.2; 2000: 6.1; 2001: 6.2; 2002: 5.7; 2003: 5.7
    - Corporate income tax: 1997: 3.4; 1998: 2.8; 1999: 2.6; 2000: 2.6; 2001: 2.7; 2002: 2.5; 2003: 2.6
    - Personal income tax: 1997: 2.5; 1998: 2.5; 1999: 2.4; 2000: 2.4; 2001: 2.2; 2002: 2.2; 2003: 2.1
    - Other (income taxes): 1997: 0.9; 1998: 1.6; 1999: 1.1; 2000: 1.1; 2001: 1.2; 2002: 1.0; 2003: 0.9
  - Excises (BIR): 1997: 2.6; 1998: 2.4; 1999: 2.1; 2000: 1.8; 2001: 1.6; 2002: 1.4; 2003: 1.3
    - Alcohol: 1997: 0.6; 1998: 0.5; 1999: 0.4; 2000: 0.4; 2001: 0.3; 2002: 0.3; 2003: 0.3
    - Tobacco: 1997: 0.6; 1998: 0.6; 1999: 0.6; 2000: 0.5; 2001: 0.5; 2002: 0.5; 2003: 0.5
    - Fuels: 1997: 1.2; 1998: 1.2; 1999: 1.0; 2000: 0.8; 2001: 0.7; 2002: 0.6; 2003: 0.5
    - Autos: 1997: 0.2; 1998: 0.1; 1999: 0.1; 2000: 0.1; 2001: 0.1; 2002: 0.0; 2003: 0.0
    - Other (excises): all years: 0.0
  - VAT (BIR): 1997: 1.9; 1998: 1.8; 1999: 1.9; 2000: 1.6; 2001: 1.6; 2002: 1.7; 2003: 1.9
  - Other domestic taxes (BIR): 1997: 1.7; 1998: 1.6; 1999: 1.4; 2000: 1.3; 2001: 1.3; 2002: 1.1; 2003: 1.0
- Bureau of Customs: 1997: 3.9; 1998: 2.9; 1999: 2.9; 2000: 2.8; 2001: 2.6; 2002: 2.4; 2003: 2.5
  - Tariffs: 1997: 2.6; 1998: 1.8; 1999: 1.4; 2000: 1.4; 2001: 1.1; 2002: 0.9; 2003: 1.0
  - Import VAT: 1997: 1.3; 1998: 1.0; 1999: 1.2; 2000: 1.3; 2001: 1.3; 2002: 1.2; 2003: 1.2
  - Excises (customs): 1997: 0.1; 1998: 0.1; 1999: 0.1; 2000: 0.1; 2001: 0.2; 2002: 0.2; 2003: 0.3
  - Other (customs): 1997: 0.0; 1998: 0.0; 1999: 0.2; 2000: 0.1; 2001: 0.1; 2002: 0.0; 2003: 0.0
- Other offices: 1997: 0.1; 1998: 0.1; 1999: 0.1; 2000: 0.1; 2001: 0.1; 2002: 0.1; 2003: 0.1
- Nontax revenue and grants: 1997: 2.5; 1998: 1.7; 1999: 1.6; 2000: 1.6; 2001: 2.0; 2002: 1.8; 2003: 2.1
- Expenditure and net lending: 1997: 19.4; 1998: 19.2; 1999: 19.8; 2000: 19.3; 2001: 19.6; 2002: 19.6; 2003: 19.2
- Deficit: 1997: 0.1; 1998: -1.9; 1999: -3.8; 2000: -4.0; 2001: -4.0; 2002: -5.3; 2003: -4.6
- Sources: Philippine authorities; and Fund staff estimates.
- Note: Authorities' presentation. Includes privatization receipts as revenue and excludes operations of the Central Bank–Board of Liquidators (CB-BOL).

### II. Excises — real-value erosion and revenue impact
- Key mechanism of revenue leakage:
  - Alcohol, tobacco, and petroleum excises are set in specific (per unit) terms, not indexed to inflation.
  - Specific rates used to reduce incentives for tax evasion via undervaluation.
- Real-value declines over 1997–2004:
  - Real value of tobacco and alcohol excise tax rates fell by about 44 percent.
  - Real value of petroleum excises fell by about 56 percent.
- Fiscal outcome:
  - Domestic revenue from these sources fell from 2.4 percent of GDP in 1997 to lower levels by 2003 (see Table 1: Excises (BIR) 1997: 2.6; 2003: 1.3).

*Source: Excerpt from IMF staff paper, "Philippines Revenue Trends, 1997–2003."*

### 1.3 percent of GDP in 2003 (Table 1).

### _wp0522 - 1.3 percent of GDP in 2003 (Table 1).

### Excise taxes: recent changes, revenue potential, and incidence
- Recent policy action:
  - In December 2004, President Arroyo signed into law increases in alcohol and tobacco excises expected to yield about 0.2 percent of GDP in annual revenue.
  - The excise law provides for increases of 6-8 percent every two years until 2011; excises are still not indexed.
- Petroleum excise possibilities and elasticity:
  - Each 20 percent increase in petroleum excise rates could raise an additional 0.1–0.15 percent of GDP.
  - Each 20 percent increase in gasoline excises would, for example, increase retail prices by only about 4 percent (assuming a current retail price of P 23/liter).
- Excise tax levels (Petos per liter, 2004; Bureau of Internal Revenue):
  - Leaded premium gasoline 5.35
  - Regular gasoline, naphta 4.80
  - Unleaded premium gasoline 4.35
  - Jet fuel 3.67
  - Diesel 1.63
  - LPG for motive power 1.63
  - Kerosene 0.60
- Cross-country context:
  - Gasoline excises in the Philippines are significantly below those in Thailand and Malaysia.
  - Petroleum products in the Philippines are exempt from the VAT, suggesting lighter overall taxation of these products.
- Distributional impacts:
  - Alcohol and tobacco products are consumed disproportionately by lower-income groups (Table 4 shows higher spending shares among poorer households).
  - Tax shifting to producers is possible, which could make alcohol and tobacco excises significantly more progressive than direct-consumer incidence implies.
  - Petroleum excises are generally progressive due to differentiated tax rates; kerosene excises are regressive.
  - If one assumes that a third of transport fares reflect gasoline/diesel costs, then the richest 1 percent of families spends six times as much on gasoline and diesel than the poorest 10 percent of families as a share of their total spending.
  - Studies accounting for general equilibrium effects still find total excises (alcohol, tobacco, and petroleum) to be moderately progressive.

### Value-added tax (VAT): revenue potential and distributional effects
- Revenue potential:
  - A 1 percentage point increase in the VAT rate in the Philippines could generate 0.2–0.3 percent of GDP in revenue, depending on behavioral responses and compliance.
- Current rate and international context:
  - The Philippines’ VAT rate is 10 percent.
  - China has a 17 percent VAT rate; Latin American countries have an average VAT rate of 15 percent.
  - Matthews and Lloyd-Williams (2000) estimate a revenue-maximizing VAT rate around 20 percent (based on OECD sample).
- Nonstandard exemptions and revenue opportunities:
  - Nonstandard exemptions include legal services, coal, natural gas, petroleum products, importation of vessels of more than 5,000 tons, and sales by certain cooperatives.
  - Repealing the exemption for petroleum products alone could raise roughly 0.2 percent of GDP in revenue.
- Distributional assessment:
  - Calculations indicate the VAT appears to be progressive, primarily due to agricultural exemptions (unprocessed agricultural goods and agricultural inputs).
  - Standard exemptions include medical services, educational services, monthly rent less than P8,000, sale of residential property valued at P1,000,000 or below, and sales by small businesses (annual gross receipts less than P550,000).
  - Caveats: (i) the effect of the exemption for small businesses is not fully taken into account and would likely make the VAT appear more progressive; (ii) calculations assume perfect compliance—weaknesses in tax administration could alter actual incidence.
- Relative incidence versus excise policy:
  - Repeal of the VAT exemption for petroleum products would likely be more progressive than increasing petroleum excises, especially if the exemption on kerosene is retained, because producers can claim input credits for VAT on intermediate use.

### Electricity rates: quasi-fiscal losses and revenue options
- NPC fiscal position and recent measures:
  - NPC losses are estimated to have reached about 1.5 percent of GDP in 2004.
  - A provisional tariff increase granted in September 2004 is expected to yield 0.7 percent of GDP, but NPC is projected to still have substantial deficits.
- Revenue potential from further rate increases:
  - Each 10 percent increase in end-user rates could increase NPC’s revenue by roughly ½ percent of GDP (rough estimate; relationship varies by region).
- Efficiency and investment considerations:
  - Efficiency arguments suggest electricity prices should reflect the social cost of production.
  - Much of NPC’s losses are argued to stem from costly supplier contracts signed in earlier years (considered sunk costs), implying some costs might be better covered by general taxes rather than electricity-specific charges.
  - Higher rates are needed to attract investment because electricity demand is expected to exceed currently-installed supply capacity beginning around 2008–2010.
- Distributional impacts:
  - Increasing electricity rates on households is progressive: share of consumption on electricity generally increases with total spending through the upper middle income groups (75–90 percentiles).
  - Incidence for commercial and industrial users is uncertain without sectoral consumption details.

### Tax incentives: rationalization and revenue gains
- Current system and problems:
  - The Philippines has a broad system of special tax incentives, with tax holidays as a cornerstone.
  - Such incentives distort economic activity, discriminate between types of businesses, complicate the corporate tax system, and increase opportunities for tax avoidance and corruption.
- Revenue potential from reform:
  - Phasing out the most distortionary incentives (such as tax holidays) could significantly boost revenue; some studies suggest gains could be as high as 1–2 percent of GDP (Manasan 2002).
- Design considerations:
  - Part of revenue gains could be used to lower the corporate income tax rate or increase provisions for accelerated depreciation to avoid making the corporate tax system too onerous.
  - Well-crafted reform could produce net revenue gains through efficiency improvements.
- Distributional ambiguity:
  - The distributive impact of rationalizing tax incentives is unclear; differential sectoral impacts are likely.
  - Some foreign companies may claim foreign tax credits for higher tax burdens, shifting the ultimate incidence to other countries’ treasuries in some cases.

### Other revenue measures and trade-offs
- Trade taxes:
  - Raising trade taxes would likely be no more equitable and less efficient than raising the VAT, and scope is limited by trade agreements.
- Personal income tax:
  - Increasing the top personal income tax rate (currently 32 percent) may have limited revenue effect due to low compliance.
  - For households with expenditure in excess of P600,000 (the top 1 percent), income tax payments constitute only 4.7 percent of their total spending despite statutory average taxation of over 20 percent.
  - Improving tax administration may be more effective than raising the top statutory rate.
- Risks of inaction:
  - Failure to raise revenue likely results in cuts in real spending, with significant cuts likely falling on capital spending and nonwage goods and services (school supplies, medicines), potentially harming growth and being more regressive than tax measures.
  - Another risk is debt monetization, leading to high inflation, adverse economic effects, and disproportionate burden on the poor.
- Mitigating distributional impacts:
  - Consider using part of revenue proceeds to strengthen social safety nets.
  - National Food Authority subsidization of low quality rice is targeted at poor households but shows some leakage.
  - Exploring conditional cash transfers (e.g., Progresa-style programs) could be useful.

### Key quantitative points and scenarios
- Baseline and recent figures:
  - 1.3 percent of GDP in 2003 (Table 1).
- Excises:
  - Alcohol and tobacco excise increases expected to yield about 0.2 percent of GDP.
  - Excise increases of 6-8 percent every two years until 2011 (per law).
  - Each 20 percent increase in petroleum excise rates could raise an additional 0.1–0.15 percent of GDP.
  - Example price effect: 20 percent gasoline excise rise → retail price up ~4 percent (assuming P 23/liter).
- VAT:
  - Current VAT rate: 10 percent.
  - A 1 percentage point VAT increase could generate 0.2–0.3 percent of GDP.
  - Repealing VAT exemption for petroleum products could raise roughly 0.2 percent of GDP.
- Electricity:
  - NPC losses estimated at about 1.5 percent of GDP in 2004.
  - September 2004 provisional tariff increase expected to yield 0.7 percent of GDP.
  - A 10 percent increase in end-user electricity rates could raise roughly ½ percent of GDP in NPC revenue.
- Tax incentives:
  - Potential revenue gain from phasing out distortionary incentives: 1–2 percent of GDP (Manasan 2002).
- Personal income tax:
  - Top statutory rate: 32 percent.
  - Top 1 percent households: income tax payments = 4.7 percent of total spending (Table 4 example); hypothetical average tax rate under assumptions = 22 percent.

### Policy recommendations and trade-offs emphasized
- Revenue package approach:
  - Given the magnitude of the fiscal problem, it is likely that virtually all main measures discussed (increasing excise, VAT, and electricity rates, and rationalizing tax incentives) will need to be adopted in some form; the precise balance depends on policy trade-offs.
- Equity and efficiency considerations:
  - Most proposed measures (excises, VAT increases, electricity rate adjustments, rationalizing incentives) would raise revenue relatively efficiently and, in many cases, be progressive—especially if part of proceeds strengthen social safety nets or avoid cuts in pro-poor spending.
- Implementation notes:
  - Carefully design excise and VAT reforms to account for incidence, producer pass-through, VAT credit mechanisms, and sectoral intermediate use.
  - Improve tax administration (particularly for top personal income tax) to complement statutory changes.
  - Consider targeted social spending (including possible conditional cash transfers) to offset adverse distributional effects and to enhance political feasibility.

*Source: _wp0522 - 1.3 percent of GDP in 2003 (Table 1).*

### REFERENCES

### REFERENCES

### Cited works

- Chalk, Nigel, 2001, “Tax Incentives in the Philippines: A Regional Perspective,” IMF Working Paper 01/182 (Washington: International Monetary Fund).

- Clements, Benedict, Hong-Sang Jung, and Sanjeev Gupta, 2003, “Real and Distributive Effects of Petroleum Price Liberalization: The Case of Indonesia,” IMF Working Paper 03/204 (Washington: International Monetary Fund).

- Devarajan, Shantayanan, and Shaikh Hossain, 1998, “The Combined Incidence of Taxes and Public Expenditures in the Philippines,” World Development, Vol. 26, pp. 963–77.

- Ebrill, Liam, Michael Keen, Jean-Paul Bodin, and Victoria Summers, 2001, The Modern VAT (Washington: International Monetary Fund).

- Manasan, Rosario, 2002, “Explaining the Decline in Tax Effort,” Philippine Institute for Development Studies Policy Note No. 2002–14 (Makati City, Philippines: Philippine Institute for Development Studies).

- Matthews, Kent, and Jean Lloyd-Williams, 2000, “Have VAT Rates Reached Their Limit? An Empirical Note,” Applied Economic Letters, Vol. 7, pp. 111–15.

- Rawlings, Laura, and Gloria Rubio, 2003, “Evaluating the Impact of CCT Programs: Lessons from Latin America.” Available via the Internet: http://www.worldbank.org/sp/safetynets/Conditional%20Cash%20Transfer.asp

- Romer, Christina, and David Romer, 1998, “Monetary Policy and the Well-Being of the Poor,” in Income Inequality: Issues and Policy Options (Kansas City: Federal Reserve Bank), pp. 159–201.

- U. S. Department of Agriculture, 2002, “Philippines Exporter Guide Annual, 2002,” Global Agriculture Information Network Report No. RP2053 (Manila: USDA).

- World Bank, 2001, Philippines: Filipino Report Card on Pro-Poor Services, Report No. 22181-PH (Washington: World Bank).

- Yoingco, Angel, and Milwida Guevara, 1993, “A Study on the Incidence of the Philippine Fiscal System: Summary and Recommendations,” APTIRC Bulletin, Vol. 11, pp. 40–4.

- Zee, Howell, Janet Stotsky, and Eduardo Ley, 2002, “Tax Incentives for Business Investment: A Primer for Policy Makers in Developing Countries,” World Development, Vol. 30, No. 9, pp. 1497–1516.

*Source: _wp0522 - REFERENCES*

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