DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.

Tax Reform for

Acceleration and Inclusion
Revised package 1
As of January 30, 2017 3:02 PM
(Full presentation)

DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.

Vision for the Philippines

By 2022 (6 years from now)
o Poverty rate reduced from 21.6 to 14% (or some 6 million
Filipinos uplifted from poverty).
o Law abiding country.
o Peace within the country and with our neighbors.
o Achieve high-middle income status, where per capita gross
national income (GNI) increases from USD 3,500 to at least
China are today).
By 2040 (24 years or one generation from now)
o Extreme poverty eradicated.
o Inclusive economic and political institutions where everyone
has equal opportunities.
o Achieve high income status, where per capita GNI increases
(where Malaysia and South Korea are today).

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How to achieve the vision

Over the long-term, all these investments require additional funds of around 1
trillion pesos per year in 2016 prices on top of the current 1.7 trillion pesos.
Over the medium term, the government will need to raise some 366 billion per
year between 2016 and 2022 (or 2.2 trillion pesos in total).

Source: Department of Budget and Management

This can be sustainably achieved through tax reform, which is integral to the
larger goals of the administration and crucial for achieving the vision of a
prosperous country.
In addition, complementary economic reforms are crucial: secure property
rights, enhance competition, improve food security, and simplify regulations.
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In summary, tax reform is needed to

fund the ten-point socioeconomic agenda

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Expanding the VAT base by

limiting exemptions
The following exemptions will be removed, unless sold by firms
whose gross sales fall below the VAT threshold:
o Exemptions found in special laws, except senior citizens and PWDs
o Cooperatives, except those selling raw agriculture produce.
o Low cost and socialized housing.
o Lease of residential units.
o Power transmission (replace the franchise tax with VAT).
o Domestic shipping importation.
o Boy scouts and girl scouts.
Limit the VAT zero-rating to direct exporters who actually export
goods out of the country. This will be implemented together with the
VAT refund starting in 2018. Remove the following zero-ratings:
o Indirect exporters and agents.
o Move renewable energy from zero-rated to exempt.
Low-income and vulnerable households will be protected through a higher
VAT threshold of 3 million pesos (i.e., business with gross sales below 3
million pesos, such as sari-sari stores, will be exempt from VAT) and targeted
transfers to poor and vulnerable households.

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 Oil excise rates
Excise rates
Pesos per liter 2017 H1 2017 H2 2018 2019 2020
Diesel and 0.00 3.00 5.00 6.00 6.24
essentials
Gas and 4.35 7.00 9.00 10.00 10.40
nonessentials
Annual indexation of 4% starting 2020, except if Dubai crude exceeds $100/barrel

Pump price (USD 53.72 per barrel)

Pesos per liter 2017 H1 2017 H2 2018 2019 2020
Diesel 32 35 37 38 38.24

Gas 46 53 55 56 56.40

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 Auto excise rates
Net manufacturing/
importation price in Current (in pesos) Proposed
pesos
Up to 600,000
2% 4%
Over 600,000 to 1.1
12,000 + 20% in 24,000 + 40% in
Million
excess of 600,000 excess of 600,000
Over 1.1 M to 2.1 M 112,000 + 40% in 224,000 + 100% in
excess of 1.1 M excess of 1.1 M
Over 2.1 M 512,000 + 60% in 1,224,000 + 200%
excess of 2.1 M in excess of 2.1 M

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High end revenue impact in 2018

(PHP billion and percent of GDP)
Tax package Loss Gain Net
Package 1: PIT and consumption -139.6 302.1 162.5
Lower personal income tax rate -137.9
Estate and donor tax -1.7
VAT base expansion 92.5
Automobile excise 31.4
Excise tax on petroleum 120.9
Complementary revenues 57.4
Tax package Loss Gain Net
Package 1: PIT and consumption -0.8 1.7 0.9
Lower personal income tax rate -0.8
Estate and donor tax 0.0
VAT base expansion 0.5
Automobile excise 0.2
Excise tax on petroleum 0.7
Complementary revenues 0.3
Subject the change based on updated data
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Gains from the lower PIT regime are more than enough
to offset additional expenses from higher oil prices, car
loan payments, and inflation.

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Protecting the poor and

low income Filipinos: VAT
VAT threshold for marginal establishment can be
increased from 1.9 to around 3 million pesos, thereby
exempting their goods from VAT.
o Cooperatives below the threshold will still be exempt
o Raw agricultural products will continue to be VAT exempt.
Higher oil excise: targeted transfers, pantawid pasada,
and jeep modernization.

To use the tax system to protect the poor and low

income earners results into massive leakages.

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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

Value- Change in Transfer
Decile/ monthly Personal Petrol and Net tax Inflationary take home
Description added Automobile** take home (full
percentile household income tax transportation due effect*** pay after
tax pay year)
total income* transfer
D1 Subsistence poor 5,233 2 (374) (160) (532) (522) (1,054) 3,600 2,546
D2 Subsistence poor 8,362 86 (438) (251) (603) (797) (1,400) 3,600 2,200
D3 Poor 10,741 400 (502) (339) (441) (950) (1,391) 3,600 2,209
D4 Near poor 13,076 1,051 (601) (427) 23 (1,093) (1,070) 3,600 2,530
D5 Near poor 15,826 2,281 (766) (557) 958 (1,263) (305) 3,600 3,295
D6 Informal worker 19,375 3,924 (1,025) (695) 2,204 (1,434) 771 1,500 2,271
D7 Minimum wage worker 24,502 7,364 (1,981) (904) 4,479 (1,667) 2,811 1,500 4,311
D8 Above minimum wage 32,482 14,010 (3,930) (1,183) 8,898 (1,988) 6,910 1,500 8,410
D9 Professional 47,424 26,774 (6,090) (1,673) (1,701) 17,310 (2,458) 14,852 14,852
D10 Middle class 112,781 56,187 (12,011) (4,316) (9,029) 30,831 (4,316) 26,515 26,515
P100 Executive 287,685 75,555 (23,288) (9,150) (27,710) 15,406 (6,382) 9,024 9,024
T1000 CEO 626,703 (34,637) (30,821) (10,674) (177,841) (253,973) (8,022) (261,995) (261,995)
Top taxpayer A 1,376,147 (325,459) (67,679) (23,438) (517,932) (934,507) (14,720) (949,227) (949,227)
Top taxpayer B 2,752,294 (862,156) (135,358) (46,876) (517,932) (1,562,321) (22,080) (1,584,401) (1,584,401)
Source: DOF staff estimates using 2015 Family Income and Expenditure Survey
& January 2016 Labor Force Survey
Notes:
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
***The inflationary effect was computed as a function of income, MPC, and estimates on the price effect of the increased oil excise on food.

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After the tax-transfer reform,

the poor benefits the most.
% increase in household income
5% 4.1%
3% 2.2% 1.7% 1.6% 1.7% 2.2% 2.6% 2.0%
1.0% 1.5%
1% 0.3%
-1%
-3%
-5% -3.5%
-4.8%
-7% -5.7%

*based on FIES 2015 data

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Price effect of excise on inflation

2017 H2 to 2018
Share of Net impact of excise to prices
Share petroleum (%)2,3
CPI Inflation
Commodity of CPI products
2015 rate (%)4,5
(%) as input
(%) 1 Diesel Gasoline LPG Kerosene

Food 159 10 1.9 1.2 1 14 16

Transportation 6 129 30 5.7 3.5 4 2 8
Electricity 131 1.3 0.8 0.8 0 1
Others 51 131 6 1.2 0.7 0.7 0.9 0
Total 100 141 1.5
Notes:
1. Transportation share is the daily average of jeepney and bus operation in Metro Manila based on the National Tax Research Center computation. Electricity
share is based on the Department of Energy power statistics. Diesel 18.6%
Gasoline 11.2%
2. The net impact of the excise is obtained by multiplying the share of oil as input and the price increase as a result of the excise. LPG 10.5%
3. Below is the increase in the price of the petro products as a result of an increase in excise tax using the prevailing Kerosene 13.3%

petro prices in Metro Manila as of Dec. 13 Diesel 64.5%

Gas 29.4%
4. Weighted net impact of the increase in excise tax on each commodity computed based on weights below using HECS 2011 LPG 4.7%
5. Overall inflation computed from the weighted average of commodity inflation based on the share of CPI Kerosene 1.3%

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A comparison
RVAT 2005 and oil price shock 2011:
We survived and became much stronger.
VAT reform Oil price shock
Indicator 2004 2005 2006 2010 2011 2012
Effective VAT rate 0 10 12 12 12 12
Dubai crude (US dollars) 34 49 61 78 106 109
GDP growth 6.7 4.8 5.2 7.6 3.7 6.7
Consumption 6.0 4.4 4.2 3.4 5.6 6.6
Overall Inflation 4.8 6.5 5.5 3.8 4.6 3.2
Food inflation 6.0 6.4 5.2 4.0 5.5 2.4
Transport inflation 11.5 16.8 10.7 3.7 6.0 2.3
Electricity inflation 3.8 7.5 5.9 5.1 5.2 4.6
Gasoline (in pesos) 20.1 26.5 30.0 35.5 48.1 48.6
Diesel (in pesos) 18.0 25.9 30.2 31.4 41.3 41.7

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Cars increase every year

despite oil price fluctuations
70 2
1.8
60
1.6
50 1.4
1.2
40
Millions
PHP

1
30
0.8

20 0.6
0.4
10
0.2
0 0

Unleaded pump price (LHS) Diesel pump price (LHS) New car registrations (RHS)
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