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).
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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DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.
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In summary, tax reform is needed to
fund the ten-point socioeconomic agenda
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DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.
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DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.
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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.
Oil excise rates
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Excise rates
Pesos per liter 2017 H1 2017 H2 2018 2019 2020
Diesel and
essentials 0.00 3.00 5.00 6.00 6.24
Gas and
nonessentials 4.35 7.00 9.00 10.00 10.40
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
Annual indexation of 4% starting 2020, except if Dubai crude exceeds $100/barrel
Auto excise rates
Net manufacturing/
importation price in
pesos
Current (in pesos)
Proposed
Up to 600,000
2%
4%
Over 600,000 to 1.1
Million
excess of 600,000
12,000 + 20% in
excess of 600,000
24,000 + 40% in
Over 1.1 M to 2.1 M
112,000 + 40% in
excess of 1.1 M
224,000 + 100% in
excess of 1.1 M
Over 2.1 M
512,000 + 60% in
excess of 2.1 M
1,224,000 + 200%
in excess of 2.1 M
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High end revenue impact in 2018
(PHP billion and percent of GDP)
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.
Subject the change based on updated data
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
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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.
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.
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To use the tax system to protect the poor and low
income earners results into massive leakages.
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.
Decile/ percentileDescription 2018 projected monthly household total income* Personal income tax Value-added tax Petrol and transportation Automobile** Net tax due Inflationary effect*** Change in take home pay Transfer (full year) Change in take home pay after 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)
* 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.
Combined effect Package 1 change in annual take home pay (in pesos)
Source: DOF staff estimates using 2015 Family Income and Expenditure Survey & January 2016 Labor Force Survey
Notes:
Each household has about two income earners
Combined tax-transfer effect
*
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.
Targeted transfers will be crucial in protecting the poor from shocks and can help improve the progressivity of the tax reform.
After the tax-transfer reform,
the poor benefits the most.
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DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.
4.1% 2.2% 1.7% 1.6% 1.7% 1.0% 1.5% 2.2% 2.6% 2.0% 0.3% -3.5% -5.7%-4.8% -7% -5% -3% -1% 1% 3% 5%
% increase in household income
*based on FIES 2015 data
Price effect of excise on inflation
2017 H2 to 2018
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Commodity of CPI Share (%) CPI 2015 Share of petroleum products as input (%) 1
Net impact of excise to prices (%)2,3
Inflation rate (%)4,5
Diesel Gasoline LPG Kerosene
Food
159
10
1.9
1.2
1
1 4
1 6
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.
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. 3. Below is the increase in the price of the petro products as a result of an increase in excise tax using the prevailing
petro prices in Metro Manila as of Dec. 13
4. Weighted net impact of the increase in excise tax on each commodity computed based on weights below using HECS 2011 5. Overall inflation computed from the weighted average of commodity inflation based on the share of CPI
Diesel 18.6% Gasoline 11.2% LPG 10.5% Kerosene 13.3% Diesel 64.5% Gas 29.4% LPG 4.7% Kerosene 1.3%
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A comparison
RVAT 2005 and oil price shock 2011:
We survived and became much stronger.
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.
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
Cars increase every year
despite oil price fluctuations
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.
0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2 0 10 20 30 40 50 60 70 M ill io ns PH P