VAT loopholes seen dampening tax effort

TAX holidays susceptible to abuse, particularly those involving valueadded tax ( VAT), are to blame for weak tax collection efforts in previous years, a government think tank said in a policy note.

“The Philippines’ low VAT effort of 4.3% recorded in 2015 was attributable to numerous VAT exemptions and zero- rated transactions. VATexempt transactions tend to break the VAT chain, which lead to higher costs and prices, and revenue losses to the government,” the National Tax Research Center (NTRC) said in its study, Proposed Reforms on ValueAdded Tax.

“Zero rating, on the other hand, is extremely complex as it provides strong incentives for fraud, creates excessive burden on tax administration, and effectively erodes the base,” it added.

Among Association of Southeast Asian Nations ( ASEAN) member states, the Philippines imposes the highest VAT rate of 12%, while Myanmar and Malaysia collect the lowest at 5% and 6%, respectively.

In terms of its VAT effort, or the VAT collected as percentage of gross domestic product (GDP), the Philippines’ 4.3% is beaten by Cambodia’s 4.8% and Laos’ 4.6%.

Currently, there are 59 lines of VAT exemption under the National Internal Revenue code.

This compares to Indonesia and Thailand’s 37 lines, and Vietnam’s 25 exemptions.

The NTRC noted that under special laws, “there are more than 80 sectors/entities/ individual groups that are accorded VAT exemption.”

The NTRC backed the Finance department’s comprehensive tax reform bill that features the withdrawal of some VAT incentives, as it would boost administration eff iciency.

“For a VAT regime to be effective it must have a broadened VAT base and minimized number of exemptions to the extent possible as exemptions tend to erode the VAT base and reduce revenue collection,” it said.

“It also creates problems in compliance and administration, particularly when a company produces both exempt and/or VATable items/ transactions. VAT exemptions create numerous efficiency and effectiveness problems,” the think tank added.

House Bill 5363, or the Tax Reform for Acceleration and Inclusion Act, aims to lower personal income tax rates while withdrawing the lines of VAT exemptions except for entitlements of senior citizens and persons with disabilities, and the cooperatives sector.

One of the most contentious measures in the tax reform program is the removal of the VAT exemptions for cooperatives, a move viewed as anti-poor. The NTRC argues, however, that its current exemption is prone to abuse as it gives rise to avoid tax by “vertical integration.”

“Exempt traders such as cooperatives, have an incentive to supply taxable items to themselves rather than purchasing them and incurring irrevocable VAT. This situation distorts the business structure, as all cooperatives have an incentive to only purchase inputs from other cooperatives.”

“It is noted that exempting cooperatives from the VAT does not protect its buyers because cooperatives will be selling their goods with higher prices to recover the input VAT that they paid when they bought their supplies from a VAT-registered entity,” it added.

Although the Finance department recognizes that the cooperatives sector caters to the poorest members of society, it proposed to include a mandatory audit system for cooperatives, to ensure transparency should legislation decide to keep the sector’s tax perks.

Apart from removing VAT exemptions, the tax reform bill also aims to raise petroleum and automobile excise tax, introduce a sugar-sweetened beverage tax, harmonize estate and donor taxes, as well as mandate tax administration measures.

The tax reform program is expected to fund the government’s P8.4trillion infrastructure program to propel the economy to growth of 7-8% annually starting next year.

In its current House- approved configuration, tax reform is projected to generate P133.8 billion in the first year of implementation, and a total of P1.163 trillion in additional revenue by 2022.

The government aims to have the bill approved before the year ends, for immediate implementation in 2018. —