Why is it that we have a lower tax effort (tax revenues in proportion to gross domestic product) than most of our neighbors, and yet have higher tax rates than they do? Consider the following: In 2014, Philippine government revenues as a percent of GDP was 15.1 percent. The corresponding percentage was 19.9 for Malaysia, 18.5 for Singapore, 19.7 for Thailand, 16.5 for Cambodia, and 21.5 for Vietnam. And yet, among our neighbors, we have the highest rates of corporate income tax and value-added tax, and one of the highest for personal income tax.
Our corporate income tax rate of 30 percent well exceeds the Asia-wide average of 22.5 percent, with Indonesia and Malaysia having 25 percent, Vietnam 22 percent, Thailand and Cambodia 20 percent, and Singapore and Taiwan 17 percent. We also have the highest value-added tax or general sales tax, with our 12 percent VAT being higher than the 10 percent for Indonesia, Malaysia, Vietnam and Cambodia; 7 percent for Singapore and Thailand; and 5 percent for Taiwan. Our individual income tax has a top rate of 32 percent, against the Asia-wide average of only 28.4 percent. While ours is lower than Taiwan’s 40 percent and Thailand and Vietnam’s 35 percent, it is higher than Indonesia’s 30 percent, Malaysia’s 26 percent, and Singapore’s 20 percent.
So how come we have a lower tax effort when our taxes are actually higher? The anomaly suggests that there is too much leakage in our tax system. Apart from weaker tax administration, we simply have too many exemptions. And the more exemptions, the more opportunities for tax evasion. My friend, Albay Rep. Joey Salceda, once remarked that we Filipinos seem to have a “culture of exemptions.” It seems that everyone could argue why he or his uncle should be allowed to pay less than the usual amount of taxes due, or no taxes at all. The problem is, they actually get it, thanks to lawmakers who are all too sympathetic, and all too eager to win reelection votes. Hence, we have well over 100 laws and statutes granting significant exemptions or tax reductions to various types of enterprises or transactions, mostly as fiscal incentives.
Who are getting these tax concessions? Congressman Salceda, during the 13th Congress, used to have nine PowerPoint slides in small print to list them. The single biggest portion then amounted to P157 billion, arising from tax and duty exemptions (P152 billion) and income tax holidays (P5 billion) granted to firms in special economic zones. These were granted on the justification that we need the incentives to attract foreign
investors into the country. The second biggest part (P10.4 billion) came from tax subsidies granted to various government entities like the National Food Authority. Also benefiting are senior citizens, labor unions, co-ops, and imports of jewelry industry inputs, aviation fuel by our national flag carriers, fishing vessels, and many more.
Are all these tax exemptions warranted and useful? Do they yield more benefits relative to what we forego in tax revenues and the benefits these could in turn give us? The Department of Finance has long been asking this question, and studies have been done to address it. Bills have been filed in Congress seeking to rationalize fiscal incentives and remove or reduce unnecessary ones, so far unsuccessfully. Now that the Duterte administration wants to lower income taxes to ease the burden on our lower and middle classes and attract more job-creating investments, it proposes to compensate for the revenues to be lost by plugging the leakages—and eliminating or reducing the many existing exemptions is a good way to go. Alas, most of our lawmakers only want the tax-cutting part, but will not touch the compensating measures, even as their cost to Filipinos are outweighed by the proposed tax reductions. But as the old adage says, we cannot have our cake and eat it, too.
Perhaps our culture of exemptions must give way to a stronger culture of upholding the common good—as passing the government’s proposed tax reforms demands of all of us, lawmakers and ordinary citizens alike.
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