Ted P. Torres
Philippine Star

The World Bank is urging the Philippine government to fully implement tax administration reforms to cope with the global financial crisis.

In its recently released quarterly report, the World Bank said there are indications the tax effort might fall again in the absence of tax policy and administration reforms.

“Even maintaining the tax effort in the first half of 2008, wherein tax effort improved to 14.6 percent of GDP, is going to be a challenge,” it said. “Tax revenues need to grow while reducing fiscal risks and maintaining fiscal stability.”

Likewise, the tax revenue loss for 2009 is likely to be even bigger given the scheduled reduction in the corporate income tax rate from 35 percent to 30 percent on Jan. 1, 2009 and the implementation of the PERA Law on top of Republic Act (RA) 9504. The estimated tax revenue loss for 2009 from the three tax measures is estimated at between 0.5 percent to 0.7 percent of GDP.

The World Bank said that to prevent further erosion in the gains attained so far in fiscal consolidation, new tax policies and more systematic and sustainable tax administration are urgently needed.

“Increasing the excise tax rates of tobacco products and rationalizing fiscal incentives are foremost recommended since both have very strong economic and social cases on top of their revenue impact,” the report added.

The World Bank said there is a great scope in improving the design and yield of tobacco excises.

Philippine tobacco excise tax rates and excise burden are among the lowest in the world and the structure of excises is complex. Consequently, tobacco excise tax revenues are both low and have been declining as a percentage of GDP over the past 10 years, the World Bank noted.

“If properly taxed, tobacco products can be a large source of revenues. Aside from the revenue benefits, health and social benefits from lower tobacco consumption are expected to be significant,” the report said.

The World Bank said the Philippines has two options in improving excise taxes on the so-called sin taxes.

A first option would involve shifting to a uniform and higher specific excise tax rate that is automatically linked to inflation thereafter. This option would guarantee that both excise incidence and burden will not fall over time. The government can expect to generate up to 1.3 percent of GDP in revenues under the best scenario or 10 percent of tax collection.

A second option, if automatic indexation is not supported or rates cannot be agreed ahead of time, is to exclude specific rates from the law, and refer these to a schedule of rates, which is to become part of the annual budget submission to Congress. Rates can then be increased over time without changing the law.

The scope for rationalizing fiscal incentives is equally large. Tax incentives substantially reduce effective tax rates on corporate income.

Phasing out tax holidays and instead offering a reduced corporate income tax rate or a five-percent tax on gross receipts—would broadly retain the current effective tax rates while enabling the government to tap into tax redundancies estimated at about one percent of GDP.

Finally, the World Bank said that there is an urgent need to improve taxpayer compliance.

“Two reform areas appear promising given their track record of success if properly implemented and their potential to increase collection in the short- term,” the global financial institution said.