IMF sees room for Philippines to introduce additional taxes

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The International Monetary Fund (IMF) said the Philippines has room to introduce higher taxes amid expectations of fiscal consolidation continuing at a slower pace over the medium term.

IMF mission chief Elif Arbatli Saxegaard said while the Philippines could raise revenues by improving tax collection efficiency, the government could also propose new tax measures.

'We do believe that there is significant scope to raise revenues through tax administration measures,' she said. 'But we also think that there is room to raise revenues through higher tax policy measures. The timing is important to implement those measures.'

Finance Secretary Ralph Recto earlier said it's possible that there will be no new taxes until 2028 as the government would try to focus on improving tax administration first.

'Revenue mobilization remains critical to sustain a credible medium-term fiscal consolidation strategy, rebuild buffers and create space for poverty reduction efforts,' Saxegaard said.

'Tax administration improvements should be supplemented with tax policy changes, notably to improve the efficiency of value-added tax and broaden the tax base.'

She also said revenue mobilization gives the government more flexibility to respond to shocks while at the same time reducing the country's fiscal deficit.

IMF resident representative Ragnar Gudmundsson said that during the pandemic, the government was able to respond to the impact of the shock because it had accumulated revenues.

'I think our primary concern is that if additional shocks surface in the future, the government (should be) in a position to respond quickly,' he said.

Latest data from the Bureau of the Treasury showed the government incurred a lower budget surplus of P42.7 billion in April, 36 percent lower than last year's P66.8 billion.

The month of April is typically an excess, although lower year-on-year this time, amid the tax season following the filing of annual income tax returns.

Meanwhile, Saxegaard said fiscal consolidation in the Philippines may continue at a slower pace than previously expected, driven by likely slower revenue mobilization and the shift to higher spending on infrastructure.

'The revised consolidation plan remains ambitious, implying a reduction in the fiscal deficit from 6.2 percent of gross domestic product in 2023 to 3.7 percent of GDP in 2028,' she said.

However, the consolidation plan will be critical to ensure that social protection programs, universal health care coverage and higher education outlays are appropriately enhanced.

Saxegaard also said the government could improve the implementation of the value-added tax, which does not necessarily require increasing the tax rate.

'There's a full spectrum of policies that the government can choose. But in the VAT, some measures could be to reduce some of the exemptions and also improve the tax refund system, which can increase compliance,' she said.

Gudmundsson also noted there is untapped revenue potential in broadening the tax base.

'There's a large range of exemptions and incentives that have been provided to businesses. The idea is not that incentives should be done away with, but maybe greater selectivity (is needed) in granting those incentives and exemptions, and making sure that they actually contribute to economic growth,' he said.

He added that the government should think carefully about the incentives and the exemptions that it provides to stimulate the economy while still tapping that revenue potential.