The World Bank is at it again and pushing for the Philippines to expand its value-added tax (VAT) base to increase government revenues. It isn’t clear if this is already a conditionality of a World Bank loan – or “prior action” in current parlance, ever since “conditionality” became a dirty word – or if the Bank is telegraphing a conditionality in a loan to come. In any case, the secretary of finance Ralph Recto apparently doesn’t need much convincing to tax Filipinos more and said: “We are looking for ways to expand VAT base and that includes VAT on digital services among others.”

The World Bank has pushed VAT as a primary means of revenue collection in developing countries for decades. The Bank sees this as a convenient revenue source because it is difficult to avoid (it has to be paid for by everyone who consumes the taxed good or service) and because sellers in effect become tax collectors (and bear much of the administrative costs and effort for compliance). Yet these are also the very reasons why it is regressive and a disproportionate burden on the poor and on small businesses.

The World Bank was behind the Philippines adopting VAT in 1986 as part of structural adjustment and stabilization programs with the Bank and the International Monetary Fund (IMF). This longstanding preference for VAT is evident in their policy advice to countries across Asia, Africa, and Latin America for decades.

The World Bank has a Global Tax Program (GTP) that talks about “mobilizing revenues fairly” and “promoting fairness [and] equity.” The lip service to improving equity is disingenuous. The World Bank is supposedly a development bank but consistently advocates for a regressive revenue generating measure that disproportionately burdens poor, low-income and middle-class households, while avoiding more progressive forms of taxation, such as direct taxes on income, wealth, and large corporations. Its misguided tax advice should be ignored in favor of setting up a more equitable tax system where those benefiting the most from the economy and with greater means contribute their fair share.

Especially in the context of the Philippines with such wide gaps in income and wealth, the design of the tax system should be rigorously guided by equity considerations and not just by revenue collection. Like the Philippine government, the World Bank is mainly focused on fiscal consolidation meaning revenue generation even through regressive means and austerity for social services.

Broadening VAT hurts poorest taxpayers

“Expanding the tax base” is a term used to hide all sorts of development sins. If this means lifting VAT exemptions on imported food, schools, health care and other essential items then such so-called broadening will boost revenue collection from disproportionately hurting poor, low-income and even middle-class households.

VAT is regressive because it is a consumption tax that is indifferent to the income or wealth of the consumer, which means that it takes a larger share of income from the poor compared to the rich. The government’s reliance on VAT has more than doubled from being 7.9% of total revenues collected by the Bureau of Internal Revenue (BIR) in 1986 to 18.9% in 2023, also increasing from the equivalent of 0.5% of the gross domestic product (GDP) to 2% of GDP over that same period.

The World Bank talks about reducing exemptions yet exemptions are there precisely to mitigate the effects of VAT on the poor. Removing them will increase revenues at the unacceptable cost of exacerbating poverty, increased hardship and worsening inequality.

Mitigating VAT

From the perspective of the tens of millions of poor and vulnerable Filipinos, VAT-exempt items that should remain exempted are imports of food and agricultural products, educational services, health care, specific goods for seniors and persons with disabilities (PWDs), and reading materials. If anything, the government should even consider higher tax rates on luxury goods like luxury cars, jewelry, designer goods and other high-end products to introduce even just a little progressivity into the inherently regressive VAT system.

Meanwhile, including erstwhile zero-rated VAT items will not really affect domestic prices for consumers.[1] These are basically meant to encourage exports by making local businesses more competitive with lower international prices for their goods or services. While local consumers could theoretically benefit indirectly if domestic firms sell the same goods and services domestically, the steady deindustrialization of the country means that the number of Filipino manufacturing firms has diminished greatly.

Fixing the unfixable

Revenue collection should not be made to depend on expanding the VAT base especially if this means removing VAT exemptions on essential products consumed by poor and low-income consumers.

There’s also something wrong with increasing revenue collection from poor and low-income families to compensate for tax cuts on wealthy families and large corporations. This is, in effect, taking from the pockets of the poor to give to the rich. The World Bank supports this.

The World Bank had a hand in the regressive Tax Reform for Acceleration and Inclusion (TRAIN) Law which raised consumption taxes, disproportionately burdening poor and low-income families, while cutting income, estate and donor taxes on higher-income families.

The World Bank’s Improving Fiscal Management operation with the Philippines noted: “The first policy area under this [2019] development policy operation (strengthening tax policy) and the two prior actions under this pillar (increase the excise tax on petroleum products and expand the VAT tax base by repealing special laws with non-essential VAT exemptions) supported two priorities under TRAIN – adjust excise taxes on tobacco, automobiles, oil, and mineral products, and broaden the VAT tax base by limiting exemptions.”

It also had a hand in the regressive Corporate Recovery and Tax Incentives for Enterprise (CREATE) Law which cut corporate income taxes. CREATE was explicitly among the “prior actions” of the pandemic-era loan Philippines Promoting Competitiveness and Enhancing Resilience to Natural Disasters Sub-Program 3. The wealthiest can and must contribute much more than they already do – but the World Bank’s preferred tax measures do the opposite.

Tax reforms should align with broader developmental goals like reducing inequality, strengthening public services, and promoting inclusive growth rather than narrowly focusing on revenue maximization. It goes without saying that the government should object to World Bank conditionalities as a matter of principle. It would be much better to improve the tax system’s progressivity with higher personal income taxes on the country’s richest families, higher corporate income taxes on large corporations domestic and foreign, and a bold wealth tax on just the country’s 3,000 billionaires. ###

[1] In zero-rated VAT items, sellers apply a 0% VAT rate on the product while also being able to claim refunds or credits for the VAT paid on inputs. This is in contrast to VAT-exempt products where no VAT is charged but sellers cannot claim refunds or credits for the VAT paid on inputs