DOMESTIC RESOURCE MOBILIZATION CASE STUDY: THE PHILIPPINES
DOMESTIC RESOURCEMOBILIZATION CASE STUDY:THE PHILIPPINESLeadership in Public Financial Management II(LPFM II)June 2018This publication was produced by Nathan Associates Inc. for review by the United States Agencyfor International Development. (CONTRACT NO. AID-OAA-I-12-00039, TASK ORDER NO.AID-OAA-TO-14-00040)i
DOMESTIC RESOURCEMOBILIZATION CASE STUDY:THE PHILIPPINESLeadership in Public Financial Management II(LPFM II)Program title:Leadership in Public Financial Management IISponsoring USAID office:USAID/E3COR:Theresa StattelContract number:AID-OAA-TO-14-00040Contractor:Nathan AssociatesDate of publication:December 12, 2017Author:Bruce Bolnick, Pooja SinghDISCLAIMERThis document is made possible by the support of the American people through the United StatesAgency for International Development (USAID). Its contents are the sole responsibility of the author(s)and do not necessarily reflect the views of USAID or the United States government.
ive SummaryivDRM Case Study: The Philippines1Introduction: Economic Conditions1Revenue Trends: A Lost Decade and Partial Recovery1The DRM Reforms4Constraints to Higher Revenue Yields Despite Reforms9Contribution of Donor Support11Lessons Learned12Appendix A – Timeline of Major Tax Policy Reforms14Appendix B – Timeline of Major Tax Administration Reforms16Appendix C – Philippines Data18Selected Bibliography24
AcknowledgmentsBruce Bolnick and Pooja Singh wrote this case study for Nathan Associates Inc. based on deskresearch and interviews (by phone or Skype) with several experts on domestic revenuemobilization in the Philippines. The authors wish to express special thanks to the followingexperts who agreed to provide in-depth information through direct interviews: Kim JacintoHenares (former Commissioner, Bureau of Internal Revenue), Filomeno Sta. Ana, III(Chairperson, Action for Economic Reforms), Margaret Cotton (Revenue Advisor, InternationalMonetary Fund), Princess Shimmadar Manaois-Battung (Project Management Specialist,USAID/Philippines), Roberto Toso (Chief of Party, USAID Facilitating Public Investment Project),Jem Armovit (Senior Economist and Tax Policy Expert, USAID Facilitating Public InvestmentProject), Arnelyn Abdon (M&E Specialist, USAID Facilitating Public Investment Project), andFrancis Xavier Vicente (independent tax specialist).The authors also thank Manaois-Battung and Jem Armovit for introducing us to keyinterviewees, and thank Ramon Clarete for providing the team with local support in Manila fordata collection from the National Tax Research Center. They also thank the following forhelpful comments on a draft version of this study: Margaret Cotton, Roberto Toso, JemArmovit, Arnelyn Abdon, Admir Zajmovic, Ramon Clarete, and economists at USAID, especiallyDr. David Dod in Washington and Princess Shimmadar Manaois-Battung in Manila. Thanks alsoto Janine Mans, who helped to organize and supervise the work; Timothy Fila, who helped withcontract matters, both under the USAID Leadership in Public Finance Management (LPFM) IIproject; and to David Dod at USAID for his overall supervision and guidance on the assignment.The authors also express our gratitude to Dr. Mark Gallagher for essential contributions incollaborating on the design for the DRM case studies. All these contributions are greatlyappreciated, though the authors bear sole responsibility for the contents.
STATCPTIMTATRAINVATWTOAssociation of Southeast Asian NationsBureau of Internal RevenueBureau of CustomsCorporate Income TaxCustoms Modernization and Tariff ActComprehensive Tax Reform ProgramDomestic Resource MobilizationDepartment of FinanceElectronic to MobileElectronic Filing and Payment SystemElectronic Tax Information SystemExpanded Value Added TaxFacilitating Public InvestmentGross Domestic ProductInternational Monetary FundIntegrated Tax SystemLeadership in Public Financial ManagementLarge Taxpayer ServiceMillennium Challenge CorporationNational Authority for Revenue AdministrationNational Tax Research CenterPhilippine PesoPersonal Income TaxRevenue Administration and Reform ProjectRun After Tax EvadersRun After The SmugglersSin Tax ActTax Computerization ProjectTax Incentives Management and Transparency ActTax Reform for Acceleration and Inclusion ActValue Added TaxWorld Trade Organizationii
PrefacePrograms to strengthen domestic resource mobilization (DRM) 1 in developing countries areimportant not only to curtail reliance on donor funding, but more importantly to provide thegovernments with a dependable, sustainable, and steadily expanding source of domestic revenuefor investing in development and delivering essential public goods and services. Effective DRMprograms can also be a foundation for building good governance and enhancing accountability inpublic finance management. In addition, DRM programs can deliver major economic benefits bycreating tax systems that foster more efficient private sector development.The 2015 Addis Ababa Action Agenda on Financing for Development placed DRM front andcenter as a goal in its own right—and as the most viable mechanism for achieving the UnitedNations Sustainable Development Goals. To follow up on the Addis Agenda, the Addis TaxInitiative was established, underpinning the international community’s commitment to helpdeveloping countries strengthen their DRM efforts.Developing countries face enormous challenges as they seek to improve revenue performance.These challenges include weak administrative and enforcement capacity, an inherently narrowtax base, a prevalence of informal sector activities, a culture of low tax compliance, and deepseated problems with corrupt practices and politically driven tax favors.Notwithstanding these challenges, many developing countries—including the Philippines—haveshown progress in strengthening DRM. This case study tells the story of the Philippines’ effortsto enhance revenue performance and provide better services for the country’s taxpayers.DRM, in its broadest sense, encompasses not only efforts to enhance government revenues but also thegovernment’s ability to effectively budget and efficiently spend financial resources to provide public goods andservices. This study, however, focuses solely on the revenue side of budget performance.1iii
Executive 520062007200820092010201120122013201420152016The Philippine economy faced two severe international financial crises over the past twodecades (1996–2016). But, in each case, economic growth quickly resumed and inflationstabilized, thanks to prudentmacroeconomic policies. TaxFigure 1. Trends in Domestic Revenue,1995 2016 (% GDP)revenues, however, slipped from18%15.4 percent of GDP in 1997 to just11.8 percent in 2004 (Figure 1).16%Policy measures to plug this gapboosted the tax ratio to 13.514%percent of GDP in 2007, but taxcuts to cushion effects of the global12%financial crisis knocked the ratioback to 12.4 percent in 2010. Sincethen, the tax ratio has rebounded by 10%1.6 percentage points through acombination of policy reforms andTotalTaxmeasures to strengthen tax administration and facilitate compliance. Even so, the tax ratio in2016 remained well below the 1997 peak.To fund an increase in priority spending on infrastructure and social services, the Dutertegovernment is promoting a Comprehensive Tax Reform Program. Phase I entails the TaxReform for Acceleration and Inclusion (TRAIN) bill, which has passed both chambers and iscurrently going through a bicameral reconciliation process. The TRAIN legislation representsthe first major overhaul of the tax system since 1997. That earlier reform program, however,had several key deficiencies, including lack of adjustments for inflation. It also suffered fromrevenue reversals caused by a proliferation of tax incentives and exemptions.Before TRAIN, the most important policy reform over the past decade has been the 2012 SinTax Act (STA), which corrected critical problems with the excise tax on tobacco and alcoholproducts. The STA narrowly survived opposition from vested interests because it was framednot just as a fiscal measure, but also as a public health measure. On the administrative side, themost important reform since 1997 was the creation of the Large Taxpayers Service at theBureau of Internal Revenue in 2000, focusing resources on the most important segment oftaxpayers. Other major administrative reforms have been in the areas of computerization,simplification of compliance, enforcement, and public awareness. These improvements in taxadministration have been an important source of the revenue gains achieved since 2010. Despitethe reform efforts, revenue gains have been weakened by continuing expansion of special taxbreaks, bank secrecy laws that hinder tax audits, lack of inflation adjustments to the excise onpetroleum products, human and financial resource constraints in the revenue bureaus, andongoing problems with corruption.iv
The case of the Philippines offers several valuable lessons for DRM programs more broadly.First, as illustrated by the 2012 STA, success against vested interests requires coordinationacross government departments combined with broad, active grassroots support and innovativepackaging, such as earmarking a portion of the revenues for social programs. Second, to achieveany significant results in a democratic institutional environment, reforms must be home grownand viewed as such; even so, international partners have a vital role to play in supporting thegovernment with technical and financial assistance. Third, the Philippine experience underscoresthe need to curb revenue leakages caused by politically driven loopholes and exemptions thatcan undermine otherwise sound, effective reforms. Fourth, constraints on access to financialinformation, exemplified by stringent bank secrecy laws in the Philippines, and seriously hamperefforts to strengthen tax investigations and audits. Fifth, political will for reform must besustained over several years for major reforms to gain traction. Finally, tax reforms work bestwhen the overarching governance environment achieves a suitable balance between operationalautonomy and accountability in tax administration.v
DRM Case Study: The PhilippinesIntroduction: Economic ConditionsOver the past two decades (1996–2016), the Philippines’ economy has grown at an average rateof 4.8 percent per year, despite facing two major financial crises. The Asian financial crisis in1997-98 and the global financial crisis of 2008-09 produced short-term contractions, but in bothcases, economic growth quickly resumed. Over the same period, inflation spiked several times,reaching 9.2 percent in 1998 and 8.3 percent in 2008. These episodes of instability were alsoshort-lived, so that inflation averaged 4.9 percent between 1997 and 2007 and 3.8 percentbetween 2007 and 2016. For the past two years, inflation has been held below 2 percent.This resilient economic performance was accompanied by structural changes that have a majorbearing on domestic resource mobilization (DRM). The service sector, parts of which can bedifficult to tax, accounted for about 50 percent of GDP on the eve of the Asian financial crisis,but grew to nearly 60 percent in 2016. In turn, the manufacturing sector declined slightly inrelative importance to just under 20 percent of GDP in 2016, from 22.3 percent in 1996. Equallyimportant, merchandise imports fell from 47 percent of GDP in 1997 to just 28 percent in 2016.Over this period, economic growth was supported by prudent macroeconomic policies markedby relatively low budget deficits. But political pressure has been growing for greater spending oninfrastructure and social services. President Rodrigo Duterte, who took office in mid-2016, hastargeted a large increase in these expenditures as part of his ten-point socioeconomic agenda.To ensure fiscal sustainability, this spending program will require a substantial improvement inthe revenue yield.In 2016 Philippine centralgovernment revenueamounted to 15.2 percentof GDP, of which 13.7percent derived fromtaxation. 2 Both ratios arelow by regional standards(Figure 1), and withrespect to government25Figure 1. Total & Tax Revenue of select ASEANCountries, 201420% of GDPRevenue Trends: ALost Decade andPartial Recovery151050TotalTaxStatutory contributions to the Social Security Fund are booked as off-budget revenue; these revenuesamounted to 2.4% of GDP in 2016.2
DRM CASE STUDIES – THE PHILIPPINESbudget targets and perceived development needs. 007200820092010201120122013201420152016To put this in perspective, the tax ratio peaked at 15.4 percent of GDP in 1997 (Figure 2). Thatsame year, the government passed the Comprehensive Tax Reform Program (CTRP), discussedbelow, aiming to establish a sound foundation for future revenue growth. But the Asian financialcrisis knocked the tax yieldFigure 2. Trends in Domestic Revenue,down to 14.1 percent of GDP1995 2016 (% GDP)in 1998, as “built-in stabilizers”18%in the tax code responded tothe recession. When the16%economy recovered, the taxratio continued to slide,14%bottoming out at 11.8 percentof GDP in 2004. This staggering12%drop in the revenue yield, fully3.6 percent of GDP, resulted10%from a combination of factors;these include a proliferation ofspecial-interest tax breaks,TotalTaxlower import duties in pursuitof trade liberalization, flaws in the design of the 1997 excise tax reform, and weak taxadministration.To plug the revenue hole, excise rates on alcohol and tobacco were adjusted in 2004, followedby an increase in the corporate income tax (CIT) rate from 32 percent to 35 percent in 2006.An increase in the value added tax (VAT) rate from 10 percent to 12 percent also took effect in2006, along with reforms to broaden VAT coverage. These measures, among others discussedbelow, boosted the tax ratio to 13.5 percent of GDP in 2007. But the global financial crisisbrought another sharp downturn in the economy, prompting the government to adopt tax cutsto cushion the impact of the crisis. As a result, the tax ratio fell to 12.2 percent of GDP in 2009,and 12.1 percent in 2010—closing out more than a decade of “lost years” for DRM.Since 2010 the ratio of tax revenue to GDP has rebounded by 1.6 percentage points (as of2016). The improvement has been due in part to the natural buoyancy of revenues as incomeshave increased—the flip side of built-in stabilizers. In addition, the government took steps toboost revenue by adopting the Sin Tax Reform Law of 2012 (despite strong resistance fromspecial interests) and pursuing measures to improve tax administration and facilitate taxcompliance. 4 Even so, revenue gains have been weakened by a stream of special-interest taxpreferences, leaving the tax ratio in 2016 well below the peak achieved in 1997.3 International comparison data comes from the IMF World Longitudinal database for the year 2014–the latestyear of available data in the database (http://data.imf.org/?sk 77413F1D-1525-450A-A23A-47AEED40FE78).Data for the Philippines in this database may differ from official statistics from government sources.A recent Philippines government posting cites World Bank assessments of the “tax gap” asshowing that tax administration improved by 40 percent between 2006 and 2016. See42
DRM CASE STUDIES – THE PHILIPPINESAs of 2016, the Bureau of Internal Revenue (BIR) accounted for 79 percent of total tax revenue,with the Bureau of Customs (BOC) collecting 20 percent and other offices 1 percent. The LargeTaxpayers Service (LTS) collected more than 60 percent of BIR revenue. By type of tax, VATwas the most important revenue source, generating more than 31 percent of the tax revenue(of which BOC collected nearly half in the form of VAT on imports). The CIT accounted for 27percent of the tax revenue, with personal income tax (PIT) generating 17 percent and excise tax11 percent.Over the “lost years” between 1997 and 2010, BIR collections plunged from 11.7 percent ofGDP to just 9.1 percent, while BOC revenue slumped from 3.5 percent of GDP to 2.9 percent.Excise revenues declined precipitously, while income tax and import duties also fell (Figure 3).Import duties now account for only 3 percent of tax revenue—down from more than 20percent in the early 1990s. That drop, however, is unsurprising given the decline in merchandiseimports relative to GDP (mentioned earlier) and liberalization of trade in compliance withbilateral and regional tradeFigure 3. Revenue Trends,agreements.by Type of Major Tax (% GDP), 1997 200820092010201120122013201420152016Since 2010, BIR collections4%have risen to 10.8 percent of3%GDP. BOC revenues,meanwhile, have slipped2%slightly further to 2.7 percentof GDP. Otherwise,1%collection performance has0%improved for all major taxes,relative to GDP. Even withthese improvements, taxCITPITExciseVATcollections are still falling farshort of the government’s stated targets. In turn, weak revenue performance continues toconstrain spending on infrastructure and social services, which are priorities for the country’soverarching development agenda. Given the need to improve revenue performance, the Dutertegovernment has been promoting a new Comprehensive Tax Reform Program (CTRP). Phase I isthe Tax Reform for Acceleration and Inclusion Act (TRAIN). As of end-November 2017, bothchambers of Congress had passed versions of the TRAIN legislation, and the bicameralreconciliation was underway. Some of the proposed reforms, however, have been watereddown during the legislative process.Philippines, Department of Finance, “BIR Can Collect Extra P433-B from Tax Policy,Administration Reforms,” News and Views, June 18, 2017; available orms/.3
DRM CASE STUDIES – THE PHILIPPINESThe DRM ReformsOver the past two decades, the government has pursued a series of tax policy measures andadministrative reforms to strengthen DRM. Figure 4 summarizes key elements and a timeline oftax and customs reforms. Policy reforms have been particularly challenging becausecongressional approval has been strongly influenced by resistance from vested interests. 5 Specialinterests have also driven a proliferation of tax exemptions and incentives that have eroded thepositive effects of other measures.Figure 4. Timeline of Major Tax and Customs Reforms in the Philippines(1985 2016)1991-95 TariffReform Programlaunched1998 Reform ofthe Internal1988 VATRevenue Codeimplementedat 10%1986 TaxReformProgram2005 Run After TaxPayer (RATE) programintroduced; BOCbegins development of2009 CIT rate reducede2m systemto 30%; eREG rolledout; Oplan Kandadoprogram launched1997Comprehensive TaxReform Program 2000 Establishmentof Large Taxpayer1994 E-VAT lawServices (LTS) andapproved, effective 1996; Excise TaxpayerTax ComputerizationServices; ITS RolloutProject at BIR to develop AccelerationIntegrated Tax System2015 eTIS pilotedat LTS; eBIR forms 2017 TRAIN Act passesboth houses; bicameralintroducedreconciliation inprocess. TradeNetplatform to be released.2012 Sin Tax ActAuthorized Economic(STA) enacted;Operator programBOC introducese2M programcreated for customs2010 Workbegins on eTIS toreplace ITS2006 VAT rateincreased to12%; CIT rateincreased to35%2016 CustomsModernization &Tariff Act enacted;TIMTA signed intolaw2014 Internal Revenue StampsIntegrated System on cigarettesimplementedReforms to Tax PolicyTransition from the colonial revenue system began in the 1950s, followed by major reforms inthe late 1980s to 1990s. The administration of Corazon Aquino initiated a tax reform programin 1986 to improve revenue yield, promote tax equity, reduce distortionary effects of taxationon
1997-98 and the global financial crisis of 2008-09 produced short-term contractions, but in both cases, economic growth quickly resumed. Over the same period, inflation spiked several times, reaching 9.2 percent in 1998 and 8.3 percent in 2008 .These episodes of instability were also
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Resource mobilization can be defined as a management process of identifying people who share the values of your organization and take steps to manage this relationship (IDRC, 2010). Resource mobilization is often wrongly considered as fundraising. In fact, fundraising is a component of the resourc
TRAINING MANUAL. Robust and Sustainable Resource Mobilization: . by Sarah Ford and the guide was developed by Meghan Armistead, who also piloted the first training. John Donahue was also directional from the inception of the . successful in resource mobilization, and to think
organizational management and development involves establishing and strengthening organizations for the resource mobilization process.it involves identifying the organization's vision,mission,and goals,and putting in place internal systems and processes that enable the resource mobilization efforts,such as: identifying the roles of board and
Both revenue and expenditure reforms should therefore be embedded in broader public financial management reforms. When this is done, domestic resource mobilization (DRM) rightly becomes a development tool for generat-ing revenues to support sustained and inclusive economic development.
Domestic Resource Mobilization: Fighting against Corruption and Illicit Finan
between tax reforms and domestic revenue mobilization. Findings on tax reforms indicated that more emphasis was put on indirect tax reform but direct tax heads was given negligible attention. Majority of tax payers do not get the sufficient tax education and this leads to non compliance on the part of tax payers. Domestic
