THE Asian Development Bank (ADB) announced last Tuesday it approved a $400-million loan to help the Philippines achieve its medium-term fiscal strategy by boosting tax compliance and reducing tax avoidance, among others.
A statement issued by the ADB read that the loan is also intended to finance the country’s “post-pandemic economic recovery through a stronger focus on revenue mobilization, including modernizing tax administration systems, and processes.”
According to the multilateral institution, the “Domestic Resource Mobilization (DRM)” program-subprogram 1 is its first “policy-based loan” dedicated to reform the process through which the Philippines raise and spend its own funds to provide for the people.
“It addresses the country’s need to tackle discrepancies in tax policy frameworks to boost tax compliance, reduce tax avoidance, and raise more revenues from activities and products that have a major impact on the environment or contribute to climate change,” read the statement from the ADB.
ADB Senior Economist for Public Finance Aekapol Chongvilaivan was quoted in the statement as saying that the program recognizes that DRM reforms “necessitate not only raising revenue, but also designing a revenue system that fosters inclusiveness, encourages good governance, promotes investments and job creation, reduces inequality, and tackles climate change.”
Moreover, Chongvilaivan said ADB backs the government’s DRM program, which he said will result in a “higher tax-to-GDP ratio and ensure sustainable financing for the country as it sets out to achieve its goals” under the Philippine Development Plan (PDP) 2023-2028.
The Philippines wants to raise its tax-to-GDP ratio from 15 percent of gross domestic product (GDP) in 2020 to at least 15.9 percent of GDP by 2026. As the PDP 2023-2028 stated, doing so would slowly narrow the gap with the 17.6-percent average ratio of its Asia and Pacific neighbors.
Among the reforms pursued by the government in line with the DRM program is the digital transformation initiative of the Bureau of Internal Revenue (BIR).
This project, the ADB noted, aims to “modernize” key taxpayers’ services, including online tax registration, return filing, and payment.
This can potentially increase the ratio of actual tax revenues to tax potential, from 75 percent in 2020 to at least 85 pecent by 2026, the ADB added.
According to the lender, the DRM program helped the government implement various international tax standards under the “Inclusive Framework on Base Erosion and Profit Shifting” and the “Global Forum on Transparency and Exchange of Information” of Organisation for Economic Co-operation and Development (OECD) and the G20. By adopting these standards, the Philippines was able to address international tax avoidance.
It was only this month that Manila joined the OECD/G20 framework. By doing so, the Philippines commits to global tax standards and progressive tax reforms that will make the country “more conducive” to private sector development and foreign investment.
The ADB said it has been engaging with the Philippines on DRM through policy dialogue, consulting services, and knowledge work. It is supporting the government’s “real property valuation and assessment reform” initiative to strengthen the state’s property valuation functions and modernize real property taxation, which accounts for 30 percent of local government units’ own-source revenues.
The ADB said it also provided technical advice in the formulation of the packages in the country’s comprehensive tax reform program from 2016 onwards.