The World Bank is supporting the government’s proposal to raise the excise tax on petroleum products, noting that it is necessary to align the rates to international standards.
In a special segment of its Philippine Economic Update report released this week, the World Bank said the Philippines operates a specific excise tax regime for petroleum products, under which most are either exempt or taxed at very low rates.
“Since 1997 all excise taxes on petroleum products have either been fixed in nominal terms, reduced or eliminated,” the Washington-based multilateral lender noted.
The real value of excise tax rates that were fixed in nominal terms fell by 53 percent between 1997 and 2013, while the real value of rates that were reduced dropped 83 percent.
But now, Petroleum excise tax rates in the Philippines are low by international standards.
Premium unleaded gasoline is currently taxed at 9 percent of the pump price, while diesel is tax exempt.
By contrast, in most of the Organization for Economic Cooperation and Development countries, the excise tax on premium unleaded gasoline account for 25 to 40 percent of the pump price.
In 2014, the value-added tax rates on premium unleaded gasoline and diesel were equivalent to just 10 and 11 percent of the pump price, respectively, the WB said.
Leaving nominal excise rates unchanged has caused Philippine excise tax revenues on petroleum products to plummet since the late 1990s, it pointed out.
In particular, the World Bank stressed that in 1997 the petroleum excise tax revenue collected by the BIR was equivalent to 1.2 percent of gross domestic product (GDP) before declining to 0.8 percent by 2001, and to 0.2 percent by 2013.
To correct this trend, the report said increasing the excise tax rates on petroleum products would improve the efficiency and equity of petroleum taxes, boost tax revenue, and reduce distortions and negative externalities.
“If rates are not increased, real tax revenues are expected to continue to decline over time, reaching an estimated P25.2 billion or 0.18 percent of GDP in 2015,” the lender noted.
It suggested the most effective option would be to raise the excise tax rates to a target share of retail prices, then automatically index the tax rates to inflation as a way of maintaining a consistent tax-rate-to-retail-price ratio.
“While a one-time increase in excise rates coupled with indexation would be ideal, a second option would be to asymmetrically adjust excise taxes based on petroleum prices,” it said.
According to the report, policymakers can use a formula-based approach to automatically raise excise taxes when petroleum prices fall and keep excise taxes steady when petroleum prices rise.
“To soften the increase in the excise tax rate as petroleum prices fall, the formula could stipulate that only a portion (e.g., 50 percent) of the decline in petroleum prices be translated into higher excise taxes,” it said.
This type of adjustment mechanism can ensure a more gradual, less jarring transition to higher excise rates, it noted.
“For example, when pretax retail prices fall, excise rates could increase by half the amount so that consumers and the government benefit equally until the excise rate reaches its target share of the retail sales price,” the lender said.
The World Bank noted an equity analysis indicates that the optimal excise-tax-to-retail-price ratio in the Philippines would be 20 percent for gasoline and 10 percent for diesel, kerosene and liquefied petroleum gas.