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NTRC TRJ-1: Proposed Tax Reform on the Excise Tax on Petroleum Products, January-February 2017

For the period 1987 to the present, four (4) laws were enacted relative to excise taxation of petroleum products, viz.: (a) EO 195 - Revising the Excise Tax Rates of Certain Petroleum Products, effective June 17, 1987; (b) RA 6965 - Revising the Form of Taxation on Petroleum Products from Ad Valorem to Specific, effective September 19, 1990; (c) RA 8184 - Restructuring the Excise Tax on Petroleum Products, effective July 26, 1996; and (d) RA 9337 - Reformed Value Added Tax (RVAT) Law, effective November 5, 2005. Excise tax collection on petroleum products for the period 2006 to 2015 moved erratically with annual average of PhP10.7 billion. However, the average ratio of the excise tax collection on petroleum products to total excise tax collection declined from 22.2% in 2006 to 7.5% in 2015, and to total BIR collection from 2.0% to 0.8% and to GDP from 0.2% to 0.1% during the period. The declining ratio of the excise tax collection on petroleum to GDP implies that the tax has not been responsive to the changes in GDP which indicates leakages or weaknesses in the tax system. It is noted that the last time the ratio of the excise tax collection on petroleum to GDP was above 1% was in 1997. Since then, it has gone down to less than 0.1% in 2015. RA 8184 brought in a short-lived increase in the excise tax collection. However, after two (2) years of implementation, said ratios started to decline. RA 9337 resulted in further decrease in the excise tax collection upon its full year implementation in 2006. Among 10 ASEAN member-countries, five (5) are imposing the excise tax or excise duty, namely, Philippines, Lao PDR, Singapore, Thailand and Vietnam while 2 are imposing excise tax-like structure namely, specific tax on certain merchandise and services tax of Cambodia and commercial tax of Myanmar. In the case of Indonesia, Malaysia, and Brunei, no excise taxes are imposed on petroleum products. Four countries are using ad valorem tax rates. These are Lao PDR with excise tax rates ranging from 5% to 25%; Myanmar, two-tiered rates of 8% or 10%; Vietnam, 10% excise tax on all kinds of gasoline, naphtha, reformate components and other components for mixing gasoline; and Cambodia, 20% tax on certain kinds of petroleum. In Lao PDR, gasoline is taxed at an average of 23% while diesel, aviation fuel and vehicle fuel at 10%. In Myanmar, a tax rate of 10% is imposed on gasoline, diesel oil or jet fuel and 8% on natural gas. Philippines and Singapore impose specific tax rates which vary depending on the type of petroleum product. The tax base is per liter (or per kilogram for certain products) for the Philippines and per decaliter (equivalent to 10 liters) for Singapore. Singapore is imposing higher tax rates when converted to Philippine Peso, ranging from SGD 0.20/decaliter to SGD 7.10/decaliter or PhP6.71/liter to PhP23.81/liter compared to Philippines with PhP0.00/liter to PhP4.35 per liter. Thailand is the only ASEAN country which has mixed impositions (ad valorem or specific rate), of which the tax depends on the rate that will produce the highest value. The ad valorem rate ranges from 0% to 36% while the specific tax rate ranges from Baht 0.00 to Baht 7.00 or PhP0.00 to PhP9.33 per liter/kilogram. In the Philippines, the excise tax on naphtha, regular gasoline and other similar products of distillation was lowered from PhP4.80 to PhP4.35 per liter and the excise tax of kerosene, diesel and fuel oil were set to PhP0.00 under RA 9337. However, from equity standpoint, rich people also consume diesel. Moreover, diesel is one of the highest contributors to environmental pollution worldwide. Furthermore, the exemption of diesel from the excise tax under RA 9337 is not in line with international practice. The proposal below is in line with best practice in the excise taxation of petroleum products i.e. to have minimum excise tax rate differentials between products to avoid product substitution and tax evasion opportunities. Likewise, in order to optimize taxation, the structure should be simple with minimum items or categories. Part of the incremental revenue from the excise tax on petroleum shall be allocated to fund highly targeted transfer programs in the first year of implementation such as the Pantawid Pasada to offset increase in fares. Also, the money that will be generated mostly from the rich will plow back to the poor through the unconditional cash transfer program and improved infrastructure and basic social services. DOF PROPOSED EXCISE TAX RATES ON PETROLEUM PRODUCTS Present Rates DOF Proposal Regular Gasoline and Others Diesel and Others Gas and Others Diesel and Others Regular Gasoline 4.35 Diesel 0.00 PhP7/liter (second half of 2017) PhP3/liter (second half of 2017 Lubricating oils (ltr.) and greases (kg.) 4.50 Processed Gas 0.05 Waxes and petrolatum (kg.) 3.50 Denatured alcohol used for motive power 0.05 PhP9/liter (2018) PhP5/liter (2018) Naphtha 4.35 Kerosene 0.00 Leaded Gasoline* 5.35 LPG 0.00 PhP10/liter (2019) PhP6/liter (2019) Unleaded Gasoline 4.35 Asphalts (kg.) 0.56 Avturbo 3.67 Fuel oil 0.00 PhP10.40/liter (2020**) PhP6.24/liter (2020**) *Phased out **Annual indexation by 4% starting 2020 Note: There shall be no indexation for the year if the average Dubai Crude Oil Price in the month preceding the scheduled indexation exceeds USD100/barrel The proposed adjustment of the tax rates will bring in more revenues for the government that will offset any revenue loss from the lowering of the personal income tax. Aside from generating revenue, it will partially recoup the cost of the damage brought about by the production, transportation, storage and use of petroleum-derived fuels on the environment.

National Tax Research Center
Authors Keywords
Lamberte, Mario B.; excise tax;
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