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2015/FMP/WKSP1/004 Session: 1

The Philippine Sin Tax Reform: Reforming Tobacco and Alcohol Taxation for Inclusive Growth

Submitted by: Philippines

Workshop on Fiscal Management Through Transparency and Reforms

Bagac, Philippines9-10 June 2015

JEREMIAS N. PAUL, JR.

Undersecretary, Department of Finance

Republic of the Philippines

THE PHILIPPINE SIN TAX REFORM:Reforming Tobacco and Alcohol

Taxation for Inclusive Growth

APEC Workshop on

Fiscal Management through Transparency and Reforms

9-10 June 2015

Bagac, Bataan, Philippines

Outline of Presentation

I. Background

II. The PH Sin Tax Reform

Rationale, Design, Issues

Wins of the Reform

III. ConclusionGains for Inclusive Growth

BACKGROUND

“The single overall lesson is that fiscal

policy can be a powerful instrument for

tackling inequality and creating a more

equitable economy”

(Hesmati, Kim, and Park. Fiscal Policy and Inclusive Growth

in Advanced Countries: Their Experience and Implications for Asia.)

BACKGROUND

Addressing income inequality has become of the

central issues of public debate in many

countries, including the Philippines.

The Department of Finance has sought to

address inequality through fiscal policy measures

under the Aquino Administration’s inclusive

growth agenda.

Recent PH experience shows that fiscal policy

can be an effective tool in the pursuit of

inclusive growth.

BACKGROUND

PH fiscal policy initiatives with implications

for inclusive growth

Better governance and enhanced public financial

management

Prudent debt management

Restructuring Excise Taxes on Tobacco

and Alcohol Products

Rationalizing Fiscal Incentives

Promoting the Transparency of Tax Expenditures

Reforming Fiscal Regime on Mining

In Focus:

The Philippine

SIN TAX REFORM

• An Act Restructuring the Excise Tax on Alcohol and Tobacco Products (19 December 2012)

• Landmark Legislation under the Aquino Administration

• Fundamentally a good governance measure with positive impact on both public health and fiscal health

Passage of Republic Act No. 10351

Help finance Universal Health Care (UHC)

Address public health issues relating to alcohol and

tobacco consumption

Simplify the current excise tax system on alcohol

and tobacco products and fix long-standing

structural weaknesses:

Remove price/brand classification freeze.

Level the playing field.

Reduce number of tiers.

Make tax system more buoyant by indexing tax

rates to inflation.

Rationale for the Reform

Simple to implement

Tax rates indexed to inflation

Rate increase enough to achieve health objectives

Remove price/brand classification freeze and level

the playing field

Aligned with international commitments under WHO

FCTC

Generate substantial revenues to finance Universal

Health Care (UHC)

Provide social safety nets to those affected

Main Design Considerations

Taxation based on 1996

net retail prices

(“price/brand

classification freeze”)

Multi-tiered system

Lack of price indexation

Non-compliant with WTO

rules (for distilled spirits)

Removal of price/brand

classification freeze

Gradual shift to unitary

taxation

Annual indexation of tax

rates

WTO compliance for

distilled spirits

Generation of additional

revenues for government

(especially for UHC)

Before RA 10351 After RA 10351

At a glance

2013 2014 2015 2016 2017

Tier 1In PhP 12.00 17.00 21.00 25.00

Unitary

PhP30.00In US $ 0.28 0.38 0.50 0.60

Tier 2In PhP 25.00 27.00 28.00 29.00

US$0.71In US $ 0.59 0.61 0.67 0.69

2012

LowIn Php 2.72

In US $ 0.06

MediumIn Php 7.56

In US $ 0.18

HighIn Php 12.00

In US $ 0.28

*PremiumIn Php 28.30

In US $ 0.67

Prior to Reform

After the Reform

*Tier 4 no production

Reformed Tax Structure for Cigarettes

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

2012 2013 2014 2015 2016 2017

In Philippine Peso

Low

Medium

High

Premium

Tier 2

Tier 1

Unitary

WINS OF THE SIN TAX REFORM

Credits to: Manix Abrera, GMA News Online

Share of tobacco and alcohol excise collections

to GDP in 2013 highest since 2000.

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

0.9%

1.0%

Tobacco & Alcohol Excise Collections as % of GDP

Tobacco & Alcohol Excise CollectionSource: BIR and NSCB

Prelim data for 2014

Win for Fiscal Health

Higher than projected incremental revenue collections

34.0

42.9

50.6

56.9

64.2

51.2 50.2

2013 2014 2015 2016 2017

Projected vs Actual Incremental Revenue from RA 10351 (In Billion Pesos)

Projected Actual

Win for Fiscal Health

FITCH RATINGS

Upgraded to BBB- /Stable from BBB+; Investment Grade

(March 27, 2013)

Affirmation (March 25, 2014)

JAPAN CREDIT RATING AGENCY

(JCRA)

Upgraded to BBB /Stable from BBB- /Positive; Investment Grade

(May 7, 2013)

Affirmation (May 30, 2014)

STANDARD & POOR’S

Upgraded to BBB-/Stable from BB+/Stable; Investment Grade

(May 2, 2013)

Upgraded to BBB /Stable from BBB- /Stable; Investment Grade

(May 8, 2014)

RATING & INVESTMENT (R&I)

INFORMATION, INC.

Upgraded to BBB /Stable from BBB- /Positive; Investment Grade

(July 9, 2014)

MOODY’SBaa3 Positive

Investment Grade (Oct. 3, 2013)

Win for Fiscal Health

11.418.9

23.7 24.631.8

42.2

53.3

83.7 87.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

2007 2008 2009 2010 2011 2012 2013 2014 2015

DOH Budget (In B PhP)$ 2.1 B

$ 2.0 B

$ 1.3 B

$ 1.0 B

$ 0.7 B

$ 0.5 B$ 0.5 B

$ 0.4 B

$ 0.2 B

Source: GAA, DBM

Win for Public Health

0.5 0.5 0.5 0.5 0.82.9 3.5

4.5 5.0 5.03.5

12.512.6

35.237.1

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

In Billion Pesos

National Government Allocation

for Health Insurance Premiums for the Poor

$ 0.3 B

$ 0.3 B

$ 0.8 B

Source: PhilHealth, DOH

2015 based on NEP

$ 0.9 B

Win for the Poor

Excise tax collections from locally manufactured cigarettes rise

steeply as volume drops.

Source: BIR

Win for Fiscal & Public Health

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

0.0

2.0

4.0

6.0

8.0

10.0

Volume of Removals (B Packs) Excise Tax Collections on Locally Manufactured Cigarettes (PB)

Significant increase in earmarks for

tobacco growing regions.

5,251

3,839

5,849

3,998

5,640

10,695

-

2,000

4,000

6,000

8,000

10,000

12,000

2010 2011 2012 2013 2014 2015

Total EarmarksIn Million Pesos

Win for the Farmers

CONCLUSION

EQUITY PROMOTION. By properly taxing products and behavior detrimental to health, the PH Sin Tax Reform redistributed profits from a rich industry to government enabling it to protect and support the more vulnerable sectors of society – the poor, the young, rural folk.

From Both Sides. From the revenue side (higher taxes to curb harmful behavior) to the spending side (earmarking for Universal Health Care), the Sin Tax Reform has shown reforming taxation of tobacco and alcohol products is good for both fiscal and public health.

CONCLUSION

Plus Efficiency. The reform also made

revenue administration with respect to

tobacco and alcohol excise taxes simpler and

less costly because it restructured the

system from multi-tiered to two-tiered and

eventually to a single uniform rate in 2017.

As such, the Sin Tax Reform has resulted in

concrete GAINS FOR INCLUSIVE GROWTH.

CONCLUSION

Challenges remain. Increasing domestic

sources of financing is a necessary but not

sufficient condition for higher and more

inclusive expenditures. Efficiency,

effectiveness, and execution capacity are

key to delivering the services on the ground

and to the people.

Continuing vigilance in implementation will

ultimately spell taxation’s success as a tool

for inclusive growth.

THANK YOU