IMF to Philippines: Broaden tax base, avoid tax amnesties

MANILA, Philippines — The International Monetary Fund (IMF) is urging the Philippines to rely more on revenue-raising measures as it trims the budget deficit, warning that tax amnesties could weaken compliance and that fiscal consolidation should not come at the expense of public investment.

Following its 2026 Article IV mission, the IMF said the government’s near-term fiscal stance remains broadly appropriate, with the budget deficit projected to ease to 5.4 percent of gross domestic product (GDP) this year and decline further in 2027.

The fiscal deficit is the shortfall when government spending exceeds revenues. As a share of GDP, it indicates how large that gap is relative to the size of the economy.

Andrea Pescatori, who led the IMF mission to Manila, said the medium-term goal of narrowing the deficit to 3.5 percent of GDP by 2030 also remains appropriate. However, he said the composition of the adjustment should shift toward stronger revenue mobilization.

“The composition of medium-term fiscal adjustment should be rebalanced toward revenue mobilization to protect priority social spending and create space for higher public investment than currently envisaged by the authorities,” Pescatori said.

Among the options cited were broadening the value-added tax (VAT) base, imposing or raising excise taxes on luxury goods and products harmful to health and the environment as well as improving the governance and design of tax incentives.

The IMF also explicitly recommended avoiding tax amnesties.

“We do not recommend tax amnesties,” Pescatori said, noting that such measures may increase collections in the short term but could undermine compliance later.

He said tax amnesties effectively allow taxpayers to settle obligations under more favorable terms, which may encourage expectations of similar relief in the future.

Pescatori also pointed to exemptions and compliance gaps in the VAT system as areas where the government could raise additional revenues.

The Philippines imposes a standard 12-percent VAT on the sale of most goods and services, although various transactions and sectors are exempt.

Pescatori said actual collections are well below what the headline VAT rate might imply partly because of these exemptions and compliance issues.

“There are various exemption, especially the one related to different segment of the population that might be more harmonized or streamlined, and this would make the VAT more efficient and would boost revenues,” he said.

Asked about proposals to raise personal income tax exemptions and exempt micro and small enterprises, Pescatori said the IMF did not have enough details to assess the specific measures.

However, he said broader tax exemptions could run counter to the objective of increasing revenues unless they are offset elsewhere.

“In principle, exemptions, especially for small enterprises, might be useful,” he said. “However, since our recommendation is to boost revenues, in some sense, this goes in the wrong direction if it’s not compensated by some other measures.”

The IMF clarified that its revenue recommendations are intended for the medium term, or roughly the next three to five years, and do not rule out temporary relief during periods of economic stress.