Herd immunity’s impact on taxation

Herd immunity occurs when a large portion of a community becomes immune to a disease, making the spread of disease from person to person unlikely. For COVID-19, it is achieved when at least 70 percent of the population is vaccinated. Since the chain of transmission has been broken, the whole community becomes protected, not only those who are vaccinated, but also those who developed immunity because of prior infection.

There are two paths to achieve herd immunity – infection and vaccination. The former is what the government is trying to control and prevent as it results in higher financial costs and poses a serious threat to the health and life of the populace. Hence, the government focused on vaccination. The Department of Health (DOH) has said that the Philippines will achieve herd immunity in 2022; however, such will be subject to the adequacy of vaccines.

Aside from the number of supplies, the other key issue that the government will have to overcome is the stigma against vaccines, which undoubtedly causes fears and doubts to Filipinos about its efficacy and safety. The latest Social Weather Stations (SWS) survey showed that 45 percent of Filipinos are willing to get vaccinated. It increased from the 32 percent initial finding, but is still considerably below the 70 percent of the population requirement.

To achieve herd immunity by 2022, the government implemented several laws to facilitate the distribution of vaccines. The President issued Executive Order 121, which gave the Food and Drug Administration (FDA) director general the power to issue Emergency Use Authorization for COVID-19 vaccines. The legislature enacted Republic Act 11525 entitled “COVID-19 Vaccination Program Act of 2021”, and to implement Section 11 thereof, the Bureau of Internal Revenue (BIR) issued Revenue Regulations 1-2021 which provides for the exemption from value-added tax (VAT), excise tax and donor’s tax and other fees of the procurement, importation, donation, storage, transport, deployment, and administration of COVID-19 vaccines. The latest is the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, which provides tax exemptions on the sale or importation of various COVID-19 items, such as vaccines, drugs, medical devices, and personal protective equipment (PPE). The pertinent tax exemptions covered three sets of COVID-19 product groups. The first category covers capital equipment, spare parts, and raw materials necessary for the production of COVID-19 PPE and items; the second category covers COVID-19 drugs, vaccines, and medical devices; and the third category is for all items and drugs needed for the conduct of COVID-19 clinical trials.

Reaching herd immunity is crucial not just for growth, but most importantly for the security and stability of the country’s economy. Last April, the Bureau of Internal Revenue (BIR) failed to meet its P235.23 billion revenue collection goal for April this year due to the reimposition of stringent lockdown measures in the National Capital Region. Lockdown measures mean businesses are not fully operational and people are encouraged to stay at home. Lockdown means less business activity which will then result in less demand for employees. Less demand for employees means a high unemployment rate. A high unemployment rate means less income. Less income means less purchasing power of consumers. As a result of this domino effect, the taxpayers will declare lesser income tax due to lack or decreased employment opportunities or because of closure of the business itself. Since there is limited or absence of regular conduct of commercial or economic activity, lesser VAT will be collected by the BIR.

In the same vein, as both business and personal transactions are restricted, tax revenue from documentary stamp tax (DST), capital gains tax (CGT) and Real Property Tax (RPT) will all be lessened.

On the contrary, if the Philippines achieves herd immunity, the threat of imposition of lockdowns will be removed. Without the threat of disruption of commercial or economic activity, investors will flock to the country. The high number of investors means increased business activity. Increased business activity means increased employment rate. Increased employment rate means increased income. Increased income means increased purchasing power of consumers. This will result in a higher income tax declared by the taxpayer and a higher VAT collected by the BIR. Since there are no restrictions, there is a free flow of business and personal transactions; hence, DST, CGT, and RPT payments will increase.

The National Internal Revenue Code provides that the tax rates be on a percentage basis. Hence, the number of transactions and the consideration on every transaction is directly proportional to the amount of revenue the BIR can collect.

Herd immunity combined with the BIR Digital Transformation (DX) Roadmap 2020-2030, which aims to strengthen revenue collections, will result in an optimistic future, and cast a shadow over the downfalls of the pandemic.

Marielle D. Santiago is a supervisor from the tax Group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice and Tier 1 transfer pricing practice by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email [email protected].