At the first mention of granting value added tax refund to foreign tourists and overseas Filipinos, there is already an implied discrimination. Why just them, when domestic tourists who travel from one province or city to the other for pleasure or business are the ones keeping tourism industry afloat.
The proponents at the House Ways and Means Committee are just looking at the revenues that foreign tourists and overseas Filipinos bring to the country, no matter how short their stay and how much or little they actually spend here for goods and services.
But they overlook the contribution of domestic tourists and tour packages—for vacations, social events or even business gatherings, conventions and exhibitions, which must be given refunds for the 12 percent value added tax they pay for goods and services, considering that domestic tourists travel more here than abroad, and thanks to their nationalism spirit and their recognition of the innate beauty of our natural resources.
The committee even toyed with raising the tax refunds for foreign tourists to promote the country’s tourism industry and destinations.
In approving the House Bill No. 7143 that proposed raising the threshold of value-added tax refund for foreign tourists to P3,000, from P2,000, on goods they have purchased from accredited retailers, the House showed its utter desperation to attract more foreign tourists here considering our poor infrastructure, logistics and transfers and inadequate lodging capacities.
As it is, the Philippines is managing the tourism sector’s recovery from the pandemic. The public health crisis shut down the tourism industry in 2020 and 2021 as mobility restrictions prevented tourists from visiting the country. (Blame that to neglect of our tourism infrastructure by so many administrations and their inconsistent policies).
The national government is targeting 4.8 million international tourists in 2023. The Philippines recorded 2.6 million tourist arrivals last year.
House lawmakers argued that increasing that amount would put the Philippines at par with other ASEAN countries, which could boost the local tourism sector.
Data provided showed that among some of its neighbors in Southeast Asia, the Philippines stood behind the VAT refund mechanisms implemented by Vietnam (P4,662.06), Malaysia (P3,758.46), and Thailand (P3,321.02).
Revenues from tourism were pegged at P173 billion in 2022.
The bill also proposed that refunds will only be done through businesses registered under the Bureau of Internal Revenue. Goods would be eligible for VAT refunds within 60 days since the purchase of items, which should cost at least P3,000.
That amount is still subject to discussion. The proposed threshold could still change as the proposal considered administrative costs and inflationary and economic pressures when adjustments are considered.
A study of the effectiveness of the tax refund schemes pilot in China estimated that every time the government refunds 1 Yuan of VAT to travelers, there is a gain of 1.8 Yuan of profit and a further 4 yuan of additional profit of related industries through the increased consumption; this seems estimated positive effect may enhance the development of tourist industry.
The study conducted by Chinese Associate Professor Tingting Wang University of Melbourne/ Southwest University of Political Science of Law and Professor Miranda Stewart University of Melbourne showed that in the case of Thailand, an analysis on the sample of 32 quarters shows that after the VAT Refund for Tourists (VRT) Policy was imposed, shopping expenditure of foreign tourists in Thailand increased, implying that the VRT is effective in encouraging foreign tourists to spend more on shopping.
It has been suggested that in India, foreign tourists and non-residents visiting India have reduced their purchases of gold jewelry because there is no mechanism to refund the taxes on their purchase.
Perceived fairness with regard to tourism tax seems to be of a particular importance if it is true that travelers’ behavior may be significantly influenced by their perception of fairness.
The crucial question is, whether it is fair to tax more heavily on goods that are purchased mainly by tourists? In an income tax law, for resident individuals, income tax is usually levied based on worldwide income, and this supports an analysis of ability to pay. Usually, non-residents, which would include travelers, should pay tax only on income sourced in the jurisdiction.
The destination principle in the consumption tax may imply a similar fairness rule: the traveler should only pay tax on goods or services consumed in the visited country; all other consumption is taxable in the location where they usually reside.
A justification on this is that citizens and residents are considered as “members” of their society, so they have a social obligation to pay tax. A foreigner who does not habitually inhabit in the country will not be a member of that society, and they should not be a taxpayer in the country.
The situation becomes more complicated for those who come to the destination country, but their purpose is not to reside permanently. Again, in relation to the income tax, time has become an important yardstick: for those foreigners who travel to and reside in the destination country for an extended period (e.g., 183 days or more) may benefit from at least some of the same legal protections and public services provided by the government of that country, and therefore may be expected to be taxed on a ‘residence’ basis on worldwide income.
But for those who come to visit and only stay for a short time cannot be said to enjoy the same extent of public services by the destination country. Nor, for goods they buy inside the destination country, but only consume after returning home, can they be said to have consumed the goods inside the country.
A different equity argument may apply if we consider ability to pay in the sense of ‘vertical’ equity (higher income people pay more tax) and ‘horizontal’ equity (sectors, or taxpayers, are treated fairly or equally). if we consider the ability to pay of tourists, it is likely that many will be relatively higher income, both than their fellow citizens of their home countries, and of many of the citizens of their tourism destination countries. On this basis, it seems unfair to exempt their purchases.