OECD to Philippines: Make bolder tax reforms

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February 14, 2026 | 12:00am

MANILA, Philippines — The Philippines needs to step up revenue mobilization and rely more on tax reforms to stabilize public debt and meet rising spending pressures, according to the Organization for Economic Cooperation and Development (OECD).

In a report, the OECD said that while the Philippines’ pre-pandemic fiscal management reduced public debt to just below 40 percent of gross domestic product in 2019, the combined effects of pandemic-related spending and weaker revenues pushed the budget deficit to 5.7 percent of GDP in 2024 and public debt to around 60 percent of GDP.

The Philippines is targeting a budget deficit of 4.3 percent of GDP by 2028 and 3.1 percent by 2030. However, the OECD warned that fiscal consolidation could rely more heavily on revenue measures.

“Stepping up the pace of fiscal consolidation and greater reliance on revenue measures, while maintaining infrastructure investment of around five percent of GDP, would allow for maintaining growth momentum, rebuilding fiscal room to address possible future shocks, and helping bring debt on a more prudent path,” it said.

Debt sustainability simulations show that bringing the country’s deficit down to 4.3 percent by 2028 would stabilize public debt at about 57 percent of GDP by 2040.

VAT reform seen as key

The OECD said the Philippines’ overall tax revenue amounts to about 18 percent of GDP, broadly in line with Southeast Asian peers, but well below the OECD average. Taxes on goods and services account for around eight percent of GDP, while income taxes amount to six percent.

A central recommendation is to improve the efficiency of value-added tax collection. Although the Philippines imposes a 12-percent VAT rate, it collects only about 45 percent of potential revenue, one of the lowest VAT revenue collection ratios among Southeast Asian states.

“Fully closing the gap between actual and potential revenue collection would yield additional VAT revenue of about 6.5 percent of GDP,” the OECD said, adding that reforms should focus on limiting zero-rating and exemptions and strengthening compliance.

The report flagged wide-ranging VAT exemptions, including those for senior citizens, private education and private health care, as poorly targeted.

“Phasing out VAT exemptions for private health care, education and senior citizens, combined with targeted social transfers, would raise revenues while improving the efficiency and equity of the tax and benefit system,” it said.

Empirical evidence suggests that many of these exemptions disproportionately benefit middle- and high-income households. The OECD said targeted social transfers, such as means-tested health stipends or grants for low-income students, would be more effective in achieving distributional goals.

It also recommended reviewing the VAT registration threshold, currently set at about $50,000, which is high by OECD standards and may distort supply chains.

Rethinking corporate incentives

The OECD also called for reforms to corporate tax incentives. While the Philippines’ statutory corporate income tax rate of 25 percent is broadly in line with peers, tax holidays and other incentives reduce the effective rate.

“Corporate tax incentives currently consist primarily of tax holidays. This risks granting generous, untargeted benefits that accrue to highly profitable firms without stimulating additional investment,” the report said.

It recommended a gradual shift toward expenditure-based incentives, such as accelerated depreciation and investment tax allowances, which are considered more effective at encouraging more investments.

The OECD’s proposed policy package implies a fiscal consolidation of 1.4 percent of GDP, aligned with the Philippines’ medium-term objective of reducing the deficit to 4.3 percent of GDP by 2028.

Revenue measures, including improving VAT efficiency, streamlining corporate tax incentives and establishing an emissions trading system, would raise revenues by an estimated 1.7 percent of GDP.

On the expenditure side, the report said that savings from reducing inefficiencies in local government spending and strengthening infrastructure project appraisal would partly offset higher social spending.

The OECD stressed that mobilizing more public revenues is essential to meet rising spending pressures from infrastructure, education, social programs and the climate transition while maintaining prudent fiscal management.