Fiscal authorities in the Philippines should begin phasing out select exemptions from the 12-percent value-added tax (VAT) and income tax holidays (ITH), increase coal excise taxes, and strengthen other revenue measures to generate additional revenue and reduce the country’s bloating debt pile.

These were among the recommendations of the Paris-based Organization for Economic Cooperation and Development (OECD) to the Philippines, citing the shortcomings of existing fiscal measures and asserting that the country should “step up the pace of fiscal consolidation and rely to a greater extent on revenue measures.”

According to OECD, the government has been collecting below its potential revenue, mainly due to services being exempt from taxes and constrained enforcement of tax measures.

Data from the organization showed the Philippines collects less than half of its potential VAT revenue under the current system. Fully closing the gap could increase revenue by about 6.5 percent of the country’s total economic output, as measured by gross domestic product (GDP).

Further, OECD noted that only relatively large businesses are required to register and pay VAT, leaving small firms outside the system.

As such, OECD said the government should phase out VAT exemptions for “private education, private healthcare, and senior citizens,” suggesting that targeted social transfers be implemented to provide aid to vulnerable groups.

"VAT exemptions… are often intended for further social objectives but are poorly targeted, regressive, and prone to abuse,” the report read. Removing select exemptions, OECD asserted, would increase revenue while making the tax system fairer and more efficient.

Recall that former Department of Finance (DOF) chief Ralph G. Recto had backed proposals to trim the list of VAT-exempt goods and services—currently numbering over 130—to help narrow the fiscal deficit.

Another concern pointed out was the country’s reliance on ITH, instead of investment-based measures, when granting tax incentives. Such an approach could benefit already profitable firms without necessarily boosting actual economic activity.

For OECD, the government should shift away from ITH and move toward expenditure-based corporate tax incentives. Expenditure-based corporate tax incentives include accelerated depreciation, investment allowances, research and development (R&D) tax credits, and enhanced deductions under the Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy (CREATE MORE) Act for labor, electricity, and research and development (R&D) costs.

These incentives lower the actual cost of productive investments such as machinery, innovation, and hiring workers. By reducing costs, they raise potential returns and directly support real output growth.

Meanwhile, OECD flagged the low taxes levied on coal, estimating the Philippines’ carbon rate—charges for carbon emissions from fossil fuels—at around 10 euros (approximately ₱690) per ton of carbon dioxide in 2021 and 2023.

This was lower than rates in countries such as South Korea and the United Kingdom (UK), even after many nations reduced energy taxes following the Russia-Ukraine war.

“To gradually close the gap with the carbon rates prevailing in other countries, the Philippines could raise the fuel excise tax on coal and align energy taxation in the industrial and power sectors with the levels faced by other sectors,” said OECD.

It noted that reforming energy taxes—such as raising coal levies, expanding tax coverage, and cutting energy-related tax perks—would help the Philippines keep pace with global efforts to price the environmental costs of fossil fuel use.

Further, OECD urged the government to proceed with the full rollout of an emissions trading system (ETS), initially covering high-emitting sectors such as power generation and heavy industries. A bill seeking to establish an ETS is currently being reviewed in Congress.

These proposed measures, when adopted, are expected to boost revenue generation and reduce the sovereign debt load. “Fiscal reforms to mobilize revenues and enhance spending efficiency would allow the Philippines to put public debt on a more prudent path,” said OECD.

It noted, however, that public finances are “strained, with budget deficits and debt well above pre-pandemic norms.”

Economic managers have trimmed the government’s revenue targets, lowering the 2026 goal to ₱4.82 trillion from ₱4.98 trillion. Targets for 2027 and 2028 were also cut to ₱5.12 trillion and ₱5.57 trillion, down 4.5 percent and 5.9 percent from earlier projections, respectively.

Under the medium-term fiscal program, the deficit is projected to narrow gradually from 5.7 percent of GDP in 2024 to 5.5 percent in 2025, 5.3 percent in 2026, 4.8 percent in 2027, and 4.3 percent in 2028.

DOF Secretary Frederick D. Go said his leadership is “committed to reducing the fiscal deficit,” emphasizing that smart spending of public funds is central to the agency’s pledge.

“It is not optional and requires a collective effort across government—to cut inefficiencies and ensure that every peso funds productive, high-impact, and high-multiplier programs,” Go added.

If the government succeeds in narrowing the fiscal gap to 4.3 percent by 2028, this would “stabilize public debt at about 57 percent of GDP by 2040.”

National government (NG) debt as a share of total output stood at 63.2 percent in 2025—the highest in 20 years since the 65.7 percent recorded in 2005. This veered further away from the Marcos Jr. administration’s target of bringing the ratio down below 60 percent before his term ends in 2028.

Despite the two-decade peak, OECD has forecast the debt-to-GDP ratio to ease to 62.4 percent in 2026 and 61.6 percent in 2027. It expects economic growth to rebound to 5.1 percent in 2026 and 5.8 percent in 2027.