The umbrella group of local manufacturers opposed the Organization for Economic Cooperation and Development’s (OECD) recommendation to the Philippines to phase out exemptions from value-added tax (VAT), warning that it could lead to potential cost spikes that threaten to upend sectors in need.

Federation of Philippine Industries (FPI) chair Elizabeth Lee said the OECD’s proposal could help the government raise revenues, but she stressed that removing VAT exemptions risks raising costs and dampening consumption.

“Any abrupt changes could ripple through households and, at the margins, labor markets, affecting employment and service access,” said Lee. “Safeguards are essential, and we must be sensitive to the effects of these changes.”

In a report, the Paris-based OECD said the Philippines collects only about 45 percent of potential revenue from its 12-percent VAT, exhibiting one of the lowest VAT revenue collection ratios in Southeast Asia.

The OECD said reforms to limit zero-rating and exemptions could yield about 6.5 percent of the country’s gross domestic product (GDP) in return, but that would mean removing widespread VAT exemptions, such as those for senior citizens, private education, and private healthcare.

“In most cases, targeted social transfers would be more efficient in achieving distributional objectives than VAT exemptions,” the report read.

Lee also expressed reservations about the OECD’s proposal to reform corporate tax incentives into an expenditure-based scheme, noting that it could further pull the Philippines behind its regional peers, which are deploying aggressive fiscal packages.

The OECD said the country should gradually phase out income tax holidays and pivot toward cost-based incentives to curb fiscal leakage while preserving international competitiveness.

“Moving away from tax holidays if and when it is implemented, must be carefully sequenced and regionally benchmarked to ensure reforms strengthen—rather than erode—the country’s investment appeal,” said Lee.

Instead of a single sweeping reform, Lee said it should be paired with measures that would make the country more competitive and attractive to investors.

In particular, she said the government should focus on reducing logistics and power costs, strengthening infrastructure, and enhancing the country’s overall productivity before adjusting the incentive system.

“The success of fiscal reforms will hinge on careful sequencing—implemented at the right pace, in the right order, to preserve demand, sustain investor confidence, and support industrial expansion,” she added.