Tourism by VAT Refund

As featured on PhilStar: Tourism by VAT RefundTourism by VAT Refund

In a report made by the World Economic Forum in May 2024, it is expected that the global tourism industry is set to continue recovering from the lows of the COVID-19 pandemic and surpass the levels seen during the pre-pandemic period due to the demand brought by people’s pent-up desire to travel after the restrictions have been lifted. The report also highlighted that high-income economies like the United States of America, Spain, Japan, France and Australia showed significant recovery in their tourism sectors, as these countries presented more favorable conditions for travel and tourism development. However, for other countries like the Philippines, challenges still remain in trying to reach pre-pandemic tourism levels and growth.

In an effort to aid the tourism sector, Senate Bill No. 2415 was introduced by our lawmakers. The bill was approved on 23 September 2024 on its third and final reading. Senate Bill No. 2415 proposes to introduce a new section, which is Section 112-A, in the National Internal Revenue Code, as amended, which will offer Value-Added Tax (VAT) refund to tourists who are non-resident foreign passport holders. Under said section, a tourist shall be eligible for a VAT refund on locally purchased goods, which may be made either electronically or in cash, provided that the following requirements are met:

(1)   The goods are purchased in person by the tourist in duly accredited stores;

(2)   Such goods are taken out of the Philippines by the tourist within 60 days from the date of purchase; and

(3)   The value of goods purchased per transaction is equivalent to at least P3,000, provided that such threshold shall be subject to review and adjustment every three years by the Secretary of Finance, upon recommendation of the Commissioner of Internal Revenue.

For the implementation of the VAT refund, the bill provides that it is the responsibility of the Department of Finance (DOF) to engage the services of one or more reputable, globally recognized, and experienced VAT refund operators that shall provide end-to-end solutions to the government for the establishment of a VAT refund system for tourists. The DOF is also tasked with promulgating the implementing rules and regulations should this bill be passed into law.

In pushing for this VAT refund mechanism for tourists, it is the hope of our lawmakers to generate income and create additional employment opportunities. According to the assessment of the National Economic Development Authority, the proposed VAT measure for tourists is expected to generate an income of P3.3 billion to P5.7 billion per annum from 2024 to 2028. It is also expected to create 4,400 to 7,100 jobs per annum from 2024 to 2028. These projected benefits that will boost the economy hinge on our lawmakers’ hope that the VAT refund will encourage tourists to purchase local goods since shopping, has always been considered a key driver of a tourist desire to travel. Moreover, they foresee the VAT refund mechanism to emerge as a potential marketing tool for the Philippines’ tourism which may drive our economy forward.

Although well-intentioned, this bill is still met with skepticism, as there are concerns that it may result in revenue leakage for the country, wherein the intended increase in the purchase of local goods may not be enough to offset the cost for the implementation of the scheme, and the Philippines may end up losing more revenue. Further, there is also a suggestion that the government should instead focus on improving the tourist experience and infrastructure, which may be achieved if there is proper funding for such projects.

It may be gleaned from the contrasting points regarding the proposed VAT measure that there are pros and cons. Nonetheless, it is worth noting that our neighboring countries, such as Thailand, Malaysia, Vietnam, Singapore, and Indonesia have VAT refund schemes available for tourists. Tourists in these countries are encouraged to keep their receipts for eligible purchases, and they can present the receipts and avail of the refund at the refund center found at the airport. Thus, this shows that a working VAT refund system is possible depending on its enforcement.

The effectiveness of the proposed VAT refund scheme in raising national revenue will heavily depend on its implementation. Currently, the bill still has gray areas that need to be addressed, especially the accreditation of stores, which was not discussed in the bill. It is up to the DOF to fill in the gaps and devise a beneficial and efficient accreditation system for the stores, which should encourage participation from the target businesses and encourage tax compliance. Hopefully, the agencies that will enforce this measure will be able to actualize an adequate and working refund system. Upon its passage into law, we just have to wait and see if such tax reform will deliver its promise and bring about tourism through the VAT refund.