VAT refund for tourists

After the Director-General of the World Health Organization declared an end to COVID-19 as a global health emergency, many of us grew eager to return to life as we knew it before COVID-19. Tourism was one of the hardest-hit industries during the height of the COVID-19 pandemic due to the mobility and international travel restrictions that were aimed at reducing the spread of the virus. Now, although many of us remain cautious and continue to wear face masks despite the lifting of most mask mandates, “revenge travel” — to make up for lost time — is a high personal priority for many.

While there are broader factors that will boost tourism (airport capacity and infrastructure, to name two), one proposal aims to improve our attractiveness as a travel destination from a tax perspective. Under House Bill (HB) No. 7292, non-resident tourists would be allowed to obtain a value-added tax (VAT) refund on their purchases of goods worth at least P3,000. The bill was approved by the House of Representatives on third and final reading, and the President himself has signaled his backing for the proposal in principle.

INTERNATIONAL PERSPECTIVE
The concept of recouping VAT or similar consumption taxes on foreign tourists’ purchases is not new. In fact, according to the House Ways and Means Committee Chairman, we are one of the last few Asian destinations that do not have a tourist VAT refund system. To better understand this proposal, let’s take a brief look at some of our neighbors.

In Indonesia, Malaysia, Singapore, Thailand, and Vietnam, the general procedures can be outlined as follows: 1) obtain and keep the tax invoices for eligible purchases; 2) show travel documents together with the invoices and the goods purchased (and not consumed) to the refund counter at the airport; and 3) claim the tax refund, most commonly in cash (local currency). Naturally, each jurisdiction has its own set of procedures and rules regarding controls (some have specific “tax-free” shops), purchase or tax amount thresholds, the number of days between when the purchase was made and when the refund is claimed, and even the actual refund mechanism (some allow refunds via credit card reverse charge). Nevertheless, the overarching procedures appear quite similar.

Outside of ASEAN, Taiwan seems to have similar procedures as outlined above, albeit with an option to use an “E-VAT Refund Machine” instead of proceeding to a refund counter. Interestingly, Japan has a drastically different approach: either a) pay for the purchase with consumption tax already deducted upon presentation of a passport, or b) obtain a refund by visiting the designated tax exemption bulk deduction counter (in-store, not at the airport) and presenting the purchased goods, receipt, and passport.

CURRENT PHILIPPINE VAT RULES
The purchase of goods within the Philippines is generally subject to 12% VAT. As an indirect tax, VAT is passed on to and shouldered by the buyer. As a tax on the “value added,” the ultimate consumer or end-user primarily bears the cost of VAT. This burden is especially felt by individual buyers, who are typically not VAT-registered and do not have the benefit of claiming input VAT credits on their purchases.

The proposal for VAT refunds on tourist purchases would add Section 112-A to the Tax Code, the salient portions of which read as follows:

“SEC. 112-A. TOURIST VAT REFUND. — A tourist shall be eligible for a value-added tax (VAT) refund on goods purchased from accredited retailers in the Philippines if such goods are taken out of the country within sixty (60) days from the date of purchase, and the value of goods purchased per transaction amounts to at least three thousand pesos (P3,000.00) …

For purposes of this section, a ‘tourist’ shall refer to a foreign passport holder, who is a non-resident individual not engaged in trade or business in the Philippines.”

The proposal seems simple enough. Tourists who are foreign nationals and not residents of the Philippines can refund the 12% VAT imposed on goods that they purchase within 60 days before they leave the country. The bill authorizes the Secretary of Finance to promulgate the rules and regulations for the law’s implementation. It appears that the legislators prefer giving leeway to the executive branch as to the exact mechanics of the VAT refund process.

POINTS FOR CONSIDERATION
According to the Presidential Communication Office, the VAT refund program for foreign tourists is targeted for implementation by 2024 and is billed as an effort to boost tourist arrivals. The counterpart Senate bill still faces hearings at the Senate Committee on Ways and Means at this writing. Nevertheless, here are a few salient points to consider about the pending measure:

1) Administration: With the ultimate goal of boosting tourist spending in mind (thus helping retailers generate more sales and growing our economy), the government should ensure that rules or requirements are simple to comply with for retailers.

2) Convenience: From the foreign tourists’ perspective, a tedious process for obtaining a VAT refund will discourage them from applying in the first place, in turn discouraging them from spending. It bears highlighting that, at 12%, we have the highest VAT rate in ASEAN.

3) Safeguards: As a refund program, this measure will likely entail funds to be programmed into the government’s annual budget. As with any government-funded measure, policies for transparency and governance must be strictly enforced.

As we welcome foreign visitors, we can, in addition to showing them a great time at our beaches and other destinations, perhaps they will also buy more “pasalubong” for their loved ones back home — VAT-free, if this proposal becomes law.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.

 

Marion D. Castañeda is a senior manager at the Tax Services department of Isla Lipana & Co., the Philippine member firm of the PwC network.

+63 (2)8845-2728

marion.castaneda@pwc.com