Taxing imported petroleum products: VAT vs excise

With Iran being roughly 7,000 kilometers away from the Philippines, the direct effects of the Persian Gulf crisis may not be a matter of concern here, though the indirect ramifications certainly have caught everyone’s attention — simply because the Middle East is a major source of petroleum. Iran, in particular, is the third-largest producer in the Organization of the Petroleum Exporting Countries (OPEC), supplying 4.5% of the world’s crude and petroleum products. It also sits astride the Strait of Hormuz, a crucial passageway for such products, and has moved to block transit for tankers carrying products from other Gulf countries that are wholly dependent on the waterway, like, Kuwait, Iraq, Bahrain, Qatar, and part of the output of the United Arab Emirates and Saudi Arabia. Since the outbreak of fighting, Iran has restricted use of the Strait by threatening to attack tankers shipping products from unfriendly countries.

The Philippines sources 90% of its imported petroleum products from the Middle East. Pump prices continue to climb as the conflict grinds on and depletes petroleum socks here. Congress has moved to approve a bill granting President Ferdinand R. Marcos, Jr. emergency powers to suspend or remove the excise tax on petroleum products.

As such, it is important to understand how petroleum products are taxed in the Philippines and how the Middle Eastern conflict influences these taxes.

EXCISE TAX
Section 129 of the Tax Code defines excise tax as a tax imposed on goods manufactured or produced in the country for local sale and consumption and on imported goods. “Specific” excise tax is imposed based on weight, volume, or another unit of measurement, while “ad valorem” excise tax is imposed on the selling price or value of the good or service. Due to their nature, imported petroleum products pay a fixed specific tax on a per-liter or per-kilogram basis. As provided under the Tax Code and in practice, the excise tax on imported petroleum products is paid before such products are released by the Bureau of Customs.

The Tax Reform for Acceleration and Inclusion Law, or TRAIN Law, amending the Tax Code, sets out the specific tax rates of various petroleum products. Three main petroleum products that are crucial in our day-to-day life are (1) unleaded premium gasoline gas, used in transportation and taxed at P10.00 per liter; (2) diesel and similar fuel oils, also used in transportation and taxed at P6.00 per liter; and (3) liquefied petroleum gas, essential for households and the service industry and taxed at P3.00 per kilogram. The Department of Finance (DoF) reported that imported petroleum products accounted for an average of P160 billion in excise tax collections between 2021 and 2025.

VALUE-ADDED TAX (VAT)
Section 105 of the Tax Code defines VAT as an indirect tax imposed on any person who, in trade or business, sells, barters, exchanges, or leases goods or renders services, or on any person who imports products. Given the indirect nature of VAT, the burden of the tax is ultimately carried by the buyers.

VAT is based on the landed cost of imported petroleum products, which is the total of the purchase price, the cost of transporting the petroleum, and the related excise tax when landed. This means that the higher the landed cost, the higher the VAT to be paid. According to the (DoF), imported petroleum products account for an average of P116 billion in VAT collected between 2021 and 2025.

THE TRUE IMPACT OF THE MIDDLE EAST CONFLICT
One might ask, “Does the conflict actually have an impact on taxes?” Well, the answer is “Yes.”

Given that excise tax rates are statutorily fixed, the conflict has no direct impact on the imposed specific tax on imported petroleum products. Regardless of fluctuations in global oil markets or geopolitical catastrophes, excise tax remains constant and is uniformly applied based on the quantity of the product.

The impact of geopolitical conflict is more directly felt on VAT, since the VAT is computed based on the landed cost of imported petroleum products. According to Section 107 of the Tax Code, landed cost includes (1) the purchase price of petroleum products, which are determined by global markets; (2) transportation or freight costs; (3) insurance costs; and (4) customs duties and excise tax, among others. Fluctuations in the first three components during geopolitical disruptions have a compounding effect on VAT liability.​

In this context, armed conflict in the Middle East restricts oil supplies or heightens supply risks, which pushes global oil prices upward given the continued dependence of most economies on petroleum products. Disruptions and heightened security risks along key shipping routes, particularly the Strait of Hormuz, have led shipping companies to delay voyages, divert vessels, or reroute cargo through alternative ports and supply chains, resulting in longer transit times, higher freight costs, and elevated insurance premiums. The domino effect from these raises the landed cost of imported petroleum products, resulting in a corresponding increase in the VAT base and, ultimately, higher VAT passed on to the buyers.

FALLING SHORT?
With gas stations increasing fuel prices, sending diesel into the triple digits, Mr. Marcos asked Congress to grant him emergency powers to reduce or suspend the excise tax on petroleum products. Such a request has been granted through a bill that was approved by both the House of Representatives and the Senate on March 19. The measure serves as an acknowledgement of the broader economic impact of the Middle Eastern conflict.

While the limitation of emergency powers over excise tax can be understood in light of national revenue considerations, the result of this measure may be muted. Excise tax is fixed by law; any reduction or suspension offers limited flexibility in fuel price mitigation. As a result, adjustments to excise tax only provide partial and temporary relief when fuel prices increase to all-time highs.

In contrast, VAT is based on landed cost, which directly links local fuel prices to fluctuations in the global oil market. This tax structure amplifies price inflation within the economy. Increases in fuel prices here subsequently affect commuting costs, the price of basic commodities, and overall purchasing power, with outsized impact on lower-income households.

From a policy perspective, the ongoing hostilities in the Middle East illustrate how taxing fuel feeds global price shocks into the domestic economy. This creates an opportunity for a more integrated review of fuel taxation. The review need not abolish fuel taxes but rather assess whether the current fuel tax structure strikes a balance between fiscal sustainability, domestic price stability, and economic resilience. For example, policymakers may wish to consider the flexibility of excise tax and VAT adjustments during periods of conflict or catastrophe. Another option is assessing how a lowered excise tax affects VAT and how, in turn, a lower tax base for VAT transmits price shocks to consumers. A clearer alignment between revenue goals and price shock mitigation can help strengthen the Philippine fuel tax system and its capacity to manage external volatility moving forward.

Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.

Samantha Patricia C. Buenafe is an associate from the Tax Advisory & Compliance practice area of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.

pagrantthornton@ph.gt.com