Conflict and costs: Taxes on imported petroleum products and the ongoing conflict in the Middle East

Despite its indirect impact on the Philippines, with Iran being roughly 7,000 kilometres away from the Philippines, some ordinary Filipinos may feel less concerned about the conflict between US, Israel, and Iran as it unfolds on the ground in the Middle East. 

Instead, public attention is often drawn to more immediate local issues influenced by the war that are currently shaping the national conversation.

The Middle East is known to be a global source of crude oil and petroleum products. Iran, in particular, ranks as the third largest producer in the Organization of the Petroleum Exporting Countries (OPEC), supplying 4.5% of the world’s crude and petroleum products.^[1] It also has dominion over a portion of the Strait of Hormuz, which acts as a crucial passageway for such products. Due to the military hostilities, Iran has substantially stopped its oil production and has limited passage through the Strait of Hormuz.

Waves of the conflict have reached the shores of the Philippines, as the latter sources ninety percent (90%) of its imported petroleum products from the Middle East. Local pump prices continue to climb as the conflict continues and depletes petroleum supply. Concerns regarding high pump prices have prompted Congress to approve a bill granting President Ferdinand Marcos Jr. emergency powers to suspend or remove the excise tax on petroleum products.

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

Tax imposed on imported petroleum products

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 are imposed with a fixed specific tax on a per-litre 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, provides for the specific tax rates of various petroleum products. Three main petroleum products that are crucial in Filipinos’ day-to-day life are (1) unleaded premium gasoline gas, used in transportation and taxed at PHP10.00 per litre; (2) diesel fuel oil and similar fuel oils, also used in transportation and taxed at PHP6.00 per litre; and (3) liquified petroleum gas, essential for households and the service industry and taxed at PHP3.00 per kilogram. Data from the Department of Finance reveals that imported petroleum products account for an average of PHP160 billion in collected excise taxes from 2021 to 2025.

Value Added Tax (VAT)

Under Section 105 of the Tax Code, VAT is 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. 

The tax, VAT in this case, 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 upon importation. This means that the higher the landed cost, the higher the VAT to be paid. According to the Department of Finance, imported petroleum products account for an average of PHP116 billion in collected VAT from 2021 to 2025.

The true impact of the Middle Eastern conflict

Upon understanding the taxes imposed on imported petroleum products, one may 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 on the importation is computed based on the landed cost of imported petroleum products. Under Section 107 of the Tax Code, landed cost includes (1) the purchase price of petroleum products largely driven by global oil price benchmarks, (2) transportation or freight costs, (3) insurance costs, and (4) customs duties and excise tax, among others. Fluctuations in the first three components during the periods of geopolitical conflict 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 for industry, power, and transportation. 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 oil prices reaching three digits, President Marcos requested Congress to grant him emergency powers to reduce or suspend excise tax on petroleum products. Such a request has been granted through a bill that has just been approved by both the House of Representatives and the Senate on March 19, 2026. The measure serves as an acknowledgement of the broader economic impact of the Middle Eastern conflict.

While the limitation of emergency powers to excise tax can be understood in light of national revenue considerations, the result of this measure may be constrained. 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 an all-time high.

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 inflations within the Philippine economy. Increases in local fuel prices subsequently affect commuting costs, prices of basic commodities, and overall purchasing power, with greater impact on lower-income households.

From a policy perspective, the ongoing hostilities in the Middle East highlight fuel taxation not only as a revenue source but also as a factor which transmits global fuel price shocks in the Philippine 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.

As published in BusinessWorld, dated 24 March 2026

 
_{[1] Reuters, Iran’s main oil and gas production and infrastructure, https://www.reuters.com/world/middle-east/an-overview-irans-energy-industry-infrastructure-2026-02-28/ (February 28, 2026).}