ACPACI

July 19, 2005

VAT ISSUES AND CONCERNS

Presented by:

DICK DU-BALADAD
Tax Partner, P&A

Presentation Coverage

RA 9337

RR 10-05

Draft RMCs

IDENTIFICATION OF
ISSUES AND CONCERNS

ISSUE 1: The 70% input VAT limitation

Application:
Quarterly Input tax is limited to 70% of output tax
Applies to quarterly return only (not to monthly
return)
Applies to excess input tax available by June 30,
2005 (implementation deferred to Qtr December
return- RR 10-2005)
Does not apply to zero-rated sales.
Applies to transitional input tax of 2%
4

ISSUE 1: The 70% input VAT limitation

Illustration for 2005

OUTPUT
VAT

2nd Qtr - 05
3rd Qtr - 05
4th Qtr 05
(not cumulative)

Cumulative
Computation 3rd and 4th

INPUT
VAT

VAT
PAYABLE EXCESS

100
100

140
50+40

0
10

40
0

100

90

30

20

200

allowed
input for 3 rd
and 4 th - 140

20- 2nd qtr

30 -3rd Qtr
50 ----total
5

ISSUE 1: The 70% input tax limitation

Effects:
Destroys basic concepts of VAT. Tax not based
on value added by businesses.
Becomes in the nature of a percentage tax.
Requires a minimum VAT payment equivalent to
3% of sales at all times.
May result to cascading tax.

ISSUE 1: The 70% input tax limitation

Effect:
Detrimental to low margin industries
Inequitable as it cuts along all industry lines
regardless of value added
Results to unnecessary increase in prices
Results to inefficiencies in business operations

Effect: Increase in Prices

Cost of Sale

47.50

47.50

2.50

20.36

Selling Price

50.00

67.86

Output VAT

5.00

Input VAT

6.79

Input VAT

4.75

= 70% x OV

4.75

Max. input VAT

3.50

4.75

VAT Payable

1.50

2.04

Excess Input tax

1.25

0.00

55.00

74.64

Mark-up

Gross Selling Price

Effect: Price build-up at the retail level

WHOLESALE

RETAIL

Cost of Sale

47.50

67.86

67.86

Mark-up

20.36

2.00

29.08

Selling Price

67.86

69.86

96.94

Output VAT

6.79

6.99

9.69

Input VAT

4.75

6.79

6.79

Max. input VAT

4.75

4.89

6.79

VAT Payable

2.04

2.10

2.91

Excess Input tax

0.00

1.90

0.00

74.64

76.84

106.63

Gross Selling Price

Effect: Causes inefficiencies in doing

business

Distorts business decisions as it forces

businesses to:
- avoid generating inputs, e.g.
discourages outsourcing
- change business models or business
transactions
- re-structure/re-align
10

ISSUE 1: The 70% input tax limitation

What happens to excess input tax?

Excess input tax build-up for businesses with
input taxes higher than 70% limitation
Excess input carried in perpetuity until used up
Cannot be the subject of refund except in cases
of dissolution/termination or change to non-VAT
If written-off, it cannot be part of deductible cost

11

ISSUE 1: The 70% input tax limitation

Effect
Eats up capital. Capital accumulation with the
government
Return of capital not maximized

12

ISSUE 2: Input amortization for capital

goods

Application:
- 1M monthly purchase subject to 60-month
amortization or based on lifetime of asset
if less than five years
- Determination of 1M purchase is on a
monthly basis (not per purchase)
- Subject further to the 70% cap limitation.
Double limitation for capital goods
13

ISSUE 2: Input amortization for capital

goods

Effect:
- Deferred recovery of advance taxes paid.
- Since determination of acquisition cost is based
-

on per month and not per purchase, it results to

different treatment for same asset
Requires closer monitoring of input tax on capex
Subjects capital goods to double input tax
limitation the 70% cap limitation and input
amortization.
14

ISSUE 2: Input amortization on capital

goods
Constructed/Assembled depreciable asset
- When to start input tax amortization? (RR 10-05)
- When the asset is completed. Not upon payment or
purchase of materials and service.
- Synchronized with period of depreciation under
income tax purposes.
- Effect: Input tax claim is subject to 3 deferrals:
- 70% limitation
- Input Amortization
- Asset Completion
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ISSUE 2: Input amortization on capital

goods

Constructed/Assembled depreciable asset

Treatment when asset is sold: (RR 10-05)
- Selling Price subject to VAT( in full)
- Unamortized input continue to amortize under
-

original term.
Effect:
- No matching
- Continue amortizing input tax of an asset that
is not existing
16

ISSUE 2: Input amortization on capital

goods

How is asset purchased through finance-leasing

treated? How will acquisition cost be determined?
(not addressed in both RA and RR)

17

ISSUE 3: Non-refund policy for Capital

Goods

Application:
Excess input tax from capital goods cannot be
the subject of a refund except if related to zerorated sales. (Old rule: can be refunded)
Amount allocated to zero-rated sales is
refundable. Issue: HOW MUCH:
- Is it full input?
- Or only the amortizable portion?
18

ISSUE 3: Non-refund policy for Capital

Goods

Example: A Co., an exporter purchased a

building worth 200M. Input tax is 20M. How
much can be claimed as refund?

Year 1: 20M (in full?)

Or
Year 1-5 : 4Million each year ( in amortized
amount?)
19

ISSUE 4: Optional Registration

Application
Applies to all VAT-registered taxpayers with
mixed transactions (Old Rule: Selected
Application Only)
Irrevocable for three years
Does it apply also to non-vat taxpayers such as
those subject to percentage taxes?
Is it entitled to transitional input tax of 2%?
How to indicate option? Apply for registration of
an activity? Rather than as an entity?
20

10

ISSUE 5: Invoicing
Effect of failure to indicate VAT as separate
item in invoice

For Seller
The invoice price is deemed exclusive of VAT.
VAT is to be paid on top of invoice price. (Old
Rule: VAT is deemed inclusive.)- RR 10-05

For buyer
Will input tax be allowed?
21

ISSUE 5: Invoicing
Effect of failure to indicate all required
information in invoice (name,business
style,address, tin of purchaser)

For Seller
- output VAT due

For buyer
- No input allowed
22

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ISSUE 6: Non-transferability of TCC

(RR 10-05)
Validity?

Lacks sufficient legal basis

Results to undue limitation over the use of
property
Would result to deprivation of property
without due process
Unreasonable, unfair
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INDUSTRY ISSUES

PEZA / SBMA
AIR AND SEA CARRIERS
TELECOMS
REAL ESTATE
POWER
PETROLEUM
PRE-NEED AND HMOS

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12

INDUSTRY ISSUES

PEZA / SBMA

25

Sales of Goods and Services to

PEZA/SBMA
RR 10-05

Automatic Zero-Rating for sales of goods and

services to PEZA/SBMA under RMC 43-99 no
longer applies
Status is downgraded to Effective Zero Rating
(EZR) but with limited application of effective
zero-rating.
EZR - The concerned taxpayer shall seek prior approval
or confirmation from the appropriate offices of the BIR that
a transaction is qualified for effective zero-rating.
26

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EFFECTIVE ZERO-RATING applies only to:

PEZA/SBMA registered enterprises
1. Under the 5% tax regime; and (not under ITH)
2. Operating inside the restricted area of the ECOZONE or
within the confines of the secured perimeter of the
Freeport Zone (does not include IT parks)
LIMITATIONS
1. Registered as Export Enterprise, or Export Producer,
etc. or whose registered activity is the exportation of
goods; or
2. Engaged in manufacturing, assembling or processing
activity and 70% exporter

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RR 10-05
Companies whose purchases are:
a. Effectively Zero-Rated
a. PEZA companies under the 5% regime
b. Located in secured/restricted areas
c. Registered export enterprise or export producer
d. 70% export producer
b. Subject to VAT
a. those subject to ITH or RCIT
b. those under 5% but not within a secured area like IT parks
c. those under 5% but not complying with and (d) above
d. BOI firms not 100% exporter
e. all others
c. Automatic 0-rated
NONE
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VATABLE GOODS & SERVICES FROM CUSTOMS

TERRITORY
FROM
CUSTOMS TERRITORY
PEZA 5%
PEZA ITH
PEZA RCIT

74-99
0% Automatic
0% Automatic
0% Automatic

NEW
0% Effective
VAT
VAT

NO PROVISION ON INTRA-ECOZONE
SALES?
29

SALE OF GOODS & SERVICES BY PEZA

REGISTERED ENTERPRISES

PEZA TO CUSTOMS
TERRITORY
GOODS
SERVICES

74-99

NEW
VAT RR

TECHNICAL
IMPORTATION SAME
VAT OR PT

NO
PROVISION

30

15

PEZA / SBMA

Special Rules on sales of petroleum to PEZA/SBMA:

-

Sales to PEZA/SBMA effectively zero-rated subject

to rules under RR 10-05

Sales from PEZA to PEZA exempt

Inter-zone transfers NO VAT as long as products

remain under Customs control like with any
customs suspense regime, e.g. transhipment

31

INDUSTRY ISSUES

AIR AND SEA CARRIERS

32

16

AIR AND SEA CARRIERS

NEW LAW: Common carriers by air and sea relative
to their transport of passengers from one place in
the Philippines to another place in the Philippines
(Before subject to 3% percentage tax)
EFFECT:
3 % common carrier tax (CCT) under Sec. 117 on
transport of passenger and cargo by domestic
carriers by air and sea
Franchise taxes of domestic air carrier
Domestic land carriers on transport of cargoes
Domestic land carriers on transport of passenger
International Carriers Air & Sea

REPEALED,
Now VAT
ABOLISHED
STILL VAT
CCT
Still CCT . Sec.
118 RR 14-05
33

AIR AND SEA CARRIERS

NEW RULE:
1. International Carriers 3% CCT
2. Domestic Carriers
- For Domestic Flights 10% VAT
- For International Flights Zero-rated
* Domestic leg of an international flight is considered
domestic flight subject to 10% VAT (even under
common rated sale).

34

17

AIR AND SEA CARRIERS

EXPANDED EXEMPTIONS
Sale, importation or lease of passenger or cargo vessels
and aircrafts, including engine, equipment and spare
parts for domestic or international transport operations
Importation of fuel, goods and supplies by persons
engaged in international shipping or air transport
operations (only pertain to international trips- domestic port
to foreign port without stopping in any Philippine port , RR 14
05)
-- ISSUE: HOW BOC IDENTIFY, APPORTION LOCAL
FROM FOREIGN OPERATIONS?
35

AIR AND SEA CARRIERS

ZERO RATED SALES (expanded)
Sale of goods, supplies/fuel and services (including
leases of property) to international shipping or air
transport companies. (previously covers only sale of
services to international shipping vessels )
- Pertains only to international operations only (phil
port to foreign port) RR 14-05 . Issue: How seller identify
/apportion that for local and for international operations.
Transport of passengers and cargo by air or sea vessels
from the Philippines to a foreign country. Issue: Does this
apply to international carriers covered by Sec. 118?
36

18

AIR AND SEA CARRIERS

Special rules on purchases of petroleum by air and sea
common carriers (RMC 29-05)
1. Carrier exclusively engaged in international operations
(a) If imported - VAT EXEMPT
(b) If domestic purchase AUTOMATIC ZERO-RATING
2. Carrier engaged in domestic and international operations
(a) if purchased on a per voyage/flight basis and use of outbound
can be directly identified AUTOMATIC ZERO-RATED
(b) if imported/purchased in bulk and destination of carrier
unknown 10% VAT. Buyer can claim refund to that pertaining
to outbound once identified
if carrier maintains dedicated tanks for storage of fuel for
outbound and purchase directly delivered to these tanks
AUTOMATIC ZERO-RATING
37

INDUSTRY ISSUES

TELECOMS

38

19

TELECOMS

Overseas telecommunications is subject to both:

(RR 10-05)
VAT (at 10% or zero-rated if qualified); and
10% Overseas Communication Tax

39

INDUSTRY ISSUES

REAL ESTATE

40

20

REAL ESTATE

Sale of real properties Selling Price or Zonal Value. If

based on zonal value, it is deemed exclusive of VAT. (RR
10-05)
Exchange of real estate properties held for sale or lease for
shares of stocks, whether resulting to corporate control or
not, is subject to VAT. (RR 10-05)
Property held for sale or lease, if transferred and such
constitute a completed gift, is considered deemed sale
subject to VAT. (RR 10-05)
41

VAT Coverage

EXPANDED EXEMPTIONS
(1) Sale of residential lot valued at P1.5 million and below, and house
and lot and other residential dwellings valued at P2.5 million
and below (previously P1,000,000).
Transition: Those sold before July 1, 2005 with SP exceeding 1M
shall still be subject to 10% VAT
(2) Lease of residential units with a monthly rental per unit not
exceeding P10,000 (previously P8,000)

42

21

INDUSTRY ISSUES

POWER AND PETROLEUM

43

POWER AND PETROLEUM

Newly covered industries: (Refer to RMC 29-2005 for
Petroleum)

Basis of transitional input tax subject to 70% cap

Determination of gross receipts (especially for
distribution companies)
Invoicing
Registration
Transition Issues
Effect of zero-rate on sale of power from
renewable sources of energy can it be identified?
44

22

INDUSTRY ISSUES

PRE-NEED AND HMO

45

Pre-Need and HMO

RR 10-05
Considered dealers of securities
Subject to 10% VAT on gross receipts without any
deduction
Actual contribution to the fund. Is it an allowed
deduction from Gross Receipts?

46

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