Vat Enhancements

7/28/2019 Vat Enhancements

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A Comprehensive Look at VAT October 25, 2005

2005 SGV & Co.The Peninsula Manila

Tax BaSe

SL-0 SGV C & OA MEMBER PRACTICE OF ERNST & YOUNG GLOBAL

Quality In Everything We Do

Key features of the VATKey features of the VATEnhancementsEnhancements

Joel L. Tan-Torres

Partner, SGV & Co.

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SGV C & OA MEMBER PRACTICE OF ERNST & YOUNG GLOBAL

A. VAT through the years

B. SC TRO

C. Pertinent compliance requirements

D. Transitory provisions

E. Apportionment of input tax

F. VAT on government contracts

G. 70% Limitation on Input VAT

H. Input Tax on capital goods

I. Revised VAT return

J. Repealing clause

K. Increase in VAT rate in 2006

Topics for discussion


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Enhancement of VAT throughthe years

_Adopted in January 1, 1988 under Executive Order No.273 (IRR RR No. 5-87)

Expanded starting January 1, 1996 under Republic Act(RA) No. 7716 (IRR RR No. 7-95)

Amended in January 1, 1997 by RA No. 8241 (IRR RR No. 6-97)

RA 9010 included professionals, including CPAs in theVAT system beginning 2003

RA 9337 expanded further the coverage of VAT (IRR-RR No 14-2005 which was amended by RR No 16-

2005)

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Supreme Court TRO

RA 9337 would have taken effect on July 1, 2005.

However, in response to several petitions filed with the court, the SCissued a TEMPORARY RESTRAINING ORDER (TRO) on theimplementation of R.A. 9337.

The TRO on RA 9337 was lifted on October 18, 2005 per SC

Resolution.

BIR issued RR 16-2005 on VAT to take effect on November 1, 2005.

What about effectivity of amendments in RA 9337 pertaining to non-VAT items such as income tax, PT, ET ?


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Pertinent compliance requirements

Registration

Invoicing

Summary list

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Registration Mandatory registration for those:

i. With gross sales or receipts for the past 12months, other than those that are exemptunder Sec. 109 (1)(A) to (U) of the TaxCode, exceeding P1.5 million; or

ii. Expecting to exceed gross sales or receiptsfor the next 12 months, other than those thatare exempt undder Sec. 109(1)(A) to (U) ofthe Tax Code, of P1.5 million.


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Registration

Those previously registered as non-VAT, butare now subject to VAT, shall update theirrecords using BIR Form 1905

Those previously registered as VAT, but doesnot exceed the P1.5M annual sales threshold,may opt to change to a non-VAT registration

Those liable to VAT, but fails to register, shall

still be liable to VAT but without benefit of inputtax

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Invoicing

VAT invoice to be issued for every sale, barter orexchange of goods or properties

VAT OR to be issued for every lease of goods orproperties, and every sale, barter or exchange ofservices


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Invoicing : content

1. Notation of VAT-registered followed byTaxpayers Identification Number (TIN)

or per RR 16-2005, TIN followed by term VAT

2. The total amount of transaction, with the amountof VAT shown as a separate item in theinvoice/OR.

Note: Previously, the VAT was not allowed to be

shown separately on the invoice/OR.

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Invoicing : content3. For exempt transactions, the term VAT-Exempt Sale

shall be written or printed prominently on the invoice/OR

4. For zero-rated transactions, the term Zero-Rated Saleshall be written or printed prominently in the invoice/OR

or alternatively, at the option of seller

if the sale involves items which are subject to VAT and some of whichare VAT zero-rated or VAT-exempt:

the invoice or receipt shall clearly indicate the breakdown of thesales price between its taxable, exempt and zero-ratedcomponents, and

the calculation of the VAT on each portion of the sale shall beshown on the invoice or receipt;


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Invoicing : content3. The date of transaction, quantity, unit cost and

description of the goods or properties or nature ofservices

4. Name, business style and address of seller

5. In the case of sales in the amount of P1,000 or morewhere the sale is made to a VAT-registered person, thename, business style, if any, address and TIN of thebuyer

6. Notation: Not to be issue for Non-VAT/Exempt sales ofgoods, properties or services. If issued, sales shall be

subject to 10% VAT.7. BIR permit to print information

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Summary list

Who are required to submit Quarterly Summary Lists of

Sales?

All persons liable for VAT with quarterly total

sales/receipts (net of VAT) exceeding Two Million Five

Hundred Thousand Pesos (P2,500,000)

Who are required to submit Quarterly Summary Lists ofPurchases?

All persons liable for VAT with quarterly total purchases

(net of VAT) exceeding One Million Pesos (P1,000,000)


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Summary list of SalesQuarterly Summary Lists of Sales shall show the monthly

total sales generated from regular buyers/ customers,regardless of amount, as well as from casualbuyers/customers with individual sales amounting toP100,000 or more.

Regular buyers/customers

Those who are engaged in business or exercise ofprofession and those with whom the taxpayer hastransacted at least six (6) transactions regardless ofthe amount.

Casual buyers/customers

Those who are engaged in business or practice ofprofession but did not qualify as regular buyers/customers as defined above.

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Summary List of Sales Content BIR-registered name of the buyer who is engaged

in business/exercise of profession

TIN of the buyer (only for sales that are subject toVAT)

Exempt Sales

Zero-rated Sales Sales Subject to VAT (exclusive of VAT)

Output Tax (VAT on sales subject to 10%)


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Summary list of Purchases: Content BIR - registered name of the seller / supplier / service

provider

Address of seller/supplier/service provider

TIN of the seller

Exempt Purchases

Zero-rated Purchases

Purchases Subject to VAT (exclusive of VAT) on

(i) services

(ii) capital goods

(iii) other goods

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Summary list : Content

The names of sellers/suppliers/service-providers andthe buyers/customers shall be alphabetically arrangedand presented in the schedules

The summary lists shall reflect the consolidated monthlytransactions per seller/supplier or buyer for each of thethree months of VAT taxable quarter

Note: It is not clear how the capital goods amortizationand 70% cap on input VAT will be taken into account

The summary lists shall be submitted in magnetic formusing 3.5-inch floppy diskettes following the formatprovided in RR 16-2005.


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Transitionary provisions

Recognize transitional input tax credit

Report unused invoices/receipts

Report billed but uncollected sale of services

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Transitional input tax Extended to taxpayers who become VAT-

registered upon exceeding P1.5 M annualsales

Equivalent to 2% of the value of the inventoryof goods, materials and supplies as of start ofVAT status, or actual VAT thereof, whichever is

higher . Capital goods and goods exempt fromVAT are excluded from the computation,


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Transitional input tax

Inventory of goods must be submitted to theBIR within 30 days from start of VAT status.

Adjusting entry to record transitional input tax

Input Tax xxx

Inventory xxx

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Use of existing invoices/receipts

Non-VAT receipts/invoices may still be used bynew VAT taxpayers until end of the year

Submit to BIR within 30 days the inventory ofunused receipts/invoices

Unused non-VAT receipts/invoices should bestamped VAT-registered as of November 1,2005


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Billed but uncollected sale ofservices

Amounts collected after Nov. 1 for bills forservices issued on or before Oct. 31 notsubject to VAT

Information return of uncollected bills to besubmitted to BIR on or before Dec. 30

Copies of bills attached to information return

Record the amount of accounts receivable

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Computation of VATComputation of VAT

10% VAT 0% VAT 10% Govt

Gross Sales/ Receipts XXX XXX XXX

Less: Sales Returns XXX

Sales Allowances XXXAl lowable Sales Dis cou nts XXX XXX XXX XXX

Net XXX XXX XXX

10% 0% 10%

OUTPUT TAX XXX [A] 0 [A] XXX

INPUT TAX:Carried over from previous period XXX -

Domesti c Purchases XXX

Importations XXX

Capital goods subject todepreciation(amortized over 60 mo) XXX

Total XXX

INPUT TAX XXX * [B] XXX* [B ] XXX **[B]

VAT PAYABLE/REFUNDABLE XXX [A-B] (XXX)[A-B] XXX[A-B]

Note: All amounts in the formula are assumed to be net of VAT*subject to l imitation (70% of output tax) under RA No. 933 **fixed at 5% standard input VAT


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Apportionment of Input Tax

In case there are VAT and non-VAT activities, input tax

shall be allowed as follows:

Total input tax which can be directly attributed to

transactions subject to VAT; and

A ratable portion of any input tax (common input tax)

which cannot be directly attributed to either activity.

Note: Example in RR 16-2005 presents a monthly attribution

computation. However, the Quarterly VAT Return provides for a

quarterly computation.

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Apportionment of Input TaxInput Tax Attributed to Exempt Activity

Input Tax Attributed to VATable Activity*

* This in turn will have to be apportioned to different VATableactivities (10%, 0%, and Government sales)

Exempt Sales

Total SalesCommon Input Tax X

Taxable Sales

Total SalesCommon Input Tax X


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Illustration: Mixed Transaction

ERA Corporation (RR 16-2005 example)

Total Sales for the month P400,000

Breakdown of Total Sales: Sales to private entities subject to 10% VAT P100,000 Sale to private entities subject to 0% VAT P100,000

Sale of VAT-exempt goods P100,000 Sale to govt.

subjected to 5% final VAT withholding P100,000

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The fol low ing inpu t taxes were passed on b y i ts

VAT suppl iers :

P20,000Input tax on depreciable capital good n otattributable to any sp ecific activity (monthlyamort izat ion for 60 mon ths)

4,000Input tax on sale to gov ernment2,000Input tax on sale of exempt goo ds

3,000Input tax on zero-rated sales

P 5,000Input tax on taxable goo ds (10%)


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Cred i tab le input tax for th e month

Input tax on sale sub ject to 10% P 5,000

Inpu t tax on zero-rated sale 3,000

Ratab le port ion of the inp ut tax not d i rec t ly

attr ibutable to any activ i ty :

Taxable sales (0% and 10%) X Am oun t of input tax

Total Sales not direct ly attr ibutable

P 200,000 x 20,000 = P 10,000

400,000

To tal c red it ab le i np ut t ax f or t he mont h = P 18,000

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Illustration: Mixed TransactionInput tax at t r ibutab le to sa les to go vernment

Inpu t tax on sale to gov t - P 4,000 Ratab le port ion of the input tax notdirect ly attr ibutable to any activ i ty :

Taxab le sales to government X Amoun t o f inpu t

To tal Sales tax no t d irec t ly a t t r ibu tab le

P 100,000 X P 20,000 - P 5,000 400,000

To tal inpu t tax att r ibu tab le to sales - P 9,000

to government


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Input tax attr ibu table to VAT-exemp t s ales

Inpu t tax on VAT-exemp t sales P 2,000 Ratab le port ion of the input tax not

direct ly attr ibutable to any activ i ty :

VAT-exemp t sa les X Amoun t o f inpu tTo tal Sales tax not d irec t ly

at t r ibutab le

P 100,000 X P 20,000 P 5,000 400,000

Total inpu t tax attr ibutable to P 7,000

VA T-exempt sales

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Illustration: Summary of the transactions of ERA Corp

4,000*005,0005,000**9,0005,0004,00010,000Sale toGovernment subjectto 5% FinalwithholdingVAT

7,000*00007,0005,0002,0000Sale ofExempt

Goods

08,000008,0008,0005,0003,0000SaleSubject to0% VAT

000010,00010,0005,0005,00010,000SaleSubject to10% VAT

Unrecoverable input

VAT

Input VATfor refund

ExcessInput

VAT forcarry-over/

Net VATPayable

Credit-able

Input VAT

TotalInput VAT

Input VATnot directlyattributable

to anyactivity

Input VATdirectly

Attributable

OutputVAT

* These amounts are not available for input tax credit but may be recognized as cost expense** Standard input VAT of 5% on sales to Government as provided i n Sec. 4.114-2(a)Withheld by Government entity as Final Withholding VAT


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RA No. 9337 and RR No. 16-2005 (Final Withholding VAT)

The Government or any of its political subdivisions,instrumentalities or agencies, including government ownedor controlled corporations (GOCCs) shall, before making

payment on account of its purchase of goods and/orservices which are subject to 10% VAT shall deduct andwithhold a final VAT of 5% of the gross payment.

The five percent (5%) final VAT withholding rate shallrepresent the net VAT payable of the seller.

VAT on Government Contracts

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VAT on Government ContractsRA No. 9337 and RR No. 16-2005 (Final Withholding VAT)

The remaining five percent (5%) effectively accounts for the standardinput VAT for sales of goods or services to government or any of its

political subdivisions, instrumentalities or agencies including GOCCs, inlieu of the actual input VAT directly attributable or ratably apportioned tosuch sales.

Should actual input VAT exceed five percent (5%) of gross payments,

the excess may form part of the sellers expense or cost.

If actual input VAT is less than 5% of gross payment, the differencemust be closed to expense or cost.

The certificate or statement to be issued is the Certificate of Final taxWithheld at source (BIR Form No. 2306), a copy of which is to be issuedto the payee.


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Example: Sales to Government

Case 1:Sales to government P110,000 (VAT inclusive)

Purchases with valid input taxes P 88,000 (VAT inclusive)

3,000Cost/expense [A-B]

[B]5,000Standard input VAT (5%)

[A]8,000Actual input tax

5,000VAT withheld final (5%)

P 10,000Output Tax (10%)

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Suggested Journal Entries: Sales to Govt

Goods:

Sale to Government P110,000 (VAT inclusive)

Purchases with valid input taxes 88,000 (VAT inclusive)

Journal Entries:

To record the sale

Dr Accounts Receivable 110,000

Cr Sales 100,000

Output Tax 10,000


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To record the purchase

Dr Expense/Asset 80,000

Input Tax 8,000

Cr Accounts Payable 88,000

To record collection

Dr Cash 105,000

Cr Accounts Receivable 105,000


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To record VAT withheld by Government

Dr Output Tax 5,000


To close the balance of output tax on sales to Government andthe related input tax

Dr Output Tax 5,000Expense/Cost 3,000

Cr Input Tax 8,000*

*Not allowed as input tax credits. Effectively, the allowable input taxcredits on sales to Government is 50% of output tax. Any excess inputtax should be charged to cost or expense.



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Example: Sales to government

Case 2:Sales to government P110,000 (VAT inclusive)

Purchases with valid input taxes P 44,000 (VAT inclusive)

(1,000)Cost/expense [A-B]

[B]5,000Standard input VAT (5%)

[A]4,000Actual input tax

5,000VAT withheld final (5%)

P 10,000Output Tax (10%)

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Sale to Government P110,000 (VAT inclusive)

Purchases with valid input taxes 44,000 (VAT inclusive)

Journal Entries:

To record the sale

Dr Accounts Receivable 110,000

Cr Sales 100,000 Output Tax 10,000



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To record the purchase

Dr Expense/Asset 40,000

Input Tax 4,000

Cr Accounts Payable 44,000

To record collection

Dr Cash 105,000



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To record VAT withheld by the Government

Dr Output Tax 5,000


To close the balance of output tax on sales to Government and the related inputtax

Dr Output Tax 5,000

Cr Input Tax 4,000*

Cost/expense 1,000

*Not allowed as input tax credits. Effectively the allowable input credits on salesto Government is equivalent to 50% of output tax. Any excess input tax shouldbe charged to cost or expense, resulting in increase in taxable income



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70% limitation on Input Tax Credit

RR No. 16-2005

If at the end of any taxable quarter the output taxexceeds the input tax, the excess shall be paid by theVAT-registered person.

Example :

Quarter x

Output VAT P100

Input VAT 80

Net VAT payable 20

Note: 70% limitation will not apply

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70% Limitation on Input Tax Credit

RR No. 16-2005

If the input tax inclusive of input tax carried over from the previousquarter exceeds the output tax,

the input tax inclusive of input tax carried over from the previous quarterthat may be credited in every quarter shall not exceed seventy

percent (70%) of the output tax;

Provided, That, the excess input tax shall be carried over to thesucceeding quarter or quarters


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Example: Limit on Input TaxCredit

Quarter x

Output VAT P100

Input VAT - actual P 110

Limit (70% of Output) 70

Excess inpu t car ryover 40*

Input Tax allowed 70

VAT Payab le P 30

*Carryover to next m onth

Note: VAT return prov ides for mo nth ly determinat ion of l imi ta t ion

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Input Tax on Capital GoodsRR No. 16-2005

Input tax on purchases or importation of capital goods whichare depreciable assets for income tax purposes,

the aggregate acquisition cost of which (exclusive of VAT) ina calendar month exceeds P1 million, regardless ofacquisition cost of each capital good,

shall be claimed as credit against output tax, as follows:

1. Estimated useful life of capital good is 5 years or more

Monthly input tax = Total Input Tax

60 months


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Input Tax on Capital Goods2. Estimated useful life is less than 5 years

If the aggregate acquisition cost (exclusive of VAT) of the

existing or finished depreciable capital goods purchased or

imported during any calendar month does not exceed P1

million:

the total input taxes will be allowable as credit againstoutput tax in the month of acquisition

MonthsinLifeUsefulEstimated

TaxInputTotalTaxInputMonthly =

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Input Tax on Capital Goods The aggregate acquisition cost of a depreciable asset in

any calendar month refers to

the total price agreed upon for one or more assetsacquired and

not on the payments actually made during the calendarmonth.

Thus, an asset acquired in instalment for an acquisition

cost of more than P 1,000,000.00 will be subject to theamortization of input tax despite the fact that the monthlypayments/instalments may not exceed P 1,000,000.00.


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Input Tax on Capital Goods

RR 16-2005 Start of Time to Claim

Claim for input tax shall commence in the calendar monthof acquisition.

If the depreciable capital good is sold/transferred within a

period of 5 years or prior to the exhaustion of the

amortizable input tax,

the entire unamortized input tax on the capital goods

sold/transferred can be claimed as input tax credit during

the month/quarter when the sale or transfer was made but

subject to the limitation prescribed under Sec. 4.110-7 ofthese Regulations.

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Illustration: Input tax on Capital GoodsCapital goods used in trade or business if total acquisition cost(excluding VAT) exceeds P1M, for one month

XYZ Company purchased machineries for P1.5M (excluding

VAT). All have estimated useful lives of 5 years. This is

supported by a VAT invoice dated November 1, 2005. Input

VAT will be claimed as follows:

Input VAT claimable = P1.5M x 10% = P150,000

Claimable as follows:

For the month of November = P150,000/60 months = P2,500

Succeeding 59 months = P2,500/month


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Purchase of cap i ta l goods ( input tax c la imable over 60 month s orusefu l l i fe whichever is shorter)

i . Upon p urchase of cap i ta l goods

Dr Capital Goods xxx Deferred Input Tax Capital Goods xxxCr Accounts Payable xxx

i i . Upon c la iming or amort iza tion of input tax on a month ly bas is

Dr Input tax Capital Goods xxx Cr Deferred Input Tax-Capital Goods xxx

Note: Taxpayer should maintain a subsidiary record in ledger form forthe acquisition, purchase or importation of depreciable assets or capitalgoods

Suggested Journal Entries Input Tax

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VAT Liability/Excess Input Tax Credits

At the end of each VAT month/quarter, the following entryshould be effected to reflect the VAT payable or excessinput tax credits for the month/quarter:

To record VAT payable

Dr Output Tax xxx Cr Input Tax-Capital Goods* xxx

Input Tax* xxx

VAT Payable/Cash xxx

*Subject to 70% limitation

Journal Entries Excess Input Tax


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Old VAT return19 Total Sales/Receipts (Sum of Items 14B to 18B) and 19A 19B

Output Tax Due (Sum of Items 14C to 18C) - 10%

20 Zero Rated Sales/Receipts 20

21 Exempt Sales/Receipts 2122 Total Sales/Receipts (Sum of Items 19A, 20 and 21) 22

ess: npu ax urc ases

23A Transitional Input Tax 23A

23B Presumptive Input Tax 23B

23C Input Tax Carried Over from Previous Quarter 23C

23D/E Domestic Purchases-Capital Goods 23D 23 E

23F/G Domestic Purchases - Goods other than Capital Goods 23F 23G

23H/I Domestic Purchases-Services 23H 23I

23J/K Services rendered by Non-Resident 23J 23K

23L/M Importations - Capital Goods 23L 23 M

23N/O Importations- Goods other than capital goods 23N 23O

23P Purchases Not Qualified for Input Tax 23P

23QTotal Purchases (Sum of Items 23D,23F,23H,23J,23L,23N & 23P) 23Q

24 Total Available Input Tax (Sum of Items 23A,23B, 23C, 23E, 23G, 23I, 23K,23M & 23O) 24

25 Less: Deduction from In ut Tax25A Any VAT Refund/ TCC Claimed 25A

25B Excess input tax carrried over to succeeding quarter, if this is an amended return 25B

25C Total (Sum of Items 25A and 25B) 25C

26 Net Creditable Input Tax (Item 24 less Item 25C) 26

27 VAT Payable/(Excess Input Tax) (Item 19B less Item 26) 27

This will be modified by the BIR.

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Revised VAT return

Revised Monthly VAT Declaration andQuarterly VAT Return (Sept 2005)

Provide for 9 schedules in the second page

Require detailed reporting of capital goods and

amortization of allowable input tax for theperiod


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Repealing Clause

RR 16-2005

All oth er laws , acts, decrees, execut ive orders,issuances and rules and regulat ions o r par ts

thereof w hich are cont rary to and inco ns is tent

with any pro vis io ns o f R.A. No. 9337 are deemed

repealed, amended o r m odi f ied.

Al l other issuances and rules and regulat ions orpar ts thereof w hich are contrary to andincons is tent w i th any prov is ions of these

Regulat ions are deemed repealed, amended o rmodi f ied.

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Repealing Clause

RR 16-2005

No VAT exemp t ions m ay be granted by the BIRexcept th ose exp l ic i t ly s tated in Sec. 109(1) of

the Tax Code, as amended b y RA No. 9337.

Al l prev ious exempt io ns granted throu gh laws,acts , decrees, execut ive orders, issu ances and

rules and regulat ions or p ar ts thereofprom ulgated or issued pr ior to the effect iv i ty ofRA No . 9337 are deemed repealed, amend ed or

mo di f ied accord ing ly .


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Increase in VAT rate in 2006Increase in VAT rate in 2006

Provided, that the President, upon recommendation of the

Secretary of Finance, shall, effective January 1, 2006, raisethe rate to 12% after any of the following conditions has

been satisfied:

i. VAT collection as a percentage of GDP of the

previous year exceeds two and four-fifth percent

(2 4/5%); or

ii. National government deficit as a percentage of

GDP of the previous year exceeds one and one-

half percent (1 %)

Documents

Vat Enhancements