VAT Issues and Concerns Dick Du-baladad

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ACPACI

July 19, 2005

VAT ISSUES AND CONCERNS

Presented by :

DICK DU-BALADADTax Partner, P&A

2

Presentation Coverage

RA 9337

RR 10-05

Draft RMCs



IDENTIFICATION OF

ISSUES AND CONCERNS

4

ISSUE 1: The 70% input VAT limitation

Ø Application:

– Quarterly Input tax is limited to 70% of output tax

– Applies to quarterly return only (not to monthlyreturn)

– Applies to excess input tax available by June 30,

2005 (implementation deferred to Qtr Decemberreturn- RR 10-2005)

– Does not apply to zero-rated sales.

– Applies to transitional input tax of 2%



5

ISSUE 1: The 70% input VAT limitation

þIllustration – for 2005

20- 2nd qtr

30 -3rd Qtr

50 ----total

allowed

input for 3rd

and 4th -140200

Cumulative

Computation -

3rd and 4th

2030901004th Qtr – 05(not cumulative)

01050+401003rd Qtr - 05

4001401002nd Qtr - 05

EXCESS

VAT

PAYABLE

INPUT

VAT

OUTPUT

VAT

6

ISSUE 1: The 70% input tax limitation

ØEffects:

– Destroys basic concepts of VAT. Tax not basedon value added by businesses.

– Becomes in the nature of a percentage tax.

Requires a minimum VAT payment equivalent to3% of sales at all times.

– May result to cascading tax.



7


Effect:

– Detrimental to low margin industries

– Inequitable as it cuts along all industry linesregardless of value added

– Results to unnecessary increase in prices

– Results to inefficiencies in business operations

8

Effect: Increase in Prices

74.6455.00Gross Selling Price

0.001.25Excess Input tax

2.041.50VAT Payable

4.753.50Max. input VAT

4.754.75Input VAT

6.795.00Output VAT

67.8650.00Selling Price

20.362.50Mark-up

47.5047.50Cost of Sale

Input VAT

= 70% x OV



9

Effect: Price build-up at the retail level

106.6376.8474.64Gross Selling Price

0.001.900.00Excess Input tax2.912.102.04VAT Payable

6.794.894.75Max. input VAT

6.796.794.75Input VAT

9.696.996.79Output VAT

96.9469.8667.86Selling Price

29.082.0020.36Mark-up

67.8667.8647.50Cost of Sale

WHOLESALE RETAIL

10

Effect: Causes inefficiencies in doingbusiness

þDistorts business decisions as it forcesbusinesses to:

- avoid generating inputs, e.g.discourages outsourcing

- change business models or businesstransactions

- re-structure/re-align



11


ØWhat happens to excess input tax?

– Excess input tax build-up for businesses withinput 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

12


ØEffect

– Eats up capital. Capital accumulation with thegovernment

– Return of capital not maximized



13

ISSUE 2: Input amortization for capital

goods

ØApplication:

- 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

14

ISSUE 2: Input amortization for capitalgoods

ØEffect:

- Deferred recovery of advance taxes paid.

- Since determination of acquisition cost is basedon 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 taxlimitation – the 70% cap limitation and inputamortization.



15

ISSUE 2: Input amortization on capital

goods

ØConstructed/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

16

ISSUE 2: Input amortization on capitalgoods

ØConstructed/Assembled depreciable asset

ØTreatment 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 thatis not existing



17

ISSUE 2: Input amortization on capital

goods

ØHow is asset purchased through finance-leasingtreated? How will acquisition cost be determined?

(not addressed in both RA and RR)

18

ISSUE 3: Non-refund policy for CapitalGoods

ØApplication:

ØExcess input tax from capital goods cannot bethe subject of a refund except if related to zero-

rated sales. (Old rule: can be refunded)

Ø Amount allocated to zero-rated sales isrefundable. Issue: HOW MUCH:

- Is it full input?

- Or only the amortizable portion?



19

ISSUE 3: Non-refund policy for Capital

Goods

ØExample: A Co., an exporter purchased abuilding worth 200M. Input tax is 20M. Howmuch can be claimed as refund?

ØYear 1: 20M (in full?)

ØOr

ØYear 1-5 : 4Million each year ( in amortizedamount?)

20

ISSUE 4: Optional Registration

ØApplication

Ø Applies to all VAT-registered taxpayers withmixed transactions (Old Rule: Selected Application Only)

ØIrrevocable for three yearsØDoes it apply also to non-vat taxpayers such as

those subject to percentage taxes?

ØIs it entitled to transitional input tax of 2%?

ØHow to indicate option? Apply for registration ofan activity? Rather than as an entity?



21

ISSUE 5: Invoicing

Effect of failure to indicate VAT as separateitem in invoice

ØFor 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

ØFor buyer

Will input tax be allowed?

22

ISSUE 5: Invoicing

Effect of failure to indicate all required

information in invoice (name,business

style,address, tin of purchaser)

ØFor Seller

- output VAT due

ØFor buyer

- No input allowed



23

ISSUE 6: Non-transferability of TCC

(RR 10-05)

Validity?

ØLacks sufficient legal basis

ØResults to undue limitation over the use of

property

ØWould result to deprivation of property

without due processØUnreasonable, unfair

24

INDUSTRY ISSUES

• PEZA / SBMA

• AIR AND SEA CARRIERS

• TELECOMS

• REAL ESTATE

• POWER

• PETROLEUM

• PRE-NEED AND HMO’S



25

INDUSTRY ISSUES

PEZA / SBMA

26

Sales of Goods and Services toPEZA/SBMA

RR 10-05

• Automatic Zero-Rating for sales of goods andservices to PEZA/SBMA under RMC 43-99 no

longer applies

• Status is downgraded to Effective Zero Rating(EZR) but with limited application of effectivezero-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.



27

EFFECTIVE ZERO-RATING applies only to:

PEZA/SBMA registered enterprises1. Under the 5% tax regime; and (not under ITH)

2. Operating inside the “restricted area of the ECOZONE” orwithin the confines of the “secured perimeter of theFreeport 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

28

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 VATa. 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

RR 10-05



29

VATABLE GOODS & SERVICES FROM CUSTOMS

TERRITORY

VAT

0% -

AutomaticPEZA RCIT

VAT

0% -

AutomaticPEZA ITH

0% -Effective

0% -AutomaticPEZA 5%

NEW74-99

FROM

CUSTOMS TERRITORY

NO PROVISION ON INTRA-ECOZONE

SALES?

30

SALE OF GOODS & SERVICES BY PEZAREGISTERED ENTERPRISES

NOPROVISIONVAT OR PTSERVICES

SAME

TECHNICAL

IMPORTATIONGOODS

NEWVAT RR74-99

PEZA TO CUSTOMSTERRITORY



31

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 Custom’s control like with anycustom’s suspense regime, e.g. transhipment

PEZA / SBMA

32

INDUSTRY ISSUES

AIR AND SEA CARRIERS



33

NEW LAW: Common carriers by air and sea relative

to their transport of passengers from one place inthe 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

ABOLISHEDSTILL VATCCTStill CCT . Sec.

118 – RR 14-05

34

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).




35

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?


36

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 internat ional shipp ing v essels )

- 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?




37

Special rules on purchases of petroleum by air and seacommon 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 pertainingto outbound once identified

© if carrier maintains dedicated tanks for storage of fuel for

outbound and purchase directly delivered to these tanks –

AUTOMATIC ZERO-RATING


38

INDUSTRY ISSUES

TELECOMS



39

TELECOMS

• Overseas telecommunications is subject to both:(RR 10-05)

– VAT (at 10% or zero-rated if qualified); and

– 10% Overseas Communication Tax

40

INDUSTRY ISSUES

REAL ESTATE



41

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)

42

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)

VAT Coverage



43

INDUSTRY ISSUES

POWER AND PETROLEUM

44

POWER AND PETROLEUM

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

• Basis of transitional input tax – subject to 70% cap

• Determination of gross receipts (especially fordistribution companies)

• Invoicing

• Registration

• Transition Issues

• Effect of zero-rate on sale of power fromrenewable sources of energy – can it be identified?



45

INDUSTRY ISSUES

PRE-NEED AND HMO

46

Pre-Need and HMO

RR 10-05

• Considered dealers of securities

• Subject to 10% VAT on gross receipts without anydeduction

– Actual contribution to the fund. Is it an allowed

deduction from Gross Receipts?

Documents

VAT Issues and Concerns Dick Du-baladad