VAT Issues and Concerns Dick Du-baladad
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Transcript of VAT Issues and Concerns Dick Du-baladad
8/13/2019 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
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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%
8/13/2019 VAT Issues and Concerns Dick Du-baladad
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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.
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ISSUE 1: The 70% input tax limitation
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
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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
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11
ISSUE 1: The 70% input tax limitation
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
ISSUE 1: The 70% input tax limitation
ØEffect
– Eats up capital. Capital accumulation with thegovernment
– Return of capital not maximized
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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.
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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
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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?
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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?
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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
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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
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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.
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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
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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
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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
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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
AIR AND SEA CARRIERS
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).
AIR AND SEA CARRIERS
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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?
AIR AND SEA CARRIERS
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?
AIR AND SEA CARRIERS
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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
AIR AND SEA CARRIERS
38
INDUSTRY ISSUES
TELECOMS
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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
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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
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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?
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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?