Features of the E-VAT Law

By Atty. Eldrid C. Antiquiera

I. Introduction

Value-added tax (VAT) is a percentage tax imposed at every stage of the distribution process on the sale, barter or exchange and similar transactions in the course of trade or business, including transactions deemed by law as a sale or on the importation of goods or sale of services based on the gross receipts derived by the person engaged in the sale of services. (Villanueva)

II. Nature of VAT

Basically, VAT is a tax on the sale or importation of goods or performance of services and therefore it is a privilege tax. It is an ad valorem tax imposed and computed as a percentage of the selling price/gross receipt on the act of selling, importing or performance of a service of a seller, importer or contractor who is exclusively made liable for its timely payment although the burden thereof is shifted to the buyer, transferee or lessee of the goods, properties or services making it an indirect tax.

III. Features of the E-VAT Law

Republic Act No. 9337 otherwise known as the Expanded Value-Added Tax Act of 2005 was signed into law by President Gloria Arroyo on May 24, 2005 and took effect on July 1, 2005. The said law was enacted to streamline and restructure the then VAT system and to provide additional revenue for the government through the increased tax rates, lifting of exemptions and subjecting to tax those transactions that were not previously covered by the tax in order to balance the government’s budget and to curb the fiscal deficit. (Tax Bitz 2005)

Some of the salient features of Republic Act No. 9337 are as follows:

· An increase in the corporate income tax from 32 percent to 35 percent, provided that effective January 1, 2009, the said rate will be reduced to 30 percent;

· A corresponding increase in the percentage of interest income subject to final tax that must be deducted from interest expense in determining allowable deductions from 38 to 42 percent;

· “Stand-by power” of the President to increase the VAT from 10 to 12 percent upon recommendation of the Secretary of Finance under certain conditions starting on January 1, 2006;

· Lifting of VAT exemptions on the sale of power and electricity, fuel and petroleum products, air and sea transport services, and services of doctors and lawyers, among others;

· VAT exemption of the sale, importation or lease of passenger or cargo vessels and aircraft, including engine equipment and spare parts thereof for domestic or international transport operations as well as the importation of fuel, goods and supplies by international shipping or air transport operators;

· New invoicing and accounting requirements for VAT-registered persons including (a) clarification on the kind of transactions when VAT invoices or official receipts must be issued, (b) the necessary information to be contained in the VAT invoices or official receipts and (c) segregation of VAT from the gross value of goods or services on the face of the VAT invoices or official receipts;

· Granting of the option to VAT-exempt taxpayers to register under the VAT system;

· Limitation on the application and carry-over of input tax credits which should not exceed seventy percent of the total output tax for the quarter; and

· Removal of the option to claim for refund or credit against other internal revenue taxes of the input tax attributable to the domestic purchase or importation of capital goods.

IV. Details of the New E-VAT Act of 2005

On Corporate Income Tax

· Increase of the corporate income tax rate to 35 from 32 percent. Provided that effective January 1, 2009, the rate shall be reduced to 30 percent. (Secs. 27 and 28);

· A corresponding adjustment of the rate of required tax credit (from 17 to 20 percent) that the country in which the nonresident foreign corporation is domiciled must allow against the tax due on intercorporate dividends from a domestic corporation to be subject to a final withholding tax of 15 instead of 35 percent. Provided that the rate of required tax credit shall be reduced to 15 percent starting January 1, 2009 (Sec. 28 (B) (5) (b));

· Lifting of the exemption of the Philippine Amusement and Gaming Corporation (PAGCOR) from corporate income tax (Sec. 27 (c). PAGCOR used to be included in the enumeration of exempt government-owned or controlled corporations) (Sec. 27 (C)); and

· A corresponding increase in the percentage of interest income subject to final tax that must be deducted from interest expense in determining allowable deductions from 38 to 42 percent. Provided that the percentage shall be reduced to 33 percent starting on January 1, 2009 (Sec. 34 (B)).

On Value-Added Tax (VAT)

· The VAT rate of 10 percent on the sale of goods (Sec. 106), importation of goods (Sec. 107) and sale of services (Sec. 108) shall continue to be effective. However, starting January 1, 2006, the President may raise the rate to 12 percent upon the recommendation of the Secretary of Finance, provided any of the following conditions has been satisfied: (a) VAT collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifths (2 4/5%) percent or (b) the national government deficit as a percentage of GDP of the previous year exceeds one and one-half (1½%) percent;

· The inclusion of a provision that the sales by VAT-registered persons of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations shall be considered as export sales subject to zero (0%) percent (Sec. 106 (A) (2) (a) (6));

· The VAT reclassification of the sale of exchange of services of common carriers by air and sea on their domestic transport of passengers, goods or cargoes from one place to another within the Philippines and the sale of electricity by generation companies, transmission, distribution companies and services by franchise grantees or electric utilities (Sec. 108). Domestic common carriers and power generation companies used to be subject to percentage taxes equivalent to 3 and 2 percent, respectively, on their gross receipts (Sec. 108);

· A clarification that to qualify for VAT zero (0%) percent rating services must be rendered to:

(a) another person or entity engaged in business that is conducted outside the Philippines or

(b) a non-resident person not engaged in business who is outside the Philippines when the services are performed.

The foregoing is in addition to the existing requirement that the consideration for the services rendered must be paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP) (Sec. 108 (B));

· Addition to VAT zero (0%) percent rated transactions of services rendered including leases of property to persons engaged in international air transport operations in addition the existing zero (0%) percent rating of services rendered to vessels engaged exclusively in international shipping (Sec. 108 (B));

· Addition to VAT zero (0%) percent rated transactions of transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country (Sec. 108);

· Addition to VAT zero (0%) percent rated transactions of sale of power or fuel generated through renewable sources of energy such as but not limited to biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy sources using technologies such as fuel cells and hydrogen fuels (Sec. 108);

· Removal of VAT exemption on the following:

(a) Sale of non-food agricultural products, marine and forest products in their original state by the primary producer or owner of the land where the same are produced;

(b) Sale of cotton and cotton seeds in their original state;

(c) Sale or importation of coal and natural gas, in whatever for or state, and petroleum products (except lubricating oil, processed gas, grease, wax and petrolatum) subject to excise tax imposed under Title VI;

(d) Sale or importation of raw materials to be used by the buyer or importer himself in the manufacture of petroleum products subject to excise tax except lubricating oil, processed gas, grease, wax, and petrolatum;

(e) Importation of passenger and/or cargo vessels of more than 5000 tons whether coastwise or ocean-going including engine and spare parts of said vessel to be used by the importer himself as operator thereof;

(f) Sale by the artist himself of this works of art, literary works, musical compositions and similar creations, or his services performed for the production of such works;

(g) Sales by electric cooperatives duly registered with the Cooperative Development Authority (CDA) or National Electrification Administration relative to the generation and distribution of electricity as well as their importation of machineries and equipment, including spare parts, which shall be directly used in the generation and distribution of electricity;

(h) Services rendered by doctors of medicine duly registered with the Professional Regulation Commission (PRC); and

(i) Services rendered by lawyers duly registered with the Integrated Bar of the Philippines (IBP) (previously exempt from VAT pursuant to Republic Act No. 9238 (February 5, 2004).

· VAT exemption of educational services rendered by private educational institutions duly accredited by the Technical Education and Skills Development Authority (TESDA) (Sec. 109 (H)) (VAT exemption was previously limited to educational services rendered by private educational institutions duly accredited by the Department of Education and the Commission on Higher Education and those rendered by government educational institutions.);

· Increase in the limit and scope of VAT exemption from sale of residential dwellings valued at P1 million to sale of residential lot valued at P1.5 million and residential dwellings valued at P2.5 million (Sec. 109 (P));

· Increase in the threshold of VAT exempt lease of residential units from a monthly rental of P8,000.00 to P10,000.00 (Sec. 109 (Q));

· Increase in the threshold of VAT exempt gross annual sale or lease of goods or properties from P550,000.00 to P1.5 million (Sec. 109 (V));

· Giving of option to VAT exempt persons to elect to subject their sale of goods or services to VAT, which election shall be irrevocable for a period of three years from the quarter that it was made (Sec. 109 (2));

· Spreading of creditable input tax over sixty months if the cost of goods or properties purchased or imported is more than P1 million or over the depreciable life of the asset if less than five years (a taxpayer was previously given the option to refund or credit excess input tax against other internal revenue taxes within two years from the time the purchase or importation was made) (Sec. 110 (A) (2);

· Limitation on excess input tax carry-over that may be claimed in one quarter to seventy percent of the output tax (Sec. 110 (B));

· Reduction in the transitional input tax credit from eight to two percent of the value of the taxpayer’s beginning inventory or actual tax paid whichever is higher (Sec. 111);

· Increase in the presumptive input tax credit from 1½ to four percent of the gross value of purchase of primary agricultural products of persons engaged in the processing of sardines, mackerel and milk, and in manufacturing refined sugar and cooking oil (and addition of manufacturing of packed noodle-based meals) (Sec. 111 (B));

On VAT Compliance Requirements

Invoicing Requirements:

· A VAT invoice for every sale, barter or exchange of goods or properties; and

· A VAT official receipt for every lease of goods or properties and for every sale, barter or exchange of services (Sec. 113 (A)).

Information to be Shown in the VAT Invoice or Official Receipt:

· The amount of VAT must be shown separately;

· For VAT exempt sale, the term “VAT Exempt Sale” must be written or printed prominently;

· For sale subject to Zero (0%) Percent VAT, the term “Zero-Rated Sale” must be written or printed prominently;

· For mixed sales (partly subject to 10 percent VAT, 0 percent VAT and VAT exempt), the taxpayer may issue separate invoices or receipts for each of the components or may issue a single invoice or receipt clearly showing the breakdown of each component

· The date of transaction, quantity, unit cost and description of goods or properties or nature of the service; and

· In the case of sales in the amount of P1,000.00 or more where the sale or transfer is made to a VAT registered person, the name, business style, if any, address and TIN of the purchaser, customer or client.

Withholding of VAT by the Government

· Government contracts are now subject to a uniform final withholding VAT of five percent. Creditable three and six percent creditable VAT used to be withheld on purchases of goods and services, respectively, by the Government from contractors (Sec. 114 (C)).

On Excise Tax

· Decrease in excise tax from P4.80 to P4.35 per liter of volume capacity on naptha, regular gasoline and other similar products of distillation (Sec. 148);

· Removal of excise tax on kerosene, diesel fuel oil and other similar fuel oils having more or less the same generating power, and bunker fuel oil, and on similar fuel oils having more or less the same generating power (Sec. 148);

· Removal of excise tax on locally extracted natural gas and liquefied natural gas.

Administrative Provisions

· A VAT registered person may cancel its VAT registrations only if:

(a) It makes written application and demonstrates to the Commissioner’s satisfaction that its gross sales or receipts for the next twelve months other than those which are not exempt will not exceed P1.5 million; or

(b) It had ceased trade or business operations and does not expect ro recommence within the next twelve months (Sec. 236 (F) (2)).

· Any person who in the course of trade or business sells, barters or exchanges goods or properties or engages in the sale or exchange of services shall be liable to register for VAT if:

(a) Its gross sales or receipts for the past twelve months other than those that are exempt have exceeded P1.5 million; or

(b) There are reasonable grounds to believe that his gross sales or receipts for the next twelve months other than those exempt will exceed P1.5 million (Sec. 236 (G)).

· A VAT exempt person who elects to register for VAT under Sec. 236 (G) shall not be entitled to cancel his registration for three years (This condition is new under VAT.).

References:

Villanueva, A. Taxation Simplified.

Tax Bitz (2005).