Revenue Regulations No. 3-2024

Implementing the amendments Introduced by Republic Act No. 11976, Otherwise Known as the “Ease of Paying Taxes Act”, on the Relevant Provisions of Title IV – Value-Added Tax (VAT) and Title V – Percentage Tax of the National Internal Revenue Code of 1997, as amended (Tax Code)

Amendments – The following words, phrases, or actions shall now be uniformly applied to the provisions affected under Revenue Regulations (RR) No. 16-2005 and its subsequent amendments:

• Gross Sales – The EOPT Act adopts the accrual basis of recognizing sales for both sales of goods and services, including transactions to government or any of its political subdivisions, instrumentalities or agencies, and government-owned or – controlled corporations (GOCCs). Hence, all references to “gross selling price”, “gross value in money”, and “gross receipts” shall now be referred to as the “GROSS SALES”, regardless of whether the sale is for goods under Section 106 or for services under Section 108 if the Tax Code.
• Invoice – Inasmuch as there is a shift from cash basis to accrual basis for sale of service, the EOPT Act mandates a single document for both sales of goods and services. Hence, all references to Sales/Commercial Invoices or Official Receipts shall now be referred to as “INVOICE”.
• Billings for sales of service on account. – With the shift from cash basis to accrual basis fro sale of service, all references to receipts or payments which was previously the basis for the recognition of sales of service under Title IV (Value-Added Tax) and Title V (Percentage Tax) of the Tax Code, shall now be referred to as “BILLING” or “BILLED”, whichever is applicable.
• VAT-exempt threshold. – The EOPT Act re-introduced the regular updating of the VAT-exempt threshold every three (3) years pursuant to Section 109(CC), in relation to Section 116 of the Tax Code. Hence, all provisions mentioning the VAT-exempt threshold of three million pesos (P3,000,000.00) shall now be read as “the amount of VAT threshold herein stated shall be adjusted to its present value every three (3) years using the Consumer Price Index (CPI), as published by the Philippine Statistics Authority (PSA)”.
• Filing and Payment. – The filing of tax return shall be done electronically in any of the available electronic platforms. However, in case of unavailability of the electronic platforms, manual filing of tax returns shall be allowed. For tax payment with corresponding due dates, the same shall be made electronically in any of the available electronic platforms or manually to any AABs and RCOs.

Specific Amendments to Sale or Exchange of Service Under Section 108 of the Tax Code. – Section 4.108-1, 4.108-4, and 4.108-6 of RR No. 16-2005, as amended, shall now be read as follows:

“SEC. 4.108-1. VAT on the Sale of Services and Use or Lease of Properties. – Sale or exchange of services, as well as the use or lease of properties, as defined in Section 108(A) of the Tax Code shall be subject to VAT, equivalent to twelve percent (12%) of the gross sales (excluding VAT).”

“SEC. 4.108-4. Definition of GrossSales. – ‘Gross sales’ refers to the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services during the taxable period for the services performed for another person which the purchaser pays or is obligated to pay to the seller in consideration of the sale, ,barter, or exchange of services that has already been rendered by the seller and the use or lease of properties that have alredy been supplied by the seller, excluding VAT and those amounts earmarked for payment to third (3rd) party or received as reimbursement for payment on behalf of another which do not redound to the benefit of the seller as provided under relevant laws, rules or regulations: Provided, that for long-term contracts for a period of one (1) year or more, the invoice shall be issued on the month in which the service, or use or lease of properties is rendered or supplied.”

“SEC 4.108-6. Allowable Deductions from Gross Selling Price. – In computing the taxable base during the quarter, the following shall be allowed as deductions from gross sales:

• The value of services rendered for which allowances were were granted by a VAT-registered person during the quarter in which a refund is made or a credit memorandum of refund is issued.
• Sales discount granted anf indicated in the invoice at the time of sale and the grant of which is not dependent upon the happening if a future event may be excluded from the gross sales within the same quarter it was given.”

Specific Amendments to VAT-Exempt Transactions – Section 4.109(B)(cc) of RR No. 16-2005, as amended, shall now be read as follows:

“SEC. 4.109. VAT-Exempt Transactions.

• Exempt Transactions – The following transactions shall be exempt from VAT:
  • Sale or lease of goods or properties or the performance of services other than the transactions mentionsed in the preceeding paragraphs, the gross annual sales do not exceed the amount of Three Million Pesos (P3,000,000.00); provided, that the amount herein stated shall be adjusted to its present values using the CPI, as published by the PSA every three (3) years.
    
    Self-employed individuals and professionals availing of the 8% tax on gross sales and other non-operating income, under Section 24(A)(2)(b) and 24(A)(2)(c)(2)(a) if the Tax Code shall also be exempt from the payment of twelve (12%) VAT.

Specific Amendments to Tax Credits. – Section 4-110-9 of RR No. 116-2005, as amended, is hereby added for the output VAT credit on uncollected receivables:
“SEC 4.110-1. Credits for Input Tax –
SEC. 4.110-9. Output VAT Credit on Uncollected Receivables – A seller of goods or services may deduct the output VAT pertaining to uncollected receivables from its output VAT on the next quarter, after the lapse of the agreed upon period to pay: Provided that, tthe seller has fully paid the VAT on the transaction: Provided further, that the VAT component of the uncolleted receivables has not been claimed as allowable deduction under Section 34(E) of the Tax Code.

Uncollected Receivable refers to sales of goods and/or services on account that transired upon the effectivity of these Regulations which remain uncollected by the buyer despite the lapse of the agreed period to pay.

To be entitled to VAT credit, the following requisites must be present:

1. The sale or exchange has taken place after the effectivity of these Regulations;
2. The sale is on credit or on account;
3. There is a written agreement on the period to pay the receivable, i.e. credit term is indicated in the invoice or any document showing the credit term;
4. The VAT is separately shown on the invoice;
5. The sale is specifically reported in the Summary List of Sales covering the period when the sale was made and not reported as part of “various” sales;
6. The seller declared in the tax return the corresponding output VAT indicated in the invoice within the period prescribed under existing rules;
7. The period agreed upon, whether extended or not, has elapsed; and
8. The VAT component of the uncollected receivable was not claimed as a deduction from gross income (i.e. bad debt).

In case of recovery of uncontrolled receivables, the output VAT pertaining thereto shall be added to the output VAT of the Taxpayer during the period of recovery.

These rules do not amend the conditions on the deductibility of bad debts expenses in the income tax returns as provided in RR No. 25-02.”

SECTION 6. Specific Amendments to Claims for Refund/Tax Credit Certificate of Input Tax – The entire Section 4.112-1 of RR No. 16-2005, as amended, is hereby amended to read as follows:

“SEC. 4.112-1. Claims for Refund/Tax Credit Certificate of Input Tax. –

• Zero-rated and Effectively Zero-rated Sales of Goods, Properties or Services
  
  A VAT-registered person whose sales of goods, properties or services are zero-rated or effectively zero-rated many apply for the issuance of a tax refund of input tax attributable to such sales. The input tax that may be subject of the claim shall exclude the portion of input tax that has been applied against the output tax. The application should be filed within two (2) years after the close of the taxable quarter when such sales were made.
  
  In case of zero-rated sales under Secs, 106(A)(2)(a)(1) and (3), Secs. 108(B)(1) and (2) of the Tax Code, the payments for the sales must have been made in acceptable foreign currency duly accounted for in accordance with the BSP rules and regulations.
  
  Where the taxpayer is engaged in both zero-rated or effectively zero-rated sales and in taxable (including sales subject to final withholding VAT) or exempt sales of goods, properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any zero-rated or effectively zero-rated sales can be claimed for refund or issuance of a tax credit certificate.
  
  In the case of a person engaged in the transport of passenger and cargo by air or sea vessels from the Philippines to a foreign country, the input taxes shall be allocated ratably between his zero-rated sales and non-zero-rated sales (sales subject to regular rate, subject to final VAT withholding and VAT-exempt sales).
  
• Cancellation of VAT registration
  
  A VAT-registered person whose registered has been cancelled due to retirement from or cessation of business, or due to changes in or cessation of status under Sec. 106(C) of the Tax Code may, within two (2) years from the date of cancellation, apply for the issuance of tax credit certificate or cash refund for any unused input tax which he may use in payment of his other internal revenue taxes or apply for refund for any unused input tax: Provided, however, that the taxpayer-claimant shall be entitled to a refund if it has no internal revenue tax liabilities against which the tax credit certificate may be utilized: Provided, further, that for purposes of dissolution or cessation of business, the date of cancellation being referred hereto is the date of issuance of BIR Tax Clearance.
  
• Where to file the claim for refund/credit
  
  Claims for tax credits/refunds shall be filed with the appropriate BIR Office that will be designated by the Commissioner of Internal Revenue for this purpose.
  
• Period within which refund/credit of input taxes shall be made
  
  In proper cases, the Commissioner of Internal Revenue shall grant refund for creditable input taxes within ninety (90) days from the date of submission of the invoices and other documents in support of the application filed in accordance with subsections (a) and (b) hereof: Provided that, should the Commissioner find that the grant of refund is not proper, the Commissioner must state in writing the legal and factual basis for the denial.
  
  The 90-day period to process and decide shall start from the filing of the claim up to the release of the payment of VAT refund: Provided that, the claim/application is considered to have been filed only upon submission of the invoices and other documents in support of the application as prescribed under pertinent revenue issuances.
  
  In case of full or partial denial of the claim for tax refund, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim, appeal the decision with the Court of Tax Appeals (CTA); or in case the VAT refund is not acted upon by the Commissioner within the 30-day period after the expiration of the 90 days required by law to process the claim or (2) forego the judicial remedy and await the final decision of the Commissioner on the application of VAT refund claim: Provided that, failure on the part of any official, agent or employee of the BIR to act on the application within the ninety (90)-day period shall be punishable under Section 269(J) of the Tax Code: Provided further that, in the event that the 90-day period has lapsed without having the refund released to the taxpayer-claimant, the VAT refund claim may still continue to be processed administratively. However, the BIR official, agent or employee who has found to have deliberately caused the delay in the processing of the VAT refund claim may be subjected to penalties imposed under said Section.
  
• Risk-based approach in the verification and processing of VAT refund claims
  
  VAT refund claims shall be classified into low-, medium-, and high-risk, with the risk classification based on the amount of VAT refund claim, tax compliance history, frequency of filing VAT refund claims, among others: Provided, that medium- and high-risk claims shall be subject to audit or other verification processes in accordance with the BIR’s national audit program for the relevant year.
  
• Manner of giving refund
  
  Refund shall be made upon warrants drawn by the Commissioner of Internal Revenue or by his duly authorized representative without the necessity of being countersigned by the Chairman, Commission on Audit (COA), the provision of the Revised Administrative Code to the contrary notwithstanding: Provided that, refunds under this paragraph shall be subject to post audit by the COA following the risk-based classification above-described: provided, further, that in case of disallowance by the COA, only the taxpayer shall be liable for the disallowed by the COA, only the taxpayer shall be liable for the disallowed amount without prejudice to any administrative liability on the part of any employee of the BIR who may be found to be grossly negligent in the grant of refund.
  
• Automatic Appropriation
  
  An amount equivalent to five percent (5%) of the VAT collection of the BIR and the BOC from the immediately preceding year shall be automatically appropriated annually and shall be treated as a special account in the general fund or as trust receipts for the purpose of funding claims for VAT refund: Provided that, any unused fund, at the end of the year shall revert to the general fund.
  
• Quarterly Report
  
  The BIR and BOC shall be required to submit to the Congressional Oversight Committee on the Comprehensive Tax Reform Program (COCCTRP) a quarterly report of all pending claims for refund and any unused fund.”

SECTION 7. Transitory Provisions.

• Billed but uncollected sale of services. – These Regulations shall apply to sale of services that transpired upon its effectivity. Hence, for outstanding receivables on services on account that are rendered prior to the effectivity of these Regulations, the corresponding output VAT shall be declared once it has been collected. In case of collection, the sales and corresponding output VAT therefrom shall be declared in the quarterly VAT return when the collection was made and shall be supported with an Invoice following the transitory provisions contained in the RR intended for invoicing requirements to implement the EOPT Act or the new BIR-approved set of Invoices, whichever is applicable.
  
• Uncollected receivables from sale of goods as of the effectivity of these Regulations – For purposes of Section 4.11-9 of these Regulations, claim of output tax credit on uncollected receivables shall only apply to transactions that transpired upon the effectivity of these Regulations. No output tax credit shall be allowed for outstanding receivables from sale of goods on account prior to the effectivity of these Regulations

SECTION 8. Administrative Provision. – Separate RR shall govern the provisions of the EOPT Act covering Sections 113, 235, 236, 237, 238, 242 and 243 of the Tax Code particularly invoicing requirements, bookkeeping and accounting requirements, registration, filing, and payment including period to be given to the taxpayers to reconfigure machines and systems adjustments as a result of the shift from cash to accrual basis pursuant to the EOPT Act.

SECTION 9. Separability Clause. – If any of the provisions of these Regulations is subsequently declared invalid or unconstitutional, the validity of the remaining provisions hereof shall remain in full force and effect.

SECTION 10. Repealing Clause. – All other issues and rules and regulations or parts thereof which are contrary to and inconsistent with any provisions of these Regulations are hereby repealed, amended, or modified accordingly.

SECTION 11 Effectivity. – These Regulations shall take effect fifteen (15) days following its publication in the Official Gazette or the BIR official website whichever comes first.

In an effort to broaden the VAT taxpayer’s base to enhance  taxpayers’ voluntary compliance of value added tax in the Philippines with the end view of increasing the collection, the Bureau of Internal Revenue (BIR) has recently launched a 2012 value added tax (VAT) audit program in the Philippines covering non-large value added taxpayers in the Philippines under Revenue Memorandum Order No. 20-2012 dated August 23, 2012 (RMO No. 20-2012).

In general, BIR conducts an audit of value added taxes in the Philippines on an annual basis, and tax audit of value added taxpayers is mostly coupled with examination of other internal revenue taxes – e.g. annual audit of “all internal revenue taxes” or “income and value added tax”. This present 2012 VAT audit program in the Philippines is a new interim audit policy of the BIR to impose strict compliance with the value added tax regulations in the Philippines and improve collections in the process.

One (1) electronic letter of authority (eLA) shall be issued for each taxable quarter or for two (2) quarters by the Regional Director (RD) upon recommendation of the VAT Audit Head, and only ROs–Assessment who are part of the VAT Audit Team of their respective region shall be authorized to conduct audit and investigation of VAT returns, whether in principal or assisting capacity.

If the taxpayer has been previously selected in the RDO for regular audit of all internal revenue tax liabilities in 2011 or any prior year, significant findings on the audit of VAT should be communicated to the Chief-AD for possible risk identification in the current quarters. If an eLA has been issued under the VAT audit program and subsequently, the taxpayer becomes a candidate for regular audit  in the RDO  based on the selection criteria under the annual audit program, the request for eLA for regular audit should not include the VAT liability.

RMO No. 20-2012 covers the VAT audit or VAT investigation of VAT taxpayers under Revenue Region Nos. 5 – Caloocan, 6 – Manila [excluding taxpayers under Revenue District Office (RDO)  Nos. 35 – Romblon, Romblon, 36 – Puerto Princesa  City, Palawan and 37 – San Jose, Occidental Mindoro], 7 – Quezon City and 8 – Makati City for the 1st and 2nd quarters of 2012 VAT Returns and every quarter thereafter. Selection criteria are as follows:

• Taxpayers whose VAT compliance is below the established  2010 or 2011 industry benchmarks, whichever is available;
• Taxpayers whose VAT returns for the succeeding quarters show a substantial decrease in tax payment (Selection code: QDTP);
• Taxpayers whose VAT returns reflect substantial input taxes from importations and local purchases, such as when the total  purchases claimed exceed 75% of the total sales (Selection code: VILP);
• Taxpayers with no VAT return filed in any quarter or all of the quarters in 2011 (Selection code: NVR);
• Taxpayers who are reporting/filing “No Operations” Returns (Selection code: NOP); [Prior to the selection of the taxpayer, an ocular inspection shall be conducted to verify whether the business exists and to determine if the volume of business transactions warrants the issuance of an electronic Letter of Authority (eLA)]
• Taxpayers with a history of declaring excess input tax carry over for all the quarters of 2011 (Selection code: VTE);
• Taxpayers who have not submitted their Summary List of Sales (SLS) or Purchases (SLP) for any of the quarters of 2011 (Selection code: LSP);
• Taxpayers with substantial sales but showing net loss (Selection code: LOS);
• Taxpayers identified to have significant under-declaration of sales as a result of the Tax Compliance Verification Drive and/or other programs of the Bureau (Selection code: TCVD);
• Taxpayers filing exempt VAT returns due to availment of tax incentives or tax exemptions (Selection code: INC); and
• Such other taxpayers selected by the head of the VAT Audit Team subject to approval by the Regional Director (Selection code: RDD)

However, the following VAT returns shall be excluded from the coverage of this Order:

• Tax credit/refund claims; and
• VAT returns selected for audit by the National Investigation Division under the Enforcement Service  and by the Special Investigation Division  of the Revenue Regional Offices.

Cases covering one (1) quarter and two (2) quarters shall be reported within sixty (60) days and ninety (90) days, respectively, from date of issuance, otherwise, the RO should make a progress report stating the reason for each. The basic audit procedures prescribed in Revenue Audit Memorandum Order (RAMO) No. 1-99 shall be strictly observed by all ROs concerned, including all revenue issuances that have an impact on VAT audit, particularly those that deal on big ticket items of purchases.

In case  there are deficiency VAT liabilities as a result of the audit, the issuance of Preliminary Assessment Notice (PAN) and Final Assessment Notice (FAN) will be in accordance with existing regulations, until such time that other relevant issuances are issued later. Likewise, based on the audit findings or violations uncovered during the audit, the VAT Audit Head may recommend surveillance, closure or other enforcement activity on the taxpayer.

Let this be a good warning to non large value added taxpayer in the Philippines to be strict in monitoring their own tax compliance. There could be a lot more ways to learn and simple ignorance could not shield penalties for violation of such value added tax regulations in the Philippines.

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may please send mail at in**@************er.org.

For the initial registration with the Bureau of Internal Revenue (BIR) in the Philippines, the simple rules to determine whether an entrepreneur or an entity should register under Other Percentage Tax (OPT) or Value Added Tax (VAT) may be enumerated as follows:

OPT by nature.

Industry covered by other percentage tax by nature are required to register under OPT regardless of gross receipts or gross sales. Examples of this are common carries – operators of public utility buses, jeepneys, taxis and the likes, life insurance premiums, banks and non-bank finance intermediaries, etc.;

VAT by nature

Industry covered by the VAT system may either register under OPT or VAT depending on expected gross receipts or gross sales within the 12-month period whether or not it would exceed P1,919,500.00.

• If expected to exceed the threshold, then may opt to register as VAT. This is optional and irrevocable for a period of three (3) years even if actual receipts do not exceed the threshold.

Example, when it registered in 2009 as VAT, actual gross receipts as seller of service or gross sales as seller of goods amounted to P1,000,000.00, 2010 only P1,400,000.00. Can he downgrade registration from VAT to non-VAT?

Answer is no because of the rule on irrevocability of optional VAT registration within three year period. It would continue as VAT registered.

• If not expected to exceed the threshold, then, it may register under OPT until such time that its gross receipts or gross sales exceed P1,919,500, in which case it will be mandatory to register under VAT. Upon VAT registration, it is entitled to claim transitional input VAT based on the higher amount between 2% of the value of the inventory or actual input VAT on such purchases, whichever is higher.Should it fail to register under VAT, then, it shall be liable for VAT, but without the benefit of the input taxes because it only applies to VAT registered.

• If its transactions are exempt from VAT, it may also opt to register as VAT. It may then apply tax exemptions on such exempt transactions or apply VAT on the exempt transactions. Once it opted to apply, then, the same is irrevocable indefinitely.

Those are the basic rules that every entrepreneur should take note of. Failure to apply the above rules may either lead to payment of penalties or any other disadvantage of the entrepreneur.

Reference:

Revenue Regulations No. 16-2005, as amended

Note: Article posted prior to TRAIN or R.A. No. 10963 effective Jan. 2018.

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may also please send mail at info(@)taxacctgcenter.ph, or you may post a question at Tax and Accounting Center Forum and participate therein.

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By: Garry S. Pagaspas

The Bureau of Internal Revenue (BIR) has issued Revenue Memorandum Circular No. 35-2012 (RMC 35-2012) dated August 3, 2012 entitled “Clarifying the Taxability of Clubs Organized and Operated Exclusively for Pleasure, Recreation, and Other Non-profit Purposes”.

RMC No. 35-2012 has been issued by the BIR to clarify the income taxation and value added tax of clubs organized and operated exclusively for pleasure, recreation, and other non-profits purposes or “recreational clubs” as follows:

Income tax of recreational clubs

Under Section 26(H) of Presidential Decree No. 1158 otherwise known as National Internal Revenue Code of 1977, clubs which are organized and operated exclusively for pleasure, recreation, or other non-profit purposes or referred to as recreational clubs are exempt from income tax. However, under the National Internal Revenue Code of  1997, such provision was not included and under the doctrine of “casus pro omisso habendus est” a person or object that is omitted from an enumeration must be held to be omitted intentionally.

As such, the income tax will apply to the income of the recreational clubs from whatever source, such as the following:

• membership fees;
• assessment dues;
• rental income; and,
• services fees

Value added tax of recreational clubs

Likewise, the BIR clarified that the recreational clubs is subject to 12% VAT under Section 105 of the 1997 Tax Code, as amended and the fact that they are registered as a non-stock and non-profit would be immaterial. Quoted is the provision on Section 105 for easy reference:

“SEC. 105. Persons Liable. – Any person who, in the course of trade or business, sells barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code.

The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716.

The phrase ‘in the course of trade or business’ means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity.

The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be considered as being course of trade or business.” (emphasis supplied)

BIR further clarified that such conclusion has been affirmed by the Supreme Court in the case of Commissioner of Internal Revenue vs. Court of Appeals and Commonwealth Management and Services Corporation (GR No. 125355 dated March 30, 2000) which held as follows:

“It is immaterial whether the primary purpose of a corporation indicates that it receives payment for service rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for purposes of determining liability for VAT on services rendered. As long as the entity provides service for a fee, remuneration, then, the service rendered is subject to VAT.”

As such, the BIR concluded that clearly, the gross receipts of recreational clubs including but not limited to membership fees, assessment dues, rental income, and services fees are subject to VAT.

Comments:

RMC 35-2012 is premised on the rule that what has been excluded in the enumeration of exempt transaction, is deemed excluded. As such, they are taxable. Please note that, taxation is the rule, and exemption is the exception for the rule. It is Section 30 of the 1997 Tax Code that enumerates income tax exempt corporations. Being a taxable entity, payment to recreational clubs are not subject to  the expanded withholding tax. This would mean to show that not-all non-stock and non-profit are exempted from income tax. Only those that are specifically enumerated are exempted. It might be good this time to revisit your non-stock and non-profit structure to check whether the same is exempted. If not among those enumerated, you may consider a domestic corporation for the business. You may read this article as a guide – Overview of Domestic Corporations in the Philippines. 

As to being subjected to VAT, the same is imposed upon the nature of activity and has nothing to do with the structure as non-stock and non-profit activities. Recreational services are VATable as a sale of service.

Finally, I would agree with the recent move of the BIR to revisit the tax treatments of certain industries and transactions of taxpayers in the Philippines. I go with the notion that new taxes may not be necessary under the proper implementation. I would expect more BIR issuance for clarifications on taxability. As such, I would advise taxpayers to be more alert in dealing with their taxes. I would encourage their education on tax compliance to avoid misapplication and save taxes. Of course, there could be a lot more ways to learn BIR tax compliance.

Related readings

• Basic Income Taxation of Corporations in the Philippines
• Overview of Value added Tax in the Philippines

Read the FULL text of RMC No. 35-2012.Taxation of Non-profit clubs for recreation

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(Garry S. Pagaspas is a Resource Speaker with Tax and Accounting Center, Inc. He is a Certified Public Accountant and a degree holder in Bachelor of Laws engaged in active tax practice for almost two (2) decades and a professor of taxation for more than five (5) years. He had assisted various taxpayers in ensuring tax compliance and tax management resulting to tax savings rendering tax studies, opinions, consultancies and other related services. For comments, you may please send mail at garry.pagaspas(@)taxacctgcenter.ph).

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may also please send mail at info(@)taxacctgcenter.ph, or you may post a question at Tax and Accounting Center Forum and participate therein.

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By: Garry S. pagaspas

Value Added Tax (VAT) in the Philippines is a tax that each and every entreprenuer should be very much aware of. Firstly, it affects all of us consumers. Secondly, it greatly affects business transactions, in a way or another, such as in pricing where goods or services bought and sold contains VAT, maximizing profits when input VAT is minimal, cash flow issues, and more. In reading below, please note the following:

• Input VAT refers to VAT the buyer pays on purchase from VAT registered and only VAT registered buyers are allowed to claim input VAT;
• Output VAT refers to the VAT the seller passed on to the buyer; and,
• VAT due and payable is output VAT less input VAT;

In this article, let us discuss some of its features for better and deeper understanding

VAT is a business tax

As a business tax, it is imposed upon those who are engaged in trade or business, and those in the practice of profession. This simply means that goods or services are imposed VAT if they are made in the ordinary course of trade or business or practice of profession. In general, VAT applies to all sales of goods and services in the ordinary conduct of trade or business or profession, and those which are incidental thereto. Isolated transactions are not subject to VAT as a rule. In short, because you are into trade, business, or practice of profession, then, you are liable to VAT.

VAT is indirect tax passed on to the buyer

In direct tax the person who actually pays the tax is the same person bound to pay the same to the Bureau of Internal Revenue (BIR or Tax Authority), while in indirect tax, the one who actually shoulders the tax is not the one bound to remit the same to the BIR. In VAT, the tax is passed on to the buyer as part of the selling price. You will notice this when you buy goods or services as the invoice or the receipt will state the amount of VAT. In other words, it is the buyer who shoulders the VAT, and the seller is the one who remits the same to the BIR. Should the seller fail to pay, the BIR will not run after the buyer because rules presupposes that VAT is imposed by the seller on all VATable sales of goods or services.

VAT is a tax on value added or mark-up

As to liabilily, VAT liability is based on the amount added to the cost of purchase. This happens because the input VAT from purchases of VAT registered buyers from VAT registered suppliers are deducted from the output VAT on its sales. As such, the seller becomes taxable based on the mark up. This runs very true in a trading business or buy and sell. In manufacturing and service type of business, the concept lives on the input VAT and output VAT combination.

VAT is a consumption tax

The sad fact about VAT is that it is shoulderd by the ultimate consumers – the general Juan dela Cruz or John Doe public. Goods and services intended to be consumed in the Philippines are imposed VAT and any person who consumes the goods or services shoulders all the VAT imposed along the distribution line. It is because, if you do not sell the goods or the service, then, you will not generate output VAT so you shoulder all the input VAT you pay on the purchase.

Notice also that importations are subject to VAT, whether for business or personal use. This is because, they are presumed to be consumed in the Philippines. On the other hand, exportation of goods – actual or technical exportations, are charged 0% (zero rated) so no VAT shall be included in the selling price because they are bound to be consumed outside of the Philippines. The purpose of zero-rating on export transactions is actually for recovery of input VAT passed on to them on purchases of materials and services from VAT rgistered taxpayers for use in the production of such goods or services for export.

Recovery on excess input VAT

Input VAT from VATable purchases are deductible from output VAT, and as such accounted as property or asset of a taxpayer. The Philippine Constitution provides that no person shall be deprived of property without due process of law, so that taxpayers are given options as to the excess input VAT. Under the rules, excess input VAT may be carried over to succeeding months or quarter until fully consumed without expiry. Input VAT from zero-rated sales may be applied for tax refund or tax credit certificates within two (2) years from the quarter of sale. Input VAT attributable to exempt sales of goods or services are allowed to be claimed as expense (input VAT expense) deductible for income tax purposes. Upon liquidation, excess input VAT may likewise be applied for refund or tax credit certificates within two (2) years from dissolution of the taxpayer. Notably, the government recently launched a VAT TCC monetization program where TCCs from VAT will be converted to cash within the five-year period.

Cash flow on transition from non-VAT to VAT

For those previously registered as non-VAT, and for a reason or another becomes VATable such as when it exceeds the VAT registration threshold of P1,919,500 (2012), the rules provides that they could claim a transitional input VAT (TIP) of 2% based on the value of its beginning inventory of goods, materials, and supplies or the actual VAT on such goods, materials, or supplies, whichever is higher. The purpose is for the taxpayer not to be burdened by the payment of VAT on VATable sales immediately following the VAT registration because the input VAT on purchases during the non-VAT period is not claimable as against output VAT. Claimable TIP is the lower of the actual VAT on inventory or 2% of the value of such inventory.

5% assured VAT collection on sales to government

As a revenue measure, the government is assured of at least a collection of the 5% of such 12% VAT imposed on government purchases. This is the essence of the final withholding VAT on government money payments where the government agency or instrumentality is mandated to withhold the 5% upon payment. On the part of the seller, the application of the standard input VAT is intended to nuetralize the impact of the final withholding VAT in relation to the actual input VAT. The difference between standard input VAT and actual input VAT attributable to such government sales is either an input VAT expense or a charge against cost similar to other income in simple language.

VAT transparency mechanism

This feature is the check and balance mechanism that tax evaders must be aware. First, VAT registered seller is mandated to segreggate or show separately the VAT passed on to buyers in the sales invoice or official receipt. The purpse is for the buyer to simply pick out the VAT figure it paid, and failure to segreggate is subject to a compromise penalty. Another mandate for all VAT registered is the mandatory submission of summary list of sales (SLS), summary list of purchases (SLP), and summary of importations. SLS, SLP are reciprocal reports of buyers and sellers the BIR matches to determine if the seller or the buyer correctly reported. Importation details from Bureau of Customs (BoC) are traced to the summary list of importations provided by the importer. Discrepancy in either case are presumed to be underdeclarations, if the taxpayer could not properly substantiate and justify.

Finally, in claims for refunds and tax credit certificates, the BIR will likewise verify if such VAT applied for refund or TCC has been recorded as an asset for transparency on the books of accounts.

Related Articles & Seminar

• Accounting for Value Added Tax in the Philippines
• Once a Month Seminar – Value Added Tax, Ins and Outs

(Garry S. Pagaspas is a Resource Speaker with Tax and Accounting Center, Inc. He is a Certified Public Accountant and a degree holder in Bachelor of Laws engaged in active tax practice for more than seven (7) years now and a professor of taxation for more than four (4) years now. He had assisted various taxpayers in ensuring tax compliance and tax management resulting to tax savings rendering tax studies, opinions, consultancies and other related services. For comments, you may please send mail at ga************@************er.ph.

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may also please send mail at info(@)taxacctgcenter.ph, or you may post a question at Tax and Accounting Center Forum and participate therein.

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The National Internal Revenue Code of 1997 (Tax Code) under Republic Act No. 8424, as amended or the Tax Reform Act of 1997 enumerates the internal revenue taxes imposed and administered by the Bureau of Internal Revenue (BIR) under Section 21 as follows:

SEC. 21. Sources of Revenue. – The following taxes, fees and charges are deemed to be national internal revenue taxes:

(a) Income tax;
(b) Estate and donor’s taxes;
(c) Value-added tax;
(d) Other percentage taxes;
(e) Excise taxes;
(f) Documentary stamp taxes; and
(g) Such other taxes as are or hereafter may be imposed and collected by the Bureau of Internal Revenue.

For better understanding, let us give you an overview of each of them. These taxes are of general tax classifications, and may contain sub classifications. In classrooms, these taxes are divided in two (2) parts – Part I for Income Taxes, and Part II – for Transfer and Business Taxes. For Accounting (BSA) and Law (LLB) course, a third part is added for the tax review covering all the two (2) parts.

Income tax. This is an annual tax on the income generated from the trade, business, profession, employment or office, dealings on property, and all other instances of flow of wealth to the taxpayer other than mere return of capital. Income tax base would depend on the nature of income, the classification of individual or corporate taxpayer, and the income tax type applicable. Income tax type is a broad classification, and sub-classifications would include – capital gains tax (CGT), minimum corporate income tax (MCIT), final taxes on passive income (FWT), withholding tax on compensation (WC), creditable or expanded withholding tax (CWT or EWT), and even stock transaction tax for sale of listed shares through the local stock exchange would fall under this classification. Read more on the following articles…Basic Income Taxation of Corporations, and Overview of Deductible Expenses in the Philippines

Estate Tax. This is levied, assessed, collected and paid upon the transfer of the net estate of every decedent, whether resident or nonresident of the Philippines based on the value of the net estate.

Donor’s Tax. This is a tax levied, assessed, collected and paid upon the transfer by any person, resident or nonresident, of the property (whether real or personal, tangible or intangible) by gift – direct or indirect. This is imposed on donations or gifts to another who accepts the same. Tax would depend on the citizenship or residence of donor, the relationship to the donee, and the nature of the property. Donations to relatives by a single donor is exempt to the extent of P100,000.00 within every calendar year. Read more on the Overview of Donor’s Tax in the Philippines.

Value-added tax. This is imposed upon any person, who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods. This is an indirect tax and is normally passed on to the buyer. As a consumption tax, the ultimate consumer shoulders that VAT imposed on the goods or service along the distribution line. Read more on the Overview of Value Added Tax in the Philippines.

Other percentage tax. Is a business tax like value-added tax (VAT) that is imposed upon persons whose business is normally subject to VAT, but, whose gross sales or receipts does not exceed P1,919,500.00 within 12 months. This is likewise imposed upon specific entities selected by law like banks, common carriers irregardless of gross sales or gross receipts within the 12-month period.Read more on the Overview of Percentage Tax in the Philippines.

Excise tax. This tax apply to certain goods manufactured or produced in the Philippines for domestic sales or consumption or for any other disposition and things imported. This is imposed in addition to the value added tax. Examples of this are sin taxes imposed on cigars, cigarettes, and alcoholic products.

Documentary stamp tax. This is a tax imposed upon documents, instruments, loan agreements and papers, and upon acceptances, assignments, sales and transfers or the obligation, right or property incident thereto. Either of parties to the taxable document may be held liable and if one is exempt, the other shall be held liable. Example of this is the documentary stamp tax (DST) on lease agreements of office space, business loans and advances, sales of real properties in the Philippines, issuance of shares of stock. Read more on the Overview of Documentary Stamp Tax in the Philippines.

Other taxes. This is a catch all enumeration for those taxes that may later be imposed.

The above are enumeration of internal revenue taxes imposed by the Bureau of Internal Revenue under the National Internal Revenue Code. Some taxes may apply to your business, but the same may be administered by other government agencies like Bureau of Customs on import and export transactions, and the Local Government Units like on business taxes, real property taxes.

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may also please send mail at info(@)taxacctgcenter.ph, or you may post a question at Tax and Accounting Center Forum and participate therein.

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By: Garry Pagaspas, CPA

As Wikipedia.Org defines the term “Freelancer”, and hereunder we quote:

“A freelancer, freelance worker, or freelance is somebody who is self-employed and is not committed to a particular employer long term. These workers are often represented by a company or an agency that resells their labor and that of others to its clients with or without project management and labor contributed by its regular employees. Others are completely independent. ‘Independent contractor” would be the term used in a higher register of English.

Fields where freelancing is common include;  music, journalism, publishing, screenwriting, film making, acting, photojournalism, cosmetics, fragrances, editing, event planning, event management, copy editing, proofreading, indexing, copy writing, computer programming, web design, graphic design, website development, consulting, tour guiding, video editing, video production and translating.”

It seems that the freelancer is a broad term applied to self-employed individuals or individuals hired as independent contractors and not as an employee of the other contracting party. For tax purposes, they are termed as “sole proprietors” and in this article, let us share you the related tax compliance and what taxes are you required to pay as a self-employed freelance in the service industry.

1. Payment of registration fees – P500.00 annually. 

Registration of your habitual freelance or self-employed is the first step to proper tax compliance. To register, you fill-out BIR Form No. 1901 for filing with the BIR along with the required attachments enumerated at the back of the form. One attachment is the BIR Form No. 0605 duly received by the BIR accredited bank covering your location after payment of P500.oo annual registration fees. In BIR Form No. 1901, you will choose the tax types applicable to you and for regular filing with the BIR. Check only those that are mostly applicable and beneficial to you to avoid the inconvenience of filing unnecessary tax returns. If BIR will do the checking, we suggest you be inquisitive as to the implications that you be aware.

2. Registering official receipts

After release of the BIR Certificate of Registration, you will be required to register Official Receipts (O.R.) that you issue every collection from your freelancing business. The fact that your client or customer did not ask for BIR official receipts will not excuse you from issuing a BIR registered O.R., and this applies even if your client or customer are based abroad. If you will be caught not issuing O.R., BIR may penalize you P1,000.00 for every collection you failed to issue O.R., sanction you under Oplan Kandado program, or worst, charge you tax evasion for imprisonment on fraud and willful attempt to evade taxes. BIR has accredited printing companies and the same will normally assist you for securing an Authority to Print (ATP). Normal requirement is at least ten (10) booklets and costs ranges from P800.00 to P1,500.00 a booklet.

3. Registering and maintaining books of accounts

This is also secured after the release of your BIR Certificate of registration and the cost is minimal – P30 to P60 a booklet. The number would depend on the nature of your registration as follows – four (4) books for non-VAT, and six (6) books for VAT-registered.

• Journal
• Ledger
• Cash receipts book
• Cash disbursements book
• Subsidiary sales journal (additional for VAT registered)
• Subsidiary purchases journal (additional for VAT registered)

4. Payment of business taxes – 12% value added tax, or 3% percentage tax;

For being habitually engaged in trade or business, or practice of profession, you will be liable for business taxes. In short, you pay business tax because you do business as a freelancer and it would not matter if you actually earn or not, after deducting business expenses for as long as you have gross receipts from freelancing business. This is where misconception lies for some – they do not wish to pay because they earn less than their expenses. Business tax in based in the gross receipts or gross sales you make, and not on the net income you make.

In general, if your annual gross receipts (services) or gross sales (goods) exceeds P1,919,500 (effective 2012 and onwards), you will be liable for 12% VAT. In which case, you must be a VAT-registered where you compute VAT due based on the difference between output VAT (12% VAT on your gross receipts/sales) and input tax (12% VAT on your purchases from VAT-registered duly supported by VAT-registered receipts or invoices. On the other hand, if you do not exceed P1,919,500 and non-VAT or other percentage tax registered, then, you will be liable for 3% percentage tax based on your gross receipts. If you registered for non-VAT and later exceeded the VAT threshold of P1,919,500, then, you are mandated to update registration to VAT using BIR Form No. 1905 and avail of the transitional input VAT. (Update from TRAIN Law: Mandated entities to register for VAT are those with gross sales or receipts for the past twelve (12) months, other than those that are exempt under Section 109(A) to (BB), exceeding Three million pesos (₱3,000,000).

You file and pay percentage tax return or BIR Form No. 2551M not later than the 20th day of the month following the applicable month (Update: TRAIN LAW made it quarterly BIR Form No. 2551Q). On the other hand, you file and pay monthly VAT return or BIR Form No. 2550M not later than the 20th day of the month following the applicable month, and the quarterly VAT return BIR Form No. 2550Q not later than the 25th day of the month following the applicable quarter. Likewise, if you are a VAT registered, you will be required to submit a summary list of sales and purchases, and issue VAT O.R. with VAT separately shown. Please note that every failure is subject to penalty so do not miss out.

5. Withholding taxes

In paying some expenses, you are automatically appointed by the BIR as a withholding tax agent. If you have some employees, you are required to withhold tax on compensation every payroll, remit monthly using BIR Form No. 1601C with a summary return at the end of the year using BIR Form No. 1604C and issue withholding tax certificates to employees using BIR Form No. 2316 annually or after separation from employment. If your salary to them is a minimum wage only, then, the same is exempt from withholding tax, including the holiday pay, hazard pay, overtime pay, and night shift differential. Should you provide de minimis benefits, the same is also not exempt from withholding.

For specific expenses, you will be required to withhold expanded withholding  taxes  like rental payment of 5%, professional fees of your bookkeeper and other professionals you hired 10%/15%, commission of 10%, and the likes specified in Revenue Regulations No. 2-98, as amended. Withholding is based on the amount you paid, excluding VAT, if any, and amounts paid should also be issued O.R. by your service providers. You will be required remit monthly expanded withholding taxes using BIR Form No. 1601E with a summary return at the end of the year using BIR Form No. 1604E and issue withholding tax certificates to payees using BIR Form No. 2307 quarterly or every after payment.

6. Filing and payment of income taxes

You are likewise required to file and pay quarterly and annual income taxes based on taxable net income at the rate of  5-32% using the tax table prescribed by the BIR. You pay income tax if your free lancing generated taxable income measured by the difference between your gross receipts and deductible expenses – business expenses and personal exemptions of p50,000 a year and P25,000 for every qualified dependent child up to four (4) (Update under TRAIN Law: no deduction allowed related to personal exemption and qualified dependent).  If you were withheld 10% or 15% or 2% upon your collections, please secure your BIR Form No. 2307 because they are your advance income tax payments deductible from your income tax returns.

Quarterly taxable net income is the difference between your gross receipts and business expenses, and is required to be filed not later than 15th day of the month following the end of applicable quarter using BIR Form No. 1701Q. Annual income tax return is filed not later than April 15 after the end of the applicable calendar year.

7. Audited financial statements (AFS)

If your gross receipts in any one quarter exceeds P150,000.00, your annual income tax return must be accompanied by a financial statements audited by an independent certified public accountant, except if you opted for optional standard deduction (OSD) in your income tax returns, where, in some instances, you may find some tax savings under OSD (Update under TRAIN Law: ..there is a mandatory requirement for corporations, companies, partnerships or persons whose gross annual sales, earnings, receipts or output exceed Three million pesos (₱3,000,000) to have their books of accounts audited and examined yearly by an independent Certified Public Accountants).You bookkeeper cannot make the audit because of the requirement of independence in mental attitude in our profession, so it will normally refer your account to another auditor. AFS is not just for simple compliance. It could serve as your opportunity for check and balance to determine whether your account had been properly handled, and establish the credibility of your financials with the government agencies and third parties, such as when securing financing with banks and financing institutions. This will cost you some amount based on the volume of your transactions.

8. Local tax compliance

You will likewise be required to secure annual community tax certificates, and business permits with the municipality or city of location. Please note that, as a rule, a business permit is a requirement for legality and you business or undertaking without it will be considered illegal. It may cost you some amount and an ounce of effort to secure one. You can either do it yourself, or secure some service providers actively engaged to secure one as they are more familiar with the process and the requirements. This will save you more headaches and irritations in processing.

Summary

The above only enumerates the most material tax types and there could be more depending on the transactions, like documentary stamp tax on lease agreements. For start-up freelancers, tax compliance is the least thing that comes to priority but the most important consideration that you cannot go away with. For me, tax compliance and trade, business, or profession always go hand in hand with. In all you business endeavors, you must take into account tax compliance so you can really enjoy the full benefits of your success. I feel pity those who succeed in the business endeavors after years, but, suddenly pulled to the ground by tax evasion charges. BIR is now aggressive on tax administration and more taxpayers and even CPAs are becoming targets of tax evasion. It will not only destroy your savings invested in your properties, but, also the credibility of your name that you have long developed through he years. It takes time to develop one, but, so easy to destroy.

(Garry S. Pagaspas is a Resource Speaker with Tax and Accounting Center, Inc. He is a Certified Public Accountant and a degree holder in Bachelor of Laws engaged in active tax practice for more than seven (7) years now and a professor of taxation for more than four (4) years now. He had assisted various taxpayers in ensuring tax compliance and tax management resulting to tax savings rendering tax studies, opinions, consultancies and other related services. 

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances.

Revenue Memorandum Circular No. 21-2012 dated May 3, 2012 circularizes the full text of Executive order No. 68 dated March 27, 2012 (E.O. 68 – 2012) entitled “Monetization Program of Outstanding Value-added tax (VAT) tax Credits Certificates (TCs)”

For easy reference, hereunder are the summary of rules laid down in EO 68 – 2012:

• Five-year (2012-2016) VAT TCC monetization program is a mechanism to give the cash equivalent of outstanding VAT TCC for the government to promote conducive business environment and raise business credibility both locally and abroad;
• VAT TCCs covered are those TCCs secured under Section 112 (A) of republic Act No. 8424 (Tax reform Act), as amended, and drawback TCCs under Section 106 (e) of the Tariff and Customs Code of the Philippines (TCCP), as amended.
• Qualified VAT TCC holders shall have the following monetization options:

1. Collect from a trustee bank a discounted value of their TCCs. Government Financing Institutions shall serve as trustee bank for the purpose and a special trust account shall be established; or
2. Collect the full cash value of the TCCs upon certain maturity date, to be determined by the Bureau of Internal Revenue (BIR) or Bureau of Customs (BoC) in accordance with the implementing rules of EO 68-2012 to be issued jointly by BIR and BoC later;

• The funding requirements of the VAT TCC monetization shall be included in the National expenditure Program (NEP) of years 2012 to 2016 to be ensured by the Department of Budget and Management (DBM) in coordination with the Department of Finance (DOF);
• For the monetization, verification procedures shall be conducted by the BIR and/or BoC and after such process, a Notice of Payment Schedule shall be issued to qualified VAT TCC holders.
• Commission of Audit (COA) shall have the power and duty to examine the recording of all transactions relative to monetization of TCCs;
• Beginning 2012, the BIR or BoC shall no longer issue TCC for VAT refund unless applied for by the VAT taxpayer under Section 112 (A) of republic Act No. 8424 (Tax reform Act), as amended, and drawback TCCs under Section 106 (e) of the Tariff and Customs Code of the Philippines (TCCP), as amended.

On comment, this seem to be a surprising development in the midst of government’s collection struggles, but is most welcomed! For VAT TCC holder’s, this might be a good option to convert such TCCs to cash that you may use for funding the operations, settlement of obligations, and for other purposes.

In the meantime, let us await the joint implementing rules and regulations of the BIR and BoC. Let us determine the specific details of its implementation as our guide.

Reference:

 Revenue Memorandum Circular No. 21-2012 dated May 3, 2012

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may also please send mail at info(@)taxacctgcenter.ph, or you may post a question at Tax and Accounting Center Forum and participate therein.

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