Value-Added Tax

Value-Added Tax

     It is a tax on the value added by every seller to his purchases of goods or services; as well as on importation of goods into the Philippines, whether for personal or business use.  VAT is a tax on consumption levied on the sale, barter, exchange or lease of goods or properties and services in the Philippines and on importation of goods into the Philippines levied at each stage of the production and distribution process (VAT revenue is secured by being collected throughout the  production/distribution process and production decisions do not get distorted due to the tax credit provision on inputs).  Personal end-consumers of products and services cannot recover VAT on purchases, but businesses are able to recover VAT (input tax) on the products and services that they buy in order to produce further goods or services that will be sold to yet another business in the supply chain or directly to a final consumer.  In this way, the total tax levied at each stage in the economic chain of supply is a constant fraction of the value added by a business to its products, and most of the cost of collecting the tax is borne by business, rather than by the state.

VAT is an indirect tax, which may be shifted or passed on to the buyer, transferee or lessee of goods, properties or services.   The Value Added Tax (VAT) Reform Act (Republic Act 9337), more commonly known as the expanded VAT (E-VAT) law, was passed by Congress in May 2005 and amended by RA9361.  After some objections on its legality, it was finally implemented on November 1, 2005.  This law provides for

-                     the expansion of the coverage of the VAT,

-                     reduction in the excise tax on certain petroleum products, and

-                     increase in the corporate income tax rate.

The burden of the tax is borne by the final consumers of VAT-able  goods or services although the producers and suppliers of these goods and services are the ones who have to file their VAT returns to the Bureau of Internal Revenue (BIR).  The VAT system was first adopted in the Philippines in 1988 in place of the sales/turnover tax and a host of other taxes.  At present, a single rate destination principle value added tax equivalent to 12% based on the following:

	Nature of Transactions		Tax Base
a.	Sale of goods or properties		Gross selling price
b.	Sale of services		Gross receipts
c.	Importation		Total landed cost
d.	Dealers in Securities		Gross Income

“Importer”

-   refers to any person who brings goods into the Philippines, whether or not made in the course of trade or business.

-   Importation is not a sale of goods, or sometimes not even a business activity, yet is subject to vat.  This is because vat is a consumption tax levied on sales to be borne by consumers with sellers acting simply as tax collectors.  And, as the origin of importation is from a foreign seller which is outside Philippine jurisdiction, the consumption tax (vat) is instead paid directly by the importer.

 “For subsistence or livelihood”

-   Any business pursued by an individual where the aggregate gross sale or receipts do not exceed P100,000 during the any 12 month period shall be considered principally for subsistence or livelihood and not in the ordinary course of trade or business.

Business Taxes on Types of Business

 Business Taxes:

*         Taxes imposed upon onerous transfers such as sale, barter, exchange or importation.

*         Business taxes are in addition to income and other taxes paid unless specifically exempted.  

*  If the Transaction is subject to vat, then it is exempt from percentage tax and vice-versa.  However, it may still be subject to excise tax.

1.    Value-added taxes. 

VAT is a tax on the value added by every seller to the purchase price or cost in the sale or lease of goods, property or services in the ordinary course of trade or business as well as on importation of goods into the Philippines, whether for personal or business use.  It is a business tax.  Without a business pursued in the Philippines (except importation) by the taxpayer, the tax cannot be applied.  “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, non-profit private organization or government entity.  Generally, services rendered in the Philippines by a non-resident foreign person shall be considered as being rendered in the course of trade or business even if the performance is not regular.

2.    Percentage taxes

*  It is a tax imposed on sale, barter, exchange or importation of goods, or sale of services based upon gross sales, value in money of receipts derived by the manufacturer, producer, importer or seller measured by certain percentage of the gross selling price or receipts.

3.    Excise taxes

 * It is a tax imposed on goods manufactured or produced in the Philippines for domestic sales or consumption or for any other disposition, and goods imported.  Specifically, excise taxes are imposed on:

Manufacturers and Importers, of any of the following categories of goods or article:

a.     Distilled spirits such as liquors

b.     Wines

c.     Fermented liquors (i.e., beer)

d.     Cigars

e.     Cigarettes

f.      Automobiles

g.     Manufactured fuel oil (i.e., gasoline bunker fuel oil)

h.     Mineral products (i.e., gold, silver); and

i.      Non-essential goods (i.e., jewelry, perfumes)

*  Classifications:

a. Specific Excise Tax -  Based on weight or volume capacity or any other      physical unit of measurement.

b. Ad-Valorem Excise Tax – Based on selling price or other specified value of    the goods.  

*  Purposes of Imposing Excise Tax

a.     To curtail consumption of certain commodities which are considered as         harmful to the individual or to the community.

b.     To protect domestic industries from competition posed by similar imported    products.

c.     To distribute the tax burden in proportion to benefit derived from a               particular government service.

Tax Exempt Corporations

Under Section 30 of NIRC:

Sec.         30.          Exemption from Tax on Corporation. – The following organizations shall not be taxed in respect to income received by them as such:

(A)       Labor, agricultural or horticultural organizations not organized principally for                profits.                        

(B)       Mutual savings bank not having a capital stock represented by shares, and                     cooperative bank without capital stock, organized and operated for mutual purposes     and without profit;

(C)       Cemetery company owned and operated exclusively for the benefit of its members;

(D)          Non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or rehabilitation of veterans, no part of its net income or asset shall belong or inure to the benefit of any member, organizer, officer or any specific person;

(F)      Business league, chamber of commerce, or board of trade, not organized for profit     and no part of the net income of which inures to the benefit of any private stockholder or individual;

(G)      Civic league or organization not organized for profit but operated exclusively for         the promotion of social welfare;

           (H)       A non-stock nonprofit educational institution;

(I)       Government educational institution;

(J)       Farmers or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organizations of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and

(K)     Farmers, fruit growers, or like association organized and operated as a sales agent for the  purpose of marketing the products of its members and turning back them the proceeds of sales, less the necessary selling on the basis of the quantity of produced finished by them.

Note:     Notwithstanding the provisions in the preceding paragraphs;

(a)   the income of whatever kind and character of the foregoing               organizations;

(b)   from any of their properties, real or personal or;

(c)   from any of their activities conducted for profit;

(d)   regardless of the disposition made of such income;

(e)   shall be subject to corporation tax.

Multinational Companies

Multinational Companies
Regional Operating headquarters		Regional  Headquarters
Tax rate:    10% of net income		Tax rate:   Exempt
Defined:		Defined:
·         Is a branch established in the Philippines which is engaged in any of the following qualifying services: Ø  General administration and planning. Ø  Business planning and coordination. Ø  Sourcing/procurement of raw materials and components. Ø  Corporate finance advisory services. Ø  Marketing control and sales promotion. Ø  Training and personnel management. Ø  Logistic services. Ø  Research and development services and project development. Ø  Technical support and maintenance. Ø  Data processing and communication. Ø  Business development.		·         Is a branch established in the Philippines and which headquarters do not earn or derived income from the Philippines and which act as supervisory, communications, and coordinating center for its affiliates, subsidiaries, or branches in the Asia-Pacific region and other foreign markets

OFFSHORE BANKING UNITS (Special Resident Corporation)

§  “OBU” is a branch of a foreign bank located in an offshore financial center (OFC). It may accept deposits and loans from other foreign banks and OBUs, but may not accept deposits from (or make loans to) the residents of the country in which it is located. OBUs are otherwise unrestricted in their legitimate activities, and are free from the monetary controls of the country of location.

Foreign banking institutions can establish and manage offshore banking units. Offshore banking units are allowed to provide all traditional banking services to non-residents in any currency other than Philippine national currency. Banking transactions to residents are limited and restricted.

These RESIDENT foreign corporations are subject to tax on income derived from:

1.       Foreign currency transactions with local commercial banks. -  EXEMPT

2.       Foreign currency transactions with branches of foreign banks authorized by BSP.- EXEMPT

3.       Interest income derived from foreign currency loans granted to residents.  -  10%

“1-3” were previously subject to 10% final tax.  “1 and 2” NOW are tax exempt

TAX EXEMPT TRANSACTIONS:

§  Income of NON-resident individual and Non-Resident corporations from transactions with OBUs.

Tax Base	Tax Rate
Ø  Income from foreign currency transactions with: Nonresidents OBUs in the Philippines Local commercial bank (including Phil. Branches of foreign banks)	EXEMPT FROM ALL TAXES (used to be 10% final tax) except net income from transactions specified by the Sec. of Finance.
Ø  Interest income from foreign currency loans granted to residents other than OBUs or local commercial banks	10% final tax
Ø  Any income of NON-Resident individual or corporation from OBUs	Exempt

Tax on Branch Profit Remittance (Except on activities registered with PEZA)

Tax Base	Tax Rate
Any profit remitted by a branch office to its head office.  Total profits applied or earmarked for remittance without deduction for the tax component. (Resident Corporations)	15%

Improperly Accumulated Earnings Tax (Closely held Corporations)

Revenue Memorandum Circular (RMC) No. 35-2011 has issued by the bureau for the clarification of issues concerning the Imposition of Improperly Accumulated Earnings Tax Pursuant to Section 29 of the Tax Code of 1997, in relation to Revenue Regulations No. 2-2001.

1. In addition to other taxes imposed, there is imposed for each year on the improperly accumulated taxable income of each corporation an improperly accumulated earnings tax equal to 10% of the improperly accumulated taxable income. The objective of imposing improperly accumulated earnings tax is to force corporations to distribute dividends to shareholders in order that related tax in dividends will be collected.

2. Improperly accumulated earnings tax is imposed on improperly accumulated taxable income earned starting January 1, 1998 by domestic corporations as defined under the Tax Code and which are classified as closely held corporations. The improperly accumulated earnings tax shall NOT APPLY TO:

a. Publicly held corporation;

b. Banks and other non-bank financial intermediaries;

c. Insurance companies;

d. Taxable partnerships;

e. General professional partnerships;

f. Non-taxable joint venture; and

g. Enterprises registered with PEZA and under Bases Conversion and Development Act, special economic zones.

Closely held corporations are those corporations at least 50% in value of the outstanding capital stock or at least 50% of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by or for not more than 20 individuals. Domestic corporations not falling under the aforementioned definition are, therefore, publicly-held corporations.

Certain Circumstances indicating Improper accumulation of profits:

1. Substantial changes to corporate officers who are stockholders at the same time/Personal loans.

2. Radical change in the nature of business after a considerable surplus has been accumulated.

3. Investment is unrelated business or activity.

4. Substantial expenditures of corporations for the personal benefit of stockholders only.
                       

PRESUMPTIONS of Improper Accumulation
a. The fact that any corporation is a mere holding company; or investment company shall be prima facie evidence of a purpose to avoid the tax upon its shareholders or members.

“Holding or Investment Company” shall refer to a corporation having practically NO ACTIVITIES except holding property, and collecting the income therefrom or investing the same

b. The fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of a business shall be determinable of the purpose to avoid the tax upon its shareholders or members, unless the corporation, by clear preponderance of evidence, shall prove to the contrary.

When is accumulation of profits Unreasonable?

If it is not required for legitimate business purposes, considering all circumstances of the case. 

The following are considered LEGITIMATE BUSINESS PURPOSES.

a. For additional working capital needed by the business.

b. For plant expansion of the business.

c. If, in accordance with contractual obligations, placed to the credit of a sinking fund for the purpose of retiring bonds issued by the corporation.

3. EFFECT of IAET: Once the profit has been subjected to IAET, the same shall no longer be subjected to IAET in later years, even if not declared as dividends. Notwithstanding the imposition of the IAET, profits which have been subjected to IAET, when finally declared as dividends, shall nevertheless be subject to tax on dividends under the Tax Code, except in those circumstances where the recipient is not subject thereto.

4. Proforma computations of improperly accumulated taxable income.

Taxable Income for the year (e. g., 2010)                                                     P xxx
Add:
 (a) Income subjected to Final Tax                           P xxx
 (b) Income exempt from tax                                       xxx
 (c) Income excluded from gross income                    xxx
 (d) NOLCO                                                                 xxx                                 xxx

Less: 
Dividends, actually or constructively paid                   xxx 

Income tax paid for the whole year                              xxx                                 xxx
Total                                                                                                                    xxx  
Add: Retained Earnings from prior years

Accumulated Earnings as of December 31, 2010
Less: Amount that may be Retained

          (100% of Paid-Up Capital as of December 31, 2010)
          or Amount reserved for the reasonable needs for the business                  xxx 

Improperly accumulated earnings or

Improperly Accumulated Taxable Income                                                 P   xxx

Multiply by: Tax Rate                                                                                          10%

Improperly accumulated earnings tax                                                         P  xxx

5. Reasonable needs of the business include the reasonably anticipated needs of the business.

6. The IAET is not computed and applied by the corporation on itself in its income tax return for a taxable year. The BIR makes the computation on its allegation of improper accumulation of profits by the corporation. The BIR makes a computation a year or years after the improper accumulation shall have taken place.

SOURCE: http://www.bir.gov.ph/images/bir_files/old_files/pdf/59678RMC%20No%2035-2011.pdf and http://www.bir.gov.ph/images/bir_files/old_files/pdf/rr02_01.pdf

Requirements on the Processing of Applications for Cash Conversion of Tax Credit Certificates

The Bureau just recently issued the Revenue Memorandum Circular no. 77-2014, clarifying certain requirements on the processing of applications for cash conversion of tax credit certificates.

It is clarified in the circular the all applications for cash conversion of TCCs which have been filed with the concerned revenue Office that issued the said TCC before the expiration of the validity period, as indicated on the face of the TCC, shall no longer be required to be revalidated for purposes of continuance of the processing of applications for TCC cash conversion.

The provisions of Section 5 b) of Revenue Regulations No. 5-200 dated July 19, 200 is clear that: "Any request for conversion into cash refund of unutilized tax credits may be allowed during the validity period of any TCC.xxx" (underscoring ours).

On the other hand, the provisions of Section 5 c) and d) of the same regulations governing revalidation only apply to any TCC whose validity period is about to expire and the same needs to be revalidated by reason that the holder of the TCC has to apply the unutilized portion thereof on its/his/her tax liabilities, subject to the prescribed exception where the TCC has already been previously revalidated.

Accordingly, the processing of all applications for TCC cash conversion filed before the expiration of the validity period of the TCC with the TCC-issuing Office and remained pending with and withheld by the concerned processing revenue Office as of the date of expiration thereof by reason of the above issue shall proceed accordingly, whether for verification, approval or for payment, without the need for revalidation of the covered TCC.

Refer http://www.bir.gov.ph/images/bir_files/internal_communications_2/RMC%20No%2077-2014.pdf of the full tex of the said circular.

Revenue Regulations No. 5-2000 was issued in August 15, 2000 governing the manner of the issuance of Tax Credit Certificates (TCCs) and the conditions for their use, revalidation and transfer. It is stated in the regulations that a TCC may be used in the by the grantee or his assigneee in the payment of his direct internal revenue tax liability but in no case shall the TCC be use in the payment of the following:

1. Payment or remittance for any kind of withholding tax;

2. Payment arising from the availment of tax amnesty declared under a legislative enactment;

3. Payment of deposits on withdrawal of exciseable articles;

4. Payment of taxes not administered or collected by the Bureau of Internal Revenue; and

5. Payment of compromise penalty

Besides, in no case shall a tax refund or TCC be given resulting from availment of incentives granted pursuant to special laws for which no actual tax payment was made.  

BIRissued TCCs may be transferred in favor of an assignee subject only to the following conditions: 

1) the transfer of a valid TCC must be with prior approval of the Commissioner or his duly authorized representative; 

2) the transfer should be limited to one transfer only; and 

3) the transferee shall use the TCC assigned to him strictly in payment of his direct internal revenue tax liability and in no case shall the same be available for conversion to cash in his hands. 

Any TCC issued which remains unutilized after five (5) years from the date of issue shall, unless revalidated before the end of the fifth year, be considered invalid. This means that the TCC shall not be allowed for use in payment of any of the taxpayer's internal revenue tax liability nor allowed to be transferred and the unutilized amount thereof shall revert to the General Fund of the National Government. The revalidated TCC shall be valid for a period of five years from the date of issue. Any request for conversion into cash refund of unutilized tax credits may be allowed during the validity period of the TCC, subject to conditions specified in the Revenue Regulations. Any TCC issued prior to January 1, 1998, may be submitted for revalidation by the holder within six (6) months prior to the end of the fifth (5th) year. No revalidated TCC shall be issued unless the Commissioner's duly authorized representative has certified that the applicant taxpayer has no outstanding tax liability. If the holder has any outstanding tax liability, said liability should be applied first against the TCC sought to be revalidated through the issuance of a Tax Debit Memo.

Special Corporations

SPECIAL CORPORATIONS

Taxpayer		Tax Base	Tax Rate
·        Proprietary educational institution and non-profit hospital		Taxable income from all sources	10%
·         Resident international carrier		Gross Philippine Billings	2 ½ %
· Regional Operating headquarters of multinational corporation		Philippine Taxable Income	10%
·         Nonresident owner or lessor of vessel		Gross rentals, lease and charter fees from the Philippines. ·         Only from charters or leases of the vessels to Filipino citizens or corporations approved by the Maritime Industry Authority.	4 ½ %
·    Nonresident cinematographic film owner, lessor or distributor		Gross income from the Philippines	25%
·     Nonresident lessor of aircraft, machinery   and other equipment		Gross rentals, charges and other fees from Philippine sources	7 ½ %
· Regional Operating headquarters of multinational corporation		Philippine taxable income	10 %

REMINDER:

-        MCIT is not applicable to Special Corporations

-  If the Gross income of a proprietary educational institution or hospital fromunrelatedtrade, business, or other activity exceeds 50% of the total gross income derived from all sources, such educational institution or hospital will be taxed as an ordinary corporation.

-     Nonresident owners of vessels are treated as special corporations only from charters or leases of the vessels to Filipino citizens or corporations approved by the Maritime Industry Authority.

-  All revenues of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes shall be exempt from taxes.

Gross Philippine Billings

For international Air carrier	Refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo or mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or payment of the ticket or passage document.
For International Shipping	Means gross revenue whether for passenger, cargo, or mail originating from the Philippines up to final destination, regardless of the place of sale or payment of freight documents.

Private Educational Institutions and Hospitals:

·         If their gross income from unrelated trade or business exceed 50% of their gross income from all sources the rule on ordinary corporation (30% rates) shall apply.

For Non-Resident Corporations:

·         Unless, otherwise, provided a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to 30% of the gross income received during the taxable year from all sources within the Philippines such as interests, rents, salaries, premium (except reinsurance premiums), annuities, emoluments, or other fixed or determinable annuities. Periodical or casual gains, profits and income and capital gains, except income subject to Capital gains tax.