There has been a lot of confusion among entrepreneurs, business managers and self-employed professionals with regard to the value-added tax (VAT). As Philippine-based income-earners on the “S” and “B” quadrants of the Cashflow Quadrant® conceptualized by world-renowned personal finance adviser Robert Kiyosaki, it is imperative for us to know the subtle nuances of the VAT regime. Being familiar with these concepts will help us avoid unnecessary expenses due to overpayment—or underpayment—of taxes. Remember, non-payment or underpayment shall also result in penalties and surcharges that may be slapped by the taxing authority on erring taxpayers.
So, how does a VAT-registered seller of goods or services know whether or not to pass on its VAT burden to its customers or clients? What if certain clients claim that we should not pass on to them the VAT burden because of their being VAT-exempt or VAT Zero-Rated? What are their differences and should they be treated?
Pursuant to Section 106 of the National Internal Revenue Code, a.k.a. the Tax Code, VAT is imposed on the gross selling price of the goods or services provided by the VAT-registered seller. It goes on further to define the term ‘gross selling price’, thus—
“The term ‘gross selling price’ means the total amount of money or its equivalent which the purchaser pays or is obligated to pay to the seller in consideration of the sale, barter or exchange of the goods or properties, excluding the value-added tax. The excise tax, if any, on such goods or properties shall form part of the gross selling price.”
On the other hand, Section 108 of the NIRC defines the phrase ‘sale or exchange of services’, thus—
“The phrase ‘sale or exchange of services’ means the performance of all kinds or services in the Philippines for others for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors; stock, real estate, commercial, customs and immigration brokers; lessors of property, whether personal or real; warehousing services; lessors or distributors of cinematographic films; persons engaged in milling processing, manufacturing or repacking goods for others; proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers; dealers in securities; lending investors; transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire another domestic common carriers by land, air and water relative to their transport of goods or cargoes; services of franchise grantees of telephone and telegraph, radio and television broadcasting and all other franchise grantees except those under Section 119 of this Code; services of banks, non-bank financial intermediaries and finance companies; and non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and bonding companies; and similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. The phrase ‘sale or exchange of services’ shall likewise include:
(1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan secret formula or process, goodwill, trademark, trade brand or other like property or right;
(2) The lease of the use of, or the right to use of any industrial, commercial or scientific equipment;
(3) The supply of scientific, technical, industrial or commercial knowledge or information;
(4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or enjoyment of any such property, or right as is mentioned in subparagraph (2) or any such knowledge or information as is mentioned in subparagraph (3);
(5) The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person.
(6) The supply of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme;
(7) The lease of motion picture films, films, tapes and discs; and
(8) The lease or the use of or the right to use radio, television, satellite transmission and cable television time.
Lease of properties shall be subject to the tax herein imposed irrespective of the place where the contract of lease or licensing agreement was executed if the property is leased or used in the Philippines.
The term “gross receipts” means 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 and deposits and advanced payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding value-added tax.”
For VAT-exempt or non-VAT purchasers, Revenue Regulations 12-2003 provides:
“SECTION 4. Treatment of the Output Tax Shifted to the Buyer of Services. – In general, the payor of the income/fee who is a VAT-registered person shall be entitled to claim the output tax paid by the financial institution as an input tax credit. On the other hand, if the payor is not a VAT-registered person, the VAT passed on by the payee shall form part of his cost. Provided, that a VAT receipt/invoice shall be issued by the payee for all the compensation for services received which shall be used as the evidence for the claim of input tax.” (underscoring mine)
For the tax (VAT) treatment of the sale, barter or exchange of goods or sale or exchange of services or lease of properties made by suppliers from the customs territory to the registered Freeport Zone enterprises in the Subic Freeport Zone (SFZ), including the Clark Freeport Zone (CFZ), as well as the Poro Point Freeport Zone (PPFZ), and vice versa pursuant to the provisions of Sections 12 and 15 of Republic Act (RA) No. 7227, as amended by RA 9400, in relation to Sections 106(A)(2)(c) and 108(B)(3) of the Tax Code of 1997, as amended by RA 9337, and implemented by Sections 5, 6, 12, and 13 of Revenue Regulations (RR) No. 4-07 amending Sections 4.106-5, 4.106-6, and 4.108-6 of RR 16-2005, Revenue Memorandum Circular 50-2007 provides a Q&A guide, to wit:
Q1: How will the sale, barter or exchange of goods or properties into the Freeport Zone by suppliers/contractors from the Customs Territory be considered?
A1: Such transactions shall be considered as export sales in accordance with RA 7227, as amended by RA 9400, which provides that the Freeport Zones shall be operated and managed as a separate customs territory. Moreover, Executive Order (EO) No. 226 provides that sales from the Customs Territory to export processing zones are considered as “export sales”.
Q2: What will be the treatment of sale, barter, exchange or lease of goods, properties and sale or exchange of services to a registered Freeport Zone enterprise by sellers/contractors from the Customs Territory?
A2: If the seller is a VAT taxpayer, such sale, barter or exchange shall be subject to VAT at zero (0%) percent. If the seller is a non -VAT taxpayer, the transaction shall be exempt from VAT.
Q3: What is meant by a “zero-rated” sale and an “exempt” sale?
A3: A zero-rated sale of goods, properties and/or services (by a VAT-registered person) is a taxable transaction for VAT purposes, but shall not result in any output tax. However, the input tax on purchases of goods, properties or services, related to such zero-rated sale, shall be available as tax credit or refund in accordance with existing regulations. Under this type of sale, no VAT shall be shifted or passed-on by VAT-registered sellers/suppliers from the Customs Territory on their sale, barter or exchange of goods, properties or services to the subject registered Freeport Zone enterprises.
A VAT-exempt transaction, on the other hand, refers to the sale of goods, properties or services or the use or lease of properties that is not subject to VAT (output tax) under Section 109 of the Tax Code of 1997, and the seller/supplier is not allowed any tax credit of VAT (input tax) on purchases related to such exempt transaction.
Q4: What is the difference between an automatically zero-rated sale and an effectively zero-rated sale?
A4: An automatically zero-rated sale refers to a sale of goods, properties and services to a Freeport Zone-registered enterprise by a VAT-registered seller/supplier that is regarded as either an export sale or a foreign currency denominated sale under Section 106 of the Tax Code of 1997. An effectively zero-rated sale, on the other hand, refers to the local sale of goods, properties and services by a VAT-registered person to an entity that was granted indirect tax exemption under special laws or international agreements. Since the buyer is exempt from indirect tax, the seller cannot pass on the VAT and therefore, the exemption enjoyed by the buyer shall extend to the seller, making the sale effectively zero-rated.
Q5: What is the coverage of VAT zero-rating?
A5: The zero-rating will cover sale, barter, exchange or lease of all goods, properties and/or services by a VAT-registered seller/contractor from the Customs Territory to a Freeport Zone-registered enterprise and shall include, among others, the following:
- The sale/supply of ordinary cars, vehicles, automobiles, specialized vehicles or other transportation equipment, provided that these are used exclusively within the subject special Freeport Zones;
- The lease of properties by VAT-registered lessors, provided that such properties are located within the subject Freeport Zones;
- The sale/supply of electricity by the National Power Corporation (“NPC”) or by any other VAT-registered seller/supplier from the Customs Territory, to any registered Freeport Zone enterprise engaged in the distribution of power or electricity within the subject Freeport Zones; and
- The sale/supply of services, provided such services are rendered or performed within the Freeport Zone.
Q6: Since the Freeport Zones are considered as foreign soil and therefore, a separate tax jurisdiction, what is the VAT treatment of sale, exchange, barter or lease of goods, properties and/or services by a Freeport Zone-registered enterprise or Resident within the Freeport Zone?
A6: Such sale, exchange, barter or lease of goods, properties and services within the subject Freeport Zones shall be exempt from VAT. The following transactions are covered under this exemption:
- All transactions between and/or among two registered Freeport Zone Enterprises or Residents;
- Consumer goods purchased and consumed within the Freeport Zones;
- Sale/supply of services, including power or electricity, by a Freeport Zone-registered enterprise or resident within the Freeport Zone, regardless of whether or not the buyer or customer is a registered Freeport Zone enterprise or Zone Resident, provided that said power/electricity or services are rendered, used or consumed within the Freeport Zone ; and
- The lease of properties owned by Freeport Zone-registered enterprises or Residents, provided that such properties are located within the subject Freeport Zones.
Q7: What is the tax treatment for the income of Freeport Zone-registered enterprises derived from sources in the Customs Territory?
A7: Freeport Zone-registered enterprises may generate income from sources within the Customs Territory of up to thirty percent (30%) of its total income from all sources; provided, that should a Freeport Zone-registered enterprise’s income from sources within the Customs Territory exceed
thirty percent (30%) of its total income from all sources, then it shall be subject to the income tax laws of the Customs Territory; provided further, that in any case, customs duties and taxes must be paid with respect to transactions, receipts, income and sales of articles to the Customs Territory and in the Customs Territory.
Q8: What is the tax treatment of sale, barter or exchange of goods and properties by Freeport Zone-registered enterprises to a buyer from the customs territory? (i.e. from the Freeport Zone into the Customs Territory)
A8: The sale, barter or exchange shall be treated as a technical importation made by the buyer in the customs territory. The buyer shall be treated as the importer and shall be imposed the corresponding import taxes and duties prior to release of the goods or merchandise from Customs custody. Any unpaid taxes thereon, aside from being the prime liability of the buyer-importer, shall constitute a lien on such goods or merchandise imported from the Freeport Zone.
Q9: What is the tax treatment of a sale of service or lease of properties (machineries and equipment) by Freeport Zone-registered enterprises to a customer or lessee from the Customs Territory?
A9: The sale of service shall be exempt from VAT if the service is performed or rendered within the Freeport Zone. The lease of properties, on the other hand, shall likewise be exempt from VAT if the property is located within the Freeport Zone. However, if the properties (machineries and equipment) leased by the Freeport Zone registered enterprise is located outside of the Freeport Zone, payments to such enterprise will be considered as royalties and subject to the final withholding VAT of 12%.
Q10: What are the documentary requirements to be submitted by Freeport Zone-registered enterprises to the BIR to be entitled to the tax benefits clarified in this Circular?
A10: 1. Certificate of Registration and Tax Exemption as a Freeport Zone registered Enterprise;
- Copies of relevant documentation of the legal status of the business enterprise (Articles of Incorporation, Partnership Agreement, SEC Registration and similar documents) showing, among others, beneficial ownership;
- If a corporation, partnership or other business enterprise is organized or constituted outside the Philippines, the name, address of the legal agent of the enterprise in the Freeport Zone accompanied by sworn proof of consent of the agent to serve as such;
- Evidence of the physical location of the business enterprise within the Freeport Zone, such as certificate of title, tax declaration, property deed, lease agreement and similar documents;
- If previously part of a larger business enterprise doing business elsewhere in the Philippines, evidence of restructuring to exclude all business operations taking place inside the boundaries of the Freeport Zone; and that the unit left to operate inside the Freeport Zone is organized as a separate legal entity.
- List of assets comprising the investment to be made; and
- Such other documents as the BIR may require.
Please take note that services performed by service providers outside the Freeport/Economic zones are VATable pursuant to the above-quoted RMC. In addition, please remember that VAT-exempt transactions, which are covered by Section 109 of the NIRC is different from VAT Zero-rated and are thus governed by different rules as can be seen from above.
Knowing these rules will help you avoid unnecessary headaches and heartaches brought about by stressful BIR tax audit assessments. Remember, “ignorance of the law excuses no one from compliance therewith” (Article 3, Civil Code).