While it has been 2 years since the enactment of Republic Act (RA) No. 10963, otherwise known as the Tax Reform for Acceleration and Inclusion (TRAIN) Act, we have not yet seen the last of the effects of its implementation.
One of the amendments introduced by the TRAIN Law, which will be effective in 2021, relates to the value-added tax (VAT) withholding system on sales to government. Section 37 of the TRAIN Law, which amends Section 114(c) of the Tax Code, provides that beginning 01 January 2021, the 5% final withholding VAT system will shift to a creditable withholding system, except for payments for purchases of goods and services arising from projects funded by Official Development Assistance (ODA) as defined under RA No. 8182, otherwise known as the 'Official Development Assistance Act of 1996,' as amended, which shall not be subject to withholding tax.
Under the existing VAT regulations, the government or any of its political subdivisions, instrumentalities or agencies including government-owned or controlled corporations (GOCCs) are required to withhold and deduct a final VAT at the rate of 5% of its gross payment to a seller of goods and/or services. The said 5% withholding VAT is final and represents the net VAT payable of the seller. The remaining 7% VAT effectively accounts for the standard input VAT in lieu of the actual input VAT attributable to such sales to government. This means that the allowable input tax on sales to government to be credited against the output tax shall not exceed 7% of the gross payments. In case the actual input VAT exceeds the 7% standard input VAT, the excess shall be recognized as a deductible expense. On the other hand, if the actual input VAT is less than the 7% standard input VAT, the difference shall be closed to other income of the seller. Given such, the VAT treatment on sales to government is distinct from VAT treatment of non-government sales since the liability of 5% final withholding VAT rests primarily on the government or any of its political subdivisions, instrumentalities or agencies including GOCCs.
As of this writing, the BIR has yet to release any issuances for the guidelines on the upcoming shift in treatment of VAT on sales to the government. But what changes can we expect with the shift from final withholding VAT to creditable withholding VAT?
Under the final withholding tax system, the 5% final VAT withheld is already considered full and final payment due from the seller. This means that the seller, in substance, will only be liable for the remaining 7% VAT which also pertains to the standard input VAT as computed above.
Based on the foregoing, we can only assume that the 5% withholding VAT will no longer be considered as final and will simply be credits or adjustments to the final VAT liability of the seller. In relation to this, another possible change to be brought by the amendment may have an impact on the recognition of creditable input tax attributable to sales to government. As the 5% withholding VAT will be considered as creditable, there may no need to compare the actual input VAT attributable to the sales to government with the standard input VAT. This means that the input VAT attributable to sales to government may be computed in the same manner as how input VAT attributable to VATable sales to non-government entities is computed.
Whatever the case may be, let’s hope that once the BIR issues the guidelines for the upcoming shift from the 5% final withholding VAT system to the creditable withholding VAT system, it will simplify the rules on VAT treatment on sales to government in keeping with the aim of the TRAIN Law to make our tax system simpler, fairer, and more efficient.
Judith C. Resuello is a Supervisor from the Tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice and Tier 1 transfer pricing practice by the International Tax Review.
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