Philippines: VAT withholding on government payments, changes effective 2021

Philippines: VAT withholding on government payments

A measure introduced by Republic Act (RA) No. 10963 (also known as the “Tax Reform for Acceleration and Inclusion (TRAIN) Act”) concerns the system of withholding of value added tax (VAT) on sales to government.

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The provision—effective 1 January 2021—provides that the 5% rate of withholding under the VAT system will transition or shift to a creditable withholding system, except for payments for purchases of goods and services arising from projects funded by Official Development Assistance (which are not subject to withholding).


Background

Before the effective date of these VAT rules, the government or any of its political subdivisions, instrumentalities or agencies including government-owned or controlled corporations were required to withhold and deduct a final VAT at the rate of 5% of a gross payment made to a seller of goods or services. The 5% withholding VAT was final and represented the net VAT payable of the seller. The remaining 7% VAT effectively accounted for the standard input VAT in lieu of the actual input VAT attributable to such sales to government. Thus, the allowable input tax on sales to government to be credited against the output tax would not exceed 7% of the gross payments. In case the actual input VAT exceeded the 7% standard input VAT, the excess was to be recognized as a deductible expense. However, if the actual input VAT were less than the 7% standard input VAT, the difference would be closed to other income of the seller. As such, the VAT treatment on sales to government has been distinct from VAT treatment of non-government sales because the liability of 5% final withholding VAT rested primarily on the government or any of its political subdivisions, instrumentalities or agencies.


KPMG observation

The tax authority has not yet released guidelines on the upcoming transition in the treatment of VAT on sales to the government, but tax professionals anticipate changes are expected with the transition to the creditable withholding VAT system. For instance, 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, is only be liable for the remaining 7% VAT which also pertains to the standard input VAT. This, it is expected that the 5% withholding VAT would no longer be considered as final and would simply be credits or adjustments to the final VAT liability of the seller. In relation to this, another possible change may affect the recognition of creditable input tax attributable to sales to government. As the 5% withholding VAT would 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 VAT-able sales to non-government entities is computed.

Read a January 2021 report prepared by the KPMG member firm in the Philippines 

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