1. Is the phrase "exclusive of value-added tax" in a contract price stipulation sufficient to shift the burden of paying VAT from the seller to the buyer?
Yes. In Allegro Microsystems, Inc. v. CCT-Toyo Consortium (G.R. No. 229537, February 10, 2020), the Supreme Court held, in a case where the subject construction contract stipulates that the contract price is "exclusive of value-added tax", that value-added tax (VAT) being an indirect tax means that it is collected by the Bureau of Internal Revenue (BIR) from the seller which, in turn, is entitled to collect the amount from the end buyer or consumer.
The case originated from a construction arbitration where the sole arbitrator ruled that VAT as a sales tax should be collected from the seller-contractor and not from the buyer-project owner, especially since the contract is silent on any agreement to shift the burden of paying VAT from the seller to the buyer. The Court of Appeals reversed the ruling and held that the phrase "exclusive of value-added tax" actually means that the contract price does not yet include the VAT component of the transaction and that the buyer is the party ultimately liable to pay VAT owing to its very nature as an indirect tax. Thus, the seller can collect an additional 12% of the contract price from the buyer as VAT.
The Supreme Court affirmed the Court of Appeals and further rejected the buyer's argument that the shifting of the burden to pay VAT is merely "permissive" and cannot be merely inferred from the phrase "exclusive of value-added tax".
SyCipLaw TIP 1: To avoid disputes, contracting parties should clearly indicate whether the stipulated contract price for goods or services already includes the VAT component, and which party shall be responsible for VAT. In the absence of stipulation, the phrase "exclusive of Value-Added Tax" will be read to mean that the contract price does not yet include VAT and that the buyer is ultimately responsible for paying the VAT.
2. May a taxpayer be estopped from questioning the authority of revenue officers who conducted a tax audit merely because the taxpayer actively participated in the audit?
No. In Commissioner of Internal Revenue v. BASF Philippines, Inc. (CTA En Banc Case No. 2323 (CTA Case No. 9747), August 2, 2021), the Court of Tax Appeals (CTA) En Banc ruled that the authority of revenue officers who conduct a tax audit is vital in the tax assessment process. The tax assessment cannot be considered valid just because the taxpayer actively participated in the tax audit conducted by revenue officers who were not authorized to examine the taxpayer's accounts.
In this case, the CTA En Banc upheld the ruling of the CTA Division cancelling and setting aside the final assessment notices and the final decision on a disputed assessment issued by the BIR on the ground that the revenue officers were without authority to conduct the tax audit.
The CTA En Banc noted that a Memorandum of Assignment (MOA) had been issued authorizing the new revenue officers to conduct the audit of the taxpayer's accounts due to the re-assignment or transfer of the original revenue officers to new district offices. The CTA En Banc held that the new revenue officers who conducted the examination of the taxpayer's records may be deemed authorized to do so without the need for a new Letter of Authority (LOA), if the said letter, notice, or memorandum was signed by the Assistant Commissioner or Head Revenue Executive Assistant of the Large Taxpayers Service. Here, however, the MOA was signed by the Revenue District Officer who had no power to authorize the examination of the taxpayer's accounts.
The CTA En Banc held that "[e]stoppel cannot be applied in this case to ratify the validity of the assessments made" and "[c]onsidering that due process requirements were not shown to have been fulfilled by the BIR, the assessment notices subject of this case are all null and void."process requirements were not shown to have been fulfilled by the BIR, the assessment notices subject of this case are all null and void."
SyCipLaw TIP 2: Only the revenue officers duly authorized under a LOA may conduct an examination of a taxpayer's accounts. In case of reassignment or transfer of revenue officers, it is not necessary that a new LOA is issued; it is sufficient that an equivalent document transferring the authority to conduct the tax audit is issued by the Regional Director or, in respect of large taxpayers, the Assistant Commissioner or Head Revenue Executive Assistant of the Large Taxpayers Service. Tax assessments resulting from tax audits conducted by unauthorized revenue officers may be assailed for being null and void, notwithstanding participation by the taxpayer in the audit.
CTA decisions, while persuasive, do not become the law of the land, unlike decisions of the Supreme Court.
3. Sales to Export Enterprises - 12% or 0%?
The issuance of Revenue Regulations (RR) No. 9-2021 on June 11, 2021 was reported in the news to have generated a lot of confusion among the export enterprises located in economic zones and freeport zones due to the imposition of the 12% VAT on the sale of goods and services to export enterprises pursuant to the provisions of Republic Act (RA) No. 10963, or the Tax Reform for Acceleration and Inclusion (TRAIN) Law. The imposition of the 12% VAT on the sale of goods or services to export enterprises was further confirmed when the implementing rules and regulations of RA No. 11534, or the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE Act IRR) were issued on June 23, 2021. The CREATE Act IRR provided that the VAT zero-rating on local purchases apply to goods or services that are directly or exclusively used in the registered projects or activities of export enterprises, except that the transactions falling under Section 106(A)(2)(a)(3), (4) and (5) and Section 108(B)(1) and (5) of the National Internal Revenue Code, as amended (Tax Code) (which includes the sale of goods and services to export enterprises) will be subject to the 12% VAT pursuant to RR 9-2021. In response to the concerns raised by various stakeholders on the effect of RR No. 9-2021, the Department of Finance (DOF) deferred the implementation of RR No. 9-2021 on July 27, 2021, until an amended RR is issued.
Based on the draft RR amending the VAT regulations and the CREATE Act IRR, the sale of raw materials, inventories, supplies, equipment, goods or services, "to registered export enterprises, to be used directly and exclusively in their registered project or activity," shall be subject to 0% VAT. This is in line with Section 294(e) and Section 295(d) of the Tax Code (as amended by the CREATE Act) in relation to the VAT incentives that may be availed by registered business enterprises. The provision imposing the twelve percent (12%) VAT on transactions falling under Section 106(A) (2)(a)(3), (4) and (5) and Section 108(B)(1) and (5) of the Tax Code, as amended, is no longer found in the draft amendatory RR.
The CREATE Act IRR already defined the phrase "direct and exclusive use in the registered project or activity" as "raw materials, inventories, supplies, equipment, goods, services and other expenditures necessary for the registered project or activity without which the registered project or activity cannot be carried out." The draft amendatory RR, on the other hand, further provided that the term "registered export enterprise" refers to those export enterprises defined under Section 4(M), Rule 1 of the CREATE Act IRR and that they must be also a registered business enterprise as defined under Section 4(W) of the CREATE Act IRR. The draft amendatory RR likewise provides that the sale to registered export enterprises covered by Section 5, Rule 18 of the CREATE Act IRR (i.e., those registered with investment promotion agencies prior to the effectivity of the CREATE Act) of goods or services used directly and exclusively in their registered project or activity is qualified for VAT zero-rating. The draft amendatory RR has not yet been issued.
SyCipLaw TIP 3: The sale to registered export enterprises of goods and services is subject to 0% VAT provided that such goods or services are directly and exclusively used in their registered projects or activities. Given the requirement and considering that any deficiency VAT assessment will be imposed on the suppliers, suppliers will be seeking assurance from registered export enterprises that the goods or services being sold to the registered export enterprise will be directly and exclusively used in the latter's registered project or activity. Registered export enterprises will thus have to work with their suppliers to ensure that there is sufficient proof available to establish that the transaction between the supplier and the registered export enterprise is subject to 0% VAT in case of a deficiency VAT assessment from the BIR.
4. In a claim for refund of input VAT, does the input VAT have to be directly attributable to the taxpayer's zero-rated or effectively zero-rated sales?
No. In Commissioner of Internal Revenue v. Maersk Global Service Centres (Philippines) Ltd. (CTA EB No. 2260 (CTA Case No. 9432), July 29, 2021), the CTA En Banc ruled that there is nothing in Section 112(A) of the Tax Code which requires that the input VAT should be "directly" attributable to the taxpayer's zero-rated or effectively zero-rated sales.
This case involves a claim for a refund of input VAT. The Commissioner of Internal Revenue (CIR) claims that the taxpayer failed to prove that its input VAT is directly attributable to its alleged zero-rated sales. The CIR contends that Section 112(A) of the Tax Code uses the phrase "directly attributable", which means that input VAT must come from purchases of goods and services that actually form part of the finished product or service of the taxpayer.
The CTA En Banc ruled that "a plain reading of Section 112 (A) of the Tax Code, clearly shows that it merely states that the creditable input VAT should be 'attributable' to zero-rated or effectively zero-rated sales. There is nothing in the aforesaid Section which requires that the input VAT should be 'directly' attributable to zero-rated or effectively zero-rated sales." The CTA En Banc further ruled that Section 112(A) of the Tax Code merely requires a claimant to establish that: (1) it is engaged in zero-rated sales of goods or services; and (2) it paid input VAT that is attributable to zero-rated sales. Thus, "input taxes that bear a direct or indirect connection with a taxpayer's zero-rated sales satisfy the requirement of the law."
The CTA En Banc also clarified that the rulings in Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue (G.R. Nos. 141104 & 148763, June 8, 2007) and Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue (G.R. No. 159471, January 26, 2011) may no longer be applied as these cases "were decided under earlier Revenue Regulations which have been revoked by [RR] No. 14-2005 which deleted the requirement that the input VAT being claimed for refund should be 'directly and entirely attributable to zero-rated sales."
SyCipLaw TIP 4: A taxpayer has to prove the following requisites to be entitled to a claim for refund of input VAT: (1) the taxpayer is VAT-registered; (2) the claim for refund was filed within the prescriptive periods both in the administrative and judicial levels; (3) there must be zero-rated or effectively zero-rated sales; (4) input taxes were incurred or paid; (5) such input taxes are attributable to zero-rated or effectively zero-rated sales; and (6) the input taxes were not applied against any output VAT liability. In order to satisfy the 5th requirement, a taxpayer is only required to prove that it made a purchase of taxable goods or services for which it paid input VAT and, subsequently, engaged in the sale of goods or services subject to VAT, albeit at zero percent (0%) rate. A taxpayer is not required to prove that the input VAT should be "directly" attributable to its zero-rated or effectively zero-rated sales.
CTA decisions, while persuasive, do not become the law of the land, unliked decisions of the Supreme court.
5. POGOs - Quo vadis?
With the advent of RA No. 11590, a new law imposing taxes on Philippine Offshore Gaming Operations (POGOs), what path might POGOs possibly take? Will POGOs continue staying in the Philippines or will they seek shelter elsewhere? RA No. 11590 takes effect on October 8, 2021.
Under RA No. 11590, the entire gross gaming revenue or receipts of POGOs or the agreed predetermined minimum monthly revenue or receipts from gaming, whichever is higher, shall be taxed at five percent (5%) in lieu of all other direct and indirect internal revenue taxes and local taxes, with respect to gaming income (Gaming Tax). In addition, the Philippine Amusement and Gaming Corporation (PAGCOR) or any special economic zone authority, tourism zone authority, or freeport authority where POGOs are located are granted the power to impose regulatory fees not cumulatively exceeding two percent (2%) of the gross gaming revenue or receipts derived from gaming operations and similar activities of all licensed POGOs or a predetermined minimum guaranteed fee, whichever is higher. "Gross gaming revenue or receipts" means gross wagers fewer payouts.
To ensure that proper taxes and regulatory fees are levied, periodic reports about the operations of POGOs showing their gross gaming revenue or receipts shall be submitted to the BIR by PAGCOR or the concerned special economic zone authority, or freeport tourism zone authority, or freeport authority as certified by their third-party auditor which must be independent, reputable, internationally-known, and accredited by industry experts.
On the other hand, non-gaming revenues of POGOs duly-licensed by PAGCOR or any special economic zone authority, tourism zone authority, or freeport authority is subject to a tax of twenty-five percent (25%) of their taxable income (gross income less allowable deductions) from all sources within or outside the Philippines.
Sales by VAT-registered persons to POGOs subject to the Gaming Tax are subject to zero percent (0%) VAT. Services performed in the Philippines by VAT-registered service providers to licensed POGOs subject to the Gaming Tax shall likewise be subject to 0% VAT.
Alien individuals regardless of residency and who are employed and assigned in the Philippines by a POGO licensee or its service provider are subject to a final withholding tax of 25% of their "gross income" which shall be understood as including basic salary/wages, annuities, compensation, remuneration and other emoluments such as honoraria and allowances received from the POGO or its service provider. Failure of the POGO or its service provider to withhold this tax will result in the alien concerned being subject to deportation, barred from re-entering the Philippines, or blacklisted as a foreign employee by the Department of Labor and Employment, Bureau of Immigration, and other relevant agencies. Any other kind of income derived from all sources in the Philippines by the said alien individuals is subject to all existing and applicable local and national taxes.
It is noteworthy that while RA No. 11590 imposes taxes on POGOs, the declaration of policy of this law includes a statement that the State's recognition of legal forms of gambling, including POGOs, should not be understood as a favorable State endorsement of such activity.
SyCipLaw TIP 5: Under RA No. 11590, resident alien individuals will be taxed the same way as non-resident alien individuals with respect to their salaries and wages from the POGO. This is an exception to the general rule on the taxation of resident alien individuals under the Tax Code. The penalty of deportation of the employee for non-withholding by the employer POGO shows that RA No. 11590 goes beyond being merely a tax measure. Alien individuals working for POGOs should ensure that their POGO employers are properly withholding the relevant taxes on their compensation, as the risk of deportation and blacklisting for failing to withhold falls not on the POGO but on the employee.
6. Is it a good time to buy a passenger car or a light commercial vehicle?
Yes! In January 2020, the Department of Trade and Industry (DTI), acting on a petition filed by the Philippine Metalworkers Alliance, imposed provisional safeguard measures in the form of a cash bond amounting to PhP70,000.00 per unit of imported completely built unit (CBU) passenger cars and PhP110,000.00 per unit of imported CBU light commercial vehicles. The imposition was based on the DTI's preliminary determination that there was "a causal link between increased imports of the products under consideration and serious injury to the domestic industry" and was supposedly necessary to "prevent further injury to the local industry which, if not addressed, would be difficult to repair". The period covered by the investigation was 2014 to 2019 (POI). The cash bond was either (a) collected by dealers from the consumers at the time of the purchase of the vehicle in the form of a security deposit, which would be refunded to the consumers in case the measures are lifted, or (b) incorporated as part of the price of the vehicle, thereby increasing the selling price of the vehicle.
The Tariff Commission has recently completed its formal investigation and concluded, among other things, that: (a) there was no increase in imports of CBU passenger cars and CBU light commercial vehicles, both in absolute terms and relative to domestic production, during the POI, and (b) since such vehicles "were not imported in increased quantities during the POI... the determination of serious injury or threat thereof, causation, and unforeseen developments has become moot and academic." Although the Tariff Commission found that imported passenger cars and light commercial cars were directly competitive with locally produced passenger cars and light commercial cars, it recommended that "no definitive general safeguard measure be imposed on the importation of the CBU passenger cars and CBU light commercial vehicles subject of the investigation."
The DTI has respected the recommendation of the Tariff Commission and has stopped the implementation of the provisional safeguard measures. Dealers who collected security deposits from the consumers have also started processing the refunding of deposits to the consumers.
SyCipLaw TIP 6: A respondent in a petition for the imposition of safeguard measures may show, among other things, that there was no increase in imports over the POI, both in absolute and relative terms, that can be considered recent, sudden, and sharp. Once this is established, the Tariff Commission may consider the issue of serious injury or threat thereof, causation, and unforeseen developments moot and academic.
7. Are your bingeing days in streaming platforms over?
Almost, unless you are willing to pay an extra 12%. The House of Representatives approved upon third reading House Bill No. 7425 (HB 7425), which seeks to impose VAT on digital transactions in the Philippines.
HB 7425 proposes to amend Section 105 of the Tax Code, to include among taxable goods those that are digital or electronic in nature, and to include among taxable services those that are rendered electronically.
It will also add a new provision on the persons liable for VAT in digital or electronic transactions. Under this new provision, it will be the non-resident digital service provider that will be liable for assessing, collecting, and remitting VAT on transactions that go through its platform.
HB 7425 provides that a "digital service provider" is a "service provider of a digital service or good to a buyer, through operating an online platform for purposes of buying and selling of goods or services or by making transactions for the provision of digital services on behalf of any person."
The "digital service provider" may be: (1) a third party who, through information-based technology or the internet, sells products for its own account (such as a seller of goods and services); (2) one who acts as an intermediary between a supplier of goods and services (such as a merchandiser or retailer) who collects or receives payment for such goods and services from a buyer in behalf of the supplier and receives a commission thereon; (3) a platform provider for promotion that uses the internet to deliver marketing messages to attract buyers; (4) a host of online auctions conducted through the internet, where the seller sells the product or service to the person who offers the highest price for it; (5) a supplier of digital services to a buyer in exchange for a regular subscription fee over the usage of the said product or service; or (6) a supplier of goods or electronic and online services that that can be delivered through an information technology infrastructure, such as the internet.
On the other hand, the "buyer" is "any person who resides or consumes taxable digital services in the Philippines from a digital service provider either for personal consumption or for trade or business purposes."
"Digital service" is generally defined as "any service that is delivered or subscribed over the internet or other electronic network and which cannot be obtained without the use of information technology and whether the delivery of service may be automated."
The following services are considered as "digital services" under HB 7425: (1) online licenses of software updates, and add-ons, website filters, and firewalls; (2) mobile applications, video games, and online games; (3) webcast and webinars; (4) provision of digital content such as music, files, images, text, and information; (5) advertisement platform such as the provision of online advertising space or intangible media platform; (6) online platform such as electronic marketplaces or networks for the sale, display, and comparison of the price of trade products or services; (7) search engine services; (8) social networks; (9) database and hosting such as website hosting, online data warehousing, file sharing, and cloud storage services; (10) internet-based telecommunication; (11) online training such as provision of distance teaching, e-learning, online courses, and webinars; (12) online newspapers and journal subscription; and (13) payment processing services.
More generally, Section 108 of the Tax Code, which, among others, defines the phrase "sale or exchange of services," will be amended to expressly state that "sale or exchange of services" means the performance of services for others for a fee, remuneration or consideration, whether rendered electronically or otherwise. The following were also added to the enumeration of services under Section 108: (1) supply by any resident or non-resident of digital services such as online advertisement services, provision for digital advertising space, and any other facility or service for the purpose of online advertisement; (2) supply by any resident or non-resident of digital services in exchange for a regular subscription fee over the usage of said product or service; and (3) supply of electronic and online services that can be delivered through an information technology infrastructure, such as the internet.
Consistent with the proposed amendments of the other provisions to include digital goods and services among taxable goods and services, Section 109 of the Tax Code, which lists the exempt transactions, will be amended to include online courses and webinars and electronic or online sale of books, newspapers, magazines, etc. among the exempt transactions provided they comply with the other requirements stated in said section.
A non-resident digital service provider may be subject to VAT for digital services provided; however, HB 7425 provides that the non-resident digital service provider may not claim creditable input VAT.
A non-resident digital service provider who, in the course of trade or business, engages in the sale or exchange of digital services must register for VAT if: (1) its gross sales or receipts for the past 12 months before the date of filing of VAT return, other than those exempt from VAT, have exceeded PhP3 million; or (2) there are reasonable grounds to believe that its gross sales or receipts for the next 12 months from date of filing of VAT return, other than those exempt from VAT, will exceed PhP3 million.
The BIR must establish a simplified automated registration system for non-resident digital service providers. Subject to rules and regulations to be prescribed by the DOF, a VAT-registered non-resident digital service provider may issue an electronic invoice or receipt.
HB 7425 also proposes to amend Section 114 of the Tax Code, which relates to return and payment of VAT to provide those payments to non-residents for services rendered in the Philippines shall be subject to 12% withholding VAT unless they are duly registered with the BIR. Note that this amendment applies to all non-residents and not only to non-resident digital service providers.
If HB7425 is passed into law, its implementing rules and regulations shall be promulgated by the DOF upon recommendation of the BIR, and in coordination with the Department of Information and Communications Technology.
SyCipLaw TIP 7: VAT is territorial in nature and should apply only when the sale takes place in the Philippines, or the services are rendered in the Philippines. With the proposed amendments to the Tax Code, it appears that digital goods and digital services will be considered sold or rendered in the Philippines if the buyer is a Philippine resident or "consumption" is within the Philippines. It is not clear how the provisions may be implemented (or specifically how the VAT will be collected) if the non-resident digital service provider does not register in the Philippines. Finally, non-resident digital service providers will have to consider whether registration for VAT purposes will trigger income tax issues and other "doing business" requirements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
