P&A's Let's Talk Tax column appears at The Economy section of BusinessWorld every Tuesday.

Please find below the August 16, 2005 article on Implementing the withholding VAT on government transactions by tax manager Shirley Go. For comments and inquiries, please email the author at Shirley.S.Go@pna.ph or call (632)886-5511. _____________________________________________________________________________

LETS TALK TAX SHIRLEY S. GO

Implementing the withholding VAT on government transactions

Like the issue on charter change, Republic Act (RA) 9337, more popularly known as the value added tax (VAT) or the expanded VAT law has continued to stir debate among all sectors of the business community. One particular area of concern is the provision on the sale of goods and services to the government. Under the new VAT law, the government or any of its political subdivisions, instrumentalities or agencies, including government-owned or controlled corporations (GOCCs) is required to deduct and withhold a final VAT at the rate of five percent (5%) before making a payment on each purchase of goods and/or services subject to the 10% VAT. The 5% final VAT deducted by the government shall represent the net VAT payable of the seller. Notably, the remaining 5% effectively becomes the allowable input VAT that a taxpayer can claim against the 10% VAT imposed on its sale to the government. This will cover the input taxes directly and indirectly attributable to the goods sold to government. Should the actual input VAT incurred by the seller on its transaction with the government exceed 5% of the gross payments, the excess is allowed to form part of the sellers cost. Conversely, in case that actual input VAT is less than 5% of the gross payments, the difference must be treated as income of the seller. The computation of the VAT on these transactions seems easy if the goods sold to government are purchased in the same quarter that they are purchased. In such case, the

taxpayer can easily ascertain if the input taxes related to the transaction exceed the maximum 5% that he can claim. However, in circumstances where the goods are purchased in a quarter different from the time that they are sold to government, the reckoning of the 5% input tax limit may be more complicated. In practice, the taxpayer keeps an inventory of goods that he makes available for sale to interested buyers. At the time of purchase, he has not yet identified the buyer and, as such, should be able to recognize the full amount of input taxes relating to the goods purchased. The taxpayer then markets the goods to potential buyers and, in the process, incurs marketing and other expenses, before he is able to sell them. In undertaking these activities, he incurs additional expenses, some of which may generate additional input taxes. If the buyer is a government agency, under the new rules, he must then evaluate the amount of input taxes he has recognized in relation to the goods sold. Should the taxpayer then trace when these goods (sold to government) were purchased? In computing for the input taxes not directly attributable to the goods sold but which can be considered in computing for the 5% input tax limitation, should it consider all the input taxes recognized from the time the goods were purchased until they are sold? If the input tax claimed is higher or lower than 5%, will it reflect the adjustment in its taxable income in the quarter when the goods were sold? Does it have to keep records to establish the input taxes constituting the 5% allowable input taxes? The process of determining the 5% allowable input taxes on sales to government could be a tedious process, but can be done with proper guidelines from the BIR. Additionally, it is hoped that the BIR will clarify when the sales to government should be reported - in the period when the sale is made (i.e., invoice date) or the period when payment is made. The law, as stated, says that the 5% is a final VAT which is applied on payments made by government, it is not a creditable VAT. While we await the decision of the Supreme Court on the VAT, it is hoped that the BIR will review the regulations that it had earlier issued and come up with answers to these practical questions. (The author is a tax manager at Punongbayan & Araullo, member firm of Grant Thornton International. For comments and inquiries, e-mail Shirley.S.Go@pna.ph or call 886-8811.)