Tax Articles

Unlocking the Other Items Affecting VAT Liability

By Atty. Fulvio D. Dawilan

Fulvio D. Dawilan Managing Partner   +632 8403 2001 loc.310 This email address is being protected from spambots. You need JavaScript enabled to view it. View Profile

With the Ease of Paying Taxes Act (EOPT or RA 11976) becoming effective, there are a number of changes that taxpayers need to implement or effect in compliance with the requirements under the new law. Many of these changes can be easily fulfilled and applied without the need to change the taxpayer’s record-keeping, accounting and invoicing systems and procedures. Affected taxpayers may simply follow the new prescribed rules when faced with transactions requiring the application of the new procedures.

However, a few of the changes may necessitate modifications in the existing practices for some taxpayers to be able to carry out or execute the mandate of the new law. These may include modifications or revisions of their existing accounting system, documentation of transactions, and monitoring and reporting procedures, among others.

One of the amendments that may necessarily require adjustments in the taxpayers’ practice is the effect of the harmonization of the rules for sales of goods and services for VAT compliance purposes. This has no significant impact for sellers and buyers of goods. But the shift from the “gross receipts” to “gross sales” as basis for VAT reporting for sellers and buyers of services necessarily needs a shift also in the accounting and documentation of transactions affecting VAT reporting to conform with the new rule.

Note that the move to the “gross sales” basis for VAT reporting does not stop with the proper accounting of every gross sale. Other related subsequent transactions affecting the collectability and ultimately the final amount collected from the customer need to be monitored as well. For VAT compliance, these also need to be accounted.

Sales Allowances and Discounts. Sellers of goods were already allowed to claim the value of goods sold that are subsequently returned or for which allowances are granted by the seller as deduction from gross sales. Also, discounts can be excluded from the gross sales within the quarter it is given. This wasn’t applicable to sellers of services precisely because reporting was required only upon receipt. But with the adoption of the “gross sales” as reference for VAT payment, a similar rule is now incorporated in the VAT compliance rules for sellers of services. The value of services rendered for which allowances are granted may now be deducted from the gross sales. Similarly, discounts may also be excluded from gross income in the quarter it is given.

Output VAT Credit on Uncollected Receivables. The EOPT added a provision allowing both sellers of goods and services to deduct the output VAT previously paid when the related receivables become uncollected. The deduction shall be done in the next quarter following the lapse of the agreed upon period to pay.

This means that if a seller reports a sale and pays the VAT, the VAT payment can be recovered in the form of an output VAT credit if the related receivable cannot be collected within the period agreed upon by the seller and the buyer. It is therefore important for the buyer and the seller to agree on the period for payment for purposes of reckoning the period when payment is considered to have lapsed. If not, it would be difficult to fix the time for claiming the output tax credit. The seller may not even be able to claim the credit if there is no such agreement or no proof to that agreement.

Interestingly, this new provision is inserted in the section on tax credits. Thus, unlike sales returns, allowances and discounts which are to be deducted or excluded from gross sales, that is not how output VAT credit on uncollected receivables are to be accounted. These are to be included among the items of tax credits – like input taxes.

Recovery of Uncollected Receivables. Receivables which cannot be collected within the period agreed upon may actually be collected, partially or in full, in the subsequent period. What happens if the related VAT was already taken up as output VAT credit? While VAT previously paid is allowed to be credited against output taxes if the related receivables are not collected at the time agreed upon, the new law also inserted a provision requiring the output taxes to be reported back when the receivable is recovered.

Taking all these together, there are four steps in every sale-collection cycle that may have impact on the VAT due from every sale transaction – the sale, the allowances and discounts, the uncollected receivable, and the recovery of a previously reported uncollected receivable. Based on all these steps, the law intends that the ultimate net basis of the VAT is the amount collected by the seller – the gross receipts – but reported in different steps. That is the ideal scenario. But when I say ideal, the taxpayer has to observe all the conditions and substantiation requirements attached to each step. If not, the taxpayer runs the risk of being effectively subjected to VAT more than what is intended by the law to be the ultimate basis of the tax.

The point is – is it really “ease to the taxpayer” to require the observance of a lot of steps in complying with its VAT obligations versus relying on a single information – the receipts – if the end is the same? While I end with this question, this is already the law and taxpayers need to observe them. I just hope that the implementing rules will make it easier for compliance so that the intention of unloading the taxpayers of the burdens associated with filing and payment is achieved. Also, the law does not address the steps needed on the part of the buyer. I hope that the implanting rules will address that void.