VALUE-ADDED TAX Updates & Mistakes
In the Philippines, taxpayer-sellers can pass on the 12% VAT to their customers, buyers, or clients in addition to the prices of products and/or services they sell. In compliance with the VAT law implemented by the Bureau of Internal Revenue (BIR), taxpayer-sellers are required to pay VAT, after deducting allowable input tax credits and other adjustments. However, during the period of VAT compliance with the BIR, taxpayer-sellers may encounter some tax problems resulting in violations and hefty penalties. We will discuss these potential tax problems and offer solutions to avoid tax code violations and its corresponding penalties.
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1. 5% VAT Withholding
Pursuant to the TRAIN Law under R.A. No. 10963, starting January 1, 2021, 5% VAT withheld on sales to government agencies became creditable from the original final.
Under the old final VAT withholding system, the 5% withheld shall be considered the final VAT payable by the taxpayer-sellers. The remaining 7% (12% VAT minus 5% VAT withheld) shall be considered Standard Input Tax. This system is complicated, as it may result in a discrepancy between the Standard Input Tax and the Input Tax Attributable to Sales to the Government. Any discrepancy shall be closed to expense or cost following the provisions of Revenue Regulations No. 16-2005, as amended (RR 16-2005).
With the implementation of a creditable VAT system, these Standard Input Tax and Input Tax Attributable to Sales to the Government are no longer applicable. However, a new tax problem arises. While the VAT withholding rate remains the same at 5%, the proof of withholding is different. BIR Form No. 2306 is used under the old final VAT withholding system. On the other hand, BIR Form No. 2307 is for a new creditable VAT withholding system. The BIR issued Revenue Memorandum Circular No. 36-2021 (RMC 36-2021) to provide guidelines for the implementation of a new creditable VAT withholding system beginning January 1, 2021. Under the RMC 36-2021, the correct proof of 5% VAT withholding is a Certificate of Creditable Tax Withheld at Source (BIR Form No. 2307) using Alphanumeric Tax Code (ATC) No. WV0l0 for purchases of goods or WV020 for purchases of services. Thus, the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) shall no longer be issued for this purpose.
Based on the foregoing, the BIR Form No. 2307 shall be used by the taxpayer-sellers as proof of claiming VAT credit in the monthly and quarterly VAT returns declarations. Hence, tax problems may arise if the government agency issued BIR Form No. 2306, and the taxpayers used it to claim VAT credit. The BIR may disallow the claim of VAT credit on the ground of erroneous proof of withholding which must be BIR Form No. 2307 beginning January 1, 2021. This disallowance shall result in hefty VAT deficiency tax assessments, including surcharges, interest, and penalties.
It is worth noting that you must ensure that the correct proof of withholding BIR Form No. 2307 for 5% VAT withholding shall be only used for claiming VAT credit beginning January 1, 2021. Otherwise, face unfavorable tax audit consequences in the future.
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2. VAT Input Tax on Capital Goods
One of the VAT credits that can be used by taxpayers is VAT input tax arising from the purchases or importations of capital goods. Capital goods are those depreciable assets for income tax purposes and have an estimated useful life of more than one (1) year. Examples include but are not limited to Building, Equipment, Machines, and Furniture and Fixtures.
In accordance with the TRAIN Law under R.A. No. 10963, the VAT input tax arising from purchases or importations of capital goods shall now be claimed fully beginning January 1, 2022. Prior to these new BIR rules, VAT input tax from purchased or imported capital goods shall be amortized or spread, depending on the useful life of depreciable assets and its accumulated monthly cost. In this regard, the BIR issued Revenue Memorandum Circular No. 21-2022 (RMC 21-2022) to set guidelines for the new VAT credit rules for capital goods. Under the RMC 21-2022, the unutilized or unused VAT input tax on purchased or imported capital goods prior to January 1, 2022 shall be continued to amortize or spread based on original schedules. However, the VAT input tax, regardless of the amount, from purchases or importations of capital goods shall be claimed outright, without amortization or spreading, beginning January 1, 2022.
In view of the above-mentioned new VAT rules on capital goods, claiming VAT input tax from purchased or imported capital goods by spreading or amortizing it beginning January 1, 2022 shall be disallowed. Hence, the BIR shall disallow any amortized VAT input tax arising from purchases or importations of capital goods that are acquired starting January 1, 2022. This disallowance shall result in unexpected VAT deficiency tax assessment, including surcharge, interest, and penalties.
We strongly recommend complying with the new VAT rules on capital goods to avoid future tax trouble and its adverse consequences.
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3. VAT Returns Declarations
The VAT compliance is composed of two (2) tax returns, namely: BIR Form No. 2550M for monthly VAT declarations and BIR Form No. 2550Q for quarterly VAT declarations. In the first two (2) months of every quarter, taxpayers shall use BIR Form No. 2550M for the declarations and payment, if any, of VAT. On the other hand, in the third month of every quarter, taxpayers shall use BIR Form No. 2550Q to cover the gross sales/receipts of the whole quarter. The payment made in the first two months using BIR Form No. 2550M shall be deducted from BIR Form No. 2550Q to arrive at the final payment or overpayment.
According to TRAIN Law under R.A. No. 10963, the declarations, filing, and payment of VAT shall now be on a quarterly basis beginning January 1, 2023. This means that BIR Form No. 2550M for monthly VAT declaration is no longer required. Only BIR Form No. 2550Q for the quarterly VAT shall be filed by the taxpayers. In this connection, the BIR issued Revenue Memorandum Circular No. 5-2023 (RMC 5-2023) to provide guidelines for the new VAT declarations. However, the BIR issued another Revenue Memorandum Circular No. 52-2023 (RMC 52-2023) to allow the taxpayers to use BIR Form No. 2550M for the monthly VAT declarations.
Under RMC 52-2023, the taxpayers have the option to declare, file, and pay their VAT monthly using BIR Form No. 2550M but they are still required to use BIR Form No. 2550Q for the quarterly VAT declarations. In case the taxpayers opt to file BIR Form No. 2550M, no penalties shall be imposed, as there are no tax code violations. Evidently, this optional filing of VAT return using BIR Form No. 2550M follows the old rule of VAT compliance.
Based on the above discussion, as we explained in the previous Blog, we do not recommend this monthly optional filing of VAT declarations using BIR Form No. 2550M. Taxpayers availing of this optional filing may face serious tax code violations because the declarations, filing, and payment of the monthly VAT using BIR Form No. 2550M shall still be in accordance with related BIR revenue issuances. In other words, taxpayers may commit tax-related violations resulting in unnecessary penalties. Besides, taxpayers will not benefit from this optional filing.
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In conclusion, the are some VAT updates and mistakes you must learn as VAT-registered taxpayers to avoid tax code violations and penalties. Remember, prevention is better than cure!
Learn more about BIR tax compliance for MSMEs
We would like to invite you to our RWB Books, with exclusive ATC online tutorial videos to explain and discuss its contents, and to learn more about how to comply with the BIR tax compliance. Kindly click the photo below to learn more about each of these RWB Books.
