In 2017, EY launched a Worldwide Indirect Tax Developments Map. It is a tool designed to track changes occurring around the world in value added tax (VAT), goods and services tax (GST) and other sales taxes, global trade, excise and other indirect taxes. Initially, the team gathered 400 records for VAT/GST and sales taxes from across the globe and noted an average of 30 to 40 changes per month. Based on these developments, five key VAT trends for succeeding years were identified:
• Trend 1: The standard VAT/GST rates have peaked
• Trend 2: Reduced rates and exemptions are instruments of tax policy
• Trend 3: The worldwide spread of VAT/GST continues
• Trend 4: Digital tax measures continue to spread and
• Trend 5: Tax administrations are embracing technology
Given this global backdrop, is the current Philippine VAT setting aligned with the key trends and developments? Let us now look at how the Philippines fares in terms of global VAT trends.
The Philippine VAT rate is stable at 12%
According to the EY article, VAT/GST rates increased in many jurisdictions after the global financial crisis in 2008. However, the upward trend eventually subsided as the global economy stabilized. Subsequently, only a few countries increased their VAT/GST rates. Some countries postponed their plans to increase rates, while countries such as Croatia, Ecuador and Switzerland reduced VAT/GST rates.
In the Philippines, the VAT rate has remained constant at 12% since 2006. VAT is based on the gross selling price in the case of sale of taxable goods, or gross receipts from the sale of taxable services, except on transactions subject to zero rate (generally export and export-related activities). However, while the rate is stable, it is still regarded as high compared to the average VAT/GST rate in the region.
There have been several moves proposing a reduction in the VAT rate, which includes Senate Bill No. 1671 filed early 2018 seeking to cut the rate to 10%. However, the Department of Finance (DoF) reported that the Philippine government needs significant funds until 2022 to build and construct necessary infrastructure nationwide and consequently, any move to reduce tax rates may face strong challenges from the executive department.
TAX REFORM LAW BROADENS THE VAT BASE
Another global trend observed, as economies continue to improve, is that a number of countries are starting to introduce exemptions for specific goods and services that were previously subject to VAT/GST as a matter of tax policy.
The Tax Reform for Acceleration and Inclusion (TRAIN) Act or RA No. 10963, the initial package of the Comprehensive Tax Reform Program (CTRP), took effect in 2018. One of the law’s main objectives is to raise the revenue needed to fund the government’s infrastructure programs by restricting VAT exemptions. Accordingly, 54 out of 61 special laws with non-essential VAT exemptions have been repealed and the law identified certain transactions previously subject to 0% VAT and imposed the 12% VAT on them upon establishing and implementing an enhanced VAT refund system. Offhand, these local VAT provisions appear contradictory to the global trend.
However, the same TRAIN Act retained and provided additional VAT exemptions on certain transactions as a matter of policy, which is consistent with global VAT trends. The VAT threshold increased from P1.9 million to P3 million. This effectively exempts from VAT the sale of goods and services of marginal establishments. According to the DoF, the exemption is provided to protect poor, low-income Filipinos and small and micro businesses, as well as to promote manageable administration. Additional exemptions under the TRAIN Act include:
• The sale or lease of goods and services to senior citizens and persons with disabilities, as provided under RA Nos. 9994 (Expanded Senior Citizens Act of 2010) and 10754 (An Act Expanding the Benefits and Privileges of Persons with Disability), respectively.
• Transfer of property pursuant to Section 40(C)(2) of the Tax Code, as amended, or tax-free exchange transactions.
• Association dues, membership fees, and other assessments and charges collected on a purely reimbursement basis by homeowners’ associations and condominium corporations established under RA Nos. 9904 (Magna Carta for Homeowners and Homeowners’ Association) and 4726 (The Condominium Act), respectively.
• Sale of gold to the Bangko Sentral ng Pilipinas (BSP).
• Sale of drugs and medicines prescribed for diabetes, high cholesterol, and hypertension.
This global key trend appears harmful and contradictory to the current policy of the government to simplify the VAT system in the Philippines. Perhaps the Philippines learned its lessons from the past that providing reduced VAT rates and exemptions for particular industries as a matter of tax policy leads to multiple VAT rates which complicates the system and increases the risk of errors in the application of VAT rates and disputes with taxpayers.
INTRODUCTION OF E-INVOICING AND E-SALES
Tax administrations are now embracing the digital revolution to administer indirect taxes more effectively. Most authorities now require the electronic submission of VAT/GST declarations, and many are mandating the use of electronic invoicing.
The Philippines has been aligned with this global trend for several years now. Certain taxpayer groups have been mandated to use the electronic filing and payment system (EFPS), as well as the eBIRForms return preparation software and online filing facility. Covered taxpayers are also required to submit their Summary Lists of Sales, Purchases and Importations, as well as periodic alphabetical lists (or “alphalists”) of payees subjected to withholding taxes — periodic, summary-type data that is analyzed by the BIR through the Reconciliation of Listings for Enforcement (or RELIEF) Validation System.
In addition, the TRAIN Act introduced e-Invoicing and e-Sales reporting requirements, which present significant advancements in terms of digitalizing tax administration. Under the law, large taxpayers and exporters are required, within the next five years, to electronically issue their invoices/receipts, as well as to report their sales data to the tax authorities at the point of sale. Upon implementation of this provision, tax authorities will be able to capture more valuable, transactional-level tax Big Data in real time. This will also allow them to perform complex analytics, improve the selection of taxpayers for audit, rationalize tax findings, and streamline tax examinations.
Therefore taxpayers should prepare for this move toward the digitalization of invoicing and sales as this reporting requirement may change the way their business operates. Modifying longstanding business processes for new systems will not only involve significant capital investment but will also entail a change in the organizations culture to ensure that the new system or process is accepted and properly adopted. Taxpayers should also be able to match the pace of the tax authorities in responding to inquiries during a tax audit to ensure compliance with the law and avoid administrative penalties and interests.
With the advent of the digital age, tax authorities increase the pace of development and implementation of tax measures by leveraging on the interconnected global tax environment. Taxpayers must be vigilant to learn about emerging tax trends and developments in order to be able to design policies and adopt processes to sufficiently address changes in indirect tax policies, ensuring compliance with the law and capitalizing on their benefits.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co.
Stephanie G. Vicente-Nava is a Partner from SGV & Co.