The Department of Finance submitted to Congress last week the first package of proposed tax reforms. The proposals include the restructuring of the personal income tax (PIT) system; expanding the value-added tax (VAT) base by reducing the coverage of its exemptions; adjusting excise taxes imposed on petroleum products; and, restructuring the excise tax on automobiles except for buses, trucks, cargo vans, jeeps, jeepney substitutes and special purpose vehicles. These proposed tax reforms, however, received varying reactions from stakeholders.
For purposes of this article, I will be focusing on certain proposed amendments on value-added tax (VAT).
The good news is that the proposed tax reforms do not include an increase in the VAT rate. However, the coverage of VAT-exemption and VAT zero-rating will be limited. Even the crediting of input VAT (i.e., VAT on purchases) against output VAT (i.e., VAT on sales) will be limited to the current year.
Under the proposed tax reforms, any excess input VAT over output VAT for the quarter may be carried forward to the next quarter of the same year. Any input VAT at the end of the last quarter of the year shall not be carried over to the succeeding taxable year, but the excess input VAT may be refunded. This proposed amendment will put the burden on the taxpayer to file a claim for refund in order to recover the excess input VAT, on which we all know is a very long and tedious (and sometimes painful) process.
Another proposed amendment is limiting the definition of export sales subject to 0% VAT to (1) direct exports; (2) sales to international shipping and air transport operations; and, (3) sales of export products to another producer or export trader. Item no. (3), however, will be deemed to be export sales subject to VAT zero-percent only when actually exported by the buyer-exporter. If this provision is passed into law, the question is how it will be implemented. Will the seller be required to issue a bond which will be subjected to liquidation upon proof of actual exportation by the buyer-exporter? Or will the sale first be subject to VAT, with a claim for refund filed upon actual exportation?
On the other hand, under the proposed amendment, the following sale of goods and services that currently enjoy VAT zero-rating (i.e., subject to 0% VAT) will be subject to 12% VAT:
• sale of raw materials to a nonresident buyer for delivery to a resident local export-oriented enterprise
• sale of raw materials to export-oriented enterprises
• those considered export sales under EO 226
• sales to entities exempt by virtue of special laws
• services to entities exempt under special laws
• services to entities engaged in international shipping or air transport
• services to export-oriented enterprises
Accordingly, purchases of PEZA-registered entities and Board of Investment registered enterprises that export 100% of their products, among others, will be subject to 12% VAT. These entities, however, still have the option to claim refunds on their unutilized input VAT related to their zero-rated sales.
I do not know any taxpayer who takes pleasure in filing a refund claim with the Bureau of Internal Revenue (BIR), due to the additional time and cost to be shouldered by the taxpayer-claimant. As we all know, a significant number of taxpayers who filed claim for refund resorted to filing cases with the Court of Tax Appeals (CTA) due to BIR’s inaction on their claims. Although the Tax Code provides for a specific period in which the BIR should process the refund (i.e., 120 days), unfortunately, if such period has lapsed, the refund is deemed denied. Hence, any inaction of the BIR is detrimental to the taxpayer-claimant.
If our government pursues the proposed amendments, it should ensure first that we have an effective and efficient refund process. To achieve this, there might be a need to amend Section 112 of the Tax Code (refund provisions of the Tax Code). Among the amendments it may introduce is a “deemed approved” provision in case of inaction by the BIR. Such provision is being implemented in other countries to ensure that the tax authority performs its duty within a reasonable period of time to ease the burden of a taxpayer. Another provision that may be considered is imposing interest on refunds in case they are not be processed or approved within the prescribed period. This would allow the taxpayer-claimant to recover the cost of money in case of significant delay beyond his control in processing his refund.
Otherwise, if the foregoing proposed amendments are implemented without improving the refund process, our ease of doing business rankings my further drop. In the World Bank Group’s Doing Business 2016 report released last year, the Philippines’ ranking dropped six notches to 103rd in 2015, across 189 economies. According to the report, among the Association of Southeast Asian Nations (ASEAN), it would be easier doing business in Singapore, Malaysia, Thailand, Brunei Darussalam, and Vietnam than in the Philippines.
Moreover, in the World Economic Forum’s (WEF) Global Competitiveness Report 2016-2017, the Philippines fell 10 notches to 57th out of the 138 economies assessed. Among the most problematic factors in doing business in the Philippines cited by WEF are inefficient government bureaucracy and taxation.
Hence, if our government desires to improve our competitiveness ranking, significant reforms in business registration and taxation, among others, are necessary. Reforms that would alleviate the already cumbersome compliance requirements in doing business in our country. Reforms that would facilitate voluntary compliance to the maximum extent possible. Reforms that would give the next generation a better future.
Edward L. Roguel is a partner of the Tax Advisory and Compliance Division of P&A Grant Thornton
As Published in BusinessWorld dated October 4, 2016.