VAT rate for ABC of government projects

THE Bureau of Internal Revenue recently issued Revenue Memorandum Circular (RMC) No. 85-2017, reiterating the value-added tax (VAT) treatment of sales to government, particularly on the preparation of the approved budget for the contracts (ABC) of government projects, pursuant to existing regulations.

Pertinent provisions include:

- Sales to government or any of its political subdivisions, instrumentalities, or agencies including government-owned or controlled                  corporations (GOCCs), are generally subject to 12 percent VAT under Sections 106 and 108 of the Tax Code, unless the transaction is                 specifically VAT-exempt or VAT zero-rated under the provisions of the same code or other special laws.

- The procuring government entity is only required to deduct and withhold a five percent final VAT based on gross payments, which             represents that net VAT payable by the seller of goods and services. The remaining seven percent (12 percent VAT - five percent final VAT           withheld) would effectively account for the standard input VAT in lieu of the actual input VAT directly attributable or ratably apportioned to      such sale. Any difference between the seven percent VAT and the actual input VAT incurred may form part or close to the seller’s expense or     cost.

The actual input VAT attributable to the sale to government cannot be claimed for refund or tax credit, considering that the act of withholding the five percent final VAT and the recognition of any difference between the seven percent VAT and the actual input VAT to cost or expense already provides the rule on how the sellers of goods and services can recoup the actual input VAT attributable or ratably apportioned to their sales to government.

The RMC takes effect immediately.

Source: P&A Grant Thornton

As published in SunStar Cebu dated 24 October 2017.