Tax Articles

Compliance with VAT Obligations: Are We Expecting Changes?

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

In my previous article, I started discussing the contents of the proposed law that aims to ease the payment and compliance by taxpayers of their tax obligations. I begun with the presentation of the proposed changes related to the rules on venue for filing and payment, and the cancellation and transfer of tax registration.

For today’s article, let me proceed with the presentation of the proposed changes in the rules for VAT compliance, specifically on the timing for VAT recognition. As we are aware, the current rules differ between sales of goods and sales of services – especially with respect to the timing of recognition of output/input taxes and the required documentation to support the related transactions. And we also understand the complications brought by these differences in treatment.

The Ease of Paying Taxes Act (EOPT) seeks to remedy these complications by harmonizing the rules and providing uniform treatment for sales of goods and services. Together with other colleagues in the tax practice, we proposed that in harmonizing the rules, the current requirements for sale of goods should be changed and follow the current rules for sale of services, that is: recognition of output tax/input tax for both sales of goods and services shall be upon receipt/payment with the official receipts as the prescribed documents. And there are a number of reasons for that, especially when referring to the ease in compliance with the VAT obligations. But I would no longer dwell on that. Instead, let’s focus on understanding what we would be expecting based so far on the provisions of the final version of the bill.

Substantially, the regime currently prescribed for sales of goods shall be adopted for sales of services. As a consequence, the output taxes on sale of services would have to be reported, as a general rule, upon sale. It follows that the input tax shall be recognized and claimed by the buyer upon purchase. This means that the reference for the payment of output taxes and in claiming the input taxes for both sales of goods and services shall be the gross sales. As the recognition of the output and input tax would no longer be reckoned upon receipt and payment for sale/purchase of services, the present prescribed documentation - which is the official receipt – will be discarded. Instead, like in the sale of goods, sales invoices should also be issued for sale of services and serves as the supporting document.

What does this mean to a taxpayer? Specifically, what is meant by “gross sales” as the basis for the recognition of output tax? When is sale considered complete that would trigger the realization of VAT? This is easily understood for sale of goods. Apparently, it is not easy to determine when “gross sales” arise for sale of services. And that’s precisely one of the reasons why the current rule provides for a different timing for sale of services.

To make the determination of “gross sales” easier for sale of services under the EOPT, the proposed law provides an additional description as referring to “service that has already been rendered by the seller and use or lease of properties that have already been supplied by the seller.” This approximates the accrual of revenues. That simply means that the VAT should be determined and paid when the revenue is accrued.

I understand that the purpose of this rule is to make the recognition of revenue for VAT purposes similar to the recording of revenue in the financial statements and income tax return, which is normally based on accrual. The same may also be computed based on the issued invoices. And that makes it easier for the tax authorities to easily identify discrepancies in the amounts presented in the financial reports, and various information and tax returns, as opposed to the current practice where a reconciliation of the information in the financial reports, income tax returns and VAT returns is necessary.

But with that as the timing for VAT recognition, there could still be an issue with respect to the issuance of the corresponding invoice, which as noted earlier, will serve as the supporting document. Unlike sale of goods where the issuance of invoice normally coincides with the sale and delivery, that is not necessarily so for sale of services. In case of the latter, the issuance of invoice depends on the business arrangements between the parties and other schemes adopted by the buyer and the seller. Invoicing could be done even before service is rendered, or upon the achievement of a specific milestone or based on percentage of accomplishment, upon completion of specific deliverables, or some other schemes that may not necessarily match with the accrual of revenues.

The issuance of an invoice may not therefore necessarily mirror the recognition of revenues derived from sale of services. Revenues may be recognized in a taxable period different from the issuance of the invoice. And to refer to the invoices issued in a specific period as reference in the determination of VATable amounts for same taxable period could be misleading. Apparently, for long-term contracts, the proposed law includes a provision that “the invoice shall be issued on the month in which the service or use or lease of properties is rendered or supplied.” That is mandating the service provider and the client to agree on a monthly billing arrangement. It could be done for some other types of services where the duration runs through different quarters. But that would be another case of tax law dictating what a business should do. For ease in compliance, it should be the tax rules following the business practice.

There are still some concerns associated with the proposed changes. As the law cannot possibly cover everything needed to realize the objectives of easing the payment of taxes, I hope the implementing regulations would fill in those details. Otherwise, we will just be replacing the inefficiencies sought to be avoided with another issue.