Tax Articles

VAT On Reimbursements Under EOPT

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

Since the enactment of the Ease of Paying Taxes (EOPT) Act, a lot of articles have been written regarding its effect on our tax system. Similarly, the proper implementation of the new law has been discussed in a number of fora, such as seminars and webinars on taxation conducted both by our tax authority and the private sector. I also understand that there will be roadshows to further inform our taxpayers for proper compliance. Hence, the dissemination of the important provisions of the law is not wanting.

There is, however, one important amendment introduced by the EOPT that had not caught much attention. I am referring to the modification of the definition of gross sales for VAT purposes on sales of services. The EOPT modified the definition of “gross sales” to specifically exclude “those amounts earmarked for payment to third (3rd) party or received as reimbursement for payment on behalf of another which do not redound to the benefit of the seller.”

Actually, Revenue Regulations No. 04-07 had already excluded payments to “unrelated” 3rd parties and reimbursements of “advance” payments made on behalf of another from the VATable “gross receipts.” The regulations limited the exclusions though to amounts earmarked to payments to “unrelated” third parties and reimbursements of “advance” payments made on behalf of another.

This clarification made by the EOPT is actually nothing new. The concept of excluding from the VAT base amounts received by service providers that are intended to third parties or as reimbursements had already been part of our VAT system.

There are also old court decisions that are still relevant and support this treatment for tax purposes. In the case of Commissioner of Internal Revenue vs. Manila Jockey Club, Inc., G.R. L-13887 and L-13890, June 30, 1960, the Supreme Court emphasized that the money which the owner of an amusement place receives but earmarked for other persons should not be included as part of the taxable gross receipts. Similarly, in the case of Commissioner of Internal Revenue vs. Tours Specialists, Inc., G.R. No. 66416, March 21, 1990, the Supreme Court ruled that gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer's benefit. The Court even stated that it is not necessary that there must be a law or regulation which would exempt such monies and receipts within the meaning of gross receipts under the Tax Code.

While these decisions involve different types of taxes, they had been applied by our authorities for other types of taxes – income tax, VAT, withholding tax. In fact, even the tax bureau itself had used them to rule on the tax-exempt treatment of transactions of similar nature or with the same arrangements. In most of these cases, reimbursement of expenses had been considered as return of capital and therefore not subject to tax.

In essence, it had always been the rule that amounts received by taxpayers that are intended to third parties or that serve as reimbursements for payments made in behalf of another do not form part of the taxable base, including for VAT purposes.

Having said that, our tax authority had not been consistent on this matter. For instance, Revenue Memorandum Circular Nos. 089-12 and 016-13 require the cash deposits and advances received by a taxpayer from its clients/customers to be booked as income and form part of the gross receipts subject to taxes, such as VAT. Accordingly, all documentations and recording should follow this tax treatment. And this is without regard to the use to which the deposits or advances are intended to. In effect, this is disregarding the concept that amounts received which are earmarked for third parties or that serve as reimbursements for expenses incurred or to be incurred by the recipient on behalf of another are non-taxable.

With the amendment introduced by EOPT, I hope that the rule on the exclusion from the taxable gross sales of amounts received by taxpayers that do not redound to their benefit, because they are mere return for payments made in behalf of another or that they are to be paid to another, has become permanent.

But I also hope that our tax authority will release a circular to clarify its implementation, recording, and documentation. And more importantly – what constitutes a mere reimbursement? Certainly, there are disbursements made by taxpayers while providing services to clients/customers. Should these form part of the gross sales when billed to customers? It would depend. I believe that expenses that are necessarily incurred by taxpayers so that they can do the required services may not qualify as mere reimbursements. They may just be costs of doing business and reimbursements for these should form part of fees (gross sales), even if they are separately billed from the fees and billed based on actual costs. On the other hand, costs that necessarily pertain to the customer/client but paid by or through its service provider may qualify as non-taxable when reimbursed to the latter. In other words, there should be clear parameters in determining what constitutes non-taxable and taxable reimbursements.