One of the changes brought by the Tax Reform for Acceleration and Inclusion (TRAIN) Act is the amendment to National Internal Revenue Code (NIRC) Section 114(C) on the treatment for the 5% Final Withholding VAT on sale to government.
Under the previous VAT regulation, the aforementioned 5% Final Withholding VAT on sale to government represents the final net VAT payable of the seller and no additional VAT payment for that transaction should be required. This amount is withheld by the withholding agent, which in this case is the government agency who avail the goods or services offered by the seller, and the 7% difference from the 12% VAT rate will be considered as the standard input VAT. Any excess of the actual input VAT related to the sale to government over the 7% standard input VAT shall be recognized as deductible expense. And any excess of the Standard Input VAT over the actual Input VAT related to sale to government will be recognized, on the other hand, as other income.
But Starting January 1, 2021, the above-mentioned rules and regulation will no longer apply, as the 5% final withholding VAT system will now shift to a creditable withholding tax system. Under this new system, no more concept of standard input VAT as the actual input VAT related on sale to government will now be the basis as deduction to output VAT. In short, VAT treatment on sales to government will now be the same as VAT treatment on sale to non-government taxpayer except for the mandatory withholding of 5% by the government agency who avail the goods or services offered by the seller.
Although as of to date, the BIR has not yet released any guideline regarding this matter but with this new system, taxes withheld on certain payment is intended only to collect at least an approximate amount of the payee’s tax due “in advance”. In other words, this does not constitute the “full and final payment” as intended by the old system.
- Republic Act No. 10963 Section 37
- National Internal Revenue Code Section 114(C) as amended