Tax rules on freight forwarding business
Tax rules on freight forwarding business
by Alfredo Q. Merto
In recent years, there have been varying interpretations on the imposition of value-added tax (VAT) and expanded withholding tax (EWT) on gross receipts derived by freight forwarders. This notwithstanding, these are issues that have remained outstanding. With the reimbursable expenses sometimes being presented as a component of receipts, will those form part of the gross receipts? Is the documentation in compliance with the substantiation requirements? How will BIR examiners determine which expenses are those of freight forwarders, and which are those of third-party service providers (TPSPs)? What constitutes “gross receipts” that will be the base of EWT?
To resolve these issues, the BIR has laid down its rules for VAT and EWT applicable to the freight forwarding business. Under Revenue Memorandum Circular (RMC) No. 35-2006, the freight forwarding business can be classified into “cross-border movement” (outbound/inbound movement), i.e., the freight forwarder acts as an intermediary between the shipper/client and shipping/airline company; and the “local movement”, wherein the freight forwarder undertakes all the services necessary to bring the goods to the agreed final destination or acts as integrator of various services necessary to bring the goods to their final destination. These movements dictate the various charges and fees from one point to another. Thus, VAT is imposed on the gross receipts, usually in the form of commission from charges which redound to the benefit of the forwarders. However, when the billing is issued to the shipper/client, reimbursable expenses account for the bulk of the cost of services.
The RMC has clarified that these reimbursable expenses would not form part of the gross receipts for VAT if, upon payment, the reimbursable expenses are covered by “Non-VAT Official Acknowledgement Receipt” issued by the forwarders to the shippers/clients, along with the TPSPs’ official receipts issued in the name of shippers/clients, and the expenses reimbursed were previously recorded by the freight forwarders as “RECEIVABLE FOR CASH ADVANCES ON BEHALF OF SHIPPERS” in their books. Since the reimbursable expenses are duly evidenced by VAT official receipts issued by TPSPs and the freight forwarders, respectively, the shippers/clients can claim input tax on such payments.
In addition, the BIR prescribes that amounts due for the TPSPs and the charges subject to VAT should be shown separately in the billing statement of the freight forwarders. In the case of a freight forwarder when it issues the corresponding VAT official receipt for services subject to VAT, i.e., commission plus charges, such VAT shall also form part of the input VAT of the shipper/client. However, the said input VAT may not necessarily be the same amount of output tax that may be declared by the forwarders in their VAT returns. This is because under the RMC, the output tax to be declared by the freight forwarders in their VAT returns shall be the output tax computed based on the actual gross receipts of the forwarders, but in no case below 5% of freight cost per billing statement which was made the basis of the VAT shifted (input tax) to the shipper/client.
Thus, under the cross-border movement, the actual gross receipts of the freight forwarder represents actual commissions received plus the other vatable charges, i.e., the local origin/destination charges and CAF, which is determined by deducting from the gross receipts received from the clients (exclusive of the VAT) and the amounts held in trust/due to TPSPs. In case the VAT component shown on the billing statement issued by the freight forwarder to the shipper/client is different from the VAT (output tax) computed based on the actual gross receipts, a reconciliation schedule should be provided for that purpose and shall be attached to the VAT return as part
of the computati on.
Under the local movement of goods, if the freight forwarder issues VAT official receipt for the entire amount received from the shipper/client, the output tax shall be based on the total amount received. The 2% EWT shall likewise be based on the entire amount received. If VAT official receipt is issued by the freight forwarder for that portion of the amount which represents the cost of freight forwarding service, and Non-VAT Acknowledgement Receipt for the amount payable to TPSPs, the output tax shall be based only on the amount covered by the VAT official receipt issued in the name of shipper/client and the output tax will be shown separately therein.
For purposes of withholding tax, the 2% EWT shall be applied as follows:
1. On cross-border transactions
For services by freight forwarder subject to regular VAT rate:
EWT=VAT amount x 2%
Rate of VAT
For services by freight forwarder subject to zero-rate:
EWT= Total compensation for zero-rated services x 2%
2. On local transactions
EWT=Total expenses x 2%
The freight forwarder is responsible for amount of EWT to be deducted from the payment, and shall issue the corresponding Certificate of Tax Withheld (BIR Form No. 2307) for the amount of EWT. The Certificate shall reflect, among others, the name of the TPSP as the payee of the income payment, and the name of the shipper as the real payor of the income payment with parenthetical mention of the name of the forwarder as agent of the Shipper.
It is good that BIR now has a better view on the transactions of freight forwarding business. However, some of the requirements mentioned in the RMC are not new. In fact, these have already been addressed before thru various BIR rulings. Unfortunately, however, the implementation during the audit investigation still varies among BIR examiners. It is hoped that the RMC will lead to a deeper understanding of the complexities of the freight forwarding business, and provide guidance to both taxpayers and BIR revenue examiners to avoid unwarranted tax assessments. (The author is a tax manager at Punongbayan & Araullo, member firm of Grant Thornton International. For comments and inquiries, please e-mail the author or call 886-5511.)