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Brokers and "others similarly situated"

Brokers and "others similarly situated"


The BIR has issued a circular clarifying the VAT and withholding tax implications of certain payments to brokers and other persons similarly situated. This was issued with the intention of clarifying issues relating to transactions involving brokers or “others similarly situated” whereby the latter incur reimbursable expenses or advance payments on behalf of customers to answer for certain expenses such as arrastre, wharfage, documentation, trucking, handling charges, storage fees, duties, taxes, etc..

The clarification of such issues is significant, given the different tax implications that may arise depending on how the transactions are documented.

For instance, that a VAT official receipt issued in the name of the taxpayer is needed for the latter to claim input tax. A Customer will not be able to claim an expense deduction for income tax purposes if the invoice or official receipt is not in his name, or if he did not withhold the tax on his payment to a supplier/service provider. The BIR has therefore deemed it appropriate, and rightly so, to issue a circular clarifying the documentary requirements and procedures to be observed for such transactions.

The circular apparently contemplates transactions involving three parties, namely, the Customer, the broker, and the third party service provider. A Customer engages the services of a third-party service provider through a broker, the broker advances certain payments on behalf of the Customer, and subsequently seeks reimbursements from the Customer. Briefly, the circular provides that in situations wherein a broker incurs reimbursable expenses or advances payments to third parties on behalf of a Customer, the third party service providers shall issue official receipts in the name of the Customers (not the broker).

For his part, the broker, upon receipt of reimbursement or advances from the Customer, issues a NON-VAT Official Acknowledgement Receipt to the Customer evidencing receipt of such reimbursement or advances. The brokers shall likewise attach the original copy of the official receipts issued by the third party service providers to the NON-VAT official acknowledgement receipts, and deliver the same to the Customers upon receipt of the reimbursable expenses.

In regard to the expanded withholding tax (EWT), the circular provides that the amount to be paid by the brokers (on behalf of the Customer) to the third-party service provider shall be net of the EWT, and the broker shall issue the Certificate of Tax Withheld (BIR Form No. 2307) to the third-party service provider. When the broker claims for reimbursement from the Customer, the broker shall demand only the amount actually paid to the third-party service provider, which is net of the EWT, with instructions to the Customer to remit to the BIR the amount corresponding to the EWT. In regard, however, to expenses incurred for or redounding to the benefit of the brokers, or those covered by VAT official receipts issued by the brokers, the same shall form part of the broker’s gross receipts , and subject to EWT and 12% VAT, notwithstanding the designation of such amounts as reimbursements from Customers.

This procedure allows the Customer to: (i) claim the amount paid to the third party service provider as a business expense; and (ii) claim the input tax on such payment. On the part of the brokers, it clarifies that they shall not be liable for any output tax on the collection of the reimbursable expenses or payments advanced on behalf of the Customer (since the payee is the third-party service provider, and not the broker); neither shall the same be subject to EWT since the payments do not form part of the broker’s gross receipts. The third-party service provider, for his part, will have the documentation (i.e., the Certificate of Tax Withheld) necessary to credit the amount of tax withheld on payments to him.  

While the rules may have clarified, to some extent, the rules on brokers, q uestions still remain as to who are those “similarly situated.” The circular apparently refers to customer brokers as an example, as is implied from the examples cited as reimbursable expenses/advances, i.e., “arrastre, wharfage, documentation, trucking, handling charges, storage fees, duties and taxes, etc.” But under what circumstances may others be considered as “similarly situated”? Under the circular, the parties have specific responsibilities, i.e., the broker to issue the Certificate of Tax Withheld (in the name of the Customer) to the third-party service provider, the Customer to remit the EWT to the BIR, etc. The third-party service provider shall not receive the full amount since it will be net of withholding tax.

Who, therefore, will decide whether a situation calls for the application of the circular? the Customer? the broker? the third-party service provider? What if the other parties to the transaction do not agree? If a person or entity acting as a representative of another, i.e., an agent, makes advances to a third-party on behalf of a principal, would the circular apply on the premise that such person is “similarly situated” as a broker? What if the agent decides that it does apply, but the third-party service provider does not agree? How will such conflicts be resolved and by whom?  

The importance of clarifying this issue is evident from the circular itself, which provides that the treatment for tax purposes by the broker may differ depending on the procedures in receipting or issuing receipts on advanced payments/reimbursable expenses by both the third-party service provider and the broker. Clearly, significant tax implications may arise if the transactions were to be improperly documented, e.g., the broker inadvertently issues its VAT official receipt upon collection of such reimbursable expenses/advanced payments; or if a third-party service provider inadvertently issued its official receipt in the name of the broker. This may also cause inconsistencies in reporting which may trigger the issuance of Letter Notices under the BIR’s RELIEF system.

Given current trends in the business world where outsourcing is steadily gaining prominence, situations of persons/entities acting as representatives or in behalf of another can be expected to become commonplace. It will therefore be very helpful if the BIR can clarify which particular business activities would be covered by the circular. The duties and responsibilities of the parties involved, particularly the Customer and broker, as well as the consequence for non-compliance, should likewise be well-discussed. 

(The author is a tax principal at Punongbayan & Araullo, member of Grant Thornton International.  For comments and inquiries, e-mail the author or call 886-5511.)