VAT and withholding on transactions with brokers
VAT and withholding on transactions with brokers
by: VILMA CRUZ-SILVEDERIO
Is your company making payments on behalf of your clients? Or do you allow your consultants, brokers or agents to make purchases or payments on your behalf? These rules are for you.
As early as 1988, or perhaps even earlier, the BIR has been quite consistent on the tax treatment for VAT and withholding tax of expenses paid by brokers, agents and similarly situated entities on behalf of their Customer.
In general, BIR is of the position that these reimbursable amounts are expenses of the Customer and should not be subject to VAT nor to income tax, and consequently, withholding tax on the broker if properly documented.
However, in practice , the procedures to comply with these requirements are quite tedious, if not difficult to implement. Thus, time and again, companies and associations in the affected sectors have filed requests for rulings seeking to clarify the rules or asking for an exemption.
To resolve these issues once and for all, the BIR issued Revenue Memorandum Circular No. 9-2006 clarifying the responsibilities of the Customer, broker and third party (TP) suppliers or providers in the transactions.
Under the rules, BIR reiterates that these reimbursable charges are expenses of the Customer and that the broker is simply acting as a conduit in the billing and payment thereof. Hence, the rules provide that the Customer should claim the expense, credit the input VAT, if any, and withhold and remit the appropriate withholding tax on such income payment to BIR. Remittance of tax withheld by the broker on behalf of the Customer shall be based on existing withholding rules and procedures; however, the liability to withhold arises only at the time that it pays the reimbursable charges to the broker, as evidenced by the acknowledgement receipt issued by the broker.
The broker, on the other hand, should issue a VAT Official Receipt (OR) only for its service fees and other charges. For the reimbursable charges, it should secure a valid VAT or Non-VAT invoice/OR, as applicable, from the TP supplier or provider in the name of the Customer; deduct from its payments to TP the appropriate withholding tax and issue the Certificate of Tax Withheld (Form 2307) on behalf of the Customer. The certificate should reflect TP as payee and the Customer as payor indicating in parenthesis the name of the broker as agent of Customer.
The broker should not claim these reimbursable charges as expenses; instead, upon payment to TP, it should record a RECEIVABLE FOR CASH ADVANCES ON BEHALF OF CUSTOMERS. When it receives payment from its Customer, the broker shall issue a Non-VAT Official Acknowledgement Receipt for the reimbursable charges, indicating only the amount and name of the TP, with the OR of the TP attached. For the broker’s commission and other amounts not supported by TP ORs, the broker shall issue VAT ORs and be subjected to the withholding tax on brokers.
The TP supplier or provider should issue the invoice or OR in the name of the broker’s Customer.
The subject matter of the Circular suggests that these procedures will apply to “others similarly situated” as brokers. Persons or authorized agents making payments on behalf of a company are therefore well-advised to adhere to these procedures. This may cover advertising agencies who pay airtime or TV time to radio and television broadcasting companies; travel agencies who pay hotels or airlines on behalf of their clients; insurance agents or brokers who receive premiums from policy holders in behalf of insurance companies. and others similarly situated.
These new rules require careful planning and coordination among the parties to the transactions. Given that it has the responsibility to withhold and remit to BIR the taxes on these reimbursable charges, the Customers should advice the broker the applicable withholding taxes it should deduct from the di
fferent reimbursable charges it pays on its behalf. If the Customer has been classified as one of the top ten thousand corporations, it should appropriately advise the broker to ensure that all payments, other than those income payments specifically subjected to withholding taxes under existing regulations, will be subjected to the 1% or 2% withholding tax, as applicable. Likewise, the Customer should advise its broker on the information that should we contained in the TP OR/invoice to ensure its sufficiency for documentation purposes.
The broker, on the other hand, should faithfully implement the Customer’s instructions. If the third-party service provider is not subject to withholding (such as GPPs and other tax-exempt entities), the broker should require a certificate of exemption for the protection of its Customer. It should reject invoices/Ors issued by the TP that do not conform with its Customer’s requirements.
Another concern that needs to be addressed by the parties in this type of transaction is the process for the submission of documents supporting these reimbursable charges, as between the broker and Customer, and the issuance of the certificate of withholding taxes, from the broker to the TP provider/seller. A delay in the submission by the broker of the VAT invoices/ORs of the TP may put at risk the claim of the Customer for the related input tax. On the other hand, delays in the delivery of the broker of the Certificate of Withholding Tax to the TP provider/seller may affect its application of such creditable withholding taxes as tax credit against income tax. Considering the peculiarity of this type of transactions, it would be difficult to totally eliminate the lags and, in this area, it is hoped that BIR will allow other secondary evidences. It would also be helpful if BIR can clarify the liability of the broker in this transaction, particularly if it fails to deduct the withholding taxes on these reimbursable charges despite advice from the Customer.
In the meantime, the rules had been issued and it is to everyone’s interest that these are complied with.(The author is a tax manager at Punongbayan & Araullo, member of Grant Thornton International. For comments and inquiries, please email the author or call 886-5511.)