Here comes the taxman again!

In its desire to ride with the boom in the real- estate business, the Bureau of Internal Revenue (BIR) has proposed a new regulation that would require the early payment of value-added tax (VAT) on real-estate transactions. The BIR calls it “advance VAT,” and, as the name connotes, it is the payment of VAT earlier than what the law requires. To put it simply, it is a forced loan or advance to the government.

Under the proposed regulation, the BIR requires real-estate dealers to pay VAT in advance on January 10th of each year. This is contrary to what the present law requires—that VAT should be paid only upon actual collection, in the case of installment sales, or upon actual sale, in the case of cash sales.

The advance VAT required to be paid is 3 percent, based on projected sales or collections for the entire year. For example, if the projected sales or collection in a year is P100 million, 3 percent of this amount should be paid to the BIR at the beginning of the year. If the regulation is passed this month, the 3-percent advance VAT is payable on March 10.

As worded in the draft regulation, the 3-percent advance VAT is based on projected—not actual—collections or sales for the year. So, while the sales or collections are yet to come, the tax is already due. Unluckily, those operating on a tight cash flow may be forced to borrow, while those whose financial condition cannot permit them to absorb the additional cost of borrowing may just have to fold up.

Evidently, while the BIR could not find a good legal basis for this move, they cited other industries where the advance payment of VAT has become an accepted practice. These are the flour and sugar millers and sellers of naturally grown and planted timber producers.

Thinking about it, though, I could not see any parallelism between the millers and lumber producers vis-à-vis real-estate dealers. In the case of the millers and lumber producers, there is difficulty implementing the collection of the VAT, specifically the point in the chain where VAT can be collected with certainty. This was the main reason an advance-VAT arrangement was resorted to.

In contrast to the millers and timber producers, the real-estate sector is a much more controlled sector from a VAT perspective. Its product, a real-estate property, is registerable and, therefore, is less likely to be moved around, consumed or transferred without the payment of the proper taxes. In fact, proof of payment of taxes is a requisite before these properties can be transferred to another.

Even more disturbing is that in trying to implement this advance-VAT scheme, the BIR requires submission of so many documents and schedules that would complicate further the compliance with the tax. In the payment of the advance VAT, it requires the submission of a schedule detailing the breakdown of specific installment sales transactions and the projected collection from receivables covered by the advance VAT, among other things. Likewise, in transferring a property from the seller to the buyer, VAT returns, summaries of advance VAT paid, installment amounts, due dates, contracts and other pertinent documents are required to be shown to the BIR before a Certificate Authorizing Registration (CAR) is issued. These are in addition to the current requirement, such as submission of proof of the withholding-tax remittances and payment of other taxes.

We know, of course, that in an advance-VAT scheme, the government gets hold of the money in advance, and the benefit derived out of that is equivalent to the cost of money corresponding to that period from the time the VAT is paid in advance up to the time the advance VAT is used. Based on the proposed regulation, the advance VAT can be used as a VAT credit in succeeding months.

The current rate of interest now ranges from 2 percent to 3 percent. If the average utilization of the advance VAT is six months, the maximum benefit of the BIR from the advance-VAT collection would be 1.5 percent, more or less.

Comparing this to the combined increase in cost of collection (as the BIR will spend more resources to process, monitor and analyze these payments) and cost of compliance (as taxpayers will have to comply with the additional documentary requirements and pay additional interest on loans needed for the taxes advanced), the benefit, if at all, may not be worth the disturbance caused to the real industry sector.

The BIR must realize that if the cost of complying with the payment of taxes increases, the revenue take of the government decreases. Why? The cost of additional labor, supplies, utilities and supervision which a taxpayer spends in complying with its tax payments are all taken as deduction from income tax. This would equate to an outright reduction in income tax equivalent to 35 percent of the additional cost incurred. In case a taxpayer needs to borrow the amount needed to pay the advance VAT, an additional deduction in the form of interest expense may be taken, as well.

Before proceeding with the proposed regulation, it may be wise for the BIR to further study and quantify the impact of this move. What may appear to have been a golden apple may turn out to be a losing proposition after all.  

The author is a partner at Benedicta-Du Baladad and Associates. If you have any comments or questions, you can e-mail the author at benedicta-dubaladad@bdb.com.ph or call 856-2952.)

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