ONE of the main focus of the Asia-Pacific Economic Cooperation (Apec) summit is the growth of the small and medium enterprises (SMEs) as part of its thrust for inclusive growth. Increase in GDP will only have meaning for the poorest of the poor, if it is felt by them. Economic growth can be said to have trickled down if a barangay’s sari-sari store is full of merchandise to sell; if a driver is finally able to afford his own tricycle, even if it is only payable in installment; if many small businesses are starting, thriving and innovating.
The Apec leaders recognize the importance of SMEs’ access to finance as a key enabler of expansion to the marginalized sector. To achieve this, our government should widen various financial options for SMEs, including non-traditional and innovative financing, especially microfinancing. Recognizing that SMEs’ access to finance is a cross-cutting issue, there should be efforts for closer collaboration with relevant public and private sector institutions, including the Bureau of Internal Revenue (BIR) and the Bangko Sentral ng Pilipinas (BSP) in discussing ways to widen access to finance and business resilience among SMEs.
The most popular means by which the poor has access to cash is through microfinancing. It is defined by Republic Act 8425 as a credit and savings mobilization program exclusively for the poor to improve the asset base of households and expand the access to savings of the poor. It involves the use of viable alternative credit schemes and savings programs including the extension of small loans, simplified loan application procedures, group character loans, collateral-free arrangements, alternative and repayments, minimum requirements for savings, and small denominated savers’ instruments.
But this scheme is not free of tax. Just recently, the Court of Tax Appeals (CTA) has ruled that microfinancing is not different from the business of commercial lending for profit. The court said that while it is true that a corporation or, specifically, a “civic league or organization not organized for profit but operated exclusively for the promotion of social welfare,” is exempted from income tax, the same cannot be said with regard to its value-added tax (VAT) liability.
Otherwise stated, a microfinance company is exempted for taxes on income. It cannot be gainsaid about its VAT liability. Since microfinancing is an act of lending money at interest, then it is a lending investor, subject to the imposition of VAT (CTA 8480).
According to the court, the law does not even distinguish micro financing from commercial lending. The present law merely stresses that even a nonstock, nonprofit organization or government entity is liable to pay VAT for the sale of goods and services.
The law expressly provides that for a taxpayer to be exempt from VAT, the transaction must be one of those enumerated in Section 109 of the Tax Code. Undeniably, microfinancing is not one of those transactions enumerated therein.
But if a microfinancing company will be considered by the BSP as a nonbank financial intermediary like money changers and pawnshops whose transactions are exempt from VAT, pursuant to Section 109 (U), then microfinancing will thrive.
In the case cited above (CTA 8480), however, the court noted that although the articles of incorporation states that among the corporate purposes of the microfinancing company is, “to provide access to economic, financial, social and other developmental opportunities to small, cottage and micro-entrepreneurial sector of society…” it cannot be considered as “other nonbank financial intermediary” simply because it was not able to show that it has been authorized by the BSP to perform quasi-banking functions. Because of this flaw, the microfinancing company in this case was ordered to pay around P70-million-plus interest and surcharges.
Based on this decision by the CTA, if the BSP recognizes microfinancing as “other nonbank financial intermediary”, then it will be exempt from VAT, as well.
One of the important drivers of our economy is the SMEs which are mostly owned by the poor in society. SMEs will only grow if they can have access to financing aid.
Microfinancing entities are created for this purpose. If microfinancing companies will be exempt both from income tax and VAT, then many will invest their money to be lent to the poor.
If the key is for the BSP to recognize microfinancing companies as nonbank financial intermediaries like pawnshops, then what is hindering it to do so?
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The author is a partner of Du-Baladad and Associates Law Offices (BDB Law), a member-firm of World Tax Services Alliance.
The article is for general information only and is not intended, nor should be construed as a substitute for tax, legal or financial advice on any specific matter. Applicability of this article to any actual or particular tax or legal issue should be supported therefore by a professional study or advice. If you have any comments or questions concerning the article, you may e-mail the author at irwin.nidea@bdblaw.com.ph or call 403-2001 local 330.