Interpretation of Section 108 (C) of the NIRC, as Amended by RA 8424

September 13, 1999 BIR RULING NO. 141-99 141-99 Mr. Andres L. Dy Jr. CPA 12-J Marcelino Street Isidora Hills, Holy Spirit Quezon City Dear Mr. Dy, This refers to your letter dated January 25, 1999, requesting clarification as to the interpretation of the provisions of the National Internal Revenue Code, as amended by Republic Act No. 8424. Particular to this issue is Section 108(C) thereof states: Determination of the Tax . The tax shall be computed by multiplying the total amount in the invoice indicated in the official receipt by one-eleventh (1/11) . This provision renders the presentation or non-presentation of the VAT as a separate item in the Official Receipt or Sales Invoice without any effect in the determination of the VAT-registered seller's tax liability. This simplifies the manner of extracting the VAT liability on a particular transaction, and effectively eradicates any issue related thereto in the event a different value added tax is presented in the O.R. Thus, for a sale of P100, an erroneous presentation of "plus 4% VAT" or a total billing of P104.00 shall not in any way cause confusion in the tax computation since the formula is based on the resultant figure of P104.00. In situations like these, the seller's defense that only 4% was passed on does not exonerate him from payment of the remaining 6% by way of output tax. To allow this alternative presentation would thus not only be utterly confusing but intentionally misleading. Under Section 105, "Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value added tax (VAT) imposed in Sections 106 and 108 of this Code. The value added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lease of the goods, properties or services; . . ." It is thence, a mistaken notion that the value added tax is a tax on the buyer, with the seller becoming a mere agent of the BIR. The law imposes the tax on the seller who, by necessary incidence, passes on the tax burden to the buyer. This system of tax shifting is an effective tool in the creation of an audit trail which is vital for tax administration and enforcement. Sec. 110. Tax Credits. (A) Creditable Input Tax . (1) Any input tax evidenced by a VAT invoice or official receipt issued in accordance with Section 113 hereof on the following transactions shall be creditable against the output tax: (a) Purchase or importation of goods . . . (b) Purchase of services on which a value added tax has been actually paid. xxx xxx xxx Thus, to the VAT registered purchaser, the tax burden passed on does not constitute cost, but input tax which is creditable against his output tax liabilities. This voids the cascading effect which is characteristic of the sales tax system of old, where the sales tax is necessarily cost to the buyer, and as such becomes a factor of cost which is a basis of the marked up seller price in turn to his customers, and so on and so forth down the distribution chain. In the VAT system, however, it is only in the case of a Non-VAT purchaser that VAT forms part of cost of the purchase. Nevertheless, of significant importance is the requirement of the synchronization of the output tax of the seller and input tax of the purchaser in a particular transaction. This is because it is at a certain point that the tax credit of the purchase simultaneously becomes the liability of the seller. To this end, the only medium of "communicating" this shifting is the VAT registered O.R. or Invoice. The issuance thereof is governed specifically by Sections 113 and 237 of the Code. Accordingly, the non-presentation of the VAT in the O.R. or Invoice would, in like manner as in output taxes determination, negate any possible confusion in the appreciation of the input tax which the VAT purchaser may apply against his output tax liabilities, through the uniform rate of 1/11 of the O.R. or invoice. So in the earlier example where a sale of P100.00 was passed on "plus 4% VAT" totalling P104.00, the VAT purchaser shall nevertheless be entitled to the P9.45 input tax (P104.00 divided by 11) and not the P4.00 as the billing erroneously suggest. Again, this alternative presentation not only invites confusion, but in this case, becomes unjustly misleading. The provisions of the Tax Code as amended by R.A. 8424 deleted traces of the alternative billing system of E.O. 273 wherein the VAT presentation was an option. Finally, and in line with the legislative intent to promote administrative feasibility, Revenue Regulation No. 8-99 was adopted pursuant to the Section 244 of the Tax Code. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue