Imposition of Value-Added Tax on Stockbrokering Services

March 14, 2003 PSE MEMO FOR BROKERS NO. 076-03 FOR : All Trading Participants SUBJECT : Imposition of Value-Added Tax on Stockbrokering Services Relative to the imposition of the value-added tax (VAT) on transactions services, please be guided by the following: SHECcD 1. Section 108 (A) of the Tax Code states that there shall be levied, assessed and collected a value-added tax equivalent to 10% of gross receipts derived from the "sale or exchange of services", which is defined as the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration. However, payments for transaction received out of an employer-employee relationship shall not be subject to VAT. Republic Act No. 9010 imposed the 10% VAT on sale of services by persons engaged in the practice of profession or calling and professional services rendered by general professional partnerships; services rendered by actors, actresses, talents, singers, and emcees; radio and television broadcasters and choreographers; musical, radio, movie, television and stage directors; and professional athletes, as well as services rendered by customs, real estate, stock, immigration and commercial brokers, beginning 1 January 2003. Generally, if a person collects and receives payment for services rendered (outside of an employer-employee relationship), the payment would be subject to VAT, except as has been qualified by law (see discussions below). Specifically, Republic Act No. 9010 mandated that for stockbrokering services, the 10% VAT shall be imposed in lieu of the 7% gross receipts tax (GRT) imposed for the years 1 January 2001 to 31 December 2002. Services rendered in the Philippines by brokers, dealers in securities and their agents for a certain fee, remuneration or consideration therefore fall under the kinds of services subject to the 10% VAT. 2. To be subject to VAT, performance of the services should not be in pursuit of an employer-employee relationship between the service-provider and the service-recipient. One element that may establish the existence of an employer-employee relationship between the person for whom the services are rendered and the person rendering such services is when both are required to give their respective shares for SSS, Medicare and Pag-ibig contributions. (Revenue Memorandum Circular No. 6-2003) 3. Foreign denominated transactions of stockbrokers shall be subject to 10% VAT. The provision on zero-rating will not apply on service fees charged by stockbrokers to foreign clients paying in acceptable foreign currency. The application of Section 108 (B) (2) of the Tax Code on zero-rating has been limited to sales of services, which are destined for consumption outside the Philippines, following the destination or cross border doctrine, e.g., payment for project studies, information services, engineering and architectural design and other similar services sold to foreign clients. In VAT Ruling No. 040-98 dated 23 November 1998, the Bureau of Internal Revenue declared that even if local travel agents rendered services to foreign tourists and services were paid in acceptable foreign currency, the transaction was not zero-rated because the services were rendered within the Philippines. cSaATC 4. Pursuant to Revenue Memorandum Circular No. 6-2003, taxpayers are classified as follows: a. Those whose gross receipts exceed P550,000.00 in any 12-month period Should register as VAT taxpayer. Required to file the monthly VAT Declaration and the quarterly VAT Return together with the remittance of any VAT payable. Must pay the annual business registration fee of P500.00. b. Those whose gross receipts exceed P100,000.00 but do not exceed P550,000.00 in any 12-month period Have the option to register as VAT or NON-VAT (3% percentage tax) taxpayer. Required to file the monthly Percentage Tax Return, and remit the tax due thereon. Must pay the annual business registration fee of P500.00. c. Those whose gross receipts do not exceed P100,000.00 in any 12-month period Exempt from the payment of VAT or Percentage Tax Required to register as NON-VAT (Exempt) taxpayer Exempt from payment of the registration fee 5. The compliance requirements are: a. For VAT taxpayers Registration/Registration Update Payment of Registration Fee (P500.00) Printing and Registration of VAT Official Receipts Registration and Keeping of Books of Accounts HTDCAS Filing of Monthly VAT Declarations and Quarterly VAT Returns b. For NON-VAT (percentage) taxpayers Registration Payment of Registration Fee (P500.00) Registration of receipts as non-VAT receipts Registration and Keeping of Books of Accounts Filing of Monthly Percentage Tax Return 6. Affected taxpayers are required to register as VAT or NON-VAT taxpayers without penalty not later than 19 March 2003. (Revenue Regulations No. 11-2003). Registration is with the Revenue District Office where the taxpayer is currently registered ( i.e., where the taxpayer regularly files his income tax returns or withholding tax returns, if any) 7. The 10% VAT or 3% percentage tax, whichever is applicable, is a tax on the business transaction or activity and is an indirect tax which the seller may pass-on or shift to the customer who ultimately bears or assumes the burden of the tax. It is different from the tax required to be withheld under Section 2.57.2 of Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001 and Revenue Regulations No. 12-2001, which is an income tax on net taxable income to be withheld by the payor or withholding agent based on the amount of income payment/accrued/payable to the income recipient or service provider who actually assumes the burden of the tax since income tax, being a direct tax, cannot be shifted. (Revenue Memorandum Circular No. 6-2003) Related to the foregoing, attached is the letter of Mr. Rolando D. Esguerra, 1st VP of Equitable PCI Bank, advising that certain banking transactions of stockbrokers will be subject to the 10% EVAT, retroactive to 01 January 2003. For your information. TIAEac (SGD.) ZAYBER B. PROTACIO General Counsel Noted by: (SGD.) JOSE G. CERVANTES Senior Vice President ATTACHMENT Equitable PCI Bank March 12, 2003 THE PHILIPPINE STOCK EXCHANGE Tektite Towers Exchange Road, Ortigas Center Pasig City Attention: ATTY. JOSE G. CERVANTES Senior Vice President Gentlemen : With the issuance of BIR Revenue Regulations No. 12-2003, implementing provisions of the National Internal Revenue Code of 1997 on the imposition of Expanded Value Added Taxes on banks, please inform your member stockbrokers that transfer fees, cancellation fees and other forms of compensation we receive from them is now subject to a 10% EVAT, retroactive to January 1, 2003. Thank you. Very truly yours, (SGD.) ROLANDO D. ESGUERRA First Vice President