Publishing Questions and Answers on Taxation Relative to the Operations of the Philippine Ports Authority

April 17, 1988 REVENUE MEMORANDUM CIRCULAR NO. 20-88 SUBJECT : Publishing Questions and Answers on Taxation Relative to the Operations of the Philippine Ports Authority TO : All Internal Revenue Officers and Others Concerned The following are the questions and answers relative to the queries on taxation of the Philippine Ports Authority. Question 1. For internal revenue purposes describe the Philippine Ports Authority (PPA). Answer PPA is a body corporate created under and by virtue of P.D. 857, as amended by Executive Order No. 546, LOI No. 1005-A, Executive Order No. 159, having corporate powers and duties provided for by law. It is attached to the Department of Public Works, Transportation and Communication for policy and program coordination. The nature of its operations may be gleaned from the following provisions of P.D. 857, as amended, viz: Sec. 2 (f), Article II To ensure that all income and revenues accruing out of dues, rates, and charges for the use of facilities and services provided by the Authority are properly collected and accounted for by the Authority, that all such income and revenues will be adequate to defray the cost of providing the facilities and services (inclusive of operating and maintenance cost, administration and overhead) of the Port Districts, and to ensure that a reasonable return on the assets employed shall be realized. Sec. 6 (v), Article IV To provide services (whether on its own, by contract, or otherwise) within the Port District and the approaches thereof, including but not limited to berthing, towing, mooring, moving, slipping, or docking any vessel; loading or discharging any vessel; sorting, weighing, measuring, warehousing, or otherwise, handling goods. Being a government corporate entity, PPA exercises also a propriety function in the pursuit of its corporate thrusts and objectives. Thus, corollary to the foregoing, there are identified instances where PPA provides by itself the actual rendition of port services. These instances are as follows: a) in case of takeover of cargo handling operations from private operators for lawful causes. This is commonly known as the Special Take-Over Units (STU) operation. b) When the Authority (PPA) provides the cargo handling operations itself instead of awarding it to a cargo handling operator. c) When PPA, under the above circumstances, undertakes generation or port-related services in the pursuit of its generation of non-traditional sources of revenues. Question 2 . What port charges and fees formerly collected by the Bureau of Customs under the Tariff and Customs Code are now collected by PPA pursuant to Executive Order No. 137. Answer The following fees and charges are now collected by PPA: 1. Harbor/anchorage fee which is a one-time charge assessed against vessels engaged in international trade every time they call at any port, is the amount the owner, agent, operator or master of a vessel has to pay for each entrance into or departure from a port of entry in the Philippines. 2. Berthing charge is the amount assessed against a vessel engaged in international trade for berthing or making fast to a vessel so berthed. 3. Usage fee is the amount assessed against a vessel engaged in coastal (domestic) trade for berthing, for making fast to a vessel so berthed or for mooring at an anchorage area. 4. Wharfage fee is the amount assessed against the cargo loaded or discharged by the vessel based on revenue tonnage for non-containerized cargo or number of boxes for containerized cargo received or discharged by such vessel. 5. Storage fee is the amount assessed on cargoes for storage in either the cargo sheds, warehouse in open storage area. casia 6. Lay-up is the fee for raising up the vessel for repair. Question 3 . Are the foregoing fees and charges subject to value-added tax (VAT)? Answer The aforesaid fees and charges are collected by PPA to defray the cost of providing the facilities and services of the Port Districts [(Sec. 2 (j) P.D. No. 857)]. Wharfage dues partake of the nature of a fee which was then collected by the government through the Bureau of Customs and now by the PPA to support its operation of the customs service. (Procter and Gamble PMC vs. Commissioner of Customs, (19 SCRA 883). Accordingly, said fees and charges are not subject to VAT which is imposed on the consideration for the sale of service. Question 4 . Is PPA exempt from VAT on all fees/revenues/charges received? Answer No. It is exempt from VAT only if the fees and charges arise from the use of government facilities. However, it is subject to VAT on gross receipts derived from taxable activities other than the fee for the use of the government facilities. Question 5 . Who is subject to VAT on taxable gross receipts generated by PPA from port related activities? Answer PPA Question 6 . Can PPA pass on the VAT to its client-users? Answer Yes, because VAT is an indirect tax. Question 7 . In case PPA enters into a contract with third parties for the operation by the latter of port facilities or performance of port related activities, where it is stipulated that PPA shall receive a percentage of fees and charges collected, what are the respective liabilities of the parties to VAT? Answer VAT liability will not arise from receipts for the use of government facilities such as receipts from harbor and anchorage fees, berthing charges, usage fee, wharfage dues, storage fee and lay-ups. However, with respect to gross receipts from other port related activities which are taxable, VAT shall be levied based on the respective shares of the parties. For example, if the sharing arrangement is 50-50 on gross receipts from taxable activities, PPA shall be subject to 10% VAT on 50% and the third party shall be liable to 10% VAT on the other 50%; thus, no cascading of VAT will result. The invoice to be issued by the third party to the persons paying such charges shall reflect that portion of the cost of the service as well as the VAT earmarked for PPA. Question 8 . Suppose PPA, or any party rendering port related services for that matter have already paid the contractor's tax instead of VAT, what are the consequences? Answer PPA, or any party for that matter, will nevertheless be subject to VAT but without prejudice to their filing a tax credit or refund for erroneous payment. If PPA has withheld such taxes without having remitted the same to BIR it may refund the same to the parties directly, or remit the amount to the BIR where, upon a claim by the taxpayer concerned, the same shall be refunded or tax credited. Question 9 . Who are the parties liable for VAT in case PPA allows a private contractor to operate pursuant to a contractual agreement? aisa dc Answer Both parties to the contract on their respective shares from gross receipts derived from taxable activities. Question 10 . Are security service contractors and consultants subject to VAT? Answer Yes, because they are performing taxable services and not exempted from VAT under Section 103 of the Tax Code, as amended. Question 11. May such security service contractors or consultants pass on the VAT to PPA? Answer Yes. Question 12 . Are PPA revenues arising from the lease of its facilities/subject to VAT? Answer No, if the property leased are real properties because such lease is exempt from VAT, pursuant to Section 103 (q) of the Tax Code, as amended. However, if the property leased are personal properties, the revenue derived from the lease thereof is subject to VAT. Question 13 . Describe the nature of the lease contract between PPA and "7-R" whereby the latter has been granted the privilege to collect storage charges for PPA in consideration for a fixed amount paid yearly to PPA? Answer Since storage fee is exempt from VAT, "7-R" shall not bill the VAT to the cargo owners. On the other hand, the consideration received by "7-R" from PPA is for rendition of collection service as a business agent; hence, subject to VAT. Question 14 . What could be done to cargo operators who charge 10% VAT from cargo owners? Is it valid? Answer Provided that the consideration is for the service that are subject to VAT, shifting of the VAT is proper. However, the collection of full 10% VAT from the cargo owners is not justified if the 10% VAT is computed on the basis of the rates prevailing before the implementation of the VAT and when the same was still subject to contractor's tax because the contractor's tax which used to be built-in on the basis of the total cost has already been repealed. Question 15 . May the input taxes on certain administrative expenses, such as purchases of supplies and services, be claimed as tax credit or refund? Answer Yes, if the input tax will exceed the output tax. Question 16 . Considering that PPA has branches all over the country it would be very difficult to consolidate all the quarterly reports of their branches before the 20th day of the month following the close of the quarter; therefore, may it resort to estimated figures to determine its liability subject to adjustment later on? Answer No. VAT computation should be based on actual data. PPA may however request for an extension of time to file its return. Question 17 . Should the input tax be recorded as receivable from BIR? Answer No, because input tax serves only to reduce the taxpayer's output tax; therefore, treating it as a receivable will convert it to an ordinary financial obligation which the law did not intend. Question 18 . What taxes have been replaced by VAT? Answer The following taxes have been replaced by VAT: 1. Sales tax 2. Compensating tax 3. Advance sales tax 4. Miller's tax 5. All the fixed taxes of various businesses (PTR) 6. Contractor's tax 7. Broker's tax 8. Tax on subsequent sales Question 19 . Since PPA has no sales journal, can it add more column in its Collection and Deposit Journal entitled "10% Output VAT"? On the other hand, can it use its Journal of checks issued for "Input VAT"? Answer The choice is up to PPA provided it is able to keep a summary of the VAT for each tax period covered by VAT return and link up such summary with the particular books where the output and input VAT are indicated. Question 20 . The principal is a firm having a tie-up with a local firm. The contract specifies that PPA will provide for the taxes to be paid by the consultant which include the contractor's tax (now VAT), Questions: Is PPA bound to pay the VAT payable by the consultant? If so, will PPA's payment of the consultant's VAT liability entitle it to claim an input tax credit? aisa dc Answer to A) PPA's obligation to pay for the consultant's tax liability is contractual and is binding only between the parties; Therefore, notwithstanding such agreement, the consultant remains principally liable for the payment of the VAT. If the consultant's gross receipts exceed P200,000.00 during a 12-month period. VAT registration is mandatory. Otherwise, VAT registration is optional. If PPA pays for the consultant's VAT liability, it is entitled to input tax credit. Question 21 . Since the consultant's billing includes personnel services as well as reimbursements for office supplies and equipment, how will it affect the computation of the VAT? Answer The tax base for VAT in the case of sale of services is gross receipts which means the total amount of money or its equivalent representing the contract price, compensation or service fee, including the amount charged for materials supplied with the services and deposits or advance payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding value-added tax. (Sec. 2(m), RR 5-87) Accordingly reimbursement for supplies and equipment shall form part of the consultant's gross receipts for purposes of the VAT. Question 22 . If work were completed prior to December 31, 1987 but billing were made after such date, which tax should apply? Answer VAT. If the contractor's tax has already been withheld, it shall be regarded as an erroneous payment which shall be refundable to the payor. Nevertheless, if the contractor's tax has already been withheld, the same shall be remitted to the BIR which shall then refund or issue a tax credit certificate in favor of the contractor/claimant. Question 23 . Should the VAT be reflected as income to be included as part of gross receipts? Answer No. VAT is not included as part of gross receipts pursuant to Sec. 2 (m) RR 5-87. Question 24 . If the cargo is already subject to VAT in the outports, is it still subject to VAT in the Port of Manila? Answer If the consideration received for services rendered in the outports is different from the consideration received in the Port of Manila, VAT shall apply for both considerations. Otherwise, if the service in the outports is treated as continuation of the services which was started or concluded in Manila, and the consideration received is for services rendered in Manila and the outports, VAT shall accrue only once. Question 25 . Some port users claim that their cargoes are exempt from VAT. What specific articles are exempt from VAT? Answer Among others, the articles exempt from VAT include non-food agricultural, marine, or forest products if sold by the primary producer in its original state, i.e., rattan, corrals, shells, etc., agricultural food products in all stages of distribution, i.e., meat, fish, vegetables, dried fish, salted fish if merely sealed in plastic bags, corn grits, rice, raw cane sugar; fertilizers, pesticides, etc. Question 26 . Does the VAT exemption of the above articles carry VAT exemption for the port related charges or fees for services involved in handling such articles in the ports? Answer No. The exemption is limited to sale and/or sale or importation in certain cases of the exempt articles. Question 27 . Three entities at the pier are collecting wharfage, cargo handling fees, and storage fees, namely: PPA, cargo handlers and 7-R, respectively. How does VAT affect the collection of such fees? Answer Handling charges are subject to VAT. However, the cargo shall be subjected to VAT only once for a particular service, i.e., VAT for handling charges. Wharfage and storage fees are however exempt from VAT. However, if the activity of collecting these charges has been granted to another party for a fee, such fee is subject to VAT. aisa dc Question 28 . Is harbor pilot's fee subject to VAT? Answer No, because harbor pilots are classified as professionals; therefore, fees received by them are exempt from VAT pursuant to Section 103 (r) of the Tax Code, as amended. Question 29 . On July 8, 1987, PPA entered into a contract with a contractor for the construction of various ports. Construction period is to run from September 1, 1987 to December 31, 1989. The contractor is obliged to perform all works in accordance with the contract specifications and to submit monthly progress billings based on actual work accomplished. In the three-month period ending December 31, 1987, the contractor completed 10% of the total work equivalent to P40 million. The corresponding progress billing has been submitted to PPA on January 15, 1988 and payable on or before February 15, 1988. What is the effect of VAT on such billings? Answer Work completed but not yet billed as of December 31, 1987 is subject to VAT pursuant to Sec. 6 (g) (3) of RR 5-87. Therefore, if the billing was made after such date, the gross receipt is subject to VAT. On work completed as of December 31, 1987, the contractor's tax will apply if the following conditions are present: 1. An information return was filed. 2. Work was completed and billed as of December 31, 1987. 3. Contractor has recorded in his books such amount receivable for 1987. 4. Contractor files not later than January 20, 1988 and on or before the 20th day after each calendar quarter, the regular contractor's tax return for the payment of contractors tax on payment received in 1988. Failure to comply with these conditions shall automatically subject the gross receipts to VAT of 10%. Question 30 . If the contractor in the preceding problem will request for cost adjustment to cover VAT, is PPA justified in granting an adjustment of 6% only corresponding to the difference between 10% VAT and 4% contractor's tax? Answer Yes. Question 31 . Is PPA required to withhold the VAT for contractor's tax applicable for 1987 transaction? Answer Payments/billings for services rendered but which remain unpaid as of December 31, 1987 are still subject to the 4% contractor's tax provided that the conditions prescribed under Section 6 (g) of Revenue Regulations No. 5-87, implementing Executive Order No. 275 are complied with, in which case, the withholding and remittance provisions provided in Revenue Regulations No. 20-86 shall still apply. (RMC 18-88). acd It should be emphasized, however, that the withholding of creditable income tax on income payments to certain contractors in accordance with Revenue Regulations No. 13-78, as amended by Revenue Regulations No. 6-85, 8-85, and 13-86, shall remain. However, beginning January 1, 1988, there shall be no withholding for VAT because at the time of payment, the same cannot be determined, computed, and ascertained (RMC 18-89). Question 32 . Are revenue or administrative fines imposed by PPA subject to VAT? Answer No, because fines are not consideration for the performance of taxable services. All internal revenue officers and others concerned are enjoined to give this Revenue Memorandum Circular the widest publicity possible. (SGD.) BIENVENIDO A. TAN, JR. Commissioner By: (SGD.) VICTOR A. DEOFERIO, JR. Commissioner