VAT Ruling No. 030-97

April 1, 1997 VAT RULING NO. 030-97 Sec. 108-000-030-97 Ayala Insurance Brokers, Inc. Makati Stock Exchange Bldg. Ayala Ave., Makati City Attention: Ms . Wilma P . Zapata Controller Gentlemen : This refers to your letter dated February 9, 1996 requesting clarification on certain issued affecting insurance brokers in relation to the Expanded Value-Added Tax. It is represented that Ayala Insurance Brokers, Inc. (AYIB) is a newly organized life and non-life insurance broker providing insurance brokering and risk management services to the insuring public; that as a broker its role is to represent and provide for the best rates and terms most beneficial to its clients (which are the Assured); that these insurance requirements are being placed by the broker to its duly accredited insurance companies; that in return the broker is getting remuneration from the insurance companies by way of commissions; that prior to the implementation of EVAT, AYIB is already Non-VAT/VAT registered taxpayer; that since the insurance companies are not yet subject to VAT then, the broker shoulders the output tax, thus incurring additional operating costs; and with the implementation of the EVAT on January 1 1996, insurance companies are now classified as VAT registered taxpayers; that they are now charging 10% VAT in lieu of the 5% premium tax to the assured; that in turn, these insurance companies are claiming the 10% EVAT on the commission being passed on to them by the insurance brokers as creditable input tax; and that to support these input taxes of the insurance companies, insurance brokers are required to issue VAT registered invoices for the commissions they received, in the same manner, the Assureds are also required to submit supporting documents for their creditable input taxes. In view of this, you would like to seek clarification on the following: 1. What are the documents needed by the assured to support there creditable input taxes? 2. Is the Official Receipt (OR) issued by the broker acceptable to support the assured's input tax? 3. Considering that the broker is accountable or is subject to VAT only on its commission income and not on premium income, is it still necessary for the broker to continue the issuance of the premium invoices? If not, is it acceptable if the broker just issue a debit note in lieu of the premium invoice? cdtech 4. Is there any specific rule on whether the commission income of the broker be exclusive or inclusive of VAT? 5. Is there a need to maintain two (2) sets of official receipts for its VAT and NON-VAT transactions? In reply, please be informed that: 1. The Assureds can support their creditable input taxes from insurance premiums paid with the duly registered invoice or receipt issued by the VAT registered insurance company. 2. The official receipt (OR) issued by the broker on the premiums payment by the assured cannot be used to support the assured's input tax. This is because the broker is subject to output tax only on the commission's received and not on the premiums payment. It is the insurance company that is liable for the VAT on premiums income and therefore such insurance company should issue the VAT receipt which can be the basis for a VAT input credit. 3. Since the premiums invoices issued by the insurance brokers cannot be used to support input taxes claimed by the assured, it is no longer necessary to issue such. Likewise, a debit note issued by the insurance broker in lieu of the premium invoice is not acceptable to support any input tax to be claimed by the assured. Input taxes on the purchase of goods, properties or services made in the course of trade or business shall be evidenced only by a VAT invoice or official receipt issued by VAT-registered person held primarily liable to pay the VAT. 4. Under Section 108 of the National Internal Revenue Code as amended by R.A. 7716, it is required that a VAT-registered person shall indicate in the receipt or invoice that total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the value-added tax. Consequently, in determining the amount of output or input taxes, such shall be determined by multiplying the total amount indicated in the invoice by 1/11. In view of this provision of the law, VAT is now billed inclusive of the invoice price. 5. If a taxable person/entity is engaged in both VAT and Non-VAT operations/transactions, a separate VAT invoice or receipt for its vatable transaction and NON-VAT invoice or receipt for its non-VAT transaction should be issued. prcd Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue