VAT Ruling No. 056-01

September 4, 2001 VAT RULING NO. 056-01 Sec. 114 (C) VAT Ruling No. 029-98 E-C Instructional Resources Agency 3/F CREST Building, North Diversion Road Buhangin, Davao City Attention: Mr . Olimpio R . Cruz Manager-Proprietor Gentlemen : This refers to your letter dated 26 November 2000 concerning your request for information on the propriety of the taxes being withheld from you by the different accountants of the DEPARTMENT OF EDUCATION CULTURE & SPORTS (DECS) Division Offices. It is represented that you are a publisher of "Educational Books;" that, in VAT RULING No. 029-98, in the case of ABC EDUCATIONAL PRODUCTS AND SERVICES DEVELOPMENT AGENCY, dated 17 September 1998, it has been held that " Sale, importation, printing or publication of books . . . ." is exempt from the Value Added Tax (VAT), pursuant to the provisions of Section 109 (y) of the National Internal Revenue Code of 1997; that, based on the said ruling, the DECS did not withhold VAT on your sales thereto of educational books until the end of the year 1999; that, however, beginning the year 2000, the aforesaid division offices of the DECS started withholding "1% for EVAT and 3% for VAT" on your sales thereto of "educational books;" that, in view of the foregoing, you are requesting information on the propriety of the aforesaid taxes being withheld by the DECS on their purchases, from you, of educational books. In reply, please be informed that Section 114 (C) of the National Internal Revenue Code of 1997 provides: "(C) Withholding of Creditable Value-added Tax . The Government or any of its political subdivisions, instrumentalities or agencies, including government-owned or -controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods from sellers and services rendered by contractors which are subject to the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold the value-added tax due at the rate of three percent (3%) of the gross payment for the purchase of goods and six percent (6%) on gross receipts for services rendered by contractors on every sale or installment payment which shall be creditable against the value-added tax ability of the seller or contractor: Provided, however, That in the case of government public works contractors, the withholding rate shall be eight and one-half percent (8.5%): Provided, further, That the payment for lease or use of properties or property rights to nonresident owners shall be subject to ten percent (10%) withholding tax at the time of payment. For this purpose, the payor or person in control of the payment shall be considered as the withholding agent. "The value-added tax withheld under this Section shall be remitted within ten (10) days following the end of the month the withholding was made." This law is implemented by Section 4.110-3 of Revenue Regulations No. 7-95, which provides that the creditable VAT shall only be withheld by the said government entities provided the supplier of goods, property and services are subject to the VAT, as follows: TADcCS "SEC. 4.110-3. Withholding of Creditable Value-Added Tax . (a) The government or any of its political subdivisions, instrumentalities or agencies, including government-owned or controlled corporations (GOCCs) shall, before making payment on account of its purchase of goods from sellers and/or services rendered by contractors which are subject to the VAT imposed in Sec. 100 and 102 of the Code, deduct and withhold the VAT due at the rate of three percent (3%) of the gross payment for the purchase of goods and six percent (6%) on gross receipts for the services rendered by contractors on every sale or installment payment which shall be creditable against the VAT liability of the seller or contractors pursuant to RA 7644 as implemented by Revenue Regulations No. 10-93; Provided, That payment of P1,000.00 and below per purchase shall not be subject to withholding tax." Since your sales of "educational books" are exempt from the VAT, you are accordingly also exempt from the 3% creditable VAT withholding. Please be informed that there is no existing law pertaining to the withholding of any 1% Expanded Value Added Tax (EVAT). However, Section 2.57.2 (N) of Revenue Regulations No. 2-98, implementing Section 57 of the National Internal Revenue Code of 1997, prescribes the 1% creditable withholding tax in case of purchase of goods by the Government, as follows: "(N) Income payments by government . Income payments, except any single purchase which is P10,000 and below, which are made by a government office, national or local, including government-owned or controlled corporations, on their purchases of goods from local suppliers -One percent (1%); A government-owned or controlled corporation which is listed as one of the top five thousand (5,000) corporations shall withhold the tax in its capacity as a government-owned or controlled corporation rather than as one of the top five thousand (5,000) corporations." This 1% creditable withholding tax may, however, be credited by the seller against his income tax liability when he files his income tax return. It appears that the "1% EVAT" withholding referred to in your said letter actually pertains to the aforesaid 1% creditable withholding tax on income payments made by a Government entity. Such being the case, it follows that the taxes being withheld from you by the aforesaid division offices of the DECS are consistent with law. The DECS is required to issue to you a "Certificate of Taxes Withheld," pursuant to Section 5.116 (C) of Revenue Regulations No. 2-98, covering the aforesaid 3% creditable VAT and 1% creditable income tax withholding. To avoid confusion, the DECS must properly classify the 1% as a creditable income tax withholding rather than "1% EVAT." Very truly yours, (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group