BIR memo: International cargo exempted from value-added tax

REPORT FROM BUSINESSWORLD The movement of cargoes by freight forwarders to another country and vice versa are exempt from paying value-added tax (VAT), the Bureau of Internal Revenue (BIR) said. In revenue memorandum circular 35-2006 issued on June 21, the bureau noted that a cross-border cargo freight forwarder merely acts as "integrator" of the different services, while the actual shipment of the goods abroad or vice versa is provided by third-party service providers. "In the shipment of goods from one place to another, it is not actually the forwarder that renders all the said services but some of which are rendered by third-party service providers, hence the payments received by the forwarder from its clients which are intended for third-party service providers cannot be considered as part of its gross receipts for tax purposes," BIR said. "Accordingly, the forwarders may only be subject to tax on their commissions and/or service fees they charge to their clients for the said integration and/or for the services they actually render," it added. For outbound cargo, the BIR said freight forwarders will only be subjected to VAT for services such as trucking, processing, documentation, disbursement fee, and actual commission on the freight. Meanwhile, for goods entering the Philippines, freight forwarders will have to pay VAT for local destination services such as collection of fees, trucking and processing and documentation, and for currency adjustment or fees to cover losses from foreign exchange fluctuations, and their commission income. On the other hand, VAT will be imposed on cargo transported within local destinations. "The services paid for by the client is the carriage of cargoes from one destination in the Philippines to another destination in the Philippines with the commitment that the said services, including other accessory services like handling, storage, documentation, etc., will all be performed by the forwarder," the BIR said. It noted the rule will apply even in hiring third-party contractors that issue VAT-registered receipts. "This is so because the forwarder does not merely act as an intermediary between the client/shipper and other service providers but undertakes to perform all the services of bringing the cargoes from one point in the Philippines to another point in the Philippines. Hence, all the expenses paid out of the money received from the client redound to the benefit of the forwarder," BIR said. The revenue memorandum circular states that for VAT purposes, the freight forwarder must issue a VAT-registered official receipt. Should third-party service providers be involved in the carriage of goods, they are required to issue a VAT-registered receipt to the freight forwarder for claiming input tax, it added. However, if forwarders engage the services of third-party service providers and the amount payable them is treated as reimbursable expenses or advanced payments, a VAT official receipt is not issued on the services rendered and reimbursable expenses are covered by a non-VAT registered acknowledgement receipt, "the amount collected on behalf of these third-party service providers must not form part of the forwarders’ gross receipts," the BIR said. For the expanded withholding tax on forwarders, meanwhile, the revenue memorandum circular states that forwarders will only be considered as ordinary contractors subject to a 2% tax. The BIR said for cross-border transactions, the 2% expanded withholding tax will be imposed on the gross commissions received, the origin/destination charges and currency adjustment. For domestic cargo, "the 2% expanded withholding tax will always fall on the shipper who claims the entire expense for income tax purposes." -- Jennee Grace U. Rubrico/BusinessWorld