Tax implications of ‘passed-on’ Gross Receipts Tax
On Nov. 15, 2016, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) No. 127-2016, which lifted the suspension of revenue issuances previously suspended under RMC No. 69-2016. One of these issuances is RMC No. 62-2016 (Circular), dated June 13, 2016, which clarifies the proper tax treatment of “passed-on” Gross Receipts Tax (GRT).
GRT is a form of percentage tax, which is defined as a business tax imposed on persons or on entities that sell or lease goods or services in the course of trade or business in the Philippines.
Pursuant to Section 121 of the National Internal Revenue Code (Tax Code), as amended, GRT is imposed on banks and non-bank financial intermediaries (NBFIs) performing quasi- banking functions, and on persons performing similar banking activities. Section 122 of the Tax Code, as amended, also imposes GRT on other NBFIs or financing companies, and on persons performing similar financing activities. On several occasions, the BIR has ruled that although GRT is a direct tax, banks and NBFIs may shift to their clients and borrowers the GRT due on transactions covered under Sections 121 and 122 of the Tax Code.
In the recent Circular, the BIR clarified the following points:
• Banks and NBFIs are directly liable for GRT pursuant to Sections 121 and 122. By agreement, however, the burden of shouldering the GRT may be shifted by these entities to their clients and borrowers. The Circular was issued to clarify the proper tax treatment of the “passed-on” GRT particularly for GRT, income tax and withholding tax purposes.
• The GRT that is “passed on” to clients and borrowers should form part of the tax base of the banks and NBFIs performing quasi-banking functions. The concept of GRT is based on the definition of “gross receipts,” that is, based on “actual or constructive receipt of income.” Accordingly, as these entities are directly liable for GRT on gross receipts derived by them from business operations, the “passed-on” GRT is considered as receipt of gross income, as specified under Section 32(A) of the Tax Code, as amended. Consequently, these shall form part of the tax base subject to 7% GRT under Section 121(c) of the Tax Code, as amended. In case the recipients of the “passed-on” GRT are NBFIs not performing quasi-banking functions, the “passed-on” GRT shall form part of the tax base subject to 5% GRT under Section 122.
• The “passed-on” GRT is considered as receipt of gross income, as specified under Section 32(A) of the Tax Code. Hence, these shall form part of the tax base subject to income tax of the banks and NBFIs. Moreover, the Circular expressly states that the “passed-on” GRT is considered as other fees and charges consistent with the implementing rules issued by the Bangko Sentral ng Pilipinas (BSP) through BSP Circular No. 370 or the Updated Rules Implementing the Truth in Lending Act to Enhance Loan Transaction Transparency dated July 20, 2011. Further, the 7% GRT paid on the “passed-on” GRT can be claimed as deductible expense for income tax purposes by these entities pursuant to Section 34(C) subject to the actual remittance of the GRT as provided under Section 128.
• The “passed-on” GRT can be claimed by the clients and borrowers as a deductible expense for income tax purposes under Section 34 subject to the withholding requirements under Section 2.58.5 of RR No. 2-98, as amended by RR No. 12-2013. The “passed-on” GRT is subject to expanded withholding tax at the rate of 2%.
IMPLICATIONS OF THE CIRCULAR
Although the Circular clarified some issues faced by the banking industry, it nevertheless opened possible issues, particularly: (1) that the GRT imposed on the “passed-on” GRT may be considered as a tax on tax; (2) the accounting of the “passed-on” GRT when this is embedded in the interest rates charged to clients and borrowers; and (3) the potential tax treatment of the “passed-on” GRT for local business tax (LBT) purposes.
Banks and NBFIs lending funds will effectively have to pay an additional tax. In addition to the GRT imposed on the actual interest earned, these entities will now have to pay additional tax on the “passed- on” GRT, which the Circular considers as receipt of gross income for shifting the GRT first to clients and borrowers.
In the example given in the Circular, ABC Bank shifted the 5% GRT due on the interest collectible from XYZ Co. for loans extended by ABC Bank to XYZ Co.
Interest collectible from XYZ Co. P10,000.00
“Passed-on” GRT (at 5%) 500.00
Total amount to be collected P10,500.00
The Circular clarified that the tax base for GRT purposes upon actual receipt by ABC Bank of interest and “passed-on” GRT shall be P10,500.00. However, this ostensibly presents a “tax on tax” situation which is another discussion altogether. The P500.00 GRT, though passed on to the customer, arguably may not be considered as receipt of additional income as it is tax that should not be taxed again in the hands of ABC Bank.
The accounting of the “passed-on” GRT, when embedded in the interest rates charged to client-borrowers, is another issue that needs resolution. In view of the Circular, it may be interpreted that banks and NBFIs will need to first carve-out the embedded “passed-on” GRT from the related interest income account because of the different GRT rates applicable on the “passedon” GRT and on the interest itself. This will therefore result in tedious and inefficient accounting by banks and NBFIs of the “passed-on” GRT in this scenario. It should be noted that the imposition of the GRT, as opposed to the income tax, was devised to maintain simplicity in tax collection and to assure a steady source of state revenue. The simplicity may not be achieved considering this accounting issue facing the banks and NBFIs.
Further, although the Circular discussed the tax treatment of the “passed-on” GRT particularly for GRT, income tax and withholding tax purposes, this could also have a potential impact on the tax base for local business tax purposes of banks and NBFIs. While the Circular clearly provides that “passed-on” GRT is considered as gross receipts, it also explicitly states that the “passedon” GRT is considered as other fees and charges.
Section 2 of the Local Finance Circular No. 1 (which prescribes the guidelines on the imposition of business tax on banks and other banking institutions by local governments) provides that municipalities may impose business taxes on banks and banking institutions. These would be at a rate not exceeding 50% of 1% on the gross receipts of the preceding calendar year derived from interest, commissions and discounts from lending activities, income from financial leasing, dividends, rentals on property, profit from acquired assets and profit from exchange or sale of property. It also provides that all other income and receipts of bank and banking institutions not enumerated shall be excluded from the taxing authority of the local government units. As other fees and charges are not among those enumerated as taxable gross receipts of bank and banking institutions, there may be basis for them to exclude the “passed-on” GRT in the tax base for LBT purposes. This position has yet to be tested with the LGUs.
Given these concerns, the BIR has issued a Circular that intends to clarify the “passed-on” GRT, but has also created possible issues that may counter the very reason for imposing a GRT. Further, the additional tax levied on the “passed-on” GRT may be an extra burden to the banks and NBFIs’ customers if these entities will shift this tax forward again to its client-borrowers. The shifted cost of the tax could lead to higher interest rates on bank loans. Thus, the BIR may consider revisiting the tax treatment of the “passed-on” GRT to address unresolved issues, seen as benefitting government, banks, NBFIs and their customers.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of EY or SGV & Co.