DOF considers BAP proposal on VAT-GRT

The Department of Finance (DOF) is considering the proposal of the Bankers Association of the Philippines (BAP) to apply the value-added tax (VAT) only on services offered by banks and instead apply the gross receipts tax (GRT) on interest income.

Finance Secretary Jose Isidro Camacho said he has directed the Bureau of Internal Revenue (BIR) to study the legal opinion of the Romulo Mabanta Law Offices on how to interpret the application of VAT on bank and financial services.

"Off-hand, I don‘t know if it is possible to do it this way. That‘s why I am having it looked at by the BIR," Camacho said.

Camacho said the DOF has repeatedly warned that the VAT on financial services would be a nightmare to implement and the department’s original position was to except financial services from the VAT.

BAP executive director Leonilo Coronel explained that based on the opinion made by Romulo Mabanta, it was possible to apply the five-percent GRT on interest income generated by financial institutions and apply the 10-percent VAT only on services.

"After all, that’s what the VAT on services is all about," Coronel said. "We forwarded the opinion to the DOF and hopefully they can address this question."

Local banks earlier said there would be a 29.93-percent drop in taxes collected from financial transactions after the government shifts from GRT to VAT.

According to the DOF, however, this would be offset by increased collections made possible by the resulting audit trail that would make it difficult for corporations to misdeclare their taxable income.

Based on DOF data, the government collected a total of P14.7 billion in 2001 from banks and other financial institutions that paid the GRT on various financial transactions.

In terms of transaction volume, banks said the VAT collection on that year would have been around P10.3 billion, representing a P4.4-billion decline due to various deduction of input VAT on financial transactions.

However, the DOF said that at best, the shift would be revenue-neutral because the application of VAT on financial transaction would necessitate the creation of an audit trail that could be used to track down and counter-check the declarations made by bank clients.

The DOF said corporations with financial transactions would be forced to reconcile their income reports once the VAT is in place.

"They can claim output VAT but then they would also have to report their finances in full. Then, the Bureau of Internal Revenue could track their income and charge them the right tax," the finance officials said.

The DOF said it was understandable for banks to oppose the shift since any policy change meant additional costs. "They naturally don’t want to go through the whole process of changing their system," officials said.