New rule for amortization of input VAT on capital goods

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TOP OF MIND – The Filipino Star

January 23, 2018 | 00h00

Most people believe that a new year symbolizes growth and change, hence the adage “Goodbye the old, make way for the new”. We decide to change the things we have found unpleasant over the past year, make New Year’s Resolutions in the hopes of implementing them, and commit to getting better at the start of the New Year.

Perhaps the most significant change that will affect us all this year is the Tax Reform for Acceleration and Inclusion Act (TRAIN) which was signed by President Duterte on December 19, 2017. The law has changed significantly the National Tax Code of 1997. (NIRC), and one of its amendments involves a new rule on the depreciation of input value added tax (VAT) on capital goods whose cost of acquisition exceeds 1 million pesos.

Prior to the TRAIN Act, Article 110 (A) (1) of the NIRC provided that the input tax on capital goods purchased or imported during a calendar month for commercial or commercial purposes must be distributed evenly over the acquisition month and the following 59 months. If, however, the estimated useful life of the capital good is less than five years, as used for depreciation purposes, the related input VAT is spread over that shorter period.

However, the TRAIN law now provides that the amortization of input VAT on capital goods, the acquisition cost of which exceeds 1 million pesos, will only be authorized until December 31, 2021. After this date, taxpayers with unused input VAT on purchased or imported capital goods are allowed to apply the same as provided until they are fully used. Therefore, input VAT on goods purchased on or after January 1, 2022 will be fully recognized and can be claimed as input tax credits against output tax. On the other hand, if the purchase was made by December 31, 2021 at the latest, the taxpayer can still amortize his input VAT until it is fully used.

This therefore raises the question: what does this amendment imply? What impact would that have on the taxpayers who will be affected by this new provision?

Given the outright recognition of input VAT, taxpayers will benefit greatly from the change as they can immediately claim the input tax credits on the output tax. Taxpayers will be able to claim input tax credits on their purchases up front, unlike the old rule, which requires them to write off the same over a period of several years. Keep in mind, however, that this outright recognition will only be authorized after December 31, 2021. Thus, if the impact for the taxpayers concerned is beneficial, it is not immediate. However, taxpayers may want to factor this particular benefit into their future procurement plans.

This modification would also require the revision of the BIR forms nos. 2550M and 2550Q. A separate field should be added to reflect the outright reporting of the total amount of input VAT on capital goods purchased after December 31, 2021. In addition, given that input VAT on purchases made before that date can still be depreciated until it is fully used, the line of VAT returns providing for its depreciation should be kept.

Just like the new year, the TRAIN law brings changes in the lives of taxpayers. While we may feel inundated with all the new changes, it’s important to welcome them and keep an optimistic mindset about them.

Reychelle May B. Medina is the Tax Group Supervisor of KPMG RG Manabat & Co. (KPMG RGM & Co.), The Philippine member firm of KPMG International. KPMG RGM & Co. has been recognized as a Level 1 Tax Practice, a Level 1 Transfer Pricing Practice, a Leading Transactional Tax Firm, and the Philippines’ National Transfer Pricing Firm of the Year 2016 by the International Tax Review.

This article is for general information purposes only and should not be taken as professional advice for any specific issue or entity.

The views and opinions expressed here are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM & Co. For comments or inquiries, please email [email protected] or [email protected]


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