REVENUE MEMORANDUM CIRCULAR NO. 85-2017 issued on October 11, 2017 prescribes the Value-Added Tax (VAT) rate to be used in the preparation of the Approved Budget for the Contract (ABC) for government projects.

     While the government purchases are subject to the twelve percent (12%) VAT, the procuring government entity is only required to deduct and withhold a five percent (5%) final VAT based on the gross payment thereof. The 5% final VAT represents the net VAT that is payable by the seller of goods or services. The remaining seven percent (7%) would effectively account for the standard input VAT for the sale of goods/services to the government entity, in lieu of the actual input VAT directly attributable or ratably apportioned to such sale. The difference between the 7% VAT and the actual input tax incurred may form part of the seller’s expense or cost or will be closed to expense or cost, as the case may be.

     Thus, the appropriate VAT rate to be used in the preparation of the ABC for government projects is 12% to allow the sellers of goods/services to have the 7% as their standard input VAT. It must be noted that sellers of goods and/or services to the government are not allowed to deduct the actual input VAT attributable to such sales against the output VAT on their regular sales because the 7% standard input VAT is supposed to take the place of said actual input VAT.

     Moreover, the actual input VAT attributable to sales to government cannot be claimed for refund or tax credit because Section 4.114-2(a) of Revenue Regulations No. 16-2005 already provides for the rule on how the sellers of goods/services can recoup the actual input VAT attributable or ratably apportioned to their sales to the government.