STATE auditors said the Procurement Service (PS) of the Department of Budget and Management (DBM) cost the government P3.268 billion in unrealized revenues after releasing P11.806 billion in payments to foreign suppliers in COVID-19 related procurements without withholding final income taxes.
“The failure to withhold and non-remittance of the final income tax amounting to P3.268 billion resulted in loss of revenues for the NG (national government),” the Commission on Audit said in the Management Letter released last July 18.
Auditors noted that Section 28.b.1 of the National Internal Revenue Code required non-resident foreign corporations (NRFCs) to pay 30 percent of their gross income received from all sources within the Philippines.
This was reduced to just 25 percent effective January 1, 2021 due to an amendment introduced by Republic Act No. 11534 or the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, one of the tax laws passed under President Duterte.
“The PS entered into contracts with foreign suppliers for the procurement of COVID-19 related items as a response to make the COVID-19 items available to its client agencies amid the pandemic. However, deficiencies on tax compliance were observed in the payment of delivered COVID-19 items,” the audit team noted.
PS-DBM defended its actions, with the acting chief of the Comptroller Division (CD) explaining that the entire P11.806 billion transactions were made tax-exempt under RA No. 11469 or the Bayanihan to Heal as One Act (Bayanihan 1).
It said Bayanihan 1 allowed the grant of incentives for both the manufacture and importation of critical equipment or supplies related to healthcare due to the necessities created by the global health crisis.
Auditors, however, said PS-DBM made an erroneous interpretation of the incentives covered under Bayanihan 1.
“The tax being imposed is against the income received by the foreign suppliers and not a tax on importation. Consumption tax is different from income tax which covers the VAT and excise tax,” the audit team pointed out.
By way of emphasis, it clarified that the exemption only applies to VAT, excise tax and other fees “but not to the final income tax.”
The Bureau of Internal Revenue, in an electronic mail sent to the PS dated December 1, 2021, likewise clarified that the one who releases payments to the NRFC is required to withhold the final tax on the gross amount of income.
“Thus, it is clear that PS shall withhold the final income tax of 30 percent and 25 percent for CYs 2020 and 2021, respectively, for the payments to foreign suppliers,” the COA said.
Likewise flagged in audit was the PS-DBM’s failure to remit VAT levied against the imported COVID-19 supplies and equipment equivalent to 12 percent of their total value.
Out of the P11.806 billion payments made to foreign suppliers, PS-DBM deducted P1.265 billion as VAT.
Under ordinary procedures, the VAT would have been collected by the Bureau of Customs (BOC) upon entry of the imported goods in local ports.
“According to the WADD (Warehousing and Delivery Division) …the BOC did not pre-collect the VAT on importations but released the goods due to the urgency of the (need for) personal protective equipment or PPE items and because of the undertakings given by the PS that it will comply with all the requirements for the application of duty and tax exemption,” the audit team noted.