Health is wealth, particularly during the COVID-19 pandemic. It would seem that the government concurs when it passed Republic Act (RA) No. 9502, otherwise known as the “Universally Accessible Cheaper and Quality Medicines Act of 2008.” The RA empowers the Department of Health (DoH) to keep medicine affordable and accessible to promote the health and well-being of Filipinos.
In light of this, the House and Senate included in RA No. 10963 (the TRAIN Law) a value-added tax (VAT) exemption on the sale of drugs prescribed for diabetes, high cholesterol and hypertension beginning Jan. 1, 2019.
Revenue Memorandum Circular (RMC) No. 2-2018 clarified that the sale by manufacturers, distributors, wholesalers and retailers of drugs prescribed for the treatment of diabetes, high cholesterol and hypertension in its final form shall be exempt from VAT while the importation are subject to VAT.
Evidently, the TRAIN Law and RMC No. 2-2018 were issued to address the objectives of RA No. 9502. However, apparently not taken into consideration when the law was passed was the effect on the pharmaceutical industry (manufacturers, importers, distributors, wholesalers and retailers) of imports not covered by the VAT exemption.
VAT-EXEMPT SALES
Prior to the passage of TRAIN Law, sales of drugs and medicines prescribed for diabetes, high cholesterol and hypertension were subject to 12% VAT. In turn, input VAT passed on to pharmaceutical companies from imports and local purchases of goods and services could be claimed against the output VAT. Due to the TRAIN Law and under Revenue Regulations (RR) No. 16-05, as amended, the input tax attributable to VAT-exempt sales was not allowed to be credited against output tax but should be treated as an expense.
This finds support in Bureau of Internal Revenue (BIR) Ruling [DA-646-06] and BIR Ruling [DA-234-04] where the BIR held that the input taxes directly attributable or allocable to exempt transactions become part of the cost of capital goods purchased or of operating expenses. In other words, the input tax attributable to VAT-exempt sales shall not be allowed as credit against the output tax but should be treated as part of cost or expense.
Input VAT from the following purchases which are directly attributable to VAT-exempt sales should be treated as follows:
Purchases of goods for sale — should form part of the cost of the inventory
Purchases of capital goods — should form part of the capitalized cost subject to depreciation
Purchases of services/consumable goods — should form part of the operating expenses
Since the VAT paid on imports is being paid and passed on to the pharmaceutical companies and forms part of the cost or expense, these companies are unable to significantly reduce the selling price to the public, which was not the intention of the legislators when the TRAIN Law was passed.
INPUT TAX ON IMPORTED GOODS
Pursuant to Section 110 (A) (2) of the 1997 Tax Code, as amended, input tax on imported goods or property by a VAT-registered person is creditable to the importer upon payment of the VAT prior to the release from the custody of the Bureau of Customs (BoC).
To address this issue, the BIR issued RMC No. 34-2019 which provides that considering that input tax attributable to VAT-exempt sale cannot be passed on to the buyer, the inventory list as of Dec. 31, 2018 of drugs and medicine which became VAT-exempt beginning Jan. 1, 2019 is required from all manufacturers, wholesalers, distributors and retailers regardless of whether or not there is an existing excess input tax. As the sale of VAT-exempt drugs and medicines are made, the input tax corresponding to the sale shall be closed to cost or expense.
It appears that the BIR, in issuing RMC No. 34-2019, has given credence to the Tax Code provision that input taxes attributable to VAT-exempt sales cannot be claimed as input tax credits but should be expensed out.
Under the RMC, if the input VAT was already claimed in the 2018 VAT returns when VAT was paid on imports prior to release from the BoC’s custody, the RMC resolved to reverse the input taxes previously claimed at the time the related inventories were sold.
This had a negative impact on the industry since the pharmaceutical companies were not able to recover fully the VAT paid on the importation of these VAT-exempt medicines.
NEW HOPE FOR RECOVERY
RA No. 11467 was signed and approved on Jan. 22, 2020. This law amended the VAT-exempt provision to now cover imports of these medicines beginning Jan. 1 2020 and to include the sale or importation of prescription drugs for cancer, mental illness, tuberculosis, and kidney diseases beginning Jan. 1, 2023.
Another positive development for the industry is the issuance of RR No. 18-2020. In its transitory provisions, the RR specified that the VAT on imports of DoH-approved prescription drugs for diabetes, high cholesterol and hypertension from the effectivity of RA No. 11467 on Jan. 27, 2020 until the effectivity of RR No. 18-2020, shall be refunded in accordance with the existing procedures for refund of VAT on imports, provided that the input tax on the imported items has not been reported and claimed as input tax credit in the monthly and/or quarterly VAT declarations/returns.
This is certainly good news for pharmaceutical companies, as including the imports as VAT-exempt transactions and allowing companies to claim refunds will surely help ease the strain on them during these trying times.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.
Joanne Macainag-Cobacha is a Tax Senior Director from the Global Compliance Reporting Service Line of SGV & Co.