RMC 35-2006

Clarifying the proper VAT and EWT treatment for

freight and incidental charges billed by Freight
Forwarders
Background
• Freight Forwarders ensure the delivery of goods
or cargoes from a certain pickup point to the
final destination.
• They are service providers, covers cross-border
movement or a local movement
• The value added refers to the compensation for
the services rendered
Gross Receipt
• Gross Receipt refers to the amount
that compensates the services
provided by the Forwarder
• It is the basis of applying VAT and
Withholding Taxes
VAT (Value Added Tax)
• Sales Tax levied on the value added to a product
• an indirect tax, which may be shifted or passed on
to the buyer
Natural Produce Processing Distribution End Consumer
(Exempt) (Value Added) (Value Added) (Pays Tax)
Cross-border Movement
• Forwarders act only as integrator of various
services coming from different service
providers
• Trucking, sorting, documentation, air/sea carriage
• Forwarders bill and collect entire shipping
cost but retains only compensation for
services actually rendered by them.
Cross-border Movement
For VAT Purposes
• Gross receipt (Value-added) is limited to
compensation for services it performs
• Payments received from client intended for third
party service providers are not part of gross
receipts for tax purposes.
• Only commissions and/or service fees charged to
clients for said integration/services actually
rendered are subject to tax
Cross-border Movement
Commissions and other services
provided by Forwarder form part
of Gross Receipts

Shipper Forwarder Consignee

Not part of Services Provided by

Forwarder are not part of Gross
Receipts

Air/Sea Other
Trucking Manpower
Carriage Services
Third-Party Services
• There are instances that forwarder avails
third-party services to bring goods to their
final destination.
• Does not form part of Gross Receipt if VAT
OR is issued directly to client.
• Otherwise, entire amount is part of Gross
Receipt
Definition of Terms
• Freight
• Accessorial Charges
• Offshore Destination Charges
• Offshore Origin Charges
• Currency Adjustment Factor
• Local Destination Charges
• Local Origin Charges
• Inbound Movement
• Outbound Movement
• Local Movement
VAT – Outbound Movement
Not Part of Gross Part of Gross Receipt
Receipt
Freight (exclusive of Commission on Freight
commission)
Accessorial Charges Local Origin Charges
Offshore Destination
Charges
VAT – Inbound Movement
Not Part of Gross Receipt Part of Gross Receipt

Freight (exclusive of Commission on Freight

commission)
Accessorial Charges Local Destination Charges

Offshore Origin Charges CAF

Charges on Cross-Border Movements
OUTBOUND
Local Origin Charges Offshore Destination
Charges

Freight
Accessorial Charges

Local Destination Charges

INBOUND Offshore Origin Charges

Local Charges Subject to 5% of Freight

VAT
VAT – Local Movement
Not Part of Gross Receipt
Third-Party Services (OR is
under name of Client)
** Other conditions on next
slide.
Part of Gross Receipt
Services provided by
forwarded, and all
services from third-
parties where OR is not
under name of client
Conditions where Reimbursible is not Subject to VAT

• Third-Party Services (OR is under name of Client)

• The payment by the client is receipted using
Non-VAT Official Acknowledgement Receipt
• The Forwarder records the reimbursible expense
as “Receivables for Cash Advances on behalf of
Shipper”
• The forwarder attached the original copy of OR’s
issued by third-party service provider in the
name of shipper on the billing
Invoicing Requirements

Vatable Charges

Amount Payable to Third-

Parties
Receipt Requirements
Issue Official Receipt

Issue Non-VAT Ack. Receipt

Determining the Actual Taxable Gross Receipt
Cross border Movement Local Movement of Goods

The output tax to be declared by the The output tax to be declared by the
forwarder should be based on actual gross forwarder will depend on the invoicing
receipt but should not be lower than 5% of procedures adopted.
freight cost

Issued with VAT Official Receipt –

5% of subject to VAT

Freight Issued with Non VAT Acknowledgement Receipt –

not subject to VAT
Commission is Higher Commission is Lower
Amount subject to tax Amount subject to tax
is actual commission is 5% of commission
Compliance Check
Cross border Movement
• Presentation of covering contract
and/or rate agreement between
forwarder and carrier to examiner
• BIR adopts audit policy to
prioritize audit of those who
report gross receipts of 5% of
Freight and below
Local Movement of Goods
• Prioritize Audit of forwarders
who are not reporting VAT on
the third party services
covered by Official Receipts
named after Client.
Substantiation Requirements

Client
Expanded Withholding Tax
• a kind of withholding tax which is prescribed on certain income
payments
• creditable against the income tax due of the payee for the taxable
quarter/year in which the particular income was earned.

Sells Goods/Services

Pays, less withholding tax

Buyer Supplier

Remits tax withheld Pays tax, less withholding tax

Applicable Withholding Taxes
• For Withholding Tax Purposes, Freight Forwarders are considered
contractors, not as commercial forwarders/agents.

• Subject to 2% Other Contractors Withholding Tax

Withholding Tax on Related Services

2% • Warehousing
• Local Trucking
• Other Services
10% • Customs Clearance
• Brokerage
Basis of Withholding Tax
Cross-border Transactions Local Transactions

Services subject to 12% VAT All charges that are charged with
VAT and issued with VAT Official
Receipt will be subjected to 2%
Withholding Tax.

Services subject to zero-rated VAT

Thank you!