INTRO Good afternoon my respectful panelists.

Today, I present to you my thesis entitled opposing the imposition of vat on deposits held in trust and the enforced recognition of income. This topic sprung from a revenue memorandum circular that struck me as odd, eerie, and weird. On December 28 of 2012, the bureau of internal revenue issued revenue memorandum circular 89-2012 to govern the imposition of vat on client deposits made to general professional partnerships for expenses that are attributable to the client. And on February 8 of this year, the bureau issued rmc 16-2013, widening the scope of the previously issued rmc to include all other taxpayers. It is no wonder why the VAT would be a favorite tax for the collecting agency. It is easy to collect and without complex computation. Almost all products and services are now subject to VAT, and its seems that the BIR is in the process of finding more transactions where it can impose the convenient VAT. Before the issuance of these RMCs, the practice has been that service-providers receive deposits from their clients, not as downpayment for service fees, but as deposits held in trust for the purpose of paying expenses that are personal to the client and in the clients name. At the end of the service engagement, the service-provider has the responsibility to turnover the unutilized amount of the deposit. With this, it is patent that the deposit arrangement does not have any characteristic of sale or service. Why did the BIR issue these RMCs? The BIR wants to curtail the practice of some service taxpayers of claiming as deductions these expenses that were made for and in the name of the client, because the client also claims these expenses as deductions, thereby making a situation where two separate entities claim the same expense as their deduction. Another is the possibility of these deposits not being returned to the client, with or without the clients consent, in which the BIR would want the service taxpayer to recognize said voluntarily unreturned deposits as revenue. Thesis Statement: Deposits and cash advances for the clients necessary expenses received by GPPs and other taxpayers in accommodation of the former shall not be subject to VAT; these amounts are deposits held in trust and constitute liabilities of the latter that do not form part of the service undertaken by the GPP and other taxpayers to their clients. Legal Issue: In the case of CIR v Tours Specialist, the Supreme court ruled that receipts subject to tax under the NIRC do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the benefit of the taxpayer. This supreme court ruling alone can overthrow the entire provisions of RMCs 89-2012 and 16-2013. When a receipt of money is made not for the benefit of the taxpayer, the NIRC did not envision these receipts as taxable receipts of any kind including VAT. In the cited case, the imposition of percentage tax was not allowed. My objective in this study is to illustrate how the BIR transgressed established principles in tax law and as well as accounting. The power to interpret the provisions of the NIRC does not include the power to amend it. An analysis of any taxpayers financial statements affected by these RMCs will reflect significant changes not just in the amount of VAT liability but in revenue and expense accounts as well. This study is relevant for the practice of taxation. It is my humble submission that this study points out erroneous consequences of the RMCs. There is an enforced recognition of revenue and expense, which

any accountant might find questionable. The RMCs endanger the VAT exposure of certain firms operating below the VAT liability threshold. And there is a disregard of the concept of trust as supported by the ruling of the sc in cir v tours specialist. We cannot allow the BIR to create an awkward situation in the field of taxation by issuing RMCs that violate settled principles in tax law and accounting. Accounting and tax go hand in hand and are not mutually exclusive. The Constitution affords full protection to property and sets the standard for law delegation. In a sense, everything must be in accord to the Constitution, and everything which is not must bow down before it. Scope and Limits This study covers deposits made by clients to a service-provider to be used as payment for expenses that are attributable to the client. Other form of deposits such as bank deposits, down payments, or earnest money shall be out of the scope. This study covers the imposition of Vat and the enforced recognition of expense and revenues, but the process of recording creditable withholding taxes shall be out of scope. The study covers both RMCs 89-2012 and 16-2013 while recognizing that the purpose of the 2013 RMC is to widen the scope of the 2012 RMC, thereby affecting all other taxpayers. CONTENT Collecting taxes is, without a question, important. Internal revenues provide our government the financial capacity to operate and provide us with services that make our life more convenient and satisfying. However, the Constitution shall enjoy primacy above all. The Commissioner of Internal Revenue is given the power to interpret the provisions of the tax code. And all interpretations would have force and effect of law. However, interpretations of law, in order to remain valid, shall remain consistent with the very law it interprets. It cannot alter or modify the law. Section 105 of the NIRC governs who are the persons subject to VAT. This section imposes VAT on any person who in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods. Peculiar to his definition is the term in the course of trade or business. And in the same section, the term was defined as a regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto. (regardless of who the taxpayer is and how the income is disposed) In accounting, a deposit will not be recorded as income if it does result to an economic benefit. And the transaction being imposed of VAT by RMCs 89-2012 and 16-2013 are deposits recorded as liabilities by the service provider. The service-provider is obliged to make a return of the deposit. For these reasons, my stand is that these deposits should not be imposed of VAT. The basis of VAT hangs on disputable presumption to say the least. The NIRC is clear in imposing VAT only on transactions that are made in the course of trade or business or incidental thereto. Examining these deposits, it would be seen that they are undertaken without a price because the deposit arrangement is an accessory to the principal service agreement between the service-provider and his client. Although it constitutes service, there is no price or consideration in this arrangement. Without consideration, there is no VAT to speak of. And for this reason, there is no basis to say that the deposits are made in the course of trade or business. The RMCs are setting the amount of the deposits as fees for the service. It disregarded factual considerations that the deposits do not constitute fees. They are objects of the agreement, yes, but imposing VAT on them is a reckless presumption of gain. There is no gain if

the receiving party do not have control or discretion towards the utilization of the deposit. To do so constitutes breach of the service agreement. My message then to the BIR is that while the policy of the law might be plausible, the methods that it chose to effectuate its goals are dangerously erroneous by themselves. Bad practice cannot defeat legality. The practices of those who take advantage of the situation should be curtailed by stricter enforcement rather than making an interpretation which prejudices those who do the practice in good faith.