The Procurement Service-Department of Budget and Management (PS-DBM) did not withhold income taxes amounting to P3.268 billion after procuring P11.806 billion in Covid-19-related items from non-resident foreign corporations (NRFCs), thus resulting in loss of revenue on the part of the national government.
The COA, in a Procurement Service Management Letter for the year 2021 dated July 18, 2022, detailed that the PS-DBM failed to withhold exactly P3,267,654,692.70 worth of income tax from a Covid-19 supply purchase worth P11,805,874,510.00.
As per the National Internal Revenue Code (NIRC), NRFCs are mandated to “pay 30 percent of the gross income received during each taxable year from all sources within the Philippines,” the COA wrote in its report.
Furthermore, this 30 percent levy was amended through Republic Act (RA) 11534 or the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act such that, as of Jan. 1, 2021, the tax was reduced to 25 percent.
Thus, COA failed to deduct the mentioned P3.268-billion income tax from payments made to NRFCs for Covid-19 response items from March 31, 2020 up until May 27, 2021.
“The former OIC -Chief, CD , explained that final taxes were not withheld as foreign suppliers are exempted from the tax, under RA 11469, otherwise known as the Bayanihan to Heal as One Act, which liberalizes the grant of incentives for the manufacture or importation of critical or needed equipment or supplies for carrying-out of the policy declared herein, including healthcare equipment and supplies, provided that importation of these equipment and supplies shall be exempt from import duties, taxes, and other fees,” the state auditors noted.
In its report, COA explained that the “tax being imposed is against the income received by the foreign suppliers and not a tax on the importation. Consumption tax is different from the income tax, which covers the VAT and excise tax. Thus, the exemption only applies to VAT, excise tax, and other fees, but not to the final income tax.”
It added that the Bureau of Internal Revenue (BIR) had notified the PS-DBM that the payors of NRFC procurement were required to deduct the final tax on the foreign suppliers’ gross income.