President Gloria Macapagal-Arroyo signed into law RA 9337 or the Expanded Value-Added Tax Act of 2005 on 24 May. This was the last piece of legislation that Congress approved before it went on sine die adjournment on 9 June. The controversial law amends a total of 21 Sections of the National Internal Revenue Code of 1997 and follows most of the amendments proposed by the Senate version (SB 1950) rather than what were originally proposed by the two House versions. Initially, the House endorsed HB 3555 which only proposed to increase the VAT to 12%, limit the claiming of input tax credits, and adjust the withholding VAT rates. The House then followed it up with HB 3705 which proposed amendments to six provisions of the Tax Code (Sections 106, 107, 108, 109, 110, and 111) the most important provisions of which were the lifting of exemptions and the introduction of a multi-tiered VAT rate. Both HB 3555 and HB 3705 were then consolidated with the Senate version which sought to retain a flat 10% VAT rate and a slew of other provisions that were not included in HBs 3555 nor 3705. The final 61-page version signed by the President has the following salient provisions:
Retains the 10% VAT but grants the President the authority to raise it to 12% starting 1 January 2006 upon meeting either conditions:
a. VAT collection for 2005 as a percentage of GDP exceeds 2.8%
b. The national government deficit for 2005 as a percentage of GDP exceeds 1.5%
Increases corporate income tax from 32% to 35% but reduces it to 30% by 2009 for both foreign and domestic corporations.
Reduces by 42% the allowable deduction for interest expense, and by 33% starting 1 January 2009.
Subjects the following items to a 10% VAT rate:
a. Domestic air and sea common carriers
b. Sale of electricity by generation companies, transmission, and distribution companies
c. Services of franchise grantees of electric utilities
Removes the VAT exemptions of the following items:
a. Sale of non-food agricultural products; marine and forest products in their original state
b. Sale of cotton and cotton seeds in their original state; and copra
c. Sale or importation of coal and natural gas
d. Sale or importation of raw materials used in the manufacture of petroleum products
e. Sale by the artist of works of art, literary works, musical compositions and similar creations or services performed
f. Sales by electric cooperatives
g. Services rendered by doctors
h. Services rendered by lawyers
Exempts the following from VAT:
a. Educational services rendered by TESDA
b. Lease of a residential unit with a monthly rent not exceeding P10,000
c. Sale, importation or lease of passenger or cargo vessels and aircraft for domestic or international transport operations, to include engine and spare parts
d. Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations
