The proposal was initiated by flour millers themselves, according to Finance officials, and the Bureau of Internal Revenue (BIR) has begun studying the modes of application.
Finance Secretary Jose Isidro Camacho told reporters over the weekend that the VAT would be collected against the milled flour and millers would be required to pay the tax in advance.
The BIR had issued a similar revenue regulation earlier this year to sugar millers, requiring sugar producers and sugar refiners to pay their taxes in advance making it difficult for them to skirt their tax duties.
In the new regulation, the VAT on the sale of sugar would be paid in advance by the owner or the seller and the actual stock would not be allowed to leave the refinery until the tax has been paid in advance.
Once the VAT has been paid, the BIR said the certification of VAT payment would be used by the sugar miller or refinery to release the refined sugar, unless the stock was owned by cooperatives which were exempted from VAT cover.
According to Camacho, a similar process could be applied on flour and he said the collection might be even easier since there were only 12 flour millers in the whole country.
Finance Undersecretary Grace Tan explained that the proposed VAT would be based on the value of the wheat imported from abroad. However, she said this could create distortions because importers bring in wheat for milling into either flour of animal feeds.
Wheat intended for animal feeds is applied a seven-percent tariff, a token protection of the local corn industry; while wheat for flour is imported at three-percent tariff.
Tan said the government wants to avoid loopholes that would allow importers to cheat on either the tariff or the VAT.
According to Tan, the Department of Finance is studying how the advance VAT would impact on flour and feed milling as well as wheat importation itself.
The advance VAT on sugar, according to Tan, was being used as a model for the advanced VAT on flour, but she said there were specific adjustments that have to be made, particularly since the primary input for flour milling is all imported.
In the sugar regulation, the BIR went into details of setting the base price for various classes of refined sugar. The bureau said the application of the 10 percent VAT would be based on the applicable base price per 50-kilogram bag depending on the class of sugar.
The base price is then adjusted periodically. The BIR said input tax credits would be allowed and the amount of advance payments made by the sellers would be allowed as credit against their output tax on the actual gross selling price of refined sugar.