End of a heartbreak: A historic breather

A heartbreak can blind the seer, bring down the glorious, and disable the adept. A relief from this could ease one’s back and free one’s breathing. Luckily, regulations have been placed to cushion the impact of heart-related diseases.

It has been a while since Republic Act 10963 (TRAIN Law) was implemented. One of the key changes is the value-added tax (VAT) exemption on the sale of drugs and medicines prescribed for the treatment and/or prevention of diabetes, high cholesterol and hypertension by manufacturers, distributors, wholesalers and retailers starting Jan. 1, as issued by the Bureau of Internal Revenue under Revenue Regulations No. 25-2018, and the list of VAT-exempt diabetes, high cholesterol and hypertension drugs as identified and published by the Food and Drug Authority issued under Revenue Memorandum Circular No. 04-2019.

The Philippines, being the third-largest pharmaceutical market in ASEAN, after Indonesia and Thailand, is considered as one of the most attractive pharmaceutical market in the Asia-Pacific region. According to the Philippine Institute for Development Studies, 15 multinational pharmaceuticals (which are dependent upon imports of active ingredients) control 66 percent of total industry sales, while 30 percent go to Filipino companies. Further, Health Secretary Francisco T. Duque III estimated that the share of domestically-manufactured medicine currently only amounts to about 10 percent out of a hundred.

Undoubtedly, importation plays a big role on pharmaceuticals and considering that the country’s pharmaceutical industry continues to grow, we should but think about its tax implications.

An issue to be taken into consideration is looking at pharmaceutical companies and their motivation for importing to produce or sell the newly exempted goods. The Pharmaceutical and Healthcare Association of the Philippines (PHAP) stated that a way may be paved towards the amendment of the TRAIN Law concerning VAT relief on importation of newly exempted medicine. PHAP executive director Teodoro B. Padilla, in an event hosted by the European Chamber of Commerce, expressed concern about the non-transferability of mandatory VAT absorbed my medicine importers.

Following PHAP’s plea on importation relief, one can think about four possibilities. First is the application of input tax on importation of exempt goods to sales of non-exempt goods. This idea can be construed as bizarre since there would be no proper matching; the output tax from sales of non-exempt goods are already credited by its corresponding input tax, thus an absurd over application of input tax credits. Section 4.110-4 of RR No. 16-2005, as amended, provides that all input taxes that can be directly attributed to transactions subject to VAT may be recognized for input tax credit.

If any input tax cannot be directly attributed to either a VAT taxable or VAT-exempt transaction, the input tax shall be pro-rated and only the ratable portion pertaining to transactions subject to VAT may be recognized for input tax credit.

Secondly, affected parties may lobby for the VAT exemption on importation of the newly exempted drugs, similar to the treatment for importation of agricultural and marine food products in their original state, fertilizers, seeds, seedlings and fingerlings, among others, pursuant to and subject to the guidelines on Section 109 of the Tax Code, as amended. However, this notion can raise questions and additional suggestions on VAT relief on importation on other exempt goods, placing a restrictive funnel on the basic principle of generating revenue to defray necessary government expenses.

Thirdly, on the perspective of the pharmaceutical companies, another option is the cancellation of VAT exemption on the sale of the said drugs. This side of the spectrum only benefits the pharmaceuticals and would only curtail increasing the cost of doing business, hence a transfer of enthusiasm from the consumers to the importing vendors.

Last would be the eventual acceptance of the status quo maintaining the current challenge among pharmaceuticals and drug manufacturers on their business decisions (i.e. increasing the price of medicine, locally manufacturing as an alternative, etc.). Since input tax on exempt transactions has no avenue of transferability to its subsequent sale, Section 4.110-4 of RR No. 16-2005, as amended, specifically provides that the input tax attributable to VAT-exempt sales shall not be allowed as credit against the output tax, but should be treated as part of cost or expense for income tax purposes. This treatment has long been accepted so it can be argued that this is not an issue to be conversed upon for ages, but simply a narration of shifting among tax treatments, unless the BIR follows up with a subsequent issuance.

Taxation is meant to provide life among the community within its jurisdiction. As taxation involves the power to destroy, time will tell whether further issues will arise or that the current regulations in place will sooner or later be acknowledged by everyone, if not only by the greater majority.

The government’s move on this VAT exemption can be considered as exceptional by most, as VAT being an indirect tax, final consumers excluding those enjoying tax exemption, ultimately shoulder the VAT and these include our loved ones. As regulations cannot prevent eventual corporeal death due to disease, tax reliefs on medication can help prolong quality time between families hopefully clinging on the ropes of life.

Jesse Jasper V. Recto is an associate from the tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice and Tier 1 transfer pricing practice by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email [email protected] or [email protected].