RMC No. 35-2006: Clarifies the proper VAT and EWT treatment of freight and other incidental charges billed by freight forwarders

Key points

1. Gross receipts on cross-border cargo. For outbound and inbound movements, freight net of the forwarder’s commission, accessorial charges and offshore charges are amounts held in trust for third-party providers and are not gross receipts. Outbound gross receipts are local origin charges and actual commission. Inbound gross receipts are local destination charges, the Currency Adjustment Factor (CAF) and actual commission.
2. Gross receipts on local cargo. If the forwarder issues a VAT Official Receipt, the entire amount received is its gross receipts and it is liable for VAT on that amount. This holds even when independent contractors do part of the work, as long as they issue their VAT receipts to the forwarder.
3. Reimbursable expenses. Reimbursable expenses and advances are not subject to VAT on the forwarder if four conditions are met. They are receipted separately by Non-VAT Official Acknowledgement Receipts, the providers issue receipts in the shippers’ names, the forwarder records them under RECEIVABLE FOR CASH ADVANCES ON BEHALF OF SHIPPERS, and the original provider receipts are attached to the acknowledgement receipts.
4. Receipts, output tax and audit. Commission is computed at 5% of total freight charges, the IATA rate. Output tax is based on actual gross receipts but never below 5% of freight cost per billing statement, while income tax is based on actual gross receipts. Forwarders reporting commissions below 5% of total freight charged are first priority for audit, as are local-movement forwarders not reporting the whole VAT-receipted amount.
5. Proof of payments to providers. Payments to third-party providers must be backed by official receipts in the forwarder’s name from the carrier or foreign forwarder or agent, plus acceptable proofs. Payments without them are treated as gross receipts subject to VAT and are not deductible for Income Tax.
6. EWT treatment. Forwarders are treated as other contractors (operator of forwarding establishment) subject to 2% withholding tax, not as commercial forwarders or agents subject to 10%. On cross-border shipments, the 2% applies to gross commissions, taken as 5% of freight paid to airline or shipping companies, plus local origin or destination charges and CAF. The forwarder withholds 2% on payments to third-party providers on behalf of shippers and issues BIR Form No. 2307, while for local transactions the shipper withholds.

Who is affected

• Freight forwarders
• Shippers and clients of freight forwarders