Vat

CONCEPT
Value Added Tax (VAT) is a business tax imposed and collected on every (a) sale, barter, or exchange of
goods or properties (real or personal), (b) lease of goods or properties (real or personal) or (c) rendition of
services, all in the course of trade or business, and (d) importation of goods (whether or not in the course of
trade or business). It is an indirect tax, thus, it can be shifted or passed on to the buyer, transferee or lessee of
goods, properties or services (Sec. 105, NIRC).
VAT is a tax on consumption levied on the sale,

barter, exchange or lease of goods or properties and services in the Philippines and on importation of goods
into the Philippines. The seller is the one statutorily liable for the payment of the tax but the amount of the
tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This
rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of
the effectivity of RA No. 9337. However, in the case of importation, the importer is the one liable for the VAT
(RR 16-05).
The current VAT rate is 12% in lieu of R.A. 10963.
Who is liable to pay the VAT?
GR: The seller is the one statutorily liable for the payment of the tax but the amount of the tax may be shifted
or passed on to the buyer, transferee or lessee of goods, properties or services.
XPN: In case of importation, the importer is the one liable for VAT (Sec. 4.105-2, R.R. 16-2005).
If the seller is VAT exempt, there is no need to pay VAT on his sales. He will have to shoulder the burden of the
VAT passed to him by his suppliers for his purchases (Ingles, 2015).
Classification of transactions under the VAT system

1. VAT- taxable transactions
1. Subject to 12% VAT rate
2. Zero-rated transactions
2. Exempt transactions
Advantages in imposing VAT
1. Economic growth
2. Simplified tax administration
3. Promote honesty
221
UN I V E R S I T Y O F SA N T O TO M A S FACULTY OF CIVIL LAW
LAW ON TAXATION
an item is taxed more than once as it makes its way from production to final retail sale. VAT is not a cascading
tax because it is merely added as part of the purchase price and not as a tax because the burden is merely
shifted. Thus, there can be no tax on the tax itself.
9. National tax - Imposed by the national government.
10. Revenueorgeneraltax
11. Regressive tax 􏰀 By its very nature, VAT is
regressive tax.
The principle of progressive taxation has no relation with the VAT system inasmuch as the VAT paid by the
consumer or business for every goods bought or services enjoyed is the same regardless of income. In other
words, the VAT paid eats the same portion of an income, whether big or small. The disparity lies in the
income earned by a person or profit margin marked by a business, such that the higher the income or profit
margin, the smaller the portion of the income or profit that is eaten by VAT. A converso, the lower the income
or profit margin, the bigger the part that the VAT eats away. At the end of the day, it is really the lower income
group or businesses with low-profit margins that is always hardest hit (ABAKADA Guro v. Ermita, G.R. No.
168056, September 1, 2005).
Q: Does the Constitution prohibit regressive taxes?
A: NO, what the Constitution simply provides is that Congress shall evolve a progressive system of taxation.
The constitutional provision has been interpreted to mean simply that "direct taxes are to be preferred and as
much as possible, indirect taxes should be minimized.” The mandate of Congress is not to prescribe but to
evolve a progressive tax system. This is a mere directive upon Congress, not a justiciable right or a legally
enforceable one. We cannot avoid regressive taxes but only minimize them (Tolentino et.al. v. Secretary of
Finance, G.R. No. 115455, Oct. 30, 1995).
Q: How is the regressive effect of VAT minimized?
A: The law minimizes the regressive effects of this imposition by providing for zero rating of certain
transactions while granting exemptions to other transactions. The transactions which are subject to VAT are
those which involve goods and services which are used or availed of mainly by higher income groups.
ELEMENTS OF VAT-TAXABLE TRANSACTIONS
UN I V E R S I T Y O F SA N T O TO M A S 2019GOLDEN NOTES
The following elements must be present in order for a transaction to be subjected to 12% VAT:
1. It must be done in the ordinary course of trade or business;

2. There must be a sale, barter, exchange, lease of properties, or rendering of service in the Philippines;
and
3. It is not VAT-exempt or VAT zero-rated (Ingles, 2015).
Unlike a direct tax, such as the income tax, which primarily taxes an individual's ability to pay based on his
income or net wealth, an indirect tax, such as the VAT, is a tax on consumption of goods, services, or certain
transactions involving the same. The VAT, thus, forms a substantial portion of consumer expenditures.
In the course of trade or business (Rule of Regularity)

It means the regular conduct or pursuit of a commercial or an economic activity, including transactions
incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock,
non-profit private organization (irrespective of the disposition of its net income and whether or not it sells
exclusively to members or their guests), or government entity (Sec. 105, NIRC).
This includes incidental transactions. Thus, the sale of a VAT taxpayer (engaged in catering business) of its
delivery van or vehicle, while an isolated event, is considered an incidental transaction in the course of trade
or business. In the course of its business, MKI bought and eventually sold its delivery van. Prior to the sale,
the van was part of MKI’s property, plant, and equipment (Mindanao II Geothermal Partnership v. CIR, G.R. No.
193301, March 11, 2013).
However, the involuntary sale of vessels by a taxpayer not engaged in the sale of vessels pursuant to the
government policy of privatization is NOT subject to VAT because the sale was not made the course of trade
or business (CIR v. Magsaysay Lines Inc., G.R. No. 146984, July 28, 2006).
Two conditions of “in the ordinary course of trade or business” (CR)
There should be:

1. Commercial or economic activity - It implies
that a transaction is conducted for profit; and

2. Regularity or habituality in the action - Regularity involves more than one isolated
222
VALUE ADDED TAX
transaction and involves repetition and continuity of action (Ingles, 2015).
XPNs to regularity:
1. Non-resident alien who perform services in the
Philippines are deemed to be making sales in the course of trade or business, even if the performance
of services is not regular (Sec. 4.105-3, RR 16-2005).
2. Importations are subject to VAT whether in the course of trade or business or not.
3. Any business where the gross sales or receipts do not exceed P100,000 during the 12-month period shall
be considered principally for subsistence or livelihood and not in the course of trade or business.
Sale, barter, exchange, lease of goods or properties, or rendering of service in the Philippines
When there is no sale, barter or exchange of goods or properties, then no VAT should be imposed.
Thus, when an affiliate provides funds to a taxpayer who then uses the funds to pay a third party, the
transaction is not subject to VAT, as there was no sale, barter, or exchange between the affiliate and the
taxpayer. The money was simply given as a dole- out (CIR v. Sony Philippines, Inc., G.R. No. 178697, November
17, 2010).
However, if a taxpayer renders service to an affiliate for a fee (even if the fee is merely to reimburse costs),
the service is subject to VAT. Thus, the collection of condominium corporations of association dues and
membership fees from its member condominium-unit owners are subject to VAT even if receives payments
for services rendered to its affiliates in trust and on reimbursement-of- cost basis only, without realizing
profit (CIR v. CA and COMASERCO, G.R. No. 125355, March 30, 2000).
Also, the fees collected by toll operators are subject to VAT as they are engaged in rendering service of
constructing, maintaining and operating expressways (Diaz v. Secretary of Finance, G.R. No. 193007, July 19,
2011).
NOTE: If the transaction is outside the Philippines, then it is not subject to VAT.
Q: The Bureau of Internal Revenue (BIR) issued Rvenue Memorandum Circular (RMC) No. 65- 2012
imposing Value-Added Tax (VAT) on association dues and membership fees collected
by condominium corporations from its member condominium-unit owners. The RMC’s validity is
challenged before the Supreme Court (SC) by the condominium corporations. The Solicitor General,
counsel for BIR, claims that association dues, membership fees, and other assessment/ charges
collected by a condominium corporation are subject to VAT since they constitute income payments or
compensation for the beneficial services it provides to its members and tenants. On the other hand,
the lawyer of the condominium corporations argues that such dues and fees are merely held in trust
by the condominium corporations exclusively for their members and used solely for administrative
expenses in implementing the condominium corporations’ purposes. Accordingly, the condominium
corporations, do not actually render services for a fee subject to VAT. Whose argument is correct?
Decide. (2014 Bar)
A: The lawyer of the condominium corporations is correct. The association dues, membership fees, and other
assessment/charges do not constitute income payments because they were collected for the benefit of the
unit owners and the condominium corporation is not created as a business entity. The collection is the money
of the unit owners pooled together and will be spent exclusively for the purpose of maintaining and
preserving the building and its premises which they themselves own and possess (First e-Bank Tower
Condominium Corp., v. BIR, Special Civil Action No. 121236, RTC Br. 146, Makati City).
Profit element not required for VAT to be imposed
VAT is a tax on trasaction, there is no need for a taxable gain, unlike in the income tax. It is not required either
by law or jurisprudence (Ingles, 2015).
VAT is a tax on transactions imposed at every stage of the distribution process on the sale, barter, exchange of
goods or property, and on the performance of services, even in the absence of profit attributable thereto. The
term “in the course of trade or business” applies to all transactions. Even a non- stock, non-profit corporation
or government entity is liable to pay VAT for the sale of goods and services (CIR v. COMASERCO, March 30,
2000).
Q:Commonwealth Management and Services Corporation (COMASERCO) is an affiliate of Philippine

American Life Insurance Co. (Philamlife), organized by the latter to perform

223
LAW ON TAXATION
collection, consultative and other technical services, including functioning as an internal auditor of
Philamlife and its other affiliates. COMASERCO rendered service to its affiliates and, in turn, the
affiliates paid the former reimbursement-on-cost which means that it was paid the cost or expense
that it incurred although without profit. Is COMASERCO liable to pay VAT?
A: YES, services rendered for a fee even on reimbursement-on-cost basis only and without realizing profit are
also subject to VAT. It is immaterial whether the primary purpose of a corporation indicates that it receives
payments for services rendered to its affiliates on a reimbursement-oncost basis only, without realizing
profit, for purposes of determining liability for VAT on services rendered. As long as the entity provides
service for a fee, remuneration or consideration, then the service rendered is subject to VAT. (CIR v.
COMASERCO, March 30, 2000).
IMPACT AND INCIDENCE OF TAX
VAT as an Indirect Tax
The amount of VAT payable may be passed on by the seller, transferor, or lessor to the buyer, transferee or
lessee. When passed on, the amount of VAT due forms part of the purchase price of goods or services. As a
result, it is the buyer who bears the burden of tax, although the one liable to pay it is the seller.
The VAT, thus, forms a substantial portion of consumer expenditures as part of the cost of goods or services
purchased. What is transferred in such instances is not the liability for the tax, but the tax burden. In adding
or including the VAT due to the selling price, the seller remains the person primarily and legally liable for the
payment of the tax. What is shifted only to the intermediate buyer and ultimately to the final purchaser is the
burden of the tax (Contex v. CIR, GR No. 151135, July 2, 2004).
pays it to the government.
as part of the purchase price.

IMPACT (Liability) INCIDENCE (Burden)
The one statutorily liable for the payment of tax, The one who bears the economic burden (payment) of tax
thus, the one who can avail of a tax refund. (VAT), the place at which the tax comes to rest.
The seller upon whom the tax has been imposed. The tax is shifted to the final consumer or the buyer of the
He collects the tax and goods, properties, or services
Effect of VAT being an indirect tax on Exemptions
If a special law merely exempts a party as a seller from its direct liability for payment of the VAT, but does not
relieve the same party as a purchaser from its indirect burden of the VAT shifted to it by its VAT-registered
suppliers, the purchase transaction is not exempt. It is because VAT is a tax on consumption, the amount of
which may be shifted or passed on by the seller to the purchaser of the goods, properties or services (CIR v.
Seagate Technology, G.R. No. 153866, February 11, 2005).
Q: Is VAT a withholding tax?
A: NO. Indirect taxes, like VAT and excise tax, are different from withholding taxes. To distinguish, in indirect
taxes, the incidence of taxation falls on one person but the burden thereof can be shifted or passed on to
another person. On the other hand, in withholding taxes, the incidence and burden of taxation fall on the
same entity, the statutory taxpayer. The burden of taxation is not shifted to the withholding agent who merely
collects, by withholding, the tax due from income payments to entities arising from certain transactions and
remits the same to the government (Asia International Auctioneers, Inc., v. CIR, G.R. No. 179115, September 26,
2012).
Q: Lily’s Fashion Inc. is registered as a Subic Bay Freeport Enterprise under R.A. 7227 and a non- VAT
taxpayer. As such, it is exempt from payment of all local and national internal revenue taxes. During
its operations, it purchased various supplies and materials necessary in the conduct of its
manufacturing business. The supplier of these goods shifted to Lily’s Fashion, Inc. the 􏰄􏰃􏰒 􏰁now
􏰄􏰂􏰒􏰆 VAT on the purchased items amounting to P500,000. Lily’s Fashion Inc. filed with the BIR a
claim for refund for the input tax shifted to it by the suppliers. If you were the CIR will you allow the
refund? (2006 Bar)
A: NO. The exemption of Lily’s Fashion Inc. is only for taxes for which it is directly liable, hence, it cannot
claim exemption for tax shifted to it, which is not at all considered a tax to the buyer but part of the purchase
price. Lily’s Fashion Inc. is not a taxpayer in so far as the passed-on tax is concerned and therefore, it cannot
claim for a refund of a tax
224
VALUE ADDED TAX

merely shifted to it. Only taxpayers are allowed to file a claim for refund.
TAX CREDIT METHOD
The input tax shifted by the seller to the buyer is credited or deducted against the buyer’s output taxes when
he in turn sells the taxable goods, properties or services.
Under the VAT method of taxation, which is invoice- based, an entity can subtract from the VAT charged on its
sales or outputs the VAT it paid on its purchases, inputs and imports (CIR v. Seagate, G.R. No. 153866, Feb. 11,
2005).
provided in the above formula.
Goods and services are taxed only in the country where they are consumed. Thus, exports are zero- rated,
while imports are taxed (Domondon, 2014).
Under the Destination Principle, the goods and services are taxed only in the country where these are
consumed, and in connection with the said principle, the Cross Border Doctrine mandates that NO VAT shall
be imposed to form part of the cost of the goods destined for consumption OUTSIDE the territorial border of
the taxing authority. Thus, exports are zero-rated, while imports are taxed.
Export processing zones are to be managed as a separate customs territory from the rest of the Philippines
and, thus, for tax purposes, are effectively considered as foreign territory. For this reason, sales by persons
from the Philippine Customs Territory to those inside the export processing zones are already taxed as
exports. (Atlas Consolidated Mining and Development Corporation v. CIR, G.R. No. 141104 & 148763, June 8,
2007).
Exception to the destination principle
Our VAT law clearly provides for an exception to the destination principle; that is, for a zero percent VAT
rate for services that are performed in the Philippines, "paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the BSP (Commissioner of Internal Revenue v.
American Express International, Inc., G.R. No. 152609, June 29, 2005).
Consistent with the destination principle, the purchases of goods and services destined for consumption
within an ECOZONE should be free of VAT; hence, no input VAT should then be paid on such purchases. With
no input VAT paid, there is nothing to be refunded or credited under Sec. 112 of the NIRC. (Coral Bay Nickel
Corp. v. CIR, G.R No. 190506, June 13, 2016)
Q: XYZ Law Offices, a law partnership in the Philippines and a VAT-registered taxpayer, received a
query by e-mail from Gainsburg Corporation, a corporation organized under the laws of Delaware, but
the e-mail came from California where Gainsburg has an office. Gainsburg has no office in the
Philippines and does no business in the Philippines.
Formula:
Illustration: For the month of January 2017, Mr. A sells to Mr. B steel cabinets for P112,000. Within the same
month, Mr. A purchased steel plates and other materials to make these cabinets for P56,000. Determine Mr.
A’s VAT payable.
To compute for the output tax from sale:
Vatable gross sales or receipts (112,000/1.12 to get 100%)
Output VAT (12% of P100,000)
P112,000
100,000 P 12,000
DESTINATION PRINCIPLE / CROSS BORDER DOCTRINE
Output Tax 􏰀Input Tax = Net VAT Payable or Excess Input Tax
Net VAT Payable = Output Tax > Input Tax Excess Input Tax = Output tax < Input Tax
Total selling price (equivalent to 112%)

To compute for the input tax from purchases: P 56,000
Domestic purchase of good (equivalent to 112%)
Vatable gross purchases (56,000/1.12 to get 100%)
Input VAT (12% of P50,000)
To compute for the VAT payable: Output VAT

Less: Input VAT
VAT payable
50,000 P 6,000
P 12,000
6,000 P 6,000
In the same example, if Mr. B is a trader of steel cabinets, he now has an input tax of P12,000 from the
purchase of steel cabinets from Mr. A. If Mr. B sells it for P168,000, he would be liable to pay the output tax of
P18,000. He could reduce the output tax by deducting or crediting his input tax, arriving at a VAT payable of
P6,000 (P18,000 less P12,000).
Refer to discussion on Output and Input Tax as
225
LAW ON TAXATION
XYZ Law Offices rendered its opinion on the query and billed Gainsburg US$1,000 for the opinion.
Gainsburg remitted its payment through Citibank which converted the remitted US$1, 000 to pesos
and deposited the converted amount in the XYZ Law Offices account. What are the tax implications of
the payment to XYZ Law Offices in terms of VAT?
A: Yes. The payment is subject to VAT but at a zero- rate. The zero-rating applies because the services were
rendered to a non-resident person who is engaged in business outside the Philippines, theconsideration
forwhich was paid for in acceptable foreign currency and accounted for in accordance with the BSP rules.
Consequently, the law office is entitled to claim the input tax attributable to such zero-rated sale as a credit
against its output tax or, at its option, apply for refund or issuance of a tax credit certificate to the extent that
such input tax was not utilized as a credit against output tax. (Sections 108(B)(2), 110(A)(1) and 112, NIRC;
See also Accenture, Inc. vs. CIR, G.R. No. 190102, July 11, 2012)
Q: SMZ, Inc., is a VAT-registered enterprise engaged in the general construction business. HP

International contracts the services of SMZ, Inc. to construct HP International’s factory building
located in the Laguna Techno Park, a special economic zone. HP International is registered with the
Philippine Economic Zone Authority (PEZA) as an ecozone export enterprise, and, as such, enjoys
income tax holiday pursuant to the Special Economic Zone Act of 1995.
SMZ, Inc., files an application with the Bureau of Internal Revenue (BIR) for the VAT zero-rating of its
sale of services to HP International. However, the BIR denies SMZ, Inc.’s application on the ground
that HP International already enjoys income tax holiday.
Is the BIR correct in denying SMZ, Inc.’s application? Explain your answer. (2017 Bar)
A: NO. All sales of goods, properties, and services made by a VATregistered supplier from the Customs
Territory to an ecozone enterprise shall be subject to VAT, at zero percent (0%) rate, regardless of the latter’s
type or class of PEZA registration. (Coral Bay Nickel Corporation v. CIR, G.R. No. 190506, June 13, 2016, citing
Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils.), Inc., G.R. No. 350154, August 9,
2005, 466 SCRA 221)
Moreover, under Section 108 (B)(3), of the 1997 NIRC as amended, services rendered to persons or entities
whose exemption under special laws effectively subjects the supply of such services to zero percent (0%) rate
are considered zero-rated. Considering the law does not provide for any additional qualification or
disqualification, the BIR cannot deny the application on the ground that HP International already enjoys
income tax holiday.
An administrative agency may not enlarge, alter or restrict a provision of law. It cannot add to the
requirements provided by law. To do so constitutes lawmaking, which is generally reserved for Congress.
(Soriano v. Secretary of Finance, et al., G.R. No. 184450, 184508, 184538, 185234, January 24, 2017)
PERSONS LIABLE
Persons liable to pay VAT, in general
1. Any person who, in the course of trade or business,
a. sells, barters, exchanges or leases goods or properties, or

b. renders services; and
2. Any person who imports goods, whether or not made in the course of his trade or business
"Person" refers to any individual, trust, estate, partnership, corporation, joint venture, cooperative or
association.
"Taxable person" refers to any person liable for the payment of VAT, whether registered or registrable in
accordance with Sec. 236 of the NIRC.
"VAT-registered person" refers to any person who is registered as a VAT taxpayer under Sec. 236 of the
NIRC. His status as a VAT-registered person shall continue until the cancellation of such registration (RR 16-
05).
NOTE: Inimportation, it shall be the importer who shall pay VAT upon release of the goods from the customs
territory. This is an exception to the general rule requiring a sale before VAT shall be incurred.
Special considerations to the following persons:
1. Husband and wife 􏰀 for VAT purposes, shall be treated as separate taxpayers.
2. Joint ventures 􏰀 although exempt from income tax, is liable to value added tax.
3. Government 􏰀 subject to VAT if they sell goods, properties or services in the course of trade or
226
VALUE ADDED TAX
business or when they perform proprietary functions. In case of transactions essential for governmental
functions, such are exempt from VAT.
4. Non-stock, non-profit association 􏰀 generally, receipts from association dues or special assessments from
members is not subject to VAT.
However, the moment the non-stock, non-profit association engages in any taxable sale of goods or services, it
is liable to VAT where the amount of its gross sales and/or gross receipts exceeds P1,919,500, or subject to
the 3% percentage tax, if gross sales and/or gross receipts is P1,919,500 or less.
Taxable persons must register for VAT purposes
Any person who, in the course of trade or business, sells, barters, or exchanges goods or properties, or
engages in the sale or exchange of services, shall be liable to register for VAT if:
1. Gross sales or gross receipts for the past 12 months have exceeded P1,919,500, other than those that
are exempt under Sec. 109 (A) to (V); or
2. There are reasonable grounds to believe that his gross receipts or gross sales in the next 12 months
shall exceed P1,919,500, other than those that are exempt under Sec. 109 (A) to (V) (Sec. 236(G),
NIRC).
Failure to register as VAT taxpayer
He shall be held liable to pay the tax as if he is a VAT registered person but he cannot avail of the input tax
credit for the period that he has not properly registered (Sec. 236(G), NIRC).
Persons NOT LIABLE to pay VAT
1. A Non-VAT registered person whose annual gross sales or receipts do not exceed P1,919,500 shall
not be liable to VAT, instead, he shall be liable for 3% percentage tax (Sec. 116, NIRC).
2. An individual who is a Marginal Income Earner (MIE) not deriving compensation as employee under
an Er-Ee relationship, self-employed and deriving gross sales or receipts not exceeding P100,000 in
any 12-month period, and where the activities of such MIE is principally for subsistence or livelihood,
he shall be exempt
227
3.
from payment of VAT or any OPT (RMC No. 7- 2014).

In transactions subject to VAT but became not subject from VAT because his annual gross sales do not exceed
P1,919,500 (Sec. 109(1)(V), NIRC). Though not subject from VAT, he shall pay percentage tax under Section
116.
He should register as a non-VAT taxpayer unless he opts to become VAT registered under Section 109(2) of
NIRC.
NOTE: A VAT-registered person, regardless whether his gross sales or gross receipts exceeds P1,919,500 or
not, shall be liable for VAT. Once VAT-registered, he shall be liable for VAT on sale of goods or services,
regardless of the amount. If a person is VAT-registered, his gross sales or gross receipt shall always be subject
to VAT whether or not it exceeds the P1,919,500 threshold, unless he cancels his registration.
Any person who is not required to register for VAT (those whose annual VATable gross sales or gross receipts
do not exceed P1,919,500) may elect to register for VAT by registering with the Revenue District Office that
has a jurisdiction over the head office of that person. Any person who elects to register based on the above
provision shall not be entitled to cancel his registration for the next three (3) years. (Sec. 236(H), NIRC)
In VAT-exempt transactions under Section 109(1) (A) to (V) of NIRC, regardless of their annual gross sales.
4.
Summary of Rules for VAT registration

BUSINES
EFFECT
S
Gross sales exceed P1,919,500

Gross sales exceed P100,000, but do not exceed P1,919,500.
Gross sales do not exceed P100,000 (marginal income earners
Mandatory VAT registration. Generally liable to pay 12% VAT. Subject to optional VAT registration
If VAT-registered: generally liable to pay 12% VAT.
If non-VAT registered: generally liable to pay 3% percentage tax
Subject to optional VAT registration
If VAT-registered: generally liable to pay 12% VAT.
If non-VAT registered: exempted from VAT and percentage tax.
IMPOSITION OF VAT
When it comes to normal VAT transactons, or those subject to 12%, we have three categories:
real property tax declaration or the consideration, whichever is higher. If the gross selling price is based on
the zonal value or market value of the property, the zonal or market value shall be deemed inclusive of VAT. If
the VAT is not billed separately, the selling price stated in the sales document shall be deemed to be inclusive
of VAT.
Allowable deductions from gross selling price

In computing the taxable base during the month or quarter, the following shall be allowed as deductions from
gross selling price:
LAW ON TAXATION
NATURE OF TRANSACTION TAX BASE
1. Sale of goods or properties
2. Importation of goods
3. Sale of services and use or lease of properties Gross Selling Price Total landed cost Gross receipts
The above are discussed in details below.
VAT ON SALE OF GOODS OR PROPERTIES
VAT is imposed and collected on
1. every sale, barter or exchange, or

2. transactions "deemed sale"
of taxable goods or properties at the rate of 12% of the gross selling price or gross value in money of the
goods or properties sold, bartered, or exchanged, or deemed sold in the Philippines (R.R. 16-2005).
NOTE: A transaction is outside the scope of VAT unless it is made for a valuable consideration. Transfer of
property without valuable consideration (e.g. gift) is exempt from VAT (Mamalateo, 2014).
Gross Selling Price
It means the total amount of money or its equivalent which the purchaser pays or is obligated to pay to the
seller in consideration of the sale, barter or exchange of the goods or properties, excluding VAT. The excise
tax, if any, on such goods or properties shall form part of the gross selling price.
Gross selling price in case of sale or exchange of real property
It is the consideration stated in the sales document or the fair market value whichever is higher.
The term "fair market value" shall mean whichever is the higher of:
1. The fair market value as determined by the Commissioner (zonal value), or
2. The fair market value as shown in schedule of values of the Provincial and City Assessors (real
property tax declaration).
However, in the absence of zonal value, gross selling price refers to the market value shown in the latest
a.
b.
Discounts
 - determined and granted at the time of sale,

 - which are expressly indicated in the invoice,
 - the amount thereof forming part of the gross
sales duly recorded in the books of accounts,
 - the grant of which is not dependent upon the
happening of a future event
Sales returns and allowances for which a proper credit or refund was made during the month or
quarter to the buyer for sales previously recorded as taxable sales (R.R. 16- 2005).
NOTE: Senior citizens are entitled to a 20% discount under R.A. 9257 or the Expanded Senior Citizens Act of
2003. The tax base thereof shall be the net sales after the deducting the 20% discount without requiring the
indication of buyer-senior citzen’s TIN (RR No. 1-2007).
Goods or properties
It refers to all tangible and intangible objects which are capable of pecuniary estimation and shall include,
among others:
1. Real properties held primarily for sale to customers or held for lease in the ordinary course of trade
or business;
2. The right or the privilege to use patent, copyright, design or model, plan, secret formula or process,
goodwill, trademark, trade brand or other like property or right;
3. The right or the privilege to use any industrial commercial or scientific equipment;
4. The right or the privilege to use motion picture films, films, tapes and discs;
5. Radio, television, satellite transmission and cable television time.
Note: The above is NOT an exclusive list.
The VAT accrues upon the consummation of sale of goods or properties, regardless of the terms of
228
VALUE ADDED TAX

payment between the contracting parties (Sec. 106 in relation to Secs. 113 and 237 of NIRC). Thus as soon as
the seller issues a VAT invoice, whether the sale is for cash or on credit, he becomes liable to VAT on such sale
(Mamalateo, 2014).
Sale of Real Properties
Sale of real properties held primarily for sale to customers or held for lease in the ordinary course of trade or
business of the seller shall be subject to VAT.
Sale of residential lot with gross selling price exceeding P1,919,500, residential house and lot or other
residential dwellings with gross selling price exceeding P3,199,200, where the instrument of sale (whether
the instrument is nominated as a deed of absolute sale, deed of conditional sale or otherwise) is executed on
or after July 1, 2012, shall be subject to 12% VAT (R.R. 16-2005, as amended by RR 16-2011 and RR 03-2012).
This includes sale, transfer or disposal within a 12- month period of two or more adjacent residential lots,
house and lots or other residential dwellingsin favor of one buyer from the same seller, for the purpose
of utilizing the lots, house and lots or other residential dwellings as one residential area wherein the
aggregate value of the adjacent properties exceeds P1,919,500, for residential lots and P3,199,200 for
residential house and lots or other residential dwellings. Adjacent residential lots, house and lots or other
residential dwellings although covered by separate titles and/or separate tax declarations, when sold or
disposed to one and the same buyer, whether covered by one or separate Deed/s of Conveyance, shall be
presumed as a sale of one residential lot, house and lot or residential dwelling.
This however, does not include the sale of parking lot which may or may not be included in the sale of
condominium units. The sale of parking lots in a condominium is a separate and distinct transaction and is
not covered by the rules on threshold amount not being a residential lot, house & lot or a residential dwelling,
thus, should be subject to VAT regardless of amount of selling price (RR 13-12).
NOTE: It is only the sale of real properties primarily held for sale to customers or held for lease in the ordinary
course of trade or business of the seller which shall be subject to VAT. As such, transactions involving real
properties held as capital asset of individuals are not subject to VAT. However, it may give rise to capital gains
tax liability.
229
Only persons engaged in real estate business either as a real estate dealer, developer or lessors, are subject to
VAT.
LAW ON TAXATION
Summary of Rules on Sale of Real Properties
Real properties held primarily for sale to customers, in general Residential lot with gross selling price
exceeding P1,919,500 (seller is a real estate dealer or developer)
Residential lot with gross selling price not exceeding P1,919,500 (seller is a real estate dealer or developer)
Residential house and lot or other residential dwellings exceeding P3,199,200 (seller is a real estate dealer or
developer)
Residential house and lot or other residential dwellings not exceeding P3,199,200 (seller is a real estate
dealer or developer)
Commercial place or lot (seller uses property in business)

Real property used in business, taxpayer is not engaged in dealing with real estate
12% VAT 12% VAT
VAT-exempt, not subject to percentage tax

12% VAT
VAT-exempt, not subject to percentage tax
12% VAT
12% VAT (incidental transaction)
TRANSACTIO
TAX TREATMENT
N
Not subject to VAT or OPT.
Residential house and/or lot by a seller
May be subject to CGT, except sale of principal residence, which
not engaged in business
may be exempt subject to certain conditions
230
VALUE ADDED TAX

Elements of VAT-taxable sale of goods or properties:
SALE OF GOODS AND PERSONAL PROPERTIES SALE OR EXCHANGE OF REAL PROPERTY

1. There is an actual or deemed sale, barter 1. The seller executes a deed of sale, including
or exchange of goods or personal dacionenpago, barter or exchange, assignment,
properties for valuable consideration; transfer, or conveyance, or merely contracts to sell
2. Undertaken in the course of trade or involving real property;
business; 2. The real property is located within the
3. For use or consumption in the Philippines;
Philippines; and 3. The seller or transferor is engaged in real estate
4. Not exempt from VAT under Section 109 business either as a real estate dealer, developer,
of or lessor;
4. The real property is an ordinary asset held
NIRC, special law or international primarily for sale or for lease in the ordinary
agreement binding upon the government course of business;
5. The sale is not exempt from VAT under Section
109 of NIRC, special law, or international
agreement binding upon the government of the
of the Philippines. Philippines;
6. The threshold amount set by law should be met.
NOTE: Absence of any of the above requisites
exempts the transaction from VAT. However, NOTE: Absence of any of the above requisites exempts the
percentage taxes may apply (Sec. 116, NIRC). transaction from VAT. However, percentage taxes may
apply under Section 116 of NIRC.
231
LAW ON TAXATION
The sale of real property subject to VAT shall either be in (1) cash basis, (2) installment basis, or (3) deferred
payment basis.
Sale on installment plan
It means sale of real property by a real estate dealer, the initial payments of which in the year of sale do not
exceed 25% of the gross selling price.
In this case, the real estate dealer shall be subject to VAT on the installment payments, including interest and
penalties, actually and/or constructively received by the seller.
Correspondingly, the buyer of the property can claim the input tax in the same period as the seller recognized
the output tax.
Sale on a deferred payment basis
It means sale of real property, the initial payments of which in the year of sale exceed 25% of the gross selling
price.
In this case, the transaction shall be treated as cash sale which makes the entire selling price taxable in month
of sale(R.R. 16-2005).
Output tax shall be recognized by the seller and input tax shall accrue to the buyer at the time of the execution
of the instrument of sale. Payments that are subsequent to “initial payments” shall no longer be subject to
output VAT (R.R. 4-2007).
Initial payments
It means payment or payments which the seller receives before or upon execution of the instrument of sale
and payments which he expects or is scheduled to receive in cash or property (other than evidence of
indebtedness of the purchaser) during the year when the sale or disposition of the real property was made. It
covers any down payment made and includes all payments actually or constructively received during the year
of sale, the aggregate of which determines the limit set by law.
Initial payments do not include the amount of mortgage on the real property sold except when such mortgage
exceeds the cost or other basis of the property to the seller, in which case, the excess shall be considered part
of the initial payments.
Also excluded from initial payments are notes or other evidence of indebtedness issued by the purchaser to
the seller at the time of the sale.
Distinctions between sale on installment plan and sale on a deferred payment basis
Initial payments do Initial payments

INSTALLMENT
DEFERRED PLAN
PLAN
not exceed 25% of the gross selling price
exceed 25% of the gross selling price
Seller shall be subject to output VAT on the

installment payments received, including the
interests and penalties for late payment,
Transaction shall be treated as cash sale which makes
the entire selling price taxable in the month of sale.
actually constructively received.
and/or
The buyer of the property can claim the input tax in Output tax shall be recognized by the seller and input
the same period as the seller recognized the output tax shall accrue to the buyer at the time of the
tax. execution of the instrument of sale.
Payments that are subsequent to “initial payments” Payments that are subsequent to “initial payments”
shall be subject to output VAT shall no longer be subject to output VAT
NOTE: Real estate dealer includes any person engaged in the business of buying, developing, selling,
exchanging real properties as principal and holding himself out as a full or part-time dealer in real estate.
Transmission of property to a trustee shall not be subject to VAT if the property is to be merely held in trust
for the trustor and/or beneficiary. However, if the property transferred is one for sale, lease or use in the
ordinary course of trade or business and the transfer constitutes a completed gift, the transfer is subject to
VAT as a deemed sale transaction. The transfer is a completed gift if the transferor divests himself absolutely
of control over the property, i.e., irrevocable transfer of corpus and/or irrevocable designation of beneficiary.
Sale of scrap materials

Sale of scrap materials by a VAT-registered person such as empty drums, plastic bags, cartons, and wood
crates; obsolete inventories and fully- depreciated fixed assets sold at minimal prices or lower than purchase
price are subject to VAT (VAT Ruling No. 25-92, March 11, 1992).
VAT ON IMPORTATION OF GOODS
232
Importation is an act of bringing goods and merchandise into a country (Philippines) from a foreign country.
VAT is imposed on goods brought into the Philippines, whether for use in business or not, except those
specifically exempted under Section 109(1) of the NIRC.
Purpose: This is to protect our local or domestic goods or articles and to regulate the entry or introduction of
foreign articles to our local market.
Tax base of VAT on importation
GR: The tax base shall be based on the total value used by the BOC in determining tariff and customs duties plus
customs duties, excise taxes, if any, and other charges to be paid by the importer prior to the release of such
goods from customs custody. (Transaction value)
XPN: In case the valuation used by the BOC in computing customs duties is based on volume or quantity of
the imported goods, the landed cost shall be the basis for computing VAT.
Landed cost consists of the invoice amount, customs duties, freight, insurance and other charges. If the goods
imported are subject to excise tax, the excise tax shall form part of the tax base.
The same rule applies to technical importation of goods sold by a person located in a Special Economic Zone
to a customer located in a customs territory (Sec. 4.107-1, R.R. 16-2005).
Payment of tax on imported goods
The VAT on importation shall be paid by the importer prior to the release of such goods from customs
custody.
Importer refers to any person who brings goods into the Philippines, whether or not made in the course of his
trade or business. It includes non-exempt persons or entities who acquire tax-free imported goods from
exempt persons, entities or agencies.
Beginning and end of importation
Importation begins when the carrying vessel or aircraft enters the Philippine territory with the intention to
unload therein. Importation is deemed terminated when the duties, taxes and other charges due upon the
goods have been paid or secured to be paid at the port of entry or in case the goods are deemed free of duties,
taxes and other charges,
233
when the goods have legally left the jurisdiction of the Bureau (Sec. 103, CMTA).
Transfer of goods by tax-exempt persons
Consequence if a tax exempt person would transfer imported goods to a non-exempt person
The purchaser or transferee shall be considered as an importer and shall be held liable for VAT and other
internal revenue tax due on such importation (Sec. 107[B], NIRC).
The tax due on such importation shall constitute a lien on the goods, superior to all charges/or liens,
irrespective of the possessor of said goods.
Q: Anshari, an alien employee of Asian Development Bank (ADB) who is retiring soon has offered to
sell his car to you, which he imported tax-free for his personal use. The privilege of exemption from
tax is recognized by tax authorities. If you decide to purchase the car, is the sale subject to tax?
Explain. (2005 Bar)
A: YES. The sale is subject to tax. Sec. 107 (B) of the NIRC provides that “In case of tax-free importation of
goods into the Philippines by persons, entities or agencies exempt from tax, where the goods are
subsequently, sold, transferred or exchanged in the Philippines to non-exempt persons or entities, the
purchasers, transferees or recipients shall be considered a the importer thereof, who shall be liable for any
internal revenue tax on such importation.
Sale or exchange of services, as well as the use or lease of properties, shall be subject to VAT, equivalent to
12% of the gross receipts (excluding VAT) (RR 16-2005).
Sale or exchange of services
It means the performance of all kinds of services in the Philippines for others for a fee, remuneration or
consideration, whether in kind or in cash, including those performed or rendered by the following:
1. Construction and service contractors;

2. Stock, real estate, commercial, customs and
immigration brokers;
3. Lessors of property, whether personal or real;

4. Transmission of electricity by electric
cooperatives
VALUE ADDED TAX

VAT ON SALE OF SERVICE AND USE OR LEASE OF PROPERTIES
LAW ON TAXATION
Lease of property shall be subject to VAT regardless of the place where the contract of lease or licensing
agreement was executed if the property leased or used is located in the Philippines.
VAT on rental and/or royalties payable to non- resident foreign corporations or owners for the sale of
services and use or lease of properties in the Philippines shall be based on the contract price agreed upon by
the licensor and the licensee. The licensee shall be responsible for the payment of VAT on such rentals and/or
royalties in behalf of the non-resident foreign corporation or owner.
Non-resident lessor/owner refers to any person, natural or juridical, an alien, or a citizen who establishes
to the satisfaction of the Commissioner of Internal Revenue the fact of his physical presence abroad with a
definite intention to reside therein, and who owns/leases properties, real or personal, whether tangible or
intangible, located in the Philippines.
Rules on advance payments made by lessee
In a lease contract, the advance payment by the lessee may be: (LOSP)
1. A loan to the lessor from the lessee, or

2. An option money for the property, or
3. A security deposit to insure the faithful
performance of certain obligations of the
lessee to the lessor, or
4. Pre-paid rental.
If the advance payment is either (1), (2), or (3) of the above, such advance payment is not subject to VAT.
However, a security deposit that is applied to rental shall be subject to VAT at the time of its application.
If the advance payment constitutes a pre-paid rental, then such payment is taxable to the lessor in the month
when received, irrespective of the accounting method employed by the lessor.
5. Persons engaged in warehousing services;

6. Lessors or distributors of cinematographic
films;
7. Persons engaged in milling, processing,
manufacturing or repacking goods for others;
8. Proprietors, operators, or keepers of hotels, motels, rest houses, pension houses, inns,
resorts, theaters, and movie houses;
9. Proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including
clubs and caterers;
10. Dealers in securities;
11. Lending investors;
12. Transportation contractors on their transport
of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic
common carriers by land relative to their transport of goods or cargoes;
13. Common carriers by air and sea relative to their transport of passengers, goods or cargoes from one
place in the Philippines to another place in the Philippines;
14. Sales of electricity by generation, transmission, and/or distribution companies;
NOTE: That sale of power or fuel generated through renewable sources of energy such as, but not
limited to, biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy
sources using technologies such as fuel cells and hydrogen fuels shall be subject to 0% VAT.
15. Franchise grantees of electric utilities, telephone and telegraph, radio and/or television broadcasting
and all other franchise grantees, except franchise grantees of radio and/or television broadcasting
whose annual gross receipts of the preceding year do not exceed P10,000,000, and franchise grantees
of gas and water utilities;
Franchise grantees of radio and/or television broadcasting whose annual gross receipts of the
preceding year do not exceed P10,000,000, shall have an option to be registered as a VAT taxpayer
and pay the tax due thereon. Once the option is exercised, said option shall not be irrevocable. (Sec.
119, NIRC)
16. Non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity
and bonding companies;and
17. Similar services regardless of whether or not the performance thereof calls for the exercise or use of the
physical or mental faculties.
This shall likewise include: (LE4SU4)
1. The lease or the use of or the right or privilege to
use any copyright, patent, design or model plan, secret formula or process, goodwill, trademark,
trade brand or other like property or right;
2. The lease or the use of, or the right to use of any industrial, commercial or, scientific equipment;
3. The supply of scientific, technical, industrial or commercial knowledge or information;
4. The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of
enabling the application or enjoyment of any such property, or right as is mentioned in subparagraph
(2) or any such knowledge or
234
information as is mentioned in subparagraph
(3);
5. The supply of services by a non-resident person
or his employee in connection with the use of property or rights belonging to, or the installation or
operation of any brand, machinery or other apparatus purchased from such nonresident person;
6. The supply of technical advice, assistance or services rendered in connection with technical
management or administration of any scientific, industrial or commercial undertaking, venture,
project or scheme;
7. The lease of motion picture films, films, tapes and discs; and
8. The lease or the use of or the right to use radio, television, satellite transmission and cable television
time.(RR 16-2005).
NOTE: The above list is not exclusive.
Requisites for the taxability of sale or exchange of services or lease or use of property (SPaCeVaN)
1. There is a sale or exchange of service or lease or use of property enumerated in the law or other
similar services;
2. The service is performed or to be performed in the Philippines;
3. The service is in the course of trade of taxpayer’s trade or business or profession;
4. The service is for a valuable consideration
actually or constructively received; and
5. The service is not exempt under the NIRC,

special law or international agreement.
NOTE: Absence of any of the requisites renders the transaction exempt from VAT but may be subject to other
percentage tax under Title V of the NIRC.
Gross receipts
It pertains to the total amount of money or its equivalent representing the contract price, compensation,
service fee, rental or royalty, including the amount charged for materials supplied with the services and
deposits and advanced payments (1)actually or (2)constructivelyreceived during the taxable quarter for
the services performed or to be performed for another person, excluding VAT, except those amounts
earmarked for payment to unrelated third (3rd) party or received as reimbursement for advance payment on
behalf of another which do not redound to the benefit of the payor (service provider).
235
A payment is a payment to a third (3rd) party if the same is made to settle an obligation of another person.
Such obligation should be evidenced by the sales invoice/ official receipt issued by the said third party to the
customer/client of the service provider.
An advance payment is an advance payment on behalf of another if the same is paid to a third (3 rd) party for
a present or future obligation of said customer/client which obligation is evidenced by a sales invoice/official
receipt issued by the creditor (3rd party) to the customer/client (the aforementioned another party) for the
sale of goods or services by the former to the latter.
For this purpose, ‘unrelated party’ shall not include taxpayer’s employees, partners, affiliates (parent,
subsidiary and other related companies), relatives by consanguinity or affinity within the fourth (4th) civil
degree, and trust fund where the taxpayer is the trustor, trustee or beneficiary, even if covered by an
agreement to the contrary (Sec. 11, R.R. 04-2007).
Constructive receipt
It occurs when the money consideration or its equivalent is placed at the control of the person who rendered
the service without restrictions by the payor.
Examples of constructive receipts:
1. Deposit in banks which are made available to
the seller without restrictions.
2. Issuance by the debtor of a notice to offset any
debt or obligation and acceptance thereof by
the seller as payment for services rendered.
3. Transfer of the amounts retained by the payor
to the account of the contractor. (RR 16-2005)

Q: Are non-stock, non-profit entities liable to pay VAT for sale of goods and services?
A: YES. As long as the entity provides service for a fee, remuneration or consideration, then the service
rendered is subject to VAT (Commissioner v. CA, G.R. No. 125355, March 30, 2000).
Q: Are toll fees collected by tollway operators are subject to VAT?
A: YES. First, VAT is imposed on “all kinds of services” When a tollway operator takes a toll fee from a
motorist, the fee is in effect for the latter’s use of the tollway facilities over which the operator enjoys private
proprietary rights.
VALUE ADDED TAX

LAW ON TAXATION
Second, VAT is imposed on “franchise grantees”. The word “franchise” broadly covers government grants of a
special right to do an act or series of acts of public concern, and is not limited to legislative franchises.
Tollway operators are, owing to the nature and object of their business, “franchise grantees.” The
construction, operation, and maintenance of toll facilities on public improvements are activities of public
consequence that necessarily require a special grant of authority from the state.
Third, the public nature of the services rendered by tollway operators does not exclude such services from
the VATable services. In specifically including by way of example electric utilities, telephone, telegraph, and
broadcasting companies in its list of VAT-covered businesses, Section 108 opens other companies rendering
public service for a fee to the imposition of VAT.
Fourth, on the argument that toll fee is a “user’s tax” and to impose VAT on toll fees is tantamount to taxing a
tax, it is established that tollway fees are not taxes. Indeed, they are not assessed and collected by the BIR and
do not go to the general coffers of the government. Toll fees are collected by private tollway operators as
reimbursement for the costs and expenses incurred in the construction, maintenance and operation of the
tollways, as well as to assure them a reasonable margin of income. (Diaz v. Sec. of Finance, G.R. No. 193007,
July 19, 2011).
Q: Are gross receipts derived from sales of admission tickets in showing motion pictures subject to
VAT?
A: NO. The legislative intent is not to impose VAT on persons already covered by the amusement tax. The
repeal by the LGC of 1991 of the Local Tax Code transferring the power to impose amusement tax on
cinema/theater operators or proprietors to the local government did not grant nor restore the said power to
the national government nor did it expand the coverage of VAT. Since the imposition of a tax is a burden on
the taxpayer, it cannot be presumed nor can it be extended by implication. As it is, the power to impose
amusement tax on cinema/theater operators or proprietors remains with the local government.
A contrary ruling will subject cinema/theater operators or proprietors to a total of 40% tax, the 10% (now
12%) VAT being on top of the 30% amusement tax imposed by the Local Government Code of 􏰄􏰓􏰓􏰄, thereby
killing the “􏰔goose􏰕 that lays the golden egg􏰔s􏰕.”
The “lease of motion picture films, films, tapes and discs” under Sec. 􏰄􏰃􏰖 of the NIRC is not the same as the
showing or exhibition of motion pictures or films. “Exhibition” is defined as “to show or to display. x xx To
produce anything in public so that it may be taken in possession”. On the other hand, “lease” is defined as “a
contract by which one owning such property grants to another the right to possess, use and enjoy it on
specified period of time in exchange for periodic payment of a stipulated price, referred as rent.” Thus, the
legislature never intended to include cinema/theater operator operators or proprietors in the coverage of
VAT (CIR v. SM Prime Holdings, Inc., G.R. No. 183505, February 26, 2010).
TRANSACTIONS DEEMED SALE
There is no actual sale of goods took place but such transactions are subject to VAT.
In a transaction deemed sale, the input VAT was already used by the seller as a credit against output VAT.
However, since there was no actual sale, no output VAT is actually charged to customers. Consequently, the
State will be deprived of its right to collect the output VAT. To avoid the situation where a VAT registered
taxpayer avail of input VAT credit without being liable for corresponding output VAT, certain transactions
should be considered sales even in the absence of actual sale (Tabag, 2015).
The following are transactions deemed sale and therefore subject to VAT: [CORD]
1. Transfer, use or consumption not in the course of business of goods or properties originally intended
for sale or for use in the course of business (i.e., when a VAT-registered person withdraws goods
from his business for his personal use)
2. Distribution or transfer to:
1. Shareholders or investors as share in the
profits of the VAT-registered persons
NOTE: Property dividends which constitute stocks in trade or properties primarily held for
sale or lease declared out of retained earnings on or after January 1, 1996 and distributed by
the company to its shareholders shall be subject to VAT based on the zonal value or fair
market value at the time of distribution, whichever is applicable (Sec. 106.7, R.R. 16-2005).
2. Creditors in payment of debt

236
VALUE ADDED TAX

3. Consignment of goods if actual sale is not made within sixty (60) days following the date such goods
were consigned.
NOTE: Consigned good returned by the consignee within the 60-day period are not deemed sold.
4. Retirement from or cessation of business with respect to all goods on hand, whether capital goods,
stock-in-trade, supplies or materials as of the date of such retirement or cessation, whether or not
the business is continued by the new owner or successor (Sec. 106 (B) NIRC).
Transactions that are considered retirement or cessation of business
1. Change of ownership of the business. There is change in the ownership of the business when a single
proprietorship incorporates; or the proprietor of a single proprietorship sells his entire business.
2. Dissolution of a partnership and creation of a new partnership which takes over the business (Sec.
4.106-7, R.R. 16-2005).
Consideration in determining whether a transaction is “deemed sale”
Before considering whether the transaction is “deemed sale”, it must first be determined whether the sale
was in the ordinary course of trade or business or not. Even if the transaction was “deemed sale” if it was not
done in the ordinary course of trade or business or was not originally intended for sale in the ordinary course
of business, the transaction is not subject to VAT (CIR v. Magsaysay Lines Inc., G.R. No. 146984, July 28, 2006).
Tax base of transactions deemed sale
In cases where a transaction is a deemed sale, barter or exchange of goods or where the selling price is
unreasonably lower than the actual market value, the Commissioner shall determine the appropriate tax
base.
NOTE: The gross selling price is unreasonably lower than the actual market value if it is lower by more than
30% of the actual market value of the same goods of the same quantity and quality sold in the immediate
locality on or nearest the date of sale (Sec. 4 106-7, R.R. 16-2005).
The output tax shall be based on the market value of the goods deemed sold as of the time of the
occurrence of the transactions enumerated above in numbers 1, 2, and 3.
However, in the case of retirement or cessation of business, the tax base shall be the acquisition cost or the
current market price of the goods or properties, whichever is lower.
In the case of a sale where the gross selling price is unreasonably lower than the fair market value, the actual
market value shall be the tax base (Sec. 4 106- 7, R.R. 16-2005).
Nonetheless, if one of the parties in the transaction is the government as defined and contemplated under the
Administrative Code, the output VAT on the transaction shall be based on the actual selling price (Sec. 7, R.R.
4-2007).
Inventory used for promotions and office supplies
Goods given for free in the course of trade or business in order to promote sales efforts are not considered
deemed sale transactions (VAT Ruling No. 109-88, April 25, 1988).
The following change in or cessation of status of a VAT registered person are subject to VAT:
1. Change of business activity from VAT taxable status to VAT-exempt status.

2. Approval of a request for cancellation of registration due to reversion to exempt status.
3. Approval of a request for cancellation of registration due to a desire to revert to exempt status after
the lapse of 3 consecutive years from the time of registration by a person who voluntarily registered
despite being exempt under Sec 109 (2) of the NIRC.
4. Approval of a request for cancellation of registration of one who commenced business with the
expectation of gross sales or receipt exceeding P1,919,500 but who failed to exceed this amount
during the first 12 months of operations.
The following change in or cessation of status of a VAT registered person are NOT subject to Output
Tax
1. Change of control in the corporation of as corporation by the acquisition of controlling interest of the
corporation by

237
CHANGE OR CESSATION OF STATUS AS VAT-REGISTERED PERSON
another stockholder or group of stockholders.
The goods or properties used in the business or those comprising the stock-in-trade of the corporation will
not be considered sold, bartered or exchanged despite the change in the ownership interest. However, the
exchange of real estate properties held for sale or for lease, for shares of stocks, whether resulting to
corporate control or not, is subject to VAT, subject to exceptions provided under Section 4.106-3 (Sale of real
properties) hereof. On the other hand, if the transferee of the transferred real property by a real estate dealer
is another real estate dealer, in an exchange where the transferor gains control of the transferee- corporation,
no output VAT is imposable on the said transfer (Sec. 8, R.R. 4-2007).
2. Change in the trade or corporate name of the business.
3. Merger or consolidation of corporations.
The unused input tax of the dissolved corporation, as of the date of merger or consolidation, shall be
absorbed by the surviving or new corporation.
ZERO-RATED SALES
Zero-rated sale by a VAT-registered person is a taxable transaction for VAT purposes but the sale does not
result in any output tax. However, the input tax on the purchases of goods, properties or services related to
such zero-rated sale shall be available as tax credit or refund.
To be subject to zero tax-rate, however, the seller must be a VAT-registered person because if he is not VAT
registered, the transactions entered into by him are exempt from the tax.
Purpose: To exempt the transaction completely from VAT previously collected since input taxes passes to
him may be recovered as refund or credits (Ingles, 2015).
The zero-rated seller becomes internationally competitive by allowing the refund or credit of input taxes that
are attributable to export sales (CIR v. Seagate Technology (Phil.), G.R. No. 153866, Feb. 11, 2005).
Zero-rated vs. VAT-exempt transactions

It generally refers to the In VAT-exempt
Simply put, the difference lies in the input tax. In VAT-exempt transactions there is no input tax credit
allowed. In the case of 0% rated transaction of a VAT registered person, the sale of goods or properties is
multiplied by 0% thus his output tax is P 0.00. If the person is VAT registered, he may claim such input tax as
tax credit or refund.
LAW ON TAXATION
supply of services. The output tax rate is set at zero. taxpayer/seller shall not bill any output tax on his sales
When applied to the tax base, such rate obviously to his customers and corollarily, is not allowed any
results in no tax chargeable against the purchaser. credit or refund of the input taxes he paid on his
purchases.
The seller of such transactions charges no output
tax but can claim a refund or tax credit certificate for This non-crediting of input taxes is exempt transactions
the VAT previously charged by suppliers(AT&T is the underlying reason why the NIRC adopted the rule
Communications Services Phils., Inc. v. CIR, G.R. No. on apportionment of tax credits under Section 104(A)
182364, August 3, 2010). whenever a VAT- registered taxpayer engages in other
VAT taxable and non-VAT taxable sales (CIR v. Eastern
No VAT shall be shifted or Telecomm. Phils.,
Inc., G.R. 163835, July 7, 2010).
No.
passed-on
registered
suppliers
Customs
their sale, barter or exchange of goods, properties or
services to the subject registered Freeport Zone
enterprises.
by VAT-
sellers
or the on
from Territory
E.g.: Output tax Less: Input tax
Excess input tax
Need not be a VAT-registered person
PP
0.00 5,000.00
5, 000.00
BASIS
By whom made
EXEMPT
Not taxable; removes VAT at the exempt stage
ZERO-RATED
Nature of transac -tion
Transaction is taxable for VAT purposes although the tax levied is 0%
Input tax
Not subject to output tax, thus cannot claim input tax credit.
May claim input tax credit although the transaction
Made by a VAT- registered person

ZERO-
VAT- EXEMPT
RATED
export sale of good and sales,
the
238
resulted to zero output tax.
ZERO-RATED SALE OF GOODS
[FEE]
1. Export sales
2. Foreign currency denominated sale
3. Effectively zero-rated sales
EXPORT SALES
The term export sales means: [FINE GO]
1. The sale and actual shipment of goods from the
Philippines to a Foreign country:
1. irrespective of any shipping arrangement;
and
2. paid for in acceptable foreign currency or
its equivalent in goods or services and accounted for in accordance with the rules and
regulations of BSP.
2. Sale of raw materials or packaging materials by a VAT-registered entity to a Non-resident buyer:

1. for delivery to a resident local export-
oriented enterprise;
2. used in the manufacturing, processing,
packing, repacking in the Philippines of the
said buyer’s goods;
3. paid for in acceptable foreign currency and
accounted in accordance with the rules of BSP.
3. Registered enterprises within separate custom territory as provided by special laws

4. Registered enterprises within tourism enterprise zones as approved by TIEZA
5. International shipping or internatinoal air transport operations, PROVIDED that:
a. Goods, supplies, equipment, and fuel shall be used
b. For international shipping or air transport operations
6. Sale of raw material or packaging materials to Export oriented enterprise whose export sales exceed
70% of total annual production
7. Sale of Gold to BSP
8. Those considered as export sales under the
Omnibus Investment Code of 1987(E.O. 226)

239
Enhanced VAT Refund System
Sales of raw materials to nonresident buyer under the aforementioned, sale of raw materials to export-
oriented enterprise whose export sales exceed 70% of total annual production, and those under the Omnibus
Investments Code shall be under 12% VAT and no longer be considered as export sales subject to 0% VAT
rate upon the following:
1. Successful establishment of VAT refund system which grants refunds of creditable input tax within
ninety (90) days
2. Pending VAT refund claims as of December 31, 2017 shall be fully paid in cash by December 31, 2019
“Considered export sales under EO 􏰂􏰂􏰗”
shall mean the Philippine port F.O.B. value determined from invoices, bills of lading, inward letters of credit,
landing certificates, and other commercial documents, of export products exported directly by a registered
export producer, or the net selling price of export products sold by a registered export producer to another
export producer, or to an export trader that subsequently export the same; Provided, that sales of export
products to another producer or to an export trader shall only be deemed export sales when actually
exported by the latter, as evidenced by landing certificates or similar commercial documents.
Constructive exports
1. Sales to bonded manufacturing warehouses of export-oriented manufacturers

2. Sales to export processing zones
3. Sales to enterprises duly registered and accredited with the Subic Bay Metropolitan
Authority pursuant to R.A. 7227
4. Sales to registered export traders operating bonded trading warehouses supplying raw materials in
the manufacture of export products under guidelines to be set by the Board in consultation with the
BIR and the
BOC.
5. Sales to diplomatic missions and other
agencies and/or instrumentalities granted tax immunities, of locally manufactured, assembled or

repacked products whether paid for in foreign currency or not (Sec. 4.106-5, RR 16-2005).
9. The sale of goods, supplies, equipment and fuel to persons engaged in International shipping
VALUE ADDED TAX

Tax Credit/ Refund
Cannot avail of tax credit or refund. Thus, may result in increased prices (Partial Relief)
Can claim or enjoy tax credit/refund (Total Relief)

LAW ON TAXATION
or international air transport operations (Sec. 106[A][2][a], NIRC as amended by RA 9337).
Rationale for zero-rating exports sale
The Philippine VAT system adheres to the cross border doctrine, according to which, no VAT shall be imposed
to form part of the cost of goods destined for consumption outside of the territorial border of the taxing
authority.
Export sale, when exempt and when zero-rated
RULES ON EXPORT SALES
A: NO. Royal Mining’s claim is bereft of merit. It is the sale of gold (and not silver) to the BSP that is
considered as export sale subject to zero-rated VAT.
FOREIGN CURRENCY DENOMINATED SALE
The phrase 'foreign currency denominated sale' means sale to a nonresident of goods, except those mentioned
in Sections 149 and 150, assembled or manufactured in the Philippines for delivery to a resident in the
Philippines, paid for in acceptable foreign currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP) (Sec. 106[A][2][b], NIRC).
NOTE: Section 149 refers to excise tax on automobiles. Section 150 refers to excise tax on non- essential
goods.
Requisites:
1. The buyer must be a non-resident;

2. The goods sold must be assembled or
manufactured in the Philippines;

3. Goods sold are to be delivered to a resident of
the Philippines; and
4. Paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the BSP.
EFFECTIVELY ZERO-RATED TRANSACTION
The term “effectively zero-rated sale of goods and properties” shall refer to the local sale of goods and
properties by a VAT-registered person to a person or entity who was granted indirect tax exemption under
special laws or international agreement.
Since the buyer is exempt from indirect tax, the seller cannot pass on the VAT and therefore, the exemption
enjoyed by the buyer shall extend to the seller, making the sale effectively zero-rated (R.M.C. 50-2007).
Effectively Zero-rated vs. Automatic Zero-rated transaction
By a Non-VAT registered By a VAT registered
VAT exempt
VATable at 0% (zero rated)

Q: Is the sale of goods to ecozone, such as PEZA, considered as export sale?
A: YES. While an ecozone is geographically within the Philippines, it is deemed a separate customs territory
and is regarded in law as foreign soil. Sales by suppliers from outside the borders of the ecozone to this
separate customs territory are deemed as exports and treated as export sales. These sales are zero-rated or
subject to a tax rate of zero percent (CIR v. Sekisui Jushi Philippines, Inc., G.R. No. 149671, July 21, 2006).
An ecozone or a Special Economic Zone has been described as selected areas with highly developed or which
have the potential to be developed into agro-industrial, industrial, tourist, recreational, commercial, banking,
investment and financial centers whose metes and bounds are fixed or delimited by Presidential
Proclamations. An ecozone may contain any or all of the following: industrial estates (IEs), export processing
zones (EPZs), free trade zones and tourist/recreational centers. The national territory of the Philippines
outside of the proclaimed borders of the ecozone shall be referred to as the Customs Territory (CIR v. Toshiba
Information Equipment (Phils.), Inc., G.R.. No. 150154, August 9, 2005).
Q: Royal Mining is a VAT-registered domestic mining entity. One of its products is silver being sold to
Bangko Sentral ng Pilipinas. It filed a claim with the BIR for tax refund in the ground that under
Section 106 of the NIRC, sales of precious metals to Bangko Sentral are considered export sales subject
to zero-rated VAT. (2006 Bar)
Refers to sales to persons or entities whose exemption under special laws or international agreements to
Refers to export sales and foreign currency denominated sales

BASIS
EFFECTIVELY
ZERO-RATED TRANSACTION
AUTOMATIC ZERO-RATED TRANSACTION

Nature
240
Q: Cebu Toyo Corp., an export enterprise, duly registered with the Philippine Economic Zone
Authority pursuant to PD 66 and is also registered with the BIR as a VAT taxpayer. It sells 80% of its
products to its mother corporation, and the rest are sold to various
241
enterprises doing business in the Mactan Export Processing Zone. Inasmuch as both sales are
considered export sales subject to VAT at 0% rate under the National Internal Revenue Code, as
amended, it filed an application for tax credit/refund of VAT paid for the said period representing
excess VAT input payments. The CIR belies the claim for refund. Is the grant of a refund representing
unutilized input VAT to Cebu Toyo proper?
A: YES. Cebu Toyo is engaged in taxable rather than exempt transactions. Taxable transactions are those
transactions which are subject to VAT either at the rate of 12% or 0%. In taxable transactions, the seller shall
be entitled to tax credit for the VAT paid on purchases and leases of goods, properties or services. An
exemption means that the sale of goods, properties or services and the use or lease of properties is not
subject to VAT (output tax) and the seller is not allowed any tax credit on VAT (input tax) previously paid. A
VAT-registered purchaser of goods, properties or services that are VAT exempt, is not entitled to any input
tax on such purchases despite the issuance of a VAT invoice or receipt. Under the system, a zero rated sale by
a VAT- registered person, which is a taxable transaction for VAT purposes, shall not result in any output tax,
but the input tax on his purchase of goods, properties or services related to such zero-rated sale shall be
available as tax credit or refund (CIR v. Cebu Toyo Corporation, G.R. No. 149073, February 16, 2005).
Q: SEAGATE is registered with the PEZA to engage in the manufacture of recording components
primarily used in computers for export. SEAGATE is a VAT-registered entity. An administrative claim
for refund of VAT input taxes with supporting documents was filed with Revenue District Office in
Cebu. The administrative claim for refund was not acted upon by the petitioner prompting the
respondent to elevate the case to the CTA. The CIR contended that since ‘taxes are presumed to have
been collected in accordance with laws and regulations, Seagate has the burden of proof that the taxes
sought to be refunded were erroneously or illegally collected. Unfortunately, Seagate failed to do so. Is
Seagate entitled to the refund or issuance of Tax Credit Certificate representing alleged unutilized
input VAT paid on capital goods purchased?
A: YES. As a PEZA-registered enterprise within a special economic zone, it is entitled to the fiscal incentives
and benefits provided for in either PD 66 or EO 226 which would not subject Seagate to internal revenue laws
and regulations, among
VALUE ADDED TAX

EFFECTIVELY
BASIS AUTOMATIC ZERO-RATED TRANSACTION
ZERO-RATED TRANSACTION
which the Philippines is a signatory
An application for zero-rating must be
No need to file an application form and to secure
Need to apply filed and the BIR approval is necessary
BIR approval before the sale is considered zero-
for zero- rating before the transaction may be
rated.
considered effectively zero-rated.
Intended to benefit the purchaser who, Primarily intended to be enjoyed by the seller
For whose not being directly and legally liable for who is directly and legally liable for the VAT,
benefit is it the payment of the VAT, will ultimately making such seller internationally competitive by
intended bear the burden of the tax shifted by the allowing the refund or credit of input taxes that
suppliers. are attributable to export sales.
Stamping of Required. The buyer, as shown by his
Not required. The buyer, as shown by his address
“zero- rated” on address in the sales invoice and shipping
in the sales invoice and shipping documents, is
VAT invoice or documents, is located outside the
located outside the Philippines.
receipt Philippines merely by fiction of law.
Results in no tax chargeable against the purchaser.
Effect
The seller can claim a refund or a tax credit certificate for the VAT previously charged by
suppliers.
LAW ON TAXATION
others. Thus, Seagate enjoys preferential tax treatment. The VAT on capital goods is an internal revenue tax
from which the entity is exempt. Although the transactions involving such tax are not exempt, Seagate as a
VAT-registered person, however, is entitled to their credits.
Since the purchases of Seagate are not exempt from the VAT, the rate to be applied is zero. Its exemption
under both P.D. 66 and R.A. 7916 effectively subjects such transactions to a zero rate, because the ecozone
within which it is registered is managed and operated by the PEZA as a separate customs territory. This
means that in such zone is created the legal fiction of foreign territory. Under the cross- border principle of
the VAT system being enforced by the BIR, no VAT shall be imposed to form part of the cost of goods destined
for consumption outside of the territorial border of the taxing authority. If exports of goods and services from
the Philippines to a foreign country are free of the VAT, then the same rule holds for such exports from the
national territory 􏰀 except specifically declared areas 􏰀 to an ecozone (CIR v. Seagate Technology (Phil.), G.R.
No. 153866, Feb. 11, 2005).
Q: Acesite is the owner and operator of the Holiday Inn Manila. It leases a portion of its hotel’s
premises to PAGCOR for casino operations. Acesite passed VAT on rental income to PAGCOR, but
PAGCOR refused to pay the passed-on VAT, invoking its franchise which exempts PAGCOR from tax.
Acesite still paid VAT on the rental income from PAGCOR to the BIR as it feared the legal consequences
of non-payment of the tax. Acesite belatedly arrived at the conclusion that its transaction with
PAGCOR was subject to zero rate as it was rendered to a tax- exempt entity. Acesite filed for a claim for
refund. Should the claim for refund be granted?
A: YES. PAGCOR is exempted from “tax of any kind or form, income or otherwise, as well as fees, charges or
levies of whatever nature, whether National or Local”. The exemptions granted in the franchise for earnings
derived from the operations conducted under the franchise shall inure to the benefit of and extend to
corporations or individual with whom the Corporation or operator has any contractual relationship in
connection with the operations of the casinos authorized to be conducted under PAGCOR’s Franchise.
PAGCOR’s franchise goes one step further by granting tax exempt status to persons dealing with PAGCOR in
casino operations. By this extension, the legislature clearly granted exemption also from indirect taxes.
Section 106(A)(2)(c) of the NIRC specifies that sales to persons or entities whose exemption under
special laws or international agreements to which the Philippines is a signatory effectively subjects such sales
to zero-rate. (CIR v. Acesite (Philippines) Hotel Corporation, G.R. No. 147295, February 16, 2007)
Related case: The payments made by PAGCOR to its catering service contractor are subject to zero-rated (0%)
VAT (CIR v. Secretary of Justice, G.R. No. 177387, November 9, 2016)
Q: A contractor constructed an office building for the World Health Organization (WHO). BIR assessed
the contractor of VAT, contending that, although WHO is exempt, the tax is being assessed on the
contractor, and not on WHO. Is the BIR correct?
A: NO. As an international organization, WHO enjoys privileges and immunities such as exemption from all
direct and indirect taxes. The contention of BIR should be rejected. In context, direct taxes are those that are
demanded from the very person who, it is intended or desired, should pay them; while indirect taxes are
those that are demanded in the first instance from one person in the expectation and intention that he can
shift the burden to someone else. The VAT is of course payable by the contractor but in the last analysis it is
the owner of the building that shoulders the burden of the tax because the same is shifted by the contractor to
the owner as a matter of selfpreservation. Thus, it is an indirect tax. And it is an indirect tax on the WHO
because, although it is payable by the contractor, the latter can shift its burden on the WHO. (CIR v. John
Gotamco& Sons, Inc., G.R. No. L-31092, February 27,1987, [Modified])
ZERO-RATED SALE OF SERVICE
The following services performed in the Philippines by VAT- registered persons shall be subject to zero
percent (0%) rate.
1. Processing, manufacturing or repacking goods for other persons doing business outside the
Philippines which goods are subsequently exported, where the services are paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the BSP;
2. Services other than those mentioned in the preceding paragraph rendered to a person engaged in
business conducted outside the Philippines or to a nonresident person not engaged in business who
is outside the Philippines when the services are performed, the consideration for which is paid for in
242
acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP i.e.
recruitment;
3. Services rendered to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects the supply of such services to
0% rate;
4. Services rendered to persons engaged in international shipping or international air transport
operations, including leases of property for use thereof; shall only be exclusively used for
international shipping or air transport operations
5. Services performed by subcontractors and/or contractors in processing, converting, or
manufacturing goods for an enterprise whose export sales exceed 70% of total annual production;
6. Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country; and
7. Sale of power or fuel generated through renewable sources of energy such as, but not limited to,
biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy sources
using technologies such as fuel cells and hydrogen fuels (Sec. 108, NIRC as amended by R.A. 9337).
8. Registered enterprises within a separate customs territory as provided for by special laws
9. Registered enterprises within tourism enterprise zones as declared by TIEZA
Services other than processing manufacturing, or repacking of goods (Sec 108 (B)(2)
Requirements to qualify for zero-rating
1. The services other than “processing, manufacturing or repacking of goods” must be performed in
the Philippines,
2. That the payment for such services be in
acceptable foreign currency accounted for
in accordance with BSP rules, and that
3. The recipient of such services is doing
business outside of the Philippines.
In CIR vs. American Express International, Inc., (2005), the Court ruled that the Legislature does not intend to
impose the condition of being "consumed abroad" in order for services performed in the Philippines by a
VAT-registered person to be zero- rated. In this case, the taxpayer renders services in the Philippines and
facilitates the collection and payment of receivables belonging to its non- resident foreign client, for which it
gets paid in
acceptable foreign currency inwardly remitted and accounted for in conformity with BSP rules and
regulations.
In Accenture Inc. vs CIR (2012), the Court ruled that the recipient of the service must be doing business
outside the Philippines for the transaction to qualify for zero-rating under Section 108 (B) of the NIRC. To
come within the purview of Section 108 (B) (2), it is not enough that the recipient of the service be proven to
be a foreign corporation; rather, it must be specifically proven to be a nonresident foreign corporation.
Services rendered to persons engaged in international shipping or international air transport

operations
In order to qualify for zero-rating, the services rendered by a VAT-registered person to a person engaged in
international air transport operations must pertain to or must be attributable to the transport of goods and
passengers from a port in the Philippines directly to a foreign port without docking or stopping at any port in
the Philippines. Accordingly, the services provided by hotels to their clients engaged in international air
transport operations pertaining to room accommodations and food and beverage services should be subject
to the 12% VAT. As they are rendered within the hotel's premises, they have no direct connection with the
transport of goods or passengers, and as such, they cannot be considered as services directly attributable to
the transport of goods and passengers from a Philippine port directly to a foreign port entitled to zero-rating
(RMC No. 031- 11).
Q: Are the following transactions subject to VAT? If yes, what is the applicable rate for each
transaction. State the relevant authority/ies for your answer.
a. Construction by XYZ Construction Co. of concrete barriers for the Asian Development Bank in
Ortigas Center to prevent car bombs from ramming the ADB gates along ADB Avenue in Mandaluyong
City.
c. Call Center operated by a domestic enterprise in Makati that handles exclusively the reservations of
a hotel chain which are all located in North America. The services are paid for in US$ and duly
accounted for with the BangkoSentral ng Pilipinas. (2010 Bar)
VALUE ADDED TAX

A:
243
1. The transaction is subject to VAT at the rate of zero percent (0%). ADB is exempt from direct and
indirect taxes under a special law, thereby making the sale of services to it by a VAT- registered
construction company effectively zero-rated (Sec. 108[B][3], NIRC).
2. The sale of services subject to VAT at zero percent (0%). Zero-rated sale of services includes services
rendered to a person engaged in business outside the Philippines and consideration is paid in
acceptable foreign currency duly accounted for by the BangkoSentral ng Pilipinas (Sec. 103[B]
[2]NIRC).
VAT-EXEMPT TRANSACTIONS
These refer to the sale of goods or properties and/or services and the use or lease of properties that is not
subject to VAT (output tax) and the seller is not allowed any tax credit of VAT (input tax) on purchases.
The person making the exempt sale of goods, properties or services shall not bill any output tax to his
customers because the said transaction is not subject to VAT (Sec 4.109-1, R.R. No. 16-2005).
Exempt Party vs. Exempt Transaction
input tax credit. Thus a VAT-registered person may choose to be subjected to rather than exempt from
payment of VAT.
Exempt transactions, enumerated
LAW ON TAXATION
a. i.
ii.
Sale or importation of
agricultural and marine food products in their original state,
livestock and poultry of
1. a kind generally used as, or yielding or producing foods for human consumption; and
2. breeding stock and genetic materials therefor
EXEMPT PARTY EXEMPT TRANSACTION

Involves goods or services which, by their nature
are specifically listed in and expressly exempted
A person or entity granted VAT exemption under the from the VAT under the NIRC, without regard to
NIRC, special law or international agreement to which RP the tax status of the
is a signatory, and by virtue of which its taxable
transactions become exempt from the VAT. parties in transactions.
the
Such party is not subject to the VAT, but may be allowed Transaction is not subject to VAT, but the seller is
a tax refund or credit of input tax paid, depending on its not allowed any tax refund or credit for any input
registration as a VAT or non-VAT taxpayer. taxes paid.
Reason for electing VAT registration
A VAT-registered person who opted to be subject to VAT may avail of the input tax credit. The input tax is
deducted from the output tax thereby reducing his tax liabilities but a VAT-registered person who opted to be
exempt therefrom cannot avail of the
Livestock shall include cows, bulls and calves, pigs, sheep, goats and rabbits. Poultry shall include fowls,
ducks, geese and turkey. Livestock or poultry does not include fighting cocks, race horses, zoo animals and
other animals generally considered as pets.
Marine food products shall include fish and crustaceans, such as, but not limited to, eels, trout, lobster,
shrimps, prawns, oysters, mussels and clams.
Meat, fruit, fish, vegetables and other agricultural and marine food products classified under this paragraph
shall be considered in their original date even if they have undergone the simple processes of preparation or
preservation for the market, such as freezing, drying, salting, broiling, roasting, smoking or stripping,
including those using advanced technological means of packaging, such as shrink wrapping in plastics,
vacuum packing, tetra-pack, and other similar packaging methods.
Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt and copra shall be
considered as agricultural food products in their original state.
Sugar whose content of sucrose by weight, in the dry state, has a polarimeter reading of 99.5o and above are
presumed to be refined sugar.
Cane sugar produced from the following shall be presumed, for internal revenue purposes, to be refined
sugar:
(1) product of a refining process,

(2) products of a sugar refinery, or
(3) product of a production line of a sugar mill accredited by the BIR to be producing and/or capable of
producing sugar with polarimeter reading of 99.5o and above, and for which the
244
Specialty feeds refers to non-agricultural feeds or food for race horses, fighting cocks, aquarium fish, zoo
animals and other animals generally considered as pets.
c. Importation of personal and household effects belonging to

1. residents of the Philippines returning
from abroad, and

2. non-resident citizens coming to resettle
in the Philippines;
Provided, that such goods are exempt from customs duties under the Tariff and Customs Code of the
Philippines
2. wearing apparel,
3. domestic animals, and
4. personal household effects (except any
vehicle, vessel, aircraft, machinery and other goods for use in the manufacture and
merchandise of any kind in commercial quantity)
5. belonging to persons coming to settle in the Philippines or their families and descendants
who are now residents or citizens of other countries, such as OVERSEAS FILIPINO
6. inquantities and of the class suitable to the profession, rank, or position
7. for their own use and
8. not for sale, barter or exchange,
9. accompanying such persons, or arriving
within a reasonable time
10. upon the production of evidence
satisfactory to the Commissioner of Internal Revenue, that such persons are actually coming
to settle in the Philippines and that the change of residence is bonafide;
5. Services subject to percentage tax
Refer to discussion on percentage tax.
6. Services by
Requisites under Sec. 800 of Modernization and Tariff Act of 2016
Customs
1. That the personal and household effects of returning residents shall neither be in commercial quantities nor
intended for barter, sale or hire and that the total dutiable value of which shall not exceed:
245
1. 2.
agricultural contract growers, and
milling for others of
1. palay into rice,

2. corn into grits, and
VALUE ADDED TAX

quedan issued therefor, and verified by the Sugar Regulatory Administration, identifies the same to be of a
polarimeter reading of 99.5o and above.
Bagasse is not included in the exemption provided for under this section (Sec. 4.109-1(B)(1)(a), R.R. 16-
2005).
Refined sugar subject to VAT
Raw Sugar refers to sugar produced by simple process of conversion of sugar cane without a need of any of
mechanical or similar device such as muscovado. For this purpose, raw sugar refers only to muscovado sugar.
Centrifugal process of producing sugar is not in itself a simple process. Therefore, any type of sugar produced
therefrom is not exempt from VAT (R.R. No. 13-2013).
1. P350,000 􏰀 for those who have stayed in a foreign country for at least 10 yrs, and has not availed of
this privilege within 10 years prior to arrival
2. P250,000 􏰀 for those who have stayed for at least 5 but not more than 10 yrs and has not availed of
this privilege within 5 years prior to arrival
3. P150,000 􏰀 for those who have stayed for a period of less than 5 yrs and has not availed of this
privilege within 6 months prior to arrival;
4. P150,000 􏰀 in case of returning OFWs. This privilege is available once in a given calendar year.
NOTE: Prior to the amendment of the Tariff and Customs Code, the ceiling amount is P10,000.
1. Amount in excess of the above threshold shall be subject to tax.
b.
Sale or importation of
2. fertilizers;
3. seeds, seedlings and fingerlings;
4. fish, prawn, livestock and poultry feeds,
including ingredients, whether locally produced or imported, used in the manufacture of
finished feeds
a. except specialty feeds for race
horses, fighting cocks, aquarium fish, zoo animals and other animals generally considered as pets)
d. Importation of 1. professional implements,
instruments and
c. sugar cane into raw sugar
Agricultural contract growers refer to those persons producing for others poultry, livestock or other
agricultural and marine food products in their original state.
g. Medical, dental, hospital and veterinary services, except those rendered by professionals
Laboratory services are exempted. If the hospital or clinic operates a pharmacy or drug store, the sale of
drugs and medicine is subject to VAT.
Q: PHILHEALTH, operates a health care delivery system or a health maintenance organization to take
care of the sick and disabled persons enrolled in the health care plan, inquired before the CIR
whether the services it provided to the participants in its health care program were exempt from the
payment of VAT. The Commissioner issued VAT Ruling 231-88 stating that PHILHEALTH, as a provider
of medical services, was exempt from the VAT coverage.
Meanwhile, R.A. 7716 (E-VAT Law) took effect, amending further the NIRC of 1977. Subsequently, R.A.
8424 (NIRC of 1997) took effect, substantially adopting and reproducing the provisions of E.O. 273 on
VAT and the E-VAT law. With the passage of these laws, the BIR sent PHILHEALTH a Preliminary
Assessment Notice for deficiency in its payment of the VAT and documentary stamp taxes (DST) for
taxable years 1996 and 1997 and a letter demanding payment of “deficiency VAT” and DST for taxable
years 1996 to 1997.
PHILHEALTH filed a protest with the Commissioner but the latter did not take action on its protest.
Consequently, PHILHEALTH brought the matter to the CTA. The CTA declared that VAT Ruling 231-88
is void and without force and effect and ordered it to pay the VAT deficiency, but canceling the
payment of DST. After a Motion for Partial Reconsideration, CTA overruled its decision with respect to
the payment of deficiency VAT and held that PHILHEALTH was entitled to the benefit of non-
retroactivity of rulings guaranteed under Section 246 of the NIRC, in the absence of showing of bad
faith on its part. Are the services of PHILHEALTH subject to VAT?
A: YES, PHILHEALTH’s services are not VAT- exempt. Those exempted from VAT are those
engaged in the performance of medical, dental, hospital and veterinary services except those rendered by
professionals. PHILHEALTH is not actually rendering medical service but merely acting as a conduit between
the members and their accredited and recognized hospitals and clinics. It merely provides and arranges for
the provision of pre-need health care services to its members for a fixed prepaid fee for a specified period of
time; that it then contracts the services of physicians, medical and dental practitioners, clinics and hospitals
to perform such services to its enrolled members; and that it enters into contract with clinics, hospitals,
medical professionals and then negotiates with them regarding payment schemes, financing and other
procedures in the delivery of health services (CIR v. Philippine Health Care Providers Inc., G.R. No. 168129,
April 24, 2007).
LAW ON TAXATION
h.
Educational services
1.
rendered by private educational institutions duly accredited by the
1. Department of Education (DepED),

2. the Commission on Higher Education
(CHED), and
3. the Technical Education and Skills
Development Authority (TESDA)
2. and those rendered by government educational institutions;
Educational services shall refer to academic, technical or vocational education provided by private
educational institutions duly accredited by the DepED, the CHED and TESDA and those rendered by
government educational institutions and it does not include seminars, in-service training, review classes and
other similar services rendered by persons who are not accredited by the DepED, the CHED and/or the
TESDA.
i. j.
Services rendered by individuals pursuant to an employer-employee relationship
Services rendered
b. c.
by regional or area headquarters established in the Philippines by multinational corporations

which act as
1. 2. 3.
supervisory,
communications and coordinating centers for their
a. affiliates,
2. subsidiaries or
3. branches
in the Asia Pacific Region, and

246
VALUE ADDED TAX

􏰇 From lending activities
Exempt VAT Exempt VAT
􏰇 From non-lending
activities
d.do not earn or derive income from the Philippines
11. Transactions which are exempt under international agreements to which the Philippines is a
signatory or under special laws except those granted under PD No. 529 which refers to
Petroleum Exploration Concessionaires under the Petroleum Act of 1949
12. Sales by agricultural cooperatives duly registered and in good standing with the Cooperative
Development Authority (CDA) to their members, as well as sale of their produce, whether in
its original state or processed form, to non-members; their importation of direct farm inputs,
machineries and equipment, including spare parts thereof, to be used directly and exclusively
in the production and/or processing of their produce
13. Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered
and in good standing with the Cooperative Development Authority
14. Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with and
in good standing with the CDA; Provided, That the share capital contribution of each member
does not exceed Fifteen Thousand Pesos (P15,000.00) and regardless of the aggregate capital
and net surplus ratably distributed among the members.
Importation by non-agricultural, non-electric and non-credit cooperatives of machineries and equipment,

including spare parts thereof, to be used by them are subject to VAT.
Electric cooperatives VAT VAT
*Exempt if referring to agricultural food product at its original state.

(Tabag, 2015)
o. Export sales by persons who are not VAT- registered
Non-agricultral, non- lending and multipurpose, non-

electric
Exempt
Exempt VAT
􏰇 Contribution per member < P15K VAT
􏰇 Contribution per member > P15K
Rules on Export Sales
By a Non-VAT registered By a VAT registered
VAT exempt
VATable at 0% (zero rated)

Summary rules on cooperatives
NOTE: The reason is to encourage exporters of goods to register as a VAT-registered person with the BIR to
be able to claim unused input tax in the form of refund or tax credit.
If he is a VAT-registered person, his export sales are zero-rated.
p. Sales of real properties, namely:
1. Sale of real properties not primarily held for sale to customers or held for lease in the
ordinary course of trade or business.
2. Sale of real properties utilized for low- cost housing as defined by RA No. 7279, otherwise
known as the "Urban Development and Housing Act of 1992" and other related laws, such as
RA No. 7835 and RA No. 8763.
"Low-cost housing" refers to housing projects intended for homeless low-income family beneficiaries,
undertaken by the Government or private developers, which may either be a subdivision or a condominium
registered and licensed by the Housing and Land Use Regulatory Board/Housing (HLURB) under BP Blg. 220,
PD No. 957 or any other similar law, wherein the unit selling price is within the selling price ceiling per unit of
P750,000.00 under RA No. 7279, otherwise known as the "Urban Development and Housing Act

Sales/Gross Receipts
by
To/From
Members
To/From
Non- Members
Agricutural Cooperatives
 􏰇 Own produce
(processed or at its
origial state)
 􏰇 Other that own
produce (i.e. from traders)
Exempt Exempt
Exempt VAT*
Credit or Multipurpose Cooperatives

247
LAW ON TAXATION
of 1992" and other laws, such as RA No. 7835 and RA No. 8763.
3. Sale of real properties utilized for socialized housing as defined under RA No. 7279, and other
related laws, such as RA No. 7835 and RA No. 8763, wherein the price ceiling per unit is P225,000.00
or as may from time to time be determined by the HUDCC and the NEDA and other related laws.
"Socialized housing" refers to housing programs and projects covering houses and lots or home lots only
undertaken by the Government or the private sector for the underprivileged and homeless citizens which
shall include sites and services development, long-term financing, liberated terms on interest payments, and
such other benefits in accordance with the provisions of RA No. 7279, otherwise known as the "Urban
Development and Housing Act of 1992" and RA No. 7835 and RA No. 8763. "Socialized housing" shall also
refer to projects intended for the underprivileged and homeless wherein the housing package selling price is
within the lowest interest rates under the Unified Home Lending Program (UHLP) or any equivalent housing
program of the Government, the private sector or non-government organizations.
4. Sale of residential lot valued of up to 2,000,000 pesos beginning January 1, 2021
If two or more adjacent residential lots, house and lots or other residential dwellings are sold or disposed in
favor of one buyer from the same seller, for the purpose of utilizing the lots, house and lots or other
residential dwellings as one residential area, the sale shall be exempt from VAT only if the aggregate value of
the said properties do not exceed P1,919,500.00 for residential lots, and P3,199,200.00 for residential house
and lots or other residential dwellings. Adjacent residential lots, house and lots or other residential dwellings
although covered by separate titles and/or separate tax declarations, when sold or disposed to one and the
same buyer, whether covered by one or separate Deed/s of Conveyance, shall be presumed as a sale of one
residential lot, house and lot or residential dwelling.
This however, does not include the sale of parking lot which may or may not be included in the sale of
condominium units. The sale of parking lots in a condominium is a separate and distinct transaction and is
not covered by the rules on threshold amount not being a residential lot, house & lot or a
residential dwelling, thus, should be subject to VAT regardless of amount of selling price.
SUMMARY RULES ON SALES OF REAL PROPERTIES

Sale not in the ordinary course of trade or business
􏰇 In general
VAT exempt
Sale of residential lot by a real estate dealer

􏰇 Selling price < P1,919,500* VAT exempt VAT
􏰇 Selling price > P1,919,500
Sale of residential lot by a non- dealer
􏰇 Use in business (incidental
transaction) VAT 6% CGT

􏰇 Not use in business (regardless
of amount)
Sale of residential house & lot and other residential dwellings by a real estate dealer
􏰇 Selling price < P3,199,200**
VAT exempt VAT
􏰇 Selling price > P3,199,200
Sale of residential house & lot and other residential dwellings by a non-dealer
􏰇 Use in business (incidental
transaction) VAT 6% CGT

􏰇 Not use in business (regardless
of amount)
Sale of real property classified as
low cost housing
Sale of real property classified as

socialized housing
VAT exempt VAT exempt

* Apply rules on adjacent lots

** Apply rules on adjacent house and lots and other residential dwellings
(Tabag, 2015)
q. Lease of residential units with a monthly rental per unit not exceeding fifteen thousand pesos
(15,000), regardless of the amount of aggregate rentals received by the lessor during the year
Every 3 years thereafter, the amount shall be adjusted to its present value using the Consumer Price Index, as
published by the Philippine Statistic Authority. Such adjustment shall be published through revenue
regulations to be issued not later than March 31 of each year.
The foregoing notwithstanding, lease of residential units where the monthly rental per unit exceeds P12,800
but the aggregate of such rentals of the lessor during the year do not exceed P1,919,500
248
VALUE ADDED TAX

shall likewise be exempt from VAT, however, the same shall be subjected to 3% percentage tax.
In cases where a lessor has several residential units for lease, some are leased out for a monthly rental per
unit of not exceeding P12,800 while others are leased out for more than P12,800 per unit, his tax liability will
be as follows:
1. The gross receipts from rentals not exceeding P12,800 per month per unit shall be exempt from VAT
regardless of the aggregate annual gross receipts.
2. The gross receipts from rentals exceeding P12,800 per month per unit shall be subject to VAT if the
aggregate annual gross receipts from said units only (not including the gross receipts from units leased for
not more than P12,800) exceeds P1,919,500. Otherwise, the gross receipts will be subject to the 3% tax
imposed under Section 116 of the NIRC.
The term 'residential units' shall refer to apartments and houses & lots used for residential purposes, and
buildings or parts or units thereof used solely as dwelling places (e.g., dormitories, rooms and bed spaces)
except motels, motel rooms, hotels, hotel rooms, lodging houses, inns and pension houses.
The term 'unit' shall mean:
 - an apartment unit in the case of apartments,

 - house in the case of residential houses,
 - per person in the case of dormitories, boarding
houses and bed spaces; and
 - per room in case of rooms for rent (RR 16-11).
Summary of rules on lease of residential units:
Q: X operates a dormitory beside the school compound. Student bed-spacers are charged Php 2,500
each per month. X has an average of 􏰅􏰃 students every month. Since “Lease” is VATable, can X pass the
12% VAT to the students? Why?
A: The lease is VAT exempt because the monthly rental per student is less than P12,800 regardless of the total
annual aggregate income of X received during the year.
NOTE: If the rent of an apartment is more than P12,800 per unit but the aggregate rent income of the lessor
does not exceed P1,919,500, the lessor is not VATable, but he is subject to the 3% direct percentage tax (Lim,
2014).
r. Sale, importation, printing or publication of books and any newspaper, magazine, review, or
bulletin which appears at regular intervals with fixed prices for subscription and sale and which is
not devoted principally to the publication of paid advertisements
A newspaper, magazine, review or bulletin must be:
(1) printed or published at regular intervals;

(2) available for subscription and sale at fixed prices; and
(3) are not principally devoted to the publication of paid advertisements.
The terms "book", "newspaper", "magazine", "review" and "bulletin" as used in the provision refer to printed
materials in hard copies. They do not include those in digital or electronic format or computerized versions,
including but not limited to: e-books, e-journals, electronic copies, online library sources, CDs and software
(RMC No. 57-2012).
s. Transport of passengers by international carriers
The transport of cargo by international carriers doing business in the Philippines shall be exempt from VAT
as the same is subject to Common Carrier's Tax (Percentage Tax on International Carriers). International
carriers exempt under Sections 109(1)(S) and 109(1)(E) of the NIRC, as amended, shall not be allowed to
register for VAT purposes (RR No. 15-15).
Summary of rules for transport of passengers or cargoes
Monthly rental P12,800 or less regardless of

VAT exempt and no percentage tax
annual gross sales
Monthly rental above P12,800 but annual gross VAT-exempt under Sec. 109 (W) but shall pay 3%
sales do not exceed P1,919,500 percentage tax under Section 116 of NIRC
Monthly rental above P12,800 and annual gross
Subject to VAT
sales exceed P1,919,500
NOTE: Lease of commercial units, regardless of the amount of monthly rental is subject to VAT unless the
lessor is non-VAT registered and annual gross receipts < P1,919,500 (Tabag, 2015).
249
Domestic
transport of
International
transport of
Transport of passengers
12%
0% VAT EXEMPT
VAT
LAW ON TAXATION
passengers or cargoes by air or

passengers or cargoes by air and sea by international air and shipping
sea carriers
NOTE:
NOTE: If domestic transport of NOTE: In case of transport of cargoes,
passengers or cargoes by land, the the international air or shipping
common carrier is liable to Transport should be done by carrier shall be subject to 3%
percentage tax on common domestic carriers with percentage tax on international
carriers international flightssuch as PAL, carriers
Cebu Pacific, etc., otherwise,
exempt
t. Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment
and spare parts thereof for domestic or international transport operations
Provided, that the exemption from VAT on the importation and local purchase of passenger and/or cargo
vessels shall be limited to those of one hundred fifty (150) tons and above, including engine and spare parts
of said vessels; Provided, further, that the vessels to be imported shall comply with the age limit requirement,
at the time of acquisition counted from the date of the vessel's original commissioning, as follows: (i) for
passenger and/or cargo vessels, the age limit is fifteen (15) years old, (ii) for tankers, the age limit is ten (10)
years old, and (iii) For high-speed passenger crafts, the age limit is five (5) years old; Provided, finally, that
exemption shall be subject to the provisions of Section 4 of Republic Act No. 9295, otherwise known as "The
Domestic Shipping Development Act of 2004";
u. Importation of fuel, goods and supplies by persons engaged in international shipping or air
transport operations
Provided, that the said fuel, goods and supplies shall be used exclusively or shall pertain to the transport of
goods and/or passenger from a port in the Philippines directly to a foreign port without stopping at any other
port in the Philippines; Provided, further, that if any portion of such fuel, goods or supplies is used for
purposes other than that mentioned in this paragraph, such portion of
fuel, goods and supplies shall be subject to 12% VAT.

Fuel, When exempt from VAT and when zero- rated
Fuel is exempt if imported by persons engaged in international shipping or air transport operations. On the
other hand, fuel is zero-rated when sold to persons engaged in international shipping or international air
transport operations without docking or stopping at any other port in the Philippines.
v. Services of 1. banks,
2. non-bank financial intermediaries performing quasi-banking functions, and

3. other non-bank financial intermediaries subject to percentage tax under Secs. 121 and 122 of
the NIRC, such as money
changers and pawnshops
In Tambunting Pawnshop, Inc. vs. CIR, G.R. No. 179085 (2010), since the taxpayer (pawnshop) is a non-bank
intermediary, it is subject to 10% (now 12%) VAT for the tax years 1996-2002; however, with the levy,
assessment and collection of VAT from non-bank intermediaries being specifically deferred by law, then
taxpayer is not liable for VAT during these tax years. But with the full implementation of the VAT system on
non-bank financial intermediaries starting January 1, 2003, taxpayer is liable for 10% VAT for the said tax
year. And beginning 2004 up to the present, by virtue of R.A. no. 9238, taxpayer is no longer liable for VAT but
it is subject to percentage tax on gross receipts from 0% to 5% as the case may be.
Pawnshops are not liable to pay VAT
Pawnshops are not classified as lending investors and therefore, they are not subject to VAT. They are subject
to percentage tax as imposed on Section 122 of NIRC (Tambunting Pawnshop, Inc., v CIR, G.R. No. 179085,
January 21, 2010; R.A. 9238; RMC 74-2005).
23. Sale or lease of goods and services to senior citizens and persons with disability
24. Transfer of property pursuant to Sec. 40(c) of R.A. 10963
25. Association dues, membership fees, and other assessments and charges collected by
homeowners associations and condominium corporations;
26. Sale of gold to the Bangko Sentral ng Pilipinas
aa.Sale of drugs and medicines prescribed for diabetes, high cholesterol, and hypertension
beginning January 1, 2019

250
VALUE ADDED TAX

bb.Sale or lease of goods or properties or services other than the transactions mentioned above
wherein the gross annual sales or receips do not exeed 3,000,000 pesos.
Every three (3) years thereafter, the amount shall be adjusted to its present value using the Consumer Price
Index, as published by the NSO. Such adjustment shall be published through revenue regulations to be issued
not later than March 31 of each year.
For purposes of the threshold of P1,919,500, the husband and the wife shall be considered separate
taxpayers. However, the aggregation rule for each taxpayer shall apply. For instance, if a professional, aside
from the practice of his profession, also derives revenue from other lines of business which are otherwise
subject to VAT, the same shall be combined for purposes of determining whether the threshold has been
exceeded. Thus, the VAT-exempt sales shall not be included in determining the threshold.
Q: State whether the following transactions are: a) VAT Exempt, b) subject to VAT at 12%; or c)
subject to VAT at 0%:
1. Sale of fresh vegetables by AlingIning at the Pamilihang Bayan ng Trece Martirez.

2. Services rendered by Jake's Construction Company, a contractor to the World Health
Organization in the renovation of its offices in Manila.
3. Sale of tractors and other agricultural implements by Bungkal Incorporated to local farmers.
4. Sale of RTW by Cely's Boutique, a Filipino dress designer, in her dress shop and other outlets.
5. Fees for lodging paid by students to Bahay- Bahayan Dormitory, a private entity operating a
student dormitory (monthly fee P1,500). (1998 Bar)
A:
1. VAT exempt. Sale of agricultural products, such as fresh vegetables, in their original state, of a kind
generally used as, or producing foods for human consumption is exempt from VAT (Sec. 109[A], NIRC).
2. VAT at 0%. Since Jake's Construction Company has rendered services to the World Health
Organization, which is an entity exempted from taxation under international agreements to which
the Philippines is a signatory, the supply of services is subject to zero percent (0%) rate
251
(Sec. 108[B][3], NIRC).
3. VAT at 12%. Tractors and other agricultural
implements fall under the definition of goods which include all tangible objects which are capable of
pecuniary estimation (Sec. 106[A][1], NIRC).
4. This is subject to VAT at 12%. This transaction also falls under the definition of goods which include
all tangible objects which are capable of pecuniary estimation (Sec. 106[A][1], NIRC).
5. VAT Exempt. The monthly fee paid by each student falls under the lease of residential units
with a monthly rental per unit not exceeding P12,800 (R.R. 16-2011), which is exempt from
VAT regardless of the amount of aggregate rentals received by the lessor during the year (Sec.
109[Q], NIRC, as amended by R.R. 16-2011). The term unit shall mean per person in the case of
dormitories, boarding houses and bed spaces (Sec. 4.103-1, R.R. No. 7-95).
OUTPUT AND INPUT TAX
Output Tax
It means the value-added tax due on the sale or lease of taxable goods or properties or services by (1) any
person registered or (2) required to register under Sec. 236 of the NIRC (Sec. 110[A][3], NIRC).
Output tax is what the taxpayer-seller passes on to the purchases. Note that what is output tax for the seller is
input tax to the purchaser(Ingles, 2015).
Output tax may come from:
i. Actual sale
ii. Transaction deemed sales
Input Tax
It means the value-added tax due on or paid by a VAT-registered person on importation of goods or local
purchase of goods, properties or services, including lease or use of properties, in the course of his trade or
business. It shall also include the transitional input tax and the presumptive input tax determined in
accordance with Section 111 of the NIRC (Sec. 110[A][3], NIRC).
It includes input taxes which can be
1. directly attributed to transactions subject to the VAT, plus

2. a ratable portion of any input tax which cannot be directly attributed to either the taxable or exempt
activity (R.R. 16-2005).

Input tax is what is passed on to the purchaser/taxpayer by the seller. If the purchaser is VAT-registered
person, then he can use the input tax as credit to the output taxes that he is liable to remit to the BIR (Ingles,
2015).
Input VAT or input tax represents the actual payments, costs and expenses incurred by a VAT- registered
taxpayer in connection with his purchase of goods and services. On the other hand, when that person or
entity sells his/its products or services, the VAT-registered taxpayer generally becomes liable for 10% (now
12%) of the selling price as Output VAT or output tax (CIR v. Benguet Corporation, G.R. No. 145559, July
14,2006).
Effect of VAT exempt purchases to input tax
VAT exempt transactions cannot be credited for input tax. However, a transaction which cannot be directly
attributed in either the taxable or exempt activity, a ratable portion of the input tax may be credited.
Input tax not a property right under the Due Process Clause
A VAT-registered person’s entitlement to the creditable input tax is a mere statutory privilege which may be
limited or removed by law.
Categories of input tax
Excess input tax credit(refer to NA discussion on application on tax

refund or tax credit certificate)
Sources of Creditable Input Tax
Any input tax evidenced by a VAT invoice or official receipt issued in accordance with Section 113 of the NIRC
on the following transactions shall be creditable against the output tax:
1. Purchase or importation of goods:
1. For sale; or
2. For conversion into or intended to form
part of a finished product for sale including
packaging materials; or
3. For use as supplies in the course of
business; or
4. For use as materials supplied in the sale of
service; or
5. For use in trade or business for which
deduction for depreciation or amortization is allowed under NIRC, except automobiles, aircraft and
yachts. (Capital Goods)
2. Purchases of real properties for which a VAT has actually been paid;
3.Purchases of services in which a VAT has actually been paid (Sec. 110, NIRC);
4. Transactions “deemed sales”;

5. Presumptive input tax;
6. Transitional input tax credits allowed under
the transitory and other provisions (Sec. 4.110- 1 R.R. 16-2005).
Capital goods (depreciable goods)
Capital goods are those goods or properties

1. with an estimated useful life of more than one
year;
2. which are treated as depreciable under the
income tax law;
3. and used directly or indirectly in the production
or sale of taxable goods or services (Ingles, 2015).
Input tax on capital goods

Aggregate cost exceeds P1M - Where aVAT
registered person purchases or imports capital 252
LAW ON TAXATION
Final withholding tax credit(Sec. 114[C], NIRC) 􏰀 is based on the amount paid to the supplier of goods
or services by the government and is required to be withheld by the government to the BIR (refer to 5%
withholding of final tax on sales to government).
TYPE OF INPUT TAX RATE
Input tax on importation of goods and local purchases of goods, properties and 12% standard or
services(Sec. 110, NIRC) 0%
Presumptive input tax credit(Sec. 111[B], NIRC) 􏰀 may be calimed by persons engaged in
the business of processing ssardines, mackerel and milk; manufacturing refined sugard and
4%
cooking oil; and noodle based instant meals; all of which are substantially produced from
primary agricultural and marine food producs, the supply of which is exempt from VAT
Transitional input tax credit(Sec. 111 [A], NIRC) 􏰀 may be claimed by persons who
2% transition al
become liable to VAT for the first time and such represent input tax on inventories goodsw,
or 12% actual
materials and supplies existing on the date of commencement of a person’s status as a
input tax rate
taxable person
VALUE ADDED TAX

goods, which are depreciable assets for income tax purposes, the aggregate acquisition cost of which
(exclusive of VAT) in a calendar month exceeds P1,000,000, regardless of the acquisition cost of each capital
good, shall be claimed as credit against output tax in the following manner:
1. If the estimated useful life of a capital good is five (5) years or more 􏰀 Input tax shall be spread
evenly over a period of 60 months and the claim for input tax credit will commence in the calendar
month when the capital good is acquired.
2. If the estimated useful life of a capital good is less than five (5) years 􏰀 Input tax shall be spread
evenly on a monthly basis by dividing the input tax by the actual number of months comprising the
estimated useful life of the capital good. Such claim for input tax credit shall commence in the
calendar month that the capital goods were acquired.
Aggregate cost does not exceed P1M - Where the aggregate acquisition cost (exclusive of VAT) of the
existing or finished depreciable capital goods purchased or imported during any calendar month does not
exceed P 1,000,000, the total input taxes will be allowable as credit against output tax in the month of
acquisition.
Aggregate cost exceeds P1M but acquired in installment payments - The aggregate acquisition cost of a
depreciable asset in any calendar month refers to the total price agreed upon for one or more assets acquired
and not on the payments actually made during the calendar month. Thus, an asset acquired in installment for
an acquisition cost of more than P 1,000,000.00 will be subject to the amortization of input tax despite the
fact that the monthly payments/installments may not exceed P1,000,000.00 (Sec 4.110-3 R.R. No. 16-2005).
NOTE: When an asset with unamortized input tax is retired from business, the unamortized input tax will be
closed against the output taxes during the month or quarter when the sale/disposal is made.
Presumptive input tax
It is an input tax credit allowed to persons or firms engaged in the: [SMM-RCN]
1. processing of: a. sardines
b. mackerel
c. milk
2. manufacturing of:
1. refined sugar
2. cooking oil
3. packed noodle based instant meals
The allowed input tax shall be equivalent to four percent (4%) of the gross value in money of their
purchases of primary agricultural products which are used as inputs to their production (Sec. 111 [B], NIRC).
They are given this 4% presumptive input tax because the goods used in the said enumeration are VAT-
exempt (Ingles, 2015).
NOTE: The term 'processing' shall mean pasteurization, canning and activities which through physical or
chemical process alter the exterior texture or form or inner substance of a product in such manner as to
prepare it for special use to which it could not have been put in its original form or condition.
Transitional input tax

Transitional input tax credit operates to benefit newly VAT-registered persons, whether or not they
previously paid taxes in the acquisition of their beginning inventory of goods, materials, and supplies. During
that period of transition from non- VAT to VAT status, the transitional input tax credit serves to alleviate the
impact of the VAT on the taxpayer. At the very beginning, the VAT-registered taxpayer is obliged to remit a
significant portion of the income it derived from its sales as output VAT. The transitional input tax credit
mitigates this initial diminution of the taxpayer’s income by affording the opportunity to offset the losses
incurred through the remittance of the output VAT at a stage when the person is yet unable to credit input
VAT payments (Fort Bonifacio Development Corporation v. CIR, 583 SCRA 168).
SUMMARY RULES ON RECOGNITION OF INPUT VAT FOR CAPITAL GOODS

Aggregate acquisition for the month > P1M, exclusive of VAT, and:
 􏰇 Life > 5 years
Input tax shall be spread evenly over such
usefule lfe but not to exceed 60 months.
 􏰇 Life < 5 years
Not a capital asset. Input tax is not allocated.

Aggregate acquisition for the month < P1M,
exclusive of VAT (regardless of useful life):

The related input VAT is not allocated. Consequently, the total amount of input VAT shall be treated as tax
credit against output VAT in the month of acquisition.
(Tabag, 2015)
253
LAW ON TAXATION
These can be availed by taxpayers who become VAT registered persons upon:
1. Exceeding the minimum turnover of P1,919,500 in any 12 month period, or

2. Who voluntarily register even if they do not reach the threshold, except for franchise grantees of
radio and TV broadcasting whose threshold is P10,000,000)
The said taxpayers shall be entitled to a transitional input tax on the inventory on hand as of the effectivity of
their VAT registration on the following:
1. Goods purchased for resale in the present condition;

2. Raw materials - Materials purchased for further processing but which have not yet undergone
processing;
3. Manufactured goods
4. Goods in process for sale; or
5. Goods and supplies for use in the course of
the taxpayer’s trade or business as a VAT- registered person (Sec. 4. 110-1(a.), R.R 16- 2005).
The allowed input tax shall be whichever is higher between:
1. 􏰗􏰘 of 􏰙he 􏰚al􏰛e of 􏰙he 􏰙a􏰜􏰉a􏰝e􏰊􏰞􏰋 beginning inventory of goods, materials and supplies; or
2. The actual value-added tax paid on such goods (Sec.111[A], NIRC).
NOTE: Transitional input tax credit may only be availed once. It may be carried over to the next taxing period,
until fully utilized.
Prior payment of taxes is not necessary before a taxpayer could avail of transitional input tax credit. All
that is required from the taxpayer is to file a beginning inventory with BIR.
A transitional input tax credit is not a tax refund per se but a tax credit. Section 112 of the NIRC does not
prohibit cash refund or tax credit of transitional input tax. The grant of a refund or issuance of tax credit
certificate in this case would not contravene the above provision. The refund or tax credit would not be
unconstitutional because it is precisely pursuant to section 105 of the old NIRC which allows refund/tax
credit (Fort Bonifacio Development Corporation vs. CIR, G.R. No. 173425, January 22, 2013).
Q: Is Transitional Input Tax Credit applicable to real property?
A: YES. Under Sec. 105 of the old NIRC (now Sec. 111[A]), the beginning inventory of “goods” forms part of the
valuation of the transitional input tax credit. Goods, as commonly understood in the business sense, refer to
the product which the VAT- registered person offers for sale to the public. With respect to real estate dealers,
it is the real properties themselves which constitute their “goods”. Such real properties are the operating
assets of the real estate dealer (Ibid.).
The input tax credit on importation of goods or local purchases of goods, properties or services by a VAT-
registered person shall be creditable:
1. To the importer upon payment of the VAT prior to the release of the goods from the customs custody;
2. To the purchaser of the domestic goods or properties upon consummation of the sale; or
3. To the purchaser of the services or the lessee or the licenses upon payment of the compensation,
rental, royalty or fee (R.R. 16- 2005).
As long as the invoices from the suppliers are issued in the name of the taxpayer and expenses were actually
incurred by the taxpayer, then the input tax pertaining to such expenses must be credited to the taxpayer.
Where the money came from to pay these expenses is another matter all together but it does not change the
fact that input tax has been incurred (CIR v. Sony Philippines, Inc., G.R. No. 178697, November 17, 2010).
Determination of output tax
In a sale of goods or properties, the output tax is computed by multiplying the gross selling price by the
regular rate of VAT. For sellers of services, the output tax is computed by multiplying the gross receipts by the
regular rate of VAT.
In all cases where the basis for computing the output tax is either the gross selling price or the gross receipts,
but the amount of VAT is erroneously billed in the invoice, the total invoice amount shall be presumed to be
comprised of the gross selling price/gross receipts plus the correct amount of VAT. Hence, the output tax
shall be computed by multiplying the total invoice amount by a fraction using the rate of VAT as numerator
and one hundred
254
PERSONS WHO CAN AVAIL OF INPUT TAX CREDIT
DETERMINATION OF OUTPUT/INPUT TAX; VAT PAYABLE; EXCESS INPUT TAX CREDITS

VALUE ADDED TAX
Net VAT payable = Output tax > Input tax
Excess tax credits = Output tax < Input
tax
percent (100%) plus rate of VAT as the denominator. Accordingly, the input tax that can be claimed by the
buyer shall be the corrected amount of VAT computed in accordance with the formula herein prescribed.
There shall be allowed as a deduction from the output tax the amount of input tax deductible to arrive at VAT
payable on the monthly VAT declaration and the quarterly VAT returns (RR 16- 2005).
Determination of input tax creditable
The amount of input taxes creditable during a month or quarter shall be determined by adding all creditable
input taxes arising from the transactions enumerated under “Sources of input tax” in page during the month
or quarter plus any amount of input tax carried-over from the preceding month or quarter, reduced by the
amount of claim for VAT refund or tax credit certificate (whether filed with the BIR, the Department of
Finance, the Board of Investments or the BOC) and other adjustments, such as purchases returns or
allowances, input tax attributable to exempt sales and input tax attributable to sales subject to final VAT
withholding.
The succeeding table illustrates the computation of output tax, creditable input tax and the resulting net VAT
payable or excess of tax credits:
NOTE: VAT-exempt transactions do not result to any output or input taxes.
Allocation of input tax on mixed transactions
A VAT-registered person who is also engaged in transactions not subject to VAT shall be allowed to recognize
input tax credit on transactions subject to VAT as follows:
1. All the input taxes that can be directly attributed to transactions subject to VAT may be recognized
for input tax credit: Provided, that input taxes which are directly attributable to VAT taxable sales of
goods and services from the Government or any of its political subdivisions, instrumentalities or
agencies, including GOCCs shall not be credited against output taxes arising from sales to non-
government entities, and
2. If any input tax cannot be directly attributed to either a VAT taxable or VAT-exempt transaction, the
input tax shall be pro-rated to the VAT taxable and VAT-exempt transactions; only the ratable portion
pertaining to transactions subject to VAT may be recognized for input tax credit.
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 of goods sold.
For persons engaged in both zero-rated sales and non-zero-rated sales, the aggregate input taxes shall be
allocated ratably between the zero-rated and non-zero-rated sales (R.R. No. 16-2005).
Determination of VAT payable or excess tax credits
The resulting computation of output tax and crediting of input tax shall result to either the net VAT payable or
excess tax credits.
Net VAT Payable (NVP) 􏰀 if at the end of any taxable quarter the output tax exceeds the input tax, the excess
shall be paid by the VAT-registered person.
Excess Tax Credits (ETC) 􏰀 If the input tax inclusive of input tax carried over from the previous quarter
exceeds the output tax, the excess input tax
BASIS EXAMPLE AMOUNT

Sale of hanky for total price of P112 VAT-
Output Vatable gross sales or receipts (amount Ex. Amt: P100 (P112/1.12)
P12.00
tax exclusive VAT) c VAT rate (12% or 0%)
Output tax: P100*12%
Purchase of materials for total price of
P56
Input Vatable purchases (amount exclusive of VAT)
VAT-Ex- Amt: 6.00
tax x applicable VAT rate
P50 (P56/1.12)
Input tax: P50*12%

Net VAT Payable or Excess tax 6.00 credits
(Output tax less Input Tax)
255
shall be carried over to the succeeding quarter or quarters.
 - Provided, that any input tax attributable to zero-rated sales by a VAT-registered person may at his
option be refunded or applied for a tax credit certificate which may be used in the payment of
internal revenue taxes
 - Thus, input tax, attributable to zero-rated sales may be:
1. Refunded, or
2. Credited against other internal revenue taxes
of the VAT taxpayer (e.g. income tax)

Transitional input tax
Input tax on “deemed sale transaction”
Advance VAT on sugar
Inventory of goods as shown in a detailed list to be submitted to the BIR Required invoices
LAW ON TAXATION
Illustration:
Jan. Feb. Mar. Q1
P 12 M 6 M 6 M P24 M
P 6 M 18 M 18 M
P 42 M
NVP P6M ETC (P12M) ETC (P12M) ETC (P18M)

PERIO
OUTPUT TAX INPUT TAX NVP OR ETC
D
Input tax from payments made to Monthly Remittance Return of Value Added Tax Withheld (BIR Form
non-residents (such as for services, 1600) filed by the resident payor in behalf of the non-resident
rentals, or royalties) evidencing remittance of VAT due which was withheld by the payor.
For the months of January and February, only the monthly taxes are computed. However, for the month of
March, the accumulated taxes for the first quarter will be aggregated to determine the NVP or ETC.
In the example, the excess tax credit of P18 can be refunded or credited against the other internal revenue
taxes of the taxpayer after the application and approval from the BIR Commissioner.
SUBSTANTIATION OF INPUT TAX CREDITS
Payment order showing payment of the advance VAT

TRANSACTIONS
REQUIRED SUPPORT
b. Installment basis
for the initial and succeeding payments
Public instrument and VAT Official Receipt for every payment

Input tax on domestic purchases of service
Official receipt showing the information required in Sec. 113 and 237 of the NIRC
TRANSACTIONS
REQUIRED SUPPORT
Importation of goods
Import entry or other equivalent document showing actual payment of VAT on imported goods
Input taxes on domestic purchases of goods or properties made in the course of trade or business
Invoice showing information required under Section 113 and 237 of the NIRC
Input tax on purchases of real property
a. Cash/deferred basis
Public instrument (i.e., deed of absolute sale, deed of conditional sale, contract/agreement to sell, etc.)
together with the VAT invoice for the entire selling price and non-VAT Official Receipt
NOTE: Cash register machine tape issued to a registered buyer constitute valid proof of official receipt. All
purchases covered by invoices/receipts other than VAT Invoice/VAT Official Receipt shall not give rise to any
input tax. (Sec. 4.113-1(A), R.R. 16-2005).
REFUND OR TAX CREDIT OF EXCESS INPUT TAX
Who may claim for refund/apply for issuance of Tax Credit Certificate (TCC):
The following can avail of refund or tax credit:
1. Zero-rated and effectively zero-rated sales - Any VAT-registered person, whose sales are zero-
rated or effectively zero-rated (Sec. 112 [A]).
2. Cessation of business or VAT status - A person whose registration has been cancelled due to
retirement from or cessation of business, or due to changes in or cessation of status under Section
106(C) of NIRC (Sec. 112[B]).
Requirements to claim for VAT refund
1. The taxpayer is VAT-registered; 256
2. The taxpayer is engaged in zero-rated or effectively zero-rated sales;

3. The input taxes are due or paid;
4. The input taxes are not transitional input taxes
as it cannot be claimed as a refund or credit;
5. The input taxes have not been applied against output taxes during and in the succeeding
quarters;
6. The input taxes claimed are attributable to
zero-rated or effectively zero-rated sales;
7. For zero-rated sales under Section 106(A)(2)(1) and (2); 106(B); and 108(B)(1) and (2), the
acceptable foreign currency exchange proceeds have been duly accounted for in accordance with the
rules and regulations
of the BSP;
8. Where there are both zero-rated or effectively
zero- rated sales and taxable or exempt sales, and the input taxes cannot be directly and entirely
attributable to any of these sales, the input taxes shall be proportionately allocated on the basis of
sales volume; and
9. The claim is filed within two years after the close of the taxable quarter when such sales were made
(Luzon Hydro Corporation v. CIR, G.R. No. 188260, November 13, 2013, penned by Justice Bersamin).
The taxpayer must prove the following for a tax refund to prosper:
1. That it is a VAT-registered entity;

2. It must substantiate the input VAT paid by
purchase invoices or official receipts
(Commissioner v. Manila Mining Corporation, G.R. No. 153204, August 31, 2005).
Failure to comply with the invoicing requirements is a ground to deny a claim for tax refund or tax
credit
In a claim for tax refund or tax credit, the applicant must prove not only entitlement to the claim but also
compliance with all the documentary and evidentiary requirement (Eastern Telecommunication Phils. Inc. v.
CIR, G.R. No. 183531, March 25, 2015).
Section 110(A)(1) of the NIRC provides that creditable input taxes must be evidenced by a VAT invoice or
official receipt, which must, in turn, comply with Sections 237 and 238 of the same law, as well as Section
4.108.1 of RR 7-95. The foregoing provisions require, inter alia, that an invoice must reflect, as required by
law: (a) the BIR Permit to Print; (b) the TIN-V of the purchaser; and (c) the word "zero-rated" imprinted
thereon. In this relation, failure to comply with the said invoicing
requirements provides sufficient ground to deny a claim for tax refund or tax credit (J. R. A. Philippines, Inc. v.
CIR, G.R. No. 171307, August 28, 2013).
Substantiation requirements to be entitled to refund or tax credit under Sec. 􏰄􏰄􏰂, NIRC. The claimant’s duties
are two-fold: (a) prove payment of input VAT to supplier; and (b) prove zero-rated sales to purchasers. The
documents required are VAT receipt for sale of services or lease of property and VAT invoice for sale of
goods. The words ‘zero- rated’ must also be stated in the VAT receipt or invoice. (Western Mindanao Power
Corporation v. CIR, G.R No. 181136, June 13, 2012).
The VAT invoice and VAT receipt should not be confused as referring to one and the same thing; the law did
not intend the two to be used alternatively. The taxpayer tried to substantiate its input VAT on purchases of
goods with official receipts and on purchases of services with invoices. Claim denied. (KEPCO v. CIR, G.R No.
181858 November 24, 2010).
In one case, the claim for refund/tax credit was denied because the proof for the zero-rated sale consisted of
secondary evidence like financial statements. (Luzon Hydro Corp. v. CIR G.R. No. 188260, November 13, 2013).
In another case, the proofs for zero-rated sales of services were sales invoices. The claim was denied.
(Takenaka Corp.-Philippine Branch v. CIR, G.R No. 193321, October 19, 2016).
Q: Are sales invoices sufficient as evidence to prove zero-rated sale of services by a taxpayer thereby
entitling him to claim the refund of its excess input VAT?
A: NO. The claim for refund must be denied on the ground that the taxpayer had not established its zero-rated
sales of services through the presentation of official receipts.
As evidence of an administrative claim for tax refund or tax credit, there is a certain distinction between a
receipt and an invoice.
Section 113 of the NIRC of 1997 provides that a VAT invoice is necessary for every sale, barter or exchange of
goods or properties, while a VAT official receipt properly pertains to every lease of goods or properties, as
well as to every sale, barter or exchange of services.
A "sales or commercial invoice" is a written account of goods sold or services rendered indicating the prices
charged therefor or a list by whatever name
VALUE ADDED TAX

257
it is known which is used in the ordinary course of business evidencing sale and transfer or agreement to sell
or transfer goods and services.
A "receipt" on the other hand is a written acknowledgment of the fact of payment in money or other
settlement between seller and buyer of goods, debtor or creditor, or person rendering services and client or
customer.
The taxpayer submitted sales invoices, not official receipts, to support its claim for refund. In light of the
aforestated distinction between a receipt and an invoice, the submissions were inadequate to comply with the
substantiation requirements for administrative claims for tax refund or tax credit (Takenaka Corporation 􏰀
Philippine Branch vs. CIR, G.R. No. 193321, October 19, 2016, penned by Justice Bersamin).
Q: Is a taxpayer located within an ECOZONE, entitled to the refund of its unutilized input taxes
incurred before it became a PEZA- registered entity?
A: NO. With the issuance of RMC 74-99, the distinction under the old rule was disregarded and the new
circular took into consideration the two important principles of the Philippine VAT system: the Cross Border
Doctrine and the Destination Principle.
The old VAT rule for PEZA-registered enterprises was based on their choice of fiscal incentives: (1) If the
PEZA-registered enterprise chose the five percent (5%) preferential tax on its gross income, in lieu of all
taxes, as provided by Rep. Act No. 7916, as amended, then it would be VAT-exempt; (2) If the PEZA-registered
enterprise availed of the income tax holiday under Exec. Order No. 226, as amended, it shall be subject to VAT
at ten percent (10%). Such distinction was abolished by RMC No. 74-99, which categorically declared that all
sales of goods, properties, and services made by a VAT-registered supplier from the Customs Territory to an
ECOZONE enterprise shall be subject to VAT, at zero percent (0%) rate, regardless of the latter's type or class
of PEZA registration.
Furthermore, Section 8 of R.A. No. 7916 mandates that PEZA shall manage and operate the ECOZONE as a
separate customs territory. The provision thereby establishes the fiction that an ECOZONE is a foreign
territory separate and distinct from the customs territory. Accordingly, the sales made by suppliers from a
customs territory to a purchaser located within an ECOZONE will be considered as exportations. Following
the Philippine VAT system's
adherence to the Cross Border Doctrine and Destination Principle, the VAT implications are that "no VAT
shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border
of the taxing authority"
As such, the purchases of goods and services by the taxpayer that were destined for consumption within the
ECOZONE should be free of VAT; hence, no input VAT should then be paid on such purchases, rendering the
taxpayer not entitled to claim a tax refund or credit.
Verily, if the taxpayer had paid the input VAT, the proper recourse is not against the Government but against
the seller who had shifted to it the output VAT (Coral Bay Nickel Corp. vs. CIR, G.R. No. 190506, June 13, 2016).
Q: May a taxpayer who has pending claims for VAT input credit or refund, set off said claims against
his other tax liabilities? Explain your answer. (2001 Bar)
A: NO. Set-off is available only if both obligations are liquidated and demandable. Liquidated debts are those
where the exact amounts have already been determined. In the instant case, a claim of the taxpayer for VAT
refund is still pending and the amount has still to be determined.
A fortiori, the liquidated obligation of the taxpayer to the government cannot, therefore, be set-off against the
unliquidated claim which the taxpayer conceived to exist in his favor (Philex Mining Corp. v. CIR, 294 SCRA
687).
Q: Petitioner X Cola, Inc. (X Cola) failed to declare certain input taxes in its VAT return for the 3 rd and
4th quarters of 2007. X Cola alleged overpayment of VAT for the said taxable periods since the
undeclared input taxes were not credited against output tax.
Since X Cola could not amend its VAT returns due to the issuance of a BIR Letter of Authority for 2007,
it filed with the BIR claims for refund of alleged overpaid VAT for the 3 rd and 4th quarters of 2007. The
BIR failed to act on the claims so X Cola filed a Petition for Review with the CTA. Is X Cola entitled to its
claims for refund?
A: NO. X Cola is not entitled to the refunds as the amounts claimed represent undeclared input taxes, not
erroneously paid taxes, as contemplated under Section 229 of the NIRC. Section 229 of the NIRC allows
recovery of any national internal revenue tax
LAW ON TAXATION
258
(including VAT) which was erroneously or illegally assessed or collected.
X Cola’s input taxes for the 􏰑rd and 4th quarters of 2007 should have been declared in its quarterly VAT returns
so that these could be creditable against the output tax for the same taxable periods. Since it failed to report
the input taxes in its VAT returns, it could not offset the undeclared input taxes against the output VAT. Under
RR No. 16-2005, input taxes must be substantiated and reported in the VAT returns to be able to claim credit
against the output tax. While X Cola was able to substantiate a portion of its claims, the input taxes were not
reported in its VAT Returns (Coca-cola Bottlers Phils., Inc. v. CIR, CTA Case Nos. 7986 & 8028, June 14, 2013).
Period to file claim for refund/apply issuance of tax credit certificate

The claim, which must be in writing, for both cases, must be filed within 2 years after the close of the taxable
quarter when the sales were made.
Reckoning point for the Two (2)-year period
1. Zero-rated or effectively zero rated sales 􏰀 Any VAT-registered person, whose sales are zero-
rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when
the sales were made (Sec. 112(A), NIRC).
The two-year period should be reckoned from the close of the taxable quarter when the relevant
sales were made pertaining to the input VAT regardless of whether said tax was paid or not(CIR vs.
Mirant Pagbilao Corporation, GR 172129, September 12, 2008).
Thus, when a zero-rated VAT taxpayer pays its input VAT for the purchase from its supplier a year
after the pertinent transaction of its sale to its purchaser, the said taxpayer only has a year to file
claim for refund or tax credit of the unutilized creditable input VAT (Ingles, 2015).
In case the taxpayer is engaged in zero-rated and also in taxable or exempt sale, and the amount of
creditable input tax due or paid cannot be directly and entirely attributed to any one of the
transactions, it shall be allocated proportionately on the basis of the volume of sales.
2. Cessation of business or VAT status - The person may, within two (2) years from the date of
cancellation, apply for the issuance of a tax
259
credit certificate for any unused input tax which may be used in payment of his other internal revenue taxes
(Sec. 112(B), NIRC).
VALUE ADDED TAX

SUMMARY OF RULES ON PRESCRIPTIVE PERIODS FOR CLAIMING REFUND OR CREDIT OF INPUT TAX
Administrative Claim: Two-Year Prescriptive Period
Only the administrative claim that must be filed within the period
GR: The reckoning date is the close of the taxable quarter when the relevant sales were made
XPN: From June 8, 2007 to September 12, 2008 the two-year prescriptive period for filing a claim for tax
refund or credit should be counted from the date of filing of the VAT return and payment of the tax (Atlas
Consolidated Mining and Dev. Corp v CIR, G.R. No. 141104, June 8, 2007).
Judicial Claim: 120+30 Day Period
Two ways of filing an appeal to the CTA:
1. Within 30 days after the CIR denies the claim within the 120-day period,
or
2. Within 30 days from the expiration of
the 120-day period if the CIR does not act within the 120-day period.
GR: The 30-day period to appeal always applies as it is both mandatory and jurisdictional
XPN: As an exception, premature filing is allowed only if filed between 10 December 2003 and 5 October
2010, when BIR Ruling No. DA- 489-03 was still in force
NOTE: Late filing is absolutely prohibited.
(Commissioner of Internal Revenue v. Mindanao II Geothermal Partnership, G.R. No. 191498, January 15, 2014)
NOTE: The rule on a claim for refund or credit of an erroneously or illegally collected tax under Section 229
of the NIRC is different. Under such, both the administrative and judicial claim must be filed within the two
(2)-year prescriptive period from the date of payment. The claim for refund or credit and the appeal to CTA
may occur simultaneously.
Period within which BIR Commissioner grants Tax Credit Certificates/refund for creditable input
taxes
LAW ON TAXATION
The Commissioner may grant TCC/ refund for creditable input taxes within 120 days from the day of
submission of the complete documents in support of the application filed (Sec. 112, NIRC; RMC 54- 2014).
The application for VAT refund/tax credit must be accompanied by complete supporting documents. In
addition, the taxpayer shall attach a statement under oath attesting to the completeness of the submitted
documents. Upon submission of the administrative claim and its supporting documents, the claim shall be
processed and no other documents shall be accepted/required from the taxpayer in the course of its
evaluation. The CIR shall render a decision based only on the documents submitted by the taxpayer. The
application for tax refund/tax credit shall be denied where the taxpayer/claimant failed to submit the
complete supporting documents (RMC 54-2014).
Note that the 120-day period begins to run from the submission of complete documents supporting the
administrative claim. If there is no evidence showing that the taxpayer was required to submit 􏰀 or actually
submitted 􏰀 additional documents after the filing of the administrative claim, it is presumed that the
complete documents accompanied the claim when it was filed (Silicon Philippines, Inc., v. CIR, G.R. No. 182737,
March 2, 2016).
If the claim for VAT is not acted upon by the Commissioner within 120-day period as required by law, such
inaction shall be deemed a denial of the application for tax refund or credit.
Effect of failure to submit complete supporting documents to judicial claim of refund in the CTA
A distinction must be made between administrative cases appealed due to:
1. Inaction of the CIR or the Commissioner

2. Failure of the taxpayer to submit supporting documents 􏰀 If the CIR dismissed an administrative
claim due to the taxpayer's failure to submit complete documents despite notice/request, then the
judicial claim before the CTA would be dismissible, not for lack of jurisdiction, but for the taxpayer's
failure to substantiate the claim at the administrative
level.
When a judicial claim for refund or tax credit in the CTA is an appeal of an unsuccessful administrative claim,
the taxpayer has to convince the CTA that the CIR had no reason to deny its claim. It, thus, becomes
imperative for the taxpayer to show the CTA that not
only is he entitled under substantive law to his claim for refund or tax credit, but also that he satisfied all the
documentary and evidentiary requirements for an administrative claim. It is, thus, crucial for a taxpayer in a
judicial claim for refund or tax credit to show that its administrative claim should have been granted in the
first place.
Consequently, a taxpayer cannot cure its failure to submit a document requested by the BIR at the
administrative level by filing the said document before the CTA (Pilipinas Total Gas, Inc. v. CIR, G.R. No.
207112, December 8, 2015).
Taxpayer must await the lapse of the 120-day period before taxpayer can appeal to CTA
The second paragraph of Section 112(D) of the NIRC envisions two scenarios: (1) when a decision is issued by
the CIR before the lapse of the 120-day period; and (2) when no decision is made after the 120-day period. In
both instances, the taxpayer has 30 days within which to file an appeal with the CTA. As we see it then, the
120-day period is crucial in filing an appeal with the CTA (CIR v. Aichi Forging Company of Asia, Inc., GR
184823, October 6, 2010).
Failure to comply with the 120-day waiting period violates a mandatory provision of law. It violates the
doctrine of exhaustion of administrative remedies and renders the petition premature and thus without a
cause of action, with the effect that the CTA does not acquire jurisdiction over the taxpayer's petition.
One of the conditions for a judicial claim of refund or credit under the VAT System is compliance with the
120+30 day mandatory and jurisdictional periods. Thus, strict compliance with the 120+30 day periods is
necessary for such a claim to prosper, whether before, during or after the effectivity of the Atlas doctrine,
except for the period from the issuance of BIR Ruling No. DA-489-03 on December 10, 2003 to October 6,
2010 when the Aichi doctrine was adopted, which again reinstated the 120+30 day periods as mandatory and
jurisdictional (CIR v. Mirant Pagbilao Corp., G.R. No. 180434, January 20, 2016).
Exception to the mandatory and jurisdictional nature of the 120+30 day period (BIR Ruling No. DA-
489-03 dated December 10, 2003)
1. During the effectivity of BIR Ruling No. DA-489- 03

2. BIR Specific Ruling which misleads a particular taxpayer to prematurely file a judicial clam
with the CTA;
260
VALUE ADDED TAX

As an exception to the mandatory and jurisdictional 120+30 day period, it was emphasized that from the time
of issuance of BIR Ruling No. DA-489-03 on December 10, 2003 up to its reversal by the Supreme Court in the
Aichi case on October 6, 2010, taxpayers/claimant need not wait for the lapse of 120-day period before it
could seek judicial relief with the CTA by way of Petition for Review (RMC 54- 2014).
Before and after the aforementioned period (i.e., December 10, 2003 to October 6, 2010), the
observance of the 120-day period is mandatory and jurisdictional to the filing of judicial claim for refund
of excess input VAT (CE Luzon Geothermal Power Co., Inc. v. CIR, G.R. No. 200841-42, August 26, 2015).
There is no need for a taxpayer to specifically invoke BIR Ruling No. DA-489-03 to benefit from the same. As
long as the judicial claim was filed between December 10, 2003 and October 6, 2010, then the taxpayer would
not be required to wait for the lapse of 120-day period (CIR v. Air Liquide Phils. Inc., G.R. No. 210646, July 29,
2015).
Remedy in case of CIR’s inaction within 􏰄􏰂􏰃-day period or CTA’s denial of claim for TCC/ tax refund
1. CIR’s inaction - The taxpayer may also appeal to the CTA within 30 days after the lapse of 120 days
from the submission of the complete documents, if no action has been taken by the Commissioner.
2. CTA’s denial -The taxpayer may appeal the full or partial denial of the claim to the Court of Tax
Appeal (CTA) within 30 days from the receipt of said denial, otherwise the decision shall become
final.
Q: Gangwam Corporation (GC) filed its quarterly tax returns for the calendar year 2012 as follows:
First quarter - April 25, 2012 Second quarter - July 23, 2012 Third quarter - October 25, 2012 Fourth
quarter - January 27, 2013
On December 22, 2013, GC filed with the Bureau of Internal Revenue (BIR) an administrative claim for
refund of its unutilized input Value- Added Tax (VAT) for the calendar year 2012. After several
months of inaction by the BIR on its claim for refund, GC decided to elevate its claim directly to the
Court of Tax Appeals (CTA) on April 22, 2014. In due time, the CTA denied the
tax refund relative to the input VAT of GC for the first quarter of 2012, reasoning that the claim was
filed beyond the two-year period prescribed under Section 112(A) of the National Internal Revenue
Code (NIRC).
a. b.
A:
a.
Is the CTA correct?

Assuming that GC filed its claim before the CTA on February 22, 2014, would your answer be the
same? (2014 Bar)
NO. The CTA is not correct. The two-year period to file a claim for refund refers to the administrative claim
and does not refer to the period within which to elevate the claim to the CTA. The filing of the administrative
claim for refund was timely done because it is made within two years from the end of the quarter when the
zero-rated transaction took place (Section112 (A), NIRC). When GC decided to elevate its claim to the CTA on
April 22, 2014, it was after the lapse of 120 days from the filing of the claim for refund with the BIR, hence,
the appeal is seasonably filed. The rule on VAT refunds is two years to file the claim with the BIR, plus 120 for
the Commissioner to act and inaction after 120 days is a deemed adverse decision on the claim, appealable to
the CTA within thirty (30) days from the lapse of the 120-day period (CIR v. Aichi Forging Company of Asia,
Inc., G.R. No. 184823, October 6, 2010). YES. The two-year prescriptive period to file a claim for refund refers
to the administrative claim with the BIR and not the period to elevate the claim to the CTA. Hence, the CTA
cannot deny the refund for reasons that the first quarter claim was filed beyond the two-year period
prescribed by law. However, when the claim is made before the CTA on February 24, there is definitely no
appealable decision as yet because the 120-day period for the Commissioner to act on the claim for refund
has not yet lapsed. Hence, the act of the taxpayer in elevation the claim to the CTA is premature and the CTA
has no jurisdiction to rile thereon (CIR v. Aichi Forging Company of Asia, Inc., G.R. No. 184823, October 6, 2010).
b.
261
Q: For calendar year 2011, FFF, Inc., a VAT- registered corporation, reported unutilized excess input
VAT in the amount of Pl ,000,000.00 attributable to its zero-rated sales. Hoping to impress his boss,
Mr. G, the accountant of FFF, Inc., filed with the BIR on January 31, 2013 a claim for tax refund/credit.
Not having received any communication from the BIR, Mr. G filed a Petition for Review with the CTA
on March 15,
LAW ON TAXATION
2013, praying for the tax refund/credit of the Pl,000,000.00 unutilized excess input VAT of FFF, Inc.
for 2011.
1. Did the CTA acquire jurisdiction over the Petition of FFF, Inc.?
2. Discuss the proper procedure and applicable time periods for administrative and judicial
claims for refund/credit of unutilized excess input VAT. (2015 Bar)
A:
1. NO. The CTA has not acquired jurisdiction over
the Petition of FFF, Inc. because the juridical claim has been prematurely filed on March 15, 2013.
The Supreme Court ruled that the 30-day period after the expiration of the 120-day period fixed by
law for the Commissioner of Internal Revenue to act on the claim for refund is jurisdictional and
failure to comply would bar the appeal and deprive the CTA of its jurisdiction to entertain the appeal.
In this case, Mr. G filed the administrative claim on January 31, 2013. The petition for review should
have been should have been filed on June 30, 2013. Filing the judicial claim on March 15, 2013 is
premature, thus the CTA did not acquire jurisdiction.
2. The administrative claim must be filed with the CIR within the two-year prescriptive period. The
proper reckoning period date for the two- year prescriptive period is the close of the taxable quarter
when the relevant sales were made. However, as an exception, are claims applied only from June 8,
2007 to September 12, 2008, wherein the two-year prescriptive period for filing a claim for tax
refund or credit of unutilized input VAT payments should be counted from the date of filing of the
VAT return and payment of the tax.
The taxpayer can file a judicial claim in one of two ways: (1) file the judicial claim within thirty days
after the Commissioner of Internal Revenue denies the claim within the 120-day period, or (2) file
the judicial claim within 30 days from the expiration of the 120-day period if the Commissioner does
not act within the 120-day period.
As a general rule, the 30-day period to appeal is both mandatory and jurisdictional. As an exception,
premature filing is allowed only if filed between December 10, 2003 and October 5, 2010, when the
BIR Ruling No. DA-489-03 was still in force.
Q: X Corporation enjoys a blanket tax exemption under PD 1869 (the Charter creating PAGCOR). X
rents a building from Y where it operates its casino activities. Y passes to X the VAT on lease as
required by law. X refused to pay invoking its blanket tax exemption. Y paid the subject taxes for fear
of the legal consequences of non- payment of the tax to the BIR. Thereafter, albeit belatedly Y realized
it should not have paid because the transactions it had with X is subject to “zero-rated” VAT.
Immediately, Y filed an administrative claim for tax refund with the CIR, but the latter failed to resolve
in favor of Y. Is the refusal of the CIR on Y’s claim for refund valid? Reason.
A: NO. The blanket tax exemption of X under PD 1869 applies to both direct and indirect taxes that extend to
entities and individuals dealing with it in its casino operations. Considering that Y paid the tax under a
mistake of fact and was not aware at the time of payment that the transactions it has with X is “zero-rated”,
the invalid payment can be recovered or refunded. The principle of solutio indebiti applies to the Government
as well, the basis thereto is grounded upon the right of recovery of money paid through misapprehensions of
facts belongs in equity and in good conscience to the person who paid it and the government cannot enrich
itself at the expense of another (CIR v Acecite (Phils.) Hotel Corporation, 516 SCRA 93).
Difference between Sec. 112 on refund for VAT and Sec. 229 on refund of other taxes
SEC. 112 (VAT) SEC. 229 (OTHER TAXES)
Period is 2 years after the close of the taxable quarter when the sales Period is 2 years from the date of
were made payment of the tax
The 30-day period of appeal to the CTA need not necessarily fall within the
Period to file an administrative
two-year prescriptive period, as long as the administrative claim before
claim before the CIR AND judicial
the CIR is filed within the two-year prescriptive period. This is because
claim with the CTA must fall
Sec. 112 (D) of the 1997 NIRC mandates that a taxpayer can file the judicial
within the 2 year prescriptive
claim: (1) only within thirty days after the Commissioner partially or fully
period
denies the claim within
262
VALUE ADDED TAX
the 120-day period, or
(2) only within thirty days from the expiration of the 120-day period if the Commissioner does not act
within the 120-day period (CIR v. San Roque Power Corporation, G.R. Nos. 187485, 196113, 197156, February
12, 2013)
Manner of Giving Refund
Refund shall be made upon warrants drawn by the Commissioner or by his duly authorized representative
without the necessity of being countersigned by the Chairman of Commission on Audit (COA). Refund shall be
subject to post audit by COA (Sec 112(D) NIRC).
1. A VAT invoice for every sale, barter or exchange of goods or properties; and
2. A VAT official receipt for every lease of goods or properties, and for every sale, barter or exchange of
services.
Only VAT-registered persons are required to print their TIN followed by the word "VAT" in their invoice or
official receipts. Said documents shall be considered as a "VAT Invoice" or VAT
Information required to be indicated on the VAT invoice or VAT official receipts
1. A statement that the seller is a VAT-registered person, and the taxpayer's identification number
(TIN);
2. The total amount which the purchaser pays or is obligated to pay to the seller with the indication that
such amount includes the VAT: Provided that:
1. The amount of the tax shall be shown as a separate item in the invoice or receipt;
NOTE: Under R.R. 18-2011 (November 21, 2011), in case of failure to indicate the VAT as a
separate item in the sales invoice or official receipt, a fine of not less than P1,000 but not
more than P50,000 shall, upon conviction, be collected for each act or omission in addition to
imprisonment of not less than 2 years but not more than 4 years.
2. If the sale is exempt from value-added tax, the term "VAT-exempt sale" shall be written or
printed prominently on the invoice or receipt;
3. If the sale is subject to 0% VAT, the term "zero-rated sale" shall be written or printed
prominently on the invoice or receipt;
4. If the sale involves goods, properties or services some of which are subject to and some of
which are VAT zero-rated or VAT- exempt, the invoice or receipt shall clearly indicate the
breakdown of the sale price between its taxable, exempt and zero-rated components, and the
calculation of the value-added tax on each portion of the sale shall be shown on the invoice
or receipt: "Provided, That the seller may issue separate invoices or receipts for the taxable,
exempt, and zero-rated components of the sale.
3. The date of transaction, quantity, unit cost and description of the goods or properties or nature of the
service; and
Summary of Rules
Any VAT-registered person, whose sales are zero- rated or effectively zero-rated may, within two (2) years after the close
of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable
input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been
applied against output tax, with the appropriate BIR Office-Large Taxpayer or RDO having jursidiction over the principal
place of business of the taxpayer.
Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty
(120) days from the date of submission of compete documents in support of the application
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act
on the application within the period prescribed above, the taxpayer affected may, within thirty (30) days from the receipt
of the decision denying the claim or after the expiration of the one hundred twenty day-period, appeal the decision or the
unacted claim with the Court of Tax Appeals
INVOICING REQUIREMENTS
Invoicing requirements, in general A VAT-registered person shall issue:

263
4. In the case of sales in the amount of P1,000 or more where the sale or transfer is made to a VAT-registered
person, the name, business style, if any, address and taxpayer identification number (TIN) of the purchaser,
customer or client (Sec. 113[B], NIRC).
NOTE: The appearance of the word “zero rated” on the face of invoices covering zero rated sales prevents
buyers from falsely claiming input VAT from their purchases when no VAT was actually paid. If, absent such
word, a successful claim for input VAT is made, the government would be refunding money it did not collect.
Further, the printing of the word “zero-rated” on the invoice helps segregate sales that are subject to 12%
VAT from those sales that are zero-rated. Unable to submit the proper invoices, taxpayer has been unable to
substantiate its claim for refund (Eastern Telecommunication Phils. Inc. v. CIR, G.R. No. 183531, March 25,
2015).
The failure to print the word “zero-rated” in the invoice/receipts is fatal to a claim for credit/refund of input
VAT on zero rated sales (JRA Philippines, Inc. v. CIR, G.R. No. 177127, October 11, 2010).
Invoicing requirements in deemed sale transactions
In the case of Sec. 106, (B)(1) [transfer, use or consumption not in the ordinary course of business of goods or
properties originally intended for sale or for use in the ordinary course of business], a memorandum entry in the
subsidiary sales journal to record withdrawal of goods for personal use is required.
In the case of Sec. 106 (B)(2), [distribution or transfer to shareholders or creditors] and Sec. 106 (B)(3)
[consignment of goods if actual sale is made within 60 days after the date of such consignment],an invoice shall
be prepared at the time of the occurrence of the transaction, which should include, all the information
prescribed in Sec. 113-1. The data appearing in the invoice shall be duly recorded in the subsidiary sales
journal. The total amount of “deemed sale” shall be included in the return to be filed for the month or quarter.
In the case of Sec. 106(B)(4), [retirement or cessation of business], an inventory shall be prepared and
submitted to the RDO who has jurisdiction over the taxpayer’s principal place of business not later than 30
days after retirement or cessation from business.
An invoice shall be prepared for the entire inventory, which shall be the basis of the entry into the subsidiary
sales journal. The invoice need not enumerate the specific items appearing in the inventory, but it must show
the total amount. It is sufficient to just make a reference to the inventory regarding the description of the
goods. However, the sales invoice number should be indicated in the inventory filed and a copy thereof shall
form part of this invoice. If the business is to be continued by the new owners or successors, the entire
amount of output tax on the amount deemed sold shall be allowed as input taxes. If the business is to be
liquidated and the goods in the inventory are sold or disposed of to VAT-registered buyers, an invoice
or instrument of sale or transfer shall to prepared citing the invoice number wherein the tax was imposed on
the deemed sale. At the same time the tax paid corresponding to the goods sold should be separately
indicated in the instrument of sale (Sec. 4.113-2, R.R. 16-2005).
Consequences of issuing erroneous VAT invoice or VAT official receipt
1. In case of non-VAT registered person who issues a VAT invoice/receipt shall be held liable for:
1. Payment of percentage tax if applicable;
2. Payment of VAT without input tax;
3. 50% surcharge on tax due as provided for
under Sec. 248(B); and
2. The purchaser shall be allowed to recognize an input tax credit provided that the invoice/official
receipt contains the required information under Sec. 110 on Tax Credits.
3. In case a VAT-registered who issues a VAT invoice/official receipt for a VAT-exempt sale without the
words “VAT Exempt Sale,” the transaction shall become taxable and the issuer shall be liable to pay VAT
thereon. The purchaser shall be entitled to claim an input tax credit on his purchase.
FILING OF RETURN AND PAYMENT

Persons required to file a VAT Return
1. Every person or entity who in the course of trade or business, sells or leases goods, properties, and
services subject to VAT, if the aggregate amount of actual gross sales or receipts exceed P1,919,500
for any 12- month period
2. A person required to register as VAT taxpayer but failed to register
3. Any person who imports goods
264
LAW ON TAXATION
4. Professional practitioners whose gross fees exceed P1,919,500 for any 12-month period.
Filing of return
Every taxable person is required to account for and pay VAT by reference to each accounting period
consisting of three months, referred to as a taxable quarter.
 - A VAT declaration for the month (form 2550M) must be filed within 20 days after the end of the
month concerned
 - A VAT return covering the amount of his gross sales or receipts and purchases for the prescribed
taxable quarter (for 2550Q) must be filed by the taxable person within 25 days following the close of
the quarter to which it relates (Sec. 114, NIRC)
Only one consolidated return shall be filed by the taxpayer for his principal place of business or head
office and all branches (Sec. 114[A], NIRC).
Payment of VAT
VAT must be paid every month.
1. Cancellation of VAT registration - Any person, whose registration has been cancelled in accordance
with Section 236, shall file and pay a return within 25 days from the date of cancellation of
registration;
NOTE: Under Section 236 of NIRC, a VAT 􏰀 registered person may cancel his registration for VAT if:
a. He makes written application and can demonstrate to the commissioner’s satisfaction that his
gross sales or receipts for the following twelve (12) months, other than those that are exempt under
Section 109(A) to (U), will not exceed P1,919,500 or
b. He has ceased to carry on his trade or business, and does not expect to recommence any trade or
business within the next twelve (12) months.
The cancellation of registration will be effective from the first day of the following month (Sec. 236
(F), NIRC).
2. VAT on sale of refined sugar- payable in advance by the owner/seller to the BIR through the
sugar refinery. The advance payment must be made prior to or upon the issuance of the
refined sugar release order or similar instruments. However, the owner-seller may withdraw
his refined sugar from the sugar mill or refinery warehouse with advance payment of the tax
if it will not be locally sold but rather for use exclusively as raw material in the manufacture of
sugar-based food products intended for zero-rated export (VAT Ruling No. 198-90, September
14, 1990).
3. VAT on sale of flour 􏰀 The VAT on the sale of flour milled from imported wheat shall be paid in
advance prior to the withdrawal of the imported wheat from customs custody based on the
formulate prescribed in the regulation (Rev. Regs. No. 29-2003, October 30, 2003). Purchases
by flour millers of imported wheat from traders shall also be subjected to advance VAT and
shall be paid by the flour miller prior to delivery (Sec. 4.114-1 (B) (2), Rev. Regs. No. 16- 05).
Where to File the Return and Pay the Tax GR: It shall be filed with and the tax paid to
1. An Authorized Agent Bank (AAB);

2. Revenue Collection Officer (RCO); or
3. Duly authorized city or municipal
VALUE ADDED TAX

FORM 2550- M FORM 2550-Q
Monthly sales and/or Quarterly sales and/or receipts within 25 days after the close of each
receipts within 20 days taxable quarter.
following the end of month.
Scop
e The VAT payable for each calendar quarter shall be reduced by the total
Accomplished only for each amount of taxes previously paid for the preceding 2 months and/or the
of the first 2 months of each sum of the allowance excess input tax carried over and the VAT
taxable quarter. withheld by the government.
Deadline
20th day of following month
25th day of following calendar quarter

Other special transactions:
Treasurer, where such Treasurer is
265
LAW ON TAXATION
1. Within the Philippines; and
2. Located within the revenue district where the taxpayer is registered or
required to register (Sec. 114[B]).
XPN: As the Commissioner otherwise permits.
Rule regarding the withholding of Final VAT on sales to government
The Government or any of its political subdivisions, instrumentalities or agencies, including government
owned or controlled corporations (GOCCs) shall, before making payment on account of its purchase of goods
and/or services taxed at 12% shall deduct and withhold a final VAT of 5% of the gross payment. The
payment for lease or use of properties or property rights to nonresident owners shall be subject to 12%
withholding tax at the time of payment. For purposes of this section, the payor or person in control of the
payment shall be considered as the withholding agent (Sec. 114(C), NIRC).
NOTE: The five percent (5%) final VAT withholding rate shall represent the net VAT payable to the seller
The remaining seven percent (7%) effectively accounts for the standard input VAT for sales of goods or
services to government or any of its political subdivisions, instrumentalities or agencies including GOCCs, in
lieu of the actual Input VAT directly attributable or ratably apportioned to such sales.
Should actual input VAT attributable to sale to government exceed seven percent (7%) of gross payments, the
excess may form part of the seller’s expense or cost.
If actual input VAT attributable to sale to government is less than 7% of gross payment, the difference must
be closed to expense or cost.
The government or any of its political subdivisions, instrumentalities or agencies, including GOCCs, as well as
private corporations, individuals, estates and trusts, whether large or non-large taxpayers, shall withhold ten
percent (12%) VAT with respect to the following payments:
1. Lease or use of properties or property rights owned by non-residents;
2. Services rendered to local insurance companies, with respect to reinsurance premiums payable to
non-residents; and
3. Other services rendered in the Philippines by non-residents.
VAT withheld and paid for the non-resident recipient (remitted using BIR Form No. 1600), which VAT is
passed on to the resident withholding agent by the non-resident recipient of the income, may be claimed as
input tax by said VAT-registered withholding agent upon filing his own VAT Return, subject to the rule on
allocation of input tax among taxable sales, zero-rated sales and exempt sales. The duly filed BIR Form No.
1600 is the proof or documentary substantiation for the claimed input tax or input VAT.
Nonetheless, if the resident withholding agent is a non-VAT taxpayer, said passed-on VAT by the non-
resident recipient of the income, evidenced by the duly filed BIR Form No. 1600, shall form part of the cost of
purchased services, which may be treated either as an "asset" or "expense", whichever is applicable, of the
resident withholding agent.
The VAT withheld shall be remitted within 10 days following the end of the month the withholding was made
(Sec. 4.114-2, RR. 16-2005).
NOTE: It was held in the case of AbakadaGuroPartylist v. Ermita,
WITHHOLDING OF FINAL VAT ON SALES TO GOVERNMENT
G.R. No. 168056,
September 1, 2005, that the since it has not been
shown that the class subject to the 5% final withholding tax has been unreasonably narrowed,
there is no reason to invalidate the provision. It
applies to all those who deal with the government.

266
PERCENTAGE TAX
PERCENTAGE TAXES (CONCEPT AND NATURE)
Percentage tax is a tax imposed on sale, barter, exchange or importation of goods, or sale of services
based upon gross sales, value in money of receipts
derived by the manufacturer, producer, importer or seller measured by certain percentage of the gross
selling price or receipts. If the transaction is subject
to OPT, it is no longer subject to VAT. Nonetheless,
OPT as well as VAT may be imposed together with
excise taxes (Tabag, 2015).

As a rule, VAT is imposed on every sale, barter, or
exchange of goods or services and on importations. However, there are instances where the same does
not apply because the transaction is subject to other
percentage taxes (OPT) as required by the NIRC.
Tax Rates
Persons exempt from VAT under Section 109 (W)

Domestic carriers and keepers of garages
Gross Receipts on sale or lease of goods, properties 3% or services

Gross Receipts on transport of passengers by land 3% (except those thru animal drawn two-wheeled
vehicles)
Gross Receipts from transport of cargo from the 3% Philippines to another country
Gross Receipts 2%
Gross Receipts 10%
􏰟 Maturity period is five years or less 5% 􏰟 Maturity period is more than five years 1% On dividends and
equity shares and net income of 0% subsidiaries
On net trading gains within the taxable year of 7% foreign currency, debt securities, derivatives and
other similar financial instruments
Interest, commissions and discounts and all other 5% items treated as gross income under the NIRC, as
amended
Interest, commissions and discounts from lending activities, as well as income from financial leasing on the
basis of remaining maturities of instruments:
􏰟 Maturity period is five years or less 5%
􏰟 Maturity period is more than five years 1% Total premiums collected 2%
COVERAG
BASIS TAX RATE
E
International Carriers: International air/shipping carriers doing business in the Philippines Franchise
Grantees:
Gas and water utilities
Overseas dispatch, message or conversation originating from the Philippines

Banks and non-bank financing intermediaries performing quasi- banking functions
Radio and television broadcasting companies whose annual gross receipts of the preceding Gross
3%
year do not exceed P10,000,000 and did not opt to register as VAT taxpayer Receipts
On interest, commissions and discounts from lending activities as well as income from financial leasing, on
the basis of remaining maturities of instruments maturities of instruments from which receipts are derived:
On royalties, rentals of property, real or personal, profits from exchange and all other items treated as
7%
gross income under Sec. 32 of the NIRC, as amended
Other non-bank financial intermediaries

Life Insurance Companies (except
purely cooperative companies or
associations)
Agents of foreign insurance companies (except reinsurance premium):
267
LAW ON TAXATION
TAX
COVERAGE BASIS
RATE
Insurance agents authorized under the Insurance Code to procure policies of Total premiums
4%
insurance for companies not authorized to transact business in the Philippines collected
Owners of property obtaining Total premiums paid 5% insurance directly with foreign
insurance companies
Proprietor, lessee or operator of the following:
Cockpits
Boxing exhibitions
Professional basketball games Jai-alai and race track (operators shall withheld tax on winnings) Winnings on
horse races
Gross receipts 18%
Gross receipts 10% Gross receipts 15% Gross receipts 30%
􏰇 Winnings or 'dividends' 10% 􏰇 Winnings from double forecast/quinella 4%
and trifecta bets

􏰇 Prizes of owners of winning race horses 10%
Cabarets, Night or Day Clubs videoke bars, karaoke bars, karaoke televisions, karaoke Gross
18%
boxes and music lounges receipts
Sale, Barter, Exchange of Shares of Stock Listed and Traded through the Local Stock Exchange or Through
Initial Public Offering
Sale, barter, exchange or other disposition of shares of stock listed and traded through the Local Stock
Exchange other than the sale by a dealer of securities [Sec. 127 (A)]
Gross selling price or gross value in money
.60% of gross selling price or 6/10 of 1%

Gross selling price or gross value in money
Proportion of disposed shares to total outstanding shares after the listing in the local stock exchange:
Sale, barter or exchange or other disposition through initial public offering (IPO) of shares of stock in closely-
held corporations [Sec. 127 (B)]
(www.bir.gov.ph)
 􏰇 Up to 25% 4%
 􏰇 Over 25% but not over 33 1/3% 2%
 􏰇 Over 33 1/3% 1%

Vat

Uploaded by

Copyright:

Available Formats

Vat

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Vat

Uploaded by

Copyright:

Available Formats

CONCEPT

VAT is a tax on consumption levied on the sale,

The current VAT rate is 12% in lieu of R.A. 10963.

Who is liable to pay the VAT?

Classification of transactions under the VAT system

Advantages in imposing VAT

9. National tax - Imposed by the national government.

Q: Does the Constitution prohibit regressive taxes?

Q: How is the regressive effect of VAT minimized?

ELEMENTS OF VAT-TAXABLE TRANSACTIONS

1. It must be done in the ordinary course of trade or business;

In the course of trade or business (Rule of Regularity)

Two conditions of “in the ordinary course of trade or business” (CR)

There should be:

that a transaction is conducted for profit; and

1. Non-resident alien who perform services in the

Profit element not required for VAT to be imposed

Q:Commonwealth Management and Services Corporation (COMASERCO) is an affiliate of Philippine

UN I V E R S I T Y O F SA N T O TO M A S FACULTY OF CIVIL LAW

IMPACT AND INCIDENCE OF TAX

VAT as an Indirect Tax

pays it to the government.

as part of the purchase price.

Effect of VAT being an indirect tax on Exemptions

Q: Is VAT a withholding tax?

VALUE ADDED TAX

TAX CREDIT METHOD

provided in the above formula.

Exception to the destination principle

Vatable gross sales or receipts (112,000/1.12 to get 100%)

Output VAT (12% of P100,000)

DESTINATION PRINCIPLE / CROSS BORDER DOCTRINE

Total selling price (equivalent to 112%)

Domestic purchase of good (equivalent to 112%)

Vatable gross purchases (56,000/1.12 to get 100%)

Input VAT (12% of P50,000)

To compute for the VAT payable: Output VAT

Refer to discussion on Output and Input Tax as

Q: SMZ, Inc., is a VAT-registered enterprise engaged in the general construction business. HP

Persons liable to pay VAT, in general

1. Any person who, in the course of trade or business,

a. sells, barters, exchanges or leases goods or properties, or

Special considerations to the following persons:

Taxable persons must register for VAT purposes

Failure to register as VAT taxpayer

Persons NOT LIABLE to pay VAT

from payment of VAT or any OPT (RMC No. 7- 2014).

Summary of Rules for VAT registration

Gross sales exceed P1,919,500

Gross sales do not exceed P100,000 (marginal income earners

UN I V E R S I T Y O F SA N T O TO M A S FACULTY OF CIVIL LAW

Allowable deductions from gross selling price

The above are discussed in details below.

VAT ON SALE OF GOODS OR PROPERTIES

VAT is imposed and collected on

1. every sale, barter or exchange, or

Gross Selling Price

Gross selling price in case of sale or exchange of real property

 - determined and granted at the time of sale,