Tax 302 – Business and Transfer Tax

Prepared by: Mark Paul I. Ramos

MODULE 2
Classification of VAT Transactions
VAT on Sale of Goods or Properties

INTRODUCTION
This module tackles the application of Value-Added Taxes on certain
transactions, in particular VAT on sale of goods or properties. This will define what
goods or properties are subject or exempted from VAT, kinds of VAT treatments
applicable, its output taxes on the side of the seller and its input taxes on the side of
the buyer.

INTENDED LEARNING OUTCOMES

ILO 1 – Be knowledgeable on the VAT on sale of goods or properties
ILO 2 – Understanding of VAT principles on certain transactions, and rules on output
tax, input tax and VAT payable
ILO 3 – Application of those VAT principles in computing and problem solving

Tax rate and Tax base

There shall be levied, assessed, and collected on every sale, barter or
exchange of goods or properties, a value-added tax equivalent to 12% of the gross
selling price or gross value in money of the goods or properties sold, bartered or
exchanged, such tax to be paid by the seller or transferor.

The tax base refers to amount on which the 12% rate of VAT is applied.

Thus, if the seller sells goods (in cash or on account) amounting to P100,000
(excluding the tax), this amount will serve as the tax base in computing the tax.

The amount of value-added tax (output tax on the seller and input tax on the
buyer) is computed as follows:

1. If the amount includes the tax

VAT = P112,000 x (12%/112%) = P12,000
or
VAT = P112,000 x 3/28 = P12,000

2. If the amount does not include the tax

VAT = P100,000 x 12% = P12,000

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 Tax 302 – Business and Transfer Tax
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Common query: For purposes of computing the VAT, when shall we multiply
the tax base by 12% or by 3/28 (or 12%/112%)?

Answer: The tax base shall be multiplied by 3/28 (or 12%/112%) if the
problem states that the amount is “inclusive of tax”, “total invoice price”, “VAT
inclusive” or other similar terms.
It shall be multiplied by 12% if the problem indicates that the amount is
“taken from the books”, “exclusive of tax”, “VAT/tax not included”, “gross selling
price”, “gross receipts” and other similar items.

Meaning of “goods or properties”

The term “goods or properties” shall mean all tangible and intangible objects
which are capable of pecuniary estimation and shall include:
a. Real properties held primarily for sale to customers or held for lease in the
ordinary course of trade or business
b. The right or the privilege to use patent, copyright, design or model, plan,
secret formula or process, goodwill, trademark, trade brand or other life
property or right
c. The right or the privilege of use in the Philippines of any industrial,
commercial, or scientific equipment
d. The right or the privilege to use motion picture films, films, tapes, and
discs, and
e. Radio, television, and satellite transmission and cable television time

Meaning of “gross selling price”

The term “gross selling price” 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
the value-added tax.

The excise tax, if any, on such goods or properties shall form part of the gross
selling price (Sec 106, NIRC).

In the case of sale, barter or exchange of real property subject to VAT, gross
selling price shall mean the consideration stated in the sales document or zonal
value, whichever is higher. In the absence of the zonal value, gross selling price
refers to the market value shown in the latest declaration or the consideration,
whichever is higher.

Deduction from gross selling price

The following shall be allowed as deductions from gross selling price in
computing the tax base during the month or quarter:

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 Tax 302 – Business and Transfer Tax
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a. Sales returns and allowances – for which a proper credit was made during
the month or quarter to the buyer for sales previously recorded as taxable
sales
b. Sales discounts – 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

Sales discount indicated in the invoice at the time of sale, the grant of which is
not dependent upon the happening of a future event, may be excluded from the
gross sales within the same month/quarter it was given.

Illustration
The following data were taken from the books of Tiberio Company during the month
of April of the current year:
Cash Sales P453,200
Sales on account 565,800
Sales returns and allowances 31,548
Sales discount 35,250

Required: Compute for the gross selling price and the tax base.
Cash Sales 453,200
Sales on account 565,800
Gross Selling Price 1,019,000

Less: Sales returns and allowances 31,548

Sales Discount 35,250 66,798
Tax Base 952,202

1. Gross selling price includes all sales made during the period whether cash
sales or sales on account
2. Sales discounts shall only be allowed as deduction from gross selling price if it
is indicated in the sales invoice
3. In the absence of sales returns and allowances and sales discounts, the tax
base shall be the gross selling price

Determination of the tax

The 12% tax shall be computed by multiplying the total amount in the invoice
by 3/28 (or 12%/112%).

The VAT payable is determined by deducting the input tax from the output tax.
Thus, the formula in computing VAT payable is:

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 Tax 302 – Business and Transfer Tax
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Output Tax xx
Less: Input tax xx
VAT Payable xx

Output tax is defined as the value-added tax due on the sale or lease of
taxable goods or properties or services by any person registered or required to
register under the Tax Code (Sec 110, NIRC). It is also called Output VAT.

Input tax refers to value-added tax from or paid by a VAT registered person in
the course of his trade or business on importation of goods or local purchase of
goods or services, including lease or use of property, from a VAT registered person.
It is also called Input VAT.

VAT payable refers to the excess of the output tax over the allowable input
tax. In the case of importation, it is the value-added tax due on such importation.

Transactions deemed sale

In transactions deemed sale, no actual sale of goods took place, but such
transactions are subject to VAT. The rationale is to recapture the VAT that was
already claimed as input tax.

Without deemed sale provisions, the amount of goods disposed of under the
transactions will be considered VAT exempt because they are transferred for
purposes other than sale. It being the case, the transaction will not result in output
tax but the input tax on purchases would be credited against output taxes on the sale
of other goods.

Illustration During the year, Quence Footstep, a shoestore, purchased 100 pairs of
shoes from its distributor. Each pair is worth P784 and sold by the shoestore at
P1,120. During the month, the engagement decided to give one pair of shoes each
to the ten salesladies. All the other 90 pairs were sold by the store.

Required:
1. VAT Payable by Quence Footstep
Output tax (P1,120 x 100pairs) x 3/28 = P12,000
Less: Input tax (P784 x 100 pairs) x 3/28= 8,400
VAT Payable P 3,600

2. VAT payable assuming that the distributions of shoes to salesladies

are not deemed sale transactions
Output tax (P1,120 x 90 pairs) x 3/28 = P10,800

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 Tax 302 – Business and Transfer Tax
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Less: Input tax (P784 x 100 pairs) x 3/28= 8,400
VAT Payable P 2,400

3. For whose advantage are deemed sale transactions – to the

taxpayer or to the government?
It is advantageous to the government because it can recapture
the input taxes that are creditable from output taxes of the other
goods that were sold by the business.

As seen in Solution 1, in transaction deemed sale the output tax

is P12,000 which is based on the entire pairs of shoes.

However, if the distribution of shoes to salesladies are not

considered as deemed sale transactions, the output tax would
only be P10,800 but the input tax remains at P8,400. Hence the
VAT payable to the government will amount only to P2,400
instead of P3,600.

The following transactions are deemed sale for VAT purposes:

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.

2. Distribution or transfer to:

a. Shareholders or investors as share in the profits of the
VAT-registered persons, or
b. Creditors in payment of debt or obligation

3. Consignment of goods if actual sale is not made within 60 days following

the date such goods were consigned. Those returned by the consignee
within the 60-day period are not deemed sold; and

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. Goods in hand refer to capital
goods, stock in trade and supplies and materials.

The following circumstances shall, among others, give rise to transactions

deemed sale:

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 Tax 302 – Business and Transfer Tax
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a. Change in ownership in the business. There is a change of
ownership in the business when a single proprietor incorporates, or
the proprietor of a single proprietorship sells his entire business
b. Dissolution of a partnership and creation of a new partnership which
takes over the business

On transactions falling under (1), (2), and (3), the output tax shall be based
on the market value of the goods deemed sold.

However, on transactions falling under (4), the tax base shall be the
acquisition cost or the current market price of the goods, whichever is
lower.

RR 16-2005 as amended by RR 4-2007 provides that the VAT provided

above shall apply to goods or properties originally intended for sale or use
in the business, and capital goods which are existing as the occurrence of
the following:
1. Change of business activity from VAT taxable status to VAT-exempt
status. An example is a VAT-registered person engaged in a taxable
activity (wholesaler/retailer) who decides to discontinue such activity and
engages instead in any other business not subject to VAT.
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 three (3) consecutive years from
the time of registration by a person who voluntarily registered despite
being exempt under Sec. 109 (2) of the Tax Code.
4. Approval of a request for cancellation of registration of one who
commenced business with the expectation of gross sales or receipts
exceeding P3,000,000, as amended, but who failed to exceed this amount
during the first twelve months of operation.

Illustration Antonio is engaged in a merchandising business. His sales invoice and

other data during the month of January are shown below:
Cash Sales 770,000
Sales return on cash sales 55,000
Account sales 495,000
Goods consigned:
January 10 of the current year 265,000
November 10 of the preceding year 16,500
Goods taken for personal use 18,150
Goods taken as payment as creditors 25,850

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 Tax 302 – Business and Transfer Tax
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Purchases of merchandise 1,008,000
Purchase of supplies 89,600
Telephone bills on domestic calls 3,360

Required: 1. Output Tax

2. Input tax
3. VAT Payable

Solution

Cash sales, net (770,000 – 55,000) 715,000

Account Sales 495,000
Consigned Goods 16,500
Deemed Sale:
Goods for personal use 18,150
Payment for creditors 25,850 44,000
TOTAL 1,270,500
Multiply by 3/28
Output Tax 136,125

Less: Input Tax

Merchandise 1,008,000
Supplies 89,600
Telephone bill 3,360
TOTAL 1,100,960
Multiply by 3/28
Input Tax 117,960
VAT PAYABLE 18,165

Zero-rated (0%) transactions

The tax rate imposed on taxable sales of goods or properties is 12% except
on some transactions that are zero-rated (0%).

Zero-rated transactions are still taxable transactions, but the rate has been set
at zero. Although the rate is zero, it is still a rate of tax chargeable against the
purchaser. It does not charge VAT on the output.

Any VAT-registered person, whose sales are zero-rated may, within 2 years
after the close of the taxable quarter when the sales were made, apply for the

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issuance of a tax credit certificate or refund of creditable input tax, to the extent that
such input tax has not been applied against output tax.

Note that unutilized creditable input taxes attributable to zero-rated sales can
only be recovered through the application for refund or tax credit.

There is no provision in the Tax Code which provided for another mode of
recovering unapplied input taxes, particularly as deductible expense for income tax
purposes.

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.

The following sales by VAT-registered persons are zero-rated:

a. Export sales
b. Sales to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively
subject such sales to zero rate

Purpose of Zero-Rating
The zero-rated seller becomes internationally competitive by allowing the
refund or credit of input taxes that are attributable to export sales (CIR vs Seagate
Technology Phils., G.R. No. 153866, Feb 11, 2005).

Rationale for Zero-rating of export sales:

The Philippine VAT system adheres to the “Cross Border Doctrine” (also
known as destination principle), according to which, not VAT shall be imposed to
form part of the cost of the goods destined for consumption outside of the territorial
border of the taxing authority [CIR vs Toshiba Information Equipment (Phils.), Inc.,
G.R. No. 150154, Aug 9, 2005].

Formula:
Gross Sales (regardless of shipping Pxx
arrangements)
Multiply by VAT rate 0%
Output VAT P0
Input VAT (xx)
VAT Payable (refundable) (Pxx)

The input VAT attributable to zero-rated (0%) sale may be:

a. Refunded; or

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 Tax 302 – Business and Transfer Tax
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b. Claimed as deduction/tax credit against output VAT on domestic sales;
or
c. Claimed as tax credit (TCC) against any other internal revenue taxes.

Refund of Input VAT on Zero-rated (0%) sale (Sec 122 NIRC; RR 13-2018)
A vat registered person whose sales of goods, properties or services are zero-rated
or effectively zero-rated may apply for the issuance of a tax refund of input vat attributable
on such sales. The input vat that may be subject of the claim shall exclude the portion of the
input vat that has been applied against the output vat. The application should be filed within
two (2) years after the close of the taxable quarter when such sales were made.

In case of zero-rated sales under Secs. 106(A)(2)(a)(1) and (3), Secs. 108(B)(1) and
2 of the Tax Code, the payments for the sales must have been made in acceptable foreign
currency duly accounted for in accordance with BSP rules and regulations.

Where the taxpayer is engaged in both zero-rated or effectively zero-rated sales and
in taxable (including sales subject to final withholding vat) or exempt sales of goods,
properties or services, and the amount of creditable input vat due or paid cannot be directly
or entirely attributed to any one of the transactions, only the proportionate share of input vat
allocated to zero-rated or effectively zero rated sales can be claimed for refund or issuance
of a tax credit certificate (TCC).

In case of person engaged in the transport of passenger and cargo by air or sea
vessels from the Philippines to a foreign country, the input vat shall be allocated ratably
between his zero rated sales and non- zero rated sales (sales subject to regular rate, subject
to final vat withholding, and vat exempt sales).

Claim for refunds shall be made with appropriate Bureau of Internal Revenue (BIR)
Office [Large Taxpayers Service (LTS)], Revenue District Office (RDO) having jurisdiction
over the principal place of business of the taxpayer. Claims for input vat refund of direct
exporters shall be exclusively filed with the VAT Credit Audit Division (VCAD).

Export Sale by a Non-VAT Registered Entity

Export sale by a non-vat registered entity is a vat-exempt transaction. Under Section
109 of the Tax Code, a vat exempt sale refers to sale of goods, properties or services or the
use or lease of properties that is not subject to VAT (output tax) and the seller/supplier is not
allowed any tax credit of VAT (input tax) on purchases related to such exempt transaction.

Gross Sales Pxx

Multiply by VAT rate N/A *VAT-exempt

Output VAT P0
Input VAT (xx) *not allowed

VAT Payable (refundable) -

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The vat paid by non-vat registered purchasers of goods or services shall be treated
by the purchaser either as part of its operating expense or cost.

Zero-Rated Sale/Export Sale of Goods

The following sales by VAT-registered persons shall be subject to 0% VAT
under Section 106 (A)(2)(a) of the Tax Code, as amended by RA No. 10963,
otherwise known as the TRAIN Law.

1. Sale and actual shipment of goods from the Philippines to a foreign

country, irrespective of any shipping arrangement that may be agreed
upon which may influence or determine the transfer of ownership of the
goods so exported and paid for in acceptable foreign currency or its
equivalent in goods or services, and accounted for in accordance with the
rules and regulations of the Bangko Sentral ng Pilipinas (BSP);

2. Sale and delivery of goods to:

a. Registered enterprises within a separate customs territory as
provided under special laws; and
b. Registered enterprises within tourism enterprise zones as declared
by the Tourism Infrastructure and Enterprise Zone Authority (TIEZA)
subject to the provisions under Republic Act No. 9593 or The
Tourism Act of 2009.

3. Sale of raw materials or packaging materials to a non-resident buyer for

delivery to a resident local export oriented enterprise to be used in
manufacturing, processing, packing or repacking in the Philippines of the
said buyer's goods, paid for in acceptable currency, and accounted for in
accordance with the rules and regulations of the BSP;

4. Sales to Export-Oriented enterprises which the code considers as export

sales at the level of the supplier of raw materials. The sale is considered
zero rated only if the sale of raw materials or packaging materials is made
to an export oriented-enterprise whose export sales exceed seventy
percent (70%) of actual annual production;

5. Export Sales under Executive Order No. 226, otherwise known as the
Omnibus Investment Code of 1987 and other special laws;

6. Sale of goods, supplies, equipment and fuel to persons engaged in

international shipping or international air transport operations.

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 Tax 302 – Business and Transfer Tax
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Export Sale of GOODS under items (2), (3) and (5) above are NOW SUBJECT TO
12% VAT UPON SATISFACTION of the following:
a. Successful establishment and implementation of an enhance refund system that
grants refunds of creditable input tax within 90 days from the filing of the vat
refund application with the BIR; The ninety (90) day period to process and decide,
pending the establishment of the enhanced VAT Refund System shall only be up
to the date of approval of the Recommendation Report on such application for
VAT refund by the Commissioner or his duly authorized representative; Provided;
that all claims for refund/tax credit certificate filed prior to January 1, 2018 will be
governed by the one- hundred (120)-day processing period; and
b. All pending vat refund claims as of Dec. 31, 2017 shall be fully paid in cash by
Dec. 31, 2019.
The Bureau of Internal Revenue issued Revenue Regulation No. 9- 2021 dated June
9, 2021 stating that the transactions previously treated as zero rated (0%) sale of GOODS
for vat purposes under Section 106(A)(2)(a) (3), (4) and (5) are NOW subject to 12% Vat.

RR 9-2021 further emphasized at EFFECTIVE JULY 27, 2021, the revised list of zero
rated (0%) SALE OF GOODS for vat purposes shall be as follows:
1. Sale and actual shipment of goods from the Philippines to a foreign country,
irrespective of any shipping arrangement that may be agreed upon which may
influence or determine the transfer of ownership of the goods so exported and
paid for in acceptable foreign currency or its equivalent in goods or services, and
accounted for in accordance with the rules and regulations of the Bangko Sentral
ng Pilipinas (BSP).

2. Sale of goods, supplies, equipment and fuel to persons engaged in international

shipping or international air transport operations: Provided, that the goods,
supplies, equipment and fuel shall be used exclusively for international shipping
or air transport operations.

Apparently, subparagraph (A)(2)(a)(2) of Section 106 of the Tax Code as amended

by TRAIN law was omitted in the revised list of zero rated (0%) SALE OF GOODS under RR
9-2021, causing confusion as to whether sale and delivery of goods to PEZA registered
entities are now subject to 12% vat or still considered zero rated (0%) sale. Based on RR
9-2021, it is now subject to 12% vat since it was omitted in the revised list of zero rated (0%)
sale of goods enumerated in Section 3 of RR 9-2021.

Section 106(A)(2)(a) (2) provides that the following shall be subject to zero rated (0%
vat):

SALE AND DELIVERY OF GOODS TO:

i. Registered enterprises within a separate customs territory as provided under
special laws; and

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 Tax 302 – Business and Transfer Tax
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ii. Registered enterprises within tourism enterprise zones as declared by the
Tourism Infrastructure and Enterprise Zone Authority (TIEZA) subject to the
provisions under Republic Act No. 9593 or The Tourism Act of 2009.

The humble opinion of the authors on this issue is that, sale of goods to PEZA
registered entities is still subject to 0% vat because the TRAIN Law clearly provided that only
Sections 106(A)(2)(a) (3), (4) and (5) shall be subjected to 12% vat upon satisfaction of
certain conditions described in the preceding page. However, for purposes of discussion
in this book, the provisions of RR 9-2021 were applied.

The Philippine Economic Zone Authority (PEZA) already wrote to Secretary Carlos
Dominguez of the Department of Finance (DOF) seeking clarification fin view of the
confusion caused to PEZA ecozone enterprises of the issuance of RR 9-2021. As of the date
of printing of this book, the DOF is yet to address the said issue.

Illustration The following data reveals the records during the month of Pip
Corporation, a VAT-registered taxpayer:
Domestic sales (invoice amount) 1,064,000
Export Sales FOB shipping point 820,000
Sales of goods to Tirso in Hong Kong, but delivered
to Pipay, a resident (payment was remitted
in dollars by Tirso thru the PNB) 75,000
Purchases of goods sold locally (inclusive of tax) 582,400
Purchases of raw materials on goods exported (net of VAT) 380,000

Required: Compute the VAT payable by Pip Corporation during the month if it
decides to claim as tax credit the input tax corresponding to the export sale.

Solution
Domestic Sales (1,064,000 x 3/28) 114,000
Export sales (820,000 x 0%) -
Foreign currency denominated sales (75,000 x -
0%)
Output Tax 114,000
Less: Input tax
Goods sold locally (582,400 x 3/28) 62,400
Materials on goods exported (380,000 x 45,600 108,000
12%)
VAT Payable 6,000

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NOTES:
1. Export sales are zero rated irrespective of any shipping arrangement that
may be agreed upon (FOB shipping point or FOB destination), which may
influence or determine the transfer of ownership of the goods so exported.
2. Although export sales and foreign currency denominated sales do not
result to any output tax, the input taxes paid on the purchase of such
goods can be credited against the output tax due for the taxable month.
3. The transactions such as export sales and foreign currency denominated
sales must be transacted by a VAT registered taxpayer. If done by
non-VAT registered, the sale is exempt from tax.

Zero-rated transactions and VAT-exempt transactions

It should be noted that zero-rated transactions are not exempt transactions
because while zero-rated are subject to VAT, exempt transactions are not.

Zero-rated transactions refers to sale, lease, barter or exchange of goods,

properties and/or services subject to VAT at the rate of 0%, while a VAT-exempt
transaction refers to sale, lease, barter or exchange of goods, properties and/or
services that are exempt from VAT (RMC 17-96).

When applied to the tax base or the selling price of the goods or services
sold, such zero rate results in no tax chargeable against the foreign buyer or
customer. But, although the seller in such transactions charges no output tax, he can
claim a refund of the VAT that his suppliers charged him. The seller thus enjoys
automatic zero rating, which allows him to recover the input taxes he paid relating to
the export sales, making him internationally competitive (Panasonic Communications
Imaging Corporation of the Philippines vs. Commissioner of Internal Revenue).

Transitional input tax on beginning inventories

The following are the situations where a person may claim transitional input
tax on beginning inventories:
1. When he becomes liable to value-added tax upon exceeding the minimum
turnover of P3,000,000 in any 12-month period, or

2. When he voluntarily registers even if his turnover does not exceed

P3,000,000 (except franchise grantees of radio and television
broadcasting whose threshold is P10M)

The following inventories shall be the subject of a transitional input tax:

a. Goods purchased for resale in their present condition
b. Materials purchased for further processing, but which have not yet
undergone processing

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c. Goods which have been manufactured by the taxpayer
d. Goods in process for sale
e. Goods and supplies for use in the course of taxpayer’s trade or business
as a VAT registered person

The amount of transitional input tax to be allowed as tax credit shall be

whichever is higher between:
1. The beginning inventory of goods, materials, and supplies equivalent to
2% of the value of such inventory, or
2. The actual value added tax paid on such goods, materials, and supplies

Illustration Vatman became subject to VAT on march 1 of the current year. The
value of his beginning inventory of goods, materials and supplies is P567,000. The
VAT paid on such inventory amount to P15,500. How much is the transitional input
tax of Vatman?

On beginning inventory (567,000 x 2%) 11,340

Actual VAT paid 15,500
Transitional input tax (whichever is higher) 15,500

A transitional input tax can only be applied as tax credit against output tax. It
cannot be claimed as tax refund, unless a taxpayer who erroneously or excessively
pays his output tax is still entitled to recover the payments he made either as a tax
credit or a tax refund. In this case, since petitioner still has available transitional input
tax credit, it filed a claim for refund to recover the output VAT it erroneously or
excessively paid for the 1st quarter of 1997. Thus, there is no reason for denying its
claim for tax refund/credit (Fort Bonifacio Devt Corp vs CIR, Jan 22, 2013).

Presumptive input tax

VAT registered persons or firms engaged in the processing of (1) sardines, (2)
mackerel, and (3) milk, and in manufacturing (4) refined sugar, (5) cooking oil, and
(6) packed noodle-based instant meals shall be allowed a presumptive input tax,
creditable against the output tax –
equivalent to 4% of gross value in money of their purchases of
primary agricultural products which are used as inputs to their
production (Sec 111[B], NIRC).

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.

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Only VAT registered persons shall be entitled to the transitional and
presumptive tax credits.

Illustration Coco Say is engaged in purchasing coconut from coconut planters and
process them into canned coconut cooking oil. In September, he made a total
purchase of P300,000, processed them and sold the cooking oil to the public. The
taxable sales, gross of VAT, amounted to P2,128,000. The invoice on the purchases
of canning and labelling materials totalled to P280,000.

Questions:
1. How much is the presumptive input tax?
Answer: The presumptive input tax is P12,000 which is the result of
multiplying the total purchases of primary agricultural products of P300,000 by
4%.

2. How much is the VAT payable?

Answer: The amount of VAT payable is computed as follows:
Output Tax (2,128,000 x 3/28) 228,000
Less: Input taxes
Presumptive input tax 12,000
On materials (280,000 x 3/28) 30,000 42,000
VAT Payable 186,000

Creditable input tax

An input tax evidenced by VAT invoice or official receipt on the following
transactions shall be creditable against the output tax of a VAT registered person:
1. Purchase or importation of goods
a. For sale, or
b. For conversion into or intended to form part of a finished product for
sale, including packaging materials, or
c. For use as supplies in the course of business, or
d. For use as materials supplied in the sale or service, or
e. For use in trade or business for which deduction for depreciation or
amortization is allowed under the Code.
2. Purchase of real properties for which a VAT has actually been paid
3. Purchase of services in which a VAT has actually been paid
4. Transitional input tax
5. Presumptive input tax
6. A VAT registered person who is also engaged in transactions not subject
to VAT shall be allowed input tax credit as follows:
a. Total input tax which can be directly attributed to transactions
subject to VAT, and

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b. A ratable portion of any input tax which cannot be directly attributed
to either activity.

Sale of real property subject to VAT

The sale of real property subject to VAT shall be either on cash basis, on
installment basis, or on a deferred payment basis.

The sale of real property is on the installment basis if the initial payments do
not exceed 25% of the selling price. It is on a “deferred payment basis not on the
installment plan” if the initial payments exceed 25% of the gross selling price.

If the sale is on cash basis or on a deferred payment plan, the whole selling
price shall be subject to tax, if it is on the installment plan, the seller or real estate
dealer shall be subject to VAT on the installment payments, including interest and
penalties.

Installment Payment Basis

In case of sale of real properties on the installment plan, 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. The sale is considered
"Installment Sale" if the "Initial Payments" does not exceed 25% of the selling price.
Correspondingly, ” the buyer of the property can claim the input vat in the same
period as the seller recognizes the output tax (RR 4-2007).

Initial Payments pertain to all payments which the seller receives on or before
the execution of the instrument of sale, including cash or property received, other
than the purchaser's evidence of indebtedness (exclude notes or other evidence of
indebtedness issued by the purchaser to seller at the time of sale) during the taxable
year when the real property was sold. Also excluded from the initial payment is 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.

INITIAL PAYMENTs:
Downpayment Pxx
Collections (year of sale) xx
Add:
Interest xx
Penalties and other charges xx
Excess of mortgage over cost, if any xx xx
Initial Payments Pxx

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RR 4-2007 further provides that if the sale of real property is on installment

plan where the zonal value/fair market value is higher than the consideration or
selling price, exclusive of the vat, the vat shall be based on the ratio of actual
collection of the consideration, exclusive of the vat, against the agreed consideration,
exclusive of the vat applied to the zonal/fair market value of the property at the time
of the execution of the Contract to Sell or Contract of Sale at the inception of the
sale. Thus, since the output vat is based on the market value of the property which is
higher than the consideration in the sales document exclusive of the vat, the input
vat that can be claimed by the buyer shall be separately-billed output vat in sales
document issued by the seller. Therefore, the output vat which is based on market
value must be billed separately by the seller in the sales document with specific
mention that the vat billed separately is based on the market value of the property.

Output VAT under Installment Sale:

FMV is the higher between:

1. Fair market value as determined by the Commissioner/zonal value
2. Fair market value as shown in the schedule of values of the Provincial and City Assessors (real property tax
declaration)

Deferred Payment Basis

In case of sale of real properties on the Deferred-Payment Basis [Initial
payments of which in the year of sale exceed twenty-five percent (25%) of gross
selling price, not the installment plan), the transaction shall be treated as cash sale
which makes the entire selling price taxable in the month of sale. 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.

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. 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.

The tax implication of cash sale, installment sale and deferred payment basis
as regards the payment of vat payable is summarized below:

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Apportionment of input tax on mixed transactions

When the establishment is engaged in mixed transactions such as when it is
engaged in sales to private persons or firms, to the government, and it is also selling
goods which are exempt from VAT, the total input taxes shall be apportioned by
applying the following formulas:

1. Taxable Sales to private Creditable

X Input tax =
Total Sales input tax

Taxable Sales to Creditable

2. government X Input tax = input tax up to
Total Sales 5%

3. Exempt Sales Creditable

X Input tax =
Total Sales input tax

Illustration Fortuna Corporation has the following sales during the following month:

Sales to private entities subject to 12% 100,000

Sales to private entities subject to 0% 100,000
Sales to exempt goods 100,000
Sales to government subjected to 5% final withholding tax 100,000
Total sales for the month 400,000

The following input taxes were passed on by its VAT suppliers:

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Input tax on taxable goods (12%) 5,000
Input tax on 0% sales 3,000
Input tax on sale to exempt goods 2,000
Input tax on sale to government entities 4,000
Input tax on depreciable capital goods not attributed to
any specific activity (monthly amortization for
60months) 20,000

REQUIRED: Compute the following:

1. Input tax attributable to sales to private entities
2. Input tax attributable to sales to government
3. Input tax attributable to VAT exempt sales
4. Input tax attributable to zero-rated sales
5. VAT Payable

ANSWERS
1. Input tax attributable to sales to private entities
Input tax on sale subject to 12% 5,000
Ratable portion of input tax not directly attributable
to any activity [(100,000/400,000) x 20,000] 5,000
Input tax attributable to sales to private entities 10,000

2. Input tax attributable to sales to government

Input tax on sale to government 4,000
Ratable portion of input tax not directly attributable
to any activity [(100,000/400,000) x 20,000] 5,000
Input tax attributable to sales to government 9,000

3. Input tax attributable to VAT exempt sales

Input tax on VAT exempt sale 2,000
Ratable portion of input tax not directly attributable
to any activity [(100,000/400,000) x 20,000] 5,000
Input tax attributable to VAT exempt sales 7,000

Note: The input VAT attributable to exempt sales in the amount of

P7,000 is not available for input tax credit but may be recognized as
cost or expense.

4. Input tax attributable to zero-rated sales

Input tax attributable to zero-rated sales 3,000

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Ratable portion of input tax not directly attributable
to any activity [(100,000/400,000) x 20,000] 5,000
Input tax attributable to zero-rated sales 8,000

5. VAT Payable

VAT Payable on sales to subject to 12%

Output tax (100,000 x 12%) 12,000
Less: Input tax
Directly Attributable 5,000
Not Directly Attributable 5,000 10,000
VAT Payable 2,000

VAT Payable on sales to government

Output tax (100,000 x 12%) 12,000
Less: Input tax
Directly Attributable 4,000
Not Directly Attributable 5,000
Total Input tax (not to be used in this 9,000
computation)
Less: Creditable input tax (100,000 x 7%) 7,000
VAT Payable 5,000

Note: 1. Standard input VAT of 7% is to be used for computation of

VAT Payable. For sales to government, it is always zero (0)
VAT Payable.
2. The unrecoverable input tax of P2,000 (actual input of 9,000
less standard input of P7,000) is not available for input tax
credit but may be recognized as cost or expense.

Spread of VAT on capital goods

Capital goods refer to goods or properties with estimated useful life greater
than one year and which are treated as depreciable assets, used directly or indirectly
in the production or sale of taxable goods or services.

Where a VAT registered person purchases or imports capital goods which are
depreciable assets for income tax purposes, the following rules shall be applied:

1. Input tax on depreciable capital goods, the aggregate acquisition cost of

which (net of VAT) in a calendar month, exceeds P1,000,000 shall be spread
evenly over 60 months or their useful life, whichever the shorter.

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2. When the aggregate acquisition cost (exclusive of VAT) of the existing or

finished capital goods purchased or imported during any calendar month does
not exceed P1,000,000, the total input taxes will be allowed as credit against
output tax in the month of acquisition.

The aggregate acquisition cost of depreciable assets in any calendar

month refers to the total price, excluding VAT, agreed upon for one or
more assets acquired and not on the payments actually made during
the calendar month.

3. If the capital goods is sold within five years or prior to exhaustion of input VAT
thereon, the entire unamortized input tax on the capital goods sold can be
claimed as input tax credit during the month/quarter when the sale was made

4. The opinion to apply for refund/tax credit certificate of capital goods has been
withdrawn

Illustration Felicisima had the following data in its books in the month of February:
Case A Case B
Sales 1,900,000 1,800,000
Purchases of goods for sale 1,260,000 600,000
Purchase of machines 1,440,000 900,000
Machine life 6 years 3 years

REQUIRED: Compute the following:

1. VAT payable on each of the independent cases
2. VAT payable in Case A assuming that the life of the machine is 4
years

ANSWERS
1. CASE A
Output tax (1,900,000 x 12%) 228,000
Less: Input Taxes
Purchases (1,260,000 x 12%) 151,200
Machine [(1,440,000 x 12%) / 60 2,880 154,080
months]
VAT Payable 73,920

CASE B
Output tax (1,800,000 x 12%) 216,000
Less: Input Taxes

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Purchases (600,000 x 12%) 72,000
Machine (900,000 x 12%) 108,000 180,000
VAT Payable 36,000

2. Machine’s useful life is 4 years

Output tax (1,900,000 x 12%) 228,000
Less: Input Taxes
Purchases (1,260,000 x 12%) 151,200
Machine [(1,440,000 x 12%) / 48 3,600 154,800
months]
VAT Payable 73,200

The amortization of the input VAT shall only be allowed until December 31,
2021 after which taxpayers with unutilized input VAT on capital goods purchased or
imported shall be allowed to apply the same as scheduled until fully utilized, provided
that in the case of purchase of services, lease or use of properties, the input tax shall
be creditable to the purchaser, lessee or licensee upon payment of the
compensation, rental, royalty or fee.

Illustration A manufacturer purchased capital goods on different occasions as

follows:

Month of Amount 12% input Useful No. of Last month of

Purchase (Php) tax life monthly Amortization
(in amortization
years)
Jan 2018 8,500,000 1,020,000 6 60 Dec 2022
Feb 2018 8,500,000 1,020,000 4 48 Jan 2022
Dec 2018 10,000,000 1,200,000 5 60 Nov 2023
Outright claim
Jan 2022 10,000,000 1,200,000 5 - on Jan 2022

a. For purchase made on January 2018, the amortization shall be for the shorter
period of 5 years only or up to December 2022 although the useful life is 6
years.

b. For purchase made on February 2018, the amortization shall be for period of
4 years only or up to January 2022 since the useful life of the asset is shorter
than 5 years.

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c. For purchase made on December 2018, the amortization shall be for the
period of 5 years or up to November 2023.

d. For purchase made on January 2022, no amortization shall be made, and the
input VAT shall be claimed on the month of purchase or January 2022.

Reference:

Ampongan, O. E. G. (2021), Transfer, Business & Local Taxation (with Practice Set)
13/e

Tabag, E.D and Garcia, E. J. (2021), Transfer & Business Taxation with Special
Topics

Bureau of Internal Revenue, Value-Added Tax,

https://www.bir.gov.ph/index.php/tax-information/value-added-tax.html

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