Value-Added Tax

IMPOSITION OF TAX
SEC. 105. PERSONS LIABLE. - Any person who, in the course of trade or business,

a.
b.
c.

Sells, barters, exchanges, leases goods or properties,

renders services

imports goods
shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code.
The value-added tax is an INDIRECT TAX and the amount of tax may be SHIFTED or PASSED on to the

a.
b.
c.

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 Republic Act No. 7716 (Jan 1, 2003).
"IN THE COURSE OF TRADE OR BUSINESS" - 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 nonstock, nonprofit 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.
The RULE OF REGULARITY, to the contrary notwithstanding, services as defined in this Code rendered in the
Philippines by nonresident foreign persons shall be considered as being course of trade or business.

VAT is a CONSUMPTION tax imposed at every stage of the distribution process on the:
1. SALE (including transactions deemed by law as a sale), BARTER, EXCHANGE or
LEASE of goods/properties;
2. RENDITION of SERVICES in the course of trade or business
3. IMPORTATION of goods, whether such imported goods are for use in business or
not.
It is a PRIVILEGE tax imposed by law on the ACT (sale, exchange, barter or lease,
importation, performance of service) as distinguished from an excise tax w/c is
applied to a few selected goods.
Tax Base:
A. In case of SALE, BARTER or EXCHANGE of goods/properties
GROSS SELLING PRICE or gross value in MONEY of the goods/properties
B. In case of SALE, EXCHANGE of SERVICES & LEASE of goods/properties
GROSS RECEIPTS
C. In case of IMPORTED goods
either
a. TOTAL VALUE + taxes & charges
b. LANDED COST + taxes & charges
CHARACTERISTICS of PH VAT
1. It is an INDIRECT TAX
the amount of tax may be SHIFTED or passed on by the seller to the buyer,
transferee of goods, properties & services
2. It is a tax ON VALUE ADDED of the taxpayer
- the value added to the raw materials or to the purchases, other than the labor
component of the goods or service, by the producer before its sale.) [output vat less
input vat]
3. It is a TRANSPARENT form of sales tax.
- The law requires that the tax be shown as a separate item in the VAT invoice/receipt
4. It is a BROAD-BASED tax on consumption of goods, properties or service in the PH
- There is VAT on every stage of the taxable sale of goods, properties or services.
5. It is collected through the TAX CREDIT METHOD (also called INVOICE METHOD)
- The input tax shifted by the seller to the buyer is credited against the buyers
output taxes when he in turn sells the taxable goods, properties or services
6. It does NOT CASCADE (tax on tax), hence, there is NO PYRAMIDING.
Cascading tax passed on by the previous seller which is now a component of gross
selling price/receipts of the seller, is again subjected to tax.
Rationale: because VAT allows a seller to credit his input tax (which is equivalent to

the output tax of previous seller) from his output tax. Hence, no tax on tax.
7. It adopts the TAX-INCLUSIVE METHOD
- Unless otherwise stated, any price charged by a VAT-registered person shall be
deemed to include the VAT charged.
8. It follows the DESTINATION PRINCIPLE or CROSS-BORDER DOCTRINE
Cross-Border Doctrine/Destination Principle 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.
Exports are zero-rated because these shall be consumed outside the PH, while
generally, imports are subject to regular VAT rate because they are for
consumption in the PH.
Freeport Zones & Economic Zones are considered as separate customs
territories. Sales by entities registered with these zones are either treated as
sales outside the country(if the purchaser is also a locator, of if the goods are
for export to a foreign country) or domestic sales. If considered domestic
sales, these sales are importations in the hands of the purchaser & are thus
subject to the corresponding customs duties & other taxes on imported goods.
VAT is
1.
2.
3.

imposed on any person who:

Sells, barters or exchanges goods or properties in the course of trade or business; or
Sells services in the course of trade or business; or
Imports goods, whether or not in the course of trade or business.

The VAT is a tax on consumption, levied on the sale, barter, exchange or lease of goods or
properties and services in the Philippines and the 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
or properties or services.
In case of importations, the importer is liable for tax.
However, any business/es pursued by an individual where the aggregate gross sales
or receipts do not exceed P100k during any 12-month period shall be considered
principally for subsistence & not in the course of trade or business. The individual is
required to register but shall be exempt from the payment of the registration fee of
P500.
The party directly & statutorily liable for the payment of the tax is the SELLER (or
transferor, importer, lessor, manufacturer, producer, wholesaler or retailer). Hence, he
cannot claim exemption from the payment of the tax simply because the BUYER
(customer, transferee, lessee) is exempt from taxation.
Neither is such BUYER exempt from paying tax. He does not really pay the tax but he
pays the seller more for the article because of the latters obligation, but that is all.
Is VAT really a tax on the value-added? Yes. Consider this:
A sells to B a piece of wood. Price: P100
Tax (10% for this example): P10.
Total: P110
B then makes the wood into a fine chair, and he sells it to C.
Price: P150.
Tax: P15
Total: P165.
B has an output tax of P15, and an input of P10.
He has a P5 NET VAT payable (output-input). Ok, fine, but where do we see
the tax on the value added by B?
We see that in the level of the price level. By applying his skills and labor, B
made a chair out of the wood that he bought from A. From P100, the price increased to
P150. There was a P50 increase from the value added by B. And applying the VAT on this
P50, it results into the same amount, which is P5. This proves that the tax is really on the

value added.
How do we know if the transaction is subject to VAT? What are the ELEMENTS?
1. It must be done in the ordinary course of trade or business
2. There must be a sale, barter, exchange, lease of goods or properties, or
rendering of service in the Philippines.
3. It is not VAT-exempt or VAT zero-rated.
If all three are present, then the transaction is subject to the 12% VAT. Absence of
one will not make the transaction subject to VAT.
But remember that IMPORTATIONS are subject to VAT, whether or not in the course
of trade or business.
As it is a tax on the transaction, there is no need whatsoever for there to be a taxable
gain (unlike in income tax). It is not required by either law or jurisprudence.
o In fact, the NIRC and in CIR v CA and COMASERCO state that non-stock, nonprofit organizations are subject to the VAT, as long as the service is done for a fee
or remuneration.
In his comment, Sir said that Comaserco would have escaped liability from
VAT if they pressed the point that they were doing the services not in the
course of business.
Ordinary course of trade or business (RULE of REGULARITY)
pursuit of a commercial or an economic activity.
It also includes transactions incidental thereto.

- the regular conduct or

It covers any person regardless whether or not the person engaged therein is a
nonstock, nonprofit organization (irrespective of the disposition of its net income and
whether or not it sells exclusively to members or their guests), or a government
entity.
NON-RESIDENT ALIENS rendering services in the PH are always subject to VAT.
Regularity is not a requirement for NRA.
HOWEVER, any business/es pursued by an individual where the aggregate gross
sales or receipts DO NOT EXCEED P100K during any 12-month period shall be
considered principally for subsistence & NOT in the course of business. He must
register but he shall be exempt from the payment of the reg fee of P500.

There should be
1. a commercial or economic activity, and
2. regularity in the action.

Regular involves more than one isolated transaction. It requires repetition and
continuity of action.
However, if the taxpayer is a NON-RESIDENT ALIEN, there is no need for the regularity of
conduct. Services rendered by them in the Philippines are considered as being in the
course of trade or business, and thus, subject to the VAT.
o This is an exception to the regularity requirement.
Any sale, barter or exchange of goods or services not in the course of trade or business is
not subject to VAT.
When determining if this element/requisite exists, be mindful of the following:
o Was the transaction done regularly? Or isolated?
o Was it incidental thereto?
o Is the taxpayer a non-resident alien? (Because if he is, the transaction need not
be regular.)
Between an automobile shop who sells 5 parcels of land and a real estate dealer who
sold a parcel of land, both will be subject to VAT. The automobile shop because of its
regular conduct, and the real estate dealer because of the nature of his business

(pursuit of a commercial or economic activity, which takes the quantitative approach.)

This provision notwithstanding, an importation of goods for personal use is still subject
to VAT because of Section 107.
o This is an exception to pursuit of a commercial or economic activity
requirement

SALE, LEASE, ETC OF GOODS OR RENDERING OF SERVICES

Lets take up SALE OF GOODS OR PROPERTIES first.
SEC. 106. VALUE-ADDED TAX on SALE of GOODS/PROPERTIES. (A) RATE AND BASE OF TAX. - There shall be levied, assessed and collected on every sale, barter or exchange of
goods or properties, value-added tax equivalent to twelve percent (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.

In dealing with this element, youre dealing with two questions:

1. Is this a normal sale?
2. If not, is this at least a transaction which are deemed sales by law (Sec. 106 (b)?
Generally, the VAT rate is 12% on the gross selling price or gross value in money of
the goods, properties sold, bartered or exchanged.
o We say generally because there are some transactions which are subject to 0%
or tax exempt, but well take those later.
For sale of goods or properties, the tax base is the gross selling price.
(1)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
1. patent,
2. copyright,
3. design or model,
4. plan,
5. secret formula or process,
6. goodwill,
7. trademark,
8. trade brand or other like property or right;
(c) The right or the privilege to USE in the PHILIPPINES of any
1. industrial,
2. commercial or
3. scientific EQUIPMENT;
(d) The right or the privilege to USE
1. motion picture films,
2. tapes and
3. discs; and
(e) RADIO, TELEVISION, SATELLITE transmission and CABLE television time.
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 VAT. The excise tax, if any, on such goods or properties shall form part of the
gross selling price.

This is not an exclusive list.

GROSS SELLING PRICE - 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 VAT. The excise tax, if any, on such
goods or properties shall form part of the gross selling price.
o In other words, the gross selling price includes everything that the buyer pays
the seller, except the VAT which is shifted to the buyer.
For example, Toby sold a shirt to Carlo. The quoted selling price was

P100, but there were freight charges of P50. The gross selling price is
P150. You apply the VAT to P150.
While the law says the VAT is based on the gross selling price, gross selling
price does not mean gross sales. The law and regulations allow downward
adjustments for:
Sales returns and allowances;
Sales discounts agreed upon at the time of the sale indicated in the sales
invoice, and availed of by the buyer.

Zero-rated/Effective zero rated transactions For goods

(2) The following sales by VAT-registered persons shall be subject to ZERO PERCENT (0%) RATE:
(a) EXPORT SALES. - The term "export sales" means:
1. The 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 raw materials or packaging materials to a nonresident buyer for delivery to a resident local exportoriented enterprise to be used in manufacturing, processing, packing or repacking in the Philippines of the
said buyer's goods and paid for in acceptable foreign currency and accounted for in
3. accordance with the rules and regulations of the BSP;
4. Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed
seventy percent (70%) of total annual production;
5. Sale of gold to the BSP; and
6. Those considered export sales under Executive Order NO. 226, otherwise known as the Omnibus
Investment Code of 1987, and other special laws.
7. The sale of goods, supplies, equipment, and fuel to persons engaged in international shipping or
international air transport operations (added by RA 9337)
(b) 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).
(c) 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.

For goods, a rate of 0% of the gross selling price will be applied if:
1. Export sale; or
2. Foreign currency denominated sale; or
3. Sales to persons or entities whose exemption under special laws, or international
agreements to which the Philippines is a signatory (effective zero rated sales)
EXPORT SALES means:
the SALES and ACTUAL SHIPMENTS or EXPORTATIONS 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 BSP.
The following are also within the meaning of export sales (possible MCQ!):
a. sales 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 said buyers
goods and PAID FOR IN ACCEPTABLE FOREIGN CURRENCY and accounted for in
accordance with BSP rules and regulations
b. sale of RAW MATERIALS or PACKAGING MATERIALS to an EXPORT-ORIENTED
ENTERPRISE whose export sales exceed 70% of total annual production
c. sale of GOLD to the BSP
d. those considered export sales under EO 226 and other special laws

e. sale of GOODS, SUPPLIES, EQUIPMENT and FUEL to persons engaged

INTERNATIONAL SHIPPING or INTERNATIONAL AIR TRANSPORT operations

in

While an ecozone is geographically within the Philippines, it is deemed a separate

customs territory and is regarded in law as foreign soil. Thus, sales by suppliers from
outside the ecozone to this separate customs territory are deemed as exports and
treated as export sales. (CIR v Sekisui)

FOREIGN CURRENCY DENOMINATED SALES means

sales to NONRESIDENTS of goods assembled or manufactured in the
Philippines,
for DELIVERY to RESIDENTS in the Philippines, and
PAID in ACCEPTABLE FOREIGN CURRENCY and accounted for in accordance
with BSP rules and regulations.
This does not apply to automobiles and non-essential goods subject to excise
taxes.
Under the CROSS-BORDER PRINCIPLE of the VAT system, no VAT shall be imposed to form
part of the cost of goods destined outside of the territorial border of the taxing authority.
ZERO-RATED SALE a sale, barter, exchange or lease of goods, properties &/or services (by
a VAT-registired person) subject to VAT @ the rate of 0% pursuant to Sections 106 (A,2) &
108 (B). The transaction is taxable for VAT purposes, w/ the input tax on purchases of
goods, properties, or services related to the zero-rated sale available as tax credit or
refund, but such sale shall not result in any output tax.
SALES SUBJECT to 0%
1. EXPORT SALES made by VAT-reg persons;
2. FOREIGN CURRENCY denominated sales
3. Sales of goods/property to persons/entities who are TAX-EXEMPT under special laws
or international agreements (such as ADB, IRRI)
Except for export sales & foreign currency sales above, other cases of zero-rated
sales shall require prior application w/ the BIR for effective zero-rating. Without an
approved application, the transaction otherwise entitled to zero-rating shall be
considered exempt.
As to HOW the transaction shall be subject to Zero-rating
(Automatically) Zero-Rated Sales
Effectively Zero-Rated Sales
Refers to a sale of goods, properties, & Refers to the LOCAL sale of goods, properties
services by a VAT-reg seller/supplier that is & services by a VAT-reg person to an entity
regarded as either an
that was granted indirect tax exemption
a. Export sale; or
under
special
laws
or
international
b. Foreign currency denominated sale agreements. Since the buyer is exempt from
under 106
indirect tax, the seller cannot pass on the
VAT & therefore, the exemption enjoyed by
the buyer shall extend to the seller, making
the sale effectively zero-rated.
Specific transactions:
Sales to registered ECOZONES & FREEPORT
ZONES enterprises are automatically zerorated.

Sales to FOREIGN EMBASSIES & its

PERSONNEL, provided that:
1. The sale has been made to embassies
in their official capacities; &
2. Zero-rating allowed on the basis of
reciprocity duly proved
SMBA, PEZA, ADB, IRRI & their supplier of
goods

Effects:
3. Considered a TAXABLE TRANSACTION for VAT purposes but shall not result in any
output tax.
4. The seller can CLAIM a REFUND or tax CREDIT Cert for the VAT previously charged by
the suppliers.
5. The word ZERO-RATED must be prominently imprinted or stamped on the face of
the VAT invoice or receipt to be issued by the seller. Otherwise, the transaction
becomes subject to the regular VAT rate. This requirement prevents the buyer from
claiming input tax credits arising from such taxable sale.
EXPORT SALES may be direct or indirect; which means:
1. SALE & ACTUAL SHIPMENT of goods from the PH to a FOREIGN country,
(irrespective of any shipping agreement that may be agreed upon w/c may influence
or determine the transfer of ownership of the goods so exported) , &
PAID FOR IN ACCEPTANCE OF FOREIGN CURRENCY OR ITS EQUIVALENT in
goods/services, & accounted for in accordance w/ the RR of the BSP;
COD collect on delivery; carrier acts for the seller in collecting the purchase
price & buyer must pay before he can obtain possession;
FOB free on board; goods are delivered free of expense to buyer to the point where they are FOB
(either point of shipment or of destination where the ownership passes)
CIF cost, insurance & freight; price fixed covers not only the cost of goods but freight,
insurance to be paid b y the seller up to point of destination.

2.

3.

4.
5.
6.

There must be an actual shipment of goods from the PH to a foreign country as

pre-condition of an export sale following the Destination Principle/Cross
Border Doctrine.
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 PH of the said buyers goods
&
PAID for in accordance w/ the RR of the BSP;
The SALE of RAW materials or PACKAGING MATERIALS to EXPERT-ORIENTED
ENTERPRISE whose EXPORT SALES EXCEED 70% of the total annual production.
export-oriented enterprise - any enterprise whose export sales exceed 70% of total
annual production of the preceding taxable yr
The SALE of GOLD to BSP;
Those CONSIDERED EXPORT SALES under E0 #226 (Arts 23 & 27), otherwise known
as the OMNIBUS INVESTMENTS CODE & other special laws; &
The SALE of goods, supplies, equipment & fuel to persons engaged in
INTERNATIONAL SHIPPING or international AIR TRANSPORT operations.
The sale is limited to goods, supplies , equipment & fuel pertaining to or
attributable to the transport of goods & passengers from a port in the PH
directly to a foreign port or vice versa without docking or stopping at any
other port in the PH, unless the docking/stopping is for the unloading of
passengers &/or cargo that originated from abroad, or to load passengers &/or
cargo bound for abroad. If any portion of such fuel, goods or supplies is used
for other purposes, such portion of fuel, goods & supplies shall be subj to 12%
VAT.

For the purpose of zero-rating, the export sales of registered export traders shall
include commission income. The exportation of goods on consignment shall NOT be
deemed export sales until the export products consigned are in fact sold by the
consignee. Sales of goods, properties, or services made by a VAT-reg supplier of a
BOI-registered manufacturer/producer whose products are 100% exported, are
considered export sales. A certification to this effect by the BOI w/c shall be good for
1yr unless subsequently re-issued by the BOI.
The Zero VAT on export sales is an incentive to exporters because while their sales
are subject to zero rate, they are entitled to claim VAT refunds/credits on their VAT
inputs.
Note that under (1 ), there must be ACTUAL SHIPMENT of the goods from the PH to a
foreign country as a pre-condition of an export sale following the DESTINATION

PRINCIPLE, under which imports are taxed while exports are given total immunity.
Sales of locally manufactured/assembled g oods for household & personal use to
Filipinos abroad & other non-residents of the PH as well as returning Overseas
Filipinos under the Internal Export Program of the govt paid for in convertible foreign
currency & accounted for in accordance w/ the RR of the BSP shall also be considered
export sales.
FOREIGN CURRENCY DENOMINATED SALE the sale to a NON-RESIDENT of goods,
assembled or manufactured in the PH for delivery to a resident in the PH & paid for in
acceptable foreign currency & accounted for in accordance w/ the RR of the BSP
except the ff, w/c are subject to excise tax,.
1. AUTOMOBILES (149) any 4 or more wheeled motor vehicle regardless of seating
capacity, which is propelled by gasoline, diesel, electricity or any other motor power
buses, trucks, cargo vans, jeeps/jeepneys/jeepney substitutes, single cab,
chassis & special-purpose vehicles
2. NON-ESSENTIAL GOODS (150)
i.
Jewelry (whether real or imitation)
ii.
Pearls
iii.
Precious or semi-precious stones & imitations
iv.
Goods made of/ornamented/mounted/fitted with precious metals/imitations or
ivory
v.
Opera glasses & lorgnettes
vi.
Perfumes & toilet waters
vii.
Yachts & other vessels intended for pleasure or sports.
EXPORT SALES under the OMNIBUS INVESTMENT CODE
1. CONSIDERED EXPORT SALES the Ph port F.O.B value, determined from invoices, bills
of lading, inward letters of credit, landing certificates, & 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 exports the same.
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 certs or similar commercial docs.
2. CONSIDERED CONSTRUCTIVE EXPORT SALES even without actual exportation, the ff
shall be considered constructively exported for the purposes above:
i.
Sales to bonded manufacturing warehouses of export-oriented manufacturers;
ii.
Sales to export processing zones
iii.
Sales to enterprises duly accredited w/ the Subic Bay Metropolitan Authority
(SMBA)
iv.
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 BOI in consultation w/ the BIR & BOC; &
v.
Sales to diplomatic missions & other agencies &/or instrumentalities granted
tax immunities, of locally manufactured, assembled or repacked products
whether paid for in foreign currency or not.

What is a SALE? - the transfer of ownership of property in consideration of money received

or to be received.
What are TRANSACTIONS DEEMED SALES?
(B) TRANSACTIONS DEEMED SALE. - The following transactions shall be deemed sale:
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;

3) CONSIGNMENT of goods if actual sale is NOT made within sixty (60) days following the date such goods
were consigned; and
4) RETIREMENT from or CESSATION of business, with respect to INVENTORIES of taxable goods existing as
of such retirement or cessation.

By virtue of law, the following are considered sales in the course of trade or business,
and is subject to the VAT:
a. 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;
Ex: Johnson & Johnson gave you baby powder
b. Distribution or transfer of inventory to shareholders or investors as share in the
profits of the VAT-registered persons; (Property Dividends)
c. Distribution or transfer of inventory to creditors in payment of debt;
d. 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;
e. Consignment of goods if actual sale is not made within sixty (60) days following the
date such goods were consigned; and
f. Retirement from or cessation of business, with respect to all goods on hand, whether
capital goods, stock in trade, supplies or materials as of date of retirement/cessation,
whether or not business is continued by the new owner or successor.

Change of ownership of the business (single prop to incorp or sale of business)

Dissolution of partnership, creation of a new one to take over business

TAX BASE:
For transactions deemed sale, 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 in 1), 2) & 3) above.
However, in the case of retirement from or cessation of business, the tax base
shall be the ACQUISITION COST or Current MARKET PRICE of the
goods/properties, whichever is LOWER.
In the case of sale where the gross selling price is unreasonably lower than the
FMV the ACTUAL MARKET VALUE
(C) CHANGES in or CESSATION of STATUS of a VAT-REGISTERED PERSON The tax imposed in (A) of this
section shall also apply to GOODS DISPOSED OF OR EXISTING as of a certain date if under the circumstances to be
prescribed in rules & regulations to be promulgated by the Sec. of Finance, upon recommendation of the
Commissioner, the STATUS of a PERSON as a VAT-REGISTERED PERSON CHANGES or is TERMINATED.

The ff are subject to output tax:

change of business activity from VAT status to EXEMPT status (ex. wholesaler to life
insurance business)
approval of request for cancellation of registration due to reversion to exempt status
reversion to exempt status of a person who voluntarily registered despite being exempt
under 109 (2)
approval of cancellation of reg of one who commenced business expecting gross sales &
receipts of P1.5million but failed during the 1st 12monts of operation
change of control of a corporation by the acquisition of the controlling interest of such corp
by a stockholder or group of stockholders (goods properties used in business, including
those held for lease are not considered sold, bartered or exchanged despite the change in
ownership interest of said corp)
However, the exchange of goods/properties, including real estate properties used in
business or held for sale/lease by the transferor, for shares of stocks, whether
resulting in corporate control or not, is subject to VAT.

Allowable Deductions from Gross Selling Price

(D) SALES RETURNS, ALLOWANCES & SALES DISCOUNTS.

The value of goods or properties

a.
b.

SOLD and subsequently RETURNED (sales returns) or

for which ALLOWANCES were granted by a VAT-registered person (allowances)

may be DEDUCTED from the gross sales or receipts for the quarter in which a refund is made or a credit
memorandum or refund is issued.
A SALES DISCOUNT that is
granted & indicated in the invoice at the time of sale and
the grant of which does not depend upon the happening of a future event
may be EXCLUDED from the gross sales within the same quarter it was given.

GR: The ff are DEDUCTIBLE from the GROSS SELLING PRICE to arrive at the tax base
upon which to apply the tax rate:
1. SALES RETURNS & ALLOWANCES the selling price of the goods/properties
returned & not sold necessarily reduces the gross sales on w/c the rate is applied.
SR & A for w/c a proper credit/refund was made during the month or quarter
to the buyer for sales previously recorded as taxable sales are allowed as a
deduction in the period when they are made. If they exceed the gross sales for
the period, the excess may be carried over to the succeeding period.
The value of the goods/properties sold & subsequently returned or for w/c
allowances are granted by a VAT-reg person may be deducted from the gross
sales/receipts for the quarter in w/c a refund is made or a credit memo is
issued.
2. SALES DISCOUNTS bona fide or regular discounts given to purchasers, w/c are
ascertainable & definitely agreed upon between the vendor & the vendee at
the time of the sale are also deductible from the gross selling price for purposes of
the tax.
If given after the sale or are in the nature of a rebate/partial remission of
indebtedness, they will NOT be allowed as a deduction from the gross selling
price
Furthermore, the discounts must be EXPRESSLY INDICATED in the sales
INVOICE & the amount thereof forming part of the gross sales DULY
RECORDED in the books of accounts. Thus, credit given to customers by way
of credit memo or note to cover promptly payment discount, volume discounts
or other special or confidential discounts are NOT deductible from the gross
selling price in determining the tax due although granted to the vendee at the
time of sale but are not expressly indicated in the sales invoice.
Similarly, credits for allowances to cover roll back in prices & other price
adjustments are NOT deductible for tax purposes.

Therefore: For DISCOUNTS to be ALLOWABLE DEDUCTIONS from the

gross selling price
1) DETERMINED & GRANTED at the time of the sale
2) w/c are EXPRESSLY INDICATED in the INVOICE,
3) the amount thereof forming part of the gross sales duly
RECORDED in the BOOKS of acct

Discounts granted & indicated in the invoice at the time of the sale & the grant of
w/c does not depend upon the happening of a future event, may be EXCLUDED
from the gross sales w/in the same month/quarter it was given.

(E). AUTHORITY OF THE COMMISSIONER TO DETERMINE THE APPROPRIATE TAX BASE. - The
Commissioner shall, by rules and regulations prescribed by the Secretary of Finance, determine the appropriate tax
base in cases where a transaction is deemed a sale, barter or exchange of goods or properties under Subsection
(B) hereof, or where the GROSS SELLING PRICE IS UNREASONABLY LOWER THAN THE ACTUAL MARKET VALUE.

VAT ON IMPORTATION OF GOODS

SEC. 107. VALUE-ADDED TAX ON IMPORTATION OF GOODS. (A) IN GENERAL. - There shall be levied, assessed and collected on every importation of goods a value-added tax
equivalent to TWELVE PERCENT (12%) based on

1.
2.

the TOTAL VALUE USED by the BUREAU OF CUSTOMS in determining tariff and customs duties

plus customs DUTIES, excise TAXES, if any, and other charges,

such tax to be PAID by the IMPORTER prior to the release of such goods from customs custody:
Provided, That where the CUSTOMS DUTIES are DETERMINED on the BASIS of the QUANTITY or VOLUME
of the goods,
the value-added tax shall be based on the LANDED COST plus EXCISE TAXES, If any.

Every importation of goods shall be subject to the VAT, whether the importation is for
a. sale or
b. use in business, or
c. personal use.
The imported goods shall be subject to 12% VAT.
The TAX BASE is:

a. the TOTAL VALUE used by the Bureau of customs in determining tariff and customs
b.

duty, plus customs duties, excise tax (if any), and other charges prior to the removal
of the goods from customs custody; OR
the LANDED COST, when the customs duties are determined on the basis of the
quantity or volume of the goods.

landed cost is meant the invoice price of imported goods, including costs of loading,
shipping, unloading, freight, insurance, customs duties, excise tax (if any), and other
charges prior to the removal of the goods from customs custody.
Expenses incurred after the release of the imported goods from customs custody
do NOT form part of the landed cost;
NOR interest charges on loans secured to finance an importation as they cannot
be considered necessary to have an imported item released form customs custody
or as an expense to complete the importation
(B) TRANSFER OF GOODS BY TAX-EXEMPT PERSONS. - In the case of TAX-FREE IMPORTATION OF GOODS into
the Philippines by persons, entities or agencies EXEMPT from tax where such goods are subsequently SOLD,
TRANSFERRED or EXCHANGED in the PHILIPPINES to NON-EXEMPT PERSONS or entities,
the PURCHASERS, TRANSFEREES or RECIPIENTS shall be CONSIDERED THE IMPORTERS thereof, who shall be
LIABLE for any internal revenue tax on such importation. The tax due on such importation shall constitute a LIEN
on the goods superior to all charges or liens on the goods, irrespective of the possessor thereof.

This article deals with TECHNICAL IMPORTATION.

When a person who was exempt from the VAT on his importation subsequently sells
(transfers or exchanges) in the Philippines such imported article to a non-exempt
person or entity, the purchaser (transferee or assignee) will be required to pay the VAT.
o X Corp is a tax-exempt entity who imported stuff. He then sold it to Diego, a nonexempt entity. Diego has to pay for the VAT. But Diego can claim the VAT paid
as creditable input taxes.
The VAT of an importation should be PAID prior to the release of the goods from

customs custody. If its subject to both excise tax and VAT, he has to pay both prior to
the release.
A seller of goods or services who imports stuff can claim the VAT paid on importations
during a taxable period as input taxes creditable against the output taxes on the sales
of the same period.

Before tackling exempt transactions, lets have an OVERVIEW OF THE VAT SYSTEM.
Understanding VAT is a matter of perspective. We first have to know WHO we are talking about.
Remember that in the VAT system, the burden of paying the VAT is passed on to the buyer. (A sells to B; B pays the 12% VAT
on it.)
o But B can recover the amount he paid to A by selling the shirt to C, since C will pay the 12% on the VAT.
The biggest difference of zero-rated/effectively zero-rated transactions and VAT-exempt transactions is the ability to recover
VAT already paid to the seller.
o Why do we look at the input tax and not the output tax?
Because the input tax is what we all seek to recover, thats what we paid for.
Output tax doesnt come out of our own pockets because we can pass that burden to our buyers.
o
In zero-rated transactions, there is total relief for the purchaser from the burden of the tax since he does not have
input VAT and in effect, because VAT is at 0%,
it does not have output VAT.
o
In exempt transactions, there is only partial relief because the purchaser is not allowed any tax refund or credit for
input taxes paid.
In normal VAT transactions, the VAT paid to A can be recovered by selling it to C. We are talking about B.
A sells to B

B sells to C

B paid A P10 as VAT. But

VAT TAXABLE (lets use

VAT TAXABLE

he recovered the P10 by

10% to simplify things)

selling the product to C. In his sale

P100

P150

to C, he received P15, which

P10 (VAT)

P15

covered

P110

P165

So, in essence, he recovered the

P10 he paid A.

What if the transaction

the P10 he

paid A.

of B to C is VAT ZERO-RATED?

A sells to B

B sells to C

B paid A P10 as VAT. But,

VAT TAXABLE (lets use

VAT ZERO-RATED

his transaction to C was

10% to simplify things)

P100
P10 (VAT)

P150
P0

zero-rated. So he didnt
receive
anything
from
to offset his VAT payment to A.

P110

P150

He has an output of O,
and an input of 10.
He can use the 10 as a
tax credit by applying for
a tax

credit

certificate

with the BIR.

What if the transaction of B to C is VAT EXEMPT?
A sells to B
B sells to C

B paid A P10 as VAT. But,

VAT TAXABLE (lets use

VAT EXEMPT

his transaction to C was

10% to simplify things)

P100
P10 (VAT)

P150
P0

exempt.
So
he
receive
anything
from
to offset his VAT payment

P110

P150

to A.
He has an output of O,
and an input of 10.
However, unlike a zerorated transation,
use the excess of 10
to offset his VAT payment

he CANNOT

didnt
C

to A. He cant recover.
So, if we were B, and we had a choice what should our next sale transaction be normal VATable, zero-rated, or exempt?
o Clearly, we wont go for exempt, because we wont recover the VAT we paid to our suppliers (A).
But what do you do with the unrecovered VAT in exempt transactions?
Itll be considered as cost, so deductible item.
o
Its a toss-up between going for normal VATable transactions and zero-rated transactions.
In both these cases, we will recover the VAT we paid to our suppliers. It will just depend on different
factors.

If we go for a zero-rated transaction, do we want to go through the hassle of having to deal with
the BIR and paying the fees?

If we go for the normal VATable, the recovery would be quicker. But this would mean wed have to
keep track of the VAT paid to us.

Now lets look at SALE OF SERVICE AND USE OR LEASE OF PROPERTIES.

SEC. 108. VALUE-ADDED TAX on

1)
2)

SALE of SERVICES and

USE or LEASE OF PROPERTIES. -

(A) RATE & BASE of TAX. - There shall be levied, assessed and collected, a value-added tax equivalent to
twelve percent (12%) of GROSS RECEIPTS derived from the sale or exchange of services, including the use or
lease of properties.
"SALE OR EXCHANGE OF SERVICES" - the PERFORMANCE of all kinds or services in the Philippines for others
for a FEE, REMUNERATION or CONSIDERATION, including those PERFORMED or RENDERED BY

1.
2.
3.
4.
5.
6.
7.
8.

construction and service contractors;

stock, real estate, commercial, customs and immigration brokers;
lessors of property, whether personal or real;
warehousing services;
lessors or distributors of cinematographic films;
persons engaged in milling processing, manufacturing or repacking goods for others;
proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts;
proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs
and caterers;

9. dealers in securities;
10. lending investors;
11. transportation contractors on their transport of goods

or cargoes, including persons who transport goods

or cargoes for hire another domestic common carriers by land, air and water relative to their transport of
goods or cargoes;

12. services of franchise grantees of telephone and telegraph, radio and television broadcasting and all other
franchise grantees except those under Section 119 of this Code;

13. services of banks, non-bank financial intermediaries and finance companies; and
14. non-life insurance companies (except their crop insurances), including surety,

fidelity, indemnity and

bonding companies; and

15. similar services regardless of whether or not the performance thereof calls for the EXERCISE or USE of the
PHYSICAL or MENTAL FACULTIES.
The phrase 'sale or exchange of services' shall likewise INCLUDE:
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 of 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 information as is mentioned in subparagraph (3);
5. The supply of services by a NONRESIDENT 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.

Lease of properties shall be subject to the tax herein imposed irrespective of the place where the contract of
lease or licensing agreement was executed IF THE PROPERTY IS LEASED OR USED IN THE PHILIPPINES.
The term "GROSS RECEIPTS" means the TOTAL AMOUNT of MONEY or its EQUIVALENT representing the
A. contract price,
B. compensation,
C. service fee,
D. rental or royalty,
INCLUDING the
1. amount charged for materials supplied with the services and
2. deposits and advanced payments actually or constructively received during the taxable quarter for the
services performed or to be performed for another person,
EXCLUDING value-added tax.

Any sale or exchange of services in the course of trade or business, including the use or
lease or properties, shall be subject to the VAT.
To be defined as SALES OF SERVICES, the services (ELEMENTS):
Should be rendered in the Philippines,
Can be any and all kinds of services rendered to others (provided there is no
employer-employee relationship);
There is a fee, remuneration or consideration.
Sale of services in the course of trade or business includes those PERFORMED OR
RENDERED BY:
a. construction and service CONTRACTORS
b. stock, real estate, commercial, customs and immigration BROKERS
C. LESSOR of property, whether personal or real
D. WAREHOUSING services
e. lessor or distributors of cinematographic FILMS
f. persons engaged in MILLING, processing, manufacturing or repacking of goods for
others
g. proprietors, operators, or keepers of HOTELS, motels, resthouses, pension houses,
inns, resorts
h. proprietors or operators of RESTAURANTS, refreshment parlors, cafes and other
eating places, including clubs and caterers
i. dealers in SECURITIES based on their gross receipts (w/c for them means gross
selling price less cost of securities sold)
J. LENDING investors
K. 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 (keep this in
mind for when we take up percentage tax)
L. COMMON CARRIERS by air and sea relative to their transport of PASSENGERS,
GOODS or CARGOES from one place in the PH to another place in the PH (same
here)
m. sales of ELECTRICITY by generation companies, transmission and distribution
companies
n. services of FRANCHISE GRANTEES of electric UTILITIES, telephone and telegraph,
radio and TV broadcasting and all other franchise grantees,
except those under Section 119 of the NIRC (gas & water utilities)
franchise grantees of radio/TV broadcasting whose annual gross receipts of the
preceding yr do not exceed P10M shall not be subj to VAT but to the 3% franchise
(percentage) tax.
O. NON-LIFE INSURANCE companies (except their crop insurances), including surety,
fidelity and bonding companies
P. SIMILAR services regardless of whether or not the performance thereof calls for the
EXERCISE OR USE of the PHYSICAL OR MENTAL FACULTIES
ALSO INCLUDED are:
a. The lease or use of or right or privilege to use any COPYRIGHT, patent, design or
model, plan, secret formula or process, goodwill, trademark, trade brand and other
like property or right;
b. The lease or the use of, or the right to use of any industrial, commercial or scientific
EQUIPMENT;

c.

The supply of scientific, technical, industrial or commercial KNOWLEDGE or information;

d. 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 enumerated in letter (b) hereof or any such knowledge or information
as is mentioned in (c)
e. 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 non-resident
person;
f.

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;
g. The lease of motion picture films, TAPES, and discs,
h. The lease or use of or the right to use radio, television, satellite TRANSMISSION and
cable television time.

Lease of properties shall be subject to the VAT irrespective of the place where the contract
or lease or licensing agreement was executed if the property is leased or used in the PH.
The list not exhaustive. However, exhibition of movies is not subject to VAT, but subject to
amusement tax imposed by local government units. (CIR v SM Prime)
For the sale or exchange of services, including the use or lease of properties, the VAT rate
is 12% of the gross receipts.
GROSS RECEIPTS means cash or its equivalent actually received or constructively
received (not including the VAT) as:
1. Payments on the contract price, compensation, service fee, rental or royalty;
Note: royalty includes services as to investment, training and education
2. Payments or materials supplied with the services; and
3. Deposits of advanced payments on the contract for services.
Ex: Lionel was a building contractor. He spent P50m for materials and P30m
for labor. The taxable gross receipts is P80m, the whole of which is VATable
by 12%.
o Constructive receipt occurs when the money consideration or its equivalent is
placed in the control of the person who rendered the service without restriction
by the payor. (like a bank deposit; issuance by the debtor of a notice to offset
any debt or obligation and acceptance thereof by the seller as payment for the
services rendered)
Are reimbursements subject to VAT? (See RMC 9-2006 for more details on this)
o If the reimbursable expenses advanced by brokers on behalf of their customers
are receipted with the brokers VAT OR, then its vatable.
o But if no receipt given (only a non-vat acknowledgment receipt), the same shall
not form the gross receipts of the broker and shall not be subject to the VAT on
the part of the broker.
However, the third-party must provide an OR in the name of the customer.

FOR SERVICES
SEC 108 (B) TRANSACTIONS SUBJECT TO ZERO PERCENT (0%) RATE. - 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 PH,
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, the CONSIDERATION for which is
paid for in acceptable FOREIGN CURRENCY and accounted for in accordance with the rules and
regulations of the BSP;
3) Services RENDERED TO PERSONS OR ENTITIES whose EXEMPTION under special laws or international
agreements to which the PH is a signatory effectively subjects the supply of such services to ZERO
PERCENT (0%) RATE;
4) Services rendered to VESSELS engaged exclusively in INTERNATIONAL SHIPPING; and
5) Services performed by subcontractors and/or contractors in processing, converting, of manufacturing
goods for an ENTERPRISE WHOSE EXPORT SALES EXCEED SEVENTY PERCENT (70%) OF TOTAL ANNUAL
PRODUCTION.
6) TRANSPORT of passengers and cargo by air or sea vessels from the PH to a FOREIGN COUNTRY (RA 9337)
7) Sale of POWER or FUEL generated through RENEWABLE SOURCES OF ENERGY such as, but no limited to,
biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy sources using
technologies such as fuel cells and hydrogen cells. (RA 9337).

For services performed in the Philippines, a rate of 0% of the gross receipts will be applied in
the following instances:
1. From PROCESSING, MANUFACTURING or REPACKING of goods,
For other persons doing business outside the Philippines,
The goods are subsequently exported,
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 processing, manufacturing, repacking of goods, rendered to a:
a. Person engaged in business conducted outside the Philippines, or
b. non-resident person not engaged in business who is outside the Philippines
when the services are performed
the consideration is paid in acceptable foreign currency and accounted for
in accordance with the blah blah blah of the BSP
3. Services rendered to persons or entities whose EXEMPTION under special laws or
international agreements to which the Philippines is a signatory effectively subjects
such services to ZERO RATE;
4. Services rendered to persons engaged in INTERNATIONAL SHIPPING or international
AIR TRANSPORT operations, including leases of property for use thereof;
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 and sea vessels
from the Philippines to a foreign country; and
7. Sale of POWER or FUEL generated through RENEWABLE SOURCES of energy
In CIR v American Express, AMEX had a branch in the Philippines (AMEX-Phil) who collected
receivables from the Philippine customers of AMEX-Hong Kong. SC held that AMEX-Phil qualified
for zero-rating. It fell under Section 108 (b) (2) (Performed services in the Philippines for a person
doing business outside the Philippines and paid in acceptable foreign currency)
The VAT system generally follows the destination principle (exports are zero-rated whereas imports
are taxed).
o However, there is an exception in the form of services performed in the Philippines for a
recipient doing business outside the Philippines (since the service is still done here).

To be exempt from the destination principle under Section 108(b)(1) and (2), the service
Must be performed in the Philippines,
For a person doing business outside the Philippines, and
Paid in acceptable foreign currency accounted for in accordance with BSP rules.
EXEMPT TRANSACTIONS
SEC. 109. EXEMPT TRANSACTIONS.

(1)
(a)

Subject to the provisions of Subsection (2) hereof, the following transactions shall be EXEMPT from VAT:
SALE OR IMPORTATION of
1) AGRICULTURAL and MARINE food products in their original state,
2) LIVESTOCK and POULTRY of a kind generally used as/yielding/producing foods for human
consumption; and
*the term livestock does not include animals generally considered as pets

(race horse, fighting cock, aquarium fish etc)

3)

BREEDING STOCK and genetic materials therefor.

Products classified under this paragraph shall be considered in their ORIGINAL STATE 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. Polished and/or husked rice, corn grits, raw cane sugar
and molasses, ordinary salt and copra shall be considered in their original state;
(b)

SALE OR IMPORTATION of
1) FERTILIZERS;
2) SEEDS, seedlings and fingerlings;
3) fish, prawn, livestock and poultry FEEDS, including ingredients, whether locally produced or
imported, used in the manufacture of finished feeds
(except specialty feeds 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 the

1) residents of the Philippines returning from abroad and
2) nonresident citizens coming to resettle in the Philippines:
Provided, That such goods are exempt from customs duties under the Tariff and Customs Code

(d)

IMPORTATION of
1) professional instruments and implements,
2) wearing apparel,
3) domestic animals, and
4) personal household effects (except any vehicle, vessel, aircraft, machinery other goods for use in
the manufacture and merchandise of any kind in commercial quantity)
belonging to PERSONS COMING TO SETTLE IN THE PHILIPPINES,
for their OWN USE and not for sale, barter or exchange,
accompanying such persons, or arriving within ninety (90) days before or after their arrival,
upon the production of evidence satisfactory to the Commissioner, that:
1. such persons are actually coming to settle in the Philippines and
2. the change of residence is bona fide;

(e)

SERVICES subject to PERCENTAGE TAX under Title V;

(f)

SERVICES by AGRICULTURAL CONTRACT GROWERS and milling for others of

1) palay into rice,
2) corn into grits and
3) sugar cane into raw sugar;

(g)

MEDICAL, DENTAL, HOSPITAL and VETERINARY SERVICES

except those rendered by professionals;

*laboratory services are exempted. But if the hospital or clinic operates a

pharmacy or drug store, the sale of drugs and medicine is subject to VAT.

(h)

EDUCATIONAL SERVICES rendered by

1) PRIVATE educational institutions, duly accredited by the DEPED/CHED/TESDA
2) GOVERNMENT educational institutions

(i)

SERVICES rendered by individuals pursuant to an EMPLOYER-EMPLOYEE RELATIONSHIP;

(j)

SERVICES rendered by RAHQ established in the Philippines by MULTINATIONAL CORPORATIONS which

act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or
branches in the Asia-Pacific Region and
do not earn or derive income from the Philippines;

(k)

TRANSACTIONS which are EXEMPT under

A) INTERNATIONAL AGREEMENTS to which the Philippines is a signatory
B) SPECIAL LAWS, except those under Presidential Decree 529;

(l)

The

1)
2)
3)

SALES by AGRICULTURAL COOPERATIVES duly registered with the Cooperative Development

Authority to their MEMBERS
as well as sale of their PRODUCE, whether in its original state or processed form, to NONMEMBERS;
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;

Sale by agricultural cooperatives to non-members can only be exempted from VAT if

the producer of the agricultural products sold is the cooperative itself. It the
cooperative is not the producer (like a trader), then only those sales to its
members shall be exempted from VAT. (RR 4-2007)
(m)

GROSS RECEIPTS from LENDING ACTIVITIES by CREDIT/MULTI-PURPOSE COOPERATIVES duly registered

with the Cooperative Development Authority;

(n)

SALES by
1) non-agricultural,
2) non- electric and
3) non-credit COOPERATIVES duly registered with the Cooperative Development Authority:
Provided, That
the share capital contribution of each member does not exceed P15k and
regardless of the aggregate capital and net surplus ratably distributed among the members;

(o)

EXPORT SALES by persons who are NOT VAT-registered;

(p)

SALE of REAL PROPERTIES

1) NOT PRIMARILY HELD FOR SALE to customers or held FOR LEASE in the ordinary course of trade
or business
2) utilized for LOW-COST and SOCIALIZED HOUSING as defined by RA 7279, (Urban Development
and Housing Act of 1992), and other related laws,
a) residential lot valued at P1,919,500 and below,
b) house and lot and other residential dwellings valued at P3,199,200 and below:
Provided, That not later January 31, 2009 and every three years thereafter, the amounts
herein stated shall be adjusted to their present value using the Consumer Price Index, as
published by the NSO;

*If the real property is not primarily held for sale to customers or held for lease in the
ordinary course of trade or business BUT the same is used in the trade or business of
the seller, the sale thereof shall be subject to VAT being a transaction incidental to
the taxpayers main business.
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.

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.
*If two or more adjacent residential lots are sold or disposed in favor of one buyer, for
the purpose of utilizing the lots as one residential lot, the sale shall be exempt from
VAT only if the aggregate value of the lots do not exceed P1,919,500.
(q)

LEASE of a RESIDENTIAL UNIT with a monthly rental not exceeding P12,800

Provided, That not later January 31, 2009 and every three years thereafter, the amounts herein stated
shall be adjusted to their present value using the Consumer Price Index, as published by the NSO;

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 does not exceed P1,919,500
shall likewise be exempt from VAT. However, it shall be subjected to the 3% percentage
tax. So:
less than P12.8k/month -> exempt
More than P12.8k/month but less than P1.9195m/year -> 3% Percentage tax.
More than P10k/month and more than P1.9195m/year -> 12% VAT.
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.
Motels are not included.
Units refer to an apartment unit in case of apartments, house in the case of houses,
per person in the case of dorms, boarding houses and bed spaces, and per room in
case of rooms for rent.
(r)

SALE, IMPORTATION, PRINTING or PUBLICATION of

1) books and
2) any newspaper, magazine review or bulletin which
appears at regular intervals with fixed prices for subscription and sale and
is not devoted principally to the publication of paid advertisements;

(s)

SALE, IMPORTATION or LEASE of

1) passenger or cargo VESSELS and AIRCRAFT,
2) including engine, equipment and spare parts thereof
for domestic or
international transport operations;

the exemption from VAT on the importation and local purchase of passenger and/or cargo
vessels shall be limited to those of 150 tons and above, including engine and spare parts
of said vessels.
o Importation of life-saving equipment, safety and rescue equipment and
communication and navigational safety equipment, steel plates and other
metal plates including marine-grade aluminum plates, used for shipping
transport operations shall be exempt. It will be subject to the Domestic
Shipping Development Act of 2004.
o Same thing with the importation of capital equipment, machinery, spare parts,
life-saving and navigational equipment, steel plates and other plates to be
used in the construction, repair, etc of any merchant marine vessel operated
or to be operated in the domestic trade.
(t)

IMPORTATION of
1) fuel,
2) goods and
3) supplies
by persons engaged in INTERNATIONAL SHIPPING or AIR TRANSPORT OPERATIONS

*said fuel, goods and supplies should be used exclusively or should pertain to the
transport of goods and/or passenger from a port in the Philippines directly to a foreign
port, or vice versa, without docking or stopping at any other port in the Philippines
unless the docking or stopping at any other Philippine port is for the purpose of
unloading passenger and/or cargoes that originated from abroad, or to load

passengers and/or cargoes bound for abroad.

If any portion of such fuel, goods or supplies is used for purposes other than that
mentioned, such shall be subject to 12% VAT
(u)

SERVICES of
1) banks,
2) non-bank financial intermediaries performing quasi-banking functions, and
3) other non-bank financial intermediaries; and

*services of such banks, non-bank financial intermediaries performing quasi-banking

functions, and other non-bank financial intermediaries , like money changers or
pawnshops, are subject to percentage tax. (RR 4-2007)
(v)

the
1)
2)

SALE/LEASE of goods/properties or
performance of SERVICES other than the transactions mentioned in the preceding paragraphs,
the GROSS ANNUAL SALES &/or RECEIPTS DO NOT EXCEED P1,919,500:
Provided, That not later January 31, 2009 and every three years thereafter, the amounts herein
stated shall be adjusted to their present value using the Consumer Price Index, as published by
the NSO.

*for purposes of the P1,919,500 threshold, 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 sale shall not be
included in determining the threshold.
(2)

A VAT-registered person may ELECT that subsection (1) not apply to its sale of goods/properties or
services,
Provided, that an election made under this Subsection shall be IRREVOCABLE for a period of three (3)
years from the quarter the election was made. (RA 9337)

EXCEPT for franchise grantees of radio and TV broadcasting whose annual

gross receipts for the preceding year do not exceed P10m. In their case,
the option becomes perpetually irrecovable. (RR 4-2007)

VAT-exempt transactions 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.
Itll be too lengthy if RR 16-05 will be replicated here. Instead, Ill just add those parts
which further explain the statutory enumeration above.
Note: the new threshold values are based on RR 16-2011.
Note: the sale of electricity is now VAT-able
Is copra exempt? Yes! Its considered a food product.
Are the fees, per diems, honoraria or allowances given to directors of corporations exempt?
o YES, exempt since not considered derived from an economic or commercial
activity. Said fees are remunerations paid in the exercise of a right of an owner in
the management of the corporation.
o Not even liable for 3% percentage tax. (RMC 77-2008, Dec 9, 2008)
Is the transfer of real estate from one real estate dealer to another real estate dealer
exempt?
o No. Exemption from VAT has been deleted. (Atty. Salvadors syllabus)

EXEMPTION means that the sale of goods/properties/services, including the use/lease of

properties is NOT subject to VAT(output tax) & the seller is not allowed any tax credit on
the VAT (input tax) previously paid.
* As a GR: persons/transactions taxed under Title V (Other Percentage Taxes) are exempt
from VAT.

DISTINCTION between ZERO-RATING & EXEMPTION

Under VAT, transactions in goods, properties or services receive preferential treatment in 2
ways: by
ZERO RATING
EXEMPTION
In a Zero-rated
No tax credit/refund allowed to
transaction, the SELLER or the seller
transferor is entitled to
CLAIM input tax
CREDIT/REFUND on his
purchase of VAT taxable
goods, properties or
services.
(Input tax is creditable)
All VAT is removed from
Exemption only removes the
the good/property/service. VAT at the exempt stage.
It is completely VAT-free.

SEC. 110. Tax Credits. (A) Creditable Input Tax. (1) Any input tax evidenced by a VAT invoice or official receipt issued in accordance with Section 113 hereof on the
following transactions shall be creditable against the output tax:
(a) Purchase or importation of goods:
(i) For sale; or
(ii) For conversion into or intended to form part of a finished product for sale including packaging materials; or
(iii) For use as supplies in the course of business; or

(iv) For use as materials supplied in the sale of service; or

(v) For use in trade or business for which deduction for depreciation or amortization is allowed under this Code, except
automobiles, aircraft and yachts.
(b) Purchase of services on which a value-added tax has been actually paid.
(2) The input tax on domestic purchase of goods or properties shall be creditable:
(a) To the purchaser upon consummation of sale and on importation of goods or properties; and
(b) To the importer upon payment of the value-added tax prior to the release of the goods from the custody of the
Bureau of Customs.
Provided, that the input tax on goods purchases or imported in calendar month for use on trade or business for
wich deduction is allowed under this Code, shall be spread evenly over the month of acquisition and the 59
succeeding months if the aggregate acquisition cost for such goods, excluding the VAT component thereof, exceeds
One million pesos (P1,000,000): Provided, however, that if the estimated useful life of the capital good is less than
5 years, as used for depreciation purposes, then the input VAT shall be spread over such a shorter period:
Provided, finally, 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 free.

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 VAT prior to the release of goods from customs
custody,
2. To the purchaser of the domestic goods or properties upon consummation of the
sale, or
3. To the purchaser of services or the lessee or licensee upon payment of the
compensation, rental, royalty or fee. (RR 16-2005)
An input tax means the VAT due or paid by a VAT-registered person on importation of
goods or local purchases of goods, properties, or services, including lease or use of
properties, in the course of his trade or business.
o It shall also include the transitional input tax and the presumptive input tax.
o It also includes input taxes which
Can be directly attributed to transactions subject to the VAT, and
A ratable portion of any input tax which cannot be directly attributed to
either the taxable or exempt activity.
Any input tax on the following transactions evidence by a VAT invoice or official receipt
by a VAT-registered person in accordance with Sections 113 and 237 of the Tax Code
shall be creditable against the output tax:
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 raw materials supplied in the sale of services, or
e. For use in trade or business for which deduction for depreciation or
amortization is allowed under the Tax 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. Transactions deemed sale,
5. Transitional input tax,
6. Presumptive input tax,
7. Transitional input tax credits.
Rule on capital goods
Section 110 (A) proviso. Provided, that the input tax on goods purchases or imported in calendar month for use on
trade or business for wich deduction is allowed under this Code, shall be spread evenly over the month of

Mickey Ingles
Ateneo Law 2012
Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012

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acquisition and the 59 succeeding months if the aggregate acquisition cost for such goods, excluding the VAT
component thereof, exceeds One million pesos (P1,000,000): Provided, however, that if the estimated useful life of
the capital good is less than 5 years, as used for depreciation purposes, then the input VAT shall be spread over
such a shorter period: Provided, finally, 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 free.

Capital goods or properties refer to goods or properties

o with estimated useful life of more than one year and
o which are treated as depreciable under the income tax law,
o used directly or indirectly, in the production or sale of taxable goods or services. If the
input tax on capital goods purchased or imported in a calendar month does NOT
exceed P1m, the input tax will be allowed in the month of purchase.
If the aggregate acquistion cost of such goods in a calendar month, excluding the VAT,
exceeds 1m:
o If the estimated life is 5 years or more, the input tax will be evenly spread over
the month of acquisition and the 59 succeeding months.
o If the estimated life is less than 5 years, the input tax will 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 asset.
For construction in progress (CIP)
o CIP is the cost of construction which is not yet completed. It is considered a
purchase of services, the value of which will be determined based on the progress
billins.
o Input taxes on such transaction will be recognized in the moth that payment was
made.
o In case of contract for the sale of service where only labor will be supplied by the
contractor and the materials will be purchased by the contractee from other
suppliers,
input tax on the labor will be recognized in the month that payment was
made based on progress billings.
Input tax on the purchase of materials will be recognized at the time when
the materials were purchased.
An asset acquired in installment for an acquisition cost of more than P1m, excluding the
VAT, will be subject to the amortization of input tax despite the fact that the monthly
payments/installments may not exceed P1m.
o When an asset with an unamortized input tax is retired from business, the
unamortized input tax will be closed against the output taxes on the taxable
period in which it is retired.
Input tax allocation and mixed transactions
(3) A VAT-registered person who is also engaged in transactions not subject to the value-added tax shall be allowed
tax credit as follows:
(a) Total input tax which can be directly attributed to transactions subject to value-added tax; and
(b) A ratable portion of any input tax which cannot be directly attributed to either activity.
The term "input tax" means the value-added tax due 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 shall also include the transitional input tax determined in accordance with Section
111 of this Code.
The term "output tax" means 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 Section 236 of this Code.

In crediting input tax, you have to look at three things:

1. Those which can be directly attributed to transactions subject to VAT, and
2. Those which cannot be directly attributed to either a VAT taxable or VAT-exempt
transaction. For these cases, the input tax shall be pro-rated to the VAT taxable and
Mickey Ingles
Ateneo Law 2012
Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012

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VAT-exempt transactions and only the ratable portion pertaining to transactions

subject to VAT may be recognized for input tax credit.
3. Sales to the Government because you cant credit input tax arising from sales to the
Government since sales to the Government is subject to final withholding VAT.
RR 16-2005 states:
o 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 that can be
directly attributable to VAT taxable sales of goods and services to the
Government (or any of its political subdivisions, etc) shall not be credited against
output taxes arising from sales to non-Government entities.
o If any input tax cannot be directly attributed to either a VAT taxable or VATexempt transaction, the input tax shall be pro-rated to the VAT taxable and VATexempt transactions and only ratable portion pertaining to transactions subject to
VAT may be recognized for input tax credit.
Example
ABC Corporations has the following sales during the month:
To private entities subject to 12% - P100,000
Export sales
- P100,000
Exempt goods
- P100,000
To the Govt
- P100,000
Total
- P400,000
The following input taxes were passed on by its VAT suppliers:
On taxable goods 12%
- P5,000
On the exports
- P3,000
On sale of exempt goods
- P2,000
On sale to government
- P4,000
On depreciable capital good,
- P20,000
Not attributable to any specific activity
(60 month amortization)
From the facts, we can see that only the input tax on the depreciable capital good can not
be allocated to any specific activity. To get the input tax for that, you have to pro-rate it
among the transactions, using the following equation:
Specific transaction
Total Sales
Output

Input
Allocated

14

Unallocated

Amount of input tax not directly

attributable to any activity
Total

Creditable

Net Vat

12%
0%
Exempt

12k
0
0

5k
3k
2k

5k
5k
5k

10k
8k
7k

10k
8k
0

Payable
2k
0
0

Govt

12k

4k

5k

9k

7k18

5k

14
15
16
17
18

15

Excess

Refund/

Input
0
8k
0

Creditable
0
8k
0

Unrecoverable
16

0
0
7k
2k

Either the VATable, export, exempt or the govt

Math column. Output Tax Creditable Tax
Law column. Sec 112
Total input Creditable Tax
Why 7? Because 5% has been withheld by the Govt.

Mickey Ingles
Ateneo Law 2012
Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012

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The input tax attributable to VAT-exempt sales shall not be allowed as credit against the
output tax but should be treated as part of cost or expense.
(B) Excess Output or Input Tax. - 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. If the input tax exceeds the output tax, the excess shall be
carried over to the succeeding quarter or quarters: Provided, however, that any input tax attributable to zero-rated
sales by a VAT-registered person may at his option be refunded or credited against other internal revenue taxes,
subject to the provisions of Section 112. (RA 9361)
(C) Determination of Creditable Input Tax. - The sum of the excess input tax carried over from the preceding
month or quarter and the input tax creditable to a VAT-registered person during the taxable month or quarter shall
be reduced by the amount of claim for refund or tax credit for value-added tax and other adjustments, such as
purchase returns or allowances and input tax attributable to exempt sale.
The claim for tax credit referred to in the foregoing paragraph shall include not only those filed with the Bureau of
Internal Revenue but also those filed with other government agencies, such as the Board of Investments the
Bureau of Customs.

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. (Known as the Net VAT payable)
If the input tax inclusive of input tax carried over from the previous quarter exceeds the
output tax, the excess input tax shall be carried over to the succeeding quarter or
quarters,
o 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. (this is where you can get
input tax credit or refunds)
o In other words, any input tax, attributable to zero-rated sales may be:
Refunded, or
Credited against other internal revenue taxes of the VAT taxpayer.
Transitional and Presumptive Input Tax Credits
SEC. 111. Transitional/Presumptive Input Tax Credits. (A) Transitional Input Tax Credits. - A person who becomes liable to value-added tax or any person who elects to
be a VAT-registered person shall, subject to the filing of an inventory according to rules and regulations prescribed
by the Secretary of finance, upon recommendation of the Commissioner, be allowed input tax on his beginning
inventory of goods, materials and supplies equivalent to two percent (2%) of the value of such inventory or the
actual value-added tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable
against the output tax.

Taxpayers who become VAT-registered persons upon exceeding the minimum turnover of
P1.5m in any 12-month period, or who voluntarily register even if their turnover does
not exceed P1.5m (except franchise grantees of radio and tv broadcasting whose
threshold is P10m) shall be entitled to a transitional input tax on the invonetory on hand
as of the effectivity of their VAT registration, on the following:
1. Goods purchase for resale in their present condition
2. Materials purchased for further processing, but which have not yet undergone
processing,
3. Goods which have been manufactured by the taxpayer
4. Goods in process for sale, or
5. Goods and supplies for use in the course of the taxpayers trade or business as a
VAT-registered person. (RR 16-2005)
The transitional input tax shall be
a. 2% of the value of the beginning inventory on hand, or
b. actual VAT paid on such goods, materials and supplies
whichever is HIGHER.
Mickey Ingles
Ateneo Law 2012
Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012

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The 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. (Fort Bonifacio Development Corp v CIR)
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. (FBDC v CIR)
There is no transitional input tax on capital goods or on supplies. (Reyes, 2009 Edition)
(B) Presumptive Input Tax Credits. (1) Persons or firms engaged in the processing of sardines, mackerel and milk, and in manufacturing refined sugar
and cooking oil and packed noodle-based instant meals, shall be allowed a presumptive input tax, creditable
against the output tax, 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.
As used in this Subsection, 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.

Presumptive input tax credits are given for those engaged: o

In the processing of sardines, mackerel and milk; and
o In manufacturing refined sugar, cooking oil and packed noodle-based instant
meals
The rate is 4% of the gross value in money.
They are given this 4% presumptive input tax because the goods used in the said
enumeration are VAT-exempt.
Refunds or Tax Credits on Input Tax
SEC. 112. Refunds or Tax Credits of Input Tax. (A) 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, 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: Provided, however,
That in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the
acceptable foreign currency exchange proceeds thereof had been duly accounted for in accordance with the rules
and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in
zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods of properties or services, 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: Provided, finally, that for a
person making sales that are zero-rated under Section 108(B)(6), the input taxes shall be allocated ratably
between his zero-rated and non-zero-rated sales.
(B) Cancellation of VAT Registration. - 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 this Code may, within
two (2) years from the date of cancellation, apply for the issuance of a tax credit certificate for any unused input
tax which may be used in payment of his other internal revenue taxes.
(C) Period Within Which Refund or Tax Credit of Input Taxes Shall be Made. - In proper cases, the 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 filed in accordance with
Subsection (A) hereof.
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 dayperiod, appeal the decision or the unacted claim with the Court of Tax Appeals.(D) Manner of Giving Refund. - Refunds shall be made upon warrants drawn by the Commissioner or by his duly
authorized representative without the necessity of being countersigned by the Chairman, Commission on audit, the
provisions of the Administrative Code of 1987 to the contrary notwithstanding: Provided, That refunds under this
paragraph shall be subject to post audit by the Commission on Audit.

There are three instances where one can avail of a VAT refund:
1. When there is excess input VAT versus output VAT;
2. Zero-rated and effectively-zero rated sales
Mickey Ingles
Ateneo Law 2012
Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012

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3. Cessation of business
For zero-rated and effectively zero-rated sales of goods, properties or services, the
application should be filed within 2 years after the close of the taxable quarter when
such sales were made.
o The two year period is 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 v Mirant Pagbilao Corp)
o Thus, when a zero-rated VAT taxpayer pays its input VAT a year after the
pertinent transaction, said taxpayer only has a year to file a claim for refund or
tax credit of the unutilized creditable input VAT.
Take note of CIR v Aichi, 2010:
o The CIR has 120 days, from the date of the submission of the complete
documents within which to grant or deny the claim for refund/credit of input vat.
o In case of full or partial denial by the CIR, the taxpayers recourse is to file an
appeal before the CTA within 30 days from receipt of the decision of the CIR.
However, if after the 120-day period the CIR fails to act on the application
for tax refund/credit, the remedy of the taxpayer is to appeal the inaction
of the CIR to CTA within 30 days.
Hence, if filed with CTA before the 120-day period expires, CTA will
dismiss for prematurity.
If filed with CTA after the 150-day (120 + 30 days), CTA will
dismiss for being late.
o Weird because it will dismiss even if still within 2 years.
o This only applies to credit input tax refunds.
For cessation of business, a VAT-registered person whose registration has been cancelled
due to retirement from or cessation of business, or due to changes in or cessation of
status under Sec. 106 (C), may within 2 years from the date of cancellation, apply for
the issuance of a tax credit certificate for any unused input tax which he may use in
payment of his other internal revenue taxes.
o Provided, that he shall be entitled to a refund if he has no internal revenue tax
liabilities against which the tax credit certificate may be utilized.
More on cessation of business or change of status as VAT-registered person (RR 162005):
o Subject to output tax:
Change of business activity from VAT taxable to VAT-exempt status.
Approval of a request for cancellation of registration due to reversion to
exempt status.
o Not subject to output tax:
Change of control of a corporation by the acquisition of the controlling
interest of such corporation by another stockholder or group of
stockholders. The goods or properties will not be considered sold,
bartered, etc.
Change in the trade or corporate name of the business.
Merger or consolidation of corporations. The unused input tax of the
dissolved corporation shall be absorbed by the surviving or new
corporation.
Withholding of creditable value-added tax
(C) Withholding of Creditable Value-Added Tax. - 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 each purchase of goods from sellers and services rendered by contractors which are
subject to the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold the value
-added tax due at the rate of five percent (5%) of the gross thereof: Provided, That the payment for lease or use
of

Mickey Ingles
Ateneo Law 2012
Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012

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properties or property rights to nonresident owners shall be subject to ten percent (12%) withholding tax at the
time of payment. For this purpose, the payor or person in control of the payment shall be considered as the
withholding agent.
The value-added tax withheld under this Section shall be remitted within ten (10) days following the end of the
month the withholding was made.

The VAT is withheld in two instances:

1. In sales of goods and services to the Govt (5% withheld by the government)
2. In payment for lease or use of properties to nonresident owners (12% withheld by
the lessee)
In transactions with the government, the 5% final withholding VAT shall represent the
net VAT payable for the seller. The remaining 7% accounts for the standard input VAT for
sales of goods or services to the government or any of its political subdivisions, in lieu of
the actual input VAT directly attributable or ratably apportioned to such sales.
o Should actual input VAT attributable to sales to government exceed 7% of gross
payments, the excess may form part of the sellers expense or cost.
o If the actual input VAT attributable to sale to government is less than 7%, the
difference should be counted as income.
Kaka sells to the Government something for P100. The VAT is P12. The P5
is withheld by the government, so the Government only pays him P107.
o In this scheme, the government assumes that your input VAT will be 7%. If it is
7%, then all is well.
But if the input VAT is higher than 7 (in Kakas case, for example it was
P10), then the excess of P3 will be treated as an expense. It will form part
of the expense column in the income statement.
But if the input VAT is smaller than 7% (for example, Kaka only spent P5),
then there is income on Kakas side, this will form part of his income.
In both instances, Kaka will lose or be benefited only by 30% (rate of
income tax) because it will form part of his income and subject to the
income tax.
In transactions with non-residents, 12% will be withheld with respect to the following
payments:
1. Lease or use of properties or property rights owned by non-residents, and
2. Other services rendered in the Philippines by non-residents.
o The government did this as a matter of enforcement. How will the Government
run after the VAT of a non-resident, right? So, they just make the payors
withholding agents.
Jhunabhel lives in the condo owned by non-resident Tevez. Jhunabhel will
withhold P12 of the total amount of the lease of P112. Jhunabhel will only
pay Tevez P100.
o The one who remits the 12% to the government, when he files his return can
state that he is entitled to an input tax credit.
In Jhunabhels case, she can ask for the input tax credit of P12.
VAT on the sale of real property in installments by a real estate dealer
A sale on installment of real property by a real estate dealer shall be subject to the 12%
VAT of the gross selling price.
A real estate dealer is any person engaged in the business of buying, developing, selling,
exchanging real property as principal and holding himself out as a full or part-time
dealer of real estate.
The gross selling price is whichever is highest of the:
o Consideration in the deed of sale,
o Zonal value, per CIR; and
Mickey Ingles
Ateneo Law 2012
Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012

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The fair market value per real property declaration with the provincial or city
assessor.
When the initial payments do not exceed 25% of the selling consideration in the deed of
sale, the steps are:
1. Multiply the gross selling price by 12% (VAT)
2. Get the VAT on the installment payment received, using the formula below:
Collection on the consideration (no VAT) x
Computed VAT in
Agreed consideration (no VAT)
Step 1
Initial payments are the payments
o which the seller received before and upon the execution of the instrument of sale,
and
o payments which he expects or is scheduled to receive in cash or property (other
than evidence of indebtedness of the purchaser) during the taxable year of the
sale or disposition.
o It will include more than the down payment in the year of sale.
o It will not include the amount of mortgage on the real property sold which was
already there at the time of sale and which was assumed by the buyer,
EXCEPT when such mortgage exceeds the cost or other basis of the
property to the seller, in which case the excess shall form part of the initial
payments.
For example, the mortgaged assumed by the buyer was P600k,
and the cost to the seller was just P500k. The P100k excess will be
included as initial payments
If the initial payments exceed 25% of the selling price, the transaction shall be
considered a cash sale with a VAT at the time of the sale.
Take note that it is the agreed consideration which is used to determine the initial
payments, while it is the highest among the consideration, zonal value and FMV which is
used for the computation of the VAT.
o

VAT on Lease
All forms of property for lease, whether real or personal, are liable to VAT except when
gross annual sales do not exceed P1.5m, in which case they will be exempt. (See
discussion on VAT-exempt)
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.
See also rules just mentioned when lessor is a non-resident.
In a lease contract, the advance payment by the lessee may be:
1. A loan to the lessor from the lessee, or
2. Option money for the property, or
3. Security deposit to insure the faithful performance of certain obligations of the lessee
to the lessor, or
4. Pre-paid rental.
o If the advanced payment is #1, 2 or 3, not subject to VAT.
o If the advanced payment is #4, then such payment is taxable to the lessor in the
month when it was received, irrespective of the accounting method employed by
the lessor.
o If the security deposit (#3) is applied to rental, then it shall be subject to VAT at
the time of its application.
VAT Registration
Mickey Ingles
Ateneo Law 2012
Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012

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Every taxpayer subject to the VAT must register with the BIR as a VAT taxpayer and pay
an annual registration fee of P500 for every separate and distinct establishment,
including facility types where the business is conducted.
Every taxpayer not subject to VAT but subject to the excise tax or percentage tax must
register with the BIR and pay an annual registration fee of P500 for every separate and
distinct establishment where the business is conducted.
o VAT exempt persons under Section 109 who did not opt to be registered as VAT
taxpayers must register as non-VAT taxpayers.
Mandatory Registration
Sec 236 (G) Persons required to register for Value-Added Tax
1) 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:
a) His gross sales or receipts for the past 12 months, other than those that are exempt under Section 109(A) to
(U) have exceeded One Million Five Hundred Thousand Pesos (P1,500,000); or
b) There are reasonable grounds to believer that his gross sales or receipts for the next 12 months, other than
those that are exempt under Section 109 (A) to (U), will exceed One Million Five Hundred Thousand Pesos
(P1,500,000);
2) Every person who becomes liable to be registered under paragraph (1) of this Subsection shall register with the
Revenue District Office which has jurisdiction over the head office or branch of that person, and shall pay the
annual registration fee prescribed in Subsection (B) hereof. If he fails to register, he shall be liable to pay the tax
under Title IV as if he were a VAT-registered person, but without the benefit of input tax credits for the period in
which he was not properly registered.

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) His gross sales or receipts for the past 12 months, other than those exempt under
Section 109 (A) to (U), have exceeded P1.5m; or
2) There are reasonable grounds to believe that his gross sales or receipts for the next
12 months, other than those exempt under Section 109 (A) to (U), will exceed
P1.5m
If a person who is mandated to register does not, he shall:
o Be liable to pay the tax as if he were a VAT-registered person, and
o Without the benefit of input tax credits.
Optional registration
(H) Optional Registration for Value-Added Tax of Exempt Person. (1) Any person is not required to register for VAT under Subsection (G) hereof may elect to resiter for VAT by
registering with the Revenue District Office that has jurisdiction over the head office of that person, and paying the
annual registration fee in Subsection (B) hereof.
(2) Any person who elects to register under this Subsection shall not be entitled to cancel his registration under
Subsection (F)(2) for the next three years.
For purposes of Title IV of this Code, any person who has registered VAT as a tax type in accordance with the
provisions of Subsection (C) hereof shall be referred to as Vat-registered person who shall be assigned only one
Taxpayer Identification Number (TIN).

Any person who is not required to registered as a VAT taxpayer may register for the VAT.
He, however, cannot cancel his registration for the next three years.
Cancellation of VAT registration
(G) Cancellation of VAT registration. (1) A VAT-registered person may cancel his registration for VAT if:
(a) he makes written application and can demonstrate ot the commissioners satisfaction that his gross sales or
receipts for the following 12 months, over than those that are exempt under Section 109 (A) to (U), will not exceed
one million five hundred thousand pesos (P1,500,000), 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 months.

Mickey Ingles
Ateneo Law 2012
Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012

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The cancellation of registration will be effective from the first day of the following month.

Read codal na lang. Hehe.

Compliance Requirements
SEC. 113. Invoicing and Accounting Requirements for VAT-Registered Persons. "(A) Invoicing Requirements. - A VAT-registered person shall issue:
"(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.
"(B) Information Contained in the VAT Invoice or VAT Official Receipt. - The following information shall be indicated
in the VAT invoice or VAT official receipt:
"(1) A statement that the seller is a VAT-registered person, followed by his 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 value-added tax: Provided, That:
"(a) The amount of the tax shall be shown as a separate item in the invoice or receipt;
"(b) 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;
"(c) If the sale is subject to zero percent (0%) value-added tax, the term " zero-rated sale" shall be written or
printed prominently on the invoice or receipt;
"(d) 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
"(4) In the case of sales in the amount of one thousand pesos (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.
"(C) Accounting Requirements. - Notwithstanding the provisions of Section 233, all persons subject to the valueadded tax under Sections 106 and 108 shall, in addition to the regular accounting records required, maintain a
subsidiary sales journal and subsidiary purchase journal on which the daily sales and purchases are recorded. The
subsidiary journals shall contain such information as may be required by the Secretary of Finance.

A VAT-registered person shall issue:

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
If the sale is exempt from VAT, the term VAT-exempt sale shall be written or printed
prominently on the invoice or receipt
If the sale is subject to 0%, the term zero-rated sale shall be written or printed
prominently on the invoice or receipt
If the sale involves some which are subject to VAT and some which are zero-rated or
VAT-exempt, the invoice or receipt shall clearly indicate the break-down of the sale price
between the taxable, exempt and zero-rated components
o The calculation of the VAT on each portion of the sale shall be shown on the
invoice or receipt.
o But the seller may issue separate invoices or receipts for the taxable, exempt and
zero-rated components of the sale
The date of the transaction, quality, unit cost and description of the goods or properties
or nature of the services must also be indicated.
o Input tax cannot be credited against output tax when supported by an undated
official receipt or invoice. (Nesic Philippines Inc v CIR, May 6, 2010)
When the sale is P1000 or more to a VAT-registered person, the name, business style,
address and TIN of the purchaser, customer or client must also be placed in the receipt
or invoice.
Issuing Erroneous VAT invoice or VAT official receipt
Section 113(D) Consequence of Issuing Erroneous Vat Invoice or Vat Official Receipt.

Mickey Ingles
Ateneo Law 2012
Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012

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(1) If a person who is not a VAT-registered person issues an invoice or receipt showing his Taxpayer Identification
Number (TIN), followed by the word VAT:
(a) The issuer shall, in addition to any liability to other percentage taxes, be liable to:
(i) The tax imposed in Section 106 or 108 without the benefit of any input tax credit;
and (ii) A 50% surcharge under Section 248 (B) of this code;
(b) The VAT shall, if the other requisite information required under Subsection (B) hereof is shown on the invoice
or receipt, be recognized as an input tax credit to the purchaser under Section 110 of this Code.
(2) If a VAT-registered person issues a VAT invoice or VAT official receipt for a VAT-exempt transaction, but fails to
display prominently on the invoice or receipt the term VAT-exempt Sale", the issuer shall be liable to account for
the tax imposed in Section 106 or 108 as if Section 109 did not apply.
"(E) Transitional Period. - Notwithstanding Subsection (B) hereof, taxpayers may continue to issue VAT invoices and
VAT official receipts for the period July 1, 2005 to December 31, 2005, in accordance with Bureau of Internal
Revenue administrative practices that existed as of December 31, 2004.

If a person is NOT a VAT-registered person issues an invoice or receipt showing his TIN
followed by the word VAT, the issuer shall be:
1. Liable for the percentage tax due on his transaction
2. Liable for the VAT, without credit for any input tax, and
3. Subject to a 50% surcharge.
o VAT shall be recognized as an input tax credit to the purchaser under Section
110, provided the requisite information required in invoices or receipts are shown
on the invoices or receipts.
If a VAT-registered person issues a VAT invoice or official receipt for a VAT-exempt
transaction, but fails to display prominently on the invoice or receipt the term VATexempt sale, he shall be subject to the VAT, as if Section 109 on exempt transactions
did not apply.
o Meaning, he has to pay the VAT.
If the 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 the
VAT.
o The output tax shall be computed by multiplying the total amount in the invoice
by a fraction using the rate of VAT as the numerator and 100% plus the rate of
the VAT as the denominator.
RR 8-99 says that penalties for violation of the requirement that output tax on sale of
goods and services should not be separately indicated in the sales invoice or official
receipt.
o The amount appearing in the sales invoices/receipts is thus deemed inclusive of
the Value-Added Tax due thereon.
o The penalty for violation of the said requirement is a fine of not less than One
Thousand Pesos (P 1,000) but not more than Fifty Thousand Pesos (P50,000),
and imprisonment of not less than two (2) years but not more than four (4)
years.
Return and Payment of VAT
Sec. 114. Return and Payment of Value-Added Tax. "(A) In General. - Every person liable to pay the value-added tax imposed under this Title shall file a quarterly
return of the amount of his gross sales or receipts within twenty-five (25) days following the close of each taxable
quarter prescribed for each taxpayer: Provided, however, That VAT-registered persons shall pay the value-added
tax on a monthly basis.
"Any person, whose registration has been cancelled in accordance with Section 236, shall file a return and pay the
tax due thereon within twenty-five (25) days from the date of cancellation of registration: Provided, That only one
consolidated return shall be filed by the taxpayer for his principal place of business or head office and all branches.
"(B) Where to File the Return and Pay the Tax. - Except as the Commissioner otherwise permits, the return shall be
filed with and the tax paid to an authorized agent bank, Revenue Collection Officer or duly authorized city or
municipal Treasurer in the Philippines located within the revenue district where the taxpayer is registered or
required to register.

Mickey Ingles
Ateneo Law 2012
Atty. Montero, with review notes from Atty. Salvador last updated: February 24, 2012

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Every person liable to pay VAT shall file a quarterly return of the amount of his quarterly
gross sales or receipts within 25 days following the close of the taxable quarter using the
latest version of Quarterly VAT Return.
The VAT-registered persons shall pay the VAT on a monthly basis.
Power of the Commissioner
SEC. 115. Power of the Commissioner to Suspend the Business Operations of a Taxpayer. - The
Commissioner or his authorized representative is hereby empowered to suspend the business operations and
temporarily close the business establishment of any person for any of the following violations:
(a) In the case of a VAT-registered Person. (1) Failure to issue receipts or invoices;
(2) Failure to file a value-added tax return as required under Section 114; or
(3) Understatement of taxable sales or receipts by thirty percent (30%) or more of his correct taxable sales or
receipts for the taxable quarter.
(b) Failure of any Person to Register as Required under Section 236. The temporary closure of the establishment shall be for the duration of not less than five (5) days and shall be lifted
only upon compliance with whatever requirements prescribed by the Commissioner in the closure order.