VALUE-ADDED TAX

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

VAT is a tax on consumption levied on the sale, barter, exchange or lease of goods or properties and
services in the Philippines and on importation of goods into the Philippines. The seller is the one statutorily
liable for the payment of the tax but the amount of the tax may be shifted or passed on to the buyer,
transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts
of sale or lease of goods, properties or services at the time of the effectivity of RA No. 9337. However, in
the case of importation, the importer is the one liable for the VAT (RR 16-05).

CHARACTERICTICS OF VAT
1. Value added - It is a tax on value added of a taxpayer arising from the sales of goods, properties or
services during the quarter. “Value added” is the difference between the total sales of the taxpayer
for the taxable quarter subject to VAT and his total purchases for the same period subject also to
value added tax (Mamalateo, 2014).

2. Tax credit or Invoice method - It is collected through the tax credit method or invoice method. The
input taxes shifted by the sellers to the buyer are credited against the buyer’s output taxes when he
in turn sells the taxable goods, properties or services (Sec. 105 and 110 [A], NIRC).

3. Sales tax – VAT is a tax on the taxable sale, barter or exchange of goods, properties or services. A
barter or exchange has the same tax consequence as a sale. A sale may be an actual or deemed sale,
or an export sale or local sale (Mamalateo, 2014). The buyer is informed that the price includes VAT
and the computation is shown in the official receipt/sales invoice.

4. Broad-based tax on consumption in the Philippines – It is broad-based because every sale of goods,
properties or services at the levels of manufacturers or producers and distributors is subject to VAT.
However, the tax burden rests on the final consumers (Mamalateo, 2014).

5. Excise tax based on consumption – It is a tax on the privilege of engaging in the business of selling
goods or services, or the importation of goods.

6. Indirect tax - Tax shifting is always presumed. It may be shifted or passed on to the buyers,
transferee, or lessee of the goods, properties or services as part of the purchase price.

7. Ad valorem tax - The amount is based on the gross selling price or gross value in money of the goods
or service, including the use or lease or properties.

8. Not a cascading tax. - Tax cascading means that an item is taxed more than once as it makes its way
from production to final retail sale. VAT is not a cascading tax because it is merely added as part of
the purchase price and not as a tax because the burden is merely shifted. Thus, there can be no tax
on the tax itself.

9. National tax - Imposed by the national government.

10. Revenue or general tax

11. Regressive tax – By its very nature, VAT is regressive tax.

ELEMENTS OF VAT-TAXABLE TRANSACTIONS

The following elements must be present in order for a transaction to be subjected to 12% VAT:
1. It must be done in the ordinary course of trade or business;

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

It means the regular conduct or pursuit of a commercial or an economic activity, including
transactions incidental thereto, by any person regardless of whether or not the person engaged
therein is a non-stock, non-profit private organization (irrespective of the disposition of its net
income and whether or not it sells exclusively to members or their guests), or government entity (Sec.
105, NIRC).

2. There must be a sale, barter, exchange, lease of properties, or rendering of service in the
Philippines; and

Sale, barter, exchange, lease of goods or properties, or rendering of service in the Philippines
When there is no sale, barter or exchange of goods or properties, then no VAT should be imposed.
Thus, when an affiliate provides funds to a taxpayer who then uses the funds to pay a third party, the
transaction is not subject to VAT, as there was no sale, barter, or exchange between the affiliate and
the taxpayer. The money was simply given as a dole-out (CIR v. Sony Philippines, Inc., G.R. No. 178697,
November 17, 2010).
However, if a taxpayer renders service to an affiliate for a fee (even if the fee is merely to reimburse
costs), the service is subject to VAT. Thus, the collection of condominium corporations of association
dues and membership fees from its member condominium-unit owners are subject to VAT even if
receives payments for services rendered to its affiliates in trust and on reimbursement-of-cost basis
only, without realizing profit (CIR v. CA and COMASERCO, G.R. No. 125355, March 30, 2000).

3. It is not VAT-exempt or VAT zero-rated (Ingles, 2015).

Profit element not required for VAT to be imposed

VAT is a tax on trasaction, there is no need for a taxable gain, unlike in the income tax. It is not
required either by law or jurisprudence (Ingles, 2015).
VAT is a tax on transactions imposed at every stage of the distribution process on the sale, barter,
exchange of goods or property, and on the performance of services, even in the absence of profit
attributable thereto. The term “in the course of trade or business” applies to all transactions. Even a
non-stock, non-profit corporation or government entity is liable to pay VAT for the sale of goods and
services (CIR v. COMASERCO, March 30, 2000).

IMPACT AND INCIDENCE OF TAX

VAT as an Indirect Tax
The amount of VAT payable may be passed on by the seller, transferor, or lessor to the buyer, transferee
or lessee. When passed on, the amount of VAT due forms part of the purchase price of goods or services.
As a result, it is the buyer who bears the burden of tax, although the one liable to pay it is the seller.

IMPACT INCIDENCE
The one statutorily liable for the The one who bears the economic burden
payment of tax, thus, the one who can (payment) of tax (VAT), the place at which the tax
avail of a tax refund. comes to rest.
The seller upon whom the tax has The tax is shifted to the final consumer or the
been imposed. He collects the tax and buyer of the goods, properties, or services as part
pays it to the government. of the purchase price.

DESTINATION PRINCIPLE / CROSS BORDER DOCTRINE

Goods and services are taxed only in the country where they are consumed. Thus, exports are zero-
rated, while imports are taxed (Domondon, 2014).

Under the Destination Principle, the goods and services are taxed only in the country where these are
consumed, and in connection with the said principle, the Cross Border Doctrine mandates that NO VAT
shall be imposed to form part of the cost of the goods destined for consumption OUTSIDE the territorial
border of the taxing authority. Hence, actual export of goods and services from the Philippines to a foreign
country must be free of VAT, while those destined for use or consumption within the Philippines shall be
imposed with 10% (now 12%) VAT (Atlas Consolidated Mining and Development Corporation v. CIR, G.R.
No. 141104 & 148763, June 8, 2007).

ZERO-RATED SALE OF SERVICE

The following services performed in the Philippines by VAT- registered persons shall be subject to
zero percent (0%) rate.
1. Processing, manufacturing or repacking goods for other persons doing business outside the
Philippines which goods are subsequently exported, where the services are paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);
2. Services other than those mentioned in the preceding paragraph rendered to a person engaged in
business conducted outside the Philippines or to a nonresident person not engaged in business who
is outside the Philippines when the services are performed, the consideration for which is paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations of the
BSP i.e. recruitment;
3. Services rendered to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects the supply of such services to
zero percent (0%) 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 seventy percent (70%) of total
annual production;
6. Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country;
and
7. Sale of power or fuel generated through renewable sources of energy such as, but not limited to,
biomass, solar, wind, hydropower, geothermal, ocean energy, and other emergeng energy sources using
technologies such as fuel cells and hydrogen fuels (Sec. 108, NIRC as amended by R.A. 9337).

VAT-EXEMPT TRANSACTIONS
These refer to the sale of goods or properties and/or services and the use or lease of properties that
is not subject to VAT (output tax) and the seller is not allowed any tax credit of VAT (input tax) on
purchases.
The person making the exempt sale of goods, properties or services shall not bill any output tax to his
customers because the said transaction is not subject to VAT (Sec 4.109-1, R.R. No. 16-2005).

a. Sale or importation of
i. agricultural and marine food products in their original state,
ii. livestock and poultry of
a. a kind generally used as, or yielding or producing foods for human consumption;
and
b. breeding stock and genetic materials therefor

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
a. 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

1. residents of the Philippines returning from abroad, and
2. non-resident citizens coming to resettle in the Philippines;
Provided, that such goods are exempt from customs duties under the Tariff and
Customs Code of the Philippines

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 and other goods
for use in the manufacture and merchandise of any kind in commercial quantity) belonging
to persons coming to settle in the Philippines,
1. for their own use and
2. not for sale, barter or exchange,
3. accompanying such persons, or arriving within ninety (90) days before or after
their arrival.
 4. upon the production of evidence satisfactory to the Commissioner of Internal
Revenue, that such persons are actually coming to settle in the Philippines and that
the change of residence is bonafide;

e. Services subject to percentage tax

f. Services by
1. agricultural contract growers, and
2. milling for others of
a. palay into rice,
b. corn into grits, and
c. sugar cane into raw sugar

g. Medical, dental, hospital and veterinary services, except those rendered by professionals

h. Educational services
1. rendered by private educational institutions duly accredited by the
a. Department of Education (DepED),
b. the Commission on Higher Education (CHED), and
c. the Technical Education and Skills Development Authority (TESDA)
2. and those rendered by government educational institutions;

OUTPUT AND INPUT TAX

Output Tax
It means the value-added tax due on the sale or lease of taxable goods or properties or services by
(1) any person registered or (2) required to register under Sec. 236 of the NIRC (Sec. 110[A][3], NIRC).

Output tax is what the taxpayer-seller passes on to the purchases. Note that what is output tax for the
seller is input tax to the purchaser (Ingles, 2015).

Input Tax
It means the value-added tax due on or paid by a VAT-registered person on importation of goods or
local purchase of goods, properties or services, including lease or use of properties, in the course of
his trade or business. It shall also include the transitional input tax and the presumptive input tax
determined in accordance with Section 111 of the NIRC (Sec. 110[A][3], NIRC).
It includes input taxes which can be
1. directly attributed to transactions subject to the VAT, plus
2. a ratable portion of any input tax which cannot be directly attributed to either the taxable or
exempt activity (R.R. 16-2005).

REFUND OR TAX CREDIT OF EXCESS INPUT TAX

Who may claim for refund/apply for issuance of tax credit certificate
The following can avail of refund or tax credit:
1. Zero-rated and effectively zero-rated sales - Any VAT-registered person, whose sales are zero-
rated or effectively zero-rated (Sec. 112 [A]).
2. Cessation of business or VAT status - A person whose registration has been cancelled due to
retirement from or cessation of business, or due to changes in or cessation of status under Section
106(C) of NIRC (Sec. 112[B]).

Requirements to claim for VAT refund

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

The taxpayer must prove the following for a tax refund to prosper:
1. That it is a VAT-registered entity;
2. It must substantiate the input VAT paid by purchase invoices or official receipts (Commissioner v.
Manila Mining Corporation, G.R. No. 153204, August 31, 2005).