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Updated 21 March 2013

PM REYES NOTES ON TAXATION II: VALUE-ADDED TAX


In general
Q1.Define Value-Added Tax (VAT).
A Value-Added Tax is a tax assessed, levied, and collected on every importation of goods, whether or not in the course of trade or business, or imposed on each sale, barter, exchange or lease of goods or properties or on each rendition of services in the course of trade or business as they pass along the production and distribution chain, the tax being limited only to the value added to such goods, properties or services by the seller, transferor or lessor.

Q3.In general, who are liable to pay the VAT?


1. Any person who, in the course of trade or business, sells, barters, exchanges or leases goods or properties, or renders services Except: A person, whether or not VATregistered, whose annual gross sales or receipts does not exceed P1.5 million.1 2. Any person who imports goods, whether in the course of trade or business or not. (see SECTION 105, T AX CODE)

Q1.1. What is the current VAT rate?


The current VAT rate is 12%.

Q4.How does the VAT taxpayer determine his tax liability?2


The taxpayer determines his tax liability by computing the tax on the gross selling price or gross receipt (output tax) and subtracting or crediting the earlier VAT on the purchase or importation of goods or on the purchase of service (input tax) against the tax due on his own sale. As otherwise stated by the Supreme Court in CIR V. SEAGATE T ECHNOLOGY [FEBRUARY 11, 2005]: Under the VAT method of taxation, which is invoicebased, an entity can subtract from the VAT charged on its sales or outputs the VAT it paid on its purchases, inputs and imports. For example, when a seller charges VAT on its sale, it issues an invoice to the buyer, indicating the amount of VAT he charged. For his part, if the buyer is also a seller subjected to the payment of VAT on his sales, he can use the invoice issued to him by his supplier to get a reduction of his own VAT liability.

Q2.What are the characteristics of the VAT?


1. It is a percentage tax imposed at every stage of the distribution process on the sale, barter, or exchange or lease of goods or properties and on the performance os service in the course of trade or business or on the importation of goods, whether for business or non-business. 2. It is a business tax levied on certain transactions involving a wide range of goods, properties and services, such tax being payable by the seller, lessor or transferor. 3. It is an excise tax or a tax on the privilege of engaging in the business of selling goods or services or in the importation of goods 4. It is an indirect tax, the amount of which may be shifted to or passed on the buyer, transferee or lessee of the goods, properties or services. 5. It is an ad valorem tax as its amount or rate is based on gross selling price or gross value in money or gross receipts derived from the transaction

If the annual gross sales or receipts does not exceed P1.5 million, he shall be liable instead for the 3% percentage tax on small business enterprises (see Section 116, Tax Code). 2 This shall be discussed in greater detail under Input Vat PM REYES NOTES ON TAXATION II: VALUE-ADDED TAX BY PIERRE M ARTIN DE LEON REYES This reviewer is a compilation of personal notes in Taxation Two and notes and lectures from Atty. Gruba and Atty. Montero and research and memoranda made during the authors internship at SyCip Salazar Gatmaitan and Hernandez (SSGH) . References have also been made to the following books: DE LEON & DE LEON, JR. THE FUNDAMENTALS OF TAXATION (2012); DE LEON & DE LEON, JR. COMPREHENSIVE REVIEW OF TAXATION (2010); VITUG & ACOSTA. TAX LAW AND JURISPRUDENCE (2006); DOMONDON, TAXATION VOLUME II: INCOME TAX (2009); CO-UNTIAN, JR. TAX DIGEST (2009); MAMALATEO , REVIEWER ON TAXATION (2008). This reviewer is best used with SACADALAN-CASASOLA, NIRC AND OTHER LAWS (2012). Possessors are granted the right to reproduce and distribute this reviewer as well as the right to convert the work to any medium for the purpose of preservation and/or continued distribution provided that the authors name remains clearly associated with the wor k and that no alterations of the form and content are made.

Updated 21 March 2013

PM REYES NOTES ON TAXATION II: VALUE-ADDED TAX


Q4.1. Differentiate input tax output tax from
V.

As differentiated by the Supreme Court in CIR BENGUET CORPORATION [JULY 14, 2006]:

Input VAT or input tax represents the actual payments, costs and expenses incurred by a VATregistered taxpayer in connection with his purchase of goods and services. Thus, "input tax" means the value-added tax paid by a VAT-registered person/entity in the course of his/its trade or business on the importation of goods or local purchases of goods or services from a VAT-registered person. On the other hand, when that person or entity sells his/its products or services, the VAT-registered taxpayer generally becomes liable for 10% (now 12%) of the selling price as output VAT or output tax. Hence, "output tax" is the value-added tax on the sale of taxable goods or services by any person registered or required to register under the Tax Code.

2. The right or privilege to use patent, copyright, design or model, plan, secret formula or process, good will, trademark, trade brand, or other like property or right 3. The right or privilege to use in the Philippines of any industrial, commercial or scientific equipment 4. The right or the privilege to use motion picture files, films tapes and discs 5. Radio, television, satellite transmission and cable television line (see SECTION 106(A)(1), T AX CODE)

Q5.2. What are sales

transactions deemed

Basic Elements
Q5.What are the elements of a VAT-taxable sale?3
1. Sale of goods and services, lease of property including deemed sale transactions 2. In the course of trade or business4 (except importation5) and including incidental transactions 3. The transaction is not a VAT zero-rated or a VAT-exempt transaction.

1. Transfer of goods or properties not in the course of business (originally intended for sale or for use in the course of business) 2. Property dividends (transfer to shareholders as share in the profits of VAT-registered persons or to creditors in payment of debt) 3. Consignment of goods without the sale being made within 60 days 4. Retirement from or cessation of business with respect to inventories of taxable goods existing (see SECTION 106(B), T AX CODE) Q5.2.1. San Roque Power entered into a purchase power agreement with NAPOCOR to develop the hydroelectric potential of the Lower Agno River. During the testing period, electricity was transferred by San Roque to NAPOCOR. Can the transfer be considered a sale of electricity? Yes. In SAN ROQUE POWER CORP. V. CIR [NOVEMBER 25, 2009], the Supreme Court held that although the transfer was not a commercial sale, the NIRC does not limit the definition of sale to commercial transactions in the normal course of business. Conspicuously, Section 106(B) of the NIRC, which deals with the imposition of VAT, does not limit the term sale to commercial sales, rather it extends the term to transactions that are deemed sale. In the said case, it was undisputed that San Roque transferred to NPC all the electricity that was produced during the trial period. The fact that it was not transferred through a commercial sale or in the normal course of business does not deflect from the fact that such transaction is deemed as a sale.

Q5.1. What are considered as goods or properties for VAT purposes?


All tangible and intangible objects which are capable of pecuniary estimation, including: 1. Real properties held primarily for sale to customers or held for lease in the ordinary course of business

One more element should be added: the annual gross sales or receipts must exceed P1.5 million. Otherwise, it is subject to the 3% percentage tax on small business enterprises. 4 As opposed to isolated transactions. Note, however, that services rendered by non-resident foreign persons shall be considered as being rendered in the course of trade or business. 5 An importation is VAT-taxable whether made in the course of trade or business or not.

PIERRE MARTIN DE LEON REYES

Updated 21 March 2013

PM REYES NOTES ON TAXATION II: VALUE-ADDED TAX


Q5.3. What is meant by in the course of trade or business
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 non-stock, non-profit private organization or a government entity.6 Q5.3.1. Pursuant to the governments privatization program, NDC decided its shares in the National Marine Corp. and 5 vessels. Magsaysay Lines bought the shares and vessels. The CIR contends that the sale of the 5 vessels is incidental to its NDCs VAT registered activity of leasing out personal property and thus VAT-taxable. Is the CIR correct? not VAT-taxable. correct? Is COMASERCO

No. In CIR V. CA AND COMASERCO [MARCH 30, 2000] , the Supreme Court opined that 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 definition of 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. In this case, even if the services rendered for a fee were on a reimbursement-on-cost arrangement and without realizing profit, the payments are still subject to VAT. Q5.4.2. Sony Philippines engaged the services of several advertising companies. Due to dire economic conditions, Sony International Singapore (SIS) gave Sony Philippines a dole-out to pay for said advertising expenses. Sony Philippines claimed as input VAT credits that VAT paid for the advertising expenses. The CIR disallowed this and assessed Sony Philippines deficiency VAT on the reimbursable received by it from SIS. The CIR contends that the reimbursable was a fee for a VATtaxable activity. Is the CIR correct? No. The Supreme Court held in CIR v. SONY PHILIPPINES [NOVEMBER 17, 2010] that Sony Philippines cannot be deemed to have received the reimbursable as a fee for a VAT-taxable activity. The absence of a sale, barter or exchange of goods or properties supports the non-VAT nature of the reimbursable. The Supreme Court distinguished this from CIR V. CA AND COMASERCO [MARCH 30, 2000] where even if there was similarly a reimbursement on cost arrangement between affiliates, there was in fact an underlying service. Here, the advertising services were rendered in favor of Sony Philippines, not SIS.

No. In CIR V. MAGSAYSAY LINES [JULY 28, 2006], the Supreme Court found that any sale, barter or exchange of goods or services not in the course of trade or business is not subject to VAT. In this case, the sale of the vessels was an isolated transaction, not done in the ordinary course of NDCs business and is thus not subject to VAT.

Q5.4. Is the profit element required for VAT to be imposed?


No. The term in the course of trade or business requires the regular conduct or pursuit of a commercial or an economic activity, regardless of whether or not the entity is profit-oriented. (see CIR V. CA AND COMASERCO [MARCH 30, 2000]) Q5.4.1. COMASERCO is a non-stock, nonprofit organization, affiliated with Philamlife and organized to perform collection, consultative or technical services. The BIR assessed COMASERCO for deficiency VAT. COMASERCO argues that the services rendered to Philamlife were on a noprofit, reimbursement-of-cost-only basis and, as such, the services are

VAT on Importations Q6.Does VAT apply to every importation?


Yes. The VAT shall be imposed on every importation of goods, whether or not in the course of trade or business. This is unlike VAT on sale of goods or properties which must be in the course of trade or

Note that services rendered by non-resident foreign persons shall be considered as being rendered in the course of trade or business.

PIERRE MARTIN DE LEON REYES

Updated 21 March 2013

PM REYES NOTES ON TAXATION II: VALUE-ADDED TAX


business. Otherwise, the person/transaction shall not be liable to pay VAT. (see CIR V. SEAGATE T ECHNOLOGY [FEBRUARY 11, 2005]).

Q6.1. Give the tax base of VAT on importation of goods.


The tax base is the total value used by the BOC in determining tariff and customs duties plus customs duties, excise taxes, if any, and other charges. Where the customs duties are determined on the basis of the quantity or volume of the goods, the VAT shall be based on the landed cost plus excise taxes, if any.

Q8.2. What is the basis if the consideration of a sale is not wholly in money as in a partexchange or barter transaction?
The base is the price that would have been charged in an open market sale for purely monetary consideration.

VAT-taxable sale of real properties Q8.3. Is the sale of real properties subject to VAT?
Yes as to the sale of real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business of the seller. In the case of sale of real properties on the installment plan, the real estate dealer shall be subject to VAT on the installment payments, including interest and penalties, actually and/or constructively received by the seller.(see SECTION 4.106-3, RR 162005 [SEPTEMBER 1, 2005]) Q8.3.1. What is the gross selling price for the sale of real properties subject to VAT? The gross selling price shall mean the consideration stated in the sales document or the fair market value,7 whichever is higher. (see SECTION 4.106-4, RR 16-2005 [SEPTEMBER 1, 2005]) Q8.3.2. How is VAT imposed on real property transactions? 1. If cash or deferred payment (payment is more than 25%), then the VAT on the whole amount is already imposed 2. If installment (less than 25% for a year), then the VAT is imposed on each payment 3. There is no VAT imposed on Section 40(C)(2) exchanges. Q8.3.3. Assuming transaction,
7

Q7.What is technical importation?


Technical importation is the subsequent sale, transfer or exchange of imported goods by VATexempt persons to non-exempt persons or entities.

Q7.1. What is the legal consequence of technical importation?


The non-exempt buyers, transferees, or recipients shall be deemed the importers of the taxable goods and shall be liable for the VAT due on such importation. (see SECTION 107(B), T AX CODE)

VAT-taxable transactions VAT-taxable sale of goods Q8.Give the basis of VAT on sale, barter or exchange of goods or properties.
The base is the gross selling price or gross value in money of the taxable goods or properties sold, bartered or exchanged.

Q8.1. What is gross selling price in relation to the VAT?


Gross selling price is 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. Any excise tax, if any, on such goods or properties shall form part of the GSP. (see SECTION 4.106-4, RR 16-2005 [SEPTEMBER 1, 2005])

a is

VAT-taxable the advance

The fair market value shall mean whichever is the higher of (1) the fair market value as determined by the CIR (zonal value) or (2) the air market value as shown in the schedule of values of the provincial and city assessors (real property tax declaration). In the absence of a zonal value, gross selling price shall refer to the market value shown in the latest real property tax declaration or the consideration, whichever is higher.

PIERRE MARTIN DE LEON REYES

Updated 21 March 2013

PM REYES NOTES ON TAXATION II: VALUE-ADDED TAX


payment in a real estate transaction subject to VAT? Of the amounts typically covering an advance payment, only the pre-paid rent is subject to VAT. Other forms of advance payment such as option money, security deposit, etc. are not subject to VAT. Q8.3.4. Is the sale of a residential lot, residential house and lot or other residential dwelling subject to VAT? Yes as to the sale of a residential lot with a GSP 8 exceeding P1,919,500 and the sale of a residential house and lot or other residential dwelling with GSP 9 exceeding P3,199,200 are subject to VAT. Installment sale of a residential house and lot or other residential dwellings exceeding P1 million10 shall be subject to VAT. (See SECTION 4.106-4, RR 16-2005 [SEPTEMBER 1, 2005], AS AMENDED BY RR 04-07 [FEBRUARY 7, 2007], RR 16-2011 [OCTOBER 27, 2011], RR 3-2013 [FEBRUARY 20, 2012] AND RR 13-2012 [OCTOBER 12, 2012]. Q8.3.5. A bought two adjacent condominium units which he intended to combine so as to fit his family. Each unit has a GSP of 2 million. The two units were separately documented. After 2 years, A decided to sell the two units. A contends that the units are exempt from VAT as the GSP did not exceeding 2.5 million. Is A correct? No. By virtue of the amendment introduced by RR 132012 [OCTOBER 12, 2012], the sale of real properties subject to VAT shall include the sale, transfer, or disposal within a 12-month period of two or more adjacent residential lots, house and lots, or other residential dwellings in favor of a buyer. Such adjacent real properties although covered by separate titles and/or separate tax declarations, when sold to one and the same buyer, whether covered by one or separate deeds of conveyance, shall be
8

presumed as a sale of one residential lot, house and lot or residential dwelling. Q8.3.6. Is the sale of the parking lot included in the sale of a condominium unit? No. The sale of parking lots is a separate and distinct transaction and is not covered by the rules on the threshold amount not being a residential lot, house and lot, or a residential dwelling and thus should be subject to VAT regardless of the amount of selling price. (see RR 13-2012 [OCTOBER 12, 2012])

VAT-taxable sale of services including lease of properties Q9.Give the basis of VAT on sale of services and use or lease of properties?
The basis shall be the gross receipts derived from the sale or exchange of services including the use or lease of properties. (see Section 108(A), Tax Code)

Q9.1. What are gross receipts in relation to the VAT?


Gross receipts means the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty actually or constructively received during the taxable quarter for the services performed or to be performed for another person.

Q9.2. Is the place of execution of the contract of lease material on the VAT-taxability of the use or lease of a property?
No. The use or lease of properties shall be subject to VAT irrespective of the place where the contract of lease or licensing agreement was executed if the property is leased or used in the Philippines.

Q9.3. Is the lease of residential units subject to VAT?


Yes as to the lease of residential units with a monthly rental per unit exceeding P12,800, regardless of the amount of aggregate rentals received by the lessor during the year

Previously 1.5 million. New figure is based on the amendment introduced by RR 16-2011 [May 7, 2004] on the new thresholds for VAT exemptions on the sale of real property. 9 Previously 2.5 million. 10 This value has not been changed by the amendments.

PIERRE MARTIN DE LEON REYES

Updated 21 March 2013

PM REYES NOTES ON TAXATION II: VALUE-ADDED TAX


Q9.3.1. What is the tax treatment of the lease of residential units, where some are leased out for exceeding P12,800 while others are leased out for more than P12,800? The tax treatment shall be as follows: 1. The gross receipts from rentals not exceeding P12,800 per month per unit shall be exempt from VAT regardless of aggregate gross receipts 2. The gross receipts from rentals exceeding P12,800 shall be subject to VAT if the aggregate annual gross receipts from said units exceeds P1,919,500,000.11 No. The Supreme Court in CIR v. SM PRIME HOLDINGS [FEBRUARY 26, 2010] held that although the enumeration of services subject to VAT under Section 108 of the 1997 Tax Code is not exhaustive. Among those included in the enumeration is the lease of motion picture films, films, tapes and discs. This, however, is not the same as the showing or exhibition of motion pictures or films. Hence, since the showing or exhibition of motion pictures or films Is not in the enumeration, such is not a VAT-taxable transaction.

VAT-exempt transactions Q10. What are VAT-exempt transactions?


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.

Q9.4. What is a sale or exchange of services?


A sale of exchange of services means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration. (See SECTION 108(A), T AX CODE for an extensive enumeration of the type of services including in said definition) Q9.4.1. Are toll fees collected by tollway operators subject to VAT? Yes. The Supreme Court in DIAZ V. SECRETARY OF FINANCE [JULY 10, 2011] answered this issue in the affirmative. The court held that VAT is imposed on all kinds of services and tollway operations who are engaged in construction, maintaining, and operating expressways are no different from lessors of property, transportation contractors, etc. Further, they also come under those described as all other franchise grantees which is not confined only to legislative franchise grantees since the law does not distinguish. They are also not a franchise grantee under Section 119 of the Tax Code which would have made them subject to percentage tax instead. Neither are the services part of the enumeration under Section 109 on VAT-exempt transactions. Q9.4.2. Are the gross receipts derived by operators or proprietors of cinema/theater houses from admission tickets subject to VAT?

Q10.1. Enumerate transactions12

the

exempt

SECTION 109(A) TO (V) provides for the following: a) Sale or importation of agricultural and marine food products in their original state.13 b) Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock and poultry feeds14 c) Importation of personal and household effects belonging to the residents of the Philippines returning from abroad d) Importation of professional instruments and implements, wearing apparel, domestic animals and personal household effects belonging to

12

11

Otherwise, the gross receipts will be subject to the 3% tax imposed under Section 116 of the Tax Code.

Those underlined are the notable VAT-exempt transactions. These enumeration is exclusive. 13 Such products are still considered in their original state even if they have undergone 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. 14 Does not include specialty feeds for race hourses, fighting cocks, aquarium fish, zoo animals, and other animals generally considered as pets.

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Updated 21 March 2013

PM REYES NOTES ON TAXATION II: VALUE-ADDED TAX


e) f) persons coming to settle for the first time in the Philippines Services subject to percentage tax Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugarcane into raw sugar Medical, dental, hospital and veterinary services 15 except those rendered by professionals Educational services rendered by private educational institutions duly accredited by DEPED, CHED, and TESDA and those by governmental educational institutions Services rendered pursuant to an employeeemployer relationship Services rendered by regional or area headquarters established in the Philippines Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws Sales by agricultural cooperatives duly registered with the Cooperative Development Authority Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative Development Authority whose lending is limited to members Sales by non-agricultural, non-electric and noncredit cooperatives duly registered with the Cooperative Development Authority16 Export sales by persons who are not VATregistered Sales of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business or sales within the low-cost cap of below 1,919,50017 for a residential lot and P3,199,20018 for a house and lot and other residential dwelling Lease of a residential unit with a monthly rental not exceeding P12,80019 Sale, importation, printing or publication of books and any newspaper, magazine, review or bulletin which appears at regular intervals with fixed prices for subscription and sale and is not devoted principally to publication of paid advertisements Sale, importation, or lease of passenger or cargo vessels and aircraft 20 t) Importation of fuels, goods and supplies by persons engaged in international shipping or air transport operations u) Services of banks, non-bank financial intermediaries performing quasi-banking functions and other non-bank financial intermediaries v) Sale or lease of goods or properties or performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of P1,919,500.21.

g) h)

i) j) k)

Q10.2. Are senior citizens exempt from the 12% VAT?


Yes. RA No. 9994 [February 15, 2010], otherwise known as the Expanded Senior Citizens Act of 2010 exempts senior citizens from paying 12-percent VAT on goods and services.

l) m)

n)

Q10.3. Are medical services rendered b doctors registered with the PRC and legal services rendered by lawyers registered with the IBP subject to VAT?
No. RR 7-2004 [MAY 7, 2004] excludes services by doctors registered with the PRC and services by lawyers registered with the IBP as well as GPPs for the sole and exclusive purport of practising law or medicine from the coverage of VAT on services

o) p)

Q10.4. Are pawnshops liable to pay VAT?


No. As explained by the Supreme Court in T AMBUNTING PAWNSHOP V. CIR [JANUARY 21, 2010]: Prior to the passage of the EVAT Law in 1994, pawnshops were treated as lending investors subject to lending investors tax.22 Subsequently, pawnshops were treated jurisprudentially as VAT-able

q) r)

s)

20

15

But see Q10.3 on VAT exemption of doctors registered with the PRC and lawyers registered with the IBP. 16 Provided that the share capital contribution of each member does not exceed P15,000 17 Previously 1.5 million. Amended by RR 16-2011 [OCTOBER 27, 2011]. 18 Previously 2.5 million. Amended by RR 16-2011 [OCTOBER 27, 2011]. 19 Previously P10,000. Amended by RR 16-2011 [OCTOBER 27, 2011].

Includes engine, equipment, and spare parts thereof for domestic or international transport operations. 21 Previously 1.5 million. Amended by RR 16-2011 [OCTOBER 27, 2011]. 22 Note that in FIRST PLANTERS PAWNSHOP VS. CIR [JULY 30, 2008], the Supreme Court held that First Planters Pawnshop was subject to VAT as it was a lending investor. It must be noted that the factual circumstances of the said case pertained to a taxable period prior to RA No. 9238. What is important to note in this case is that the Supreme Court stated that pawnshops should now be treated as non-bank financial intermediaries and, as such, not subject to VAT.

PIERRE MARTIN DE LEON REYES

Updated 21 March 2013

PM REYES NOTES ON TAXATION II: VALUE-ADDED TAX


enterprises under the general classification of sale or exchange of services. RA No. 9238 which passed in 2004 finally classified pawnshops as other non-bank financial intermediaries. agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate

Q10.5. Is a health maintenance organization liable to pay VAT?


Yes. In CIR V. PHILIPPINE HEALTH CARE PROVIDERS, INC. [APRIL 24, 2007], PHCPI claimed that its services were exempt from VAT and sought a BIR ruling in this regard. The BIR ruled that PHCPI was exempt. The CIR, however, later assessed PHCPI for deficiency VAT taxes. The CIR contended that PHCPI does not actually render medical service but merely acts as a conduit between the members and PHCPIs accredited and recognized hospitals and clinics. The Supreme Court opined that the services of an entity which does not actually provide medical and/or hospital services but merely arranges for the same are subject to VAT. The Court, however, ruled PHCPI cannot be faulted for its reliance on the BIR ruling as such was issued when the term health maintenance organization had no significance for taxation purposes at the time. The failure of PHCPI to describe itself as a health maintenance organization subject to VAT does not amount to bad faith.

Q10.8. S and ABS-CBN entered into an agreement where S will provide his services exclusively to ABS-CBN as a talent for the latters TV and radio shows. Is he liable to pay VAT?
No provided that there exists no employer-employee relationship between S and ABS-CBN. In SONZA V. ABS-CBN [JUNE 10, 2004], the Supreme Court held that an independent contractor is liable to pay VAT. Section 109 only exempts from VAT services rendered pursuant to an employer-employee relationship.

VAT zero-rated transactions Q11. What are zero-rated transactions?


A VAT zero-rated transaction are sales by VATregistered persons which are subject to 0% rate, meaning the tax burden is not passed on to the purchaser. A zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT purposes, shall not result in any output tax. However, the input tax on his purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund.

Q10.6. Is the sale of copra subject to VAT?


No. RA 9337 amended Section 109(A) to include copra as those that should be considered in their original state. Previously in MISAMIS ORIENTAL V. DOF [NOVEMBER 10, 1994], the Supreme Court opined that copra is not food and is not intended for human consumption. Thus, it is not exempt from VAT. The rule now is the sale of copra is VAT-exempt.

Q11.1. Distinguish VAT rating from zero rating.


As explained by the Supreme Court in CIR BENGUET CORPORATION [JULY 14, 2006]:
V.

Q10.7. Is PAGCORs sale of services subject to VAT?


No. In PAGCOR V. CIR [MARCH 15, 2011], the Supreme Court held that RA 9337 only withdrew PAGCORs exemption from corporate income taxes but does not contain any provision that subjects the same to VAT. PAGCOR is exempt from the payment of VAT, because PAGCOR's charter, P.D. No. 1869, is a special law that grants it exemption from taxes. Moreover, the exemption of PAGCOR from VAT is supported by Section 6 of R.A. No. 9337, which retained Section 108 (B) (3) of R.A. No. 8424, thus: Services rendered to persons or entities whose exemption under special laws or international

In transactions taxed at a 10% rate (now 12%), when at the end of any given taxable quarter the output VAT exceeds the input VAT, the excess shall be paid to the government; when the input VAT exceeds the output VAT, the excess would be carried over to VAT liabilities for the succeeding quarter or quarters. On the other hand, transactions which are taxed at zero-rate do not result in any output tax. Input VAT attributable to zero-rated sales could be refunded or credited against other internal revenue taxes at the option of the taxpayer

PIERRE MARTIN DE LEON REYES

Updated 21 March 2013

PM REYES NOTES ON TAXATION II: VALUE-ADDED TAX


Q11.1.1. Illustrate the distinction made above. Assume that VAT-registered person purchases materials from his supplier at P100, P9.6 of which was passed on to him by his supplier as the latters 12% output VAT. In a zero-rated transaction, the taxpayer can recover the P9.6 from the BIR either through a refund or a tax credit. When the taxpayer sells his finished product for lets say P120, he is not required to pay the output VAT of P2.4 (12% of the P20 value he has added to the P100 material). In a transaction subject to VAT, however, he may recover both the input VAT of P9.6 which he paid to the supplier and his output VAT of P2.4 by passing both these costs to the buyer. The buyer then pays P12, the total 12% VAT. exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such transactions to a zero rate. The tax rate is set at zero. As applied to the tax base, When applied to the tax such rate does not yield base, such rate obviously any tax chargeable against results in no tax the purchaser chargeable against the purchaser The seller of such The seller who charges transactions charges no zero output tax on such output tax, but can claim a transactions can also refund of or a tax credit claim a refund of or a tax certificate for the VAT credit certificate for the previously charged by VAT previously charged by suppliers suppliers intended to be enjoyed by intended to benefit the the seller who is directly purchaser who, not being and legally liable for the directly and legally liable VAT, making such seller for the payment of the internationally competitive VAT, will ultimately bear by allowing the refund or the burden of the tax credit of input taxes that shifted by the suppliers. are attributable to export sales.

Q11.2. Distinguish zero rating from VATexemption.


As differentiated by the Supreme Court in CIR v. CEBU T OYO CORPORATION [FEBRUARY 16, 2005]: Zero-rated VAT-Exempt It is a taxable transaction Not subject to the output but does not result in an tax output tax The input VAT on the The seller in an exempt purchases of a VATtransaction is not entitled registered person with to any input tax on his zero-rated sales may be purchases despite the allowed as tax credits or issuance of a VAT invoice refunded or receipt; Persons engaged in Registration is optional for transactions which are VAT-exempt persons. zero-rated, being subject to VAT, are required to register

Q11.4. Enumerate the requisites that must be complied with in order to be entitled to a refund or issuance of a TCC for input VAT due or paid attributable to zero-rated or effectively zero-rated sales.
1. There must be zerorated or effectively zerorated sales; 2. Input taxes were incurred or paid; 3. Such input taxes are directly attributable to zerorated or effectively zerorated sales; 4. Input taxes were not applied against any output VAT liability; and 5. The claim for refund was filed within the twoyear prescriptive period. (see SITEL PHILIPPINES CORPORATION CASE NO. 7623, MARCH 3, 2010])
V.

Q11.3. Distinguish zero-rated from effectively zero-rated transactions.23


As distinguished by the Supreme Court in CIR SEAGATE T ECHNOLOGY [FEBRUARY 11, 2006]:
V.

CIR [CTA

Zero-rated Effectively zero-rated generally refers to the refers to the sale of goods export sale of goods and or supply of services to supply of services persons or entities whose
23

See enumeration of zero-rated sales of goods in Q11.5.

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Zero-rated sales of goods Q11.5. Enumerate the zero-rated sales of goods.
SECTION 106(A)(2) provides for the following: a) Export Sales (IF GONE) a) Sale and actual shipment of goods from the Philippines to a Foreign country b) Sale of raw materials or packaging materials to a Non-resident buyer for delivery to a resident local export-oriented enterprise c) Sale of raw materials or packaging materials to Export-oriented enterprise whose export sales exceed 70% of total annual production d) Sale of Gold to the BSP e) Those that are not considered export sales under the Omnibus Investment Code and other special laws f) Sale of goods, supplies, and equipment and fuel to persons engaged in International shipping or international air transport operations. b) Foreign currency denominated sale the sale to a non-resident of goods assembled or manufactured in the Philippines for delivery to a resident in the Philippines paid in acceptable foreign currency and accounted for in accordance with BSP rules and regulations c) Sales to persons or entities whose exemption under special laws and international agreements to which the Philippines is a signatory subjects such sales to 0% rate (effectively zero-rated transactions) Q11.5.1. Explain the VAT treatment of PEZA-registered enterprises prior to and after the effectivity of RMC 74-99 [OCTOBER 15, 1999]. Prior to RMC 74-99: Whether a PEZA-registered enterprise was exempt or subject to VAT depended on the type of fiscal incentives availed of by the said enterprise. PEZA entities can avail of two alternative or subsequent incentives of income tax holiday (ITH) or 5% preferential tax rate on gross income. If the entity avails of the 5% preferential tax rate, it is exempt from all taxes including VAT but if it avails of the ITH, it shall be exempt from income taxes for a number of years but not VAT (see CIR v. SEKISUI JUSHI PHILIPPINES [JULY 21, 2006]). This explains the decisions in CIR V. T OSHIBA INFORMATION EQUIPMENT [AUGUST 9, 2005] and CIR v. CEBU T OYO CORPORATION [FEBRUARY 16, 2005] where in both cases the Supreme Court held that the PEZA-registered enterprise is entitled to a VAT refund/credit because it opted to avail itself of the income tax holiday. Having availed of the income tax holiday and its export sales being a zero-rated transaction, the PEZA-registered enterprise was entitled to refund or credit for its unutilized input taxes. In both cases, the transactions were made prior to the effectivity of RMC 74-99. After the effectivity of RMC 74-99: The tax treatment of sales of goods and services of PEZA-registered enterprises is now based on the principles of separate custom territory and cross border doctrine. As explained by the Court in the cases of CIR V. SEAGATE T ECHNOLOGY [FEBRUARY 11, 2005], CIR v. SEKISUI JUSHI PHILIPPINES [JULY 21, 2006], CIR V. T OSHIBA I NFORMATION EQUIPMENT [AUGUST 9, 2005], CIR V. CONTEX [JULY 2, 2004]: PEZA-registered enterprises, which would necessarily be located within ecozones, are VATexempt entities not because of Section 24 of RA 7926 (which imposes the 5% preferential tax rate on gross income of PEZA-registered enterprises in lieu of all taxes) but rather because of Section 8 of the same which establishes the fiction that ecozones are foreign territory. As a result, sales made by a supplier in the Customs Territory (national territory of the Philippines outside the borders of the ecozone) to a purchaser in the ecozone shall be considered as exportation from the Customs Territory. Conversely, sales made by a supplier from the ecozone to a purchaser in the Customs Territory shall be considered as an importation into the Customs Territory. The Philippine VAT system adheres to the crossborder doctrine which means that no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. 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

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with ten percent (10%) (now 12% VAT). Sales made by an enterprise within a non-ecozone territory, i.e., Customs Territory, to an enterprise within an ecozone territory shall be free of VAT. Q11.5.2. Summarize the current tax treatment of PEZA-registered enterprises Currently, the VAT treatments of sale of goods and services to and by PEZA-registered within and without the ecozones are as follows: 1. Any sale of goods, property or services by a VAT-registered supplier from the customsterritory to any Ecozone-registered enterprise regardless of incentive availed is zero-rated on the part of the VAT-registered seller because ecozones are foreign soil by fiction and thus the sale is considered an export sale. 2. Sales to an ecozone enterprise made by a nonVAT or unregistered supplier would only be exempt from VAT and the supplier shall not be able to claim credit/refund for its input VAT because, under Section 109(O) of the Tax Code, 3. export sales by persons who are not VATregistered are exempt transactions. If the ecozone-enteprise is an exporter, its input VAT are subject to refund not because of the incentives it availed but because of the nature of its transactions (export sales). Any sale of goods or property by an ecozoneregistered enterprise to a buyer in the customs territory shall be subject to 12% VAT because it shall be considered an importation. The tax is imposed on the buyer/importer. Any sale of services by an ecozone-registered enterprise to a buyer in the customs territory shall either be subject to 12% VAT or to percentage tax depending on the nature of the service. The tax is imposed on the ecozone-enterprise. Any sale of goods or property between ecozoneregistered enterprises (intra-ecozone sales) are tax-exempt. Any sale of services between ecozone-registered enterprises is exempt from VAT or percentage tax if PEZA-registered enterprise seller is subject to 5% preferential tax rate and 0% if PEZAregistered enterprise seller is subject to the Tax Code.

4.

5.

6.

7.

SUMMARY OF VAT TREATMENT OF SALES OF GOODS AND SERVICES TO AND BY PEZA-REGISTERED ENTERPRISES WITHIN AND WITHOUT THE ECOZONE 24 Sale of Goods VAT - registered supplier from customs territory to PEZA registered enterprise (regardless of whether or not the PEZA - registered enterprise is subject to the 5% "in lieu of all tax" regime) VAT-exempt supplier from customs territory to PEZAregistered enterprise (regardless of whether or not the PEZA-registered buyer is subject to tax under the NIRC, or to the 5% special tax regime) 0% VAT Sale of Services 0% VAT

VAT exempt

VAT exempt

24

Original summary made by Atty. B.P. Panigbatan. Updated and annotated by PM Reyes during 2011 SyCip Internship.

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PEZA-registered enterprise to buyer from customs territory (local/domestic sales) 12% VAT imposed on buyer in addition to the import tax and customs duties 12% VAT imposed on the PEZA-registered enterprise seller or to the percentage tax plus normal tax on income. Exempt from Vat or any percentage tax if PEZA registered enterprise seller is subject to 5% special tax regime 0% VAT if PEZA - registered enterprise seller is subject to Tax Code

PEZA - registered enterprise to another PEZA registered enterprise (intra-ecozone sales)

VAT exempt

Q11.5.3. Benguet Corporation treated its sale of gold to the BSP as export sales and as such, they are zero-rated. The BIR issued a VAT Ruling affirmed such treatment. This was reiterated in subsequent rulings. BIR then disallowed refund of input VAT contending that a subsequent ruling was issued revoking the zero-rated status and that this could retroact because no prejudice would result to Benguet as it can offset it against its output and that it can claim the same as cost. Is the BIR correct? No. In CIR V. BENGUET CORPORATION [JULY 14, 2006], the Supreme Court found that (1) Benguet did not have enough output to offset the input VAT it accumulated precisely because believing it was zerorated it did not pass on output VAT and (2) assuming that that there is a right to refund overpaid income tax which would result if additional cost is taken up, only 32% of the amount would be recovered and it does not solve Benguets other disadvantageous situations. IN this regard, Supreme Court differentiated VAT rating and zero-rating. A taxpayer subject to 10% (now 12%) output VAT on its sales of goods and services may recover its input VAT costs by passing on said costs as output VAT to its buyers of goods and services but it cannot claim the same as a refund or tax credit, while a taxpayer subject to 0% on its sales of goods and services may only recover its input VAT costs by filing a refund or tax credit with the BIR. In said case, by providing for retroactive

application of the VAT ruling declaring sales of gold to the CB as subject to 10% VAT (12%), Benguets application for refund/tax credit was denied. Clearly, the retroactive application is prejudicial to Benguet. Q11.5.4. Acesite is the operator of Holiday Inn Hotel. It leases part of its premises to PAGCOR and caters food and beverages to its patrons. Acesite contends that the sale of food and beverages to PAGCOR is zero-rated and thus entitling them to claim a tax refund/credit. Is Acesite correct? Yes. In CIR v. ACESITE PHILIPPINES [FEBRUARY 16, 2007], the Supreme Court stated that 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 (0%) rate shall be subject to 0%. Since the law clearly provides for PAGCORs exemption, the sale of services of Acesite to PAGCOR is effectively zero-rated. Hence, Acesite may refund the VAT it paid on its sale of food and beverages to PAGCOR.

Zero-rated sales of services Q11.6. Enumerate the zero-rated sales of services.


SECTION 108(B) provides for the following: 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

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2. accordance with the rules and regulations of the BSP Services Other than those mentioned in the preceding paragraph rendered to a person engaged in business conducted outside the Philippines or a nonresident person not engaged in business who is outside the Philippines when the services were 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. Services rendered to person or entities whose exemption under Special Laws or International Agreements effectively subjects the supply of such services to a 0% rate. Sale of Services to Persons Engaged in International Shipping or Air Transport Operations Sale of Services for Export-Oriented Enterprise whose export sales exceed 70% of total annual production Transport of Passengers and Cargo by Air or Seal Vessels from the Philippines to a Foreign Country Sale of Power Generated through Renewable Sources of Energy Q11.6.1. What is the destination principle and are there any exceptions thereto? As a general rule, the value-added tax (VAT) system uses the destination principle. This means that goods and services are taxed only in the country where they are consumed. Exceptions to the destination principle are found in Section 108(B) of the 1997 Tax Code. They are deemed exceptions because although the services are performed in the Philippines, the sales of such services are zero-rated provided the following requisites are met: 1. The service is performed in the Philippines 2. The service falls under any of the categories provided in Section 108(B) 3. It is paid for in acceptable foreign currency that is accounted for in accordance with the regulations of the Bangko Sentral ng Pilipinas 4. The recipient of such services is doing business 25 outside the Philippines.
25

3.

4.

Q11.6.2. American Express Philippines (AMEX-P) is a Philippine Branch of AMEX International. AMEX-P is a servicing unit of AMEX Hong Kong (AMEX-HK) and facilitates the collections of AMEX-HK receivables from card members in the Philippines. AMEX-P claimed a refund for its input taxes arising from zerorated sales of services to AMEXHK. CIR argues that AMEX-Ps services must be consumed abroad in order to be zero-rated. Is the CIR correct? No. In AMERICAN EXPRESS I NTERNATIONAL V. CIR [JUNE 29, 2005], the Supreme Court opined that while as a general rule, the VAT system uses the destination principle as a basis for the jurisdictional reach of the tax such that goods and services are taxed only in the country where they are consumed, exceptions to the destination principle are found in Section 108(B) of the 1997 Tax Code. In this case, Amex Phils. facilitated in the Philippines the collection and payment of receivables belonging to its Hong Kong-based foreign client, Amex HK, and getting paid for it in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP. As such, they are deemed exceptions because although the services are performed in the Philippines, the sales of such services are considered zero-rated. Q11.6.3. Placer Dome Inc (PDI) owns 39.9% of Marcopper. It undertook to clean-up and rehabilitate the Makalupnit and Boac Rivers in Marinduque which was affected by its mining operations. PDI engaged the services of Placer Dome Technical Services Limited (PD Canada), a non-resident foreign corporation in Canada which, in turn, engaged the services of Placer Dom Technical Services Philippines (PD Philippines). PD Philippines filed for a claim for tax credit/refund and contends that its sale of services to Placer Dome Canada was zero-rated. The CIR invokes the destination principle, contending that Placer

5. 6.

7.

Note that CIR V. BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR M INDANAO, INC. [JANUARY 22, 2007] added this requisite

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Dome Philippines services, while rendered to a non-resident foreign corporation, are not destined to be consumed abroad. Is the CIR correct? No. In CIR V. PLACER DOME [JUNE 8, 2007], the Supreme Court reiterated its ruling in AMERICAN EXPRESS I NTERNATIONAL V. CIR [JUNE 29, 2005] to the effect that the services enumerated in Section 108B constitute as exceptions to the destination principle and are zero-rated. Since Placer Dome Philippines services meet the requirements of Section 108(B)(2), it is zero-rated. Q11.6.4. A foreign consortium composed of Burmeister Denmark and Mitsui Engineering entered into a contract with NAPOCOR for the operation and maintenance of two barges.. The Consortium appointed Burmeister Denmark as coordination manager. Burmeister Denmark established Burmeister Mindanao which subcontracted the operation and maintenance of the two barges. NAPOCOR paid the foreign consortium while the consortium, in turn, paid Burmeister Philippines foreign currency inwardly remitted into the Philippines. The BIR refused to grant a refund since the services were not destined for consumption abroad. Are the services of Burmeister Philippines entitled to zero-rated status? Yes. In CIR V. BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR MINDANAO, INC. [JANUARY 22, 2007], they are entitled to zero-rated satus and to the refund but only for the period covered prior to the filing of the CIRs answer in the CTA. This is so because prior, Burmeister was able to secure a ruling from the BIR allowing zero-rating of its sales. However, such ruling is valid only until the time that the CIR filed its answer in the CTA which amounted to a revocation of the said ruling. The revocation cannot be made retroactive. It must be noted, however, that without this special circumstance, Burmeister would not have been entitled to a zero-rated status. This is because the Consortium which was the recipient of the services rendered by Burmeister was deemed doing business within the Philippines. While the Consortiums principal members are non-resident foreign corporations, the Consortium itself is doing business in the Philippines. Hence, the transactions of BWSC Mindanao are not subject to VAT at zero percent. Q11.6.5. ABC is a business process outsourcing company and is engaged in the business of providing call center services from the Philippines to domestic and offshore businesses. Can ABC claim for a refund or issuance of a TCC for its excess input tax paid on domestic purchases of goods and services which were allegedly attributable to ABCs zero-rated sales of services?

Yes provided it meets the following requisites: 1. the services must be other than processing, manufacturing or repacking of goods; 2. payment for such services must be in acceptable foreign currency accounted for in accordance with the BSP rules and regulations; and 3. the recipient of such services is doing business outside the Philippines. In SITEL PHILIPPINES CORPORATION V. CIR [CTA CASE NO. 7623, MARCH 3, 2010], ACCENTURE VS. COMMISSIONER OF I NTERNAL REVENUE [C.T.A. CASE NO. 7046, SEP. 22, 2009], PARLANCE SYSTEMS VS. COMMISSIONER OF I NTERNAL REVENUE [C.T.A. CASE NO. 7459, JUL. 9, 2009], business process outsourcing companies were refused a refund of their excess input VAT because their sale of services were not zero-rated because they failed to prove that their clients were non-resident foreign corporations doing business outside the Philippines.

Input VAT Q12. What is the tax credit method in relation to the VAT?
Under the tax credit method, an entity can credit against or subtract from the VAT charged on its sales

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or outputs the VA paid on its purchases, inputs and imports.26 SECTION 110(A) provides that any input tax evidenced by a VAT invoice or official receipt on purchase or importation of goods or for purchase of services shall be creditable against output tax.27 In ABAKADA GURO PARTY LIST V. ERMITA [SEPTEMBER 1, 2005], the Supreme Court ruled that as to (1) it is wrong to assume that when the input tax exceeds 70% of the output tax, the input tax in excess of the 70% remains uncredited. It was reiterated that the excess input tax is retained in the business books and remains creditable in the succeeding quarters as explicitly allowed by Section 110(B). Further, a VAT-registered person is allowed to apply for the issuance of a TCC for any unused input taxes to the extent that such input taxes have not yet been applied to output taxes. As to (2), the Supreme Court stated that there is no retention of any tax collection because the taxpayer has already previously paid the input tax to a seller, and the seller will subsequently remit such input tax to the BIR. The party directly liable for VAT is the seller. What only needs to be done is for the taxpayer/buyer to apply or credit these input taxes against his output taxes. This was affirmed in the motion of reconsidation,. In ABAKADA GURO PARTY LIST V. ERMITA [OCTOBER 18, 2005], the Supreme Court opined that the right to credit input tax as against output tax is a privilege created by law, a privilege that also the law can limit. A person has no vested right in statutory privileges.

Q12.1. Give the three possible scenarios that may arise in computing the VAT payable.
If at the end of any taxable month or quarter: Output tax = input tax Output tax > input tax Output tax < input tax No VAT payable The excess shall be paid by the VAT-registered person The excess shall be carried over to the succeeding quarter or quarters

Note that if input vat results from zero-rated or effectively zero-rated transactions, any excess over the output taxes shall be refunded to the taxpayer or credited against other internal revenue taxes, at the taxpayers option.

Q12.2. Section 8 of RA No. 9337, otherwise known as the Expanded VAT Law, imposes a 70% limitation on the input tax. Thus, a VAT taxpayer can credit his input tax only up to the extent of 70% of the output tax. It was argued that (1) this makes the VAT regressive and unconstitutional and (2) it in effect leads to a retention of tax collection in the hands of VATregistered establishments which violates the principle that a tax should be for public purposes.

Q12.3. Is the source of the money used to pay the input tax paid for a business expense by a company material to a claim for excess input VAT?
No. In CIR v. SONY PHILIPPINES [NOVEMBER 17, 2010], Sony Philippines claimed as input VAT credits the VAT it paid for the advertising expenses using reimbursables from its affiliate in Singapore. The CIR disallowed this and assessed Sony Philippines deficiency VAT. The Supreme Court held that it is evident under Section 110 of the Tax Code that an advertising expense duly covered by a VAT invoice is a legitimate business expense. Sony incurred such advertising expense. Where the money came from is another matter all together but will definitely not change the VAT effect.

26

As explained in ABAKADA GURO PARTY LIST V. ERMITA [SEPTEMBER 1, 2005] , the VAT system was previously a single stage system under a cost deduction method and was payable only by the original sellers. Now, the VAT system is a multi-stage system a mixture of the cost deduction method and the tax credit method. 27 Again, input tax is the tax paid by a person, passed on to him by the seller, when he buys goods. Output tax is the tax due to the person when he sells goods.

Q12.4. Is a taxpayer entitled to a refund of excess input tax for rendition of services to an entity which the law exempts from indirect taxes?
Yes. In CIR v. ACESITE PHILIPPINES [FEBRUARY 16, 2007], the Supreme Court held that given that PAGCOR was exempt from indirect taxes, the

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transactions between Acesite and PAGCOR were effectively zero-rated. As such, Acesite is entitled to the refund or credit of any excess over the output taxes. Input tax on sale of exempt goods Input tax on sale to government Input tax on depreciable capital Not attributable to any specific activity (monthly amortization for 60 months) - P2,000 - P4,000 - P20,000

Q12.5. Explain the rule on the apportionment of input VAT on mixed transactions and illustrate its application?
SECTION 4.110-4 OF RR16-2005 [SEPTEMBER 1, 2005] provides that a VAT-registered taxpayer who is also engaged in transactions not subject to VAT shall be allowed to recognize input tax credit on transactions subject to VAT as follows: 1. All the input taxes that can be directly attributed to transactions subject to VAT may be recognized for input tax credit Exception: Input taxes that can be directly attributable to VAT taxable sales to the Government or any of its political subdivisions, instrumentalities or agencies shall not be credited against output taxes arising from sales to nonGovernment entities. 2. If any input tax cannot be directly attributed to either a VAT-taxable or VAT-exempt transaction, the input tax shall be pro-rated to the VAT taxable and VAT-exempt transactions and only the ratable portion pertaining to transactions subject to VAT may be recognized for input tax credit.

The creditable input VAT available for each of the respective type of transactions entered into by ABC Corp are as follows: 1. For the sales subject to 12% VAT (i) actual input of P5,000 and (ii) ratable portion of P5,000 2. For the sales subject to 0% VAT (i) actual input VAT of 3,000 and (ii) ratable portion of P5,000 3. For sale of exempt goods no input VAT is creditable as the transactions are VAT-exempt 4. For the sales to government no input VAT is creditable as the law imposes a 5% FWT obligation on the government agency-payor. Q12.5.1. In the above illustration, how was the ratable portion of creditable input VAT for VATtaxable and zero-rated sales computed? For input VAT creditable on VAT-taxable sales:

For input VAT creditable on VAT zero-rated sales To illustrate: ABC Corporation had the following sales during the month: Sale to private entities subject to 12% - P100,000 Sale to private entities subject to 0% - P100,000 Sale of exempt goods - P100,000 Sale to govt subject to 5% FWT - P100,000 Total Sales for the month - P400,000 The following input taxes were passed on by its VAT suppliers: Input tax on taxable goods at 12% Input tax on zero-rated sales - P5,000 - P3,000

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Withholding, Presumptive and Transitional Input VAT Q13. What does the withholding of VAT apply?
1. Payments are made to a non-resident whose services are considered as VAT-taxable in which case the 12% will be withheld by the payor 2. Payments by government agencies, in which case the government entity will withhold 5% on its payments.

(now 5%) from the payments still due. The JV disputed this and argued that all the receipts issued to LVM would have made JV subject to VAT and, hence, LVM could claim such as input tax. Can LVM rightfully deduct the amount representing the withholding VAT due on its transaction with DPWH?
No. In LVM CONSTRUCTION CORPORATION V. SANCHEZ [DECEMBER 5, 2011], the Supreme Court held that as an entity which dealt directly with the government insofar as the main constract was concerned, LVM was itself required by law to pay the 8.5% (now 5%) VAT which was withheld by DPWH. Given that the JV complied with their own obligation when they paid their VAT from their gross receipts and the fact that the contract between LVM and the JV did not stipulate any obligation on LVM assuming the VAT, LVM has no basis to withhold payments. Although the burden to pay an indirect tax like the VAT can be passed on, the liability to pay the same remains with the seller. IN this case, both LVM and the JV are liable for their respective VAT obligations as respective sellers.

Q13.1. What is the rule on withholding of VAT by government agencies?


SECTION 114(C) provides that the government or any of its political subdivisions, instrumentalities or agencies, including GOCCs, shall, before making payment on account of each purchase of goods or services subject to VAT, deduct and withhold a final VAT equivalent to 5% of the gross payment thereof provided that the payment for lease or use of properties or property rights to non-resident owners shall be subject to 10% withholding tax at the time of payment.

Q13.2. Is a party dealing with a government entity deprived of its entitlement to the input VAT it accumulated considering the VAT withholding tax mechanism?
The 7% difference (12%-5%) is the presumed input VAT cost of the entity dealing with the government agency. If the actual input VAT is below 7%, then the taxpayer will realize additional income. However, if the actual input VAT is above 7%, then the difference between the actual input VAT and the 7% is considered as additional cost.

Q14. What is the rule on transitional input credits?


SECTION 111(A) provides that a person who becomes liable to VAT or any person who elects to be VATregistered shall, subject to the filing of an inventory, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent to 2% of the value of such inventory or the actual VAT paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax.

Q13.3. LVM Construction Corp. was engaged by the DPWH for the construction of roads and bridges. LVM subcontracted one of the projects to a Joint Venture. After completion, the JV demanded full payment to which LVM responded that they discovered that no deductions for VAT were made on previous payments and as such they were going to deduct 8.5%

Q14.1. Fort Bonifacio Development Corp (FBDC) is a real estate developer that bought from the national government a parcel of land which used to be a military reservation. At the time of the sale, there was yet no VAT on sales of real property. Subsequently, when VAT was already imposed on sales of real property, FBDC sold two parcels of land to Metro Pacific Corp. FBDC claimed transitional

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input VAT corresponding to its inventory of land. The BIR disallowed the claim. It contended that under RR 7-95, real estate developers may avail of the transitional input tax m only on improvements on the real property belonging to their beginning inventory. (1) Is the FBDC entitled to claim transitional input vat (2) If yes, is the transitional input vat applicable only to improvements and (3) should there be a previous payment for the transitional input VAT to be creditable.
The issues were first resolved in the case of FORT BONIFACIO DEVELOPMENT CORP. V. CIR [APRIL 2, 2009] and was affirmed in a motion for reconsideration in FORT BONIFACIO DEVELOPMENT CORP. V. CIR [OCTOBER 2, 2009]. The recent case of FORT BONIFACIO DEVELOPMENT CORP. V. CIR [SEPTEMBER 4, 2012] simply reaffirmed the doctrines laid down in the previous cases, which are as follows: As to (1): Yes, FBDC is entitled to claim transitional input VAT by virtue of Section 111(A) (previously Section 105) As to (2): No, RR 7-95 cannot limit the application and coverage of Section 105 (now Section 111(A) by stating that in the case of real estate dealers, the basis of the presumptive input tax shall be the improvements. This is a legislative act beyond authority of the CIR and the Secretary of Finance. The term goods and properties includes real properties held primarily for sale to customers or held for lease in the ordinary course of business. Thus, FBDC is entitled to claim transitional input VAT based not only the improvements but also on the value of the entire real property and regardless of whether or not there was actual payment on the purchase price of the real property or not. As to (3): No, the transitional input tax operates to the benefit of newly VAT-registered persons, whether or not they previously paid taxes in the acquisition of their beginning inventory of goods, materials and supplies. Section 111(B) provides that persons or firms engaged in the processing of sardines, mackerel and milk, and in the manufacturing or refined sugar, cooking oil and packed noodle-based instant meals, shall be allowed a presumptive input tax, creditable against the output tax, equivalent to 4% of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production.

VAT Refunds Q16. What are the requirements for a claim for VAT refund/credit?
1. The taxpayer is engaged in sales which are zerorated or effectively zero-rated 2. The taxpayer is VAT-registered 3. The claim must be filed within two years after the close of the taxable quarter when such sales were made 4. The input taxes are due or paid; 5. The input taxes are not transitional input taxes 6. The input taxes have not been applied against output taxes during and in the succeeding quarters 7. The input taxes claimed are attributable to zerorated or effectively zero-rated sales 8. In certain types of zero-rated sales, the acceptable foreign currency exchange proceeds thereof had been duly accounted for in accordance with BSP rules and regulations [Sections 106(A)(2)(a)(1) and (2); Section 106(B); Sections 108(B)(1) and (2)] 9. 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. (See INTEL T ECHNOLOGY PHILIPPINES 27, 2007])
V.

CIR [APRIL

Q16.1. In claims for VAT refund/credit, what is the reckoning point for the two-year prescriptive period?
The reckoning period is from the close of the taxable when the relevant sales were made. In CIR V. MIRANT PAGBILAO CORP. [SEPTEMBER 12, 2008], Mirant generated power which it sells to NAPOCOR in which connection it secured the services of Mitsubishi Corporation of Japan. In the belief that its sale of

Q15. What is the rule on presumptive input tax credits?

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power generation services to the NPC was VAT zerorated because of NAPOCORs tax exempt status, Mirant filed an application for effective zero-rating. The BIR issued a ruling stating that the supply of electricity by Mirant to NAPOCOR shall be subject to 0% VAT. On April 14, 1998, Mirant paid Mitsubishi the VAT component billed by the latter for services rendered. Mirant files its quarterly VAT return for the nd 2 quarter of 1998, where it reflected the input VAT paid to Mitsubishi. Subsequently, on December 20, 1999, Mirant filed an administrative claim for refund of unutilized input VAT arising from purchase of capital goods from Mitsubishi and its domestic purchase of goods and services attributable to its zero-rated sales of power-generation services to NAPOCOR. The claim was denied for being filed beyond the prescriptive period of two years. The Supreme Court held that Mirants claim has prescribed. Unutilized input VAT payments must be claimed within two years reckoned from the close of the taxable quarter when the relevant sales were made pertaining to the input VAT even if the payment 28 for the VAT was made some quarters after that. The fact that there was a pending request for zerorating cannot be a basis for the late filing of return and payment of taxes. Further, Mirant cannot avail itself of the provisions of either Section 204(C) or 229 of the NIRC which, for the purpose of refund, prescribes the payment of the tax as the starting point for the two-year prescriptive limit for the filing of a claim. These provisions apply only to instances of erroneous payment or illegal collection of internal revenue taxes. b) If no action on the claim for tax credit certificate/refund has been taken by the CIR after the 120 day period in which he must decide, the taxpayer may appeal to the CTA within 30 days from the lapse of the 120 day period. Claim for tax refund/credit from VAT Filing and Payment

Administrative claim filed with the CIR w/in 2 years from the close of the taxable quarter when the relevant sales were made

Submission of additional relevant supporting documents w/in 60 days from filing of claim

Appeal to CTA Division w/in 30 days from receipt of notice of denial or from lapse of 120 days of inaction counted from submission of documents to CIR. The appeal need not be made within the 2 year prescriptive period.

Q16.2. What is the period within which tax refund/credit of input taxes shall be made?
SECTION 112(C) provides that: 1. The CIR shall grant a tax credit certificate/refund for creditable input taxes within 120 days from the date of submission of complete documents in support of the application. 2. In case of full or partial denial of the claim for tax credit certificate/refund: a) The taxpayer may appeal to the CTA within 30 days from the receipt of said denial, otherwise the decision shall be come final

Follow mode of appeal to CTA En Banc up to SC Q16.2.1. Aichi Forging is a VATregistered corporation engaged in manufacturing and processing of steel. Aichi filed a tax credit/refund for its unutilized input tax from purchases and importation attributed to its zero-rated sales. The CIR and CTA ruled that the administrative and judicial claims were filed beyond the period allowed by law. Moreover, the CIR puts in issue the fact that the administrative claim and the judicial claim were filed on the same day. The CIR

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Note that previously in ATLAS CONSOLIDATED MINING V. CIR [JUNE 8, 2007] , the rule was that the two-year prescriptive period for filing a claim for refund/credit of input VAT on zero-rated sales was counted from the date of filing of the return

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PM REYES NOTES ON TAXATION II: VALUE-ADDED TAX


opines that simultaneous filing of the claims contravenes the NIRC which requires the prior filing of an administrative claim. Is the CIR and CTA correct? Yes. In CIR V. AICHI FORGING COMPANY OF ASIA [ OCTOBER 6, 2010], the court first reiterated that the unutilized input VAT must be claimed within two years after the close of the taxable quarter when the sales were made as laid down in CIR V. MIRANT PAGBILAO CORP. [SEPTEMBER 12, 2008]. Going to the administrative and judicial claims, the Court ruled that the administrative claim was timely filed while the judicial claim was premature. In this case, applying the Administrative Code which states that a year is composed of 12 calendar months instead of the Civil Code ( a year is equivalent to 365 days), it is clear that Aichi timely filed its administrative claim within the two-year prescriptive period. On the other hand, the claim of Aichi must be denied for non-observance of the 120-day period Where the taxpayer did not wait for the decision of the CIR or the lapse of the 120-day period, it having simultaneously filed the administrative and the judicial claims, the filing of the said judicial claim with the CTA is premature. The non-observance of the 120-day period is fatal to the filing of a judicial claim. The claim of Aichi that such non-observance is not fatal as long as both the administrative and judicial claim is filed within the 2year prescriptive period is without legal basis. The 2 year prescriptive period refers to applications for refund/credit filed with the CIR and not to appeals made to the CTA. Applying the two-year period to judicial claims would render nugatory Section 112(D) of the NIRC, which already provides for a specific period within which a taxpayer should appeal the decision or inaction of the CIR. The 120-day period is crucial in filing an appeal with the CTA. Q16.2.2. How do we reconcile CIR V. MIRANT PAGBILAO CORP. [SEPTEMBER 12, 2008] and CIR V. AICHI FORGING COMPANY OF ASIA [ OCTOBER 6, 2010]? In both Mirant and Aichi The 2-year prescriptive period is counted from the end of the taxable quarter when the sales were made. The 2-year prescriptive period applies to both the administrative and judicial claim. Thus, both claims must be filed within 2 years from the end of the taxable quarter In Aichi when the sales were made The 2-year prescriptive period only applies to the administrative claim. Thus: 1. For the administrative claim, file within 2 years from end of the taxable quarter when sales were made. 2. For judicial claim, BIR has 120 days to decide. If adverse decision within the 120 day period, 30 days from receipt of decision to appeal to CTA. If no BIR decision within th 120 days, 30 days from the 120 day to appeal to the CTA. Thus, Aichi affirmed the Courts ruling in Mirant in that the 2-year prescriptive period shall be reckoned from the end of the taxable quarter when the relevant sales were made but clarified that such prescriptive period applies only to the filing of the administrative claim.

Q16.3. For a claim for tax refund/credit, is it sufficient that the applicant was able to prove entitlement to the grant of the claim under substantive law?
No. In WESTERN MINDANAO POWER CORP. V. CIR [JUNE 13, 2012], WMPC filed for a claim for refund of excess and unutilized input VAT. The CIR objected to this contending that WMPC was not entitled to such in view of its failure to comply with invoicing requirements, particularly the failure of the invoice covering its zero-rated sales to show the word zerorated. WMPC argues that such was not an indispensable requirement to establish the claim. The Supreme Court held that in a claim for tax refund or tax credit, the applicant must prove not only entitlement to the grant of the claim under substantive law. It must also show satisfaction of all the documentary and evidentiary requirements for an administrative claim for a refund or tax credit. Hence, the mere fact that petitioners application for zerorating has been approved by the CIR does not, by itself, justify the grant of a refund or tax credit. The taxpayer claiming the refund must further comply with the invoicing and accounting requirements mandated by the NIRC, as well as by revenue regulations implementing them. Under the NIRC, a creditable input tax should be evidenced by a VAT invoice or

In Mirant

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PM REYES NOTES ON TAXATION II: VALUE-ADDED TAX


official receipt, which may only be considered as such when it complies with the requirements of RR 795, particularly Section 4.108-1. This section requires, among others, that (i)f the sale is subject to zero percent (0%) value-added tax, the term zerorated sale shall be written or printed prominently on the invoice or receipt.

Q17.1. Is there a difference between an invoice and official receipt for purposes of substantiation?
Yes. In CIR v. MANILA MINING CORPORATION [AUGUST 31, 2005], the Supreme Court defined a sales or commercial invoice is a written account of goods sold or services rendered indicating the prices charged therefor or a list by whatever name it is known which is used in the ordinary course of business evidencing sale and transfer or agreement to sell or transfer goods and services. A receipt on the other hand is a written acknowledgment of the fact of payment in money or other settlement between seller and buyer of goods, debtor or creditor, or person rendering services and client or customer. In KEPCO PHILIPPINES V. CIR [NOVEMBER 24, 2010], in ruling on Kepcos contention that an invoice and an official receipt are interchangeable, the Supreme Court stated that only a VAT invoice might be presented to substantiate a sale of goods or properties, while only a VAT receipt could substantiate a sale of services. The VAT invoice is the sellers best proof of the sale of the goods or services to the buyer while the VAT receipt is the buyers best evidence of the payment of goods or services received from the seller. Even though VAT invoices and receipts are normally issued by the supplier/seller alone, the said invoices and receipts, taken collectively, are necessary to substantiate the actual amount or quantity of goods sold and their selling price (proof of transaction), and the best means to prove the input VAT payments (proof of payment). Hence, VAT invoice and VAT receipt should not be confused as referring to one and the same thing. Certainly, neither does the law intend the two to be used alternatively

Administrative Provisions Q17. What information should be contained 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 VATexempt, 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 valueadded 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 zerorated 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.

Q17.2. Kepco filed a claim for refund of unutilized input VAT based on its zero-rated sale of power to NAPOCOR. A substantial portion of the claim was denied for having been supported by VAT invoices which only had the INT-VAT stamped and not printed. There were also certain sales by Kepco which failed to indicate the words zero-rated. Is Kepco entitled to the claim for refund?

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PM REYES NOTES ON TAXATION II: VALUE-ADDED TAX


No. In KEPCO PHILIPPINES V. CIR [NOVEMBER 24, 2010], the Supreme Court ruled that the requirement that the TIN be imprinted and not merely stamped is a reasonable requirement imposed by the BIR. Moreover, the requirement of the appearance of the words zero-rated on the face of the invoice prevents the buyers from falsely claiming input VAT from their purchases when no VA was actually paid. The failure to adhere to these rules will not only expose the taxpayer to penalties but should also serve to disallow the claim. 3. The monthly VAT Declarations of taxpayers whether large or not shall be filed and the taxes paid not later than the 20th day following the end of each month SECTION 114(B) provides for where the return shall be filed and the tax paid. Except as the Commissioner otherwise permits, the return shall be filed with and the tax paid to: 1. An authorized agent bank 2. Revenue Collection Officer; or 3. Duly authorized city or municipal Treasurer in the Philippines located within the revenue district where the taxpayer is registered or required to register.

Q17.3. What are the consequences of issuing erroneous VAT invoices or VAT official receipts?
1. If a person who is not VAT-registered issues an invoice or receipt showing his TIN, followed by the word VAT, the erroneous issuance shall result to the following: a) The Non-VAT person shall be liable to the: i. ii. iii. percentage taxes applicable VAT due on the transactions without the benefit of any input tax credit 50% surcharge as penalty

b) The VAT shall, if the other requisite information required is shown on the invoice or receipt, be recognized as an input tax credit to the purchaser. 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 VAT imposed. The purchaser shall be entitled to claim an input tax credit on said purchase.

Q18. What are the rules to follow with regard to the return and payment of VAT?
SECTION 114(A) provides for the who will file the return and pay the VAT and when shall the return be filed and the tax be paid. 1. VAT returns shall be filed by persons liable to pay VAT. 2. A quarterly VAT return of the amount of his gross sales or receipts within 25 days after the close of each taxable quarter prescribed for each taxpayer.

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