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Primer on VAT

1. Who are liable for the payment of VAT:
Any person who, in the course of trade or business, sells, barters, exchanges,
leases good or properties, renders services and any person who imports
goods shall be subject to VAT. The VAT is an indirect tax and the amount of
tax may be shifted or passed on the buyer, transferee or lessee of the goods,
properties or services.
In other words, the following are liable to pay VAT:
a. Any person who in the ordinary course of business sells, barters, or
exchanges goods or properties. !""#$%,
&person liable is the seller, barterer, exchanger
b. Any person engaged in the sale or exchange of services including the
lease or use of properties in the ordinary course of business.
$'(VI)'$%,
&person liable is the person engaged in providing the service
c. In case of importation, the importer who imports the goods.
I*+"(TATI",% please note that in importation, the transaction need
not be -in the ordinary course of business%
2. For purposes of VAT, what does in the course of trade or business
mean
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&stoc., non&pro/t private
organi0ation irrespective of the disposition of its net income and whether or
not it sells exclusively to the members or their guests% or government entity.
!. "i#e the re$uisites for VAT ta%ability.
a. There is a sale, barter, exchange or other dispositions in the
+hilippines
b. The sale must be of taxable goods, properties or services
c. *ade by a taxable person in the course or furtherance of his1its
business
&. ' e%chan(ed merchandise worth Php )* in e%chan(e property of the
same amount. What is the VAT conse$uence
If the exchange was made in the course of trade or business, it is subject to
VAT. If the exchange was not done in the regular course of trade or business,
it is not subject to VAT.
). For purposes of VAT di+erentiate isolated and incidental
transactions.
An incidental transaction is not the main purpose of the business but is
somehow related to it. An incidental transaction is subject to VAT. Isolated
transactions however is not related to the business. It is not subject to VAT.
,. VAT is imposed on the transaction based on the "ross -ellin( Price.
What is "ross -ellin( Price. What are its inclusions and e%clusions
It means the total amount of money or its e2uivalent 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. !$+ excludes the VAT. 3owever, excise
taxes form part of the !$+.
.. /ature of VAT 0Tolentino #. -ecretary of Finance1
a. Is it ,"T a tax on privilege but a tax on transactions
b. It is a percentage tax because it imposes a certain percentage of tax
on certain transactions
c. It is an ad valorem tax because it is based on value
d. It is ,"T a license tax but a tax on certain transactions
e. It is ,"T a regulatory tax because the registration fee is just to pay the
expenses of registration and enforcement.
2. VAT law challen(ed as unconstitutional on the (round that it is not
comply with the re$uirement that it should be uniform and e$ual.
3ecide.
VAT is constitutional because it is applied similarly on all goods and services
to the public which are not exempt by law for the payment of such at a
constant rate of 45 or 645 now 675%. 8apatiran ng mga ,aglilin.od sa
+amahalaan v. Tan%
4. Petitioners claim that the application of VAT to e%istin( contracts of
the sale of real property by installment on deferred payment basis
would result in substantial increases in the monthly amorti5ation
payments. VAT law is challen(ed as unconstitutional on the (round
that it impairs e%istin( contracts because the buyer did not
anticipate it at the time he entered into the contract. 3ecide.
VAT is still constitutional. The reservation of the essential attributes of
sovereignty is read into the contracts as a postulate of the legal order.
)ontracts must be understood as having been made in reference to the
possible exercise of the rightful authority of the government and no
obligation of contract can extend to the defeat of that authority. Tolentino v.
$"9%
16. VAT law is challen(ed as unconstitutional on the (round that it
is re(ressi#e therefore it does not comply with the 7onstitutional
mandate to the le(islati#e body to e#ol#e a pro(ressi#e system of
ta%ation. 3ecide.
VAT is constitutional. The )onstitution does not prohibit the imposition of
indirect taxes li.e VAT which are regressive. :hat it simply provides is that
)ongress shall evolve a progressive system of taxation. The )onstitutional
provision has been interpreted that direct taxes are to be preferred as much
as possible, and indirect taxes should be minimi0ed. Tolentino v. $"9%
11. What (oods or properties are sub8ect to VAT
9irstly, the goods or properties to be subject to VAT must be capable of
pecuniary estimation. They include:
a. (eal properties held primarily for sale to customers or held for lease in
the ordinary course of trade or business
b. The right or privilege to use patent, copyright, design or model, plan,
secret formula or process1goodwill, trademar., trade brand or other
property or right.
c. The right or the privilege to use in the +hilippines of any industrial,
commercial or scienti/c e2uipment
d. The right or privilege to use motion picture /lms, /lms, tapes and discs
e. (adio, television, satellite transmission and cable television
12. What sales are sub8ect to 5ero rated VAT
a. 9%port -ales
i. $ale and actual shipment of goods from the +hilippines to a
foreign country
ii. $ale of raw materials or pac.aging materials to a non&resident
buyer for delivery to a local export oriented enterprise paid for
acceptable foreign currency and approved by the ;$+
iii. $ale of raw materials to an export oriented enterprise whose
export exceed <45 of total annual production
iv. $ale of gold to ;$+
v. Those considered as exports by law
vi. $ale of goods, e2uipment and fuel to persons engaged in
international shipping or international air transport operations
b. Forei(n 7urrency 3enominated -ale
c. -ale to persons entitled by law to 5ero rated VAT
1!. 3i+erentiate :ero ;ated from 9%emption.
:ero ;ated 9%emption
It is primarily intended to be enjoyed
by the $'=='( who is directly and
legally liable for the VAT. The purpose
here is to ma.e the seller
internationally competitive by
allowing the refund or credit of input
taxes that are attributable to export
sales. $eller is entitled to VAT refund.
It is intended to bene/t the purchaser
who not being directly and legally
liable for the payment of the VAT.
3owever, he bears the burden of the
indirect VAT shifted to it by the seller
because he is not entitled to VAT
refund.
There is total relief from the burden of
VAT because he can avail of a refund.
There is partial relief because there is
no refund.
1&. ' , VAT re(istered, is en(a(ed in the sale of furniture and
appliances. <e has an idle land. The land is sold. What is the ta%
conse$uence. =s it sub8ect to VAT
,o. The land is a capital asset subject to capital gains tax. The land is a
capital asset because it is not used in the regular course of trade or business.
The sale of a capital asset is not subject to VAT.
1). What are transactions deemed sale
a. Transfer, use, or consumption not in the course of business of goods or
properties originally intended for sale or for use in the course of
business. 9or example, 3ardware )ompany uses paint held out for
sale to repaint its own building.%
b. #istribution or transfer to shareholders or investors as share in the
pro/ts of the VAT registered person, or to creditors in the payment of
debt. 9or example, 3ardware )ompany has no ready cash to pay
shareholders, distributes nails as property dividend. 3ardware
)ompany has no cash to pay debt. The debtor accepts nails as dacion
en pago.)
c. )onsignment of goods if there is no actual sale within >4 days.
d. (etirement from or cessation of business
1,. For ser#ices to be VATable, what are re$uired
a. The service is to be conducted in the +hilippines
b. The service is for another other than itself
c. It is for a fee, remuneration or consideration
d. It is done in the regular course of business
1.. ' 7ompany is en(a(ed in the ser#ice of paintin( buildin(s.
<owe#er, the fees it char(es is based on a >no?pro@t, reimburse only
for the cost of materials usedA basis. ' was assessed for VAT but
ar(ued that it is not liable because it only seeBs reimbursement for
the materials used in the ser#ice. 3ecide.
It is immaterial whether the primary purpose of a corporation indicates that it
receives payments for services on a reimbursement&of&cost basis only even
without reali0ing pro/t for purposes of determining VAT on services rendered.
As long as ? was doing the service for a fee, remuneration or consideration,
the service rendered is subject to VAT. )I(. v. )omaserco%
12. 3istin(uish 5ero rated transactions from e+ecti#ely 5ero rated
transactions.
@ero (ated 'Aectively @ero (ated
!enerally refers to the export of sale
of goods and supply and services
(efer to sale of goods and supply of
services to persons or entities entitled
by special law or international
agreements to a 0ero rate
The seller charges no output VAT, he
can claim a refund or a tax credit
certi/cate
The seller charges no output VAT, he
can claim a refund or a tax credit
certi/cate
14. What is the VAT conse$uence of an 9%port :one entity sub8ect
to income ta% holiday as a(ainst an 9%port :one entity sub8ect to
preferential ta% rate lieu of all ta%es.
=ncome ta% holiday? the taxpayer is not exempt from VAT but is exempt
from the payment of income taxes for a certain number of years. ;ecause he
is liable for VAT, he is entitled to all bene/ts of VAT such as VAT refunds or
credits.
Preferential ta% rate in lieu of all ta%es? taxpayer is exempt from VAT
because in lieu of the VAT and other taxes, he is liable to pay taxes based on
a preferential tax rate. The taxpayer is entirely exempt from the VAT system,
therefore he cannot enjoy the bene/ts of VAT such as a claim for VAT refund
or credit.
26. <ow is VAT liability determined
VAT liability is the diAerence between the "utput VAT VAT imposed to the
sale, transfer, barter exchange or service performed, and passed on the
buyer , transferee, etc% and the Input VAT VAT passed on to it by goods
purchased or received%. If "utput VAT is more than Input VAT, the diAerence is
the liability. If Input VAT is more than "utput VAT, the diAerence can be
carried over to the next VAT period and may be used as a VAT credit to
reduce future "utput VAT.
21. What are transitional input ta% credits What are presumpti#e
ta% credits
a. Transitional =nput ta% credits
A person become liable to VAT tax or any person who elects to be a
VAT registered person, if 2uali/ed, shall be allowed input tax on his
beginning inventory of goods, materials and supplies e2uivalent to 2C
of the #alue of the in#entory or the actual #alue?added ta%
paid on such (oods, material and ser#ices whiche#er is hi(her,
which shall be creditable against the output tax.
b. Presumpti#e =nput ta% credits
+ersons or /rms engaged in the processing of sardines, mac.erel, and
mil. and the manufacture of re/ned sugar, coo.ing oil and pac.ed
noodle&based means, shall be allowed a presumptive input tax
creditable against the output tax, e$ui#alent to &C of the (ross
money of their purchases of primarily a(ricultural products
which are used as inputs to their production.
22. <ow can a claim for refund of input #at be made
A VAT registered person whose sales are 0ero&rated or eAectively 0ero&rated
may apply for the issuance of a tax credit certi/cate or refund of creditable
input tax due or paid attributable to such sales. It does not cover transitional
VAT. The claim must be made within 7 years after the close of the taxable
2uarter when the sales were made to the extent that such input tax as not
been applied against output tax.
2!. What are the in#oicin( re$uirements of a person liable for the
payment of VAT
VAT invoice for every sale, barter, or exchange of goods or properties.
VAT "Bcial (eceipt for every lease of goods or properties, and for every sale,
barter or exchange of services.
2&. When should VAT returns be @led and when should VAT
payments be made
'very person liable for the payment of VAT shall /le a 2uarterly return of the
amount of his gross sales or receipts within 7C days following the close of
each taxable 2uarter prescribed. +ayment shall be made on a monthly basis.
2). <ow can VAT liability be withheld
The government or any of its political subdivisions, instrumentalities or
agencies including !"))s shall before ma.ing payment on account of
purchase of goods and services subject to VAT shall deduct and withhold a
/nal value added tax at the rate of C5 of the gross payments. +rovided that
payment for lease or use of property rights to non&resident owners shall be
subject to 645 withholding tax at the time of payment.
3owever, the taxpayer dealing with the government remains to be liable for
VAT at the rate of 675, the percentage given above is only the amount that
the government entity ma.ing the payment can withhold%
2,. When can the 7ommissioner of =nternal ;e#enue suspend the
business of a VAT liable entity
a. In the case of a VAT registered person
i. 9ailure to issue receipts or invoices
ii. 9ailure to /le VAT returns
iii. Dnderstatement of sales by E45 of the correct taxable sales for
the taxable 2uarter
b. 9ailure to register as re2uired by =aw.
The suspension shall not be less than C days and shall be lifted only after
compliance.
3i(ests of /ew 7ases on VAT
CIR v. Sekisui(2006)
)ase: $e.isui is a +'@A entity engaged in manufacture and export see.ing for
refund of unutili0ed input taxes. ;eing a +'@A exporter, can it claim its unutili0ed
input VATF
(uling: G'$, $e.isui is entitled to tax refund. +e0a entites have 7 alternative
incetives of income tax holiday or C5 !I'. 9or C5!I', VAT is not imposed on on the
sales of the +'@A entity. ;eing under IT3, it will be subject to VAT and should
(egister. 3owever, 6% sales to the +'@A entity is 0ero&rated on the part of the seller
since +'@A is considered -foreign soilH, therefore, export salesI and 7% if the +'@A
entity is an exporter, its input VAT is subject to refund due to the nature of its
transactions export sales%
CIR v. Magsaysay Lines
)ase: ,ational #evelopment )orp. sold its ships to *agsaysay =ines because of the
government&mandated plan of privati0ation. Is the sale subject to VATF
(uling: ,". 'xempt sale because it is an isolated transaction. The re2uirement of
the sale being -in the course of trade or businessH of the seller is indispensable and
the seller must be treated as having done so -all the timeH. If the VAT is imposed on
isolated transactions, there would be less chance of being able to recover the VAT
on its sale since no input VAT may have been passed&on to the seller given the
nature of the transaction as not -doing businessH. The enumeration of what are
-deemed saleH does not modify the re2uirement of the sale being in the -ordinary
course o trade or businessH
CIR v. Burmeister
)ase: ;urmeisterJs parent company entered into an "K* contract with ,+) but the
actual "K* was subcontracted to ;urmeister. ,+) paid the parent company with a
mixture of currencies while the parent company paid ;urmeister in foreign currency.
;I( refuses refund since services are -not destined for consumption abroadH
destination principle%. Are the receipts of ;urmeister 0ero&ratedF
(uling: +artial. ;urmeister is entitled to refund but only for the period covered prior
to the /ling of )I(Js answer in the )TA. 6% The re2uirement is that the service
recipient is doing business outside the +hilippines. The recipient in this case is the
parent company a foreign consortium%, which secured a 6C&year contract from ,+),
and this cannot be interpreted as an isolated transactionI 7% the refund was
allowed since ;urmeister secured a ;I( ruling allowing 0ero&rating of its sales to the
foreign consortium, but this ruling is only valid until the time the )I( /led its answer
with the )TA, which is a deemed revocation of the ruling.
CIR v. Acesite Hte!
)ase: Acesite leases part of its hotel to +A!)"( and attempts to pass on to the
latter the VAT it incurred on its leasing charges. +A!)"( refuses due to its tax&
exempt status. Acesite pays the VAT but reali0es thereafter that its transaction with
+A!)"( is 0ero&rated. #oes +A!)"(Js exemption cover indirect taxed and ma.e
AcesiteJs sales 0ero&ratedF
(uling: G'$. $ales to +agcor are 0ero&rated. +agcorJs charter not only exempts
+agcor from paying taxes, the exemption also inures to the bene/t of entities with
whom +agcor has any contractual relationship for its casinos. +agcorJs exemption is
from both direct and indirect taxes, therefore, Acesite is also not liable for VAT and is
an eAectively 0ero&rated seller since its -services are rendered to persons or entities
whose exemption under special laws eAectively subjects the supply of such services
to 0ero rateH.
CIR v. "#i!Hea!t#
)ase: +hilhealthJs primary purpose is to operate a prepaid group practice health
care delivery system or a health maintenance organi0ation. A ;I( ruling exempted
+hilhealth from VAT for being a provider of health care services. 3owever, the )TA
ruled that +hilhealth is liable for being a service contractor that does not actually
render medical services. Are +hilhealthJs services considered as medical services
and thus, VAT exemptF
(uling: ,". ;ut philhealth may be VAT&exempt due to the previous ;I( ruling. The
VAT exempt transaction involves -medical, dental, hospital, and veterinary services
except those rendered by professionalsH. +hilhealth is not providing medical
services but merely acts a conduit, who arranges of the provision of health care,
and contracts the services of doctors and hospitals. Its services are not Vat&exempt.
3owever, there can be no retroactive application of the revocation since this will
prejudice the taxpayer.
I$%&L v. CIR
)ase: Intel is an exporter registered with the +'@A. Its refund claim was denied on
the ground that its export invoices is not competent evidence to prove 0ero&rated
sales. Intel claims that its other documents are enough to establish its export sales.
Is the failure to indicate -Authority to +rintH in the invoices fatal to a claim for
refundF
(uling: ,". The Law identi/ed by the ;I( is not suBcient to invalidate the claim of
Intel. The re2uirements for claiming refund for Vat 0ero&rated transactions are: 6%
taxpayer is engaged in 0ero&rated transactionsI 7% taxpayer is Vat&registeredI E%
claim /led within 7 yearsI M% creditable input tax is attributable to 0ero&rated
transactionsI and C% accounting of foreign exchange proceeds, if applicable. There
is no rule re2uiring the printing of such other than those speci/c items re2uired to
be indicated.