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VAT (Value Added Tax)

12% VAT started on Feb 1, 2006


Threshold of gross sales/receipts is 1,919,500

It is a uniform percentage tax imposed on each sale of goods/service, lease of property. It is a


tax on consumption. It is a business tax. It is an indirect tax. It is a national tax that is multi-stage
or multi-point. It is an ad valorem tax imposed not on the thing or service but on the act.
The sale of goods or services must be made in the course of trade or business. *One engaged
in the promotion and development of gymnastics is not subject to VAT, because gymnastics is a
sport not a business enterprise.
However, any business where the gross sales or receipts do not exceed 100k during any 12month period shall be considered principally for subsistence or livelihood.
Requisites or Elements of VAT (other than on imports)
a. There must be a sale in the PHL
b. The sale must be of taxable goods or services
c. The sale must be made by a taxable person in the course or furtherance of his business
*Gross receipts from lease of real property covered by the VAT law are subject to VAT
regardless of the place where the contract of lease was executed, if the property on lease
is located in the PHL.
Taxable person refers to any person liable for the payment of VAT, whether or not registered
under the tax system.
Illustration #1: X, a VAT-registered person, operates a grocery. His books show gross sales of 2M
in his first year of operation and 1.7M in his second year. Is he liable for VAT in his second year of
operation?
YES. Being a VAT-registered person, he remains subject to VAT although the gross annual sales in
his second year of operation did not exceed the minimum turnover of 1,919,500. ANY PERSON
WHO IS REGISTERED UNDER THE VAT SYSTEM SHALL BE SUBJECT TO VAT REGRADLESS OF THE
AMOUNT OF HIS GROSS ANNUAL SALES/DURING THE YEAR.
#2: X has a gross receipt amounting to 1.95M. However, he has not taken any necessary steps to
register under the VAT system. What is his tax liability?
X is subject to VAT. Notwithstanding the fact that he is not registered under the VAT system, he is
engaged in a vatable activity and exceeded the minimum turnover of 1,919,500. ANY PERSON
WHO IS ENGAGED IN VAT TAXABLE BUSINESS AND WHOSE ANNUAL GROSS SALES OR RECEIPTS
EXCEED 1,919,500 SHALL BE SUBJECT TO VAT, WHETHER OR NOT HE IS REGISTERED UNDER THE
VAT SYSTEM.
#3: X operates a gift shop and a beauty parlor. The annual gross service of the gift shop is 960k
while the beauty parlor had an annual gross receipt of 600k. She has not registered for VAT
purposes. What is her tax liability?
While operation of both gift shop and beauty parlor are VATable activities, she is NOT subject to
VAT because she is not registered under the VAT system and her aggregate annual gross receipts
for all VATable activities do not exceed 1,919,500.
#4: X is a manager of a local bank. He decided to sell his residential house and lot where he and
his family stay as a result of a promotion in his job to another city. Is he subject to VAT on the
sale?

NO. The house and lot, which are residential properties are non-business assets. The sale thereof
is an isolated, non-business transaction. To be subject to VAT, the sale (or lease) must be in the
course of trade or business.
#5: X, imported the latest model of a foreign car for 2M. The car is for personal use, is he subject
to VAT on the importation?
YES. The importation shall be subject to VAT, whether or not in the course of trade or business
regardless of the amount.
Transactions subject to VAT:
a. Every sale, barter, exchange, lease or similar transaction made in the course of trade or
business
b. Transactions deemed sale for VAT purposes
c. Importation of goods whether in the course of trade or business or not
d. Every sale of service made in the course of trade or business other than services rendered
by persons subject to other percentage taxes.
Transactions that are deemed sale for VAT purposes:
a. The transfer, use or consumption not in the course of business of (1) goods or properties
for sale (2) goods to be used in the course of business.
b. Distribution or transfer to shareholders or investors as share in the profits of the business
c. Transfer to creditors in payment of debt or obligation
d. Goods consigned and not sold within 60 days from date of consignment. Consigned goods
returned by the consignee within the 60 day period are not deemed sold.
e. Retirement from or cessation of business with respect to inventories of taxable goods
(including capital goods) then existing, whether or not the business is continued by the
new owner or successor.
f. Change of ownership of business
g. Incorporation of a single proprietorship
h. Dissolution of a partnership and creation of a new partnership that takes over the business
i. Death of an individual who is a VAT registered person even if the estate or heir of the
decedent shall continue to operate the business.
Q: X Corporation is a VAT-registered business entity. Its employees are allowed to buy directly
from the company with 20% discount once every quarter. Is the sale vatable?
Yes. It is VATable because it is an ordinary sale of goods to customers. The sale should be
included in the gross sales of the corporation in computing the VAT due to the government.
X decided to purchase new motor vehicles and sell old ones to its employees, is the sale VATable?
The vehicles are considered ordinary assets of the corporation; the sale to its own employees is
considered incidental sale in the course of business and trade. Hence, it is VATable. (CS Garment
vs. CIR)
Options available to the seller or producer under the VAT system:
a. The seller or producer may claim tax credit within a 12% ceiling, he may choose to absorb
the VAT and not pass it on to the consumer; or
b. The seller or producer may choose to pass it on to his buyers

Rate structure under the VAT system:


a. 0% rate for exports sales and persons whose sales are zero-rated. This includes foreign
currency denominated sales and sales to entities that are tax exempt under special laws
and international agreements
The 0% VAT (zero-rating) is an incentive to all exporters since they are entitled to claim
VAT refunds on their inputs, while their export sales are subject to zero rate.
Zero rated sales of services include the following: (1) processing, manufacturing or
repacking goods for others for export (2) services paid for in foreign currency inwardly
remitted and (3) services zero-rated under special laws and international agreements.
Export sales, or sales outside the PHL shall be subject to VAT at 0% if made by a VAT
registered person. If made by persons who are not VAT-registered, the export sales shall be
treated as exempt sales.
b. 12% for all other transactions.