TAXATION II
PART III
VALUE-ADDED TAX
Sections 105-115 of the NIRC, amended by RA No. 9337
Implemented by RR No. 16-05 as amended by RR No. 4-07
I. PRELIMINARY MATTERS
a. Nature and characteristic of VAT in general
Sec. 4.105.-2 of RR No. 16-05
SECTION 4.105-2. Nature and Characteristics of VAT. — VAT is a tax on
consumption levied on the sale, barter, exchange or lease of goods or
properties and services in the Philippines and on importation of goods into
the Philippines. The seller is the one statutorily liable for the payment of the
tax but the amount of the tax may be shifted or passed on to the buyer,
transferee or lessee of the goods, properties or services. This rule shall
likewise apply to existing contracts of sale or lease of goods, properties or
services at the time of the effectivity of RA No. 9337. However, in the case of
importation, the importer is the one liable for the VAT.
CASES: CIR vs. Magsaysay Lines GR No. 146984 dated July 28, 2006
Pursuant to a government program of privatization, NDC, a VAT-registered
entity created for the purpose of selling real property, decided to sell to
private enterprise all of its shares in its wholly-owned subsidiary the National
Marine Corporation (NMC). The NDC decided to sell in one lot its NMC
shares and five (5) of its ships, which are 3,700 DWT Tween-Decker,
"Kloeckner" type vessels. The vessels were constructed for the NDC
between 1981 and 1984, then initially leased to Luzon Stevedoring
Company, also its wholly-owned subsidiary. Subsequently, the vessels were
transferred and leased, on a bareboat basis, to the NMC. The NMC shares
and the vessels were offered for public bidding. Among the stipulated terms
and conditions for the public auction was that the winning bidder was to pay
"a value added tax of 10% on the value of the vessels." Magsaysay Lines,
Inc., offered to buy the shares and the vessels for P168,000,000.00. The bid
was made by Magsaysay Lines, purportedly for a new company still to be
formed composed of itself, Baliwag Navigation, Inc., and FIM Limited of the
Marden Group based in Hongkong . The bid was approved by the Committee
on Privatization, and a Notice of Award was issued to Magsaysay Lines.
VAT is ultimately a tax on consumption, even though it is assessed on many
levels of transactions on the basis of a fixed percentage.It is the end user of
consumer goods or services which ultimately shoulders the tax, as the
liability therefrom is passed on to the end users by the providers of these
goods or services who in turn may credit their own VAT liability (or input
REVIEWER TAX 2- YUMI
VAT) from the VAT payments they receive from the final consumer (or output
VAT).The final purchase by the end consumer represents the final link in a
production chain that itself involves several transactions and several acts of
consumption. The VAT system assures fiscal adequacy through the
collection of taxes on every level of consumption,yet assuages the
manufacturers or providers of goods and services by enabling them to pass
on their respective VAT liabilities to the next link of the chain until finally the
end consumer shoulders the entire tax liability.
CIR vs. Seagate Technology (Phils) GR No. 153866 February 11, 2005
The VAT is a uniform tax ranging, at present, from 0 percent to 10 percent
levied 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.It is an indirect tax that may be shifted or passed on to
the buyer, transferee or lessee of the goods, properties or services. As such,
it should be understood not in the context of the person or entity that is
primarily, directly and legally liable for its payment, but in terms of its nature
as a tax on consumption.
b. VAT as an indirect tax
CASE: Contex vs. CIR GR No. 151135 dated July 2, 2004
VAT is an indirect tax. As such, the amount of tax paid on the goods,
properties or services bought, transferred, or leased may be shifted or
passed on by the seller, transferor, or lessor to the buyer, transferee or
lessee. Unlike a direct tax, such as the income tax, which primarily taxes an
individual’s ability to pay based on his income or net wealth, an indirect tax,
such as the VAT, is a tax on consumption of goods, services, or certain
transactions involving the same. The VAT, thus, forms a substantial portion
of consumer expenditures. Further, in indirect taxation, there is a need to
distinguish between the liability for the tax and the burden of the tax. As
earlier pointed out, the amount of tax paid may be shifted or passed on by
the seller to the buyer. What is transferred in such instances is not the liability
for the tax, but the tax burden. In adding or including the VAT due to the
selling price, the seller remains the person primarily and legally liable for the
payment of the tax. What is shifted only to the intermediate buyer and
ultimately to the final purchaser is the burden of the tax. Stated differently, a
seller who is directly and legally liable for payment of an indirect tax, such as
the VAT on goods or services is not necessarily the person who ultimately
bears the burden of the same tax. It is the final purchaser or consumer of
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such goods or services who, although not directly and legally liable for the
payment thereof, ultimately bears the burden of the tax.
c. Persons Liable (Sec. 105)
Persons Liable. - Any person who, in the course of trade or business, sells
barters, exchanges, leases goods or properties, renders services, and any
person who imports goods shall be subject to the value-added tax (VAT)
imposed in Sections 106 to 108 of this Code.
The value-added tax is an indirect tax and the amount of tax may be shifted
or passed on to the buyer, transferee or lessee of the goods, properties or
services. This rule shall likewise apply to existing contracts of sale or lease of
goods, properties or services at the time of the effectivity of Republic Act No.
7716.
i. Persons liable in general
CASE: CIR vs. CA and Commonwealth Management Services
Commonwealth Management and Services Corporation (COMASERCO, for
brevity), is a corporation duly organized and existing under the laws of the
Philippines. It is an affiliate of Philippine American Life Insurance Co.
(Philamlife), organized by the letter to perform collection, consultative and
other technical services, including functioning as an internal auditor, of
Philamlife and its other affiliates. On January 24, 1992, the Bureau of Internal
Revenue (BIR) issued an assessment to private respondent COMASERCO
for deficiency value-added tax (VAT). COMASERCO's annual corporate
income tax return ending December 31, 1988 indicated a net loss in its
operations. COMASERCO asserted that the services it rendered to
Philamlife and its affiliates, relating to collections, consultative and other
technical assistance, including functioning as an internal auditor, were on a
"no-profit, reimbursement-of-cost-only" basis. It averred that it was not
engaged id the business of providing services to Philamlife and its affiliates.
COMASERCO was established to ensure operational orderliness and
administrative efficiency of Philamlife and its affiliates, and not in the sale of
services. COMASERCO stressed that it was not profit-motivated, thus not
engaged in business. In fact, it did not generate profit but suffered a net loss
in taxable year 1988. COMASERCO averred that since it was not engaged in
business, it was not liable to pay VAT.
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ii. Who are required to register for VAT (Sec. 236 G) [Sec. 9.236-1 of RR
No. 16-05]
Sec. 236 (G)
Any person, who expects to realize gross sales or receipts subject to value-
added tax in excess of the amount prescribed under Section 109(z) of this
Code for the next 12-month period from the commencement of the business,
shall register with the Revenue District Office which has jurisdiction over the
head office or branch and shall pay the annual registration fee prescribed in
Subsection (B) hereof.
Sec. 9.236-1 of RR No. 16-05
(a) In general. — Any person who, in the course of trade or business, sells,
barters, exchanges goods or properties, or engages in the sale of services
subject to VAT imposed in Secs. 106 and 108 of the Tax Code shall register
with the appropriate RDO using the appropriate BIR forms and pay an annual
registration fee in the amount of Five Hundred Pesos (P500) using BIR Form
No. 0605 for every separate or distinct establishment or place of business
(save a warehouse without sale transactions) before the start of such
business and every year thereafter on or before the 31st day of January.
Any person who maintains a head or main office and branches in different
places shall register with the RDO which has jurisdiction over the place
wherein the main or head office or branch is located. However, the
registration fee shall be paid to any accredited bank in the Revenue District
where the head office or branch is registered provided that in areas where
there are no accredited banks, the same shall be paid to the RDO, collection
agent, or duly authorized treasurer of the municipality where each place of
business or branch is situated.
Each VAT-registered person shall be assigned only one TIN. The branch
shall use the 9-digit TIN of the Head Office plus a 3-digit Branch Code.
(b) Mandatory:
Any person who, in the course of trade or business, sells, barters or
exchanges goods or properties or engages in the sale or exchange of
services shall be liable to register if:
i. His gross sales or receipts for the past twelve (12) months, other than
those that are exempt under Sec. 109 (1)(A) to (U) of the Tax Code, have
exceeded One million five hundred thousand pesos (P1,500,000.00); or
ii. There are reasonable grounds to believe that his gross sales or receipts
for the next twelve (12) months, other than those that are exempt under Sec.
109 (1)(A) to (U) of the Tax Code, will exceed One million five hundred
thousand pesos (P1,500,000.00).
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Every person who becomes liable to be registered under paragraph (1) of
this subsection shall register with the RDO which has jurisdiction over the
head office or branch of that person, and shall pay the annual registration fee
prescribed in subsection 9.236-1(a) hereof. If he fails to register, he shall be
liable to pay the output tax under Secs. 106 and/or 108 of the Tax Code as if
he were a VAT-registered person, but without the benefit of input tax credits
for the period in which he was not properly registered.
Moreover, franchise grantees of radio and television broadcasting, whose
gross annual receipt for the preceding calendar year exceeded
P10,000,000.00, shall register within thirty (30) days from the end of the
calendar year.
iii. Optional VAT Registration (Sec. 236 H) [Sec. 9.236-1 of RR No. 16-05]
(c) Optional VAT Registration. —
(1) Any person who is VAT-exempt under Sec. 4.109-1 (B) (1) (V) not
required to register for VAT may, in relation to Sec. 4.109-2, elect to be VAT-
registered by registering with the RDO that has jurisdiction over the head
office of that person, and pay the annual registration fee of P500.00 for every
separate and distinct establishment.
(2) Any person who is VAT-registered but enters into transactions which are
exempt from VAT (mixed transactions) may opt that the VAT apply to his
transactions which would have been exempt under Section 109(1) of the Tax
Code, as amended. [Sec. 109(2)]
(3) Franchise grantees of radio and/or television broadcasting whose annual
gross receipts of the preceding year do not exceed ten million pesos
(P10,000,000.00) derived from the business covered by the law granting the
franchise may opt for VAT registration. This option, once exercised, shall be
irrevocable. (Sec. 119, Tax Code)
Any person who elects to register under this subsections (1) and (2) above
shall not be allowed to cancel his registration for the next three (3) years.
The above-stated taxpayers may apply for VAT registration not later than ten
(10) days before the beginning of the calendar quarter and shall pay the
registration fee prescribed under sub-paragraph (a) of this Section, unless
they have already paid at the beginning of the year. In any case, the
Commissioner of Internal Revenue may, for administrative reason deny any
application for registration. Once registered as a VAT person, the taxpayer
shall be liable to output tax and be entitled to input tax credit beginning on
the first day of the month following registration.
d. Meaning of the phrase “in the course of trade of business” (Sec.
105)
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Sec. 4.105-3 of RR No. 16-05 - Meaning of "In the Course of Trade or
Business". — The term "in the course of trade or business" means the
regular conduct or pursuit of a commercial or economic activity, including
transactions incidental thereto, by any person regardless of whether or not
the person engaged therein is a non-stock, non-profit private organization
(irrespective of the disposition of its net income and whether or not it sells
exclusively to members or their guests), or government entity.
Non-resident persons who perform services in the Philippines are deemed to
be making sales in the course of trade or business, even if the performance
of services is not regular.
CASE: CIR vs. Magsaysay Lines GR No. 146984 dated July 28, 2006
Interpretation of the term “In the Course of Trade or Business. VAT is not a
singular-minded tax on every transactional level. Its assessment bears direct
relevance to the taxpayer’s role or link in the production chain. Hence, as
affirmed by Section 99 of the Tax Code and its subsequent incarnations, the
tax is levied only on the sale, barter or exchange of goods or services by
persons who engage in such activities, in the course of trade or business.
These transactions outside the course of trade or business may invariably
contribute to the production chain, but they do so only as a matter of accident
or incident. As the sales of goods or services do not occur within the course
of trade or business, the providers of such goods or services would hardly, if
at all, have the opportunity to appropriately credit any VAT liability as against
their own accumulated VAT collections since the accumulation of output VAT
arises in the first place only through the ordinary course of trade or business.
Is the sale subject to VAT ?
No. The sale is not subject to VAT.
"course of business" or "doing business" connotes regularity of activity. In the
instant case, the sale was an isolated transaction. The sale which was
involuntary and made pursuant to the declared policy of Government for
privatization could no longer be repeated or carried on with regularity. It
should be emphasized that the normal VAT-registered activity of NDC is
leasing personal property. This finding is confirmed by the Revised Charter of
the NDC which bears no indication that the NDC was created for the primary
purpose of selling real property.
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e. Exceptions to the Rule of Regularity
f. Output Tax vs. Input Taxes
i. Sources of Input Tax (Sec. 110 A)
(A) Creditable Input Tax. -
(1) Any input tax evidenced by a VAT invoice or official receipt issued in
accordance with Section 113 hereof on the following transactions shall be
creditable against the output tax:
(a) Purchase or importation of goods:
(i) For sale; or
(ii) For conversion into or intended to form part of a finished
product for sale including packaging materials; or
(iii) For use as supplies in the course of business; or
(iv) For use as materials supplied in the sale of service; or
(v) For use in trade or business for which deduction for
depreciation or amortization is allowed under this Code, except automobiles,
aircraft and yachts.
(b) Purchase of services on which a value-added tax has been
actually paid.
(2) The input tax on domestic purchase of goods or properties shall be
creditable:
(a) To the purchaser upon consummation of sale and on importation
of goods or properties; and
(b) To the importer upon payment of the value-added tax prior to the
release of the goods from the custody of the Bureau of Customs.
However, in the case of purchase of services, lease or use of
properties, the input tax shall be creditable to the purchaser, lessee or
licensee upon payment of the compensation, rental, royalty or fee.
(3) A VAT-registered person who is also engaged in transactions not
subject to the value-added tax shall be allowed tax credit as follows:
(a) Total input tax which can be directly attributed to transactions
subject to value-added tax; and
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(b) A ratable portion of any input tax which cannot be directly
attributed to either activity.
The term "input tax" means the value-added tax due from or paid by a
VAT-registered person in the course of his trade or business on importation
of goods or local purchase of goods or services, including lease or use of
property, from a VAT-registered person. It shall also include the transitional
input tax determined in accordance with Section 111 of this Code.
The term "output tax" means the value-added tax due on the sale or
lease of taxable goods or properties or services by any person registered or
required to register under Section 236 of this Code.
ii. Excess Output or Input Tax (Sec. 111 B)
Excess Output or Input Tax. - If at the end of any taxable quarter the output
tax exceeds the input tax, the excess shall be paid by the VAT-registered
person. If the input tax exceeds the output tax, the excess shall be carried
over to the succeeding quarter or quarters. any input tax attributable to the
purchase of capital goods or to zero-rated sales by a VAT-registered person
may at his option be refunded or credited against other internal revenue
taxes, subject to the provisions of Section 112.
iii. Rule on Input Tax on Capital Goods (Sec. 4.110-3 of RR No. 16-05)
Claim for Input Tax on Depreciable Goods. — Where a VAT-registered
person purchases or imports capital goods, which are depreciable assets for
income tax purposes, the aggregate acquisition cost of which (exclusive of
VAT) in a calendar month exceeds One Million pesos (P1,000,000.00),
regardless of the acquisition cost of each capital good, shall be claimed as
credit against output tax in the following manner:
(a) If the estimated useful life of a capital good is five (5) years or more —
The input tax shall be spread evenly over a period of sixty (60) months and
the claim for input tax credit will commence in the calendar month when the
capital good is acquired. The total input taxes on purchases or importations
of this type of capital goods shall be divided by 60 and the quotient will be the
amount to be claimed monthly.
(b) If the estimated useful life of a capital good is less than five (5) years —
The input tax shall be spread evenly on a monthly basis by dividing the input
tax by the actual number of months comprising the estimated useful life of
the capital good. The claim for input tax credit shall commence in the
calendar month that the capital goods were acquired.
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Where the aggregate acquisition cost (exclusive of VAT) of the existing or
finished depreciable capital goods purchased or imported during any
calendar month does not exceed One million pesos (P 1,000,000.00), the
total input taxes will be allowable as credit against output tax in the month of
acquisition; Provided, however, that the total amount of input taxes (input tax
on depreciable capital goods plus other allowable input taxes) allowed to be
claimed against the output tax in the quarterly VAT Returns shall be subject
to the limitation prescribed under Sec. 4.110-7 of these Regulations.
The aggregate acquisition cost of a depreciable asset in any calendar month
refers to the total price agreed upon for one or more assets acquired and not
on the payments actually made during the calendar month. Thus, an asset
acquired in installment for an acquisition cost of more than P 1,000,000.00
will be subject to the amortization of input tax despite the fact that the
monthly payments/installments may not exceed P1,000,000.00.
iv. Substantiation of Input Tax Credits (Sec. 4.110-8 of RR No. 16-05)
(a) Input taxes for the importation of goods or the domestic purchase of
goods, properties or services is made in the course of trade or business,
whether such input taxes shall be credited against zero-rated sale, non-zero-
rated sales, or subjected to the 5% Final Withholding VAT, must be
substantiated and supported by the following documents, and must be
reported in the information returns required to be submitted to the Bureau:
(1) For the importation of goods — import entry or other equivalent document
showing actual payment of VAT on the imported goods.
(2) For the domestic purchase of goods and properties — invoice showing
the information required under Secs. 113 and 237 of the Tax Code.
(3) For the purchase of real property — public instrument i.e., deed of
absolute sale, deed of conditional sale, contract/agreement to sell, etc.,
together with VAT invoice issued by the seller.
(4) For the purchase of services — official receipt showing the information
required under Secs. 113 and 237 of the Tax Code.
A cash register machine tape issued to a registered buyer shall constitute
valid proof of substantiation of tax credit only if it shows the information
required under Secs. 113 and 237 of the Tax Code.
(b) Transitional input tax shall be supported by an inventory of goods as
shown in a detailed list to be submitted to the BIR.
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(c) Input tax on "deemed sale" transactions shall be substantiated with the
invoice required under Sec. 4.113-2 of these Regulations.
(d) Input tax from payments made to non-residents (such as for services,
rentals and royalties) shall be supported by a copy of the Monthly Remittance
Return of Value Added Tax Withheld (BIR Form 1600) filed by the resident
payor in behalf of the non-resident evidencing remittance of VAT due which
was withheld by the payor.
(e) Advance VAT on sugar shall be supported by the Payment Order
showing payment of the advance VAT.
II. VAT ON GOODS AND SERVICES
a. Definition of goods and services (Sec. 106 and Sec. 108)
SEC. 106 The term "goods" or "properties" shall mean all tangible and
intangible objects which are capable of pecuniary estimation and shall
include: (a) Real properties held primarily for sale to customers or held for
lease in the ordinary course of trade or business; (b) The right or the
privilege to use patent, copyright, design or model, plan, secret formula or
process, goodwill, trademark, trade brand or other like property or right; (c)
The right or the privilege to use in the Philippines of any industrial,
commercial or scientific equipment; (d) The right or the privilege to use
motion picture films, tapes and discs; and (e) Radio, television, satellite
transmission and cable television time.
SEC. 108 The phrase "sale or exchange of services" means the performance
of all kinds or services in the Philippines for others for a fee, remuneration or
consideration, including those performed or rendered by construction and
service contractors; stock, real estate, commercial, customs and immigration
brokers; lessors of property, whether personal or real; warehousing services;
lessors or distributors of cinematographic films; persons engaged in milling
processing, manufacturing or repacking goods for others; proprietors,
operators or keepers of hotels, motels, resthouses, pension houses, inns,
resorts; proprietors or operators of restaurants, refreshment parlors, cafes
and other eating places, including clubs and caterers; dealers in securities;
lending investors; transportation contractors on their transport of goods or
cargoes, including persons who transport goods or cargoes for hire another
domestic common carriers by land, air and water relative to their transport of
goods or cargoes; services of franchise grantees of telephone and telegraph,
radio and television broadcasting and all other franchise grantees except
those under Section 119 of this Code; services of banks, non-bank financial
intermediaries and finance companies; and non-life insurance companies
(except their crop insurances), including surety, fidelity, indemnity and
bonding companies; and similar services regardless of whether or not the
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performance thereof calls for the exercise or use of the physical or mental
faculties. The phrase 'sale or exchange of services' shall likewise include:
(1) The lease or the use of or the right or privilege to use any copyright,
patent, design or model, plan secret formula or process, goodwill, trademark,
trade brand or other like property or right;
(2) The lease of the use of, or the right to use of any industrial, commercial
or scientific equipment;
(3) The supply of scientific, technical, industrial or commercial knowledge or
information;
(4) The supply of any assistance that is ancillary and subsidiary to and is
furnished as a means of enabling the application or enjoyment of any such
property, or right as is mentioned in subparagraph (2) or any such knowledge
or information as is mentioned in subparagraph (3);
(5) The supply of services by a nonresident person or his employee in
connection with the use of property or rights belonging to, or the installation
or operation of any brand, machinery or other apparatus purchased from
such nonresident person.
(6) The supply of technical advice, assistance or services rendered in
connection with technical management or administration of any scientific,
industrial or commercial undertaking, venture, project or scheme;
(7) The lease of motion picture films, films, tapes and discs; and
(8) The lease or the use of or the right to use radio, television, satellite
transmission and cable television time.
Lease of properties shall be subject to the tax herein imposed irrespective of
the place where the contract of lease or licensing agreement was executed if
the property is leased or used in the Philippines.
b. VAT base for goods and services (Sec. 106 and Sec.108)
SEC. 106. Value-Added Tax on Sale of Goods or Properties. -
(A) Rate and Base of Tax. - There shall be levied, assessed and collected
on every sale, barter or exchange of goods or properties, value-added tax
equivalent to ten percent (10%) of the gross selling price or gross value in
money of the goods or properties sold, bartered or exchanged, such tax to be
paid by the seller or transferor.
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of
Properties. -
(A) Rate and Base of Tax. - There shall be levied, assessed and collected, a
value-added tax equivalent to ten percent (10%) of gross receipts derived
from the sale or exchange of services, including the use or lease of
properties.
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c. Meaning of gross selling price and gross receipts (Sec. 106 and
Sec.108)
Sec. 106
The term "gross selling price" means the total amount of money or its
equivalent which the purchaser pays or is obligated to pay to the seller in
consideration of the sale, barter or exchange of the goods or properties,
excluding the value-added tax. The excise tax, if any, on such goods or
properties shall form part of the gross selling price.
Sec.108
The term "gross receipts" means the total amount of money or its equivalent
representing the contract price, compensation, service fee, rental or royalty,
including the amount charged for materials supplied with the services and
deposits and advanced payments actually or constructively received during
the taxable quarter for the services performed or to be performed for another
person, excluding value-added tax.
d. Rules on sales of Real Property
i. Rule on Sales on Installment [RR No. Sec. 4.106-3 of RR No. 16-05 as
amended by Sec. 3 of RR No. 4-07]
Installment sale of residential house and lot or other residential dwellings with
gross selling price exceeding P1,000,000.00, where the instrument of sale
(whether the instrument is nominated as a deed of absolute sale, deed of
conditional sale or otherwise) was executed prior to November 1, 2005,
shall be subject to ten percent (10%) output VAT.
Sale of real property on installment plan means sale of real property by a real
estate dealer, the initial payments of which in the year of sale do not exceed
twenty-five (25%) of the gross selling price.
In case of installment sale, the seller shall be subject to output VAT on the
installment payments received, including the interests and penalties for late
payment, actually and/or constructively received, subject to the provisions of
Sec.4.106-4 hereof. Correspondingly, the buyer of the property can claim the
input tax in the same period as the seller recognized the output tax.
Installment payments, including interests and penalties, actually and/or
constructively received starting February 1, 2006 shall be subject to twelve
percent (12%) output VAT.
ii. See also rule on sale of real property use in business (Sec. 14 (l) of RR
No. 4-07)
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(1) Sale of real properties not primarily held for sale to customers or held for
lease in the ordinary course of trade or business. However, even if the real
property is not primarily held for sale to customers or held for lease in the
ordinary course of trade or business but the same is used in the trade or
business of the seller, the sale thereof shall be subject to VAT being a
transaction incidental to the taxpayer’s main business.
iii. Correlate with Sec. 109 on exempt sales of Real Property
(w) Sale of real properties not primarily held for sale to customers or held for
lease in the ordinary course of trade or business or real property utilized for
low-cost and socialized housing as defined by Republic Act No. 7279,
otherwise known as the Urban Development and Housing Act of 1992, and
other related laws, house and lot and other residential dwellings valued at
One million pesos (P1,000,000) and below: Provided, That not later than
January 31st of the calendar year subsequent to the effectivity of this Act and
each calendar year thereafter, the amount of One million pesos (P1,000,000)
shall be adjusted to its present value using the Consumer Price Index, as
published by the national Statistics Office (NSO);
e. VAT on Importations (Sec. 107)
In General. - There shall be levied, assessed and collected on every
importation of goods a value-added tax equivalent to ten percent (10%)
based on the total value used by the Bureau of Customs in determining tariff
and customs duties plus customs duties, excise taxes, if any, and other
charges, such tax to be paid by the importer prior to the release of such
goods from customs custody: Provided, That where the customs duties are
determined on the basis of the quantity or volume of the goods, the value-
added tax shall be based on the landed cost plus excise taxes, If any.
i. Exempt Importations under Sec. 109
SEC. 109. Exempt Transactions. - The following shall be exempt from the
value-added tax:
(a) Sale of nonfood agricultural products; marine and forest products in their
original state by the primary producer or the owner of the land where the
same are produced;
(b) Sale of cotton seeds in their original state; and copra;
(c) Sale or importation of agricultural and marine food products in their
original state, livestock and poultry of or king generally used as, or yielding or
producing foods for human consumption; and breeding stock and genetic
materials therefor. Products classified under this paragraph and paragraph
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(a) shall be considered in their original state even if they have undergone the
simple processes of preparation or preservation for the market, such as
freezing, drying, salting, broiling, roasting, smoking or stripping. Polished
and/or husked rice, corn grits, raw cane sugar and molasses, and ordinary
salt shall be considered in their original state;
(d) Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish,
prawn, livestock and poultry feeds, including ingredients, whether locally
produced or imported, used in the manufacture of finished feeds (except
specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals
and other animals generally considered as pets);
(e) Sale or importation of coal and natural gas, in whatever form or state,
and petroleum products (except lubricating oil, processed gas, grease, wax
and petrolatum) subject to excise tax imposed under Title VI;
(f) Sale or importation of raw materials to be used by the buyer or importer
himself in the manufacture of petroleum products subject to excise tax,
except lubricating oil, processed gas, grease, wax and petrolatum;
(g) Importation of passenger and/or cargo vessels of more than five
thousand tons (5,000) whether coastwise or ocean-going, including engine
and spare parts of said vessel to be used by the importer himself as operator
thereof;
(h) Importation of personal and household effects belonging to the residents
of the Philippines returning from abroad and nonresident citizens coming to
resettle in the Philippines: Provided, That such goods are exempt from
customs duties under the Tariff and Customs Code of the Philippines;
(i) Importation of professional instruments and implements, wearing apparel,
domestic animals, and personal household effects (except any vehicle,
vessel, aircraft, machinery other goods for use in the manufacture and
merchandise of any kind in commercial quantity) belonging to persons
coming to settle in the Philippines, for their own use and not for sale, barter
or exchange, accompanying such persons, or arriving within ninety (90) days
before or after their arrival, upon the production of evidence satisfactory to
the Commissioner, that such persons are actually coming to settle in the
Philippines and that the change of residence is bona fide;
(j) Services subject to percentage tax under Title V;
(k) Services by agricultural contract growers and milling for others of palay
into rice, corn into grits and sugar cane into raw sugar;
(l) Medical, dental, hospital and veterinary services subject to the provisions
of Section 17 of Republic Act No. 7716, as amended:
(m) Educational services rendered by private educational institutions, duly
accredited by the Department of Education, Culture and Sports (DECS) and
the Commission on Higher Education (CHED), and those rendered by
government educational institutions;
(n) Sale by the artist himself of his works of art, literary works, musical
compositions and similar creations, or his services performed for the
production of such works;
7
(o) Services rendered by individuals pursuant to an employer-employee
relationship;
(p) Services rendered by regional or area headquarters established in the
Philippines by multinational corporations which act as supervisory,
communications and coordinating centers for their affiliates, subsidiaries or
branches in the Asia-Pacific Region and do not earn or derive income from
the Philippines;
(q) Transactions which are exempt under international agreements to which
the Philippines is a signatory or under special laws, except those under
Presidential Decree Nos. 66, 529 and 1590;
(r) Sales by agricultural cooperatives duly registered with the Cooperative
Development Authority to their members as well as sale of their produce,
whether in its original state or processed form, to non-members; their
importation of direct farm inputs, machineries and equipment, including spare
parts thereof, to be used directly and exclusively in the production and/or
processing of their produce;
(s) Sales by electric cooperatives duly registered with the Cooperative
Development authority or National Electrification Administration, relative to
the generation and distribution of electricity as well as their importation of
machineries and equipment, including spare parts, which shall be directly
used in the generation and distribution of electricity;
(t) Gross receipts from lending activities by credit or multi-purpose
cooperatives duly registered with the Cooperative Development Authority
whose lending operation is limited to their members;
(u) Sales by non-agricultural, non- electric and non-credit cooperatives duly
registered with the Cooperative Development Authority: Provided, That the
share capital contribution of each member does not exceed Fifteen thousand
pesos (P15,000) and regardless of the aggregate capital and net surplus
ratably distributed among the members;
(v) Export sales by persons who are not VAT-registered;
(w) Sale of real properties not primarily held for sale to customers or held for
lease in the ordinary course of trade or business or real property utilized for
low-cost and socialized housing as defined by Republic Act No. 7279,
otherwise known as the Urban Development and Housing Act of 1992, and
other related laws, house and lot and other residential dwellings valued at
One million pesos (P1,000,000) and below: Provided, That not later than
January 31st of the calendar year subsequent to the effectivity of this Act and
each calendar year thereafter, the amount of One million pesos (P1,000,000)
shall be adjusted to its present value using the Consumer Price Index, as
published by the national Statistics Office (NSO);
(x) Lease of a residential unit with a monthly rental not exceeding Eight
thousand pesos (P8,000); Provided, That not later than January 31st of the
calendar year subsequent to the effectivity of Republic Act No. 8241 and
each calendar year thereafter, the amount of Eight thousand pesos (P8,000)
shall be adjusted to its present value using the Consumer Price Index as
published by the National Statistics Office (NS0);
REVIEWER TAX 2- YUMI
(y) 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 which is not devoted principally to the
publication of paid advertisements; and
(z) Sale or lease of goods or properties or the 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 Five hundred fifty
thousand pesos (P550,000): Provided, That not later than January 31st of
the calendar year subsequent to the effectivity of Republic Act No. 8241 and
each calendar year thereafter, the amount of Five hundred fifty thousand
pesos (550,000) shall be adjusted to its present value using the Consumer
Price Index, as published by the National Statistics Office (NSO).
The foregoing exemptions to the contrary notwithstanding, any person whose
sale of goods or properties or services which are otherwise not subject to
VAT, but who issues a VAT invoice or receipt therefor shall, in addition to his
liability to other applicable percentage tax, if any, be liable to the tax imposed
in Section 106 or 108 without the benefit of input tax credit, and such tax
shall also be recognized as input tax credit to the purchaser under Section
110, all of this Code.
ii. Transfer of Goods by Tax-exempt Persons (Sec. 107 B)
(B) Transfer of Goods by Tax-Exempt Persons. - In the case of tax-free
importation of goods into the Philippines by persons, entities or agencies
exempt from tax where such goods are subsequently sold, transferred or
exchanged in the Philippines to non-exempt persons or entities, the
purchasers, transferees or recipients shall be considered the importers
thereof, who shall be liable for any internal revenue tax on such importation.
The tax due on such importation shall constitute a lien on the goods superior
to all charges or liens on the goods, irrespective of the possessor thereof.
f. Transactions deemed sale (Sec. 106 B)
(B) Transactions Deemed Sale. - The following transactions shall be
deemed sale:
(1) Transfer, use or consumption not in the course of business of goods
or properties originally intended for sale or for use in the course of business;
(2) Distribution or transfer to:
(a) Shareholders or investors as share in the profits of the VAT-
registered persons; or
(b) Creditors in payment of debt;
(3) Consignment of goods if actual sale is not made within sixty (60)
days following the date such goods were consigned; and
8
 (4) Retirement from or cessation of business, with respect to inventories
of taxable goods existing as of such retirement or cessation.
i. Rationale of Imposition
ii. Enumeration – Sec. 4.106-7 RR No. 16-05
iii. Tax Base of Transactions Deemed Sale
RR No. 16-05
(b) The Commissioner of Internal Revenue shall determine the appropriate
tax base in cases where a transaction is deemed a sale, barter or exchange
of goods or properties under Sec. 4.106-7 paragraph (a) hereof, or where the
gross selling price is unreasonably lower than the actual market value. The
gross selling price is unreasonably lower than the actual market value if it is
lower by more than 30% of the actual market value of the same goods of the
same quantity and quality sold in the immediate locality on or nearest the
date of sale.
For transactions deemed sale, the output tax shall be based on the market
value of the goods deemed sold as of the time of the occurrence of the
transactions enumerated in Sec. 4.106-7(a)(1),(2), and (3) of these
Regulations. However, in the case of retirement or cessation of business, the
tax base shall be the acquisition cost or the current market price of the goods
or properties, whichever is lower.
In the case of a sale where the gross selling price is unreasonably lower than
the fair market value, the actual market value shall be the tax base.
g. Rules for Certain Services
i. Common Carriers
1. Sec. 4.108-2 Nos. 11 and 12 of RR No. 16-05
(11) transportation contractors on their transport of goods or
cargoes,including persons who transport goods or cargoes for hire and other
domestic common carriers by land relative to their transport of goods or
cargoes;
REVIEWER TAX 2- YUMI
(12) common carriers by air and sea relative to their transport of passengers,
goods or cargoes from one place in the Philippines to another place in the
Philippines
2. Sec. 4.108-3 of RR No. 16-05
ii. Lease of Properties
1. Sec. 4.108-3 of RR No. 16-05
2. Lease of Residential Units – [Sec. 4.109-1 (B)(q) of RR No. 16-05]
lease of residential units with a monthly rental per unit not exceeding 10k,
regardless of the amount of the aggregate rentals received by the lessor
during the year, Provided, that not later than January 31, 2009 and every
three years thereafter, the amount of 10k shall be adjusted to its present
value using the consumer price index, as published by the NSO.
The foregoing, not withstanding,lease of residential units where the monthly
rental per unit exceeds 10k but the aggregate of such rentals of the lessor
during the year do not exceed 1.5M shall be likewise exempt from VAT,
however the same shall be subjected to 3% percentage tax.
In cases where a lessor has several residential units for lease, some are
leased out for a monthly rental per unit of not exceeding P10,000.00 while
others are leased out for more than P10,000.00 per unit, his tax liability will
be as follows:
1. The gross receipts from rentals not exceeding P10,000.00 per month per
unit shall be exempt from VAT regardless of the aggregate annual gross
receipts.
2. The gross receipts from rentals exceeding P10,000.00 per month per unit
shall be subject to VAT if the aggregate annual gross receipts from said units
only (not including the gross receipts from units leased for not more than
P10,000.00) exceeds P1,500,000.00. Otherwise, the gross receipts will be
subject to the 3% tax imposed under Section 116 of the Tax Code.
The term 'residential units' shall refer to apartments and houses & lots used
for residential purposes, and buildings or parts or units thereof used solely as
dwelling places (e.g., dormitories, rooms and bed spaces) except motels,
motel rooms, hotels and hotel rooms.
The term 'unit' shall mean an apartment unit in the case of apartments,
house in the case of residential houses; per person in the case of
9
dormitories, boarding houses and bed spaces; and per room in case of
rooms for rent.
iii. Professional Services
iv. Medical Services
1. Sec. 4.109-1 (B)(g) of RR No. 16-05
(g) Medical, Dental, hospital and veterinary services, except those rendered
by professionals.
Laboratory services are exempted. If the hospital or clinic operates a
pharmacy or drug store, the sale of drugs and medicine is subject to VAT
Philippine Healthcare Providers vs. CIR GR No. 168129 dated April 24,
2007
The Supreme Court (SC) in one case, affirmed the validity of the imposition
of the VAT on HMOs, as enunciated in VAT Ruling No. 18-98, on the ground
that HMOs do not actually provide medical and/or hospital services, but
merely arrange the provision of said services, which under the law, is not a
VAT-exempt activity.
III. ZERO RATED SALES OF GOODS AND SERVICES and VAT
EXEMPT SALES
a. Nature of Zero Rated Sales
Zero-rated Sales of Goods or Properties. A zero-rated sale of goods or
properties by a sale by a VAT-registered person is a taxable transaction for
VAT purposes but the sale does not result in any output tax.
However, the input tax on the purchases of goods, properties or services
related to such zero-rated sale shall be available as tax credit or refund in
accordance with Rev. Regulations No. 16-2005. (Rev. Regs. No. 16-2005,
1st par.)
b. Zero Rated Sale of Goods (Sec. 106)
The following sales by VAT-registered persons shall be subject to zero
percent (0%) rate:
(a) Export Sales- The sale and actual shipment of goods from the
Philippines to a foreign country, irrespective of any shipping arrangement
that may be agreed upon which may influence or determine the transfer of
REVIEWER TAX 2- YUMI
ownership of the goods so exported and paid for in acceptable foreign
currency or its equivalent in goods or services, and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas
(b)Foreign Currency Denominated Sale- means sale to a nonresident of
goods, except those mentioned in Sections 149 and 150, assembled or
manufactured in the Philippines for delivery to a resident in the Philippines,
paid for in acceptable foreign currency and accounted for in accordance with
the rules and regulations of the Bangko Sentral ng Pilipinas (BSP).
c. Zero Rated Sale of Services (Sec. 108 B)
(1) Processing, manufacturing or repacking goods for other persons
doing business outside the Philippines which goods are subsequently
exported, where the services are paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);
(2) Services other than those mentioned in the preceding paragraph, the
consideration for which is paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);
(3) Services rendered to persons or entities whose exemption under
special laws or international agreements to which the Philippines is a
signatory effectively subjects the supply of such services to zero percent
(0%) rate;
(4) Services rendered to vessels engaged exclusively in international
shipping; and
(5) Services performed by subcontractors and/or contractors in
processing, converting, of manufacturing goods for an enterprise whose
export sales exceed seventy percent (70%) of total annual production.
10
CASES:
CIR vs. American Express GR No. 152609 dated June 29, 2005
Facts: American Express international is a foreign corporation operating in
the Philippines, it is a registered taxpayer. On April 13, 1999, [respondent]
filed with the BIR a letter-request for the refund of its 1997 excess input taxes
in the amount of P3,751,067.04, which amount was arrived at after deducting
from its total input VAT paid of P3,763,060.43 its applied output VAT
liabilities only for the third and fourth quarters of 1997 amounting to
P5,193.66 and P6,799.43, respectively. The CTA ruled in favor of the herein
respondent holding that its services are subject to zero-rate pursuant to
Section 108(b) of the Tax Reform Act of 1997 and Section 4.102-2 (b)(2) of
Revenue Regulations 5-96. The CA affirmed the decision of the CTA.
Issue: Whether or not the company is subject to zero-rate tax pursuant to the
Tax Reform Act of 1997.
Held: Services performed by VAT-registered persons in the Philippines (other
than the processing, manufacturing or repacking of goods for persons doing
business outside the Philippines), when paid in acceptable foreign currency
and accounted for in accordance with the rules and regulations of the BSP,
are zero-rated. Respondent is a VAT-registered person that facilitates the
collection and payment of receivables belonging to its non-resident foreign
client, for which it gets paid in acceptable foreign currency inwardly remitted
and accounted for in conformity with BSP rules and regulations. Certainly,
the service it renders in the Philippines is not in the same category as
“processing, manufacturing or repacking of goods” and should, therefore, be
zero-rated. In reply to a query of respondent, the BIR opined in VAT Ruling
No. 080-89 that the income respondent earned from its parent company’s
regional operating centers (ROCs) was automatically zero-rated effective
January 1, 1988. Service has been defined as “the art of doing something
useful for a person or company for a fee” or “useful labor or work rendered or
to be rendered by one person to another.” For facilitating in the Philippines
the collection and payment of receivables belonging to its Hong Kong-based
foreign client, and getting paid for it in duly accounted acceptable foreign
currency, respondent renders service falling under the category of zero
rating. Pursuant to the Tax Code, a VAT of zero percent should, therefore, be
levied upon the supply of that service.
As a general rule, the VAT system uses the destination principle as a basis
for the jurisdictional reach of the tax. Goods and services are taxed only in
the country where they are consumed. Thus, exports are zero-rated, while
imports are taxed. VAT rate for services that are performed in the
Philippines, “paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP.” Thus, for the supply
of service to be zero-rated as an exception, the law merely requires that first,
REVIEWER TAX 2- YUMI
the service be performed in the Philippines; second, the service fall under
any of the However, the law clearly provides for an exception to the
destination principle; that is, for a zero percent categories in Section 102(b)
of the Tax Code; and, third, it be paid in acceptable foreign currency
accounted for in accordance with BSP rules and regulations. Indeed, these
three requirements for exemption from the destination principle are met by
respondent. Its facilitation service is performed in the Philippines. It falls
under the second category found in Section 102(b) of the Tax Code, because
it is a service other than “processing, manufacturing or repacking of goods”
as mentioned in the provision. Undisputed is the fact that such service meets
the statutory condition that it be paid in acceptable foreign currency duly
accounted for in accordance with BSP rules. Thus, it should be zero-rated.
CIR vs. Burmeister and Wain Scandinavian Contractor Mindanao, Inc.
In Commissioner of Internal Revenue v. Burmeister and Wain Scandinavian
Contractor Mindanao, Inc. (G.R. No. 153205, January 22, 2007), it held that
the recipient of the services must be a person doing business outside the
Philippines to qualify for zero rate. It painstakingly explained that the fact the
law stipulates payment in “acceptable foreign currency under BSP rules”
means that the legislature clearly envisions export sales. Under BSP rules,
the proceeds of export sales must be reported to the BSP. If the provider and
the recipient of the services are both doing business in the Philippines, the
transaction is not considered an export sale even if payment is denominated
in foreign currency. In such a case, reporting to the BSP is an unnecessary
act.
The Supreme Court further rationalized that it does not make sense for
allowing zero-rated VAT for services where the recipient is doing business in
the Philippines. If it were so, those subject to the regular VAT can avoid
paying the VAT by simply stipulating payment in foreign currency inwardly
remitted by the recipient of services.
With the passage of RA 9337, however, the jurisprudential requisite that
services (other than processing, manufacturing or repacking of goods) must
be rendered to other persons doing business outside the Philippines was
incorporated in the law itself. Hence, law and jurisprudence are now one in
saying that the supply of services will be accorded VAT zero-rating when the
following requirements are met: (1) the service is performed in the
Philippines; (2) the service falls under any of the categories provided in
Section 108(B) of the Tax Code; (3) the recipient is a person or entity doing
business outside the Philippines; and (3) it is paid for in acceptable foreign
currency that is accounted for in accordance with the regulations of the BSP.
11

CIR vs. Acesite GR No. GR No. 147295 dated February 16, 2007
PAGCOR IS EXEMPT FROM PAYMENT OF DIRECT AND INDIRECT
TAXES. HENCE, THE SALE OF GOODS AND SERVICES TO PAGCOR IS
SUBJECT TO 0% VAT.
P.D. 1869 grants PAGCOR an exemption from the payment of taxes, direct
or indirect. By extending the exemption to entities or individuals dealing with
PAGCOR, the legislature clearly granted exemption also from indirect taxes.
Section 102(b)(3) of the 1977 Tax Code (now Sec. 108(b)(3) of R.A. 8424)
subjects to 0% VAT the services rendered to persons or entities whose
exemption under special laws subjects the supply of such services to 0%
rate. Hence, the lease of property and sale of food and beverages to
PAGCOR is subject to 0% VAT.
d. Automatic zero-rate vs. Effectively zero-rate
CASES:
CIR vs. Seagate Technology (Phils) GR No. 153866 February 11, 2005
In terms of the VAT computation, zero rating and exemption are the same,
but the extent of relief that results from either one of them is not.
Applying the destination principle to the exportation of goods, automatic zero
rating is primarily intended to be enjoyed by the seller who is directly and
legally liable for the VAT, making such seller internationally competitive by
allowing the refund or credit of input taxes that are attributable to export
sales.Effective zero rating, on the contrary, is intended to benefit the
purchaser who, not being directly and legally liable for the payment of the
VAT, will ultimately bear the burden of the tax shifted by the suppliers.
In both instances of zero rating, there is total relief for the purchaser from the
burden of the tax. But in an exemption there is only partial relief, because the
purchaser is not allowed any tax refund of or credit for input taxes paid.
If at the end of a taxable quarter the output taxes charged by a seller are
equal to the input taxes passed on by the suppliers, no payment is required.
It is when the output taxes exceed the input taxes that the excess has to be
paid.If, however, the input taxes exceed the output taxes, the excess shall be
carried over to the succeeding quarter or quarters. Should the input taxes
result from zero-rated or effectively zero-rated transactions or from the
acquisition of capital goods, any excess over the output taxes shall instead
be refunded to the taxpayer or credited against other internal revenue taxes.
Effectively zero-rated transactions, however, refer to the sale of goods or
supply of services to persons or entities whose exemption under special laws
or international agreements to which the Philippines is a signatory effectively
subjects such transactions to a zero rate.Again, as applied to the tax base,
REVIEWER TAX 2- YUMI
such rate does not yield any tax chargeable against the purchaser. The
seller who charges zero output tax on such transactions can also claim a
refund of or a tax credit certificate for the VAT previously charged by
suppliers.
CIR vs. Toshiba Information Equipment GR No. 150154 dated August 9,
2005
Rationale for zero-rating of exports. The Philippine VAT system adheres to
the Cross Border Doctrine, according to which, 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. [Commissioner of Internal Revenue v.
Toshiba Information Equipment (Phils.), Inc., G. R.. No. 150154, August 9,
2005]
e. Destination principle and cross border doctrine
As a general rule, the VAT system uses the destination principle as a basis
for the jurisdictional reach of the tax.
Goods and services are taxed only in the country where they are consumed.
Thus, exports are zero-rated, while imports are taxed.
Is there any exception to the destination principle ?
SUGGESTED ANSWER: Yes. The law clearly provides for an exception to
the destination principle; that is, for a zero percent VAT rate for services that
are performed in the Philippines, "paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the [BSP]."
The “Cross Border Doctrine” is also known as the destination principle.
Hence, actual or constructive export of goods and services from the
Philippines to a foreign country must be zero-rated for VAT; while, those
destined for use or consumption within the Philippines shall be imposed the
twelve percent (12%) VAT.
f. CIR vs. American Express GR No. 152609 dated June 29, 2005
As a general rule, the value-added tax (VAT) system uses the destination
principle. However, our VAT law itself provides for a clear exception, under
which the supply of service shall be zero-rated when the following
requirements are met: (1) the service is performed in the Philippines; (2) the
service falls under any of the categories provided in Section 102(b) of the
Tax Code; and (3) it is paid for in acceptable foreign currency that is
accounted for in accordance with the regulations of the Bangko Sentral ng
Pilipinas. Since respondent’s services meet these requirements, they are
12
zero-rated. Petitioner’s Revenue Regulations that alter or revoke the above
requirements are ultra vires and invalid.
As a general rule, the VAT system uses the destination principle as a basis
for the jurisdictional reach of the tax.[51] Goods and services are taxed only
in the country where they are consumed. Thus, exports are zero-rated, while
imports are taxed.
CIR vs. Toshiba Information Equipment GR No. 150154 dated August 9,
2005
The Philippine VAT system adheres to the Cross Border Doctrine, according
to which, 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 with ten percent (10%) VAT.
Sales of goods, properties and services by a VAT-registered supplier from
the Customs Territory to an ECOZONE enterprise shall be treated as export
sales. If such sales are made by a VAT-registered supplier, they shall be
subject to VAT at zero percent (0%). In zero-rated transactions, the VAT-
registered supplier shall not pass on any output VAT to the ECOZONE
enterprise, and at the same time, shall be entitled to claim tax credit/refund of
its input VAT attributable to such sales. Zero-rating of export sales primarily
intends to benefit the exporter (i.e., the supplier from the Customs Territory),
who is directly and legally liable for the VAT, making it internationally
competitive by allowing it to credit/refund the input VAT attributable to its
export sales.
Meanwhile, sales to an ECOZONE enterprise made by a non-VAT or
unregistered supplier would only be exempt from VAT and the supplier shall
not be able to claim credit/refund of its input VAT.
Even conceding, however, that respondent Toshiba, as a PEZA-registered
enterprise, is a VAT-exempt entity that could not have engaged in a VAT-
taxable business, this Court still believes, given the particular circumstances
of the present case, that it is entitled to a credit/refund of its input VAT.
REVIEWER TAX 2- YUMI
g. Zero Rated Sales vs. Exempt Sales
CIR vs. Cebu Toyo Corp. GR No. 149073 dated February 16, 2005
Taxable transactions are those transactions which are subject to value-
added tax either at the rate of ten percent (10%) or zero percent (0%). In
taxable transactions, the seller shall be entitled to tax credit for the value-
added tax paid on purchases and leases of goods, properties or services.
An exemption means that the sale of goods, properties or services and the
use or lease of properties is not subject to VAT (output tax) and the seller is
not allowed any tax credit on VAT (input tax) previously paid. 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. Thus, a VAT-registered purchaser of goods, properties or services that
are VAT-exempt, is not entitled to any input tax on such purchases despite
the issuance of a VAT invoice or receipt.
Now, having determined that respondent is engaged in taxable transactions
subject to VAT, let us then proceed to determine whether it is subject to 10%
or zero (0%) rate of VAT. To begin with, it must be recalled that generally,
sale of goods and supply of services performed in the Philippines are taxable
at the rate of 10%. However, export sales, or sales outside the Philippines,
shall be subject to value-added tax at 0% if made by a VAT-registered
person.Under the value-added tax system, 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 purchase of goods,
properties or services related to such zero-rated sale shall be available as
tax credit or refund.
In principle, the purpose of applying a zero percent (0%) rate on a taxable
transaction is to exempt the transaction completely from VAT previously
collected on inputs. It is thus the only true way to ensure that goods are
provided free of VAT. While the zero rating and the exemption are
computationally the same, they actually differ in several aspects, to wit:
(a) A zero-rated sale is a taxable transaction but does not result in an output
tax while an exempted transaction is not subject to the output tax;
(b) The input VAT on the purchases of a VAT-registered person with zero-
rated sales may be allowed as tax credits or refunded while the seller in an
exempt transaction is not entitled to any input tax on his purchases despite
the issuance of a VAT invoice or receipt.
13
(c) Persons engaged in transactions which are zero-rated, being subject to
VAT, are required to register while registration is optional for VAT-exempt
persons.
In this case, it is undisputed that respondent is engaged in the export
business and is registered as a VAT taxpayer per Certificate of Registration
of the BIR.[27] Further, the records show that the respondent is subject to
VAT as it availed of the income tax holiday under E.O. No. 226. Perforce,
respondent is subject to VAT at 0% rate and is entitled to a refund or credit of
the unutilized input taxes, which the Court of Tax Appeals computed at
P2,158,714.46, but which we find—after recomputation—should be
P2,158,714.52.
h. Enumeration of Exempt Transactions (Sec. 109) Sec. 4.109-1 (B) of
RR No. 16-05
i. Exempt Persons vs. Exempt Transactions
j. CIR vs. Seagate Technology (Phils) GR No. 153866 February 11,
2005
An exempt transaction, on the one hand, involves goods or services which,
by their nature, are specifically listed in and expressly exempted from the
VAT under the Tax Code, without regard to the tax status -- VAT-exempt or
not -- of the party to the transaction. Indeed, such transaction is not subject
to the VAT, but the seller is not allowed any tax refund of or credit for any
input taxes paid.
An exempt party, on the other hand, is a person or entity granted VAT
exemption under the Tax Code, a special law or an international agreement
to which the Philippines is a signatory, and by virtue of which its taxable
transactions become exempt from the VAT. Such party is also not subject to
the VAT, but may be allowed a tax refund of or credit for input taxes paid,
depending on its registration as a VAT or non-VAT taxpayer.
IV. TRANSITIONAL AND PRESUMPTIVE INPUT TAX
Sec. 4.111-1 of RR No. 16-05
SECTION 4.111-1. Transitional/Presumptive Input Tax Credits. —
(a) Transitional Input Tax Credits on Beginning Inventories
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Taxpayers who became VAT-registered persons upon exceeding the
minimum turnover of P1,500,000.00 in any 12-month period, or who
voluntarily register even if their turnover does not exceed P1,500,000.00
(except franchise grantees of radio and television broadcasting whose
threshold is P10,000,000.00) shall be entitled to a transitional input tax on the
inventory on hand as of the effectivity of their VAT registration, on the
following:
(1) goods purchased for resale in their present condition;
(2) materials purchased for further processing, but which have not yet
undergone processing;
(3) goods which have been manufactured by the taxpayer;
(4) goods in process for sale; or
(5) goods and supplies for use in the course of the taxpayer's trade or
business as a VAT-registered person.
The transitional input tax shall be two percent (2%) of the value of the
beginning inventory on hand or actual VAT paid on such, goods, materials
and supplies, whichever is higher, which amount shall be creditable against
the output tax of VAT-registered person. The value allowed for income tax
purposes on inventories shall be the basis for the computation of the 2%
transitional input tax, excluding goods that are exempt from VAT under Sec.
109 of the Tax Code.
The threshold amount of P1,500,000.00 shall be adjusted, not later than
January 31, 2009 and every three years thereafter, to its present value using
the Consumer Price Index as published by the NSO.
CASE: Fort Bonifacio Development vs. CIR GR No. 158885 dated April
2, 2009
In Fort Bonifacio Development Corp. v. CIR (G.R. No. 158885, April 2, 2009),
the court invalidated a provision of Revenue Regulations (RR) No. 07-95,
which limits the application of the 8-percent transitional-input tax to inventory
consisting of improvements only, and not to the total value of lot inventory, in
the case of real-estate dealers. The court emphasized that the law which RR
07-95 seeks to implement did not make any differentiation between the
treatment of a real-estate dealer from those engaged in other transactions
such as, for example, sellers of commercial goods. Thus, there is no basis
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for the BIR to make that differentiation for real-estate dealers in the
implementing regulation.
The Court noted that the common standard for the application of the
transitional input tax credit, as enacted by EO 273 and all subsequent tax
laws which reinforced or reintegrated the tax credit, is simply that the
taxpayer in question has become liable to VAT or has elected to be a VAT-
registered person. “It is apparent that the transitional input tax credit operates
to benefit newly VAT-registered persons, whether or not they previously paid
taxes in the acquisition of their beginning inventory of goods, materials, and
supplies. During that period of transition from non-VAT to VAT status, the
transitional input tax credit serves to alleviate the impact of the VAT on the
taxpayer. At the very beginning, the VAT-registered taxpayer is obliged to
remit a significant portion of the income it derived from its sales as output
VAT. The transitional input tax credit mitigates this initial diminution of the
taxpayer’s income by affording the opportunity to offset the losses incurred
through the remittance of the output VAT at a stage when the person is yet
unable to credit input VAT payments,” ruled the Court.
V. VAT REFUND
a. Compare with Sec. 204 and 229
SEC. 204. Authority of the Commissioner to Compromise, Abate and Refund
or Credit Taxes.
Credit or refund taxes erroneously or illegally received or penalties imposed
without authority, refund the value of internal revenue stamps when they are
returned in good condition by the purchaser, and, in his discretion, redeem or
change unused stamps that have been rendered unfit for use and refund
their value upon proof of destruction. No credit or refund of taxes or penalties
shall be allowed unless the taxpayer files in writing with the Commissioner a
claim for credit or refund within two (2) years after the payment of the tax or
penalty: Provided, however, That a return filed showing an overpayment shall
be considered as a written claim for credit or refund.
SEC. 229. Recovery of Tax Erroneously or Illegally Collected. - no suit or
proceeding shall be maintained in any court for the recovery of any national
internal revenue tax hereafter alleged to have been erroneously or illegally
assessed or collected, or of any penalty claimed to have been collected
without authority, of any sum alleged to have been excessively or in any
manner wrongfully collected without authority, or of any sum alleged to have
been excessively or in any manner wrongfully collected, until a claim for
refund or credit has been duly filed with the Commissioner; but such suit or
proceeding may be maintained, whether or not such tax, penalty, or sum has
been paid under protest or duress.
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In any case, no such suit or proceeding shall be filed after the expiration of
two (2) years from the date of payment of the tax or penalty regardless of any
supervening cause that may arise after payment: Provided, however, That
the Commissioner may, even without a written claim therefor, refund or credit
any tax, where on the face of the return upon which payment was made,
such payment appears clearly to have been erroneously paid.
b. Grounds
c. Periods
CASE:
Contex vs. CIR GR No. 151135 dated July 2, 2004
The point of contention here is whether or not the petitioner may claim a
refund on the Input VAT erroneously passed on to it by its suppliers.
HELD: While it is true that the petitioner should not have been liable for the
VAT inadvertently passed on to it by its supplier since such is a zero-rated
sale on the part of the supplier, the petitioner is not the proper party to claim
such VAT refund.
Section 4.100-2 of BIR’s Revenue Regulations 7-95, as amended, or the
“Consolidated Value-Added Tax Regulations” provide:
Sec. 4.100-2. Zero-rated Sales. 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 in accordance with these regulations.
The following sales by VAT-registered persons shall be subject to 0%: (a)
Export Sales “Export Sales” shall mean 5) Those considered export sales
under Articles 23 and 77 of Executive Order No. 226, otherwise known as the
Omnibus Investments Code of 1987, and other special laws, e.g. Republic
Act No. 7227, otherwise known as the Bases Conversion and Development
Act of 1992.
(c) Sales to persons or entities whose exemption under special laws, e.g.
R.A. No. 7227 duly registered and accredited enterprises with Subic Bay
Metropolitan Authority (SBMA) and Clark Development Authority (CDA), R.
A. No. 7916, Philippine Economic Zone Authority (PEZA), or international
agreements, e.g. Asian Development Bank (ADB), International Rice
Research Institute (IRRI), etc. to which the Philippines is a signatory
effectively subject such sales to zero-rate.”
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Since the transaction is deemed a zero-rated sale, petitioner’s supplier may
claim an Input VAT credit with no corresponding Output VAT liability.
Congruently, no Output VAT may be passed on to the petitioner. On the
second issue, it may not be amiss to re-emphasize that the petitioner is
registered as a NON-VAT taxpayer and thus, is exempt from VAT. As an
exempt VAT taxpayer, it is not allowed any tax credit on VAT (input tax)
previously paid. In fine, even if we are to assume that exemption from the
burden of VAT on petitioner’s purchases did exist, petitioner is still not
entitled to any tax credit or refund on the input tax previously paid as
petitioner is an exempt VAT taxpayer. Rather, it is the petitioner’s suppliers
who are the proper parties to claim the tax credit and accordingly refund the
petitioner of the VAT erroneously passed on to the latter.
Atlas Consolidated Mining vs. CIR GR Nos. 141104 and 148763 dated
June 8, 2007
In the Atlas case, the court ruled that the reckoning point for counting the
two-year prescriptive period is from the filing of the VAT returns and not from
“the close of the taxable quarter when the sales were made.” The Court of
Tax Appeals (CTA) adopted this decision in many of its subsequent cases.
CIR vs. Mirant Pagbilao Corp. GR No. 172129 dated September 12, 2008
The Mirant case adopted a different rule for claims involving refunds of
excess input VAT. Using Section 112 of the Tax Code as basis, the Mirant
case said claims involving refunds of excess-input VAT must be filed with the
Bureau of Internal Revenue (BIR) and with the courts within two years from
the close of the taxable quarter when the relevant sales were made,
regardless of when the input VAT was paid.
The Mirant ruling differs significantly from the general rule in that, while the
reckoning point for the two-year prescriptive period under the general rule is
counted from the filing of the tax return, the Mirant case adopted the “close of
the taxable quarter when the sales were made” for VAT-refund claims. In
short, the Mirant case carved out the claims involving excess input VAT
refunds from the coverage of the general rule and put it under a special rule
governed by Section 112 of the Tax Code.
REVIEWER TAX 2- YUMI
Northern Mini Hydro vs. CIR CTA Case No. 7257 dated May 28, 2009
(also read the separate opinion of Justice Acosta)
VI. OTHER MATTERS
a. Invoicing Requirements (Sec. 113) [Sec. 4.1113-1 of RR No. 16-05]
SECTION 4.113-1. Invoicing Requirements. —
(A) A VAT-registered person shall issue: —
(1) A VAT invoice for every sale, barter or exchange of goods or properties;
and
(2) A VAT official receipt for every lease of goods or properties, and for every
sale, barter or exchange of services.
Only VAT-registered persons are required to print their TIN followed by the
word "VAT" in their invoice or official receipts. Said documents shall be
considered as a "VAT Invoice" or VAT official receipt. All purchases covered
by invoices/receipts other than VAT Invoice/VAT Official Receipt shall not
give rise to any input tax.
VAT invoice/official receipt shall be prepared at least in duplicate, the original
to be given to the buyer and the duplicate to be retained by the seller as part
of his accounting records.
(B) Information contained in VAT invoice or VAT official receipt. — The
following information shall be indicated in VAT invoice or VAT official receipt:
(1) A statement that the seller is a VAT-registered person, followed by his
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 VAT; Provided, That:
(a) The amount of tax shall be shown as a separate item in the invoice or
receipt;
(b) If the sale is exempt from VAT, 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%) VAT, the term "zero-rated sale"
shall be written or printed prominently on the invoice or receipt;
(d) If the sale involves goods, properties or services some of which are
subject to and some of which are VAT zero-rated or VAT-exempt, the invoice
or receipt shall clearly indicate the break-down of the sale price between its
taxable, exempt and zero-rated components, and the calculation of the VAT
on each portion of the sale shall be shown on the invoice or receipt. The
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seller has the option to issue separate invoices or receipts for the taxable,
exempt, and zero-rated components of the sale.
(3) In the case of sales in the amount of one thousand pesos (P1,000.00) or
more where the sale or transfer is made to a VAT-registered person, the
name, business style, if any, address and TIN of the purchaser, customer or
client, shall be indicated in addition to the information required in (1) and (2)
of this Section.
b. Information which must be contained (Sec. 113)
SEC. 113. Invoicing and Accounting Requirements for VAT-Registered
Persons. -
(A) Invoicing Requirements. - A VAT-registered person shall, for every sale,
issue an invoice or receipt. In addition to the information required under
Section 237, the following information shall be indicated in the invoice or
receipt:
(1) A statement that the seller is a VAT-registered person, followed by his
taxpayer's identification number (TIN); and
(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.
(B) Accounting Requirements. - Notwithstanding the provisions of Section
233, all persons subject to the value-added tax under Sections 106 and 108
shall, in addition to the regular accounting records required, maintain a
subsidiary sales journal and subsidiary purchase journal on which the daily
sales and purchases are recorded. The subsidiary journals shall contain such
information as may be required by the Secretary of Finance.
c. Consequences of Issuing Erroneous VAT Invoice (Sec. 113) [ RR
No. 4.113-4 of RR No. 16-05]
SECTION 4.113-4. Consequences of Issuing Erroneous VAT Invoice or VAT
Official Receipt. —
(A) Issuance of a VAT Invoice or VAT Receipt by a non-VAT person. — 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:
(1) The non-VAT person shall be liable to:
(i) the percentage taxes applicable to his transactions;
REVIEWER TAX 2- YUMI
(ii) VAT due on the transactions under Sec. 106 or 108 of the Tax Code,
without the benefit of any input tax credit; and
(iii) a 50% surcharge under Sec. 248 (B) of the Tax Code;
(2) VAT shall be recognized as an input tax credit to the purchaser under
Sec. 110 of the Tax Code, provided the requisite information required under
Subsection 4.113 (B) of these Regulations is shown on the invoice or receipt.
(B) Issuance of a VAT Invoice or VAT Receipt on an Exempt Transaction by
a VAT-registered Person. — 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 words "VAT-exempt sale", the
transaction shall become taxable and the issuer shall be liable to pay VAT
thereon. The purchaser shall be entitled to claim an input tax credit on his
purchase.
d. Filing of Monthly and Quarterly VAT Returns and Payment of VAT
(Sec. 114)
SEC. 114. Return and Payment of Value-Added Tax. -
(A) In General. - Every person liable to pay the value-added tax imposed
under this Title shall file a quarterly return of the amount of his gross sales or
receipts within twenty-five (25) days following the close of each taxable
quarter prescribed for each taxpayer: Provided, however, That VAT-
registered persons shall pay the value-added tax on a monthly basis.
Any person, whose registration has been cancelled in accordance with
Section 236, shall file a return and pay the tax due thereon within twenty-five
(25) days from the date of cancellation of registration: Provided, That only
one consolidated return shall be filed by the taxpayer for his principal place of
business or head office and all branches.
(B) Where to File the Return and Pay the Tax. - Except as the Commissioner
otherwise permits, the return shall be filed with and the tax paid to an
authorized agent bank, Revenue Collection Officer or duly authorized city or
municipal Treasurer in the Philippines located within the revenue district
where the taxpayer is registered or required to register.
(C) Withholding of Creditable Value-Added Tax. - The Government or any of
its political subdivisions, instrumentalities or agencies, including government-
owned or -controlled corporations (GOCCs) shall, before making payment on
account of each purchase of goods from sellers and services rendered by
contractors which are subject to the value-added tax imposed in Sections
106 and 108 of this Code, deduct and withhold the value-added tax due at
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the rate of three percent (3%) of the gross payment for the purchase of i. Government payments
goods and six percent (6%) on gross receipts for services rendered by
contractors on every sale or installment payment which shall be creditable ii. Services Rendered by Non-residents
against the value-added tax liability of the seller or contractor: Provided,
however, That in the case of government public works contractors, the
withholding rate shall be eight and one-half percent (8.5%): Provided, further, iii. Withholding VAT Returns/Time of Payment
That the payment for lease or use of properties or property rights to
nonresident owners shall be subject to ten percent (10%) withholding tax at
the time of payment. For this purpose, the payor or person in control of the
payment shall be considered as the withholding agent. f. Power of the Commissioner to Suspend Business Operations (Sec.
5) [Sec. 4.115-1 of RR No. 16-05]
The value-added tax withheld under this Section shall be remitted within ten
(10) days following the end of the month the withholding was made. SECTION 4.115-1. Administrative and Penal Provisions. —

e. Withholding VAT (Sec. 114 C) [Sec. 4.114-2 of RR No. 16-05 as
amended by Sec. 22 of RR No. 4-07]
SEC. 4.114-2. Withholding of VAT on Government Money Payments and
Payments to Non-Residents. –
(a)The government or any of its political subdivisions, instrumentalities or
agencies including government-owned or controlled corporations (GOCCs)
shall, before making payment on account of each purchase of goods and/or
of services taxed at twelve percent (12%) VAT pursuant to Secs. 106 and
108 of the Tax Code, deduct and withhold a final VAT due at the rate of five
percent (5%) of the gross payment thereof. The five percent (5%) final VAT
withholding rate shall represent the net VAT payable of the seller. The
remaining seven percent (7%) effectively accounts for the standard input
VAT for sales of goods or services to government or any of its political
subdivisions, instrumentalities or agencies including GOCCs in lieu of the
actual input VAT directly attributable or ratably apportioned to such sales.
Should actual input VAT attributable to sale to government exceeds seven
percent (7%) of gross payments, the excess may form part of the sellers’
expense or cost. On the other hand, if actual input VAT attributable to sale to
government is less than seven percent (7%) of gross payment, the difference
must be closed to expense or cost.
(a) Suspension of business operations. — In addition to other administrative
and penal sanctions provided for in the Tax Code and implementing
regulations, the Commissioner of Internal Revenue or his duly authorized
representative may order suspension or closure of a business establishment
for a period of not less than five (5) days for any of the following violations:
(1) Failure to issue receipts and invoices.
(2) Failure to file VAT return as required under the provisions of Sec. 114 of
the Tax Code.
(3) Understatement of taxable sales or receipts by 30% or more of his correct
taxable sales or receipt for the taxable quarter.
(4) Failure of any person to register as required under the provisions of Sec.
236 of the Tax Code.
(b) Surcharge, interest and other penalties. — The interest on unpaid amount
of tax, civil penalties and criminal penalties imposed in Title XI of the Tax
Code shall also apply to violations of the provisions of Title IV of the Tax
Code.

(b) The government or any of its political subdivisions, instrumentalities or

agencies including GOCCs, as well as private corporation, individuals,
estates and trusts, whether large or non-large taxpayers, shall withhold
twelve percent (12%) VAT, starting February 1, 2006, with respect to
the following payments:
(1)Lease or use of properties or property rights owned by non-residents; and
(2) Other services rendered in the Philippines by non-residents

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