Business Income
scheme. (Sec. 27(A)
Gross Income Tax Scheme
Taxable income is the gross income.
 For NRA-NETB, gross income includes dividends, interest and
royalties, technical assistance and service fees, rental and leasing
income and capital gains. Gross income is subject to final
withholding tax of 25%.
 For NRFC, gross income includes dividends, interest and royalties,
technical assistance and service fees which are all subject to final
withholding tax of 30% (generally).
 For corporations, gross income refers to the following (note that
this is also used for purposes of OSD).
a. For manufacturing and merchandising
Gross income = gross sales – SRA and discounts - cost of goods
sold
b. For corporations engaged in services
Gross income = gross receipts – SRA and discount
The GIT scheme is available (subject to certain conditions) to
corporations whose ratio of cost of sales to gross sales/receipts from
all sources does not exceed 55%. The exercise of this option, instead
of the net income taxation, is irrevocable for the 3 consecutive
taxable years during which the corporation is qualified under the
Corporations falling under MCIT - 2% of gross income
Classification of business income earners:
I. Individuals
1. Generally subject to income tax of 5-32% of their taxable income
2. For taxpayers earning both compensation income and business
income (individuals), taxable income is:
Gross Income
Less: Allowable deductions
Equals : Net Income
Less: Personal and additional exemptions
Equals: Taxable income
3. Can avail of OSD – 10% of sales (RA 9504)
II. Domestic Corporations:
1. Generally subject to income tax of 30% of their taxable income.
2. Special domestic corporations:
a. Proprietary Educational Institutions and hospitals which are non-
profit – subject only to income tax of 10% of their taxable income
(except passive income).
Predominance Test - If these institutions derive income from
unrelated trade, business or other activity and their gross income
derived therefrom exceeds 50% of their total income (unrelated
activity is more predominant), the regular corporate tax rate will be
imposed. (Sec. 27) Example of unrelated activities include canteen
services, parking lot, etc.
Read: CIR vs. St. Luke’s Medical Center, Inc. (GR No. 195909,
September 26, 2012)
3. GSIS, SSS, PHIC, PCSO, Local Water Districts are exempt. All other GOCC’S
are subject to the regular corporate tax rates. IV. Non-resident foreign corporations

Note: Exemption of PAGCOR was revoked under RA 9337 which took
effect on July 1, 2005.
III. Resident foreign corporations
1. Generally subject to income tax equivalent to 30% of the taxable
income. The following however are subject to special rates:
a. International air carrier or international shipping doing business in
the Philippines subject only to 2.5% on its “Gross Philippine Billings”.
(Sec. 28(A)(3)
They are subject to 30% of the GROSS INCOME during the taxable year.
Gross income in this case includes passive income and capital gains
(except gains from sale/exchange of shares of stock of domestic
corporation not traded through the stock exchange and from sale
of real property located in the Philippines.
2. Non-resident foreign corporations which are subject to special rates:
a. Non-resident cinematographic film owner, lessor, or distributor –
25% of its gross income from all sources within the Philippines.

'Gross Philippine Billings' means gross revenue whether for b. Nonresident Owner or Lessor of Vessels Chartered by Philippine
passenger, cargo or mail originating from the Philippines up to final Nationals. - 4 1/2% of gross rentals, lease or charter fees from leases
destination, regardless of the place of sale or payments of the passage or charters to Filipino citizens or corporations, as approved by the
or freight documents. (Sec. 28(A)3(b) Maritime Industry Authority.

b. Offshore Banking Units – 10% final income tax
Note that any income of nonresidents, whether individuals or
corporations, from transactions with said offshore banking units shall
be exempt from income tax. (Sec. 28(A)(4)
c. Rentals, charters and other fees derived by a nonresident lessor of
aircraft, machineries and other equipment - 7 1/2% of gross rentals or
fees.
VALUE ADDED TAX

c. Regional or Area Headquarters - not subject to income tax

d. Regional Operating Headquarters of Multinational Companies. –
10%

2. They have the option to be taxed at 15% on gross income under the
same conditions as provided in Section 27 (A)

3. They are subject to MCIT at the rate of 2% as prescribed under section 27

(E).

4. Aside from the income tax that a branch of a foreign corporation is

liable to pay on its net income that was derived from Philippine
sources at a rate of 30%, the said branch is also liable to pay branch
profit remittance tax at the rate of 15% of its remittance.
• Optional Standard Deduction
Sec. 34(L), NIRC as amended by RA 9504.
"(L) Optional Standard Deduction. - In lieu of the deductions allowed under
the preceding Subsections, an individual subject to tax under Section
24, other than a nonresident alien, may elect a standard deduction in
an amount not exceeding forty percent (40%) of his gross sales or
gross receipts, as the case may be.
In the case of a corporation subject to tax under section 27(A) and
28(A)(1), it may elect a standard deduction in an amount not
exceeding forty percent (40%) of its gross income as defined in
Section 32 of this Code. Unless the taxpayer signifies in his return his
intention to elect the optional standard deduction, he shall be
considered as having availed himself of the deductions allowed in the
preceding Subsections. Such election when made in the return shall
be irrevocable for the taxable year for which the return is made:
Provided, That an individual who is entitled to and claimed for the
optional standard shall not be required to submit with his tax return
such financial statements otherwise required under this
Code: Provided, further, That except when the Commissioner
otherwise permits, the said individual shall keep such records
pertaining to his gross sales or gross receipts, or the said corporation
shall keep such records pertaining to his gross income as defined in
Section 32 of this Code during the taxable year, as may be required by
the rules and regulations promulgated by the Secretary of Finance,
upon recommendation of the Commissioner
Allowable Deductions (Sec. 34, NIRC):
(A) Expenses. -
(B) Interest.-
(C) Taxes.-
(D) Losses. -
(E) Bad Debts. -
(F) Depreciation. -
(G) Depletion of Oil and Gas Wells and Mines. -
(H) Charitable and Other Contributions. -
(I) Research and Development.-
Expenses
1. They must constitute ORDINARY and NECESSARY expenses
Ordinary means normal, usual or customary. Necessary means
directly related to the business of the taxpayer and such expenses
were helpful in the development of the business of the taxpayer.
2. They must be reasonable in amount
– Entertainment, Amusement and Recreation Expense – shall not
exceed:
• 0.5% of net sales – Sale of goods
• 1% of net revenue – Sale of services/exercise of
profession
• If both, must be apportioned – (net revenue or sales
/Total Revenue) x Actual EAR Expense
– Depreciation of motor vehicle (RR No. 12-2012; RMC No. 2-
2013)
• Only one vehicle for land transport is allowed for the
use of an official or employee
• The value of such vehicle should not exceed P2.4M.
• No depreciation is generally allowed for yachts,
helicopters, airplanes, and/or aircrafts, unless the
taxpayer’s main line of business is transport operations
or lease of transportation equipment and the vehicles
purchased are used in said operations.
3. They must be paid or INCURRED during the TAXABLE YEAR in carrying
on the business or in the exercise of profession
Note: Option is given to educational institution to deduct outright
capital outlays of depreciable assets for the expansion of school
facilities.
4. They must be sustained by adequate proof
Cohan Rule – while a taxpayer is not relieved from the burden of
substantiating its claimed deduction, the BIR should permit a
reasonable amount of deduction taking into account the business of
the taxpayer. The absence of sufficient or available supporting
document is not sufficient to disallow the claimed deduction. Such
claim may be established by credible oral testimony.

An expense shall be allowed as a deduction only if it is shown that the
corresponding withholding tax has been paid. (Sec. 34(K).
5. They must NOT be against law, morals, public policy or public order
Bribes, kickbacks and other similar payments are not allowed as deduction
Interest
1. There must be an indebtedness;
2. There should be an interest expense paid or incurred upon such
indebtedness;
3. The indebtedness must be that of the taxpayer;
4. The indebtedness must be connected with the taxpayer's trade,
business or exercise of profession;
5. The interest expense must have been paid or incurred during the
taxable year;
Sec 34 (B) (2) Exceptions. - No deduction shall be allowed in respect of
interest under the succeeding subparagraphs:
(a) If within the taxable year an individual taxpayer reporting income on
the cash basis incurs an indebtedness on which an interest is paid in
advance through discount or otherwise: Provided, That such interest shall
be allowed a a deduction in the year the indebtedness is paid: Provided,
further, That if the indebtedness is payable in periodic amortizations, the
amount of interest which corresponds to the amount of the principal
amortized or paid during the year shall be allowed as deduction in such
taxable year;
6. The interest must have been stipulated in writing;
7. The interest must be legally due;
8. The interest payment arrangement must not be between related
taxpayers;
Sec. 36 (B) In computing net income, no deductions shall in any case be
allowed in respect of losses (including interest and bad debts) from
sales or exchanges of property directly or indirectly -
(1) Between members of a family. For purposes of this paragraph, the family
of an individual shall include only his brothers and sisters (whether by
the whole or half-blood), spouse, ancestors, and lineal descendants;
or
(2) Except in the case of distributions in liquidation, between an individual
and corporation more than fifty percent (50%) in value of the
outstanding stock of which is owned, directly or indirectly, by or for
such individual; or
(3) Except in the case of distributions in liquidation, between two
corporations more than fifty percent (50%) in value of the outstanding
stock of which is owned, directly or indirectly, by or for the same
individual if either one of such corporations, with respect to the
taxable year of the corporation preceding the date of the sale of
exchange was under the law applicable to such taxable year, a
personal holding company or a foreign personal holding company;
(4) Between the grantor and a fiduciary of any trust; or
(5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of
another trust if the same person is a grantor with respect to each
trust; or
(6) Between a fiduciary of a trust and beneficiary of such trust.
Limitation as to the amount – THE TAX ARBITRAGE RULE
If a taxpayer paying interest expense also receives interest income
subject to final withholding tax, it must be reduced by 33% of the
interest income subjected to final tax.
Example: Principal loan – P10M, Interest expense – P1M , Tax relief – 30% of
P1M
Investment – P10M, Interest income – P1M, Tax Burden – 20% of
P1M
Allowed interest expense = 1M – 33% of 1M, Tax relief – 200K
Taxes
The following taxes, however, are NOT allowed as deduction:
1. Income tax imposed by the national government
  Net Operating Loss = excess of allowable deductions over gross
2. Estate and Donor’s taxes; and income during the year.

3. Special assessment - taxes assessed against local benefits of a kind  Can be carried over to the next 3 years after the year the net
tending to increase the value of the property assessed (because the operating loss was sustained.
payment is in the nature of a CAPEX).
 No substantial change in the ownership of the business – no more
Note: If the assessments are made for the purpose of maintenance or repair than 25% change of ownership (75% retention rule)
of local benefits (and not to increase the value of the property) , the
assessment paid may be deducted if the payment is ordinary and
necessary in the conduct of the trade or business of the taxpayer. Bad Debts
1. The debts must be connected with the taxpayer’s profession, trade or
4. Foreign income taxes if the taxpayer signifies in his return his intention of business
availing it as a tax credit.
2. The debts must not be sustained in a transaction entered into between
• Income taxes paid in another country can either be a tax deduction or related parties
a tax credit. Tax credits for foreign taxes are allowed only for income
without the Philippines. 3. The income which gave rise to the accounts receivables written-off must
have been reported for income tax purposes
Losses
 Casualty losses of the property connected with the trade, business 4. The debts must be valid and legally demandable
or profession
 Losses incurred in trade, business or professio 5. The debts must be actually ascertained to be worthless and charged-off
 Capital losses within the taxable year.
 Losses from wash sales of stocks or securities
Depreciation/Depletion
 Wagering losses
1. Must be reasonable
 Abandonment losses
2. For the exhaustion, wear and tear of property used in the trade or
Requisites:
business;
1. They must be actually sustained (evidenced by closed and completed
3. Charged off during the taxable year
transaction) during the taxable year;
Charitable and other contributions
2. The loss is not compensated for by insurance or other forms of
Requisites:
indemnity
1. Net income of the donee-institution must not inure to the benefit of any
Net Operating Loss Carry Over (NOLCO)
private individual (Private Inurement Doctrine)

2. Actually paid or made to any of those specified in the tax code


3. Made within the taxable year
4. Not more than 10% (if individual, 5% if corporate) of the taxpayer’s
taxable income to be computed without including the contribution; and
5. Supported by adequate proof
• Contributions deductible in full:
– Donations to the government or political subdivisions
including fully-owned GOCCs to be used EXCLUSIVELY in
undertaking PRIORITY activities (according to priority plan
determined by NEDA) in education, health, youth and sports
development, human settlement, science and culture, and
economic development.
• •
– Donations to foreign institutions or international organizations
in compliance with agreements, treaties or commitments.
• Contributions subject to limitation of 10% for individuals and 5% for
– Donations to accredited NGO’s subject to the following
conditions:
• Organization - Organized EXCLUSIVELY for SRE
(scientific, research, educational), character building
and youth and sports development, health, social
welfare, cultural, charitable and combination thereof.
• Utilization - The donation must be utilized not later than
the 15th day of the 3rd month following the close of its
taxable year.
• The administrative expense must not exceed 30% of
total expenses.
• Transfer - Upon dissolution, asset must be distributed to
another non-profit domestic corporation or to the state.
• Valuation rule: Contribution of property (other than money) shall be valued
– Donations of prizes and awards to athletes are deductible
• Sports tournament should be sanctioned by the
national sports association accredited by the Philippine
Olympic Committee.
– Under special laws: Donations to
• IBP
• Development Academy of the Philippines
• SEAFDEC
• National Social Action Council
• National Museum, Library and Archives
• UP and other state colleges and universities
• Phlippine Rural Reconstruction Movement
• Cultural Center of the PHilippines (CCP)
• Trustees of the Press Foundation of Asia
• National Commision on Culture
• Humanitarian Science Foundation
• Artesian Well Fund
• IRRI
• National Science Development Board and to public or
recognized non-profit non-stock educational
institutions.
Note: Donation to a candidate in an election is exempt from donor’s
tax but is not deductible from the gross income.
corporation:
– any donation to the government not in accordance with the
priority plan of NEDA
– contributions to NGO’s who did not comply with the above
conditions
– other contributions to government or accredited corporations
and associations
Maximum allowable charitable contribution = (taxable income before
contribution x 10% or 5%)
at acquisition cost.
Research and Development
May be treated as:
• Ordinary and necessary expense which may be claimed as deduction
in the year when the same were paid or incurred; or
• Deferred expenses which may be amortized for over a period of 5
years.
Charitable and other contributions
• Note: Donation to a candidate in an election is exempt from donor’s
tax but is not deductible from the gross income.
Contributions subject to limitation of 10% for individuals and 5% for
corporation:
– any donation to the government not in accordance with the
priority plan of NEDA
– contributions to NGO’s who did not comply with the above
conditions
– other contributions to government or accredited corporations
and associations
Maximum allowable charitable contribution = (taxable income before
contribution x 10% or 5%)
Valuation rule: Contribution of property (other than money) shall be valued
at acquisition cost.
Pension Trusts
Requisites:
 The employer must have established a pension or retirement plan
to provide for the payment of reasonable pensions to his
employees;
 The pension plan must be reasonable and actuarially sound
 It must be funded by the employer, i.e, he contributes cash to the
plan
 The amount contributed must no longer be subject to his control or
disposition
 The amount has not been allowed before as a deduction
 The amount is apportioned in equal parts over a period of 10
consecutive years beginning with the year in which the transfer or
payment is made.
Improperly Accumulated Earnings Tax (IAET) – Sec. 29, NIRC
• Imposed as a form of penalty to corporations retaining earnings for
more than the reasonable needs of business inorder to recoup the
lost taxes.
• 10% of improperly accumulated taxable income
• Exceptions – IAET does not apply to:
– Publicly held corporations
– Banks and other non-bank financial intermediaries
– Insurance companies
• In the following cases, there is a prima facie evidence of a purpose by
a corporation to avoid the tax upon its shareholders:
– Where the corporation is a mere HOLDING company
– Where the corporation is an INVESTMENT company and at any
time during the taxable year more than 50% in value of its
outstanding stocks is owned, directly or indirectly by one
person;
• However, if the taxpayer is able to show by clear and convincing
evidence that the corporation was neither formed nor availed of for
the purpose of avoiding the tax, the presumption for the above are
not conclusive.
• Where the corporation permits its earnings or profits to be
accumulated beyond the REASONABLE needs of the business.
– Bardahl formula – requires an examination of whether the
taxpayer has sufficient liquid assets to pay all of its current
liabilities and any extraordinary expenses reasonably
anticipated, plus enough to operate the business during one
operating cycle.
– Immediacy test – taxpayer must establish by clear and
convincing evidence that such accumulation was for the
immediate needs of the business. The accumulated profits
 must be used within a reasonable time after the close of the
taxable year.
• Note: IAET does not apply to partnership because of Sec. 73.
Sec. 73 (D) - Net Income of a Partnership Deemed Constructively
Received by Partners. – The The taxable income declared by a
partnership for a taxable year which is subject to tax under Section 27
(A) of this Code, after deducting the corporate income tax imposed
therein, shall be deemed to have been actually or constructively
received by the partners in the same taxable year and shall be taxed
to them in their individual capacity, whether actually distributed or
not.
Characteristics of VAT (and VAT System)
1. VAT is a tax on consumption
2. VAT is an indirect tax
3. Based on destination principle or cross-border doctrine
4. VAT is not a cascading tax
5. It is cumulative
6. Tax burden is felt in every stage of transfer and accumulates until finally
borne by the end consumer.
7. It employs tax credit method.
8. Basically, a tax on gross margin.
9. It is a neutral tax
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.
The phrase "in the course of trade or business" means the regular
conduct or pursuit of a commercial or an economic activity, including
transactions incidental thereto, by any person regardless of whether
or not the person engaged therein is a nonstock, nonprofit 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.
The rule of regularity, to the contrary notwithstanding, services as
defined in this Code rendered in the Philippines by nonresident
foreign persons shall be considered as being course of trade or
business.
RA 9337, 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, a 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: Provided,
That the President, upon the recommendation of the Secretary of
 Finance, shall, effective January 1, 2006, raise the rate of value-added
tax to twelve percent (12%), after any of the following conditions has
been satisfied:
"(i) Value-added tax collection as a percentage of Gross Domestic
product (GDP) of the previous year exceeds two and four-fifth percent
(2 4/5%); or
"(ii) National government deficit as a percentage of GDP of the
previous year exceeds one and one-half percent (1 1/2%).
"(1) 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, films, tapes
and discs; and
"(e) Radio, television, satellite transmission and cable television time.
"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.
(b) Foreign Currency Denominated Sale. - The phrase '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) Sales to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory
effectively subjects such sales to zero rate.
(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
(4) Retirement from or cessation of business, with respect to
inventories of taxable aoods existing as of such retirement or
cessation.
(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
(4) Retirement from or cessation of business, with respect to
inventories of taxable aoods existing as of such retirement or
cessation.
(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
(4) Retirement from or cessation of business, with respect to
inventories of taxable aoods existing as of such retirement or
cessation.
SEC. 107. Value-Added Tax on Importation of Goods. -
(A) 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: Provided, further, That the
President, upon the recommendation of the Secretary of Finance,
shall, effective January 1, 2006, raise the rate of value-added tax to
twelve percent (12%), after any of the following conditions has been
satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic
Product (GDP) of the previous year exceeds two and four-fifth percent
(2 4/5%); or
(ii) National government deficit as a percentage of GDP of the
previous year exceeds one and one-half percent (1 1/2%).
(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.
(A) 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: Provided, further, That the
President, upon the recommendation of the Secretary of Finance,
shall, effective January 1, 2006, raise the rate of value-added tax to
twelve percent (12%), after any of the following conditions has been
satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic
Product (GDP) of the previous year exceeds two and four-fifth percent
(2 4/5%); or
(ii) National government deficit as a percentage of GDP of the
previous year exceeds one and one-half percent (1 1/2%).
(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.
"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: Provided, That the President, upon the recommendation of the
Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-
added tax to twelve percent (12%), after any of the following conditions has
been satisfied:
• (i) Value-added tax collection as a percentage of Gross Domestic
Product (GDP) of the previous year exceeds two and four-fifth percent
(2 4/5%); or
• (ii) National government deficit as a percentage of GDP of the
previous year exceeds one and one-half percent (1 1/2%).
• "The phrase 'sale or exchange of services' means the performance of
all kinds of 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, rest-houses, 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 and other domestic common carriers by land
relative to their transport of goods or cargoes; 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;
sales of electricity by generation companies, transmission, and
distribution companies; services of franchise grantees of electric
utilities, telephone and telegraph, radio and television broadcasting
and all other franchise grantees except those under Section 119 of
this Code 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
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 or 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 technicai 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.
• "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.
(B) Transactions Subject to Zero Percent (0%) Rate. - The following services
performed in the Philippines by VAT-registered persons shall be
subject to zero percent (0%) rate:
(1) Processing, manufacturing or repacking goods for other persons
doing business outside the Philippines which goods are subsequently
exported, where the services are paid for in acceptable foreign
currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);
 (2) Services other than those mentioned in the preceding paragraph
rendered to a person engaged in business conducted outside the
Philippines or to a nonresident person not engaged in business who is
outside the Philippines when the services are performed, the
consideration for which is paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the
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 persons engaged in international shipping or
international air transport operations, including leases of property for
use thereof;
(5) Services performed by subcontractors and/or contractors in
processing, converting, or manufacturing goods for an enterprise
whose export sales exceed seventy percent (70%) of total annual
production;
(6) Transport of passengers and cargo by air or sea vessels from the
Philippines to a foreign country; and
(7) Sale of power or fuel generated through renewable sources of
energy such as, but not limited to, biomass, solar, wind, hydropower,
geothermal, ocean energy, and other emerging energy sources using
technologies such as fuel cells and hydrogen fuels.
"SEC. 109. Exempt Transactions. - (1) Subject to the provisions of
subsection (2) hereof, the following transactions shall be exempt from the
value-added tax:
• "(A) Sale or importation of agricultural and marine food products in
their original state, livestock and poultry of a kind generally used as,
or yielding or producing foods for human consumption; and breeding
stock and genetic materials therefor.
• "Products classified under this paragraph 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, ordinary salt,
and copra shall be considered in their original state;
• "(B) 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);
• "(C) 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;
• "(D) 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;
• "(E) Services subject to percentage tax under Title V;
• "(F) Services by agricultural contract growers and milling for others of
palay into rice, corn into grits and sugar cane into raw sugar;
• "(G) Medical, dental, hospital and veterinary services except those
rendered by professionals;
• "(H) Educational services rendered by private educational institutions,
duly accredited by the Department of Education (DEPED), the
Commission on Higher Education (CHED), the Technical Education And
Skills Development Authority (TESDA) and those rendered by
government educational institutions;
• "(I) Services rendered by individuals pursuant to an employer-
employee relationship;
• "(J) 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;
• "(K) Transactions which are exempt under international agreements
to which the Philippines is a signatory or under special laws, except
those under Presidential Decree No. 529;
• "(L) 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;
• "(M) Gross receipts from lending activities by credit or multi-purpose
cooperatives duly registered with the Cooperative Development
Authority;
• "(N) 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;
• "(O) Export sales by persons who are not VAT-registered;
• "(P) 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, residential lot valued
at One million five hundred thousand pesos (P1,500,000) and below,
house and lot, and other residential dwellings valued at Two million
five hundred thousand pesos (P2,500,000) and below: Provided, That
not later than January 31, 2009 and every three (3) years thereafter,
the amounts herein stated shall be adjusted to their present values
using the Consumer Price Index, as published by the National
Statistics Office (NSO);
• "(Q) Lease of a residential unit with a monthly rental not exceeding
Ten thousand pesos (P10,000)Provided, That not later than January
31, 2009 and every three (3) years thereafter, the amount herein
stated shall be adjusted to its present value using the Consumer Price
Index as published by the National Statistics Office (NSO);
• "(R) 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;
• "(S) Sale, importation or lease of passenger or cargo vessels and
aircraft, including engine, equipment and spare parts thereof for
domestic or international transport operations;
• "(T) Importation of fuel, goods and supplies by persons engaged in
international shipping or air transport operations;
• "(U) Services of banks, non-bank financial intermediaries performing
quasi-banking functions, and other non-bank financial intermediaries;
and
• "(V) 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 One million five hundred thousand pesos (P1,500,000):
Provided, That not later than January 31, 2009 and every three (3)
years thereafter, the amount herein stated shall be adjusted to its
present value using the Consumer Price Index as published by the
National Statistics Office (NSO);
(2) A VAT-registered person may elect that Subsection (1) not apply to
its sale of goods or properties or services: Provided, That an election
made under this Subsection shall be irrevocable for a period of three
(3) years from the quarter the election was made.”
"SEC. 110. Tax Credits. -
"(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.
"(b) Purchase of services on which a value-added tax has actually been paid.
"(2) The input tax on domestic purchase or importation of goods or
properties by a VAT-registered person 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.
"Provided, That the input tax on goods purchased or imported in a calendar
month for use in trade or business for which deduction for depreciation is
allowed under this Code, shall be spread evenly over the month of
acquisition and the fifty-nine (59) succeeding months if the aggregate
acquisition cost for such goods, excluding the VAT component thereof,
exceeds One million pesos (P1,000,000): Provided, however, That if the
estimated useful life of the capital good is less than five (5) years, as used
for depreciation purposes, then the input VAT shall be spread over such a
shorter period: Provided, finally, that 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-add tax; and
"(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.
"(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: Provided, That the
input tax inclusive of input VAT carried over from the previous quarter that
may be credited in every quarter shall not exceed seventy percent (70%) of
the output VAT: Provided, however, That any input tax attributable 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.
"(C) Determination of Creditable Input Tax. - The sum of the excess input tax
carried over from the preceeding month or quarter and the input tax
creditable to a VAT-registered person during the taxable month or quarter
shall be reduced by the amount of claim for refund or tax credit for value-
added tax and other adjustments, such as purchase returns or allowances
and input tax attributable to exempt sale.
"The claim for tax credit referred to in the foregoing paragraph shall include
not only those filed with the Bureau of Internal Revenue but also those filed
with other government agencies, such as the Board of Investments and the
Bureau of Customs."
"SEC. 111. Transitional/ Presumptive Input Tax Credits. -
"(A) Transitional Input Tax Credits. - A person who becomes liable to value-
added tax or any person who elects to be a VAT-registered person shall,
subject to the filing of an inventory according to rules and regulations
prescribed by the Secretary of Finance, upon recommendation of the
Commissioner, be allowed input tax on his beginning inventory of goods,
materials and supplies equivalent to two percent (2%) of the value of such
inventory or the actual value-added tax paid on such goods, materials and
supplies, whichever is higher, which shall be creditable against the output
tax.
"(B) Presumptive Input Tax Credits. -
"Persons or firms engaged in the processing of sardines, mackerel and milk,
and in manufacturing refined sugar, cooking oil and packed noodle based
instant meals, shall be allowed a presumptive input tax, creditable against
the output tax, equivalent to four percent (4%) of the gross value in money
of their purchases of primary agricultural products which are used as inputs
to their production.
"As used in this Subsection, the term 'processing' shall mean pasteurization,
canning and activities which through physical or chemical process alter the
exterior texture or form or inner substance of a product in such manner as
to prepare it for special use to which it could not have been put in its
original form or condition."
"SEC. 112. Refunds or Tax Credits of Input Tax. -
"(A) Zero-Rated or Effectively Zero-Rated Sales. - Any VAT-registered person,
whose sales are zero-rated or effectively zero-rated may, within two (2)
years after the close of the taxable quarter when the sales were made,
apply for the issuance of a tax credit certificate or refund of creditable input
tax due or paid attributable to such sales, except transitional input tax, to
the extent that such input tax has not been applied against output
tax: Provided, however, That in the case of zero-rated sales under Section
106(A)(2)(a)(1), (2) and (b) and Section 108 (B)(1) and (2), the acceptable
foreign currency exchange proceeds thereof had been duly accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP): Provided, further, That where the taxpayer is engaged in zero-rated or
effectively zero-rated sale and also in taxable or exempt sale of goods of
properties or services, and the amount of creditable input tax due or paid
cannot be directly and entirely attributed to any one of the transactions, it
shall be allocated proportionately on the basis of the volume of
sales: Provided, finally, That for a person making sales that are zero-rated
under Section 108 (B)(6), the input taxes shall be allocated ratably between
his zero-rated and non-zero-rated sales.
"(B) Cancellation of VAT Registration. - A person whose registration has
been cancelled due to retirement from or cessation of business, or due to
changes in or cessation of status under Section 106(C) of this Code may,
within two (2) years from the date of cancellation, apply for the issuance of
a tax credit certificate for any unused input tax which may be used in
payment of his other internal revenue taxes.
"(C) Period within which Refund or Tax Credit of Input Taxes shall be Made. -
In proper cases, the Commissioner shall grant a refund or issue the tax
credit certificate for creditable input taxes within one hundred twenty (120)
days from the date of submission of complete documents in support of the
application filed in accordance with Subsection (A) hereof.
"In case of full or partial denial of the claim for tax refund or tax credit, or
the failure on the part of the Commissioner to act on the application within
the period prescribed above, the taxpayer affected may, within thirty (30)
days from the receipt of the decision denying the claim or after the
expiration of the one hundred twenty day-period, appeal the decision or the
unacted claim with the Court of Tax Appeals.
"(D) Manner of Giving Refund. - Refunds shall be made upon warrants
drawn by the Commissioner or by his duly authorized representative
without the necessity of being countersigned by the Chairman, Commission
on Audit, the provisions of the Administrative Code of 1987 to the contrary
notwithstanding: Provided, That refunds under this paragraph shall be
subject to post audit by the Commission on Audit."
"SEC. 113. Invoicing and Accounting Requirements for VAT-Registered
Persons. -
"(A) Invoicing Requirements. - 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.
"(B) Information Contained in the VAT Invoice or VAT Official Receipt. - The
following information shall be indicated in the VAT invoice or VAT official
receipt:
"(1) A statement that the seller is a VAT-registered person, followed by his
taxpayer's identification number (TIN);
"(2) The total amount which the purchaser pays or is obligated to pay to the
seller with the indication that such amount includes the value-added
tax: Provided, That:
"(a) The amount of the tax shall be shown as a separate item in the invoice
or receipt;
"(b) If the sale is exempt from value-added tax, the term "VAT-exempt sale"
shall be written or printed prominently on the invoice or receipt;
"(c) If the sale is subject to zero percent (0%) value-added tax, the term
"zero-rated sale" shall be written or printed prominently on the invoice or
receipt;
"(d) If the sale involves goods, properties or services some of which are
subject to and some of which are VAT zero-rated or VAT-exempt, the
invoice or receipt shall clearly indicate the breakdown of the sale price
between its taxable, exempt and zero-rated components, and the
calculation of the value-added tax on each portion of the sale shall be
shown on the invoice or receipt: "Provided, That the seller may issue
separate invoices or receipts for the taxable, exempt, and zero-rated
components of the sale.
"(3) The date of transaction, quantity, unit cost and description of the goods
or properties or nature of the service; and
"(4) In the case of sales in the amount of one thousand pesos (P1,000) or
more where the sale or transfer is made to a VAT-registered person, the
name, business style, if any, address and taxpayer identification number
(TIN) of the purchaser, customer or client.
"(C) 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.
"(D) Consequence of Issuing Erroneous Vat Invoice or Vat Official Receipt. -
"(1) If a person who is not a VAT-registered person issues an invoice or
receipt showing his Taxpayer Identification Number (TIN), followed by the
word "VAT":
"(a) The issuer shall, in addition to any liability to other percentage taxes, be
liable to:
"(i) The tax imposed in Section 106 or 108 without the benefit of any input
tax credit; and
"(ii) A 50% surcharge under Section 248 (B) of this code;
"(b) The VAT shall, if the other requisite information required under
Subsection (B) hereof is shown on the invoice or receipt, be recognized as
an input tax credit to the purchaser under Section 110 of this Code.
"(2) If a VAT-registered person issues a VAT invoice or VAT official receipt for
a VAT-exempt transaction, but fails to display prominently on the invoice or
receipt the term "VAT-exempt Sale", the issuer shall be liable to account for
the tax imposed in Section 106 or 108 as if Section 109 did not apply.
"(E) Transitional Period. - Notwithstanding Subsection (B) hereof, taxpayers
may continue to issue VAT invoices and VAT official receipts for the period
July 1, 2005 to December 31, 2005, in accordance with Bureau of Internal
Revenue administrative practices that existed as of December 31, 2004."
"(C) Withholding of 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 and services which are subject to the
value-added tax imposed in Sections 106 and 108 of this Code, deduct and
withhold a final value-added tax at the rate of five percent (5%) of the gross
payment thereof: Provided, 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 purposes of this Section,
the payor or person in control of the payment shall be considered as the
withholding agent.
"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."
existed as of December 31, 2004."

"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, Reveenue 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.