CHARACTERISTICS (ABCD VIP)

1. Tax on gross profit – Output tax (sales) minus Input tax (purchases)
2. Business tax – Generally applies to regular sales and purchases
3. Non-cascading – Not a tax on a tax
4. Follows destination principle – Applies to consumption within PH only
5. Ad Valorem – Uses a base to determine tax liability
6. Indirect – can be shifted
7. Privilege or excise tax – not a tax on property

Q: Are there personal transactions which are vatable?

A: Yes. Importations and non-regular NRA activities.

Q: Why is VAT called a consumption tax?

A: Because it follows the destination or cross border doctrine which means only properties consumed within
the bounds of territories should be taxed. Thus, exports are either zero or exempt while imports are always
vatable.

Q: What is being shifted?

A: Only the burden to pay VAT is shifted to the buyer (economic taxpayer), never the liability to collect and
remit to government. The latter remains with the seller (statutory taxpayer).

Q: Who are liable to pay VAT?

A: General Rule: Seller is the one statutorily liable for the payment of the tax. Can be shifted to buyers.
Exception: In the case of importation, the importer (buyer) is the one liable for the VAT.
Exception to the exception: In cases of VAT-Exempt importations (Pasalubong ng Balikbayan).

SOURCES
VAT is a tax on regular sale or consumption levied on the following: (BELIS2)
• Barter
• Exchange
• Lease
• Importation
• Sales
• Services

Q: Does VAT arises from every sale transaction?

A: No. VAT arises only from regular/ordinary/normal/incidental business transactions.

Example: A sold to B some of her inventory.

Q: Vatable?
A: Yes. Item is an inventory.

Another example: A sold to B her watch.

Q: Is there a sale?
A: Yes. Sale of watch.

Q: Vatable sale?
A: No. Not a regular sale.

Q: Mariah Carey made a one-time concert in the Philippines. Ticket vatable?

A: Yes. NRA.

Q: What are incidental transactions?

A: Not the business itself but related to the conduct of the business. That is, if Camilla Homes sold cars to
its employees, those are vatable because, regardless of not being real property, it is important to their
agents’ daily activities.

Note: VAT will arise even in the absence of profit (i.e., at a loss) attributable to a business transaction.

PERSONS LIABLE
Any person who, in the course of trade or business (Doctrine of Regularity), is considered
• seller
• lessor
• service provider
• importer, whether or not made in the course of trade or business
• Non-resident persons even if the performance of services is not regular.

ADVANTAGES (Promotes PESH)

1. Promote savings
2. Economic growth
3. Simplified tax administration
4. Higher governmental revenues

Q: Is VAT regressive?
A: Yes. Because VAT has basically flat rate, the poorer you are, the heavier VAT to you.

Q: Who are the persons required to register for VAT?

A: Every person if:
• The actual Gross sale or gross receipts have exceeded 1,919,500; or
• Expecting Gross sales or receipts to exceed 1,919,500 within 12 months.

Q: May a person earning below the threshold register under the VAT system?
A: Yes. Optional registration. Cannot be revoked within 3 years.

Q: My annual importations totaled P1,500,000. Vatable?

A: Yes. Regardless of value and purpose.

Q: What is the penalty for failure to register as VAT taxpayer?

A: Must pay the VAT but cannot avail of the input tax credit.

VAT ON SALE OF GOOD OR PROPERTIES

Every sale, barter or exchange of goods or properties shall be subject to 12% VAT based on the gross
selling price or gross value in money of the goods or properties sold.

Gross Selling Price: the total amount of money or its equivalent plus excise tax.

Goods: all tangible and intangible objects which are capable of pecuniary estimation.

Invoice Interpretation:
Sales Invoice VAT Sales Invoice
Gross of Vat Net of VAT
Vat Exclusive VAT Inclusive
Formula: Base x 12% = VAT Base / 1.12 X 12% = VAT

Q: Are all intangible properties subject to VAT?

A: No, only those capable of pecuniary (monetary) estimation.
Q: Is the sale of real properties subject to VAT?
A: Ordinary real property is VATable. Capital properties are non-VATable. Only real estate dealers are
subject to VAT.

Q: What are the allowable deductions from the gross selling price?
A:
1. Discounts determined and granted at the time of the sale (i.e., trade discounts).
2. Sales returns and allowances for which proper credit or refund was made.

ZERO-RATED AND EFFECTIVELY ZERO RATED SALES

The following sales by VAT-REGISTERED persons shall be subject to 0% rate (TIGER):
• Sales to entities with treaties (e.g., PEZA, SBMA)
• International travels (Planes and Ships)
• Sale of gold to BSP
• Exports of VAT reg. entities
• Sale of renewable energy

Note: These are only common examples lifted out by examiners.

Automatic vs. Effectively Zero-Rated Sale

Although both are taxed similarly, automatic zero-rated transactions differ from effectively zero-rated
transactions as to their source.

An automatically zero-rated sale refers to an export sale or a foreign currency denominated sale or local
sale without treaty agreements.

An effectively zero-rated sale are local sale to entity with treaty agreements (e.g., PEZA, SBMA).

Q: What if silent, automatic or effectively zero-rated?

A: Automatic yan.

TRANSACTIONS DEEMED SALE (IN EFFECT SUBJECT TO 12% VAT)

Note: The gross selling price is “unreasonably lower” than the fair market value if it is lower by more than
30% of the actual market value.

a. Kinain mo na mga inventories.

b. Distribution or transfer to:

• Shareholders
• Property dividends
• Creditors
• Consignment of goods if actual sale is not made within 60 days following the date such goods were
consigned

Q: What is the difference between “zero-rated” and “VAT-exempt” transactions?

A: In VAT-exempt transactions there is no input tax credit allowed. In Zero-Rated, there is creditable VAT.
E.g.: Output tax -------------------- P 0.00
Less: Input tax ------------------- 5,000.00
VAT Creditable 5, 000.00

Q: Is the sale of goods to ecozone, such as PEZA, considered as export sale?

A: Yes. Notably, while an ecozone is geographically within the Philippines, it is deemed a separate customs
territory and is regarded in law as foreign soil.
Q: What is the rationale for zero-rating exports sale?
A: It is because 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.

VAT ON SALE OF SERVICES AND USE OR LEASE OF PROPERTIES

Constructive receipt: occurs when the money consideration or its equivalent is placed at the control of the
person who rendered the service without restrictions by the payor.

Q: What are the categories of Services:

A:
1. Professional/ technical consultancy
2. Transfer of technology
3. Lease or use of intangible property
4. Lease or use of tangible property

Q: Are non-stock, non-profit entities liable to pay VAT for sale of goods and services?

A: Yes. As long as the entity provides service for a fee, remuneration or consideration, then the service
rendered is subject to VAT.

VAT EXEMPT TRANSACTIONS

Sale of goods or properties and/or services and the use or lease of properties that is not subject to VAT
and the seller is not allowed any tax credit of VAT on purchases.

The following are VAT-exempt transactions: (RICE POPS)

Sale of residential lot valued at 1,919,500 and below, or house and lot valued at 3,199,200 and below
International flight’s fuel
Cooperative dealings
Exports on Non-VAT reg. Entities
Pasalubong of our balikbayans
Sale or importation of agricultural and marine food products in their original state
Printing of books and the likes which are not devoted of paid advertisements
Sale or importation of fertilizers, seeds, seedlings and fingerlings

Note: These are only common examples lifted out by examiners.

Q: Why would a VAT-exempt person choose to be subject to VAT than to be VAT exempt?
A: A VAT-registered person who opted to be subject to VAT may avail of the input tax credit. However, a
VAT-registered person who opted to be exempt therefrom cannot avail of the input tax credit.

Q: Will a VAT-registered purchaser of goods, properties or services that are VAT-exempt be entitled to any
input tax on such purchase?
A: No.

Q: Are petroleum products exempt from VAT?

A: No longer exempt.

Q: What are some common zero-rated and VAT-Exempt transactions?

A: Zero-rated (TIGER)
Exempt (RICE POPS)

SOURCES OF INPUT TAX

a. Purchase or importation of goods
b. Purchase of real properties for which a VAT has actually been paid
c. Purchases of services in which a VAT has actually been paid
d. Transactions deemed sale
e. Transitional input tax (2%)
f. Presumptive input tax (4%)
g. Transitional input tax credits allowed under the transitory and other provisions of these Regulations
h. Creditable Withholding VAT on payments to non-residents

Q: What is transitional input tax credit?

A: It is an input tax credit allowed to person who becomes liable to value-added tax or any person who
elects to be a VAT-registered person. The allowed input tax shall be whichever is higher between:
• 2% of the value of the taxpayer’s beginning inventory of goods, materials and supplies; or
• The actual value-added tax paid on such goods.
Q: What is presumptive input tax credit?
A: It is an input tax credit allowed to persons or firms engaged in the:
1. processing of:
a. sardines
b. mackerel
c. milk
2. manufacturing of:
a. refined sugar
b. cooking oil
c. packed noodle based instant meals
The allowed input tax shall be equivalent to four percent (4%) of the gross value in money.

DETERMINATION OF THE INPUT/OUTPUT TAX; VAT PAYABLE; EXCESS INPUT TAX CREDIT

VAT payable computation:

Output Tax
- Input Tax
VAT payable (Refundable)

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.

Q: If input tax exceeds output tax, will there be refund?

A: Generally no. Carryover is the proper treatment. Except if the due to zero-rated transactions or illegally
assessed tax, refund is allowed.

Any input tax attributable to zero-rated sales by a VAT-registered person may at his option be refunded or
credited (apply for TCC) against other internal revenue taxes.

Q: What are the options available to a VAT-registered person, whose sales are (1) zero-rated, effectively
zero-rated, (2) has ceased in business operation, or (3) has been assessed illegally?
A:
1. To claim for tax credit (TCC); or
2. To claim for refund.

Q: What are the consequences of issuing an erroneous VAT invoice/VAT official receipt?
A:1. In case of non-VAT registered person who issues a VAT invoice/receipt shall be held liable to:
a. payment of percentage tax if applicable;
b. payment of VAT without input tax;
c. 50% surcharge on tax due; and
d. the purchaser shall be allowed to recognize an input tax credit provided that the invoice/official receipt
contains the required information.

2. In case of VAT-registered who issues a VAT invoice/official receipt for a VAT-exempt sale without the
words “VAT Exempt Sale” shall be held liable to pay 12% VAT.

Q: When should VAT be paid?

A: GR: VAT-registered persons shall pay the VAT on a monthly basis.
XPN: Persons whose registration has been canceled in accordance with Section 236 who shall pay the tax
due thereon within 25 days from the date of cancellation of registration.

VAT RATES

12 Regular rate
7 Standard input vat
5 Final withholding vat
4 Presumptive input vat
2 Transitional input vat
0 Zero-Rated
Exempt Non-VAT

Regulatory requirements

Monthly 2550M VAT Declaration 20th

Quarterly 2550Q VAT Return 25th

Note: Examinees are commonly confused as regards BIR form for VAT Declaration or Return. Its VAT Dec
if Monthly; VAT return if quarterly. BIR requires only quarterly returns.

Value Added Tax (VAT) in the Philippines is a tax that each and every entreprenuer should be very much aware of.
Firstly, it affects all of us consumers. Secondly, it greatly affects business transactions, in a way or another, such as
in pricing where goods or services bought and sold contains VAT, maximizing profits when input VAT is minimal,
cash flow issues, and more. In reading below, please note the following:
 • Input VAT refers to VAT the buyer pays on purchase from VAT registered and only VAT
registered buyers are allowed to claim input VAT;
• Output VAT refers to the VAT the seller passed on to the buyer; and,
• VAT due and payable is output VAT less input VAT;
In this article, let us discuss some of its features for better and deeper understanding
VAT is a business tax
As a business tax, it is imposed upon those who are engaged in trade or business, and those in the practice of
profession. This simply means that goods or services are imposed VAT if they are made in the ordinary course of
trade or business or practice of profession. In general, VAT applies to all sales of goods and services in the ordinary
conduct of trade or business or profession, and those which are incidental thereto. Isolated transactions are not
subject to VAT as a rule. In short, because you are into trade, business, or practice of profession, then, you are liable
to VAT.
VAT is indirect tax passed on to the buyer
In direct tax the person who actually pays the tax is the same person bound to pay the same to the Bureau of Internal
Revenue (BIR or Tax Authority), while in indirect tax, the one who actually shoulders the tax is not the one bound
to remit the same to the BIR. In VAT, the tax is passed on to the buyer as part of the selling price. You will notice
this when you buy goods or services as the invoice or the receipt will state the amount of VAT. In other words, it is
the buyer who shoulders the VAT, and the seller is the one who remits the same to the BIR. Should the seller fail to
pay, the BIR will not run after the buyer because rules presupposes that VAT is imposed by the seller on all
VATable sales of goods or services.
VAT is a tax on value added or mark-up
As to liabilily, VAT liability is based on the amount added to the cost of purchase. This happens because the input
VAT from purchases of VAT registered buyers from VAT registered suppliers are deducted from the output VAT
on its sales. As such, the seller becomes taxable based on the mark up. This runs very true in a trading business or
buy and sell. In manufacturing and service type of business, the concept lives on the input VAT and output VAT
combination.
VAT is a consumption tax
The sad fact about VAT is that it is shoulderd by the ultimate consumers – the general Juan dela Cruz or John Doe
public. Goods and services intended to be consumed in the Philippines are imposed VAT and any person who
consumes the goods or services shoulders all the VAT imposed along the distribution line. It is because, if you do
not sell the goods or the service, then, you will not generate output VAT so you shoulder all the input VAT you pay
on the purchase.
Notice also that importations are subject to VAT, whether for business or personal use. This is because, they are
presumed to be consumed in the Philippines. On the other hand, exportation of goods – actual or technical
exportations, are charged 0% (zero rated) so no VAT shall be included in the selling price because they are bound to
be consumed outside of the Philippines. The purpose of zero-rating on export transactions is actually for recovery of
input VAT passed on to them on purchases of materials and services from VAT rgistered taxpayers for use in the
production of such goods or services for export.
Recovery on excess input VAT
Input VAT from VATable purchases are deductible from output VAT, and as such accounted as property or asset of
a taxpayer. The Philippine Constitution provides that no person shall be deprived of property without due process of
law, so that taxpayers are given options as to the excess input VAT. Under the rules, excess input VAT may be
carried over to succeeding months or quarter until fully consumed without expiry. Input VAT from zero-rated sales
may be applied for tax refund or tax credit certificates within two (2) years from the quarter of sale. Input VAT
attributable to exempt sales of goods or services are allowed to be claimed as expense (input VAT expense)
deductible for income tax purposes. Upon liquidation, excess input VAT may likewise be applied for refund or tax
credit certificates within two (2) years from dissolution of the taxpayer. Notably, the government recently launched
a VAT TCC monetization program where TCCs from VAT will be converted to cash within the five-year period.
Cash flow on transition from non-VAT to VAT
For those previously registered as non-VAT, and for a reason or another becomes VATable such as when it exceeds
the VAT registration threshold of P1,919,500 (2012), the rules provides that they could claim a transitional input
VAT (TIP) of 2% based on the value of its beginning inventory of goods, materials, and supplies or the actual VAT
on such goods, materials, or supplies, whichever is higher. The purpose is for the taxpayer not to be burdened by the
payment of VAT on VATable sales immediately following the VAT registration because the input VAT on
purchases during the non-VAT period is not claimable as against output VAT. Claimable TIP is the lower of the
actual VAT on inventory or 2% of the value of such inventory.
5% assured VAT collection on sales to government
As a revenue measure, the government is assured of at least a collection of the 5% of such 12% VAT imposed on
government purchases. This is the essence of the final withholding VAT on government money payments where the
government agency or instrumentality is mandated to withhold the 5% upon payment. On the part of the seller, the
application of the standard input VAT is intended to nuetralize the impact of the final withholding VAT in relation
to the actual input VAT. The difference between standard input VAT and actual input VAT attributable to such
government sales is either an input VAT expense or a charge against cost similar to other income in simple
language.
VAT transparency mechanism
This feature is the check and balance mechanism that tax evaders must be aware. First, VAT registered seller is
mandated to segreggate or show separately the VAT passed on to buyers in the sales invoice or official receipt. The
purpse is for the buyer to simply pick out the VAT figure it paid, and failure to segreggate is subject to a
compromise penalty. Another mandate for all VAT registered is the mandatory submission of summary list of sales
(SLS), summary list of purchases (SLP), and summary of importations. SLS, SLP are reciprocal reports of buyers
and sellers the BIR matches to determine if the seller or the buyer correctly reported. Importation details from
Bureau of Customs (BoC) are traced to the summary list of importations provided by the importer. Discrepancy in
either case are presumed to be underdeclarations, if the taxpayer could not properly substantiate and justify.
Finally, in claims for refunds and tax credit certificates, the BIR will likewise verify if such VAT applied for refund
or TCC has been recorded as an asset for transparency on the books of accounts.

This brings us to the topic on value-added tax (VAT). As so provided in our Internal Revenue Code, any person or
entity, who, in the course of trade or business, sells, exchanges or leases goods or properties, or renders services, and
any person who imports goods shall be liable for VAT. VAT is generally imposed on sale of goods in the
Philippines as well as importation of goods into the Philippines. Likewise, VAT is imposed on receipts from
services rendered in the Philippines. Instead of the VAT, the 3-percent percentage tax may be imposed upon persons
selling items and services who make sales/receipts of not more than P3,000,000 a year.
How would the government be able to ensure compliance with the remittance of VAT or percentage tax for online
transactions? RMC 55-2013 reminds that business establishments or persons who conduct business have certain
obligations to fulfill, one of which would be to register with the BIR and another to file applicable tax returns on due
dates and pay the corresponding taxes. However, this would address only the situations where the sellers are actually
situated in the Philippines.
In cases of cross-border transactions, where our tax authority has no jurisdiction over the seller, requiring the sellers
to register and pay their taxes will be difficult if not impossible to implement. As a result, many online transactions
remain untaxed. The challenge is more apparent in cases of services sold through the Internet.
First, receipts from services are subject to VAT only if the service is rendered in the Philippines. In determining
whether a service fee is subject to VAT in the Philippines or not, the important question to be addressed is—is the
service considered rendered in the Philippines? Specifically, in cases of Internet-related transactions, are the online
services that are viewable and accessible in the Philippines by the intended customers considered rendered in the
Philippines?
Unfortunately, the Philippine tax laws had not caught up with the developments in the Internet commerce. Tax laws
were not developed to address the changes that continue to take place with the developments/changes in technology.
Although these are already common situations that are usually encountered by taxpayers and by the tax
authorities/tax implementing agencies, our laws are still far from addressing these issues.
Second, even if the service is considered rendered in the Philippines and therefore subject to VAT, usually, the
sellers involved are non-residents. The rules require that in such case, the payor of the service fee shall be
considered as a withholding agent and be responsible in remitting the VAT. This may be easier to comply in a
business-to-business transaction. Individuals, however, constitute a significant number of online customers, making
it difficult for the tax authority to implement the payment through the withholding-tax system. This is just among the
many situations involving online transactions where tax rules are deficient.
As technology continues to evolve, it brings new challenges. So, too, must the law adapt to the circumstances of the
times.