TAXATION II

PART III
VALUE-ADDED TAX

SECTIONS 105-115 OF THE NIRC, AMENDED BY RA NOS. 9337, 10378

AND RA 10963 IMPLEMENTED BY RR NOS. 16-05 AS AMENDED BY RR
NOS. 4-07 AND RR 13-2018 (AMONG OTHERS)

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 non-stock, 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
rendered in the course of trade or business.

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 twelve percent
(12%) 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.
Nawala ang (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%).)
NIRC/ RA 9337 (1) "Goods or Properties." 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.
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.
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RA10963 “(2) The following sales by VAT-registered persons shall be subject to zero
percent (0%) rate:
“(a) Export Sales.— The term ‘export sales’ means:
“(1) 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 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 (BSP);
“(2) Sale and delivery of goods to:
“(i) Registered enterprises within a separate customs territory as
provided under special laws; and
“(ii) Registered enterprises within tourism enterprise zones as
declared by the Tourism Infrastructure and Enterprise Zone Authority
(TIEZA) subject to the provisions under Republic Act No. 9593 or The
Tourism Act of 2009.
“(3) Sale of raw materials or packaging materials to a nonresident buyer for
delivery to a resident local export-oriented enterprise to be used in
manufacturing, processing, packing or repacking in the Philippines of the said
buyer’s goods and paid for in acceptable foreign currency and accounted for
in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP);
“(4) Sale of raw materials or packaging materials to export-oriented
enterprise whose export sales exceed seventy percent (70%) of total annual
production;
“(5) Those considered export sales under Executive Order No. 226, otherwise
known as the Omnibus Investment Code of 1987, and other special laws; and
“(6) The sale of goods, supplies, equipment and fuel to persons engaged in
international shipping or international air transport operations: Provided,
That the goods, supplies, equipment and fuel shall be used for international
shipping or air transport operations.
“Provided, That subparagraphs (3), (4), and (5) hereof shall be subject to the twelve percent
(12%) value-added tax and no longer be considered export sales subject to zero percent
(0%) VAT rate upon satisfaction of the following conditions:
“(1) The successful establishment and implementation of an enhanced VAT refund system
that grants refunds of creditable input tax within ninety (90) days from the filing of the VAT
refund application with the Bureau: Provided, That, to determine the effectivity of item no. 1,
all applications filed from January 1, 2018 shall be processed and must be decided within
ninety (90) days from the filing of the VAT refund application; and
“(2) All pending VAT refund claims as of December 31, 2017 shall be fully paid in cash by
December 31, 2019.
“Provided, That the Department of Finance shall establish a VAT refund center in the Bureau
of Internal Revenue (BIR) and in the Bureau of Customs (BOC) that will handle the
processing and granting of cash refunds of creditable input tax.
“An amount equivalent to five percent (5%) of the total VAT collection of the BIR and the
BOC from the immediately preceding year shall be automatically appropriated annually and
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shall be treated as a special account in the General Fund or as trust receipts for the purpose
of funding claims for VAT refund: Provided, That any unused fund, at the end of the year shall
revert to the General Fund.
“Provided, further, That the BIR and the BOC shall be required to submit to the Congressional
Oversight Committee on the Comprehensive Tax Reform Program (COCCTRP) a quarterly
report of all pending claims for refund and any unused fund.

Nawala ang (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).
“(b) 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 goods
existing as of such retirement or cessation.
(C) Changes in or Cessation of Status of a VAT-registered Person. - The tax imposed in
Subsection (A) of this Section shall also apply to goods disposed of or existing as of a certain
date if under circumstances to be prescribed in rules and regulations to be promulgated by
the Secretary of Finance, upon recommendation of the Commissioner, the status of a person
as a VAT-registered person changes or is terminated.
(D) Sales Returns, Allowances and Sales Discounts. - The value of goods or properties
sold and subsequently returned or for which allowances were granted by a VAT-registered
person may be deducted from the gross sales or receipts for the quarter in which a refund is
made or a credit memorandum or refund is issued. Sales discount granted and indicated in
the invoice at the time of sale and the grant of which does not depend upon the happening of
a future event may be excluded from the gross sales within the same quarter it was given.
(E) Authority of the Commissioner to Determine the Appropriate Tax Base. - The
Commissioner shall, by rules and regulations prescribed by the Secretary of Finance,
determine the appropriate tax base in cases where a transaction is deemed a sale, barter or
exchange of goods or properties under Subsection (B) hereof, or where the gross selling price
is unreasonably lower than the actual market value.

“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 twelve percent (12%) 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

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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.

(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 twelve percent (12%) of gross receipts derived from the sale or exchange of
services, including the use or lease of properties.
“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, 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 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 by any entity, and
distribution companies, including electric cooperatives; 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);

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“(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, projector 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: Provided, That these
services shall be exclusive for international shipping or air transport operations;
“(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 domestic 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.
“(8) Services rendered to:
“(i) Registered enterprises within a separate customs territory as provided under special
law; and

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“(ii) Registered enterprises within tourism enterprise zones as declared by the TIEZA subject
to the provisions under Republic Act No. 9593 or The Tourism Act of 2009.
“Provided, That subparagraphs (B)(1) and (B)(5) hereof shall be subject to the twelve
percent (12%) value-added tax and no longer be subject to zero percent (0%) VAT rate upon
satisfaction of the following conditions:
“(1) The successful establishment and implementation of an enhanced VAT refund system
that grants refunds of creditable input tax within ninety (90) days from the filing of the VAT
refund application with the Bureau: Provided, That, to determine the effectivity of item no. 1,
all applications filed from January 1, 2018 shall be processed and must be decided within
ninety (90) days from the filing of the VAT refund application; and
“(2) All pending VAT refund claims as of December 31, 2017 shall be fully paid in cash by
December 31, 2019.
“Provided, That the Department of Finance shall establish a VAT refund center in the Bureau
of Internal Revenue (BIR) and in the Bureau of Customs (BOC) that will handle the
processing and granting of cash refunds of creditable input tax.
“An amount equivalent to five percent (5%) of the total value-added tax collection of the BIR
and the BOC from the immediately preceding year shall be automatically appropriated
annually and shall be treated as a special account in the General Fund or as trust receipts for
the purpose of funding claims for VAT Refund: Provided, That any unused fund, at the end of
the year shall revert to the General Fund.
“Provided, further, That the BIR and the BOC shall be required to submit to the COCCTRP a
quarterly report of all pending claims for refund and any unused fund.”

“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 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 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, tools of trade, occupation or
employment, wearing apparel, domestic animals, and personal and household effects
belonging to persons coming to settle in the Philippines or Filipinos or their families and
descendants who are now residents or citizens of other countries, such parties hereinafter
referred to as overseas Filipinos, in quantities and of the class suitable to the profession, rank
or position of the persons importing said items, for their own use and not for barter or sale,
accompanying such persons, or arriving within a reasonable time: Provided, That the Bureau
of Customs may, upon the production of satisfactory evidence that such persons are actually
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coming to settle in the Philippines and that the goods are brought from their former place of
abode, exempt such goods from payment of duties and taxes: Provided, further, That vehicles,
vessels, aircrafts, machineries and other similar goods for use in manufacture, shall not fall
within this classification and shall therefore be subject to duties, taxes and other charges;
“(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 (₱15,000) 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 (₱1,500,000) and below, house and lot, and other residential
dwellings valued at Two million five hundred thousand pesos (₱2,500,000) and
below: Provided, That beginning January 1, 2021, the VAT exemption shall only apply to sale
of real properties not primarily held for sale to customers or held for lease in the ordinary
course of trade or business, sale of real property utilized for socialized housing as defined by
Republic Act No. 7279, sale of house and lot, and other residential dwellings with selling
price of not more than Two million pesos (₱2,000,000): Provided, further, That 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 Philippine Statistics Authority (PSA);

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“(Q) Lease of a residential unit with a monthly rental not exceeding Fifteen thousand pesos
(₱15,000);
“(R) Sale, importation, printing or publication of books and any newspaper, magazine,
review or bulletin which appears at regular intervals with fixed prices or subscription and
sale and which is not devoted principally to the publication of paid advertisements;
“(S) Transport of passengers by international carriers;
“(T) Sale, importation or lease of passenger or cargo vessels and aircraft, including engine,
equipment and spare parts thereof for domestic or international transport operations;
“(U) Importation of fuel, goods and supplies by persons engaged in international shipping or
air transport operations: Provided, That the fuel, goods, and supplies shall be used for
international shipping or air transport operations;
“(V) Services of bank, non-bank financial intermediaries performing quasi-banking
functions, and other non-bank financial intermediaries;
“(W) Sale or lease of goods and services to senior citizens and persons with disability, as
provided under Republic Act Nos. 9994 (Expanded Senior Citizens Act of 2010) and 10754
(An Act Expanding the Benefits and Privileges of Persons With Disability), respectively;
“(X) Transfer of property pursuant to Section 40(C)(2) of the NIRC, as amended;
“(Y) Association dues, membership fees, and other assessments and charges collected by
homeowners associations and condominium corporations;
“(Z) Sale of gold to the Bangko Sentral ng Pilipinas (BSP);
“(AA) Sale of drugs and medicines prescribed for diabetes, high cholesterol, and
hypertension beginning January 1, 2019; and
“(BB) 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 Three million pesos (₱3,000,000).

“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. [65]
(b) Purchase of services on which a value-added tax has been actually paid.
(2) The input tax on domestic purchase or importation of goods or properties by a VAT-
registered person [66] 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.
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 “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 (₱1,000,000): 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, further, That the amortization of the
input VAT shall only be allowed until December 31, 2021 after which taxpayers with
unutilized input VAT on capital goods purchased or imported shall be allowed to apply the
same as scheduled until fully utilized: 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-added
tax; and[68]
(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. [69] - 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, 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 preceding 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%) [70] 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 and cooking oil, shall be
allowed a presumptive input tax, creditable against the output tax, equivalent to four percent
(4%) [71] of the gross value in money of their purchases of primary agricultural products
which are used as inputs to their production.
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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. [72]
(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 of Input Taxes shall be Made.— In proper cases, the
Commissioner shall grant a refund for creditable input taxes within ninety (90) days from
the date of submission of the official receipts or invoices and other documents in support of
the application filed in accordance with Subsections (A) and (B) hereof: Provided, That
should the Commissioner find that the grant of refund is not proper, the Commissioner must
state in writing the legal and factual basis for the denial.
“In case of full or partial denial of the claim for tax refund, the taxpayer affected may, within
thirty (30) days from the receipt of the decision denying the claim, appeal the decision with
the Court of Tax Appeals: Provided, however, That failure on the part of any official, agent, or
employee of the BIR to act on the application within the ninety (90)-day period shall be
punishable under Section 269 of this Code.
(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. [74]
(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:
10
(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. Provided, That:
(a) The amount of the tax shall be known 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 involved 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 value-added tax on each portion of the sale shall be known 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. [75]
(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 persons 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; [76]
(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. [77]
(E) Transitional Period. - Notwithstanding Subsection (B) hereof, taxpayers may continue
to issue VAT invoices and VAT official receipt 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.

“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: Provided, finally, That beginning January 1, 2023, the filing and payment
required under this Subsection shall be done within twenty-five (25) days following the close
of each taxable quarter.
“x x x

11
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 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 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 beginning January 1, 2021, the VAT witholding system
under this Subsection shall shift from final to a creditable system: Provided, further, That the
payment for lease or use of properties or property rights to nonresident owners shall be
subject to twelve percent (12%) withholding tax at the time of payment: Provided, finally,
That payments for purchases of goods and services arising from projects funded by Official
Development Assistance (ODA) as defined under Republic Act No. 8182, otherwise known
as the ‘Official Development Assistance Act of 1996’, as amended, shall not be subject to the
final withholding tax system as imposed in this Subsection. For purposes of this Section, the
payor or person in control of the payment shall be considered as the withholding agent.

SEC. 115. Power of the Commissioner to Suspend the Business Operations of a

Taxpayer. - The Commissioner or his authorized representative is hereby empowered to
suspend the business operations and temporarily close the business establishment of any
person for any of the following violations:
(a) In the case of a VAT-registered Person. -
(1) Failure to issue receipts or invoices;
(2) Failure to file a value-added tax return as required under Section 114; or
(3) Understatement of taxable sales or receipts by thirty percent (30%) or more of his
correct taxable sales or receipts for the taxable quarter.
(b) Failure of any Person to Register as Required under Section 236.
The temporary closure of the establishment shall be for the duration of not less than five (5)
days and shall be lifted only upon compliance with whatever requirements prescribed by the
Commissioner in the closure order.

“Sec. 116. Tax on Persons Exempt from Value-added Tax (VAT).— Any person whose sales or
receipts are exempt under Section 109(BB) of this Code from the payment of value-added
tax and who is not a VAT-registered person shall pay a tax equivalent to three percent (3%)
of his gross quarterly sales or receipts: Provided, That cooperatives, and beginning January
1, 2019, self-employed and professionals with total annual gross sales and/or gross receipts
not exceeding Five hundred thousand pesos (₱500,000) shall be exempt from the three
percent (3%) gross receipts tax herein imposed.”

SEC. 117. Percentage Tax on Domestic Carriers and Keepers of Garages. - Cars for rent
or hire driven by the lessee, transportation contractors, including persons who transport
passengers for hire, and other domestic carriers by land, [81] for the transport of passengers

12
[except owners of bancas] and owners of animal-drawn two wheeled vehicle), and keepers
of garages shall pay a tax equivalent to three percent (3%) of their quarterly gross receipts.
The gross receipts of common carriers derived from their incoming and outgoing freight
shall not be subjected to the local taxes imposed under Republic Act No. 7160, otherwise
known as the Local Government Code of 1991.

In computing the percentage tax provided in this Section, the following shall be considered
the minimum quarterly gross receipts in each particular case:

Jeepney for hire -

1. Manila and other Cities P 2,400
2. Provincial 1,200
Public utility bus -
Not exceeding 30 passengers P 3,600
Exceeding 30 but not exceeding 50 6,000
passengers 7,200
Exceeding 50 passengers
Taxis - P 3,600
1. Manila and other Cities 2,400
2. Provincial P 3,000
Car for hire (with chauffer) 1,800
Car for hire (without chauffer)

SEC. 118 Percentage Tax on International Carriers. -

(A) International air carriers doing; business in the Philippines on their gross receipts
derived from transport of cargo from the Philippines to another country shall pay a tax of
three percent (3%) of their quarterly gross receipts.
(B) International shipping carriers doing business in the Philippines on their gross receipts
derived from transport of cargo from the Philippines to another country shall pay a tax
equivalent to three percent (3%) of their quarterly gross receipts.

I. PRELIMINARY MATTERS

Q: Define Value-Added Tax (VAT).

A Value-Added Tax is a tax assessed, levied, and collected 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.
Q: What is the current VAT rate?
The current VAT rate is 12%.

WHAT IS VALUE-ADDED TAX?

It is a tax imposed only in a piece of work, merit or importance of goods, properties or
services and not to the total value of the goods and services.
It is also a tax on spending or consumption.
It is levied on the sale, barter, exchange or lease of goods or properties and services to be
consumed here in the Philippines.
It is a uniform tax levied on any 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
Q: What are the characteristics of the VAT?
1. It is a percentage tax imposed at every stage of the distribution process on the sale, barter,
or exchange or lease of goods or properties and on the performance of service in the course
of trade or business or on the importation of goods, whether for business or non-business.
13
2. It is a business tax levied on certain transactions involving a wide range of goods,
properties and services, such tax being payable by the seller, lessor or transferor.
3. It is an excise tax or a tax on the privilege of engaging in the business of selling goods or
services or in the importation of goods
4. It is an indirect tax, the amount of which may be shifted to or passed on the buyer,
transferee or lessee of the goods, properties or services.
5. It is an ad valorem tax as its amount or rate is based on gross selling price or gross value
in money or gross receipts derived from the transaction

Note: This early on I want to make the distinction between an exempt entity (a taxpayer exempt
from VAT) and an exempt transaction (a transaction exempt from VAT). The distinction
proceeds from the nature of VAT as an indirect tax. If the law exempts the statutory taxpayer
(aka the seller), this does not mean that the buyer is also exempt. The VAT can be shifted to the
buyer. Also, if the law exempts the buyer from VAT meaning the seller cannot pass/shift the VAT
to the buyer, this does not mean the seller is exempt. He must pay the tax. In both cases, the
transaction is not exempt from VAT because someone will pay. But if the law says the
transaction is exempt from VAT then neither the buyer nor the seller will have to pay VAT. That
is the distinction. Remember that especially when we discussed zero-rated, effectively zero-
rated and exempt transactions.
Q: What are VAT-taxable transactions?
VAT-taxable transactions are those transactions which are subject to VAT either at the rate
of 12% or 0% and the seller shall be entitled to tax credit for the VAT paid on purchases and
leases of goods, properties, and services. (CIR V. CEBU TOYO [FEBRUARY 16, 2005])
Q: What are the elements of a VAT-taxable transaction?
1. There must be a sale, barter, exchange or lease in the Philippines
2. The sale, barter, exchange or lease must be of taxable goods, properties or services
3. The sale must be made by a taxable person in the course of trade or furtherance of his/its
profession

Note: (1) An importation is VAT-taxable whether made in the course of trade or business or
not.

VAT ON GOODS AND SERVICES

Definition of goods and services (Sec. 106 and Sec. 108)
 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 contractor. It shall 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);

14
(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.

VAT base for goods and services (Sec. 106 and Sec.108)
 The VAT base for goods or properties is the gross selling price or gross value in money
of the goods or properties sold, bartered or exchanged. The mere consummation of
sale or delivery of object would subject the taxpayer liable for VAT.
 The VAT base for sale of services and use or lease of properties are the gross receipts
derived from the sale or exchange of services, including the use or lease of properties.

Meaning of gross selling price and gross receipts (Sec. 106 and Sec.108) Sec. 11 of RR
No. 4-07
 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 VAT. The excise tax, if any, shall
form part of the gross selling price
 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 services
performed or to be performed for another person, excluding VAT

a. NATURE AND CHARACTERISTIC OF VAT IN GENERAL

SEC. 4.105.-2 OF RR NO. 16-05
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.

CIR VS. MAGSAYSAY LINES GR NO. 146984 DATED JULY 28, 2006

15
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
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.

Facts: Petitioners, consisting of investors/shipping companies field on April 10, 1989 a

petition for refund of the CTA for reversal of certain VAT rulings and for the refund of
P15,120,000 representing erroneously paid 10% VAT on the sale thru public bidding of 5
vessels by the National Development Corp. to said group of investors. On April 27, 1992, the
CTA ordered the CIR to refund the amount to petitioners.

The resolution of the CTA dated December 9, 1992, delaying its motion for reconsideration
was received by respondent CIR on January 6, 1993. Upon receipt thereof, CIR, thru the office
of the SOL-GEN, filed on the same date with the CA a motion for reconsideration of 30 days
or until February 6, 1993, within which to file a petition for review. However, on February 5,
1993, the OSG filed on behalf of respondent CIR a second motion for extension of 30 days, or
until March 8, 1993, within which to file said petition.

On February 11, 1993, the OSG received the resolution dated February 3, 1993 of respondent
appellate court granting respondent CIR’S first motion for extension “with a warning that so
further extension shall be entertained.” Manifestation and motion, on March 8, 1993, or
within the period requested in the second motion for extension, the petition for review was
filed thru registered mail.

In a resolution of May 3, 1993, respondent CA dismissed the petition for being filed out of
time. Later, however, the CA reconsidered its ruling and directed herein petitioner to file its
comment on the reinstated petition. Hence, petitioners filed the instant petition.

Issue: Whether or not the motion for extension to file a petition for review of CA my be
permitted.

16
Held: The petition is devoid of merit. The petition for review pending before respondent
appellate court was file din accordance with circular no. 1-91, dated January 27, 1991. While
circular no. 1-91 is silent as to whether a motion for extension of time to file a petition for
review with the CA may be permitted, nevertheless, the court already ruled in Liboro vs. CA,
that such motion is allowed and should be granted. Parenthetically, it should be mentioned
that Adm. Circular no. 1-95 which took effect on February 15, 1995 allows motion for
extension of time to file petitions for review.

The resort to the filing of the first motion for extension dated January 6, 1993 was proper,
and said motion validly and timely filed, pursuant to the then prevailing rules of procedure.
The first motion having been granted on February 3, 1993 or well within the period of
extension asked for, was no less valid and effective. Therefore, petitioner has until February
6, 1993 to file the subject petition for review.

With respect to the 2nd motion for extension filed on February 5, 1993, the court took
cognizance of the fact that the intermittent and extended power failures assuming almost
daily throughout 1993 rendered substantial work delays inevitable. Hence the 2nd motion
for extension was justified and the grant thereof was proper under the circumstances.

While generally speaking, a review on appeal is not a matter of right but of sound judicial
discretion, and may be granted only when there are special and important reasons therefore,
in this instance, substantial justice would be better by allowing the appeal.

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.

FACTS: Respondent is a resident foreign corporation duly registered with the Securities and
Exchange Commission to do business in the Philippines and is registered with the Philippine
Export Zone Authority (PEZA). The respondent is Value Added Tax-registered entity and
filed for the VAT returns. An administrative claim for refund of VAT input taxes in the amount
of P28,369,226.38 with supporting documents (inclusive of the P12,267,981.04 VAT input
taxes subject of this Petition for Review), was filed on 4 October 1999, but no final action has
been received by the respondent from the petitioner on the claim for VAT refund. CIR asserts
that by virtue of the PEZA registration alone of respondent, the latter is not subject to the
VAT. Consequently, the capital goods and services respondent has purchased are not
considered used in the VAT business, and no VAT refund or credit is due.

ISSUE: Whether or not Seagate, a VAT-Registered PEZA Enterprise is entitled to tax refund
or credit.
HELD: Yes, Seagate is entitled to refund or credit. As a PEZA-registered enterprise within a
special economic zone, respondent is entitled to the fiscal incentives and benefit provided

17
for in either PD 66 or EO 226. It shall, moreover, enjoy all privileges, benefits, advantages or
exemptions under both Republic Act Nos. (RA) 7227 and 7844.
Respondent, which as an entity is exempt, is different from its transactions which are not
exempt. The end result, however, is that it is not subject to the VAT. The non-taxability of
transactions that are otherwise taxable is merely a necessary incident to the tax exemption
conferred by law upon it as an entity, not upon the transactions themselves.
The petitioner’s assertion that the capital goods and services respondent has purchased are
not considered used in the VAT business, and thus no VAT refund or credit is due is non
sequitur. On this matter, the SC held that by the VAT’s very nature as a tax on consumption,
the capital goods and services respondent has purchased are subject to the VAT, although at
zero rate.
Seagate has complied with all the requisites for VAT refund or credit. First, respondent is a
VAT-registered entity. Second, the input taxes paid on the capital goods of respondent are
duly supported by VAT invoices and have not been offset against any output taxes.
To summarize, special laws expressly grant preferential tax treatment to business
establishments registered and operating within an ecozone, which by law is considered as a
separate customs territory. As such, respondent is exempt from all internal revenue taxes,
including the VAT, and regulations pertaining thereto. Its sales transactions intended for
export may not be exempt, but like its purchase transactions, they are zero-rated. No prior
application for the effective zero rating of its transactions is necessary. Being VAT-registered
and having satisfactorily complied with all the requisites for claiming a tax refund of or credit
for the input VAT paid on capital goods purchased, respondent is entitled to such VAT refund
or credit.
Having determined that respondent’s purchase transactions are subject to a zero VAT rate,
the SC has determined that tax refund or credit is in order.

CONCURRING OPINION OF JUSTICE ABAD – FORT BONIFACIO DEVELOPMENT CORP. VS. CIR,
GR NO. 173425 DATED SEPTEMBER 4, 2012.

FACTS:
Petitioner was a real estate developer that bought from the national government a parcel of
land that used to be the Fort Bonifacio military reservation. At the time of the said sale there
was as yet no VAT imposed so Petitioner did not pay any VAT on its purchase. Subsequently,
Petitioner sold two parcels of land to Metro Pacific Corp. In reporting the said sale for VAT
purposes (because the VAT had already been imposed in the interim), Petitioner claimed
transitional input VAT corresponding to its inventory of land. The BIR disallowed the claim of
presumptive input VAT and thereby assessed Petitioner for deficiency VAT.

ISSUE:
Is Petitioner entitled to claim the transitional input VAT on its sale of real properties given its
nature as a real estate dealer and if so (i) is the transitional input VAT applied only to the
improvements on the real property or is it applied on the value of the entire real property and
(ii) should there have been a previous tax payment for the transitional input VAT to be
creditable?

HELD:
YES. Petitioner is entitled to claim transitional input VAT based on the value of not only the
improvements but on the value of the entire real property and regardless of whether there was
in fact actual payment on the purchase of the real property or not.

18
The amendments to the VAT law do not show any intention to make those in the real estate
business subject to a different treatment from those engaged in the sale of other goods or
properties or in any other commercial trade or business. On the scope of the basis for
determining the available transitional input VAT, the CIR has no power to limit the meaning
and coverage of the term "goods" in Section 105 of the Tax Code without statutory authority or
basis. 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.

Concurring Opinion, Justice Abad

A value added tax is a form of indirect sales tax paid on products and services at each stage of
production or distribution, based on the value added at that stage and included in the cost to
the ultimate consumer.

To illustrate how VAT works, take a lumber store that sells a piece of lumber to a carpentry
shop for P 100.00. The lumber store must pay a 12% VAT or P 12.00 on such sale but it may
charge the carpentry shop P 112.00 for the piece of lumber, passing on to the latter the burden
of paying the P 12.00 VAT.

When the carpentry shop makes a wooden stool out of that lumber and sells the stool to a
furniture retailer for P 150.00 (which would now consists of the P 100.00 cost of the lumber,
the P 50.00 cost of shaping the lumber into a stool, and profit), the carpentry shop must pay a
12% VAT of P 6.00 on the P 50.00 value it added to the piece of lumber that it made into a stool.
But it may charge the furniture retailer the VAT of P 12.00 passed on to it by the lumber store
as well as the VAT of P 6.00 that the carpentry shop itself has to pay. Its buyer, the furniture
retailer, will pay P 150.00, the price of the wooden stool, and P 18.00 (P 12.00 + P 6.00), the
passed-on VAT due on the same.

When the furniture retailer sells the wooden stool to a customer for P 200.00, it would have
added to its P150.00 acquisition cost of the stool its mark-up of P 50.00 to cover its overhead
and profit. The furniture retailer must, however, pay an additional 12% VAT of P 6.00 on the P
50.00 add-on value of the stool. But it could charge its customer all the accumulated VAT
payments: the P 12.00 paid by the lumber store, the P 6.00 paid by the carpentry shop, and the
other P 6.00 due from the furniture retailer, for a total of P 24.00. The customer will pay P
200.00 for the stool and P 24.00 in passed-on 12% VAT.

Now, would the furniture retailer pay to the BIR the P 24.00 VAT that it passed on to its
customer and collected from him at the store’s counter? Not all of the P 24.00. The furniture
retailer could claim a credit for the P 12.00 and the P 6.00 in input VAT payments that the
lumber store and the carpentry shop passed on to it and that it paid for when it bought the
wooden stool. The furniture retailer would just have to pay to the BIR the output VAT of P 6.00
covering its P 50.00 mark-up. This payment rounds out the 12% VAT due on the final sale of the
stool for P 200.00.

When the VAT law first took effect, it would have been unfair for a furniture retailer to pay all
of the 10% VAT (the old rate) on the wooden stools in its inventory at that time and not be able
to claim deduction for any tax on sale that the lumber store and the carpentry shop presumably
passed on to it when it bought those wooden stools. To remedy this unfairness, Section 105 of
the NIRC granted those who must pay VAT for the first time a transitional input tax credit of
8% of the value of the inventory of goods they have or actual value-added tax paid on such
goods when the VAT law took effect. The furniture retailer would thus have to pay only a 2%
VAT on the wooden stools in that inventory, given the transitional input VAT tax credit of 8%
allowed it under the old 10% VAT rate.
19
In the case before the Court, FBDC had an inventory of Fort Bonifacio lots when the VAT law
was made to cover the sale of real properties for the first time. FBDC registered as new VAT
payer and submitted to the BIR an inventory of its lots. FBDC sought to apply the 8%
transitional input tax credit that Section 105 grants first-time VAT payers like it but the CIR
would not allow it. The dissenting opinion of Justice Carpio echoes the CIR’s reason for such
disallowance. When the Government sold the Fort Bonifacio lands to FBDC, the Government
paid no sales tax whatsoever on that sale. Consequently, it could not have passed on to FBDC
what could be the basis for the 8% transitional input tax credit that Section 105 provides.

The reasoning appears sound at first glance. But Section 105 grants all first-time VAT payers
such transitional input tax credit of 8% without any precondition. It does not say that a
taxpayer has to prove that the seller, from whom he bought the goods or the lands, paid sales
taxes on them. Consequently, the CIR has no authority to insist that sales tax should have been
paid beforehand on FBDC’s inventory of lands before it could claim the 8% transitional input
tax credit. The Court’s decision in G.R. 158885 and G.R. 170680 more than amply explains this
point and such explanation need not be repeated here.

But there is a point that has apparently been missed. When the Government sold the military
lands to FBDC for development into mixed residential and commercial uses, the presumption is
that in fixing their price the Government took into account the price that private lands similarly
situated would have fetched in the market place at that time. The clear intent was to privatize
ownership of those former military lands. It would make no sense for the Government to sell the
same to intended private investors at a price lesser than the price of comparable private lands.
The presumption is that the sale did not give undue benefit to the buyers in violation of the anti-
graft and corrupt practices act.

Moreover, there is one clear evidence that the former military lands were sold to private
investors at market price. After the Government sold the lands to FBDC, then wholly owned by
BCDA, the latter sold 55% of its shares in FBDC to private investors in a public bidding where
many competed. Since FBDC had no assets other than the lands it bought from the Government,
the bidding was essentially for those lands. There can be no better way of determining the
market price of such lands than a well-publicized bidding for them, joined in by interested bona
fide bidders.

Thus, since the Government sold its lands to investors at market price like they were private
lands, the price FBDC paid to it already factored in the cost of sales tax that prices of ordinary
private lands included. This means that FBDC, which bought the lands at private-land price,
should be allowed like other real estate dealers holding private lands to claim the 8%
transitional input tax credit that Section 105 grants with no precondition to first-time VAT
payers. Otherwise, FBDC would be put at a gross disadvantage compared to other real estate
dealers. It will have to sell at higher prices than market price, to cover the 10% VAT that the
BIR insists it should pay. Whereas its competitors will pay only a 2% VAT, given the 8%
transitional input tax credit of Section 105. To deny such tax credit to FBDC would amount to
a denial of its rights to fairness and to equal protection.

The Court was correct in allowing FBDC the right to be refunded the VAT that it already paid,
applying instead to the VAT tax due on its sales the transitional input VAT that Section 105
provides.

Justice Carpio also argues that if FBDC will be given a tax refund, it would be sourced from
public funds, which violates Section 4(2) of the Govenm1ent Auditing Code that govemment
funds or property cannot be used in order to benefit private individuals or entities. They shall
only be spent or used solely for public purposes.

20
But the records show that FBDC actually paid to the BIR the amounts for which it seeks a BIR
tax refund. The CIR does not deny this fact. FBDC was forced to pay cash on the VAT due on its
sales because the BIR refused to apply the 8% transitional input VAT tax credits that the law
allowed it. Since such tax credits were sufficient to cover the VAT due, FBDC is entitled to a
refund of the VAT it already paid. And, contrary to the dissenting opinion, if FBDC will be given
a tax refund, it would be sourced, not from public funds, but from the VAT payments which FBDC
itself paid to the BIR.

Like the previous cases before the Court, the BIR has the option to refund what FBDC paid it
with equivalent tax credits. Such tax credits have never been regarded as needing
appropriation out of government funds. Indeed, FBDC concedes in its prayers that it may get its
refund in the form of a Tax Credit Certificate.

b. VAT AS AN INDIRECT TAX

VAT 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. What is transferred in such instance
is not the liability for the tax but the tax burden.

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 such goods or services who, although not directly and legally liable for the
payment thereof, ultimately bears the burden of the tax.

FACTS:

1. Petitioner Contex Corporation: domestic corporation engaged in the business of

manufacturing hospital textiles and garments and other hospital supplies for export
- Place of business: Subic Bay Freeport Zone (SBFZ)
- Duly registered with the Subic BayMetropolitan Authority (SBMA) as a Subic Bay
Freeport Enterprise (RA 7227)
- As an SBMA-registered firm, petitioner is exempt from all local and national
internal revenue taxes except for the preferential tax (Section 12c of RA 7227)
- Registered with the BIR as a NON-VAT TAXPAYER (Certificate of Registration
RDO)

21
2. Jan 1, 1997 to Dec 31, 1998: petitioner purchased various supplies and materials
necessary in the conduct of its manufacturing business

3. The suppliers of these goods SHIFTED UNTO PETITIONER the 10% VAT on the
purchased items, which led the petitioner to pay input taxes (P539,411.88 and
P504,057.49 for 1997 and 1998, resp.)

4. Acting on the belief that it was exempt from all national and local taxes, including VAT,
petitioner filed two applications for tax refund or tax credit of the VAT it paid

5. Revenue District Officer of BIR RDO Mr. Carlos denied the 1st application letter

6. Petitioner filed another application for tax refund/credit directly with Regional
Director of BIR Region IV Atty. Pagabao
- Sought a refund or issuance of a tax credit certificate (P1,108,307.72),
representing erroneously paid input VAT (Jan 1, 1997 to Nov 30, 1998)

7. No response from BIR Regional Director

8. Petitioner elevated the matter to CTA in a petition for review

- Section 112(A) if read in relation to Section 106(A)(2)(a) of NIRC and Section
12(b) and (c) of RA 7227 would show that it was not liable in any way for any VAT

9. In opposing the claim for tax refund or tax credit, BIR asked CTA to apply the rule that
claims for refund are strictly construed against the taxpayer
- Since petitioner failed to establish both its right to a tax refund or tax credit and
its compliance with the rules on tax refund (Sections 204 and 229 of Tax Code),
its claim should be denied

10. CTA: petition partially granted; respondent is hereby ordered to refund or in the
alternative to issue a tax credit certificate in favor of petitioner (P683,061.90)
representing erroneously paid input VAT
- Petitioner misread Sections 106(A)(2)(a) and 112(A) of Tax Code  these
provisions apply only to those entities registered as VAT taxpayers whose sales
are zero-rated
- Petitioner does not fall under this category, since it is a non-VAT taxpayer as
evidenced by the Certificate of Registration RDO
- Petitioner is exempt from the imposition of input VAT on its purchases of supplies
and materials
- Petitioner is required to pay as a SBFZ-registered enterprise is a 5% preferential
tax
- Disallowed all refunds of input VAT paid by petitioner prior to June 29, 1997 for
being barred by the 2-yr prescriptive period (Section 229, Tax Code)
- Also limited the refund only to the input VAT paid by the petitioner on supplies
and materials directly used by the petitioner in the manufacture of goods
- Struck down all claims for charges, and all materials and supplies shipped or
delivered to the petitioner’s Makati and Pasay City offices

11. CIR filed a petition for review of the CTA decision by the CA
- The exemption of Contex Corporation under RA 7227 was limited only to DIRECT
TAXES and not to indirect taxes such as the input component of the VAT
- VAT is a burden passed on by a VAT-registered person to the end users; hence, the
direct liability for the tax lies with the suppliers and not Contex

12. CA: reversed CTA’s decision; in favor of CIR; Contex’s claim for refund of erroneously
paid taxes is denied

22
 - The exemption from duties and taxes on the importation of raw materials, capital,
and equipment of SBFZ-registered enterprises under RA 7227 and its
implementing rules covers only “the VAT imposable under Section 107 of Tax
Code, which is direct liability of the importer, and in no way includes the VAT of
the seller-exporter the burden of which was passed on to the importer as an
additional costs of the goods
- Exemption granted by RA 7227 relates to the act of importation (Section 107
specifically imposes the VAT on importations
- Exemption of SBFZ-registered enterprises from internal revenue taxes is qualified
as pertaining only to those for which they may be directly liable (direct tax, and
only in connection with their importation of raw materials, capital, and equipment
as well as the sale of their goods and services)

ISSUES:
(1) the correctness of the finding of the Court of Appeals that the VAT exemption embodied
in Rep. Act No. 7227 does not apply to petitioner as a purchaser; and
(2) the entitlement of the petitioner to a tax refund on its purchases of supplies and raw
materials for 1997 and 1998.

On the first issue, petitioner argues that the appellate courts restrictive interpretation of
petitioners VAT exemption as limited to those covered by Section 107 of the Tax Code is
erroneous and devoid of legal basis. It contends that the provisions of Rep. Act No. 7227
clearly and unambiguously mandate that no local and national taxes shall be imposed upon
SBFZ-registered firms and hence, said law should govern the case. Petitioner calls our
attention to regulations issued by both the SBMA and BIR clearly and categorically providing
that the tax exemption provided for by Rep. Act No. 7227 includes exemption from the
imposition of VAT on purchases of supplies and materials.

The respondent takes the diametrically opposite view that while Rep. Act No. 7227 does
grant tax exemptions, such grant is not all-encompassing but is limited only to those taxes
for which a SBFZ-registered business may be directly liable. Hence, SBFZ locators are not
relieved from the indirect taxes that may be shifted to them by a VAT-registered seller.

At this juncture, it must be stressed that the 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 individuals
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 such goods or services who, although not directly and legally liable for
the payment thereof, ultimately bears the burden of the tax.

23
Exemptions from VAT are granted by express provision of the Tax Code or special laws.
Under VAT, the transaction can have preferential treatment in the following ways:

(a) VAT Exemption. An exemption means that the sale of goods or properties and/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. This is a case
wherein the VAT is removed at the exempt stage (i.e., at the point of the sale, barter or
exchange of the goods or properties).

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. On the other hand, a
VAT-registered purchaser of VAT-exempt goods/properties or services which are exempt
from VAT is not entitled to any input tax on such purchase despite the issuance of a VAT
invoice or receipt.

(b) Zero-rated Sales. These are sales by VAT-registered persons which are subject to
0% rate, meaning the tax burden is not passed on to the purchaser. 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.

Under Zero-rating, all VAT is removed from the zero-rated goods, activity or firm. In
contrast, exemption only removes the VAT at the exempt stage, and it will actually increase,
rather than reduce the total taxes paid by the exempt firms business or non-retail customers.
It is for this reason that a sharp distinction must be made between zero-rating and
exemption in designating a value-added tax.

Apropos, the petitioners claim to VAT exemption in the instant case for its purchases of
supplies and raw materials is founded mainly on Section 12 (b) and (c) of Rep. Act No. 7227,
which basically exempts them from all national and local internal revenue taxes, including
VAT and Section 4 (A)(a) of BIR Revenue Regulations No. 1-95.

On this point, petitioner rightly claims that it is indeed VAT-Exempt and this fact is not
controverted by the respondent. In fact, petitioner is registered as a NON-VAT taxpayer per
Certificate of Registration issued by the BIR. As such, it is exempt from VAT on all its sales
and importations of goods and services.

Petitioners claim, however, for exemption from VAT for its purchases of supplies and
raw materials is incongruous with its claim that it is VAT-Exempt, for only VAT-
Registered entities can claim Input VAT Credit/Refund.

Accordingly, we find that the Court of Appeals did not commit any reversible error of law in
holding that petitioners VAT exemption under Rep. Act No. 7227 is limited to the VAT on
which it is directly liable as a seller and hence, it cannot claim any refund or exemption for
any input VAT it paid, if any, on its purchases of raw materials and supplies.

IN THE CASE AT BAR:

(1)
 Petitioner’s claim to VAT exemption in the instant case for its purchases of supplies
and raw materials is founded mainly on Section 12(b) and (c) of RA 7227, which
basically exempts them from all national and local internal revenue taxes, including
VAT and Section 4(A)(a) of BIR Revenue Regulations No. 1-95.
 Petitioner rightly claims that it is indeed VAT-exempt and this fact is not controverted
by the respondent. In fact, petitioner is registered as a NON-VAT taxpayer per

24
 Certificate of Registration issued by the BIR. As such, it is EXEMPT from VAT on all its
sales and importations of goods and services.

(2)

 Petitioner’s claim, however, for exemption from VAT for its purchases of supplies and
raw materials is incongruous with its claim that it is VAT-exempt, for only VAT-
registered entities can claim Input VAT Credit/Refund.
 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.
 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.
 As an exempt VAT taxpayer, it is not allowed any tax credit on VAT (input tax)
previously paid.
 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.

Regressive tax: the true essence of a progressive tax is that the poor pays less and the rich
pays more. As such, since the rich and the poor pay the same amount of VAT on goods and
services, it is by this reason, considered a regressive form of tax.

c. PERSONS LIABLE (SEC. 105)

i. PERSONS LIABLE IN GENERAL

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.

GR: Any person, whether natural or juridical, 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 VAT.

CIR VS. CA AND COMMONWEALTH MANAGEMENT SERVICES GR NO. 125355 DATED MARCH
30, 2000.

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
25
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.

FACTS: COMASERCO is a domestic corporation. It is an affiliate of Philamlife. COMASERCO is

organized to perform collection, consultative and other technical services, including
functioning as an internal auditor, of Philamlife and its other affiliates. Later on, BIR assessed
COMASERCO for VAT deficiency.
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 in 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. Since it was not engaged in business, it was not
liable to pay VAT.
On the other hand, CIR maintains that the services rendered by COMASERCO to Philamlife
and its affiliates, for a fee or consideration, are subject to VAT. VAT is a tax on the value added
by the performance of the service. It is immaterial whether profit is derived from rendering
the service.
ISSUE: W/N COMASERCO was engaged in the sale of services, and thus liable to pay VAT
thereon.
RULING: YES
Section 105 of the NIRC clarifies that even a non-stock, non-profit, organization or
government entity, is liable to pay VAT on the sale of goods or services. VAT is a tax on
transactions, imposed at every stage of the distribution process on the sale, barter, exchange
of goods or property, and on the performance of services, even in the absence of profit
attributable thereto. The term "in the course of trade or business" requires the regular
conduct or pursuit of a commercial or an economic activity regardless of whether or not the
entity is profit-oriented.
Hence, it is immaterial whether the primary purpose of a corporation indicates that it
receives payments for services rendered to its affiliates on a reimbursement-on-cost basis
only, without realizing profit, for purposes of determining liability for VAT on services
rendered. As long as the entity provides service for a fee, remuneration or consideration,
then the service rendered is subject to VAT.

DISCUSSION:
Here, COMASERCO offered its services to Philamlife Life as its sole client in exchange that the
latter will pay it back. In other words, COMASERCO practically receives nothing.
Nevertheless, the SC ruled that even if there is no income involved because it purely
reimbursement-of-cost-only basis, as long as there is service for remuneration or
consideration, it is subject to VAT. Take note that under the law, it provides sale of services.
Further the law says without any regard whether the entity the entity is for profit or not,
without any regard of the purpose for which the income or money is received in
consideration of such service.

26
ii. WHO ARE REQUIRED TO REGISTER FOR VAT (SEC. 236 G, AS AMENDED BY RA 10963)

“(G) Persons Required to Register for Value-Added Tax.—

“(1) 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 for value-
added tax if:

“(a) His gross sales or receipts for the past twelve (12) months, other than those that are
exempt under Section 109(A) to (BB), have exceeded Three million pesos (₱3,000,000); or

“(b) 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 Section 109(A) to (BB), will
exceed Three million pesos (₱3,000,000).

(2) Every person who becomes liable to be registered under paragraph (1) of this Subsection
shall register with the Revenue District Office which has jurisdiction over the head office or
branch of that person, and shall pay the annual registration fee prescribed in Subsection (B)
hereof. If he fails to register, he shall be liable to pay the tax under Title IV 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.

iii. OPTIONAL VAT REGISTRATION (SEC. 236 H, AS AMENDED BY RA 10963)

“(H) Optional Registration for Value-Added Tax of Exempt Person.— (1) Any person
who is not required to register for value-added tax under Subsection (G) hereof may elect
to register for value-added tax by registering with the Revenue District Office that has
jurisdiction over the head office of that person, and paying the annual registration fee in
Subsection (B) hereof.

“(2) Any person who elects to register under this Subsection shall not be entitled to cancel
his registration under Subsection (F)(2) for the next three (3) years.

“Provided, That any person taxed under Section 24(A)(2)(b) and 24(A)(2)(c)(2)(a) of the
NIRC who elected to pay the eight percent (8%) tax on gross sales or receipts shall not be
allowed to avail of this option.

“For purposes of Title IV of this Code, any person who has registered value-added tax as a
tax type in accordance with the provisions of Subsection (C) hereof shall be referred to as a
‘VAT-registered person’ who shall be assigned only one Taxpayer Identification Number
(TIN).

PRINCIPLES TO REMEMBER
Section 24(A)(2)(b) refers to self-employed individuals and/or professionals.
Section 24(A)(2)(c)(2)(a) refers to mixed income earners which means that the person is
employed and at the same time he is exercising his own trade or business or profession.
RATIONALE FOR THE PROHIBITION: These persons has the option to be taxed at 8%
based on their gross sales or gross receipts. However, this is only if their income will not
exceed P3M. In other words, these persons do not have the option to elect the 8% if their
income exceeds P3M.

27
iv. SEC. 109(2),

(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.

v. Q/AS 6, 30 AND 31 OF RMC NO. 46-2008 DATED FEBRUARY 1, 2008,

Q-6: Can on-line international air carriers opt to be under the VAT system and be subject to
VAT at zero-rate on their outbound international operations similar to domestic air carriers
registered as domestic corporations?
A-6: No. The business of an international air carrier is exempt from VAT because it is a sale
of services subject to percentage tax. If the main business is exempt from VAT, the VAT-
exempt person can not elect that the said exempt business/es be placed under the VAT
system. The option to be subject to VAT on its exempt transactions is available only to a
VAT-registered person pursuant to Section 109(2) of the Code, as amended by R.A. 9337.

Q-30: Can an international airline company who is engaged in other activities subject to
VAT, i.e. leasing of properties, etc., elect that all its business activities be subject to VAT?
A-30: No. The main or principal business of an international airline company is VAT-exempt
because the same is subject to the percentage tax under Title V of the Tax Code. Therefore,
the international airline can not elect that its exempt principal business be subject to VAT
even if its secondary businesses are subject to VAT.

Q-31: How do we determine the main or principal business of a taxpayer who is engaged in
mixed business activities?
A-31: In determining the main or principal business of a taxpayer, we apply the pre-
dominance test. Under this test, if more than fifty percent (50%) of its gross sales and/or
gross receipts comes from its business/es subject to VAT, its main/principal business falls
within the VAT system making its status as a VAT person. Otherwise, he can not be
considered as a VAT person eligible for the election provided for under Section 109(2) of
the Tax Code.

vi. SEC. 4-109-2 OF RR NO. 13-2018

SEC. 4.109-2. Exempt Transactions May be Registered for VAT Purposes.
— A VAT-registered person may, in relation to Sec. 236 (H) of the 1997 Tax Code, as
amended, elect that the exemption in Sec. 4.109-1(B) hereof shall not apply to his sales of
goods or properties or services. Once the election is made, it shall be irrevocable for a period
of three (3) years counted from the quarter when the election was made except for franchise
grantees of radio and TV broadcasting whose annual gross receipts for the preceding year
do not exceed ten million pesos (P10,000,000.00) where the option becomes perpetually
irrevocable.

Illustration 6: WPM is a rice dealer. His total annual gross sales and/or receipts do not exceed
Three Million (P3,000,000.00), allowing him to avail the following:

(a) WPM is a VAT-exempt taxpayer. He may elect to avail of the optional registration for VAT
of exempt person under Section 236 (H) of the 1997 Tax Code, as amended. Upon election of
such option, he
28
shall not be entitled to cancel his VAT registration for the next three (3) years;

(b) WPM may elect to pay the 8% commuted tax rate on gross sales or receipts and other
non-operating income in lieu of the graduated income tax rates and the percentage tax under
Section 24(A)(2)(b) of the 1997 Tax Code, as amended, since his gross sales or receipts did
not exceed Three Million Pesos (P3,000,000) during the taxable year. If he elects to pay the
8% commuted tax, he shall not be
allowed to avail of the optional registration for VAT of exempt person provided by Section
236(H) of the 1997 Tax Code, as amended.

IV. VAT VS. PERCENTAGE TAX

Value Added Tax (VAT) is a form of sales tax. As such, it is based on gross receipts from
sale, barter, exchange, or lease of goods or properties and services within the Philippines. It
is also imposed on goods imported into the country. VAT is an indirect tax which means the
end consumer is being charged for the tax. In the Philippines, the rate of VAT is at 12% except
for export sales and other zero-rated sales which is at 0%.

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 VAT) from the VAT payments they
receive from the final consumer (or output VAT).

For small businesses with gross annual sales and receipts that do not exceed Php
3,000,000.00, and are not VAT-registered, percentage tax is imposed for sold or leased
goods, properties or services. The tax rate varies depending on the nature of business. The
usual rate is 3% but it could go as high as 35%.

A percentage tax is a national tax measured by a certain percentage of the gross selling price
or gross value in money of goods sold, bartered or imported; or of the gross receipts or
earnings derived by any person engaged in the sale of services. It is not subject to
withholding.

Those not falling under Sec. 109 and goes beyond the VAT threshold will be subject to
percentage tax.

VAT PERCENTAGE TAX

TAX RATE
12% VAT or Output Tax 3% from Gross Sales or Receipts
NATURE
Indirect Direct
DEDUCTIBILITY
Input tax can be deducted from Output Tax Only allowable Deductions on Gross Sales
FORM
Sales Tax Business Tax

1. SEC. 109(BB) VS. SEC. 116 (AS AMENDED BY RA 10963)

29
 “109 (BB)” 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 Three million pesos (₱3,000,000).

“Sec. 116. Tax on Persons Exempt from Value-added Tax (VAT).— Any person whose
sales or receipts are exempt under Section 109(BB) of this Code from the payment of
value-added tax and who is not a VAT-registered person shall pay a tax equivalent to
three percent (3%) of his gross quarterly sales or receipts: Provided, That cooperatives,
and beginning January 1, 2019, self-employed and professionals with total annual gross
sales and/or gross receipts not exceeding Five hundred thousand pesos (₱500,000) shall
be exempt from the three percent (3%) gross receipts tax herein imposed.”

d. MEANING OF THE PHRASE “IN THE COURSE OF TRADE OF BUSINESS” (SEC. 105)
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 non-stock, 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
rendered in the course of trade or business.

SEC. 4.105-3 OF RR NO. 16-05

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.

HOW IS “IN THE COURSE OF TRADE OR BUSINESS” DEFINED?

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 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 (Section 105 of the NIRC).

30
There are actually two definitions given by the Tax Code:
1. Regular conduct or pursuit of a commercial or an economic activity. This means that you
normally do it with the end view of gaining profit.
2. Transactions incidental thereto

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.

Facts:
The Court of Tax Appeals (CTA) and the Court of Appeals commonly ruled that the sale is not
subject to VAT.
Pursuant to a government program of privatization, NDC decided to sell to private enterprise
all of its shares in 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 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."... private... respondent Magsaysay Lines, Inc.
(Magsaysay Lines) offered to buy the shares and the vessels for P168,000,000.00. The bid
was approved by the Committee on Privatization, and a Notice of Award dated 1 July 1988
was issued to Magsaysay Lines.
VAT Ruling No. 568-88 dated 14 December 1988 from the BIR, holding that the sale of the
vessels was subject to the 10% VAT.
At this point, NDC drew on the Letter of Credit to pay for the VAT, and the amount of
P15,120,000.00 in taxes was paid... private respondents filed an Appeal and Petition for
Refund with the CTA... refund of the VAT payment made... amounting to P15,120,000.00 CIR)
opposed the petition.

31
The CTA ruled that the sale of a vessel was an "isolated transaction," not done in the ordinary
course of NDC's business, and was thus not subject to VAT, which under Section 99 of the
Tax Code, was applied only to sales in the course of trade or business.

Issues:
Whether the sale by the National Development Company (NDC) of five (5) of its vessels to
the private respondents is subject to value-added tax (VAT) under the National Internal
Revenue Code of 1986 (Tax Code) then... prevailing at the time of the sale.
Ruling:
The fact that the sale was not in the course of the trade or business of NDC is sufficient in
itself to declare the sale as outside the coverage of VAT. 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. Based on the aforecited jurisprudence, is that "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

Principles:
VAT
The conclusion that the sale was not in the course of trade or business, which the CIR does
not dispute before this Court, should have definitively settled the matter. Any sale, barter or
exchange of goods or services not in the course of trade or... business is not subject to VAT.

Discussion:
Here, NDC is not engaged in the selling of vessels. In fact, its business is primarily on leasing
the vessels. Being such, it cannot be said that the sale of the five vessels is made in the
ordinary course of tis trade or business. Another important thing to take note here is the
reason why the vessels were sold. It was pursuant to a government mandate. Hence, NDC
was obliged to sell the vessels.

MINDANAO II GEOTHERMAL PARTNERSHIP VS. CIR, GR NO. 193301 DATED MARCH 11, 2013

FACTS: Mindanao II is engaged in the business of finance, engineering, supply, installation,

testing, commissioning, operation, and maintenance of a 48.25 megawatt geothermal power
plant. Later on, it sold its Nissan Patrol car which it now claims as input VAT. It stated that
the sale of the fully depreciated Nissan Patrol is a one-time transaction and is not incidental
to its VAT zero-rated operations. The BIR disallowed the input tax credit.
ISSUE: W/N the sale of the Nissan Patrol is subject to VAT.
RULING: YES
Mindanao II relies on Commissioner of Internal Revenue v. Magsaysay Lines, Inc. (Magsaysay
and Imperial v. Collector of Internal Revenue (Imperial) to justify its position. Magsaysay,
decided under the NIRC of 1986, involved the sale of vessels of the National Development
Company (NDC) to Magsaysay Lines, Inc. We ruled that the sale of vessels was not in the
course of NDC’s trade or business as it was involuntary and made pursuant to the
Government’s policy for privatization. Magsaysay, in quoting from the CTA’s decision,
imputed upon Imperial the definition of "carrying on business." Imperial, however, is an
unreported case that merely stated that "‘to engage’ is to embark in a business or to employ
oneself therein."
Mindanao II’s sale of the Nissan Patrol is said to be an isolated transaction. However, it does
not follow that an isolated transaction cannot be an incidental transaction for purposes of
VAT liability. Indeed, a reading of Section 105 of the 1997 Tax Code would show that a
transaction "in the course of trade or business" includes "transactions incidental thereto."
32
Mindanao II’s business is to convert the steam supplied to it by PNOC-EDC into electricity
and to deliver the electricity to NPC. In the course of its business, Mindanao II bought and
eventually sold a Nissan Patrol. Prior to the sale, the Nissan Patrol was part of Mindanao II’s
property, plant, and equipment. Therefore, the sale of the Nissan Patrol is an incidental
transaction made in the course of Mindanao II’s business which should be liable for VAT.

DISCUSSION:
Here, the SC ruled that sale of the Nissan Patrol is not an isolated transaction but it is
incidental to its trade or business because it has been using the car for its business. Being
such, the sale thereof is subject to VAT.
Let us now compare it with the case of CIR vs. MAGSAYSAY LINES where the SC ruled that
the sale of the five vessels is not subject to VAT because it is deemed to be an isolated
transaction.
Actually, the main difference between the two cases is the fact of voluntariness of the
transaction. In CIR vs. MAGSAYSAY LINES, practically, the corporation has no choice but to
sell its vessels because it is obliged to follow a government mandate. Hence, the sale is
involuntary on its part. On the other hand, in MINDANAO II GEOTHERMAL vs. CIR, the sale
of its Nissan Patrol is voluntary on its part. Further, the corporation cannot deny that at some
point, it has been using the car in relation to its business. Therefore, it is incidental thereto.
In other words, it can be said that everything that is connected to your business or incidental
thereto, when sold, is subjected to VAT.
Illustration:
Supposing you are engaged in a car wash business. Then suddenly you decided to sell your
water pump because you want to upgrade. If you are a VAT registered person and you sell
that machine, what is the VAT implication?
You cannot argue with the BIR that you should not be subjected to VAT because you are
engaged in the business of car wash and not on the selling of machines. The law is clear that
VAT is imposed on the regular conduct or pursuit of a commercial or an economic activity,
including transactions incidental thereto.
Another difference between the two cases is that MINDANAO II cannot simply rely in the
case of CIR vs. MAGSAYSAY LINES. Basically, the SC is saying that the latter is just an isolated
case. In a way the SC is saying that as long as you used in your business and you subsequently
sell it, then you should pay the VAT for that sale even if it is not primarily your business.
IS A NON-STOCK, NON-PROFIT ORGANIZATION WHO SELLS PROPERTIES LIABLE TO
VAT?
YES. The law is clear. It says that 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.

CIR VS. SONY PHILS, INC. G.R. NO. 178697, NOVEMBER 17, 2010

FACTS: Sony Philippines engaged the services of several advertising companies. Due to dire
economic conditions, Sony International Singapore (SIS) gave Sony Philippines a dole-out to
pay for said advertising expenses. Sony Philippines claimed as input VAT credits that VAT
paid for the advertising expenses.
The CIR disallowed this and assessed Sony Philippines deficiency VAT on the reimbursable
received by it from SIS. The CIR contends that the reimbursable was a fee for a Vataxable
activity. It points out that since Sony’s advertising expense was reimbursed by SIS, the
former never incurred any advertising expense. As a result, Sony is not entitled to a tax
credit. At most, the CIR continues, the said advertising expense should be for the account of
SIS, and not Sony. The CIR further argues that Sony itself admitted that the reimbursement
from SIS was income and, thus, taxable.

ISSUE: W/N the advertising expenses granted by SIS to Sony Phil is subject to VAT.
33
RULING: NO

Insofar as the subsidy may be considered as income and, therefore, subject to income tax,
the Court agrees. However, the Court does not agree that the same subsidy should be subject
to VAT. To begin with, the said subsidy termed by the CIR as reimbursement was not even
exclusively earmarked for Sony’s advertising expense for it was but an assistance or aid in
view of Sony’s dire or adverse economic conditions, and was only "equivalent to the latter’s
(Sony’s) advertising expenses."

Under Section 106, there must be a sale, barter or exchange of goods or properties before
any VAT may be levied. Certainly, there was no such sale, barter or exchange in the subsidy
given by SIS to Sony. It was but a dole out by SIS and not in payment for goods or properties
sold, bartered or exchanged by Sony.
The case of COMASERCO is not applicable in this case. In that case, COMASERCO rendered
service to its affiliates and, in turn, the affiliates paid the former reimbursement-on-cost
which means that it was paid the cost or expense that it incurred although without profit.
This is not true in the present case. Sony did not render any service to SIS at all. The services
rendered by the advertising companies, paid for by Sony using SIS dole-out, were for Sony
and not SIS. SIS just gave assistance to Sony in the amount equivalent to the latter’s
advertising expense but never received any goods, properties or service from Sony.

DISCUSSION:

Here, the BIR is contending that the money given by Sony Singapore to Sony Philippines
should be subjected to VAT. Further, Sony Philippines cannot claim any input VAT credits for
the advertising expenses because it did not declare any VAT from the money given by Sony
Singapore.
The SC ruled that unlike in the case of COMASERCO where services were in fact rendered by
COMASERCO in favor of Philamlife, here there was no underlying service at all because the
advertising services was rendered in favor of Sony Philippines and not for Sony Singapore.
What the latter merely did is to provide dole-out to Sony Philippines in order to pay said
advertising expenses.
In other words, in COMASERCO it provides that I will do something for you and you just
reimburse me for the services I render. Since it is for a consideration regardless of any profit
present and there were services rendered that is already a VATABLE transaction. On the
other hand in SONY case, there was indeed receipt of money and it gained income for it but
there is no sale, barter or exchange involved.
As to the money received by Sony Philippines from Sony Singapore, the SC ruled that it forms
part of its income. But is that correct? Diba it is a dole out. It means that it somehow partakes
the nature of a donation. Is donation income? Think about it.

POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT CORPORATION VS. CIR, GR NO.
198146 DATED AUGUST 8, 2017

Taxation. EPIRA Law. The sale of the power plants is not in pursuit of a commercial or
economic activity but a governmental function mandated by law to privatize NPC generation
assets. PSALM was created primarily to liquidate all NPC financial obligations and stranded
contract costs in an optimal manner. The purpose and objective of PSALM are explicitly
stated in Section 50 of the EPIRA law.

FACTS:

34
Petitioner Power Sector Assets and Liabilities Management Corporation (PSALM) is a
government-owned and controlled corporation created under Republic Act No. 9136 (RA
9136), also known as the Electric Power Industry Reform Act of 2001 (EPIRA). Section 50 of
RA 9136 states that the principal purpose of PSALM is to manage the orderly sale, disposition
and privatization of the National Power Corporation (NPC) generation assets, real estate and
other disposable assets, and Independent Power Producer (IPP) contracts with the objective
of liquidating all NPC financial obligations and stranded contract costs in an optional manner.
PSALM conducted public biddings for the privatization of the Pantabangan-Masiway
Hydroelectric Power Plant and Magat Hydroelectric Power Plant. First Gen Hyrdropower
Corporation with its $126 Million bid and SN Aboitiz Power Corporation with its $530
Million bid were the winning bidders for the Pantabangan-Masiway Plant and Magat Plant,
respectively. NPC received a letter from the Bureau of Internal Revenue demanding
immediate payment of P3,813,080,472 deficiency value-added tax for the sale of the
Pantabangan-Masiway Plant and Magat Plant. The NPC indorsed BIR’s letter to PSALM. The
BIR, NPC and PSALM executed a Memorandum of Agreement. In compliance with the MOA,
PSALM remitted under protest to the BIR the amount of P3,813,080,472, representing the
total basic VAT due.
PSALM filed with the Department of Justice (DOJ) a petition for the adjudication of
the dispute with the BIR to resolve the issue of whether the sale of the power plants should
be subject to VAT. The DOJ ruled in favor of PSALM. The DOJ denied BIR’s Motion for
Reconsideration. The BIR Commissioner filed with the Court of Appeals a petition for
certiorari. The Court of Appeals dismissed the petition. Upon motion for reconsideration, the
Court of Appeals reinstated the petition.
PSALM paid under protest to the BIR and moved for reconsideration, which the Court
of Appeals denied. Hence, this petition.

ISSUE: of whether the sale of the Pantabangan-Masiway and Magat Power Plants by
petitioner PSALM to private entities is subject to VAT.

HELD: PSALM is not a successor-in-interest of NPC. Under its charter, NPC is mandated to
“undertake the development of hydroelectric generation of power and the production of
electricity from nuclear, geothermal and other sources, as well as the transmission of electric
power on a nationwide basis. With the passage of the EPIRA law, which restructured the
electric power industry into generation, transmission distribution, supply sectors, the NPC
is now primarily mandated to perform missionary electrification function through the Small
Power Utilities Group (SPUG) and is responsible for providing power generation and
associated power delivery systems in areas that are not connected to the transmission
system. On the other hand, PSALM, a government-owned and controlled corporation, was
created under the EPIRA law to manage the orderly sale and privatization of NPC assets with
the objective of liquidating all of NPC’s financial obligations in an optimal manner. Clearly,
NPC and PSALM have different functions. Since PSALM is not a successor-in-interest of NPC,
the repeal by RA 9337 of NPC’s VAT exemption does not affect PSALM.
Even if PSALM is deemed a successor-in-interest of NPC, still the sale of the power
plants is not “in the course of trade or business” as contemplated under Section 105 of the
NIRC, and thus, not subject to VAT. The sale of the power plants is not in pursuit of a
commercial or economic activity but a governmental function mandated by law to privatize
NPC generation assets. PSALM was created primarily to liquidate all NPC financial
obligations and stranded contract costs in an optimal manner. The purpose and objective of
PSALM are explicitly stated in Section 50 of the EPIRA law.
35
 Similarly, the sale of the power plants in this case is not subject to VAT since the sale was
made pursuant to PSALM’s mandate to privatize NPC assets, and was not undertaken in the
course of trade or business. In selling the power plants, PSALM was merely exercising a
governmental function for which it was created under the EPIRA law.

e. EXCEPTIONS TO THE RULE OF REGULARITY

SEC. 105. 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.

Exceptions to the Rule of Regularity (sec. 105)

 General rule: to be subject to VAT, the transaction must be made in the ordinary or
regular course of trade or business. (Rule of regularity)
 Exception: importation / services rendered by non-resident foreign persons in the
Philippines.
o These transactions are subject to VAT regardless of whether or not done in the
regular course of business.

Discussion:
A foreigner will render services which will be consumed here in the Philippines. Since the
service will be consumed here, there will be a VAT implication. Pagbayad mo sa service
provider, there will be a withholding VAT. In short, the services rendered by nonresident
foreign persons shall be deemed as done in the course of trade or business for the purposes
of VAT.

f. OUTPUT TAX VS. INPUT TAXES

INPUT TAX means the value-added tax paid by a VAT-registered person/entity in the course
of his/its trade or business on the importation of goods or local purchases of goods or
services from a VAT- registered person (from the book of Casasola).

OUTPUT TAX is the value-added tax on the sale of taxable goods or services by any person
registered or required to register under the Tax Code (from the book of Casasola).

Otherwise stated, OUTPUT TAX is the VAT due on the sale or lease or taxable goods,
properties or services by an VAT-registered person. On the other hand, INPUT TAX is the
VAT due on or paid by a VAT- registered person on importation of good or local purchases
of goods or services, including lease or use of properties, in the course of his trade or business
(from the book of Casasola).

FORMULA: OUTPUT VAT- INPUT VAT = VAT PAYABLE

i. SOURCES OF INPUT TAX (SEC. 110 A) (AS AMENDED BY RA 10963)

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:

36
(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. [65]
(b) Purchase of services on which a value-added tax has been actually paid.
(2) The input tax on domestic purchase or importation of goods or properties by a VAT-
registered person [66] 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 (₱1,000,000): 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, further, That the amortization of the
input VAT shall only be allowed until December 31, 2021 after which taxpayers with
unutilized input VAT on capital goods purchased or imported shall be allowed to apply the
same as scheduled until fully utilized: 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-added
tax; and[68]
(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. [69] - 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, 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 preceding 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.

SOURCES OF INPUT TAX

37
 (1) Domestic purchase of goods or services including lease or use of property from a VAT-
registered person for your business
You can claim the VAT that you paid to your suppliers.
(2) Importation of goods which refers to your business
You can claim the VAT you paid for your importation as part of your input VAT
(3) Transitional Input VAT

FROM REYES:
Q: What are the sources of input tax?
1. Purchase or importation of goods
a. For sale; or
b. For conversion into or intended to form part of a finished product for sale including
packaging materials; or
c. For use as supplies in the course of business;
d. For use as materials supplied in the sale of service;
e. For use in trade or business for which deduction for depreciation or amortization
is allowed under the Tax Code except automobiles, aircraft and yachts.
2. Purchase of real properties for which ha VAT has actually been paid
3. Purchase of services in which VAT has actually been paid
4. Transactions deemed sale
5. Presumptive input tax
6. Transitional input tax (see Section 4.110-1, RR 16-2005)

ii. EXCESS OUTPUT OR INPUT TAX (SEC. 110 B)

(B) Excess Output or Input Tax. [69] - 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, 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.

Divide it to 2:
SEC. 110(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.
SEC. 110(B). Excess Output or Input Tax.- If the input tax exceeds the output tax, the excess
shall be carried over to the succeeding quarter or quarters. Provided, however, That 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.

Q: How is output tax determined?

The output tax is computed by:
1. Multiplying the GSP (for sellers of goods or properties) or the gross receipts (for sellers of
services) by 12% or
2. Where the amount of VAT is erroneously billed in the invoice or receipt, by dividing the
total invoice amount by a fraction using the rate of VAT as numerator and 100% plus the rate
of VAT as the denominator (Section 4.110-6, RR 16-2005)

iii. RULE ON INPUT TAX ON CAPITAL GOODS (SEC. 110A) (AS AMENDED BY RA 10963)
A. Creditable Input Tax. -

38
(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. [65]
(b) Purchase of services on which a value-added tax has been actually paid.
(2) The input tax on domestic purchase or importation of goods or properties by a VAT-
registered person [66] 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 (₱1,000,000): 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, further, That the amortization of the
input VAT shall only be allowed until December 31, 2021 after which taxpayers with unutilized
input VAT on capital goods purchased or imported shall be allowed to apply the same as
scheduled until fully utilized: 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-added
tax; and[68]
(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.

Discussion:
(6) Depreciable Capital Goods
They refer to goods or properties with estimated useful life of greater than one (1) year,
which are treated as depreciable assets used directly or indirectly in the production or sale
of taxable goods or services.
These are different from capital assets. Capital goods are properties subject to depreciation
used in your business.
In income taxation context, these are part of your ordinary assets.
WHAT IS THE TREATMENT IF YOU BUY DEPRECIABLE CAPITAL GOODS?

39
Kung mupalit kag multicab for your laundry shop business, there will be a corresponding
VAT passed to you as the purchaser, can you deduct the entire 12% VAT? Can you claim it as
part of your input taxes?

You can still claim the input tax, but the law says that there are occasions that you cannot
claim it completely in one shot. Remember that VAT is payable quarterly.
The amount of the input tax that you can deduct in the taxable quarter will depend on the
aggregate acquisition cost for the specific month.
a. If the aggregate acquisition cost of the depreciable capital goods, excluding VAT exceeds
P1M, you are required to amortize the VAT component for sixty (60) months or the life of
the asset, whichever is shorter.
b. If it does not exceed P1M, that’s the time that you can claim the entire 12% VAT during
the quarter when the depreciable capital good was purchased.

Examples:
Supposing in a single month, you bought a multicab, tag P600,000, the VAT component is
(600K x 12%) 72,000, if this is the only purchase that you had in a calendar month, you can
claim the entire 72,000 as part of your input VAT.
What if bumili ako ng dalawang multicab, 1.2M na, multiply it by 12% is 144,000. You must
amortize this depending on the life of the multicab or 60 months (5 years), whichever is
shorter.

1. SEC. 4.110-3 OF RR NO. 16-05 AS AMENDED BY SEC. 16 OF RR 4-2007

Section 16. INPUT TAX ON DEPRECIABLE GOODS. - Sec. 4.110-3 of RR No. 16-2005
is hereby amended to read as follows:
“SEC. 4.110-3. 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 a capital good. The claim for
input tax credit shall commence in the month that the capital goods were acquired.

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 (P1,000,000.00), the total input taxes will be allowable as
credit against output tax in the month of acquisition.
Capital goods or properties refers to goods or properties with estimated useful life
greater than one (1) year and which are treated as depreciable assets under Sec. 34(F)
of the Tax Code, used directly or indirectly in the production or sale of taxable goods
or services.

40
The aggregate acquisition cost of depreciable assets in any calendar month refers to
the total price, excluding the VAT, agreed upon for one or more assets acquired and
not on the payments actually made during the calendar month. Thus, an asset
acquired on installment for an acquisition cost of more than P1,000,000.00, excluding
the VAT, will be subject to the amortization of input tax despite the fact that the
monthly payments/installments may not exceed P1,000,000.00.

2. SEC. 4.110-3 OF RR NO. 13-2018 -Gi buo lang niya ang 2 ka RR

SEC. 4.110-3. Claims 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.

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.
Capital goods or properties refers to goods or properties with estimated useful life
greater than one (1) year and which are treated as depreciable assets under Sec. 34(F)
of the Tax Code, used directly or indirectly in the production or sale of taxable goods
or services. The aggregate acquisition cost of depreciable assets in any calendar
month refers to the total price, excluding the VAT, agreed upon for one or more assets
acquired and not on the payments actually made during the calendar month. Thus, an
asset acquired on installment for an acquisition cost of more than P1,000,000.00,
excluding the VAT, will be subject to the amortization of input tax despite the fact that
the monthly payments/installments may not exceed P1,000,000.00.

DISCUSSION:
CHANGES UNDER THE TRAIN LAW:
1. The amortization of the input VAT in the purchase or the importation of depreciable
capital goods shall be allowed only until the end of the year 2021. After Dec. 31, 2021,
regardless of the aggregate acquisition cost of the depreciable capital goods, the taxpayer
can claim the entirety of the input VAT;
2. After Dec. 31, 2021, what about those taxpayers who have unutilized input VAT for their
purchases or importation of depreciable capital goods? They can still claim the input VAT,
they can follow their previous schedule of amortization. Same lang, apply lang hanggang

41
matapos, possible man before Dec. 31, 2021 nimo sya gipalit diba, tapusin mo nalang yung
amortization.
3. Beginning Jan. 1, 2022, there is no more amortization of input VAT for purchases or
imports of depreciable capital goods.

3. IV. SUBSTANTIATION OF INPUT TAX CREDITS (SEC. 4.110-8 OF RR NO.

16-05)
SEC. 4.110-8. Substantiation of Input Tax Credits. --(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.
(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.

Q: What are the substantiation requirements of input tax credits?

Input taxes 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
Invoice showing the information required
2. For the domestic purchase of under Section 113 and 237 of the Tax Code
goods and properties

Public instrument i.e., deed of absolute sale,

3. For the purchase of real deed of conditional sale,
property contract/agreement to sell, etc., together
with VAT invoice issued by the seller.
Official receipt showing the information
4. For the purchase of services required under Section 113 and 237 of the
Tax Code.
42
 Inventory of goods as shown in a detailed
5. Transitional input tax list to be submitted to the BIR

Invoice required
6. Input tax on Deemed sale

4. CIR VS. SONY PHILS, INC. G.R. NO. 178697, NOVEMBER 17, 2010
The Court is not persuaded. As aptly found by the CTA-First Division and later
affirmed by the CTA-EB, Sonys deficiency VAT assessment stemmed from the CIRs
disallowance of the input VAT credits that should have been realized from the
advertising expense of the latter.[18] It is evident under Section 110[19] of the 1997
Tax Code that an advertising expense duly covered by a VAT invoice is a
legitimate business expense. This is confirmed by no less than CIRs own
witness, Revenue Officer Antonio Aluquin. There is also no denying that Sony
incurred advertising expense. Aluquin testified that advertising companies
issued invoices in the name of Sony and the latter paid for the same. Indubitably,
Sony incurred and paid for advertising expense/ services

VAT ON GOODS AND SERVICES

a. DEFINITION OF GOODS AND SERVICES (SEC. 106 AND SEC. 108)

SEC 106
NIRC/ RA 9337 (1) "Goods or Properties." 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 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, 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 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 by any entity, and distribution companies,

43
including electric cooperatives; 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 technical advice, assistance or services rendered in connection with
technical management or administration of any scientific industrial or commercial
undertaking, venture, projector 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 –

“(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 twelve percent
(12%) 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 –

“(A) Rate and Base of Tax.— There shall be levied, assessed and collected, a value-added tax
equivalent to twelve percent (12%) of gross receipts derived from the sale or exchange of
services, including the use or lease of properties.

44
c. MEANING OF GROSS SELLING PRICE AND GROSS RECEIPTS (SEC. 106 AND SEC.108)

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.

“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.

i. SEC. 11 OF RR NO. 4-07

Section 11. GROSS RECEIPTS. - Sec. 4.108-4 of RR No. 16-2005 is hereby amended to
read as follows: “SEC. 4.108-4. Definition of Gross Receipts. – ‘Gross receipts’ refers to
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 applied as payments for services rendered and advance payments
actually or constructively received during the taxable period for the services performed or
to be performed for another person, excluding the VAT, except those amounts earmarked for
payment to unrelated third (3rd ) party or received as reimbursement for advance payment
on behalf of another which do not redound to the benefit of the payor.

A payment is a payment to a third (3rd) party if the same is made to settle an obligation of
another person, e.g., customer or client, to the said third party, which obligation is evidenced
by the sales invoice/official receipt issued by said third party to the obligor/debtor (e.g.,
customer or client of the payor of the obligation).

An advance payment is an advance payment on behalf of another if the same is paid to a

third (3rd) party for a present or future obligation of said another party which obligation is
evidenced by a sales invoice/official receipt issued by the obligee/creditor to the
obligor/debtor (i.e., the aforementioned “another party”) for the sale of goods or services by
the former to the latter. For this purpose ‘unrelated party’ shall not include taxpayer’s
employees, partners, affiliates (parent, subsidiary and other related companies), relatives by
consanguinity or affinity within the fourth (4th) civil degree, and trust fund where the
taxpayer is the trustor, trustee or beneficiary, even if covered by an agreement to the
contrary.

‘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.

The following are examples of constructive receipts:

(1.) deposits in banks which are made available to the seller of services without restrictions;
(2.) issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof
by the seller as payment for services rendered; and
(3.) transfer of the amounts retained by the payor to the account of the contractor.”

45
 MEDICARD PHILIPPINES, INC. VS. CIR, GR NO. 222743 DATED APRIL 5, 2017

Facts:

MEDICARD is a Health Maintenance Organization (HMO) that provides prepaid health and
medical insurance coverage to its clients. Individuals enrolled in its health care programs
pay an annual membership fee and are entitled to various preventive, diagnostic and
curative medical services provided by duly licensed physicians, specialists and other
professional technical staff participating in the group practice health delivery system at a
hospital or clinic owned, operated or accredited by it.

Upon finding some discrepancies between MEDICARD’s Income Tax Returns (ITR) and VAT
Returns, the CIR informed MEDICARD and issued a Letter Notice (LN).

According to the CIR, the taxable base of HMOs for VAT purposes is its gross receipts without
any deduction under Section 4.108.3(k) of Revenue Regulation (RR) No. 16-2005. Citing
Commissioner of Internal Revenue v. Philippine Health Care Providers, Inc., the CIR argued
that since MEDICARD does not actually provide medical and/or hospital services, but merely
arranges for the same, its services are not VAT exempt.

ISSUE:
Whether the gross receipts of a Health Maintenance Organization, like MEDICARD, for VAT
purposes include the amount earmarked for medical utilization of its members.
RULING:
No.

An HMO like MEDICARD is principally engaged in the sale of services. Its VAT base and
corresponding liability is, thus, determined under Section 108(A) of the Tax Code, as
amended.

The term gross receipts as elsewhere mentioned as the tax base under the NIRC does not
contain any specific definition. Therefore, absent a statutory definition, the term has been
construed in its plain and ordinary meaning, that is, gross receipts is understood as
comprising the entire receipts without any deduction.

Under Section 108, however, the scope of the term gross receipts for VAT purposes is limited
only to the amount that the taxpayer received for the services it performed or to the amount
it received as advance payment for the services it will render in the future for another person.

The CIR’s argument that the act of earmarking or allocation is by itself an act of ownership
and management over the funds is not correct. On the contrary, the act of earmarking or
allocating a certain percentage of the membership fee at the time of payment weakens the
ownership imputed to MEDICARD. The act of earmarking or allocating indicates the
unequivocal recognition by MEDICARD that its possession of the funds is not in the concept
of owner but as a mere administrator of the same. For this reason, at most, MEDICARD’s right
in relation to these amounts is a mere inchoate owner which would ripen into actual
ownership if, and only if, there is underutilization of the membership fees at the end of the
fiscal year. Prior to that, MEDICARD is bound to pay from the amounts it had allocated as an
administrator once its members avail of the medical services of its healthcare providers.

Hence, for purposes of determining the VAT liability of an HMO, like MEDICARD, the
amounts earmarked and actually spent for medical utilization of its members should
not be included in the computation of its gross receipts.

DISCUSSION:
46
Even if you read the definition of “gross receipts”, the BIR said that it includes everything
that you have received without deductions. But what did the SC say? You read the definition
of gross receipts as a whole. You give meaning to all the words and phrases within that
definition.
The SC said that not the entire fees should be subjected to the 12% VAT, only those which
pertains to the actual services rendered by the taxpayer.
(Sir: The problem with the decision is, diba it is already part of Medicard’s services to facilitate
with third persons. You don’t mean to say that you will pay for the Medicard only for the services
that they would render. Para saan pala yung service fees? Take note that the coverage of the
service fees is two-fold: 1. For its own medical services and 2. To facilitate it with others. And of
course, part of the service of facilitation is to make arrangements with third persons and it goes
along with it the payment of the medical services to be rendered by these third persons. O diba?
So its kinda weird yung sinabi ng SC but in a way, tama din naman sila. It is not the services of
Medicard, it’s actually the services of some other person or entity.)
What does “SALE OR EXCHANGE OF SERVICES” mean? *Sir reads the definition under
Section 108 – A, 2nd paragraph*
We will not discuss everything here but the operative term here is “all kinds of services in
the Philippines for others for a fee, remuneration or consideration”.
When we say “ALL SERVICES IN THE PHILIPPINES”, it does not mean that the services have
to be done in the Philippines. It means the services are ultimately consumed in the
Philippines. And if you notice also, there is a listing of the kind of services that is subject to
VAT. But take note, the listing is not exclusive.

d. RULES ON SALES OF REAL PROPERTY

Q: How is VAT imposed on real property transactions?

1. If cash or deferred payment, then the VAT on the whole amount is already imposed
2. If installment, then the VAT is imposed on each payment
3. There is no VAT imposed on Section 40(C)(2) exchanges.

Note: (1) In an installment plan, the initial payments do not exceed 25% of the GSP. If the initial
payments exceed 25%, the sale is on a deferred payment basis.
(2) In case of installment, the buyer can claim the input tax in the same period as the seller
recognized the output tax. In deferred-payment basis, the output tax shall be recognized by the
seller and the input tax shall accrue to the buyer at the time of the execution of the instrument
of sale.

i. RULE ON SALES ON INSTALMENT [RR NO. SEC. 4.106-3 OF RR NO. 16-05 AS AMENDED
BY SEC. 3 OF RR NO. 4-07]

Section 3. SALE OF REAL PROPERTIES. - Sec. 4.106-3 of RR No. 16- 2005 is hereby
amended to read as follows:
“SEC. 4.106-3. Sale of Real Properties. - Sale of real properties held primarily for sale
to customers or held for lease in the ordinary course of trade or business of the seller
shall be subject to VAT.

Sale of residential lot with gross selling price exceeding P1,500,000.00, residential house
and lot or other residential dwellings with gross selling price exceeding P2,500,000.00,
where the instrument of sale (whether the instrument is nominated as a deed of absolute
sale, deed of conditional sale or otherwise) is executed on or after Nov. 1, 2005, shall be
subject to ten percent (10%) output VAT, and starting Feb. 1, 2006, to twelve percent
(12%) output VAT.
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

47
instrument is nominated as a deed of absolute 2 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.

Sale of real property by a real estate dealer on a deferred payment basis not on the
installment plan means sale of real property, the initial payments of which in the year
of sale exceed twenty-five percent (25%) of the gross selling price.

“Initial payments” means payment or payments which the seller receives before or
upon execution of the instrument of sale and payments which he expects or is scheduled
to receive in cash or property (other than evidence of indebtedness of the purchaser)
during the taxable year when the sale or disposition of the real property was made. It
covers any down payment made and includes all payments actually or constructively
received during the year of sale, the aggregate of which determines the limit set by law.

Initial payments do not include the amount of mortgage on the real property sold except
when such mortgage exceeds the cost or other basis of the property to the seller, in which
case the excess shall be considered part of the initial payments.

Also excluded from the initial payments are notes or other evidence of indebtedness
issued by the purchaser to the seller at the time of the sale.

In the case of sale of real properties on a deferred-payment basis not on the installment
plan, the transaction shall be treated as cash sale which makes the entire selling price
taxable in the month of sale. Output tax shall be recognized by the seller and input tax
shall accrue to the buyer at the time of the execution of the instrument of sale.

Payments subsequent to “initial payments” shall no longer be subject to output VAT, in

the case of sale on a deferred payment basis.

Pre-selling of real estate properties by real estate dealers shall be subject to VAT in
accordance with the rules prescribed above.

Real estate dealer includes any person engaged in the business of buying, developing,
selling, exchanging real properties as principal and holding himself out as a full or part-
time dealer in real estate.

Transmission of property to a trustee shall not be subject to VAT if the property is to be

merely held in trust for the trustor and/or beneficiary. However, if the property
transferred is one for sale, lease or use in the ordinary course of trade or business and
48
 the transfer constitutes a completed gift, the transfer is subject to VAT as a deemed sale
transaction pursuant to Section 4.106-7(a)(1) of these Regulations. The transfer is a
completed gift if the transferor divests himself absolutely of control over the property,
i.e., irrevocable transfer of corpus and/or irrevocable designation of beneficiary.”

 The sale of real properties held primarily for sale to customers or held for lease in the
ordinary course of trade or business of the seller shall be subject to VAT
 In the case of sale of real properties on the installment plan, the real estate dealer
shall be subject to VAT on the installment payments, including interest and penalties,
actually and/or constructively received by the seller.
o Sale of real property on installment plan – means sale of real property by a
real estate agent where the initial payment of which in the year of sale do not
exceed 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.
o Initial payment – means payment or payments which the seller receives
before or upon execution of the instrument of sale and payments which he
expects or is scheduled to receive in cash or property during the taxable year
when the sale or disposition of the real property was made.
o Sale of real property by a real estate dealer on a deferred payment basis
not on the installment plan – means sale of real property where the initial
payment of which in the year of sale exceed 25% of the gross selling price.
▪ this transaction shall be treated as cash sale which makes the entire
selling price taxable in the month of sale.

See also rule on sale of real property use in business (Sec. 14 (l) of RR No. 4-07)
 Sale of real properties not primarily held for sale to customers or held for lease
in the ordinary course of business. – however even if the real property is not
primarily held for sale to customer or held for lease in the ordinary course of 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
 Correlate with Sec. 109 on exempt sales of Real Property
o In section 109(p) when a person not engaged in real estate business and sells
a real property owned by it, then such transaction is exempt from VAT.
However, RR 4-07 limited the scope of this exemption by providing that all
real properties used by a taxpayer in his business are subject to VAT, since
they are incidental to the main business.
In the Magsaysay case, the sale of properties that constitute an isolated transaction, such
as sale of real properties that are USED by entities but NOT held primarily for sale or
lease are not subject to VAT.
II. EXEMPT REAL PROPERTY / REAL PROPERTY USED IN BUSINESS
SEC. 109(P)[SEC. 4.109-1(B)(1)(P) OF RR NO. 13-2018] AS AMENDED BY RA 10963

“(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 (₱1,500,000) and below, house and lot, and other residential
dwellings valued at Two million five hundred thousand pesos (₱2,500,000) and
below: Provided, That beginning January 1, 2021, the VAT exemption shall only apply to sale
of real properties not primarily held for sale to customers or held for lease in the ordinary
course of trade or business, sale of real property utilized for socialized housing as defined by
Republic Act No. 7279, sale of house and lot, and other residential dwellings with selling

49
price of not more than Two million pesos (₱2,000,000): Provided, further, That 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 Philippine Statistics Authority (PSA);

(p) The following sales of real properties are exempt from VAT, namely:
(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.

(2) Sale of real properties utilized for low-cost housing as defined by RA No. 7279, otherwise
known as the "Urban Development and Housing Act of 1992" and other related laws.
"Low-cost housing" refers to housing projects intended for homeless low-income family
beneficiaries, undertaken by the Government or private developers, which may either be a
subdivision or a condominium registered and licensed by the Housing and Land Use
Regulatory Board/Housing (HLURB) under BP Blg. 220, PD No. 957 or any other similar law,
wherein the unit selling price is within the selling price per unit as set by the Housing and
Urban Development Coordinating Council (HUDCC) pursuant to RA No. 7279 otherwise
known as the “Urban Development and Housing Act of 1992” and other laws.

(3) Sale of real properties utilized for socialized housing as defined under RA No. 7279, and
other related laws, such as RA No. 7835 and RA No. 8763, wherein the price ceiling per unit
is P450,000.00 or as may from time to time be determined by the HUDCC and the NEDA and
other related laws.

"Socialized housing" refers to housing programs and projects covering houses and lots or
home lots only undertaken by the Government or the private sector for the underprivileged
and homeless citizens which shall include sites and services development, long-term
financing, liberated terms on interest payments, and such other benefits in accordance with
the provisions of RA No. 7279, otherwise known as the "Urban Development and Housing
Act of 1992" and RA No. 7835 and RA No. 8763. "Socialized housing" shall also refer to
projects intended for the underprivileged and homeless wherein the housing package selling
price is within the lowest interest rates under the Unified Home Lending Program (UHLP) or
any equivalent housing program of the Government, the private sector or nongovernment
organizations.

(4) Sale of residential lot valued at One Million Five Hundred Thousand Pesos
(P1,500,000.00) and below, or house & lot and other residential dwellings valued at Two
Million Five Hundred Thousand Pesos (P2,500,000.00) and below, as adjusted in 2011 using
the 2010 Consumer Price Index values.

If two or more adjacent residential lots are sold or disposed in favor of one buyer, for the
purpose of utilizing the lots as one residential lot, the sale shall be exempt from VAT only if
the aggregate value of the lots do not exceed P1,500,000.00. Adjacent residential lots,
although covered by separate titles and/or separate tax declarations, when sold or disposed
to one and the same buyer, whether covered by one or separate Deed of Conveyance, shall
be presumed as a sale of one residential lot.

50
Provided, That beginning January 1, 2021, the VAT exemption shall only apply to sale
of real properties not primarily held for sale to customers or held for lease in the
ordinary course of trade or business, sale of real property utilized for socialized
housing as defined by Republic Act No. 7279, sale of house and lot, and other
residential dwellings with selling price of not more than Two Million Pesos
(P2,000,000.00): Provided, further, That every three (3) years thereafter, the amounts
stated herein shall be adjusted to its present value using the Consumer Price Index, as
published by the Philippine Statistics Authority (PSA).

e. VAT ON IMPORTATIONS (SEC. 107)

“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 twelve percent (12%) 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.

(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

i. EXEMPT IMPORTATIONS UNDER SEC. 109 (AS AMENDED BY RA 10963)

(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 (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;

Agricultural and marine food products must be in their original state for them to be VAT
exempt. Please take note also of the definition of what is considered ORIGINAL STATE.
Products 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:
1. Freezing;
2. Drying;
3. Salting;
4. Broiling;
5. Roasting;
6. Smoking; or
7. Stripping
51
8. Including those using advanced technological means of packaging, such as:
a. Shrink wrapping in plastics;
b. Vacuum packing;
c. Tetra-pack; and
d. Other similar packaging methods.

Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt and copra
shall be considered as agricultural food products 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);

Pag sinabi nating Letter A., it refers for animals and for human consumption. So makaon. So
if you eat a dog, it is not a VAT exempt transanction ha!
Pag sinabi nating feeds, it does not included SPECIALTY FEEDS. Like pet food, ginapakaon
sa pang sabong.

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;

In other words, these are importations by balikbayan.

What i-import ko ang ref? Very expensive ref? Is that possible?
ELEMENTS
1. Importation must be the personal and household effects;
2. Belonging to the RETURNING RESIDENTS of the Philippines and nonresident citizen
coming to RESETTLE in the Philippines;
3. 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;

Yung dati balik bayan, ito naman importation of persons in order to settle here in the
Philippines. Not necessarily balikbayan.
Importation must be of:
1. Professional instruments and implements;
2. Wearing apparel;
3. Domestic animals; and
4. Personal household effects.

EXCEPT any vehicle, aircraft, machinery, other gods for use in the manufacture of
merchandise of any kind in commercial quantity:
1. Belonging to persons coming to SETTLE in the Philippines;
2. For their own use and not for sale, barter, or exchange;
3. Accompanying such persons; or
4. Arriving within 90 days before or after their arrival;
5. Upon production of evidence satisfactory to the CIR;
52
6. That such persons are actually coming to SETTLE in the Philippines; and
7. That the change of residence is bona fide.

This provision has been changed under the TRAIN Law.

What are the articles involved here? Practically the same articles may nadagdag lang konti..
tools of trade, occupation or employment.

WHO OWNS OR IMPORTS THESE ARTICLES? They are either:

1. Persons coming to settle in the Philippines;
They want to live here already regardless of citizenship
2. Overseas Filipinos or under the law, Filipinos or their families and descendants who are
now residents or citizens of other countries
Not necessarily na mobalik sila diri. Ok lang overseas Filipinos.

WHAT ARE THE (COMMISSIONS(?) OF VAT EXEMPTIONS UNDER THIS PROVISION? The
imported articles shall be:
1. In quantities and of the class suitable to the profession, rank or position of the persons
importing said items,
2. For their own use and not for barter or sale,
3. accompanying such persons, or arriving within a reasonable time

So now there is a change, dati 90 days, ngayon, within a reasonable time. Bakit? Because
there are some balik bayan boxes na hindi dumadating withn 90 days
4. Provided, further, That vehicles, vessels, aircrafts, machineries and other similar goods for
use in manufacture, shall not fall within this classification and shall therefore be subject to
duties, taxes and other charges;

(k) Services by agricultural contract growers and milling for others of palay into rice, corn into
grits and sugar cane into raw sugar;

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;

WHO AVAIL OF THIS EXEMPTION? Agricultural coops who are CDA registered. Take note
CDA registration is very essential.
WHAT ARE VAT EXEMPT TRANSACTIONS OVER HERE?
1. Sale to their members;
2. As well as sale of their produce, whether in its original state or processed form, to non-
members
Even if the agri-coop will sell to non-members, still they are exempt from VAT
3. Their importation of spare parts thereof, to be used directly and exclusively in the
production and/or processing of their produce.

(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

ELEMENTS:
1. Printed or published at regular intervals;
2. Available for subscription and sale at fixed prices; and
3. Are not principally devoted to the publication of paid advertisements

53
(U) Importation of fuel, goods and supplies by persons engaged in international shipping or
air transport operations: Provided, That the fuel, goods, and supplies shall be used for
international shipping or air transport operations;

It is not enough for this entities to import fuel, goods and supplies, it is also required that this
business entities must use the fuel, goods and supplies for international shipping or air
transport operations.

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

Some books would refer to this provision as “technical importation”.

The first thing that would happen is that the goods and properties are imported here in the
Philippines and they are imported by a VAT-exempt person. Subsequently, this person would
transfer this to another person who is not a VAT-exempt entity.

EXAMPLE: Circumstances involving Consul Officials of foreign countries. Supposing an

Indonesian Consul Officer will come here in the Philippines, bringing along his own vehicle.
By principle of international comity, this person is not taxable here in the Philippines.
Thus, the car is not subject to VAT on importation. But what happens when the Consul Official
decides to sell his car? The buyer of the car will be liable for VAT on importation.

Q: What is technical importation?

Technical importation is the subsequent sale, transfer or exchange of imported goods by
VAT-exempt persons to non-exempt persons or entities.
Q: What is the legal consequence of technical importation?
The non-exempt buyers, transferees, or recipients shall be deemed the importers of the
taxable goods and shall be liable for the VAT due on such importation. (see SECTION 107(B),
TAX CODE)

f. TRANSACTIONS DEEMED SALE (SEC. 106 B)

Q: What is meant by transactions deemed sale?

There is no actual sale. However, the law deems that there is a taxable sale.

(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

54
(4) Retirement from or cessation of business, with respect to inventories of taxable goods
existing as of such retirement or cessation.

Note: (1) Before considering whether the transaction is deemed sale, it must first be determined
whether the sale was in the ordinary course of trade or business. Even if the transaction was
“deemed sale,” if it was note done in the ordinary course of trade or business, still the
transaction is not subject to VAT (CIR v. MAGSAYSAY LINES [JULY 28, 2006]).

Note: (1) Before considering whether the transaction is deemed sale, it must first be determined
whether the sale was in the ordinary course of trade or business. Even if the transaction was
“deemed sale,” if it was note done in the ordinary course of trade or business, still the
transaction is not subject to VAT (CIR v. MAGSAYSAY LINES [JULY 28, 2006]).

(2) As to (1), the transaction is deemed sale when the taxpayer-seller withdraws goods from his
inventory of goods held primarily for sale for his own personal or non-business use. The
withdrawal or transfer of goods results in the use or consumption of such goods by a person
(the seller himself) who is effectively the final consumer, such withdrawal or transfer is deemed
a sale subject to output tax.

(3) As to (2), the requisites to constitute the distribution or transfer to a shareholder or creditor
a transaction deemed sale are: (a) the VAT-registered person distributing or paying is a
domestic corporation; (b) what is being declared or paid is either real property owned by the
company or shares of stocks owned in another company; and (c) the domestic corporation is
either a real estate dealer (in case of real property) or dealer in securities (in case of shares of
stock)

(4) As to (3), as a general rule, a consignment of goods by the consignment-owner to the

consignee is not a taxable transaction. However, it is subject to VAT when the consigned goods
are: (a) not sold by the consignee; and (b) not returned by him to the consignor-owner within
60 days from date of consignment.

(5) As to (4), the VAT-registered taxpayer who ceases or retires from business, including an
unregistered joint venture undertaking construction activity, must pay output tax on the gross
value of his inventory of materials, goods and supplies existing at the time of cessation or
retirement of business.

i. RATIONALE OF IMPOSITION

ii. ENUMERATION – SEC. 4.106-7 RR NO. 16-05

SEC. 4.106-7. Transactions Deemed Sale. —

(a) The following transactions shall be "deemed sale" pursuant to Sec. 106 (B) of the Tax
Code:
(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.
Transfer of goods or properties not in the course of business can take place
when VAT-registered person withdraws goods from his business for his
personal use;
(2) Distribution or transfer to: i. Shareholders or investors share in the profits
of VAT-registered person; Property dividends which constitute stocks in
trade or properties primarily held for sale or lease declared out of retained
earnings on or after January 1, 1996 and distributed by the company to its
shareholders shall be subject to VAT based on the zonal value or fair
55
 market value at the time of distribution, whichever is applicable. ii.
Creditors in payment of debt or obligation.
(3) Consignment of goods if actual sale is not made within 60 days following
the date such goods were consigned. Consigned goods returned by the
consignee within the 60-day period are not deemed sold;
(4) Retirement from or cessation of business with respect to all goods on hand,
whether capital goods, stock-in-trade, supplies or materials as of the date
of such retirement or cessation, whether or not the business is continued
by the new owner or successor. The following circumstances shall, among
others, give rise to transactions "deemed sale" for purposes of this Section;
i. Change of ownership of the business. There is a change in the ownership of the
business when a single proprietorship incorporates; or the proprietor of a single
proprietorship sells his entire business.
ii. Dissolution of a partnership and creation of a new partnership which takes over
the business.

iii. TAX BASE OF TRANSACTIONS DEEMED SALE

(b) (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.
Nonetheless, if one of the parties in the transaction is the government as defined and
contemplated under the Administrative Code, the output VAT on the transaction shall be
based on the actual selling price. (Amended by RR 4-2007)

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

Tax Base – Gross Receipts which 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.
Let’s simplify the definition, the gross receipts is the total amount of money or its
equivalent which would include:
1. Contract Price – what is written in the contract or probably the service fees;
2. Materials and services supplied for the rendition of your service;
3. Deposits and advanced payments actually or constructively received.

Basically, what the service provider receives for the rendition of services will form part
of the gross receipts.
56
 i. COMMON CARRIERS
WHAT IS THE TAX RATE?
3% based on the quarterly gross receipts. Take note that the payment of
percentage tax is quarterly in nature. Pretty much the same with VAT.
What about domestic carriers by land of goods and cargoes. Because in this
case, the transaction is passengers diba? Generally, it’s just domestic carriage of
persons.
DOMESTIC CARRIERS
AIR SEA LAND
Passengers – Passengers – Passengers –
VATable if PH to PH VATable if PH to PH Always OPT (3%)
Zero-rated if PH to abroad Zero-rated if PH to
abroad

Goods and cargoes Goods and cargoes Goods and cargoes

VATable if PH to PH VATable if PH to PH VATable if PH to
Zero-rated if PH to abroad Zero-rated if PH to PH
abroad

VATABLE MEANS
1. If VAT-registered – subject to VAT
2. If Gross receipts exceed the threshold (1.9M[old]/3M[TRAIN]) – subject to VAT
3. If neither – not subject to VAT

PROBLEM: Manny Corp owns a fleet of bus carrying persons and baggages from DVO to any
point in Mindanao. What are the business tax implications?
The implications are as follows:
1. Gross receipts attributable to transport of passengers - subject to OPT (3%)
2. Gross receipts attributable to transport of cargoes – VATable

Another thing is the gross receipts of common carriers derived from their incoming and
outgoing freight shall not be subjected to the local taxes imposed under the Local
Government Code.
Under the codal, there is a minimum gross receipts for each quarter depending on what type
of vehicle is being used for the transportation and the place where the business was
operating. You take note of the minimum amount. The BIR is trying to increase this but then
BIR decided not to do anything about this because there is no legal basis. And kung pataasan
pa nila ito, kawawa naman yung mga small time operators and drivers of these vehicles.

WHAT ABOUT INTERNATIONAL CARRIERS?

OLD NIRC SEC. 118 Percentage Tax on International Carriers. –

(A) International air carriers doing business in the Philippines on their gross receipts derived
from transport of cargo from the Philippines to another country shall pay a tax of three
percent (3%) of their quarterly gross receipts.
(B) International shipping carriers doing business in the Philippines on their gross receipts
derived from transport of cargo from the Philippines to another country shall pay a tax
equivalent to three percent (3%) of their quarterly gross receipts.

THREE THINGS

57
1. The persons involved here are international carriers. Meaning, resident foreign
corporations engaged in business here in the Philippines. And if it is air transportation
company, it has landing rights here in the PH. So meaning, online carrier siya
2. The percentage tax refers only to the carriage of goods
3. The transportation of things goods or cargoes is from the PH to abroad. Meaning, outgoing
travel or flight.

INTERNATIONAL CARRIERS
AIR
Passengers -
VATable if PH to PH or abroad to PH
Zero-rated if PH to abroad
Vat-exempt from Jan. 1, 2018 [Sec. 109(s)]
SEA
Passengers -
VATable if PH to PH or abroad to PH
Zero-rated if PH to abroad
Vat-exempt from Jan. 1, 2018 [Sec. 109(s)]

Goods and cargoes - Goods and cargoes -

VATable if PH to PH VATable if PH to PH
VAT-exempt if abroad to PH VAT-exempt if abroad to PH
OPT (3%) if PH to OPT (3%) if PH to

1. SECS. 108, 109(S) 116, 117 AND 118 (AS AMENDED BY RA 10963)
2. 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;
(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;

3. SEC. 4.108-3 OF RR NO. 16-05

"Common carrier" refers to persons, corporations, firms or associations
engaged in the business of carrying or transporting passengers or goods or
both, by land, water, or air, for compensation, offering their services to the
public and shall include transportation contractors. Common carriers by land
with respect to their gross receipts from the transport of passengers including
operators of taxicabs, utility cars for rent or hire driven by the lessees (rent-a-
car companies), and tourist buses used for the transport of passengers shall be
subject to the percentage tax imposed under Sec. 117 of the Tax Code, but shall
not be liable for VAT.
(e) Domestic common carriers by air and sea are subject to 10% VAT on their
gross receipts from their transport of passengers, goods or cargoes from one
place in the Philippines to another place in the Philippines.
II. LEASE OF PROPERTIES

Q: When is the lease of properties subject to VAT?

The use or lease of properties shall be subject to VAT irrespective of the place where
the contract of lease or licensing agreement was executed if the property is leased or
used in the Philippines.

Q: Give the basis of VAT on sale of services and use or lease of properties?

58
The basis shall be the gross receipts derived from the sale or exchange of services including
the use or lease of properties. (see Section 108(A), Tax Code)
Note: Gross receipts means the total amount of money or its equivalent representing the
contract price, compensation, service fee, rental or royalty actually or constructively received
during the taxable quarter for the services performed or to be performed for another person.
Q: What are the requisites for the taxability of the sale of services and use or lease of
properties?
1. There is a sale or exchange of service or lease or use of property enumerated in the law or
other similar services
2. The service is performed or to be performed in the Philippines
3. The service is in the course of the taxpayer’s trade or business or profession
4. The service is for a valuable consideration actually or constructively received and
5. The service is not exempt under the Tax Code, special law or internal agreement
Note: Absence of any of the requirements renders the transaction exempt from VAT but may be
subject to other percentage tax.

There are two types of properties for lease:

1. Commercial
GENERAL RULE: It is dependent on the VAT registration and also dependent on the
threshold.
2. Residential
The gross receipts from lease of residential units are subject to the following rules:

If the monthly rental does not exceed The lessor shall be exempt from VAT and
P15,000 per unit per month, regardless other percentage
of the aggregate annual rentals tax (OPT).
If the monthly rental exceeds P15,000 The lessor is exempt from VAT, but
per unit per month but the aggregate subject to 3% OPT
annual rentals do not exceed
P3,000,000.00
If the monthly rental exceeds P15,000 The lessor is subject to 12% VAT
per month per unit
and the aggregate annual rentals exceed
P3,000,000.00

1. SEC. 4.108-3 OF RR NO. 16-05

a. Lessors of Property. — All forms of property for lease, whether real or personal, are
liable to VAT subject to the provisions of Sec. 4.109-1(B)(1)(v) of these Regulations. "Real
estate lessor" includes any person engaged in the business of leasing or subleasing real
property. Lease of property shall be subject to VAT regardless of the place where the
contract of lease or licensing agreement was executed if the property leased or used is
located in the Philippines.

VAT on rental and/or royalties payable to non-resident foreign corporations or owners

for the sale of services and use or lease of properties in the Philippines shall be based on
the contract price agreed upon by the licensor and the licensee. The licensee shall be
responsible for the payment of VAT on such rentals and/or royalties in behalf of the non-
resident foreign corporation or owner in the manner prescribed in Sec. 4.114-2(b)
hereof.
"Non-resident lessor/owner" refers to any person, natural or juridical, an alien, or a
citizen who establishes to the satisfaction of the Commissioner of Internal Revenue the
fact of his physical presence abroad with a definite intention to reside therein, and who

59
 owns/leases properties, real or personal, whether tangible or intangible, located in the
Philippines. In a lease contract, the advance payment by the lessee may be:
(i) a loan to the lessor from the lessee, or
(ii) an option money for the property, or
(iii) a security deposit to insure the faithful performance of certain obligations of
the lessee to the lessor, or
(iv) pre-paid rental. If the advance payment is actually a loan to the lessor, or an
option money for the property, or a security deposit for the faithful
performance of certain obligations of the lessee, such advance payment is not
subject to VAT.
However, a security deposit that is applied to rental shall be subject to VAT at the time of
its application. If the advance payment constitutes a pre-paid rental, then such payment
is taxable to the lessor in the month when received, irrespective of the accounting method
employed by the lessor.

2. LEASE OF RESIDENTIAL UNITS

a. SECS. 109(Q), 109(BB), 116, 236(G) AND 236(H) (AS AMENDED BY RA 10963)
“(Q) Lease of a residential unit with a monthly rental not exceeding Fifteen thousand
pesos (₱15,000);
“(BB) 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 Three million pesos (₱3,000,000).

“Sec. 116. Tax on Persons Exempt from Value-added Tax (VAT).— Any person whose sales or
receipts are exempt under Section 109(BB) of this Code from the payment of value-added
tax and who is not a VAT-registered person shall pay a tax equivalent to three percent (3%)
of his gross quarterly sales or receipts: Provided, That cooperatives, and beginning January
1, 2019, self-employed and professionals with total annual gross sales and/or gross receipts
not exceeding Five hundred thousand pesos (₱500,000) shall be exempt from the three
percent (3%) gross receipts tax herein imposed.”

(G) Persons Required to Register for Value-Added Tax.—

“(1) 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 for
value-added tax if:
“(a) His gross sales or receipts for the past twelve (12) months, other than those that
are exempt under Section 109(A) to (BB), have exceeded Three million pesos
(₱3,000,000); or
“(b) 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 Section 109(A) to
(BB), will exceed Three million pesos (₱3,000,000).

“(H) Optional Registration for Value-Added Tax of Exempt Person.— (1) Any person who
is not required to register for value-added tax under Subsection (G) hereof may elect to
register for value-added tax by registering with the Revenue District Office that has
jurisdiction over the head office of that person, and paying the annual registration fee in
Subsection (B) hereof.
“(2) Any person who elects to register under this Subsection shall not be entitled to
cancel his registration under Subsection (F)(2) for the next three (3) years.

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 “Provided, That any person taxed under Section 24(A)(2)(b) and 24(A)(2)(c)(2)(a) of the
NIRC who elected to pay the eight percent (8%) tax on gross sales or receipts shall not
be allowed to avail of this option.
“For purposes of Title IV of this Code, any person who has registered value-added tax as
a tax type in accordance with the provisions of Subsection (C) hereof shall be referred to
as a ‘VAT-registered person’ who shall be assigned only one Taxpayer Identification
Number (TIN).
“x x x.”

b. SEC. 4.109.1(B)(1)(Q) OF RR NO. 13-2018

(q) Lease of residential units with a monthly rental per unit not exceeding Fifteen
Thousand Pesos (P15,000.00).
The foregoing notwithstanding, lease of residential units where the monthly rental per
unit exceeds Fifteen Thousand Pesos (P15,000.00), but the aggregate of such rentals of
the lessor during the year do not exceed Three Million Pesos (P3,000,000.00) shall
likewise be exempt from VAT; however, the same shall be subject to three percent (3%)
percentage tax under Section 116 of the Tax Code.
In cases where a lessor has several residential units for lease, some are leased out for a
monthly rental per unit of not exceeding P15,000.00 while others are leased out for more
than P15.000.00 per unit, his tax liability will be as follows:
1. The gross receipts from rentals not exceeding P15,000.00 per month per unit shall be
exempt from VAT regardless of the aggregate annual gross receipts. It is also exempt
from the 3% percentage tax. 2. The gross receipts from rentals exceeding P15,000.00
per month per unit shall be subject to VAT if the aggregate annual gross receipts from
said units only exceeds P3,000,000.00. Otherwise, the gross receipts will be subject
to the 3% tax imposed under Section 116 of the Tax Code.
In case of mixed transactions, the abovementioned rule should be observed.
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, lodging houses, inns and pension houses.
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 dormitories, boarding houses and bed
spaces; and per room in case of rooms for rent.

III. PROFESSIONAL SERVICES

Q: What is the situs of professional tax?

Professional tax is payable in the province where the taxpayer practices his profession or
where the principal office is located in case he practices his profession in several places.
Note: (1) The taxpayer has the option. Such person who has paid the corresponding
professional tax shall be entitled to practice his profession in any part of the Philippines without
being subjected to any national or local tax, license or fee for the practice of such profession
(see Section 139, LGC)
(2) Professional tax may be imposed by a province or city but not by a municipality or barangay
(3) Professionals exclusively employed in government shall be exempt from payment

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IV. 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

Q: Is a health maintenance organization liable to pay VAT?

Yes. In CIR V. PHILIPPINE HEALTH CARE PROVIDERS, INC. [APRIL 24, 2007], PHCPI
claimed that its services were exempt from VAT and sought a BIR ruling in this regard. The
BIR ruled that PHCPI was exempt. The CIR, however, later assessed PHCPI for deficiency
VAT taxes. The CIR contended that PHCPI does not actually render medical service but
merely acts as a conduit between the members and PHCPI’s accredited and recognized
hospitals and clinics. The Supreme Court opined that the services of an entity which does
not actually provide medical and/or hospital services but merely arranges for the same are
subject to VAT. The Court, however, ruled PHCPI cannot be faulted for its reliance on the
BIR ruling as such was issued when the term “health maintenance organization” had no
significance for taxation purposes at the time. The failure of PHCPI to describe itself as a
“health maintenance organization” subject to VAT does not amount to bad faith.

v. CINEMA OPERATORS / PROPRIETORS

CIR VS. SM PRIME HOLDINGS, INC. GR NO. 183505 DATED FEBRUARY 26, 2010

Ruling: The legislature never intended to include cinema/theater operators or proprietors

in the coverage of VAT.

FACTS:

• In a number of CTA cases, the BIR sent SM Prime and First Asia a Preliminary
Assessment Notice (PAN) for VAT deficiency on cinema ticket sales for taxable year 2000
(SM), 1999 (First Asia), 2000 (First Asia), 2002 (First Asia), and 2003 (First Asia).

o SM and First Asia filed for protest but the BIR just denied them and sent them a Letter
of Demand subsequently.

o All the PANs were subjected to a Petition for Review filed by SM and First Asia to the
CTA.

• The CTA First Division ruled that there should only be one business tax applicable to
theater and movie houses, the 30% amusement tax. Hence, the CIR is wrong in collecting
VAT from the ticket sales.

o CIR appealed the case to the CTA En Banc.

• The CTA En Banc affirmed the ruling of the CTA First Division.

ISSUE: Whether the cinema ticket sales are subject to VAT and thus included in the
meaning of “Sale or Exchange of Services”?

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 HELD:

NO. While (1) the enumeration under Section 108 on the VAT-taxable services is not
exhaustive and (2) the said list includes “the lease of motion picture films, films, tapes
and discs”, the said activity however is not the same as showing or exhibition of motion
pictures or films. Thus, since the showing or exhibition of motion pictures or films is not
in the enumeration, the CIR must show that it falls under the phrase “similar services”.

The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition
of VAT on the gross receipts of cinema/theater operators or proprietors derived from
admission tickets. The removal of the prohibition (on the national government to tax
certain activities) under the Local Tax Code did not grant nor restore to the national
government the power to impose amusement tax on cinema/theater operators or
proprietors. Neither did it expand the coverage of VAT.

vi. VAT ON TOLL FEES

DIAZ VS. THE SECRETARY OF FINANCE AND CIR, GR NO. 193007. JULY 19, 2011

Q: Are toll fees collected by tollway operators subject to VAT?

Yes. The Supreme Court in DIAZ V. SECRETARY OF FINANCE [JULY 10, 2011] answered
this issue in the affirmative. The court held that VAT is imposed on “all kinds of services”
and tollway operations who are engaged in construction, maintaining, and operating
expressways are no different from lessors of property, transportation contractors, etc.
Further, they also come under those described as “all other franchise grantees” which is
not confined only to legislative franchise grantees since the law does not distinguish.
They are also not a franchise grantee under Section 119 of the Tax Code which would
have made them subject to percentage tax instead. Neither are the services part of the
enumeration under Section 109 on VAT-exempt transactions.

Note: RMC 63-2010 [JULY 19, 2010] was issued to implement Section 108 and impose VAT
on the gross receipts of tollway operators from all types of vehicles starting August 16, 2010.

Ruling: VAT is levied, assessed, and collected, according to Section 108, on the gross receipts
derived from the sale or exchange of services as well as from the use or lease of properties.
The law imposes VAT on all kinds of services rendered in the PH for a fee, including those
specified in the list. The enumeration of affected services is not exclusive. By qualifying
services with the words “all kinds”, Congress has given the term services an all-
encompassing meaning. The listing of specific services are intended to illustrate how
pervasive and broad is the VAT’s reach rather than establish concrete limits to its
application. Thus, every activity that can be imagined as a form of service rendered for a fee
should be deemed included unless some provision of law especially excludes it.
When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latter’s
use of the tollway facilities over which the operator enjoys private proprietary rights that its
contract and the law recognize. In this sense, the tollway operator is no different from the
following service providers under Section 108 who allow others to use their properties or
facilities for a fee –
(a) Lessors of property, whether personal or real;
(b) Warehousing service operators;
(c) Lessors or distributors of cinematographic films;

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(d) Proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns,
resorts;
(e) Lending investors (for use of money);
(f) 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; and
(g) Common carriers by air and sea relative to their transport of passengers, goods or
cargoes from one place in the PH to another place in the PH.
Services to be subject to VAT need not fall under the traditional concept of services, the
personal or professional kinds that require the use of human knowledge and skills.
Tollway operators are franchise grantees.
The word franchise broadly covers government grants of a special right to do an act or series
of acts of public concern.
Nothing in Section 108 indicates that the franchise grantees it speaks of are those who hold
legislative franchises.
Franchises conferred or granted by local authorities, as agents of the state, constitute as
much a legislative franchise as though the grant had been made by Congress itself. The term
franchise has been broadly construed as referring, not only to authorizations that Congress
directly issues in the form of a special law, but also to those granted by administrative
agencies to which the power to grant franchises has been delegated by Congress.
The construction, operation and maintenance of toll facilities on public improvements are
activities of public consequence that necessarily require a special grant of authority from the
state.
Businesses of a public nature such as public utilities and the collection of tolls or charges for
its use or service is a franchise.

vii. FRANCHISE GRANTEES (PAGCOR)

PAGCOR VS. THE BIR, G.R. NO. 172087. MARCH 15, 2011

Ruling: The provision subjecting PAGCOR to 10% VAT is invalid for being contrary to RA
9337. Nowhere in the said law is it provided that PAGCOR can be subjected to VAT. RA 9337
is clear only as to the removal of PAGCOR's exemption from the payment of corporate income
tax.
Under RA 9337, transactions which are exempt under international agreements to which the
PH is a signatory or under special laws, except PD 529, are exempt from VAT.
PAGCOR’s charter, PD 1869, is a special law that grants petitioner exemption from taxes.
PAGCOR is undoubtedly exempt from indirect taxes because the law exempts from taxes
persons or entities contracting with PAGCOR in casino operations.
By extending the exemption to entities or individuals dealing with PAGCOR, the legislature
clearly granted exemption also from indirect taxes. It must be noted that the indirect tax of
VAT can be shifted or passed to the buyer, transferee, or lessee of the goods, properties, or
services subject to VAT. Thus, by extending the tax exemption to entities or individuals

64
dealing with PAGCOR in casino operations, it is exempting PAGCOR from being liable to
indirect taxes.
The proviso in PD 1869, extending the exemption to entities or individuals dealing with
PAGCOR in casino operations, is clearly to proscribe any indirect tax, like VAT, that may be
shifted to PAGCOR.

V. ZERO RATED SALES OF GOODS AND SERVICES AND VAT EXEMPT SALES

“(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: Provided, That these
services shall be exclusive for international shipping or air transport operations;
“(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 domestic 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.
“(8) Services rendered to:
“(i) Registered enterprises within a separate customs territory as provided under
special law; and
“(ii) Registered enterprises within tourism enterprise zones as declared by the TIEZA
subject to the provisions under Republic Act No. 9593 or The Tourism Act of 2009.
“Provided, That subparagraphs (B)(1) and (B)(5) hereof shall be subject to the twelve
percent (12%) value-added tax and no longer be subject to zero percent (0%) VAT
rate upon satisfaction of the following conditions:
“(1) The successful establishment and implementation of an enhanced VAT refund system
that grants refunds of creditable input tax within ninety (90) days from the filing of the VAT
refund application with the Bureau: Provided, That, to determine the effectivity of item no. 1,

65
all applications filed from January 1, 2018 shall be processed and must be decided within
ninety (90) days from the filing of the VAT refund application; and
“(2) All pending VAT refund claims as of December 31, 2017 shall be fully paid in cash by
December 31, 2019.
“Provided, That the Department of Finance shall establish a VAT refund center in the Bureau
of Internal Revenue (BIR) and in the Bureau of Customs (BOC) that will handle the
processing and granting of cash refunds of creditable input tax.
“An amount equivalent to five percent (5%) of the total value-added tax collection of the BIR
and the BOC from the immediately preceding year shall be automatically appropriated
annually and shall be treated as a special account in the General Fund or as trust receipts for
the purpose of funding claims for VAT Refund: Provided, That any unused fund, at the end of
the year shall revert to the General Fund.
“Provided, further, That the BIR and the BOC shall be required to submit to the COCCTRP a
quarterly report of all pending claims for refund and any unused fund.”

a. NATURE OF ZERO RATED SALES

IS ZERO-RATING STILL A VAT TRANSACTION? Yes, it is still a VAT transaction because
it is a sale, barter, or exchange of property. Only that the percentage of the tax to be
imposed is 0%.
Therefore, if it considered to be a VAT transaction, there is an output tax on the
transaction (0%) and yet I may still claim input taxes for the goods or services that have
been procured to run the business. No output tax but there is an input tax.
What woud then be the treatment on the input tax if the output tax is zero (0)? You may
claim or ask for a VAT refund from the government.
TWO TYPES OF ZERO-RATED TRANSACTIONS (FOR GOOD OR PROPERTIES):

(1) AUTOMATICALLY ZERO-RATED TRANSACTIONS

Generally, it refers to the actual exportation of goods. This is line with the concept of
Destination Principle and the Cross Border Doctrine.
Once you export, destine of consumption would be abroad. That transaction is “VAT
exempt” because there is no output tax but zero-rated. No imposable output VAT. Make
no mistake that when we say zero-rated, it is NOT a VAT exempt transaction.

(2) EFFECTIVELY ZERO-RATED TRANSACTIONS

Refers to the local sale of goods or supply of services by a VAT registered person to
persons who are granted tax exemptions under special laws or international agreements
to which the Philippines is a signatory. In other words, that transaction either a sale,
barter, or exchange, even if done WITHIN the Philippines is considered zero-rated by
reason of law or international agreements to which the Philippines is a signatory.
Example: Economic zones – when it comes to commercial transactions, it is considered
as a “foreign territory”
b. ZERO RATED SALE OF GOODS (SEC. 106) (AS AMENDED BY RA NO. 10963)
RA10963 “(2) The following sales by VAT-registered persons shall be subject to zero
percent (0%) rate:
“(a) Export Sales.— The term ‘export sales’ means:
“(1) The sale and actual shipment of goods from the Philippines to a foreign
country, irrespective of any shipping arrangement that may be agreed upon
66
 which may influence or determine the transfer of 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 (BSP);
“(2) Sale and delivery of goods to:
“(i) Registered enterprises within a separate customs territory as
provided under special laws; and
“(ii) Registered enterprises within tourism enterprise zones as
declared by the Tourism Infrastructure and Enterprise Zone Authority
(TIEZA) subject to the provisions under Republic Act No. 9593 or The
Tourism Act of 2009.
“(3) Sale of raw materials or packaging materials to a nonresident buyer for
delivery to a resident local export-oriented enterprise to be used in
manufacturing, processing, packing or repacking in the Philippines of the said
buyer’s goods and paid for in acceptable foreign currency and accounted for
in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP);
“(4) Sale of raw materials or packaging materials to export-oriented
enterprise whose export sales exceed seventy percent (70%) of total annual
production;
“(5) Those considered export sales under Executive Order No. 226, otherwise
known as the Omnibus Investment Code of 1987, and other special laws; and
“(6) The sale of goods, supplies, equipment and fuel to persons engaged in
international shipping or international air transport operations: Provided,
That the goods, supplies, equipment and fuel shall be used for international
shipping or air transport operations.
“Provided, That subparagraphs (3), (4), and (5) hereof shall be subject to the twelve percent
(12%) value-added tax and no longer be considered export sales subject to zero percent
(0%) VAT rate upon satisfaction of the following conditions:
“(1) The successful establishment and implementation of an enhanced VAT refund system
that grants refunds of creditable input tax within ninety (90) days from the filing of the VAT
refund application with the Bureau: Provided, That, to determine the effectivity of item no. 1,
all applications filed from January 1, 2018 shall be processed and must be decided within
ninety (90) days from the filing of the VAT refund application; and
“(2) All pending VAT refund claims as of December 31, 2017 shall be fully paid in cash by
December 31, 2019.
“Provided, That the Department of Finance shall establish a VAT refund center in the Bureau
of Internal Revenue (BIR) and in the Bureau of Customs (BOC) that will handle the
processing and granting of cash refunds of creditable input tax.
“An amount equivalent to five percent (5%) of the total VAT collection of the BIR and the
BOC from the immediately preceding year shall be automatically appropriated annually and
shall be treated as a special account in the General Fund or as trust receipts for the purpose
of funding claims for VAT refund: Provided, That any unused fund, at the end of the year shall
revert to the General Fund.
“Provided, further, That the BIR and the BOC shall be required to submit to the Congressional
Oversight Committee on the Comprehensive Tax Reform Program (COCCTRP) a quarterly
report of all pending claims for refund and any unused fund.
“(b) 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.

Q: Enumerate the zero-rated sales of goods.

1. Export Sales (IF GONE)

a) Sale and actual shipment of goods from the Philippines to a Foreign country
b) Sale of raw materials or packaging materials to a Non-resident buyer for delivery to a
resident local export-oriented enterprise

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c) Sale of raw materials or packaging materials to Export-oriented enterprise whose export
sales exceed 70% of total annual production
d) Sale of Gold to the BSP
e) Those that are not considered export sales under the Omnibus Investment Code and other
special laws
f) Sale of goods, supplies, and equipment and fuel to persons engaged in International
shipping or international air transport operations.

2. Sales to persons or entities whose exemption under special laws and international
agreements to which the Philippines is a signatory subjects such sales to 0% rate (effectively
zero-rated transactions)
Note: As to 1(e), “considered export sales under E.O. 226” includes the sale of goods and services
by a VAT-registered person in the customs territory to ecozone and Freeport enterprises so as
to make them automatically zero-rated (Section 4.106-5, RR No. 4-2007)

As to 1(f), the goods subject to zero-rating are limited to goods and passengers transported
from a port in the Philippines directly to a foreign port, or vice versa, without docking or
stopping at any other port in the Philippines. (Ibid)

REQUIREMENTS MUST BE COMPLIED WITH SO THAT THE EXPORT SALES BE

CONSIDERED SALES SUBJECT TO ZERO-RATED
1. There must be actual exportation of goods or properties;
2. The sale or transaction must be paid for in an acceptable foreign currency or its equivalent
goods or services;
3. The payment is accounted for in accordance with the BSP rules and regulations;
4. The taxpayer exporting is a VAT registered person only VAT registered persons may be
able to avail the benefit of the VAT system
5. The substantiation requirements must have been complied with by the taxpayer

TWO KINDS OF SALE OF RAW MATERIALS OR PACKAGING MATERIALS:

1. Paid for in acceptable foreign currency and accounted for in accordance with the BSP rules
and regulations (no. 2)
2. Does not need be paid in acceptable foreign currency and accounted for in accordance with
the BSP rules and regulations (no.3)
A B
A sells to B, an export-oriented enterprise. B’s total production or more than 70% of its
production is for exportation. Ultimately, the raw material or packaging materials will be
consumed outside the Philippines.
ATLAS CONSOLIDATED vs. CIR
G.R. No. 146221 | September 25, 2007
If the sales are made to an export-oriented enterprise, does zero-rated VAT apply only to the
goods that are exported?
It doesn’t matter. What is important is that it is an export oriented enterprise. The sale
remains to be zero-rated sale

i. SEC. 4.106-5 OF RR NO. 13-2018

SEC. 4.106-5. Zero Rated Sales of Goods or Properties. - xxx

The following sales by VAT-registered persons shall be subject to zero percent (0%) rate:
68
(a) Export sales. -"Export Sales" shall mean:
(1) 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 ownership of the goods so exported, 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 (BSP);
(2) The sale of raw materials or packaging materials to a non-resident buyer
for delivery to a resident local export-oriented enterprise to be used in
manufacturing, processing, packing or repacking in the Philippines of the said buyer's
goods, paid for in acceptable foreign currency, and accounted for in accordance with
the rules and regulations of the BSP;
(3) The sale of raw materials or packaging materials to an export-oriented
enterprise whose export sales exceed seventy percent (70%) of total annual
production.
Any enterprise whose export sales exceed 70% of the total annual production
of the preceding taxable year shall be considered an export-oriented enterprise.
(4) Transactions considered export sales under Executive Order No. 226,
otherwise known as the Omnibus Investments Code of 1987, and other special laws.

"Considered export sales under Executive Order No. 226" shall mean the Philippine
port F.O.B. value determined from invoices, bills of lading, inward letters of credit, landing
certificates, and other commercial documents, of export products exported directly by a
registered export producer, or the net selling price of export products sold by a registered
export producer to another export producer, or to an export trader that subsequently
exports the same: Provided, That sales of export products to another producer or to an export
trader shall only be deemed export sales when actually exported by the latter, as evidenced
by landing certificates or similar commercial documents: Provided, further, That without
actual exportati9on the following shall be considered constructively exported for purposes
of these provisions: (1) sales to bonded manufacturing warehouses of export-oriented
manufacturers; (2) sales to export processing zones; (3) sales to registered export traders
operating bonded trading warehouses supplying raw materials in the manufacture of export
products under guidelines to be set by the Board in consultation with the Bureau of Internal
Revenue (BIR) and the Bureau of Customs (BOC); (4) sales to diplomatic missions and other
agencies and/or instrumentalities granted tax immunities, of locally manufactured,
assembled or repacked products whether paid for in foreign currency or not.

For purposes of zero-rating, the export sales of registered export traders shall include
commission income. The exportation of goods on consignment shall not be deemed export
sales until the export products consigned are in fact sold by the consignee; and Provided,
finally, that sales of goods, properties or services made by a VAT-registered supplier to a
BOI-registered manufacturer/producer whose products are 100% exported are considered
export sales. A certification to this effect must be issued by the Board of Investment (BOB
which shall be good for one year unless subsequently re-issued by the BOI.

(5) The sale of goods, supplies, equipment and fuel to persons engaged in
international shipping or international air transport operations: Provided, That the
goods, supplies, equipment, and fuel shall be used exclusively for international
shipping or air transport operations.

The sale of goods, supplies, equipment and fuel to persons engaged in international
shipping or international air transport operations is limited to goods, supplies, equipment
69
and fuel that shall be used in the transport of goods and passengers from a port in the
Philippines directly to a foreign port, or vice versa, without docking or stopping at any other
port in the Philippines unless the docking or stopping at any other Philippine port is for the
purpose of unloading passengers and/or cargoes that originated from abroad, or to load
passengers and/or cargoes bound for abroad: Provided, further, that if any portion of such
fuel, goods, supplies or equipment is used for purposes other than that mentioned in this
paragraph, such portion of fuel, goods, supplies, and equipment shall be subject to 12% VAT.

Provided, That items (2), (3), and (4) abovementioned shall be subject to the twelve
percent (12%) VAT and no longer be subject to zero percent (0%) VAT rate upon
satisfaction of the following conditions:
1. The successful establishment and implementation of an enhanced
VAT refund system that grants and pays refunds of creditable input tax
within ninety (90) days from the filing of the VAT refund application
with the Bureau: Provided that, to determine the effectivity of Item no.
1, all applications filed from January 1, 2018 shall be processed and
decided within ninety (90) days from the filing of the VAT refund
application.
The 90-day period to process and decide, pending the establishment of
the enhanced VAT Refund System shall only be up to the date of
approval of the Recommendation Report on such application for VAT
refund by the Commissioner or his duly authorized representative.
However, all claims for refund/tax credit certificate filed prior to
January 1, 2018 shall still be governed by the one hundred twenty
(120)-day processing period.
The Secretary of Finance shall provide transitory rules for the grant of
refund under the enhanced VAT Refund System after the determination
of the fulfilment of the condition by the Commissioner of Internal
Revenue as provided in item 1 paragraph 1 hereof; and
2. All pending VAT refund claims as of December 31, 2017 shall be fully
paid in cash by December 31, 2019.
Provided, That Department of Finance shall establish a VAT refund
center in the BIR and in the Bureau of Customs (BOC) that will handle
the processing and granting of cash refunds of creditable input tax.
(b) 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.
II. PROVISIONS VETOED BY THE PRESIDENT

The President also vetoed the zero-rating of sale of goods and services to separate customs
territory as well as tourism enterprise zones, like the Tourism Infrastructure and Enterprise
Zone Authority (TIEZA).

“The above provisions go against the principle of limiting the VAT (value-added tax) zero-
rating to direct exporters. The proliferation of separate customs territories, which include
building, creates significant leakages in our tax system,” the chief executive said.

The zero rating, Duterte added makes the tax system highly inequitable and significantly
reduces the revenues that could be better used for the poor.

For TIEZA, the President said the office’s charter only allows duty- and tax-free importation
of capital equipment, transportation equipment and other goods.

70
The special provision under the TRAIN law for TIEZA, Duterte said only “grants new
incentive to suppliers of registered tourism enterprises.”

c. ZERO RATED SALE OF SERVICES (SEC. 108 B) (AS AMENDED BY RA NO. 10963)
“(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: Provided, That these services shall be exclusive for
international shipping or air transport operations;
“(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 domestic 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.
“(8) Services rendered to:
“(i) Registered enterprises within a separate customs territory as provided
under special law; and
“(ii) Registered enterprises within tourism enterprise zones as declared by
the TIEZA subject to the provisions under Republic Act No. 9593 or The
Tourism Act of 2009.
“Provided, That subparagraphs (B)(1) and (B)(5) hereof shall be subject
to the twelve percent (12%) value-added tax and no longer be subject to
zero percent (0%) VAT rate upon satisfaction of the following conditions:

71
 “(1) The successful establishment and implementation of an enhanced
VAT refund system that grants refunds of creditable input tax within
ninety (90) days from the filing of the VAT refund application with the
Bureau: Provided, That, to determine the effectivity of item no. 1, all
applications filed from January 1, 2018 shall be processed and must be
decided within ninety (90) days from the filing of the VAT refund
application; and
“(2) All pending VAT refund claims as of December 31, 2017 shall be
fully paid in cash by December 31, 2019.
“Provided, That the Department of Finance shall establish a VAT refund
center in the Bureau of Internal Revenue (BIR) and in the Bureau of
Customs (BOC) that will handle the processing and granting of cash
refunds of creditable input tax.
“An amount equivalent to five percent (5%) of the total value-added tax
collection of the BIR and the BOC from the immediately preceding year
shall be automatically appropriated annually and shall be treated as a
special account in the General Fund or as trust receipts for the purpose
of funding claims for VAT Refund: Provided, That any unused fund, at the
end of the year shall revert to the General Fund.
“Provided, further, That the BIR and the BOC shall be required to submit
to the COCCTRP a quarterly report of all pending claims for refund and
any unused fund.”

SECTION 108(B) provides for the following:

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 BSP
2. Services Other than those mentioned in the preceding paragraph rendered to a person
engaged in business conducted outside the Philippines or a nonresident person not
engaged in business who is outside the Philippines when the services were performed,
the consideration for which is paid for in acceptable foreign currency and accounted for
in accordance with the rules and regulations of the BSP.
3. Services rendered to person or entities whose exemption under Special Laws or
International Agreements effectively subjects the supply of such services to a 0% rate.
(effectively zero-rated transaction)
4. Sale of Services to Persons Engaged in International Shipping or Air Transport
Operations
5. Sale of Services for Export-Oriented Enterprise whose export sales exceed 70% of total
annual production
6. Transport of Passengers and Cargo by Air or Seal Vessels from the Philippines to a
Foreign Country
7. Sale of Power Generated through Renewable Sources of Energy

Q: What are the requisites for the zero-rating of the sale of service under Section
108(B)(2)?
1. The service is performed in the Philippines
2. The service falls under any of the categories provided in Section 108(B)
3. It is paid for in acceptable foreign currency that is accounted for in accordance with
the regulations of the Bangko Sentral ng Pilipinas
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4. The recipient of such services is doing business outside the Philippines.

i. SEC. 4.108-5 OF RR NO. 13-2018

SEC. 4.108-5. Zero Rated Sale of Services. —
(a) In general. — A zero-rated sale of service (by a VAT-registered person) is a taxable
transaction for VAT purposes, but shall not result in any output tax. However, the
input tax on 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.
(b) Transactions Subject to Zero Percent (0%) VAT Rate. — The following services
performed in the Philippines by a VAT-registered person shall be subject to zero percent
(0%) VAT 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 BSP;
(2) Services other than processing, manufacturing or repacking rendered to a
person engaged in business conducted outside the Philippines or to a non-
resident 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 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 air
transport operations, including leases of property for use thereof: Provided,
that these services shall be exclusively for international shipping or air transport
operations. Thus, the services referred to herein shall not pertain to those
made to 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, the same being subject to twelve percent (12%) VAT
under Sec. 108 of the Tax Code.
(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 the total annual production;
(6) Transport of passengers and cargo by domestic air or sea vessels from the
Philippines to a foreign country. Gross receipts of international air or shipping
carriers doing business in the Philippines derived from transport of
passengers and cargo from the Philippines to another country shall be exempt
from VAT; however, they are still liable to a percentage tax of three percent
(3%) based on their gross receipts derived from transport of cargo from the
Philippines to another country as provided for in Sec. 118 of the Tax Code; and
(7) Sale of power or fuel generated through renewable sources of energy such
as, but not limited to, biomass, solar, wind, hydropower, geothermal and
steam, ocean energy, and other emerging sources using technologies such as
fuel cells and hydrogen fuels: Provided, however, that zero-rating shall apply
strictly to the sale of power or fuel generated through renewable sources of
energy, and shall not extend to the sale of services related to the maintenance
or operation of plants generating said power.

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 Provided, That Subparagraphs (b)(1) and (b)(5) abovementioned shall be subject
to the twelve percent (12%) VAT and no longer be subject to zero percent (0%)
VAT rate upon satisfaction of the following conditions:
1. The successful establishment and implementation of an enhanced VAT
refund system that grants and pays refunds of creditable input tax within
ninety (90) days from the filing of the VAT refund application with the Bureau:
Provided that, to determine the effectivity of Item no. 1, all applications filed
from January 1, 2018 shall be processed and decided within ninety (90) days
from the filing of the VAT refund application.
The 90-day period to process and decide, pending the establishment of the enhanced
VAT Refund System shall only be up to the date of approval of the Recommendation
Report on such application for VAT refund by the Commissioner or his duly authorized
representative.
However, all claims for refund/tax credit certificate filed prior to January 1, 2018 shall
still be governed by the one hundred twenty (120)-day processing period.
The Secretary of Finance shall provide transitory rules for the grant of refund under the
enhanced VAT Refund System after the determination of the fulfilment of the condition
by the Commissioner of Internal Revenue as provided in item 1 paragraph 1 hereof; and
2. All pending VAT refund claims as of December 31, 2017 shall be fully paid
in cash by December 31, 2019.
Provided, That Department of Finance shall establish a VAT refund center in the BIR and
in the Bureau of Customs (BOC) that will handle the processing and granting of cash
refunds of creditable input tax.

ii. PROVISIONS VETOED BY THE PRESIDENT

CIR VS. AMERICAN EXPRESS GR NO. 152609 DATED JUNE 29, 2005

Facts: BBB 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.
Issue: WON the service rendered is zero-rated.
Ruling: As a general rule, the 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 –
(a) The service is performed in the PH;
(b) The service falls under any of the categories provided in Section 102(b) of the Tax Code;
and
(c) It is paid for in acceptable foreign currency that is accounted for in accordance with the
regulations of the BSP.
Services performed by VAT-registered persons in the PH, other than the processing,
manufacturing or repacking of goods for persons doing business outside the PH, when paid
in acceptable foreign currency and accounted for in accordance with the rules and
regulations of the BSP, are zero-rated.
Pursuant to the Tax Code, a VAT of zero percent should be levied upon the supply of that
service.

74
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.
Interpellations on the subject in the halls of the Senate also reveal a clear intent on the part
of the legislators not to impose the condition of being consumed abroad in order
for services performed in the PH by a VAT-registered person to be zero-rated.

CIR VS. BURMEISTER AND WAIN GR NO. 153205 DATED JAUNARY22, 2007
Facts: The payer-recipient of BBB’s services is the Consortium which is a joint-venture doing
business in the PH. While the Consortium’s principal members are non-resident foreign
corporations, the Consortium itself is doing business in the PH.
Issue: WON the service rendered is subject to zero-rated VAT.
Ruling: The Tax Code not only requires that the services be other than “processing,
manufacturing or repacking of goods” and that payment for such services be in acceptable
foreign currency accounted for in accordance with BSP rules. Another essential condition for
qualification to zero-rating is that the recipient of such services is doing business outside
the PH. While this requirement is not expressly stated in the second paragraph of Section
102(b), this is clearly provided in the first paragraph of Section 102(b) where the listed
services must be for other persons doing business outside the PH. The phrase “for other
persons doing business outside the PH” not only refers to the services enumerated in the
first paragraph of Section 102(b), but also pertains to the general term “services” appearing
in the second paragraph of Section 102(b).
If the provider and recipient of the “other services” are both doing business in the PH, the
payment of foreign currency is irrelevant.
In a domestic transaction, where the provider and recipient of services are both doing
business in the PH, the BSP cannot require any party to make payment in foreign currency.
Services covered by Section 102(b) (1) and (2) are in the nature of export sales since the
payer-recipient of services is doing business outside the PH. Under BSP rules, the proceeds
of export sales must be reported to the BSP. Thus, there is reason to require the provider of
services under Section 102(b) (1) and (2) to account for the foreign currency proceeds to the
BSP.

DISCUSSION:
What type of corporation is Burmeister? It is foreign consortium. And they entered into a
contract with Napocor for the maintenance of two power barges located in the Philippines.
They obtained a BIR ruling saying that they are zero-rated. And when they file a refund, the
BIR denied the refund. At CTA, Burmeister said that they are entitled to a refund on the basis
that the services rendered by the Burmeister were zero-rated because binayaran sila
through dollars.
The SC said that it is not enough that the services were through a foreign currency. It is also
required that the transaction to be zero-rated must be that for persons doing business
outside the Philippines. What was the business of Burmeister here? It is doing business in
the Philippines. the services will be consumed here in the Philippines. Since the transaction
is in the Philippines, what is the taxability of the services rendered? Diba baliktad siya?
Burmeister should be subject to VAT. All transactions occurred here in the Philippines for
the benefit of a Philippine resident.

Compare this with the case of CIR vs. AMERICAN EXPRESS.

75
The services provided by AMEX PH is to facilitate collection of receivables of AMEX
Hongkong. And then AMEX PH filed a refund at the BIR for the excess input VAT. Sabi niya,
that is supposed to be a zero-rated transaction.
The main question to be resolved by the SC: WON AMEX-PH is entitled to a refund.
We have to look first of what if the nature of the business of AMEX-PH. Is it covered by the
zero-rated sale of services? First, the services are performed here in the Philippines. Second,
should the services be done abroad in order to be zero-rated? Not necessarily. Because
performance and consumption is actually different things. When we say facilitation of
collection is different from the outcome of the facilitation of the collection. While the
facilitation is done here in the Philippines, ultimately the consumption here is not.
The next question is where is the service consumed?
The SC said the services are made and consumed here in the Philippines. Why? Take a look
at the definition of CONSUMPTION.

CONSUMPTION is "the use of a thing in a way that thereby exhausts it." It is easy for use
to consume goods because Makita man natin but what about services? But if you’re going
to apply the definition of consumption it means the performance or "successful
completion of a contractual duty, usually resulting in the performer’s release from any
past or future liability.

Now, looking back at the services rendered by AMEX-PH, when does AMEX-PH complete its
services? Does it complete it services abroad? Diba hindi? It send its reports to AMEX-HK. So
upon sending the reports to AMEX-HK, the services are already consumed. Tapos na! The
moment AMEX-PH sends the bills and drafts to AMEX-HK, the former is already released of
its obligation to do something else.
Since the performance and the services are consumed here in the Philippines then there is
more reason to reject the proposal that they are subject to zero-rated VAT.
If we allow the AMEX-PH to be subject to zero-rated VAT then we will be violating the
DESTINATION PRINCIPLE.
However, 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]."
THUS, FOR THE SUPPLY OF SERVICE TO BE ZERO-RATED AS AN EXCEPTION, THE LAW
MERELY REQUIRES THAT:
1. The service be performed in the Philippines;
2. The service fall under any of the categories in Section 102(b) of the Tax Code; and
3. It be paid in acceptable foreign currency accounted for in accordance with BSP rules and
regulations.

The SC also mentioned TAX SITUS OF A ZERO-RATED SERVICE. “The law neither makes a
qualification nor adds a condition in determining the tax situs of a zero-rated service. Under
this criterion, the place where the service is rendered determines the jurisdiction to impose
the VAT.”

CIR VS. ACESITE GR NO. GR NO. 147295 DATED FEBRUARY 16, 2007
Facts: BBB is a hotel owner which leases its premises to PAGCOR for casino operations. It
also caters food and beverages to PAGCOR’s casino patrons.
Issue: WON the VAT exemption of PAGCOR extends to BBB.
Ruling: While it was proper for PAGCOR not to pay the 10% VAT charged by BBB, the latter
is not liable for the payment of it as it is exempt in this particular transaction by operation of
law to pay the indirect tax.

76
Under the Tax Code, services rendered to persons or entities whose exemption under special
laws or international agreements to which the PH is a signatory effectively subjects the
supply of such services to zero rate.
The proviso in PD 1869, extending the exemption to entities or individuals dealing with
PAGCOR in casino operations, is clearly to proscribe any indirect tax, like VAT, that may be
shifted to PAGCOR.

d. AUTOMATIC ZERO-RATE VS. EFFECTIVELY ZERO-RATE

(1) AUTOMATICALLY ZERO-RATED TRANSACTIONS

Generally, it refers to the actual exportation of goods. This is line with the concept of
Destination Principle and the Cross Border Doctrine.
Once you export, destine of consumption would be abroad. That transaction is “VAT exempt”
because there is no output tax but zero-rated. No imposable output VAT. Make no mistake
that when we say zero-rated, it is NOT a VAT exempt transaction.

(2) EFFECTIVELY ZERO-RATED TRANSACTIONS

Refers to the local sale of goods or supply of services by a VAT registered person to persons
who are granted tax exemptions under special laws or international agreements to which
the Philippines is a signatory. In other words, that transaction either a sale, barter, or
exchange, even if done WITHIN the Philippines is considered zero-rated by reason of law or
international agreements to which the Philippines is a signatory.

Zero-rated Effectively zero-rated

generally refers to the export sale of refers to the sale of goods or supply of services to
goods and supply of services 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.
The tax rate is set at zero. When As applied to the tax base, such rate does not yield
applied to the tax base, such rate any tax chargeable against the purchaser
obviously results in no tax
chargeable against the purchaser

The seller of such transactions
charges no output tax, but can claim
a refund of or a tax credit certificate
for the VAT previously charged by
suppliers
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.
The taxpayer need not file an
application form and to secure BIR
approval before sale
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
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.
The rules are:
1. Prior to RA 9337 (before November 1, 2005) –
application is needed except in sales to PEZA, sales
to BOI-registered 100% manufacturer-exporter

77
 2. RA 9337 up to before RR 4-2007 (November 1,
2005 to April 5, 2007) – application is needed; no
exceptions
3. RR 4-2007 (April 6, 2007 onwards) – need for
application not expressly provided.

CIR VS. SEAGATE TECHNOLOGY (PHILS) GR NO. 153866 FEBRUARY 11, 2005

Ruling: Zero-rated transactions generally refer to the export sale of goods and supply of
services. The tax rate is set at zero. When applied to the tax base, such rate obviously results
in no tax chargeable against the purchaser. The seller of such transactions charges no output
tax, but can claim a refund of or a tax credit certificate for the VAT previously charged by
suppliers.
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 PH is a signatory effectively subjects such transactions to a zero rate. Again, as
applied to the tax base, 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.
Zero Rating and Exemption

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.

CIR VS. TOSHIBA INFORMATION EQUIPMENT GR NO. 150154 DATED AUGUST 9, 2005
Ruling: 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.
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 PH is a signatory, and by
virtue of which its taxable transactions become exempt from VAT.
An ECOZONE or a Special Economic Zone has been described as selected areas with highly
developed or which have the potential to be developed into agro-industrial, industrial,
tourist, recreational, commercial, banking, investment and financial centers whose metes
and bounds are fixed or delimited by Presidential Proclamations. An ECOZONE may contain
any or all of the following: industrial estates (IEs), export processing zones (EPZs), free trade
zones and tourist/recreational centers.

78
The national territory of the PH outside of the proclaimed borders of the ECOZONE shall be
referred to as the Customs Territory.
RA 7916 mandates that the PEZA shall manage and operate the ECOZONES as a separate
customs territory. Thus, creating the fiction that the ECOZONE is a foreign territory. As a
result, sales made by a supplier in the Customs Territory to a purchaser in the ECOZONE
shall be treated as an exportation from the Customs Territory. Conversely, sales made by a
supplier from the ECOZONE to a purchaser in the Customs Territory shall be considered as
an importation into the Customs Territory.
The PH 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
PH to a foreign country must be free of VAT; while, those destined for use or consumption
within the PH shall be imposed with 10% VAT.
No output VAT may be passed on to an ECOZONE enterprise since it is a VAT-exempt entity.
The VAT treatment of sales to it, however, varies depending on whether the supplier from
the Customs Territory is VAT-registered or not.
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 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.

e. DESTINATION PRINCIPLE AND CROSS BORDER DOCTRINE

DESTINATION PRINCIPLE means that the destination of the goods determines the taxation
or exemption from VAT. Goods and services are taxed only in the country where they are
consumed.
CROSS BORDER DOCTRINE states that VAT is to be imposed to form part to the cost of
goods destined for consumption outside of the territorial border of the taxing authority.
Illustration:
Goods or services consumed here in the Philippines are subject to the 12% VAT but the goods
or services exported outside the Philippines are subject to zero-rated transaction because it
is no longer consumed here in the Philippines.

CIR VS. AMERICAN EXPRESS GR NO. 152609 DATED JUNE 29, 2005
Ruling: 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.

CIR VS. TOSHIBA INFORMATION EQUIPMENT GR NO. 150154 DATED AUGUST 9, 2005

Ruling: The PH 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
79
territorial border of the taxing authority. Hence, actual export of goods and services from the
PH to a foreign country must be free of VAT; while, those destined for use or consumption within
the PH shall be imposed with 10% VAT.

CORAL BAY NICKEL CORPORATION VS. CIR, GR NO. 190506 DATED JUNE 13, 2016
 This appeal is brought by a taxpayer whose claim for the refund or credit pertaining
to its alleged unutilized input tax for the third and fourth quarters of the year 2002
amounting to P50,124,086.75
 The petitioner, a domestic corporation engaged in the manufacture of nickel and/or
cobalt mixed sulphide, is a VAT entity registered with the Bureau of Internal Revenue
(BIR). It is also registered with the Philippine Economic Zone Authority (PEZA) as an
Ecozone Export Enterprise at the Rio Tuba Export Processing Zone under PEZA
Certificate of Registration dated December 27, 2002
 On August 5, 2003,2 the petitioner filed its Amended VAT Return declaring unutilized
input tax from its domestic purchases of capital goods
 On June 14, 2004,3 it filed with Revenue District Office No. 36 in Palawan its
Application for Tax Credits/Refund (BIR Form 1914) together with supporting
documents.
 the petitioner elevated its claim to the CTA on July 8, 2004 by petition for review,
praying for the refund of the aforesaid input VAT

CTA division ruling:

 the claim for tax refund is denied
 petitioner was not entitled to the refund of alleged unutilized input VAT following
Section 106(A)(2)(a)(5) of the National Internal Revenue Code (NIRC) of 1997, as
amended, in relation to Article 77(2) of the Omnibus Investment Code and
conformably with the Cross Border Doctrine.

 the CTA in Division cited Commissioner of Internal Revenue v. Toshiba Information
Equipment (Phils) Inc. and Revenue Memorandum Circular ("RMC") No. 42-
03.7chanrobleslaw

The main contention of the corporation?

 petitioner contends that Toshiba is not applicable inasmuch as the unutilized input
VAT subject of its claim w(as incurred from May 1, 2002 to December 31, 2002 as a
VAT-registered taxpayer, not as a PEZA-registered enterprise; that during the period
subject of its claim, it was not yet registered with PEZA because it was only on
December 27, 2002 that its Certificate of Registration was issued;12 that until then, it
could not have refused the payment of VAT on its purchases because it could not
present any valid proof of zero-rating to its VAT-registered suppliers; and that it
complied with all the procedural and substantive requirements under the law and
regulations for its entitlement to the refund.

Sc ruling:
 the appeal of the corporation is bereft of merit
 The petitioner's insistence, that Toshiba is not applicable
because Toshiba Information Equipment (Phils) Inc., the taxpayer involved thereat,
was a PEZA-registered entity during the time subject of the claim for tax refund or
credit, is unwarranted

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  The most significant difference between Toshiba and this case is that Revenue
Memorandum Circular No. 74-99 was not yet in effect at the
time Toshiba Information Equipment (Phils) Inc. brought its claim for refund.
Regardless of the distinction, however, Toshiba actually discussed the VAT
implication of PEZA-registered enterprises and ECOZONE-located enterprises in its
entirety, which renders Toshiba applicable to the petitioner's case.

What is the old VAT rule?

(1) if the PEZA-registered enterprise chose the 5% preferential tax on its gross income in
lieu of all taxes, as provided by Republic Act No. 7916, as amended, then it was VAT-exempt;
and
(2) if the PEZA-registered enterprise availed itself of the income tax holiday under Executive
Order No. 226, as amended, it was subject to VAT at 10%17(now, 12%).
 Based on this old rule, Toshiba allowed the claim for refund or credit on the part
of Toshiba Information Equipment (Phils) Inc.
 With the issuance of RMC 74-99, the distinction under the old rule was disregarded
and the new circular took into consideration the two important principles of the
Philippine VAT system: the
 Cross Border Doctrine
 and the Destination Principle.

RMC No. 74-99, significance?

 The rule that any sale by a VAT-registered supplier from the Customs Territory to a
PEZA-registered enterprise shall be considered an export sale and subject to zero
percent (0%) VAT was clearly established only on 15 October 1999, upon the
issuance of RMC No. 74-99
 This old rule clearly did not take into consideration the Cross Border Doctrine
essential to the VAT system or the fiction of the ECOZONE as a foreign territory.

What is the old rule again? (emphasis)

 the old VAT rule for PEZA-registered enterprises was based on their choice of fiscal
incentives: (1) If the PEZA-registered enterprise chose the five percent (5%)
preferential tax on its gross income, in lieu of all taxes, as provided by Rep. Act No.
7916, as amended, then it would be VAT-exempt; (2) If the PEZA-registered
enterprise availed of the income tax holiday under Exec. Order No. 226, as amended,
it shall be subject to VAT at ten percent (10%).
 This distinction was abolished by RM no. 74-99
 RM no. 74-99 , categorically declared that all sales of goods, properties, and
services made by a VAT-registered supplier from the Customs Territory to an
ECOZONE enterprise shall be subject to VAT, at zero percent (0%) rate, regardless
of the tatter's type or class of PEZA registration; and, thus, affirming the nature
of a PEZA-registered or an ECOZONE enterprise as a VAT-exempt entity
 fiction that an ECOZONE is a foreign tenitory separate and distinct from the customs
territory
 Accordingly, the sales made by suppliers from a customs territory to a purchaser
located within an ECOZONE will be considered as exportations.
 . Following the Philippine VAT system's adherence to the Cross Border Doctrine and
Destination Principle, the VAT implications are that "no VAT shall be imposed to form
81
 part of the cost of goods destined for consumption outside of the territorial border of
the taxing authority

According to the toshiba case. Why are companies registered in ecozone VAT exempt?
 because of Section 8 of the same statute which establishes the fiction that
ECOZONES are foreign territory.
 The petitioner's principal office was located in Barangay Rio Tuba, Bataraza,
Palawan.21 Its plant site was specifically located inside the Rio Tuba Export
Processing Zone — a special economic zone (ECOZONE) created by Proclamation No.
304, Series of 2002, in relation to Republic Act No. 7916. As such, the purchases of
goods and services by the petitioner that were destined for consumption within the
ECOZONE should be free of VAT; hence, no input VAT should then be paid on such
purchases, rendering the petitioner not entitled to claim a tax refund or credit. Verily,
if the petitioner had paid the input VAT, the CTA was correct in holding that the
petitioner's proper recourse was not against the Government but against the seller
who had shifted to it the output VAT
 Vat is an indirect tax which can be shifted
 In the meantime, the claim for input tax credit by the exporter-buyer should be denied
without prejudice to the claimant's right to seek reimbursement of the VAT paid, if
any, from its supplier.
 Note that the claim of tax refund is in the nature of a tax exemption. It is therefore the
burden of the claimant to prove that it is entitled to such refund.
 Petition of corporation is denied

REVENUE MEMORANDUM CIRCULAR NO. 74-99

The rule that any sale by a VAT-registered supplier from the Customs Territory to a PEZA-
registered enterprise shall be considered an export sale and subject to zero percent (0%)
VAT was clearly established only on 15 October 1999, upon the issuance of RMC No. 74-
99.
Q: Summarize the current tax treatment of PEZA-registered enterprises as provided
in RMC 74-99 and as further clarified in RMC 50-2007.
1. Any sale of goods, property or services by a VAT-registered supplier from the customs-
territory to any Ecozone-registered enterprise – regardless of incentive availed – is zero-
rated on the part of the VAT-registered seller because ecozones are foreign soil by fiction
and thus the sale is considered an export sale.

2. 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 for its input
VAT because, under Section 109(O) of the Tax Code, export sales by persons who are not
VAT-registered are exempt transactions.

3. If the ecozone-enteprise is an exporter, its input VAT are subject to refund not because
of the incentives it availed but because of the nature of its transactions (export sales).

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 4. Any sale of goods or property by an ecozone-registered enterprise to a buyer in the
customs territory shall be subject to 12% VAT because it shall be considered an
importation. The tax is imposed on the buyer/importer.

5. The sale of service or lease of properties by PEZA-registered enterprises to a customer

or lessee from the customs territory shall be exempt from VAT if the service is performed
within the ecozone. The lease of properties will be exempt if the property is located
within the ecozone. However, if the properties are located outside of the ecozone,
payments to such enterprise shall be considered as royalties and subject to final
withholding VAT of 12%

Sale of Goods Sale of Services

VAT - registered 0% VAT 0% VAT
supplier from customs
territory to PEZA -
registered enterprise
VAT-exempt supplier VAT exempt VAT exempt
from customs
territory to PEZA-
registered enterprise
PEZA-registered 12% VAT imposed on VAT-exempt if the service is performed
enterprise to buyer buyer in addition to or rendered within the ecozone. Same
from customs the import tax and rule applies to lease of properties if
territory customs duties located in the ecozone.
(local/domestic sales) 12% VAT imposed on the PEZA-
registered
enterprise seller if the service is
performed outside or the property
leased is located outside the ecozone,

f. ZERO RATED SALES VS. EXEMPT SALES

Zero-rated VAT-Exempt
It is a taxable transaction but does not Not subject to the output tax
result in an output tax

The input VAT on the purchases of a VAT- The seller in an exempt transaction is not
registered person with zero-rated sales entitled to any input tax on his purchases
may be allowed as tax credits or refunded despite the issuance of a VAT invoice or
receipt;
Persons engaged in transactions which are Registration is optional for VAT-exempt
zero-rated, being subject to VAT, are persons
required to register

CIR VS. CEBU TOYO CORP. GR NO. 149073 DATED FEBRUARY 16, 2005
Facts: BBB availed of the fiscal incentive of income tax holiday under EO 226 which exempts
it from income taxes for a number of years but not from other internal revenue taxes such as
VAT.
Issue: WON the transactions of BBB are taxable for VAT purposes.
Ruling: Taxable transactions are those transactions which are subject to VAT either at the
rate of 10% or 0%. In taxable transactions, the seller shall be entitled to tax credit for the
VAT paid on purchases and leases of goods, properties or services.

83
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.
Generally, sale of goods and supply of services performed in the PH are taxable at the rate of
10%. However, export sales, or sales outside the PH, shall be subject to VAT at 0% if made
by a VAT-registered person. Under the VAT 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 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;
(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.

g. ENUMERATION OF EXEMPT TRANSACTIONS (SEC. 109 AS AMENDED BY RA NO.

10963)
h. SEC. 4.109-1 (B) OF RR NOS. 16-05, 4-07 AND 13-2018

Q: What are VAT-exempt transactions?

VAT-exempt transactions refer to the sale of goods or properties and/or services and
the use or lease of properties that is not subject to VAT (output tax) and the seller is not
allowed any tax credit of VAT (input tax) on purchases.
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.

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 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 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

84
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, tools of trade,
occupation or employment, wearing apparel, domestic animals, and personal
and household effects belonging to persons coming to settle in the Philippines
or Filipinos or their families and descendants who are now residents or
citizens of other countries, such parties hereinafter referred to as overseas
Filipinos, in quantities and of the class suitable to the profession, rank or
position of the persons importing said items, for their own use and not for
barter or sale, accompanying such persons, or arriving within a reasonable
time: Provided, That the Bureau of Customs may, upon the production of
satisfactory evidence that such persons are actually coming to settle in the
Philippines and that the goods are brought from their former place of abode,
exempt such goods from payment of duties and taxes: Provided, further, That
vehicles, vessels, aircrafts, machineries and other similar goods for use in
manufacture, shall not fall within this classification and shall therefore be
subject to duties, taxes and other charges;
“(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;
85
“(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 (₱15,000) 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 (₱1,500,000) and below, house and lot, and other residential dwellings
valued at Two million five hundred thousand pesos (₱2,500,000) and
below: Provided, That beginning January 1, 2021, the VAT exemption shall only
apply to sale of real properties not primarily held for sale to customers or held
for lease in the ordinary course of trade or business, sale of real property
utilized for socialized housing as defined by Republic Act No. 7279, sale of
house and lot, and other residential dwellings with selling price of not more
than Two million pesos (₱2,000,000): Provided, further, That 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 Philippine Statistics
Authority (PSA);
“(Q) Lease of a residential unit with a monthly rental not exceeding Fifteen
thousand pesos (₱15,000);
“(R) Sale, importation, printing or publication of books and any newspaper,
magazine, review or bulletin which appears at regular intervals with fixed
prices or subscription and sale and which is not devoted principally to the
publication of paid advertisements;
“(S) Transport of passengers by international carriers;
“(T) Sale, importation or lease of passenger or cargo vessels and aircraft,
including engine, equipment and spare parts thereof for domestic or
international transport operations;
“(U) Importation of fuel, goods and supplies by persons engaged in
international shipping or air transport operations: Provided, That the fuel,
goods, and supplies shall be used for international shipping or air transport
operations;
“(V) Services of bank, non-bank financial intermediaries performing quasi-
banking functions, and other non-bank financial intermediaries;
“(W) Sale or lease of goods and services to senior citizens and persons with
disability, as provided under Republic Act Nos. 9994 (Expanded Senior
Citizens Act of 2010) and 10754 (An Act Expanding the Benefits and Privileges
of Persons With Disability), respectively;
“(X) Transfer of property pursuant to Section 40(C)(2) of the NIRC, as
amended;
“(Y) Association dues, membership fees, and other assessments and charges
collected by homeowners associations and condominium corporations;
“(Z) Sale of gold to the Bangko Sentral ng Pilipinas (BSP);
“(AA) Sale of drugs and medicines prescribed for diabetes, high cholesterol,
and hypertension beginning January 1, 2019; and

86
 “(BB) 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 Three million pesos
(₱3,000,000).

SEC. 4.109-1. VAT-Exempt Transactions. —(A)In general. — "VAT-exempt transactions"

refer to the sale of goods or properties and/or services and the use or lease of properties
that is not subject to VAT (output tax) and the seller is not allowed any tax credit of VAT
(input tax) on purchases. 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. (B) Exempt transactions. —(1) Subject to the provisions of Subsection (2)
hereof, the following transactions shall be exempt from VAT:

(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. Livestock
shall include cows, bulls and calves, pigs, sheep, goats and rabbits. Poultry shall
include fowls, ducks, geese and turkey. Livestock or poultry does not include fighting
cocks, race horses, zoo animals and other animals generally considered as pets.
Marine food products shall include fish and crustaceans, such as, but not limited to,
eels, trout, lobster, shrimps, prawns, oysters, mussels and clams. Meat, fruit, fish,
vegetables and other agricultural and marine food products classified under this
paragraph shall be considered in their original date 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, including those using
advanced technological means of packaging, such as shrink wrapping in plastics,
vacuum packing, tetra-pack, and other similar packaging methods. Polished and/or
husked rice, corn grits, raw cane sugar and molasses, ordinary salt and copra shall be
considered as agricultural food products in their original state. Sugar whose content
of sucrose by weight, in the dry state, has a polarimeter reading of 99.5 ° and above
are presumed to be refined sugar.
Cane sugar produced from the following shall be presumed, for internal revenue
purposes, to be refined sugar: (1) product of a refining process, (2) products of a sugar
refinery, or (3) product of a production line of a sugar mill accredited by the BIR to be
producing and/or capable of producing sugar with polarimeter reading of 99.5° and
above, and for which the quedan issued therefor, and verified by the Sugar Regulatory
Administration, identifies the same to be of a polarimeter reading of 99.5° and above.
Bagasse is not included in the exemption provided for under this section.
(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); "Specialty feeds" refers to non-agricultural feeds or food 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 residents of the
Philippines returning from abroad and non-resident 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,
87
machinery and 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 of Internal Revenue, that such persons are
actually coming to settle in the Philippines and that the change of residence is
bonafide;
(e) Services subject to percentage tax under Title V of the Tax Code, as enumerated
below:
(1) Sale or lease of goods or properties or the performance of services of non-VAT-
registered persons, other than the transactions mentioned in paragraphs (A)
to (U) of Sec. 109(1) of the Tax Code, the gross annual sales and/or receipts of
which does not exceed the amount of One Million Five Hundred Thousand
Pesos (P1,500,000.00); 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) (Sec. 116 of the Tax Code);
(2) Services rendered by domestic common carriers by land, for the transport of
passengers and keepers of garages (Sec. 117);
(3) Services rendered by international air / shipping carriers (Sec. 118);
(4) Services rendered by 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), and by franchise grantees of gas and
water utilities (Sec. 119);
(5) Service rendered for overseas dispatch, message or conversation originating
from the Philippines (Sec. 120);
(6) Services rendered by any person, company or corporation (except purely
cooperative companies or associations) doing life insurance business of any
sort in the Philippines (Sec. 123);
(7) Services rendered by fire, marine or miscellaneous insurance agents of foreign
insurance companies (Sec. 124);
(8) Services of proprietors, lessees or operators of cockpits, cabarets, night or day
clubs, boxing exhibitions, professional basketball games, Jai-Alai and race
tracks (Sec. 125); and
(9) Receipts on sale, barter or exchange of shares of stock listed and traded
through the local stock exchange or through initial public offering (Sec. 127).
(f) Services by agricultural contract growers and milling for others of palay into rice,
corn into grits, and sugar cane into raw sugar; "Agricultural contract growers" refers
to those persons producing for others poultry, livestock or other agricultural and
marine food products in their original state.
(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.
(h) Educational services rendered by private educational institutions duly accredited
by the Department of Education (DepED), the Commission on Higher Education
(CHED) and the Technical Education and Skills Development Authority (TESDA) and
those rendered by government educational institutions; "Educational services" shall
refer to academic, technical or vocational education provided by private educational
institutions duly accredited by the DepED, the CHED and TESDA and those rendered
by government educational institutions and it does not include seminars, in-service
training, review classes and other similar services rendered by persons who are not
accredited by the DepED, the CHED and/or the TESDA;
88
(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.
(h) Educational services rendered by private educational institutions duly
accredited by the Department of Education (DepED), the Commission on Higher
Education (CHED) and the Technical Education and Skills Development Authority
(TESDA) and those rendered by government educational institutions; "Educational
services" shall refer to academic, technical or vocational education provided by
private educational institutions duly accredited by the DepED, the CHED and TESDA
and those rendered by government educational institutions and it does not include
seminars, in-service training, review classes and other similar services rendered by
persons who are not accredited by the DepED, the CHED and/or the TESDA;
(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 granted under PD No.
529 Petroleum Exploration Concessionaires under the Petroleum Act of 1949; and
(l) Sales by agricultural cooperatives duly registered and in good standing with the
Cooperative Development Authority (CDA) 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 and in good standing with the Cooperative Development Authority,
(n) Sales by non-agricultural, non-electric and non-credit cooperatives duly
registered with and in good standing with the CDA; Provided, That the share capital
contribution of each member does not exceed Fifteen Thousand Pesos (P15,000.00)
and regardless of the aggregate capital and net surplus ratably distributed among the
members. Importation by non-agricultural, non-electric and non-credit cooperatives
of machineries and equipment, including spare parts thereof, to be used by them are
subject to VAT.
(o) Export sales by persons who are not VAT-registered;
(p) The following sales of real properties are exempt from VAT, namely:
(1) Sale of real properties not primarily held for sale to customers or held for
lease in the ordinary course of trade or business.
(2) Sale of real properties utilized for low-cost housing as defined by RA No.
7279, otherwise known as the "Urban Development and Housing Act of 1992" and
other related laws, such as RA No. 7835 and RA No. 8763.

"Low-cost housing" refers to housing projects intended for homeless low-income

family beneficiaries, undertaken by the Government or private developers, which
may either be a subdivision or a condominium registered and licensed by the Housing
and Land Use Regulatory Board/Housing (HLURB) under BP Blg. 220, PD No. 957 or
any other similar law, wherein the unit selling price is within the selling price ceiling
per unit of P750,000.00 under RA No. 7279, otherwise known as the "Urban
Development and Housing Act of 1992" and other laws, such as RA No. 7835 and RA
No. 8763.

89
 (3) Sale of real properties utilized for socialized housing as defined under RA
No. 7279, and other related laws, such as RA No. 7835 and RA No. 8763, wherein the
price ceiling per unit is P225,000.00 or as may from time to time be determined by
the HUDCC and the NEDA and other related laws.

"Socialized housing" refers to housing programs and projects covering houses and
lots or home lots only undertaken by the Government or the private sector for the
underprivileged and homeless citizens which shall include sites and services
development, long-term financing, liberated terms on interest payments, and such
other benefits in accordance with the provisions of RA No. 7279, otherwise known as
the "Urban Development and Housing Act of 1992" and RA No. 7835 and RA No. 8763.
"Socialized housing" shall also refer to projects intended for the underprivileged and
homeless wherein the housing package selling price is within the lowest interest rates
under the Unified Home Lending Program (UHLP) or any equivalent housing program
of the Government, the private sector or non-government organizations.
(4) Sale of residential lot valued at One Million Five Hundred Thousand Pesos
(P1,500,000.00) and below, or house & lot and other residential dwellings valued at
Two Million Five Hundred Thousand Pesos (P2,500,000.00) and below where the
instrument of sale/transfer/disposition was executed on or after November 1, 2005;
Provided, That not later than January 31, 2009 and every three (3) years thereafter,
the amounts stated herein shall be adjusted to its present value using the Consumer
Price Index, as published by the National Statistics Office (NSO); Provided, further,
that such adjustment shall be published through revenue regulations to be issued not
later than March 31 of each year;

If two or more adjacent residential lots are sold or disposed in favor of one buyer, for
the purpose of utilizing the lots as one residential lot, the sale shall be exempt from
VAT only if the aggregate value of the lots do not exceed P1,500,000.00. Adjacent
residential lots, although covered by separate titles and/or separate tax declarations,
when sold or disposed to one and the same buyer, whether covered by one or
separate Deed of Conveyance, shall be presumed as a sale of one residential lot.

(q) Lease of residential units with a monthly rental per unit not exceeding Ten
Thousand Pesos (P10,000.00), regardless of the amount of aggregate rentals received
by the lessor during the year; Provided, that not later than January 31, 2009 and every
three (3) years thereafter, the amount of P10,000.00 shall be adjusted to its present
value using the Consumer Price Index, as published by the NSO;

The foregoing notwithstanding, lease of residential units where the monthly rental
per unit exceeds Ten Thousand Pesos (P10,000.00) but the aggregate of such rentals
of the lessor during the year do not exceed One Million Five Hundred Pesos
(P1,500,000.00) shall likewise be exempt from VAT, however, the same shall be
subjected to three percent (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

90
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 dormitories, boarding houses and
bed spaces; and per room in case of rooms for rent.

(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; Provided, that the exemption from VAT on the importation and local
purchase of passenger and/or cargo vessels shall be limited to those of one hundred
fifty (150) tons and above, including engine and spare parts of said vessels; Provided,
further, that the vessels to be imported shall comply with the age limit requirement,
at the time of acquisition counted from the date of the vessel's original
commissioning, as follows: (i) for passenger and/or cargo vessels, the age limit is
fifteen (15) years old, (ii) for tankers, the age limit is ten (10) years old, and (iii) For
high-speed passenger crafts, the age limit is five (5) years old; Provided, finally, that
exemption shall be subject to the provisions of Section 4 of Republic Act No. 9295,
otherwise known as "The Domestic Shipping Development Act of 2004";
(t) Importation of fuel, goods and supplies by persons engaged in international
shipping or air transport operations; Provided, that the said fuel, goods and supplies
shall be used exclusively or shall pertain to the transport of goods and/or passenger
from a port in the Philippines directly to a foreign port without stopping at any other
port in the Philippines; Provided, further, that if any portion of such fuel, goods or
supplies is used for purposes other than that mentioned in this paragraph, such
portion of fuel, goods and supplies shall be subject to 10% VAT;
(u) Services of banks, non-bank fmancial intermediaries performing quasi-banking
functions, and other non-bank financial intermediaries subject to percentage tax
under Secs. 121 and 122 of the Tax Code, such as money changers and pawnshops;
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
(P1,500,000.00); Provided, That not later than January 31, 2009 and every three (3)
years thereafter, the amount of P1,500,000.00 shall be adjusted to its present value
using the Consumer Price Index, as published by the NSO.
For purposes of the threshold of P1,500,000.00, the husband and the wife shall be
considered separate taxpayers. However, the aggregation rule for each taxpayer shall
apply. For instance, if a professional, aside from the practice of his profession, also
derives revenue from other lines of business which are otherwise subject to VAT, the
same shall be combined for purposes of determining whether the threshold has been
exceeded. Thus, the VAT-exempt sales shall not be included in determining the
threshold.

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(B) Exempt transactions. –
(1) Subject to the provisions of Section 4.109.2 hereof, the following
transactions shall be exempt from VAT:
(a) xxx
xxx xxx xxx
(d) Importation of professional instruments and implements, tools of
trade, occupation or employment, wearing apparel, domestic animals,
and personal and household effects belonging to persons coming to
settle in the Philippines or Filipinos or their families and descendants
who are now residents or citizens of other countries, such parties
hereinafter referred to as overseas Filipinos, in quantities and of the
class suitable to the profession, rank or position of the persons
importing said items, for their own use and not for barter or sale,
accompanying such persons, or arriving within a reasonable time:
Provided, That the Bureau of Customs may, upon the production of
satisfactory evidence that such persons are actually coming to settle in
the Philippines and that the goods are brought from their former place
of abode, exempt such goods from payment of duties and taxes: Provided,
further, that vehicles, vessels, aircrafts, machineries and other similar
goods for use in manufacture, shall not fall within this classification and
shall therefore be subject to duties, taxes and other charges;
(e) Services subject to percentage tax under Title V of the Tax Code, as
enumerated below:
(1) Sale or lease of goods or properties or the performance of services of non-
VAT-registered persons, other than the transactions mentioned in paragraphs
(A) to (AA) of Sec. 109(1) of the Tax Code, the gross annual sales and/or
receipts of which does not exceed the amount of Three Million Pesos
(P3,000,000.00).
xxx xxx xxx
(p) The following sales of real properties are exempt from VAT, namely:
(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.
(2) Sale of real properties utilized for low-cost housing as defined by RA No.
7279, otherwise known as the "Urban Development and Housing Act of 1992"
and other related laws.
"Low-cost housing" refers to housing projects intended for homeless low-
income family beneficiaries, undertaken by the Government or private
developers, which may either be a subdivision or a condominium registered
and licensed by the Housing and Land Use Regulatory Board/Housing
(HLURB) under BP Blg. 220, PD No. 957 or any other similar law, wherein the
unit selling price is within the selling price per unit as set by the Housing
and Urban Development Coordinating Council (HUDCC) pursuant to RA
No. 7279 otherwise known as the “Urban Development and Housing Act of
1992” and other laws.
(3) Sale of real properties utilized for socialized housing as defined under RA
No. 7279, and other related laws, such as RA No. 7835 and RA No. 8763,
wherein the price ceiling per unit is P450,000.00 or as may from time to time
be determined by the HUDCC and the NEDA and other related laws.
"Socialized housing" refers to housing programs and projects covering houses
and lots or home lots only undertaken by the Government or the private sector
for the underprivileged and homeless citizens which shall include sites and
services development, long-term financing, liberated terms on interest

92
payments, and such other benefits in accordance with the provisions of RA No.
7279, otherwise known as the "Urban Development and Housing Act of 1992"
and RA No. 7835 and RA No. 8763. "Socialized housing" shall also refer to
projects intended for the underprivileged and homeless wherein the housing
package selling price is within the lowest interest rates under the Unified
Home Lending Program (UHLP) or any equivalent housing program of the
Government, the private sector or non-government organizations.

(4) Sale of residential lot valued at One Million Five Hundred Thousand Pesos
(P1,500,000.00) and below, or house & lot and other residential dwellings
valued at Two Million Five Hundred Thousand Pesos (P2,500,000.00) and
below, as adjusted in 2011 using the 2010 Consumer Price Index values.
If two or more adjacent residential lots are sold or disposed in favor of one
buyer, for the purpose of utilizing the lots as one residential lot, the sale shall
be exempt from VAT only if the aggregate value of the lots do not exceed
P1,500,000.00. Adjacent residential lots, although covered by separate titles
and/or separate tax declarations, when sold or disposed to one and the same
buyer, whether covered by one or separate Deed of Conveyance, shall be
presumed as a sale of one residential lot.
Provided, That beginning January 1, 2021, the VAT exemption shall only
apply to sale of real properties not primarily held for sale to customers
or held for lease in the ordinary course of trade or business, sale of real
property utilized for socialized housing as defined by Republic Act No.
7279, sale of house and lot, and other residential dwellings with selling
price of not more than Two Million Pesos (P2,000,000.00): Provided,
further, That every three (3) years thereafter, the amounts stated herein shall
be adjusted to its present value using the Consumer Price Index, as published
by the Philippine Statistics Authority (PSA).
(q) Lease of residential units with a monthly rental per unit not exceeding
Fifteen Thousand Pesos (P15,000.00).
The foregoing notwithstanding, lease of residential units where the monthly
rental per unit exceeds Fifteen Thousand Pesos (P15,000.00), but the
aggregate of such rentals of the lessor during the year do not exceed Three
Million Pesos (P3,000,000.00) shall likewise be exempt from VAT; however,
the same shall be subject to three percent (3%) percentage tax under Section
116 of the Tax Code.
In cases where a lessor has several residential units for lease, some are leased
out for a monthly rental per unit of not exceeding P15,000.00 while others
are leased out for more than P15,000.00 per unit, his tax liability will be as
follows:
1. The gross receipts from rentals not exceeding P15,000.00 per month per
unit shall be exempt from VAT regardless of the aggregate annual gross
receipts. It is also exempt from the 3% percentage tax.
2. The gross receipts from rentals exceeding P15,000.00 per month per unit
shall be subject to VAT if the aggregate annual gross receipts from said units
only exceeds P3,000,000.00. Otherwise, the gross receipts will be subject to
the 3% tax imposed under Section 116 of the Tax Code.

In case of mixed transactions, the abovementioned rule should be observed.

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, lodging houses, inns and pension houses.
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 dormitories,
boarding houses and bed spaces; and per room in case of rooms for rent.

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Illustration 1: A lessor rents his 15 residential units for P14,500 per
month. During the taxable year, his accumulated gross receipts
amounted to P2,610,000. He is not subject to VAT since the monthly rent
per unit does not exceed P15,000. He is also not subject to 3% Percentage
Tax.
Using the same example, assuming he has 20 residential units with the
same monthly rent per unit and his accumulated gross receipts during
the taxable year amounted to P3,480,000, he is still not subject to VAT
even if the accumulated earnings exceeded P3,000,000 since the
monthly rent per unit does not exceed P15,000. He is also not subject to
3% Percentage Tax.
Illustration 2: A lessor rents his 15 residential units for P15,500 per
month. During the taxable year, his accumulated gross receipts
amounted to P2,790,000. He is not subject to VAT since his accumulated
gross receipts did not exceed P3,000,000. He is, however, subject to 3%
Percentage Tax since the monthly rent per unit is more than P15,000.00.
Using the same example, assuming he has 20 residential units with the
same monthly rent per unit and his accumulated gross receipts during
the taxable year amounted to P3,720,000, he is already subject to VAT
since the accumulated earnings exceeded P3,000,000 and the monthly
rent per unit is more than P15,000.00.
Illustration 3: A lessor rents his 2 commercial and 10 residential units
for monthly rent of P60,000 and P15,000 per unit, respectively. During
the taxable year, his accumulated gross receipts amounted to P3,240,000
(P1,440,000 from commercial units and P1,800,000 from residential
units). The P1,440,000 from commercial units is not subject to VAT since
it did not exceed P3,000,000. It is, however, subject to 3% Percentage
Tax. On the other hand, the P1,800,000 accumulated receipts from the
residential units are not subject to Percentage Tax and exempt from VAT
since the monthly rent is not more than P15,000.
Using the same example, assuming the lessor has 5 commercial units and
his accumulated gross receipts during the taxable year amounted to
P5,400,000 (P3,600,000 from commercial units and P1,800,000 from
residential units), he is subject to VAT with respect to P3,600,000 since
it exceeded P3,000,000. The P1,800,000 accumulated receipts from
residential units are not subject to Percentage Tax and exempt from VAT
since the monthly rent is not more than P15,000.
Illustration 4: A lessor rents his 5 commercial and 10 residential units
for monthly rent of P60,000 and P15,500 per unit, respectively. During
the taxable year, his accumulated gross receipts amounting to
P5,460,0000 (P3,600,000 from commercial units and P1,860,000 from
residential units) shall be subject to VAT since it exceeded the
P3,000,000 threshold and the monthly rent of residential units is more
than P15,000.
xxx xxx xxx
(s) Transport of passengers by international carriers;
(t) Sale, importation or lease of passenger or cargo vessels and aircraft,
including engine, equipment and spare parts thereof for domestic or
international transport operations: Provided, however, that the exemption
from VAT on the importation and local purchase of passenger and/or cargo
vessels shall be subject to the requirements on restriction on vessel
importation and mandatory vessel retirement program of Maritime Industry
Authority (MARINA);
(u) Importation of fuel, goods and supplies by persons engaged in
international shipping or air transport operations: Provided, That the
fuel, goods and supplies shall be used for international shipping or air
transport operations. Thus, said fuel, goods and supplies shall be used

94
exclusively or shall pertain to the transport of goods and/or passenger from a
port in the Philippines directly to a foreign port, or vice versa, without docking
or stopping at any other port in the Philippines unless the docking or stopping
at any other Philippine port is for the purpose of unloading passengers and/or
cargoes that originated from abroad, or to load passengers and/or cargoes
bound for abroad: Provided, further, that if any portion of such fuel, goods or
supplies is used for purposes other than that mentioned in this paragraph,
such portion of fuel, goods and supplies shall be subject to twelve percent
(12%) VAT;
(v) Services of banks, non-bank financial intermediaries performing
quasi-banking functions, and other non-bank financial intermediaries
such as money changers and pawnshops, subject to percentage tax under Secs.
121 and 122, respectively, of the Tax Code;
(w) Sale or lease of goods and services to senior citizens and persons with
disabilities, as provided under Republic Act Nos. 9994 (Expanded Senior
Citizens Act of 2010) and 10754 (An Act Expanding the Benefits and
Privileges of Persons with Disability), respectively;
(x) Transfer of Property pursuant to Section 40(C)(2) of the Tax Code, as
amended;
(y) Association dues, membership fees, and other assessments and
charges collected on a purely reimbursement basis by homeowners’
associations and condominium corporations established under Republic
Act No. 9904 (Magna Carta for Homeowners and Homeowners’
Association) and Republic Act No. 4726 (The Condominium Act),
respectively;
(z) Sale of gold to the Bangko Sentral ng Pilipinas;
(aa) Sale of drugs and medicines prescribed for diabetes, high
cholesterol, and hypertension to beginning January 1, 2019 as
determined by the Department of Health; and
(bb) 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 Three Million
Pesos (P3,000,000.00).
Self-employed individuals and professionals availing of the 8% tax on
gross sales and/or receipts and other non-operating income, under
Sections 24(A)(2)(b) and 24(A)(2)(c)(2)(a) of this Code shall also be
exempt from the payment of twelve (12%) VAT.
Illustration 5: Mr. JMLH signified his intention to be taxed at “8%
income tax in lieu of the graduated income tax rates and percentage tax
under Section 116” in his 1st Quarter Income Tax. However, his gross
sales/receipts during the taxable year have exceeded the VAT threshold
as follows: Amount
January Php 250,000.00
February 250,000.00
March 250,000.00
April 250,000.00
May 250,000.00
June 250,000.00
July 250,000.00
August 250,000.00
September 250,000.00
October Php 1,000,000.00
November 1,000,000.00
December 1,000,000.00 3,000,000.00
Total gross Sales/Receipts Php 5,250,000.00

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 Mr. JMLH lost the option to pay the 8% commuted tax rate when his gross
sales/receipts exceeded the three million threshold during the 4th
Quarter. For business tax purposes, he is subject to the 12% VAT
prospectively starting November 2018. He is also required to update his
registration from non-VAT to VAT on or before November 30, 2018.

i. EXEMPT PERSONS VS. EXEMPT TRANSACTIONS

VAT EXEMPT TRANSACTION VAT EXEMPT PERSON

It involves goods. It is transactional in
nature. Goods or services that are
specifically listed by law to be VAT
exempt.
EFFECTS
VAT mechanisms under the NIRC is not
applicable to that kind of transaction.
Meaning there will be no output tax to be
paid by the taxpayer and also there will be
no input tax to be claimed by the taxpayer
in that kind of transaction.
The person/entity is granted a VAT
exemption under the tax code or under
special law or international agreements
entered by the Philippines.
Since the person is exempt from VAT,
the person exempt from VAT if will sell
a product that person will not be able to
impose 12% VAT. But he will most likely
be subjected to 0% VAT and whatever
he purchases later on he can refund it
from the government. In other words,
he can claim for input taxes because he
is exempt totally from the payment of
any VAT even indirectly

VAT EXEMPT TRANSACTION

Ex: I am a VAT registered taxpayer. I engaged in a domestic passenger transportation
business by land and by sea. With respect to the transaction with the transportation by land,
what is the business tax implication? It is VAT exempt right because it covered by other
percentage tax. The service itself, transporting of passengers domestically by land, that is a
VAT exempt transaction.
VAT EXEMPT PERSON
Ex: A PEZA-registered entity. Mag benta ka sa kanila, zero-rated. At the same time, if this
entity will sell, they are exempt from VAT. (22:46)
There is a list provided under Sec. 109. You do not need to memorize this. You just need to
familiarize with the provisions with each and exempt transaction. Let us discuss them one
by one.

CIR VS. SEAGATE TECHNOLOGY (PHILS) GR NO. 153866 FEBRUARY 11, 2005

Ruling: 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 PH 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.

96
If a special law merely exempts a party as a seller from its direct liability for payment of the
VAT, but does not relieve the same party as a purchaser from its indirect burden of the VAT
shifted to it by its VAT-registered suppliers, the purchase transaction is not exempt.

VI. TRANSITIONAL AND PRESUMPTIVE INPUT TAX

SEC. 111
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.

WHO MAY CLAIM THIS TRANSITIONAL INPUT VAT?

1. A person who becomes liable to value-added tax;
2. Any person who elects to be a VAT-registered person.

But if you want to be simple about it, transition input VAT is that input VAT which can be
claimed by the taxpayer who becomes liable for VAT for the first time.
Example: Dati, hindi ako lumampas ng 1.9M threshold, right now because I’m doing well
with my advertising, my sales went up exceeding such threshold, I have to register as a
VAT-taxpayer, it’s already mandatory registration on my part, so in my transition period,
since I will pay the VAT, I can claim the transitional input tax.
Q: What is the amount of the transitional input VAT that can be deducted against
the output tax?
1. 2% of the value of the beginning inventory of goods materials, and supplies; OR

Which is why the law requires you to submit an inventory in accordance with the revenue
regulation (inaudible) to the Secretary of Finance so that you will be able to determine
the basis of the 2%. Do you still consider the VAT you paid for the inventory materials?
No longer.
2. The actual value-added tax paid on such goods, materials and supplies, whichever
is higher.

You look at the receipts, how much VAT did you pay when you purchased these goods,
materials and supplies. This is one form of tax-minimization.

Q: What is the rule on transitional input credits?

A person who becomes liable to VAT or any person who elects to be VAT-registered shall,
subject to the filing of an inventory, be allowed input tax on his beginning inventory of goods,
materials and supplies equivalent to 2% of the value of such inventory or the actual VAT paid
on such goods, materials and supplies, whichever is higher, which shall be creditable against
the output tax.

(4) Presumptive Input Tax Credits

SEC. 111. Transitional/Presumptive Input Tax Credits. –
(B) Presumptive Input Tax Credits. –
1) Persons or firms engaged in the processing of sardines, mackerel and milk, and in
manufacturing refined sugar and cooking oil, shall be allowed a presumptive input tax,
creditable against the output tax, equivalent to one and one-half percent (4%) of the gross
value in money of their purchases of primary agricultural products which are used as inputs
97
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.

Q: WHO MAY CLAIM THIS PRESUMPTIVE INPUT TAX?

A: It’s claimable only by those who are engaged in specific businesses. They are:
1. Persons or firms engaged in the processing of sardines, mackerel and milk; and
2. Persons or firms engaged in manufacturing refined sugar and cooking oil and packed
noodle-based instant meals.

Q: WHAT IS THE INPUT VAT RATE?

A: 4% of the gross value in money of their purchases of primary agricultural products,
which are used as inputs to their production.
Example: What if you buy sardines in its original state to be used in my sardines
processing plant? What is the tax consequence as to the supplier or seller of sardines?
Diba human consumption in its original state, it is supposed to be VAT-exempt. May
napasa ba na input VAT sa akin? Wala diba, nothing, because I purchased it from a VAT-
exempt person.
Take note: I will only have input VAT when I purchase something from someone who is
also a VAT-registered person. Pag VAT-exempt person, wala yan.
What am I supposed to pay as input tax? I am a VAT registered person but because of the
nature of my business, I sell sardines, I cannot make any input tax, in the end daku kaayo
ang output tax diba. So this is one form of a remedy provided for by law for those who
are engaged in those kinds of businesses. If you notice, these are basic necessities, yung
sardines, mackerel, milk. Noddles? Necessity ba sya? LOL.

Q: What is the rule on presumptive input tax credits?

Persons or firms engaged in the processing of sardines, mackerel and milk, and in the
manufacturing or refined sugar, cooking oil and packed noodle-based instant meals, shall
be allowed a presumptive input tax, creditable against the output tax, equivalent to 4%
of the gross value in money of their purchases of primary agricultural products which are
used as inputs to their production.

Q: TRANSITIONAL INPUT TAX VS. PRESUMPTIVE INPUT TAX

A: Their differences are:
1. Their tax rates
2. Tax base
3. How does it work

SEC. 4.111-1 OF RR NO. 16-05

SEC. 4.111-1. Transitional/ Presumptive Input Tax Credits.—

(a) Transitional Input Tax Credits on Beginning Inventories
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;
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 (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.

(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 paragraph, 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.

FORT BONIFACIO DEVELOPMENT VS. CIR GR NO. 158885 DATED APRIL 2, 2009

Petitioner was a real estate developer that bought from the national government a parcel
of land that used to be the Fort Bonifacio military reservation. At the time of the said sale
there was as yet no VAT imposed so Petitioner did not pay any VAT on its purchase.
Subsequently, Petitioner sold two parcels of land to Metro Pacific Corp. In reporting the
said sale for VAT purposes (because the VAT had already been imposed in the interim),
Petitioner claimed transitional input VAT corresponding to its inventory of land. The BIR
disallowed the claim of presumptive input VAT and thereby assessed Petitioner for
deficiency VAT.

ISSUE:
Is Petitioner entitled to claim the transitional input VAT on its sale of real properties
given its nature as a real estate dealer and if so (i) is the transitional input VAT applied
only to the improvements on the real property or is it applied on the value of the entire
real property and (ii) should there have been a previous tax payment for the transitional
input VAT to be creditable?

HELD:
YES. Petitioner is entitled to claim transitional input VAT based on the value of not only
the improvements but on the value of the entire real property and regardless of whether
there was in fact actual payment on the purchase of the real property or not.

The amendments to the VAT law do not show any intention to make those in the real
estate business subject to a different treatment from those engaged in the sale of other
goods or properties or in any other commercial trade or business. On the scope of the
basis for determining the available transitional input VAT, the CIR has no power to limit
the meaning and coverage of the term "goods" in Section 105 of the Tax Code without
statutory authority or basis. The transitional input tax credit operates to benefit newly

99
 VAT-registered persons, whether or not they previously paid taxes in the acquisition of
their beginning inventory of goods, materials and supplies.

FORT BONIFACIO DEVELOPMENT VS. CIR GR NO. 175707 DATED NOVEMBER 19, 2014

Whether the transitional/presumptive input tax credit under Section 105 of the NIRC
may be claimed only on the "improvements" on real properties.

The Court held in the earlier consolidated decision, G.R. Nos. 158885 and 170680, as follows:
On its face, there is nothing in Section 105 of the Old NIRC that prohibits the inclusion of real
properties, together with the improvements thereon, in the beginning inventory of goods,
materials and supplies, based on which inventory the transitional input tax credit is
computed. It can be conceded that when it was drafted Section 105 could not have possibly
contemplated concerns specific to real properties, as real estate transactions were not
originally subject to VAT. At the same time, when transactions on real properties were finally
made subject to VAT beginning with Rep. Act No. 7716, no corresponding amendment was
adopted as regards Section 105 to provide for a differentiated treatment in the application
of the transitional input tax credit with respect to real properties or real estate dealers.

It was Section 100 of the Old NIRC, as amended by Rep. Act No. 7716, which made real estate
transactions subject to VAT for the first time. Prior to the amendment, Section 100 had
imposed the VAT "on every sale, barter or exchange of goods", without however specifying
the kind of properties that fall within or under the generic class "goods" subject to the tax.

Rep. Act No. 7716, which significantly is also known as the Expanded Value-Added Tax
(EVAT) law, expanded the coverage of the VAT by amending Section 100 of the Old NIRC in
several respects, some of which we will enumerate. First, it made every sale, barter or
exchange of "goods or properties" subject to VAT. Second, it generally defined "goods or
properties" as "all tangible and intangible objects which are capable of pecuniary
estimation." Third, it included a non-exclusive enumeration of various objects that fall under
the class "goods or properties" subject to VAT, including "[r]eal properties held primarily for
sale to customers or held for lease in the ordinary course of trade or business."

From these amendments to Section 100, is there any differentiated VAT treatment on
real properties or real estate dealers that would justify the suggested limitations on
the application of the transitional input tax on them? We see none.

Rep. Act No. 7716 clarifies that it is the real properties "held primarily for sale to customers
or held for lease in the ordinary course of trade or business" that are subject to the VAT, and
not when the real estate transactions are engaged in by persons who do not sell or lease
properties in the ordinary course of trade or business. It is clear that those regularly engaged
in the real estate business are accorded the same treatment as the merchants of other goods
or properties available in the market. In the same way that a milliner considers hats as his
goods and a rancher considers cattle as his goods, a real estate dealer holds real property,
whether or not it contains improvements, as his goods.117 (Citations omitted, emphasis
added.)

Under Section 105, the beginning inventory of "goods" forms part of the valuation of
the transitional input tax credit. Goods, as commonly understood in the business
sense, refers to the product which the VAT registered person offers for sale to the
public. With respect to real estate dealers, it is the real properties themselves which
constitute their "goods". Such real properties are the operating assets of the real
estate dealer.

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Section 4.100-1 of RR No. 7-95 itself includes in its enumeration of "goods or properties"
such "real properties held primarily for sale to customers or held for lease in the ordinary
course of trade or business." Said definition was taken from the very statutory language of
Section 100 of the Old NIRC. By limiting the definition of goods to "improvements" in Section
4.105-1, the BIR not only contravened the definition of "goods" as provided in the Old NIRC,
but also the definition which the same revenue regulation itself has provided.118 (Emphasis
added.)

The Court then emphasized in its Resolution in G.R. No. 158885 and G.R. No. 170680 that
Section 105 of the old NIRC, on the transitional input tax credit, remained intact despite the
enactment of Republic Act No. 7716. Section 105 was amended by Republic Act No. 8424,
and the provisions on the transitional input tax credit are now embodied in Section 111(A)
of the new NIRC, which reads:

Section 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 [F]inance, upon
recommendation of the Commissioner, be allowed input tax on his beginning inventory of
goods, materials and supplies equivalent for 8% 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.119

In G.R. Nos. 158885 and 170680, the Court asked, "If the plain text of Republic Act No. 7716
fails to supply any apparent justification for limiting the beginning inventory of real estate
dealers only to the improvements on their properties, how then were the Commissioner of
Internal Revenue and the courts a quo able to justify such a view?" The Court then answered
this question in this manner:

The fact alone that the denial of FBDC's claims is in accord with Section 4.105-1 of RR 7-95
does not, of course, put this inquiry to rest. If Section 4.105-1 is itself incongruent to Rep. Act
No. 7716, the incongruence cannot by itself justify the denial of the claims. We need to
inquire into the rationale behind Section 4.105-1, as well as the question whether the
interpretation of the law embodied therein is validated by the law itself.

It is correct, as pointed out by the CTA, that upon the shift from sales taxes to VAT in 1987
newly-VAT registered people would have been prejudiced by the inability to credit against
the output VAT their payments by way of sales tax on their existing stocks in trade. Yet that
inequity was precisely addressed by a transitory provision in E.O. No. 273 found in Section
25 thereof. The provision authorized VAT-registered persons to invoke a "presumptive input
tax equivalent to 8% of the value of the inventory as of December 31, 1987 of materials and
supplies which are not for sale, the tax on which was not taken up or claimed as deferred
sales tax credit," and a similar presumptive input tax equivalent to 8% of the value of the
inventory as of December 31, 1987 of goods for sale, the tax on which was not taken up or
claimed as deferred sales tax credit. (Emphasis ours.)

VII. VAT REFUND

“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
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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. [72]
(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 of Input Taxes shall be Made.— In proper cases, the
Commissioner shall grant a refund for creditable input taxes within ninety (90) days
from the date of submission of the official receipts or invoices and other documents in
support of the application filed in accordance with Subsections (A) and (B)
hereof: Provided, That should the Commissioner find that the grant of refund is not proper,
the Commissioner must state in writing the legal and factual basis for the denial.
“In case of full or partial denial of the claim for tax refund, the taxpayer affected may, within
thirty (30) days from the receipt of the decision denying the claim, appeal the decision
with the Court of Tax Appeals: Provided, however, That failure on the part of any official,
agent, or employee of the BIR to act on the application within the ninety (90)-day period
shall be punishable under Section 269 of this Code.
(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.

THREE BASIC PRINCIPLES ABOUT VAT REFUND

1. This is a law, which is strictly construed against the taxpayer and in favor of the taxing
authority because a tax refund partakes the nature of a tax exemption. The consequence is
that, it is up for the taxpayer to support it with facts na he is entitled to such refund.
2. The proper party to seek the refund for tax is the statutory taxpayer. It is the seller of the
property and not the end consumer.
3. The VAT refund is applicable only to the VAT registered taxpayers. If he is not a VAT
registered person, he cannot claim for any tax refund.

Two Instances wherein the VAT-registered taxpayer can claim a Tax Credit/Refund of
Input Tax:
1. Zero-rated or effectively zero-rated sales of goods, properties, or services [SEC. 112 (A)];
2. The cancellation of VAT registration [SEC. 112 (C)].

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 Palugi na business mo, you do not want to pay the VAT anymore, it’s already below 1.9M
(or 3M now), you want to be subject to OPT na, it’s okay, you cancel your VAT registration, if
there are excess input taxes, you may claim for a tax refund. This is under SEC. 112 (B) (?)

Q: What about the other VAT taxpayers?

A: The other VAT taxpayers, they have no zero-rated sales, they can only carry-over of the
excess input tax to the next taxable quarter.
TWO-TIERED PROCESS OF THE APPLICATION FOR A VAT REFUND
1. First, the taxpayer must file the administrative claim for refund before the BIR
2. Second, if the administrative application fails, then that’s the time that the taxpayer will
have to avail of the judicial application for tax refund.

PROCEDURE
(1) Where should it be filed: The administrative claim for refund shall be filed at the
appropriate BIR office or the Revenue District Office where the principal business is located.

(2) When should it be filed:

The taxpayer should file the administrative claim within two (2) years from the close of
the taxable quarter when the sales were made. It’s not two years from the date of sale.
If it’s NOT filed within the two (2) year period, prescribed na, he cannot claim a refund.
If filed within the two (2) year period, CIR has 90 days within which to decide the
application for refund.

TWO INTERPRETATIONS UNDER THE EXISTING REVENUE REGULATIONS:

1. By Kim Henares: Revenue Regulation in 2014, sabi nya at the time of the submission dapat
kompleto kana, whatever that is submitted afterwards will no longer be considered. The
problem is, she applied such new ruling even before the effectivity of such. Supposedly, it
does not have any retroactive effect. There is a SC ruling which states that what must be
applied must be the rules at the time of the submission.
2. 2017 Revenue Regulation by Carlos Dominguez, which recognizes such SC ruling.

CONCLUSION: The 120-day period is reckoned from the date of submission complete
documents in support of the application filed.
(3) After it is filed together with the supporting documents, three (3) things may
happen:
a. CIR will grant the application for refund; or
b. CIR will deny the application; or
c. CIR will not do anything. There is INACTION by the CIR.

(4) In case there is DENIAL by the CIR, the taxpayer may avail of the judicial remedies.
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 a. If taxpayer receives the denial of the application (administrative claim) from the
CIR- The taxpayer may file an appeal (judicial claim) within 30 days from the receipt
of the denial with the CTA IN DIVISION via a PETITION FOR REVIEW under
Revised Rules of Court of Tax Appeals (RRCTA) Rule 8, Sec. 2. The rule to follow is
RULE 42 of the ordinary Rules of Court (RRCTA Rule 8, Sec. 4). So, suppletory ang
ating Rules of Court.
b. CTA IN DIVISION wholly or partially denies the petition for review; the taxpayer
may file a motion for reconsideration within 15 days from receipt of the decision
(Rule 15 Sec. 1 of RRCTA).
c. CTA IN DIVISION denies the motion for reconsideration, the taxpayer may elevate
it to the CTA EN BANC, he will file a PETITION FOR REVIEW (RRCTA Rule 8, Sec. 1)
d. CTA EN BANC decides against the taxpayer, that’s the time that the taxpayer may go
up to the SUPREME COURT through a PETITION FOR REVIEW ON CERTIORARI
under RULE 45 of the Rules of Court within the 15 days from receipt of the
decision. Iba ang petition on certiorari ha under Rule 65, iba yun.
(5) If there is INACTION by the CIR within 120 days from submission of complete
documents, taxpayer has two (2) options: (According to Dean daw)
a. Wait for the CIR to make the decision; or
b. Taxpayer may opt not to wait for the decision but instead file an appeal with
the CTA in division within 30 days after the lapse of the 120-day period.
In either of the two options, if the CTA in division decides against the taxpayer, the taxpayer
may file a motion for reconsideration or for new trial, and it it’s still denied, he may go to the
CTA en banc, after that, another motion for reconsideration or new trial and if he will still
lose, then the taxpayer will go the Supreme Court via Rule 45 of the Rules of Court.
Q: Supposing the two (2) year prescriptive period is already running out, hindi pa matapos
ang 120 day period, what should the taxpayer do? What kind of application for refund does
the 2-year prescriptive period apply to?
A: It only applies to the administrative claim for refund. So, if it’s only on the last day of the
2-year prescriptive period that you have filed the administrative claim, it’s all right.
Thereafter, the taxpayer must wait for 120 days. The taxpayer cannot file before the lapse of
the 120-day period because the 120-day period and the 30 days thereafter within which
to file the appeal (judicial claim) are MANDATORY and JURISDICTIONAL.
GENERAL RULE: 120-day period and the 30 days thereafter within which to file the appeal
are MANDATORY and JURISDICTIONAL.
EXCEPTION: The time between Dec. 10, 2003 until October 6, 2010 when the Aichi Ruling
came out and became effective.

UNDER THE TRAIN LAW:

1. The CIR is now given ninety (90) days from the date of submission of the official receipts
or invoices and other documents in support of the application filed. Dati 120 days, now 90
days nalang.
2. The application is for tax refund only, if you notice the term “tax credit” is removed. In
other words, kwartahay nani karun.

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3. The CIR is now required to make a ruling on the refund application unlike before that the
CIR may not do anything within the 120-day period. But right now, he is mandatorily
required to make a ruling and he must state the ruling in writing and the legal and factual
basis of his denial. But the law says “denial” lang, what about “grant”?

In case of full and partial denial of the application for refund, the taxpayer may appeal the
same within thirty (30) days from the receipt of the decision denying the claim; appeal the
decision with the Court of Tax Appeals. So, same parin. This is thru petition for review; file it
in the CTA in division.
4. What if the BIR will not act on the refund application? Then the official, agent, or employee
of the BIR concerned shall be subject to criminal sanctions.

Q: What are the requirements for a claim for VAT refund/credit?

1. The taxpayer is engaged in sales which are zero-rated or effectively zero-rated
2. The taxpayer is VAT-registered
3. The claim must be filed within two years after the close of the taxable quarter when such
sales were made
4. The input taxes are due or paid;
5. The input taxes are not transitional input taxes
6. The input taxes have not been applied against output taxes during and in the succeeding
quarters
7. The input taxes claimed are attributable to zero-rated or effectively zero-rated sales
8. In certain types of zero-rated sales, the acceptable foreign currency exchange proceeds
thereof had been duly accounted for in accordance with BSP rules and regulations [Sections
106(A)(2)(a)(1) and (2); Section 106(B); Sections 108(B)(1) and (2)]
9. Where there are both zero-rated or effectively zero-rated sales and taxable or exempt
sales, and the input taxes cannot be directly and entirely attributable to any of these sales,
the input taxes shall be proportionately allocated on the basis of sales volume. (See INTEL
TECHNOLOGY PHILIPPINES V. CIR [APRIL 27, 2007])

Note: In JP MORGAN CHASE BANK, N.A. – PHILIPPINE CUSTOMER CARE CENTER VS.
COMMISSIONER OF INTERNAL REVENUE [CTA CASE NOS. 7650, 7681 AND 7782, MARCH
13, 2012], the CTA held that Input taxes incurred prior to registration as VAT taxpayer with
the BIR cannot be the subject of a refund.
An application for refund/tax credit certificate on the basis of the cancellation of VAT
registration filed before the effectivity of the cancellation is premature. MINDANAO I
GEOTHERMAL PARTNERSHIP VS. COMMISSIONER OF INTERNAL REVENUE, CTA CASE NO.
8247, AUGUST 10, 2012
Amounts reflected in the supporting documents must the same with the amount reported as
zero-rated sales in its VAT Return for the period subject for refund. (HARTE-HANKS
PHILIPPINES, INC. VS. COMMISSIONER OF INTERNAL REVENUE, CTA CASE NO. 7975 &
7998, JULY 2, 2012)

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A VAT-registered person claiming VAT zero rated direct export sales must present at least three
(3) types of documents, to wit: (a) the sales invoice as proof of sale of goods; (b) the export
declaration and bill of lading or airway bill as proof of actual shipment of goods from the
Philippines to a foreign country; and (c) bank credit advice, certificate of bank remittance or
any other document proving payment for the goods in acceptable foreign currency or its
equivalent in goods and services. PHILEX MINING CORPORATION INC. VS. COMMISSIONER
OF INTERNAL REVENUE, CTA CASE NO. 8284, JULY 30, 2012

Q: In claims for VAT refund/credit, what is the reckoning point for the two-year
prescriptive period?
The reckoning period is from the close of the taxable when the relevant sales were made.
Note: For this matter, It is important to discuss the leading case of CIR V. MIRANT PAGBILAO
CORP. [SEPTEMBER 12, 2008].
In CIR V. MIRANT PAGBILAO CORP. [SEPTEMBER 12, 2008], Mirant generated power
which it sells to NAPOCOR in which connection it secured the services of Mitsubishi
Corporation of Japan. In the belief that its sale of power generation services to the NPC was
VAT zero-rated because of NAPOCOR’s tax exempt status, Mirant filed an application for
effective zero-rating. The BIR issued a ruling stating that the supply of electricity by Mirant
to NAPOCOR shall be subject to 0% VAT. On April 14, 1998, Mirant paid Mitsubishi the VAT
component billed by the latter for services rendered. Mirant files its quarterly VAT return
for the 2nd quarter of 1998, where it reflected the input VAT paid to Mitsubishi.
Subsequently, on December 20, 1999, Mirant filed an administrative claim for refund of
unutilized input VAT arising from purchase of capital goods from Mitsubishi and its domestic
purchase of goods and services attributable to its zero-rated sales of power-generation
services to NAPOCOR. The claim was denied for being filed beyond the prescriptive period
of two years.
The Supreme Court held that Mirant’s claim has prescribed. Unutilized input VAT payments
must be claimed within two years reckoned from the close of the taxable quarter when the
relevant sales were made pertaining to the input VAT even if the payment for the VAT was
made some quarters after that.16 The fact that there was a pending request for zero-rating
cannot be a basis for the late filing of return and payment of taxes. Further, Mirant cannot
avail itself of the provisions of either Section 204(C) or 229 of the NIRC which, for the
purpose of refund, prescribes the payment of the tax as the starting point for the two-year
prescriptive limit for the filing of a claim. These provisions apply only to instances of
erroneous payment or illegal collection of internal revenue taxes.
Note: In the case of claims for refund of unutilized VAT on account of cessation of business, the
2-year period shall commence from the date of cancellation of registration of the taxpayer and
not from the close of the taxable quarter when the sales were made (Associated Swedish
Steels v. CIR [CTA Case No. 7850, August 23, 2012).
The cancellation of VAT registration commences from the first day of the month following the
application, under Section 236 of the Tax Code. (Ibid)
Q: What is the period within which tax refund/credit of input taxes shall be made?
The CIR shall grant a tax credit certificate/refund for creditable input taxes within 90 days
from the date of submission of complete documents in support of the application. (see
Section 112(C), Tax Code)

106
Note: The 120-day period is counted from the submission of the complete documents with the
BIR. (PILIPINAS TOTAL GAS, INC. VS. COMMISSIONER OF INTERNAL REVENUE [CTA,
JANUARY 05, 2012])
Non-submission of complete documents at the administrative level is not fatal to a judicial
claim (PHILEX MINING CORPORATION VS. COMMISSIONER OF INTERNAL REVENUE [CTA
CASE NO. 8228, MAY 31, 2012])
What is fatal to the taxpayer's cause is its failure to submit sufficient evidence such as invoices
and receipts in support of its claim before the CTA and not its failure of to submit complete
documents before the BIR and not before the CTA. COMMISSIONER OF INTERNAL REVENUE
VS. PHILIPPINE AIRLINES, INC., CTA EB CASE NO. 775, JULY 24, 2012
Q: What is the remedy in case of denial of the CTA of the claim for refund or if the CIR
failed to act on the claim within the 120-day period?
In case of full or partial denial of the claim for tax credit certificate/refund:
a) The taxpayer may appeal to the CTA within 30 days from the receipt of said denial,
otherwise the decision shall be come final

b) If no action on the claim for tax credit certificate/refund has been taken by the CIR after
the 120 day period in which he must decide, the taxpayer may appeal to the CTA within 30
days from the lapse of the 120 day period.

Note: Judicial claim for refund should be filed within thirty (30) days from the receipt of the
decision of the Commissioner of Internal Revenue (CIR) or upon the expiration of the one
hundred twenty (120) days in case of inaction of the CIR. KEPCO PHILIPPINES CORPORATION
VS. COMMISSIONER OF INTERNAL REVENUE, [CTA EB NO. 736 695, JANUARY 10, 2012];
DIAGEO PHILIPPINES, INC. VS. COMMISSIONER OF INTERNAL REVENUE, [CTA CASE NOS.
7846 AND 7865, JANUARY 16, 2012]; PHILEX MINING CORPORATION VS. COMMISSIONER
OF INTERNAL REVENUE, C.T.A. EB NO. 728, AUGUST 31, 2012; PILIPINAS TOTAL GAS, INC.
VS. CIR, C.T.A. EB NO. 776, OCTOBER 11, 2012; NORTHWIND DEVELOPMENT
CORPORATION VS. CIR, CTA CASE NO. 7918, OCTOBER 03, 2012
In case of inaction by the BIR, judicial claim for refund filed beyond thirty (30) days from the
expiration of the one hundred twenty (120) days is filed out of time and deprives the Court the
authority to entertain the same. COMMISSIONER OF INTERNAL REVENUE, VS. TEAM SUAL
CORPORATION [C.T.A. EB NO. 686, MAY 22, 2012]; CE CASECNAN WATER AND ENERGY
COMPANY, INC. VS. CIR, CTA EB NO. 726 [CTA CASE NO. 7739, June 26, 2012]; PHILEX
MINING CORPORATION VS. CIR [CTA EB NO. 778 CTA CASE NO. 7720, JUNE 26, 2012]
As the provision is phrased, the word "may" relates to the taxpayer's option to appeal or not to
appeal, upon the denial of its claim for refund or after the expiration of the 120-day period.
However, if the tax payer opts to appeal, such claim must be filed within the 30-day period given
from receipt of the denial or the expiration of the 120-day period. Thus, it is the option to appeal
which is permissive, however, the period to appeal must be mandatorily complied with.
(MINDANAO II GEOTHERMAL PARTNERSHIP VS. COMMISSIONER OF INTERNAL REVENUE,
CTA EB CASE NO. 750, JULY 5, 2012)
Q: Can the taxpayer appeal to the CTA without waiting for the lapse of the 120 day
period?

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No. Where the taxpayer did not wait for the decision of the CIR or the lapse of the 120-day
period, the filing of the said judicial claim with the CTA is premature. The non-observance of
the 120-day period is fatal to the filing of a judicial claim.
Note: In this regard, let us discuss the leading case of CIR V. AICHI FORGING COMPANY OF
ASIA [ OCTOBER 6, 2010].

Q: Outline the process for the refund or credit of excess or unutilized input taxes under
Section 112(c).
1. Filing and Payment

2. Administrative

claim within 2 years – counted from the close of the taxable quarter when the relevant
sales were made
3. Submission of additional and relevant support documents – within 60 days from
filing of claim

4. Appeal to CTA Division – within 30 days from receipt of notice of denial or from lapse
of 120 days of inaction counted from submission of documents. The appeal should not be
made within the 2-year prescriptive period. Otherwise, the judicial claim is premature. The
Motion for Reconsideration or New Trial to CTA Division within 15 days from receipt of
decision.

5. Appeal to CTA En Banc – within 15 days from receipt of resolution. Motion for
Reconsideration to the CTA En Banc within 15 days from receipt of decision

6. Appeal to the SC – within 15 days from receipt of resolution under Rule 45

a. COMPARE WITH SECS. 204 AND 229

SEC. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit
Taxes. -
The Commissioner may –
(C) 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.
A Tax Credit Certificate validly issued under the provisions of this Code may be applied
against any internal revenue tax, excluding withholding taxes, for which the taxpayer is
directly liable. Any request for conversion into refund of unutilized tax credits may be
allowed, subject to the provisions of Section 230 of this Code: Provided, That the original
copy of the Tax Credit Certificate showing a creditable balance is surrendered to the
appropriate revenue officer for verification and cancellation: Provided, further, That in no
case shall a tax refund be given resulting from availment of incentives granted pursuant to
special laws for which no actual payment was made.

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
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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.
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

 Excess input VAT attributable to zero-rated sales.

o Reckoning period: from close of taxable quarter
 Excess input VAT at the time of cancellation of the VAT registration. (cessation of
business)
o Reckoning period: from date of cancellation
o Two ways to claim for refund
▪ Administrative claim for refund with the BIR within 2 years from the
close of the taxable quarter
▪ Judicial claim for refund within 30 days either
 Form the date of the denial of BIR made within 120 days period
to decide
 If there is no decision but inaction from the date of the lapse of
the 120 day period.

Nota Bene:
 Rule for general claim of refund: must be filed within 2 years from date of
payment(filing of final adjustment return or ITR) both in administrative claim and
judicial claim.
o The taxpayer has 30 days to appeal the decision of the BIR to the CTA provided
that it is within the 2 year prescriptive period. In other words, the taxpayer
must file an appeal to the CTA while the claim is still pending in the BIR
provided there is no denial or inaction.
 Rule for VAT refund:
o Action by the BIR within 90 days + 30 days
o Inaction by the BIR for 90 days = lapse + 30 days

c. PERIODS (AS AMENDED BY RA 10963) SEC. 112 OF THE NIRC (AS AMENDED BY RA
10963)

 The taxpayer should file the administrative claim within two (2) years from the close
of the taxable quarter when the sales were made. It’s not two years from the date of
sale.
 If it’s NOT filed within the two (2) year period, prescribed na, he cannot claim a
refund.
 If filed within the two (2) year period, CIR has 90 days within which to decide the
application for refund.
 Appel with CTA within 30 days

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RMC NO. 17-2018
The Tax Verification Notices (TVNs) shall be issued by the head of the processing office in
the verification of claims for Value-Added Tax (VAT) refund and shall be manually issued
until such time that the Tax Verification Notice Monitoring System (TVNMS) is fully
operational.

The time frame to grant claims for VAT refund is ninety (90) days from the date of
submission of the official receipts or invoices and other documents in support of the
application filed. The processing of claims based on submitted documents shall not be
construed as an audit/investigation; hence, the taxpayer-claimant may be issued
subsequently a Letter of Authority (LA) by the VAT Audit Section (VATAS) in the Regional
Assessment Division or the investigating office having jurisdiction over the taxpayer-
claimant.

Any findings in the course of the verification/review of the VAT claims that may lead to a
deficiency in internal revenue taxes, other than VAT, shall be communicated by the
processing/reviewing office to the concerned investigating office having jurisdiction over
the taxpayer-claimant. However, if the fmdings involve VAT, these may result to
disallowance or denial of the claim, or if the case warrants, for possible assessment of VAT
liability. Should the claim be for denial, such fact should be communicated in writing to the
taxpayer within the 90-day period.

Cases where the results would be an assessment on VAT instead of a refund/TCC should be
referred to the VATAS, for Regional Offices where the VATAS is already in place, Revenue
District Office (ADO), Large Taxpayers Audit Division or Large Taxpayers VAT Audit Unit
(LTVAU), as the case may be. A copy of the Revenue Officer's memorandum report and
documents relevant to the findings shall be furnished to the aforesaid offices. The concerned
Revenue District Officer/Chief of LT Audit Division/Head of VATAS/Head of LTVAU shall
evaluate the report/fmdings referred to them and shall request for the issuance of an
electronic LA (eLA), if warranted.

However, if there is already an existing eLA covering the same period, the concerned office
shall consolidate the findings referred to them with their findings and recommend the
issuance of a Notice for Informal Conference/Preliminary Assessment Notice/Final
Assessment Notice for the collection of the deficiency tax. Subsequently, a feedback on the
action taken shall be sent to the VAT claim processing office within fifteen (15) days from
receipt of the fmdings All claims by direct exporters shall be filed with and processed by the
VAT Credit Audit Division (VCAD), including direct exporters under the jurisdiction of the
Large Taxpayers Service. All claims processed by the VCAD shall be reviewed by the Tax
Audit Review Division (TARD) prior to approval of the claims. The following are the
authorized approving revenue officials for said claims:

SEC. 112-1 OF RR NO. 13-2018

(d) Period within which refund/credit of input taxes shall be made

In proper cases, the Commissioner of Internal Revenue shall grant refund for creditable
input taxes within ninety (90) days from the date of submission of the official receipts
or invoices and other documents in support of the application filed in accordance with
subsections (A) and (B) hereof: Provided, That, should the Commissioner find that the
grant of refund is not proper, the Commissioner must state in writing the legal and
factual basis for the denial.

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 The 90-day period to process and decide, pending the establishment of the enhanced
VAT Refund System shall only be up to the date of approval of the Recommendation
Report on such application for VAT refund by the Commissioner or his duly authorized
representative: Provided, That all claims for refund/tax credit certificate filed prior to
January 1, 2018 will be governed by the one hundred twenty (120)-day processing
period.

In case of full or partial denial of the claim for tax refund, the taxpayer affected may,
within thirty (30) days from the receipt of the decision denying the claim, appeal the
decision with the Court of Tax Appeals: Provided, however, that failure on the part of any
official, agent, or employee of the BIR to act on the application within the ninety (90)- day
period shall be punishable under Section 269 of the Tax Code, as amended.

(e) Manner of giving refund

Refund shall be made upon warrants drawn by the Commissioner of Internal Revenue or
by his duly authorized representative without the necessity of being countersigned by
the Chairman, Commission on Audit (COA), the provision of the Revised Administrative
Code to the contrary notwithstanding: Provided, That refunds under this paragraph shall
be subject to post audit by the COA.

CONTEX VS. CIR GR NO. 151135 DATED JULY 2, 2004

Ruling: Only VAT-Registered entities can claim Input VAT Credit/Refund.

As an exempt VAT taxpayer, it is not allowed any tax credit on VAT (input tax) previously
paid.

ATLAS CONSOLIDATED MINING VS. CIR GR NOS. 141104 AND 148763 DATED JUNE 8, 2007
Ruling: The two-year prescriptive period for the filing of claims for refund/credit of input
VAT must be counted from the date of filing of the quarterly VAT return, and that sales to
EPZA-registered enterprises operating within economic processing zones were effectively
zero-rated and were not covered by RR 2-88.

CIR VS. MIRANT PAGBILAO CORP. GR NO. 172129 DATED SEPTEMBER 12, 2008

Ruling: Unutilized input VAT payments not otherwise used for any internal revenue tax due
the taxpayer must be claimed within two years reckoned from the close of the taxable
quarter when the relevant sales were made pertaining to the input VAT regardless of
whether said tax was paid or not.
Prescriptive period commences from the close of the taxable quarter when the sales were
made and not from the time the input VAT was paid nor from the time the official receipt was
issued. Thus, when a zero-rated VAT taxpayer pays its input VAT a year after the pertinent
transaction, said taxpayer only has a year to file a claim for refund or tax credit of the
unutilized creditable input VAT. The reckoning frame would always be the end of the quarter
when the pertinent sales or transaction was made, regardless when the input VAT was paid.
Secs. 204(C) and 229 of the Tax Code also set a two-year prescriptive period, reckoned from
date of payment of the tax or penalty, for filing of a claim of refund or tax credit. However,
these provisions apply only to instances of erroneous payment or illegal collection of internal
revenue taxes.
Creditable input VAT is an indirect tax which can be shifted or passed on to the buyer,
transferee, or lessee of the goods, properties, or services of the taxpayer. The fact that the
subsequent sale or transaction involves a wholly-tax exempt client, resulting in a zero-rated
or effectively zero-rated transaction, does not, standing alone, deprive the taxpayer of its
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right to a refund for any unutilized creditable input VAT, albeit the erroneous, illegal, or
wrongful payment angle does not enter the equation.

CIR VS. SAN ROQUE POWER (GR NO. 187485 DATED FEBRUARY 12, 2013) AND OTHER
CASES (TAKE
NOTE OF OLD RULE AND COMPARE WITH NEW PROVISION UNDER THE TRAIN LAW)
Ruling: The taxpayer can file his administrative claim for refund or credit at anytime within
the two-year prescriptive period. If he files his claim on the last day of the two-year
prescriptive period, his claim is still filed on time. The Commissioner will have 120 days
from such filing to decide the claim. If the Commissioner decides the claim on the 120th day,
or does not decide it on that day, the taxpayer still has 30 days to file his judicial claim with
the CTA. Now 90 days.

MICROSOFT PHILS., INC. VS. CIR, GR NO. 180173 DATED APRIL 6, 2011
Ruling: A VAT-registered taxpayer is required to comply with all the VAT invoicing
requirements to be able to file a claim for input taxes on domestic purchases for goods or
services attributable to zero-rated sales. A VAT invoice is an invoice that meets the
requirements of Section 4.108-1 of RR 7-95.
The printing of the word zero-rated is required to be placed on VAT invoices or receipts
covering zero-rated sales in order to be entitled to claim for tax credit or refund.

COCA-COLA BOTTLERS PHILIPPINES, INC. VS. CIR, GR NO. 222428 DATED FEBRUARY 19,
2018

VIII. OTHER MATTERS

a. INVOICING REQUIREMENTS (SEC. 113)
Q: What are required to be issued by a VAT-registered person?
1. VAT invoice – for every sale, barter or exchange of goods or properties
2. VAT official receipt – for every lease of goods or properties and for every sale, barter
or exchange of services.

Note: Only VAT-registered persons are required to print their Tax Identification Number
(TIN) followed by the word “VAT” in their invoice or official receipt, which shall be
considered the VAT invoice or VAT official receipt. All purchases not covered by
invoices/receipts other than the VAT invoice or VAT official receipt shall not give rise to any
input tax (see Section 4.113-1(A), RR 16-2005]
Q: Is there a difference between an invoice and official receipt for purposes of
substantiation?
In KEPCO PHILIPPINES V. CIR [NOVEMBER 24, 2010], in ruling on Kepco’s contention
that an invoice and an official receipt are interchangeable, the Supreme Court stated that
only a VAT invoice might be presented to substantiate a sale of goods or properties, while
only a VAT receipt could substantiate a sale of services. The VAT invoice is the seller’s
best proof of the sale of the goods or services to the buyer while the VAT receipt is the
buyer’s best evidence of the payment of goods or services received from the seller. Even
though VAT invoices and receipts are normally issued by the supplier/seller alone, the
said invoices and receipts, taken collectively, are necessary to substantiate the actual
amount or quantity of goods sold and their selling price (proof of transaction), and the
best means to prove the input VAT payments (proof of payment). Hence, VAT invoice and

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 VAT receipt should not be confused as referring to one and the same thing. Certainly,
neither does the law intend the two to be used alternatively
Note: The unamended Section 113 did not distinguish between an invoice and a receipt
when used as evidence of a zero-rated transaction. Thus, in the case of transactions which
took place during the period of the unamended law, the Court could accept either or both
of the documents as evidence of zero-rated transactions (SOUTHERN PHILIPPINES V.
CIR [OCTOBER 19, 2011]; AT&T COMMUNICATIONS SERVICES PHILIPPINES V. CIR
[AUGUST 3, 2010]

Q: What information should be contained 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.
(see Section 4.113-1(B), RR 16-2005)

Q: What are the invoicing and recording requirements for deemed sale transactions?

Deemed sale transaction Invoicing and recording requirements

1. Transfer, use or consumption not in

the course of business of goods or A memorandum entry in the subsidiary
properties originally intended for sale or sales journal to record withdrawal of
use in the course of business goods for personal use

2. Distribution or transfer to Invoice, at the time of the transaction,

shareholders/investors or creditors which should include all the info
prescribed in Sec. 113(B)

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 3. Consignment of goods if actual sale is Invoice, at the time of the transaction,
not made within 60 days which should include all the info
prescribed in Sec. 113(B)

An inventory shall be prepared and

4. Retirement from or cessation of
business with respect to all goods on
hand
submitted to the RDO who has
jurisdiction over the taxpayer‘s principal
place of business not later than 30 days
after retirement or cessation from the
business. An invoice shall be prepared for
the entire inventory, which shall be the
basis of the entry into the subsidiary sales
journal. The invoice need not enumerate
the specific items appearing in the
inventory regarding the description of the
goods. However, the sales invoice number
should be indicated in the inventory filed
and a copy thereof shall form part of this
invoice.

i. If the business is to be continued by the

new owners or successors, the entire
amount of output tax on the amount
deemed sold shall be allowed as input
taxes.
ii. If the business is to be liquidated and
the goods in the inventory are sold or
disposed of it VAT-registered buyers, an
invoice or instrument of sale or transfer
shall be prepared, citing the invoice
number wherein the tax was imposed on
the deemed sale. At the same time, the tax
paid corresponding to the goods sold
should be separately indicated in the
instrument of sale

i. AUTHORITY TO PRINT
SILICON PHILS., INC. VS. CIR, GR NO. 172378 DATED JANUARY 17, 2011 (TAKE NOTE
OF RMO NO. 12-2013)

Ruling: The ATP (Authority to Print) need not be reflected or indicated in the invoices or
receipts because there is no law or regulation requiring it. Thus, in the absence of such law
or regulation, failure to print the ATP on the invoices or receipts should not result in the
outright denial of a claim or the invalidation of the invoices or receipts for purposes of
claiming a refund.
While there is no law requiring the ATP to be printed on the invoices or receipts, Section 238
of the NIRC expressly requires persons engaged in business to secure an ATP from the BIR
prior to printing invoices or receipts. Failure to do so makes the person liable under Section
264 of the NIRC.

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Under Section 112(A) of the NIRC, a claimant must be engaged in sales which are zero-rated
or effectively zero-rated. To prove this, duly registered invoices or receipts evidencing zero-
rated sales must be presented. However, since the ATP is not indicated in the invoices or
receipts, the only way to verify whether the invoices or receipts are duly registered is by
requiring the claimant to present its ATP from the BIR. Without this proof, the invoices or
receipts would have no probative value for the purpose of refund.
It was held in one case that what is important with respect to the BIR authority to print is
that it has been secured or obtained by the taxpayer, and that invoices or receipts are duly
registered.
 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 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 VAT. Provided, that –
(a) The amount of the tax shall be known 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 0% VAT, the term “zero-rated sale” shall be written or printed
prominently on the invoice or receipt;
(d) If the sale involved 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 value-added tax on each portion of the sale shall
be known 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 P1k 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. (Sec. 113(B), NIRC)

b. INFORMATION WHICH MUST BE CONTAINED [SEC. 113(B)]

(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); 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. Provided, That:
(a) The amount of the tax shall be known 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 involved 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 value-added tax on each portion of the sale
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 shall be known 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. CONSEQUENCES OF ISSUING ERRONEOUS VAT INVOICE [SEC. 113(D)] [RR NO. 4.113-4
OF RR NO.
16-05]
(D) Consequence of Issuing Erroneous VAT Invoice or VAT Official Receipt. -
(1) If a person who is not a VAT-registered persons 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; [76]
(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.

SEC. 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;
(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(A) AS AMENDED BY RA 10963)

“(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
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a monthly basis: Provided, finally, That beginning January 1, 2023, the filing and payment
required under this Subsection shall be done within twenty-five (25) days following the close
of each taxable quarter.

e. WITHHOLDING VAT [SEC. 114 (C) AS AMENDED BY RA NO. 10963] [SEC. 4.114-2 OF RR
NO. 13-
2018]

“(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 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 beginning January 1, 2021, the VAT witholding system
under this Subsection shall shift from final to a creditable system: Provided, further, That the
payment for lease or use of properties or property rights to nonresident owners shall be
subject to twelve percent (12%) withholding tax at the time of payment: Provided, finally,
That payments for purchases of goods and services arising from projects funded by Official
Development Assistance (ODA) as defined under Republic Act No. 8182, otherwise known
as the ‘Official Development Assistance Act of 1996’, as amended, shall not be subject to the
final withholding tax system as imposed in this Subsection. For purposes of this Section, the
payor or person in control of the payment shall be considered as the withholding agent.
i. GOVERNMENT PAYMENTS

Q: What is the rule on withholding of VAT by government agencies?

The government or any of its political subdivisions, instrumentalities or agencies, including
GOCCs, shall, before making payment on account of each purchase of goods or services
subject to VAT, deduct and withhold a final VAT equivalent to 5% of the gross payment
thereof provided that the payment for lease or use of properties or property rights to non-
resident owners shall be subject to 10% withholding tax at the time of payment. (Section
4.114-2, RR 16-2005)
Note: The 5% final VAT shall represent the net VAT payable of the seller or, otherwise stated,
the presumed input VAT cost of the entity dealing with the government agency. The
remaining 7% effectively accounts for the standard input VAT, in lieu of the actual input VAT
directly attributable or ratably apportioned to such sales. (Ibid) Okay, I sense confusion.
Let me explain. Remember na in order for the taxpayer to determine yung tax liability niya, yan
ang formula! Remember also na if input tax > output tax, pwde mo i-carry over ito to the
succeeding quarters or kapag yung input vat results from a zero-rated or effectively zero-rated
transaction, puwede humingi ng refund or credit. Ang implication in case of 5% final VAT ay
hindi magaaply yang formula na output tax minus input tax. So automatic kapag withholding
by the government, do not use that formula!
Tanong: Is the taxpayer still entitled to the excess input VAT if meron? It depends. Ito ang rules.
If the actual input VAT is above 7% of gross payments, then the difference between the actual
input VAT and the 7% or the excess may form part of seller’s expense or cost. On the other hand,
if the actual input VAT is below 7% of gross payments, the different must be closed or deducted
to expense or cost. Hence, the taxpayer will realize additional income.
ii. SERVICES RENDERED BY NON-RESIDENTS
Q: In what instances shall the 12% final VAT be withheld?
1. Lease or use of properties or property rights owned by non-residents;
2. Services rendered to local insurance companies, with respect to reinsurance premiums
payable to non-residents; and;
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 3. Other services rendered in the Philippines by non-residents
iii. WITHHOLDING VAT RETURNS/TIME OF PAYMENT

f. POWER OF THE COMMISSIONER TO SUSPEND BUSINESS OPERATIONS (SEC. 5) [SEC.

4.115-1 OF RR NO. 16-05]

SEC. 4.115-1. Administrative and Penal Provisions. —

(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 receipt 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.

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