Module 2

VALUE ADDED TAX1

A. Definition and Scope of VAT

Value added tax is a general consumption tax that requires a 12%

additional tax on the sales price of goods and/or services by VAT-registered
seller or seller required by law to be under the VAT system. It is an indirect tax,
which may be shifted or passed on to the buyer, transferee or lessee of goods,
properties or services.

The Value Added Tax applies, in general, to all persons who sell, barter, exchange or lease goods
or properties, or render services in the course of trade or business2 whose annual gross sales or receipts
exceed P1.5 million3, and those who import goods, whether for business or otherwise.4

The following transactions are deemed sale for purposes of Value Added Tax5

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 business6

2. Distribution or transfer to shareholders or investors as share in the profits of the VAT-registered

persons, or to creditors in payment of debt;

3. Consignment of goods if actual sale is not made within 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.

On these deemed sale transactions, the BIR Commissioner, by the rules and regulations
prescribed by the Secretary of Finance, and is authorized to determine the base of the tax.7

1 Title IV, NIRC, as amended by RANos.7716, 8241, 8424, 9238, 9337, 9361, and 9511
2 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 persons regardless of whether or not the person engaged
therein is a non-stock, non-profit private organization (irrespective of the dispositions of its net income and whether
or not it sells exclusively to members or their guests), or government entity.
On-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. (Sec. 4.105-3, RR No. 16-2005)
3 Sec. 109(V), supra RA No. 9337 increased the amount of threshold from P750, 000 under RR 1-2005 to P1.5
million. As required by the same Act, it should be adjusted to present value using the Consumer Price Index (CPI)
published by the National Statistics Office (NSO) not later than January 31, 2009 and every 3 years thereafter.
4 Sec. 105, supra
5 Sec. 106 (B), supra
6 Transfer of goods or properties not in the course of business can take place when a VAT registered person
withdraws goods from his business for his personal use. [Sec. 4.106-7 (a) (1), RR No. 16-2005]
7 Sec. 106 (A), supra
B. RATE AND BASE OF TAX8

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%) (Starting February 1, 2006)9

The taxable base is gross selling price in the case of sale of taxable goods, or gross receipts from
the sale of taxable services, except on transactions subject to zero rates (generally export and export-
related activities).

On imports, the base is the dutiable value, plus customs duties, excise tax, if any, and other
charges prior to the release of such goods from customs custody.

C. TRANSACTIONS SUBJECT TO 12%

1. Sale of Goods or Properties10

All goods and properties (except those specifically exempt), including those subject to excise tax,
sold, bartered or exchanged are subject to a 12% VAT based on the gross selling price11 or gross value in
money.

2. Importation of Goods12

Importation of goods is subject to a 12% VAT based on the total value used by the Bureau of
Customs in determining tariff and customs duties, plus excise taxes, if any, and other charges which shall
be paid prior to the release of the goods from customs custody.

Provided, that where the customs duties are determined on the basis of the quantity or volume of
the goods, the VAT shall be based on the landed cost plus excise tax, if any.

In case tax-free imports are subsequently sold to non-exempt persons, the purchasers or
possessors thereof shall be considered the importers thereof who shall be liable for any internal revenue tax
on such importation.

8 Sec. 106 (E), supra

9 Under RA No. 9337, the President, upon recommendation of the Secretary of Finance, shall,
effective January 1, 2006, raise the rate of value-added tax to 12% after any of the following conditions
has been satisfied: (1)Value-added tax collection as a percentage of Gross Domestic Product (GDP) of
the previous year exceeds 2 4/5%; or (2)National Government Deficit as a percentage of GDP of the
previous year exceeds 1 ½%.However, the increase from 10% to 12% took effect only on February 1,
2006 thru the issuance of RMC No. 7-2006 that approved the recommendation of the Secretary of the
Department of Finance.
10 Sec.106 (A), supra
11The 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 VAT. The excise tax, if any, on such goods or properties shall form
part of the gross selling price. In the case of sale, barter or exchange of real property subject to VAT,
gross selling price shall mean the consideration stated in the sales document of the fair market value,
whichever is higher.
If the VAT is not billed separately in the document of sale, the selling price or the consideration stated
therein shall be deemed to be inclusive of VAT (Sec. 4.106-4, RR No. 4-2007)
12 Sec. 107, supra
3. Sale of Services and Use or Lease of Properties13

The ‘sale or exchange of services’14 is subject to a 12% VAT

based on the gross receipts 15 derived by any person engaged in the
sale of such services or lease of properties, including the following:

a. Construction and service contractors;

b. Stock, real estate, commercial, customs and immigration brokers;
c. Lessors of property, whether personal or real;
d. Persons engaged in warehousing services;
e. Lessors or distributors of cinematographic films;
f. Persons engaged in milling, processing, manufacturing or repacking of goods for others;
g. Proprietors, operators or keepers of hotels, motels, rest houses, pension houses, inns, resorts,
theaters and movie houses;
h. Proprietors or operators of restaurants, refreshment parlors, cafes and other eating places,
including clubs and caterers;
i. Dealers in securities;
j. Lending investors;
k. 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;
l. 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;16
m. Sales of electricity by generation and distribution companies17;
n. Franchise grantees of electric utilities, telephone and telegraph; radio and/or television
broadcasting and all other franchise grantees, except franchise grantees of radio and/or
television broadcasting whose annual gross receipts of the preceding year do not exceed P10
million, and franchise grantees of gas and water utilities;
o. Non-life insurance companies (except their crop insurances) including surety, fidelity, indemnity
and bonding companies;
p. Similar services regardless of whether or not the performance thereof calls for the exercise of or
use of the physical and mental faculties.
q. 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;
r. The lease or the use of, or the right to use of any industrial, commercial or scientific equipment;
s. The supply of scientific, technical, industrial or commercial knowledge or information;
t. 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 item (r)
above or any such knowledge or information as is mentioned in item (s) above;

13 Sec. 108, supra

14The term “sale or exchange of services ”means the performance of all kinds of services in the Philippines for others for a
fee, remuneration or consideration, regardless of whether or not the performance thereof calls for the exercise or use of the
physical or mental faculties. [Sec. 108(A), supra.]
15The 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 applied as payments for services rendered and advanced payments actually or constructively received during the
taxable period for services performed or to be performed for another person, excluding 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. (Sec. 4.108-4, RR No. 4-2007)
16 RA No. 9337 removed the VAT exemption of common carriers by air and sea relative to their transport of passengers.
17RA No. 9511 imposeda 3% franchise tax on all gross receipts derived by the National Grid Corporation from its
transmission operation, ineffect, amending the VAT by reverting the taxation of transmission companies to the franchise tax.
 u. The supply of services by a non-resident 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 non-resident person;
v. 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;
w. The lease of motion picture films, films, tapes and discs; and
x. The lease or the use of, or the right to use, radio, television, satellite transition and cable
television time.

D. TRANSACTIONS SUBJECT TO 0%

1. Sale of Goods18

a. export sales19
b. foreign currency dominated sales20
c. Sales to persons or entities whose exemption under special
laws or international agreements to which the Philippines is a
signatory effectively subjects such sales to zero-rate.

2. Sale of Services21

a. 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;
b. Services other than processing, manufacturing or repacking 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 BSP;
c. 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 0% rate;
d. Services rendered to persons engaged in international shipping or air transport operations,
including leases of property for use thereof; Provided, however, that 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;
e. Services performed by subcontractors and/or contractors in processing, converting, or
manufacturing goods for an enterprise whose export sales exceed 70% of total annual
production.

18Sec. 106(A)(2), supra.

19“Export sales” means: 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)
20“Foreign currency denominated sale”means the sale to a non-resident of goods, except those mentioned in Sections 149
and 150 of the Tax Code, 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 BSP. [Sec. 106(A)(2)
(b),
 supra.]
21Sec. 108(B), supra.
f. Transport of passengers and cargo by domestic air or sea carriers from the Philippines to a
foreign country 22
g. 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 sources
using technologies such as fuel cells and hydrogen fuels.23

E. EXEMPT TRANSACTIONS AND SERVICES24

1. Sale or importation of:

a. Agricultural and marine food products in their original state,25

livestock and poultry of a kind generally used as, or yielding or producing foods
for human consumption; and breeding stock and genetic materials therefor;26 and
b. 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 feeds27 for race
horses, fighting cocks, aquarium fish, zoo animals and other animals generally
considered as pets).
2. Importation of:

a. 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;
b. 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 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; and
c. Fuel, goods and supplies by persons engaged in international shipping or air transport
operations.28
22Gross receipts of international air carriers doing business in the Philippines and international sea carriers doing business
in the Philippines are still liable to a percentage tax of 3% based on their gross receipts as provided for in Section 118 of the
Tax Code but shall not be liable to VAT. [Sec. 4.108-5 (b)(6), RR No. 16-2005]
23Provided, 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. [Sec. 4.108-5 (b)(7), RR No. 16-2005
24Sec. 109, supra.
25Products 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, and copra shall be considered in their original
state. [Sec. 109(A), supra.]
26“Marine food products”shall include fish and crustaceans, such as, but not limited to, eels, trout, lobster, shrimps, prawns,
oysters, mussels and clams.“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. [Sec. 4.109-1(B)(a), RR No. 16-2005]
27“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. [Sec. 4-109-1 (B)(b), RR No. 16-2005]
28Provided, 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, 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 12% VAT. [Sec. 4.109-1 (B)(v), RR No. 4-2007]

3. Services rendered by:

a. Persons subject to percentage tax under Title V of the NIRC;

b. Agricultural contract growers and milling for others of palay into rice, corn into grits and sugar
cane into raw sugar;
c. Medical, dental, hospital and veterinary services except those rendered by professionals;
d. Educational services29 rendered by private educational
institutions, duly accredited by the Department of Education (DepEd),
the Commission of Higher Education (CHED), the Technical Education
and Skills Development Authority (TESDA) and those rendered by
government educational institutions;
e. Individuals pursuant to an employer-employee relationship;
f. 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; and
g. Banks, non-bank financial intermediaries performing quasi-banking functions, and other non-
bank financial intermediaries.30

4. Sales by:

a. Agricultural cooperatives duly registered 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;31
b. Non-agricultural, non-electric and non-credit cooperatives duly registered with the CDA;
Provided, That the share capital contribution of each member does not exceed P15,000 and
regardless of the aggregate capital and net surplus ratably distributed among the members; and
c. Persons who are not VAT-registered on their export sales.

5. Transactions which are exempt under international agreements to which the Philippines is a signatory or
under special laws32, except those granted under Presidential Decree No. 529 (Petroleum Exploration
Concessionaires under the Petroleum Act of 1949);

6. Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the
CDA;
29“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 TESDA. [Sec. 4.109-1 (B)(h), RR No. 16-2005]
30Other non-bank financial intermediaries,such as money changers and pawnshops, subject to percentage tax under
Sections121 and 122, respectively,of the Tax Code. [Sec. 4.109-1 (B)(w), RR No. 4-2007
31Sales by agricultural cooperatives to non-members can only be exempted from VAT if the producer of the agricultural
products sold is the cooperative itself. If the cooperative is not the producer (e.g., trader), then only those sales to its
members shall be exempted from VAT.It is to be reiterated however, that sale or importation of agricultural food products in
 their original state is exempt from VAT irrespective of the seller and buyer thereof, pursuant to Subsection (a) [Sec.4.109-1
(B) (l), RR No. 4-2007]
32RA No. 9295 (Domestic Shipping Development Act of 2004), RA No. 9367 (Biofuels Act of 2006), RA No. 9520 (Philippine
Cooperative Code of 2008), and RA No. 9994 (Expanded Senior Citizens Act of 2010).

7. Lease of a residential unit33 with a monthly rental not exceeding P10, 000.0034

8. Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of
trade or business35 or real property utilized for low cost and socialized housing36 as defined by RA No. 7279,
otherwise known as the Urban Development and Housing Act of 1992, and other related laws, residential lot
valued at P1.5 million and below, house and lot, and other residential dwellings valued at P2.5 million and
below;37

9. 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;

10. Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and
spare parts thereof for domestic or international transport operations;38 and

11. 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 of which do not exceed the
amount of P1.5 million.39

33The term “residential units” shall refer to apartments and houses and 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. {Sec. 4.109-1 (B)(q), RR No. 4-2007]
34Sec. 109(Q), supra.RA No. 9337 increased the threshold for the lease of residential lot from P8,000 to P10,000,
regardless of the amount of the aggregate rentals received by the lessor during the year. As required by the same Act, it
should be adjusted to present value using the CPI published by the NSO not later than January 31, 2009 and every 3
years thereafter.
35However, 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. [Sec. 4.109-1 (B)(p)(1), RR No. 4-2007]
36“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 (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 under RA No. 7279, otherwise known as the Urban
Development and Housing Act of 1992” and other laws, such as RA Nos. 7835 and 8763.On the other hand, “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 Nos. 7279, 7835 and 8763. It 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. [Sec.
4.109-1 (B)(p), RR No. 16-2005]
37Sec. 109(P), supra.RA No. 9337 provided a different threshold for the sale of residential lot which is P1.5 million, and
P2.5 million for residential house and lot and other residential dwellings. As required by the same Act, it should be
adjusted to present value using the CPI published by the NSO not later than January 31, 2009 and every 3 years
thereafter.
38Provided, that the exemption from VAT on the importation and local purchase ofpassenger and/or cargo vessels shall
be limited to those of 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’soriginalcommissioning, as follows: (i) for passenger and/or cargo vessels, the age limit is 15 years old, (ii) for
tankers, theage limit is 10 years old, and (iii) for high-speed passenger crafts, the age limit is 5 years old: Provided, finally,
 that the exemption shall be subject to the provisions of Sec. 4 of RA No. 9295, otherwise known as the “Domestic
Shipping Development Act of 2004.” [Sec. 4.109-1 (B)(s), RR No. 16-2005
39Sec. 109(V), supra.RA No. 9337 increased the amount of threshold from P750,000 under RR 1-2005 to P1.5 million. As
required by the same Act, it should be adjusted to present value using the CPI published by the NSO not later than
January 31, 2009 and every 3 years thereafter.

F. CREDITABLE INPUT TAXES40

A VAT-registered person is entitled to credit input taxes evidenced by VAT invoices or official
receipts issued in accordance with Sec. 113 and 237 of the NIRC on the following against his/her
output 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; or
d. For use as raw materials supplied in the sale of services; or
e. For use in trade or business for which deduction for depreciation or amortization is
allowed under the Tax Code;

2. Purchase of real properties for which a VAT has actually been paid;

3. Purchase of services in which a VAT has actually been paid;

4. Transactions “deemed sale” under Section 106(B) of the Tax Code;

5. Transitional input tax allowed under Section 4.111 (a) of RR No.16-2005;

6. Presumptive input tax allowed under Section 4.111 (b), supra, and

7. Transitional input tax credits allowed under the transitory and other provisions, supra.

G. MANNER OF COMPUTING THE VAT

The tax is computed in the following manner:

1. Output tax exceeds total input tax.

Output Tax41 xxx
Less: Input Tax42 (xxx)
VAT Payable xxx

2. Input tax total exceeds output tax

Output Tax xxx
Less: Input Tax* (xxx)
VAT Payable xxx

40Sec. 110, supra, as amended by RA No. 9361 which repealed the 70% input VAT cap. (approved onNovember 21, 2006)
 41The term “output tax ”means the VAT due on sale or lease of taxable goods or properties or services by any person registered
or required to register under Section 236 of this Code. [Sec. 110(A)(3), supra.]
42The term “input tax ”means the VAT 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. [Sec. 110(A)(3), supra.
*The unutilized input tax can be carried over to the succeeding month/quarter.

Specifically, in computing the VAT, the input tax paid in a taxable quarter is credited against the
output tax for the same quarter. 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 due him, subject to the provisions of Section 112.43
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) exceeds P1 million in a
calendar month, regardless of the acquisition cost of each capital goods shall be claimed as credit against
output tax in the following manner:

(a) If the estimated useful life of a capital good is five years or more:
Total cost of capital goods (exclusive of VAT) xxx
Divided by: 60 months (beginning on the month of acquisition) 60
Input tax to be claimed monthly xxx
(b) If the estimated useful life of a capital good is less than five years:

Total cost of capital goods (exclusive of VAT) xxx

Divided by: actual number of months comprising
the estimated useful life of the capital goods
(beginning on the month of acquisition) xxx

Input tax to be claimed monthly xxx

However, if 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 P1 million, the total input
tax will be allowable as credit against output tax in the month of acquisition.44

H. TRANSITIONAL/PRESUMPTIVE INPUT TAX CREDITS45

1. Transitional Input Tax Credits.

Any person who becomes liable to value added tax or who elects to be a VAT-registered person
shall be allowed, subject to the filing of an inventory as prescribed by rules and regulations, on his/her
beginning inventory of goods, materials and supplies, an input tax equivalent to 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.

2. Presumptive Input Tax Credits.

Any person or firm engaged in the processing46 of sardines, mackerel, and milk, and in
manufacturing refined sugar and 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 his production.
43Sec. 110, supra, as amended by RA No. 9361
44Ibid.
45Sec. 111, supra.
46The 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. 111(b), supra.]

I. COMPLIANCE REQUIREMENTS

1. Registration for VAT and Non-VAT Taxpayers47

Every person subject to any internal revenue tax (VAT and/or Non-VAT taxpayers) shall register
each one of his place of business or establishment with the appropriate Revenue District Officer (RDO).

An annual registration fee in the amount of P500 each for every separate or distinct establishment
or place of business, including facility types where sales transactions occur shall be paid upon registration,
and every year thereafter on or before the last day of January. Any person commencing a business must
pay the fee before engaging therein.

However, individuals engaged in business where the gross sales or receipts do not exceed P100,
000 during any 12-month period and cooperatives other than electric cooperatives are not required to pay
the registration fee imposed in RR No. 16-2005.

A person who maintains a head office, branch or facility shall register with the RDO having
jurisdiction over the head office, branch or facility. The registration fee shall be paid to an authorized agent
bank located within the revenue district, or to the Revenue Collection Officer, or duly authorized Treasurer of
the city or municipality where each place of business or branch is registered.

A non-VAT taxpayer whose gross sales or receipts in any 12-month period exceeds the amount
prescribed under Sec. 109(V) of the NIRC for exemption from the VAT shall register as a VAT taxpayer and
pay the annual registration fee mentioned above within ten (10) days after the end of the last month of that
period and shall be liable to the VAT commencing from the first day of the month following his/her
registration.

a. Optional Registration48

The following VAT-exempt or zero-rated transactions may be registered under VAT not later than
10 days before the beginning of a taxable quarter and shall pay the registration fee prescribed above:

(1) Any person who is VAT-exempt under Sec. 4.109-1(B)(1)(V) of RR No. 16-2005 not
required to register for VAT may, in relation to Section 4.109-2, elect to be VAT registered by
registering with the RDO that has jurisdiction over the head office of that person, and pay annual
registration fees of P500 for every separate and distinct establishment.
(2) Any person who is VAT-registered but enters into a transaction which is exempt from
VAT (mixed transactions) may opt that the VAT apply to his transaction which would have been
exempt under Section 109(l) of the NIRC.
 (3) Franchise grantees of radio and/or television broadcasting whose annual gross
receipts of the preceding year do not exceed P10 million derived from the business covered by the
law granting the franchise may opt for VAT registration. This option, once exercised shall be
irrevocable. (Section 119, Tax Code)

Any person who is not required to register but opts to register shall not be allowed to cancel his/her
registration for the next three (3) years.
47Sec. 236, supra
48Sec. 236(H), supra

2. Withholding of Value-Added Tax49

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 VAT imposed in Sections 106 and 108 of the NIRC,
deduct and withhold a final VAT at the rate of 5% of the gross payment thereof.50

In addition, the government or any of its political subdivisions, instrumentalities or

agencies, including GOCCs, as well as private corporations, individuals, estates and trusts, whether
large or non-large taxpayers, shall withhold 12% VAT with respect to the following:

a. Lease or use of properties or property rights owned by non-residents;

b. Services rendered to local insurance companies, with respect to reinsurance premiums payable
to non-residents; and
c. Other services rendered in the Philippines by non-residents.

The payor or person in control of the payment shall be the withholding agent. The tax so withheld
shall be remitted within 10 days following the end of the month the withholding was made.

3. Invoicing Requirements51

All VAT-registered persons who sell, barter or exchange goods, properties or services shall issue a
VAT invoice or receipt indicating therein, among others, the following information:

a. A statement that the seller is a VAT-registered person, followed by his taxpayer’s identification
number (TIN);

b. 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:

(1) The amount of the tax shall be shown as a separate item in the invoice or receipt;

(2) If the sale is exempt from VAT or zero-rated, the term VAT-exempt or zero-rated sale
shall be written or printed prominently on the invoice or receipt; and

(3) If the sale involves goods, properties or services some of which are subject to VAT
and some of which are VAT zero-rated or VAT exempt, the invoice or receipt shall clearly
 indicate the breakdown of the total amount of sale between its taxable, exempt and zero
rated components, and the calculation of the VAT on each portion of the sale: Provided,
That the seller may issue separate invoices or receipts for the taxable, exempt and zero-
rated components of the sale.

49Sec. 114(C), supra

50The 5% final VAT withholding rate shall represent the net VAT payable of the seller. The remaining 7%effectively
accounts for the standard input VAT for sales of goods or services to government or any of its political subdivisions,
instrumentalities or agencies including GOCC’s, in lieu of the actual input VAT directly attributable or ratably apportioned to
such sales. Should actual input VAT attributable to sale to government exceeds7% of gross payments, the excess may form
part of the sellers’ expense or cost. On the other hand, if actual input VAT attributable to sale to government is less than 7%
of gross payment, the difference must be closed to expense or cost. [Sec. 4.114-2 (a), RR No. 4-2007]
51Sec. 113(A) and (B), supra

c. The date of transaction, quantity, unit cost and description of the goods or properties or nature of
service; and
d. In the case of sales in the amount of P1,000 or more where the sale or transfer is made to a
VAT-registered person, the name, business style, if any, address and the TIN of the purchaser,
customer or client.
4. Accounting Requirements52
In addition to the regular accounting records required, all VAT taxpayers shall maintain a subsidiary
sales journal and subsidiary purchases journal on which the daily sales and purchases are recorded.

5. Return and Payment of Value-Added Tax53

Every person liable to pay the VAT shall file a quarterly return
of the amount of his gross sales or receipts within 25 days following the
close of each taxable quarter prescribed for each taxpayer with 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. The
VAT-registered persons shall pay the VAT on a monthly basis on the

taxable sales/receipts for the month, using the VAT declaration form within 20 days after the end of each
month: Provided, however, That with respect to taxpayers who availed of the electronic filing and payment
system (EFPS), the taxpayers classified under the following business industries shall be required to file
monthly VAT declarations on or before the dates prescribed as follows:

Group A – 25 days following the end of the month

1. Insurance and pension funding
2. Activities Auxiliary to Financial Intermediation
3. Construction
4. Water Transport
5. Hotels and restaurants
6. Land Transport

Group B – 24 days following the end of the month

1. Manufacture and Repair of Furniture
2. Manufacture of basic Metals
3. Manufacture of Chemical and Chemical Products
4. Manufacture of Coke, Refined Petroleum and Fuel Products
5. Manufacture of Electrical Machinery and Apparatus N.E.C.
 6. Manufacture of Fabricated Metal Products
7. Manufacture of Food, Products and Beverages
8. Manufacture of Machinery and Equipment N.E.C.
9. Manufacture of Medical, Precision and Optical Instruments
10. Manufacture of Motor Vehicles, Trailers and Semi-Trailers
11. Manufacture of Office, Accounting and Computing Machinery
12. Manufacture of Other Non-Metallic Mineral Products
13. Manufacture of Other Transport Equipment
14. Manufacture of Other Wearing Apparel
15. Manufacture of Paper and Paper Products

52Sec. 113(C), supra

53Sec. 114, supra
16. Manufacture of Radio, TV & Communication Equipment/Apparatus
17. Manufacture of Rubber and Plastic Products
18. Manufacture of Textiles
19. Manufacture of Tobacco Products
20. Manufacture of Wood and Wood Products
21. Manufacturing N.E.C.
22. Metallic Ore Mining
23. Non-Metallic Mining/Quarrying

Group C – 23 days following the end of the month

1. Retail Sale
2. Wholesale Trade and Commission Trade
3. Sale, Maintenance, Repair of Motor Vehicle, Sale of Automotive Fuel
4. Collection, Purification and Distribution of Water
5. Computer and Related Activities
6. Real Estate Activities

Group D – 22 days following the end of the month

1. Air Transport
2. Electricity, Gas, Steam, and Hot Water Supply
3. Postal & Telecommunications
4. Publishing, Printing & Reproduction of Recorded Media
5. Recreational, Cultural and Sporting Activities
6. Recycling
7. Renting of Goods and Equipment
8. Supporting and Auxiliary Transport Activities

Group E – 21 days following the end of the month

1. Activities of Membership Organizations Inc.

2. Health and Social Work
3. Public Administration & Defense Compulsory Social Security
4. Research and Development
5. Agricultural, Hunting and Forestry
6. Farming of Animals
7. Fishing
 8. Other Service Activities
9. Miscellaneous Business Activities
10. Unclassified

It is reiterated and clarified, however, that the return for withholding of VAT shall be filed on or
before the 10th day of the following month, which is likewise the due date for payment. To erase any doubt
and to ensure receipt by the BIR before midnight of the due dates prescribed above for the filing of a return,
the electronic return shall be filed on or before 10:00 p.m. of the above prescribed due dates.

Any person whose registration has been cancelled in accordance with Section 236 shall file a
return and pay the tax due thereon within 25 days from the date of cancellation of registration. Only one
consolidated return shall be filed by the taxpayer for his principal place of business or head office and all
branches.

The VAT on the importation of goods is paid before the release of such goods from Customs
custody.

CLOSURE OF BUSINESS ESTABLISHMENT

The BIR Commissioner or his duly authorized representative may order the suspension of the
business operations, and temporarily close the business establishment of any person for a period of not less
than 5 days for any of the following violations:

a. Failure to register with the appropriate RDO;

b. Failure to issue receipts or invoices;
c. Failure to file a VAT return; or
d. Understatement of taxable sales or receipts by 30% or more of his correct taxable sales or
receipts for the taxable quarter.

General explanation of VALUE ADDED TAX

This sets out the basic principles of VAT. It outlines how VAT works, which must register and account for
VAT and the obligations this, entails. The sections hereunder outline the basic principles applying to VAT and more
detailed information is contained in the links provided in each section.

1. What is VAT?

VAT is a tax on consumer spending. It is collected by VAT-registered traders on

their supplies of goods and services affected within the State, for consideration, to their
customers. Generally, each such trader in the chain of supply from manufacturer through
to retailer charges VAT on his/her sales* and is entitled to deduct from this amount the
VAT paid on his/her purchases.

The effect of offsetting VAT on purchases against VAT on sales is to impose the tax on the added value at
each stage of production – hence Value-Added Tax. For the final consumer, not being VAT-registered, VAT simply
forms part of the purchase price.

2. What is VAT charged on?

 Most goods and services supplied in Ireland are subject to VAT. Goods imported into Ireland from outside
the EU are also subject to VAT – this is charged by Customs at the point where the goods enter the State. See
Imports.

Persons engaged in business in Ireland who receive goods from a trader within the EU, or services (with
certain exceptions) from any trader established anywhere outside Ireland, including outside the EU, are required to
account for the VAT payable on receipt of the goods or services as if they had actually made the supply themselves.
This requirement applies to traders generally and also to entities that would not normally be engaged in taxable
supplies, such as Government Departments, Local authorities and other public bodies, charities, universities and
hospitals.

As may be seen from the example below, the consumer pays a total of €615 for the finished product, of
which €115 is VAT.

What is VAT?
  Purchase Transactions Sale Transactions
Total Price Total Credit for Net to
Price Paid VAT Value VAT @
  Purchase Charged Sale VAT Paid Collector
(Ex.VAT) € € Added € 23% €
Price € (Ex.VAT) € Price € € General €
Manufacturer - - - 100 100 23 123 0 23
Wholesaler 100 23 123 100 200 46 246 23 23
Distributor 200 46 246 100 300 69 369 46 23
Retailer 300 69 369 200 500 115 615 69 46
Consumer 500 115 615 - - - - - -

3. Taxable person and accountable person

A taxable person is any person who independently carries on a business in the Community or elsewhere. It
includes persons who are exempt from VAT as well as flat-rate farmers. VAT law provides that VAT is chargeable on
the supply of goods and services affected within the Community or elsewhere for consideration by a taxable person
acting as such, other than in the course or furtherance of an exempted activity.

A person who is required to charge VAT is referred to as an accountable person. An accountable person is,
therefore, a taxable person (an individual, partnership, company etc.) who supplies taxable goods or services in the
State and who is, or is required to be, registered for VAT. See VAT Registration.

4. Who must register for VAT?

Persons who are involved in the taxable supply of property and persons whose annual turnover from
supplies of taxable goods and services in the State, or the value of whose acquisitions of goods from other EU
Member States, exceed or are likely to exceed certain thresholds are obliged to register for VAT. See VAT
Registration.

Persons whose turnover from taxable activities does not exceed the thresholds are not obliged to register
but they may register for VAT if they so wish.

Persons who are in receipt of a service from a business established in another Member State or outside the
EU are accountable persons under Place of Supply rules.
 However, persons who do not have an establishment in the State but who either supply and install goods in
the State or who supply gas through the natural gas distribution network or electricity in the State are not accountable
persons. A sub-contractor not established in the State who provides construction services in the State to principal
contractors is not an accountable person, but may register for VAT in order to claim a repayment of input VAT.

Revenue issues a VAT registration number to a person when it is satisfied that the person is carrying on a
taxable business in the State.

5. Exemptions

A person, who makes exempt supplies, comes within the scope of the term ‘taxable person’ but this has no
bearing on his/her VAT status. Goods and services of the kind listed in Schedule 1 (PDF, 78KB) are exempt from
VAT and suppliers of such goods and services are not entitled to register for VAT unless they also make taxable
supplies. VAT registration will refer to their taxable supplies only. Exempt suppliers may be required to register and
account for VAT in respect of intra-Community acquisitions and services from abroad that are taxable where received
and on goods and services received by them generally. For special provisions relating to property please see the
Guide to VAT on Property.

6. Non Taxable Entities

The State, local authorities and bodies established by statute are not normally required to register for VAT in
respect of supplies of goods or services by them but may be required to register and account for VAT in respect of
goods and services received by them or where services or transactions by them create a significant distortion of
competition. See State Procurement.

The entities concerned include Government Departments, State sponsored bodies, An Garda Siochana, the
Defence Forces, the Health Services Executive, public hospitals, enterprise boards, educational establishments
(such as universities, institutes of technology, schools, VECs), local authorities including regional authorities, harbor
authorities.

Third level educational establishments may be required to register for VAT in respect of certain research
services. Where facilities are provided for taking part in sport by a not for profit organization that organization may be
required to register for VAT. See Sport Facilities.

7. Basis of accounting

Registered persons normally account for VAT on the invoice ('sales') basis. This means that they become
liable for VAT by reference to invoices issued and sales made by them irrespective of whether payment has actually
been received .

However, certain persons may opt to account for VAT on the moneys received ('cash') basis i.e. by
reference to payments actually received by them (see Money Received Basis).

8. Reverse charge/Self-accounting
 VAT is normally charged and accounted for by the supplier of the goods or services. However, in certain limited
circumstances the recipient of goods or services, rather than the supplier, is obliged to account for the VAT due. This
applies:-

 on the intra-Community acquisition of goods from another Member State (see Acquisitions from other EU
Member States)
 on receipt from abroad of services that are taxable where received (see Supply of Services, paragraph 3)
 on receipt from abroad of cultural, artistic or entertainment services from persons not established in the
State (see Supply of Services, paragraph 9)
 repair, valuation or contract work carried out on movable goods in another State in certain circumstances
(see Supply of Services, paragraph 15)
 where goods are installed or assembled for certain designated persons in the State by a supplier who is not
established in the State (see Registration, paragraph 8)
 where intra-Community transport and ancillary services are supplied by a non-established person to an
accountable person in the State (see Supply of Services, paragraph 4)
 where construction services are supplied to a principal contractor by a sub-contractor, whether or not the
sub-contractor is established in the State (see Registration, paragraph 8)
 on the receipt of gas through the natural gas distribution system, or electricity, from a person not established
in the State by certain categories of persons in the State
 on receipt of greenhouse gas emission allowances from another taxable person established in the State or
abroad
 where ownership of goods is transferred by way of a vesting order to NAMA
 where a taxable person carries on a business in the State which consists or includes dealing in scrap metal
 where there is a supply of construction work in the State between two connected persons

9. Amount on which VAT is chargeable

The amount on which VAT is chargeable is the total sum the person supplying the goods or services
becomes entitled to receive, including all taxes, commissions, costs and charges but excluding the VAT chargeable
in respect of the transaction.

10. What are the rates of VAT?

There are a number of different rates of VAT applied in Ireland.

In general, the standard rate of VAT applies to the supply of goods and services in Ireland. In specific
circumstances VAT is charged at the reduced rate, a second reduced rate, the zero rates and a special rate that
applies principally to the livestock sold by VAT registered traders.

It’s worth noting that the reduced rates apply to a number of labor-intensive services while the zero rate
applies to many foods, oral medicines, children’s shoes and children’s clothes.

A special scheme applies to agricultural supplies made by farmers who are generally not required to register
for VAT.

In addition to these rates there are a number of activities that are exempt from VAT. These include many
services supplied in the public interest, for example education, public transport and areas of childcare.

The goods and services exempt from VAT, together with those liable to VAT at the zero or reduced rates
are all listed in VAT legislation in Schedules 1, 2 and 3 of the Value Added Tax Consolidation Act.
11. Right to deduct VAT

In computing the amount of VAT payable in respect of a taxable period, a registered person may deduct the
VAT charged on most goods and services which are used for the purposes of the taxable business. No deduction
may be made, however, for the VAT on goods and services used for any other purpose (see VAT not Deductible).
Non-established sub-contractors providing construction services that are subject to reverse charge may register for
VAT if they wish to claim a refund. (See VAT Registration and Reverse Charge Construction (PDF, 199KB)).

12. VAT returns

A VAT-registered person normally accounts for VAT on a two-monthly basis (January/February, March/April
etc.). The return is made online on the Revenue ROS system together with a payment for any VAT due. The due
date for the submission of the ROS VAT return is the 23rd of the month following the end of the taxable period. For
example, a return for the VAT period May/June is due by 23rd July. (See Accounting for VAT).

13. Trade between different EU Member States

In the European Single Market, VAT is accounted for on sales of goods between traders EU Member States
by a system of intra-Community supplies and acquisition of goods . The supplies are zero-rated in the EU Member
State of origin and VAT is accounted for by the VAT-registered recipient in the EU Member State of destination.

14. Imports (non-EU)

For VAT purposes imports are goods brought into Ireland from non-EU countries. As a general rule,
imported goods are liable to VAT at the point of entry into the State, at the same rate as applies to the sale within the
State of similar goods.

15. Exports (non-EU)

For VAT purposes exports are goods supplied subject to a condition that they are to be transported to a
place outside the EU. The zero rate of VAT applies to exports.

16. Zero-rating scheme for qualifying businesses (Section 56 of the VAT Consolidation Act 2010)

This scheme provides that an accountable person, who derives not less than 75% of their annual turnover
from exports or intra-Community supplies of goods out of the State, can apply to have most goods and services
supplied to them zero-rated. Intra- Community acquisitions and imports made by them will also be zero-rated.

The zero rating does not apply to supplies of goods or services which, in the normal course would not be
deductible - for example, passenger motor vehicles, petrol, food, drink or most accommodation. A VAT-registered
person who thinks they might qualify under this scheme should make an application to the Revenue District
responsible for their tax affairs. See Zero rating of Goods and Services. The authorization will take effect two weeks
after the date of its issue. ]

This is to allow the authorized person sufficient time to forward copies of the authorization to his/her
suppliers. Accordingly, a qualifying person should apply in good time before the desired date of effect of the
authorization. Likewise when the authorization is nearing its expiration date an application should be made in
advance of the expiration date to avoid a lapse in the authorization. Otherwise normal VAT rules will apply.
17. Property transactions

The main features of the VAT on Property rules are:-

 The first supply of newly developed property is taxable for a period of five years from completion
 The first supply of newly developed residential property is always taxable
 The second and subsequent supply is taxable for a period of two years following occupation
 There is an option to tax the supply of properties where the supply would otherwise be exempt
 Lettings are exempt but where the letting is between unconnected parties there is an option to tax the rents.
The option to tax also applies where the parties are connected but the lessee is entitled to deduct over 90%
of the VAT charged on the rent
 A Capital Goods Scheme which ensures that the amount of VAT deductible on acquisition or development
of a property will correspond with the use of the property over a period of 20 years (10 years in the case of
refurbishment work)
 There are transitional rules to ensure that properties that have been developed under the old system will
pass into the new system with a minimum of disruption

The system is described in detail in the Guide to VAT on Property.

18. Flat-rate farmers

Farmers who do not register for VAT are compensated for the VAT they are charged on their purchases by
means of a flat-rate addition to the prices at which they sell their agricultural produce and agricultural services to
VAT-registered persons. These farmers are known in the VAT system as ‘flat-rate’ farmers. A farmer may
nonetheless be obliged to register in respect of the intra-Community acquisition of goods, certain services received
from abroad and certain other supplies. (See (VAT Registration).

19. Repayment of VAT to foreign businesses

In general, persons who are engaged in business outside the State but who are not engaged in business in
the State can claim a refund from Revenue of VAT charged to them in respect of services and goods supplied to
them in the State for business purposes, where the VAT would be deductible by them if they were accountable
persons in the State. (See: e Brief No. 90/2009: New Electronic VAT Refund (EVR) procedures with effect from 1
January 2010)

Since 1st January 2010 the procedure for the reimbursement of VAT incurred by EU taxable persons in
Member States where they are not established has been replaced by a fully electronic procedure, thereby ensuring a
quicker refund to claimants. Refund applications must be made through an electronic portal set up by the Member
State of establishment of the applicant. Each application is subject to an electronic approval process in the Member
State of establishment before being passed on to the Member State where the VAT was incurred by the business
(the Member State of refund).

20. Repayments to unregistered persons

There are special provisions for repayment of VAT incurred by unregistered persons in certain cases e.g. on
farm buildings by unregistered farmers, on supplies to unregistered sea-fishermen, on certain supplies to disabled
persons and to diplomats. See Repayments to Unregistered Persons.

21. Records to be kept

 A VAT-registered person must keep full and true records of all business transactions which affect their
liability to VAT. The records must be kept up to date and must be sufficiently detailed to enable them to accurately
calculate a liability or repayment and to enable Revenue to check the calculation, if necessary. Records must
normally be retained for six years from the date of the latest transactions to which they refer, see Records to be kept.

22. Appeals

A person has the right to appeal against Section 110 estimates, Section 111 assessments, a determination
made by Revenue in relation to the rate of VAT chargeable and in relation to whether an activity is an exempt activity.
A person also has the right of appeal in relation to charges made in accordance with regulations, for example, in
connection with an application for de-registration, and in relation to all claims for repayment. (See Accounting for
VAT)

Any question of fact or law may be brought before the Appeal Commissioners, and the taxpayer if
dissatisfied with the decision of the Appeal Commissioners may have the appeal re-heard by the Circuit Court. Both
the taxpayer and Revenue may appeal to the High Court on a point of law and from there to the Supreme Court. As
VAT is governed by EU law, the Appeal Commissioners or any of the courts may refer the case to the European
Court of Justice (ECJ).

Matters which may be appealed also include:-

 a charge to tax in connection with the issue of an incorrect invoice or the issue of an invoice showing tax by
a non-registered person,
 compulsory group registration, refusal to allow group registration and the cancellation of an existing group
registration
 a determination of open market value in relation to certain supplies between connected persons
 the refusal by Revenue to authorize a person to operate as a refunding agent for the VAT Retail Export
Scheme
 the treatment of a person who allows supplies to be made on land owned, occupied or controlled by them,
as jointly and severally liable with another person
 a charge to tax in accordance with regulations
 a claim for repayment of VAT
 a refusal by Revenue to treat a person as an accountable person
 a refusal by Revenue to accept that an expression of doubt is genuine (see paragraph 23 below)

23. Letter of expression of doubt

VAT law provides that where a person is in doubt about the application of VAT law to a transaction,
including the rate of VAT, he/she may lodge a letter of Expression of Doubt with Revenue. If the expression of doubt
is accepted by Revenue as genuine, interest will not apply to any tax payable until the matter in doubt is resolved.

In the event that Revenue refuses to accept that the expression of doubt is genuine, it is open to the
taxpayer to have such refusal referred to the Appeal Commissioners.

24. Internal Review procedures

Where a taxpayer wishes to seek a review of Revenue's handling of their tax affairs, or a decision made by a
Revenue official, they can ask for an internal review to be carried out either:

 by a senior Revenue official at a local level who was not involved in the original decision
  by Revenue’s Internal Reviewer alone
 jointly by Revenue’s Internal Reviewer and an External Reviewer

Requests for an internal review can be made to the Internal Review Unit, Revenue Commissioners, Dublin
Castle, Dublin 2.

25. Revenue on-line Service (ROS)

ROS is a secure on-line service that enables taxpayers and agents to interact electronically with Revenue. It
offers taxpayers a quick, secure and cost effective method to manage their tax affairs online. ROS enables a
taxpayer to view their own current position with Revenue for various taxes and levies, to file tax returns, including the
VAT 3 returns and annual Return of Trading Details (RTD) and to make payments online in a variety of methods.
Traders can register for ROS by accessing the ROS website.

ILLUSTRATION: Example of how to calculate output and input VAT

1. During a VAT period, Shop AS, which is registered in the VAT Register, purchases goods for NOK 62,000
including VAT. The input VAT is NOK 12,400.   During the same period, the business sells goods for NOK
150,000 excl. VAT.   The output VAT is NOK 37,500.   In the VAT settlement, you deduct input VAT from
output VAT. The resulting amount must be reported to your regional tax office. As you can see, you only pay
tax to the state on the 'the value your enterprise has added to the goods'.
(If your purchases exceed your sales in any one period, the difference will be negative, and the difference
will naturally be refunded.)   
   
The above example is illustrated in the table below, which also shows the calculations. In an accounting
program, this will all be calculated automatically, and you can print out a report corresponding to the one
you are required to submit to the tax office.

Sales Calculation VAT Total

Sold goods for NOK 150,000 excl. VAT. 150,000 x 25/100 = kr 37,500,- output VAT 37,500,-
Bought goods for NOK 62,000 incl. VAT 62,000 x 25/125 = NOK 12,400,- input VAT 12,400,-
VAT payable 37,500 - 12,400 =NOK 25,100 Difference 25,100,-
POST TESTS:

Note: Value Added Tax is a tax on the supply of goods and services which is eventually borne by the final
consumer, but which is collected at each stage of the production and distribution chain. Currently the
Standard rate of VAT in South Africa is 14% and this is the rate to be used when answering all questions.

Case 1: On 17 March, Tilly sells goods to the four customers shown in the table. The value of the goods is also
shown. VAT has not yet been included in the invoice price of the goods.

Question 1:Calculate the value of VAT in each case and the total value of the invoice to be sent to each
customer.

CUSTOMER VALUE OF GOODS SOLD VAT INVOICE TOTAL

Nina R 54.67 7.65 62.32
Khentsane R 132.91 18.61 151.52
Phuti R 17.54 2.46 20
Bongi R2 381.92 333.47 2,715.39

Case 2: On 4 September, Harry receives invoices for goods that he purchased. The invoices show the total price of
the goods including VAT.

Question 2: Calculate the value of goods that Harry received and the amount of VAT added to this to
produce the invoice total.

SELLER INVOICE TOTAL VALUE OF GOODS VAT

PURCHASED
Cindi R 325.76 285.75 40.01
Xolani R 54.22 47.56 6.66
Tenyeko R 4 571.09 4,009.73 561.36
Azwindini R 72.77 63.83 8.94

NB. The most difficult calculation involving VAT is encountered when cash discount is involved.

Questions 3: Fill in the gaps.

1. Two types of discount are used in the business world:

a. Trade Discount is a reduction in price when goods are supplied to other businesses (usually in the same
line of business). This reduced price is not available to the general public.

2. This type of discount is generally shown on the invoice (source document), but is not included in the double-
entry records.
 b. Cash Discount is an allowance that can be deducted from the total amount charged for goods if the debt
is settled within a time specified by the supplier.

3. This type of discount is only recorded when advantage is taken of the reduction Early payment discount

Case 3: Bernard sells goods valued at R2 760 to Aileen. Aileen is allowed a 25% trade discount.

Question 4: Calculate:

a) The amount that Bernard will show on his sales invoice for the goods sold and the amount that he will
enter in his sales journal Answer: 2,070
b) The amount that Aileen will enter in her purchases journal Answer: Answer: 2,070

Notes:

CASH DISCOUNT

One of the trickiest calculations that you will come across during your accounting studies involves the
calculation of VAT on goods that are subject to both trade and cash discount. Learn it and practice it several
times.

VAT is always calculated after deducting cash discount. If the customer does not pay before the date
stipulated on the purchase invoice, they lose the benefit of the cash discount.

Case 4: On 3 October Maleka sells goods to Pierre with a catalogue value of R7, 500. The goods are subject to a
trade discount of 33⅓% and if Pierre settles the outstanding amount before the end of the month he may deduct a
2½% cash discount (invoice no. 1234). On 4 October Maleka sells goods to Mapule with a catalogue price of R376.
He allows Mapule 25% trade discount and 3% cash discount for settlement within 30 days (invoice no. 1,235). Also,
on 4 October Maleka sells goods to Bongani with a catalogue price of R518. Bongani’s order is subject to 50% trade
discount and a cash discount of 1% if the debt is settled by the end of the month (invoice no. 1,236).

Questions 4: Calculate:
a the total of the sales invoice sent to Pierre Answer: 5,000
b the total of the sales invoice sent to Mapule Answer: 282
c the total of the sales invoice sent to Bongani Answer: 259
d Prepare the entries in Maleka sales journal.
Answer: (dr)Accounts Receivable 5,541
(cr)Output VAT 680.47
(cr)Sales 4,860.53

Maleka: sales Journal

Date Particulars Invoice no. Sales Vat Invoice total
3 October Pierre 1 234 R 4,385.96 R 614.04 R 5,000
4 October Mapule 1 235 247.38 34.63 282
4 October Bongani 1 236 227.19 31.81 259
Case 5: (Sale on Property) Mr. Garci sold the following properties during the year:

Family home, with zonal value for P 2, 500, 000,00 P3,000,000.00

Warehouse with a zonal value of P 4,000,000.00 P3, 500,000.00
Personal Car P 200,000.00
Business Delivery Trucks P 500,000.00

Question 5: how much is the amount subject to VAT? Answer: 500,000

Question 6: What are the classifications of sale or exchange of services?

Answer: 1. Construction and service contractors;

2. Stock, real estate, commercial, customs and immigration brokers;
3. Lessors of property, whether personal or real;
4. Persons engaged in warehousing services;
5. Lessors or distributors of cinematographic films;
6. Persons engaged in milling, processing, manufacturing or repacking of goods for others;
7. Proprietors, operators or keepers of hotels, motels, rest houses, pension houses, inns, resorts, theaters and
movie houses;
8. Proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs
and caterers;
9. Dealers in securities;
10. Lending investors;
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
13. Sales of electricity by generation and distribution companies
14. Franchise grantees of electric utilities, telephone and telegraph; radio and/or television broadcasting and all
other franchise grantees, except franchise grantees of radio and/or television broadcasting whose annual
gross receipts of the preceding year do not exceed P10 million, and franchise grantees of gas and water
utilities;
15. Non-life insurance companies (except their crop insurances) including surety, fidelity, indemnity and bonding
companies;
16. Similar services regardless of whether or not the performance thereof calls for the exercise of or use of the
physical and mental faculties.
17. 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;
18. The lease or the use of, or the right to use of any industrial, commercial or scientific equipment;
19. The supply of scientific, technical, industrial or commercial knowledge or information;
20. 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 item (r) above or any such
knowledge or information as is mentioned in item (s) above;
 21. The supply of services by a non-resident 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 non-resident person;
22. 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;
23. The lease of motion picture films, films, tapes and discs; and
24. The lease or the use of, or the right to use, radio, television, satellite transition and cable television time.

Question 7: Why are services performed within subject to VAT while those performed outside are not subject to VAT
in the Philippines? Answer: A value-added tax (VAT) of 12% percent shall be imposed on gross
receipts derived from the sale of services performed in the Philippines. Conversely, if the services are
performed outside the Philippines, the sale will not be subject to VAT. This is because of the double
taxation concept.

Question 8: What are the requisites of service transactions subject to VAT?

Answer: Must be render services in the course of trade or business, whose annual gross sales or
receipts exceed P3 million (based on TRAIN Law), and those who import goods, whether for business or
otherwise.

Question 9: Compare the VAT rules applicable to a service contractor in general to the security provider contractor.

Answer: In general, service contractors is subject to VAT for the whole amount of service rendered, but
according to RMC no. 39-2007, security provider contractors are subject to VAT only for the portion of
agency fee that will form as part of their gross receipts, while the recognition of the salaries of the
security guards is a liability and will not form part of the gross income.

Question 10: Discuss how the business tax and withholding tax are imposed on professional fees.

Answer: The taxpayer will have to pay his/her income tax derived from his/her earnings from
professional fee. But the payor is required to withhold 5% to 10% withholding tax for individuals and 10%
to 15% for corporation for the professional fee (based on TRAIN Law). But the taxpayer can use the
withheld tax as tax credit in filing his/her income tax.