VALUE ADDED TAX1

Value added tax is a tax on the sale, barter, exchange, lease of goods and properties, rendition
of services and importation of goods.

VAT is a:

1) Business tax on the value added or mark-up;

VAT is added to the goods, property, or service at each stage of the manufacture/production,
distribution, or sale up to the end consumer.

 Is VAT really a tax on the value-added? 2

o Yes. Consider this:

Andres sells to Boris (Mr. Ramos) a piece of wood – a nice, fine, well-sanded
piece of wood.

Price : P100

VAT (12%) : P12 (Input Tax on Boris as the buyer)

Total : P112

Boris then expertly crafts the wood into a rocking chair and sells it to Cletus.

Price : P150

VAT (12%) : P18 Output Tax on Boris as the seller)

Total : P168

Boris has an output tax of P18, and an input tax of P12. He has a P6 net VAT payable [output
(P18) minus input (12) = P6 VAT]. But where do we see the tax on the “value added” by Boris?

We see that in the level of the price. By applying his skills and labor, Boris made a chair out of
the wood that he bought from Andres. From P100 (Wood Price), the price increased to P150 (Rocking
Chair Price). There was a P50 increase because of the value added by Boris. And applying the VAT on this
P50 (P50 x 12%), it results into the same amount, which is P6. This proves that the tax is really on the
“value added”

INPUT TAX AND OUTPUT TAX

Output Tax less Input Tax = VAT Payable

 If Output Tax is MORE THAN Input Tax = VAT Payable

 If Input Tax is MORE THAN Output Tax = Tax Credit or Tax Refund

1
Fenandez, Vicky C., 590 Practice Question with Suggested Answers in Taxation (2020), pp. 160-186
2
Ingles, Tax Made Less Taxing (2018)
 Input Tax

Input tax means the VAT due from or paid by a VAT-registered person in the course of his trade
or business, on the importation of goods, or on the local purchase of goods or service, including
lease or use of property from a VAT-registered person.

Input Tax is the Value Added Tax on trade and business related PURCHASES of the taxpayer.

Output Tax

Output tax means the VAT due on the sale or lease of taxable goods or property or service by
any person registered or required to register as a VATable person (Sec. 110 (A), NIRC).

Output Tax is the Value Added Tax paid on SALES of a VAT-registered person or entity.

Sec. 236 G – Persons Required to Register for Value-Added Tax

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

"(1) Any person who, in the course of trade or business, sells, xxx

"(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).
Effect of Failure to Register:
(2) xxx. 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. (as amended by TRAIN Law)
(H) Optional Registration for VAT of Exempt Person:

(1) Any person who is not required for VAT under Subsection G may elect to register
for VAT by registering with the RDO and paying the annual registration fee of
PhP500.00.
(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) [PSEI/Prof) and 24 A (2)
(c) (2) (a) (MIE) who elects to pay eight percent (8%) on gross sales or receipts shall
not be allowed to avail of this option.
RR No. 8-2018:
 1) The option to be taxed at 8% income tax rate is NOT AVAILABLE to a VAT-registered
taxpayer, regardless of the amount of gross sales/receipts, and to a taxpayer who is subject
to Other Percentage Taxes under Title V of the NIRC.

2) A taxpayer who signifies intention to avail of the 8% tax rate option and is conclusively
qualified for said option at the end of the taxable year since the annual gross sales/receipts
and other non-operating income did not exceed the VAT threshold of P3 Million.

3) A taxpayer shall automatically be subject to the graduated rates under Section 24 (A) (2) (a)
of the Tax Code, even if the flat 8% income tax rate option is initially selected, when
taxpayers gross sales/receipts, and other non-operating income exceeded the VAT threshold
during the taxable year. 3

2) Sales tax
VAT is applied at the point of sale, and is paid on each sale, barter, exchange or lease of goods,
property, and service in the Philippines, and on the importation of goods into the Philippines.

 As it is a tax on the transaction, there is no need whatsoever for there to be a taxable

gain (unlike in income tax). It is not required by either law or jurisprudence.

3) Consumption tax
VAT is paid by the consumer upon the spending on goods, property, and service in the
Philippines.
The VAT is a tax on consumption, levied on the sale, barter, exchange or lease of goods or
properties and services in the Philippines and the importation of goods into the Philippines. 4
 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 or
properties or services.
 VAT is imposed on the seller, not the buyer.
o EXCEPT on importation.
4) Indirect tax
Although the seller/transferor/lessor is the one statutorily liable for the payment of the VAT, the
amount may be shifted or passed on to the buyer, transferee or lessee of the goods, property or
service. In the case of importation, the importer is the one liable for the VAT and the tax is
passed on to the customer as a component of the sales price.

 If the seller is VAT exempt, no need for payment on VAT on his sales. He will have to
shoulder the burden of the VAT passed to him by his suppliers for his purchases.

5) Destination tax
VAT is levied at the situs of the end user/consumer.

3
Dascil, NIRC (2018), p. 473
4
Ingles, ibid, p. 312
 ELEMENTS OF VAT:
1) There must be a sale or exchange of goods, sale of services, lease of goods or properties, or
importation of good;
2) The activity must be done in the regular course of commercial trade or activity, except in the
case of importation, the importer remains liable to VAT whether or not it was made in the
regular course of business or not.
 SEC. 105
 “Ordinary course of trade or business” means the regular conduct or pursuit of a
commercial or an economic activity. It also includes transactions incidental
thereto. It covers any person regardless whether or not the person engaged
therein is a nonstock, nonprofit organization (irrespective of the disposition of
its net income and whether or not it sells exclusively to members or their
guests), or a government entity.
o Regular involves more than one isolated transaction. It requires
repetition and continuity of action.
o Except when the taxpayer is a NRFC/NRANETB, there is no need for the
regularity of conduct. Services rendered by them in the Philippines are
considered as being in the course of trade or business, and thus, subject
to the VAT.

3) The economic activity must be a VATable transaction, not VAT exempt or VAT zero-rated;
 Except IMPORTATION which is always subject to VAT.
 Any sale, barter, exchange of goods or services in the course of trade or business is
subject to VAT.
 The sale of a vehicle used in the business of the TP, while isolated, is subject to
VAT as the transaction was an incidental transaction made in the course of the
TPs business.
 However, the involuntary sale of vessels by a TP not engaged in the sale of
vessels pursuant to the government’s policy of privatization is not subject to
VAT because the sale was not in the course of trade or business.

4) The activity must be done by a person who is VATable; and

 Between an automobile shop who sells five (5) parcels of land and a real estate dealer
who sold a parcel of land, both will be subject to VAT.
o The automobile shop because of its regular conduct (no. of sales); and
o The real estate dealer (even if only one land sold) because of the nature of his
business in the pursuit of an economic activity.
 The provision on Sec. 105 notwithstanding, an importation of goods for personal use is
still subject to VAT because of Section 107.
o This is an exception to “pursuit of a commercial or economic activity”
requirement.

5) The activity must be made in the Philippines (Sec. 105, NIRC)

  Hence, if a TP renders service to an affiliate for a fee (even if the fee is merely to
reimburse costs), the service is still subject to VAT) (CIR vs. CA, G.R. No. 125355, 3-30-2000.)
 Similarly, the fees collected by toll way operators are subject to VAT. Toll way operators
are engaged in rendering service (constructing, maintaining, and operating expressways).
(Diaz vs. Secretary, G.R. No. 193007, July 19, 2011)
 When there is no sale, barter or exchange of goods or properties, then no VAT should be
imposed.
 Hence, when an affiliate provides funds to a TP who then uses the funds to pay a third
party, the transaction is not subject to VAT, as there was no sale, barter, or exchange
between the affiliate and the TP. The money was simply given as a dole-out. (CIR vs. Sony
Philippines, Inc. G.R. No. 178697, November 17, 2010)

PERSONS LIABLE TO VAT

The seller of goods or services, the transferor, the importer and the lessor are the person liable
to pay the VAT. They can however shift the burden to their customer, client, transferee and lessee.

IMPACT AND INCIDENCE OF VAT

Impact of VAT

The impact of VAT refers to the person from whom the tax is collected

- The seller of goods or services, the lessor of the goods or properties and the
importer of the goods.

Incidence of VAT

The incidence of VAT refers to the person who eventually pays the tax

- The ultimate consumer or buyer of goods or services, the lessee of the goods or
properties, and the buyer of the imported goods.

METHODS IN DETERMINING THE VAT

Tax Credit-Invoice Method

Under the tax-credit invoice method, the VAT is applied to the sales price of the good or service
(“output”) and the tax is disclosed on the sales invoice. As such, the tax credit-invoice method is
considered to be a “transactional method” tax, as it is imposed on each sale. A business credit is provided
for all VAT on purchases of taxable goods and services (“inputs”) used in the business. Accordingly, the
net tax paid at a stage of production or distribution is computed on the value added by the business at
that particular stage.

Subtraction Method
 Under the subtraction method, the VAT base is computed as the difference between the taxable
sales and its purchases of taxable goods and services. At the end of the reporting period, the tax rate is
applied to the difference. The subtraction method VAT is considered to be “account based” as it is
computed from the books and records of account.

DESTINATION PRINCIPLE AND CROSS –BORDER DOCTRINE

Destination Principle

According to the Destination Principle, goods, property and services are taxed only in the country
where they are destined, used or consumed. That is the place or the onus of taxation. Thus, those destined
for use or consumption within the Philippines shall be imposed the VAT; while those destined outside the
Philippines are not.

Cross-Border Doctrine

Under the Cross Boarder Doctrine, the economic or export processing zone in the Philippines is
recognized, by legal fiction, as a foreign territory managed as a separate customs territory from the rest
of the Philippines. No VAT shall be imposed to form part of the cost of the goods destined for consumption
outside the territorial boarder of the taxing authority. For this reason, sales by persons from the Philippine
customs territory to those inside the export processing zones are taxed as exports, hence, not subject to
VAT (Atlas Consolidated Mining vs. CIR, G.R. No. 141104, June 8, 2007)

HOW IS VAT IMPOSED:

a) On the Sale of Goods or Property (Sec. 106)

b) On the Importation of Goods (Sec. 107)
c) On the Sale of Service (Sec. 108)
d) On the Use or Lease of Property (Sec. 108)

Imposition of VAT on the Sale of Goods or Properties (Sec. 106)

Sec. 106 A. “Goods or Properties” include:

(1) The term 'goods' or 'properties' shall mean all tangible and intangible objects which are
capable of pecuniary estimation and shall include:

(a) Real properties held primarily for sale to customers or held for lease in the ordinary course
of trade or business;

(b) The right or the privilege to use patent, copyright, design or model, plan, secret formula or
process, goodwill, trademark, trade brand or other like property or right;

(c) The right or the privilege to use in the Philippines of any industrial, commercial or scientific
equipment;
 (d) The right or the privilege to use motion picture films, tapes and discs; and

(e) Radio, television, satellite transmission and cable television time.

VAT ON SALE OF GOODS AND PROPERTIES

On every sale, barter or exchange of goods or property, a twelve percent (12%) VAT is levied,
assessed and collected on the gross selling price or gross value in money of the goods or property sold,
bartered or exchanged, the tax to be paid by the seller or transferor. (Sec. 106 (A), NIRC as amended).

TRAIN has fixed Section 106 to reflect that the VAT for sale of goods and properties is now clearly
12% in general, but note that there are some transactions which are subject to 0% or tax exempt.

For sale of goods or properties, the tax base is the gross selling price.

The amount of the VAT to be paid by the TP shall be equivalent to 12% of the GSP of the goods or
property. Thus, the formula shall be:

Gross Selling Price x 12% = Output Tax 5

GROSS SELLING PRICE (Sec. 106 A1)

“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.”

 In other words, the GSP includes everything that the buyer pays the seller, except VAT
which is shifted to the buyer.
o For example, Toby sold a shirt to Carlo. The quoted selling price was P100, but
there were freight charges of P50. The GSP is P150. You apply the VAT to P150.

 While the law says the VAT is based on the GSP, “gross selling price” does not mean gross
sales. The law and regulations allow downward adjustment for:
o Sales returns and allowances
o Sales discounts agreed upon at the time of the sale indicated in the sales invoice,
and availed of by the buyer.

In dealing with this element, you’re dealing with two questions:

 Is this a normal sale?

 If not, is this at least a transaction which are deemed sales by law under Section 106 (b)? 6

5
Sababan, Taxation Law Review (2008), p. 162
6
Ingles, Tax Made Less Taxing, pp. 317-318
Types of Sales

1. Actual Sale.
- In actual sale, a VAT-registered person is the seller and another VAT-registered person
is the buyer. The seller’s output tax becomes the buyer’s input tax, which the latter
can credit against his output tax on his taxable sales of goods, properties or services
during the quarter.

2. Deemed Sale.
- In deemed sales, the seller is also the buyer and no valuable consideration is thus
paid.
- For example, if the owner withdraws goods for personal (non-business) use from his
inventory, he derives a tax advantage from the input tax, which he has already
credited at the time of purchase against his output tax. Since 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 value-added tax.
- The rationale of the transaction deemed sale provision is to recapture the value-
added tax that was claimed as input tax at the time of purchase. 7

3. Export Sale (Sec. 106 B)

4. Foreign Currency Denominated Sale.
- This is a sale to a non-resident of goods and paid for in foreign currency.
- This DOESN’T include automobiles and nonessential goods, assembled or
manufactured in the Philippines for delivery to a resident in the Philippines and paid
for in foreign currency.8
- Foreign currency denominated sales are no longer zero-rated under the TRAIN Law. 9

TRANSACTIONS DEEMED 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;

7
Mamalateo, Reviewer on Taxation (2019), p. 508
8
Lumbera, Bar Review Notes (2019), p. 46
9
Ingles, TRAIN Supplement (2018), p. 43
 (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.

 By virtue of law, the following are considered sales in the course of trade or business, and is
subject to VAT:

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 of inventory to shareholders or investors as share in the profits of the VAT-
registered persons (Property Dividends);
3. Distribution or transfer of inventory to creditors in payment of debt;
4. Consignment of goods if actual sale is not made within sixty (60) days following the date such
good were consigned; and
5. Retirement from or cessation of business, with respect to inventories of taxable goods existing as
of such retirement or cessation (includes capital goods – R.R. 16-2005)

For example, Zombie Solutions Inc. sells on a regular basis axes which it believes will help in a
zombie apocalypse. It decides to give its tax counsel, Atty. Zomaida Bielo, a limited edition axe.
That transaction is a transaction deemed sale.

The CIR shall determine the appropriate tax base in cases where transactions are deemed sales,
or where the GSP is unusually lower than the actual market value.10

ZERO-RATED SALES (0% VAT)

"(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:

10
Ingles, ibid. p. 320
 "(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.

ZERO-RATED AND EFFECTIVELY ZERO-RATED TRANSACTION

"(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.

Zero-Rated

Zero-rated sale of goods or properties, and services is a taxable transaction for VAT purposes,
but shall not result in any output tax. The input tax on purchases of goods, properties or services shall
be available as tax credit or refund. It includes export sales.

Effectively Zero-Rated

Effectively zero-rated sale of goods or properties, and services is the local sale of goods and
properties by a VAT-registered person to a person or entity who was granted indirect tax exemption
under special laws or international agreement. Although it does not involve actual export, it is
considered as constructive export, and is entitled to the benefit of zero-rating.

ZERO RATED SALES OF GOODS:

A rate of 0% of the GSP will be applied if:

1. Export Sale [Sec. 106 (2) (a) (1-6)]; or

2. Sales to persons or entities whose exemption under special laws, or international
agreements to which the Philippines is a signatory (effectively zero-rated sales) [Sec. 106
(2) (b)].

AMENDMENTS UNDER THE TRAIN LAW

 The sale of gold to the BSP is no longer zero-rated; it is now VAT-exempt

 The sale of goods and other stuff to international shipping of international air transport
operations are only zero-rated IF the goods are used for international shipping or other air
transport operations.
o The rationale is to make international air and sea commerce more
competitive.11
 Foreign currency denominated sales are no longer zero-rated.

 TRAIN has also set some standards to remove the zero-rating for sale of packaging materials
to nonresidents, export sales under EO 226, and sale of goods, etc. to international
shipping/air operations.
o These transactions will be subject to the normal 12% rate if a successful VAT
refund system is established, among others. [Sec. 106 (2), 6 th par).12

 The President VETOED the provision on the Sale and Delivery of Goods to (i) Registered
enterprises within a separate customs territory; and (2) Registered enterprise within TIEZA
(Tourism Infrastructure and Enterprise Zone Authority). His veto message reads:

“The above provisions go against the principle of limiting the VAT zero-rating to direct
exporters. The proliferation of separate customs territories, which include buildings,
creates significant leakages in our tax system. This makes the tax system highly

11
Dascil, NIRC (2018), p. 268
12
Ingles, The TRAIN Supplement, p. 42-43
 inequitable and significantly reduces the revenues that could be better used for the
poor. As to tourism enterprises, the current law only allows for duty and tax free
importation of capital equipment and other goods. The TIEZA Law explicitly allows only
duty and tax free importation of ycapital equipment, transportation equipment and
other goods (in certain cases and always subject to rules provided by the DOF). Thus,
this provision actually grants a new incentive to suppliers of registered tourism
enterprises. At any rate, the TIEZA law, which is still in effect for two more years, can
be used to avail of the above-mentioned incentives.”

DISCUSSION ON ZERO-RATED

Purpose of Zero-rated:

To exempt the transaction completely from VAT previously collected since input taxes passed
to him may be recovered as refunds or credits.13

 Under the zero-rated transaction, the VAT-registered entities are subject to Zero percent
(0%). One might ask: “If they subject to 0%, why then should they be considered as
VAT liable?” The importance lies with respect to the input tax. An entity under this section
(Zero-rated) that is VAT-registered is subject to 0%, meaning the GSP of his goods or
properties shall be multiplied by 0%, hence his output tax shall be equivalent to P0.00. On
the other hand, since he is VAT-registered, he may claim input tax for the purchases he
made from VAT-registered entities. Therefore, assuming his input tax is P10,000.00, in
computing for his VAT liability, the equation will be:

Output Tax P00,000.00

Less: Input Tax 10,000.00

VAT Payable/(Creditable) (10,000.00)

As can be gleaned from the above, the result will be a VAT creditable amount which is the
excess of the input tax over the output tax. This excess input tax or “creditable input tax”
serves as a tax credit which can be deducted from any tax under the NIRC, as provided
under Section (110 B), to wit: xxx, 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 tax, x x x. Hence, the advantage of being subject to 0% rather than
being exempt is obvious. The input tax can be credited against any internal revenue tax. 14

 The biggest difference of zero-rated/effectively zero-rated transactions and VAT-exempt

transactions is the ability to recover VAT already paid to the seller.

o Why do we look at the input tax and not the output tax?
 Because the input tax is what we all seek to recover, that is what we
shouldered.

For example:

Arnulfo (supplier) sells to Boy a spanking new shirt; Boy

shoulders the 12% VAT on it (input tax for Boy as Buyer).

13
Ingles, ibid, p. 329
14
Sababan, ibid, p. 162
 Boy can recover the amount (input tax) he paid to Arnulfo by
selling the T-shirt to Carlos, wherein Carlos will shoulder the
12% VAT (output tax for Boy as Seller)

So, as you can see, Boy wants to recover the 12%VAT (input
tax) that he paid to Arnulfo, his supplier.

 Output tax doesn’t come out of our pockets because we can pass that
burden to our buyers.
 Boy’s selling of the shirt to Carlos will burden Carlos, not Boy.

ILLUSTRATION:

VAT (12%)

Arnulfo sells to Boy Boy sells to Carlos

VAT TAXABLE VAT TAXABLE Boy paid Arnulfo P12 as VAT. But he recovered
the P12 by selling the product to Carlos. In his
P100.00 (GSP) P150.00 (GSP) sale to Carlos, he received P18 which covered
+ 12.00 (VAT) + 12.00 (VAT) the P12 he paid to his supplier Arnulfo. So, in
P112.00 P168.00 essence, he recovered the P12 he paid Arnulfo.

 In normal VAT (12%) transactions, the VAT paid to the supplier (Arnulfo) can be recovered
by selling the product to a purchaser (Carlos):

VAT ZERO RATED (0%)

Arnulfo sells to Boy Boy sells to Carlos

VAT TAXABLE VAT TAXABLE Boy paid Arnulfo P12 as VAT. But, his
transaction to Carlos was zero-rated. So, he did
P100.00 (GSP) P150.00 (GSP) not receive anything from Carlos to offset his
+ 12.00 (VAT) + 0.00 (VAT) VAT payment to Arnulfo. He has an output of
P112.00 P150.00 zero, and an input of P12.

He can apply for a refund or a tax credit of the

P12 with the BIR because the law allows this.

 In zero-rated (0%) transactions, there is total relief for the purchaser (Carlos) from the burden
of the tax since he does not have to pay any VAT on the transaction.
 On the side of the seller (Boy), the input tax on his purchase from his supplier
(Arnulfo) shall be available as a tax credit or refund.

VAT-EXEMPT

Arnulfo sells to Boy Boy sells to Carlos

 VAT TAXABLE VAT TAXABLE Boy paid Arnulfo P12 as VAT. But, his
transaction to Carlos was VAT-exempt. So, he
P100.00 (GSP) P150.00 (GSP) did not receive anything from Carlos to offset his
+ 12.00 (VAT) + 0.00 (VAT) VAT payment to Arnulfo. He has an output of
P112.00 P150.00 zero, and an input of P12.

However, unlike the zero-rated transaction, he

cannot apply for a refund or a credit of the P12
with the BIR because the law does not allow this.

 In exempt transactions, there is only partial relief because the seller (Boy) is not allowed any
tax refund or credit for input taxes paid on his purchases from his supplier (Arnulfo)

 In fact, some jurisdictions call zero-rated transactions “exempt with credit” (because you
can credit input tax) and VAT-exempt transactions “exempt without credit” (because you
can’t credit input tax. So that’s a helpful way of remembering the difference between zero-
rated and VAT-exempt. You can get a credit with zero-rated transactions and you can’t get
a credit with VAT-exempt transactions.

 So, if we were Boy, and we had a choice.. what should our next sale transaction be – normal
VATable, zero-rated or exempt?

o Clearly, we won’t go for exempt, because we won’t recover the VAT we paid to our
suppliers (Arnulfo).

 But what do you do with the unrecovered VAT in exempt transactions?

 It will be considered COST.

o It is a toss-up between going for normal VATable transactions and zero-rated

transactions.
 In both these cases, we will recover the VAT we paid to our suppliers. It will just
depend on different factors.

 If we go for a zero-rated transaction, do we want to go through the hassle of having to deal with
the BIR and paying the fees?

 If we go for the normal VATable, the recovery would be quicker. But this would mean we’d have
to keep track of the VAT paid to us and then have to pay the net VAT payable to the government.
And what if our line of business is really engaged in exporting (zero-rated), should we go to the
trouble of looking for buyers here in the Philippines if that’s not our main line of business anyway?

VAT ON IMPORTATION OF GOODS (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.

 Every importation of goods shall be subject to the VAT, whether for use in business or not.
 The imported goods shall be subject to 12% VAT.
 The tax base is:
o The total value used by the BOC in determining tariff and customs duty, plus customs duties,
excise tax (if any), and other charges prior to the removal of the goods from customs custody; OR

o Based on the landed cost, when the customs duties are determined on the basis of the quantity
or volume of the goods. By “landed cost” is meant the invoice cost, freight, insurance, customs
duties, excise tax (if any), and other charges prior to the removal of the goods from the customs
territory.15

 Input tax paid on importation is also creditable against the output tax of the VAT-registered
importer.16

Transfer of Goods by Tax-Exempt Persons [Sec. 107 (B)]

 It is to be noted that under Section 107 (B), the Code provides for a situation where the goods were
transferred by a tax-exempt person. The situation is where the importer is exempt from VAT and such
goods are subsequently sold, transferred or exchanged in the Philippines to a non-exempt purchaser,
transferee or recipient shall be considered as the imported and shall be liable for the VAT due on such
importation.17

 When a person who was exempt from the VAT on his importation subsequently sells (transfers or
exchanges) in the Philippines such imported article to a non-exempt person or entity, the purchaser
(transferee or assigned) will be required to pay the VAT.

o Xavi Passing Academy, Inc. is a tax-exempt entity who imported high-end soccer balls.
Xavi Passing Academy, Inc. then sold it to Diego Dribblers, Inc. a non-exempt entity. Diego
Dribblers, Inc. has to pay for the VAT. Diego Dribblers, Inc. can claim the VAT paid as
creditable input taxes.

15
Ingles, p. 326
16
Dascil, p. 269
17
Sababan, p. 165
 The VAT of an importation should be paid prior to the release of the goods from customs custody. If
it is subject to both excise tax and VAT, the taxpayer has to pay both prior to the release.
 A seller of goods or services who imports stuff can claim the VAT paid on importations during a taxable
period as input taxes creditable against output taxes on the sales of the same period.

VAT ON SALE OF SERVICES AND USE OR LEASE OF PROPERTIES (SEC. 108)

"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.

VAT ON SALE OF SERVICES (12%)

Sale or exchange of services broadly embraces the performance of all kinds of services in the
Philippines for others for a fee, remuneration, or consideration, by a person, regardless of whether
the performance thereof calls for the exercise or use of the physical or mental faculties.

It means any transaction undertaken in the course of trade or business which does not constitute
sale of goods and which is not expressly exempt from VAT under the Tax Code or special law.

Services of the following persons are subject to VAT: 18

1. construction and service contractors;

2. stock, real estate, commercial, customs and immigration brokers;
3. lessors of property, whether personal or real;
4. warehousing services;
5. lessors or distributors of cinematographic films;
6. persons engaged in milling, processing, manufacturing or repacking goods for others;
7. proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts;
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 companies, transmission by any entity, and distribution
companies, including electric cooperatives;

18
Mamalateo, ibid, p. 518
 14. 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;
15. non-life insurance companies (except their crop insurances), including surety, fidelity,
indemnity and bonding companies; and
16. similar services regardless of whether or not the performance thereof calls for the exercise or
use of the physical or mental faculties.

 Lease of properties shall be subject to VAT irrespective of the place where the contract of lease
was executed if the property is leased or used in the Philippines [Sec. 108 (A)]

REQUISITES FOR TAXABILITY OF SERVICES (12% VAT)

1. The seller must be a VAT-registered, or even if not, he/it is a VAT-registrable person and his/its
gross annual receipts exceeds P3,000,000.00 (TRAIN);

2. The sale must be performed in the course of trade or business;

3. The sale of service must be for a valuable consideration.

4. The sale must have been done and for use or consumption in the Philippines;

5. The sale must be considered as a zero-rated sales;

6. The sale must not be exempt from VAT under the Tax Code, special law, or international
agreement;

7. In the case of lease of properties, the property being leased should be located in the Philippines
irrespective of the place where the contract of lease or licensing agreement was executed.

SITUS OF SERVICE PRINCIPLE

The place where the service is performed determines the jurisdiction to impose the VAT.

The place of payment is immaterial since the situs of the service is determined by the place
where such service is performed.

GROSS RECEIPTS (Sec. 108)

The term 'gross receipts' means the total amount of money or its equivalent representing the contract
price, compensation, service fee, rental or royalty, including the amount charged for materials supplied
with the services and deposits and advanced payments actually or constructively received during the
taxable quarter for the services performed or to be performed for another person, excluding value-added
tax, EXCEPT those amounts earmarked for payment to unrelated third (3 rd) party, or received as
reimbursement for advance payment on behalf of another which do not redound to the benefit of the
payor.19

Advance Payment

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

rd
a 3 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 (R.R.
16-204, Sec. 4.108-4)

Unrelated Party

For this purpose, “unrelated party” shall not include TP’s employees, partners, affiliates
(parent, subsidiary and other related companies), relatives by consanguinity or affinity within the
4th civil degree, and trust fund where the TP is the trustor, trustee or beneficiary, even if covered
by an agreement to the contrary.

Payment to 3rd Party

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

Actual or Constructive Receipt20

Tax accounting rules for gross receipts within a taxable period for VAT if different from the accrual
method of accounting for INCOME TAX purposes. Issuing and/or sending statement of account to the
customer for whom the service was rendered or still to be performed does not create output tax liability
to the seller nor does it give rise to input tax (creditable by the VAT-registered buyer) until the
consideration is received by the seller.

Actual or constructive receipt of the contract price, compensation, remuneration, or fee makes the
seller of service liable for VAT, even if no service has yet been performed by him. Thus, if a contractor
receives upon the execution of the contract a down payment of 20% of the total contract price, such
amount received is already subject to the VAT although he does not start the construction of the project
until after the next taxable quarter.

Constructive Receipt

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

19
Casasola, NIRC Vol 2 (2013), p. 806
20
Mamalateo, Reviewer on Taxation (2019), p. 523
 Examples of Constructive Receipt:

1) deposit in banks which are made available to the seller of the 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 contractee to the account of the contractor.

Sale of Service by an Insurance Broker

Income of insurance broker comes from commission, and not from premium payments; hence,
the basis for VAT should be the commission it receives and not the premium payments it receives and
remits to the insurance company. Such sales constitute part of the taxable income of the insurance
companies, not the broker.

Dealer in Securities

A “dealer in securities” is a merchant of stocks or securities, whether an individual, partnership,

or corporation, with an established place of business, regularly engaged in the purchase of securities and
their resale to customers. He buys securities and sells them to customers with a view to the gains and
profits that may be derived therefrom.

A “pre-need company” is considered as a dealer in securities subject to 12% VAT on gross-income.

Its gross receipts consist of actual receipts of premium on contract price minus contributions to the trust
funds to be set up independently as mandated by the SEC.

Tollway operators

Tollway operators are covered by the VAT because they render services for a fee. They are just
like lessors, warehouse operators, and other groups expressly mentioned by law.

Lease of Properties owned by Non-residents

A non-resident person who derives rental income from the lease of tangible property physically
situated in the Philippines or receives royalties for granting the right to use in the Philippines the intangible
property (e.g. copyright or patent) belonging to him is a taxable person. The amount of rentals and
royalties remitted to the non-resident lessor or licensor is subject to VAT, irrespective of the place where
the contract of lease or licensing agreement is executed, if the property is leased or used in the Philippines
(Destination Principle – where the tangible property is leased or used).

ZERO-RATED TRANSACTION OF SERVICES

"(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.

"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."

Note that PRRD vetoed Sec. 108 B 8 (zero-rating of services to PEZA and TIEZA registered entities).

 For zero-rated sales of services, the only change was that the sale of services to persons engaged
in international shipping or air transport should be exclusive to international shipping or air
transport operations in order to be zero-rated.

 TRAIN has also set some standards to remove the zero-rating for the first five enumerated
transactions

o These transactions will be subject to the normal 12% rate if a successful VAT refund
system is established, among others. 21

ZERO-RATED SALE OF SERVICES

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 the Regulations.22

Zero-rated transactions refer to the export sale of goods and supply of services. The seller of such
transactions charges no output tax, but can claim a refund or a tax credit certificate for the VAT previously
charged by suppliers. This is for the benefit of the seller.23

EFFECTIVELY ZERO-RATED SALE OF SERVICES

The term “effectively zero-rated sales of services shall refer to the local sale of services by a VAT-
registered person to a person or entity who was granted indirect tax exemption under special laws or
international agreement.24

Effecttively zero-rated transactions refer to the sale of goods or supply of services to persons or
entities whose exemption under special laws or international agreements to which the Philippines is a

21
Ingles, TRAIN Supplement, p. 44
22
Casasola, NIRC (2013), p. 833
23
Ingels, Tax Made Less Taxing (2018), p. 335
24
Casasola, ibid., p. 835
signatory effectively subject such transactions to a zero rate. Such rate does not yield any tax chargeable
against the purchaser. This is for the benefit of the purchaser.

 Strictly speaking, it is the sales by the suppliers which are zero-rated. But the entities are granted
an indirect tax exemption for policy and economic reasons.

In both zero-rated and effectively zero-rated transactions, the seller who charges zero output tax can
claim a refund or a tax credit certificate for the VAT previously charged by the suppliers.

VAT-EXEMPT TRANSACTIONS (SEC. 109)

"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 of nonfood agricultural products; marine and forest products in their original
state by the primary producer or the owner of the land where the same are produced;

(B) Sale of cotton seeds in their original state; and copra;

(C) Sale or importation of agricultural and marine food products in their original state,
livestock and poultry of or king generally used as, or yielding or producing foods for
human consumption; and breeding stock and genetic materials therefor.

Products classified under this paragraph and paragraph (a) shall be considered in their
original state even if they have undergone the simple processes of preparation or
preservation for the market, such as freezing, drying, salting, broiling, roasting,
smoking or stripping.

Polished and/or husked rice, corn grits, raw cane sugar and molasses, and ordinary
salt shall be considered in their original state;

"(D) 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;

"(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

"(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).
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.

 The seller does not charge VAT and he CANNOT claim exemption from what has been passed to
him.
 A VAT-registered person may elect that the exemptions shall not apply to his sales of goods or
properties or services.

 But once the election is made, it shall be irrevocable for a period of three 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 P10M. In their case, the
option becomes perpetually irrevocable.

 For VAT-exempt transactions, TRAIN has made the following changes:

o For OFWs coming to settle in the Philippines, the 90-day before-and-after arrival period
to bring goods VAT-exempt has been removed;
o Beginning 2021, the VAT exemption for the sale of residential lots shall only apply to the:
 Sale of real properties not primarily held for sale to customers or held for lease in
the ordinary course of trade or business; Otherwise, VATable.
 Sale of real property utilized for socialized housing as defined under R.A. 7279
 Sale of house and lot, and other residential dwellings with selling price of not
more than P2,000,000.00; Otherwise, VATable.

o The threshold for the lease of residential units is now P15,000 per month per unit.
 However, the lease of residential units where the monthly rental per unit exceeds
P15,000.00 but the aggregate of such rentals of the lessor during the year do not
exceed P3,000,000.00 shall likewise be exempt from VAT. However, it shall be
subjected to the 3% percentage tax. (R.R. 13-2018)

o Importation of fuel, goods and supplies by persons engaged in international shipping or

air transport operations are only exempt provided that such are used for international
shipping or air transport operations;

o Sale or lease of goods and services to senior citizens and PWDs are now part of the exempt
list, though it was already exempt under RA 9994 and RA 10754.

o Transfers of property based on Section (40) (C) (2) or tax-free exchanges are now exempt;

o Association dues, membership fees and other assessments, collected on a purely

reimbursement basis by homeowner’s association and condominium corporations are
now exempt;

o Sale of gold to the BSP is now exempt (it was zero-rated before)

o Sale of drugs and medicines for diabetes, high cholesterol, and hypertension are exempt
beginning 2019;
 o The VAT Threshold is now P3,000,000.00;

 So, if gross annual sales and/or receipts do not exceed P3,000,000.00, a person
need not register as VAT-taxpayer.

 Remember, qualified self-employed individuals and professionals availing of the 8% income tax
on gross sales and/or receipts are exempt from 12% VAT (R.R. 13-2018)25

25
Ingles, TRAIN Supplement, pp. 47-48