INSTITUTE OF ACCOUNTS BUSINESS AND FINANCE

1st Sem
Department of Accountancy 2020
TRANSFER AND BUSINESS TAXATION

MODULE 4 – VALUE ADDED TAX

VALUE ADDED TAX

VAT is a tax on consumption levied on the sale, barter, exchange or lease of goods or properties and
services in the Philippines and on importation of goods into the Philippines.
NATURE AND CHARACTERISTICS OF VAT
General rule: 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 goods, properties or services.
Exception: In the case of importation, the importer is the one liable for the VAT.

*As to incidence of taxation, VAT is an indirect tax. Shifting is one way of escaping the payment of tax.
PERSONS LIABLE TO VAT:
1. Seller of goods (Accrual)
2. Seller of service (Cash)
3. Lessor of goods or properties (Cash)
4. Importer
REGISTRATION
1. VAT Registration, in General. – Any person who, in the course of trade or business, sells, barters,
exchanges goods or properties, or engages in the sale of services subject to VAT, shall register
the VAT tax type with the BIR district office having jurisdiction over the Head Office.
2. Mandatory VAT Registration. - Any person who, in the course of trade or business, sells, barters
or exchanges goods or properties or engages in the sale or exchange of services shall be liable to
register the VAT tax type if:
a. His gross sales or receipts for the past twelve (12) months, other than those that are
exempt under Section 109 of the Code, as amended, have exceeded Three Million Pesos
(P3,000,000.00); 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 of the Code, as
amended, will exceed Three Million Pesos (P3,000,000.00).

Moreover, franchise grantees of radio and television broadcasting, whose gross

annual receipt for the preceding calendar year exceeded P10,000,000.00, shall
register as VAT taxpayer within thirty (30) days from the end of the taxable year
3. Optional Registration of VAT for VAT-Exempt Persons. –
a. Any person who is VAT-exempt and whose sale or lease of goods or properties or the
performance of services other than the transactions mentioned in Section 109, the gross
annual sales and/or receipts do not exceed the amount of Three Million Pesos
(P3,000,000.00) not otherwise required to register for VAT may elect to be VAT-
registered by registering with the BIR district office that has jurisdiction over the Head
Office of that person.
b. Any person who is VAT-registered but enters into transactions which are exempt from
VAT (mixed transactions) may opt that the VAT apply to his transactions which would
have been exempt under Section 109 (1) of the Code, as amended.
c. Franchise grantees of radio and/or television broadcasting whose annual gross receipts of
the preceding year do not exceed Ten Million Pesos (P10,000,000.00) derived from the
business covered by the law granting the franchise may opt for VAT registration. This
option, once exercised, shall be irrevocable.

Any person who elects to register under a and b above shall not be allowed to cancel his
VAT registration for the next three (3) years. Once registered as a VAT person, the
taxpayer shall be liable to output tax and be entitled to input tax credit beginning on the

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first day of the month following registration.

REGISTRATION FEE/ANNUAL REGISTRATION FEE
A Registration Fee or Annual Registration Fee in the amount of Five Hundred Pesos (P500.00) for every
Head Office and/or branch shall be paid upon registration and every year thereafter on or before
January 31.

Form to Use: Payment Form 0605

EFFECT OF FAILURE TO REGISTER
Every person who becomes liable to VAT mandatorily shall register with the BIR district office which has
jurisdiction over his Head Office. If he fails to register, he shall be liable to pay the output tax under
Sections. 106 and/or 108 of the Code, as amended, 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.
IN THE COURSE OF TRADE OR BUSINESS
The phrase means the regular conduct or pursuit of a commercial or an economic activity including
transactions incidental thereto, by any person regardless of whether or not the person engaged therein
in a non-stock, non-profit private organization (irrespective of the disposition of its net income and
whether or not it sells exclusively to members or their guests), or government entity.

Non-residents who perform services in the Philippines are deemed to be making sales in the course of
trade or business, even if the performance is not regular.
GOODS OR PROPERTIES
- refers to all tangible and intangible objects which are capable of pecuniary estimation and shall
include, among others:

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 any industrial, commercial or scientific equipment;
d. The right or the privilege to use motion picture films, films, tapes and discs; and
e. Radio, television, satellite transmission and cable television time.
Sale or exchange services - means the performance of all kinds of services in the Philippines for others
for a fee, remuneration or consideration, whether in kind or in cash, including those performed or
rendered by:
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 goods for others;
g. Proprietors, operator or keepers of hotels, motels, resthouses, pension houses, inns, resorts, theatres
and movie houses;
h. Proprietors, 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;

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m. Sales of electricity by generation, transmission, and/or distribution;

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 P10,000,000, and franchise grantees
of gas and water utilities;
o. Non-life insurance companies (except their crop insurance), including surety, fidelity, indemnity and
bonding companies;
p. Similar services regardless of whether or not the performance thereof calls for the exercise or use of
the physical or mental facilities.
MEANING OF GROSS SELLING PRICE
– 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

Allowable deductions from GSP:

a. discounts determined and granted at the time of sale, which are expressly indicated in the
invoice, the amount thereof forming part of the gross sales duly recorded in the books of
accounts
b. sales discounts indicated in the invoice at the time of sale, the grant of which is not
dependent upon the happening of a future event, may be excluded from the gross sales
within the same month/quarter it was given
MEANING OF GROSS RECEIPTS
- total amount of money or its equivalent representing the contract price, compensation, service fee,
rental or royalty, including the amount charged for materials supplied with the services and deposits
applied as payments for services rendered and advance payments actually or constructively received
during the taxable period for the services performed or to be performed for another person, excluding
VAT.
SALES INVOICE VS. OFFICIAL RECEIPT
Sale of Goods – Sales Invoice
Sale of Service – Official Receipt
TYPES OF SALES
1. Sales Subject to VAT or VATable sales:
1. 12% of gross selling price or gross receipts
• Regular sales based from gross selling price or gross receipts which may include
sale to government based from gross selling price or gross receipts
• Deemed sales based from FMV as of the time of occurrence of the transactions
2. Zero-rated (0%) sale
2. VAT-exempt Sale
REGULAR SALES (12%)
Domestic sale, transfer, barter or exchange of goods or services. Stated otherwise, VATable sales subject
to 12% are sales not otherwise subject to 0% nor exempt from VAT.
DEEMED SALES OR CONSTRUCTIVE SALES (12%)
1. Transfer, use or consumption not in the ordinary course of business of goods or properties
originally intended for sale or for use in the ordinary course of business (e.g. withdrawal of goods
for personal use)
EXCEPTION: Bayanihan to Heal as One Act, donations of the following are not deemed sale:
• Donations of all critical or needed healthcare equipment or supplies in
combatting COVID-19
• Relief Goods

2. Distribution or transfer to:

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i. Shareholders or investors share in the profits of Vat-registered person (e.g. property

dividends based on zonal or assessed value whichever is higher)
ii. Creditors in payment of debt or obligation

3. Consignment of goods which remain unsold within 60 days (if returned there is no deemed sale)

4. Retirement from or cessation of business with respect to all goods on hand, whether capital
goods, stock in trade, supplies or materials, as of the date of such retirement or cessation –
based on acquisition cost or current market price whichever is lower
i. Change in business ownership – i.e.: incorporation of a sole proprietorship and sale of
a business.
ii. Dissolution of a partnership and formation of another to take over the business
WITHHOLDING OF VAT ON GOVERNMENT MONEY PAYMENTS AND PAYMENTS TO NON-RESIDENTS
Application of rules on Sale to Government:
Sale to government Php 1,000,000.00
Rate 12%
Output tax 120,000.00
Less: Standard Input tax (7%) 170,000.00
VAT Payable Php 50,000.00
Less: Final VAT (5%) 50,000.00
VAT Payable Php 0.00

FOR INCOME TAX PURPOSES:

Assumptions:
1. Standard input tax is higher than actual input tax.
Standard input tax Php 50,000
Actual input tax 30,000
Item of gross income 20,000

2. Standard input tax is lower than actual input tax.

Actual input tax Php 50,000
Standard input tax 30,000
Cost or expnse Php 20,000

Note: Treatment of actual input tax is closed to expense.

CHANGE OR CESSATION OF STATUS AS VAT-REGISTERED PERSON
a. Subject to output tax
The VAT shall apply to goods or properties originally intended for sale or use in business and
capital goods which are existing as of the occurrence of the following
1. Change of business activity from VAT taxable status to VAT-exempt status
2. Approval of a request for cancellation of registration due to reversion to exempt status
3. Approval of request for cancellation of registration due to a desire to revert to exempt of
status after the lapse of three (3) consecutive years from the time of registration by a
person who voluntarily registered despite being exempt
4. Approval of a request for cancellation of registration of one who commenced business
with the expectation of gross sales or receipts exceeding Php 3 Million, but who failed to
exceed this amount during the first twelve months of operation.
5. The exchange of goods or properties including the real estate properties used in business
or held for sale or for lease by the transferor, for shares of stocks, whether resulting in
corporate control or not, is subject to VAT.
b. Not subject to output tax

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The VAT shall not apply to goods or properties which are originally intended for sale or use in the
course of business existing as of the occurrence of the following:
1. Change of control of a corporation by acquisition of the controlling interest of such
corporation by another stockholder (individual or corporate) or group of stockholders.
2. Change in the trade or corporate name of the business
3. Merger or consolidation of corporations. The unused input tax of the dissolved
corporation, as of the date of merger or consolidation, shall be absorbed by the surviving
new corporation.
ZERO-RATE SALES (0%)
ZERO-RATED SALE OF GOODS ZERO-RATED SALE OF SERVICE
1. The sale and actual shipment of goods 1. Processing, manufacturing or repacking
from the Philippines to a foreign goods for other persons doing business
country, irrespective of any shipping outside the Philippines which goods are
arrangement, paid for in acceptable subsequently exported, where the
foreign currency or its equivalent in services are paid for in acceptable foreign
goods or services, and accounted for in currency and accounted for in
accordance with the rules and accordance with the rules and
regulations of the Bangko Sentral ng regulations of the Bangko Sentral ng
Pilipinas (BSP). Pilipinas (BSP)*

Requisites:
• Actual shipment from Phils to
abroad
• Paid for in acceptable foreign
currency
• Currency accounted by the BSP
2. 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 and paid for in acceptable
foreign currency and accounted for in
accordance with the rules and
regulations of the Bangko Sentral ng
Pilipinas (BSP).*
Requisites:
• Goods sold to non-residents
• Paid for in acceptable foreign
currency
• Currency accounted by the BSP
3. Sale of raw materials or packaging
materials to export-oriented enterprise
whose export sales exceed seventy
percent (70%) of total annual
production.*
Requisites:
• Service was rendered to non-
residents
• Paid for in acceptable foreign
currency
• Currency accounted by the 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)
Requisites:
• Service was rendered to non-
residents
• Paid for in acceptable foreign
currency
• Currency accounted by the BSP
3. Transport of passengers and cargo by
domestic air or sea vessels from the
Philippines to a foreign country

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4. Export sales under EO 226 – in addition 4. Sale of power or fuel generated through
to actual export* renewable sourced of energy such as but
a. Sale of export producer to another not limited to biomass, solar, wind,
export producer or to an export hydropower, geothermal, ocean energy,
trader that subsequently export the and other emerging energy sources using
same technologies such as fuel cells and
b. Even without actual exportation hydrogen fuels.
1. Sales to bonded manufacturing
warehouses of export-oriented
manufacturers
2. Sales to export processing zones
(BOI-registered manufacturers
or producers)
3. sales to registered export
traders operating bonded
trading warehouses supplying
raw materials in the
manufacture of export products
4. sales to diplomatic missions and
other agencies and or
instrumentalities granted tax
immunities, of locally
manufactured, assembled or
repacked products whether paid
for in foreign currency or not
5. The sale of goods, supplies, equipment 5. Services rendered to persons or entities
and fuel to persons engaged in whose exemption under special laws or
international shipping or international international agreements to which the
air transport; provided, that the goods, Philippines is a signatory effectively
supplies, equipment and fuel have been subjects the supply of such services to
sold and used for international shipping zero percent (0%) rate
or air transport operation
6. 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 exclusively for
international shipping or air transport
operations
7. 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*.
NOTE: With * shall be subject to the 12% VAT and no longer be considered export sales subject to
0% VAT upon satisfaction of the following conditions:
✓ There is a successful establishment and implementation of an enhanced VAT refund system
that grants refunds of creditable input tax within 90 days from the filing of the VAT refund
application with the Bureau.
✓ All pending VAT refund claims as of December 31, 2017 shall be fully paid in cash by

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December 31, 2019.

VAT-EXEMPT TRANSACTIONS
a. Sale or importation of:
1. agricultural and marine food products in their original state.
2. livestock and poultry of a kind generally used as, or yielding or producing foods for human
consumption; and
3. breeding stock and genetic materials
Example:
Agricultural Marine Livestock Poultry
Polished/husked rice Fish Cows Fowls
Corn grits Crustaceans such Bulls Ducks
Raw cane sugar and as: Calves Geese
Molasses Lobsters, shrimps Pigs Turkey
Ordinary salt Prawns, oysters Sheep
Copra Mussels, clams Goats
Trout, eels Rabbits
b. Sale or importation of:
a. fertilizers, seeds, seedlings and fingerlings;
b. fish, prawn, livestock and poultry feeds, including ingredients, whether locally produced or
imported, used in the manufacture of finished feeds.
c. (except specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals and other
animals generally considered as pets)
Note: if feeds are capable of human consumption, vatable. Products must have certification from
Food and Drugs Administration that it is NOT fit for human consumption.

c. Importation of personal and household effects

• belonging to residents of the Philippines returning from abroad and
• non-residing citizens coming to resettle in the Philippines;
• Provided, that such goods are exempt from custom duties under the Tariff and Customs
Code of the Philippines as repealed by Customs Modernization and Tariff Act (CMTA)
d. Importation of professional instruments and implements, tools of trade, occupation or
employment, wearing apparel, domestic animals, and personal and household effects belonging to
persons coming to settle in the Philippines or Filipinos or their families and descendants who are
now residents or citizens of other countries, such parties hereinafter referred to as overseas
Filipinos, in quantities and of the class suitable to the profession, rank or position of the persons
importing said items for their own use and not for barter or sale, accompanying such persons, or
arriving within a reasonable time: Provided, That the Bureau of Customs may, upon the production
of satisfactory evidence that such persons are actually coming to settle in the Philippines and that
the goods are brought from their former place of abode, exempt such goods from payment of
duties and taxes: Provided, further, That vehicles, vessels, aircrafts, machineries and other similar
goods for use in manufacture, shall not fall within this classification and shall therefore be subject
to duties, taxes and other charges
e. Services subject to percentage tax under Title V of the Tax Code:
• Seller of goods or service whose gross annual sales/receipts does not exceed Php 3 Million
• Domestic common carriers
• Services of franchise grantees of radio and/or TV broadcasting whose receipts does not
exceed Php 10 Million and by franchise grantees of gas and water utilities*
• Services rendered by overseas dispatch
• Insurance services

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• Services of amusement places (cockpit, cabaret, clubs, boxing exhibitions, professional

basketball games, Jai-Alai and race tracks
• Services by stock brokers
f. Services by agricultural contract growers (persons producing for others poultry, livestock or
other agricultural and marine food products in their original state) 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;

Laboratory services are exempted. Hospital bills constitute medical services.

If the hospital or clinic operates a pharmacy or drugstore, the sale of drugs and medicines are :
1. Sales made by the drugstore to the in-patients which are included in the hospital bills are part
of medical bills exempt from VAT.
2. Sales of the drug store to the out-patients are subject to VAT, because they are not part of
medical services of the hospital.
h. Educational services rendered by private educational institutions, duly accredited by:
• Department of Education (DepEd)
• Commission on Higher Education (CHED) and
• 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 agreement to which the Philippines is a signatory or
• under special laws except those granted under PD No. 529, Petroleum Exploration
Concessionaries under Petroleum Act of 1949;
l. Sales by agricultural cooperatives duly registered and in good standing 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
and in good standing with the Cooperative Development Authority
n. Sales by non-agricultural, non-electric and non-credit cooperatives duly registered and in good
standing with the Cooperative Development Authority; 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
o. Export sales by persons who are not VAT registered
p. The following sales of real properties are exempt from VAT, namely:

1. Sale of real property not primarily held for sale to customer or held for lease in the ordinary
course of trade or business.
However, even if the real property is not primarily 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

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business;
2. Sale of real property utilized for low-cost
3. Sale of real property utilized for socialized housing
4. Sale of residential lot valued at P1,919,500 and below and house and lot and other residential
dwellings valued at P3,199,200 and below.

TRAIN AMENDMENT:
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, residential
lot valued at P1,500,000.00 and below; house and lot, and other residential dwellings valued at
P2,500,000.00 and below.

Note: Reference is made to 2010 Consumer Price Index. 2010 CPI is P 1,919,500 and P3,199,200.

Beginning January 1, 2021:

The VAT exemption shall not anymore apply to:
- Sale of low-cost housing
- Sale of residential lot
The threshold selling price amount for sale of house and lot, and other residential dwellings shall
be P2,000,000.00.

Every 3 years, the threshold amount shall be adjusted to its present value using the Consumer
Price Index, as published by the Philippine Statistics Authority (PSA).

q. Lease of:
• residential units
• with a monthly rental not exceeding P15,000
• regardless of the amount of aggregate rentals received by the lessor during the year.

Lease of Residential Units

Monthly Rental Annual Receipts Tax
Monthly rental <P15,000 > P3,000,000 VAT and PT exempt
Monthly rental <P15,000 < P3,000,000 VAT and PT exempt
Monthly rental > P15,000 > P3,000,000 VAT
Monthly rental > P15,000 < P3,000,000 PT

Lease of commercial units, regardless of the amount of monthly rental is subject to VAT unless the
lessor is non-VAT registered and annual gross receipts is less than P3,000,000.
r. Sale or 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 advertisement
NOTE: If in electronic form, VATable.
s. The transport of passengers by international carriers
t. Sale, importation or lease of passenger or cargo vessels and aircraft, including engine,
equipment and spare parts thereof for domestic or international transport operations;
Provided, however, that the exemption from VAT on the importation and local purchase of
passenger and/or cargo vessels shall be subject to the /requirements on restriction on vessel
importation and mandatory vessel retirement program of Maritime Industry Authority
(MARINA).

u. Importation of fuel, goods and supplies by persons engaged in international shipping and air

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transport operations; Provided, that the said fuel, goods and supplies shall be used exclusively or
shall pertain to the transport of goods and/or passengers from a port in the Philippines directly
to a foreign port, or vice-versa, without docking or stopping at any other port in the Philippines
unless the docking or stopping at any other Philippine port is for the purpose of unloading
passengers and/or cargoes that originated from abroad, or to load passengers and/or cargoes
bound for abroad; Provided further, that if any portion of such fuel, goods or supplies is used for
purposes other than that mentioned in this paragraph, such fuel, goods and supplies shall be
subject to 12% VAT.
v. Services of banks, non-bank financial intermediaries performing quasi-banking functions, and
other non-bank financial intermediaries, such as money changers and pawnshops, subject to
percentage tax under Secs. 121 and 122, respectively, of the Tax Code
(w) Sale or lease of goods and services to senior citizens and person with disabilities
(x) Transfer of property under Section 40(C)(2) of the NIRC (Tax-free exchange)
(y) Association dues, membership fees, and other assessments and charges collected by
homeowners associations and condominium corporations.
(z) Sale of gold to the BSP.
(aa) Sale of drugs and medicines prescribed for diabetes, high cholesterol, and hypertension
beginning January 1, 2019
(bb). Sale or lease of goods or properties or the performance of services other than the
transactions mentioned in the preceding paragraphs, the annual gross annual sales and/or receipts
do not exceed the amount of P3 Million.

*Self-employed individuals and professionals who availed of the 8% tax.

VAT EXEMPTION OF SENIOR CITIZENS AND PERSONS WITH DISABILITIES

FORMAT OF COMPUTATION OF VAT: (CTP-PDI-TREGD)

Output tax xxx
Less:
Allowable input taxes:
Carry-over from previous period xxx
Transitional input tax xxx
Presumptive input tax xxx xxx
Add: Input tax from current period:
Purchase of capital goods <P1M xxx
Purchase of capital goods >P1M xxx
Domestic purchases of goods xxx
Domestic purchases of service xxx
Importation xxx xxx
Total available input tax xxx
Less: Deductions from input tax:
Input tax applied for TCC xxx
Input tax refund xxx
Input tax attributable to exempt sale xxx
Input tax on gov’t sale xxx
Deferred input xxx xxx
VAT Payable (Overpayment) xxx
Less: Input Tax and other tax credit xxx
VAT payable (Overpayment) xxx
OUTPUT TAX
Output tax means the 12% value-added tax on sale, transfer, barter exchange or lease of taxable goods

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or properties or services by any person registered or required to register.

INPUT TAX
Input tax – is the value- added tax due on or paid by a VAT registered person on importation of goods or
local purchases of goods, properties or services, including lease or use of properties in the course of his
trade or business.
1. Regular input VAT – 12% of
a. Domestic purchase from VAT-registered seller
b. Importation of goods or service for business use

2. Transitional input tax – 2% of Beg Inv subject to VAT or actual VAT paid in BI whichever is higher

3. Presumptive input tax – 4% of agricultural purchases of manufacturers of:

a. Sardines d. Milk
b. Mackerel e. Packed noodles
c. Cooking Oil f. Refined sugar

4. Standard input tax – 7% of GSP / GR on sale to government

5. Final VAT – final VAT of 5% of government withheld by the government, any of its political
subdivisions, instrumentalities, including GOCCs. Note: TRAIN shifted from final to creditable
beginning January 1, 2021.

TREATMENT OF INPUT TAX

1. Generally, input tax attributable to regular sales is creditable against output tax.
Exceptions:
a. Purchase or importation of depreciable goods with aggregate acquisition cost (excluding VAT) in a
calendar month exceeds Php 1 Million shall be claimed as credit against the output tax in the
following manner:
• If the estimated useful life of a capital good is five (5) years or more - The input tax shall be
spread evenly over a period of sixty (60) months and the claim for input tax credit will
commence in the calendar month when the capital good is acquired. The total input taxes on
purchases or importations of this type of capital goods shall be divided by 60 and the
quotient will be the amount to be claimed monthly
• If the estimated useful life of a capital good is less than five (5) years — The input tax shall be
spread evenly on a monthly basis by dividing the input tax by the actual number of months
comprising the estimated useful life of the capital good. The claim for input tax credit shall
commence in the calendar month that the capital goods were acquired
• The amortization of the input VAT shall only be allowed until December 31, 2021 after which
taxpayers with unutilized input VAT on capital goods purchased or imported shall be allowed
to apply the same as scheduled until fully utilized.
b.For Construction in Progress, the claim of input tax is based on the progress billings
2. Input tax attributable to zero-rated sales are refundable under TRAIn Law:
3. Input tax attributable to VAT exempt transactions are part of cost of goods sold or expense. (Note: In
Bayanihan to Heal as One Act, input taxes on exempt donations are chargeable against output tax)
4. Input tax attributable to sales to the government are closed to expense
Note: Actual input tax is compared with the standard input VAT (7% of gross payment to the
government or GOCC)
a. If actual input tax > 7% standard input VAT – deductible expense
b. If actual input tax < 7% standard input VAT – taxable gain (item of gross income)

VAT PATABLE (EXCESS OUTPUT) or EXCESS INPUT TAX

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a. 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

Output tax 100

Less: Input tax 60
VAT Payable 40

b. If the input tax exceeds the output tax, there is overpayment. Excess can be:
• Carried over to succeeding quarter/s
• Applied tax credit certificate
• Refunded upon cessation of registration
TREATMENT OF INPUT TAX: ZERO-RATED VS EXEMPT SALE

VAT ON IMPORTATION OF GOODS

a. In general. VAT is imposed on goods brought into the Philippines, whether for use in business or
not. The tax shall be based on the total value used by the BOC in determining tariff and customs
duties, excise tax if any and other charges prior to the release of the goods from customs
custody. In case the valuation used by the BOC in computing customs duties is based on volume
or quantity, the landed cost shall be the basis for computing the VAT. No VAT shall be collected
on imported goods which are expressly exempted.
b. The VAT on importation shall be paid by the importer prior to release of such goods from
customs custody.
c. Sale, transfer or exchange of imported goods by tax-exempt persons. In case tax exempt persons
imports goods which are exempt and which are subsequently sold, transferred or exchanged to
non-exempt persons, the latter (buyer) shall considered the importers thereof and shall be liable
for VAT due on such importation. The tax due on importation shall constitute a lien on the
goods, superior to all charges/or liens, irrespective of the possessor of said goods.
APPORTIONMENT OF INPUT TAX ON MIXED TRANSACTIONS
A VAT-registered person who is also engaged in transactions not subject to VAT shall be
allowed to recognize input tax credit on transactions subject to VAT as follows:
1. All the input taxes that can be directly attributed to transactions subject to VAT may
be recognized for input tax credit;
2. Input tax that can be directly attributable to sales to government shall NOT be
credited against output taxes arising from sales to non-government entities

3. If any input tax cannot be directly attributed to either a VAT taxable or VAT-exempt
transaction, the input tax shall be pro-rated to the VAT taxable and VAT-exempt

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transactions and only the ratable portion pertaining to transactions subject to VAT
may be recognized for input tax credit.
SOURCES OF AVAILABLE INPUT TAX
• Excess input tax carried over from previous period
• Input tax deferred on capital goods exceeding Php 1 Million
• Presumptive input tax
• Transitional input tax
• Others (Standard input tax)
• Current input taxes from:
• Purchase of capital goods
• Purchase of other than capital goods
• Purchase of service
• Input tax from importation
DEDUCTION FROM INPUT TAX
• Input Tax on Purchases of Capital Goods exceeding P1Million deferred for the succeeding period
• Input tax on sale to government closed to expense
• Input tax allocable to exempt sale
• VAT refunds
• VAT applied for Tax Credit Certificate, if applicable

Total Available Input Tax xxx

Deductions from Input tax xxx
Creditable/Allowable Input tax xxx

VAT ON SALE OF REAL PROPERTY

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 or 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.

The term ‘fair market value’ shall mean whichever is higher of: 1) the fair market value as determined by
the Commissioner /zonal value, or 2) the fair market value as shown in schedule of values of the
Provincial and City Assessors (real property tax declaration).

In the absence of zonal value/fair market value as determined by the Commissioner, gross selling price
refers to the market value shown in the latest real property tax declaration or the consideration,
whichever is higher.

If the gross selling price is based on the zonal value or market value of the property, the zonal or market
value shall be deemed exclusive of VAT. Thus, the zonal value/market value, net of the output VAT,
should still be higher than the consideration in the document of sale, exclusive of the VAT.

If the sale of real property is on installment plan where the zonal value/fair market value is higher than
the consideration/selling price, exclusive of the VAT, the VAT shall be based on the ratio of actual
collection of the consideration, exclusive of the VAT, against the agreed consideration, exclusive of the
VAT, appearing in the Contract to Sell/Contract of Sale applied to the zonal value/fair market value of
the property at the time of the execution of the Contract to Sell/Contract of Sale at the inception of the
contract. Thus, since the output VAT is based on the market value of the property which is higher than
the consideration/selling price in the sales document, exclusive of the VAT, the input VAT that can be
claimed by the buyer shall be the separately-billed output VAT in the sales document issued by the

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seller. Therefore, the output VAT which is based on the market value must be billed separately by the
seller in the sales document with specific mention that the VAT billed separately is based on the market
value of the property

RULES IN DETERMINING WHEN TO PAY VAT

Sale of real properties held primarily for sale to customers or held for lease in the ordinary course of
trade or business of the seller shall be subject to VAT. Sale of residential lot with gross selling price
exceeding P1,500,000.00*, residential house and lot or other residential dwellings with gross selling
price exceeding P2,500,000.00* to twelve percent (12%) output VAT.

INSTALLMENT BASIS
Sale of real property on installment plan means sale of real property by a real estate dealer, the initial
payments of which in the year of sale do not exceed twenty-five (25%) of the gross selling price. In case
of installment sale, the seller shall be subject to output VAT on the installment payments received,
including the interests and penalties for late payment, actually and/or constructively received.
Correspondingly, the buyer of the property can claim the input tax in the same period as the seller
recognized the output tax.

CASH OR DEFERRED BASIS

Sale of real property by a real estate dealer on a deferred payment basis not on the installment plan
means sale of real property, the initial payments of which in the year of sale exceed twenty-five percent
(25%) of the gross selling price. “Initial payments” means payment or payments which the seller receives
before or upon execution of the instrument of sale and payments which he expects or is scheduled to
receive in cash or property (other than evidence of indebtedness of the purchaser) during the taxable
year when the sale or disposition of the real property was made. It covers any down payment made and
includes all payments actually or constructively received during the year of sale, the aggregate of which
determines the limit set by law. Initial payments do not include the amount of mortgage on the real
property sold except when such mortgage exceeds the cost or other basis of the property to the seller,
in which case the excess shall be considered part of the initial payments. Also excluded from the initial
payments are notes or other evidence of indebtedness issued by the purchaser to the seller at the time
of the sale. In the case of sale of real properties on a deferred-payment basis not on the installment
plan, the transaction shall be treated as cash sale which makes the entire selling price taxable in the
month of sale. Output tax shall be recognized by the seller and input tax shall accrue to the buyer at the
time of the execution of the instrument of sale. Payments subsequent to “initial payments” shall no
longer be subject to output VAT, in the case of sale on a deferred payment basis.

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

Real estate dealer includes any person engaged in the business of buying, developing, selling,
exchanging real properties as principal and holding himself out as a full or part-time dealer in real
estate. Transmission of property to a trustee shall not be subject to VAT if the property is to be merely
held in trust for the trustor and/or beneficiary. However, if the property transferred is one for sale, lease
or use in the ordinary course of trade or business and the transfer constitutes a completed gift, the
transfer is subject to VAT as a deemed sale transaction pursuant to Section 4.106-7(a)(1) of these
Regulations. The transfer is a completed gift if the transferor divests himself absolutely of control over
the property, i.e., irrevocable transfer of corpus and/or irrevocable designation of beneficiary
CANCELLATION OF VAT REGISTRATION
A VAT-registered taxpayer may cancel his registration for VAT if:
• Gross sales or receipts do not exceed Php 3 Million
• Cessation or termination of business

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• Change of ownership, in the case of single proprietorship

• Dissolution of partnership or corporation
• Merger or consolidation with respect to the dissolved corporation/s
• A person who has registered prior to planned business commencement, but failed to actually
start his business
TRANSITION FROM VAT TO NON-VAT
Goods or properties originally intended for sale or use in business, including capital goods, disposed of
or existing as of the date of change of status of a taxpayer from VAT to Non-VAT are subject to VAT
imposed under Section 106(A) of the Tax Code of 1991, as amended. Hence, taxpayers are required to
file the quarterly VAT return covering the period when the change of status transpired and pay the
corresponding VAT due thereon.
PRESCRIPTIVE PERIODS ON CLAIMS FOR REFUND
• Period to File Administrative Claim – two (2) years
• Reckoning period of two (2) years:
1. Refund of zero-rated sale – from the close of taxable quarter of zero-rating sale
2. Cancellation or closure or cessation – from the date of issuance of clearance
3. Erroneous payment of taxes – from the date of erroneous or excessive payment
• Time Frame of BIR to process and grant VAT refunds – ninety (90) days from the date of
submission of the complete documents
VENUE OF FILING OF REFUNDS
Jurisdiction/Venue:
1. Direct exporters – VAT Credit Audit Division (VCAD)
2. Other zero-rating – RDO or Large Taxpayer Service (LTS)
3. Closure or cessation of business – RDO or Large Taxpayer Service (LTS)
VAT REFUND CENTER
The Department of Finance shall establish a VAT refund center in the BIR and BOC that will handle the
processing and granting of cash refunds of creditable input tax.
AUTOMATIC APPROPRIATION
An amount equivalent to five percent (5%) of the total VAT collection of the BIR and the BOC 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.
REMEDY IN CASE OF DENIAL
In case of full or partial denial of the claim for tax refund, the taxpayer affected may, within thirty (30)
days from the receipt of the decision denying the claim, appeal the decision with the Court of Tax
Appeals.

Old Rule: The taxpayer can file an appeal in one of two ways:

1. file the judicial claim within thirty days after the Commissioner denies the claim within the 120-
day period, or
2. file the judicial claim within thirty days from the expiration of the 120-day period if the
Commissioner does not act within the 120-day period.

CONSEQUENCES OF ISSUING ERRONEOUS VAT INVOICE OR VAT OFFICIAL RECEIPT

1. Issuance of a VAT invoice/receipt by a non-VAT person. The non-VAT person shall be liable to:
i. The percentage tax applicable to the transaction
ii. VAT due on the transaction WITHOU the benefit of input tax
iii. 50% surcharge
Note: The input tax shall be recognized as credit to the purchaser/buyer.
2. Issuance of a VAT invoice/receipt on an exempt transaction by a VAT-registered person. If there

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is failure to display prominently on the invoice or receipt the words “AT-exempt sale”, the
transaction shall become taxable and the issuer shall be liable thereon.
Note: The input tax shall be recognized as credit to the purchaser/buyer.

SUSPENSION OF BUSINESS OPERATIONS

The Commissioner of Internal Revenue or his duly authorized representative may order suspension or
closure of a business establishment for a period of not less than five (5) days for any of the following
violations:
1. Failure to issue receipts and invoices
2. Failure to file VAT return/s
3. Understatement of taxable sales or receipts by 30% or more of his correct taxable sales/receipts
for the taxable quarter
4. Failure to register as VAT, if required (see mandatory registration)
Notes:
BIR programs related to VAT (Mission Orders and/or e-Letters of Authority are issued):
1. Oplan Kandado (Closure of Business) thru:
• Stock-Taking
• Surveillance
• Tax Compliance Verification Drive (Tax Mapping Operations)
2. RATE (Run After Tax Evaders)

VAT RETURNS
Period Form or Return Deadline
th
Monthly 2550M 20 day after close of month
Quarterly 2550Q 25th day after close of month
Notes:
1. Attachment to the VAT returns: Summary List of Sales (SLS) and Summary List of Purchases (SLP)
2. Consolidated filing (Head Office and Branches)
3. VAT will become quarterly only beginning January 1, 2023
END

References:
1. National Internal Revenue Code of 1997, as amended
2. R.A. 9337
3. R.A. 10963 or the Tax Reform for Acceleration and Inclusion Act
4. Revenue Regulations No. 16-2005, as amended
5. Revenue Regulations No. 13-2018
6. Revenue Regulations No. 9-2020

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