CHAPTER 7 SUMMARY supplied with the services and deposits applied as payments
THE REGULAR OUTPUT VAT for services, rendered and advanced payments actually or
Overview of the Tax Basis of the VAT:
Taxable Transaction Tax Basis
1. Sale of goods Gross selling price, unless
unreasonably lower
2. Sale of services Gross receipts
3. Sale of properties Gross selling price as defined by the
BIR
4. Transactions deemed Fair value of the property deemed
sales sold
1. Sale of Goods – subject to 12% VAT based on Gross Selling
Price, unless unreasonably lower.
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 goods or
properties. The excise tax, if any, on such goods or properties
shall form part of the gross selling price.
- includes cash sales, credit sales, and on installment basis
and is analogous to the income taxation concept of “gross
sales” except only on the treatments of contingent discounts.
Allowable deductions from the gross selling price:
1. discounts determined and granted at the time of sale,
expressly indicated in the invoice, amount thereof forming
part of the gross sales and are duly recorded in the books of
accounts.
- to be deductible, discounts must NOT BE dependent upon
the happening of a future event or contingency.
2. Sales returns and allowances for which a proper credit or
refund was made during the month or quarter to the buyer
on taxable sales.
Unreasonably lower selling price
- if selling price is unreasonably lower, VAT shall be based on
the Fair Value of the goods sold.
- gross selling price is unreasonably lower when it is lower by
more than 30% of the actual market value of the goods sold.
Fair value of the goods shall be determined by the CIR.
- If one of the parties is the government – based on ACTUAL
SELLING PRICE.
- to determine if the selling price is “unreasonably lower”:
Gross Selling Price
Fair Value
= if less than 0.7, selling price is unreasonably lower.
Timing of Output Vat Reporting
- output VAT on the sale of vatable goods is reported in the
month of sale.
2. Sale of Vatable Services – subject to 12% VAT based on
gross receipts.
Gross Receipts – total amounts of money or its equivalent
representing the contract price, compensation, service fee,
rental or royalty, including the amount charged for materials
constructively received during the taxable period for the
services performed or to be performed for another person,
excluding VAT.
Timing of Output VAT Reporting
- output VAT on sale of vatable services is reported in the
month of collection.
3. Sale of Vatable Properties - sale, barter, or exchange of
vatable real properties is subject to VAT on the gross selling
price.
Gross Selling Price:
HIGHER between:
a. Zonal value; and
b. Fair value per assessor’s office
- in the absence of a zonal value, “gross selling price” shall
mean the fair value per assessment or consideration stated
in the sales document, whichever is higher.
- if based on zonal value or assessed value, the zonal value or
assessed value shall be presumed exclusive of VAT.
- if fair market value is higher than the selling price, the
output VAT must be separately billed with specific mention
that the VAT billed separately is based on the market value of
the property.
- if the gross selling price is based on the consideration
appearing in the document of sale, the same shall be
presumed to be inclusive of VAT. (x12/112)
Sale of residential lot – exempt from VAT, if sold at a price
not exceeding P1,919,500.
Sale of residential dwelling – exempt from VAT, if selling
price does not exceed P3,199,200.
VAT on goods VS. VAT on properties
- the term “selling price” or consideration on the sale of
property is legally presumed vat-inclusive but that is not the
case in the sale of goods.
- the concept of “unreasonably lower” does not apply on the
sale of property. The higher of the fair value and the selling
price is always the basis of the VAT.
Timing of Output VAT reporting
- output VAT on the sale of vatable properties is reported in
the month of sale or by installment method.
Installment reporting of Output VAT on real properties
- output VAT on the sale of real properties may be reported in
installment if the initial payment from such sale does not
exceed 25% of the selling price
Ratio of initial payment
- payments shall be projected until the end of the year of sale
to determine the ratio of the initial payment.
Reportable output VAT (under installment basis)
Payments/Selling Price x Total Output Vat

Sale of property by a realty dealer on a deferred payment
basis
- sale of property by a realty dealer on a deferred payment
basis, not on the installment plan, shall be treated as a cash
sale. The fair value or the gross selling price, whichever is
higher is subject to VAT in the month of sale. Subsequent
collections from the sale shall no longer be subjected to VAT.
Interest and penalties
- interest and penalties actually or constructively received by
the seller are likewise subject to VAT.
Sale of properties considered “ordinary assets”
- even if the real property is not primarily held for sale to
customers or held for lease in the ordinary course of business
but the same is used in the trade or business of the seller, the
seller thereof shall be subject to VAT being a transaction
incidental to the taxpayer’s main business.
-thus, sale of properties held for use (ordinary assets) such as
land, building, equipment, machineries, property
improvements, and supplies aside from inventories and
supplies are vatable.
Sale of property not in the ordinary course of business
- sales of properties not in the ordinary course of business are
exempt from VAT. Hence, the sale of capital assets is exempt
from VAT.
4. Transactions deemed sales – consumption in nature but
are not coursed through a purchase transaction
List of transactions deemed sales:
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 share in the profits of VAT-
registered persons
b. Creditors in payment of debt or obligation
3. Consignment of goods if actual sale is not made within 60
days following the date such goods were consigned
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 cessation, whether or not the
business is continued by the new owner or successor
5. Cessation of status as a VAT-registered person
Examples of consumptions not in the ordinary course of
business
1. withdrawal by the business owner for personal use goods
held for sale or properties held for use
2. using goods held for sale or properties held for use to pay
off debts with creditors (Dacion en pago)
3. using goods held for sale or properties held for use as
property dividends to shareholders
4. Exchange of goods held for use for other properties
5. Sale or disposal of properties held for use in exchange for
cash or other properties
Notes:
- initial acquisition of control is a tax-free exchange that is a
VAT-exempt transaction
Donations:
- VATable.
- if designated as “revocable,” the output VAT is nil. To be
considered deemed sold, there must be a transfer of
ownership over the property. 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.
- if donee is an accredited non-profit organization, output
VAT is nil. Transfer to an accredited non-profit organization is
not subject to VAT.
- actual sales of stock is VAT-exempt
Consignment of goods not withdrawn in 60 days
- consigned goods to consignees, if not withdrawn within 60
days, are also presumed or deemed sold subject to VAT.
Retirement or cessation of business
- retirement or cessation from business will result in the
transfer of all goods or properties of the business to the
personal use or account of the business owner or owners.
Hence, it is also a “deemed sale”
General Rule: Business dissolution is deemed sale, such as in
the following cases:
1. Change in ownership of the business
a. Incorporation of a sole proprietorship
b. Sale of a proprietor of his entire business
2. Dissolution of a partnership
a. And creation of a new partnership which takes over
the business
b. By incorporation into a partnership
When there is no business dissolution, there is no deemed
sale such as in the following cases:
1. Change in the controlling shareholder
2. Change in trade or corporate name
3. Change in business address
Exception to the business dissolution rule:
1. Merger or consolidation there is business dissolution but
not a deemed sale under the
law.
2. Cessation of status as VAT- there is no business dissolution
registered person but is treated as a deemed sale.
Merger or consolidation
- both merger and consolidation result in the dissolution of a
corporation and the transfer of the assets of the dissolved
corporation to the absorbing corporation. In principle, the
assets of the dissolved corporation should be considered
deemed sold.
- legally, however, the dissolution of the corporation is not a
deemed sale. The unused input tax of the dissolved
corporation as of the date of merger or consolidation shall be
absorbed by the surviving corporation.
Cessation of status as VAT-registered person
Goods or properties originally intended for sale or use in the Rule on VAT not separately billed
business, and capital goods existing as of the occurrence of - if VAT is not separately billed in the document of sale, the
any of the following shall be deemed sold: selling price or the consideration stated shall be deemed to
a. Change of business activity from VAT-taxable status be inclusive of the VAT. (12/112)
to VAT-exempt status
b. Approval of a request for cancellation of registration Incorrect billing of the VAT
due to reversion of exempt status - if VAT is incorrectly billed, total amount billed by the
c. Approval of request for cancellation of registration taxpayer shall be deemed inclusive of the VAT. The VAT shall
due to a desire to revert to exempt status after the be recomputed as a factor of 12/112.
lapse of 3 consecutive years from the time of
registration by a person who voluntarily registered
despite being exempt.
d. Approval of a request for cancellation of registration
of one who commenced business with the
expectation of gross sales or receipt exceeding
P3,000,000 but who failed to exceed this amount
during the first twelve months of operations.

Output tax on transactions deemed sales

- The output tax on deemed sales transactions shall be based
on the market value of the goods sold as of the occurrence
of the deemed sale transaction.

- However, in the case of retirement or cessation of business,

it shall be based on the acquisition costs or the current
market price of the goods or properties, whichever is lower.

Determination of fair value

- the Commissioner of Internal Revenue shall determine the
appropriate tax base in cases where the:
a. transaction is a deemed sale
b. gross selling price is unreasonably lower

Invoicing requirement for subsequent sale of goods or

properties deemed sold
- subsequent sale of goods or properties deemed sold shall
not be subject to VAT. Seller of goods or properties
previously deemed sold shall indicate the sales invoice
number wherein the output tax on the deemed sale was
imposed and the corresponding tax paid on the items sold.
For continuing business taxpayers, this is essential to avoid
further imposition of any business tax on the subsequent
sale. This is also essential for the buyer to establish its claim
of input VAT on his purchase of goods previously deemed
sold to the seller.

Deemed sales rules apply only to VAT taxpayers

- the concept and rules of deemed sales and the taxation of
the sale of ordinary assets apply only to VAT taxpayers. These
do not apply to non-VAT taxpayers by virtue of absence of an
equivalent provision in our tax law.

Determination of the Output VAT

- amount of output VAT is dependent upon the price quoted
by the VAT taxpayer. Such amount is understood to be
inclusive of the VAT in the absence of a special agreement to
the contrary.

NOTES:
Seller absorbs the VAT – VAT-inclusive
Buyer absorbs the VAT – VAT-exclusive