CHAPTER 7-THE REGULAR OUTPUT VAT

➢ This chapter discusses the detailed rules of 12% output VAT on vatable sales of goods, services, or
properties.

SOURCES OF REGULAR OUTPUT VAT

1. Sale of vatable goods
2. Sale of vatable services
3. Sale of vatable properties
4. Transactions deemed sales

The following table an 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 sales Fair value of the property deemed sold

Sale of Vatable Goods

➢ The sale of goods is subject to 12% VAT based on gross selling price. Gross selling price is simply referred
to as gross sales.

Illustration
In February 2020, Cenidoza Corporation made the following sales:
Cash sales 200,000
Sales on account (80,000 collected) 100,000
Installment sales (120,000 collected) 300,000
Delivery charges to customers 15,000
Advances from customers 50,000
Total sales 665,000

The gross selling price and output VAT are as follows:

Cash sales 200,000

Sales on account (80,000 collected) 100,000
Installment sales (120,000 collected) 300,000
Delivery charges to customers 15,000
Gross selling price 615,000
Multiply by: 12%
Output VAT 73,800

Unreasonably lower selling price

*If the selling price is unreasonably lower, the VAT shall be based on the fair value of the goods sold.

*The gross selling price deemed unreasonably lower when it is lower by more than 30% of the actual market value
of the goods sold.

Nonetheless, if one of the parties is the government, the output VAT shall be based on the actual selling price
(Sec. 7, RR4-2007).
Illustration 1
A VAT seller made the following sales of goods to private customers during the month:
Selling Price Fair value
To Customer 1 150,000 180,000
To Customer 2 200,000 190,000
To Customer 3 102,000 150,000
Total sales 452,000

The output VAT shall be computed as:

Customer Discount Selling Price Fair value Tax basis
1 (150/180) = 83% 17% 150,000 180,000 150,000
2 (200/190)=105% 0% 200,000 190,000 200,000
3 (102/150)=68% 32% 102,000 150,000 150,000
Tax basis 500,000
Multiply by: 12%
Output VAT 60,000

• The output VAT on the sale of vatable goods is reported in the month of sale

Sale of Vatable Services

* The sale of services is subject to 12% VAT based on the gross receipts. Gross receipt is collection of income.
The gross receipt includes advances and collection of amount charged for labor and materials included in the
service.
• The output VAT on the sale of services is reported in the month of collection.

Sale of Vatable Properties

The sale, barter or exchange of vatable real properties is subject to VAT on the gross selling price.

Under the regulations, gross selling price" means the higher of the:
a. Consideration or selling price
b. Fair value of the property

Under the NIRC, the fair value of real property is the higher between the:
a. Zonal value; and
b. Fair value per assessor's office.

If the gross selling price is based on the zonal value or assessor's fair value of the property, the zonal value or
assessed value shall be presumed exclusive of VAT.
Illustration
Mr. Realtor, a real property dealer, sold a commercial lot in June 2020. The following data relate to the sale:

Appraisal value 4,500,000

Zonal value 4,000,000
Assessor’s fair value 2,500,000
Selling price 3,800,000

The gross selling price and the output VAT shall be:
Gross selling price (FMV) 4,000,000
Multiply by: 12%
Output VAT 480,000
Note: If the gross selling price is based on the consideration appearing in document of sale, the same is presumed
to be inclusive of VAT.

Note: Do not forget the threshold on residential lot (SP-1,919,500) and residential dwelling (SP-3,199,200).

Comparison of the VAT on goods and VAT on properties

It must be noted that the term "selling price" or consideration on the sale of property is legally presumed VAT
inclusive but this is not the case on the sale of goods.

The output VAT on the sale of

If the FV is And the SP is
Goods is computed as Real property is computed as
100,000 120,000 120,000 x 12% 120,000 x 12/112
100,000 80,000 80,000 x 12% 100,000 x 12%
100,000 60,000 100,000 x 12% 100,000 x 12%

Note: The concept of unreasonably lower does not apply on the sale of property---the higher of the fair value and
selling price is always the basis of the VAT.
• The 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

The output VAT on the sale of real properties may be reported in installment if the initial payment from such sale if
it does not exceed 25% of the selling price.

Illustration
On August 1, 2020, a real property dealer sold a commercial lot with the following data:
Zonal value 6,000,000
Assessed value 4,500,000
Selling price 5,000,000

A down payment of P500,000 was paid with the balance due in 36 monthly installments of P125,000 starting
September 1, 2020.

Output VAT (6M x 12%) 720,000

Ratio of initial payment= Initial payment/ Selling Price

*if it does not exceed the 25% of the selling price, the output VAT on the sale may be reported in installments.
*If it exceeds to 25%, the output VAT is reported in the month of sale in full.

Reportable output VAT:

Payments/SP x Output VAT Output VAT
August 2020 500k/5M x 720K 72,000
September 2020* 125K/5M x 720K 18,000
*and every month thereafter

The billing for every installment (125k + 18K Output VAT = 143K, starting September)

The reportable Output VAT in the third and fourth quarters of 2020 shall be:

Third Quarter Fourth Quarter

July August Sept Oct Nov Dec
Output VAT 72K 90K 18K 18K 54K
Sale of property by a realty dealer on a deferred payment basis
* If it exceeds to 25%, the output VAT is reported in the month of sale in full.

Interest and penalties

*whether 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 sale thereof shall be subject to
VAT being a transaction incidental to the taxpayer's main business (Sec of RR16-2005 as amended by
RR4-2007).

➢ Therefore, the 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

The sales of properties not in the ordinary course of business are exempt from VAT. Hence, the sale of capital
assets is exempt from VAT.

Illustration:
Pearl Corporation, a VAT Taxpayer, sold the following properties:

Old factory (BV=1.5M) 1.3M

Vacant lot, held as investment 4 M

SP of old factory 1.3 M x 12% = 156K output VAT

Note: The VAT on sale of ordinary assets applies only to VAT-registered taxpayers.

Transactions Deemed Sales (subjected to the VAT)

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. (gift or donation, not revocable)
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

Transfer, use or consumption not in the ordinary course of business

This occurs when vatable ordinary assets are used for purposes other than their intended purpose, such as when:
1. Goods or properties held for sale are no longer sold but are transferred or disposed of by other means
other than sale.
2. Properties originally intended for use are no longer used but are transferred, disposed of or exchanged
with other properties.
Examples of consumptions not in the 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

Note:
✓ Transfer to an accredited non-profit organization is not subject to VAT. (output VAT is nil or zero)
✓ Transfer as to be merely held in trust for the trustor and/or beneficiary is not subject to VAT. (output VAT
is nil or zero)
✓ Initial acquisition of control is a VAT-exempt transaction.
✓ Distribution of property dividends (capital assets) are not subject to VAT as deemed sales. Needless to
say, distribution of property dividends (ordinary assets) are subject to VAT as deemed sales.

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.
This is not an actual consumption, but the rule is apparently intended to prevent taxpayers from deferring
recognition of output VAT by nonreporting or delayed reporting of the sales on consignment
Illustration
A VAT-registered taxpayer has its own sales operations but also sells goods through consignees. It also sells
goods on consignment for a commission. The following were the results of operations for the month ended April
30, 2020:

Sales own inventories 500,000

Sales - reported by consignees 150,000
Sales in behalf of consignors 100,000
Commission income on goods sold for consignors 20,000
The billed prices of outstanding consignments still held by consignees as of April 30, 2020 are as follows:
February 2020 50,000
March 2020 80,000
April 2020 120,000

The Output VAT shall be computed as:

Direct sales 500,000
Sales through consignees 150,000
Commission income 20,000
Total sales/receipts P670,000 x 12% 80,400
Deemed sales (February) 50,000 x 12% 6,000
Output VAT 86,400

Retirement or cessation of business

➢ Remember that when the owner of the business withdraws a certain merchandise for his personal
consumption, much would it be when he ceased or retire from business where all of the assets will
become his personal disposal. Hence, it is also a "deemed sale."
➢ If the business is continued by a new owner, the goods or properties of the business are effectively sold
to the new owner. Hence, the goods or Properties of the business are likewise deemed sold.

Illustration:
Mr. Misamis, a VAT-registered taxpayer, ceased business operation in May 2020. His business properties upon
termination of business operation include:
 Book value Fair value
Cash 50,000 50,000
Accounts receivables 120,000 120,000
Investments 180,000 400,000
Inventories 200,000 250,000
Property, plant and equipment 800,000 600,000
Total assets 1,350,000

Inventories 200,000
Property, plant and equipment 600,000
Basis 800,000
Multiply by: 12%
Output VAT 96,000

General Rule: Business dissolution is deemed sale.

1. Change of ownership of the business
a. Incorporation of a sole proprietorship
b. Sale by 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

Not business dissolution: Change in controlling shareholder; change in trade or corporation name; change in
business address

*Merger or dissolution and acquisition of corporate control are not considered deemed sale under the law.

Cessation of status as VAT-registered person

1. VAT to VAT exempt (business activity)
2. Cancellation of VAT registration to exempt status.
3. Cancellation of VAT registration after 3 years lock in period.
4. Approval from VAT to nonVAT status of one who commenced business with expectation of exceeding 3M
but failed to exceed.

Note: 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.

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.

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.
➢ The subsequent sale of goods or properties deemed sold shall not be subject to VAT. The seller of
goods or properties previously deemed sold shall indicate the sales invoice number wherein the output
tax on the deemed sales was imposed and the corresponding tax paid on the items sold.

Note: Deemed sales rules apply only to VAT taxpayers only

Determination of the Output VAT

The amount of output VAT is dependent upon the price quoted (invoice price) by the VAT taxpayer. Such
amount is understood to be inclusive of the VAT in the absence of a special agreement to the contrary.
How to get the output vat
If inclusive of VAT, you can get the output VAT by using 12/112
If exclusive of VAT, just simply multiply the gross selling price or gross receipts to 12%.

Rule on VAT not separately billed

If the VAT is not separately billed in the document of sale, the selling price or the consideration stated therein shall
be deemed agreed to be inclusive of the VAT. The VAT shall be computed from the agreed price as a factor of
12/112.

Incorrect billing of VAT

If the VAT is incorrectly billed, the total amount billed by the taxpayer shall be deemed inclusive of the VAT. The
VAT shall be recomputed as a factor of 12/112.

Illustration
A VAT seller invoiced a sale of goods as follows:
Selling price P 100,000
Output VAT 10,000
Invoice price 110,000

The Output VAT should have been P12,000, computed as P100,000 x 12%. This is an incorrect billing. Hence,
the Output VAT shall be re-computed from the invoice price as: P110,000x 12/112; hence, P11,785.71. The
P11,785.71 Output VAT shall be reported in the VAT return.