Sale of services & use or lease of properties

TABLE OF CONTENTS
Requirements for taxability services 381
Meaning of 'sale or exchange of services" 381
Broker 382
Warehousing service 383
Millers 383
Operators of hotels and restaurants 384
Dealers in securities and lending investors 384
Sale of electricity by generation, transmission and distribution company 385
VAT on transportation contractors 386

TRANSFER & BUSINESS — Ampongan 380

VAT on franchise grantees 387

Non-life insurance companies 388
Other sale or exchange of services 388
Rate and base of tax 389
Transactions subject to zero percent (0%) rate 390
Lease of properties 392
Advance payment by the lessee 394
Exercise 18-1. True or False Questions 395
Exercise 18-2. Multiple Choice Questions 397
Exercise 18-3. Multiple Choice Questions 398
Exercise 18-4. Multiple TAXES Choice Problems 401
Exercise 18-5. Discussion Questions 403
Exercise 18-6. Case Study 406
Exercise 18-7. Case Study 407
Exercise 18-8. Case Study 408
: VALUE-ADDED TAX (Sale of Services. Etc) 381

Requirements for taxability of services

To be subject to VAT, the following requirements must be satisfied:

1. The service must be performed in the course of trade or business.

The phrase in the course of trade or business 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 is a
 nonstock, nonprofit 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 (Sec. 105, NIRC)
Thus, a transaction shall be considered as in the course of trade or business if
it is regularly conducted (including transactions incidental thereto) and undertaken in
pursuit of a commercial or economic activity.
"Course of business". or "doing business" connotes regularity of activity.

2. It must be performed in the Philippines.

To be subject to VAT, the service must be rendered in the Philippines. Those
rendered abroad are not taxable because the place where the service is performed
determines the jurisdiction to impose the VAT. Thus, the place of payment is
Immaterial.
3. Consideration must he received actually or constructively.
The value added tax accrues upon actual or constructive receipt of the
consideration. Thus, whether the receipt consists of delayed payments or even
deposit or advance payments, the same constitutes gross receipts subject to VAT.
4 The transaction is not exempt under the Code, special laws or international
agreements.
No matter how regular is the occurrence of the transaction, if it is exempt
under the code as found in Chapter 16 or in other special laws, such transaction shall
be exempt from VAT.
Meaning of "sale or exchange of services"
Sale or exchange of services means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration, including the following
"service, Performed or rendered by
1 Construction and service contractors,
TRANSFER & BUSINESS TAXES — Ampongan
2. Stock, real estate, commercial, customs and Immigration brokers;
3. Lessors or property, whether real or personal;
4. Person engaged in warehousing services;
5. Lessors or distributors of cinematographic films;
6. Persons engaged in milling, processing, manufacturing or repacking good, , others;
7, proprietors, operators or keepers of hotels, motels, rest houses, pension house, inns, resorts,
theatres, and movie houses;
8. Proprietors or operators of restaurants, refreshment parlors, cafes and other eating Places,
including clubs and caterers;
9. Dealers in securities;
10. Lending investors;
11 Transportation contractors on their transport of goods or cargoes, including persons who
Transport goods or cargoes for hire and other domestic carriers by land 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, transmission, and/or distribution companies;
14. Franchise grantees of electric utilities, telephone and telegraph, radio and/or
television broadcasting and all other franchise grantees, except franchise grantees
of radio and/or television broadcasting companies whose annual gross receipts of
the preceding year do not exceed P10,000,000 and franchise grantees of gas and
water utilities;
15. Non-life insurance companies (except crap insurances), including sure,,
identity and bonding companies;
16 Similar services regardless of whether or not the performance thereof calls for the
exercise or use of the physical or mental faculties (Rev. Rel. 162.6,

Broker
A broker is one whose occupation is to bring parties together or to bargain for
them in matters of trade, commerce or navigation for a fixed or regular compensation.
VALUE-ADDED TAX Sale of Services etc. 383

A 0000 broker is one who is engaged in transporting with hired trucks for
delivery of goods of customers from the customs premises to their place of establishment
for a fee (8IR Ruling 299-921.
A real estate broker is one who is engaged in selling, leasing, mortgaging, etc. of
ma, property of others for a fee.

Examples of commercial brokers are the following:

a. Fish brokers who sell fish and other marine fresh water products brought or shipped
by traders, producers or shippers from different provinces to public markets in
Divisoria, Malabon and Navotas Fish Port Complex on whose basis to the amount of
sales of the first and other products sold which are basically owned or produced by
the traders, producers or shippers (IR Ruling 224-881
b. A person who acts as a sales agent of publishing companies for a commission, but if
he purchases outright the publication he sells, he is considered a merchant or an
ordinary book dealer and not a commercial dealer IBM Ruling 219-99).
c. Agents and/or salesman acting for a domestic company in the buying and selling of
securities paid solely on commission basis.
Warehousing service
Warehousing service means rendering personal services by a warehouseman, such
as:
a. Engaging in the business of receiving and storing goods for others for compensation
or profit:
b. Receiving goods and merchandise to be stored In his warehouse for hire; and
c. Keeping and storing goods for others, as a business and for use (Rev. Reg. .14-2005).

Miller
Tito millers subject to value-added tax are those engaged in milling others except millers
of palay into rice, corn into corn grits, and sugarcane Into NW cane sugar.

If the miller Is paid in cash for his services, VAT shall be based on his gross receipts
to services during the month or gun.

If he receives a share of milled products instead of cash, the value-added tax .at
b. based on the actual market value of his share in the milled product (except rice, corn
grits and raw cane sugar).
TRANSFER & BUSINESS TAXES — Amponaan384
Operators of hotels and restaurants
The mowing persons or entitles engaged In hotel and restaurant business
subject to VAT:
1. Proprietors, operators or keepers of hotels, motels, rest houses, pension house
Inns, apparels and resort,
2. Proprietors or operators of restaurant, refreshment parlors, cafes and other eat',
places;
3. Proprietors or operators of bars and clubs;
4. Caterers
5. Non-stock, nonprofit organizations, government-owned and controlled corporation,
and cooperatives engaged in the hotel and restaurant business;
6. Other similar establishments (MC No. 746).
The term "gross receipts" in hotel and restaurant operators shall include, among
others, charges for rooms, laundry and valet services, food and beverages consumption,
corkage, handling charges for providing telephone, tele, cable, or fax services, cake shoo
sales, lease to concessionaires, compensation a. other services
It does not include the following:
1. Service charges billed separately and actually distributed to waiters and employees;
2. Actual cost of long distance and overseas telephone calls, fax, cable, telex and
 charges of the telecommunication companies collected by establishment for the
customer/clients for the concerned telecommunication companies, such as PLOT,
which are earmarked for payment to the latter;
3. VAT passed on to customers; and local taxes charged Cid,

Dealers in securities and lending investors

Dealer in securities means a merchant of stocks or securities:
a. With an established place of business;
b. Regularly engaged in the purchase of securities and their resale to customers, that
one who as a merchant buys securities and sells them to customers;
c. With a view to the gains and profits that may he derived therefrom (Rev. Reg.)

18- VALUE-ADDED TAX Sale of Services tc. 385

Lending investors include all persons other than banks, non bank financial
Intermidiaries, finance companies and other financial intermediaries not performing
Quasi-banking functions, who make a practice of lending money for themselves or others at
Interest (ibid.)

Sale of electricity by generation, transmission and distribution companies

Generation companies refers to persons or entities authorized by Energy
Regulatory Commision (ERC) to operate facilities in the generation of electricity.
For this purpose, generation of electricity refers to the production of electricity by
a generation company or a cogeneration facility pursuant to the provisions of the RA
9136 (EPIRA). They shall Include all Independent Power Producers (IPPs) and NPC/Power
Sector Assets and Liabilities Management Corporation (PSALM)-owned generation
facilities.
Transmission companies refers to any person or entity that owns and conveys
electricity through the high voltage backbone system and/or sub transmission assets, e.g.
NPC or TRANSCO.
Sub transmission asset, shall refer to the facilities related to the power delivery
service below the transmission voltages and based on the functional assignment of asset
including, but not limited to step-down transformers used solely by load customers,
reactive compensation equipment to improve power factor, overhead lines, and the land
where such facilities/equipment are located.

These include NPC assets linking the transmission system and the distribution systems
which are neither classified as generation or transmission.
Distribution companies refers to persons or entities which operate a distribution
systems in accordance with the provisions of the EPIRA.
 They shall include any distribution utility such as an electric cooperative organized
under RA 6938, or as otherwise provided in the [PIRA, a private corporation, or a
government-owned utility or existing local government unit which has an exclusive
franchise to operate a distribution system in accordance with the EPIRA.
For purposes of value-added tax, a distribution system refers to the system of
wires and associated facilities belonging to a franchised distribution utility extending

TRANSFER & BUSINESS TAXES - Ampongan 386

between the delivery points on the transmission or sub transmission system or generator
connection and the point of connection to the premises of end-users.
Gross receipts of these companies shall refer to the following:
(a) Total amount charged by generation companies for the sale of electricity and related
ancillary services; and/or
(b) Total amount charged by transmission companies for transmission of electricity,
related ancillary services; and/or
(c) Total amount chart. by distribution companies and electric cooperatives for
distribution and supply of electricity, and related electric service. The universal
charges passed on and collected by distribution companies and electric cooperatives
shall be excluded from the computation of gross receipts.

VAT on transportation contractors

transportation contractors subject to VAT refer to domestic common carriers by land, air
and sea who transport goods or cargoes, and to domestic air or water carriers on their transport
of passengers.
Transportation contractors who transport passengers for Are by land (domestic or
international), are not subject to value-added tax because they are subject to Common
Carrier's Tax of three percent (3%) based on gross receipts.
Transports of passengers and cargoes by domestic Mr. or Sea VCSSC1S from the
Philippines to a foreign country of rattler are subject to 0% VAT.

Illustration 18-1
Safe Transport Company is engaged in the carriage of passengers from
Luzon to Visayas and/or Mindanao, and vice-versa. It is also engaged in the
domestic carriage of goods or cargo. During the period, it had the following
data:
Receipts from carriage of passengers P 560,000
Receipts from carriage of goods or cargo336,000
Purchases of goods subject to VAT I 68,000
Purchases of goods not subject to VAT 80.000
REQUIRED: Compute the VAT payable if Safe Transport Company is a:
1. Domestic common carrier by air and sea.
2. Domestic common carrier by land Assume that the gross
receipts on carriage of passenger's amount io P500.000

18- Value-Added Tax (Sale of services, etc.)387

1. Domestic common carried by air and sea.
passenger (560,000 x 3/28) P60,000
Goods or cargo (336,000 x 3 /28) 36,000
Output tax 96,000
Less: Input tax (168,000 x 3/28) 18,000
VAT payable 78,000

2. Domestic common carrier by land.

Output tax (336,000 x 3/28) 36,000
Less: Input tax (168,000 x 3/28: 18,000
Allocation of input tax:
Passengers 500,000
Goods or cargo (336,000-36,000) 300,000
Total 800,000
(300/800 x 18,000) 6,750
VAT PAYABLE 29,250

Common carriers by air and/or sea are eatable on gross receipts

from the transport of passengers and goods/cargoes from one place in the
Philippines to another place in the Philippines.
Common carriers by land are subject to VAT only on gross receipts
from the transport of goods or cargoes. The receipts on carriage of
passengers are subject to common carrier's tax.

VAT on franchise grantees

The following services of franchise grantees are subject to VAT:
1. On telephone and telegraph;
2. On toll road operations;
3. On radio and television broadcasting, except franchise grantees of radio and
television of
broadcasting companies whose annual gross receipts of se Tax preceding year
 exceed P10,000,000 because they are subject to a Franchise to tax of 3%
5. All other franchise grantees (except gas and water)

TRANSFER & B SINESS TAXES — Ampongan — 388

PAGCOR. although a franchise grantee is exempt from value-added tax,

Non-life insurance companies

Only the transactions entered. into by persons in the course of , _
business are taxable. They include the following marine, fire and
surety, Fidelity, indemnity; bonding companies and mutual benefit association
nonresident foreign person rendering non-life insurance services in the Philippines
Value-added tax is not imposed on gross receipt's dewed from
premiums on Life insurance

Other sale or exchange of services

The phrase “sale or exchange of services” shall likewise include the following:
I. The lease of the use of or the right or privilege to use any copyright, patent, design,
or model, plan, secret formula or process. Goodwill, trademark, trade brand or,
like property or right.
2.The lease or the use of. or the right to use of any industrial, commercial or scientific
equipment
3 The supply of scientific. technical, industrial or commercial knowledge or scientific information.
4. The supply of any assistance that is ancillary and subsidiary to and furnished as a means of
enabling the application or enjoyment of any such property or right as in mentioned in
subparagraph (2) or any such knowledge or information mentioned in subparagraph (3).
5. The supply of services by a nonresident person or his employee in connect, the use of
property or right belonging to, of the installation or operation of any brand. machinery or other
apparatus purchased from such nonresident person;
6 The supply of technical advice, assistance or service rendered in connection with technical
management or administration of any scientific, industrial or commercial undertaking, venture,
pro, or scheme;
7. The lease of motion picture films, films, tapes and discs, and
8. The lease or the use of or the right to use radio, television, satellite transmission and cable
television time.

18-VALUE-ADDED TAX (Sales of Services etc.)

Lease of properties shall be subject to tax herein imposed irrespective of the place where the
contract of Iease or licensing agreement was executed, if property is leased or used in the
Philippines (ibid)
RATE BASE OF TAX
There that shall levied, assessed and collected a value-add. tax equivalent to
twelve percent (12%) of gross receipts derived from the sale or exchange of services

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 he
performed for another person, excluding value-added tax.

Constructive receipt occurs when the money consideration or its equivalent is

placed in the control of the person who conducted the service without restriction by the
payor such as depositing the money in the bank which are available to the payee without
Restriction
illustration 18-2
Dely Hensia is a building contractor. Its records in the month of February
show the following:

Bldg. A- Confront price, P 2,200,000

Payment received 1,792,000
Receivable 448,000

Bldg. B- Contract price. P 4,000,000

Payment received for work done 2,240,000
Advances for work to be done 1,220,000

Bldg. C- (Finished lost year)

Contract price, P2.500,000
Receivables last year (collected February) 392,000

Payments made:

For services of VAT subcontractor 1,568,000

Purchases of construction materials subject to VAT 694,400
Wages of employees 450,000
Purchases of supplies from VAT suppliers 56,000

Transfer Business Taxes - Ampongan

REQUIRED: COMPUTE THE VAT PAYABLE
Output tax:
Bldg. A- Gross receipts 1,792,000
Bldg. B- Payment received 2,240,000
Advances 1,120,000
Bldg. C- Gross Receipts 392,000
Total 5,544,000
Multiply by 3/28 594,000
Less: Input tax
Subcontractors 1,568,000
Materials 694,000
Supplies 56,000
Total 2,318,400
Multiply 3/28 248,400
VAT payable 345,600

Transactions subject to zero percent (0%) rate

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 Co
purchases of goods, properties or services related to such zero-rated sale shall be
available as tax credit or refund.
The following services perform. In the Philippines by a VAT-registered person 010
be subject to zero percent (0%) VA! rate:
I. Processing., manufacturing or repacking goods for other persons doing business
outside the Philippines, which goods are subsequently exported, where the service,
are paid for In acceptable foreign currency and accounted for in accordance with the
rules and regulations of the IISP;
2. Services other than processing, manufacturing or repacking rendered I0
engaged in business conducted outside the Philippines or to a nonresident
engaged in business who is outside the Philippines when the services are performed
consideration for which is paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulation of the BSP;
3. Services rendered to persons or entities whose exemption under special laws the Philippines
is a signatory effectively effectively subjects of the supply of such services to Zero Percent (0%)
rate;
VALUE-ADDED TAX (Sales or Services etc..) 391

4.Services rendered to persons engaged in international shipping or air transport

operations, including leases of property for use thereof: Provided, that these services shall
exclusively for international shipping or air transport operations

Thus, the services referred to herein shall not pertain to those made to common carriers by
air and sea relative to their transport of passengers, goods or cargoes from one place in the
Philippines to another place in the Philippines, the same being subject to twelve percent (12%)
VAT.

5. Services performed by subcontractors and/or contractors in processing, converting, or

manufacturing goods for all enterprise whose export sales exceed seventy percent (70%) of the
total annual production;

6. Transport of passengers and cargo by domestic air or sea vessels from the Philippines to a
foreign country.
Gross receipts of international air or shipping carriers doing business the Philippines
derived from transport of passengers and cargo from the Philippines to another country shall be
exempt from VAT, however, they are still liable to a percentage tax of three percent (3%) based
on their gross receipts derived from transport of cargo from the Philippines to another; and

7. Sale of power or fuel generated through renewable sources of energy such as but not
limited to, biomass, solar, wind, hydropower, geothermal and steam, ocean energy, and other
emerging sources using technologies such as fuel cells and hydrogen fuels. Provided, however,
that zero-rating shall apply strictly to the sale of power or fuel generated through renewable
sources of energy, and shall not extend to the sale of services related to the maintenance or
operation of plants generating said Power.

Provided, That Subparagraphs (1) and (5) abovementioned shall be subject to the twelve
Percent (12%) VAT and no longer be subject to zero percent (O.) VAT rate upon satisfaction of
the following condition,

1. The successful establishment and implementation of an enhanced VAT refund system

that grants and pays refunds of creditable Input tax within ninety (90) days from the filling
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 decided
within ninety (90) days from the filling of the VAT refund application. The 90-day period
to process and decide, pending the establishment of enhanced VAT Refund System
shall only be up to the date approval of the Recommendation Report on such application
for VAT refund by the Commissioner or his duly representative.