VAT

MODULE 1 – GENERAL PRINCIPLES TO ZERO-RATED

TAX II
MFA BALILI
 Overview

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Sec. 105 VAT, Tax Code
SEC. 105. Persons Liable. - Any person who, in the course of trade or business, sells
barters, exchanges, leases goods or properties, renders services, and any person who
imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to
108 of this Code.
The value-added tax is an indirect tax and the amount of tax may be shifted or passed on
to the buyer, transferee or lessee of the goods, properties or services. This rule shall
likewise apply to existing contracts of sale or lease of goods, properties or services at the
time of the effectivity of Republic Act No. 7716.
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 non-stock, 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.
The rule of regularity, to the contrary notwithstanding, services as defined in this Code
rendered in the Philippines by nonresident foreign persons shall be considered as being
rendered in the course of trade or business.

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Persons Liable
1. Any person who, in the course of trade or business ----
• sells, barters, or exchanges goods or properties (seller or transferor)
• leases goods or properties (lessor)
• renders services (service provider)

2. Any person who Imports goods (importer) ---

In the case of importation of taxable goods, the importer, whether an

individual or corporation and whether or not made in the course of his trade or business, shall
be liable to VAT imposed in Sec. 107 of the Tax Code. (Sec 4.105-1, RR 16-2005, as amended)

“Person” refers to any individual, trust, estate, partnership, corporation, joint venture,
cooperative or association. (Sec 4.105-1, RR 16-2005, as amended)

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Basic Formula
Transactions VAT
Sale or lease of goods, properties or Output VAT
services
Less: Purchases including importations Less: Input VAT
Equals: Value-Added Equals: Net VAT Payable or Excess
Input VAT, as the case may be

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Direct vs Indirect Tax
Abakada Guro Party List vs Ermita, GR 168056, 168207, etc, Sept 1, 2005:

The VAT is a tax on spending or consumption. It is levied on the sale, barter, exchange or lease
of goods or properties and services. Being an indirect tax on expenditure, the seller of goods or
services may pass on the amount of tax paid to the buyer, with the seller acting merely as a tax
collector. The burden of VAT is intended to fall on the immediate buyers and ultimately, the end-
consumers.

In contrast, a direct tax is a tax for which a taxpayer is directly liable on the transaction or
business it engages in, without transferring the burden to someone else. Examples are
individual and corporate income taxes, transfer taxes, and residence taxes.

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Direct vs Indirect Tax contd
CIR vs Magsaysay Lines, GR 146984, July 28, 2006:

VAT is ultimately a tax on consumption, even though it is assessed on many levels of transactions on the
basis of a fixed percentage. It is the end-user of consumer goods or services which ultimately shoulders the
tax, as the liability therefrom is passed on to the end users by the providers of these goods or services who
in turn may credit their own VAT liability (or input VAT) from the VAT payments they receive from the final
consumer (or output VAT). The final purchase by the end consumer represents the final link in a production
chain that itself involves several transactions and several acts of consumption. The VAT system assures
fiscal adequacy through the collection of taxes on every level of consumption, yet assuages the
manufacturers or providers of goods and services by enabling them to pass on their respective VAT liabilities
to the next link of the chain until finally the end consumer shoulders the entire tax liability.

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In the course of trade or business
• Rule of Regularity
the regular conduct or pursuit of a commercial or economic activity, including transactions
incidental thereto, by any person regardless of whether or not the person engaged therein is 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-resident foreign persons

The Rule of Regularity notwithstanding, services rendered in the Philippines by non-resident
foreign persons shall be considered as being rendered in the course of trade or business.

• Incidental
The term “incidental” means something necessary, appertaining to, or depending upon
another which is termed the principal, something incident to the main purpose

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In the course of trade or business contd
CIR vs CA & COMARSECO, GR 125355, March 30, 2000:
xxx a domestic corporation that provided technical, research, management and technical assistance to its
affiliated companies and received payments on a reimbursement-of-cost basis, without any intention of
realizing profit, was subject to VAT on services rendered. In fact, even if such corporation was organized without
any intention of realizing profit, any income or profit generated by the entity in the conduct of its activities was
subject to income tax. lex

Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives payments for
services rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for purposes
of determining liability for VAT on services rendered. As long as the entity provides service for a fee,
remuneration or consideration, then the service rendered is subject to VAT.

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In the course of trade or business contd
PSALM vs CIR, GR 198146, August 8, 2017:
PSALM, a government-owned and controlled corporation, was created under the EPIRA law to manage the
orderly sale and privatization of NPC assets with the objective of liquidating all of NPC's financial obligations in
an optimal manner. Clearly, NPC and PSALM have different functions.
Since PSALM is not a successor-in-interest of NPC, the repeal by RA 9337 of NPC's VAT exemption does not
affect PSALM. In any event, even if PSALM is deemed a successor-in-interest of NPC, still the sale of the power
plants is not "in the course of trade or business" as contemplated under Section 105 of the NIRC, and thus, not
subject to VAT.
The sale of the power plants is not in pursuit of a commercial or economic activity but a governmental function
mandated by law to privatize NPC generation assets. PSALM was created primarily to liquidate all NPC financial
obligations and stranded contract costPSALM is limited to selling only NPC assets and IPP contracts of NPC.
The sale of NPC assets by PSALM is not "in the course of trade or business" but purely for the specific purpose
of privatizing NPC assets in order to liquidate all NPC financial obligations. PSALM is tasked to sell and privatize
the NPC assets within the term of its existence.

Thus, it is very clear that the sale of the power plants was an exercise of a governmental function mandated by
law for the primary purpose of privatizing NPC assets in accordance with the guidelines imposed by the EPIRA
law.
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In the course of trade or business contd
CIR vs Magsaysay Lines, GR 146984, July 28, 2006:

That the sale of the vessels was not in the ordinary course of trade or business of NDC was appreciated by
both the CTA and the Court of Appeals, the latter doing so even in its first decision which it eventually
reconsidered.[20] We cite with approval the CTAs explanation on this point:

“In Imperial v. Collector of Internal Revenue, G.R. No. L-7924, September 30, 1955 (97 Phil. 992), the
term carrying on business does not mean the performance of a single disconnected act, but means
conducting, prosecuting and continuing business by performing progressively all the acts normally
incident thereof; while doing business conveys the idea of business being done, not from time to time,
but all the time. xxx Course of business is what is usually done in the management of trade or business.
Xxx”

What is clear therefore, based on the aforecited jurisprudence, is that course of business or doing business
connotes regularity of activity. In the instant case, the sale was an isolated transaction. The sale which was
involuntary and made pursuant to the declared policy of Government for privatization could no longer be
repeated or carried on with regularity. It should be emphasized that the normal VAT-registered activity of NDC
is leasing personal property.

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Nature and Characteristics
1) Broad-based tax on consumption of goods, properties or services in the Philippines --
• Imposed on each sale, barter or exchange or lease of goods or properties, or on each rendition
of services, in the course of trade or business, as they pass along the production and
distribution chain, the tax being limited only to the value added to such goods, properties or
services by the seller, transferor or lessor
• Levied on the importation of goods whether in the course of trade or business
2) Indirect tax ---
• May be shifted or passed on by the seller to the buyer, transferee or lessee
• Seller is the one statutorily liable for the tax, but the burden (ie, the amount) of the tax is
shifted/passed-on to, and borne by the buyer, transferee or lessee
• Liability for the tax vs burden of the tax
• For importation, importer is the one liable for the VAT
3) Collected through the tax credit method ---
If at the end of a taxable quarter, the output taxes charged by a seller are equal to the input
taxes passed on by the suppliers, no payment is required. It is when the output taxes exceed the
input taxes that the excess has to be paid. If, however, the input taxes exceed the output taxes, the
excess shall be carried over to the succeeding quarter or quarters.
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Nature and Characteristics contd
4) NOT a cascading tax ---
There is no tax pyramiding because what has been subjected to VAT before is not thereafter
subjected to VAT.
5) NOT a tax on tax ---
In indirect taxation, there is a need to distinguish between the liability for the tax and the
burden of the tax. As earlier pointed out, the amount of tax paid may be shifted or passed on
by the seller to the buyer. What is transferred in such instances is not the liability for the tax,
but the tax burden. In adding or including the VAT due to the selling price, the seller remains
the person primarily and legally liable for the payment of the tax. What is shifted only to the
intermediate buyer and ultimately to the final purchaser is the burden of the tax. Stated
differently, a seller who is directly and legally liable for payment of an indirect tax, such as the
VAT on goods or services, is not necessarily the person who ultimately bears the burden of the
same tax. It is the final purchaser or consumer of such goods or services who, although not
directly and legally liable for the payment thereof, ultimately bears the burden of the tax.

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Nature and Characteristics contd
6) Transparent form of sales tax ---
The VAT is required to be shown as a separate item on the sales invoice or official receipt.
7) VAT adheres to the Cross Border Doctrine/Destination Principle ---
• Under the cross-border principle of the VAT system, no VAT shall be imposed to form part of
the cost of goods destined for consumption outside of the territorial border of the taxing
authority. If exports of goods and services from the Philippines to a foreign country are free
of the VAT, then the same rule holds for such exports from the national territory -- except
specifically declared areas -- to an ecozone.
• The Philippine VAT system adheres to the Cross Border Doctrine, according to which, no
VAT shall be imposed to form part of the cost of goods destined for consumption outside of
the territorial border of the taxing authority. Hence, actual export of goods and services
from the Philippines to a foreign country must be free of VAT; while, those destined for use
or consumption within the Philippines shall be imposed with ten percent (10%) VAT (now
12%).

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Principles of VAT taxation
• Principle of territoriality – tax is imposed on transactions that take place within
its territory

• Origin principle – only national taxpayers would be exposed to the tax, without distinguishing
between transactions “consumed” locally or abroad. Exports taxable, imports exempt.
• Situs = country of production

• Destination principle – VAT is imposed in the country in which the products or services are
actually consumed or used. Exports exempt, imports taxable.
• Situs = country of consumption

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 Who are liable for the VAT

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Who are required to register
(1) Mandatory VAT Registration
1) His gross sales or receipts for the PAST 12 months (other than those exempt under Sec
109(1)(A) to (V) have exceeded ---
• P1,919,500 effective Jan 1, 2012
• P3,000,000 effective Jan 1, 2018 under RA 10963

2) There are reasonable grounds to believe that his gross sales or receipts for the NEXT 12
months (other than those exempt under Sec 109(1)(A) to (V) will exceed ---
• P1,919,500 effective Jan 1, 2012
• P3,000,000 effective Jan 1, 2018 under RA 10963

3) Franchise grantees of radio and television broadcasting whose gross annual receipts for the
preceding taxable year exceeded P10,000,000 should register within 30 days from the end
of the taxable year

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Who are required to register contd
(2) Optional VAT Registration

1) Any person who is VAT-exempt under Sec 109(1)(W) --- ie, otherwise VAT-taxable but his gross
sales or receipts do not exceed the VAT threshold ---
• P1,919,500 effective Jan 1, 2012
• P3,000,000 effective Jan 1, 2018 under RA 10963

2) Any person who is VAT-registered but enters into transactions which are exempt --- ie, mixed
transactions --- may apply to have the VAT apply to his exempt transactions

3) Franchise grantees of radio and television broadcasting whose gross annual receipts (derived
from the business covered by the franchise) for the preceding taxable year DO NOT exceed
P10,000,000.
• Once option is exercised, irrevocable

Persons opting to register for the VAT under (1) to (3) above will not be allowed to cancel his
registration for the next 3 years.

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Who are required to register contd
(3) Registration as Non-VAT or VAT-exempt

1) VAT-exempt persons under Sec 109(1) who did not opt to register as VAT taxpayers

2) Marginal income earners – individuals engaged in business where gross sales or receipts do
not exceed P100,000 during any 12-month period

3) Non-stock, non-profit (NSNP) organizations & associations engaged in trade or business

whose gross sales or receipts do not, for any 12-month period, exceed the VAT threshold ---
• P1,919,500 effective Jan 1, 2012
• P3,000,000 effective Jan 1, 2018 under RA 10963

4) Cooperatives other than electric cooperatives

5) Radio and television broadcasting whose gross annual receipts do not exceed P10,000,000
and which did not opt to be VAT-registered

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Who are required to register contd
(3) Registration as Non-VAT or VAT-exempt contd

6) PEZA and other ecozone-registered enterprises enjoying the 5% preferential tax rate in lieu
of all taxes

7) SBMA and other freeport zone-registered enterprises enjoying the 5% preferential tax rate in
lieu of all taxes

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When/where to register
• Before the start of business and every year thereafter on or before January 31
• With the Revenue District Office (RDO) having jurisdiction over the place where the principal
place of business or branch office is located
• Register and pay annual registration fee of P500 for every separate or distinct establishment
• “Principal place of business” – the place where the head or main office is located as appearing
in the corporation’s Articles of Incorporation. In the case of an individual – the place where the
head or main office is located AND where the books of accounts are kept
• “Separate or distinct establishment” – any branch or facility where sales transactions occur
• “Branch” – a fixed establishment in a locality which conducts sales operations of the business
as an extension of the principal office

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 VAT Rates

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VAT Rates; VAT Status

VAT Rate VAT Status

12% VAT-taxable; TIN-V
0% VAT-taxable; zero-rated; TIN-V
Exempt VAT-exempt; Non-VAT; TIN-NV

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VAT-Taxable vs Zero-Rated vs VAT-Exempt Sales
1) VAT-Taxable
• If at the end of a taxable quarter, the output taxes charged by a seller are equal to the input
taxes passed on by the suppliers, no payment is required. It is when the output taxes exceed the
input taxes that the excess has to be paid. If, however, the input taxes exceed the output taxes, the
excess shall be carried over to the succeeding quarter or quarters.

2) Zero-rated
• Zero-rated transactions generally refer to the export sale of goods and supply of services. The
tax rate is set at zero. When applied to the tax base, such rate obviously results in no tax
chargeable against the purchaser. The seller of such transactions charges no output tax, but
can claim a refund of or a tax credit certificate for the VAT previously charged by suppliers.

3) VAT-Exempt
• An exempt transaction involves goods or services which, by their nature, are specifically listed in
and expressly exempted from the VAT under the Tax Code, without regard to the tax status -- VAT-
exempt or not -- of the party to the transaction. Indeed, such transaction is not subject to the VAT,
but the seller is not allowed any tax refund of or credit for any input taxes paid.
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 Sales of Goods or Properties

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Sale of Goods or Properties
➢ Goods: all tangible and intangible objects which are capable of pecuniary
estimation.
➢ Includes:
• Real properties held primarily for sale to customers or held for lease in the ordinary course
of business
• The right or the privilege to use patent, copyright, design or model, plan, secret formula or
processes, goodwill, trademark, trade brand or other like property or right
• The right or the privilege to use in the Philippines of any industrial, commercial or
scientific equipment
• The right or the privilege to use motion picture films, film tapes and discs
• Radio, television, satellite transmission and cable television time

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Sale of Goods or Properties contd
• Rate and Base of Tax
There shall be levied, assessed and collected on every sale, barter or exchange of goods or
properties, a VAT equivalent to twelve percent (12%) of the gross selling price or gross value in
money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller
or transferor.
• “Gross selling price" ---
Means the total amount of money or its equivalent which the purchaser pays or is obligated to
pay to the seller in consideration of the sale, barter or exchange of the goods or properties,
excluding the VAT. The excise tax, if any, on such goods or properties shall form part of the
gross selling price.

• VAT Invoice
A VAT-registered person shall issue a VAT invoice for every sale, barter or exchange of goods or
properties

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Transactions Deemed Sale
1. Transfer, use or consumption not in the course of business of goods or properties originally
intended for sale or for use in the course of business;
• eg: Withdrawal of goods from business for the personal use of a VAT-registered person
2. Distribution or transfer to:
a) Shareholders or investors as share in the profits of the VAT-registered persons; or
• Property dividends which constitute stocks in trade or properties primarily held for sale or lease
declared out of retained earnings on or after January 1, 1996 and distributed by the company to
its shareholders shall be subject to VAT based on the zonal value or fair market value at the time
of distribution, whichever is applicable.
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
• Consigned goods returned by the consignee within the 60-day period are not deemed sold.
* VAT base in transactions (1), (2) & (3) above – Market value of the goods at time of occurrence
of the deemed sale transaction
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Transactions Deemed Sale contd
4. Retirement from or cessation of business, with respect to inventories of taxable goods
existing as of such retirement or cessation, whether the business is continued by the new
owner or successor.
• With respect to all goods on hand, whether capital goods, stock-in-trade, supplies, or materials
• The following circumstances shall, among others, give rise to transactions “deemed sale” for
purposes of this Section:
i. Change of ownership of the business. There is a change in the ownership of the business
when a single proprietorship incorporates; or the proprietor of a single proprietorship sells
his entire business.
ii. Dissolution of a partnership and creation of a new partnership which takes over the
business.
• VAT base - acquisition cost or the current market price of the goods or properties,
whichever is lower. In the case of a sale where the gross selling price is unreasonably
lower than the fair market value, the actual market value shall be the VAT base.

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Change/Cessation of VAT-registered Status
• The VAT also applies 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 a request for cancellation of registration due to a desire to revert to exempt
status after the lapse of 3) consecutive years from the time of registration by a person
who voluntarily registered
(4) Approval of a request for cancellation of registration of one who commenced business
with the expectation of gross sales or receipts exceeding the VAT threshold, but who
failed to exceed this amount during the first 12 months of operation.

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NOT Subject to Output Tax
The VAT shall not apply to goods or properties which are originally intended for sale or for use in
the ordinary course of business existing as of the occurrence of the following:
(1) Change of control of a corporation by the acquisition of the controlling interest of such corporation by
another stockholder (individual or corporate) or group of stockholders. The goods or properties used in
business (including those held for lease) or those comprising the stock-in-trade of the corporation,
having a change in corporate control, will not be considered sold, bartered or exchanged despite the
change in the ownership interest in the said corporation.
However, 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 stock, whether resulting in corporate control or
not, is subject to VAT.
Illustration: Abel Corporation (transferee) is a merchandising concern and has an inventory of goods for sale
amounting to Php 1 million. Nel Corporation (transferor), a real estate developer, exchanged its real estate
properties for the shares of stocks of Abel Corporation resulting to the acquisition of corporate control. The
inventory of goods owned by Abel Corporation (Php 1 million worth) is not subject to output tax despite the
change in corporate control because the same corporation still owns them. This is in recognition of the separate
and distinct personality of the corporation from its stockholders. However, the exchange of real estate properties
held for sale or for lease b Nel Corporation for the shares of stocks of Abel Corporation, whether resulting in
corporate control or not, is subject to VAT.
(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 or new corporation.

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Zero-Rated Sales of Goods
(a) Export Sales – meaning:
(1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any
shipping arrangement that may be agreed upon which may influence or determine the transfer of
ownership of the goods so exported, and paid for in acceptable foreign currency or its equivalent in
goods or services, and accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP)
(2) Sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident local
export-oriented enterprise to be used in manufacturing, processing, packing or repacking in the
Philippines of the said buyer's goods, and paid for in acceptable foreign currency and accounted for
in accordance with BSP rules and regulations
(3) Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed
70% of total annual production
; (4) Those considered export sales under EO 226, otherwise known as the Omnibus Investment Code of
1987, and other special laws.

"Considered export sales under EO 226" means ➔

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Zero-Rated Sales of Goods
(a) Export Sales – contd
(a) the Philippine port F.O.B. value of export products exported directly by a registered export
producer, or
(b) the net selling price of export products sold by a registered export producer to another export
producer, or to an export trader that subsequently exports the same: Provided, That sales of
export products to another producer or to an export trader shall only be deemed export sales
when actually exported by the latter, as evidenced by landing certificates or similar commercial
documents.
(c) Without actual exportation the following shall be considered constructively exported for purposes
of these provisions:
(i) sales to bonded manufacturing warehouses of export-oriented manufacturers;
; (ii) sales to export processing zones;
(iii) sales to registered export traders operating bonded trading warehouses supplying raw
materials in the manufacture of export products
(iv) 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.
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Zero-Rated Sales of Goods
(a) Export Sales – contd
• For purposes of zero-rating, the export sales of registered export traders shall include
commission income.
• The exportation of goods on consignment shall not be deemed export sales until the export
products consigned are in fact sold by the consignee.
• Sales of goods, properties or services made by a VAT-registered supplier to a BOI-registered
manufacturer/producer whose products are 100% exported are considered export sales. A
certification to this effect must be issued by the BOI which shall be good for one year unless
subsequently reissued by the BOI.
(5) The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or
international air transport operations: Provided, That the goods, supplies, equipment, and fuel shall
be used exclusively for international shipping or air transport operations ➔
;
Limited to goods, supplies, equipment and fuel that shall be used in the transport of goods and
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:
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Zero-Rated Sales of Goods contd
(a) Export Sales contd
HOWEVER, subparagraphs (2), (3), and (4) hereof shall be subject to the 12% VAT and shall no longer be
considered export sales subject to 0% VAT rate upon satisfaction of the following conditions:
(1) The successful establishment and implementation of an enhanced VAT refund system that grants and pays refunds of
creditable input tax within 90 days from the filing of the VAT refund application: Provided that, to determine the
effectivity of Item no. 1, all applications filed from January 1, 2018 shall be processed and decided within 90 days
from the filing of the VAT refund application.
The 90-day period to process and decide, pending the establishment of the enhanced VAT Refund System shall only
be up to the date of approval of the Recommendation Report on such application for VAT refund by the Commissioner
or his duly authorized representative.
However, all claims for refund/tax credit certificate filed prior to January 1, 2018 shall still be governed by the one
hundred twenty (120)-day processing period.
The Secretary of Finance shall provide transitory rules for the grant of refund under the enhanced VAT Refund System
; after the determination of the fulfilment of the condition by the Commissioner of Internal Revenue as provided in item
1 paragraph 1 hereof; and
(2) All pending VAT refund claims as of December 31, 2017 shall be fully paid in cash by December 31, 2019.
Provided, That Department of Finance shall establish a VAT refund center in the BIR and in the BOC that will handle
the processing and granting of cash refunds of creditable input tax.

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Zero-Rated Sales of Goods contd
(b) Sales to persons or entities whose exemption under special laws or international agreements
to which the Philippines is a signatory effectively subjects such sales to zero rate. ➔
• Effectively zero-rated sales
In this kind of zero-rated sale, the condition for the zero-rating is that there is a special law or
international agreement which declares that the buyer is exempt from VAT. ➔ Sale is treated as
effectively zero-rated so that the seller charges the buyer Zero% VAT.

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Effectively Zero-Rated Sales
RA 7916, PEZA Law:
• SECTION 3. Purposes, Intents and Objectives. Xxx — (f) To vest the special economic zones on certain
areas thereof with the status of a separate customs territory within the framework of the Constitution
and the national sovereignty and territorial integrity of the Philippines.
• SECTION 8. ECOZONE to be Operated and Managed as Separate Customs Territory. — The ECOZONES
shall be managed and operated by the PEZA as separate customs territory.
• “Special economic zones (SEZ)" — hereinafter referred to as the ECOZONES, are selected areas with
highly developed or which have the potential to be developed into agro-industrial, industrial,
tourist/recreational, commercial, banking, investment and financial centers. An ECOZONE may contain
any or all of the following: industrial estates (IEs), export processing zones (EPZs), free trade zones, and
tourist/recreational centers.
• "Export processing zone (EPZ)" — a specialized industrial estate located physically and/or
administratively outside customs territory, predominantly oriented to export production. Enterprises
located in export processing zones are allowed to import capital equipment and raw materials free from
duties, taxes and other import restrictions.

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Effectively Zero-Rated Sales contd
RA 7916, PEZA Law: contd
• "Free trade zone" — an isolated policed area adjacent to a port of entry (as a seaport) and/or airport
where imported goods may be unloaded for immediate transshipment or stored, repacked, sorted,
mixed, or otherwise manipulated without being subject to import duties. However, movement of these
imported goods from the free-trade area to a non-free-trade area in the country shall be subject to
import duties.
• SECTION 23. Fiscal Incentives. — Business establishments operating within the ECOZONES shall be
entitled to the fiscal incentives as provided for under PD 66, the law creating the Export Processing
Zone Authority, or those provided under Book VI of EO 226, otherwise known as the Omnibus
Investment Code of 1987.
• SECTION 24. Exemption from Taxes Under the National Internal Revenue Code. — Any provision of
existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall
be imposed on business establishments operating within the ECOZONE. In lieu of paying taxes, five
percent (5%) of the gross income earned by all businesses and enterprises within the ECOZONE shall
be remitted to the national government. xxx

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Effectively Zero-Rated Sales contd
CIR vs Seagate Technology Phils, GR 153866, Feb 11, 2005:

Zero-Rated vs Effectively Zero-Rated Transactions

Although both are taxable and similar in effect, zero-rated transactions differ from effectively zero-rated
transactions as to their source.
Zero-rated transactions generally refer to the export sale of goods and supply of services. The tax rate is set
at zero. When applied to the tax base, such rate obviously results in no tax chargeable against the
purchaser. The seller of such transactions charges no output tax, but can claim a refund of or a tax credit
certificate for the VAT previously charged by suppliers.
Effectively zero-rated transactions, however, refer to the sale of goods or supply of services to persons or
entities whose exemption under special laws or international agreements to which the Philippines is a
signatory effectively subjects such transactions to a zero rate. Again, as applied to the tax base, such rate
does not yield any tax chargeable against the purchaser. The seller who charges zero output tax on such
transactions can also claim a refund of or a tax credit certificate for the VAT previously charged by suppliers.

TAX II 39
Effectively Zero-Rated Sales contd
CIR vs Seagate Technology Phils, GR 153866, Feb 11, 2005: contd

Zero Rating and Exemption

In terms of the VAT computation, zero rating and exemption are the same, but the extent of relief that
results from either one of them is not.
Applying the destination principle to the exportation of goods, automatic zero rating is primarily intended to
be enjoyed by the seller who is directly and legally liable for the VAT, making such seller internationally
competitive by allowing the refund or credit of input taxes that are attributable to export sales. Effective
zero rating, on the contrary, is intended to benefit the purchaser who, not being directly and legally liable for
the payment of the VAT, will ultimately bear the burden of the tax shifted by the suppliers.
In both instances of zero rating, there is total relief for the purchaser from the burden of the tax. But in an
exemption there is only partial relief, because the purchaser is not allowed any tax refund of or credit for
input taxes paid.

TAX II 40
Effectively Zero-Rated Sales contd
CIR vs Seagate Technology Phils, GR 153866, Feb 11, 2005: contd

Exempt Transaction and Exempt Party

The object of exemption from the VAT may either be the transaction itself or any of the parties to the
transaction.
An exempt transaction, on the one hand, involves goods or services which, by their nature, are specifically
listed in and expressly exempted from the VAT under the Tax Code, without regard to the tax status -- VAT-
exempt or not -- of the party to the transaction. Indeed, such transaction is not subject to the VAT, but the
seller is not allowed any tax refund of or credit for any input taxes paid.
An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code, a
special law or an international agreement to which the Philippines is a signatory, and by virtue of which its
taxable transactions become exempt from the VAT. Such party is also not subject to the VAT, but may be
allowed a tax refund of or credit for input taxes paid, depending on its registration as a VAT or non-VAT
taxpayer.

TAX II 41
Effectively Zero-Rated Sales contd
CIR vs Seagate Technology Phils, GR 153866, Feb 11, 2005: contd

As mentioned earlier, the VAT is a tax on consumption, the amount of which may be shifted or passed on by
the seller to the purchaser of the goods, properties or services. While the liability is imposed on one person,
the burden may be passed on to another. Therefore, if a special law merely exempts a party as a seller from
its direct liability for payment of the VAT, but does not relieve the same party as a purchaser from its indirect
burden of the VAT shifted to it by its VAT-registered suppliers, the purchase transaction is not exempt.
Applying this principle to the case at bar, the purchase transactions entered into by respondent are not VAT-
exempt.
Special laws may certainly exempt transactions from the VAT. However, the Tax Code provides that those
falling under PD 66 are not. PD 66 is the precursor of RA 7916 -- the special law under which respondent
was registered. The purchase transactions it entered into are, therefore, not VAT-exempt. These are subject
to the VAT; respondent is required to register.
Its sales transactions, however, will either be zero-rated or taxed at the standard rate of 10%, depending
again on the application of the destination principle.
If respondent enters into such sales transactions with a purchaser -- usually in a foreign country -- for use or
consumption outside the Philippines, these shall be subject to 0%. If entered into with a purchaser for use
or consumption in the Philippines, then these shall be subject to 10%, unless the purchaser is exempt
TAX II 42
Effectively Zero-Rated Sales contd
CIR vs Seagate Technology Phils, GR 153866, Feb 11, 2005: contd

from the VAT, the rate to be applied is zero. Its exemption under both PD 66 and RA 7916 effectively
subjects such transactions to a zero rate, because the ecozone within which it is registered is managed and
operated by the PEZA as a separate customs territory. This means that in such zone is created the legal
fiction of foreign territory. Under the cross-border principle of the VAT system, no VAT shall be imposed to
form part of the cost of goods destined for consumption outside of the territorial border of the taxing
authority. If exports of goods and services from the Philippines to a foreign country are free of the VAT, then
the same rule holds for such exports from the national territory -- except specifically declared areas -- to an
ecozone.
Sales made by a VAT-registered person in the customs territory to a PEZA-registered entity are considered
exports to a foreign country; conversely, sales by a PEZA-registered entity to a VAT-registered person in the
customs territory are deemed imports from a foreign country. An ecozone -- indubitably a geographical
territory of the Philippines -- is, however, regarded in law as foreign soil. This legal fiction is necessary to
give meaningful effect to the policies of the special law creating the zone. If respondent is located in an
export processing zone within that ecozone, sales to the export processing zone, even without being
actually exported, shall in fact be viewed as constructively exported under EO 226. Considered as export
sales, such purchase transactions by respondent would indeed be subject to a zero rate.

TAX II 43
Effectively Zero-Rated Sales contd
(1) CIR vs Toshiba Information Equipment Phils, GR 150154, Aug 9, 2005

• The rule that any sale by a VAT-registered supplier from the Customs Territory to a PEZA-registered
enterprise shall be considered an export sale and subject to zero percent (0%) VAT was clearly
established only on 15 October 1999, upon the issuance of RMC No. 74-99. Prior to the said date,
however, whether or not a PEZA-registered enterprise was VAT-exempt depended on the type of fiscal
incentives availed of by the said enterprise. This old rule on VAT-exemption or liability of PEZA-registered
enterprises, followed by the BIR, also recognized and affirmed by the CTA, the Court of Appeals, and
even this Court, cannot be lightly disregarded considering the great number of PEZA-registered
enterprises which did rely on it to determine its tax liabilities, as well as, its privileges.
• According to the old rule, Section 23 of RA 7916 gives the PEZA-registered enterprise the option to
choose between two sets of fiscal incentives: (a) The 5% preferential tax rate on its gross income earned
(GIE); and (b) the income tax holiday (ITH) under EO 226.
• The 5% tax rate on GIE as amended, is in lieu of all taxes. Except for real property taxes, no other
national or local tax may be imposed on a PEZA-registered enterprise availing of this particular fiscal
incentive, not even an indirect tax like VAT.

TAX II 44
Effectively Zero-Rated Sales contd
(1) CIR vs Toshiba Information Equipment Phils, GR 150154, Aug 9, 2005: contd

• Alternatively, Book VI of EO 226 grants ITH to registered pioneer and non-pioneer enterprises for 6- and
4-year periods, respectively. Those availing of this incentive are exempt only from income tax, but shall
be subject to all other taxes, including the 10% (now 12%) VAT.
• This old rule clearly did not take into consideration the Cross Border Doctrine essential to the VAT system
or the fiction of the ECOZONE as a foreign territory. It relied totally on the choice of fiscal incentives of
the PEZA-registered enterprise. Again, for emphasis, the old VAT rule for PEZA-registered enterprises was
based on their choice of fiscal incentives:
(1) If the PEZA-registered enterprise chose the 5% tax on GIE, in lieu of all taxes, then it would be VAT-
exempt;
(2) If the PEZA-registered enterprise availed of the ITH, it shall be subject to VAT at 10% (now 12%).
Such distinction was abolished by RMC No. 74-99, which categorically declared that all sales of goods,
properties, and services made by a VAT-registered supplier from the Customs Territory to an ECOZONE
enterprise shall be subject to VAT at zero percent (0%) rate, regardless of the latter’s type or class of
PEZA registration; and, thus, affirming the nature of a PEZA-registered or an ECOZONE enterprise as a
VAT-exempt entity.
TAX II 45
Effectively Zero-Rated Sales contd
(2) CIR vs Toshiba Information Equipment Phils, GR 157594, March 9, 2010:
• It is now a settled rule that based on the Cross Border Doctrine, PEZA-registered enterprises, such as
Toshiba, are VAT-exempt and no VAT can be passed on to them. The Court explained in the Toshiba
case that –
PEZA-registered enterprise, which would necessarily be located within ECOZONES, are VAT-exempt
entities, NOT because of Section 24 of RA 7916, as amended, which imposes the five percent (5%)
preferential tax rate on gross income of PEZA-registered enterprises, in lieu of all taxes; but, rather,
because of Section 8 of the same statute which establishes the fiction that ECOZONES are foreign
territory. Xxx
• The Philippine VAT system adheres to the Cross Border Doctrine, according to which, no VAT shall be
imposed to form part of the cost of goods destined for consumption outside of the territorial border of
the taxing authority. Hence, actual export of goods and services from the Philippines to a foreign
country must be free of VAT; while, those destined for use or consumption within the Philippines shall
be imposed with 10% (now 12%) VAT.
• Applying said doctrine to the sale of goods, properties, and services to and from the ECOZONES, the BIR
issued RMC 74-99, on 15 October 1999. Of particular interest to the present Petition is Section 3
thereof, which reads –
TAX II 46
Effectively Zero-Rated Sales contd
(2) CIR vs Toshiba Information Equipment Phils, GR 157594, March 9, 2010: contd
• “SECTION 3. Tax Treatment of Sales Made by a VAT Registered Supplier from the Customs Territory, to a
PEZA Registered Enterprise. –
(1) If the Buyer is a PEZA registered enterprise which is subject to the 5% special tax regime, in lieu of
all taxes, except real property tax, pursuant to R.A. No. 7916, as amended:
(a) Sale of goods (i.e., merchandise). – This shall be treated as indirect export hence, considered
subject to zero percent (0%) VAT xxx.
(b) Sale of service. – This shall be treated subject to zero percent (0%) VAT under the “cross border
doctrine” of the VAT System xxx.
(2) If Buyer is a PEZA registered enterprise which is not embraced by the 5% special tax regime, hence,
subject to taxes under the NIRC (eg, Service Establishments which are subject to taxes under the
NIRC rather than the 5% special tax regime):
(a) Sale of goods (i.e., merchandise). – This shall be treated as indirect export hence, considered
subject to zero percent (0%) VAT xxx.
(b) Sale of Service. – This shall be treated subject to zero percent (0%) VAT under the “cross border
doctrine” of the VAT System xxx.
TAX II 47
Effectively Zero-Rated Sales contd
(2) CIR vs Toshiba Information Equipment Phils, GR 157594, March 9, 2010: contd
(3) In the final analysis, any sale of goods, property or services made by a VAT registered supplier from
the Customs Territory to any registered enterprise operating in the ecozone, regardless of the class
or type of the latter’s PEZA registration, is actually qualified and thus legally entitled to the zero
percent (0%) VAT. Accordingly, all sales of goods or property to such enterprise made by a VAT
registered supplier from the Customs Territory shall be treated subject to 0% VAT, pursuant to Sec.
106(A)(2)(a)(5), NIRC, in relation to ART. 77(2) of the Omnibus Investments Code, while all sales of
services to the said enterprises, made by VAT registered suppliers from the Customs Territory, shall
be treated effectively subject to the 0% VAT, pursuant to Section 108(B)(3), NIRC, in relation to the
provisions of R.A. No. 7916 and the “Cross Border Doctrine” of the VAT system.
This Circular shall serve as a sufficient basis to entitle such supplier of goods, property or services to
the benefit of the zero percent (0%) VAT for sales made to the aforementioned ECOZONE enterprises
and shall serve as sufficient compliance to the requirement for prior approval of zero-rating imposed by
Revenue Regulations No. 7-95 effective as of the date of the issuance of this Circular.”
• Indubitably, no output VAT may be passed on to an ECOZONE enterprise since it is a VAT-exempt entity.
xxx

TAX II 48
 Sale of Services &
Use or Lease of Properties

TAX II 49
Sale of services & use or lease of properties
• Sec 108:
(A) Rate and Base of Tax. - There shall be levied, assessed and collected, a value-added tax
equivalent to twelve percent (12%) of gross receipts derived from the sale or exchange of
services, including the use or lease of properties.

• VAT Official Receipt

A VAT-registered person shall issue a VAT official receipt for every lease of goods or properties, and
for every sale, barter or exchange of services.

TAX II 50
Sale of services & use or lease of properties contd
• “Gross receipts" - 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 advance payments actually or constructively received during the
taxable quarter for the services performed or to be performed for another person, excluding the VAT,
EXCEPT those amounts ---
(i) earmarked for payment to unrelated 3rd party (ie, a payment to settle an obligation of another
person (eg, customer or client); the sales invoice/official receipt should be issued by said 3rd party
in the name of the customer or client (the obligor/debtor); or
(ii) received as reimbursement for advance payment on behalf of “another party” which do not
redound to the benefit of the payor (ie, payment on behalf of another party, paid to a 3rd party, for
a present or future obligation of said “another party”, which obligation is evidenced by a sales
invoice/official receipt issued by the obligee/creditor to the obligor/debtor (ie, the “another party”)
for the sale of goods or services by the former to the latter.

TAX II 51
Sale of services & use or lease of properties contd
• Constructive receipt occurs when the money consideration or its equivalent is placed at the
control of the person who rendered the service without restrictions by the payor

• Examples:
• Deposits in banks which are made available to the seller of services without restrictions;
• Issuance by the debtor of a notice to offset any debt or obligation and acceptance
thereof by the seller as payment for services rendered; and
• Transfer of the amounts retained by the payor to the account of the contractor.

TAX II 52
Sale of services & use or lease of properties contd
• “Sale or exchange of services" - the performance of all kinds of services in the Philippines
for others for a fee, remuneration or consideration, including those performed or rendered
by ---
• Construction and service contractors;
• Stock, real estate, commercial, customs and immigration brokers;
• Lessors of property, whether personal or real;
• Warehousing services;
• Lessors or distributors of cinematographic films;
• Persons engaged in milling processing, manufacturing or repacking goods for others;
• Proprietors, operators or keepers of hotels, motels, rest houses, pension houses, inns, resorts;
• Proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and
caterers;
• Dealers in securities;
• Lending investors;
• 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;
• 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;

TAX II 53
Sale of services & use or lease of properties contd
• Sales of electricity by generation companies, transmission, and distribution companies;
• Services of franchise grantees of electric utilities;
• Telephone and telegraph, radio and television broadcasting and all other franchise grantees except those
under section 119 of this Code,
• Non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity, and bonding
companies; and
• Similar services

regardless of whether or not the performance thereof calls for the exercise or use of the physical or
mental faculties.
• Includes also:
(1) The lease or 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 other like property or right;
(2) The lease of 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 information;
(4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the
application or enjoyment of any such property, or right as is mentioned in subparagraph (2) or any such
knowledge or information as is mentioned in subparagraph (3);
TAX II 54
Sale of services & use or lease of properties contd
(6) The supply of technical advice, assistance or services rendered in connection with technical management or
administration of any scientific, industrial or commercial undertaking, venture, project 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.

TAX II 55
Zero-Rated Sales of Services
(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which
goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for
in accordance with BSP rules and regulations
(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 BSP rules and regulations
(3) Services rendered to persons or entities whose exemption under special laws or international agreements to which
the Philippines is a signatory effectively subjects the supply of such services to 0% rate;
(4) Services rendered to persons engaged in international shipping or international air transport operations, including
leases of property for use thereof: Provided, that these services shall be 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 under Sec. 108 of the Tax Code.
(5) Services performed by subcontractors and/or contractors in processing, converting, of manufacturing goods for an
enterprise whose export sales exceed 70% of total annual production.
(6) Transport of passengers and cargo by domestic air or sea vessels from the Philippines to a foreign country; and
(7) Sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar,
wind, hydropower, geothermal, ocean energy, and other emerging energy sources using technologies such as fuel
cells and hydrogen fuels.
TAX II 56
Zero-Rated Sales of Services contd
HOWEVER, subparagraphs (b)(1) and (b)(5) abovementioned shall be subject to the 12% VAT and shall no
longer be subject to zero percent (0%) VAT rate upon satisfaction of the following conditions:

(1) The successful establishment and implementation of an enhanced VAT refund system that grants and pays refunds
of creditable input tax within 90 days from the filing of the VAT refund application: Provided that, to determine the
effectivity of Item no. 1, all applications filed from January 1, 2018 shall be processed and decided within 90 days
from the filing of the VAT refund application.
The 90-day period to process and decide, pending the establishment of the enhanced VAT Refund System shall only
be up to the date of approval of the Recommendation Report on such application for VAT refund by the
Commissioner or his duly authorized representative.
However, all claims for refund/tax credit certificate filed prior to January 1, 2018 shall still be governed by the 120-
day processing period.
The Secretary of Finance shall provide transitory rules for the grant of refund under the enhanced VAT Refund
; System after the determination of the fulfilment of the condition by the Commissioner of Internal Revenue as
provided in item 1 paragraph 1 hereof; and
(2) All pending VAT refund claims as of December 31, 2017 shall be fully paid in cash by December 31, 2019.
Provided, That Department of Finance shall establish a VAT refund center in the BIR and in the BOC that will handle
the processing and granting of cash refunds of creditable input tax.

TAX II 57