Chapter 2 — Value Added Tax on Importation CHAPTER 2 VALUE ADDED TAX ON IMPORTATION Chapter Overview and Objectiv: After this chapter, readers are expected to comprehen . The concept of importation 2. The types of consumption tax on importation ‘The list of importations which are exempt consumption The concept of in “original state” for agricultural or marine food products The concept of qualified exemption The scope and applicability of the VAT on importation The concept of landed cost and Import VAT computation The concept of technical importation The treatment of the VAT on importation =e yenan IMPORTATION Importation refers to the purchase of goods or services by Philippine residents from non-resident sellers. r Types of Consumption Tax on Importation 1. VAT on importation — for the import of goods 2. Final withholding VAT - for the purchase of services from non-residents Comparison between the Consumption Tax on Importation | Object consumption | Goods Services Imposed upon Importers / buyers Foreign service providers Statutory taxpayer Importers / buyers Resident purchaser of the service* Nature Direct consumption tax Indirect business tax Tax basis Landed cost Contract price Collecting agency BOC BIR Timing of payment Before wee of | After the month of payment goods “Individuals engaged in business and corporations The VAT on importation is payable to the Bureau of Custom and is paid prior to the withdrawal of the goods from the Customs warehouse. The final 21 Scanned by TapScannerChapter 2 - Value Added Tax on Importation withholding VAT is 12% of the contract price for services rendered by non residents. It is remitted to the BIR IMPORT OF GOODS The importation of goods is either: 1. Exempt importation 2. Vatable importation EXEMPT IMPORTATION A. Importation of exempt goods Certain goods considered basic necessities al importation, such as: 1. Agricultural and marine food products in their original state 2. Fertilizers, seeds, seedlings and fingerlings, fish, prawn, livestock and poultry feeds, including ingredients used in the manufacture of finished feeds 3. Books and any newspaper, magazine, review, or bulletin which appear at regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of paid advertisements 4. Passengers or cargo vessels and aircrafts, including engine, equipment and spare parts thereof for domestic or international transport operations re not subject to the VAT on ‘j B. Importation by VAT-exempt persons 1. International shipping or air transport operators on their import of fuel, goods and supplies 2. Cooperatives of direct farm inputs, machineries and equipment including spare parts thereof, to be used directly and exclusively in the production and or processing of their produce 3. PEZA locators on their import of goods or services C. Quasi-importation tf ee and hossehiold effects belonging to residents of the pines returning from abroad and non-resi i econ non-resident citizens coming Professional instruments and i 0 implements, wearing apparel, do : , domestic animals, and personal household effects belonging to pera coming © settle in the Philippines, for th eee lr own use and not for sale, barter 0" D. Importation which are exempt nee pt under special laws and internationd! 22Chapter 2 - Value Added Tax on Importation IMPORTATION OF EXEMPT GOODS The importation of the following exempt goods is not subject to VAT: A. Basic human food and related goods 1, Agricultural or marine food products in original state 2, Livestock and poultry of a kind generally used as, or yielding or producing foods for human consumption 3, Breeding stock and genetic materials therefore B, Books, newspapers and magazines C. Passengers or cargo vessels and aircrafts, including engine, equipment and spare parts BASIC HUMAN FOOD AND RELATED PRODUCTS a Agricultural or marine food products in original state 7 Import exemption is limited to agricultural or marine food products in their original state or those which undergone simple processing, Good that underwent advanced processing are vatable. Examples of exempt agricultural or marine food products in original state: 1, Grapes, apples, oranges and other fruits 2, Vegetables, tea, ginseng 3. Rice, corn, coffee beans and other edible farm products 4, Marine foods such as fish and crustaceans 5. Poultry and livestock 6, Milk, eggs, and meat for human consumption Livestock includes cow, bulls, calves, pigs, sheep, goats and rabbits. Poultry shall include fowls, ducks, geese and turkey. Marine food shall include fish and crustaceans such as, but not limited to, eels, trout, lobster, shrimps, prawns, oysters, mussels and clams (RR16-2005). To be considered in “original state”, the goods must be in their raw form. However, those that underwent simple processing are also exempt. Meaning of simple processing The term simple processing includes: a. Acts of preparation for the market b. Acts of preservation, or ¢. Acts of packaging including advanced technological means of packaging Examples of simple acts of preparation: a. Boiling d. Roasting b. Broiling e, Stripping ¢ Husking f. Grinding 23 Scanned by TapScannerChapter 2 — Value Added Tax on Importation Examples of simple acts of preservation: a. Freezing c. Smoking b. Drying d Salting Packaging is not processing as it does not alter the nature zt ad ones. ht merely involves putting the product in a medium that makes nt for handling, storage or marketing. Thus, goods may still be in their original state even if they are packaged using advanced technological means, such as: a. Shrink wrapping in plastics pb. Vacuum packing c. Tetra-packing 4. Other similar packaging methods Hence, the following agricultural or marine food products which underwent processing are also exempt: ‘etra-packed fresh fruit juice Shrink wrapped meat fe Boiled eggs and lechon ‘Though boiled eggs and lechon are said to be cooked in their ordinary sense, the cooking methods used (Le. boiling or heating) are simple processing, Hence boiled eggs and Jechon are exempt. Raw Sugar means the natural sugar extracted from Sugarcane through simple mechanical process by pressing the juice; boiled to crystallize; filtered using age we separate these crystals, and dried, resulting to crystalized brown. sugar with sucrose content by weight in dry state corresponding to a polarimeter reading of less than 99.50 degrees and or whose color is 800 ICU or less. Raw sugar iscoba 6: 2015, May 22, 2015) ame le The importation of the aforementioned agricultural or marine food products in their original state is exempt from VAT. 24 le ares ecuneeChapter 2 — Value Added Tax on Importation Processed agricultural or marine food products processed agricultural or marine food products pertain to those which have undergone changes in their chemical compositions or have undergone complex processing or treatment or are utilizing advanced technologies in their processing. Examples of vatable processed agricultural or marine food products: Refined sugar | Canned sardines [Flour Wine or vinegar Butter | Marinated milk fish Vegetable or coconutoil | Soy = The importation of processed products and those considered not in their original state shall be subject to VAT on importation. ‘Use or purpose dictates vatability Flowers intended as love gifts are vatable since they are not food but cauliflower, of course, is an exempt human food. Cockfighting chickens are vatable since they are primarily intended for human amusement. They are only food when they lose. However, chicken produced for meat or eggs are VAT-exempt human foods. Farm or fishery inputs /Marine or agricultural inputs intended for the production of marine or agricultural food products which are ultimately intended for human consumption are also VAT-exempt. The importation of farm or fishery inputs such as seeds, seedlings, breeding stocks and genetic materials are exempt. Likewise, foods of these inputs such as fertilizers and feeds including ingredients manufacture of finished feeds are also VAT-exempt. Products intended as maintenance of crops, livestock or poultry and supplemental implements of agricultural or inputs such as pesticides, herbicides, animal medicines, fishing equipment, fishing boats, tractors, plows, driers, threshers and harvesters are vatable. Zoo animals, race horse, aquarium fish, fighting cocks and pets are not intended for human consumption; hence, vatable. Feeds of these non-food animals called “specialty feeds” is likewise vatable, Ingredients of feeds for animal food intended for ultimate human consumption is VAT-exempt but ingredients for the processing of human food is vatable. 25 Scanned by TapScannerChapter 2 - Value Added Tax on Importation Illustration Simaron Company imported the following agricultural implements: Urea Ferthzer P 800,000 Cargil corn seeds 400,000 Pesticides 600,000 Herbicides 800,000 The fertilizer and seeds are exempt. Note that exemption Is limited to seed, seedlings and fertilizers. Other farming implements such as pesticides ang herbicides are subject to VAT on importation. Rules on VAT taxation of poultry and feeds —___——_-> | Livestock. Poultry Pets | Importation of _x x v Importation of feeds for __| x x o Importation of feed x x v ingredients for aa! Note: The importation of ingredients for the processing of foods for human consumption vatable because processed human foods are vatable Examples of vatable non-food agricultural or marine products: a. Logs, wood, bamboo, orchid, and similar forest products b. Rubber hem, abaca, tobacco, topical herbs, cotton and other non-food crops c. Shells, corals, and other non-food marine products usually used as ornaments d. Race horses, fighting cocks, aquarium fish, zoo animals, and other animals generally considered as pets BOOKS, NEWSPAPERS, MAGAZINE, REVIEW OR BULLETINS The VAT exemption on the importation of these goods 1s apparently base¢ upon the necessity of education and information. The Philippin consttution requires the state to give priority to education to foste! patriotism and nationalism, accelerate social progress, and promote tol? human liberation and development. (See Sec. 17, Article I, Philippi" Constitution) The Philippine Constitution also recognizes the vital role of communicatio" and information in nation-building. (See Sec. 24 Ibid.) / Conditions for exemption of newspaper, magazine review or bulletin: 1. They must appear at regular intervals with fixed prices for subscriptio” 2. The sale must not be devoted principally to the publication of pal advertisements. 26 Scanned by TapScanner = =O erng Chapter 2 — Value Added Tax on Importation Note that exemption does not extend to other school supplies such as chalk, board markers, pens, notebook; pad paper and office supplies. PASSENGER OR CARGO VESSELS AND AIRCRAFTS The VAT exemption covers the import of passenger or cargo vessels and aircrafts, including engine, equipment and spare parts thereof for domestic or international transport operations. The VAT exemption on the import of these items lapsed under RA 9295 but was reinstated by RA 10378 and was codified under the TRAIN law. This incentive for VAT-exemption is granted by law in an effort to help the modernization of the shipping, transport and tourism industry. To qualify for exemption, the importation must be subject to the | requirements on restriction on vessel importation and mandatory vessel retirement program of the Marina Industry Authority (MARINA): Passenger or cargo vessels - 15 years > Tankers ~ 10 years = High speed passenger crafts - 5 years Illustration Total Transport Group has land, sea and air transport operations. To beef up its operations, it imported 5 units of Daewoo bus, 1 unit of aircraft and 2 cruise ships. e importation of the airplane and ships are exempt but the importation of the buses for land transport is subject to VAT. Note to readers: In mastering the consumption taxes, legal sensitivities must be considered. It is an established principle of law, that items not included are deemed excluded. Exempt goods must be strictly construed to cover only to those listed by the law as discussed herein. Other basic necessities such as medicines, clothing, processed foods, kitchen supplies, school supplies, and the like are not exempt. A familiarization of the list is imperative. VAT-exempt persons are not subject to VAT on importation. The extent of their exemption varies per exempt persons When an exempt importer subsequently sells his exempt importation to a non-exempt person, the non-exempt buyer shall be subject to VAT on 27 Scanned by TapScannermas Chapter 2 - Value Added Tax on Importation importation. The tax due on such importation shall constitute a lien on the goods, superior to all charges or liens, irrespective of the possessor Of saig goods (Sec. 4.107-1(c), RR1 6-2005). VAT-Exempt Persons under the NIRC: 1. International shipping or air transport operators 2. Agricultural cooperatives 3. Ecozone-locators / International shipping or air transport operators The exemption is limited to the importation of fuel, goods and supplies Although these goods or supplies are physically brought into the Philippines, they are not intended to be consumed herein. They will ultimately be used in international transport. This consumption is a foreign consumption rather than domestic consumption. Mlustration 1 Malaysian Ferries is an international shipping carrier. It imported to the Philippines fuel and supplies to be used in its shipping operations. Note that the fuel, goods, or supplies will be consumed in the high seas or in x foreign territories outside the country. The importation is not a domestic \ consumption but a foreign consumption; hence, it is exempt from VAT. y Illustration 2 Pinoy Airline imported jet fuel from Iraq at a total cost of P50,000,000. 40% of the importation is declared for domestic airline operations while 60% 1s declared for international air transport operations. 60% of the P50,000,000 importation will be consumed in foreign airspaces. This ts not for domestic consumption, hence, it is exempt from VAT. Only the 40% portion which will be used domestically will be subject to the VAT on importation. Illustration 3 Lufta Airline, an international air carrier, imported jet fuel at a total cost of P40,000,000, It subsequently sold P10,000,000 of these to a Feel Air, a domestic air carrier. Lufta Airline is exempt on its importation of the P10,000,000 worth Jet fuel. Since Fee Air ts not an exempt person and that jet fuels are vatable goods, Feel Air will be treated as the importer of the P10,000,000 jet fuel and will be subjected to VAT. Lufta Airline is not required to pass the VAT on its sales of the fuel. Agricultural cooperatives 4 The status of agri-coop as VAT-exempt person is limited to importation of direct farm inputs, machineries and equipment, including their spare parts (RA 9337) 28 ee by TapScannerChapter 2 - Value Added Tax on Importation Conditions for exemption: J The cooperative must be an agricultural cooperative duly registered and in good standing with the Cooperative Development Authority (CDA). kk The importation involves direct farm inputs, machineries, equipment and their spare parts to be used directly and exclusively in the production or processing of their produce. Mlustration 1 Abra Farmer's Cooperative imported the following equipment: Tractors and threshers to be used by the cooperative P_ 2,000,000 | Plows and water pumps to be resold to members 3,000,000 | Fertilizers and hybrid seeds to be sold by the cooperative 1,000,000 | Herbicides and pesticides to be used by the cooperative 500,000 [cars for the use of cooperative directors and officers 2,000,000 The following table summarizes the tax treatment of the importation: ‘actors and threshers to be used by the cooperative Exempt lows and water pumps to be resold to members Vatable Fertilizers and hybrid seeds to be sold by the cooper: mpt Herbicides and pesticides to be used by the cooperative Exempt Cars for the use of cooperative directors and officers Vatable Note: 1. The importation of machineries and equipment for the processing or processing needs of the cooperative is exempt; hence, tractors and threshers are exempt from VAT on importation. 2. The importation of fertilizers and seeds is exempt to any importer. The importation of herbicides and pesticides which are “direct farm inputs” is exempt to cooperatives. Note that the importation of farmers of herbicides and pesticides is vatable 3, Although plows and water pumps qualify as machineries, they are not intended for the use of the cooperative; hence, these are also vatable 4. The cars are vatable because they are not direct farm inputs, machineries, or equipment. } Mustration 2 Assume that fertilizers and herbicides in the foregoing illustration is subsequently sold by Abra Farmer's Cooperative to Jon Juan, member farmer. What is the tax consequence of the sale? Jon Juan shall be treated as importer and shall be subject to VAT but only to on vatable goods such as the herbicides. Since the fertilizer is a VAT-exempt goods, Jon Juan shall not pay VAT on importation thereon. Mustration 3 A credit cooperative imported a computer server from abroad at a cost of P1,500,000. This importation is generally subject to VAT on importation since the exemption does not extend to cooperatives which are not engaged in processing or production, 29 Scanned by TapScannerre Chapter 2 — Value Added Tax on Importation lustration 4 & aw ultrafiners , mining cooperative imported an ozone generate Oe ss ganerally ibe grinding machine for its gold recovery plant. The OO ve { VAT because the cooperative is not an agricultural coope IMustration 5 and 20 sacks Arado Coop, a farming cooperative, imported ten Ee aie Sacks of hyn hybrid seeds. Arado Coop subsequently sold four tractor: seeds to Mr. Laco, a cooperative member. Arado Coop is exempt from VAT on its importation of farm ee ca nd set Its sales of equipment and seeds to Mr. Laco is not subject to Po M Laco shall be considered an importer but Mr. Laco shall be subject to YY on the farm equipment but not on the hybrid seeds. Illustration 6 A cooperative imported frozen meat from China. It subsequently sold all of this to Philippine consumers. The importation of frozen meat, an exempt goods, is an exempt importation for any importer. Hence, the sale by the cooperative to the consumers (i.e., final consumption) shall not be subject to VAT. Likewise, the buyers shall not be subject to VAT on importation. / Ecozone-locators Ecozones are designated places of economic activity for the production of goods or services for the export market. By legal fiction, economic zones are considered foreign countries and are deemed outside Customs territory Thus, the importation of goods into the economic zones by locators is exempt not only from VAT on importation but also from customs duties. The exemption from VAT covers any goods, supplies or machineries brought into the ecozones by locators. Technical Importation The rules of VAT on importation apply to consumers in a customs territory from persons Zones (Sec. 4.107-1, RR 16-2005 technical importation bi located in Special Economic » Customs territory refers to the Portion of the i i outside of designated Special eco) Republic of the soca nomic zones (Ecozones). (RR2-2005) “Technical importation" refers to the Purchase of non-} residents from Philippine Ecozone-registered enter] €cozones are considered foreign territories. Her . Hence, mt Economic zones such as but not limited to, Su al and Cagayan-Ecozone is subje: Ecozone, Zambo-Ecozon ‘ct to the VAT on importation, 30 Ecozone Philippiné Prises. By legal fiction Scanned by TapScanner eiNN Chapter 2 — Value Added Tax on Importation Similarly, sales to Ecozones are subject to zero-rated VAT for VAT taxpayers because Ecozones are considered foreign territories Likewise, Ecozones are exempt from business tax for ni (K) and (V), NIRC as amended). sales to jon-VAT taxpayers (See Sec. 109 Illustration 1 Winshield Corporation, a PEZA locator, sold scrap metals to Recycle Industries Corporation, a customs territory buyer ( i.e., buyer outside the Ecozone) Recycle Industries shail pay the VAT on importation directly to the Bureau of Customs (BOC). Winshield Corporation is not required to impose the VAT on its sales. However, it must be furnished a copy of the receipt issued by the BOC for the VAT payment (See BIR Ruling No. DA-031-2007, January 19, 2007). Illustration 2 KT, an ecozone locator, imported two machineries for use in the ecozone. It resold one machinery to S3, a fellow PEZA-locator, and resold the other to T4, a Person outside the zone. x The importation by the locator shall be exempt The sales to $3 shall not be subject to business tax since it is deemed a foreign consumption. $3, also an ecozone locator, shail not likewise be subject to the VAT on importation. However, T4, a non-locator, shall pay VAT on importation on the machinery it purchased from KT. QUASI-IMPORTATION 1. Import of personal and household effects belong to residents of the Philippines returning from abroad or non-resident citizens coming to resettle in the Philippines 2. Professional instruments and implements, wearing apparel, domestic animals, and personal household effects belonging to persons coming to settle in the Philippines, for their own use and not for sale, barter or exchange Conditions for exemption: 1, The personal and household effects belong to Philippine residents or non-residents intending to resettle in the Philippines 2. The goods are exempt from Customs duties Note that these goods are past consumptions which have been previously Subjected to consumption tax herein. The importation of personal or household effects or professional 7 implements by non-residents intending to resettle in the Philippines is a loreign consumption not subject to Philippine consumption tax. 31 Lee Eas by TapScannerChapter 2 - Value Added Tax on Importation Note that when these were purchased previously, they were alread, subjected to consumption taxes. The VAT on importation applies t: importations which represent current consumptions of personal, househol, or professional effects. It does not apply to their past consumption. Mustration 1 Mr. Siman was employed abi personal effects such as clothes, pieces ©) aggregating P300,000 in value. When his contract en Philippines bringing with him the same effects which no value of P280,000. The importation (te, Fel Since these are past purchases which had been subje purchased in the Philippines. road as an OFW. He went abroad taking with hip | personal jewelry and gadget; ded, he returned to the w have an aggregate turn) of the personal effects will not be subject to VAT cted to consumption tax wher Illustration 2 urchased an iPhone 6 worth P30,000 for While employed abroad, Mr. Siman p : selfie purposes. Mr. Siman brought the iPhone to the Philippines when his employment contract ended. The importation of the iPhone shall not be subject to VAT on importation for the same reason that it is not a present consumption of household effects when it was brought into the Philippines. Furthermore, purchases abroad by non-residents ar not subject to consumption tax in the Philippines. Their subsequent importation to the Philippines is exempt from VAT on importation. Mlustration 3 Mrs, Kookai Ukay, a Philippine resident, purchased used clothing and shoes worth P300,000 from abroad to be sold in her “Ukay-ukay” sales outlets in the Philippines. She reserved P50,000 of these for her personal use The entire P300,000 purchase of goods from abroad is i ” p a domestic consumption subject to the VAT on importation. This rule applies without regard to the purpas of the importation whether for business or for personal use. Mlustration 4 Mrs. Lovely Bulalo, a non-resident Filipino businesswoman, owns a machine it her business in France. She decommissioned the machine to be tr fe ved te her business in the Philippines. ‘ansferre! Although the machine is a past foreign consum, i n ption, the importatie e to the Philippines is subject to VAT because the VAT-exemption scleited a personal, professional or household effects. weaiony 32 en PMciecuatesaw ss ew Chapter 2- Value Added Tax on Importation Illustration 5 An international non-profit organization bas intended as donation to victims of flood in the P! various household effects, grocery goods and rice The importation of these donated goods into the Philippines is subject to VAT, except for the rice - a VAT-exempt goods. These imported donations are exempt from VAT if made in favor of accredited non-profit organization. ed in Switzerland sent goods hilippines. The goods consist of Importation of professional instruments and implements, wearing apparel, domestic animal and personal household effects Conditions for exemption: 1. The goods belong to persons who come to settle in the Philippines. 2. The goods must accompany the person upon arrival or within 90 before or after his/her arrival. 3. There must be evidence to show that the change 0 4, The importation 1s not a vehicle, machinery or ou manufacture or merchandise of any kind in commercial quantity. days of residence is bona fide. her equipment used in the Illustration 1 Mr. Marquez, a professional boxer, applied for an application to migrate in the Philippines and was granted by the Philippine government. He brought his boxing gears and household effects including his personal car to the Philippines. The importation of professional instruments and household effects are exempt but the importation of the car is subject to VAT. Illustration 2 Mr. Kung Fu, a Chines: immigration visa. He brought with him the follow personal effects: ¢ martial arts master, arrived in the Philippines with an ‘ing which he declared as his 10 pieces of brand new iPhone 6 P 150,000 each | P.80,000 each 10 pieces of brand new IBM laptops mn) ['S desktop computers _ | P-40,000 each | [1 piece of used laptop | oP 1 piece of used iPhone 4S 1 piece of used calculator 400 | 7,000 (Used clothes, apparel and travelling bag 1" or, clothes, and apparel are apparently The used laptop, iPhone 48, calculat. exempt from VAT. personal effects which are past consumptions; hence, these are The nature and quantity of the iPhone 6, IBM laptops and desktop computers is clearly inconsistent with the concept of personal effects. These items are unquestionably for domestic consumption; hence, subject to VAT. 33 Scanned by TapScannerChapter 2 - Value Added Tax on Importation Illustration 3 While in Dubai, Mrs. Waca bought a car and numerou: her salaries as OFW. She intended to sell the jewe! townsfolk in the Philippines. When her contract ended, M' the car and the jewelry to the Philippines. s pieces of jewelry from Iry to her friends ang rs. Waca brought in ersonal effect. The imported v isnota The importation of the car is vatable since it pe mmakes them clearly not pieces of jewelries are in commercial quantity whic! personal items; hence, vatable. iT: Import that are exempted by special laws, agreements to which the Philppine government isa SI to the VAT on importation. treaties or international gnatory is not subject THE VAT ON IMPORTATION Other importation of goods Is subject to VAT regardless of whether the: 1. importer is engaged or not engaged in trade or business 2. importer is a VAT or non-VAT business 3. importation is for business or personal use 4, non-resident seller is engaged or not engaged in business ‘As a consumption tax, the VAT on importation applies without regard to the purpose of the importation and whether or not the sellers or buyers are engaged in business. Presumption of vatability Importation is generally subject to VAT unless it can be proven as exempt under any of those conditions discussed herein or under a provision of a special law or treaty. The burden of proof in establishing VAT exemption rests upon the importer. Tax basis of the VAT on importation he VAT on importation is computed as 12% of the total lande: the te landed cost of t Composition of landed cost: A. Dutiable value B. Oher in-land costs 1. Custom duty 2. Excise tax, ifany 3. Other in-land costs, such as: a. Bank charge e. Arrastre charge b. Brokerage fee £. Wharfage due c. Arrastre charge g. Documentary stamp tax d. Wharfage due h. Import processing fees 34 wif Esler ula eRe NM i=] sole UlalogChapter 2 - Value Added Tax on Importation Simply stated, landed costs encompass all costs of importation incurred prior to / the withdrawal of the goods from the warehouse of the Bureau of Customs, except unofficial or illegal payments made. The dutiable value, also called transaction value, refers to the total value used by the Bureau of Customs in determining customs duties, such as: 1, Cost of the goods 2. Freight 3. Insurance 4, Other charges and costs to bring goods herein ‘The dutiable value encompasses all costs incurred in bringing the goods up to the Philippine port and prior to any other in-land costs of import. The customs duty is computed as: Dutiable value x Exchange rate x Rate of Duty Illustration 1- basic MRS Trading Corporation imported goods from abroad for domestic sale. Shown below are the details of the importation: Peso value of supplier’s invoice P 2,000,000 Other costs incurred to bring goods to Philippine port 70,000 ~~ Other charges before withdrawal of goods, including P5,000 facilitation fee paid to a fixer 85,000 -* Customs duties 10% Freight of goods from BOC warehouse to MRS warehouse in Makati City 20,000 The customs duties shall first be computed as: Peso value of supplier's invoice P 2,000,000 Other costs to bring goods to the Philippines Dutiable value P 2,070,000 Rate of duty 10% Customs duties P_207,000 The VAT on importation shall be computed as: Dutiable value P 2,070,000 Other official costs paid before withdrawal of goods from the BOC 80,000 Customs duties —— 207.000 Total landed cost P 2,357,000 Multiply by: VAT rate —__12% | VAT on importation P__ 282,840 | 35 Scanned by TapScannerey Chapter 2 - Value Added Tax on Importation Illustration 2 - comprehensive Mang Pandong imported a sports car from the US for personal use. Thy following shows details of the charges of the importation: Purchase price $ 50,000 Insurance in transit 500 Freight 00 Total invoice price $__51,300 Arrastre P 8,500 Bank charge 6,000 Wharfage dues 800 Brokerage fee 90,000 Custom's documentary stamp 265 Import processing fee 250 Total other charges P___105,815 The relevant exchange rate per Bureau of Customs Memorandum Circular is P45:$1. The importation is subject to P683,510 excise tax and 30% tariff rate. The dutiable value and customs duties shall be computed as: Purchase price $ 50,000 Insurance in transit 500 Freight __ 800 Dutiable value in $ s 51,300 Multiply by: Exchange rate 45.00 Dutiable value in Peso P 2,308,500 Multiply by: Rate of duty 30% Customs duty Pp 692,550 The landed cost and value added tax are computed as: Dutiable value P 2,308,500 Customs duty 692,550 Excise tax 683,510 Other charges Landed cost P 3,790,375 Multiply by: VAT rate on import eos TR VAT on importation P___ 454.845 The VAT shall be paid to the Bureau of Customs (BOC) using a fe by the BOC. ) using 2 form prescribe IMPORT OF SERVICES The purchase of services from non-residents may be: 1. VAT-exempt 2. Subject to specific percentage tax 36 canned by TapScannerto ee Chapter 2- Value Added Tax on Importation 3. Subject to final withholding VAT ‘The import of services is generally subject to a final withholding VAT, except when it is exempted or is imposed with a percentage lax. Nature of the Final Withholding VAT In principle, domestic consumption by anybody (business or non-business) of services from abroad should be subject to VAT regardless of the place (within or without) where the service is rendered“ However, our current tax law views the final withholding VAT as a business tax, The VAT is deemed imposed upon non-resident service providers. For this purpose, the law conclusively presumes that the non-resident sellers are engaged in business even if their sales transactions are merely casual. Since non-residents cannot be obligated to file tax returns due to territorial consideration, the resident buyer is obligated to “withhold” the VAT and to remit the same to the government. Thus, the term “final withholding VAT.” The VAT is deemed passed-on by the non-resident service provider which, in turn, is withheld by the resident purchaser of the service. As a withholding tax, the obligation to withhold the VAT technically exists only if: 1. the service is rendered within the Philippines; and “2, the payor-purchaser of the service is an individual engaged in business or acorporation There is no obligation to withhold the VAT if the payor is not a business, except for corporate purchasers of service. Moreover, the situs of taxation of | services is determined by the place where the service is rendered and not the place where the output of the service will be ultimately used. Hence, the service must be rendered within to be subjected to the withholding tax. Illustration 1 Eagle Company sought the help of Mr. Putin, a repairman doing business in Australia, to fix its malfunctioning machinery in the Philippines. The contract price was P1,000,000. Eagle Company shall pay P120,000 (12% x PIM) final | withholding VAT to the BIR. | Query: ane 1. What if Mr. Putin is not engaged in Business in Australia? The contract price is still subject to the 12% final withholding VAT. Mr. Putin is conclusively Presumed engaged in business. 37 Scanned by TapScanneted ae ae REE IE EE SE: Chapter 2 - Value Added Tax on Importation The contract price is stijy i -profit institution? 2. What if Eagle Company is a non-pro! profit corporations are subject to the 12% final withholding VAT. Even non required to withhold. 3. What if Eagle Company is an ecozone locator? The contract Pee yal not be subjected to the 12% final withholding VAT because ecozone locators are outside the country (i.e. non-residents) by legal fiction. Mlustration 2 ; pit Mr. Wong, a resident travelling sales agents, asked the assistance @° er tit 3 to help him install a GPS tracking Chinese national doing business abroad, device in his car for P300,000, Mr. Wong shall pay P36,000 (12% x P300,000) final withholding VAT. Query: 1. What if Mr, Teng is not engaged in business in China? The contract price is still subject to the 12% final withholding VAT since he will be presumed engaged in business. 2. What if Mr. Wong is not a businessman? The contract price shall not be subject to final withholding VAT because withholding tax obligation exists only for individuals engaged in business. VAT-EXEMPT IMPORT OF SERVICES The following are exempt from the final withholding VAT: a. Purchase of services from non-residents when the service is rendered abroad b. Purchase of services from non-residents when the individual purchaser is not engaged in business c. Purchase of services from non-residents by VAT-exempt persons such as ecozone locators In case the service is rendered by non-residents to ecozone locators, the final withholding VAT is not imposable since ecozone locators aré considered non-residents. The withholding requirement cannot be imposed with non-residents. Hence, the transaction shall be exempt from the final withholding VAT. (See BIR ITAD Ruling Nos. 311-14, dated November 4, 2014 and 316-14 dated November 24, 2014) i IMPORT OF SERVICES SPECIFICALLY SUBJECT TO PERCENTAGE TAX The only import of service that is currently subject to a percentage tax is the direct acquisition of insurance cover from abroad. The premium payment oS on insurance policies directly sourced abroad is subject to a ercentage tax. The policyholder shall pay the same to the BIR. 38 Scanned by TapScanner0 Chapter 2 — Value Added Tax on Importation VATABLE IMPORT OF SERVICES | All other of import of services is subject to final withholding VAT. The final withholding VAT is computed as 12% of the contract price. Unlike withholding income tax, this amount shall not be deducted upon the amount to be remitted abroad because it is deemed passed-on by the non-resident service provider and “withheld” by the resident payor-withholding agent. Examples of vatable import of services: 1, Lease or use of properties or property rights owned by non-residents 2. Services rendered to local insurance companies, with respect to reinsurance premiums payable to non-residents 3, Other services rendered in the Philippines by non-residents Illustration 1 Session Food Corporation is a licensed franchisee of Ronald, Inc., a non-resident foreign franchisor. During the month, Session is due to pay P800,000 royalties. The final withholding VAT shall be: Royalties P 800,000 VAT tax rate en Amount due Ronald, Inc. P_96,000 The amount to be remitted to Ronald, Inc. abroad shall be: Royalties P 800,000 Less: Final income tax (P800,000 x 30%) —— 240.000 Amount due Ronald, Inc. P__560,000 Unless agreed that the contract price is VAT- inclusive, the VAT is not deductible against the gross royalty because the Withholding VAT is not a tax on income. Remember that that non-resident corporations are subject to 30% final withholding tax on income. Illustration 2 Phil Mines imported a customized ozone generator from Chen Company in China, Before shipment, Phil Mines had the machine customized by Guangzu Industries in China for P500,000. The generator has a total landed cost of P1,200,000 on importation. Chen Company installed the generator at Phil Mine's processing plant in the Philippines for P220,000. Phil Mines shall pay the following VAT on importation to the BOC; Import landed cost P 1,200,000 Multiply by: ee VAT on importation P144.000 39 Scanned by TapScannerChapter 2 Value Added Tax on Importation the Bi Phil Mines shall likewise pay the following final withholding VAT to the BIR Installation service contract price P 220,000 Multiply by: Final withholding VAT P__26,400 The customization service by Guangzu Industries is not subject to final Vay since the service is done abroad. The installation service is subject to fin, withholding VAT since it is done within. Payment of the withholding VAT Using BIR Form 1600, the withholding VAT is remitted monthly on or before the 10% day of the following month after the withholding was made, excey for taxes withheld for December which shalll be filed or paid on or. befor. January 25 of the following year. Treatment of the VAT on ‘importation and the Withholding VAT 1. If the resident purchaser is a VAT-registered business, it can claim the VAT on importation or withholding VAT as input VAT creditable against its output VAT. ~_ Uthe resident purchaser is a non-VAT business, the VAT on importation or Anal withholding VAT shall be part of the cost of purchace vy goods or Services and shall be treated as asset or expense, 3. If the purchaser isn lot engaged in business, the VAT on importati s merely added to the Costs of the goods imported, esecon 40 Scanned by TapScanner esChapter 2 — Value Added Tax on Importation CHAPTER 2: SELF-TEST EXERCISES Discussion Questions What is importation? Is VAT on importation a business tax? Explain. What is the nature and scope of the VAT on importation? Enumerate the list of exempt importations. What is meant by the phrase “in original state”? What is landed cost? Distinguish dutiable value from landed cost. Discuss technical importation. Enumerate the current and existing ecozones in the Philippines. 0. Discuss the final withholding VAT, its scope and nature. 1 . Discuss the treatment of the VAT on importation and the final withholding VAT. rp eengaurenr True or False 1 1, The VAT on importation is a business tax. 2. The final withholding VAT is a business tax. 3. The VAT on importation is 12% of the value added on importation. 4. The VAT on importation is 12% of the receipts from the sale of services abroad. 5. Importation is subject to either VAT or percentage tax. 6. The final withholding VAT is 12% of the contract price of purchased services from within the Philippines. 7. The sale of services abroad is subject to 12% final withholding VAT. 8. The VAT on importation is paid to the Bureau of Internal Revenue. 9. The final withholding VAT on services is paid to the Bureau of Internal Revenue. 10. The importation of any agricultural or marine products is VAT exempt. 11. The importation of professional instruments and implements is exempt from VAT. 12. The importation of any product intended for human consumption is VAT- exempt. 13. The importation of ingredients which are intended for the manufacture of goods for human consumption is VAT-exempt. 14, The importation of professional instruments and implements in commercial quantities is VAT-exempt. 15. The importation of equipment, machinery and spare parts for marine vessels is VAT-exempt. True or False 2 0 1. Resident foreigners are not subject to the VAT on importation, 2. Allagricultural or aquaculture inputs are VAT-exempt. 3. The sale of processed agricultural products is vatable, 41 Scanned by TapScannerChapter 2 — Value Added Tax on Importation 4. The importation of books and newspapers is VAT-exempt. 5. The importation of life-saving equipment is VAT-exempt. 6. The lease of aircrafts or vessels from non-residents is exempt from the fina) withholding VAT. 7. The purchase of services from foreign consultants is exempt from fing) withholding VAT. 1 8. The importation of fuel, goods, and supplies by international carriers js VAT-exempt. } 9. The importation of agricultural machineries by farmers is exempt. 10. The importation of agricultural machineries by agricultural cooperatives js VAT-exempt. | 11, The VAT on importation is payable only by those engaged in business. 12. The final withholding VAT on importation of services is payable even by | those not engaged in business. 13. The VAT on importation and the final withholding VAT can be claimed as Input VAT creditable against Output VAT. 14. In economic reality, the VAT on importation and the final withholding VAT are taxes paid by non-resident sellers. 15. Qualified exempt importation is exempt from VAT only if made by an exempt person. Multiple Choice: Theory - Agricultural or marine food products: Part 1 1. Which is subject to value added tax? a. Sheep c. Cut sheep meat b. Sheep wool d. All of these 2. Which agricultural product is VAT-exempt on importation? a. Charcoal c. Lumber b. Wood d.Corn __.3. Which importation is subject to VAT? a. Importation from abroad ___ b. Purchase of goods from economic zones in the Philippines c BothAandB dq, Neither Anor B , Which isnot subject to VAT on importation? a, Importation of goods for personal use ila b. ‘ Importation of goods for business use ¢. Purchase of goods from Ecozone entities d. Purchase of goods from other domestic sellers lowing is subject to the VAT on importation wher ¢. Mushroom d. ordinary salt 42 Scanned by TapScannerChapter 2 — Value Added Tax on Importation 6. Which non-food agricultural product is exempt from VAT on importation? a. Chicken manure c. Live hogs b. Eggs d. Cattle 7. Which of the following is not exempt from VAT? a. Grapes c. Orchids b. Oranges d. Kiwi fruits 8. Which seedling is vatable? a. Grafted mango seedlings c. Narra seedlings b. Pomelo seedlings d, Guava seedlings 9. Which agricultural produce is exempt from VAT? a, Rubber c. Copra b. Abaca hemp d. Firewood 10. Which is vatable? a. Bamboo shoots c, Banana fruits b. Banana hearts d. Bamboo poles 11, Which is VAT-exempt? a. Cotton soft wood c. Cotton wool b. Cotton seeds d. None of these 12, Which is VAT-exempt? a. Coconut lumber c. Coconut shells b. Coconut brooms sticks d. Coconut meat 13. Which is subject to VAT on importation? a, Wheat c. Barley b. Coffee bean d. Cocoa 14, Which agricultural product is subject to VAT? a. Honey c, Sugar cane b. Rattan cane d, Sugar beets 15, Which is subject to VAT on importation? a. Cocoon silk c. Furniture b. Pineapple silk d, All of these : 16, Seedlings of this tree are exempt from VAT on importation. | a. Rubber tree c. Palm oil tree b. Paper tree d, Mahogany tree | 43 | Scanned by TapScanner