CHAPTER III VALUE-ADDED TAX Preliminary The value-added tax (VAT) system was first introduced in the Philippines on January 1, 1988, with the tax imposable on “any. person who, in the course of trade or business, sells, barters or ang s in similar transactions and 10 imports goods.” The first VAT law is found in Executive Order No. 273, which amended several provisions of the then National Internal Revenue Code of 1986 (Old NIRC). Executive Order No. 273 adopted a VAT system to rationalize the then system of taxing goods and services by imposing a multi- stage value-added tax to replace the tax on original and subsequent sales_tax and percentage tax or vertain-Services’ The” adoption of value-added tax is"6ne of the structura provided in the Tax ms ‘administration the tax syste . Tt is also necessary to amend, revise and renumber the provisions of the National Internal Revenue Code and to transfer the collection of certain taxes as a consequence of these and previous amendments in order to strengthen and improve tax administration and facilitate compliance thereof. (Executive Order No. 273, 25 July 1987) On January 1, 1996, Republic Act No. TZ16 took effect. The law itself was approved on May 5, 1994, but its implementation was delayed following the legal challenges to its constitutionality, which were finally resolved in Tolentino v. Secretary of Finance (G.R. No. 115455, October 30, 1995). It amended provisions of the Old NIRC Principally by restructuring the VAT system. It was under Republic Act No. 7716 that VAT was imposed for the first time on the sale of real properties. (Fort Bonifacio Development Corporation v- Conimissioner of Internal Revenue, G.R. Nos. 158885 nd 170680, April 2, 2009) Republic Act No. 7716 was amended by Republic Act No. 8241 enacted on December 20, 1996. On December 11, 1997, Republic Act No. 8424 or the National Internal Revenue Code of 1997 was 60 4 di(CHAPTER IIL a ‘VALUE-ADDED TAX enacted and further amended the VAT system by broadening the coverage of VAT. Republic Act No. 8424 also made part of the NIRC, for the first time, the concept of “presumptive input tax credits,” with Section 111(b) of the New NIRC. “ —— After Republic Act No. 8424, several laws were passed which further amended Philippine VAT law, to wit: a. Republic Act No. 8761, an Act which imposes VAT on certain services, enacted on February 6, 2000; b. Republic Act No. 9010, an Act which defers the imposition of VAT on certain services, enacted on February 27, 2001; c. Republic Act No. 9238, an Act which excludes several services from the coverage of the VAT, enacted on February 5, 2004; 4. Republic Act No. 9337, an Act which amends Sections 106, 107, 108, 109, 110, 111, 112, 113 and 114 of the NIRC, enacted on May 24, 2005; fe. Republic Act No, 9361, an Act which amends Section 110(B) of the NIRC, enacted on November 21, 2006; {Republic Act No, 10378, an Act which grants VAT exemptions to international air carriers, enacted on March 7, 2013; and g. Republic Act No, 10864, an Act which amends Section 109(A) and (F) of the NIRC, enacted on June 10, 2016. ‘The latest amendment in Philippine VAT law is the TRAIN Law; which took effect on January 1, 2018 The TRAIN Law expanded the value-added tax base by amending some transactions previously zero-rated sales to either subject to VAT or simply VAT. previouly zeroed a ow Ea alo aed now VAT-exempt fom ww also added new VAT-exempt inreased the rom PT,IT9,500.00 to P3,000,000.00. Finally, on January 22, 2020, Republic Act No. 11467 was ine eig law amending Section 109(1)(AA) of the Tax Code fiabetes, and hypertension beginning January 1, 2020; tuberculosis, and kidney diseases ly on the sale but also onrAXATION LAW . Volume Concept and Framework of VAT VAT is a consumption tax, It is a tax on consumption expressed Et yurchased as a percentage of the value a ‘or services By the producer or taxpayer. (Commissioner of Internal Revenue v, merican Express International, Inc. (Philippine Branch), G.R. No, 152609, June 29, 2005) The term “consumption” is the use of a thing in a way that thereby exhausts it. As applied to services, the term means the perfor: successful completion of a contractual duty, usually resting inthe performer ctuenee oe ay Liability. (Commissioner of Internal Revenue v. Placer Dome Technical Services (Phils.), Inc., G.R. No. 164365, June 8, 2007) In fine, consumption of goods means the use or utilization of Sods or property. For tax purposes, consumption arises whee tie goods or properties are s hanged, or leased. When goods or Properties purchased are subsequently re-sold, there is “rsthes Consumption. Consumption goes on until the goods or properties reach the ultimate or final consumer. An example ie manufacturer of fond items who sells to a wholesaler, who thon celle toa retailer, Tre sells to the buyer, who ultimately consumed the food items. ‘There is consumption on every stage of transfer, in every sale. there is consumption when one avails of the services or when one renders sem; . ces to another. When a person rides a taxi or avail ride-hailing serv, i nly one consumption stage in service. a a eae ik It is important to determine where the B00ds or services are consumed because the situs € place of taxation of VAT is the place. of consumption” For this pure oC Nation of VAT ither be a_domestie onsumption oF Toreigm consume ee thet consumption is a consumption or Utilization of goods or services srinnthe Philinnines, white Foreign consi; 2 eOds or service e 3 ‘umption is consumption or wtlization of goods or services outside the Philippines. Following the principle of territoriality the ippii sein its territorial jurisdiction. Thus.-VAT may-only be imposed y| oF » OF Ob goods or services a be iption stined to consumed in the Philippines, Conceptually, this is the destination £ 's-border doctrine, ——_—— } pines. =‘CHAPTER IIL 63 ‘VALUE-ADDED TAX Cross-Border Doctrine or De: ation Principle ‘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 Pfiippine shal be imposed with ten erent (09 (now 12%) VAT. (Toshiba Philippines Equipments (Phils.), Inc. v. Commissioner of Internal Revenue, G.R. No. 157594, March 9, 2010) ‘Asa general rule, the VAT system uses the destination principle ‘as a basis for the jurisdictional reach of the tax. Goods and services are taxed only in the country where they aré consumed. Thus, exports are zero-rated, while imports are taxed. (Commissioner of Internal Revenue v. American Express International, Inc. (Philippine Branch), G.R. No. 152609, June 29, 2005) Hence, domestic sale of goods and services and importation are subject to twelve percent (12%) VAT under Sections 106, 107, tnd 108 of the Tax Code while exportation is either zero:rated or VAT-exempt, in either case, there is no out . Export sales are ro-rated if made by a VAT-registered person (Section 106(A}(2) TG NIRC, cn amended) and-VAT-exempcit made by a.non-VAt (a), NIRC, as amen yn-VAT- registered person (Section 10% 1X0), NIRC, as amended). eee Person Paying the Consumption Tax — He tax. Hence, the buyer! purchaser or the person who avails the service is the one who pays the consumption tax. It is the consumer who pays the tax i ‘on the sale of goods or rendering of service and VAT. being a is paid by the buyer or consumer. However, under our present law, it is the seller of goods or services, not the buyer, ay the VAT. Is there a conflict is the person statutorily liable to pay. e two statements? There is none. is a difference bet consumption tax, the person actually paying the tax. This is the case VAT is an indirect tax.a TAXATION LAW Volume VAT as an Indirect Tax StL VAT 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. (Section 105, NIRC) To understand the concept of indirect tax, the concepts of impact and incidence of taxation should be first understood. imposed. In so far as the law ed, the taxpayer j rson who Tus pay the tax tothe government. He is referred to as the “statutory taxpayer” or the one on whom the tax is formally assessed. On the other hand, “incidence of taxation” means the point on which (ie js burden Snally reste or-settlee down. It takes place when shifting has been effected from the statutory taxpayer to another. Relative thereto, direct taxes are those that are exacted from the very person, to whom it is intended or desired, and should pay them; they are impositions for which a taxpayer is directly liable on the transaction or business he is engaged in. On the contrary, indirect taxes are those that are demanded, in the first instance, from, or are paid by, one person in the expectation and intention that he can shift the burden to someone else. Stated elsewise, indirect taxes are taxes wherein the liability for the payment of the tax falls on one person but the burden thereof can be shifted or passed on to another persan, such as when the tax is imposed upon goods before reaching the consumer who ultimately pays for it. When the seller passes on the tax to his buyer, he, in effect, hhifts the tax burden, not the liability to pay it, to the purchaser as part of the price of goods sold or services rendered, As VATis an indirect tax, by tacking the VAT due to the selling price, the seller remains the person primarily and Tegally Table 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 able 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 end-user of such goods or services who, although not directly and legally liable for the payment thereof, ultimatel burden of the tax. (Commissioner of Internat Revenue v. Philippine Long Distance Telephone Company, G.R. No. 140230, December 15, 2005)CHAPTER IIL 65 VALUE-ADDED TAX In fine, while the seller is the person liable to pay the tax in the eyes of law, it is the buyer who in reality pays the tax or bears the burden of tax because VAT is included in the price the buyer pays the seller of goods or services. Nature and Characteristics of VAT VAT isa tax on consumption levied on the sale barter, exchange or lease-of goods or properties and services in the Philippines and on im into the Philippines. The seller is the one ‘statutorily liable to pay the tax, but the amount of the tax may be shifted or passed on the buyer, transferee or lessee of the goods, properties or services. However, incase of importation. the importer is the one liable for the VAT. (Section 4.105-2, Revenue Regulations No. 16-2005) VAT is a tax on transactions, imposed at every stage of the distribution process sale, barter, exchange of goods or property, and on the performance of services, even in the absence of profit attributable thereto. VAT is an indirect and consumption tax which the end users OE ere the prov -shoulder, as ability therefor is passed on to them by the providers of goods afid services who, in turn, may credit their ‘own VAT liability from the VAT payments they receive from the final consumer. (Malayan Insurance Company, Inc. v. St. Francis Square Realty Corporation, GR. Nos, 198916-17, July 23, 2018) the amount of tax may be shifted or passes on the buyer, transferee, or lessee of the goods, properties, or service. (Section 105, NIRC) The VAT is a tax on consumption, an indirect tax that the provider of goods or services may pass on is customers: (Panasonic Communications Imaging Corp. v. issioner of Internal Revenue, G.R. No. 178090, February 8, VAT is an indirect tax and t y VAT is ultimately a tax on consumy sed on many levels of transactions on the basis of a fixed tage. It is the end user of consumer goods or services which : liability therefrom is passed ‘ders of these goods or services who. lity (or input VAT) from the final consumer (or output VAT). ption, even though it may credit their own VAT] payments they receive from the‘TAXATION LAW a Volume It the end consumer represents the final link ee na eer chain that elf invaves several transactions dd 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. (Commissioner of Internal Revenue v. Magsaysay Lines, Inc., G.R. No, 146984, July 28, 2006) PERSONS LIABLE Any person who, in the course of his tra sells, iparioreseaclntiges or leanes goods or properties,-or-renders “services, and any person who imports goods, shall be liable to VAT imposed in Section 106 to 108 of the Tax Code. However, in the case of importation of taxable goods, the importer, whether an individual or corporation and whether or not made in the course of bis trade a business, shall be liable to VAT imposed in Section 107 of the Tax Code. —_ Preliminarily, a “person” for tax purposes means an. {eust, estate, or corporation. (Section 22(a), NIRC) The term als? des Partnership, joint venture, cooperative, or association. Thus, following Seat TOE arte re an individual, trust estate, or corporation may be liable to VAT, To be liable to VAT, » 4 person must either (1) sell, barter: een or lease of goods or properties, or renders services, OF | inane —— Lar a these activities or without engaging . + exchange, lease, r i 00 cannot be held Hable to VAT yea OF importation, Pe In the first cate oF leases goods or pron or exchange of goer business tobe linble for VATT. Any sale. bar In the second cat is subi to VAT ropa oar the imports taxable it onde at SOUrse of trade o foods for personal consumptiCHAPTER IIL or VALUE-ADDED TAX In the Course of Trade or Business ‘The phrase “in the course of trade or business” means the regular conduct or pursuit of a commercial or an economic activity, including tran: i ereto, by any person regar« Ss of whether or not the person engaged therein is a non-stock, non- profit private organization (respective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. (Section 105, NIRC) Inexplaining the phrase “in the course of trade or business,” the Supreme Court in Commissioner of Internal Revenue v. Magsaysay Lines, Inc. (G.R. No. 146984, July 28, 2006) citing Imperial v. Collector of Internal Revenue (G.R. No. L-7924, September 30, 1955), held that 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 pormally incident thereof; while “doing business” conveys the idea of business being done, not from time to time, but all the time, “Course of business” is what is usually done in the management of trade or business. What is clear therefore, based on the aforecited jurisprudence, is that “course of business” or “doing business” connotes regularity of activity, Regularity is an act characterized by habituality and repétitiveness. 3 F lease of goods or ies; rendering of services must be a regular conduct bf the person engaged thereto to be liable to VAT. Any transaction that is an isol: time, or casual transaction is not subject to VAT. Stock and Non-Profit Organization and Government Entity na non-stock, non-profit organization, or government / is liable to pay VAT on the sale of goods or services. VAT ‘on transactions, imposed at every stage of the distribution the sale, barter, exchange of goods or property, and on the jancé ‘The term “in the course of trade or business” requires the conduct or pursuit of a commercial or an economic activity, ‘of whether or not the entity is profit-oriented. definition of the term “in the course of trade or busines ‘ated in the present law applies to all transactions even to68 ‘TAXATION LAW Volume It those made prior to its enactment. Executive Order No. 273 stated that any person who, in the course of trade or business, sells, barters, or exchanges goods and services, was already liable to pay VAT. The present law merely stresses that even a non-stock, non- profit organization or government entity is liable to pay VAT for the sale of goods and services. Section 108 of the National Internal Revenue Code of 1997 defines the phrase “sale of services” as the “performance of all kinds i sesvices bas otteca icin Tos cenqnoecalspaice oommaratsons includes “the supply of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking or project.” On February 5, 1998, the Commissioner of Internal Revenue issued BIR Ruling No. 010-98 emphasizing that 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. 7 Hence, it is immaterial whether the primary purpose of & 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 lo he entity provides service for a fee. remuneration or consideration, then the service rendered is subject to VAT. (Commissioner of Internal Revenue v. Court of Appeals and Commonwealth Management and Serv, . 125355, March 30, 2000) vices Corporation, G.R. No. Exceptions to the Rule of Regularity As stated, the transaction must be don business to be subject to VAT. The transaction men erat oF trade oF ‘action must be characterized ver, there are exceptions (0 exchange, or lease of goods lone in the course of trade oF exceptions are as follows: as a regular or habitual conduct. Howe this rule which means the sale, barter, or properties, or render of service not di business remain subject to VAT. These(CHAPTER IIL 69 VALUE-ADDED TAX et: © Importation As expressly provided in the first paragraph of Section 105 of the Tax Code, importation of taxable goods whether or not made in the course of his trade or business shall be liable to VAT imposed in Section 107 of the Tax Code. at 2 Transactions Incidental to the Course of Trade or Business The definition of “in the course of trade or business” includes | ransactions incidental thereto” or transactions accompanying or arising from the regular course of trade or business. - | | Abakeshop which through the years accumulated empty sacks of flours and then sold them is subject to VAT on this sale even though selling of empty sacks of flours is not its trade or business. The sale of empty sacks of flours is a transaction incidental to trade or business of a bakeshop. Similarly, a restaurant selling empty bottles of oil is subject to VAT because the sale of bottles of oil is incidental to the restaurant business. In Mindanao I Geothermal Partnership v. Commissioner of Internal Revenue (G.R. No. 193301, March 11, 2013), Mindanao II was assessed by the BIR of deficiency VAT on the sale of its fully depreciated Nissan Patrol. Mindanao II argued that the sale is an isolated transaction that should not have been subject to VAT. In ruling against Mindanao II, the Supreme Court held that it does not follow that aniaolated transaction cannot bean incidentaTtrensacto7 | for purposes of VAT liability. Indeed, a reading of Section 105 of the 1997-Tax Code woukd-show that a transaction “in the course of trade or business” includes “transactions incidental thereto.” Mindanao II's business is to convert the steam supplied to it by PNOC-EDC into electricity and to deliver the electricity to NPC. In the course of its business, Mindanao II bought and eventually sold a Nissan Patrol. Prior to the sale, the Nissan Patrol was part of Mindanao II's property, plant, and equipment. Therefore, the sale of the Nissan Patrol is an incidental transaction made in the course of Mindanao II's business which should be liable for VAT. ed to the earlier case of Commissioner of Internal Magsaysay Lines, Inc. (G.R. No. 146984, July 28, 2006), sme Court ruled that the sale of the vessels of the National nt Company to Magsaysay Lines, Inc. is not subject to it was not in the course of trade or business, as it was¢ NU c # ‘TAXATION LAW ‘Volume If involuntary 2d nT DRC “privatization. “The Suprene-Court cited the Court of ‘Tax Appeals ruling that the phrase “course of business” or “doing: bu: connotes regularity of activity. Thus, since the sale of the vessels was an isolated transaction, made pursuant to the government's privatization policy, and which transaction could no longer be repeated or carried on with regularity, such sale was not in the course of trade or business and was not subject to VAT. In the recent case of Power Sector Assets and Liabilities Management (PSALM) Corporation v. Commissioner of Internal Revenue (G.R. No. 198146, August 8, 2017), the Supreme Court determined as to whether the sale of the power plants by PSALM to private entities is subject to VAT. In ruling that it is not subject to VAT, the Supreme Court held that 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 el Ss eneration assets. ‘was created primarily to liquidate all NPC financial obligations and stranded contract costs in an optimal manner. 73. Services Performed in the Philippines by Non-Resident Person Non-resident persons who perform services in the Philippines fare deemed to be making sales in the course of trade or business. even if the performance of service is not regular. (Section 105, NIRC: Section 4.105-3, Revenwe Regutations-No. 16-2005) 4S Transactions Deemed Sale ((y (9) ( b) ‘The transactions deemed sale are enumerated in Section 106(B) of the Tax Code. They are called “deemed sale” transaction: because in actuality, thereis really no sate, © circumstances present made 3 wea sale (hence the term “deemed sale") that is why the law made them tubject to VAT ‘These transactions are as follows: 8 Transfer, use, or consumption not in the course of business of ‘g00d5 OF properties originally intended for sale or for use in the course of business ‘The person involved is a VA’ i n and the subject matter is goods or properties originally intended for sale or use i"9 CHAPTER IIL n ‘VALUE-ADDED TAX business. Transfer of goods or properties not in the course of business can take place when a VAT-registered person withdraws goods from his business for personal use. (Section 4.106-7, Revenue Regulations ‘An example is when the manager of a grocery store appropriated for himself some goods originally intended for sale to customers. There is really no sale, but the Tax Code considers this as deemed sale, and thus, VAT must be paid on the deemed sale of grocery items. b. Distribution or transfer to: ~ il Shareholders or investors as share VAT-registered persons; or ii, Creditors in payment of debt; ‘The first paragraph connotes property dividends while the second pertains to dacion en pago. In the first paragraph, property dividends which constitute stocks in trade or properties primarily held for sale or lease declared out of retained earnings 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. (Section 4.106-7, Revenue Regutations No. 16:2005) Not all assets declared as property dividends are subject to VAT. The property declared must be constituting stocks or properties held for-sale to customers. An example is a grocery store declaring its grocery items for sale to customers as property dividends, In the second paragraph, dacion en pago is defined under Article 1245 of the New Civil Code as an act whereby_property-is alienated to the creditor in satisfaction of a debt in money, Dacion en pago is governed by the law of sales. The property used to pay off the debt must be an ordinary asset. If the property used in payment of debt is a capital asset, the dacion en pago is not subject to VAT. Consignment of goods if actual sale is not made within sixty (60) days following the date such goods were consigned; and The subject matter is consigned goods. There are two (2) important dates taken into consideration before consigned goods may be subject to VAT, ie., the date of consignment of goods and the date sixty (60) days thereafter when no sale is made. Ino sale is made within 60 days from the date of consignment, the consigned goods are “deemed sold” and therefore subject to VAT. the profits of the2 ‘TAXATION LAW Volume Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirement or cessation. — Goods on hand at the time of retirement or cessation of business includes capital-goods, stockintrade, supplies, or materials. The rule applies whether or not the business is continued by the new owner or successor. The following circumstances shall, among others, give rise to transactions “deemed sale” for this purpose: ( i. Change of ownership of the business. There is a change in the ownership of the business whem single proprietorship incorporates; or the proprietor or a single proprietorship sells his entire business. ae Ji Dissolution of a partnership _and ion_of_a_new 4.106-7, Revenue Regulations No, 16-2005) VAT ON SALE OF GOODS OR PROPERTIES The subject matter of this VAT imposition is the sale, barter, or exchange of goods or properties. The term “goods or properties” means all tangible and intangible objects which are eapable of pecuniary estimation and shall include; }. % Real properties held primarily for sale to customers or held for leasein the ordinary course of trade or business; Cb. The right or the privite to use patent, copyright, design or model, plan, secret formula or process, 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: 4. ‘The Fight or the’ privilege to use motion picture films, t tapes and discs; and ne A e. Radio, teleysion, satellite transmission and cable television time. (Section 4106-2, Revenue Regulations No 16-2005) The above enumeration is not an exclusive list of items considered or included in the term “goods or properties.” In Fort Bonifacio Developmient Corporation v. Commissioner of Internal Revenue (G.R. Nos. 158885 & 170680, October 2, 2009), | | fo 4CHAPTER IIL cc VALUE-ADDED TAX the Supreme Court resolved the issue as to whether or not the term “goods” as used in Section 105 (now Section 111) of the Old Tax Code includes the value of improvements and real properties for purposes of claiming transitional input tax. As explained by the Supreme Court, the term “goods or properties” by the unambiguous terms of Section 100 (now Section 105) includes “real properties held primarily for sale to costumers or held for lease in the ordinary course of business.” Having been defined in Section 100 (now Section 105) of the NIRC, the term “goods” as used in Section 105 (now Section 111) of the same code could not have a different meaning. Under Section 105 (now Section 111), the beginning inventory of “goods” forms part of the valuation of the transitional input tax credit. Goods, as commonly understood in the business sense, refers to the product which the VAT-registered person offers for sale to the public, With respect to real estate dealers, it is the real properties themselves which constitute their “goods.” Such real properties fare the operating assets of the real estate dealer. Hence, the term “goods” includes not only the value of the improvements on the real properties but should include the value of the real properties as well. Requisites of Taxability of Sale of Goods or Properties \ } The following are the requisites to make sale of goods or properties subject to VAT: . Ce There is an actual or desmod sale barter, or exchange of goods or properties for valuable consideration; " C. by The sale is in the course of trade or business in the Philippines; — i cc The goods or properties are located in the Philippines and are for use or consumption therein; and NE 4 ‘The sale is not exempt fram. VAT under Seaton 10 of NIRC. special law, or international agreement binding upon the government of the Philippines Types of Sales of Goods or Properties While Section 106(A) of the Tax Code only states “sale,” the imposition necessarily includes the barter, exchange, or lease of goods or properties. For purposes o properties may be classified as follows: if imposing VAT, sale of goods orm“ TAXATION LAW ‘Volume It a D >. Deemed Sales; DZ © Zero Rated Sales (Automatic and Effectively Zero-Rated Sales); and ZL iL Export Sales + ~ Actual Export Sales + ~Constructive Export Sales } ii, “Foreign Currency Denominated Sales % ili” Effectively Zero-Rated Sales t 4. Exempt Sales. Vatable Sales Vatable sales or taxable sales of good or properties refer to the sale, barter, exchange, and/or lease of goods or properties, whether in cash or in kind, subject to VAT under Section 106(A) of the Tax Code. In fact, vatable sales are catch-all type of sale~This means that the sale, barter, properties not falling either as deemed sales, zero-rated sales, or exempt sales, are vatable sales. Rate and Tax Base of Vatable Sales VAT is imposed and collected on every sale, barter or exchange of taxable goods or properties at a rate of twelve percent (12%) of the gross selling price or gross value in mone is or properties sold, bartered, or exchanged in the Philippines. (Section 4106 1, The tax base of VAT on sale of goods or properties is the “gross selling price” which means the total amount of money or its carvalent which the purchaser pays or is obligated to pay to the ‘seller in consideration of the sale, barter, exchange Tits sods OF properties, exctudi e-added tax. The excise tax, if any, on such go0Us OF properties Shall orm part of the gross selling price. “ection Towray nrc P= he gross seling pre It must be emphasized that Tax Code expressly excludes the value-added tax from the “gross selling price” to avoid a “tax onthe(CHAPTER IIL a VALUE-ADDED TAX tax.” To clarify that only the value-added tax does not form part of the gross selling price, Section 106 expressly states that the gross selling price shall include any-excise tax, effectively resulting in a “tax on a tax.” Of course, the “tax on a tax” is in reality a tax on the portion of the income or receipt that is equivalent to the tax, usually withheld and remitted to the government, (China Banking Corporation v. Court of Appeals, G.R. No. 146749; June 10, 2003) In case of sale, barter or exchange of real property subject to VAT, gross selling price means the consideration-stated.in the sales document or the fair-mariet value, whichever is higher. The tern “fair market value" shall mean whichever is higher of: 1) the fair market value as determined by the Commissioner (zonal value), or 2) the fair market value as shown in schedule of values of the Provincial or City Assessors (real property tax declaration). However, in the absence of the zonal value, gross selling price refers to the market value shown in the latest real property tax declaration or the consideration, whichever is higher. If the gross selling price is on the zonal value or market value of the the zonal not billed separately, the selling prices stated in the sales document al to be inclusive of ion 4106-4, Revenue julations No. 16-2005) In fine, unless otherwise indicated, the selling price is already VAT inclusive. The twelve percent (12%) VAT is based on selling price without VAT. This is better expressed using this formula: Selling Price without VAT 100% Plus: VAT 12% Selling Price with VAT 112% Deemed Sales transactions deemed sale of goods or ing price properties at a rate of twelueporcont (12%) ofthe grose-selling pris or gross. value in money of the Boots or properties deem in one refer to previous discussion on transactions the Philippines. deemed sale. VAT is imposed on ine the appropriate tax base in ‘a sale, barter, or exchange of selling price is unreasonably ly than thirty76 ‘TAXATION LAW Volume Tr percent (30%) of the actual market value of the same goods of the quality sold in the locality on or nearest date of ame quanti sale For transactions deemed sale, the output tax shall be based on the market value of the goods deemed sold as of t) occa . However, in case of retirement or cessation of business, the tax base shall be acquisition cost or the current market price of the goods or properties; Whichever is lower. In case of a sale where gross selling price is unreasonably lower than the fair market value, the actual market value shall be the tax base. (Section 4.106-7(b), Révenue Regulations No. 16-2005) Zero-Rated Si A zero-rated sale of goods or properties is a sale, barter, or exchange of goods or properties of a VAT-registered person subject to zero percent (0%) VAT. It is a vatable transaction for all intents and purposes but considering the VAT rate is zero percent (0%), there is no resulting output tax. The input tax on purchases of goods, properties or services, related to such Zero. Sales, shall be available as tax refund in accordance With existing regulations. the latter part of this Chapter. As stated, a zero-rated sale of goods or properties is subject to VAT except that VAT rate is zero percent (0%) instead of twelve percent (12%), thus, no resulting output tax and no VAT liability. This is better expressed using the following formula Selling Price without VAT 100% Plus: VAT 0% Gross Selling Price 100% In general, the following sales by a VAT-registered person shall be subject to zero percent (0%) rate: . " a Export Sales In its ordinary meaning, export sale means the sale, barter, or exchange of goods or Properties destined for Aausumption outside the Philippines. As used in Section 106(A)(2)(a) of the Tax Code, export sales may either be actual export sale or constructive export sale.CHAPTER n VALUE-ADDED TAX | | Actual export sale is when there is an actual shipment of goods from the Philippines to a foreign cou! rr When the goods physically Teft the ine territory. ‘onstructive export sale is when the goods do not leave the Philippines but delivered to a resident or an entity which in the eyes or by fiction of law is considered as export sales. The goods are not taken out from the Philippines to a foreign country. An example is when goods are sold to ‘an entity within a customs territory or economic zones in the Philippines. Note that only export sales made by a VAT-registered person are zero-rated sales. If the export sale is made by a non-VAT registered person, the sale is merely an exempt sale. (Section 10%1)(0), NIRC) b. _ Foreign Currency Denominated Sales Foreign currency denominated sale means sale to a nop- resident of goods, except those mentioned in Sections 149 ‘and T50 of the Tax Code, assembled or manufactured in the PPilppines for detivery 1's resident inthe Tee paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the ‘Bangko Sentral ng Pilipinas Note that foreign currency denominated sale is zero-rated under the NIRC. Upon the effectivity of the TRAIN Law, foreign currency inated sale is now a sale subject to twelve percen ©. “ffectively Zero-Rated Sales Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subject such sales to ze) ie), NIRCSTC also refers tothe Sale of goods and properties by a VAT-registered person to a person or entity who was granted indirect tax exemption under special laws or international agreements. (Section 4.106-6, Revenue Regulations No. 16-2005) In order to qualify as effectively zero-rated sales, there must be a special law or international agreement dlassifying the sales8 TAXATION LAW ‘Volume IL Export Sales As amended by TRAIN Law, export sales by a VAT-registered person subject to zero percent (0%) rate shall mean: o ¥ ~ 3, « ® ao ye : 4 5. 6. Rane ~ & pan Ws The sale and actual—shipment_of goods from the fppines 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); Sale and delivery of goods to: (i) Registered enterprises within a separate customs territory as provided under special laws; and Gi) Registered enterprises within tourism enterprise zones as declared by the Tourism Infrastructure and Enterprise Zone Authority (TIEZA) subject to the provisions under Republic Act No, 9593 or The Tourism Act of 2009. Sale of raw materials or packaging materials to a non- 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 the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Sale of raw materials or packaging materials to export oriented enterprise whose export sales exceed seventy percent (70%) of total annual production: Those considered export sales under Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987, and other special law: The sale of goods, supplies, equipment, and fuel to persons engaged in international shipping or international aif traneport operations: Provided, that the goods, supplies. equipment and fuel shall be used for international shipping or air transport operations; (Section 106(AN2)- IRC, as amended by FRAIN Law)CHAPTER IIL 9 VALUE-ADDED TAX Item 2, the sale and delivery of goods to (i) registered enterprises within a separate customs territory as provided under special laws; and (ii) registered enterprises within tourism enterprise zones as declared by the TIEZA subject to the provisions under Republic Act No, 9593 or the Tourism Act of 2009 were added as export sale, and thereby zero-rated sale, by the TRAIN Law. However, the President vetoed this additional provision on the ground that the provisions go against the principle of limiting the VAT zero-rating to direct exporters. As an effect, these sales are not zero-rated subject to the — applicable tax incentive provisions of the TIBZA Law. In item 6, TRAIN Law added a requirement that the sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations must be used for international shipping or air transport operations to qualify for zero percent (0%) VAT. It must also be noted that under Section 106(A)(2)(a)(4) of the Tax Code, sale of gold to BSP is considered an export sale subject to zero percent (0%) lowever, TRAIN Law removed the zero- rated status of sale of gold to BSP and reclassified such as an exempt transaction under Section 109 of the Tax Code. os Implementation of tem and the Change of Zero-Rated Sales to 12% Vatable Sales TRAIN Law further instituted the implementation of an | enhanced VAT refund system, the successful implementation of which will make some zero-rated sales subject to twelve percent | (12%) VAT, Section 31 of TRAIN Law provides that items 3, 4, and i 5 shall be subject to twelve percent (12%) VAT and no longer be considered export sales subject to zero percent (0%) VAT rate upon satisfaction of the following conditions: ‘The successful establishment and implementation of | an -ahanced VAT refund system that grants refunds of creditabte input tax within ninety (00) days from the flim of the-VAT-Fefund- application with the Buréau. | Provided, tha tararmine the elfectivity of item ‘no. 1. all applications filed from January 1, 2018 shall be processed and must be decided within ninety (90) days from the filing of the VAT refund application; and Pk ee)80 ‘TAXATION LAW ‘Volume It ber 31,2017 ‘Nb. All pending VAT refund claims as of Decem| shall be fully paid in cash by December 31, 2019. ‘The Department of Finance (DOF) shall establish a VAT refund center in the Bureau of Internal Revenue (BIR) and in the Bureau of Customs (BOC) that will handle the processing and granting of cash refunds of creditable input tax. An amount equivalent to five percent (5%) of the total VAT collection of the BIR and the BOC from the immediately preceding year shall be automatically appropriated annually and shall be treated as a special account in the General Fund or as trust receipts for the purpose of funding claims for VAT refund: Provided, that any unused fund, at the end of the year shall revert to the General Fund. The BIR and the BOC shall be required to submit to the Congressional Oversight Committee on the Comprehensive Tax Reform Program (COCCTRP) a quarterly report of all pending claims for refund and any unused fund. Note that the above provisions only cover the following zero- rated sales: 7 1, Sale of raw materials or packaging materials toa nonresident buyer Tor~del export-orie i ‘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 the rules and regulations of the BSP; 2. Sale of raw materials or packaging materials to export- oriented enterprise whose export sales ty DEF a ion, 8. Those considered export sales under Executive Order No. ‘226, otherwise known-as the umniby ve it Code of 1987, and other special orn rage eal d Effective Zero-Rated Sale Although both are taxable and simiCHAPTER IIL a VALUE-ADDED TAX 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 oF entities whose exemption under special _tlaws—or international agreements to which the Philippines is a signatory effectively subjects such transactions to jaro rate. Again, as applied to the tar base ach nite ao aoe 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. (Commissioner of Internal Revenue v. Seagate Technology (Philippines), G.R. No. 153866, February 11, 2005) Exempt Sal An exempt sale is a sale of goods, properties, or services and the use or lease of properties which is not subject to output tax and whereby the buyer is not allowed any tax credit or input tax related to such exempt sale. The ject of exemption from the VAT may either be the 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 stat =i ia the tax statue “exempt arty 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 nted tion under the Tax Code, a special Jaw or an international agreement 10 which the Philippines is a_signatory, ind_by virt ble_tra 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 its registration as a VAT or non-VAT taxpayer. (Commissioner Revenue v. Seagate Technology (Philippines), G.R. No. iry 11, 2005) transactions under Section 109 of the Tax Code, a: IN Law, is discussed separately in this Chapter.82 ‘TAXATION LAW Volume II Special Rules on Sale of Real Propertie: Sale of real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business of the seller shall be subject to VAT. In the case of sale of properties on installment plan, the real estate dealer shall be subject to VAT on the installment payments, including interest and penalties, actually and/or constructively received by the seller. Sale of residential lot with gross selling price ‘exceeding P1,919,500.00, residential house and lot or other residential dwellings with gross selling price exceeding P3,199,200.00, where the instrument of sale (whether the instrument is nominated as a deed of absolute sale, deed of conditional sale or otherwise) is executed and notarized on or after January 1, 2012 and shall be subject to twelve percent (12%) output VAT- — Installment sale of residential house and lot and other residential dwellings is subject to VAT. “Sale of real property on installment plan” means sale of real property by a real estate dealer, the initial payments of which in the sale of sale do not exceed twenty. five percent (25%) of the gross selling price. However, in case of sale of real properties on the deferred- payment basis, not on the installment plan, the transaction shall be treated as cash sale which makes the entire selling price taxable in the month of sale. “Sale of real properties by a real estate dealer on a deferred Payment basis, not on the installment plan” means sale of real property, the initial payments of which in the year of sale exceed twenty-five (25%) of the gross selling price. “Initial payments” means payment or payments which the seller receives before or upon the execution of the instrument of sale and payments which the seller expects or is scheduled to receiv? in case or property (other than evidence of indebtedness of the purchaser) during the year when the sale or disposition ef the real Property was made. It covers any down payment made and includes all payments actually or constructively received during the year of sale, the aggregate of which determines the limit set by law. Initial payments do not include the amount of mortgage on the real property sold except when such mortgage exceeds the cost OF other basis of the property to the seller, in which case, the excess shall be considered part of the initial payments,CHAPTER UL a VALUE-ADDED TAX Also excluded from the initial payments are notes or other evidence of indebtedness issued by the purchaser to the seller at the time of sale. Pre-selling of real estate properties by real state dealers shall be subject to VAT in accordance with the rules prescribed above. “Real estate dealer” includes any person engaged in the business of buying, developing, selling, exchanging re; as principal and holding himself out as a full or part-time dealer in real estate. (Section 4.106-3, Revenue Regulations No. 16-2005) Change or Cessation of Status as VAT-Registered Person 9—— ‘The VAT provided for in Section 106 of the Tax Code applies to ds or properties originally intended for sale or use in business, capital goods which are existing as of the occurrence of the following, a. Change of business activity from VAT taxable status ‘ to VAT-exempt status, An example is a VAT-registered = person engaged in a taxable activity like wholesaler or retailer who decides to discontinue such activity and engages instead in life'insurance business or in any other business not subject to VAT; + b. Approval of a request for cancellation of registration due to reversion to exempt status; ¢. Approval of a request for cancellation of registration due to a desire to revert to exempt status after the lapse of three (3) consecutive years from the time of registration by a person who voluntarily registered despite being exempt under Section 109(2) of the Tax Code. d. Approval of a request for cancellation of registration of one who commenced business with the expectation of gross sales or receipts exceeding P3,000,000.00 but who failed to exceed this amount during the first twelve months. ‘The VAT shall not apply to goods or properties existing as of the the following: a of control of a corporation by the acquisition of ling interest of such corporation by another ler or group of stockholders. ‘The goods or used in business or those comprising the stock-