1. VALUE ADDED TAX (Sec. 105-Sec.

112, NIRC as amended by RA 11256 and RA 11346)

- Tax on the value added to a good or service

- What is the value-added tax? – it is the gross profit/gross margin (tax on the gross margin)

- The amount you add to the goods is the VAT.

CHARACTERISTICS

- INDIRECT TAX – the tax impact is different from the tax incidence

Tax impact (DIRECT TAX)– the impact of taxation in VAT is on the seller. (who is statutory liable for the
tax)

Tax incidence (INDIRECT TAX) – the actual payment of the tax can be passed on to the buyer. (where
the tax is finally settled) – si buyer ang taga-settle or finish line (si buyer ang sisingilin para sa pambayad
ng final tax)

VAT is a regressive tax – the tax rate decreases and the tax base increases or vice versa

- Nagging regressive because the tax rate increases against to the income being generated by a
person

- TAX CREDIT - tax is collected through a tax credit method

OUTPUT VAT – VAT THAT WILL BE PAID BY THE SELLER (TAX RATE OF 12% X SELLING
PRICE)

INPUT VAT – VAT WILL BE PAID BY THE SELLER (IT IS THE TAX CREDIT)

TAX CREDIT METHOD – PROVE YOUR INPUT VAT (NEEDS A SALES INVOICE/VAT OR FROM THE
PERSON WHO SOLD U THE GOODS OR SERVICE)

IN DOING SO, THERE WILL BE A CHECK AND BALANCE SINCE EVERYONE WILL BE NEEDING
THEM TO JUSTIFY THEIR INPUT VAT CREDITS.

FOR ADMINISTRATIVE FEASIBILITY

TAX DEDUCTION METHOD – GROSS PROFIT

- TAX ON CONSUMPTION – pasa pasa yung gastos sa consumer/buyer

EXPORTS – VAT IS NOT IMPOSED; BECAUSE THE CONSUMER IS NOT IN THE COUNTRY

IMPORTS – VAT is imposed in the PH because it will be consumed here

- DESTINATION PRINCIPLE/CROSS-BORDER DOCTRINE – WHY? BECAUSE VAT IS A TAX

ON CONSUMPTION

- VAT is being taxed in the place where it is destined to be consumed. If you are not going to
consume the goods and services in the PH, and is destined to be consumed abroad, the
 consumer/persons who will consume it in another jurisdiction, will not be liable to pay VAT in the
PH.

- Where the good/service is to be consumed, that is where the VAT should be collected.

- TRANSPARENT FORM OF SALES TAX

Sales tax – will be imposed on the selling price

- EXCISE TAX – privilege on the importation (neither personal nor property tax, so it is an excise
tax)

- NOT A TAX ON A TAX/CASCADING TAX – Because VAT allows the seller to credit the input tax.

(hindi nagpapatong-patong)

- NEUTRAL TAX – does not create incentives; not influenced by tax considerations nor consumers
be influenced by the tax

- - it is neutral because the tax will be collected regardless of the nature of business or activity that
you are engaged in

EXEMPTIONS ARE CONISDERED AS INCENTIVES

SECTION 105

PERSONS LIABLE TO PAY VAT

1) Those who sells (barters, exchanges, or leases) goods or property in the course of trade or
business

2) Those who render service in the course of trade or business

3) Those who import goods regardless if its made in the course of trade or business

EXAMPLE:

Non-resident alien sells goods in the PH but it is an isolated transaction (once lang nagbenta), will it be
subject to VAT?

- NO. The selling should be in the course of trade or business, hence, there is a regular conduct.

What if the non-resident renders service in the PH? (isolated case again)

- YES. There is no need for regularity of conduct by the non-resident foreign person.

If it is rendered in a single transaction by a resident citizen?

- NO. Unless if it is really the business and is done in the course of trade or business – it will be
subject to VAT.
Non-resident foreign persons – rule of regularity does not apply – meaning subject to VAT. It will be
considered as in the course of trade or business regardless of if it is a single transaction or not.
(RENDERING OF SERVICES LANG)

In the course of trade or business – the regular conduct or pursuit of a commercial or an economic
activity, including transactions incidental thereto, by any person regardless of whether or not the person
engaged therein is a non-stock, nonprofit private organization (irrespective of the disposition of its net
income and whether or not it sells exclusively to members or their guests), or government entity.

MAGSAYSAY CASE:

If it is an isolated transaction? Will it be subjected to VAT?

- NO. The activity must be regularly conducted to be considered as in the course of business.

- Wala pa dito “incidental thereto” na phrase sa NIRC.

MINDANAO GEOTHERMAL II

- “regular conduct” “incidental transactions”

- Incidental thereto – the transaction is necessarily in pursuit of the primary activity

- 1:05

- Sale of the Nissan Patrol; Should it be subjected to VAT? – YES. (The car is listed as an asset of
the company)

- For as long as a good/property is listed in the balance sheet in the company, it is

considered to be used in the course of trade and business.

- If capital asset under Sec 39, normally not subject to VAT. If ordinary asset, subject to VAT.

- The property being sold is part of the company’s ordinary asset.

- Whether the good/property is part of the company’s assets. Ordinary asset – the sale of which
is done in the course of trade or business. (hence, VATable)

- 1:23:48

COMASERCO

- Sec 105 - “regardless of whether or not the person engaged therein is a non-stock, non-profit
private organization or govt entity, VAT will be imposed if it is done in the course of trade or
business”

- Whether COMASERCO will be liable to pay VAT. – “in the course of trade or business” the
regular conduct or business or an economic activity (and transactions incidental thereto) by any
person, regardless whether it is non-stock or non-profit organization/govt entity, it applies to all
transactions even to those made prior to the enactment of the VAT law.

- In this case, COMASERCO is an affiliate of an insurance company (consultative and technical

services) – it is non-stock, non-profit

- It renders services to its affiliates for a fee. Therefore, it is VATable.

 - Even if there is no intention of realizing profit, for as long as the company provides service
for a fee or renumeration, then the service will be subjected to VAT.

- This is basis for association dues of condominiums being VATable. (Later overturned by the Sec
109 – to reverse the RRs previously issued)

- Under the TRAIN Law, Sec 109 – (y) Association dues, membership fees on condominiums are
already EXEMPT.

VAT REGISTRATION REQUIREMENTS

Under the VAT system, there is a requirement of registration.

Under the law, who are required to register?

- Any person, who, in the course of their trade or business sells or barters or exchanges goods or
properties or render services subject to VAT if the aggregate amount is equivalent to 3M.
(minimum) - VAT threshold (For the taxable year)

- Any person who import with a 3M aggregate amount of gross sales or receipts within the taxable
year.

If you import, and there is no annual turnover of 3M, do they have to register as a VAT person?

They are not required to register, but they are required to pay VAT and file the
corresponding VAT return – regardless of if they are VAT registered or not.

- VAT registered – you are already registered under the VAT system

- But can you register even if your sales are under 3M? – YES. But not required to register. You
are only required if your sales are MORE THAN 3M.

What does registrable mean?

- A taxable entity is qualified to register within the threshold (the 3M minimum gross sales/receipts)

- REUIQREMENT: At least actual gross sales or receipts

- What must a registrable person do? – present actual proof of actual sales or receipts attesting to
minimum gross sales

- THE ACT (where you present the proof) – submit application to the BIR to register in the VAT
system

- If you are registrable (already exceeded the 3M threshold), you have to register within the 10
days after the end of the last month when his revenue has already breached the 3M threshold.
(the businessman started his business without having registered but in the course of his business he
met the threshold for being a VAT registerable person)

What will happen if he does not register? – Taxpayer for VAT without the benefit of input
VAT.
 A VAT registrable person will be motivated to file to become a VAT registered person
because of the input tax credits. If not, he will not be allowed to claim.

INPUT TAX CREDIT –

The threshold only applies to business other than those who are franchise grantees.
The threshold for franchisee is 10M (annual gross receipts of the preceding year).

Sec 106

Tax base for sale of goods/properties – gross selling price/gross sales

Tax base for sale of services – gross receipts

Tax base for importation – landed costs (dadagdagan ng 12% VAT) (includes the freight, insurance,
custom duties tax, excise tax)

- Imposing of VAT on the customs and excise tax

- Imposition of tax on a tax – tax pyramiding

*each of the classes has different tax bases

Tax base – it is the amount or value to which you multiply the tax rate

Difference between gross sales and gross receipts

- The difference lies in income recognition

For example, you are selling goods/merchandise. Your gross sale is 5M for the year but 1M of that is still
to be paid/collected next taxable year. Will you declare 5M are your tax base for the taxable year?

How much is the tax base?

- Still 5M.

If it is sale of service?

- 4M only because it is the gross receipts.

TRANSACTIONS DEEMED SALE

- Subject to VAT

- The basis is the value of the goods deemed sold at the time of the occurrence of the said
transaction.

- Sec 106(1) – for example: ordinary business is selling of laptops, one of them are used instead of
selling it. The laptop being used is originally intended for sale in the course of trade or business.
Therefore, since kinuha sa paninda mo, it is subject to VAT. Even if there is no transaction. It is
deemed sale. (if you are VAT registered)

- (2) Why is it subject to VAT? – (a) there is consumption (dividends) (b) dacion en pago
 - (3) consignment – ordinarily, if you give the goods to the consignor, it is not sale yet. If the person
whom the goods were given (consigned) sold the same, it is considered consignment agreement
(yun ang sale and VATable). If na-consign and HINDI nabenta, it will be considered as
transaction deemed sale after the lapse of 60 days. (whether or not it is sold within 60 days, it is
already subject to VAT)

- (4) remaining inventory of a closed business will be deemed sale (di kasama equipment; only raw
materials, finished products, work-in-progress)

ZERO-RATED TRANSACTIONS

Tax rates – there are two (12% and 0%)

Two kinds of zero-rated transactions

1) Actual zero-rated transactions – these transactions are zero-rated

The benefit is on the seller. (WHO IS THE EXPORTER) – the law intends not to charge VAT to the
export seller.

The law also intends not to charge any VAT for the input VAT.

2) Effectively zero-rated transactions – the zero-rating comes from international agreements or

special laws

The benefit is on the part of the buyer. (the exporter in this case) The buyer is exempted by
special law or international agreement.

EXPORT SALES

- If there is an entity which is into export, and that entity is located in an eco-zone (registered under
PEZA for example), the sales transactions of that entity will be zero-rated. (walang VAT)

- What about the suppliers of this entity? (outside of the customs territory/PEZA)

Pag nagbenta si supplier, the transaction will be effectively zero-rated kase ang bumibili si export seller.

- A sale transaction of the supplier to the export seller is effectively zero-rated. IT IS AS THOUGH
THE SUPPLIER EXPORTS ITS PRODUCT.

- WALANG OUTPUT VAT AND INPUT VAT

SEC 106 (a)(2) – export sales (3,4,5)

“provided they will directly and exclusively use the goods for their registered business activities”

Directly and exclusively use – GOODS (raw materials, inventories, packaging materials and goods)
SERVICES (sale of services including the provision of basic infrastructure, utilities, and maintenance,
repair, and overhaul of equipment)
CREATE (Corporation Recovery and Tax Incentives for Enterprises Act) Law is for the benefit of
corporations.

TRANSACTIONS SUBJECT TO 0% RATE

1) Export sales (THERE ARE 6 OF THEM)

2) Effectively zero-rated transactions

ZERO-RATED SERVICES

Sec 108(b)

*SAME WITH 3,4,5 (refer to goods)

1 and 5 (refer to services) under Sec 108 and the same with 3,4,5 under Sec 106

Sale of goods and services to export-oriented enterprises.

EXEMPT TRANSACTIONS

Andoks manok – not VATable

Sec 109(a) – refers to farm products

Sec 109 (b) – refers to farm inputs; excluded pang karera, sabong, aquarium/animals considered as pets

A and B refers to farm products for food production

“ORIGINAL STATE”

Contract growers –

Purpose of VAT exemption – to protect the food supply – to make the cost of food production low.

Sec 109(n) – look at the share capital contribution not the total/aggregate capital of the cooperative.

If 15,000 lang ang capital contribution, they are VAT exempt. (Applies to non-agricultural, non-electric and
non-credit cooperatives)

Sec 109(o) - If VAT registered will they be exempt? No. It will be zero-rated.

The requirement for zero-rating is their VAT registration. If they are not registered, they are nonetheless
exempt. (Their export sales are still exempt)

Sec 109(p) – still follow the old threshold 3.99M and 1.919M due to tax indexation
Under P, sale of real property is not primarily held for sale to customers. These are capital asserts and
are not subject to VAT.

Real property – ordinary asset, use the threshold

Even if the value is 5M (more than 3M) but classified under socialized housing, it will still be exempt.

Pag mas mataas ang value for socialized housing it is still exempt bc socialized housing pa rin under Sec
109(p).

Sec 109(w) – does not only apply to medicines and foods; so long as it is goods and services sold to
senior and PWD

EXEMPT: Sale or lease of goods or properties or the performance of services other than the transactions
mentioned in the preceding paragraphs:

VAT threshold of 3M – annual sales and/or receipts do not exceed the amount of 3M

Sec 109(q) - *Will the lessor still be exempt if the residential unit is also used as commercial unit? – YES.
So long as the monthly rental will not exceed 15k.

*20 apartments being leased for 15k per unit and then in a year, the monthly revenue is more than 3M,
will it be VAT exempt? – the lease will not be subject to VAT bc it is exempt under Sec 109(q). Even if it
already exceeded the VAT threshold. (To benefit the lessees – umuupa)

- Walang conditions under q. So long as the monthly rental does not exceed the monthly rental.

SOURCES OF INPUT TAX CREDITS

1) Purchase or importation of goods

2) Purchase of real properties for which VAT has already been paid

3) Purchase of services in which VAT has already been paid

4) Transactions deemed sale

5) Presumptive input tax – an individual shall be entitled to a presumptive input tax creditable
against the output tax, equivalent to 4% of the gross value in money of their purchases of primary
agricultural products which are used as inputs to their production (PURPOSE: For the benefit
manufacturers of agricultural products because the fresh agricultural products they buy are
already tax exempt) – may output VAT pero walang input VAT kase VAT exempt yung binibili nila

6) Transitional input tax - A person who becomes liable to VAT or any person who elects to be VAT-
registered shall, subject to the filing of an inventory, be allowed input tax on his beginning
inventory of goods, materials and supplies equivalent to 2% of the value of such inventory or
the actual VAT paid on such goods, materials and supplies, whichever is higher, which shall be
creditable against the output tax. (only applies to those who are liable for VAT and those who
elects any VAT-registered person)
 PURPOSE: initially, buying goods without VAT, walang input tax credits. Then all of a sudden,
you become a VAT-registered business entity, nabili mo inventories mo without VAT so walang
input VAT pero liable ka to pay VAT. It at least gives you 2% for your beginning inventories an
nabili mo dati na walang VAT kase nagtransition ka from no VAT to VAT.

REFUND

Zero-rated sales: The input VAT related to the purchases of goods; the companies can ask for a claim of
refund/tax credit for the unutilized input VAT.

- For example, you have transitional input tax of 2%, can you claim it as part of tax refund, because
it is an excess tax credit. – NO. (kase walang binayaran na input VAT)

1:22:30

2.1. Purposes and objectives of VAT

2.2. Characteristics of VAT and Philippine VAT System

Cases:

i. Abakada Guro Party List vs. Ermita GR No. 168730, September 1, 2005

FACTS:

This case is a consolidation of complaints on the constitutionality of RA 9337 amending the NIRC on the
rates of VAT on certain goods and services.

The main contention against the enactment of the law revolves around the proviso authorizing the
President, upon recommendation of the Secretary of Finance, to raise the VAT rate to 12%, effective
January 1, 2006, after specified conditions have been satisfied.

On May 24, 2005, the President GMA signed into law Republic Act 9337 or the VAT Reform Act. Before
the law took effect on July 1, 2005, the Court issued a TRO enjoining government from implementing the
law in response to a numerous petitions for certiorari and prohibition questioning the constitutionality of
the new law.

The challenged section of R.A. No. 9337 is the common proviso in Sections 4, 5 and 6: “That the
President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise
the rate of value-added tax to 12%, after any of the following conditions has been satisfied: (i) Value-
added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two
and four-fifth percent (2 4/5%); or (ii) National government deficit as a percentage of GDP of the previous
year exceeds one and one-half percent (1½%)”

Petitioners allege that the grant of stand-by authority to the President to increase the VAT rate is an
abdication by Congress of its exclusive power to tax because such delegation is not covered by Section
28 (2), Article VI Consti.

They argue that VAT is a tax levied on the sale or exchange of goods and services which cannot be
included within the purview of tariffs under the exemption provided for in the Constitution since the latter
refers to customs duties, tolls or tribute payable upon merchandise to the government and usually
imposed on imported/exported goods.
Petitioners further alleged that delegating to the President the legislative power to tax is contrary to
republicanism. They insist that accountability, responsibility and transparency should dictate the actions of
Congress and they should not pass to the President the decision to impose taxes. They also argue that
the law also effectively nullified the President’s power of control, which includes the authority to set aside
and nullify the acts of her subordinates like the Secretary of Finance, by mandating the fixing of the tax
rate by the President upon the recommendation of the Secretary of Justice.

ISSUE: Whether there is a violation of the Constitution.

RULING:

No.

Progressive taxation is built on the principle of the taxpayer's ability to pay. Taxation is progressive
when its rate goes up depending on the resources of the person affected. The VAT is an antithesis of
progressive taxation. By its very nature, it is regressive. The principle of progressive taxation has
no relation with the VAT system inasmuch as the VAT paid by the consumer or business for every
goods bought or services enjoyed is the same regardless of income.

In other words, the VAT paid eats the same portion of an income, whether big or small. The disparity lies
in the income earned by a person or profit margin marked by a business, such that the higher the
income or profit margin, the smaller the portion of the income or profit that is eaten by VAT. A converso,
the lower the income or profit margin, the bigger the part that the VAT eats away.

At the end of the day, it is really the lower income group or businesses with low-profit margins that is
always hardest hit.

Nevertheless, the Constitution does not really prohibit the imposition of indirect taxes, like the VAT.

What it simply provides is that Congress shall "evolve a progressive system of taxation."
Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not
impossible, to avoid them by imposing such taxes according to the taxpayers' ability to pay.

In the case of the VAT, the law minimizes the regressive effects of this imposition by providing for
zero rating of certain transactions (R.A. No. 7716, §3, amending §102 (b) of the NIRC), while
granting exemptions to other transactions. (R.A. No. 7716, §4 amending §103 of the NIRC).

The input tax is not a property or a property right, and a VAT-registered person’s entitlement to the
creditable input tax is a mere statutory privilege. The right to credit input tax as against the output tax is
clearly a privilege created by law, a privilege which the law can also remove or limit.

Input tax is defined under the NIRC as the VAT paid by a VAT-registered person on the importation of
goods or local purchase of good and services, including lease or use of property, in the course of trade or
business, from a VAT-registered person and Output Tax is the VAT due on the sale or lease of taxable
goods or properties or services by any person registered or required to register under the law.

*Characteristics of VAT

Tax credit method (ask for a VAT invoice or OR from the person who sold the goods/service)– you need
to prove your tax credit or input VAT

- To justify their input VAT credits (for administrative feasibility)

Not a cascading tax – because VAT allows a seller to credit his input tax
Tax is neutral – not influenced by tax considerations/incentives (tax will be collected regardless of the
nature of the industry)

Non-resident alien sells goods once only – not VATable (there is no regularity of conduct)

Non-resident who renders service in a single transaction in the PH – subject to VAT (services
rendered by them in the PH are considered as being in the course of trade or business and is subject to
VAT)

iii. CIR vs. Toshiba Information Equipment Phils, GR No. 150154, August 9, 2005

FACTS:

Toshiba is a domestic corporation with the primary purpose of engaging in the business of
manufacturing and exporting of electrical and mechanical machinery, equipment, systems,
accessories, parts, components, materials and goods of all kinds.

Toshiba is also registered with the Philippine Economic Zone Authority (PEZA) as an
ECOZONE Export Enterprise, it is also registered with the BIR as a VAT taxpayer and
withholding agent.

Toshiba filed its VAT returns for the taxable year 1996, reporting input VAT in the amount of
P18,247,303.94. It alleged that the said input VAT was from its purchases of capital goods
and services which remained unutilized since it had not yet engaged in any business activity
or transaction for which it may be liable for any output VAT.

Consequently, Toshiba filed with the One-Stop Shop Inter-Agency Tax Credit and Duty
Drawback Center of the Department of Finance (DOF) applications for tax credit/refund of its
unutilized input VAT totaling P19,338,422.07.

To toll the running of the two-year prescriptive period for judicially claiming a tax credit/refund,
respondent Toshiba, on 31 March 1998, filed with the CTA a Petition for Review. The CTA, in
its Decision dated 10 March 2000, ordered petitioner CIR to refund, or in the alternative, to
issue a tax credit certificate to respondent Toshiba in the amount of P16,188,045.44. The CA
affirmed the CTA’s decision.

ISSUE: Whether respondent Toshiba is entitled to the tax credit/refund of its input VAT on its
purchases of capital goods and services. – YES.

RULING:

An ECOZONE enterprise is a VAT-exempt entity. Sales of goods, properties, and services by

persons from the Customs Territory to ECOZONE enterprises shall be subject to VAT at 0%.

Toshiba bases its claim for tax credit/refund on Sec 106(b) of the Tax Code, which reads:

Meanwhile, the CIR opposes such claim on account of Section 4.106-1(b) of Revenue
Regulations (RR) No. 7-95, otherwise known as the VAT Regulations. It argues that although
respondent Toshiba may be a VAT-registered taxpayer, it is not engaged in a VAT-taxable
business. According to petitioner CIR, respondent Toshiba is actually VAT-exempt, invoking
Sec 103 of the Tax Code.
 Since respondent Toshiba is a PEZA-registered enterprise, it is subject to the five percent
(5%) preferential tax rate imposed under Chapter III, Section 24 of Republic Act No. 7916,
otherwise known as The Special Economic Zone Act
of 1995, as amended.

In this case, Sec 103(q) of the Tax Code cannot apply to transactions of respondent Toshiba
because although the said section recognizes that transactions covered by special laws may be
exempt from VAT, the very same section provides that those falling under PD No. 66 are not.

Presidential Decree No. 66, creating the Export Processing Zone Authority (EPZA), is the
precursor of Rep. Act No. 7916, as amended, under which the EPZA evolved into the PEZA.
Consequently, the exception of Presidential Decree No. 66 from Section 103(q) of the Tax Code of
1977, as amended, extends likewise to Rep. Act No. 7916, as amended.

The Court explains that despite being PEZA-registered enterprises, which would necessarily be located
within ECOZONES, are VAT-exempt entities because of Sec 8 of the same statute, which established the
fiction that ECOZONES are foreign territory.

Respondent Toshiba is located within an ECOZONE. An ECOZONE or a Special Economic Zone are:

[S]elected areas with highly developed or which have the potential to be developed into agro-
industrial, industrial, tourist, recreational, commercial, banking, investment and financial centers
whose metes and bounds are fixed or delimited by Presidential Proclamations. An ECOZONE
may contain any or all of the following: industrial estates (IEs), export processing zones (EPZs),
free trade zones and tourist/recreational centers.

Section 8 of Rep. Act No. 7916, as amended, mandates that the PEZA shall manage and operate the
ECOZONES as a separate customs territory (national territory outside of the PH); thus, creating the fiction
that the ECOZONE is a foreign territory.

As a result, sales made by a supplier in the Customs Territory to a purchaser in the ECOZONE shall be
treated as an exportation from the Customs Territory. Conversely, sales
made by a supplier from the ECOZONE to a purchaser in the Customs Territory shall be considered as
an importation into the Customs Territory.

Since the PH 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 PH to a foreign country must be free
of VAT; while those destined for use or consumption within the PH shall be imposed with 10% VAT.

In application, the BIR issued Revenue Memorandum Circular (RMC) no. 74-99. Section 3 reads as:

Indubitably, no output VAT may be passed on to an ECOZONE enterprise since it is a VAT-exempt entity.
The VAT treatment of sales to it, however, varies depending on whether the supplier from the Customs
Territory is VAT-registered or not.

Sales of goods, properties and services by a VAT-registered supplier from the Customs Territory to an
ECOZONE enterprise shall be treated as export sales. If such sales are made by a VAT-registered
supplier, they shall be subject to VAT at 0%.

Even conceding, however, that respondent Toshiba, as a PEZA-registered enterprise, is a VAT-exempt

entity that could not have engaged in a VAT-taxable business, this Court still believes, given the particular
circumstances of the present case, that it is entitled to a credit/refund of its input VAT.
 2.3. Persons and transactions subject to VAT (Sec. 105, NIRC)

2.3.1. Meaning of “in the course of trade or business”

Cases:

ii. CIR vs. Magsaysay Lines G.R. No. 146984, July 28, 2006

*wala pa phrase na “incidental thereto” sa NIRC

FACTS:

Pursuant to a govt program of privatization, National Development Company (NDC) decided to sell to
private enterprises all of its shares in its wholly-owned subsidiary, the National Marine Corporation
(NMC). The NDC decided to sell in one lot its NMC shares and 5 of its ships. It was initially leased to
Luzon Stevedoring Company and was subsequently transferred and leased, on a bareboat basis, to the
NMC.

The NMC shares and the vessels were offered for public bidding. Among the stipulated terms and
conditions for the public auction was that the winning bidder was to pay “a value added tax of 10% on the
value of the vessels.”

Respondent Magsaysay Lines offered to buy the shares and the vessels. The bid was made for
Magsaysay Lines’ new company, Baliwag Navigation and FIM Limited (based in HK). The bid was
approved by the Committee on Privatization and a Notice of Award was issued to Magsaysay Lines.

The implementing contract was executed. Paragraph 11.02 of the contract stipulated that “[v]alue-added
tax, if any, shall be for the account of the PURCHASER.” Per arrangement, an irrevocable confirmed
Letter of Credit previously filed as bidders bond was accepted by NDC as security for the payment of
VAT, if any.

By this time, a formal request for a ruling on whether the sale of the vessels was subject to VAT had
already been filed with the BIR by private respondents.

The parties agreed that should no favorable ruling be received from the BIR, the NDC was authorized to
draw on the Letter of Credit upon written demand the amount needed for the payment of the VAT on the
stipulated date.

The BIR held that the vessels was subject to the 10% VAT (in favor of NDC). The ruling cited the fact that
NDC was a VAT-registered enterprise, and thus its “transactions incident to its normal VAT registered
activity of leasing out personal property including sale of its own assets that are movable, tangible objects
which are appropriable or transferable are subject to the 10% [VAT].”

The NDC drew on the Letter of Credit to pay for the VAT.

Private respondents filed an appeal and petition for refund with the CTA. The CIR opposed the petition,
arguing that private respondents were not the real parties in interest as they were not the transferors or
sellers as contemplated in Secs 99 and 100 of the Tax Code. Furthermore, the CIR argued that the sale
of the vessels were among those transactions “deemed sale,” as enumerated in Section 4 of R.R. No. 5-
87.

ISSUE: Whether the sale by the NDC of 5 of its vessels to the private respondents is subject to VAT
under the NIRC then prevailing at the time of the sale.

RULING:
NO.

VAT is ultimately a tax on consumption, even though it is assessed on many levels of transactions on the
basis of a fixed percentage. It is the end user of consumer goods or services which ultimately shoulders
the tax, as the liability therefrom is passed on to the end users by the providers of these goods or services
who in turn may credit their own VAT liability (or input VAT) from the VAT payments they receive from the
final consumer (or output VAT).

The final purchase by the end consumer represents the final link in a production chain that itself involves
several transactions and several acts of consumption.

The VAT system assures fiscal adequacy through the collection of taxes on every level of consumption,
yet assuages (alleviates) 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.

VAT is not a singular-minded tax on every transactional level. Its assessment bears direct relevance to
the taxpayer’s role or link in the production chain. Hence, as affirmed by Section 99 of the Tax Code and
its subsequent incarnations, the tax is levied only on the sale, barter or exchange of goods or
services by persons who engage in such activities, in the course of trade or business.

These transactions outside the course of trade or business may invariably contribute to the production
chain, but they do so only as a matter of accident or incident. As the sales of goods or services do not
occur within the course of trade or business, the providers of such goods or services would hardly, if at
all, have the opportunity to appropriately credit any VAT liability as against their own accumulated VAT
collections since the accumulation of output VAT arises in the first place only through the ordinary course
of trade or business.

The sale of the vessels was not in the ordinary course of trade or business of NDC. The Court clarified
the differences:

“carrying on business” does not mean the performance of a single disconnected act, but
means conducting, prosecuting and continuing business by performing progressively all the acts
normally incident thereof; while “doing business” conveys the idea of business being done, not
from time to time, but all the time “Course of business” is what is usually done in the
management of trade or business.

“Doing business” and “course of business” connotes regularity of activity.

In this case, the Charter of the NDC bears no indication that the NDC was created for the primary
purpose of selling real property. Hence, the sale was not in the course of trade or business.

Any sale, barter or exchange of goods or services not in the course of trade or business is not subject
to VAT.

What Section 100 and Section 4(E)(i) of R.R. No. 5-87 elaborate on is not the meaning of “in the course
of trade or business,” but instead the identification of the transactions which may be deemed as
sale.

Accordingly, the Court ruled that given the undisputed finding that the transaction in question was not
made in the course of trade or business of the seller (NDC), the sale is not subject to VAT pursuant to
Sec 99 of the Tax Code; no matter how the said sale may hew to those transactions deemed sale as
defined under Sec 100.
Sec 4€ of R.R. No. 5-87, reflecting Sec 100 of the Tax Code, clarifies that such “change of ownership” is
only an attending circumstance to “retirement from or cessation of business, with respect to all goods on
hand as of the date of such retirement or cessation.” Indeed, Sec 4€ of R.R. No. 5-87 expressly
characterizes the “change of ownership of business” as only a “circumstance” that attends those
transactions “deemed sale”, which are otherwise stated in the same section.

iii. Mindanao Geothermal Partnership II v. Commissioner of Internal Revenue (G.R. No.

193301, 194637, March 11, 2013)

FACTS:

The CTA denied Mindanao II Geothermal Partnership’s (Mindanao II) claims for refund or tax credit for
the first and second quarters of taxable year 2003 for being filed out of time. The CTA, however, ordered
the CIR to refund or credit to Mindanao II unutilized input VAT for the third and fourth quarters of taxable
year 2003.

In another case, the CTA denied Mindanao I’s claims for refund or tax credit for the first to the fourth
quarters of 2003.

Both Mindanao I and II are partnerships registered with the SEC and are VAT taxpayers registered with
the BIR and Block Power Production Facilities accredited by the DOE.

The EPIRA amended the Tax Code 1997, when it decreed that sales of power by generation companies
shall be subject to a zero-rate of VAT. (The delivery and supply of electric energy by generation
companies became VAT zero-rated.) Pursuant to EPIRA, Mindanao I and II filed with the CIR claims for
refund or tax credit of accumulated unutilized and/or excess input taxes due to VAT zero-rated sales in
2003.

FACT OVERVIEW (Both Mindanao I and II are similarly situated)

Mindanao II allegedly entered into a Built-Operate-Transfer (BOT) contract with the Philippine National Oil
Corporation – Energy Development Company (PNOCEDC) for finance, engineering, supply, installation,
testing, commissioning, operation, and maintenance of a 48.25 megawatt geothermal power plant.

Mindanao II alleges that its sale of generated power and delivery of electric capacity and energy of
Mindanao II to NPC for and in behalf of PNOCEDC is its only revenue generating activity which is in the
ambit of VAT zero-rated sales under the EPIRA Law.

The amendment of the NIRC of 1997 modified the VAT rate applicable to sales of generated power by
generation companies from 10% to 0%.

Mindanao II makes domestic purchases of goods and services and accumulates therefrom creditable
input taxes.

Pursuant to NIRC, Mindanao II alleges that it can use its accumulated input tax credits to offset its output
tax liability.

Mindanao II filed an application for refund and/or issuance of tax credit certificate with the BIR

The application for refund by Mindanao II remains unacted upon by the CIR.

Hence, these three petitions.

The Court of Tax Appeals’ Ruling: found that Mindanao II satisfied the twin requirements for VAT zero
rating under EPIRA: (1) it is a generation company, and (2) it derived sales from power generation.
The CTA First Division found that Mindanao II is entitled to a refund in the modified amount of
P7,703,957.79, after disallowing P522,059.91 from input VAT and deducting P18,181.82 from Mindanao
II’s sale of a fully depreciated P200,000.00 Nissan Patrol.

The input taxes amounting to P522,059.91 were disallowed for failure to meet invoicing requirements,
while the input VAT on the sale of the Nissan Patrol was reduced by P18,181.82 because the output VAT
for the sale was not included in the VAT declarations.

Mindanao II filed a motion for partial reconsideration.

It stated that the sale of the fully depreciated Nissan Patrol is a onetime transaction and is not incidental
to its VAT zero-rated operations. Moreover, the disallowed input taxes substantially complied with the
requirements for refund or tax credit.

ISSUE: Whether the sale of the fully depreciated Nissan Patrol is a one-time transaction and is not
incidental to the VAT zero-rated operation of [Mindanao II].

RULING:

NO.

Section 105 of the 1997 Tax Code does not support Mindanao II’s position:

SEC. 105. Persons Liable. Any person who, in the course of trade or business, sells barters,
exchanges, leases goods or properties, renders services, and any person who imports goods
shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code.

The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial
or an economic activity, including transactions incidental thereto, by any person regardless of whether or
not the person engaged therein is a nonstock, nonprofit private organization (irrespective of the
disposition of its net income and whether or not it sells exclusively to members or their guests), or
government entity.

The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the
Philippines by nonresident foreign persons shall be considered as being rendered in the course of
trade or business.

Mindanao II relies on Commissioner of Internal Revenue v. Magsaysay Lines, Inc. (Magsaysay) and
Imperial v. Collector of Internal Revenue (Imperial) to justify its position. Magsaysay, decided under the
NIRC of 1986, involved the sale of vessels of the National Development Company (NDC) to Magsaysay
Lines, Inc. We ruled that the sale of vessels was not in the course of NDC’s trade or business as it was
involuntary and made pursuant to the Government’s policy for privatization. Magsaysay, in quoting from
the CTA’s decision, imputed upon Imperial the definition of "carrying on business." Imperial, however, is
an unreported case that merely stated that "‘to engage’ is to embark in a business or to employ oneself
therein."

Mindanao II’s sale of the Nissan Patrol is said to be an isolated transaction. However, it does not follow
that an isolated transaction cannot be an incidental transaction for purposes of VAT liability.
Indeed, a reading of Section 105 of the 1997 Tax Code would 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 PNOCEDC 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.

Incidental transaction – the transaction is necessarily in pursuit of the primary activity

Power Sector Assets and Liabilities Management (PSALM) Corporation v. CIR, GR No. 198146, August
8, 2017

FACTS:

Petitioner Power Sector Assets and Liabilities Management Corporation (PSALM) is a government-owned
and controlled corporation created under Republic Act No. 9136 (RA 9136), also known as the Electric
Power Industry Reform Act of 2001 (EPIRA). Section 50 of RA 9136 states that the principal purpose of
PSALM is to manage the orderly sale, disposition, and privatization of the National Power Corporation
(NPC) generation assets, real estate and other disposable assets, and Independent Power Producer
(IPP) contracts with the objective of liquidating all NPC financial obligations and stranded contract costs in
an optimal manner.

PSALM conducted public biddings for the privatization of the Pantabangan-Masiway Hydroelectric Power
Plant (Pantabangan-Masiway Plant) and Magat Hydroelectric Power Plant (Magat Plant) on 8 September
2006 and 14 December 2006, respectively. First Gen Hydropower Corporation with its $129 Million bid
and SN Aboitiz Power Corporation with its $530 Million bid were the winning bidders for the Pantabangan-
Masiway Plant and Magat Plant, respectively.

On 28 August 2007, the NPC received a letter dated 14 August 2007 from the Bureau of Internal
Revenue (BIR) demanding immediate payment of P3,813,080,472 deficiency value-added tax (VAT) for
the sale of the Pantabangan-Masiway Plant and Magat Plant. The NPC indorsed BIR's demand letter to
PSALM.

On 30 August 2007, the BIR, NPC, and PSALM executed a Memorandum of Agreement (MOA).

On 21 September 2007, PSALM filed with the Department of Justice (DOJ) a petition for the adjudication
of the dispute with the BIR to resolve the issue of whether the sale of the power plants should be subject
to VAT. The case was docketed as OSJ Case No. 2007-3.

On 13 March 2008, the DOJ ruled in favor of PSALM.

The BIR moved for reconsideration, alleging that the DOJ had no jurisdiction since the dispute involved
tax laws administered by the BIR and therefore within the jurisdiction of the Court of Tax Appeals (CTA).
Furthermore, the BIR stated that the sale of the subject power plants by PSALM to private entities is in
the course of trade or business, as contemplated under Section 105 of the National Internal Revenue
Code (NIRC) of 1997, which covers incidental transactions. Thus, the sale is subject to VAT. On 14
January 2009, the DOJ denied BIR's Motion for Reconsideration.

The BIR went up to the Court of Appeals which held that the petition filed by PSALM with the DOJ was
really a protest against the assessment of deficiency VAT, which under Section 204 of the NIRC of 1997
is within the authority of the Commissioner of Internal Revenue (CIR) to resolve. In fact, PSALM's
objective in filing the petition was to recover the P3,813,080,472 VAT which was allegedly assessed
erroneously and which PSALM paid under protest to the BIR.

Quoting paragraph H of the MOA among the BIR, NPC, and PSALM, the Court of Appeals stated that the
parties in effect agreed to consider a DOJ ruling favorable to PSALM as the latter's application for refund.
Citing Section 4 of the NIRC of 1997, as amended by Section 3 of Republic Act No. 8424 (RA 8424) and
Section 7 of Republic Act No. 9282 (RA 9282), the Court of Appeals ruled that the CIR is the proper body
to resolve cases involving disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto, or other matters arising under the NIRC or other laws
administered by the BIR. The Court of Appeals stressed that jurisdiction is conferred by law or by the
Constitution; the parties, such as in this case, cannot agree or stipulate on it by conferring jurisdiction in a
body that has none.

In conclusion, the Court of Appeals found that the DOJ Secretary gravely abused his discretion
amounting to lack of jurisdiction when he assumed jurisdiction over OSJ Case No. 2007-3. PSALM
moved for reconsideration, which the Court of Appeals denied in its 3 August 2011 Resolution. Hence,
this petition.

ISSUE: Whether the sale of the power plant is subject to VAT.

RULING:

NO.

To resolve the issue of whether the sale of the Pantabangan-Masiway and Magat Power Plants by
petitioner PSALM to private entities is subject to VAT, the Court must determine whether the sale is "in
the course of trade or business" as contemplated under Section 105 of the NIRC, which reads:

SEC 105. Persons Liable. - Any person who, in the course of trade or business, sells, barters,
exchanges, leases goods or properties, renders services, and any person who imports goods
shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code. Xxx

The phrase 'in the course of trade or business' means the regular conduct or pursuit of a
commercial or an economic activity, including transactions incidental thereto, by any person
regardless of whether or not the person engaged therein is a nonstock, nonprofit private
organization (irrespective of the disposition of its net income and whether or not it sells
exclusively to members or their guests), or government entity. 

The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the
Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade
or business.

Under Section 50 of the EPIRA law, PSALM's principal purpose is to manage the orderly sale, disposition,
and privatization of the NPC generation assets, real estate and other disposable assets, and IPP
contracts with the objective of liquidating all NPC financial obligations and stranded contract costs in an
optimal manner.

PSALM asserts that the privatization of NPC assets, such as the sale of the Pantabangan-Masiway and
Magat Power Plants, is pursuant to PSALM's mandate under the EPIRA law and is not conducted in the
course of trade or business. PSALM cited the 13 May 2002 BIR Ruling No. 020-02, that PSALM's sale
of assets is not conducted in pursuit of any commercial or profitable activity as to fall within the ambit of a
VAT-able transaction under Sections 105 and 106 of the NIRC.

On the other hand, the CIR argues that the previous exemption of NPC from VAT under Section 13 of
Republic Act No. 6395 (RA 6395) was expressly repealed by Section 24 of Republic Act No. 9337 (RA
9337).

As a consequence, the CIR posits that the VAT exemption accorded to PSALM under BIR Ruling No.
020-02 is also deemed revoked since PSALM is a successor-in-interest of NPC. Furthermore, the CIR
avers that prior to the sale, NPC still owned the power plants and not PSALM, which is just considered as
the trustee of the NPC properties. Thus, the sale made by NPC or its successors-in-interest of its power
plants should be subject to the 10% VAT beginning 1 November 2005 and 12% VAT beginning 1
February 2007.

We do not agree with the CIR's position, which is anchored on the wrong premise that PSALM is a
successor-in-interest of NPC. PSALM is not a successor-in-interest of NPC. PSALM, a government-
owned and controlled corporation, was created under the EPIRA law to manage the orderly sale and
privatization of NPC assets with the objective of liquidating all of NPC's financial obligations in an optimal
manner. Clearly, NPC and PSALM have different functions. Since PSALM is not a successor-in-
interest of NPC, the repeal by RA 9337 of NPC's VAT exemption does not affect PSALM.

In any event, even if PSALM is deemed a successor-in-interest of NPC, still the sale of the power plants
is not "in the course of trade or business" as contemplated under Section 105 of the NIRC, and thus, not
subject to VAT. The sale of the power plants is not in pursuit of a commercial or economic activity
but a governmental function mandated by law to privatize NPC generation assets. PSALM was
created primarily to liquidate all NPC financial obligations and stranded contract costs in an optimal
manner. The purpose and objective of PSALM are explicitly stated in Section 50 of the EPIRA law.

PSALM is limited to selling only NPC assets and IPP contracts of NPC. The sale of NPC assets by
PSALM is not "in the course of trade or business" but purely for the specific purpose of privatizing NPC
assets in order to liquidate all NPC financial obligations. Thus, it is very clear that the sale of the
power plants was an exercise of a governmental function mandated by law for the primary
purpose of privatizing NPC assets in accordance with the guidelines imposed by the EPIRA law.

The CIR argues that the Magsaysay case, which involved the sale in 1988 of NDC vessels, is not
applicable in this case since it was decided under the 1986 NIRC. The CIR maintains that under Section
105 of the 1997 NIRC, which amended Section 99 of the 1986 NIRC, the phrase "in the course of trade or
business" was expanded, and now covers incidental transactions. Since NPC still owns the power plants
and PSALM may only be considered as trustee of the NPC assets, the sale of the power plants is
considered an incidental transaction which is subject to VAT.

We disagree with the CIR's position. PSALM owned the power plants which were sold. PSALM's
ownership of the NPC assets is clearly stated under Sections 49, 51, and 55 of the EPIRA law.

Under the EPIRA law, the ownership of the generation assets, real estate, IPP contracts, and other
disposable assets of the NPC was transferred to PSALM. Clearly, PSALM is not a mere trustee of the
NPC assets but is the owner thereof. Precisely, PSALM, as the owner of the NPC assets, is the
government entity tasked under the EPIRA law to privatize such NPC assets.

The CIR alleges that the sale made by NPC and/or its successors-in interest of the power plants is an
incidental transaction which should be subject to VAT. This is erroneous. As previously discussed, the
power plants are already owned by PSALM, not NPC. Under the EPIRA law, the ownership of these
power plants was transferred to PSALM for sale, disposition, and privatization in order to liquidate all NPC
financial obligations.

Unlike the Mindanao II  case, the power plants in this case were not previously used in PSALM's
business. The power plants, which were previously owned by NPC were transferred to PSALM for the
specific purpose of privatizing such assets. The sale of the power plants cannot be considered as an
incidental transaction made in the course of NPC's or PSALM's business. Therefore, the sale of the
power plants should not be subject to VAT.

ORDINARY ASSET (Sec 39)

Whether the good/property is part of the company’s assets.

Sale of ordinary asset is in the course of trade or business. – VAT

 iv. Commissioner of Internal Revenue v. Court of Appeals and Commonwealth
Management and Services Corporation, GR No. 125355, March 30, 2000

FACTS:

BIR issued an assessment to private respondent Commonwealth Management and Services Corporation
(COMASERCO) for deficiency VAT for taxable year 1988. COMASERCO’s annual corporate income tax
return indicated a net loss in its operations.

On Feb 10, 1992, COMASERCO filed with the BIR, a letter-protest, objecting to the latter’s finding of
deficiency VAT. The CIR demanded for the payment of the deficiency VAT.

COMASERCO filed with the CTA, arguing that the services rendered to Philamlife and its affiliates,
relating to collections, consultative and other technical assistance, including functioning as an internal
auditor, were on a “no-profit, reimbursement-of-cost-only” basis. It averred that it was not engaged in the
business of providing services to Philamlife and its affiliates. COMASERCO was established to ensure
operational orderliness and administrative efficiency of Philamlife and its affiliates, and not in the sale of
services. COMASERCO stressed that it was not profit-motivated, thus not engaged in business. In fact, it
did not generate profit but suffered a net loss in taxable year 1988. COMASERCO averred that since, it
was not engaged in business, it was not liable to pay VAT.

Petitioner CIR avers that to “engage in business” and to “engage in the sale of services” are two different
things. Petitioner maintains that the services rendered by COMASERCO to Philamlife and its affiliates, for
a fee or consideration, are subject to VAT. VAT is a tax on the
value added by the performance of the service. It is immaterial whether profit is derived from rendering
the service.

ISSUE: Whether the services rendered by COMASERCO are subject to VAT.

RULING:

YES.

Section 99 of the National Internal Revenue Code of 1986, as amended by Executive Order (E.O.) No.
273 in 1988, provides that:

“Section 99. Persons liable.—Any person who, in the course of trade or business, sells, barters or
exchanges goods, renders services, or engages in similar transactions and any person who
imports goods shall be subject to the value-added tax (VAT) imposed in Sections 100 to 102 of
this Code.”

RA No. 7716 or the Expended VAT Law (EVAT) amended Sec 99 of the Tax Code. It provides:

"Sec. 99. Persons Liable. — Any person who, in the course of trade or business, sells, barters,
exchanges, leases goods or properties, renders services, and any person who imports goods
shall be liable to the value-added tax (VAT) imposed in Sections 100 to 102 of this Code.

"The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the
buyer, transferee or lessee of the goods, properties or services. This rules likewise apply to
existing contracts of sale or lease of goods, properties or services at the time of the effectivity of
this Act.
 "The phrase 'in the course of trade or business' means the regular conduct or pursuit of a
commercial or an economic activity, including transactions incident thereto, by any person
regardless of whether or not the person engaged therein is a non-stock, non-profit private
organization (irrespective of the disposition of its net income and whether or not it sells
exclusively to members or their guests), or government entity.

"The rules of regularity, to the contrary, notwithstanding, services as defined in this Code
rendered in the Philippines by nonresident foreign persons shall be considered as being rendered
in the course of trade or business."

Therefore, even a non-stock, non-profit, organization or government entity is liable to pay VAT on the sale
of goods and services. 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 nonstock, nonprofit organization or government entity is liable to pay VAT for
the sale of goods and services.

Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives payments
for services rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for
purposes of determining liability for VAT on services rendered.

VAT is a tax on transactions, imposed at every stage, of the distribution process on the sale, barter,
exchange of goods or property, and on the performance of services, even in the absence of profit
attributable thereto.

The term “in the course of trade or business” requires the regular conduct or pursuit of a commercial or an
economic activity, regardless of whether or not the entity is profit oriented.

“in the course of trade or business” applies to all transactions even made prior to its enactment.

“sales of services” – “performance of all kinds of services for others for a fee, renumeration or
consideration.” It 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.”

Service for a fee/renumeration – the service will be subjected to VAT (regardless of any profit)

Under Sec 109y – association dues and membership fees are already exempt from VAT

REGISTRATION OF VAT

10 days after the end of the last month after his revenue has exceeded the 3M threshold

What will happen if he does not register?

- Does not matter if not registered – they are still liable without the benefit of input VAT. (they will
not be allowed to claim input tax credits if he is not registered)

Registration is optional to those who has not breached the 3M threshold.

Distinguish sale of goods and services

 - Each of these classes has different tax bases

Goods – gross selling price

Services – gross receipts

The difference lies on the

TAX BASE – the amount/value which is considered to determine the tax (you multiply the tax rate to
determine the tax)

Tax base x tax rate = TAX

2.3.2. Scope of VAT

2.3.2.1. Sale, barter, exchange or lease of goods and properties (Sec. 106)

2.3.2.2. Sale or exchange of services (Sec. 108)

2.3.2.3. Importation of Goods (Sec. 107)

2.3.2.4. Transactions deemed sale – Sec. 106(B), NIRC

Cases:

I. Renato v. Diaz and Aurora Timbol v. SOF, GR No. 193007, July 19,
2011

FACTS:

Petitioners assail the validity of the impending imposition of VAT by the BIR on the collections of tollway
operators.

Petitioner’s Argument:

Petitioners claim that, since the VAT would result in increased toll fees, they have an interest as regular
users of tollways in stopping the BIR action. Petitioner’s hold the view that Congress did not, when it
enacted the NIRC, intend to include toll fees within the meaning of "sale of services" that are subject to
VAT; that a toll fee is a "user's tax," not a sale of services; that to impose VAT on toll fees would amount
to a tax on public service; and that, since VAT was never factored into the formula for computing toll fees,
its imposition would violate the non-impairment clause of the constitution. 

Tollway operators cannot be regarded as franchise grantees under the NIRC since they do not hold
legislative franchises.

Respondent’s Argument:
The government avers that the NIRC imposes VAT on all kinds of services of franchise grantees,
including tollway operations; that the Court should seek the meaning and intent of the law from the words
used in the statute; and that the imposition of VAT on tollway operations has been the subject as early as
2003 of several BIR rulings and circulars. 

The government also argues that petitioners have no right to invoke the non-impairment of contracts
clause since they clearly have no personal interest in existing toll operating agreements (TOAs) between
the government and tollway operators. At any rate, the non-impairment clause cannot limit the State's
sovereign taxing power which is generally read into contracts.

Finally, the government contends that the non-inclusion of VAT in the parametric formula for computing
toll rates cannot exempt tollway operators from VAT. In any event, it cannot be claimed that the rights of
tollway operators to a reasonable rate of return will be impaired by the VAT since this is imposed on top of
the toll rate. Further, the imposition of VAT on toll fees would have very minimal effect on motorists using
the tollways.

ISSUE: Whether toll fees collected by tollway operators be subjected to VAT. (Are tollway operations a
franchise and/or a service that is subject to VAT)?

RULING:

YES.

The phrase ‘sale or exchange of services’ means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration, including those performed or rendered
by ...... services of franchise grantees of electric utilities, telephone and telegraph, radio and television
broadcasting and all other franchise grantees except those under Section 119 of this Code ....... and
similar services regardless of whether or not the performance thereof calls for the exercise or use of the
physical or mental faculties. (Sec 108, NIRC)

It is plain from the above that the law imposes VAT on "all kinds of services" rendered in the
Philippines for a fee, including those specified in the list. The enumeration of affected services is not
exclusive.

By qualifying "services" with the words "all kinds," Congress has given the term "services" an all-
encompassing meaning. The listing of specific services are intended to illustrate how pervasive and broad
is the VAT’s reach rather than establish concrete limits to its application. Thus, every activity that can be
imagined as a form of "service" rendered for a fee should be deemed included unless some provision of
law especially excludes it.

Now, do tollway operators render services for a fee? 

Presidential Decree (P.D.) 1112 or the Toll Operation Decree establishes the legal basis for the services
that tollway operators render. In consideration for constructing tollways at their expense, the operators are
allowed to collect government-approved fees from motorists using the tollways until such operators could
fully recover their expenses and earn reasonable returns from their investments.

When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latter’s use of the
tollway facilities over which the operator enjoys private proprietary rights that its contract and the law
recognize. In this sense, the tollway operator is no different from the service providers under Sec 108,
who allow others to use their properties or facilities for a fee.

It does not help petitioners’ cause that Section 108 subjects to VAT "all kinds of services" rendered for a
fee "regardless of whether or not the performance thereof calls for the exercise or use of the physical or
mental faculties." This means that "services" to be subject to VAT need not fall under the traditional
concept of services, the personal or professional kinds that require the use of human knowledge
and skills.

And not only do tollway operators come under the broad term "all kinds of services," they also come
under the specific class described in Section 108 as "all other franchise grantees" (regardless if referring
to legislative franchise or not) who are subject to VAT, "except those under Section 119 of this Code."
Tollway operators are franchise grantees and they do not belong to exceptions that Sec 119 spares from
the payment of VAT. The word “franchise” broadly covers government grants of a special right to do an
act or series of acts of public concern.

2.3.3. VAT registration requirement