TAXATION

TXN02

VALUE - ADDED TAX

BUSINESS TAX
 Business refers to organized efforts and regular activities to produce and/or sell products or
services.
 Any business or business pursued by an individual where the aggregate gross sale or
receipts do not exceed P100,000 during any 12-month period shall be considered
principally for subsistence or livelihood and not in the course of business.
 Generally, services rendered in the Philippines by a non-resident foreign person shall be
considered as being rendered in the course of trade or business even if the performance of
service is not regular
TYPES OF BUSINESS TAX
 Value-Added Tax (VAT)
 Other Percentage Tax (OPT)
 Excise Tax/Sin Tax

VALUE-ADDED TAX - is a tax on consumption levied on the sale, barter, exchange or lease of goods
or properties and services in the Philippines and on importation of goods into the Philippines; It is an
indirect tax, which may be shifted or passed on to the buyer, transferee or lessee of goods, properties or
services.

SCOPE OF VAT
 Sale, barter or exchange of goods and properties in the course of trade or business.
 Sale of services or similar transactions in the course of trade or business.
 Lease of goods and properties, or similar transactions, in the course of trade or business.
 Importation of goods, whether in the course of trade or business or not.
WHO ARE LIABLE TO PAY VAT?
 VAT Registered:
 Sales, barters, exchanges, leases of goods or properties and services, except those
transactions under Sec 109 (A) to (BB), of a person who is a VAT registered.
 VAT Registrable:
 Sales, barters, exchanges, leases of goods or properties and services, except those
transactions under Sec 109 (A) to (BB), of a person who is not VAT registered but whose
aggregate gross sales or receipts exceed Three Million Pesos (P3,000,000.00).
 Services of Franchise grantees of radio and TV broadcasting, whose annual receipt for
the preceding years exceeded P10,000,000.
 Importer of Products
WHO ARE LIABLE TO REGISTER AS VAT TAXPAYERS?
 Any person who, in the course of trade or business, sells, barters or exchanges goods or properties
or engages in the sale or exchange of services shall be liable to register if:

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  His gross sales or receipts for the past twelve (12) months, other than those that are
exempt under Section 109 (A) to (U), have exceeded Three Million Pesos
(P3,000,000.00).
 He is required to register as VAT taxpayer before the end of the month
following the month the threshold exceeded.
 There are reasonable grounds to believe that his gross sales or receipts for the next twelve
(12) months, other than those that are exempt under Section 109 (A) to (U), will exceed
Three Million Pesos (P3,000,000.00).
 Optional registrant may register 10 days before the beginning of the taxable
quarter.
 Franchise grantees of radio and TV broadcasting, whose annual receipt for the
preceding year exceeded P10,000,000.
 They are required to register 30days from the end of the calendar year.

WHO ARE REQUIRED TO FILE VAT RETURN?

 Any person or entity who, in the course of his trade or business, sells, barters, exchanges, leases
goods or properties and renders services subject to VAT, if the aggregate amount of actual gross
sales or receipts exceed Three Million Pesos (Php3,000,000.00).
 A person required to register as VAT taxpayer but failed to register.
 Any person, whether or not made in the course of his trade or business, who imports goods.

VAT REPORTING RESPONSIBILITIES

 For the 1st two months of the quarter, VAT should be paid and reported on or before 20th day
following the close of the month using Form 2550M.
 For the last month of the quarter, VAT Quarter Summary must be reported on or before 25 th day
following the close of the quarter using Form 2550Q and any remaining payable should be paid
on or before the mentioned deadline.
VAT RATES: Business Transactions are either
 VAT Exempt;
 “VATable”
 Subject to 12% VAT
 Zero-rated

WHAT ARE THE VAT EXEMPT TRANSACTIONS?

 (A) Sale or importation of agricultural and marine food products in their original state, livestock
and poultry of a kind generally used as, or yielding or producing, foods for human consumption;
and breeding stock and genetic materials;
 Products classified under this paragraph shall be considered in their original state even if they
have undergone the simple processes of preparation or preservation for the market, such as
freezing, drying, salting, broiling, roasting, smoking or stripping. Polished and/or husked
rice, corn grits, raw cane sugar and molasses, ordinary salt and copra shall be considered in
their original state;

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 (B) Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock and
poultry feeds, including ingredients, whether locally produced or imported, used in the
manufacture of finished feeds (except specialty feeds for race horses, fighting cocks, aquarium
fish, zoo animals and other animals considered as pets);
 Importation of personal and household effects belonging to the residents of the Philippines
returning from abroad and nonresident citizens coming to resettle in the Philippines: Provided,
That such goods are exempt from customs duties under the Tariff and Customs Code of the
Philippines;
 (D) Importation of professional instruments and implements, tools of trade, occupation or
employment, wearing apparel, domestic animals, and personal and household effects belonging to
persons coming to settle in the Philippines or Filipinos or their families and descendants who are
now residents or citizens of other countries, such parties hereinafter referred to as overseas
Filipinos, in quantities and of the class suitable to the profession, rank or position of the persons
importing said items, for their own use and not for barter or sale, accompanying such persons, or
arriving within a reasonable time: Provided, That the Bureau of Customs may, upon the
production of satisfactory evidence that such persons are actually coming to settle in the
Philippines and the goods are brought from their former place of abode, exempt such goods from
payment of duties and taxes: Provided, further, That the vehicles, vessels, aircrafts, machineries
and other similar goods for use in manufacture, shall not fall within this classification and shall
therefore be subject to duties, taxes and other charges;
 (E) Services subject to percentage tax under Title V
 (F) Services by agricultural contract growers and milling for others of palay into rice, corn into
grits and sugar cane into raw sugar;
 (G) Medical, dental, hospital and veterinary services except those rendered by professionals;
 (H) Educational services rendered by private educational institutions, duly accredited by the
Department of Education(DepED), the Commission on Higher Education (CHED), the Technical
Education and Skills Development Authority (TESDA) and those rendered by government
educational institutions;
 Services rendered by individuals pursuant to an employer-employee relationship;
 (J) Services rendered by regional or area headquarters established in the Philippines by
multinational corporations which act as supervisory, communications and coordinating centers for
their affiliates, subsidiaries or branches in the Asia-Pacific Region and do not earn or derive
income from the Philippines;
 (K) Transactions which are exempt under international agreements to which the Philippines is a
signatory or under special laws, except those under Presidential Decree No. 529;
 (L) Sales by agricultural cooperatives duly registered with the Cooperative Development
Authority to their members as well as sale of their produce, whether in its original state or
processed form, to non-members; their importation of direct farm inputs, machineries and
equipment, including spare parts thereof, to be used directly and exclusively in the production
and/or processing of their produce;
 (M) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered
with the Cooperative Development Authority;
 (N) Sales by non-agricultural, non- electric and non-credit cooperatives duly registered with the
Cooperative Development Authority: Provided, That the share capital contribution of each
member

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 does not exceed Fifteen thousand pesos (P15,000) and regardless of the aggregate capital and net
surplus ratably distributed among the members;
 (O) Export sales by persons who are not VAT-registered;
 (P) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary
course of trade or business or real property utilized for low-cost and socialized housing as defined
by Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of
1992, and other related laws, residential lot valued at One million pesos (P1,500,000) and below,
house and lot, and other residential dwellings valued at Two million five hundred thousand pesos
(P2,500,000) and below: Provided, That beginning January 1, 2021, the VAT exemption shall
only apply to sale of real properties not primarily held for sale to customers or held for lease in
the ordinary course of trade or business, sale of real property utilized for socialized housing as
defined by Republic Act No. 7279, sale of house and lot, and other residential dwellings with the
selling price of not more than Two million pesos (P2,000,000): Provided, further, That every
three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the
Consumer Price Index, as published by the Philippine Statistics Authority(PSA);
 (Q) Lease of a residential unit with a monthly rental not exceeding Fifteen thousand pesos
(₱15,000);
 (R) Sale, importation, printing or publication of books, and any newspaper, magazine, journal,
review bulletin, or any such educational reading material covered by the UNESCO agreement on
the importation of educational scientific and cultural materials, including the digital or electronic
format thereof. Provided, that the materials enumerated herein are not devoted principally to the
publication of paid advertisements.
 (S) Transport of passengers by international carriers;
 (T) Sale, importation or lease of passenger or cargo vessels and aircraft, including engine,
equipment and spare parts thereof for domestic or international transport operations;
 (U) Importation of fuel, goods and supplies by persons engaged in international shipping or air
transport operations: Provided, That the fuel, goods, and supplies shall be used for international
shipping or air transport operations;
 (V) Services of bank, non-bank financial intermediaries performing quasi-banking functions, and
other non-bank financial intermediaries;
 (W) Sale or lease of goods and services to senior citizens and persons with disability , as provided
under Republic Act Nos. 9994 (Expanded Senior Citizens Act of 2010) and 10754 (An Act
Expanding the Benefits and Privileges of Persons With Disability), respectively;
 (X) Transfer of property pursuant to Section 40(C)(2) of the NIRC, as amended;
 (Y) Associations dues, membership fees, and other assessments and charges collected by
homeowners’ associations and condominium corporations;
 (Z) Sale of gold to the Banko Sentral ng Pilipinas (BSP);
 (AA) Sale of or importation of prescription drugs and medicines for:
(i) Diabetes, high cholesterol, and hypertension beginning January 1, 2020; and
(ii) Cancer, mental illness, tuberculosis, and kidney diseases beginning January 1, 2021.
 (BB) Sale or importation of the following beginning January 1, 2021 to December 31, 2023:
(i) Capital equipment, its spare parts and raw materials, necessary for the production of
personal productive equipment components such as coverall, gown, surgical cap, surgical

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 mask, N-95 mask, scrub suits, goggles and face shield, double or surgical gloves,
dedicated shoes and shoe covers, for Covid-19 prevention
(ii) All drugs, vaccines and medical devices specifically prescribed and directly used for
the treatment of Covid-19; and
(iii) Drugs for the treatment of Covid-19 approved by the FDA for use in clinical trials ,
including raw materials directly necessary for the production of such drugs: Provided,
that the DTI shall certify that such equipment, spare parts or raw materials for
importation are not locally available or insufficient in quantity, or not in accordance with
the quality or specification required: Provided, further, That item (ii) within sixty (60)
days from the effectivity of this Act, and every three (3) months thereafter, the
Department of Health (DOH) shall issue a list of prescription drugs and medical devices
covered in this provision: Provided, finally, That the exemption claimed under this
Subsection shall be subject to post audit by the Bureau of Internal Revenue or Bureau of
Customs as may be applicable.
 (CC) Sale or lease of goods or properties or the performance of services other than the
transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not
exceed the amount of Three million pesos (P3,000,000).
VAT ZERO-RATED TRANSACTIONS:
The following transactions by VAT-registered persons shall be subject to zero percent (0%) rate:
1. The sale and actual shipment of goods from the Philippines to a foreign country ,
irrespective of any shipping arrangement that may be agreed upon which may influence
or determine the transfer of ownership of the goods so exported and paid for in
acceptable foreign currency or its equivalent in goods or services, and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
2. Sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident
local export-oriented enterprise to be used in manufacturing, processing, packing or
repacking in the Philippines of the said buyer's goods and paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);
3. Processing, manufacturing or repacking goods for other persons doing business outside the
Philippines which goods are subsequently exported, where the services are paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations
of the Bangko Sentral ng Pilipinas (BSP);
4. Services other than those mentioned in (3), rendered to a person engaged in business
conducted outside the Philippines or to a nonresident person not engaged in business
who is outside the Philippines when the services are performed, the consideration for
which is paid for in acceptable foreign currency and accounted for in accordance with
the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
5. Services performed by subcontractors and/or contractors in processing, converting, or
manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of
total annual production;
6. Sale of raw materials or packaging materials to export-oriented enterprise whose export
sales exceed seventy percent (70%) of total annual production;

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 7. Those considered export sales under Executive Order NO. 226, otherwise known as the
“Omnibus Investment Code of 1987”, and other special laws; and
8. The sale of services, goods, supplies, equipment and fuel to persons engaged in
international shipping or international air transport operations: Provided, That the
services, goods, supplies, equipment and fuel shall be used for international shipping or
air transport operations.
9. Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign
country; and
10. Sale of power or fuel generated through renewable sources of energy such as, but not
limited to, biomass, solar, wind, hydropower, geothermal, ocean energy, and other
emerging energy sources using technologies such as fuel cells and hydrogen fuels.
11. Sales of goods and services to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively subjects such
sales to zero rate.
 Items (2), (3), (5), (6) and (7) hereof shall be subject to the twelve percent (12%) value-
added tax 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 enhanced VAT refund
system that grants refunds of creditable input tax within ninety (90) days from the
filing of the VAT refund application with the Bureau: Provided, That, to
determine the effectivity of item no. 1, all applications filed from January 1, 2018
shall be processed and must be decided within ninety (90) days from the filing of
the VAT refund application; and
 All pending VAT refund claims as of December 21, 2017 shall be fully paid in
cash by December 31, 2019.
HOW TO COMPUTE VAT PAYABLE
VAT Payable = Output VAT – Input VAT – Creditable Withholding Tax

PROBLEM 1AoT Corporation, a VAT manufacturer submitted the following data for the last month of
2020 (all figures are at total invoice value)
Materials purchased 280,000
Purchase returns 16,800
Sales, local 336,000
Sales return, local 22,400
Foreign currency denominated export sales, peso equivalent 170,000
Purchases from board of accountancy 31,360
Operating Expenses 30,000

Required: Compute:
1. VAT payable
2. Income tax (30% tax on net income)

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 SOURCES OF OUTPUT VAT
 VAT on Actual Sale (including installment sale of real property not primarily held for sale whose
selling price exceeded the exempt amount)
 VAT on Transaction Deemed Sale
SOURCES OF INPUT VAT
 VAT on Actual Purchases
 Purchase of Capital Goods with amount P1,000,000 and above
 Ordinary Goods and Services
 VAT on importation
 Transitional Input Tax
 Presumptive Input Tax
TRANSACTION DEEMED SALES
 Transfer, use or consumption, not in the course of business, of goods or properties originally
intended for sale or for use in the course of business.
 Distribution or transfer to:
 Shareholders or investors as share in the profits of the VAT-registered person; or
 Creditors in payment of debt or obligation
 Consignment of goods if actual sale is not made within sixty (60) days following the date such
goods were consigned. Consigned goods returned by the consignee within the 60-day period are
not deemed sold;
 Retirement from or cessation of business, with respect to all goods on hand, whether capital
goods, stock-in-trade, supplies or materials as of the date of such retirement or cessation, 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";
 Change of ownership of the business. There is a change in the ownership of the business
when a single proprietorship incorporated; or the proprietor of a single proprietorship
sells his entire business.
 Dissolution of a partnership and creation of a new partnership which takes over the
business.
VAT ON SALE OF REAL PROPERTY ON INSTALLMENT
 Sale is considered on installment if Initial Payments does not exceed 25% of Selling Price.
 Initial Payments – all payments received in the year of sale (including interests and penalties and
including excess of mortgage over cost)
PROBLEM 2
A real estate dealer entered in a VATable sale with the following details:
 Selling Price – P6,000,000
 Zonal Value – P6,300,000
 Assessed Value – P5,800,000

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  Payment Scheme (6 years) – P1,250,000 every December 31 for the 1st 3 years and P750,000 for
the last 3 years.

Compute Output VAT to be paid in the year of sale.

TRANSITIONAL INPUT VAT

 Persons who become liable to VAT or elects to be a VAT-registered shall be allowed input tax
equivalent to 2% of his beginning inventory or the actual VAT paid on such inventory whichever
is higher.
PROBLEM 3
On the month of October 2021, ECQ exceeded the VAT threshold and opted to register as VAT taxpayer
effective November 01, 2021. The only stocks at the end of October were the P200,000 inventory
purchased that month. 5% of the P200,000 (net of VAT) purchases came from a VAT-registered supplier
and 95% from a non-VAT registered supplier. On the month of November 2021, ECQ sold goods
amounting to P313,600 (Vat inclusive). Compute VAT Payable for the month of November.

PRESUMPTIVE INPUT
 Persons or firms engaged in the processing of sardines, mackerel and milk, and in manufacturing
refined sugar and cooking oil, shall be allowed a presumptive input tax, creditable against the
output tax, equivalent to four percent (4%) of the gross value in money of their purchases of
primary agricultural products which are used as inputs to their production.

PROBLEM 4
Mr. Lang Es, non-VAT registered with annual Gross Sales less than P3,000,000, is an operator of a
business that processes vegetable cooking oil. Following are his transactions for the 1st quarter of the year
2021.
 Purchases from VAT supplier – Jan (VAT Exclusive) – P10,000
 Purchases from VAT supplier – Feb (VAT Exclusive) – P12,000
 Purchases from VAT supplier – Mar (VAT Exclusive) – P10,500
 Purchase of Vegetables from VAT Exempt supplier – Jan – P15,000
 Purchase of Vegetables from VAT Exempt supplier – Feb – P25,000
 Purchase of Vegetables from VAT Exempt supplier – Mar – P20,000
 Sales (net of any applicable business tax) – Jan – P100,000
 Sales (net of any applicable business tax) – Feb – P120,000
 Sales (net of any applicable business tax) – Mar – P90,000
Compute business tax payable.

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STANDARD INPUT
 Government or any of its political subdivisions, instrumentalities or agencies including GOCCs
shall, before making payment on account of each purchase taxed at 12% VAT, deduct and
withhold VAT of 5%. Such amount is considered Final Withholding Tax. Provided, that effective
January 1, 2021, it will be considered Creditable Withholding Tax.
PROBLEM 5
A VAT taxpayer had the following sales and with their corresponding directly input VAT during the month:
Sales amount Input VAT
Sales to private entities 900,000.00 60,000.00
Export sales 300,000.00 36,000.00
Sales to government 250,000.00 24,000.00
Sales to exempt goods 100,000.00 2,400.00
1,550,000.00 122,400.00
Required:
1. How much input VAT should be allowed as creditable?
2. How much of the actual input shall form part of the cost and expenses?
3. Compute VAT Payable

AMORTIZATION OF INPUT VAT ON PURCHASES OF CAPITAL GOODS COSTING

MORE THAN P1,000,000
 Input VAT of depreciable capital goods are distributed to its estimated useful life or 5 years,
whichever is shorter. Provided, that effective January 1, 2022, input VAT of all newly purchased
depreciable capital goods will be claimed in full on the month/quarter of purchase.
 Depreciable Capital Goods refers to properties that are used directly or indirectly in the
production or sale of taxable goods or services. Such goods has estimated useful life of more than
one year and are treated as depreciable assets for income tax purposes.

PROBLEM 6
On December 1, 2021, JMH Corp purchased machinery amounting to P5,000,000. Such machinery will be
used in the production of the company’s sole product, “board passers”.

Required:
1. Assuming that the machinery has an estimated useful life of 4 years:
a. Determine the input VAT related on the said purchase for the month of December 2021.
b. Determine the input VAT relate on the said purchase for the month of January 2022.

2. Assuming that the machinery has an estimated useful life of 6 years:

a. Determine the input VAT related on the said purchase for the month of December 2021.
b. Determine the input VAT relate on the said purchase for the month of January 2022.

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INPUT VAT OF PURCHASES NOT DIRECTLY ATTRIBUTABLE TO VATABLE SALE
 In cases where purchases are not directly attributable to VATable sale, input VAT are
prorated based on sales

PROBLEM 7
Ms. Mikasa is an operator of business which primary source of income is to process cooking oil called
Salakam oil. The following transaction transpired during the month of February 2021:

Sales (net of VAT)

Regular sales 3,600,000.00
Personal consumption 400,000.00
Sales to senior citizens (gross of any applicable discounts) 1,600,000.000
Export Sales 800,000.00
Total 6,400,000.00

Purchases (net of VAT)

Fresh Sardines 1,400,000.00
Office supplies 1,500,000.00
Total 2,900,000.00

Required: Compute VAT Payable

ADVANCED PAYMENT OF VAT/OPT

 Raw sugar and refined sugar under RR 6-2015 shall be subject to advance payment of VAT, by
the owner/seller before the sugar is withdrawn from any sugar refinery/mill.
 Base rate is 12% of P1,400 per bag of 50kg refined sugar / P1,000 per bag of 50kg for all other
types of sugar.
 Exempt from Advanced payment:
 Withdrawal of raw cane sugar.
 Withdrawal of sugar by duly accredited and registered agricultural cooperative of
good standing.
 Withdrawal of sugar by agricultural cooperative which is sold to another agricultural
cooperative.

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