Chapter 2 VALUE-ADDED TAX ON SALE OF GOODS OR PROPERTIES Preliminary Statements. . The value-added tax is a consumption tax. It is imposed on a seller, but the seller passes it on to the buyer; 2. The value-added tax must be shown on the official invoice or receipt issued to the buyer, as a separate item; The value-added tax is 12%, 5% or 0% of the selling price; While each sale has a value-added tax, and separate recording in the books of accounts is on a per transaction basis, reporting and payment of the value-added tax to the government is made monthly, on the tran- sactions of the month. Pe THE TAXPAYER Any person who sells, barters or exchanges goods or pro- perties in the course of trade or business will be subject to the value-added tax. (The law exempts certain transactions from the value-added tax.) The taxable tran- Whatis a sale, barter or exchange? sactions are sale, barter and ex- Asale is the transfer of ownership of property in chage. Whenever consideration of money received or to be received. For inarulethe word the expanded meaning of “sale”, see Figure 2-1 on “sale” is used, it transactions “deemed sales”. must be under- stood to include A barter or exchange is the transfer of ownership of barter and ex- property in consideration of property received or tobe change. received. An isolated transaction of sale or exchange of pri- vate property is not in the course of trade or business, and is not subject to the value-added tax. Mustration 2-1. Mr. Amade a cash sale of his mer A Study on Business Taxes and Transfer Taxes 24¥ chandise inventory. The sale is subject to the value-agq, ed tax. Mustration 2-2. Mr. B sold his three-year old family car This is not subject to the value-added tax. Figure 2-1. Transactions deemed sales The following are considered “sales” in the course of trade or business subject to the value-added tax (Statutory enumera. tion): (a) Transfer, use or consumption, not in the ordinary course of business, of goods or properties ordinarily intended for sale or in the course of business; (b) Distribution or transfer of inventory to shareholders or in- vestors for their shares in the profits of a VAT-registered person; (c) Distribution or transfer of inventory to creditors in payment of debt; (d) Consignment of goods if actual sale is not made within sixty days following the date such goods were consigned; (e) Retirement from or cessation of business, with respect to inventories of taxable goods as of the date of such retire- ment or cessation. Mustration 2-3. Mr. C sells household furniture. He re- moved from his store a living rootm set for use in his resi- dential house. This is deemed a sale. Mustration 2-4. D Co. declared and paid a dividend out of merchandise inventory. This is deemed a sale. Ilustration 2-5. E Co. is indebted to F Co. for raw ma- terials. When E Co. could not pay in money, F Co. agreed to receive the finished goods of E Co. in payment. This is deemed a sale by E Co. Mustration 2-6. G Co., a manufacturer, made sales, 25 follows: To Mr. H, on credit, with title to the goods passing {0 Mr. H, and to Mr. 1, on consignment, with title to the goods to pass only upon actual sale of the consigned goods fo a buyer. The goods consigned to Mr. | are still in the Shelves of Mr. |. The sale to Mr. H is subject to the valu added tax because title to the goods has passed to Mr. H. The consignment to Mr. 1, although title to the goods has A Study on Business Taxes and Transfer Taxes 2not yet passed, will b to the value-added tax ree ctually sold by Mr. |, or after sixty days from the date of consignment (Provision of lav) e subject was a partnership in trade. J&K M was formed to continue the ‘JeK was dissolved, the books ‘andise inventory of P100,000, ry. The inventory will 1d will be sub- Mlustration 2-7. J&K was dissolved and L& business of J&K. At the time of accounts showed a merch’ which was also the physical invento be deemed sold by J&K Co. to L&M Co., an ject to the value-added tax. WHAT ARE GOODS OR PROPERTIES? Sales of movable “Goods or properties” are all tangible and intangible and immovable objects which are capable of pecuniary (moriey) es- properties are timation. (The law has a provision that states what are taxable within the meaning of “goods or properties”.) What are “goods”? Goods are movable properties. Thus, sales by a car dealer are sales of goods in the conduct of trade or business, subject to the value- added tax. What is within the meaning of “properties"? Inclu- ded in the term “properties” are real properties. Thus, sales by a real estate dealer are sales of properties in the conduct of trade or business, subject to the value- added tax. THE TAX BASE The tax base (the amount on which the rate of value-added tax is applied) is gross selling price. Meaning of gross selling price. By statutory definition: “Gross selling price” means the total amount of money or its equivalent which the purchaser pays or is obligated to pay to the seller in consideration of the sale, barter, or exchange, exclu- ‘A Study on Business Taxes and Transfer Taxes 23¥ ding the value-added tax. The excise tax, if any, o such goods, will form part of the gross selling price,’ ° Stated briefly, gross selling price includes everythin that the buyer pays the seller, except the Value-addeg tax shifted to the buyer. “Gross selling price” does not mean gross sales. The law and regulations allow downward adjustments for. (a) Sales returns and allowances; (b) Sales discounts agreed upon at the time of sale (the granting of which does not depend on the happening of a future event) indicated on the sales invoice, and availed of by the buyer. Mustration 2-8. Mr. A sold an article to Mr. B. The quoted selling price was P10,000, not including freight and value-added tax. Mr. B has to pay P10,500 (addi- tional P500 for the freight) and the value-added tax be- fore title to the goods passes to him upon delivery at his place. The gross selling price was P10,500. In an “actual sale”, the Mlustration 2-9. Mr. C produced articles at a product. selling price of the jon cost of P50,000. The articles are subject to an ex- seller is: cise tax of P5,000. The articles became subject to the (a) Recovery of cost excise tax the moment they came into existence, a- and expenses; and though payment of the tax will be made only upon re- (b) Desired profit. moval of the goods from the place of production. The share of the articles in the operating expenses is cal- culated at P8,000. The desired profit is P37,000. The selling price was P100,000, which was: The VAT billed to the + Recovery of: buyer, and received Production cost P 50,000 by the seller, is not part Operating expenses 8,000 of the selling price. Excise tax 5,000 Desired profit 37,000 Selling price 100,000 Value-added tax at 12% 12,000 Total, to be paid by the buyer 112,000 The gross selling price does not include the valv™ added tax. Mlustration 2-10. In a taxable period, Mr. D had 5. sales, value-added tax not included, of P425,000- 4 Study on Business Taxes and Transfer Taxes 2retums and allowances for the same period, and sales discounts, stated on the invoice, availed of by cus- tomers, were P20,000 and P5,000, respectively. The gross selling price tax base was: Gross sales 425,000 Less: Sales returns and allowances 20,000 Sales discounts 5,000 25,000 Gross selling price tax base 400,000 The Commissioner of Internal Revenue will deter- mine the appropriate tax base in cases where the transactions are deemed sales, or where the gross selling price is unusually lower than the actual market value. Mustration 2-11. Mr. D sold an article for P50,000, when the prevailing market value was P100,000. The Commissioner of Internal Revenue will determine the amount on which to compute the output value-added tax. Mustration 2-12. E Co. is a lumber sawmill. It used lumber from its production to construct the residential house of its President. This transaction is deemed a sale. The Commissioner of Internal Revenue will deter- mine the amount on which to compute the output value- added tax. THE TAX RATES se The tax rates are: (a) Twelve percent (12%), if domestic sale; (b) Five percent (5%), if sales to the Government (and cer- tain entities); (c) Zero percent (0%), if export sale. The law states zero-rated tax on exports (and cer- tain other transactions). Goods exported are “Export sales” means the sales and actual ship- taxed at 0%, whether ments or exportations of goods from the Philippines title to the goods to a foreign country, irrespective of any shipping passed to the buyer arrangement that may be agreed upon which may in- A Study on Business Taxes and Transfer Taxes 25in the Philippines or fluence or determine the transfer of ownership of t abroad, but paid in goods so exported, and paid for in acceptable fo. acceptable foreign reign currency or its equivalent in goods or Servi. currency ces, and accounted for in accordance with the Tules and regulations of the Banko Sentral Ng Pilipinas Mlustration 2-13. Mr. E exported his _manufactureg goods to F Co. in the United States, under terms of ship. ment F.O.B. California, United States. Payment was jn dollars remitted thru the Philippine National Bank, Caj, fornia, U.S.A., branch. Since title to the goods was trans. ferred, and hence, the sale was consummated, in the United States, the sale was an export sale. Mlustration 2-14. G Co. exported its manufactured goods to H Co. in the United States, under terms of shipment F.O.B. Manila, Philippines. Payment was in dollars remitted thru the Philippine National Bank, Cali- fornia, U.S.A., branch. Even as title to the goods was transferred, and hence, the sale was consummated, in the Philippines, the sale was still an export sale. THE TAX FORMULA. Output taxes (seller’s value-added tax on sales) Less: Input taxes (seller’s value-added taxes paid on pur- chases, etc.) Equals: Value-added tax payable of seller (See Figure 2-2) What is output tax? It is the value-added tax on a sale. What is input tax? It is value-added taxes paid: Cn local purchases from VAT-registered persons, and on impor ations, of goods: (2) For sale; (b) For conversion into or intended to form part of a finished product for sale, including packaging materials; (c) For use as supplies; . (d) For use in trade or business, for which depreciation (or 27) tization) is allowed for income tax purposes (capital 90045) 26 A Study on Business Taxes and Transfer Taxesexcept automobiles, aircrafl and yachts; (e) Value-added taxes paid on purchases of real property; (f) Value-added taxes paid on purchases of services; (g) Transitional input tax (See Chapter 6); and (h) Presumptive input tax (See page 2-14 of this Chapter), Figure 2-2. Tax formula ee ae, 6 oe WW ee AT eg Output taxes Input taxes Real nennary Siinnliae Grove Canital nande Sanviinee Matariale Braciimntive Trancitinnal Value-added tax payable Mlustration. Mr. W, a VAT taxpayer, made domestic sales of P600,000 and ex- port sales of P1,400,000. The output taxes on do- mestic sales would have been P600,000 x 12%, or P72,000, and the output taxes on exports would have been P1,400,000 x 0%, or PO. Mustration. Mr. 0. import- ed goods to be sold, with a landed cost of P40,000 (Chapter 7). He sold the goods to Mr. P for P90,000 Mr. P sold the goods to Mr. Q for P170,000, for use by Mr. Q as raw materials. Mr. Q secured the services of Mr. R, a service contractor and paid Mr. R P50,000. Mr. Q sold his products for P400,000. All taxpayers involved are VAT-registered persons and all selling prices mentioned do not include the value-added tax. The computations for the value-added taxes in the series of transactions involving VAT taxpayers would have been as shown in Figure 2-4. Figure 2-3. The tax formula on a purchase-sale transaction: Mr. A, a VAT taxpayer Output tax on a sale here Mr. B, a VAT taxpayer Output tax ona sale here to Mr. B+ Less: Input tax on purchase A Study on Business Taxes and Transfer Taxes from Mr. A VAT payable here 27i Cascading effect of the VAT A Study on Business Taxes and Transfer Taxes Cascading effect of the value-added tax. (See Figure 2-4 ) Figure 2-4. Value-added taxes in a series of transactions involving VAT taxpa} For Mr. O: Upon importation: Landed cost of imported article P 40,000 Value-added tax (P40,000 x 12%) P 4,800 Upon the sale: Selling price P 90,000 Output tax (P90,000 x 12%) 10,800 Less: Input tax (upon importation) 4,800 Value-added tax payable P 6,000 For Mr. P: Selling price P170,000 Output tax (P170,000 x 12%) P20,400 Less: Input tax (On purchase from Mr. O) 19.800 Value-added tax payable P 9,600 For Mr. Q: Selling price P400,000 Output tax (P400,000 x 12%) P48,000 Less: Input taxes — (On purchase from Mr. P P 20,400 ‘On purchase from Mr. R — below) 6,000 Total input taxes 26,400 Value-added tax payable P21,601 For Mr. R: Value-added tax — Output tax (P50,000 x 12%) P 6,000 Mustration 2-15. Mr. R, a VAT taxpayer, made a sale at P100,000, value-added tax not included, of goods that he bought at P3,000 from a non-VAT taxpayer. The value- added tax payable was P12,000, computed as follows: Output tax (100,000 x 12%) 12,000 Less: Input tax ae Value-added tax payable 2,000 Mustration 2-16, Mr. S, a VAT tax de a sale at 8, payer, made a P100,000, value-added tax not included, of goods that he 28bought at P3,000 from a VAT taxpayer, value-added tax not included. The value-added tax payable was P11,640, computed as follows: Output tax (P100,000 x 12%) P 12,000 Less: Input tax (P3,000 x 12%) 360 Value-added tax payable Pite40 Mlustration 2-17. On assumed data: Gross sales 200,000 Less: Sales returns and allowances 20,000 Sales discounts 4,200 21,200 Net sales 178,800 Output tax (P178,800 x 12%) P 21,456 On assumed data: Gross purchases P 100,000 Less: Purchase retums and allowances 10,000 Purchase discounts 500 10,500 Net purchases 89,500 Input tax (P89,500 x 12%) 10,740 From the preceding computations: Output tax P21,456 Less: Input tax 10.740 P10,716 Value-added tax payable VERY IMPORTANT. ustrations in the pages in this chapter, and succeeding chap- ig sot of circumstances, such circumstances ithin a month. It must be stated While th ters, may be on a concurrins must be understood as all occurring w now: That the value-added tax is paid after the transactions of, a month. end of, and on all VAT-related iustration 2-18. Mr. A is a VAT trader, selling goods purchased from VAT suppliers. He had the following tran- actions in March 2019, value-added tax not included: P 42,000 29 June 2 Purchases on account ‘A Study on Business Taxes and Transfer Taxes3 Purchase returns and allowances 1709 June 5 Sales on account 100,099, June 6 Purchase discount 300 june 7 Sales returns and allowances 10,008 lune 15 Sales discount 1,809 How much was the value-added tax payable for the month? Computations: Sales P 100,009 Less: Sales returns and allowances P 10,000 Sales discount 1,800 14,800 Net sales P 88.209 88,209 Purchases P42,000 Less: Purchase returns and allowances P 1,700 Purchase discount 300 2,000 Net purchases 40,000 Output tax (P88,200 x 12%) P 10,584 Less: Input tax (P40,000 x 12%) 4.800 Value-added tax payable P 5.784 (See Appendix B on Books of Accounts on Value-Added Tax) Mlustration 2-19. in March 2019, Mr. H, a VAT taxpayer, had: 3/2 Purchase of goods for sale from | Co., VAT taxpayer, VAT not included P 300,000 3/4 Purchase of goods for sale from Mr. J, anon-VAT taxpayer 200,000 3/10 Purchase of supplies from Mr. K, VAT taxpayer, VAT not included 50,000 3/15 Purchase of services from Mr. L, VAT taxpayer, VAT not included 60,000 3/17 Purchase of office equipment from M Co., VAT taxpayer, VAT not included 40,000 3/19 Purchase of land for use in business, from VAT taxpayer, VAT not included 500.000 3/20 Sales, VAT not included 4,500,000 3/31, Payment of rent to O Co., VAT taxpayer, VAT not included 50,000 A Study on Business Taxes and Transfer Taxes 5210How much was the value-added tax payable for March? P60,000, computed, as follows: Output taxes (P1,500,000 x 12%) P180,000 Less: Input taxes On goods (P300,000 x 12%) 36,000 On supplies (P50,000 x 12%) 6,000 On services (P60,000 x 12%) 7,200 On office equipment (P40,000 x 12%) 4.800 On land (P500,000 x 12%) 60,000 On rent (P50,000 x 12%) 6,000 120,000 Value-added tax payable P’ 60,000 Mlustration 2-20. \n the preceding illustration, how much would have been the net income for the period if the office equipment had a useful life of three years and four months, and there were operating expenses paid to non- VAT taxpayers of P200,000? The computation: Sales 1,500,000 Less: Cost and expenses: Purchase of goods - VAT suppliers ~P300,000 Purchase of goods - Non-VAT suppliers 200,000 Purchase of supplies 50,000 Purchase of services 60,000 Depreciation of office equipment (P40,000/40 months) 1,000 Rent 50,000 Other operating expenses 200,000 861,000 Net income 639,000 The output taxes and input taxes do not go into the com- putation of the net income. They are not treated as expenses because they are credited or offset against each other. Any excess of output taxes over the input taxes in the same taxable period will be a Value-added Tax Payable for the pe- riod, and will be a liability in the Statement of Financial Position. On the other hand, any excess of the input taxes over the output taxes of the same period will be a Deferred Input Tax for use in the next taxable period, which will appear in the assets section of the Statement of Financial Position. PROBLEMS. Solve problems 2-1 to 2-4. A Study on Business Taxes and Transfer Taxes 24THE REAL ESTATE DEALER The tax base is the considera- tion stated in the deed of sale, or the zonal value, or the fair mar- ket value in the assessment rolts, whichever is the highest perty by a real estate dealer will by A sale of real pro} at 12% of the gross seit, subject to the value-added tax ing price. Who is a real estate dealer? A real estate dealer js any person engaged in the business of buying, develop. ing, selling, or exchanging real property as principal ang holding himself out as a full or part-time dealer of reaj estate. What is gross selling price? Gross selling price is which. ever is higher between the consideration stated in the contract of sale and the fair market value. What is fair market value? It is whichever is higher bet. ween the fair market value as determined by the Comis- sioner of Internal Revenue (zonal value), and the fair market value as shown in the schedule of values of the Provincial or City Assessor (real property tax deciara- tion). In the absence of zonal value/fair market value as determined by the Commissioner of Internal Revenue, fair market value refers to the market value shown in the latest real property tax declaration. Mustration 2-21. Case 1 Case2 Case3 In pesos Consideration stated in : the deed of sale 3,000,000 4,200,000 3,000,000 Zonal value 3,500,000 4,500,000 2,500,000 Fair market value in the é assessment rolls 2,000,000 '-4#700,000 2,500,000 Gross selling price 3,500,000 4,700,000 3,000,000 Value-added tax at 12% 420,000 564,000 360,000 Stated in another Way, gross selling price is whichever 'S highest of the: (a) Consideration stated in the deed of sale; (b) con value, per Commissioner of Internal Revenue: an (c) Fair market value per Real Property Declaration with the Provincial or City Assessor. 2A2 A Study on Business Taxes and Transfer TaxesInstallment pay- ments of the va- lue-added tax is allowed if the ini- tial payments do not exceed 25% of selling price in the deed of sale Installment sale by the real estate dealer. In case of a sale by a real estate dealer in installments, can the value-added tax be computed in installments (as output value-added tax for the real estate dealer and in- put value-added tax for the buyer)? Yes, if the initial pay- ments do not exceed twenty-five percent (25%) of the selling price stated in the deed of sale (not which- ever is highest of the three values looked into). Initial payments will include all payments scheduled in the year of sale. Figure 2.5 Installment value-added tax of a real estate dealer. When the initial payments do not exceed -twenty-five percent (25%) of the selling price: Step 1. Compute the value-added tax at twelve percent (12%) on the tax base (whichever is highest of three values); Step 2. Determine the value-added tax on the installment payment, as follows: Agreed VAT not included x Computed VAT Collection on the selling price, 1d VAT not included in Step 1 selling price, The official receipt issued must clearly state on what the VAT component is based. Mustration 2-22. Sale of real property in installments by a real estate dealer. Consideration in the deed of sale P 1,800,000 Zonal value 2,000,000 Fair market value in the assessment rolls of the city 4,700,000 Payments on the consideration: ‘July 1, 2018 (date of sale) 225,000 December 1, 2018 225,000 July 1, 2019 1,350,000 Value-added tax on highest of three values (P2,000,000 x 12%) P 240,000 Down payment, July 4, 2018 P 225,000 Payment, December 1, 2018 225,000 Installment payments, year of sale P 450,000 Initial payments of P450,000 do not 2-13 A Study on Business Taxes and Transfer Taxesee exceed 25% of the consideration of P1,800,000 Installment value-added tax: July 1, 2018: P225,000/P 1,800,000 x P240,000 P 30 09 December 1, 2018: “NO P225,000/P 1,800,000 x P240,000 P 29 om July 1, 2019: A809 P14,350,000/P 1,800,000 x P240,000 P 180 009 The deed of sale and each official receipt showing pa, ment on the installment price must state that the yay," added tax is based on the zonal value. . Mustration 2-23. Mr. B is a real estate dealer. He soly , piece of land in installments. Data were as follows: Installment selling price, VAT not included 4,000.09) Zonal value 2,000,009 Fair market value 5,000,009 Installment selling price 4,000,009 Terms of payment: . May 2, 2018 (date of sale) 4,000,000 May 2, 2019 3.000.009 Total 4,000,000 He had expenses of operations paid to VAT taxpayers, value-added tax not included, as follows: May 2, 2018 20,000 May 2, 2019 60,000 Output tax? Input tax? Value-added tax payable? Value-added tax on the sale (on highest three values) (P5,000,000 x 12%) P 600,000 May 2, 2018 Output tax (1,000,000/P4,000,000 x P600,000)P 150,000 Less: Input tax on expenses (P20,000 x 12%) 2,400 Value-added tax payable P 147,600 May 2, 2019 Output tax (P3,000,000/P4,000,000 x P600,000) 450,000 Less: Input tax (P60,000 x 12%) 7,200 Value-added tax payable P 442,800 PROBLEMS. Solve problems 2-5 to 2-8. PRESUMPTIVE INPUT TAX. A Sludy on Business Taxes and Transfer Taxes 2dAgricultural pro- ducts, previously VAT exempt, give input tax to the preferred taxpayer Persons or firms engaged in processing sardines, ma- ckerel, and milk, and in manufacturing refined sugar and cooking oil, and packed noodle-based instant meals will be allowed a presumptive input tax, equi- valend to four percent (4%) of the gross value in mo- ney of their purchases of: primary agricultural products which are used as inputs to their production. Primary agricultural products are agricultural products in their original state. (Are original marine products within the meaning of original agricultural products? The author thinks no. The law at times mentions “agricultural” and “marine” pro- ducts separately.) The term “processing” means pasteurization, canning and activities which through physical or chemical pro- cess alters the exterior texture or form or inner sub- stance of a product in such a manner as to prepare it for special use to which it could not have been put in its original form and condition (this present definition of “processing” was the old definition of “manufacturing” in the law). Iustration 2-24. Mr. ST purchases sardines from fisher- _men and processes them into canned sardines. Going to processing in a certain taxable period were the following purchases, value-added tax not included: Fish (from fishermen) P100,000 Tin cans 20,000 Tomato paste (in cans) 5,000 Olive oil (in plastic bottles) 2,500 Pepper (from farmers) 1,800 Paper labels (from printers) 500 Sales during the period, value-added tax not included, amounted to P400,000. The value-added tax payable would have been: Output taxes (P400,000 x 12%) P 48,000 Less: Input taxes - Actual value-added taxes on purchases — On tin cans (P20,000 x 12%) 2,400 ‘A Study on Business Taxes and Transfer Taxes 245\'! On tomato parte (P5,000 # 17%) 600 On olive oll (2,500 1 12%) WO OO On paper babel (P500 4 12%) Presummiplive input tar On popper (91,800 44%) 12 Value-added tax payable PROBLEM. Solve problem 24. JOURNAL ENTRIES. On (assumed amounts) (a) Purchase at P100,000, VAT not included, for cash (Debit) Purchases P100,000 (Debit) Input taxes 12,000 (Credit) Cash P1120 (b) Sales at P200,000, VAT not included, for cash (Debit) Cash P224,000 (Debit) Output taxes 2A, (Credit) Sales 200,000 (c) Recognition of VAT to pay: P24,000 (Debit) Output taxes (Credit) Input taxes P12,000 (Credit) Value-added tax payable 12,000 PROBLEM. Solve problem 2-10. A Study on Business Taxes and Transfer Taxes 246