NATURE AND CHARACTERISTICS OF VALUE ADDED TAX

What is VALUE ADDED TAX?

VAT is a tax on consumption levied on the sale, barter, exchange, or lease of goods or
properties and services in the Philippines and on the importation of goods into the
Philippines. (Revenue Regulation No. 16-05, Sec. 4, 105-2)

What are the characteristics of VAT?

a. It is a tax imposed on the value added to goods, properties or services of a taxpayer;

b. It is a transparent form of sales tax imposed on the taxable sale, barter, or exchange
of goods, properties or services;
c. It is a broad-based tax on consumption imposed on all stages of taxable sale but the
tax burden rests with the final consumer who consumes the goods, properties, or
services;
d. It is an indirect tax;
e. It is computed through tax credit method or invoice method wherein the input tax
shifted by the sellers to the buyer is credited against the buyer’s output taxes when
he/she in turn sells the taxable goods, properties, or services;
f. It follows the destination principle/cross-border doctrine

What is a destination principle or cross border doctrine?

The destination principle or cross border doctrine provides that goods and services are
taxed only in the country where these are consumed. The Philippine VAT system adheres to the
destination principle or cross border doctrine, according to which, no VAT shall be imposed to
form part of the cost of goods destined for consumption outside of its territorial-border of the
taxing authority.

PERSONS LIABLE TO VALUE-ADDED TAX

Who are the persons liable for VAT? (National Internal Revenue Code, Section 105)

a. 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 VAT.

b. There are two types of persons, Natural person and Juridical Person.
c. Natural persons are those who where born, Juridical persons are corporations
When is a person characterized as a taxable person for VAT purposes?
d. Generally, a person is characterized as a taxable person for VAT purposes, if:

e. He undertakes taxable transactions in goods, properties or services consumed or

destined for consumption within the Philippines;
f. Such transactions are entered into in the course of his/her trade or business; and
g. The amount of his/her gross sales or receipts is over the threshold fixed by law or
regulation.

What is meant by the phrase “in the course of trade or business”? (NIRC, Sec 105)
In the course of his/her 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 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.

What transactions are subject to VAT even if not made in the course of trade or business?
The following transactions shall be subject to VAT, although not made in the course of
trade or business:
a. Services rendered in the Philippines by non-resident foreign persons shall be considered as
being rendered in the course of trade or business; (NIRC, Sec 105) and
b. Importation of goods. There shall be levied, assessed and collected for every importation of
goods a VAT equivalent to 12%. (NIRC, sec 107 (A))

IMPOSITION OF VALUE-ADDED TAX

When is VAT imposed?

VAT is imposed whenever there is:
a. Sale of goods or properties; (NIRC Sec 106)
b. Importation of goods; (NIRC sec 107) and
c. Sale of services and use of lease of properties (NIRC, Sec 108)

How is VAT computed?

VAT is computed by multiplying the VAT rate of 12% to the appropriate tax base for the
particular transaction.
 SUMMARY OF VAT RATES AND BASES

Transaction Rate Tax Base

Sales of Goods 12% Gross selling price or gross value in money of the goods or
properties sold, bartered or exchanged. (NIRC, sec 106 (A))
1. The value used by the Bureau of Customs in
determining tariff and customs duties, plus customs
duties, excise taxes, if any, and other charges, such as
postage, commission, and similar charges, prior to the
release of goods from customs custody; or
Importation of
2. In case the valuation used by the BoC in computing
12% customs duties is based on volume or quantity of the
goods
imported goods, the landed cost shall be the basis for
computing VAT. Landed cost consists of the invoice
amount, customs duties, freight, insurance and other
charges. If the goods imported are subject to excise tax,
the excise tax shall form part of the tax base. (RR no. 16-
05. Sec 4. 107-1(a))
Sale of services 12% Gross receipts derived from the sale or exchange of services,
including the use of lease of properties. (NIRC, Sec 108)

What does the term “goods or properties” mean? (NIRC, Sec 106 (A)(1))

The term “Goods” or “properties” shall mean all tangible and intangible objects which are
capable of pecuniary estimation and shall include:
a. Real properties held primarily for sale to customers or held for lease in the ordinary
course of trade or business;
b. The right or the privilege to use patent, copyright, design or model, plan, secret formula
or process, goodwill, trademark, trade brand or other like property or right;
c. The right of the privilege to use motion picture, films, tapes and discs; and
d. Radio, television, satellite transmission and cable time.

How is VAT on the sale of goods or properties computed? (NIRC, Sec 106 (A))
There shall be levied, assessed and collected on every sale, barter or exchange of goods or
properties, a VAT equivalent to 12% of the gross selling price or gross value in money of the
goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor.

What is meant by gross selling price?

The term gross selling price means 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
of the goods or properties, excluding VAT.
What transactions are deemed as sale? (NIRC, Sec 106 (B))
a. 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;
b. Distribution or transfer to:
a. Shareholders or investors as share in the profits of the VAT-registered person; or
b. Creditors in payment of debt
c. Consignment of goods if actual sale is not made within 60 days following the date such
goods were consigned; and
d. Retirement from or cessation of business, with respect to inventories of taxable goods
existing as of such retirement or cessation.

When are “transactions deemed as sale” subject to VAT?

Before considering whether the transaction is deemed sale, it must first be determined
whether the sale was in the ordinary course of trade or business. Even if the transaction was
“deemed sale,” if it was not done in the ordinary course of trade or business, still the transaction is
not subject to VAT.

When is Vat imposed on importation of goods?

VAT is imposed on goods brought into the Philippines, whether for use in business or not.

Who pays for the tax on importation of goods?

The VAT on importation shall be paid by the importer prior to the release of such goods
from customs custody.

What is meant by sale or exchange of services? (NIRC, Sec 108 (A))

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.

What is meant by “service”?

The art of doing something useful for a person or company for a fee or useful labor or work
rendered or to be rendered to another for a fee.

When is the lease of properties subject to VAT? (NIRC, Sec 108)

The lease of property shall be subject to VAT irrespective of the place where the contract of
lease or licensing agreement was executed, if the property is leased or used in the Philippines.