Law on Income Tax
Value-Added Tax
What is Value-Added Tax?
It is a tax on consumption imposed at every stage
of the distribution process on
a. the sale, barter, exchange, or lease of
goods or properties
b. rendition of services in the course of
trade or business
c. the importation of goods, whether or not
such imported goods are for use in
business.
VAT rate: 12% standard rate; 0% on certain sales
or transactions
VAT base: gross selling price or gross receipts
NATURE AND CHARACTERISTICS
It is a PERCENTAGE TAX imposed by law not on
the thing or service but on the act (sale, barter,
exchange, lease, importation, or performance of
service)
An INDIRECT TAX where the seller is the one
statutorily liable for the payment of the tax, but the
amount of the tax may be shifted or passed on to
the buyer, transferee or lessee of the goods,
properties or services. [Sec. 105, NIRC]
A REGRESSIVE TAX where 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.
A BUSINESS TAX that is levied on certain
transactions involving a wide range of goods,
properties and services, such tax being payable by
the seller, lessor or transferor.
WHAT ARE VAT-TAXABLE TRANSACTIONS?
Those transactions which are subject to VAT either
at the rate of 12% or 0% and the seller shall be
entitled to tax credit for the VAT paid on purchases
and leases of goods, properties, and services (CIR
V. CEBU TOYO [FEBRUARY 16, 2005])
ELEMENTS OF A VAT-TAXABLE TRANSACTION
1. There must be a sale, barter, exchange, or
lease of goods or properties, performance
of service in the Philippines, or importation
of good
2. The subject matter must be taxable goods
or properties or services
3. The sale must be made by a taxable person
in the course of trade or business or in the
furtherance of one’s profession.
Meaning of “in the course of trade or business”
(Rule of Regularity)
● The regular conduct or pursuit of a
commercial or 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. [Sec. 105, NIRC; Section 4.105-3,
RR 16-2005]
Exceptions:
1. Services rendered by non-resident foreign
persons shall be considered as being
rendered in the course of trade or business,
even if the performance of services is not
regular. [Section 4.105-3, RR 16-2005]
2. Importation are subject to VAT whether or
not made in the course of trade or business
[Sec. 4.105-1, RR 16-2005]
3. Any business where the gross sales or
receipts do not exceed P100,000 during the
12-month period shall be considered
principally for subsistence or livelihood and
 not in the course of trade or business. Thus,
they are exempt from VAT and percentage
tax. [RMC 7-2014 in relation to RR 7-2012]
WHO ARE THE PERSONS LIABLE TO
VALUE-ADDED TAX
1. Any person who sells, barters, exchanges,
or leases goods or properties, or who
renders services, in the course of trade or
business
Exceptions:
a) A non-VAT-registered person whose annual
gross sales or receipts do not exceed P3M.
b) Franchise grantees under Sec. 119 of this
Code whose annual gross receipts do not
exceed P10M and who are not
VAT-registered.
2. Any person who imports goods, whether or
not in the course of business
3. Any person who voluntarily registers its
business under the VAT system, regardless of level
of sales.
TAX CREDIT METHOD
Tax credit is collected through the tax credit
method. The input taxes shifted by the sellers to
buyers are credited against the buyer's output
taxes when he in turn sells the taxable goods,
properties or services.
The VAT payable is the excess of output tax over
input tax:
OUTPUT VAT – INPUT VAT = VAT PAYABLE or
EXCESS INPUT TAX
Note:
Output Tax > Input Tax = Net VAT Payable
Output Tax < Input Tax = Excess Input Tax
DESTINATION PRINCIPLE AND
CROSS-BORDER DOCTRINE
GR: Goods and services are taxed only in the
country where they are consumed. Thus, exports
are zero- rated, while imports are taxed. [CIR v.
American Express International, G.R. No. 152609
(2005)]
Exception: Zero-rated services under Sec.
108(b)(1)[1] and (2)
Requisites for the exception to apply:
1. The service is performed in the Philippines;
2. The service falls under any of the categories
provided in Section 108(b) of the Tax Code;
and
Note: The recipient of such services must
be doing business outside the Philippines.
[CIR v. Burmeister, G.R. No. 153205 (2007)]
3. It is paid in acceptable foreign currency that
is accounted for in accordance with the
regulations of the BSP. [CIR v. American
Express International, G.R. No. 152609
(2005)]
In a zero-rated service, the place where the service
is rendered determines the jurisdiction to impose
the VAT. The place of payment is immaterial; much
less is the place where the output of the service will
be further or ultimately used.
Q: Is the profit element required for VAT to be
imposed?
A: The term "in the ordinary course or trade of
business" requires the regular conduct or pursuit of
a commercial or an economic activity, regardless of
whether or not the entity is profit-oriented (CIR V.
CA COMASERCO [MARCH 30,2000])
IMPOSITION OF VALUE-ADDED TAX
1. VAT On Sale Of Good Or Properties
 ● Every sale, barter or exchange
(actual sale and in the course of
trade or business)
● Transactions “deemed sale” of
taxable goods or properties [Sec.
4.106-1, RR 16- 2005]
Rate: 12% VAT [Sec. 106, NIRC]
Who Pays: Seller/Transferor[Sec. 106(A), NIRC]
What are considered as “goods or properties”
for VAT purposes?
● all tangible and intangible objects which are
capable of pecuniary estimation, including:
○ Real properties held primarily for
sale to customers or held for lease in
the ordinary course of trade or
business;
○ 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;
○ The right or the privilege to use in
the Philippines of any industrial,
commercial or scientific equipment;
○ The right or the privilege to use
motion picture films, films, tapes and
discs;
○ Radio, television, satellite
transmission and cable television
time. [Sec. 106(A)(1), NIRC]
What are the requisites of a VAT-taxable sale?
a. There is an actual or deemed sale of goods
or properties for a valuable consideration
b. Undertaken in the course of trade or
business
c. For use or consumption in the Philippines
(regardless of the payment arrangements)
d. Not exempt from VAT under Sec. 109 of the
NIRC, special law, or international
agreement
How is VAT imposed on real property
transactions?
Sale of real properties held primarily for sale to
customers or held for lease in the ordinary course
of trade or business of the seller shall be subject to
VAT. [Sec. 4.106-3, RR 16-2005]
Requisites for Taxability
a. The seller executes a deed of sale, barter or
exchange, assignment or conveyance, or
contract to sell real property.
b. The real property is located within the
Philippines.
c. The seller or transferor is engaged in real
estate business either as a real estate
dealer, developer, or lessor.
d. The real property is held primarily for sale or
for lease in the ordinary course of his trade
or business, or at least an ordinary asset
used in the trade or business of the VAT
taxpayer as an incident to his VAT-taxable
activity.
e. The sale is not exempt from VAT under Sec.
109 of the NIRC, special law, or
international agreement. [MAMALATEO]
Sale Of Real Property Not Subject To Vat
a. Sale of real properties not primarily held for
sale or lease in the course of trade or
business
b. Real property utilized for low cost or
socialized housing
c. Residential lot valued at P1.5M and below
d. House and lot, and other residential
dwellings valued at P2.5M and below [Sec.
109(1)(P)]
Note: Beginning January 1, 2021, the VAT
exemption for sale of house and lot, and other
residential dwellings shall apply only to those with
selling price of not more than P2,000,000.
e. Transfer of property to a corporation in
exchange for shares of stocks in a tax- free
exchange under Sec. 40(C)(2) of the NIRC
[Sec. 109(1)(X), NIRC]
f. Transmission of property to a trustee if the
property is to be merely held in trust for the
trustor and/or beneficiary [Sec. 4.106-3, RR
16-2005]
Exception: If the property transferred is originally
intended for sale, lease or use in the ordinary
course of trade or business AND the transfer
constitutes a completed gift, the transfer is subject
to VAT as a deemed sale transaction. The transfer
is a completed gift if the transferor divests himself
absolutely of control over the property,
i.e.,irrevocable transfer of corpus and/or irrevocable
designation of beneficiary.
Modes of Sales of Real Estate
a. Cash sale – the entire selling price is
taxable in the month of sale
b. Installment sales- a sale in which the initial
payments in the year of sale do not exceed
25% Gross Selling Price (GSP)
Effect: VAT is recognized based on
collection, including interest and penalties,
actually and/or constructively received by
the seller.
- “Initial payments” means payment or
payments which the seller receives
before or upon execution of the
instrument of sale and payments
which he expects or is scheduled to
receive in cash or property during
the taxable year when the sale or
disposition of the real property was
made. It covers any down payment
made and includes all payments
actually or constructively received
during the year of sale, the
aggregate of which determines the
limit set by law.
c. Sale on a deferred-payment basis- initial
payments in the year of sale exceed 25% of
the GSP
Effect: The transaction shall be treated as
cash sale which makes the entire selling
price taxable in the month of sale.
Subsequent payments are no longer subject
to VAT.
2. SALE OR EXCHANGE OF SERVICES
● Means the performance of all kinds of
services in the Philippines for others for a
fee, remuneration or consideration [Sec 108
(A), NIRC
Requisites:
a. There is a sale or exchange of service or
lease or use of property enumerated in the
law or other similar services;
b. The service is performed or to be performed
in the Philippines;.
c. For a valuable consideration actually or
constructively received; and
d. The service is not exempt under the NIRC,
special law or international agreement.
3. ON IMPORTATION OF GOODS
Rate: 12% VAT
Total value used by the Bureau of Customs (BOC)
in determining tariff and customs duties, plus
customs duties, excise taxes, if any, and other
charges (such as postage, commission) Where the
customs duties are determined on the basis of the
quantity or volume of the goods, VAT shall be
based on the landed cost, plus excise taxes, if any.
WHAT ARE ZERO-RATED TRANSACTIONS?
A zero-rated sale of goods, properties, or services
by a VAT-registered person is a taxable transaction
for VAT ppurposes but shall not result in any output
tax. However, the input tax on purchases of goods,
properties or services, related to such zero-rated
sale, shall be available as tax credit or refund.
The following transactions are subject to VAT at
0%
a. Export sales
b. Sales of goods or property to persons or
entities who are tax-exempt (Effectively
Zero-Rated Sales)
c. Zero-rated sale of services
What are the two types of zero-rated
transactions?
1. Zero Rated Sales of Goods or Properties.
2. Zero Rated Sales of Services
Sales by VAT Registered person subject to 0%
rate
Export sales. - "Export Sales " shall mean:
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, 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. The sale of raw materials or packaging
materials to a non-resident 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, paid
for in acceptable foreign currency, and
accounted for in accordance with the rules
and regulations of the BSP;
3. The sale of raw materials or packaging
materials to an export-oriented enterprise
whose export sales exceed seventy percent
(70%) of total annual production. Any
enterprise whose export sales exceed 70%
of the total annual production of the
preceding taxable year shall be considered
an export-oriented enterprise.
4. Transactions considered export sales under
Executive Order No. 226, otherwise known
as the Omnibus Investments Code of 1987,
and other special laws.
5. The sale of goods, supplies, equipment and
fuel to persons engaged in international
shipping or international air transport
operations: Provided, That the goods,
supplies, equipment, and fuel shall be used
exclusively for international shipping or air
transport operations.
Export sales subject to 0%
1. The (i) sale and actual shipment of goods
from the Philippines to a foreign country
AND (ii) paid for in acceptable foreign
currency or its equivalent in goods or
services, AND (iii) accounted for in
accordance with the rules and regulations of
the BSP
2. The sale of goods, supplies, equipmentn
and fuel to persons engaged in international
shipping or international air transport
operations: Provided, That the goods,
supplies, equipment and fuel shall be used
exclusively for international shipping or air
transport operations [as amended by Train
Law; Sec. 2, RR 13- 2018]
Export sales subject to 12%
1. The (i) sale of raw materials or packaging
materials to a nonresident buyer (ii) for
delivery to a resident local export-oriented
enterprise (iii) to be used in manufacturing,
processing, packing or repacking in the
Philippines of the said buyer's goods AND
(iv) paid for in acceptable foreign currency
AND (v) accounted for in accordance with
the rules and regulations of the BSP
2. Sale of raw materials or packaging
materials to export-oriented enterprise
whose export sales exceed 70% of total
annual production
3. Those considered export sales under the
Omnibus Investment Code of 1987, and
other special laws (e.g. Bases C
Zero rated sale of services subjected to 12%
1. 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 BSP;
2. Services performed by subcontractors
and/or contractors in processing,
converting, or manufacturing goods for an
 enterprise whose export sales exceed 70%
of total annual production;
VAT-EXEMPT ZERO-RATED

A taxable transaction Not subject to output

EFFECTIVELY ZERO-RATED SALES OF but does not result in tax
GOODS AND SERVICES an output tax
Effectively Zero-Rated Sales- This refers to (i) the
The input VAT The seller is not
local sale of goods and properties (ii) by a attributable to entitled to any input tax
VAT-registered person (iii) to a person or entity who zero-rated sales may on his purchaser
was granted direct be allowed as tax despite the issuance of
and indirect tax exemption under special laws or credits or refund a VAT invoice receipt.
international agreement Sales under Special Law
Persons engaged in Registration is optional
or International Agreements subject to 0%
zero-rated transactions for VAT-exempt
are required to register persons

ZERO-RATED (AUTOMATICALLY ZERO-RATED)

VS EFFECTIVELY ZERO-RATED
TRANSACTIONS.
VAT-EXEMPT TRANSACTIONS
Refer to the sale of goods or properties and/or
AUTOMATIC EFFECTIVELY services and the use or lease of properties that is
ZERO-RATED ZERO-RATED NOT subject to VAT (output tax) and the seller is
TRANSACTIONS TRANSACTIONS
not allowed any tax credit of VAT (input tax) on
Refers to export sales Refers to sales to purchases.
and foreign currency persons or entities
denominated sales whose exemption The VAT-registered person may elect that the
under special laws or exemption not apply to its sale of goods or
international properties or services; provided that the election
agreements to which
made shall be irrevocable for a period of three (3)
the Philippines is a
signatory years from the quarter the election was made [Sec.
4.109-2, RR 16-2005 as amended by RR 13-2018].
The seller of such It does not yield any tax
transactions charges chargeable against the Exempt Transactions Sec. 109, NIRC]
no output tax, but can purchaser a. Sale or importation of agricultural and marine
claim a refund or a tax
food products in their original state, livestock and
credit certificate for the
VAT previously charged poultry of a kind generally used as, or yielding or
by suppliers producing foods for human consumption, and
breeding stock and genetic materials therefor;
This is for the benefit of This is for the benefit of ● Products in their original state remain as
the seller. the purchaser such even if they have undergone the
The seller who charges zeo output tax can claim simple processes of preparation or
a refund or a tax credit certificate for the VAT preservation for the market, such as
previously charged by suppliers. freezing, drying, salting, broiling, roasting,
smoking or stripping, including those using
advanced technological means of
packaging, such as shrink wrapping in
VAT EXEMPTION VS ZERO-RATED plastics, vacuum packing, tetra-pack, and
other similar packaging methods.
 ● Polished and/or husked rice, corn grits, raw
cane sugar and molasses, ordinary salt,
AND COPRA shall be considered in their
original state
● Livestock or poultry do not include fighting
cocks, race horses, zoo animals and other
animals generally considered as pets. [Sec.
4.109-1(B)(1)(a), RR 16-2005]
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 generally considered as pets);
c. Importation of personal and household effects
belonging to (i) Philippine residents returning from
abroad and (ii) non-resident citizens coming to
resettle in the Philippines; provided, that such
goods are also 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 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 (i.e., 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 [as amended by
TRAIN Law]
The Bureau of Customs may,upon production of
satisfactory evidence that such persons are actually
coming to settle in the Philippines and that the
goods are
brought from their former place of abode, exempt
such goods from payment of duties and taxes [as
amended by TRAIN Law];
Exception: Vehicles, vessels, aircrafts,
machineries, and other goods for use in
manufacturing shall be subject to duties, taxes and
other
charges.
e. Services subject to percentage tax;
f. Services by agricultural contract growers and
milling for others of palay into rice, corn into grits,
and sugar cane into raw sugar;
● Agricultural contract growers refer to those
producing for others poultry, livestock or
other agricultural and marine food products
in their original state.
g. Medical, dental, hospital and veterinary services,
except those rendered by professionals;
● Laboratory services are exempted. If the
hospital or clinic operates a pharmacy or
drugstore, the sale of drugs and medicine is
subject to VAT.
Note: R.A. 9337 removed the VAT-exemption
previously granted to doctors and lawyers.
h. Educational services (i) rendered by private
educational institutions, duly accredited by DepEd,
CHED, TESDA, and (ii) those rendered by
government educational institutions;
i. 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 PD No. 529 (Petroleum Exploration
Concessionaires under the Petroleum Act of 1949);
l. Sales by agricultural cooperatives duly registered
with the Cooperative Development Authority (CDA)
to their members, as well as sale of their produce,
whether it is 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;
● Sale by agricultural cooperatives to
non-members are exempted from VAT if the
producer is the cooperative itself. If not
(e.g., trader), then only those sales to its
members shall be exempted from VAT. [RR
4-2007]
RA 8763, wherein the price ceiling per unit
is P480,000 for a horizontal socialized
housing with a minimum floor area of
24sq.m, and P700,000 (if within NCR and
nearby areas) orbP600,000 (in other areas)
for socialized vertical/condominium projects
with a minimum floor area of 22sq.m.
● Sale of residential lot valued at P1.5M and
below, or house & lot and other residential
dwellings valued at P2.5M and below, as
adjusted in 2011 using the 2010 Consumer
Price Index values.

m. Gross receipts from lending activities by credit

or multi-purpose cooperatives duly registered with
the CDA;

n. Sales by non-agricultural, non-electric and

non-credit cooperatives duly registered and in good
standing with the CDA; Provided, that the share
capital contribution of each member does not
exceed P15,000 and regardless of the aggregate
capital and net surplus ratably distributed among
the members;
● However, their importation of machineries
and equipment, including spare parts
thereof, to be used by them are subject to
VAT. [Sec. 4.109-1(B)(1)(n), RR 16-2005]

o. Export sales by persons who are not

VAT-registered;

p. Sale of real properties as follows:

● 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 properties utilized for low-cost
housing as defined by R.A. 7279 (Urban
Development and Housing Act of 1992) and
other related laws
● Sale of real properties utilized for socialized
housing as defined under RA 7279, and
other related laws, such as RA 7835 and