ISU MODULE TEMPLATE

Subject: BUSINESS TAXATION

Title of the Module
Chapter 3: Value-Added Tax on Sale of Services
Requirements for taxability of services
To be subject to VAT, the following requirements must be satisfied:
1. the service must be performed in the course of trade or business.
The phrase “in the course of trade or busines” 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 whether or not it sells exclusively to
members or their guest), or government entity (Sec. 105, NIRC)
2. it must be performed in the Philippines.
To be subject to VAT, the service must be rendered in the Philippines. Those rendered abroad are not taxable because
the place where the service is performed determines the jurisdiction to impose VAT. Thus, the place of payment is immaterial.
3. Consideration must be received actually or constructively.
The value added tax accrues upon actual or constructive receipt of the consideration. Thus, whether the receipts consist
of delayed payment or even deposit or advance payments, the same constitutes gross receipts subject to VAT.
4. the transaction is not exempt under the Code, special laws or international agreements.
No matter how regular the occurrence of the transaction is, if it is exempt under the code as or in other special laws,
such transaction shall be exempt from VAT.

Meaning of “sale or exchange of services”

Sale or exchange of service means the performance of all kinds of services in the Philippines for others for a fee,
remuneration or consideration, including the following services performed or rendered by:
1. Construction and service contractors;
2. Stock, real estate, commercial customs and immigration brokers;
3. lessors of property, whether real or personal;
4. persons engaged in warehousing services;
5. lessors or distributors of cinematographic films;
6. persons engaged in milling, processing, manufacturing or repacking goods for others;
7. proprietors, operators or keepers of hotels, motels, rest houses, pension houses, inns, resorts, theatres, and movie houses;
8. proprietors, operators of restaurants, refreshment parlors, café and other eating places, including clubs and caterers;
9. dealers in securities;
10. lending investors;
11. transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire
and other domestic carriers by land to their transport of goods or cargoes;
12. common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Philippines
to another place in the Philippines;
13.Sale of electricity by generation, transmission, and/or distribution companies;
14. franchise grantees of electric utilities, telephone and telegraph, radio and/or television broadcasting and all other franchise
grantees, except franchise grantees or radio and/or television broadcasting companies whose annual gross receipts or the
preceding year do not exceed P10,000,000 and franchise grantees of gas and water utilities;
15. non-life insurance companies (except crop insurance), including surety, fidelity, indemnity and bonding companies;
16. similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental
faculties (Rev. Reg. 16-2005)

Broker
 A broker is one whose occupation is to bring parties together or to bargain for them in matters of trade, commerce or
navigation for a fixed or regular compensation.
A custom broker is one who is engaged in transporting with hired trucks for delivery of goods of customers from the
customs premises to their place of establishment for a fee
A real estate broker is one who is engaged in selling, leasing, mortgaging, etc. of real properties of others for a fee.

Warehousing service
Warehousing service means rendering personal services by a warehouseman, such as:
a. engaging in the business of receiving and storing goods for others for compensation or profit
b. receiving goods and merchandise to be stores in his warehouse for hire; and
c. keeping and storing goods for others, as business and for use

Millers
The millers subject to value-added tax are those engaged in milling for others except millers of palay into rice, corn into
corn grits, and sugarcane into raw cane sugar.
If the miller is paid in cash for his services, VAT shall be based on his gross receipts for services during the month or
quarter.
If he receives a share of milled products instead of cash, the value-added tax shall be based on the actual market value
of his share in the milled product (except rice, corn grits and raw cane sugar)

Operators of Hotels and Restaurants

The following persons or entities engaged in hotel and restaurant business are subject to VAT:
1. proprietors, operators or keepers of hotels, motels, rest houses, pension houses, inns, apartelles and resorts;
2. proprietors or operators of restaurants, refreshment parlors, café and other eating places;
3. proprietors or operators of bars and clubs;
4. caterers;
5. non-stock, nonprofit organizations, government-owned and controlled corporations and cooperatives engaged in the hotel and
restaurant business;
6. other similar establishments (RMC No. 7-96)

The term “gross receipts” in hotel and restaurant operators shall include, among others, charges for rooms, laundry and valet
services, food and beverages consumption, corkage, handling charges for providing telephone, telefax, cable, or fax services,
cake shop sales, lease to concessionaires, compensation and other services.
It does not include the following:
1. services charges billed separately and actually distributed to waiters and employees;
2. actual cost of long distance and overseas telephone calls, fax, cable, telex, and charges of the telecommunication companies
collected by establishments for the customer/client for the concerned telecommunication companies, such as PLDT, which are
earmarked for payment to the latter;
3. VAT passed on to customers; and
4. Local taxes charged

Dealers in Securities and Lending Investors

Dealer in securities means a merchant of stocks or securities:
a. with an established place of business;
b. regularly engaged in the purchase of securities and their resale to customers, that is, one who as a merchant buys securities
and sells them to customers;
c. with a view to the gains and profits that may be derived therefrom (Rev. Reg. 7-95)

Lending investors include all persons other than banks, non-banks financial intermediaries, finance companies and other
financial intermediaries not performing quasi-banking functions, who make a practice of lending money for themselves or
others at interest.
Sale of Electricity by Generation, Transmission and Distribution Companies
 Generation companies refers to persons or entities authorized by Energy Regulatory Commission (ERC) to operate
facilities in the generation of electricity.
For this purpose, generation of electricity refers to the production of electricity by a generation company or co-
generation facility pursuant to the provision of the RA 9136 (EPIRA). They shall include all independent power producers
(IPPs) and NPC/Power Sector Assets and Liabilities Management Corporation (PSALM)-owned generation facilities
Transmission companies refers to any person or entity that owns and conveys electricity through high voltage backbone
system and/or sub transmission assets, e.g. NPC or Transco.
Sub-transmission assets shall refer to the facilities related to the power delivery service below the transmission voltages
and based on the functional assignment of asset including, but not limited to step-down transformers used solely by load
customers, reactive compensation equipment to improve power factor, overhead lines, and the land where such
facilities/equipment’s are located
Distribution companies refers to persons or entities which operate a distribution system in accordance with the
provision of the EPIRA
They shall include any distribution utility such as an electric cooperative organized under RA 6938, or as otherwise
provided in the EPIRA, a private corporation, or a government-owned utility or existing local government unit which has an
exclusive franchise to operate a distribution system in accordance with the EPIRA.
Gross receipts of these companies shall refer to the following:
a. total amount charged by generation companies for the sale of electricity and related ancillary services; and/or
b. total amount charged by transmission companies for transmission of electricity and related ancillary services; and/or
c. total amount charged by distribution companies and electric cooperatives for distribution and supply of electricity, and related
electric service. The universal charges passed on and collected by distribution companies and electric cooperatives shall be
excluded from the computation of gross receipts.
VAT on Transportation Contractors
Transportation contractors subject to VAT refers to domestic common carriers by land, air and sea who transport goods
or cargoes, and domestic air or water carriers on their transport of passengers.
Transportation contractors who transport passengers for hire by land (domestic or international), are not subject to
value-added tax because they are subject to common carrier’s tax of three percent (3%) based on gross receipts.
Transport of passengers and cargoes by domestic air or sea vessels from the Philippines to a foreign country of carrier
are subject to 0% VAT.
International
Carriers Originating from the Philippines
transport of
Passenger VAT exempt
CC
Cargo or Goods T

Domestic Common Carriers within the Philippines Philippines to Abroad

Passengers
by Land CCT 0%
by Air or Sea VAT 0%
Cargo or Goods VAT 0%

Illustration:
Safe transport company is engaged in carriage of passengers from Luzon to Visayas and/or Mindanao, and vice-versa. It
is also engaged in the domestic carriage of goods or cargo. During the period, it had the following data:

Receipts from carriage of passengers P560,000

Receipts from carriage of goods or cargo 336,000
Purchases of goods subject to VAT 168,000
Purchases of goods not subject to VAT 80,000
Required: compute the VAT payable if Safe transport company is a:
1. domestic common carrier by air and sea
2. domestic common carrier by land (assume that the gross receipts on carriage of passenger’s amount to P500,000)

1. Domestic common carrier by air and sea

Passengers (560,000 X 3/28) P 60,000
Goods or cargo (336,000 X 3/28) 36,000
Output tax 96,000
Less: input tax (168,000 X 3/28) 18,000
VAT payable 78,000

2. Domestic common carrier by land

Output tax (336,000 X 3/28) 36,000

Less: Input tax (168,000 X 3/28) 18,000
Allocation of input tax
Passengers 500,000
Goods or cargo 300,000
Total 800,000 6,750
VAT Payable 29,250

VAT on Franchise Grantees

The following services of franchise grantees are subject to VAT:
1. on telephone and telegraph;
2. on toll road operations;
3. on radio and television broadcasting, except franchise grantees of radio and television broadcasting companies whose annual
gross receipts of the preceding year do not exceed P10,000,000 because they are subject to a Franchise tax of 3%;
4. all other franchise grantees (except gas and water utilities)

Non-life insurance companies

Only the transactions entered into by persons in the course of non-life insurance business are taxable. They include the
following: marine, fire and casualty insurance, surety, fidelity, indemnity, bonding companies and mutual benefit associations,
including non-resident foreign person rendering non-life insurance services in the Philippines.
Value-added tax is not imposed on gross receipts derived from the payment of premiums on life insurance.
Other sale or exchange of services
The phrase “sale or exchange of services” shall likewise include the following:
1. the lease of the use of or the right or privilege to use any copyright, patent, design or model, plan, secret formula or process,
goodwill, trademark, trade brand or other like property or right;
2. the lease or the use of, or the right to use any industrial, commercial or scientific equipment;
3. the supply of scientific, technical, industrial or commercial knowledge or information;
4. the supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or
enjoyment of anu such property, or right as is mentioned in subparagraph or any such knowledge or information as mentioned in
subparagraph;
5. the supply of services by a nonresident person or his employee in connection with the use of property or right belonging to, or
the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person;
6. the supply of technical advice, assistance or services rendered in connection with technical management or administration of
any scientific, industrial or commercial undertaking, venture, project or scheme;
7. the lease of motion picture films, films, tapes and discs; and
8. the lease or the use of or the right to use radio, television, satellite transmission and cable television time.
Illustration:
Baby James is a building contractor, its records in the month of February show the following:
Building A Contract price, P2,200,000
Payment received P1,792,000
Receivable 448,000

Building B Contract price, P4,000,000

Payment received for work done P2,240,000
Advances for work to be done 1,120,000

Building C (finished last year)

Contract price, P2,500,000
Receivables last year (collected February) P392,000

Payment made:
For services of VAT subcontractor 1,568,000
Purchases of construction materials subject to VAT 694,400
Wages of employees 450,000
Purchases of supplies from VAT suppliers 56,000
Required: compute for VAT payable
Output tax
Building A – gross receipts 1,792,000
Building B – payment received 2,240,000
Advances 1,120,000
Building C – gross receipts 392,000
Total 5,544,000 X 3/28 594,000
Less: Input tax
Subcontractors 1,568,000
Materials 694,400
Supplies 56,000
Total 2,318,400 X 3/28 248,400
VAT Payable 345,600

Lease of Properties
In general, all forms of lease of properties held primarily for lease to customers in the ordinary course of trade or
business, whether real or personal, shall be subject to VAT unless the gross annual receipts of the lessor do not exceed
P3,000,000
Lease of property shall be subject to VAT regardless of the place where the contract of lease was executed if the
property leased is located in the Philippines. However, the following leases of residential units shall be exempt from value-
added tax:
1. those with a monthly rental not exceeding P15,000 per unit regardless of the amount of aggregate rentals received by the
lessor during the year;
2. those whose aggregate rentals of the lessor during the year do not exceed P3,000,000, even if the monthly rental per unit
exceeds P15,000.
The term “residential units” shall refer to apartments and houses and lots used for residential purposes, and buildings or pars or
units thereof used solely as dwelling places (e.g. dormitories, rooms and bed spaces) except motels, motel rooms, hotel and
hotel rooms, lodging houses, inns and pension houses
Illustration:

Monthly Rental Aggregate Annual Rental

Case 1 12,000.00 2,000,000.00
Case 2 17,500.00 2,100,000.00
Case 3 14,000.00 3,360,000.00
 Case 4 16,000.00 3,264,000.00

Illustration:
Liz, the lessor rents her two (2) commercial and (10) residential units for monthly rent of P60,000 and P15,000 per unit,
respectively. During the taxable year, her accumulated gross receipts amounted to P3,240,000 (P1,440,000 from commercial
units and P1,800,000 from residential units).
a. is the P3,240,000 subject to VAT?
b. how about if Liz has five (5) commercial units and her accumulated gross receipts during the taxable year amounted to
P5,400,000 (P3,600,000 from commercial units and P1,800,000 from residential units?