TAX 2 – FINALS (NOTES)
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MODULE 6-7 VALUE-ADDED TAX
Value Added Tax Defined
 This is a consumption tax 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
 VAT is a tax on the value added by every seller to the purchase price or cost in the sale or
lease of goods, property, or services in the ordinary course of trade or business as well as on
importation of goods into the Philippines, whether for personal or business use.
 It is an indirect and consumption tax which the end users of consumer goods, properties or
services ultimately shoulder, as the liability therefor is passed onto them by the providers of
goods and services who, in turn, may credit their own VAT liability from the VAT payments
they receive from the final consumers
 VAT is a consumption tax imposed at every stage of the distribution process on the sale,
barter, exchange (including transactions deemed by law as a sale), or lease of goods or
properties and rendition of services in the course of trade or business, or on the importation of
goods, whether such imported goods are for use in the business or not.
Characteristics of VAT
The tax is called VAT because it is imposed on the value not previously subjected to VAT, i.e., on
the value added to the goods or services at each stage of the distribution chain
 Indirect Tax
o It is an indirect tax and the amount of tax may be shifted or passed on to the buyer,
transferee or lessee of goods, properties, or services
o It is an indirect tax and the amount of tax and may be shifted or passes on to the
buyer, transferee, or lessee of the goods, properties or services
o “Impact of Taxation” – point on which a tax is originally imposed
 In so far as the law is concerned, the taxpayer is the person who must pay
the tax to the government
 Referred to as “statutory taxpayer” or whom the tax is formally assessed
 The party directly and statutorily liable for the payment of the tax is the
seller.
 Hence, he cannot claim exemption from the payment of the tax
simply because the buyer is exempt from tax.
o “Incidence of Taxation” means the point on which the tax burden finally rests or
settles down
 Takes place when shifting has been effected from the statutory taxpayer to
 The “burden of the tax” is borne by the final consumers although the
producers and suppliers of these goods and services are the ones who have
to file their VAT returns to the BIR.
 Refers to the buyer or final consumer who ultimately bears the burden of
taxation.
o Indirect taxes are those that are demanded, in the first instance, from or paid by , one
person in the expectation and intention that he can shift the burden to someone else
 When the seller passes on the tax to his buyer, he, in effect, shifts the tax
burden to, not the liability to pay it, to the purchaser as part of the price of
goods sold or services rendered
o By tacking the VAT due to the selling price, the seller remains the person primarily
and legally liable for the payment of tax.
 What is shifted only to the intermediate buyer and ultimately to the final
purchaser is the burden of the tax.
 Tax on Consumption
o Consumption - Use of a thing in a way that exhausts it
o VAT is a consumption tax imposed at every stage of the distribution process on:
A. Sale, exchange, or lease of goods or properties
B. Rendition of services in the course of trade or business, and
C. Importation of goods, whether or not such imported goods are for use in the
business.
o For tax purposes, consumption arises when the goods or properties are sold or
exchanged, or leased
o Consumption goes on until the goods or properties reach the ultimate or final
consumer
o There is consumption on every stage of transfer, in every sale
o With respect to services or when one renders a service to another, there is only one
consumption stage in these cases
o Consumption may either be domestic or foreign
 Domestic Consumption is a consumption or utilization of goods or
services within the Philippines
 Foreign Consumption is consumption or utilization of goods or services
outside the Philippines
o Situs or place of taxation of VAT is the place of consumption
 o Following the principle of territoriality, Philippines can only impose tax on persons, o Seller who charges a zero output tax on such transactions can also claim a refund of
properties, rights, events, and activities within its territorial jurisdiction (Destination or a tax credit certificate for the VAT previously charged by suppliers.
principle or Cross-border doctrine)
Difference between Automatic Zero-Rated Sale and Effective Zero-Rated Sale
 Percentage Tax
Although both are taxable and similar in effect, zero-rated transactions differ from effectively
o It is a tax on consumption expressed as a percentage of the value added to goods or
zero-rated transactions as to their source.
services purchased by the producer or taxpayer
 Zero-rated transactions refer to the export sale of goods and supply of services. The seller of
o It is imposed by law not on the thing or service but on the act (sale, barter, exchange,
such transactions charges no output tax, but can claim a refund or a tax credit certificate of the
lease, importation or performance of service)
VAT previously charged by the suppliers. This is for the benefit of the seller.
VAT Principles  Effectively zero-rated transactions refer to the sale of goods or supply of services to persons
 Destination Principle or entities whose exemption under special laws or international agreements to which the
o No VAT shall be imposed to form part of the cost of goods destined for consumption Philippines is a signatory effectively subjects such transactions to a zero rate. Such rate does
outside of the territorial border of the taxing authority not yield any tax chargeable against the purchaser. This is for the benefit of the purchaser.
o Actual export of goods and services from the Philippines to a foreign country must o Strictly speaking, it is the sales by the suppliers which are zero-rated. But the entities
be free of VAT while those destined for use or consumption within the Philippines are granted an indirect tax exemption for policy and economic reasons.
shall be imposed 12% VAT  In both zero-rated and effectively zero-rated transactions, the seller who charges zero output
o General Rule: Destination Principle is used as a basis for jurisdictional reach of the tax can claim a refund of a tax credit certificate for the VAT previously charged by the
tax suppliers.
 Goods and services are taxed only in the country where they are consumed
Liability for VAT
 Exports: zero-rated
 Sale in the ordinary course of business — Any person who in the course of his trade or
 Imports: taxed
business sells, barters, exchanges or leases goods or properties, or renders services, and any
o Cross Border Doctrine – good imported and consumed outside the taxing authority
person who imports, shall be liable to vat imposed in Section 106-108 of the Tax Code (Sec.
is not subject to VAT
4. 105-1 of RR 16-2005)
 VAT zero-rating
 Importation — In the case of importation of taxable goods, the importer, whether an
o Domestic sale of goods and services and importation are subject to 12% VAT under
individual or corporation and whether or not made in the course of his trade or business, shall
Sections 106, 107, and 108 of the Tax Code while exports are either zero-rated or be liable for VAT imposed in Sec. 107 of the Tax Code.
VAT-exempt.
 Buyer/Purchaser or the person who avails the service is the one who pays the consumption tax
o Generally refer to the export sale of goods and supply of services
 It is the consumer who pays the tax imposed on the sales of goods or rendering of services
 Tax rate is set at 0%
and VAT, being a consumption tax
 Seller of such transactions charges no output tax but can claim a refund of
 But there is a difference between the person statutorily liable to pay and the person actually
or a tax credit certificate for the VAT previously charged
paying the tax because VAT is an indirect tax
 Exports are zero-rated if made by a VAT registered person
 Exports are VAT-exempt if made by a non-VAT registered person
A. Transactions subject to VAT
 Effectively zero-rating
Elements in determining whether a transaction is subject to VAT:
o Sale of goods or supply of services to persons or entities whose exemption under
1. It must be done in the course of trade or business;
special laws or international agreements to which the Philippines is a signatory
effectively subjects such transactions to a zero rate
2. There must be a sale, barter or exchange, lease of goods or properties, or rendering of
service in the Philippines; and
3. It is not VAT-exempt or VAT zero-rated.
o GENERAL RULE: If all three are present, then the transaction is subject to the 12%
VAT.
o Absence of one will not make the transaction subject to VAT
o XPN: Importations are subject to VAT, whether or not made in the course of trade or
business.
o Any person who in the course of his trade or business, sells, barters, exchanges, or
renders services, and;
o Any person who imports goods, shall be liable to VAT imposed in Section 106 to 108
of the Tax Code
 In this case, the importer, individual or a corporation and whether or not
made in the course of his trade or business, shall be liable for VAT imposed
in Section 107 of the Tax Code
o “Persons” for tax purposes means an individual, trust, estate, or corporation
 It also includes partnerships, join venture, cooperative, or association.
o Even a non-stock, non-profit organization, or government entity is liable to pay VAT
on the sale of goods or services
 It is immaterial whether the primary purpose of a corporation indicates that
it receives payments for services rendered to its affiliates on a
reimbursement-on-cost basis only, without realizing profit, for the purpose
of determining liability for VAT on the services rendered.
 As long as the entity provides service for a fee, remuneration or
consideration, then the service rendered is subject to VAT (CIR v CA and
Commonwealth Management and Services Corporation)
o To be liable to VAT, a person must either:
(1) Sell, barter, exchange, or lease of goods or properties, or
(2) Import taxable goods
 In (1), the person who sells, barters, exchanges, or leases goods or
properties, or renders must do so in the course of his trade or business to be
liable for VAT
 Any sale, barter, or exchanges of goods or services not in the
course of trade or business is not subject to liable VAT with certain
exceptions
 In (2), the person who imports taxable goods is subject to VAT regardless of
whether or not the importation is done in the course of trade or business
 An importation of goods for personal consumption or use is subject
to VAT
o As it is a tax on the transaction, there is no need whatsoever for there to be a taxable
gain (unlike in income tax). It is not required by either law or jurisprudence.
 In the Course of Trade or Business
o The regular conduct or pursuit of a commercial or an economic activity, including
transactions incidental thereto, 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
o “Carrying on business” does not mean the performance of a single disconnected act,
but means conducting, prosecuting, and continuing business by performing
progressively all the acts normally incident thereof
o “Doing business” conveys the idea of business being done, not from time to time, but
all the time
o “Course of business” is what is usually done in the management of trade or business
 “Doing business” and “Course of business” connotes regularity of activity.
 Regularity is an act characterized by habituality and repetitiveness
 Any transaction that is an isolated transaction, one-time, or casual
transaction is not subject to VAT.
o There should be:
 A commercial or economic activity; and
 Regularity in the action
 Regular involves more than one isolated transaction.
 It requires repetition and continuity in action.
o VAT provision pertain to those persons whose undertakings are intended to be
pursued on a going concern basis where the end view is to realize unrestricted
amounts of pecuniary gains or profits from those who may avail of the goods they
sell or the services they render (RMC 77-2008)
o Therefore, isolated transactions are generally not considered in the ordinary course
of business, hence not subject to business tax
o General Rule: The transaction must be done in the ordinary course of trade or
business to be subject to VAT
o XPNS:
1. Importation
  As provided on the first paragraph of Sec. 105 of the Tax Code,
importation of taxable goods whether or not made in the course of his
trade of business shall be liable to VAT imposed in Sec. 107 of the Tax
Code
2. Transaction incidental to the course of trade of business
 The definition of “in the course of trade or business” includes
“transactions incidental thereto” or transactions accompanying or
arising from the regular course of trade or business
o Example: A bakeshop which through the years accumulated
empty sacks of flours and then sold them is subject to VAT on
this sale even though selling of empty sacks of flours is not its
trade or business
o Example: The sale of a vehicle used in the business of the
taxpayer, while isolated, is subject to VAT as the transaction
was an incidental transaction made in the course of the
taxpayer’s business. (Mindanao II Geothermal Partnership v.
CIR, G.R. No. 193301, March 11, 2013)
 However, the involuntary sale of vessels by a
taxpayer not engaged in the sale of vessels pursuant
to the government’s policy of privatization is not
subject to VAT because the sale was not in the course
of trade or business
 The sale of a power plant by a GOCC due to a law
that mandated the privatization of NPC assets is also
not subject to VAT because it was not in pursuit of a
commercial or economic activity. (PSALM v. CIR,
Inc., G.R. No. 198146, August 8, 2017)
3. Services Performed in the Philippines by Non-Resident Foreign Person
 Revenue Regulations (RR) 16-2005 provides that services rendered in
the Philippines by non-resident foreign persons shall be considered as
being rendered in the course of trade or business even if the
performance is not regular
Isolated Transaction
By residents By nonresidents (on services rendered in
the Philippines)
Not subject to VAT Subject to Final withholding VAT
Not considered in the ordinary in the Considered done in the ordinary course of
ordinary course of trade or business trade or business
4. Transactions Deemed Sale
 Under Sec. 106 (B) of the Tax Code, certain transactions which are not
actually sales because of the absence of actual exchange between the
buyer and the seller, are considered included in the term “sale” for VAT
purposes
 They are called “deemed sale” transactions because in actuality, there is
really no sale, but the circumstances present made them appear or seem
like to have a sale that is why the law made them subject to VAT.
 In a transaction deemed sale, the input VAT was already used by the
seller as a credit against the output VAT. However, since there was no
actual sale, no output VAT is actually charged to customers.
Consequently, the State will be deprived of its right to collect the output
VAT.
 To avoid a situation where a VAT registered taxpayer avail of input
VAT credit without being liable for the corresponding output VAT,
certain transactions should be considered sales even in the absence of
actual sales
 The following transaction are considered deemed sale:
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;
o The person involved is a VAT-registered person and the
subject matter is goods or properties originally intended
for sale or use in business.
o Transfer of goods or properties not in the course of
business can take place when a VAT-registered person
withdraws goods from his business for personal use
B. Distribution or transfer to:
a. Shareholders or investors as share in the profits of the VAT-
registered persons; or
o Connotes property dividends which constitute stocks in
trade or properties primarily held for sale or lease
declared out of retained earnings and distributed by the
 company to its shareholders shall be subject to VAT
based on the zonal value or FMV at the time of
distribution, whichever is applicable
o Not all assets declared as property dividends are subject
to VAT. The property declared must be constituting
stocks or properties held for sale to customers
b. Creditors in payment of debt;
o Pertains to dacion en pago, an act whereby property is
alienated to the creditor in satisfaction of a debt in
money (Art. 1245 NCC)
o Governed by the law on sales
o The property used to pay off the debt must be an
ordinary asset.
o If the property used in the payment of the debt is a
capital asset, the dacion en pago is not subject to VAT
c. Consignment of goods if actual sale is not made within sixty
(60) days following the date such goods were consigned; and
o The subject matter is consigned goods
o If no sale is made within 60 days from the date of
consignment, the consigned goods are “deemed sold”
and therefore subject to VAT
d. Retirement from or cessation of business, with respect to
inventories of taxable goods existing as of such retirement or
cessation.
o Goods on hand at the time of retirement or cessation of
business, includes capital goods, stock in trade, supplies,
or materials.
o The rule applies whether or not the business is continued
by a new owner or successor.
o The following circumstances should, among others, give
rise to transactions “deemed sale” for this purpose:
 Change of ownership of the business. There is
change in the ownership of the business when a
single proprietorship incorporates; or the
proprietor or a single proprietorship sells his
entire business
 Dissolution of a partnership and creation of a
new partnership, which takes over the business
 RR 16-2005 as amended by RR4-2007 provides that the VAT provided above shall apply to
goods or properties originally intended for sale or use in business, and capital goods which are
existing as of the occurrence of the following:
1. Change of business activity from VAT taxable status to VAT-exempt status
o Example: A VAT-registered person engaged in a taxable activity
(wholesaler/retailer) who decides to discontinue such activity and engages
instead in any other business not subject to VAT
2. Approval of a request for cancellation of registration due to reversion to exempt status
3. Approval of a request for cancellation of registration due to:
a. Reversion to exempt status
b. A desire to revert to exempt status after lapse of 3 consecutive years from the time of
registration by a person who voluntarily registered despite being exempt under Sec.
109(2) of the NIRC
c. Failure to exceed the threshold of P3,000,000 by one who commenced business with
the expectation of gross sales or receipts exceeding said threshold.
 VAT Transactions deemed sale shall not be imposed on goods or properties existing as of the
occurrence of the following:
1. Change of control of a corporation by the acquisition of the controlling interest of such
corporation by another stockholder or group of stockholders. The goods or properties
used in the business or those comprising the stock-in-trade of the corporation, having a
change in corporate control will not be considered sold, bartered or exchanged despite the
change in the ownership interest in the said corporation.
2. Change in the trade or corporate name of the taxpayer
3. Merger or consolidation of corporations
o The unused input tax of the dissolved corporation, as of the date of the merger or
consolidation, shall be absorbed by the new or surviving corporation
Kinds of VAT
(1) VAT on sale, barter or exchange of goods or properties
 Requisites of Taxability of Sale of Goods or Properties
a. There is an actual or deemed sale, barter, or exchange of goods or properties
for valuable consideration
b. The sale is in the course of trade or business in the Philippines
c. The goods or properties are located in the Philippines and are for use or
consumption therein
 d. The sale is not exempt from VAT under Section 109 of the NIRC, special law,
or international agreement binding upon the government of the Philippines.
Types of Sales of Goods or Properties
 For purposes of imposing VAT, sale of goods or properties may be classified as follows:
a. Vatable Sales
o Sale, barter, exchange, or lease of goods or properties not falling either as
deemed sale, zero-rated sales, or exempt sales
o Vatable sales or taxable sales of goods or properties refer to the sale, barter
or exchange, and or lease of goods or properties, whether in cash or in kind,
subject to VAT under Section 106(A) of the Tax Code.
b. Deemed Sales
c. Zero-Rated Sales
o Sale, barter, or exchange, of goods or properties of a VAT-registered person
subject to 0% VAT
o It is a vatable transaction but since VAT rate is 0%, there is no resulting
output tax
o Input tax related to such zero-rated sales, shall be available as tax refund in
accordance with existing regulations
o Following sales by a VAT-registered person is subject to 0% rate:
i. Foreign Currency Denominated Sales - now subject to 12% VAT
ii. Export Sales
iii. Effectively Zero-Rated Sales
 Sales to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory
effectively subject such sales to zero-rates
 Also refers to sale of goods and properties by a VAT-registered
person to a person or entity who was granted indirect tax
exemption under special laws or international agreements
 In order to qualify as effectively zero rated sales, there must be a
special or international agreement, classifying the sales as such
d. Exempt Sales
(2) VAT on Importation of Goods
(3) VAT on sale of services and use or lease of properties
VAT on sale, barter or exchange of goods or properties
Requisites of Taxability of Sale of Goods or Properties
a. There is an actual or deemed sale, barter, or exchange of goods or properties for valuable
consideration
b. The sale is in the course of trade or business in the Philippines
c. The goods or properties are located in the Philippines and are for use or consumption therein
d. Thae sale is not exempt from VAT under Section 109 of the NIRC, special law, or
international agreement binding upon the government of the Philippines
Vatable Sales/Taxable Goods
 Refer to sale, barter, exchange, and/or lease of goods or properties, in cash or in kind, subject
to VAT under Section 106(A) of the Tax Code
 These are catch-all type of sales.
o Sale, barter, exchange, or lease of goods or properties not falling either as deemed
sales, zero-rated sales, or exempt sales, are vatable sales
Rate and Tax Base
 VAT is imposed and collected on every sale, barter or exchange of taxable goods or properties
at a rate of 12% of the gross selling price or gross value of in money of goods or properties
sold, bartered, or exchanged in the Philippines
 “Gross selling price" means total amount of money or its equivalent which purchaser pays or
is obligated to pay to the seller in consideration of the sale, barter, or exchange of goods or
properties, excluding the VAT.
 In other words, the gross selling price includes everything that the buyer pays the seller,
except the VAT which is shifted to the buyer.
 While the law says the VAT is based on the gross selling price, “gross selling price” does not
mean gross sales.
 Excludes: VAT, sales discounts and allowances and returns
 Includes: Excise tax paid, initial payments, interests and penalties (if installment),
commission income (if exported), purchase price, charges for packing, delivery and insurance.
o In case of sale, barter, or exchange of real property, subject to VAT, gross selling
price means the consideration stated in the sales document or the FMV, whichever
higher of:
 1) FMV as determined by the CIR (zonal value) or
 2) the FMV as shown in schedule of values of the Provincial or City
Assessors (real property tax declaration)
o In the absence of zonal value, gross selling price refers to market value shown in the
latest tax declaration or the consideration, whichever higher
  If the gross selling price is based on zonal value or market value of the
property, the zonal or market value shall be deemed inclusive of VAT
 If the VAT is not billed separately, the selling prices in the sales document is
deemed inclusive of VAT
 Excise tax if any, on such goods or properties shall form part of the gross
selling price means the consideration stated in the sales document
o Tax Code expressly excludes VAT from the gross selling price to avoid “tax on the
tax”
Allowable Deductions from GSP
1. Sales returns and allowances - those for which a proper credit or refund was made during the
month or quarter to the buyer for sales previously recorded as taxable sales.
o These refer to the value of goods or properties sold and subsequently returned or for
which allowances were granted by a VAT-registered person.
2. Sales Discounts - bona fide or regular discounts given to purchasers, which are ascertainable
and definitely agreed upon between the vendor and the vendee at the time of the sale.
o Must be determined and granted at the time of the sale
o Must be expressly indicated in the sales invoice and the amount forming part of the
gross sales duly recorded in the books of accounts
o The grant is not dependent upon the happening of a future event.
Meaning of “Goods or Properties”
 “Goods or properties” – all tangible and intangible objects which are capable of pecuniary
estimation and includes:
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 property or right
c. The right or privilege to use in the Philippines of any industrial, commercial, or
scientific equipment
d. The right or the privilege to use motion picture films, tapes, and discs and;
e. Radio, television, satellite transmission and cable television time
o The above list is not an exclusive list considered or included in the term “goods or
properties”
 The term “goods or properties” by the unambiguous terms of Section 100 (now Section 105)
includes “real properties held primarily for sale to customers or held for lease in the ordinary
course of business”
o Goods, as commonly understood in the business sense, refers to the product which
the VAT-registered person offers for sale to the public
o With respect to real-estate dealers, it is the real properties themselves which
constitute their “goods”
 Their “goods” includes both the value of the real properties and the value of
the improvements thereto as well.
 Transactions subject to VAT zero-rating
o Export Sales – shall mean:
 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
exported and paid for an acceptable foreign currency or its equivalent in
goods or services and accounted for in accordance with the BSP
 Paid for in acceptable foreign currency or its equivalent in goods or services
and accounted for in accordance with the BSP
 The sale, barter or exchange of goods or properties destined for
consumption outside the Philippines.
 Sale and delivery of goods to:
 Registered enterprises within a separate customs territory as
provided under special laws
 Registered enterprises within tourism enterprise zones as
declared by Tourism Infrastructure and Enterprise Zone Authority
(TIEZA)
 Note: The President vetoed this provision on the ground that the
provisions go against the principle of limiting the VAT zero-rating
to direct exporters. As an effect these sales are not zero-rated
subject to the applicable tax incentive provisions of the TIEZA
Law
 Sale of raw materials or packaging materials to a non-resident buyer
for delivery to a resident local export-oriented to be used in
manufacturing, processing, packing, or repacking in the Philippines of
said buyer’s goods and paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the BSP
 Sale of raw materials or packaging materials to export-oriented
enterprise whose export sales exceed 70% of the total annual
production
  Those export sales under E.O 226 (Omnibus Investment Code of 1987) and
other special laws
 Sales of goods, supplies, equipment and fuel to persons engaged in
international shipping or international air operations, provided they are
used for such
 Actual Export Sales
 Sale, barter, or exchange of goods or properties destined for
consumption outside the Philippines
 Constructive Export Sale
 Goods do not leave the Philippines but delivered to a resident or
entity which in the eyes or by fiction of law is considered as export
sales. (i.e to an embassy)
o Foreign currency denominated sale
 Subject to 12% VAT upon effectivity of TRAIN but prior to that:
 Sale to a non-resident of goods, except those mentioned in Sections 149 and
150 of the Tax Code, assembled and manufactured in the Philippines for
delivery to a resident in the Philippines paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulation of
the BSP is zero-rated.
o Transaction covered by reciprocity rule
 Same rule as stated in Estate and Donor’s
o Transactions deemed sale
 VAT is imposed on transactions deemed sale of goods or properties at a rate
of 12% of the gross selling price or gross value in money of the goods or
properties deemed sold in the Philippines
 Some examples of transactions deemed sale:
1. 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 (withdraws goods or properties for personal use.
2. Distribution or transfer
a. To shareholders or investors as share in the profits of the VAT-
registered persons
b. To creditors in payment of debt or obligation
3. Consignment of goods if actual sale is not made within 60 days
following the date such goods were consigned
4. Retirement from or cessation of business, with respect to inventories of
taxable goods existing as of such retirement or cessation
 The Commissioner shall determine the appropriate tax base in a case where
a transaction is deemed a sale, barter, or exchange of goods or properties or
where the gross selling price is unreasonably lower than the actual
market value
 Gross selling price is unreasonably lower than actual market value if it is
lower by more than 30% of the actual market value of the same goods of
the same quantity and quality sold in the locality on or nearest date of sale
 Output tax shall be based on the market value of the goods deemed sold as
of the time of the occurrence of the transaction
 In case of retirement or cessation of business, the tax base shall acquisition
cost or the current market price of the goods or properties, whichever lower
 In case of a sale where gross selling price is unreasonably lower than the
FMV, the actual market value shall be the tax base.
o Sales to persons or entities whose exemption under special laws, or international
agreements to which the Philippines is a signatory (effectively zero-rated sales)
VAT on sale of real properties
Requisites for Taxability of Sale or Exchange of Real Property
1. The seller executes a deed of sale, barter or exchange, assignment or conveyance, or contract
to sell of real property
2. The real property is located within the Philippines
3. The seller or transferor is engaged in real estate business either as a real estate dealer,
developer or lessor
4. 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
5. The sale is not exempt from VAT under Sec. 109 of the NIRC, special law, or international
agreement.
Modes of Sale of Real Estate; Effects
1. Cash sale - the entire selling price is taxable in the month of sale
2. Installment sales - a sale in which the initial payments in the year of sale do not exceed 25%
gross selling price (GSP)
o Effect: VAT is recognized based on collection, including interest and penalties
actually and/or constructively received by the seller.
Note: “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.
3. Sale on a deferred-payment basis - initial payments in the year of sale exceed 25% of the GSP
o 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.
Sale of Real Property NOT subject to VAT
1. Sale of real properties not primarily held for sale or lease in the course of trade or business
2. Real property utilized for low cost or socialized housing
3. Residential lot valued at P1.5M and below
4. House and lot, and other residential dwellings valued at P2.5M and below
a. 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.
5. 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
6. Transmission of property to a trustee if the property is to be merely held in trust for the trustor
and/or beneficiary.
VAT on importation of goods
 General Rule: VAT is a business tax, hence, it should only be imposed to transactions arising
from the ordinary course of business or trade
o XPN: VAT on importation is imposed regardless of whether such importation is for
personal or business use.
 Rate and Base
o 12% Tax rate with Tax Base of total value used by the BOC in determining
tariff and custom duties, plus custom duties, excise tax, and other charges
 Or if computing custom duties is based on volume or quantity of the
imported good, the landed cost.
 “Importation”
o Act of bringing goods from a foreign country into the Philippines.
o According to Section 1202 of the Tariff and Customs Code, importation begins when
the vessel or aircraft enters the jurisdiction of the Philippine with the intention to
unlade therein.
o Importation is deemed terminated upon payment of duties, taxes and other charges
due upon the articles, or secured be paid, at a port of entry and the legal permit for
withdrawal shall have been granted, or in case said are free of duties, taxes and other
charges, until they have legally left the jurisdiction of the customs.
o In general, VAT is imposed on goods brought into the Philippines, whether used for
business or not.
o Tax is based on total value used by the BOC in determining tariff and custom duties,
plus custom duties, excise tax, and other charges
o In case the valuation used by the BOC in computing custom duties is based on
volume or quantity of the imported good, the landed cost shall be the basis for
computing VAT
 Landed cost consists of invoice amount, customs duties, freight,
insurance, and other charges
 Expenses incurred after the release of the goods such as those incurred in
delivering goods do not form part of the landed cost.
 If the goods imported are subject to excise tax, the excise tax shall form part
of the tax base
o VAT is also imposed on technical importation – sales of goods by a person located in
a Special Economic Zone to a customer located in a customs territory
o VAT on importation is paid by the importer prior to the release of such goods from
customs custody. If it is subject to both excise tax and VAT, the taxpayer has to pay
both prior to the release.
o A seller of goods or services who imports stuff can claim the VAT paid on the
importations during a taxable period as input taxes creditable against the output taxes
on the sales of the same period.
 Transfer of Goods by Tax-Exempt Persons
o In case of goods imported into the Philippines by VAT-exempt Persons, entities or
agencies which are subsequently sold, transferred or exchanged in the Philippines to
non-exempt persons or entities, the purchasers, transferees, or recipients shall be
considered the importer and shall be liable for the VAT due on such importation
 Tax due on such importation shall constitute a lien on the goods superior to
all charges or liens on the goods, irrespective of the possessor.
o Example: Tiki Taka Inc., is a tax-exempt entity that imports high-end soccer balls.
Tiki Taka Inc., then sold it to Diego Dribblers, Inc., a non-exempt entity. Diego
Dribblers, Inc. has to pay for the VAT. Diego Dribblers, Inc. can claim the VAT paid
as creditable input taxes.
VAT on sale of services and use or lease of properties
 Rate and Base
o “Sale of service” — performance of all kind of services in the Philippine for others
for a fee, remuneration or consideration, whether in kind or in cash
o It is a tax on service and, as such, it accrues at the time the service fee is collected
(regardless of timing of collection)
 Such payments may be collected in advance or after the service is rendered
o Sale or exchange of services, as well as use or lease of properties, in the course of
trade or business is subject to VAT equivalent to 12% of the gross receipts.
o “Gross Receipts”
 Total amount of money or its equivalent representing the contract
price, compensation, service fee, rental, or royalty,
 Amount charged for materials supplied with the services and
 Deposits and advanced payments actually or constructively received during
the taxable quarter for the services performed or to be performed, excluding
VAT
 “Constructive receipt” occurs when the money consideration or
its equivalent is placed at the control of the person who rendered
the service without restrictions by the payor. The following are
examples of constructive receipts:
o Deposits in banks, which are made available to the seller
of services without restrictions
o Issuance by the debtor of a notice, to offset any debt or
obligation and acceptance thereof by the seller as payment
for services rendered
o Transfer of the amounts, retained by the payor to the
account of the contractor
 Example: Geralt of Cainta was a Filipino monster hunter who specialized in
hunting aswangs. He spent P20,000,000 for materials and P10,000,000 for
labor. People tossed him coins as payment amounting to gross receipts of
P30,000,000, the whole of which is VATable by 12%.
o Gross receipts do not include amounts earmarked for payment to unrelated third
parties or received as reimbursed for advance payment on behalf of another which do
not redound to the benefit of the payor.
 It is considered payment to a third party if the same is made to settle an
obligation of another person (like a customer or a client) to the said party.
 The sales invoice or official receipt must be issued by the third
party to the obligor or debtor (the customer or a client of the payor)
o It is an advance payment on behalf of another if the payment is to a third party for a
present or future obligation of said another party.
 The sales invoice or official receipt must be issued by the obligee/creditor to
the obligor/debtor (the “another party) for the sale of the goods or services
by the former to the latter
o “Unrelated party” shall not include the taxpayer's employees, partners, affiliates,
relatives by consanguinity or affinity within the 4th degree, and trust funds where the
taxpayer is the trustor, trustee, or beneficiary, even if covered by an agreement to the
contrary.
 Amounts earmarked by an HMO to its medical service providers on behalf of its clients do
not form part of its gross receipts for VAT purposes.
 Sale or Exchange of Services
o Performance of all kinds of services in the Philippines for others for a fee,
remunerations, or consideration, including those performed or rendered by the ff:
a) construction and service contractors
b) stock, real estate, commercial, customs, and immigration brokers
c) lessors of property, personal or real
d) warehousing services
e) lessors or distributors of cinematic films
f) persons engaged in milling processing, manufacturing or repacking of
goods for other
g) proprietor, operators, or keepers of hotels, motels, rest houses, pension
houses, inns, resorts
h) proprietors, operators of restaurants, refreshment parlors, cafes and other
eating places, including clubs and caterers
i) dealers in securities
j) lending investors
k) transportation contractors on their transport of goods or cargoes, including
persons who transport goods or cargoes for hire and other domestic carriers
by land relative to their transport of goods or cargoes
l) common carriers by air or sea relative to their transport of passengers,
goods or cargoes from one place in the Philippines to another in the
Philippines
m) Sales of electricity by generation companies, transmission, and distribution
companies
 n) Franchise grantees of electric utilities, telephone, and telegraph, radio and
television broadcasting and all other franchise grantees except franchise
grantees of radio or television broadcasting whose annual gross receipts of
the preceding year do not exceed P10,000 and franchise grantees of gas and
water utilities
o) Non-life insurance companies (except their crop insurances), including
surety, fidelity, indemnity, and bonding companies
p) Similar services regardless of whether the performance thereof calls for the
exercise or use of the physical or mental faculties.
o The enumeration above is not exclusive list
o Every activity that can be imagined as a form of service rendered for a fee should be
deemed included unless it be excluded by the law
o Such sale or exchange of services shall also include:
a) The lease or 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;
b) The lease of the use of, or the right to use of any industrial, commercial or
scientific equipment;
c) The supply of scientific, technical, industrial or commercial knowledge or
information;
d) The supply of any assistance that is ancillary and subsidiary to and is
furnished as a means of enabling the application or enjoyment of any such
property, or right as is mentioned in subparagraph (2) or any such
knowledge or information as is mentioned in subparagraph (3);
e) The supply of services by a nonresident person or his employee in
connection with the use of property or rights belonging to, or the installation
or operation of any brand, machinery or other apparatus purchased from
such nonresident person.
f) 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;
g) The lease of motion picture films, films, tapes and discs; and
h) The lease or the use of or the right to use radio, television, satellite
transmission and cable television time.
 Lease of properties
o Lease of properties shall be subject to tax if the property is leased or used in the
Philippines, regardless of the place where the contract of lease was executed
o Lease of Commercial Units
a) Advance by the lessee is subject to VAT if the payment is applied to rentals
such as prepaid rent.
b) Advance payment is not subject to VAT is the advance payment is not a
rental payment but:
 A loan to the lessor from the lessee
 An option money for the property
 A security deposit to insure the faithful performance of certain
obligations of the lessee to the lessor
 Requisites on Taxability
a. There is a sale or exchange of service, or lease, or use of property enumerated in
the Tax Code, or other similar services
b. The service is performed or to be performed in the Philippines
c. The service is in the course of trade of taxpayer’s trade or business or profession
d. The service is for a valuable consideration actually or constructively received
e. The service is not exempt under the Tax Code, special law, or international
agreements.
 In the ordinary course of business”
o Same as discussion above.
 Transactions subject to VAT zero-rating
o A zero-rated sale of service by a VAT-registered person is a taxable transaction for
VAT purposes but shall not result in any output tax
o Input tax on purchase of goods, properties, or services related to such zero-rated sale
shall be available as a tax refund in accordance with the applicable rules and
regulations
o VAT rate is 0% instead of 12%
o Purpose — The zero rated seller becomes internationally competitive by allowing
the refund or credit of input taxes that are attributable to export sales (CIR v Seagate
Technology Phils.)
o Following services performed in the Philippines by VAT-registered persons shall be
subject to 0% rate according to Section 108 (B) of the NIRC:
a) 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);
 b) Services other than those mentioned in the preceding paragraph, 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);
c) Services rendered to persons or entities whose exemption under special
laws or international agreements to which the Philippines is a signatory
effectively subjects the supply of such services to zero percent (0%) rate;
d) Services rendered to persons engaged in international shipping or
international air transport operations, including leases of property for use
thereof: Provided, That these services shall be exclusive for international
shipping or air transport operations;
e) 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;
f) Transport of passengers and cargo by domestic air or sea vessels from the
Philippines to a foreign country;
g) 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.
h) VETOED BY THE PRESIDENT
i) Services rendered to offshore gaming licensees subject to gaming tax under
Section 125-A of this Code by service providers, including accredited
service providers as defined in Section 27 (G) of this Code.
o Revenue Regulation No. 9-2021, REVISED list of zero rated SALES OF
SERVICES for VAT Purposes
1. Services other than those mentioned in the preceding paragraph, 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);
2. Services rendered to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively subjects
the supply of such services to zero percent (0%) rate;
3. Services rendered to persons engaged in international shipping or international air
transport operations, including leases of property for use thereof: Provided, That
these services shall be exclusive for international shipping or air transport operations;
4. Transport of passengers and cargo by domestic air or sea vessels from the Philippines
to a foreign country;
5. 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.
Exempt Sales
 Sale of goodsf, properties, or services, and the use or lease of properties which is not subject
to output tax and whereby the buyer is not allowed any tax credit or input tax related to such
exempt sale.
 Object of exemption may be from transaction itself or any of the parties to the transaction.
 Exempt sales are exempt consumption of goods or services from domestic sellers.
 Exempt sales are not subject to VAT and percentage tax
 “Exempt Transaction” – involves goods or services which, by their nature, are specifically
listed in and expressly exempted from VAT under the Tax Code, whether party is VAT-exempt
or not.
o Here, seller is not allowed any tax refund of or credit for any input taxes paid.
 “Exempt party” – person or entity granted VAT exemption under the Tax Code, a special law,
or an international agreement to which the Philippines is a signatory and by virtue of which its
taxable transactions become exempt from VAT.
o They may be allowed a tax refund of or credit for input taxes paid, depending on
whether he is a VAT or non-VAT taxpayer
NOTE: It must be emphasized that the term “vatable” means that the sale is subject to VAT if the
taxpayer is VAT-registered or a VAT registrable person but to a 3% percentage tax if the taxpayer is
non-VAT taxpayer
Exempt Transactions
 Sale of goods or properties and/or services and the use or lease of properties not subject to
VAT (output tax) and the seller is not allowed any tax credit of VAT (input tax) on purchases
 Person making the exempt sale of goods, properties or services shall not bill any output tax to
his customers.
Transactions Exempt from VAT
a) Sale or importation of agricultural and marine food products in their original state, livestock
and poultry of or king generally used as, or yielding or producing foods for human
consumption; and breeding stock and genetic materials therefor.
o Meat, fruit, fish, vegetables and other agricultural and marine food products shall be
in their original state even if they had undergone simple processes of preparation and
preservation for the market. (i.e freezing, drying, slating, broiling, roasting, smoking
or stripping and packaging)
o Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt
and copra shall be considered as agricultural food products in their original state
o “In their original state” means unprocessed
o Sale of marinated fish is not exempt from vat
o Raw cane sugar means sugar whose content of sucrose by weight, in the dry state,
has a polarimeter reading of 99.5 degrees and which have undergone one stage of
filtration and centrifugal process and no further processes.
o The amendment merges the term “raw sugar” or “raw cane sugar” with one
definition.
o Raw sugar products now exempt from VAT also include blanco directo, premium
raw, special raw, washed sugar and muscovado
o Note that the sale of refined sugar is not exempted as it can no longe be considered in
its original state since it already underwent several refining processes.
o However, if the sale of the sugar, whether raw of refined, was made by an
agricultural cooperative to it members or non-members, such transaction is still VAT-
exempt.
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)
o “Specialty feeds” refer to non-agricultural feeds or foods for racehorses, fighting
cocks, aquarium fish, zoo animals and others generally considered as pets
o The sale of livestock or poultry feeds and ingredients used in the manufacture of
finished feeds is exempt
 However, the sale of ingredients which may also be used for production or
processing of food for human consumption is vatable
 Thus, for the sale or importation of livestock and poultry feeds or
ingredients used in the manufacture of finished feeds to be exempt from
VAT, it must be proven that the same is unfit for human consumptions or
that the ingredient cannot be used for the production of food for human
consumption as certified by the Food and Drug Administration
c) 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
o Exemption applies to all the personal effects of returning residents to the Philippines
or non-residents intending to resettle in the Philippines
o Illustration: Mike returned from Serbia after watching Gilas games during the 2021
Olympic Qualifying Tournament. He brought with him several personal effects
(souvenirs) he bought from Serbia.
 Question: Are the personal effects brought by Mike to the Philippines
subject to VAT?
 Answer: No. Personal and household effects brought from abroad by a
resident of the Philippines are exempt from VAT.
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.
o TRAIN law expanded the coverage of this exemption to:
 Importation of tools of trade, occupation, or employment and
 Importation by Overseas Filipinos and their families and descendants
 BOC is given authority to exempt importation of goods except aircraft,
vehicles, vessels, machineries, and similar goods, by persons coming to
settle in the Philippines and overseas Filipinos from excise tax and duties
upon proof that such persons are actually coming to settle in the Philippines
and such goods are brought from their former place of abode
e) Services subject to percentage tax under Title V
o VAT and percentage cannot be imposed simultaneously in the same subject matter
o If the service is already subject to percentage tax under Title V, said service is no
longer subject to VAT
f) Services by agricultural contract growers and milling for others of palay into rice, corn into
grits and sugar cane into raw sugar
o “Agricultural contract growers” those persons producing for other poultry, livestock
or other agricultural and marine food products in their original state
o It must be noted that the exemption is limited to the services of producing or raising
for others and milling agricultural or marine food products
 Agricultural support services, food processing and food service enterprises
are taxable
o Toll processing services exempt from VAT shall pertain only to services to clients
from which growing of animals were contracted.
o As such, preparing and packaging hogs/chicken ready for delivery after producing or
growing them can be said to be within the purview of “agricultural contract growing”
o However, if such an activity is done independently of growing poultry, livestock or
other agricultural and marine food products, the same can be considered services not
covered by agricultural contract growing.
g) Medical, dental, hospital and veterinary services except those rendered by professionals
o Laboratory services are exempted
o Hospital bills constitute medical services.
o The sales made by the drugstore to the in-patients which are included in the hospital
bills are part of the medical bills exempt from VAT.
o Sale of drugs and medicines to in-patients of pharmacy maintained and operated by
hospitals are exempted from VAT
o Sales of drugs or medicine by pharmacy of hospitals to out-patients or walk-in
customers is subject to VAT because they are not part of medical services of the
hospital
o Medical practitioners shall likewise include medical technologist, allied health
workers and other medical practitioners who are not under an employer-employee
relationship with the hospital, clinic or HMO and other similar establishment
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
o “Educational services” refer to academic, technical or vocational education provided
by private educational institutions duly accredited by DepEd, CHED, and TESDA
and those rendered by government educational institutions.
o It does not include seminars, in-service training, review classes, and other similar
services rendered by persons who are not accredited by DepEd, CHED, or TESDA
i) Services rendered by individuals pursuant to an employer-employee relationship
o As compared with services rendered by professionals under Section 109 (1)(G) of
the Tax Code, the present exemption applies only when employer-employee
relationship is present
o Four-Fold Test in Determining Whether an Employer-Employee Relationship Exists
(SEPADISCO):
1) Selection and Engagement of Employee
2) Payment of Wages/Salary
3) Power of Dismissal
4) Employer’s power to control the employee with respect to the means and
methods by which the work is accomplished
o The provision of services to an employer under an employer-employee relationship
is not a business. Hence, it is exempt from business taxes.
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
o Regional or area headquarters are defined in Section 22(D) of the Tax Code
 A regional or area headquarters is an integral part of the multinational
corporation. It is not a separate business or a branch, but an administrative
office which does not derive income on its own; hence it is not subject to
business tax.
o They are exempt from VAT because they do not derive income from the Philippines
o Regional operating headquarters is taxable
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 (Petroleum
Exploration Concessionaires under the Petroleum Act of 1949)
o VAT exemption based on international agreement or special law
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 Agricultural Cooperatives Refer to (l) above Refer to (l) above
and/or processing of their produce ”Lending Activities” by Refer to (m) above Refer to (m) above
o An exemption from Section 109(1)(A) of the Tax Code that even if agricultural lending and multi-purpose
product is sold in its processed form, sale remains VAT exempt cooperatives
Non-agricultural, non-
Sales by Agricultural electric, non-lending/credit
To Members To Non-Members cooperatives
Cooperatives
Sale if cooperatives’s own  Contribution per
produce (processed or at its Exempt Exempt member < 15,000 VAT VAT
original state)  Contribution per
member > 15,000 Exempt Exempt
Other than the cooperatives VAT
own produce (i.e. from
‘traders’) Exempt Exempt — if referring to
agricultural food at its original o) Export sales by persons who are not VAT-registered
state o Compared to VAT-registered persons, the export sales of which are zero-rated.
o While both do not have output tax liability, only VAT-registered person with zero-
m) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered rated sales can claim refund of input tax
with the Cooperative Development Authority  The law gives premium to entity who opts to register under the VAT system
o The qualifier for exemption is registration and good standing with the CDA. p) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary
o This necessarily follows that the credit or multi-purpose cooperative has complied course of trade or business or real property utilized for low-cost and socialized housing as
with the CDA and pertinent issuances of the CDA 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)
Gross receipts by Credit or and below, house and lot, and other residential dwellings valued at Two million five hundred
Multi-purpose To Members To Non-Members thousand pesos (P2,500,000) and below: Provided, That beginning January 1, 2021, the VAT
cooperatives exemption shall only apply to sale of real properties not primarily held for sale to customers
From lending activities Exempt Exempt or held for lease in the ordinary course of trade or business, sale of real property utilized for
From non-lending activities VAT VAT 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
n) Sales by non-agricultural, non- electric and non-credit cooperatives duly registered with the (P2,000,000): Provided, further, That every three (3) years thereafter, the amount herein stated
Cooperative Development Authority: Provided, That the share capital contribution of each shall be adjusted to its present value using the Consumer Price Index, as published by the
member does not exceed Fifteen thousand pesos (P15,000) and regardless of the aggregate Philippine Statistics Authority (PSA)
capital and net surplus ratably distributed among the members o Following sales of real properties are VAT-exempt:
o Importation by non-agricultural, non-electric and non-credit cooperatives of  Sale of real properties not primarily held for sale to customers or held for
machineries and equipment including spare parts, to be used by them are subject to lease in the ordinary course of trade or business
VAT  Sale of real properties utilized for low-cost housing
 Sale of real properties utilized for socialized housing, wherein price ceiling
Gross Receipts/Sales by From Members From Non-Members unit is 450K or as may from time to time determined by the Housing and
Electric Cooperatives VAT VAT
 Urban Development Coordinating Council (HUDCC) and the National
Economic and Development Authority (NEDA) and other related laws
 Sale of residential lot valued at P1,500,000 and below (now P1,919,500), or
house & lot and other residential dwellings valued at P2,500,000 and below
(now P3,199,200)
o Revenue Regulations No. 16-2011, increased the VAT threshold of residential lots to
P1,919,500 and other residential dwellings to P3,199,200 and below
o “Low-cost housing” refers to housing projects intended for homeless low-income
family beneficiaries, undertaken by the Government or private developers, which
may either be a subdivision or a condominium registered and licensed by the
Housing and Land Use Regulatory Board/Housing (HLURB) wherein the unit
selling price is within selling price per unit set by the HUDCC
o “Socialized housing” refers to housing programs and projects covering houses and
lots or home lots only undertaken by the government or the private sector for the
underprivileged and homeless citizens which shall include sites and services
development, long-term financing, liberated terms on interest payments
 Also refer to projects intended for the underprivileged and homeless
wherein the housing package selling price is within the lowest interest rates
under the United Home Lending Program (UHLP) or any equivalent
housing program of the Government
o If 2 or more adjacent residential lots are sold or disposed in favor of one buyer, for
the purpose of utilizing the lots as one residential lot, the sale shall be exempt from
VAT only if the aggregate value of the lots do not exceed P1,500,000 (now
P1,919,500).
o This does not include the sale of parking lots which may or may not be included in
the sale of condominium units. Sale of these parking lots are subject to VAT
o Sale of residential properties within the price ceiling are considered reasonable
human necessity and hence exempt. Those sold above the threshold are not
considered necessities due to the high price and are thus vatable
Guide:
 If the sale of real property was NOT made in the ordinary course of trade or
business, the real property is classified as capital asset, hence, not subject to VAT but
to capital gains tax
 If the sale was made in the ordinary course of trade or business:
o VAT EXEMPT
i. Sale of residential house and lot and other residential dwellings provided
the selling price is not more than P3,1999,200
ii. Sale of real property utilised for socialized housing
o SUBJECT TO VAT
i. Sale of residential house and lot and other residential dwellings if
the selling price is MORE than P3,199,200.
ii. Sale of residential lot if made by a real estate dealer
iii. Sale of commercial lot/units
iv. Other real properties not specifically provided under the law as
vat-exempt.
q) Lease of a residential unit with a monthly rental not exceeding Fifteen thousand pesos
(₱15,000)
o TRAIN Law increased the threshold for monthly rental from not exceeding P12,800
to not exceeding P15,000
o Lease of residential units where monthly rental per unit exceeds P15,000 but the
aggregate of such rentals of the lessor during the year does not exceed P3,000,000
shall likewise be exempt from VAT, however it will be subject to 3% percentage tax.
o Where lessor has several residential units for lease, some are leased out for a
monthly rental per unit not exceeding P15,000 while others leased out for more than
P15,000 per unit, his tax liability is as follows:
 Gross receipts from rentals not exceeding P15,000 per month per unit shall
be exempt from 3% percentage tax
 Gross receipts from rentals exceeding P15,000 per month per unit shall be
subject to VAT only if the aggregate annual gross receipts from said units
exceed P3,000,000. Otherwise such gross receipts is subject to 3%
percentage tax
o The Percentage Tax rate under Section 116 of the Tax Code, as amended by RA
11534 (CREATE Law) shall be as follows:
 Prior to July 1, 2021: 3%
 From July 1, 2021 - June 30, 2023: 1%
 Beginning July 1, 2023: 3%
o “Residential Units” shall mean apartments and houses and lots used for residential
purposes, and buildings or parts or units thereof used solely as dwelling places
o “Unit” mean an apartment unit in the case of apartment, house in the case of
residential houses; per person in the case of dormitories, boarding houses, and bed
spaces; and per room in the case of rooms for rent
 o The apparent purpose of this exemption is to provide tax incentive for keeping the o Transport of cargo by international carriers is also not subject to VAT, however, it is
rentals of housing units low considering that housing is a necessary and natural subject to percentage tax under Section 118 of the Tax Code, also known as Common
human consumption Carrier’s Tax on International Carriers
r) Sale, importation, printing or publication of books, and any newspaper, magazine, journal, GUIDE:
review bulletin, or any such educational reading material covered by the UNESCO Agreement  International Carriers (resident foreign corporations):
on the Importation of Educational, Scientific and Cultural Materials, including the digital or Transport of Originating in the Philippines
electronic format thereof: Provided, That the materials enumerated herein are not devoted Passengers VAT Exempt
principally to the publication of paid advertisements Cargo or goods VAT Exempt. However, it is subject to
o Sale of news paper, though containing paid advertisements, remains exempt from Common Carrier’s Tax (Percentage Tax)
VAT because the newspaper is not devoted principally to the publication of paid under Section 118.
advertisements.
o They are published primarily for disseminate news and information.  Domestic Common Carriers:
o The activities that are exempt from VAT under this provision are as follows: Philippines to abroad
Transport of Within the Philippines
 Sale [(Sec. 108(B)(6)]
 Importation Passengers
 Printing  By land Common Carrier’s Tax 0% VAT
under Sec. 117
 Publication of books, newspapers, magazines, review and bulletins or any
 By air or sea** VAT 0% VAT
such educational reading material covered by the UNESCO
o A corporation’s other transactions, such as the printing of brochures, bookbinding, Cargo or goods** VAT 0% VAT
engraving, stereotyping, electrotyping, lithographing of various reference books, **Generally subject to VAT. However, if applicable, it may be subject to percentage tax under
trade books, journals and other literary works, are subject to VAT Section 116.
 The taxpayer is required to register its business as a VAT business entity and t) Sale, importation or lease of passenger or cargo vessels and aircraft, including engine,
issue a separate VAT invoice/receipt to record such transactions equipment and spare parts thereof for domestic or international transport operations, provided
s) Transport of passengers by international carriers that the exemption from vat on the importation and local purchase of passenger and/or cargo
o Added by R.A. 10378 vessels shall be subject to the requirements on restriction on vessel importation and
o Transport of passengers by international carriers doing business in the Philippines is mandatory vessel retirement program of MARINA
not subject to business tax (vat and percentage tax). u) Importation of fuel, goods and supplies by persons engaged in international shipping or air
o On the other hand, transport of cargo by international carriers is not also subject to transport operations: Provided, That the fuel, goods, and supplies shall be used for
VAT, however, it is subject to percentage tax under Section 118 of the Tax Code, also international shipping or air transport operations
known as Common Carrier’s Tax on International Carriers. o TRAIN Law requires that the fuel, goods, and supplies imported must be used for
o The following summarizes the business tax treatments: international shipping or air transport operations or should pertain to the transport of
1. Receipts from outgoing flights (foreign consumption, service rendered within) — 0% goods and/or passenger from a port in the Philippines directly to a foreign port, or
VAT vice versa, without docking or stopping at any other port in the Philippines unless the
2. Receipts from incoming flights (foreign consumption, service rendered abroad) — docking or stopping at any other Philippine port is for the purpose of unloading
Exempt passenger and/or cargoes that originated from abroad, or to load passengers and/or
3. Receipts from domestic flights (domestic consumption) — 12% VAT cargoes bound for abroad to be VAT exempt
 o If any portion of such fuel, goods, or supplies is used for purposes other than that
mentioned, such shall be subject to 12% VAT.
v) Services of bank, non-bank financial intermediaries performing quasi-banking functions, and
other non-bank financial intermediaries, such as money changers and pawnshops, subject to
percentage tax under Section 121 and 122, respectively of the Tax Code
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 on a purely
reimbursement basis by homeowners’ associations and condominium corporations established
under RA 9904 and RA No. 4726, respectively.
o VAT exemption has no condition attached
o In the absence of a profit-seeking motive as proven by reimbursement-type
assessments of its members, the home owner’s or condominium associations cannot
be said to be a business.
 However, if it is being operated as if it sells to its members from which it
derives a mark-up and profit, then it is a taxable business
z) Sale of gold to the Banko Sentral ng Pilipinas (BSP)
o Reclassified from zero-rated sale to VAT exempt sale
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.
Provided, That the DOH shall issue a list of approved drugs and medicines for this purpose
within sixty (60) days from the effectivity of this Act;
o Exemption covers drugs and medicines to these specifically identified health
conditions
o DOH shall issue a list of approved drugs and medicines for this purpose
o The exemption from VAT under this subsection shall only apply to the sale or
importation by manufacturers, distributors, wholesalers and retailer of drugs and
medicine included in the list of approved drugs and medicine issued by the DOH for
this purpose
bb) Sale or importation of the following beginning January 1, 2021 to December 31, 2023: [106]
(i) Capital equipment, its spare parts and raw materials, necessary for the production of
personal protective equipment components such as coveralls, gown, surgical cap, surgical
mask, N-95 mask, scrub suits, goggles and face shield, double or surgical gloves, dedicated
shoes, and shoe covers, for COVID-19 prevention; and
(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 Food and Drug Administration
(FDA) for use in clinical trials, including raw materials directly necessary for the production
of such drugs: Provided, That the Department of Trade and Industry (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 for 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 by this provision: Provided, finally,
That the exemption claimed under this subsection shall be subject to post audit by the Bureau
of Internal Revenue or the 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 (P3,000,000.00)
o Pertains to other transactions not mentioned or covered by Section 109(1)(A) to
(AA).
o Amount of annual gross sales or receipts is determinative of the VAT liability
 If gross sales or receipts does not exceed P3,000,000, entity is exempt from
VAT.
 Presupposes that such entity is non-VAT registered
 If it exceeds, then they are liable for VAT
o The P3,000,000 gross annual sales shall comprise of the business’ total revenue from
sale of its products, which are either goods or services, including nonrefundable
advance deposits/payments for services, net of discount, sales return and allowances,
covering the fiscal or calendar year.
o Sales incidental to the registered operations of the business shall also be included
Tax on Persons Exempt from VAT
 Any person whose sales or receipts are exempt under Section 109(1)(CC) of the Tax Code, as
amended from the payment of VAT and who is not a VAT-registered person shall pay a tax
equivalent to 3% of his gross quarterly sales or receipts.
 The following are exempt from the payment of 3% percentage tax
1. Cooperatives
2. Self-employed individuals and professionals availing the 8% tax on gross sales
and/or receipt and other non-operating income, under Sections 24(A)(2)(b) and
24(A)(2)(c)(2)(a) of the Tax Code, as amended
Exempt Transactions May Be Registered for VAT Purposes
 A VAT-registered person may elect that VAT exemption under Section 109(1) of the Tax Code
shall not apply to his sale of goods or properties or services and instead be subject to 12%
VAT.
 In this case, the exemption will not apply, and VAT will be paid
 General Rule: Once the election is made, it shall be irrevocable for a period or 3 years
counted from the quarter when the election was made
o XPN: For franchise grantees or radio and TV broadcasting whose annual gross
receipts for the preceding year do not exceed P10M, the option becomes perpetually
irrevocable
 Reason: The taxpayer has a substantial amount of input tax that he wants to utilize
o If the transaction is VAT-exempt, the seller is not allowed any tax credit of input tax
on purchases.
o The input tax merely forms part of the cost of purchase increasing the cost of goods
o If the transaction is vatable, then the seller may use the input tax on purchases as
credit to output tax on the sale
VAT Liability
 The VAT Liability is determined by computing the output tax and the input tax at the end of
every month and quarter
 VAT liability is the excess of output tax over the input tax as shown below:
Output Tax xx
Less: Input Tax xx
VAT Liability/VAT Payable xx
Refund or credit of excess input VAT
 “Output Tax” means the value-added tax due on the sale or lease of taxable goods or
properties or services by any person registered or required to register under Section 236 of the
Tax Code
o The output tax is presumed passed on by the seller on his sales or receipts
 Arises on the following transactions:
a) Sale, barter, or exchange of goods and properties at a rate of 12% of the gross selling
price or gross value in money of the goods or properties sold, bartered or exchanged
b) Sale or exchange of services and use or lease of properties at a rate of 12% of gross
receipts derived from the sale or exchange of services and use or lease of properties.
c) Importation of goods at a rate of 12% based on the total value used by the BOC in
determining tariff and custom duties, excise tax, if any, and other charges, provided
that where the custom duties are determined on the basis of quantity or volume of the
goods, the VAT shall be based on the landed cost plus excise taxes, if any
 “Input Tax” means the value-added tax due from or paid by a VAT registered person in the
course of his trade or business on importation of goods or local purchase of goods or services,
including lease or use of property, from a VAT-registered person
o It shall also include transitional input tax determined in accordance with Section 111
of the Tax Code, presumptive input tax, and deferred input tax
 If input tax exceeds output tax, excess shall be carried over to the succeeding quarters.
o Any input tax attributable to zero-rated sales by a VAT registered person may be
refunded subject to the provisions of Section 112 of the Tax Code as amended
Creditable Input Tax
 Any input tax covered by a VAT invoice or official receipt issued by a VAT registered person
under Section 113 and 237 of the Tax Code on these transactions are creditable against the
output tax.
 Creditable Input tax includes input taxes which can be directly attributed to transactions
subject to VAT plus a ratable portion of any input tax which cannot be directly attributed to
either the taxable or exempt activity
 Input tax reduced the VAT liability because it is credited or deducted from the output tax to
determine the VAT liability of the taxpayer.
 Without input tax, VAT liability is equivalent to the output tax.
 Any qualified person may avail of the input tax provided the transactions are evidenced by a
VAT invoice or official receipt issued by a VAT-registered person
 Input tax credit on importation of goods or local purchases of goods, properties, or services by
a VAT-registered person shall be creditable:
a) To the importer upon payment of VAT prior to the release of goods from custom custody
b) To the purchaser of the domestic goods or properties upon consummation of the sale.
c) To the purchaser of services or the lessee or licensee upon payment of the compensation,
rental, royalty, or fee
 Sources of Creditable Input Tax
o Purchase or importation of goods:
 For sale
 For conversion into or intended to form part of a finished product for sale
including package materials
 For use as supplies in the course of business
 For use as materials supplied in the sale of service
  For use in trade or business for which deduction for depreciation or
amortization is allowed under the Tax Code
o Purchase of real properties for which a VAT has actually been paid
o Purchase of services on which a value-added tax has actually been paid
o Transactions “deemed sale” under Section106(B)
o Transitional input tax allowed under Section 111
o Presumptive input tax allowed under Section 111 of the Tax Code
Refund of Input Tax
 A zero-rated sale, barter, or exchange of goods or properties, or sale or exchange of goods or
service, or use of property of a VAT-registered person is subject to 0% VAT and does not
result to output tax, the creditable input tax is unutilized
 Such unutilized input tax shall be available as tax refund.
 Under Section 112 of the Tax Code, creditable input tax due or paid attributable to zero-rated
or effectively zero-rated sales may be claimed as tax refund or apply for the issuance of a tax
credit certificate.
o Under TRAIN law, the VAT-registered person may only apply for tax refund and no
longer for issuance of tax credit certificate
 When the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable
or exempt sale of goods or properties or services, and the amount of creditable input tax due
or paid cannot be directly or entirely attributed to any one of the transactions, it shall be
allocated proportionately on the basis of the volume of sales.
 For a person making sales that are zero-rated under Section 108(B)(6) of the Tax Code, input
taxes shall be allocated ratably b/w zero-rated and non-zero rated sales.
 A taxpayer with zero-rated transaction enjoys a total exemption from VAT because he does
not incur an output tax on its sales and the input tax paid on the purchases may still be
refunded.
o Compared to VAT-exempt transactions, taxpayer only enjoys partial exemption
because while an exempt transaction does not have output tax, input tax paid cannot
be refunded.
Requisites for Claim of Refund of Input Tax
 Pursuant to Section 112(A) and (C), the taxpayer-claimant must comply with the ff. requisites
in order to be entitled to refund of excess input VAT attributable to zero-rated or effectively
zero-rated sales:
a. Taxpayer-claimant must be VAT-registered
b. There must be zero-rated or effectively zero-rated sales
c. Input taxes are incurred or paid
d. Such input taxes are attributable to zero-rated or effectively zero-rated sales
e. The input taxes are not applied against any output VAT liability
f. The claim for refund is filed within the prescriptive period
 Input tax to be refunded does not include transitional input tax
 Requirements above are strictly construed against taxpayer
Transitional Input Tax
 Taxpayers who become liable for VAT for the first time may avail of the benefit of transitional
input tax
o They become liable for the first time when he becomes a VAT-registered person upon
exceeding the minimum turnover of P3M in any 12-month period
o Does not apply to franchise grantees of radio and television broadcasting because
their threshold is P10M.
 This is a one-time tax credit. It can be used as a credit on the quarter when taxpayer became
first liable for VAT.
 Prior payment of taxes is not required to avail of this tax credit. What is required is to file a
beginning inventory with the BIR.
 First time VAT taxpayers are entitled to transitional input tax on the inventory on hand on the
following:
a) Goods purchased for resale in their present condition
b) Materials purchased for their processing but which have not yet undergone processing
c) Goods which have been manufactured by the taxpayer
d) Goods in process for sale
e) Goods and supplies for use in the course of the taxpayer’s trade or business as a VAT-
registered person
 Transitional input tax is 2% of the value of the beginning inventory on hand or actual VAT
paid on such goods, materials and supplies, whichever is higher, which amount shall be
creditable against the output tax of the VAT-registered person
 Value allowed for income tax purposes on inventories shall be for computation of 2%
transitional input tax, excluding goods exempt from VAT.
 Under Section 111, the beginning inventory of “goods” forms part of the valuation of the
transitional input tax credit
o Goods refer to the product which VAT-registered person offers for sale to the public
 o With respect to real estate dealers, it is the real properties themselves which are the
“goods”
Presumptive Input Tax
 Persons or firms engaged in the processing of sardines, mackerel, and milk, and in
manufacturing of refined sugar, cooking oil, and packed noodle-based instant meals, shall be
allowed a presumptive input tax, creditable against output tax, equivalent to 4% of the gross
value in money of their purchases or primary agricultural products which are used as inputs
for their production
 “Processing” means pasteurization, canning, and activities which through physical or
chemical process alter the exterior texture or form or inner substance of a product in such
manner as to prepare it for special use to which it could not have been put in its original
condition
 Presumptive Input Tax addresses a situation where a VAT-registered person who processes
agricultural products as primary ingredients in its production is liable to pay output tax
on the sale of the processed goods but cannot claim input tax because the purchases are
from non-VAT registered person who did not pass on an input tax on purchases
 As a premium to these persons engaged in the aforementioned processing, they are allowed by
law to claim presumptive input tax as if there are input taxes on the purchases of primary
agricultural products
Excess Unutilized Input Tax
 When input tax exceeds output tax, taxpayer has no VAT liability or payable.
 VAT-registered taxpayer has 2 options available for his excess unutilized input tax
 First Option:
o Carry over the excess during the quarter into the next succeeding quarter or quarters
until they are fully utilized
o There is no limit to the amount and number of quarters to carry over.
 Second Option
o File a claim for refund of the excess.
o This is not available to all taxpayers but only to VAT-registered person with zero-
rated sales and with respect to excess unutilized input tax attributable to such sales.
Whom may apply for Tax Refund or Credit
 Any VAT-registered person, whose sales are zero-rated or effectively zero rated
o Discussed above already
 A person whose VAT registration has been cancelled
o Under Section 112(B): Any person whose registration has been cancelled due to
retirement or cessation of business, or due to changes in or cessation of status under
Section 106(C) of this Code may, within two (2) years from the date of cancellation,
apply for the issuance of a tax credit certificate for any unused input tax which may
be used in payment of his other internal revenue taxes.
o It provides the taxpayers the last opportunity to recover funds paid on VAT passed on
to them to the extent of any unused input VAT.
 This could mean input VAT carried over from the very first period of the
taxpayer’s existences and does not necessarily came from zero-rated sales.
o Input VAT is an asset which, upon dissolution, may be returned to the shareholders as
capital or as part of liquidating dividends. However, such input VAT of the dissolving
company cannot be utilized and will have no value to the shareholder receiving the
assets.
 But if a refund is applied for, the unutilized input VAT can be converted to
cash and become an asset of value for distribution to shareholders.
Persons Who Can Avail of the Input Tax Credit
 Any qualified person may avail of the input tax credit provided the transactions are evidenced
by a VAT invoice or an official receipt issued by a VAT-registered person in accordance with
Sections 113 and 237 of the Tax Code
 Input tax credit on importation of goods, properties, or services by a VAT-registered person
shall be creditable:
a. To the importer upon payment of VAT prior to the release of goods from customs
custody
b. To the purchaser of the domestic goods or properties upon consummation of the sale
c. To the purchaser of services or the lessee or licensee upon payment of compensation,
rental, royalty or fee
Period within which Refund or Tax Credit of Input Taxes shall be Made
 One of the requirements to filing a claim for refund on unutilized input tax is the filing of
administrative claim within the prescriptive period which is within 2 years after the close of
the taxable quarter when the sales were made and is filed before the BIR
 Supreme Court ruled that unutilized input VAT payments not otherwise used for any internal
revenue tax due taxpayer must be claimed within 2 years reckoned from the close of the
taxable quarter when the relevant sales were made pertaining to the input VAT regardless of
whether said tax was paid or not.
  The taxpayer can file an administrative claim for VAT refund at any time within the 2-year  “Principal place of business” – place where the head or main office is located as appearing in
prescriptive period. the corporation’s AOC.
 Every quarter where the sale occurred has its own 2-year period of prescription in filing an o In the case of an individual, it shall be the place where the head or main office is
administrative claim for refund. located and where the books of accounts are kept.
 An application or claim for refund may cover one or more quarters provided it is filed within  “Warehouse” – place or premises where the inventory of goods for sale are kept and from
the prescriptive period for all the quarters covered by the application or claim which such goods are withdrawn for delivery to customers, dealers, or persons acting on
 These shall be filed with the appropriate BIR Office, Large Taxpayers Office (LTS) or behalf of the business
Revenue District Office (RDO) having jurisdiction over the principal place of business of the
taxpayer. VAT Threshold
 For claims of input tax refund of direct exporters, are filed with VAT Credit Audit Division VAT Threshold Amount Covered Taxpayers
(VCAD) General Threshold P3M Applicable to all taxpayers
other than franchise grantees of
Compliance Requirements for VAT Registration radio or television
Special Threshold P10M Applicable only to franchise
General Registration Requirement grantees or radio or television
 Any person who in the course of trade or business, sells, barters, exchange goods or
Mandatory VAT Registration
properties, or engages in the sale of services subject to VAT imposed in Sections 106 and 108
of the Tax Code shall register with the appropriate RDO and pay an annual registration fee of  Registration in the VAT system is mandatory to any person who in the course of trade or
P500 for every separate distinct establishment or place of business before the start of such business, sells, barters, or exchanges goods or properties or engages in the sale or exchange of
business and every year thereafter on or before January 31. services if:
1. His gross sales or receipts for the past of 12 months other than those exempt under
 Any person who maintains a head or main office and branches in different places shall
Section 109(1)(A) to (U) of the Tax Code have exceeded P3M or;
register with the RDO which has jurisdiction over the place wherein the main or head office is
2. There are reasonable grounds to believe that his gross sales or receipts for the next
located.
12 months other than those exempt under Section 109(1)(A) to (U) of the Tax Code,
o Registration fee for this shall be paid to any accredited bank in the Revenue District
will exceed P3M
where head office or branch is registered.
 Every person who becomes liable to register under (1) shall register with the RDO and shall
o Where there are no accredited banks, the same shall be paid to the RDO, collection
pay the prescribed annual registration fee
agent, or duly authorized treasurer of the municipality where each place of business
 Franchise grantees for radio and television broadcasting whose gross annual receipt for the
is situated.
preceding calendar year exceeded P10M shall register within 30 days from the end of the
 Each VAT-registered person shall be assigned only one TIN. The branch shall use the 9-digit
calendar year.
TIN of the Head Office plus a 3-digit Branch Code
 “VAT-registered person” – any person registered in accordance with this section
Optional VAT Registration
 “VAT-registrable person” - any person who is required to register but failed to register
 Any person VAT-exempt under Section 1(BB) of the Tax Code or those whose gross annual
 “Separate or distinct establishment” – any branch or facility where sale transactions occur sales or receipts did not exceed P3M may elect to be VAT-registered by registering with the
 “Branch” – means a fixed establishment in a locality which conducts sale operations of the RDO that has jurisdiction over them and pay the annual registration fee for every separate and
business as an extension of the principal office distinct establishment
  Annual gross sales or receipts are more than P100,000 but do not exceed P3M, VAT
registration is optional.
 Any person who is VAT-registered but enters into transactions which are exempt from VAT
may opt that the VAT apply to his transactions which could have been exempt under Section
109 (1) of the Tax Code
 These persons shall not be allowed to cancel his registration for the next 3 years
 If they do not opt to register then they will be subject to 3% percentage tax.
 The same option shall be available to franchise grantees of radio and/or television.
o Once exercised, is irrevocable
Registration of Non-VAT or Exempt Taxpayer
 Every person, other than those required to be registered as a VAT person, engaged on any
business, shall on or before the commencement of his business, or whenever he transfers to
another revenue district, register with the RDO concerned within 10 days from the
commencement of business or transfer and shall pay the registration fee for every separate
and distinct establishment or place of business
 Fee shall be paid to any AAB where each place of business or branch is situated
 Registration shall contain his name or style, place of residence, business, the place where such
business is carried on, and such information as may be required by Commissioner
Required to Register as Non-VAT Person
 They are not required to pay 3% percentage tax
 Ff. are required to register as Non-VAT Person and pay the applicable registration fee:
a. VAT-exempt persons under Section 109 of the Tax Code who did not opt to register
as VAT taxpayers
b. Individuals engaged in the business where the gross sales or receipts do not exceed
P100,000 during any 12-month period
 Not made to pay the registration fee
c. Non-stock, non-profit organizations and associations engaged in trade or business
whose gross sales or receipts do not exceed P3M for any 12-month period
d. Cooperatives other than elective cooperatives
 Not required to pay registration fee
Invoicing and Accounting Requirements for VAT Registered Person
Invoicing Requirement
 A VAT invoice is issued for every sale, barter, or exchange of goods or properties.
o It is the best proof of the sale of goods or services to the buyer
 VAT Official receipt is used for every lease of goods or properties or for every sale, barter,
exchange, or service
o Buyer’s best evidence of the payment of goods or services received from seller
 Said invoices and receipts, taken collectively, are necessary to substantiate the actual amount
or quantity of goods sold and their selling price (proof of transaction) and the best means to
prove the input VAT payments (proof of payment)
 Only VAT-registered persons are required to print their TIN followed by the word “VAT” in
their invoice or official receipt
o They shall be considered as a “VAT Invoice” or VAT Official Receipt.
 All purchases covered by invoices/receipts other than VAT Invoice/VAT Official Receipt shall
not give rise to any input tax
Information Contained in VAT Invoice/Official Receipt
1) A statement that the seller is a VAT-registered person, followed by his TIN
2) The total amount which the purchaser pays or is obligated to pay to the seller
with the indication that such amount includes the VAT. Provided that:
(a) The amount of tax shall be known as a separate item in the invoice or receipt
(b) If the sale is exempt from VAT, the term: “VAT-exempt sale” shall be written or
printed prominently on the invoice or receipt
(c) If the sale is subject to 0% VAT, term “zero-rated sale” shall be written or printed
prominently on the invoice or receipt
(d) If the sale involved goods, properties, or services, some of which are subject to and
some of which are VAT zero-rated or VAT-exempt, the invoice or receipt shall clearly
indicate the breakdown of the sale price b/w taxable, exempt and zero rated
components, and the calculation of the VAT on each portion of the sale is known as its
invoice or receipt; Provided that the seller may issue separate invoices or receipts for
the taxable, exempt, and zero-rated components of the sale
3) The date of transaction, quantity, unit cost, and description of the goods or
properties or nature of the service and
4) In the case of sales in the amount of P1000 or more where the sale or transfer is
made to a VAT-registered person, the name, business style, if any, address and
TIN of the purchaser, customer, or client
Consequences of Issuing VAT Invoice/Receipt by a Non-VAT Person
1) The non-VAT person shall be liable to:
 a. The percentage taxes applicable to his transactions
b. VAT due on the transactions under Section 106 or 108 of the Tax Code, w/out benefit
of input tax credit
c. A 50% surcharge under Section 248(B) of the Tax Code
2) The VAT shall be recognized as an input tax credit to the purchaser under Section 110 of the
Tax Code, provided that requisite information under Section 113(B) of the Tax Code is shown
on the invoice or receipt
Consequence of Issuing a VAT Invoice/Receipt on Exempt Transaction
 If a VAT-registered person issues a VAT invoice or VAT official receipt for a VAT-exempt
transaction but fails to display on the invoice or receipt “VAT-exempt sale,” the transaction
shall be taxable and the issuer shall be liable for VAT
 Purchaser is entitled to claim an input tax credit on his purchases.
Accounting Requirements
 Section 113(B) of the Tax Code states:
o Notwithstanding the provisions of Section 233, all persons subject to the value-added
tax under Sections 106 and 108 shall, in addition to the regular accounting
records required, maintain a subsidiary sales journal and subsidiary purchase
journal on which the daily sales and purchases are recorded. The subsidiary
journals shall contain such information as may be required by the Secretary of
Finance.
Return and Payment of Value-Added Tax
Filing of Return
 Every person liable to pay the VAT shall file a quarterly return of the amount of his gross
sales or receipts within 25 days following the close of each taxable quarter prescribed for
each taxpayer.
 “Taxable Quarter” – quarter that is synchronized to the income tax quarter of the taxpayer
(i.e., the calendar quarter or fiscal quarter)
 Any person, whose registration has been cancelled in accordance with Section 236, shall file a
return and pay the tax due thereon within 25 days from the date of cancellation of registration:
Provided, that only on consolidated return shall be filed by the taxpayer for his principal place
of business or head office and all branches
Payment of VAT
 VAT-registered persons shall pay the VAT on a monthly basis
 Filing and payment required under the Tax Code, as amended by the TRAIN Law, shall be
done within 25 days following the close of each taxable quarter.
o This synchronizes the filing and payment of VAT and adheres to the pay-as-you-file
system.
Place to File and Pay the Tax
 Except as the Commissioner otherwise permits, the return shall be filed with and the tax paid
to an AAB, Revenue Collection Officer, or duly authorized city or municipal Treasurer
located within the Revenue District where taxpayer is registered or required to register.
Withholding of Creditable VAT on Government Money Payments and Payments to Non-Residents
 Section 114(C) of the Tax Code.
 The Government or any of its political subdivisions, instrumentalities, or agencies, including
GOCCs shall, before making payment on account of each purchase of goods or services
which are subject to VAT imposed in Sections 106 and 108 of the Tax Code, deduct and
withhold a final VAT at the rate of 5% of the gross payment thereof
 Illustration: Company A sold to a GOCC goods worth P2,000,000
 of 12% VAT or P240,000.
o When the GOCC pays Company A, the GOCC will withhold 5% of the VAT or
P100,000 and will only pay Company A P2,140,000.
o Company A has no more obligation to pay or remit to the BIR the remaining 140,000
VAT (P240,000 – P100,000) because the P100,000 withheld by the GOCC constitute
final VAT on the sale to the GOCC
o The remaining P140,000 is treated as a standard input tax on the sales of goods or
properties to the government
 For bookkeeping purposes, the actual input VAT attributable to the sales to the government
will no longer be deducted to the output tax on the other regular sales and instead, the amount
is closed to the standard input VAT account
 If the actual input VAT exceeds the standard input VAT, the difference is accounted as seller’s
input VAT expense
 If the actual input VAT is less than the standard input VAT, the difference is closed or
deducted to an expense or cost account
 Payment for lease or use of properties or property rights to non-resident owners shall be
subject to 12% withholding tax at the time of payment.
  Payments for purchase of goods and services arising from projects funded by Official
Development Assistant (ODA) shall not be subject to Final/Creditable Withholding Tax.
Power of the Commissioner to Suspend the Business Operations of a Taxpayer
 The Commissioner or his authorized representative is empowered to suspend the business
operations and temporarily close the business establishment of any person for any of the ff.
violations:
1) In case of a VAT-registered person
a. Failure to issue receipts or invoices
b. Failure to file a VAT return as required under Section 114
c. Understatement of taxable sales or receipts by 30% or more of his correct taxable
sales or receipts of the taxable quarter.
2) Failure of any person to register as required under Section 236.
 Temporary closure of the establishment shall be for the duration of not less than 5 days and
shall be lifted only upon compliance with whatever requirements prescribed by the
Commissioner on the closure order.
 BIR enforces this provision through Oplan Kandado which aims to intensify BIR’s
enforcement operations through strict imposition of prescribed administrative sanctions for
non-compliance with basic tax requirements
 BIR may issue an Apprehension Slip on the spot if the taxpayer is caught in the act of not
issuing official receipts/invoices or issuing official receipts/invoices that are not registered
with the BIR.
 If basis is found for closure of business establishment, taxpayer is sent a notice giving him the
opportunity to explain “under oath” within 48 hours why the business should not be closed
o If the taxpayer fails to respond within 48 hours or if BIR deems the explanations
insufficient or unjustified, a 5-day VAT Compliance Notice (VCN) shall be issued.
o Taxpayer is given 2 days to respond to the VCN.
o If taxpayer refuses or neglects to submit an explanation within the prescribed 2-day
period, BIR shall issue a Closure Order approved by the Commissioner.
 Upon receipt of taxpayer's response, the 5-day VCN shall be deemed suspended and shall
only resume upon receipt of the BIR’s reply/resolution finding the taxpayer liable.
 To effect the Closure Order, BIR will padlock the entrance and place a sign that the
establishment is closed due to nonpayment of taxes or for other violations of the VAT rules
and regulations.
o Closure of a business establishment shall be for a period of not less than 5 days
and/or until the violation is rectified.
o In some cases, immediate or partial compliance may be considered sufficient basis to
lift the closure.
MODULE 8 – WITHHOLDING OF TAXES
Withholding Tax System
 A system of collection of taxes employed primarily for the efficient collection of taxes by the
government.
 It is a tool to ensure that the government will have a regular and steady source of revenue
inflows all throughout the year to support and finance the operations, projects, and programs
of the government.
 It is akin to an advance tax collection system where the corresponding or approximate amount
of tax is withheld and deducted by the withholding agent and remitted to the government.
 The concept of withholding tax on income implies that the amount of tax withheld comes
from the income earned by the taxpayer, then that amount forms part of his gross receipts.
 The tax withheld are in the nature of advance tax payments in order to extinguish its possible
tax obligation.
o They are installments on the annual tax which may be due at the end of a taxable
year.
Requisites of Withholding Taxes
1) The payment of income is subject to income tax
2) The income is fixed or determinable at the time of payment.
3) It is one of the income payments subject to withholding tax as listed in the regulations
4) The payee is a Philippine resident liable to pay income tax
5) The payor-withholding agent is also a Philippine resident.
Kinds of Withholding Tax
a) Withholding Tax at Source
o In the withholding tax system, the withholding agent retains a portion of the amount
received by the income earner. In turn, said amount is credited to the total income tax
payable in transactions covered by the expanded withholding tax
o In cases of income payments subject to withholding tax on compensation and final
withholding tax, the amount withheld is already the entire tax to be paid for the
particular source of income.
 o Payee is the taxpayer, person on whom tax is imposed
o Payor, a separate entity, acts as the government’s agent for the collection of the tax in
order to ensure its payment.
o Two liabilities: (1) Income earner/payee and (2) Withholding agent
 (1) is liable to the income tax due on the income, subject to withholding tax,
he earned.
 (2) is liable on the withholding tax he deducted and should be remitted to
the BIR out of the income earned by the income earner/taxpayer.
Kinds of Withholding Tax at Source
a. Final Withholding Tax
 Amount of income tax withheld by the withholding agent is constituted as a
full and final payment of the income tax due from the payee on said income.
 Liability for payment of tax rests primarily on withholding agent
 In case of failure to withhold the tax or if such tax is under withholding, the
deficiency shall be collected from the payor/withholding agent
 Payee is not required to file an income tax return for the particular
income.
b. Creditable Withholding Tax
 Taxes withheld on certain income payments are intended to equal or atleast
approximate the tax due of the payee on said income.
 Income recipient is still required to file an income tax return, under Sections
51 and 52 of the NIRC, to report the income and/or pay the difference b/w
the tax withheld and the tax due on the income.
 Taxes withheld on income payments covered by the expanded withholding
tax and compensation income are creditable in nature.
FINAL WITHHOLDING CREDITABLE WITHHOLDING
Amount of tax withheld is constituted as a Taxes withheld on certain income payments
full and final payment of the income tax due are intended to equal or atleast approximate
from the payee on the said income the tax due of the payee on said income
The liability for payment of tax is primarily Payee of income is required to report the
on the withholding agent income and/or pay the difference b/w the
tax withheld and the tax due on the income
Payee also has right to ask for a refund if
tax withheld is more than tax due
Payee is not required to file an income tax Income recipient is still required to file an
return for the particular income income tax return as stated under Sections
51 and 52.
Types of Creditable Withholding Tax
(a) Withholding Tax on Compensation (WTC) – tax withheld from income payments
arising from an employer-employee relationship
(b) Expanded Withholding Tax (EWT) – prescribed on certain income payments and is
creditable against the income tax due of the payee for the taxable quarter/year which
particular income was earned.
(c) Withholding Tax on Government Money Payments (GMP) – Value Added Taxes
(GVAT) – tax withheld by national government agencies and instrumentalities,
including GOCC’s and LGU’s, before making any payments to VAT registered
taxpayers/suppliers/payees on account of their purchases of goods and services
(d) Withholding Tax on GMP – Percentage Taxes – tax withheld by national government
agencies and instrumentalities, including GOCC’s and LGU’s, before making any
payments to non-VAT registered taxpayers/suppliers/payees
Income Payments Subject to Final Withholding Tax (FWT)
 Section 57(A) of the Tax Code provides for the exclusive enumeration of income payments
subject to final withholding tax.
 Income payments not included in the list are not subject to FWT
 Income payments subject to FWT are:
o Passive incomes subject to final income tax
o Income of Non-resident foreign corporation subject to gross income tax
o Fringe Benefits
o Informer’s reward
Income Payments Subject to Creditable Withholding Tax (CWT)
 Secretary of Finance, may upon recommendation of the Commissioner, require the
withholding of a tax on the items of income payable to a natural or juridical person, residing
in the Philippines, by payor-corporation/persons at the rate not less than 1% but not more than
32%, which shall be credited against the income tax liability of the taxpayer for the taxable
year.
b) Withholding Tax on Compensation
o A method of collecting the income tax at source upon receipt of the income
 o It applies to all employed individuals, citizens or aliens, deriving income from
compensation for services rendered in the Philippine.
o Employer is constituted as withholding agent
Wages and Compensation
 “Wages” means all remuneration (other than fees paid to a public official) for
services performed by an employee for his employer, including cash value of all
remuneration paid in any medium other than cash
 “Wages” excludes:
 For agricultural labor paid entirely in products of the farm where
the labor is performed
 For domestic service in a private home
 For casual labor not in the course of the employer’s trade or
business
 For services by a citizen or resident of the Philippines for a foreign
government or an international organization
 Name by which the remuneration for services is designated is immaterial
 For tax purposes, wages and compensation are synonymous
 “Payroll period” means a period for which payment of wages is ordinarily made to
the employee by his employer
 “Miscallaneous payroll period" means a payroll period other than, a daily, weekly,
biweekly, semi-monthly, monthly, quarterly, semi-annual, or annual period.
Requisites for Withholding Tax on Wages/Compensation
a. There must exist an employer-employee relationship
b. There must be payment, actual or constructive, on the services rendered by employee
to employer
c. There must be payroll period
Persons Required to Deduct and Withhold Tax
a) Any juridical person, whether or not engaged in trade or business
b) An individual with respect to payments made in connection with his trade or business
o Insofar as taxable sale, exchange or transfer of real property is concerned, individual
buyers who are not engaged in trade or business are also constituted as withholding
agent.
c) All government offices including GOCC’s, as well as provincial, city, and municipal
governments.
Persons Not Required to Withhold Tax to Income Payments made to the following:
a) National government and its instrumentalities, including provincial, city, or municipal
governments
b) Person enjoying exemption from payment of income taxes pursuant to the provisions of any
law, general or special, such as but not limited to:
(1) Sales of real property by a corporation which is registered and certified by the
HLURB or the HUDCC as engaged in socialized housing project where the selling
price of the house and lot or only lot does not exceed the socialized housing price
applicable to the area as prescribed and certified by the said board/council and its
implementing rules and regulations
(2) Corporations registered with the Board of Investments and enjoying exemptions
from the income tax provided by R.A 7916 and Omnibus Investment Code of 1987/
(3) Corporations which are exempt from the income tax under Section 30 of the Tax
Code and GOCC’s exempt from income tax under Section 27(A)(C) of the same
Code (GSIS, SSS, PHIC, Local Water Districts). However, income payments arising
from any activity which is conducted for profit or income derived from real or
personal property shall be subject to withholding tax as prescribed in these
regulations.
(4) Joint ventures or consortium formed for the purpose of undertaking construction
projects or engaging in petroleum, coal, geothermal and other energy operations
pursuant to an operating or consortium agreement under a service contract with the
government. Provided however, such joint ventures or consortium shall comply with
the ff. conditions to be considered as joint venture not taxable as a corporation:
i. Should involve joining or pooling of resources by licensed local
contracts; that is, licensed as general contractor by the PCAB of the
DTI
ii. These local contractors are engaged in construction business
iii. The Joint Venture itself must likewise be duly licensed as such by the
PCAB of the DTI
 Joint ventures involving foreign contractors may also be treated as a
nontaxable corporation only if the member foreign contractor is covered by
a special license as contractor by the PCAB of the DTI; and the construction
project is certified by the appropriate Tendering Agency (gov’t office) that
the project is a foreign financed/internationally funded project and that
international bidding is allowed under the Bilateral Agreement entered into
by and b/w the Philippine Government and the foreign/international
 financial institution pursuant to the implementing rules and regulations of
R.A 4566 (Contractor’s License Law)
(5) Individuals who earn P250,000 and below from a lone income payor upon
compliance with the ff. requirements:
(i) Individual has executed a payee’s sworn declaration of gross receipts in
accordance with the required format.
(ii) The sworn declaration has been submitted to the lone income
payor/withholding agent on or before January 15 of each year or before the
initial income payment, whichever applicable