VALUE ADDED TAX

Characteristics of Vat
a.
b.
c.
d.
e.
f.
g.

Tax on value added of taxpayer

Transparent form of sales tax
Broad-based tax on consumption of goods, properties and services in the Phil
Indirect tax: tax is imposed on seller but burden of tax is shifted to the buyer
Tax is collected thru the tax credit method
No cascading of tax in VAT system
Tax-inclusive method is adopted by the Philippines

VAT is a tax on the value added of a taxpayer arising from the taxable sales of goods,
properties or services during the the quarter rate of 0% or 10%.
Value Added the difference between total sales of the taxpayer for the taxable quarter
subject to value added tax and his total purchases for the same period subject also to value
added tax.
In this sense, the value added of a businessman is the same as his gross profit, provided
that he is not engaged in transactions exempt from VAT. If there is no value added on
taxable sales (because the gross sales or receipts is equal to the gross purchases) or where
there is a loss from the sale, there is still output tax due on the transaction. There will be no
value added tax due ot there will be an excess input tax which may be carried over to the
next quarter(s), respectively. The presence or absence of marl-up or profit by itself is not
material for purposes of determining taxability of transaction subject to tax.
Output Tax VAT due on the sale or lease of taxable goods, properties or services by any
person registered or required to register under Sec. 236 of the Tax Code (Sec.111A, NIRC).
Input Tax VAT 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, properties or services including
lease or use of property, from a VAT registered person.
The buyer becomes entitled to the input tax upon consumption of sale and issuance of a VAT
invoice, in case of sale of goods or properties, and upon payment of service fee or
compensation, in the case of services. It is not necessary that the inventory of goods or
properties be sold before the buyer thereof becomes entitled to claim the input tax.
TAX CREDIT METHOD
1. Cost Deduction Method manner of computing the taxpayers VAT liability by
deducting his costs and expenses subject to VAT from his taxable sales of goods,
properties or services, and multiplying the resulting value added by 12%.
2. Tax Credit Method manner by which the VAT of a taxpayer is computed. The input
taxes shifted by the sellers to the buyer are credited against the buyers output taxes
when he in turn sells the taxable goods, properties and services.
Sales Tax
VAT is a tax on the taxable sale, barter, or exchange of goods, properties or services. A
barter or exchange has the same tax consequences as a sale. A sale may be actual or a
deemed sale, or an export sale or a local sale. Exceptions are as follows: (1.) Importation of
goods; (2.) Erroneous issuance of VAT invoice or receipt for VAT exempt sales of goods,
properties or services; (3.) Deemed sales of goods or properties

Destination Principle
-

The destination of the goods determines taxation or exemption from tax. Export sales
of goods are subject to 0% while imports of goods are subject to 12% VAT. Some
ruling referred to the destination principle as cross border doctrine
Exports are zero-rated because the consumption of such goods will be made outside
the Philippines, while imports of goods are subject to 12% VAT because they are for
consumption within the Philippines.

Principle of Recoupment of Tax

-

Interposing an exempt transaction along the chain of distribution diminishes the

ability of the VAT system to collect the tax on the values added by each seller; in fact,
it aggravates cascading of taxes. As a result, VAT that was foregone in the prior
exempt transaction is recouped from the succeeding customer who is liable to VAT.

PERSONS LIABLE TO TAX

Taxable persons
A person may be characterized as a taxable person if:
(a.)
He is a person who sells barters, exchanges, leases goods or properties,
renders services, and any person who imports goods
(b.)
Transactions are entered into in the course of his trade or business; and
(c.)
The amount of his gross sales or receipts is over the threshold fixed by law or
regulations
A taxable person may conduct business as an individual, estate or trust,
partnership, joint venture, corporation, cooperative or association. Special
attention must be given to the following situations:
1. Husband and Wife
- For VAT purposes, husband and wife shall be treated as separate taxpayers
- Must individually comply with the administrative requirements prescribed for VAT
taxpayers
AGGREGATION RULE APPLIES - whereby taxable sales of goods, properties and
services by each spouse shall be added together to determine whether he/she
exceeded the general threshold prescribed by law (Php1,919,500)
- If he/she does, then he/she must register as a VAT person and comply with his/her
obligations under the VAT law; otherwise, he/she would be subject to 3% tax
under Sec. 116 of NIRC.
2. Joint Venture
- An unincorporated joint venture engaged in construction activity or in energyrelated projects, although exempt from income tax, is liable to VAT
- BIR has allowed certain arrangements the unincorporated joint venture is treated
merely as a flow-through entity that does not pay VAT. In such a case, the
members of the JV are responsible for their respective obligations under the joint
venture agreement and can claim input taxes on their taxable purchases
3. Government
- GR: Branches of the government when performing an essential government
function are exempt from VAT
EXC: When they perform proprietary functions such as selling goods, properties
or services in the course of trade or business
- Local water districts and similar public utilities are not exempt from VAT
4. Non-stock, non-profit association or organization
- GR: A non-stock, non-profit association or organization whose receipts come
purely from association dues or special assessments from members is not subject
to VAT
- The reason for the exemption may either be: (a.) that it is not engaged in
business or in taxable sale of goods, properties or services; or (b.) that the
amount received by it from the members is not income but represents additional
capital contribution
5. Condominium corporation
- Amounts paid in as association dues, membership fees and other
assessments/charges by members/tenants of a condominium corporation form
part of gross income of the latter subject to income tax as well as VAT, because a

condominium corporation furnishes items members/tenants with beneficial

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-ofcost basis only, without realizing profit, for purposes of determining liability for
VAT on services rendered

6. Subdivisions or Villages Homeowners Associations

- Sec. 18 of RA 9904 (Magna Carta for Homeowners and Homeowners
Assoc.) provides that association dues and income derived from rentals of their
facilities shall be tax - exempt: Provided, That such income and dues shall be
used for the cleanliness, safety, security and other basic services needed by the
members, including the maintenance of the facilities of their respective
subdivisions or villages. The grant of tax incentives shall be subject to the
following conditions:
(1.)The homeowners association must be duly constitute associate as defined
under Sec. 3b of RA9904
(2.)The LGU having jurisdiction over the homeowners association must issue a
certification identifying the basic service being rendered by the homeowners
association and therein stating its lack of resources to render such services
(3.)The homeowners association must present proof that the income and dues
are used for the cleanliness, safety, security and other basic services needed
by members, including the maintenance of the facilities of their respective
subdivisions or villages
7. Recreational or sports club
- The gross receipts of recreational clubs including but not limited to membership
fees, assessment dues, rental income, and service fees are subject to VAT
- GR: A non-stock, non-profit association or organization whose receipts come
purely from association dues or special assessments from members is not subject
to VAT
EXC: The moment the non-stock, non-profit association engages in any taxable
sale of goods or services like operating a restaurant or canteen, boutique or shop
selling sporting goods or leases its facilities or spaces to others, it is liable to VAT
where the amount of its gross sales/receipts exceeds Php 1,919,500; or subject to
3% percentage tax, if amount is less than Php 1,919,500.
8. Importer
- VAT is properly and legally due on the local buyers who are considered the
importers.

OUTPUT TAX ON SALE OF GOODS OR PROPERTIES

Elements of Taxable Sale of Goods or Properties
The sale of goods must be:
(a.)An actual or deemed sale of goods or properties for a valuable consideration;
(b.)Undertaken in the course of trade or business
(c.) For the use or consumption in the Philippines
(d.)Not exempt from VAT under NIRC (Sec.109), special law or international agreement
Sale or exchange of real property is subject to VAT where:
(a.)The seller executes a deed of sale, barter or exchange, assignment or conveyance, or
contract to sell of real property
(b.)The real property is located within the Philippines;
(c.) The seller or transferor is engaged in real estate business either as a real estate
dealer, developer, or lessor
(d.)The real property is held primarily for sale of for lease in the ordinary course of his
trade or business, or at least an ordinary asset used in the trade or business of VAT
taxpayer as an incident to his VAT-taxable activity; and
(e.)The sale is not exempt from VAT under Sec. 109 of the NIRC, special law or
international agreement binding upon the government of the Philippines

Sale of Goods or Properties

By contract of sale, one of the contracting parties obligates himself to transfer the ownership
of and to deliver a determinate thing, and other to pay therefor a price certain in money or
its equivalent (Art. 1458. NCC)
- VAT accrues upon the consummation of sale of goods or properties, regardless of
the terms of payment between the contracting parties; thus as soon as seller
issues a VAT invoice, he comes liable to VAT
Types of Sale
(1.)Actual Sale Both seller and buyer are VAT registered persons. The sellers output tax
becomes the buyers input tax which the latter can credit against his output tax on
his taxable sales of goods, properties or services during the quarter
(2.)Deemed Sale the ff. transactions are deemed sales:
a. Transfer, use or consumption, not in the course of business, of goods or properties
originally intended for sale or for use in the course of business.
b. Distribution or transfer to shareholders or investors as share in the profits of the
VAT-registered person; or creditors in payment of debt or obligation
c. Consignment of goods if actual sale is not made within sixty (60) days following
the date such goods were consigned;
d. Retirement from or cessation of business, with respect to all goods on hand
In deemed sales, the seller is also the buyer and no valuable consideration is paid.
EXAMPLE: If the owner withdraws goods for personal (non-business) use from his
inventory, he derives a tax advantage from the input tax, which he already
credited at the time of purchase against his output tax.

The rationale of the transaction deemed sale provisions is to recapture VAT that was
claimed as input tax at the time of purchase.
(3.)Export Sale
(a.)The term export sale means:
1. The sale and actual shipment of goods from the Philippines to a foreign
country, irrespective of any shipping arrangement that may be agreed upon
which may influence or determine the transfer of ownership of the goods so
exported, paid in acceptable foreign currency or its equivalent in goods or
services, and accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP);
2. The sale of raw materials or packaging materials to a non-resident buyer for
delivery to as resident local export-oriented enterprise to be used in
manufacturing, processing, packing or repacking in the Philippines of the said
buyer's goods, paid for in acceptable foreign currency, and accounted for in
accordance with the rules and regulations of the BSP;
3. The sale of raw materials or packaging materials to an export-oriented
enterprise whose export sales exceed seventy percent (70%) of total annual
production;
4. Sale of gold to the BSP;
5. Transactions considered export sales under Executive Order No. 226,
otherwise known as the Omnibus Investments Code of 1987, and other special
laws; and
6. The sale of goods, supplies, equipment and fuel to persons engaged in
international shipping or international air transport operations
(b.)Foreign Currency Denominated Sale
The sale to a non-resident of goods, except those mentioned in Sections 149
and 150 of the Tax Code, assembled or 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 regulations of the BSP
(c.) Sale of goods or property to persons or entities who are tax-exempt under special
laws or international agreements to which the Philippines is a signatory, such as,
Asian Development Bank (ADB), International Rice Research Institute (IRRI), etc.

Goods or Properties
Goods any movable, tangible object, which is appropriable or transferable, and having
intrinsic value.
It connotes any commodity produced and subsequently purchased to satisfy the current
wants and perceived needs of the buyer
Goods or Properties all tangible and intangible objects, whether real or personal, which
are capable of pecuniary estimation. It includes: (a.) real properties and (b.) intangible
properties
In the course of trade or business
The regular conduct or pursuit of a commercial or an economic activity,
including transactions deemed incidental thereto, regardless of whether or not the
person engaged therein is a non-stock, non-profit private organization (irrespective of

the disposition of its net income and whether or not it sells exclusively to members or
their guests), or government entity.
Isolated transactions are not subject to VAT.
Incidental income follows taxation of the principal activity.

Goods or properties must be located in the Philippines and consumed or destined

for consumption in the Phil.
Special economic zones under RA 7916 (PEZA Law) and Freeport zones under
RA 7227 (BCDA Law) are treated as foreign territories by fiction of law. Hence,
importation of goods by a special economic or Freeport zone enterprise shall be
exempt from VAT and customs duties and will be subject to VAT and duties only upon
their withdrawal from the customs custody.
Vat on imported goods There shall be levied, assessed and collected on every
importation of goods a VAT equivalent to 12% based on total value used by the Bureau of
Customs in determining tariff and customs duties plus customs duties, excise taxes, if any,
and other charges, such tax to be paid by the importer prior to the release of such goods
from customs custody: Provided, That where the customs duties are determined on the basis
of the quantity or volume of the goods, VAT shall be based on the landed cost plus excise
tax, if any.
QUESTION: An alien employee of the Asian Development Bank (ADB) who is
retiring soon has offered to sell his car to you, which he imported tax-free for his
personal use. The privilege of exemption from tax is granted to qualified personal
use under the ADB Charter which is recognized by the tax authorities. If you
decide to purchase the car, is the sale subject to tax? Explain.
ANSWER: The sale is subject to tax. Sec. 107B of the NIRC provides that In the case of taxfree importation of goods into the Philippines by persons, entities or agencies exempt from
tax, where such goods 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 thereof, who shall be liable for any internal revenue tax on such importation.
The absence of profit in the performance of taxable services does not make such
activity for a fee exempt from VAT

OUTPUT TAX ON SALE OF SERVICES

Sale or exchange of services embraces the performance of all kinds of services in
the Philippines for others for a fee, by a person, regardless of whether the performance
thereof calls for the exercise or use of physical or mental faculties,
PERSONS SELLING TAXABLE SERVICES
1.

Construction and service contractors

2.

Brokers

3.

Lessors of property, real or personal

4.

Warehousing services

5.

Lessors or distributors of cinematographic films

6.

Persons engaged in milling, processing, manufacturing or repacking goods for

others

7.

Proprietors or operators or keepers of hotels, motels, resthouses, pension

houses, inns and resorts

8.

Proprietors or operators of restaurants and other similar establishments

9.

Dealers in securities

10.

Lending investors

11.

Transportation contractors on their transport of goods or cargoes

12.

Domestic common carriers by air and sea between points in the Philippines

13.

Sales of electricity (by generation, transmission, and distribution companies)

14.

Services of franchise grantees, except water and gas

15.

Non-life insurance companies, except crop insurance

16.

Similar services, regardless of whether or not the performance thereof calls for
the exercise or use of the physical or mental faculties

Requisites for Taxability of Services

1. The service must be performed or is to be performed in the course of trade or
business in the Philippines, except in the case of service done in the Philippines by a
non-resident person
2. For a valuable consideration actually or constructively received
3. The service is not exempt under the Tax Code, special law, or international
agreement

QUESTION: State whether the ff. transactions are (a.) VAT exempt; (b.) subject to
Vat at 10%; or (c.) subject to VAT at 0%
1. Sale of fresh vegetables by Aling
Ining at the Pamilihang Bayan ng
Trece Martirez

ANSWER
Vat exempt. 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 (sec. 109, NIRC)

2. Services rendered by Jakes

Construction Comp., a contractor to
WHO in the renovation of its offices in
Manila

VAT at 10%. 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. Sale of tractors and other agricultural

implements by BUngkal Inc. to local
farmers

VAT at 10%. Tractors and other agricultural

implements fall under all tangible and
intangible objects which are capable of
pecuniary estimation and shall include
VAT at 10%. Falls under definition of goods

4. Sale of RTW by Celys boutique, a

Filipino dress designer, in her dress
shop and other outlets
5. Fees for lodgingpaid by students to
Bahay-Bahayam Dormitory, a private
entity operating a student dormitory
(monthly fee of Php1,500)

VAT exempt. The monthly fee paid by each

student falls under lease of a residential unit
with a monthly rental not exceeding Ten
thousand pesos (P10, 000)

TAX BASES
Actual Sale of Goods or Properties
Tax base is Gross Selling Price (GSP) - the total amount of money or its equivalent,
which the purchaser pays or is obligated to pay to the seller in consideration of the
sale, barter or exchange of the goods or properties, excluding the VAT.
In the case of sale of appliances and other personal properties on
installment basis, the entire GSP is subject to 12% VAT on the quarter of the sale
(whether the consideration is received in full or not in the quarter of the sale)
However, in the case of sale, barter or exchange of real property subject to
VAT, the GSP shall mean the consideration stated in the sales document
If the VAT is not billed separately in the document of sale, the selling price or the
consideration stated therein shall be deemed to be inclusive of VAT
Sale of Goods
GR: VAT (output tax) accrues on sale of goods or properties (other than real
property) at the time of sale, when the sales invoice is issued, although none or only
a part of GSP is paid by the buyer at the time of sale
Sale of Real Property
- In case of sale of real property on the installment, where the initial payments do not
exceed 25% of the total contract price or GSP, the tax base shall be the amount
actually or constructively received during the taxable quarter. The seller shall
recognize output tax and input tax shall accrue to the buyer at the time of execution
of the instrument sale
- In case of a deferred payment sale not on the installment plan, where the initial
payment exceed 25% of the total contract price or gross selling price, the tax base
shall be the entire gross selling price, in which case, even if only a part of the total
consideration is received by the seller, his output tax is computed on the entire GSP.
His subsequent receipt of the unpaid balance in the succeeding years will no longer
be subject to VAT that must be evidenced by non-VAT invoice or receipt
Sales discount, returns and allowances
- Sales discounts determined and granted at the time of sale, which are expressly
indicated in the sales invoice relating to sales of goods or properties do not form part
of the tax base; hence, deducted from GSP. Sales discounts determined and granted
at the time of sale, which are expressly indicated in the sales invoice do not form part
of the tax base. Grant of discount must not depend upon the happening of a future
event or the fulfillment of certain condition. They must be recorded in the books of
accounts of the seller.
- 20% sales discounts to senior citizens under RA 9257 (Amended Senior Citizens Law)
shall be deducted from gross sales before applying the VAT rate.
Transactions deemed sale
- The tax base for transactions deemed sale is the market value of such goods as of
the occurrence of the transaction deemed sale.
- However, in the case of retirement from or cessation of business which is also a
transaction deemed sale, the tax base shall be the acquisition cost or the current
market price of the goods, whichever is lower (sec.106B, NIRC)
Commissioners power to determine tax base

If the GSP in the invoice is unreasonably lower than the actual market value, the
Commissioner is authorized to determine and prescribe the actual market value to be
used as the tax base. The GSP is considered unreasonably lower than the 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 immediate locality on or nearest
the date of sale

Sale of Services
- VAT accrues upon actual or constructive receipt of payment by the seller of service.
Thus, when the seller received no payment, no VAT (output tax) liability arises.
- Corollary, if an amount of the contract price, fee or compensation is received by the
seller, he is liable to VAT even though he has not performed any service to the buyer
during the quarter
To be subject to VAT, the sale or exchange of service must meet all of the following
essential requisites:
(1.)There is a sale or exchange of service or lease of property enumerated in the law or
other similar services
(2.)The service is performed or to be performed in the Philippines
(3.)The service is performed or to be performed in the course of the taxpayers trade or
business or profession;
(4.)The service is performed or to be performed for a valuable consideration actually or
constructively received; and
(5.)The service is not exempt under the Tax Code, special law, or international
agreement
In the absence of any of the requisites, the transaction is exempt from VAT but it may be
subject to other percentage tax.
The services of the ff. persons listed in Sec. 108 of NIRC are subject to VAT:
(1.)Construction and service contractors;
(2.)Stock, real estate, commercial, customs and immigration brokers;
(3.)Lessors of property, whether personal or real;
(4.)Warehousing services;
(5.)Lessors or distributors of cinematographic films;
(6.)Persons engaged in milling processing, manufacturing or repacking goods for others;
(7.)Proprietors, operators or keepers of hotels, motels, rest houses, pension houses, inns
and resorts;
(8.)Proprietors or operators of restaurants, refreshment parlors, cafes and other eating
places, including clubs and caterers;
(9.)Dealers in securities;
(10.)
Lending investors;
(11.)
Transportation contractors on their transport of goods or cargoes, including
persons who transport goods or cargoes for hire another domestic common carriers
by land relative to their transport of goods or cargoes;
(12.)
Common carriers by air and sea relative to their transport of passengers,
goods or cargoes from one place in the Philippines to another place in the Philippines;
(13.)
Sales of electricity by generation companies, transmission, and distribution
companies;
(14.)
Services of franchise grantees of electric utilities, telephone and telegraph,
radio and television broadcasting and all other franchise grantees except those under
section 119 of this Code; and

(15.)
Non-life insurance companies (except their crop insurances), including surety,
fidelity, indemnity, and bonding companies; and
(16.)
Similar services regardless of whether or not the performance thereof calls for
the exercise or use of the physical or mental faculties.
The GPP shall be treated as a separate and distinct taxable person from the
individual partners composing the partnership For VAT purposes, all gross receipts
from the sale of services rendered by the partners for and in the name of the partnership
shall be entirely taxable against the partnership. However, the sales of services made by
any of the partners thereof, in his personal and individual capacity shall be entirely taxable
against the partnership.
However, the sales of services made by any of the partners thereof, in his personal and
individual capacity, shall not be attributed to the partnership, but shall be taxable against
such partner as an individual professional.
VAT is based on income actually received While it may be true that there was an
overpayment because there was a decrease in the charter hire fee, the law, however, is
explicit that the 10% VAT should not be based on income that must have been received but
on income that was actually received
Advance rental payments
- Advance payment by the lessee which actually in the nature of (a.) loan to the lessor
from the lessee; or (b.) an option money or property; or (c.) a security deposit to
insure the faithful performance of certain conditions of the lessee to the lessor is not
subject to VAT
Reimbursement of expenses
- Generally, reimbursements do not form part of the tax base of the seller of service,
provided they conform to the requirements prescribed in the law or its implementing
regulations.
To be exempt from VAT, receipts covering reimbursed expenses must be in
the name of the customer (PMSC vs. Comm., CTA Ruling)
Tax implications and recording of deposits /advances made by clients to GPP for
expenses
1. Upon receipt of the cash deposits/advances from the client, the GPP shall issue an
official receipt. The amount received shall be booked as income of the GPP and form
part of the GPPs gross receipts and subject to VAT, if applicable.
2. The GPP shall record the expense it incurred and paid on behalf of the clients as its
own expenses, for income tax purposes, if the official receipt/invoice issued by the
third-party is in the name of the GPP. Said expenses, supported by official
receipt/invoices issued by the third-party establishments in the name of the GPP, may
be claimed by the latter as deductions from its gross income.