TAXATION

Value-Added Tax
LECTURE NOTES

VALUE-ADDED TAX
Sections 105-115 of the NIRC, amended by RA No. 9337
Implemented by RR No. 16-05 as amended by RR No. 4-07

I. PRELIMINARY MATTERS

a. Nature and characteristic of VAT in general

Sec. 4.105-2 of RR No. 16-05. Nature and Characteristics of VAT.
— VAT is a tax onconsumption levied on the sale, barter, exchange or lease of goods or properties and services in the
Philippines and on importation of goods intothe Philippines. The seller is the one statutorily liable for the payment of
thetax but the amount of the tax may be shifted or passed on to the buyer,transferee or lessee of the goods, properties
or services. This rule shalllikewise apply to existing contracts of sale or lease of goods, properties or services at the time
of the effectivity of RA No. 9337. However, in the case of importation, the importer is the one liable for the VAT.

CASES: CIR vs. Magsaysay Lines GR No. 146984 dated July 28, 2006

Pursuant to a government program of privatization, NDC, a VAT-registeredentity created for the purpose of selling real
property, decided to sell toprivate enterprise all of its shares in its wholly-owned subsidiary the NationalMarine
Corporation (NMC). The NDC decided to sell in one lot its NMCshares and five (5) of its ships, which are 3,700 DWT
Tween-Decker,"Kloeckner" type vessels. The vessels were constructed for the NDCbetween 1981 and 1984, then initially
leased to Luzon StevedoringCompany, also its wholly-owned subsidiary. Subsequently, the vessels weretransferred and
leased, on a bareboat basis, to the NMC. The NMC sharesand the vessels were offered for public bidding. Among the
stipulated termsand conditions for the public auction was that the winning bidder was to pay"a value added tax of 10%
on the value of the vessels." Magsaysay Lines Inc., offered to buy the shares and the vessels for P168,000,000.00. The
bidwas made by Magsaysay Lines, purportedly for a new company still to beformed composed of itself, Baliwag
Navigation Inc., and FIM Limited of theMarden Group based in Hongkong . The bid was approved by the Committeeon
Privatization, and a Notice of Award was issued to Magsaysay Lines.VAT is ultimately a tax on consumption, even though
it is assessed on manylevels of transactions on the basis of a fixed percentage.It is the end user of consumer goods or
services which ultimately shoulders the tax, as theliability therefrom is passed on to the end users by the providers of
thesegoods or services who in turn may credit their own VAT liability (or inputVAT) from the VAT payments they receive
from the final consumer (or outputVAT).The final purchase by the end consumer represents the final link in aproduction
chain that itself involves several transactions and several acts of consumption. The VAT system assures fiscal adequacy
through thecollection of taxes on every level of consumption,yet assuages themanufacturers or providers of goods and
services by enabling them to passon their respective VAT liabilities to the next link of the chain until finally theend
consumer shoulders the entire tax liability.

CIR vs. Seagate Technology (Phils) GR No. 153866 February 11, 2005

The VAT is a uniform tax ranging, at present, from 0 percent to 10 percentlevied on every importation of goods, whether
or not in the course of trade or business, or imposed on each sale, barter, exchange or lease of goods or properties or on
each rendition of services in the course of trade or businessas they pass along the production and distribution chain, the
tax being limitedonly to the value added to such goods, properties or services by the seller,transferor or lessor.It is an
indirect tax that may be shifted or passed on tothe buyer, transferee or lessee of the goods, properties or services. As
such,it should be understood not in the context of the person or entity that isprimarily, directly and legally liable for its
payment, but in terms of its natureas a tax on consumption.

b. VAT as an indirect tax

CASE: Contex vs. CIR GR No. 151135 dated July 2, 2004

VAT is an indirect tax. As such, the amount of tax paid on the goods,properties or services bought, transferred, or leased
may be shifted or passed on by the seller, transferor, or lessor to the buyer, transferee or lessee. Unlike a direct tax,
such as the income tax, which primarily taxes anindividual’s ability to pay based on his income or net wealth, an indirect
tax,such as the VAT, is a tax on consumption of goods, services, or certaintransactions involving the same. The VAT,
thus, forms a substantial portionof consumer expenditures. Further, in indirect taxation, there is a need todistinguish
between the liability for the tax and the burden of the tax. Asearlier pointed out, the amount of tax paid may be shifted
or passed on bythe seller to the buyer. What is transferred in such instances is not the liabilityfor the tax, but the tax
burden. In adding or including the VAT due to theselling price, the seller remains the person primarily and legally liable
for thepayment of the tax. What is shifted only to the intermediate buyer andultimately to the final purchaser is the
burden of the tax. Stated differently, aseller who is directly and legally liable for payment of an indirect tax, such asthe
VAT on goods or services is not necessarily the person who ultimatelybears the burden of the same tax. It is the final
purchaser or consumer of such goods or services who, although not directly and legally liable for thepayment thereof,
ultimately bears the burden of the tax.

c. Persons Liable (Sec. 105)

Persons Liable. - Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or
properties, renders services, and anyperson who imports goods shall be subject to the value-added tax (VAT)imposed in
Sections 106 to 108 of this Code.The value-added tax is an indirect tax and the amount of tax may be shiftedor passed
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on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing
contracts of sale or lease of goods, properties or services at the time of the effectivity of Republic Act No.7716.

i. Persons liable in general

CASE: CIR vs. CA and Commonwealth Management Services

Commonwealth Management and Services Corporation (COMASERCO, for brevity), is a corporation duly organized and
existing under the laws of thePhilippines. It is an affiliate of Philippine American Life Insurance Co.(Philamlife), organized
by the letter to perform collection, consultative andother technical services, including functioning as an internal auditor,
of Philamlife and its other affiliates. On January 24, 1992, the Bureau of InternalRevenue (BIR) issued an assessment to
private respondent COMASERCOfor deficiency value-added tax (VAT). COMASERCO's annual corporateincome tax return
ending December 31, 1988 indicated a net loss in itsoperations. COMASERCO asserted that the services it rendered
toPhilamlife and its affiliates, relating to collections, consultative and other technical assistance, including functioning as
an internal auditor, were on a"no-profit, reimbursement-of-cost-only" basis. It averred that it was not engaged in the
business of providing services to Philamlife and its affiliates.COMASERCO was established to ensure operational
orderliness andadministrative efficiency of Philamlife and its affiliates, and not in the sale of services. COMASERCO
stressed that it was not profit-motivated, thus notengaged in business. In fact, it did not generate profit but suffered a
net loss in taxable year 1988. COMASERCO averred that since it was not engaged inbusiness, it was not liable to pay
VAT.

ii. Who are required to register for VAT (Sec. 236 G) [Sec. 9.236-1 of RRNo. 16-05]

Sec. 236 (G)

Any person, who expects to realize gross sales or receipts subject to value-added tax in excess of the amount prescribed
under Section 109(z) of thisCode for the next 12-month period from the commencement of the business,shall register
with the Revenue District Office which has jurisdiction over thehead office or branch and shall pay the annual registration
fee prescribed inSubsection (B) hereof.

Sec. 9.236-1 of RR No. 16-05

(a) In general. — Any person who, in the course of trade or business, sells,barters, exchanges goods or properties, or
engages in the sale of servicessubject to VAT imposed in Secs. 106 and 108 of the Tax Code shall register with the
appropriate RDO using the appropriate BIR forms and pay an annualregistration fee in the amount of Five Hundred Pesos
(P500) using BIR FormNo. 0605 for every separate or distinct establishment or place of business(save a warehouse
without sale transactions) before the start of suchbusiness and every year thereafter on or before the 31st day of
January.Any person who maintains a head or main office and branches in differentplaces shall register with the RDO
which has jurisdiction over the placewherein the main or head office or branch is located. However, theregistration fee
shall be paid to any accredited bank in the Revenue Districtwhere the head office or branch is registered provided that in
areas wherethere are no accredited banks, the same shall be paid to the RDO, collectionagent, or duly authorized
treasurer of the municipality where each place of business or branch is situated.Each VAT-registered person shall be
assigned only one TIN. The branchshall use the 9-digit TIN of the Head Office plus a 3-digit Branch Code.(b)
Mandatory:Any person who, in the course of trade or business, sells, barters or exchanges goods or properties or
engages in the sale or exchange of services shall be liable to register if:i. His gross sales or receipts for the past twelve
(12) months, other thanthose that are exempt under Sec. 109 (1)(A) to (U) of the Tax Code, haveexceeded One million
nine hundred nineteen thousand five hunderd pesos (P1,919,500.00); or ii. There are reasonable grounds to believe that
his gross sales or receipts for the next twelve (12) months, other than those that are exempt under Sec.109 (1)(A) to
(U) of the Tax Code, will exceed One million nine hundred nineteen thousand five hunderd pesos (P1,919,500.00).1

Every person who becomes liable to be registered under paragraph (1) of this subsection shall register with the RDO
which has jurisdiction over thehead office or branch of that person, and shall pay the annual registration feeprescribed in
subsection 9.236-1(a) hereof. If he fails to register, he shall beliable to pay the output tax under Secs. 106 and/or 108 of
the Tax Code as if he were a VAT-registered person, but without the benefit of input tax creditsfor the period in which he
was not properly registered.Moreover, franchise grantees of radio and television broadcasting, whosegross annual receipt
for the preceding calendar year exceededP10,000,000.00, shall register within thirty (30) days from the end of
thecalendar year.iii. Optional VAT Registration (Sec. 236 H) [Sec. 9.236-1 of RR No. 16-05](c) Optional VAT Registration.
—(1) Any person who is VAT-exempt under Sec. 4.109-1 (B) (1) (V) notrequired to register for VAT may, in relation to
Sec. 4.109-2, elect to be VAT-registered by registering with the RDO that has jurisdiction over the headoffice of that
person, and pay the annual registration fee of P500.00 for everyseparate and distinct establishment.(2) Any person who
is VAT-registered but enters into transactions which areexempt from VAT (mixed transactions) may opt that the VAT
apply to histransactions which would have been exempt under Section 109(1) of the TaxCode, as amended. [Sec.
109(2)](3) Franchise grantees of radio and/or television broadcasting whose annualgross receipts of the preceding year
do not exceed ten million pesos(P10,000,000.00) derived from the business covered by the law granting thefranchise
may opt for VAT registration. This option, once exercised, shall beirrevocable. (Sec. 119, Tax Code)Any person who
elects to register under this subsections (1) and (2) aboveshall not be allowed to cancel his registration for the next three
(3) years.The above-stated taxpayers may apply for VAT registration not later than ten(10) days before the beginning of
the calendar quarter and shall pay theregistration fee prescribed under sub-paragraph (a) of this Section, unlessthey
have already paid at the beginning of the year. In any case, theCommissioner of Internal Revenue may, for
administrative reason deny anyapplication for registration. Once registered as a VAT person, the taxpayer shall be liable
to output tax and be entitled to input tax credit beginning onthe first day of the month following registration.

d. Meaning of the phrase “in the course of trade of business” (Sec.105)

1
Under the TRAIN Act, the VAT threshold was increased from P1,919,500.00 to P3,000,000
.

Sec. 4.105-3 of RR No. 16-05 - Meaning of "In the Course of Trade or Business". — The term "in the course of trade or
business" means theregular conduct or pursuit of a commercial or economic activity, includingtransactions incidental
thereto, by any person regardless of whether or notthe person engaged therein is a non-stock, non-profit private
organization(irrespective of the disposition of its net income and whether or not it sellsexclusively to members or their
guests), or government entity.Non-resident persons who perform services in the Philippines are deemed tobe making
sales in the course of trade or business, even if the performanceof services is not regular.

CASE: CIR vs. Magsaysay Lines GR No. 146984 dated July 28, 2006

Interpretation of the term “In the Course of Trade or Business. VAT is not asingular-minded tax on every transactional
level. Its assessment bears directrelevance to the taxpayer’s role or link in the production chain. Hence, asaffirmed by
Section 99 of the Tax Code and its subsequent incarnations, thetax is levied only on the sale, barter or exchange of
goods or services bypersons who engage in such activities, in the course of trade or business.These transactions outside
the course of trade or business may invariablycontribute to the production chain, but they do so only as a matter of
accidentor incident. As the sales of goods or services do not occur within the courseof trade or business, the providers of
such goods or services would hardly, if at all, have the opportunity to appropriately credit any VAT liability as againsttheir
own accumulated VAT collections since the accumulation of output VATarises in the first place only through the ordinary
course of trade or business.Is the sale subject to VAT?No. The sale is not subject to VAT."course of business" or "doing
business" connotes regularity of activity. In theinstant case, the sale was an isolated transaction. The sale which
wasinvoluntary and made pursuant to the declared policy of Government for privatization could no longer be repeated or
carried on with regularity. Itshould be emphasized that the normal VAT-registered activity of NDC isleasing personal
property. This finding is confirmed by the Revised Charter of the NDC which bears no indication that the NDC was created
for the primarypurpose of selling real property.

e. Exceptions to the Rule of Regularity

f. Output Tax vs. Input Taxes

i. Sources of Input Tax (Sec. 110 A)

(A) Creditable Input Tax. -

(1) Any input tax evidenced by a VAT invoice or official receipt issued inaccordance with Section 113 hereof on the
following transactions shall becreditable against the output tax:
(a) Purchase or importation of goods:
(i) For sale; or
(ii) For conversion into or intended to form part of a finishedproduct for sale including packaging
materials;
(iii) For use as supplies in the course of business; or
(iv) For use as materials supplied in the sale of service; or
(v) For use in trade or business for which deduction for depreciation or amortization is allowed under this
Code, except automobiles,aircraft and yachts.
(b) Purchase of services on which a value-added tax has beenactually paid.
(2) The input tax on domestic purchase of goods or properties shall becreditable:
(a) To the purchaser upon consummation of sale and on importationof goods or properties; and
(b) To the importer upon payment of the value-added tax prior to therelease of the goods from the custody of
the Bureau of Customs.However, in the case of purchase of services, lease or use of properties, the input tax
shall be creditable to the purchaser, lessee or licensee upon payment of the compensation, rental, royalty or fee.
(3) A VAT-registered person who is also engaged in transactions notsubject to the value-added tax shall be allowed tax
credit as follows:
(a) Total input tax which can be directly attributed to transactionssubject to value-added tax; and
(b) A ratable portion of any input tax which cannot be directlyattributed to either activity.The term "input tax"
means the value-added tax due from or paid by aVAT-registered person in the course of his trade or business on
importationof goods or local purchase of goods or services, including lease or use of property, from a VAT-
registered person. It shall also include the transitionalinput tax determined in accordance with Section 111 of this
Code.The term "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 this Code.

ii. Excess Output or Input Tax (Sec. 111 B)

Excess Output or Input Tax. - If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall
be paid by the VAT-registered person. If the input tax exceeds the output tax, the excess shall be carried over to the
succeeding quarter or quarters. Any input tax attributable to the purchase of capital goods or to zero-rated sales by a
VAT-registered person may at his option be refunded or credited against other internal revenue taxes, subject to the
provisions of Section 112.

iii. Rule on Input Tax on Capital Goods (Sec. 4.110-3 of RR No. 16-05)

Claim for Input Tax on Depreciable Goods. — Where a VAT-registered person purchases or imports capital goods, which
are depreciable assets for income tax purposes, the aggregate acquisition cost of which (exclusive of VAT) in a calendar
month exceeds One Million pesos (P1,000,000.00),regardless of the acquisition cost of each capital good, shall be
claimed as credit against output tax in the following manner:
(a) If the estimated useful life of a capital good is five (5) years or more —The input tax shall be spread evenly
over a period of sixty (60) months andthe claim for input tax credit will commence in the calendar month when
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the capital good is acquired. The total input taxes on purchases or importations of this type of capital goods shall
be divided by 60 and the quotient will be the amount to be claimed monthly.
(b) If the estimated useful life of a capital good is less than five (5) years —The input tax shall be spread evenly
on a monthly basis by dividing the input tax by the actual number of months comprising the estimated useful life
of the capital good. The claim for input tax credit shall commence in the calendar month that the capital goods
were acquired.

Where the aggregate acquisition cost (exclusive of VAT) of the existing or finished depreciable capital goods purchased or
imported during any calendar month does not exceed One million pesos (P 1,000,000.00), the total input taxes will be
allowable as credit against output tax in the month of acquisition; Provided, however, that the total amount of input
taxes (input tax on depreciable capital goods plus other allowable input taxes) allowed to be claimed against the output
tax in the quarterly VAT Returns shall be subject to the limitation prescribed under Sec. 4.110-7 of these Regulations.The
aggregate acquisition cost of a depreciable asset in any calendar month refers to the total price agreed upon for one or
more assets acquired and not on the payments actually made during the calendar month. Thus, an asset acquired in
installment for an acquisition cost of more than P 1,000,000.00 will be subject to the amortization of input tax despite
the fact that the monthly payments/installments may not exceed P1,000,000.00.2

iv. Substantiation of Input Tax Credits (Sec. 4.110-8 of RR No. 16-05)

(a) Input taxes for the importation of goods or the domestic purchase of goods, properties or services is made in the
course of trade or business,whether such input taxes shall be credited against zero-rated sale, non-zero-rated sales, or
subjected to the 5% Final Withholding VAT, must besubstantiated and supported by the following documents, and must
bereported in the information returns required to be submitted to the Bureau:

(1) For the importation of goods — import entry or other equivalent document showing actual payment of VAT on
the imported goods.

(2) For the domestic purchase of goods and properties — invoice showingthe information required under Secs.
113 and 237 of the Tax Code.

(3) For the purchase of real property — public instrument i.e., deed of absolute sale, deed of conditional sale,
contract/agreement to sell, etc.,together with VAT invoice issued by the seller.

(4) For the purchase of services — official receipt showing the informationrequired under Secs. 113 and 237 of
the Tax Code.A cash register machine tape issued to a registered buyer shall constitutevalid proof of
substantiation of tax credit only if it shows the informationrequired under Secs. 113 and 237 of the Tax Code.

(b) Transitional input tax shall be supported by an inventory of goods asshown in a detailed list to be submitted to the
BIR.

(c) Input tax on "deemed sale" transactions shall be substantiated with theinvoice required under Sec. 4.113-2 of these
Regulations.

(d) Input tax from payments made to non-residents (such as for services,rentals and royalties) shall be supported by a
copy of the Monthly RemittanceReturn of Value Added Tax Withheld (BIR Form 1600) filed by the residentpayor in behalf
of the non-resident evidencing remittance of VAT due whichwas withheld by the payor.

(e) Advance VAT on sugar shall be supported by the Payment Order showing payment of the advance VAT.

II. VAT ON GOODS AND SERVICES

a. Definition of goods and services (Sec. 106 and Sec. 108)

SEC. 106 The term "goods" or "properties" shall mean all tangible and intangible objects which are capable of pecuniary
estimation and shall include:

(a) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business;

(b) The right or the privilege to use patent, copyright, design or model, plan, secret formula or process, goodwill,
trademark, trade brand or other like property or right;

(c)The right or the 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.

2
Under Train Act, amortization of input VAT shall only be allowed until December 31, 2021.

After such date, taxpayers with unutilized input VAT on capital goods purchased or imported shall be allowed to apply the
same as scheduled until fully utilized.
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SEC. 108. The phrase "sale or exchange of services" means the performance of all kinds or services in the Philippines for
others for a fee, remuneration or consideration, including those performed or rendered by construction and service
contractors; stock, real estate, commercial, customs and immigration brokers; lessors of property, whether personal or
real; warehousing services; lessors or distributors of cinematographic films; persons engaged in milling processing,
manufacturing or repacking goods for others; proprietors, operators or keepers of hotels, motels, resthouses, pension
houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes and other eating places,
including clubs and caterers; dealers in securities; lending investors; transportation contractors on their transport of
goods or cargoes, including persons who transport goods or cargoes for hire another domestic common carriers by land,
air and water relative to their transport of goods or cargoes; services of franchise grantees of telephone and telegraph,
radio and television broadcasting and all other franchise grantees except those under Section 119 of this Code; services
of banks, non-bank financial intermediaries and finance companies; and non-life insurance companies (except their crop
insurances), including surety, fidelity, indemnity and bonding companies; and similar services regardless of whether or
not the performance thereof calls for the exercise or use of the physical or mental faculties. The phrase 'sale or exchange
of services' shall likewise include:

(1) 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;

(2) The lease of the use of, or the right to use of any industrial, commercial or scientific equipment;

(3) The supply of scientific, technical, industrial or commercial knowledge or information;

(4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the
application or enjoyment of any such property, or right as is mentioned in subparagraph (2) or any such knowledge or
information as is mentioned in subparagraph (3);

(5) 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.

(6) The supply of technical advice, assistance or services rendered in connection with technical management or
administration of any scientific, industrial or commercial undertaking, venture, project or scheme;

(7) The lease of motion picture films, films, tapes and discs; and

(8) The lease or the use of or the right to use radio, television, satellite transmission and cable television time. Lease of
properties shall be subject to the tax herein imposed irrespective of the place where the contract of lease or licensing
agreement was executed if the property is leased or used in the Philippines.

b. VAT base for goods and services (Sec. 106 and Sec.108)

SEC. 106. Value-Added Tax on Sale of Goods or Properties. -(A) Rate and Base of Tax. - There shall be levied, assessed
and collected on every sale, barter or exchange of goods or properties, value-added tax equivalent to twelve percent
(12%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax
to be paid by the seller or transferor.

SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. -(A) Rate and Base of Tax. - There shall
be levied, assessed and collected, a value-added tax equivalent to twelve percent (12%) of gross receipts derived from
the sale or exchange of services, including the use or lease of properties.

c. Meaning of gross selling price and gross receipts (Sec. 106 andSec.108)

Sec. 106. The term "gross selling price" means 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
value-added tax. The excise tax, if any, on such goods or properties shall form part of the gross selling price.

Sec.108. The term "gross receipts" means the total amount of money or its equivalent representing the contract price,
compensation, service fee, rental or royalty, including the 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 for another person, excluding value-added tax.

d. Rules on sales of Real Property

i. Rule on Sales on Installment [RR No. Sec. 4.106-3 of RR No. 16-05 as amended by Sec. 3 of RR No. 4-07] Installment
sale of residential house and lot or other residential dwellings with gross selling price exceeding P1,919,500.00, where
the instrument of sale (whether the instrument is nominated as a deed of absolute sale, deed of conditional sale or
otherwise) was executed prior to November 1, 2005, shall be subject to ten percent (10%) output VAT. Sale of real
property on installment plan means sale of real property by a real estate dealer, the initial payments of which in the year
of sale do not exceed twenty-five (25%) of the gross selling price. In case of installment sale, the seller shall be subject
to output VAT on the installment payments received, including the interests and penalties for late payment, actually
and/or constructively received, subject to the provisions of Sec.4.106-4 hereof. Correspondingly, the buyer of the
property can claim the input tax in the same period as the seller recognized the output tax. Installment payments,
including interests and penalties, actually and/or constructively received starting February 1, 2006 shall be subject to
twelve percent (12%) output VAT.
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ii. See also rule on sale of real property use in business (Sec. 14 (l) of RRNo. 4-07)

(1) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or
business. However, even if the real property is not primarily held for sale to customers or held for lease in the ordinary
course of trade or business but the same is used in the trade or business of the seller, the sale thereof shall be subject to
VAT being a transaction incidental to the taxpayer’s main business.

iii. Correlate with Sec. 109 on exempt sales of Real Property

(w) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or
business or real property utilized for low-cost and socialized housing as 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
Nine Hundred Nineteen Thousand Five Hundred P1,919,500.00 and below; house and lot, and other residential dwellings
valued at Three Million One Hundred Ninety Nine Thousand Two Hundred P3,199,200.00 and below3. Provided, that not
later than January 31st of the calendar year subsequent to the effectivity of this Act and each calendar year thereafter,
every three years, the threshold amount of One Million Nine Hundred Nineteen Thousand and Five Hundred pesos
(P1,919,500) shall be adjusted to its present value using the Consumer Price Index, aspublished by the national Statistics
Office (NSO)4;

e. VAT on Importations (Sec. 107)

In General. - There shall be levied, assessed and collected on everyimportation of goods a value-added tax equivalent to
twelve percent (12%) based on the 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
suchgoods from customs custody: Provided, That where the customs duties aredetermined on the basis of the quantity or
volume of the goods, the value-added tax shall be based on the landed cost plus excise taxes, If any.

i. Exempt Importations under Sec. 109

SEC. 109. Exempt Transactions. - The following shall be exempt from the value-added tax:

(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.

Products classified under this paragraph and paragraph (a) shall be considered in their original state even if they have
undergone the simple processes of preparation or preservation for the market, such as freezing, drying, salting, broiling,
roasting, smoking or stripping, polished and/or husked rice, corn grits, raw cane sugar and molasses, copra and ordinary
salt shall be considered in their original state;

(b) Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock and poultry feeds, including
ingredients, whether locally produced or imported, used in the manufacture of finished feeds (except specialty feeds for
race horses, fighting cocks, aquarium fish, zoo animals and other animals generally considered as pets);

(c) Importation of personal and household effects belonging to 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;

(d) Importation of professional instruments and implements, wearing apparel, domestic animals, and personal household
effects (except any vehicle, vessel, aircraft, machinery other goods for use in the manufacture and merchandise of any
kind in commercial quantity) belonging to persons coming to settle in the Philippines, for their own use and not for sale,
barter or exchange, accompanying such persons, or arriving within ninety (90) days before or after their arrival, upon the
production of evidence satisfactory to the Commissioner, that such persons are actually coming to settle in the
Philippines and that the change of residence is bona fide5;

3
Under Train Act, beginning January 1, 2021:
The VAT exemption shall not anymore apply to:
- Sale of low-cost housing
The threshold selling price amount for sale of house and lot, and other residential dwellings shall be P2,000,000.00

4
Every 3 years, the threshold amount shall be adjusted to its present value using the Consumer Price Index, as
published by the Philippine Statistics Authority (PSA).

5
Under TRAIN Act, the following are the changes on VAT-exempt transactions:
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 that the goods are brought from their former place of abode, exempt such goods
from payment of duties and taxes: Provided, further, That vehicles, vessels, aircrafts, machineries and other similar
.

(e) Services subject to percentage tax under Title V;

(f) Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar cane into
raw sugar;

(g) Medical, dental, hospital and veterinary services subject to the provisions of Section 17 of Republic Act No. 7716, as
amended except those rendered by professionals;

(h) Educational services rendered by private educational institutions, duly accredited by the Department of Education
(DepEd), the Commission on Higher Education (CHED), and Technical Education and Skills Development Authority
(TESDA) and those rendered by government educational institutions;

(i) Services rendered by individuals pursuant to an employer-employee relationship;

(j) Services rendered by regional or area headquarters established in the Philippines by multinational corporations which
act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-
Pacific Region and do not earn or derive income from the Philippines;

(k) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special
laws, except those under Presidential Decree Nos. 66, 529 and 1590;

(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 spareparts thereof, to be used directly and exclusively in the
production and/or processing of their produce;

(m) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative
Development Authority whose lending operation is limited to their members;

(n) Sales by non-agricultural, non- electric and non-credit cooperatives duly registered with the Cooperative
Development Authority: Provided, That the share capital contribution of each member does not exceed Fifteen thousand
pesos (P15,000) and regardless of the aggregate capital and net surplus ratably distributed among the members;

(o) Export sales by persons who are not VAT-registered;

(p) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or
business or real property utilized for low-cost and socialized housing as 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
Nine Hundred Nineteen Thousand Five Hundred P1,919,500.00 and below; house and lot, and other residential dwellings
valued at Three Million One Hundred Ninety Nine Thousand Two Hundred P3,199,200.00 and below6. Provided, that not
later than January 31st of the calendar year subsequent to the effectivity of this Act and each calendar year thereafter,
every three years, the threshold amount of One Million Nine Hundred Nineteen Thousand and Five Hundred pesos
(P1,919,500) shall be adjusted to its present value using the Consumer Price Index, as published by the national
Statistics Office (NSO)7;

(q) Lease of a residential unit with a monthly rental not exceeding Twelve thousand eight hundred pesos (P12,800)8;
Provided, That not later than January 31st of thecalendar year subsequent to the effectivity of Republic Act No. 8241 and
each calendar year thereafter, every 3 years the amount of P12,800 shall be adjusted to its present value using the
Consumer Price Index as published by the National Statistics Office (NS0) 9;

(r) Sale, importation, printing or publication of books and any newspaper, magazine review or bulletin which appears at
regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of paid
advertisements;

(s) Sale or importation or lease of passenger or cargo vessels and aircraft including engine, equipment and spareparts
thereof for domestic or international transport operations. Provided, that the exemption from VAT on the importation and
local purchase of passenger and/or cargo vessels shall be limited to those of 150 tons and above, including engine and
spareparts of said vessel; and the vessel to be imported shall comply with the age limit requirement as follows:
(1) Passenger and/or cargo – 15 years old

(2) Tankers – 10 years old

(3) High speed passenger crafts – 5 years old

Provided finally that the exemption shall be subject to the provisions of Sec. 4 of RA 9295, otherwise known as “The
Domestic Shipping Development Act of 2004”

goods for use in manufacture, shall not fall within this classification and shall therefore be subject to duties, taxes and
other charges.
6
Same with footnote no. 3
7
Same with footnote no. 4
8
Under Train Act, the threshold amount of P12,800 was increased to P15,000
9
Same with footnote no. 4
.
(t) Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations,
provided that (1) fuel, goods and supplies shall be exclusively or shall pertain to the transport of goods and/or passenger
from a port in the Philippines directly to a foreign port without stopping at any other port in the Philippines; (2) fuel,
goods or supplies is used for the purposes other than that mentioned in the preceding paragraph, such portion of fuel,
goods and supplies shall be subject to 12% VAT10.

(u) Importation of life-saving equipment, safety and rescue equipment and communication and navigation safety
equipment, steel plates and other metal plates including marine-grade aluminum plates used for shipping transport
operations. Provided, that the exemption shall be subject to the provisions of Sec. 19 of RA 9295, otherwise known as
“The Domestic Shipping Development Act of 2004” (RR 4-2007)

(v) Imporation of capital equipment, machinery and spare parts, life-saving and navigational safety equipment, steel
plates and other metal plates including marine-grade aluminum plates used in construction, repair, renovation or
alteration of any merchant marine vessel operatied or to be operated in the domestic trade. Provided, that the exemption
shall be subject to the provisions of Sec. 19 of RA 9295, otherwise known as “The Domestic Shipping Development Act of
2004” (RR 4-2007)

(w) Services of banks, non-bank financial intermediaries performing quasi-banking functions, and other non-bank
financial intermediaries

(x) Sale or lease of goods or properties or the performance of services other than the transactions specifically mentioned
as VAT-exempt, the gross annual sales and/or receipts do not exceed the amount of P1,919,500.00 (as amended)11.

(y) VAT on purchase of specified goods and services by a Senior Citizen

(z) Any person whose sales or receipts are exempt 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; provided, that, cooperatives shall be exempt
from the 3% gross receipts tax herein imposed12

Any other exemptions as provided by TRAIN Act:

(z.1) Sale or lease of goods and services to senior citizens and persons with disabilities, as provided under RA
Nos. 9994 (Expanded Senior Citizens Act of 2010) and 10754 (An Act Expanding the Benefits and Privileges of
Persons With Disability), respectively

(z.2) Transfer of property in merger or consolidation [under Section 40(C)(2) of the NIRC/tax-free exchange].

(z.3) Association dues, membership fees, and other assessments and charges collected by homeowners
associations and condominium corporations.

(z.4) Sale of gold to the BSP.

(z.5) Sale of drugs and medicines prescribed for diabetes, high cholesterol, and hypertension beginning January
1, 2019.

(z.6) Sale or lease of goods and services to senior citizens and persons with disabilities, as provided under RA
Nos. 9994 (Expanded Senior Citizens Act of 2010) and 10754 (An Act Expanding the Benefits and Privileges of
Persons With Disability), respectively

The foregoing exemptions to the contrary not withstanding, any person whose sale of goods or properties or services
which are otherwise not subject to VAT, but who issues a VAT invoice or receipt therefor shall, in addition to his liability
to other applicable percentage tax, if any, be liable to the tax imposed in Section 106 or 108 without the benefit of input
tax credit, and such tax shall also be recognized as input tax credit to the purchaser under Section 110, all of this Code.

ii. Transfer of Goods by Tax-exempt Persons (Sec. 107 B)

(B) Transfer of Goods by Tax-Exempt Persons. - In the case of tax-free 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 importers
thereof, who shall be liable for any internal revenue tax on such importation. The 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 thereof.

f. Transactions deemed sale (Sec. 106 B)

10
There is an additional provision under TRAIN Act which states that the fuel, goods, and supplies shall be used for
international shipping or air transport operations.

11
Under the TRAIN Act, the threshold amount of P1,919,500 was increased to P3,000,000.
12
Under the TRAIN Act, the same provision applies but with additional provision stating that “Beginning January 1, 2019,
selfemployed and professionals with total annual gross sales and/or gross receipts not exceeding PhP500,000 shall be
exempt from the 3% gross receipts tax herein imposed.”

Note: The italicized provision above was vetoed by the President because the proposed exemption will result in
unnecessary erosion of revenues and would lead to abuse and leakages
.

(B) Transactions Deemed Sale. - The following transactions shall be 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;

(2) Distribution or transfer to:

(a) Shareholders or investors as share in the profits of the VAT-registered persons; or
(b) Creditors in payment of debt;

(3) Consignment of goods if actual sale is not made within sixty (60) days following the date such goods were consigned;
and

(4) Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirement
or cessation.

i. Rationale of Imposition

ii. Enumeration – Sec. 4.106-7 RR No. 16-05

iii. Tax Base of Transactions Deemed Sale (RR No. 16-05)

(b) The Commissioner of Internal Revenue shall determine the appropriate tax base in cases where a transaction is
deemed a sale, barter or exchange of goods or properties under Sec. 4.106-7 paragraph (a) hereof, or where the gross
selling price is unreasonably lower than the actual market value. The gross selling price is 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. For transactions deemed sale, the output tax
shall be based on the market value of the goods deemed sold as of the time of the occurrence of the transactions
enumerated in Sec. 4.106-7 (a) (1),(2), and (3) of these Regulations. However, in the case of retirement or cessation of
business, the tax base shall be the acquisition cost or the current market price of the goods or properties, whichever is
lower. In the case of a sale where the gross selling price is unreasonably lower than the fair market value, the actual
market value shall be the tax base.

g. Rules for Certain Services

i. Common Carriers

1. Sec. 4.108-2 Nos. 11 and 12 of RR No. 16-05

(11) transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes
for hire and other 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

2. Sec. 4.108-3 of RR No. 16-05

ii. Lease of Properties

1. Sec. 4.108-3 of RR No. 16-05

2. Lease of Residential Units – [Sec. 4.109-1 (B)(q) of RR No. 16-05]

Lease of residential units with a monthly rental per unit not exceeding 12.8k, regardless of the amount of the aggregate
rentals received by the lessor during the year 13. Provided, that not later than January 31, 2009 and every three years
thereafter, the amount of 12.8k shall be adjusted to its present value using the consumer price index, as published by
the NSO14. The foregoing, notwithstanding, lease of residential units where the monthly rental per unit exceeds 12.8k but
the aggregate of such rentals of the lessor during the year do not exceed 1919.5K shall be likewise exempt from VAT,
however the same shall be subjected to 3% percentage tax. In cases where a lessor has several residential units for
lease, some are leased out for a monthly rental per unit of not exceeding P12,800.00 while others are leased out for
more than P12,800.00 per unit, his tax liability will be as follows: (1) The gross receipts from rentals not exceeding
P12,800.00 per month per unit shall be exempt from VAT regardless of the aggregate annual gross receipts. (2) The
gross receipts from rentals exceeding P12,800.00 per month per unit shall be subject to VAT if the aggregate annual
gross receipts from said units only (not including the gross receipts from units leased for not more than P12,800.00)
exceeds P1,919,500.00. Otherwise, the gross receipts will be subject to the 3% tax imposed under Section 116 of the
Tax Code. The term 'residential units' shall refer to apartments and houses & lots used for residential purposes, and
buildings or parts or units thereof used solely as dwelling places (e.g., dormitories, rooms and bed spaces) except
motels, motel rooms, hotels and hotel rooms. The term 'unit' shall mean an apartment unit in the case of apartments,
house in the case of residential houses; per person in the case of dormitories, boarding houses and bed spaces; and per
room in case of rooms for rent.

13
Same with footnote 8

14
Same with footnote 4
.
iii. Professional Services

iv. Medical Services

1. Sec. 4.109-1 (B)(g) of RR No. 16-05

(g) Medical, Dental, hospital and veterinary services, except those rendered by professionals. Laboratory services are
exempted. If the hospital or clinic operates a pharmacy or drug store, the sale of drugs and medicine is subject to VAT

Philippine Healthcare Providers vs. CIR GR No. 168129 dated April 24,2007

The Supreme Court (SC) in one case, affirmed the validity of the imposition of the VAT on HMOs, as enunciated in VAT
Ruling No. 18-98, on the ground that HMOs do not actually provide medical and/or hospital services, but merely arrange
the provision of said services, which under the law, is not a VAT-exempt activity.

III. ZERO RATED SALES OF GOODS AND SERVICES and VAT EXEMPT SALES

a. Nature of Zero Rated Sales

Zero-rated Sales of Goods or Properties. A zero-rated sale of goods or properties by a sale by a VAT-registered person is
a taxable transaction for VAT purposes but the sale does not result in any output tax. However, the input tax on the
purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund in
accordance with Rev. Regulations No. 16-2005. (Rev. Regs. No. 16-2005,1st par.)

b. Zero Rated Sale of Goods (Sec. 106)

The following sales by VAT-registered persons shall be subject to zero percent (0%) rate:

(a) Export Sales-

(i) 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 and paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP)15

(ii) Sale of raw materials or packaging materials to a non-resident buyer for delivery to a resident local export oriented
enterprise to be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer’s goods,
paid for in acceptable currency, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP)16

(iii) Sale of raw materials or packaging materials to an export-oriented enterprise whose export sales exceed 70% of
total annual production17

(iv) Sale of gold to BSP18

(v) Transactions considered export sales under E.O. No. 226 (Please refer to Art. 23 of EO 226)19

(vi) Sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air
transport operations20

15
Under TRAIN Act, same provision with the NIRC.
Further, [Sale and delivery of goods to:
(A) Registered enterprises within a separate customs territory as provided under special laws; and
(B) Registered enterprises within tourism enterprise zones as declared by TIEZA subject to the provisions under
the Tourism Act of 2009]
Note: The italicized provision of the TRAIN Act is vetoed by the president because this go against the principle of limiting
VAT zero-rating to direct exporters.

16
Under TRAIN Act, same provisions apply but will no longer be zero-rated once an enhanced VAT refund system is in
place**

17
Under TRAIN Act, same provisions apply but will no longer be zero-rated once an enhanced VAT refund system is in
place**

18
Under TRAIN Act, sale of gold to BSP is now under VAT-exempt transaction

19
Under TRAIN Act, same provisions apply but will no longer be zero-rated once an enhanced VAT refund system is in
place**

20
Under TRAIN Act, same provisions apply but with additional provision as follows: “Provided, that the goods, supplies,
equipment and fuel shall be used for international shipping or air transport operations.”

**Provided, that subparagraphs (3), (4) and (5) hereof shall be subject to the 12% VAT and no longer be considered
export sales subject to 0% VAT rate upon satisfaction of the following conditions:
.

(b) Foreign Currency Denominated Sale- means sale to a nonresident of goods, except those mentioned in Sections 149
and 150, 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 withthe rules and regulations of the Bangko Sentral ng Pilipinas
(BSP)21.

(c) Sales to persons or entities deemed tax-exempt under Special Law or International Agreement

(i) Sale of goods to persons or entities who are tax-exempt under special laws, such as: SBMA, PEZA and etc.

(ii) Sale of goods to persons or entities who are tax-exempt under international agreement, such as: ADB, IRRI and etc.

c. Zero Rated Sale of Services (Sec. 108 B)

(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods
are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP)22;

(2) Services other than those mentioned in the preceding paragraph, the consideration for which is paid for in acceptable
foreign currency andaccounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP)23;

(3) 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%) rate24;

(4) Services rendered to persons engaged in international shipping and air transport operations, including leases of
property for use thereof25; and

(5) Services performed by subcontractors and/or contractors inprocessing, converting, of manufacturing goods for an
enterprise whose export sales exceed seventy percent (70%) of total annual production26.

(6) Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country 27

(7) 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 fuels28.

1.The successful establishment and implementation of an enhanced VAT refund system that grants refunds of
creditable input tax within 90 days from the filing of the VAT refund application with the Bureau: provided, that to
determine the effectivity of item no. 1, all application filed from January 1, 2018 shall be processed and must be
decided within 90 days from the filing of the VAT refund application;

2. All pending VAT refund claims as of December 31, 2017 shall be fully paid in cash by December 31, 2019.
Provided, that the Department of Finance (DOF) shall establish a VAT refund center in the Bureau of Internal
Revenue (BIR) and in the Bureau of Customs (BOC) that will handle the processing and granting of cash refunds
ofcreditable input tax.
An amount equivalent to 5% of the total VAT collection of the BIR and the BOC for the immediately preceding
year shall be automatically appropriated annually and shall be treated as a special account in the general fund or
as trust receipts for the purpose of funding claims for VATrefund: provided, that any unused fund, at the end of
the year shall revert to the general fund.
Provided, further, that the BIR and BOC shall be required to submit to the Congressional Oversight Committee on
the Comprehensive Tax Reform Program (COCCTRP) a quarterly report of all pending claims forrefund and any
unused fund.

21
Under TRAIN Act, this provision is deleted.
22
Under TRAIN Act, same provisions apply but will no longer be zero-rated once an enhanced VAT refund system is in
place***
23
Under TRAIN Act, same provision with the NIRC.
24
Under TRAIN Act, same provision with the NIRC.
25
Under TRAIN Act, same provision but with additional provision as follows: “Provided, that these services shall be
exclusively for international shipping or air transport operations.”
26
Under TRAIN Act, same provisions apply but will no longer be zero-rated once an enhanced VAT refund system is in
place***
27
Under TRAIN Act, this provision was revised to read as follows: “Transport of passengers and cargo by DOMESTICair or
sea vessels from the Philippines to a foreign country.”
28
Under TRAIN Act, same provision with the NIRC.

***Provided,that Subparagraphs B (1) and B (5) hereof shall be subject to the 12% VAT and no longer be considered
export sales subject to 0% VAT rate upon satisfaction of the following conditions:
1.The successful establishment and implementation of an enhanced VAT refund system that grants refunds of
creditable input tax within 90 days from the filing of the VAT refund application with the Bureau: Provided, that to
determine the effectivity of item no. 1, all application filed from January 1, 2018 shall be processed and must be
decided within 90 days from the filing of the VAT refund application;
2.All pending VAT refund claim as of December 31, 2017 shall be fully paid in cash by December 31, 2019.
.

CASES:

CIR vs. American Express GR No. 152609 dated June 29, 2005

Facts: American Express international is a foreign corporation operating inthe Philippines, it is a registered taxpayer. On
April 13, 1999, [respondent] filed with the BIR a letter-request for the refund of its 1997 excess input taxesin the amount
of P3,751,067.04, which amount was arrived at after deductingfrom its total input VAT paid of P3,763,060.43 its applied
output VAT liabilities only for the third and fourth quarters of 1997 amounting to P5,193.66 and P6,799.43, respectively.
The CTA ruled in favor of the hereinrespondent holding that its services are subject to zero-rate pursuant toSection
108(b) of the Tax Reform Act of 1997 and Section 4.102-2 (b)(2) of Revenue Regulations 5-96. The CA affirmed the
decision of the CTA. Issue: Whether or not the company is subject to zero-rate tax pursuant to theTax Reform Act of
1997. Held: Services performed by VAT-registered persons in the Philippines (other than the processing, manufacturing
or repacking of goods for persons doingbusiness outside the Philippines), when paid in acceptable foreign currencyand
accounted for in accordance with the rules and regulations of the BSP,are zero-rated. Respondent is a VAT-registered
person that facilitates thecollection and payment of receivables belonging to its non-resident foreignclient, for which it
gets paid in acceptable foreign currency inwardly remitted and accounted for in conformity with BSP rules and
regulations. Certainly,the service it renders in the Philippines is not in the same category as“processing, manufacturing or
repacking of goods” and should, therefore, bezero-rated. In reply to a query of respondent, the BIR opined in VAT
RulingNo. 080-89 that the income respondent earned from its parent company’sregional operating centers (ROCs) was
automatically zero-rated effectiveJanuary 1, 1988. Service has been defined as “the art of doing somethinguseful for a
person or company for a fee” or “useful labor or work rendered or to be rendered by one person to another.” For
facilitating in the Philippinesthe collection and payment of receivables belonging to its Hong Kong-basedforeign client,
and getting paid for it in duly accounted acceptable foreigncurrency, respondent renders service falling under the
category of zerorating. Pursuant to the Tax Code, a VAT of zero percent should, therefore, belevied upon the supply of
that service.As a general rule, the VAT system uses the destination principle as a basisfor the jurisdictional reach of the
tax. Goods and services are taxed only inthe country where they are consumed. Thus, exports are zero-rated,
whileimports are taxed. VAT rate for services that are performed in thePhilippines, “paid for in acceptable foreign
currency and accounted for inaccordance with the rules and regulations of the BSP.” Thus, for the supply of service to be
zero-rated as an exception, the law merely requires that first,the service be performed in the Philippines; second, the
service fall under any of the However, the law clearly provides for an exception to the destination principle; that is, for a
zero percent categories in Section 102(b)of the Tax Code; and, third, it be paid in acceptable foreign currency accounted
for in accordance with BSP rules and regulations. Indeed, these three requirements for exemption from the destination
principle are met by respondent. Its facilitation service is performed in the Philippines. It falls under the second category
found in Section 102(b) of the Tax Code, because it is a service other than “processing, manufacturing or repacking of
goods”as mentioned in the provision. Undisputed is the fact that such service meets the statutory condition that it be
paid in acceptable foreign currency duly accounted for in accordance with BSP rules. Thus, it should be zero-rated.

CIR vs. Burmeister and Wain Scandinavian Contractor Mindanao, Inc.

In Commissioner of Internal Revenue v. Burmeister and Wain Scandinavian Contractor Mindanao, Inc. (G.R. No. 153205,
January 22, 2007), it held thatthe recipient of the services must be a person doing business outside thePhilippines to
qualify for zero rate. It pain stakingly explained that the fact thelaw stipulates payment in “acceptable foreign currency
under BSP rules” means that the legislature clearly envisions export sales. Under BSP rules,the proceeds of export sales
must be reported to the BSP. If the provider andthe recipient of the services are both doing business in the Philippines,
thetransaction is not considered an export sale even if payment is denominatedin foreign currency. In such a case,
reporting to the BSP is an unnecessaryact.The Supreme Court further rationalized that it does not make sense for
allowing zero-rated VAT for services where the recipient is doing business inthe Philippines. If it were so, those subject to
the regular VAT can avoidpaying the VAT by simply stipulating payment in foreign currency inwardlyremitted by the
recipient of services.With the passage of RA 9337, however, the jurisprudential requisite thatservices (other than
processing, manufacturing or repacking of goods) mustbe rendered to other persons doing business outside the
Philippines wasincorporated in the law itself. Hence, law and jurisprudence are now one insaying that the supply of
services will be accorded VAT zero-rating when thefollowing requirements are met: (1) the service is performed in
thePhilippines; (2) the service falls under any of the categories provided in Section 108(B) of the Tax Code; (3) the
recipient is a person or entity doingbusiness outside the Philippines; and (3) it is paid for in acceptable foreigncurrency
that is accounted for in accordance with the regulations of the BSP.
CIR vs. Acesite GR No. GR No. 147295 dated February 16, 2007

d. Automatic zero-rate vs. Effectively zero-rate

CASES:

CIR vs. Seagate Technology (Phils) GR No. 153866 February 11, 2005

Provided, that the DOF shall establish a VAT refund center in the BIR and in the BOC that will handle the
processing and granting of cash refunds of creditable input tax.
An amount equivalent to 5% of thetotal VAT collection of the BIR and the BOC for the immediately preceding
year shall be automatically appropriated annually and shall be treated as a special account in the general fund or
as trust receipts for the purpose of funding claims for VAT refund: provided, that any unused fund, at the end of
the year shall revert to the general fund.
Provided, further, that the BIR and BOC shall be required to submit to the COCCTRP a quarterly report of all
pending claims for refund and any unused fund.
.
In terms of the VAT computation, zero rating and exemption are the same, but the extent of relief that results from
either one of them is not. Applying the destination principle to the exportation of goods, automatic zero rating is primarily
intended to be enjoyed by the seller who is directly and legally liable for the VAT, making such seller internationally
competitive by allowing the refund or credit of input taxes that are attributable to export sales. Effective zero rating, on
the contrary, is intended to benefit the purchaser who, not being directly and legally liable for the payment of the VAT,
will ultimately bear the burden of the tax shifted by the suppliers. In both instances of zero rating, there is total relief for
the purchaser from the burden of the tax. But in an exemption there is only partial relief, because the purchaser is not
allowed any tax refund of or credit for input taxes paid. If at the end of a taxable quarter the output taxes charged by a
seller are equal to the input taxes passed on by the suppliers, no payment is required. It is when the output taxes exceed
the input taxes that the excess has to be paid. If, however, the input taxes exceed the output taxes, the excess shall be
carried over to the succeeding quarter or quarters. Should the input taxes result from zero-rated or effectively zero-rated
transactions or from the acquisition of capital goods, any excess over the output taxes shall insteadbe refunded to the
taxpayer or credited against other internal revenue taxes. Effectively zero-rated transactions, however, refer to the sale
of goods or supply of services to persons or entities whose exemption under special laws or international agreements to
which the Philippines is a signatory effectively subjects such transactions to a zero rate. Again, as applied to the tax
base, such rate does not yield any tax chargeable against the purchaser. The seller who charges zero output tax on such
transactions can also claim a refund of or a tax credit certificate for the VAT previously charged by suppliers.

CIR vs. Toshiba Information Equipment GR No. 150154 dated August 9,2005

Rationale for zero-rating of exports. The Philippine VAT system adheres to the Cross Border Doctrine, according to which,
no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the
taxing authority. [Commissioner of Internal Revenue v.Toshiba Information Equipment (Phils.), Inc., G. R.. No. 150154,
August 9,2005]

e. Destination principle and cross border doctrine

As a general rule, the VAT system uses the destination principle as a basisfor the jurisdictional reach of the tax. Goods
and services are taxed only in the country where they are consumed.Thus, exports are zero-rated, while imports are
taxed. Is there any exception to the destination principle? SUGGESTED ANSWER: Yes. The law clearly provides for an
exception tothe destination principle; that is, for a zero percent VAT rate for services thatare performed in the
Philippines, "paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the
[BSP]."The “Cross Border Doctrine” is also known as the destination principle. Hence, actual or constructive export of
goods and services from the Philippines to a foreign country must be zero-rated for VAT; while, those destined for use or
consumption within the Philippines shall be imposed the twelve percent (12%) VAT.

f. CIR vs. American Express GR No. 152609 dated June 29, 2005

As a general rule, the value-added tax (VAT) system uses the destination principle. However, our VAT law itself provides
for a clear exception, under which the supply of service shall be zero-rated when the following requirements are met: (1)
the service is performed in the Philippines; (2) the service falls under any of the categories provided in Section 102(b) of
the Tax Code; and (3) it is paid for in acceptable foreign currency that is accounted for in accordance with the regulations
of the Bangko Sentral ng Pilipinas. Since respondent’s services meet these requirements, they are zero-rated. Petitioner’s
Revenue Regulations that alter or revoke the above requirements are ultra vires and invalid. As a general rule, the VAT
system uses the destination principle as a basis for the jurisdictional reach of the tax. [51] Goods and services are taxed
only in the country where they are consumed. Thus, exports are zero-rated, while imports are taxed.

CIR vs. Toshiba Information Equipment GR No. 150154 dated August 9,2005

The Philippine VAT system adheres to the Cross Border Doctrine, according to which, no VAT shall be imposed to form
part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. Hence, actual
export of goods and services from the Philippines to a foreign country must be free of VAT; while, those destined for use
or consumption within the Philippines shall be imposed with ten percent (10%) VAT. Sales of goods, properties and
services by a VAT-registered supplier from the Customs Territory to an ECOZONE enterprise shall be treated as export
sales. If such sales are made by a VAT-registered supplier, they shall be subject to VAT at zero percent (0%). In zero-
rated transactions, the VAT-registered supplier shall not pass on any output VAT to the ECOZONE enterprise, and at the
same time, shall be entitled to claim tax credit/refund of its input VAT attributable to such sales. Zero-rating of export
sales primarily intends to benefit the exporter (i.e., the supplier from the Customs Territory), who is directly and legally
liable for the VAT, making it internationally competitive by allowing it to credit/refund the input VAT attributable to its
export sales. Meanwhile, sales to an ECOZONE enterprise made by a non-VAT or unregistered supplier would only be
exempt from VAT and the supplier shall not be able to claim credit/refund of its input VAT. Even conceding, however, that
respondent Toshiba, as a PEZA-registered enterprise, is a VAT-exempt entity that could not have engaged in a VAT-
taxable business, this Court still believes, given the particular circumstances of the present case, that it is entitled to a
credit/refund of its input VAT.

g. Zero Rated Sales vs. Exempt Sales

CIR vs. Cebu Toyo Corp. GR No. 149073 dated February 16, 2005

Taxable transactions are those transactions which are subject to value-added tax either at the rate of ten percent (10%)
or zero percent (0%). In taxable transactions, the seller shall be entitled to tax credit for the value-added tax paid on
purchases and leases of goods, properties or services. An exemption means that the sale of goods, properties or services
and the use or lease of properties is not subject to VAT (output tax) and the seller is not allowed any tax credit on VAT
(input tax) previously paid. The person making the exempt sale of goods, properties or services shall not bill any output
tax to his customers because the said transaction is not subject to VAT. Thus, a VAT-registered purchaser of goods,
.
properties or services that are VAT-exempt, is not entitled to any input tax on such purchases despite the issuance of a
VAT invoice or receipt. Now, having determined that respondent is engaged in taxable transactions subject to VAT, let us
then proceed to determine whether it is subject to 10% or zero (0%) rate of VAT. To begin with, it must be recalled that
generally, sale of goods and supply of services performed in the Philippines are taxable at the rate of 10%. However,
export sales, or sales outside the Philippines, shall be subject to value-added tax at 0% if made by a VAT-registered
person. Under the value-added tax system, a zero-rated sale by a VAT-registered person, which is a taxable transaction
for VAT purposes, shall not result in any output tax. However, the input tax on his purchase of goods, properties or
services related to such zero-rated sale shall be available as tax credit or refund. In principle, the purpose of applying a
zero percent (0%) rate on a taxable transaction is to exempt the transaction completely from VAT previously collected on
inputs. It is thus the only true way to ensure that goods are provided free of VAT. While the zero rating and the
exemption are computationally the same, they actually differ in several aspects, to wit:(a) A zero-rated sale is a taxable
transaction but does not result in an output tax while an exempted transaction is not subject to the output tax;(b) The
input VAT on the purchases of a VAT-registered person with zero-rated sales may be allowed as tax credits or refunded
while the seller in an exempt transaction is not entitled to any input tax on his purchases despite the issuance of a VAT
invoice or receipt. (c) Persons engaged in transactions which are zero-rated, being subject to VAT, are required to
register while registration is optional for VAT-exempt persons. In this case, it is undisputed that respondent is engaged in
the export business and is registered as a VAT taxpayer per Certificate of Registration of the BIR. [27] Further, the
records show that the respondent is subject to VAT as it availed of the income tax holiday under E.O. No. 226. Per force,
respondent is subject to VAT at 0% rate and is entitled to a refund or credit of the unutilized input taxes, which the Court
of Tax Appeals computed at P2,158,714.46, but which we find—after recomputation—should be P2,158,714.52.

h. Enumeration of Exempt Transactions (Sec. 109) Sec. 4.109-1 (B) of RR No. 16-05

i. Exempt Persons vs. Exempt Transactions j. CIR vs. Seagate Technology (Phils) GR No. 153866 February 11,2005

An exempt transaction, on the one hand, involves goods or services which, by their nature, are specifically listed in and
expressly exempted from the VAT under the Tax Code, without regard to the tax status -- VAT-exempt or not -- of the
party to the transaction. Indeed, such transaction is not subject to the VAT, but the seller is not allowed any tax refund
of or credit for any input taxes paid. An exempt party, on the other hand, is a 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 the VAT. Such party is also not subject to the VAT, but may be
allowed a tax refund of or credit for input taxes paid, depending on its registration as a VAT or non-VAT taxpayer.

IV. TRANSITIONAL AND PRESUMPTIVE INPUT TAX

Sec. 4.111-1 of RR No. 16-05

SECTION 4.111-1. Transitional/Presumptive Input Tax Credits. —(a) Transitional Input Tax Credits on Beginning
Inventories Taxpayers who became VAT-registered persons upon exceeding the minimum turnover of P1,919,500.00 in
any 12-month period, or who voluntarily register even if their turnover does not exceed P1,919,500.00 (except franchise
grantees of radio and television broadcasting whose threshold is P10,000,000.00) shall be entitled to a transitional input
tax on the inventory on hand as of the effectivity of their VAT registration, on the following:

(1) goods purchased for resale in their present condition;

(2) materials purchased for further processing, but which have not yet undergone processing;

(3) goods which have been manufactured by the taxpayer;

(4) goods in process for sale; or

(5) goods and supplies for use in the course of the taxpayer's trade or business as a VAT-registered person.The
transitional input tax shall be two percent (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 VAT-
registered person. The value allowed for income tax purposes on inventories shall be the basis for the computation of the
2% transitional input tax, excluding goods that are exempt from VAT under Sec.109 of the Tax Code.

CASE: Fort Bonifacio Development vs. CIR GR No. 158885 dated April2, 2009

In Fort Bonifacio Development Corp. v. CIR (G.R. No. 158885, April 2, 2009), the court invalidated a provision of
Revenue Regulations (RR) No. 07-95, which limits the application of the 8-percent transitional-input tax to inventory
consisting of improvements only, and not to the total value of lot inventory, in the case of real-estate dealers. The court
emphasized that the law which RR 07-95 seeks to implement did not make any differentiation between thetreatment of a
real-estate dealer from those engaged in other transactions such as, for example, sellers of commercial goods. Thus,
there is no basis for the BIR to make that differentiation for real-estate dealers in the implementing regulation. The Court
noted that the common standard for the application of the transitional input tax credit, as enacted by EO 273 and all
subsequent tax laws which reinforced or reintegrated the tax credit, is simply that the taxpayer in question has become
liable to VAT or has elected to be a VAT-registered person. “It is apparent that the transitional input tax credit operates
to benefit newly VAT-registered persons, whether or not they previously paid taxes in the acquisition of their beginning
inventory of goods, materials, and supplies. During that period of transition from non-VAT to VAT status, the transitional
input tax credit serves to alleviate the impact of the VAT on the taxpayer. At the very beginning, the VAT-registered
taxpayer is obliged to remit a significant portion of the income it derived from its sales as output VAT. The transitional
input tax credit mitigates this initial diminution of the taxpayer’s income by affording the opportunity to offset the losses
incurred through the remittance of the output VAT at a stage when the person is yet unable to credit input VAT
payments,” ruled the Court.
.

V. VAT REFUND

a. Compare with Sec. 204 and 229

SEC. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes.

Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of
internal revenue stamps when they are returned in good condition by the purchaser, and, in his discretion, redeem or
change unused stamps that have been rendered unfit for use and refund their value upon proof of destruction. No credit
or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for
credit or refund within two (2) years after the payment of the tax or penalty: Provided, however, That a return filed
showing an overpayment shall be considered as a written claim for credit or refund.

SEC. 229. Recovery of Tax Erroneously or Illegally Collected. - no suit or proceeding shall be maintained in any court for
the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or
collected, or of any penalty claimed to have been collected without authority, of any sum alleged to have been
excessively or in any manner wrongfully collected without authority, or of any sum alleged to have been excessively or in
any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such
suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of payment of
the tax or penalty regardless of any supervening cause that may arise after payment: Provided, however, That the
Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon
which payment was made, such payment appears clearly to have been erroneously paid.

b. Grounds

c. Periods

Section 112. The Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within 120
days from the date of submission of the complete documents. In case of full or partial denial of the claim for tax refund
or tax credit, or the failure on the part of the Commissioner to act on the application within the period prescribed above,
the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after the
expiration of the 120 day-period, appeal the decision or the unacted claim with the Court of Tax Appeals29.

Failure on the part of the Commissioner to act on the application within the period prescribed shall be deemed a denial of
the application30.

CASE:

Contex vs. CIR GR No. 151135 dated July 2, 2004

The point of contention here is whether or not the petitioner may claim are fund on the Input VAT erroneously passed on
to it by its suppliers.

HELD: While it is true that the petitioner should not have been liable for the VAT inadvertently passed on to it by its
supplier since such is a zero-rated sale on the part of the supplier, the petitioner is not the proper party to claim such
VAT refund.

Section 4.100-2 of BIR’s Revenue Regulations 7-95, as amended, or the “Consolidated Value-Added Tax Regulations”
provide:

Sec. 4.100-2. Zero-rated Sales. A zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT
purposes, shall not result in any output tax. However, the input tax on his purchases of goods, properties or services

29
Under TRAIN Act, this provision was revised to read as follows: “In proper cases, the Commissioner shall grant a refund
for creditable input taxes within 90 days from the date of submission of the official receipts or invoices and other
documents in support of the application filed in accordance with Subsection (A) AND (B) hereof: provided, that, should
the Commissioner find that the grant of refund is not proper, the commissioner must state in writing the legal and factual
basis for the denial.
In case of full or partial denial of the claim for tax refund,the taxpayer affected may, within 30 days from the receipt of
the decision denying the claim appeal the decision with the Court of Tax Appeals. Provided, however, that failure on the
part of the Commissioner to act on the application within the 90day period shall be punishable under Section 269 of this
Code.

Moreover, it removed the option for claiming tax credit

Additional provision read as follows: should the Commissioner find that the grant of refund is not proper, the
Commissioner must sate in writing the legal and factual basis for denial.

30
The deemed denial of failure to act on the application is removed.
Additional provision:
Failure on the part of any official, agent, or employee of the BIR to act on the application within the ninety (90) – day
period shall be punishable under Section 269 of the Tax Code (administrative fine and imprisonment).
.
related to such zero-rated sale shall be available as tax credit or refund in accordance with these regulations. The
following sales by VAT-registered persons shall be subject to 0%: (a) Export Sales “Export Sales” shall mean 5) Those
considered export sales under Articles 23 and 77 of Executive Order No. 226, otherwise known as the Omnibus
Investments Code of 1987, and other special laws, e.g. Republic Act No. 7227, otherwise known as the Bases Conversion
and Development Act of 1992. (c) Sales to persons or entities whose exemption under special laws, e.g.R.A. No. 7227
duly registered and accredited enterprises with Subic Bay Metropolitan Authority (SBMA) and Clark Development
Authority (CDA), R.A. No. 7916, Philippine Economic Zone Authority (PEZA), or international agreements, e.g. Asian
Development Bank (ADB), International RiceResearch Institute (IRRI), etc. to which the Philippines is a signatory
effectively subject such sales to zero-rate.”

Since the transaction is deemed a zero-rated sale, petitioner’s supplier may claim an Input VAT credit with no
corresponding Output VAT liability. Congruently, no Output VAT may be passed on to the petitioner. On the second issue,
it may not be a miss to re-emphasize that the petitioner is registered as a NON-VAT taxpayer and thus, is exempt from
VAT. As an exempt VAT taxpayer, it is not allowed any tax credit on VAT (input tax) previously paid. In fine, even if we
are to assume that exemption from the burden of VAT on petitioner’s purchases did exist, petitioner is still not entitled to
any tax credit or refund on the input tax previously paid as petitioner is an exempt VAT taxpayer. Rather, it is the
petitioner’s suppliers who are the proper parties to claim the tax credit and accordingly refund the petitioner of the VAT
erroneously passed on to the latter.

Atlas Consolidated Mining vs. CIR GR Nos. 141104 and 148763 dated June 8, 2007

In the Atlas case, the court ruled that the reckoning point for counting the two-year prescriptive period is from the filing
of the VAT returns and not from “the close of the taxable quarter when the sales were made.” The Court of Tax Appeals
(CTA) adopted this decision in many of its subsequent cases.

CIR vs. Mirant Pagbilao Corp. GR No. 172129 dated September 12, 2008

The Mirant case adopted a different rule for claims involving refunds of excess input VAT. Using Section 112 of the Tax
Code as basis, the Mirant case said claims involving refunds of excess-input VAT must be filed with the Bureau of Internal
Revenue (BIR) and with the courts within two years from the close of the taxable quarter when the relevant sales were
made, regardless of when the input VAT was paid. The Mirant ruling differs significantly from the general rule in that,
while the reckoning point for the two-year prescriptive period under the general rule isc ounted from the filing of the tax
return, the Mirant case adopted the “close of the taxable quarter when the sales were made” for VAT-refund claims. In
short, the Mirant case carved out the claims involving excess input VATrefunds from the coverage of the general rule and
put it under a special rule governed by Section 112 of the Tax Code. Northern Mini Hydro vs. CIR CTA Case No. 7257
dated May 28, 2009 (also read the separate opinion of Justice Acosta)

VI. OTHER MATTERS

a. Invoicing Requirements (Sec. 113) [Sec. 4.1113-1 of RR No. 16-05]

SECTION 4.113-1. Invoicing Requirements. —

(A) A VAT-registered person shall issue: — (1) A VAT invoice for every sale, barter or exchange of goods or
properties;and (2) A VAT official receipt for every lease of goods or properties, and for every sale, barter or exchange of
services. Only VAT-registered persons are required to print their TIN followed by the word "VAT" in their invoice or official
receipts. Said documents 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. VAT invoice/official
receipt shall be prepared at least in duplicate, the original to be given to the buyer and the duplicate to be retained by
the seller as part of his accounting records.

(B) Information contained in VAT invoice or VAT official receipt. — The following information shall be indicated in VAT
invoice or VAT 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 shown 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 zero percent (0%) VAT, the term "zero-rated sale" shall be written or printed
prominently on the invoice or receipt;
(d) If the sale involves 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 break-down of the sale price between
its taxable, exempt and zero-rated components, and the calculation of the VATon each portion of the sale shall be
shown on the invoice or receipt. The seller has the option to issue separate invoices or receipts for the taxable,
exempt, and zero-rated components of the sale.

(3) In the case of sales in the amount of one thousand pesos (P1,000.00) 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, shall be
indicated in addition to the information required in (1) and (2) of this Section.
.

b. Information which must be contained (Sec. 113)

SEC. 113. Invoicing and Accounting Requirements for VAT-Registered Persons. -

(A) Invoicing Requirements. - A VAT-registered person shall, for every sale, issue an invoice or receipt. In addition to the
information required under Section 237, the following information shall be indicated in the invoice or receipt:(1) A
statement that the seller is a VAT-registered person, followed by his taxpayer's identification number (TIN); and (2) The
total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes
the value-added tax. (B) Accounting Requirements. - Notwithstanding the provisions of Section233, 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.

c. Consequences of Issuing Erroneous VAT Invoice (Sec. 113) [ RRNo. 4.113-4 of RR No. 16-05]

SECTION 4.113-4. Consequences of Issuing Erroneous VAT Invoice or VAT Official Receipt. —

(A) Issuance of a VAT Invoice or VAT Receipt by a non-VAT person. — If a person who is not VAT-registered issues an
invoice or receipt showing his TIN, followed by the word "VAT", the erroneous issuance shall result to the following:(1)
The non-VAT person shall be liable to:(i) the percentage taxes applicable to his transactions;(ii) VAT due on the
transactions under Sec. 106 or 108 of the Tax Code, without the benefit of any input tax credit; and (iii) a 50%
surcharge under Sec. 248 (B) of the Tax Code;(2) VAT shall be recognized as an input tax credit to the purchaser under
Sec. 110 of the Tax Code, provided the requisite information required under Subsection 4.113 (B) of these Regulations is
shown on the invoice or receipt.

(B) Issuance of a VAT Invoice or VAT Receipt on an Exempt Transaction by a VAT-registered Person. — If a VAT-
registered person issues a VAT invoice or VAT official receipt for a VAT-exempt transaction, but fails to display
prominently on the invoice or receipt the words "VAT-exempt sale", the transaction shall become taxable and the issuer
shall be liable to pay VAT thereon. The purchaser shall be entitled to claim an input tax credit on his purchase.

d. Filing of Monthly and Quarterly VAT Returns and Payment of VAT (Sec. 114)

SEC. 114. Return and Payment of Value-Added Tax. -

(A) In General. - Every person liable to pay the value-added tax imposed under this Title shall file a quarterly return of
the amount of his gross sales or receipts within twenty-five (25) days following the close of each taxable quarter
prescribed for each taxpayer: Provided, however, That VAT-registered persons shall pay the value-added tax on a
monthly basis as follows (1) manual filing and payment of monthly VAT declaration – within 20 days of the following
month; (2) electronic filing of monthly VAT declaration – within 21-25 days of the following month, depending on the
industry classification; and (3) electronic payment of the monthly VAT declaration – within 25 days of the following
month31.

Any person, whose registration has been cancelled in accordance with Section 236, shall file a return and pay the tax due
thereon within twenty-five (25) days from the date of cancellation of registration: Provided, That only one consolidated
return shall be filed by the taxpayer for his principal place of business or head office and all branches.

(B) Where to File the Return and Pay the Tax. - Except as the Commissioner otherwise permits, the return shall be filed
with and the tax paid to an authorized agent bank, Revenue Collection Officer or duly authorized city or municipal
Treasurer in the Philippines located within the revenue district where the taxpayer is registered or required to register.

e. Withholding VAT (Sec. 114 C) [Sec. 4.114-2 of RR No. 16-05 asamended by Sec. 22 of RR No. 4-07]

SEC. 4.114-2. Withholding of VAT on Government Money Payments and Payments to Non-Residents. – (a) The
government or any of its political subdivisions, instrumentalities or agencies including government-owned or controlled
corporations (GOCCs) shall, before making payment on account of each purchase of goods and/or of services taxed at
twelve percent (12%) VAT pursuant to Secs. 106 and 108 of the Tax Code, deduct and withhold a final VAT due at the
rate of fivepercent (5%) of the gross payment thereof. The five percent (5%) final VATwithholding rate shall represent
the net VAT payable of the seller32. The remaining seven percent (7%) effectively accounts for the standard input VAT for
sales of goods or services to government or any of its political subdivisions, instrumentalities or agencies including
GOCCs in lieu of the actual input VAT directly attributable or ratably apportioned to such sales. Should actual input VAT
attributable to sale to government exceeds seven percent (7%) of gross payments, the excess may form part of the
sellers’ expense or cost. On the other hand, if actual input VAT attributable to sale togovernment is less than seven
percent (7%) of gross payment, the difference must be closed to expense or cost. (b) The government or any of its
political subdivisions, instrumentalities or agencies including GOCCs, as well as private corporation, individuals, estates

31
Under TRAIN Act, beginning January 1, 2023, the filing and payment of VAT shall be done within 25 days following the
close of each taxable quarter.
32
Under TRAIN Act, there is an additional provision that reads as follows: beginning January 1, 2021, the VAT
withholding system shall shift from final to a creditable system.

Payments for purchases of goods and services arising from projects funded by Official Development Assistance (ODA)
shall not be subject to the final withholding tax system.
.
and trusts, whether large or non-large taxpayers, shall withhold twelve percent (12%) VAT, starting February 1, 2006,
with respect to the following payments:

(1) Lease or use of properties or property rights owned by non-residents; and

(2) Other services rendered in the Philippines by non-residents

i. Government payments
ii. Services Rendered by Non-residents
iii. Withholding VAT Returns/Time of Payment

f. Power of the Commissioner to Suspend Business Operations (Sec.5) [Sec. 4.115-1 of RR No. 16-05]

SECTION 4.115-1. Administrative and Penal Provisions. —

(a) Suspension of business operations. — In addition to other administrative and penal sanctions provided for in the Tax
Code and implementing regulations, the Commissioner of Internal Revenue or his duly authorized representative may
order suspension or closure of a business establishment for a period of not less than five (5) days for any of the following
violations:

(1) Failure to issue receipts and invoices.

(2) Failure to file VAT return as required under the provisions of Sec. 114 of the Tax Code.

(3) Understatement of taxable sales or receipts by 30% or more of his correcttaxable sales or receipt for the taxable
quarter.

(4) Failure of any person to register as required under the provisions of Sec.236 of the Tax Code.

(b) Surcharge, interest and other penalties. — The interest on unpaid amount of tax, civil penalties and criminal penalties
imposed in Title XI of the Tax Code shall also apply to violations of the provisions of Title IV of the Tax Code.

QUIZZERS

1. Which is incorrect?
a. A taxpayer whose annual gross receipts/sales exceed P1,919,500 shall pay VAT even if not VAT registered
b. A taxpayer whose annual receipts/sales do not exceed P1,919,500 but who is VAT registered shall pay VAT.
c. The same transaction may be subjected to both income tax and VAT
d. Marginal income earners are both exempt from VAT and income tax.

2. Katrina invested P500,000 in the shares of stock of Manila Trading Corp. Later she sold the said shares for only
P350,000. The corporation’s shares are listed and are traded in the local stock exchange. The percentage tax on the sale
is:
a.None b. P 1,250 c.P 2,500 d. P50,000

3. The following accounting records reveal:

Accounts receivable, beginning - P100,000
Accounts receivable, ending - 110,000
Inventory, beginning - 50,000
Inventory, ending - 85,000
Purchases - 90,000
Sales - 250,000
Purchase discount - 5,000
Sales return- 10,000
Collections - 200,000
Cost of sales -20,000

How much is the vatable sales?

a.P 250,000 b.P240,000 c.P230,000 d. P200,000

4. How much is the output VAT?

a. 27,600 b. 28,800 c. 30,000 d. 24,000

5. How much is the input VAT?

a. 10,200 b. 10,800 c. 8,400 d. None

6. The following events happen in a VAT enterprise:

June performance of services
July received an invoice amount of P112,000
August paid the services.

When and how much input VAT will be claimed?

a. July, P12,000
b. August, P12,000
c. July, P13,440
.
d. August, P13,440

7. A VAT enterprise had a VAT exempt transaction, however, it only has a VAT invoice. As the accountant of the
enterprise what will you advise?
a.Stamp “VAT EXEMPT” on the duplicate VAT invoice.
b.Charge and collect output VAT from client.
c.Charge output and refund to client
d.Error in transaction does not pay output

8. When to file VAT declaration?

a. Monthly b. Yearly c.Quarterly d. Weekly

9. When will you submit the required purchases summary list to the BIR?

a. Attached with the monthly VAT return

b. Attached with the quarterly VAT return
c. Submit only if purchases exceeds P2,500,000
d. Submit even if purchases do not exceed P2,500,000

10. Who are allowed to withhold VAT from its VAT suppliers?
a. Entities, organization, business or corporation duly registered with Philippine Economic Zone Authority.
b. Non-resident individuals and corporation.
c. Government or any of its instrumentalities including government owned and controlled corporation.
d. Resident foreign corporation doing business in the Phillippines

11. Which of the following is subject to other percentage tax?

a. Business with annual gross receipts do not exceed P1,919,500.
b. Unregistered VAT enterprises.
c. Businesses who are engaged in sale of services and goods
d. Businesses who are engaged in importation

12. Refers to a local sale of service by VAT-registered person to a person or entity who was granted indirect tax
exemption under the special laws or international agreement.
a. Automatic Zero-rated transactions
b. Effective zero-rated transactions
c. VAT-exempt transactions.
d. Zero-rated transactions

13. What input taxes may be credietd?

a. Input taxes from non-VAT suppliers
b. Input taxes from purchase of direct labor
c. Input taxes from importation of goods for sale
d. Input taxes from importation of personal and household effects

14. Diety is non-stock, non-profit organization, made an importation of agricultural food product in its original state
from a Chinese farmer amounting to P2,240, 000. If you are the customs collector, how will you treat such importation?
a.Subject to 12% VAT
b. Subject to 0% VAT
c. Exempt
d. Subject to 3% OPT

15. Mr. San Diego approached you and asked for your professional help with regard to a sale of his ancestral house and
lot in the amount of P5,000,000. Your advise would be such transaction will be subject to:
a.Subject to 12% VAT
b. Subject to 0% VAT
c. Exempt
d. Subject to 3% OPT

16. Which of the following is exempt from VAT?

a. Export sale by non-VAT individuals
b. Foreign currency denominated transactions
c. Sale of services to entities duly registered with PEZA
d. Sale to Ramon Magsaysay Awards Foundation

17. Construction by XYZ Construction Corp. of concrete barrier for the Asian Development Bank in Ortigas Centerto
prevent car bombs ramming the ADB gates along ADB Avenue in Mandaluyong City is subject to what business tax?
a.Subject to 12% VAT
b. Subject to 0% VAT
c. Exempt
d. None of the above

18. Call center operated by a domestic enterprises in Makati that exclusively the reservations of a hotel chain which are
all located in North America. The services are paid for in US dollars and duly accounted for with the rulings of Bangko
Central ng Pilipinas. Is subject to?
a.Subject to 12% VAT
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b. Subject to 0% VAT
c. Exempt
d. None of the above

19. Sale of orchids by a flower shop which raises its flower in Tagaytay is subject to:
a.Subject to 12% VAT
b. Subject to 0% VAT
c. Exempt
d. None of the above

Additional Quizzers
Problem 1

Topline Company sold to Bestbooks Enterprises goods worth P10,000, exclusive of tax. Record the accounting entries in
the salesbook and in the purchase book if:

1. The buyer and the seller are subject to VAT.

2. Seller is VAT registered, while buyer is not.
3. Seller is no VAT registered, while buyer is VAT registered.

Problem 2

All amounts given are total invoice costs/prices:

A, non-VAT taxpayer, sells to B, VAT taxpayer P 67,200
B, VAT taxpayer, sells to C, VAT taxpayer 100,800
C, VAT taxpayer, sells to D, VAT taxpayer, an exporter 168,000
D, VAT taxpayer, exports 300,000

1. The value-added tax of B:

A. Payable of P 3,600 C. Payable of P 10,080
B. Payable of P 10,800 D. Payable of P 12,096
2. The value-added tax of C:
A. Payable of P 7,200 C. Payable of P 8,064
B. Payable of P 6,720 D. Refundable of P 10,900
3. The value-added tax of D:
A. Payable of P 18,000 C. Payable of P 36,000
B. Refundable of P 18,000 D. Refundable of P 36,000

Problem 3
H and W, husband and wife had the following gross sales (net of tax) during the year:
W- restaurant owner- P800,000
H-
a. Professional CPA- P350,000
b. Medium sized store:
Sale of office/school supplies P 1,120,000
Sale of books P 275,000

4. Which of the following statements is true?

A. For purposes of the threshold of P 1,919,500, the gross receipts of the husband and wife shall be combined.
B. The gross receipts shall be subject to VAT even if she does not register voluntarily under the VAT system.
C. For purposes of the threshold of P 1,919,500, the sale of office supplies and the practice of profession are considered
as separate taxpayers.
D. For purposes of the threshold of P 1,919,500, the aggregation rule for each taxpayer shall apply. Thus, the gross
receipts from the medium sized store shall be added to the receipts from the practice of profession.

Problem 4
5. Winery is a manufacturer of wine. During a particular calendar quarter, it had the following transactions (net of VAT):
Jan. 4, 2013 : Consigned wine to a retailer in Makati City amounting to P200,000.
Feb. 14, 2013 : Exported P 1,000,000 worth of wine to Spain.
Feb. 27, 2013 : President of Winery celebrated his birthday, consuming P50,000 worth of wine given to him by the
company as a birthday gift.
Mar. 20, 2013 : Declared property dividend of one case of wine for every 10 shares, amounting to P150,000.

The output tax for the calendar quarter ended March 31, 2013 is:
A. P 48,000 C. P 140,000
B. P 168,000 D. P 40,000

Problem 5
6. Farmland Merchandising became subject to VAT effective January 1, 2013:
The following are its records:
Gross sales- January 1 to Dec. 31, 2012- P 2,900,000
January 2013 data:
January 1 inventory:
Purchases from VAT registered persons - 48,000
Purchased from non-VAT registered persons – 332,000
.
Actual VAT paid - 5,140
Sales (total invoice amount) – 224,000
Purchases (exclusive of VAT) – 60,000
The VAT payable on January 2013 is -
A. P 11,660 C. P 16,400
B. P 9,200 D. None

Problem 6
7. In a month, total invoice prices/costs:
Domestic sales P 672,000
Export sales 1,500,000
Purchases from VAT-registered persons of:
Goods exported 560,000
Goods sold in the Philippines 224,000
The input taxes attributable to export sales which may be refunded or credited against other internal revenue taxes, is:
A. P 60,000 C. P 84,000
B. P 24,000 D. P 96,000

Problem 7
8. Bogart is an operator of parking lots. What business tax is due on his income from the business?
A. Broker’s tax C. Caterer’s tax
B. Common carrier’s tax D. Value-added tax

Problem 8
Sale of services by a VAT-registered contractor:
Collections on total invoice price for contracts completed (including P 448 000 for materials) - P 1,120,000
Receivables on billings (VAT included) - 336,000
Advances on contracts (VAT not included) - 200,000

Purchases of:
Materials (VAT included) 224,000
Services of sub-contractor (VAT not included) 448,000
Services of persons subject to percentage taxes 56,000
Salaries of employees 60,000

9. Output taxes are:

A. P 158 400 C. P 132 000
B. P 144 000 D. P 154 000
10. The input taxes are:
A. P 67 200 C. P 77 760
B. P 72 000 D. P 80 640
11. The value-added tax payable is:
A. P 64 800 C. P 86 400
B. P 86 400 D. P 66 240

Problem 9
12. Lesion is a lessor of real property and personal property (cars). The tax that he pays is:
A. Excise tax C. Transaction tax
B. Value-added tax D. None of these

Problem 10
13. Which of the following shall be subject to 0% VAT?
A. Sale of electricity by generation companies.
B. Sale of electricity by transmission companies.
C. Sale of electricity by distribution companies.
D. Sale of power or fuel generated through renewable sources of energy.

14. Which of the following sales of real properties shall not be exempt from VAT?
A. Sale of real properties not primarily for sale to customers or held for lease in the ordinary course of trade or business.
B. Sale of real properties utilized for low-cost and socialized housing.
C. Sale of real properties utilized for commercial purposes.
D. Sale of residential lot valued at P1 919 500 and below, or house and lot and other residential dwellings valued at
P 3 199 500, and below.

Problem 14
20. INDICATE if the following receipts from lease of residential units are subject to VAT or not:
Case Monthly Rental Aggregate Annual Rental Subject to VAT or not?
1 P 7,000 P 2,600,000
2 12,800 1,400,000
3 9,500 1,450,000
4 13,000 1,919,500
5 13,000 2,600,000

1. The following are major internal revenue business taxes in the NIRC of 1997, except one:
A. Income tax C. Value-added tax
.
B. Excise tax D. Percentage tax

2. Alamid imported cigarettes from Taiwan for sale. At a later date, he sold cigarettes in the Philippines. He is subject to
value-added tax. He is also subject to the business tax of:
A. Excise tax C. Percentage tax
B. Income tax D. None of these

3. Burgos is manufacturer of fermented liquors. In making sales, all taxes on the products and transactions are passed
on to the buyers. For purposes of the value-added tax, which of these taxes listed below that he pays forms part of the
gross selling price?
A. Excise tax C. Percentage tax
B. Value-added tax D. None of these

4. Cantor is a VAT-registered dealer of liquors. On his sales in the Philippines, his tax is:
A. Excise tax C. Percentage tax
B. Value-added tax D. None of these

5. Statement 1: A person subject to excise tax is also subject to value-added tax.

Statement 2: A person subject to percentage tax is also subject to value-added tax.
A. Both statements are correct
B. Statement 1 is correct while statement 2 is wrong
C. Both statements are wrong
D. Statement 1 is wrong while statement 2 is correct

6. Which statement is correct? The value-added tax on importation:

A. Should be paid by the tax-exempt importer, if he subsequently sells the goods to a non-tax-exempt purchaser.
B. Should be paid by the non-tax-exempt purchaser to whom the tax-exempt importer sells it.
C. Is a liability either of the tax-exempt importer or the non-tax-exempt purchaser.
D. Shall not pay the value-added tax because the transaction was exempt at the point of importation.

7. Which statement is wrong? Transactions considered “in the course of trade or business” and, therefore, subject to the
business taxes include:
A. Regular conduct or pursuit of a commercial or an economic activity by a stock private organization.
B. Regular conduct or pursuit of a commercial or an economic activity by a non-stock, non-profit private organization.
C. Isolated services in the Philippines by non-resident foreign persons.
D. Isolated sale of goods or services for a gross selling price or receipts of P 500 000.

8. First statement: Sales of drugs and medicines of pharmacy run by the hospital to outpatients are subject to VAT.
Second statement: Pharmacy items used in the performance of medical procedures in hospital units such as in the
operating and delivery rooms and by other departments are considered part of medical services rendered by the hospital,
hence, not subject to VAT.
A. Both statements are correct
B. Both statements are incorrect
C. Only the first statement is correct
D. Only the second statement is correct

9. To be exempt from value-added tax, the lease of residential units shall have:
I. Monthly rental per unit of P 12 500 or less.
II. Gross annual rentals exceeding P 1 919 500.
A. Both I and II are necessary
B. Both I and II are not necessary
C. Only I is necessary
D. Only II is necessary

10. Gross selling price includes all of the following, except one. Which one?
A. Total amount which the purchaser pays to the seller.
B. Total amount which the purchaser is obligated to pay to the seller.
C. Excise tax.
D. Value-added tax.

11. Which statement is correct?

A. The sales invoice that shows a total, with an indication that it includes the value-added tax even if it does not show
the tax separately, is a correctly prepared invoice.
B. The invoice which shows the selling price and the value-added tax separately, but with a total which is a correct
amount is a properly prepared invoice.
C. An invoice which shows the selling price and the value-added tax separately, which is paid by the buyer, is violative of
the revenue regulations on issuance of sales invoice.
D. A sales invoice by a VAT taxpayer can be used only on a VAT sale.

12. S1: In the books of accounts of a VAT-registered taxpayer, sales are recorded net of output taxes.
S2: In the books of accounts of a VAT-registered taxpayer, purchases are recorded net of input taxes.
A. Both statements are correct
B. Both statements are wrong
C. The first statement is correct but the second statement is wrong
D. The first statement is wrong but the second statement is correct
.

13. Which of the following are not account titles with balances in the books of accounts of a VAT taxpayer?
A. Output taxes C. Excess input taxes carry-over
B. Input taxes D. VAT payable

14. The allowable transitional input tax is:

A. The lower between 2% of the value of beginning inventory or actual VAT paid on such inventory.
B. The higher between 2% of the value of beginning inventory or actual VAT paid on such inventory.
C. The actual VAT paid on the beginning inventory.
D. 2% of the value of beginning inventory.

15. Which statement is wrong?

A. There is a transitional input tax on sales of goods or properties.
B. There is a transitional input tax on sales of services.
C. There is a presumptive input tax on sales of goods or properties.
D. There is a presumptive input tax on sales of services.
16. Ilarde, a VAT taxpayer, on January 1, 2013, made the following purchases from VAT sellers, for use in his business.
The amounts stated below are not inclusive of value-added taxes:
Machine 1, with a useful life of 20 years P 3 000 000
Machine 2, with a useful life of 3 years 1 800 000
Patent, with usefulness of 10 months 600 000

The input taxes from the purchases, available to Ilarde, for the month of January, 2013:
A. P 19 200 C. P 79 500
C. P 70 000 D. P 84 000

17. A VAT-registered supplier sold goods amounting to P 500 000 gross selling price to a government-controlled
corporation during a particular quarter. Which of the following statements is incorrect in relation to the sale of goods?
A. The sale is subject to withholding of final VAT.
B. The government-controlled corporation will withhold P 25 000 final VAT.
C. The government-controlled corporation shall remit withholding VAT to the BIR within 10 days following the end of the
month the withholding was made.
D. The VAT-registered supplier may refuse the withholding of VAT as long as it is willing to pay the full 12% VAT.
18. Zorro had the following data arising out of sales and purchases in January, 2013:
Output taxes on sales P 240 000
Input taxes on purchases of goods sold 238 200
Input taxes on machine bought with a useful life of 12 years 180 000

The value-added tax payable for the month:

A. P 0 C. P 72 000
B. P 1 800 D. P 60 000

19. Kitkat, a VAT taxpayer, had the following data for the first 3 months of taxable year 2013:
Data for the months of January February March
VAT not included:
Sales P 1 150 000 P 2 000 000 P 1 850 000
Purchases 600 000 1 600 000 900 000

The value-added tax payable at the end of March is:

A. P 90 000 C. P 95 000
B. P 180 000 D. P 114 000

20. On January 5, 2013, Smarty Co., VAT-registered, sold on account goods for P 112 000 to Global Corp. The term was
2/10, n/30. Payment was made on January 10, 2013. The total amount due is.
A. P 112 000 C. P 109 760
B. P 98 000 D. P 100 000