VAT

Nature
1) A business tax. In effect, a sales tax
2) Indirect tax – burden can be shifted by the seller to the buyer
3) Imposed:
(a) On the gross selling price if sale, barter, or exchange of goods or properties
or
(b) On the gross receipts if sale of services, or in the lease or use of properties

in the course of trade or business;

(c) On the total value or landed cost, if importation of goods, whether or not in the course of
business.

How Computed? Tax Credit Method: Output Tax less Input Tax

Summary of Tax Consequences of VAT-Taxable and VAT-Exempt Transactions

Kind of Transaction Tax Consequences

(a) VAT-Taxable transactions

1. Sales or leases taxed at 12% (a) Seller is subject to VAT at 12%.

(b) Seller is entitled to input tax credit;
(c) Seller pays excess of output tax over input tax to the BIR;
(d) Seller can carry-over excess input taxes to succeeding quarter(s).

2. Sales or leases taxed at 0% (a) Seller is subject to VAT at 0%

(zero-rated) (b) Seller is entitled to input tax credit;
(c) Seller can claim refund or tax credit for input taxes;

(b) Exempt transactions (a) Seller is exempt from VAT;

(b) Seller cannot separately bill output tax to his customers;
(c) Seller is not entitled to input tax credit
(d) Seller shall be liable to VAT if he issues VAT invoice or receipt,
but without the benefit of input tax credit.

REGISTRATION FOR VAT

Mandatory Registration Optional Registration

1) Gross sales/receipts on all lines of non-exempt 1) Any person who is not subject to mandatory
businesses 1 for the past 12 months exceed registration because his actual or expected gross
P3,000,000. sales/receipts from non-exempt businesses for the
past 12 months do not exceed P3,000,000.

1 VATable businesses.
2 RR 8-2018.
3 The exempt business(es) must be minor lines of business of a VAT-registered person.
4 Sec. 106(A)(2), NIRC; Sec. 4.106-5, Rev. Reg. No. 16-2005 as amended by Rev. Reg. No. 13-2018.
5 0% VAT on purchases is another way of saying that the purchaser is exempt from the input VAT that is normally charged

Page 1 of 24
2) Expected sales/receipts for the next 12 months 2) Any VAT-registered person who has other lines of
from all lines of non-exempt businesses businesses which are VAT-exempt. The VAT-
exceed P3,000,000. exempt business must not be the main line of
business.

Note: In (1) and (2), the registration shall e irrevocable

for the next 3 years.

3) Franchise grantees of radio and/or TV 3) Franchise grantees of radio and/or TV

broadcasting whose annual sales for the last broadcasting whose annual sales < P10 M.
taxable year exceed P10,000,000
Note: Registration is irrevocable

Benefit: The VAT-registered person is entitled to input Benefit: The customers or clients of the taxpayer will
tax credits. be able to reduce their VAT payables by using the
input tax credits from their purchases from the
taxpayer.

Notes:

1) Registration is required for every separate or distinct establishment or place of business where sales
transactions occur except a warehouse without sales transaction

2) Each VAT-registered person shall be assigned one (1) TIN. The branch shall use the 9-digit TIN of the
head office + a 3-digit branch code.

3) For those who are not registered, but become liable to VAT2:

A non-VAT taxpayer who initially presumed that his gross sales/receipts plus other non-operating income
for the taxable year will not exceed the P3,000,000 VAT threshold but has actually exceeded the same
during the taxable year, shall immediately update his registration to reflect the change in tax profile from
non-VAT to VAT taxpayer.

He is required to update his registration immediately within the month following the month he exceeded
the VAT threshold. And he shall be liable to VAT prospectively starting on the first day of the month
following the month when the threshold is breached.

4) Annual registration fee: P500 for every separate or distinct place of business where sales transactions
occur.

Cooperatives are exempt from the registration fee.

5) VAT Registration Certificate and Registration Fee Return must be posted in a conspicuous place in the
place of business.

Effect of Failure to Register by Persons Required to Do So

1) Liable to VAT on their sales;

2) No input VAT credits on their purchases;
3) Cannot separately bill output VAT to customer. In other words, the taxpayer cannot shift the VAT
burden to his customers;
4) Fines and sanctions (OPLAN KANDADO: suspension of operations or closure of business > 5 days).

2 RR 8-2018.

Page 2 of 24
Cancellation of Registration

A VAT-registered person may cancel his VAT-registration if:

1) He makes a written application showing that his gross sales or receipts (excluding exempt sales) in the
next 12 months shall not exceed P3,000,000; or
2) He ceases business;
3) There is a change in ownership in the case of a single proprietorship;
4) Dissolution of the partnership or corporation;
5) Merger or consolidation with respect to the dissolved corporation;
6) Failure to actually start business;
7) Business becomes exempt;
8) A person who voluntarily registers and then applies for cancellation after the lapse of 3 years;
9) A VAT-registered person whose gross sales or receipts for 3 consecutive years did not exceed
P3,000,000 beginning January 1, 2018.

Persons Subject to VAT

1) Those engaged in the selling or leasing of goods, properties, or services subject to VAT and
registered regardless of the level of sales;

2) Those engaged in the selling or leasing of goods, properties or services subject to VAT, whose gross
sales or receipts during the year or in any 12-month period >P3,000,000, whether or not
registered;

Note: For purposes of the threshold of P3,000,000, husband and wife shall be considered separate
taxpayers.

3) Those who are VAT-registered and who have VAT-exempt businesses which they choose to
register under the VAT-system, regardless of level of sales3;

4) Franchise grantees of radio and/or TV broadcasting whose gross annual receipts do not exceed P10
Million, but are registered;

5) Importers of goods subject to VAT, whether or not in the course of trade or business, regardless of
the amount of purchase.

Note: Unless specifically exempted by law, even a non-stock, non-profit organization or government entity is
liable to pay VAT on the sale of goods or services. As long as the entity provides goods or services for a
fee, remuneration or consideration, then such sale is subject to VAT.

ZERO-RATED TRANSACTIONS

- Does not result in output VAT, but the taxpayer is entitled to input VAT which shall be available either as
a tax credit or as a refund, IF taxpayer is registered.

- IF not registered, the sales of the taxpayer will be considered VAT-exempt sales.

3 The exempt business(es) must be minor lines of business of a VAT-registered person.

Page 3 of 24
 I) Zero-Rated Sales of Goods

(a) Export sales of goods

1. Sale of goods to a foreign country and paid for in acceptable foreign currency;
2. Sale of raw materials or packaging materials to a non-resident buyer for delivery to a
resident export-oriented enterprise, and paid for in acceptable foreign currency;
3. Sale of raw materials or packaging materials to export-oriented enterprises whose export
sales exceed 70% of total annual production;
4. Considered export sales under E.O. No. 226 (the Omnibus Investment Code), and other
special laws:
(a) Sales to bonded manufacturing warehouses of export-oriented manufacturers;
(b) Sales to registered export traders operating bonded trading warehouses
supplying raw materials in the manufacture of export products;
(c) Sales to a BOI-registered producer whose products are 100% exported.
5. Sale of goods, supplies, equipment, and fuel to persons engaged in international
shipping or international air transport operations. Provided, that the sale of such goods
and fuel shall pertain to the transport of goods and passengers from a Philippine
port directly to a foreign port, or vice-versa, without docking or stopping at any
other port in the Philippines.

Note: The transactions under items (2), (3), and (4) above shall be subject to the 12%
VAT, and shall no longer be considered export sales subject to 0% VAT, upon the
satisfaction of the following conditions:

(1) The successful establishment and implementation of an enhanced VAT refund system
that grants refunds of creditable input taxes within ninety (90) days from the filing of
the VAT refund application with the Bureau; and
(2) All pending VAT refund claims as of December 31, 2017 shall be fully paid in cash by
December 31, 2019.4

(b) Effectively zero-rated sales

Local sales by VAT-registered persons to persons or entities deemed tax-exempt (i.e., granted
exemption from indirect taxes) under a special law or international agreement, such as:

(1) Enterprises registered with the SBMA, CDA, PEZA, and other export processing zones;
(2) ADB; IRRI.
(3) Sales to diplomatic missions and other agencies or instrumentalities granted tax immunities;
(4) Regional or area headquarters of (RHQs) of multinational corporations enjoying VAT 0-rating
on its purchases at the time of effectivity of the TRAIN; and
(5) Other persons/entities who are entitled to 0% VAT on purchases.5

II) Zero-Rated Sales of Services

The following services performed locally in the Philippines by VAT-registered persons shall be
subject to a 0% rate:

(1) Processing, manufacturing, or repacking goods for other persons which goods are subsequently
exported, and which are paid for in acceptable foreign currency;

4Sec. 106(A)(2), NIRC; Sec. 4.106-5, Rev. Reg. No. 16-2005 as amended by Rev. Reg. No. 13-2018.
50% VAT on purchases is another way of saying that the purchaser is exempt from the input VAT that is normally charged
by the seller.

Page 4 of 24
 (2) Services other than those in (l), rendered to a person engaged in business conducted outside
the Philippines, or to a non-resident, person not engaged in business and who is outside the
Philippines, and which are paid for in acceptable foreign currency;

(3) Services rendered to persons/entities whose exemption under special laws or international
agreements effectively subjects the supply of such services to a 0% rate6;

(4) Services rendered to persons engaged in international shipping or international air transport
operations, including leases of property for use thereof; Provided, that the sale of services shall
pertain to the transport of goods and passengers from a Philippine port directly to a foreign
port, or vice-versa

(5) Services performed by subcontractors or contractors in processing, converting, or manufacturing

goods for an enterprise whose export sales exceed 70% of total annual production;

(6) Transport of passengers and cargo by domestic air or sea carriers from the Philippines to a
foreign country.

Note: Transport of passengers and cargo by domestic air or sea carriers from a foreign
country to the Philippines is EXEMPT from business taxes including the VAT for lack of
jurisdiction.

(7) Sale of power or fuel generated through renewable sources of energy such as solar, wind,
biomass, geothermal, and ocean energy.

Note: Zero-rating does not extend to the sale of services related to maintenance or operating of
plants generating said energy.

Note: The transactions under items (1) and (5) above shall be subject to the 12% VAT, and shall no
longer subject to 0% VAT rate, upon the satisfaction of the following conditions:

(1) The successful establishment and implementation of an enhanced VAT refund system that
grants refunds of creditable input taxes within ninety (90) days from the filing of the VAT refund
application with the Bureau; and

(2) All pending VAT refund claims as of December 31, 2017 shall be fully paid in cash by
December 31, 2019.7

EXEMPT TRANSACTIONS

- The sale shall not be subject to output VAT, but the seller is not allowed to ITC8.
- Seller cannot bill any output VAT to his customers.
- If the seller issues a VAT invoice or receipt without being VAT-registered, he shall be liable to the output
VAT without the benefit of any input VAT credit.

(1) Sale or importation of (a) agricultural and marine food products in their original state, (b) livestock or
poultry of a kind generally used as, or yielding or producing foods for human consumption; and (c)
breeding stock and genetic materials therefore;

6 Effectively zero-rated sales of services.

7 Sec. 108(B), NIRC; Sec. 4.108-5, Rev. Reg. No. 16-2005 as amended by Rev. Reg. No. 13-2018.
8 Input Tax Credit.

Page 5 of 24
 “Original state” – Meat, fruit, fish, vegetables, and other agricultural and marine food products classified
under this paragraph 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, including those using
advanced technological means of packaging, such as shrink wrapping in plastics,
vacuum packing, tetra-pack, and other similar packaging methods;

– Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt,
and copra shall be considered in their original state.

“Livestock or Poultry”
– Does not include fighting cocks, race horses, zoo animals, and other animals generally
considered as pets.

Notes: a) Sale of bagasse is not exempt from VAT.

b) Fresh water is not an agricultural product, but is considered a mineral. The sale thereof is not
exempt from VAT.

(2) Sale or importation of (a) fertilizers; (b) seeds, seedlings and fingerlings; (c) 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 considered as pets);

(3) Importation of personal and household effects belonging to residents of the Philippines returning from
abroad and non-resident citizens coming to resettle in the Philippines; Provided, that such goods are
exempt from Philippine custom duties;

(4) Importation of (a) professional instruments and implements; (b) tools of trade, occupation or
employment; (c) wearing apparel; (d) domestic animals; and (e) personal and household effects (except
vehicles, vessels, aircrafts machineries and other goods for use in manufacture and merchandise of any
kind in commercial quantities) belonging to overseas Filipinos9, 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 sale,
barter or exchange, accompanying such persons, or arriving within a reasonable time;

(5) Services subject to percentage tax under Title V of the Tax Code (Secs. 116-127, Tax Code);

(6) Services by agricultural contract growers10, and milling for others of palay into rice, corn into grits, and
sugar cane into raw sugar;
(7) Medical, dental, hospital and veterinary services except those rendered by professionals;

Note: Lab services are exempt.

Sale of drugs and medicines are VATabel, generally. Therefore, if the hospital or clinic operates
a drug store, the sale of drugs and medicine shall be subject to VAT. However, the sale of the
same to in-patients is considered part of hospital services, and shall therefore be VAT-exempt.

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

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

9 Overseas Filipinos shall refer to persons coming to settle in the Philippines, or Filipinos or their families and descendants
who are now residents or citizens of other countries.
10 Agricultural contract grower refers to a person/entity producing for others poultry, livestock, or other agricultural and

marine food products in their original state.

Page 6 of 24
 (10) Services rendered by regional or area headquarters (“RHQs”) 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;

(11) Transactions which are exempt under international agreements to which the Philippines is a
signatory or under special laws except those granted under P.D. No. 52911;

(12) Sales by agricultural cooperatives duly registered and in good standing with the Cooperative
Development Authority (“CDA”) to their members, as well as of sale of their produce, whether in its
original state or processed form, to non-members; and their importation of direct farm inputs,
machineries and equipment, including spare parts thereof, to be used directly and exclusively in the
production and/or processing of their produce;

(13) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered
and in good standing with the Cooperative Development Authority;

(14) Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with and in
good standing with CDA; Provided, that the share capital contribution of each member does not exceed
Fifteen Thousand Pesos (P15,000.00);

Notes:
(a) Importation by non-agricultural, non-electric, and non-credit cooperatives of machineries and
equipment, including spare parts thereof to be used by them are subject to VAT.

(b) All electric cooperatives registered with National Electrification Administration (“NEA”) shall
be subject to VAT on sales relative to the generation and distribution of electricity as well as
their importation of machineries and equipment, including spare parts. Provided, however, that
sale of power or fuel generated through renewable sources of energy such as, but not limited to,
biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy
sources using technologies such as fuel cells and hydrogen fuels, shall be subject to 0% VAT.

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

(16) The following sales of real properties:

(a) Sale of real properties not primarily held 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 housing and socialized housing as defined by
RA No. 7279, otherwise known as the "Urban Development and Housing Act of 1992" and other
related laws;
(c) Sale of residential lot valued at One Million Five Hundred Thousand Pesos
(P1,500,000.00) and below;
(d) Sale of house and lot and other residential dwellings valued at Two Million Five
Hundred Thousand Pesos (P2,500,000.00) and below.12

Note: For purposes of (c) and (d), if two (2) or more adjacent residential lots, house and lots, or
other residential dwellings are sold or disposed in favor of one buyer from the same
seller, for the purpose of utilizing the same as one residential area, the sales shall be exempt
from VAT only if the aggregate value of the properties do not exceed P1,500,000 for residential
lots, and P2,500,000 for residential house and lots or other residential dwellings.

11 Petroleum Exploration Concessionaires under the Petroleum Act of 1949

12 Beginning January 1, 2021, the VAT exemption shall only apply to the following sales of real properties:
(a) Real property not primarily held for sale to customers or held for lease in the ordinary course of trade or business;
(b) Real property utilized for socialized housing as defined by R.A. No. 7279; and
(c) House and lot, and other residential dwellings with a selling price of not more than Two Million Pesos (P2,000,000)
(TRAIN).

Page 7 of 24
 (17) Lease of residential units 13 with a monthly rental per unit not exceeding Fifteen Thousand Pesos
(P15,000.00), regardless of the amount of aggregate rentals received by the lessor during the year;

Note: Lease of residential units with a monthly rental per unit >P15,000, but the annual aggregate of
such rentals does not exceed P3,000,000, shall still be exempt from VAT, but shall be subject to the 3%
percentage tax. If the annual aggregate exceeds P3,000,000, the same shall be subject to VAT.

(18) 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;

Note: Sale of books, newspapers, magazines, etc. in electronic format is VAT-taxable.

(19) Transport of passengers by international carriers;

Note: Transport of cargo by international carriers is also exempt from VAT because they are
subject to the OPT under Section 118 of the Tax Code.

(20) Sale, importation or lease of passenger or cargo vessels and aircraft, including engine equipment
and spare parts thereof for domestic or international transport operations;

Provided, the importation or purchase meets the requirements of Maritime Industry Authority (MARINA).

(21) Importation of fuel, goods and supplies by persons engaged in international shipping or air transport
operations;

Provided, that the said fuel, goods and supplies shall be used exclusively or shall pertain to the transport
of goods and/or passenger from a port in the Philippines directly to a foreign port, or vice-versa, without
docking or stopping at any other port in the Philippines unless the docking or stopping at any other
Philippine port is for the purpose of unloading passengers and/or cargoes that originated form abroad,
or to load passengers and/or cargoes bound for abroad

(22) Services of banks, non-bank financial intermediaries performing quasi-banking functions,

and other non-bank financial intermediaries, such as money changers and pawnshops, subject to
percentage tax under Sections 121 and 122, respectively of the Tax Code;

(23) Sale or lease of goods and services to Senior Citizens and PWDs, as provided under R.A.
Nos. 9994 and 10754, respectively;

(24) Transfer of property in merger or consolidation pursuant to Section 40(C)(2) of the Tax Code;

(25) Association dues, membership fees, and other assessments and charges collected on a
purely reimbursement basis by homeowners’ associations and condominium
corporations;

(26) Sale of gold to the BSP 14 (previously zero-rated transaction);

13The 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, hotel rooms, lodging houses, inns, and pension houses.

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.
14 Sale of gold and other metallic minerals to persons and entities, except sale of gold to the BSP, are subject to 12% VAT

if the gross selling price exceeds the threshold of P3,000,000.

Page 8 of 24
 (27) Sale of drugs and medicines prescribed for diabetes, high cholesterol, and hypertension
(beginning on January 1, 2019 as determined by the Department of Health);

(28) Other VAT-exempt sales:

(a) Fees, per diems, allowances, and other income received by corporate directors from
corporations of which they are not employees;

(b) Sales by PEZA and other ecozone registered enterprises enjoying the preferential tax
rate of 5% in lieu of all taxes;

(c) Sales of services by professionals and other suppliers of services hired under a contract of
service or job order with the departments and agencies of the government, it instrumentalities,
local government units, state colleges and universities, including GOCCs and government
financial institutions (“GFIs”) shall be exempt from VAT. Provided, (1) they derive gross receipts
of not more than P250,000 in any 12-month period, (2) such incomes are received from a LONE
PAYOR, and (3) such professionals have no other source of income15;

(d) Other sales which are VAT-exempt under special laws.

(29) Sale or lease of goods or properties or the performance of services other than the transactions
mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed
the amount of Three Million Pesos (P3,000,000).

For purposes of the threshold of P3,000,000, the husband and wife shall be considered separate
taxpayers.

VAT-TAXABLE SALE OF GOODS/PROPERTIES

1) VATable sales – the sale must be (a) an actual sale (b) in the course of trade or business, of goods or
properties within the commerce of man.

2) Transactions Deemed Sale – transactions which lack one or both of the elements that makes a sale
VATable. Transactions (a) to (d) below are deemed sales so as to prevent the taxpayer from evading
payment of the output VAT.

Transaction (e), on the other hand, is treated as an actual sale to enable the recipients of the goods or
properties to avail of the input VAT credits on such transactions “deemed sales.”16

(a) Transfer, use, or consumption not in the course of business of goods or properties originally intended for
sale or for use in the course of business.

Transfer of goods or properties not in the course of business can take place when the VAT-registered
person withdraws goods from his business for his personal use.

(b) Distribution or transfer of goods or properties to:

(1) Shareholders or investors as property dividends; or
(2) Creditors in payment of debt or obligation.

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

15 RMC No. 69-2017, as amended by RMC No. 51-2018.

16 From the point of view of the new owner of such goods/properties, it is a “deemed purchase.”

Page 9 of 24
 Consigned goods returned by the consignee within the 60-day period are not deemed sold; and

(d) Transmission of property to a trustee IF:

(1) the property transferred is one for sale, lease, or use in the ordinary course of trade or business, and
(2) the transfer constitutes a completed gift. The transfer is a completed gift if the transferor divests
himself absolutely of control over the property, i.e., an irrevocable transfer of the corpus and/or an
irrevocable designation of the beneficiary.

(e) Retirement from or cessation of business with respect to inventories of taxable goods (capital goods,
stock-in-trade, supplies, materials) existing as of such retirement or cessation, whether or not the
business is continued by the new owner.

Examples of transaction deemed sale, and therefore VAT-taxable:

a) “Change of ownership of the business.” There is a change in the ownership of the business when a
single proprietorship incorporates, or the proprietor of a single proprietorship sells his entire business.
b) Dissolution of a partnership, and creation of a new partnership which takes over the business.
c) Liquidating dividends where the assets of the corporation are distributed to the shareholders.

Examples of transactions not subject to VAT:

a) Change in the control of a corporation;
b) Merger or consolidation of corporations;
c) Change in the trade or corporate name.

OUTPUT VAT

- 12% of the gross selling price (“GSP”), exclusive or net of VAT, of the goods sold, bartered, exchanged,
or deemed sold in the Philippines,

OR

12/112 of the total invoice price (inclusive or gross of VAT).17

- For zero-rated sales, the output VAT is 0% of the GSP

Tax Base: GSP, net of Sales Discounts, Sales Returns, and Allowances

A) GSP = the total amount of money or its equivalent which the purchaser must pay18 the seller in
consideration of the sale, barter, or exchange. Any excise tax shall form part of the GSP.

When the GSP is unreasonably lower than the actual marker value, the CIR shall, by rules and regulations
prescribed by the Secretary of Finance, determine the appropriate tax base. However, when one of the
parties in the government, the output VAT shall be based on the actual selling price.

“Unreasonably lower” = lower by more than 30% of the actual market value.

B) For transactions deemed sale:

17 (3/28) or (12/112) of Invoice Amount, if

a) VAT is not separately billed; or
b) VAT is erroneously billed
18 That is, the entire GSP whether paid in cash, credit, or installment.

Page 10 of 24
 1) Tax Base = Market value of the goods at the time of transaction

In a) Transfer, use, or consumption not in the course of trade or business;

b) Distribution to shareholders or creditors;
c) Consignment sales;
d) Transmission of property to trustee.

2) Tax Base = Lower of acquisition cost or current market price of the goods

In retirement from or cessation of business.

C) When there is cessation of status as a VAT-registered person

The output tax on goods or properties originally intended for sale or for use in business, including capital
goods existing at the time of the change in or cessation of status of a taxpayer as a VAT-registered person,
shall be based on the acquisition cost or the current market price of the goods, whichever is
lower.

Computation of Input VAT (“ITC”)

- The same rules above are applied, but to purchases.

VAT on Sale of Real Properties

Sale of real properties (a) held primarily for sale to customers or (b) held for lease in the ordinary course of trade
or business of the seller or (c) used in trade or business, shall be subject to VAT:

(1) Regardless of the amount of the gross selling price, if the real property is not residential (i.e., commercial,
industrial, etc.)

(2) If real property is residential, it shall be subject to VAT if the GSP exceeds:

(a) P1,500,000 for residential lots, or

(b) P2,500,000 for residential house and lots or other residential dwellings.

Notes:

(a) In the sale, barter, or exchange of real properties subject to VAT,

1) the GSP shall be the highest of:

a) Selling price in the sales document; or

b) Zonal value; or
c) Assessor’s value.

2) If VAT is not billed separately in the sales document, the selling price is deemed inclusive of VAT.

3) If the GSP is based on the zonal or assessor’s value, the same is deemed exclusive of VAT.

(b) IF Cash Sale:

VAT = 12% of highest of (Selling price, zonal value, or assessor’s value)

Page 11 of 24
 IF Deferred-payment basis not on the installment plan

VAT = 12% of highest of (Selling price, zonal value, or assessor’s value)

IF on Installment Plan

(1) VAT payments = 12% of installment payments

BUT

(2) Where GSP = Zonal or Assessor’s value

Actual collection of the

consideration
Higher of
(exclusive of VAT)
Zonal Value
Agreed consideration X = Tax Base
or Assessor’s
appearing in the
Value
contract
(exclusive of VAT)

Tax Base x 12% = VAT

(c) If two (2) or more adjacent residential lots, house and lots, or other residential dwellings are sold or disposed
in favor of one buyer from the same seller, for the purpose of utilizing the same as one residential area, the
sales shall be VAT-taxable if the aggregate value of the properties exceed P1,500,000 for residential lots,
and P2,500,000 for residential house and lots or other residential dwellings;

(d) The sale of parking lots is subject to VAT regardless of the amount of the selling price since parking lots are
not residential lots.

(e) VAT may likewise be imposed in foreclosure sales. When the mortgagor failed to redeem the real property
which was an ordinary asset in his hands, the VAT must be paid by the mortgagor on or before the 20th day
or 15th day of the month following the month when the right of redemption prescribes.

VAT-TAXABLE SALE OF SERVICES

- Sale of services or lease or use of properties (real, tangible personal, intangible), or supply of knowledge,
information, or assistance.

Requisites of a VAT-Taxable Sale of Services

1) The sale must be conducted in the ordinary course of trade or business;

2) For leases, the property must be leased or used in the Philippines;

3) The seller or lessor is VAT-registered, or if not, the gross receipts of the seller or lessor during the
year or in any 12-month period exceed the minimum of gross receipts of P3,000,000; and

4) In the case of lease of a residential unit, the monthly rental exceeds P15,000, and the aggregate
annual gross receipts of the lessor (from all residential units with monthly rentals exceeding P15,000)
exceed P3,000,000.

Page 12 of 24
Taxable Services
- All kinds of services in the Philippines for a consideration, as long as it is not exempted by law.
- Includes:

1) Sales of 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 and cargoes;

2) Sales of domestic common carriers by air and sea relative to their transport of
passengers, goods, or cargoes form one place in the Philippines to another place in
the Philippines;

Notes:
a) Common carriers by land with respect to their gross receipts form transport of
passengers shall not be liable to VAT, but to the percentage tax under Section 117.

b) Additional charge for excess baggage is subject to VAT.

3) Sales of electricity by generation, transmission, and/or distribution companies;

a) Gross receipts refer to the amounts charged by generation, transmission by any entity
including the National Grid Corporation of the Philippines, and distribution companies
including electric cooperatives.

b) The universal charge passed on and collected by distribution companies and

electric cooperatives shall be excluded from the computation of the gross receipts.

c) Sale of power or fuel generated thru renewable sources of energy shall be subject to 0%
VAT.

4) Sales of franchise grantees of electric utilities, telephone and telegraph, radio and/or television
broadcasting and all other franchise grantees, except

a) Franchise grantees of radio and/or television broadcasting whose annual gross receipts
of the preceding year do not exceed Ten Million Pesos (P10,000,000),
b) Franchise grantees of gas and water utilities

Subject to OPT (franchise tax) under Sec. 119

c) Amounts received for overseas dispatch, message, or conversation originating from the
Philippines are subject to 10% percentage tax under Section 120 of the Tax Code.

5) Non-life insurance companies including surety, fidelity, indemnity, and bonding companies;

Gross receipts = premiums collected whether paid in money, notes, credits, or any
substitute for money, but does not include:
a) Premiums from crop insurance
b) Reinsurance premiums
c) Returned premiums (premiums refunded within 6 months after payment on account of
rejection)
d) DST and local taxes passed on by the insurance company to the insured

Note: Insurance and reinsurance commissions, whether life or non-life, are subject to VAT.

Page 13 of 24
 6) Lease of properties

a) Regardless of place where contract is executed as long as property leased is located in

the Philippines.
b) Any advance payment shall be subject to VAT if the same constitutes prepaid rental. If
the same constitutes a loan, option money, or security deposit, it shall not be subject to
VAT.
c) The VAT on the rentals or royalties payable to a non-resident owner or non-resident
lessor shall be withheld by the lessee or licensee in behalf of the non-resident and
remitted to the BIR.

7) Dealers in securities

Gross receipts = Gross selling price less cost of the securities sold.

8) Pre-need companies

Gross receipts = premiums or payments received from the plan holders

9) HMOs

Gross receipts = service fees = enrollment fees + other charges received from their members

Computation of Output VAT:

12% of gross receipts, net of VAT OR 12/112 of the total invoice amount, gross of VAT.

“Gross receipts” refers to the total amount of money or its equivalent representing the contract price,
compensation, service fee, rental or royalty, including

(a) The amount charged for materials supplied with the services,
(b) Deposits applied as payments for services rendered, and
(c) Advance payments

Actually, or constructively received during the taxable period for the services performed or to
be performed for another person.

Notes:
(1) “Constructive receipt” occurs when the money consideration or its equivalent is placed at the
control of the person who rendered the services without restrictions by the payor.

(2) Under the definition of “gross receipts,” any amount forming part of the contract price, not
actually or constructively received, is not subject to VAT. Thus, receivables under the contract
shall be taxed in the month or quarter when payment is received, actually or
constructively.

(3) “Gross Receipts” do not include amounts earmarked for payment to unrelated third parties or
received as reimbursement for advance payment on behalf of another which do not redound
to the benefit of the payor.

Page 14 of 24
Consequences of Issuing Erroneous VAT Invoice or VAT Official Receipt

(a) 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 other applicable percentage taxes;
ii. The VAT due on the transaction without the benefit of input tax credit; and
iii. A 50% surcharge under Sec. 248(B) of the Tax Code.

(2) The VAT shall be recognized as an input tax credit to the purchaser, provided the requisite
information is shown on the invoice or receipt.

(b) If a VAT-registered person issues a VAT invoice or VAT official receipt for a VAT-exempt transaction, and
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.

VAT ON IMPORTATION

Importer = 1) Any person who brings goods into the Philippines, whether or not in the course of trade or
business; or
2) A non-exempt person who acquires tax-free imported goods from VAT-exempt persons. Such
non-exempt person shall be considered the importer thereof and liable for the VAT thereon.

Tax Base
1) The total value used by the Bureau of Customs in determining the tariff and customs duties + the
customs duties + excise taxes, if any + other charges, such as postage, commission and similar charges,
prior to the release of the goods from the customs custody.

2) In case the valuation used by the Bureau of Customs in computing the duties is based on volume or
quantity of the imported goods, the landed cost shall be the basis of computing the VAT. Landed cost
consists of the invoice amount, customs duties, freight, insurance, and other charges. If the goods
imported are subject to excise tax, the excise tax shall form part of the tax base.

3) The same rule applies to technical importation of goods sold by a person located in a Special Economic
Zone to a customer located in a customs territory (i.e., Philippine territory).

Payment of VAT on Importation

The VAT on importation shall be paid by the importer prior to the release of the goods from customs custody.

INPUT TAX CREDIT

1) Also called input VAT

2) VAT due or paid on the importation of goods or
VAT paid by a purchaser (to the seller) on the local purchases of goods, properties, or services in the
course of trade or business.

Can be availed by a VAT-registered imported, or a VAT-registered purchaser or goods or services.

Page 15 of 24
 3) Includes transitional input tax and the presumptive input tax

Sources/Classification of Input Tax Credits

1) VAT paid (to the supplier or vendor) by a VAT-registered person on his local purchases, and VAT
paid (to the BIR) on importation of goods;

2) ITC from transactions “deemed purchase” – the “deemed sale” transaction will also result in a
“deemed purchase” transaction which gives rise to input tax

3) Transitional input tax –

Persons allowed the transitional input tax: Those persons

a) Becoming VAT-registered for the first time upon exceeding the minimum gross sales of
P3,000,000 in any 12-month period or
b) Who voluntarily register under the VAT system

Transitional input VAT = Higher of (2% of the value of the beginning inventory, or the actual input
VAT paid on such goods, materials, and supplies)

Provided: Inventory shall exclude goods exempt from VAT.

4) Presumptive input tax

a) Available to persons or firms engaged in the processing of sardines, mackerel, and milk,
and in the manufacturing of refined sugar, cooking oil, and packed noodle-based
instant meals.

b) The presumptive input tax shall be equivalent to 4% of the gross value in money of their
purchases of primary agricultural products 19 which are exempt from VAT and which
are used as inputs to production.

5) Input tax on depreciable goods (deferred input tax credits)

The purchase or importation of depreciable capital goods totaling > P1,000,000 (exclusive of
VAT) in a calendar month, regardless of the acquisition cost of each capital good, and regardless of the
terms of payment, shall give rise to input tax credits as follows:

a) If the estimated useful life of a capital good ≥ 5 years, the input tax credit shall be spread over a
period of 60 months, and the monthly input tax credit (“ITC”) shall commence in the month the
capital good was acquired.

b) If the estimated useful life of a capital good < 5 years, the input tax shall be spread evenly by
dividing the input tax by the actual number of months comprising the estimated useful life. The
claim for ITC shall commence in the month that the capital good was acquired.

c) If the depreciable capital good is sold/transferred within a period of five (5) yeas or prior to the
exhaustion of the amortizable input tax thereon, the entire unamortized input tax on the capital
goods sold/transferred can be claimed as input tax credit during the month/quarter when the
sale or transfer is made.

19 Agricultural product does not include fish and marine resources.

Page 16 of 24
 Note: The amortization of the input VAT provided under Section 110(A)(2) of the Tax Code 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.

EXCEPTION: Input taxes on the purchase of the following non-depreciable vehicles and all input
taxes on the maintenance expenses thereon shall not be allowed as input tax credits against
the output VAT:

(1) Purchase of vehicles for which no substantiation exists;

(2) Purchases of (a) yachts, (b) helicopters, (c) airplanes, or aircrafts, and (d) land vehicles for the use
of an official or employee exceeding P2,400,000, unless the taxpayer’s main line of business is
in transport operations or in leasing transportation equipment and the vehicles are used in said
operations.

6) Input tax on Construction in Progress (CIP)

CIP – cost of construction work which is not yet completed. It will not be depreciated until the asset is
placed in service.

In put tax credit can be recognized in the month payment is made. However, once the asset is
completed and reclassified as a capital asset, no additional ITC can be claimed.

7) Ratable portion of any input tax which cannot be directly attributed to either taxable or
exempt activity

8) Issuance of a VAT invoice by a non-VAT person – provided the requisite information is

shown on the invoice or receipt

9) Issuance of a VAT invoice on an exempt transaction by a VAT-registered person –

provided the requisite information is shown on the invoice or receipt.

How is an ITC used?

1) Used as a credit against the output tax to compute the VAT payable;
2) Any excess ITC shall be carried over to the succeeding period;

3) Input tax attributed to zero-rated sales by a VAT-registered taxpayers may, at his option,

a) Be applied against the output VAT from sales of a VATable line of business, or carried over to
the succeeding period;
b) Be refunded; or
c) The taxpayer can apply for a tax credit certificate (“TCC”) which can be used in the
payment of other internal revenue taxes

4) Input tax attributable to VAT-exempt sales are expensed.

Page 17 of 24
Determination of ITC in a Taxable Month/Quarter

Formula: All input taxes arising during the month/quarter

+ Input tax carried over from previous period
+ Deferred ITC
Less: Claim from VAT refund or tax credit
Less: Input tax attributable to exempt sales
Less: Input tax attributable to final withholding tax
Input tax credit for the month/quarter

ITCs for VAT-Registered Persons W ho Are Also Engaged in Non-VAT Lines of Business

Such taxpayers shall be entitled to the following ITCs:

1) Input VAT directly attributable to transactions or sales subject to VAT;

2) For input VAT that cannot be directly attributed to either VAT-taxable, VAT-exempt, zero-rated, or
Government transactions, only the ratable portion pertaining to the VAT-taxable and zero-rated
transactions may be recognized for ITCs.

Formulas:

Total sales/receipts on VAT-taxable sales Unattributed Input tax to be allocated to

X =
Total sales/receipts input taxes VAT-taxable transactions

Total sales/receipts on Exempt sales Unattributed Input tax to be allocated to

X =
Total sales/receipts input taxes Exempt transactions

Total sales/receipts on Zero-rated sales Unattributed Input tax to be allocated to

X =
Total sales/receipts input taxes Zero-rated transactions

Total sales/receipts on Government sales Unattributed Input tax to be allocated to

X =
Total sales/receipts input taxes Government transactions

Notes:
1) Input taxes (a) directly attributable and (b) ratably allocated, to VAT-exempt sales – not allowed as
ITCs, but shall be treated as part of costs or expenses.

2) Input taxes (a) directly attributable and (b) ratably allocated, to sales to the government – not
allowed as ITCs, BUT excess over the implied 7% input VAT will be expensed.20

3) Input taxes (a) directly attributable and (b) ratably allocated, to zero-rated sales – shall be allowed as
ITCs and any excess can be carried forward, or refunded, or applied for a tax credit certificate (TCC).

20If the implied ITC (7%) is more than the actual ITCs, the excess shall decrease expenses or be recognized as other income
for income tax purposes.

Page 18 of 24
REFUND or TAX CREDIT OF INPUT TAX

- Only VAT-registered persons may apply for issuance of the TCC or refund on the following basis:
1) Input taxes paid corresponding to zero-rated or effectively zero-rated sales.
2) Unused input taxes as of the date of the retirement from or cessation of business.
3) Unused input taxes due to cessation of status of a VAT-registered person.

Limitations

1) The input taxes must not have been applied against output taxes.

2) The claim for refund or tax credit shall not include the transitional input tax.

3) In the case of export sales, the payments must be made in acceptable foreign currency.

4) Where the taxpayer is engaged in VATable (12%21), zero-rated, or exempt sales, and the amount
of creditable input tax cannot be directly or entirely attributed to any one of the transactions,
only the proportionate share of input taxes allocated to zero-rated sales can be claimed for
refund or issuance of a TCC.

Time of Filing Claim for Refund or Tax Credit

a) For input taxes on zero-rated sales or lease of goods, properties, or services:

The application should be filed within two (2) years after the close of the taxable
quarter when such sales were made (Sec. 112, NIRC).

b) For unused input taxes upon retirement, change, or cessation of status as a VAT-registered
person.

The application should be filed within two (2) years from the date of cancellation 22 of
his VAT registration (Sec. 112, NIRC)

Place of Filing Application or Claim

Claims for refunds/tax credit certificates shall be filed with the appropriate BIR office (Large Taxpayers’
Service (“LTS”) or Revenue District Office (“RDO”)) having jurisdiction over the principal place of
business of the taxpayer.

However, direct exporters shall file their claim for refund/tax credit certificate with VAT Credit Audit
Division (“VCAD”).

The filing of the claim with one office shall preclude the filing of the same claim with another office.

21Includes sales to the government which are subject to the 5% Final VAT.
22The date of cancellation is the date of issuance of the tax clearance(s) by the BIR after full settlement of all tax liabilities
relative to the cessation of business or change in status of the taxpayer.

Page 19 of 24
 Period Within Which Refund or Tax Credit of Input Taxes Shall Be Acted Upon

Close of the Taxable Quarter

(or Date of Cancellation of
Within 25 days (or within 25 Registration)
days from the end of the
month when the registration Within 2 years
was cancelled)

Date of filing the Quarterly VAT Date of Filing Application for

Return (of Final VAT Return) Refund or TCC with Submission of
Complete Documents in Support of
the Application.

Within 90 days

Within 2 years Application is fully or partially

denied Application is granted

Within 30 days

Appeal to the
Court of Tax Appeals

Notes:

(a) The application for refund/TCC must be supported by complete documents. Failure to submit the
relevant documents in support of the claim upon filing of the application shall result in the non-
acceptance thereof.

(b) Prior to the effectivity of TRAIN (January 1, 2018), in case the Commissioner failed to act on the
application within the prescriptive period23, such inaction was deemed a denial of the application which
gave the applicant the right to appeal to the CTA.24

At present, Section 112 (C) of the Tax Code, as amended by R.A. No. 10963, does not give the same
avenue of appeal to the taxpayer-applicant in cases where the Commissioner fails to act on the
application. However, such inaction is now penalized under Section 269 of the Tax Code. The specter
of a criminal penalty under Section 269 hopefully encourages BIR officials to promptly act on the
taxpayer’s application within the 90-day period.

23 Prior to R.A. No. 10963, the Commissioner (under Section 112(C) of the Tax Code) was given 120 days from the date of
submission of complete documents to act on the application for refund or issuance of a tax credit certificate.
24 Thus, a taxpayer could file the appeal in one of 2 ways, namely:

(1) File the judicial claim within thirty (30) days from the receipt of the decision of the Commissioner denying the claim;
OR
(2) File the judicial claim within thirty (30) days from the expiration of the 120-day period if the Commissioner fails to act
within the 120-day period. In this regard, the taxpayer was required to observe the 120+30 day rule before lodging a
petition for review with the CTA (RMC No. 54-2014)

Page 20 of 24
INCOME TAX ASPECT OF VAT

Treatment of VAT

Under the VAT system, sales and purchases accounts are taken up in the books exclusive of the VAT.
The gross selling price or gross receipt, and the cost of sales, including expenses, shall be recorded in
the books net of the VAT, whether or not the latter is billed separately in the invoices or receipts.

This applies to the computation of income taxes. For purposes of the income tax, the sales, cost of
sales, and expenses shall be taken up consistently net of the VAT.

FILING OF VAT RETURN and PAYMENT OF VAT

1) Monthly VAT Return or Declaration

All persons liable to VAT shall pay a monthly VAT based on the taxable receipts and creditable
purchases for the month.

BIR Form 2550M – filed not later than the 20th day following the end of the taxable month.
– shall be filed only for the first 2 months of each quarter.

2) Quarterly VAT Return or Declaration

All persons liable to VAT shall file a quarterly return which shall include sales and purchase information
for the quarter, including the information for the first 2 months of the quarter for which monthly VAT
returns have been filed.

BIR Form 2550M – filed not later than the 25th day following the end of the taxable quarter.
– payments made in the 2 previous monthly VAT returns shall be credited against the
quarterly VAT payable to arrive at the net VAT payable (or excess input tax) for the
quarter.

3) Returns Under the Electronic Filing and Payment System (“EFPS”)

Taxpayers enrolled in the EFPS shall be required to file their monthly VAT declarations within 21, 22, 23,
24 or 25 days following the end of each month, depending on their industry classification.

Payment of the tax due via the EFPS shall be five (5) days later than the deadlines for filing.

Note: Beginning January 1, 2023, the filing and payment of VAT shall be done within 25 days following
the close of each taxable quarter (Sec. 114(A) as amended by the TRAIN).

4) Advance Payment of VAT

The following are subject to the advance payment of VAT:

(a) Withdrawal of refined sugar from the mill/refinery by the owner/seller

The operator of the sugar mill or refinery shall not allow any withdrawal of refined sugar from its
premises without the advance payment of VAT except when the refined sugar is owned and
withdrawn by a cooperative.

The advance VAT shall be determined based on schedules provided by the BIR.

Page 21 of 24
 (b) Sale of flour

a) VAT on the sale of flour milled from imported wheat shall be paid prior to the release from
the Bureau of Customs’ custody of the wheat which is imported and declared for flour
milling; and

b) Purchases by flour millers of imported wheat from traders shall also be subjected to advance
VAT, and shall be paid by the flour miller prior to delivery.

(c) Transport of naturally grown and planted timber products –

Owners/sellers of naturally grown and planted timber products, whether natural or juridical, who
are holders of permits issued by or agreements entered into with, the Department of
Environment and Natural Resources (“DENR’’), are liable to pay the advance VAT on naturally
grown and planted timber products harvested prior to its transport for purposes of
consummating a sale.

An owner of naturally grown and planted timber products, who can present a Certificate of
Registration (BIR Form No. 2303) showing that the owner is subject only to the other percentage
tax of 3%, shall be exempt from the payment of advance VAT. However, if the aggregate value
of the products to be transported exceeds P3 000,000 the same shall be subject to advance
VAT.

(d) Sale of jewelry, gold and other metallic minerals to (1) Non-resident individuals
not engaged in business and (2) Non-resident foreign corporations

5) Short Period Return

A final quarterly VAT return shall be filed by:

a) Any person who retires from business with due notice to the BIR office where the taxpayer’s
head office is registered or
b) Any person whose VAT registration has been cancelled,

Within 25 days from the end of the month when the business ceases to operate or when the VAT
registration has been officially cancelled.

Thus, if a taxpayer’s Certificate of Registration is canceled on November 20,2015, he shall file his
final quarterly VAT return and pay the tax on or before December 25.2015.

However, subsequent monthly declaration/quarterly returns are still required to be filed if the results
of the winding up of the affairs or business of the taxpayer reveal taxable transactions.

Where to File and Pay

Only one (1) consolidated quarterly VAT return or monthly VAT declaration covering the results of operations of
the head office as well as the branches for all lines of business subject to VAT shall be filed by the taxpayer for
every return period, with the BIR office where said taxpayer is required to be registered.

a) Where payment is involved:

The monthly VAT declaration and quarterly return shall be filed with, and the VAT due thereon paid to:

Page 22 of 24
 (1) An authorized agent bank (“ABB”) under the jurisdiction of the Revenue District/BIR Office where
the taxpayer (head office of the business establishment) is required to be registered; or
(2) In cases where there are no duly accredited agent banks within the municipality or city, the
monthly VAT declaration and quarterly VAT return, shall be filed with and any amount due shall
be paid to the RDO Collection Agent, or duly authorized Treasurer of the Municipality/City where
such taxpayer (head office of the business establishment) is required to be registered.

b) Where no payment is involved

The quarterly VAT return and the monthly VAT declaration shall be filed with the RDO/Large Taxpayers
District Office (“LTDO”)/Large Taxpayers Assistance Division (“LTAD”), Collection Agent, duly
authorized Municipal/City Treasurer of the Municipality or city where the taxpayer (head office of the
business establishment) is registered or required to be registered.

c) Taxpayer filing via the EFPS shall comply with the provisions of the EFPS Regulations.

ISSUANCE OF VAT INVOICE AND RECEIPT

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 (Sec. 113 (A), NIRC).

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 the VAT invoice/VAT official receipt
shall not give rise to any input tax.

If a taxable person is also engaged in exempt operations he may issue separate invoices or receipts for
the taxable and exempt operations. A “VAT invoice” shall be issued only for sales or leases of
goods, properties, or services subject to VAT.

If the sale involves goods, properties, or services some of which are subject to VAT and some of which
are VAT zero-rated or VAT-exempt, the invoice or receipt shall clearly indicate the breakdown of the sale
price between its taxable, exempt, and zero-rated components, and the calculation of the VAT on each
portion of the sale shall be shown on the invoice or receipt. The seller may issue separate
invoices or receipts for the taxable, exempt and zero-rated components of the sale.

WITHHOLDING OF VAT

Mandatory Withholding of VAT

1) The Government or any of its political subdivisions, instrumentalities or agencies

including government-owned or controlled corporations (“GOCCs”) shall, before making
a payment on account of each purchase of goods and/or services taxed at twelve
percent (12%) VAT under the Tax Code, deduct and withhold a final VAT due at the rate
of five percent (5%) of the gross payment thereof.

5 % Final VAT = VAT withheld by the government buyer

7% of the gross payment represents the input tax for the sales to the government in lieu of the
actual input VAT directly attributable to such sales.

Page 23 of 24
 i. If the actual input VAT exceeds the 7% of gross payments, such excess may form part of the
seller’s expenses
ii. If the actual input VAT is less than the 7% of gross payments, the difference must be closed to
expenses (decrease expense).

2) A resident payor (government or private) shall withhold the twelve percent (12%) VAT
with respect to payments for the lease or use of properties or property rights owned by
non-residents.

Page 24 of 24