12/1/20

TAXATION LAW
VALUE-ADDED TAX
MARVIN PATRICIO CAÑERO
Attorney-at-Law
Certified Public Accountant
Law Professor and Bar Reviewer in Taxation
Former Revenue Attorney – Bureau of Internal Revenue

ATTY. MARVIN P. CAN ERO, CPA 1 ATTY. MARVIN P. CAN ERO, CPA 2

Constitutional Issues:

ØVAT is a regressive tax because "VAT payment by low-income

households will be a higher proportion of their incomes (and
expenditures) than payments by higher-income households.
ØThe Constitution does not prohibit theimposition of indirect taxes, like
the VAT. What it simply provides is that Congress shall "evolve a
ØIn the case of the VAT, the law minimizes the regressive effects of this progressive system of taxation." Resort to indirect taxes should be
imposition by providing for zero rating of certain transactions (R.A. No. minimized but not avoided entirely because it is difficult, if not
7716, §3, amending §102 (b) of the NIRC), while granting exemptions to impossible, to avoid them by imposing such taxes according to the
other transactions. (R.A. No. 7716, §4 amending §103 of the NIRC) [ taxpayers' ability to pay. ( Tolentino vs. SOF)
Tolentino vs. SOF]

ATTY. MARVIN P. CAN ERO, CPA 3 ATTY. MARVIN P. CAN ERO, CPA 4

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ØTo begin with, it is not the law — but the revenue bill — which is
required by the Constitution to "originate exclusively" in the House of
Representatives. In fact, a bill originating in the House may undergo
such extensive changes in the Senate that the result may be a rewriting
of the whole. What the Constitution simply means is that the initiative
for filing revenue bills must come from the HOR. (Tolentino vs. SOF)
ATTY. MARVIN P. CAN ERO, CPA 5 ATTY. MARVIN P. CAN ERO, CPA
Cross Border Doctrine/Destination Principle
ØNo VAT shall be imposed to form part of the cost of goods destined for
consumption outside the territorial border of the Philippine taxing
authority.
ØConversely, those goods destined for use or consumption and services
to be rendered within the Philippines shall be subject to the 12% VAT
pursuant to the “Destination Principle” (CIR vs. Toshiba Information
Equipment [Phils.], Inc., 2005)
ATTY. MARVIN P. CAN ERO, CPA 7 ATTY. MARVIN P. CAN ERO, CPA
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ØThere is no undue delegation of legislative power when the President
was given the stand-byauthority to raise the VAT rate from 10% to 12%
when a certain condition is met. It is simply a delegation of
ascertainment of facts upon which enforcement and administration of
the increase rate under the law is contingent. No discretion would be
exercised by the President. It is the ministerial duty of the President to
immediately impose the 12% rate upon the existence of any of the
conditions specified by Congress. (Abakada Guro vs. Ermita)
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Nature and Characteristics
ØIndirect Tax
ØUniform Tax
ØBroad-Based Tax on Consumption
ØPrivilege Tax
ØPhilippines adopted the “separate indication of tax” method
ØCollected Through the Tax Credit Method
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Tax Credit Method
ØAn entity can credit against or subtract from the VAT charged on its
sales or outputs the VAT paid on its purchases, inputs and imports.
(ABAKADA Guro Party List vs. Ermita, 1 September 2005)
ØIf at the end of a taxable period, the output taxes are equal to the input
taxes, 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 or may be claimed for tax refund or tax
credit certfiicates as may be allowed under the law. (CIR v. Seagate
Technology (Philippines February 11, 2005)
ATTY. MARVIN P. CAN ERO, CPA 9 ATTY. MARVIN P. CAN ERO, CPA
“In the Ordinary Course of Trade or Business”
Øthe regular conduct or pursuit of a commercial or economic activity,
including transactions incidental thereto, by any person regardless of
whether or not the person engaged therein is a non-stock, non-profit
private organization (irrespective of the disposition of its net income
and whether or not it sells exclusively to members or their guests), or
government entity. (Section 105, NIRC)
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Persons Liable to VAT
ØAny person who, in the course of his trade or business, sells, barters,
exchanges or leases goods or properties, or renders services, and any
person who imports goods,
ØIn case of importation, the importer is liable, whether or not made in
the course of his trade or business; if the imported goods are
subsequent sold/transfers by tax-exempt persons to non-exempt
persons, the latter shall be considered the importers and shall be liable
for VAT due on the importation.
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CIR Vs. Magsaysay Lines, 2006
ØThe subject sale is not vatable because sale of the vessels was not in
the ordinary course of trade or business of NDC. The phrase"course
of business" or "doing business" connotes regularity of activity. In
the instant case, the sale was an isolated transaction. The sale which
was involuntary and made pursuant to the declared policy of
Government for privatization could no longer be repeated or carried
on with regularity. It should be emphasized that the normal VAT-
registered activity of NDC is leasing personal property”.
ATTY. MARVIN P. CAN ERO, CPA 12
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Power Sector Assets and Liabilities Management Corporation Vs. CIR, July 3, 2019
ØVAT is ultimately a tax on consumption, and it is levied onl y on the sale, barter
or exchange of goods or services by persons who engage in such activities, in
the course of trade or business.
ØThe sale of the power pla nts by PSALM is not subject to VAT since the sale
was made pursuant to PSALM's mandate to privatize NPC's assets, and was
not undertaken in the course of tra de or business; it is not in pursuit of a
commercial or economic activity but a governmental function mandated by
law to privatize NPC generation assets.
ØSince the lease of Naga Complex and col lection of income and receivables are
within PSALM's powers necessary to discharge its mandate unde r the law
and likewise undertaken in the exercise of PSALM's governmental function,
these activities are likewise notATTY. MARVIN
subject to
P. CAN VAT.
ERO, CPA 13
Sale of a fully depreciated company vehicle:
ØIt is subject to VAT. It does not follow that an isolated transaction
cannot be an incidental transaction for purposes of VAT liability.
Indeed, a reading of Section 105 of the Tax Code would show that a
transaction “in the course of trade or business” includes
“transactions incidental thereto” ( Mindanao II Geothermal vs. CIR,
2013)
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Association of Non-Profit Clubs, Inc. vs. BIR,. June26, 2019
ØIt is a basic principle that before a transaction is imposed VAT, a sale,
barter or exchange of goods or properties, or sale of a service is
required.
ØMembership fees, assessment dues, and the like are not subject to
VAT because in collecting such fees, the club is not selling its service
to the members. Conversely, the members are not buying services
from the club when dues are paid; hence, there is no economic or
commercial activity to speak of as these dues are devoted for the
operations/maintenanceof thefacilities of the organization. As such,
there could be no "sale, barter or exchange of goods or properties, or
sale of a service" to speak of, which would then be subject to VAT.
ATTY. MARVIN P. CAN ERO, CPA 14
Transactions Subject to VAT:
a. Sale of Goods or Properties Subject to 12% VAT-Sec. 106(A)
b. Sale or Exchange of Services Subject to 12% VAT-Sec. 108(A)
c. Transactions Deemed Sales Subject to 12% VAT- Sec. 107(B)
d. Sale of Goods or Properties Subject to 0% VAT–Sec.106(A)(2)
e. Sale or Exchange of Services Subject to 0% VAT-Sec. 108(B)
f. Importation of Goods - Section 107
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BAR: In June 2013, DDD Corp., a domestic corporation engaged in the
business of leasing real properties in the Philippines, entered into a lease
agreement of a residential house and lot with EEE, Inc., a non-resident
foreign corporation. Theresidential house and lot will be used by officials
of EEE, Inc. during their visit to the Philippines. The lease agreement was
signed by representatives from DDD Corp. and EEE, Inc. in Singapore.
DDD Corp. did not subject the said lease to VAT believing that it was not a
domestic service contract. Was DDD Corp. correct? Explain.
ATTY. MARVIN P. CAN ERO, CPA 17
Zero-Rated Transactions:
ØA zero-rated sale of goods or properties/sale of service (by a VAT-
registered person) is a taxable transaction for VAT purposes, but shall
not result in any output tax. However, the input tax on purchases of
goods, properties or services, related to such zero-rated sale, shall be
available as tax credit or refund.
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Transactions Deemed Sale
1) Transfer, use or consumption not in the course of business of goods
or properties originally intended for sale or for use in the course of
business.
2) Distribution or transfer to: (a) shareholders or investors share in the
profits of VAT-registered person; (b) creditors in payment of debt or
obligation.
3) Consignment of goods if actual sale is not made within 60 days
following the date such goods was consigned.
4) Retirement from or cessation of business, with respect to inventories
of taxable goods existing as of such retirement or cessation
ATTY. MARVIN P. CAN ERO, CPA 18
Zero-Rated Sale of Goods:
A. Export sales
1. Actual export of goods;
2. The sale of raw materials or packaging materials to a non-resident
buyer for delivery to a resident local export-oriented enterprise;
3. The sale of raw materials or packaging materials to an export-
oriented enterprise;
4. Export sales under OIC and other special laws;
5. The sale of goods, supplies, equipment and fuel to persons
engaged in international shipping or air transport operations.
ATTY. MARVIN P. CAN ERO, CPA 20
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Zero-Rated Sale of Goods:
B. Foreign Currency Denominated Sale
C. Sales to Persons or Entities Deemed Tax-exempt Under Special Law or
International Agreement.
ATTY. MARVIN P. CAN ERO, CPA 21
Zero-Rated Sale of Service:
6. Transport of passengers and cargo by domestic air or sea carriers
from the Philippines to a foreign country.
Ø Gross receipts of international air and sea carriers doing business
in the Philippines are still liable to a percentage tax of 3% based
on their gross receipts as provided for in Sec. 118 of the Tax Code
but shall not to be liable to VAT; and
7. Sale of power or fuel generated through renewable sources of energy.
Øshall not extend to the sale of services related to the maintenance or
operation of plants generating said power
ATTY. MARVIN P. CAN ERO, CPA 23
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Zero-Rated Sale of Service:
1. PMR goods for other persons doing business outside the Philippines,
which goods are subsequently exported;
2. Services other than PMR rendered to a person engaged in business
conducted outside the Philippines or to a non-resident person not
engaged in business who is outside the Philippines;
3. Services rendered to persons or entities who are tax-exempt under
special laws or international agreements to which the Philippines is a
signatory effectively subject the supply of such services to 0%;
4. Services rendered to persons engaged in international shipping or air
transport operations, including leases of property for use thereof;
5. Services performed by subcontractors and/or contractors in
processing, converting, or manufacturing goods for an export-
oriented enterprise;
ATTY. MARVIN P. CAN ERO, CPA 22
Requisites for Zero-Rated Sales of “other services”:
1. The seller is VAT- registered;
2. The services are rendered to person engaged in business conducted
outside the Phils. or to a non-resident person not engaged in business who
is outside the Phils. when the services are performed;
3. The services are paid in acceptable foreign currency accounted for in
accordance with BSP rules.
üThe the SEC Certificate of Non-Registration show that their affiliates are
foreign corporation; on the other ha nd, the articles of
association/certificates of incorporation stating that these affiliates are
registered to operate in the ir respective home countrie s, outside the
Philippines are prima facie evidence that their clients are not engaged in
trade or busine ss in the Philippines. (CIR vs. Deutsche Knowledge Services
Pte. Ltd., 2020)
ATTY. MARVIN P. CAN ERO, CPA 24
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VAT on Importation:
Ø12% VAT shall be imposed on goods brought into the Philippines,
whether or not for use in business or whether or not the importation
was made in the course of trade or business (Section 105, NIRC; RR 16-
2005).
ØThe VAT on importation shall be paid by the importer prior to the
release of such goods from customs custody.
ØIn case of tax-free importation of goods 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 the VAT on such importation [Section
107(B), NIRC]
ATTY. MARVIN P. CAN ERO, CPA 25
Sale or importation of agricultural and marine food products in their
original state
ØProducts 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.
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VAT Exempt Transactions:
Øsale of goods or properties and/or services and the use or lease of
properties that is not subject to VAT (output tax)
Øthe seller is not allowed any tax credit of VAT (input tax) on purchases
Ø 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
ATTY. MARVIN P. CAN ERO, CPA 26
Øsale of raw cane sugar is exempt from VAT because it is considered
to be in its original state;
Øsale of refined sugar is generally subject to VAT because it can no
longer be considered to be in its original state; however, such
transaction may nevertheless qualify as a VAT-exempt transaction if
the sale is made by a CDA-registered cooperative which sells: (1)
exclusively to its members; or (2) to both members and non-
members, its produce, whether in its original state or processed
form. (CIR vs. UNITED CADIZ SUGAR FARMERS ASSOCIATION MULTI-
PURPOSE COOPERATIVE, 2016)
ATTY. MARVIN P. CAN ERO, CPA 28
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ØA qualified cooperative also enjoy s exemption from the requirement of
advance payment of VAT upon withdrawal from the refinery/mill. The
agricultural cooperative's exemption from the requirement of adva nce
payment is a logical consequence of the exemption from VAT of its sale s of
refine d sugar (CIR vs. UNITED CADIZ SUGAR FARMERS ASSOCIATION MPC,
2016)
ØFor an agricult ural cooperative to be exempted from the payment of
advance VAT on refined suga r, it must be (a) a cooperative in good
standing duly accredited and reg istered with the CDA; and (b) the
producer of the sugar. (CIR vs. Negros Consolidated Farmers MPC, 2018)
ATTY. MARVIN P. CAN ERO, CPA 29
Melissa inherited from her father a 1,000-square-meter lot. At the time of
her father's death on March 14, 1995, the property was valued at
P720,000.00. On February 28, 2018, to defray the cost of the medical
expenses of her sick son, she sold the lot for P2,600,000.00, on cash basis.
The prevailing market value of the property at the time of the sale was
P3,000.00 per square meter. Is Melissa liable to pay VAT on the sale of
the property? If so, how much and why? If not, why not?
ATTY. MARVIN P. CAN ERO, CPA 31
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Sale of Real Properties Exempt from VAT:
1. real properties not primarily held for sale to customers or held for
lease in the ordinary course of trade or business;
2. real properties utilized for socialized and low-cost housing as defined
by RA No. 7279 and other related laws
3. residential lot valued at P1,500,000.00 and below, or house & lot and
other residential dwellings valued at P2,500,000.00 and below.
ATTY. MARVIN P. CAN ERO, CPA 30
Lease of Residential Units Not Subject to VAT:
1. Monthly Threshold: with a monthly rental per unit not exceeding
P15,000.00 regardless of the amount of aggregate rentals received by
the lessor during the year;
2. Annual Threshold: lease of residential units where the monthly rental
per unit exceeds P15,000.00 but the aggregate of such rentals of the
lessor during the year do not exceed P3, 000,000.00;
ATTY. MARVIN P. CAN ERO, CPA 32
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OTHER VAT-EXEMPT TRANSACTIONS

Waiver of Exemption:
1. Transport of passengers by international carriers;
2. Sale or lease of goods and services to senior citizens and persons with
disability
ØA VAT-registered person may elect that the exemptions under Section
3. Transfer of property pursuant to Section 40(C)(2) of the NIRC, as 109 (1) of the NIRC not apply to its sale of goods or properties or
amended;
services: Provided, that an election made under this subsection shall be
4. Association dues, membership fees, and other assessments and irrevocable for a period of three (3) years from the quarter the election
charges collected by homeowners associations and condominium was made. [Section 109(2), NIRC]
corporations;
5. Sale of gold to the BSP;
6. Sale of drugs and medicines prescribed for diabetes, high cholesterol,
and hypertension beginning January 1, 2019; and

ATTY. MARVIN P. CAN ERO, CPA 33 ATTY. MARVIN P. CAN ERO, CPA 34

CREDITABLE INPUT TAX:
Transitional Input Tax Presumptive Input Tax
1. Creditable against the output tax; 1.
2. TPs who became VAT-registered 2.
persons upon exceeding the
annual threshold, or who
voluntarily register even if their
turnover does not exceed the
annual threshold;
3.
3. 2% of the value of the beginning
inventory on hand or actual VAT
paid, whichever is higher
Creditable against the output tax;
Persons or firms engaged in the
processing of sardines, mackerel,
and milk, and in manufacturing
refined sugar, cooking oil
4% of the gross value in money of
purchases of primary agricultural
products which are used as inputs
to their production
Tax Refund of Unutilized Input VAT– Sec 112
1.A VAT-registered person whose sales of goods, properties or services
are zero-rated or effectively zero-rated may apply for the issuance of
a tax credit certificate/refund of input tax attributable to such sales.
2. A VAT-registered person whose registration has been cancelled due
to retirement from or cessation of business, or due to changes in or
cessation of status under Sec. 106 (C) of the Tax Code may, within two
(2) years from the date of cancellation, apply for the issuance of a tax
credit certificate or refund if he has no internal revenue tax liabilities
against which the tax credit certificate may be utilized.

ATTY. MARVIN P. CAN ERO, CPA 35 ATTY. MARVIN P. CAN ERO, CPA 36

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Tax refund of unutilized Input VAT arising from zero-rated or effectively Amendments under the Train Law: ( 90/30)
zero-rated transactions:
The Two-Year Prescriptive Period:
a. It is only the administrative claim that must be filed within the
2-year period.
b. The proper reckoning date for the 2-year period is the close of
the taxable quarter when the relevant sales were made.
c. The only other rule is the Atlas ruling (from filing of return and
payment), which applied only from 8 June 2007 to 12
September 2008.
1. The CIR 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;
2. Should the CIR find that the grant of refund is not proper, the CIR
must state in writing the legal and factual basis for the denial.
3. 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 CTA:
4. Failure on the part of any official, agent, or employee of the BIR to act
on the application within the 90-day period shall be punishable under
Section 269 of the Tax Code.

ATTY. MARVIN P. CAN ERO, CPA 37 ATTY. MARVIN P. CAN ERO, CPA 38

Consequences of Issuing Erroneous VAT Invoice or VAT Official Receipt:

• TPI is engaged in the business of power generation and subse quent sale
thereof and is registered with the Bureau of Internal Revenue (BIR) as a Value
Added Tax taxpayer. It filed an administrative claim for re fund of its
unutil ized input VAT attributable to its zero-rated sales of power generation
services on 30 March 2019 for taxable year 2018. The CIR has not rule d upon
TPI’s administrative claim; thus, it filed a Petition for Review to suspend the
running of the two-year prescriptive period the follow ing judicial claim for
refund:
:
• Issuance of VAT receipt/invoice by a Non-VAT person:
a) Percentage taxes applicable to his transactions
b) VAT due on transaction imposed in Sec. 106 or 108 without the benefit of
any input tax credit;
c) A 50% surcharge under Sec. 248 (B)
d) VAT shall be recognized as an input tax credit to the purchaser

Period Covered Date Filed • Failure to indicate “VAT-exempt sale” for a VAT-exempt transaction: the issuer
1st Quarter of 2018 31 March 2019 shall be liable for VAT.
2nd Quarter of 2018 30 May 2019
3 and 4th Quarters of 2018
rd 15 July 2019

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üThe Supreme Court has consistently rule d on the de nial of a claim for refund
or tax credit whenever the word “zero-rated” has been omitted on the
invoices or sale receipts of the taxpayer-claimant (Eastern Telecommunications
Philippines, Inc. vs. CIR,; Northern Mindanao Power Corporation vs. CIR)
THANK YOU!
üSection 113 of the Tax Code and the Consol idated Value-Added Tax Regulations
of 2005 does not create a presumption that non-imprintment of the word "zero
rated" deems the transaction subject to 12 %VAT. Thus, in this case, failure to
comply with invoicing re quirement s as mandated by law does not deem the
transaction subject to 12% VAT. (CIR V. Euro-philippines Airline Services, Inc.)

ATTY. MARVIN P. CAN ERO, CPA 41 ATTY. MARVIN P. CAN ERO, CPA 42

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