Value-Added Tax

Nature and Characteristics of Value-Added Tax

Value-Added Tax (VAT) is a form of sales tax.

It is consumption-based;
It is an indirect tax where tax shifting is always presumed;
It is a credit-invoice method value-added tax;
It is imposed on the value-added in each stage of the production and distribution process.

Tax on value added. The amount is based on the gross selling price or gross value in money of the goods or service, including the use or lease or properties.

Sales tax. VAT is a tax on the privilege of engaging in the business of selling goods or services, or in the importation of goods

Tax on consumption. VAT is a consumption tax imposed at every stage of the distribution process on (i) the sale, barter, exchange, or lease of goods or properties and (ii) rendition of services in the course of trade or business, or the (iii) importation of goods, whether such imported goods are for use in business or non-business purposes.

It is the end-user or consumer of goods or services which ultimately shoulders the tax as a liability therefrom is passed on to the end-users.

Indirect tax; impact and incidence of tax. The seller is the one statutorily liable for the payment of the tax but the amount of the tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services.

Tax credit method. Under the VAT method of taxation, which is invoice-based, an entity can subtract from the VAT charged on its sales or outputs the VAT it paid on its purchases, inputs and imports.

A taxpayer’s tax payable is the excess of output tax over input tax:

Output Tax – Input Tax = VAT Payable

For example, G sold goods to M with a gross selling price of P5,000,000 plus VAT of P600,000. M sold the goods to K for P6,000,000 plus VAT of P720,000. How much is the VAT Payable of M?

= Output Tax - Input Tax

= P720,000 - P600,000

= P120,000

VAT Payable. If at the end of any taxable quarter the output exceeds the input tax, the excess shall be paid by the VAT-registered person.

Excess Input Tax Carry-Over. If the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters.

VAT Refund. Input tax attributable 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.

Destination principle and cross-border doctrine. Under the Destination principle, Goods and services are taxed only in the country where they are consumed. Thus, exports are zero-rated, while imports are taxed.

Cross Border Doctrine mandates that no VAT shall be imposed to form part of the cost of the goods destined for consumption outside the territorial border of the taxing authority.

The Supreme Court held that the 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 12% VAT.

Sec. 108(b)(2), which subjects certain services rendered in the Philippines to a zero-rated VAT, provides an exception to the destination principle. The requisites to fall under the provision are as follows:

The service is performed in the Philippines;
the service falls under any of the categories provided in Section 102(b)62 of the Tax Code; and
it is paid for in acceptable foreign currency that is accounted for in accordance with the regulations of the BSP.

Persons Subject to Value-Added Tax

Any person who sells, barters, exchanges, or leases goods or properties, or who renders services, in the course of trade or business
Any person who imports goods, whether or not in the course of business
Any person who voluntarily registers its business under the VAT system, regardless of level of sales.
A person who is not a VAT-registered but issues a VAT invoice or official receipt
A VAT-registered person who issues a VAT invoice or VAT official receipt for a VAT-exempt transaction, but fails to display prominently on the invoice or receipt the term VAT-exempt Sale
Any non-resident persons who perform services in the Philippines as they are deemed to be making sales in the course of trade or business, even if the performance or their services is not regular;

Transactions Subject to 12%

Business activity is considered a VAT transaction when it is subject to the value-added tax system.

A value-added tax sale transaction can be broadly classified as:

Regular VAT transactions are subject to 12%;
Zero-rated transactions or transactions subject to 0%; or
Exempt transactions.

Transaction	Rates	Tax Base
On sale of goods and properties	12%	Gross selling price or gross value in money of the goods or properties sold, bartered or exchanged
On sale of services and use or lease of properties	12%	Gross receipts derived from the sale or exchange of services, including the use or lease of properties
On importation of goods	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 as tax to be paid by the importer prior to the release of such goods from customs custody; Provided, that where the customs duties are determined on the basis of quantity or volume of the goods, the VAT shall be based on the landed cost plus excise taxes, if any.
On export sales and other zero-rated sales	0%	Zero Rated Sales of Goods, Properties, and Services

Requisites for 12% VAT

The transaction is not among those transactions expressly exempted from VAT;
The transaction is not among those transactions subject to zero (0%) value-added tax rate;
The sale of goods or properties is within the Philippines;
The ownership of goods or properties is transferred from the seller to the buyer; and
The sale of goods or properties is made in consideration of money or its equivalent, except those activities considered deemed sale.

Gross Selling Price

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.

Allowable Deductions from Gross Selling Price

Discounts determined and granted at the time of sale, which are expressly indicated in the invoice, the amount thereof forming part of the gross sales duly recorded in the books of accounts

Sales returns and allowances for which a proper credit or refund was made during the month or quarter to the buyer for sales previously recorded as taxable sales.

= gross sales – sales returns – sales allowances - sales discount

For example, Mr. Parine, VAT-registered, has the following information.

Gross local sales, P530,000

Freight paid by customer, P10,000

Sales return and allowances, P18,000

Sales discounts granted to customers, P12,000

What is the gross selling price as the tax base for the 12% output tax?

= P530,000 + P10,000 - P18,000 - P12,000

= P510,000

The Output Tax shall be P61,200 (P510,000 x 12%).

In the case of sale, barter, or exchange of real property subject to VAT, gross selling price shall mean the consideration stated in the sales document or the fair market value whichever is higher.

Fair market value shall mean (1) fair market value as determined by the Commissioner (zonal value), or (2) fair market value as shown in the schedule of values in the Provincial and City Assessors (real property tax declaration).

The billing of the sale transactions may be exclusive or inclusive of VAT. The procedures to determine the value-added tax are:

Multiply the total price or landed cost by 12%, if the sale transaction is exclusive of VAT
Divide the amount by 112% and then deduct the result from the total amount inclusive of VAT, if the sale transaction is inclusive of VAT (or multiply the invoice price by 12 and divide the result by 112)

Deemed Inclusive

If the VAT is not billed separately in the document of sale, the selling price or the consideration stated therein shall be deemed to be inclusive of VAT.

If the gross selling price is based on the zonal value or market value of the property, the zonal or market value shall be deemed exclusive of VAT.

Goods or Properties

The term "goods or properties" shall mean all tangible and intangible objects, which are capable of pecuniary estimation and shall include, among others:

Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business;
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;
The right or privilege to use in the Philippines of any industrial, commercial or scientific equipment;
The right or the privilege to use motion picture films, films, tapes and discs; and
Radio, television, satellite transmission and cable television time.

Sale of Real Properties

On Installment Plan	On a Deferred Payment Basis	Cash
Means sale of real property by a real estate dealer, the initial payments of which in the year of sale do not exceed 25% of the gross selling price.	Means sale of real property by a real estate dealer, the initial payments of which in the year of sale exceed 25% of the gross selling price.	Total selling price is paid immediately by the buyer.
Output VAT accrues every installment payment	This is considered as cash sale.	Cash sale of real properties shall be subject to 12% output tax based on the gross selling price.

Initial Payments refer to the amount received by the seller before or upon execution of the instrument of sale and all payments in cash or property (other than evidence of indebtedness of the purchaser) including interest and penalties during the taxable year.

VAT on Installment Plan

In an installment sale, the seller shall be subject to output VAT on the installment payments received, including interest and penalties for late payment.

VAT on collection received = Output VAT x Actual collection (exclusive of VAT) / Selling Price

For installment Sale, in 2021, RDC, a real estate dealer, sold a real property for P6,000,000. The initial payment was P1,200,000.

How much is the output VAT in 2021?

a. Determine if the sale qualifies as an installment sale

Limit is

= Selling price x 25% limit

= P6,000,000 x 25%

= P1,500,000

The sale qualifies as installment sale since the initial payment of P1,200,000 is not more than 25% of the selling price, P1,500,000.

b. Determine Total output VAT

= Gross selling price x 12%

= P6,000,000 x 12%

= P720,000

c. Compute output VAT on 2021 collection

= 2021 collection / gross selling price x Total output VAT

= P1,200,000 / P6,000,000 x P720,000

= P144,000

If RDC collected P1,800,000 in 2022, the output VAT is

= 2022 collection / gross selling price x Total output VAT

= P1,800,000 / P6,000,000 x P720,000

= P216,000

VAT on Deferred Sale

Assuming in 2021, RDC sold a real property for P3,000,000, and the buyer made an initial payment of P1,200,000. How much is the output VAT?

a. Determine if the sale qualifies as an installment sale

Limit is

= Selling price x 25% limit

= P3,000,000 x 25%

= P750,000

The sale does not qualify as an installment sale since the initial payment of P1,200,000 is more than 25% of the selling price, P750,000.

b. Compute the VAT based on the gross selling price

= P3,000,000 x 12%

= P360,000

Gross Receipts

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.

= Cash received + deposits/advance payments + materials

For example, “R” constructed plant facilities for P6,000,000, VAT exclusive. In June, he billed CC Company for P3,500,000. “R” received the payment in July amounting to P3,500,000. Determine the amount of tax liability in June and July.

a. June

No VAT payable since there is no collection in June.

b. July

= Gross receipts x 12%

= P3,500,000 x 12%

= P420,000

Gross Receipts

= Cash received + deposits/advance payments + materials

a. June

No VAT is payable since there is no collection in June.

b. July

= Gross receipts x 12%

= P3,500,000 x 12%

= P420,000

Constructive Receipts

Means that the money consideration or its equivalent is already under the control of the person rendering the services without restrictions by the payor.

Bank deposits without restrictions;
Issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof by the seller as payment for services rendered;
Transfer of the amounts retained by the contractee to the account of the contractor.

Sale or Exchange of Services

The term "sale or exchange of services" means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, whether in kind or in cash, including those performed or rendered by the following:

Construction and service contractors;
Stock, real estate, commercial, customs and immigration brokers;
Lessors of property, whether personal or real;
Persons engaged in 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, rest houses, pension houses, inns, resorts, theatres, and movie houses;
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 and other domestic common carriers by land relative to their transport of goods or cargoes;
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;
Sale of electricity by generating, transmission by any entity including the National Grid Corporation of the Philippines (NGCP), and distribution companies including electric cooperatives shall be subject to twelve percent (12%) VAT on their gross receipts.;
Franchise grantees of electric utilities, telephone and telegraph, radio and/or television broadcasting and all other franchise grantees, except franchise grantees of radio and/or television broadcasting whose annual gross receipts of the preceding year do not exceed Ten Million Pesos (P10,000,000.00), and franchise grantees of gas and water utilities;
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 of use of the physical or mental faculties.

The phrase "sale or exchange of services" shall likewise include:

The lease or 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;
The lease or the use of, or the right to use of any industrial, commercial or scientific equipment;
The supply of scientific, technical, industrial or commercial knowledge or information;
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 or any such knowledge or information;
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 non-resident person;
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;
The lease of motion picture films, films, tapes and discs; and
The lease or the use of or the right to use radio, television, satellite transmission and cable television time.

Lessor of Property

All forms of property for lease, whether real or personal, are liable to VAT, except for those services exempted from VAT, regardless of the place where the contract of lease or licensing agreement was executed if the property leased or used is located in the Philippines.

Non-Resident Foreign Corporation Lessor

An NRFC is generally taxable at 25% final withholding tax (FWT) and at 12% final withholding value-added tax (FWVAT).

The lessee shall be responsible for the payment of the VAT on such rentals/royalties on behalf of the NRFC.

Treatment of Other Lease Payments

Considered as	Subject to Value-Added Tax?
Loan to the lessor	No
Security Deposit	No
Security Deposit applied to rental	Yes
Prepaid rental	Yes, taxable in the month when received

Warehousing Services

Rendering personal services of a warehouse person such as:
Engaging in the business of receiving and storing goods of others for compensation or profit;
Receiving goods and merchandise to be stored in his/her warehouse for hire; or
Keeping and storing goods for others, as a business and for use.

Miller

A person engaged in milling for others, and is subject to VAT on the sale of services, except milling of palay into rice, corn into corn grits, and sugarcane into raw sugar.

Domestic Common Carrier

By Land for the transport of
Passengers (regardless of gross receipts); Sec. 117	OPT
Goods or Cargoes
• Gross receipts > P3,000,000	VAT
• Gross receipts < P3,000,000 and not VAT Registered; Sec. 116	OPT
• VAT Registered (regardless of gross receipts)	VAT
By Air and Sea for the transport of Passengers or Cargoes	VAT

RMC 70-2015

Transport network companies, such as but not limited to the likes of UBER, GRAB TAXI, their Partners/suppliers and similar arrangements, who are not holders of a valid and current Certificate of Public Convenience are known as land transportation service contractors subject to the 12% VAT.

Otherwise, it is classified as a common carrier subject to the 3% domestic carrier tax under Sec. 117.

International Air Carrier

	Transaction	Rate	Tax Base
Sec. 118	Percentage Tax on International Carriers	3%	Gross Receipts derived from transport of cargo from the Philippines to another country
Sec. 109 (S)	VAT Exempt Transaction	Exempt	Transport of passengers by international carriers

Sale of Electricity

Sale of electricity by generating, transmission by any entity including the National Grid Corporation of the Philippines (NGCP), and distribution companies including electric cooperatives shall be subject to twelve percent (12%) VAT on their gross receipts.

Dealers in Securities and Lending Investors

Gross Selling Price	xxx
Less: Acquisition cost of securities sold	(xxx)
Balance	xxx
Add: Other incidental income	xxx
Gross Receipts	Pxxx

For dealers of securities and lending investors, the tax base (gross receipts) is computed as follows:

Services of Franchise Grantees

Franchise grantees of telephone and telegraph	12%
Toll Road Operations (RMC 39-2011)	12%
Overseas calls [subject to Overseas Communication Tax]	10%
Franchise grantees of radio and/or television broadcasting companies whose annual gross receipts do not exceed P10,000,000	3%
Franchise grantees of radio and/or television broadcasting companies whose annual gross receipts exceeds P10,000,000	12%
Franchises grantees of gas and water utilities	2%
All other franchises (except as provided by law)	12%

Examples of Legislative Franchise and their Respective Tax Provisions

National Grid Corporation

RA 9511 imposed a 3% franchise tax on all gross receipts derived by the National Grid Corporation from its transmission operation, in effect, amending the VAT by reverting the taxation of transmission companies to the franchise tax.

“Section 9. Tax Provisions. - In consideration of the franchise and rights hereby granted, the Grantee, its successors or assigns, shall pay a franchise tax equivalent to three percent (3%) of all gross receipts derived by the Grantee from its operation under this franchise.”

Dito Telecommunity Corporation

Section 18. Tax Provisions. - The grantee, its successors or assignees, shall be liable to pay the same taxes on their real estate, buildings and personal property, exclusive of this franchise, as other persons or corporations which are now or hereafter may be required by law to pay, except radio telecommunications and electronic communications equipment, machinery and spare parts needed in connection with the business of the grantee which shall be exempt from customs duties, tariffs and other taxes, as well as those declared exempt in this section. In addition thereto, the grantee, its successors or assignees, shall pay a value-added tax on all gross receipts of the business transacted under this franchise by the grantee, its successors or assignees, in the Philippines, in lieu of any and all taxes of any kind, nature or description levied, established or collected by an authority whatsoever including, but not limited to, city, municipal, provincial or national, from which the grantee is hereby expressly exempted effective from the date of effectivity of this Act: Provided, That the grantee, its successors or assignees, shall continue to be liable for income taxes payable under Title II of the National Internal Revenue Code pursuant to Section 2 of Executive Order No. 72 unless the latter enactment is amended or repealed, in which case the amendment or repeal shall be applicable thereto.

The grantee shall file the return with and pay the tax due thereon to the Commissioner of Internal Revenue or his duly authorized representative in accordance with the National Internal Revenue Code and the return shall be subject to audit by the Bureau of Internal Revenue.

Smart Communications, Inc.

"Sec. 9. Tax Provisions. - The grantee, its successors or assignees, shall be liable to pay the same taxes on their real estate, buildings and personal property, exclusive of this franchise, as other persons or corporations which are now or hereafter may be required by law to pay, except radio telecommunications and electronic communications equipment, machinery and spare parts needed in connection with the business of the grantee which shall be exempt from customs duties, tariffs and other taxes, as well as those declared exempt in this section. In addition thereto, the grantee, its successors or assignees, shall pay a value-added tax on all gross receipts of the business transacted under this franchise by the grantee, its successors or assignees, in the Philippines, in lieu of any and all taxes of any kind, nature or description levied, established or collected by an authority whatsoever including, but not limited to, city, municipal, provincial or national, from which the grantee is hereby expressly exempted effective from the date of the effectivity of this Act: Provided, That the grantee, its successors or assignees, shall continue to be liable for income taxes payable under Title II of the National Internal Revenue Code pursuant to Section 2 of Executive Order No. 72 unless the latter enactment is amended or repealed, in which case the amendment or repeal shall be applicable thereto.

"The grantee shall file the return with and pay the tax due there onto the Commissioner of Internal Revenue or his duly authorized representative in accordance with the National Internal Revenue Code and the return shall be subject to audit by the Bureau of Internal Revenue."

Manila Water Company

Sec. 23. Tax Provision. – The grantee, its successors or assignees, shall be liable to pay the same taxes on their real estate buildings and personal property as other persons or corporations which are now or hereafter may be required by law to pay. The grantee, its successors or assignees, shall continue to be liable for income taxes payable under Title II of the National Internal Revenue Code. In no case shall the income taxes due from the grantee, its successors or assignees, be passed on to its customers.

Non-Life Insurance Companies

Includes

Marine insurance
Fire insurance
Casualty insurance
Surety, Fidelity, indemnity bond
Mutual benefit associations
Non-Life Insurance Companies are subject to VAT of 12% of their gross receipts. They are not liable to the payment of the premium tax under Sec. 123 of the Tax Code.
Non-Life reinsurance premiums are subject to VAT
Insurance and reinsurance commissions, whether life or non-life, are subject to VAT.

Health Maintenance Organizations

The Court likewise rules that for purposes of determining the VAT liability of an HMO, the amounts earmarked and actually spent for medical utilization of its members should not be included in the computation of its gross receipts.

Transactions Deemed Sales

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;
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;
Consignment of goods if actual sale is not made within sixty (60) days following the date such goods were consigned; and
Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirement or cessation.

Appropriated for Personal Use

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

For example, “A”, owner of Masaya Merchandising Center reported a total sales, VAT-excusive, of P3,800,000. He used goods intended for sale amounting to P180,000 for various parties he celebrated. How much is subject to VAT?

= P3,800,000 + 180,000

= P3,980,000

Distribution to Shareholder or Creditor

For example, AAA Appliances Center is a distributor of various household appliances. During the month, it distributed 20 units of 55-inch television set to its shareholders. The said televisions are sold to the market for P40,000 each. How much is the output VAT?

= P40,000 x 20 x 12%

= P96,000

T-Car Company is a retailer of brand new automobiles. It has an outstanding bank loan liability with BPI amounting to P900,000. During the year, T-Car settled its account with BPI by giving a brand-new automobile with acquisition cost of P750,000. How much is the output VAT?

= P900,000 x 12%

= P108,000

Consignment of Goods

Consignment of goods if actual sale is not made within sixty (60) days following the date such goods were consigned. Consigned goods returned by the consignee within the 60-day period are not deemed sold.

For example, M Trading Company had the following data. For the month, the consignment to A has a sale of P70,000.

Consignment to A (1-30 days old), P180,000

Consignment to B (31-36 days old), P220,000

Consignment to C (61-90 days old), P260,000

Consignment to D ( over 90 days old), P150,000

How much is the output VAT?

= (Transaction Deemed Sale + Actual Sale) x 12%

= [(P260,000 + 150,000) + P70,000] x 12%

= P480,000 x 12%

= P57,600

Change or Cessation of Status [Subject to Output Tax]

Under Sec. 4.106-8(a) of RR No. 2005, VAT shall apply to goods or properties originally intended for sale or lease in business, and capital goods that exist as of the occurrence of the following:

change of business activity from VAT to VAT-exempt status;
approval of a request for cancellation of registration due to reversion to exempt status;
approval of a request for cancellation of registration due to a desire to revert to exempt status after the lapse of three (3) consecutive years from the time of registration by a person who voluntarily registered despite being exempt under Sec. 109(2) of the Tax Code; and
approval of a request for cancellation of registration of one who commenced business with the expectation of gross sales/receipts exceeding P3,000,000 but who failed to exceed this amount during the first 12 months of operation.

Change or Cessation of Status[Not Subject to Output Tax]

(A) Transfer of property pursuant to Section 40(C)(2) of the NIRC, as amended, shall be exempt from VAT

Tax-free reorganizations
Transfer pursuant to a plan of merger or consolidation;
Stock or Asset Acquisition in exchange of stock
Recapitalization;
Reincorporation;

(B) Transfer to a controlled corporation

Output Tax 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 deemed sale;
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 (if lower by more than 30%) than the fair market value, the actual market value shall be the tax base.

Effectively Zero-Rated

Zero-Rated Sale of Goods or Properties

A zero-rated sale of goods or properties (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.

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

Export Sales
Sales to persons or entities whose exemption from direct and indirect taxes under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate.
Sale of raw materials, inventories, supplies, equipment, packaging materials and goods, to a registered export enterprise, to be used directly and exclusively in its registered project or activity pursuant to Setions 294(E) and 295(D) of republic Act No. 11534 or the "Corporate Recovery and Tax Incentives for Enterprise Act" ("CREATE Act"), and Section 5, Rule 2 of its IRR for a maximum period of seventeen (17) years from the date of registration, unless otherwise extended under the SIPP; Provided, That the term "registered export enterprise" shall refer to an export enterprise as defined under Section 4(M), Rule 1 of the CREATE Act IRR, that is also a registered business enterprise as defined in Section 4(W) of the same IRR: Provided further, That the above-described sales to existing registered enterprises located inside ecozones and freeport zones shall also be qualified for VAT zero-rating under this sub-item until the expiration of the transitory period.

Export Sales shall mean

The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported, paid 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);
The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations: Provided, That the goods, supplies, equipment, and fuel shall be used exclusively for international shipping or air transport operations.

Effectively Zero-Rated SalesConstructive Export

Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate.

Sales to Asian Development Bank (ADB);
Sales to International Rice Research Institute (IRRI).
RA 10068 (Organic Agriculture Act of 2010) and
RA 10659 (Sugarcane Industry Development Act of 2015).

For example, M Company, VAT-registered, had the following sales, exclusive of VAT.

Sales to various local traders, P1,200,000

Sales to HiHi Company, duly registered with SBMA , P300,000

Export sales – Japan, P600,000

How much is the output tax?

Only the Sales to various local traders are subject to 12% VAT.

= P1,200,000 x 12%

= P144,000

Sales to HiHi Company, a duly registered with SBMA and Export sales – Japan are subject to zero percent rate.

Zero-Rated Sale of Services

A zero-rated sale of service (by a VAT-registered person) is a taxable transaction for VAT purposes, but shall not result in any output tax. 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.

The following services performed in the Philippines by a VAT-registered person shall be subject to zero percent (0%) rate:

Services other than processing, manufacturing or repacking 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 when the services are performed, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP;
Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate;
Sale of services, including provision of basic infastructre, utilities, and maintenace, repair an d overhaul of equipment, to a registered export enterprise, to be used directly and exclusively in its registered project or activity pursuant to Sections 294(E) and 295(D) of CREATE ACt, and Sections, Rule 2 of its IRR for a maximum period of seventeen (17) years from the date of registration, unless otherwise extended under the SIPP; Provided, That the term "registered export enterprise" shall refer to an export enterprise as defined under Section 4(M), Rule 1 of the CREATE IRR, that is also a registered business enterprise as defined in Section 4(W) of the same IRR: Provided further, That the above-described sales to existing registered export enterprises located inside ecozones and freeport zones shall also be qualified for VAT zero-rating under this sub-item until the expiration of the transitory period.
Services rendered to persons engaged in international shipping or air transport operations, including leases of property for use thereof: Provided, that these services shall be exclusively for international shipping or air transport operations.
Transport of passengers and cargo by domestic air or sea vessels from the Philippines to a foreign country.
Sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal and steam, ocean energy, and other emerging sources using technologies such as fuel cells and hydrogen fuels.
Services rendered to offshore gaming licensees subject to gaming tax under Section 125-A, NIRC by service providers, including accredited service providers as defined in Section 27 (G), NIRC.

Zero-Rated vs VAT-Exempt

Zero-Rated	VAT-Exempt
Subject to 0% VAT. Does not result in an output tax	Not subject to VAT. Does not result in an output tax
Input tax on purchases of a VAT-registered person with zero-rated sales may be allowed as refund	Input tax on purchases of a VAT-registered person is not allowed to be refunded or credited. Input tax forms part of the cost/expense of the buyer.
Persons engaged in zero-rated transactions, being subject to VAT, are required to register	Registration is optional for VAT-exempt persons

Value-Added Tax Exempt

VAT EXEMPT sale is a sale of goods, properties or service and the use or lease of properties which is not subject to output tax and whereby the buyer is not allowed any tax credit or input tax related to such exempt sale.

SEC. 109. Exempt Transactions. –

(A) Sale or importation of

agricultural (raw cane sugar, ordinary salt, copra, etc.) and marine food products (fish, lobsters, shrimps) in their original state,
Livestock (cows, pigs, goats, rabbits), and
poultry of a kind (fowls, ducks, geese) generally used as, or yielding or producing foods for human consumption; and breeding stock and genetic materials therefor.

Those products 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, ordinary salt and copra 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);

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, tools of trade, occupation or employment,
wearing apparel,
domestic animals, and
personal and household effects

belonging to persons coming to settle in the Philippines or Filipinos or their families and descendants who are now residents or citizens of other countries, such parties hereinafter referred to as overseas Filipinos, in quantities and of the class suitable to the profession, rank or position of the persons importing said items, for their own use and not for barter or sale, accompanying such persons, or arriving within a reasonable time:

Provided, That the Bureau of Customs may, upon the production of satisfactory evidence that such persons are actually coming to settle in the Philippines and the goods are brought from their former place of abode, exempt such goods from payment of duties and taxes:

Provided, further, That the vehicles, vessels, aircrafts, machineries and other similar goods for use in manufacture, shall not fall within this classification and shall therefore be subject to duties, taxes and other charges;

(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 except those rendered by professionals;

Exempt from VAT

Subject to VAT

The sales by the drugstore to the in-patients which are included in the hospital bills are part of medical bills exempt from VAT.

Laboratory services are exempted. Hospital bills constitute medical services.

Sales of the drugs store to the out-patients are taxable because they are not part of medical services of the hospital.

For example, Roofie incurred the following:

Hospital bills exclusive of doctor’s fees and medicines, P1,000,000

Laboratory expenses exclusive of medicines, P500,000

Medicines purchased from the hospitals pharmacy, P100,000

Medicines purchased from a pharmacy outside of the hospital, P100,000

Doctor’s fees, P100,000

Compute the VAT.

a. Determine items subject to VAT

~~Hospital bills exclusive of doctor’s fees and medicines, P1,000,000~~

~~Laboratory expenses exclusive of medicines, P500,000~~

Medicines purchased from the hospital's pharmacy (not included in the bill), P100,000

Medicines purchased from a pharmacy outside of the hospital, P100,000

Doctor’s fees, P100,000

b. Compute the VAT

= (100,000 + 100,000 + 100,000) x 12%

= 36,000

Assume that Roofie incurred the following:

Hospital bills, P1,200,000

Laboratory expenses exclusive of medicines, P500,000

Medicines purchased from the hospital's pharmacy (included in the hospital bills), P100,000

Medicines purchased from a pharmacy outside of the hospital, P100,000

Doctor’s fees (included in the hospital bills), P100,000

Compute the VAT.

a. Determine items subject to VAT

~~Hospital bills, P1,200,000~~

~~Laboratory expenses exclusive of medicines, P500,000~~

~~Medicines purchased from the hospitals pharmacy (included in the hospital bills), P100,000~~

Medicines purchased from a pharmacy outside of the hospital, P100,000

~~Doctor’s fees (included in the hospital bills), P100,000~~

b. Compute the VAT

= 100,000 x 12%

= 12,000

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

(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 No. 529;

Examples of Special Laws exempting certain transactions from VAT:

PD No. 1869 (PAGCOR Charter)
RA 9295 (Domestic Shipping Development Act of 2004)
RA 9367 (Biofuels Act of 2006)
RA 9520 (Philippine Cooperative Code of 2008)
RA 10072 (Philippine Red Cross)
RA 10073 (New Girl Scouts of the Philippines Charter)
RA 10744 (Credit Surety Fund Cooperative Act of 2015)
RA 10747 (Rare Diseases of the Philippines)

(L) Agricultural cooperatives duly registered with the Cooperative Development Authority

Sales to their members;
Sale of their produce, whether in its original state or processed form, to non-members;
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;

(M) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative Development Authority;

(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;

Note that Sale of electricity by generation, transmission by any entity including the National Grid Corporation of the Philippines (NGCP), and distribution companies including electric cooperatives shall be subject to twelve percent (12%) VAT on their gross receipts

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

For example, AAA Corporation has the following data:

Export Sale, P1,000,000

Purchase, P500,000

How much is the VAT?

If AAA Corporation is VAT-registered, it has VAT refundable of P60,000 since the export sale is zero-rated.

= Output VAT - Input VAT

= Export Sales x 0% - Purchases x 12%

= P1,000,000 x 0% - P500,000 x 12%

= P0 - P60,000

= P60,000 (VAT refundable)

If AAA Corporation is Non-VAT registered, the sale is exempt. The corresponding input VAT is not refundable but forms part of the cost.

(P) The following sales of real properties are exempt from VAT (effective Jan. 1, 2018), namely:

Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business;
Sale of 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,
Sale of residential lot valued at One million pesos (P1,500,000) and below,
Sale of house and lot, and other residential dwellings valued at Two million five hundred thousand pesos (P2,500,000) and below:

Beginning January 1, 2021, the VAT exemption shall only apply to

sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business,
sale of real property utilized for socialized housing as defined by Republic Act No. 7279,
sale of house and lot, and other residential dwellings with the selling price of not more than Two million pesos (P2,000,000):

Every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index, as published by the Philippine Statistics Authority (PSA);

(Q) Lease of a residential unit with a monthly rental not exceeding Fifteen thousand pesos (₱15,000);

Gross Rentals not Exceeding P15,000 per month per unit

Gross Rentals Exceeding P15,000 per month per unit

The gross receipts from rentals not exceeding P15,000.00 per month per unit shall be exempt from VAT regardless of the aggregate annual gross receipts. It is also exempt from the 3% percentage tax.

The gross receipts from rentals exceeding P15,000.00 per month per unit shall be subject to VAT if the aggregate annual gross receipts from said units only exceeds P3,000,000.00. 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, lodging houses, inns and pension houses.

For example, A lessor rents his 15 residential units for P14,500 per month. During the taxable year, his accumulated gross receipts amounted to P2,610,000.

He is not subject to VAT since the monthly rent per unit does not exceed P15,000. He is also not subject to 3% Percentage Tax.

Using the same example, assuming he has 20 residential units with the same monthly rent per unit and his accumulated gross receipts during the taxable year amounted to P3,480,000.

He is still not subject to VAT even if the accumulated earnings exceeded P3,000,000 since the monthly rent per unit does not exceed P15,000. He is also not subject to 3% Percentage Tax.

A lessor rents his 15 residential units for P15,500 per month. During the taxable year, his accumulated gross receipts amounted to P2,790,000.

He is not subject to VAT since his accumulated gross receipts did not exceed P3,000,000. He is, however, subject to 3% Percentage Tax since the monthly rent per unit is more than P15,000.00.

Using the above example, assuming he has 20 residential units with the same monthly rent per unit and his accumulated gross receipts during the taxable year amounted to P3,720,000.

He is already subject to VAT since the accumulated earnings exceeded P3,000,000 and the monthly rent per unit is more than P15,000.00.

(R) Sale, importation, printing or publication of books, and any newspaper, magazine, journal, review bulletin, or any such educational reading material covered by the UNESCO Agreement on the Importation of Educational, Scientific and Cultural Materials, including the digital or electronic format thereof: Provided, That the materials enumerated herein are not devoted principally to the publication of paid advertisements;

(S) Transport of passengers by international carriers;

	Transaction	Rate	Tax Base
Sec. 118	Percentage Tax on International Carriers	3%	Gross Receipts derived from transport of cargo from the Philippines to another country
Sec. 109 (S)	VAT Exempt Transaction	Exempt	Transport of passengers by international carriers

Transport of passengers and cargo by domestic air or sea vessels from the Philippines to a foreign country is subject to zero percent rate.

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

(U) Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations: Provided, That the fuel, goods, and supplies shall be used for international shipping or air transport operations;

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

They are subject to Gross Receipts Tax.

Sec. 121, Gross Receipts Tax; Taxable Base	Tax Rate
Interest, commissions and discounts from lending activities as well as income from financial leasing, on the basis of remaining maturities of instruments from which receipts are derived:
• If maturity period is five years or less	5%
• If maturity period is more than five years	1%
Dividends and equity shares and net income of subsidiaries	0%
Royalties, rentals of property, real or personal, profits from exchange and all other items treated as gross income under Sec. 32 of the Tax Code, as amended	7%
Net trading gains within the taxable year of foreign currency, debt securities, derivatives and other similar financial instruments	7%

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

Sale of Goods or Services to PWD

VAT Exempt

5% Discount on Staples

Republic Act. No. 10754 or An Act Expanding the Benefits and Privileges of PWD entitles PWDs to a 20% discount and VAT exemption on medicine, hotel and restaurant services, theater and concert tickets, among others.

Every PWD shall enjoy a special discount of five percent (5%) of the regular retail price, without exemption from the value-added tax (VAT) of basic necessities and prime commodities.

Revenue Regulations No. 9-2019

Sale of Goods or Services to Senior Citizens

Twenty Percent (20%) Discount and VAT Exemption - The senior citizens shall be entitled to the grant of twenty percent (20%) discount and to an exemption from the value-added tax (VAT), IF APPLICABLE, on the sale of the goods and services covered by Section 1 to 6 of this Article, from all establishments for the exclusive use and enjoyment or availment of senior citizens

For example, a senior citizen ordered P1,060 (VAT inclusive) worth of goods, how much is the sales discount for the senior citizen?

= Amount ordered by senior citizen / 1.12 x 20%

= P1,060 / 1.12 x 20%

= P189.29

(X) Transfer of property pursuant to Section 40(C)(2) of the NIRC, as amended;

Section 40(C)(2) pertains to Tax-free reorganizations and Transfer to a controlled corporation.

Tax-free reorganizations includes the following:

Transfer pursuant to a plan of merger or consolidation;
Stock or Asset Acquisition in exchange of stock
Recapitalization;
Reincorporation;

(Y) Associations dues, membership fees, and other assessments and charges collected by homeowners’ associations and condominium corporations;

(Z) Sale of gold to the Banko Sentral ng Pilipinas (BSP);

(AA) Sale of or importation of prescription drugs and medicines for:

Diabetes, high cholesterol, and hypertension beginning January 1, 2020; and
Cancer, mental illness, tuberculosis, and kidney diseases beginning January 1, 2021.

The exemption shall apply to the sale or importation by the manufacturers, distributors, wholesalers, and retailer of drugs and medicines included in the “list of approved drugs and medicines” issued by the DOH for this purpose.

(BB) Sale or importation of the following beginning January 1, 2021 to December 31, 2023:

Capital equipment, its spare parts and raw materials, necessary for the production of personal protective equipment components such as coveralls, gown, surgical cap, surgical mask, N-95 mask, scrub suits, goggles and face shield, double or surgical gloves, dedicated shoes, and shoe covers, for COVID-19 prevention; and
All drugs, vaccines and medical devices specifically prescribed and directly used for the treatment of COVID-19; and
Drugs for the treatment of COVID-19 approved by the Food and Drug Administration (FDA) for use in clinical trials, including raw materials directly necessary for the production of such drugs: Provided, That the Department of Trade and Industry (DTI) shall certify that such equipment, spare parts or raw materials for importation are not locally available or insufficient in quantity, or not in accordance with the quality or specification required: Provided, further, That for item (ii), within sixty (60) days from the effectivity of this Act, and every three (3) months thereafter, the Department of Health (DOH) shall issue a list of prescription drugs and medical devices covered by this provision: Provided, finally, That the exemption claimed under this subsection shall be subject to post-audit by the Bureau of Internal Revenue or the Bureau of Customs as may be applicable.

(CC) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of Three million pesos (P3,000,000.00).

Input Tax

Pointers in Input Tax

Only a VAT-registered person can claim input tax;
No input value-added tax shall be allowed on purchases of goods or properties for personal use;
Should be actually paid and substantiated with invoice or official receipts; and
Input tax attributable to zero-rated sales by a VAT-registered person may, at his option, be refunded or applied for a tax credit certificate.

Persons Who can Avail of the Input Tax Credit

Purchaser of the domestic goods or properties upon consummation of the sale
Purchaser of services or the lessee or licensee upon payment of the compensation, rental, royalty, or fee.
Importer upon payment of VAT prior to the release of goods from customs custody

Credits for Input Tax

Input tax means the VAT due on or paid by a VAT-registered on importation of goods or local purchase of goods, properties or services, including lease or use of property in the course of his trade or business.

It shall also include the transitional input tax determined in accordance with Section 111 of the Tax Code, presumptive input tax and deferred input tax from previous period.

Sources of Input Tax

Local Purchases
Importation
Purchases of real properties for which VAT has actually paid
Purchases of services in which a VAT has actually been paid
Transaction deemed sale
Presumptive Input Tax
Transitional Input Tax

Input Tax on Local Purchases/Importation

Any input tax evidenced by a VAT invoice or official receipt issued in accordance with Section 113, NIRC on the following transactions shall be creditable against the output tax:

(a) Purchase or importation of goods:

For sale; or
For conversion into or intended to form part of a finished product for sale including packaging materials; or
For use as supplies in the course of business; or
For use as materials supplied in the sale of service; or
For use in trade or business for which deduction for depreciation or amortization is allowed under this Code.

(b) Purchase of services on which a value-added tax has been actually paid.

The input tax on domestic purchase or importation of goods or properties by a VAT-registered person shall be creditable:

To the purchaser upon consummation of sale and on importation of goods or properties; and
To the importer upon payment of the value-added tax prior to the release of the goods from the custody of the Bureau of Customs.

VAT on Importation

Importation of goods and properties brought into the Philippines for whatever purposes, whether for use in business or not are subject to VAT transactions except for importations specifically exempted from 12% VAT rate under Section 109.

The VAT is paid directly by the importer.

Tax Base In Case of Importation

In General, Dutiable Value or Total value for tariff and customs duties as determined by the Bureau of Customs plus customs duties, excise taxes, if any, and other legitimate charges, prior to removal of goods from the custody of the customs.

On the Basis of Quantity or Volume of Goods, Landed costs which include invoice cost, freight, insurance, customs duties, excise taxes, if any, and other legitimate charges, prior to removal of goods from the custody of the customs.

For example, “N” imported a non-essential article with the following particulars. The applicable excise tax rate is 20%.

Value of importation as determined by the BOC, $15,000

Freight and insurance, PP20,000

Custom duties, P20,000

Other expenses prior to the release of goods from customs custody, P10,000

Facilitation expense, P5,000

The exchange rate is $1:P40

Transfer costs from customs to the importer’s warehouse, P25,000

How much is the Input VAT on Importation?

a. Compute the Excise Tax

= [($15,000 x P40) + 20,000 + 20,000 + 10,000] x 20%

= 650,000 x 20%

= P130,000

b. Compute the Tax Base

= Total Cost before Excise Tax + Excise Tax

= P650,000 + 130,000

= P780,000

c. Based on the foregoing, the VAT is

= Tax Base x 12%

= P780,000 x 12%

= P93,600

Importation 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.

Input Tax on Depreciable Goods

Aggregate Acquisition Cost in a Calendar Month, excluding VAT Component	Useful life is 5 years and above	Useful life is below 5 years
Exceeds P1 million	Input tax shall be spread evenly over 60 months (over the month of acquisition and the 59 succeeding months)	Input tax shall be amortized over such a shorter period.
Does not Exceed P1 million	No amortization (Input VAT may be claimed outright)	No amortization (Input VAT may be claimed outright)

For example, A VAT-registered taxpayer acquired the following capital goods from VAT-registered suppliers:

Date of Purchase	Cost	Useful Life
January 2018	P2,000,000	10 years
February 2018	1,500,000	2 years

How much is the creditable input vat for the respective months?

Date of Purchase	Computation	Creditable Input VAT
January 2018	P2,000,000 x 12% / 60 months	P4,000
February 2018	P1,500,000 x 12% / 24 months	7,500
	Total	P11,500

Provided, further, That the amortization of the input VAT shall only be allowed until December 31, 2021 after which taxpayers with unutilized input VAT on capital goods purchased or imported shall be allowed to apply the same as scheduled until fully utilized.

This means that Input VAT on goods purchased on or after Jan. 1, 2022 shall be fully recognized outright and may be claimed as input tax credits against output tax. On the other hand, if the purchase was made on or before Dec. 31, 2021, the taxpayer can still amortize its input VAT until the same is fully utilized.

Month of Purchase	Cost	Useful Life	No. of Monthly Amortization	Last Month of Amortization
January 2018	P8,500,000	6 years	60	December 2022
February 2018	8,500,000	4 years	48	January 2022
January 2022	10,000,000	5 years	-	*Outright claim on January 2022

Input Tax on Mixed Transactions

A VAT-registered person who is also engaged in transactions not subject to the value-added tax shall be allowed tax credit as follows:

Total input tax which can be directly attributed to transactions subject to value-added tax; and
A ratable portion of any input tax which cannot be directly attributed to either activity.

Withholding of VAT on Government Money Payments

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 services taxed at twelve percent (12%) VAT pursuant to Sections 106 and 108 of the Tax Code, deduct and withhold a Final VAT due at the rate of five percent (5%) of the gross payment.

Beginning January 1, 2021, the VAT withholding system under this subsection shall shift from final to a creditable system.

The value-added tax withheld under this Section shall be remitted within ten (10) days following the end of the month the withholding was made.

Presumptive Input Tax Credits

Persons or firms engaged in the processing of sardines, mackerel and milk, and in manufacturing refined sugar and cooking oil, shall be allowed a presumptive input tax, creditable against the output tax, equivalent to four percent (4%) of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production.

For example, Sweetie Company, a manufacturer of refined sugar has the following data for the month of June 2021.

Sales, Refined Sugar, P10,000,000

Purchases:

Sugar cane, P1,000,000

Wrapping Supplies, P200,000

Labels, P125,000

Compute the VAT Payable.

a. Determine output tax

= Sales, Refined Sugar x 12%

= P10,000,000 x 12%

= P1,200,000

b. Determine input tax on purchases

= (Wrapping Supplies + Labels) x 12%

= (P200,000 + P125,000) x 12%

= P39,000

c. Determine Presumptive Input Tax

= Sugar cane x 4%

= P1,000,000 x 4%

= P40,000

d. Compute VAT Payable

= Output Tax - Input Tax

= P1,200,000 - 24,000 - 15,000 - 40,000

= P1,121,000

Sales, Refined Sugar	P10,000,000 x 12%	P1,200,000
Purchases:
Sugar cane	1,000,000 x 4%	(40,000)
Wrapping Supplies	200,000 x 12%	(24,000)
Labels	125,000 x 12%	(15,000)
VAT Payable		1,121,000

Note that the presumptive input tax in manufacturing refined sugar and cooking oil can be availed only by the manufacturer (person who owns the sugar or oil it processes).

Fishda Corporation processes sardines. During the month, it had the following ingredients in processing of canned sardines.

Fresh sardines, P800,000

Tomatoes, P400,000

Rock Salt, P20,000

Tin can and Wrapper, P200,000

How much is the presumptive input tax?

= Primary Agricultural Products x 4%

= (Tomatoes + Rock Salt) x 4%

= (P400,000 + P20,000) x 4%

= P16,800

Sardines are marine products, not agricultural products.

Transitional Input Tax Credits

Amount

Persons Entitled

The transitional input shall be higher between

• two percent (2%) of the value of the beginning inventory on hand or

• actual VAT paid on such goods, materials, and supplies

This shall be creditable against the output tax of a VAT-registered person.

• A person who becomes liable to value-added tax or

• any person who elects to be a VAT-registered person

Transitional input tax on the inventory is allowed on the following:

Goods purchased for resale in their present condition
Materials purchased for further processing, but which have not yet undergone processing
Goods which have been manufactured by the taxpayer
Goods in process for sale or
Goods and supplies for use in the course of the taxpayer’s trade or business as a VAT-registered person

For example, XYZ Company (used to be VAT Exempt) decided to register under the VAT system on January 2, 2021. It had the following data in the first quarter ending March 31, 2021.

Sales, P5,000,000

January – March, 2021 Purchases, P2,000,000

Inventory, Jan. 1, 2021

From VAT registered suppliers, P500,000

From non-VAT registered suppliers, P500,000

Compute the VAT Payable.

a. Compute the output VAT

= sales x 12%

= 5,000,000 x 12%

= 600,000

b. Compute the input VAT for the current quarter

= purchases x 12%

= 2,000,000 x 12%

= 240,000

c. Compute the transitional input VAT

The higher between:

Two percent (2%) of the value of the beginning inventory on hand

= P1,000,000 x 2%

= 20,000

Actual VAT paid on such goods, materials, and supplies

= 500,000 x 12%

= 60,000

d. Compute the VAT Payable

= Output VAT – Input VAT from current purchases – Transitional Input VAT

= 600,000 – 240,000 – 60,000

= 300,000

Value-Added Tax Payable

Computation of Monthly and Quarterly VAT

Every person liable to pay VAT shall file monthly VAT declarations for the first 2 months of the quarter, and pay the VAT liabilities not later than 20th day following the end of each month;
Every person liable to pay VAT shall likewise file a quarterly return which reflects the cumulative figures for the taxable quarter which reflects the cumulative figures for the taxable quarter within 25 days following the close of taxable quarter;
Excess input tax of the first month of the quarter shall be carried as tax credit on the second month and shall not be refundable; and
Excess input tax of the second month of the quarter shall not be carried as tax credit to the quarterly return.

For example, Stinger Company, VAT-registered taxpayer, has the following data:

Gross Sales	Amount	VAT
July	P2,000,000	P240,000
August	2,500,000	300,000
September	3,000,000	360,000
Gross Purchases
July	1,400,000	168,000
August	1,900,000	228,000
September	2,400,000	288,000
Excess input tax from the 2^nd quarter	50,000

Compute the monthly and quarterly VAT payable.

a. VAT Payable in July

= Output Tax - Input Tax - Excess Input tax from the 2nd Quarter

= P240,000 - P168,000 - P50,000

= P22,000

b. VAT Payable in August

= Output Tax - Input Tax

= P240,000 - P228,000

= P72,000

c. VAT Payable in September (Cumulative, Quarter 3)

= Quarter 3 Output Tax - Quarter 3 Input Tax - Excess Input tax from the 2nd Quarter - VAT Payments

= (P240,000 + 300,000 + 360,000) - (P168,000 + 228,000 + 288,000) - P50,000 - (22,000 + 72,000)

= P900,000 - P684,000 - P50,000 - P94,000

= P72,000

	July	August	Quarter 3
Output Tax	P240,000	P300,000	P900,000
Less:
Input Tax	168,000	228,000	684,000
Carry Over*	50,000		50,000
Total	P218,000	P228,000	P734,000
Net VAT Payable	22,000	72,000	166,000
VAT Paid in July			(22,000)
VAT Paid in August			(72,000)
VAT Payable	P22,000	72,000	P72,000

Claim for input VAT Refund/Tax Credit

The Bureau of Internal Revenue (BIR) recently issued Revenue Memorandum Circular (RMC) No. 47-2019 which provides for the uniform guidelines and revised mandatory requirements for the processing and grant of VAT refund application under Section 112 of the 1997 Tax Code, as amended.

There are two instances where a taxpayer may claim for refund:

Sales of goods, properties or services which are zero-rated or effectively zero-rated; and
Cancelled registration 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.

Zero-rated or Effectively Zero-rated Sales

Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax.

Cancellation of VAT Registration

A person whose registration has been cancelled due to retirement from or cessation of business, or due to changes in or cessation of status under Section 106(C) of this Code may, within two (2) years from the date of cancellation, apply for the issuance of a tax credit certificate for any unused input tax which may be used in payment of his other internal revenue taxes.

Under RR No. 16-2005, a dissolving company shall be entitled to a refund if he has no internal revenue tax liabilities against which the tax credit certificate may be utilized.

Under RR No. 13-2018, the date of cancellation of VAT registration is the date of issuance of tax clearance by the BIR, after full settlement of all tax liabilities relative to the cessation of business or change of VAT status of the taxpayer.

Period of Grant of Refund/Credit

In proper cases, the Commissioner of Internal Revenue shall grant refund for creditable input taxes within ninety (90) days from the date of submission of the official receipts or invoices and other documents in support of the application.

In case of full or partial denial of the claim for tax refund, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim, appeal the decision with the Court of Tax Appeals.

Tax Return Preparation and Filing and Tax Payments

Who are Required to File VAT Returns

Any person or entity who, in the course of his trade or business, sells, barters, exchanges, leases goods or properties and renders services subject to VAT, if the aggregate amount of actual gross sales or receipts exceed Three Million Pesos (Php3,000,000.00);
A person required to register as VAT taxpayer;
Any person, whether or not made in the course of his trade or business, who imports goods.

Deadline of BIR Form 2550M

Manual Filing	Not later than the 20th day following the end of each month
Through Electronic Filing and Payment System (eFPS)	21 – 25 days following the end of the month (on or before the prescribed due dates enunciated in RR No. 16-2005)

Deadline of BIR Form 2550M

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.

Only one consolidated Monthly VAT Declaration/Quarterly VAT Return shall be filed covering the results of operation of the head office as well as the branches for all lines of business subject to VAT.

The Quarterly Summary Lists of Sales and Purchases shall be submitted in Compact Disk-Recordable (CDR) following the format provided under Section 4.114-3(g) of RR No. 16-2005, as amended by RR No. 1-2012.

The Quarterly Summary Lists of Sales and Purchases shall be submitted through electronic filing facility for taxpayers under the jurisdiction of the Large Taxpayers Service (LTS) and those enrolled under the eFPS.

Compliance Requirements

The following compliance activities must be performed by a VAT-registered taxpayer:

Pay the annual registration fee of P500.00 for every place of business or establishment that generates sales;
Register the books of accounts of the business/occupation/calling, including practice of profession, before using the same;
Register the sales invoices and official receipts as VAT-invoices or VAT official receipts for use on transactions subject to VAT;
File of the Monthly Value-added Tax Declaration;
Submit and File the Quarterly VAT Return, Quarterly Schedule of Monthly Sales and Output Tax (if the quarterly sales exceed P2,500,000.00), and the soft copy of the Quarterly Schedule of Monthly Domestic Purchases and Input Tax/ the soft copy of the Schedule of Transactional/Individual Importation (if the quarterly total purchases exceed P1,000,000.00)

Registration with BIR

VAT taxpayers shall apply for registration as VAT Taxpayers and pay the corresponding registration fee of five hundred pesos (P500.00).

Thereafter, taxpayers are required to pay the annual registration fee of five hundred pesos (P500.00) not later than January 31, every year.

Under RA 10963, the registration shall contain the

taxpayer’s name,
style,
place of residence,
business, and
such other information as may be required by the Commissioner in the form prescribed therefor.

Mandatory Registration

In VAT, registration is either mandatory or optional. The following persons are required to register:

His gross sales or receipts for the past twelve (12) months, other than those that are exempt under Section 109(A) to (CC), have exceeded Three million pesos (₱3,000,000)*
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 Section 109(A) to (CC), will exceed Three million pesos (₱3,000,000).
Franchise grantees of radio and/or television broadcasting whose annual gross receipts of the preceding year exceed ten million pesos (P10,000,000.00) derived from the business covered by the law granting the franchise; shall register within 30 days at end of the calendar year.

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

Effect of Non-Registration

Any person who becomes liable to VAT and fails to register as such shall be liable to pay the output tax as if he is a VAT-registered person, but without the benefit of input tax credits for the period in which he was not properly registered.

The taxpayer is liable to pay value-added tax on the sale of goods or rendering of services;
The value added tax paid on purchases of goods or services cannot be deducted on VAT imposed on sale of goods or services;
The VAT cannot be billed separately to customers; and
The taxpayer is penalized through the imposition of fines and penalties.

For example, Mr. Puyat made total annual sales of P5,000,000 and annual purchases of goods of P3,600,000, exclusive of input tax of P432,000. Mr. Puyat did not register as value-added taxpayer. What is the tax liability of Mr. Puyat?

= P5,000,000 x 12%

= P600,000, he is obliged to pay the VAT, but he cannot claim input tax.

Smart, a non-VAT registered domestic corporation rendered professional services to Wise, VAT registered entity. Smart charged a total amount of P10,000,000, exclusive of VAT. How much is the total amount due by Wise to Smart?

P10,000,000, only VAT registered entities can impose output VAT.

Optional Registration

VAT exempt person in Sec 109 (CC) of NIRC; seller or lessor of goods or services whose actual or expected gross ales or receipts do not exceed the marginal threshold amount of P 3,000,0000 for any 12 month period.
Any person who is VAT-registered but enters into transactions which are exempt from VAT (mixed transactions) may opt that the VAT apply to his transactions which would have been exempt under Section 109 of the Tax Code, as amended.
Franchise grantees of radio and/or television broadcasting whose annual gross receipts of the preceding year do not exceed ten million pesos (P10,000,000.00) derived from the business covered by the law granting the franchise may opt for VAT registration. This option, once exercised, shall be irrevocable. (Sec. 119, Tax Code).

Any person who elects to register under optional registration shall not be allowed to cancel his registration for the next three (3) years.

Cancellation of VAT Registration

The cancellation for registration will be effective from the first day of the following month the cancellation was approved.

If he makes a written application and can demonstrate to the commissioner's satisfaction that his gross sales or receipts for the following twelve (12) months, other than those that are exempt under Section 109 (A) to (U), will not exceed Three Million Pesos (P3,000,000.00); or
If he has ceased to carry on his trade or business, and does not expect to recommence any trade or business within the next twelve (12) months.

Invoicing Requirements

A VAT-registered person shall issue:

A VAT invoice for every sale, barter or exchange of goods or properties; and
A VAT official receipt for every lease of goods or properties and for every sale, barter or exchange of services.

Consequence of Issuing Erroneous VAT Invoice or VAT Official Receipt.-

If a person who is not a VAT-registered person issues an invoice or receipt showing his Taxpayer Identification Number (TIN), followed by the word “VAT”;

(a) The issuer shall, in addition to any liability to other percentage taxes, be liable to:

The tax imposed in Section 106 or 108 without the benefit of any input tax credit; and
A 50% surcharge under Section 248(B) of this Code;

(b) The VAT shall, if the other requisite information required under Subsection (B) hereof is shown on the invoice or receipt, be recognized as an input tax credit to the purchaser under Section 110 of this Code.

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 term ‘VAT exempt sale,’ the issuer shall be liable to account for the tax imposed in section 106 or 108 as if Section 109 did not apply.