BEHTTINAKIMBARRIOS.

Taxation 2 1

VALUE ADDED TAX

A. HISTORICAL BACKGROUND
B. DEFINITION , NATURE AND CONCEPT

VALUE ADDED TAX: vat is imposed and collected on every sale, barter or exchange, or transactions
deemed sale of taxable goods or properties at the rate of 12% of the gross selling price or gross value in
money of the good or properties sold, bartered, or exchanged, or deemed sold in the Philippines

It is a tax imposed on each sale of goods and/or services in the course of trade or business as they
pass along the production and distribution chain, culminating with the sale to the final end-user.

CONCEPT, NATURE AND CHARACTERISTIC:

o
o

o
o
o
o
o
o
o
o

It is an excise tax, imposed not on the goods or services as such but on the privilege of selling or
importing goods, rendering services for a fee, remuneration or consideration.
It is a percentage tax imposed on the sale, barter or exchange or importation of goods or the sale
of services or lease/sale of properties based on the Gross sale, value in money or receipt derived
by the manufacturer, producer, importer or seller who is liable for its timely payment
It is national tax, levied at all stages of the production channels
It is an ad valorem tax imposed by law directly not on the thing or service but on the act of the
seller, importer, or contractor exclusively made liable for its payment
It is an indirect tax and the amount of tax may be shifted or passes on to the buyer, transferee, or
lessee of the goods, properties or services
VAT is collected through the tax credit method
VAT is not a cascading tax
VAT is not a tax on tax
VAT is a transparent form of sales tax
VAT adheres to the cross border doctrine/destination principle.

TAX PYRAMIDING:
C. PURPOSE:

D. FEATURES:

All persons liable to pay VAT shall register with the appropriate RDD; while certain vat-exempt
persons may apply for optional registration
It provides for two rates:
0% rate for export sales and sale/service which are zero-rated or are effectively zero-rated
12% for other sale, barter or exchange of goods and service
A VAT registered person is entitled to credit input taxes against output tax payable.
It is the consumption type of tax

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All goods, services and properties ( except those specifically exempted) including goods subject
to excise taxes (except as petroleum products) are subject to the tax at all levels of distribution
Although the tax is levied at all stages of production, the total value of the goods is subject to tax
once and once only
The CIR, may in certain cases, determine the appropriate tax base for the purpose of the
imposition and collection of tax
CIR may suspend the business operation and temporarily close the business establishment of a
tax for violation of VAT law or regulation.
The filling of returns and payment of the tax shall be made directly to duly accredited banks.

1. OPTIONS AVAILABLE TO THE SELLER OR PRODUCER UNDER THE VAT SYSTEM

a. The seller or producer may claim tax credit within a 12% ceiling, he may choose to
absorb the VAT and not pass it to the consumer
b. The seller or producer may choose to pass it on to his buyers.

2. RATE STRUCTURE UNDER THE VAT SYSTEM

a. 0% for export sales, and persons whose sales are effectively zero-rated. This
includes foreign currency denominated sales and sales to entities that are exempt
under special laws and international agreement.

0% VAT (zero rating) is an incentive to all exporters since they are entitled to claim VAT refunds
on their inputs, while their export sales are subject to zero rate
Zero rated sales of services includes the following:
o Processing, manufacturing or repacking goods for others for exports
o Services paid for in foreign currency inwardly remitted
o Services zero rated under special laws and international agreement

Export sale, or sales outside Philippines shall be made subject to VAT at 0% if made by a vat
registered persons. If made by person who are not VAT-registered, the export sales shall be
treated as exempt sales.
b.

12% for all other articles and transactions covered.

E. PERSONS LIABLE TO VAT, IN GENERAL

- Any 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 import goods, shall be liable to VAT
imposed in section 106 and 108

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1. IN THE COURSE OF BUSINESS OR TRADE, DEFINED

Means the regular conduct or pursuit of commercial and economic activity, including transactions
incidental thereto, by any person, regardless of whether or not the person is engaged therein is a
non-stock, non-profit or government entity.
INCIDENTAL: something necessary; once an activity has been identified as a business, any
supply/ sale made while carrying it on is likely to be made in the course or furtherance of
business.
o Disposition of assets and liabilities of a business
o Disposition of a business as going concern
o Anything that is done in connection with the termination or intended termination of a
business.

2. REQUISITES OF VAT (OTHER THAN ON IMPORTS)

a. There must be a sale in the Philippines
b. The sale must be taxable goods and services
c. The sale must be made by a taxable person in the course or furtherance of his business

3. VAT TAXABLE PERSON

Any person liable to pay for the payment of VAT, whether registered or registrable in accordance
with sec. 236 of the tax code
Any person in the course of business shall register with the appropriate RDO using appropriate
BIR forms and pay an annual registration of 500 for every separate and distinct establishment or
place of business before the start of such business and every year thereafter on or before the 31 st
day of January

4. MANDATORY VAT REGISTRATION

Any person who, in the course of his trade or business, sells barters, exchanges, or leases goods
or properties, or engages in the sale or exchange of services is mandatorily required to register if
as VAT if:
a. His gross sales or receipt for the past 12 months, other than those exempt under
section 109, have exceeded P 1,919,500 effective January 2012
b. There are reasonable grounds to believe that his gross sales or receipt for the next 12
months will exceed P1,919,500

5. NON VAT REGISTRATION

any person , other than those required to be registered as VAT persons, engaged in any business,
shall before the commencement of his business, or whenever he transfers to another revenue
district, register with the RDO concerned within 10 days from the commencement of his business
or transfer shall pay the applicable registration fee of 500 for every separate or distinct
establishment or place of business, if he has not paid he fee in the beginning of the year

Following are required to register as a non vat persons

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a. Vat exempt person under section 109 of the TC who did not opt to register as tax
payer
b. Individuals engaged in business where gross sales or receipts do not exceed 100,000
during any 12-month period. They are required to pay but will not be required to pay
the registration fee of 500
c. Non-stock, non-profit organizations and associations engaged in trade or business
whose gross sales or receipt do not exceed P 1,919,500 effective January 2012 for
any 12 month period
d. Cooperatives other than electric cooperatives. They are not required to pay the
registration fee
e. Radio and TV broadcasting whose gross annual receipts do not exceed P 10,000 and
which do not opt to be VAT registered
f. PEZA and other ecozone registered enterprises enjoying the 5% preferential yax rate
in lieu of all taxes
g. SBMA and other free port zone-registered enterprises enjoying the preferential tax
rate of 5% in lieu of all taxes

6. OPTIONAL VAT REGISTRATION

a. Any person who is VAT exempt not required to register for VAT may, in relation to
section 109(2), elect to be VAT-registered by registering with the RDO
b. Any person who is VAT registered but enters into a transaction which are exempt
from VAT may opt that the VAT apply to his transaction
c. Franchise grantees of radio and /or television broadcasting whose annual gross
receipts in the preceding year does not exceed 10,000 may opt for vat registration.
This option once exercised, shall be irrevocable
Any person who elects to register in (a) and (b) shall not be allowed to cancel registration for the
next 3 years
May apply for VAT registration not later than 10 days before the beginning of the taxable quarter
Once registered as a VAT person, the taxpayer shall be liable to output tax and be entitled to input
tax credit beginning on the first day of the month following registration

F. TRANSACTIONS COVERED BY TAX

o every sale, barter, exchange, lease or similar transaction made in the course of business
o Transactions deemed sale for vat purposes
o Importation of goods whether in the course of trade or business
o Every sale of service made in the course of trade or business other than services rendered
by person subject to other percentage taxes

1. SALE OF GOODS OR PROPERTIES

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a. GOODS OR PROPERTIES DEFINED

Refers to all tangible, intangible objects which are capable of pecuniary estimation and shall
include among others:
o Real property held primarily for sale to customers or held for lease in the ordinary course
of business

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o
o
o
o

The right or the privilege to use patent, copyright, designs or model, plan, secret formula
or process, goodwill, trademark, trade mark or other property or right
The right or the privilege to use any industrial, commercial of scientific equipment
The right or the privilege to use motion picture films, tapes, discs; and
The right or the privilege to use Radio, television, satellite transmission and cable
television time.

SALE OF GOODS OR PROPERTIES WHICH ARE SUBJECT TO THE 12% VAT

REQUISITES:
o
o
o
o
o
o
o
o

The seller must be VAT- registered, or even if not, he/it is a vat resgistrable person and
his/its gross annual sales exceeds 1,919,500
Goods or properties are tangible or intangible objects capable of pecuniary estimation
Sale must be an actual or constructive sale or transaction
Sale must be undertaken in the course of trade or business
Sale must be done in the Philippines
Sale must be for consumption in the Philippines
Ale must not considered as a zero rated sale
Sale must not be exempted from vat under tax code or special law

b. SALE OF REAL PROPERTIES SUBJECT TO 12% VAT (page 773)

Sale of real property held primarily for sale to customers or held for lease in the ordinary course
of trade or business of the seller shall be subject to VAT
(1) RESIDENTIAL LOT: sale of residential lot with a gross selling price
exceeding P 1,919,500
(2) RESIDENTIAL HOUSE AND LOT: sale of residential house and lot with a
gross selling price exceeding P 3,199,200

2. SALE OF SERVICE

SALE OF SERVICES WHICH ARE SUBJECT TO THE 12% VAT

REQUISITES:
o
o
o
o
o
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The seller must be VAT- registered, or even if not, he/it is a vat resgistrable person and
his/its gross annual sales exceeds 1,919,500
Sale must be undertaken in the course of trade or business
The sale of service must be for a valuable consideration actually or constructively
received
Sale must have been done and for the use or consumption in the ohiippines
The sale must not be considered as a zero-rated sale

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o
o

The sale must not be exempt from VAT

In the case of lease of properties, the property being leased should be located in the
Philippines

A. SALE OR EXCHANGE OF SERVICE

Means the performance of all kinds of services in the Philippines for others for a fee,
remuneration and consideration, whether in cash or in kind including those rendered by the
following:
o construction and service contractors;
o stock, real estate, commercial, customs and immigration brokers;
o lessors of property, whether personal or real;
o persons engaged in warehousing services;
o lessors or distributors of cinematographic films;
o persons engaged in milling, processing, manufacturing or repacking goods for others;
o proprietors, operators, or keepers of hotels, motels, rest houses, pension houses, inns,
resorts, theaters, and movie houses;
o proprietors or operators of restaurants, refreshment parlors, cafes and other eating places,
including clubs and caterers;
o dealers in securities;
o lending investors;
o 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;
o 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;
o sales of electricity by generation, transmission, and/or distribution companies;
o 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;
o non-life insurance companies (except their crop insurances), including surety, fidelity,
indemnity and bonding companies; and
o Similar services regardless of whether or not the performance thereof calls for the
exercise or use of the physical or mental faculties.

3. TRANSACTIONS DEEMED SALE FOR VAT PURPOSE (PAGE 789)

a. DEFINE
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The following transactions shall be "deemed sale" pursuant to Sec. 106 (B) of the Tax Code:
(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. 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;

(2) Distribution or transfer to:

i. Shareholders or investors share in the profits of VAT-registered person;
Property dividends which constitute stocks in trade or properties primarily held
for sale or lease declared out of retained earnings on or after January 1, 1996 and
distributed by the company to its shareholders shall be subject to VAT based on the zonal
value or fair market value at the time of distribution, whichever is applicable.
ii. 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 were consigned. Consigned goods returned by the consignee within the 60-day period are
not deemed sold;
(4) Retirement from or cessation of business with respect to all goods on hand, whether capital
goods, stock-in-trade, supplies or materials as of the date of such retirement or cessation,
whether or not the business is continued by the new owner or successor. The following
circumstances shall, among others, give rise to transactions "deemed sale" for purposes of this
Section;
i. Change of ownership of the business. There is a change in the ownership of the
business when a single proprietorship incorporates; or the proprietor of a single
proprietorship sells his entire business.
ii. Dissolution of a partnership and creation of a new partnership which takes over
the business.

b. BASIS OF OUTPUT TAX (PAGE 462 lim)

In case of rendition of services: the taxable base shall be the gross receipt or the total amount in
money or its equivalent representing contract price, compensation or service fee, rental or royalty,
including the amount charged for materials supplied with the service and deposits and advance
payments actually or constructively received during the taxable quarter for the services rendered,
or to be performed for another. Excluding ta
4. IMPORTATION OF GOODS
a. BASIS OF THE VAT (PAGE 463 lim; 796 casasola)

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In case of importation: the total value used by the bureau of customs in determining tariff and
custom duties, plus excise tax, if any and other charges prior to the release from custom custody
b. DESTINATION PRINCIPLE/CROSS BORDER DOCTRINE: no vat shall be
imposed to form part of the cost of goods destined from consumption outside of
territorial border of the taxing authority
Good are taxed on,y in the country where it is consumed.
Hence, actual export of goods and services from the Philippines to a foreign country must be free
of VAT, while those destined for the use and consumption within the Philippines shall be imposed
with 12% vat.

5. ZERO RATE TRANSACTION

a. NATURE: A zero rated sale of goods and 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 sale, shall
be available as tax credit or refund.

Zero rated transaction generally refers to export sale of goods. The tax rate in this case is
zero. When applied to the tax base or selling price of the goods sold, such zero rate
results in no tax chargeable against the purchaser, foreign buyer or customer.
Zero rate export sales does not include export sales of PEZ and other economic zone
registered enterprise enjoying 5% preferential tax rate in lieu of all taxes (page 779 C.
footnote)

b. EXPORT SALES: or sales outside Philippines, are subject to VAT at 0% rate if made
by the VAT registered person. When applied to the tax base, the 0% obviously in no
tax chargeable against the consumer. The seller of such transaction charges no output
tax, but can claim a refund or tax credit certificate for the vat previously charged by
suppliers.

c. FOREIGN CURRENCY DENOMINATED SALE: The sale to a non-resident of

goods (movable goods assembled or manufactured in the Philippines) except
automobiles and non-essential goods assembled and manufactured in the Philippines
for delivery to a resident in the Philippines, paid for in acceptable foreign currency
and accounted for in accordance with the rules and regulation of the BSP.
(1) REQUISITES IN ORDER FOR FCD SALE BE CONSIDERED AS
EXPORT SALE
o The buyers are Filipinos abroad, returning overseas Filipino or other
non-residents of the Philippines
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o
o

The goods are assembled or manufactured in the Philippines for

household and personal use
The goods are paid for in convertible or acceptable foreign currency
inwardly remitted through a banking system in the Philippines.

d. SALE OF GOODS SUBJECT TO 0% VAT

The following sales by VAT-registered persons shall be subject to zero percent (0%) rate:
a) Export sales. "Export Sales" shall mean:
(1) The sale and actual shipment of goods from the Philippines to a foreign
country, irrespective of any shipping arrangement that may be agreed upon which may
influence or determine the transfer of ownership of the goods so exported, paid 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);
(2) The sale of raw materials or packaging materials to a non-resident buyer for
delivery to a resident local export-oriented enterprise to be used in manufacturing,
processing, packing or repacking in the Philippines of the said buyer's goods, paid for in
acceptable foreign currency, and accounted for in accordance with the rules and
regulations of the BSP;
(3) The sale of raw materials or packaging materials to an export-oriented
enterprise whose export sales exceed seventy percent (70%) of total annual production;
Any enterprise whose export sales exceed 70% of the total annual production of
the preceding taxable year shall be considered an export-oriented enterprise.
(4) Sale of gold to the BSP; and
(5) Transactions considered export sales under Executive Order No. 226,
otherwise known as the Omnibus Investments Code of 1987, and other special laws.
(6) The sale of goods, supplies, equipment and fuel to persons engaged in
international shipping or international air transport operations; Provided, That
the same is limited to goods, supplies, equipment and fuel pertaining to or
attributable to the transport of goods and passengers from a port in the
Philippines directly to a foreign port without docking or stopping at any other
port in the Philippines; Provided, further, that if any portion of such fuel,
goods or supplies is used for purposes other than that mentioned in this
paragraph, such portion of fuel, goods and supplies shall be subject to 10%
VAT.
(b) "Foreign Currency Denominated Sale". "Foreign Currency Denominated Sale" means
the sale to a non-resident of goods, except those mentioned in Secs. 149 and 150 of the Tax
Code, assembled or manufactured in the Philippines for delivery to a resident in the Philippines,
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paid for in acceptable foreign currency and accounted for in accordance with the rules and
regulations of the BSP.
Sales of locally manufactured or assembled goods for household and personal use to Filipinos
abroad and other non-residents of the Philippines as well as returning Overseas Filipinos under
the Internal Export Program of the government paid for in convertible foreign currency and
accounted for in accordance with the rules and regulations of the BSP shall also be considered
export sales.
(c) "Sales to Persons or Entities Deemed Tax-exempt under Special Law or International
Agreement". Sales of goods or property to persons or entities who are tax-exempt under
special laws, e.g. sales to enterprises duly registered and accredited with the Subic Bay
Metropolitan Authority (SBMA) pursuant to R.A. No. 7227, sales to enterprises duly registered
and accredited with the Philippine Economic Zone Authority (PEZA) or international agreements
to which the Philippines is signatory, such as, Asian Development Bank (ADB), International
Rice Research Institute (IRRI), etc., shall be effectively subject to VAT at zero-rate.

e. SALE OF SERVICES SUBJECT TO 0% VAT

(a) In general. 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 in accordance with these Regulations.
(b) Transactions Subject to Zero Percent (0%) VAT Rate. The following services performed in
the Philippines by a VAT-registered person shall be subject to zero percent (0%) VAT rate:
(1) Processing, manufacturing or repacking goods for other persons doing business
outside the Philippines, which goods are subsequently exported, where the services are paid for
in acceptable foreign currency and accounted for in accordance with the rules and regulations of
the BSP;
(2) 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;
(3) Services rendered to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively subjects the supply of
such services to zero percent (0%) rate;
(4) Services rendered to persons engaged in international shipping or air transport
operations, including leases of property for use thereof; Provided, however, that the services
referred to herein shall not pertain to those made to common carriers by air and sea relative to

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their transport of passengers, goods or cargoes from one place in the Philippines to another place
in the Philippines, the same being subject to 10% VAT under Sec. 108 of the Tax Code;
(5) Services performed by subcontractors and/or contractors in processing, converting, or
manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of the
total annual production;
(6) Transport of passengers and cargo by domestic air or sea carriers from the Philippines
to a foreign country. Gross receipts of international air carriers doing business in the Philippines
and international sea carriers doing business in the Philippines are still liable to a percentage tax
of three percent (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 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; Provided, however,
that zero-rating shall apply strictly to the sale of power or fuel generated through renewable
sources of energy, and shall not extend to the sale of services related to the maintenance or
operation of plants generating said power.
(SALE OF SERVICES SUBJECT TO 12% VAT, page 805 Casasola)

6. EFFECTIVELY ZERO RATE SALE OF GOODS OR SERVICES

Refer to the local sale of goods or supply of services by a VAT registered person to
persons or entities who were granted indirect tax exemption under special laws or
international; agreement on which the Philippine is a signatory. Again, as applied to the
tax base, such rate does not yield any tax chargeable against the purchaser. The seller
who charges zero output tax on such transaction can also claim a refund or supply for a
tax credit certificate for the vat previously charge by suppliers.

a. REQUISITES FOR QUALIFICATION

o For effective zero rating transactions, however, the taxpayer has to be
a VAT registered and must comply with the invoicing requirements
(RMC 42-2003)
G. EXEMPT TRANSACTIONS FOR VAT PURPOSES

1. EXEMPT TRANSACTION, DEFINED

Involves goods or services which are, by their nature are specifically listed in and
expressly exempted from the VAT under the tax code, without regard to the tax status
exempt or not- of the party to the transaction

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2. DISTINCTION BETWEEN ZERO RATED VAT TRANSACTION AND VAT

EXEMPT TRANSACTION
ZERO RATED VAT TRANSACTION
A zero rated sale of goods and 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 sale, shall
be available as tax credit or refund.

VAT EXEMPT TRANSACTION

Refers to the sale of goods or properties
and/or services and the use or lease of
properties that is not subject to VAT (OT) and
the seller is not allowed any tax credit of VAT
(IT) on purchases

The 12% tax on purchases will be available as The person making the exempt sale shall not
an input tax credit. Considered as falling bill any output tax to his customers because
under legal system because of tax credit or the said transaction is not subject to VAT
refund made available by law

3. TAX EXEMPT TRANSACTIONS ( page 845 casasola; 153 lim)

In general. "VAT-exempt transactions" refer to the sale of goods or properties and/or

services and the use or lease of properties that is not subject to VAT (output tax) and the seller is
not allowed any tax credit of VAT (input tax) on purchases. 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.

I.

II.

VAT covered transactions with gross annual sales/receipts not exceeding P. 1,919,500 per
annum
Sale or importation of agricultural and marine food products in their original state

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ORIGINAL STATE: include those that undergone the simple processes of preparation or
preservation for the market, such as:
-

Freezing

Drying

Salting

Broiling

Roasting

stripping

INLCUDES:
-

Agricultural and marine food products in their original state

livestock and poultry of a kind generally used as, or yielding or producing foods for
human consumption; and
Breeding stock and genetic materials therefor.

EXCEPTIONS:
-

III.

Fighting cocks
Race horses
Zoo animals
Other animals genetically considered as pets

Sale or importation of fertilizers, seeds, and feeds

INCLUDES
-

Fertilizers
Seeds and seedlings
fingerlings, fish, prawn, livestock and poultry feeds
including ingredients
whether locally produced or imported
used in the manufacture of finished feeds

EXCEPTIONS: SPECIALTY FEEDS which refers to non-agricultural feeds or food for race
horses, fighting cocks, aquarium fish, zoo animals and other animals generally considered as
pets.
IV.

Importation of personal and household effects belonging to returning residents of the

Philippines from abroad and non-resident 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;
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V.

Importation of professional instruments and implements, wearing apparel, domestic

animals, and personal household belonging to persons coming to settle in the Philippines,
for their own use and not for sale, barter or exchange.

accompanying such persons, or arriving within ninety (90) days before or after their
arrival
upon the production of evidence satisfactory to the Commissioner of Internal Revenue,
that such persons are actually coming to settle in the Philippines and that the change of
residence is bonafide;

EXCEPTION: except any vehicle, vessel, aircraft, machinery and other goods for use in the
manufacture and merchandise of any kind in commercial quantity
VI.

Services subject to percentage tax under Title V of the Tax Code

a. Sale or lease of goods or properties or the performance of services of non-VATregistered persons, other than the transactions mentioned in paragraphs (A) to (U) of
Sec. 109(1) of the Tax Code, the gross annual sales and/or receipts of which does not
exceed the amount of 1,919,200 (as amended 16-2011)
b. Services rendered by domestic common carriers by land, for the transport of
passengers and keepers of garages (Sec. 117);
c. Services rendered by international air/shipping carriers (Sec. 118);
d. Services rendered by 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 by franchise grantees of gas and water utilities (Sec. 119);
e. Service rendered for overseas dispatch, message or conversation originating from the
Philippines (Sec. 120);
f. Services rendered by any person, company or corporation (except purely cooperative
companies or associations) doing life insurance business of any sort in the Philippines
(Sec. 123);
g. Services rendered by fire, marine or miscellaneous insurance agents of foreign
insurance companies (Sec. 124);
h. Services of proprietors, lessees or operators of cockpits, cabarets, night or day clubs,
boxing exhibitions, professional basketball games, Jai-Alai and race tracks (Sec.
125); and
i. Receipts on sale, barter or exchange of shares of stock listed and traded through the
local stock exchange or through initial public offering (Sec. 127).
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VII.

Services by agricultural contract growers and millers for others of palay into rice, corn
into grits, and sugar cane into raw sugar;

AGRICULTURAL CONTRACT GROWERS refers to those persons producing for others

poultry, livestock or other agricultural and marine food products in their original state.

VIII.

Medical, dental, hospital and veterinary services,

EXCEPTION:
IX.

Those rendered by professionals.

Laboratory services are exempted.
If the hospital or clinic operates a pharmacy or drug store, the sale of drugs and medicine
is subject to VAT.
Sale of drugs or pharmaceutical items of the hospital pharmacy to in-patient of hospitals
considered part of hospital service which is exempt from VAT
Educational services rendered by private educational institutions duly accredited and
those rendered by government educational institutions.

ACCREDITED BY: DepED and TESDA

EDUCATIONAL SERVICES shall refer to academic, technical or vocational education provided
by private educational institutions duly accredited by the DepED, the CHED and TESDA and
those rendered by government educational institutions

EXCLUDES:
X.

XI.

Seminars
in-service training
review classes; and
other similar services rendered by persons who are not accredited by the DepED, the
CHED and/or the TESDA;
Services rendered by individuals pursuant to an employer-employee relationship

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;

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XII.

Transactions which are exempt under international agreements to which the Philippines is
a signatory or under special laws
EXCEPTION: those granted under PD No. 529 Petroleum Exploration Concessionaires
under the Petroleum Act of 1949

XIII.

Sales by agricultural cooperatives duly registered and in good standing with the
Cooperative Development Authority (CDA)
-

To their members;
as well as sale of their produce, whether in its original state or processed form, to nonmembers;
Sale by agricultural cooperatives to non-members can only be exempted from vat IF
the producer of the agricultural products sold is the cooperative itself.

their importation of direct farm inputs, machineries and equipment, including spare parts
thereof, to be used directly and exclusively in the production and/or processing of their
produce;

XIV.

Gross receipts from lending activities by credit or multi-purpose cooperatives duly

registered and in good standing with the Cooperative Development Authority,

XV.

Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with

and in good standing with the CDA;

Provided, that the share capital contribution of each member does not exceed Fifteen
Thousand Pesos (P15, 000.00) and regardless of the aggregate capital and net surplus
ratably distributed among the members.
Importation by non-agricultural, non-electric and non-credit cooperatives of machineries
and equipment, including spare parts thereof, to be used by them are subject to VAT.
Cooperative is not exempt from VAT passed by its VAT registered supplier.
The vat passed on to it by the said seller is not a tax on the part of the cooperative but just
part of the cost of goods that it buys from its seller

XVI.

Export sales by persons who are not VAT-registered;

-

XVII.

Export sales of non-VAT registered taxpayers are exempt from vat

Export sales of vat registered taxpayer are considered as zero rated
sales of real properties exempt from VAT ( page 862 C)

a. Sale of real properties not primarily held for sale to customers or held for lease in the
ordinary course of trade or business.

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b. Sale of real properties utilized for low-cost housing as defined by RA No. 7279,
otherwise known as the "Urban Development and Housing Act of 1992" and other related
laws, such as RA No. 7835 and RA No. 8763.
-

Low-cost housing" refers to housing projects intended for homeless low-income family
beneficiaries, undertaken by the Government or private developers.

c. Sale of real properties utilized for socialized housing as defined under RA No. 7279, and
other related laws, such as RA No. 7835 and RA No. 8763, wherein the price ceiling per
unit is P 400,000 or as may from time to time be determined by the HUDCC and the
NEDA and other related laws.
d. Sale of residential lot valued at 1,919,500 and below, or house & lot and other residential
dwellings valued at 3,199,200 and below.
e. If two or more adjacent residential lots are sold or disposed in favour of one buyer, for
the purpose of utilizing the lots as one residential lot, the sale shall be exempt from VAT
only if the aggregate value of the lots do not exceed P1,919,500, and P 3,199,200 for
residential house and lots or other residential dwellings.
Adjacent residential lots, although covered by separate titles and/or separate tax
declarations, when sold or disposed to one and the same buyer, whether covered by one
or separate Deed of Conveyance, shall be presumed as a sale of one residential lot.
f. Lease of residential units with a monthly rental per unit not exceeding P 12,800,
regardless of the amount of aggregate rentals received by the lessor during the year;
Provided, that not later than January 31, 2009 and every three (3) years thereafter, the
amount of P10,000.00 shall be adjusted to its present value using the Consumer Price
Index, as published by the NSO;
g. The foregoing notwithstanding, lease of residential units where the monthly rental per
unit exceeds P12,800 but the aggregate of such rentals of the lessor during the year do not
exceed 1,919,500 shall likewise be exempt from VAT, however, the same shall be
subjected to three percent (3%) percentage tax.
h. Transfer of real property to a trustee if the property is to be held merely in trust for the
seller
XVIII.

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

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BOOK, NEWSPAPER, MAGAZINE, REVIEW AND BULLETIN: printed material in hard

copies
XIX.

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

XX.

Provided, that the exemption from VAT on the importation and local purchase of
passenger and/or cargo vessels shall be limited to those of one hundred fifty (150) tons
and above, including engine and spare parts of said vessels;
Provided, further, that the vessels to be imported shall comply with the age limit
requirement, at the time of acquisition counted from the date of the vessel's original
commissioning, as follows: (i) for passenger and/or cargo vessels, the age limit is fifteen
(15) years old, (ii) for tankers, the age limit is ten (10) years old, and (iii) For high-speed
passenger crafts, the age limit is five (5) years old;
Provided, finally, that exemption shall be subject to the provisions of Section 4 of
Republic Act No. 9295, otherwise known as "The Domestic Shipping Development Act
of 2004";
Importation of fuel, goods and supplies by persons engaged in international shipping or
air transport operations

XXI.

Provided, that the said fuel, goods and supplies shall be used exclusively or shall pertain
to the transport of goods and/or passenger from a port in the Philippines directly to a
foreign port without stopping at any other port in the Philippines; Provided, further, that
if any portion of such fuel, goods or supplies is used for purposes other than that
mentioned in this paragraph, such portion of fuel, goods and supplies shall be subject to
10% VAT;
Transport of passengers by international carriage ( as inserted by RA 10378)

What being referred here are the international air carriers and international shipping
carriers doing business in the Philippines which are subject to 3% percentage tax on their
quarterly gross receipts

XXII.

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

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

XXIII.

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 P 1,919,500
-

For purposes of the threshold of P 1,919,500, the husband and the wife shall be
considered separate taxpayers. However, the aggregation rule for each taxpayer shall
apply. For instance, if a professional, aside from the practice of his profession, also

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derives revenue from other lines of business which are otherwise subject to VAT, the
same shall be combined for purposes of determining whether the threshold has been
exceeded. Thus, the VAT-exempt sales shall not be included in determining the threshold.

H. COMPARISONS
1. AUTOMATIC ZERO-RATED VAT
2. EFFECTIVELY ZERO-RATED VAT
3. EXEMPT TAX
AUTOMATIC ZERO-RATED
VAT

EFFECTIVELY ZERORATED VAT

Refer to actual export sale of Refer to the local sale of

goods and supply of services. goods or supply of services to
The tax rate is set to zero.
persons or entities whose
exemption under special laws
or international agreements to
which the Philippines is a
signatory effectively subjects
such transactions to a zero
rate.
When applied to the tax base,
such rate obviously results in
no tax chargeable against the
purchaser.
The seller charges no output
tax, but can claim a refund or
a tax credit certificate for the
VAT previously charge by
supplier

EXEMPT TAX
Refer to the sale of goods or
properties and/or services and
the use or lease of properties
that is not subject to VAT
(output tax) and the seller is
not allowed any tax credit of
VAT (input tax) on purchases.

Again, as applied to the tax

base, such rate does not yield
any tax chargeable against the
purchaser.

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
The seller who charges zero not subject to VAT.
output tax on such transactions
can also claim a refund of or a
tax credit certificate for the
VAT previously charged by
suppliers.

I. THE INPUT TAX

1. DEFINITION: means the vat due or paid by a VAT-registered person on importation of
goods or local purchases of goods, properties, or services, including lease or use of
properties, in the course of business or trade.

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2. SOURCES OF INPUT TAX: any input tax on the following transactions evidences by a
VAT invoice or official receipt issued by a VAT-REGISTERED person in accordance with
section 113 AND 237 of the tax code shall be creditable against the output tax.

a. Purchase or importation of goods

1) For sale; or
2) For conversion into or intended to form part of a finished product for sale, including
packaging materials; or
3) For use as supplies in the course of business; or
4) For use as raw materials supplied in the sale of services; or
5) For use in trade or business for which deduction for depreciation or amortization is
allowed under the Tax Code, Purchase of real properties for which a VAT has actually
been paid;
b. Purchase of services in which a VAT has actually been paid;
c. Transactions "deemed sale" under Sec. 106 (B) of the Tax Code;
d. Transitional input tax allowed under Sec. 4.111 (a) of these Regulations;
e. Presumptive input tax allowed under Sec. 4.111 (b) of these Regulations;
f. Transitional input tax credits allowed under the transitory and other provisions of these
Regulations.

3. WHEN REFUNDED OR CLAIMED AS TAX CREDIT.

a. EXPORT SALE: an exporter who is a VAT-registered shall within 2 years from the
end of the actual exploration apply for the issuance of a tax credit certificate or refund
of input tax upon presentation of profit of proceeds has been accounted for in
accordance with BSP regulation.
Persons other than those engaged in export sale whose sales are zero-rated or
effectively zero rated may within 2 years after the close of their quarter when such
sale were made, apply for the issuance of a tax credit/refund certificate of the input
tax attributable to such sales
b. VAT REGISTERED PERSON may apply for the issuance of a tax credit/refund
certificate of input taxes paid on capital goods imported or locally purchased. Said
application may be made only after the expiration of 2 succeeding quarters following
the quarter in which the purchase was made
4. PERSON WHO CAN AVAIL OF THE INPUT TAX.
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The input tax credit on importation of goods or local purchases of goods, properties or services
by a VAT-registered person shall be creditable:
(a) To the importer upon payment of VAT prior to the release of goods from customs custody;
(b) To the purchaser of the domestic goods or properties upon consummation of the sale; or
(c) To the purchaser of services or the lessee or licensee upon payment of the compensation,
rental, royalty or fee.

5. THE PRESUMPTIVE INPUT TAX ON BEGINNING INVENTORY

6. THE PRESUMPTIVE INPUT TAX CREDIT , DEFINED
-

The arbitrary input tax credit allowed to persons liable for VAT or to VAT registered
persons where the purchases are not subject to any input tax.

Highly limited in application

a. KIND
1. Persons or firms engaged in the processing of sardines, mackerel, and milk, and
in manufacturing refined sugar, cooking oil and packed noodle-based instant
meals, 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.( RA
8424)
2. Public works contractors shall be allowed a presumptive input tax equivalentto 11/2 of the contract price with respect to government contracts only in lieu of the
actual input taxes therefrom.

7. THE TRANSITIONAL INPUT TAX CREDIT, DEFINED.

-

The input tax allowed to be creditable against the output tax a person liable to VAT or a VAT
registered person on his beginning inventory of goods, materials and supplies, equivalent to 2%
of the value of his inventory filed according to the rules and regulations prescribed by the
department of finance, upon recommendation of the CIR, or the actual VAT paid on such goods,
materials and supplies, whichever is higher (RA 8424)

a. WHO MAY AVAIL OF THE 2% TRANSITIONAL INPUT TAX CREDIT

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I.

Taxpayers who became VAT-registered persons upon exceeding the minimum

turnover of P1,919,500 in any 12-month period:

II.

or who voluntarily register even if their turnover does not exceed P1,919,500
(except franchise grantees of radio and television broadcasting whose
threshold is P10,000,000.00) shall be entitled to a transitional input tax on the
inventory on hand as of the effectivity of their VAT registration, on the
following:
1. Goods purchased for resale in their present condition;
2. Materials purchased for further processing, but which have not yet
undergone processing;
3. Goods which have been manufactured by the taxpayer;
4. Goods in process for sale; or
5. Goods and supplies for use in the course of the taxpayer's trade or
business as a VAT-registered person.

The transitional input tax shall be two percent (2%) of the value of the beginning
inventory on hand or actual VAT paid on such, goods, materials and supplies, whichever is
higher, which amount shall be creditable against the output tax of VAT-registered person. The
value allowed for income tax purposes on inventories shall be the basis for the computation of
the 2% transitional input tax, excluding goods that are exempt from VAT under Sec. 109 of the
Tax Code.

8. DISTINCTION
BETWEEN
PRESUMPTIVE
TRANSITIONALINPUT TAX CREDIT

PRESUMPTIVE INPUT TAX

1. It is 4% of the goods value in money of
their purchases of primary agricultural
products which are used as inputs to
their production
2. Applicable to persons engaged in
(a) Processing of sardines, mackerel and
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INPUT

TAX

AND

TRANSITIONAL INPUT TAX CREDIT

1. This is input tax on the inventory in
hand as of the effectivity of the vat
registration of a
(a) A tax payer who becomes VATregister having exceeded the P
1,919,500 in any 12 month period

BEHTTINAKIMBARRIOS. Taxation 2 23

milk
(b) Manufacturing refined sugar, cooking
oil and packed noodle-based instant
meals
3. The amount is creditable against the
output tax of a vat-registered person

(b) Voluntarily registers as a vat-payer

even if turnover sale does not
exceed P 1,919,500
2. It is computed as 2% of the value of the
beginning inventory on hand or actual
VAT paid on such goods, material and
supplies whichever is higher.
3. It is amount creditable against the
output tax of a vat-registered person

J. THE OUTPUT TAX

1. DEFINITION: the VAT due on the sale or lease of taxable goods/services or properties by any
person registered or required to register for vat purposes.

2. DIFFERENCE BETWEEN AN INPUT TAX AND OUTPUT TAX

INPUT TAX

OUTPUT TAX

The VAT paid by a VAT registered person in the

course of his trade or business of imported goods,
local goods and services, including lease or use of
property . It includes the transitional input tax and
the presumptive input tax.

The VAT due on the sale or lease of taxable

goods/services or properties by any person
registered or required to register for vat purposes

3. WHEN MAY AN INPUT TAX BE CREDITED AGAINST THE OUTPUT TAX

Any input tax on the purchase or importation of goods
a. For sale or for conversion into or intended to form part of a finished product for sale or use in
the course of business
b. For use as supplies in the course of business; or
c. For use as material supplied in the sale of service; or

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d. For use in the trade or business for which deduction for depreciation is allowed under the
VAT law except automobiles. Aircrafts and yacht; or
e. Sale of tax exempt products domestically by the pioneer industries registered under BOI as of
august 1, 1986 to VAT-registered person, the VAT otherwise die on such products shall also be
considered as input tax creditable against the output tax payable
f.

Purchase of real properties for which a VAT actually been paid; or

g. Purchase for services for which a VAT has actually been paid
h. Transaction deemed sale
i.

Presumptive input tax

j.

A VAT registered person who is also engaged in transaction not subject to vat shall be
allowed tax credit as follows
(1) Total input tax which can be directly attributed to transactions subject to VAT, and
(2) A ratable portion of any input tax, which cannot be directly attributed to either
activity

k. Services performed by a VAT registered person shall be credited against the output tax
payable by the VAT registered person, provided the invoice or receipt was issued therefore by
a VAT registered person in a manner prescribed under the vat law

4. TAX BASES OF OUTPUT TAX

IN CASE OF SALE OF GOODS (including capital goods) the taxable shall be the gross selling
price which shall be total amount in money or its equivalent that the purchaser pays to get the
goods, including excise tax if any and miscellaneous charges such as packaging, delivery,
insurance and other handling expenses even if these amount are separately billed or invoiced.

IN CASE OF RENDITION OF SERVICE the taxable base shall be the gross receipt or total
amount of money or its equivalent representing the contract price, compensation or service fee,
rental or royalty, including the amount charged for material supplied with the service and deposits
and advance payment actually or constructively received for the services rendered, or to be
performed to another person, excluding the VAT.

a. GROSS SELLING PRICE , DEFINED

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 VAT.
The excise tax, if any, on such goods or properties shall form part of the gross selling price.

b. GROSS RECEIPT, DEFINED

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refers to 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 applied as payments for services rendered and advance payments
actually or constructively received during the taxable period for the services performed or to be
performed for another person, excluding VAT.
c. CONSTRUCTIVE RECEIPT

Occurs when the money consideration or its equivalent is placed at the control of the person who
rendered the service without restrictions by the payor.
1. EXAMPLES:
The following are examples of constructive receipts:
(1) Deposit in banks which are made available to the seller of services without
restrictions;
(2) Issuance by the debtor of a notice to offset any debt or obligation and acceptance
thereof by the seller as payment for services rendered; and
(3) Transfer of the amounts retained by the payor to the account of the contractor

5. TAX BASE OF OUTPUT TAX IN CASE OF IMPORTATION

IN THE CASE OF IMPORTATION- the total value used by the BOC in determining the tariff
and custom duties, plus excise tax, if any and other charges prior to the release from customs
custody
a. LANDED COST: Consists of the invoice amount, custom duties, freight, insurance and other
charges. If the goods imported are subject to excise tax, the excise tax shall form part of the
tax base

In case the valuation used by the BOC in computing custom duties is based on the volume or
quantity of the imported goods, the landed cost shall be the basis for computing tax.

6. TAX BASE OF OUTPUT TAX IN TRANSACTION DEEMED SALE (PAGE 793 CASASOLA)

For transaction deemed sale, the output tax shall be based on the fair market value of the goods
deemed sold as of the time of the occurrence of the transactions enumerated in section 4.106-7 of
RR-2005

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7. TAX BASE ON OUTPUT TAX IN CASE OF RETIREMENT FROM BUSINESS OR

CESSATION OF BUSINESS

In case of cessation or retirement of business, the tax base shall be the acquisition cost of the
current market price of the goods or properties, whichever is lower.

8. INSTANCES WHEN THE CIR IS AUTHORIZED TO DETERMINE THE APPROPRIATE VAT

BASE

The CIR shall determine the appropriate tax base in cases where

a. the transaction is deemed a sale, barter, or exchange of goods or properties under section 4.106-7
par. A of RR 16-2005 as amended; or
b. where the gross selling price is unreasonably lower than the actual market value

It is unreasonably lower if it is lower by more than 30% of the actual market value of the same
goods of the same quantity and quality sold in the immediate locality on or nearest the date of
sale

c. the CIR suspended the business operation and temporarily close the business for violation of the
VAT law

9. GOODS NOT SUBJECT TO OUTPUT TAX

Not subject to output tax
The VAT shall not apply to goods or properties existing as of the occurrence of the following:
a. Change of control of a corporation by the acquisition of the controlling interest of such
corporation by another stockholder or group of stockholders. The goods or properties used in
business or those comprising the stock-in-trade of the corporation, having a change in corporate
control, will not be considered sold, bartered or exchanged despite the change in the ownership
interest in the said corporation.
Illustration: Abel Corporation is a merchandising concern and has an inventory of goods for sale
amounting to Php1 million. Nel Corporation, a real estate developer, exchanged its real estate properties
for the shares of stocks of Abel Corporation resulting to the acquisition of corporate control. The
inventory of goods owned by Abel Corporation (Php1 million worth) is not subject to output tax despite
the change in corporate control because the same corporation still owns them. This is in recognition of the
separate and distinct personality of the corporation from its stockholders. However, the exchange of real
estate properties held for sale or for lease, for shares of stocks, whether resulting to corporate control or
not, is subject to VAT. This is an actual exchange of properties which makes the transaction taxable.
b. Change in the trade or corporate name of the business;

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c. Merger or consolidation of corporations. The unused input tax of the dissolved corporation, as of
the date of merger or consolidation, shall be absorbed by the surviving or new corporation.

10. TRANSACTIONS NOT SUBJECT TO OUTPUT TAX AND CANNOT CLAIM INPUT TAX

An exemption means that the sale of goods or services is not subject to VAT (output tax). The
seller is not allowed any tax credit (input tax) previously paid. The seller making the exempt sale
of goods or services shall not separately bill any output tax to his customer because the said
transaction is not subject to VAT.

On the other hand, a VAT registered purchaser of goods or services which are exempt from VAT
is not entitled to any input tax on such purchases.

K. VAT COMPUTATION

1. VAT PAYABLE, DEFINED

2. OUTPUT TAX COMPUTATION
a. ON SALE ON GOODS:
OT = gross selling price X 12% rate of VAT
b. ON SALE OF REAL PROPERTY
OT = gross selling price X 12% rate of VAT
Gross selling price is the consideration stated in the sales document or the fair market value whichever is
higher. The term fair market value shall mean whichever is higher of:
1) The fair market value as determined by the Commissioner /zonal value, or
2) The fair market value as shown in schedule of values of the Provincial and City Assessors
(Real property tax declaration)

c. ON SALE OF SERVICES/USE OR LEASE OF PROPERTY

OT = gross receipts X 12% rate of VAT

d. ON IMPORTATION OF GOODS

OT = total landed cost X 12% rate of VAT

In all cases where the basis of the OT is the GSP or GR, but the amount of OT is erroneously billed billed
in the invoice, total invoice amount is presumed to be comprised of the GSP/GR plus the correct amount
of VAT, hence the output tax is:
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OT = total invoice amount X (VAT/100% +VAT)

3. COMPUTATION OF VAT PAYABLE

Output tax
Less: input tax
________________
VAT PAYABLE/EXCESS TAX CREDITS

4. EFFECTS OF EXCESS OUTPUT TAX OR INPUT TAX

a. If at the end of the taxable quarter, the output tax exceeds input tax (OT > IT) , the excess
shall be paid by the tax-registered person
b. If the input tax inclusive of input tax carried over from the previous quarter exceeds the
output tax (IT > OT), the excess input tax shall be carried over to the succeeding quarter
or quarters
PROVIDED however, that any 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 which may be used in
the payment of IR taxes

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