VALUE-ADDED TAXES (VAT)

1.
Define value-added tax (VAT).
SUGGESTED ANSWER: A tax which is imposed only on the increase in the worth, merit or
importance of goods, properties or services, and not on the total value of the goods or
services being sold or rendered.
2.
What is the nature of VAT ?
SUGGESTED ANSWSER: VAT is an indirect tax that may be shifted or passed on to
the buyer, transferee or lessee of the goods, properties or services. As such, it should be
understood not in the context of the person or entity that is primarily, directly liable for its
payment, but in terms of its nature as a tax on consumption. [Commissioner of Internal
Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February 11, 2005 citing
various authorities}
As an indirect tax on services, its main object is the transaction itself or, more
concretely, the performance of all kinds of services conducted in the course of trade or
business in the Philippines. These services must be regularly conducted in this country,
undertaken in pursuit of a commercial or an economic activity, for a valuable consideration,
and not exempt under the Tax Code, other special laws, or any international agreement.
(Commissioner, of Internal Revenue v. American Express International, Inc. (Philipppine
Branch), G. R. No. 152609, June 29, 2005 citing various cases and authorities)
VAT is a percentage tax imposed on any person whether or not a franchise grantee,
who in the course of trade or business, sells, barters, exchanges, leases, goods or properties,
renders services. It is also levied on every importation of goods whether or not in the course
of trade or business. The tax base of the VAT is limited only to the value added to such goods,
properties, or services by the seller, transferor or lessor. Further, the VAT is an indirect tax
and can be passed on to the buyer. (Quezon City, et al., v. ABS-CBN Broadcasting
Corporation, G. R. No. 166408, October 6, 2008)
3.
What is the effect on exemptions of VAT being an indirect tax ?
Reason out and illustrate your answer.
SUGGESTED ANSWER: If a special law merely exempts a party as a seller from its
direct liability for payment of the VAT, but does not relieve the same party as a purchaser
from its indirect burden of the VAT shifted to it by its VAT-registered suppliers, the purchase
transaction is not exempt.
REASON: The VAT is a tax on consumption, the amount of which may be shifted or
passed on by the seller to the purchaser of the goods, properties or services. [Commissioner
of Internal Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February 11, 2005)
Illustration: A VAT exempt seller sells to a non-VAT exempt purchaser. The
purchaser is subject to VAT because the VAT is merely added as part of the purchase price and
not as a tax because the burden is merely shifted. The seller is still exempt because it could
pass on the burden of paying the tax to the purchaser.
4.
The VAT is a tax on consumption.
Explain the meaning of
consumption as used under the VAT system. Give an example.
SUGGESTED ANSWER: Consumption is "the use of a thing in a way that thereby
exhausts it."
Applied to services, the term means the performance or "successful completion of a
contractual duty, usually resulting in the performer's release from any past or future liability x
x x" Unlike goods, services cannot be physically used in or bound for a specific place when
their destination is determined. Instead, there can only be a "predetermined end of a course"
when determining the service "location or position x x x for legal purposes."
For example the services rendered by a local firm to its foreign client are performed
or successfully completed upon its sending to a foreign client the drafts and bills it has
gathered from service establishments here. Its services, having been performed in the

Philippines, are therefore also consumed in the Philippines. Such facilitation service has no
physical existence, yet takes place upon rendition, and therefore upon consumption, in the
Philippines. [Commissioner of Internal Revenue v. American Express G.R. No. 152609, 29
June 2005, 462 SCRA 197 cited in Commissioner of Internal Revenue v. Placer Dome Technical
Services (Phils.), Inc. G. R. No. 164365, June 8, 2007]
5.
a.

Who are liable for the value-added tax ?

SUGGESTED ANSWER:
Any person who, in the course of his trade or business,
1)
Sells, barters, exchanges or leases goods
or
properties, or
2)
renders services, and
b.
any person who imports goods xxx
However, in the case of importation of taxable goods, the importer, whether an
individual or corporation and whether or not made in the course of his trade or business, shall
be liable to VAT xxx. (Rev. Regs. No. 16-2005,Sec. 4.105-1, paraphrasing supplied)
6.
What are the various VAT methods and systems ?
SUGGESTED ANSWER:
a.
Cost deduction method. This is a single-stage tax which is payable only
by the original sellers.
[Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No.
168056, September 1, 2005 and companion cases citing Deoferio, Jr. V. A. and Mamalateo,
V.C., The Value Added Tax in the Philippines (First Edition 2000)] This was subsequently
modified and a mixture of cost deduction method and tax credit method was used to
determine the value-added tax payable. (Ibid.)
b.
Tax credit method. This method relies on invoices, an entity can credit
against or subtract from the VAT charged on its sales or outputs the VAT paid on its
purchases, inputs and imports. [Commissioner of Internal Revenue v. Seagate Technology
(Philippines), G. R. No. 153866, February 11, 2005 citing various cases and authorities;
Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and
companion cases)
If at the end of a taxable period, the output taxes charged by a seller are equal to
the input taxes passed on by the suppliers, no payment is required. It is when the output
taxes exceed the input taxes that the excess has to be paid. If however, the input taxes
exceed the output taxes, the excess shall be carried over to the succeeding quarter or
quarters. Should the input taxes result from zero-rated or effectively zero-rated transactions
or from acquisition of capital goods, any excess over the output taxes shall instead be
refunded to the taxpayer or credited against other internal revenue taxes. [Commissioner of
Internal Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February 11, 2005
citing various cases and authorities]
7.
The VAT being imposed on the increase in worth merit or
improvement of the goods or services. How is this done ?
SUGGESTED ANSWER: The VAT utilizes the concept of the output and input taxes.
8.
Define output tax.
SUGGESTED ANSWER: The value-added tax due on the sale or lease or taxable goods,
properties or services by any VAT-registered person.
9.
Define input tax.
SUGGESTED ANSWER: The VAT due on or paid by a VAT-registered person on importation
of good or local purchases of goods or services, including lease or use of properties, in the
course of his trade or business. (Rev. Regs. No. 4.110-1, 1 st par.)
10.
What are included in the input tax.
SUGGESTED ANSWER: It shall also include:

a.
the transitional input tax and
b.
the presumptive input tax xxx.
It includes
c.
input taxes which can be directly attributed to transactions subject to the
VAT plus a ratable portion of any input tax which cannot be directly attributed to either the
taxable or exempt activity. (Rev. Regs. No. 4.110-1, 1 st par., 2nd sentence,. And 2nd par.,
paraphrasing, arrangement and numbering supplied )
11.
May the right to credit the input tax be limited by legislation ?
SUGGESTED ANSWER: Yes because it is a mere creation of law. Prior to the
enactment of multi-stage sales taxation, the sales taxes paid at every level of distribution are
not recoverable from the taxes payable. With the advent of Executive Order No. 273 imposing
a 10% multi-stage tax on all sales, it was only then that the crediting of the input tax paid on
purchase or importation of goods and services by VAT-registered persons against the output
tax was established. This continued with the Expanded VAT Law (R.A. No. 7716), and The Tax
Reform Act of 1997 (R.A. No. 8424). The right to credit input tax as against the output tax is
clearly a privilege created by law, a privilege that also the law can limit. It should be stressed
that a person has no vested right in statutory privileges. (ABAKADA Guro Party List, etc. et al.
vs. Ermita, G.R. No. 168207, October 15, 2005, and companion cases, on the motion for
reconsideration)
12.What is the concept of transitional input tax credits on beginning
inventories ?
SUGGESTED ANSWER:
Taxpayers who become VAT-registered persons upon
exceeding the minimum turnover of P1,500,000.00 in any 12-month period, or who voluntarily
register even if their turnover does not exceed P1,500,000.00 (except franchise grantees of
radio and television broadcasting whose threshold is P10,000,000.00) shall be entitled to a
transitional input tax on the inventory on hand as of the effectivity of their VAT registration, on
the following:
a.
goods purchased for resale in their present condition;
b.
materials purchased for further processing, but which have not yet
undergone processing;
c.
goods which have been manufactured by the taxpayer;
d.
goods in process for sale; or
e.
goods and supplies for use in the course of the taxpayers trade or business
as a VAT-registered person. [Rev. Regs. No. 16-2005, Sec.4.111-1, (a), 1 st par., arrangement
and numbering supplied]
14.
What is the concept of presumptive input tax credits ?
SUGGESTED ANSWER:
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.
As used in this paragraph, the term processing shall mean pasteurization, canning
and activities which through physical or chemical process alter the exterior texture or form or
inner substance of a product in such a manner as to prepare it for special use to which it could
not have been put in its original form or condition. [Rev. Regs. No. 16-2005, Sec.4.111-1, (b)]
15. Does the VAT registration fee violate religious freedom ?
SUGGESTED ANSWSER: The VAT registration fee imposed on non-VAT enterprises
which includes among others, religious sects which sells and distributes religious literature is
not violative of religious freedom, although a fixed amount is not imposed for the exercise of a
privilege but only for the purpose of defraying part of the cost of registration.

The registration fee is thus more of an administrative fee, one not imposed on the
exercise of a privilege, much less a constitutional right. (Tolentino v. Secretary of Finance, et
al., and companion cases, 235 SCRA 630)
16.
Explain the proper interpretation of the term In the Course of
Trade or Business.
SUGGESTED ANSWSER: VAT is not a singular-minded
tax on every transactional level. Its assessment bears direct relevance to the taxpayers role
or link in the production chain. Hence, as affirmed by Section 99 of the Tax Code and its
subsequent incarnations, the tax is levied only on the sale, barter or exchange of goods or
services by persons who engage in such activities, in the course of trade or business.
These transactions outside the course of trade or business may invariably contribute to the
production chain, but they do so only as a matter of accident or incident. As the sales of
goods or services do not occur within the course of trade or business, the providers of such
goods or services would hardly, if at all, have the opportunity to appropriately credit any VAT
liability as against their own accumulated VAT collections since the accumulation of output
VAT arises in the first place only through the ordinary course of trade or business.
(Commissioner of Internal Revenue v. Magsaysay Lines, Inc., et al., G. R. No. 146984, July 28,
2006)
16-A. Pursuant to a government program of privatization, NDC, a VATregistered entity created for the purpose of selling real property, decided to sell to
private enterprise all of its shares in its wholly-owned subsidiary the National
Marine Corporation (NMC). The NDC decided to sell in one lot its NMC shares and
five (5) of its ships, which are 3,700 DWT Tween-Decker, "Kloeckner" type vessels.
The vessels were constructed for the NDC between 1981 and 1984, then initially
leased to Luzon Stevedoring Company, also its wholly-owned subsidiary.
Subsequently, the vessels were transferred and leased, on a bareboat basis, to the
NMC.
The NMC shares and the vessels were offered for public bidding. Among
the stipulated terms and conditions for the public auction was that the winning
bidder was to pay "a value added tax of 10% on the value of the vessels."
Magsaysay Lines, Inc., offered to buy the shares and the vessels for
P168,000,000.00. The bid was made by Magsaysay Lines, purportedly for a new
company still to be formed composed of itself, Baliwag Navigation, Inc., and FIM
Limited of the Marden Group based in Hongkong . The bid was approved by the
Committee on Privatization, and a Notice of Award was issued to Magsaysay Lines.
Is the sale subject to VAT ?
SUGGESTED
ANSWER:
No. The sale is not subject to VAT.
In Imperial v. Collector of Internal Revenue, G.R. No. L7924, September 30, 1955 (97 Phil. 992), the term "carrying on business" does not mean the
performance of a single disconnected act, but means conducting, prosecuting and continuing
business by performing progressively all the acts normally incident thereof; while "doing
business" conveys the idea of business being done, not from time to time, but all the time. [J.
Aranas, UPDATED NATIONAL INTERNAL REVENUE CODE (WITH ANNOTATIONS), p. 608-9
(1988)]. "Course of business" is what is usually done in the management of trade or
business. [Idmi v. Weeks & Russel, 99 So. 761, 764, 135 Miss. 65, cited in Words & Phrases,
Vol. 10, (1984)]. What is clear therefore, based on the aforecited jurisprudence, is that
"course of business" or "doing business" connotes regularity of activity. In the instant case,
the sale was an isolated transaction. The sale which was involuntary and made pursuant to
the declared policy of Government for privatization could no longer be repeated or carried on
with regularity. It should be emphasized that the normal VAT-registered activity of NDC is
leasing personal property.
This finding is confirmed by the Revised Charter of the NDC
which bears no indication that the NDC was created for the primary purpose of selling real
property. (Commissioner of Internal Revenue v. Magsaysay Lines, Inc., et al., G. R. No. 146984,
July 28, 2006)

17.
Under the Value Added Tax (VAT), the tax is imposed on sales,
barter, or exchange or goods and services. The VAT is also imposed on certain
transactions deemed sales. What are these so-called transactions deemed
sales ?
SUGGESTED ANSWER:
a.
Transfer, use or consumption not in the course of business or
properties originally intended for sale or for use in the course of business. xxx
b. Distribution or transfer to:
1)
Shareholders or investors as share in the profits of the VAT- registered
person; xxx or
2)
Creditors in payment of debt or obligation
c. Consignment of goods if actual sale is not made within sixty (60) days
following the date such goods were consigned. Consigned goods returned by the consignee
within the 60-day period are not deemed sold.
d.
Retirement from or cessation of business, with respect to all goods on
hand,
1)
whether capital goods, stock-in-trade, supplies or materials as of the date
of such retirement, or cessation,
2)
whether or not the business is continued by the new owner or successor.
xxx [Rev. Regs. No. 16-2005, Sec. 4.106-7, paraphrasing, arrangement and numbering
supplied]
18.
What transactions considered retirement or cessation of business
deemed sale subject to VAT ?
SUGGESTED ANSWER:
a. Change of ownership of the business. There is change in the ownership of the
business where a single proprietorship incorporates; or
1) the proprietor of a single proprietorship sells his entire business.
b.
Dissolution of a partnership and creation of a new partnership which takes
over the business. [Rev. Regs. No. 16-2005, Sec. 4.106-7 (a), (4) paraphrasing, arrangement
and numbering supplied]
19.
What sale of or lease of real properties subject to VAT ?
SUGGESTED ANSWER: Sale of real properties 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. (Rev.
Regs. No. 16-2005, Sec. 4.106-3, 1st par.)
Thus, capital transactions of individuals are not subject to VAT. Only real estate
dealers are subject to VAT.
20.
On Jan. 10, 2008, X, a domestic corporation
engaged in the real estate business, sold a building for P10,000,000.00. Is the sale
subject to the value-added tax (VAT)? If so, how much? Explain.
SUGGESTED ANSWER: Yes. 12% on the gross selling price because the sale was made in
the ordinary course of trade of business of X, a domestic corporation engaged in the real
estate business.

namely:

21.
What sale of real property exempt from VAT ?
SUGGESTED ANSWER: The following sales of real properties are exempt from VAT,

a.
Sale of real properties not primarily held for sale to customers or held for
lease in the ordinary course of trade or business;
b.
Sale of real properties utilized for low-cost housing as defined by RA No.
7279, otherwise known as the Urban and Development Housing Act of 1992 and other
related laws, such as RA No. 7835 and RA No. 8763.
xxx
xxx
xxx

c.
Sale of real properties utilized for socialized housing as defined under RA
No. 7279, and other related laws wherein the price ceiling per unit is P225,000.00 or as may
from time to time be determined by the HUDCC and the NEDA and other related laws.
xxx
xxx
xxx
d.
Sale of residential lot valued at One Million Five Hundred Thousand Pesos
(P1,500,000.00) and below, or house & lot and other residential dwellings valued at Two
Million Give Hundred Thousand Pesos (P2,500,000.00) and below where the instrument of
sale/transfer/disposition was executed on or after November 1, 2005, provided, That not later
than January 31, 2009 and every three (3) years thereafter, the amounts stated herein shall
be adjusted to its present value using the Consumer Price Index, as published by the National
Statistics Office (NSO); provided, further, that such adjustment shall be published through
revenue regulations to be issued not later than March 31 of each year.
If two or more adjacent residential lots are sold or disposed in favor 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 P1,500,000.00. Adjacent residential lots,
although covered by separate titles and/or separate tax declarations, when sold or disposed
of 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. [Rev. Regs. No. 4.109-1 (B), (p), paraphrasing
and numbering supplied]
22.
What is the VAT on services and lease of properties ?
SUGGESTED ANSWER:
a.
There shall be levied, assessed, and collected,
b.
a value-added tax equivalent to ten percent (10%) of gross receipts
c.
derived from the sale or exchange of services,
1)
including the use or lease of properties.
d.
Provided, That the President, upon the recommendation of the Secretary of
Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent
(12%), after any of the following conditions has been satisfied:
1)
Value-added tax collection as a percentage of Gross Domestic product
(GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or
2)
National government deficit as a percentage of GDP of the previous year
exceeds one and one-half percent (1 1/2%). [NIRC of 1997, Sec. 108 (A), as amended by R.A.
No. 9337, arrangement and numbering supplied]
23.
Sale or exchange of services, defined.
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:
a.
construction
and
service
contractors;
b.
stock, real estate, commercial, customs and
immigration brokers;
c.
lessors of
property, whether personal or real;
d.
persons
engaged
in
warehousing services
e.
lessors or distributors of cinematographic
films;
f.
persons engaged in milling, processing, manufacturing or repacking
goods for others;
g.
proprietors, operators or
keepers of hotels, motels, rest-houses, pension houses, inns, resorts; theaters, and movie
houses;
h.
proprietors or operators of restaurants, refreshment parlors, cafes and
other eating places, including clubs and caterers;
i.
dealers in securities;
j.
lending investors;
k.
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;
l.
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;
m.
sales of electricity by generation companies, transmission, and/or

distribution companies;
n.
franchise grantees of electric
utilities, telephone and telegraph, radio and 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
p.
similar services regardless of whether or not the performance thereof calls
for the exercise or use of the physical or mental faculties. [NIRC of 1997, Sec. 108 (A), as
amended by R.A. No. 9337; Rev. Regs. No. 16-2005, Sec. 4,108-2, 1 st par., arrangement and
numbering supplied]

24.
X Corporation rendered technical services through its work
engineers to PNB and SSS in the construction of their buildings. The work
engineers acted as overseers of X Corporation, rendering their professional
services as employees of X corporation. Should X Corporation be subjected to VAT
or should it be subjected to tax on the professional services of those employees
themselves? Decide the case with reason.
SUGGESTED ANSWER: X Corporation is subject to VAT.
25.

Also included in the phrase sale or exchange of services.

a.
The lease or the use of or the right or privilege to use any copyright,
patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or
other like property or right;
b.
The lease or the use of, or the right to use any industrial, commercial or
scientific equipment;
c.
The supply of scientific, technical, industrial or commercial knowledge or
information;
d.
The supply of any assistance that is ancillary and subsidiary to and is
furnished as a means of enabling the application or enjoyment of any such property, or right
as is mentioned in subparagraph (2) hereof or any such knowledge or information as is
mentioned in subparagraph (3) hereof; or
e.
The supply of services by a non-resident 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;
f.
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 of scheme;
g.
The lease of motion picture films, film tapes and discs;
h.
The lease or the use of or the right to use radio, television, satellite
transmission and cable television time. (Rev. Regs. No. 16-2005, Sec. 4.108-2, 2 nd par.)
26.
Zero-rated Sales of Goods or Properties. A zero-rated sale of goods or
properties by a sale by a VAT-registered person is a taxable transaction for VAT purposes but
the sale does not result in any output tax.
However, the input tax on the purchases of goods, properties or services related to such
zero-rated sale shall be available as tax credit or refund in accordance with Rev. Regulations
No. 16-2005. (Rev. Regs. No. 16-2005, 1st par.)
27. Concept of VAT zero-rating. The tax rate is set at zero. When applied
to the tax base, such rate obviously results in no tax chargeable against the purchaser. The
seller of such transactions charges no output tax, but can claim a refund or a tax credit
certificate for the VAT previously charged by suppliers. [Commissioner of Internal Revenue v.
Seagate Technology (Philippines), G. R. No. 153866, February 11, 2005]

Under a zero-rating scheme, the sale or exchange of a particular service is

completely freed from the VAT, because the seller is entitled to recover, by way of a refund or
as an input tax credit, the tax that is included in the cost of purchases attributable to the sale
or exchange. The tax paid or withheld is not deducted from the tax base. (Commissioner, of
Internal Revenue v. American Express International, Inc. (Philippine Branch), G. R. No. 152609,
June 29, 2005 citing various cases)
28. Situs of taxation of zero-rated VAT services such as facilitating the
collection of receivables from credit card members situated in the Philippines and
payment to service establishments in the Philippines. The place where the service is
rendered determines the jurisdiction (Commissioner of Internal Revenue v. American Express
International, Inc. (Philipppine Branch), G. R. No. 152609, June 29, 2005 citing [N]o state may
tax anything not within its jurisdiction without violating the due process clause of the
[C]constitution. Manila Gas Corp. v. Collector of Internal Revenue, 62 Phil. 895, 900, January
17, 1936, per Malcolm, J.) to impose the VAT [Commissioner, supra citing Deoferio, Jr. and
Mamalateo, The Value Added Tax in the Philippines (2000), p. 93]
Performed in the Philippines, the service is necessarily subject to its jurisdiction
[Commissioner, supra citing Alejandro, The Law on Taxation (1966 rev. ed.) p. 33], for the
State necessarily has to have a substantial connection [Commissioner, supra citing Garner
(ed. in chief), Blacks Law Dictionary (8th ed., 1999), p. 1503] to it in order to enforce a zero
rate. [Commissioner, supra citing De Leon, The Fundamentals of Taxation (12th ed., 1998), p.
3] The place of payment is immaterial [Commissioner, supra citing Deoferio, Jr. and
Mamalateo, The Value Added Tax in the Philippines (2000), p. 93], much less is the place
where the output of the service will be further or ultimately used.
This is so because the law neither makes a qualification nor adds a condition in
determining the tax situs of a zero-rated service. (Commissioner, supra)
29.
What is the destination principle the VAT ?
SUGGESTED ANSWER: As a general rule, the VAT system uses the destination principle
as a basis for the jurisdictional reach of the tax.
Goods and services are taxed only in the country where they are consumed. Thus,
exports are zero-rated, while imports are taxed.
30.
Is there any exception to the destination principle ?
SUGGESTED ANSWER:
Yes.
The law clearly provides for an exception to the
destination principle; that is, for a zero percent VAT rate for services that are performed in the
Philippines, "paid for in acceptable foreign currency and accounted for in accordance with the
rules and regulations of the [BSP]."
31.
Rationale for zero-rating of exports. The Philippine VAT system adheres to
the Cross Border Doctrine, according to which, no VAT shall be imposed to form part of the
cost of goods destined for consumption outside of the territorial border of the taxing
authority. [Commissioner of Internal Revenue v. Toshiba Information Equipment (Phils.), Inc.,
G. R.. No. 150154, August 9, 2005]
The Cross Border Doctrine is also known as the destination principle.
Hence, actual or constructive export of goods and
services from the Philippines to a foreign country must be zero-rated for VAT; while, those
destined for use or consumption within the Philippines shall be imposed the twelve percent
(12%) VAT.
32.
Zero-rated sale distinguished from exempt transactions:
a.
A zero-rated sale is a taxable transaction but does not result in an output
tax WHILE an exempt transaction is not subject to the output tax.
b.
The input tax on the purchases of a VAT registered person who has zerorated sales may be allowed as tax credits or refunded WHILE the seller in an exempt

transaction is not entitled to any input tax on his purchases despite the issuance of a VAT
invoice or receipt.
c.
Persons engaged in transactions which are zero rated being subject to VAT
are required to register WHILE registration is optional for VAT-exempt persons.
33.
Zero-rated sales by VAT-registered persons. The following sales by VATregistered persons shall be subject to zero percent (0%) rate:
a.
Export sales;
b.
Considered export sales under Executive Order No. 224;
c.
Foreign currency denominated sale; and
d.
Sales to persons or entities demed tax-exempt under special law or international
agreement. (Rev. Regs. No. 16-2005, Sec. 4.106-5, 2 nd par., paraphrasing supplied)
34.
Sale of gold to the Central Bank considered as export sales. As export
sales, the sale of gold to the Central Bank is zero-rated, hence, no tax is chargeable to it as
purchaser. Zero rating is primarily intended to be enjoyed by the seller, which charges no
output VAT but can claim a refund of or a tax credit certificate for the input VAT previously
charged to it by suppliers. (Commissioner of Internal Revenue v. Manila Mining Corporation,
G.R. No. 153204, August 31, 2005)
35.
Sales to ecozone, such as PEZA, considered export-sale. Notably, while an
ecozone is geographically within the Philippines, it is deemed a separate customs territory
and is regarded in law as foreign soil. Sales by suppliers from outside the borders of the
ecozone to this separate customs territory are deemed as exports and treated as export sales.
These sales are zero-rated or subject to a tax rate of zero percent. (Commissioner of Internal
Revenue v. Sekisui Jushi Philippines, Inc., G. R. No. 149671, July 21, 2006 citing various
authorities)
36.
Ecozone, defined. An ECOZONE or a Special Economic Zone has been
described as
[S]elected areas with highly developed or which have the potential to be
developed into agro-industrial, industrial, tourist, recreational, commercial, banking,
investment and financial centers whose metes and bounds are fixed or delimited by
Presidential Proclamations. An ECOZONE may contain any or all of the following: industrial
estates (IEs), export processing zones (EPZs), free trade zones and tourist/recreational
centers.
The national territory of the Philippines outside of the proclaimed borders of
the ECOZONE shall be referred to as the Customs Territory. [Commissioner of Internal
Revenue v. Toshiba Information Equipment (Phils.), Inc., G. R.. No. 150154, August 9, 2005]
37.
Zero-rated sale of service, defined. A zero-rated sale of service (by a VATregistered 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 Rev. Regs. No. 162005. [Rev. Regs. No. 16-2005, Sec. Sec. 4.108-5 (a), words in italics supplied)
38. Service performed by American Express in facilitating the
collection of receivables from credit card members situated in the Philippines and
payment to service establishments in the Philippines in behalf of its Hong-Kong
based client is subject to VAT but zero-rated. This is so because it meets all the
requirements for VAT imposition, as follows:
a.
It regularly renders in the Philippines the service of facilitating the
collection and payment of receivables belonging to a foreign company that is a clearly
separate and distinct entity.

b.
Such service is commercial in nature; carried on over a sustained period of
time; on a significant scale with a reasonable degree of frequency; and not at random,
fortuitous, or attenuated.
c.
For this service, it definitely receives consideration in foreign currency that
is accounted for in conformity with law.
d.
It is not an entity exempt under any of our laws or international
agreements. (Commissioner, of Internal Revenue v. American Express International, Inc.
(Philipppine Branch), G. R. No. 152609, June 29, 2005)
39.
While the service performed by American Express is subject to VAT
it is zero-rated, and BIR Revenue Regulations that alter the legal requirements for
zero-rating are ultra vires and invalid. The VAT system uses the destination principle
which posits that the goods and services are taxed only in the country where they are
consumed,
However, the law itself provides for clear exceptions under which the supply of
services shall be zero-rated, among which are the following:
a.
The service is performed in the Philippines;
b.
The services are within the categories provided for under the Tax Code; and
c.
It is paid for in acceptable foreign currency of the Bangko Sentral ng
Pilipinas.
American Express renders assistance to its foreign clients by receiving the bills of
service establishments located in the country and forwarding them to their clients abroad.
The services are performed or successfully completed upon send to its foreign clients the
drafts and bills it has gathered from service establishments here, Its services, having been
performed in the Philippines are therefore also consumed in the Philippines. Thus, its services
are exempt from the destination principle and are zero-rated.
The BIR could not change the law. (Commissioner, of Internal Revenue v. American
Express International, Inc. (Philipppine Branch), G. R. No. 152609, June 29, 2005)
40.
A foreign Consortium composed of BWSC-Denmark, Mitsui
Engineering and Shipbuilding Ltd., and Misui and Co., Ltd., which entered into a
contract with NAPOCOR for the operation and maintenance of two power barges
appointed BWSC-Denmark as its coordination manager. BWSCMI was established
as the subcontractor to perform the actual work in the Philippines. The Consortium
paid BWSCMI in acceptable foreign exchange and accounted for in accordance with
the rules and regulations of the BSP.
Through a February 14, 1995 ruling the BIR declared that BWSCMI may choose
to register as a VAT persons subject to VAT at zero rate. For 1996, it filed the
proper VAT returns showing zero rating. On December 29, 1997, believing that it is
covered by Rev. Regs. 5-96, dated February 20, 1996, BWSCMI paid 10% output
VAT for the period April-December 1996, through the Voluntary Assessment
Program (VAP).
On January 7, 1999, BWSCMI was able to obtain a Ruling from the BIR
reconfirming that it is subject to VAT at zero-rating. On this basis, BWSCMI applied
for a refund of the output VAT it paid.
a.
Is BWSCMI subject to the 10% VAT or is it zero rated ?
SUGGESTED ANSWER: Yes. BWSCMI is not zero rated and is subject to the 10% VAT.
It is rendering service for the Consortium which is not doing business in the Philippines. Zerorating finds application only where the recipient of the services are other persons doing
business outside of the Philippines. BWSCMI provides services to the Consortium which by
virtue of its contract with NAPOCOR is doing business within the Philippines. (Commissioner
of Internal Revenue v. Burmeister and Wain Scandinavian Contractor Mindanao, Inc., G. R. No.
153205, January 22, 2007)
b.
Could it obtain a refund of the VAT it paid through the VAP ? Explain.

SUGGESTED ANSWER: Yes. BWSCMI is entitled to refund of the 10% output VAT it
paid the based on the non-retroactivity of the prejudicial revocation of the BIR Rulings which
held that its services are subject to 0% VAT and which BWSCMI invoked in applying for
refund of the output VAT. (Commissioner of Internal Revenue v. Burmeister and Wain
Scandinavian Contractor Mindanao, Inc., supra)
NOTES AND COMMENTS:
a.
Do not confuse the BWSCMI case with the American Express case.
American Express International, Inc. (Philippine Branch)] is a VAT-registered person that
facilitates the collection and payment of receivables belonging to its non-resident foreign
client [American Express International, Inc. (Hongkong Branch)], for which it gets paid in
acceptable foreign currency inwardly remitted and accounted for in accordance with BSP
rules and regulations.
(Commissioner of Internal Revenue v. Burmeister and Wain
Scandinavian Contractor Mindanao, Inc., G. R. No. 153205, January 22, 2007)
41.

VAT-Exempt transactions, defined.

a.
The sale of goods or properties and/or services and the use or lease of
properties that is
b.
not subject to VAT (output tax) and
c.
the seller is not allowed any tax credit on VAT (input tax) 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. [Rev.
Regs. No. 16-2005, Sec. 4.109-1 (A), arrangement and numbering supplied]
42.

VAT-exempt transactions distinguished from VAT-exempt entities.

a.
An exempt transaction, on the one
hand, involves goods or services which, by their nature, are specifically listed in and expressly
exempted from the VAT under the Tax Code, without regard to the tax status VAT-exempt or
not of the party to the transaction.
An
exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax
Code, a special law or an international agreement to which the Philippines is a signatory, and
by virtue of which its taxable transactions become exempt from VAT. [Commissioner of
Internal Revenue v. Toshiba Information Equipment (Phils.), Inc., G. R. No. 150154, August 9,
2005]
b.
An exempt transaction shall not be the subject of any billing for output VAT
but it shall not also be allowed any input tax credits WHILE an exempt party being zero-rated
is allowed to claim input tax credits.
43.
What transactions are from VAT ?
SUGGESTED ANSWER: (Subject to the election by a VAT-registered person not to
be subject to the value-added tax), the following shall be exempt from VAT:
(A) Sale or importation of 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.
Livestock shall include cows, bulls and calves, pigs, sheep, goats and rabbits.
Poultry shall include fowls, ducks, geese and turkey, Livestock or poultry does not include
fighting cocks, race horses, zoo animals and other animals generally considered as pets.
Marine food products shall include fish and crustaceans, such as, but not limited
to, eels, trout, lobster, shrimps, prawns, oysters, mussels and clams.
Meat, fruit, fish, vegetables and other agricultural and marine food Products
classified under this paragraph shall be considered in their original state even if they have
undergone the simple processes of preparation or preservation for the market, such as
freezing, drying, salting, broiling, roasting, smoking or stripping, including those using
advanced technological means of packaging, such as shrink wrapping in plastics, vacuum
packing, tetra-pack, and other similar packaging methods. Polished and/or husked rice, corn

(1)
(2)

grits, raw cane sugar and molasses, ordinary salt, and copra shall be considered in their
original state.
Sugar whose content of sucrose by weight, in the dry state, has a polarimeter
reading of 99.5o and above are presumed to be refined sugar.
Cane sugar produced from the following shall be presumed, for internal revenue
purposes, to be refined sugar:
product of a refining process,
products of a sugar refinery, or
(3)
product of a production line of a sugar mill accredited by the BIR to be
producing sugar with polarimeter reading of 99.5o and above, and for which the
quedanissued therefor, and verified by the Sugar Regulatory Administration, identifies the
same to be of a polarimeter reading of 99.5o and above.
Bagasse is not included in the exemption provided for under this section.
(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);
Specialty feeds refers to non-agricultural feeds or food for race horses, fighting
cocks, aquarium fish, zoo animals and other animals generally considered as pets.
(C)
Importation of personal and household effects belonging to the residents of
the Philippines returning from abroad and nonresident citizens coming to resettle in the
Philippines: Provided, That such goods are exempt from customs duties under the Tariff and
Customs Code of the Philippines;
(D)
Importation of professional instruments and implements, wearing apparel,
domestic animals, and personal household effects (except any vehicle, vessel, aircraft,
machinery, other goods for use in the manufacture and merchandise of any kind in
commercial quantity) belonging to persons coming to settle in the Philippines, for their own
use and not for sale, barter or exchange, accompanying such persons, or arriving within
ninety (90) days before or after their arrival, upon the production of evidence satisfactory to
the Commissioner of Internal Revenue, that such persons are actually coming to settle in the
Philippines and that the change of residence is bona fide;
(E) Services subject to percentage tax under Title V of the Tax Code, as
enumerated below:
(1)
Sale or lease of goods or properties or the performance of services of nonVAT-registered persons, other than the transactions mentioned in paragraphs (A) to (U) of Sec.
109 (1) of the Tax Code, the annual sales and/or receipts of which does not exceed the
amount of One Million Five Hundred thousand Pesos (P1,500,000.00), Provided, That not later
than January 31, 2009 and 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 National
Statistics Office (NSO). (Sec. 116, Tax Code)
(2)
Services rendered by domestic common carriers by land for the transport
of passengers and keepers of garages. (Sec. 117)
(3)
Services rendered by international air/shipping carriers. (Sec. 118)
(4)
Service 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 franchises of gas and water utilities. (Sec. 119)
(5)
Service rendered for overseas dispatch message or conversation
originating from the Philippines. (Sc. 120)
(6)
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)
(7)
Services rendered by fire, marine or miscellaneous insurance agents of
foreign insurance companies. (Sec. 124)

(8)
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
(9)
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)
(F)
Services by agricultural contract growers and milling 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.
(G)
Medical, dental, hospital and veterinary services except those rendered by
professionals;
Laboratory services are exempted. If the hospital or clinic operates a pharmacy or
drug store, the sale of drugs and medicine is subject to VAT.
(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;
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 and it does not include
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.
(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 Petroleum Exploration Concessionaires under the Petroleum Act of 1949; and;
(L)
Sales by agricultural cooperatives duly registered 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 non-members; 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;
(M)
Gross receipts from lending activities by credit or multi-purpose
cooperatives duly registered and in good standing 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;
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.
(O)
Export sales by persons who are not VAT-registered;
(P)
Sale of real properties not primarily held for sale to customers or held for
lease in the ordinary course of trade or business, or real property utilized for low-cost and
socialized housing as defined by Republic Act No. 7279, otherwise known as the Urban
Development and Housing Act of 1992, and other related laws, such as RA No. 7835 and RA
No. 8765, residential lot valued at One million five hundred thousand pesos (P 1,500,000) and
below, house and lot, and other residential dwellings valued at Two million five hundred
thousand pesos (P 2,500,000) and below: Provided, That not later than January 31, 2009 and

every three (3) years thereafter, the amounts herein stated shall be adjusted to their present
values using the Consumer Price Index, as published by the National Statistics Office (NSO);
(Q)
Lease of a residential unit with a monthly rental not exceeding Ten
thousand pesos (P 10,000) Provided, That not later than January 31, 2009 and 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 National Statistics Office (NSO);
(R)
Sale, importation, printing or publication of books and any newspaper,
magazine, review or bulletin which appears at regular intervals with fixed prices for
subscription and sale and which is not devoted principally to the publication of paid
advertisements;
(S)
Sale, importation or lease of passenger or cargo vessels and aircraft,
including engine, equipment and spare parts thereof for domestic or international transport
operations; Provided, that the exemption from VAT on the importation and local purchase of
passenger and/or cargo vessels shall be limited to those of one hundred fifty (150) tons and
above, including engine and spare parts of said vessels; Provided, further, that the vessels be
imported shall comply with the age limit requirement, at the time of acquisition counted from
the date of the vessels original commissioning, as follows: (i) for passenger and/or cargo
vessels, the age limit is fifteen years (15) years old, (ii) for tankers, the age limit is ten (10)
years old, and (iii) For high-speed passenger cars, 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.
(T)
Importation of fuel, goods and supplies by persons engaged in international
shipping or air transport operations; Provided, that the said fuel, goods and supplies shall be
used exclusively or shall pertain to the transport of goods and/or passenger from a port in the
Philippines directly to a foreign port 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 (now 12%);
(U) Services of banks, non-bank financial intermediaries performing quasi-banking
functions, and other non-bank financial intermediaries; and
(V)
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 One million five hundred thousand pesos
(P1,500,000): Provided, That not later than January 31, 2009 and 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 National Statistics Office (NSO).
For purposes of the threshold of P1,500,000.00, the husband and wife shall be
cnsidered separate taxpayers. However, the aggregation rule for each taxpayer shall apply.
For instance, if a profesional, aside from the practice ofhis profession, also 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 to be icluded in determining the threshold. [NIRC of 1997, Sec. 109 (1), as
amended by R. A. No. 9337; words in italics from Rev. Regs. No. 16-2005, Sec. 4.109-1 (B),
words in parentheses supplied]
44. X is engaged in the importation and sale of books and magazines. Is the
importation of books and magazines subject to the 10% VAT? Explain.
SUGGESTED ANSWER: No. 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;
45.
Is there any tax to be paid by persons exempt from VAT ?
SUGGESTED ANSWER: Yes.

a.
Any person, whose sales or receipts are exempt under Sec. 109 (1) (V) of
the Tax Code,
(V) 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 One million five hundred thousand pesos (P1,500,000):
Provided, That not later than January 31, 2009 and 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 National Statistics Office (NSO), from the payment of VAT and
b.
who is not a VAT-registered person
c.
shall pay a tax equivalent to three percent (3%) of his gross monthly sales
or receipts;
Provided, that cooperatives shall be exempt from the three (3%) gross receipts tax
herein imposed. (Rev. Regs. No. 16-2005, Sec. 4.116-1, arrangement, numbering and words
in italics supplied)