A.

B.
C.
D.

Sec 105-115 TAX CODE

RA 9238 (Effective January 1, 2004)
REVELANT VAT REGULATIONS
NATURE, CHARACTERISTICS AND PURPOSE

VALUE-ADDED TAX
VAT is a percentage tax imposed at every stage of the
distribution process on the sale, barter, exchange (including any
other transaction deemed by law as sale), or lease of goods, or
properties and on the performance of service in the course of trade
or business, or on the importation of goods, whether for business
or non-business purposes.

It is essentially a tax on spending or consumption levied on

certain transactions involving a wide range of goods,
properties and services, such tax being payable by the
seller, transferor, lessor or importer.

It is an indirect tax and the amount of tax may, by law, be

shifted or passed on to the buyer, transferee or lessee of
the goods, properties or services. (Sec. 105, NIRC)

It is a tax on the estimated market value added to a tax

product or material at each stage of its manufacture or
distribution, ultimately passed on to the consumer
NATURE, CHARACTERISTIC AND PIR OF VAT

VAT is a tax on consumption levied on the sale, barter,

exchange, or lease of goods or properties and services in
the Philippines and on importation of goods into the
Philippines.

The seller is the one statutorily liable for the payment of

the tax but the amount of the tax may be shifter or passed
on to the buyer, transferee or lessee of the goods,
properties or services. However, in the case of importation,
the importer is the one liable for the VAT (Sec.4, 105-2 RR
16-2005)

Value added is the value that a producer adds to his raw

materials or purchases (other than labor) before selling the
new or improved product or service

VAT is an indirect tax levied on goods and services; not on

persons, and ultimately paid by consumers in the form of
higher prices
Apply to existing contracts of sale or lease of goods,
properties or services at the time of effectivity of RA No
7716 (9337).
VAT system assures fiscal adequacy through the collection
of taxed on every level of consumption, yet assuages the
manufacturers or provides of goods and services by
enabling them to pass on their respective VAT liabilities to
the next link of the chain until finally the end consumer
shoulders the entire tax liability
It is a method of imposing an ad valorem tax on value
added.
The whole of the sales value of consumer goods, properties
(or services) is taxed by installments as the goods pass
along the production and distribution chain involving
successive transactions between business but the tax is
levied at each stage only on the value added at one point.
At the manufacturers level, the tax is applied on the sale
prices of the manufacturer.
VAT is a multi-stage or multi-point sales tax as it is
collected at each stage or point in the production and
distribution process. However, although the tax is levied at
all stages, their total value is subject to tax once and once
only, so that the amount of tax collected would be equal to
that of a single, first-stage tax on original sales, which is
said to be more equitable than the former sales tax.

ADVANTAGES IN IMPOSING VAT

1. Economic growth
2. Simplified tax administration
3. Promote honesty
4. Higher governmental revenues
DESTINATION PRINCIPLE
Genaral Rule: VAT system uses the destination principle as a basis
for the jurisdictional reach of the tax. Goods and services are
taxed in the country where they are consumed.

Exports Zero-rated

Imports taxed

CASES:
TOLENTINO V. SEC. OF FINANCE G.R. NO. 115455 (Oct. 20,
1995)
FACTS: (A large part of the case is a discussion of whether the
Senate may propose an entirely new bill as a substitute measure
to what was passed in the House of Representatives)
1. RA No. 7716 was titled An Act Restructuring the Value-Added
Tax (VAT) System, Widening its tax base and enhancing its
administration, and for these purposes amending and repealing the
relevant provisions of the National Internal Revenue Code, as
amended, and for other purposes. This is otherwise known as the
Expanded Value-Added Tax.
2. According to the Constitution, Art. VI, Par. 24 all appropriation,
revenue or tariff bills, bills authorizing increase of the public debt,
bills of local application, and private bills must originate in the
House of Representatives, but the Senate may propose or concur
with amendments. Tolentino argues that even if the original bill
was filed and passed in the House of Representatives under H. No.
11197, the Senate did not merely amend such bill but instead
passed its own version under S. No. 1630.
3. The argument of Tolentino was put to rest when it was decided
by the Court that S. No 1630 was enacted as a substitute
measure, taking into consideration.H.B. 11197. Amendment by
substitution concerns a mere matter of form and not of substance.
ISSUES AND HELD:
There were several cases filed and these were all decided in one
decision only. We will discuss their arguments and the reply of the
Court.
1. Philippine Air Lines
PAL maintains that R.A. No. 7716 violates Art. VI, 26 (1) of the
Constitution which provides that "Every bill passed by Congress
shall embrace only one subject which shall be expressed in the
title thereof." PAL contends that the amendment of its franchise by
the withdrawal of its exemption from the VAT is not expressed in
the title of the law.
Pursuant to 13 of P.D. No. 1590, PAL pays a franchise tax of 2%
on its gross revenue "in lieu of all other taxes, duties, royalties,
registration, license and other fees and charges of any kind,

nature, or description, imposed, levied, established, assessed or

collected by any municipal, city, provincial or national authority or
government agency, now or in the future."
PAL was exempted from the payment of the VAT along with other
entities by 103 of the National Internal Revenue Code, which
provides as follows:
103. Exempt transactions. The following shall be exempt from
the value-added tax:
xxxxxxxxx
(q) Transactions which are exempt under special laws or
international agreements to which the Philippines is a signatory.
R.A. No. 7716 seeks to withdraw certain exemptions, including
that granted to PAL, by amending 103, as follows:
103. Exempt transactions. The following shall be exempt from
the value-added tax:
xxxxxxxxx
(q) Transactions which are exempt under special laws, except
those granted under Presidential Decree Nos. 66, 529, 972, 1491,
1590. . . .
PAL asserts that the amendment of its franchise must be reflected
in the title of the law by specific reference to P.D. No. 1590. It is
unnecessary to do this in order to comply with the constitutional
requirement, since it is already stated in the title that the law
seeks to amend the pertinent provisions of the NIRC, among which
is 103(q), in order to widen the base of the VAT. Actually, it is the
bill which becomes a law that is required to express in its title the
subject of legislation. The titles of H. No. 11197 and S. No. 1630 in
fact specifically referred to 103 of the NIRC as among the
provisions sought to be amended. We are satisfied that sufficient
notice had been given of the pendency of these bills in Congress
before they were enacted into what is now R.A.No. 7716.
2. Philippine Press Institute
We have held that, as a general proposition, the press is not
exempt from the taxing power of the State and that what the
constitutional guarantee of free press prohibits are laws which
single out the press or target a group belonging to the press for
special treatment or which in any way discriminate against the
press on the basis of the content of the publication, and R.A. No.
7716 is none of these.
Now it is contended by the PPI that by removing the exemption of
the press from the VAT while maintaining those granted to others,

the law discriminates against the press. At any rate, it is averred,

"even nondiscriminatory taxation of constitutionally guaranteed
freedom is unconstitutional."
With respect to the first contention, it would suffice to say that
since the law granted the press a privilege, the law could take back
the privilege anytime without offense to the Constitution. The
reason is simple: by granting exemptions, the State does not
forever waive the exercise of its sovereign prerogative.
Indeed, in withdrawing the exemption, the law merely subjects the
press to the same tax burden to which other businesses have long
ago been subject.
The VAT is not a license tax. It is not a tax on the exercise of a
privilege, much less a constitutional right. It is imposed on the
sale, barter, lease or exchange of goods or properties or the
sale or exchange of services and the lease of properties
purely for revenue purposes. To subject the press to its
payment is not to burden the exercise of its right any more
than to make the press pay income tax or subject it to
general regulation is not to violate its freedom under the
Constitution.
3. CREBA:Chamber of Real Estate and Brokers Association,
Inc.
CREBA asserts that R.A. No. 7716 (1) impairs the obligations of
contracts, (2) classifies transactions as covered or exempt without
reasonable basis and (3) violates the rule that taxes should be
uniform and equitable and that Congress shall "evolve a
progressive system of taxation."
Impairs Obligations of contract:
With respect to the first contention, it is claimed that the
application of the tax to existing contracts of the sale of real
property by installment or on deferred payment basis would result
in substantial increases in the monthly amortizations to be paid
because of the 10% VAT. The additional amount, it is pointed out,
is something that the buyer did not anticipate at the time he
entered into the contract.
The short answer to this is the one given by this Court in an early
case: "Authorities from numerous sources are cited by the
plaintiffs, but none of them show that a lawful tax on a new
subject, or an increased tax on an old one, interferes with a
contract or impairs its obligation, within the meaning of the
Constitution. Even though such taxation may affect particular

contracts, as it may increase the debt of one person and lessen the
security of another, or may impose additional burdens upon one
class and release the burdens of another, still the tax must be paid
unless prohibited by the Constitution, nor can it be said that it
impairs the obligation of any existing contract in its true legal
sense." (La Insular v. Machuca Go-Tauco and Nubla Co-Siong, 39
Phil. 567, 574 (1919)). Indeed not only existing laws but also "the
reservation of the essential attributes of sovereignty, is . . . read
into contracts as a postulate of the legal order." (PhilippineAmerican Life Ins. Co. v. Auditor General, 22 SCRA 135, 147
(1968)) Contracts must be understood as having been made in
reference to the possible exercise of the rightful authority of the
government and no obligation of contract can extend to the
defeat of that authority. (Norman v. Baltimore and Ohio
R.R., 79 L. Ed. 885 (1935)).
Classifies transactions as covered or exempt without
reasonable basis
It is next pointed out that while 4 of R.A. No. 7716 exempts such
transactions as the sale of agricultural products, food items,
petroleum, and medical and veterinary services, it grants no
exemption on the sale of real property which is equally essential.
The sale of real property for socialized and low-cost housing is
exempted from the tax, but CREBA claims that real estate
transactions of "the less poor," i.e., the middle class, who are
equally homeless, should likewise be exempted
The sale of food items, petroleum, medical and veterinary services,
etc., which are essential goods and services was already exempt
under 103, pars. (b) (d) (1) of the NIRC before the enactment of
R.A. No. 7716. Petitioner is in error in claiming that R.A. No. 7716
granted exemption to these transactions, while subjecting those of
petitioner to the payment of the VAT. Moreover, there is a
difference between the "homeless poor" and the "homeless less
poor" in the example given by petitioner, because the second
group or middle class can afford to rent houses in the meantime
that they cannot yet buy their own homes. The two social classes
are thus differently situated in life. "It is inherent in the power
to tax that the State be free to select the subjects of
taxation, and it has been repeatedly held that 'inequalities
which result from a singling out of one particular class for
taxation,
or
exemption
infringe
no
constitutional
limitation.'"

Violates the rule that taxes should be uniform and

equitable and that Congress shall evolve a progressive system of
taxation
Equality and uniformity of taxation means that all taxable articles
or kinds of property of the same class be taxed at the same rate.
The taxing power has the authority to make reasonable and
natural classifications for purposes of taxation. To satisfy this
requirement it is enough that the statute or ordinance applies
equally to all persons, forms and corporations placed in similar
situation.
The validity of the original VAT law (E.O. 273) was already
questioned on grounds similar to the above.
As the Court sees it, EO 273 satisfies all the requirements of a
valid tax. It is uniform. . . .
The sales tax adopted in EO 273 is applied similarly on all goods
and services sold to the public, which are not exempt, at the
constant rate of 0% or 10%.
The disputed sales tax is also equitable. It is imposed only on
sales of goods or services by persons engaged in business with an
aggregate gross annual sales exceeding P200,000.00. Small corner
sari-sari stores are consequently exempt from its application.
Likewise exempt from the tax are sales of farm and marine
products, so that the costs of basic food and other necessities,
spared as they are from the incidence of the VAT, are expected to
be relatively lower and within the reach of the general public.
CREBA also claims that the VAT is regressive. The Constitution
does not really prohibit the imposition of indirect taxes which, like
the VAT, are regressive. What it simply provides is that Congress
shall "evolve a progressive system of taxation." The constitutional
provision has been interpreted to mean simply that "direct taxes
are . . . to be preferred [and] as much as possible, indirect taxes
should be minimized." Indeed, the mandate to Congress is not
to prescribe, but to evolve, a progressive tax system.
Otherwise, sales taxes, which perhaps are the oldest form of
indirect taxes, would have been prohibited with the proclamation
of Art. VIII, 17(1) of the 1973 Constitution from which the
present Art. VI, 28(1) was taken. Sales taxes are also regressive.
Resort
to
indirect
taxes
should
be minimized but
not avoided entirely because it is difficult, if not impossible, to
avoid them by imposing such taxes according to the taxpayers'
ability to pay. In the case of the VAT, the law minimizes the
regressive effects of this imposition by providing for zero rating of

certain transactions (R.A. No. 7716, 3, amending 102 (b) of the

NIRC), while granting exemptions to other transactions. (R.A. No.
7716, 4, amending 103 of the NIRC).
4. Cooperative Union of the Philippines (CUP)
Under the Constitution, cooperatives are exempted from paying
taxes. There is no basis for the assertion of the CUP that the
Constitution provides for these tax privileges. Perhaps, as a
matter of policy, cooperatives should be granted tax exemption,
but that is left to the discretion of Congress. If Congress does not
grant exemption and there is no discrimination to cooperatives, no
violation of any constitutional policy can be charged.
The
Constitution only allow the following to be exempt from taxation:
charitable institutions, churches and personages, by reason of Art.
VI, Par 28(3) and non-stock, non-profit educational institutions.
CUP's further ground for seeking the invalidation of R.A. No. 7716
is that it denies cooperatives the equal protection of the law
because electric cooperatives are exempted from the VAT. The
classification between electric and other cooperatives (farmers
cooperatives, producers cooperatives, marketing cooperatives,
etc.) apparently rests on a congressional determination that there
is greater need to provide cheaper electric power to as many
people as possible, especially those living in the rural areas, than
there is to provide them with other necessities in life. We cannot
say that such classification is unreasonable.
DISPOSITIVE: We have carefully read the various arguments
raised against the constitutional validity of R.A. No. 7716. We have
in fact taken the extraordinary step of enjoining its enforcement
pending resolution of these cases. We have now come to the
conclusion that the law suffers from none of the infirmities
attributed to it by petitioners and that its enactment by the
other branches of the government does not constitute a
grave abuse of discretion. Any question as to its necessity,
desirability or expediency must be addressed to Congress
as the body which is electorally responsible, remembering
that, as Justice Holmes has said, "legislators are the ultimate
guardians of the liberties and welfare of the people in quite as
great a degree as are the courts." (Missouri, Kansas & Texas Ry.
Co. v. May, 194 U.S. 267, 270, 48 L. Ed. 971, 973 (1904)). It is
not right, as petitioner in G.R. No. 115543 does in arguing that we
should enforce the public accountability of legislators, that those

who took part in passing the law in question by voting for it in

Congress should later thrust to the courts the burden of reviewing
measures in the flush of enactment. This Court does not sit as a
third branch of the legislature, much less exercise a veto power
over legislation.
WHEREFORE, the motions for reconsideration are denied with
finality and the temporary restraining order previously issued is
hereby lifted.
DIAZ V. SEC OF FINANCE, GR NO 193007 (JULY 19, 2011)
DOCTRINE: VAT is levied, assessed, and collected, according to
Section 108, on the gross receipts derived from the sale or
exchange of services as well as from the use or lease of properties.
Tollway operators are, owing to the nature and object of their
business, "franchise grantees." The construction, operation, and
maintenance of toll facilities on public improvements are activities
of public consequence that necessarily require a special grant of
authority from the state.
Tollway fees are not taxes.
They are not assessed and
collected by the BIR and do not go to the general coffers of the
government. A tax is imposed under the taxing power of the
government principally for the purpose of raising revenues to fund
public expenditures. Toll fees, on the other hand, are collected by
private tollway operators as reimbursement for the costs and
expenses incurred in the construction, maintenance and operation
of the tollways, as well as to assure them a reasonable margin of
income. Although toll fees are charged for the use of public
facilities, therefore, they are not government exactions that can be
properly treated as a tax. Taxes may be imposed only by the
government under its sovereign authority, toll fees may be
demanded by either the government or private individuals or
entities, as an attribute of ownership.
The seller of services, who in this case is the tollway operator, is
the person liable for VAT. The latter merely shifts the burden of
VAT to the tollway user as part of the toll fees.

FACTS: Petitioners filed this petition for declaratory relief assailing

the validity of the impending imposition of VAT by the BIR on the
collections of tollway operators.

Petitioners allege that BIR attempted during the GMA

administration to impose VAT on toll fees, but was deferred
due to opposition of Diaz and other sectors. BIR has revived
the idea and would impose the challenged tax on toll fees
beginning August 16, 2010 unless judicially enjoined.

Petitioners hold that Congress did not intend to include toll

fees within the meaning of "sale of services" that are subject
to VAT; that a toll fee is a "user's tax," not a sale of services;
that to impose VAT on toll fees would amount to a tax on
public service; and that, since VAT was never factored into the
formula for computing toll fees, its imposition would violate the
non-impairment clause of the constitution.

SC issued a TRO enjoining the implementation of the VAT.

Later, the Court issued another resolution treating the petition
as one for prohibition.

The government, through the OSG avers that the NIRC

imposes VAT on all kinds of services of franchise grantees,
including tollway operations, except where the law provides
otherwise; that the Court should seek the meaning and intent
of the law from the words used in the statute; and that the
imposition of VAT on tollway operations has been the subject
as early as 2003 of several BIR rulings and circulars.
o

that petitioners have no right to invoke the nonimpairment of contracts clause since they have no
personal interest in existing toll operating agreements
between the government and tollway operators.

that the non-inclusion of VAT in the formula for

computing toll rates cannot exempt tollway operators
from VAT. The imposition of VAT on toll fees would
have very minimal effect on motorists using the
tollways.

Petitioners pointed out that tollway operators cannot be

regarded as franchise grantees under the NIRC since they do
not hold legislative franchises; that BIR intends to collect the
VAT by rounding off the toll rate and putting any excess
collection in an escrow account which would be illegal since
only the Congress can modify VAT rates and authorize its
disbursement.

ISSUE: May toll fees collected by tollway operators be subjected

to value- added tax? YES.
HELD:
RE NATURE OF THE ACTION <PROCEDURAL>
There are precedents for treating a petition for declaratory relief as
one for prohibition if the case has far-reaching implications and
raises questions that need to be resolved for the public good. The
Court has also held that a petition for prohibition is a proper
remedy to prohibit or nullify acts of executive officials that amount
to usurpation of legislative authority.
Here, the imposition of VAT on toll fees has far-reaching
implications. Its imposition would impact, not only on the more
than half a million motorists who use the tollways everyday, but
more so on the government's effort to raise revenue for funding
various projects and for reducing budgetary deficits. The Court has
ample power to waive such technical requirements when the legal
questions to be resolved are of great importance to the public. The
same may be said of the requirement of locus standi which is a
mere procedural requisite.
RE VAT/ SALE OR EXCHANGE OF SERVICES
The third paragraph of Section 108 defines "sale or exchange of
services." The law imposes VAT on "all kinds of services" rendered
in the Philippines for a fee, including those specified in the list.
The enumeration of affected services is not exclusive. By qualifying
"services" with the words "all kinds," Congress has given the term
"services" an all-encompassing meaning. The listing of specific
services are intended to illustrate how pervasive and broad is the
VAT's reach rather than establish concrete limits to its application.
Thus, every activity that can be imagined as a form of

"service" rendered for a fee should be deemed included

unless some provision of law especially excludes it.
RE TOLLWAY OPERATOR/SERVICE
P.D. 1112 or the Toll Operation Decree establishes the legal basis
for the services that tollway operators render. Essentially, tollway
operators construct, maintain, and operate expressways, also
called tollways, at the operators' expense. In consideration for
constructing tollways at their expense, the operators are allowed
to collect government-approved fees from motorists using the
tollways until such operators could fully recover their expenses and
earn reasonable returns from their investments.
When a tollway operator takes a toll fee from a motorist, the fee is
in effect for the latter's use of the tollway facilities over which the
operator enjoys private proprietary rights that its contract and the
law recognize. In this sense, the tollway operator is no different
from the following service providers under Section 108 who allow
others to use their properties or facilities for a fee:
1. Lessors of property, whether personal or real;
2. Warehousing service operators;
3. Lessors or distributors of cinematographic films;
4. Proprietors, operators or keepers of hotels, motels,
resthouses, pension houses, inns, resorts;
5. Lending investors (for use of money);
6. 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; and
7. 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.
Section 108 subjects to VAT "all kinds of services" rendered for a
fee "regardless of whether or not the performance thereof calls for
the exercise or use of the physical or mental faculties." This
means that "services" to be subject to VAT need not fall
under the traditional concept of services, the personal or
professional kinds that require the use of human knowledge
and skills.

And not only do tollway operators come under the broad term "all
kinds of services," they also come under the specific class
described in Section 108 as "all other franchise grantees" who are
subject to VAT, "except those under Section 119 of this Code."
Tollway operators are franchise grantees and they do not
belong to exceptions (the low-income radio and/or television
broadcasting companies with gross annual incomes of less than
P10 million and gas and water utilities) that Section 119 spares
from the payment of VAT.
"FRANCHISE" broadly covers
government grants of a special right to do an act or series of acts
of public concern. Nothing in Section 108 indicates that the
"franchise grantees" it speaks of are those who hold legislative
franchises. The term "franchise" has been broadly construed as
referring, not only to authorizations that Congress directly issues
in the form of a special law, but also to those granted by
administrative agencies to which the power to grant franchises has
been delegated by Congress.
Tollway operators are, owing to the nature and object of their
business, "franchise grantees." The construction, operation, and
maintenance of toll facilities on public improvements are activities
of public consequence that necessarily require a special grant of
authority from the state. Apart from Congress, tollway franchises
may also be granted by the TRB, pursuant to the exercise of its
delegated powers under P.D. 1112. The franchise in this case is
evidenced by a "Toll Operation Certificate."
RE SALE OF SERVICE:
In specifically including by way of example electric utilities,
telephone, telegraph, and broadcasting companies in its list of
VAT-covered businesses, Section 108 opens other companies
rendering public service for a fee to the imposition of VAT.
Businesses of a public nature such as public utilities and the
collection of tolls or charges for its use or service is a franchise.

an airport for public use. Such fees are often termed user's tax.
This means taxing those among the public who actually use a
public facility instead of taxing all the public including those who
never use the particular public facility. A user's tax is more
equitable - a principle of taxation mandated in the 1987
Constitution."
Petitioners assume that "user's tax" must also pertain to tollway
fees. The discussion in the MIAA case on toll roads and toll fees
was made, not to establish a rule that tollway fees are user's tax,
but to make the point that airport lands and buildings are
properties of public dominion and that the collection of terminal
fees for their use does not make them private properties. Tollway
fees are not taxes. They are not assessed and collected by the
BIR and do not go to the general coffers of the government.
It would of course be another matter if Congress enacts a law
imposing a user's tax, collectible from motorists, for the
construction and maintenance of certain roadways. The tax in
such a case goes directly to the government for the replenishment
of resources it spends for the roadways. This is not the case here.
What the government seeks to tax here are fees collected from
tollways that are constructed, maintained, and operated by private
tollway operators at their own expense under the build, operate,
and transfer scheme that the government has adopted for
expressways. Except for a fraction given to the government, the
toll fees essentially end up as earnings of the tollway
operators.

RE USERS TAX

RE VAT ON TOLLWAYS:
VAT on tollway operations cannot be deemed a tax on tax due to
the nature of VAT as an indirect tax. In indirect taxation, a
distinction is made between the liability for the tax and burden of
the tax. The seller who is liable for the VAT may shift or pass on
the amount of VAT it paid on goods, properties or services to the
buyer. In such a case, what is transferred is not the seller's liability
but merely the burden of the VAT.

MIAA CASE: The terminal fees MIAA charges to passengers, as

well as the landing fees MIAA charges to airlines, constitute the
bulk of the income that maintains the operations of MIAA. The
collection of such fees does not change the character of MIAA as

Thus, the seller remains directly and legally liable for payment of
the VAT, but the buyer bears its burden since the amount of VAT
paid by the former is added to the selling price. Once shifted, the
VAT ceases to be a tax and simply becomes part of the cost

that the buyer must pay in order to purchase the good,

property or service.

or properties, renders services and any person who

imports goods shall be subject to the VAT imposed in Sec.
106 108 of this Code.
The VAT is an indirect tax and the amount of tax
may be shifted or passed on to the buyer, transferee or
lessee of the goods, properties or services. This rule shall
likewise apply to existing contracts of sale or lease of
goods, properties or services at the time of the effectivity
of RA 771.
The phrase in the course of trade or business
means the regular conduct or a pursuit of a commercial or
an economic activity, including transactions incidental
thereto, by any person regardless of whether or not the
person engaged therein is a nonstick, nonprofit private
organization (irrespective of the disposition of its net
income and whether or not it sells exclusively to members
or their guests), or government entity.
The
rule
of
regularity,
to
the
contrary
notwithstanding, services as defined in this Code rendered
in the Philippines by non-resident foreign persons shall be
considered as being rendered in the course of trade or
business.

Consequently, VAT on tollway operations is not really a tax on the

tollway user, but on the tollway operator. Under Section 105 of the
Code, VAT is imposed on any person who, in the course of trade or
business, sells or renders services for a fee. In other words, the
seller of services, who in this case is the tollway operator, is the
person liable for VAT. The latter merely shifts the burden of VAT to
the tollway user as part of the toll fees.
For this reason, VAT on tollway operations cannot be a tax on tax
even if toll fees were deemed as a "user's tax." VAT is assessed
against the tollway operator's gross receipts and not necessarily on
the toll fees. Although the tollway operator may shift the VAT
burden to the tollway user, it will not make the latter directly liable
for the VAT. The shifted VAT burden simply becomes part of the toll
fees that one has to pay in order to use the tollways.
RE ADMINISTRATIVE FEASIBILITY:
Administrative feasibility is one of the canons of a sound tax
system. It simply means that the tax system should be capable of
being effectively administered and enforced with the least
inconvenience to the taxpayer. Non-observance of the canon,
however, will not render a tax imposition invalid "except to
the extent that specific constitutional or statutory limitations are
impaired." Thus, even if the imposition of VAT on tollway
operations may seem burdensome to implement, it is not
necessarily invalid unless some aspect of it is shown to violate any
law or the Constitution.

Here, it remains to be seen how the taxing authority will actually

implement the VAT on tollway operations. Any declaration by the
Court that the manner of its implementation is illegal or
unconstitutional would be premature.
WHEREFORE, the Court DISMISSES the petitioners petition for
lack of merit, and SETS ASIDE the Court's TRO.

Note: Persons refers to any individual, trust, estate,

partnership, corporation, joint venture, cooperative or
association.

Consequently, any sale, barter or exchange of goods or

services not in the course of trade or business is NOT
subject to VAT. (Commissioner v. Magsaysay Lines Inc.
G.R. No. 146984, July 28, 2006)

RULE OF REGULARITY (defining in the course of trade or

business as used under the VAT law)

E. PERSONS LIABLE
1.

Sec. 105. Persons Liable Any person who, in the course

of trade or business, sells, barters, exchange, leases goods

PERSONS LIABLE TO PAY VAT - Any person in the course

of trade or business:
a. Sells, barters, exchanges, lease goods or
properties;
b. Renders services; and
c. Imports goods shall be subject to VAT imposed in
sections 106-108 of the NIRC

It means the regular conduct or pursuit of a

commercial or an economic activity, including
transactions incidental thereto, by any person
regardless of whether or not the person engaged
therein is a non-stock, non-profit private organization
(irrespective of the dispositions of its ne income and
whether or not it sells exclusively to members or their
guests), or government entity.

GENERAL RULE: If the disposition of goods or services is

not in the course of trade or business then it is not subject
to VAT
Exception: Importation is subject to VAT regardless of
whether or not it is in the course of trade or business.
Ratio: This is to protect our local or domestic goods or
articles and to regulate the entry or introduction of foreign
articles to our local market.
EXEMPTIONS TO THE RULE OF REGULARITY
1) Any business where the gross sales or receipts or
do not exceed P100,000 during the 12-month
period shall be considered principally for
subsistence or livelihood and not in the course of
trade or business.
2) Services rendered in the Philippines by nonresident foreign persons shall b considered as
being rendered in the course of trade or business.
(Sec. 105, NIRC)

Non-resident persons who perform services in the

Philippines are deemed to be making sales in the course of
trade or business, even if the performance of services is
not regular. (Sec. 4. 105-3, RR 16-2005)
Taxable persons refer to any person liable for the payment
of VAT, whether registered or registrable in accordance
with Sec. 236 of the Tax Code.
VAT-Registered person refers to any person who is
registered as a VAT taxpayer under Sec. 236 of the Tax
Code or a person who opted to be registered as VAT

taxpayer. His status as a VAT registered person shall

continue until the cancellation of the registration.
PERSONS REQUIRED TO REGISTER FOR VAT every person who in
the course of trade of business, sells, barter or exchanges goods or
properties, or engages in the sale or exchange of goods, services
subkect to VAT if:
1) The Gross sale or gross receipts have exceeded 1.5
million; or
2) There are reasonable grounds to believe that his gross
receipts or gross sales in the next 12 month shall exceed
1.5 million. (Sec. 236[G], NIRC)
CASES:
CIR v. CA/COMASERCO
FACTS: Commonwealth Management and Services Corporation
(COMASERCO) is a corporation duly organized and existing under
the laws of the Philippines. It is an affiliate of Philippine American
Life Insurance Co. (Philamlife), organized by the letter to perform
collection, consultative and other technical services, including
functioning as an internal auditor, of Philamlife and its other
affiliates.
BIR issued an assessment to COMASERCO for deficiency VAT
amounting to P351,851.01 for taxable year 1988. COMASERCOs
annual corporate income tax return ending December 31, 1988
indicated a net loss in its operations in the amount of P6,077.
COMASERCO asserted that the services it rendered to Philamlife
and its affiliates, relating to collections, consultative and other
technical assistance, including functioning as an internal auditor,
were on a "no-profit, reimbursement-of-cost-only" basis. It
averred that it was not engaged in the business of providing
services to Philamlife and its affiliates. It was established to ensure
operational orderliness and administrative efficiency of Philamlife
and its affiliates, and not in the sale of services. It was not profitmotivated, thus not engaged in business. In fact, it did not
generate profit but suffered a net loss in taxable year 1988.
COMASERCO averred that since it was not engaged in business, it
was not liable to pay VAT.

CIR avers that to "engage in business" and to "engage in the sale

of services" are two different things. Petitioner maintains that the
services rendered by COMASERCO to Philamlife and its affiliates,
for a fee or consideration, are subject to VAT. VAT is a tax on the
value added by the performance of the service. It is immaterial
whether profit is derived from rendering the service.
The CTA rules in favour of CIR. The CA reversed.

law; it cannot be merely implied therefrom. In the case of VAT,

Section 109, Republic Act 8424 clearly enumerates the
transactions exempted from VAT. The services rendered by
COMASERCO do not fall within the exemptions.

F. DEFINITION OF
1

ISSUE: WON COMASERCO was engaged in the sale of services

and must be liable to pay for VAT.
HELD: VAT is a tax on transactions, imposed at every stage of the
distribution process on the sale, barter, exchange of goods or
property, and on the performance of services, even in the absence
of profit attributable thereto. The term "in the course of trade or
business" requires the regular conduct or pursuit of a commercial
or an economic activity regardless of whether or not the entity is
profit-oriented.
The Commissioner of Internal Revenue issued BIR Ruling No. 01098 emphasizing that a domestic corporation that provided
technical, research, management and technical assistance to its
affiliated companies and received payments on a reimbursementof-cost basis, without any intention of realizing profit, was subject
to VAT on services rendered. In fact, even if such corporation was
organized without any intention realizing profit, any income or
profit generated by the entity in the conduct of its activities was
subject to income tax.
Hence, it is immaterial whether the primary purpose of a
corporation indicates that it receives payments for services
rendered to its affiliates on a reimbursement-on-cost basis only,
without realizing profit, for purposes of determining liability for VAT
on services rendered. As long as the entity provides service for a
fee, remuneration or consideration, then the service rendered is
subject to VAT.
At any rate, since taxes are the lifeblood of the nation, statutes
that allow exemptions are construed against the grantee and
liberally in favour of the government. Any exemption from the
payment of a tax must be clearly stated in the language of the

In the course of trade of business (Rule of Regularity)

The regular conduct or pursuit of a commercial or an
economic activity, including transactions incidental thereto,
by any person regardless of whether or not the person
engaged therein is a non-stock, nonprofit private
organization or government entity.

Non-resident persons who perform services in the

Philippines are deemed to be making sales in the course of
trade or business, even if the performance of services is
not regular.

The term course of business or doing business connotes

regularity of activity. Any sale, barter, exchange of goods
or services not in the course of trade or business in not
subject to VAT.

A transaction will be characterized as having been entered

into by a person in the course of trade or business if it is
1
Regularly conducted; and
2
Undertaken in pursuit of a commercial or economic
activity are considered as entered into in the
course of trade or business.

NOTE:
PERSON refers to any individual, trust, estate,
partnership, corporation, joint venture, cooperative or association.
GENERAL RULE: If the disposition of goods or services is not in
the course of trade or business then it is not subject to VAT.
EXEMTPION TO THE GR: Importation is subject to VAT
regardless of whether or not it is in the course of trade or
business.
Reason: This is to protect our local or domestic goods or articles
and to regulate the entry or introduction of foreign articles to our
local market.

Exceptions to the Rule of Regularity

Any business where the gross sales or receipt do not

exceed P100, 000 during any 12-month period shall be
considered principally for subsistence or livelihood and
not in the course of trade or business.
Services rendered in the Philippines by non-resident
foreign persons shall be considered as being rendered in
the course of trade or business.
Subsistence and livelihood
Any business where the gross sales or receipt do not
exceed P100, 000 during any 12-month period. an
exception to the REGULARITY RULE

G. VAT TAX RATES

Q: How are transactions classified under the VAT system?
A:
1 VAT taxable transactions
a Subject to 12% VAT rate
b Zero-rated transactions
2 Exempt transactions
Q: Define taxable transactions under the VAT law.
A: Taxable transactions are those transactions which are subject to
VAT either at the rate of 12% (effective January 1, 2006, VAT rate
was increase from 10-12%) or 0%, and the seller shall be entitled
to tax credit for the VAT paid on purchases and leases of goods,
properties or services.
Q: Mr. A, a VAT-exempt retailer sells to Mr. O, a non-VAT exempt
purchaser. Is Mr. O liable to pay VAT on the transaction?
A: Yes. The purchaser is subject to VAT because it 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.
Q: Lilys Fashion Inc is a garment manufacturer located and
registered as a Subic Bay Freeport Enterprise under R.A. 7227 and

a non-VAT taxpayer. And as such, it is exempt from payment of all

local and national internal revenue taxes. During its operations, it
purchased various supplies and materials necessary in the conduct
of its manufacturing business. The supplier of these goods shifted
to Lilys Fashion, Inc. the 10% VAT on the purchased items
amounting to P500,000. Lilys Fashion Inc. filed with the BIR a
claim for refund for the input tax shifted to it by the suppliers. If
you were the CIR will you allow the refund?
A: No. The exemption of Lilys Fashion Inc. is only for taxes which
it is directly liable, hence, it cannot claim exemption for tax shifted
to it, which is not at all considered a tax to the buyer but part of
the purchase price. Lilys Fashion Inc. is not a taxpayer in so far as
the passed-on tax is concerned and therefore, it cannot claim for a
refund of a tax merely, shifted to it. Only taxpayers are allowed to
file a claim for refund.

H. VATABLE ACTIVITIES
1. SALE OF GOODS OR PROPERTIES (Sec 106)
a. 12% (Sec 106.A.1)
REQUISITES OF TAXABILITY OF SALE OF GOODS OR PROPERTIES
(a) There is an actual or deemed sale, barter or exchange of
goods or personal properties for valuable consideration
(b) The sale is in the course of trade or business or exercise of
profession in the Philippines
(c) The goods or properties are located in the Philippines and
are for use or consumption therein; and
(d) The sale is not VAT exempt under Sec 109 NIRC, special
laws, or international agreements binding upon the
Government of the Philippines
NOTE: Absence of any of the above requisites EXEMPTS the
transaction from VAT. However, percentage taxes may apply (Sec
116)
REQUISITES OF TAXABILITY OF SALE OR EXCHANGE OF REAL
PROPERTY
(a) The seller executes a deed of sale, including dacion en
pago, barter or exchange, assignment, transfer or
conveyance, or merely contract to sell involving real
property

(b) The real property is located within the Philippines

(c) The seller or transferor is a real estate dealer
(d) The real property is an ordinary asset held primarily for
sale or for lease in the ordinary course of business
(e) The sale is not exempt from VAT under Sec 109 NIRC,
special law, or international agreement binding upon the
government of the Philippines
(f) The threshold amount set by law should be met

As such, capital transactions of individuals are not subject to VAT.

Only real estate dealers are subject to VAT.

NOTE: Absence of any of the above requisites EXEMPTS the

transaction from VAT. However, percentage taxes may apply under
Sec 116 NIRC

Q: What is gross selling price?

A: It means the total amount of money or its equivalent which the
purchaser pays or is obligated to pay to the seller in consideration
of the sale, barter or exchange of the goods or properties,
excluding the VAT. The excise tax, if any, on such goods or
properties shall form part of the gross selling price (Sec 106.A.1)

TAX RATE OF SALE OF GOODS OR PROPERTIES

12% on every sale, barter or exchange of goods or properties
added to the gross selling price or gross value in money of the
goods or properties sold, bartered or exchanged, to be paid by the
seller or transferor.
GOODS OR PROPERTIES SUBJECT TO VAT
(a) Real properties held primarily for sale to costumers or held
for lease in the ordinary course or business
(b) The right or privilege to use patent, design or model, plan,
secret formula or process, goodwill, trademark, trade
brand or other like property or right
(c) The right or the privilege to use in the Philippines of any
industrial, commercial or scientific equipment
(d) The right or privilege to use motion picture films, films,
tapes and discs
(e) Radio, television, satellite transmission and cable television
time
Q: Are all intangible properties subject to VAT?
A: No, only those capable of pecuniary estimation (Sec 4.106, RR
16-2005)
Q: Is the sale of real properties subject to VAT?
A: 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 (1st par, Sec 4.16-3, RR

Q: What are taxable sales?

A: Taxable sales refer to the sale, barter, exchange, and/or lease
of goods or properties, including transactions deemed sale and the
performance of service for consideration, whether in cash or in
kind

Q: What are the allowable deductions from the selling price?

A:
(1) Discounts determined and granted at the time of sale
(2) Sales returns and allowances for which proper credit or
refund was made during the month or quarter to the buyer
for sales previously recorded as taxable sales
Q: When is the sale of real property subject to VAT?
A:
(1) Residential lot with gross selling price exceeding P1.5
million
(2) Residential house and lot or other residential dwellings
with gross selling price exceeding P2.5 million
NOTE: Whether the instrument is denominated as a deed of
absolute sale, deed of conditional sale or otherwise.
Q: What is the gross selling price (in case of sale or exchange) of
real property?
A: It is the consideration stated in the sales document or the FMV
whichever is higher. If the VAT is not billed separately in the
document of sale, the selling price or the consideration stated
therein shall be deemed to be inclusive of VAT.
Q: Define initial payments

A: Payment/s which the seller receives before or upon execution of

the instrument of sale and payments which he expects or is
scheduled to receive in cash or property (other than evidence of
indebtedness of the purchaser/ during the year when the sale or
disposition of real property was made.
SALE ON INSTALLMENT PLAN AND SALE ON DEFERRED PAYMENT
DISTINGUISHED
INSTALLMENT PLAN
DEFERRED PLAN
Initial payments do not exceed Initial payments exceed 25% of
25% of the gross selling price
the gross selling price
Seller shall be subject to output Transaction shall be treated as
VAT on the installment payments cash sale, which makes the entire
received including the interests selling price taxable in the month
and penalties for late payment, of sale
actually and or constructively
received
The buyer of the property can Output tax shall be recognized by
claim the input tax in the same the seller and input tax shall
period as the seller recognized the accrue to the buyer at the time of
output tax
the execution of the instrument of
sale
Payments that are subsequent to Payments that re subsequent to
initial payments shall be subject initial payments shall no longer
to output VAT
be subject to output VAT
b. 0% (sec 106.A.2)
ZERO-RATED SALES OF GOODS OR PROPERTIES, AND
EFFECTIVELY ZERO-RATED SALES OF GOODS OR PROPERTIES
Q: What is the meaning of zero-rated transaction?
A: The gross selling price of goods or properties is multiplied by
the 0% VAT rate. The zero-rated sale of goods or properties 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 a tax
credit or refund.
Q: What is a VAT exemption transaction?

A: A VAT exempt transaction refers to sale, lease, barter or

exchange of goods, properties, and/or services that are exempt
from VAT under Sec 103 NIRC
Q: What is the difference between zero-rated and VAT-exempt
transactions?
A: The difference lies in the input tax. In VAT-exempt transactions,
there is no input tax credit allowed. In case of zero-rated
transaction of a VAT registered person, the sale of goods or
properties is multiplied by 0% thus his output tax is P0.00. Since
the person is VAT-registered, he can claim input tax for purchases
made from VAT registered entities. (RMC 17-96)
EXAMPLE of ZERO-RATED VAT
Output tax --------------------------------------------- P 0.00
Less: Input tax ----------------------------------------- P 5,000
VAT Creditable (Refund)
P 5,000
VAT-EXEMPT AND ZERO-RATED TRANSACTIONS DISTINGUISHED
EXEMPT
ZERO-RATED
Nature
of Not taxable; removes Transaction is taxable for
transactions
VAT at the exempt VAT purposes although the
stage
tax levied is 0%
By whom made
Need not be a VAT Can claim or enjoy tax
registered person
credit/refund (Total relief)
Tax
Cannot avail of tax Can claim or enjoy tax
Credit/Refund
credit or refund. Thus, credit/refund (Total relief)
may result in increased
prices (Partial relief)
Q: Who shall qualify for zero-rating?
A: Any VAT registered person whose sales fall under Sec 100.a.2
and 102.b NIRC (RMC 17-96)
Q: What are the zero-rated sales of goods by a VAT registered
person?
A:
(a) Export sales Destination principle
(b) Foreign currency denominated sale To encourage
purchase in the Philippines

(c) Sales to persons or entities whose exemption under special

laws or international agreements to which the Philippines is
a signatory effectively subjects such sales to zero rate (Sec
(Sec 106.A.2.c)

(c) Provided, that sales of export products to another producer

or to an export trader shall only be deemed expert sales
when actually exported by the latter, as evidenced by landing
certificates or similar commercial documents

EXPORT SALES
Q: What is meant by export sales?
A: The term export sales means:
(a) The sale and actual shipment of goods from the Philippines
to a foreign country:
(1) Irrespective of any shipping arrangement
(2) Paid for in an acceptable foreign currency or its
equivalent in goods or services
(3) Accounted for in accordance with the rules and
regulations of BSP
(b) Sale of raw materials or packaging materials by a VAT
registered entity to a non-resident buyer:
(1) For delivery to a non-resident local export-oriented
enterprise
(2) Used in the manufacturing, processing, packing,
repacking in the Philippines of the said buyers goods
(3) Paid for in acceptable foreign currency
(4) Accounted in accordance with the rules of BSP
(c) Sale of raw material or packaging materials to export
oriented enterprise whose export sales exceed 70% of
total annual production
(d) Sale of gold to BSP
(e) Those considered as export sales under EO 226 (Omnibus
Investment Code of 1987) sale to Export Processing
Zone (EPZ)
(f) Sale of goods, supplies, equipment and fuel to persons
engaged in international shipping or international air
transport operations (Sec 106.A.2.a NIRC; RMC 17-96)

Q: When is export sale exempt and when is it zero-rated?

A: Export sale is exempt if made by a non-VAT person (Sec 109
NIRC). On the other hand, it is zero-rated if it is made by a VAT
registered person (Sec 4.106-5, RR 16-2005)

NOTE: Under the Omnibus Investment Code:

(a) The Philippine port FOB value determined from invoices, bills
of lading, inward letters of credit, landing certificates, and
other commercial documents, of export products exported
direct by a registered export producer; or
(b) The net selling price of export products sold by registered
export producer to another export producer, or to an export
trader that subsequently export the same;

Q: Is the sale of goods to ecozone, such as PEZA, considered as

export sale?
A: Yes. Notably, while an ecozone is geographically within the
Philippines, it is deemed as 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 0% (CIR v.
Sekisui Jushi Phils Inc, G.R. no 149671, July 21, 2006)
Q: What is an ecozone?
A: An ecozone or a special economic zone has been described as
selected areas within 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 bound 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 Customs Territory
(CIR v. Toshiba Information Equipment Phils Inc, G.R. no
150154, August 9, 2005)
Q: What are constructive reports?
A:
(1) Sales to bonded manufacturing warehouses of exportoriented manufacturers
(2) Sales to export processing zones (EPZs)
(3) Sales to enterprises duly registered and accredited with
SBMA pursuant to RA 7227

(4) Sales to registered export traders operating bonded

trading warehouses supplying raw materials in the
manufacture of export products under guidelines to be set
by the Board in consultation with BR and Bureau of
Customs (BOC)
(5) Sales to diplomatic missions and under agencies and/or
instrumentalities granted tax immunities, of locally
manufactured, assembled, repacked products whether paid
for in foreign currency or not
Q: What is the rationale for zero-rating exports sale?
A: It is because the Philippine VAT system adheres to the cross
border doctrine, according to which, no VAT shall be imposed to
form part of ht costs of goods destined for consumption outside of
the territorial border of the taxing authority.
NOTE: For purposes of zero-rating, export sales of registered
export traders shall include commission income.
Exportation of goods on consignment shall not be deemed export
sales until the export products consigned are in fact sold to the
consignee.
Provided, finally, that the sales of goods, properties, or services
made a by a VAT registered supplier to a BOI registered
manufacturer/producer whose products are 100% exported are
considered export sales.
A certification to this effect must be issued by the BOI which shall
be good for 1 year unless subsequently reissued by BOI.
FOREIGN CURRENCY DENOMINATED SALE
The phrase foreign currency denominated sale means sale to a
non-resident of goods, except those mentioned in Sec 149 and
150, assembled or manufactured in the Philippines for delivery to a
resident of the Philippines, paid for in acceptable foreign currency
and accounted for in accordance with the rules and regulations of
BSP (Sec 106.A.2.b)
NOTE: Sec 149 refers to excise tax on automobiles. Sec 150 refers
to excise tax on non-essential goods.

ZERO-RATED TRANSACTION AND AUTOMATIC ZERO-RATED

TRANSACTION DISTINGUISHED
EFFECTIVELY
ZERO- AUTOMATIC ZERO-RATED
RATED TRANSACTION
TRANSACTION
Nature
Refers to the sale of Refers
to
taxable
goods,
properties
or transaction
for
VAT
services
by
a
VAT- purposes, but shall not
registered person to a result in any output tax.
person, or entity who was However, the input tax on
granted
indirect
tax purchases
of
goods,
exemption under special properties
or
services
laws
or
international related to such zero-rated
agreements
sale, shall be available as
tax credit or refund
Need to apply An application for zero- Need
not
file
an
zero-rating
rating must be filed and application form and to
BIR approval is necessary secure
BIR
approval
before the transaction before sale
may
be
considered
effectively zero-rated
For
whose Primarily intended to be Intended to benefit the
benefit it is enjoyed by the seller who purchaser who, not being
intended
is directly and legally directly and legally liable
liable for the VAT, making for the payment of the
such seller internationally VAT, ultimately bear the
competitive by allowing burden of the tax shifted
the refund or credit of by the suppliers
input taxes that are
attributable
to
export
sales
Effect
Results in no tax chargeable against the purchaser. The
seller can claim a refund or a tax credit certificate for
the VAT previously charged by suppliers
NOTE: For zero-rated transactions, whether automatic or
effectively zero-rated, the word zero-rated must be prominently
stamped on the face of the VAT invoice or receipt issued by the
seller (failure to comply will make the transaction VAT taxable).
TRANSACTIONS DEEMED SALE

Q: What are the transactions deemed sale and therefore subject to

VAT?
A:
(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 (i.e., when a VAT-registered
person withdraws goods from his business for his personal
use)
(2) Distribution or transfer to:
(a) Shareholders or investors as share in the profits of the
VAT-registered persons; or
(b) Creditors in payment of debt
REQUISITES:
(a) The VAT registered person distributing or paying is a
domestic corporation
(b) What is being declared or paid is either real property
owned by the company or shares of stocks owned in
another company; and
(c) The domestic corporation is either a real estate dealer
(in case of real property) or dealer in securities (in
case of shares of stock)
NOTE: Only real estate dealers and dealers in securities
are liable for payment of VAT in case of sale, barter, or
exchange of real property or shares of stocks under Sec
106 and 108, respectively.
(3) Consignment of goods if actual sale is not made within 60
days following the date such goods were consigned
EXCEPTION: If the consigned goods were physically
returned by the consignee within the 60-day period
(4) Retirement from or cessation of business, with respect to
inventories of taxable goods existing as of such retirement
or cessation (Sec 106.B)
NOTE: The transactions are deemed sale because in reality, there
is no sale but the law provides that the following transactions are
considered as sale and are thus subject to VAT.

Q: What transactions considered retirement or cessation of

business deemed sale subject to VAT?
A:
(1) Change of ownership of the business. There is change in
the ownership of the business when a single proprietorship
incorporates; or the proprietor of a single proprietorship
sells his entire business
(2) Dissolution of a partnership and creation of a new
partnership which takes over the business. (Sec 4.106-7,
RR 16-2005)
Q: What is necessary to consider in determining whether a
transaction is deemed sale?
A: Before considering whether the transaction is deemed sale, it
must first be determined whether the sale was in the ordinary
course of the trade or business. Even if ht transaction was
deemed sale if it was not done in the ordinary course of trade or
business, still the transaction is not subject to VAT (CIR v.
Magsaysay Lines Inc, G.R. no 146984, July 28, 2006)
Q: What is the tax base of transactions deemed sale?
A: The output tax shall be based on the market value of the goods
deemed sold at the time of the occurrence of the transactions
enumerated above in numbers 1, 2 and 3. However, in case of
retirement or cessation of business, the tax base shall be the
acquisition cost or the current market price of the goods or
properties whichever is lower.
In the case of a sale where the gross selling price is unreasonably
lower than the FMV, the actual market value shall be the tax base.
ISOLATED TRANSACTION CRITERIA AND INCIDENTIAL
TRANSACTION CRITERIA (BIR RULING 113-98)
The sale of a microwave backbone transmission network by Liberty
Broadcasting Network, Inc., a domestic corporation holding a
congressional franchise to provide the public with wireless radio
communication services and to operate radio communication
stations nationwide, to another wireless communications carrier,
being an isolated transaction, is not in the course of its trade or
business of selling communication services. Thus, not subject to
VAT. Moreover, the subject sale shall not result in any input tax
credit to the buyer.

ISSUE: WON the said sale are in the ordinary course of trade or
business
BIR Ruling: The phrase in the course of trade or business under
Sec 106 NIRC means the regular conduct or pursuit of a
commercial or an economic activity, including transactions
incidental thereto.
CAB: The sale of microwave backbone transmission network to
another wireless communications network is not the course of
trade or business of selling telecommunications services. Neither is
it incidental thereto since the same does not necessarily follow the
primary function of selling telecommunication services. According,
since the sale of microwave backbone transmission network is an
isolated transaction, the said sale is not subject to VAT. Moreover,
the subject shall not result in any input tax credit to the buyer.
VAT RULING 027-96
ISSUE: In case of sales of private property in favor of the
government for road right-of-way purposes, WON the private
property owners shall not be subject o VAT
BIR Ruling: Under Sec 100.a.1.A NIRC, real properties held
primarily for sale to customers are subject VAT. Conversely, the
seller who is not engaged in a VAT taxable business; or if engaged
in a VAT taxable business, but the stock in trade is not real
property, cannot be subject to VAT.

Q: When is a change in or cessation of status of a VAT registered

person subject to VAT?
A: The following are subject to 12% output VAT:
(1) Change of business activity from VAT taxable status to VAT
exempt status
(2) Approval of a request for cancellation of registration due to
reversion to exempt status
(3) Approval of a request for cancellation of registration due to
a desire to revert to exempt status after the lapse of 3
consecutive years from the time of registration by a person
who voluntarily registered despite being exempt under Sec
109.2 NIRC
(4) Approval of a request for cancellation of registration of one
who commenced business with the expectation of gross
sales or receipt exceeding P1.5 million but who failed to
exceed this amount during the first 12 months of
operations
Q: When is a change in or cessation of status of a VAT registered
person not subject to VAT?
A: The following are not subject to 12% output VAT:
(1) Change of control in the corporation as corporation by the
acquisition of controlling interest of the corporation by
another stockholder or group of stockholders
The goods or properties used in the business or those
comprising the stock-in-trade of the corporation will not be
considered sold, bartered or exchanged, despite the
change in the ownership interest. However, exchange of
property by corporation acquiring control for the shares of
stocks of the target corporation is subject to VAT

In other words,. Sale of real property under a negotiated sale for a

road right of way is not subject to VAT if the seller is not selling
property in the regular conduct of his business. However, even if
the seller is engaged in the sale of real property in the course of
business, if the transaction is forced on the seller by virtue of the
exercise of the governments power of eminent domain, i.e.
negotiated purchase for road right of way, it cannot be said that
the sale is conducted in the course of the taxpayers trade or
business; hence, pursuant to Sec 99, it is not subject to VAT.
CHANGE OR CESSATION OF STATUS AS VAT-REGISTERED
PERSON

(2) Change in the trade or corporate name of the business

(3) 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 new
corporation.
2.

a.
b.

IMPORTATION OF GOODS
Sec 107 NIRC
Determination of Tax Base

Sec. 107. VAT on Importation of Goods A. In General there shall be levied, assessed and
collected on every importation of goods a VAT
equivalent to 12% based on the total value used
by the Bureau of Customs in determining tariff and
custom duties, plus customs duties, excise taxes, if
any, and other charges, such tax to be paid by the
importer prior to the release of such goods from
customs custody: Provided, That where the
customs duties are determined on the basis of the
quantity or volume of the goods, the value-added
tax shall be based on the landed cost plus excise
taxes, if any: Provided, further, That the President,
upon the recommendation of the Secretary of
Finance, shall, effective Jan. 1, 2005, raise the
r,ate of VAT to 12%, after any of the following
conditions has been satisfied:
i.
VAT collections as a percentage of Gross
Domestic Product(GDP) of previous year
exceeds 2 4/5%; or
ii.
National
government
deficit
as
a
percentage of GDP of previous year
exceeds 1 1/2 %
B. Transfers of Goods by Tax-exempt Persons. In
the case of tax-free importation of goods into the
Philippines by persons, entities or agencies exempt
from tax where such goods are subsequently sold,
transferred or exchanged in the Philippines to nonexempt persons or entities, the purchasers,
transferees or recipients shall be considered the
importers thereof, who shall be liable for any
internal revenue tax on such importation. The tax
due on such importation shall constitute a lien on
the goods superior to all charges or liens on the
goods, irrespective of the possessor thereof.

Importation is subject to VAT, it shall be assessed and

collected upon goods brought into the Philippines
whether for use in business or not.

TAX BASE OF IMPORTATION

General Rule: The tax base shall be based on the total

value used by the BOC in determining tariff and customs
duties plus customs duties excise taxes, if any, and other
charges to be paid by the importer prior to the release of
such goods from customs custody. (Sec. 107[A])
TAX BASE = Total value used by BOC in determining tariff
and custom duties + custom duties + excise tax + other
charges (postage, commission, and similar charges, prior
to the release of the goods from customs custody)
Exception: Where the customs duties are determined on
the basis of quantity or volume of the goods, the VAT shall
be based on the landed cost plus excise taxes, if any.
LAND COSTS = invoice amount + customs duties + freight
+ insurance + other charges (excise tax shall form part of
the tax base)

3.

The importer shall pay the tax prior to the release of

the imported goods.
An importer is a person who brings goods into the
Philippines, whether or not made in the course of trade
or business. It includes non-exempt persons or entities
who acquire tax free imported goods from exempt
persons, entities or agencies.
Importation begins when a vessel or aircraft enters the
Philippine jurisdiction with the intention to unload
goods/cargo. Importation ends upon the payment of
duties, taxes, and other charges due upon the article,
or to be paid at the port of entry and legal permit for
withdrawal shall have been granted.
Technical Importation Sale of goods by a PEZA
registered enterprise to a buyer from the customs
territory shall be treated as a technical importation.
Such buyer shall be treated as an importer thereof and
shall be imposed with the corresponding import taxes

SALE OF SERVICES AND USE OR LEASE OF PROPERTIES

a. 12%
Sec. 108. VAT on Sale of Services and Used or
Lease of Properties

A. Rate and Base of Tax. There shall be levied,

assessed and collected, a VAT equivalent to
12% (RMC 7-2006, [Jan 1, 2006] effective Feb
1, 2006) of gross receipts derived from the
sale or exchange of services, including the use
or lease of properties; Provided, that the
President, upon the recommendation of the
Secretary of Finance, shall effective Jan. 1,
2006, raise the rate of VAT to 12%, after any
of the following conditions has been satisfied:
i.
VAT collection as a percentage of GDP
of previous year exceeds to 2 4/5% ;
or
ii.
National government deficit as a
percentage of GDP of previous year
exceeds 1 %.
The phrase sale or exchange of services
means the performance of all kinds of services
in the Philippines for others for a fee,
remuneration or consideration, including those
performed or rendered by construction and
service
contractors;
stock,
real
estate,
commercial, customs and immigration brokers;
lessors of property whether personal or real;
warehousing services; lessors or distributors of
cinematographic films. Persons engaged in
milling,
processing,
manufacturing
or
repacking goods for others; proprietors,
operators, or keepers of hotels, motels,
resthouses, pension houses, inns, resorts;
proprietors or operators of restaurants,
refreshment parlors, cafes and other eating
places, including clubs and caterers; dealers in
securities; lending investors; transportation
contractors on their transport of goods or
cargoes, including persons who transport
goods or cargoes for hire and other domestic
common carriers by land relative to their
transport of goods or cargoes; common carries
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; sales of electricity by generation

companies, transmission, and distribution
companies; services of franchise grantee of
electric utilities, telephone and telegraph, radio
and television broadcasting and all other
franchise grantees except those under Section
119 of this Code; and non-life insurance
companies; and similar services regardless of
whether or not the performance thereof calls
for the exercise or use of the physical or
mental faculties. The phrase sale or exchange
of services shall likewise include:
1) 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;
2) The lease or the use of, or the right to
use of any industrial, commercial or
scientific equipment;
3) The supply of scientific, technical,
industrial or commercial knowledge or
information;
4) 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 mentioned in
subparagraph
(2)
or
any
such
knowledge or information as is
mentioned in subparagraph (3);
5) The supply of services by a nonresident
person or his employee in connection
with the use of property or rights
belonging to, or the installation or
operation of any brand, machinery or
other apparatus purchased from such
nonresident person;
6) The supply of technical advice,
assistance or services rendered in
connection with technical management
or administration of any scientific,

industrial or commercial undertaking,

venture, project or scheme;
7) The lease of motion picture films, films,
tapes and disc; and
8) The lease or the use of or the right to
use
radio,
television,
satellite
transmission and cable television time.
Lease of properties shall be subject to the tax
herein imposed irrespective of the place where
the contract of lease or licensing agreement
was executed if the property is leased or used
in the Philippines.
The term gross receipts means the total
amount
of
money
or
its
equivalent
representing the contract price, compensation,
service fee, rental or royalty, including the
amount charged for materials supplied with the
services and deposits and advance payments
actually or constructively received during the
taxable quarter for the services performed or
to be performed for another person, excluding
VAT.

MEANING OF SALE OR EXCHANGE OF SERVICES

SUBJECT TO VAT
It means the performance of all kinds of
services in the Philippines for others for a fee,
remuneration or consideration, whether in cash
or in kind.
Sale or exchange of service, as well as the use
or lease of properties shall be subject to 12%
VAT
Sales or Exchange includes:
1. Construction and service contract
2. Stock, real estate, commercial customs
and immigration brokers
3. Lessors of property, whether personal or
real
4. Persons engaged in warehouse services

5.
6.
7.

8.
9.
10.
11.

12.

13.
14.

15.
16.

Lessors or distributors of cinematographic

film
Persons engaged in milling processing,
manufacturing or repacking goods for
others
Proprietors, operators, or keepers of
hotels, motels, rest houses, pension
houses, inns, resorts, theaters, and movie
house
Proprietors or operators of restaurants,
refreshment parlors, cafes, and other
eating places, including clubs and caterers
Dealers in securities
Lending investor
Transportation
contractors
on
their
transport of goods or cargoes, including
persons who transport goods or cargoes for
hire and other domestic common carriers
by land relative to their transport of goods
or cargoes
Common carriers by air and sea relative to
their transport of passenger, goods, or
cargoes from one place in the Philippines
to another place in the Philippines
Sales
of
electricity
by
generation,
transmission,
and/or
distribution
companies
Franchise grantees of electric utilities,
telephone and telegraph, radio and/or
broadcasting television and all other
franchise
grantees
except
franchise
grantees
of
radio
and/or
television
broadcasting whose annual gross receipt of
the preceding year do not exceed
P10,000,000 and franchise grantees of gas
and water utilities
Non-life insurance companies (except their
crop insurances), including surety, fidelity,
indemnity and bonding companies
Similar services regardless of whether or
not the performance thereof calls for the

Sale or
1.

2.
3.
4.

5.

6.

7.
8.

exercise or use of the physical or mental

faculties
exchange of services shall also include:
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
The lease or the use of, or the right to use
any industrial, commercial knowledge or
information
The
supply
of
scientific,
technical,
industrial or commercial knowledge or
information
The supply of any assistance that is
ancillary and subsidiary to and furnished as
a means of enabling the application or
enjoyment of any such property or right as
is mentioned in subparagraph (b) hereof or
any such knowledge or information as is
mentioned in subparagraph (c) hereof
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 nonresident person
The supply of technical advice, assistance
or services rendered in connection with
technical management or administration of
any scientific, industrial or commercial
undertaking, venture, project or scheme
The lease of motion picture films, film
tapes, and discs
The lease or use of, or the right to use,
radio, television, satellite transmission and
cable television time.

Lessors of Property All forms of property for

lease, whether real or personal, are liable to VAT
Note: Lease of properties shall be subject to the
tax herein imposed irrespective of the place where

the contract of lease or licensing agreement was

executed if the property is leased or used in the
Philippines.

3.

SALE OF SERVICES AND USE OR LEASE OF PROPERTIES

(Sec 108)
a. 12% (Sec 108.A)
b. 0%
c. Determination of Tax Base

1.
12%
Sec. 108. VAT on Sale of Services and Used or Lease of
Properties
B. Rate and Base of Tax. There shall be levied, assessed
and collected, a VAT equivalent to 12% (RMC 7-2006, [Jan
1, 2006] effective Feb 1, 2006) of gross receipts derived
from the sale or exchange of services, including the use or
lease of properties; Provided, that the President, upon the
recommendation of the Secretary of Finance, shall
effective Jan. 1, 2006, raise the rate of VAT to 12%, after
any of the following conditions has been satisfied:
iii.
VAT collection as a percentage of GDP of previous
year exceeds to 2 4/5% ; or
iv.
National government deficit as a percentage of
GDP of previous year exceeds 1 %.
The phrase sale or exchange of services means the
performance of all kinds of services in the Philippines for
others for a fee, remuneration or consideration, including
those performed or rendered by construction and service
contractors; stock, real estate, commercial, customs and
immigration brokers; lessors of property whether personal
or real; warehousing services; lessors or distributors of
cinematographic films. Persons engaged in milling,
processing, manufacturing or repacking goods for others;
proprietors, operators, or keepers of hotels, motels,
resthouses, pension houses, inns, resorts; proprietors or
operators of restaurants, refreshment parlors, cafes and
other eating places, including clubs and caterers; dealers
in securities; lending investors; transportation contractors
on their transport of goods or cargoes, including persons

who transport goods or cargoes for hire and other

domestic common carriers by land relative to their
transport of goods or cargoes; common carries 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; sales of electricity by generation
companies, transmission, and distribution companies;
services of franchise grantee of electric utilities, telephone
and telegraph, radio and television broadcasting and all
other franchise grantees except those under Section 119 of
this Code; and non-life insurance companies; and similar
services regardless of whether or not the performance
thereof calls for the exercise or use of the physical or
mental faculties. The phrase sale or exchange of services
shall likewise include:
1) 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;
2) The lease or the use of, or the right to use of any
industrial, commercial or scientific equipment;
3) The supply of scientific, technical, industrial or
commercial knowledge or information;
4) 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 mentioned in subparagraph (2) or any such
knowledge or information as is mentioned in
subparagraph (3);
5) The supply of services by a nonresident person or his
employee in connection with the use of property or
rights belonging to, or the installation or operation of
any brand, machinery or other apparatus purchased
from such nonresident person;
6) The supply of technical advice, assistance or services
rendered in connection with technical management
or administration of any scientific, industrial or
commercial undertaking, venture, project or scheme;
7) The lease of motion picture films, films, tapes and
disc; and

8) The lease or the use of or the right to use radio,

television, satellite transmission and cable television
time.
Lease of properties shall be subject to the
tax herein imposed irrespective of the place
where the contract of lease or licensing
agreement was executed if the property is
leased or used in the Philippines.
The term gross receipts means the total
amount
of
money
or
its
equivalent
representing the contract price, compensation,
service fee, rental or royalty, including the
amount charged for materials supplied with the
services and deposits and advance payments
actually or constructively received during the
taxable quarter for the services performed or
to be performed for another person, excluding
VAT.

MEANING OF SALE OR EXCHANGE OF SERVICES

SUBJECT TO VAT
It means the performance of all kinds of
services in the Philippines for others for a fee,
remuneration or consideration, whether in cash
or in kind..
Sale or exchange of service, as well as the use
or lease of properties shall be subject to 12%
VAT
Sales or Exchange includes:
1. Construction and service contract
2. Stock, real estate, commercial customs and
immigration brokers
3. Lessors of property, whether personal or real
4. Persons engaged in warehouse services
5. Lessors or distributors of cinematographic
film
6. Persons engaged in milling processing,
manufacturing or repacking goods for others
7. Proprietors, operators, or keepers of
hotels, motels, rest houses, pension

houses, inns, resorts, theaters, and movie

house
8. Proprietors or operators of restaurants,
refreshment parlors, cafes, and other
eating places, including clubs and caterers
9. Dealers in securities
10. Lending investor
11. 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
12. Common carriers by air and sea relative to
their transport of passenger, goods, or
cargoes from one place in the Philippines
to another place in the Philippines
13. Sales
of
electricity
by
generation,
transmission,
and/or
distribution
companies
14. Franchise grantees of electric utilities,
telephone and telegraph, radio and/or
broadcasting television and all other
franchise
grantees
except
franchise
grantees
of
radio
and/or
television
broadcasting whose annual gross receipt of
the preceding year do not exceed
P10,000,000 and franchise grantees of gas
and water utilities
15. Non-life insurance companies (except their
crop insurances), including surety, fidelity,
indemnity and bonding companies
16. Similar services regardless of whether or
not the performance thereof calls for the
exercise or use of the physical or mental
faculties
Sale or exchange of services shall also include:
1. 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

2.
3.
4.

5.

6.

7.
8.

The lease or the use of, or the right to use

any industrial, commercial knowledge or
information
The supply of scientific, technical, industrial
or commercial knowledge or information
The supply of any assistance that is ancillary
and subsidiary to and furnished as a means
of enabling the application or enjoyment of
any such property or right as is mentioned in
subparagraph (b) hereof or any such
knowledge or information as is mentioned in
subparagraph (c) hereof
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 nonresident person
The supply of technical advice, assistance or
services
rendered in
connection with
technical management or administration of
any scientific, industrial or commercial
undertaking, venture, project or scheme
The lease of motion picture films, film tapes,
and discs
The lease or use of, or the right to use, radio,
television, satellite transmission and cable
television time.

Lessors of Property All forms of property for

lease, whether real or personal, are liable to VAT
Note: Lease of properties shall be subject to the
tax herein imposed irrespective of the place where
the contract of lease or licensing agreement was
executed if the property is leased or used in the
Philippines.

Real Estate Lessor includes any person engaged

in the business of leasing or subleasing real
property
1. Regardless of the place where the contract
of lease or licensing agreements was

2.

executed if the property leased or used is

located in the Philippines
VAT on rental and/or royalties payable to
non-resident foreign corporation or owners
for the sale of services and use or lease of
properties in the Philippines shall be based
upon the contract price agreed upon by the
licensor and the licensee

Non-Resident Lessor/Owner any person, natural

or juridical, an alien, or a citizen who establishes to
the satisfaction of the CIR the fact of the physical
presence abroad with definite intention to reside
therein, and who owns/leases properties, real or
personal whether tangible or intangible, located in
the Philippines.

Advance payments:
1. A loan to the lessor from the lessee,
2. An option money for the property, or
3. A security deposit to insure the faithful
performance of certain obligations of the
lessee to the lessor, or
4. Pre-paid rental
If the advance paymet is for the faithful
performance of certain obligations of the
lessee, it is not subject to VAT.
A security deposit that is applied to rental
shall be subject to VAT at the time of its
application
If the advance payment constitutes a prepaid
rental, then such payment is taxable to the
lessor in the month when received, irrespective
of the accounting method employed by the
lessor.

Warehousing service rendering personal service

of a warehouseman such as:
i.
Engaging in the business of receiving and
storing goods for compensation
ii.
Receiving goods and merchandise to be
stored in his warehouse for hire; or

iii.

Keeping and storing goods for others as a

business and for use

Miller a person engaged in milling for others

(except palay into rice and corn into corn grits, and
sugarcane into raw sugar) is subject to VAT on sale
of services.
Cash: VAT shall be based on his gross
receipts for the month or quarter
Receives a share of the milled products
instead of cash: VAT shall be based on the
actual market value of his share
Sale by the owner or miller of his share of
the milled product (except rice, corn grits
and raw sugar) shall be subject to VAT

Common Carriers refers to persons, corporations,

firms or associations engaged in the business of
carrying or transporting passengers or goods or
both, by land, water or air for compensation,
offering services to the public and shall include
transportation contractors.

Common Carriers by land with respect to their

gross receipts from the transport of passengers
including operators of taxicabs, utility cars for rent
or hire driven by the lessees, and tourist buses
used for the transport of passengers shall be
subject to percentage tax.

Domestic common carriers by air and sea are

subject to 12% VA on their gross receipts from
their transport of passengers, goods or cargoes
from one place in the Philippines to another place
in the Philippines.

Sale of electricity by generation, transmission, and

distribution companies shall be subject to 12% VAT
on their gross receipts (sale of power or fuel
generated through renewable sources of energy
such as biomass, solar, wind, hydropower,
geothermal, ocean energy, and other emerging

energy sources using technologies such as fuel

cells and hydrogen fuels shall be subject to 0%
VAT)

Generation companies refers to persons or

entities authorized by the ERC to operate facilities
used in the generation of electricity

Gross Receipts (Sale of electricity):

i.
Total amount charged by generation
companies for the sale of electricity and
related ancillary services; and/or
ii.
Total amount charged by transmission
companies for transmission of electricity
and related ancillary services; and/or
iii.
Total amount charged by distribution
companies and electric cooperatives for
distribution and supply of electricity and
related electric services. The universal
charged passed on and collected by
distribution
companies
and
electric
cooperative shall be exclude from the
computation of the gross receipts

Dealers in securities and lending investors: subject

to VAT on the basis of their gross receipts. For
dealer in securities, the term gross receipts means
gross selling price less cost of the securities sold

Service of franchise grantees of telephone and

telegraph, radio and/or television broadcasting, toll
road operations and all other franchise grantees,
except gas and water utilities, shall be subject to
VAT
Radio
and/or
television
broadcasting
annual gross receipt of the preceding year
do not exceed P10,000,000 shall not be
subject to VAT but 3% percentage tax.
Gas and water utilities: subject to 2%
franchise tax on their gross receipts
Telephone and telegraph: Subject to VAT
on their gross receipts derived from their

telephone, telegraph, telewriter exchange,

wireless
and
other
communication
equipment services
Amounts received for overseas dispatch,
message, or conversion originating frm the
Philippines are subject to percentage tax
and hence exempt from VAT

Non-Life Insurance Companies: including surety,

fidelity, indemnity and bonding companies are
subject to VAT
Not liable to premium tax under Sec. 23
(percentage tax) of NIRC
Gross receipts: total premium collected,
whether paid in money, notes, credits or
any substitution for money
Insurance and reinsurance commissions,
whether life or non-life, are subject to VAT
VAT due from the foreign reinsurance
company is to be withheld by the local
insurance company and to be remitted to
the BIR

Pre-need companies: the compensation for their

services is the premiums or paymens received
from the plan holders

Health maintenance organization (HMO)

Gross receipts: total amount of money or
its equivalent representing the service fee
actually or constructively received during
the taxable period for the services
performed or to be performed, excluding
VAT

GROSS RECEIPTS 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.
CONSTRUCTIVE RECEIPTS occurs when the money
consideration or its equivalent is placed at the control
of the person who rendered the services without
restrictions by the payor.
Deposit in banks which are made available to
the seller of service without restrictions
Issuance by the debtor of a notice to offset any
debt or obligation and acceptance thereof by
the seller as payment of services rendered
Transfers of amount retained by the payor to
the account of the contractor
REQUISITES FOR TAXABILITY OF SALE OR EXCHANGE
OF SERVICES OR LEASE OR USE OF PROPERTY:
1. There is a sale or exchange of service or
lease or use of property enumerated in the
law or other similar services;
2. The service is performed or to be
performed in the Philippines
3. The service is in the course of trade of
taxpayers trade or business or profession;
4. The service is for a valuable consideration
actually or constructively received; and
5. The service is not exempt under the Tax
Code,
special
law
or
international
agreement.
Note: Absence of any of the requisites renders
the transaction exempt from VAT but may b
subject to other percentage tax under the Title
V of NIRC.

Zero-rated Sales of Service

The following services performed in the Philippines
by a VAT-registered person shall be subject to 0%
VAT rate:
1. Processing, manufacturing, or repacking
goods for other persons doing business
outside the Philippines:

2.

3.

4.

a) Which goods are subsequently

exported
b) Where the services are paid for in
acceptable foreign currency
c) Accounted for in accordance with
the rules and regulations of the
BSP
Services
other
than
processing,
manufacturing, or repacking:
a) Rendered to a person engaged in
business conducted outside the
Philippines or to a non-resident
person not engaged in business
whos outside the Philippines when
the services are performed [CIR v.
Busmeirter, et al. GR No 153205
(2007) require performance of
services to nonresident to qualify
as zero-rated.]
b) The consideration of which is paid
for in acceptable foreign currency
c) Accounted for in accordance with
the rules and regulations of the
BSP
Services rendered to persons or entities
whose exemptions under special laws or
international agreements to which the
Philippines is a signatory effectively
subjects the supply of such services to zero
percent rate
Services rendered to persons engaged in
international shipping or air transport
operations, including leases of property for
use thereof
Shall not pertain to those made to
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
(subject to 12% VAT)

5.

6.

7.

Services performed by subcontractors

and/or
contractors
in
processing,
converting, or manufacturing goods for an
enterprise whose export sales exceed 70%
of the total annual production
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
percentage tax
Sale of power or fuel generated through
renewable sources of energy such as, but
not limited to, biomass, solar, wind,
hydropower, geothermal and stream, ocean
energy, and other emerging sources using
technologies such as fuel cells and
hydrogen fuels.
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

EFFECTIVELY ZERO-RATED SALE OF SERVICES refer

to the local sale of services by a VAT-registered person
to a person or entity who was granted indirect tax
exemption under special laws or international
agreement (limited to 3,4,5)

Concerned taxpayer must seek prior approval

or prior confirmation from appropriate offices
to the BIR so that a transaction is qualified for
effectively zero-rating

Without an approved application for effective

zero-rating, the transaction otherwise entitled
to zero-rating shall be considered exempt.

DETERMINATION OF TAX BASE

Categories of Services:
1. Professional/technical consultancy
2. Transfer of technology
3. Lease or use of intangible property
4. Lease or use of tangible property
Note: Non-life insurance policies are subject to VAT
while life insurance policies are VAT exempt but
subject to 5% premium tax under Sec. 123 of
NIRC

I. EXEMPT TRANSACTIONS (Sec 109)

The following shall be exempt from the value-added tax:

(A) Sale or importation of agricultural and marine food products in
their original state, livestock and poultry of or king generally used
as, or yielding or producing foods for human consumption; and
breeding stock and genetic materials therefor.
Products classified under this paragraph and 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.
Polished and/or husked rice, corn grits, raw cane sugar and
molasses, and ordinary salt shall be considered in their original
state;

Livestock: cows, bulls, and calves, pigs, sheep, goats and

rabbits
Poultry: fowls, ducks, geese and turkey
Does not include fighting cocks, race horses, zoo animals
and other animals generally considered as pets.
Marine food products: fish and crustaceans, such as but
not limited to eels, trout, lobster, shrimps, prawns, oysters,
mussels, and clams.
Meat, fruit, vegetables and other agricultural and marine
food products are considered in their original state even if
they undergone the simple process of preparation or
preservation for the market: freezing, drying, salting,

broiling, roasting, smoking, or stripping, shrink wrappings

in plastic, vacuum packing, tetra-pack, and other similar
packaging method.
Polished and/or husked rice, corn grits and raw cane sugar
and molasses, ordinary salt and copra shall be considered
as agricultural product in their original state.
Sugar whose content of sucrose by weight, in the dry
state: parameter reading of 99.5 and above are presumed
to be refined sugar.
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);
(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, 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;
(F) Services by agricultural contract growers and milling for others
of palay into rice, corn into grits and sugar cane into raw sugar;

BIR has clarified that toll processing or toll dressing, which

are covered by the VAT exemption of services by
agricultural contract growers under Sec. 109 (F) of the Tax
Code of 1997, pertain to toll processing services for clients
from which growing of animals were contracted. Thus, the
activity of preparing and packaging hogs/chicken ready fro
delivery after producing or growing is considered within
the purview of agricultural contract growing, which is
exempt from VAT under Sec. 109 (F) of the Tax Code of
1997, as amended. However, if the toll processing/toll
dressing/toll
manufacturing
service
is
performed
independently from growing poultry, livestock, or other
agricultural and marine food products, the activity is not
covered by the agricultural contract growing and therefore
subject to VAT under Sec. 108 of the Tax Code of 1997, as
amended. (Revenue Memorandum Circular No. 971010, Dec. 21, 2010.)

(G) Medical, dental, hospital and veterinary services subject to the

provisions of Section 17 of Republic Act No. 7716, as amended:

Laboratory services are exempted

If the hospital or clinic operates a pharmacy or drug store,

the sale of drugs and merchandise is subject to VAT.
However, sales of drugs to inpatients of hospitals
are considered part of hospital services, which are
exempt from VAT
(H)
Educational services rendered by private educational
institutions, duly accredited by the Department of Education
(DepEd) and the Commission on Higher Education (CHED), the
Technical Education and Skills Development Authority (TESDA) and
those rendered by government educational institutions;

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 TESDA.
(I) Services rendered by individuals pursuant to an employeremployee 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 PD no. 529 (Petroleum Exploration
Concessionaires under the Petroleum Act of 1949);
(L) Sales by agricultural cooperatives duly registered with the
Cooperative Development Authority 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;

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. If the cooperative is
not the producer (e.g., trader)), then only those sales to
its members shall be exempted from VAT;
However, the sale or importation of agricultural food
products in their original state is exempt from VAT
irrespective of the seller and buyer.

(M)
Gross receipts from lending activities by credit or multipurpose cooperatives duly registered with the Cooperative
Development Authority;
(N)
Sales by non-agricultural, non- electric and non-credit
cooperatives duly registered with the Cooperative Development
Authority: Provided,
That the share capital contribution of each member does not
exceed P15,000 and regardless of the aggregate capital and net
surplus ratably distributed among the members;

Importation of machineries and equipment, including spare

parts thereof, to be used by them are subject of VAT.
(O) Export sales by persons who are not VAT-registered;
(P) The following Sale of real properties are EXEMPT from VAT:
(RR no. 16 2011)

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 housing
a subdivision or a condominium registered and
licensed by the HLURB
Undertaken by the government or private
developers
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,
residential lot valued at P1,919,500.00 and below, or
house & lot and other residential dwellings valued at
P3,199,200.00 and below where the instrument of
sale/transfer/disposition was executed on or after July 1,
2005;
Provided, That 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 P1,919,500.00. 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.

(Q) (RR no. 16 2011)

Lease of residential units with a monthly rental per unit not
exceeding P12,800.00, regardless of the amount of aggregate
rentals received by the lessor during the year; Provided, every
three (3) years thereafter, the amount shall be adjusted to its
present value using the Consumer Price Index, as published by the
NSO; Provided, further, that such adjustment shall be published

through revenue regulations to be issued not later than March 31

of each year;

The foregoing notwithstanding, lease of residential units

where the monthly rental per unit exceeds P12,800.00 but
the aggregate of such rentals of the lessor during the year
do not exceed P1,919,500.00 shall likewise be exempt
from VAT, however, the same shall be subjected to three
percent (3%) percentage tax.
In cases where a lessor has several residential units for
lease, some are leased out for a monthly rental per unit of
not exceeding P12,800.00 while others are leased out for
more than P12,800.00 per unit, his tax liability will be as
follows:

1.

The gross receipts from rentals not exceeding

P12,800.00 per month per unit shall be exempt from
VAT regardless of the aggregate annual gross receipts.
The gross receipts from rentals exceeding P12,800.00
per month per unit shall be subject to VAT if the
aggregate annual gross receipts from said units only
(not including the gross receipts from units leased for
not more than P12,800.00) exceeds P1,919,500.00.
Otherwise, the gross receipts will be subject to the 3%
tax imposed under Section 116 of the Tax Code.

2.

The term 'residential units' shall refer to

apartments and houses & lots used for residential
purposes, and buildings or parts or units thereof
used solely as dwelling places (e.g., dormitories,
rooms and bed spaces) except motels, motel
rooms, hotels, hotel rooms, lodging houses, inns
and pension houses.
The term 'unit' shall mean an apartment unit in the
case of apartments, house in the case of
residential houses; per person in the case of
dormitories, boarding houses and bed spaces; and
per room in case of rooms for rent.

(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) Sales, importation or lease of passenger or cargo vessels and

aircraft, including engine, equipment and spare parts thereof fro
domestic or international transport operations

limited to 150 tons and above, including engine

and spare parts of said vessels

comply with the age limit requirement, at the time

of acquisition counted from the date of the vessels
original commissioning
passenger/cargo vessel: 15 years
old
tankers: 10 years old
high-speed passenger crafts: 5
years old.
Exemption shall be subject to the provisions of
The Domestic Shipping Development Act
(T) Importation of fuel, goods and supplies by persons engaged in
international shipping or air transport operations
Shall be used exclusively or shall pertain to the
transport of goods and/or passengers from a port
in the Philippines directly to a foreign port without
stopping at any other port in the Philippines.
(U)
Services of banks, non-bank financial intermediaries
performing quasi-banking functions, and other non-bank financial
intermediaries; and
(V) RR 16-2011
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 P1,919,500.00; Provided, every three (3) years
thereafter, the amount shall be adjusted to its present value using
the Consumer Price Index, as published by the NSO; Provided,
further, that such adjustment shall be published through revenue
regulations to be issued not later than March 31 of each year;

For purposes of the threshold of P1,919,500.00,

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 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.

all stages of production or distribution regardless of who

the seller is.

The question is whether copra is an agricultural food or

non-food product for purposes of this provision of the
NIRC. On June 11, 1991, respondent Commissioner of
Internal Revenue issued the circular in question, classifying
copra as an agricultural non-food product and declaring it
"exempt from VAT only if the sale is made by the primary
producer pursuant to Section 103(a) of the Tax Code, as
amended."

The reclassification had the effect of denying to the

petitioner the exemption it previously enjoyed when copra
was classified as an agricultural food product under
103(b) of the NIRC. Petitioner challenges RMC No. 47-91
on various grounds.

A VAT-registered person may, elect that the exemption

shall not apply to his sales of goods or services or
properties which is irrevocable for a period of 3 years.
MISAMIS ORIENTAL COCO TRADERS vs. SEC. OF FINANCE
238 SCRA 63
FACTS: Petitioner is a domestic corporation whose members,
individually or collectively, are engaged in the buying and selling of
copra.

The petitioner alleges that prior to the issuance of Revenue

Memorandum Circular 47-91, which implemented VAT
Ruling 190-90, copra was classified as agricultural food
product. And under Sec. 103(b) of the NIRC, the sale of
agricultural food products in their original state is exempt
from VAT at all stages of production or distribution.

Under 103(a) the sale of agricultural non-food products in

their original state is exempt from VAT only if the sale is
made by the primary producer or owner of the land from
which the same are produced. The sale made by any other
person or entity, like a trader or dealer, is not exempt from
the tax.

On the other hand, under 103(b) the sale of agricultural

food products in their original state is exempt from VAT at

ISSUES:
1. Whether the BIR is the proper competent government
agency to determine the proper classification of food
products.
YES
2.

Whether Commissioner erred in not considering copra as

an "agricultural food product" within the meaning of
103(b) of the NIRC.
NO.

3.

Whether RMC No. 47-91 is discriminatory and violative of

the equal protection clause of the Constitution.
NO.

4.

Whether RMC No. 47-91 is counterproductive because

traders and dealers would be forced to buy copra from
coconut farmers who are exempt from the VAT and that to
the extent that prices are reduced the government would
lose revenues as the 10% tax base is correspondingly
diminished.
NO.

HELD:

1.

The BIR, as the government agency charged with the

implementation and interpretation of the tax laws, is
entitled to great respect.

In interpreting Section 103 of the NIRC, the CIR correctly gave it a

strict construction consistent with the rule that tax exemptions
must be strictly construed against the taxpayer and liberally in
favor of the state.
The ruling was made by the CIR in the exercise of his power under
245 of the NIRC to "make rulings or opinions in connection with
the implementation of the provisions of internal revenue laws,
including rulings on the classification of articles for sales tax and
similar purposes.
2.

3.

In the case at bar, we find no reason for holding that

respondent Commissioner erred in not considering copra
as an "agricultural food product" within the meaning of
103(b) of the NIRC. As the Solicitor General contends,
"copra per se is not food, that is, it is not intended for
human consumption. Simply stated, nobody eats copra for
food." That previous Commissioners considered it so, is not
reason for holding that the present interpretation is wrong.
The Commissioner of Internal Revenue is not bound by the
ruling of his predecessors. 7 To the contrary, the overruling
of decisions is inherent in the interpretation of laws.
Petitioner likewise claims that RMC No. 47-91 is violative of
the equal protection clause because while coconut farmers
and copra producers are exempt, traders and dealers are
not, although both sell copra in its original state.
Petitioners add that oil millers do not enjoy tax credit out
of the VAT payment of traders and dealers.

The argument has no merit. There is a material or substantial

difference between coconut farmers and copra producers, on one
hand, and copra traders and dealers, on the other. The former
produce and sell copra, the latter merely sell copra.
The Constitution does not forbid the differential treatment of
persons so long as there is a reasonable basis for classifying them
differently. It is not true that oil millers are exempt from VAT.

Pursuant to 102 of the NIRC, they are subject to 10% VAT on the
sale of services.
4.

This is not so. The sale of agricultural non-food products is

exempt from VAT only when made by the primary producer
or owner of the land from which the same is produced, but
in the case of agricultural food products their sale in their
original state is exempt at all stages of production or
distribution. At any rate, the argument that the
classification of copra as agricultural non-food product is
counterproductive is a question of wisdom or policy which
should be addressed to respondent officials and to
Congress.

2. REVENUE MEMORANDUM CIRCULAR NO. 07-94

Water, being a mineral rather than agricultural product may not
legally be classified as agricultural food product within the
purview of Section 103(b), NIRC.
Hence, sale of water, whether in the form of bottled mineral
water or water delivered/supplied to inter-island and ocean-going
vessels by persons engaged in the business of supplying water to
the aforesaid inter-island and ocean-going vessels, shall be
subject to 10% VAT, pursuant to Section 100(a), NIRC.
4. REVENUE REGULATION 03-2012
Sale of Real Properties. Sale of real properties 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.
Sale of residential lot with gross selling price exceeding
P1,919,500.00, residential house and lot or other
residential dwellings with gross selling price exceeding
P3,199,200.00, where the instrument of sale (whether the
instrument is nominated as a deed of absolute sale, deed of
conditional sale or otherwise) is executed and notarized on or after
January 1, 2012 and shall be subject to twelve percent (12%)
output VAT.
However, for instruments of sale executed and notarized on or
after Nov. 1, 2005 but prior to January 1, 2012, the threshold
amounts should appropriately be P1,500,000 and P2,500,000

respectively, and excess thereof shall be subject to ten percent

(10%) output VAT, and starting Feb. 1, 2006, to twelve percent
(12%) output VAT.

included in the term "hospital services" which are

exempt from value-added tax under Section 103(1)
of the National Internal Revenue Code.

The following sales of real properties are exempt from VAT,

namely:

SEC. 103. Exempt Transactions - The following shall

be exempt from VAT:

Sale of residential lot valued at P1,919,500.00 and below, or

house & lot and other residential dwellings valued at
P3,199,200.00
and
below
where
the
instrument
of
sale/transfer/disposition was executed and notarized on or after
January 1, 2012;

Xxx

However, for instruments executed and notarized on or after Nov.

1, 2005 but prior to January 1, 2012, the threshold amounts
should appropriately be P1,500,000 and P2,500,000 respectively.

Revenue regulations no. 5-87, implementing the said code

states:

Provided, That 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;
5. ST. LUKES MEDICAL CENTER vs. CIR CTA
FACTS: Petitioner is a non-stock, non-profit corporation duly
organized and existing under Philippine laws, and primarily
engaged in the hospital business.
1. The controversy started when the respondent assessed the
petitioner on August 2, 1993 deficiency value-added tax
(VAT) on its pharmacy sale for the year 1991 in the total
amount of P9,866,151.23 to which the petitioner filed a
protest and prayed for cancellation.
2. However, petitioner's protest was denied by the
respondent, hence, this petition for review.
3. the petitioner advanced the view in its petition that the
respondent exceeded its legal authority when it assessed
VAT on its use and consumption of pharmacy items
for in-patients, those used by its special units such as
operating and delivery rooms during medical procedures,
and pharmaceutical items used by other departments of
the hospital, since these items are necessarily

xxx

xxx

(1) Medical, dental, hospital and veterinary services

Xxx

xxx

xxx

Sec. 9 . Exemptions.
Xxx

xxx

xxx

(12) Medical, Dental, Hospital and Veterinary Services.

Laboratory services are also exempted. If the hospital or
clinic operates a pharmacy or drugstore, the sale of drugs
and medicine, if it exceeds 200k during a 12 month period
is subject to VAT.
ISSUE: WON the in-patient pharmacy sale is subject to VAT
HELD: YES
Respondent contends the Sec (9) (b) (12) of Revenue Regulations
No. 5-87 is very clear and unequivocable, that pharmacy sales, if it
exceeds P200k during the twelve-month period, is subject to VAT,
thus, the question of whether such drugs or pharmaceutical
products sold to out-patients or in-patients is immaterial, and that
petitioner failed to present proof that would substantiate its
claimed deductions.
Petitioner HAS UTTERLY FAILED to convince the court, that selling
of drugs and other pharmacy items to in-patients form part of its
hospital services. Dispensing of drugs is different from selling of
drugs.

Pharmacy services were not included in the exemptions mentioned

in Sec 103 of the tax code, thus it behooves the Court to apply the
principle of STRICT CONSTRUCTION OF TAX EXEMPTION AGAINST
THE TAX PAYER.
To be exempted from tax, the taxpayer has the duty to justify the
exemption by words too plain to be mistaken and too categorical
to be misinterpreted. Thus PHARMACY SALES NOT BEING
MENTIONED IN SEC. 103 OF THE TAX CODE AS EXEMPT FROM
VAT, IT SHOULD BE DEEMED SUBJECT TO VAT. Expressio unius
est exclusion alterius and Ubi lex non distinguit nec nos
distinguere debemos, where the law does not distinguish, under
statutory construction, applies in the instant case.
6. RA No. 9238
The following are exempt from VAT
(bb) Services Rendered by Doctors of Medicine duly Registered
with the Professional Regulatory Commission (PRC), and
(cc) Services Rendered by Lawyers Duly Registered with the
Integrated Bar of the Philippines (IBP)
RR 7-2004
The following are VAT exempted:
1.

2.

3.

services rendered by a doctor of medicine

duly registered and of good standing with the PRC in the
practice of his medical profession, for such services which
may be rendered, under existing law, only by a duly
licensed doctor of medicine in good standing with the PRC,
legal services rendered by a lawyer duly
registered and of good standing with the IBP in the
practice of his legal profession for such services which may
be rendered, under existing law, only by a lawyer duly
registered and in good standing with the IBP,
medical services rendered by a general
professional partnership whose partners are composed
exclusively of doctors of medicine registered with the PRC
where the general professional partnership was organized
solely and exclusively for the practice of medical

4.

profession, and for such services which may be rendered,

under existing law, only by a duly licensed doctor of
medicine in good standing with the PRC, or
legal services rendered by a general
professional partnership whose partners are composed
exclusively of lawyers duly registered with the IBP in the
practice of legal profession where the general professional
partnership was organized solely and exclusively for the
practice of law, and for such services which may be
rendered, under existing law, only by a lawyer duly
registered and of good standing with the IBP.
NEW SECTIONS:
SEC 109 (aa) Services of banks, non-bank financial
intermediaries performing quasi-banking functions, and
other non-bank financial intermediaries;
S109 (bb) Services Rendered by Doctors of Medicine duly
Registered with the Professional Regulatory Commission
(PRC), and
S109 (cc) Services Rendered by Lawyers Duly Registered
with the Integrated Bar of the Philippines (IBP)

J. TAX CREDIT (Sec 110)

SEC. 110. Tax Credits. (A) Creditable Input Tax. - (1) Any input tax evidenced by a
VAT invoice or official receipt issued in accordance with Section
113 hereof on the following transactions shall be creditable against
the output tax:
(a) Purchase or importation of goods:
(i)
For sale; or
(ii)
For conversion into or intended to form part of a
finished product for sale including packaging
materials; or
(iii)
For use as supplies in the course of business; or
(iv)
For use as materials supplied in the sale of service;
or

(v)

For use in trade or business for which deduction for

depreciation or amortization is allowed under this
Code.

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

actually paid.
(2) The input tax on domestic purchase of goods or properties
shall be creditable:
(a) To the purchaser upon consummation of sale and on
importation of goods or properties; and
(b) To the importer upon payment of the value-added tax
prior to the release of the goods from the custody of
the Bureau of Customs.
Provided, that the input tax on goods purchased or imported in a
calendar month for use on trade or business for which deduction is
allowed under this Code, shall be spread evenly over the month of
acquisition and the 59 succeeding months if the aggregate
acquisition cost for such goods, excluding the VAT component
thereof, exceeds 1Million pesos: provided, however, that if the
estimated useful life of the capital good is less than 5 years, as
used for depreciation purposes, then the input VAT shall be spread
over such a shorter period: provided, finally that in that case of
purchase of services, lease or use of properties, the input tax shall
be creditable to the purchaser, lessee or license upon payment of
the compensation, rental, royalty or fee.
(3) A VAT-registered person who is also engaged in transactions
not subject to the value-added tax shall be allowed tax credit as
follows:
(a) Total input tax which can be directly attributed to transactions
subject to value-added tax; and
(b) A ratable portion of any input tax which cannot be directly
attributed to either activity.
The term "input tax" means the value-added tax due from or
paid by a VAT-registered person in the course of his trade or
business on importation of goods or local purchase of goods or
services, including lease or use of property, from a VAT-registered

person. It shall also include the transitional input tax determined

in accordance with Section 111 of this Code.
The term "output tax" means the value-added tax due on the
sale or lease of taxable goods or properties or services by any
person registered or required to register under Section 236 of this
Code.
(B) Excess Output or Input Tax- If at the end of any taxable
quarter the output tax exceeds the input tax, the excess shall be
paid by the VAT-registered person. If the input tax exceeds the
output tax, the excess 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
credited against other internal revenue taxes, subject to the
provisions of Section 112.
(C) Determination of Creditable Input Tax- The sum of the
excess input tax carried over from the preceding month or quarter
and the input tax creditable to a VAT-registered person during the
taxable month or quarter shall be reduced by the amount of claim
for refund or tax credit for value-added tax and other adjustments,
such as purchase returns or allowances and input tax attributable
to exempt sale.
The claim for tax credit referred to in the foregoing paragraph shall
include not only those filed with other government agencies, such
as the Board of Investments and the Bureau of Customs.
Q: Explain the Tax Credit Method (also called invoice method) of
collecting VAT?
A: The input tax shifted by the seller to the buyer is credited
against the buyers output taxes when he in turn sells the taxable
goods, properties or services.
1. CREDITS FOR INPUT TAX

The VAT due on 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 trade or business.

Includes the transaction and the presumptive input tax

Includes input taxes which can be directly attributed to
transactions subject to the VAT plus a ratable portion of any
input taxes which cannot be directly attributed to either the
taxable or exempt activity.
Evidenced by a VAT invoice or official receipt issued by a
VAT-registered person.

CLAIM FOR INPUT TAX ON DEPRECIABLE GOODS

i)

REQUISITES:
A VAT-registered person purchases or imports capital
goods (which are depreciable goods for income tax
purposes)
If aggregate acquisition cost of all capital goods
(exclusive of VAT)
in a calendar month exceeds
P1million, the input tax cannot be claimed outright but
should be subject to amortization over a period of 5
years or useful life of the capital goods, whichever is
lower.
If the aggregate acquisition cost of all capital goods in
a calendar month does not exceed P1 million, the input
tax may be claimed outright as credit against output
tax.
Aggregate acquisition cost refers to the total price agreed
upon for one or more assets acquired and not the
payments actually made during the calendar month.

ii)

MANNER OF CLAIMING INPUT TAX

1MILLION PESOS

OF

MORE

THAN

1. Estimated useful life of a capital good is 5 years or more:

Input tax spread evenly over a period of 60
months
Commenced in the calendar month when the
capital good is acquired
2. Estimated useful life is less than 5 years:
Input tax spread evenly on monthly basis by the
actual number of months comprising the estimated
useful life of the capital good

Commenced in the calendar month when the

capital good is acquired

If the depreciable capital good is sold/transferred within the period

of 5 years or prior to the exhaustion of the amortizable input tax
thereon: entire unamortized input tax on the capital goods sold,
can be claimed as input tax credit during the month or quarter
when the sale or transfer was made but subject to limitation.
2. TRANSITIONAL INPUT TAX
SEC. 111. Transitional/Presumptive Input Tax Credits. (A) Transitional Input Tax Credits.- A person who becomes
liable to value-added tax or any person who elects to be a
VAT-registered person shall, subject to the filing of an
inventory according to rules and regulations prescribed by the
Secretary of finance, upon recommendation of the Commissioner,
be allowed input tax on his beginning inventory of goods,
materials and supplies equivalent to 2% of the value of
such inventory or the actual value-added tax paid on such
goods, materials and supplies, whichever is higher, which
shall be creditable against the output tax.
3. PRESUMPTIVE INPUT TAX
Sec. 111
(B) Presumptive Input Tax Credits. (1) Persons or firms engaged in the processing of sardines,
mackerel and milk, and in manufacturing refined sugar and
cooking oil, shall be allowed a presumptive input tax,
creditable against the output tax, equivalent to one and
one-half percent (1 1/2%) 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 Subsection, 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 manner as to prepare it for special
use to which it could not have been put in its original form or
condition.

(2) Public works contractors shall be allowed a presumptive

input tax equivalent to one and one-half percent (1 1/2%)
of the contract price with respect to government contracts
only in lieu of actual input taxes therefrom.

K. COMPUTATION OF VAT PAYABLE

1. COMPUTATION OF OUTPUT TAX
i)

Goods or properties: Gross Selling Price x VAT rate

Allowable deductions from gross selling price:

1. Discounts determined and granted at the time of sale
(expressly indicated in the invoice, amount thereof should
from part of gross sales duly recorded in the books, and
the granting of the discount does not depend on the
happening of the future event);
2. Sales returns and allowances for which a proper credit or
refund was made during the month or quarter to the buyer
fro sales previously recorded as taxable sales.
ii)

Reduction in Creditable Input Tax

Amount of claim for VAT refund or Tax Credit Certificate
(whether filed with the BIR, the Department of Finance,
the Board of Investments or the BOC)
Other adjustments, such as purchase returns or
allowances, input tax attributable to sales subject to final
VAT withholding.
3. EXCESS OUTPUT OVER INPUT / EXCESS INPUT OVER
OUTPUT
Determination of the output tax and VAT payable and computation
of VAT payable or excess tax credits
VAT payable computation:
OUTPUT TAX
- INPUT TAX____
= VAT PAYABLE

Sellers of service: Gross Receipts x VAT rate

2. DETERMINATION OF INPUT TAX CREDIT

Determination of Input Tax Credit during a taxable month or
quarter
All creditable input taxes during the month or quarter
+ any amount of input taxes carried-over from preceding
month/quarter
- (claim for VAT refund or tax credit certificate)
- (other adjustments purchase returns)
- (input tax attributable to exempt sales)
- (input tax on capital goods purchased during the
month/quarter subject to amortization)
+/- (difference between standard input and actual input on
government sales)
+ (creditable VAT withheld on payments to non-residents
= INPUT TAX CREDIT
NOTE: Adjustment to Input Tax
Addition to Creditable Input Tax

Input tax arising from qualified transactions in the current

month or quarter
Input tax carried-over from the preceding month or
quarter

If at the end of any taxable quarter the output tax exceeds

the input tax, the excess shall be paid by the VATregistered person.
If the input tax exceeds the output tax, the excess shall be
carried over to the succeeding quarter or quarters.
Any input tax attributable to zero-rated sales by a VATregistered person may at his option be refunded or
credited against other internal revenue taxes subject to
provisions of Section 112.

ALLOCATION OF INPUT TAX ON MIXED TRANSACTIONS

A VAT-registered person who is also engaged in transactions not
subject to VAT shall be allowed to recognize input tax credit on
transactions subject to VAT as follows:
i) All the input taxes that can be directly attributed to
transactions subject to VAT may be recognized for input
tax credit

ii)

NOTE:

Input taxes which are directly attributed to VAT

taxable sales of goods and services from the
Government or any of its political subdivisions,
instrumentalities or agencies, including GOCCs
shall not be credited against output taxes arising
from sales to non-government entities
If any input tax cannot be directly attributed to either a
VAT taxable or VAT-exempt transaction, the input tax shall
be pro-rated to the VAT taxable and VAT-exempt
transactions
Only the ratable portion pertaining to transactions
subject to VAT may be recognized for input tax
credit.

Input tax attributable to VAT-exempt sales shall

not be allowed as credit against the output tax but
should be treated as part of cost of goods sold.
For persons engaged in both zero-rated sales and
non zero rates sales, the aggregate input taxes
shall be allocated ratably between the zero-rated
sale and non zero-rated sale

every payment
On domestic purchase of services

VAT OR

On importation of goods

Import entry or other equivalent

document showing actual payment
of VAT on the imported goods and
BOC OR

On transitional input tax

Inventory of goods as shown in a

detailed list to be submitted to the
BIR

On demand sale transactions

Required invoices

On payments
residents

Monthly Remittance Return of VAT

withheld (BIR Form 1600) filed by
the resident payor in behalf of the
non-resident
evidencing
remittance of VAT due which was
withheld by the payor.

made

to

Advance VAT on sugar

SUBSTANTIATION REQUIREMENTS OF INPUT TAX CREDITS
Required Supporting Documents for claiming Input VAT
TRANSACTIONS
REQUIRED SUPPORT
On domestic purchases of goods VAT invoice
or properties made in the course
of trade or business
On purchase of real property
Cash/deferred payment basis

Public instrument (i.e., deed of

absolute sale, deed of conditional
sale, contract/agreement to sell,
etc) together with the VAT Invoice
for the entire selling price and
Non-VAT ORs for the initial and
succeeding payments

Installment basis

Public instrument and VAT OR for

non-

Payment order showing payment

of the advance VAT

A cash register machine tape issued to a registered buyer shall

constitute valid proof of substantiation of tax credit only if it shows
the information required under sec. 113 and 237 of the Tax Code
(invoicing requirements)

L. REFUNDS (Sec 112)

SEC. 112. Refunds or Tax Credits of Input Tax. (A) Zero-Rated or Effectively Zero-Rated Sales of goods,
properties or services
Any VAT-registered person, whose sales are zero-rated
or effectively zero-rated may, within 2 years after the
close of the taxable quarter when the sales were made,
apply for the issuance of a tax credit certificate or refund
of creditable input tax due or paid attributable to such
sale.

The creditable input tax allowed to be refunded does not

include transitional input tax.
In case the taxpayer is engaged in zero-rated or
effectively zero-rated sale and also in taxable or exempt
sale and the amount of creditable input tax due or paid
cannot be directly and entirely attributed to any one of
the transactions, it shall be allocated proportionately on
the basis of the volume of sales.

(B) Cancellation of VAT Registration.

A person whose registration has been cancelled due to
retirement from or cessation of business, or due to
changes in or cessation of status may, within 2 years from
the date of cancellation, apply for the issuance of a tax
credit certificate for any unused input tax.
(C) Period Within Which Refund or Tax Credit of Input
Taxes Shall be Made.
the Commissioner shall grant a refund or issue the tax
credit certificate for creditable input taxes within 120 days
from the date of submission of complete documents in
support of the application.
Taxpayer may appeal to the CTA within 30 days from
receipt of said denial.
If no action on the claim for refund has been taken by the
CIR after 120-day period from the date of submission of
the application with complete documents, the taxpayer,
may appeal to the CTA within 30 days from the lapse of
the 120-day period.
The CIR has 120 days, from the date of the submission of
the complete documents within which to grant or deny the
claim for refund/credit of input Vat. In case of full or
partial denial of the by the CIR, the taxpayers recourse is
to file an appeal before the CTA within 30 days from
receipt of the decision of the CIR. Otherwise, if after the
120-day period, the CIR fails to act on the application for
tax refund/credit, the remedy of the taxpayer is to appeal
the inaction of the CIR to CTA within 30 days. Hence, if
filed with the CTA before the 120-day period expires, CTA
will dismiss for prematurity. If filed with the CTA after the
150-day (120+30 days), CTA will dismiss for being late.
This only applies to credit input tax refunds.

(D) Manner of Giving Refund.

Refunds shall be made upon warrants drawn by the
Commissioner or by his duly authorized representative
without the necessity of being countersigned by the
Chairman, Commission on audit.
Refunds under this paragraph shall be subject to post audit
by the Commission on Audit.

M. COMPLIANCE REQUIREMENTS
REGISTRATION
2.
PERSONS COMMENCING BUSINESS (SEC 236.G)
Q: Who are the persons required to register for VAT?
A: Every person who in the course of business or trade, sells,
barters or exchanges goods or properties, or engages in the sale
or exchange of services shall register for VAT if:
1.
The gross sale or gross receipts
have exceeded P1.5 million for the past 12 months; or
2.
There are reasonable grounds to
believe that his gross sales or receipts in the next 12
months shall exceed P1.5 million
NOTE: Those who are liable to register for VAT under Sec 236.G.1
shall register with the RDO which has jurisdiction over the head
branch or office of that person and shall pay the annual
registration fee prescribed in Sec B thereof.
EFFECT OF FAILURE TO REGISTER
If a person fails to register for VAT, he shall be taxed as if he were
a VAT-registered person but without the benefit of input tax credits
for the period in which he was not properly registered.
3.

PERSONS BECOMING LIABLE TO VAT

Q: Who is a VAT-registered person?

A: Any person who has registered VAT as a tax type in accordance
with Sec 236.C shall be referred to as a VAT-registered person who
shall be assigned only to one TIN.

Q: What is the effect of a franchise grantee of radio and TV

broadcasting, whose annual gross income receipts for the
preceding year do not exceed P10 million, who opts for VAT
registration?
A: The registration becomes irrevocable.
4.

2.

3.

OPTIONAL REGISTRATION (SEC 236.H)

Q: Who may optionally register for VAT?

A: Any person who is not required to register for VAT under Sec
236.G may elect to register for VAT by registering with RDO that
has jurisdiction over the head office of that person, and paying the
annual registration fee in Subsection B. (Sec 236.H).
NOTE: Under RR 16-05
(1) Any person who is VAT-exempt under Sec 4.109-1 (VAT
exempt persons) may elect to be VAT registered
(2) Any person who is VAT-registered but enters into a
transaction which are exempt from VAT (mixed
transactions) may opt that the VAT apply to his transaction
which would have been exempt under Sec 109.2 NIRC.
Registration is irrevocable for 3 years
(3) Franchise grantees of radio and TV broadcasting with
annual gross receipts of the preceding year do not exceed
P10 million may opt for VAT registration. Registration is
irrevocable
Q: What is the effect of optional registration?
A: He shall not be entitled to cancel his registration under
Subsection F.2 for the next 3 years, except a franchise grantee,
with gross receipts of P10 million and below, who opts for VAT
registration.
CASE:
ATLAS CONSOLIDATED MINING V. CIR, G.R. NO 134467
(1999)
FACTS: Petitioner Atlas Consolidated Mining is engaged in the
business of mining, production and sale of various mineral
products, consisting principally of copper concentrates and gold
and duly licensed with BIR
1.
Respondent BIR approved petitioners
application for VAT zero-rating on the following sales:

4.
5.

In April 1990, petitioner filed a VAT return

with BIR for the first quarter of 1990, declaring its sales to
the Central Bank, PASAR and Philphos as zero-rated sales
and therefore not subject to any output tax
Of the claim P33 million filed by petitioner,
BIR only approved/credited P2.5 million. BIR alleged that
BIR regulations automatically disallow VAT refund for
failure to present the required documents although the
purchases can be substantiated by other documents
Petitioner contends that its sales to
Philphos and PASAR should be zero-rated for the 1st
quarter of 1990
On the other hand, BIR argues that by
virtue of the joint stipulation of facts, petitioner is bound
by its admission that it was registered for VAT only from
August 15, 1990, well beyond the 1 st quarter for which it
was applying for tax credit

ISSUE: WON petitioner is a VAT-registered for the 1 st quarter of

1990 despite clear evidence showing the effectivity of petitioners
VAT registration to be January 1, 1988
HELD: Yes.
As a general rule, a judicial admission is binding on the declarant.
However, such rule does not apply when there is a showing that:
(1) the admission was made through a palpable mistake; and (2)
no such admission was made in accordance with Sec 4, Rule 129
ROC.
In the present case, it is clear that petitioner had committed a
palpable mistake. Based on the BIR records, the registration
certificate is 32-0-004622 effective August 15, 1990. But the
actual VAT registration certificate, which petitioner mentioned in th
stipulation is numbered 36-A-6-002224 effective January 1, 1988,
thereby showing that it had been VAT-registered even prior to the
1st quarter of 1990.
This can only mean that the petitioner made a palpable mistake
either in referring to the wrong BIR record or in attaching the
wrong VAT registration certificate. At any rate, the fact remains
that petitioner was VAT-registered as of January 1, 1988.

That petitioners explanation of the discrepancy was made only

after the CTA had promulgated its decision is understandable. It
was only when that promulgation was made that petitioner
became aware of the clerical error in the joint stipulation of facts.

Petitioners other registration number 32-0-004622 came about

when it moved its principal place of business to a different revenue
district. Its 2nd registration as a VAT enterprise on August 1990,
was made in compliance with Sec 3 of RMC no 6-88, which
required it to re-register after it moved its principal place of
business to another RDO.
5.

CANCELLATION OF REGISTRATION (SEC 236.F)

Q: What is required for the cancellation of VAT registration?

A:
1.
The VAT-registered person makes written
application and demonstrates to the CIRs satisfaction that
his gross sales or receipts for the following 12 months, other
than those that are exempt under Sec 109 A to U, will not
exceed P1.5 million
2.
He has ceased to carry on his trade or
business and does not expect to recommence any trade or
business within the next 12 months (Sec 236.F)
EFFECTIVITY OF CANCELLATION: The cancellation of registration
will be effective from the 1st day of the following month.
VAT INVOICING AND ACCOUNTING
INVOICING AND ACCOUNTING REQUIREMENTS FOR VATREGISTERED PERSONS (SEC 113)
A. INVOICING REQUIREMENTS
1 VAT invoice for every sale, barter or exchange of goods
or properties
2 VAT receipt for every lease of goods or properties, and
every sale, barter or exchange of services
B. INFORMATION CONTAINED IN VAT RECEIPT
1 Statement that the seller is VAT-registered, followed by
his Tax Identification Number (TIN)

3
4

Total amount purchaser is obligated to pay seller with

indication that such amount includes VAT
a. The amount of tax shall be shown as a separate
item in the invoice
b. If the sale is exempt from VAT, the term VATexempt shall be indicated
c. If the sale is subject to zero-rating, the term Zerorated sale shall be indicated
d. If it is a mixed transaction (partly zero-rated,
partly exempt or partly subject to 12% VAT), the
invoice shall indicate the breakdown of the sale
price between its taxable, exempt and zero-rated
The date of transaction, quantity, unit cost, and
description of goods or nature of service
If the sale is worth P1000 or more, or the transfer is
made to a VAT-registered person, the name, TIN of
purchaser or customer should be indicated

ACCOUNTING REQUIREMENTS (Sec 113.C)

Notwithstanding Sec 233, all persons subject to VAT shall in
addition to regular accounting records required, maintain a
subsidiary sales journal and subsidiary purchase journal showing
daily sales and purchases.
CONSEQUENCES FOR ISSUING ERRONEOUS BAT INVOICE OR
RECEIPT (Sec 113.D)
1 If a person who is not VAT-registered issues an invoice or
receipt showing it is VAT-registered:
a. The issuer shall be liable to, in addition to any liability
to other percentage taxes:
(1) The tax imposed in Sec 106 or 108 without benefit
of any input tax credit; and
(2) 50% surcharge under Sec 248.B
b. The VAT shall be recognized as an input tax credit to
the purchaser under Sec 110
2 If a VAT-registered person issued a VAT invoice for a VAT
exempt transaction but fails to indicate it is a VAT-exempt
sale, the issuer shall be liable to account for the tax imposed
under Sec 106 108 (despite Sec 109)
ISSUANCE OF RECEIPTS OR INVOICES FOR COMMERCIAL SALES
(SEC 237)

Q: When are receipts or sales or commercial invoices issued?

A: All persons subject to an internal revenue tax for each sale or
transfer of merchandise or for services rendered valued at 25
pesos or more, issue duly registered receipts or sales or
commercial invoices, prepared at least in duplicate, showing the
date of transaction, quantity, unit cost and description of
merchandise or nature of service. (Sec. 237)
Q: How many years should the issuer and purchaser keep the
receipts?
A: They shall keep the receipts for a period of 3 years from the
close of the taxable year in which such invoice or receipt was
issued (Sec 237).
RR 08-99
This Revenue Regulation provides penalties for violation of the
requirement that Output tax on the sale of goods and services
should not be separately indicated in the sales invoice or receipt.
SCOPE: All VAT-registered persons who are required under Sec
237 NIRC to issue receipts or sales or sales or commercial invoices
are no longer allowed to separately bill the VAT. The amount
appear in the receipts/invoices should be deemed inclusive of VAT.
PENALTY: Failure or refusal to comply with he requirement shall be
punished by a fine of not less than P1000 but not more than
P50,000 and imprisonment of not less than 2 years but not more
than 4 years.
SEC 109 NIRC last par
A VAT-registered person may opt that Subsection (1) not apply to
its goods or properties. Such election shall be irrevocable for a
period of 3 years from the quarter the election was made.
RMC 61-2003
Pursuant to Sec 109 NIRC, a VAT-registered person whose sales of
goods, properties or services which are not subject to VAT but
nonetheless issues a VAT invoice or receipt for such transactions
shall have the following consequences:

1
2
3

Shall be liable to the payment of output tax due on such sale

of exempt goods or services computed at 1/11 of the total
amount appearing on such VAT invoice/receipt
No input tax credits shall b claimed against output tax due
on such transactions
Shall be liable to applicable percentage charge, if any

RETURN AND PAYMENT OF VAT

BIR Form 2550M
BIR Form 2550Q
WITHHOLDING VAT
Q: State the rule regarding the withholding of Final VAT on sales
to government
A: The Government or any of its political subdivisions,
instrumentalities or agencies, including government owned or
controlled corporations (GOCCs) shall, before making payment on
account of its purchase of goods and/or services taxed at 12%
shall deduct and withhold a final VAT of 5% of the gross payment.
(Section 114(C), NIRC).
NOTE:

The five percent (5%) final VAT withholding rate shall

represent the net VAT payable to the seller

The remaining seven percent (7%) effectively accounts for

the standard input VAT for sales of goods or services to
government or any of its political subdivisions,
instrumentalities or agencies including GOCCs, in lieu of
the actual Input VAT directly attributable or ratably
apportioned to such sales.

Should actual input VAT attributable to sale to government

exceed seven percent (7%) of gross payments, the excess
may form part of the sellers expense or cost
If actual input VAT attributable to sale to government is
less than 7% of gross payment, the difference must be
closed to expense or cost.

N. POWER OF THE COMMISSIONER TO SUSPEND

BUSINESS OPERATIONS (Sec 115)

CIR or his authorized representative are empowered to suspend

the business operations and temporarily close the business
establishment of any persons for any of the following violations:
1.
In case of a VAT-registered person:
a. Failure to issue receipts or invoices
b. Failure to file VAT return as required under Sec 114
c. Understatement of taxable sales or receipts by 30% or
more of his correct taxable sales or receipts for the
taxable quarter

2.

Failure of any person to registered as required

under Sec 236 Temporary close of the establishment for
the duration of not less than 5 days but shall be lifted only
upon compliance with the requirements prescribed by CIR in
the closure order.