NOTES IN TAXATION

VALUE-ADDED TAX
By: Atty. Khaliquzzaman M. Macabato, CPA
Professor, MSU-College of Law

I. Imposition of the Tax

Definition
It 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 importation of goods, whether for business or non-business purposes.
It is a business tax levied on certain transactions involving a wide range of goods,
properties, and services, such tax being payable by the seller, lessor or transferor. The
tax is so called as Value Added Tax because it is imposed on the value not previously
subject to the VAT.
Under the Tax Code, the performance of services for consideration is considered
and taxable as a sale. It includes the use or lease of properties, whether real or personal.
(See Sec 108[A].) A transaction subject to the VAT is a taxable sale.

Meaning of the phrase in the course of trade or business.

The phrase in the course of trade or business means the regular conduct or

pursuit of commercial or economic activity, including transactions incidental thereto,

by any person regardless of whether or not the person engaged therein is a non-stock,
non-profit private organization (irrespective of the disposition of its net income and
whether or not it sells exclusively to member or their guest), or government entity.

The rule of regularity to the contrary notwithstanding, services as defined in

the Tax Code rendered in the Philippines by non-resident foreign persons shall be
considered as being rendered in the course of trade or business (see Sec. 105 as
amended by R.A. 7716).
However, any individual engaged in business or businesses where the aggregate
gross sales or receipt do not exceed P100,000.00 during any 12-month period shall be

principally for subsistence or livelihood and not in the course of trade or business, and
shall be exempt from the payment of VAT and from any percentage tax imposed under
the Tax Code. (Consolidated Value-Added Tax Regulations)

Nature of Value-Added Tax.

The valueadded tax 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 o services. This
rule shall likewise apply to existing contracts sales or lease of goods, properties or
services at the time of the effectivity of this Act. Vat is a tax on transaction; hence, it is
still subject to the tax even in the absence of profit attributable thereto. Certain sales of
goods and/or services are either zero-rated or exempted from the VAT (Secs. 106[A,2],
108[B], 109). The shifting of VAT to them does not make them directly liable for the
payment of the VAT; hence, they cannot invoke the exemption privileges granted to
avoid the passed-on VAT. The VAT shifted forms additional part of the cost of goods,
properties, and services purchased. Once shifted, the VAT ceases to be a tax.
Thus, for the VAT-registered purchaser, the tax burden passed on does not
constitute cost, but input tax which is creditable against the output tax liabilities. This
avoids the cascading effect which is characteristic of the former sales tax system where
the sales tax is necessarily cost to the buyer, and as such becomes a factor of cost
which is a basis of marked-up seller price, in return to his customers, and so on and so
forth down the distribution chain.
In the VAT system, it is only in the case of non-VAT purchaser that VAT form part
of cost of the purchase. (BIR Ruling No. 141-99, Sept. 13, 1999). The VAT taxpayer
may opt to absorb the VAT and not pass it on the purchaser or lessee.
Thus, the VAT registered seller of goods and/or services may shift the tax
(VAT) burden even to entities that enjoy tax exemption, such as in the following cases

1.
Cooperatives (enjoys tax exemptions under the Cooperative Code, RA
No. 6938), VAT being an indirect tax. (BIR Ruling 151, August 9, 1991)
2. Shipping companies are not exempt to pay the VAT shifted to them by their
contractors and suppliers because the formers exemptions are limited only to
direct taxes.
3. The sale of goods and services to a government agency ( e.g. VAT on the
janitorial services by Barreto Gen. Services to the MSU-IIT can be shifted by the
former to the latter since VAT is an indirect tax). (VAT Ruling No. 245, Sept. 22,
1989.)

4. The tax exemption granted to embassy or its diplomatic agents, granted in

accordance with the Vienna Convention on Diplomatic Relations does not include
exemption from the VAT. Purchase of Locally-made car by the Embassy shall be
subject to both VAT and excise taxes under Section 106[A] and 149, respectively,
in relation to Sec. 128. (VAT Ruling No. 089, March 19, 1992.)
5. The sales of services by stock transfer agents to stockbrokers through
clearing houses is subject to VAT pursuant to Sec. 108[A]. The VAT, being an
indirect tax, can be passed on by the agents to the clearing house (which is
registered as a bank; hence, a non-VAT entity) and once shifted, forms an
additional and integral part of the cost of goods and/or services that the non-VAT
entity has to shoulder. (VAT Ruling No. 77, Aug. 21, 1991.)
6. Notwithstanding the fact that NPC is a tax exempt under its Charter and the
contract it entered with a foreign corporation, for project funded from a foreign
loan, stipulated that NPC will assume responsibility for taxes due said foreign
corporation, such foreign corporation is still liable for the VAT. Such stipulation is
binding only between NPC and the contractor, in their private capacities, and the
Contractors personal liability to pay the taxes may NOT be transferred to NPC
with binding effect on the BIR.
However, in case the loan agreement was made pursuant to the Foreign
Borrowings Act (R.A. 4860, as amended by PD No. 150.), the contractor may
be accorded VAT exemption if such agreement contained a stipulation that the
contractor shall be exempt from tax, including the 10 % VAT. Otherwise, VAT
exemption cannot be granted the NPC, for and in behalf of said contractor, for
lack of legal basis. (VAT Ruling No. 063, June 27, 1991.)
CONCEPT
The adoption of the VAT in the Philippines effective Jan. 1, 1988, is provided for in
E.O. 273 and implemented by Revenue Regulations N. 5-87 as amended. This system
implemented a multi-stage imposition of value-added tax on sales of and distribution
process culminating in sale to the final consumer. Generally described, the taxpayer
(the seller) determines his tax liability by computing the tax on the gross selling price
or gross receipt (output tax) and subtracting or crediting the earlier VAT on the
purchase or importation of goods or on the sale of services (input tax) against the
tax due on his own sale (see Kapatiran, Inc., etc. vs. Tan. G.R. No. 81311, 30 June
1988, in which the re-structured tax system was held to be constitutional). This
concept of system has long been implemented in the Philippines but only on a limited
scale.
In 1978 when the Philippines adopted the Tax Credit system, we have in fact gone
into the VAT system and this was on the Manufacturer level. Years later we adopted
the system on the importers' level.
The VAT system therefore is not a new system to us, neither is it a new tax

imposition. It merely re-structure our sales tax system to simplify compliance and
administration and put equity in the system. In fact, VAT is just a replacement to many
sales and percentage taxes existing in the Tax Code at varying rates and amounts.
TAXES REPLACED
1. Privilege Tax Receipt (PTR)
The PTR, whether fixed or graduated was abolished even if the business is
exempt or not covered by VAT.

2. Percentage Taxes on Goods

a. Importation of Goodsi. Destination Principle
The Destination Principle of whether the goods are intended for resale or
for use by the importer has been removed. Consequently, the payment of
advance sales tax on goods intended for resale or compensating tax on goods for
use by importer has been abolished.
ii. Essentiality of Goods
The varying rates applicable to imported goods according to its essentiality
have also been abolished, such as:
a. Essential Commodities 10%
b. Ordinary Articles 20 %,
c. Non-essential or luxury goods 30%.
b. Percentage Tax on Sale of Goods
a. Importers Sales TaxAll sales by importers of goods effective Jan. 1, 1986 were subject to
importers sales tax at the rate imposed according to the essentiality of the
commodities. Conversely, all advance sales taxes paid starting on the same date
became creditable against the quarterly importers sales tax which was also
abolished.
b. Manufacturers Sales Tax

The percentage tax on domestic sales of locally manufactured articles whose

rate vary at 10%, 20%, 30% according to its essentiality has also been abolished.
c. Subsequent Sales TaxThe 1.5% sales tax on subsequent sales by traders imposed since Jan. 1,
1986 was also abolished.
c. Percentage Tax on Sale of Services
a. Contractors Tax
The 4% tax on the actual gross receipt by persons engage in the rendition of
all kinds of services performed for others has been abolished.
b. Brokers Tax Brokers Tax the 7% tax on gross receipts or commissions
earned by brokers has been abolished.
c. Tax on lessors of Personal Properties The 3% tax on gross receipts of lessor
of personal properties has been abolished.
d. Tax on Cinematographic films, distributors and lessors The 3% tax on gross
receipts of cinematographic films owners, lessors and distributors has been
abolished.
d. Articles Subject To Excise Tax
(a) Certain Articles Removed from the Excise Tax System.
The imposition of specific or ad valorem tax on some articles has been
removed such as:
a. Matches
b. Video tapes
c. Solvents
d. Compounded liquor.
(b) Excise Tax System re-structured
Some articles remained with the excise tax system such as (1) distilled
spirits, (2) wines, (3) fermented liquor, (4) cigar and cigarettes, (5) manufactured
oils and other fuels, and (5) saccharine.
However, certain articles were covered by the excise tax system. These are
automobiles, non-essential goods, and mineral products.

3. Persons Liable to the Payment of VAT.Any person who, in the course of trade or business, sells, barters, exchanges,
leases goods or properties, renders services, and any person who imports goods
shall be subject to the value-added tax (VAT).
Briefly, the persons liable to the payment of VAT are the following:
1. Importers
2. Lessors of goods or properties
3. Seller of Goods
4. Seller of Services
However, any person whose sales or receipts are exempt under Section 109[Z]
of the Tax Code from payment of VAT and who is not a VAT-registered person
shall pay a tax equivalent to three percent (3%).

4. Basis of the Value Added Tax.

a. Imported ArticlesThe valuation of all imported goods is within the jurisdiction of the

Bureau of Customs. However, when the Landed Cost shall have been
determined, then such landed cost will be the basis for the imposition of the
value-added tax.

In cases where the imported articles are subject to Excise tax, said tax

must first be determined then added to the landed cost. The total amount will
now be the basis for computing the value added tax.

Thus, the tax base on importation of goods shall be either

1. on the total value used by the Bureau of Customs in determining tariff and
customs duties which value shall include (a) dutiable value in pesos of the goods
or articles, (b) the customs duties, (c) excise taxes, if any, and (d) other charges
(like, wharfage dues, brokerage fees, etc.) payable by the importer, or
2. on the landed cost plus excise tax where the customs duties are determined
on the basis of the quality or volume of the imported goods. Landed cost consist
of the invoice amount, customs duties, freight, insurance and other charges. If
the goods imported are subject to excise tax, the excise tax shall form part of the
tax base.

b. Locally sold goodsThe

value-added tax is imposed on the gross selling price or

gross value in money of goods, bartered, or exchanged on every sale barter or
exchange. Discount given at the time of sale can only be deducted from the
gross selling price before computing the value-added tax.

c.

Sale of Services -

The

value added tax is imposed on the gross receipts, both

actual and constructive, derived by any person performing all kinds of services
for others for a fee, remuneration or consideration.

This

includes those performed or rendered by construction or

service contractors, brokers, lessors of personal properties, lessors or
distributors of cinematographic films, persons engaged in milling, processing,
manufacturing or repacking goods for others and similar services of whether or
not the performance of such service calls for the exercise or use of the physical
or mental faculties.

Lease of properties shall be subject to the VAT under Section

108 of the Tax Code irrespective of the place where the contract of lease or
licensing agreement was executed if the property is leased or used in the
Philippines.

d. Meaning of the terms gross selling price, gross receipt, goods or property
for sale, etc.
- Gross selling price The term gross selling price means the total amount of money or its equivalent
which the purchaser pays or is obliged to pay to the seller of properties, excluding
the value-added tax. The excise tax, if any, on such goods or properties shall form
part of the gross selling price. (see Sec. 106[1], NIRC.).
- Gross receipt
The term gross receipt means the total amount of money or its equivalent
representing the contract price, compensation, service fee, rental or royalty,
including the amount charged for materials supplied with the services and deposits
and advanced payments actually or constructively received during the taxable
quarters for the services performed or to be performed for another person,

excluding value-added tax. (see ibid.)

- Goods or properties
In general, the term goods or properties shall mean all tangible and
intangible objects which are capable of pecuniary estimation. (see Sec. 106[1],
NIRC.]
In particular, they include the following:
1. Real properties held primarily for sale to customers or held for lease in the
ordinary course of trade or business;
2. The right or privilege to use patent, copyright, design or model, plan, secret
formula or process, goodwill, trademark, trade brand or other like property
or right;
3. The right or privilege to use in the Philippines of any industrial, commercial
or scientific equipment;
4. The right or privilege to use motion picture films, films, tapes and discs; and
5. Radio, television, satellite transmission and cable television time. (see ibid.)
- Sale or exchange of servicesIn general, the phrase sales or exchange of services means the performance
of all kinds of services in the Philippines for others for a fee, remuneration or
consideration.
In particular, it includes services performed or rendered by the following:
1. Construction and service contractors;
2. Stock, real estate, custom and immigration brokers;
3. Lessors of property, whether personal or real;
4. Warehousing services;
5. Lessor or distributor of cinematographic films;
6. Persons engaged in milling, processing, manufacturing or repacking goods
for others;
7. 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;
8. Dealers in securities;
9. Lending investors;

10. Transportation contractors on their transport of goods or cargoes, including

persons who transport goods cargoes for hire and domestic common carries
by land, air and water relative to their transport of goods or cargoes;
11. Services of franchise grantees of telephone and telegraph, radio and
television broadcasting and all other franchise grantees, except those under
Section 119 of the NIRC;
12. Services of Banks, non-bank financial intermediaries and finance
companies; and
13. Similar services regardless of whether or not the performance thereof calls
for the exercise or use of physical or mental faculties (see ibid.)
The phrase shall likewise includes:
1. The lease or use of or the right or privilege to use any copy right, patent,
design or model, plan, secret formula or process, goodwill, trademark, trade
brand or other like property or right;
2. The lease or 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 is 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 discs; and
8. The lease or the use of or the right to use radio, television, satellite
transmission and cable television time. (see ibid.)
It must be noted, however that a person is subject to VAT only if he renders
service in the course of trade or business.(Sec. 105). This implies that the
rendering of services is done with regularity and continuity, and not just

occasionally. Gross receipt derived from the exercise of a profession or calling

became subject to VAT starting January 1, 1997. See Sec. 7, R.A. No. 7716, as
amended by R.A. 8241.).
e. Conditions that must concur in order that the value-added tax shall become due.
1. There is a sale, barter, exchange, transfer or similar transaction, either for
nominal or valuable consideration, intended to transfer ownership of or title to,
articles imported, milled, produced or manufactured;

2. The sale in consummated, not merely perfected (see Shell Company vs.

Sipocot, 105 Phil. 1263), in the Philippines. The Place where the title to the thing
passes determines the place of delivery or tax situs (see Tarugamen Lumber vs.
Collector, 4SCRA 842).
The term sale or its equivalent must not be confused with contract for a piece
of work on which the value-added tax on services under Section 108 ( VAT on
sales of services) is instead imposed. Thus, the mere fact alone that certain
articles are made upon previous orders of customers will not argue against the
imposition of the tax under Section 100 (now Sec. 106 NIRC, [VAT on sales of
goods]) if such articles are ordinarily manufactured by the taxpayer for sale to the
public. (Celestino Co. vs. Coll., 99 Phil. 841.)
Distinction between a contract a contract of sale and contract for a piece of
work.
The distinction between a contract of sale and one for work, labor and
materials is tested, said the High Court in Commissioner vs. Engineering
Equipment and Supply Company (64 SCRA 590), by the inquiry whether the
thing transferred is one not in existence and which never would have existed but
for the order of the party existed and has been the subject of sale of some other
persons even if the order had not been given. If the article ordered by the
purchaser is exactly such as the manufacturer makes and keeps on hand for sale
to anyone, and no change or modification of it is made at the others request, it is
a contract of sale even though it may be entirely made after, and in consequence
of, the latters order for it (see also Commissioner vs. Arnalduz Carpentry Shop,
159 SCRA 199).
When the percentage tax on sales and the independent contractors tax were
still in effect, it was then necessary to distinguish whether the sale is one of
goods or of services to determine the applicable rate of tax. But under the valueadded tax system, both sales of goods and sales of services are now basically
subject to the same rate of ten percent (10%). Thus, the distinction between the
effects of a contract of sale and a contract for piece of work is no longer as
pronounced now as it was before the inception of the value-added tax system.

5. Rates imposed under the VAT System. 1. 10%

All taxable transactions in the sale of goods, services or importation of

goods are subject to the value added tax of 10%. (see Sec. 106, 107 & 108,
NIRC.)
Transactions taxable as sales:
The following are transactions taxable as sales:
(1) Barter or exchange.
It is a contract by which the parties exchange one commodity or article
of property for another. (see 7 C.J. 931.)
(2) Sale upon previous orders.

A contract for the delivery at a certain price of an article which the

vendor in the ordinary course of his business manufactures or procures for the
general market, whether the same is on hand at the time or not, is a contract of
sale. (see Celestino Co. & Co. vs. Coll., 99 Phil. 841.) But if the goods are to
be manufactured specially for the customer and upon his special order, and not
for the general market, it is a contract for a piece of work and not a contract of
sale (see Art. 1467, Civil Code; Inchausti and Co. vs. Cromwell, 20 Phil. 345.)
(3) Leases and hiring agreements with option to buy.
In this case, the tax is based on the gross selling price of the property and
not on the installments periodically paid to the seller. (BIR Ruling, 4 Feb. 1948,
Gen. Cir. No.444, 21 Dec. 1939; Manila Gas Corp. vs. Calupitan, 66 Phil.
646.). In a case where the court found that the so-called contracts of lease of
neon signs installed by a taxpayer for his customers were in reality contracts
of sale between the taxpayer and his customers, the taxpayer was held liable to
pay deficiency sales tax on the neon signs. (see Chu Hoi Horn vs. C.T.C., et.
al., L-22046, 29 October 1968.); and
(4) Transaction deemed sale.

The transactions deemed sale are enumerated in Subsection (B), Section

106 of the National Internal Revenue Code. Transfer of goods not in the

course of business can take place when the VAT-registered person withdraws
goods from his business for his personal use. (see Sec. 4.100-4[A], Rev. Regs.
No. 7-95.)

Circumstances

that shall give rise to transactions deemed sale for

purposes of Section 106(B,4) of the NIRC:
(i) Change of ownership of business.
(ii) Dissolution of a partnership other than a general professional partnership
and creation of a new partnership which takes over the business.
5. Value-added Tax on Importation of Goods. -

As

already pointed out elsewhere in this work, all

imported articles are generally subject to the ten percent (10%) value-added tax
based on the total value used by the Bureau of Customs in determining tariff
and customs duties, plus customs duties, excise taxes, 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 quality or volume of the goods, the value added tax shall be based
on the landed cost plus excise taxes, if any. (Sec. 107[A],NIRC.)

Generally, it is the importer prior to the release of the

goods from customs custody who is liable for the payment of the value-added
tax thereon. However, if the goods imported into the Philippines is tax-free
because it was imported by a person, entities or agencies exempt from tax, the
subsequent sale, transfer or exchange of such goods to non-exempt persons or
entities constitute as importation of goods by the purchasers, transferees or
recipients of such goods originally imported as tax-free. The law considers
such purchaser, transferees or recipients (from the original tax-free importers)
as 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. (see Sec. 107 [B] in relation to Sec. 107[A], ibid.)
The VAT on importation replaces the advance Sales tax

payable by the regular importers who import goods or articles for sale or Raw
materials in the manufacture of finished articles for sale, and the
compensating tax payable by all persons who import, whether in the course
of trade or business or not, articles for their own use or consumption.

The

rationale for the imposition of compensating tax

applies similarly to the VAT on importation of goods for non-business use. The

underlying principles for such tax impositions are

a. The purpose is to place persons purchasing from merchants in the
Philippines on a more or less equal basis for tax purposes with those who
buy directly from foreign countries. The theory is that the former bears the
burden of the local sales tax because it is shifted to them as part of the
selling price of the local merchants, while the latter do not.
b. The tax also places casual importers on equal footing with established
merchants who pay sales tax on articles imported by them and others taxes.
(see Report of Tax Commission, Vol. 2, p. 205; Panay Elec. Co. vs. Comm.
, 97 Phil.979.)

The

tax on importation is a tax on the privilege of importing

goods. It shall be paid by the importer prior to the release of the imported
goods from custom custody.

Importer refers to any person who brings goods into the

Philippines, whether or not made in the course of his trade or business. It
includes non-exempt persons or entities who acquire tax-free imported goods
from exempt persons, entities or agencies. (See Sec. 4.101.1[B], Rev. Regs. No.
7-95.)
Cases when tax applicable:
(i) Importations are subject to VAT, whether donated or purchased. Such
being the case, importation of articles consigned to charitable, religious,
cultural or social welfare corporations or institutions, e.g. church bells and
spares consigned to a parish church, are not exempt but are subject to VAT
pursuant to Sec. 101. This, however, does not apply to transactions where the
recipient is granted special exemption privileges, i.e. exemption from indirect
taxes like VAT, under its charter or provided for under the Constitution. (VAT
Ruling No. 057, 21 June 1991, as supported by VAT Ruling No. 169-89.)
(ii)If a chemical, e.g. xylene, is used as a raw material in the manufacture of
pesticides, its importation is exempt from VAT pursuant to Sec. 109(c).
However, if it is not used as a raw material in the manufacture of pesticides by
the importer himself and used for agricultural purposes as duly certified by the
Fertilizer and Pesticides Authority (FPA). , its importation is subject to VAT in
accordance with Sec. 101. (VAT Ruling No. 058, June 26, 1991, which clarified
BIR Ruling No. 092-91.)
(iii) A non-profit organization is exempt only from income tax on income
received by it as a social welfare organization under Sec 30(G), and is not
exempt from other taxes. As such, imported relief goods and equipment

received as donation from abroad by such organization are subject to VAT

pursuant to Sec. 101. (VAT Ruling No. 072, 17 July 1991.)
(iv) Equipment of a foreign contractor which is brought into the Philippines
to be used in discovering and locating oil and petroleum basins in the
Philippines is subject to compensating tax (now VAT) despite the fact that the
same will be re-exported after the work. (see BIR Ruling, 30 April 1974.)
(v) Imported cotton is subject to VAT pursuant to Section 101. If the
imported cotton is processed into textile by textile mills and subsequently sold
to garment manufacturers, the sale is also subject to VAT in the same manner
as the sale of textile manufactured out of lo0cally produced cotton. (see VAT
Ruling No. 087, Sept 4, 1991.)
Cases when tax not applicable:
(i) The value-added tax shall not apply to goods to be used by the importer
himself in the manufacture or preparation of petroleum product (except
lubricating oil and grease) subject to excise tax under Section 148. If the
imported goods are to be used in the manufacture of lubricating oil and grease,
the value-added tax on such raw materials shall be collected from the importer.
(Sec. 7[a], Rev. Regs. No.5-87).
(ii) Deficiency advance sales tax (now VAT) arising from recomputation or
adjustment of the landed cost of imported articles (not total value used by the
Bureau of Customs x x x) is not subject to surcharge and interest because the
deficiency tax is not the result of delinquency but of final liquidation by the
Bureau of Customs. (see BIR Ruling, Sept. 4, 1974.)
(iii) Imported articles which are merely to replace those returned by reason
of their defective quality, are no longer subject to the advance sales tax (nox
VAT). The advance sales tax paid on the original importation can be applied
against the tax due on the replacement shipment, provided that no additional
amount is expended for the importation of the replacement and that the
replacement shipment is the same kind of articles as those re-exported to the
foreign supplier. (see BIR Ruling, July 2, 1974.)
(iiii) Exported merchandise which were shipped back to the Philippines on
account of rejection by port authorities in the port of destination or by the
buyers abroad are not subject to the VAT because the shipment does not
constitute importation. (see BIR Ruling No. 078, June 19, 1986; No. 178, Sept.
17, 1986.)
When importation begins and ends.

Importation begins when the carrying vessel or aircraft enters the

jurisdiction of the Philippines with intention to unload therein. Importation is
deemed terminated upon payment of the duties, taxes and other charges due
upon the articles, or secure to be paid, at a port of entry and the legal permit for
withdrawal shall have been granted. (see Sec. 1202, Tariff and Customs Code.)
However, under the concept of bonded manufacturing warehouse,

the importation of articles brought to such warehouse for processing and reexportation in not yet complete; hence, no tax consequence results as long as
the imported article remains therein within the prescribed period of time.
Where the processing is not done within said warehouse, then the processing
is said to be done in the so-called customs territory. Since the importation in
such case is deemed complete, the same shall be subject to VAT pursuant to
Section 107(A), which provides that the tax shall be paid prior to (or upon)
release from the customs custody. (see BIR Ruling No. 062, 17 April 1990.)
The law in force when the payment is made should prevail.

Since it is in the will of the importer or the owner of the imported

goods to choose the moment for making payment of the internal revenue tax
from its arrival at the port of entry until immediately before its withdrawal
from the custom house, the law in force when the payment is made is the one
that should prevail, for human voluntary acts are governed by the laws in force
at the time of their performance, unless there is a legal provision to the
contrary. (see Luzon Brokerage Co., Inc. vs. Posadas, 51 Phil. 305; BIR Ruling
No. 110, 18 March 1988.)

2. Zero Percent (0%).

Zero-rated sales are considered taxable sales but subject to zero rate.
The zero-rating under the VAT maybe availed of by any VAT registered person
if he is engaged in any or all of the following activities:
1. Sale of goods
a. Export sales.
The term export sales means:
(i) The sale and actual shipment of goods from the Philippines to a foreign
country, irrespective of any shipping arrangement that may be agreed upon
which may influence or determine the transfer of ownership of the goods so
exported and paid for in acceptable foreign currency or its equivalent in goods

or services, and accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP).
(ii) Sale of raw materials or packaging materials to a nonresident buyer for
delivery to a resident local export-oriented enterprise to be used in
manufacturing, processing, packing or repacking in the Philippines of said
buyers goods and paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Philippinas
(BSP);
(iii) Sale of raw materials or packaging materials to export-oriented
enterprise whose exports sales exceed seventy percent (70%) of the total
annual production;
(iiii) Sale of gold to the Bangko Sentral ng Philipinas; and
(v) Those considered export sales under Executive Order No. 226,
otherwise known as the Omnibus Investments Code of 1987 and other special
laws.

Export sales are zero-rated if made by VAT-registered persons.

But, if
made by a person who is not registered, they are treated as exempt sales. (Sec.
109[R].) The zero rating privilege of the exporter does not extend to its/his
supplier. (BIR Ruling No. 198, 5 May 1988.) It is given as an incentive to
exporters since they are entitled to claim VAT refunds on their input taxes
while their export sales are subject to zero rate.

The Omnibus Investment Code of 1987 (Exec. Order No. 226, passed 17
July 1987.) prescribes that the following sales, without actual exportation, are
considered constructively exported:
1. Sales to bonded
manufacturers;

manufacturing

warehouses

of

export-oriented

2. Sales to registered Philippine Economic Zone Authority (PEZA) enterprises;

3. Sales to registered export traders operating bonded trading warehouses
supplying raw materials used in the manufacture of export products; and sales
to diplomatic missions and other agencies and/or instrumentalities granted tax
immunities, of locally manufactured, assembled or repacked products, whether
paid for in foreign currency or not. (see Art 23, E.O. No. 226.)

Consistent

with this policy on constructive export, PEZA accepts

registers as export enterprises even companies engaged in 100% constructive

exportation, enjoying the same incentives and privileges granted to direct

exporters such as income tax holidays (ITH) and tax and duty-free importation.

However, the BIR has ruled that sales of petroleum products to foreign

international marine vessels do not fall within the definition of export sales
(Subsec. [4,2,9].) as contemplated by law although the transactions transpire in
the Philippines since they do not involve exportation as there is no actual
shipment to a foreign country. The transactions are subject to excise tax under
Sec. 148 (BIR Ruling No. 148-99, Sept. 17, 1999.)

Sale

of ordinary automobile to entities registered with PEZA, SBMA,

Clark Development Authority, and other ECOZONE registered enterprises are
not entitle to zero-rating.

Pursuant to Rule XV, Section 1(D) of the Rules and regulations issued

by PEZA to implement the Special Economic Zone Act of 1995 (R.A. No.
7916.), exemptions from the imposition of value-added tax are being allowed
only with respect to importation of specialized vehicles and other
transportation equipment that are directly related to the registered activity. For
example, a registered construction firm may import specialized vehicles such
as pay loaders, graders, etc. without the payment of the value-added tax.

However, exemption does not extend to importation of service vehicles

since the same are not directly related to the registered activity as a
construction contractor. As a matter of policy, PEZA is not giving tax
incentives for the procurement of vehicles or transportation equipment that are
not directly connected with the firms registered activities in view of the
absence of an effective monitoring system to determine whether these vehicles
are indeed being utilized by registered enterprises in the conduct of their
registered activities. It appear, therefore, that with the issuance of the
aforementioned ruling, the BIR is more liberal in the grant of tax incentives to
locators inside the PEZA zone. (Rev. Memo. Cir. No. 25-99; see BIR Ruling
No. 074-99, 4 June 1999.).
b. Foreign Currency denominated sale inwardly remitted to the Philippines
through the local banking system.
The phrase foreign currency denominated sale or internal export means
sale to a nonresident of goods, except those mentioned in Sections 149 and
150, assembled or manufactured in the Philippines for delivery to a resident in
the Philippines, paid for in foreign currency and accounted for in accordance
with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP).
But the term internal export under P.D. No. 1820 and E.O. No. 765 ( the
laws in operation prior to E.O. No. 273.) does not apply for VAT purposes,

being inconsistent with the term export sales under the VAT law, which is
restricted to actual exports and foreign denominated sale. Such being the case,
the sale to domestic manufacturers for the supply of articles for government
projects, financed from proceeds of foreign loans cannot be considered subject
to zero percent VAT.
Moreover, although loan agreements between the government and foreign
creditors may provide for the exemption from taxes, charges and other levies of
local contractors and suppliers for projects utilizing proceeds from said loans,
this exemption privilege is extended only to the awardee of the contract (i.e.,
the contractor) and not to suppliers of such contractors. Hence, the sale of steel
pipes to contractors of government agency for waterworks project funded by
the World Bank cannot be legally considered VAT exempt nor zero-rated. VAT
Ruling. (VAT Ruling No.062, 26 June 1991.)
c. Sale to persons or entities exempted under special laws or international
agreement to which the Philippines is a signatory effectively subjects such
sales to zero-rate (see Sec 106, as amended by R.A. 7716).
They refers to exemptions expressly granted under special laws or
treaties which are extended not only to the grantee but also to its supplier of
goods.
Under Subsection (A, 2, c), it is not the person or entity enjoying taxexemption privilege under special law or international agreement which is
given the privilege of enjoying zero-rating under the VAT law, but the sales
(by suppliers) to such persons or entities which may be subject to zero-rate.
(BIR Ruling No. 077, 4 March 1988.) The fact that the Philippines is a
signatory to an international agreement is of no moment where such
agreement does not provide for any tax exemption.
The following are examples of zero rated sales:
1. In the case of sale of goods to U.S. Military facility which was exempt
from sales tax under the former RP-US Military Base Agreement, the
exemption of the grantee extended to the seller and, therefore, the sale was
zero-rated.
2. Executive Order No. 161 provides that goods sold directly to the
Asian Development Bank (ADB) shall not be subject to sales tax, and
services rendered under contracts entered into with said bank shall not be
subject to contractors tax. In this case, the sale of goods services to ADB
are effectively zero-rated. (ibid.)
3. Pursuant to Section 2 of Executive Order No. 581 (as amended by
E.O. No. 587.), the sale of gold to the central bank is considered export sale,

hence, the sale of gold tailing is subject to VAT at 0% pursuant to Section

106 (A, 2, a), if the seller is a VAT-registered person; otherwise, as exempt,
pursuant to Section 109(R). But the service fee charged to customers for
processing their gold tailings is subject to VAT under Section 108(A). He is
subject to income tax on any gain derived from sale to the Central Bank of
gold tailings and the service fee for the processing of the same. (BIR Ruling
No.224, Nov. 2, 1989.)
4. Section 3 of Executive Order No. 420 provides that the John Hay
Special Economic Zone shall have all the applicable incentives of the
Special Economic Zone (SEZ) under Section 12 of R.A. No. 7227 (Bases
Conversion and Development Act of 1992) and there applicable incentives
granted in the Export Processing Zone, the Omnibous Investment Code of
1987, the Foreign Investment Act of 1991, and new investment laws that
may be enacted. (BIR ruling No. 085-98, 2 June 1998.
2. Sales of Services.-

The following services performed in the Philippines by VAT-registered

persons shall be subject to zero percent (0%) rate:

a. Processing, manufacturing or repacking goods for other persons doing

business outside the Philippines which goods are subsequently exported,
where the services are paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);
b. Services other than those mentioned in the preceding paragraph, the
consideration for which is paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);
c. Services rendered to persons or entities exempted under special laws or
international agreements to which the Philippines is a signatory;
d. Services rendered to vessels engaged exclusively in international shipping;
and
e. Services performed by subcontractors and/or contractors in processing,
converting, manufacturing goods for an enterprise whose export sales
exceed seventy percent (70%) of annual production. (see Sec. 108 [B],
NIRC.)
3. Transaction deemed sale.

Under the Tax Code, the following transactions are considered deemed
sale:
a. Transfer, use or consumption not in the course of business of goods
originally intended for sale or use in the course of business.
b. Distribution to shareholders or investors as share in profit.
c. Transfer to creditors in payment of debt.
d. Consignment of goods after the lapse of 60 days.
e. Goods at hand at the time of retirement. (see Sec. 106[B], NIRC).
The commissioner shall, by regulations, determine the appropriate tax
base in cases where a transaction is deemed sale, barter or exchange of goods
or properties, or where the gross selling price is unreasonably lower than the
actual market value. (see Sec. 106[D], ibid.)
The gross selling price is considered unreasonably lower than the actual
market value if it is lower by more than 30% of the actual market value of the
same goods or properties of the same quantity and quality sold in the
immediate locality on or nearest the date of sale. (Sec. 6[A], Rev. Regs. No. 587.)
On merger/consolidation of corporations, Rev. Memo. Cir. No. 19-19
had effectively revoked an earlier rulings of the BIR (in BIR Ruling No. S34263-97; also BIR Ruling No. 063-93 dated 10 Jan. 1993; BIR Ruling No. 47293 dated 3 December 1993.) and, declared it as a flagrant violation of the VAT
law. Pertinent portion of said ruling abandoned declared that (a) the
transferred assets, which include the merchandise inventory of the absorbed
corporations, shall not be subject to the value-added tax and (b) that the
unused input taxes of the absorbed entities shall be transferred for the use or
tax credit to the out put tax of the surviving corporation. The ruling in
question enunciated a twin illegality.
In cases where merger/consolidation of corporations result in transfer of
merchandise inventories to the surviving corporation, such transfer of
merchandise inventories to the surviving corporation, by clear provision of
law, is deemed sale for VAT purposes. The reason is that the absorbed
corporation, upon the merger, ceases or retires from doing business; hence, all
its inventories of taxable goods existing as of such retirement or cessation
from doing business are considered deemed sale for purposes of the valueadded tax. (see Sec. 106[B,4], NIRC.) The unused input taxes of the absorbed
corporations cannot be legally transferred to the surviving corporations for the

latters use as tax credits to its output VAT. This could only be used as tax
credit to the VAT payments of the absorbed corporations and the same is not
transferred to a party not privy to the contract from where the input taxes
arose. (Section 110[A, 2, a], NIRC, as implemented by Section 4.104-1[d] of
Rev. Regs. NO. 7-95.) In other words, only the direct buyers of goods/services
to whom the input taxes were passed on could avail of the right to tax credit.
Under the VAT law, the absorbed entity should pay the VAT on the
merchandise inventory, there being a deemed sale transaction, after tax
crediting the corresponding input taxes, with the right to claim refund, if the
input exceeds the output tax. If the output is paid, this may be passed on to
the surviving corporation for its use as tax credit. (see Rev. Memo. Cir. No.
19-19, 25 February 1999.)
4. Changes in or cessation of status as a VAT-registered person.
In case where there is a change in or cessation of status as a VAT-registered
person, the value-added tax provided for in Sections 106 and 108 shall apply to
services, goods or properties originally intended for sale or for use in business
and capital goods which are existing as of the occurrence of the following:
(a) Change of business activity from value-added taxable status to exempt
status. An example is a registered person engaged in a taxable activity, like
wholesaler or retailer, who decided to discontinue such activity and engages
instead in life insurance business or in any other business not subject to valueadded tax;
(b) Approval of request for cancellation of registration due to reversion to
exempt status;
(c) Approval of a request for cancellation of registration due to a desire to
revert to exempt status after the lapse of two consecutive years from the time
of registration by a person who voluntarily registered in spite of being exempt
under Section 109 (a), (b), (c), and (d) with respect to his export sales only and
Section 109(t); and
(d) Approval of a request for cancellation of registration of one who
commenced business with the expectation of gross sales or receipts exceeding
P550,000, but who failed to exceed this amount during the first twelve months
of operation.
However, the value-added tax shall not apply to goods existing as of the
occurrence of the following:
(a) Change of control of a corporation by the acquisition of the controlling
interest of such corporation by another stockholders. Example: transfer of
property to a corporation in exchange for its share of stock under Section 40

(C, 2, 6[c].);
(b) Change in the trade or corporate name of the business; and
(c) Merger or consolidation of corporations. The unused input tax of the
dissolved corporation as of the date of merger or consolidation shall be
absorbed by the surviving or new corporation. (see Sec. 4.100.5, Rev. Regs. No.
7-95.)
c. Exempt Transactions. -

An exemption means that the sale of goods or properties and/or services and

the use or lease of properties is not subject to VAT (output tax) and the seller, etc.
is not entitled to claim tax credit on VAT (input tax) previously paid. Thus, the
person making the exempt sale of goods, properties, or services shall not bill any
output tax to his customers because the said transaction is not subject to VAT. On
the other hand, a VAT-registered purchaser of VAT exempt goods, properties, or
services which are exempt from VAT is not entitled to any output tax on such
purchase despite the issuance of a VAT invoice or receipt. (see Sec. 4.103.1[A],
par. 2, Rev. Regs. No. 7-95.)

Section

109 of the National Internal Revenue Code enumerated the

transactions which are considered exempt transactions. They are the following:

(a) Sale of nonfood products; marine and forest products in their original

state by the primary producer or the owner of the land where the same are
produced;

(b) Sale of cotton and cotton seeds in their original state; and copra;
(c)

Sale or importation of agricultural and marine food products in their

original state, livestock and poultry of a kind generally used as, or yielding or
producing foods for human consumption; and breeding stock and genetic
materials therefore;

Product

classified under this paragraph and paragraph (a) 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;
( d) 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 pet.);

(e) Sale or importation of coal and natural gas, in whatever form or state,

petroleum products (except lubricating oil, processed gas, grease, wax and
petrolatum) subject to excise tax imposed under Title VI;

(f) Sale or importation of raw materials to be used by the buyer or importer

himself in the manufacture of petroleum products subject to excise tax, except

lubricating oil, processed gas, grease, wax and petrolatum;

(g)

Importation of passenger and/or cargo vessels of more than five

thousand (5,000) tons, whether coastwise or oceangoing, including engine and
spare parts of said vessel to be used by the importer himself as operator thereof;

(h) 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;

(i) Importation of professional instrument and implements, wearing apparel,

domestic animals, and personal household effects (except any vehicle, vessel,
aircraft, machinery, other goods for use in 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 the Commissioner, that such persons are
actually coming to settle in the Philippines and that the change of residence is
bona fide;

(j) Services subject to percentage tax under Title V;

(k) Services by agricultural contract growers and milling for others of palay

into rice, corn into grits and sugar cane into raw sugar;

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

of Section 17 of Republic Act No. 7716, as amended;

(m) Educational Services rendered by private educational institutions, duly

accredited by the Department of Education, Culture and Sports and the
Commission on Higher Education (CHED), and those rendered by government
educational institution;

(n)

Sale by the artist himself of his work of art, literary works, musical
compositions and similar creations, or his services performed for the production of
such works;

(o)

Services rendered by individuals pursuant to an employer-employee

relationship;

(p)

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 incomes in the
Philippines;

(q) Transactions which are exempt under international agreements to which

the Philippines is a signatory or under special laws, except those under

Presidential Decree No. 66, 529 and 1590;

(r) Sales by agricultural cooperatives duly registered with the Cooperative

Development Authority to their members as well as sales of their produce,

whether in its original state or processed form, to non-members; machineries and
equipment, including spare parts thereof, to be used directly and exclusively in the
production and/or processing of their produce;

(s)

Sales by electric cooperatives duly registered with the Cooperative

Development Authority or National Electrification Administration, relative to the
generation and distribution of electricity as well as their importation of
machineries and equipment, including pars, which shall be directly used in the
generation and distribution of electricity;

(t) Gross receipts from lending activities by credit or multipurpose

cooperatives duly registered with the Cooperative Development Authority:
Provided, That the share capital contribution of each member does not exceed
Fifteen thousand pesos (P15,000) and regardless of the aggregate capital and net
surplus ratably distributed among the members;
(v) Export sales by person who are not Vat-registered;
(w) Sales of real properties not primarily held for sale to customers or held
for lease in the ordinary course of trade or business or real property utilized for
low-cost and socialized housing as defined by Republic Act No. 7279, otherwise
known as the Urban Development Housing Act of 1992, and other related laws,
house and lot and other residential dwellings valued at One million pesos

(P1,000,000) and below: Provided, That not later than January 31st of the calendar
year thereafter, the amount of One million pesos (P1,000,000) shall be adjusted to
its present value using the Consumer Price Index, as published by the National
Statistic Office (NSO);

(x)

Lease of residential unit with a monthly rental not exceeding Eight

thousand pesos (P8,000): Provided, That not later than January 31st of the calendar
year subsequent to the effectivity of Republic Act No. 8241 and each calendar
year thereafter, the amount of Eight thousand (P8,000) shall be adjusted to its
present value using the Consumer Price Index, as published by the National
Statistic Office (NSO);

(y) Sale, importation, printing or publication of books and any news paper,

magazine, review or bulletin which appears at regular intervals with fixed price
for subscription and sales and which is not devoted principally to the publication
of paid advertisements; and

(z) 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 receipt do not exceed the amount of Five hundred fifty thousand
pesos (P550,000): Provided, That not later than January 31st of the calendar year
subsequent to the effectivity of Republic Act No. 8241 and each calendar year
thereafter, the amount of Five hundred fifty thousand (P550,000) shall be adjusted
to its present value using the Consumer Price Index, as published by the National
Statistic Office (NSO).

The

foregoing exemptions to the contrary notwithstanding, any person

whose sale of goods or properties or services which are otherwise not subject to
VAT, but who issue a VAT invoice or receipt therefore shall, in addition to his
liability to other applicable percentage tax, if any, be liable to the tax imposed in
Section 106 or 108 without the benefit of input tax credit to the purchaser under
Section 110, all of this Code.
Non-food products.

The

exemption for non-food agricultural products in Subsection (a)

does not include importation. Thus, in the hands of subsequent seller, the sale
shall be subject to VAT. Copra is classified by the BIR as an agricultural non-food
product. (RMO Cir. 47-91 which implements VAT Ruling No. 190-90; Misamis
Oriental Assn of Coco Traders, Inc. vs. Dept of Finance Secretary, 56 SCAD 496,
238 SCRA 63, Nov. 10 1994.)

Food Products.

Agricultural, etc. products are exempt from the payment of VAT whether it

is sold or imported, as the case may be (see Subsection a, b.) in their original
state.
However, after these products have undergone processing or
manufacturing, their original sale by the processor or manufactures shall be
subject to 10% VAT based on the gross selling price. Agricultural and marine
products in their original state, the sale or importation of which is exempt from
VAT under Section 109(c) refer only to those intended for human consumption.

Under

R.A. No. 8241, the phrase except importation of meat after the
phrase original state in Subsection (c) of Section 109 was deleted, this
subjecting importation of meat to VAT. By virtue of our membership to the World
Trade Organization (WTO), importation of meat from WTO member country were
exempted from the VAT. This exemption was effected in an amendment
introduced by Rev. Regs. No. 5-96, amending Section 4.103-1(B,c) of Rev. Regs.
No. 7-95. However, this exemption is not provided in the amendment effected by
Rev. Regs. No. 6-97.

The term agricultural product is not limited to vegetables and substances

directly resulting from the tillage of the soil but includes everything which serves
to satisfy human needs which is grown upon the land whether it pertains to
vegetable kingdom or to the animal kingdom. (Molina vs. Rafferty, 38 Phil 167.)
Hence a person engaged in the business of raising poultry and swine is not subject
to value-added tax.

Moreover, the term livestock and poultry in Subsection (c) of Section 109

refer to live animals of any kind generally used as, or yielding or producing food
for human consumption. Livestock shall include cows, bulls and calves, pigs,
sheep, goat and rabbits.

Furthermore, the term poultry includes fowls, ducks, geese and turkey. (It

does not include fighting cocks, race horses, zoo animals and other animals
generally considered pets.)

Marine food products includes fish and crustaceans, such as eels, trout,

lobsters, shrimps, prawns, oysters, mussels and clams.

Exemption from VAT on sale of fish (Sebsecs. c, d.) covers only direct tax

liability, i.e. output tax on gross sale of fish in their original state. It does not cover
the input VAT passed on by the supplies as forming part invoice price. Being an
indirect tax, VAT may be shifted to buyers of goods and services. (BIR Ruling No.
174-98, 11 Dec. 1998.).
Distinction between Zero rating and Exemption

Under a value-added tax, commodities, transactions, or firms can receive

preferential treatment in two different ways, by zero rating or exemption. Under

zero rating, all value-added tax is removed from zero rated goods, activity, or firm.
In contrast, exemption only removes the value-added tax at the exempt stage, and
it will actually increase, rather than reduce, the total taxes paid by exempt firms
business or non-retail customers. It is for this reason that a sharp distinction must
be made between zero rating and exemption in designing a value-added tax. (The
Philippine Revenue Jurnal, 1 August 1987, p. 19, quoting a U.S. Treasury Report;
see also Rev. Regs. No. 7-95.)

As stated above both are two different ways by which transactions subject

to the VAT are given preferential treatment. The distinction between a zero-rating
and exemption may, otherwise, be stated as follows:

(1) Under the first, the transaction is completely free of VAT. On the other

hand, the second only removes the vat at the exempt stage.

(2) A VAT taxpayer who is subject to zero rate of tax (see Sec.112[A]) can

claim and enjoy tax credit or refund for the input tax invoices to him on his
purchases. The same privilege is not available to exempt taxpayers. In view of
these difference, the total taxes payable by the exempt taxpayer may increase
rather than decrease. The non-creditability of input taxes in exempt transactions
may thus result in increase prices and consequently, proportionately increased
taxes which are all shouldered by the ultimate or non-retail consumer.

The

person making the exempt transaction shall not separately bill any
output tax to his costumers because the said transaction is not subject to VAT. On
the other hand, a VAT-registered purchaser of goods or services which are exempt
from VAT is not entitled to any input tax on such purchase. (Sec. 12[A], Rev. Regs.
No. 10-94.)
(3) Although zero-rated transactions are not subject to actual charge since the
tax is levied at 0% pursuant to Section 100 and 102 of the NIRC, as amended,
they are nevertheless taxable sales for purposes of measuring turnover sales to
determine whether VAT registration is required. By contrast, exempt sales are not
taxable sales. Generally, a person who make only exempt sales under Section
108 is not a taxable person and may not registered for VAT. Any VAT-registered
person whose sales falls under Section 106[A, 2] and 108 [B] shall qualify for
zero-rating.
6. Formula for the Computation of Value-added tax.

Output Tax Input tax = VAT payable.

Output Tax = Gross sales or Receipts x 10%.

Input Tax = Purchase of goods or services x 10%.
The

term Output Tax means the value-added tax due on the sale of
taxable goods or services by any person registered or required to register as a VAT
person.

The term Input Tax means the value-added tax paid by a VAT registered
person in the course of his trade or business on importation of goods or local
purchases of goods or services from a VAT registered person.
7. Sources of Creditable Input Taxes.

1. Importation of goods.
2. Local purchase of:

a) Raw material
b) Supplies
c) Goods or properties intended for sale
d) Capital equipment

3. Billing from services where the VAT has actually been paid.
4. Transactions deemed sale under Section 106;
5. Purchase from BOI Registered pioneer industries (VAT Otherwise due.
6. Presumptive or transitional input tax.
8. Sources of Presumptive or Transitional Input Taxes.
1. Transitional Input Tax Credit.

A person who become liable to value added tax or any person who

elects to be a VAT-registered person shall, subject to the filing of inventory to

rule 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 8% of the value of

such inventory or the actual value-added tax paid on such goods, materials
and supplies; whichever is the higher, which shall be creditable against the
output tax. (see Sec. 111(A), NIRC.)

2.

Presumptive Input Tax Credit.

(1) Persons or firms engaged in processing of sardines, mackerels

and milk, and in manufacturing refine sugar and cooking oil, shall be allowed
a presumptive input tax, creditable against the output tax, equivalent to on and
one-half percent (1 %) of the gross value in money of their purchases of
primary agricultural products which are used as input to their productions.

As used therein, 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 %) of the contract price with
respect to government contracts only in lieu of actual input taxes therefrom.
(see Sec. 111(B), as amended by RA 8241).
9. Refund of excess Tax Credits

1. Export Sales
An exporter who is a VAT registered person may apply for the issuance
of a tax credit certificate or refund of the input taxes attributable to the goods
exported up to the extent that such input taxes have not been applied to output
taxes within two years following the closing of the taxable quarter when the
exportations were made and after compliance of Central Bank Regulation.
(see Sec. 112, NIRC, a amended by RA 8424.)
2. Zero-rated or effectively zero-rated sales
Any person, not previously mentioned in number 1 above whose sales

are zero-rated or effectively zero-rated may apply for the issuance of a tax
credit certificate or refund of input taxes attributable to such sale to the extent
of such input taxes not applied against output taxes within a period of two
years when the sales were made, except transitional tax.

It must be noted, however, that where the taxpayer in number above is

engaged in zero-rated or effectively zero-rated sale and also in taxable or

exempt sale of goods or properties or services, and the amount of creditable
input tax due or paid cannot be directly attributed to any one of the
transactions, it shall be allocated proportionately on the basis of the volume of
sales. (see ibid.)

3. Capital Goods
A

VAT registered person may apply for the issuance of a tax credit
certificate or refund of input taxes paid on Capital goods imported or locally
purchased, to the extent that such input taxes have not been applied against
output taxes. (see ibid.)

The application for refund maybe made within two (2) years after the

close of the taxable quarter when such importation or local purchase was
made. In no case may the application be filed after two (2) years from dates
herein prescribed. (see ibid.)

Moreover, refund of output taxes on capital goods shall be allowed only

to the extent that such capital goods are used in VAT taxable business. If it is
also used in exempt operations, the input tax refundable shall only be the
ratable portion corresponding to the taxable operation.

Capital goods or properties refer to goods or properties with estimated

useful life greater than one year and which are treated as depreciable assets
under Section 34(F) of the Tax Code, used directly or indirectly in the
production or sale of taxable goods or services (see Sec. 4.106-1[b], Rev.
Regs. No. 7-95.)

4. Cancellation of VAT registration

A person whose registration has been cancelled due to retirement from

or cessation of business or due to changes or cessation of status may apply for

the issuance of tax credit certificate for any unused input taxes which he may
use in payment of his other internal revenue taxes within a period of two years
from date of cancellation.

Period within which refund or tax credit of input taxes shall be made.In proper cases, the Commissioner shall grant a refund or issue the tax

credit certificate for creditable input taxes within one hundred twenty (120)

days from the date of submission of complete documents in support of the

application filed in accordance with Subsection (A) and (B) hereof.

In case of full or partial denial on the part of the Commissioner to act

on the application within 30 days from receipt of the decision denying the
claim or after the expiration of the one hundred twenty (120) days period,
appeal the decision or the unacted claim with the Court of Tax Appeals . (as
amended by RA 8424).

Manner of giving refund.

Refund shall be made upon warrants drawn by the Commissioner of his

duly authorized representative without the necessity of being countersigned by

the Chairman, Commission on Audit, the, the provision of the Administrative
Code of 1987 to the contrary notwithstanding: Provided, That refunds under
this paragraph shall be subject to post audit by the Commission on Audit (Sec.
112, NIRC, as amended by RA 8424).

10. Mechanics on how VAT operates

_______Purchase________

(a)

1st seller
2
44

nd

(c)

Price
Input
Paid
VAT
Total

10

seller 10

(d)

(e)

Price Output
Change VAT Total

11

11

(f)

(e-b)

Paid to
BIR

40

3rd seller 40
4th seller 6 0
9

(b)

Sale___________________

4
6

66

44
60 6
66 2
90 9
99 3
99
-
-

Consumer
90
9

TOTAL VAT PAID TO BIR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

This illustration shows the movement of goods from manufacturer (1st
seller) to various stages of distribution (2nd to 4th seller) until it reaches the
ultimate consumer or end-user. It demonstrates how output taxes are imposed
on each sale in column (e) and input taxes in column (b) are applied.
Note that VAT is only imposed on the value added I column (e-b) and the

tax is collected at every stage of distribution and not on the final sale to
consumer.
At any point of sales or distribution and until the goods reach the end-user
the tax is always at 10%.
The above illustration showed the application of VAT on a per transaction
basis of the particular article from manufacturer to end-user. This set-up is not
actually done in actual practice because what is required of a VAT taxpayer is
to compute his total sales or receipt for the quarter multiplied by 10% less the
total input tax available for the quarter, the balance if any, is the amount to be
remitted to the BIR.
If the input taxes exceed the output taxes for the quarter, then the excess is
carried over to the succeeding quarter.
The term input tax means the value-added tax due from or paid by a
VAT-registered person in the course of trade or business on importation of
goods or local purchase of goods or services, including lease or use of
propert7yu, from a Vat-registered person. It shall also include the transitional
input tax determined in accordance with Section 111 of the Tax Code.

Input

taxes, as defined in Section 110, also includes input taxes

which can be directly attributed to transactions subject to the value-added tax
plus a ratable portion of any input tax which cannot be attributed to either the
taxable or exempt activity. (see Sec. 4.104.1, par. 2 Rev. Regs. No. 7-95.)

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 the tax Code.
II. COMPLIANCE REQUIREMENT

1. Registration of Value Added Taxpayers. a. In General

Any

person subject to Value Added Tax shall register with the Revenue
District Office where his principal place of business or head office is located and
pay an annual registration fee in the amount of Five hundred pesos (P500) for
every separate or distinct establishment or place of business and every year
thereafter on or before the last day of January. Any person just commencing a
business subject to the value-added tax must pay the fee before engaging therein.

If

the taxpayer has branches in different places no other registration is

allowed (only at the RDO which has jurisdiction over the place wherein the main
or head office is located). No matter how many branches are operated, the taxpayer
is treated as a single unit taxpayer. But, the fee shall be paid to the authorized agent
bank, or to the Revenue District Officer, collection agent, or to duly authorized
treasurer of the municipality where each place of business or branch is situated.
(see Sec.236, NIRC, as amended by RA8241.)
b. Person Commencing business.
Any person who expects top realize gross sales or receipts subject to VAT
exceeding P550,000 for the next 12 months, shall register within 30 days before
the start of said business with the Revenue District Office having jurisdiction of his
principal place of business and shall pay the annual registration fee prescribed in
the preceding paragraph.
c. Persons already in business becoming liable to VAT.
Any person whose gross sales or receipts in any 12 month period exceeds
P550,000 shall register within 30 days after the end of the last month of that period
and shall be liable to VAT starting from the first day of the month following his
registration.
d. Optional registration of exempt persons.
There are twenty-six exempt transactions under Section 109. However, out of
this number only five may be optionally registered for VAT purposes. These are:
1. Sale of non-food agricultural, marine products in their original state, by the
primary producer or owner of the land where the same is produced; (see Sec.
109(a), Tax Code).
2. Sale or importation in their original state of agricultural and marine products;
livestock and poultry; breeding stock and genetic materials. (see Sec. 109(c), Tax
Code);

3. Sale or importation of fertilizers and pesticides, seeds and fingerlings,

feed and fish meal. (see Sec. 109(d), Tax Code);
4.

Printing, publication, importation or sale of books, newspapers,

magazines, reviews or bulletins appearing regularly and not devoted to
advertisements; and

5. Sales and/or services performed by persons subject to VAT but did not
exceed P550,000. (see Sec. 109(z), Tax Code.)
Cancellation of Registration.

The registration of any person who ceases to be liable to the Value-added tax

shall be cancelled by the Commissioner upon application for cancellation of

registration. Any person who opted to be registered under paragraph (d) of this
section may, under regulation of the Secretary of Finance, apply for cancellation of
such registration. (see Sec. 236[F], NIRC as amended by RA 8241.).
Basis for Cancellation of VAT Registration.
(a) Retirement from business;
(b) Dissolution of Corporation or partnership;
(c) Change of ownership (Single proprietorship)
(d) Merger or Consolidation;
(e) Failure to start Business as planned;
(f) Failure to go beyond P550,000 for two consecutive years;
(g) Failure to achieve P550,000; and
(h) Desire to revert to exempt status after two years as voluntary registrant.
2. Invoicing and Accounting Requirement for VAT Registered Persons. a. Invoicing requirement.
A VAT registered person shall, for every sale, issue an invoice or receipt. In
addition to the information required under Section 237, the following information
shall be indicated in the invoice or receipt:

(1) Statement that the seller is a VAT-registered person, followed by his TIN, and
(2) The total amount which the purchaser pays or is obligated to pay to the seller
with the indication that such amount includes the value added tax.
b. Accounting Requirements. -

In addition to the regular accounting records required under Section 232 and

233, such as General Journal, and General Ledger, a subsidiary sales journal and a
subsidiary purchase journal shall be maintained on which daily sales and purchase
are recorded. (see supra.)

If

a VAT registered person operates branches all over the country, each

branch must also be equipped with a subsidiary sales journal. Should a branch
engage in buying operations, then it must also maintain a subsidiary purchase
journal.

The subsidiary journals shall contain such information as may be required by

the Secretary of Finance. (see Sec. 113, NIRC as amended by RA 7716).

3. Notification Requirement. a. Change of place of Business.

It shall be the duty of every VAT-registered person to file a notice of change of

his principal place of business or any of his branches or offices. The notice shall be
filed within 15 days from the date of such change with the Revenue District
Officers who have jurisdiction of his former and new place of business.
b. Other changes.
Any VAT-registered person shall notify the Revenue District Office of the
change or termination of his status as a VAT-registered person.
4. Return and payment of Value-Added tax. -

1. Where to file the Return and Pay the Tax.

Every person subject to VAT shall file a quarterly return of his gross

sales or receipts and pay the tax due thereon to a duly accredited bank located in the
Revenue District where such person is registered or required to be registered.
Where there are no duly accredited banks in the City or Municipality, then the
return shall be filed and any amount due shall be paid to any duly bank within the
district, or to the Revenue District Officer, Collector Agents or duly authorized
Treasurer of the City or Municipality where such taxpayer has his principal place of
business.
Only one consolidated return shall be filed by the taxpayer for all the branches
and lines of business subject to VAT.
If no tax is payable, the taxpayer shall file the return with the Revenue District
Officer, Collection Agent or authorized Municipal Treasurer where the taxpayers
principal place of business is located.
2. Time for filing and payment of Tax. -

The return shall be filed and the tax paid within 25 days following the end of
each quarter specifically prescribed for a VAT-registered person under regulations to
be promulgated by the Secretary of Finance. Any person whose registration is
cancelled in accordance with paragraph (e) of Section 107 shall file a return within
25 days fro the cancellation of such registration (see Sec. 114[A], RA 8424).
3. Withholding of Creditable Value-Added Tax.

The government or any of its political subdivisions, instrumentalities

or agencies, including government-owned or controlled corporations (GOCC) shall,

before making payment on account of each purchase of goods from sellers and
services rendered by contractors which are subject to value added tax imposed in
Sections 106 and 108 of this Code, deduct and withhold the value-added tax due at
the rate of Three percent (3%) of the gross payment for the goods and six percent
(6%) on gross receipt for services rendered by contractors or every sale or
installment payment which shall be creditable against the value-added tax liability
of the seller or contractor: Provided, however, That in the case of government
public works contractors, the withholding rate shall be eight and one-half percent
(8.5%): Provided, further, That the payment for lease or use of properties or
property rights to nonresident owner shall be subject to ten percent (10%)
withholding tax at the time of payment. For this purpose, the payor or person in
control of the payment shall be considered as the withholding agent. The valueadded tax withheld under this Section shall be remitted within ten (10) days
following the end of the month the withholding was made (see Se. 5[C], R.A. 8241;
Sec. 114[C], as amended by RA 8424).
5. Tax on Persons Exempt from Value-added Tax. -

Any person engaged in sale of goods or services subject to Value-

Added Tax but whose gross annual sales or receipts did not exceed P550,000 and
opted not to voluntarily register as VAT taxpayer shall pay a tax equivalent to three
percent (3%) of his gross quarterly sales. Cooperatives shall, however, be exempt
from the three percent (3%) gross receipts tax herein imposed. (see Sec. 116,
NIRC.)

The return shall be filed within twenty-five days (25) after the end
of each taxable quarter. (see Sec.128[A,1], NIRC.)
6.Power of the Commissioner to suspend the business operations of a taxpayer.-

1. Suspension of Business Operation. In

addition to other administrative and penal sanctions and

implementing regulations provided for in the Tax Code, the Commissioner or his

authorized representative is empowered to suspend the business operations and

temporarily close the business establishment of any person for any of the following
violations:
a. In the case of a VAT-registered person.
1. Failure to issue receipt or invoices;
2. Failure to file a value-added tax return as required under Section 114 of
Tax Code, or

the

3. Understatement of taxable sales or receipts by 30% or more of his correct

taxable sales or receipt for the quarter.
b. Failure of any person to register as required under Section 236 of the tax Code
(see Sec. 115, NIRC.)

2. Surcharge, interest and other penalties.

The interest on unpaid amount of tax, penalties and
criminal penalties imposed in Title X of the Tax C ode should also apply to
violation of the Provision of Title IV of the Tax Code.
7. Effectivity of the Imposition of VAT on Certain Goods, Properties and Services. -

The value-added tax shall be levied, assessed and

collected on the following transactions, starting January 1, 2000:

a. Services performed in the exercise of profession or calling subject to the

professional tax under the Local Government Code or Republic Act No.
7160, and professional services performed by registered general
professional partnerships; actors, actress, talents, singers and emcees; radio
and television broadcasters, choreographers; musical, radio, movie,
television and stage directors; and professional athletes;
b. Services rendered by banks, non-bank financial intermediaries not
performing quasi-banking functions; and
c. The lease or use of sports facilities and equipment by amateur players, as
provided under Republic Act No. 6847, except sports facilities and
equipment which are exclusively or mainly for private use of shareholders
or members of the club or organization which owns or operates such sports
facilities and equipment. This is subject to VAT effective January 1, 1998.

Prior to their inclusion in the coverage of the value-added tax, the above
services shall continue to pay the applicable tax prescribed under the present
provisions of the National Internal Revenue Code, as amended.
However, when public interest so requires, the Congress of the Republic of the
Philippines, taking into account the impact on prices of goods and services, may
exclude any of the above services from the coverage of the value-added tax:
Provided, however, That in the event of the exclusion of any of the above services
the existing applicable tax under the provisions of the National Internal Revenue
Code, as amended, shall continue to be paid on the services so excluded (see
Section 17, as amended by RA 8241, as further amended by Section %, Transitory
Provisions, RA 8424.)