VALUE ADDED TAX

By Atty Agnes Santos

Concept, Characteristics / Elements of
VAT-taxable transactions
 Reference: Sections 105 to 115- NIRC

 Value-Added Tax (VAT) is a form of sales tax. It 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. (CIR v.
Magsaysay Lines, GR No. 146984, July 28, 2006)
 It is an indirect tax, which may be shifted or passed on to the buyer,
transferee or lessee of goods, properties or services. (CIR v. Seagate
Technology Philippines, GR No. 153866, February 11, 2005)
Impact and Incidence of VAT

 IMPACT (Statutory Burden)

 The impact of tax in VAT is with the seller, who has the burden under the law to
pay the tax to the BIR

 INCIDENCE (Economic Burden)

 The incidence of tax in VAT is with the buyer, where the law allows the VAT due on
the transaction to be shifted to the customer / buyer / end-user
Who are liable for VAT

 Any person or entity who, in the course of his trade or business sells, barters,
exchanges, leases goods or properties and renders services in the Philippines,
subject to VAT, if the aggregate amount of actual gross sales or receipts
exceed Three Million Pesos (Php3,000,000.00)

 A person required to register as VAT taxpayer but failed to register (VAT-

registrable)

 Any person, whether or not made in the course of his trade or business, who
imports goods
In the Course of Trade or Business
Definition
 Section 105 par 3 –

 The phrase “in the course of trade or business” means the regular conduct or
pursuit of a commercial or economic activity, including transactions
incidental thereto, by a 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
members or their guests), or government entity
Incidental v. Isolated Transactions

 CIR V. MAGSAYSAY LINES (supra)

 The tax is levied only on the sale, barter or exchange of goods or services by
persons who engage in such activities, in the course of trade or business. These
transactions outside the course of trade or business may invariably contribute to
the production chain, but they do so only as a matter of accident or incident. As
the sales of goods or services do no occur within the course of trade or business,
the providers of such goods or services would hardly, if at all, have the
opportunity to appropriately credit any VAT liability as against their own
accumulated VAT collections since the accumulation of output VAT arises in the
first place only through the ordinary course of trade of business.
 CIR V. MAGSAYSAY LINES (continued)

 That the sale of the vessels was not in the ordinary course of trade or
business of NDC was appreciated by both the CTA and the Court of Appeals,
the latter doing so even in its first decision which is eventually reconsidered.

 Citing Imperial v. Collector of Internal Revenue (GR L-7924, 09-30-1955)

which said, “the term ‘carrying on business’ does not mean the performance
of a single disconnected act, but means conducting, prosecuting and
continuing business by performing progressively all the acts normally incident
thereof; while ‘doing business’ conveys the idea of business being done, not
from time to time, but all the time.”
 CIR V. MAGSAYSAY LINES (continued)

 RESOLUTION: In the instant case, the sale was an isolated transaction.

The sale which was involuntary, and made pursuant to the declared policy of
Government for privatization could no longer be repeated or carried on with
regularity. It should be emphasized that the normal VAT-registered activity
of NDC is leasing of personal property (i.e. shipping vessels).
“Incidental” Transaction

 Mindanao Geothermal Partnership v. CIR (GR No. 193301, 03-11-2013)

 Mindanao II asserts that the sale of a fully depreciated Nissan Patrol is not an
incidental transaction in the course of its business; hence it is an isolated
transaction that should not have been subject to 10% VAT.
 Section 105. (NIRC) Persons Liable – Any person who in the course of trade or
business sells, barters, exchanges, leases goods or properties, renders services
…..shall be subject to the value-added tax imposed in Sections 106 to 108 of this
Code.
 Mindanao Geothermal Partnership v. CIR (continued)

 The phrase “in the course of trade or business” means the regular conduct or
pursuit of a 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 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.
 Mindanao Geothermal Partnership v. CIR (continued)

 Mindanao II’s sale of the Nissan Patrol is said to be an isolated transaction.

However, it does not follow that an isolated transaction cannot be an incidental
transaction for purposes of VAT liability. Indeed, a reading of Section 105 of the
1997 Tax Code would show that a transaction, “in the course of trade or business”
includes “transactions incidental thereto.” Mindanao II’s business is to convert
the steam supplied to it by PNOC-EDC into electricity and to deliver the electricity
to NPC. In the course of its business, Mindanao II bought and eventually sold a
Nissan Patrol. Prior to the sale, the Nissan Patrol was part of Mindanao II’s
property, plant and equipment. Therefore, the sale of the Nissan Patrol is an
incidental transaction made in the course of Mindanao II’s business which should
be liable for VAT.
VAT Rates

 On sale of goods and properties – 12% of the gross selling price

 On sale of services and use or lease of properties – 12% of the gross receipts

 On importation of goods – 12% based on the total value used by the BOC in
determining tariff and customs duties, and excise taxes (e.g. invoice amount,
freight, storage/brokerage, insurance, etc.

 On export of goods and services – 0% of the gross selling price or gross

receipts
Tax Credit Method (Output v. Input VAT)

 The VAT collected by a VAT-registered seller from its customers on the sale of
goods or services is known as OUTPUT VAT. While the VAT paid to the VAT
registered seller on the purchase of goods or services is denominated as
INPUT VAT.
 OUTPUT TAX is a liability – the amount was collected by the VAT seller from its
customers in behalf of the government. This amount does not form part of
the gross sales / gross income of the seller. The amount is to be remitted to
the government
 INPUT TAX is an asset – the amount paid to the VAT supplier by a VAT
registered purchaser is considered as prepaid tax since amount can be
credited or applied against the OUTPUT TAX liability
SCENARIOS

OUTPUT TAX equals INPUT TAX No amount due or payable / no excess credit
Output exceeds Input Excess output tax payable to BIR
Input Tax exceed Output Tax
a. When input tax resulted from 1. File for refund of excess input tax credits
zero-rated or effectively zero- 2. Carry over excess input tax credit to
rated transactions succeeding quarter / period
b. When input tax resulted from VAT 1. Carry over the excess input tax to
taxable transactions (12%) succeeding quarter / period
May VAT paid on reimbursed expense be
claimed as input tax credit?
 CIR v. Sony Philippines Inc GR No. 178687, 11-17-2010
 The CIR contends that since Sony (Phils)’s advertising expense was reimbursed by
its parent company, Sony International Singapore (SIS), the former never incurred
any advertising expense. As a result, Sony is not entitled to a tax credit. At most
the CIR continues, the said advertising expense should be for the account of SIS
and not Sony (Phils)
 It is evident under Section 110(now 113) of the 1997 Tax Code that an advertising
expense duly covered by a VAT invoice is a legitimate business expense. This is
confirmed by no less than CIR’s own witness, Revenue Officer Antonio
Aluquin. There is also no denying that Sony incurred advertising expense. Aluquin
testified that advertising companies issued invoices in the name of Sony and the
latter paid for the same. Indubitably, Sony incurred and paid for advertising
expense/ services. Where the money came from is another matter all together but
will definitely not change said fact.
Destination Principle / Cross Border
Doctrine
 No VAT shall be imposed to form part of the cost of goods destined for
consumption outside of the territorial border of the taxing authority. Hence,
actual export of goods and services FROM THE PHILIPPINES TO A FOREIGN
COUNTRY must be free from VAT. Conversely, those destined for use or
consumption within the Philippines shall be imposed with the 12% VAT.

 Thus, exports are subject to 0% VAT rate, while local transactions, including
importations, are subject to 12% VAT
Vatable v. Zero rated v. Exempt
Transactions
Vatable Zero Rate Exempt
Rate 12% 0% 0%
Required VAT registered VAT registered Non-VAT registered
Registration
Claim for input tax Allowed Allowed Not Allowed
credits (VAT paid on purchases
form part of the cost
of goods or services
purchased)

While an exporter may be subject to zero-rate, if it does not register for VAT, it
will be treated as VAT Exempt (Sec 109[O], NIRC as amended). Its transactions
will not be subject to VAT but it is likewise not qualified to claim input tax
credits
Vatable Transactions
 Sale of GOODS or PROPERTIES (Sec 106, NIRC)
 ALL tangible and intangible objects which are capable of pecuniary
estimation, and shall include:
 Real Properties HELD PRIMARILY FOR SALE to customers
 Real Properties HELD PRIMARILY FOR LEASE in the ordinary course of trade or
business
 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
 Motion picture films, films, tapes and discs

 Radio, television, satellite transmission and cable television time

Vatable Transactions
 Sale of GOODS or PROPERTIES (Sec 106, NIRC)
 Tax Base = GROSS SELLING PRICE (GSP)
 Gross Selling Price means
 The total amount of money or its equivalent which the purchaser pays or is obligated
to pay to the seller
 In consideration of the sale, barter, or exchange of the goods or properties,
excluding the VAT
 The excise tax, if any, on such goods shall form part of the gross selling price

 Supporting Document = VAT Invoice

Vatable Transactions
 Sale of SERVICES (Sec 108, NIRC)
 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 real or personal
 Warehousing Services
 Lessors or distributors of cinematographic films
 Persons engaged in milling, processing, manufacturing or repacking for others
 Proprietors, operators or keepers of hotels, motels, rest houses, pension
houses, inns, resorts
Vatable Transactions
 Sale of SERVICES (Sec 108, NIRC, continued)
 Operators of restaurants, refreshment parlors, cafes and other eating places,
including clubs and caterers
 Dealers in securities, lending investors
 Transportation contractors on their transport of GOODS OR CARGOES;
including persons who transport goods or cargoes for hire and other
domestic common carriers by LAND relative to their transport of goods
or cargoes
 Common Carriers by AIR AND SEA, relative to their transport of
PASSENGERS, GOODS OR CARGOES from one place in the Philippines to
another place in the Philippines
 Sale of electricity by generation companies, transmission by any entity and
distribution companies, including electric cooperatives
 Services of franchise grantees and electric utilities
Vatable Transactions
 Sale of SERVICES (Sec 108, NIRC, continued)
 Telephone and telegraph, radio and television broadcasting and ALL OTHER
FRANCHISE GRANTEES, EXCEPT
 Those under Sec 119 (subject to Percentage Taxes)
 Non-life insurance companies (Except their CROP insurance)
 Surety, fidelity, indemnity and bonding companies

 Similar services regardless of whether or not the performance thereof calls

for the exercise or use of the physical or mental faculties.
 Supply of –
 Scientific, technical, industrial or commercial knowledge or information
 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 (on lease of
scientific equipment) or any knowledge or information …..
Vatable Transactions
 Sale of SERVICES (Sec 108, NIRC, continued)
 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
 technical advice, assistance or services rendered in connection with technical
management or administration of any scientific, industrial or commercial undertaking,
venture, project or scheme
 Lease or use of or the right or privilege to use –
 any copyright, patent, design or model, plan secret formula or process, goodwill,
trademark, trade brand or other like property or right;
 any industrial, commercial or scientific equipment
 motion picture films, films, tapes and discs; and
 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.
Vatable Transactions
 Sale of SERVICES (Sec 108, NIRC, continued)
 Tax Base = GROSS RECEIPTS (GR)
 Gross Receipts means
 the total amount of money or its equivalent representing the contract price,
compensation, service fee, rental or royalty, including the amount charged for
materials supplied with the services and deposits and advanced payments
actually or constructively received during the taxable quarter for the services
performed or to be performed for another person, excluding value-added tax.

 Supporting Document = VAT Official Receipt

Zero-Rated Transactions
Sale of Goods Sale of Services
Export Sales Processing, manufacturing or repacking of
- sale and actual shipment of goods from goods for export for persons doing business
the Phils to a foreign country outside the Philippines
- Paid for in acceptable foreign currency - Paid for in acceptable foreign currency
- Accounted for in accordance with BSP - Accounted for in accordance with BSP
rules and regulations rules and regulations
Sale / delivery of goods to Services rendered to
- Enterprises with separated customs - Enterprises with separated customs
territory under special laws territory under special laws
(embassies, PEZA zones, etc) (embassies, PEZA zones, etc)

Other services for persons doing business

outside the Philippines or to non-residents
not engaged in business who is outside the
Phils when the service was performed
 Sale of Goods Sale of Services
Indirect Export Sales Services rendered to-
- Sale to non-resident buyer for - export oriented enterprise where at
delivery to local export oriented least 70% of its total production are
enterprise exported
- Sale to export oriented enterprise - BOI registered companies and other
where at least 70% of its total special laws
production are exported
- BOI registered companies and other
special laws
Sale of goods, supplies, equipment and fuel Services rendered to persons engaged in
to persons engaged in international shipping international shipping and air transport
and air transport operations operations, including lease of property
thereto

Sale of power and fuel generated through

renewable energy sources
Sale of goods to persons enjoying Services rendered to –
exemptions under international agreements - persons enjoying exemptions under
or special laws international agreements or special
laws
Zero rated Transactions
 New provision under the TRAIN (See Revenue Regulations No. 9-2021)
 Provided, That subparagraphs (3), (4), and (5) (INDIRECT Exports under Section
106) and subparagraphs (B)(1) and (B)(5) of Section 108) hereof shall be subject
to the twelve percent (12%) value-added tax and no longer be considered
export sales subject to zero percent (0%) VAT rate upon satisfaction of the
following conditions:
 The successful establishment and implementation of an enhanced VAT refund
system that grants refunds of creditable input tax within ninety (90) days from the
filing of the VAT refund application with the Bureau: Provided, That, to determine
the effectivity of item no. 1, all applications filed from January 1, 2018 shall be
processed and must be decided within ninety (90) days from the filing of the VAT
refund application
 An amount equivalent to five percent (5%) of the total value-added tax collection of the
BIR and the BOC from the immediately preceding year shall be automatically
appropriated annually and shall be treated as a special account in the General Fund or as
trust receipts for the purpose of funding claims for VAT Refund: Provided, That any
unused fund, at the end of the year shall revert to the General Fund. (AUTOMATIC
APPROPRIATION)
Zero rated Transactions

 New provision under the TRAIN (See Revenue Regulations No. 9-2021)
 Provided, That subparagraphs (3), (4), and (5) (INDIRECT Exports under Section
106) and subparagraphs (B)(1) and (B)(5) of Section 108) hereof shall be subject
to the twelve percent (12%) value-added tax and no longer be considered
export sales subject to zero percent (0%) VAT rate upon satisfaction of the
following conditions:
 The successful establishment and implementation of an enhanced VAT refund
system that grants refunds of creditable input tax within ninety (90) days from the
filing of the VAT refund application with the Bureau: Provided, That, to determine
the effectivity of item no. 1, all applications filed from January 1, 2018 shall be
processed and must be decided within ninety (90) days from the filing of the VAT
refund application
Persons Required to Register for Value-
Added Tax
 Section 236 (G), NIRC
(1) Any person who, in the course of trade or business, sells, barters or exchanges
goods or properties, or engages in the sale or exchange of services, shall be liable
to register for value-added tax if:
(a) His gross sales or receipts for the past twelve (12) months, other than those that are
exempt under Section 109(A) to (BB), have exceeded Three million pesos (P3,000,000); or
(b) There are reasonable grounds to believe that his gross sales or receipts for the next twelve
(12) months, other than those that are exempt under Section 109(A) to (BB), will exceed
Three million pesos (P3,000,000).
(2) Every person who becomes liable to be registered under paragraph (1) of this
Subsection shall register with the Revenue District Office which has jurisdiction
over the head office or branch of that person, and shall pay the annual registration
fee prescribed in Subsection (B) hereof. If he fails to register, he shall be liable to
pay the tax under Title IV 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.
Optional Registration for VAT
 Section 236 (H) (previously Section 109(A)(2))

(1) Any person who is not required to register for value-added tax under Subsection (G)
hereof may elect to register for value-added tax by registering with the Revenue
District Office that has a jurisdiction over the head office of that person, and paying
the annual registration fee in Subsection (B) hereof.
(2) Any person who elects to register under this Subsection shall not be entitled to cancel
his registration under Subsection (F)(2) for the next three (3) years.
Provided, That any person taxed under Section 24(A)(2)(b) and 24(A)(2)(c)(2)(a) of the
NIRC who elected to pay the eight percent (8%) tax on gross sales or receipts shall not
be allowed to avail of this option