Overview of VAT

Concepts (Part I)

Atty. Kim M. Aranas, CPA

Instructor

For reference purposes only.

For exclusive use of 2018 LLB 319A subject.

Unauthorized use and distribution in strictly prohibited.
Karma is a bitch.

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 Outline

 Introduction to VAT
 Transaction deemed sale
 VAT on Sale of Goods or Properties
 VAT on Sale of Services and Use/Lease of
Properties
 VAT on Importation of Goods
 Exemptions from VAT (Section 109)
 VAT Registration and Invoicing
requirements
 Compliance Requirements

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 What is VAT?

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What is VAT?

The value-added tax (VAT) is a tax on consumption

levied on the sale, barter, exchange or lease of goods or
properties and services in the Philippines and on
importation of goods into the Philippines.
(Section 4.105-2, RR 16-05)

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Nature and Characteristics

Viewed broadly, the VAT is a uniform tax

VAT is an indirect tax ranging, at present, from 0 percent to 12
• liability to pay is on percent levied on every importation of goods,
whether or not in the course of trade or
the seller business, or imposed on each sale, barter,
exchange or lease of goods or properties or on
• burden may be each rendition of services in the course of trade
shifted or passed or business as they pass along the production
and distribution chain, the tax being limited
on to the buyer. only to the value added to such goods,
properties or services by the seller, transferor
or lessor. (CIR v. Seagate Technology (Phil.) GR. No.
153866, February 11, 2005)

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 A quick trip down the memory lane…

EO No. 273
Effectivity – January 1, 1988

Governed by RA 8424 (1997 Tax Code) as heavily amended

by R.A. 9337 (EVAT Law) on May 11, 2005, RR 16-2011, RR
3-2012, RA 10963, RR 13-2018.

-February 2006 VAT Rate was increased from 10% to 12%.

-Effective January 1, 2018, VAT threshold is increased
from P1,919,500 to P3,000,000 of gross sales or gross
receipts.
-EVAT Law & the fate of Ralph Recto

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 Introduction to VAT
VAT Rates: 0% & 12%

VAT Law adheres to Cross Border Doctrine/

Destination Principle:

Distinguish Cross-border Doctrine from Destination Principle.

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How is VAT computed?
Computation: Credit (invoice) Method

Amount of
VATable receipts/sales
Output tax xxx X 12%
Less: Input tax xxx
VAT Payable xxx
Amount of
VATable purchases
X 12%

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Expanded Coverage of VAT
1. NON-Food agricultural, marine, and other forest
products in their original state by the primary producer
or owner of the land; (versus Sec 109 A, NIRC)
2. Cotton and cotton seeds in original state;
3. Coal and natural gas in whatever form or state;
4. Petroleum products including raw materials for their
production;
5. Sale by the artist of his works or art, literary works,
musical compositions and similar creations, or his
services performed for the production of such works;

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Expanded Coverage of VAT

5. Services by doctors (PRC) & Lawyers (IBP) (versus Sec 109 G & I);
6. Common carriers by air and sea as to transport of Passengers
within the Philippines (how about carriers in land?)
7. Toll Road Operations (Timbol v. Sec. of Finance, GR No. 193007, July 19, 2011)
8. Electricity from “generation”, “transmission”, and
“distribution” companies;
9. Sale by “electric” cooperatives including importation of
machines and equipment, and spare parts.
10. Effectively zero-rated exports upon the implementation of
the enhanced VAT refund system.

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 Nature & Characteristics of VAT:

A. Tax on value added of taxpayer

Value Added- [Sales – Purchases] both are subject to VAT
during the taxable quarter.

The taxpayer (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 purchase of service (input tax)
against the tax due on his own sale.

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 B. Transparent form of sales tax – VAT must be
separately indicated in the VAT invoice or receipt

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 C. Broad-based tax on consumption of goods, properties and
services in the Phil relate with “Destination” principle – tax
imports, zero-rate exports

D. Tax is collected thru the tax credit method (also, invoice

method):

[Output tax on sales - input tax on

purchases]
(compare with “cost deduction method”)

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 E. No cascading of tax in VAT system

“Cascading” – a tax on tax

GSP and GR definition excludes VAT passed on by the sellers

to the buyers
(Pp v. Tan, GR No. 15232, August 16, 2005)

Allows the credit of “input tax” against “output” tax

applying the Principle of Recoupment of Tax

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 F. “Tax-inclusive method” is adopted by the Phil. VAT is
deemed included in total invoice amount in VAT invoice or
receipt

To get the VAT = Total Invoice Amount x 3/28

G. Indirect tax (versus direct tax)

Impact of Taxation – Seller
Incidence of Taxation – Final Consumer
Forward passing versus Backward passing
Sellers’ Market versus Buyers Market

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 H. VAT is regressive!

“Resort to indirect taxes should be minimized but not

avoided entirely because it is difficult if not impossible *** in
the case of VAT the law minimizes the regressive effects of
this imposition by providing 0-rating or exemptions to certain
transactions.”
(Tolentino v. Sec Finance, consolidated cases decided on Oct. 30, 1995)

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 I. VAT is a percentage tax imposed by law directly not on the thing or
service but on the act (sale, barter, exchange, lease, importation,
rendering service)

K. VAT is an ad valorem tax, which means that the

amount is based on the gross selling price or gross value
in money of goods and services

J. VAT is an excise tax, or a tax on the privilege of engaging in the

business of selling goods or services, or in the importation of goods but
unlike excise, it is not applied only to a few selected goods

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 VAT Transactions

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VAT Transactions

12% - Transaction is taxable and rate imposed is 12%.

0% - Transaction is taxable and rate imposed is 0%. Hence, there
is no resulting output tax.
Exempt - Transaction is not taxable. No output tax is computed.

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Summary of Difference
Difference 12% VAT 0% VAT Exempt

Seller’s liability to Seller charge 12% VAT Seller charge 0% VAT to Seller does not charge VAT to
VAT to customer customer customer

Treatment of input Can recognize input tax Can recognize input tax Cannot recognize input tax on
tax on VAT charged to him on VAT charged to him by VAT charged to him by his
by his suppliers his suppliers suppliers – Input treated as
part of the cost of goods or
service purchased

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Taxable Transactions
1. Sale, barter, exchange or lease of goods or
properties or similar transactions, in the course of
trade or business;

regular conduct including incidental but not isolated

transaction whether non-stock, non-profit or
government entity (Sec. 105)

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Taxable Transactions
CIR v. Magsaysay Lines Inc. GR No.  Incidental Transaction included in
146984 the definition of “in the course of
“Course of business” is what is usually
trade or business” somehow
done in the management of trade or
related to the main business.
business. What is clear therefore is that
“course of business” or “doing
business” connotes regularity of Isolated Transaction does not
activity. relate to the main business not
included in the definition above
Related Case: CIR v. CA & Commonwealth mentioned.
Management & Services Corp. GR No. 125355,
March 30, 2000

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Taxable Transactions
Is the sale of power plants by PSALM to private entities
Mindanao II Geothermal Partnership subject to VAT?
v. CIR/Mindanao I Geothermal
Partnership v. CIR. G.R. No. 193301 & No. Under the EPIRA Law, PSALM—a GOCC was
G.R. No. 194637, March 11, 2013. created to manage the orderly sale, disposition, and
privatization of the NPC generate assets and real estates
What happened? and liquidate all of NPC’s financial obligations.

PSALM is not a successor-in-interest of the NPC; hence,

Taxpayer’s business is the repeal of NPC’s VAT exemption does not affect
conversion steam to PSALM. In any event, the sale of the power plants is not
in pursuit of a commercial or economic activity but a
electricity. governmental function mandated by law to privatize NPC
generation assets. As such the sales of the power plant
Sale of nissan patrol – is not within the regular course of business condition
under Section 105 of the NIRC. (Power Sector Asset and
isolated or incidental? Liabilities Management Corporation v. CIR, G.R. No. 198146, August 8,
2017)

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Transactions covered by VAT
VAT covers transactions which are made "in the course of trade or
business"
The term “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, nonprofit private organization
(irrespective of the disposition of its net income and whether or not it sells
exclusively to members or their guests), or government entity. (Section
4.105-3, RR 16-05)

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Determinants

"Incidental Transactions"

Incidental defined
• something else as primary; something necessary, appertaining to, or
depending upon another, which is termed the principal (Black's Law
Dictionary, 6th ed. p. 762).

CTA Case No. 8319 (November 7, 2013)

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Isolated vs. Incidental Transactions
"In the course of trade or business"

1. Frequency - Regularly conducted

2. Purpose – pursuit of a commercial or economic activity

Isolated = exempt

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Isolated vs. Incidental Transactions
Recent Rulings:

Interest income on loans – VATable

(CTA Case No. 8024, Waterfront Philippines Inc v CIR)

Property, Plant, and Equipment – VATable

(GR Nos. 193301 and 194637, Mindanao II Geothermal Partnership v CIR)

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Incidental Sales
CTA En Banc Case No. 287, CS Garments Inc. vs CIR (January 14, 2008)

The sale of an asset purchased and used in the furtherance of the

business is an incidental sale.
– Classified as “Property, Plant and Equipment” - PPEs are
tangible assets held for use in the production or supply of
goods/services or for administrative purposes and with useful
life of more than one period. (PAS 16)

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 Sale of Real Property (Ordinary Assets)

Entire selling price is

Cash basis taxable in the month of
sale

VAT on every installment

Installment Plan payments including interest
Sale of Real (initial payment is 25% or less and penalties
Property of GSP) (actual/constructive receipt)
(Ordinary Asset)

Deferred payment basis

(initial payment exceeds 25% Same as cash basis
of GSP)

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Taxable Transactions
2.) Sale of services or similar transactions in the
course of trade or business;

EX. Lease/rent exceeding the exempt amount; dining in

resto; lease of motion picture, films, discs (only the lease, it
excludes showing or exhibiting the film as it becomes subject
to amusement tax!)

 EXCEPTION to RULE on REGULARITY- Service rendered by

Non Resident Persons – always treated as “in the course of
trade/business” hence VATable. Even if isolated-VATable.
(Sec 105)

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Taxable Transactions
For Services recall on:

Services of domestic carrier by air, sea and land (for

land if persons- 3% tax; if cargo – 12% VAT)

Sale of electricity is subject to VAT.

Non-life insurance – 12% VAT

Life insurance – no VAT.

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Taxable Transactions
CIR v. Sony Philippines Inc. GR No. 178697, November 17, 2010:

 Sony Phil engaged the services of several advertising companies;

 Due to Sony Phil’s dire economic conditions, Sony Int’l Singapore
handed Sony Phil a dole-out to answer for the expenses payable to the
advertising companies;
 Sony Phil was thereafter assessed deficiency VAT for the transaction i.e.
dole-out, between Sony Phil and Sony Int’l Singapore.

The Supreme Court ruled that the dole-out or subsidy from the
Singaporean company to the Phil Company neither constituted a sale of
goods or properties nor sale of services.

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Taxable Transactions

3. Importation of goods whether in the course of trade or

business or NOT.

Only importation of goods/properties NOT service.

VATable whether or not made in the ordinary course of
business.
Exempt importation: personal household effects of
balikbayan or to resettle in the Philippines with exceptions.

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Taxable Transactions

Two cases of tax free Importations:

1. Importation of TAX free product regardless of the
status of the importer; subsequent sale is still
VAT exempt!
2. Importation of taxable products but exempted due
to status of VAT exempt importer. Subsequent
sale to a VATable buyer is subject to VAT!
Whether or not made in the course of trade or business.

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When subject to VAT?

GR: Persons whose gross annual sales or

receipts during any year or in any 12 month
period exceeds the threshold OR even if
sales /receipts do not exceed but
REGISTERED under the VAT system.

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 12% VAT

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Persons liable to VAT
1. Seller - any person who, in the course of trade or
business
- Sells, barters, exchanges, leases goods or properties subject to VAT
- Renders services subject to VAT
2. Importer - any person who imports goods subject
to VAT – whether or not
- Importer is engaged or not engaged in business
- Importation is to be used for business or non-business/personal purpose

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VAT Threshold

P3,000,000

P1,919,500
Gross annual sale of
goods/properties or
receipts from
performance of service
other than transactions Before TRAIN After TRAIN

which are VAT-exempt

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 Transactions deemed sale

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Transactions deemed sale
SEC. 106. Value-Added Tax on Sale of Goods or
Properties.
(A) Rate and Base of Tax. - There shall be levied,
assessed and collected on every sale, barter or
exchange of goods or properties…

A transaction may be subject to VAT even if there

was no actual sale of properties

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Transactions Deemed Sale
Donations or gifts
1. Transfer, use or
consumption not in the In general, VATable, unless exempt.
course of business of
goods or properties • If ordinary asset of the donor, the same
originally intended for sale shall be considered deemed sales
or for use in the course of subject to VAT
business; • Corresponding input VAT attributed to the
VAT portion of the cost of the donation
must be deducted from the accumulated
input VAT of the donor.

• Exempt if donor or donated properties

are VAT-exempt
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- BIR Ruling [DA-(DT-016) 116-10]
Transactions Deemed Sale
2. Distribution or transfer to 3. Distribution or transfer to
shareholders or investors as creditors in payment of debt
share in the profits of VAT- or obligation.
registered persons
• Property dividends in the form of Examples:
stocks in trade or properties
• Condominium given to the architect
primarily held for sale or lease
as payment for architectural
(under current rules, including
services
those used in business
• Land held for sale (realty company)
• VAT base: zonal value or FMV at
transferred in payment of
the time of distribution, whichever
backwages and separation pay of
is applicable
employees

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Transactions Deemed Sale
BIR Ruling DA-297-05
Floors of a building (owned by the company and used in business)
contributed to the employees retirement fund is not subject to VAT

– Not a sale, barter or exchange of taxable goods made in the

course of business
– Not deemed sale transaction
• Not a payment to a creditor
• A transfer in the course of business

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Transactions Deemed Sale
4. Consignment of goods if 5. Retirement from or cessation of
actual sale is not made business – all goods on hand
within 60 days following the shall be deemed sold
date such goods were
consigned.  whether capital goods, stock-
in-trade, supplies or materials
– Consigned goods returned as of the date of retirement
by the consignee within  whether or not the business
the 60-day period are not is continued by the new
deemed sold. owner or successor

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Transactions Deemed Sale
People of the Philippines v. Katherine M. Lim and Edelyn Coronacion, CTA
Criminal Case No. 0-113, December 12, 2011

– The closure of a business and/or cessation of one’s business

operations does not automatically imply or result in the absence of
inventories or properties, which may be subjected to VAT under Section
106 of the Tax Code.

– The Tax Code considered “retirement of business” relative to the

“inventories of taxable goods existing as of such retirement or
cessation” as “transaction deemed sale” subject to VAT, because the
law contemplates the eventual sale and disposal by the taxpayer of its
remaining goods.

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Transactions Deemed Sale

– In the same vein, the CTA further explained that foreclosure and public
sale of one’s properties do not necessarily mean non-existence of taxable
goods in the absence of proof to the contrary.

– Existence of “inventories” and property, plant and equipment, as reported

in the financial statements of the company, despite that the company’s
remaining inventories were already disposed in favor of its erring
employees, is evidenced of existence of inventories which may be subject
to VAT.

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Transactions Deemed Sale
Retirement from or cessation of business

i. Change of ownership of the business

 a single proprietorship incorporates
 the proprietor of a single proprietorship sells his entire business.

ii. Dissolution of a partnership and creation of a new partnership

which takes over the business

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Transactions Deemed Sale
Conversion of a branch to a wholly owned subsidiary = retirement from
business

Transfer of assets in the branch in exchange for shares of the

subsidiary is generally VATable
– goods on hand whether capital goods, stock-in-trade, supplies or
materials as of the date of the reorganization – VATable
– real property not held for sale or lease (1985 & 1991 ruling) -
exempt

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Transactions Deemed Sale
Closure of branch:
– There is no change in ownership or retirement or
cessation of business in case of closure of a branch.
– Hence, closure of a branch should not be
considered “deemed sale”.
- BIR Ruling No. DA-358-03

Rule: All assets of the branch as of dissolution shall be deemed

sold.

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 VAT Base

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VAT Base

Sale of goods:
Gross Selling Price

Total amount of money or its equivalent which

the purchaser pays or is obligated to pay to the
seller in consideration of the sale, barter or
exchange of the goods or properties, excluding
VAT, but including the excise tax, if any.
(Section 4.106-4, RR 16-05, as amended)

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VAT Base: Sale of Real Properties

Sale of real properties

Gross Selling Price

Gross selling price (GSP) - consideration stated in

the sales document or the fair market value (FMV)
whichever is higher.

Where: FMV = higher of zonal value, FMV in schedule

of values of the local Assessors (real property tax
declaration)
If no zonal value, GSP is MV in latest RPT declaration

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Basis of VAT
Basis of VAT for transactions deemed sale –

1. market value at the time of the transaction

2. in the case of retirement of business – acquisition cost or the
current market price, whichever is lower
3. where the gross selling price is unreasonably lower than the
FMV – the actual market value

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Sale of real properties

• If GSP is based on the zonal value or

market value of the property, the
zonal or market value shall be deemed
exclusive of VAT.

• If the VAT is not billed separately, the

selling price stated in the sales
document shall be deemed to be
inclusive of VAT.

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Sale of real properties
• VATable sale of real property
– held primarily for sale to customers or
– held for lease in the ordinary course of trade
or business of the seller
• Installment sale – output VAT due on every
installment payment, including interest and
penalties, actually and/or constructively received
by the seller.
• Deferred-payment - treated as cash sale and
entire selling price taxable in month of sale

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VAT base on sale of services: Gross Receipts
Sale of Service
Gross Receipts
‘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.
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VAT base: lease of property
Lease of Property
Gross Receipts

Gross rental as appearing in the contract of lease, including advance payment

in the nature of pre-paid rent (VATable in the month received) and security
deposit (VATable at the time of application to rental)

If advance payment is a loan to lessor, or option money for the property, not
subject to VAT.

(Note: Lease of property located in the Philippines subject to VAT regardless of the place
agreement was executed)

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Allowable deductions from gross
selling price
1. Discounts – deductible from gross sales within the
same month or quarter it was given.
Conditions for deductibility

A. Determined and granted at the time of sale;

B. Grant not dependent upon the happening of a future event;
C. Expressly indicated in the invoice; and
D. Amount forms part of the gross sales recorded in the
books.

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Discounts
Non-deductible discounts
1. Prompt payment discount
(BIR VAT Ruling No. 068-91, July 05, 1991; Goldstar
Philippines Sales Corporation v. CIR, CTA Case No. 5715,
May 11, 2004)

2. Rebates for meeting pre-set monthly quota

(BIR VAT Ruling Nos. 204-90, October 1, 1990 and 224-
89, September 6, 1989)

3. Volume, bulk or quantity discount

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Allowable deductions from gross selling
price

2. Sales returns and allowances - deductible from

gross sales or receipts in the month or quarter in
which the refund is made or the credit memorandum
or refund is issued for sales previously recorded as
taxable sales. (Sec. 4.106-9, RR 16-05)

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 PROCEED TO VAT
REGISTRATION & INVOICING

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