. ei ae ——h Chapter 3 VALUE-AD| DED TAX ON SALE OF SERVICES Preliminary Statements. Garvie ervice is Subject to the value-added tax if: (a) Service is ii ier Sonic is in the course of trade or business; (c) Service is rendered in the Philippines; Not subject to any of the percentage taxes. ‘SALE OR EXHANGE OF SERVICES”. Its meaning. “Sale or exchange of services” means the performance of all kinds of services in the Philippines for others for a fee, remu- neration or consideration (but there must be no employer-em- ployee relationship). A taxpayer may, however, in his registered business, have two lines of taxable activities, one subject to the value-added tax and another subject to a percentage tax (See Figure 3-2). IMustration 3-1. A lease contract entered into in the Phi- lippines by a citizen of the Philippines who is a dealer in real estate, for use of an apartment in New York, U.S.A. by a citizen of the Philippines, is not subject to the value-added tax. Lease is a sale of services (by definition in the law). But the services were not rendered in the Philippines. What businesses can one see around that are subject to the value added tax? Examples are: (a) Hotels, motels, inns, pension houses and resorts; (b) Restaurants, cafes and other eating places; (c) Security agencies; (d) Warehouses; (e) Forwarders (0On forwarding of cargoes); (f) Lessors of properties, real or personal. (For statutory definition and enumeration, see Figure 3-1) and Transfer Taxes 341 ‘A Study on Business Taxesigure 3-1. Statutory definition and enumeration of sale of services, servites (in the course of trade or business) includes those per- Sale of I red by (statutory provision): formed or rende! {@) Construction and service contractors: ee (b) Stock, real estate, commercial, customs and immigration brokers; {¢) Lessors of property, whether personal or real; (d) Warehousing services; (e) Lessors or distributors of cinematographic films; {9 Persons engaged in milling, processing, manufacturing or repack- ing of goods for others; (g) Proprietors, operators, or keepers of hotels, motels, resthouses, pension houses, inns, resorts; tors of restaurants, refreshment parlors, cafes (h) Proprietors or operat and other eating places, including clubs and caterers; () Dealers in securities; (j) Lending investors; (k) Transportation cont including persons who transport good: domestic common carriers by land, 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, (m) Sales of electricity by generation companies, tribution companies; (n) Services of franchise grantees of electric utilities, telephone and telegraph, radio and television broadcasting and all other franchise grantees, except those under Section 119 of the National Internal Revenue Code who are subject to percentage tax; (0) Non-life insurance companies (except their crop insurances), in- cluding surety, fidelity and bonding companies; © (p) Similar services regardless of whether or not the perform- ance thereof calls for the exercise or use of the physical or mental faculties. (q) The lease or the 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 and other like property or right; (1) The lease or the use of, or the right to use of any industrial, com- mercial or scientific equipment, (s) The supply of scientific, technical, industrial or commercial know- ledge or information; tractors on their transport of goods or cargoes, is or cargoes for hire and other relative to their transport of transmission, and dis- A Study on Business Taxes and Transfer Taxes 32(Q) The supply of any assistance that is aneilla i is furnished as a means of enabling the sppicalln | or antes ee any such property, of right as is enumerated in letter (0 her eae any such knowledge or information as is mentioned in eae: ragraph (3); Me (u) The supply of services by a non-resident person or hi connection with the use of property or rights polonging tot or the fratallation or operation of any brand, machinery or other apparatus purchased from such non-resident person; (v) 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; (w) The lease of motion picture films, tapes and discs; of or the right to use radio, television, satellite (x) The lease or use transmission and cable television time. “similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or ‘mental faculties” (para- p) is very broad in its import and application, to include all kinds by whatever name they may be called or described, for a fee, reentage tax on the services. of services, in the Philippines, provided thi is no pel MMON CARRIERS. PERCENTAGE TAX ON COI ye tax of domestic carriers? Figure 3-2. Value-added tax or percentag Common carrier by land: Transporting goods or cargoes 12% Value-added tax 3% Common carrier's tax Transporting passengers Common carriers by air or sea: From one point in the Philippines to another point in the Philippines Transporting goods or cargoes 42% Value-added tax Transporting passengers 12% Value-added tax From one point in the Philippines to a point outside the Philippines Transporting goods or cargoes 0% value-added tax 0% value-added tax Transporting passengers A Study on Business Taxes and Transfer Taxes =tion 3-2. B Transport Co. is a domestic corporation in | bi f ; | ad transportation business in Luzon, Philippines, trans. | ood people and cargo from southern Philippines to northern | Pnilippines, rand vice versa. Ina day, it had the following gross | receipts: | For transporting passengers 200,000 | For transporting cargoes 50,000 | Total ; 250°000, | What were the business taxes involved? 100 x 3%) P 6,000 Common carrier's tax (P200,01 é 6,000 | Gomaradded tax — Output VAT (P50,000 x 12%) — P 6,000 IMustration 3-3. C Shipping Co., a domestic corporation, has interisland vessels in the Philippines transporting passengers (from one point in the Philippines to another point cargoes i or Pniippines). In one trip, it had the following gross re- ceipts: ‘ ae eterpois 500,000 Fe ae 400,000 Lite P600,000 What were the business taxes involved? ~ Common carrier's tax (P500,000 x 12%) P 60,00 Value-added tax — Output VAT (P100,000 x 12%) P 100 iustration 3-4. D Overseas Shipping is a domestic corpora- tion, transporting passengers and cargoes from one point in the Ia iS E Philippines to a point abroad, and vice versa. In one voyage, it had the following gross receipts: , For transporting passengers 2,000,000 For transporting cargoes 1,000,000 Total P3,000,000 What was the business tax involved? Value-added tax — Output VAT (P3,000,000 x 0%) P. 0 PROBLEMS. Solve problems 3-1 to 3-3. . THE TAX BASE. The tax base of the value-added tax on sale of ser- vices is gross receipts. (See Figure 3-3.) A Study on Business Taxes and Transfer Taxes 34The term “gross receipts” me: ans cash i i actually received or constructively received (not a sities value-added tax) as: tee (a) Payments on the contract price, compensation, service fee, rental or royalty; (b) Payments for materials supplied with the services; and (c) Deposits or advanced payments on the contract for ser- vices. Constructive receipt occurs u when the money consideration or its equi- valent is placed in the control of the person who rendered the service without restriction by the payor. Examples are: (a) Deposits in banks which are available to the seller of services, without restriction; (b) Issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof by the seller as payment for the services rendered; (c) Transfer of amount retained by the owner to the account of the contractor. The tax is on Mustration 3-5. Mr. Ais a building contractor. In construct- cash received. ing a building, he furnished labor and was paid a contract price of 1,100,000, VAT not included. The taxable gross re- ceipts is P14 100,000. The output value-added tax is P132,000 Receivables, are not taxable (P1,100,000 x 12%). Ilustration 3-6. Mr. Bis a building contractor. . In construc- ting a building, the contract price collected, VAT not included, were for: Taxable gross Materials 3,300,000 receipts include Labor 4,100,000 gross receipts ‘Total 4,400,000 for materials fur- , \ nished with the The taxable gross receipts is 4,400,000. The output value services added tax is 4,400,000 x 12%, or 528,000. Illustration 3-7. A building contractor received a payment ress of P2,200,000 (based on the In addition, he ‘ona construction in prog! eof the contract ‘Advances on the percentage ‘of completion of the building). contract, although received 220,000 advance on the balance 2 not yet eamed, price, on work still to be done. All the amounts mentioned are are already taxable VAT not included. The taxable gross receipts is 2,420,000. The output value-added tax is (P2,420,000 x12%) P290,400. gross receipts IMustration 3-8. Mr. D, a building contractor, had a contract AStudy on Business Taxes and Transfer Taxes 35ie of P5,000,000, value-added tax not included, on contract with Mr. E. Mr. E paid P4,800,000 as he balance of P200,000 as guaranty against de- fects of the building that may be discovered within one year fer the date of completion of the construction. The taxable orm receipts of Mr. O is P4,800,000, and the output value- eded tax at 12% is P576,000. recoivabl ‘a. building © retained the Can there be sales discounts and sales retums and al- lowances that will reduce the gross receipts? Yes. mustration 3-9. In services provided, with materials fur- nished, payments on it were received already by the VAT tax- payer, but the buyer of the services returned some of the materials, the gross receipts of the VAT taxpayer will be re- duced by the peso value of the sales returns. IMustration 3-10. In services provided, payments on which were received already by the VAT taxpayer, but the buyer of the services complained on the quality of the work done, and there was a downward adjustment on the price for the services (allowance), the gross receipts will be reduced by the sales al- lowance. THE TAX RATES. (a) Twelve percent (12%) of the gross receipts; (b) Zero percent (0%) of the gross receipts from services per- formed to certain entities under certain conditions (provided in the law). THE TAX FORMULA. Output taxes (seller’s value-added tax on sales) Less: Input taxes (seller's value-added taxes on purchases) Value-added tax payable by the seller (See Figure 3-3) What are the input taxes? They are: A Sludy on Business Taxes and Transfer Taxes : 36Value-added taxes paid: On local purchases from VAT registered t on importation of goods: axpayers, and (a) For materials, supplied with the sale of services; (b) For use as supplies; een (c) For use in trade or business for which i (or amortization) is allowed for income ag ‘migaaes (capital goods), except automobiles, aircraft and yachts (See Chapter 5); Value-added taxes paid on purchase of real property; Value-added taxes paid on purchase of services; Transitional input tax (See page 5-8). Figure 3-4. Tax formula. Mustration. Mr. H, a build- Output taxes ing contractor, constructed a commercial building for Mr. |. Input taxes He secured the services of Mr. J. Mr. | paid P10,000,000 to Mr.H. Mr. H. paid Mr.J, a Real nranarhy Materials] subcontractor, P2,000,000. All. prices - were VAT not Saninas included. Mr. H has an out- put tax of P1,200,000 and an ‘Traneitinnal mana] input tax of P240,000, or a a value-added tax payable of 960,000. Value-added tax payable is a building contractor. He cons- for which he made a final billing ‘on October 20, 2019 of P6,000,000, VAT not included, for d. On that billing, he received materials used, and labor applie of billing, with the balance 5,000,000 cash on the date received on October 29. Payments in October 2019 related to Mustration 3-11. Mr. K i tructed a building for Mr. L, construction were: Materials purchased on October 12, 2019, value-added tax not included P 1,000,000 Labor furnished by a sub-contractor, paid on on 10 October 30, VAT not included How much was the value-added tax payable for October, 37 ‘A Study on Business Taxes and Transfer TaxesWhen the gross receipt was sub- 20197 P504,000, computed as follows: output tax (P6,000,000 x 12%) 720,000 Less: Input taxes ~ ‘On materials purchased (P1,000,000 x 12%) P120,000 chased tee00 600 x 12%) 96,000 216,000 Value-added tax payable, October P504,000 tustration 3-12. Mr. Lis in the business of repairing mo- antes, furnishing labor only, or both labor and parts. tor vehicles | For one month, he had the following data, value-added tax not included: ‘Amounts received as advances on cars to be repaired and repainted P 11,000 ‘Amounts received for cars repaired, repainted, finished and delivered to owners: For labor p 110,000 For parts (purchased from automobile parts VAT- registered dealers) 33,000 The parts were billed to the customers at the invoice prices of the parts dealers. Amounts paid to machine shops for re- grinding, reboring and other machine shop jobs on car en- gines amounted to P44,000, value-added tax not included. Amounts paid to suppliers of paints amounted to P22,000, value-added tax not included. The value-added tax payable for the month would have been computed, as follows: Cash received as advances P 11,000 Cash received for work completed: For labor 110,000 For parts 33,000 Total amount received P 154,000 Output taxes (P154,000 x 12%) P 18,480 Less: Input taxes — On parts purchased (P33,000 x 12%) P_ 3,960 On services of machine shops (P44,000 x 12%) 5,280 On paints purchased (P22,000x 12%) 2,640 11,880 Value-added tax payable P 6,600 Mlustration 3-13. Mr. AB is a Certified Public Accountant in Practice of public accounting. He is a VAT-registered taxpay- A Study on Business Taxes and Transfer Taxes 38ject fo withholding _ yer. Data for a taxable month, value-added tax not included income tax, deter- mine the gross re- receipts before withholding tax by dividing the amount received by the rate of withholding tax Professional fees: Received, net of a 10% withholding income tax ‘on the gross professional fees Receivables Reimbursements received on advances for clients: Expenses chargeable to client, billed to clients Expenses chargeable to client, billed to Mr. AB Purchase of computer from VAT taxpayer Purchase of office supplies from VAT taxpayer Payments for water from VAT supplier Payments for electricity from VAT taxpayer Payments to the PLDT Salaries of office personnel Other expenses of operations: Paid to VAT taxpayers Paid to non-VAT taxpayers 180,000 300,000 20,000 6,000 70,000 1,000 10,000 20,000 5,000 25,000 3,000 8,000 The computation for the value-added tax payable would be: Output taxes: On professional fees received: (P180,000/90%) 200,000 (P200,000 x 12%) On reimbursements received from clients for expenses chargeable to clients, billed to Mr. AB (P6,000 x 12%) Total Less: Input taxes: On expenses chargeable to client, billed to Mr. AB (P6,000 x 12%) P 720 Purchase of computer (P70,000 x 12%) 8,400 Purchase of office supplies (P1,000 x 12%) 120 Purchase of water (P10,000 x 12%) 1,200 Purchase of electricity (P20,000 x 12%) 2,400 Payments to PLDT (P5,000 x 12%) 600 Payments for other expenses of ope- rations, paid to VAT taxpayers (P3,000 x 12%) 360 Value-added tax payable A°Study on Business Taxes and Transfer Taxes P 24,000 720 P 24,720 13,800 P 40,920 39PROBLEMS. Solve problems 3-4 to 3-7. Withholding of value-added tax. The Government or any of its political subdivisions, ins- trumentalities or agencies, including government-owned or controlled corporations will, before making payment on ac- count of services rendered by contractors which are sub- ject to value-added tax, deduct and withhold a final with- holding value-added tax at the rate of five percent (5%) of the gross payment. When a sale is subject the above rule, such sale i toa final value-added tax under is not included anymore in the month-end and. quarter-end computations for the value- added tax payable. The tax withheld will be considered a cost or an expense by the seller. A Study on Business Taxes and Transfer Taxes 310PROBLEMS 4-1. The X Co. is @ holder of franchise to operate transportation units by fand from point fo point in the Philippines. It had the following data for a month, any tax not included: Gross receipts from transporting cargoes 1,000,000 Gross receipts from transporting passengers 2,000,000 Payments to VAT suppliers and providers related to the business of transporting cargoes 300,000 Payments to VAT suppliers and providers related to the business of transporting passengers 700,000 Value-added tax payable? is 3:2. The Y Co. is a common carrier with air and sea transportation units, transporting cargoes and passengers from point to point in the Philippines. ithad the following data in a month, any tax not included: Gross receipts: For transporting cargoes 3,000,000 For transporting passengers 4,000,000 Payments to VAT suppliers of materials and service providers 3,000,000 Payments to non-VAT suppliers of materials 500,000 Value-added tax payable? 3-3. The Z Co. is a common carrier with air and sea transportation units transporting cargoes to points abroad. Data in a month, value-added tax not included: { Gross receipts: For transporting cargoes 5,000,000 For transporting passengers 5,000,000 Payments to VAT suppliers of materials and service providers 4,000,000 Payments to non-VAT suppliers of materials 2,500,000 VAT tax consequence of the operations? 3-4.Mr: A is a building contractor. In a month, he had the following data, VAT not included: From a contract price of P2,000,000 Cash received ‘800,000 | A Study on Business Taxes and Transfer Taxes 3-11aoe Receivable Cost of materials from VAT suppliers Cost of services from VAT providers How much ts the value-added (8X Pays le? is constructing three tractor, Is ja h, VAT not included, 3-5.B Co., a building mont buildings, with data in as follows: Building No. 1, complet owner - ‘i 4 Contract price of P5,000,000, with prévious collections of 2,000,000 Collected during the month + Retention by the property owner : Building No. 2, nO ‘work done yet: For a private roperty owner — eon of P4,000,000 Contract price 0 : Advances on the contract price during the ed: For private properly month Purchases from VAT suppliers during the month: For Building No. 1: Materials Sub-contractors — for labor Tools and parts replacements for const- truction equipment iS Value-added tax paid for the month? 3-6.For services rendered, VAT not included: Gross receipts Cost of materials — From VAT suppliers From non-VAT suppliers Cost of services — + From VAT service providers From non-VAT service providers Cost of fixed asset purchased from VAT supplier Value-added tax payable? Value-added tax payable? UM RG a cha Public Accountant. He had lowing data ina VAT taxabl & not included: nual In contracts for professi ices: nee professional services: A Study on Business Taxes and Transfer Taxes 4,200,000 300,000 200,000 2,800,000 200,000 1,000,000 2.500,000 4,000,000 10,000 P2,000,000 600,000 400,000 100,000 80,000 800,000 200,000 3-12