VALUE ADDED

TAX
 • The VAT covers all sales of goods, properties, services, or
lease of properties other than:
1. VAT-exempt sales; and
2. Services specifically subject to percentage tax.

The scope of • VAT is a consumption tax imposed on:

VAT on sales 1. Sale, barter, exchange, or lease of goods, properties, and

services in the cOurse of trade or business in the Philippines;
and
2. Importation of goods into the Philippines, whether or not in
the course of trade or business.

VAT THRESHOLD: Any business providing taxable supplies in

Philippines is liable to VAT registration if their sales
exceed PHP 3 million per annum. There is a voluntary VAT
registration option.
Provided, however, that the seller must be a VAT-registered person or a VAT-registrable person. A registrable person or those who
exceed the VAT threshold (P 3, 000, 000.00 per annum) are subject to VAT even if not registered as VAT-taxpayer. On the other
hand, a VAT-registered person will be subject to VAT even if its annual sales do not exceed the VAT threshold.

According to an advisory released by BIR, All VAT-registered taxpayers which includes self-employed individuals and/or
professionals whose total gross sales/receipts and other non-operating income do not exceed the new VAT threshold of
P3,000,000 in the preceding year, may elect to change his/her status from VAT to Non-VAT by filing a duly accomplished BIR Form
No. 1905, Application for Registration lnformation Update, tothe Revenue District Office (RDO) having the jurisdiction of the Head
Office of the concerned taxpayers on or before March 31, 2018, following the existing procedures on updates of registration
(Bureau of Internal Revenue, Tax Reform for Acceleration and Inclusion (TRAIN), 2019)

llustration:

a. ABC Company is a VAT-registered taxpayer with sales not exceeding the VAT threshold in any 12-month period. The company
shall pay VAT on its VA Table sales or receipts regardless if it is below the threshold because it is a VAT-registered taxpayer.

b. Mr. X, a non-VAT registered taxpayer, exceeded the VAT threshold in August 2x19. He reported a P200,000 sales in September
2x19. Mr. X shall pay VAT on his sales effective September 2x19.
Application
Taxpayers with Mixed Types of Sales

A department store had the following sales for the 12-month period:

Fruits and vegetables 800, 000

Groceries 800, 000
Clothes, shoes, and other apparels 600, 000
Furniture 400,000
TOTAL 2, 600, 000

Since the total of the VATable sales is below the VAT threshold, the department store is not required to
register as a VAT taxpayer. Consequently, it may Continue paying the 3% percentage tax on these VATable
sales until it exceeds the threshold.
Taxpayers with Multiple Businesses

As of September 2x19, Mr. Jose had the following gross receipts from his professional practice and his other
businesses in the immediately preceding 12 months:

Gross receipts from the restaurant 2, 000, 000

Gross receipts from the barbershop 1, 000, 000
Gross receipts from professional practice 1, 000, 000
Total 4, 000, 000

Since the total of the VATable sales exceeds the VAT threshold, the Mr. Jose is required to register as a VAT
taxpayer.
 Output Output VAT P XXXX

Input Less: Input VAT XXXX

Vat Tax Model Net Net payable VAT PXXXX

Tax Less: Tax credits XXXX

Tax Tax Payable or Overpayment XXXX

 • The output VAT is the VAT passed on to customers or clients by a VAT taxpayer
on his sales to customers. It is collected and treated as current tax liability of
the seller taxpayer (Banggawan, 2015).

• The output VAT can only be imposed and recognized when:

1. There is a sale (actual or deemed sale); and

2. The seller-taxpayer is VAT-registered.
Output VAT and
its types • The output VAT may be subject to different rates, as follows:

1. Regular Output VAT - This is computed as 12% on domestic sales, which

includes:
Sellers of goods or properties - Gross selling price; and
Sellers of services or lease of properties Gross receipts.
2. Zero-rated Output VAT This arises from the export sales, zero-rated sales, and
effectively zero-rated sales (Sec. 106, NIRC).
 • Input VAT is the VAT paid on the local purchases of
goods or services, including the lease or use of
property from a VAT-registered person. It also
includes VAT paid on the importation of goods or
services by the taxpayer.
• This may also arise from incentives provided by
law, such as the transitional input VAT and the
Input VAT presumptive input VAT (Banggawan, 2015).
• If the output VAT is treated as current liablity, note
that the input VAT is to be treated as a current
asset of the taxpayer-seller because it is an
advance payment of VAT.
• The input VAT is usually applied as tax credit
against the output VAT to compute the net VAT
payable.
Classification of Sales for VAT purpose

a) VAT Exempt Sales

• Exempt sales of VAT- taxpayers refer to sales of (a) exempt goods, services, or
properties, and (b) services specifically subject to percentage tax. These sales will not
be subject to output VAT. Consequently, the seller will not be allowed to credit input
VAT.
• Further, the input VAT traceable to exempt sales is part of the costs or expenses of
the seller and is deductible against gross income subject to income tax.
b) Zero-Rated Sales

Zero-rated sales are the sale of goods or services to non-residents. These include:

a. Export sales of goods or services: and

b. Other sales conferred with zero-rating status by law.

A zero-rated sale of service (by a VAT-registered person) is a taxable transaction for VAT purposes but not
result in any output tax. However, the input tax on purchases of goods, properties, or services related to
such zero-rated sale shall be available as tax credit or refund in accordance with the Tax Code.

If claimed as tax refund, the taxpayer will recover cash. If claimed as tax credit, a Tax Credit Certificate will
be issued, which can be used as tax credit against any other internal revenue taxes aside from VAT.

If the input VAT on zero-rated sales is not claimed through any of the two (2) alternatives, it is credited as
output VAT at the end of the month.
Zero Rated Sales shall be computed ass follows
Illustration: A VAT-registered person exported goods for P400,000.
These goods were purchased for P200,000, exclusive of P24,000 input
VAT

OUTPUT VAT 0%
INPUT VAT 24, 000
VAT PAYABLE - 24, 000 (may be claimed as tax credit or tax refund)
c) Sales to Government and Government-Owned and Controlled Corporations (GOCCs)

The sale to government and government-owned and controlled corporations (GOCCs) is subject to a 5% final
withholding VAT at source, on sales. Please note that government agencies are required to withhold 5% VAT on
VATable transactions.

Section 114(C) of the Tax Code, as amended, provides the following:

\
"(C) Withholding of Value-added Tax. - The Government or any of its political subdivisions, instrumentalities or
agencies, including government-owned or -controlled corporations (GOCCs) shall, before making payment on
account of each purchase of goods and services which are subject to the value-added tax imposed in Sections 106
and 108 of this Code, deduct and withhold a final value-added tax at the rate of five percent (5%) of the gross
payment thereof: Provided, That the payment for lease or use of properties or property rights to nonresident
owners shall be subject to twelve percent (12%) withholding tax at the time of payment: For purposes of this
Section, the payor or person in control of the payment shall be considered
as the withholding agent.“

The 5% final withholding VAT is presumed the VAT payable of the seller. Consequently, the seller need not pay
further VAT on the sale. Because of this, the claimable input VAT of the seller is effectively set by the law at only
7% (12%-5%) of gross sale to the government or GOCCs.
The VAT on sales to Government is
computed as follows
• A VAT registered person sold goods to the Government agenty for P400, 000. These goods were
purchase for P336, 000, including P36, 000 input VAT.

OUTPUT VAT (400, 000X12%) P 48, 000

StandaRD Input VAT ( 7% x 400, 000) P 28, 000
Witheld Final VAT (5% x 400, 000) P20, 000
Less: TOTAL INPUT VAT P48, 000
VAT DUE 0
d. Regular Sales
Regular sales pertain to sales other than exempt sales, sales to the government or GOCCs, and export
sales.

Ilustration: A taxpayer made sales of P1,000,000 exclusive of P120,000 output VAT, and purchases of
P800,000 exclusive of P96,000 input VAT.

OUTPUT VAT (P1, 000, 000.00 X 12%) P120, 000

LESS; INPUT VAT P96, 000
VAT PAYABLE P24, 000
 Table of summary: Comparison of OUTPUT VAT and INPUT VAT

Types of Sale Output VAT Claimable Input VAT VAT Payable

a) Exempt Sale -none- -none- -none

b) Zero Rated Sale Zero Actual Negative

c) Sales to Government 12% of sale/receipts 7% of sales/receipts -none-

d) Regular Sales 12% of sale/receipts Actual Positive

 • Sales of Registrable Persons - These sales are
subject to VAT even with non-registration as VAT
taxpayers, but no input VAT credit is allowed.
• Sales of Non-VAT Taxpayers Issuing VAT Invoice or
Receipt - These are sales illegally charged with VAT
by non-VAT taxpayers. These sale transactions shall
Other VATable be subject to VAT without the benefit of input VAT
plus the 50% surcharge and the usual 3%
Sales percentage tax.
• Exempt Sales Billed by VẬT Taxpayers as Regular
Sales - These are exempt sales that are billed
through a VAT invoice or VAT receipts, which are
considered regular sales. Also, exempt sales which
are not clearly categorized as 'exempt' in the VAT
invoice or VAT receipts shall be considered as
regular sales subject to VAT.
EXEMPT SALES
The Concept of Exempt Sales

Exempt sales are exempt consumption of goods, properties, or services from

domestic sellers. Exempt sales are not subject to Value-added Tax (VAT) and Other
Percentage Tax (OPT). Hence,

a. VAT taxpayers making the exempt sale of goods, properties, or services shall not
bill any output to their customers because the sale is not subject to VAT.

b. Accordingly, these transactions are entitled to claim any credit for the actual
input VAT paid during the period.

c. A non-VAT person making exempt sales shall not be subject to the 3% percentage
tax on the sale
LIST OF
EXEMPT
SALES
The following transactions shall be exempt from VAT under Section 109 of the NIRC as amended by TRAIN
Law:

a. Sale or importation of agricultural and marine 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 therefor.

Products considered to be in their 'original state' means unprocessed. Agricultural or marine food products are
still considered in original estate even if they have undergone simple processes of preparation or preservation
for the market, such as freezing, drying, salting, broiling, roasting, smoking, or stripping.

Provided that the food is generally used for human consumption.

- Livestock or poultry does not include fighting cocks, racehorses, zoo animals, and other animals generally
considered as pets.
-Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt, and copra shall be
considered as agricultural products in their original state.
-Bagasse, the dry pulpy residue left after the extraction of juice from sugar cane, used as fuel for electricity
generators, etc., is not included in the exemption provided for under this section.
b. Sale or importation of fertilizers, seeds, seedlings and fingerlings, fish, prawn, livestock, and poultry feeds,
including the ingredients used in the manufacture of finished feeds, except for specialty feeds.

Specialty feeds refer to food for racehorses, fighting cocks, aquarium fish, zoo animals, and other animals
generally considered as pets.

For the sale or importation of certain feed ingredients (whey powder, skimmed milk powder, lactose, buttermilk
powder, whole milk powder, palm olein) and such other feed ingredients and additives which may be hereinafter
be determined by competent authority to have possible utilization for human consumption, there must be a
showing that the same is unfit for human consumption or that the ingredient cannot be used for the production
of food for human consumption as certified by the Food and Drug Administration (FDA). [RMC 55-2014 as revised
by RMC 66-2014 and RMC 78-2014]
c. Personal and household effects of persons coming to settle permanently in the Philippines returning from
abroad and non-resident citizens coming to resettle in the Philippines. Provided, that such goods are exempt
from custom duties under the Tariff and Custom Code of the Philippines.

• Returning Resident - Filipino nationals who have stayed in a foreign country for a period of at least six (6)
months (Philippine Consulate General, 2019).

Personal and household effects belonging to returning residents including household appliances, jewelry,
precious stones, and other goods of luxury which were formally declared and listed before departure and
identified before the District Collector when exported from the Philippines by such returning residents;
personal and household effects including wearing apparel, goods of personal adornment, toilet goods,
instruments related to one's profession and other personal and household effects of the same kind except
luxury items. Returning residents shall have tax and duty exemption on personal and household effects
provided that (Philippine Consulate General, 2019):
PROVIDED:

• It is not in commercial quantity;

• It is not intended for barter, sale or hires; and

• Limited to the value of:

1. Three hundred fifty thousand pesos (P350,000.00) for those who have stayed in a foreign country for at least
10 years and have not availed of this privilege within the 10 years prior to returning resident's arrival;

2. Two hundred fifty thousand pesos (P250,000.00) for those who have stayed in a foreign country for at least five
(5) years, but not more than 10 years and have not availed of this privilege within five (5) years prior to returning
resident's arrival;

3. One hundred fifty thousand pesos (P150,000.00) for those who have stayed in a foreign
cOuntry for less than five (5) years and have not availed of this privilege within six (6) months
prior to returning resident's arrival.
•Overseas Filipino Workers (OFWs) – Holders of valid passports issued by the Department of Foreign Affairs (DFA) and
certified by the Department of Labor and Employment (DOLE) or the Philippine Overseas Employment Association (POEA)
for overseas employment purposes. They cOver all Filipinos working in a foreign country under an employment contract
(Philippine Consulate General, 2019).

In addition to the privileges granted to Returning Residents as described above, an OFW may be allowed to bring in, tax and
duty - free honme appliances and other durables, limited to one (1) of every kind once in a given calendar year
accompanying them on their return or arriving within sixty (60) days after every OFVWs return providing further that it shall
not exceed the value of one hundred fifty thousand pesos (P150,000.00).

Residents of the Philippines, OFWs, or other Filipinos while residing abroad or upon their return to the Philippines shall be
allowed to bring in or sent to their families and relatives in the Philippines balikbayan boxes which shall be exempt from
applicable duties and taxes imposed under the NIRC of 1997; provided that (Philippine Consulate General, 2019);

1. Balikbayan boxes contain personal and household effects only and shall not be in commercial quantities nor intended for
barter, sale or for hire;
2. t shall not exceed one hundred fifty thousand pesos (P150,000.00):
3. This privilege availed of up to three (3) times in a calendar year; and
4. Any amount in excess of the allowable non-dutiable value shall be subject to applicable duties and taxes
d. Importation of professional instruments and implements, tools of the trade, occupation or employmernt,
wearing apparel, domestic animals, and personal household effects belonging to:

- Persons coming to settle in the Philippines; or

- Filipinos or their families and descendants who are now residents or citizens of other countries, such parties
hereinafter referred to as overseas Filipinos,

i. In quantities and of the class suitable to the profession, rank or position of the persons importing
said items;

ii. For their own use;

ii. Not for barter or sale; and

iv. Accompanying such persons or arriving within a reasonable time.

- It shall be exempt from payment of Customs duties and taxes provided that the bureau may, upon the
production of satisfactory evidence that such persons are coming to settle in the Philippines and that the goods
are brought from their former place of abode except for vehicles, aircraft, and machinery.
e. Services subject to other percentage taxes under the new Tax Code of the Philippines

f. Services by agricultural contract growers and milling for others of palay into corn rice, corn into grits, and
sugar cane into raw sugar.

Agricultural contract growers are the persons producing for others' poultry, livestock or other agricultural
and marine food products in their original state.

Illustration: John has contracted PureBeef, distributor of beef and pork meat products, to raise cows and hogs.
John shall be paid a fixed contract price for the undertaking.

John is an agricultural contract grower. The contract price received by John from PureBeef is exempt from
business tax. The sale of PureBeef of its meat products is also exempt from business tax.

g. Medical, dental, hospital, and veterinary services, EXCEPT those rendered by a professional The sale of health or
hospital services is not subject to business tax. This rule applies to all health services whether rendered by a private,
non-profit, or government hospital. Health services rendered by professionals and the sale of drugs are VATable.
h. Educational services rendered by private educational institutions, duly accredited by the Department of
Education (DepEd), the Commissions on Higher Education (CHED), the Technical Education and Skills Development
Authority (TESDA), and those rendered by the government educational institutions.

The exemption does not include seminars, in-service training, review classes and other similar services rendered
by educational institutions that are not accredited by DepEd, CHED, and/or TESDA.

i. Services rendered by individual pursuant to employer-employer relationship.

j. Services rendered by regional or area headquarters established in the Philippines by multinationa

corporations that act as supervisory, communications and coordinating centers for their affiliates
subsidiaries or branches in the Asia-Pacific Region and do not earn or derive income from the Philippines.

A regional or area headquarters (RAH or RHQ) is an integral part of the multinational corporation. It is not a
separate business or branch, but an administrative office which does not derive income on its own; hence, it is not
subject to business tax. However, a regional operating headquarters (ROHQ) is taxable.
k. Transactions which exempt under international agreements to which the Philippines is a signatory under special
laws (e.g., entitlement of a VAT-registered PEZA Enterprise to refund or credit for input VAT), except those under
Presidential Decree No. 529 that grant Petroleum Exploration Concessionaires exemption from Customs Duty and
Tax of Importation Machinery required for their Exploration Operation

l. Importation by agricultural cooperatives of direct farm inputs, machinery., and equipment, including spare parts
thereof, to be used directly and exclusively in the production and/or processing of their produce

m. Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the
Cooperative Development Authority (CDA).

n. Sales by non-agricultural, non-electric, and non-credit cooperatives duly registered with the CDA
- 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.

0. Export sales by a person who is not VAT-registered

p. Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or
business or sale residential lot valued at one million five hundred thousand pesos (P1,500,000) and below or sale of
house and lot, and other residential dwellings valued at two million five hundred thousand pesos (P2,500,000) and
below.

Provided that beginning January 1, 2021, the VAT exemption shall only apply to sale of real properties
not primarily held for sale to customers or held for lease in the ordinary course of trade or business or
sale of house and lot, and other residential dwellings with selling price of not more than two million pesos
(P2,000,000).

q. Lease of the residential unit with a monthly rental not excęeding fifteen thousand pesos (P15,000).

The foregoing notwithstanding, lease of residential units where the monthly rental per unit exceeds fifteen thousand
pesos (P15,000.00), but the aggregate of such rentals of the lessor during the year do not exceed three million pesos
(P3,000,000.00) shall likewise be exempt from VAT; however, the same shall be subject to three percent (3%)
percentage tax under Section 116 of the Tax Code.
r. Sale, importation, printing or publication of books and any newspaper, magazine, review, or bulletin which appears at
regular intervals with fixed prices or subscription and sale and whichis not devoted principally to the publication of paid
advertisements

s. Transport of passengers by international carriers

t. Sale, importation, or lease of passenger or cargo vessels and aircraft, including engine, equipment, and
spare parts thereof for domestic or international transport operations

u. Importation of fuel, goods, and supplies by persons engaged in international shipping or air transport
operations

-Provided that the fuel, goods, and supplies shall be used for international shipping or air transport
operations.

w. Services of a bank, non-bank financial intermediaries perfoming quasi-banking functions, and other non-
bank financial intermediaries

Sale or lease of goods and services to senior citizens and persons with a disability, as provided under Expanded Senior Citizen
Act of 2010 (R.A. No. 9994) and An Açt Expanding the Benefits and Privileges of Persons with Disability (R.A. No. 10754),
respectively
x. Tax-Free Exchanges of Properties pursuant to Section 40 (C) (2) of the NIRC of 1997, as amended. This can be
transferred to a controlled corporation; and merger or consolidation.

y. Association dues, membership fees, and other assessments and charges collected by homeowners'
associations and condominium corporations

z. Sale of gold to the Bangko Sentral ng Pilipinas (BSP)

aa. Sale of drugs and medicines prescribed for diabetes, high cholesterol, and hypertension beginning January 1,
2019

bb. Sale or lease of goods, properties or the performance of services other than the transactions mentioned in the
preceding paragraphs, where the gross annual sales and/or receipts do not exceed the amount of Three Million
Pesos (P3,000,000)
Sales to Senior Citizen and Persons with
Senior citizens and persons with disability (PWD) are entitled toa 20%
disability special discount on their purchases fromcertain business
establishments such as hotels and similar lodging establishments,
restaurants, recreational centers and other places of culture, leisure
and amusements, hospitals, drugstores, and services Such as medical,
dental, domestic air, sea, and land transport fares and funeral or
burial services.

Any discount is reflected as a deduction on the establishment's gross

income subject to regular income tax. With the implementation of
Revenue Regulations No.5-2017, PWDs were granted 20% sales
discount and exemption from Value-added Tax (VAT) under Sections
32 and 33 of RA. 7277, as amended by RA. No.9442. otherwise known
as the "Magna Carta for Persons with Disability" and R.A. No. 10754
(Bureau of Internal Revenue, Revenue Regulations No. 5-2017, Rules
and Regulations Implementing Republic Act No. 10754, 2019).
Computation of the Discount and VAT Exemption Granted to Senior Citizens and Qualified Persons with
Disability

The VAT on the sale of goods or services with sales discounts granted by business establishments shall be computed
in accordance with the following formula:

Amount of sale (with VAT) P1,120.00

Less: 12% VAT (1,120 x 12%) 120.00
Total amount P 1,000.00
Less: 20% Sales Discount (1,000 x 20%) 200.00
Total Amount Due P 800.00

The two hundred pesos (P200.00) cost of the discount in the above illustration, shal be allowed as a deduction from
gross income for the same taxable year that the discount is granted: Provided that the total amount of the claimed
tax deduction net of VAT, if applicable, shall be included in their gross sales receipts for tax purp0ses and shall be
subject to proper documentation in accordance with the provisions of the Tax Code. This means that for the
establishment to be allowed to claim the discount as a deduction, the amount of sales that must be reported for
income tax purposes is the VAT-exclusive selling price of P1,000.00 and not the amount of sales net of the discount -
P800.00 (Bureau of Internal Revenue, Revenue Regulations No. 5-2017, Rules and Regulations Implementing Republic
Act No. 10754, 2019).
For percentage taxpayer, the amount of sales discounts shall be excluded for
purposes of computing the 3% percentage tax but shall be included as part of the
gross sales/receipts for income tax purp0ses. The sales discount granted shall then
be accounted for as a deduction from the gross income of the establishment for the
same taxable year that the discount was granted.

Sales/ Receipts P1,120.00

Less: 20% Sales Discount (1,120 x 20%) 224.00
Amount payable by PWD/Received by seller P 896.00
Tax Rate x 3%
Percentage Tax Due 26.88
Prohibition on Availment of Double Discounts

The privileges granted to PWD shall not be claimed if the said PWD claims a
higher discount as may be granted by the commercial establishment and/or
under other existing laws or in combination with another discount program/s.
Thus, a PWD who is at the same time a senior citizen can only claim one (1)
20% discount on a particular sales transaction (Bureau of Internal Revenue,
Revenue Regulations No. 5-2017, Rules and Regulations Implementing Republic
Act No. 10754, 2019).
 Zero Rated
Transactions
Zero-rated sales are basically foreign consumptions or equivalents of foreign consumptions and
sales conferred with an export sale treatment by special laws and international agreements to
which the Philippines is a signatory. These are sales, barters or exchanges of goods, properties
and/or services subject to 0% VAT pursuant to Sections 106 (A) (2) and 108 (B) of the Tax Code.
It is a taxable transaction for VAT purposes but shall not result in any output tax. However, the
input tax on purchases of goods, properties or services, related to such zero-rated sales, shall
be available as tax credit or refund in accordance with existing regulations (Bureau of Internal
Revenue, Value-Added Tax, 2019).

Exempt sales and zero-rated sales are both sales that will not have output VAT. In both cases,
the taxpayers do not pay VAT. The difference lies in the treatment of input VAT. The input VAT
in the case of exempt sales is non-creditable and nonrefundable. It can only be claimed as
deductions in the income tax return.
Categories of Zero-Rated Sales
The following services performed in the Philippines by VAT-registered persons shall be subject to 0%
rate(Bureau of Internal Revenue, Value-Added Tax, 2019):

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 processing, manufacturing, or repacking rendered to a person engaged in

business conducted outside the Philippines or to a non-resident person engaged in business who is
outside thePhilippines when the services are performed, the consideration for which is paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations of the
BSP:
c. Services rendered to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects the supply of such services to 0%
rate;

d. Services rendered to persons engaged in international shipping or air transport operations,

including leases of property for use thereof; Provided, that these services shall be exclusively for
international shipping or air transport operations. (Thus, the services referred to herein shall not
pertain to those made to common carriers by air and sea relative to their transport of passengers,
goods or cargoes from one place in the Philippines to another place in the Philippines, the same being
subject to 12% VAT under Sec. 108 of the Tax Code, as amended);

e. Services performed by subcontractors and/or contractors in processing, converting, or

manufacturing goods
f. Transport of passengers and cargo by domestic air or sea carriers from the Philippines to a foretgn country.
(Gross receipts of international air carriers and international sea carriers doing business in the Philippines
derived from transport of passengers and cargo from the Philippines to another country shall be exempt from
VAT; however, they are still liable to a percentage tax of 3% based on their gross receipts derived from
transport of cargo from the Philippines to another country as provided for in Sec. 118 of the Tax Code, as
amended); and

g. Sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass,
solar, wind, hydropower, geothermal and steam, ocean energy, and other shipping sources using technologies
such as fuel cells and hydrogen fuels; Provided, however, that zero-rating shall apply strictly to the sale of
power or fuel generated through renewable sOurces of energy, and shall not extend to the sale of services
related to the maintenance or operation of plants generating said power.
The following sales by VAT-registered persons shall be subject to 0% rate (Bureau of
Internal Revenue, Value-Added Tax, 2019):
a. Export sales

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 s0 exported, paid in acceptable foreign currency or its equivalent in goods or
services, and accounted for in accordance with the rules and regulations of the BSP;

ii. The sale of raw materials or packaging materials to a non-resident buyer for delivery to as a resident
local export-oriented enterprise to be used in manufacturing, processing, packing or repacking in the
Philippines of the said buyer's goods, paid for in acceptable foreign currency, and accounted for in
accordance with the rules and regulations of the BSP;

iii. The sale of raw materials or packaging materials to an export-oriented enterprise whose export sales
exceed 70% of total annual production,
iv. Transactions considered export sales under Executive Order No. 226, otherwise known as the
Omnibus Investments Code of 1987, and other special laws; and

v. The sale of goods, supplies, equipment, and fuel to persons engaged in international shipping or internation al
air transport operations; Provided, that the goods, supplies, equipment, and fuel shall be
used exclusively for international shipping or air transport operations; Provided, that the same is limited to goods,
supplies, equipment, and fuel that shall be used in the transport of goods and passengers from a port in the
Philippines directly to a foreign port, or vice-versa without docking or stopping at any other port in the Philippines
unless the docking or stopping at any other Philippine port is for the purpose of unloading passengers and/or
cargoes that originated from abroad, or to load passengers and/or cargoes bound for abroad; Provided, further,
that if any portion of such fuel, goods or supplies is used for purposes other than the mentioned in this paragraph,
such portion of fuel, goods, and supplies shall be subject to 12% output VAT.

b. Sales to persons or entities deemed tax exempt under special laws or International Agreement

Sale of goods or property to persons or entities who are tax-exempt under special laws or international
agreements to which the Philippines is a signatory, such as, Asian Development Bank (ADB), International Rice
Research Institute (IRRI), subject such sales to zero rate (Bureau of Internal Revenue, Value-Added Tax, 2019).
Output VAT
• Sale of goods- This is subject to 12% VAT based on the gross selling price in the month of sale.

• Sale of Service- This is subject to 12% VAT based on the gross receipts or collection.

• Sale of Properties- Sales of Properties by a Dealer, Developer, or Lessor of Real Properties- Under the law, the
sale, including pre-selling, barter, or exchange of real properties by a realty dealer, is subject to VAT on the gross
selling price.

In the case of sale, barter or exchange of real property, the term 'grOss selling price' was interpreted to mean the
consideration stated in the sales document or fair value of the property, whichever is higher.
Simply, 'gross selling price' is the amount higher of the selling price or fair market value. The fair market value,
under the NIRC, is the higher between the zonal value and assessed value.

a. In the absence of a zonal value, the gross selling price shall mean the assessed value or consideration stated in the
sales document, whichever is higher.

b. If the gross selling price is based on the zonal value or assessed value of the property, the zonal value or assessed
value shall be presumed exXclusive of VAT.

c. If the fair market value is higher than the selling price, the output VAT must be separately billed with specific
mention that the VAT billed separately is based on the market value of the property
• Sale of Properties Considered "Ordinary Assets“

Even if the real property is not primarily held for sale to customers or held for lease in the ordinary cOurse of business
but the same is used in the trade or business of the seller, the sale thereof shall be subject to VAT being a transaction
incidental to the taxpayer's main business. Therefore, the sale of properties held for use, such as land, building,
equipment, machinery, property improvenents, and supplies, aside from inventories and supplies, are VATable.

• Sale of Property not in the Ordinary Course of Business- These are exempt from VAT. Hence, the sale of Capital
Asset is exempt from VAT.
TRANSACTIONS DEEMED SALE
Transactions deemed sales are transactions which are acquisitions in nature but are not coursed through
apurchase transaction by the consumer. Consequently, these transactions are not recorded as sales by the
seller. Nevertheless, since these transactions are forms of taxable consumptions, they are considered 'deemed
sales' for VAT purposes.

The following transactions are considered as deemed sales:

A. Transfer, use, or consumption, not in the course of business, of goods or properties originally intended for
sale or for use in the course of business. Transfer of goods or properties not in the course of business can
take place when a VAT-registered person withdraws goods from his business for his personal use .

A business proprietor or partner may withdrawgoods or properties held for sale, lease, or use in the ordinary
course of trade or business for his personal consumption. This consumption is hot coursed through purchase
and will not be recorded as a sale by the business. For the purpose of the VAT, this transaction is deemed as
a sale subject to VAT (Banggawan, 2015).
Illustration 10: A realtor transferred the ownership of a residential property, which was held for sale, to his
daughter who was getting married. The property had a cost basis of P2,000,000 and a fair market value of
P2,500,000 at the date of transfer. The output VAT was computed as:

Fair Market Value 2, 500, 000

Multiplied by 12%
OUTPUT VAT 300, 000

B. Distribution or transfer to

Shareholders or investors as share in the profits of the VAT-registered person;

or
Creditors in payment of debt or obligation

The acquisition of shareholders of goods or properties declared as property dividends or by creditors a

payment of their loans under a dacion en pago payment is a form of consumption which is analogous to
purchase. Hence, the distribution is deemed sold and subject to VAT.

'Dacion en Pago' is defined as "a special mode of payment," where the debtor can offer other means payment
to the creditor. In simpler term, this is a payment in a form of property which is left or given to the lender to
satisfy an obligation.
C. Consignment of goods if actual sale is not made within 60 days following the date such goods were
consigned. Consigned goods returned by the consignee within the 60-day period are not deemed sold
(Bureau of Internal Revenue, Value-Added Tax, 2019).

Consigned goods to consignees are presumed or deemed sales subject to VAT if not withdrawn withín 60
days. This is not actual consumption, but the rule is apparently intended to prevent taxpayers from deferring
recognition of output VAT by non-reporting or delayed reporting of the sales on consignment.

D. Retirement from or cessation of business, with respect to all goods on hand, whether capital goods, stock-
in-trade, supplies or materials as of the date of such retirement or cessation, whether the business is
continued by the new Owner or successor. The following circumstances shall, among others, give rise to
transactions "deemed sale" (Bureau of Internal Revenue, Value-Added Tax, 2019);

• Change of ownership of the business. There is a change in the ownership of the business when a single
proprietorship incorporated, or the proprietor of a single proprietorship sells his entire business; and

• Dissolution of a partnership and creation of a new partnership that takes over the business.

If the business is continued by a new owner, the goods or properties of the business are effectively sold to
the new owner. Hence, the goods or properties of the business are likewise deemed sold.
Illustration 12: Mr. Ramos, a VAT-registered taxpayer, ceased business operation in May 2x19. His business
properties upon the termination of business operation include:

CASH 50, 000 The computation of output VAT deemed Sale

Accounts receivables 120, 000 INVENTORIES 200, 000
Investments 180, 000 PROPERTY, PLANT, AND EQUIP 800, 000
Inventories 200, 000 BASIS 1, 000, 000
Property, Plant, Equipment 800, 000 MULTIPLIED BY 12%
TOTAL ASSETS 1,350, 000 OUTPUT VAT P 120, 000

E. Cessation of the status of a person as a VAT-registered person (Bureau of Internal Revenue, Value-Added
Tax 2019)
Goods or properties originally intended for sale or use in the business, and capital goods existing as of the
occurrence of any of the following shall be deemed sold:

i. Change of business activity from VAT-taxable status to VAT-exempt status;

ii. Approval of a request for cancellation of a registration due to reversion to exempt status,
iii. Approval of request for cancellation of a registration due to a desire to revert to exempt status after the
lapse of 3 consecutive years from the time of registration by a person who voluntarily registered despite
being exempt; and
iV. Approval of a request for cancellation of registration of one who commenced business with the
expectation of gross sales or receipt exceeding P3,000,000 but who failed to exceed this amount during
the first 12 months of operations.
Illustration:

X Corporation, a VAT taxpayer, declared its goods and inventory with production cost of P400, 000 but with
sales value of P600, 000 as dividends to its shareholders

Fair Market Value P 600, 000

Multiplied by %12
Output VAT 72, 000