Vat- Bello

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TAX 2

VAT INTRODUCTION

A"y. Terence Conrad H. Bello 2

A"y. Terence Conrad H. Bello Slide No. 3

A.  Features of VAT

1.  Essen?al Features of VAT: a.  Tax on consump?on b.  Limited to value added c.  It is an indirect tax



2.  Method of collec?ng VAT – through the tax credit method §  Input tax is credited against output tax to arrive at

net VAT payable (net VAT payable is effec?vely the tax on the value added)

§  Illustra(on: tax credit method and tax on “value added” Assume there are four firms (1) a logging concessionaire who also manufactures lumber, (2) a furniture manufacturer, (3) a furniture wholesaler, and (4) a furniture retailer who sells furniture to the end consumer, which is the household



Taxpayer Sales Value Output Input VAT Price Added Tax Tax Payable

Concessionaire 10.00 10.00 1.00 -‐ 1.00

Manufacturer 25.00 15.00 2.50 1.00 1.50

Wholesaler 40.00 15.00 4.00 2.50 1.50

Retailer 50.00 10.00 5.00 4.00 1.00

Household: purchase price (P50) + VAT (P5) = P55 5.00

* For illustra,on purposes only, the VAT rate used in the example is 10% (the rate now is 12%)



3.  Output and Input a.  The VAT on the concessionaire’s sale of lumber is known as “output tax”

b.  The output tax, when it is passed on the purchaser who manufactures the lumber into furniture, becomes the manufacturer’s “input tax”

c.  The sale of furniture by the manufacturer to the wholesaler is likewise subject to VAT (output tax); however, he is en?tled to deduct from such output tax, the input tax which is shiYed to him by the concessionaire

4.  Basic formula: Output tax (12% or 0%) Less: input tax_______ VAT Payable

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I.   TAXABLE TRANSACTIONS

A"y. Terence Conrad H. Bello 7 A"y. Terence Conrad H. Bello Slide No. 8

A.  In General

1.  Taxable transac?ons covered: a.  Sale of goods or proper?es (in the course of T or

B) b.  Importa?on of goods (W/N in the course of T or

B) c.  Sale of services (in the course of T or B)

2.  General requirements (sale of goods and services) a.  There is a sale (of goods or services); AND b.  The sale is made “in the course of trade or

business”


A.  In General; 1st Requirement; There is a Sale

1.  In order for a transac?on to be subjected to VAT, it is essen?al that there is a sale of goods or services

2.  Illustra?ve cases – VAT Rul. No. 26-‐97 §  TP shares the same building with 2 or more subsidiaries §  Being the nominal party-‐lessee (i.e., lessee-‐of-‐record), TP

advances the payment of rent to the lessor, then seeks reimbursement from its co-‐lessees (the subs) for their propor?onate share of the rent, without mark-‐up or profit element (i.e., reimbursement-‐of-‐cost basis)

§  Same treatment for other expenses such as security, building maintenance and u?li?es (TP advances the expenses then seeks reimbursement from the subs)

§  Ruling: reimbursements not subject to VAT since TP does not sell, barter, exchange or lease goods or property or renders services



2.  Illustra?ve cases – §  See also Tourist Trade and Travel Corp. v. CIR

wherein reimbursements received by a mall owner for advances it had made for the payment of electric, water, and telephone bills and for the janitorial services provided were held to be not subject to VAT since the TP was not engaged in the business of providing electricity, water, security and janitorial services to the lessees

§  Court reasoned that it is not TP who directly supplied electricity, water and similar other goods to the lessees, neither did it render security and janitorial services



2.  Illustra?ve cases – §  See, however, VAT Rul. 18-‐98, wherein an HMO was

considered as engaged in business as a service contractor and was held liable to pay VAT although the actual health care services were rendered by independent health care providers

§  In Tourist Trade, the TP therein was neither selling electricity, water, etc. nor rendering janitorial and security services

§  In VAT Rul. 18-‐98, the TP therein sold health care services through independent third par?es who actually performed the service on the TP’s behalf


A.  In General; 2nd Requirement; Sale is in the Course of Trade or Business

1.  An important requirement for imposi?on of VAT is that the sale or transac?on has been entered into in the course of any business carried on by the TP

2.  The phrase “in the course of trade or business” means: §  the regular conduct or pursuit of a commercial or an

economic ac?vity §  including transac?ons incidental thereto §  regardless of W/N the person engaged therein is a

non-‐stock, non-‐profit private organiza?on (irrespec?ve of the disposi?on of its net income and whether or not it sells exclusively to members or their guests), or government en?ty (§ 105)

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3.  Thus the phrase “in the course of trade or business” connotes REGULARITY §  Thus, a non-‐stock corpora?on whose primary purpose is to

engage in research ac?vi?es and to provide services (for a fee) in community organiza?on, development planning and development livelihood, development communica?on and rural resource management was held subject to VAT. BIR Rul. 1-‐94, Jan. 4, 1994

§  On the other hand, the factor of regularity was absent in BIR Rul. 98-‐97, Aug. 28, 1997, which involved a manufacturer and exporter of goods that received a considera?on for agreeing to pre-‐terminate its lease contract and to cancel its purchase op?on over the leased premises. The BIR ruled that the lease pre-‐termina?on and cancella?on of purchase op?on does not cons?tute a sale, barter or exchange of goods or proper?es in the course of trade or business of TP which is engaged in the manufacture and expor?ng of goods



5.  Is profit mo?ve/element essen?al for taxability? §  No. Thus, a company that intends to establish a consumer

store for the benefit of its employees where there will be no value added to the goods sold because they will be sold at cost was held liable to VAT. The absence of profit and value added to the goods sold does not make a person opera?ng a consumer store selling basic commodi?es at cost exempt from VAT. VAT Rul. No. 444-‐88, Sept. 13, 1988

§  In BIR Rul. 10-‐98, Feb. 5, 1998, the BIR ruled that a TP whose primary purpose as set forth in its AOI is to provide technical, research, management and personnel assistance to affiliates on a reimbursement-‐of-‐cost basis (i.e., no mark-‐up or profit element) is subject to VAT –  the phrase “sale or exchange of services” includes, among

others, the supply of technical service, assistance or services rendered in connec?on with technical mgt or administra?on of any scien?fic, industrial or commercial undertaking, project or scheme



5.  Is profit mo?ve/element essen?al for taxability? No CIR v. Commonwealth Mgt. & Services Corp. §  TP is an affiliate of Philamlife organized by the la"er to

perform collec?on, consulta?ve and other technical services, including func?oning as an internal auditor of Philamlife and its other affiliates

§  TP assessed by the BIR for deficiency VAT §  Conten?ons of TP:

–  It was not engaged in the business of providing services to its affiliates since the services were on a “no profit, reimbursement-‐of-‐cost basis” only; not profit oriented = not engaged in business

–  In fact it did not generate profit but suffered a net loss during the tax year at issue

–  “In the course of T or B” requires that the business is carried on with a view to profit or livelihood



5.  Is profit mo?ve/element essen?al for taxability? No CIR v. Commonwealth Mgt. & Services Corp.

§  Issue: Whether TP was engaged in the sale of service, thus liable for VAT

§  Held: Liable for VAT §  Even a non-‐stock, non-‐profit organiza?on or government en?ty

is liable to pay VAT on the sale of goods or services §  VAT is a tax on transac?ons, imposed at every stage of the

distribu?on process on the sale, barter, exchange of goods or property, and on the performance of services, even in the absence of profit a"ributable thereto

§  The term “in the course of trade or business” requires the regular conduct or pursuit of a commercial or an economic ac?vity, regardless of whether or not the en?ty is profit-‐oriented



5.  Is profit mo?ve/element essen?al for taxability? No CIR v. Commonwealth Mgt. & Services Corp.

§  Hence, it is immaterial whether the primary purpose of a corpora?on indicates that it receives payments for services rendered to its affiliates on a reimbursement-‐on-‐cost basis only, without realizing profit, for purposes of determining liability for VAT on services rendered

§  As long as the en?ty provides service for a fee, remunera?on or considera?on, then the service rendered is subject to VAT

§  The services of TP do not fall within the § 109 enumera?on of exempt transac?ons


A.  In General; 2nd Requirement; Sale is in the Course of Trade or Business; Incidental Transac?on vs. Isolated Transac?on

1.  By express provision of law (§ 105), “incidental transac?ons” are considered as undertaken in the course of business §  “Incidental” – means depending upon or appertaining to

something else as primary; something necessary, appertaining to, or depending upon another which is termed the principal

§  Hence, the sale by a garments manufacturer of a motor vehicle assigned to its GM is subject to VAT –  The sale of the motor vehicle is an incidental transac?on

because the vehicle was purchased and used in furtherance of the TP’s business. CS Garments v. CIR, CTA Case 6520, Jan. 4, 2007

–  Posi?on adopted by BIR in RMO 15-‐2011 when it revoked rulings exemp?ng sale of company car from VAT

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2.  However, the BIR (and even the courts) in certain instances exempted from VAT the sale of property used in business supposedly because the sale was an isolated transac?on §  See BIR Rul. 113-‐98, where the BIR ruled that the

sale by a telecom company of its microwave backbone transmission network to another wireless communica?ons carrier is not in the course of the TP’s trade or business of selling telecommunica?on services –  The BIR explained that the sale is not subject to

VAT because it is an isolated transac?on; and that the transac?on does not necessarily follow the primary func?on of selling telecom services



§  See also Magsaysay Lines, Inc. v. CIR, CTA Case No. 4353, April 27, 1992, aff. in G.R. No. 146984, July 28, 2006, where the court held that the sale by a property lessor, a GOCC, of its vessels held out for lease in line with the government’s priva?za?on program is not subject to VAT –  Court held that the sale was an isolated transac?on; the

sale which was involuntary and made pursuant to the declared policy of government for priva?za?on could no longer be repeated or carried on with regularity; it should be emphasized that the normal VAT-‐registered ac?vity of the TP is leasing personal property; the sale of the vessels as such are not necessary to carry out the TP’s primary func?on of leasing personal proper?es

–  Without analysis, the court held that the sale was not incidental to the TP’s normal business of leasing property (“[t]he act of selling capital assets does not necessarily follow the act of leasing these assets”)



Lapanday Food Corp. v. CIR §  Interest income derived by a parent company

from intercompany loans to affiliates, as a form of financial assistance, is considered services incidental to the parent’s business and, thus, subject to VAT



Mindanao II Geothermal Partnership v. CIR §  However, it does not follow that an isolated transac?on

cannot be an incidental transac?on for purposes of VAT liability

§  A reading of Sec?on 105 of the 1997 Tax Code would show that a transac?on “in the course of trade or business” includes “transac?ons 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 transac?on made in the course of Mindanao II’s business which should be liable for VAT



3.  The mere fact that a transac?on is isolated will not necessarily disqualify it from being made incidentally in the course of trade or business

4.  Thus, an “isolated transac?on” -‐-‐ if at the same ?me is an “incidental transac?on” -‐-‐ will be characterized as entered into “in the course of trade or business,” hence, subject to VAT


B.  Sale of Goods or Proper?es

1.  Sec. 106: “there shall be levied, assessed and collected on every sale, barter or exchange of goods or proper?es, a value-‐added tax equivalent to 12% of the gross selling price

2.  What are the taxable transac?ons covered by § 106? a.  Actual sales b.  “Deemed sale” transac?ons c.  Changes in or cessa?on of status of a VAT-‐

registered person

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B.  Sale of Goods or Proper?es: Actual Sale

1.  A sale is a transfer of goods to another either (a) for cash or on credit, or (b) partly for cash and partly for credit

2.  Covers sales, barters and exchanges 3.  VAT accrues upon consumma?on of the sale,

regardless of the terms of payment between the contrac?ng par?es (implicit in the defini?on of “gross selling price,” which includes money or money equivalent which the purchaser is “obligated to pay”); unlike sale of services wherein VAT accrues only upon payment of considera?on (when the gross receipts are “actually or construc?vely received” by the seller)


B.  Sale of Goods or Proper?es: “Deemed Sale” Transac?ons

1.  VAT on goods and proper?es not limited to actual sales; also covers certain transac?ons which the law “deems” as if it was an actual sale, hence, subject to VAT

2.  What are the “deemed sale transac?ons? a.  Transfer, use or consump?on not in the course of business of

goods or proper?es originally intended for sale or use in the course of business

b.  Distribu?on or transfer to (i) shareholders or investors as share in the profits of the VAT-‐registered TP; or (ii) creditors in payment of debt

c.  Consignment of goods if actual sale is not made within 60 days d.  Re?rement from or cessa?on of business with respect to

inventories of taxable goods exis?ng as of such re?rement or cessa?on (§ 106(B))



3.  Ra?onale for taxing “deemed sale” transac?ons: §  To recapture/recoup claimed input tax

a"ributable to the taxable goods withdrawn for personal or non-‐business use



4.  Illustra?on of input tax recapture: §  TP bought merchandise (say 10 t-‐shirts) for P1,000; VAT

of P100 was passed on to him by the store that sold him the t-‐shirts (total purchase price therefore is P1,100); TP intends to sell the t-‐shirts @ P220 each for a total of P2,200 (VAT inclusive). For the sale of the t-‐shirts, TP has a VAT payable of P100 (P200 output less P100 input)

§  Instead of selling everything, TP withdraws for his personal use 3 t-‐shirts and sold the remaining 7 t-‐shirts; without the “deemed sale” provisions, TP has a VAT payable only of P40 (output of P140 less input of P100)

§  Without “deemed sale” provisions, government foregoes P60 of VAT revenue

§  With the “deemed sale” provisions, government is restored to P100 VAT posi?on



5.  Examples of “deemed sale” transac?ons: §  § 106(B)(1) – Mr. K sells household furniture; he removes from

his store a living room set for use in his residen?al house §  § 106(B)(2)(a) – J Co. declared a property dividend out of

inventory §  § 106(B)(2)(b) – M Co. is indebted to N Co. for raw materials;

when M Co. could not pay in money, N Co. agreed to a dacion of the finished goods in payment of the indebtedness

§  § 106(B)(3) – TP sold goods on consignment to A, with ?tle to the goods passing only upon sale to a buyer; 65 days aYer consignment, goods s?ll unsold by A

§  § 106(B)(4) -‐ P & Co. was a taxable partnership; P & Co. was dissolved and Q & Co. was formed to con?nue the business of P & Co; at the ?me that P & Co. was dissolved, its books of accounts showed a merchandise inventory of P100,000; the inventory is deemed sold by P & Co. upon dissolu?on


B.  Sale of Goods or Proper?es: Changes in or Cessa?on of Status of VAT-‐Registered TP

1.  VAT also applies to goods disposed of or exis?ng under certain circumstances §  Example: change of business ac?vity from VAT-‐taxable

status to VAT-‐exempt status –  Illustra?on: VAT-‐registered person engaged in a taxable

ac?vity like wholesaler or retailer who decides to discon?nue such ac?vity and engages instead in life insurance business or in any other business not subject to VAT

–  Goods exis?ng as of the change in status from VATable to VAT-‐exempt become subject to VAT even in the absence of an actual sale

§  Ra,onale: same as “deemed sale” transac?ons (input tax recapture)

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B.  Sale of Goods or Proper?es: Taxable Base; Gross Selling Price

1.  Taxable base – means the amount or the value on which the VAT rate will be applied in compu?ng the output tax §  For a taxable person who sells goods or proper?es,

the taxable base is the “gross selling price” §  “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 considera?on of the sale, barter or exchange of the goods or proper?es, excluding VAT. The excise tax, if any, on such goods or proper?es shall form part of the gross selling price.

§  Special rules for sale of real property (FMV or zonal value, whichever is higher; taxable base for VAT may be accounted for under the instalment method)


B.  Sale of Goods or Proper?es: Taxable Base; Gross Selling Price

2.  Timing issues; when VAT accrues – computa?on of taxable base for sales of goods or proper?es is different from that of supply of services §  Sale of goods or proper?es – generally requires the

use of the accrual method on the basis of the statutory defini?on of “gross selling price” (“total amount of money or its equivalent that the purchaser pays or is obligated to pay to the seller”)

§  Sale of services – cash method of accoun?ng, which means the considera?on is taxable only upon actual or construc?ve receipt, regardless of W/N the service has been rendered (see statutory defini?on of “gross receipts”)


B.  Sale of Goods or Proper?es: Taxable Base; Gross Selling Price; Sales Discount, Returns, & Allowance

1.  Sales discounts and returns and allowances as allowable deduc?ons from gross selling price a.  For sales discounts – discount must be indicated in the invoice at the

?me of sale, the grant of which is not dependent upon the happening of a future event §  Illustra,on: TP grants discounts to ice cream houses in the form of rebates for mee?ng monthly sales quota; rebates are determined only at the end of the month

§  Answer: Deduc?on not allowed. Discounts condi?oned upon the subsequent happening of an event or fulfillment of certain condi?ons, such as prompt payment or a"ainment of sales goals, shall not be allowed as deduc?ons. Only discounts granted and determined at the ?me of sale which are indicated in the invoice are allowed as deduc?ons from the gross selling price. BIR Rul. No. 204-‐90

b.  For sales returns and allowances – proper credit or refund was made during the month or quarter to the buyer for sales previously recorded as taxable sales


B.  Sale of Goods or Proper?es: Taxable Base; Deemed Sales, Re?rement and Cessa?on, Below Market GSP

1.  Transac?ons deemed sale -‐ output tax shall be based on the market value of the goods deemed sold as of the ?me of the occurrence of the deemed sale transac?ons enumerated in Sec. 4.106-‐7(a)(1),(2), and (3)

2.  Re?rement or cessa?on of business -‐ tax base shall be the acquisi?on cost or the current market price of the goods or proper?es, whichever is lower

3.  Sale where the gross selling price is unreasonably lower than FMV -‐ the actual market value shall be the tax base §  Meaning of “unreasonably lower” -‐ if GSP is lower by

more than 30% of the actual market value of the same goods of the same quan?ty and quality sold in the immediate locality on or nearest the date of sale


C.  Importa?on of Goods

1.  In general -‐ VAT is imposed on goods brought into the Philippines, whether for use in business or not

2.  Tax base – VAT is based on the total value used by the BOC in determining tariff and customs du?es, plus customs du?es, excise tax, if any, and other charges, such as postage, commission, and similar charges, prior to the release of the goods from customs custody

3.  If du?es based on volume or quan?ty -‐ landed cost shall be the basis for compu?ng VAT. Landed cost consists of the invoice amount, customs du?es, freight, insurance and other charges. If the goods imported are subject to excise tax, the excise tax shall form part of the tax base


C.  Importa?on of Goods

4.  Importa?on of § 109(1) exempt goods – no VAT 5.  Time for payment – prior to release from customs

custody

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D.  Sale of Services; Meaning of “Sale or Exchange of Services”

1.  “Sale or exchange of services” -‐ means the performance of: §  all kinds of services §  in the Philippines §  for others for a fee, remunera?on or

considera?on, whether in kind or in cash §  including those performed or rendered by certain

persons and those involving certain transac?ons enumerated under the law (see enumera?on; enumera?on is not exclusive; see Lhuiller v. CIR)

§  and similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental facul?es


D.  Sale of Services; Requirements for Taxability

What are the requirements for the taxability of sale of services? §  The service must be in the course of trade or

business; Ø  Note: services rendered in the Philippines by non-‐

resident foreign persons are considered as having been rendered in the course of trade or business

§  The service must be performed in the Philippines; and

§  The considera?on is actually or construc?vely received


D.  Sale of Services; Requirements for Taxability; Place of Performance Rule

1.  As a statutory principle, all kinds of services performed in the Philippines are subject to VAT at the rate of 12% or 0%

2.  Services performed outside the Philippines, even if undertaken in the course of business, are beyond the scope of VAT, therefore, not subject to VAT §  The place where the service is performed determines

the jurisdic?on to impose VAT (place of payment is immaterial since the situs of the service is determined by the place where the service is performed)

§  Thus, marke?ng ac?vi?es of a realty broker in the U.S. to en?ce OFWs to buy condo units in the Philippines held not subject to VAT since services were rendered outside the Philippines. BIR Rul. 110-‐97


D.  Sale of Services; Requirements for Taxability; Place of Performance Rule

§  Legal services performed by a U.K. law firm in the U.K. and in the U.S. for the Republic of the Philippines in an arbitra?on case in Washington, DC not subject to VAT. ITAD Rul. 154-‐02


D.  Sale of Services; Taxable Base; Gross Receipts Actually & Construc?vely Received

1.  Defini?on of “gross receipts” §  refers to the total amount of money or its equivalent

represen?ng the contract price, compensa?on, service fee, rental or royalty,

§  including the amount charged for materials supplied with the services and deposits applied as payments for services rendered and advance payments

§  actually or construc?vely received during the taxable period

§  for the services performed or to be performed for another person,

§  excluding VAT A"y. Terence Conrad H. Bello Slide No. 42

D.  Sale of Services; Taxable Base; Gross Receipts Actually & Construc?vely Received

2.  Although taxable transac?on is past, present, or future performance of service – tax accrues upon actual or construc?ve receipt

3.  Tax accoun?ng – cash method (not accrual method) 4.  “Construc?ve receipt” occurs when the money

considera?on or its equivalent is placed at the control of the person who rendered the service without restric?ons by the payor. Examples: §  Deposit in banks which are made available to the

seller of services without restric?ons; §  Issuance by the debtor of a no?ce to offset any debt

or obliga?on and acceptance thereof by the seller as payment for services rendered; and

§  Transfer of the amounts retained by the payor to the account of the contractor

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D.  Sale of Services; Taxable Base; Gross Receipts Actually & Construc?vely Received; Inclusions and Exclusions

1.  Includes: §  Contract price, compensa?on, service fee, rentals or

royal?es §  Amount charged for materials supplied with the services §  Deposits and advance payments

2.  Thus, gross receipts includes amounts billed to clients intended to recover costs and expenses (e.g., salaries and wages due to employees, due the government, deprecia?on of equipment, supplies, overhead, etc.) as well as the profit mark-‐up. VAT Rul. No. 111-‐88

3.  Includes management fee (based on profits of managed company), expenses incurred in connec?on with services rendered, and reimbursement by managed company of salaries and fringe benefits of seconded employee. VAT Rul. No. 205-‐90


D.  Sale of Services; Taxable Base; Gross Receipts Actually & Construc?vely Received; Inclusions and Exclusions

4.  Excludes, however, receivables (i.e., por?on of the contract price not yet actually or construc?vely received). BIR Rul. No. 195-‐89

5.  Also excludes amounts earmarked for payment to third par?es as well as reimbursement of out-‐of-‐pocket expenses (under certain condi?ons) §  Thus, amounts received by a local travel agent from

foreign tourist agencies which formed part of the package fee paid by the tourists but were intended or earmarked for hotel room accommoda?ons and accordingly paid by the local travel agency to the hotels not subject to VAT

§  Gross receipts do not include monies or receipts entrusted to the TP which do not belong to them and do not redound to the TP’s benefit. CIR v. Tours Specialists, Inc.

II.   RELIEF FROM VAT


A.  Zero Ra?ng vs. Exemp?on

1.  Basic principle: a seller who is directly and legally liable for the payment of VAT on goods and services is not necessarily the person who ul?mately bears the burden of the tax §  It is the final purchaser or consumer of such goods

and services who ul?mately bears the burden of the VAT (VAT being an indirect tax)

2.  From the perspec?ve of the final consumer, VAT zero-‐ra?ng and VAT exemp?on both offer some relief from the burden of taxa?on, but the degree or extent of relief is different

3.  VAT exemp?on offers par?al relief from the VAT incidence, while VAT zero-‐ra?ng offers total relief from the VAT incidence (see CIR v. Seagate Tech.)



4.  Why is the degree of relief different? a.  VAT exemp?on (par?al relief) –

§  the transac?on is not subject to VAT (output tax) §  but the seller is not allowed any tax credit of VAT

(input tax) on purchases b.  VAT zero-‐ra?ng (total relief) –

§  the zero-‐rated sale of goods or services (by a VAT-‐registered person) is a taxable transac?on for VAT purposes, but shall not result in any output tax (because the output tax rate is 0%)

§  However, the input tax on purchases of goods, proper?es or services related to such zero-‐rated sale shall be available as tax credit or refund

5.  Illustra?on: assume there are 3 sellers A, B, C and a final purchaser, D



EXEMPT ZERO-‐RATED

VAT on selling price 0 VAT on selling price 0

Purchase Price 100 Purchase Price 100

VAT passed on 12 VAT passed on 12

Total amt. charged 112 Total amt. charged 112

Refund (12)

Net amount 100

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B.  Zero-‐Rated Transac?ons

§  Objec?ve of zero-‐ra?ng: to make exporters compe??ve interna?onally through VAT relief

§  Two ways to grant relief: Ø  Exporter’s sale is subject to 0% rate and is

allowed a refund or credit of input tax passed on to exporter by his supplier (“automa?c zero ra?ng”)

Ø  Supplier of exporter is “effec?vely zero-‐rated” where his sale to the exporter is subject to 0% rate



Automa?c zero-‐ra?ng:

Supplier Exporter Customer

Selling Price 100 VAT on sale to Customer

0 Purchase price 200

VAT 12 Purchase price 100 VAT passed on 0

Total amt. charged to exporter

112 VAT passed on 12 Total amt. charged by exporter

200

Total amt. charged by supplier

112

Refund (12)

Net amount 100



Effec?ve zero-‐ra?ng:

Supplier Exporter Customer

Selling Price 100 VAT on sale to Customer

0 Purchase price 200

VAT 0 Purchase price 100 VAT passed on 0

Total amt. charged to exporter

100 VAT passed on 0 Total amt. charged by exporter

200

Total amt. charged by supplier

100

Refund -‐

“Effec?vely,” the privilege of zero-‐ra?ng is extended to suppliers of the exporter



Sale of Goods: 1.  Actual export sale (§ 106(A)(2)(a)(1)) – considera?on in

FX, accounted for in accordance with BSP rules and regs. 2.  Sale of raw materials or packaging materials to a

nonresident buyer for delivery to a resident local export-‐oriented enterprise (§ 106(A)(2)(a)(2)) – considera?on in FX, accounted for in accordance with BSP rules and regs.

3.  Sale of raw/packaging materials to export-‐oriented enterprises (§ 106(A)(2)(a)(3)) – export sales must exceed 70% of total annual prod’n

4.  Sale of gold to BSP (§ 106(A)(2)(a)(4)) 5.  Those considered export sales under the Omnibus

Investments Code (§ 106(A)(2)(a)(5))



Sale of Goods: 6.  Sale of goods, supplies, equipment and fuel to

interna?onal vessels or air carriers (§ 106(A)(2)(a)(6)) 7.  Foreign currency denominated sale (§ 106(A)(2)(b))

– •  Sale of goods assembled or manufactured in the Phil. For

delivery to a Phil. resident •  e.g., sale of locally manufactured car to OFWs for

delivery to Philippine residents (e.g., family of OFWs in the Phils.)

8.  Sales to persons or en??es whose exemp?on under special laws or int’l agreements effec?vely subjects such sales to 0% rate (§ 106(A)(2)(c)) (e.g., SMBA, PEZA, ADB, IRRI)



Sale of Services: 1.  Processing, mfg. or repacking goods for other persons doing

business outside the Philippines which goods are subsequently exported (§ 108(B)(1)) -‐ considera?on in FX, accounted for in accordance with BSP rules and regs.

2.  Services other than those men?oned in no. 1 rendered to nonresidents (§ 108(B)(2)) -‐ considera?on in FX, accounted for in accordance with BSP rules and regs. §  CIR v. AMEX §  CIR v. Burmeister & Wain Scandinavian

3.  Services rendered to persons or en??es whose exemp?on under special laws or int’l agreements effec?vely subjects such services to 0% rate (§ 108(B)(3))

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Sale of Services: 4.  Services rendered to interna?onal vessels or air carriers,

including leases of property (§ 108(B)(4)) 5.  Services performed by contractors or subcontractors in

processing, conver?ng, or manufacturing goods for export-‐oriented enterprises (§ 108(B)(5)) -‐ export sales must exceed 70% of total annual prod’n

6.  Transport of passengers and cargo by interna?onal carriers (§ 108(B)(6))

7.  Sale of power or fuel generated through renewable sources of energy (§ 108(B)(7))


C.  Exempt Transac?ons

1.  See enumera?on under § 109(1) (memorize!) §  Sale or importa?on of marine or food products in their

original state §  Sale or importa?on of fer?lizers; seeds, seedlings and

fingerlings; etc. §  Importa?on of personal and household effects of returning

residents §  Services subject to percentage tax §  Medical, dental, hospital and veterinary services, except

those rendered by professionals (e.g., doctors, den?sts, vet, etc.)

§  Educa?onal services rendered by private educa?onal ins?tu?ons

§  Services rendered by RHQ §  Transac?ons exempt under special law §  Sale of low cost housing, etc.



2.  What is the coverage of the exemp?on? a.  General rule:

§  Exemp?on covers only taxes for which party favored by the exemp?on is directly liable; exemp?on does not extend to indirect taxes like VAT

§  Being an indirect tax, once VAT is shiYed to the buyer, it is no longer a tax but an addi?onal cost which becomes a part of the amount of the contract price to be paid by the buyer. Phil. Acetylene Co., Inc. v. CIR; Phil. Nat’l Police Mul(-‐Purpose Coopera(ve, Inc. v. CIR; BIR Rul. No. 155-‐98; BIR Rul. No. 47-‐99



2.  What is the coverage of the exemp?on? b.  Excep?ons:

§  When the law itself provides for exemp?on from indirect taxes. CIR v. John Gotamco & Sons, Inc. (involving the exemp?on of the WHO from indirect taxes)

§  When the history of statutes clearly indicates the grant of indirect tax exemp?on. Maceda v. Macaraig, Jr. (confirming NPC’s exemp?on from direct and indirect taxes following an examina?on of the evolu?on of NPC’s charter)

IV.  TAX CREDITS AND REFUNDS


A.  Input Tax Credit

1.  What is input tax? §  Means the VAT due on or paid by a VAT-‐registered

person on importa?on of goods or local purchases of goods, proper?es, or services, including lease or use of proper?es, in the course of his trade or business.

§  Also includes the transi?onal input tax and the presump?ve input tax determined in accordance with Sec. 111 of the Tax Code

§  Must be evidenced by a VAT invoice or VAT O/R issued by a VAT-‐registered person

2.  Who can avail of input tax credit? §  VAT-‐registered importer of goods §  VAT-‐registered purchaser of local goods or proper?es §  VAT-‐registered purchaser of services or lessee or licensee

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A.  Input Tax Credit

3.  What types of input tax are creditable? a.  Purchase or importa?on of goods:

§  for sale §  for conversion into or intended to form part of a finished

product for sale, including packaging materials §  for use as supplies in the course of business §  for use as raw materials supplied in the sale of services §  for use in trade or business for which deduc?on for

deprecia?on or amor?za?on is allowed b.  Purchase of real proper?es for which a VAT has actually been

paid c.  Purchase of services for which a VAT has actually been paid d.  Transac?ons “deemed sale” e.  Transi?onal input tax f.  Presump?ve input tax


A.  Input Tax Credit; Excess Output Tax or Input Tax

1.  Basic formula: Output tax (12% or 0%) Less: input tax_______ VAT Payable

2.  Per § 110(B), if at the end of the taxable quarter, output tax exceeds input tax – VAT-‐registered person pays the excess

3.  On the other hand, if input tax exceeds output tax: a.  General rule: carry-‐over excess input to the succeeding

quarter or quarters b.  Excep?on: if the unu?lized input is a"ributable to zero-‐

rated sales, the VAT-‐registered TP has 3 op?ons: §  Carry-‐over excess input tax §  Refund unu?lized input tax §  Credit unu?lized input tax vs. other internal revenue

taxes (i.e., TCC)


A.  Input Tax Credit; Amor?za?on of Input Tax on Capital Goods

1.  Input tax on purchase or importa?on of depreciable goods must be spread evenly over the month of acquisi?on and the 59 succeeding months if the aggregate acquisi?on cost, excluding the VAT component, exceeds P1M

2.  If the es?mated useful life of the capital good is less than 5 years, the input VAT shall be spread over such shorter period

3.  The aggregate acquisi?on cost of a depreciable asset in any calendar month refers to the total price agreed upon for one or more assets acquired and not on the payments actually made during the calendar month. Thus, an asset acquired on installment for an acquisi?on cost of more than P1M will be subject to the amor?za?on of input tax despite the fact that the monthly payment/installment does not exceed P1M


B.  Transi?onal Input Tax

1.  Who is en?tled to the transi?onal input tax? §  A person who becomes liable to VAT or any

person who elects to be a VAT-‐registered person (e.g., TPs who exceed the P1.5 M threshold or TPs who elect VAT coverage even if their turnover does not exceed P1.5 M)

2.  How much is the transi?onal input tax? §  Transi?onal input tax credit is 2% of the value of

the beginning inventory on hand as of the effec?vity of the VAT-‐registra?on, or the actual VAT paid, whichever is higher


C.  Presump?ve Input Tax

1.  Who is en?tled to the presump?ve input tax? §  Persons or firms engaged in the processing of

sardines , mackerel , and mi lk , and in manufacturing refined sugar, cooking oil and packed noodle-‐based instant meals

2.  How much is the presump?ve input tax? §  4% of the gross value in money of the TPs’

purchases of primary agricultural products which are used as inputs to their produc?on


D.  Final Withholding VAT

1.  When does it apply? §  The 5% final withholding VAT applies to sales of goods or

services to the government or to GOCCs 2.  When does the obliga?on to withhold arise?

§  Before making payment on account of the purchase, the government en?ty or the GOCC shall deduct and withhold the 5% final VAT based on the gross payment thereof

3.  What does the 5% final withholding VAT represent? §  It represents the net VAT payable of the seller

4.  What is the effect of the 5% final withholding VAT on the seller’s input tax a"ributable to the sale to the government or the GOCC? §  It essen?ally limits the amount of input VAT that the

seller may credit against the 12% output tax to only 7% (12% output -‐ 5% net VAT payable = 7% standard input)

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E.  Claims for Refund or Tax Credit

1. When can a VAT-‐registered TP claim a refund or tax credit for unu?lized input VAT? §  In only 2 instances:

–  Zero-‐rated or effec?vely zero-‐rated sales (§ 112(A)) – unu?lized input VAT must be a"ributable to the zero-‐rated sales (i.e., either directly a"ributable or allocable to zero-‐rated sales)

–  Cancella?on of VAT registra?on (§ 112(B)) -‐ due to re?rement from or cessa?on of business, or due to changes in or cessa?on of status under § 106(C)



2.  What is the period within which the CIR should act on the claim? §  Within 120 days from submission of complete documents in

support of the applica?on 3.  What is the prescrip?ve period for filing the claim for refund or TCC?

a.  In the case of zero-‐rated sales: §  Administra?ve claim – must be made within 2 years from

from the close of the taxable quarter when the relevant sales were made (CIR v. Mirant Pagbilao Corp., GR 172129, Sept. 12, 2008)

§  Judicial claim – –  Within 30 days from denial of claim or from the lapse of

the 120 day period without any ac?on from the BIR (§ 112(A)) (CIR v. Aichi Forging, GR 184823, Oct. 6, 2010)

–  CIR v. San Roque Power Corp., GR 187485, Feb. 12, 2013



3.  What is the prescrip?ve period for filing the claim for refund or TCC? b.  In the case of cancella?on of VAT registra?on:

§  Administra?ve claim – must be made within 2 years from the date of cancella?on

§  Judicial claim – same

V.   COMPLIANCE REQUIREMENTS

A"y. Terence Conrad H. Bello 70


A.  BIR Registra?on

1.  Mandatory registra?on – generally, any person whose sale of goods and services are subject to VAT is required to register as a VAT taxpayer with the appropriate RDO (and pay annual registra?on fee of P500). VAT registra?on is mandatory if: §  TP’s gross sales or receipts for the past 12 mos.

(other than exempt sales) exceed P1,919,500 §  TP has reasonable grounds to believe that his

gross sales or receipts for the next 12 mos. (other than exempt sales) will exceed P1,919,500



2.  Op?onal registra?on – TP may elect to register as a VAT taxpayer in the following instances: §  TP’s annual gross sales or receipts do not exceed

P1,919,500 §  TP with mixed transac?ons (taxable and

exempt), may elect that exempt transac?ons be subject to VAT

§  Franchise grantees of radio and TV broadcas?ng whose annual gross receipts of the preceding year do not exceed P10M

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3.  Consequences of non-‐registra?on – §  TP liable for VAT §  But disqualified to claim input VAT credits



4.  Cancella?on of VAT registra?on – §  TP is previously VAT-‐registered but whose annual

gross sales or receipts fall below P1,919,500 §  Re?rement from business subject to VAT


B.  Record Keeping Requirement

§  Requirement to keep subsidiary sales journal and subsidiary purchase journal


C.  Invoices and Receipts

§  Issue VAT invoice for sale of goods §  Issue VAT O/R for sale of services §  Informa?on contained in VAT invoice/OR

Ø  TIN-‐V Ø  Total amount due (inclusive of VAT) Ø  VAT as a separate item Ø  “Zero-‐rated sale” wri"en or printed prominently Ø  Break down for mixed transac?ons Ø  Date, quan?ty, unit cost and descrip?on/nature Ø  If sale is P1,000 or more, indicate name, address

and TIN of VAT-‐registered buyer


C.  Invoices and Receipts

Consequence or erroneous issuance of VAT invoice/OR §  If TP is not VAT-‐registered and issues invoice/OR

indica?ng “TIN-‐V”: Ø  Liable for VAT in addi?on to percentage tax Ø  Disqualified from input VAT credit a"ributable to

the sale Ø  50% surcharge Ø  Purchaser, however, eligible to claim input VAT Ø  Break down for mixed transac?ons

§  If TP is VAT-‐registered and issues VAT invoice/OR for exempt transac?on – liable for VAT as if not exempt

Documents

Vat- Bello