CHAPTER 6- INTRODUCTION TO THE VALUE ADDED TAX

VALUE ADDED TAX

 Covers all vatable sales of goods, properties services or leases
Vatable sales or receipts are from sources other than:
 Exempt Sales
 Receipts from services specifically subject to percentage tax
VAT taxpayers
 VAT-registered persons
o Subject to VAT even if its annual sales does not exceed threshold
 VAT-registrable persons
o Those whose sales or receipts exceed VAT threshold without registering as VAT
taxpayers.
o Subject to VAT without the benefit of input tax credit
VAT threshold
VAT Threshold Amount Covered taxpayers
General Threshold 3,000,000 Applicable to all taxpayers other
than franchise grantees of radio
and television
Special Threshold 10,000,000 Applicable only to franchise
grantees of radio and television

Assessment of the VAT threshold

Illustration 1: Taxpayers with mixed transactions
Cipeda Department Store had the following sales for the last 12-month period:
Fertilizers, seeds, poultry and hog feeds 1,200,000
Fruits and Vegetables 800,000
Groceries 800,000
Clothes, shoes and other apparel 600,000
Furniture 400,000
Total 3,800,000

Fertilizers, seeds, poultry and hog feeds Exempt

Fruits and Vegetables Exempt
Groceries Vatable
Clothes, shoes and other apparel Vatable
Furniture Vatable

Vatable sales are:

Groceries 800,000
Clothes, shoes and other apparel 600,000
Furniture 400,000
Total 1,800,000

The total vatable sales is below the VAT threshold, thus the business is not required to register as a
VAT taxpayer and may continue paying 3% percentage tax until it exceeds the threshold.

Illustration 2 Individual with multiple proprietorship businesses

As of September 2020, Mr. See had the following gross receipts from his professional practice and his
other businesses in the immediately preceding-12 months
Gross receipts from restaurant businesses 2,200,000
Gross receipts from barbecue stand 200,000
Gross receipts from taxicab operations 1,500,000
Gross receipts from professional practice 900,000
Total 4,800,000

Gross receipts from restaurant businesses Vatable

Gross receipts from barbecue stand* Exempt
Gross receipts from taxicab operations 3% common carrier’s tax
Gross receipts from professional practice Vatable

Gross receipts from restaurant business 2,200,000

Gross receipts from exercise of profession 900,000
Total Vatable Sales and Receipts 3,100,000

*Gross receipts from barbecue stand is exempt since it involves simple processing
*starting October 2020, Mr. See shall pay VAT.

Illustration 3: Corporations with subsidiaries and branches

Black Clover Corp. had the following subsidiaries and branches and their corresponding recorded 12-
month sales:

Subsidiaries:
Asta Corporation- 55% owned 3,200,000
Yuno- Corporation- 70% owned 1,800,000
Total subsidiary sales 4,000,000

Branches:
Royal Capital Branch 800,000
Heart Kingdom Branch 700,000
Total Branch Sales 1,500,000

Black Clover reported the following sales:

Sales to Heart Kingdom Branch 400,000
Sales to Asta Corporation 300,000
Sales to other customers 900,000
Total parent company sales 1,600,000

Each corporation is a separate taxpayer.

Asta Corporation Vat- taxpayer
Yuno Corporation Non-VAT taxpayer
Black Clover Corporation Non-VAT taxpayer

A branch is not a separate entity with their head office, thus Heart Kingdom and Royal Capital are not
separate entities with Black Clover.

Sales to Asta Corporation 300,000

Sales to other customers 900,000
Sales of Royal Capital Branch 800,000
Sales of Heart Kingdom Branch 700,000
Total Vatable sales of Black Clover 2,700,000

Black Clover Sales to Heart Kingdom Branch is not considered because it is a sale to itself; it is not a
realized sale. Black Clover shall be registered as a non-VAT taxpayer.

Illustration 4: Married individual taxpayers

Mr. and Mrs. Tanaka had the following sales and gross receipts

Mr. Tanaka Mrs. Tanaka Total

Gross receipts from profession 2,200,000 1,700,000 3,900,000
Sales from sari-sari store ________ 1,350,000 1,350,000
Total 2,200,000 3,050,000 5,250,000

Each individual is a taxable person and is separately subject to business tax. Aggregation shall be
made for each individual. Mr. Tanaka will pay 3% percentage tax and Mrs. Tanaka shall pay VAT.

If any sales or receipts cannot be directly attributed to or identified as exclusively earned or realized by
either spouse, the same shall be divided equally between them for the purpose of determining their
respective sales or receipts or the purposes of threshold

Optional VAT Registration

 Taxpayers below the threshold can voluntarily register as VAT taxpayers. Such option is
subject to the 3-year lock-in period. The taxpayer is precluded to have his VAT registration
revoked until the lapse of 3 years.

VAT Taxpayers with Mixed Transactions

 It must be noted that despite the VAT registration, VAT shall apply only to vatable sales or
receipts. His non-vatable sales or receipts remain exempt from VAT. The exempt sales remain
to be exempt while the receipts specifically subject to percentage tax are subject to their
specific percentage tax rates. The only exception to this is when the taxpayer opted to have
the VAT apply to this non-vatable sales or receipts.

 Recall that the option to subject to exempt sales to VAT is not permanent. It can be revoked by
the taxpayer after the lapse of the 3-year lock in period.

THE VALUE ADDED TAX MODEL

The VAT payable of a VAT taxpayer is computed as:

Output VAT xxx,xxx

Less: Input VAT xxx,xxx
VAT Due xxx,xxx
Less: Tax Credits xxx,xxx
Vat Still Due xxx,xxx

Output VAT
1. Regular Output VAT- 12% VAT imposed on domestic sales or receipts
2. Zero Output VAT-0% VAT imposed on export and other zero-rated sales

The detailed rules on output VAT will be discussed in Chapter 7

Input VAT
 Input VAT is the VAT paid by the taxpayer on the domestic purchases from VAT suppliers or
on the importation of goods or services in the course of business.

 Despite absence of actual payment of VAT on purchase or import, input VAT may also be
allowed by law as incentives to the taxpayer such as in the case of presumptive input VAT
Chapter 9 (Sa Mami Co PaRe-on their purchases of primary agricultural products.)

 Input VAT has rules on creditability. Not all paid input VAT is creditable against output VAT.
Those allowed to be deductible against output VAT is called "claimable input VAT", "allowable
input VAT" or "creditable input VAT.
VAT DUE
At the end of each month, the input VAT is offset with the output VAT. A positive VAT due is paid to the
BIR. A negative VAT is normally non-refundable but is carried over to the next succeeding months or
quarter.

Output VAT 12,000

Less: Input VAT 8,400
Vat Due 3,600

VAT REPORTING
Period covered BIR Form Deadline
First month of the quarter 2550M 20 days from end of month
Second month of the quarter 2550M 20 days from end of month
For the quarter 2550Q 25 days from end of quarter

Illustration
A VAT taxpayer had the following purchases and sales, exclusive of VAT
January February March
Cash Purchases 700,000 320,000 375,000
Cash Sales 650,000 580,000 500,000

Journal Entries: (January)

Purchases 700,000
Input VAT 84,000
Cash 784,000

Cash 728,000
Sales 650,000
Output VAT 78,000

Output VAT 78,000

Input VAT 78,000

In VAT reporting, the January 2550M would look like:

Output VAT 78,000
Less:Input VAT 84,000
VAT due (6,000)*

*this is not a VAT refundable. It is called input VAT carry-over.

Journal Entries: (February)

Purchases 320,000
Input VAT 38,400
Cash 358,400

Cash 649,600
Sales 580,000
Output VAT 69,600

Output VAT 69,600

Input VAT* 44,400
VAT Payable 25,200

VAT Payable 25,200

Cash 25,200
In VAT reporting, the February 2550M would look like:
Output VAT 69,600
Less:Input VAT 44,000
VAT due 25,200

Journal Entries: (March)

Purchases 375,000
Input VAT 45,000
Cash 420,000

Cash 560,000
Sales 500,000
Output VAT 60,000

Output VAT 60,000

Input VAT* 45,000
VAT Payable 15,000

VAT Payable 15,000

Cash 15,000

In VAT reporting, the March 2550Q would look like:

Output VAT 207,600
Less: Input VAT 167,400
VAT due 40,200
Less: Tax Credit
Estimated monthly VAT payments 25,200
Vat still due 15,000

Sales subject to special VAT rules

There are sales or receipts that are receipts that are subject to special or unique tax, rules such as the
following:
a. Sales to the Government
b. Zero-rated Sales
c. Exempt sales

Type of sales What is unique?

Sales to the Government Limited claimable input VAT (7%)
Zero-rated sales No output VAT but with claimable input VAT
Exempt sales No output VAT and no claimable input VAT

Sales to the government including GOCCs

 The sales to the government and GOCCs is vatable at 12% normal rate but the law requires
government agencies or GOCCs to withhold a 5% final VAT on their purchases. The invoice
sales or billing to the government or GOCCs will be deducted 5% final VAT based on sales or
receipts. The taxpayer will only collect the balance.

Output VAT 12% of sales or receipts

Less: Input VAT (Limited to 7%)
VAT due 5% of sales or receipts

The 7% claimable input VAT on sales to the government or GOCCs is referred to as the standard input
VAT or presumed Input VAT.
Illustration
During the month, a VAT-registered person made a single sale of goods to a government agency for
P448,000, inclusive of P48,000 output VAT. These goods were purchased for P336,000, including
P36,000 input VAT.

In reporting, Form 2550M would look like:

Output VAT (400K x 12%) 48,000

Less: Standard Input VAT (400K x 12%) 28,000
VAT due 20,000
Less: Tax credit- 5% withholding VAT (400K x 5%) 20,000
VAT due and payable 0

Actual Input VAT > Standard Input VAT= the difference (loss) is closed to cost of sales or expenses as an
addition.
36,000-28,000= 8,000

Actual Input VAT < Standard Input VAT= the difference (gain) is closed to cost or expenses as reduction.

Zero-rated Sales
 In principle, foreign consumption like export sales are non-vatable. In our current tax laws, they
are subject to a 0% VAT to VAT taxpayers. With a zero output VAT and a claimable input VAT,
the VAT due would be negative.

As such, the allows taxpayer the privilege to claim the input VAT as a:
a. Tax refund
b. Tax credit

If claimed as tax refund, the taxpayer will be paid back in cash.

Debit: Cash Credit: Input VAT

If claimed as tax credit certificate (TCC), the taxpayer can use it to reduce other internal revenue tax
obligations to the BIR. Debit: Prepaid Tax Credit: Input VAT

**If the input VAT on zero rated sales is not applied with refund or tax credit, the claimable input VAT
would be added to creditable input VAT deductible against output VAT on other vatable sales.
Debit: Output VAT Credit: Input VAT

**default treatment (silent)

Not only export sales are subject to 0% VAT. There are domestic sales or local sales of goods or
services that are considered export sales such as sales to economic zones and persons engaged
international transport operations

Local sales to persons with indirect tax exemption such as international Rice Research Institute and
Asian Development Bank are effectively subject to 0% VAT. This is referred to as effectively zero-rated
sale. (to be discussed in Chapter 8)

Exempt sales
For purpose of the VAT, exempt sales are non-vatable sales such as:
a. Exempt sales of goods, services or properties
b. Services specifically subject to percentage tax
Exempt sales will not be subject to output VAT. Consequently, the seller is also not allowed to credit
input VAT. The input VAT traceable to exempt sales is part of costs or expenses of the seller and is
deductible against gross income subject to income tax.

Illustration:
Mr. Leo, a VAT-registered person sold unprocessed marine food products for P450,000 which he
bought for P200,000. He also purchased P10,000 supplies, exclusive of P1,200 input VAT, which were
all used in connection with these sales.

Inventory/Purchases 200,000
Supplies 10,000
Input VAT 1,200
Cash 211,200

Cash 450,000
Sales 450,000

Cost of sales 200,000

Supplies expense 11,200
Inventory/Purchases 200,000
Supplies 10,000
Input VAT 1,200

Zero-rated sales Exempt sales

Output VAT None None
Input VAT Creditable Non-creditable (expense)
Types of sales Export or domestic/local sales Domestic sales
Taxpayers involved VAT taxpayers only VAT or non-VAT taxpayers

Classification of sales or receipts

1. Sales to the government
2. Zero-rated sales
3. Exempt sales
4. Regular sales

Regular sales are subject to 12% VAT and are allowed full credit of actual input VAT. It covers all sales
of goods, properties or services other than:
a. Sales to the government or GOCCs
b. Zero-rated sales
c. Exempt sales

Summary of VAT rules for each type of sales

Type of sales Output VAT Claimable input VAT VAT due
Exempt sales None None None
Zero-rated sales Zero Actual if not claimed as Negative
credit or refund
Sales to government 12% of sales/ receipts 7% of sales/receipts None
Regular sales 12% of sales/ receipts Actual input VAT paid Positive or Negative

Classification Rules
1. The sale of goods destined to a non-resident buyer abroad is a zero-rated sale even if it
involves exempt goods
2. The sale of vatable goods or services in the Philippines is normally a regular vatable sale,
except when the sale is:
a. Made to the government or GOCCs- subject to the final withholding VAT
 b. Considered an export or effectively zero-rated such as sales to VAT exempt persons-
subject to 0% VAT
3. The sale of exempt goods and services to the government or GOCC is still exempt sales.

Summary of Rules on Sales of Goods:

Domestic Sales Export Sales
Taxable persons VAT-exempt persons Any person
Sale of exempt goods Exempt 0% VAT 0% VAT
Sale of vatable goods 12% VAT 0% VAT 0% VAT

Other sales subject to VAT

1. Sales of registrable persons

o The sales of registrable persons are subject to VAT despite their non-registration as
VAT taxpayers but no input VAT credit is allowed.
2. Sales of non-VAT taxpayers who issues VAT receipt or invoice
o Non-VAT taxpayers who illegally charge VAT on their sales shall be subject to VAT
without the benefit of input VAT plus the 50% surcharge and 3% percentage tax.
3. Exempt sales billed by VAT taxpayers as regular sales
o Exempt sales which are not so clearly indicated as “Exempt” in the VAT receipts shall
be considered as regular sales subject to VAT