Business

Taxes

VALUE ADDED TAX – Part 1

Module 13 – The Regular Output VAT
Chapters 6&7
Prepared by: Mrs. Nelia I. Tomas, CPA, LPT

Business and Transfer Taxation, Laws, Principles and Application. 2019 Edition. Banggawan, Rex B.
Learning Objectives

After completing the lesson, the students will be able to

1. Comprehend the scope of VAT an sale
2. Understand the mandatory registration and optional registration
3. Identify the registration requirements
4. Explain the VAT threshold application
5. Discuss the VAT model
6. Understand the sources and treatment of output and input VAT on different types of sales
7. Explain the other vatable sales and invoicing requirements
8. Comprehend the output VAT and the VAT base on the sales of goods
9. Comprehend the output VAT and the VAT base on the sales of services
10. Comprehend the output VAT on the sales of properties
11. Explain the transactions deemed sales
12. Demonstrate the reporting of output VAT
THE VALUE ADDED TAX
The VAT covers all vatable sales of goods, properties, services, or lease of properties by
VAT taxpayers.

Vatable sales or receipts are from sources other than:

1. Exempt sales
2. Receipts from services specifically subject to percentage tax

Who are VAT taxpayers?

a. VAT-registered persons
b. VAT-registrable persons
Illustration 1
As of September 2020, Mr. Tobaco had the following gross receipts from his professional practice and his
other businesses in the immediately preceding 12-months:

Gross receipts from restaurant business P 2,200,000

Gross receipts from barbecue stand 200,000
Gross receipts from taxi cab operations 1,500,000
Gross receipts from professional practice 900,000
Total P 4,800,000

Requirements:
1. Compute for vatable sales.
2. What type of business tax does Mr. Tobaco will be liable for the month of October 2020?
Taxpayers with Mixed Transactions
 VAT shall apply only to vatable sales or receipts
 The non-vatable sales or receipts remains exempt from VAT.
 The exempt sales remain to be exempt while the receipts 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.
 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 P xxx,xxx

Less: Input VAT xxx,xxx
VAT due P xxx,xxx
Less: Tax credits xxx,xxx
VAT still due Pxxx,xxx
Output VAT
 This is the VAT on the vatable sales or receipts. This is presumed to be passed on the
seller on his sales or receipts.

Types of Output VAT

1. Regular Output VAT
2. Zero Output VAT
SOURCES OF REGULAR OUTPUT VAT
Taxable Transaction
1. Sales of vatable goods
2. Sales of vatable services
3. Sales of vatable properties
4. Transactions deemed sales
Tax basis
Gross selling price, unless reasonably lower
Gross receipts
Gross selling as defined by the BIR
Fair value of property deemed sold

SALE OF VATABLE GOODS

 The sale of goods is subject to 12% VAT based on gross selling unless unreasonably
lower.
 If the selling price is unreasonably lower, the VAT shall be based on the fair value of
the goods sold.
 The gross selling price deemed unreasonably lower when it is lower by more than
30% of the actual market value of the goods sold. The fair value of the goods shall be
determined by the Commissioner of Internal Revenue.
 Nonetheless, if one of the parties is the government, the output VAT shall be based on
the actual selling price (Sec. 7, RR4-2007).
Illustration 2
In June 2020, Mabaca Corporation made the following sales:
Cash Sales P 200,000
Sales on account (P80,000 collected) 100,000
Installment sales (P120,000 collected) 300,000
Delivery charges to customers 15,000
Advances from customers 50,000
Total sales P 665,000

Requirements: Compute for the gross selling price and the output VAT.
SALE OF VATABLE SERVICES
 The sale of services is subject to 12% VAT based on gross receipts or collection of
income.

SALE OF VATABLE PROPERTIES

 The sale, barter or exchange of vatable real properties is subject to VAT on gross
selling price.
 Under the regulations, gross selling price means the higher of the:
a. Consideration or selling price
b. Fair value of the property
 Under the NIRC, the fair value of real property is the higher between the:
a. Zonal value; and
b. Fair value per assessor's office.
 In the absence of a zonal value, “gross selling price” shall mean the fair value per
assessment or consideration stated in the sales document, whichever is higher.
 If gross selling price is based on the zonal value or assessor’s fair value property of
the property, the zonal value or assessed value shall be presumed exclusive of VAT.
 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.
 If the gross selling price is based on the consideration appearing in the document of
sale, the same is presumed to be inclusive of VAT.

Installment reporting of Output VAT on real properties

 The output VAT on the sale of real properties may be reported installment if the initial
payment from such sale does not exceed 25% of the selling price.

Timing of Output VAT reporting

 Output VAT on the sale of vatable goods is reported in the month of sale.
 Output VAT on the sale of vatable services is reported in the month of collection.
 Output VAT on the sale of vatable properties is reported in the month of sale or by
installment method.
Illustration 3 – Sale of vatable services
A VAT-registered repairman had the service provider and had the following revenue and collection during
the month:
Revenue Collection Balance
Client A – for services rendered:
Billing for materials P 200,000 P 200,000 P 0
Service fee 100,000 50,000 50,000
Total P 300,000 P 250,000 P 50,000

Client B – work not yet started on a P500,000 contract:

Advances P P 200,000 P _______

The gross receipt includes advances and collection of amount charged for labor and materials included with
the service.

Requirements: Compute for the gross receipts and the output VAT.
Illustration 4 – Sale of vatable properties
Mr. Realtor, a real property dealer, sold a commercial lot in June 2020. The following data relate to the sale:

Appraisal value P 4,500,000

Zonal value 4,000,000
Assessor’s fair value 2,500,000
Selling price 3,800,000

Requirement: Compute for the output VAT.

Illustration 5
August 1, 2020, a real property dealer sold a commercial lot with the following data:

Zonal value P 6,000,000

Assessed value 4,500,000
Selling price 5,000,000

A down payment of P500,000 was paid with the balance due in 36 monthly installments of P 125,000
starting September 1, 2020.

Output VAT (P6,000,000 x 12%) P 720,000

Requirements: Compute for the reportable VAT for the month of August, September and every month
thereafter.
Sale of property by a realty dealer on a deferred payment basis
 The sale of property by a realty dealer on a deferred payment basis, not on the
installment plan, shall be treated as a cash sale.
 The fair value or gross selling price whichever is higher is subject to VAT in the month
of sale.
 Subsequent collections from the sale shall no longer be subjected to VAT

Sales 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 (Sec. 4.109-1 (B) (p) of RR16-2005 as amended by RR4-
2007).

Sale of property not in the ordinary course of business

 This sale is exempt from VAT.
TRANSACTIONS DEEMED SALES
 There are acquisition transactions involving goods or properties which are consumption
in nature but are not coursed through a purchase transaction. These transactions (i.e.
consumptions) are not recorded as sales by the business and could evade taxation.
These transactions are considered “deemed sales” subjected to the VAT.

List of Transactions deemed sales:

1. 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.
2. Distribution or transfer to:
a. Shareholders or investors share in the profits of VAT-registered persons
b. Creditors in payment of debt or obligation
3. Consignment of goods if actual sale is not made within 60 days following the date such
goods were consigned
4. 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 cessation, whether
or not the business is continued by new owner or successor
5. Cessation of status as a VAT-registered person
Transfer, use or consumption not in the ordinary course of business
 This occurs when vataþle ordinary assets are used for purposes other than their
intended purpose, such as when:
1. Goods or properties held for sale no longer sold but are transferred or
disposed of by other means other than sale.
2. Properties originally intended for use are no longer used but are transferred,
disposed of or exchanged with other properties.

Examples of consumptions not in the course of business:

1. Withdrawal by the business owner for personal use, goods held for sale or properties
held for use
2. Using goods held for sale or properties held for use to pay off debts with creditors
(Dacion en Pago)
3. Using goods held for sale or properties held for use as property dividends to
shareholders
4. Exchange of goods held for use for other properties
5. Sale or disposal of properties held for use in exchange for cash or other properties
Consignment of goods not withdrawn in 60 days
 Consigned goods to consignees, if not withdrawn within 60 days are also presumed or
deemed sold subject to VAT.

Retirement or cessation of business

 The retirement or cessation from business will result in the transfer of all goods or
properties of the business to the personal use or account of the business owner or
owners. Hence, it is also a “deemed sale.”
 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.
General Rule: Business dissolution is deemed sale.
As a rule of thumb, one must note that when there is business dissolution, there is deemed
sale, such as in the following cases:
1. Change of ownership of the business
a. Incorporation of a sole proprietorship
b. Sale by a proprietor of his entire business
2. Dissolution of a partnership
a. and creation of a new partnership which takes over the business
b. by incorporation into a partnership

Exception to the business dissolution rule:

1. Merger or consolidation There is a business dissolution but not deemed sale

under the law.
2. Cessation of status as There is no business dissolution but is treated as a
VAT-registered person deemed sale.
Illustration 6 – Consignment of goods
A VAT-registered taxpayer has its own sales operations but also sells goods through consignees. It also sell
goods on consignment for a commission. The following were the results of operations for the month ended
April 30, 2020:

Sales – own inventories P 500,000

Sales – reported by consignees 150,000
Sales – in behalf of consignors 100,000
Commission income on goods sold to consignors 20,000

The billed prices of outstanding consignments still held by consignees as of April 30, 2020 are as follows:

February 2020 P 50,000

March 2020 80,000
April 2020 120,000

Requirements: How much is the amount of deemed sales? Compute for the output VAT.
Cessation of status as VAT-registered person
 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:
a. Change of business activity from VAT-taxable status to VAT-exempt status
b. Approval of a request for cancellation of registration due to reversion to
exempt status
c. Approval of request for cancellation of 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 exempt
d. 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 twelve months of
operations

Output tax on transactions deemed sales

 The output tax on deemed sales transactions shall be based on the market value of the
goods sold as of the occurrence of the deemed sale transaction.
 In the case of retirement or cessation of business, it shall be based on the acquisition
costs or the current market price of the goods or properties, whichever is lower.
Determination of fair value
The Commissioner of Internal Revenue shall determine the appropriate tax base in cases
where the:
a. transaction is a deemed sale
b. gross selling price is unreasonably lower

Invoicing Requirement for Subsequent Sale of Goods or Properties Deemed Sold

 The subsequent sale of goods or properties deemed sold shall not be subject to VAT.
 The seller of goods or properties previously deemed sold shall indicate the sales
invoice number wherein the output tax on the deemed sale was imposed and the
corresponding tax paid on the items sold.
 For continuing business taxpayers, this is essential to avoid further imposition of any
business tax on the subsequent sale. This is also essential for the buyer to establish its
claim of input VAT on his purchase of goods previously deemed sold to the seller.
Billing Requirements for Output VAT
 The output VAT must be specifically indicated in the VAT invoice or receipt. It must be
billed separately in the case of sales of properties where the fair value exceeds the
selling price.

Determination of the Output VAT

 The amount of output VAT is dependent upon the price quoted by the VAT taxpayer.
Such amount is understood to be inclusive of the VAT in the absence of a special
agreement to the contrary.

Rule on VAT not separately billed

 If the VAT is not separately billed in the document of sale, the selling price or the
consideration stated therein shall be deemed to be inclusive of the VAT.
 The VAT shall be computed from the agreed price as a factor of 12/112.

Incorrect billing of VAT

 If the VAT is incorrectly billed, the total amount billed by the taxpayer shall be deemed
inclusive of the VAT.
 The VAT shall be computed from the agreed price as a factor of 12/112.
Required Readings

Chapters 6, pp. 196 – 202: Chapters 7, pp. 228 - 244

Banggawan, Rex B. 2019. BUSINESS AND TRANSFER TAXATION LAWS,

PRINCIPLES, AND APPLICATIONS. Real Excellence Publishing., Pasay
Default Barangay, Pasay City, Philippines.
Learning Activities

Chapters 6, pp. 213 – 227: Chapters 7, pp. 245 - 261

Banggawan, Rex B. 2019. BUSINESS AND TRANSFER TAXATION LAWS,

PRINCIPLES, AND APPLICATIONS. Real Excellence Publishing., Pasay
Default Barangay, Pasay City, Philippines.
 Appendix: Course Materials Evaluation
Adopted: BEST PRACTICES AND SAMPLE QUESTIONS FOR COURSE EVALUATION SURVEYS. Retrieved from
https://assessment.provost.wisc.edu/best-practices-and-sample-questions-for-courseevaluation-surveys//.