PART IV

VALUE-ADDED TAX (VAD

CBAPTERXV
INTRODUCTION

Characteristics of Value-Added Tax

(Bar Question (1996])
1. It is a tax on the value added of a taxpayer.
2. It is collected through the "tax credit method" or "invoice
method."
3. It is a transparent form of sales tax.
4. It is a broad-based tax on ronsumption of goods, properties,
or services in the Philippines as it applies to all stages of
manufacture, production, and distribution of goods and
services.
5. It is an indirect tax.
6. The Philippines adopted the "separate indication of tax
method."
7. There is no cascading in the value-added tax system.

Tax on value added

VAT is a tax on the value added of a taxpayer arising from
taxable sales of goods, properties, or services during the quarter at
the rate of zero percent or 10%. ·"Value added,, is the difference
between total sales of the taxpayer for the taxable quarter subject
to value-added tax and his total purchases for the same period
subject also to value-added tax. In this sense, the value added of a
businessman is the same as his gross profit, provided that he is not
engaged in transactions exempt from value-added tax. If there is
no value added on taxable sales (because the gross sales or receipts

488
 VALUE-ADDED T AX (VAT) 489
Introduction

is equal to the gross purchases) or where there is a loss from sale

(because the gross purchases is more than gross sales or receipts),
there is still output tax due on the transaction. There will be no
value-added tax due or there will be a n excess input tax which may
be carried over to the next quarter(s), respectively. The presence or
absence of mark-up or profit by itself is not material for purposes of
determining taxability of a transaction subject to tax.
The term "output tax,, m eans the value-added tax due on the
sale or lease of taxable goods, properties or services by any person
registered or required to register under Section 236 of the Tax Code
(Sec. 11 OfA], NIRC).
The term "input tax,, means the value-added tax due from or
paid by a VAT-registered person in the course of his trade or business
on importation of goods or loca l purchase of goods, properties, or
services, including lease or use of property, from a VAT-registered \

I
person (Sec. 11 O[A}, NIRC). The buyer becomes entitled to the input
tax upon consummation of sale and issuance of a VAT invoice, in the
case of sale of goods or properties, and upon payment of service fee
or compensation, in the case of sale of services. It is not necessary
that the inventory of goods or properties be sold before the buyer \
thereof becomes entitled to claim the input tax.
The value added of a taxpayer and his value-added tax due
or excess input tax on his transactions during the quarter can be \1
computed by using the formula shown below: Il
J

CASE "A" CASE "B"

Amount VAT Amount VAT
Sales 100 100
Output tax (100 x 12%) 12.0 12.0
Purchases 80 130
Input tax (80 or 130 x 12%) 9.6 15.6
Value added 20 (30)
VAT payable (20 x 12%) 2.4
Excess input tax [(30) x (3.6)
12%)]

Tax Credit Method

There are two popular ways of computing the value-added tax
of a taxpayer. These are the (a) cost deduction method, and (b) tax
credit method.
 RIVJSWD ON TAXATION

~ deduction maJaod"1 refers to the manner of computing

the taxpayer's value-added tax liability by deducting his costs and
expenses subject to value-added tax from his taxable sales of good8,
properties, or services, and multiplying the resulting value added by
12%. (See illustration above).
"Tax credit lftdhod• (sometimes called "'invoice method"',
refers to the manner by which the value-added tax of a taxpayer is
computed. The input taxes shifted by the sellers to the buyer are
II
credited against the buyer's output taxes when he in tum sells the
taxable goods, properties, or services (Secs. 105 and 11 OfA], NIRC). I
The tax is shifted when the buyer of goods, properties, or services
used in the product ion or distribution process passes the input tax
forward to his buyer or backward to his supplier. There is generally
forward shifting of tax when there is a seller's market (i.e., there
I
are more buyers than sellers or demand is greater than supply), and
there is backward shifting of tax when there is a buyer's market
like in real estate and coconut oil industries. Although the seller is
the person legally liable to pay the tax. the seller shifts the burden
of the tax to the intermediate buyers who successively pass on the
tax to their buyers until the goods, property, or service reaches the
final consumer. It will be noted that whether it is the cost deduction
method or the tax credit method is used, the value-added tax due or
the excess input tax is the same. (See illustration above).
VAT is an indirect tax that may be shifted or passed on to the
buyer, transferee, or lessee of the goods, properties or services. As
such, it should be understood not in the context of the person or entity
that is primarily, directly, and legally liable for its payment, but in
terms of its nature as a tax on consumption. In either case, though,
the same conclusion is arrived at. The law that originally imposed
the VAT in the country, as well as the subsequent amendments of
that law, has been drawn from the tax credit method. Such method
adopted the mechanics and self-enforcement features of the VAT
as first i_mplemented and practiced in Europe, and subsequently
adopted 1n New Zealand and Canada. Under the present method
that relies on invoices, an entity can credit against or subtract
from the VAT charged on its sales or outputs the VAT paid on its
purchases, inputs, and imports. If at the end of a taxable quarter
the output taxes charged by a seller are equal to the input taxes
passed on by the suppliers, no payment is required. It is when the
output taxes exceed the input taxes that the excess has to be paid. If.
however, the input taxes exceed the output taxes, the excess shall be
 VALUE-ADDEDTAX (VAT) 491
Introduction

carried over to the succeeding quarter or quarters. Should the input

taxes result from zero-rated or effectively zero-rated transactions
or from the acquisition of capital goods, any excess over the output
taxes shall instead be refunded to the taxpayer or credited against
other internal revenue taxes (CIR v. Seagate Technology
(Philippines), G.R. No. 153866, February 11, 2005).

Sales Tax
VAT is a tax on the taxable sale, barter or exchange of goods,
properties, or services. A barter or exchange has the same tax
consequence as a sale. A sale m ay be an actual sale or a deemed
sale, or an export sale or a local sale. \
, ... i
Generally, there must be· an actual sale of goods, properties,
or services in the Philippines in order that value-added tax may be I\

imposed. Exceptions are as follows: (~o tt,-<,/

/. Importation of goods. - Importation of goods by any
person, who may or may not be engaged in trade or
business in the Philippines, in which case, the tax is
imposed on th e impor ter-buyer (Sec. 105, NIRC). Take
note that importation of service is not subject to value-
added tax, unless such service is performed within the
Philippines;
~ Erroneous issuance of VAT invoice or receipt for VAT-
exempt sales of goods, properties, or services. - Sales of
goods, properties, or services exempt from value-added
tax are not covered by the value-added tax system and
should be evidenced by non-VAT invoices or receipts.
However, the erroneous issuance by a seller of a VAT
invoice or receipt for an exempt sale of goods, properties,
or services makes him liable to the value-added tax (Sec.
/ l 13[DJ, N IRC); and
3. Deemed sales of goods or properties (Sec. 106[BJ, NIRC).

Taxable Transactions
The main object of the value-added tax is the transaction. A
transaction could either be: jf5 a sale, ba~ter, or exchange of goods
or properties in the course of trade or business; Ma sale of service
in the course of trade or business; or ~an importation of goods
whether or not made in the course of trade or business (Sec. 105'
NIRC). '
492 R EVIEWER ON TAXATION

Broad-based tax on consumption in the Philippines

VAT is broad-based because every sale of goods, pro_per~ies, or
services at the levels of manufacturers or producers and distributors
(whether at wholesale and retail) is s~bject to v~lue:adde~ tax.
While every taxable sale of goods, properties, or services IS subJect to
value-added tax, the tax burden rests with the final ?onsumer who \
consumes the goods, properties or services. Consumpt10n take~ place "
when the taxpayer does not sell further the goods, _properties, or
services either because he is the final consumer or he IS not engaged
in business subject to value-added tax like sale of agricultural food
products in their original state.
Sale of goods located and consumed outside the Philippines is
exempt from value-added tax, even if the contracting parties are
both domestic corporations.
The VAT system encourages savings because the tax is
imposed only upon consumption. Moreover, investments in capital
goods such as machinery and equipment are effectively not subject
to value-added tax due to the provision in the Tax Code allowing
taxpayers to recover input taxes paid on acquisition of capital goods
through refund or tax credit.

Destination Principle
The destination of the goods determines taxation or exemption
from tax. Export sales of goods are subject to zero percent rate (or
zero-rated), while imports of goods are subject to 12% value-added
tax. Some rulings referred to the destination principle as "cross
border doctrine." Exports are zero-rated because the consumption
of such goods will be made outside the Philippines, while imports
of goods are subject to 12% value-added tax because they are for
consumption within the Philippines. In the case of services, the
consumption takes place where the service is performed following
the "situs-of-service principle." '
When the goods, properties or services are consumed or are
destined f~r _consumption abroad, they are zero-rated; hence, no
output tax is imposed on the sale thereof, but the input taxes passed
on _upon purchase of taxable goods, properties, or ser•ices may be
claimed by the taxpayer as refund or tax credit from the BIR.

Indirect Tax
~ indirect tax is_ a tax demanded in the first instance from one
person in the expectation and intention that he can shift the burden
 VALUE-ADDED TAX (VAT) 493
Introduction

to someone else (CIR v. Tours Specialists, Inc., G.R. No. 66416,

March 21, 1990). It is one paid by a person who is not directly liable
therefor, and who may thereafter shift or pass on the tax to another
person or entity, which ultimately assumes the tax burden (Maceda
v. Macaraig, 197 SCRA 771 [19911). The impact of taxation is on
the seller upon whom the tax has been imposed, while the incidence
of tax is on the final consumer, the place at which the tax comes to
rest.
A person who is engaged in trade or business subject to value-
added tax does not bear the burden of taxation, since he generally
passes on the tax to his customers (whether VAT-registered or not),
in which case, there is "forward passing'' of tax. "Backward passing''
of tax happens when the seller assumes the payment of the tax,
which happens when there is a buyer's market or supply is greater
than demand. This is illustrated below:

FORWARD BACKWARD
PASSING
Selling Price 120.0 1'\,l'Y 107.14 /i, 1-I
Output tax 14.4 • 12.86
Cost 100.0 100.00
Input tax 12.0 12.00
Gain 20.0 7.14
VAT Payable 2.4 0.86

In the example above, the total invoice amount (gross selling

price plus 12% VAT) is Pl34.40 (Pl20 + Pl4.40), in forward shifting
of tax, and Pl20.00 (Pl07 .14 + Pl2.86), in backward shifting of
tax.

Cumulative through the chain of distribution of goods and

performance of services
Every taxable sale or transfer of goods, properties, or services
is subject to value-added tax. This means that on the taxable
transaction, the seller is subject to output tax, while the buyer is
entitled to input tax. When there is a new sale of the same goods,
properties, or services, the new seller is subj ect to the output tax and
the new buyer is entitled to input tax. This procedure is repeated
until the last sale to the final consumer. In such a case, the input tax
passed on to the final consumer becomes part of his acquisition cost
or operating expense.

i
494 REVIEWER ON TAXATION

Tax-inclusive method/separate indication of VAT

Sale of goods by the supplier must be su~ject to value-adde_d
tax in order to entitle the buyer who is also sub3ect to VAT to credit .
the input tax from the output tax on his taxable sale. Th~ VA'!'- l
registered seller need not show the output tax as a separate item 1_n
his sales invoice or receipt to be liable to the value-added tax, nor 1s
the VAT-registered buyer required to prove to the BIR that it has I
been shown as a separate item in the sales invoice or receipt to be
entitled to input tax. The law presumes that in every VAT invoice I
or receipt, there is always a VAT component shifted by the seller,
which can easily be determined by dividing the total invoice amount
by 11 or by multiplying the total invoice amount by 1/11, when the
regular VAT rate is 10%, or by dividing the total invoice amount by
9.33333 or multiplying the total invoice amount by 1/9.33333, when
the regular VAT rate is 12% (Sec. 106[D}[l} and Sec. 108[CJ, NIRC).
The value-added tax wa.s mandated not to be shown as a separate
item in the invoice or receipt, except in the case of banks which are
required to indicate the value-added tax as a separate item in the
invoice or receipt in order that the same may be credited by a VAT-
registered buyer of the bank's services from his output tax (Secs.
106 and 108, NIRC, as implemented by Rev. Regs. Nos. 12-2003 and
20-2003).
Effective November 1, 2005, R.A. 9337, however, made a
complete turn-around by requiring that the VAT component shall
be separately indicated in the VAT invoice or receipt. To implement
such provision, Revenue Regulations No. 18-2011 was promulgated
on November 21, 2011. ·

Value added tax does not cascade

A tax is said to cascade when there is "tax on tax" (Secs. 106[AJ,
,: 08[A],.a:"d,,11 OfA], NIRC). Another name given to "cascading" is
pyramiding - the tax should not be imposed upon another tax
(People v. Sandig':nbayan and Tan, G.R. No. 15232, August
16, ~00~( In defining the terms "gross selling price" and "gross
receipts, the value-added tax law expressly excludes the value-
~dded taxes passed on by the sellers to the buyers. Moreover, the
inp':1t tax~s due from or paid by the buyer are allowed to be credited
against his output taxes. There was cascading in the old sales tax
system
d as fthe sales tax on oricnnal
b£
sales of goo d s pa1'db y 1mpor
· t ers
an _manu acturers and the turnover taxes paid by wholesalers and
retailers of goods became part of the gross sell'1ng price · sub'Jeet t o the
t urnover t ax.
 VALUE-ADDED TAX (VAT) 495
Introduction

Principle of Recoupment of Tax

Interposing an exempt transaction along the chain of
distribution diminishes the ability of the VAT system to collect the
tax on the values added by each seller; in fact, it aggravates cascading
of taxes. As a result, the value-added tax that was foregone in the
prior exempt transaction is recouped from the succeeding customer
who is liable to value-added tax.
 CHAPTER XVI
PERSONS LIABLE TO TAX

Taxable Persons
A person may be characterized as a taxable person, if (a) he
undertakes taxable transactions in goods, properties or services
consumed or destined for consumption within the Philippines, (b)
such transactions are entered into in the course of his trade or
business, and (c) the amount of his gross sales or receipts is over the
threshold fixed by law or regulations. An importer of taxable goods,
whether made in the course of trade or business, is also a taxable
person.
Revenue Regulations No. 13-2018, dated March 15, 2018,
implementing the VAT provisions under R.A. 10963 (TRAIN),
effective January 1, 2018, clarified the following:
1. The general VAT-exempt threshold1 is P3,000,000;
2. The VAT-exempt threshold on low-cost housing is the
selling price per unit as set by the Housing and Urban
Development Coordinating (HUDCC) pursuant to R.A.
7279 (Urban Development and Housing Act of 1992);2
3. The VAT-exempt threshold on socialized housing for
residential house and lot is P450,000 or as may from time
to time be determine by the HUDCC and the NEDA and
other related laws, and residential lot only, P180,000;3
4. The VAT-exempt threshold amount for sale of resident
lot is Pl,919,500, and sale of residential house and lot and

1
Sec. 109(BB) of the 1997 Tax Code, as amended by R.A. No. 10963 (TRAIN).
2
See RMC No. 30-2009, dated May 14, 2009.
3
See Rev. Regs. No. 13-2018; RMC No. 36-2014; HUDCC MC No. 1, S2013,
dated October 16, 2013.

496
 VALUE-ADDED TAX (VAT) 497
Persons Liable to Tax

other dwelling, P3,199,200, as adjusted in 2011 using the

2010 Consu mer Price Index values·, 4
5. If two or Rdjncent residential Jots are sold or dis posed in
favor of one buyer, for the purpose of utilizing the lots as
one residential lot, the sale shall be exempt from VAT only
if the aggregate value of the lots do not exceed Pl,919,500,
as adjusted in 2011 using the 2010 Consumer Price Index
values;
6. Adjacent residential lots, although covered by separate
titles and/or separate tax declarations, when sold or
disposed to one and the same buyer, whether covered by
one or separate Deed of Conveyance, shall be pres umed
as a sale of one residential lot;
7. Beginning January 1, 2021, the VAT exemption shall only
apply to the following:
a. Sale of real properties not primarily held for sale to
customers or held for lease in the ordinary course of
trade or business;
b. Sale of real property utilized for socialized housing
as defined by R.A. 7279; and
c. Sale of house and lot, and other residential dwellings
with selling price of not more than P2,000,000,
s ubject to price adjustment using the Consumer
Price Index, as published by the Philippine Statistics
Authority (PSA), every three years thereafter;
8. The VAT-exempt threshold for lease of residential units is
P15,000 per month.
A taxable person must register for value-added tax purposes
(Sec. 237/AJ, NIRC). However, his failure to regist er as a VAT
person does not exculpate him from his liability to pay the value-
added tax on his taxable sales of goods, properties or services. In
other words, registration as a VAT person is not a re quirement to

4The threshold amounts undt-r Soc. 109(1)(P), NlRC, as amended by R.A. No.
10963 (TRAIN), was clarified under Rev. Regs. No. 13-2018, dated March 15, 2018,
to mean residential lot valu~ at Pl ,500,000, and houi;e and lot and other residential
dwelling valued at ~2.500,000, as adjusted in 2011 using the 2010 Consumer
Price Index values; Refer to Rev. Regs. No. 3-2012, Rev. Regs. No. 16-2011.
498 REVIEWER ON TAXATION

make a person liable to value-added tax (Secs. 106, 107, and 108,
NIRC). In relation to Section 109(1)(BB) of the NIRC, an existing
VAT-registered person whose gross sales/receipts in the preceding
year did not exceed the VAT-exempt threshold of P3,000,000, may
opt to: (a) register as a Non-VAT as a result of the implementation
of R.A. 10963 (TRAIN), effective January 1, 2018; or (b) avail of
the Optional Registration for VAT of Exempt Person under Section
236(H) of the NIRC, subject to the condition that once availed of,
shall not be entitled to cancel the VAT registration for the next three
years (Sec. 13, Rev. Regs. No. 13-2018).
A taxable person may conduct business as an individual
(single proprietorship), estat e or trust, partnership, joint venture,
corporation, cooperative, or association. Special attention must be
given to the following situations:
Husband and wife. - For VAT purposes, husband and
wife shall be treated as separate taxpayers. Each spouse engaged
in taxable sale of goods, properties, or services must comply with
the administrative requirements prescribed for VAT taxpayers.
However, the "aggregation rule" for each spouse shall apply,
which means that the taxable sales of goods, properties, and services
by each spouse shall be added together to determine whether he/she
has exceeded the general threshold prescribed by law (P3,000,000). If
he/she does, then he/she must register as a VAT person and comply
with his/her obligations under the VAT law; otherwise, h e/she would
be subject to the three percent percentage tax under Section 116 of
the Tax Code.
Joint venture. - An unincorporated joint venture is created
when two corporations, while registered and operating separately,
were placed under one sole management, which operated the business
affairs of said companies as though constituted as a single entity,
thereby obtaining substantial economy and profits in the operation.
An unincorporated joint venture is a variant form of temporary
organization erected for the purpose of carrying out some particular
transaction or project. Dissolution is effected upon accomplishment
or abandonment of the purpose for which the organization was
formed. An unincorporated joint venture engaged in construction
activity or in energy-related projects, although exempt from income
tax, is liable to value-added tax. Hence, it must register as a VAT
person, secure its own Taxpayer Identification Number, keep its
books of accounts, issue sales invoices or official receipts, and file
VAT declarations 01· returns and pay value-added taxes.
 VALUE-ADDED TAX (VAT) 499
Persons Liable to Tax

However, the BIR has allowed certain arrangements through

which the unincorporated joint venture is treated merely as a "flow-
through entity'' that does not pay value-added t ax. In such a case,
the members of the joint venture are responsible for their respective
obligations under the joint venture agreement and can claim input
taxes on their taxable purchases (See BIR Ruling No. 2-97, January
14, 1997).
Government. - The government, consisting of the three
branches, namely the executive, legislative, and judiciary, and
its political subdivision, performing an essential governmental
function, is exempt from value-added tax. However , government
entities and instrumentalities, including government-owned or
-controlled corporations, are subject to value-added tax if they sell
goods, properties, or services in the course of trade or business or
when they perform proprietary functions. Thus, local water districts
and similar public utilities are not exempt from value-added
tax. Beginning November 1, 2005, the government is required to
withhold a final VAT of five percent based on the gross payment for
its purchases of taxable goods, properties or services pursuant to the
provisions of R.A. 9337.
Non-stock, non-profit association or organization. -
Generally, a non-stock, non-profit association or organization whose
receipts come purely from association dues or specia l assessments
from members is not subject to the value-added tax. The reason
for the exemption may either be: (a) that it is not engaged in
business or in taxable sale of goods, properties, or services; or (b)
that the amount received by it from the members is not income but
represents additional capital contribution; or (c) that it is a liability
of the association which must be spent by the association for the
special purposes for which the fund was created, and the passing
of Board Resolution by the Board of Trustees should clearly spell
this out. Thus, a business league, which is not organized for profit,
relies solely on the mandatory contributions of its members for
its operating expenses, and performs functions exclusively for the
benefit of its members, is not considered rendering service in the
course of trade or business; hence, not subject to VAT.6
The Manila Bethel Temple, Inc., a religious organization, is
exempt from all taxes to which it is directly liable on activities not
I
i
!
t
5VAT Ruling No. 801-90, October 11, 1990.
li
!
500 R EVIEWER ON TAXATION

conducted for profit. Such activities include gross receipts from

the following sources: (a) sale of bibles and other religious articles
(all reading materials) on a non-profit basis to church members;
(b) receipts from the Music College in the form of offerings on a
voluntary basis; and (c) receipts from the Bible College in the form
of offerings on a voluntary basis.6 Along the same vein, the receipt
of small sums of money by priests or their congregation from the
relatives and friends of the deceased for praying for the soul of dead
persons is also exempt from value-added tax, sin ce such religious
activity is not considered as a taxable trade or business.
Condominium corporation. - A condominium corporation
that will not sell, barter, exchange, or lease any good or property
and will not render service for a fee, but merely implements the
administration of the required services to collect the association dues
and assessments from the unit owners, pursuant to its corporate
purposes as "trustee" of the fund, is not subject to VAT on such activity.
The above ruling was recently revoked by Revenue Memorandum
Circular No. 65-2012 dated October 31, 2012,7 where the CIR ruled
that amounts paid in as association dues, membership fees, and
other assessments/charges by members/tenants of a condominium
corporation form part of gross income of the latter subject to income
tax (and expanded withholding tax) as well as value-added tax,
because a condominium corporation furnishes its members/tenants
with beneficial services (i.e., benefits, advantages, and privileges in
return for such payments). The RMC was anchored on the decision
of the Supreme Court in the case of CIR v. CA and Commonwealth
Management and Services Corporation (G.R. No. 125355, March 30,
2000), whereby the said Court stated: "Even a non-stock, non-profit
organization or government entity is liable to pay VAT on the sale of
goods or services. VAT is a tax on transaction, even in the absence of
profit attributable thereto." In Section 105 of the Tax Code, the term
"in the course of trade or business" requires the regular conduct or
pursuit of a commercial or economic activity, regardless of whether
or not the entity is profit-oriented. The provision of Section 105 is

6
VAT Ruling No. 266-89, October 26, 1989.
7
A petition for declaratory relief against the RMC was filed by the First e-Bank
Tower Condominium Corporation on December 26, 2012 before a Makati RTC. The
cour1: ruled that the RMC did not only clarify an existing law, but chan ges its import
and mterpretation that in so doing it prejudices the right of the petitioner as a
taxpayer. Also, it added that the BIR failed to give due notice and opportunity to
be heard, before issuing said circular. Thus, in imposing additional tax burden on
petitioner, respondent violated the constitutional right to due process and hearing.
 VALUE-ADDED TAX (VAT) 501
Persons Liable to Tax

clear. Hence, it is immaterial whether the primary purpose of a

corporation indicates that it receives payments for services rendered
to its affiliates on a reimbursement-of-cost basis only, without
realizing profit, for purposes of determining liability for VAT on
services rendered. As long as the entity provides service for a fee,
remuneration or consideration, then the service rendered is subject
to VAT. However, Section 109(1)(Y) of the NIRC, as amended by
R.A. 10963 (TRAIN) and implemented by Rev. Regs. No. 13-2018,
made association dues, membership fees, and other assessments
and charges collected by homeowners associations established
under R.A. 9904 and condominium corporations established under
R.A. 4726, exempt from VAT, effective January 1, 2018.
Subdivisions or Villages Homeowners Associations.
- Section 18 of R.A. 9904 (Magna Carta for Homeowners and
Homeowners' Associations) provides that the association dues
and income derived from rentals of property of the homeowners'
association may be exempted from income tax, VAT, and percentage
tax, provided that the homeowners' association complement,
support, and strengthen the local government unit in providing vital
services to their members, and the grant of tax incentives shall be
subject to the following conditions:
1. The homeowners' association must be a duly constitute
"association" as defined under Section 3(b) of R.A. 9904;
2. The local government unit having jurisdiction over
the homeowners' association must issue a certification
identifying the basic services being rendered by the
homeowners' association and therein stating its lack
of resources to render such services, notwithstanding
its clear mandate under the applicable laws, rules
and regulations, provided that such services must fall
within the purview of the "basic community services and
facilities" which is defined in Section 3(d) of R.A. 9904 as
those referring to services and facilities that redound to
the benefit of all homeowners and from which, by reason
of practicality, no homeowner may be excluded such as
but not limited to security, street and vicinity lights,
maintenance, repairs and cleaning of streets, garbage
collection and disposal, and other similar services and
facilities; and
3. The homeowners' association _must present proof (e.g.,
financial statements) that the income and dues are used
502 R EVIEWER ON T AXATION

for the cleanliness, safety, security, and other basic

services needed by members, including the maintenance
of the facilities of their respective subdivisions or villages.
Unless the above conditions are met, the homeowners'
association shall generally be subject to income tax and VAT because
beneficial services are rendered by the association to its members.a

Bar Question (2014)_,

The Bureau of Internal Revenue (BIR) issued Revenue
Memorandum Circular (RMC) No. 65-2012 imposing Value-Added
Tax (VAT) on association dues and membership fees collected by
condominium corporations from its member condominium-unit
owners. The RMC's validity is challenged before the Supreme Court
(SC) by the condominium corporations . The Solicitor General,
counsel for BIR, claims that association dues, membership fees, and
other assessment/charges collected by a condom_inium corporation
are subject to VAT since they constitute income payments or
compensation for the beneficial services it provides to its members
and tenants.
On the other hand, the lawyer of the condominium corporations
argues that such dues and fees are merely held in trust by the
condominium corporations exclusively for their members and used
solely for administrative expenses in implementing the condominium
corporations' purposes. Accordingly, the condominium corporations
do not actually render services for a fee subject to VAT.
Whose argument is correct? Decide.

Suggested answers (either answer should be given credit):

Suggested answer 1:
The lawyer of the condominium corporations is correct. The
association dues, membership fees, and other assessment/charges do
not constitute income payments because they were collected for the
benefit of the unit owners and the condominium corporation is not
created as a business entity. The collection is the money of the unit

8RMC No. 9-2013, January 31, 2013. The homeowners associations argue that
the LGUs involved would not generally issue the certification sta ting that they have
no resources t? rend~r .such basic community services in order to get the true-exempt
status. The said condition thus effectively removes the window when the homeowners
association may be exempted from tax.
 VALUE-ADDED TAX (VAT) 503
Persons Liable to Tax

owners pooled together and will be spent exclusively for the purpose
of maintaining and preserving the building and its premises which
they themselves own and possess (First e-Bank Tower Condominium
Corp. v. BIR, Special Civil Action No. 12-1236, RTC Br. 146, Makati
City).

Suggested answer 2:
In the case of Office Metro Philippines, Inc. (formerly Regus
Centres, Inc. v. CIR [CTA Case No. 8382), the Court only dealt with
the EWT issue as the VAT issue was not raised. However, the CTA
held that in the payment of association dues to a condominium
corporation, these dues are merely held in trust and used solely for
administrative expenses from which (the condominium corporation)
does not realize any gain or profit. The BIR, on the other hand, views
these payments as income or compensation for beneficial services.
However, a perusal of Section 105 shows that transactions in
the course of a trade or business (sells, barters, exchanges, leases
goods or properties, renders services, imports goods) are those subject
to VAT. In the case of a condominium corporation, the function of
the entity is merely for administrative purposes and not a trade or
business. Thus, payments in the form of association dues should not
be subjected to VAT.
[NOTE: Section 109(l)(Y) of the NIRC, as a mended by R.A.
10963 (TRAIN) and implemented by Rev. Regs. No. 13-2018, made
association dues, membership fees, and other assessments and
charges collected by homeowners associations established under
R.A. 9904 and condominium corporations established under R.A.
4726, exempt from VAT, effective January 1, 2018]
Recreational or sports club. - The Quezon City Sports
Club is not subject to VAT on membership dues and fees and guest
fees, tennis, pelota, squash, badminton, bowling, billiards, and gym
fees as payments for the use of facilities. 9 However, this ruling was
superseded by Revenue Memorandum Order No. 35-2012 dated
August 6, 2012, which declares that even a non-stock, non-profit
organization or government is liable to pay VAT on the sale of goods
or services. Thus, the gross receipts of recreational clubs, including
but not limited to membership fees, assessment dues, rental income ,

'dyAT Ruling No. 098-88, April 14, 1988.

504 REVIEWER ON TAXATION

and service fees are subject to VAT. Also, PCCI, which is a non.
stock, non-profit corporation organized to maintain and protect the
integrity of its registry of purebred dogs and whose activities are
principally sourced from registration and membership fees from its
members, is subj ect to VAT (RMC No. 64- 2013, September 30, 2013).
However , the moment the non-stock, non-profit association
engages in any taxable sale of goods or services, like operating a
rest aurant or cant een, boutique or s hop selling sporting goods,
or leases its facilities or s paces to others, it is liable to the value-
a dded tax where the amount of its gross sales an d/or gross receipts
exceeds Pl.5 million (now P3,000,000), or subject to the three
percent percentage tax, if gross sales and receipts is Pl.5 million
or less. Non-stock, non-profit association may include foundations
and condominium corporations. It should be noted, however, that
a non-stock, non-profit association cannot be exempt from VAT
on its purchases of goods, properties, or services inasmuch as its
exemption from income tax is not a legal basis to make it exempt
from VAT. 10
The Cultural Center of the Philippines is not subject to tax on
ticket sales of cultural shows but is taxable on sales of goods by its
gift shops. 11
Importer. - Although t he actual seller of goods is the head
office in J apan, it cannot be made liable for value-added tax as the
sale was consummated in Japan. Neither is the Philippine branch
of the foreign corporation liable for value-added tax as it is not the
actual seller. The branch merely acted as an agent of the head office
in promoting its sales, delivering the samples and the quotation to
the possible buyers. The head office is t he actual seller of the goods
as indicated in the commercial invoices. The head office in J apan
as a trading office buys the goods from manufacturers in J apan
and then sells the same to local buyers in the Philippines. VAT is
properly and legally due on the local buyers who are considered the
importers. Considering that such value-added tax on importation
was already paid by the local buyers, it should no longer be imposed
on the Philippine branch (Kanematsu Corporation, Manila
Branch v. CIR, CTA Case No. 4875, February 12, 1997).

1
°VAT Ruling No. 247-89, October 4, 1989.
llVAT Rulin g No. 18-89, J a nuary 25, 1989.
 VALUE-ADDED TAX (VAT) 505
Persons Liable to Tax

Bar Question (2008)

Greenhills Condominium Corporation is an existing non-
stock, non-profit association of unit owners in Greenhills Tower
San Juan City since 2001. To be able to reduce the associatio~
dues being collected from the unit owners, the Board of Directors
of the corporation agreed to lease part of the ground floor of the
condominium building to DEF Savings Bank for P120,000 a month
starting January, 2007.
a. Is the non-stock, non-profit association liable to value-
added tax in 2007? If your answer is in the negative, is it
liable to another kind of business tax?
b. Will the association be liable to value-added tax in 2008,
if it increases the rental to P150,000 a month beginning
January, 2008? Explain.

Suggested answers:
a. No, Greenhills Condominium Corporation will not be
subject to value-added tax, since its gross rental income
for the year 2007 will be Pl,440,000 (P120,000 times 12).
The sale or lease of goods or 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 One million five
hundred thousand pesos (Pl,500,000), shall be exempt
from value-added tax (Sec. 109[VJ, NIRC). However, it
would be subject to the three percent percentage tax on its
gross rental income under Section 116 of the Tax Code.
b. Yes. If Greenhills Condominium Corporation increases the
monthly rental income to P 150,000, it will be subject to the
12% value-added tax beginning November 1, 2008, unless
it registers as a VAT person effective January 1, 2008. The
reason for this is that the gross annual rental income of the
association for 2008 would be Pl,800,000 (P150,000 times
12) (Sec. 109[V], NIRC). Moreover, the association will be
deemed to be engaged in the business of leasing, despite its
being a non-stock, non-profit organization. The phrase "in
the course of trade or business" means the regular conduct
or pursuit of a commercial or an economic activity,
including transactions incidental thereto, by any person,
regardless of whether or not the person engaged therein is
506 REVIEWER ON TAXATION

a non-stock, non-profit private organization (irrespective

of the disposition of its net income and whether or not it
sells exclusively to members or their guests), or government
entity (Sec. 105, NIRC).
[NOTE: The VAT-exempt threshold is now P3,000,000 under
R.A. 10963 [TRAIN], effective January 1, 2018.]

Bar Question (1991)

Newtex International (Phils.), Inc. is an American firm duly
authorized to engage in business in the Philippines as a branch
office. In its activity of acting as a buying agent for foreign buyers of
shirts and dresses abroad and performing liaison work between its
home office and the Filipino garment manufacturers and exporters,
Newtex does not generate any income. To finance its office expenses
here, its head office abroad regularly remits to it the needed amount.
To oversee its operations and manage its office here, which had been
in operation for two years, the head office assigned three foreign
personnel. Is Newtex subject to VAT?

Suggested answer:
Newtex is not subject to VAT. The VAT is imposed on sellers
and not on buyers. The branch office did not derive any income or
compensation so as to possibly permit the imposition of a value-
added tax on compensation for services rendered. In addition, since
the transactions are direct export sales, the VAT does not apply.
Export sales are among those that are either zero-rated or exempt
from value-added tax (Secs. 99-100, NIRC).