BAR 2021

TAXATION LAW

VALUE-ADDED TAX
Handout No. 002-E
 REMINDERS IN VALUE-ADDED TAX

Q: How is Value-Added Tax (VAT) defined?

A: Value Added Tax (VAT) is a business tax imposed and collected on every (a)
sale, barter, or exchange of goods or properties (real or personal), (b) lease of
goods or properties (real or personal) or (c) rendition of services, all in the course
of trade or business, and (d) importation of goods (whether or not in the course of
trade or business). It is an indirect tax, thus, it can be shifted or passed on to the
buyer, transferee or lessee of goods, properties or services (Sec. 105, NIRC).

Q: What is the current VAT rate?

A: The current VAT rate is 12% (effective January 1, 2006, VAT rate was increased
from 10 to 12%) of the gross selling price or gross value in money of the goods
or properties sold, bartered or exchanged, such tax to be paid by the seller or
transferor. (Sec. 106 (A), NIRC)

Q: Is the imposition of VAT constitutional?

A: Yes, the Supreme Court upheld the validity of raising the VAT rate from 10% to
12% based on the following reasons: (1) The VAT law is uniform: it provides a
standard rate of 10% (now 12%) on all goods or services and 0% rate on certain
sales and transactions; (2) It is equitable: The law is equipped with a threshold
margin where VAT does not apply to sales of goods or services with gross
annual sales or receipts not exceeding P3 million; (3) VAT , by its very nature, is
regressive, but the Constitution does not prohibit the imposition of indirect taxes.
What it simply provides is that Congress shall “evolve a progressive system of
taxation”. (ABAKADA Guro v. Ermita, G.R. No. 168056, September 1, 2005).

Q: Who is liable to pay the VAT?

A: Generally, the seller is the one statutorily liable for the payment of the tax, but the
amount of the tax may be shifted or passed on to the buyer, transferee or lessee
of goods, properties or services. (Sec. 105, NIRC)

Q: Is it considered a tax when the VAT is shifted already to the buyer or

customer as an addition to the cost of goods or services sold?
A: No, once the VAT is shifted to the buyer or customer as an addition to the cost of
goods or services sold, it is no longer a tax but an additional cost which the buyer
or customer has to pay in order to obtain the goods or services. The buyer
cannot be held directly liable to pay tax or invoke an exemption privilege to avoid
paying the output tax passed on to them by the vendor, in the form of higher
selling price. (BIR Ruling No. 639-12, December 4, 2012)

Q: Enumerate the Characteristics of VAT and explain briefly.

A:
(1) Value added - It is a tax on value added of a taxpayer arising from the sales
of goods, properties or services during the quarter. “Value added” is the
difference between the total sales of the taxpayer for the taxable quarter
subject to VAT and his total purchases for the same period subject also to
value added tax.

(2) Tax credit or Invoice method - It is collected through the tax credit method or
invoice method. The input taxes shifted by the sellers to the buyer are
credited against the buyer‟s output taxes when he in turn sells the taxable
goods, properties or services (Sec. 105 and 110 [A], NIRC).

(3) 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 may be an actual or deemed sale, or an export sale or local

TAXATION LAW Value-Added Tax [1]

 sale. The buyer is informed that the price includes VAT and the computation
is shown in the official receipt or sales invoice.

(4) Broad-based tax on consumption in the Philippines – It is broad-based

because every sale of goods, properties or services at the levels of
manufacturers or producers and distributors is subject to VAT. However, the
tax burden rests on the final consumers.

(5) Excise tax based on consumption – It is a tax on the privilege of engaging in

the business of selling goods or services, or the importation of goods.

(6) Indirect tax - Tax shifting is always presumed. It may be shifted or passed on
to the buyers, transferee, or lessee of the goods, properties or services as
part of the purchase price.

(7) Ad valorem tax - The amount is based on the gross selling price or gross
value in money of the goods or properties sold, bartered or exchanged or on
the gross receipts derived from the sale or exchange of services, including
the use or lease of properties.

(8) Not a cascading tax - Tax cascading means that an item is taxed more than
once as it makes its way from production to final retail sale. VAT is not a
cascading tax because it is merely added as part of the purchase price and
not as a tax because the burden is merely shifted. Thus, there can be no tax
on the tax itself.

(9) National tax - Imposed by the national government.

(10) Regressive tax – By its very nature, VAT is regressive tax.

Q: Does the principle of progressive taxation relate to VAT system?

A: No, it has no relation with the VAT system inasmuch as the VAT paid by the
consumer or business for every goods bought or services enjoyed is the same
regardless of income. In other words, the VAT paid eats the same portion of an
income, whether big or small. The disparity lies in the income earned by a person
or profit margin marked by a business, such that the higher the income or profit
margin, the smaller the portion of the income or profit that is eaten by VAT. A
converso, the lower the income or profit margin, the bigger the part that the VAT
eats away. At the end of the day, it is really the lower income group or
businesses with low-profit margins that is always hardest hit (ABAKADA Guro v.
Ermita, G.R. No. 168056, September 1, 2005).

Q: Does the Constitution prohibit regressive taxes?

A: No, what the Constitution simply provides is that Congress shall evolve a
progressive system of taxation. The constitutional provision has been interpreted
to mean simply that "direct taxes are to be preferred and as much as possible,
indirect taxes should be minimized.” The mandate of Congress is not to prescribe
but to evolve a progressive tax system. This is a mere directive upon Congress,
not a justiciable right or a legally enforceable one. We cannot avoid regressive
taxes but only minimize them (Tolentino et.al. v. Secretary of Finance, G.R. No.
115455, Oct. 30, 1995).

Q: How is the regressive effect of VAT minimized?

A: The law minimizes the regressive effects of this imposition by providing for zero
rating of certain transactions while granting exemptions to other transactions.
The transactions which are subject to VAT are those which involve goods and
services which are used or availed of mainly by higher income groups.

Q: What are the elements of VAT-taxable transactions?

TAXATION LAW Value-Added Tax [2]

A: The following elements must be present in order for a transaction to be subjected
to 12% VAT: (a) It must be done in the ordinary course of trade or business; (b)
There must be a sale, barter, exchange, lease of properties, or rendering of
service in the Philippines; and (c) It is not VAT-exempt or VAT zero-rated.

Q: What does “In the course of trade or business (Rule of Regularity)” mean?
A: It 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 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).

Q: 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. Is the sale of the Nissan Patrol considered an incidental
transaction made in the course of Mindanao II‟s business which should be
liable for VAT?
A: Yes, Mindanao II‟s sale of the Nissan Patrol is said to be an isolated transaction.
However, it does not follow that an isolated transaction cannot be an incidental
transaction for purposes of VAT liability. Indeed, a reading of Section 105 of the
1997 Tax Code would show that a transaction “in the course of trade or
business” includes “transactions incidental thereto. (Mindanao II Geothermal
Partnership v. CIR, G.R. No. 193301, March 11, 2013).

VAT on Sale of Goods or Properties

Q: What are the elements of VAT-taxable sale of goods and personal

properties?
A: The following elements must be present in order for the sale of goods and
personal properties be subjected to VAT: (a) There is an actual or deemed sale,
barter or exchange of goods or personal properties for valuable consideration; (b)
Undertaken in the course of trade or business; (c) For use or consumption in the
Philippines; and (d) Not exempt from VAT under Section 109 of NIRC, special
law or international agreement binding upon the government of the Philippines.

Q: What are the elements of VAT-taxable sale or exchange of real properties?

A: The following elements must be present in order for the sale or exchange of real
properties be subjected to VAT: (a) The seller executes a deed of sale, including
dacion en pago, barter or exchange, assignment, transfer, or conveyance, or
merely contracts to sell involving real property; (b) The real property is located
within the Philippines; (c) The seller or transferor is engaged in real estate
business either as a real estate dealer, developer, or lessor; (d) The real property
is an ordinary asset held primarily for sale or for lease in the ordinary course of
business; (e) The sale is not exempt from VAT under Section 109 of NIRC,
special law, or international agreement binding upon the government of the
Philippines; and (f) The threshold amount set by law should be met.

Q: State the rationale why VAT is imposed on goods brought into the
Philippines, whether for use in business or not, except those specifically
exempted under Section 109(1) of the NIRC?
A: The reason VAT is imposed on goods brought into the Philippines is to protect
our local or domestic goods or articles and to regulate the entry or introduction of
foreign articles to our local market.

Q: Who is responsible for the payment of tax on imported goods?

TAXATION LAW Value-Added Tax [3]

A: The VAT on importation shall be paid by the importer prior to the release of such
goods from customs custody.

Q: In relation to VAT, what does the term „goods or properties‟ include?

A: The term „goods or properties‟ shall mean all tangible and intangible objects
which are capable of pecuniary estimation and shall include:
(1) Real properties held primarily for sale to customers or held for lease in the
ordinary course of trade or business;
(2) The right or the privilege to use patent, copyright, design or model, plan,
secret formula or processes, goodwill, trademark, trade brand or other like
property or right;
(3) The right or the privilege to use in the Philippines of any industrial,
commercial or scientific equipment;
(4) The right or the privilege to use motion picture films, films, tapes and discs;
and
(5) Radio, television, satellite transmission and cable television time. (Sec.
106(A(1), NIRC)

Q: The twelve percent (12%) VAT on every sale, barter or exchange of goods
or properties, shall be based on what?
A: The 12% VAT shall be based on the the gross selling price or gross value in
money of the goods or properties sold, bartered or exchanged. The „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 consideration of the sale, barter or
exchange of the goods or properties, excluding the value-added tax. The excise
tax, if any, on such goods or properties shall form part of the gross selling price.
(Sec. 106 (A)(1), NIRC)

Q: What is the concept of Zero-rated sales of goods or properties and

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

Q: What are the transactions subject to VAT at zero percent rate (0%)?
A: The following are transactions subject to VAT at 0%:
a. Export sales:
(1) the sale and actual shipment of goods from the Philippines to a foreign
country;
(2) sale of raw materials or packaging materials to a nonresident buyer for
delivery to a resident local export-oriented enterprise to be used in
manufacturing, processing, packing or repacking in the Philippines of the
said buyer‟s goods;
(3) sale of raw materials or packaging materials to export-oriented enterprise
whose export sales exceed seventy percent (70%) of total annual
production;
(4) export sales under the Omnibus Investments Code and other special laws;
(5) the sale of goods, supplies, equipment and fuel to persons engaged in
international shipping or international air transport operations.
b. Sales of goods or property to persons or entities who are tax-exempt
(Effectively Zero-Rated Sales); and
c. Zero-rated sale of services.
(Sec. 106 (A)(2), NIRC)

Note: The export sales (2), (3) and (4) above shall be subject to 12% VAT upon
the satisfaction of the following conditions:

TAXATION LAW Value-Added Tax [4]

 a. The successful establishment and implementation of an enhanced VAT
refund system that grants refunds of creditable input tax within ninety (90)
days from the filing of the VAT refund application with the Bureau. Provided
that, to determine the effectivity of the said system, all applications filed from
January 1, 2018 shall be processed and must be decided within ninety (90)
days from the filing of the VAT refund application; and
b. All pending VAT refund claims as of December 31, 2017 shall be fully paid in
cash by December 31, 2019. (Sec. 106 (A)(2), NIRC)

Q: What does Effectively Zero-Rated Sale mean?

A: This refers to (a) the local sale of goods and properties (b) by a VAT-registered
person (c) to a person or entity who was granted direct and indirect tax
exemption under special laws or international agreement (e.g., PEZA, Asian
Development Bank, International Rice Research Institute). [Sec. 106(A)(2)(b)
NIRC]

Q: Is it necessary to determine the nature of the sale prior determining that a

transaction is “Deemed Sale”?
A: Yes, before considering whether the transaction is “deemed sale”, it must first be
determined whether the sale was in the ordinary course of trade or business or
not. Even if the transaction was “deemed sale” if it was not done in the ordinary
course of trade or business or was not originally intended for sale in the ordinary
course of business, the transaction is not subject to VAT (CIR v. Magsaysay
Lines Inc., G.R. No. 146984, July 28, 2006).

Q: Is there an instance when the Commissioner will determine the appropriate

tax base in transactions deemed sale?
A: Yes, in cases where a transaction is a deemed sale, barter or exchange of goods
or where the selling price is unreasonably lower than the actual market value, the
Commissioner shall determine the appropriate tax base. (Sec. 106 (E), NIRC)

Q: When does a „change in or cessation of status of a VAT registered person‟

subject to VAT?
A: The following change in or cessation of status of a VAT registered person are
subject to VAT: (a) 1. Change of business activity from VAT taxable status; (b)
Approval of a request for cancellation of registration due to reversion to exempt
status or a desire to revert to exempt status after the lapse of 3 consecutive
years from the time of registration by a person who voluntarily registered despite
being exempt under Sec 109 (2) of the NIRC or failure to meet the specific
threshold of P3,000,000.00 by one who commenced business with the
expectation of reaching the gross sales or receipt during the first 12 months of
operations. (R.R. No. 16-2005, R.R. No. 13-2018) CESSATION OF STATUS

AS VAT-REGIST
Q: Who shall pay the VAT in a tax-free importation?
A: In the case of tax-free importation of goods into the Philippines by persons,
entities or agencies exempt from tax, where such goods are subsequently sold,
transferred or exchanged in the Philippines to non-exempt persons or entities,
the purchaser, transferees or recipients, who shall be considered as the
importers thereof, who shall be liable for any internal revenue tax on such
importation. The tax due on such importation shall constitute a lien on the goods
superior to all chargers or liens on the goods, irrespective of the possessor
thereof. (NIRC, Sec. 107(B) as amended by TRAIN LAW).

VAT on Sale of Services and Use or Lease of Properties

TAXATION LAW Value-Added Tax [5]

Q: What are the requisites for the taxability of sale or exchange of services or
lease or use of property?
A: The requisites for the taxability of sale or exchange of services or lease or use of
property are as follows:
(1) There is a sale or exchange of service or lease or use of property enumerated
in the law or other similar services;
(2) The service is performed or to be performed in the Philippines;
(3) The service is in the course of trade of taxpayer‟s trade or business or
profession;
(4) The service is for a valuable consideration actually or constructively received;
and,
(5) The service is not exempt under the NIRC, special law or international
agreement.

Q: What is the tax base on the sale of services and use or lease of properties?
A: The 12% VAT on the sale of services and use or lease of properties shall be
based on the gross receipts derived from the sale or exchange of services,
including the use or lease of properties.

The term „gross receipts‟ means the total amount of money or its equivalent
representing the contract price, compensation, service fee, rental or royalty,
including the amount charged for materials supplied with the services and
deposits and advanced payments actually or constructively received during the
taxable quarter for the services performed or to be performed for another person,
excluding value-added tax.

Q: Enumerate the services performed in the Philippines by a VAT-registered

person which shall be subject to 0% VAT.
A: The following services performed in the Philippines by a VAT-registered person
shall be subject to 0% VAT:
(1) Processing, manufacturing or repacking goods for other persons doing
business outside the Philippines which goods are subsequently exported,
where the services are paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of the BSP;
(2) Services other than those mentioned in the preceding paragraph, rendered to
a person engaged in business conducted outside the Philippines or to a
nonresident person not engaged in business who is outside the Philippines
when the services are performed, the consideration for which is paid for in
acceptable foreign currency and accounted for in accordance with the rules
and regulations of the BSP;
(3) Services rendered to persons or entities whose exemption under special laws
or international agreements to which the Philippines is a signatory effectively
subjects the supply of such services to 0% rate;
(4) Services rendered to persons engaged in international shipping or
international air transport operations, including leases of property for use
thereof: Provided, That these services shall be exclusively for international
shipping or air transport operations;
(5) Services performed by subcontractors and/or contractors in processing,
converting, or manufacturing goods for an enterprise whose export sales
exceed 70% of total annual production;
(6) Transport of passengers and cargo by domestic air or sea vessels from the
Philippines to a foreign country; and
(7) Sale of power or fuel generated through renewable sources of energy such
as, but not limited to, biomass, solar, wind, hydropower, geothermal, ocean
energy, and other emerging energy sources using technologies such as fuel
cells and hydrogen fuels.
[Sec. 108(B), NIRC, as amended]

TAXATION LAW Value-Added Tax [6]

Q: In relation to the preceding enumerations, when do items (1) and (5) be
subject to the 12% VAT and no longer be considered export sales subject
to 0% VAT?
A: Items (1) and (5) above shall be subject to the 12% VAT and no longer be
considered export sales subject to 0% VAT rate upon satisfaction of the following
conditions: (a)The successful establishment and implementation of an enhanced
VAT refund system that grants refunds of creditable input tax within 90 days from
the filing of the VAT refund application with the Bureau; and (b) All pending VAT
refund claims as of December 31, 2017 shall be fully paid in cash by December
31, 2019. (Sec. 108(B), NIRC)

Q: Does 0% VAT on services performed in the Philippines violative of the

destination principle?
A: No, the 0% VAT on services performed in the Philippines is an exception to the
destination principle, which states that goods and services are taxed only in the
country where they are consumed. [CIR v. American Express International, G.R.
No. 152609 (2005)

VAT - Exempt Transactions

Q: What are VAT exempt transactions?

A: It refers to the sale of goods or properties and/or services and the use or lease of
properties that is not subject to VAT (output tax) and the person making the
exempt sale of goods, properties or services (seller) shall not bill or pass on any
output tax to his customers.

Note: The VAT-registered person may elect that the exemption not apply to its
sale of goods or properties or services; provided that the election made shall be
irrevocable for a period of three (3) years from the quarter the election was made
[Sec. 4.109-2, RR 16-2005 as amended by RR 13-2018].

Q: Enumerate the VAT Exempt Transactions.

A: The following transactions are exempt from VAT: [Sec. 109, NIRC]

a. Sale or importation of agricultural and marine food products in their original

state, livestock and poultry of a kind generally used as, or yielding or
producing foods for human consumption, and breeding stock and genetic
materials therefor;
(1) Products in their original state remain as such even if they have
undergone the simple processes of preparation or preservation for the
market, such as freezing, drying, salting, broiling, roasting, smoking or
stripping, including those using advanced technological means of
packaging, such as shrink wrapping in plastics, vacuum packing, tetra-
pack, and other similar packaging methods.
(2) Polished and/or husked rice, corn grits, raw cane sugar and molasses,
ordinary salt, AND COPRA shall be considered in their original state
(3) Livestock or poultry do not include fighting cocks, race horses, zoo
animals and other animals generally considered as pets. [Sec. 4.109-
1(B)(1)(a), RR 16-2005]

b. Sale or importation of fertilizers, seeds, seedlings and fingerlings, fish, prawn,

livestock and poultry feeds including ingredients, whether locally produced or
imported, used in the manufacture of finished feeds (except specialty feeds
for race horses, fighting cocks, aquarium fish, zoo animals, and other animals
generally considered as pets);

TAXATION LAW Value-Added Tax [7]

 c. Importation of personal and household effects belonging to (i) Philippine
residents returning from abroad and (ii) non-resident citizens coming to
resettle in the Philippines; provided, that such goods are also exempt from
customs duties under the Tariff and Customs Code of the Philippines;

d. Importation of professional instruments and implements, tools of trade,

occupation or employment, wearing apparel, domestic animals, and personal
household effects:
(1) belonging to persons coming to settle in the Philippines, or Filipinos or
their families and descendants who are now residents or citizens of other
countries (i.e., overseas Filipinos
(2) in quantities and of the class suitable to the profession, rank or position of
the persons importing said items
(3) for their own use and not for barter or sale,
(4) accompanying such persons, or arriving within a reasonable time [as
amended by TRAIN Law]

Note: The Bureau of Customs may, upon production of satisfactory evidence

that such persons are actually coming to settle in the Philippines and that
the goods are brought from their former place of abode, exempt such goods
from payment of duties and taxes [as amended by TRAIN Law];

Exception: Vehicles, vessels, aircrafts, machineries, and other goods for use
in manufacturing shall not fall within this classification and shall be subject to
duties, taxes and other charges.

e. Services subject to percentage tax; (see Percentage Tax)

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

Agricultural contract growers refer to those producing for others poultry,

livestock or other agricultural and marine food products in their original state.
[Sec. 4.109-1(B)(1)(f), RR 16-2005]

g. Medical, dental, hospital and veterinary services, except those rendered by

professionals;

Laboratory services are exempted. If the hospital or clinic operates a

pharmacy or drugstore, the sale of drugs and medicine is subject to VAT.
[Sec. 4.109-1(B)(1)(g), RR 16-2005]

Note: R.A. 9337 removed the VAT exemption previously granted to doctors
and lawyers.

h. Educational services (i) rendered by private educational institutions, duly

accredited by DepEd, CHED, TESDA, and (ii) those rendered by government
educational institutions;

i. Services rendered by individuals pursuant to an employer-employee

relationship;

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

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

k. Transactions which are exempt under international agreements to which the

Philippines is a signatory or under special laws, except those under PD No.

TAXATION LAW Value-Added Tax [8]

 529 (Petroleum Exploration Concessionaires under the Petroleum Act of
1949);

l. Sales by agricultural cooperatives duly registered with the Cooperative

Development Authority (CDA) to their members, as well as sale of their
produce, whether it is original state or processed form, to non-members; their
importation of direct farm inputs, machineries and equipment, including spare
parts thereof, to be used directly and exclusively in the production and/or
processing of their produce;

Sale by agricultural cooperatives to non-members are exempted from VAT if

the producer is the cooperative itself. If not (e.g., trader), then only those
sales to its members shall be exempted from VAT. [RR 4-2007]

m. Gross receipts from lending activities by credit or multi-purpose cooperatives

duly registered with the CDA;

n. Sales by non-agricultural, non-electric and non-credit cooperatives duly

registered and in good standing with the CDA; Provided, that the share capital
contribution of each member does not exceed P15,000 and regardless of the
aggregate capital and net surplus ratably distributed among the members;

However, their importation of machineries and equipment, including spare

parts thereof, to be used by them are subject to VAT. [Sec. 4.109-1(B)(1)(n),
RR 16- 2005]

o. Export sales by persons who are not VAT registered;

p. Sale of real properties as follows:

i. Sale of real properties NOT primarily held for sale to customers or held for
lease in the ordinary course of trade or business.

ii. Sale of real properties utilized for low-cost housing as defined by R.A.
7279 (Urban Development and Housing Act of 1992) and other related
laws (e.g., R.A. 7835, R.A. 8763;

Low-cost housing" refers to housing projects intended for homeless low-

income family beneficiaries, undertaken by the Government or private
developers, which may either be a subdivision or a condominium
registered and licensed by the Housing and Land Use Regulatory Board /
Housing (HLURB) under BP 220, PD 957 or any other similar law, wherein
the unit selling price is within the selling price ceiling per unit as set by the
Housing and Urban Development Coordinating Council (HUDCC). [RR 13-
2018]

iii. Sale of real properties utilized for socialized housing as defined under RA
7279, and other related laws, such as RA 7835 and RA 8763, wherein the
price ceiling per unit is P480,000 for a horizontal socialized housing with a
minimum floor area of 24sq.m, and P700,000 (if within NCR and nearby
areas) or P600,000 (in other areas) for socialized vertical/condominium
projects with a minimum floor area of 22sq.m. [HUDCC Resolution Nos. 1
and 2, series of 2018]

"Socialized housing" refers to housing programs and projects covering

houses and lots or home lots only undertaken by the Government or the
private sector for the underprivileged and homeless citizens which shall
include sites and services development, long-term financing, liberated
terms on interest payments, and such other benefits. [RR 13-2018]

TAXATION LAW Value-Added Tax [9]

 iv. Sale of residential lot valued at P1.5M and below, or house & lot and other
residential dwellings valued at P2.5M and below, as adjusted in 2011
using the 2010 Consumer Price Index values.

(1) If two or more adjacent residential lots are sold or disposed of in favor
of one buyer (even if covered by separate titles or tax declarations or
separate deeds of conveyance), 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 does not exceed P1.5M. [RR 13-2018]

(2) Sale of parking lots shall not be considered a sale of residential lot.
Hence, it shall be subject to VAT regardless of its selling price. [RR 13-
2012]

Note: Beginning January 1, 2021, the VAT exemption shall only apply to
(i) sale of real properties not primarily held for sale to customers or held
for lease in the ordinary course of trade or business, (ii) sale of real
property utilized for socialized housing as defined by RA No. 7279, (iii)
sale of house and lot, and other residential dwellings with selling price of
not more than P2,000,000 [Sec. 109(1)(P), NIRC, as amended by TRAIN
Law]

q. Lease of residential units with a monthly rental per unit not exceeding
P15,000;
(1) If more than P15,000 but the aggregate rentals of the lessor during the
year do not exceed P3M, the lease shall be exempt from VAT, but subject
to 3% percentage tax.
(2) Where a lessor has several residential units for lease, his tax liability will
be as follows:
 Gross receipts from rentals not exceeding P15,000 shall be exempt
from VAT and percentage tax regardless of the aggregate annual
gross receipts.
 Gross receipts from rentals exceeding P15,000 shall be subject to VAT
IF the aggregate annual gross receipts from said units only exceed
P3M.

Otherwise, the gross receipts will be subject to the 3% tax imposed under
Sec. 116 of the NIRC.

(3) Residential units' refers to apartments and houses & lots used for
residential purposes, and buildings or parts or units thereof used solely as
dwelling places (e.g., dormitories, rooms and bed spaces) except motels,
motel rooms, hotels and hotel rooms, lodging houses, inns and pension
houses.

(4) „Unit' means an apartment unit in the case of apartments, house in the
case of residential houses; per person in the case of dormitories, boarding
houses and bed spaces; and per room in case of rooms for rent. [RR 13-
2018]

r. Sale, importation, printing or publication of books and any newspaper,

magazine, review or bulletin which appears at regular intervals with fixed
prices for subscription and sale and which is not devoted principally to the
publication of paid advertisements;

s. Transport of passengers by international carriers; [added by TRAIN Law]

Note: Transport of cargoes by international carriers doing business in the

Philippines is likewise exempt from VAT, but subject to 3% percentage tax
under Sec. 118 of the NIRC.

TAXATION LAW Value-Added Tax [10]

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

The exemption from VAT on the importation and local purchase of passenger
and/or cargo vessels shall be subject to the requirements on restriction on
vessel importation and mandatory vessel retirement program of the Maritime
Industry Authority (MARINA). [RR 13-2018]

u. Importation of fuel, goods, and supplies by persons engaged in international

shipping or air transport operations: Provided, That the fuel, goods, and
supplies shall be used for international shipping or air transport operations [as
amended by TRAIN Law];

(1) The said fuel, goods and supplies shall be used exclusively or shall
pertain to the transport of goods and/or passengers from a port in the
Philippines directly to a foreign port without stopping at any other port in
the Philippines, except to unload passengers and/or cargoes from abroad
or load the same bound for abroad.
(2) If any portion of such fuel, goods or supplies is used for any other
purpose, such portion of fuel, goods and supplies shall be subject to VAT.
[RR 13-2018]

v. Services of banks, non-bank financial intermediaries performing quasi-

banking functions and other non-bank financial intermediaries (such as
money changers and pawnshops) subject to percentage tax; [RR 13-2018]

w. Sale or lease of goods and services to senior citizens and persons with
disability, as provided under RA No. 9994 (Expanded Senior Citizens Act of
2010) and 10754 (An Act Expanding the Benefits and Privileges of Persons
with Disability), respectively [added by TRAIN Law];

x. Transfer of property pursuant to Section 40(C)(2) of the NIRC, as amended

[added by TRAIN Law];

y. Association dues, membership fees, and other assessment and charges

collected by homeowners association and condominium corporations [added
by TRAIN Law];

z. Sale of gold to BSP [added by TRAIN Law];

aa. Sale or importation of prescription drugs and medicines prescribed for

diabetes, high cholesterol, and hypertension beginning January 1, 2019
[added by TRAIN Law];

bb. Sale or lease of goods or properties or the performance of services other than
the transactions mentioned in the preceding paragraphs, the gross annual
sales and/or receipts do not exceed the amount of P3M;

For purposes of the threshold of P3M, the husband and the wife shall be
considered separate taxpayers. However, the aggregation rule (e.g.,
combining income from business and profession) for each taxpayer shall
apply.

The VAT-exempt sales shall NOT be included in determining the threshold.

[Sec. 4.109-1(B), RR 16- 2005]

cc. Self-employed individuals and professionals availing of the 8% tax on gross

sales and/or receipts and other non operating income, under Sections
24(A)(2)(b) and 24(A)(2)(c)(2)(a) of the NIRC [RR 13-2018].

TAXATION LAW Value-Added Tax [11]

Q: What are the features of VAT exempt transactions:
A: The following are the features:
(1) The seller is NOT allowed to credit the VAT (input tax) passed to him on his
purchases of taxable goods, properties or services, because he has no output
tax to deduct it from;
(2) VAT-exempt transactions shall not be liable for VAT or the 3% percentage
tax;
(3) VAT-exempt transactions shall not be included in determining the general
threshold prescribed by law, the amount of which is P 3,000,000. (Revenue
Regulation No. 13-18)

Q: Distinguish exempt transaction from exempt party.

A: An exempt transaction involves goods or services which, by their nature, are
specially listed in and expressly exempted from the VAT under the NIRC, without
regard to the tax status (VAT-exempt or not) or the party to the transaction.
Indeed, such a transaction is not subject to the VAT and the seller is not allowed
any tax refund of or credit for any input tax on its registration as taxes paid.

An exempt party, on the other hand, is a person or entity granted VAT exemption
under the NIRC, a special law or an international agreement to which the
Philippines is a signatory, and by virtue of which its taxable transactions become
exempt from the VAT. Such party is also not subject to the VAT but may be
allowed a tax refund of or credit for input taxes paid depending on its registration
as VAT or non-VAT taxpayer (Commissioner of internal Revenue vs. Seagate
technology (PHL) G.R. No. 153866, February 11,2005)

Input and Output Tax

Q: Define Input and Output tax.
A: Input tax – the VAT due from or paid by a VAT registered person on importation
of goods or local purchase of goods, properties, or services, including lease or
use of properties, in the course of his trade or business [Sec. 110(A)(3), NIRC]
It includes the transitional input tax and the presumptive input tax. It likewise
includes input taxes, which can be directly attributed to transactions subject to
VAT plus a ratable portion of any input tax, which cannot be directly attributed to
either the taxable transaction or exempt activity (R.R. No. 16-05. Sec. 4. 110-1)
Output tax – the VAT due on the sale or lease of taxable goods or properties or
services by any person registered or required to register under Section 236 of the
NIRC [Sec. 110(A)(3), NIRC]

Q: What are the Sources of Input Tax?

A: The following are the sources of Input tax:
a. Purchase or Importation of Goods (evidenced by VAT invoice/receipt)
i. For sale; or
ii. For conversion into or intended to form part of a finished product for sale
including packaging materials; or
iii. For use as supplies in the course of business; or
iv. For use as materials supplied in the sale of service; or
v. For use in trade or business for which deduction for depreciation or
amortization is allowed under the NIRC.
b. Purchase of real properties for which VAT has actually been paid;
c. Purchase of services in which VAT has actually been paid;
d. Transactions deemed sale;
e. Transitional Input Tax [Sec 111(A), NIRC]
f. Presumptive Input Tax [Sec. 111(B), NIRC]

TAXATION LAW Value-Added Tax [12]

Q: Who may avail of transitional input tax.
A: The following may avail:
(1) A person who becomes VAT-liable for the first time upon exceeding P3M in
any 12-month period, or
(2) any person who voluntarily registers even if their turnover does not exceed
P3M (except franchise grantees of radio and television broadcasting whose
threshold is P10M) [Sec. 4.111-1(a), RR 16- 2005]

The transitional input tax credit mitigates this initial diminution of the taxpayer‟s
income by affording the opportunity to offset the losses incurred through the
remittance of the output VAT at a stage when the person is yet unable to credit
input VAT payments (Fort Bonifacio Development Corporation v. CIR, G.R. No.
158885, October 2, 2009).

Q: What is Transitional Input Tax Credit?

A: Transitional input tax credit is the input tax on the beginning inventory of goods,
materials and supplies that may be availed of by a person who becomes liable to
VAT or any person who elects to be a VAT-registered person. [Sec. 111(A),
NIRC]

Q: How do you determine the Transitional Input Tax Credit?

A: Whichever is higher of:
(1) two percent (2%) of the value of the beginning inventory of goods, materials
and supplies, OR
(2) actual VAT paid on such goods, materials and supplies.
Either of the two circumstances above shall be creditable against the output tax.
(Sec. 111 (A), NIRC)
Note: A real estate dealer is entitled to claim transitional input VAT on its
beginning inventory based on the value of the entire real property, including the
improvements thereon, regardless of whether there was prior payment of VAT on
the purchase of such real property. [Fort Bonifacio Development Corp. v. CIR,
G.R. Nos. 158885 and 170680 (2009)]
Q: Who may avail of Presumptive Input Tax Credits?
A: Persons or firms engaged in the:
(1) processing of (i) sardines, (ii) mackerel and (iii) milk, and
(2) manufacturing of (i) refined sugar, (ii) cooking oil and (iii) packed noodle
based instant meals.

“Processing” means pasteurization, canning and activities which through physical

or chemical process alter the exterior texture or form or inner substance of a
product in such manner as to prepare it for special use to which it could not have
been put in its original form or condition. [Sec. 111(B), NIRC]

Q: What is the allowed rate of presumptive input tax credit?

A: Those qualified to avail of the presumptive input tax credit are entitled to
presumptive input taxes equivalent to 4% of the gross value in money of their
purchases of primary agricultural food products which are used as inputs in their
production. [Sec. 111(B), NIRC]

Q: How do you treat an excess output tax or excess input tax?

A: If at the end of any taxable quarter:
(1) The output tax exceeds the input tax, the excess shall be paid by the VAT-
registered person.
(2) The input tax exceeds the output tax, the excess shall be carried over to the
succeeding quarter or quarters.

TAXATION LAW Value-Added Tax [13]

 However, any input tax attributable to zero-rated sales may be refunded or
credited. [Sec. 110(B), NIRC]
Illustration:
For a given taxable quarter ABC Corp. has
output VAT of 100 and input VAT of 80. Since output tax exceeds the input tax
for such taxable quarter, all of the input tax may be utilized to offset against the
output tax. Thus, the VAT payable is 20.

Q: How do you substantiate Input Tax Credits?

A: Input taxes must be substantiated and supported by the following documents,
and must be reported in the information returns required to be submitted to the
BIR:

a. Importation of goods – import entry or other equivalent document showing

actual payment of VAT on the imported goods.

b. Domestic purchase of goods and properties – invoice showing the information

required under Sections 113 (Invoicing Requirements) and 237 (Issuance of
Receipts or Invoices) of the NIRC.

c. Purchase of real property – public instrument, i.e., deed of absolute sale,

deed of conditional sale, contract/agreement to sell, etc., together with VAT
invoice issued by the seller.

d. Purchase of services – official receipt showing the information required under

Secs. 113 and 237 of the NIRC.

e. Transitional input tax – inventory of goods as shown in a detailed list to be

submitted to the BIR.

f. Input tax on "deemed sale" transactions – required invoice.

g. Input tax from payments made to non-residents (such as for services, rentals
and royalties) – copy of the Monthly Remittance Return of VAT Withheld (BIR
Form 1600) filed by the resident payor in behalf of the nonresident evidencing
remittance of VAT due which was withheld by the payor.

h. Advance VAT on sugar – Payment Order showing payment of the advance

VAT Who May Claim for Refund/Apply for Issuance of Tax Credit Certificate.

Refunds or Tax Credits of Input Tax

Q: How do you claim refund or tax credit for Zero-Rated Sales (Sec. 112(A),
NIRC)?
A: A claim for refund or tax credit for unutilized input VAT may be allowed only if the
following requisites concur, namely:
(1) the taxpayer is VAT-registered;
(2) the taxpayer is engaged in zero-rated or effectively zero-rated sales;
(3) the input taxes are due or paid;
(4) the input taxes are not transitional input taxes;

TAXATION LAW Value-Added Tax [14]

 (5) the input taxes have not been applied against output taxes during and in the
succeeding quarters;
(6) the input taxes claimed are attributable to zero-rated or effectively zero-rated
sales;
(7) for zero-rated sales under Section 106(A)(2)(a)(1) and (3) and 108(B)(1) and
(2), the acceptable foreign currency exchange proceeds have been duly
accounted for in accordance with the rules and regulations of the BSP;
(8) where there are both zero-rated or effectively zero-rated sales and taxable or
exempt sales, and the input taxes cannot be directly and entirely attributable
to any of these sales, the input taxes shall be proportionately allocated on the
basis of sales volume; and
(9) the claim is filed within two (2) years after the close of the taxable quarter
when such sales were made.
(Luzon Hydro Corporation v. CIR, G.R. No. 188260 (2013); Sec. 4.112-1, RR
16- 2005)

Q: How do you claim tax refund or credit in case of Cancelled VAT

Registration? (Sec. 112(B), NIRC)
A: These are the guidelines:
(1) A VAT-registered person whose registration has been cancelled due to (i)
retirement from or cessation of business, or due to changes in or (ii) cessation
of status under Section 106(C) of the NIRC may, within two (2) years from the
date of cancellation, apply for the issuance of a tax credit certificate for any
unused input tax which may be used in payment of his other internal revenue
taxes.

(2) The taxpayer shall be entitled to a refund if he has no internal revenue tax
liabilities against which the tax credit certificate may be utilized.

(3) The date of cancellation shall be the date of issuance of tax clearance by the
BIR, after full settlement of all tax liabilities.

(4) The filing of the claim shall be made only after completion of the mandatory
audit of all internal revenue tax liabilities covering the immediately preceding
year and the short period return and the issuance of the applicable tax
clearance/s. [RR 13- 2018]

Q: What is the period within which to file a claim for refund or apply for
issuance of Tax Credit Certificate? (Sec 112(C), par. 1, NIRC)
A: These are the rules:

(1) The claim must be filed within 2 years after the close of the taxable quarter
when the sales were made (or 2 years from the date of cancellation of
registration). [Sec. 112(A) and (B), NIRC]

It is only the administrative claim for VAT refund or Tax Credit of Input Taxes
that must be filed within the two-year period, which must be reckoned from
the close of the taxable quarter when the relevant sales were made. [CIR v.
San Roque Power Corporation, G.R. 187485 (2013)]

In tax refunds of erroneous tax payments under Sec. 229 of the NIRC, the
administrative and judicial claims may be made simultaneously, and the
reckoning point of the 2-year period is from the date of payment.

(2) The CIR shall grant the refund within 90 days from the date of submission of
the official receipts or invoices and other documents in support of the
application.

TAXATION LAW Value-Added Tax [15]

 Note: Prior to January 1, 2018, all claims for refund or tax credit will be
governed by the 120-day processing period.

(3) Should the CIR find that the grant of refund is not proper, the CIR must state
in writing the legal and factual basis for the denial.

Q: How can you file a tax refund or credit through a judicial claim? (Sec 112
(C), par. 2, NIRC)
A: In a claim for tax refund or credit:
(1) In case of full or partial denial of the claim or tax refund, the taxpayer may
appeal to the CTA within 30 days from the receipt of decision.

(2) The 30-day period to appeal is both mandatory and jurisdictional.

Exception: Premature filing is allowed only if filed between 10 December 2003

and 5 October 2010, when BIR Ruling No. DA- 489-03 was still in force. (CIR v.
San Roque Power Corporation, G.R. 187485 (2013))

Q: What is the Effect of inaction by the CIR?

A: Failure on the part of any official, agent, or employee of the BIR to act on the
application within the 90-day period shall be punishable under Section 269 of the
NIRC (Violations Committed by Government Enforcement Officers). (Sec.
112(C), NIRC)

Note: The provision on the appeal of the CIR‟s failure to act on the application for
refund or tax credit was removed by the TRAIN Law.

Q: What happened in the San Roque case and what is San Roque Doctrine?
A: Crucial facts: San Roque did not wait for the 120-day period to lapse before filing
its judicial claim and it filed its judicial claim more than 4 years before the Atlas
doctrine (i.e., the 2-year prescriptive period should be counted from the date of
payment of the output VAT, not from the close of the taxable quarter when the
sales involving the input VAT were made).

The 120-day (now 90-day) waiting period is mandatory and jurisdictional.

Failure to comply with the 120-day period violates a mandatory provision of law.
It violates the doctrine of exhaustion of administrative remedies and renders the
petition premature and thus without a cause of action, with the effect that the
CTA does not acquire jurisdiction over the taxpayer‟s petition.

The mere fact that a taxpayer has undisputed excess input VAT, or that the tax
was admittedly illegally, erroneously or excessively collected from him, does not
entitle him as a matter of right to a tax refund or credit. Strict compliance with the
mandatory and jurisdictional conditions prescribed by law to claim such tax
refund or credit is essential and necessary for such claim to prosper. Well-settled
is the rule that tax refunds or credits, just like tax exemptions, are strictly
construed against the taxpayer. The burden is on the taxpayer to show that he
has strictly complied with the conditions for the grant of the tax refund or credit.

Q: What is the period to file a judicial claim in case of inaction of BIR to

refund?
A: In case of full or partial denial of the claim for tax refund, the taxpayer affected
may within thirty (30) days from the receipt of the decision denying the claim,
appeal the decision with the Court of Tax Appeals (NIRC, Section 112(C)).

Note:

TAXATION LAW Value-Added Tax [16]

 (1) Prior to TRAIN law, Section 112(C) states that “in case of full or partial denial
for tax refund or tax credit, or the failure on the part of the Commissioner to
act on the application within the period prescribed above, the taxpayer may,
within thirty (30) days from the receipt of the decision denying the claim or
after the expiration of the one hundred twenty-day (120) period appeal the
decision or the unacted claim with the Court of Tax Appeals”.

(2) However, the TRAIN‟s omission of the CIR‟s inaction does not bar the filing of
the judicial claim. The CTA charter provides the CTA shall exercise an
exclusive appellate jurisdiction to renew by appeal inaction by the
Commissioner of Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties in relation
thereto, or other matters arising under the National Internal Revenue Code or
other laws administered by the Bureau of Internal Revenue where the
National Internal Revenue Code Provides a specific period of action, in which
case the inaction shall be deemed denial. (R.A. No. 9282, Sec. 7(a)(2)).

(3) The Commissioner‟s inaction on the claim during the 120-day period (now 90
days) is “deemed a denial,” pursuant to Section 7(a)(2) of Republic Act No.
1125, as amended by Section 7 of Republic Act No. 9282. Team Energy had
30 days from the expiration of the 120-day period (now 90 days) to file its
judicial claim with the Court of Tax Appeals, Its failure to do so rendered the
Commissioner‟s “deemed a denial” decision as final and unappealable (Team
Energy Corporation v. Commissioner of Internal Revenue, G.R. No. 197663 &
G.R. No. 197770, March 14,2018)

Q: State the exclusive appellate jurisdiction of CTA.

A: The CTA has exclusive appellate jurisdiction to review by appeal the inaction by
the CIR in cases involving disputed assessments, refunds of internal revenue
taxes, fees or other charges, penalties in relations thereto, or other matters
arising under the NIRC or other laws administered by the BIR, where the NIRC
provides a specific period of action, in which case the inaction shall be deemed a
denial. (Sec. 7(a)(2), R.A. 1125 as amended by R.A. 9282)

Q: What is the Manner of Refund?

A: Refunds shall be made upon warrants drawn by the CIR or by his duly authorized
representative without the necessity of being countersigned by the Chairman of
the Commission on Audit (COA), provided that refunds shall be subject to post
audit by COA. (Sec. 112(D), NIRC)

Q: Define the Enhanced VAT Refund System.

A: VAT refund system that grants and pays refunds of creditable input tax within
ninety (90) days from the filing of the VAT refund application with the Bureau
(R.R. No. 13-18, Sec. 2).

Q: What is the effect of successful establishment and implementation of the

Enhanced VAT Refund System?
A: The following sales subject to 0% VAT shall be subject to 12% VAT:

1. Zero Rated Sale of Goods or Properties:

a. The sale of Raw materials or packaging material to a non-resident buyer
for delivery to a resident local export-oriented enterprise to be used in
manufacturing, processing, packing or repacking in the Philippines of the

TAXATION LAW Value-Added Tax [17]

 said buyer‟s goods, paid for in acceptable foreign currency, and accounted
for in accordance with the rules and regulations of the BSP;
b. The sale of Raw materials or packaging materials to an export-oriented
enterprise who export sales exceed seve
c. Transactions considered export sales under E.O. No. 226, otherwise
known as the Omnibus Investments Code of 1987, and other special laws.
2. Zero-Rated Sale of Service:
a. Processing manufacturing or repacking of goods for other persons doing
business outside the Philippines, which goods are subsequently exported and
paid for in acceptable foreign currency and accounted for in accordance with
the rules and regulations of the BSP; and
b. Services performed by Subcontractors and/or contractors in processing,
converting, or manufacturing goods for an enterprise whose export sales
exceed 70% of the total annual production (R.R. No. 13-18 Sec. 2)

Note: In addition to the establishment of Enhance VAT Refund System to subject

to 12% VAT, all pending VAT refund claims as of December 31, 2017 shall be
fully paid in cash by December 31,2019 (R.R. No. 13-18. Sec. 2).

Invoicing and Accounting Requirements for VAT-registered Persons

Q: What are the Invoicing Requirements for VAT-registered persons?

A: In general, the invoicing requirements for a VAT-registered person are as follows:
a. A VAT invoice for every sale, barter or exchange of goods or properties; and
b. A VAT official receipt (O.R.) for every lease of goods or properties, and for
every sale, barter or exchange of services (Sec. 113(A), NIRC)

Only VAT-registered persons are required to print their TIN followed by the word
“VAT” in their invoice or O.R.s, which shall be considered as a “VAT Invoice” or
“VAT O.R.”. All purchases covered by invoices/receipts other than VAT
Invoice/VAT O.R. shall not give rise to any input tax. [Sec. 4.113-1(A), RR 16-
2005]

Q: What are the Information Contained in the VAT Invoice or VAT Official
Receipt?
A: The following are required:
(1) A statement that the seller is a VAT registered person, followed by his
taxpayer's identification number (TIN);
(2) The total amount which the purchaser pays or is obligated to pay to the seller
with the indication that such amount includes the VAT:
a. The amount of the tax shall be shown as a separate item in the
invoice/receipt;
b. If the sale is exempt from VAT, the term "VAT-exempt sale" shall be
written or printed prominently on the invoice or receipt;
c. If the sale is subject to 0% VAT, the term "zero-rated sale" shall be written
or printed prominently on the invoice or receipt;
d. If the sale involves goods, properties or services some of which are
subject to and some of which are VAT zero-rated or VAT-exempt, the
invoice or receipt shall clearly indicate the breakdown of the sale price
between its taxable, exempt and zero-rated components, and the
calculation of the VAT on each portion of the sale shall be shown on the
invoice or receipt. The seller may issue separate invoices or receipts for
the taxable, exempt, and zero-rated components of the sale.
(3) The date of transaction, quantity, unit cost and description of the goods or
properties or nature of the service; and

TAXATION LAW Value-Added Tax [18]

 (4) In the case of sales in the amount of P1,000 or more where the sale or
transfer is made to a VAT-registered person, the name, business style, if any,
address and TIN of the purchaser, customer or client. (Sec. 113(B), NIRC)

Q: What are the accounting requirements for VAT-registered persons?

A: These are the requirements:
a. Transfer, use or consumption not in the course of business of goods or
properties originally intended for sale or for use in the course of business:
Memorandum entry in the subsidiary sales journal to record withdrawal of
goods forpersonal use;

b. Distribution or transfer to shareholders, investors or creditors; and

consignment of goods if actual sale is not made within 60 days – Invoice, at
the time of the transaction, which should include all the information required in
a VAT invoice; data in the invoice shall be duly recorded in the subsidiary
sales journal;

c. Retirement from or cessation of business with respect to all goods on hand –

An inventory shall be prepared and submitted to the RDO with jurisdiction
over the taxpayer‟s principal place of business not later than 30 days after
retirement or cessation from business. An invoice shall be prepared for the
entire inventory, which shall be the basis of the entry into the subsidiary sales
journal. If the business is to be continued by the new owners or successors,
the entire amount of output tax on the amount deemed sold shall be allowed
as input taxes. [Sec. 4.113-2, RR 16-2005]

Q: What are the consequences for the issuance of a VAT Invoice or VAT
Official Receipt by a non-VAT person?
A: If a person who is not a VAT-registered person issues an invoice or receipt
showing his TIN, followed by the word "VAT", the erroneous issuance shall result
to the following:
a. The issuer shall be liable to:
(1) percentage taxes applicable to his transactions;
(2) VAT due on transactions under Section 106 or 108 of the NIRC, without
the benefit of any input tax credit; and
(3) a 50% surcharge under Section 248(B) of the NIRC.
b. The VAT shall be recognized as an input tax credit to the purchaser, if the
other requisite information is shown on the invoice/receipt. (Sec. 113(D),
NIRC)

Q: What are the consequences for the issuance of a VAT Invoice or VAT
Receipt on an Exempt Transaction by a VAT registered Person?
A: If a VAT-registered person issues a VAT invoice or VAT OR for a VAT-exempt
transaction, but fails to display prominently on the invoice or receipt the term
"VAT-exempt Sale”:
a. the transaction shall become taxable;
b. the issuer shall be liable to pay VAT thereon; and
c. the purchaser shall be entitled to claim an input tax credit on his purchase.
[Sec. 4.113-4(B), RR 16-05]

Return and Payment of VAT

Q: State the procedure in Filing of Returns and Payment of VAT.

A: In filing return and payment of VAT:
(1) Every person liable to pay VAT shall file a quarterly return of the amount of
his gross sales or receipts within 25 days after the close of each taxable
quarter prescribed for each taxpayer.
(2) The monthly VAT Declarations of taxpayers whether large or non-large shall
be filed and the taxes paid not later than the 20th day following the end of
each month.

TAXATION LAW Value-Added Tax [19]

 (3) Beginning January 1, 2023, the filing of return and payment of VAT shall be
done within 25 days following the close of each taxable quarter. (Sec. 114(A),
NIRC as amended by TRAIN Law; Sec. 4.114-1(A), RR 16-2005)

Note: VAT is paid on a monthly basis. Payments in the monthly VAT declarations
shall be credited in the quarterly VAT return to arrive at the net VAT payable or
excess input tax/overpayment as of the end of a quarter. [Sec. 4.114-1(A), RR
16-2005]

Withholding of VAT

Q: What are the exceptions to the general rule that the VAT cannot be
collected by way of withholding?
A: General Rule: VAT cannot be collected by way of withholding.

Exceptions:
(1) Gross payments by the government shall be subject to the 5% final
withholding VAT;
(2) Gross payments by resident VAT taxpayers to non-residents shall be subject
to 12% withholding VAT. (Sec. 4.114-2, RR 16-2005)

Note: The payor or person in control of the payment is considered as the

withholding agent.

Q: How do you treat taxes on Sales to Government?

A: The government or any of its political subdivisions, instrumentalities or agencies,
including GOCCs shall, before making payment for purchases of goods and
services which are subject to the VAT, deduct and withhold a 5% final VAT on
the gross payments. (Sec. 114(C), NIRC)

Note: Beginning January 1, 2021, the VAT withholding system under this
Subsection shall shift from final to a creditable system. (Sec. 114(C), NIRC)

The 5% final VAT shall represent the net VAT payable of the seller. The
remaining 7% effectively accounts for the standard input VAT, in lieu of the actual
input VAT directly attributable or ratably apportioned to such sales. [Sec. 4.114-2,
RR 16-2005]

Should actual input VAT attributable to sales to the government exceed 7% of

the gross payments, the excess may form part of the sellers‟ expense or cost. On
the other hand, if actual input VAT is less than 7% of gross payment, the
difference must be closed to expense or cost. [Sec. 4.114-2, RR 16-2005]

Q: How do you treat payments to non-residents?

A: The government, as well as private corporations, individuals, estates and trusts,
whether large or non-large taxpayers, shall withhold 12% VAT with respect to the
following:
(1) Lease or use of properties or property rights owned by non-residents; and
(2) Other services rendered in the Philippines by non-residents. [Sec. 22, RR 4-
2007]

Note: Payments for purchases of goods and services arising from projects
funded by Official Development Assistance (ODA) as defined under RA No.
8182, or the „ODA Act of 1996‟, as amended, shall NOT be subject to the
final/creditable withholding tax system as imposed in this Subsection. [Sec. 2, RR
13- 2018]

Q: What are the Administrative and Penal Sanctions provided for under NIRC
in case of non-payment of VAT?

TAXATION LAW Value-Added Tax [20]

A: Under the Tax Code:
a. Surcharge, interest and other penalties – The interest on unpaid amount of
tax, civil penalties and criminal penalties imposed in Title XI of the NIRC shall
also apply to violations of the VAT provisions of the NIRC. (Sec. 115, NIRC;
Sec. 4.115-1, RR 16-2005)

b. Suspension of business operations – In addition to other administrative and

penal sanctions provided for in the NIRC and implementing regulations, the
CIR or his duly authorized representative may order the suspension or
closure of a business establishment for a period of not less than 5 days for
any of the following violations:
i. Failure to issue receipts and invoices;
ii. Failure to file VAT return as required under Sec. 114 of the NIRC;
iii. Understatement of taxable sales or receipts by 30% or more of his correct
taxable sales or receipt for the taxable quarter;
iv. Failure of any person to register as required under Sec. 236 of the NIRC.

~o0o~

TAXATION LAW Value-Added Tax [21]