CHARACTERISTIC OF VAT

1. It is an indirect tax where tax shifting is always presumed

The value added tax is an indirect tax and the amount may be shifted or passed on to the
buyer, transferee or lesser of the goods, properties or services (Section 105 tax code;
Section 4, RR 16-2005).
The seller is the one statutorily liable to pay for the payment of the tax but the amount of
tax may be shifted or passed on the buyer or transferee or lessee of the goods, properties
or services. This rule shall likewise apply to existing contacts of sale or lease of goods,
properties or services at the time of the effectivity of RA 9337 (Vat Reform Act).
However in the case of importation, the importer is the liable for the Vat (RR 16-2005)
2. It is consumption- based.
Vat is a tax on consumption levied on the sale, barter, exchange or lease of goods or
properties and services in the Philippines and on importation of goods into the
Philippines (RR16-2005). It is the end user of consumer goods which ultimately
shoulders the tax as a liability therefrom is passed on the end users by the providers of
these goods or services. The Vat, thus, forms a substantial portion of consumer
expenditures.
3. It is imposed on the value-added in each stage of production and distribution process.
The Vat system assured fiscal adequacy through the collection of taxes on every level of
consumption. Each business in the supply chain takes part in the price of controlling and
collecting the tax. To illustrate vat on each stage of production, refer to the illustration in
the next page.

VAT is imposed on the value-added in each stage of production and/or distribution process.
Tabako Manufacturing is a manufacture of bombastic tobacco (sin product subject to excise tax)
It sells its product to Noypi Distibutors, the company's exclusive distributor in the Philippines.
Noypi sells the same to the following:
ABC Company- exclusive distributor for Luzon
DEF, Incorporated- exclusive distributor for Visayas
XYZ Company- eclusive distributor for Mindanao
VAT IS IMPOSED AS FOLLOWS
• Tabakp is subject to vat on its sale to Noypo. In addition to vat, Tabako is also subject to
excise tax.
 • Noypi will charge vat to its customers such as 7/24
• 7/24 will charge vat to its customers/ end-users.
NOTE: The end-users will ultimately shoulder the tax passed-on to them by the suppliers of the
goods.

4. It is a credit-invoice method value-added tax

Vat payable or the amount of vat to be remitted by taxpayers to the Bureau of Internal
Revenue (BIR) is computed by deducting the input vat from the output vat. The seller of
goods or services passed-on to the end users the liability to pay the tax who in turn may
credit their val liability from the Val payments they received from the final consumer.
This is because cr is a consumption tax levied on sales to be home by consumers with
sellers acting simply as tax collectors.
Illustration 5: Tax Credit Approach
On January 10,2021, Alpha Corporation sold product "X" to Delta Incorporated for P 1,000,000
plus 12% vat. On January 15, 2021, Delta sold the product to Omega Corporation for P
1,200,000 plus vat of P144,000
Question: How much is the vat payable of Delta?
• Answer: P24,000
Output Vat (from sale to Omeage).
Input Vat (Purchases from Alpha)
Vat Payable
• Vat payable is the excess of output vat (vat on sale) over input vat (vat on purchases).
The excess of vat passed-on by Delta to Omega (P144,000) over the vat paid its
purchases from Alpha (P120,00)
• The input vat is a deduction (tax credit) from output vat.

BASIS OF VALUE ADDED TAX

The 12% value added tax shall be based on the following
Nature of Transaction(s) Tax Base
a. Sales of goods or properties Gross selling price
b. Sales of services Gross receipts
c. Importation Total landed cost
d. Dealer in Securities Gross Income
SALE OF GOODS:

In computing the taxable base during the month or quarter, the following shall be allowed as
deductions from gross selling price [Section 106 (D) of the Tax Code, as amended]
a) Discounts determined and granted at the time of sale, which are expressly indicated in
the invoice, the amount thereof forming part of the gross sales duly recorded in the books of
accounts. Sales discount indicated in the invoice at the time of sale, the grant of which is not
dependent upon the happening of a future event, may be excluded from the gross sales within
the same month/ quarter it was given.
b) Sales returns and allowances for which a proper credit or refund was made or a credit
memo was issued during the month or quarter to the buyer for sales previously recorded as
taxable sales
GROSS SELLING PRICE
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
VAT. The excise tax, if any, on such goods or properties shall form part of the gross selling
price [SEC. 106 (A)(1), NIRC]
In the case of sale, barter or exchange of real property subject to VAT, gross selling price shall
mean the consideration stated in the sales document or the fair market value, whichever is
higher (RR 4-2007; Section 4. 106-4, RR 16-2005).

FAIR VALUE MARKET

The term shall mean whichever is higher of:
1) the fair value as determined by the Commissioner or
2) the fair market value as shown in schedule of values of the Provincial and City Assessors
(real property tax declaration). However, in the absence of zonal value as determined by the
Commissioner, gross selling price refers to the market value shown in the latest real property
tax declaration of the consideration, whichever is higher (RR 4-2007)
GROSS RECEIPTS
Gross receipts refer to 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 applied as payments for services rendered and advance
payments actually or constructively received during the taxable period for the services
performed or to be performed for another person, excluding the VAT.

"Constructive receipt" occurs when the money consideration or its equivalent is placed at the
control of the person who rendered the service without restrictions by the payor. constructive
receipts: The following are examples of
a) Deposit in banks which are made available to the seller of services without restrictions.
b) Issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof by
the seller as payment for services rendered; and
c) Transfer of the amounts retained by the payor to the account of the contractor.

VAT REGISTRATION

Under the Tax Code, as amended, vat registration is classified into two (2), mandatory and
optional vat registration.
A. MANDATORY REGISTRATION
1. Any person or entity who, in the course of his trade or business, sells, barters, exchanges,
leases goods or properties and renders services subject to VAT, if the aggregate amount of
actual gross sales or receipts exceed P3,000,000 beginning January 1, 2018 under RA 10963-
TRAIN Law for the past 12 months (other than those that are exempt) or there are reasons to
believe that the gross sales or receipts for the next 12 months will exceed 30,000

2. Radio and/or television broadcasting companies whose annual gross receipts of the preceding
year exceeds P10,000,000. Mandatory registration applies within 30 days from the end of the
taxable year to radio/ TV broadcasters whose gross annual receipt for the taxable year exceeded
P10M (RR 4-2007).
3. A person required to register as VAT taxpayer but failed to register

VAT THRESHOLD FOR HUSBAND AND WIFE

For purposes of the threshold of P3,000,000, as amended, the husband and the wife shall be
considered separate taxpayers. However, the aggregation rule for each taxpayer shall apply. For
instance, if a professional, aside from the practice of his profession, also derives revenue from
other lines of business which are otherwise subject to VAT, the same shall be combined for
purposes of determining whether the threshold has been exceeded. Thus, the VAT-exempt sales
shall not be included in determining the threshold.

OPTIONAL REGISTRATION
1. Any person who is VAT-exempt or not required to register for VAT may elect to be VAT-
registered by registering with the RDO that has jurisdiction over the head office of that person,
and pay the annual registration fee for every separate and distinct establishment. Any person
who elects to register under optional registration shall not be allowed to cancel his registration
for the next three (3) years.
2. Franchise grantees of radio and/or television broadcasting whose annual gross receipts of the
preceding year do not exceed ten million pesos (P10,000,000) derived from the business
covered by the law granting the franchise may opt for VAT registration. This option, once
exercised, shall be irrevocable. (Sec. 119, Tax Code).

CANCELLATION OF REGISTRATION
Instances when a VAT-registered person may cancel his VAT registration:
1. If he makes a written application and can demonstrate to the commissioner's satisfaction that
his gross sales or receipts for the following twelve (12) months, other than those that are exempt
under Section 109 (A) to (U), will exceed P3,000,000; or
2. If he has ceased to carry on his trade or business, and does not expect to recommence any
trade or business within the next twelve (12) months
Power of the Commissioner to suspend Business Operations
The Commissioner of the Internal Revenue or his authorized representative may order
suspension or closure of business establishment for a period of not less than 5 days for any of
the following violations:
1.Failure to issue receipts or invoices
2. Failure to file vat return
3. ”Understatement" of taxable sales or receipts by 30% or more of the
correct taxable sales or receipts for the taxable quarter.
4. Failure of any person to register as required under the law.

COMPUTATION OF VAT (VALUE ADDED TAX) PAYABLE

ILLUSTRATION 5:
Orange Corporation, the leading distributor of orange juice in the country, sold 10 boxes
of its products to 7/24 convenience store. The selling price is P10,000 per box exclusive of vat.
lf Orange Corporation is a vat registered entity, it should charge an additional amount of
P12,000 per box representing 12% vat., Consequently, 7/24 will pay a total of P112,000
computed as follows:
Selling Price (10 boxes x P10,000) P100,000
Add: 12%VAT 12,000
Total Amount due/payable by 7/24 P112,000
Case C. Lease of Property
In anticipation of Ivan's birthday party, Josephine went to Belo Medical Group to avail facial
services for P30,000 exclusive of vat. Belo is a vat registered entity, hence, charges additional
12% vat. Consequently, Josephine should pay a total of P33,600 computed as follows:
Value of the services rendered P30.000
Add: 12% VAT 3,600
Total Amount Due payable by lvan P 33,600
Case D. Sale of Services by a non-VAT registered entity
Mas Smart Tayo, a non-vat registered corporation rendered professional services to Kate (vat
registered) for P100,000. Annual gross receipts of Mas Smart exceeded the P3,000,000 vat
threshold during 2021.
Question 1. How much is the total amount due by Kate to Mas Smart?
Answer: P100,000
***For failure to register under the VAT System, MAS Smart cannot pass-on the output vat to
its customers.
Question 2. Using the same assumption in the preceding question, how much is the var
due/payable of Mas Smart to the BIR?
Answer: P12,000
***A non-vat registered entity required to register as vatable entity but failed to do so is liable
to pay the equivalent output vat of 12% and is not entitled to claim input

II. OTHER PERCENTAGE TAXES (OPT)

It is a tax imposed on sale, barter, exchange or importation of goods, or sale of services based
upon gross sales, value in money of receipts derived by the manufacturer, producer, importer or
seller measured by a certain percentage of the gross selling price or receipts.
III. EXCISE TAXES
In addition to VAT, excise taxes apply to goods manufactured or produced in the Philippines
for domestic sales or consumption or for any other disposition, and goods imported.