Chapter 6 - Introduction to the Value Added Tax . PTER 6 CETRODUCTION TO THE VALUE ADDED TAX : Chapter Overview and Objectives i i the VAT on sales. It is intended | ter provides an overview of the ded to rH ge users with a broader understanding of the VAT and to provide an integration of the concepts discussed in previous chapters. The succeeding chapters of the book discuss details of the VAT on sales. After this chapter, readers are expected to comprehend: The scope of VAT on sale‘ } Mandatory registration and optional registration Registration requirements VAT threshold application The VAT model Sources and treatment of output and input VAT on different types of sales 7. Other vatable sales and invoicing requirements oy eeye THE VALUE ADDED TAX The VAT covers all vatable sales of goods, properties, services, or lease of properties by VAT taxpayers. Vatable sales or receipts are from sources other than: 1. Exempt sales . 2. Receipts from services specifically subject to percentage tax Who are VAT taxpayers? a. VAT-registered persons b. VAT-registrable petsons A VAT-registered person will be subject to VAT tea even if its annual sales do bah yeeroret da! War tald A registrable person or those whose sales oF t reshold without registeri are subject to VAT without the benefit of an input tae ere VAT taxpayers The VAT Threshold neral Threshold ‘Special Thresholdre Chapter 6 — Introduction to:the Value Added Tax. ASSESSMENT OF THE VAT THRESHOLD Illustration 1: Taxpayers with mixed transactions Cipeda Department Store had the following sales for the last 12-month period: Fertilizers, seeds, poultry, and hog feeds P 1,200,000 Fruits and vegetables 800,000 Groceries 800,000 Clothes, shoes, and other apparels 600,000 Furniture ___ 400,000 Total ‘P_3,800,000 Note that the sales of fertilizers, seeds, poultry, hog feeds, fruits, and vegetables are exempt sales, The vatable sales are: Groceries P 800,000 Clothes, shoes, and other apparels 600,000 Furniture _—___ 400,000 Total P_1,800,000 Since the total of the vatable sales is below the VAT threshold, the Cipeda Department Store is not required to register as a VAT taxpayer. Consequently, it may continue paying the 3% percentage tax on these vatable sales until it exceeds the threshold. Illustration 2: Individual with multiple proprietorship businesses As of September 2020, Mr. Tabaco had the following gross receipts from his professional practice and his other businesses in the immediately preceding 12- months: Gross receipts from restaurant business P 2,200,000 Gross receipts from barbecue stand 200,000 Gross receipts from taxi cab operations 1,500,000 Gross receipts from professional practice ‘900,000 Total P_4,800,000 The following sales and receipts are exempt: Barbecue stand sales - exempt P 200,000 Taxi cab receipts - subject to OPT ___1,500,000 Total VAT-exempt sales P_1,700,000 Barbecue stand js a seller of goods not service. Since the goods underwent simple processing, it is exempt from business tax. Taxi cab is subject to common carrier's tax. 197Chapter 6 — Introduction to the Value Added Tax ‘The vatable sales and receipts are: Gross receipts from restaurant business Gross receipts from exercise of profession Total B_-3.100,000 P_ 2,200,000 ts exceeded P3M, Mr. Tabaco shall pay VAT . ‘ , Since the vatable sales and receipts exceeded Pore Tt ractce, Mr. Tabaco starting October 2020 for the restau d shall pay 3% common carrier's tax on the taxi cab. strat a ith subsidiaries and branches aaa ipotion had he s and branches and their Petronicus Corporation had the following subsidiaries corresponding recorded 12-month sales: Subsidiaries: Branus Corporation - 55% owned P 3,200,000 Alexus, Inc. - 70% owed Total subsidiary sales P. 4,000,000 Branches: Dagupan City branch office P 800,000 San Fernando City branch office Total branch sales P_1500,000 Petronicus Corporation reported the following sales: Sales to San Fernando branch office P 400,000 Sales to Branus Corporation 300,000 Sales to other customers ___ 900,000 Total Parent company sales P_1,600,000 Each corporation is a separate taxable person. Branus, Alexus and Petronicus Corporation are separate corporations that should be separately registered. Branus should be registered as a VAT taxpayer. Alexus should be registered as @ non-VAT taxpayer. A branch is not a separate entity with their head office. Hence, Dagupan branch and San Fernando branch are not separate entities with Petronicus. ‘The vatable sales of Petronicus shall be computed as follows: Sales to Branus Corporation 7 Sales to other customers gooaoo Sales of Dagupan branch 200,000 Sales of San Fernando City branch 8 0,000 — 200,000 Total vatable sales of Petronicus Corporation 2.700.000 198Chapter 6 — Introduction to the Value Added Tax Note that Petronicus sales :to San Fernando City branch is not considered because it is a sale to itself. It is not a realized sale. Petronicus Corporation shall be registered as a non-VAT taxpayer. IMlustration 4: Married individual taxpayers Mr. and Mrs. Crocs had the following sales and gross receipts: from their respective businesses during the last 12-month period: —MrCrocs_ _Mrs.Crocs_ __Total _ Gross receipts from profession P 2,200,000 P 1,700,000 P. 3,900,000 Sales, from sari-sari store ——_—_. __-.350,000 .__1,350,000 Total P2,200,000 P_3,050,000 P 5,250,000 Each individual is a taxable person and is separately subject to business tax. The aggregation shall be made for each individual spouse. Hence, Mr. Crocs will pay the 3% percentage in the upcoming month, but Mrs. Crocs’ shall ‘pay VAT because she exceeded the VAT threshold. If any sales or receipts cannot be directly attributed to or identified as exclusively earnéd or realized by either spouse, the-same shall be divided equally between them for the purpose of determining their respective sales or receipts for purposes of the threshold. Optional VAT Registration Taxpayers below the threshold can voluntarily register as VAT taxpayers. Such option is subject to the 3-year lock-in period. The taxpayer is precluded to have his VAT registration revoked until the lapse of 3 years. VAT Taxpayers with Mixed Transactions It must be noted that despite the VAT registration, VAT shall apply only to the vatable sales or receipts. His non-vatable sales or receipts remains exempt from VAT. The exempt sales remain to be exempt while the receipts specifically subject to percentage tax are subject to their specific percentage tax rates. The only exception to this is when the taxpayer opted to have the VAT apply to this non-vatable sales or receipts. Recall that the option to subject to exempt sales to VAT is not permanent. It can be revoked by the taxpayer after the lapse of the 3-year lock in period. ‘THE VALUE ADDED TAX MODEL The VAT payable of a VAT taxpayer is computed as: 199Chapter 6- Introduction to the Value Added.Tax OUTPUT VAT ple sales'or receipts. The output VAT js Output VAT is the VAT on the vatal presumed passed on by the seller on his sales or receipts. Ilustration ‘Assume that a ABC Company, @ account. ‘The taxpayer shall bill the’ following to the customer: VAT taxpayer, made a P100,000 vatable sales on Selling price P 100,000 ‘Add: VAT (12% x P100,000) _—12,000 Total invoice price B112.000 ‘This shall be recorded by the taxpayer in its books as follows: Accounts receivable P 112,000 Sales P 100,000 Output VAT 12,000 Types of Output VAT 1 Regular Output VAT -'12% VAT imposed on domestic sales or receipts 2. Zero Output VAT- 0% VAT imposed on export and other -zero-rated sales ‘The detailed rules on output VAT will be discussed in Chapter 7 and Chapter 8. INPUT VAT Input VAT is thé VAT paid'by the taxpayer on the domestic purchases from VAT suppliers or on the importation of goods or services in the course of business. Despite absence of actual payment of VAT on i i iT purchase or import, input VA’ may also be allowed by law as incentives to se of presumptive input VAT. the onpayer eucheas nem Input VAT bas rakes ‘on creditability. Not all paid input VAT is creditable against output VAT: Those allowed to be deductible against output VAT is put VAT", “allowable input VAT" or “creditable input VAT” 200Chapter 6 — Introduction to the Value Added Tax {lustration Assume ABC Company in the previous ill supplier. The supplier billed at P78,400, asrranion purchased goods from a VAT ‘The VAT shall be checked’ oh the invoice. If icated there Thmputed from the invoice asfollowss = oe Invoice price P 78,400 Divide by: VAT-inclusive rate (100% + 12%) 112% Purchase price Pp 70,000 Multiply by: VAT rate 12% VAT on purchase P8400 This shall be recorded by the taxpayer in its books as follows: Purchases P 70,000 Input VAT 8400 ‘Accounts payable P = 78400 The detailed rules on output VAT will be discussed in Chapter 9. VAT DUE At the end of each month, positive VAT due is paid to refundable but is carried over to the n the input VAT is offset with the output VAT. A the BIR. A negative VAT is normally non- ext-succeeding months or quarter. lustration Continuing the two preceding two illustrations, ABC Company shall compute its VAT due as follows: Output VAT P 12,000 Less: Input VAT 8.400 VAT due 23.600 Atthe end of the month, ‘ABC Company shall close its VAT accounts as follows: Output VAT Pp 12,000 Input VAT P8400 VAT payable 3,600 VAT REPORT'NG o as follows Recall that VAT is First mont | First month:ofthe quar Second month of the quarter “| 4927 For the quarter i 25 days from en f quarterChapter 6 introduction to tie'Value Added Ta” 16- ' exclusive of VAT: Mlustration 1 . inig purchases: and’sales, : VAT taxpayer hiad the following Al C ~_P. 320,000 P_375,000 tae * 450,000 580,000 500,000 les Accounting Entries: . The following are recorded by the taxpayer: January Purchases P.. 700,000 84,000 Input veoh ” P 784,000 P 728,000 Oe ous P 650,000 Output VAT ‘78,000 Output VAT - P 78,000 Input VAT P 78,000 There will be no VAT payable ’since the input VAT exceeds the output VAT. The P 6,000 (i.e. P84,000 - P78,000) unutilized input VAT remains on the book. In VAT reporting, the January 2550M ‘would look like: Output VAT P 78,000 Less: Input VAT — 84,000 VAT due (26.000) This is not VAT refundable. It is called “input VAT carry-over”. February Purchases P 3; Input VAT waa Cash ° P 358400 Cash Sales P. .649,600 _ Output VAT P °580,000 69,600 aaaer Chapter 6 — Introduction to the Value Added Tax: Output VAT P 69,600 Input VAT* P. 44400 VAT payable 25,200: VAT payable P 25200 Cash P 25200 To record payment of VAT due +*(P38,400 from February + P6,000 January carry over) In VAT reporting, the February 2550M would look like: Output VAT P 69,600 Less: Input VAT 44.400 VAT due P__25,200 March Purchases P 375,000 Input VAT 45,000 Cash P = 420,000. Cash P . 560,000 Sales P — 500;000 Output VAT 60,000 Output VAT” P 60,000 Input VAT P 45,000 VAT payable 15,000 VAT payable P. 15,000 Cash P 15,000 To record payment of VAT due in VAT reporting, the Quarterly 2550Q in March would look like: Output VAT P 207,600. Less: Input VAT Al VAT due P 40,200 Less: Tax credit Estimated monthly VAT payments ___25,200 VAT still due P__15.900 gative, it is non-refundable. The unutllized input If the quarterly tax.due is ney u VAT remains in the books and is carried over as input VAT in the following month of the next quarter. 203Chapter 6 — Introduction to the Value Added Tax avAt eaver using the calendar year had the fohagine output VAT and input VAT during the months starting January to Ap’ January February March April pe0000 P90000 © PBS,000P75,000 eva goo00 80,000 65,000. 70,000 The VAT due and payable shall be reported and computed as follows; January February. March = April Output VAT P 80,000 P 90,000 P255,000 P. 75,000 Less: Input VAT “60,000 80,000 205,000 » 70,000 Monthly VAT due P2090 £1g000 z 5,000 Less: VAT paid in prior months 30,000 Quarterly VAT due Note: 1. The monthly VAT return (BIR Form 2550M) for the first two months of the quarter reports only output VAT and input VAT for the month. ‘The quarterly VAT retum (BIR Form 2550Q) for the third month of the quarter covers output VAT and input VAT from January to March. Any VAT paid in the prior two months is deducted from the quarterly balance. ‘April is the first month of the second quarter. Reporting will be, monthly for April and May and cumulative for the quarter ending june. 2 Mlustration 3 A VAT taxpayer had the following sales and purchases, exclusive of any VAT, in the second quarter of the calendar year: Sales —April_ _May _ __|une__ __Total__ Sales P 625,000 P 400,000 P 800,000 P1,825,000 Input VAT P 60,000 P 54,000 P 50,400 P 164,400 The VAT due and payable shall be: —April_-__May _ __fune Sales P 625000 P 400,000 P1,625,000 Multiply by % 12% 1 Output VAT P 75000 P 48000 Paidee Less: Input VAT oa VAT due —164.400 Less: VAT paid in 218.000 (2__6,000) P_ 54,600 Prior months LA Quarterly VAT due 215,000 P_39,600 204Chapter 6 — Introduction to the Value Added Tax Note: 1, Anegative VAT payable in a month means no VAT is to be paid. 2, Ancgative VAT payable in the first month of the quarter or at the end ofthe quarter may be carried over to the succeeding month or quarter as the case may be. This will be discussed in detail under input VAT carry-over in Chapter 9, The foregoing discussion covers the normal accounting procedures of VAT compliance for regular vatable sales, Sales subject to special VAT rules There are sales,or receipts that are subject to special or, unique tax rules, such as the following: a. Sales to the government b. Zero-rated sales c. Exemptsales The following table show a summiary of the unique tax rules: ‘Sales to the-governnient _* Limited claimables Zero-rated salesinn /}sNo,output:VAT:but with claim: a. “Exempt sales No output VAT and no claimab) Sales to the government including GOCCs The sales to the government and GOCCs is yatable at 12% normal rate but the law requires government agencies or GOCCs to withhold a 5% final VAT on their purchases. The invoice sales or billing to the government or GOCCs will be deducted 5% final VAT based on sales or receipts. The taxpayer will only collect the balance. The 5% withheld tax shall be presumed as the actual VAT due of the taxpayer on.the sale. There would: be no more VAT payable: Thus the taxpayer has to adjust his claimable input VAT on that sale because the input VAT is effectively fixed or standardized by the government at 796: Output VAT 12% of sales or receipts Less: Input VAT (Limited to 7% __) <++----- Final VAT due "5% of sales or receipts The 7% claimable input VAT on sales to’ the governiment or GOCCs is Teferred to as the standard input VAT. . Illustration During the month, a VAT-registered person made a single sale of goods to a government agency for P448,000, inclusive of P48,000 output VAT. These goods were purchased for P336,000, including P36,000 input VAT. 205Chapter 6 — Introduction to the Value Added Tax ‘The taxpayer shall record the following in his books: Inventory/Purchases P ae Input VAT 936000 To record the purchase of goods Cash (P448K - P20K) P 428,000 Withheld final VAT (P400K x 5%) 20,000 Sales P «00.000 Output VAT 8, Teron the sales to the government and ‘the final withholding VAT Cost of sales P 300,000 Inventory/Purchases P 300,000 To record the cost of sales to the government Output VAT P 48,000 Cost of sales 8,000 Input VAT P 36,000 Withheld final VAT 20,000 To close the output VAT and withheld final VAT at month end Note: 1. There [sno VAT due and payable on sales to the government. 2. The difference between the actual input VAT and the P 28,000 (P400,000 x 7%) presumed input VAT is closed to cost of sales or expenses, as the case may be. 3. The P8,000 (P36,000 - P28,000) excess actual input VAT is a loss which is added to cost of sales. If the 7% of sales exceeds the actual input VAT, a reduction to cost or expenses (ie. gain) will occur. In reporting, Form 2550M would look like: Output VAT P 48,000 Less: Standard input VAT (7% x P-400,000) VAT due P 20,000 Less: Tax credit - 5% withholding VAT 20.000 VAT due and payable 2 0 Zero-rated sales In principle, foreign consumption like export sales are non-vatable. In our current tax laws, they are subject to a 0% VAT to VAT ith a zero Output VAT and a ciaimable input VAT, the VAT due woud be ne ee As such, the law allows taxpayer the privil im the i . a. tax refund, or privilege to claim the input VAT as a: b. tax credit against 206Chapter 6 — Introduction to the Value Added Tax If claimed as tax refund, the taxpayer will be paid back in cash. If claimed as tax credit, the taxpayer can use it to reduce other internal revenue tax obligations to the BIR. If the input VAT on zero-rated sales is not applied with refund or tax credit, the claimable input VAT would be added to creditable input VAT deductible against output VAT on other vatable sales. Illustration AVAT-registered person exported goods for $8,000 (equivalent to P400,000). These goods were purchased for P200,000, before P24,000 input VAT. The taxpayer shall record the following in his books: Inventory/Purchases P 200,000 Input VAT 24,000 : : Cash P 224,000 To record the purchase of goods Cash P 400,000 Sales P. 400,000 To record the export sales Cost of sales P 200,000 Inventory/Purchases P 200,000 To record the cost of export sales If claimed as tax refund: Cash P 24,000 Input VAT P= 24,000 To record receipt of input VAT refund If claimed as tax credit certificate (TCC): a Prepaid tax P 24,000 Input VAT P= 24,000 To record receipt of tax credit certificate Note: The prepaid tax (TCC) can be used to settle any iaternal revenue tax obligation of the taxpayer such as income tax, excise tax, donor’s tam, documamtary stamp tax and others, Ifnot claimed as refund or TCC: The input VAT Is simply deducted against output VAT at the end of the month. Output VAT P 24,000 Input VAT P 24,000 To close input VAT to output VAT at month-end Note that this is the default treatment of input VAT on zero-rated sales. If the input VAT is not claimed as TCC or tax refund, it will be credited against output VAT. 207Chapter 6 — Introduction to the value ‘Added Tax Other zero-rated Sales fh stherd re dbiméitie’sal y wae axe subjéct'to 0%'VAT. There art § ies or hoes oe so ee a os that are considered export sales such as sales to economic a and persons engaged international transport operations. eal top ith indirect taxed n sich aS International L leg to ‘persons with indirect fax‘exemption su r Rice Research Institute and Asian Development ‘Bank are effectively subject to 0% VAT. This is referred to.as effectively zero-rated sale. les ‘similar to'the treatment and 'f these exceptional sales will be se types, of's ‘The'0% VAT is applied to’ pes 1 discussion 0} procedures discussed. Det discussed in Chapter 8. Exempt sales . For purpose of the VAT, exempt: sales are non-vatable sales such as: a. Exempt sales of godds, services or properties b.. Services specifically subject to percentage tax Exempt sales will not be subject to output VAT. Consequently, the séller is also not allowed to credit input VAT. The input VAT traceable to exempt sales is part of costs or expenses of the seller and is deductible against gross income subject to income tax. Mlustration During the month, a VAT-registered person sold unprocessed agricultural food products for P400,000 which he bought for P150,000. He: also purchased P100,000 worth of supplies, exclusive of.P12,000 input VAT, which were all used in connection, with these sales. ‘The taxpayer shall record the following it his'books: Inventory/Purchases P 150,000 Supplies 100,000 Input VAT -12,000 Cash P 262, To record the purchase of goods and supplies ene Cash , P,, , 400,000 Sales To record the exempt sale Pp 40.000 Cost of sales. P .150,000 Supplies expense 112,000 Inventory/Purchases P 150,000 Supplies 100,000 Input VAT 12,000 To record.the cast of the exempt sales and supplies used. 208Chapter 6 — Introduction to the Value Added Tax Note: i 1, No output VATis allowed to be charged on exempt sales. However, ifthe taxpayer charged VAT on exempt sales, the same shall be considered taxable for purposes of the VAT. 2. The P12,000 input VAT is included in the supplies expense and is not claimable as tax credit. Comparison of Zero-rated Sales and Exempt sales Output VAT), Band toe None, 8 [Input VAT ‘Non-creditable (expense) _ | Types of sales ~ Domestic sales Taxpayers involved VAT ormon VAT taxpayers Zero-rating is applicable on VAT taxpayers only. Henée, zero-rated sales apply only to VAT taxpayers whereas exempt sales can occur for both VAT and non- VAT taxpayers. However, VAT taxpayers may not have exempt sales if he opted to subject exempt sales to VAT. CLASSIFICATION OF SALES OR RECEIPTS FOR VAT PURPOSES Owing to the differences in the rules, there are four types of sales or receipts for purposes of the VAT: 1, Sales to the government 2. Zero-rated sales 3, Exempt sales 4, Regular sales Regular sales are subject to 12% VAT and are allowed full credit of actual input VAT. It covers all sales of goods, properties or services other than: a. Sales to the government or GOCCs b. Zero-rated sales c. Exempt sales Summary of VAT rules for each type of sales -hone- Sales to government sales/receip| ‘Regular sales "12% of 7 i sales/receipts VAT paid negative 209Chapter 6 — Introduction to the Value Added Tax Classification Rules ‘ 1. The sale of godds destined to’a non-resident buyer abroad is a zero-rateq al if it involves exempt goods. ‘sina it 2. The ‘sale of vatable goods or services in the Philippines is-normally regular vatable sale, except when the sale is: ; ; a. made to the government or GOCC~ subject to final withholding vaT b. considered an-export or effectively zero-rated such as sales to VAT. in.ekerptipersons- subject to'0% VAT : / 3. The sale of exempt goods and services to the government or GOCC is sti}, ‘exempt sales. “These are persons with indjrect tax exemption Hlustration 1 A VAT registered person sold and exported the following goods during the quarter: Philippines Abroad’ Banana fruit P 500,000 $ 10,000 Tobacco 800,000 20,000 Total P1,300,000 $_._30,000 The P500,000 sale of exempt goods banana fruit in the Philippines is. an exempt sale. The P800,000 sale of vatable non-food tobacco in.the Philippines is a regulat’sale. The $30,000 export sale is zéro-rated sales. Illustration 2 A VAT registered taxpayer made the following domestic sales of goods to the following entities: - ——DA__ __IRRI___ Private clients Sale of rice seeds P 500,000 P 700,000 P 1'800,000 Sale of pesticides 400,000 ___300,000 ___ 3.200.000 Total P_200.000 P_1,000,000 P__-4,000,000 DA - Department of Agriculture; IRRI— International Rice Research Institute 210Chapter 6 ~ Introduction to the Value Added Tax | Rice seeds are exempt goods while pesticides are vatable, IRRI is a VAT-exempt person with indirect tax exemption. The following domestic sales are exempt sales: | ——DA__ __IRRI___ Private clients Sale of rice seeds P 500,000 P 0 P_ 1,800,000 Sale of pesticides 0 go. io Total P_500,000'P___a P__1,800,000 The following are zero-rated sales: " Prive lien! Sale of rice seeds. P 0 P 700,000 P 0 Sale of pesticides 0 300,000 _______o Total P___0 P.1,900,000 P___ The P400,000 sale of pesticides (ie. vatable goods) to the Department of Agriculture is a vatable sale to the government. The P3,200,000 sale of pesticides to private clients is a regular sale. Other sales subject to VAT 1. Sales of registrable persons The sales of registrable persons are subject to VAT despite their non- registration as VAT taxpayers but no input VAT credit is allowed. 2. Sales of non-VAT taxpayers who issues VAT invoice or receipt ‘The sale of non-VAT taxpayers who illegally charge VAT on their sales shall be subject to VAT without the benefit of input VAT plus the 50% surcharge and the usual 3% percentage tax. 3. Exempt sales billed by VAT taxpayers as regular sales Exempt sales that are billed through a VAT invoice or VAT receipts will be considered as regular sales. Furthermore, exempt sales which are not so clearly indicated as “Exempt’ in the VAT invoice or VAT receipts shall be considered as regular sales subject to VAT. Mlustration ‘Assume a taxpayer sold goods for P1,000,000. He purchased the goods for P800,000 exclusive of P 96,000 VAT. If the taxpayer is a registrable person, he will pay: Output VAT (P1M x 12%) P 120,000 Less: Input VAT ——__ P__120,000 VAT due and payable 211Chapter 6 — Introduction to the Value Added Tax If the taxpayer is a non-VAT person who issues a VAT invoice, he will pay: Output VAT (P1M x 12%) P even Surcharge on output VAT (P 120,000 x 50%) 60, Percentage tax (P1M x 3%), —_30,000 P__210,000 Total taxes due If the taxpayer is a VAT taxpayer who failed to identify the sales as exempt, he will pay: Output VAT (P1M x 12%) P 120,000 Less: Input VAT —— 26,000 VAT due and payable P___24,000