VALUE ADDED TAX

What is value-added tax?

What is value-added tax?
The Value-Added Tax (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. (Sec. 4.105-2, Revenue Regulations (RR) No. 16-
05, the Consolidated VAT Regulations)
What are the natures of value-added tax?
What are the natures of value-added tax?
1. Indirect Tax
2. Tax on Consumption
3. Uses Tax Credit Method
1. Indirect Tax
It is an indirect tax that may be shifted or passed on to the
buyer, transferee or lessee of the goods, properties or services.
(Commissioner of Internal Revenue vs. SEAGATE Technology
(Philippines); G.R. No. 153866; February 11, 2005)
2. Tax on Consumption
VAT is ultimately a tax on consumption, even though it is
assessed on many levels of transactions on the basis of a fixed
percentage. It is the end user of consumer goods or services
which ultimately shoulders the tax, as the liability therefrom is
passed on to the end users by the providers of these goods or
services who in turn may credit their own VAT liability (or input
VAT) from the VAT payments they receive from the final consumer
(or output VAT). The final purchase by the end consumer
represents the final link in a production chain that itself involves
several transactions and several acts of consumption. (CIR us.
Magsaysay Lines; GR No. 146984; July 28, 2006)
3. Tax Credit Method
If at the end of a taxable quarter the output taxes charged by a
seller are equal to the input taxes passed on by the suppliers, no
payment is required. It is when the output taxes exceed the input
taxes that the exes has to be paid.
If however, the input taxes exceed the output taxes, the excess
shall be carried over the succeeding quarter or quarters. Should
the input taxes result from zero-rated or effectively zero-rated
transactions or from the acquisition of capital goods, any excess
over the output taxes shall instead be refunded to the taxpayer or
credited against the output tax. (CIR vs. Seagate Technology (Phils.);
GR No. 153866; Feb. 11, 2005)
What are the registration requirements
for VAT?
What are the registration requirements
for VAT?
It varies since VAT registration can be mandatory or optional.
Persons Required to Register for VAT
a) His gross sales or receipts for the past twelve (12) months,
other than those that are exempt under Section 109 (A) to (BB),
have exceeded P3,000,000 (Prior to TRAIN, P1,919,000); or
b) There are reasonable grounds to believe that his gross sales
or receipts for the next twelve (12) months, other than those
that are exempt under Section 109 (A) to (BB), have exceeded
P3,000,000; (Sec. 236[G])
c) Radio and television franchisees are required to register for VAT
if their gross receipts for the preceding calendar year exceeded
P10,000,000. (Sec. 119)
Persons Availing of the 8% Flat Rate of
Income Tax
Individual taxpayers availing of the 8% flat rate of income tax are
likewise exempt from the payment of the 12% VAT, and under
Sec. 236(H) of the Tax Code, as amended, are not allowed to avail
of the optional VAT registration.
However, note that under RR No. 13-18, if a taxpayer who initially
availed of the 8% flat rate, but whose sales during the year
exceeded P3,000,000, he shall be liable for 12% VAT
prospectively, starting the next month when his sales exceeded
P3,000,000 and shall be required to update his VAT registration on
or before the last day of the said month.
Illustration 1:
Mr. Fuerzas signified his intention to be taxed at 8% in his First
Quarter Income Tax. For the first three quarters, his sales
amounted to P2,250,000. However, his sales for the month of
October, November and December were all P1,000,000 each.

What are the tax implications on the given illustration?

Analysis on Illustration 1:
In this case, Mr. Fuerzas exceeded the P3,000,000 threshold
during the month of October. Accordingly,

1. He is subject to the 12% VAT beginning November (the next

month); and
2. He is required to update his VAT registration from Non-VAT to
VAT-registered on or before November 30.
Optional Registration for VAT
a) Any person who is not required to register for value-added tax
may elect to register for value-added tax.
▪ Any person who elects to register shall not be entitled to
cancel his registration for the next three (3) years.
▪ Individual taxpayers availing of the 8% flat rate of income tax
are not allowed to avail of the optional VAT registration.

(b) Radio and television franchisees who are not required to

register under letter (c) above. Once registration is availed, it can
no longer be cancelled.
Basis of Determining Mandatory
Registrability for VAT
The basis shall be comprised only of those which are not
considered exempt under Sec. 109(A) to (BB). Thus, any such
sales falling within the exemptions are excluded from the gross
sales for purposes of determining if the taxpayer is required to be
registered for VAT.
Illustration 2:
A company had P2,000,000 sales of fresh fruits and P2,500,000
sales of fruit jams.
Analysis:
The sale of fresh fruits is considered exempt under Sec. 109(A).
Therefore, the basis of determining mandatory registrability would
only be P2,500,000, the amount of sales not exempt under Sec.
109(A) to (BB). Considering, however, that the amount does not
exceed P3,000,000, the company is not mandatorily required to
register for VAT.
Main Business of those who will
Optionally Register
Under Sec. 109(2), the main business may be subject to VAT and
the transactions which are exempt do not constitute his main
business. As such, if the main business is exempt, then optional
registration is not available considering that Sec. 109(2) speaks of
a “VAT-registered person” who can exercise such option.
Moreover, under RMC No. 46-2008, the BIR clarified that “[I]f the
main business is exempt from VAT, the VAT-exempt person cannot
elect that the said exempt business/es be placed under the VAT
system. The option to be subject to VAT on its exempt transactions
is available only to a VAT-registered person pursuant to Section
109(2) of the Code, as amended by R.A. 9337.”
Registration not a Requisite for VAT
Liability; but Required to Claim Input VAT
The amount of sales is the one determinative of the liability for
VAT not registration. As such, if the amount of sales for the past
12 months exceeded or at any time exceeds P3,000,000, the
taxpayer shall be subject to the VAT even if he did not register for
such type of tax.
The registration requirement is actually a pre-requisite to claim
input VAT. Accordingly, even if the taxpayer becomes liable for VAT
for exceeding the threshold amount of P3,000,000 but fails to
register, he shall be liable for the output VAT on such sales , but
shall not be entitled to any input VAT for his failure to register.
Who are liable to pay VAT?
Who are liable to pay VAT?
1. Any person who, in the course of trade or business,
a. sells, barter, or exchanges goods or properties (seller or
transferor)
b. leases goods or properties (lessor)
c. renders services (service provider)

2. Imports goods (importer) – the person who brings goods

into the Philippines, whether or not made in the course of trade
or business.
As an indirect tax, VAT-registered sellers may pass or shift the
burden of the VAT to the buyers. However, the amount of VAT is
still to be remitted to the BIR by the seller as he is the one
statutorily liable for its payment.
Services rendered on a reimbursement-at-cost basis
still subject to VAT even if no profit is realized
therefrom
Even a non-stock, non-profit, organization or government entity is
liable to pay VAT on the sale of goods or services. The term “in the
course of trade or business” requires the regular conduct or
pursuit of a commercial or an economic activity regardless of
whether or not the entity is profit-oriented.
Hence, it is immaterial whether the primary purpose of a
corporation indicates that it receives payments for services
rendered to its affiliates on a reimbursement-on-cost basis only,
without realizing profit, for purposes of determining liability for VAT
on services rendered. As long as the entity provides service for
a fee, remuneration or consideration, then the service
tendered is subject to VAT. (CIR Us. CA and Commonwealth
Management Services (COMASERCO); GR No. 125355; March 30, 2000)
Subsidized Expenses where there is no sale of services
is NOT subject to VAT
In the case of CIR vs. Sony Philippines, Inc., Sony Philippines was
assessed by the BIR of deficiency VAT for being reimbursed by
Sony International Singapore (SIS) the amount of advertising
expenses it (Sony PH) incurred. The Supreme Court held that “[t]o
begin with, the said subsidy termed by the CIR as reimbursement
was not even exclusively earmarked for Sony's advertising
expense for it was but an assistance or aid in view of Sony’s dire or
adverse economic conditions and was only “equivalent to the
latter’s (Sony’s) advertising expenses.”
Under Sec. 106, "there must be a sale, barter or exchange of
goods or properties before any VAT may be levied. Certainly,
there was no such sale, barter or exchange in the subsidy given by
SIS to Sony. It was but a dole out by SIS and not in payment for
goods or properties sold, bartered o exchanged by Sony.”
In the case of CIR vs. Court of Appeals (COMASERCO case), the
Court had the occasion to rule that services rendered for a fee
even on reimbursement-on-cost basis only and without realizing
profit are also subject to VAT. The case, however, is not applicable
to the present case. In that case, COMASERCO rendered
service to its affiliates and, in turn, the affiliates paid the
former reimbursement-on-cost which means that it was paid
the cost or expense that it incurred although without profit.
This is not true in the present case. Sony did not render any
service to SIS at all. The services rendered by the advertising
companies, paid for by Sony using SIS dole-out, were for Sony
and not SIS. SIS just gave assistance to Sony in the amount
equivalent to the latter's advertising expense but never
received any goods, properties or service from Sony. (CIR vs.
Sony Philippines, Inc., GR No. 178697 dated November 17, 2010)
How to determine the value added tax?
How to determine the value added tax?
1. If the amount provided is exclusive of VAT, that amount is
simply multiplied by 12% to arrive at the amount of VAT,
2. If the amount provided is inclusive of VAT, that amount is
divided by 112% and then multiplied by 12% to arrive at
the amount of VAT.
The amount indicated in the official receipt or the invoice amount
is presumably inclusive of VAT. Thus, if the official receipt or
invoice price states P112,000 as the amount of sales, the VAT
amount is 12/112 of P112,000 which is P12,000. On the other
hand, if what is provided is “sales” or “purchases” account, these
are presumably exclusive of VAT, since for accounting purposes,
these accounts are usually recorded net of VAT, the input VAT and
output VAT having their respective accounts.
VAT on Sale of Goods
or Properties
What shall the term “goods” or
“properties” mean?
The term “goods” or “properties” shall mean all tangible and
intangible objects which are capable of pecuniary estimation
and shall include:
What shall the term “goods” or
“properties” mean?
(a) Real properties held primarily for sale to customers or held for lease
in the ordinary course of trade or business;
(b) The right or privilege to use patent, copyright , design or model, plan,
secret formula or process, goodwill, trademark, trade brand or other
like property or right;
(c) The right or the privilege to use in the Philippines of any industrial,
commercial or scientific equipment;
(d) The right or the privilege to use motion picture films, tapes and
discs; and
(e) Radio, television, satellite transmission and cable television time.
What is the tax base for the sale of goods
or properties?
What is the tax base for the sale of goods
or properties?
For sale of goods is the “gross selling price” which is 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, NIRC)
In short, the gross selling price is the invoice price less any
allowable discounts and excluding the VAT.
What is the tax base for the sale of goods
or properties?
In case of barter, sale 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. The term
“fair market value” shall mean whichever is higher of:
(1) the fair market value as determined by the Commissioner
(zonal value);
(2) fair market value as shown in schedule of values of the
Provincial or City Assessors (real property tax declaration).
(Sec. 4.106-4, RR No. 16-05)
What are the allowable deductions from
gross selling price?
What are the allowable deductions from
gross selling price?
a. Sales returns and allowances
b. Sales discounts, provided:
(1) The sales discount granted is indicated in the voice at the
time of sale; and
(2) The grant of which does not depend upon happening of a
future event.
(3) The discount is expressly indicated in the invoice/OR.
(Sec. 4.106-9, RR No. 16-05)
Accordingly, a cash discount which is based on the prompt
payment of the buyer is not allowable as a deduction from gross
sales because it is dependent on the timing of payment. Trade
discounts, however, which are granted at the time of sale and are
based, usually, on the bulk of the orders, is allowable since it is
not dependent on a future event.
When does the VAT accrue in sale of goods
or properties?
When does the VAT accrue in sale of goods
or properties?
VAT accrues on the consummation of the sale in a contract of
sale, the contract is perfected upon the meeting of the minds.
However, ownership is not transferred until delivery is made which
is the consummation of the contract.
Under RR No. 16-05, the input VAT is creditable upon
consummation of the sale, which is upon the delivery of the
goods and issuance of the sales invoice. Consequently, the VAT
thereon accrues at the same time regardless of whether payment
has already been made, subject to the exception under sale of real
properties.
Illustration 3:
Ace sold goods to Bridge on March 28, 2023 when it was
delivered as well. Bridge paid Ace on April 2, 2023.

Analysis:
Since the transaction is a sale of goods, the VAT shall be
recognized in March when the sale is consummated, regardless of
whether the payment was made on the subsequent month, i.e.,
April.
Sale of Real Property
Sale of real property on installment means sale of real property
by a real estate dealer, the initial payments of which in the year of
sale do not exceed 25% of the gross selling price/contact
price.

In this case, the VAT shall be due on each installment payments

only reported on each of their respective months/quarters and not
the whole VAT due on the sale
Sale on a Deferred-Payment Basis
If the initial payments exceed 25% of the gross selling
price/contact price, the transaction shall be considered as a sale
on a deferred-payment basis and will be treated as a cash sale
which makes the entire selling price taxable in the month/quarter
of sale.
Initial payments shall mean the sum of the:
1. Down payment
2. All instalment payments made or is expected to be received
during the year of sale; and
3. When the amount of mortgage is more than the cost to the
seller, the excess shall form part of the initial payments (e.g.,
the mortgage on the real property is P1,000,000, where the
cost to the seller is P800,000 – the excess of P200,000 is
considered part of the initial payments).
The term “initial payments” do not include any notes or other
evidence of indebtedness issued by the purchaser to the seller or
the mortgage when the same is lower than the cost to the seller.
Illustration 4:
A land was sold for P3,000,000, exclusive of VAT payable in 20
monthly instalments of P150,000 each.
a. If the lot was sold on March 1, 2023, how much would be
the VAT?
Since the initial payments is 50% of the selling price (10 mos. *
P150,000 = P1,500,000), this would be considered as a sale on
“deferred-payment” basis and accordingly, the whole P360,000
(P3,000,000 * 12%) VAT on the sale of lot would be due in the
month/quarter of sale, i.e., March.
Illustration 4:
A land was sold for P3,000,000, exclusive of VAT payable in 20
monthly instalments of P150,000 each.
b. If the lot was sold on November 1, 2023, how much would
be the VAT?
Accordingly, only 12% of the P300,000 would be the VAT due, i.e.,
P18,000 for November and P18,000 for December, or P36,000
for the quarter.
Illustration 4:
A land was sold for P3,000,000, exclusive of VAT payable in 20
monthly instalments of P150,000 each.
c. Similar case with (b), but the fair market value of the land is
P2,000,000, how much would be the VAT?
The computation would be the same since the selling price is
higher than the market value.
Illustration 4:
A land was sold for P3,000,000, exclusive of VAT payable in 20
monthly instalments of P150,000 each.
d. Similar case with (b), but the fair market value of the land is
P4,000,000, how much would be the VAT?
The amount P4,000,000 will be the basis of the VAT computation,
which in the case of real property is based on the FMV or Selling
price whichever is higher.
The VAT base on each installment will be computed as follows:
Installment Price
X Fair Market Value = VAT Base
Total Contract Price
In the above illustration, the VAT base for November and
December would be P150,000, computed as follows:
P150,000
X P4,000,000 = P200,00
P3,000,000
The VAT due then would be P24,000 (P200,000 VAT base * 12%)
for November and P24,000 for December.

Note:
The denominator is ALWAYS the selling price/contact price since
this represents 100% of the total payments that will be made. The
formula computes for the ratio of the completion of payment and
what percentage that is compared to the fair market value which is
the proper VAT base.
Transactions Deemed Sale
What do you mean by transactions deemed
sale?
As the term applies, entails no actual sale, but by their nature, are
considered as “sales” subject to VAT.
Rationale:
To recoup from the input VAT already claimed on such goods
which are not subsequently subjected to output VAT since they are
not sold. Note that the input VAT on purchase of raw materials can
be claimed on the month of purchase with the expectation that
the goods will relate to output VAT upon their sale, if the
disposition of the finished goods do not result in a VATable
transaction, or if not deemed sale, then the taxpayer would have
benefited from the input VAT without any corresponding output
VAT liability.
Tax base for transactions deemed sale
The Commissioner of Internal Revenue shall determine the
appropriate tax base in cases where a transaction is deemed a
sale, barter or exchange of goods or properties, or where the gross
selling price is unreasonably lower than the actual market value.
Tax base for transactions deemed sale
The gross selling price is unreasonably lower than the actual
market value if it is lower by more than 30% of the actual market
value of the same goods of the same quantity and quality sold in
the immediate locality or the nearest date of sale. In case of such,
the actual market value shall be the tax base. (Sec. 4.106-7 (b),
RR No. 16-05)
The following transactions shall be deemed
sale:
1. Transfer, use or consumption not in the course of business
of goods or properties originally intended for sale or for use in
the course of business.
This can take place when a VAT-registered person withdraws
goods from his business for his personal use. (Sec. 4.106-7[a][1]
of RR No. 16-05)
2. Distribution or transfer to:
a. Shareholders or investors as share in profits of the
VAT-registered persons
Property dividends which constitute stocks in trade or
properties primarily held for sale or lease declared out of
retained earnings and distributed by the company to its
shareholders shall be subject to VAT. (Sec. 4.106-1[a][2][i]
of RR No. 16-05)
b. Creditors in payment of debt
3. Consignment of goods if actual sale is not made within sixty
(60) days following the date such goods were consigned
Consignment of goods in itself is not a VAT taxable transaction.
Only if actual sale is not made within sixty (60) days following the
date such goods were considered consigned will it be treated as a
transaction deemed sale subject to VAT.
4. Retirement from or cessation of business, with respect to
inventories of taxable goods existing as of such retirement or
cessation. (Sec. 106[B])
The VAT shall also apply to goods disposed of or existing as of a
certain date if under circumstances to be prescribed in rules and
regulations to be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner, the status of a person as
a VAT-registered person changes or is terminated.
Subject to OUTPUT TAX
The VAT shall apply to goods or properties originally intended for
sale or use in business, and capital goods which are existing as of
the occurrence of the following:
1. Change of business activity from VAT taxable status to VAT
exempt status;
2. Approval of a request for cancellation of registration due to
reversion to exempt status;
Subject to OUTPUT TAX
3. Approval of request for cancellation or registration due to a
desire to revert to exempt status after the lapse of 3 consecutive
years from the time of registration by a person who voluntarily
registered despite being exempt under Sec. 109(2) of the Tax
Code;
4. Approval of request for cancellation or registration of one who
commended business with the expectation of one who
commenced business with the expectation of gross sales or
receipts exceeding P3,000,000 (P1,919,500 prior to the TRAIN),
but who failed to exceed this amount during the first 12 months of
operation. (Sec. 4.106-8(a), RR No. 16-05)
NOT Subject to OUTPUT TAX
The VAT shall not apply to goods or properties existing as of the
occurrence of the following:
1. Change of control of a corporation by the acquisition of the
controlling interest of such corporation by another stockholder or
group of stockholders. The goods or properties used in business or
those comprising the stock-in-trade if the corporation, having a
change in corporate control, will not be considered sold, bartered
or exchanged despite the change in the ownership interest in the
said corporation
NOT Subject to OUTPUT TAX
2. Change in the trade or corporate name of the business;
3. Merger or consolidation of corporations. The unused input tax of
the dissolved corporation, as of the date of the merger or
consolidation, shall be absorbed by the surviving or new
corporation. (Sec. 4.106-8 (b), RR No. 16-05)
VAT on Importations
What do you mean by importation?
Importation is the act of bringing goods and merchandise into the
Philippines from a foreign country.
Tax base for VAT on importations
The total value used by the Bureau of Customs (BOC) in
determining tariff and custom duties, plus customs duties,
excise taxes, if any, and other charges, such as postage,
commission, and similar charges, prior to the release of the
goods from customs custody.
In case the valuation used by the BOC in computing customs
duties is based on volume or quantity, the landed cost shall be
the basis for computing VAT. “Landed cost” consists of the
invoice amount, customs duties, freight, insurance and other
charges.

If the goods imported are subject to excise tax, the excise tax
shall form part of the tax base.
Note, however, that those amounts paid which are contrary to law,
morals or public policy shall not be included in the VAT base and
likewise are not deductible for income tax purposes, such
facilitation fees or bribe.

The same rule applies to technical importations. (see zero-rated

sales
Sale of tax-free goods to non-exempt persons
The importation of goods is exempt from VAT and customs duties
if made by an exempt person (like an embassy or an ambassador).
However, in the event he sells, transfers or otherwise disposes of
the goods in favor of a NON-EXEMPT person, the importation shall
be taxable against the purchases, transferee or recipient who shall
be considered as importer thereof.
Importer refers to any person who brings goods into the
Philippines, whether or not made in the course of trade or
business. (Sec. 4.107-1(b), RR No. 16-05)
VAT on Sale of Service
What do you mean by “sale or exchange of
services?
The phrase “sale or exchange of services” means the
performance of all kinds or services in the Philippines for others
for a fee, remuneration or consideration, including those
performed or rendered by
▪ Construction and service contractors;
▪ Stock, real estate, commercial, customs and immigration
brokers;
▪ Lessors of property, whether personal or real;
▪ Warehousing services;
▪ Lessors or distributors of cinematographic films;
▪ Persons engaged in milling processing, manufacturing or
repacking goods for others;
▪ Proprietors, operators or keepers of hotels, motels, rest-
houses, pension houses, inns, resorts;
▪ Proprietors or operators of restaurants, refreshment parlors,
cafes and other eating places, including clubs and caterers;
▪ Dealers in securities;
▪ Lending investors;
▪ Transportation contractors on their transport of goods or
cargoes, including persons who transport goods or cargoes for
hire and other domestic common carriers by land relative to
their transport of goods or cargoes;
▪ Common carriers by air and sea relative to their transport of
passengers, goods or cargoes from one place in the Philippines
to another place in the Philippines;
▪ Sale of electricity by generation companies, transmission,
distribution companies;
▪ Services of franchise grantees of electric utilities, telephone
and telegraph, radio and television broadcasting and all other
franchise grantees except those under Section 119 of this
Code; and
▪ Non-life insurance companies (except their crop insurances)
including surety, fidelity, indemnity and bonding companies;
and
similar services regardless of whether or not the performance
thereof calls for the exercise or use of the physical or mental
faculties.
The phrase ‘sale or exchange of services’ shall likewise include;
1) The lease or use of, or the right or privilege to use any copyright,
patent, design or model, plan secret formula or process,
goodwill, trademark, trade brand or other like property or right;
2) The lease of the use or, or the right to use of any industrial,
commercial or scientific equipment;
3) The supply of scientific, technical, industrial or commercial
knowledge or information;
4) The supply of any assistance that is ancillary and subsidiary to
and is furnished as a means of enabling the application or
enjoyment of any such property, or right as is mentioned in
subparagraph (2) or any such knowledge or information as is
mentioned in subparagraph (3);
5) The supply of services by a non-resident person or his
employee in connection with the use of property or rights
belonging to, or the installation or operation of any brand,
machinery or other apparatus purchased from such non-
resident person.
6) The supply of technical advice, assistance or services rendered
in connection with technical management or administration of
any scientific, industrial or commercial undertaking, venture,
project or scheme;
7) The lease of motion picture films, films, tapes and discs; and
8) The lease or the use of or the right to use radio, television,
satellite transmission and cable television time.
Lease of properties shall be subject to the tax herein imposed
irrespective of the place where the contract of lease or licensing
agreement was executed if the property is leased or used in the
Philippines. (Sec. 108)
Services must be performed in the Philippines
Such that, if the services were performed outside the Philippines,
the same is not subject to VAT. Note, however, that even though
the services are performed in the Philippines but for a foreign
client/customer, the same may still be treated as zero=rated
subject to the BIR’s fulfillment of the conditions under the TRAIN
Law for their removal from the list of zero-rated sales. (To be
discussed in zero-rated sale of service)
When does the VAT accrue in sale of services?
In sale of services, the VAT accrues at the time of payment
independent of whether the services has been performed or not,
or in short, following the cash basis of accounting.

As such, even if the services were already performed, but the

same remain unpaid, no VAT is due yet. On the other hand, if
payment is already received but no services has been performed
yet, the VAT is already due.
Tax base for Sale of Services
For sale of services is the “gross receipts” which 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,” (Sec. 108, NIRC) except
those amounts earmarked for payment to unrelated third party or
received as reimbursement for advance payment on behalf of
another which do not redound to the benefit of the payor. (Sec. 4.108-
4, RR No. 16-05, as amended by RR No. 4-07)
Pass-through transactions: for the above exceptions to apply, the
receipt must be issued for the third person who will ultimately
shoulder the expense, in order to be excluded from the gross
receipts of the person receiving the reimbursement or the
advances,
Illustration 5:
Aling Myrna paid P100 to Balang, P30 of which is reimbursement
of the services advanced by Balang and paid to Cardi.
How much of the receipts will be subjected to VAT?
In this case, Balang should only issue a receipt for P70, and Cardi
will issue a receipt for P30 in the name of Aling Myrna, in order for
Balang to be subjected only P70 to VAT instead of the whole P100
received from Aling Myrna.
What is a constructive receipt?
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. The following are
examples of constructive receipts:
1. Deposit in banks which are made available to the seller of
services without restrictions;
2. 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
3. Transfer of the amounts retained by the payor to the account of
the contractors. (Sec. 4.108-4, RR No. 16-05)
Lessors of Property
Unless considered exempt under Sec. 109 of the Tax Code,
lessors of property shall be considered liable for VAT on the
gross rentals, regardless of the place where the contract of lease
or license agreement was executed if the property leased or used
is located in the Philippines.
VAT on rental and/or royalties payable to non-resident foreign
corporations or owners for the sale of service and use or lease of
properties in the Philippines shall be based on the contract price
agreed upon by the licensor and licensee. The licensee shall be
responsible for the payment of VAT on such rentals and/or
royalties on behalf of the non-resident foreign corporation or
owner in the manner prescribed under [withholding VAT on
payments to non-residents]. (Sec. 4.108-3(a), RR No. 16-05)
Advance payment: If the advance payment constitutes prepaid
rental, then such payment is taxable to the lessor in the month
when received, irrespective of the accounting period employed by
the lessor.
The following do not constitute advance payment of rentals
subject to VAT:
1. Loan to the lessor;
2. An option money for the property; or
3. A security deposit for the faithful performance of certain
obligations of the lessee, such advance payment is not subject
to VAT. However, a security deposit applied to rentals shall be
subject to VAT at the of its application.
Professionals
As compared to the Local Government Code which covers only
lawyers and those who are PRC licensed, for VAT purposes,
professionals include Actors, Professional Athletes, Singers,
Broadcasters, Directors, etc.
General Professional Partnerships: Deposits received by the
GPP should be booked as income at that time and a VAT Official
Receipt issued, thus subject the same to VAT upon receipt,
regardless if the GPP will only use the same for out-of-pocket
expense to be paid to third parties. (RMC No. 89-2012)

The same rule applies to other service providers, other than GPPs.
(RMC No. 16-2013)
Expenses incurred from such deposits made by clients, when paid
for by GPP, must be in the name of the GPP in order for the same
to be claimed an expense for income tax purposes or claim any
input VAT credits therefrom.
Sale of Cinema Tickets NOT Subject to VAT
While enumeration of services under Sec. 108 is merely by way of
example only and not exclusive, the legislative intent is not to
impose VAT on gross receipts of cinema/theater houses on their
admission tickets, only to lessors of cinematographic films.
Instead, the same is subject to the 10% amusement tax under
the Local Government Code, as amended. Only lessors or
distributors of cinematographic films are included in the coverage
of VAT. (CIR vs. SM Prime Holdings, GR No. 183505 dated
February 26, 2010)
Toll Fees Subject to VAT
VAT on tollway operations cannot be deemed a tax on tax due to
the nature of VAT as an indirect tax.

The seller remains directly and legally liable for payment of the
VAT, but the buyer bears its burden since the amount of VAT paid
by the former is added to the selling price. Once shifted, the VAT
ceases to be a tax and simply becomes part of the cost that
the buyer must pay in order to purchase the good, property or
service.
Consequently, VAT on tollway operations is not really a tax on the
tollway user, but on the tollway operator. Under Section 105 of the
Code, VAT is imposed on any person who, in the course of trade or
business, sells or renders services for a fee. In other words, the
seller of services, who in this case is the tollway operator, is the
person for VAT. The latter merely shifts the burden of VAT to the
tollway user as part of the toll fees.
For this reason, VAT on tollway operations cannot be a tax on tax
even if toll fees were deemed as a “user’s tax”. VAT is assessed
against the tollway operator’s gross receipts and not necessarily
on the toll fees. Although the tollway operator may shift the VAT
burden simply becomes part of the toll fees that one has to pay in
order to use the tollways. (Diaz vs. the SOF and the CIR, GR No.
193007 dated July 19, 2011)
Dealers in Securities
Dealers in securities mean merchants of stock or securities
regularly engaged in the purchase of securities and their resale.

Output Tax Base: Gross Selling Price less Cost of the Securities
sold
Lending Investors
Lending investors include all persons other than banks, non-bank
financial intermediaries, finance companies and other financial
intermediaries not performing quasi-banking functions who make
a practice of lending money for themselves or others at interest.

Output Tax Base: Gross Receipts. (Sec. 4.108-3(g), RR No. 16-

05)
Franchise Grantees
Generally, telephone and telegraph, radio and/or television
broadcasting and all other franchise grantees, except gas and
water utilities, shall be subject to VAT in lieu of franchise tax.

However, franchise grantees of radio and/or television

broadcasting whose annual gross receipts of the preceding year
do not exceed P10,000,000 shall not be subject to VAT but to the
3% franchise tax imposed under Sec. 119 of the NIRC.
Franchise grantees of gas and water utilities shall be subject to the
2% franchise tax on their gross receipts and not to VAT.

Gross receipts of other franchise grantees, other than those

covered by Sec. 199 of the Tax Code, shall be subject to the V AT,
subject to the threshold requirement and optional registration
availment. (Sec. 4.108-3(h), RR No. 16-05)
Sale to PAGCOR is Zero-Rated
PAGCOR is exempt from the payment of VAT because PAGCOR’s
charter, P.D. No. 1869, is a special law that grants petitioner
exemption from taxes. Although R.A. No. 9337 (amendment to the
Tax Code) introduced amendments to Section 108 of R.A. No. 8424
by imposing VAT on other services not previously covered, it did not
amend the portion of Section 108 (B)(3) that subjects to zero
percent rate services performed by VAT-registered persons 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.
(PAGCOR vs. BIR; GR No. 172087; March 15, 2011)
Non-Life Insurance Companies
Non-life insurance companies are those engaged in the business
of property insurance, as distinguish from insurance on human
lives, health, accident and insurance appertaining thereto or
connected therewith which shall be subject to the percentage tax
under Sec. 123 of the NIRC. (Sec. 4.108-3(i), RR No. 16-05)
Tax Base: Premiums collected, whether paid in money, notes, credits
or any substitute for money.
1. Reinsurance Premiums: are subject to VAT.
2. Commissions: whether related to life or non-life, insurance or
reinsurance, are subject to VAT.
3. VAT due from Reinsurance Companies: is to be withheld by the
local insurance company and to be remitted to the BIR in
accordance with [the withholding VAT (to be discussed later)].

Life Insurance Companies: premiums paid to LIFE insurance

companies are subject to 2% premiums tax which is a percentage
tax. Accordingly, they are exempt from the VAT.
ZERO-RATED SALES
What are zero-rated transactions?
Transactions that do not result in output VAT, but the taxpayer is
entitled to input VAT which shall be available either as a tax credit
or as a refund, IF taxpayer is registered.

IF not registered, the sales of the taxpayer will be considered

VAT-exempt sales.
Zero-Rated Sale of
Goods
A. Export sales of goods
1) Sale and actual shipment of goods from the Philippines to a
foreign country and paid for in acceptable foreign currency, and
accounted for in accordance with the rules and regulations of the
BSP.
2) Sale of goods, supplies, equipment, and fuel to persons
engaged in international shipping or international air transport
operations. Provided, that the sale of such goods and fuel shall
pertain to the transport of goods and passengers from a
Philippine port directly to a foreign port, or vice-versa, without
docking or stopping at any other port in the Philippines.
B. Effectively zero-rated sales
Local sales by VAT-registered persons to persons or entities
deemed tax-exempt (i.e., granted exemption from indirect taxes)
under a special law or international agreement, such as:
1. ADB; IRRI.
2. Sales to diplomatic missions and other agencies or
instrumentalities granted tax immunities;
3. Regional or area headquarters of (RHQs) of multinational
corporations enjoying VAT 0-rating on its purchases at the time
of effectivity of the TRAIN;
4. Qualified foreign embassies or resident foreign missions which
have been issued a VAT Certificate (“VC”), and their personnel
and their dependents who have been issued a VAT
Identification Card (“VIC”), on purchases of goods and services
in the Philippines; and
5. Other persons/entities who are entitled to 0% VAT on
purchases.
Resident foreign mission (“RFM”) is either an embassy or a
consulate, and includes the Taipei Economic and Cultural Office
(“TECO”) in Manila (RMC No. 44-2020).

0% VAT on purchases is another way of saying that the purchaser

is exempt from the input VAT that is normally charged by the seller.
C. Sale of raw materials, inventories,
supplies, equipment, packaging materials,
and goods to a registered export enterprise to
be used directly and exclusively in its
registered project or activity pursuant to
Section 294(E) and 295(D) of the Tax Code.
(Sec. 106(A)(2)(c), NIRC)
The zero-rating of such sales shall be for a maximum period of
seventeen (17) years from the date of registration of the export
enterprise, unless otherwise extended under the Strategic
Investment Priority Plan (“SIPP”).
A registered export enterprise (“REE”) is a registered business
enterprise engaged in manufacturing, assembling or processing, or
services such as information technology activities and business
processing outsourcing, and resulting in (a) the direct exportation,
and/or (b) sale of its products or services to another registered
export enterprise that will form part of the final export product or
service of the latter, of at least 70% of its total production or
output.
A registered business enterprise refers to any individual,
partnership, corporation, Philippine branch of a foreign
corporation, or other entity organized and existing under Philippine
laws, and registered with an Investment Promotion Agency
(“IPA”), excluding service enterprises such as those engaged in
customs brokerage, trucking or forwarding services, janitorial
services, security services, insurance, banking and other financial
services, consumers’ cooperatives, credit unions, consultancy
services, retail enterprises, restaurants, or such other similar
services, as may be determined by the Fiscal Incentives Review
Board (“FIRB”) (Sec. 4(W), Rule 1, CREATE IRR).
Notes:
1. The above-described sales to existing REEs located inside
ecozones and freeport zones shall also qualify for VAT 0-
rating, but only on purchases of goods directly and exclusively
used in their registered projects or activities.
2. An exporter which is VAT-registered, but not registered as an
REE pursuant to Section 294(E) and 295(D), shall only enjoy
0% VAT on its direct export sale of goods.
A freeport zones refer to those REEs duly registered and
accredited with the Subic Bay Metropolitan Authority (“SBMA”),
the Clark Development Authority (“CDA”), Aurora Pacific
Economic Zone and Freeport Authority (“APECO”), and the
Philippine Economic Zone Authority).
Sales to existing registered export enterprises (“REEs”) located
inside Ecozones or Freeport zones and those REEs registered with
the BOI and Investment Promotion Agencies (“IPAs”) other than
the PEZA or the Freeports, shall also be qualified for VAT 0-rating
under Rev. Reg. No. 16-2005. However, the VAT 0-rating shall only
apply to the purchase of goods and/or services directly and
exclusively used in the registered project/activity of an REE
D. Sales to offshore gaming licensees
(OGLs)subject to gaming tax under Section
125-A of the Tax Code
The sale of goods or properties by VAT-registered persons to OGLs
subject to the gaming tax under Section 125-A of the Tax Code
shall be subject to a 0% VAT rate. Provided:
1. The VAT 0-rating shall only apply if the OGL is paying the 5%
gaming tax; and
2. Where the goods supplied are used in non-gaming operations,
the 0% rate shall not apply.

An offshore gaming licensee is an offshore gaming operator, duly

licensed and authorized to conduct offshore gaming operations,
including the acceptance of bets from offshore customers.
Zero-Rated Sale of
Services
1. Services other than those in processing,
manufacturing, or repacking rendered to a
person engaged in business conducted
outside the Philippines, or to a non-resident
person not engaged in business and who is
outside the Philippines when the services are
performed, and which are paid for in
acceptable foreign currency;
2. Services rendered to persons/entities
whose exemption under special laws or
international agreements effectively subjects
the supply of such services to a 0% rate;
3. Sale of services, including the provision of
basic infrastructure, utilities, and
maintenance, repair and overhaul of
equipment to a registered export enterprise to
be used directly and exclusively in its
registered project or activity pursuant to
Sections 294(E) and 295(D) of the Tax Code.
The zero-rating of such sales shall be for a maximum period of
seventeen (17) years from the date of registration of the export
enterprise, unless otherwise extended under the Strategic
Investment Priority Plan (“SIPP”).
Notes:
1. The above-described sales to existing REEs located inside
ecozones and freeport zones shall also qualify for VAT 0-rating,
but only on purchases of services directly and exclusively used
in their registered projects or activities.
2. An exporter which is VAT-registered, but not registered as an
REE pursuant to Section 294(E) and 295(D), shall only enjoy
0% VAT on its direct export sale of services.
4. Sale of services rendered to persons
engaged in international shipping or
international air transport operations,
including leases of property for use thereof;
Provided, that the sale of services shall
pertain to the transport of goods and
passengers by such international carrier or
shipper from a Philippine port directly to a
foreign port, or vice-versa.
5. Transport of passengers and cargo by
domestic air or sea carriers from the
Philippines to a foreign country.
Note:
Transport of passengers and cargo by domestic air or sea carriers
from a foreign country to the Philippines is EXEMPT from
business taxes including the VAT due to lack of jurisdiction.
6. Sale of power or fuel generated through
renewable sources of energy such as solar,
wind, biomass, geothermal, and ocean
energy. The sale of ancillary services
generated through renewable sources of
energy shall also be subject to 0% VAT.
Note:
Zero-rating does not extend to the sale of services related to
maintenance or operating of plants generating said energy.
7. Sale of services rendered to offshore
gaming licensees (OGLs) subject to the
gaming tax under Section 125-A of the Tax
Code by service providers, including
accredited service providers defined in
Section 27(G) of the Tax Code.
The sale of services by VAT-registered persons, including
accredited service providers, to OGLs subject to the gaming tax
under Section 125-A of the Tax Code shall be subject to a 0% VAT
rate. Provided:

a) The VAT 0-rating shall only apply if the OGL is paying the 5%
gaming tax; and
b) Where the services provided are used in non-gaming
operations, the 0% rate shall not apply.
An accredited service provider to an offshore gaming licensee
shall be a natural person, regardless of citizenship or residence) or
a juridical person, wherever duly organized, which provides
ancillary services to an offshore gaming licensee or to any gaming
licensee or operator with licenses from other jurisdictions. Such
ancillary services include but shall not be limited to customer and
technical relations and support, information technology, gaming
software, data provision, payment solutions, and live and
streaming services.
 VAT-EXEMPT
TRANSACTIONS
Under VAT-exempt transactions:
The sale shall not be subject to output VAT, but the seller is not
allowed any Income Tax Credit (ITC).

Seller cannot bill any output VAT to his customers.

If the seller issues a VAT invoice or receipt without being VAT-

registered, he shall be liable to the output VAT without the benefit
of any ITC.
 (A) VAT Exemption
Under Section 109 of
the Tax Code
1. Sale or importation of (a) agricultural and
marine food products in their original state, (b)
livestock or poultry of a kind generally used as,
or yielding or producing foods for human
consumption; and (c) breeding stock and genetic
materials therefor;
“Original State”
• Meat, fruit, fish, vegetables, and other agricultural and marine
food products classified under this paragraph shall be
considered in their original state 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;
“Original State”
• Polished and/or husked rice, corn grits, raw cane sugar and
molasses, ordinary salt, and copra shall be considered in their
original state.
“Livestock or Poultry”
• Does not include fighting cocks, race horses, zoo animals, and
other animals generally considered as pets.
Note:
• Sale of bagasse is not exempt from VAT.
• Fresh water is not an agricultural product, but is considered a
mineral. The sale thereof is not exempt from VAT.
2. Sale or importation of (a) fertilizers; (b)
seeds, seedlings, and fingerlings; (c) 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);
3. Importation of personal and household
effects belonging to the residents of the
Philippines returning from abroad, and non-
resident citizens coming to the Philippines:
Provided, that such goods are exempt from
Philippine customs duties;
4. Importation of (a) professional instruments and
implements; (b) tools of trade, occupation or employment;
(c) wearing apparel; (d) domestic animals; and (e) personal
household effects (except any vehicle, aircraft, machinery,
and other goods for use in the manufacture and
merchandise of any kind in commercial quantities),
belonging to overseas Filipinos, in quantities and of the
class suitable to the profession, rank, or position of the
persons importing said items, for their own use and not for
sale, barter, or exchange, accompanying such persons, or
arriving within a reasonable time;
5. Services subject to percentage tax under Title
V of the Tax Code (Secs. 116-127, Tax Code);
6. Services by agricultural contract growers, and
milling for others of palay into rice, corn into
grits, and sugar cane into raw sugar;
7. Medical, dental, hospital, and veterinary
services except those rendered by
professionals;
Notes:
• Lab services are exempt.
• Sale of drugs and medicines are VATable, generally. Therefore, if
the hospital or clinic operates a drug store, the sale of drugs
and medicine shall be subject to VAT. However, the sale of the
same to in-patients are considered part of hospital services,
and shall therefore be VAT-exempt.
8. Educational services rendered by private
educational institutions, duly accredited by the
Department of Education (“DepEd”), the
Commission on Higher Education (“CHED”), the
Technical Education and Skills Development
Authority (“TESDA”), and those rendered by
government educational institutions;
9. Services rendered by individuals pursuant to
an employer-employee relationship;
10. Services rendered by regional or area
headquarters (“RHQs”) 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;
11. Transactions which are exempt under
international agreements to which the
Philippines is a signatory or under special laws,
except those under PD 529 (Petroleum
Exploration Concessionaires under the
Petroleum Act of 1949);
12. Sales by agricultural cooperatives duly registered
with and in good standing with the Cooperative
Development Authority (“CDA”) to their members as
well as sale of their produce, whether in its original
state or processed form,29 to non-members; and
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;
13. Gross receipts from lending activities by
credit or multi-purpose cooperatives duly
registered with and in good standing with the
Cooperative Development Authority;
14. Sales by non-agricultural, non-electric,
and non-credit cooperatives duly registered with
and in good standing with the Cooperative
Development Authority: Provided, that the share
capital contribution of each member does not
exceed Fifteen Thousand Pesos (₱15,000).
Notes:
• Importation by non-agricultural, non-electric, and non-credit
cooperatives of machineries and equipment, including spare parts
thereof to be used by them are subject to VAT.
• All electric cooperatives registered with the National Electrification
Administration (“NEA”) shall be subject to VAT on sales relative to the
generation and distribution of electricity as well as their importation of
machineries and equipment, including spare parts. Provided, however,
that 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, shall be subject to
0% VAT.
15. Export sales by persons who are not VAT-
registered;
16. The following sales of real properties are
VAT-exempt:
• Sale of real properties not primarily held for sale to
customers or held for lease in the ordinary course of trade or
business;

Note:
However, even if the real property is not primarily held for sale to
customers or held for lease in the ordinary course of trade or
business, but the same is used in the trade or business of the
seller, the sale thereof shall be subject to VAT being a transaction
incidental to the taxpayer’s main business.
• Sale of real properties utilized for low-cost housing and
socialized housing as defined by R.A. No. 7279, and other
related laws;

• House and lot, and other residential dwellings with a selling

price of not more than ₱3,199,200. Every three (3) years
thereafter, the amount stated herein shall be adjusted to its
present value using the Consumer Price Index, as published by
the Philippine Statistics Authority (“PSA”).
Prior to January 1, 2021, the sale of the following residential real
properties were VAT-exempt:
1) Sale of residential lot valued at One Million, Five Hundred
Thousand Pesos (₱1,500,000) and below;
2) Sale of house and lot and other residential dwellings valued at
Two Million, Five Hundred Thousand Pesos (₱2,500,000) and
below.
Note: For purposes of (1) above, if two (2) or more adjacent
residential lots are sold or disposed in favor of one buyer from
the same seller, for the purpose of utilizing the same as one
residential lot, the sale shall be exempt from VAT only if the
aggregate value of the properties do not exceed ₱1,500,000.
17. Lease of a residential unit with a monthly
rental not exceeding Fifteen Thousand Pesos
(₱15,000), regardless of the amount of
aggregate rentals received by the lessor during
the year;
Note:
• If monthly rental of the residential units exceeds ₱15,000, they
are placed in the same category with commercial or industrial
rental properties. If the aggregate gross receipts during the
taxable year from such category exceed ₱3,000,000, then the
receipts shall be subject to VAT. Otherwise, they will be subject
to the 3% OPT.
18. Sale, importation, printing, or publication of
books and any newspaper, magazine, journal,
review bulletin, or any such educational reading
material covered by the UNESCO Agreement on the
Importation of Educational, Scientific, and Cultural
Materials, including the digital or electronic format
thereof. Provided, the materials enumerated herein
are not devoted principally to the publication of paid
advertisements;
Note:
• Sale of books, newspapers, magazines, etc. in electronic
format are also VAT-exempt.
19. Transport of passengers by international
carriers;

Note:
• Transport of cargo by international carriers is also exempt
from VAT because they are subject to the OPT under Section 118
of the Tax Code.
20. Sale, importation, or lease of passenger or
cargo vessels and aircraft, including engine,
equipment, and spare parts thereof for domestic
or international transport operations;

Provided, the importation or purchase meets the

requirements of the Maritime Industry Authority
(MARINA).
21. Importation of fuel, goods, and supplies by
persons engaged in international shipping or air
transport operations;
Provided, that 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 or vice-versa without docking or stopping at any other port in
the Philippines unless the docking or stopping at any other
Philippine port is for the purpose of unloading passengers and/or
cargoes that originated from abroad, or to load passengers and/or
cargoes bound for abroad.
22. 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 under
Sections 121 and 122, respectively, of the Tax
Code;
23. Sales or lease of goods and services to
Senior Citizens and PWDs, as provided under
R.A. Nos. 9994 and 10754;
The sale of items listed in RR 5-2017 as basic necessities and
prime commodities to PWDs shall not be exempt from the VAT
(Sec. 7, Rev. Reg. No. 5-2017 as amended by Rev. Reg. No. 9-
2019).
24. Transfer of property pursuant to Section
40(C)(2) of the Tax Code;
25. Association dues, membership fees, and
other assessments and charges collected by
homeowners’ associations, condominium
corporations, and recreational clubs;
Note:
• The collection thereof is for the benefit of the unit owners or
members. Moreover, they do not arise from transactions
involving the sale, barter, or exchange of goods or property, or
are generated by the performance of services.
26. Sale of gold to the BSP;

Note:
• Sale of gold and other metallic minerals to persons and
entities, except sale of gold to the BSP, are subject to
12% VAT if the gross selling price exceeds the threshold
of ₱3,000,000.
27. Sale or importation of prescription drugs
and medicines for:
i. Diabetes, high cholesterol, and hypertension beginning January
1, 2020; and
ii. Cancer, mental illness, tuberculosis, and kidney diseases
beginning January 1, 2021;
iii. Drugs, vaccines, and medical devices prescribed and directly
used for COVID-19 treatment beginning January 1, 2021 until
December 31, 2023;
28. Sale or importation of capital equipment, its
spare parts and raw materials, necessary for the
production of personal protective equipment
components such as coveralls, gowns, surgical
caps, surgical masks, N-95 masks, scrub suits,
goggles and face shields, double or surgical
gloves, dedicated shoes, and shoe covers, for
COVID-19 prevention beginning January 1, 2021 to
December 31, 2023.
29. 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 Three
Million Pesos (₱3,000,000).
For purposes of the threshold of ₱3,000,000, the husband and
wife shall be considered separate taxpayers.
(B) VAT Exemption Under
Section 295 in Title XIII of
the Tax Code
1. VAT exemption on importation, and VAT zero-rating
on local purchases shall only apply to goods and
services directly and exclusively used in the
registered project or activity by a registered
business enterprise.
2. The importation of COVID-19 vaccines shall be
exempt from import duties, taxes, and other fees,
subject to the approval or licenses issued by the DOH
or FDA. Provided, such vaccines must not be
intended for resale or other commercial use, and
shall be distributed without any consideration from
persons to be vaccinated.
3. Crude oil that is intended to be refined at a local
refinery, including the volumes that are lost and not
converted to petroleum products when the crude oil
actually undergoes the refining process, shall be exempt
from the payment of applicable taxes and duties upon
importation.

Provided, the applicable duties and taxes on petroleum

products shall be payable only upon lifting of the petroleum
products produced from the imported crude oil.
 (C) VAT Exemption Under
Special Laws/ Regulations/
Rulings
1. Fees, per diems, allowances, and other income
received by corporate directors from corporations
of which they are not employees;
2. (a) Sales by PEZA and other ecozone registered
enterprises; (b) Importation by PEZA and other
ecozone enterprises, but only if the goods and
services imported are directly attributable to and
exclusively used in the registered project or
activity of the registered export enterprise.
3. Sales of services by professionals and other suppliers of
services hired under a contract for service or job order with
the departments and agencies of the government, its
instrumentalities, local government units, state colleges
and universities, including GOCCs and government financial
institutions (“GFIs”) shall be exempt from VAT. Provided, (1)
they derive gross receipts of not more than ₱250,000 in any
12-month period, (2) such incomes are received from a
LONE PAYOR, and (3) such professionals have no other
source of income.
4. Amounts of money received in trust which do
not belong to the recipient and which do not
redound to the benefit of the recipient are not subject
to VAT.
5. Services rendered within intra-company
divisions are not services performed for another
person. Such intra-company divisions are considered
one and the same entity for financial reporting and
income tax purposes. Though management fees are
charged by the division rendering the services, the
same are not subject to VAT.
6. Importation of personal computers, laptops,
tablets, or similar equipment appropriate for use in
schools, which are donated for distribution to
public schools regardless of level, including state
universities and colleges and vocational institutions
under TESDA, shall be exempt from import duties and
taxes.
Note:
• In case of foreign donations, the importation of personal
computers, laptops, tablets, or similar equipment, made from
September 15, 2020 to December 19, 2020, by the
Department of Education (“DEPED”), Commission on Higher
Education (“CHED”), or TESDA, shall be exempt from VAT.
Provided, if the importer/consignee is other than the
aforementioned agencies, the importer should present a Deed
of Donation duly accepted by such agencies.
Input Tax Credit
• Also called input VAT.
• VAT due or paid on the importation of goods or VAT paid
by a purchaser (to the seller) on the local purchases of
goods, properties, or services in the course of trade or
business.
Can be availed by a VAT-registered importer, or a
VAT- registered purchaser of goods or services.
• Includes transitional input tax and the presumptive
input tax.
What are the Sources/Classification of
Input Tax Credits?
1. VAT paid (to the supplier or vendor) by a VAT-
registered person on his local purchases, and VAT
paid (to the BIR) on importation of goods;
2. ITC from transactions “deemed purchase” – The
“deemed sale” transaction will also result in a
“deemed purchase” transaction which gives rise to
input tax.
3. Transitional Input Tax
Persons allowed the transitional input tax: Those persons

a) becoming VAT-registered for the first time upon

exceeding the minimum gross sales of ₱3,000,000 in
any 12-month period or
b) who voluntarily register under the VAT system.
Transitional input VAT = Higher of (2% of the value of the
beginning inventory, or the actual input VAT paid on such
goods, materials, and supplies)

Provided: Inventory shall exclude goods exempt from VAT.

4. Presumptive Input Tax
a) Available to persons or firms engaged in the processing
of sardines, mackerel, and milk, and in the
manufacturing of refined sugar, cooking oil, and
packed noodle-based instant meals.
b) The presumptive input tax shall be equivalent to 4% of
the gross value in money of their purchases of
primary agricultural products61 which are exempt
from VAT, and which are used as inputs in production.
5. Input tax on depreciable goods (deferred input
tax credits)
The purchase or importation of depreciable capital goods
totaling > ₱1,000,000 (exclusive of VAT) in a calendar
month, regardless of the acquisition cost of each capital
good, and regardless of the terms of payment, shall give rise
to input tax credits as follows:
1) If the estimated useful life of a capital good ≥ 5 years,
the input tax credit shall be spread over a period of 60
months, and the monthly input tax credit (“ITC”) shall
commence in the month the capital good was acquired.
2) If the estimated useful life of a capital good < 5 years,
the input tax shall be spread evenly by dividing the input
tax by the actual number of months comprising the
estimated useful life. The claim for ITC shall commence
in the month that the capital good was acquired.
3) If the depreciable capital good is sold/transferred within
a period of five (5) years or prior to the exhaustion of the
amortizable input tax thereon, the entire unamortized
input tax on the capital goods sold/transferred can be
claimed as input tax credit during the month/quarter
when the sale or transfer is made.
Note:
• The amortization of the input VAT provided under Section
110(A)(2) of the Tax Code shall only be allowed until December
31, 2021. After such date, taxpayers with unutilized input VAT
on capital goods purchased or imported shall be allowed to
apply the same as scheduled until fully utilized.
• Effective January 1, 2022, all input VAT on purchases of capital
goods shall be allowed as input tax credits upon purchase or
payment. The same shall no longer be deferred.
Exception:
Input taxes on the purchase of the following non-depreciable
vehicles and all input taxes on the maintenance expenses thereon
shall not be allowed as input tax credits against the output VAT:
1) Purchases of vehicles for which no substantiation exists;
2) Purchases of (a) yachts, (b) helicopters, (c) airplanes, or
aircrafts, and (d) land vehicles for the use of an official or
employee of the taxpayer exceeding ₱2,400,000, unless the
taxpayer’s main line of business is in transport operations or in
leasing transportation equipment, and the vehicles are used in
said operations.
6. Input tax on Construction in Progress (CIP)
CIP –cost of construction work which is not yet completed.
It will not be depreciated until the asset is placed in service.

Input tax credit can be recognized in the month payment is

made. However, once the asset is completed and
reclassified as a capital asset, no additional ITC can be
claimed.
7. Ratable portion of any input tax which cannot be
directly attributed to either taxable or exempt activity

8. Issuance of a VAT invoice by a non-VAT person –

provided the requisite information is shown on the
invoice or receipt.

9. Issuance of a VAT invoice on an exempt transaction by

a VAT-registered person – provided the requisite
information is shown on the invoice or receipt.
How is an ITC used?
1) Used as a credit against the output tax to compute the VAT
payable;
2) Any excess ITC shall be carried over to the succeeding period;
3) Input tax attributed to 0-rated sales by a VAT-registered
taxpayer may, at his option,
(a) Be applied against the output VAT from sales of a VATable
line of business, or carried over to the succeeding period; or
(b) The taxpayer can apply for a refund or tax credit certificate
(“TCC”)
4) Input tax attributable to VAT-exempt sales are expensed.
Note:
• A TCC can be used in the payment of other internal revenue
taxes.
• If claim for refund or TCC is denied by the BIR, the amount of the
claim is available as a deductible loss for the purpose of
computing a taxpayer’s taxable income (CIR vs. Maersk Global
Services, CTA EB Case No. 1786, June 13, 2019).
ITCs for VAT-Registered Persons who are also
Engaged in Non-VAT Lines of Business
Such taxpayers shall be entitled to the following ITCs:
1) Input VAT directly attributable to transactions or sales
subject to VAT;
2) For input VAT that cannot be directly attributed to either VAT-
taxable, VAT-exempt, 0-rated, or Government transactions,
only the ratable portion pertaining to the VAT-taxable and 0-
rated transactions may be recognized for ITCs.
Notes:
• Input taxes(a) directly attributable to VAT-exempt sales and
(b) ratably allocated to VAT-exempt sales – not allowed as
ITCs, but shall be treated as part of costs or expenses.
• Prior to January 1, 2021, input taxes paid on purchases (a)
directly attributable to sales to the government and (b)
ratably allocated to sales to the government were not
allowed as ITCs. However, the excess of such input taxes over
the implied 7% standard input VAT were allowed to be
expensed.
• Input taxes (a) directly attributable to 0-rated sales and (b)
ratably allocated to 0-rated sales – shall be allowed as ITCs
and any excess can be carried forward, or refunded, or applied
for a tax credit certificate (TCC).