VALUE ADDED TAX

Value-Added Tax (VAT) is a form of sales tax. It 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. It is an indirect tax, which may be shifted or passed on to the buyer,
transferee or lessee of goods, properties or services.

It is an indirect tax and the amount of tax may, by law, be shifted or passed on to the buyer,
transferee or lessee of the goods, properties or services. (Sec. 105, NIRC)

It is a tax on the estimated market value added to a product or material at each stage of its
manufacture or distribution, ultimately passed on to the consumer.

OUTPUT TAX LESS INPUT TAX EQUALS VAT

VAT Taxable transactions: - Creditable Input Taxes: = PAYABLE/
a. 12% VAT (Sale of a. Purchase or EXCESS
goods or importation of TAX
properties, goods and services CREDITS
transactions on which VAT has
deemed sale, been paid
importation of b. Transactions deemed
goods, sale of sale
services, lease or c. Transitional input tax
use of properties credit
b. 0% VAT (Export d. Presumptive input
sales, 0% rated tax credit
service e. Purchase of real
transactions, properties for which a
c. VAT has actually
been paid
f. Transitional input tax
credits allowed under
the transitory and
other provisions of
the Regulations
g. Creditable
Withholding VAT on
payments to non-
residents
*VAT-exempt transactions are not subject to output VAT, hence no input VAT.

Why is the tax called “Valued Added Tax”?

This tax is called VAT because the tax payable by the seller, etc. is based on the values added
by him to the cost of goods or merchandise which he previously purchased which he in turn sells
to his customers. There values are the input tax and gross profit.

Nature of VAT

It is an indirect 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. The amount of tax paid on the goods, properties or services bought, transferred, or
leased may be shifted or passed on by the seller, transferor, or lessor to the buyer, transferee or
lessee.

The seller is the one statutorily liable for the payment of the tax, but the amount of the tax
may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services.
However, in the case of importation, the importer is the one liable for the VAT. (Sec 4.105-2 RR
16-2005)
 What is transferred in such instances is not the liability for the tax, but the tax burden. In
adding or including the VAT due to the selling price, the seller remains the person primarily and
legally liable for the payment of the tax. What is shifted only to the intermediate buyer and
ultimately to the final purchaser is the burden of the tax.

Transactions classified under the VAT system?

1) VAT taxable transactions

a) Subject to 12% VAT rate
b) Zero-rated transactions
2) Exempt transactions

Taxable transactions under the VAT law.

Taxable transactions are those transactions which are subject to VAT either at the rate of
12% (effective January 1, 2006, VAT rate was increase from 10-12%) or 0%, and the seller shall
be entitled to tax credit for the VAT paid on purchases and leases of goods, properties or services
(Commissioner v. Cebu Toyo Corporation, G.R. No. 149073, February 16, 2005)

Characteristics of VAT?

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

2) It is consumption-based
3) It is imposed on the value-added in each stage of distribution
4) It is a credit-invoice method value-added tax
5) It is not a cascading tax.

Explain the Tax Credit Method (also called “invoice method”) of collecting VAT

The input tax shifted by the seller to the buyer is credited against the buyer’s output taxes
when he in turn sells the taxable goods, properties or services.

What is the “Destination Principle” or the “Cross Border Doctrine” as used in VAT?

Under this doctrine, goods and services are taxed only in the country where they are
consumed. No VAT shall be imposed to form part of the cost of goods destined outside the
territorial border of the taxing authority. Thus, exports are zero-rated, while imports are taxed.

Actual shipment of the goods from the Philippines to a foreign country is a precondition of
an export sale following the destination principle being adhered to by our VAT system.

Is there any exception to the destination principle?

Yes. The law clearly provides for an exception to the destination principle; that is, for a zero
percent VAT rate for services that are performed in the Philippines, "paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the BSP."

Hence, actual or constructive export of goods and services from the Philippines to a foreign
country must be zero-rated for VAT; while those destined for use or consumption within the
Philippines shall be imposed the twelve percent (12%) VAT.

Who are liable to register as VAT taxpayers?

Any person who, in the course of trade or business, sells, barters or exchanges goods or
properties or engages in the sale or exchange of services shall be liable to register if:
a. His gross sales or receipts for the past twelve (12) months, other than those that are exempt
under Section 109 (A) to (U), have exceeded Three Million Pesos (P3,000,000.00): 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 (U), will exceed
Three Million Pesos (P3,000,000.00).

Define “in the course of trade or business” (Rule of Regularity) as used under the VAT law.

It means the regular conduct or pursuit of a commercial or an economic activity, including

transactions incidental thereto, by any person regardless of whether or not the person engaged
therein is a non-stock, non-profit private organization (irrespective of the disposition of its net
income and whether or not it sells exclusively to members or their guests), or government entity.

General Rule: If the disposition of goods or services is not in the course of trade or business
then it is not subject to VAT

Exception: Importation is subject to VAT regardless of whether or not it is in the course of

trade or business.

Value-Added Tax on Sale of Goods or Properties

Requisites for taxability of sale of goods and personal properties

1. There is an actual or deemed sale, barter or exchange of goods or personal properties for
valuable consideration;
2. The sale is in the course of trade or business or exercise of profession in the Philippines;
3. The goods or properties are located in the Philippines and are for use or consumption
therein; and
4. The sale is not exempt from VAT under Section 109 of NIRC, special law, international
agreement binding upon the government of the Philippines.

Absence of any of the above requisites EXEMPTS the transaction from VAT. However,
percentage taxes may apply (Section 116, NIRC).

Requisites for taxability of sale or exchange of real property?

1. The seller executes a deed of sale, including dacion en pago, barter or exchange,
assignment, transfer, or conveyance, or merely contract to sell involving real property
2. The real property is located within the Philippines;
3. The seller or transferor is a real estate dealer
4. The real property is an ordinary asset held primarily for sale or for lease in the ordinary
course of business
5. The sale is not exempt from VAT under Section 109 of NIRC, special law, or international
agreement binding upon the government of the Philippines
6. The threshold amount set by law should be met.

Absence of any of the above requisites EXEMPTS the transaction from VAT. However,
percentage taxes may apply under Section 116 of NIRC.

Goods or properties which are subject to VAT?

The term "goods or properties" shall mean all tangible and intangible objects, which are
capable of pecuniary estimation and shall include, among others:
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 the 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 privilege to use in the Philippines of any industrial, commercial or scientific
equipment;
d. The right or the privilege to use motion picture films, films, tapes and discs; and
e. Radio, television, satellite transmission and cable television time.
 Taxable sales refers to the sale, barter, exchange and/or lease of goods or properties,
including transactions deemed sale and the performance of service for consideration, whether in
cash or in kind.

The term 'gross selling price' means the total amount of money or its equivalent which the
purchaser pays or is obligated to pay to the seller in consideration of the sale, barter or exchange
of the goods or properties, excluding (if the output tax is included the term is total selling price or
selling price with VAT) the value-added tax but including the input tax. The excise tax, if any, on
such goods or properties shall form part of the gross selling price.

Value-Added Tax Rates

1. On sale of goods and properties - twelve percent (12%) of the gross selling price or gross
value in money of the goods or properties sold, bartered or exchanged
2. On sale of services and use or lease of properties - twelve percent (12%) of gross receipts
derived from the sale or exchange of services, including the use or lease of properties
3. On importation of goods - twelve percent (12%) based on the total value used by the Bureau
of Customs in determining tariff and customs duties, plus customs duties, excise taxes, if
any, and other charges, such as tax to be paid by the importer prior to the release of such
goods from customs custody; provided, that where the customs duties are determined on
the basis of quantity or volume of the goods, the VAT shall be based on the landed cost
plus excise taxes, if any.
4. On export sales and other zero-rated sales - 0%

What is a zero-rated sale?

It is a sale, barter or exchange of goods, properties and/or services subject to 0% VAT

pursuant to Sections 106 (A) (2) and 108 (B) of the Tax Code. It is a taxable transaction for VAT
purposes, but shall not result in any output tax. However, the input tax on purchases of goods,
properties or services, related to such zero-rated sales, shall be available as tax credit or refund in
accordance with existing regulations.

What is the difference between “zero-rated” and “VAT-exempt” transactions?

The difference lies in the input tax. In VAT-exempt transactions there is no input tax credit
allowed. In the case of 0% rated transaction of a VAT registered person, the sale of goods or
properties is multiplied by 0% thus his output tax is 0.00. Since the person is VAT-registered, he
can claim input tax for purchases made from VAT-registered entities.

E.g. Output tax 0.00

Less: Input Tax 5,000.00
VAT Creditable 5,000.00

EXEMPT ZERO-RATED
Nature of transaction
Not taxable; removes VAT at the exempt stage Transaction is taxable for VAT purposes
although the tax levied is 0%
By whom made
Need not be a VAT-registered person Made by a VAT-registered person
Tax Credit/Refund
Cannot avail of tax credit or refund. Thus, may Can claim or enjoy tax credit or refund (Total
result in increased prices (Partial Relief) Relief)

What transactions are considered as zero-rated sales?

The following services performed in the Philippines by VAT-registered person shall be

subject to zero percent (0%) rate:
 a. Processing, manufacturing or repacking goods for other persons doing business outside the
Philippines which goods are subsequently exported where the services are paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations
of the Bangko Sentral ng Pilipinas (BSP);
b. Services other than processing, manufacturing or repacking rendered to a person engaged
in business conducted outside the Philippines or to a non-resident person engaged in
business who is outside the Philippines when the services are performed, the consideration
for which is paid for in acceptable foreign currency and accounted for in accordance with
the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
c. Services rendered to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively subjects the
supply of such services to zero percent (0%) rate;
d. Services rendered to persons engaged in international shipping or air transport operations,
including leases of property for use thereof; Provided, that these services shall be
exclusively for international shipping or air transport operations. (Thus, the services
referred to herein shall not pertain to those made to 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, the same being subject to twelve percent (12%) VAT
under Sec. 108 of the Tax Code, as amended);
e. Services performed by subcontractors and/or contractors in processing, converting, or
manufacturing goods for an enterprise whose export sales exceeds seventy percent (70%)
of total annual production;
f. Transport of passengers and cargo by domestic air or sea carriers from the Philippines to a
foreign country. (Gross receipts of international air carriers and international sea carriers
doing business in the Philippines derived from transport of passengers and cargo from the
Philippines to another country shall be exempt from VAT; however they are still liable to
a percentage tax of three percent (3%) based on their gross receipts derived from transport
of cargo from the Philippines to another country as provided for in Sec. 118 of the Tax
Code, as amended); and
g. Sale of power or fuel generated through renewable sources of energy such as, but not
limited to, biomass, solar, wind, hydropower, geothermal and steam, ocean energy, and
other shipping sources using technologies such as fuel cells and hydrogen fuels; Provided,
however that zero-rating shall apply strictly to the sale of power or fuel generated through
renewable sources of energy, and shall not extend to the sale of services related to the
maintenance or operation of plants generating said power.

The following sales by VAT-registered persons shall be subject to zero percent (0%) rate:
a. Export sales
1. The sale and actual shipment of goods from the Philippines to a foreign country,
irrespective of any shipping arrangement that may be agreed upon which may
influence or determine the transfer of ownership of the goods so exported, paid in
acceptable foreign currency or its equivalent in goods or services, and accounted
for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP);
2. The sale of raw materials or packaging materials to a non-resident buyer for
delivery to as a resident local export-oriented enterprise to be used in
manufacturing, processing, packing or repacking in the Philippines of the said
buyer's goods, paid for in acceptable foreign currency, and accounted for in
accordance with the rules and regulations of the BSP;
3. The sale of raw materials or packaging materials to an export-oriented enterprise
whose export sales exceed seventy percent (70%) of total annual production;
4. Transactions considered export sales under Executive Order No. 226, otherwise
known as the Omnibus Investments Code of 1987, and other special laws; and
5. The sale of goods, supplies, equipment and fuel to persons engaged in international
shipping or international air transport operations; Provided, That the goods,
supplies, equipment, and fuel shall be used exclusively for international shipping
or air transport operations; Provided, that the same is limited to goods, supplies,
equipment and fuel that shall be used in the transport of goods and 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;Provided, further, that if any portion of such fuel, goods or supplies is used
for purposes other than the mentioned in this paragraph, such portion of fuel, goods
and supplies shall be subject to twelve percent (12%) output VAT.
b. Sales to Persons or Entities Deemed Tax-exempt under Special Law or International
Agreement
c. Sale of goods or property to persons or entities who are tax-exempt under special laws or
international agreements to which the Philippines is a signatory, such as, Asian
Development Bank (ADB), International Rice Research Institute (IRRI), subject such sales
to zero rate.

What are the transactions which are no longer subject to zero-percent (0%)?
1. Sale of gold to BSP
2. Foreign-currency denominated sales

Upon the successful establishment and implementation of an enhanced VAT refund system
by the Department of Finance (DOF), what are the transactions that will now be subject to
twelve percent (12%) and no longer be subject to zero percent (0%)?
1. The sale of raw materials or packaging materials to a non-resident buyer for delivery to a
resident local export-oriented enterprise to be used in manufacturing, processing, packing
or repacking in the Philippines of the said buyer's goods, paid for in acceptable foreign
currency, and accounted for in accordance with the rules and regulations of the BSP;
2. The sale of raw materials or packaging materials to an export-oriented enterprise whose
export sales exceed seventy percent (70%) of total annual production;
3. Transactions considered export sales under Executive Order No. 226, otherwise known as
the Omnibus Investments Code of 1987, and other special laws
4. Processing, manufacturing or repacking goods for other persons doing business outside the
Philippines which goods are subsequently exported where the services are paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations
of the Bangko Sentral ng Pilipinas (BSP); and
5. Services performed by subcontractors and/or contractors in processing, converting, or
manufacturing goods for an enterprise whose export sales exceeds seventy percent (70%)
of total annual production.

Is the sale of goods to ecozone, such as PEZA, considered as export sale?

Yes. Notably, while an ecozone is geographically within the Philippines, it is deemed a

separate customs territory and is regarded in law as foreign soil. Sales by suppliers from outside
the borders of the ecozone to this separate customs territory are deemed as exports and treated as
export sales.

These sales are zero-rated or subject to a tax rate of zero percent. (CIR v. Sekisui Jushi
Philippines, Inc., G.R. No. 149671, July 21, 2006)

What transactions are considered deemed sales?

The following transactions are considered as deemed sales:

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. Transfer of goods or
properties not in the course of business can take place when VAT-registered person
withdraws goods from his business for his personal use;
2) Distribution or transfer to:
a) Shareholders or investors as share in the profits of the VAT-registered person; or
b) Creditors in payment of debt or obligation
 3) Consignment of goods if actual sale is not made within sixty (60) days following the date
such goods were consigned. Consigned goods returned by the consignee within the 60-day
period are not deemed sold;
4) Retirement from or cessation of business, with respect to all goods on hand, whether capital
goods, stock-in-trade, supplies or materials as of the date of such retirement or cessation,
whether or not the business is continued by the new owner or successor.

The following circumstances shall, among others, give rise to transactions "deemed sale";
5) Change of ownership of the business. There is a change in the ownership of the business
when a single proprietorship incorporated; or the proprietor of a single proprietorship sells
his entire business
6) Dissolution of a partnership and creation of a new partnership which takes over the
business.

VAT on Importation of Goods

Is importation subject to VAT?

Yes. VAT shall be assessed and collected upon goods brought into the Philippines whether
for use in business or not.

What is the tax base of importation?

General Rule: The tax base shall be based on the total value used by the BOC in determining
tariff and customs duties plus customs duties, excise taxes, if any, and other charges to be paid by
the importer prior to the release of such goods from customs custody. (Sec.107[A])

Exception: Where the customs duties are determined on the basis of quantity or volume of
the goods, the VAT shall be based on the landed cost plus excise taxes, if any.

Who pays for the tax on imported goods?

The importer shall pay the tax prior to the release of the imported goods.

Who is an importer?

An importer is a person who brings goods into the Philippines, whether or not made in the
course of trade or business. It includes non-exempt persons or entities who acquire tax free
imported goods from exempt persons, entities or agencies.

When does importation begin and end?

Importation begins when a vessel or aircraft enters the Philippine jurisdiction with the
intention to unload goods/cargo. Importation ends upon the payment of duties, taxes, and other
charges due upon the article, or to be paid at the port of entry and legal permit for withdrawal shall
have been granted.

What is “technical importation”?

Sale of goods by a PEZA registered enterprise to a buyer from the customs territory shall be
treated as a technical importation. Such buyer shall be treated as an importer thereof and shall be
imposed with the corresponding import taxes.

VAT on Sale of Service and Use of Lease of Properties

What is meant by “sale or exchange of services” subject to VAT?

It means the performance of all kinds of services in the Philippines for others for a fee,
remuneration or consideration.

What does the phrase “sale or exchange of services” likewise include?

 1) The lease or the 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 or the use of, 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 nonresident 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
8) The lease or the use of or the right to use radio, television, satellite transmission and
cable television time. (Ibid.)

Note: 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.

Requisites for Taxability of sale or exchange of services or lease or use of property

1. There is a sale or exchange of service or lease or use of property enumerated in the law or
other similar services;
2. The service is performed or to be performed in the Philippines;
3. The service is in the course of trade of taxpayer’s trade or business or profession;
4. The service is for a valuable consideration actually or constructively received; and
5. The service is not exempt under the Tax Code, special law or international agreement.

Note: Absence of any of the requisites renders the transaction exempt from VAT but may
be subject to other percentage tax under Title V of the Tax Code

VAT-exempt sale

It is a sale of goods, properties or service and the use or lease of properties which is not
subject to output tax and whereby the buyer is not allowed any tax credit or input tax related to
such exempt sale.

What are the VAT-exempt transactions?

a. Sale or importation of agricultural and marine food products in their original state,
livestock and poultry of a kind generally used as, or yielding or producing foods for
human consumption; and breeding stock and genetic materials therefore;
b. Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock
and poultry feeds, including ingredients, whether locally produced or imported, used in
the manufacture of finished feeds (except specialty feeds for race horses, fighting cocks,
aquarium fish, zoo animals and other animals considered as pets);
c. Importation of personal and household effects belonging to residents of the Philippines
returning from abroad and non-resident citizens coming to resettle in the Philippines;
Provided, that such goods are exempt from custom duties under the Tariff and Customs
Code of the Philippines;
d. Importation of professional instruments and implements, tools of trade, occupation or
employment, wearing apparel, domestic animals, and personal and household effects (
except vehicles, vessels, aircrafts machineries and other similar goods for use in
manufacture which are subject to duties, taxes and other charges) belonging to persons
coming to settle in the Philippines or Filipinos or their families and descendants who are
now residents or citizens of other countries, such parties hereinafter referred to as 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 barter or sale, accompanying such
persons, or arriving within a reasonable time; Provided, That the Bureau of Customs may,
upon the production of satisfactorily evidence that such persons are actually coming to
settle in the Philippines and that the goods are brought from their place of residence,
exempt such goods from payment of duties and taxes.
e. Services subject to percentage tax under Title V of the Tax Code, as amended;
f. Services by agricultural contract growers and milling for others of palay into rice, corn
into grits, and sugar cane into raw sugar;
g. Medical, dental, hospital and veterinary services except those rendered by professionals;
h. Educational services rendered by private educational institutions duly accredited by the
Department of Education (DepED), the Commission on Higher Education (CHED) and
the Technical Education and Skills Development Authority (TESDA) and those rendered
by the government educational institutions;
i. Services rendered by individuals pursuant to an employer-employee relationship;
j. Services rendered by regional or area headquarters established in the Philippines by
multinational corporations which act as supervisory, communications and coordinating
centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region and do not
earn or derive income from the Philippines;
k. Transactions which are exempt under international agreements to which the Philippines
is a signatory or under special laws except those granted under P.D. No. 529 - Petroleum
Exploration Concessionaires under the Petroleum Act of 1949;
l. Sales by agricultural cooperatives duly registered and in good standing with the
Cooperative Development Authority (CDA) to their members, as well as of their produce,
whether in its original state or processed form, to non-members, their importation of direct
farm inputs, machineries and equipment, including spare parts thereof, to be used directly
and exclusively in the production and/or processing of their produce;
m. Gross receipts from lending activities by credit or multi-purpose cooperatives duly
registered and in good standing with the Cooperative Development Authority;
n. Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with
and in good standing with CDA; Provided, that the share capital contribution of each
member does not exceed Fifteen Thousand Pesos (P15,000.00) and regardless of the
aggregate capital and net surplus ratably distributed among the members;
o. Export sales by persons who are not VAT-registered;
p. The following sales of real properties:
i. Sale of real properties not primarily held for sale to customers or held for lease
in the ordinary course of trade or business.
ii. Sale of real properties utilized for low-cost housing as defined by RA No. 7279,
otherwise known as the "Urban Development and Housing Act of 1992" and
other related laws, such as RA No. 7835 and RA No. 8763;
iii. Sale of real properties utilized for specialized housing as defined under RA No.
7279, and other related laws, such as RA No. 7835 and RA No. 8763, wherein
price ceiling per unit is Php 450,000.00 or as may from time to time be
determined by the HUDCC and the NEDA and other related laws;
iv. Sale of residential lot valued at One Million Five Hundred Thousand Pesos
(P1,500,000.00) and below, or house and lot and other residential dwellings
valued at Two Million Five Hundred Thousand Pesos (P2,500,000.00) and
below, as adjusted using latest Consumer Price Index values. (If two or more
adjacent lots are sold or disposed in favor of one buyer, for the purpose of
utilizing the lots as one residential lot, the sale shall be exempt from VAT only
if the aggregate value of the lots do not exceed One Million Five Hundred
Thousand Pesos (P1,500,000.00). Adjacent residential lots, although covered by
separate titles and/or separate tax declarations, when sold or disposed to one and
the same buyer, whether covered by one or separate Deed of Conveyance, shall
be presumed as a sale of one residential lot.)
q. Lease of residential units with a monthly rental per unit not exceeding Fifteen Thousand
Pesos (P15,000.00), regardless of the amount of aggregate rentals received by the lessor
during the year; Provided, that not later than January 31, 2009 and every three (3) years
thereafter, the amount of P10,000.00 shall be adjusted to its present value using the
 Consumer Price Index, as published by the Philippine Statistics Authority (Formerly
known as NSO);
r. Sale, importation, printing or publication of books and any newspaper, magazine, review
or bulletin which appears at regular intervals with fixed prices for subscription and sale
and which is not devoted principally to the publication of paid advertisements;
s. Transport of passengers by international carriers;
t. Sale, importation or lease of passenger or cargo vessels and aircraft, including engine
equipment and spare parts thereof for domestic or international transport perations;
Provided, that the exemption from VAT on the importation and local purchase of
passenger and/or cargo vessels shall be subject to the requirements on restriction on vessel
importation and mandatory vessel retirement program of Maritime Industry Authority
(MARINA);
u. 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 passenger 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 form abroad, or to
load passengers and/or cargoes bound for abroad; Provided, further, that if any portion of
such fuel, goods or supplies is used for purposes other that the mentioned in the paragraph,
such portion of fuel, goods and supplies shall be subject to 12% VAT;
v. Services of banks, non-bank financial intermediaries performing quasi-banking functions,
and other non-bank financial intermediaries, such as money changers and pawnshops,
subject to percentage tax under Sections 121 and 122, respectively of the Tax Code; and
w. Sale or lease of goods and services to senior citizens and persons with disabilities, as
provided under Republic Act Nos. 9994 (Expanded Senior Citizens Act of 2010) and
10754 (An Act Expanding the Benefits and Privileges of Persons with Disability),
respectively;
x. Transfer of property in merger or consolidation (pursuant to Section 40(C)(2) of the Tax
Code, as amended);
y. Association dues, membership fees, and other assessments and charges collected on a
purely reimbursement basis by homeowners’ associations and condominium established
under Republic Act No. 9904 (Magna Carta for Homeowners and Homeowner’s
Association) and Republic Act No. 4726 (The Condominium Act), respectively;
z. Sale of gold to the Banko Sentral ng Pilipinasn (BSP) (previously zero-rated transaction);
aa. Sale of drugs and medicines prescribed for diabetes, high cholesterol, and hypertension
(beginning on January 1, 2019 as determined by the Department of Health); and
bb. Sale or lease of goods or properties or the performance of services other than the
transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts
do not exceed the amount of Three Million Pesos (Php 3,000,000.00). Note: Self-
employed individuals and professionals availing of the 8% on gross sales and/or receipts
and other non-operating income, under Sections 24 (A)(2)(b) and 24 (A)(2)(c)(2) of the
NIRC shall also be exempt from the payment of twelve (12%) VAT.

Transfer of Goods by Tax Exempt Persons

What is the consequence if a tax exempt person would transfer imported goods to a non-
exempt person?

The purchaser or transferee shall be considered as an importer and shall be held liable for
VAT and other internal revenue tax due on such importation. (Sec. 107[B])

Note: The tax due on such importation shall constitute a lien on the goods superior to all
charges or liens on the goods, irrespective of the possessor thereof.

INPUT TAX and OUTPUT TAX

Define Input Tax.

 It means the value-added tax due from or paid by a VAT-registered person in the course of
his trade or business on importation of goods or local purchase of goods or services, including
lease or use of property, from a VAT-registered person. It shall also include the transitional input
tax determined in accordance with Section 111 of the NIRC. (Sec.110 [A][3], NIRC)

Is input tax a property right within the Constitutional purview of the due process clause?

No. A VAT-registered person’s entitlement to the creditable input tax is a mere statutory privilege
which may be limited or removed by law.

Define Output Tax.

It means the value-added tax due on the sale or lease of taxable goods or properties or services by
any person registered or required to register under Sec. 236 of the NIRC. (Sec. 110[A][3], NIRC)

Sources of Input Tax

Creditable input taxes?

The input tax evidenced by a VAT invoice or official receipt issued in accordance with
Section 113 of the NIRC on the following transactions shall be creditable against the output tax:
1. Purchase or importation of goods:
a. For sale; or
b. For conversion into or intended to form part of a finished product for sale
including packaging materials; or
c. For use as supplies in the course of business; or
d. For use as materials supplied in the sale of service; or
e. For use in trade or business for which deduction for depreciation or amortization
is allowed under this Code, except automobiles, aircraft and, yachts.
2. Purchase of services on which a VAT has been actually paid. (Sec. 110 [A][1], NIRC)

What are included as input tax credits?

1) Transactions deemed sale

2) Transitional input tax credits
3) Presumptive input tax credits
4) Purchase of real properties for which a VAT has actually been paid
5) Transitional input tax credits allowed under the transitory and other provisions of the
Regulations
6) Creditable Withholding VAT on payments to non-residents

What is transitional input tax credit?

It is an input tax credit allowed to person who becomes liable to value-added tax or any
person who elects to be a VAT-registered person. The allowed input tax shall be whichever is
higher between:
a. 2% of the value of the taxpayer’s beginning inventory of goods, materials and
supplies;or
b. The actual value-added tax paid on such goods. (Sec.111[A], NIRC)

What is the purpose of transitional input tax credit?

It operates to benefit newly VAT-registered persons, whether or not they previously paid
taxes in the acquisition of their beginning inventory of goods, materials, and supplies. During that
period of transition from non-VAT to VAT status, the transitional input tax credit serves to
alleviate the impact of the VAT on the taxpayer. At the very beginning, the VAT-registered
taxpayer is obliged to remit a significant portion of the income it derived from its sales as output
VAT. The transitional input tax credit mitigates this initial diminution of the taxpayer’s income by
affording the opportunity to offset the losses incurred through the remittance of the output VAT at
a stage when the person is yet unable to credit input VAT payments. (Fort Bonifacio Development
Corporation v. CIR, G.R. No. 158885; G.R. No. 170680, Apr. 2, 2009)

Is the allowance for transitional input tax credit applicable to real property?

Yes. Under Sec. 105 of the old NIRC (now Sec. 111[A]), the beginning inventory of “goods”
forms part of the valuation of the transitional input tax credit. Goods, as commonly understood in
the business sense, refer to the product which the VAT-registered person offers for sale to the
public. With respect to real estate dealers, it is the real properties themselves which constitute their
“goods”. Such real properties are the operating assts of the real estate dealer. (Ibid.)

What is presumptive input tax credit?

It is an input tax credit allowed to persons or firms engaged in the:
a. processing of:
i. sardines
ii. mackerel
iii. milk
b. manufacturing of:
i. refined sugar
ii. cooking oil
iii. packed noodle based instant meals

The allowed input tax shall be equivalent to four percent (4%) of the gross value in money
of their purchases of primary agricultural products which are used as inputs to their production.
(Sec. 111 [B], NIRC)

Note: The term 'processing' shall mean pasteurization, canning and activities which through
physical or chemical process alter the exterior texture or form or inner substance of a product in
such manner as to prepare it for special use to which it could not have been put in its original form
or condition.

Persons Who Can Avail of Input Tax Credit

To whom shall the input tax be creditable?

1. To the purchaser upon consummation of sale and on importation of goods or properties;

and
2. To the importer upon payment of the VAT prior to the release of the goods from the custody
of the Bureau of Customs.

However, in the case of purchase of services, lease or use of properties, the input tax shall
be creditable to the purchaser, lessee or licensee upon payment of the compensation, rental, royalty
or fee. (Sec. 110 [A][2], NIRC)

DETERMINATION OF OUTPUT/INPUT TAX; VAT PAYABLE; EXCESS INPUT TAX

CREDITS

How is output tax determined?

1. Sellers of goods or properties: Gross selling price x VAT rate

2. Sellers of service: Gross receipts x VAT rate

Determination of Input Tax Creditable

The sum of the excess input tax carried over from the preceding month or quarter and the
input tax creditable to a VAT-registered person during the taxable month or quarter shall be
reduced by the amount of claim for refund or tax credit for VAT and other adjustments, such as
purchase returns or allowances and input tax attributable to exempt sale.
 The claim for tax credit referred to in the foregoing paragraph shall include not only those
filed with the BIR but also those filed with other goverment agencies, such as the Board of
Investments or the Bureau of Customs [Sec. 110 [C], NIRC]

Allocation of Input Tax on Mixed Transactions

May a VAT- registered person who is also engaged in transactions not subject to VAT be
allowed tax credit?

Yes. A VAT-registered person who is also engaged in transactions not subject to the VAT
shall be allowed tax credit as follows:
1. Total input tax which can be directly attributed to transactions subject to value-added
tax; and
2. A ratable portion of any input tax which cannot be directly attributed to either
activity. (Sec. 110 [A][3], NIRC)

How is input tax allocated on mixed transactions?

A VAT-registered person who is also engaged in transactions not subject to VAT shall
be allowed to recognize input tax credit on transactions subject to VAT as follows:
1. All the input taxes that can be directly attributed to transactions subject to VAT may
be recognized for input tax credit: provided, that input taxes which are directly
attributable to VAT taxable sales of goods and services from the Government or any
of its political subdivisions, instrumentalities or agencies, including GOCCs shall not
be credited against output taxes arising from sales to non-government entities.
2. If any input tax cannot be directly attributed to either a VAT taxable or VAT-exempt
transaction, the input tax shall be pro-rated to the VAT taxable and VAT-exempt
transactions; only the ratable portion pertaining to transactions subject to VAT may
be recognized for input tax credit

Note: Input tax attributable to VAT-exempt sales shall not be allowed as credit against the
output tax but should be treated as part of cost of goods sold. For persons engaged in both zero-
rated sales and non-zero rated sales, the aggregate input taxes shall be allocated ratably between
the zero-rated and non-zero rated sales.

Determination of the output tax and VAT payable and computation of VAT payable or
excess tax credits

How to compute the VAT payable?

Output tax
LESS: Input tax_______ ___
VAT payable/ excess tax credits

What are the rules in computing VAT?

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

Note: Any input tax attributable to the purchase of capital goods or to zero-rated sales by a
VAT-registered person may at his option be refunded or credited against other internal revenue
taxes, subject to the provisions of Section 112.

REFUND OR TAX CREDIT OF EXCESS INPUT TAX

What are the options available to a VAT-registered person, whose sales are zero-rated or
effectively zero-rated?
 1. To claim for tax credit; or
2. To claim for refund. (Sec. 112[A], NIRC)

For a claim for tax refund to prosper, what must the VAT-registered entity prove?

The taxpayer must prove the following:

a. That it is a VAT-registered entity;
b. It must substantiate the input VAT paid by purchase invoices or official receipts
(Commissioner v. Manila Mining Corporation, G.R. No. 153204, Aug. 31, 2005).

May a taxpayer who has pending claims for VAT input credit or refund, set off said claims
against his other tax liabilities? Explain your answer.

No. Set-off is available only if both obligations are liquidated and demandable. Liquidated
debts are those where the exact amounts have already been determined. In the instant case, a claim
of the taxpayer for VAT refund is still pending and the amount has still to be determined. A fortiori,
the liquidated obligation of the taxpayer to the government cannot, therefore, be set-off against the
unliquidated claim which the Taxpayer conceived to exist in his favor. (Philex Mining Corp. v.
CIR, G.R. No. 125704, Aug. 29, 1998) (2001 Bar Question)

Period to File Claim/Apply for Issuance of TCC

The claim, which must be in writing, for both cases, must be filed within 2 years after the
close of the taxable quarter when the sales were made apply for:
1. The issuance of a tax credit certificate;
2. Refund of creditable input tax due or paid attributable to such sales. (Ibid.)

Note: The creditable input tax allowed to be refunded does not include transitional input
tax.

In case the taxpayer is engaged in zero-rated and also in taxable or exempt sale, and the
amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of
the transactions, it shall be allocated proportionately on the basis of the volume of sales.
Example computation: