Republic of the Philippines

Isabela State University

College of Business, Accountancy & Public Administration
Department of Accountancy & Management Accounting
Echague, Isabela

Bachelor of Science in Accountancy 2

Rowell S. Cardenas, CPA

Subject Instructor

Second Semester
School Year 2020-2021
 MODULE 2
VALUE ADDED TAX

Introduction

The module, Value Added Tax, contains discussion materials and practice problems
related to what Value Added Tax is and its nature. Discussion as to transactions that are
VAT-exempt. It also contains discussion as to how value added taxes are being computed.
The module also contains the source transactions for both output VAT and input VAT.
Provisions on VAT-exemption of senior citizens and persons with disabilities will also be
discussed in this module. Included also are the related administrative provisions.

In this module you are required and expected to accomplish sets of practice problems
in order to complete each learning outcomes/objectives. In each learning
outcomes/objectives are Task/Activity Sheets. Follow and perform the activities on
your own. If you have questions, do not hesitate to ask for assistance from your
professor. You are required to submit and compile these activities (Student Portfolio).

Learning Objectives
After studying this module, you shoud be able to
1. Describe the concept and nature of Value Added Tax
2. Be Familiarized with Different VAT Exempt Transactions
3. Know the computation for VAT on sale of goods or properties
4. Know the source transactions of Output VAT
5. Know the source transactions of Input VAT
6. Compute VAT on importation
7. Compute VAT on lease of properties
8. Compute VAT on sale of services
9. Compute VAT on mixed business transactions
10. Discuss the provisions on VAT exemptions of Senior Citizens.
11. Discuss the Administrative provisions related to filing of VAT and invoicing
requirements.
 Lesson 1 Nature and Concept of Value Added Tax and VAT Exempt
Transactions

DEFINITION OF VALUE ADDED TAX

.

Value Added Tax. 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.

VAT COMPUTATION
Output VAT (12%) Pxx
Less: Input VAT (12%) xx
VAT Payable Pxx

Output VAT. is the VAT due on sale or lease of taxable goods or properties or services by any
person registered as a VAT entity.

Input VAT. is the VAT due from or paid by a VAT-registered entity in the course of trade or
business on purchase, importation, lease or use of goods or properties or services from a VAT
supplier.

VAT Payable. is the excess of output VAT after deducting creditable input VAT.

VAT-EXEMPT TRANSACTIONS

VAT Exempt Transactions. Refer to sale of goods, properties and services, lease or use of
properties which are not subject to VAT. The buyer on the same case cannot claim Input VAT
on such transactions. It is not allowed also that the person making the VAT exempt transaction
bill the amount of output VAT to his customers.

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

original state, livestock and poultry of a kind generally used as, or yielding or
producing foods for human consumption; and breeding stock and genetic
materials therefor.
Meat, fruit, fish, vegetables and other agricultural and marine food products shall be
considered in their original date 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.

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

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

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

occupation or employment, wearing apparel, domestic animals, and personal and
household effects 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 for barter or sale,
accompanying such persons, or arriving within a reasonable time: Provided, That
the Bureau of Customs may, upon the production of satisfactory evidence that
such persons are actually coming to settle in the Philippines and that the goods
are brought from their former place of abode, exempt such goods from payment of
duties and taxes: Provided, further, that vehicles, vessels, aircrafts, machineries
and other similar goods for use in manufacture, shall not fall within this
classification and shall therefore be subject to duties, taxes and other charges;

E. Services subject to percentage tax under Title V of the Tax Code, as enumerated:
a. Tax on Person exempt from Value Added Tax
b. Percentage tax on domestic carriers and keepers of garages
c. Percentage tax on international carriers
d. Tax on Franchises
e. tax on overseas dispatch, message or conversation originating from Philippines
f. Tax on banks and non-banks financial intermediaries
g. tax on other non-bank financial intermediaries
h. Tax on life insurance premiums
i. tax on agents of foreign insurance companies
j. Amusement taxes
k. Tax on winnings
l. Tax on sale, barter or exchange of shares of stocks listed and traded through the
local stock exhange or through initial public offering.

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.
Laboratory services are exempted. If the hospital or clinic operates a pharmacy or
drug store, the sale of drugs and medicine is subject to VAT. (in-patients where
bills for medicine or drugs are included in the medical bill, not subject to VAT)
(Doctor’s Fees for in-patients are no subject to VAT otherwise, Vatable.)

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 government educational institutions;
“Educational services” shall refer to academic, technical or vocational education
provided by private educational institutions duly accredited by the DepED, the
CHED and TESDA and those rendered by government educational institutions and
 it does not include seminars, in-service training, review classes and other similar
services rendered by persons who are not accredited by the DepED, the CHED
and/or the TESDA;

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 PD 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 sale 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
(members or non-members),

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

with and in good standing with the 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.
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.

O. Export sales by persons who are not VAT-registered;

P. The following sales of real properties are exempt from VAT, namely:
a. Sale of real properties not primarily held for sale to customers or held for
lease in the ordinary course of trade or business.
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.
 b. 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.

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

income family beneficiaries, undertaken by the Government or private
developers, which may either be a subdivision or a condominium registered
and licensed by the Housing and Land Use Regulatory Board/Housing
(HLURB) under BP Blg. 220, PD No. 957 or any other similar law, wherein
the unit selling price is within the selling price per unit as set by the
Housing and Urban Development Coordinating Council (HUDCC) pursuant
to RA No. 7279 otherwise known as the “Urban Development and Housing
Act of 1992” and other laws.

c. Sale of residential lot valued at One Million Five Hundred Thousand Pesos
(P1,500,000.00) and below, or house & lot and other residential dwellings
valued at Two Million Five Hundred Thousand Pesos (P2,500,000.00) and
below, as adjusted in 2011 using the 2010 Consumer Price Index values.
If two or more adjacent residential 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 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.

Provided, That beginning January 1, 2021, the VAT exemption shall only
apply to sale of real properties not primarily held for sale to customers or
held for lease in the ordinary course of trade or business, sale of real
property utilized for socialized housing as defined by Republic Act No.
7279, sale of house and lot, and other residential dwellings with selling price
of not more than Two Million Pesos (P2,000,000.00): Provided, further, That
every three (3) years thereafter, the amounts stated herein shall be
adjusted to its present value using the Consumer Price Index, as published
by the Philippine Statistics Authority (PSA).

Q. Lease of residential units with a monthly rental per unit not exceeding Fifteen
Thousand Pesos (P15,000.00).

The foregoing notwithstanding, lease of residential units where the monthly rental
per unit exceeds Fifteen Thousand Pesos (P15,000.00), but the aggregate of such
rentals of the lessor during the year do not exceed Three Million Pesos
(P3,000,000.00) shall likewise be exempt from VAT; however, the same shall be
subject to three percent (3%) percentage tax under Section 116 of the Tax Code.
 In cases where a lessor has several residential units for lease, some are leased out for a
monthly rental per unit of not exceeding P15,000.00 while others are leased out for more
than P15,000.00 per unit, his tax liability will be as follows:
a. The gross receipts from rentals not exceeding P15,000.00 per month per
unit shall be exempt from VAT regardless of the aggregate annual gross
receipts. It is also exempt from the 3% percentage tax.
b. The gross receipts from rentals exceeding P15,000.00 per month per unit
shall be subject to VAT if the aggregate annual gross receipts from said
units only exceeds P3,000,000.00. Otherwise, the gross receipts will be
subject to the 3% tax imposed under Section 116 of the Tax Code.

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
operations: Provided, however, 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 fuel, goods and supplies
shall be used for international shipping or air transport operations. Thus, 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 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 that mentioned in
this paragraph, such portion of fuel, goods and supplies shall be subject to twelve
percent (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.

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 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 corporations established under Republic Act No. 9904
(Magna Carta for Homeowners and Homeowners’ Association) and Republic
Act No. 4726 (The Condominium Act), respectively;

Z. Sale of gold to the Bangko Sentral ng Pilipinas;

AA.Sale of drugs and medicines prescribed for diabetes, high cholesterol, and
hypertension to beginning 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 (P3,000,000.00).

VAT on Sale of Goods or Properties. is imposed and collected on every sale, barter
or exchange, or transactions “deemed sale” of taxable goods or properties at the rate
of 12% of the gross selling price or gross value in money of the goods or properties
sold, bartered, or exchanged, or deemed sold in the Philippines.
The term Goods or Properties as used shall refer to all tangible and intangible objects
which are capable of pecuniary estimation.

SOURCE TRANSACTIONS FOR OUTPUT VAT

1. Actual Sale- These are transactions where exchanges between buyers and sellers
are done in the ordinary course of trade or business. These includes transactions
incidental to the trade or business of the seller.

2. Transactions Deemed Sale- These transactions lack actual exchanges between

the seller and the buyer, of the goods or properties over a consideration either in
money or in kind. As discussed, one of the characteristics of VAT is that it applies
tax credit approach where VAT payable are computed by deducting input vat (VAT
on purchases) with the output vat (VAT on sales). In these deemed sale
transactions, Input VAT on the purchases were already used. In order for the state
not to be deprived of its right to collect output VAT, the following transactions
were considered as sale under Sec. 106B of the Tax Code:

a. Transfer, use or consumption not in the course of business of goods or

properties originally intended for sale or for use in the course of business.
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;
Example: A Cake Manufacturing Company celebrated its year-end party. In
connection with that, inventories worth P100,000 were consumed.
 b. Distribution of properties primarily held for sale to:
• Shareholders or investors share in the profits of VAT-registered
person;
• Creditors in payment of debt or obligation.
c. Consignment of goods if actual sale is not made within 60 days following the date
such goods were consigned. Consigned goods returned by the consignee within
the 60-day period are not deemed sold;
d. Retirement or cessation of status as VAT registered person with respect to
all goods on hand as of the date of retirement or cessation, whether the
business is continued by the new owner or successor. The term “Goods on
Hand” as used shall refer to capital goods, stock in trade and supplies and
materials.

3. Zero Rated Sales- A zero-rated sale of goods or properties (by a VAT-registered

person) is a taxable transaction for VAT purposes, but shall not result in any
output tax. However, the input tax on purchases of goods, properties or services,
related to such zero-rated sale, shall be available as tax credit or refund in
accordance with these Regulations.
The Following Sales by VAT-Registered persons shall be subject to zero-percent
(0%) rate:
a. Export Sales- Actual or considered Export Sales:
i. 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 for 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);
ii. (2) 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
iii. The sale of raw materials or packaging materials to an export-
oriented enterprise whose export sales exceed seventy percent
(70%) of total annual production.
Any enterprise whose export sales exceed 70% of the total annual
production of the preceding taxable year shall be considered an
export-oriented enterprise.
iv. Transactions considered export sales under Executive Order No.
226, otherwise known as the Omnibus Investments Code of 1987,
and other special laws.
v. 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. The sale of goods, supplies, equipment and fuel to
persons engaged in international shipping or international air
transport operations 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,
supplies or equipment is used for purposes other than that
mentioned in this paragraph, such portion of fuel, goods, supplies,
and equipment shall be subject to 12% VAT.
Note: Provided, That items (ii), (iii), and (iv) abovementioned shall be subject to the twelve percent (12%) VAT
and no longer be subject to zero percent (0%) VAT rate upon satisfaction of the following conditions:
1. The successful establishment and implementation of an enhanced VAT refund system that grants and pays
refunds of creditable input tax within ninety (90) days from the filing of the VAT refund application with the
Bureau: Provided that, to determine the effectivity of Item no. 1, all applications filed from January 1, 2018
shall be processed and decided within ninety (90) days from the filing of the VAT refund application.
The 90-day period to process and decide, pending the establishment of the enhanced VAT Refund System shall
only be up to the date of approval of the Recommendation Report on such application for VAT refund by the
Commissioner or his duly authorized representative.
However, all claims for refund/tax credit certificate filed prior to January 1, 2018 shall still be governed by the
one hundred twenty (120)-day processing period.
The Secretary of Finance shall provide transitory rules for the grant of refund under the enhanced VAT Refund
System after the determination of the fulfilment of the condition by the Commissioner of Internal Revenue as
provided in item 1 paragraph 1 hereof; and
All pending VAT refund claims as of December 31, 2017 shall be fully paid in cash by December 31, 2019.
b. Effectively Zero-Rated Sales- Sales to persons or entities whose
exemption under special laws or international agreements to which the
Philippines is a signatory effectively subjects such sales to zero rate.
Ex. Sale of Goods to Asian Development Bank and International Rice
Research Institute.
Note: Input VAT for Zero-Rated Sale of VAT-Registered Entities shall be allowed as tax
credit or refund. For Non-VAT-Registered Entities however, Input Tax should not be
available as a tax credit or for refund.
Note: The purpose of Zero-Rating is to make exporters become internationally
competitive by lowering the sales price of the goods sold. The Rationale for Zero-Rating
is based on the “Cross Border Doctrine” that no VAT shall be imposed to the goods
ultimately consumed outside the territorial jurisdiction of the taxing authority.

SOURCE TRANSACTIONS FOR INPUT VAT

Input VAT. means the VAT due on or paid by a VAT-registered person on importation of
goods or local purchases of goods, properties, or services, including lease or use of
properties, in the course of his trade or business. It shall also include the transitional
input tax and the presumptive input tax determined in accordance with Sec. 111 of the
Tax Code.
Any input tax on the following transactions evidenced by a VAT invoice or official receipt
issued by a VAT-registered person in accordance with Secs. 113 and 237 of the Tax Code
shall be creditable against the output tax:
1. Purchase or importation of Goods:
a. For Sale,
b. Used 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 raw materials supplied in the sale of services; or
e. For use in trade or business for which deduction for depreciation or
 amortization is allowed under the Tax Code,

2. Purchase of Real Properties for which VAT has actually been paid.
Where a VAT- registered person purchases or imports capital goods, which are
depreciable assets for income tax purposes, the aggregate acquisition cost of
which (exclusive of VAT) in a calendar month exceeds One Million pesos
(P1,000,000.00), regardless of the acquisition cost of each capital good, shall be
claimed as credit against output tax in the following manner:
a. Should the estimated useful life of the depreciable asset exceed 5 years, the
applicable input tax shall be amortized over 5 years. Otherwise, the input
tax will be amortized over the useful life of the depreciable asset.
Note: Amortizing the input VAT shall be allowable only until December 31, 2021. Starting
January 1, 2022, any input VAT on capital goods should be availed as an outright tax credit
on the month of acquisition. However, Taxpayers with unutilized input VAT as of December
31, 2021 shall be allowed to apply the same as scheduled until such was fully utilized
Note: Assets purchased with a useful life of one year or less shall not be allowed for the
allocation of input tax for such an asset cannot be considered as capital asset.

3. Presumptive Input VAT

Persons or firms engaged in the processing of sardines, mackerel, and milk,
and in manufacturing refined sugar, cooking oil and packed noodle-based
instant meals, shall be allowed a presumptive input tax, creditable against the
output tax, 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.

As used in this paragraph, 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.

Sellers of agricultural products are not liable to pay VAT thus; such should not be
carried on to the ultimate consumers. As such, purchases of agricultural products
should not be also allowed to claim of an input tax. This however, are not
applicable to the persons engaged in the activities mentioned above, where 4%
was presumed to be the input tax on such purchases.

4. Transitional Input Tax

Taxpayers who became VAT-registered persons upon exceeding the threshold
of P3,000,000.00 in any 12-month period, or who voluntarily register even if
they did not exceed P3,000,000.00 (except franchise grantees of radio and
television broadcasting whose threshold is P10,000,000.00) shall be entitled to a
transitional input tax on the inventory on hand as of the effectivity of their VAT
registration.

The transitional input tax shall be two percent (2%) of the value of the beginning
inventory on hand or actual VAT paid on such, goods, materials and supplies,
whichever is higher, which amount shall be creditable against the output tax of
VAT-registered person. The value allowed for income tax purposes on inventories
shall be the basis for the computation of the 2% transitional input tax, excluding
goods that are exempt from VAT under Sec. 109 of the Tax Code.
 5. Standard Input Tax
The government or any of its political subdivisions, instrumentalities or agencies,
including government-owned or controlled corporations (GOCCs) shall, before
making payment on account of each purchase of goods and/or of services taxed at
12% VAT pursuant to Secs. 106 and 108 of the Tax Code, deduct and withhold a
final VAT due at the rate of five percent (5%) of the gross payment thereof.

The five percent (5%) final VAT withholding rate shall represent the net VAT
payable of the seller. The remaining seven percent (7%) effectively accounts for
the standard input VAT for sales of goods or services to government or any of its
political subdivisions, instrumentalities or agencies including GOCCs, in lieu of the
actual input VAT directly attributable or ratably apportioned to such sales. Should
actual input VAT exceed seven percent (7%) of gross payments, the excess may
form part of the sellers’ expense or cost. On the other hand, if actual input VAT is
less than 7% of gross payment, the difference must be closed to income.

Lesson 3 Value Added Tax on Importation and Sale of Real Properties and
Services

VAT ON IMPORTATION
VAT is imposed on goods brought into the Philippines, whether for use in business or
not. The tax shall be based on the total value used by the BOC in determining tariff and
customs duties, plus customs duties, excise tax, 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 of the imported goods, 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.
The VAT on importation shall be shouldered by the importer and such VAT shall be paid
prior to the release of the imported materials from the customs custody.
The term “importer” as used shall refer to person who bring goods into the Philippines
whether or not it was made in the ordinary course of trade or business. It includes non-
exempt persons or entities who acquire tax-free imported goods from exempt persons,
entities or agencies.
In cases where goods are imported by VAT-exempt person for the purpose selling such
imported goods to a non-exempt person, the latter shall be considered as the importer
and shall be liable to pay the VAT due on such importation.
 Determined by BOC: Based on Landed Cost
Total Value* Pxx Invoice Amount Pxx
Add: Add:
Customs Duties xx Customs Duties xx
Excise Tax xx Excise Tax xx
Other Charges** xx Other Charges** xx
Tax Base xx Tax Base xx
Tax Rate 12% Tax Rate 12%
VAT ON IMPORTATION Pxx VAT ON IMPORTATION Pxx
* This shall be based on the total value used by BOC for
determining the tariff and customs duties.
**Other Charges prior to the release of the imported goods from the customs custody
shall include legitimate charges only (i.e. Insurance, Freight, Postage, Interest,
Commission, Bank Charge, Brokerage, Wharfage, Arrastre, Stamps and Processing Fee.

VAT ON LEASE OF REAL PROPERTIES

All forms of property for lease, whether real or personal, are liable to VAT subject to the
provisions of Sec. 4.109-1(B)(1)(v) of these Regulations.
“Real estate lessor” includes any person engaged in the business of leasing or subleasing
real property.
Lease of property shall be subject to VAT regardless of the place where the contract of
lease or licensing 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 services and use or lease of properties in the Philippines shall be based on
the contract price agreed upon by the licensor and the licensee. The licensee shall be
responsible for the payment of VAT on such rentals and/or royalties in behalf of the non-
resident foreign corporation or owner in the manner prescribed in Sec. 4.114-2(b) hereof.
Lease on commercial units shall be subjected to 12%VAT based on gross receipts. Lease
of residential units however, are either VAT-exempt or subject to 12% VAT (refer to
VAT-exempt discussion).
In a lease contract, the advance payment by the lessee may be:
a. a loan to the lessor from the lessee, or
b. an option money for the property, or
c. a security deposit to insure the faithful performance of certain obligations
of the lessee to the lessor, or
d. pre-paid rental.
If the advance payment is actually a. b. or c., such advance payment is not subject to VAT.
However, a security deposit that is applied to rental shall be subject to VAT at the time of
its application.
If the advance payment constitutes a pre-paid rental, then such payment is taxable to the
lessor in the month when received, irrespective of the accounting method employed by
the lessor.
VAT ON SALE OF REAL PROPERTIES
Sale of real properties held primarily for sale to customers or held for lease in the
ordinary course of trade or business of the seller shall be subject to VAT.
In the case of sale of real properties on the installment plan, the real estate dealer shall
be subject to VAT on the installment payments, including interest and penalties,
actually and/or constructively received by the seller.
The sale of real property subject to VAT can either be in cash basis, deferred payment
basis or installment basis.
Sale of real property on cash basis. It is when the buyer immediately pays the selling
price to the seller. The output VAT resulting therein shall be paid immediately on the
month of sale.
Sale of real property on deferred payment basis. means sale of real property, the
initial payments of which in the year of sale exceed twenty-five percent (25%) of the gross
selling price. The output VAT resulting therein shall be paid immediately on the month of
sale.
Sale of real property on an installment basis. means sale of real property by a real
estate dealer, the initial payments of which in the year of sale do not exceed twenty-five
percent (25%) of the gross selling price. The output VAT shall be based on the installment
payments inclusive of interest and penalties.
Initial Payments. means payment or payments which the seller receives before or upon
execution of the instrument of sale and payments which he expects or is scheduled to
receive in cash or property (other than evidence of indebtedness of the purchaser)
during the year when the sale or disposition of the real property was made. It covers
any down payment made and includes all payments actually or constructively received
during the year of sale, the aggregate of which determines the limit set by law.
Initial payments do not include the amount of mortgage on the real property sold except
when such mortgage exceeds the cost or other basis of the property to the seller, in which
case, the excess shall be considered part of the initial payments.
Also excluded from initial payments are notes or other evidence of indebtedness issued
by the purchaser to the seller at the time of the sale.

OUTPUT VAT UNDER INSTALLMENT SALE:

Initial Payment
YEAR OF SALE= * Higher between GSP and FMV
Gross Selling Price

Collections
SUBSEQUENT YEARS= * Higher between GSP and FMV
Gross Selling Price

VAT ON SALE OF SERVICES.

VAT on sale of services. Sale or exchange of services as defined by the tax code are
subject to 12% VAT based on the gross receipts.
Sale or exchange of services is a tax on payments or compensations for services rendered
in the exercise of profession or calling. Like VAT on sale of goods or properties, VAT on
sale of services are also an indirect tax and thus, can be shifted. It is a tax on service; thus,
the VAT accrues at the time the service fee is collected (which may be collected before,
on, or after the performance of the service).
Meaning of sale or exchange of services. The term “sale or exchange of services” means
the performance of all kind of services in the Philippines for others for a fee, remuneration
or consideration, whether in kind or in cash, including those performed or rendered by
the following:
a. construction and service contractors;
b. stock, real estate, commercial, customs and immigration brokers;
c. lessors of property, whether personal or real;
d. persons engaged in warehousing services;
e. lessors or distributors of cinematographic films;
f. persons engaged in milling, processing, manufacturing or repacking goods for
others;
g. proprietors, operators, or keepers of hotels, motels, rest houses, pension houses,
inns, resorts, theaters, and movie houses;
h. proprietors or operators of restaurants, refreshment parlors, cafes and other
eating places, including clubs and caterers;
i. dealers in securities;
j. lending investors;
k. 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;
l. 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;
m. sales of electricity by generation, transmission, and/or distribution companies;
n. franchise grantees of electric utilities, telephone and telegraph, radio and/or
television broadcasting and all other franchise grantees, except franchise grantees
of radio and/or television broadcasting whose annual gross receipts of the
preceding year do not exceed Ten Million Pesos (P10,000,000.00), and franchise
grantees of gas and water utilities;
o. non-life insurance companies (except their crop insurances), including surety,
fidelity, indemnity and bonding companies; and
p. 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:
a. 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;
b. The lease or the use of, or the right to use any industrial, commercial or scientific
equipment;
c. The supply of scientific, technical industrial or commercial knowledge or
information;
d. 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) hereof or any such knowledge or information as
is mentioned in subparagraph (3) hereof;
e. 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;
f. 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;
g. The lease of motion picture films, films, tapes, and discs; and
 h. The lease or the use of, or the right to use, radio, television, satellite transmission
and cable television time.

ZERO-RATED SALE OF SERVICES.

A zero-rated sale of service (by a VAT-registered person) is a taxable transaction for VAT
purposes, but shall not result in any output tax. However, the input tax on purchases of
goods, properties or services related to such zero-rated sale shall be available as tax
credit or refund in accordance with these Regulations.
Transactions Subject to Zero Percent (0%) VAT Rate. – The following services
performed in the Philippines by a VAT-registered person shall be subject to zero percent
(0%) VAT 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 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 not engaged in business who is outside the Philippines when the services
are performed, the consideration for which is paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the
BSP;
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.
e. Services performed by subcontractors and/or contractors in processing,
converting, or manufacturing goods for an enterprise whose export sales exceed
seventy percent (70%) of the total annual production.
f. Transport of passengers and cargo by domestic air or sea vessels from the
Philippines to a foreign country. Gross receipts of international air or shipping
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; 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 emerging 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.
 Lesson 4 VAT on Mixed Business Transactions, Senior Citizens and PWD, and
Administrative Provisions.

VAT ON MIXED BUSINESS TRANSACTIONS.

A VAT-Registered entity may enter into transactions which are subject to VAT, VAT-
Exempt, Zero-Rated VAT, and transactions with the government, GOCC and its
instrumentalities. For VAT purposes such is known as mixed business transactions. The
main concern for these transactions is the apportionment of the creditable input tax.
A VAT registered entity engaging in mixed business transactions shall be allowed an input
tax credit as follows:
a. 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 that can be
directly attributable to VAT taxable sales of goods and services to the Government
or any of its political subdivisions, instrumentalities or agencies, including
government-owned or controlled corporations (GOCCs) shall not be credited
against output taxes arising from sales to non- Government entities; and
b. 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 and only the ratable portion pertaining to transactions
subject to VAT may be recognized for input tax credit.
Note: The 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 or expense.

Notwithstanding the foregoing provisions, for persons engaged in both zero-rated sales under Sec.
108(B)(6) of the Tax Code and non-zero-rated sales, the aggregate input taxes shall be allocated
ratably between the zero-rated sale and non-zero-rated sale.

VAT EXEMPTION OF SENIOR CITIZENS AND PWDs.

Senior Citizen or Elderly. refers to any Filipino citizen who is a resident of the
Philippines, and who is sixty (60) years old or above. It may apply to senior citizens with
“dual citizenship” status provided they prove their Filipino citizenship and have at least
six (6) months residency in the Philippines.
Resident Citizen. a Filipino Citizen with permanent/legal residence in the Philippines,
and shall include one, who, having migrated to a foreign country, has returned to the
Philippines with a definite intention to reside therein, and whose immigrant visa has been
surrendered to the foreign government.
VAT exempt sales to Senior Citizens. All establishments, supplying any of the following
goods and services, as specified in the Act to Senior Citizens, for their exclusive use and
enjoyment or availment, shall give a discount of twenty (20%) per cent. The granting of
discount herein mentioned shall apply to the sale of the following goods and services:
A. Medicines, including influenza and pneumococcal vaccines, and such other
essential medical supplies, accessories and equipment to be determined by the
Department of Health (DOH).
a. On all drug stores, hospital pharmacies, medical and optical clinics and
similar establishments dispensing medicines, the discount for sales of
drugs/medicines shall be subject to the Guidelines to be issued by the
Bureau of Food and Drugs, Department of Health (BFAD-DOH), in
coordination with the Philippine Health Insurance Corporation
 (PHILHEALTH). For this purpose, the term "medicines" shall refer to both
prescription and nonprescription medicines, and articles approved by the
BFAD-DOH, which are intended for use in the diagnosis, cure, mitigation,
treatment or prevention of disease in man; but do not include food and
devices or their components, parts, or accessories.
B. On the professional fees of attending physician/s in all private hospitals, medical
facilities, outpatient clinics and home health care services, where the discount
shall be based on the compensation for services charged from the Senior Citizen.
C. On professional fees of licensed professional health workers providing home
health care services as endorsed by private hospitals or employed through home
health care employment agencies, where the discount shall be based on the fees
charged from the Senior Citizen.
D. On medical and dental services, diagnostic and laboratory fees in all private
hospitals, medical facilities, outpatient clinics, and home health care services, in
accordance with the rules and regulations to be issued by the DOH, in coordination
with the Philippine Health Insurance Corporation (PhilHealth).
a. “Medical services” refers to hospital services, professional services of
physicians and other health care professionals and diagnostic and
laboratory tests that are necessary for the diagnosis or treatment of an
illness or injury.
b. “Dental services” refers to oral examination, cleaning, permanent and
temporary filling extractions and gum treatments, restoration,
replacement or repositioning of teeth, or alteration of the alveolar or
periodontium process of the maxilla and the mandible that are necessary
for the diagnosis or treatment of an illness or injury.
c. “Home health care service” refers to health or supportive care provided to
the Senior Citizen patient at home by licensed health care professionals to
include but not limited to, physicians, nurses, midwives, physical
therapists and caregivers.
E. In actual fare for land transportation travel in public utility buses (PUBs), public
utility jeepneys (PUJs), taxis, Asian utility vehicles (AUVs), shuttle services and
public railways, including Light Rail Transit (LRT), Mass Rail Transit (MRT), and
Philippine National Railways (PNR).
F. On actual transportation fare for domestic air transport services and sea shipping
vessels and the like, based on the actual fare and advanced booking.
G. On the utilization of services in hotels and similar lodging establishments,
restaurants and recreation centers.
a. For hotels and similar lodging establishments, the discount shall be for
room accommodation and other amenities offered by the establishment,
such as, but not limited to, massage parlor, sauna bath, food, drinks and
other services offered.
b. For this purpose, the term "hotel/hostel" shall refer to the building, edifice
or premises or a completely independent part thereof, which is used for
the regular reception, accommodation or lodging of travelers and tourists,
and the provision of services incidental thereto, for a fee.
c. "Lodging establishment" shall refer to a building, edifice, structure,
apartment or house including tourist inn, apartelle, motorist hotel and
pension house engaged in catering, leasing or providing facilities to
transients, tourists or travelers. The following are considered as lodging
establishments:
i. Tourist Inn — a lodging establishment catering to transients, which
does not meet the minimum requirement of an economy hotel.
ii. Apartelle — a building or edifice containing several independent
and furnished or semi-furnished apartments, regularly leased to
 tourists and travelers for dwelling on a more or less long-term basis
and offering basic services to its tenants, similar to hotels.
iii. Motorist Hotel — any structure with several separate units,
primarily located along the highway, with individual or common
parking space, at which motorists may obtain lodging and in some
instance, meals.
iv. Pension House — a private, or family-operated tourist boarding
house, tourist guest house or tourist lodging house, regularly
catering to tourist, and/or traveler, containing several independent
table rooms, providing common facilities, such as toilets,
bathrooms/showers, living and dining rooms and/or kitchen and
where a combination of board and lodging may be provided.
d. The term lodging establishment shall also include lodging houses, which
shall mean such establishments are regularly engaged in the hotel business,
but which, nevertheless, are not registered, classified and licensed as hotels
by reason of inadequate essential facilities and services. Long term
arrangement for residential purposes is not covered.
e. For restaurants, the discount shall be for the sale of food, drinks, dessert
and other consumable items served by the establishments, including value
meals and promotional meals offered for the consumption of the general
public.
f. For this purpose, the term "restaurant" shall refer to any establishment
offering to the public, regular and special meals or menu, fast food, cooked
food and short orders. Such eating places may also serve coffee, beverages
and drinks. Food and goods sold by establishments that are not
restaurants are not covered, therefore not allowed to give the 20%
discount.
g. For recreation centers, the discount shall be for the utilization of services
in the form of fees, charges and rental facilities, such as, but not limited to,
sports facilities and equipment.
H. On admission fees charged by theaters, cinema houses and concert halls, circuses,
carnivals, and other similar places of culture, leisure and amusement, where the
discount shall be on the admission fees charged by the said establishments;
I. On funeral and burial services for the death of Senior Citizens. The beneficiary or
any person who shall shoulder the funeral and burial expenses of the deceased
Senior Citizen shall claim the discount, such as casket, embalmment, cremation
cost and other related services for the Senior Citizen upon payment and
presentation of his death certificate;

VAT EXEMPT SALES TO PWDs

Qualified PWD shall be entitled to claim at least twenty percent (20%) discount from the
following establishments relative to the sale of goods and services for their exclusive use
and enjoyment or availment of the PWD:
A. Hotels and similar lodging establishments; restaurants and recreation centers;
B. Theaters, cinema houses, concert halls, circuses, carnivals and other similar places
of culture, leisure and amusement;
C. All drugstores regarding purchase of generic and branded medicine;
D. Medical and dental services including diagnostic and laboratory fees (e.g., x-rays,
computerized tomography scans and blood tests) and professional fees of
attending doctors in all government facilities or all private hospitals and medical
facilities subject to the guidelines to be issued by the DOH, in coordination with
the Philippine Health Insurance Corporation (Phil Health);
 E. Domestic air and sea transportation based on the actual fare. For promotional
fares, the PWD can avail the establishment’s offered discount or the 20% discount
provided herein, whichever is higher and more favorable;
F. Land transportation privileges based on the actual fare such as, public utility buses
or jeepneys (PUBs/PUJs). taxis, Asian Utility Vehicles (AUVs), shuttle services and
public railways such as Light Rail Transit (LRT), Metro Rail Transit (MRT),
Philippine National Railways (PNR), and such other similar infrastructure that will
be constructed, established and operated by public or private entity; and
G. Funeral and burial services for the death of the PWD: Provided, that the
beneficiary or any person who shall shoulder the funeral and burial expenses of
the deceased PWD shall claim the discount under this rule for the deceased PWD
upon presentation of the death certificate and PWD Identification Card (ID) or in
its absence, the original or certified true copy of the proof of registration from the
issuing local government unit. Such expenses shall cover the purchase of casket or
urn, embalming, hospital morgue, transport of the body to intended burial site in
the place of origin, but shall exclude obituary publication and the cost of the
memorial lot.
H. All other goods and services sold by the foregoing establishments not included in
the above enumeration expressly provided by law shall not be considered for the
20% discount privilege notwithstanding that the same are for the exclusive use
and enjoyment or availment of the PWD.

ADMINISTRATIVE PROVISIONS

VAT Declarations

1. 2550M- Monthly Value Added Tax Declaration (Not later than the 20th day following the end
of each month)
2. 2550Q- Quarterly Value Added Tax Declaration (Within 25 days following the close of the
taxable quarter)
Place of Filing VAT Returns
If payment is involved. The monthly VAT declaration and quarterly return shall be filed
with, and VAT due thereon paid to, an AAB under the jurisdiction of the Revenue
District/BIR Office where the taxpayer (head office of the business establishment) is
required to be registered.
In cases where there are no duly accredited agent banks within the municipality or city,
the monthly VAT declaration and quarterly VAT return, shall be filed with and any
amount due shall be paid to the RDO, Collection Agent or duly authorized Treasurer of
the Municipality/City where such taxpayer (head office of the business establishment) is
required to be registered.
The quarterly VAT return and the monthly VAT declaration, where no payment is
involved, shall be filed with the RDO/LTDO/Large Taxpayers Assistance Division
(LTAD), Collection Agent, duly authorized Municipal/City Treasurer of Municipality/City
where the taxpayer (head office of the business establishment) is registered or required
to be registered.”
Taxpayers filing via EFPS shall comply with the provisions of the EFPS Regulations.
Invoicing Requirements
A VAT-registered person shall issue:
a. A VAT invoice for every sale, barter or exchange of goods or properties; and
b. A VAT official receipt for every lease of goods or properties, and for every sale,
barter or exchange of services.
Only VAT-registered persons are required to print their TIN followed by the word “VAT”
in their invoice or official receipts. Said documents shall be considered as a “VAT Invoice”
or VAT official receipt. All purchases covered by invoices/receipts other than VAT
Invoice/VAT Official Receipt shall not give rise to any input tax.

Consequences of issuing an erroneous invoice or official receipt.

1. Issuance of a VAT Invoice or VAT Receipt by a non-VAT person. – If a person
who is not VAT-registered issues an invoice or receipt showing his TIN, followed
by the word “VAT”, the erroneous issuance shall result to the following:
a. Liable to the percentage taxes applicable to his transactions;
b. Liable to VAT due on the transactions under Sec. 106 or 108 of the Tax
Code, without the benefit of any input tax credit; and
c. Liable to a 50% surcharge under Sec. 248 (B) of the Tax Code;
d. VAT shall be recognized as an input tax credit to the purchaser under Sec.
110 of the Tax Code.
2. Issuance of a VAT Invoice or VAT Receipt on an Exempt Transaction by a
VAT-registered Person – If a VAT-registered person issues a VAT invoice or VAT
official receipt for a VAT-exempt transaction, but fails to display prominently on
the invoice or receipt the words “VAT-exempt sale”, the transaction shall become
taxable and the issuer shall be liable to pay VAT thereon. The purchaser shall be
entitled to claim an input tax credit on his purchase.
END