Value added tax
virtue of E.O No 273 (July 25, 1987),
A. Preliminary topics
Value added tax (VAT)
● Is a consumption tax imposed at
every stage of the distribution
process on the sale, barter,
exchange, or lease of goods or
properties.
Tax base of VAT
● The tax based on the gross selling
price or gross value in money of the
goods or properties sold, bartered,
or exchanged or the gross receipts
derived from the sale.
Nature of VAT
- Tax is called VAT because it is
imposed on the value not previously
subjected to the VAT
(1) VAT is a privilege tax imposed by law
directly, not on the thing or services, but on
the act (sale, barter, exchange or lease of
goods or properties) of the seller, transferor,
importer, or lessor, although the burden of
the tax is borne by the ultimate consumer.
(2) It is an ad valorem tax, the amount
based on the gross selling price or value in
money
(3)It is an indirect tax. It may be shifted or
passed on to the buyer, transferee, lessee,
(4) It is ultimately a tax on consumption,
even though it is assessed on many levels
of transaction based on a fixed percentage.
The Vat System
● Has been adopted in our country by
effective January 1, 1988
(1) Tax Replaced
(a) Original sales tax imposed on sales
by manufacturers or producers of
goods or articles other tha those
subject to exercise taxes;
(b) Subsequent sales (turnover) tax
every sale after the original sale of
taxable article
(c) Advance sales tax imposed on the
importation of goods for business
use
(d) Compensating tax goods for non
business use
(e) Exercise taxes imposed on certain
articles (videotapes, solvents,
matches)
(f) Miller’s tax imposed on the
production or milling of certain
agricultural products (sugar,
coconut)
(g) Percentage taxes payable by
contractors, brokers, lessor of
personal property
(2) Advantages
(a) It eliminates the cascading problem
experienced under the former sales
tax particularly the subsequent
turnover tax because only the value
added to the sale is subject thereto;
(b) VAT is neutral between different
goods, properties, and services or
businesses because it applies to all
persons and transaction at uniform
rate
(c) Wider tax base
(d) Easy to administer
(e) Payments are now based on the
output tax (VAT) and the input tax
 (Tax credits) as supported by
receipts
(f) It is expected to generate large
revenues
(3) Important features
(a) All persons liable to the VAT shall
register with the appropriate revenue
district officer
(b) It provided two rates: (1) 0% rate for
export sales and sales and services;
(2) 12% for all other goods,
properties, and services
(c) A VAT registered person is entitled
to credit input taxes evidenced by a
VAT invoice
(d) It is consumption type of VAT
(e) Although the tax is levied at all
stages, the total value of the goods
is subject to tax only once
(f) The commissioner may suspend the
business operations and temporarily
close the business establishment of
taxpayer for violation of VAT law or
regulations (didnt issue an invoice,
didnt register, exceed to 3M)
B. Imposition of the tax
Meaning of certain terms
(1) The term persons refer to any individual
➢ Government owned or controlled
corporations are subject to VAT if the
course of trade or business they sell
goods or properties, import goods
etc
(2) Taxable persons any person liable for
the payment of the VAT, whether registered
or registrable
➢ VAT registered persons refers to any
persons registered accordance with
section 236.
➢ VAT registrable persons any persons
who is required to register. (Exceed
to 3M, but not yet registered)
(3) Goods or properties refer to all tangible
and intangible
(4) Gross selling price means total amount
of money or its equivalent which the
purchaser pays.
Persons liable to VAT
Any persons who sells, barters, exchanges
in the course of trade or business and any
persons who imports goods whether or not
course of business is subject to the
VAT(liable to pay output VAT whether
registered or not if his annual gross sales or
receipt exceed 3M)
C. Sale of Goods or properties
Requisite for liability
(1) There must be a sale, barter,
exchange, or lease in the Philppines
(2) The VATable transactio must involve
taxable goods properties
(transaction must not be VAT exemp
or zero rated)
(3) The VATable transaction must be
made by a taxable person in the
course of business or trade
Activity in trade or business
The phrase “in the course of trade or
business” means the regular conduct or
pursuit of a commercial or pursuit of a
commercial or an economic activity
(1) Association dues, membership fees,
and other assessment/charges by
 condominium corp are not subject to
VAT.
Rate and base of VAT on sale of goods or
properties
(1) 12% VAT
Illustration:
X sold an account to Y, 100 pieces or
merchandise. The invoice given by X to Y is
as follows:
100 pieces Merchandise “X” P1,100
In this case, X should segregate the amount
intended to cover the tax. The amount
intended to cover the tax is arrived at by
multiplying the total invoice amount by 1/11
or:
P1,100 x 1/11 = P1,100 x1 / 11 = 100
The resulting figure of 100 is the output tax
which should be deducted from P1,100 to
arrive at the gross selling price of P1,000
without the tax
Based on 12% VAT the following
computation may be used
P1,100 (gross sale) ÷ 1. 12 = 982.15 (net
sale)
982.15 x 12% = 117.85 (VAT)
982.15 + 117.85 = 1,100.00
Zero rated sale of goods or properties
A zero rated transaction refers to a sale,
barter, exchange subject to VAT at the rate
of 0% under section 106. The transaction is
taxable for VAT proposes, with the input tax
on purchases of goods, but such sale shall
not result in any output tax
(1) Sales subject to 0% VAT - these sales by
VATregustered persons are subject to 0%
VAT
(a) Export sales made by VAT
registered persons
(b) Sales of goods or property to
persons or entities who are tax
exempt under special laws or
international agreements.
(2) Export sales
(a) The sale and actual shipment of
goods from the Philippines to foreign
country
(b) The sale of raw materials or
packaging materials to a nonresident
buyer for delivery to a resident local
export oriented. (export enterprise)
(c) The sale of raw materials or
packaging material export oriented
enterprise whose enterprise whose
export sales exceed 70% total
annual production
(d) Transaction considered export sales
under executive
(3) Need for prior application and BIR
approval
(4) Pertinent rules - to encourage to export
product
Export sales under omnibus investment
code
(1) Considered export sales
(2) Considered constructive export
sales
(a) Sales to bonded
manufacturing warehouse
export-oriented
manufacturers
(b) Sales to export processing to
export processing zones
(c) Sales to enterprise duly
accredited with the SBMA
 (d) Sales to registered export
traders operating bonded
trading warehouse supplying
raw materials
(e) Sales to diplomatic missions
and other agencies
(ambassador ng ibang bansa
0 rated)
Transaction involving real properties
(1) Persons liable to VAT
(a) Any person, whether natural
or juridical engaged in the
sale, barter or exchange or
real properties in the ordinary
course of trade or business
(b) Real estate lessors or sub
lessors
(c) Nonresident lessors of real
property located in the the
Philippines
(d) Non stock, non profit
organizations engaged in the
sale, barter, exchange, or
lease
(e) Government , its agencies
and instrumentalities
including GOCCs engaged i
the sale, barter, exchange, or
lease
(2) Transaction subject to VAT
➢ Sale of real property held
primarily for sale customers
or held for lease in the
course of trade or business
of the seller
(3) Transaction not subject to VAT
(a) Sale of real property not primarily
held for sale to customers or held for
lease in the ordinary course of trade
or business of the seller
(b) Sale of real property utilized for low
cost and socialized housing
(c) Sale of house and lot and other
residential dwellings with a selling
price of 2M and below
(d) Lease of residential unit with
monthly rental not exceeding 15K
Transaction taxable as sales
1. Barter or exchange
2. Contract for a piece of work
(customize)
3. Leases and hiring agreements with
option to buy
4. Transactiondeemed sale
➢ Transfer, use or consumption
not in the course of business
of the business of goods or
properties originally intended
for sale
➢ Distribution or transfer of
goods or properties
➢ Consignment of goods if
actual sale is not made within
sixty days following the date
such goods were consigned
➢ Retirement from or cessation
of business, with respect to
inventories of taxable goods
existing as of such retirement
or cessation
Tax based of deemed sale transactions
(1) For transaction deemed sale, the
output tax shall be based on the
market value of the goods deemed
sold as of the time of the occurrence
of the transaction enumerated above
(2) In the case of retirement from or
cessation of business, the tax base
shall be acquisition cost,or the
current market price of the goods or
properties, whichever is lower
 (3) In the case of sale where the gross
Sales = 250,000,000
selling price is lower than fair market subject to
value, the actual market value shall VAT
be the tax base
Multiply = 12%
by:VAT rate
Retirement from or cessation of business
Change in or cessation of status as a VAT- Output tax = 30,000,000
for the
registered person
period
(1) Subject to output tax - the VAT
provided in section 106 on sale of Deduct: = =
goods or properties shall apply to Input tax for
goods or properties originally the period
intended for sale or use in business
● Change of business activity from
value added taxable status to
exempt status. (discontinued
business)
● Approval of request for cancellation
of registration due to reversion to
exempt status; Sale > 3M

Determination of tax base

(1) Two cases - the commissioner shall,
by rules and regulations prescribed
by sec of finance
(a) Where a transaction is
deemed a sale
(b) Where the gross selling price
is unreasonably lower than
the actual market value
(more than 30% yung
understatement)
(2) Gross selling price unreasonably low - if
it is lower by more than 30% of the actual
market value of the same goods or
properties of the same quantity and quality

Allowable deductions from gross selling

price
(1) Sales return and allowances
QUIZ

The difference between the two is that in

zero rated, the sales are 0%, so the input
tax is also 0%. However, because you
already paid for it (input tax) when you
purchased raw materials, etc., the VAT you
paid will be refunded and can be used to
pay other taxes. While tax exempt, you
cannot receive a VAT refund because you
have not paid any VAT because you are
exempt.

For example, when I purchased materials, I

paid P200 plus P24 VAT. If I am a VAT
registered exporter, the 24 pesos will be
refunded or used as a tax credit because
my sales will be zero-rated. However, if I am
exempted from paying VAT, I just pay 200
pesos because I will not pay the VAT and
hence have nothing to claim as a tax credit
or refund.

VAT is not considered a progressive tax, as

it imposes a greater burden on those with
lower incomes than on those with higher
incomes, making it a regressive tax.
However, the uniform and equitable
implementation of VAT, along with the
Congress's exemption of essential goods
and services consumed by those with lower
incomes, reduces the regressive nature of
VAT and allows it to remain constitutional.