DLSU College of Law Atty. Martin Ignacio D.

Mijares
Taxation Law Review First Semester, AY 2019-2020

LAST MEETING
 Rights and Remedies under the Tax Code
 Statute of Limitations
 Prosecution of Crimes and Other Offenses
 Refund of Erroneously Paid Tax
TAXATION LAW REVIEW

Martin Ignacio D. Mijares 1

Session Fifteen – 11/14/2019

1 2

TODAY
 Value-Added Tax
 Nature and concept of VAT
 Nature of VAT
 Impact and incidence of tax
 Characteristics of the Philippine VAT System 4
VALUE-ADDED
 Transactions subject to regular VAT
 Sale of goods and properties
TAX
 Sale of services
 Importation of goods

Nature and Characteristics of VAT

3 4

1
DLSU College of Law
Taxation Law Review
DEFINITION OF VAT
 VAT is a consumption tax imposed at every stage of
the distribution process on the sale, barter, exchange
(including transactions deemed by law as a sale), or
lease of goods or properties and rendition of services
in the course of trade or business, or on the
importation of goods, whether such imported goods
are for use in business or not
 The tax so-called because it is imposed on the value
not previously subjected to the VAT, i.e., on the value
added to the goods or services at each stage of the
distribution chain.
5 6
5 6
NATURE OF VAT
 It is an ad valorem tax
 The amount of the tax is based on the gross selling price
of gross value in money of the goods or properties, or
gross receipts derived from the performance of services,
including the use or lease of properties
 It is an indirect tax
 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 party directly and statutorily liable for the payment of the
tax is the seller, etc.
 Thus, in the hands of the customer, it loses the character of
a tax.
7 8
7 8
Atty. Martin Ignacio D. Mijares
First Semester, AY 2019-2020
NATURE OF VAT
 The tax is a privilege tax
 Imposed by law directly not on the thing or service but on
the act (sale, barter, exchange or lease of goods or
properties, importation of goods, or sale or performance
of service) of the seller (manufacturer/producer,
wholesaler or retailer), transferor, importer, or lessor who
is exclusively made liable for its timely payment although
the burden of the tax is borne by the ultimate consumer
 The VAT is to be distinguished from excise taxes which
are applied to a few selected goods
IMPACT AND INCIDENCE OF TAX
 Tax Liability vs. Tax Burden
 In indirect taxation, there is a need to distinguish between
the liability for the tax and the burden of the tax
 The amount of tax paid may be shifted or passed on by
the seller to the buyer
 What is transferred in not the liability for the tax, but the tax
burden
 By 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
 Seller who is directly and legally liable for the payment of an
indirect tax is not necessarily the person who ultimately bears
the burden of the tax
2
DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

IMPACT AND INCIDENCE OF TAX IMPACT AND INCIDENCE OF TAX

 IMPACT  SHIFTING  INCIDENCE
 Impact of taxation – is that point on which a tax is
originally imposed
 Statutory taxpayer, or the one on whom the tax is formally
assessed
 He is the subject of the tax
 As far as the law is concerned, the taxpayer is the person
who must pay the tax to the government
 Incidence of taxation – is that point on which the tax
burden finally rests or settles
 It takes place when shifting has been effected from the
statutory taxpayer to another or someone else who cannot
pass on the burden further
 Relationship of impact, shifting, and incidence
 Impact is the initial phenomenon, the shifting is the
intermediate process, and the incidence is the result
 In the case of VAT, impact of the VAT is on the seller
(manufacturer) who shifts the burden to the buyer
(customer) who finally bears the incidence of the tax
 Direct taxes cannot be shifted, the impact and incidence
of taxation shall be on the initial taxpayer

9 10

9 10

CHARACTERISTICS OF THE PHILIPPINE CHARACTERISTICS OF THE PHILIPPINE

VAT VAT
 It is a tax on the value added by the taxpayer  Input Tax – Output Tax Mechanism
 “Value added” is the difference between the total sales of
the taxpayer for the taxable quarter subject to VAT and
his total purchases for the same period subject also to Producer of RM Manufacturer
VAT
 The value added by a stage in production is the same as or
equal to gross profit Sells RM for Sells product for
P110.00 plus VAT of P300.00 plus VAT of
 It is a tax that is based on the value added to the good or
P13.20, or for a total P36.00, or for a total
service from one stage of production to another until it SP of P123.20 SP of P336.00
reaches the ultimate or end consumer
Output VAT P13.20 Output VAT P36.00
Input VAT 0.00 Input VAT 13.20
VAT Payable P13.20 VAT Payable P22.80

11 12

11 12

3
DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

CHARACTERISTICS OF THE PHILIPPINE CHARACTERISTICS OF THE PHILIPPINE

VAT VAT
 It is a tax on the value added by the taxpayer  It is a transparent form of sales tax
 The VAT is a tax on the taxable sale, barter or exchange
Producer of of goods, properties, or services
RM Manufacturer Retailer Consumer
 It is imposed on and must be paid by the seller
P: P0 P: P110 P: P300 P: 350  VAT is “transparent” since the law requires that the tax be
S: 110 S: P300 S: 350 shown as a separate item in the VAT invoice or receipt
 The seller and the buyer exactly know how much is the VAT
P110 P190 50
component of a taxable transaction
Producer of RM Manufacturer Retailer
 Makes compliance with the VAT law easier
SP 110 300 350

O/VAT 13.20 36.00 42.00

PP 0 110 300

I/VAT 0 13.20 36.00

Diff 110 13.20 190 22.80 50 6.00

13 14
Value added
VAT paid

13 14

CHARACTERISTICS OF THE PHILIPPINE CHARACTERISTICS OF THE PHILIPPINE

VAT VAT
 It is a broad-based tax on consumption of good,  It is a broad-based tax on consumption of good,
properties, or services in the Philippines properties, or services in the Philippines
 Broad-based because every sale of goods, properties, or  To ensure that only final consumption is taxed, the tax on
services at all levels of manufacturers or producers and all goods and services subsequently used as inputs to
distributors (at wholesale and retail) is subject to VAT production must in effect be refunded to purchasers of
 The tax burden generally rests with the final consumer those inputs
who consumes the goods, properties, or services
 Consumption takes place when the taxpayer does not
sell further the taxable goods, properties, or services in
the Philippines either because he is the final consumer
or he is not engaged in trade or business subject to VAT

15 16

15 16

4
DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

CHARACTERISTICS OF THE PHILIPPINE CHARACTERISTICS OF THE PHILIPPINE

VAT
 It is an indirect tax
 Tax is demanded in the first instance from one person in
the expectation and intention that he can shift the burden
to someone else
 The impact of taxation is on the seller upon whom the
tax has been imposed; the incidence of tax is on the
final consumer, the place at which the tax comes to rest
VAT
 It is collected through the tax credit method
 The Philippines adopted the tax credit (vs. the cost
deduction) method
 Tax credit method (or the invoice method) is the manner
by which the VAT of a taxpayer is computed using the
invoice credit method
 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
 Provides an audit trail that allows tax authorities to check
and monitor input taxes claimed by VAT taxpayer in
computing their VAT liabilities for the period
 VAT component of a taxable transaction is separately shown in
the VAT invoice or receipt

17 18

17 18

CHARACTERISTICS OF THE PHILIPPINE CHARACTERISTICS OF THE PHILIPPINE

VAT
 The Philippines adopts the “tax-inclusive method”
 The selling price is inclusive of VAT
 The VAT is included in the selling price but is required to
be indicated as a separate item in the VAT invoice or
receipt
 In case of failure to separately indicate, the VAT is presumed
to be included in the gross selling price or gross receipt
unless otherwise indicated
VAT
 The Philippines follows the destination principle
 The Philippines' VAT law adheres to the Cross Border
Doctrine or the Destination Principle
 The onus of taxation under our VAT system is in the country
where the goods, property or services are destined, used or
consumed.
 For this reason, no VAT shall form part of the cost
component of products which are destined for consumption
outside of the territorial border of the Philippines.
 Conversely, those destined for use or consumption within the
Philippines shall be subject to the 10% [now, 12%] VAT
 Goods and services are taxed only in the country where they
are consumed.
 Thus, exports are zero-rated, while imports are taxed

19 20

19 20

5
DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

CHARACTERISTICS OF THE PHILIPPINE CHARACTERISTICS OF THE PHILIPPINE

VAT
 There is no cascading (tax on tax) under the VAT
system
 The tax is said to cascade when there is “tax on tax” or
the tax passed on by the previous seller, which is now a
component of the gross selling price or gross receipts of
the present seller, is being taxed
 Also known as “pyramiding”
 the tax should not be imposed upon another tax
 There was cascading in the old sales tax system as the sales tax
on original sales of goods paid by importers and manufacturers
and the turnover taxes, which are another kind of sales taxes
paid by wholesalers of goods, became part of the gross selling
price subject to turnover tax on the part of the retailer
VAT
 There is no cascading (tax on tax) under the VAT
system
 The VAT system avoids or prevents cascading of the tax
since the VAT shifted by the seller of goods, properties,
or services to the buyer does not form part of the gross
selling price or gross receipts of the new seller which is
subject to tax
 The input taxes due or paid on his purchases of taxable
goods, properties, and services are credited against his
output taxes on his taxable sales
 Excess input tax over output tax may be carried over or
refunded if attributable to zero-rated sales

21 22

21 22

CHARACTERISTICS OF THE PHILIPPINE

VAT
 Structure of the Philippine VAT System
 Taxable transactions (12%)
 Sale of goods
 Sale of services
TRANSACTIONS
 Importation of goods

 Zero-rated Transactions (Automatically zero-rated or

SUBJECT TO
Effectively zero-rated)
 Sale of goods
REGULAR VAT
 Sale of services

 Exempt Transactions
In General

23

23 24

6
DLSU College of Law
Taxation Law Review
PERSONS LIABLE TO VAT
 Section 105, Tax Code
 VAT is imposed on any person who undertakes any
taxable transaction during the taxable quarter
 Any person who, in the course of his trade or business, sells,
barters, exchanges, or leases goods or properties or renders
services shall be liable to VAT
 In the case of importation of taxable goods, the importer,
whether an individual, corporation, or association and
whether or not the importation of goods is made in the
course of his or its trade or business, shall be liable to VAT
25
25
PERSONS LIABLE TO VAT
 Taxable Person
 A person may be characterized as a “taxable person” if
 He undertakes taxable transactions in goods, properties, or
services consumed or destined for consumption within the
Philippines
 Such transactions are done in the course of his trade or
business
 Except in the case of nonresident foreign person who renders
services in the Philippines
 The amount of his gross sales or receipts is over the
threshold fixed by law or regulations
27
27
Atty. Martin Ignacio D. Mijares
First Semester, AY 2019-2020
PERSONS LIABLE TO VAT
 A person may be an individual (single proprietorship),
estate or trust, partnership, joint venture, corporation,
cooperative or association
 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, is subject
to VAT
26
26
“IN THE COURSE OF TRADE OR
BUSINESS”
 Means the regular conduct or pursuit of a commercial
or an economic activity, including transactions
incidental thereto, by any person
 Embraces income from the regular conduct or pursuit of
main commercial or economic activity as well as income
from incidental business activity, provided there is no
particular provision applicable to the specific transaction
 To simplify the tax system as well as its administration, same
kind of business tax is imposed on the income derived from
the main business activity and incidental activity
 Active business transactions undertaken incidental to the
pursuit of a commercial or economic activity are deemed
entered into in the course of trade or business
28
28
7
DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

“IN THE COURSE OF TRADE OR

BUSINESS”
CIR V. COMASERCO
 “Carrying on business”  Issue: WON COMASERCO was engaged in the sale
 Does not mean the performance of a single disconnected of services and thus liable to pay VAT thereon
act but means conducting, prosecuting, and continuing  To "engage in business" and to "engage in the sale of
business by performing progressively all the acts services" are two different things
normally incident thereof
 VAT is a tax on the value added by the performance of
 “Doing business” the service
 Conveys the idea of business being done, not from time  It is immaterial whether profit is derived from rendering
to time, but all the time the service
 “In the course of business”  Even a non-stock, non-profit organization or government
 Connotes regularity of activity entity, is liable to pay VAT on the sale of goods or services.

29 30

29 30

CIR V. COMASERCO CIR V. MAGSAYSAY LINES, INC. ET AL.

 VAT is a tax on transactions, imposed at every stage of
the distribution process on the sale, barter, exchange
of goods or property, and on the performance of
services, even in the absence of profit attributable
thereto
 It is immaterial whether the primary purpose of a
corporation indicates that it receives payments for
services rendered to its affiliates on a reimbursement-on-
cost basis only, without realizing profit, for purposes of
determining liability for VAT on services rendered
 As long as the entity provides service for a fee,
remuneration or consideration, then the service rendered
is subject to VAT
 Issue: WON the sale by the National Development
Company (NDC) of five of its vessels to the private
respondents is subject to VAT
 Pursuant to a government program of privatization,
NDC decided to sell to private enterprise all of its
shares in its wholly-owned subsidiary the National
Marine Corporation (NMC) and five of its ships
 CTA ruled that the sale of a vessel was an “isolated
transaction” not done in the ordinary course of NDC’s
business and was thus not subject to VAT

31 32

31 32

8
DLSU College of Law
Taxation Law Review
CIR V. MAGSAYSAY LINES, INC. ET AL.
 VAT is ultimately a tax on consumption, even though it
is assessed on many levels of transactions on the
basis of a fixed percentage
 It is the end user of consumer goods or services which
ultimately shoulders the tax, as the liability therefrom is
passed on to the end users by the providers of these
goods or services who in turn may credit their own VAT
liability (or input VAT) from the VAT payments they
receive from the final consumer (or output VAT)
 The final purchase by the end consumer represents the
final link in a production chain that itself involves several
transactions and several acts of consumption
33
33
CIR V. MAGSAYSAY LINES, INC. ET AL.
 That the sale of the vessels was not in the ordinary
course of trade or business of NDC was appreciated
by both the CTA and the Court of Appeals, the latter
doing so even in its first decision which it eventually
reconsidered.
 The phrase "course of business" or "doing business"
connotes regularity of activity
 “Carrying on business" does not mean the performance of a
single disconnected act, but means conducting, prosecuting
and continuing business by performing progressively all the
acts normally incident thereof;
 “Doing business" conveys the idea of business being done,
not from time to time
35
35
Atty. Martin Ignacio D. Mijares
First Semester, AY 2019-2020
CIR V. MAGSAYSAY LINES, INC. ET AL.
 VAT is not a singular-minded tax on every
transactional level
 Its assessment bears direct relevance to the taxpayer's
role or link in the production chain
 The tax is levied only on the sale, barter or exchange of
goods or services by persons who engage in such activities,
in the course of trade or business
 These transactions outside the course of trade or business may
invariably contribute to the production chain, but they do so only
as a matter of accident or incident
 As the sales of goods or services do not occur within the course
of trade or business, the providers of such goods or services
would hardly, if at all, have the opportunity to appropriately credit
any VAT liability as against their own accumulated VAT
collections since the accumulation of output VAT arises in the
first place only through the ordinary course of trade or business
34
34
CIR V. MAGSAYSAY LINES, INC. ET AL.
 In the instant case, the sale was an isolated transaction
 The sale which was involuntary and made pursuant to the
declared policy of Government for privatization could no
longer be repeated or carried on with regularity
 It should be emphasized that the normal VAT-registered
activity of NDC is leasing personal property
 This finding is confirmed by the Revised Charter of the NDC
which bears no indication that the NDC was created for the
primary purpose of selling real property
 The conclusion that the sale was not in the course of
trade or business, which the CIR does not dispute before
this Court, should have definitively settled the matter
 Any sale, barter or exchange of goods or services not in
the course of trade or business is not subject to VAT
36
36
9
DLSU College of Law
Taxation Law Review
CS GARMENTS, INC. V. CIR
 Issue: WON the sale of the Company’s motor vehicle
to its General Manager is subject to VAT
 VAT is imposed on a sale or transaction entered into
by a person in the course of any trade or business
 A transaction will be characterized as having been
entered into by a person in the course of trade or
business if it is:
 Regularly conducted; and
 Undertaken in pursuit of a commercial or economic
activity
 Transactions that are made incidental to the pursuit of
a commercial or economic activity are considered
entered into in the course of trade or business
37
37
CS GARMENTS, INC. V. CIR
 Petitioner’s primary business in the manufacture of
garments for sale abroad
 In carrying out its business, petitioner acquired and
eventually sold a Mercedes Benz to its GM
 Prior to the sale, the motor vehicle formed part of
petitioner’s capital assets
 Therefore, the sale of the motor vehicle is an incidental
transaction because the vehicle was purchased and used
in furtherance of petitioner’s business
39
39
Atty. Martin Ignacio D. Mijares
First Semester, AY 2019-2020
CS GARMENTS, INC. V. CIR
 Transactions that are made incidental to the pursuit of
a commercial or economic activity are considered
entered into in the course of trade or business
 “Incidental”: something else as primary; something
necessary, appertaining to, or depending on another,
which is termed as principal
 An isolated transaction is not necessarily disqualified
from being made incidentally in the course of trade or
business
38
38
CS GARMENTS, INC. V. CIR
 Once an activity has been identified as a business,
any supply/sale made while carrying it on is likely to be
made in the course or furtherance of business
 Thus, a supply/sale in the course or furtherance of
business includes:
 The disposition of the assets and liabilities of a business;
 The disposition of a business as a going concern; and
 Anything done in connection with the termination or intended
termination of a business
40
40
10
DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

TRANSACTIONS COVERED
 Taxable Transactions
 Section 105, 1st par., Tax Code

TRANSACTIONS  The main object of the VAT is the transaction

 A taxable transaction could either be:

SUBJECT TO  A sale, barter, or exchange of goods or properties in the

course of trade or business

REGULAR VAT  A sale of service, or lease or use of goods or property, in the

course of trade or business
 An importation of goods, whether or not made in the course
of trade or business

Sale of Goods and Properties

42

41 42

TRANSACTIONS COVERED TRANSACTIONS COVERED

 Requisites for Taxability of Sale of Goods or Properties
 To be subject to VAT, the transaction involving tangible or
intangible goods or properties must meet all of the
following essential requirements:
 There is an actual or deemed sale, barter, or exchange of
goods or properties for a valuable consideration
 The sale is undertaken in the course of trade or business or
exercise of profession in the Philippines
 The goods or properties are located within the Philippines
and are for use or consumption therein
 The sale is not exempt from VAT under Section 109, Tax
Code, special law, or international agreement binding upon
the government of the Philippines
 Actual Sale of Goods or Properties
 Section 106(A)(1), Tax Code
 Goods or properties – means all tangible and intangible
object which are capable of pecuniary estimation and shall
include:
 Real properties held primarily for sale to customers or held for
lease in the ordinary course of trade or business
 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
 The right or the privilege to use in the Philippines of any
industrial, commercial, or scientific equipment
 The right or privilege to use motion picture films, films, tapes,
and discs
 Radio, television, satellite transmission, and cable television time

43 44

43 44

11
DLSU College of Law
Taxation Law Review
TRANSACTIONS COVERED
 Actual Sale of Goods or Properties
 In an actual sale, the seller, who is generally a VAT-
registered person, transfers ownership and delivers the
goods or properties to the buyer, who may or may not be
registered as a VAT taxpayer
 The VAT-registered seller’s output tax
 Automatically becomes the input tax of a VAT-registered
buyer, which he can credit the input tax against his output tax
 Becomes part of the cost of acquisition of an asset or an
expense of a non-VAT-registered (or VAT-exempt) buyer
45
45
TRANSACTIONS COVERED
 Transactions Deemed Sale
 Distribution or transfer to:
 Creditors in payment of debt
 Consignment of goods if actual sale is not made within
60 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
 Others:
 Change of ownership of the business such as when a single
proprietorship incorporates or the proprietor of a single
proprietorship sells his entire business
 Dissolution of a partnership and creation of a new
partnership which takes over the business
47
47
Atty. Martin Ignacio D. Mijares
First Semester, AY 2019-2020
TRANSACTIONS COVERED
 Transactions Deemed Sale
 Section 106(B), Tax Code
 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
 Example: when a VAT-registered person withdraws goods
from his business for his personal use
 Distribution or transfer to:
 Shareholders or investors as share in the profits of the VAT-
registered persons
 Property dividends which constitute stocks in trade or properties
primarily held for sale or lease declared out of retained earnings
on or after January 1, 1996 and distributed by the company to its
shareholders shall be subject to VAT based on the zonal value or
FMV at the time of distribution, whichever is applicable; or
46
46
TRANSACTIONS COVERED
 Sale of Real Properties
 Section 4.106-3, Rev. Regs. No. 16-2005
 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
 Sale of residential lot with GSP exceeding P1,500,000,
residential house and lot or other residential dwellings
with GSP exceeding P2,500,000 shall be subject to 12%
output VAT
 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
48
48
12
DLSU College of Law
Taxation Law Review
TRANSACTIONS COVERED
 Sale of Real Properties
 Adjacent 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
 This includes sale, transfer, or disposal within a 12-month
period of two or more adjacent residential lots, house and
lots or other residential dwellings in favor of one buyer from
the same seller, for the purpose of utilizing the lots, house
and lots or other residential dwellings as one residential area
wherein the aggregate value of the adjacent properties
exceeds P1,500,000 for residential lots, and P2,500,000 for
residential house and lots or other residential dwellings
49
49
TAXABLE BASE
 Gross Selling Price
 Section 106(A), Tax Code
 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 the VAT
 The excise tax, if any, on such goods or properties shall form
part of the gross selling price
 The VAT (output tax) on the sale of the goods or
properties accrues at the time of the sale, when the VAT
sales invoice is issued, although none or only part of the
gross selling price is paid by the buyer at the time of sale
51
51
Atty. Martin Ignacio D. Mijares
First Semester, AY 2019-2020
TRANSACTIONS COVERED
 Sale of Real Properties
 Adjacent residential lots, house and lots or other residential
dwellings 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/s
of Conveyance, shall be presumed as a sale of one
residential lot, house and lot or residential dwelling
 This however, does not include the sale of parking lot which
may or may not be included in the sale of condominium units
 The sale of parking lots in a condominium is a separate and
distinct transaction and is not covered by the rules on threshold
amount not being a residential lot, house and lot or a residential
dwelling, thus, should be subject to VAT regardless of amount of
selling price
50
50
TAXABLE BASE
 Gross Selling Price in Sale, Barter, or Exchange of
Real Property
 In the case of sale, barter or exchange of real property
subject to VAT, gross selling price shall mean the
consideration stated in the sales document or the fair
market value, whichever is higher
 If the VAT is not billed separately in the document of sale, the
selling price or the consideration stated therein shall be
deemed to be inclusive of VAT
 If the gross selling price is based on the zonal value or
market value of the property, the zonal or market value shall
be deemed exclusive of VAT
52
52
13
DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

TAXABLE BASE TAXABLE BASE

 Sales Discounts, Returns, and Allowances
 Section 106(D), Tax Code
 Allowable Deductions from Gross Selling Price
 In computing the taxable base during the month or quarter,
the following shall be allowed as deductions from gross
selling price:
 Discounts determined and granted at the time of sale, which are
expressly indicated in the invoice, the amount thereof forming
part of the gross sales duly recorded in the books of accounts
 Sales discount indicated in the invoice at the time of sale, the
grant of which is not dependent upon the happening of a future
event, may be excluded from the gross sales within the same
month/quarter it was given
 Sales returns and allowances for which a proper credit or refund
was made during the month or quarter to the buyer for sales
previously recorded as taxable sales
 For Transactions Deemed Sale and Below Market
GSP
 The CIR shall determine the appropriate tax base in
cases where
 A transaction is deemed a sale, barter or exchange of goods
or properties, or
 Where the gross selling price is unreasonably lower than the
actual market value
 The gross selling price is unreasonably lower than the actual
market value if it is lower by more than 30% of the actual market
value of the same goods of the same quantity and quality sold in
the immediate locality on or nearest the date of sale
 Nonetheless, if one of the parties in the transaction is the
government the output VAT on the transaction shall be based on
the actual selling price

53 54

53 54

TAXABLE BASE TAX RATE

 For Transactions Deemed Sale and Below Market  Section 106, Tax Code
GSP  12%, effective February 1, 2006
 For transactions deemed sale, the output tax shall be  Previously, 10%
based on the market value of the goods deemed sold as
of the time of the occurrence of the transactions deemed
sale
 However, in the case of retirement or cessation of
business, the tax base shall be the acquisition cost or the
current market price of the goods or properties,
whichever is lower
 In the case of a sale where the gross selling price is
unreasonably lower than the fair market value, the actual
market value shall be the tax base

55 56

55 56

14
DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

SALE OR EXCHANGE OF SERVICES

 Section 108(A), Tax Code
 “Sale or exchange of services” means the performance of

TRANSACTIONS all kinds of services in the Philippines for others for a fee
 Requisites for taxability of services

SUBJECT TO  There is a sale or exchange of services or lease of property

enumerated in the law or other similar services
 The service is performed or to be performed in the

REGULAR VAT Philippines

 The services is performed or to be performed in the course
of the taxpayer’s trade or business or profession
 The service is performed or to be performed for a valuable
consideration actually or constructively received
Sale of Services  The service is not exempt under the Tax Code, special law,
or international agreement

58

57 58

SALE OR EXCHANGE OF SERVICES SALE OR EXCHANGE OF SERVICES

 Broad and comprehensive meaning
 Embraces the performance in the Philippines of any
listed service or other similar services, regardless of
whether the performance thereof calls for the exercise or
use of the physical or mental faculties, by any person
enumerated in Section 108, Tax Code, for other persons
for a fee, remuneration, or consideration
 The enumeration is not exclusive: other services similar
to those enumerated shall also be subject to VAT
 E.g., professionals, insurance brokers, actors and actresses,
and other similar services
 Lessors of Property
 All forms of property for lease, whether real or personal,
are liable to VAT
 "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 NRFCs 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 NRFC or owner

59 60

59 60

15
DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

SALE OR EXCHANGE OF SERVICES SALE OR EXCHANGE OF SERVICES

 Lessors of Property
 In a lease contract, the advance payment by the lessee
may be:
 A loan to the lessor from the lessee, or
 An option money for the property, or
 A security deposit to insure the faithful performance of
certain obligations of the lessee to the lessor, or
 Pre-paid rental
 Lessors of Property
 If the advance payment is actually a loan to the lessor, or
an option money for the property, or a security deposit for
the faithful performance of certain obligations of the
lessee, such advance payment is not subject to VAT
 However, a security deposit 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

61 62

61 62

SALE OR EXCHANGE OF SERVICES SALE OR EXCHANGE OF SERVICES

 Warehousing service  Miller
 Rendering personal services of a warehouseman such  A miller, who is a person engaged in milling for others
as: (except palay into rice, corn into corn grits, and
 engaging in the business of receiving and storing goods of sugarcane into raw sugar), is subject to VAT on sale of
others for compensation or profit; services
 receiving goods and merchandise to be stored in his  If the miller is paid in cash for his services, VAT shall be
warehouse for hire; or based on his gross receipts for the month or quarter
 keeping and storing goods for others, as a business and for  If he receives a share of the milled products instead of cash,
use VAT shall be based on the actual market value of his share in
the milled products
 Sale by the owner or the miller of his share of the milled
product (except rice, corn grits and raw sugar) shall be
subject to VAT

63 64

63 64

16
DLSU College of Law
Taxation Law Review
SALE OR EXCHANGE OF SERVICES
 Common Carriers by Land
 All receipts from service, hire, or operating lease of
transportation equipment not subject to the percentage
tax on domestic common carriers and keepers of
garages imposed under Section 117, Tax Code shall be
subject to VAT
 "Common carrier" refers to persons, corporations, firms, or
associations engaged in the business of carrying or
transporting passengers or goods or both, by land, water, or
air, for compensation, offering their services to the public and
shall include transportation contractors
65
65
SALE OR EXCHANGE OF SERVICES
 Sale of electricity
 Sale of electricity by generation, transmission, and by
any entity including the National Grid Corporation of the
Philippines, distribution companies, including electric
cooperatives, shall be subject to twelve percent (12%)
VAT on their gross receipts starting February 1, 2006
 The sale of power or fuel generated through renewable
sources of energy such as, but not limited to, biomass, solar,
wind, hydropower, geothermal, ocean energy, and other
emerging energy sources using technologies such as fuel
cells and hydrogen fuels shall be subject to 0% VAT
67
67
Atty. Martin Ignacio D. Mijares
First Semester, AY 2019-2020
SALE OR EXCHANGE OF SERVICES
 Common Carriers by Land
 Common carriers by land with respect to their gross
receipts from the transport of passengers including
operators of taxicabs, utility cars for rent or hire driven by
the lessees (rent-a-car companies), and tourist buses
used for the transport of passengers shall be subject to
the percentage tax imposed under Section 117, Tax
Code, but shall not be liable for VAT
 Common Carriers by Air and Sea
 Domestic common carriers by air and sea are subject to
12% VAT on their gross receipts from their transport of
passengers, goods, or cargoes from one place in the
Philippines to another place in the Philippines starting
Feb. 1, 2006
66
66
SALE OR EXCHANGE OF SERVICES
 Dealers in securities and lending investors
 Dealers in securities and lending investors shall be
subject to VAT on the basis of their gross receipts
 For Dealer in Securities, the term "gross receipts" means
gross selling price less cost of the securities sold
 "Dealer in securities" means a merchant of stock or securities,
whether an individual partnership or corporation, with an
established place of business, regularly engaged in the purchase
of securities and their resale to customers, that is, one who as a
merchant buys securities and sells them to customers with a
view to the gains and profits that may be derived therefrom
 "Lending investor" includes all persons other than banks, non-
bank financial intermediaries, finance companies and other
financial intermediaries not performing quasi-banking functions
who make a practice of lending money for themselves or others
at interest
68
68
17
DLSU College of Law
Taxation Law Review
SALE OR EXCHANGE OF SERVICES
 Services of franchise grantees
 Services of franchise grantees of telephone and
telegraph, radio and/or television broadcasting, toll road
operations and all other franchise grantees, except gas
and water utilities, shall be subject to VAT in lieu of
franchise tax
 However, franchise grantees of radio and/or television
broadcasting whose annual gross receipts of the preceding
year do not exceed P10,000,000.00 shall not be subject to
VAT, but to the 3% franchise tax imposed under Section 119,
Tax Code, subject to the optional registration
 Franchise grantees of gas and water utilities shall be subject to
2% franchise tax on their gross receipts derived from the
business covered by the law granting the franchise pursuant to
Section 119, Tax Code
69
69
DIAZ V. CIR
 Issue: WON the toll fees collected by tollway operators
are subject to VAT?
 The law imposes VAT on "all kinds of services"
rendered in the Philippines for a fee, including those
specified in the list
 By qualifying "services" with the words "all kinds,"
Congress has given the term "services" an all-
encompassing meaning
 The enumeration of affected services is not exclusive
 The listing of specific services are intended to illustrate how
pervasive and broad is the VAT's reach rather than establish
concrete limits to its application
 Every activity that can be imagined as a form of "service"
rendered for a fee should be deemed included unless some
provision of law especially excludes it
71
71
Atty. Martin Ignacio D. Mijares
First Semester, AY 2019-2020
SALE OR EXCHANGE OF SERVICES
 Services of franchise grantees
 Gross receipts of all other franchisees, other than those
covered by Section 119, Tax Code, regardless of how their
franchises may have been granted, shall be subject to the
12% VAT imposed under Section 108, Tax Code starting
Feb. 1, 2006
 PAGCOR and entities or individuals dealing with it in casino
operations are exempt from VAT
 Franchise grantees of telephone and telegraph shall be
subject to VAT on their gross receipts derived from their
telephone, telegraph, telewriter exchange, wireless and other
communication equipment services
 Amounts received for overseas dispatch, message, or
conversation originating from the Philippines are subject to the
percentage tax under Section 120, Tax Code and exempt from
VAT
70
70
DIAZ V. CIR
 Now, do tollway operators render services for a fee?
 P.D. 1112 or the Toll Operation Decree establishes the
legal basis for the services that tollway operators render
 Essentially, tollway operators construct, maintain, and
operate expressways, also called tollways, at the operators'
expense
 In consideration for constructing tollways at their expense,
the operators are allowed to collect government-approved
fees from motorists using the tollways until such operators
could fully recover their expenses and earn reasonable
returns from their investments
72
72
18
DLSU College of Law
Taxation Law Review
DIAZ V. CIR
 Now, do tollway operators render services for a fee?
 When a tollway operator takes a toll fee from a motorist,
the fee is in effect for the latter's use of the tollway
facilities over which the operator enjoys private
proprietary rights that its contract and the law recognize
 In this sense, the tollway operator is no different from the
service providers under Section 108 who allow others to use
their properties or facilities for a fee
73
73
DIAZ V. CIR
 And not only do tollway operators come under the
broad term "all kinds of services," they also come
under the specific class described in Section 108 as
"all other franchise grantees" who are subject to VAT,
"except those under Section 119 of this Code."
 Tollway operators are franchise grantees and they do not
belong to exceptions (the low-income radio and/or
television broadcasting companies with gross annual
incomes of less than P10 million and gas and water
utilities) that Section 119 spares from the payment of
VAT.
 The word "franchise" broadly covers government grants
of a special right to do an act or series of acts of public
concern
75
75
Atty. Martin Ignacio D. Mijares
First Semester, AY 2019-2020
DIAZ V. CIR
 It does not help petitioners' cause that Section 108
subjects to VAT "all kinds of services" rendered for a
fee "regardless of whether or not the performance
thereof calls for the exercise or use of the physical or
mental faculties."
 This means that "services" to be subject to VAT need not
fall under the traditional concept of services, the personal
or professional kinds that require the use of human
knowledge and skills.
74
74
DIAZ V. CIR
 Petitioners contend that the public nature of the
services rendered by tollway operators excludes such
services from the term "sale of services" under Section
108, Tax Code
 But, again, nothing in Section 108 supports this
contention
 The reverse is true. In specifically including by way of
example electric utilities, telephone, telegraph, and
broadcasting companies in its list of VAT-covered
businesses, Section 108 opens other companies
rendering public service for a fee to the imposition of VAT
 Businesses of a public nature such as public utilities and
the collection of tolls or charges for its use or service is a
franchise
76
76
19
DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

DIAZ V. CIR DIAZ V. CIR

 Is the toll fee a user’s tax such that to impose VAT on  Is the toll fee a user’s tax such that to impose VAT on
such fees would be a taxing a tax? such fees would be a taxing a tax?
 The fees paid by the public to tollway operators for use of  VAT on tollway operations cannot be deemed a tax on tax
the tollways, are not taxes in any sense. due to the nature of VAT as an indirect tax
 VAT on tollway operations is not really a tax on the tollway
Tax Toll Fees
user, but on the tollway operator
Imposed under the taxing power of the Collected by private tollway operators
government principally for the purpose as reimbursement for the costs and  The seller remains directly and legally liable for payment of the
of raising revenues to fund public expenses incurred in the construction, VAT, but the buyer bears its burden
expenditure maintenance and operation of the  VAT is assessed against the tollway operator’s gross receipts
tollways, as well as to assure them a and not necessarily on the toll fees
reasonable margin of income
 Although the tollway operator may shift the VAT burden to the
Imposed only by the government under Demanded by either the government or
tollway user, it will not make the latter directly liable for the VAT
its sovereign authority private individuals or entities, as an
attribute of ownership.  The shifted VAT burden simply becomes part of the toll fees that
one has to pay in order to use the tollways
Demand of sovereignty Demand of ownership

77 78

77 78

SALE OR EXCHANGE OF SERVICES SALE OR EXCHANGE OF SERVICES

 Non-life insurance companies
 Including surety, fidelity, indemnity and bonding
companies are subject to VAT
 They are not liable to the payment of the premium tax under
Section 123, Tax Code
 Pre-need Companies
 Corporations registered with the SEC and authorized/
licensed to sell or offer for sale pre-need plans, whether a
single plan or multi-plan
 They are engaged in business as seller of services providing
services to plan holders by managing the funds provided by
them and making payments at the time of need or maturity of
the contract
 As service providers, the compensation for their services is the
premiums or payments received from the plan holders
 Health Maintenance Organizations (HMOs)
 Entities, organized in accordance with the provisions of
the Corporation Code of the Philippines and licensed by
the appropriate government agency, which arranges for
coverage or designated managed care services needed
by plan holders/members for fixed prepaid membership
fees and for a specified period of time
 HMO's gross receipts shall be the total amount of money or
its equivalent representing the service fee actually or
constructively received during the taxable period for the
services performed or to be performed for another person,
excluding the VAT
79 80

79 80

20
DLSU College of Law
Taxation Law Review
TAXABLE BASE
 Section 108, Tax Code
 Definition of Gross Receipts
 "Gross receipts" refers to the total amount of money or its
equivalent representing the contract price, compensation,
service fee, rental or royalty, including the amount
charged for materials supplied with the services and
deposits applied as payments for services rendered and
advance payments actually or constructively received
during the taxable period for the services performed or to
be performed for another person, excluding the VAT
 Exception: those amounts earmarked for payment to
unrelated third (3rd) party or received as reimbursement for
advance payment on behalf of another which do not redound
to the benefit of the payor
81
81
TAXABLE BASE
 Definition of Gross Receipts
 For this purpose ‘unrelated party’ shall not include
taxpayer’s employees, partners, affiliates (parent,
subsidiary and other related companies), relatives by
consanguinity or affinity within the fourth (4th) civil degree,
and trust fund where the taxpayer is the trustor, trustee or
beneficiary, even if covered by an agreement to the
contrary
83
83
Atty. Martin Ignacio D. Mijares
First Semester, AY 2019-2020
TAXABLE BASE
 Definition of Gross Receipts
 A payment is a payment to a third (3rd) party if the same
is made to settle an obligation of another person, e.g.,
customer or client, to the said third party, which obligation
is evidenced by the sales invoice/official receipt issued by
said third party to the obligor/debtor (e.g., customer or
client of the payor of the obligation)
 An advance payment is an advance payment on behalf of
another if the same is paid to a third (3rd) party for a
present or future obligation of said another party which
obligation is evidenced by a sales invoice/official receipt
issued by the obligee/creditor to the obligor/debtor (i.e.,
the aforementioned “another party”) for the sale of goods
or services by the former to the latter
82
82
TAXABLE BASE
 "Constructive receipt“
 Occurs when the money consideration or its equivalent is
placed at the control of the person who rendered the
service without restrictions by the payor
 The following are examples of constructive receipts:
 deposit in banks which are made available to the seller of
services without restrictions;
 issuance by the debtor of a notice to offset any debt or
obligation and acceptance thereof by the seller as payment
for services rendered; and
 transfer of the amounts retained by the payor to the account
of the contractor
84
84
21
DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

IMPORTATION OF GOODS
 Section 107, Tax Code
 In general

TRANSACTIONS  VAT is imposed on goods brought into the Philippines, whether

for use in business or not

SUBJECT TO  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,
REGULAR VAT 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
Importation of Goods  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

86

85 86

IMPORTATION OF GOODS IMPORTATION OF GOODS

 Requisites for Taxability of Imported Goods
 Goods from a foreign country are imported into the
Philippines
 The importer is a person in the Philippines
 The importation is not exempt from VAT under the Tax
Code, special law, or international agreement
 Goods come from a foreign country
 VAT is imposed on goods and properties brought into the
Philippines, whether for use in business or not
 Technical Importation
 Foreign country means any country other than the
Philippines or special economic zone or freeport zone
 By fiction of law, areas declared by law as special economic
zones or freeport zones have been treated as foreign territories
for tax purposes
 Goods from registered entities operating or located in special
economic zones or freeport zones, although geographically
considered within the territorial jurisdiction of the Philippines, that
are brought into the customs territory are considered imported
goods that are subject to VAT

87 88

87 88

22
DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

IMPORTATION OF GOODS IMPORTATION OF GOODS

 Goods are imported into the Philippines
 To constitute “importation” there must be an intention on
the part of the importer that the imported goods will
ultimately be destined in the Philippines at the time of
shipment, whether for business or non-business use
 Importation commences when the carrying vessel or aircraft
enters the jurisdiction of the Philippines with intention to
unload
 Importation is deemed terminated only upon payment of the
duties, taxes, and other charges due upon the articles, or the
same has been secured to be paid and the legal permit for
the withdrawal shall have been granted
89
 Importer is in the Philippines
 "Importer" refers to any person who brings goods into
the Philippines, whether or not made in the course of his
trade or business
 It includes non-exempt persons or entities who acquire tax-
free imported goods from exempt persons, entities or
agencies
 He is the consignee of an imported article designated as
such in the bill of lading or the person to whom the bill of
lading has been duly endorsed or assigned
 Owner of the goods at the time of withdrawal thereof from
the customhouse
 The country of origin must be foreign (including those
considered foreign by fiction of law)
90

89 90

IMPORTATION OF GOODS
 Importation is not exempt from VAT
 No VAT shall be imposed and collected on importation of
goods which are specifically exempted under Section
109(A), (B), (C), (D), (L), (R), (S), and (T), Tax Code TRANSACTIONS
 Applicability and payment
 The rates prescribed under Section 107(A) Tax Code
92
SUBJECT TO 0%
shall be applicable to all importations withdrawn from
customs custody VAT
 The VAT on importation shall be paid by the importer
prior to the release of such goods from customs custody

12% vs. 0% vs. Exempt Transactions

91

91 92

23
DLSU College of Law Atty. Martin Ignacio D. Mijares
Taxation Law Review First Semester, AY 2019-2020

93
THANK YOU

93

24