VAT (Value Added Tax) is a tax on the refining sugar.
sugar. Marinated fish sales are descendants who are now residents or
value added by sellers to the purchase
price or cost of goods, property, or
services in the ordinary course of trade
or business, as well as on importation of
goods into the Philippines for personal
or business use. Sale of goods or
services is subject to VAT unless exempt,
except for transactions for subsistence
or livelihood.
A. The sale or importation of
agricultural and marine food products in
their original state, including meat,
fruits, and vegetables, is considered
exempt from VAT under the tax code.
This exemption applies to products that
have undergone simple processes such
as freezing, drying, salting, broiling,
roasting, smoking, or stripping, as well
as those using advanced packaging
methods. Raw sugar cane, which is
produced by a simple process without
mechanical devices, is exempt from VAT
under the tax code. Raw sugar is
defined as sugar with a polarimeter
reading of less than 99.5 degrees, while
refined sugar is sugar with a polarimeter
reading of 99.5 degrees and above.
Sugar refined mills engage in the
business of milling sugar into raw or
not exempt from VAT. Exemptions from
tax must be clearly stated in the law's
language.
B. The sale of importation of fertilizers,
seeds, seedlings, fingerlings, fish, prawn,
livestock, and poultry feeds, including
ingredients, is prohibited, except for
specialty feeds. Specialty feeds are non-
agricultural feeds for race horses, while
pets like fighting cocks, aquarium fish,
and zoo animals are subject to vat.
Certain feed ingredients, such as whey
powder and lactose, must be certified
as unfit for human consumption or
certified by the FDA.
C. The importation of personal and
household effects belonging to returning
Filipino residents and nonresident
citizens coming to resettle is exempt
from customs duties under the Tariff
and Custom Code of the Philippines.
D. The Importation of professional
instruments, implements, tools,
clothing, domestic animals, and
personal effects belonging to persons
coming to settle in the Philippines or
Filipinos or their families and
citizens of other countries is allowed.
The Bureau of Customs may exempt
these goods from payment of duties and
taxes if satisfactory evidence is provided
that the goods are brought from their
former place of abode. However,
vehicles, vessels, aircrafts, and
machineries for manufacture are not
classified and are subject to duties,
taxes, and other charges.
E. Services subject to Percentage Tax
under Title V of the Tax Code, as
amended, in Chapter 9.
F. Agricultural contract growers produce
poultry, livestock, and other agricultural
and marine food products in their
original state, offering toll processing,
dressing, and manufacturing services.
These services include weighing, killing,
dressing, scalding, cut-ups, and
packaging. However, under RR 97-2010,
it was clarified that "toll processing
services exempt from VAT" only pertain
to services to clients from which animal
growing was contracted. Therefore,
preparing and packaging hogs/chicken
ready for delivery can be considered
agricultural contract growing. However,
if done independently of growing
poultry, livestock, or other food
products, it can be considered vatable
services not covered by agricultural
contract growing.
G. The regulation covers medical, dental,
hospital, and veterinary services, except
those provided by professionals.
Laboratory services are exempt, and the
sale of drugs and medicines in hospitals
or clinics is subject to VAT. Hospital bills
are considered medical services, and
sales made by drugstores to in-patients
are exempt from VAT. Medical
practitioners include medical
technologists, allied health workers, and
other practitioners not under an
employer-employee relationship with
hospitals or clinics. Professional
practitioners, including medical
practitioners, CPAS, insurance agents,
and those required to pass government
examinations, are subject to VAT if their
annual gross professional fees exceed
P3,000,000.
H. The text defines "educational
services" as academic, technical, or
vocational education provided by private
educational institutions accredited by
the Department of Education, the
Commission on Higher Education, the
Technical Education and Skills
Development Authority, and
government educational institutions. It
excludes seminars, in-service training,
review classes, and similar services from
individuals not accredited by these
bodies.
I. Services rendered by individuals
pursuant to an employer-employee
relationship.
J. Multinational corporations establish
Regional or Area Headquarters (RHQs) in
the Philippines, serving as supervisory,
communications, and coordinating
centers for their Asia-Pacific affiliates,
subsidiaries, or branches without
generating income from the Philippines.
K. Transactions exempt under
international agreements or special laws
in the Philippines, except for those
under Presidential Decree No. 529, are
subject to special laws such as PAGCOR
Charter, Biofuels Act, Philippine Red
Cross, Expanded Senior Citizens Act, and
Magna Carta for PWDS.
L. Agricultural cooperatives registered
with the Cooperative Development
Authority can sell their produce to
members and non-members, as well as
import direct farm inputs, machinery,
and equipment for production and
processing. The sale or importation of
agricultural food products in their
original state is exempt from VAT,
regardless of the seller and buyer, as
per Subsection.
M. The exemption is not limited to
gross receipts from lending activities
by credit or multi-purpose
cooperatives registered with the
Cooperative Development Authority.
N. Non-agricultural, non-electric, and
non-credit cooperatives registered
with the Cooperative Development
Authority can sell their products,
provided their share capital
contribution does not exceed P15,000,
and imports of machineries and
equipment are subject to VAT.
O. Export Sales by persons who are not
vat registered.
Export sales may be exempt or subject
to vat as shown in the figure below:

P. The TRAIN Law outlines the
exemption from VAT on the sale of real
property starting January 1, 2021. This
exemption applies to the sale of
properties not primarily held for sale or
lease in the ordinary course of trade or
business, as well as the sale of real
property utilized for socialized housing.
Socialized Housing refers to programs
and projects undertaken by the
government or private sector for the
underprivileged and homeless citizens,
including sites and services
development, long-term financing, and
liberalized terms on interest payments.
The adjusted threshold for selling
houses and lots and other residential
dwellings with a selling price of not
more than P3,199,200 is set at
P3,199,200, adjusted annually using the
2010 consumer price index (CPI).
However, the provision of increasing the
threshold to P4,200,000 was vetoed by
President Duterte.
The exemption does not include
the sale of parking lots in the sale of
condominium units, which are separate
transactions and should be subject to
VAT regardless of the amount of selling
price. If the sale of real property was
made in the ordinary course of trade or
business, it is classified as a capital asset
and not subject to VAT but to capital
gains tax.
In summary, the TRAIN Law
outlines the exemptions and limitations
on the sale of real property, including
the sale of residential houses and lots,
socialized housing, residential lots,
commercial lots/units, and other non-
exempt real properties.
Q. The lease of a residential unit with a
monthly rental per unit not exceeding
P15,000 is exempt from VAT, but the
monthly rental per unit must not exceed
P3,000,000. The percentage tax rate
under Section 116 of the Tax Code as
amended is 3% prior to July 1, 2021, 1%
from July 1, 2021 to June 30, 2023, and
3% starting July 1, 2023. The revised
threshold of P15,000 and P3,000,00
applies only upon the effectivity of
RA10963 (TRAIN Law) beginning January
1, 2018. In cases where a lessor has
several residential units for lease, their
tax liability will be:
(a) gross receipts from rentals not
exceeding P15,000 per month per unit
are exempt from VAT regardless of the
aggregate annual gross receipts; and (b)
gross receipts from rentals exceeding
P15,000 per month per unit are subject
to VAT if the annual gross receipts
exceed P3,000,000 from said units only,
not including the gross receipts from
units leased out for not more than
P15,000.
R. The CREATE Law allows the sale,
importation, printing, and publication
of books, newspapers, magazines,
journals, review bulletins, and other
educational reading materials covered
by the United Nations Educational,
Scientific and Cultural Organization
(UNESC0) Agreement. However, these
activities are exempt from VAT under
BIR Ruling No. 083-2014, which only
covers printed matters in hard copy
and does not apply to electronic
formats. Other activities, such as
printing brochures, bookbinding,
engraving, stereotyping, electrotyping,
and lithographing, are subject to VAT.
The taxpayer must register their
business as a VAT business entity and
issue a separate VAT invoice/receipt to
record these transactions.
S. The Philippines does not impose
business tax on the transport of
passengers by international carriers,
while cargo transport is subject to a
percentage tax under Section 118 of the
Tax Code, also known as Common
Carrier's Tax on International Carriers.
T. The sale, importation, or lease of
passenger or cargo vessels and aircraft,
including engines, equipment, and spare
parts, for domestic or international
transport operations, subject to
MARINA's restrictions on vessel
importation and mandatory retirement
program.
U. The text outlines the importation of
fuel, goods, and supplies for
international shipping or air transport
operations in the Philippines. The fuel
must be used exclusively for
transporting goods and passengers from
a Philippine port to a foreign port
without docking or stopping at any
other port. If any portion of the fuel is
used for purposes other than those
mentioned, it will be subject to a 12%
VAT.
V. The Tax Code imposes a percentage
tax on services provided by banks, non-
bank financial intermediaries, and other
non-bank financial intermediaries like
money changers and pawnshops.
W. The Expanded Senior Citizens Act of
2010 and the Act Expanding the Benefits
and Privileges of Persons with Disability
(PWD) both allow the sale or lease of
goods and services.
X. Transfer of property pursuant to
Section 40(C)(2) of the Tax Code, as
amended (Upon effectivity of RA10963-
TRAIN Law only; new provision).
Y. The provision allows homeowners'
associations and condominium
corporations to collect association dues,
membership fees, and other
assessments and charges on a
reimbursement basis, effective from
January 1, 2018 or upon the effectivity
of RA10963-TRAIN Law.
Z. Starting January 1, 2018, the sale of
gold to the Bangko Sentral ng Pilipinas
is subject to 0% vat, effective from
RA10963-TRAIN Law.
AA. Starting January 1, 2021, the
exemption from VAT for the sale or
importation of prescription drugs and
medicines for diabetes, high
cholesterol, and hypertension will only
apply to manufacturers, distributors,
wholesalers, and retailers listed in the
Department of Health's approved
drugs and medicines list.
BB. Starting January 1, 2021, the
Department of Trade and Industry (DTI)
is required to certify that capital
equipment, spare parts, and raw
materials for the production of
personal protective equipment (PPE)
components and drugs for COVID-19
prevention are not locally available,
insufficient in quantity, or not in
accordance with the required quality
or specification. The Department of
Health (DOH) will issue a list of
prescription drugs and medical devices
covered by this provision within 60
days of the CREATE effectivity and
every three months thereafter. For
exemptions, suppliers or importers
must submit a certified true copy of
the "License to Operate" issued by the
DOH-FDA and a sworn declaration from
the manufacturer-buyer that the items
will be used for the manufacture of PPE
components and drugs for COVID-19
treatment. The exemption claimed
under this subsection will be subject to
post audit by the Bureau of Internal
Revenue (BIR) or the Bureau of
Customs (BOC).
CC. The gross annual sales and receipts
of a business must not exceed
P3,000,000, which includes total
revenues from selling goods or
services, including nonrefundable
advance deposits/payments, net of
discounts, sales returns, and
allowances, covering the fiscal or
calendar year. Sales incidental to the
business's registered operations are
also included under Section 105 of the
Tax Code, as amended.
COMPUTATION OF VAT PAYABLE
1. Actual Sale Sales involving actual
exchanges between buyers and sellers,
regardless of whether they are non-
stock, non-profit, private, or
government entities, are subject to
12% vat unless exempt.
Sale of Service (including lease of properties)
Gross receipts are the total amount of Money 5t
or equivalent, including contract price,
compensation, service fee, rental, royalty,
materials, deposits, and advance payments
received during the taxable period, excluding
VAT.
INCIDENTAL TRANSACTIONS
In the course of trade or business refers to the
regular conduct or pursuit of commercial or
economic activities by any person, regardless
of whether they are a non-stock, non-profit,
private organization, or government entity.
2. Transactions Deemed Sale
Section 106(B) of the tax code allows certain
transactions to be considered "sale" for value
added tax purposes. Vat is a credit-invoice
method value-added tax, calculated by
deducting input from output vat. In transactions
considered sales, input vat is used as a credit
against output vat, but no output vat is charged.
To avoid this, certain transactions should be
considered sales.
THE FOLLOWING TRANSACTIONS
ARE CONSIDERED DEEMED SALE:
The VAT system applies to transactions
involving the transfer, use, or consumption of
goods or properties intended for sale or use in
the course of business. The basis for computing
the applicable VAT is the fair market value of
the goods consumed. Distribution or transfer to
shareholders or investors as share in the profits
of a VAT-registered person, and distribution or
transfer to creditors in payment of debt or
obligation are also considered sales.
Consignments of goods if actual sale is not
made within 60 days following the date of
consignment are not deemed sold. Retirement
from or cessation of status as VAT registered
person with respect to "goods on hand" (as of
the date of retirement or cessation) is also
considered sale.
The VAT system applies to goods or properties
originally intended for sale or use in business
and capital goods existing as of the occurrence
of changes in business activity, such as a VAT
registered person reverting to VAT-exempt
status, a request for cancellation of registration
due to reversion to exempt status, or a person
commenced business with the expectation of
gross sales or receipts exceeding this amount
during the first twelve months of operation.
VAT (TRANSACTION DEEMED SALE)
SHALL NOT BE IMPOSED ON GOODS
OR PROPERTIES EXISTING AS OF THE
OCCURRENCE OF THE FOLLOWING:
Change of control in a corporation,
change in tax payer's trade or corporate name,
or merger or consolidation of corporations
result in the unused tax of dissolved
corporations being absorbed by the new or
surviving corporation.
3. Zero rated Sales (0% VAT)
EXPORT SALE BY A VAT REGISTERED
ENTITY
A VAT registered person's "zero-rated sale" of
goods, properties, or services is taxable for
VAT purposes, but input tax on related
purchases can be refunded or taxed.
Zero-rated sellers gain international
competitiveness by allowing refunds or credits
for input taxes attributed to export sales.
RATIONALE FOR ZERO RATING OR
EXPORT SALES:
The Philippine VAT system follows the "Cross
Border Doctrine," meaning no VAT is imposed
on goods destined for consumption outside the
taxing authority's territorial border. However,
vat zero-rating is not limited to export sales but
also registered activities of business
enterprises. Input vat attributed to zero-rated
sales can be refunded, claimed as a deduction
or tax credit against domestic sales, or used as
a tax credit against other internal revenue taxes.
Taxpayers engaged in both zero-rated and non-
zero-rated sales can claim a refund or tax credit
certificate.
EXPORT SALE BY A NON-VAT
REGISTERED ENTITY
A non-VAT registered entity's export
sale is a vat-exempt transaction, not subject to
VAT. The seller/supplier cannot claim input tax
credit on such transactions. The vat paid by the
purchaser is treated as operating expense or
cost.
ZERO RATED SALE
A). The Tax Code, as amended, allows 0% VAT
for certain sales by vat-registered persons.
These sales include export sales of goods or
properties from the Philippines to foreign
countries, goods, supplies, equipment, and fuel
used exclusively for international shipping or
air transport operations, sales to persons or
entities subject to zero rates under special laws
or international agreements, and sales of raw
materials, inventories, supplies, equipment,
packaging materials, and goods to a registered
Export Enterprise (REE) for a maximum period
of 17 years from the date of registration, unless
otherwise extended under the Strategic
Investment Priority Plan.
B). The Export Sale (Zero-Rated Sale) of
Services refers to services rendered to
individuals or entities outside the Philippines,
including those engaged in business outside
the country, those subject to exemption from
direct or indirect taxes under special laws or
international agreements, and those sold to
Registered Export Enterprises (REEs) for a
maximum of 17 years from the date of
registration. VAT-registered suppliers to
REEs enjoying fiscal incentives under the
CREATE Act are treated as VAT zero-rated,
but only for goods and/or services used in the
registered project or activity. The enjoyment
of VAT and duty incentives is reckoned from
the registered export enterprise's date of
registration and throughout the period
indicated in its Certificate of Registration.
Services rendered to persons engaged in
international shipping or air transport
operations, including leases of property for
use thereof, are also subject to VAT. Gross
receipts of international air or shipping
carriers derived from transport of passengers
and cargo from the Philippines to a foreign
country are exempt from VAT, but still liable
to a percentage tax of 3% based on their gross
receipts. Zero-rating applies strictly to the
sale of power or fuel generated through
renewable sources of energy.
The RMC 24-2021 defines export enterprises
as individuals, partnerships, corporations, or
other entities organized under Philippine laws
and registered with an Investment Promotion
Agency (IPA) for manufacturing, assembling,
or processing activities, and services like
IT/BPO. These enterprises direct exportation or
sale of their products or services to another
registered export enterprise, forming part of the
final export product or service of the latter.
Registered Business Enterprises (RBEs) are
entities organized under Philippine laws and
registered with an IPA, excluding service
enterprises such as customs brokerage,
trucking, janitorial, security services,
insurance, banking, and other financial
services. Income delivered within economic
zones is subject to taxes under the National
Internal Revenue Code (NIRC) of 1997. Direct
and exclusive use in a registered project or
activity includes raw materials, supplies,
equipment, goods, packaging materials, and
other expenditures directly attributable to the
project or activity.
INPUT VAT
Input Vat refers to the tax paid by a Vat-
registered taxpayer on importation or local
purchase of goods, properties, or services. It
includes transitional input determined by
section 111 of the Tax Code, presumptive input
tax, and deferred input tax from previous
periods. This includes purchases for sale,
conversion, supplies, services, real properties,
and services.
INPUT VAT ON CAPITAL GOODS
(Depreciable Goods)
Capital goods, with a useful life of over a year,
are depreciable assets used in taxable goods or
services. RR 16-2005 allows input taxes on
capital goods purchase as a tax credit against
output VAT.
INPUT VAT ON CAPITAL GOODS
AGGREGATE Purchase during the month
(exclusive of vat)
The Train Law allows for the
allocation of input tax on capital goods
aggregate purchases during the month,
excluding VAT. The tax is spread evenly during
the estimated useful life of the depreciable
asset, but not exceeding 60 months. Allocation
begins in the calendar month when the capital
good was acquired. If the asset is sold within
five years or before exhaustion of input tax, the
entire unamortized input tax can be claimed as
input tax credit during the sale. If the asset's
life is less than one year or twelve months,
input tax is not allocated. The total amount of
input tax is treated as tax credit against output
tax in the month of acquisition. The rule of
amortizing input tax on capital goods is only
allowed until December 31, 2021, and
taxpayers with utilized input tax as of
December 31, 2021, can apply the same until
fully utilized.
CONSTRUCTION IN PROGRESS
Construction in progress (CIP) refers to the
cost of construction work that is not yet
completed and is considered a purchase of
service for claiming input tax. The value of CIP
is determined based on progress billings and
does not qualify as capital goods until the
construction is completed. In contracts for
service sales where only labor is supplied by
the contractor and materials are purchased by
the contractee, input tax credit on labor is
recognized on the month payment was made
based on progress billings. Once input tax has
been claimed while the construction is in
progress, no additional tax can be claimed upon
asset completion when it is reclassified as a
depreciable capital asset and depreciated.
2. IMPORTATION
Construction in progress (CIP) refers to the
cost of construction work that is not yet
completed and is considered a purchase of
service for claiming input tax. The value of CIP
is determined based on progress billings and
does not qualify as capital goods until the
construction is completed. In contracts for
service sales where only labor is supplied by
the contractor and materials are purchased by
the contractee, input tax credit on labor is
recognized on the month payment was made
based on progress billings. Once input tax has
been claimed while the construction is in
progress, no additional tax can be claimed upon
asset completion when it is reclassified as a
depreciable capital asset and depreciated.
PERSON LIABLE/COVERED:
The text defines importers as individuals,
entities, or agencies who bring goods into the
Philippines, including those who acquire tax-
free imported goods from exempt entities, and
the non-exempt person, purchaser, or transferee
is considered the importer for VAT purposes.
IMPORTATION OF GOODS BY TAX
EXEMPT PERSONS
The Philippines' VAT-exempt individuals
or entities are responsible for the VAT due on
goods imported by them, which are later sold,
transferred, or exchanged to non-exempt
entities, making them the importers of the
goods.
COMPUTATION OF VAT
IMPORTATION
The Input Vat on Importation can be
calculated in two ways: 1) based on the value
of the imported article (also known as "ad-
valorem" tax), where the BOC determines
customers' duties based on the value of the
imported article, and excludes illegal
payments like facilitation fee/expense (bribe).
Other charges by the BOC should be
legitimate, such as customs duties, brokerage,
wharfage, arrest, stamps, and processing fee.
The tax base for vat purposes should exclude
illegal payments.
3). Presumptive Input Tax of 4% on sale of
goods
The government has introduced a
presumptive input tax for businesses involved
in processing sardines, mackerel, milk, refined
sugar cooking oil, and packed noodle-based
instant meals. This tax is 4% of the gross value
of the primary agricultural products used in
production, which includes pasteurization,
canning, and activities that alter the product's
texture, form, or inner substance to prepare it
for special use. The tax is applicable to
businesses involved in the processing of
sardines, mackerel, milk, refined sugar,
cooking oil, and packed noodle-based instant
meals.
4. Transitional Input Tax
Individuals who become liable to value-
added tax or choose to be VAT-registered can
receive an input tax on their inventory of
goods, materials, and supplies, equivalent to
2% of the value or the actual value added tax
paid, whichever is higher. This tax is creditable
against the output tax. Taxpayers who can avail
of this tax include those who become liable to
VAT and those who elect to be VAT registered.
5. CREDITABLE WITHHOLDING VAT
Starting January 1, 2021, the tax code will
shift from a final to a creditable vat system,
with the payor being the withholding agent.
This means that the 5% vat withheld by the
government or its political subdivisions,
instrumentalities, or agencies, including
government-owned or controlled corporations
(GOCCS), will be creditable against the seller's
output vat. The seller must recognize the actual
amount of input vat on its sale to the
government, eliminating the need to account
for the difference between standard input vat
and actual input vat. The BIR issued RMC 36-
2021 to provide guidelines on this transition.
PRIOR To 2021
The government or its political
subdivisions, instrumentalities, or agencies,
including government-owned or controlled
corporations (GOCCs), must deduct and
withhold Final VAT at a rate of 5% of the gross
payment for each purchase of goods and/or
services taxed at 12% val. The 5% final VAT
withholding rate represents the not VAT
payable of the seller, while the remaining 7%
accounts for the standard input VAT for sales of
goods or services to the government or
GOCCS. If actual input VAT attributable to
sales to the government exceeds 7% of gross
payments, the excess may form part of the
sellers' expense or cost. If actual input VAT
attributable to sales to the government is less
than 7%, the difference must be closed to
income.
VAT Withheld from Nonresidents
Section 114 (C) of the Tax Code states that
nonresident owners must pay a 12%
withholding tax on lease or use of properties or
property rights. However, payments for goods
and services from projects funded by Official
Development Assistance (ODA) are exempt
from these taxes. The payor or person in
control of the payment is considered the
withholding agent for this purpose.
CARRY-OVER of Excess Input Vat
RR 2-2007 states that if the input tax,
including the input tax carried over from the
previous quarter, exceeds the output tax, the
excess will be carried over to the succeeding
quarter or quarters. However, VAT-registered
taxpayers can choose to refund or apply for a
tax credit certificate for zero-rated sales. The
Tax Code, as amended, also states that if the
output tax exceeds the input tax, the excess will
be paid by the VAT-registered person.
However, input tax attributable to zero-rated
sales can be refunded or credited against other
internal revenue taxes, subject to Section 112.
Section 110(C) determines the creditable input
tax, reducing the sum of the excess input tax
carried over from the preceding month or
quarter and the input tax creditable to a VAT
registered person during the taxable month or
quarter. This includes claims for refunds or tax
credits for value-added tax, purchase returns,
allowances, and input tax attributable to
exempt sales.
LEASE OF REAL PROPERTY
Leases of properties for lease to customers in
the ordinary course of trade or business are
subject to VAT unless the lessor's gross annual
receipts do not exceed P3,000,000, as
amended, and are non-vat registered. For
commercial units, gross receipts from leases
are subject to 12% VAT if the property is
located in the Philippines. Advance payments
for rentals, such as prepaid rent, are subject to
VAT. However, advance payments for loans,
option money, or security deposits are not. For
residential units, VAT exempt sales can be
found on page 258.
SALE OF REAL PROPERTY
Real property sales primarily in business
are subject to value added tax, with output vat
based on the difference between selling price
and fair market value. Fair market value refers
to the higher value between the BIR's zonal
value and the Provincial and City Assessors'
schedule of values. Sale of real property
subject to vat can be classified as cash basis,
installment basis, or deferred payment basis,
which is crucial for determining the seller's
output vat percentage.
Installment Payment Basis
In the sale of real properties on an
installment plan, the real estate dealer is subject
to VAT on installment payments, including
interest and penalties, received by the seller.
The sale is considered an "Installment Sale" if
the initial payment does not exceed 25% of the
selling price. The buyer can claim the input vat
during the same period as the seller recognizes
the output tax. Initial payments include all
payments received by the seller or before the
execution of the instrument of sale, except for
the purchaser's evidence of indebtedness. The
amount of mortgage on the property sold is
excluded from the initial payment, except when
it exceeds the property's cost or other basis.
RR 4-2007 states that if the sale of real
property is on an installment plan where the
zonal value/fair market value is higher than the
consideration or selling price, the vat will be
based on the ratio of actual collection of the
consideration against the agreed consideration
applied to the property's market value at the
time of the execution of the Contract to Sell or
Contract of Sale at the inception of the sale.
The input vat that can be claimed by the buyer
must be separately-billed output vat in the sales
document issued by the seller.
Deferred Payment Basis
The sale of real properties on a Deferred-
Payment basis, where initial payments exceed
25% of the gross selling price, is treated as a
cash sale, making the entire selling price
taxable in the month of sale. Output tax is
recognized by the seller, while input tax
accrues to the buyer at the execution of the
instrument of sale. Exchanges of real estate
properties for shares of stocks, whether
resulting from corporate control or not, are
subject to VAT. However, if the transferee is
another real estate dealer, no output VAT is
imposable on the transfer.
PRE-SELLING OF REAL ESTATE
PROPERTIES
Real estate dealers, who engage in
buying, developing, selling, and exchanging
real properties as principals, are subject to
value added tax in accordance with the rules
discussed above, ensuring fair treatment for
their pre-selling of properties.
PROPERTY IN-TRUST AND
TRANSACTION DEEMED SALE
The transfer of property to a trustee is
not subject to vat if it is held in trust for the
trustor and beneficiary. However, if the
property is for sale, lease, or use in trade or
business and the transfer is a completed gift, it
is subject to vat as a deemed sale transaction.
This is true even if the transferor divests
themselves completely.
VAT ON SALE OF SERVICES
Vat on sale of service is a tax on
payments for services rendered as an exercise
of profession or calling. It is an indirect tax that
can be passed on to the client or customer and
accrues at the time the service fee is collected.
Payments may be collected in advance or after
the service is rendered. The "sale or exchange
of services" is subject to 12% vat based on
gross receipts derived by any person engaged in
the sale of such services or lease of properties.
Section 108(A) of the Tax Code as amended by
10963 (TRAIN Law) defines the term "sale or
exchange of services" as the performance of all
kinds of services in the Philippines for fee,
remuneration, or consideration. This includes
those performed by construction and service
contractors, stock, real estate, commercial,
customs and immigration brokers, lesors of
property, warehouse services, cinematographic
films, persons engaged in milling, processing,
manufacturing, repacking of goods, pension
houses, inns, resorts, other eating places,
proprietors, operators of hotels, motels, rest
houses, restaurants, refreshment parlors, cafes,
dealers in securities, lending investors,
transportation contractors, sales of electricity,
telephone and telegraph, radio/and television
broadcasting, franchise grantees of electric
utilities, telephone and telegraph, radio/and
television broadcasting, and non-life insurance
(except their crop insurances), including surety,
fidelity, indemnity companies bonding
companies, and similar services regardless of
whether the performance requires the exercise
of physical and mental faculties.
The term "sale or exchange of service" also
includes the lease or use of copyright patents,
design models, plans, secret formulas,
goodwill, trademarks, trade brands, industrial,
commercial, or scientific equipment, scientific
knowledge or information, assistance, services
by non-resident persons or their employees,
technical advice, assistance, lease of motion
picture films, tapes and discs, and lease of
radio, television, satellite transmission, and
cable television time.
Lease of properties is subject to vat regardless
of the place where the contract of lease or
licensing agreement was made if the property is
leased or used in the Philippines. The term
"gross receipts" under the TRAIN Law
represents the total amount of money or its
equivalent representing the contract price,
compensation, service fee, rental, or royalty,
including materials supplied with the services
and deposits and advanced payments actually
and constructively received during the taxable
period for services performed or to be
performed for another person, excluding value
added tax.
NON-LIFE INSURANCE
Non-life insurance transactions in the
Philippines are subject to value added tax,
including marine, free and casualty insurance,
surety, fidelity, indemnity, bonding companies,
and mutual benefit associations. These
transactions are not subject to Premiums Tax
under Section 123 of the Tax Code.
Nonresident foreign persons rendering non-life
insurance services in the Philippines are also
subject to 12% VAT. Non-life insurance
companies include individuals, partnerships,
associations, and corporations, including
professional reinsurers, mutual-benefit
associations, and government-owned
corporations. Gross receipts from non-life
insurance include total premium collections,
insurance and reinsurance commissions, and
vat due from foreign reinsurance companies.
The local insurance company withholds vat due
from foreign reinsurance companies and remits
it to the BIR through the Monthly Remittance
Return of Value Added Tax Witheld (BIR Form
160).
PRE-NEED COMPANIES
Pre-need companies are registered
with the Securities and Exchange Commission
and licensed to sell or offer pre-need plans,
either single or multi-plan. They manage funds
provided by plan holders and make payments at
contract maturity. Compensation for their
services comes from premiums or payments
received from plan holders. They engage in
business as service providers.
HEALTH MAINTENANCE
ORGANIZATIONS (HMO3)
HMOS are licensed entities in the
Philippines that provide managed care services
for plan holders/members for fixed prepaid
membership fees. Their gross receipts are the
amount of money or equivalent received during
the taxable period for services performed for
another person, excluding VAT. Compensation
for their services is presumed to be the total
enrollment fee from members plus other
charges received.
FRANCHISE GRANTEES
Franchise grantees are taxed on
electric utilities, telephone and telegraph
services, toll road operations, and radio and
television broadcasting, except for radio and
television broadcasting companies with annual
gross receipts below P10M, which are subject
to a 3% Franchise Tax.
DEALERS IN SECURITIES AND
LENDING INVESTORS
A dealer in securities is a merchant
with an established business, regularly engaged
in the purchase and resale of securities to
customers, and aims to derive gains and profits
from the transactions. This involves regularly
buying and selling securities to customers.
MILLERS
Millers are taxed on their services,
except for those milling for others. The basis
for VAT is gross receipts for services during a
month or quarter, or the actual market value of
their share in the milled products. The owner of
the miller's share in the milled product, except
rice, corn grits, and raw sugar, is also subject to
VAT.
CONSTRUCTION AND SERVCE
CONTRACTORS
Construction in Progress (CIP) is the
cost of construction work not yet completed,
considered a purchase of services. Input VAT
on CIP is recognized and claimed in the month
of purchase for goods or payment for services,
if supported by a proper VAT invoice or official
receipt. The P1,000,000 threshold on capital
goods requiring an amortization of input taxes
does not apply on CIP. Input taxes will be
recognized on labor when payment is made on
progress billings, and on materials at the time
materials are purchased.
RECREATIONAL CLUBS
Recreational clubs or dubs, operating
solely for leisure and non-profit purposes, are
subject to VAT on gross receipts such as
membership fees, assessment dues, rental
income, and service fees.
VAT Exemption and Discounts to Senior
Citizens and PWDS
The Expanded Senior Citizens Act of
2010 grants senior citizens and persons with
disabilities (PWDs) tax exemptions and
discounts on certain items. Senior citizens, who
are 60 years old or older, can apply for dual
citizenship if they prove their Filipino
citizenship and have at least six months of
residency in the Philippines. Resident citizens
are Filipino citizens with permanent legal
residence in the Philippines, including those
who have migrated to a foreign country and
returned with a definite intention to reside
there. Persons with disabilities are individuals
with limitations or different abilities due to
mental, physical, or sensory impairments. The
Act also provides a 20% discount on basic
necessities and prime commodities. The Magna
Carta Law for PWDs also applies to senior
citizens and PWDs.
RULE FOR RESTAURANTS (RR-7-2010)
The 20% discount and VAT exemption
for restaurants apply to various types of food,
drinks, dessert, and other consumable items,
including value meat and promotional meals,
offered for public consumption. Condiments
and side products fall under the category of
other consumable items served by
establishments. The discount applies to dine-in,
take-out, take-home, drive-thru, delivery
orders, called-in, or phoned-in orders. Bulk
orders are not eligible for the 20% discount and
VAT exemption.
Set meals, group meals, or group walk-ins,
including purchases of whole cakes and pizza,
are not eligible for the 20% discount and VAT
exemption. Pasalubong food items, such as
biscotto, ginamos, and mango preserves, are
not eligible for the 20% discount and VAT
exemption.
Meals primarily prepared for children and not
for the senior citizen's personal consumption
are not eligible for the 20% discount. Alcoholic
beverages are generally not subject to the 20%
discount and VAT exemption, especially if
purchased in bulk, buckets, or cases. However,
alcoholic beverages purchased in bars, clubs, or
carpets are exempt from VAT but subject to
18% amusement tax under Section 125 of the
NIRC.
Cigarettes and cigarettes are not considered
food or essential items subject to the 20%
discount. Toll fees are not the same as fares, so
they are not subject to the 20% Senior Citizen
Discount.
Sample Computation of Discount and
Amount Due
The VAT on the sale of goods and
services with sales discounts granted to senior
citizens and PWDs is calculated using a
formula. The seller's gross sales or receipts are
undercounted, and the discount is reported as a
deduction from their gross income. The seller's
journal entries should be as follows:
SELLER IS NOT SUBJECT TO VAT
The 20% sales discount granted to
non-VAT sellers, subject to Percentage Tax
under Sec 116, is calculated by subtracting the
undisputed amount of P1,00 from the gross
sales or receipts. The discount is reported as a
deduction from the sellers' gross income, not as
a total of gross sales or receipts.
INPUT CAT ATTRIBUTABLE TO SALE
TO SCs and PWDs
The VAT exempt sale input tax is
considered a cost or expense account for
business establishments and is not eligible for
an input tax credit.
EXEMPTION FROM PERCENTAGE TAX
The Magna Carta Law of Senior
Citizens and PWDs offers vat exemption for
certain goods and services, but does not cover
the payment of Percentage Tax.
GRANT OF 5% SPECIAL DISCOUNT
FOR SENIOR CITIZENS (RR-7-2010 as
amended by RR-8-2010 and RMC 38-2012)
The DTI-DA Administrative Order
No. 10-02, series of 2010, grants a special
discount of 5% on the regular retail price of
basic necessities and prime commodities for
senior citizens. These discounts are for personal
and exclusive consumption and enjoyment.
Basic necessities include rice, corn, bread, fish,
pork, beef, and poultry meat, eggs, milk,
vegetables, coffee, sugar, cooking oil, salt,
soap, firewood, charcoal, and candles. Prime
commodities include fresh fruits, flour, dried,
processed, and canned pork, beef, and poultry
meat, dairy products not falling under basic
necessities, canned sardines, tuna, noodles,
onions, garlic, geriatric diapers, herbicides,
poultry, swine, and cattle feeds, veterinary
products, nipa shingle, plyboard, construction
nails, batteries, electrical supplies, light bulbs,
and steel wire. Retailers, including
supermarkets, grocer/convenience stores, and
shops, are not exempt from VAT. The total
purchase amount must not exceed P1,300 per
calendar week without carrying over the unused
amount. A purchase booklet issued by OSCA
must be presented to the retailer upon purchase
of basic necessities and prime commodities.
5% Special Discount to PWDs (RR 9-2019)
PWDs can receive a 5% discount on
basic necessities and prime commodities, up to
P1,300 per week, without exemption from
value-added tax. The discount is valid for
purchases not exceeding P1,300 per week, and
must be spent on items for personal exclusive
consumption within the week. The discount is
not applicable to unused items. At least four
types of items are eligible for the discount.
Deduction from the gross Income of the
Seller
The seller/establishment can claim a
discount of 20% or 5% to SCs and PWDs as a
deduction from gross income, based on the net
cost of goods or services. However, the cost of
the discount must be allowed as a deduction,
and the total tax deduction net of value-added
tax must be included in gross sales receipts and
complied with the National Internal Revenue
Code.
Prohibition on the availment of double
discounts
Senior citizens and persons with
disabilities (PWD) can only claim a single 20%
discount on transactions, and the same rule
applies to 5% discounts on basic necessities
and prime commodities. These discounts
cannot be combined with higher discounts
granted by commercial establishments or
existing laws. SC/PWD can avail of either the
promotional discount or the 20%/5% discount,
whichever is higher. However, the discount
must not be less than 20%/5%.
COMPUTATION OF VAT AND
DISCOUNT granted to National Athletes
and Coaches (RA10966, as amended)
Under RR 13-2022, qualified National
Athletes and Coaches are entitled to a 20%
sales discount on goods and services sold for
their actual and exclusive use or enjoyment.
This discount is exclusive of VAT on the sale of
these goods and services. The discount is
applicable to transportation services, hotels,
resorts, restaurants, medicine and drug
purchases, recreation centers, sports equipment
purchases, and admission fees.
Vat on the sale of goods and services with sales
discounts granted by business establishments is
computed using a formula. Establishments
granting discounts to qualified National
Athletes and Coaches can deduct the sales
discount from their gross income, subject to
conditions provided under RR 13-2020. For
percentage tax sellers, the sales discount is
included for computing the Percentage Tax and
is included as part of the gross sales and
receipts for income taxation purposes.
However, the sales discount granted must be
accounted as a deduction from the
establishment's gross income for the same based on their gross sales or receipts. The
taxable year. monthly vat return must be filed and paid
The gross selling price and the sales discount within 20 days of the end of each month, while
must be separately indicated in the official the quarterly vat return must be filed and paid
receipt or sales invoice issued by the within 25 days of the close of each taxable
establishment for the sale of goods or services quarter. The term "taxable quarter" refers to the
to qualified National Athletes and Coaches. quarter that aligns with the taxpayer's income
Only the actual amount of sales discount not tax quarter. Starting January 1, 2023, filing and
exceeding 20% of the gross selling price or payment must be done 25 days after the end of
gross receipts can be deducted from the gross each taxable quarter. If a person's registration
income, net of VAT, and must be subject to has been called, they must file and pay the tax
proper documentation. due within 25 days of the cancellation of
registration. Only one consolidated return must
Prohibition on the availment of double be filled for their principal place of business or
discounts head office and all branches.
The privileges mentioned are not
applicable if the National Athletes and Coaches
claim a higher promotional discount from a
commercial establishment or other existing
laws, or when combined with other discount
programs. Senior citizens or persons with
disabilities (PWD) can only claim a single 20%
discount on a sale transaction.
MIXED BUSINESS TRANSACTION
A Vat registered person can engage in
mixed business transactions, which include
subject to vat, zero-rated vat, and vat exempt
transactions. The main concern in mixed
business transactions is the allocation or
apportionment. A vat registered person can
receive input tax credit for total input tax
directly attributed to vat transactions and the
ratable portion of input tax not directly
attributed to either activity, based on sales
volume.
FILING OF VAT RETURNS (Sec. 114(A))
The Tax Code requires individuals to
file and pay monthly and quarterly vat returns