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9/18/14

TAX 2
VAT

INTRODUCTION

A"y. Terence Conrad H. Bello

A. Features of VAT

A. Features of VAT

1. Essen?al Features of VAT:


a. Tax on consump?on

2. Method of collec?ng VAT through the tax credit


method
Input tax is credited against output tax to arrive at
net VAT payable (net VAT payable is eec?vely the
tax on the value added)
Illustra(on: tax credit method and tax on value
added
Assume there are four rms (1) a logging
concessionaire who also manufactures lumber, (2) a
furniture manufacturer, (3) a furniture wholesaler,
and (4) a furniture retailer who sells furniture to the
end consumer, which is the household

b. Limited to value added


c. It is an indirect tax

A"y. Terence Conrad H. Bello

Slide No. 3

A. Features of VAT

Taxpayer

A"y. Terence Conrad H. Bello

Slide No. 4

A. Features of VAT

Sales

Value Output

Price

Added

Tax

Input

VAT

Tax

Payable

Concessionaire

10.00 10.00 1.00

Manufacturer

25.00 15.00 2.50 1.00 1.50

Wholesaler

40.00 15.00 4.00 2.50 1.50

Retailer

50.00 10.00 5.00 4.00 1.00

Household: purchase price (P50) + VAT (P5) = P55

- 1.00

5.00

* For illustra,on purposes only, the VAT rate used in the example is 10%
(the rate now is 12%)
A"y. Terence Conrad H. Bello

Slide No. 5

3. Output and Input


a. The VAT on the concessionaires sale of lumber is known as
output tax
b. The output tax, when it is passed on the purchaser who
manufactures the lumber into furniture, becomes the
manufacturers input tax
c. The sale of furniture by the manufacturer to the wholesaler
is likewise subject to VAT (output tax); however, he is
en?tled to deduct from such output tax, the input tax which
is shiYed to him by the concessionaire
4. Basic formula:
Output tax (12% or 0%)
Less: input tax_______
VAT Payable
A"y. Terence Conrad H. Bello

Slide No. 6

9/18/14

A. In General

I.

1. Taxable transac?ons covered:


a. Sale of goods or proper?es (in the course of T or
B)
b. Importa?on of goods (W/N in the course of T or
B)
c. Sale of services (in the course of T or B)
2. General requirements (sale of goods and services)
a. There is a sale (of goods or services); AND
b. The sale is made in the course of trade or
business

TAXABLE TRANSACTIONS

A"y. Terence Conrad H. Bello

A. In General; 1st Requirement; There is a Sale

Slide No. 9

A. In General; 1st Requirement; There is a Sale

2. Illustra?ve cases
See also Tourist Trade and Travel Corp. v. CIR
wherein reimbursements received by a mall owner
for advances it had made for the payment of electric,
water, and telephone bills and for the janitorial
services provided were held to be not subject to VAT
since the TP was not engaged in the business of
providing electricity, water, security and janitorial
services to the lessees
Court reasoned that it is not TP who directly supplied
electricity, water and similar other goods to the
lessees, neither did it render security and janitorial
services
A"y. Terence Conrad H. Bello

Slide No. 10

A. In General; 2nd Requirement; Sale is in the Course of Trade or Business

2. Illustra?ve cases
See, however, VAT Rul. 18-98, wherein an HMO was

considered as engaged in business as a service


contractor and was held liable to pay VAT although
the actual health care services were rendered by
independent health care providers
In Tourist Trade, the TP therein was neither selling
electricity, water, etc. nor rendering janitorial and
security services
In VAT Rul. 18-98, the TP therein sold health care
services through independent third par?es who
actually performed the service on the TPs behalf
A"y. Terence Conrad H. Bello

Slide No. 8

A. In General; 1st Requirement; There is a Sale

1. In order for a transac?on to be subjected to VAT, it is essen?al


that there is a sale of goods or services
2. Illustra?ve cases
VAT Rul. No. 26-97
TP shares the same building with 2 or more subsidiaries
Being the nominal party-lessee (i.e., lessee-of-record), TP
advances the payment of rent to the lessor, then seeks
reimbursement from its co-lessees (the subs) for their
propor?onate share of the rent, without mark-up or prot
element (i.e., reimbursement-of-cost basis)
Same treatment for other expenses such as security, building
maintenance and u?li?es (TP advances the expenses then
seeks reimbursement from the subs)
Ruling: reimbursements not subject to VAT since TP does not
sell, barter, exchange or lease goods or property or renders
services
A"y. Terence Conrad H. Bello

A"y. Terence Conrad H. Bello

Slide No. 11

1. An important requirement for imposi?on of VAT is that


the sale or transac?on has been entered into in the
course of any business carried on by the TP
2. The phrase in the course of trade or business means:
the regular conduct or pursuit of a commercial or an
economic ac?vity
including transac?ons incidental thereto
regardless of W/N the person engaged therein is a
non-stock, non-prot private organiza?on
(irrespec?ve of the disposi?on of its net income and
whether or not it sells exclusively to members or
their guests), or government en?ty ( 105)
A"y. Terence Conrad H. Bello

Slide No. 12

9/18/14

A. In General; 2nd Requirement; Sale is in the Course of Trade or Business

3. Thus the phrase in the course of trade or business connotes


REGULARITY
Thus, a non-stock corpora?on whose primary purpose is to
engage in research ac?vi?es and to provide services (for a fee)
in community organiza?on, development planning and
development livelihood, development communica?on and
rural resource management was held subject to VAT. BIR Rul.
1-94, Jan. 4, 1994
On the other hand, the factor of regularity was absent in BIR
Rul. 98-97, Aug. 28, 1997, which involved a manufacturer and
exporter of goods that received a considera?on for agreeing
to pre-terminate its lease contract and to cancel its purchase
op?on over the leased premises. The BIR ruled that the lease
pre-termina?on and cancella?on of purchase op?on does not
cons?tute a sale, barter or exchange of goods or proper?es in
the course of trade or business of TP which is engaged in the
manufacture and expor?ng of goods
A"y. Terence Conrad H. Bello

Slide No. 13

A. In General; 2nd Requirement; Sale is in the Course of Trade or Business

5. Is prot mo?ve/element essen?al for taxability? No


CIR v. Commonwealth Mgt. & Services Corp.
TP is an aliate of Philamlife organized by the la"er to
perform collec?on, consulta?ve and other technical
services, including func?oning as an internal auditor of
Philamlife and its other aliates
TP assessed by the BIR for deciency VAT
Conten?ons of TP:
It was not engaged in the business of providing services
to its aliates since the services were on a no prot,
reimbursement-of-cost basis only; not prot oriented
= not engaged in business
In fact it did not generate prot but suered a net loss
during the tax year at issue
In the course of T or B requires that the business is
carried on with a view to prot or livelihood
A"y. Terence Conrad H. Bello

Slide No. 15

A. In General; 2nd Requirement; Sale is in the Course of Trade or Business

5. Is prot mo?ve/element essen?al for taxability? No


CIR v. Commonwealth Mgt. & Services Corp.
Hence, it is immaterial whether the primary purpose of a
corpora?on indicates that it receives payments for
services rendered to its aliates on a reimbursement-on-
cost basis only, without realizing prot, for purposes of
determining liability for VAT on services rendered
As long as the en?ty provides service for a fee,
remunera?on or considera?on, then the service rendered
is subject to VAT
The services of TP do not fall within the 109
enumera?on of exempt transac?ons
A"y. Terence Conrad H. Bello

Slide No. 17

A. In General; 2nd Requirement; Sale is in the Course of Trade or Business

5. Is prot mo?ve/element essen?al for taxability?


No. Thus, a company that intends to establish a consumer
store for the benet of its employees where there will be no
value added to the goods sold because they will be sold at cost
was held liable to VAT. The absence of prot and value added
to the goods sold does not make a person opera?ng a
consumer store selling basic commodi?es at cost exempt from
VAT. VAT Rul. No. 444-88, Sept. 13, 1988
In BIR Rul. 10-98, Feb. 5, 1998, the BIR ruled that a TP whose
primary purpose as set forth in its AOI is to provide technical,
research, management and personnel assistance to aliates
on a reimbursement-of-cost basis (i.e., no mark-up or prot
element) is subject to VAT
the phrase sale or exchange of services includes, among
others, the supply of technical service, assistance or
services rendered in connec?on with technical mgt or
administra?on of any scien?c, industrial or commercial
undertaking, project or scheme
A"y. Terence Conrad H. Bello

Slide No. 14

A. In General; 2nd Requirement; Sale is in the Course of Trade or Business

5. Is prot mo?ve/element essen?al for taxability? No


CIR v. Commonwealth Mgt. & Services Corp.
Issue: Whether TP was engaged in the sale of service, thus
liable for VAT
Held: Liable for VAT
Even a non-stock, non-prot organiza?on or government en?ty
is liable to pay VAT on the sale of goods or services
VAT is a tax on transac?ons, imposed at every stage of the
distribu?on process on the sale, barter, exchange of goods or
property, and on the performance of services, even in the
absence of prot a"ributable thereto
The term in the course of trade or business requires the
regular conduct or pursuit of a commercial or an economic
ac?vity, regardless of whether or not the en?ty is prot-
oriented
A"y. Terence Conrad H. Bello

Slide No. 16

A. In General; 2nd Requirement; Sale is in the Course of Trade or Business; Incidental


Transac?on vs. Isolated Transac?on

1. By express provision of law ( 105), incidental transac?ons are


considered as undertaken in the course of business
Incidental means depending upon or appertaining to
something else as primary; something necessary,
appertaining to, or depending upon another which is termed
the principal
Hence, the sale by a garments manufacturer of a motor
vehicle assigned to its GM is subject to VAT
The sale of the motor vehicle is an incidental transac?on
because the vehicle was purchased and used in
furtherance of the TPs business. CS Garments v. CIR,
CTA Case 6520, Jan. 4, 2007
Posi?on adopted by BIR in RMO 15-2011 when it
revoked rulings exemp?ng sale of company car from VAT
A"y. Terence Conrad H. Bello

Slide No. 18

9/18/14

A. In General; 2nd Requirement; Sale is in the Course of Trade or Business; Incidental


Transac?on vs. Isolated Transac?on

2. However, the BIR (and even the courts) in certain


instances exempted from VAT the sale of property used
in business supposedly because the sale was an isolated
transac?on
See BIR Rul. 113-98, where the BIR ruled that the
sale by a telecom company of its microwave
backbone transmission network to another wireless
communica?ons carrier is not in the course of the
TPs trade or business of selling telecommunica?on
services
The BIR explained that the sale is not subject to
VAT because it is an isolated transac?on; and
that the transac?on does not necessarily follow
the primary func?on of selling telecom services
A"y. Terence Conrad H. Bello

Slide No. 19

A. In General; 2nd Requirement; Sale is in the Course of Trade or Business; Incidental


Transac?on vs. Isolated Transac?on

Lapanday Food Corp. v. CIR


Interest income derived by a parent company
from intercompany loans to aliates, as a form
of nancial assistance, is considered services
incidental to the parents business and, thus,
subject to VAT

A"y. Terence Conrad H. Bello

Slide No. 21

A. In General; 2nd Requirement; Sale is in the Course of Trade or Business; Incidental


Transac?on vs. Isolated Transac?on

3. The mere fact that a transac?on is isolated will not


necessarily disqualify it from being made incidentally in
the course of trade or business
4. Thus, an isolated transac?on -- if at the same ?me is
an incidental transac?on -- will be characterized as
entered into in the course of trade or business,
hence, subject to VAT

A"y. Terence Conrad H. Bello

Slide No. 23

A. In General; 2nd Requirement; Sale is in the Course of Trade or Business; Incidental


Transac?on vs. Isolated Transac?on

See also Magsaysay Lines, Inc. v. CIR, CTA Case No. 4353, April
27, 1992, a. in G.R. No. 146984, July 28, 2006, where the
court held that the sale by a property lessor, a GOCC, of its
vessels held out for lease in line with the governments
priva?za?on program is not subject to VAT
Court held that the sale was an isolated transac?on; the
sale which was involuntary and made pursuant to the
declared policy of government for priva?za?on could no
longer be repeated or carried on with regularity; it should
be emphasized that the normal VAT-registered ac?vity of
the TP is leasing personal property; the sale of the vessels
as such are not necessary to carry out the TPs primary
func?on of leasing personal proper?es
Without analysis, the court held that the sale was not
incidental to the TPs normal business of leasing property
([t]he act of selling capital assets does not necessarily
follow the act of leasing these assets)

A"y. Terence Conrad H. Bello

Slide No. 20

A. In General; 2nd Requirement; Sale is in the Course of Trade or Business; Incidental


Transac?on vs. Isolated Transac?on

Mindanao II Geothermal Partnership v. CIR


However, it does not follow that an isolated transac?on
cannot be an incidental transac?on for purposes of VAT
liability
A reading of Sec?on 105 of the 1997 Tax Code would show
that a transac?on in the course of trade or business
includes transac?ons incidental thereto
Mindanao IIs business is to convert the steam supplied to it
by PNOC-EDC into electricity and to deliver the electricity to
NPC. In the course of its business, Mindanao II bought and
eventually sold a Nissan Patrol. Prior to the sale, the Nissan
Patrol was part of Mindanao IIs property, plant, and
equipment. Therefore, the sale of the Nissan Patrol is an
incidental transac?on made in the course of Mindanao IIs
business which should be liable for VAT
A"y. Terence Conrad H. Bello

Slide No. 22

B. Sale of Goods or Proper?es

1. Sec. 106: there shall be levied, assessed and


collected on every sale, barter or exchange of goods
or proper?es, a value-added tax equivalent to 12%
of the gross selling price
2. What are the taxable transac?ons covered by
106?
a. Actual sales
b. Deemed sale transac?ons
c. Changes in or cessa?on of status of a VAT-
registered person

A"y. Terence Conrad H. Bello

Slide No. 24

9/18/14

B. Sale of Goods or Proper?es: Actual Sale

B. Sale of Goods or Proper?es: Deemed Sale Transac?ons

1. A sale is a transfer of goods to another either (a) for


cash or on credit, or (b) partly for cash and partly for
credit
2. Covers sales, barters and exchanges
3. VAT accrues upon consumma?on of the sale,
regardless of the terms of payment between the
contrac?ng par?es (implicit in the deni?on of gross
selling price, which includes money or money
equivalent which the purchaser is obligated to pay);
unlike sale of services wherein VAT accrues only upon
payment of considera?on (when the gross receipts
are actually or construc?vely received by the seller)
A"y. Terence Conrad H. Bello

Slide No. 25

B. Sale of Goods or Proper?es: Deemed Sale Transac?ons

To recapture/recoup claimed input tax


a"ributable to the taxable goods withdrawn for
personal or non-business use

Slide No. 27

B. Sale of Goods or Proper?es: Deemed Sale Transac?ons

Slide No. 26

4. Illustra?on of input tax recapture:


TP bought merchandise (say 10 t-shirts) for P1,000; VAT
of P100 was passed on to him by the store that sold him
the t-shirts (total purchase price therefore is P1,100); TP
intends to sell the t-shirts @ P220 each for a total of
P2,200 (VAT inclusive). For the sale of the t-shirts, TP has
a VAT payable of P100 (P200 output less P100 input)
Instead of selling everything, TP withdraws for his
personal use 3 t-shirts and sold the remaining 7 t-shirts;
without the deemed sale provisions, TP has a VAT
payable only of P40 (output of P140 less input of P100)
Without deemed sale provisions, government foregoes
P60 of VAT revenue
With the deemed sale provisions, government is
restored to P100 VAT posi?on
A"y. Terence Conrad H. Bello

Slide No. 28

B. Sale of Goods or Proper?es: Changes in or Cessa?on of Status of VAT-Registered TP

5. Examples of deemed sale transac?ons:


106(B)(1) Mr. K sells household furniture; he removes from
his store a living room set for use in his residen?al house
106(B)(2)(a) J Co. declared a property dividend out of
inventory
106(B)(2)(b) M Co. is indebted to N Co. for raw materials;
when M Co. could not pay in money, N Co. agreed to a dacion
of the nished goods in payment of the indebtedness
106(B)(3) TP sold goods on consignment to A, with ?tle to
the goods passing only upon sale to a buyer; 65 days aYer
consignment, goods s?ll unsold by A
106(B)(4) - P & Co. was a taxable partnership; P & Co. was
dissolved and Q & Co. was formed to con?nue the business of
P & Co; at the ?me that P & Co. was dissolved, its books of
accounts showed a merchandise inventory of P100,000; the
inventory is deemed sold by P & Co. upon dissolu?on
A"y. Terence Conrad H. Bello

A"y. Terence Conrad H. Bello

B. Sale of Goods or Proper?es: Deemed Sale Transac?ons

3. Ra?onale for taxing deemed sale


transac?ons:

A"y. Terence Conrad H. Bello

1. VAT on goods and proper?es not limited to actual sales; also


covers certain transac?ons which the law deems as if it was an
actual sale, hence, subject to VAT
2. What are the deemed sale transac?ons?
a. Transfer, use or consump?on not in the course of business of
goods or proper?es originally intended for sale or use in the
course of business
b. Distribu?on or transfer to (i) shareholders or investors as
share in the prots of the VAT-registered TP; or (ii) creditors in
payment of debt
c. Consignment of goods if actual sale is not made within 60 days
d. Re?rement from or cessa?on of business with respect to
inventories of taxable goods exis?ng as of such re?rement or
cessa?on ( 106(B))

Slide No. 29

1. VAT also applies to goods disposed of or exis?ng under certain


circumstances
Example: change of business ac?vity from VAT-taxable
status to VAT-exempt status
Illustra?on: VAT-registered person engaged in a taxable
ac?vity like wholesaler or retailer who decides to
discon?nue such ac?vity and engages instead in life
insurance business or in any other business not subject
to VAT
Goods exis?ng as of the change in status from VATable
to VAT-exempt become subject to VAT even in the
absence of an actual sale
Ra,onale: same as deemed sale transac?ons (input tax
recapture)
A"y. Terence Conrad H. Bello

Slide No. 30

9/18/14

B. Sale of Goods or Proper?es: Taxable Base; Gross Selling Price

B. Sale of Goods or Proper?es: Taxable Base; Gross Selling Price

1. Taxable base means the amount or the value on which


the VAT rate will be applied in compu?ng the output tax
For a taxable person who sells goods or proper?es,
the taxable base is the gross selling price
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 considera?on of
the sale, barter or exchange of the goods or
proper?es, excluding VAT. The excise tax, if any, on
such goods or proper?es shall form part of the gross
selling price.
Special rules for sale of real property (FMV or zonal
value, whichever is higher; taxable base for VAT may
be accounted for under the instalment method)
A"y. Terence Conrad H. Bello

Slide No. 31

B. Sale of Goods or Proper?es: Taxable Base; Gross Selling Price; Sales Discount,
Returns, & Allowance
1. Sales discounts and returns and allowances as allowable deduc?ons from
gross selling price
a. For sales discounts discount must be indicated in the invoice at the
?me of sale, the grant of which is not dependent upon the happening of
a future event
Illustra,on: TP grants discounts to ice cream houses in the form of
rebates for mee?ng monthly sales quota; rebates are determined only
at the end of the month
Answer: Deduc?on not allowed. Discounts condi?oned upon the
subsequent happening of an event or fulllment of certain condi?ons,
such as prompt payment or a"ainment of sales goals, shall not be
allowed as deduc?ons. Only discounts granted and determined at the
?me of sale which are indicated in the invoice are allowed as
deduc?ons from the gross selling price. BIR Rul. No. 204-90
b. For sales returns and allowances proper credit or refund was made
during the month or quarter to the buyer for sales previously recorded
as taxable sales
A"y. Terence Conrad H. Bello

Slide No. 33

C. Importa?on of Goods

A"y. Terence Conrad H. Bello

Slide No. 32

B. Sale of Goods or Proper?es: Taxable Base; Deemed Sales, Re?rement and


Cessa?on, Below Market GSP

1. Transac?ons deemed sale - output tax shall be based on


the market value of the goods deemed sold as of the
?me of the occurrence of the deemed sale transac?ons
enumerated in Sec. 4.106-7(a)(1),(2), and (3)
2. Re?rement or cessa?on of business - tax base shall be
the acquisi?on cost or the current market price of the
goods or proper?es, whichever is lower
3. Sale where the gross selling price is unreasonably lower
than FMV - the actual market value shall be the tax base
Meaning of unreasonably lower - if GSP is lower by
more than 30% of the actual market value of the
same goods of the same quan?ty and quality sold in
the immediate locality on or nearest the date of sale
A"y. Terence Conrad H. Bello

Slide No. 34

C. Importa?on of Goods

1. In general - VAT is imposed on goods brought into the


Philippines, whether for use in business or not
2. Tax base VAT is based on the total value used by the
BOC in determining tari and customs du?es, plus
customs du?es, excise tax, if any, and other charges,
such as postage, commission, and similar charges, prior
to the release of the goods from customs custody
3. If du?es based on volume or quan?ty - landed cost shall
be the basis for compu?ng VAT. Landed cost consists of
the invoice amount, customs du?es, freight, insurance
and other charges. If the goods imported are subject to
excise tax, the excise tax shall form part of the tax base
A"y. Terence Conrad H. Bello

2. Timing issues; when VAT accrues computa?on of


taxable base for sales of goods or proper?es is
dierent from that of supply of services
Sale of goods or proper?es generally requires the
use of the accrual method on the basis of the
statutory deni?on of gross selling price (total
amount of money or its equivalent that the
purchaser pays or is obligated to pay to the seller)
Sale of services cash method of accoun?ng,
which means the considera?on is taxable only
upon actual or construc?ve receipt, regardless of
W/N the service has been rendered (see statutory
deni?on of gross receipts)

Slide No. 35

4. Importa?on of 109(1) exempt goods no VAT


5. Time for payment prior to release from customs
custody

A"y. Terence Conrad H. Bello

Slide No. 36

9/18/14

D. Sale of Services; Meaning of Sale or Exchange of Services

D. Sale of Services; Requirements for Taxability

1. Sale or exchange of services - means the


performance of:
all kinds of services
in the Philippines
for others for a fee, remunera?on or
considera?on, whether in kind or in cash
including those performed or rendered by certain
persons and those involving certain transac?ons
enumerated under the law (see enumera?on;
enumera?on is not exclusive; see Lhuiller v. CIR)
and similar services regardless of whether or not
the performance thereof calls for the exercise or
use of the physical or mental facul?es
A"y. Terence Conrad H. Bello

Slide No. 37

D. Sale of Services; Requirements for Taxability; Place of Performance Rule

1. As a statutory principle, all kinds of services performed in


the Philippines are subject to VAT at the rate of 12% or 0%
2. Services performed outside the Philippines, even if
undertaken in the course of business, are beyond the
scope of VAT, therefore, not subject to VAT
The place where the service is performed determines
the jurisdic?on to impose VAT (place of payment is
immaterial since the situs of the service is determined
by the place where the service is performed)
Thus, marke?ng ac?vi?es of a realty broker in the U.S.
to en?ce OFWs to buy condo units in the Philippines
held not subject to VAT since services were rendered
outside the Philippines. BIR Rul. 110-97
A"y. Terence Conrad H. Bello

Slide No. 39

What are the requirements for the taxability of sale of


services?
The service must be in the course of trade or
business;
Note: services rendered in the Philippines by non-
resident foreign persons are considered as having
been rendered in the course of trade or business
The service must be performed in the Philippines;
and
The considera?on is actually or construc?vely
received
A"y. Terence Conrad H. Bello

Slide No. 38

D. Sale of Services; Requirements for Taxability; Place of Performance Rule

Legal services performed by a U.K. law rm in


the U.K. and in the U.S. for the Republic of the
Philippines in an arbitra?on case in Washington,
DC not subject to VAT. ITAD Rul. 154-02

A"y. Terence Conrad H. Bello

Slide No. 40

D. Sale of Services; Taxable Base; Gross Receipts Actually & Construc?vely Received

D. Sale of Services; Taxable Base; Gross Receipts Actually & Construc?vely Received

1. Deni?on of gross receipts


refers to the total amount of money or its equivalent
represen?ng the contract price, compensa?on,
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 construc?vely received during the taxable
period
for the services performed or to be performed for
another person,
excluding VAT

2. Although taxable transac?on is past, present, or future


performance of service tax accrues upon actual or
construc?ve receipt
3. Tax accoun?ng cash method (not accrual method)
4. Construc?ve receipt occurs when the money
considera?on or its equivalent is placed at the control of
the person who rendered the service without
restric?ons by the payor. Examples:
Deposit in banks which are made available to the
seller of services without restric?ons;
Issuance by the debtor of a no?ce to oset any debt
or obliga?on 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

A"y. Terence Conrad H. Bello

Slide No. 41

A"y. Terence Conrad H. Bello

Slide No. 42

9/18/14

D. Sale of Services; Taxable Base; Gross Receipts Actually & Construc?vely Received;
Inclusions and Exclusions

D. Sale of Services; Taxable Base; Gross Receipts Actually & Construc?vely Received;
Inclusions and Exclusions

1. Includes:
Contract price, compensa?on, service fee, rentals or
royal?es
Amount charged for materials supplied with the services
Deposits and advance payments
2. Thus, gross receipts includes amounts billed to clients
intended to recover costs and expenses (e.g., salaries and
wages due to employees, due the government, deprecia?on
of equipment, supplies, overhead, etc.) as well as the prot
mark-up. VAT Rul. No. 111-88
3. Includes management fee (based on prots of managed
company), expenses incurred in connec?on with services
rendered, and reimbursement by managed company of
salaries and fringe benets of seconded employee. VAT Rul.
No. 205-90

4. Excludes, however, receivables (i.e., por?on of the


contract price not yet actually or construc?vely
received). BIR Rul. No. 195-89
5. Also excludes amounts earmarked for payment to third
par?es as well as reimbursement of out-of-pocket
expenses (under certain condi?ons)
Thus, amounts received by a local travel agent from
foreign tourist agencies which formed part of the
package fee paid by the tourists but were intended
or earmarked for hotel room accommoda?ons and
accordingly paid by the local travel agency to the
hotels not subject to VAT
Gross receipts do not include monies or receipts
entrusted to the TP which do not belong to them
and do not redound to the TPs benet. CIR v. Tours
Specialists, Inc.

A"y. Terence Conrad H. Bello

Slide No. 43

A"y. Terence Conrad H. Bello

Slide No. 44

A. Zero Ra?ng vs. Exemp?on

1. Basic principle: a seller who is directly and legally liable


for the payment of VAT on goods and services is not
necessarily the person who ul?mately bears the burden
of the tax
It is the nal purchaser or consumer of such goods
and services who ul?mately bears the burden of the
VAT (VAT being an indirect tax)
2. From the perspec?ve of the nal consumer, VAT zero-
ra?ng and VAT exemp?on both oer some relief from
the burden of taxa?on, but the degree or extent of
relief is dierent
3. VAT exemp?on oers par?al relief from the VAT
incidence, while VAT zero-ra?ng oers total relief from
the VAT incidence (see CIR v. Seagate Tech.)

II. RELIEF FROM VAT

A"y. Terence Conrad H. Bello

45

A. Zero Ra?ng vs. Exemp?on

Slide No. 46

A. Zero Ra?ng vs. Exemp?on

4. Why is the degree of relief dierent?


a. VAT exemp?on (par?al relief)
the transac?on is not subject to VAT (output tax)
but the seller is not allowed any tax credit of VAT
(input tax) on purchases
b. VAT zero-ra?ng (total relief)
the zero-rated sale of goods or services (by a
VAT-registered person) is a taxable transac?on
for VAT purposes, but shall not result in any
output tax (because the output tax rate is 0%)
However, the input tax on purchases of goods,
proper?es or services related to such zero-rated
sale shall be available as tax credit or refund
5. Illustra?on: assume there are 3 sellers A, B, C and a nal
purchaser, D
A"y. Terence Conrad H. Bello

A"y. Terence Conrad H. Bello

Slide No. 47

EXEMPT
VAT on selling price

ZERO-RATED
0 VAT on selling price

Purchase Price

100 Purchase Price

100

VAT passed on

12 VAT passed on

12

Total amt. charged

A"y. Terence Conrad H. Bello

112 Total amt. charged

112

Refund

(12)

Net amount

100

Slide No. 48

9/18/14

B. Zero-Rated Transac?ons

B. Zero-Rated Transac?ons

Objec?ve of zero-ra?ng: to make exporters


compe??ve interna?onally through VAT relief
Two ways to grant relief:
Exporters sale is subject to 0% rate and is
allowed a refund or credit of input tax passed
on to exporter by his supplier (automa?c
zero ra?ng)
Supplier of exporter is eec?vely zero-rated
where his sale to the exporter is subject to
0% rate

A"y. Terence Conrad H. Bello

Slide No. 49

B. Zero-Rated Transac?ons

Supplier

VAT
Total amt. charged
to exporter

Exporter

Customer

100 VAT on sale to


Customer

0 Purchase price

0 Purchase price

100 VAT passed on

100 VAT passed on


Total amt. charged
by supplier
Refund

200
0

0 Total amt. charged


by exporter

200

100
-

Eec?vely, the privilege of zero-ra?ng is extended to


suppliers of the exporter

A"y. Terence Conrad H. Bello

Slide No. 51

B. Zero-Rated Transac?ons

7. Foreign currency denominated sale ( 106(A)(2)(b))


Sale of goods assembled or manufactured in the Phil. For


delivery to a Phil. resident
e.g., sale of locally manufactured car to OFWs for
delivery to Philippine residents (e.g., family of OFWs in
the Phils.)

8. Sales to persons or en??es whose exemp?on under


special laws or intl agreements eec?vely subjects
such sales to 0% rate ( 106(A)(2)(c)) (e.g., SMBA,
PEZA, ADB, IRRI)
A"y. Terence Conrad H. Bello

VAT
Total amt. charged
to exporter

Exporter

Customer

100 VAT on sale to


Customer

0 Purchase price

12 Purchase price

100 VAT passed on

112 VAT passed on

A"y. Terence Conrad H. Bello

200
0

12 Total amt. charged


by exporter

Total amt. charged


by supplier

112

Refund

(12)

Net amount

100

200

Slide No. 50

Sale of Goods:
1. Actual export sale ( 106(A)(2)(a)(1)) considera?on in
FX, accounted for in accordance with BSP rules and regs.
2. Sale of raw materials or packaging materials to a
nonresident buyer for delivery to a resident local
export-oriented enterprise ( 106(A)(2)(a)(2))
considera?on in FX, accounted for in accordance with
BSP rules and regs.
3. Sale of raw/packaging materials to export-oriented
enterprises ( 106(A)(2)(a)(3)) export sales must
exceed 70% of total annual prodn
4. Sale of gold to BSP ( 106(A)(2)(a)(4))
5. Those considered export sales under the Omnibus
Investments Code ( 106(A)(2)(a)(5))
A"y. Terence Conrad H. Bello

Slide No. 52

B. Zero-Rated Transac?ons

Sale of Goods:
6. Sale of goods, supplies, equipment and fuel to
interna?onal vessels or air carriers ( 106(A)(2)(a)(6))

Supplier

Selling Price

B. Zero-Rated Transac?ons

Eec?ve zero-ra?ng:

Selling Price

Automa?c zero-ra?ng:

Slide No. 53

Sale of Services:
1. Processing, mfg. or repacking goods for other persons doing
business outside the Philippines which goods are
subsequently exported ( 108(B)(1)) - considera?on in FX,
accounted for in accordance with BSP rules and regs.
2. Services other than those men?oned in no. 1 rendered to
nonresidents ( 108(B)(2)) - considera?on in FX, accounted
for in accordance with BSP rules and regs.
CIR v. AMEX
CIR v. Burmeister & Wain Scandinavian
3. Services rendered to persons or en??es whose exemp?on
under special laws or intl agreements eec?vely subjects
such services to 0% rate ( 108(B)(3))
A"y. Terence Conrad H. Bello

Slide No. 54

9/18/14

B. Zero-Rated Transac?ons

C. Exempt Transac?ons

Sale of Services:
4. Services rendered to interna?onal vessels or air carriers,
including leases of property ( 108(B)(4))
5. Services performed by contractors or subcontractors in
processing, conver?ng, or manufacturing goods for
export-oriented enterprises ( 108(B)(5)) - export sales
must exceed 70% of total annual prodn
6. Transport of passengers and cargo by interna?onal
carriers ( 108(B)(6))
7. Sale of power or fuel generated through renewable
sources of energy ( 108(B)(7))
A"y. Terence Conrad H. Bello

Slide No. 55

C. Exempt Transac?ons

A"y. Terence Conrad H. Bello

Slide No. 56

C. Exempt Transac?ons

2. What is the coverage of the exemp?on?


a. General rule:
Exemp?on covers only taxes for which party favored
by the exemp?on is directly liable; exemp?on does
not extend to indirect taxes like VAT
Being an indirect tax, once VAT is shiYed to the
buyer, it is no longer a tax but an addi?onal cost
which becomes a part of the amount of the contract
price to be paid by the buyer. Phil. Acetylene Co., Inc.
v. CIR; Phil. Natl Police Mul(-Purpose Coopera(ve,
Inc. v. CIR; BIR Rul. No. 155-98; BIR Rul. No. 47-99

A"y. Terence Conrad H. Bello

1. See enumera?on under 109(1) (memorize!)


Sale or importa?on of marine or food products in their
original state
Sale or importa?on of fer?lizers; seeds, seedlings and
ngerlings; etc.
Importa?on of personal and household eects of returning
residents
Services subject to percentage tax
Medical, dental, hospital and veterinary services, except
those rendered by professionals (e.g., doctors, den?sts, vet,
etc.)
Educa?onal services rendered by private educa?onal
ins?tu?ons
Services rendered by RHQ
Transac?ons exempt under special law
Sale of low cost housing, etc.

Slide No. 57

2. What is the coverage of the exemp?on?


b. Excep?ons:
When the law itself provides for exemp?on
from indirect taxes. CIR v. John Gotamco &
Sons, Inc. (involving the exemp?on of the WHO
from indirect taxes)
When the history of statutes clearly indicates
the grant of indirect tax exemp?on. Maceda v.
Macaraig, Jr. (conrming NPCs exemp?on
from direct and indirect taxes following an
examina?on of the evolu?on of NPCs charter)
A"y. Terence Conrad H. Bello

Slide No. 58

A. Input Tax Credit

1. What is input tax?


Means the VAT due on or paid by a VAT-registered
person on importa?on of goods or local purchases of
goods, proper?es, or services, including lease or use of
proper?es, in the course of his trade or business.
Also includes the transi?onal input tax and the
presump?ve input tax determined in accordance with
Sec. 111 of the Tax Code
Must be evidenced by a VAT invoice or VAT O/R issued by
a VAT-registered person
2. Who can avail of input tax credit?
VAT-registered importer of goods
VAT-registered purchaser of local goods or proper?es
VAT-registered purchaser of services or lessee or licensee

IV. TAX CREDITS AND REFUNDS

A"y. Terence Conrad H. Bello

59

A"y. Terence Conrad H. Bello

Slide No. 60

10

9/18/14

A. Input Tax Credit

A. Input Tax Credit; Excess Output Tax or Input Tax

3. What types of input tax are creditable?


a. Purchase or importa?on of goods:
for sale
for conversion into or intended to form part of a nished
product for sale, including packaging materials
for use as supplies in the course of business
for use as raw materials supplied in the sale of services
for use in trade or business for which deduc?on for
deprecia?on or amor?za?on is allowed
b. Purchase of real proper?es for which a VAT has actually been
paid
c. Purchase of services for which a VAT has actually been paid
d. Transac?ons deemed sale
e. Transi?onal input tax
f. Presump?ve input tax

A"y. Terence Conrad H. Bello

Slide No. 61

A. Input Tax Credit; Amor?za?on of Input Tax on Capital Goods

Slide No. 63

C. Presump?ve Input Tax

Slide No. 62

1. Who is en?tled to the transi?onal input tax?


A person who becomes liable to VAT or any
person who elects to be a VAT-registered person
(e.g., TPs who exceed the P1.5 M threshold or
TPs who elect VAT coverage even if their
turnover does not exceed P1.5 M)
2. How much is the transi?onal input tax?
Transi?onal input tax credit is 2% of the value of
the beginning inventory on hand as of the
eec?vity of the VAT-registra?on, or the actual
VAT paid, whichever is higher

A"y. Terence Conrad H. Bello

Slide No. 64

D. Final Withholding VAT

1. Who is en?tled to the presump?ve input tax?


Persons or rms engaged in the processing of
s a r d i n e s , m a c k e r e l , a n d m i l k , a n d i n
manufacturing rened sugar, cooking oil and
packed noodle-based instant meals
2. How much is the presump?ve input tax?
4% of the gross value in money of the TPs
purchases of primary agricultural products which
are used as inputs to their produc?on

A"y. Terence Conrad H. Bello

A"y. Terence Conrad H. Bello

B. Transi?onal Input Tax

1. Input tax on purchase or importa?on of depreciable goods


must be spread evenly over the month of acquisi?on and the
59 succeeding months if the aggregate acquisi?on cost,
excluding the VAT component, exceeds P1M
2. If the es?mated useful life of the capital good is less than 5
years, the input VAT shall be spread over such shorter period
3. The aggregate acquisi?on cost of a depreciable asset in any
calendar month refers to the total price agreed upon for one
or more assets acquired and not on the payments actually
made during the calendar month. Thus, an asset acquired on
installment for an acquisi?on cost of more than P1M will be
subject to the amor?za?on of input tax despite the fact that
the monthly payment/installment does not exceed P1M
A"y. Terence Conrad H. Bello

1. Basic formula:
Output tax (12% or 0%)
Less: input tax_______
VAT Payable
2. Per 110(B), if at the end of the taxable quarter, output tax
exceeds input tax VAT-registered person pays the excess
3. On the other hand, if input tax exceeds output tax:
a. General rule: carry-over excess input to the succeeding
quarter or quarters
b. Excep?on: if the unu?lized input is a"ributable to zero-
rated sales, the VAT-registered TP has 3 op?ons:
Carry-over excess input tax
Refund unu?lized input tax
Credit unu?lized input tax vs. other internal revenue
taxes (i.e., TCC)

Slide No. 65

1. When does it apply?


The 5% nal withholding VAT applies to sales of goods or
services to the government or to GOCCs
2. When does the obliga?on to withhold arise?
Before making payment on account of the purchase, the
government en?ty or the GOCC shall deduct and
withhold the 5% nal VAT based on the gross payment
thereof
3. What does the 5% nal withholding VAT represent?
It represents the net VAT payable of the seller
4. What is the eect of the 5% nal withholding VAT on the
sellers input tax a"ributable to the sale to the government
or the GOCC?
It essen?ally limits the amount of input VAT that the
seller may credit against the 12% output tax to only 7%
(12% output - 5% net VAT payable = 7% standard input)
A"y. Terence Conrad H. Bello

Slide No. 66

11

9/18/14

E. Claims for Refund or Tax Credit

E. Claims for Refund or Tax Credit

1. When can a VAT-registered TP claim a refund


or tax credit for unu?lized input VAT?
In only 2 instances:
Zero-rated or eec?vely zero-rated sales (
112(A)) unu?lized input VAT must be
a"ributable to the zero-rated sales (i.e., either
directly a"ributable or allocable to zero-rated
sales)
Cancella?on of VAT registra?on ( 112(B)) - due
to re?rement from or cessa?on of business, or
due to changes in or cessa?on of status under
106(C)
A"y. Terence Conrad H. Bello

Slide No. 67

2. What is the period within which the CIR should act on the claim?
Within 120 days from submission of complete documents in
support of the applica?on
3. What is the prescrip?ve period for ling the claim for refund or TCC?
a. In the case of zero-rated sales:
Administra?ve claim must be made within 2 years from
from the close of the taxable quarter when the relevant sales
were made (CIR v. Mirant Pagbilao Corp., GR 172129, Sept.
12, 2008)
Judicial claim
Within 30 days from denial of claim or from the lapse of
the 120 day period without any ac?on from the BIR (
112(A)) (CIR v. Aichi Forging, GR 184823, Oct. 6, 2010)
CIR v. San Roque Power Corp., GR 187485, Feb. 12, 2013

A"y. Terence Conrad H. Bello

Slide No. 68

E. Claims for Refund or Tax Credit

3. What is the prescrip?ve period for ling the claim


for refund or TCC?
b. In the case of cancella?on of VAT registra?on:
Administra?ve claim must be made within 2
years from the date of cancella?on
Judicial claim same

V. COMPLIANCE REQUIREMENTS

A"y. Terence Conrad H. Bello

Slide No. 69

A. BIR Registra?on

70

A. BIR Registra?on

1. Mandatory registra?on generally, any person


whose sale of goods and services are subject to VAT
is required to register as a VAT taxpayer with the
appropriate RDO (and pay annual registra?on fee of
P500). VAT registra?on is mandatory if:
TPs gross sales or receipts for the past 12 mos.
(other than exempt sales) exceed P1,919,500
TP has reasonable grounds to believe that his
gross sales or receipts for the next 12 mos.
(other than exempt sales) will exceed P1,919,500

A"y. Terence Conrad H. Bello

A"y. Terence Conrad H. Bello

Slide No. 71

2. Op?onal registra?on TP may elect to register as a


VAT taxpayer in the following instances:
TPs annual gross sales or receipts do not exceed
P1,919,500
TP with mixed transac?ons (taxable and
exempt), may elect that exempt transac?ons be
subject to VAT
Franchise grantees of radio and TV broadcas?ng
whose annual gross receipts of the preceding
year do not exceed P10M

A"y. Terence Conrad H. Bello

Slide No. 72

12

9/18/14

A. BIR Registra?on

A. BIR Registra?on

3. Consequences of non-registra?on
TP liable for VAT
But disqualied to claim input VAT credits

A"y. Terence Conrad H. Bello

4. Cancella?on of VAT registra?on


TP is previously VAT-registered but whose annual
gross sales or receipts fall below P1,919,500
Re?rement from business subject to VAT

Slide No. 73

B. Record Keeping Requirement

A"y. Terence Conrad H. Bello

C. Invoices and Receipts

Requirement to keep subsidiary sales journal


and subsidiary purchase journal

Issue VAT invoice for sale of goods


Issue VAT O/R for sale of services
Informa?on contained in VAT invoice/OR

A"y. Terence Conrad H. Bello

Slide No. 74

Slide No. 75

TIN-V
Total amount due (inclusive of VAT)
VAT as a separate item
Zero-rated sale wri"en or printed prominently
Break down for mixed transac?ons
Date, quan?ty, unit cost and descrip?on/nature
If sale is P1,000 or more, indicate name, address
and TIN of VAT-registered buyer

A"y. Terence Conrad H. Bello

Slide No. 76

C. Invoices and Receipts

Consequence or erroneous issuance of VAT invoice/OR


If TP is not VAT-registered and issues invoice/OR
indica?ng TIN-V:
Liable for VAT in addi?on to percentage tax
Disqualied from input VAT credit a"ributable to
the sale
50% surcharge
Purchaser, however, eligible to claim input VAT
Break down for mixed transac?ons
If TP is VAT-registered and issues VAT invoice/OR for
exempt transac?on liable for VAT as if not exempt
A"y. Terence Conrad H. Bello

Slide No. 77

13