Chapter 2-VALUE ADDED TAX ON IMPORTATION

IMPORTATION
 Importation refers to the purchase of goods or services by the Philippine residents from non-resident sellers.
Type of Consumption Tax on importation
1. VAT on importation – for the import of goods
2. Final withholding VAT – for the purchase of services from non-residents

Comparison between the consumption Tax on importation

VAT on importation Final withholding VAT
Object consumption Goods Services
Imposed upon Importers/buyers Foreign service providers
Statutory taxpayer Importers/buyers Resident purchaser of the
service*
Nature Direct consumption tax Indirect business tax
Tax basis Landed cost Contract price
Collecting agency BOC BIR
Timing of payment Before withdrawal of goods After the month of payment

*Individuals engaged in business and corporations

*The final withholding VAT is 12% of the contract price for services rendered by non-residents. It is remitted to the BIR

The import of goods is either:

 Exempt importation
 Vatable importation

EXEMPT IMPORTATION
A. Importation of exempt goods
Certain goods considered basic necessities are not subject to the VAT on importation, such as:
 Agricultural and marine food products in their original state

 Fertilizers, seeds, seedlings and fingerlings, fish, prawn, live stocks and poultry feeds, including ingredients used in the
manufacture of finished feeds

 Books and any newspaper, magazine, review, or bulletin which appear at regular intervals with fixed prices for
subscription and sale and which is not devoted principally to the publication of paid advertisements

 Passengers or cargo vessels and aircrafts, including engine, equipment and spare parts thereof for domestic or
international transport

B. Importation by VAT-exempt persons

 International shipping or air transport operators on their import of fuel, goods, and supplies

 Cooperatives of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and
exclusively in the production and or processing of their produce

 PEZA locators on their import of goods

C. Quasi-importation
 Personal and household effects belonging to residents of the Philippines returning from abroad and non-resident citizens
coming to resettle in the Philippines.

 Professional instruments and implements, wearing apparel, domestic animals, and personal household effects belonging
to persons coming to settle in the Philippines, for their own use and not for sale, barter or exchange

D. Importation which are exempt under special laws and international agreement

BASIC HUMAN FOOD AND RELATED PRODUCTS

Agricultural or marine food products in original state
  Import exemption is limited to agricultural or marine food products in their original state or those which undergone simple
processing. Good that underwent advanced processing are vatable.

Examples of exempt agricultural or marine food products in original state:

1. Grapes, apples, oranges and other fruits
2. Vegetables, tea, ginseng
3. Rice, corn, coffee beans and other edible farm products
4. Marine foods such as fish and crustaceans
5. Milk, eggs, and meat for human consumption

Livestock includes cow, bulls, calves, pigs, sheep, goats, and rabbits. Poultry shall include fowls, ducks, geese and turkey. Marine
food shall include fish and crustaceans such as, but not limited to eels, trout, lobster, shrimps, prawns, oysters, mussels and clams.

The term simple processing includes:

a. Acts of preparation for the market
b. Acts of preservation or
c. Acts of packaging including advanced technological means of packaging

Hence, the following agricultural or marine food products which underwent processing are also exempt:
With simple act of With simple act of With acts of packaging
preparation preservation
Husked rice Sundried fruits Tetra-packed fresh fruit juice
Corn grits Salted meat Shrink wrapped meat
Raw sugar cane sugar Smoked fish
Roasted beans Dried fish
Ordinary salt Frozen meat or fish
Ground meat
Copra
Boiled eggs
Lechon

 Processed agricultural or marine food products pertain to those which have undergone changes in their chemical
compositions or have undergone complex processing or treatment or are utilizing advanced technologies in their
processing.

Example of vatable processed agricultural or marine food products:

Refined sugar Canned sardines Flour
Wine or Vinegar Butter Marinated milk fish
Vegetable or coconut oil

*The importation of processed products and those considered not in their original state shall be subject to VAT on importation.

Use or purpose dictates vatability

Cockfighting chickens are vatable since they are primarily intended for human amusement. They are only food when they lose.
However, chicken produced for meat or eggs are VAT-exempt human foods.

Farm or fishery inputs

 Marine or agricultural inputs intended for the production of marine or agricultural food products which are ultimately
intended for human consumption are also VAT-exempt.

 The importation of farm or fishery inputs such as seeds, seedlings, breeding stocks and genetic materials are exempt.
Likewise, foods of these inputs such as fertilizers and feeds including ingredients manufacture of finished feeds are also
VAT-exempt.

 Products intended as, maintenance of crops, livestock or poultry and supplemental implements of agricultural or inputs
such as pesticides, herbicides, animal medicines, fishing equipment, fishing boats, tractors, plows, driers threshers and
harvesters are vatable.

 Zoo animals, race horse, aquarium fish, fighting cocks and pets are not intended for human consumption; hence, vatable.
Feeds of these non-food animals called “specialty feeds” is likewise vatable.
  Ingredients of feeds for animal food intended for ultimate human consumption is VAT-exempt but ingredients for the
processing of human food is vatable.

Rules on VAT taxation of poultry and feeds

 Livestock Poultry Pets
Importation of X X ✓
Importation of feeds for X X ✓
Importation of feed X X ✓
Ingredients for

*The importation of the ingredients for the processing of foods for human consumption is vatable because processed human foods
are vatable.

BOOKS, NEWSPAPERS, MAGAZINE, REVIEW BULLETINS

Conditions for exemption of newspaper, magazine review or bulletin:
 They must appear at regular intervals with fixed prices for subscription.
 The sale must not be devoted principally to the publication of paid advertisements.

PASSENGER OR CARGO VESSELS AND AIRCRAFTS

The VAT exemption covers the import of passenger or cargo vessels and aircrafts, including engine, equipment and spare parts
thereof for domestic or international transport operations.

IMPORTATION BY VAT-EXEMPT PERSONS

International shipping on air transport operators

 The exemption is limited to the importation of fuel, goods, and supplies. Although these goods are supplies are
physically brought into the Philippines, they are not intended to be consumed herein. They will ultimately be used in
international transport. This consumption is a foreign consumption rather than domestic consumption.
Illustration 1
Malaysian Ferries is an international shipping carrier. It imported to the Philippines fuel and supplies to be used in shipping
operations.
Note that the fuel goods or supplies will be consumed in the high seas or in foreign territories outside the country. The importation
is not a domestic consumption but a foreign consumption; hence, it is exempt from VAT.

Illustration 2
Pinoy Airline imported jet fuels from Iraq at a total cost of P50,000,000, 40% of the importation is declared for domestic airline
operations while 60% is declared for international transport operations.
60% of the P50,000,000 importation will be consumed in foreign airspaces. This is not for domestic consumption; hence, it is
exempt from VAT. Only the 40% portion which will be used domestically will be subject to the VAT on importation.

Agricultural cooperatives
The states of Agri-coop as VAT-exempt person is limited to importation of direct farm inputs, machineries and equipment, including
their spare parts (RA 9337)
Conditions for exemption:
 The cooperative must be an agricultural cooperative duly registered and in good standing with the Cooperative
Development Authority (CDA).
 The importation involves direct farm inputs, machineries, equipment and their spare parts to be used directly and
exclusively in the production or processing of their produce.

Illustration 1
Abra Farmer’s Cooperative imported the following equipment:
Tax Treatment
Tractors and threshers to be used by the cooperative Exempt
Plows and water pumps to be resold to members Vatable
Fertilizers and hybrid seeds to be sold by the cooperative Exempt
Herbicides and pesticides to be used by the cooperative Exempt
Cars for the use of cooperative directors and officers Vatable

Illustration 2
Assume that fertilizers and herbicides in the foregoing illustration is subsequently sold by Abra Farmer’s cooperative to Jon Juan,
member farmer. What is the tax consequence of the sale?
Jon Juan shall be treated as importer and shall be subject to VAT but only on vatable goods such as herbicides. Since the fertilizer
is a VAT-exempt goods, Jon Juan shall not pay VAT on importation thereon.

Ecozone-locators
 Ecozone are designated places of economic activity for the production of goods or services for the export market. By legal
fiction, economic zones are considered foreign countries and are deemed outside Customs territory. Thus, the importation
of goods into the economic zones by locators is exempt not only from VAT on importation but also from custom duties.
The exemption from VAT covers any goods, supplies or machineries brought into the ecozones by locators.

Customs territory refers to the portion of the Republic of the Philippines outside of designated special economic zones (Ecozone)

“Technical importation” refers to the purchase of non-Ecozone Philippine residents from the Philippine Ecozone-registered
enterprises. By legal fiction ecozones are considered foreign territories.

Illustration 1
Winshield Corporation, a PEZA locator, sold scrap metals to Recycle Industries Corporation, a customs territory buyer (I.e., buyer
outside the ecozone).
Recycle Industries shall pay the VAT on importation directly to the Bureau of Customs (BOC). Winshield Corporation is not
required to impose the VAT on its sales. However, it must be furnished a copy of the receipt issued by the BOC for the VAT
payment.

QUASI-IMPORTATION
1. Import of personal and household effects belong to residents of the Philippines returning from abroad or non-resident
citizens coming to resettle in the Philippines
2. Professional instruments and implements, wearing apparel, domestic animals, and personal household effects belonging
to persons coming to settle in the Philippines, for their own use and not for sale, barter or exchange
Condition for exemption:
 The personal and household effects belong to Philippine residents or non-resident intending to resettle in the Philippines
 The goods are exempt from Custom duties
*Note that these goods are past consumptions which have been previously subjected to consumption tax herein.

Illustration 1
Mr. Siman was employed abroad as an OFW. He went abroad taking with him personal effects such as clothes, piece of personal
jewelry and gadgets aggregating P300,000 in value. When his contract ended, he returned to the Philippines bringing with him the
same effects which now have an aggregate value of P280,000.
The importation (i.e., return) of the personal effects will not be subject to VAT since these are past purchases which had been
subjected to consumption tax when purchased in the Philippines.

Illustration 2
While employed abroad, Mr. Siman purchased an iPhone 6 worth P30,000 for selfie purposes. Mr. Siman brought the iPhone to the
Philippines when his employment contract ended.
The importation of the iPhone shall not be subject to VAT on importation for the same reason that it is not a present consumption of
household effects when it was brought into the Philippines. Furthermore, purchases abroad by non-residents are not subject to
consumption tax in the Philippines. Their subsequent importation to the Philippines is exempt from VAT on importation.

Importation of professional instruments and implements, wearing apparel, domestic animal and personal household
effects

Conditions for exemption:

 The goods belong to the persons who come to settle in the Philippines.
 The goods must accompany the person upon arrival or withing 90 days before or after his/her arrival.
 There must be evidence to show that the change of residence is bona fide.
 The importation is not a vehicle, machinery or the equipment used in the manufacture of merchandise of any kind in
commercial quantity.

Illustration 1
Mr. Marquez, a professional boxer, applied for an application to migrate in the Philippines and was granted by the Philippine
government. He brought his boxing gears and household effects including his personal car to the Philippines.
The importation of professional instruments and household effects are exempt but the importation of the car is subject to VAT.

Illustration 2
Mr. Kung Fu, a Chinese martial arts master, arrived in the Philippines with an immigration visa. He brought with him the following
which he declared as his personal effects:

10 pieces of brand new iPhone 6 P 150,000 each

10 pieces of brand new IBM laptops P80,000 each
5 desktop computers P40,000 each
1 piece of used laptop P 30,000
1 piece of used iPhone 4S 20,000
1 piece of used calculator 400
Used clothes, apparel and travelling bag 7,000

The used laptop, iPhone 4S, calculator and apparel are apparently personal effects which are past consumptions; hence, these are
exempt from VAT.
The nature and quantity of the iPhone 6, IBM laptops and desktop computers is clearly inconsistent with the concept of personal
effects. These items are unquestionably for domestic consumption; hence, subject to VAT.

IMPORTATION EXEMPT UNDER SPECIAL LAWS AND TREATIES

 Import that are exempted by special laws, treaties and international agreements to which the Philippine government is a
signatory is not subject to the VAT on importation.

THE VAT ON IMPORTATION

Other importation of goods is subject to VAT regardless of whether the:
1. Importer is engaged or not engaged in the trade business.
2. Importer is a VAT or non-VAT business
3. Importation is for business or personal use
4. Non-resident seller is engaged or not engaged to business

The basis of the VAT on importation

The VAT on importation is computed as 12% of the total landed cost of the importation.
Composition of landed cost:
A. Dutiable value
B. Other in-land costs
1. Custom duty
2. Excise tax, if nay
3. Other in-land costs, such as:
a. Bank charge
b. Brokerage fee
c. Arrastre charge
d. Wharfage due
e. Documentary stamp tax
f. Import processing fees

The dutiable value, also called transaction value, refers to the total value used by the Bureau of Customs in determining
customs duties, such as:
1. Cost of the goods
2. Freight
3. Insurance
4. Other charges and costs to bring goods herein

 The dutiable vale encompasses all costs incurred in bringing the goods up to the Philippine port and prior t any other in-
land costs of import

*The customs duty is computed as: Dutiable value x Exchange rate x Rate of Duty

Illustration 1
MRS Trading Corporation imported goods from abroad for domestic Sale. Shown below are the details of the importation.
Peso value of supplier’s invoice P2,000,000
Other costs incurred to bring goods to Philippine port 70,000
Other charges before withdrawal of goods, including 85,000
P5,000 facilitation fee paid to a fixer
Custom duties 10%
Freight of goods from BOC warehouse to 20,000
MRS warehouse in Makati City

The customs duties shall first be computed as

Peso value of supplier’s invoice P2,000,000
Other costs to bring goods to Philippine 70,000
Dutiable value P2,070,000
Rate of duty 10%
Customs duties P 207,000

The VAT on importation shall be computed as:

Dutiable value P2,070,000
Other official costs paid before withdrawal of goods
From the BOC 80,000
Customs duties 207,000
Total landed cost P2,357,000
Multiply by: VAT rate 12%
VAT on importation P282,840

IMPORT OF SERVICES
The purchase of services from non-residents may be:
1. VAT-exempt
2. Subject to specific percentage tax
3. Subject to final withholding VAT

 Our current tax law views the final withholding VAT as a business tax. The VAT is deemed imposed upon non-resident
service providers. For this purpose, the law conclusively presumes that the non-resident sellers are engaged in business
even if their sales transactions are merely casual,
 Since non-residents cannot be obligated to file tax returns due to territorial consideration, the resident buyer is obligated to
“withhold” the VAT and to remit the same to the government, thus, the term “final withholding VAT”. The VAT is deemed
passed-on by the non-resident service provider which, in turn, is withheld by the resident purchaser of the service.

As the withholding tax, the obligation to withhold the VAT technically exists only if:
1. The service is rendered within the Philippines; and
2. The payor-purchaser of the service is an individual engaged in business or a corporation

Illustration 1
Eagle Company sought the help of Mr. Putin, a repairman doing business in Australia, to fix its malfunctioning machinery in the
Philippines. The contract price was P1,000,000. Eagle Company shall pay P120,000(12%x P1M) final withholding VAT to the BIR.
Query:
1. What if Mr. Putin is not engaged in business in Australia? The contract price is still subject to the12% final withholding VAT. Mr.
Putin is conclusively presumed engaged in business.
2. What if Eagle Company is a non-profit institution? The contract price is still subject to the 12% final withholding VAT. Even non-
profit corporations are required to withhold.
3. What if Eagle Company is an ecozone locator? The contract price will not be subjected to the 12% final withholding VAT
because ecozone locators are outside the country (i.e. non-residents) by legal fiction.

VAT-EXEMPT IMPORT OF SERVICES

The following are exempt from the final withholding Vat:
a. Purchase of services from non-residents when the service is rendered abroad
b. Purchase of services from non-residents when the individual purchaser is not engaged in business
c. Purchase of services from non-residents by VAT-exempt persons such as ecozone locators

IMPORT OF SERVICES SPECIFICALLY SUBJECT TO PERCENTAGE TAX

  The only import of service that is currently subject to a percentage is the direct acquisition of insurance cover from abroad.
The premium payment on insurance policies directly sourced abroad is subject to 5% percentage tax. The policyholder
shall pay the same to the BIR.

VATABLE IMPORT OF SERVICES

 All other import of services is subject to final withholding VAT. The final withholding VAT is computed as 12% of the
contract price.

Examples of vatable import of services:

1. Lease or use of properties or property rights owned by non-residents
2. Services rendered to local insurance companies, with respect to reinsurance premiums payable to non-residents
3. Other services rendered in the Philippines by non-residents.

Illustration 1
Session Food Corporation is licensed franchise of Ronald Inc., a non-resident foreign franchisor. During the month, Session is due
to pay P800,000 royalties.

The final withholding VAT shall be:

Royalties P 800,000
VAT tax rate 12%
Amount due Ronald Inc. P 96,000

The amount to be remitted to Ronald, Inc., abroad shall be:

Royalties P 800,000
Less: Final income tax (P800,000 x 30%) 240,000
Amount due Ronald Inc. P 560,000

Illustration 2
Phil Mines imported a customized ozone generator from Chen Company in China. Before shipment, Phil Mines had the machine
customized by Guangzu Industries in China for P500,000. The generator has a total landed cost of P1,200,000 on importation.
Chen Company installed the generator at Phil Mine’s processing plant in the Philippines for P220,000.
Phil Mines shall pay the following VAT on importation to the BOC:
Import landed cost P 1,200,000
Multiply by: 12%
VAT om importation P 144,000

Phil Mines shall likewise pay the following final withholding VAT to the BIR:
Installation service contract price P 220,000
Multiply by: 12%
Final Withholding VAT P 26,400

 Using BIR Form 1600, the withholding VAT is remitted monthly on or before the 10 th day of the following month after the
withholding was made, except for taxes withheld for December which shall be files or paid on or before January 25 of the
following year.

Treatment of the VAT on importation and the Withholding VAT

1. If the resident purchaser is a VAT-registered business, it can claim the VAT on importation or withholding VAT as input
VAT creditable against its output VAT.
2. If the resident purchaser is a non-Vat business, The VAT on importation or final withholding VAT shall be part of the cost
of purchase of goods or services and shall be treated as asset or expense.
3. If the purchaser is not engaged in business, the VAT on importation is merely added to the costs of the goods imported.