VAT summary notes business taxation.

Taxation (SBA21)

0 0
 Atty. C. Llamado (October 2021)

VAT

Nature
1) A business tax. In effect, a sales tax.
2) Indirect tax – burden can be shifted by the seller to the buyer.
3) Imposed:
(a) On the gross selling price if sale, barter, or exchange of goods or properties
or
(b) On the gross receipts if sale of services, or in the lease or use of properties

in the course of trade or business;1

(c) On the total value or landed cost, if importation of goods, whether or not in
the course of business.

4) How Computed? Tax Credit Method: Output Tax less Input Tax

Summary of Tax Consequences of VAT-Taxable and VAT-Exempt

Transactions

Kind of Transaction Tax Consequences

A. VAT-Taxable transactions:

1. Sales or leases taxed at (a) Seller is subject to VAT at 12%;

12% (b) Seller is entitled to input tax credit;
(c) Seller pays excess of output tax over input tax to the BIR;
(d) Seller can carry-over excess input taxes to succeeding
quarter(s).

2. Sales or leases taxed at 0% (a) Seller is subject to VAT at 0%;

(zero-rated) (b) Seller is entitled to input tax credit;
(c) Seller can claim refund or tax credit for input taxes;

B. Exempt transactions (a) Seller is exempt from VAT;

(b) Seller cannot separately bill output tax to his customers;
(c) Seller is not entitled to input tax credit;
(d) Seller shall be liable to VAT if he issues VAT invoice or
receipt, but without the benefit of input tax credit.

1
Likewise, transactions that are made incidental to the pursuit of a commercial or economic activity are
considered in the course of trade or business. Incidental means something else as primary. It is something
necessary, appertaining to, or depending upon another which is termed the principal. Hence, an isolated
transaction is not necessarily disqualified from being made incidentally in the course of trade or business.
Thus, a sale in the course or furtherance of business includes: (1) the disposition of the assets and liabilities
of a business; (2) the disposition of a business 0 0
as a going concern; and (3) anything done in connection with
the termination or intended termination of a business (CS Garments, Inc. vs. CIR, CTA EB Case No. 287,
January 14, 2008; RMC No. 15-2011).
1
0 0
 Atty. C. Llamado (October 2021)

REGISTRATION FOR VAT

Mandatory Registration Optional Registration

1) Sellers whose gross sales/receipts on ALL 1) Any person who is not subject to mandatory
lines of non-exempt businesses2 for the registration because his actual or expected
past 12 months exceed ₱3,000,000. gross sales/receipts from non-exempt
businesses for the past 12 months do not
exceed ₱3,000,000.
2) Sellers whose expected sales/receipts for 2) Any VAT-registered person who has other
the next 12 months from ALL lines of non- lines of business which are VAT-exempt.
exempt businesses exceed ₱3,000,000. The VAT-exempt business must not be the
main line of business.

Note: In (1) and (2), the registration shall be

irrevocable for the next 3 years.
3) Franchise grantees of radio and/or TV 3) Franchise grantees of radio and/or TV
broadcasting whose annual sales for the broadcasting whose annual sales ≤ ₱10 M.
last taxable year exceed ₱10,000,000.
Note: Registration is irrevocable.

Benefit: The VAT-registered person is entitled Benefit: The customers or clients of the
to input tax credits. taxpayer will be able to reduce their
VAT payables by using the input tax
credits from their purchases from the
taxpayer.

Notes:

1) Registration is required for every separate or distinct establishment or place of business

where sales transactions occur except a warehouse without sales transactions.

2) Each VAT-registered person shall be assigned one (1) TIN. The branch shall use the 9-
digit TIN of the head office + a 3-digit branch code.

3) For those who are not registered, but become liable to VAT:3

A non-VAT taxpayer who initially presumed that his gross sales/receipts plus other non-
operating income for the taxable year will not exceed the ₱3,000,000 VAT threshold but
has actually exceeded the same during the taxable year, shall immediately update his
registration to reflect the change in tax profile from non-VAT to VAT taxpayer.

He is required to update his registration immediately within the month following the month
he exceeded the VAT threshold. And he shall be liable to VAT prospectively starting on
the first day of the month following the month when the threshold is breached.

4) Annual registration fee: ₱500 for every separate or distinct place of business where sales
transactions occur.

Cooperatives are exempted from the registration fee.

5) VAT Registration Certificate and Registration Fee Return must be posted in a conspicuous
place in the place of business.

2
0 0
VATable businesses (i.e. those subject to 12% VAT, 0% VAT, and 5% VAT on sales to the government).
3
RR 8-2018.
2
0 0
 Atty. C. Llamado (October 2021)

Effect of Failure to Register by Persons Required to VAT-Register

1) Liable to VAT on their sales;

2) Cannot separately bill output VAT to customer. In other words, the taxpayer cannot
shift the VAT burden to his customers;
3) No input tax credits on their purchases;
4) Fines and sanctions (ex. OPLAN KANDADO: suspension of operations or closure of
business ≥ 5 days).

Cancellation of Registration

A VAT-registered person may cancel his VAT-registration if:

1) He makes a written application showing that his gross sales or receipts (excluding
exempt sales) in the next 12 months shall not exceed ₱3,000,000; or
2) He ceases business;
3) There is a change in ownership in the case of a single proprietorship;
4) Dissolution of the partnership or corporation;
5) Merger or consolidation with respect to the dissolved corporation;
6) Failure to actually start business;
7) Business becomes exempt;
8) A person who voluntarily registers and then applies for cancellation after the lapse of
3 years;
9) A VAT-registered person whose gross sales or receipts for 3 consecutive years did not
exceed ₱3,000,000 beginning January 1, 2018.

Summary: Persons Subject to VAT

1) Those engaged in the selling or leasing of goods, properties, or services subject to

VAT and registered regardless of the level of sales;

2) Those engaged in the selling or leasing of goods, properties or services subject to

VAT, whose gross sales or receipts during the year or in any 12-month period
>₱3,000,000, whether or not registered;

Note: For purposes of the threshold of ₱3,000,000, husband and wife shall be
considered separate taxpayers.

3) Those who are VAT-registered and who have VAT-exempt businesses which they
choose to register under the VAT-system, regardless of level of sales;4

4) Franchise grantees of radio and/or TV broadcasting whose gross annual receipts do not
exceed ₱10 Million, but are registered;

5) Importers of goods, whether or not in the course of trade or business, regardless of the
amount of purchase.

Note: Unless specifically exempted by law, even a non-stock, non-profit organization or

government entity is liable to pay VAT on the sale of goods or services. As long
as the entity provides goods or services for a fee, remuneration or consideration,
then such sale is subject to VAT.

0 0
4
The exempt business(es) must be minor line(s) of business of a VAT-registered person.
3
0 0
 Atty. C. Llamado (October 2021)

ZERO-RATED TRANSACTIONS
- Does not result in output VAT, but the taxpayer is entitled to input VAT which shall be
available either as a tax credit or as a refund, IF taxpayer is registered.

- IF not registered, the sales of the taxpayer will be considered VAT-exempt sales.

(I) Zero-Rated Sales of Goods

(a) Export sales of goods

1) Sale of goods to a foreign country and paid for in acceptable foreign currency;
2) Sale of raw materials or packaging materials to a non-resident buyer for delivery to
a resident export-oriented enterprise, and paid for in acceptable foreign currency;
3) Sale of raw materials or packaging materials to export-oriented enterprises whose
export sales exceed 70% of total annual production;
4) Considered export sales under E.O. No. 226 (the Omnibus Investment Code), and
other special laws:
(a) Sales to bonded manufacturing warehouses of export-oriented manufacturers;
(b) Sales to registered export traders operating bonded trading warehouses
supplying raw materials in the manufacture of export products;
(c) Sales to a BOI-registered producer whose products are 100% exported.
5) Sale of goods, supplies, equipment, and fuel to persons engaged in international
shipping or international air transport operations. Provided, that the sale of such
goods and fuel shall pertain to the transport of goods and passengers from a
Philippine port directly to a foreign port, or vice-versa, without docking or
stopping at any other port in the Philippines.

Note: The transactions under items (2), (3), and (4) above shall be subject to the 12%
VAT, and shall no longer be considered export sales subject to 0% VAT, upon the
satisfaction of the following conditions:

(1) The successful establishment and implementation of an enhanced VAT refund

system that grants refunds of creditable input taxes within ninety (90) days
from the filing of the VAT refund application with the BIR; and
(2) All pending VAT refund claims as of December 31, 2017 shall be fully paid in
cash by December 31, 2019.5

(b) Effectively zero-rated sales

Local sales by VAT-registered persons to persons or entities deemed tax-exempt (i.e.,

granted exemption from indirect taxes) under a special law or international agreement,
such as:
(1) Enterprises registered with the SBMA, CDA, PEZA, and other export processing
zones;
(2) ADB; IRRI.
(3) Sales to diplomatic missions and other agencies or instrumentalities granted tax
immunities;
(4) Regional or area headquarters of (RHQs) of multinational corporations enjoying
VAT 0-rating on its purchases at the time of effectivity of the TRAIN; and
(5) Other persons/entities who are entitled to 0% VAT on purchases6.

5
6
0 No. 16-2005
Sec. 106(A)(2), NIRC; Sec. 4.106-5, Rev. Reg. 0 as amended by Rev. Reg. No. 13-2018.
0% VAT on purchases is another way of saying that the purchaser is exempt from the input VAT that is
normally charged by the seller.
4
0 0
 Atty. C. Llamado (October 2021)

II) Zero-Rated Sales of Services

The following services performed locally in the Philippines by VAT-registered persons

shall be subject to a 0% rate:

(1) Processing, manufacturing, or repacking goods for other persons which goods are
subsequently exported, and which are paid for in acceptable foreign currency;

(2) Services other than those in (1), rendered to a person engaged in business conducted
outside the Philippines, or to a non-resident person not engaged in business and who
is outside the Philippines, and which are paid for in acceptable foreign currency;

(3) Services rendered to persons/entities whose exemption under special laws or

international agreements effectively subjects the supply of such services to a 0%
rate7;

(4) Services rendered to persons engaged in international shipping or international air

transport operations, including leases of property for use thereof; Provided, that the
sale of services shall pertain to the transport of goods and passengers from a
Philippine port directly to a foreign port, or vice-versa

(5) Services performed by subcontractors or contractors in processing, converting, or

manufacturing goods for an enterprise whose export sales exceed 70% of total annual
production;

(6) Transport of passengers and cargo by domestic air or sea carriers from the
Philippines to a foreign country.

Note: Transport of passengers and cargo by domestic air or sea carriers from a
foreign country to the Philippines is EXEMPT from business taxes
including the VAT for lack of jurisdiction.

(7) Sale of power or fuel generated through renewable sources of energy such as solar,
wind, biomass, geothermal, and ocean energy.

Note: Zero-rating does not extend to the sale of services related to maintenance or
operating of plants generating said energy.

Note: The transactions under items (1) and (5) above shall be subject to the 12% VAT,
and shall no longer subject to 0% VAT rate, upon the satisfaction of the following
conditions:

(1) The successful establishment and implementation of an enhanced VAT

refund system that grants refunds of creditable input taxes within ninety (90)
days from the filing of the VAT refund application with the Bureau; and

(2) All pending VAT refund claims as of December 31, 2017 shall be fully paid
in cash by December 31, 2019.8

7
0 0
Effectively 0-rated sales of services.
8
Sec. 108(B), NIRC; Sec. 4.108-5, Rev. Reg. No. 16-2005 as amended by Rev. Reg. No. 13-2018.
5
0 0
 Atty. C. Llamado (October 2021)

VAT-EXEMPT TRANSACTIONS

- The sale shall not be subject to output VAT, but the seller is not allowed any ITC9.
- Seller cannot bill any output VAT to his customers.
- If the seller issues a VAT invoice or receipt without being VAT-registered, he shall be
liable to the output VAT without the benefit of any ITC.

(A) VAT exemption under Section 109 of the Tax Code:

(1) Sale or importation of (a) agricultural and marine food products in their original state, (b)
livestock or poultry of a kind generally used as, or yielding or producing foods for human
consumption; and (c) breeding stock and genetic materials therefor;

“Original state” - Meat, fruit, fish, vegetables, and other agricultural and marine food
products classified under this paragraph shall be considered in their
original state even if they have undergone the simple processes of
preparation or preservation for the market, such as freezing, drying,
salting, broiling, roasting, smoking, or stripping, including those
using advanced technological means of packaging, such as shrink
wrapping in plastics, vacuum packing, tetra-pack, and other similar
packaging methods;

- Polished and/or husked rice, corn grits, raw cane sugar and molasses,
ordinary salt, and copra shall be considered in their original state.

“Livestock or Poultry”
- Does not include fighting cocks, race horses, zoo animals, and other
animals generally considered as pets.

Notes: a) Sale of bagasse is not exempt from VAT.

b) Fresh water is not an agricultural product, but is considered a mineral. The sale
thereof is not exempt from VAT.

(2) Sale or importation of (a) fertilizers; (b) seeds, seedlings, and fingerlings; (c) fish, prawn,
livestock and poultry feeds, including ingredients, whether locally produced or imported,
used in the manufacture of finished feeds (except specialty feeds for race horses, fighting
cocks, aquarium fish, zoo animals and other animals generally considered as pets);

(3) Importation of personal and household effects belonging to the residents of the
Philippines returning from abroad, and non-resident citizens coming to the Philippines:
Provided, that such goods are exempt from Philippine customs duties;

(4) Importation of (a) professional instruments and implements; (b) tools of trade, occupation
or employment; (c) wearing apparel; (d) domestic animals; and (e) personal household
effects (except any vehicle, aircraft, machinery, and other goods for use in the manufacture
and merchandise of any kind in commercial quantities), belonging to overseas Filipinos10,
in quantities and of the class suitable to the profession, rank, or position of the persons
importing said items, for their own use and not for sale, barter, or exchange, accompanying
such persons, or arriving within a reasonable time;

(5) Services subject to percentage tax under Title V of the Tax Code (Secs. 116-127, Tax
Code);

9
10
Input Tax Credit. 0 0
Overseas Filipinos shall refer to persons coming to settle in the Philippines, or Filipinos or their families
and descendants who are now residents or citizens of other countries.
6
0 0
 Atty. C. Llamado (October 2021)

(6) Services by agricultural contract growers11, and milling for others of palay into rice, corn
into grits, and sugar cane into raw sugar;

(7) Medical, dental, hospital, and veterinary services except those rendered by
professionals;

Note: Lab services are exempt.

Sale of drugs and medicines are VATable, generally. Therefore, if the hospital or
clinic operates a drug store, the sale of drugs and medicine shall be subject to VAT.
However, the sale of the same to in-patients are considered part of hospital services,
and shall therefore be VAT-exempt.

(8) Educational services rendered by private educational institutions, duly accredited by the
Department of Education (“DepEd”), the Commission on Higher Education (“CHED”),
the Technical Education and Skills Development Authority (“TESDA”), and those
rendered by government educational institutions;

(9) Services rendered by individuals pursuant to an employer-employee relationship;

(10) Services rendered by regional or area headquarters (“RHQs”) established in the Philippines
by multinational corporations which act as supervisory, communications, and coordinating
centers for their affiliates, subsidiaries, or branches in the Asia-Pacific Region, and do not
earn or derive income from the Philippines;

(11) Transactions which are exempt under international agreements to which the Philippines
is a signatory or under special laws, except those under PD 52912;

(12) Sales by agricultural cooperatives duly registered with and in good standing with the
Cooperative Development Authority (“CDA”) to their members as well as sale of their
produce, whether in its original state or processed form,13 to non-members; and their
importation 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;

(13) Gross receipts from lending activities by credit or multi-purpose cooperatives duly
registered with and in good standing with the Cooperative Development Authority;

(14) Sales by non-agricultural, non-electric, and non-credit cooperatives duly registered

with and in good standing with the Cooperative Development Authority: Provided, that
the share capital contribution of each member does not exceed Fifteen Thousand Pesos
(₱15,000).

Notes:

(a) Importation by non-agricultural, non-electric, and non-credit cooperatives of

machineries and equipment, including spare parts thereof to be used by them are subject
to VAT.

11
Agricultural contract grower refers to a person/entity producing for others poultry, livestock, or other
agricultural and marine food products in their original state.
12
Petroleum Exploration Concessionaires under the Petroleum Act of 1949.
13
0 sugar is0exempt from VAT and from the advance VAT
Sale by an agricultural cooperative of refined
(CIR vs. Negros Consolidated Farmers Multi-Purpose Cooperative, S.C. (First Division), G.R. No.
212735, December 5, 2018).
7
0 0
 Atty. C. Llamado (October 2021)

(b) All electric cooperatives registered with the National Electrification Administration
(“NEA”) shall be subject to VAT on sales relative to the generation and distribution
of electricity as well as their importation of machineries and equipment, including spare
parts. Provided, however, that sale of power or fuel generated through renewable
sources of energy such as, but not limited to, biomass, solar, wind, hydropower,
geothermal, ocean energy, and other emerging energy sources using technologies such
as fuel cells and hydrogen fuels, shall be subject to 0% VAT.

(15) Export sales by persons who are not VAT-registered;

(16) The following sales of real properties are VAT-exempt:

(a) Sale of real properties not primarily held for sale to customers or held for lease in
the ordinary course of trade or business;

Note: However, even if the real property is not primarily held for sale to customers
or held for lease in the ordinary course of trade or business, but the same is
used in the trade or business of the seller, the sale thereof shall be subject to
VAT being a transaction incidental to the taxpayer’s main business.14

(b) Sale of real properties utilized for low-cost housing and socialized housing as defined
by R.A. No. 7279, and other related laws;

(c) House and lot, and other residential dwellings with a selling price of not more than
New ₱3,199,200. Every three (3) years thereafter, the amount stated herein shall be adjusted
to its present value using the Consumer Price Index, as published by the Philippine
Statistics Authority (“PSA”).15, 16

(17) Lease of a residential unit17 with a monthly rental not exceeding Fifteen Thousand Pesos
(₱15,000), regardless of the amount of aggregate rentals received by the lessor during the
year;

Note: IF monthly rental of the residential units exceeds ₱15,000, they are placed in the
same category with commercial or industrial rental properties. If the aggregate
gross receipts during the taxable year from such category exceed ₱3,000,000, then
the receipts shall be subject to VAT. Otherwise, they will be subject to the 3%
OPT.

14
Sec. 4.109-1(B)(p), Rev. Reg. No. 16-2005, as amended by Rev. Reg. No. 4-2007.
15
Sec. 109(1)(P), NIRC; Sec. 4.109-1(B)(p), Rev. Reg. No. 16-2005, as amended by Rev. Reg. No. 8-2021.
16
Prior to January 1, 2021, the sale of the following residential real properties were VAT-exempt:
(1) Sale of residential lot valued at One Million, Five Hundred Thousand Pesos (₱1,500,000) and below;
(2) Sale of house and lot and other residential dwellings valued at Two Million, Five Hundred Thousand
Pesos (₱2,500,000) and below.

Note: For purposes of (1) above, if two (2) or more adjacent residential lots are sold or disposed in
favour of one buyer from the same seller, for the purpose of utilizing the same as one residential
lot, the sale shall be exempt from VAT only if the aggregate value of the properties do not exceed
₱1,500,000.
17
The term “residential units” shall refer to apartments and houses & lots used for residential purposes,
and buildings or parts or units thereof used solely as dwelling places (e.g., dormitories, rooms, and bed
spaces), except motels, motel rooms, hotels, hotel rooms, lodging houses, inns, and pension houses.

The term “unit” shall mean an apartment unit in the case of apartments, house in the case of residential
0 boarding0houses and bed spaces; and per room in case of
houses; per person in the case of dormitories,
rooms for rent.

8
0 0
 Atty. C. Llamado (October 2021)

(18) Sale, importation, printing, or publication of books and any newspaper, magazine, journal,
review bulletin, or any such educational reading material covered by the UNESCO
Agreement on the Importation of Educational, Scientific, and Cultural Materials, including
the digital or electronic format thereof. Provided, the materials enumerated herein are not
devoted principally to the publication of paid advertisements;18

Note: Sale of books, newspapers, magazines, etc. in electronic format are also VAT-
exempt.

(19) Transport of passengers by international carriers;

Note: Transport of cargo by international carriers is also exempt from VAT because
they are subject to the OPT under Section 118 of the Tax Code.

(20) Sale, importation, or lease of passenger or cargo vessels and aircraft, including engine,
equipment, and spare parts thereof for domestic or international transport operations;

Provided, the importation or purchase meets the requirements of the Maritime Industry
Authority (MARINA).

(21) Importation of fuel, goods, and supplies by persons engaged in international shipping or
air transport operations;

Provided, that the said fuel, goods, and supplies shall be used exclusively or shall pertain
to the transport of goods and/or passengers from a port in the Philippines directly to a
foreign port or vice-versa without docking or stopping at any other port in the Philippines
unless the docking or stopping at any other Philippine port is for the purpose of unloading
passengers and/or cargoes that originated from abroad, or to load passengers and/or cargoes
bound for abroad.

(22) Services of banks, non-bank financial intermediaries performing quasi-banking

functions, and other non-bank financial intermediaries, such as money changers and
pawnshops subject to percentage tax under Sections 121 and 122, respectively, of the Tax
Code;

(23) Sales or lease of goods and services to Senior Citizens and PWDs19, as provided under
R.A. Nos. 9994 and 10754;

(24) Transfer of property pursuant to Section 40(C)(2) of the Tax Code;

(25) Association dues, membership fees, and other assessments and charges collected by
homeowners’ associations, condominium corporations, and recreational clubs;

Note: The collection thereof is for the benefit of the unit owners or members. Moreover,
they do not arise from transactions involving the sale, barter, or exchange of goods
or property, or are generated by the performance of services.20

18
Sec. 109(1)(R), NIRC as amended by R.A. No. 11534.
19
The sale of items listed in RR 5-2017 as basic necessities and prime commodities to PWDs shall not be
exempt from the VAT (Sec. 7, Rev. Reg. No. 5-2017 as amended by Rev. Reg. No. 9-2019).
20
0
Association of Non-Profit Clubs, Inc. (“ANPC”) vs.0CIR, Supreme Court (2nd Division), G.R. No.
228539, June 26, 2019; CIR vs. First E-Bank Tower Condominium Corporation, Supreme Court (1st
Division), G.R. No. 215801, January 15, 2020.
9
0 0
 Atty. C. Llamado (October 2021)

(26) Sale of gold to the BSP21;

(27) (a) Sale22 or importation of prescription drugs and medicines for:23

(i) Diabetes, high cholesterol, and hypertension beginning January 1, 2020;24 and
(ii) Cancer, mental illness, tuberculosis, and kidney diseases beginning January 1, 2021;
NEW (iii) Drugs, vaccines, and medical devices prescribed and directly used for COVID-19
treatment beginning January 1, 2021 until December 31, 2023;25

(28) Sale or importation of capital equipment, its spare parts and raw materials, necessary
for the production of personal protective equipment components such as coveralls,
NEW gowns, surgical caps, surgical masks, N-95 masks, scrub suits, goggles and face
shields, double or surgical gloves, dedicated shoes, and shoe covers, for COVID-19
prevention beginning January 1, 2021 to December 31, 2023.26

(29) Sale or lease of goods or properties or the performance of services other than the
transactions mentioned in the preceding paragraphs, the gross annual sales and/or
receipts do not exceed the amount of Three Million Pesos (₱3,000,000).

For purposes of the threshold of ₱3,000,000, the husband and wife shall be considered
separate taxpayers.

21
Sale of gold and other metallic minerals to persons and entities, except sale of gold to the BSP, are
subject to 12% VAT if the gross selling price exceeds the threshold of ₱3,000,000.
22
The VAT exemption shall apply to the sale by manufacturers, distributors or wholesalers, and retailers
of drugs and medicines referred to in Section 109(1)(AA) of the Tax Code.

Manufacturer refers to any establishment engaged in any and all operations involved in the production
of drugs, including preparation, processing, compounding, formulating, filling, packaging, repackaging,
altering, ornamenting, finishing, and labelling with the end view of its storage for sale or distribution.
Provided, the term shall not apply to the compounding and filling of prescriptions in drugstores and
hospital pharmacies.

Distributor or Wholesaler means any establishment that purchases drugs in its final form, for wholesale
distribution to other establishments or outlets.

Retailer refers to any establishment that procures drugs prescribed in its final form, and licensed by the
FDA to carry on the retail business of sale of drugs directly to the general public (Joint Administrative
Order No. 2-2018 of the BIR, DOF, and DOH).
23
Sec. 109(1)(AA), NIRC as amended by R.A. No. 11467.
24
From January 1, 2019 to December 31, 2019, only the sale of drugs and medicines for diabetes, high
cholesterol and hypertension was exempt from the VAT. Importation of the same remained to be subject
to VAT (Rev. Reg. No. 25-2018).
25
Includes drugs for the treatment of COVID-19 approved by the Food and Drug Administration (“FDA”)
for use in clinical trials, including raw materials directly necessary for the production of such drugs (Sec.
109(1)(BB), NIRC as inserted by R.A. No. 11534).
26
0 0
The VAT-exemption in the importation of such equipment, supplies, inputs, and raw materials actually
began in March 25, 2020 under R.A. No. 11469.
10
0 0
 Atty. C. Llamado (October 2021)

(B) VAT exemption under Section 295 in Title XIII of the Tax Code:
NEW (1) VAT exemption on importation, and VAT zero-rating on local purchases shall only apply
to goods and services directly and exclusively used in the registered project or activity by
a registered business enterprise.27

(2) The importation of COVID-19 vaccines shall be exempt from import duties, taxes, and
other fees, subject to the approval or licenses issued by the DOH or FDA. Provided, such
vaccines must not be intended for resale or other commercial use, and shall be distributed
without any consideration from persons to be vaccinated.28

(3) Crude oil that is intended to be refined at a local refinery, including the volumes that are
lost and not converted to petroleum products when the crude oil actually undergoes the
refining process, shall be exempt from the payment of applicable taxes and duties upon
importation.29

Provided, the applicable duties and taxes on petroleum products shall be payable only
upon lifting of the petroleum products produced from the imported crude oil.30

(C) VAT exemption under Special Laws/Regulations/Rulings

(1) Fees, per diems, allowances, and other income received by corporate directors from
corporations of which they are not employees;

(2) Sales by PEZA and other ecozone registered enterprises;

(3) Sales of services by professionals and other suppliers of services hired under a contract
for service or job order with the departments and agencies of the government, its
instrumentalities, local government units, state colleges and universities, including
GOCCs and government financial institutions (“GFIs”) shall be exempt from VAT.
Provided, (1) they derive gross receipts of not more than ₱250,000 in any 12-month
period, (2) such incomes are received from a LONE PAYOR, and (3) such professionals
have no other source of income.31

(4) Amounts of money received in trust which do not belong to the recipient and which
do not redound to the benefit of the recipient are not subject to VAT.32

(5) Services rendered within intra-company divisions are not services performed for
another person. Such intra-company divisions are considered one and the same entity for
financial reporting and income tax purposes. Though management fees are charged by
the division rendering the services, the same are not subject to VAT.33

(6) Importation of personal computers, laptops, tablets, or similar equipment

NEW appropriate for use in schools, which are donated for distribution to public schools

27
Sec. 295(D), NIRC.
28
Sec. 295(E), NIRC.
29
Sec. 295(G), NIRC.
30
Ibid.
31
RMC No. 69-2017, as amended by RMC No. 51-2018.
32
0 CIR vs.0Tours Specialists, Inc., GR. No. 66416, March
BIR Ruling No. 242-2018, February 21, 2018;
21, 1990.
33
Mercury Group of Companies, Inc. vs. CIR, CTA Case No. 9531, September 6, 2019.
11
0 0
 Atty. C. Llamado (October 2021)

regardless of level, including state universities and colleges and vocational institutions
under TESDA, shall be exempt from import duties and taxes.34

Note: In case of foreign donations, the importation of personal computers, laptops,

tablets, or similar equipment, made from September 15, 2020 to December 19,
2020, by the Department of Education (“DEPED”), Commission on Higher
Education (“CHED”), or TESDA, shall be exempt from VAT. Provided, if the
importer/consignee is other than the aforementioned agencies, the importer
should present a Deed of Donation duly accepted by such agencies.35

34
35
Sec. 4(zzz), R.A. No. 11494. 0 0
Sec. 4(c), Rev. Reg. No. 26-2020.

12
0 0
 Atty. C. Llamado (October 2021)

VAT-TAXABLE SALE OF GOODS/PROPERTIES

1) VATatable sales – the sale must be (a) an actual sale (b) in the course of trade or business, of
goods or properties within the commerce of man.

2) Transactions deemed sale – transactions which lack one or both of the elements that makes a
sale VATable. Transactions (a) to (d) below are deemed sales so as to prevent the taxpayer
from evading payment of the output VAT.

Transaction (e), on the other hand, is treated as an actual sale to enable the recipients of the
goods or properties to avail of the input VAT credits on such transactions “deemed sale.”36

(a) Transfer, use, or consumption not in the course of business of goods or properties
originally intended for sale or for use in the course of business.37

Transfer of goods or properties not in the course of business can take place when the VAT-
registered person withdraws goods from his business for his personal use.

(b) Distribution or transfer of goods or properties to:

(1) Shareholders or investors as property dividends; or
(2) Creditors in payment of debt or obligation.

(c) Consignment of goods if actual sale is not made within sixty (60) days following the date
such goods were consigned.

Note: Consigned goods returned by the consignee within the 60-day period are not
deemed sold;

(d) Transmission of property to a trustee IF:

(1) the property transferred is one for sale, lease, or use in the ordinary course of trade or
business, and
(2) the transfer constitutes a completed gift.38

36
From the point of view of the new owner of such goods/properties, it is a “deemed purchase”.
37
The following are not considered transactions deemed sale:

(a) Donations of (a) critical or needed healthcare equipment or supplies and (b) relief goods
such as, but not limited to, food packs (rice, canned goods, noodles, etc.) and water, given
to the entities enumerated in Rev. Reg. No. 9-2020, for the sole purpose of combatting the
COVID-19 virus during the period of the state of national emergency under R.A. No.
11469, shall not be treated as transactions deemed sale subject to VAT.

(b) In case of local donations of personal computers, laptops, tablets, or similar equipment (i.e.
mobile phones, printers), made from September 15, 2020 to December 19, 2020, for use in
teaching and learning in public schools,37 but where such goods were originally intended
for sale or for use in the course of business by the donor, the same shall not be treated as
transactions deemed sale subject to VAT. Furthermore, any input VAT attributable to the
purchase of such donated goods not previously claimed as input tax credit shall be
creditable against any output VAT.
38
0 0
The transfer is a completed gift if the transferor divests himself absolutely of control over the property,
i.e., an irrevocable transfer of the corpus and/or an irrevocable designation of the beneficiary.
13
0 0
 Atty. C. Llamado (October 2021)

(e) Retirement from or cessation of business with respect to inventories of taxable goods
(capital goods, stock-in-trade, supplies, materials) existing as of such retirement or
cessation, whether or not the business is continued by the new owner.

Examples of transactions deemed sale, and therefore VAT-taxable:

a) “Change of ownership of the business”. There is a change in the ownership of the business
when a single proprietorship incorporates, or the proprietor of a single proprietorship sells
his entire business.
b) Dissolution of a partnership, and creation of a new partnership which takes over the business.
c) Liquidating dividends where the assets of the corporation are distributed to the shareholders.

Examples of transactions not subject to VAT:

1) Change in the control of a corporation;
2) Merger or consolidation of corporations;
3) Change in the trade or corporate name.

OUTPUT VAT
- 12% of the gross selling price (“GSP”), exclusive or net of VAT, of the goods sold,
bartered, exchanged, or deemed sold in the Philippines, OR

12
/112 of the total invoice price (inclusive or gross of VAT).39

- For 0-rated sales, the output VAT is 0% of the GSP.

Tax Base: GSP, net of Sales Discounts , Sales Returns, and Allowances

A) GSP = the total amount of money or its equivalent which the purchaser must pay40 the
seller in consideration of the sale, barter, or exchange.41

Note: Any excise tax shall form part of the GSP.

B) For transactions deemed sale:

1) Tax Base = Market value of the goods at the time of transaction

39
(3/28) or (12/112) of Invoice Amount, if
a) VAT is not separately billed; or
b) VAT is erroneously billed
40
That is, the entire GSP whether paid in cash, credit, or installment.
41
When the GSP is unreasonably lower than the actual market value, the CIR shall, by rules and
regulations prescribed by the Secretary of Finance, determine the appropriate tax base. However, when
one of the parties is the government, the output VAT shall be based on the actual selling price.

0 30% of the
“Unreasonably lower” = lower by more than 0 actual market value.

14
0 0
 Atty. C. Llamado (October 2021)

In a) Transfer, use, or consumption not in the course of trade or business;

b) Distributions to shareholders or creditors;
c) Consignment sales;
d) Transmission of property to trustee.

2) Tax Base = Lower of acquisition cost or current market price of the goods

In retirement from or cessation of business.

C) When there is a cessation of status as a VAT-registered person

The output tax on goods or properties originally intended for sale or for use in business,
including capital goods existing at the time of the change in or cessation of status of a
taxpayer as a VAT-registered person, shall be based on the acquisition cost or the current
market price of the goods, whichever is lower.

Computation of Input VAT (“ITC”)

- The same rules above are applied, but to purchases.

VAT on Sale of Real Properties

Sale of real properties (a) held primarily for sale to customers, or (b) held for lease in the
ordinary course of trade or business of the seller, or (c) used in trade or business, shall be
subject to VAT:

(1) Regardless of the amount of the gross selling price, if the real property is not residential
(i.e., commercial, industrial, etc.)

(2) If real property is residential, it shall be subject to VAT if the GSP exceeds:

(a) ₱1,500,000 for residential lots, or

(b) ₱2,500,000 for residential house and lots or other residential dwellings.

Notes:

(a) In the sale, barter, or exchange of real properties subject to VAT:

1) the GSP shall be the highest of:

a) Selling price in the sales document; or
b) Zonal value; or
c) Assessors’ value

2) If VAT is not billed separately in the sales document, the selling price is deemed
inclusive of VAT.
0 0

15
0 0
 Atty. C. Llamado (October 2021)

3) If the GSP is based on the zonal or assessor’s value, the same is deemed exclusive of
VAT.

(b) If cash sale:

VAT = 12% of highest of (Selling price, zonal value, or assessor’s value)

If deferred-payment basis not on the installment plan

VAT = 12% of highest of (Selling price, zonal value, or assessor’s value)

If on installment plan

(1) VAT payments = 12% of installment payments

BUT

(2) Where GSP = Zonal or Assessor’s value

Actual collection of the consideration Higher of

(exclusive of VAT) Zonal Value
x = Tax Base
Agreed consideration appearing in the or Assessor’s
contract (exclusive of VAT) Value

Tax Base x 12% = VAT

(c) If two (2) or more adjacent residential lots are sold or disposed in favour of one buyer
from the same seller, for the purpose of utilizing the same as one residential lot, the sales
shall be VAT-taxable if the aggregate value of the properties exceed ₱1,500,000.

(d) The sale of parking lots is subject to VAT regardless of the amount of the selling price
since parking lots are not residential lots.

(e) VAT may likewise be imposed in foreclosure sales. When the mortgagor fails to redeem
the real property which was an ordinary asset in his hands, the VAT must be paid by the
mortgagor on or before the 20th day or 25th day of the month following the month when the
right of redemption prescribes.

(f) Beginning January 1, 2021, the VAT exemption shall only apply to the following sales of
real properties:
(a) Real property not primarily held for sale to customers or held for lease in the ordinary
course of trade or business;
(b) Real property utilized for socialized housing as defined by R.A. No. 7279; and
(c) House and lot, and other residential dwellings with a selling price of not more than
Two Million Pesos (₱3,199,200).42
0 0
42
R.A. No. 10963 (TRAIN).

16
0 0
 Atty. C. Llamado (October 2021)

VAT-TAXABLE SALE OF SERVICES

- Sale of services or lease or use of properties (real, tangible personal, intangible), or supply
of knowledge, information, or assistance.

Requisites of a VAT-Taxable Sale of Services

1) The sale must be conducted in the ordinary course of trade or business;

2) For leases, the property must be leased or used in the Philippines;

3) The seller or lessor is VAT-registered, or if not, the gross receipts of the seller or lessor
during the year or in any 12-month period exceed the minimum of gross receipts of
₱3,000,000; and

4) In the case of lease of a residential unit, the monthly rental exceeds ₱15,000, and the
aggregate annual gross receipts of the lessor (from all residential units with monthly
rentals exceeding ₱15,000) exceed ₱3,000,000.

Taxable Services
- All kinds of services in the Philippines for a consideration, as long as it is not exempted
by law.

- Includes:

1) Sales of transportation contractors on their transport of goods or cargoes, including

persons who transport goods or cargoes for hire and other domestic common
carriers by land relative to their transport of goods or cargoes;

2) Sales of domestic common carriers by air and sea relative to their transport of
passengers, goods, or cargoes from one place in the Philippines to another place
in the Philippines;

Notes:

a) Common carriers by land with respect to their gross receipts from the
transport of passengers, shall not be liable to VAT, but to the percentage tax
under Section 117.

b) Additional charge for excess baggage is subject to VAT.

3) Sales of electricity by generation, transmission, and/or distribution companies;

The VAT shall be based on gross receipts charged by generation, transmission by

any entity including the National Grid Corporation of the Philippines, and
distribution companies including electric cooperatives.

Exceptions:

a) The universal charge passed on and collected by distribution companies and

electric cooperatives shall be excluded from the computation of the gross
receipts.

b) Sale of power or fuel 0generated 0thru renewable sources of energy shall be

subject to 0% VAT.

17