TAX II : SYLLABUS – VALUE-ADDED TAX

Atty. Ma. Victoria A. Villaluz

I. Nature of the VAT and underlying Laws

1. Broad-based tax on consumption of goods, properties or services in the Philippines –
 Imposed on each sale, barter or exchange or lease of goods or properties, or
on each rendition of services, in the course of trade or business, as they pass
along the production and distribution chain, the tax being limited only to
the value added to such goods, properties or services by the seller,
transferor or lessor
 Levied on the importation of goods whether in the course of trade or
business
2. Indirect tax ---
 May be shifted or passed on by the seller to the buyer, transferee or lessee
 Seller is the one statutorily liable for the tax, but the burden (ie, the amount)
of the tax is shifted/passed-on to, and borne by the buyer, transferee or
lessee
 Liability for the tax vs burden of the tax
 For importation, importer is the one liable for the VAT
3. Collected through the tax credit method ---
 If at the end of a taxable quarter, the output taxes charged by a seller are
equal to the input taxes passed on by the suppliers, no payment is required.
It is when the output taxes exceed the input taxes that the excess has to be
paid. If, however, the input taxes exceed the output taxes, the excess shall be
carried over to the succeeding quarter or quarters.
4. NOT a cascading tax ---
 There is no tax pyramiding because what has been subjected to VAT before
is not thereafter subjected to VAT.
5. NOT a tax on tax ---
 In indirect taxation, there is a need to distinguish between the liability for
the tax and the burden of the tax. As earlier pointed out, the amount of tax
paid may be shifted or passed on by the seller to the buyer. What is
transferred in such instances is not the liability for the tax, but the tax
burden. In adding or including the VAT due to the selling price, the seller
remains the person primarily and legally liable for the payment of the tax.
What is shifted only to the intermediate buyer and ultimately to the final
purchaser is the burden of the tax.
 Stated differently, a seller who is directly and legally liable for payment of
an indirect tax, such as the VAT on goods or services, is not necessarily the
person who ultimately bears the burden of the same tax. It is the final
purchaser or consumer of such goods or services who, although not directly
and legally liable for the payment thereof, ultimately bears the burden of the
tax.
6. Transparent form of sales tax ---
 The VAT is required to be shown as a separate item on the sales invoice or
official receipt.
7. VAT adheres to the Cross Border Doctrine/Destination Principle ---
 Under the cross-border principle of the VAT system, no VAT shall be
imposed to form part of the cost of goods destined for consumption outside
of the territorial border of the taxing authority.
 If exports of goods and services from the Philippines to a foreign country

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 are free of the VAT, then the same rule holds for such exports from the
national territory – except specifically declared areas -- to an ecozone.
 The Philippine VAT system adheres to the Cross Border Doctrine,
according to which, no VAT shall be imposed to form part of the cost of
goods destined for consumption outside of the territorial border of the
taxing authority. Hence, actual export of goods and services from the
Philippines to a foreign country must be free of VAT; while, those destined
for use or consumption within the Philippines shall be imposed with 12%
VAT

II. Who are Liable for the VAT (Sec. 105, TC)
1. Any person who, in the course of trade or business
 Sells, barters or exchanges, goods or properties (seller or transferor)
 Leases goods of properties (lessor)
 Renders services (service provider)
2. Any person who imports goods (importer)
 In the case of importation of taxable goods, the importer, whether an
individual or corporation and whether or not made in the course of his trade
or business, shall be liable to VAT imposed in Sec. 107 of the Tax Code. (Sec
4.105-1, RR 16-2005, as amended)

“Person” refers to any individual, trust, estate, partnership, corporation, joint venture,
cooperative or association. (Sec 4.105-1, RR 16-2005, as amended)

III. Transations Subject to VAT

READ: Section 106, 107, 108 Tax Code as amended by the TRAIN Law
1. Sale of Goods or Properties
2. Sale or Exchange of Services
3. Importation of Goods

 Meaning of the phrase “ in the course of trade or business”

 Transactions incidental to the regular course of trade or business
 Isolated transactions

4. What is output VAT or output tax? What is input VAT or input tax?

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IV. Tax Base
1. Sale of Goods and Properties
 Definition of “gross selling price or gross value in money”
 Allowable deductions from the gross selling price
 VAT base for sale of real properties
2. Importation of Goods
 VAT is based on the same amount on which the Bureau of Customs (BOC)
computes tariff and customs duties
3. Sale of Services including Lease of Properties
 Definition of the term “gross receipts”
 What is excluded from the term “gross receipts”
 What is constructive receipt
 VAT on Non-resident lessors of property

V. Transactions Deemed Sale – Section 106 (B), Tax Code

1. Transfer, use or consumption not in the course of business of goods/properties
originally intended for sale or use in the course of business
2. Distribution or transfer to shareholders, investors or creditors
3. Consignment of goods if actual sale is not made within 60 days from date of
consignment
4. Retirement from or cessation of business with respect to inventories on hand

READ : BIR RULING [DA-(VAT-050) 282-09], dated June 5, 2009

VAT RULING NO. 011-02, dated March 6, 2002

VI. ZERO-RATED and VAT-EXEMPT Transactions

READ TRAIN LAW
1. What is a VAT-exempt transaction
An exempt transaction involves goods or services which, by their nature, are
specifically listed in and expressly exempted from the VAT under the Tax Code,
without regard to the tax status – VAT exempt or not -- of the party to the
transaction. Indeed, such transaction is not subject to the VAT, but the seller is not
allowed any tax refund of or credit for any input taxes paid.

2. What is a zero-rated transaction

 Zero-rated transactions generally refer to the export sale of goods and
supply of services. The tax rate is set at zero. When applied to the tax base,
such rate obviously results in no tax chargeable against the purchaser. The
seller of such transactions charges no output tax, but can claim a refund of or
a tax credit certificate for the VAT previously charged by suppliers.
 Taxable transaction for VAT purposes but shall not result in any output tax

3. ZERO-rated Transactions- Section 106 of the Tax Code, as amended by the TRAIN
LAW
 Automatically zero-rated transactions
o Export sales of goods and supply of services
1. Sale and actual shipment of goods from the Philippines to a
foreign country
 irrespective of any shipping arrangement that may
be agreed upon which may influence or determine
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 the transfer of ownership of the goods so exported,
 paid for in acceptable forein currency or its
equivalent in goods or services and
 accounted for in accordance with the rules and
regulations of the BSP

2. Sale of raw materials or packaging materials to a non-resident

buyer for delivery to a resident local export-oriented
enterprise
 to be used in manufacturing, processing, packing or
repacking in the Philippines of the said buyer’s
goods,
 paid for in acceptable foreign currency, and
 accounted for in accordance with the rules and
regulations of the BSP

3. Sale of raw materials or packaging materials to an export-

oriented enterprise whose export sales exceed 70% of total
annual production
 Export oriented enterprise – Any export-oriented
enterprise whose export sales exceed 70% of the
total annual production of the preceding taxable
year

4. Transactions considered export sales under EO 226 1

 PH port F.O.B. value determined from invoices,
bills of lading, inward letters of credit, landing
certificates and other commercial documents of
export products exported directly by a registered
export producer
or
the net selling price of export products sold by a
registered export producer to another export
producer or to an export trader that subsequently
exports the same
 Sales of export products to another
producer or to an export trader shall only
be deemed export sales when actually
exported by the latter as evidenced by
landing certificates or similar commercial
documents
 Without actual exportation the following
shall be considered constructively exported
for purposes of these provisions
o Sales to bonded manufacturing
warehouses of export-oriented
manufacturers
o Sales to export processing zones

1Upon the satisfaction of certain conditions, (2) (3) (4) will no longer be 0% VAT rate but will be subject to 12% VAT
rate (See VII)

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 o Sales to registered expoer traders
operating bonded trading
warehouses supplying raw materials
in the manufacture of export
products under guidelines to be set
by the Board in consultation with
the BIR and the BOC
o Sales to diplomatic missions and
other agencies and/or
instrumentalities granted tax
immunities, of locally manufactured,
assembled or repacked products
whether paid for in foreign currency
or not.
 For purposes of zero-rating, the export
sales of registered export traders shall
include commission income.
o The exportation of goods on
consignment shall not be deemed
export sales until the export
products consigned are in fact sold
by the consignee

5. Sales of good, properties or services made by a VAT-

registered supplier to a BOI-registered
manufacturer/producer whose products are 100% exported
 Certification of the BOI good for 1 year needed

6. Sale of goods, supplies, equipment and fuel to persons

engaged in international shipping or international air
transport operations
 Such must be used exclusively for international
shipping or air transport operations
 Sale must be limited to those used in the transport
or goods and 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 passenger/cargoes that originated from
abroad/loading passengers/cargoes bound for
abroad
 If any is not used for such purpose, such
portion shall be subject to 12% VAT

o Sales to persons or entities whose exemption under special laws or

international agreements to which the PH is a signatory effectively
subject such sales to zero rate

 Effectively zero-rated transactions

o Sales to persons or entities whose exemption under special laws or

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 international agreement to which the PH is a signatory effectively
subjects such sales to zero rate.
o In this kind of zero-rated sale, the condition for the zero-rating is that
there is a special law or international agreement which declares that
the buyer is exempt from VAT
o Sales under such is then treated as effectively zero-rated so that the
seller charges the buyer 0% VAT.
 CIR vs. SEAGATE TECHNOLOGY PHILIPPINES
o Zero-rated vs. Effectively zero-rated transactions
1. Differ as to source (see above)
2. Extent of relief: Destination Principle
 Automatically zero-rated transactions
 Primarily intended to be enjoyed by the seller
who is legally and legally viable for the VAT
 Effect: Makes seller internationally
competitive by allowing the refund or
credit of input taxes that are
attributable to export sales.
 Effectively zero-rated transactions
 Intended to benefit the purchaser who, not
being directly and legally liable for the
payment of VAT, will ultimately bear the
burden of the tax shifted by suppliers.

 PEZA Relevance
o To designate certain areas as economic zones
1. Selected areas to develop into agro-industrial, economic
development, industrial, tourist/recreational, banking,
investment, financial centers
 Industrial estates
 Export possessing zones
 A specialised industrial estate located
physically/administratively in a separate
customs regime for the purpose of export
production.
 Enterprises in these zones are allowed to
import raw materials and capital equiment
free from duties, tax and other import
restrictions.
 In lieu of paying taxes, 5% of the gross
income earned by all businesses and
enterprises are remitted to the national
government.

 Free trade zones

 Isolated policy area adjacent to a port of entry
and/or airport where imported goods may be
unloaded for immediate transshipment or
stored, repacked, sorted or mixed or
otherwise manipulated without being subject
to import duties
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  Movement from free trade area to non free
trade area is subject to import duties
 Tourist/recreational centers

4. VAT-EXEMPT Transactions-Section 109, as amended by the TRAIN LAW

VII. Transactions/Services that are Currently Zero-rated BUT will be Eventually Subject to
VAT
1. Enhanced VAT refund system
 System that grants and pays refunds of creditable input tax within 90 days
from the filing of the VAT refund application with the Bureau
o Provided that all applications filed from Jan.1, 2018 shall be processed
and decided within 90 days from the filing of the VAT refund
application
 The 90 day period to process and decide, pending the establishment of the
enhance VAT Refund System shall only be up to the date of approval of the
Recommendation Report on such application for VAT refund by the
Commissioner or his duly authorized representative.
 All claims for refund/tax credit certificate filed prior to January 1, 2018 shall
still be governed by the 120 day processing period
 All pending VAT refund claims as of Dec. 21, 2017 shall be fully paid in case
by Dec. 31, 2019
 All this provided that the Dept. of Finance shall establish a VAT refund
center in the BIR and in the BOC that will handle the processing and granting
of cash refunds of creditable input tax.

2. Sale
 The sale of raw materials or packaging materials to a non-resident buyer for
delivery to a resident local export-oriented enterprise to be used in
manufacturing, processing, packing or repacking in the Philippines of said
buyer’s goods, paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP
 The sale of raw materials to an export-oriented enterprise whose export sales
exceed 70% of total annual production.
 Transactions considered export sales under EO 226/Omnibus Investment
Code.
3. Services
 Processing, manufacturing or repacking goods for other persons doing
business outside in the Philippines
 Services performed by subcontractors and/or contractors in processing,
converting or manufacturing goods for an enterprise whose export sales
exceed 70%

READ TRAIN Law and Rev. Regs. No.13-2018

VIII. VAT-EXEMPT Transactions- Option to be VAT-registered

1. Definition
 Goods or services which by their nature are specifically listed in and
expressly exempted from the VAT under the Tax Code, without regard to
the tax status
 Such transaction is not subject to the VAT but the seller is not allowed any
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 tax refund of or credit for any input taxes paid
2. What are VAT exempt transactions
 Importation of professional instrument and implements, tools of trade,
occupation, employment,
3. Optional registration- cannot be cancelled for a period of 3 years

IX. Tax Credits

1. Claim for Input Tax on depreciable Goods- capital goods
 Definition of Capital goods
o Goods or properties with estimated useful life greater than 1 year and
which are treated as depreciable assets under the Tax Code, used
directly or indirectly in the production or sale of taxable goods or
services.

 Estimated useful life is 5 years or more

Input tax shall be spread evenly over a period of sixty (60) months and the
claim for input tax credit will commence in the calendar month when the
capital good is acquired. The total input taxes on purchases or importations
of this type of capital goods shall be divided by 60 and the quotient will be
the amount to be claimed monthl.
 Estimated useful life is LESS than 5 years.

The input tax shall be spread evenly on a monthly basis by dividing the
input tax by the actual number of months comprising the estimated useful
life of the capital good. The claim for input tax credit shall commence in the
calendar month that the capital goods were acquired.

Where the aggregate acquisition cost (exclusive of VAT) of the existing or

finished depreciable capital goods purchased or imported during any
calendar month does not exceed One million pesos (P 1,000,000.00), the
total input taxes will be allowable as credit against output tax in the month
of acquisition.

2. Construction in Progress (CIP)

 Cost of construction work which is not yet completed.
 CIP is not depreciated until the asset is placed in servic.
 CIP is considered, for purposes of claiming input tax, as a purchase of
service, the value of which shall be determined based on the progress
billings. Until such time the construction has been completed, it will not
qualify as capital goods as herein defined, in which case, input tax credit on
such transaction can be recognized in the month the payment was made:
Provided, that an official receipt of payment has been issued based on the
progress billings.

X. Claims for Refund/Credit of Input Tax

1. Zero-rated and Effectively zero-rated- READ- SEC. 4.112-1, Rev. Regs. 13 2018: A
VAT-registered person whose sales of goods, properties or services are zero-rated or
effectively zero-rated may apply for the issuance of a tax refund of input tax
attributable to such sales.
 Allocation of input tax credits between zero-rated/ effectively zero-rated
and vatable transactions

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 o The input tax that may be subject of the claim shall exclude the
portion of input tax that has been applied against the output tax.
 When should claim be filed
o The application should be filed within 2 years after the close of the
taxable quarter when such sales were made.
 Where the taxpayer is engaged in both zero-rated or effectively zero-rated
sales and in taxable (including sales subject to final witholding VAT) or
exempt sales of goods, properties or services, and the amount of creditable
input tax due or paid cannot be directly and entirely attributed to any one of
the transactions, only the proportionate share of input taxes allocated to
zero-rated or effectively zero-rated sales can be claimed for refund or
issuance of a tax credit certificate
 In the case of a person engaged in the transport of passenger and cargo by
air or sea vessels from the Philippines to a foreign country, the input taxes
shall be allocated ratably between his zero-rated sales and non zero-rated
sales (sales subject to regular rate, subject to final VAT witholfing and
VAT-exempt sales)

2. Cancellation of VAT registration

 A VAT-registered person whose registration has been cancelled due to
retirement from or cessation of business or due to changes in or cessation of
status under Sec. 106 (c) of the Tax Code may, within 2 years from the date
of the cancellation, apply for the issuance of tax credit certificate for any
unused input tax, which he may use in payment of his other internal revenue
taxes.
o Date of cancellation = date of issuance of tax clearance by the BIR
1. After full settlement of all tax liabilities relative to cessation
of business or change of status of the concerned taxpayer
o Filing of the claim – when made
1. Only after completion of the mandatory audir of all internal
revenue tax liabilities covering the immediately preceding
year and the short period return and the issuance of the
applicable tax clearance/s by the appropriate BIR Office
which has jurisdiction over the taxpayer
 He shall entitled to a refund if his other internaal revenue tax liabilities
against which the tax credit certificate may be utilized.

3. Where should claim be filed

 Claims for refunds – Where
o Appropriate BIR Office (Large Taxpayers Service, Revenue District
Office) having jurisdiction over the principal place of business of the
taxpayer.
 Claims for input tax refund of direct exporters – Where
o Exclusively filed with the VAT Credit Audit Division (VCAD)
4. Period within which the refun or tax credit will be made
 The CIR shall grant refund for credit input taxes within 90 days from the
date of submission of the official receipts or invoices and other documents in
support of the application filed accordingly
o Should the Commissioner find that the grant of refund is not proper,
the Commission must state in writing the legal and factual basis for
the denial
1. In case of full or partial denial of the claim for tax refund, the

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 taxpayer affected may, within 30 days from the receipt of the
decision denying the claim, appeal the decision with the Court
of Tax Appeals.
 Failure on the part of any official, agent or employee
of the BIR to act on the application within the 90
day period shal be punishable under Sec. 269 of the
Tax Code.
 The 90 day period to process and decide, pending the establishment of the
enhanced VAT Refund System shall only be up to the date of approval of the
Recommendation Report on such application for VAT refund by the
Commissioner or his duly authorized representative
o All claims for refund/tax credit certificate filed prior to January 1,
2018 will be governed by the 100 day processing period.
5. Manner of giving refund; VAT refund Center
 Refund shall be made upon warrant drawn by the Commissioner of Internal
Revenuew or by his duly authorized representative without the necessity of
being countersigned by the Chairman, COA, the provision of the Revised
Admin. Code to the contrary notwithstanding
o Refunds under this paragraph shall be subject to post audit by the
COA
 The Dept. of Finance shall establish a VAT refund center in the BIR and in
the Bureau of Customs that will handle the processing and granting of cash
refunds of creditable input tax.

XI. Invoicing Requirements

 A VAT-registered person shall issue:
1. A VAT invoice for every sale, barter or exchange of good or properties and
2. A VAT official receipt for every lease of goods or properties and for every sale,
barter or exchange of services
 Only VAT-registered persons are required to print their TIN followed by the word VAT
in their invoice or official receipts. Said documents shall be considered as VAT invoice or
VAT

XII. Filing of VAT Returns- READ-Rev.Regs. 13-2018

 Every person liable to pay the VAT imposed shall file a quarterly return of the amount of
his gross sales or receipts within 25 days following the close of each taxable quarter
prescribed for each taxpayer.
o Taxable quarter: Quarter that is synchronised with the income tax quarter of the
taxpayer
 The VAT registered persons shall pay the VAT on a monthly basis
 Beginning January 1, 2023, the filing and payment required under the Tax Code shall be
done within 25 days following the close of each taxable quarter.
XIII. Withholding of VAT on Government Money Payments
XIV. Payments to Non-Residents- READ- SEC.4-114-2, Rev. Regs.13-2018
 The Government or any of its political subdivisions, instrumentalities or agencies,
including GOCCs shall, before making payment on account of each purchase of goods and
servies which are subject to the VAT imposed in Sec. 106 and 108 of this Code, deduct and
withhold a final VAT at the rate of 5% of the gross payment.
 Beginning Jan. 21 2021, the VAT withholding system under this subsection shall shift
from final to a creditable system
o Provided that the payment for lease or use of properties or property right to
nonresident owners shall be subject to 12% withholding tac at the time of the
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 payment
o Project funded by Official Development Assistance shall not be subject to the
final/creditable withholding taxes imposed

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