CPAR (May 2024)

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 sales1 if sale, barter, or exchange of goods or properties
or
(b) On the gross sales2 if sale of services, or in the lease or use of properties

in the course of trade or business;3

(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 Less Other Credits

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 credits;
(c) Seller pays excess of output tax over total credits (i.e. input
tax and other credits) to the BIR;
(d) Seller can carry-over excess credits 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 credits;
(c) Seller can (1) carry-over or (2) claim refund or tax credit
certificate, for excess credits

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 credits;
(d) Seller shall be liable to VAT if he issues VAT invoice, but
without the benefit of input tax credit.

1
“Gross selling price” before the effectivity of R.A. No. 11976.
2
“Gross receipts” before the effectivity of R.A. No. 11976.
3
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 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).
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CPAR (May 2024)

REGISTRATION FOR VAT

Mandatory Registration Optional Registration

1) Sellers whose gross sales on ALL lines of 1) Any person who is not subject to mandatory
non-exempt businesses4 for the past 12 registration because his actual or expected
months exceed ₱3,000,000. gross sales from non-exempt businesses for
the past 12 months do not exceed
₱3,000,000.
2) Sellers whose expected sales for the next 2) Any VAT-registered person who has other
12 months from ALL lines of non-exempt lines of business which are VAT-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) Those who are required to register but fail to do so shall be liable to pay the output VAT
but shall not have the benefit of input tax credits.

4) For those who are not registered, but become liable to VAT:5

A non-VAT taxpayer who initially presumed that his gross sales 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.

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

4
VATable businesses (i.e. those subject to 12% VAT and 0% VAT).
5
RR 8-2018.
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CPAR (May 2024)

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 or electronic application showing that his gross sales (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 for 3 consecutive years did not exceed
₱3,000,000.

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 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;6

4) Franchise grantees of radio and/or TV broadcasting whose gross annual sales 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.

6
The exempt business(es) must be minor line(s) of business of a VAT-registered person.
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 CPAR (May 2024)

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 and actual shipment of goods from the Philippines to a foreign country and
paid for in acceptable foreign currency, and accounted for in accordance with the
rules and regulations of the BSP.

2) 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.

(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) ADB; IRRI.

(2) Sales to diplomatic missions and other agencies or instrumentalities granted tax
immunities;
(3) Regional or area headquarters of (RHQs) of multinational corporations enjoying
VAT 0-rating on its purchases at the time of effectivity of the TRAIN;
(4) Qualified foreign embassies or resident foreign missions7 which have been issued
a VAT Certificate (“VC”), and their personnel and their dependents who have been
issued a VAT Identification Card (“VIC”), on purchases of goods and services in
the Philippines; and
(5) Other persons/entities who are entitled to 0% VAT on purchases8.

(c) Sale of raw materials, inventories, supplies, equipment, packaging materials, and
New goods to a registered export enterprise to be used directly and exclusively in its
registered project or activity pursuant to Section 294(E) and 295(D) of the Tax
Code.9

The zero-rating of such sales shall be for a maximum period of seventeen (17) years
from the date of registration of the export enterprise, unless otherwise extended under
the Strategic Investment Priority Plan (“SIPP”).10

7
Resident foreign mission (“RFM”) is either an embassy or a consulate, and includes the Taipei Economic
and Cultural Office (“TECO”) in Manila (RMC No. 44-2020).
8
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.
9
Sec. 106(A)(2)(c), NIRC.
10
Ibid.
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 CPAR (May 2024)

A registered export enterprise (“REE”) is a registered business enterprise11

engaged in manufacturing, assembling or processing, or services such as
information technology activities and business processing outsourcing, and
resulting in (a) the direct exportation, and/or (b) sale of its products or services to
another registered export enterprise that will form part of the final export product
or service of the latter, of at least 70% of its total production or output.12

Notes:

(1) The above-described sales to existing REEs located inside ecozones and
freeport zones13 shall also qualify for VAT 0-rating, but only on purchases
of goods directly and exclusively used in their registered projects or
activities.14, 15

(2) An exporter which is VAT-registered, but not registered as an REE pursuant

to Section 294(E) and 295(D), shall only enjoy 0% VAT on its direct export
sale of goods.

(d) Sales to offshore gaming licensees (OGLs)16 subject to gaming tax under Section
New 125-A of the Tax Code

The sale of goods or properties by VAT-registered persons to OGLs subject to the

gaming tax under Section 125-A of the Tax Code shall be subject to a 0% VAT rate.
Provided:17

(1) The VAT 0-rating shall only apply if the OGL is paying the 5% gaming tax;
and
(2) Where the goods supplied are used in non-gaming operations, the 0% rate shall
not apply.

11
A registered business enterprise refers to any individual, partnership, corporation, Philippine branch of
a foreign corporation, or other entity organized and existing under Philippine laws, and registered with
an Investment Promotion Agency (“IPA”), excluding service enterprises such as those engaged in
customs brokerage, trucking or forwarding services, janitorial services, security services, insurance,
banking and other financial services, consumers’ cooperatives, credit unions, consultancy services, retail
enterprises, restaurants, or such other similar services, as may be determined by the Fiscal Incentives
Review Board (“FIRB”) (Sec. 4(W), Rule 1, CREATE IRR).
12
Sec. 4(M), Rule 1, CREATE IRR.
13
Those REEs duly registered and accredited with the Subic Bay Metropolitan Authority (“SBMA”), the
Clark Development Authority (“CDA”), Aurora Pacific Economic Zone and Freeport Authority
(“APECO”), and the Philippine Economic Zone Authority).
14
RMC No. 24-2022.
15
Sales to existing registered export enterprises (“REEs”) located inside Ecozones or Freeport zones and
those REEs registered with the BOI and Investment Promotion Agencies (“IPAs”) other than the PEZA
or the Freeports, shall also be qualified for VAT 0-rating under Rev. Reg. No. 16-2005. However, the
VAT 0-rating shall only apply to the purchase of goods and/or services directly and exclusively used in
the registered project/activity of an REE.
16
An offshore gaming licensee is an offshore gaming operator, duly licensed and authorized to conduct
offshore gaming operations, including the acceptance of bets from offshore customers (Sec. 22(II),
NIRC).
17
Rev. Reg. No. 20-2021.
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 CPAR (May 2024)

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) Services other than those in processing, manufacturing, or repacking 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 when the services
are performed, and which are paid for in acceptable foreign currency;

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

international agreements effectively subjects the supply of such services to a 0%
rate18;

(3) Sale of services, including the provision of basic infrastructure, utilities, and
New
maintenance, repair and overhaul of equipment to a registered export enterprise to
be used directly and exclusively in its registered project or activity pursuant to
Sections 294(E) and 295(D) of the Tax Code.19

The zero-rating of such sales shall be for a maximum period of seventeen (17) years
from the date of registration of the export enterprise, unless otherwise extended
under the Strategic Investment Priority Plan (“SIPP”).20

Notes:

(a) The above-described sales to existing REEs located inside ecozones and freeport
zones21 shall also qualify for VAT 0-rating, but only on purchases of services
directly and exclusively used in their registered projects or activities.22, 23

(b) An exporter which is VAT-registered, but not registered as an REE pursuant to

Section 294(E) and 295(D), shall only enjoy 0% VAT on its direct export sale
of services.

(4) Sale of 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

18
Effectively 0-rated sales of services.
19
Sec. 4.108-5(b)(3), Rev. Reg. No. 16-2005 as amended by Rev. Reg. Nos. 13-2018, 26-2018, 9-2021,
and 21-2021.
20
Ibid.
21
Those REEs duly registered and accredited with the Subic Bay Metropolitan Authority (“SBMA”), the
Clark Development Authority (“CDA”), Aurora Pacific Economic Zone and Freeport Authority
(“APECO”), and the Philippine Economic Zone Authority).
22
RMC No. 24-2022.
23
Sales to existing registered export enterprises (“REEs”) located inside Ecozones or Freeport zones and
those REEs registered with the BOI and Investment Promotion Agencies (“IPAs”) other than the PEZA
or the Freeports, shall also be qualified for VAT 0-rating. However, the VAT 0-rating shall only apply
to the purchase of goods and/or services directly and exclusively used in the registered project/activity
of an REE.

6
 CPAR (May 2024)

passengers by such international carrier or shipper from a Philippine port directly

to a foreign port, or vice-versa.

(5) 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 due to lack of jurisdiction.

(6) Sale of power or fuel generated through renewable sources of energy such as solar,
wind, biomass, geothermal, and ocean energy. The sale of ancillary services
generated through renewable sources of energy shall also be subject to 0% VAT.

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

(7) Sale of services rendered to offshore gaming licensees (OGLs) subject to the
New gaming tax under Section 125-A of the Tax Code by service providers, including
accredited service providers defined in Section 27(G) of the Tax Code.

The sale of services by VAT-registered persons, including accredited service

providers, to OGLs subject to the gaming tax under Section 125-A of the Tax Code
shall be subject to a 0% VAT rate. Provided:24

(a) The VAT 0-rating shall only apply if the OGL is paying the 5% gaming tax;
and
(b) Where the services provided are used in non-gaming operations, the 0% rate
shall not apply.

An accredited service provider to an offshore gaming licensee shall be a natural

person, regardless of citizenship or residence) or a juridical person, wherever duly
organized, which provides ancillary services to an offshore gaming licensee or to
any gaming licensee or operator with licenses from other jurisdictions. Such
ancillary services include but shall not be limited to customer and technical
relations and support, information technology, gaming software, data provision,
payment solutions, and live and streaming services.25

24
Rev. Reg. No. 20-2021.
25
Sec. 27(G), NIRC.
7
CPAR (May 2024)

VAT-EXEMPT TRANSACTIONS

- The sale shall not be subject to output VAT, but the seller is not allowed any ITC26.
- Seller cannot bill any output VAT to his customers.
- If the seller issues a VAT invoice 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 Filipinos27,
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);
26
Input Tax Credit.
27
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.
8
CPAR (May 2024)

(6) Services by agricultural contract growers28, 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 52929;

(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,30 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 sales31 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.

28
Agricultural contract grower refers to a person/entity producing for others poultry, livestock, or other
agricultural and marine food products in their original state.
29
Petroleum Exploration Concessionaires under the Petroleum Act of 1949.
30
Sale by an agricultural cooperative of refined sugar is exempt from VAT and from the advance VAT
(CIR vs. Negros Consolidated Farmers Multi-Purpose Cooperative, S.C. (First Division), G.R. No.
212735, December 5, 2018).
31
“Gross receipts” before the effectivity of R.A. No. 11976.
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 CPAR (May 2024)

(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.32

(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 ₱3,600,000. 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”).33, 34

(17) Lease of a residential unit35 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 sales36 during the taxable year from such category exceed ₱3,000,000, then
the sales shall be subject to VAT. Otherwise, they will be subject to the 3% OPT.

(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

32
Sec. 4.109-1(B)(p), Rev. Reg. No. 16-2005, as amended by Rev. Reg. No. 4-2007.
33
Sec. 109(1)(P), NIRC; Sec. 4.109-1(B)(p), Rev. Reg. No. 16-2005, as amended by Rev. Reg. Nos. 8-
2021 and 1-2024.
34
Prior to January 1, 2024, the threshold amount in the sale of house and lot and other residential dwellings
for purposes of determining VAT exemption was ₱3,199,200.
35
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
houses; per person in the case of dormitories, boarding houses and bed spaces; and per room in case of
rooms for rent.
36
“Gross receipts” before the effectivity of R.A. No. 11976.
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CPAR (May 2024)

the digital or electronic format thereof. Provided, the materials enumerated herein are not
devoted principally to the publication of paid advertisements;37

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 PWDs38 which are subject
to a discount 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.39

(26) Sale of gold to the BSP40;

37
Sec. 109(1)(R), NIRC as amended by R.A. No. 11534.
38
The sale of items listed in basic necessities and prime commodities to Senior Citizens and PWDs, which
are subject to a special discount rate of 5%, shall not be exempt from the VAT (JMC No. 1, series of
2022, May 18, 2022).
39
Association of Non-Profit Clubs, Inc. (“ANPC”) vs. CIR, 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.
40
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 sales exceed the threshold of ₱3,000,000.

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CPAR (May 2024)

(27) (a) Sale41 or importation of prescription drugs and medicines for:42

(i) Diabetes, high cholesterol, and hypertension beginning January 1, 2020;43 and
(ii) Cancer, mental illness, tuberculosis, and kidney diseases beginning January 1, 2021;
(iii) Drugs, vaccines, and medical devices prescribed and directly used for COVID-19
treatment beginning January 1, 2021 until December 31, 2023;44

(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,
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, 2023.45

(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 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.

41
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).
42
Sec. 109(1)(AA), NIRC as amended by R.A. No. 11467.
43
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).
44
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).

Starting January 1, 2024, the sale of such items shall be subject to VAT again.
45
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.

Starting January 1, 2024, the sale of such items shall be subject to VAT again.

12
 CPAR (May 2024)

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.46

(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.47

(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.48

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.49

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) (a) Sales by PEZA and other ecozone registered enterprises which are taxed under
the 5% GIT;

(b) Importation by PEZA and other ecozone enterprises, but only if the goods and
services imported are directly attributable to and exclusively used in the registered
project or activity of the registered export enterprise.

(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 sales50 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.51

(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.52

46
Sec. 295(D), NIRC.
47
Sec. 295(E), NIRC.
48
Sec. 295(G), NIRC.
49
Ibid.
50
“Gross receipts” before the effectivity of R.A. No. 11976.
51
RMC No. 69-2017, as amended by RMC No. 51-2018.
52
BIR Ruling No. 242-2018, February 21, 2018; CIR vs. Tours Specialists, Inc., GR. No. 66416, March
21, 1990.
13
 CPAR (May 2024)

(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.53

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

NEW appropriate for use in schools, which are donated for distribution to public schools
regardless of level, including state universities and colleges and vocational institutions
under TESDA, shall be exempt from import duties and taxes.54

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.55

(7) VAT-exemption of certain sales to Solo Parents under R.A. No. 8972 as amended by
NEW R.A. No. 11861 (Expanded Solo Parents Welfare Act). A ten percent (10%) discount
and exemption from the VAT on baby’s milk, food, micro-nutrient supplements,
sanitary diapers, duly-prescribed medicines, vaccines, and other medical supplements
purchased from the birth of the child or children until six (6) years of age of a solo parent
who is earning less than Two Hundred Fifty Thousand Pesos (₱250,000) annually.56

Note: Senior Citizens who qualify as Solo Parents under R.A. No. 8972 as amended by
R.A. No. 11861 shall be entitled to the ten percent (10%) discount and VAT
exemption on such purchases provided the same are purchased from the birth of
the dependent child/children until six (6) years of age, and the Senior Citizen is
earning less than Two Hundred Fifty Thousand Pesos (₱250,000) annually.

53
Mercury Group of Companies, Inc. vs. CIR, CTA Case No. 9531, September 6, 2019.
54
Sec. 4(zzz), R.A. No. 11494.
55
Sec. 4(c), Rev. Reg. No. 26-2020.
56
Sec. 15(b), R.A. No. 8972 as amended by R.A. No. 11861.

14
CPAR (May 2024)

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.”57

(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.58

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.59

(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.

57
From the point of view of the new owner of such goods/properties, it is a “deemed purchase”.
58
The following are not considered transactions deemed sale, and therefore not subject to output VAT:

(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;

(b) The donation to TESDA, state universities and colleges, the Department of Education, and CHED-
accredited schools of capital equipment, raw materials, spare parts, and accessories, which were
previously imported tax and duty free under Section 294(D) of the Tax Code.
59
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.
15
CPAR (May 2024)

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
Tax Base: Gross sales, net of sales discounts , sales returns, and allowances

- 12% of the gross sales, 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).60

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

A) Gross sales = the total amount of money or its equivalent which the purchaser must pay61
the seller in consideration of the sale, barter, or exchange.62

Note: Any excise tax shall form part of the gross sales.

B) For transactions deemed sale:

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

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.

60
(3/28) or (12/112) of Invoice Amount, if
a) VAT is not separately billed; or
b) VAT is erroneously billed
61
That is, the entire gross sales whether paid in cash, credit, or installment.
62
When the gross sales 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.

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

16
CPAR (May 2024)

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 sales, if the real property is not a residential dwelling
(i.e., commercial or industrial real property, or residential lot only)

(2) If real property is a residential dwelling it shall be subject to VAT if the gross sales
exceed ₱3,600,000.

Notes:

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

1) the Gross Sales 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.

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

(b) If cash sale:

17
CPAR (May 2024)

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

(d) 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.

(e) 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
Three Million, Six Hundred Thousand Pesos (₱3,600,000).63

63
R.A. No. 10963 (TRAIN).

18
CPAR (May 2024)

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 sales64 of the seller or lessor
during the year or in any 12-month period exceed the minimum of gross sales 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 sales65 of the lessor 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 sales 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 sales 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 sales.

64
“Gross receipts” before the effectivity of R.A. No. 11976.
65
“Gross receipts” before the effectivity of R.A. No. 11976.
19
CPAR (May 2024)

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

subject to 0% VAT.

4) Sales of franchise grantees of electric utilities, telephone and telegraph, radio and/or
television broadcasting and all other franchise grantees.

Exceptions:
a) franchise grantees of radio and/or television broadcasting whose annual gross
sales of the preceding year do not exceed Ten Million Pesos (₱10,000,000),
b) franchise grantees of gas and water utilities;

subject to OPT (franchise tax) under Sec. 119

c) amounts received for overseas dispatch, message, or conversation originating

from the Philippines are subject to the 10% OPT under Section 120 of the Tax
Code.

5) Non-life insurance companies including surety, fidelity, indemnity, and bonding

companies. VAT shall be based on gross sales defined as follows:

Gross sales = premiums collected whether paid in money, notes, credits, or

any substitute for money, but does not include:
a) Premiums from crop insurance
b) Reinsurance premiums
c) Returned premiums (premiums refunded within 6
months after payment on account of rejection)
d) DST and local taxes passed on by the insurance company
to the insured.

Note: Insurance and reinsurance commissions, whether life or non-life, are

subject to VAT.

6) Lease of properties

a) Regardless of place where contract is executed as long as property leased is

located in the Philippines.

b) Any advance payment shall be subject to VAT if the same constitutes prepaid
rental. If the same constitutes a loan, option money, or security deposit, it shall
not be subject to VAT.

c) The VAT on the rentals or royalties payable to a non-resident owner or non-

resident lessor shall be withheld by the lessee or licensee in behalf of the non-
resident lessor and remitted to the BIR.

20
CPAR (May 2024)

7) Dealers in securities – shall pay VAT based on gross sales which is defined as:

Gross sales = Gross sales less cost of the securities sold.

8) Pre-need companies – shall pay VAT based on gross sales defined as:

Gross sales = premiums or payments received from the plan holders

9) HMOs – shall pay VAT based on gross sales or service fees defined as:

Gross sales or service fees = enrollment fees + other charges received from
their members

Note: In Medicard Philippines, Inc. vs. Commissioner of Internal Revenue (G.R.

No. 222743, April 5, 2017), the Supreme Court held that an HMO primarily
acts as an intermediary between its members and the healthcare providers
(e.g. doctors, hospitals, and clinics) for a fee. HMOs are allowed to
establish that a portion of such membership fees does not actually
compensate it for its services, but actually compensates other persons such
as medical service or healthcare providers.

The Supreme Court thus held that, for purposes of determining the VAT
liability of an HMO, the amounts earmarked and actually spent for medical
utilization of its members should not be included in the computation of its
gross sales.66

Computation of Output VAT:

Tax Base = Gross sales, net of allowances, refunds, discounts67

66
Medicard Philippines, Inc. vs. Commissioner of Internal Revenue, Supreme Court Third Division, G.R.
No. 222743, April 5, 2017.
67
Prior to January 22, 2024, the output VAT on the sale of services or lease of properties was 12% of gross
receipts, net of allowances, refunds, and discounts.

“Gross receipts” referred to the total amount of money or its equivalent representing the contract price,
compensation, service fee, rental or royalty, including

(a) the amount charged for materials supplied with the services,
(b) deposits applied as payments for services rendered, and
(c) advance payments

actually or constructively received during the taxable period for the services performed or to be
performed for another person.

Under the definition of “gross receipts,” any amount forming part of the contract price, not actually or
constructively received, was not subject to VAT. Thus, receivables under the contract was taxed in the
month or quarter when payment was received, actually or constructively.

“Constructive receipt” occurred when the money consideration or its equivalent is placed at the control
of the person who rendered the services without restrictions by the payor.

21
CPAR (May 2024)

12
12% of gross sales, net of VAT, OR /112 of the total invoice amount, gross of VAT

Gross sales means the total amount of money or its equivalent which the purchaser pays
or is obligated to pay to the seller in consideration of the sale, barter, or exchange of
services that has already been rendered by the seller and the use or lease of properties
that have already been supplied by the seller.

Gross sales represents the contract price, compensation, service fee, rental or royalty,
including the amount charged for materials supplied with the services during the taxable
quarter, for the services performed for another person.

Gross sales shall exclude the VAT and those amounts earmarked for payment to a 3rd party
or received as reimbursement for payment on behalf of another which do not redound to
the benefit of the seller as provided under relevant laws, rules, or regulations.

For long-term contracts for a period of one (1) year or more, the invoice shall be issued on
the month in which the service, or use or lease of properties is rendered or supplied.

22
CPAR (May 2024)

ISSUANCE OF VAT INVOICE

A VAT-registered person shall issue a VAT invoice for every sale, barter, exchange, or lease of
goods or properties, and for every sale, barter, or exchange of services, regardless of the amount
of the sale or transfer.68

A VAT Sales Invoice, for purposes of VAT, is a written account evidencing the sale of goods,
properties, or services issued to customers in the ordinary course of business, whether cash sales
or on account (credit) which shall be the basis of the output tax liability of the seller and the input
tax claim of the buyer. Cash sales invoices, and charge sales invoices fall under this definition.69

Only VAT-registered persons are required to print their TIN followed by the word “VAT” in their
invoices. Said documents shall be considered as a “VAT invoice”. All purchases covered by
invoices/receipts other than the VAT invoice shall not give rise to any input tax.

A taxpayer having taxable, zero-rated, and exempt transactions has the option either (1) to use
separate invoices for the separate components of the sale, or (2) to issue just one sales invoice.

In case the taxpayer opts to use only one invoice for all these sales, such invoice must clearly
indicate the breakdown of the sales price among its taxable, exempt, and zero-rated components,
and the calculation of the VAT on each portion of the sale should be shown on the invoice. For
this purpose, the printed invoice must reflect the vatable, zero-rated, and exempt sales, either in
separate columns or separate rows.

Consequences of Issuing Erroneous VAT Invoice

(a) If a person who is not VAT-registered issues an invoice showing his TIN, followed by the
word “VAT”, the erroneous issuance shall result to the following:

(1) The non-VAT person shall be liable to:

(i) the other applicable percentage taxes;
(ii) the VAT due on the transaction without the benefit of input tax credit; and
(iii) a 50% surcharge under Sec. 248(B) of the Tax Code.

(2) The VAT shall be recognized as an input tax credit to the purchaser, provided the
requisite information is shown on the invoice.

(b) If a VAT-registered person issues a VAT invoice for a VAT-exempt transaction, and fails
to display prominently on the invoice the words “VAT-exempt sale”, the transaction shall
become taxable and the issuer shall be liable to pay VAT thereon. The purchaser shall be
entitled to claim an input tax credit on his purchase.

(c) If a VAT-registered person issues a VAT invoice to another VAT-registered person with
lacking information required under Section 113(B) of the Tax Code, the issuer shall be
liable for non-compliance with the invoicing requirement.
The VAT shall still be allowed as input tax credit on the part of the purchaser if the lacking
information does not pertain to the amount of sales, amount of VAT, names and TINs of
the both the seller and purchaser, description of the goods or the nature of the service, and
the date of the transaction.

68
Sec. 237, NIRC as amended by R.A. No. 11976.
69
Rev. Reg. No. 18-2012.
23
CPAR (May 2024)

VAT ON IMPORTATION
- VAT paid by the importer before the goods are released by the Bureau of
Customs.

Importer is 1) Any person who brings goods into the Philippines, whether or not in the course of
trade or business; or
2) A non-exempt person who acquires tax-free imported goods from VAT-exempt
persons. Such non-exempt person shall be considered the importer thereof and
shall be liable for the VAT thereon.

Tax Base

1) The total value used by the Bureau of Customs in determining the tariff and customs duties
+ the customs duties + excise taxes, if any, + other charges, such as postage, commission
and similar charges, prior to the release of the goods from customs custody.

2) In case the valuation used by the Bureau of Customs in computing the duties is based on
volume or quantity of the imported goods, the landed cost shall be the basis for computing
the VAT. Landed cost consists of the invoice amount, customs duties, freight, insurance,
and other charges. If the goods imported are subject to excise tax, the excise tax shall form
part of the tax base;

3) The same rule applies to technical importation of goods sold by a person located in a
Special Economic Zone to a customer located in a customs territory (i.e., Philippine
territory where customs laws are imposed).

Payment of VAT on Importation.

The VAT on importation shall be paid by the importer prior to the release of the goods from
customs custody.

24
CPAR (May 2024)

COMPUTATION OF VAT PAYABLE:

Output VAT xxxxx

Less: Input Tax Credit (“ITC”) (xxxx)
Net VAT xxxxx
Less: Creditable VAT Withheld (xxxx)
Less: Advance VAT Payments (xxxx)
Less: Other Credits (xxxx)
VAT Payable xxxxx

(A) INPUT TAX CREDIT

1) Also called input VAT.

2) VAT due or paid on the importation of goods or

VAT paid by a purchaser (to the seller) on the local purchases of goods, properties, or
services in the course of trade or business.

Can be availed by a VAT-registered importer, or a VAT-registered purchaser of goods

or services.

3) Includes transitional input tax and the presumptive input tax.

Sources/Classification of Input Tax Credits

1) VAT paid (to the supplier or vendor) by a VAT-registered person on his local purchases,
and VAT paid (to the BIR) on importation of goods;

2) ITC from transactions “deemed purchase” – The “deemed sale” transaction will also
result in a “deemed purchase” transaction which gives rise to input tax.

3) Transitional input tax –

Persons allowed the transitional input tax: Those persons

a) becoming VAT-registered for the first time upon exceeding the minimum gross sales
of ₱3,000,000 in any 12-month period or

b) who voluntarily register under the VAT system.

Transitional input VAT = Higher of (2% of the value of the beginning inventory, or the
actual input VAT paid on such goods, materials, and supplies)

Provided: Inventory shall exclude goods exempt from VAT.

25
CPAR (May 2024)

4) Presumptive input tax

a) Available to persons or firms engaged in the processing of sardines, mackerel, and

milk, and in the manufacturing of refined sugar, cooking oil, and packed noodle-
based instant meals.

b) The presumptive input tax shall be equivalent to 4% of the gross value in money of
their purchases of primary agricultural products70 which are exempt from VAT,
and which are used as inputs in production.

5) Input tax on depreciable goods (deferred input tax credits)

The purchase or importation of depreciable capital goods totaling > ₱1,000,000

(exclusive of VAT) in a calendar month, regardless of the acquisition cost of each capital
good, and regardless of the terms of payment, shall give rise to input tax credits as follows:

1) If the estimated useful life of a capital good ≥ 5 years, the input tax credit shall be
spread over a period of 60 months, and the monthly input tax credit (“ITC”) shall
commence in the month the capital good was acquired.

2) If the estimated useful life of a capital good < 5 years, the input tax shall be spread
evenly by dividing the input tax by the actual number of months comprising the
estimated useful life. The claim for ITC shall commence in the month that the
capital good was acquired.

3) If the depreciable capital good is sold/transferred within a period of five (5) years
or prior to the exhaustion of the amortizable input tax thereon, the entire
unamortized input tax on the capital goods sold/transferred can be claimed as input
tax credit during the month/quarter when the sale or transfer is made.

Note: The amortization of the input VAT provided under Section 110(A)(2) of the Tax
Code shall only be allowed until December 31, 2021. After such date, taxpayers
with unutilized input VAT on capital goods purchased or imported shall be allowed
to apply the same as scheduled until fully utilized.

Effective January 1, 2022, all input VAT on purchases of capital goods shall be
allowed as input tax credits upon purchase or payment. The same shall no longer
be deferred.

EXCEPTION: Input taxes on the purchase of the following non-depreciable vehicles and
all input taxes on the maintenance expenses thereon shall not be allowed as input tax
credits against the output VAT:

(1) Purchases of vehicles for which no substantiation exists;

(2) Purchases of (a) yachts, (b) helicopters, (c) airplanes, or aircrafts, and (d) land vehicles
for the use of an official or employee of the taxpayer exceeding ₱2,400,000, unless the
taxpayer’s main line of business is in transport operations or in leasing transportation
equipment, and the vehicles are used in said operations.

6) Input tax on Construction in Progress (CIP)

70
Agricultural product does not include fish and marine resources.

26
CPAR (May 2024)

CIP –cost of construction work which is not yet completed. It will not be depreciated until
the asset is placed in service.

Input tax credit can be recognized in the month payment is made. However, once the asset
is completed and reclassified as a capital asset, no additional ITC can be claimed.

7) Ratable portion of any input tax which cannot be directly attributed to either taxable
or exempt activity

8) Issuance of a VAT invoice by a non-VAT person – provided the requisite information

is shown on the invoice.

9) Issuance of a VAT invoice on an exempt transaction by a VAT-registered person –

provided the requisite information is shown on the invoice.

10) VAT withheld by lessees/purchasers of services on payments made to non-resident

lessors/sellers of services

A resident payor (government or private) shall withhold the twelve percent (12%) VAT
with respect to payments for:

(a) the lease or use of properties or property rights owned by non-residents; and
(b) other services rendered in the Philippines by non-residents.71

The VAT withheld in (a) and (b) shall be remitted within ten (10) days following the end
of the month the withholding was made.

The VAT withheld and paid for the non-resident recipient may be claimed as a credit by
the said VAT-registered withholding agent upon filing his own VAT return, subject to the
rule on the allocation of input tax among taxable sales, zero-rated sales, and exempt sales.

How is an ITC used?

1) Used as a credit against the output tax to compute the net VAT;
2) Any excess ITC shall be carried over to the succeeding period;

3) Input tax attributed to 0-rated sales by a VAT-registered taxpayer may, at his option,

a) Be applied against the output VAT from sales of a VATable line of business, or carried
over to the succeeding period; or
b) The taxpayer can apply for a refund or tax credit certificate (“TCC”)72.73

4) Input tax attributable to VAT-exempt sales are expensed.

71
Sec. 114 (C), NIRC.

72
A TCC can be used in the payment of other internal revenue taxes.
73
If claim for refund or TCC is denied by the BIR, the amount of the claim is available as a deductible loss for the
purpose of computing a taxpayer’s taxable income (CIR vs. Maersk Global Services, CTA EB Case No. 1786,
June 13, 2019).

27
 CPAR (May 2024)

ITCs for VAT-Registered Persons Who Are Also Engaged in Non-VAT Lines of
Business

Such taxpayers shall be entitled to the following ITCs:

1) Input VAT directly attributable to transactions or sales subject to VAT;

2) For input VAT that cannot be directly attributed to either VAT-taxable, VAT-exempt, 0-
rated, or Government transactions, only the ratable portion pertaining to VAT-exempt
sales is not available as ITCs.

Total VAT-taxable sales Unattributed Input tax to be allocated to

x =
Total sales input taxes VAT-taxable transactions

Total Exempt sales Unattributed Input tax to be allocated to

x =
input taxes Exempt transactions
Total sales

Total 0-rated sales Unattributed Input tax to be allocated to

x =
Total sales input taxes 0-rated transactions

Total VAT-taxable sales to the

government Unattributed Input tax to be allocated to
x =
input taxes government transactions
Total sales

Notes:

1) Input taxes (a) directly attributable to VAT-exempt sales and (b) ratably allocated to VAT-
exempt sales – not allowed as ITCs, but shall be treated as part of costs or expenses.

Input taxes on the purchase of the non-depreciable vehicles listed under Rev. Reg. No. 12-
2012, and all input taxes on the maintenance expenses74 incurred thereon are likewise
disallowed as input tax credits against output VAT, and as deductible expenses in
computing the income tax.

Input taxes on purchases made from a Cannot be Located (“CBL”) taxpayer whose
New registration has been recommended for cancellation, and whose name has been published
in the BIR website, and in at least 2 newspapers of general circulation75 shall not be
allowed as input tax credits nor as deductible expenses. The disallowance shall apply
to transactions made after the publication of the name of the CBL supplier/seller.76

74
These include but shall not be limited to repairs and maintenance, oil and lubricants, gasoline, spare
parts, tires and accessories, premiums paid for insurance covering said vehicles, and registration fees
(RMC No. 2-2013).
75
CBL taxpayers are taxpayers to whom Letter Notices, Letters of Authority, and Tax Verification Notices
could not be served because they could not be located in their registered addresses. Handling Revenue
Officers, after complying with the requirements of RMC No. 98-2010, are required to report the names
of CBL taxpayers for publication in the BIR website, and in at least 2 newspapers of general circulation.
This is to provide such taxpayers with the opportunity to come forward and clarify their CBL status, and
to settle their outstanding tax obligations (RMC No. 98-2010).
76
The input VAT paid on such purchases shall be allowed as input tax credits if the buyer can prove the
existence of the supplier tagged as CBL by the BIR, and the authenticity of the purchases made (RMC
No. 29-2023).

28
CPAR (May 2024)

2) Prior to January 1, 2021, input taxes paid on purchases (a) directly attributable to sales to
the government and (b) ratably allocated to sales to the government were not allowed as
ITCs. However, the excess of such input taxes over the implied 7% standard input
VAT were allowed to be expensed.77

3) Input taxes (a) directly attributable to 0-rated sales and (b) ratably allocated to 0-rated
sales – shall be allowed as ITCs and any excess can be carried forward, or refunded, or
applied for a tax credit certificate (TCC).

(B) CREDITABLE WITHHOLDING VAT

(1) Creditable Withholding VAT withheld by the Government (CWVAT)

Beginning January 1, 2021, the government or any of its political subdivisions,

instrumentalities or agencies including government-owned or controlled corporations
(“GOCCs”) shall, before making a payment on account of each purchase of goods and/or
services taxed at twelve percent (12%) VAT under the Tax Code, deduct and withhold
a creditable withholding VAT equivalent to five percent (5%) of the gross payment
thereof.

This simply means that a VAT-registered seller to the government shall treat the sale just
like any other VAT-taxable sale where the VAT payable shall be computed by subtracting
the available input tax credits on purchases related to such sale from the 12% output VAT
on such sale. The seller’s VAT payable is reduced by a credit equivalent to the 5% VAT
withheld by the government.78

The government or any of its political subdivisions, instrumentalities, or agencies

including GOCCs shall issue to the vendor the Certificate of Creditable Tax Withheld at
Source (BIR Form No. 2307).79

The BIR Form No. 2307 shall be used as proof by a VAT-taxable vendor in claiming a
VAT credit in its monthly and quarterly VAT declaration.80

(2) 12% VAT withheld by lessees/purchasers of services on payments made to non-

resident lessors/sellers of services

(C) ADVANCE VAT PAYMENTS

The following are subject to the advance payment of VAT:

(a) Withdrawal of refined sugar from the mill/refinery by the owner/seller.

77
If the implied ITC (7%) was more than the actual ITCs, the excess decreased deductible expenses or
were recognized as other income for income tax purposes.
78
In other words, the 5% creditable withholding VAT acts like an advance payment of the VAT obligation
of the seller.
79
RMC No. 36-2021.
80
Ibid.
29
 CPAR (May 2024)

The operator of the sugar mill or refinery shall not allow any withdrawal of refined
sugar from its premises without the advance payment of VAT by the owner of the
sugar, except when the refined sugar is owned and withdrawn by a cooperative.

The advance VAT shall be determined based on schedules provided by the BIR.

(b) Sale of flour

a) VAT on the sale of flour milled from imported wheat shall be paid prior to the
release from the Bureau of Customs’ custody of the wheat which is imported
and declared for flour milling; and

b) Purchases by flour millers of imported wheat from traders shall also be

subjected to advance VAT, and shall be paid by the flour miller prior to
delivery.

(c) Transport of naturally grown and planted timber products -

Owners/sellers of naturally grown and planted timber products, whether natural or

juridical, who are holders of permits issued by, or agreements entered into with, the
Department of the Environment and Natural Resources (“DENR”), are liable to pay
the advance VAT on naturally grown and planted timber products harvested prior
to its transport for purposes of consummating a sale.

An owner of naturally grown and planted timber products, who can present a
Certificate of Registration (BIR Form No. 2303) showing that the owner is subject
only to the other percentage tax of 3%, shall be exempt from the payment of
advance VAT. However, if the aggregate value of the products to be transported
exceeds ₱3,000,000, the same shall be subject to advance VAT.

(d) Sale of jewelry, gold, and other metallic minerals to (1) Non-resident
individuals not engaged in business and (2) Non-resident foreign corporations

(D) OTHER CREDITS

NEW Output VAT Credit on Uncollected Receivables81

A seller of goods or services may deduct the output VAT pertaining to uncollected
receivables. This may be deducted from its output VAT on the next quarter after the lapse
of the agreed period to pay, under the following conditions:

(1) The seller has fully paid the VAT on the transaction; and
(2) The VAT component of the uncollected receivables has not been claimed as an
allowable deduction under Sec. 34(E) of the Tax Code.82

In case of recovery of the uncollected receivable, the output VAT pertaining thereto shall
be added to the output VAT of the taxpayer during the period of recovery.

81
Sec. 110(D), NIRC as inserted by R.A. No. 11976.
82
Sec. 34(E) of the Tax Code provides for the bad debt deduction in computing the net taxable income
in the income tax return.
30
CPAR (May 2024)

REFUND or TAX CREDIT OF EXCESS INPUT TAX

- Only VAT- registered persons may apply for issuance of a TCC or refund on the following
basis:
1) Input taxes paid corresponding to 0-rated or effectively 0-rated sales;
2) Unused input taxes as of the date of the retirement from or cessation of business;
3) Unused input taxes due to cessation of status of a VAT-registered person;

Limitations

1) The input taxes must not have been applied against output taxes.
2) The claim for refund or tax credit shall not include the transitional input tax.
3) In the case of export sales, the payments must be made in acceptable foreign currency.
4) Where the taxpayer is engaged in VATable (12%83), 0-rated, or exempt sales, and the
amount of creditable input tax cannot be directly or entirely attributed to any one of the
transactions, only the proportionate share of input taxes allocated to 0-rated sales can be
claimed for refund or issuance of a TCC:

Time for Filing Claim for Refund or Tax Credit84

a) For input taxes on zero-rated sales or lease of goods, properties, or services:

The application should be filed within two (2) years after the close of the taxable quarter
when such sales were made.

b) For unused input taxes upon retirement, change, or cessation of status as a VAT-registered
person.

The application should be filed within two (2) years from the date of cancellation85 of
his VAT registration.

Place of Filing Application or Claim

Claimant Place of Filing of Claim

Direct exporters, regardless of percentage of VAT Credit Audit Division (VCAD) in the
export sales to total sales BIR National Office
Those engaged in other VAT 0-rated activities, The following offices having jurisdiction over
other than direct exports the claimant:

Those with accumulated unutilized input taxes (1) VAT Audit Section (VATAS) in the
upon cancellation of their VAT registration Regional Assessment Division;

Those with claims of recovery of erroneously (2) Revenue District Office (RDO) if without
or illegally collected VAT a VATAS;

(3) The Large Taxpayers VAT Audit Unit

(LTVAU) of the Large Taxpayers Service

83
Includes sales to the government.
84
Sec. 112, NIRC as amended by R.A. No. 11976.
85
The date of cancellation is the date of issuance of the tax clearance(s) by the BIR after full settlement of
all tax liabilities relative to the cessation of business or change in status of the taxpayer.
31
 CPAR (May 2024)

Period Within Which Refund or Tax Credit of Input Taxes Shall Be Acted
Upon

Close of the Taxable Quarter

(or Date of Cancellation of
Within 25 days (or within 25 days Registration)
from the end of the month when
registration was cancelled) Within 2 years

Date of filing the Quarterly Date of Filing Application for

VAT Return (or Final VAT Refund or TCC
Return)

Within 90 days

(1) Application is fully or partially

Within 2 years Application is granted
denied; or
(2) CIR fails to act on application
within 90 days

Within 30 days
(see note (b)
below)

Appeal to the Court of

Tax Appeals

Notes:

(a) The application for refund/TCC must be supported by complete documents. Failure to
submit the relevant documents in support of the claim upon filing of the application shall
result in the non-acceptance thereof.

(b) In case of full or partial denial of the claim for tax refund/TCC or failure on the part of the
CIR to act on the application within the 90-day period, the taxpayer affected may, within
thirty (30) days from the receipt of the decision denying the claim or after the expiration
of the 90-day period, appeal the decision with the Court of Tax Appeals (“CTA”).86

86
Sec. 112(C), NIRC as amended by R.A. No. 11976; Sec. 4.112-1(d), Rev. Reg. No. 16-2005.

32
 CPAR (May 2024)

In case the Commissioner fails to act on the application within the 90-day period, such
inaction is deemed a denial of the application which gives the applicant the right to appeal
to the CTA

Such inaction is now penalized under Section 269 of the Tax Code. The spectre of a
criminal penalty under Section 269 hopefully encourages BIR officials to promptly act on
a taxpayer’s application within the 90-day period.

(c) Failure to timely file a judicial claim with the CTA within the 30-day period shall render
the Commissioner’s decision final and unappealable.

Moreover, the taxpayer must file the judicial appeal before the lapse of the two (2)
year period from the date of filing the VAT return for the taxable quarter.

Because of this last requirement, taxpayers need not wait for the lapse of the 90-day period
before seeking judicial relief with the CTA by way of Petition for Review.

A taxpayer may therefore file a “Petition for Review” with the CTA involving a claim for
refund or TCC that is still pending with the BIR. In such cases, the administrative agency
and the CTA may act on the case separately.

(d) When a claim for refund/TCC is denied by the BIR, the amount of the claim is a valid loss
which may be properly deducted from gross income for income tax purposes. Provided,
the taxpayer was not compensated for the loss, and the BIR/DOF categorically stated in
its denial letter that the taxpayer’s claim cannot be given due course.87

(e) The BIR shall classify VAT refund claims into low-, medium-, and high-risk claims. The
NEW risk classification shall be based on the amount of VAT refund claim, the tax compliance
history (of the taxpayer), frequency of filing VAT refund claims (by the taxpayer), among
others.

The medium- and high-risk claims shall be subject to audit or other verification processes
in accordance with the BIR’s national audit program for the relevant year.88

87
CIR vs. Maersk Global Service Centers (Philippines) Ltd., CTA (En Banc) Case No. 1786, June 13, 2019.
88
Sec. 112(C), NIRC as amended by R.A. No. 11976.

33
CPAR (May 2024)

FILING OF VAT RETURN and PAYMENT OF VAT

1) Monthly VAT Return or Declaration

All persons liable for VAT may pay a monthly VAT based on the taxable sales and
creditable purchases for the month.

BIR Form 2550M – filed not later than the 25th day following the end of the taxable quarter.

– filed only for the first 2 months of each quarter.

2) Quarterly VAT Return or Declaration

All persons liable for VAT shall file a quarterly return which shall include sales and
purchase information for the quarter, including the information for the first 2 months of the
quarter for which monthly VAT returns have been filed.

BIR Form 2550Q – filed not later than the 25th day following the end of the taxable
quarter.

– payments made in the 2 previous monthly VAT returns shall be

credited against the quarterly VAT payable to arrive at the net VAT
payable (or excess input tax) for the quarter.

3) Returns Under the Electronic Filing and Payment System (“EFPS”)

Taxpayers enrolled in the EFPS shall be required to file their monthly VAT declarations
within 21, 22, 23, 24, or 25 days following the end of each month, depending on their
industry classification.

Payment of the tax due via the EFPS shall be five (5) days later than the deadlines for filing.

Note: Beginning January 1, 2023, the filing and payment of VAT shall be done within
twenty-five (25) days following the following the close of each taxable quarter.89

However, VAT-registered taxpayer may continue to file and pay their VAT liabilities
on a monthly basis using BIR Form No. 2550M.

The filing of BIR Form No. 2550Q and the payment of the VAT thereon must still be
made within 25 days from the close of the taxable quarter. However, there shall be no
prescribed deadline for the monthly filing of BIR Form No. 2550M.90

(4) Short Period Return

A final quarterly VAT return shall be filed by:

89
Sec. 114(A), NIRC as amended by R.A. No. 10963; RMC No. 5-2023.
90
RMC No. 52-2023

34
CPAR (May 2024)

a) Any person who retires from business with due notice to the BIR office where the
taxpayer’s head office is registered or
b) Any person whose VAT registration has been cancelled,

within 25 days from the end of the month when the business ceases to operate or when the
VAT registration has been officially cancelled.

Thus, if a taxpayer’s Certificate of Registration is cancelled on November 20, 2020, he

shall file his final quarterly VAT return and pay the tax on or before December 25, 2020.

However, subsequent monthly declaration/quarterly returns are still required to be filed if

the results of the winding up of the affairs or business of the taxpayer reveal taxable
transactions.

Where to File and Pay

Only one (1) consolidated quarterly VAT return or monthly VAT declaration covering the results
of operations of the head office as well as the branches for all lines of business subject to VAT
shall be filed by the taxpayer, for every return period.

a) Where payment is involved:

The monthly VAT declaration and quarterly return shall be filed with, and the VAT due
thereon paid, either electronically or manually, to:91

(1) any authorized agent bank (“AAB”); or

(2) Revenue District Office through a Revenue Collection Officer; or
(3) authorized tax software provider.

b) Where no payment is involved:

The quarterly VAT return and the monthly VAT declaration shall be filed with the Revenue
District Office or Large Taxpayers District Office (“LTDO”), or Large Taxpayers
Assistance Division (“LTAD”) of the BIR.

c) Taxpayer filing via the EFPS shall comply with the provisions of the EFPS Regulations.

Quarterly Summary Lists

All persons liable for VAT are required to submit a quarterly Summary List of Sales, and a
quarterly Summary List of Purchases.

The lists shall be recorded using the BIR’s Reconciliation of Listing for Enforcement
(“RELIEF”) System application.92

91
Sec. 114(B), NIRC as amended by R.A. No. 11976.
92
The RELIEF application can be downloaded from the BIR website.

35
CPAR (May 2024)

When and Where to File the Summary Lists

The quarterly summary list of sales or purchases, whichever is applicable, shall be

submitted through compact disc-recordable (“CDR”) medium to the RDO or LTDO or
LTAD having jurisdiction over the taxpayer, on or before the 25th day of the month
following the close of the taxable quarter (calendar or fiscal quarter).

However, taxpayers under the jurisdiction of the Large Taxpayers Service (“LTS”),
and those enrolled under the EFPS shall, through the electronic filing facility93,
submit their summary lists of sales/purchases to the RDO/LTDO/LTAD, on or before
the 30th day of the month following the close of the taxable quarter.

Suspension of Business Operations94

The Commissioner or his authorized representative is empowered to suspend the business

operations and temporarily close the business establishment of any person for any of the
following violations pursuant to the BIR’s Oplan Kandado initiative:

1) Failure to issue invoices;

2) Failure to file a VAT return as required by the Tax Code;

3) Understatement of taxable sales by thirty percent (30%) or more of his correct taxable
sales for the taxable quarter; or

4) Failure to register as required by the Tax Code .

INCOME TAX ASPECT OF VAT

Treatment of VAT

Under the VAT system, sales and purchases accounts are taken up in the books exclusive of
the VAT. The gross sales or gross revenues, and the cost of sales, including expenses, shall
be recorded in the books net of the VAT, whether or not the latter is billed separately in the
invoices.

This applies to the computation of income taxes. For purposes of the income tax, the sales,
cost of sales, and expenses shall be taken up consistently net of the VAT.

93
esubmission.gov.ph facility.
94
Sec. 115, NIRC as amended by R.A. No. 11976; RMO No. 3-2009.

36