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VALUE-ADDED TAX (VAT)

VAT is an indirect tax, meaning that the tax burden can be transferred or passed on to the buyer, transferee,
or lessee of the goods, properties, or services. This rule also applies to existing contracts for the sale or lease
of goods, properties, or services at the time of the effectiveness of Republic Act No. 7716.
The term "in the course of trade or business" refers to the regular conduct or pursuit of a commercial or
economic activity, including transactions incidental to it, by any person. This definition applies regardless of
whether the person is a nonstock, nonprofit private organization (regardless of how its net income is used or
whether it exclusively serves its members or their guests) or a government entity.
Despite the rule of regularity, services defined under this Code performed in the Philippines by nonresident
foreign persons shall be considered rendered during trade or business. Additionally, digital services provided
by nonresident digital service providers shall be deemed performed or rendered in the Philippines if they are
consumed within the country.
The liable person is anyone engaged in trade or business who sells, barters, exchanges, or leases goods or
properties, provides services (including digital services), or imports goods and shall be subject to the value-
added tax (VAT) as imposed under Sections 106 to 108 of this Code.
The Scope of VAT on Sales
The VAT covers all sales of goods, properties, services, or lease of properties other than:
1. VAT-exempt sales; and
2. Services specifically subject to percentage tax.
VAT is a consumption tax imposed on:
1. Sale, barter, exchange, or lease of goods, properties, and services during trade or business in the
Philippines; and
2. Importation of goods into the Philippines, whether during trade or business.
Provided, however, that the seller must be a VAT-registered person or a VAT-registrable person. A registrable
person or those who exceed the VAT threshold are subject to VAT even if not registered as a VAT taxpayer. On
the other hand, a VAT-registered person will be subject to VAT even if their annual sales do not exceed the
VAT threshold.
According to a recent advisory from the Bureau of Internal Revenue (BIR), all VAT-registered taxpayers,
including self-employed individuals and professionals, whose total gross sales, receipts, and other non-
operating income did not exceed the revised VAT threshold of P3,000,000 in the preceding year, may opt to
shift from VAT to Non-VAT status. To do so, they must submit a duly accomplished BIR Form No. 1905
(Application for Registration Information Update) to the Revenue District Office (RDO) that has jurisdiction
over their Head Office (Bureau of Internal Revenue, 2024).
Here are the VAT-exempt transactions:
1. Sale of Agricultural and Marine Products - The sale of agricultural food products in their original state,
including rice, corn, vegetables, meat, and fish, as well as fertilizers, seedlings, and animal feeds, is VAT-
exempt. Additionally, the sale of livestock, poultry for human consumption, and marine or aquatic
products by fishermen also qualifies for VAT exemption.
2. Educational Institutions - Non-profit private educational institutions are exempt from VAT. Similarly,
government-owned and government-accredited educational institutions also qualify for VAT exemption.

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3. Medical and Health Services - Medical services provided by hospitals, clinics, doctors, and dentists, as well
as the sale of prescribed drugs for diabetes, hypertension, and high cholesterol, are VAT-exempt.
4. Financial and Banking Services - Financial and banking services, including those provided by banks, non-
bank financial intermediaries (quasi-banks), and life insurance providers, are VAT-exempt.
5. Government and Non-Profit Transactions - Government and non-profit transactions, including the sale of
goods and services by government-owned and controlled corporations (GOCCs), transactions by non-
stock, non-profit organizations, and sales to government entities subject to final withholding VAT, are VAT-
exempt.
6. Real Estate Transactions - Including the sale of residential lots valued at P1,919,500 or below, the sale of
houses and lots valued at P3,199,200 or below, and the lease of residential units with a monthly rent of
P15,000 or below—are VAT-exempt.
7. Transportation Services - Including those provided by land-based common carriers (buses, jeepneys,
tricycles) subject to a 3% common carriers tax instead of VAT, and international carriers engaged in
passenger transport are VAT-exempt.
Illustration:
a. ABC Company is a VAT-registered taxpayer whose sales do not exceed the VAT threshold in any 12-month
period. The company should pay VAT on its VATable sales or receipts regardless of whether they are below
the threshold because it is a VAT-registered taxpayer.
b. Mr. X, a non-VAT registered taxpayer, exceeded the VAT threshold in August 2024. He reported P200,000
in sales in September 2024. Mr. X shall pay VAT on his sales effective September 2024.
c. The VAT Threshold - A Comprehensive Application
Taxpayers with Mixed Types of Sales
The department store had the following sales for the 12-month period:
Fertilizers, seeds, poultry, and hog feeds P 1,200,000
Fruits and vegetables 800,000
Groceries 800,000
Clothes, shoes, and other apparel 600,000
Furniture 400,000
Total P 3,800,000
Note that the sales of fertilizers, seeds, poultry, hog feeds, fruits, and vegetables are exempt from sales. The
VATable sales are:
Groceries P 800,000 Since the total VATable sales are below the VAT
Clothes, shoes, and other apparel 600,000 threshold, the department store is not required to
Furniture 400,000 register as a VAT taxpayer. Consequently, it may
Total P 1,800,000 continue paying the 3% percentage tax on these
VATable sales until it exceeds the threshold.
Taxpayers with Multiple Businesses
As of September 2024, Mr. Jose had the Gross receipts from the restaurant P 2,200,000
following gross receipts from his Gross receipts from the barbershop 800,000
professional practice and his other Gross receipts from taxicab operations 1,500,000
businesses in the immediately preceding 12 Gross receipts from professional practice 1,000,000
months. Total P 5,500,000

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The VATable sales are: Gross receipts from the restaurant business P 2,200,000
Gross receipts from the barbershop 800,000
Gross receipts from the exercise of a profession 1,000,000
Total P 4,000,000
Note that common domestic carriers by land, such as taxis, are specifically subject to percentage tax and are
VAT-exempt. The taxpayer shall pay VAT starting October 2024 for the restaurant, barbershop, and exercise
of the profession because these VATable sales exceeded the threshold. Mr. Jose shall still pay the 3% common
carriers tax on the taxicab, but not VAT.
The VAT Model
The basic computation to arrive at a taxpayer’s net VAT payable is computed as follows:
Output VAT P xxx
Less: Input VAT xxx
Net VAT payable P xxx
Less: Tax credits or payments xxx
Tax still payable or (overpayment) P xxx

Classification of Sales for VAT Purposes

The classification of sales is important due to the differences in the treatment of output VAT and input VAT.
VAT-Exempt Sales
Exempt sales of VAT taxpayers refer to sales of (a) exempt goods, services, or properties and (b) services
specifically subject to percentage tax. These sales will not be subject to output VAT. Consequently, the seller
will not be allowed to credit input VAT.
Further, the input VAT traceable to exempt sales is part of the seller's costs or expenses and is deductible
against gross income subject to income tax.
Illustration: During the month, a VAT-registered person sold unprocessed agricultural food products for
P400,000, which he bought for P150,000 (i.e., a VAT-exempt transaction). He also purchased P100,000 worth
of supplies, exclusively P12,000 input VAT, which was all used in connection with these sales. The following
are recorded in the taxpayer’s books:
Accounts Debit Credit
Inventory 150,000
Supplies 100,000
Input VAT (100,000*12%) 12,000
Cash 262,000
To record the purchase of goods and supplies.
Cash 400,000
Sales 400,000
To record exempt sales.
Cost of Sales 150,000
Supplies Expense 112,000
Inventory/Purchases 150,000
Supplies 100,000
Input VAT 12,000
To record the cost of the exempt sales and supplies used.

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Note:
a. No input VAT is recorded on the purchase of unprocessed agricultural food products since the seller of
VAT-exempt transactions could not impose output VAT on the sale of goods. Therefore, no input VAT is
recorded for VAT-exempt transactions. Thus, such input VAT is not allowed to be credited against output
VAT but shall be treated as an expense or Input VAT Expense for the taxpayer to recover the same.
b. No output VAT can be charged on exempt sales. If the taxpayer charged VAT on exempt sales, the same
shall be considered taxable for the purpose of VAT.
c. The P12,000 input VAT is included in the supplies expenses and is not claimable as a tax credit. Since the
cost for the unprocessed agricultural food products is related to VAT-exempt transactions, the input VAT
is recorded as part of the Expenses/Cost of Sales.
Zero-Rated Sales
Zero-rated sales are the sale of goods or services to non-residents. These include (Banggawan R. B., 2023):
a. Export sales of goods or services; and
b. Other sales conferred on zero-rate status by law.
A zero-rated sale of service (by a VAT-registered person) is a taxable transaction for VAT purposes but shall
not result in any output tax. However, the input tax on purchases of goods, properties, or services related to
such zero-rated sales shall be available as a tax credit or refund in accordance with the Tax Code.
If claimed as a tax refund, the taxpayer will recover cash. If claimed as a tax credit, a Tax Credit Certificate will
be issued, which can be used as a tax credit against any other internal revenue taxes aside from VAT
(Banggawan R. B., 2023).
If the VAT on zero-rated sales is not claimed through any of the two (2) alternatives, it is credited against
output VAT at the end of the month.
Illustration: A VAT-registered person exported goods for P400,000. These goods were purchased for P200,000,
exclusive of P24,000 input VAT. The following are recorded in the taxpayer’s books:
Accounts Debit Credit
Inventory 200,000
Input VAT 24,000
Cash 262,000
To record the purchase of goods.

Cash 400,000
Sales 400,000
To record export sales.

Cost of Sales 200,000

Inventory/Purchases 200,000
To record the cost of export sales.
If claimed as a tax refund:
Cash 24,000
Input VAT 24,000
To record receipt of input VAT refund.
If claimed as a tax credit certificate (TCC):

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Prepaid Tax 24,000

Input VAT 24,000
To record receipt of tax credit certificate.
If not claimed as refund or TCC: (This is the default treatment of input VAT on zero-rated sales)
Output VAT 24,000
Input VAT 24,000
To close input VAT to output VAT at the end of the month.
VAT Exemption vs. Zero-Rating
VAT Exemption and Zero-Rating are two (2) different tax treatments that affect how Value-Added Tax (VAT) is
applied to goods and services. While both result in no VAT being charged to the buyer, they have different
implications for businesses.

1. VAT Exemption—In a VAT-exempt transaction, the seller does not charge VAT on the sale, and the buyer
is not required to pay VAT. However, businesses dealing with VAT-exempt sales cannot claim input VAT
credits on their purchases, meaning they bear the VAT cost on inputs. Common examples of VAT-exempt
transactions include educational services, medical services, and some financial transactions.
2. Zero-Rating—In a zero-rated transaction, the seller charges 0% VAT on the sale, meaning the buyer still
does not pay VAT. However, unlike VAT-exempt businesses, sellers of zero-rated goods and services can
claim VAT credits input, allowing them to recover VAT paid on their purchases. Zero-rated transactions
typically include exported goods and services, international transport, and sales to certain government or
diplomatic entities.

Feature VAT Exemption Zero-Rating

VAT Charged to Buyer No No (0% VAT)
Can Seller Claim Input VAT? No Yes
Typical Transactions Medical, education, financial Exports, international services,
services government sales

Sales to Government and Government-Owned and Controlled Corporations (GOCCs)

The sale to government and government-owned and controlled corporations (GOCCs) is subject to a 5% final
withholding VAT at source on sales. Please note that government agencies are required to withhold 5% VAT
on VATable transactions.
Section 114(C) of the Tax Code, as amended, provides the following:
"Withholding of Value-added Tax. – The Government or any of its political subdivisions, instrumentalities,
or agencies, including government-owned or -controlled corporations (GOCCs) shall, before making
payment on account of each purchase of goods and services which are subject to the value-added tax
imposed in Sections 106 and 108 of this Code, deduct and withhold a final value-added tax at the rate of
five percent (5%) of the gross payment thereof: Provided, That the payment for lease or use of properties
or property rights to nonresident owners shall be subject to twelve percent (12%) withholding tax at the
time of payment: For purposes of this Section, the payor or person in control of the payment shall be
considered as the withholding agent.“

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The 5% final withholding VAT is presumed to be the seller's VAT payable. Consequently, the seller need not
pay further VAT on the sale. As a result, the seller's claimable VAT is effectively set by the law at only 7% (12%-
5%) of gross sales to the government or GOCCs.
Illustration: A VAT-registered person sold goods to a government agency for P400,000. These goods were
purchased for P336,000, including P36,000 input VAT. The following are recorded in the taxpayer’s books:

Accounts Debit Credit

Inventory/Purchases 300,000
Input VAT 36,000
Cash 336,000
To record the purchase of goods.

Cash (P448,000 – P20,000) 428,000

Creditable Withholding VAT (P400,000 x 5%) 20,000
Sales 400,000
Output VAT (400,000 x 12%) 48,000
To record the sales to the government and the final withholding VAT.

Cost of Sales 300,000

Inventory/Purchases 300,000
To record the cost of sales to the government.

Output VAT 48,000

Cost of Sales 8,000
Input VAT 36,000
Creditable Withholding VAT 20,000
To close the output VAT and withhold the final VAT at the end of the month.
Note:
a. There is no VAT payable on sales to the government since the VAT due is conclusively presumed at 5%,
which is withheld at the source.
b. The difference between the actual input VAT (P36,000) and the P28,000 presumed input VAT is close to
the Cost of Sales or Expenses.
c. The P8,000 excess from the actual VAT input is a loss, which is added to the cost of sales. If 7% of sales
exceed the actual input VAT, a reduction in costs or expenses will occur.
The VAT on sales to the government is computed as follows:
Output VAT (400,000 x 12%) P 48,000
Less: Standard input VAT (7% x 400,000) 28,000
Withheld final VAT (5% x 400,000) 20,000
Total input VAT 48,000
VAT due and payable P 0

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Regular Sales
Regular sales pertain to sales other than exempt sales, sales to the government or GOCCs, and export sales.
Illustration: A taxpayer made sales of P1,000,000 exclusive of P120,000 output VAT and purchases of P800,000
exclusive of P96,000 input VAT. The following are recorded in the taxpayer’s books:
Accounts Debit Credit
Inventory/Purchases 800,000
Input VAT 96,000
Cash 896,000
To record the purchase of goods.

Cash 1,120,000
Sales 1,000,000
Output VAT 120,000
To record regular sales.

Cost of Sales 800,000

Inventory/Purchases 800,000
To record the cost of regular sales.

Output VAT 120,000

Input VAT 96,000
VAT Payable 24,000
To close VAT accounts and set up, the VAT is due and payable.

VAT Payable 24,000

Cash 24,000
To record payment of VAT to the government.
The VAT payable on regular sales may be computed as follows:
Output VAT (1,000,000 x 12%) P 120,000
Less: Input VAT 96,000
VAT Payable 24,000
Output VAT
The output VAT is the VAT passed on to customers or clients by a VAT taxpayer on his sales to customers. It is
collected and treated as the current tax liability of the seller taxpayer (Banggawan R. B., 2023).
The output VAT can only be imposed and recognized when:
1. There is a sale (actual or deemed sale); and
2. The seller-taxpayer is VAT-registered.
The output VAT may be subject to different rates, as follows:
1. Regular Output VAT – This is computed as 12% of domestic sales, which includes:
• Sellers of goods or properties – Gross selling price; and
• Sellers of services or lease of properties – Gross receipts.

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2. Zero-rated Output VAT – This arises from export sales, zero-rated sales, and effectively zero-rated sales
(Sec. 106, NIRC).
Sources of Regular Output VAT
The sources of Regular Output VAT in the Philippines are primarily based on Sections 106, 107, and 108 of the
National Internal Revenue Code (NIRC), as amended by the TRAIN Law. The first source is the sale of tangible
goods, which, under Section 106(A) of the NIRC, includes the sale, barter, or exchange of goods, properties,
and real estate that are not exempt from VAT. Businesses engaged in manufacturing, wholesale, and retail
trade must impose 12% VAT on their sales, as well as those selling commercial real estate (Tabag E. D., 2022).
Another key source is the sale of services and the lease of properties, as stated in Section 108(A) of the NIRC.
This applies to businesses and professionals providing services for a fee, such as consultants, contractors, and
technical experts. Likewise, the lease of commercial properties, including office spaces and warehouses,
generates output VAT when rented out by VAT-registered individuals or entities.
Additionally, the importation of goods is subject to VAT under Section 107 of the NIRC. Imported goods incur
a 12% VAT upon entry into the Philippines, and this tax is collected by the Bureau of Customs. The VAT is
computed based on the landed cost, which includes the purchase price, freight, insurance, and applicable
customs duties.
Lastly, certain transactions deemed sale are considered taxable under Revenue Regulations No. 16-2005.
These transactions include the withdrawal of inventory for personal use, transfers of goods between related
entities without actual sale, and the use of business assets for non-business purposes. Even though no direct
sales occur, these transactions are treated as taxable events to prevent tax avoidance and ensure proper VAT
compliance.
Transactions Deemed Sale
Transactions Deemed Sale refer to transactions that, while not outright sales, are treated as sales for tax or
accounting purposes. These typically involve the transfer of assets or rights where revenue is recognized as if
a sale has occurred. Examples include:
1. Installment Sales – When a business sells goods or services on an installment basis, it must account for
Output VAT (Value-Added Tax) based on tax regulations. In many jurisdictions, Output VAT is recognized
either at the point of sale or as payments are received, depending on the tax treatment of installment
transactions.
2. Exchange of Assets – When a company swaps assets, such as trading one piece of equipment for another
or exchanging land for a building, it is treated as if a sale has occurred. The company recognizes a gain or
loss based on the difference between the fair market value (FMV) of the asset received and the book value
of the asset given up.
• If the FMV of the asset received is greater than the book value of the asset given up, a gain is
recognized.
• If the FMV of the asset received is less than the book value of the asset given up, a loss is recognized.
• If the exchange has a commercial substance, gains and losses are fully recognized. If it lacks
commercial substance, gain recognition may be deferred.
3. Involuntary Conversions – This occurs when a company’s assets are destroyed, stolen, condemned, or
otherwise involuntarily disposed of, and the company receives compensation such as insurance proceeds
or government reimbursements. Since the asset is replaced with cash or a similar asset, it is treated as if
it were sold, and a gain or loss is recorded based on the proceeds received compared to the asset’s book
value.

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4. Transfer of Ownership with Retained Rights - In a sale and leaseback transaction, a company sells an asset
(e.g., a building or equipment) but leases it back from the buyer, allowing continued use of the:
• If the leaseback qualifies as a finance lease, the seller recognizes a financing liability instead of a sale.
• Asset while receiving cash from the sale. If the leaseback qualifies as an operating lease, the company
recognizes a sale but defers any gains or losses over the lease term.
Invoicing Requirements for Deemed Sales (Tabag E. D., 2022)
Deemed sales refer to transactions that are not traditional sales but are treated as such for tax or accounting
purposes. Tax authorities often require businesses to issue invoices for deemed sales to ensure proper tax
compliance, particularly for Value-Added Tax (VAT) or Goods and Services Tax (GST) reporting. In such cases,
a sales invoice or official receipt must be issued even if no actual sale has occurred, depending on tax
regulations, with the invoice reflecting the fair market value (FMV) of the goods or services as the taxable
amount. Proper documentation is necessary, including details such as the transaction description (e.g., asset
exchange, donation, or involuntary conversion), the applicable VAT or GST rate and amount, and references
to relevant tax rules if required by authorities. The invoice should also include VAT or GST computations,
ensuring that if the deemed sale is taxable, the appropriate tax is reflected based on FMV, or if exempt, it is
properly labeled as "VAT-exempt" or "Zero-rated." Businesses must retain copies of these invoices for audit
and tax reporting, as some jurisdictions mandate reporting of deemed sales in periodic tax returns.
Examples of invoicing for deemed sales vary depending on the transaction type. In installment sales, a sales
invoice is issued at the time of sale, even if payment is received in installments, with VAT reported either
upfront or upon cash collection, depending on tax rules. In asset exchanges, both parties must issue invoices
reflecting the FMV of the assets exchanged, with VAT computed based on the FMV of the asset given up. For
involuntary conversions, such as when insurance proceeds are received for lost or destroyed assets, some tax
authorities may require an invoice for VAT purposes, and invoicing may also be necessary upon the acquisition
of a replacement asset. Lastly, in transfers of ownership with retained rights (leasebacks), a sales invoice is
issued for the sale portion with VAT based on FMV, while leaseback payments are separately invoiced as rental
expenses. These invoice requirements ensure compliance with tax regulations and proper financial reporting
for sales transactions.
Input VAT
Input VAT is the VAT paid on the local purchases of goods or services, including the lease or use of property
from a VAT-registered person. It also includes VAT paid for the importation of goods or services by the
taxpayer. This may also arise from incentives provided by law, such as the transitional input VAT and the
presumptive input VAT (Banggawan R. B., 2023).
If the output VAT is treated as a current liability, note that the input VAT is to be treated as a current asset of
the taxpayer-seller because it is an advance payment of VAT. The input VAT is usually applied as a tax credit
against the output VAT to compute the net VAT payable.
Table Summary: Comparison of Output VAT and Input VAT
Types of Sales Output VAT Claimable Input VAT VAT Payable
a. Exempt Sales -none- -none- -none-
b. Zero-rated Sales Zero Actual Negative
c. Sales to Government 12% of sales/receipts 7% of sales/receipts -none-
d. Regular Sales 12% of sales/receipts Actual Positive

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Other VATable Sales

• Sales of Registrable Persons – These sales are subject to VAT even with non-registration as VAT taxpayers,
but no input VAT credit is allowed.
• Sales of Non-VAT Taxpayers Issuing VAT Invoice or Receipt – These are sales illegally charged with VAT
by non-VAT taxpayers. These sale transactions shall be subject to VAT without the benefit of input VAT,
plus the 50% surcharge and the usual 3% percentage tax.
• Exempt Sales Billed by VAT Taxpayers as Regular Sales – These are exempt sales that are billed through
a VAT invoice or VAT receipts, which are considered regular sales. Also, exempt sales that are not clearly
categorized as ‘exempt’ in the VAT invoice or VAT receipts shall be considered as regular sales subject to
VAT.

References:
Banggawan, R. B. (2023). Business & Transfer Taxation (Laws, Principles, and Applications with Tax Remedies). Real
Excellence Publishing.
Bureau of Internal Revenue. (2024). Tax Reform for Acceleration and Inclusion (TRAIN). Retrieved from Bureau of Internal
Revenue: https://www.bir.gov.ph/index.php/train.html
De Leon, H. S., & De Leon, Jr., H. M. (2022). The Law on Transfer and Business Taxation. REX Book Store.
Tabag, E. D. (2022). Business & Transfer Taxation with Special Topics. EDT Book Publishing Inc.
Tabag, E. D. (2023). Business & Transfer Taxation with Special Topics. EDT Book Publishing Inc.

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