OUTPUT AND INPUT TAXES

Output tax means the value-added tax due on the sale or lease of taxable
goods or property or services by a VAT-registered person. Input tax is the
value-added tax due from or paid by a VAT-registered person in the course of
his trade or business on importation of goods or local purchase of goods or
services, including lease or use of property from a VAT-registered person.
Generally, any input tax evidenced by a VAT invoice or official receipt shall
be creditable against the output tax.

To the VAT-registered purchaser, the tax burden passed on does not

constitute cost, but input tax which is creditable against his output tax
liabilities. This voids the cascading effect which is a characteristic of the
sales tax system of old, where the sales tax Is necessarily cost to the buyer,
and as such becomes a factor of cost which is a basis of the marked up seller
price in turn to his customers, and so on and so forth down the distribution
chain. In the VAT system, however, it is only in the case of a non-VAT
purchaser that VAT forms part of cost of the purchase (BIR Ruling 141-99,
Sept. 13, 1999). Input taxes on the following are creditable against the
output tax:

1. Purchase or importation of goods:

a. For sale;

b. For conversion into or intended to form part of a finished product

for sale including packaging materials;

For use as supplies in the course of business;

c. For use as materials supplied in the sale of service;

 d. For use in trade or business for which deduction for depreciation
or amortization is allowed under the Tax Code.

2. Purchase of real properties for which a value-added tax has actually

been paid.

3. Purchase of services in which a value-added tax has actually been

paid.

4. Transactions “deemed sale”.

5. Transitional input tax allowed.

6. Presumptive input tax allowed.

7. Transitional input tax credits allowed under the transitory and other
provisions.

Illustration. Source. Victoria Manufacturing Corporation vs. Commissioner of

Internal lievenue, CTA (Special First Division) Case 8187, June 23, 2013

Meralco refunds are not gross receipts subject to output VAT because the
refund did not arise from either a sale of goods or sale of services. The
receipt of Meralco refunds in 2006 resulted in VMC’s over-claiming of its input
tax for its Meralco billings prior to 2006. Thus, upon receipt of the refund,
VMC should have deducted the related input tax from its current input taxes
on payments for electric consumption.
Illustration. Source: BIR Ruling 061-2000, Nov. 8, 2000

Asia Pacific Primestar, Inc. (APPI) availed of the services of AGI. Consolidated
Trading (AGL) in the form of equipment rental and technical service fees.
APPI now asks whether it may claim an input VAT credit for the value-added
tax paid on its transaction with AGL despite the fact that the same is not
supported by a duly registered official receipt.

The BIR answered in the negative: “Before a VAT-registered person can claim
input taxes, the input tas should be supported by an invoice or receipt
showing the information as required under Sections 113(4) and 237 of the
Tax Code of 1997. Accordingly, APPI cannot claim an input VAT credit for the
VAT paid on its transaction with AGL since the VAT paid by APPI is not
supported by a duly registered official receipt.”

Illustration. Source: BIR Ruling 159-99, Oct. 14, 1999

Fujirebio Philippines, Inc., a registered VAT taxpayer as wholesaler/importer,

temporarily abandoned its trading activity; it instead devoted itself to
negotiating or brokering between parties to effect sale of goods earning
commission income from such service.

Input tax, as defined, are generated from the purchase of VAT-taxable goods
or services from a VAT. Registered taxpayer without distinguishing whether
the input taxes are sourced from the purchase of goods or services. In other
words, input taxes generated from the purchase of goods or services can be
used without distinction as a credit against the output tax due from VAT-
registered person. Such being the case, the commission earner who is liable
to the output tax on commission income may claim the input tax generated
from his/its importation of goods or trading activity subject to the condition
that such input taxes have not been applied against output taxes.
The input tax on domestic purchase of goods, properties or services or
importation of goods by a VAT-registered person shall be creditable to:

A the purchaser of the domestic goods or properties upon consummation of

the sale;

b. the purchaser of services, or the lessee or licensee upon payment of the

compensation, rental, royalty or fee; or

c. the importer upon payment of the value-added tax prior to the release of
the goods from the custody of the Bureau of Customs.

Transitional Input Tax

A person who becomes liable to value-added tax when the minimum

turnover of P1,919,500 (effective Jan. 1, 2012; before P1,500,000) in any 12-
month period has been exceeded or any person who elects to be a VAT-
registered person shall, subject to the filing of an inventory according to
rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, be allowed input tax on his beginning
inventory of goods, materials and supplies equivalent to 2% of the value of
such inventory or the actual value-added tax paid on such goods, materials
and

supplies, whichever is higher. The amount allowable shall be creditable

against the output tax.

Real estate developers subject to VAT for the first time are entitled to
transitional input tax credit based on the value of their beginning inventory
of real properties. In the absence of authority from any law, the
Commissioner of Internal Revenue has no power to limit the determination of
the transitional input tax credit only to the improvements on the real
properties (Fort Bonifacio Development Corporation vs. CIR, et al., Supreme
Court En Banc G.R. Nos. 158885 and 170680, promulgated Oct. 2, 2009).
Illustration. Starting 2010, Mr. Puno becomes liable to value-added tax.
Records show that he has P300.000 worth of merchandise inventory. Actual
payments of VAT on purchases from VAT-registered persons amounted to
P27,000.

Mr. Puno is entitled to transitional input tax credit of P27,000; the P6,000
(computed as P300,000 x 2%) being lower than the value-added tax actually
paid.

Presumptive Input Tax

-nio puppetoring

VAT-Dempt

Persons or firms engaged in the processing of sardines, mackerel and milk,

and in manufacturing refined sugar, cooking oil and packed noodle-based
instant meals, shall be allowed a presumptive input tax, creditable against
the output tax, equivalent to four percent (4%) of the gross value in money
of their purchases of primary agricultural products which are used as inputs
to their production.

Processing shall mean pasteurization, canning and activities which through

physical or chemical process alter the exterior texture or form or inner
substance of a product in such manner as to prepare it for special use to
which it could not have been put in its original form or condition. (1) no

Illustration. Mr. Jorge is engaged in the manufacture of refined sugar. For the
month, purchases of raw sugar from VAT-exempt persons totaled P330,000.
Proceeds from sale of refined sugar amounted to P550,000. Mr. Jorge shall be
entitled to a presumptive input tax of P13,200 (P330,000 x 4%).
Input Tax on Depreciable Goods

VAL

Rev. Reg. 13-2018

RR 13-18 discusses and illustrates in Section 4.110-3 Claims for Input Tax on
Depreciable

Goods:

Capital goods or properties refer to goods or properties with estimated useful

life greater than one (1) year and which are treated as depreciable assets
under the Tax Code, used directly or indirectly in the production or sale of
taxable goods or services.

Where a VAT registered person purchases or imports capital goods, which are
depreciable assets for income tax purposes, the aggregate acquisition cost
of which (exclusive of VAT) in a calendar month exceeds P1,000,000,
regardless of the acquisition cost of each capital good, shall be claimed as
credit against output tax in the following manner:

A. If the estimated useful life of a capital good is 5 years or more The input
tax shall be spread evenly over a period of 60 months and the claim for input
tax credit will commence in the calendar month when the capital good is
acquired. The total input taxes on purchases or importations of this type of
capital goods shall be divided by 60 and the quotient will be the amount to
be claimed monthly.

B. If the estimated useful life of a capital good is less than 5 years-The input
tax shall be spread evenly on a monthly basis by dividing the input tax by
the actual number of months comprising the estimated useful life of the
capital good. The claim for input tax credit shall commence in the calendar
month that the capital goods were acquired.

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

finished depreciable capital goods purchased or imported during any
calendar month does not exceed P1,000,000, the total input taxes will be
allowable as credit against output tax in the month of acquisition.

The aggregate acquisition cost of a depreciable asset in any calendar month

refers to the total price (exclusive of VAT) agreed upon for one or more
assets acquired and not on the payments actually made during the calendar
month. Thus, an asset acquired in installment for an acquisition cost of more
than P1,000,000 (exclusive of VAT) will be subject to the amortization of
input tax despite the fact that the monthly payments/installments may not
exceed P1,000,000.

Construction in progress (CIP) is the cost of construction work which is not

yet completed. CIP is not depreciated until the asset is placed in service.
Normally, upon completion, a CIP item is reclassified and the reclassified
asset is capitalized and depreciated.

CIP is considered, for purposes of claiming input tax, as a purchase of

service, the value of which shall be determined based on the progress
billings. Until such time the construction has been completed, it will not
qualify as capital goods as herein defined, in which case, input tax credit on
such transaction can be recognized in the month the payment was made,
Provided, that an official receipt of payment has been issued based on the
progress billings.

In case of contract for the sale of service where only the labor will be
supplied by the contractor and the materials will be purchased by the
contractee from other suppliers, input tax credit on the labor contracted shall
still be recognized on the month the payment was made based on progress
billings while input tax on the purchase of materials shall be recognized at
the time the materials were purchased.
Once the input tax has already been claimed while the construction is still in
progress, no additional input tax can be claimed upon completion of the
asset when it has been reclassified as a depreciable capital asset and
depreciated.

C. The amortization of the input VAT shall only be allowed until Dec. 31, 2021
after which taxpayers with unutilized input VAT on capital goods purchased
or imported shall be allowed to apply the same as scheduled until fully
utilized: Provided, That in the case of purchase of services, lease or use of
properties, the input tax shall be creditable to the purchaser, lessee or
licensee upon payment of the compensation, rental, royalty or fee (Revenue
Memorandum Circular 21-2022, Dec. 9, 2021).

Illustration 1: ABC Corporation sold capital goods on installment on Oct. 1,

2018. It is agreed that the selling price, including the VAT, shall be payable in
five (5) equal monthly installments with the first installment to be paid on
Oct. 1, 2018. The data pertinent to the sold assets are as follows:

Selling price

P 5,000,000 (exclusive of VAT)

Passed-on VAT

P 600,000

Original Cost of Asset

P 3,000,000

Accumulated Depreciation at the time of sale

- P 1,000,000

Unutilized Input Tax (Sold Asset)

P 100,000

Accounting Entries:

SELLER

BUYER

Oct. 1, 2018

1,120,000

Oct. 1, 2018

Cash

Asset

Installment Receivable

4,480,000
Input Tax

Accum. Depreciation

Cash

1,120,000

Output Tax

Installment Payable

Asset

Gain on sale of asset

4,480,000

To record VAT liability:

Output Tax

Input tax

VAT Payable

Periodic receipt of installment:

Cash

1,120,000

1,120,000

Periodic subsequent payment:

Installment Payable

Cash

1,120,000

Installment Payable

Chapter 20: Output and Input VAT |

1,120,000

The input tax of P600,000 shall be spread evenly over a period of 60 months
starting on October 2018, the date of purchase.

If the depreciable capital good is sold/transferred within a period of 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 was
made (Revenue Memorandum Circular 21-2022, Dec. 9, 2021).
Illustration 2: A manufacturer purchased capital goods on different occasions
as follows:

Month of Purchase

Amount (Php)

12% Input Tax

Useful Life

No. of Monthly Amortization

Last Month of Amortization

January 2018

Php 8,500,000)

8,500,000

Php 1,020,000

6 years

601
48

60

December 2022

February 2018

1,020,000

4 years

January 2022

December 2018

1,020,000

5 years

November 2022

January 2018

1,020,000
5 years

*Outright claim on January 2022

a. For purchase made on January 2018, the amortization shall be for the
shorter period of 5 years only or up to December 2022 although the useful
life is 6 years.

b. For purchase made on February 2018, the amortization shall be for a

period of 4 years only or up to January 2022 since the useful life of the asset
is shorter than 5 years.

c. For purchase made on December 2021, the amortization shall be for a

period of 5 years or up to November 2026.

d. For purchase made on January 2022, no amortization shall be made and

the input VAT shall be claimed on the month of purchase or January 2022.

Revenue Regulations 12-2012 (effective Oct. 17, 2012) and Revenue

Memorandum Circular 2-2013 prescribes and clarifies the rules on the
deductibility of depreciation and other expenses relating to the purchase of
vehicles, as well as the input taxes that may be claimed on such purchase.
The rules are as follows:

1. No deduction for depreciation shall be allowed unless the purchase of

the vehicle (defined in the RR as passenger vehicles of all type,
whether by land, water, or air) is substantiated by sufficient evidence,
such as official receipts and other adequate records, which contain,
among others, the following: (a) Specific Motor Vehicle Identification
Number, Chassis Number, or other registrable identification number of
the vehicle; (b) Total price of specific vehicle subject to depreciation;
and (c) Direct connection or relation of the vehicle to the development,
 management, operation, and/or conduct of the trade of business or
profession of the taxpayer.
2. Only one vehicle for land transport is allowed for the use of an official
or employee, the value of which should not exceed P2,400,000.
3.
4. No depreciation shall be allowed for yachts, helicopters, airplanes
and/or aircrafts, and land vehicles, which exceed the amount of
P2,400,000, unless the main line of business of the taxpayer is
transport operations or lease of transportation equipment, and the
vehicles purchased are used in said operations.
5.
6. 4. For income tax purposes, all expenses related to the non-
depreciable vehicles such as but not limited to repairs and
maintenance, oil and lubricants, gasoline, spare parts, tires and
accessories, premium paid for insurance covering said vehicles and
registration fees shall not be allowed as a deduction in their entirety. In
case the vehicles which are not allowed depreciation expense, or the
non-depreciable vehicles will be sold at a loss, the loss to be incurred
from such sale shall not be deductible from gross income.
7.
8. Input taxes on the purchase of non-depreciable vehicles and all input
taxes on maintenance expenses incurred thereon shall also be
disallowed.
9.
10. Apportionment of Input Tax on Mixed Transactions
11.
12. A VAT-registered person who is also engaged in transactions not
subject to the value-added tax shall be allowed to recognize input tax
credit on transactions subject to VAT as follows:
13.
14. t5
15.
16. 1 All the input taxes which can be directly attributed to
transactions subject to VAT (except sales of goods and services to
government or government-owned or controlled corporations); and
17.
18. 2. A ratable portion of any input tax which cannot be directly
attributed to either VAT taxable or VAT exempt activity. The input tax
shall be prorated on the basis of sales.
19.
20. Creditable Input Tax
21.
22. Creditable input tax for the current taxable month or quarter is
determined as follows:
23.
24. Input Tax, current period
25.
26. XXX
27.
28. XXX
29.
30. XXX
31.
32. Add: Excess Input Tax, previous period
33.
34. Less:
35.
36. Claim for Refund/Tax Credit Certificate
37.
38. XXX
39.
40. Purchases Returns & Allowances
41.
42. XXX
43.
44. dy
45.
46. Input Tax-Exempt Sales
47.
48. XXX
49.
50. Input Tax-Sale to Government
51.
52. XXX
53.
54. Creditable Input Tax
55.
56. XXX
57.
58. *subject to final VAT withholding of 5%
59.
60. (now, creditable under TRAIN Law, effective Jan. 1, 2021).
61. Value-Added Tax Payable
62.
63. If at the end of any taxable quarter the output tax exceeds the
input tax, the excess shall be paid by the VAT-registered person.
64.
65. If the input tax inclusive of input tax carried over from the
previous quarter exceeds the output tax, the excess input tax shall be
carried over to the succeeding quarter or quarters. Provided, however,
that any input tax attributable to zero-rated sales by a VAT-registered
person may at his option be refunded or applied for a tax credit
certificate which may be used in the payment of internal revenue
taxes, subject to the limitations as may be provided for by law, as well
as other implementing rules (Revenue Regulations 4-2007). The value-
added tax basic formula is as follows:
66.
67. Output Taxes
68.
69. Less: Input Taxes
70.
71. VAT Payable
72.
73. The amount of value-added tax should be shown as a separate
item in the invoice or receipt (RR16-2005). To derive the amount of tax
when only the total is shown in the invoice, multiply the total by the
fraction 12/112.
74.
75. Illustration. Source: Coca-Cola Bottlers Philippines, Inc. vs.
Commissioner of Internal Revenue, CTA (Speciqi Second Division) Case
Nos. 7986 & 8028, June 14, 2013
76.
77. Petitioner Coca-Cola Bottlers Philippines, Inc. (CCBPI) failed to
declare certain input taxes in its VAT retums for the 3rd and 4th
quarters of 2007. CCBPI alleged overpayment of VAT for the said
taxable periods since the undeclared input taxes were not credited
against output tax, Since CCBPI could not amend its VAT returns due to
the issuance of a BIR Letter of Authority for 2007, it filed with the BIR
claims for refund of alleged overpaid VAT for the 3rd and 4th quarters
 of 2007. As the BIR failed to act on the claims, CCBPI filed Petitions for
Review with the Court of Tax Appeals (CTA).
78.
79. Is CCBPI entitled to its claims for refund? No. CCBPI Cola is not
entitled to the refunds as the amounts claimed represent undeclared
input taxes, not erroneously paid taxes, as contemplated under Section
229 of the Tax Code. Section 229 of the Tax Code allows the recovery
of any national internal revenue tax (including VAT) which was
erroneously or illegally assessed or collected.
80.
81. CCBPI's input taxes for the 3rd and 4th quarters of 2007 should
have been declared in its quarterly VAT returns so that these could be
creditable against the output tax for the same taxable periods. Since it
failed to report the input taxes in its VAT returns, it could not offset the
undeclared input taxes against the output VAT. Under RR 16-2005,
input taxes must be substantiated and reported in the VAT returns to
be able to claim credit against the output tax. While CCBPI was able to
substantiate a portion of its claims, the input taxes were not reported
in its VAT returns,
82.
83. Value-Added Tax Entries

84. Illustration. Alicia Villarama Feeds based in Pasig City trades

specialty feeds for race horses, fighting cocks, aquarium fish, zoo
animals and other animals generally considered as pets. On May 13,
2022, Alicia Villarama Feeds purchased on account specialty feeds with
a total amount payable of P784,000. A wholesaler operating in the

Region bought for cash all of the available feeds on May 25, 2022; amount of
cash received was P1,120,000. Alicia Villarama Feeds paid the value-added
tax due by month end not minding the actual deadline. The entries related to
value-added tax are as follows:

The

2033 May 13
Purchases

Input Tax (700,000 x 12%)

84,000

Accounts Payable

784,000

Or ya dit he ue

Or

To record purchases on account

25 Cash

1,120,000

Sales

120,000

Output Tax (1,000,000 x 12%)

To record cash sales.

31

Output Tax

120,000

84,000

36,000

Input Tax

VAT Payable

To recognize VAT payable.

31

VAT Payable

Cash In Bank

36,000
36,000

To record payment of VAT.

Input tax increased the amount to be paid but has no effect on the cost of
the purchases. Output tax also increased the amount collected but not
necessarily, the sales figure.

The value of goods or properties sold and subsequently returned or for which
allowances were granted by a VAT-registered person may be deducted from
the gross sales or receipts for the quarter in which the refund is made or a
credit memorandum is issued. Sales discounts granted or indicated in the
invoice at the time of sale may be excluded from the gross sales within the
same month/quarter it was given.

Illustration. Assume that the wholesaler purchased the feeds from Villarama
on account and that a 2% sales discount is available if the account is settled
within 10 days from invoice date. Villarama was able to collect the account
on May 30. The related entry follows:

May 30

Cash

1,097,600

Output Tax

2,400
Sales Discounts

20,000

Accounts Receivable

1,120,000

Alicia Villarama, because of the sales discounts granted, will pay value-added
tax due of P33,600 only.

Media Advertising Placements

Revenue Memorandum Circular 91-2012, issued Dec. 28, 2012, supplements

RMC 63. 2012 on invoicing and recording of income payments for media
advertising placements under a split payment scheme or arrangement.

Under a split payment arrangement, the advertiser may engage or contract

directly with a media entity/supplier and an advertising agency for media
advertising placements to the media supplier and to the advertising agency
are limited to the cost of the service provided by each entity like, billing of
the media supplier for the total cost of production and media placement and
billing of advertising agency for commission/service fee).

Illustration. Assume that the total cost of the advertiser for the total media
advertisement is P100,000 comprised of P85,000 media entity/supplier.
Billing and P15,000 advertising agency commission/service fee, inclusive of
VAT, the accounting entries are presented next page:

Books of Accounts of the Advertiser:

1. Receipt of Billing from Media Entity/Supplier:

Books of Accounts of the Media Entity/Supplier:

1. Billing to Client/Advertiser for the Media Placement.

Advertising Expense

85,000

Accounts Receivable - Advertiser

Deferred Input VAT (85,000 x 12%)

10,200

Income/Fees-Media Placement

Accounts Payable - Media

Entity/Supplier

2. Payment to Media Entity/Supplier:

Accounts Payable - Media

Entity/Supplier
95,200

Deferred VAT Payable

95,200

85,000

10,200

2. Receipt of Income Payment from Advertiser:

95,200

Cash

93,500

Creditable IT Withheld (85,000 x 2%)

1,700

Creditable Withholding Tax

1,700
Cash

93,500

Accounts Receivable-Advertiser

95,200

3. Receipt of Billing from Advertising Agency:

Service Expense

Books of Accounts of the Advertising Agency:

1. Billing to Client/Advertiser for the Commission/Service Fee:

15,000

Accounts Receivable - Advertiser

Deferred Input VAT (15,000 x 12%)

Accounts Payable - Advertising

Agency

1,800
Commission Income/Service Fees

16,800

Deferred VAT Payable

16,800

15,000

1,800

4. Payment to Advertising Agency:

Accounts Payable - Advertising

2. Receipt of Income Payment from Advertiser:

16,800

Cash

16,500

Agency
Creditable IT Withheld (15,000 x 2%)

Cash

300

16,500

Creditable IT Withheld

300

Accounts Receivable - Advertiser

15,800