CHAPTER 8 – Value Added Tax

Computation of VAT Payable

Output VAT (Gross Sales/Receipts) x 12% / 0% Php xxxxx

Less: Input VAT (Gross Purchases/Disbursement) x 12% xxxxx
VAT Payable (Excess of Input VAT) Php xxxxx

Sources of Output Tax

1. Actual Sale – sales where there are actual exchanges between buyer and seller in the ordinary course
of business.

Basis in Computing the 12% Output VAT

 Sale of Goods – Gross Selling Price
The term “gross selling price” means the total amount of money or its equivalent which the
purchaser pays or is obligated to pay the seller in consideration of the sale, barter or exchange of
the goods or properties, exclusive of VAT. The excise tax shall form part of the gross selling price.
 Sale of Services – Gross Receipts
a. Not Subject to VAT
b. A loan to the lessor from the lessee
c. An option money for the property
d. A security deposit to insure the faithful performance of certain obligations of the lessee
to the lessor
 Sale of Securities – Gross Income
 Sale of Real Property – Gross selling price of fair market value whichever is higher

Incidental Transactions

Exercise No. 1 – Net of VAT Approach

Panatag Corporation, a VAT registered domestic corporation, reported gross sales of P5,000,000.00,
exclusive of vat, for the 3rd quarter of 2024. Determine the output vat for the quarter.

Exercise No. 2 – Gross of VAT approach

Panatag Corporation, a VAT registered domestic corporation, reported gross sales of P7,840,000.00,
exclusive of vat, for the 3rd quarter of 2024. Determine the output vat for the quarter.

2. Transactions Deemed Sale – under section 106(B) of the Tax Code, certain transactions which are not
actual sales because of the absence of actual exchange between the buyer and the seller, are
considered or included in the term sale for vat purposes.

(1) Transfer, use or consumption not in the course of business of goods or properties originally
intended for sale or for use during business.
(2) Distribution or transfer to:
(a) Shareholders or investors as share in the profits of the VAT-registered persons; or
(b) Creditors in payment of debt;
 (3) Consignment of goods if actual sale is not made within sixty (60) days following the date such
goods were consigned; and
(4) Retirement from or cessation of business, with respect to inventories of taxable goods existing as
of such retirement or cessation.

Exercise No. 1
Determine which of the following is transactions deemed sale:

Case A – San Miguel Corporation, manufacturer of the best beer in the world, “San Miguel Beer”,
celebrated its centennial anniversary a week ago. The company consumed P1,000,000.00 worth of
beer during the celebration.

Case B – Assume the data in the preceding case except that the P1,000,000.00 worth of beer was sold
to the company’s customers.

Case C – Waterboy, Inc., the leading distributor of distilled and purified water, consumed some of its
merchandise valued at P300,000.00 during the company’s team building activities.

Case D – Jollibee Foods, Inc. distributed 6,000 pieces of funrun t-shirts to its recent charity activities.

Exercise No. 2
Cardo Dalisay, a sole proprietor of a grocery store in Butuan City. He has a debt to one of his
compadres, Mr. Magtanggol, amounting to P50,000.00. They agreed that instead of cash, Mr. Dalisay
will send P75,000.00 worth of groceries to extinguish his obligation. How much is the output VAT
payable?

RR16-2005 as amended by RR4-2007 provides that the vat provided above shall apply to goods or
properties originally intended for sale or use in business, and capital goods which are existing as of the
occurrence of the following:
a. Change of business activity from VAT taxable status to VAT exempt status.
b. Approval of a request for cancellation of registration due to reversion to exempt status
c. Approval of a request for cancellation of registration of one who commenced business with the
expectation of gross sales or receipts exceeding P3,000,000.00, as amended, but who failed to
exceed this amount during the first 12 months of operation.

3. Zero Rated Sales – 0% VAT

Output VAT (Gross Sales/Receipts) x 0% 0.00
Less: Input VAT (Gross Purchases/Disbursement) x 12% xxxxx
VAT Refundable (Php xxxxx)
The Input VAT attributable to zero rated sales may be:
a. Refunded
b. Claim as deduction/tax credit against output vat on domestic sales
c. Claim as tax credit against any other internal revenue taxes

EXPORT SALE BY A VAT REGISTERED ENTITY

 A "zero rated sale" of goods, properties and/or services 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 sale, shall be available as tax
credit or refund. in accordance with existing regulations (RR 21-2021).

PURPOSE OF ZERO-RATING:
• The zero rated seller becomes internationally competitive by allowing the refund or credit of
input taxes that are attributable to export sales (CIR vs. Seagate Technology Phils., G.R.
No. 153866, Feb. 11, 2005).

RATIONALE FOR ZERO RATING OF EXPORT SALES:PURPOSE OF ZERO-RATING:

• The zero rated seller becomes internationally competitive by allowing the refund or credit of
input taxes that are attributable to export sales (CIR vs. Seagate Technology Phils., G.R.
No. 153866, Feb. 11, 2005).

RATIONALE FOR ZERO RATING OF EXPORT SALES:

• The Philippine vat system adheres to the "Cross Border Doctrine" (also known as destination
principle), according to which, no VAT shall be imposed to form part of the cost of the goods
destined for consumption of the territorial border of the taxing authority.

**Refund of Input Vat on zero rated (0%) sale (Sec. 122 NIRC; RR 13-2018)
A vat registered person whose sales of goods, properties or services are zero-rated or effectively zero-
rated may apply for the issuance of a tax refund of input vat attributable on such sales. The input vat that
may be subject of the claim shall exclude the portion of the input vat that has been applied against the
output vat. The application should be filed within two (2) years after the close of the taxable quarter when
such sales were made.

Where the taxpayer is engaged in both zero-rated and non-zero rated (12%) or exempt sale of goods,
properties or services, and the amount of creditable input vat due or paid cannot be directly or entirely
attributed to any one of the transactions, only the proportionate share of input vat allocated to zero-rated
sales can be claimed for refund or issuance of a tax credit certificate (TCC).

In case of taxpayers engaged in the transport of passengers and cargo by air or sea vessels from the
Philippines to a foreign country, the input vat shall be allocated ratably between zero rated sales and non-
zero rated sales (sales subject to 12% vat rate, subject to final vat withholding, and vat exempt sales).

The following sales by VAT-registered persons shall be subject to zero percent (0%) rate:[85]

(a) Export Sales. The term “export sales” means:

 The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of
any shipping arrangement that may be agreed upon which may influence or determine the
transfer of ownership of the goods so exported and paid for in acceptable foreign currency or its
equivalent in goods or services, and accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP);
 The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or
international air transport operations: Provided, That the goods, supplies, equipment and fuel
shall be used for international shipping or air transport operations.
 Sales to a persons or entities whose exemption from direct or indirect taxes under special laws or
international agreements to which the Philippines is a signatory effectively subjects such sales to
zero rate
 Sale of raw materials, inventories, supplies, equipment, packaging materials, and goods, 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 Republic Act No. 11534 or the “Corporate Recovery
and Tax Incentives for Enterprise Act” (“CREATE Act”), and Section 5, Rule 2 of its IRR for a
maximum period of seventeen (17) years from the date of registration, unless otherwise extended
under the SIPP; Provided, That the term “registered export enterprise” shall refer to an export
enterprise as defined under Section 4 (M), Rule 1 of the CREATE Act IRR, that is also a registered
business enterprise as defined in Section 4 (W) of the same IRR: Provided further, That the above-
described sales to existing registered export enterprises located inside ecozones and freeport
zones shall also be qualified for VAT zero rating under this sub-item until the expiration of the
transitory period.

Local purchases of goods relating to the following services shall not be considered as “directly and
exclusively used” in the registered project or activity of a registered export enterprise, to wit:
 janitorial services;
 security services;
 financial services;
 consultancy services;
 marketing and promotion; and
 Services rendered for administrative operations such as Human Resources (HR),
legal, and accounting.

This notwithstanding, the registered export enterprise is not precluded from further proving, with
supporting evidence, to the concerned Investment Promotion Agency (IPA) that any of the local
purchase of goods relating to the above-listed services are indeed directly and exclusively used in
its registered project or activity. In all instances, in issuing the VAT zero-rating certification, the
concerned IPA shall be guided by the rule that such local purchases of goods are directly
attributable to the registered project or activity without which such registered project or activity
cannot be carried out. These are costs that are indispensable to the project or activity, i.e., without
which the project or activity cannot proceed, and these include expenses that are necessary or
required depending on the nature of the registered project or activity of the export enterprise.

If the purchased goods are used in both the registered project or activity and administrative
operations, the registered export enterprise shall adopt a method to best allocate the same. If a
proper allocation could not be determined, the purchase of such goods shall be subject to twelve
percent (12%) VAT.

The VAT zero-rating on local purchases of goods shall be availed of on the basis of the VAT zero-
rating certification issued by the concerned IPA, without prejudice, however, to the conduct of
post-audit investigation/verification by the Bureau of Internal Revenue (BIR) that the goods are
indeed directly and exclusively used by the registered export enterprise in its registered project
or activity.

For this purpose, upon the effectivity of these Regulations, local suppliers of goods of the
registered export enterprise shall no longer be required to apply for approval of VAT zero-rating
 with the BIR. All applications with accompanying VAT zero-rating certification issued by the
concerned IPA which have been received but have not yet acted upon by the concerned office of
the BIR upon the effectivity of these Regulations shall be accorded VAT zero-rating treatment from
the date of filing of such application subject to the conduct of post-audit by the BIR that the goods
are indeed directly and exclusively used by the registered export enterprise in its registered project
or activity.

The concerned IPA shall furnish the BIR through the Assessment Service Attention: Audit
Information, Tax Exemption and Incentives Division (AITEID) within twenty (20) days following the
close of each taxable quarter a list of registered export enterprise issued with VAT zero-rating
certification. In order to obtain relevant information, for audit purposes, the Commissioner of
Internal Revenue may prescribe a report template in a separate revenue issuance.

b. Zero-Rated Sale of Services. —

 Services other than processing, manufacturing or repacking of goods, rendered to a person
engaged in business conducted outside the Philippines or to a non-resident person not engaged
in business who is outside the Philippines when the services are performed, the consideration for
which is paid for in acceptable foreign currency and accounted for in accordance with the rules
and regulations of the Bangko Sentral ng Pilipinas (BSP);
 Services to persons or entities whose exemption from direct or indirect taxes under special laws
or international agreements to which the Philippines is a signatory effectively subjects such sales
to zero rate;
 Sale of services, including the provision of basic infrastructure, utilities, and 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 CREATE Act, and
Section 5, Rule 2 of its amended IRR for a maximum period of seventeen (17) years from the date
of registration, unless otherwise extended under the SIPP; Provided, That the term “registered
export enterprise” shall refer to an export enterprise as defined under Section 4 (M), Rule 1 of the
CREATE IRR, that is also a registered business enterprise as defined in Section 4 (W) of the same
IRR: Provided further, That the above-described sales to existing registered export enterprises
located inside ecozones and Freeport zones shall also be qualified for VAT zero-rating under this
sub-item until the expiration of the transitory period. Health maintenance organization (HMO)
plans acquired by a registered export enterprise for its employees who are directly and exclusively
involved in the operations of their registered projects or activities and forming part of their
compensation package shall be considered as “directly and exclusively used” in the registered
project or activity of a registered export enterprise subject to the conditions provided under the
existing laws, rules and regulations regarding the availment thereof.
 Services rendered to persons engaged in international shipping or ab transport operations,
including leases of property for use thereof Provided, that these services shall be exclusively for
international shipping or air transport operations. Thus, the services referred lo here. in shall not
pertain to those made to 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, the same
being subject to twelve percent (12%) VAT under Sec. 108 of the Tax Code:
 Transport of passengers and cargo by domestic air or sea vessels from the Philippines to a foreign
country. Gross receipts of international air or shipping carriers doing business in the Philippines
derived from transport of passengers and cargo from the Philippines to another country shall be
exempt from VAT; however, they are stil liable to a percentage tax of three percent (3%) based on
 their gross receipts derived from transport of cargo from the Philippines to another country as
provided for in Sec. 118 of the Tax Code; and
 Sale of power or fuel generated through renewable sources of energy such as, but not limited to,
biomass, solar, wind, hydropower, geothermal and steam, ocean energy, and other emerging
sources using technologies such as fuel cells and hydrogen fuels: Provided, however, that zero-
rating shall apply strictly to the sale of power or fuel generated through renewable sources of
energy, and shall not extend to the sale of services related to the maintenance or operation of
plants generating said power.

Sources Input VAT:

1. Local Purchases of goods and services
2. Acquisition of Capital Goods
3. Importation
4. Presumptive Input VAT
5. Transitional Input VAT
6. Creditable Withholding CVAT

Input VAT on Capital Goods

Beginning January 1, 2022, the purchase of capital goods shall be treated as an ordinary purchase of goods
for purposes of recognizing input vat.

Exercise:
Kimberly purchased a P2,000,000.00 van vehicle to be used as a delivery equipment for her business last
January 10, 2023. The vehicle is estimated to be used for 5 years. How much is the allowable input vat for
2023 from this transaction?

2M X12% / 60
IMPORTATION

Vat on importation is imposed regardless of whether the importation is for personal or business used.
Although importation is not a sale of goods, or sometimes not even a business activity, vat is imposed
because vat is a consumption tax levied on sales to be borne by consumers with sellers acting simply as
tax collectors.

Persons Liable/Covered:
1. Any person, entity, or agency who bring goods to the Philippines, whether made in the ordinary
course of business or not.
2. Non-exempt persons or entities who acquire tax-free imported goods from exempt persons or
entities. The exempt person, purchaser, transferee shall be considered as the importer for vat
purposes.

Exercise No. 1
Chris imported a brand new car in 2023. The importation was valued by the Bureau of Customs (inclusive
of other charges and taxes, except vat) at P3,000,000.00.
Question No. 1:
Assume Chris imported the car for personal use, how much is the input vat on importation?
3,000,000 x 12% = 360,000

Question No. 2:
Assume Chris imported the car for business use, how much is the input vat on importation?
3,000,000 x 12% = 360,000

Question No. 3:
Assume Chris imported the car as a birthday gift to his wife, how much is the input vat on importation?

3,000,000 x 12% = 360,000

Question No. 4:
Assume Chris was able to secure vat exemption from an appropriate regulatory body, how much is the
input vat on importation?

Question No. 5:
Assume Chris is exempt from vat on importation, how much is the input vat if then intention of Chris is to
sell the car to ABC Company, a non-exempt entity?
3,000,000 x 12% = 360,000

Question No. 6:
Who is the liable for the input VAT in question no. 5?

ABC Company
Computation of VAT on importation
Value for tariff and customs duties xxxxx
Add:
Custom Duties xxxxx
Excise Tax, if applicable xxxxx
Other legitimate charges xxxxx
Tax Base xxxxx
VAT Rate 12%
VAT on Importation xxxxx

Invoice Amount
Add:
Custom Duties xxxxx
Freight xxxxx
Insurance xxxxx
Tax Base xxxxx
VAT Rate 12%
VAT on Importation xxxxx

Exercise No. 1.
Nirvana Cigar, classified as non-essential article was imported for sale. Additional information are as
follows:
Value of importation determined by the BOC ($1 = P55) S15,000.00 X 40 = 600K
Customs duties P20,000.00
Excise Tax 35,000.00
Processing Fee 10,000.00
Facilitation Expense 5,000.00
Shipping cost from customs to importer's warehouse 25,000.00
Selling price of the goods imported 2,000,000.00

Question No. 1
How much is the VAT on importation?

600k + 65k x 20% = 133k excise tax

665k + 133k = 798k x 12% = 95,760

Question No. 2
How much is the vat payable?
Exercise No. 2
Taxpayer is a VAT registered person. Importations were for sale in the ordinary course of trade or business
and for personal use. All amounts are exclusive of vat.

Exchange rate is S1 =P55.00 For business For personal

$ 150,000.00 $ 2,000.00
Expenses based on invoice cost:
Freight and insurance 5% 5%
Other expenses related before removal from BOC 5% 5%
Transfer expense from BOC to warehouse in Butuan 5% 5%

Selling price of the goods imported ₱ 15,000,000.00

Question No. 1: How much is the input vat on importation?

For business For personal
$ 150,000.00 $ 2,000.00
Exchange Rate ₱ 55.00 ₱ 55.00
Invoice cost at Php ₱ 8,250,000.00 ₱ 110,000.00
Add:
Expenses based on cost:
Freight and Insurance (5%) 412,500.00 5,500.00
Other charges before removol from BOC (5%) 412,500.00 5,500.00
Taxable Base 9,075,000.00 121,000.00
Input VAT rate 12% 12%
Total Input Vat on Importation ₱ 1,089,000.00 ₱ 14,520.00

Total ₱ 1,103,520.00

Question No. 2: How much is the vat payable?

Gross Selling Price ₱ 15,000,000.00
Tax Rate 12%
Output VAT Payable 1,800,000.00
Less:
Input VAT on importation (business use) 1,089,000.00
Input VAT on transfer expense to Butuan 412,500.00
Total VAT Payable 298,500.00
PRESUMTIVE INPUT TAX OF 4% ON SALE OF GOODS
Persons or firms engaged in the processing of sardines, mackerel and milk, and in manufacturing refined
sugar cooking oil and 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.

The term "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.

Entitled to Presumptive VAT: persons/entities engaged in the

Processing of: Sardines, Mackerel, Milk
Manufacturing of: Refined sugar, cooking oil, packed noodles based instant meals

Exercise No. 1
Minola Company, manufacturer of cooking oil made of corn, has the following data for the month:
Sales, net of VAT 10,000,000.00
Purchases - corn 2,000,000.00
Purchases - bottle containers 250,000.00
Purchase of wrapping supplies 200,000.00
Purchase of labels 125,000.00

Determine the vat payable of Minola:

Selling Price, net of VAT 10,000,000.00
Tax Rate 12%
Output VAT 1,200,000.00
Less: Allowable Input VAT
Corn (2,000,000.00 x 4%) 80,000.00
Bottle Containers (250,000.00 x 12%) 30,000.00
Wrapping Supplies (200,000.00 x 12%) 24,000.00
Labels (125,000.00 x 12%) 15,000.00 149,000.00
Total VAT Payable 1,051,000.00
Exercise No. 2
Mega Corporation, a manufacturer of sardines has the following data for the month of January 2024.
Sales, net of VAT 12,000,000.00
Purchases - fresh fish 30,000,000.00
Purchases - fresh tomatoes 500,000.00
Purchases - carrots 500,000.00
Purchases - Del Monte Tomato Paste 1,000,000.00
Purchases - tin cans 1,000,000.00
Purchases - wrapping supplies 200,000.00
Purchase of labels 200,000.00

Determine the vat payable of Mega Corp.:

Selling Price, net of VAT 12,000,000.00
Tax Rate 12%
Output VAT 1,440,000.00
Less: Allowable Input VAT
Purchases - fresh tomatoes (4%) 20,000.00
Purchases - carrots (4%) 20,000.00
Purchases - Del Monte Tomato Paste (12%) 120,000.00
Purchases - tin cans (12%) 120,000.00
Purchases - wrapping supplies (12%) 24,000.00
Purchase of labels (12%) 24,000.00 328,000.00
Total VAT Payable 1,112,000.00