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PART 4 - VALUE-ADDED TAX

2. Incidence of Tax
Title VI, NIRC (a) The incidence of tax in on the one who bears the
burden of taxation. (b) The incidence of VAT is on the
I. NATURE AND CHARACTERISTICS OF VAT
final consumer.
Context Corp. vs.
A. Tax on Value Added Commissioner of Internal
is a type of consumption tax that is placed on a product Revenue (433 SCRA
whenever value isadded at a stage of production and at 376)
the point of retail sale.
FACTS:
B. Sales Tax
1. Petitioner Contex Corporation: domestic corporation
Sales tax is an additional amount of money you pay based engaged in the business of manufacturing hospital
on a percentage of the selling price of goods and services textiles and garments and other hospital supplies for
that are purchased. export
- Place of business: Subic Bay Freeport Zone (SBFZ)
The Sales Tax Rate in Philippines stands at 12 percent. Sales Tax - Duly registered with the Subic BayMetropolitan
Authority (SBMA) as a Subic Bay Freeport
Rate in Philippines averaged 11.85 percent from 2006 until 2018,
Enterprise (RA 7227)
reaching an all time high of 12 percent in 2007 and a record low - As an SBMA-registered firm, petitioner is exempt from
of 10 percent in 2006. all local and national internal revenue taxes except
for the preferential tax (Section 12c of RA 7227)
In Philippines, the sales tax rate is a tax charged to consumers - Registered with the BIR as a NON-VAT TAXPAYER
based on the purchase price of certain goods and services. The (Certificate of Registration RDO)
benchmark we use for the sales tax rate refers to the highest
rate. Revenues from the Sales Tax Rate are an important source 1. Jan 1, 1997 to Dec 31, 1998: petitioner purchased various
of income for the government of Philippines. supplies and materials necessary in the conduct of its
manufacturing business

1. The suppliers of these goods SHIFTED UNTO


PETITIONER the 10% VAT on the purchased items,
C. Tax on Consumption (Sec. 4. 105-2) which led the petitioner to pay input taxes (P539,411.88
and P504,057.49 for 1997 and 1998, resp.)
Consumption taxes can take the form of sales taxes,
tariffs, excise and other taxes on consumed goods and
services. The term can also refer to a taxing system as a 1. Acting on the belief that it was exempt from all national and
whole where people are taxed based on how much they local taxes, including VAT, petitioner filed two
consume rather than how much they add to the economy applications for tax refund or tax credit of the VAT it
(income tax). paid

A consumption tax is a tax levied


on consumption spending on goods and services. 1. Revenue District Officer of BIR RDO Mr. Carlos denied the
The tax base of such a tax is the money spent 1st application letter
on consumption.Consumption taxes are usually indirect,
such as a sales tax or a value-added tax.
1. Petitioner filed another application for tax refund/credit
VAT It is a tax on consumption levied on the sale, barter, directly with Regional Director of BIR Region IV Atty.
exchange or lease of goods or properties and services in the Pagabao
Philippines and on importation of goods into the Philippines. [RR - Sought a refund or issuance of a tax credit certificate
16- 2005] (P1,108,307.72), representing erroneously paid
input VAT (Jan 1, 1997 to Nov 30, 1998)
D. Indirect Tax
1. No response from BIR Regional Director
It is an indirect tax, the amount of which may be shifted to or
passed on the buyer, transferee, or lessee of the goods, properties 1. Petitioner elevated the matter to CTA in a petition for
or services. [Sec. 105, NIRC] review
- Section 112(A) if read in relation to Section
1. Impact of Tax 106(A)(2)(a) of NIRC and Section 12(b) and (c) of
(a) The impact of taxation is on the statutory taxpayer, RA 7227 would show that it was not liable in any
the one from whom the government collects. way for any VAT
(b) The impact of VAT is on the seller or importer upon
1. In opposing the claim for tax refund or tax credit, BIR asked
whom the tax has been imposed. (Sec. 105, NIRC)
CTA to apply the rule that claims for refund are strictly
construed against the taxpayer ISSUES:
- Since petitioner failed to establish both its right to a tax (1) Whether or not the VAT exemption embodied in RA
refund or tax credit and its compliance with the 7227 applies to petitioner as a purchaser
rules on tax refund (Sections 204 and 229 of Tax
Code), its claim should be denied (1) Whether or not petitioner may claim a refund on the
Input VAT erroneously passed on to it by its
1. CTA: petition partially granted; respondent is hereby suppliers
ordered to refund or in the alternative to issue a tax
credit certificate in favor of petitioner (P683,061.90) HELD:
representing erroneously paid input VAT (1) YES, limited to the VAT on which it is directly liable as a
- Petitioner misread Sections 106(A)(2)(a) and 112(A) of seller hence, it cannot claim any refund or exemption
Tax Code these provisions apply only to those for any input VAT it paid, if any, on its purchases of
entities registered as VAT taxpayers whose sales raw materials and supplies;
are zero-rated
- Petitioner does not fall under this category, since it is a (1) NO
non-VAT taxpayer as evidenced by the Certificate
of Registration RDO RATIO:
- Petitioner is exempt from the imposition of input VAT
on its purchases of supplies and materials VAT
- Petitioner is required to pay as a SBFZ-registered - Indirect tax
enterprise is a 5% preferential tax - As such, the amount of tax paid on the goods, properties or
- Disallowed all refunds of input VAT paid by petitioner services bought, transferred, or leased may be shifted or
prior to June 29, 1997 for being barred by the 2-yr passed on by the seller, transferor, or lessor to the buyer,
prescriptive period (Section 229, Tax Code) transferee or lessee
- Also limited the refund only to the input VAT paid by - Unlike a direct tax, such as the income tax, which primarily
the petitioner on supplies and materials directly taxes an individual’s ability to pay based on his income
used by the petitioner in the manufacture of goods or net wealth, an indirect tax, such as the VAT, is a tax
- Struck down all claims for charges, and all materials and on consumption of goods, services, or certain
supplies shipped or delivered to the petitioner’s transactions involving the same
Makati and Pasay City offices - VAT thus forms a substantial portion of consumer
expenditures
1. CIR filed a petition for review of the CTA decision by the
CA INDIRECT TAXATION
- The exemption of Contex Corporation under RA 7227 - Liability for the tax vs. burden of the tax
was limited only to DIRECT TAXES and not to - The amount of tax paid may be shifted or passed on by the
indirect taxes such as the input component of the seller to the buyer
VAT - What is transferred in such instances is not the liability for
- VAT is a burden passed on by a VAT-registered person the tax, but the TAX BURDEN
to the end users; hence, the direct liability for the - In adding or including the VAT due to the selling price, the
tax lies with the suppliers and not Contex seller remains the person primarily and legally liable for
the payment of the tax. What is shifted only to the
1. CA: reversed CTA’s decision; in favor of CIR; Contex’s intermediate buyer and ultimately to the final purchaser
claim for refund of erroneously paid taxes is denied is the burden of the tax
- The exemption from duties and taxes on the importation - A seller who is directly and legally liable for payment of an
of raw materials, capital, and equipment of SBFZ- indirect tax, such as the VAT on goods or services is not
registered enterprises under RA 7227 and its necessarily the person who ultimately bears the burden
implementing rules covers only “the VAT of the same tax. It is the final purchaser or consumer of
imposable under Section 107 of Tax Code, which is such goods or services who, although not directly and
direct liability of the importer, and in no way legally liable for the payment thereof, ultimately bears
includes the VAT of the seller-exporter the burden the burden of the tax.
of which was passed on to the importer as an
additional costs of the goods PREFERENTIAL TREATMENTS:
- Exemption granted by RA 7227 relates to the act of (a) VAT Exemption
importation (Section 107 specifically imposes the - Sale of goods or properties and/or services and the use
VAT on importations or lease of properties is not subject to VAT (output
- Exemption of SBFZ-registered enterprises from internal tax) and the seller is not allowed any tax credit on
revenue taxes is qualified as pertaining only to VAT (input tax) previously paid
those for which they may be directly liable (direct - VAT is removed at the exempt stage (i.e., at the point of
tax, and only in connection with their importation the sale, barter or exchange of the goods/properties)
of raw materials, capital, and equipment as well as - The person making the exempt sale of goods, properties
the sale of their goods and services) or services shall not bill any output tax to his
customers because the said transaction is not
1. Petitioner moved for reconsideration of CA decision; denied subject to tax
2. Hence, this instant petition. - A VAT-registered purchaser of VAT-exempt
goods/properties or services which are exempt from
VAT is not entitled to any input tax on such Territory to ECOZONE enterprises shall be subject to VAT at zero
purchase despite the issuance of a VAT invoice or percent (0%).
receipt
It would seem that CIR failed to differentiate between VAT-
(a) Zero-rated Sales exempt transactions from VAT-exempt entities.
- Sales by VAT-registered persons which are subject to
0% rate (tax burden is not passed on to the An exempt transaction, on the one hand, involves goods or
purchaser)
services which, by their nature, are specifically listed in and
- A zero-rated sale by a VAT-registered person, which is
expressly exempted from the VAT under the Tax Code, without
a taxable transaction for VAT purposes, shall not
result to any output tax. However, the input tax on regard to the tax status – VAT-exempt or not – of the party to
his purchases of goods, properties or services the transaction…
related to such zero-rated sale shall be available as
tax credit or refund in acc with these regulations An exempt party, on the other hand, is a person or entity
All VAT is removed from granted VAT exemption under the Tax Code, a special law or an
the zero-rated goods, international agreement to which the Philippines is a signatory,
activity or firm and by virtue of which its taxable transactions become exempt
from VAT…
E. Tax Credit Method
CIR, bases its argument on VAT-exempt transactions. Since such
The tax credit method refers to the manner by which the value transactions are not subject to VAT, the sellers cannot pass on
added tax of a taxpayer is computed. The input taxes shifted by any output VAT to the purchasers of goods, properties, or
the sellers to the buyer are credited against the buyer’s output services, and they may not claim tax credit/refund of the input
taxes when he in turn sells the taxable goods, properties or VAT they had paid thereon.
services.
This cannot apply to transactions of Toshiba because although
F. Destination Principle the transactions covered by special laws may be exempt from
VAT, those falling under Presidential Decree No. 66 (EPZA) are
(a) It is the basis for the jurisdictional reach of the VAT. not.
(b) As a general rule, goods and services are taxed only in the
country where they are consumed. (Deoferio Jr. and Mamalateo. This Court agrees, however, that PEZA-registered enterprises,
The Value Added Tax in the Philippines, p. 43; CIR v. American which would necessarily be located within ECOZONES, are VAT-
Express International, 2005) exempt entities because ECOZONES are foreign territory. As a
result, sales made by a supplier in the Customs Territory to a
CIR vs. Toshiba Information purchaser in the ECOZONE shall be treated as an exportation
Equipment (Phils.) (466 SCRA 211) from the Customs Territory. Conversely, sales made by a supplier
from the ECOZONE to a purchaser in the Customs Territory shall
FACTS: Toshiba registered with the PEZA as an ECOZONE Export
be considered as an importation into the Customs Territory.
Enterprise and it registered with the BIR as a VAT taxpayer and a
withholding agent.
The Philippine VAT system adheres to the Cross Border Doctrine,
according to which, no VAT shall be imposed to form part of the
Toshiba filed its VAT returns for the first and second quarters of
cost of goods destined for consumption outside of the territorial
taxable year 1996, reporting input VAT in the amount of
border of the taxing authority. Hence, actual export of goods and
P13,118,542.00 and P5,128,761.94, respectively, or a total of
services from the Philippines to a foreign country must be free of
P18,247,303.94. It alleged that the said input VAT was from its
VAT; while, those destined for use or consumption within the
purchases of capital goods and services which remained
Philippines shall be imposed with ten percent (10%) VAT.
unutilized since it had not yet engaged in any business activity or
transaction for which it may be liable for any output VAT.
No output VAT may be passed on to an ECOZONE enterprise
since it is a VAT-exempt entity. The VAT treatment of sales to it,
Toshiba filed with DOF applications for tax credit/refund of its
however, varies depending on whether the supplier from the
unutilized input VAT. To toll the running of the two-year
Customs Territory is VAT-registered or not.
prescriptive period for judicially claiming a tax credit/refund
Toshiba, filed with the CTA a Petition for Review.
Sales of goods, properties and services by a VAT-registered
supplier from the Customs Territory to an ECOZONE enterprise
CTA ordered CIR to refund, or in the alternative, to issue a tax
shall be treated as export sales. If such sales are made by a VAT-
credit certificate to Toshiba in the amount of P16,188,045.44. CA
registered supplier, they shall be subject to VAT at zero percent
AFFIRMED.
(0%). In zero-rated transactions, the VAT-registered supplier shall
not pass on any output VAT to the ECOZONE enterprise, and at
ISSUE: WON Toshiba is entitled to the tax credit/refund of its
the same time, shall be entitled to claim tax credit/refund of its
input VAT on its purchases of capital goods and services.
input VAT attributable to such sales. Zero-rating of export sales
primarily intends to benefit the exporter (i.e., the supplier from
HELD: YES. An ECOZONE enterprise is a VAT-exempt entity. Sales
the Customs Territory), who is directly and legally liable for the
of goods, properties, and services by persons from the Customs
VAT, making it internationally competitive by allowing it to
credit/refund the input VAT attributable to its export sales. B. In the course of trade or business
- Notwithstanding the rule on
Meanwhile, sales to an ECOZONE enterprise made by a non-VAT regularity – Services performed by
or unregistered supplier would only be exempt from VAT and the non-resident foreign persons in the
supplier shall not be able to claim credit/refund of its input VAT. Philippines are subject to VAT.

Even conceding, however, that respondent Toshiba, as a PEZA-


registered enterprise, is a VAT-exempt entity that could not have “in the course of trade or business”
engaged in a VAT-taxable business, this Court still believes, given
the particular circumstances of the present case, that it is 
Rule of Regularity: the regular conduct or pursuit of a
entitled to a credit/refund of its input VAT. commercial or an economic activity, including transactions
incidental thereto,by any person regardless of whether or not the
The sale of capital goods by suppliers from the Customs Territory person engaged therein is a nonstock, nonprofit private
to Toshiba took place way before the issuance of RMC No. 74-99, organization (irrespective of the disposition of its net income and
and when the old rule was accepted and implemented by no less whether or not it sells exclusively to members or their guests), or
than the BIR itself. Since Toshiba opted to avail itself of the government entity.
income tax holiday under Exec. Order No. 226, as amended, then
it was deemed subject to the ten percent (10%) VAT. It was very Non-resident persons who perform services in the Philippines
likely therefore that suppliers from the Customs Territory had are deemed to be making sales in the course of trade or business,
passed on output VAT to Toshiba, and the latter, thus, incurred even if the performance of services is not regular. (Sec. 105,
NIRC; RR 16- 2005)
input VAT. Accordingly, this Court gives due respect to and
adopts herein the CTA’s findings that the suppliers of capital
Exception: When the annual sales do not exceed 3M*, the
goods from the Customs Territory did pass on output VAT to
taxpayer shall be liable instead to pay a percentage tax equivalent
Toshiba and the amount of input VAT which Toshiba could claim
to 3% of his gross monthly sales/receipts.
as credit/refund.
To be subject to 3% percentage tax, the following requisites must
RULING: WHEREFORE, based on the be satisfied:
(1) The gross annual sales and/or receipts do not
foregoing, this Court AFFIRMS the
decision of the Court of Appeals in CA- exceed P3M; AND

G.R. SP. No. 59106, and the order of the
CTA in CTA Case No. 5593, ordering said (2) The taxpayer is not a VAT-registered person.
petitioner CIR to refund or, in the
alternative, to issue a tax credit
- Commissioner of Internal
certificate to respondent Toshiba, in the
Revenue vs. COMASERCO (329
amount of P16,188,045.44, representing SCRA 237)
unutilized input VAT for the first and
second quarters of 1996. FACTS:
II. PERSONS LIABLE TO VAT (Sec. 105, NIRC) Commonwealth Management and Services Corporation
(COMASERCO) is a corporation affiliate of Philippine
Sec. 105. Persons Liable. - Any person who, in the American Life Insurance Co. (Philamlife), organized by the
course of trade or business, sells barters, exchanges, latter to perform collection, consultative and other technical
leases goods or properties, renders services, and any services, including functioning as an internal auditor of
person who imports goods shall be subject to the Philamlife and its other affiliates.
value-added tax (VAT) imposed in Sections 106 to 108
of this Code. The BIR issued an assessment to COMASERCO for
deficiency value-added tax (VAT) amounting to
P351,851.01, for taxable year 1988. COMASERCO's
annual corporate income tax return ending December 31,
A. Taxable Person
1988 indicated a net loss in its operations in the amount
1. Refers to any person of P6,077.00.
liable to VAT whether
registered or registrable COMASERCO filed with the BIR, a letter-protest objecting
according to Sec. 236 of to the latter's finding of deficiency VAT, but the CIR still sent
NIRC. a collection letter to COMASERCO demanding payment of
2. Where the amount of the deficiency VAT.
gross receipts exceed
COMASERCO filed with the CTA a petition for review
the threshold fixed by law contesting the Commissioner's assessment, asserting that
(Sec. 109 (BB), NIRC) the services it rendered to Philamlife and its affiliates,
relating to collections, consultative and other technical
P3M NEW THRESHOLD assistance, including functioning as an internal auditor,
were on a "no-profit, reimbursement-of-cost-only" basis. It
averred that it was not engaged id the business of providing Contrary to COMASERCO's contention the above
services to Philamlife and its affiliates. It was established to provision clarifies that even a non-stock, non-
ensure operational orderliness and administrative efficiency profit, organization or government entity, is liable to
of Philamlife and its affiliates, and not in the sale of services. pay VAT on the sale of goods or services. VAT is a tax
It stressed that it was not profit-motivated, thus not engaged on transactions, imposed at every stage of the
in business. In fact, it did not generate profit but suffered a distribution process on the sale, barter, exchange of
net loss in taxable year 1988. It averred that since it was goods or property, and on the performance of services,
not engaged in business, it was not liable to pay VAT. even in the absence of profit attributable thereto. The
term "in the course of trade or business" requires the
CTA rendered decision in favor of the CIR. Court of regular conduct or pursuit of a commercial or an
Appeals reversed, hence this petition for review on economic activity, regardless of whether or not the
certiorari. entity is profit-oriented.

ISSUE: COMASERCO was engaged in the sale of services, The definition of the term "in the course of trade or
and thus liable to pay VAT thereon. YES to both. business" incorporated in the present law applies to all
transactions even to those made prior to its enactment.
RULING: Executive Order No. 273 stated that any person who, in
the course of trade or business, sells, barters or
Re: “In the Course of Trade or Business” exchanges goods and services, was already liable to
pay VAT. The present law merely stresses that even a
Petitioner: to "engage in business" and to "engage in the nonstock, nonprofit organization or government entity
sale of services" are two different things; the services is liable to pay VAT for the sale of goods and services.
rendered by COMASERCO to Philamlife and its affiliates,
for a fee or consideration, are subject to VAT. VAT is a tax
on the value added by the performance of the service. It is Re: “Sale of Services”
immaterial whether profit is derived from rendering the
service. J Sec. 108 of the NIRC of 1997 defines the phrase "sale of
services" as the "performance of all kinds of services for
COMASERCO: the term "in the course of trade or others for a fee, remuneration or consideration." It includes
business" requires that the "business" is carried on with a "the supply of technical advice, assistance or services
view to profit or livelihood; the activities of the entity must rendered in connection with technical management or
be profit- oriented. COMASERCO submits that it is not administration of any scientific, industrial or commercial
motivated by profit, as defined by its primary purpose in the undertaking or project."
articles of incorporation, stating that it is operating "only on
reimbursement-of-cost basis, without any profit." Private The CIR issued BIR Ruling No. 010-98 emphasizing that a
respondent argues that profit motive is material in domestic corporation that provided technical, research,
ascertaining who to tax for purposes of determining liability management and technical assistance to its affiliated
for VAT. companies and received payments on a reimbursement-of-
cost basis, without any intention of realizing profit, was
SC: We agree with the Commissioner. Sec. 99 of the NIRC subject to VAT on services rendered. In fact, even if such
of 1986, as amended by E.O. No. 273 in 1988, provides corporation was organized without any intention of realizing
that: “Any person who, in the course of trade or business, profit, any income or profit generated by the entity in the
sells, barters or exchanges goods, renders services, or conduct of its activities was subject to income tax.
engages in similar transactions and any person who
imports goods shall be subject to the value-added tax (VAT) Hence, it is immaterial whether the primary purpose of
imposed in Sections 100 to 102 of this Code." a corporation indicates that it receives payments for
services rendered to its affiliates on a reimbursement-
On May 28, 1994, Congress enacted R.A. No. 7716, the on-cost basis only, without realizing profit, for
Expanded VAT Law (EVAT), amending among other purposes of determining liability for VAT on services
sections, Section 99 of the Tax Code. On January 1, 1998, rendered. As long as the entity provides service for a
Republic Act 8424, the National Internal Revenue Code of fee, remuneration or consideration, then the service
1997, took effect. The amended law provides that: “Any rendered is subject to VAT.
person who, in the course of trade or business, sells,
barters, exchanges, leases goods or properties, renders At any rate, it is a rule that because taxes are the lifeblood
services, and any person who imports goods shall be of the nation, statutes that allow exemptions are construed
subject to the value-added tax (VAT) imposed in Sections strictly against the grantee and liberally in favor of the
106 and 108 of this Code. . . . The phrase "in the course government. Otherwise stated, any exemption from the
of trade or business" means the regular conduct or payment of a tax must be clearly stated in the language of
pursuit of a commercial or an economic activity, including the law; it cannot be merely implied therefrom. In the case
transactions incidental thereto, by any person regardless of of VAT, Sec. 109, R.A. 8424 clearly enumerates the
whether or not the person engaged therein is a nonstock, transactions exempted from VAT. The services rendered by
nonprofit organization (irrespective of the disposition of its COMASERCO do not fall within the exemptions.
net income and whether or not it sells exclusively to
members of their guests), or government entity.” Both the CIR and the CTA correctly ruled that the services
rendered by COMASERCO to Philamlife and its affiliates
are subject to VAT. The performance of all kinds of services passed on to the end users by the providers of these goods or
for others for a fee, remuneration or consideration is services who in turn may credit their own VAT liability (or input
considered as sale of services subject to VAT. As the VAT) from the VAT payments they receive from the final
government agency charged with the enforcement of the consumer (or output VAT). The final purchase by the end
law, the opinion of the CIR, in the absence of any showing consumer represents the final link in a production chain that itself
that it is plainly wrong, is entitled to great weight. Also, it involves several transactions and several acts of consumption.
has been the long standing policy and practice of this Court The VAT system assures fiscal adequacy through the collection
to respect the conclusions of quasi-judicial agencies, such of taxes on every level of consumption, yet assuages the
as the CTA. manufacturers or providers of goods and services by enabling
them to pass on their respective VAT liabilities to the next link of
the chain until finally the end consumer shoulders the entire tax
- CIR vs. Magsaysay Lines (497 liability.
SCRA 63)
Yet VAT is not a singular-minded tax on every transactional
level. Its assessment bears direct relevance to the taxpayer’s role
FACTS: or link in the production chain. Hence, as affirmed by Section 99
Pursuant to a government program of privatization, NDC decided of the Tax Code and its subsequent incarnations, the tax is levied
to sell to private enterprise all of its shares in its wholly owned only on the sale, barter or exchange of goods or services by
subsidiary the National Marine Corporation (NMC). The NDC persons who engage in such activities, in the course of trade or
decided to sell in one lot its NMC shares and five (5) of its ships. business. These transactions outside the course of trade or
The NMC shares and the vessels were offered for public bidding. business may invariably contribute to the production chain, but
Among the stipulated terms and conditions for the public auction they do so only as a matter of accident or incident. As the sales of
was that the winning bidder was to pay "a value added tax of 10% goods or services do not occur within the course of trade or
on the value of the vessels." On 3 June 1988, private respondent business, the providers of such goods or services would hardly, if
Magsaysay Lines, Inc. (Magsaysay Lines) offered to buy the at all, have the opportunity to appropriately credit any VAT
shares and the vessels. The bid was made by Magsaysay Lines, liability as against their own accumulated VAT collections since
purportedly for a new company still to be formed composed of the accumulation of output VAT arises in the first place only
itself, Baliwag Navigation, Inc., and FIM Limited of the Marden through the ordinary course of trade or business.
Group based in Hongkong (collectively, private respondents). The conclusion that the sale was not in the course of trade or
The implementing Contract of Sale was executed. A formal business, which the CIR does not dispute before this Court,
request for a ruling on whether or not the sale of the vessels was should have definitively settled the matter. Any sale, barter or
subject to VAT had already been filed with the Bureau of Internal exchange of goods or services not in the course of trade or
Revenue (BIR). business is not subject to VAT.
Private respondents through counsel received VAT Ruling No.
568-88 from the BIR, holding that the sale of the vessels was
subject to the 10% VAT. The ruling cited the fact that NDC was a
VAT-registered enterprise, and thus its "transactions incident to III. VAT ON SALE OF GOODS OR
its normal VAT registered activity of leasing out personal PROPERTIES (Sec. 106, NIRC)
property including sale of its own assets that are movable,
tangible objects which are appropriable or transferable are subject “SEC.106. Value-added Tax on Sale of Goods
to the 10% [VAT]." or Properties. –
Private respondents moved for the reconsideration but the same “(A) Rate and Base of Tax. – There shall be
was denied. It then filed an appeal with the CTA with a prayer of levied, assessed and collected on every sale,
reversal of the VAT ruling. barter or exchange of goods or properties, a
PETITIONER’S ARGUMENTS: value-added tax equivalent to twelve percent
The CIR defended the VAT rulings holding the sale of the vessels (12%) of the gross selling price or gross value
liable for VAT, especially citing Section 3 of Revenue Regulation in money of the goods or properties sold,
No. 5-87, which provided that "[VAT] is imposed on any sale or bartered or exchanged, such tax to be paid by
transactions ‘deemed sale’ of taxable goods (including capital the seller or transferor.
goods, irrespective of the date of acquisition)." The CIR argued
that the sale of the vessels were among those transactions
1. "Goods or Properties." The term "goods" or
"deemed sale," as enumerated in Section 4 of R.R. No. 5-87. It
"properties" shall
seems that the CIR particularly emphasized Section 4(E)(i) of the
Regulation, which classified "change of ownership of business"
mean all tangible and intangible objects which are capable
as a circumstance that gave rise to a transaction "deemed sale."
of pecuniary estimation and shall include:
ISSUE:
Whether or not the sale of the vessels was a transaction subject to 2. Real properties held primarily for sale to customers or
VAT held for lease in the ordinary course of trade or
business; 

RULING:
VAT is ultimately a tax on consumption, even though it is 3. The right or the privilege to use patent, copyright, design
assessed on many levels of transactions on the basis of a fixed or model, plan, secret formula or process, goodwill,
percentage. It is the end user of consumer goods or services trademark, trade brand or other like property or
which ultimately shoulders the tax, as the liability therefrom is right; 

4. The right or the privilege to use in the Philippines of any a. there is a sale or exchange
industrial, commercial or scientific equipment; 

b. the thing sold or exchanges is a capital asset.
5. The right or the privilege to use motion picture films,
tapes and discs; and 


6. Radio, television, satellite transmission and cable When securities become worthless, there is strictly no sale
television time. 
 or exchange but the law deems it to be a loss. These are
allowed to be deducted only to the extent of capital gains
and not from any other income of the taxpayer. A similar
The term "gross selling price" means the total amount of kind of treatment is given by the NIRC on the retirement of
money or its equivalent which the purchaser pays or is certificates of indebtedness with interest coupons or in
obligated to pay to the seller in consideration of the sale, registered form, short sales and options to buy or sell
barter or exchange of the goods or properties, excluding the property where no sale or exchange strictly exists. In these
value-added tax. The excise tax, if any, on such goods or cases, The NIRC dispenses with the standard
properties shall form part of the gross selling price. requirements.

A. Rate and Tax Base


1. Rates 12% or 0% There is ordinary loss when the property sold is not a
2. Tax Base – Gross Selling Price capital asset.
a. Meaning of Gross Selling
Price China Banking Corp.
vs. Court of Appeals (403
In the case, CBC as an investee corporation, is a subsidiary
SCRA 634)
corporation of China Banking whose shares in CBC are not
Facts: intended for purchase or sale but as an investment. An
equity investment is a capital asset of the investor.
Unquestionably, any loss is a capital loss to the investor.
China Banking Corporation made a 53% equity investment
(P16,227,851.80) in the First CBC Capital – a Hongkong
subsidiary engaged in financing and investment with
“deposit-taking” function.
--

Additional notes:
It was shown that CBC has become insolvent so China
Banking wrote-off its investment as worthless and treated it *The loss cannot be deductible as bad debt since the
as a bad debt or as an ordinary loss deductible from its shares of stock do not constitute a loan extended by it to its
gross income. subsidiary or a debt subject to obligatory repayment by the
latter.

CIR disallowed the deduction on the ground that the


investment should not be classified as being worthless. It
also held that assuming that the securities were worthless, b. Allowable deductions from
then they should be classified as a capital loss and not as a Gross Selling Price (Sec.
bad debt since there was no indebtedness between China 106(D), NIRC; Sec. 4. 106-9,
Banking and CBC. RR 16-05, as amended)

(D) Sales Returns, Allowances and Sales Discounts. -


The value of goods or properties sold and subsequently
Issue: returned or for which allowances were granted by a VAT-
registered person may be deducted from the gross sales or
Whether or not the investment should be classified as a receipts for the quarter in which a refund is made or a credit
capital loss. memorandum or refund is issued. Sales discount granted
and indicated in the invoice at the time of sale and the grant
of which does not depend upon the happening of a future
event may be excluded from the gross sales within the
Held: same quarter it was given.

Yes. Section 29.d.4.B of the NIRC contains provisions on


securities becoming worthless. It conveys that capital loss B. Requisites for Taxability of sale of
normally requires the concurrence of 2 conditions: goods and/or properties: In general
1. Sale, barter or exchange of goods - (5) Lease (rental per unit < 12,800/month and total 
rental
or properties from all units < P1,919,500/ year) 


an actual or deemed sale of goods or properties - (6) Transmission to a trustee (Except: transmission is

deemed sale transaction) 
Transmission of property
2. Meaning of term “goods or to a trustee shall NOT be subject to VAT IF the property
properties” is to be merely held in trust for the trustor and/or
beneficiary. However, IF the property transferred is
all tangible and intangible objects which are capable of pecuniary originally intended for sale, lease or use in the ordinary
estimation, including: 106 enum course of trade or business AND the transfer constitutes
a completed gift, the transfer is subject to VAT as a
3. In the course of trade or business deemed sale transaction. The transfer is a completed gift
if the transferor divests himself absolutely of control
undertaken in the course of trade or business; over the property, i.e., irrevocable transfer of corpus
4. Goods and properties are located and/or irrevocable designation of beneficiary. 

within the Philippines and
consumed therein - (7) Transfer to corporation in exchange of shares of stocks
(see Sec. 40, NIRC for Tax-free exchange) 

for the use or consumption in the Philippines
5. Sale of goods or properties not - (8) Advance payment by the lessee 

exempt from VAT under Sec. 109
- (9) Security deposits for lease agreements 

of NIRC

not exempt from value added tax under the Tax 
Code, special - The real estate dealer shall be subject to VAT on the
law, or international agreement 
 installment payments, including interest and penalties,
actually and/or constructively received by the seller.
C. Sale of Real Properties

Person Liable: gross sales/receipts > P1,919,500/year (per RR D. Zero-rate Sales of goods or properties
16-2011)
 (Sec. 106 (A), NIRC)
1. Zero-rated Sales, defined
(1) Any person (natural or juridical) engaged in sale or exchange
of real properties (a) A zero-rated sale by a VAT-registered person is a taxable
transaction for VAT purposes, but shall not result in any output

(2) Real estate lessors
 tax.

(3)Non-resident lessors (property located in the Philippines)
 (b) However, input tax on purchases of goods, properties or
services related to such zero-rated sale shall be available as tax
(4) Non-stock, Non-profit organizations
 credit or refund. (RR 16-2005)

(5) Government agencies, instrumentalities, GOCCs 2. Sales subject to 0% VAT


a. Export Sales (Sec.106 (2)(a))
Taxable: b. Foreign Currency
Denominated Sales (Sec.106
(1) On installment plan (2)(b))

7. (2) Pre-selling by real estate dealers 
 *notes


FCDS
8. (3) Sale of residential lot >P1,919,500 ; or house and

lot/other residential dwelling>P3,199,200 (RR 16- (1) Sale to a nonresident of goods, except those

2011) 
 mentioned in Sections 149 and 150 (automobiles and
non-essential goods like jewelry, perfume, and yachts),
9. (4) Lease of residential units (rental per unit 
>12,800/month assembled or manufactured in the Philippines for
OR total rental from ALL units>P1,919,500/year) 
 delivery to a resident in thePhilippines paid for in
acceptable foreign currency AND accounted for in
Not taxable: accordance with the rules and regulations of the BSP.
(Sec. 
106(A)(2)(b), NIRC) 

- (1) Not primarily held for sale 

(2) Sales of locally manufactured or assembled goods
- (2) Low cost or socialized housing 
 
for household and personal use to Filipinos abroad
and other non-residents of the Philippines as well as
- (3) Residential lot < P1,919,500 
 returning Overseas Filipinos under the Internal Export
Program of the government paid for in convertible
foreign currency AND accounted for in accordance with
- (4) house and lot/ other residential dwelling< 
P3,199,200 

the rules and regulations of the BSP shall also be refund application; and
considered export sales. (RR 16-2005) 

“(2) All pending VAT refund claims as of December 31,
2017 shall be fully paid in cash by December 31, 2019.

SEC 106 “Provided, That the Department of Finance shall establish a


VAT refund center in the Bureau of Internal Revenue (BIR)
“(2) The following sales by VAT-registered persons shall be and in the Bureau of Customs (BOC) that will handle the
subject to zero percent (0%) rate: processing and granting of cash refunds of creditable input
tax.
“(a) Export Sales. – The term ‘export sales’ means:
“An amount equivalent to five percent (5%) of the total VAT
“(1) The sale and actual shipment of goods from the collection of the BIR and the BOC from the immediately
Philippines to a foreign country, irrespective of any shipping preceding year shall be automatically appropriated annually
arrangement that may be agreed upon which may influence and shall be treated as a special account in the General
or determine the transfer of ownership of the goods so Fund or as trust receipts for the purpose of funding claims
exported and paid for in acceptable foreign currency or its for VAT refund: Provided, That any unused fund, at the end
equivalent in goods or services, and accounted for in of the year shall revert to the General Fund.
accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP); “Provided, further, That the BIR and the BOC shall be
required to submit to the Congressional Oversight
“(i) Registered enterprises within a separate customs Committee on the Comprehensive Tax Reform Program
territory as provided under special laws; and (COCCTRP) a quarterly report of all pending claims for
refund and any unused fund.
“(ii) Registered enterprises within tourism enterprise zones
as declared by the Tourism Infrastructure and Enterprise “(b) Sales to persons or entities whose exemption under
Zone Authority (TIEZA) subject to the provisions under special laws or international agreements to which the
Republic Act No. 9593 or The Tourism Act of 2009. Philippines is a signatory effectively subjects such sales to
zero rate.
“(3) Sale of raw materials or packaging materials to a
nonresident buyer for delivery to a resident local export- (b) Foreign Currency Denominated Sale. - The phrase
oriented enterprise to be used in manufacturing, "foreign currency denominated sale" means sale to a
processing, packing or repacking in the Philippines of the nonresident of goods, except those mentioned in Sections
said buyer’s goods and paid for in acceptable foreign 149 and 150, assembled or manufactured in the Philippines
currency and accounted for in accordance with the rules for delivery to a resident in the Philippines, paid for in
and regulations of the Bangko Sentral ng Pilipinas (BSP); acceptable foreign currency and accounted for in
accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP).
“(4) Sale of raw materials or packaging materials to export-
oriented enterprise whose export sales exceed seventy
percent (70%) of total annual production; (c) Sales to persons or entities whose exemption under
special laws or international agreements to which the
Philippines is a signatory effectively subjects such
“(5) Those considered export sales under Executive Order
sales to zero rate.
No. 226, otherwise known as the Omnibus Investment
Code of 1987, and other special laws; and

“(6) The sale of goods, supplies, equipment and fuel to 3. Sales to tax-exempt entities
persons engaged in international shipping or international
EFFECTIVELY ZERO-RATED SALES
air transport operations: Provided, That the goods, supplies,
equipment and fuel shall be used for international shipping
or air transport operations. Sales to persons or entities whose exemption under special laws
or international agreements to which the Philippines is a signatory
effectively subjects such sales to zero rate. (§ 106(A2c)); the local
“Provided, That subparagraphs (3), (4), and (5) hereof shall
sale of goods and properties by a VAT-registered person to a
be subject to the twelve percent (12%) value-added tax and
person or entity who was granted indirect tax exemption under
no longer be considered export sales subject to zero
special laws or international agreement. (RR 16-2005)
percent (0%) VAT rate upon satisfaction of the following
conditions:
Examples:
“(1) The successful establishment and implementation of an
enhanced VAT refund system that grants refunds of (1) sales to enterprises duly registered & accredited with the
creditable input tax within ninety (90) days from the filing of
the VAT refund application with the Bureau: Provided, That, (a) Subic Bay Metropolitan Authority,
(b) Philippine Economic
to determine the effectivity of item no. 1, all applications Zone Authority (PEZA),
filed from January 1, 2018 shall be processed and must be
decided within ninety (90) days from the filing of the VAT (2) international agreements to which the Phil. is signatory, such
as
(a) Asian Development Bank (ADB),
(b) International Rice sole proprietorship incorporates, or the proprietor sells his entire
Research Institute (IRRI) business) and dissolution of a partnership and creation of a new
partnership which takes over the business. (RR 16-2005)

4. Differentiated from Effectively


Zero-rated Sales of goods and
properties (Sec.106 (2)(c))

Note: RR 4-2007 removed the distinction between automatic and Rate: 12% VAT
effectively zero-rated transactions found in prior Revenue
Regulations (including RR 16-2005) with respect to prior Basis: Market value of the goods deemed sold as of the time of
application. The paragraph requiring prior application has now the occurrence of the transactionsor as the Commissioner shall
been deleted. prescribe. In the case of retirement/cessation of business, the tax
base shall be the acquisition cost or the current market price of
the goods or properties, whichever is lower. In the case of a sale
where the gross selling price is unreasonably lower than the fair
E. Transaction deemed Sale (Sec. 106
market value, the actual market value shall be the tax base. The
(B), NIRC) gross selling price is unreasonably lower than the actual market
1. Transfer, use or consumption not value if it is lower by more than 30% of the actual market value
in the course of business of of the same goods of the same quantity and quality sold in the
goods/properties originally immediate locality on or nearest the date of sale. (RR 16-2005)
intended for sale or use in the
course of business
F. Change or Cessation of Status as
e.g. when a VAT-registered person withdraws goods from his VAT-registered person (Sec. 106 (C),
business for his personal use. (RR 16-2005) NIRC)

(C) Changes in or Cessation of Status of a VAT-


2. Distribution or transfer to registered Person. - The tax imposed in Subsection (A) of
shareholders, investors or this Section shall also apply to goods disposed of or
creditors existing as of a certain date if under circumstances to be
prescribed in rules and regulations to be promulgated by
(a) Shareholders or investors as share in the profits of the VAT- the Secretary of Finance, upon recommendation of the
registered persons; or (b) Creditors in payment of debt; Commissioner, the status of a person as a VAT-registered
person changes or is terminated.
Property dividends which constitute stocks in trade or properties
primarily held for sale or lease declared out of retained earnings
on or after Jan. 1, 1996 and distributed by the company to its 1. Subject to VAT – goods or
shareholders shall be subject to VAT based on the zonal value or properties originally intended for
FMV at the time of the distribution, whichever is applicable. (RR sale or use in business and
16-2005) capital goods existing as of
occurrence of the following:

3. Consignment of goods if actual Rate: 12%



sale is not made within 60 days
from date of consignment Basis: the acquisition cost or the current market price of the goods
or properties, whichever is LOWER.
Consigned goods returned by the consignee within the 60-day
period are not deemed sold. (RR 16- 2005) VAT shall apply to goods disposed of or existing as of a certain
date if under the circumstances to be prescribed in rules and
regulations to be promulgated by the Secretary of Finance, upon
4. Retirement from or cessation of recommendation of the Commissioner, the status of a person as a
business, with respect to VAT-registered person changes or is terminated.
inventories of taxable goods
existing as of such retirement or UNDER RR 16-2005 SEC. 4.106 (B):
cessation.
Subject to Vat - applicable to goods/properties originally intended
With respect to ALL goods on hand, whether capital goods, for sale or use in business and capital goods which are existing as
stock-in-trade, supplies or materials, as of the date of such of the occurrence of the following:
retirement or cessation, whether or not the business is continued
by the new owner or successor.

Examples are change of ownership of the business (e.g. when a


a. Change of business activity “(A) In General. – There shall be levied, assessed and
from VAT taxable status to collected on every importation of goods a value-added tax
VAT-exempt status equivalent to twelve percent (12%) based on the total value
used by the Bureau of Customs in determining tariff and
Example: A VAT-registered person engaged in a taxable activity customs duties, plus customs duties, excise taxes, if any,
like wholesaler or retailer who decides to discontinue such and other charges, such tax to be paid by the importer prior
activity and engages instead in life insurance business or in any to the release of such goods from customs custody:
other business not subject to VAT. Provided, That where the customs duties are determined on
the basis of the quantity or volume of the goods, the value-
b. Approval of requests for added tax shall be based on the landed cost plus excise
cancellation of a registration taxes, if any.
due to reversion to exempt
(B) Transfer of Goods by Tax-exempt Persons. - In the
status case of tax-free importation of goods into the Philippines by
c. Approval of request for persons, entities or agencies exempt from tax where such
cancellation of registration goods are subsequently sold, transferred or exchanged in
due to desire to revert to the Philippines to non- exempt persons or entities, the
exempt status after lapse of 3 purchasers, transferees or recipients shall be considered
consecutive years. the importers thereof, who shall be liable for any internal
revenue tax on such importation. The tax due on such
from the time of registration by a person who voluntarily importation shall constitute a lien on the goods superior to
registered despite being exempt under Sec. 109 (2) all charges or liens on the goods, irrespective of the
possessor thereof

d. Approval of request for


cancellation of registration for Rate: 12%

failure to meet threshold
Basis: total value used by the Bureau of Customs in determining
amount (for VAT. tariff and customs duties, plus customs duties, excise taxes, if
any, and other charges (such as postage, commission).
of one who commenced business with the expectation of gross
sales/receipts exceeding P1,919,500 (per RR 16-2011) but who
failed to exceed this amount during the first 12 months of Where the customs duties are determined on the basis of the
operation quantity or volume of the goods, the value-added tax shall be
based on the landed cost plus excise taxes, if any.

Landed Cost = invoice amount + customs duties + freight +


2. Not Subject to VAT
insurance + other charges + excise tax (if any)
a. Change of control of a
corporation (Sec. 40 (C) (2)) Who Pays: IMPORTER prior to the release of such goods from
customs custody (Sec. 107 (A), NIRC)
by the acquisition of the controlling interest of such corporation
by another stockholder (individual or corporate) or group of
Importer = any person who brings goods into the Philippines,
stockholders.
whether or not made in the course of his trade or business,
including non-exempt persons or entities who acquire tax-free
imported goods from exempt persons, entities or agencies (RR
b. Change in the trade or 16-2005)
corporate name
c. Merger or consolidation of TRANSFER OF GOODS BY TAX EXEMPT PERSONS(Sec.
corporations (Sec. 40 (C) (2)) 107 (B), NIRC)

The unused input tax of the dissolved corporation, as of the date 10. (a) If importer is tax-exempt, the subsequent
of merger or consolidation, shall be absorbed the surviving or 
purchasers, transferees or recipients of such imported
new corporation. goods shall be considered as importers who shall be
liable for the tax on importation. 

Note: Exchange of goods or properties including the real estate
properties used in business or held for sale or for lease by the 11. (b) The tax due on such importation shall constitute a
transferor, for shares of stocks, whether resulting in corporate lien on the goods superior to all charges or liens on the
control or not, is SUBJECT TO VAT (RR 10-11) goods, irrespective of the possessor thereof. (as
amended by RA 9337) 


IV. VAT ON IMPORTATION (Sec. 107, NIRC)

“SEC. 107. Value-added Tax on Importation of Goods. – V. VAT ON SALE OF SERVICES AND USE OR
LEASE OF PROPERTIES (Sec. 108, NIRC;)
Rate: 12% (1) Construction and service contractors



Basis: Gross receipts derived from the sale or exchange of (2)Stock, real estate, commercial, customs and
services, including the use or lease of properties.
immigration brokers

A. Tax Rate – 12% or 0% 
(3) Lessors of property, whether personal or real


B. Tax Base – Gross Receipts
1. Gross Receipts, Defined (Sec.
108, NIRC)
In a lease contract, the advance payment by the lessee may be:

the total amount of money or its equivalent representing the
contract price, compensation, service fee, rental or royalty, (a) a loan to the lessor from the lessee - NOT subject to VAT

including the amount charged for materials supplied with the
services and deposits and advanced payments actually or (b)an option money for the property - NOT subject to VAT

constructively received during the taxable quarter for the services
performed or to be performed for another person, excluding VAT. (c) a security deposit to insure the faithful
(Sec. 108 (A), NIRC)
performance of certain obligations of the lessee to the lessor -
NOT subject to VAT BUT if the security deposit is applied to
2. Constructive Receipt rental, it shall be subject to VAT at the time of its application

occurs when the money consideration or its equivalent is placed d) Pre-paid rental
received, irrespective of the accounting
at the control of the person who rendered the service without method employed by the lessor
restrictions by the payor. Examples:
(4) Persons engaged in warehousing services 

(1) deposit in banks which are made available to the seller of
services without restrictions (5) Lessors or distributors of cinematographic films 


(2) issuance by the debtor of a notice to offset any debt or (6) Persons engaged in milling, processing, manufacturing or
obligation and acceptance thereof by the seller as payment for repacking goods for others are subject to VAT, EXCEPT palay
services rendered into rice, corn into corn grits, and sugarcane into raw sugar 


(3)transfer of the amounts retained by the contractee to the (7) Proprietors, operators, or keepers of hotels, motels, rest
account of the contractor. (RR 16-2005) houses, pension houses, inns, resorts, theaters, and movie houses

C. Requisites for Taxability of Sale of (8) Proprietors or operators of restaurants, refreshment parlors,
Services cafes and other eating places, including clubs and caterers 


(1) The service must be performed or is to be performed in the (9) Dealers in securities
course of trade or business in the Philippines; 

“Gross receipts” means gross selling price less cost of the
(2) For a valuable consideration actually or constructively securities sold. RR 7-95: Pre-need companies are considered
received; and 
 dealers in securities.

(3) The service is not exempt under the Tax Code, special law or (10) Lending investors
All persons OTHER than banks, non-
international agreement bank financial intermediaries, finance companies and other
financial intermediaries NOT performing quasi-banking functions
(4) Person selling or rendering service is liable to VAT who make a practice of lending money for themselves or others at
interest

(11) Transportation contractors on their transport of goods or


cargoes, including persons who transport goods or cargoes for
1. Sale or Exchange of services hire and other domestic common carriers by land relative to their
(a) Meaning of “Sale or exchange transport of goods or cargoes
of services”
(12) Common carriers by air and sea relative to their transport of
- the performance of all kind of services in the Philippines for passengers, goods or cargoes from one place in the Philippines to
others for a fee, remuneration or consideration, whether in kind or another place in the Philippines
in cash, including those performed or rendered by the following:
(unless otherwise indicated, from RR 16-2005) On transportation: All receipts from service, hire, or operating
lease of transportation equipment not subject to the percentage tax
on domestic common carriers and keepers of garages shall be 2. Person selling services liable to
subject to VAT. VAT
3. Service performed in the
(13) Sales of electricity by generation, transmission, and/or Philippines
distribution companies
4. Service performed in the course
of trade or business
(a) EXCEPT sale of power or fuel generated

through renewable sources of energy, such 5. Seller of service who actually or
as, but not limited to, biomass, solar, wind constructively receives the fee or
hydropower, geothermal, ocean energy, and remuneration
other emerging energy sources using 6. Service is not exempt from VAT
technologies such as fuel cells and hydrogen
fuels, which shall be subject to 0% rate of
D. Zero-Rate Sale of Services (Sec.
VAT (zero-rated). 

108(B), NIRC)
(b) The universal charge passed on and collected by 1. Zero-rated Sales, defined
distribution companies and electric
A zero-rated sale by a VAT-registered person is a taxable
cooperatives shall be excluded from the
transaction for VAT purposes, but shall not result in any output
computation of gross receipts. 

tax.
(14) Franchise grantees of electric utilities, telephone and
Input tax on purchases of goods, properties or services related to
telegraph, radio and/or television broadcasting and all other
such zero-rated sale shall be available as tax credit or refund. (RR
franchise grantees (including PAGCOR and its
16-2005)
licensees/franchisees) 


(a) EXCEPT franchise grantees of radio and/or television


broadcasting whose annual gross receipts of the preceding year do 2. Services subject to 0% VAT
not exceed Ten Million Pesos (P10,000,000.00) (which shall be
subject to 3% franchise tax under Sec. 119, subject to optional
registration), and franchise grantees of gas and water utilities (1) Processing, manufacturing or repacking goods for other
(under Sec. 109, subject to 2% franchise tax) persons doing business outside the Philippines which goods are
subsequently exported, where the services are paid for in
(b) With respect to franchise grantees of telephone and telegraph acceptable foreign currency AND accounted for in accordance
services, amounts received for overseas dispatch, message, or with the rules and regulations of the BSP
conversation originating from the Philippines are subject to the
percentage tax under Sec. 120 and hence exempt from VAT (2) Services other than those mentioned in the preceding
paragraph rendered to a person engaged in business conducted
(15) Non-life insurance companies (except their crop insurances), outside the PhilippinesOR a nonresident person not engaged in
including surety, fidelity, indemnity and bonding companies; business who is outside the Philippines when
and
(a) Insurance and reinsurance commissions, as 
opposed
to premiums, whether life or non- 
life, are subject to VAT. the services are performed, the consideration for which is paid for
in acceptable foreign currency AND accounted for in accordance
(b) Non-life insurance premiums are subject to with the rules and regulations of the BSP

VAT. 

The services referring to ‘processing, manufacturing, repacking’
(c) Life insurance premiums are NOT subject to and ‘services other than those in (1)’ both require (i) payment in

VAT, for they are subject to percentage tax. foreign currency; (ii) inward remittance; (iii) accounted for by the

 BSP; AND (iv) that the service recipient is doing business outside
the Philippines. If this is not the case, taxpayers can circumvent
just by stipulating payment in foreign currency. (CIR v.
(16) Similar services regardless of whether or not the
Burmeister)
performance thereof calls for the exercise or use of the physical or
mental faculties 

12. (3) Services rendered to persons or entities whose

exemption under special laws or international
(17) The lease or the use of or the right or privilege to use any
agreements to which the Philippines is a signatory
copyright, patent, design or model, plan secret formula or process,
effectively subjects the supply of such services to zero
goodwill, trademark, trade brand or other like property or right 

percent (0%) rate (as amended by RA 9337) 


13. (4) Services rendered to persons engaged in


Commissioner of Internal international shipping or international air transport
Revenue vs. COMASERCO (329 operations, including leases of property for use thereof
SCRA 237) [as amended by RA 9337]; Provided, however, that the
services referred to herein 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 Phil. to another place in the Phil. (the same
being subject to 12% VAT under Sec. 108) 
 INPUTTAX–theVATdueonorpaidbyaVAT- registered person on
importation of goods or local purchases of goods, properties, or
14. (5) Services performed by subcontractors and/or services, including lease or use of properties, in the course of his
contractors in processing, converting, or manufacturing trade or business.
goods for an enterprise whose export sales exceed
seventy percent (70%) of total annual production. 
 (a) It includes the transitional input tax and the presumptive input
tax as determined in accordance with Section 111 of the Code.
(6) Transport of passengers and cargo by air or sea vessels from
the Philippines to a foreign country (as added by RA 9337) and; 15. (b) It includes input taxes which can be directly
attributed to transactions subject to the VAT plus a
(7) Sale of power or fuel generated through renewable sources of ratable portion of any input tax which cannot be directly
energy such as, but not limited to, biomass, solar, wind, attributed to either the taxable or exempt activity. 

hydropower, geothermal, ocean energy, and other emerging
energy sources using technologies such as fuel cells and hydrogen 16. (c) Input tax must be evidenced by a VAT invoice or
fuels. (as added by RA 9337) official receipt issued by a VAT-registered person in
accordance with Secs. 113 and 237 of the Code. [RR 16-
Zero-rating shall apply strictly to the sale of power or fuel 2005] 

generated through renewable sources of energy, and shall not
extend to the sale of services related to the maintenance or OUTPUT TAX – the VAT due on the sale or lease of taxable
operation of plants generating said power. goods or properties or services by any person registered or
required to register under Section 236 of the Code. (Sec. 110 (A),
NIRC)
3. Differentiated from Effectively
Zero-rated Sales of goods and
properties B. Sources of Input Tax – creditable
against output tax (Sec. 110, NIRC)
RR 4-2007 removed the distinction between automatic and 1. Purchase or importation of goods
effectively zero-rated transactions found in prior Revenue a. For sale; or
Regulations (inc. RR 16- 2005) with respect to prior application
from the BIR. b. For conversion into or
intended to form part of a
finished product for sale,
VI. VAT EXEMPT TRANSACTIONS (Sec. 109, including packaging
NIRC) materials; or
A. VAT Exempt Transactions, in general c. For use a supplies in the
course of business; or
VAT EXEMPT TRANSACTIONS, IN GENERAL d. For use as raw materials
supplied in the sale of
(a) Sale of goods or properties and/or services and 
the use or services; or
lease of properties that is NOT subject to VAT (output tax) and
e. For use in trade or
the seller is not allowed any tax credit of VAT (input tax) on
purchases. 
 business for which
deduction for
(b) The person making the exempt sale of goods, properties or depreciation or
services shall not bill any output tax to his customers. (RR 16- amortization is allowed
2005) 
 under the NIRC.
i. Claim for Input
(c) But, the VAT-registered person may elect that the exemption tax on
not apply to its sale of goods or properties or services; provided
depreciable
that the election made shall be irrevocable for a period of three
(3) years from the quarter the election was made. (Sec. 109(2), goods
NIRC) 


2. Purchase of real properties for


B. Exempt Transactions, Enumerated which VAT has actually been paid
(Sec. 4. 109-1 (B), RR 16-05, as 3. Purchase of services in which
amended) VAT has actually been paid
4. Transactions “deemed sale”
VII. COMPUTATION OF VAT under Sec. 106 (B) of the NIRC
A. Input Tax & Output Tax, defined (Sec. 5. Transitional Input tax under Sec.
110, NIRC) 111(a) of the NIRC (Sec. 111 (A),
NIRC)
6. Presumptive input tax under Sec. TRANSITIONAL TAX [Sec. 111(A), NIRC]
Any person
111(b) of the NIRC liable for VAT or who elects to be a VAT- registered person shall
be allowed INPUT TAX in his beginning inventory of goods,
Persons or firms engaged in the processing of sardines, mackerel materials and supplies
and milk, and in manufacturing refined sugar and cooking oil and
packed noodle based instant meals, shall be allowed a 17. (a) equivalent to TWO PERCENT (2%) of the value of
presumptive input tax, creditable against the output tax, 
such inventory; OR 

equivalent to FOUR PERCENT (4%) of the gross value in money
of their purchases of primary agricultural products which are used 18. (b) the actual VAT paid on such goods, materials and
as inputs to their production. 
supplies, whichever is HIGHER, which shall be
creditable against the OUTPUT TAX. 


7. Transitional input tax credits PRESUMPTIVE INPUT TAX(Sec. 111(B), NIRC) — Persons
allowed under the transitory and or firms engaged in the processing of sardines, mackerel and
other provisions of the milk, and in manufacturing refined sugar and cooking oil and
packed noodle based instant meals, shall be allowed a
Regulations.
presumptive input tax, creditable against the output tax,
(a) 2% of the value of the beginning inventory on hand or actual equivalent to 4% of the gross value in money of their purchases
VAT paid on such, goods, materials and supplies, whichever is of primary agricultural products which are used as inputs to their
HIGHER, which amount shall be creditable against the output tax production.
of VAT-registered person. 


(b) The value allowed for income tax purposes on inventories D. Determination of Output/Input Tax;
shall be the basis for the computation of the 2% transitional input Vat Payable; Excess Input Tax
tax, EXCLUDING goods that are exempt from VAT under Sec. Credits
109 of the Tax Code. (RR 16-2005) 
 1. Determination of Output Tax

(c) A real estate dealer is entitled to claim transitional input VAT DETERMINATION OF OUTPUT TAX
based on the value of the entire real property sold regardless of
whether there was in fact actual payment of VAT on the purchase If at the end of any taxable quarter, the output tax exceeds the
of the real property. At the time the purchase was made, there was input tax, the excess shall be paid by the VAT-registered person.
still no VAT imposed. (Fort Bonifacio Development Corp. v. (Sec. 110(B), NIRC)
CIR) 


2. Determination of Input Tax


Creditable
C. Persons who can avail of the input tax
credit DETERMINATION OF INPUT TAX CREDITABLE (Sec. 110 ,
NIRC)

CREDITABLE INPUT TAX (Sec. 110(A)(2), NIRC) - Input
tax on domestic purchase or importation of goods or properties (a) The sum of the excess input tax carried over from the
shall be creditable:
(a) To the purchaser upon consummation of preceding month or quarter and the input tax creditable to a VAT-
sale and registered person during the taxable month or quarter shall be
reduced by the amount of claim for refund or tax credit for value-
on importation of goods or properties; and
(b) To the importer added tax and other adjustments, such as purchase returns or
upon payment of the VAT prior to the release of the goods from allowances and input tax attributable to exempt sale.
the custody of the Bureau of Customs.
(b) The claim for tax credit referred to includes not only those
(1) The input tax on goods purchased or imported 
in filed with the BIR but also those filed with other government
a calendar month for use in trade or business for which agencies, such as the Board of Investments the Bureau of
deduction for depreciation is allowed under the Code, Customs.
shall be spread evenly over the month of acquisition and
the fifty-nine (59) succeeding months if the aggregate
acquisition cost for such goods, excluding the VAT
3. Allocation of Input Tax on Mixed
component thereof, exceeds One million pesos
(P1,000,000) 
 Transactions

A VAT-registered person who is also engaged in transactions not


(2) However, if the estimated useful life of the capital subject to VAT shall be allowed to recognize input tax credit on
good is less than five (5) years, as used for depreciation transactions subject to VAT as follows:
purposes, then the input VAT shall be spread over such
a shorter period 

(1) All the input taxes that can be directly attributed to
transactions subject to VAT may be recognized for input
(c) To the purchaser of services or the lessee or licensee upon tax credit 
Input taxes that can be directly attributable
payment of the compensation, rental, royalty or fee. to VAT taxable sales of goods and services to the
Government or any of its political subdivisions, E. Substantiation of input tax credits
instrumentalities or agencies, including GOCCs shall (Sec. 113), NIRC
not be credited against output taxes arising from sales to
non-Government entities 

(a) INPUT TAXES must be substantiated supported by the
(2) If any input tax cannot be directly attributed to following documents, and must be reported in the information
either a VAT taxable or VAT-exempt transaction, the returns required to be submitted to the Bureau:
(1) For the
input tax shall be pro-rated to the VAT taxable and importation of goods= Import entry or
VAT-exempt transactions and ONLY the ratable portion
pertaining to transactions subject to VAT may be other equivalent document showing actual
recognized for input tax credit. 

payment of VAT on the imported goods. (2)For the domestic
purchase of goods and properties = Invoice showing the
4. Determination of the output Tax information required under Secs. 113 (Invoicing and Accounting
and VAT Payable and Requirements for VAT-Registered Persons) and 237 (Issuance of
Computation of VAT Payable or Receipts or Sales or Commercial Invoices) of the Tax Code.
Excess Tax Credits
(3) For the purchase of real property = public 
instrument i.e.,
deed of absolute sale, deed of conditional sale,
contract/agreement to sell, etc., together with VAT invoice issued
by the seller. 


(4) For the purchase of services =official receipt showing the


information required under Secs. 113 and 237 of the Tax Code.

A cash register machine tape issued to a registered buyer shall


constitute valid proof of substantiation of tax credit only if it
shows the information required under Secs. 113 and 237 of the
Tax Code.
Where VAT erroneously billed
(b) TRANSITIONAL INPUT TAX shall be supported by an
Where the basis for computing the output tax is either the gross inventory of goods as shown in a detailed list to be submitted to
selling price/gross receipts, but the amount of VAT is erroneously the BIR. 

billed in the invoice, the total invoice amount shall be presumed
to be comprised of the gross selling price/gross receipts plus the (c) Input tax on "DEEMED SALE" TRANSACTIONS shall be
correct amount of VAT. Hence, substantiated with the invoice required. 


(d) INPUT TAX FROM PAYMENTS MADE TO NON-


RESIDENTS (such as for services, rentals and royalties) shall be
supported by a copy of the Monthly Remittance Return of Value
Added Tax Withheld (BIR Form 1600) filed by the resident payor
in behalf of the non-resident evidencing 
 remittance of VAT
due which was withheld by the payor.
Accordingly, the input tax that can be claimed by the buyer shall
be the corrected amount of VAT computed in accordance with the (e) ADVANCE VAT ON SUGAR shall be supported by the
formula prescribed. Payment Order showing payment of the advance VAT.

VAT payable & excess input tax


F. Refund or Tax Credit of Excess Input
(1) If at the end of any taxable month orquarter: Tax (Sec. 112, NIRC)
1. Who may claim for refund/apply
(a) the output tax exceeds the input tax, the excess shall be paid for issuance of Tax Credit
by the VAT-registered person Certificate (TCC) or Cash Refund

(b) the input tax exceeds the output tax, the excess shall be carried (1) Zero-RatedSales(Sec.112(A),NIRC)
over to the succeeding quarter or quarters
(a) Any VAT-registered person, whose sales are zero-rated or
(2) Any input tax attributable to zero-rated sales by a VAT- effectively zero-rated may apply for the issuance of a tax credit
registered person may at his option be refunded or applied for a certificate/refund of creditable input tax due or paid attributable to
tax credit certificate which may be used in the payment of internal such sales, EXCEPT transitional input tax, to the extent that such
revenue taxes. input tax has not been applied against output tax, within two (2)
years after the close of the taxable quarter when the sales were
made. The input tax that may be subject of the claim shall exclude
the portion of input tax that has been applied against the output one hundred twenty (120) day period from the date of submission
tax. of the application with complete documents, the taxpayer may
appeal to the CTA within 30 days from the lapse of the 120-day
(b)The acceptable foreign currency exchange proceeds must have period. [RR 16-2005] 

been duly accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP) in the case
of zero-rated transactions paid for in acceptable foreign currency 3. Manner of giving refund

and requiring that such be accounted for in accordance with BSP
rules & regulations (Secs. 106(A)(2)(a)(1) and (2), and Sec. Refunds shall be made upon warrants drawn by the
106(A)(2)(b) and Sec. 108(B)(1) and (2), NIRC). Commissioner or by his duly authorized representative without
the necessity of being countersigned by the Chairman,
(c) Where the taxpayer is engaged in zero-rated or effectively Commission on Audit, the provisions of the Administrative Code
zero-rated sale and also in taxable or exempt sale of goods of of 1987 notwithstanding: provided that refunds shall be subject to
properties or services, and the amount of creditable input tax due post audit by the Commission on Audit. (Sec. 112(D), NIRC)
or paid cannot be directly and entirely attributed to any one of the
transactions, it shall be allocated proportionately on the basis of DESTINATION PRINCIPLE OR CROSS-BORDER
the volume of sales. DOCTRINE

The destination of the goods determines taxation or exemption


from tax. Export sales of goods are subject to zero percent (0%)
(d)In the case of a person engaged in the transport of passenger rate while imports of goods are subject to 12% VAT.
and cargo by air or sea vessels from the Philippines to a foreign
country, the input taxes shall be allocated ratably between his
zero-rated sales and non- zero-rated sales (sales subject to regular
VIII. Transactions subject to Special Rules
rate, subject to final VAT withholding and VAT- exempt sales).
(RR 16-2005) A. Transactions of Foreign Governments
B. Transactions with
The absence of the word “zero-rated” on the invoices and receipts PEZA/SBMA/CEZA-registered entities
of a taxpayer will result in the denial of the claim for tax refund. IX. Compliance Requirements
(Eastern Telecommunications Philippines, Inc. v. CIR) A. Registration (Sec. 236 (G) - (H),
NIRC)
(2) Cancellation of VAT Registration. (Sec. 112 (C), NIRC) 1. Mandatory (Sec. 236 (G), NIRC)
2. Optional (Sec. 236 (H), NIRC)

(a) A person whose registration has been cancelled due to
retirement from or cessation of business, or due to changes in or B. Invoicing and Accounting
cessation of status under Section 106(C) of the Code may, within Requirements (Sec. 113, NIRC)
two (2) years from the date of cancellation, apply for the issuance 1. Invoicing Requirements, In
of a tax credit certificate for any unused input tax which may be General (Sec. 113 (1), NIRC)
used in payment of his other internal revenue taxes. 2. Invoicing and Recording Deemed
Sale Transactions (Sec. 113(2))
(b) He shall be entitled to a refund if he has no internal revenue
3. Consequences of issuing
tax liabilities against which the tax credit certificate may be
utilized. Erroneous VAT Invoice or Vat
Official Receipt (Sec.113 (4))
C. Filing of Return and Payment of VAT
2. Period to file claim for (Sec. 114(A))
refund/apply for Issuance of D. Withholding of creditable VAT (Sec.
TCC/Cash Refund 114(C), NIRC)
E. Administrative and Penal Sanctions
In proper cases, the Commissioner of Internal Revenue shall grant (Sec. 115, NIRC)
a tax credit certificate/refund for creditable input taxes within one
hundred twenty (120) days from the date of submission of
complete documents in support of the application.

In case of full or partial denial of the claim for tax credit


certificate/refund as decided by the Commissioner of Internal
Revenue:

(a) The taxpayer may appeal to the Court of Tax 
Appeals


(CTA) within thirty (30) days from the receipt of said denial,
otherwise the decision shall become final. 


(b) If no action on the claim for tax credit certificate/refund has


been taken by the Commissioner of Internal Revenue after the