Vat Part I

TAXATION II PART III
VALUE-ADDED TAX
Sections 105-115 of the NIRC, amended by RA Nos. 9337, 10378 and RA 10963
Implemented by RR Nos. 16-05 as amended by RR Nos. 4-07 and RR 13-2018 (among others)
I. PRELIMINARY MATTERS
What is VAT?
Value Added Tax is an indirect business tax imposed and collected on every (a) sale, barter, or exchange of goods
or properties (real or personal), (b) lease of goods or properties (real or personal) or (c) rendition of services, all
in the course of trade or business, and (d) importation of goods (whether or not in the course of trade or business).
It is an indirect tax, thus, it can be shifted or passed on to the buyer, transferee or lessee of goods, properties or
services.
a. Nature and characteristic of VAT in general

VAT is a tax on consumption levied on the sale, barter, exchange or lease of goods or properties and services in
the course of trade or business in the Philippines and on importation of goods into the Philippines, whether or not
in the course of trade or business. The seller is the one statutorily liable for the payment of the tax but the amount
of the tax may be shifted or passed on to the buyer, transferee or lessee of goods, properties or services. In case
of importation, the importer is the one liable for VAT (Sec. 4.105-2 R.R. 16-2005).
Unlike a direct tax, such as the income tax, which primarily taxes an individual􀇯s ability to pay based on his income
or net wealth, an indirect tax, such as the VAT, is a tax on consumption of goods, services, or certain transactions
involving the same.
Q: What are the characteristics of the VAT?

1. It is a percentage tax imposed at every stage of the distribution process on the sale, barter, or exchange or lease
of goods or properties and on the performance of service in the course of trade or business or on the importation
of goods, whether for business or non-business.
2. It is a business tax levied on certain transactions involving a wide range of goods, properties and services, such
tax being payable by the seller, lessor or transferor.
3. It is an excise tax or a tax on the privilege of engaging in the business of selling goods or services or in the
importation of goods.
4. 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 or services.
5. It is an ad valorem tax as its amount or rate is based on gross selling price or gross value in money or gross
receipts derived from the transaction.
This early on I want to make the distinction between an exempt entity (a taxpayer exempt from VAT) and an
exempt transaction (a transaction exempt from VAT). The distinction proceeds from the nature of VAT as an
indirect tax. If the law exempts the statutory taxpayer (aka the seller), this does not mean that the buyer is also
exempt. The VAT can be shifted to the buyer. Also, if the law exempts the buyer from VAT meaning the seller
cannot pass/shift the VAT to the buyer, this does not mean the seller is exempt. He must pay the tax. In both
cases, the transaction is not exempt from VAT because someone will pay. But if the law says the transaction is
exempt from VAT then neither the buyer nor the seller will have to pay VAT. That is the distinction. Remember
that especially when we discussed zero-rated, effectively zero-rated and exempt transactions.
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 CIR vs. Magsaysay Lines GR No. 146984 dated July 28, 2006
Facts: Pursuant to a government program of privatization, NDC decided to sell to private enterprise all of its shares
in its wholly-owned subsidiary the National Marine Corporation (NMC). The NDC decided to sell in one lot its NMC
shares and five (5) of its ships.
The NMC shares and the vessels were offered for public bidding. Among the stipulated terms and conditions for
the public auction was that the winning bidder was to pay a value added tax of 10% on the value of the vessels.
On 28 September 1988, the implementing Contract of Sale was executed between NDC, on one hand, and
Magsaysay Lines, Baliwag Navigation, and FIM Limited, on the other. Paragraph 11.02 of the contract stipulated
that [v]alue-added tax, if any, shall be for the account of the PURCHASER. Per arrangement, an irrevocable
confirmed Letter of Credit previously filed as bidders bond was accepted by NDC as security for the payment of
VAT, if any.
In January of 1989, private respondents through counsel received VAT Ruling No. 568-88 dated 14 December 1988
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 its normal VAT registered activity of leasing
out personal property including sale of its own assets that are movable, tangible objects which are appropriable
or transferable are subject to the 10% [VAT].
The CTA ruled that the sale of a vessel was an isolated transaction, not done in the ordinary course of NDCs
business, and was thus not subject to VAT, which under Section 99 of the Tax Code, was applied only to sales in
the course of trade or business. The CTA further held that the sale of the vessels could not be deemed sale, and
thus subject to VAT, as the transaction did not fall under the enumeration of transactions deemed sale as listed
either in Section 100(b) of the Tax Code, or Section 4 of R.R. No. 5-87.
Issue: whether the sale by the National Development Company (NDC) of five (5) of its vessels to the private
respondents is subject to value-added tax (VAT) under the National Internal Revenue Code of 1986 (Tax Code)
then prevailing at the time of the sale.
Ruling: No. The fact that the sale was not in the course of the trade or business of NDC is sufficient in itself to
declare the sale as outside the coverage of VAT.
That the sale of the vessels was not in the ordinary course of trade or business of NDC was appreciated by both
the CTA and the Court of Appeals, the latter doing so even in its first decision which it eventually reconsidered.
We cite with approval the CTAs explanation on this point:
In Imperial v. Collector of Internal Revenue, G.R. No. L-7924, September 30, 1955 (97 Phil. 992), the term
carrying on business does not mean the performance of a single disconnected act, but means conducting,
prosecuting and continuing business by performing progressively all the acts normally incident thereof;
while doing business conveys the idea of business being done, not from time to time, but all the time. [J.
Aranas, UPDATED NATIONAL INTERNAL REVENUE CODE (WITH ANNOTATIONS), p. 608-9 (1988)]. Course
of businessis what is usually done in the management of trade or business. [Idmi v. Weeks & Russel, 99
So. 761, 764, 135 Miss. 65, cited in Words & Phrases, Vol. 10, (1984)].
What is clear therefore, based on the aforecited jurisprudence, is that course of business or doing business
connotes regularity of activity. In the instant case, the sale was an isolated transaction. The sale which was
involuntary and made pursuant to the declared policy of Government for privatization could no longer be repeated
or carried on with regularity. It should be emphasized that the normal VAT-registered activity of NDC is leasing
personal property.
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This finding is confirmed by the Revised Charter of the NDC which bears no indication that the NDC was created
for the primary purpose of selling real property.
The conclusion that the sale was not in the course of trade or business, which the CIR does not dispute before this
Court, should have definitively settled the matter. Any sale, barter or exchange of goods or services not in the
course of trade or business is not subject to VAT.
(Section 99 v. Section 100)
The Court finds that Section 99 of the Tax Code is sufficient reason for upholding the refund of VAT payments, and
the subsequent disquisitions by the lower courts on the applicability of Section 100 of the Tax Code and Section 4
of R.R. No. 5-87 are ultimately irrelevant.
Section 100 of the Tax Code, which is implemented by Section 4(E)(i) of R.R. No. 5-87 now relied upon by the CIR,
is captioned Value-added tax on sale of goods, and it expressly states that [t]here shall be levied, assessed and
collected on every sale, barter or exchange of goods, a value added tax x x x. Section 100 should be read in light
of Section 99, which lays down the general rule on which persons are liable for VAT in the first place and on what
transaction if at all. It may even be noted that Section 99 is the very first provision in Title IV of the Tax Code, the
Title that covers VAT in the law.
It would have been a different matter if Section 100 purported to define the phrase in the course of trade or
business as expressed in Section 99. If that were so, reference to Section 100 would have been necessary as a
means of ascertaining whether the sale of the vessels was in the course of trade or business, and thus subject to
VAT. But that is not the case. What Section 100 and Section 4(E)(i) of R.R. No. 5-87 elaborate on is not the meaning
of in the course of trade or business, but instead the identification of the transactions which may be deemed as
sale. It would become necessary to ascertain whether under those two provisions the transaction may be deemed
a sale, only if it is settled that the transaction occurred in the course of trade or business in the first place. If the
transaction transpired outside the course of trade or business, it would be irrelevant for the purpose of
determining VAT liability whether the transaction may be deemed sale, since it anyway is not subject to VAT.
Accordingly, the Court rules that given the undisputed finding that the transaction in question was not made in
the course of trade or business of the seller, NDC that is, the sale is not subject to VAT pursuant to Section 99 of
the Tax Code, no matter how the said sale may hew to those transactions deemed sale as defined under Section
100.
 Change of ownership - only a circumstance that attends those transactions deemed sale, which are otherwise
stated in the same section.
(further discussion on VAT)

A brief reiteration of the basic principles governing VAT is in order. VAT is ultimately a tax on consumption, even
though it is assessed on many levels of transactions on the basis of a fixed percentage. It is the end user of consumer
goods or services which ultimately shoulders the tax, as the liability therefrom is passed on to the end users by the
providers of these goods or services who in turn may credit their own VAT liability (or input VAT) from the VAT
payments they receive from the final consumer (or output VAT). The final purchase by the end consumer represents
the final link in a production chain that itself involves several transactions and several acts of consumption. The VAT
system assures fiscal adequacy through the collection of taxes on every level of consumption, yet assuages the
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 liability.
Yet VAT is not a singular-minded tax on every transactional level. Its assessment bears direct relevance to the
taxpayers role or link in the production chain. Hence, as affirmed by Section 99 of the Tax Code and its subsequent
incarnations, the tax is levied only on the sale, barter or exchange of goods or services by persons who engage in such
activities, in the course of trade or business. These transactions outside the course of trade or business may invariably
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contribute to the production chain, but they do so only as a matter of accident or incident. As the sales of goods or
services do not occur within the course of trade or business, the providers of such goods or services would hardly, if
at all, have the opportunity to appropriately credit any VAT liability as against their own accumulated VAT collections
since the accumulation of output VAT arises in the first place only through the ordinary course of trade or business.
 CIR vs. Seagate Technology (Phils) GR No. 153866 February 11, 2005
Business companies registered in and operating from the Special Economic Zone in Naga, Cebu -- like herein
respondent -- are entities exempt from all internal revenue taxes and the implementing rules relevant thereto,
including the value-added taxes or VAT. Although export sales are not deemed exempt transactions, they are
nonetheless zero-rated. Hence, in the present case, the distinction between exempt entities and exempt transactions
has little significance, because the net result is that the taxpayer is not liable for the VAT. Respondent, a VAT-registered
enterprise, has complied with all requisites for claiming a tax refund of or credit for the input VAT it paid on capital
goods it purchased. Thus, the Court of Tax Appeals and the Court of Appeals did not err in ruling that it is entitled to
such refund or credit.
Facts: Seagate is a resident foreign corporation duly registered with the Securities and Exchange Commission to
do business in the Philippines. It is registered with the Philippine Export Zone Authority (PEZA) and has been issued
PEZA Certificate No. 97-044 pursuant to Presidential Decree No. 66, as amended, to engage in the manufacture
of recording components primarily used in computers for export. Such registration was made on 6 June 1997.
Seagate is a VAT registered entity. It filed an administrative claim for refund of VAT input taxes in the amount of
P28,369,226.38 with supporting documents with the Revenue District Office, which was elevated to the CTA.
Issue: Whether or not respondent is entitled to the refund or issuance of Tax Credit Certificate in the amount of
P12,122,922.66 representing alleged unutilized input VAT paid on capital goods purchased for the period April 1,
1998 to June 30, 1999.
Ruling: Yes. No doubt, as a PEZA-registered enterprise within a special economic zone, respondent is entitled to
the fiscal incentives and benefits provided for in either PD 66[9] or EO 226. It shall, moreover, enjoy all privileges,
benefits, advantages or exemptions under both Republic Act Nos. (RA) 7227 and 7844.
Special Laws Covering Respondent:
PD 66, notwithstanding the provisions of other laws to the contrary, respondent shall not be subject to
internal revenue laws and regulations for raw materials, supplies, articles, equipment, machineries, spare
parts and wares, except those prohibited by law, brought into the zone to be stored, broken up, repacked,
assembled, installed, sorted, cleaned, graded or otherwise processed, manipulated, manufactured, mixed
or used directly or indirectly in such activities. Even so, respondent would enjoy a net-operating loss carry
over; accelerated depreciation; foreign exchange and financial assistance; and exemption from export
taxes, local taxes and licenses.
Comparatively, the same exemption from internal revenue laws and regulations applies if EO 226 is
chosen. Under this law, respondent shall further be entitled to an income tax holiday; additional
deduction for labor expense; simplification of customs procedure; unrestricted use of consigned
equipment; access to a bonded manufacturing warehouse system; privileges for foreign nationals
employed; tax credits on domestic capital equipment, as well as for taxes and duties on raw materials;
and exemption from contractors taxes, wharfage dues, taxes and duties on imported capital equipment
and spare parts, export taxes, duties, imposts and fees, local taxes and licenses, and real property taxes.
A privilege available to respondent under the provision in RA 7227 on tax and duty-free importation of
raw materials, capital and equipment -- is, ipso facto, also accorded to the zone under RA 7916.
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Furthermore, the latter law -- notwithstanding other existing laws, rules and regulations to the contrary -
- extends to that zone the provision stating that no local or national taxes shall be imposed therein. No
exchange control policy shall be applied; and free markets for foreign exchange, gold, securities and future
shall be allowed and maintained. Banking and finance shall also be liberalized under minimum Bangko
Sentral regulation with the establishment of foreign currency depository units of local commercial banks
and offshore banking units of foreign banks.
In the same vein, respondent benefits under RA 7844 from negotiable tax credits for locally-produced
materials used as inputs. Aside from the other incentives possibly already granted to it by the Board of
Investments, it also enjoys preferential credit facilities and exemption from PD 1853.
From the above-cited laws, it is immediately clear that petitioner enjoys preferential tax treatment. It is not
subject to internal revenue laws and regulations and is even entitled to tax credits. The VAT on capital goods is an
internal revenue tax from which petitioner as an entity is exempt. Although the transactions involving such tax
are not exempt, petitioner as a VAT-registered person, however, is entitled to their credits.
As mentioned earlier, the VAT is a tax on consumption, the amount of which may be shifted or passed on by the
seller to the purchaser of the goods, properties or services. While the liability is imposed on one person, the
burden may be passed on to another. Therefore, if a special law merely exempts a party as a seller from its direct
liability for payment of the VAT, but does not relieve the same party as a purchaser from its indirect burden of the
VAT shifted to it by its VAT-registered suppliers, the purchase transaction is not exempt. Applying this principle to
the case at bar, the purchase transactions entered into by respondent are not VAT-exempt.
Special laws may certainly exempt transactions from the VAT. However, the Tax Code provides that those falling
under PD 66 are not. PD 66 is the precursor of RA 7916 -- the special law under which respondent was registered.
The purchase transactions it entered into are, therefore, not VAT-exempt. These are subject to the VAT;
respondent is required to register.
Since the purchases of respondent are not exempt from the VAT, the rate to be applied is zero. Its exemption
under both PD 66 and RA 7916 effectively subjects such transactions to a zero rate, because the ecozone within
which it is registered is managed and operated by the PEZA as a separate customs territory. This means that in
such zone is created the legal fiction of foreign territory. Under the cross-border principle of the VAT system being
enforced by the Bureau of Internal Revenue (BIR), no VAT shall be imposed to form part of the cost of goods
destined for consumption outside of the territorial border of the taxing authority. If exports of goods and services
from the Philippines to a foreign country are free of the VAT, then the same rule holds for such exports from the
national territory -- except specifically declared areas -- to an ecozone.
Sales made by a VAT-registered person in the customs territory to a PEZA-registered entity are considered exports
to a foreign country; conversely, sales by a PEZA-registered entity to a VAT-registered person in the customs
territory are deemed imports from a foreign country. An ecozone -- indubitably a geographical territory of the
Philippines -- is, however, regarded in law as foreign soil. This legal fiction is necessary to give meaningful effect
to the policies of the special law creating the zone. If respondent is located in an export processing zone within
that ecozone, sales to the export processing zone, even without being actually exported, shall in fact be viewed
as constructively exported under EO 226. Considered as export sales, such purchase transactions by respondent
would indeed be subject to a zero rate.
This exemption covers both direct and indirect taxes, stemming from the very nature of the VAT as a tax on
consumption, for which the direct liability is imposed on one person but the indirect burden is passed on to
another. Respondent, as an exempt entity, can neither be directly charged for the VAT on its sales nor indirectly
made to bear, as added cost to such sales, the equivalent VAT on its purchases. Ubi lex non distinguit, nec nos
distinguere debemus. Where the law does not distinguish, we ought not to distinguish.
Having determined that respondent’s purchase transactions are subject to a zero VAT rate, the tax refund or credit
is in order.
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As correctly held by both the CA and the Tax Court, respondent had chosen the fiscal incentives in EO 226 over
those in RA 7916 and PD 66. It opted for the income tax holiday regime instead of the 5 percent preferential tax
regime.
The latter scheme is not a perfunctory aftermath of a simple registration under the PEZA law, for EO 226 also has
provisions to contend with. These two regimes are in fact incompatible and cannot be availed of simultaneously
by the same entity. While EO 226 merely exempts it from income taxes, the PEZA law exempts it from all taxes.
Therefore, respondent can be considered exempt, not from the VAT, but only from the payment of income tax for
a certain number of years, depending on its registration as a pioneer or a non-pioneer enterprise. Besides, the
remittance of the aforesaid 5 percent of gross income earned in lieu of local and national taxes imposable upon
business establishments within the ecozone cannot outrightly determine a VAT exemption. Being subject to VAT,
payments erroneously collected thereon may then be refunded or credited
 Concurring Opinion of Justice Abad – Fort Bonifacio Development Corp. vs. CIR, GR No. 173425 dated
September 4, 2012.
In 1992 Congress enacted Republic Act (R.A.) 7227 creating the Bases Conversion Development Authority (BCDA) for
the purpose of raising funds through the sale to private investors of military lands in Metro Manila. To do this, the
BCDA established the Fort Bonifacio Development Corp. (FBDC), a registered corporation, to enable the latter to
develop the 214-hectare military camp in Fort Bonifacio, Taguig, for mix residential and commercial purposes. On
February 8, 1995 the Government of the Republic of the Philippines ceded the land by deed of absolute sale to FBDC
for ₱ 71.2 billion. Subsequently, cashing in on the sale, BCDA sold at a public bidding 55o/o of its shares in FBDC to
private investors, retaining ownership of the remaining 45%.
In October 1996, after the National Internal Revenue Code (NIRC) subjected the sale and lease of real properties to
VAT, FBDC began selling and leasing lots in Fort Bonifacio. FBDC filed its first VAT return covering those sales and
leases and subsequently made cash payments for output VAT due. After which, FBDC filed a claim for refund
representing transitional input tax credit based on 8o/o of the value of its beginning inventory of lands or actual value-
added tax paid on its goods, whichever is higher, that Section 105 of the NIRC grants to first-time VAT payers like
FBDC.
Since the Court’s April 2, 2009 decision and October 2, 2009 resolution in G.R. 158885 and G.R. 170680 had long
become final and executory, they should foreclose the identical issue in the present cases (G.R. 173425 and G.R.
181092) of whether or not FBDC is entitled to the transitional input tax credit granted in Section 105 of the NIRC.
Indeed, the rulings in those previous cases may be regarded as the law of the case and can no longer be changed.
A value added tax is a form of indirect sales tax paid on products and services at each stage of production or
distribution, based on the value added at that stage and included in the cost to the ultimate consumer.3
To illustrate how VAT works, take a lumber store that sells a piece of lumber to a carpentry shop for ₱ 100.00. The
lumber store must pay a 12% VAT or ₱ 12.00 on such sale but it may charge the carpentry shop ₱ 112.00 for the piece
of lumber, passing on to the latter the burden of paying the ₱ 12.00 VAT.
When the carpentry shop makes a wooden stool out of that lumber and sells the stool to a furniture retailer for ₱
150.00 (which would now consists of the ₱ 100.00 cost of the lumber, the ₱ 50.00 cost of shaping the lumber into a
stool, and profit), the carpentry shop must pay a 12% VAT of ₱ 6.00 on the ₱ 50.00 value it added to the piece of
lumber that it made into a stool. But it may charge the furniture retailer the VAT of ₱ 12.00 passed on to it by the
lumber store as well as the VAT of ₱ 6.00 that the carpentry shop itself has to pay. Its buyer, the furniture retailer, will
pay ₱ 150.00, the price of the wooden stool, and ₱ 18.00 (₱ 12.00 + ₱ 6.00), the passed-on VAT due on the same.
When the furniture retailer sells the wooden stool to a customer for ₱ 200.00, it would have added to its ₱ 150.00
acquisition cost of the stool its mark-up of ₱ 50.00 to cover its overhead and profit. The furniture retailer must,
however, pay an additional 12% VAT of ₱ 6.00 on the ₱ 50.00 add-on value of the stool. But it could charge its customer
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all the accumulated VAT payments: the ₱ 12.00 paid by the lumber store, the ₱ 6.00 paid by the carpentry shop, and
the other ₱ 6.00 due from the furniture retailer, for a total of ₱ 24.00. The customer will pay ₱ 200.00 for the stool
and ₱ 24.00 in passed-on 12% VAT.
Now, would the furniture retailer pay to the BIR the ₱ 24.00 VAT that it passed on to its customer and collected from
him at the store’s counter? Not all of the ₱ 24.00. The furniture retailer could claim a credit for the ₱ 12.00 and the ₱
6.00 in input VAT payments that the lumber store and the carpentry shop passed on to it and that it paid for when it
bought the wooden stool. The furniture retailer would just have to pay to the BIR the output VAT of ₱ 6.00 covering
its ₱ 50.00 mark-up. This payment rounds out the 12% VAT due on the final sale of the stool for ₱ 200.00.
When the VAT law first took effect, it would have been unfair for a furniture retailer to pay all of the 10% VAT (the old
rate) on the wooden stools in its inventory at that time and not be able to claim deduction for any tax on sale that the
lumber store and the carpentry shop presumably passed on to it when it bought those wooden stools. To remedy this
unfairness, Section 105 of the NIRC granted those who must pay VAT for the first time a transitional input tax credit
of 8% of the value of the inventory of goods they have or actual value-added tax paid on such goods when the VAT
law took effect. The furniture retailer would thus have to pay only a 2% VAT on the wooden stools in that inventory,
given the transitional input VAT tax credit of 8% allowed it under the old 10% VAT rate.
In the case before the Court, FBDC had an inventory of Fort Bonifacio lots when the VAT law was made to cover the
sale of real properties for the first time. FBDC registered as new VAT payer and submitted to the BIR an inventory of
its lots. FBDC sought to apply the 8% transitional input tax credit that Section 105 grants first-time VAT payers like it
but the CIR would not allow it. The dissenting opinion of Justice Carpio echoes the CIR’s reason for such disallowance.
When the Government sold the Fort Bonifacio lands to FBDC, the Government paid no sales tax whatsoever on that
sale. Consequently, it could not have passed on to FBDC what could be the basis for the 8% transitional input tax credit
that Section 105 provides.
The reasoning appears sound at first glance. But Section 105 grants all first-time VAT payers such transitional input
tax credit of 8% without any precondition. It does not say that a taxpayer has to prove that the seller, from whom he
bought the goods or the lands, paid sales taxes on them. Consequently, the CIR has no authority to insist that sales
tax should have been paid beforehand on FBDC’s inventory of lands before it could claim the 8% transitional input tax
credit. The Court’s decision in G.R. 158885 and G.R. 170680 more than amply explains this point and such explanation
need not be repeated here.
But there is a point that has apparently been missed. When the Government sold the military lands to FBDC for
development into mixed residential and commercial uses, the presumption is that in fixing their price the Government
took into account the price that private lands similarly situated would have fetched in the market place at that time.
The clear intent was to privatize ownership of those former military lands. It would make no sense for the Government
to sell the same to intended private investors at a price lesser than the price of comparable private lands. The
presumption is that the sale did not give undue benefit to the buyers in violation of the anti-graft and corrupt practices
act.
Moreover, there is one clear evidence that the former military lands were sold to private investors at market price.
After the Government sold the lands to FBDC, then wholly owned by BCDA, the latter sold 55% of its shares in FBDC
to private investors in a public bidding where many competed. Since FBDC had no assets other than the lands it bought
from the Government, the bidding was essentially for those lands. There can be no better way of determining the
market price of such lands than a well-publicized bidding for them, joined in by interested bona fide bidders.
Thus, since the Government sold its lands to investors at market price like they were private lands, the price FBDC
paid to it already factored in the cost of sales tax that prices of ordinary private lands included. This means that FBDC,
which bought the lands at private-land price, should be allowed like other real estate dealers holding private lands to
claim the 8% transitional input tax credit that Section 105 grants with no precondition to first-time VAT payers.
Otherwise, FBDC would be put at a gross disadvantage compared to other real estate dealers. It will have to sell at
higher prices than market price, to cover the 10% VAT that the BIR insists it should pay. Whereas its competitors will
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pay only a 2% VAT, given the 8% transitional input tax credit of Section 105. To deny such tax credit to FBDC would
amount to a denial of its rights to fairness and to equal protection.
The Court was correct in allowing FBDC the right to be refunded the VAT that it already paid, applying instead to the
VAT tax due on its sales the transitional input VAT that Section 105 provides.
Justice Carpio also argues that if FBDC will be given a tax refund, it would be sourced from public funds, which violates
Section 4(2) of the Govenm1ent Auditing Code that government funds or property cannot be used in order to benefit
private individuals or entities. They shall only be spent or used solely for public purposes.
But the records show that FBDC actually paid to the BIR the amounts for which it seeks a BIR tax refund. The CIR does
not deny this fact. FBDC was forced to pay cash on the VAT due on its sales because the BIR refused to apply the 8%
transitional input VAT tax credits that the law allowed it. Since such tax credits were sufficient to cover the VAT due,
FBDC is entitled to a refund of the VAT it already paid. And, contrary to the dissenting opinion, if FBDC will be given a
tax refund, it would be sourced, not from public funds, but from the VAT payments which FBDC itself paid to the BIR.
Like the previous cases before the Court, the BIR has the option to refund what FBDC paid it with equivalent tax credits.
Such tax credits have never been regarded as needing appropriation out of government funds. Indeed, FBDC concedes
in its prayers that it may get its refund in the form of a Tax Credit Certificate.
b. VAT as an indirect tax

The amount of tax payable on the goods, properties or services bought, transferred, or leased may be passed on by the
seller, transferor, or lessor to the buyer, transferee or lessee. When passed on, the amount of VAT due forms part of the
purchase price of goods or services. As a result, it is the buyer who bears the burden of tax, although the one liable to pay
it is the seller. The VAT, thus, forms a substantial portion of consumer expenditures as part of the cost of goods or services
purchased. What is transferred in such instances is not the liability for the tax, but the tax burden.
In adding or including the VAT due to the selling price, the seller remains the person primarily and legally liable for the
payment of the tax. What is shifted only to the intermediate buyer and ultimately to the final purchaser is the burden of
the tax. Stated differently, a seller who is primarily and legally liable for payment of an indirect tax, such as the VAT on
goods or services is not necessarily the same person who ultimately bears the burden of the same tax. It is the final
purchaser or consumer of such goods or services who, although not primarily and legally liable for the payment thereof,
ultimately bears the burden of the tax (Contex v. CIR, GR No. 151135, July 2, 2004).
 Contex vs. CIR GR No. 151135 dated July 2, 2004
Facts: Petitioner is a domestic corporation engaged in the business of manufacturing hospital textiles and garments
and other hospital supplies for export. Petitioner’s place of business is at the Subic Bay Freeport Zone (SBFZ). It is duly
registered with the Subic Bay Metropolitan Authority (SBMA) as a Subic Bay Freeport Enterprise, pursuant to the
provisions of Republic Act No. 7227. As an SBMA-registered firm, petitioner is exempt from all local and national
internal revenue taxes except for the preferential tax provided for in Section 12 (c) of Rep. Act No. 7227. Petitioner
also registered with the Bureau of Internal Revenue (BIR) as a non-VAT taxpayer.
From January 1, 1997 to December 31, 1998, petitioner purchased various supplies and materials necessary in the
conduct of its manufacturing business. The suppliers of these goods shifted unto petitioner the 10% VAT on the
purchased items, which led the petitioner to pay input taxes.
Acting on the belief that it was exempt from all national and local taxes, including VAT, pursuant to Rep. Act No. 7227,
petitioner filed two applications for tax refund or tax credit of the VAT it paid.
Issue: whether the VAT exemption embodied in Rep. Act No. 7227 does not apply to petitioner as a purchaser.
Ruling: Petitioner is exempt from VAT on all its sales and importations of goods and services.
8|VALUE-ADDED TAX
It must be stressed that the VAT is an indirect tax. As such, the amount of tax paid on the goods, properties or services
bought, transferred, or leased may be shifted or passed on by the seller, transferor, or lessor to the buyer, transferee
or lessee. Unlike a direct tax, such as the income tax, which primarily taxes an individual’s ability to pay based on his
income or net wealth, an indirect tax, such as the VAT, is a tax on consumption of goods, services, or certain
transactions involving the same. The VAT, thus, forms a substantial portion of consumer expenditures.
Further, in indirect taxation, there is a need to distinguish between the liability for the tax and the burden of the tax.
As earlier pointed out, the amount of tax paid may be shifted or passed on by the seller to the buyer. What is
transferred in such instances is not the liability for the tax, but the tax burden. In adding or including the VAT due to
the selling price, the seller remains the person primarily and legally liable for the payment of the tax. What is shifted
only to the intermediate buyer and ultimately to the final purchaser is the burden of the tax.[18]Stated differently, a
seller who is directly and legally liable for payment of an indirect tax, such as the VAT on goods or services is not
necessarily the person who ultimately bears the burden of the same tax. It is the final purchaser or consumer of such
goods or services who, although not directly and legally liable for the payment thereof, ultimately bears the burden
of the tax.
Exemptions from VAT are granted by express provision of the Tax Code or special laws. Under VAT, the transaction
can have preferential treatment in the following ways:
(a) VAT Exemption. An exemption means that the sale of goods or properties and/or services and the use or
lease of properties is not subject to VAT (output tax) and the seller is not allowed any tax credit on VAT (input
tax) previously paid. This is a case wherein the VAT is removed at the exempt stage (i.e., at the point of the
sale, barter or exchange of the goods or properties).
The person making the exempt sale of goods, properties or services shall not bill any output tax to his
customers because the said transaction is not subject to VAT. On the other hand, 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 purchase despite the issuance of a VAT invoice or receipt.
(b) Zero-rated Sales. These are sales by VAT-registered persons which are subject to 0% rate, meaning the tax
burden is not passed on to the purchaser. A zero-rated sale by a VAT-registered person, which is a taxable
transaction for VAT purposes, shall not result in any output tax. However, the input tax on his purchases of
goods, properties or services related to such zero-rated sale shall be available as tax credit or refund in
accordance with these regulations.
Under Zero-rating, all VAT is removed from the zero-rated goods, activity or firm. In contrast, exemption only removes
the VAT at the exempt stage, and it will actually increase, rather than reduce the total taxes paid by the exempt firms
business or non-retail customers. It is for this reason that a sharp distinction must be made between zero-rating and
exemption in designating a value-added tax.
Apropos, the petitioners claim to VAT exemption in the instant case for its purchases of supplies and raw materials is
founded mainly on Section 12 (b) and (c) of Rep. Act No. 7227, which basically exempts them from all national and
local internal revenue taxes, including VAT and Section 4 (A)(a) of BIR Revenue Regulations No. 1-95.
On this point, petitioner rightly claims that it is indeed VAT-Exempt and this fact is not controverted by the respondent.
In fact, petitioner is registered as a NON-VAT taxpayer per Certificate of Registration issued by the BIR. As such, it is
exempt from VAT on all its sales and importations of goods and services.
 While it is true that the petitioner should not have been liable for the VAT inadvertently passed on to it by its
supplier since such is a zero-rated sale on the part of the supplier, the petitioner is not the proper party to
claim such VAT refund.
9|VALUE-ADDED TAX
Since the transaction is deemed a zero-rated sale, petitioner’s supplier may claim an Input VAT credit with
no corresponding Output VAT liability. Congruently, no Output VAT may be passed on to the petitioner.
Rather, it is the petitioners suppliers who are the proper parties to claim the tax credit and accordingly
refund the petitioner of the VAT erroneously passed on to the latter.
c. Persons Liable (Sec. 105)

SEC. 105. Persons Liable. - Any person who, in the course of trade or business, sells barters, exchanges, leases goods or
properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in
Sections 106 to 108 of this Code.
The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee
of the goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties
or services at the time of the effectivity of Republic Act No. 7716.
The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic
activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein
is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells
exclusively to members or their guests), or government entity.
The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by non-
resident foreign persons shall be considered as being course of trade or business.
i. Persons liable in general
Any person who:

1. In the course of trade or business, sells, barters, exchanges, leases goods or properties or undertakes deemed sale
transactions.
2. renders services;
XPN: A Non-VAT registered person whose annual gross sales or receipts do not exceed P1,919,500 shall not be liable to
VAT, instead, he shall be liable for 3% percentage tax (Sec. 116, NIRC).
Also, an individual who is a Marginal Income Earner (MIE) not deriving compensation as employee under an Er-Ee
relationship, self-employed and deriving gross sales or receipts not exceeding P100,000 in any 12-month period, and
where the activities of such MIE is principally for subsistence or livelihood, he shall be exempt from payment of VAT or
any OPT (RMC No. 7-2014).
NOTE: A VAT-registered person, regardless whether his gross sales or gross receipts exceeds P1,919,500 or not, he shall
be liable for VAT. Once VAT registered, he shall be liable for VAT on sale of goods or services, regardless of the amount.
 CIR vs. CA and Commonwealth Management Services GR No. 125355 dated March 30, 2000
Facts: Commonwealth Management and Services Corporation (COMASERCO, for brevity), is a corporation duly
organized and existing under the laws of the Philippines. It is an affiliate of Philippine American Life Insurance Co.
(Philamlife), organized by the letter to perform collection, consultative and other technical services, including
functioning as an internal auditor, of Philamlife and its other affiliates.
On January 24, 1992, the Bureau of Internal Revenue (BIR) issued an assessment to private respondent
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, 1988 indicated a net loss in its operations
in the amount of P6,077.00.
10 | V A L U E - A D D E D T A X
On February 10, 1992, COMASERCO filed with the BIR, a letter-protest objecting to the latter's finding of deficiency
VAT. On August 20, 1992, the Commissioner of Internal Revenue sent a collection letter to COMASERCO
demanding payment of the deficiency VAT.
COMASERCO asserted that the services it rendered to Philamlife and its affiliates, relating to collections,
consultative and other technical assistance, including functioning as an internal auditor, were on a "no-profit,
reimbursement-of-cost-only" basis. It averred that it was not engaged in the business of providing services to
Philamlife and its affiliates. COMASERCO was established to ensure operational orderliness and administrative
efficiency of Philamlife and its affiliates, and not in the sale of services. COMASERCO stressed that it was not profit-
motivated, thus not engaged in business. In fact, it did not generate profit but suffered a net loss in taxable year
1988. COMASERCO averred that since it was not engaged in business, it was not liable to pay VAT.
Issue: whether COMASERCO was engaged in the sale of services, and thus liable to pay VAT thereon.
Ruling: Petitioner avers that to "engage in business" and to "engage in the sale of services" are two different
things. Petitioner maintains that the 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
immaterial whether profit is derived from rendering the service.
We agree with the Commissioner.
COMASERCO contends that the term "in the course of trade or business" requires that the "business" is carried
on with a view to profit or livelihood. It avers that the activities of the entity must be profit- oriented. COMASERCO
submits that it is not motivated by profit, as defined by its primary purpose in the articles of incorporation, stating
that it is operating "only on reimbursement-of-cost basis, without any profit." Private respondent argues that
profit motive is material in ascertaining who to tax for purposes of determining liability for VAT.
We disagree.
On May 28, 1994, Congress enacted Republic Act No. 7716, the Expanded VAT Law (EVAT), amending among other
sections, Section 99 of the Tax Code. On January 1, 1998, Republic Act 8424, the National Internal Revenue Code
of 1997, took effect. The amended law provides that:
"SEC. 105. Persons Liable. - Any person who, in the course of trade or business, sells, barters, exchanges,
leases goods or properties, renders services, and any person who imports goods shall be subject to the
value-added tax (VAT) imposed in Sections 106 and 108 of this Code.
"The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer,
transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing sale or
lease of goods, properties or services at the time of the effectivity of Republic Act No.7716.
"The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or
an economic activity, including transactions incidental thereto, by any person regardless of whether or
not the person engaged therein is a nonstock, nonprofit organization (irrespective of the disposition of its
net income and whether or not it sells exclusively to members of their guests), or government entity.
"The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the
Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade
or business."
Contrary to COMASERCO's contention the above provision clarifies that even a non-stock, non-profit, organization
or government entity, is liable to pay VAT on the sale of goods or services. VAT is a tax on transactions, imposed
at every stage of the distribution process on the sale, barter, exchange of goods or property, and on the
performance of services, even in the absence of profit attributable thereto. The term "in the course of trade or
business" requires the regular conduct or pursuit of a commercial or an economic activity, regardless of whether
or not the entity is profit-oriented.
The definition of the term "in the course of trade or business" incorporated in the present law applies to all
transactions even to those made prior to its enactment. Executive Order No. 273 stated that any person who, in
the course of trade or business, sells, barters or exchanges goods and services, was already liable to pay VAT. The
present law merely stresses that even a nonstock, nonprofit organization or government entity is liable to pay VAT
for the sale of goods and services.
Section 108 of the National Internal Revenue Code of 1997 defines the phrase "sale of services" as the
"performance of all kinds of services for others for a fee, remuneration or consideration." It includes "the supply
of technical advice, assistance or services rendered in connection with technical management or administration
of any scientific, industrial or commercial undertaking or project."
Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives payments for
services rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for purposes of
determining liability for VAT on services rendered. As long as the entity provides service for a fee, remuneration
or consideration, then the service rendered is subject to VAT.
At any rate, it is a rule that because taxes are the lifeblood of the nation, statutes that allow exemptions are
construed strictly against the grantee and liberally in favor of the government. Otherwise stated, any exemption
from the payment of a tax must be clearly stated in the language of the law; it cannot be merely implied therefrom.
In the case of VAT, Section 109, Republic Act 8424 clearly enumerates the transactions exempted from VAT. The
services rendered by COMASERCO do not fall within the exemptions.
ii. Who are required to register for VAT (Sec. 236 G, as amended by RA 10963)
Section 72. Section 236 of the NIRC, as amended, is hereby further amended to read as follows:
“(G) Persons Required to Register for Value-Added Tax.—
(1) x x x
(a) His gross sales or receipts for the past twelve (12) moths, other than those that are exempt under Section 109 (A) to
(BB), have exceeded Three million pesos (P3, 000, 000); or
(b) There are reasonable grounds to believe that his gross sales or receipts for the next twelve (12) moths, other than
those that are exempt under Section 109 (A) to (BB), will exceed Three million pesos (P3,000,000).
iii. Optional VAT Registration (Sec. 236 H, as amended by RA 10963) Sec. 109(2), Q/As 6, 30 and 31 of RMC
No. 46-2008 dated February 1, 2008, Sec. 4-109-2 of RR No. 13-2018
Sec. 236 H, as amended by RA 10963

“(H) Optional Registration for Value-Added Tax of Exempt Person. – (1) Any person who is not required to register for
value-added tax under Subsection (G) hereof may elect to register for value-added tax by registering with the Revenue
District Office that has jurisdiction over the head office of that person, and paying the annual registration fee in Subsection
(B) hereof.
(2) Any person who elects to register under this Subsection shall not be entitled to cancel his registration under Subsection
(F)(2) for the next three (3) years.
“Provided, That any person taxed under Section 24(A)(2)(c)(2)(a) of NIRC who elected to pay the eight percent (8) % tax
on gross sales or receipts shall not be allowed to avail of this option.
“For purposes of Title IV of this Code, any person who has registered value-added tax as a tax type in accordance with the
provisions of Subsection (C) hereof shall be referred to as a VAT-registered person who shall be assigned only one Taxpayer
Identification Number (TIN).
Q/As 6, 30 and 31 of RMC No. 46-2008
Q-6: Can on-line international air carriers opt to be under the VAT system and be subject to VAT at zero-rate on their
outbound international operations similar to domestic air carriers registered as domestic corporations?
A-6: No. The business of an international air carrier is exempt from VAT because it is a sale of services subject to percentage
tax. If the main business is exempt from VAT, the VAT-exempt person can not elect that the said exempt business/es be
placed under the VAT system. The option to be subject to VAT on its exempt transactions is available only to a VAT-
registered person pursuant to Section 109(2) of the Code, as amended by R.A. 9337.
Q-30: Can an international airline company who is engaged in other activities subject to VAT, i.e. leasing of properties,
etc., elect that all its business activities be subject to VAT?
A-30: No. The main or principal business of an international airline company is VAT-exempt because the same is subject
to the percentage tax under Title V of the Tax Code. Therefore, the international airline can not elect that its exempt
principal business be subject to VAT even if its secondary businesses are subject to VAT.
Q-31: How do we determine the main or principal business of a taxpayer who is engaged in mixed business activities?
A-31: In determining the main or principal business of a taxpayer, we apply the pre-dominance test. Under this test, if
more than fifty percent (50%) of its gross sales and/or gross receipts comes from its business/es subject to VAT, its
main/principal business falls within the VAT system making its status as a VAT person. Otherwise, he can not be considered
as a VAT person eligible for the election provided for under Section 109(2) of the Tax Code.
Sec. 4-109-2 of RR No. 13-2018
SEC. 4.109-2. Exempt Transactions May be Registered for VAT Purposes.

— A VAT-registered person may, in relation to Sec. 236 (H) of the 1997 Tax Code, as amended, elect that the exemption
in Sec. 4.109-1(B) hereof shall not apply to his sales of goods or properties or services. Once the election is made, it shall
be irrevocable for a period of three (3) years counted from the quarter when the election was made except for franchise
grantees of radio and TV broadcasting whose annual gross receipts for the preceding year do not exceed ten million pesos
(P10,000,000.00) where the option becomes perpetually irrevocable.
Illustration 6: WPM is a rice dealer. His total annual gross sales and/or receipts do not exceed Three Million
(P3,000,000.00), allowing him to avail the following:
(a) WPM is a VAT-exempt taxpayer. He may elect to avail of the optional registration for VAT of exempt person
under Section 236 (H) of the 1997 Tax Code, as amended. Upon election of such option, he shall not be entitled
to cancel his VAT registration for the next three (3) years;
(b) WPM may elect to pay the 8% commuted tax rate on gross sales or receipts and other non-operating income
in lieu of the graduated income tax rates and the percentage tax under Section 24(A)(2)(b) of the 1997 Tax Code,
as amended, since his gross sales or receipts did not exceed Three Million Pesos (P3,000,000) during the taxable
year. If he elects to pay the 8% commuted tax, he shall not be allowed to avail of the optional registration for VAT
of exempt person provided by Section 236(H) of the 1997 Tax Code, as amended.
iv. VAT vs. Percentage Tax
1. Sec. 109(BB) vs. Sec. 116 (as amended by RA 10963)

“(BB) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the
preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of Three million pesos
(₱3,000,000).
“Sec. 116. Tax on Persons Exempt from Value-added Tax (VAT).— Any person whose sales or receipts are exempt under
Section 109(BB) of this Code from the payment of value-added tax and who is not a VAT-registered person shall pay a tax
equivalent to three percent (3%) of his gross quarterly sales or receipts: Provided, That cooperatives, and beginning
January 1, 2019, self-employed and professionals with total annual gross sales and/or gross receipts not exceeding Five
hundred thousand pesos (₱500,000) shall be exempt from the three percent (3%) gross receipts tax herein imposed.”
d. Meaning of the phrase “in the course of trade of business” (Sec. 105)
"The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic
activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein
is a nonstock, nonprofit organization (irrespective of the disposition of its net income and whether or not it sells exclusively
to members of their guests), or government entity.
Sec. 4.105-3 of RR No. 16-05

SEC. 4.105-3. Meaning of “In the Course of Trade or Business”. – The term “in the course of trade or business” means the
regular conduct or pursuit of a commercial or economic activity, including transactions incidental thereto, by any person
regardless of whether or not the person engaged therein is a non-stock, non-profit private organization (irrespective of
the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity.
Non-resident persons who perform services in the Philippines are deemed to be making sales in the course of trade or
business, even if the performance of services is not regular.
CIR vs. Magsaysay Lines GR No. 146984 dated July 28, 2006
 Mindanao II Geothermal Partnership vs. CIR, GR No. 193301 dated March 11, 2013
Facts: On March 11, 1997, [Mindanao II] allegedly entered into a Built (sic)-Operate-Transfer (BOT) contract with
the Philippine National Oil Corporation – Energy Development Company (PNOC-EDC) for finance, engineering,
supply, installation, testing, commissioning, operation, and maintenance of a 48.25 megawatt geothermal power
plant, provided that PNOC-EDC shall supply and deliver steam to Mindanao II at no cost. In turn, Mindanao II shall
convert the steam into electric capacity and energy for PNOC-EDC and shall deliver the same to the National Power
Corporation (NPC) for and in behalf of PNOC-EDC. Mindanao II alleges that its sale of generated power and delivery
of electric capacity and energy of Mindanao II to NPC for and in behalf of PNOC-EDC is its only revenue-generating
activity which is in the ambit of VAT zero-rated sales under the EPIRA Law.
Hence, the amendment of the NIRC of 1997 modified the VAT rate applicable to sales of generated power by
generation companies from ten (10%) percent to zero (0%) percent.
In the course of its operation, Mindanao II makes domestic purchases of goods and services and accumulates
therefrom creditable input taxes. Pursuant to the provisions of the National Internal Revenue Code (NIRC),
Mindanao II alleges that it can use its accumulated input tax credits to offset its output tax liability. Considering,
however that its only revenue-generating activity is VAT zero-rated under RA No. 9136, Mindanao II’s input tax
credits remain unutilized.
Thus, on the belief that its sales qualify for VAT zero-rating, Mindanao II adopted the VAT zero-rating of the EPIRA
in computing for its VAT payable when it filed its Quarterly VAT Returns.
Considering that it has accumulated unutilized creditable input taxes from its only income-generating activity,
Mindanao II filed an application for refund and/or issuance of tax credit certificate with the BIR’s Revenue District
Office at Kidapawan City on April 13, 2005 for the four quarters of 2003.
The CTA First Division found that Mindanao II is entitled to a refund in the modified amount of ₱7,703,957.79,
after disallowing ₱522,059.91 from input VAT and deducting ₱18,181.82 from Mindanao II’s sale of a fully
depreciated ₱200,000.00 Nissan Patrol. The input taxes amounting to ₱522,059.91 were disallowed for failure to
meet invoicing requirements, while the input VAT on the sale of the Nissan Patrol was reduced by ₱18,181.82
because the output VAT for the sale was not included in the VAT declarations.
Mindanao II filed a motion for partial reconsideration. It stated that the sale of the fully depreciated Nissan Patrol
is a one-time transaction and is not incidental to its VAT zero-rated operations. Moreover, the disallowed input
taxes substantially complied with the requirements for refund or tax credit.
The CTA En Banc ruled that the sale of the fully-depreciated Nissan Patrol is incidental to Mindanao II’s VAT zero-
rated transactions pursuant to Section 105.
Issue: Whether the sale of the fully depreciated Nissan Patrol is a one-time transaction and is not incidental to the
VAT zero-rated operation of Mindanao II.
Ruling:
Mindanao II asserts that the sale of a fully depreciated Nissan Patrol is not an incidental transaction in the course
of its business; hence, it is an isolated transaction that should not have been subject to 10% VAT.
Section 105 of the 1997 Tax Code does not support Mindanao II’s position:
SEC. 105. Persons Liable. - Any person who, in the course of trade or business, sells barters, exchanges,
leases goods or properties, renders services, and any person who imports goods shall be subject to the
value-added tax (VAT) imposed in Sections 106 to 108 of this Code.
The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer,
transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts
of sale or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716.
The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or
not the person engaged therein is a nonstock, nonprofit private organization (irrespective of the
disposition of its net income and whether or not it sells exclusively to members or their guests), or
government entity.
The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the
or business. (Emphasis supplied)
Mindanao II’s sale of the Nissan Patrol is said to be an isolated transaction. However, it does not follow that an
isolated transaction cannot be an incidental transaction for purposes of VAT liability. Indeed, a reading of Section
105 of the 1997 Tax Code would show that a transaction "in the course of trade or business" includes "transactions
incidental thereto."
Mindanao II’s business is to convert the steam supplied to it by PNOC-EDC into electricity and to deliver the
electricity to NPC. In the course of its business, Mindanao II bought and eventually sold a Nissan Patrol. Prior to
the sale, the Nissan Patrol was part of Mindanao II’s property, plant, and equipment. Therefore, the sale of the
Nissan Patrol is an incidental transaction made in the course of Mindanao II’s business which should be liable for
VAT.
 CIR vs. Sony Phils, Inc. G.R. No. 178697, November 17, 2010
Facts: In 1998, the CIR issued Letter of Authority authorizing certain revenue officers to examine Sony’s books of
accounts and other accounting records regarding revenue taxes for "the period 1997 and unverified prior years.”
In the following year, a preliminary assessment for 1997 deficiency taxes and penalties was issued by the CIR
which Sony protested. Afterwards, the CIR issued final assessment notices, the formal letter of demand and the
details of discrepancies. Then Sony filed a petition for review before the CTA.
The CTA-First Division ruled on the following: 1) disallowed the deficiency VAT assessment because the subsidized
advertising expense paid by Sony which was duly covered by a VAT invoice resulted in an input VAT credit; 2)
maintained the deficiency EWT assessment on Sony’s motor vehicles and on professional fees paid to general
professional partnership; 3) disallowed the EWT assessment on rental expense; 4) upheld the penalties for the
late payment of VAT on royalties. In sum, the CTA-First Division partly granted Sony’s petition by cancelling the
deficiency EWT assessment but upheld a modified deficiency EWT assessment as well as the penalties.
Because the CTA-First Division denied its motion for reconsideration, CIR filed a petition for review with the CTA-
EB. However, the latter dismissed the petition. Hence, this petition is filed before the SC.
Issue: WON Sony Phil. is engaged in the sale of services to Sony Singapore (SIS), thus liable to pay VAT.
Ruling: No.
On this point alone, the deficiency VAT assessment should have been disallowed. Be that as it may, the CIRs
argument, that Sony’s advertising expense could not be considered as an input VAT credit because the same was
eventually reimbursed by Sony International Singapore (SIS), is also erroneous.
The CIR contends that since Sony’s advertising expense was reimbursed by SIS, the former never incurred any
advertising expense. As a result, Sony is not entitled to a tax credit. At most, the CIR continues, the said advertising
expense should be for the account of SIS, and not Sony.
The Court is not persuaded. As aptly found by the CTA-First Division and later affirmed by the CTA-EB, Sony’s
deficiency VAT assessment stemmed from the CIRs disallowance of the input VAT credits that should have been
realized from the advertising expense of the latter. It is evident under Section 110 of the 1997 Tax Code that an
advertising expense duly covered by a VAT invoice is a legitimate business expense. This is confirmed by no less
than CIRs own witness, Revenue Officer Antonio Aluquin. There is also no denying that Sony incurred advertising
expense. Aluquin testified that advertising companies issued invoices in the name of Sony and the latter paid for
the same. Indubitably, Sony incurred and paid for advertising expense/ services. Where the money came from is
another matter altogether but will definitely not change said fact.
The CIR further argues that Sony itself admitted that the reimbursement from SIS was income and, thus, taxable.
In support of this, the CIR cited a portion of Sony’s protest filed before it:
The fact that due to adverse economic conditions, Sony-Singapore has granted to our client a subsidy
equivalent to the latters advertising expenses will not affect the validity of the input taxes from such
expenses. Thus, at the most, this is an additional income of our client subject to income tax. We submit
further that our client is not subject to VAT on the subsidy income as this was not derived from the sale
of goods or services.
Insofar as the above-mentioned subsidy may be considered as income and, therefore, subject to income tax, the
Court agrees. However, the Court does not agree that the same subsidy should be subject to the 10% VAT. To
begin with, the said subsidy termed by the CIR as reimbursement was not even exclusively earmarked for Sony’s
advertising expense for it was but an assistance or aid in view of Sony’s dire or adverse economic conditions, and
was only equivalent to the latters (Sony’s) advertising expenses.
Section 106 of the Tax Code explains when VAT may be imposed or exacted. Thus:
SEC. 106. Value-added Tax on Sale of Goods or Properties.
(A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or
exchange of goods or properties, value-added tax equivalent to ten percent (10%) of the gross
selling price or gross value in money of the goods or properties sold, bartered or exchanged, such
tax to be paid by the seller or transferor.
Thus, there must be a sale, barter or exchange of goods or properties before any VAT may be levied. Certainly,
there was no such sale, barter or exchange in the subsidy given by SIS to Sony. It was but a dole out by SIS and not
in payment for goods or properties sold, bartered or exchanged by Sony.
 Power Sector Assets and Liabilities Management Corporation vs. CIR, GR No. 198146 dated August 8, 2017
Facts: Petitioner Power Sector Assets and Liabilities Management Corporation (PSALM) is a government-owned
and controlled corporation created under Republic Act No. 9136, also known as the Electric Power Industry
Reform Act of 2001 (EPIRA). Section 50 of RA 9136 states that the principal purpose of PSALM is to manage the
orderly sale, disposition, and privatization of the National Power Corporation (NPC) generation assets, real estate
and other disposable assets, and Independent Power Producer (IPP) contracts with the objective of liquidating all
NPC financial obligations and stranded contract costs in an optimal manner.
PSALM conducted public biddings for the privatization of the Pantabangan-Masiway Plant and Magat Plant.
NPC received a letter from the BIR demanding immediate payment of a deficiency value-added tax (VAT) for the
sale of the Pantabangan-Masiway Plant and Magat Plant. The NPC indorsed BIR's demand letter to PSALM.
On 30 August 2007, the BIR, NPC, and PSALM executed a Memorandum of Agreement (MOA), wherein they
agreed that:
A) NPC/PSALM shall remit under protest to the BIR the amount of Php 3,813,080,472.00, representing
basic VAT as shown in the BIR letter dated August 14, 2007, upon execution of this Memorandum of
Agreement (MOA).
In compliance with the MOA, PSALM remitted under protest to the BIR the amount of ₱3, 813, 080, 472,
representing the total basic VAT due.
On 21 September 2007, PSALM filed with the Department of Justice (DOJ) a petition for the adjudication of the
dispute with the BIR to resolve the issue of whether the sale of the power plants should be subject to VAT.
Issue: Whether the sale of the power plants is subject to VAT.
Ruling: It is not subject to VAT since the sale was made pursuant to PSALM' s mandate to privatize NPC assets,
and was not undertaken in the course of trade or business.
To resolve the issue of whether the sale of the Pantabangan-Masiway and Magat Power Plants by petitioner
PSALM to private entities is subject to VAT, the Court must determine whether the sale is "in the course of trade
or business" as contemplated under Section 105 of the NIRC, which reads:
SEC 105. Persons Liable. - Any person who, in the course of trade or business, sells, barters, exchanges, leases
goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax
(VAT) imposed in Sections 106 to 108 of this Code.
The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer,
transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts
of sale or lease of goods, properties or services at the time of the effectivity of Republic Act 7716.
The phrase 'in the course of trade or business' means the regular conduct or pursuit of a commercial or
not the person engaged therein is a nonstock, nonprofit private organization (irrespective of the
disposition of its net income and whether or not it sells exclusively to members or their guests), or
government entity.
The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the
or business.
Under Section 50 of the EPIRA law, PSALM's principal purpose is to manage the orderly sale, disposition, and
privatization of the NPC generation assets, real estate and other disposable assets, and IPP contracts with the
objective of liquidating all NPC financial obligations and stranded contract costs in an optimal manner.
PSALM asserts that the privatization of NPC assets, such as the sale of the Power Plants, is pursuant to PSALM's
mandate under the EPIRA law and is not conducted in the course of trade or business. PSALM cited the 13 May
2002 BIR Ruling No. 020- 02, that PSALM' s sale of assets is not conducted in pursuit of any commercial or
profitable activity as to fall within the ambit of a VAT-able transaction under Sections 105 and 106 of the NIRC.
Under its charter, NPC is mandated to "undertake the development of hydroelectric generation of power and the
production of electricity from nuclear, geothermal and other sources, as well as the transmission of electric power
on a nationwide basis." With the passage of the EPIRA law which restructured the electric power industry into
generation, transmission, distribution, and supply sectors, the NPC is now primarily mandated to perform
missionary electrification function through the Small Power Utilities Group (SPUG) and is responsible for providing
power generation and associated power delivery systems in areas that are not connected to the transmission
system. On the other hand, PSALM, a government-owned and controlled corporation, was created under the
EPIRA law to manage the orderly sale and privatization of NPC assets with the objective of liquidating all of NPC's
financial obligations in an optimal manner. Clearly, NPC and PSALM have different functions. Since PSALM is not
a successor-in-interest of NPC, the repeal by RA 9337 of NPC's VAT exemption does not affect PSALM.
In any event, even if PSALM is deemed a successor-in-interest of NPC, still the sale of the power plants is not "in
the course of trade or business" as contemplated under Section 105 of the NIRC, and thus, not subject to VAT.
The sale of the power plants is not in pursuit of a commercial or economic activity but a governmental function
mandated by law to privatize NPC generation assets. PSALM was created primarily to liquidate all NPC financial
obligations and stranded contract costs in an optimal manner. The purpose and objective of PSALM are explicitly
stated in Section 50 of the EPIRA law.
PSALM is limited to selling only NPC assets and IPP contracts of NPC. The sale of NPC assets by PSALM is not "in
the course of trade or business" but purely for the specific purpose of privatizing NPC assets in order to liquidate
all NPC financial obligations. PSALM is tasked to sell and privatize the NPC assets within the term of its existence.
The EPIRA law even requires PSALM to submit a plan for the endorsement by the Joint Congressional Power
Commission and the approval of the President of the total privatization of the NPC assets and IPP contracts.
It is very clear that the sale of the power plants was an exercise of a governmental function mandated by law for
the primary purpose of privatizing NPC assets in accordance with the guidelines imposed by the EPIRA law. Thus,
the sale of the power plants in this case is not subject to VAT since the sale was made pursuant to PSALM’s
mandate to privatize NPC assets, and was not undertaken in the course of trade or business. In selling the power
plants, PSALM was merely exercising a governmental function for which it was created under the EPIRA law.
e. Exceptions to the Rule of Regularity
f. Output Tax vs. Input Taxes
Difference between Output and Input Tax
Output tax
It is the value added tax due on the sale or lease of taxable goods, properties or services by any person registered
or required to register under Sec. 236 of the Tax Code (Sec. 110[A][3], NIRC).
Input tax
It means the value-added tax due on or paid by a VAT-registered person on importation of goods or local purchase
of goods, properties or services, including lease or use of properties, in the course of his trade or business. It shall
also include the transitional input tax and the presumptive input tax determined in accordance with Section 111
of the NIRC. (R.R. 16-2005)
 Effect of VAT exempt purchases to input tax

VAT exempt transactions cannot be credited for input tax, however a transaction which cannot be directly
attributed in either the taxable or exempt activity, a ratable portion of the input tax may be credited.
 Input tax not a property right under the Due Process Clause
A VAT-registered person’s entitlement to the creditable input tax is a mere statutory privilege which may be
limited or removed by law.
 NOTE: Input VAT or input tax represents the actual payments, costs and expenses incurred by a VAT-registered
taxpayer in connection with his purchase of goods and services. On the other hand, when that person or entity
sells his/its products or services, the VAT-registered taxpayer generally becomes liable for 10% (now 12%) of the
selling price as Output VAT or output tax (CIR v. Benguet Corporation, G.R. No. 145559, July 14, 2006).
 Tax Credit Method (also called Invoice method) of collecting VAT
The input tax shifted by the seller to the buyer is credited or deducted against the buyer􀇯s output taxes when he
in turn sells the taxable goods, properties or services. Under the VAT method of taxation, which is invoice-based,
an entity can subtract from the VAT charged on its sales or outputs the VAT it paid on its purchases, inputs and
imports (CIR v. Seagate, G.R. No. 153866, Feb. 11, 2005).
Formula: OT-IT= VAT Payable
i. Sources of Input Tax (Sec. 110 A) (as amended by RA 10963)
Creditable input taxes

The input tax evidenced by a VAT invoice or official receipt issued in accordance with Section 113 of the NIRC on the
following transactions shall be creditable against the output tax:
1. Purchase or importation of goods:

a. For sale; or
b. For conversion into or intended to form part of
a finished product for sale including packaging materials; or
c. For use as supplies in the course of business; or
d. For use as materials supplied in the sale of service; or
e. For use in trade or business for which deduction for depreciation or amortization is allowed under this
Code, except automobiles, aircraft and yachts.
2. Purchases of real properties for which a VAT has actually been paid;
3. Purchases of services in which a VAT has actually been paid;
4. Transactions “deemed sales”;
5. Transitional input tax;
6. Presumptive input tax;
7. Transitional input tax credits allowed under the transitory and other provisions (Sec. 4.110-1 R.R. 16- 2005).
(A) Creditable Input Tax. -
(1) Any input tax evidenced by a VAT invoice or official receipt issued in accordance with Section 113 hereof on the
following transactions shall be creditable against the output tax:
(a) Purchase or importation of goods:

(i) For sale; or
(ii) For conversion into or intended to form part of a finished product for sale including packaging
materials; or
(iii) For use as supplies in the course of business; or
(iv) For use as materials supplied in the sale of service; or
(v) For use in trade or business for which deduction for depreciation or amortization is allowed under
this Code, except automobiles, aircraft and yachts.
(b) Purchase of services on which a value-added tax has been actually paid.
(2) The input tax on domestic purchase of goods or properties shall be creditable:
(a) To the purchaser upon consummation of sale and on importation of goods or properties; and
(b) To the importer upon payment of the value-added tax prior to the release of the goods from the custody of
the Bureau of Customs.
However, in the case of purchase of services, lease or use of properties, the input tax shall be creditable to the
purchaser, lessee or licensee upon payment of the compensation, rental, royalty or fee.
(3) A VAT-registered person who is also engaged in transactions not subject to the value-added tax shall be allowed tax
credit as follows:
(a) Total input tax which can be directly attributed to transactions subject to value-added tax; and
(b) A ratable portion of any input tax which cannot be directly attributed to either activity.
“Sec. 110. Tax Credits.—
“(A) Creditable Input Tax.—
“(1) x x x
“(2) x x x
“(a) x x x
“(b) x x x
“Provided, That the input tax on goods purchased or imported in a calendar month for use in trade or business
for which deduction for depreciation is allowed under this Code 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 component thereof, exceeds One million pesos (₱1,000,000): Provided, however, That if the estimated
useful life of the capital good is less than five (5) years, as used for depreciation purposes, then the input VAT shall
be spread over such a shorter period: Provided, further, That the amortization of the input VAT shall only be
allowed until December 31, 2021 after which taxpayers with unutilized input VAT on capital goods purchased or
imported shall be allowed to apply the same as scheduled until fully utilized: Provided, finally, That in the case of
purchase of services, lease or use of properties, the input tax shall be creditable to the purchaser, lessee or
licensee upon payment of the compensation, rental, royalty or fee.
“x x x.”
ii. Excess Output or Input Tax (Sec. 111 B)
(B) Excess Output or Input Tax.— If at the end of any taxable quarter the output tax exceeds the input tax, the excess
shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the excess shall be carried over to the
succeeding quarter or quarters. Any input tax attributable to the purchase of capital goods or to zero-rated sales by a VAT-
registered person may at his option be refunded or credited against other internal revenue taxes, subject to the provisions
of Section 112.
iii. Rule on Input Tax on Capital Goods (Sec. 110A) (as amended by RA 10963)
Claim for Input Tax on Depreciable Goods. — Where a VAT-registered person purchases or imports capital goods, which
are depreciable assets for income tax purposes, the aggregate acquisition cost of which (exclusive of VAT) in a calendar
month exceeds One Million pesos (P1,000,000.00), regardless of the acquisition cost of each capital good, shall be claimed
as credit against output tax in the following manner:
(a) If the estimated useful life of a capital good is five (5) years or more — The input tax shall be spread evenly
over a period of sixty (60) months and the claim for input tax credit will commence in the calendar month when
the capital good is acquired. The total input taxes on purchases or importations of this type of capital goods shall
be divided by 60 and the quotient will be the amount to be claimed monthly.
(b) If the estimated useful life of a capital good is less than five (5) years — The input tax shall be spread evenly
on a monthly basis by dividing the input tax by the actual number of months comprising the estimated useful life
of the capital good. The claim for input tax credit shall commence in the calendar month that the capital goods
were acquired.
Where the aggregate acquisition cost (exclusive of VAT) of the existing or finished depreciable capital goods purchased or imported
during any calendar month does not exceed One million pesos (P 1,000,000.00), the total input taxes will be allowable as credit against
output tax in the month of acquisition; Provided, however, that the total amount of input taxes (input tax on depreciable capital goods
plus other allowable input taxes) allowed to be claimed against the output tax in the quarterly VAT Returns shall be subject to the
limitation prescribed under Sec. 4.110-7 of these Regulations.
The aggregate acquisition cost of a depreciable asset in any calendar month refers to the total price agreed upon for one or more
assets acquired and not on the payments actually made during the calendar month. Thus, an asset acquired in installment for an
acquisition cost of more than P 1,000,000.00 will be subject to the amortization of input tax despite the fact that the monthly
payments/installments may not exceed P1,000,000.00.
1. Sec. 4.110-3 of RR No. 16-05 as amended by Sec. 16 of RR 4-2007
Section 16. INPUT TAX ON DEPRECIABLE GOODS. - Sec. 4.110-3 of

RR No. 16-2005 is hereby amended to read as follows:
“SEC. 4.110-3. Claim for Input Tax on Depreciable Goods. -Xxx
(a) Xxx xxx xxx.

(b) If the estimated useful life of a capital good is less than five (5) years – The input tax shall be spread evenly on a monthly
basis by dividing the input tax by the actual number of months comprising the estimated useful life of a capital good. The
claim for input tax credit shall commence in the month that the capital goods were acquired.
Where the aggregate acquisition cost (exclusive of VAT) of the existing or finished depreciable capital goods purchased or
imported during any calendar month does not exceed one million pesos (P1,000,000.00), the total input taxes will be
allowable as credit against output tax in the month of acquisition.
Capital goods or properties refers to goods or properties with estimated useful life greater than one (1) year and which
are treated as depreciable assets under Sec. 34(F) of the Tax Code, used directly or indirectly in the production or sale of
taxable goods or services.
The aggregate acquisition cost of depreciable assets in any calendar month refers to the total price, excluding the VAT,
agreed upon for one or more assets acquired and not on the payments actually made during the calendar month. Thus,
an asset acquired on instalment for an acquisition cost of more than P1,000,000.00, excluding the VAT, will be subject to
the amortization of input tax despite the fact that the monthly payments/instalments may not exceed P1,000,000.00.
Xxx xxx xxx.
Construction in progress (CIP) is the cost of construction work which is not yet completed. CIP is not depreciated until the
asset is placed in service. Normally, upon completion, a CIP item is reclassified and the reclassified asset is capitalized and
depreciated.
CIP is considered, for purposes of claiming input tax, as a purchase of service, the value of which shall be determined
based on the progress billings. Until such time the construction has been completed, it will not qualify as capital goods as
herein defined, in which case, input tax credit on such transaction can be recognized in the month the payment was made;
Provided, that an official receipt of payment has been issued based on the progress billings.
In case of contract for the sale of service where only the labor will be supplied by the contractor and the materials will be
purchased by the contractee from other suppliers, input tax credit on the labor contracted shall still be recognized on the
month the payment was made based on a progress billings while input tax on the purchase of materials shall be recognized
at the time the materials were purchased.
Once the input tax has already been claimed while the construction is still in progress, no additional input tax can be
claimed upon completion of the asset when it has been reclassified as a depreciable capital asset and depreciated.”
2. Sec. 4.110-3 of RR No. 13-2018
SEC. 4.110-3. Claims for Input Tax on Depreciable Goods. – Where a VAT-registered person purchases or imports capital
goods, which are depreciable assets for income tax purposes, the aggregate acquisition cost of which (exclusive of VAT)
in a calendar month exceeds One Million pesos (P1,000,000.00), regardless of the acquisition cost of each capital good,
shall be claimed as credit against output tax in the following manner:
(a) If the estimated useful life of a capital good is five (5) years or more
- The input tax shall be spread evenly over a period of sixty (60) months and the claim for input tax credit will commence
in the calendar month when the capital good is acquired. The total input taxes on purchases or importations of this type
of capital goods shall be divided by 60 and the quotient will be the amount to be claimed monthly.
(b) If the estimated useful life of a capital good is less than five (5) years
— The input tax shall be spread evenly on a monthly basis by dividing the input tax by the actual number of months
comprising the estimated useful life of the capital good. The claim for input tax credit shall commence in the calendar
month that the capital goods were acquired.
Where the aggregate acquisition cost (exclusive of VAT) of the existing or finished depreciable capital goods purchased or
imported during any calendar month does not exceed One million pesos (P 1,000,000.00), the total input taxes will be
allowable as credit against output tax in the month of acquisition.
Capital goods or properties refers to goods or properties with estimated useful life greater than one (1) year and which
are treated as depreciable assets under Sec. 34(F) of the Tax Code, used directly or indirectly in the production or sale of
taxable goods or services.
The aggregate acquisition cost of depreciable assets in any calendar month refers to the total price, excluding the VAT,
agreed upon for one or more assets acquired and not on the payments actually made during the calendar month. Thus,
an asset acquired on installment for an acquisition cost of more than P1,000,000.00, excluding the VAT, will be subject to
the amortization of input tax despite the fact that the monthly payments/installments may not exceed P1,000,000.00.
Construction in progress (CIP) is the cost of construction work which is not yet completed. CIP is not depreciated until the
asset is placed in service. Normally, upon completion, a CIP item is reclassified and the reclassified assetis capitalized and
depreciated.
CIP is considered, for purposes of claiming input tax, as a purchase of service, the value of which shall be determined
based on the progress billings. Until such time the construction has been completed, it will not qualify as capital goods as
herein defined, in which case, input tax credit on such transaction can be recognized in the month the payment was made:
Provided, that an official receipt of payment has been issued based on the progress billings.
In case of contract for the sale of service where only the labor will be supplied by the contractor and the materials will be
purchased by the contractee from other suppliers, input tax credit on the labor contracted shall still be recognized on the
month the payment was made based on a progress billings while input tax on the purchase of materials shall be recognized
at the time the materials were purchased.
Once the input tax has already been claimed while the construction is still in progress, no additional input tax can be
claimed upon completion of the asset when it has been reclassified as a depreciable capital asset and depreciated.
(c) The amortization of the input VAT shall only be allowed until December 31, 2021 after which taxpayers with
unutilized input VAT on capital goods purchased or imported shall be allowed to apply the same as scheduled until fully
utilized: Provided, That in the case of purchase of services, lease or use of properties, the input tax shall be creditable to
the purchaser, lessee or licensee upon payment of the compensation, rental, royalty or fee.
Illustration 7: ABC Corporation sold capital goods on installment on October 1, 2018. It is agreed that the selling price,
including the VAT, shall be payable in five (5) equal monthly installments with the first installment to be paid on October
1, 2018. The data pertinent to the sold assets are as follows:
Selling price - P 5,000,000 (exclusive of VAT)

Passed-on VAT - P 600,000
Original Cost of Asset - P 3,000,000
Accumulate Depreciation at the time of sale - P 1,000,000
Unutilized Input Tax (Sold Asset) - P 100,000
Accounting Entries:
SELLER BUYER
October 1, 2017 October 1, 2017
Cash P1,120,000 Asset P5,000,000
Installment Receivable 4,480,000 Input Tax 500,000
Accumulated Depreciation 1,000,000
Output Tax 600,000 Cash 1,120,000
Asset 3,000,000 Installment Payable 4,480,000
Gain on sale of set 3,000,000
To record VAT liability:

Output Tax 600,000
Input tax 100,000
VAT Payable 500,000
Periodic receipt of installment Periodic Subsequent Payment:

Cash 1,120,000 Installment payable 1,120,000
1,120,000 Cash 1,120,000
* The input tax of P600,000.00 shall be spread evenly over a period of 60 months starting on
October 2018 of purchase.
If the depreciable capital good is sold/transferred within a period of five (5) years or prior to the exhaustion of the
amortizable input tax thereon, the entire unamortized input tax on the capital goods sold/transferred can be
claimed as input tax credit during the month/quarter when the sale or transfer was made.
Illustration 8: A manufacturer purchased capital goods on different occasions as follows:

Month of Amount 12% Input Useful No. of Last Month of
Purchase (Php) Tax Life Monthly Amortization
Amortization
January 2018 Php 8,500,000 Php 1,020,000 6 years 60 December 2022
February 2018 8,500,000 1,020,000 4 years 48 January 2022
December 2018 10,000,000 1,020,000 5 years 60 November 2022
January 2018 10,000,000 1,020,000 5 years - *Outright claim
on
January 2022
a) For purchase made on January 2018, the amortization shall be for the shorter period of 5 years only or up to
December 2022 although the useful life is 6 years.
b) For purchase made on February 2018, the amortization shall be for period of 4 years only or up to January 2022 since
the useful life of the asset is shorter than 5 years.
c) For purchase made on December 2021, the amortization shall be for the period of 5 years or up to November 2026.
d) For purchase made on January 2022, no amortization shall be made and the input VAT shall be claimed on the month
of purchase or January 2022.
iv. Substantiation of Input Tax Credits (Sec. 4.110-8 of RR No. 16-05)
(a) Input taxes for the importation of goods or the domestic purchase of goods, properties or services is made in the course
of trade or business, whether such input taxes shall be credited against zero-rated sale, non-zero-rated sales, or subjected
to the 5% Final Withholding VAT, must be substantiated and supported by the following documents, and must be reported
in the information returns required to be submitted to the Bureau:
(1) For the importation of goods — import entry or other equivalent document showing actual payment of VAT
on the imported goods.
(2) For the domestic purchase of goods and properties — invoice showing the information required under Secs.
113 and 237 of the Tax Code.
(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.
(b) Transitional input tax shall be supported by an inventory of goods as shown in a detailed list to be submitted to the
BIR.
(c) Input tax on "deemed sale" transactions shall be substantiated with the invoice required under Sec. 4.113-2 of these
Regulations.
(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.
(e) Advance VAT on sugar shall be supported by the Payment Order showing payment of the advance VAT.
CIR vs. Sony Phils, Inc. G.R. No. 178697, November 17, 2010
II. VAT ON GOODS AND SERVICES
a. Definition of goods and services (Sec. 106 and Sec. 108)
SEC. 106 The term "goods" or "properties" shall mean all tangible and intangible objects which are capable of pecuniary
estimation and shall include: (a) Real properties held primarily for sale to customers or held for lease in the ordinary
course of trade or business; (b) The right or the privilege to use patent, copyright, design or model, plan, secret formula
or process, goodwill, trademark, trade brand or other like property or right; (c) The right or the privilege to use in the
Philippines of any industrial, commercial or scientific equipment; (d) The right or the privilege to use motion picture films,
tapes and discs; and (e) Radio, television, satellite transmission and cable television time.
SEC. 108 The phrase "sale or exchange of services" means the performance of all kinds or services in the Philippines for
others for a fee, remuneration or consideration, including those performed or rendered by construction and service
contractors; stock, real estate, commercial, customs and immigration brokers; lessors of property, whether personal or
real; warehousing services; lessors or distributors of cinematographic films; persons engaged in milling processing,
manufacturing or repacking goods for others; proprietors, operators or keepers of hotels, motels, resthouses, pension
houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including
clubs and caterers; dealers in securities; lending investors; transportation contractors on their transport of goods or
cargoes, including persons who transport goods or cargoes for hire another domestic common carriers by land, air and
water relative to their transport of goods or cargoes; services of franchise grantees of telephone and telegraph, radio and
television broadcasting and all other franchise grantees except those under Section 119 of this Code; services of banks,
non-bank financial intermediaries and finance companies; and non-life insurance companies (except their crop
insurances), including surety, fidelity, indemnity and bonding companies; and similar services regardless of whether or not
the performance thereof calls for the exercise or use of the physical or mental faculties. The phrase 'sale or exchange of
services' shall likewise include:
(1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan secret
formula or process, goodwill, trademark, trade brand or other like property or right;
(2) The lease of the use of, or the right to use of any industrial, commercial or scientific equipment;
(3) The supply of scientific, technical, industrial or commercial knowledge or information;
(4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the
application or enjoyment of any such property, or right as is mentioned in subparagraph (2) or any such knowledge
or information as is mentioned in subparagraph (3);
(5) The supply of services by a nonresident person or his employee in connection with the use of property or
rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from
such nonresident person.
(6) The supply of technical advice, assistance or services rendered in connection with technical management or
administration of any scientific, industrial or commercial undertaking, venture, project or scheme;
(7) The lease of motion picture films, films, tapes and discs; and
(8) The lease or the use of or the right to use radio, television, satellite transmission and cable television time.
Lease of properties shall be subject to the tax herein imposed irrespective of the place where the contract of lease or
licensing agreement was executed if the property is leased or used in the Philippines.
b. VAT base for goods and services (Sec. 106 and Sec.108)
SEC. 106. Value-Added Tax on Sale of Goods or Properties. -
(A) Rate and Base of Tax. - There shall be levied, assessed and collected on every sale, barter or exchange of goods or
properties, value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods
or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor.
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. -
(A) Rate and Base of Tax. - There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%)
of gross receipts derived from the sale or exchange of services, including the use or lease of properties.
c. Meaning of gross selling price and gross receipts (Sec. 106 and Sec.108)
Sec. 106
The term "gross selling price" means the total amount of money or its equivalent which the purchaser pays or is obligated
to pay to the seller in consideration of the sale, barter or exchange of the goods or properties, excluding the value-added
tax. The excise tax, if any, on such goods or properties shall form part of the gross selling price.
Sec.108
The term "gross receipts" means the total amount of money or its equivalent representing the contract price,
compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and
deposits and advanced payments actually or constructively received during the taxable quarter for the services performed
or to be performed for another person, excluding value-added tax.
i. Sec. 11 of RR No. 4-07
Section 11. GROSS RECEIPTS. - Sec. 4.108-4 of RR No. 16-2005 is hereby amended to read as follows:
“SEC. 4.108-4. Definition of Gross Receipts. – ‘Gross receipts’ refers to the total amount of money or its equivalent
representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials
supplied with the services and deposits applied as payments for services rendered and advance payments actually or
constructively received during the taxable period for the services performed or to be performed for another person,
excluding the VAT, except those amounts earmarked for payment to unrelated third (3rd ) party or received as
reimbursement for advance payment on behalf of another which do not redound to the benefit of the payor.
A payment is a payment to a third (3rd) party if the same is made to settle an obligation of another person, e.g., customer
or client, to the said third party, which obligation is evidenced by the sales invoice/official receipt issued by said third party
to the obligor/debtor (e.g., customer or client of the payor of the obligation).
An advance payment is an advance payment on behalf of another if the same is paid to a third (3rd) party for a present or
future obligation of said another party which obligation is evidenced by a sales invoice/official receipt issued by the
obligee/creditor to the obligor/debtor (i.e., the aforementioned “another party”) for the sale of goods or services by the
former to the latter.
For this purpose ‘unrelated party’ shall not include taxpayer’s employees, partners, affiliates (parent, subsidiary and other
related companies), relatives by consanguinity or affinity within the fourth (4th) civil degree, and trust fund where the
taxpayer is the trustor, trustee or beneficiary, even if covered by an agreement to the contrary.
‘Constructive receipt’ occurs when the money consideration or its equivalent is placed at the control of the person who
rendered the service without restrictions by the payor. The following are examples of constructive receipts:
(1) Deposits in banks which are made available to the seller of services without restrictions;
(2) Issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof by the seller as
payment for services rendered; and
(3) Transfer of the amounts retained by the payor to the account of the contractor.”
 Medicard Philippines, Inc. vs. CIR, GR No. 222743 dated April 5, 2017
Facts: MEDICARD is a Health Maintenance Organization (HMO) that provides prepaid health and medical
insurance coverage to its clients. Individuals enrolled in its health care programs pay an annual membership fee
and are entitled to various preventive, diagnostic and curative medical services provided by duly licensed
physicians, specialists and other professional technical staff participating in the group practice health delivery
system at a hospital or clinic owned, operated or accredited by it.
Upon finding some discrepancies between MEDICARD's Income Tax Returns (ITR) and VAT Returns, the CIR
informed MEDICARD and issued a Letter Notice. Subsequently, the CIR also issued a Preliminary Assessment
Notice (PAN) against MEDICARD for deficiency VAT.
According to the CIR, the taxable base of HMOs for VAT purposes is its gross receipts without any deduction under
Section 4.108.3(k) of Revenue Regulation (RR) No. 16-2005. The CIR argued that since MEDICARD does not actually
provide medical and/or hospital services, but merely arranges for the same, its services are not VAT exempt.
When elevated to the CTA, it ruled that the amounts that MEDICARD earmarked , and eventually paid to doctors,
hospitals and clinics cannot be excluded from · the computation of its gross receipts under the provisions of RR
No. 4-2007 because the act of earmarking or allocation is by itself an act of ownership and management over the
funds by MEDICARD which is beyond the contemplation of RR No. 4-2007. It also ruled that MEDICARD's earnings
from its clinics and laboratory facilities cannot be excluded from its gross receipts because the operation of these
clinics and laboratory is merely an incident to MEDICARD's main line of business as HMO and there is no evidence
that MEDICARD segregated the amounts pertaining to this at the time it received the premium from its members.
Issue: Whether the amounts earmarked and eventually paid by MEDICARD to the medical service providers do
not form part of gross receipts for VAT purposes.
Ruling: No. The amounts earmarked and actually spent for medical utilization of its members should not be
included in the computation of its gross receipts.
Since an HMO like MEDICARD is primarily engaged in arranging for coverage or designated managed care services
that are needed by plan holders/members for fixed prepaid membership fees and for a specified period of time,
then MEDICARD is principally engaged in the sale of services. Its VAT base and corresponding liability is, thus,
determined under Section 108(A)32 of the Tax Code, as amended by Republic Act No. 9337.
Prior to RR No. 16-2005, an HMO, like a pre-need company, is treated for VAT purposes as a dealer in securities
whose gross receipts is the amount actually received as contract price without allowing any deduction from the
gross receipts. This restrictive tenor changed under RR No. 16-2005. Under this RR, an HMO's gross receipts and
gross receipts in general were defined.
Section 4.108-4. x x x. "Gross receipts" refers to the total amount of money or its equivalent representing
the contract price, compensation, service fee, rental or royalty, including the amount charged for
materials supplied with the services and deposits applied as payments for services rendered, and advance
payments actually or constructively received during the taxable period for the services performed or to
be performed for another person, excluding the VAT.
According to the CTA en banc, the entire amount of membership fees should form part of MEDICARD's gross
receipts because the exclusions to the gross receipts under RR No. 4-2007 does not apply to MEDICARD. What
applies to MEDICARD is the definition of gross receipts of an HMO under RR No. 16-2005 and not the modified
definition of gross receipts in general under the RR No. 4-2007.
The CTA en banc overlooked that the definition of gross receipts under. RR No. 16-2005 merely presumed that
the amount received by an HMO as membership fee is the HMO's compensation for their services. As a mere
presumption, an HMO is, thus, allowed to establish that a portion of the amount it received as membership fee
does NOT actually compensate it but some other person, which in this case are the medical service providers
themselves.
It is notable in this regard that the term gross receipts as elsewhere mentioned as the tax base under the NIRC
does not contain any specific definition. Therefore, absent a statutory definition, this Court has construed the
term gross receipts in its plain and ordinary meaning, that is, gross receipts is understood as comprising the entire
receipts without any deduction. Congress, under Section 108, could have simply left the term gross receipts
similarly undefined and its interpretation subjected to ordinary acceptation. Instead of doing so, Congress limited
the scope of the term gross receipts for VAT purposes only to the amount that the taxpayer received for the
services it performed or to the amount it received as advance payment for the services it will render in the future
for another person.
In the proceedings below, the nature of MEDICARD's business and the extent of the services it rendered are not
seriously disputed. As an HMO, MEDICARD primarily acts as an intermediary between the purchaser of healthcare
services (its members) and the healthcare providers (the doctors, hospitals and clinics) for a fee. By enrolling
membership with MED ICARD, its members will be able to avail of the pre-arranged medical services from its
accredited healthcare providers without the necessary protocol of posting cash bonds or deposits prior to being
attended to or admitted to hospitals or clinics, especially during emergencies, at any given time. Apart from this,
MEDICARD may also directly provide medical, hospital and laboratory services, which depends upon its member's
choice.
Thus, in the course of its business as such, MED ICARD members can either avail of medical services from
MEDICARD's accredited healthcare providers or directly from MEDICARD. Based on industry practice, MEDICARD
informs its would-be member beforehand that 80% of the amount would be earmarked for medical utilization
and only the remaining 20% comprises its service fee. In the latter case, MEDICARD's sale of its services is exempt
from VAT under Section 109(G).
The CTA's ruling and CIR's Comment have not pointed to any portion of Section 108 of the NIRC that would extend
the definition of gross receipts even to amounts that do not only pertain to the services to be performed: by
another person, other than the taxpayer, but even to amounts that were indisputably utilized not by MED ICARD
itself but by the medical service providers.
What is controlling in this case is the well-settled doctrine of strict interpretation in the imposition of taxes, not
the similar doctrine as applied to tax exemptions. The rule in the interpretation of tax laws is that a statute will
not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously. A tax cannot be
imposed without clear and express words for that purpose. Accordingly, the general rule of requiring adherence
to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act
are not to be extended by implication. In answering the question of who is subject to tax statutes, it is basic that
in case of doubt, such statutes are to be construed most strongly against the government and in favor of the
subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyond what statutes
expressly and clearly import. As burdens, taxes should not be unduly exacted nor assumed beyond the plain
meaning of the tax laws.
For this Court to subject the entire amount of MEDICARD's gross receipts without exclusion, the authority should
have been reasonably founded from the language of the statute. That language is wanting in this case. In the
scheme of judicial tax administration, the need for certainty and predictability in the implementation of tax laws
is crucial. Our tax authorities fill in the details that Congress may not have the opportunity or competence to
provide. The regulations these authorities issue are relied upon by taxpayers, who are certain that these will be
followed by the courts. Courts, however, will not uphold these authorities' interpretations when dearly absurd,
erroneous or improper. The CIR's interpretation of gross receipts in the present case is patently erroneous for lack
of both textual and non-textual support.
d. Rules on sales of Real Property
i. Rule on Sales on Instalment [RR No. Sec. 4.106-3 of RR No. 16-05 as amended by Sec. 3 of RR No. 4-07]
Installment sale of residential house and lot or other residential dwellings with gross selling price exceeding P1,000,000.00,
where the instrument of sale (whether the instrument is nominated as a deed of absolute sale, deed of conditional sale
or otherwise) was executed prior to November 1, 2005, shall be subject to ten percent (10%) output VAT.
Sale of real property on installment plan means sale of real property by a real estate dealer, the initial payments of which
in the year of sale do not exceed twenty-five (25%) of the gross selling price.
In case of installment sale, the seller shall be subject to output VAT on the installment payments received, including the
interests and penalties for late payment, actually and/or constructively received, subject to the provisions of Sec.4.106-4
hereof. Correspondingly, the buyer of the property can claim the input tax in the same period as the seller recognized the
output tax. Installment payments, including interests and penalties, actually and/or constructively received starting
February 1, 2006 shall be subject to twelve percent (12%) output VAT.
ii. Exempt Real Property / Real Property used in Business Sec. 109(P) [Sec. 4.109- 1(B)(1)(p) of RR No. 13-2018]
as amended by RA 10963
Sale of real property use in business (Sec. 14 (l) of RR No. 4-07)
(1) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or
business. However, even if the real property is not primarily held for sale to customers or held for lease in the ordinary
course of trade or business but the same is used in the trade or business of the seller, the sale thereof shall be subject to
VAT being a transaction incidental to the taxpayer’s main business.
Section 109 - (w) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course
of trade or business or real property utilized for low-cost and socialized housing as defined by Republic Act No. 7279,
otherwise known as the Urban Development and Housing Act of 1992, and other related laws, house and lot and other
residential dwellings valued at One million pesos (P1,000,000) and below: Provided, That not later than January 31st of
the calendar year subsequent to the effectivity of this Act and each calendar year thereafter, the amount of One million
pesos (P1,000,000) shall be adjusted to its present value using the Consumer Price Index, as published by the national
Statistics Office (NSO);
Section 34. Section 109 of the NIRC, as amended (RA 10963), is hereby further amended to read as follows:
“Sec. 109. Exempt Transactions.—
(P) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade
or business or real property utilized for low-cost and socialized housing as defined by Republic Act No. 7279,
otherwise known as the Urban Development and Housing Act of 1992, and other related laws, residential lot
valued at One million five hundred thousand pesos (₱1,500,000) and below, house and lot, and other residential
dwellings valued at Two million five hundred thousand pesos (₱2,500,000) and below: Provided, That beginning
January 1, 2021, the VAT exemption shall only apply to sale of real properties not primarily held for sale to
customers or held for lease in the ordinary course of trade or business, sale of real property utilized for socialized
housing as defined by Republic Act No. 7279, sale of house and lot, and other residential dwellings with selling
price of not more than Two million pesos (₱2,000,000): Provided, further, That every three (3) years thereafter,
the amount herein stated shall be adjusted to its present value using the Consumer Price Index, as published by
the Philippine Statistics Authority (PSA);
e. VAT on Importations (Sec. 107)
UST: is an act of bringing goods and merchandise into a country (Philippines) from a foreign country.
VAT shall be assessed and collected upon goods brought into the Philippines, whether for use in business or not,
except those specifically exempted under Section 109(1) of the NIRC.
PM REYES:
Q: Does VAT apply to every importation?
Yes. The VAT shall be imposed on every importation of goods, whether or not in the course of trade or business.
This is unlike VAT on sale of goods or properties which must be in the course of trade or business. Otherwise, the
person/transaction shall not be liable to pay VAT. (see CIR V. SEAGATE TECHNOLOGY [FEBRUARY 11, 2005]).
Q: What is the tax base of VAT on importation of goods?
The tax base is the total value used by the BOC in determining tariff and customs duties plus customs duties, excise
taxes, if any, and other charges.
Where the customs duties are determined on the basis of the quantity or volume of the goods, the VAT shall be
based on the landed cost plus excise taxes, if any.
SEC. 107. Value-Added Tax on Importation of Goods. -
(A) In General. - There shall be levied, assessed and collected on every importation of goods a value-added tax equivalent
to ten percent (10%) based on the total value used by the Bureau of Customs in determining tariff and customs duties plus
customs duties, excise taxes, if any, and other charges, such tax to be paid by the importer prior to the release of such
goods from customs custody: Provided, That where the customs duties are determined on the basis of the quantity or
volume of the goods, the value-added tax shall be based on the landed cost plus excise taxes, If any.
(B) Transfer of Goods by Tax-Exempt Persons. - In the case of tax-free importation of goods into the Philippines by
persons, entities or agencies exempt from tax where such goods are subsequently sold, transferred or exchanged in the
Philippines to non-exempt persons or entities, the purchasers, transferees or recipients shall be considered the importers
thereof, who shall be liable for any internal revenue tax on such importation. The tax due on such importation shall
constitute a lien on the goods superior to all charges or liens on the goods, irrespective of the possessor thereof.
“Sec. 107. Value-added Tax on Importation of Goods.—
“(A) In General.— There shall be levied, assessed and collected on every importation of goods a value-added tax equivalent
to twelve percent (12%) based on the total value used by the Bureau of Customs in determining tariff and customs duties,
plus customs duties, excise taxes, if any, and other charges, such tax to be paid by the importer prior to the release of such
goods from customs custody: Provided, That where the customs duties are determined on the basis of the quantity or
volume of the goods, the value-added tax shall be based on the landed cost plus excise taxes, if any.
“(B) Transfer of Goods by Tax-exempt Persons.— x x x.”
i. Exempt Importations under Sec. 109 (as amended by RA 10963)
SEC. 109. Exempt Transactions. - The following shall be exempt from the value-added tax:
(a) Sale of nonfood agricultural products; marine and forest products in their original state by the primary producer or the
owner of the land where the same are produced;
(b) Sale of cotton seeds in their original state; and copra;
(c) Sale or importation of agricultural and marine food products in their original state, livestock and poultry of or king
generally used as, or yielding or producing foods for human consumption; and breeding stock and genetic materials
therefor. Products classified under this paragraph and paragraph (a) shall be considered in their original state even if they
have undergone the simple processes of preparation or preservation for the market, such as freezing, drying, salting,
broiling, roasting, smoking or stripping. Polished and/or husked rice, corn grits, raw cane sugar and molasses, and ordinary
salt shall be considered in their original state;
(d) Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock and poultry feeds, including
ingredients, whether locally produced or imported, used in the manufacture of finished feeds (except specialty feeds for
race horses, fighting cocks, aquarium fish, zoo animals and other animals generally considered as pets);
(e) Sale or importation of coal and natural gas, in whatever form or state, and petroleum products (except lubricating oil,
processed gas, grease, wax and petrolatum) subject to excise tax imposed under Title VI;
(f) Sale or importation of raw materials to be used by the buyer or importer himself in the manufacture of petroleum
products subject to excise tax, except lubricating oil, processed gas, grease, wax and petrolatum;
(g) Importation of passenger and/or cargo vessels of more than five thousand tons (5,000) whether coastwise or ocean-
going, including engine and spare parts of said vessel to be used by the importer himself as operator thereof;
(h) Importation of personal and household effects belonging to the residents of the Philippines returning from abroad
and nonresident citizens coming to resettle in the Philippines: Provided, That such goods are exempt from customs duties
under the Tariff and Customs Code of the Philippines;
(i) Importation of professional instruments and implements, wearing apparel, domestic animals, and personal household
effects (except any vehicle, vessel, aircraft, machinery other goods for use in the manufacture and merchandise of any
kind in commercial quantity) belonging to persons coming to settle in the Philippines, for their own use and not for sale,
barter or exchange, accompanying such persons, or arriving within ninety (90) days before or after their arrival, upon the
production of evidence satisfactory to the Commissioner, that such persons are actually coming to settle in the Philippines
and that the change of residence is bona fide;
(j) Services subject to percentage tax under Title V;
(k) Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar cane into
raw sugar;
(l) Medical, dental, hospital and veterinary services subject to the provisions of Section 17 of Republic Act No. 7716, as
amended:
(m) Educational services rendered by private educational institutions, duly accredited by the Department of Education,
Culture and Sports (DECS) and the Commission on Higher Education (CHED), and those rendered by government
educational institutions;
(n) Sale by the artist himself of his works of art, literary works, musical compositions and similar creations, or his services
performed for the production of such works;
(o) Services rendered by individuals pursuant to an employer-employee relationship;
(p) Services rendered by regional or area headquarters established in the Philippines by multinational corporations which
act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific
Region and do not earn or derive income from the Philippines;
(q) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special
laws, except those under Presidential Decree Nos. 66, 529 and 1590;
(r) Sales by agricultural cooperatives duly registered with the Cooperative Development Authority to their members as
well as sale of their produce, whether in its original state or processed form, to non-members; their importation of direct
farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the
production and/or processing of their produce;
(s) Sales by electric cooperatives duly registered with the Cooperative Development authority or National Electrification
Administration, relative to the generation and distribution of electricity as well as their importation of machineries and
equipment, including spare parts, which shall be directly used in the generation and distribution of electricity;
(t) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative
Development Authority whose lending operation is limited to their members;
(u) Sales by non-agricultural, non- electric and non-credit cooperatives duly registered with the Cooperative Development
Authority: Provided, That the share capital contribution of each member does not exceed Fifteen thousand pesos
(P15,000) and regardless of the aggregate capital and net surplus ratably distributed among the members;
(v) Export sales by persons who are not VAT-registered;
(w) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or
business or real property utilized for low-cost and socialized housing as defined by Republic Act No. 7279, otherwise known
as the Urban Development and Housing Act of 1992, and other related laws, house and lot and other residential dwellings
valued at One million pesos (P1,000,000) and below: Provided, That not later than January 31st of the calendar year
subsequent to the effectivity of this Act and each calendar year thereafter, the amount of One million pesos (P1,000,000)
shall be adjusted to its present value using the Consumer Price Index, as published by the national Statistics Office (NSO);
(x) Lease of a residential unit with a monthly rental not exceeding Eight thousand pesos (P8,000); Provided, That not later
than January 31st of the calendar year subsequent to the effectivity of Republic Act No. 8241 and each calendar year
thereafter, the amount of Eight thousand pesos (P8,000) shall be adjusted to its present value using the Consumer Price
Index as published by the National Statistics Office (NS0);
(y) Sale, importation, printing or publication of books and any newspaper, magazine review or bulletin which appears at
regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of paid
advertisements; and
(z) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the
preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of Five hundred fifty thousand
pesos (P550,000): Provided, That not later than January 31st of the calendar year subsequent to the effectivity of Republic
Act No. 8241 and each calendar year thereafter, the amount of Five hundred fifty thousand pesos (550,000) shall be
adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office (NSO).
The foregoing exemptions to the contrary notwithstanding, any person whose sale of goods or properties or services
which are otherwise not subject to VAT, but who issues a VAT invoice or receipt therefor shall, in addition to his liability
to other applicable percentage tax, if any, be liable to the tax imposed in Section 106 or 108 without the benefit of input
tax credit, and such tax shall also be recognized as input tax credit to the purchaser under Section 110, all of this Code.
RA 10963
“Sec. 109. Exempt Transactions.— (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall
be exempt from the value-added tax:
“(A) x x x
“(B) x x x
“(C) x x x
“(D) Importation of professional instruments and implements, tools of trade, occupation or employment, wearing apparel,
domestic animals, and personal and household effects belonging to persons coming to settle in the Philippines or Filipinos
or their families and descendants who are now residents or citizens of other countries, such parties hereinafter referred
to as overseas Filipinos, in quantities and of the class suitable to the profession, rank or position of the persons importing
said items, for their own use and not for barter or sale, accompanying such persons, or arriving within a reasonable time:
Provided, That the Bureau of Customs may, upon the production of satisfactory evidence that such persons are actually
coming to settle in the Philippines and that the goods are brought from their former place of abode, exempt such goods
from payment of duties and taxes: Provided, further, That vehicles, vessels, aircrafts, machineries and other similar goods
for use in manufacture, shall not fall within this classification and shall therefore be subject to duties, taxes and other
charges;
“(E) Services subject to percentage tax under Title V;
“(F) Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar cane into
raw sugar;
“(G) Medical, dental, hospital and veterinary services except those rendered by professionals;
“(H) Educational services rendered by private educational institutions, duly accredited by the Department of Education
(DepEd), the Commission on Higher Education (CHED), the Technical Education and Skills Development Authority (TESDA)
and those rendered by government educational institutions;
“(I) Services rendered by individuals pursuant to an employer-employee relationship;
“(J) Services rendered by regional or area headquarters established in the Philippines by multinational corporations which
act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific
Region and do not earn or derive income from the Philippines;
“(K) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special
laws, except those under Presidential Decree No. 529;
“(L) Sales by agricultural cooperatives duly registered with the Cooperative Development Authority to their members as
well as sale of their produce, whether in its original state or processed form, to non-members; their importation of direct
farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the
production and/or processing of their produce;
“(M) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative
Development Authority;
“(N) Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with the Cooperative Development
Authority: Provided, That the share capital contribution of each member does not exceed Fifteen thousand pesos
(₱15,000) and regardless of the aggregate capital and net surplus ratably distributed among the members;
“(O) Export sales by persons who are not VAT-registered;
“(P) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or
business or real property utilized for low-cost and socialized housing as defined by Republic Act No. 7279, otherwise known
as the Urban Development and Housing Act of 1992, and other related laws, residential lot valued at One million five
hundred thousand pesos (₱1,500,000) and below, house and lot, and other residential dwellings valued at Two million five
hundred thousand pesos (₱2,500,000) and below: Provided, That beginning January 1, 2021, the VAT exemption shall only
apply to sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or
business, sale of real property utilized for socialized housing as defined by Republic Act No. 7279, sale of house and lot,
and other residential dwellings with selling price of not more than Two million pesos (₱2,000,000): Provided, further, That
every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price
Index, as published by the Philippine Statistics Authority (PSA);
“(Q) Lease of a residential unit with a monthly rental not exceeding Fifteen thousand pesos (₱15,000);
“(R) Sale, importation, printing or publication of books and any newspaper, magazine, review or bulletin which appears at
regular intervals with fixed prices or subscription and sale and which is not devoted principally to the publication of paid
advertisements;
“(S) Transport of passengers by international carriers;
“(T) Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts
thereof for domestic or international transport operations;
“(U) Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations:
Provided, That the fuel, goods, and supplies shall be used for international shipping or air transport operations;
“(V) Services of bank, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial
intermediaries;
“(W) Sale or lease of goods and services to senior citizens and persons with disability, as provided under Republic Act Nos.
9994 (Expanded Senior Citizens Act of 2010) and 10754 (An Act Expanding the Benefits and Privileges of Persons With
Disability), respectively;
“(X) Transfer of property pursuant to Section 40(C)(2) of the NIRC, as amended;
“(Y) Association dues, membership fees, and other assessments and charges collected by homeowners associations and
condominium corporations;
“(Z) Sale of gold to the Bangko Sentral ng Pilipinas (BSP);
“(AA) Sale of drugs and medicines prescribed for diabetes, high cholesterol, and hypertension beginning January 1, 2019;
and
“(BB) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the
preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of Three million pesos
(₱3,000,000).
ii. Transfer of Goods by Tax-exempt Persons (Sec. 107 B)
SEC. 107. Value-Added Tax on Importation of Goods. –

(B) Transfer of Goods by Tax-Exempt Persons. - In the case of tax-free importation of goods into the Philippines by
persons, entities or agencies exempt from tax where such goods are subsequently sold, transferred or exchanged in the
Philippines to non-exempt persons or entities, the purchasers, transferees or recipients shall be considered the importers
thereof, who shall be liable for any internal revenue tax on such importation. The tax due on such importation shall
constitute a lien on the goods superior to all charges or liens on the goods, irrespective of the possessor thereof.
f. Transactions deemed sale (Sec. 106 B)
(B) Transactions Deemed Sale. - The following transactions shall be deemed sale:
(1) Transfer, use or consumption not in the course of business of goods or properties originally intended for sale or for
use in the course of business;
(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.
 There is no actual sale of goods took place but such transactions are subject to VAT.
 When these goods were acquired, the corresponding input VAT was recognized and have been claimed by the
VAT-registered person as input tax credit. Therefore, to recapture the input tax credit, the goods or properties
shall be considered sold even if it was not actually sold and used for non-business purposes.
 Consideration in determining whether a transaction is “deemed sale”

Before considering whether the transaction is “deemed sale”, it must first be determined whether the sale was in
the ordinary course of trade or business. Even if the transaction was “deemed sale” if it was not done in the
ordinary course of trade or business or was not originally intended for sale in the ordinary course of business, the
transaction is not subject to VAT (CIR v. Magsaysay Lines
Inc., G.R. No. 146984, July 28, 2006).
i. Rationale of Imposition
ii. Enumeration – Sec. 4.106-7 RR No. 16-05
SEC. 4.106-7. Transactions Deemed Sale. –
(a) The following transactions shall be “deemed sale” pursuant to Sec. 106 (B) of the Tax Code:
(1) Transfer, use or consumption not in the course of business of goods or properties originally intended for sale
or for use in the course of business. Transfer of goods or properties not in the course of business can take place
when VAT-registered person withdraws goods from his business for his personal use;
(2) Distribution or transfer to:
i. Shareholders or investors share in the profits of VAT-registered person;
Property dividends which constitute stocks in trade or properties primarily held for sale or lease declared
out of retained earnings on or after January 1, 1996 and distributed by the company to its shareholders
shall be subject to VAT based on the zonal value or fair market value at the time of distribution, whichever
is applicable.
ii. Creditors in payment of debt or obligation.
(3) Consignment of goods if actual sale is not made within 60 days following the date such goods were consigned.
Consigned goods returned by the consignee within the 60-day period are not deemed sold;
(4) Retirement from or cessation of business with respect to all goods on hand, whether capital goods, stock-in-
trade, supplies or materials as of the date of such retirement or cessation, whether or not the business is
continued by the new owner or successor. The following circumstances shall, among others, give rise to
transactions “deemed sale” for purposes of this Section;
i. Change of ownership of the business. There is a change in the ownership of the business when a single
proprietorship incorporates; or the proprietor of a single proprietorship sells his entire business.
ii. Dissolution of a partnership and creation of a new partnership which takes over the business.
(b) The Commissioner of Internal Revenue shall determine the appropriate tax base in cases where a transaction
is deemed a sale, barter or exchange of goods or properties under Sec. 4.106-7 paragraph (a) hereof, or where
the gross selling price is unreasonably lower than the actual market value. The gross selling price is unreasonably
lower than the actual market value if it is lower by more than 30% of the actual market value of the same goods
of the same quantity and quality sold in the immediate locality on or nearest the date of sale.
For transactions deemed sale, the output tax shall be based on the market value of the goods deemed sold as of
the time of the occurrence of the transactions enumerated in Sec. 4.106-7(a)(1),(2), and (3) of these Regulations.
However, in the case of retirement or 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 market value, the actual
market value shall be the tax base.
iii. Tax Base of Transactions Deemed Sale
RR No. 16-05
(b) The Commissioner of Internal Revenue shall determine the appropriate tax base in cases where a transaction is deemed
a sale, barter or exchange of goods or properties under Sec. 4.106-7 paragraph (a) hereof, or where the gross selling price
is unreasonably lower than the actual market value. The gross selling price is unreasonably lower than the actual market
value if it is lower by more than 30% of the actual market value of the same goods of the same quantity and quality sold
in the immediate locality on or nearest the date of sale.
For transactions deemed sale, the output tax shall be based on the market value of the goods deemed sold as of the time
of the occurrence of the transactions enumerated in Sec. 4.106-7(a)(1),(2), and (3) of these Regulations. However, in the
case of retirement or 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 market value, the actual market value
shall be the tax base.
 However, in the case of retirement or 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 market value, the actual
market value shall be the tax base (Sec. 4 106-7, R.R. 16-2005).
 Nonetheless, if one of the parties in the transaction is the government as defined and contemplated under the
Administrative Code, the output VAT on the transaction shall be based on the actual selling price (Sec. 7, R.R. 4-
2007).

Vat Part I

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Vat Part I

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TAXATION II PART III

a. Nature and characteristic of VAT in general

Q: What are the characteristics of the VAT?

(Section 99 v. Section 100)

(further discussion on VAT)

Special Laws Covering Respondent:

b. VAT as an indirect tax

 Contex vs. CIR GR No. 151135 dated July 2, 2004

c. Persons Liable (Sec. 105)

i. Persons liable in general

Any person who:

We agree with the Commissioner.

“(G) Persons Required to Register for Value-Added Tax.—

Sec. 236 H, as amended by RA 10963

Q/As 6, 30 and 31 of RMC No. 46-2008

Sec. 4-109-2 of RR No. 13-2018

SEC. 4.109-2. Exempt Transactions May be Registered for VAT Purposes.

1. Sec. 109(BB) vs. Sec. 116 (as amended by RA 10963)

Sec. 4.105-3 of RR No. 16-05

SEC. 106. Value-added Tax on Sale of Goods or Properties.

Issue: Whether the sale of the power plants is subject to VAT.

e. Exceptions to the Rule of Regularity

f. Output Tax vs. Input Taxes

Difference between Output and Input Tax

 Effect of VAT exempt purchases to input tax

 Tax Credit Method (also called Invoice method) of collecting VAT

Formula: OT-IT= VAT Payable

Creditable input taxes

1. Purchase or importation of goods:

(A) Creditable Input Tax. -

(a) Purchase or importation of goods:

(iii) For use as supplies in the course of business; or

(iv) For use as materials supplied in the sale of service; or

“Sec. 110. Tax Credits.—

“(A) Creditable Input Tax.—

ii. Excess Output or Input Tax (Sec. 111 B)

1. Sec. 4.110-3 of RR No. 16-05 as amended by Sec. 16 of RR 4-2007

Section 16. INPUT TAX ON DEPRECIABLE GOODS. - Sec. 4.110-3 of

“SEC. 4.110-3. Claim for Input Tax on Depreciable Goods. -Xxx

(a) Xxx xxx xxx.

Xxx xxx xxx.

2. Sec. 4.110-3 of RR No. 13-2018

Selling price - P 5,000,000 (exclusive of VAT)

To record VAT liability:

Periodic receipt of installment Periodic Subsequent Payment:

Illustration 8: A manufacturer purchased capital goods on different occasions as follows:

January 2018 Php 8,500,000 Php 1,020,000 6 years 60 December 2022

February 2018 8,500,000 1,020,000 4 years 48 January 2022

December 2018 10,000,000 1,020,000 5 years 60 November 2022

iv. Substantiation of Input Tax Credits (Sec. 4.110-8 of RR No. 16-05)

SEC. 106. Value-Added Tax on Sale of Goods or Properties. -

i. Sec. 11 of RR No. 4-07

Sale of real property use in business (Sec. 14 (l) of RR No. 4-07)

Q: Does VAT apply to every importation?

Q: What is the tax base of VAT on importation of goods?

SEC. 107. Value-Added Tax on Importation of Goods. -

“Sec. 107. Value-added Tax on Importation of Goods.—

(b) Sale of cotton seeds in their original state; and copra;

(j) Services subject to percentage tax under Title V;

(o) Services rendered by individuals pursuant to an employer-employee relationship;

(v) Export sales by persons who are not VAT-registered;

“(E) Services subject to percentage tax under Title V;

“(I) Services rendered by individuals pursuant to an employer-employee relationship;