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VALUE ADDED TAX

I.

Concept: VAT is a form of consumption tax (from 0% to 12%) imposed on


each:

a. Sale, barter, exchange or lease of goods, properties or services in the


course of trade or business in the Philippines; and,

b. Importation of goods into the Philippines, whther or not in the course of


trade or business.

Characteristics/Elements of VAT:

1. It is imposed on business transactions: Not all sales are subject to VAT. The
liability of a person to pay VAT depends on his sales of goods, properties, or
services in carrying out his trade or business that are subject to VAT.

2. It follows the CONSUMPTION/DESTINATION PRINCIPLE: observes the


jurisdictional reach of tax whereby goods and services are taxed only in the
country where they are consumed. The place of sale is presumed to be the
place of consumption.

As a rule, the 12% VAT will be imposed on transation of goods or services


intended to be consumed in the Philippines. Consequently, importation of
goods/services are subject to 12% regular VAT because they are intended to
be consumed in the Philippines.

Furthermore, NO VAT SHALL BE IMPOSED on goods or services sold outside


the territorial border of the taxing authority. Export sales are either Zero-
rated VAT or VAT-exempt transactions.

3. It is an INDIRECT TAX, a PRIVILEGE TAX and an AD VALOREM TAX.

a. Indirect tax: the amount of VAT may be shifted or passed on to the buyer,
transferree, or lessee of the goods, properties, or services (Sec. 105 NIRC)

Businesses that pay VAT generally pass this tax burden to the next buyer that
makes it an indirect tax. The final effect is equal to that of a retail sales tax.

b. Privilege tax: it is NOT imposed on goods, properties, or services but on the


right or privilege to sell or purchase, exchange, or barter goods or services.

c. Ad Valorem tax: the basis for determining the amount of tax is the value or
sales price of the goods or services sold.

4. It is CUMULATIVE: Vat passes several distribution stages: from the


distributor to the wholesaler to the retailer and finally to the consumer.
At each stage, the seller adds a mark-up to his purchase cost to make a
profit. The seller shifts the VAT burden to the buyer and the tax finally
accumulated is borne by the consumer.

5. It employs the TAX CREDIT METHOD and a tax on GROSS MARGIN: if the
buyer resells his purchases, he is allowed to reduce the amount of VAT on his
sales by the amount of VAT on his purchases, provided that he is VAT-
registered.

How to compute the GROSS MARGIN: Gross sales minus cost of sales =
Gross margin. The VAT payable is 12% of the gross margin.

Example:

Total Sales: Php 100,000


Total Purchases: Php 60,000

VAT on Sales (P100,000 x 12%) Php 12,000


less VAT on Purchases (P60,000 x 12%) Php 7,200
VAT Payable Php 4,800

OR

Sales Php 100,000


Less Cost of Sales Php 60,000
Gross Margin Php 40,000
Multiply by VAT Rate 12%
VAT Payable Php 4,800

6. It follows the principle of NO DOUBLE TAXATION: the value of goods


previously subjected to VAT should not be subjected to the same tax. The
OUTPUT VAT of the VAT-registered seller becomes the INPUT-VAT of the VAT-
registered buyer. If the VAT-REGISTERED BUYER sold the goods, he can
reduce the related OUTPUT VAT of his sales by the INPUT VAT from his
PURCHASES. (Have Atty. Laco provide an example kasi di ko talaga ma-
visualize)

II.

Impact and Incidence of Tax

III.

Tax Credit Method: Under the present method that relies on invoices, an
entity can credit against or subtract from the VAT charged on its sales our
outputs the VAT paid on its purchases, inputs and imports.

If at the end of the taxable quarter:


a. Output taxes Input taxes
charged by the seller = passed on by = No
Payment is required
the suppliers

b. Output taxes > Input taxes = Excess has


to be paid

c. Input taxes > Output taxes = Excess has


to be carried over
to the succeeding
quarter/s

Note: The input VAT is primarily intended to reduce the amount of output VAT
in computing the VAT payable for the taxable period. Under R.A. 9361, the
excess amount if input VAT from the previous period shall be CARRIED OVER
to the succeeding quarter or quarters.

The amount of input VAT that cannot be utilized as input VAT credits may be
applied for TAX REFUND.

It is creditable against (i.e. deductible from) the output VAT if the related
goods or services from which it arises are used in the conduct of business.

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.

d. Should the input taxes result from zero-rated or effectively zero-rated


transactions or from the acquisition of capital goods, any excess over the
output taxes shall instead be REFUNDED to the taxpayer or credited against
other internal revenue taxes.

NOTE: Under RR 14-2011, it provides that all tax credit certificates (TCCs)
issued by the BIR shall not be allowed to be transferred or assigned to any
person.

The unutilized input VAT can be applied for TAX CREDIT CRETIFICATE which
can be used as payment for applicable national internal revenue tax.

IV.

DESTINATION PRINCIPLE: observes the jurisdictional reach of tax whereby


goods and services are taxed only in the country where they are consumed.
The place of sale is presumed to be the place of consumption.

As a rule, the 12% VAT will be imposed on transation of goods or services


intended to be consumed in the Philippines. Consequently, importation of
goods/services are subject to 12% regular VAT because they are intended to
be consumed in the Philippines.

Furthermore, NO VAT SHALL BE IMPOSED on goods or services sold outside


the territorial border of the taxing authority. Export sales are either Zero-
rated VAT or VAT-exempt transactions.

To be EXEMPT from the DESTINATION PRINCIPLE under Section 108(B)(2) the


services must be:

a. Performed in the Philippines;

b. For a person doing business outside the Philippines; and

c. Paid in acceptable foreign currency accounted for in accordance with BSP


Rules.

V.

Persons liable:

1. Any person who, IN THE COURSE OF TRADE OR BUSINESS, sells, barters,


exchanges, leases goods or properties, renders service,

2. Any person who imports goods shall be subject to VAT.

3. If a person who is NOT A VAT-REGISTERED PERSON issues an invoice or


receipt showing his TIN followed by the word VAT.

4. If a VAT-REGISTERED PERSON issues a VAT invoice or VAT official receipt for


a VAT EXEMPT TRANSACTION but fails to display prominently on the invoice or
receipt the term VAT-EXEMPT SALE, the issuer shall be liable to account for
the tax imposed in Secs. 106 and 108.

IN THE COURSE OF TRADE OR BUSINESS: regular conduct or pursuit of


commercial or an exonomic activity, including transcations incidental thereto,
by any person regardless of whther or not the person engaged therein is a
non-stock, non-profit private organization or government entity.

Sec. 4 106-1 RR16-2005, 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 or service is not regular. This is the RULE OF
REGULARITY.

In case of importation of goods, importer is liable for VAT.

VI.

Imposition of VAT
1. 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.

Provided, that the President upon receommendation of the Secretary of


Finance, shall be effective January 1, 2006 raise the rate of VAT to 12%, after
any of the following conditions has been satisfied:

Value added tax collection as a percentage of Gross Domestic Product (GDP)


of the previous year exceeds 2 4/5%; or

National government deficit as a percentage of GDP of the previous year


exceeds 1/2%

(1) 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.

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.

(2) The following sales by VAT-registered persons shall be subject to


zero percent (0%) rate:

(a) Export Sales. - The term "export sales" means:


(1) The sale and actual shipment of goods from the
Philippines to a foreign country, irrespective of any
shipping arrangement that may be agreed upon which
may influence or determine the transfer of
ownership of the goods so exported and paid for in acceptable foreign
currency or its equivalent in goods or services, and
accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);

(2) Sale of raw materials or packaging materials to a


nonresident buyer for delivery to a resident local export-
oriented enterprise to be used in manufacturing,
processing, packing or repacking in the Philippines of
the said buyer's goods and paid for in acceptable foreign currency and
accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);

(3) Sale of raw materials or packaging materials to


export-oriented enterprise whose export sales exceed
seventy percent (70%) of total annual production;

Provided the seller complies with other requirements, like


registration with the BOI and the EPZA. The said
regulation does not hint nor mention that only
a percentage of the sales would be zero-rated. The
Commissioner cannot, by administrative fiat, amend the law by making
compliance therewith more burdensome.

(4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP);


and

(5) Those considered export sales under Executive Order


NO. 226, otherwise known as the Omnibus Investment
Code of 1987, and other special laws.

(6) The sale of goods, supplies, equipment and fuel to


persons engaged in international shipping or
international air transport.

(b) Foreign Currency Denominated Sale. - The phrase "foreign


currency denominated sale" means sale to a
nonresident of goods, except those mentioned in
Sections 149 and 150, assembled or manufactured in the
Philippines for delivery to a resident in the Philippines, paid for in
acceptable foreign currency and accounted for in accordance
with the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP).

(c) Sales to persons or entities whose exemption under special


laws or international agreements to which the
Philippines is a signatory effectively subjects such sales to
zero rate.

The value-added tax becomes due when the following conditions concur:

a. There is a sale, barter, exchange, transfer or similar transaction,


either for nominal or valuable consideration, intended to transfer
ownership of, or title to, articles imported, milled, produced, or
manufactured.

b. The sale is consummated not merely perfected in the Philippines.


The place where title to the thing passes determines the place of delivery
of tax situs.

2. On Importation of Goods: the tax shall be paid by the importer prior to the
release of the goods from customs custody. In cases where the customs
duties are imposed in the basis of the quantity or volume of goods, the VAT
shall be computed on the landed cost plus excise tax when due.

The tax is NOT IMPOSED if the imported goods are used by the
importer himself in the manufacture or preparation of petroleum
EXCEPT lubricating oil and grease which are subject to excise tax.

In 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, entities, the purchasers, transferees or recipients shall
be considered the importers who shall be liable for any internal rvenue
tax on such importation. The tax due shall constitute as a LIEN on the
goods superior to other charges or liens on the goods irrespective of
the possessor.

If the imported goods are sold or transferred by the importer BEFORE


the release of the goods (the same still technically under importation),
the transferee becomes the new importer liable to tax. Where the
goods are withdrawn from the Customs from a tax-exempt entitybut
the circumstances indicate that another is the actual importer, the
latter can be held liable.

3. On Services

(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.

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

Note: Not the same as the showing or exhibition of motion pictures or


films. The legistlature never intended operators or proprietors of
cinema/theater houses to be covered by VAT.

In Commissioner of Internal Revenue vs. SM Prime Holdings, Inc. (G.R.


No. 183505, 26 February 2010), respondent is the operator of several
movie theaters and was assessed by the petitioner for deficiency VAT
on its cinema ticket sales. The Supreme Court affirmed the ruling of the
Court of Tax Appeals that gross receipts derived by operators or
proprietors of cinema/theater houses from admission tickets are NOT
subject to VAT.

(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.

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.

Section 106 of the NIRC 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, commercial undertaking or project.

VII.

Transactions Deemed Sale: are business transactions that are NOT ACTUAL
SALES but by legal fiction they are assumed or considered sales due to the
consumption or irregular disposal of goods/properties by a VAT-registered
seller.

The purpose of deemed sale transactions is to RECOVER the input VAT of


existing goods that might have been credited against the output VAT in the
previous taxable period (monthly/quarterly).

The TAXABLE BASE of transactions deemed sales would be:

1. Market Value Method: the taxable base of transactions deemed sale is the
actual market value of such goods as the occurrence of the transaction
considered as sale.

2. Lower of Cost or Market Method: the acquisition of cost or current market


price of the goods, whichever is lower is applied in case of retirement or
cessatino of business.

3. CIR Valuation: where the gross selling price (GSP) is unreasonably lower
than the actual market value, the Commissioer shall determine the
appropriate tax base for 12% VAT.

UNREASONABLE GROSS SELLING PRICE: GSP 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 or quality sold in
the immediate locality or the nearest date of sale.

In deemed sale transactions, the VAT-registered taxpayer may take


advantage of a discount within the threshold amount of reasonable
selling prince which is within 30% discount of the actual market value.

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;

Transfer of goods not in the course of business: goods or properties intended


for sale or use in business but instead consumed for personal use by the
seller-taxpayer are considered deemed sales.

Transmission of Property shall observe the following rules:

a. Transmission of a property to a trustee shall not be subject to VAT if


the property is to be merely held in trust for the trustor and/or
beneficiary.

b. If the property transferred is one for sale, lease or use in the


ordinary course of trade or business and the transfer constitutes a
COMPLETED GIFT, the transfer is subject to VAT as a deemed sale
transaction.

The transfer is a completed gift if the transferor divests himself


absolutely of the control over the property.
Examples: Irrevocable transfer of corpus and/or irrevocable designation
of beneficiary.

Illustration: Atty. Mapulon, a VAT-registered real estate developer.


donated one of his inventories (a residential house and lot) with zonal
value/fair market value of Php2.5M to Engineer Lakapati.

This scenario is deemed sale transaction. The presence of OUTPUT VAT


depends on the selling price. If the selling price is Php 3M, there is NO
OUTPUT VAT to be paid because sales of residential dwellings valued at Php
3,199,200 and below are VAT-EXEMPT (Sec. 2, Rev. Regs. No. 16-2011).
HOWEVER, if the selling price is Php 4M, Output VAT of Php 480,000 will have
to be paid based on the following computation:

Selling Price: Php 4,000,000


Multiplied by VAT Rate 12%
Output VAT Php 480,000

(2) Distribution or transfer to:

(a) Shareholders or investors as share in the profits of the VAT-registered


persons; or

Distributions of inventory/property to shareholders or investors as


share in the profits of a VAT-registered person are deemed sale transactions.

Illustration: Bathala Corporation, a VAT-registered business, imported


100 cars costing Php 500,00 each, excluding VAT. Eighty (80) cars were sold
to the market at Php 700,000 per unit, and twenty of the units of the cars
were declared and distributed to stockholders as property dividend. Bathala
corporation used the acquisition cost of the car as taxable base of the
transactions deemed sale.

Net VAT payable:

Actual sales (Php 700,000 x 80 cars sold) Php


56,000,000
Add: Deemed sales (Php 500,000 x 20 cars) Php 10,000,000
Total Sales Php 66,000,000
Multiplied by VAT rate 12%
Output VAT Php 7,920,000
Less Input VAT (Php 500,000 x 100 x 12%) Php 6,000,000
Output VAT Php 1,920,000

*Pa-explain kay Atty. Laco why twice nag-output VAT

(b) Creditors in payment of debt;


Illustration: Apolaki company, a VAT-Registered business, settled its
account with its raw material supplier in the form of finished goods as follows:

Amount of credit payable to supplier Php 100,000


Payment to supplier in the form of goods
previously purchased from VAT business, at cost Php
80,000
Available input VAT Php 5,000

VAT Payable would be:

Deemed sale - amount of liability settled Php 100,000


Multiplied by VAT rate 12%
Output VAT Php 12,000
Less available input VAT Php 5,000
Net VAT Payable Php 7,000

(3) Consignment of goods if actual sale is not made within sixty (60) days
following the date such goods were consigned; and

Illustration: HOB consigned goods to SM on May 15, 201X. The selling


price of the goods as of August 30, 201X is Php 130,000. The consigned
goods remained unsold after 60 days and are not retrieved by HOB. The cost
of the goods is Php 100,000

How much is the ouput VAT allowed for VAT reporting purposes?

Deemed Sales Php 130,000


Multiply by VAT rate 12%
Output VAT Php 15,600

Note: There is no actual sale but the Output VAT should still be reported
because the goods are consigned beyond 60 days. If the problem is silent,
use the Market Value Method ( Actual Market Value)

(4) Retirement from or cessation of business, with respect to inventories of


taxable goods existing as of such retirement or cessation.

This is a deemed sale transation whether the business is continued by


the new owner or successor.

"All goods on hand existing upon retirement" would refer to the


following:

a. Capital goods
b. Stock-in trade or inventory goods
c. Supplies
d. Materials
The acquisition cost or current market price of the goods WHICHEVER
IS LOWER is applied in case of retirement or cessation of business.

Illustration: Baku and Mino, partners in Kawa partnership, a VAT-


registered merchandising business, decided to dissolve their partnership. The
dissolution and liquidation resulted in the distribution of Php 200,000
merchandise inventory to each of the partner. Record shows that the
inventory was acquired at the total cost of Php 300,000.

In the case above, the transfer to each partner are considered sold
subject to VAT. The OUTPUT VAT would be:

Deemed sales at cost Php 300,000


Multiplied by regular VAT rate 12%
Output VAT Php 36,000

Notes:

1. Change of business ownership and dissolution of partnership falls under


the category of retirement from business.

2. The transactions above are considered sales for VAT purposes because
there was an input VAT when goods were acquired which may have been
claimed by the VAT-registered person as input tax credit. To recapture the
input tax credit, the inventory left shall be considered sold when the business
retires from operation, even if it was not actually sold and used for non-
business purpose.

Limitations to Deemed Sale Transactions

1. In general, deemed sales are not permitted to use the UGSP

2. Applicable only to sales of inventory goods and/or properties classified as


ordinary asset

3. VAT-exempt and OPT transaction are not covered by deemed sale


transactions. It is applicable only to transactions subject to VAT

4. Any loss related to deemed sale transactions are non-deductible for


income tax purposes.

VIII.

Change or Cessation of status as VAT-registered person

The VAT shall also apply to inventory goods disposed off or existing as of a
certain date if the status as a VAT-registered person changes or is terminated.

Illustration: Kidlat trading, originally registered as a VAT-registered


business, applied for the conversion of business registration from VAT to Non-
VAT because after 3 consecutive years of bsuiness operation its yearly
average sales in only Php 1,000,000. On the date the business VAT
registration was terminated to be Non-VAT, its records show:

Total Sales inclusive of VAT Php 1,120,000


Remaining merchandise inventory at cost Php 350,000
Input VAT available Php 20,000

Assuming that the market value of the remaining merchandise is Php


300,000, the net VAT payable of Kidlat Trading would be:

Output Vat from:


Sales (Php 1,120,000/9.333) Php 120,000
Remaining merchandise inventory
Lower - market value (Php 300,000) x 12% Php 36,000
Total Output Vat Php 156,000
Less Input Vat available Php 20,000
NET VAT Payabale Php 136,000

1. Subject to output tax

The VAT provided for in Sec. 106 of the Tax Code shall apply to goods
or properties originally intended for sale or use in business, and capital
goods which are existing as of the occurrence of the following:

a. Change of business activity from VAT taxable status to VAT-


exempt status. An example is a VAT-registered person engaged
in a taxable activity like wholesaler or retailer who decides to
discontinue such activity and engages instead in life
insurance business or in any other business not subject to VAT;

b. Approval of a request for cancellation of registration due to


reversion to exempt status.

c. Approval of a request for cancellation of registration due to a


desire to revert to exempt status after the lapse of three (3)
consecutive years from the time of registration by a person
who voluntarily registered despite being exempt under Sec.
109 (2) of the Tax Code.

d. Approval of a request for cancellation of registration of one


who commenced business with the expectation of gross sales
or receipts exceeding P1,500,000.00, but who failed
to exceed this amount during the first twelve months of
operation.
2. Not subject to output tax

The VAT shall not apply to goods or properties existing as of the


occurrence of the following:

a. Change of control of a corporation by the acquisition of the


controlling interest of such corporation by another stockholder
or group of stockholders. The goods or properties used in
business or those comprising the stock-in-trade of the
corporation, having a change in corporate control, will not be considered
sold, bartered or exchanged despite the change in the
ownership interest in the said corporation. (Change in Corporate
Control)

Exception: The exchange of goods or properties including real


estate properties used in business or held for sale or for lease by
the transferor, for shares of stock whether resulting in corporate
control or not, is subject to VAT.

Illustration 1: Abel Corporation is a merchandising concern and


has an inventory of goods for sale amounting to Php1 million. Nel
Corporation, a real estate developer, exchanged its real estate
properties for the shares of stocks of Abel Corporation resulting
to the acquisition of corporate control. The inventory of goods
owned by Abel Corporation (Php1 million worth) is not subject to
output tax despite the change in corporate control because the
same corporation still owns them. This is in recognition of the
separate and distinct personality of the corporation from its
stockholders. However, the exchange of real estate properties
held for sale or for lease, for shares of stocks, whether resulting
to corporate control or not, is subject to VAT. This is an actual
exchange of properties which makes the transaction taxable.

Illustration 2: Adobo is a food business with 100,000 unissued


ordinary equity shares at a sales price of Php 150 per share. It
has the following goods and properties used in business:

Inventory and supplies Php 5,000,000


Delivery trucks Php 3,000,000
Furniture and fixtures Php 2,000,000
Total goods and properties Php 10,000,000

Adobo exchanged its 100,000 unissied ordinary shares for a


prime commercial lot owner by Mayon Realty Corporation. The
commercial lot is one of the property inventories of Mayon with a
fair market value of Php 20,000,000. As a result of exchange,
Mayon acquired control over Adobo.

Which of the properties is subject to VAT?

Only the exchange of commercial inventory of Mayon used to


acquire the shares of stock of Adobo is subject to VAT. The output
VAT would be:

FMV of commercial lot Php 20,000,000


Multiplied by VAT rate 12%
Output VAT Php 2,400,000

The total goods and properties used in business by Adobo are


not subject to output tax despite the change in corporate control
because the same corporation still owns them.

b. Change in the trade or corporate name of the business;

c. Merger or consolidation of corporations. The unused input tax


of the dissolved corporation, as of the date of merger or
consolidation, shall be absorbed by the surviving or new
corporation.

Transfers of assets as a result of merger or consolidation are not


considered deemed sale transaction because they are just
transfers in form and not substance.

In a merger or consolidation, the unused input tac of the


dissolved corporation, as of the date of the merger or
consolidation, shall be absorbed by the surviving corporation.

Illustration: Malakas Co. merged with Maganda Co. being the


surviving corporation. The following properties of Malakas Co.
were transferred to Maganda Co. in exchange for 10,000 equity
shares of Maganda Co. with FMV of Php 500/share.

Total assets:

Accounts receivable Php 300,000


Merchandise inventory Php 500,000
Property, plant and equipment Php 7,200,000
Php 8,000,000

Total Liabilities:

Accounts payable Php 500,000


Bank loans payable Php 1,000,000 Php
1,500,000
Stockholder's Equity

Share capital Php 5,000,000


Retained earnings Php 1,500,000 Php
6,500,000

Total liabilities and equity Php


8,000,000

How much is the VAT to be paid as a result of the merger?

None. The merger is not considered deemed sale transaction.

IX.

Zero-rated and Effectively Zero-Rated Sales of Goods or Properties

Any VAT-registered person, whose sales are zero-rated or effectively zero-


rated may, within two (2) years after the close of the taxable quarter when
the sales were made, apply for the issuance of a tax credit certificate or
refund of creditable input tax due or paid attributable to such sales, except
transitional input tax, to the extent that such input tax has not been applied
against output tax: Provided, however, That in the case of zero-rated sales
under Section 106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the
acceptable foreign currency exchange proceeds thereof had been duly
accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is
engaged in zero-rated or effectively zero-rated sale and also in taxable or
exempt sale of goods of properties or services, and the amount of creditable
input tax due or paid cannot be directly and entirely attributed to any one of
the transactions, it shall be allocated proportionately on the basis of the
volume of sales.

Effectively Zero-rated Sale of Goods

Meaning of "Effectively Zero-rated Sale of Goods": shall refer to the local sale
of goods and properties by a VAT-registered person to a person or entity who
was granted indirect tax exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects such
transactions to zero rate.

Under these regulations, transactions not involving actual export but


are considered as constructive export shall be entitled to the benefit of
zero-rating, such as local sales of goods and properties to persons or
entities covered under sale to export-oriented enterprises, sale of
goods, supplies, equipment and fuel to persons engaged in
international shipping or international air transport operations of Sec.
106 (A)(2)(a)(3) and (6) of the Code, (b) foreign currency denominated
sale and (c) sales to tax-exempt persons or entities.

EXCEPT FOR EXPORT SALE AND FOREIGN CURRENCY DENOMINATED


SALE, other cases of zero-rated sales shall require prior application with
the appropriate BIR office for effective zero-rating. Without an
approved application, the transaction otherwise entitled to zero-rating
shall be considered exempt.

Effective zero rating, is intended to benefit the purchaser who, not neing
directly and legally liable for the payment of the VAT, will ultimately bear the
burden of the tax shifted to the suppliers.

Effectively zero-rated sales include the following:

1. Sale of power or fuel generated through renewable sources of energy such


as:

a. biomass, solar, wind, hydropower, geothermal ocean energy;


b. Other emerging energy sources using technologues such as fuel
cells and hydrogen fuels.

2. Sales and services to the following persons or entities who were granted
indrect tax exemption under special laws and/or international agreement:

a. Enterprises duly registered and accredited with SBMA and Clark


Development Authority (RA 7227)
b. Enterprise duly registered and accredited with Philippine Economic
Zone Authority (RA 7916)
c. Asian Development Bank
d. International Rice Research Institute

Illustration: Philippine Airlines (PAL) transports passengers within and outside


the Philippines. PAL reported the following gross receipts during the taxable
year:

Gross receipts from transport of Within Without


Passengers Php10,000,000 Php15,000,000
Cargoes Php 6,000,000 Php
9,000,000
Total gross receipts Php16,000,000 Php24,000,000

The gross receipts from services rendered within the Philippines is subject to
12% VAT while the total gross receipts outside of the Philippines are subject
to zero-rated VAT.

Zero-Rated or Effectively Zero-Rated Organization


VAT-registered business is allowed to deduct the related input VAT but is not
allowed to collect output VAT on its sale of goods or services with zero-rated
VAT or effectively zero-rated VAT.

The following organizations are included in this category:

1. PEZA or SBMA Registered Enterprises

The sale of goods and services to PEZA and SBMA-registered business


enterprises operating within the ECOZONE shall be effectively zero-rated.
Under the Cross Border Doctrine, a supply of service to PEZA-registered
enterprise shall be treated as effectively zero-rated VAT as long as the
performance of service is within the ECOZONE area. The ECOZONE are, under
the fiction of foreign territory, may be considered as a special customs (or
foreign) territory.

PEZA or SBMA-registered enterprises located within the export processing


zone are the ones whose products are destined to be used or consumed
outside the Philippines.

Illustration: Mango Computer Services, a VAT-registered service provider,


maintains the computer conditions of Texas Instruments (TI), a PEZA-
registered enterprise operating within the ECOZONE. Mango receives
P2,000,000 service contract fee per month. Since TI is a PEZA-registered
enterprise operating within the ECOZONE, the service rendered by Mango is
not subject to 12% VAT, it is subject to 0% VAT.

Note: The sale of services should be rendered within the PEZA boundaries to
be entitled to the benefits of Section 24 of RA 7916. If the service is outside
PEZA boundaries, the service is subject to 12% VAT.

2. International Organizations

The gross receipts of a service contractor from an international organization


granted tax exemptions from all direct and indirect taxes under special laws
or international agreement in the Philippines are subject to zero-rated VAT.

Illustration: Maharlika Construction entered into a contract with the World


Health Organization to erect a building within for the said organization. The
construction price is Php20,000,000. Assuming that the cost incurred in
constricting the building amounted to Php15,000,000 plus Php1,800,000
related input VAT, how much is the VAT payable?

Since WHO is exempt from all direct and indirect taxes in the Philippines, the
construction service rendered by Maharlika is zero-rated VAT. Consequently,
there is no VAT payable, but instead Maharlika can claim creditable input VAT
or VAT refund. Thus,
Output VAT (Php20m x 0%) Php 0
Less Input VAT Php1,800,000
VAT Refund Php1,800,000

3. Other Organizations that are zero-rated or effectively zero-rated are:

a. Asian Development Bank


b. International Rice Research Institute
c. US Agency for International Development
d. US Navy Supply Depot, Department of Navy
e. World Health Organization
f. International Labor Organization

Foreign Sales of Services by Domestic Corporation

Gross receipts of a domestic corporation for:

1. Transport of passengers and cargo by air or sea vessel from the Philippines
to foreign country

2. Services, other than those mentioned in the preceding paragraph, are paid
in acceptable foreign currency and accounted in accordance with rules and
regulations of the BSP.

Export Sales of Ecozone-Registered Enterprises

The export sales of PEZA and other ecozone-registered enterprises enjoying


preferential tax rate of 5% in lieu of all taxes are NOT ENTITLED TO THE
BENEFIT OF ZERO RATING. These enterprises are exempt from all national
and local taxes and therefore are not qualified to register as VAT taxpayers.
Consequently, the said export sales are only exempt from VAT under Section
109(1)(O) of the NIRC and not zero-rated. Even if they were able to register
as VAT taxpayers because their registered activities with the PEZA makes
their VAT registration invalid or void registration.

Zero-rated Transactions

Zero-rated transactions generally refer to the export of goods and supply of


services. The tax rate is set at zero. When applied to the tax base, such rate
obviously results in no tax chargeable against the purchaser. The seller of
such transactions charges no output tax, but can claim a refund of or a tax
credit certificate for the VAT previously charged by suppliers.

The bases of zero-rated VAT on export sales are the DESTINATION PRINCIPLE
and the CROSS BORDER DOCTRINE. Under the Destination Principle, goods
and services are taxed only in the country where these are consumed.
Relating to the destination principle, the Cross Border Doctrine carries out a
policy that no VAT shall be imposed to form part of the cost of the goods
destined for consumption outside the territorial border of the taxing authority.

Illustration - Sales of Goods

SMC (VAT-registered) reported the following sales during the taxable quarter:

Domestic Sales Foreign


Sales
Sales of goods P100,000,000
$20,000,000
Multiplied by VAT rate 12%
0%
Output VAT P 12,000,000 $ 0

Illustration - Sales of Services

Cebu Pacific (VAT-registered) reported the following gross receipts on


transports of passengers within and outside the Philippines:

Within Outside
Gross Receipts P200,000,000
$50,000,000
Multiplied by VAT rate 12%
0%
Output VAT P 24,000,000 $
0

The taxpayers belonging to this group are registered under VAT system;
however, they are engaged in sales or exchanges of goods/services that are
subject to output VAT rate of zero percent as provided by law.

These are mainly export sales by VAT registered persons which will generate
the needed reserves of foreign currencies.

A zero-rated sale is still considered a taxable transaction for VAT purposes but
the VAT rate used is 0%.

A sale by a VAT-registered tax payer of goods and/or services taxed at 0%


shall not result in any output VAT, while the input VAT on its purchases of
goods or services related to zero-rated sale shall be available as:

1. Tax refund

2. Creditable input tax

3. Tax Credit Certificate (Atlas Consolidated vs. CIR)


Illustration:

X, a VAT-registered business, engaged in export of locally made products.


During the taxable year, its total export sales with foreign currency payments
have an equivalent value of $10,000 with a peso exchange rate of Php50 per
USD.

Also, its total input VAT payments for its purchases and utilized services all in
connection with the conduct of business amounted to Php 36,000.

If X has no other transactions which will give rise to business tax liability, its
tax credit would be as follows:

Zero-rated export sales ($10,000 x P50 x 0%) Php 0


Less Creditable Input VAT Php 36,000
Creditable input VAT Php 36,000

Notes:

1. Any VAT attributable to zero-rated or effectively zero-rated sales by a VAT-


registered person may be applied for TCC within 2 years after the close of the
taxable quarter. The TCC can be refunded or credited against other internal
revenue taxes, subject to the provisions of Sec. 112.

2. The tax refund or conversion of input VAT to TCC does not apply to the
following input VAT:

a. Transitional input VAT


b. Presumptive input VAT

Applying the destination principle to the exportation of goods, automatic zero


rating is primarily intended to be enjoyed by the seller who is directly and
legally liable for VAT, making such seller internationally competitive by
allowing the refund or credit of input taxes that are attributable to export
sales.

In both instances of zero-rating, there is total relief for the purchaser from the
burden of the tax. But in am exemption there is only partial relief, because
the purchaser is not allowed any tax refund or credit for input taxes paid.

Requisites of Zero-Rated Exported Sales

1. The business is a VAT registered entity

2. Engaged in the sale and actual shipment of goods from the Philippines to
foreign country

3. Required to present certification that payments are made in acceptable


foreign currency.

If said requisites are satisfied, the taxpayer is entitled to a cliam for refund, or
issuance of a tax credit certificate for creditable input taxes.

Illustration:

Narra Inc. reported the following sales during the year:

Domestic Sales 75%


Php150,000,000
Foreign Sales
Taiwan (payment in Philippine Peso) 15% Php
30,000,000
USA (payment in USD) 10% $
400,000

The total creditable input VAT related to the said sales amounted to Php
14,000,000.

The net VAT payable would be:

Output VAT from PH Sales (Php 150,000,000 x 12%)


Php18,000,000
Taiwan Sales Exempt
USA Sales ($400,000 x 0%) Zero-
rated
Total Output VAT Php18,000,000
Less Creditable Input VAT [Php14,000,000 x (75% + 10%) ]
Php11,900,000
Net VAT Payable Php 6,100,000

Note: Foreign sales are not subject to business tax in the Philippines. The
sales in Taiwan are not paid in acceptable foreign currency; hence, not zero-
rated sales but VAT-exempt sales. VAT-exempt sales could not avail of input
VAT.

Transactions under Zero-Rate

A. Export Sales: export sales or sales outside the Philippines are subject to
VAT at 0% if made by a VAT-registered person and pain in acceptable foreign
currency.

COMMISSIONER OF INTERNAL REVENUE v. CEBU TOYO CORPORATION. G.R.


No. 149073. February 16, 2005

FACTS: Respondent Cebu Toyo Corporation is a domestic corporation engaged


in the manufacture of lenses and various optical components. Its principal
office is located at the Mactan Export Processing Zone (MEPZ) in Lapu-Lapu
City, Cebu and is a subsidiary of Toyo Lens Corporation, a non-resident
corporation organized under the laws of Japan. It is a zone export enterprise
registered with the Philippine Economic Zone Authority (PEZA), pursuant PD
66 and is also registered with the BIR as a VAT taxpayer.

The sales of respondent are considered export sales subject to VAT at 0% rate
under Section 106 of the NIRC, as amended.

Respondent then filed, an application for tax credit/refund of VAT paid for the
period April 1, 1996 to December 31, 1997 amounting to P4,439,827.21
representing excess VAT input payments. Respondents claim that they can
avail of the tax credits as they are VAT-registered exporter of goods at the
rate of 0%.

The CIR oppose such stating that they are not entitled to the tax credit as the
claims for refund are strictly construed against respondents as it is of the
nature of tax exemption.

The CTA granted the motion partially to the respondents as they only lowered
the tax credits to P2,158,714.46 representing unutilized input tax payments.
The CIR filed a petition with the CA which was denied.

ISSUE: Whether Cebu Toyo Corporation can avail of the tax credits.

RULING: YES. Respondents availed of an income tax holiday as provided in


the Omnibus Investments Code ( EO 226). It is one of the fiscal incentives
granted to PEZA-registered enterprises and one of the options to its tax
burden. Both the CA and CTA found that respondent availed of the income tax
holiday for four (4) years as it was shown in their Annual Corporate Income
Tax Returns. In it also is where respondent specified that it was availing of the
tax relief under EO 226. Hence, respondent is not exempt from VAT and it
correctly registered itself as a VAT taxpayer. In fine, it is engaged in taxable
rather than exempt transactions.

Taxable transactions are those transactions which are subject to value-added


tax either at the rate of ten percent (10%) or zero percent (0%). In taxable
transactions, the seller shall be entitled to tax credit for the value-added tax
paid on purchases and leases of goods, properties or services.

An exemption means that the sale of goods, properties 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. 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. Thus, a VAT-registered purchaser of goods, properties or services that are
VAT-exempt, is not entitled to any input tax on such purchases despite the
issuance of a VAT invoice or receipt.

The court also held that respondent is subjected to VAT at 0% rate as it is


engaged in the export business.

Coverage of Export Sales:

1. Actual sales to foreign country: refers to actual export sales, the sale and
actual shipment of goods from the Philippines to a foreign country.

Actual exportation is evidenced by export documents such as:

a. Philippine Port F.O.B. value (from invoices)


b. Bills of Lading
c. Inward letters of credit
d. Certificate of inward payments in acceptable foreign currency
e. Landing certificates
f. Other similar documents

Illustration:

Seludong Corporation reported the following export sales in 2015:

Date of Shipment Date of Landing Shipping Contract: Amount

Certificates Destination
10/01/2015 11/01/2015 FOB destination:Japan
$10,000
11/15/2015 12/05/2015 FOB shipping point:Taiwan
$30,000
12/25/2015 01/20/2016 FOB destination:USA
$60,000

The reportable actual export sales subject to zero-rated VAT would be:

FOB destination:Japan $10,000


FOB shipping point:Taiwan $30,000
Total actual export sales $40,000

The export sales to USA is NOT INCLUDED because the date of landing
certificate is after the taxable year 2015.

2. Constructive exportations: these are transactions entitled to the benefit of


zero-rating such as local sales of goods and properties to the following person
or entities:

a. Sales to export-oriented enterprise


The sale of raw materials or packing materials and services performed
by subcontractors and/or contractors to an export oriented enterprise
whose sales exceed 70% of the total production. Burden of proving that
the buyer companies were not just BOI-registered but also exporting
70% of their total annual production for zero-rating to apply. (Atlas
Consolidated vs. CIR)

Illustration: The PMC, VAT-registered supplied raw materials to the


following export-oriented enterprises:

Baybayin Corporation Php 20,000,000


Kulitan Corporation Php 30,000,000

Additional information shows:

Total Annual Cost of


Percentage of
Production Costs Exported export sales/
Products production
cost

Baybayin Corporation Php 30,000,000 Php


22,500,000 75%
Kulitan Corporation Php 60,000,000 Php 36,000,000
60%

The PMC, zero-rated sales would only be the sale of raw materials to
Baybayin Corporation because its export sales exceed 70% of its
production, while the sale to Kulitan Corporation is subject to 12%
regular VAT.

b. Sale of goods, supplies, equipment and fuel to persons engaged in


international shipping/transport operations

c. Foreign currency denominated sales: these are sales of goods to


non-residents, except those mentioned in Section 149 (automobiles)
Section 150 (non-essential goods), assembled or manufactured in the
Philippines for delivery to a resident in the Philippines, paid for in
acceptable foreign currency and accounted for in accordance with the
rules and regulations of the BSP.

Illustration

Yakal Furniture Shop is a VAT-registered manufacturing business. Its


export sales during the taxable year show the following:

Taiwan (payment in Php) Php10,000,000


USA (payment in USA) $ 5,000,000
Japan (payment in Yen) Y 8,000,000

The export sales to USA and Japan are ZERO-RATED while the sales to
Taiwan are VAT-EXEMPT because the payment is not in foreign currency.
Foreign sales are not subject to business tax in the Philippines
(following the Destination Principle).

d. Sales to tax-exempt persons or entities (effective zero-rated sales)

e. Considered export sales under 1987 Omnibus Investment Code and


other special laws such as RA 7227 otherwise known as the Bases
Conversion and Development Act of 1992. The 1987 Omnibus
Investment Code provides the following sales as constructive export:

e.1 Sales to bonded manufacturing warehouses of export-


oriented manufacturer

e.2 Sales to export processing zones

e.3 Sales to foreign military bases, diplomatic missions and/or


other instrumentalities granted with tax immunities, of locally
manufactured, assembled or repacked products whther paid for
foreign currency or not.

e.4 Sales to non-resident Filipino and balikbayans paid for in


convertible foreign currency inwardly remitted through the
Philippine banking system.

e.5 Commission income on export sales of export registered


trader

e.6 Consigned goods actually sold by foreign consignees.

Illustration: Seludong Corporation, a VAT-registered export trader, made


the following export sales during the year:

Bataan Export Processing Zone Php6,000,000


Mactan Export Processing Zone Php3,000,000
US Embassy Php2,000,000
Commission income on export sales Php1,000,000
Consigned goods to Malaysia (80% sold) Php4,000,000

Total amount of zero-rated sales would be:

Bataan Export Processing Zone Php6,000,000


Mactan Export Processing Zone Php3,000,000
US Embassy Php2,000,000
Commission income on export sales Php1,000,000
Consigned goods to Malaysia (Php4M x 80% ) Php3,200,000
Zero-rated Sales Php15,200,000

Note: The exportation of goods on consignment shall not be deemed


export sales until the export products consigned are in fact sold by the
consignee.

3. Sale of gold to BSP: gold sold to Central Bank shall be considered export
sales, and therefort be subject to the export and premium duties. (E.O. 581).
All sales of gold to Central Bank are considered constructive exports and are
also considered as export sales subject to zero-rate.

COMMISSIONER OF INTERNAL REVENUE v. MANILA MINING CORPORATION 468


SCRA 571 (2005)

For a judicial claim for refund to prosper, the party must not only prove that it
is a VAT registered entity, it must substantiate the input VAT paid by purchase
invoices or official receipts.

Respondent Manila Mining Corporation (MMC), a VAT-registered enterprise,


filed its VAT Returns for the year of 1991 with the BIR. MMC, relying on Sec. 2
of Executive Order (E.O.) 581 as amended which provides that gold sold to
the Central Bank is considered an export sale which under Section 100(a)(1)
of the NIRC, as amended by E.O. 273, is subject to zero-rated if such sale is
made by a VAT-registered person, filed an application for tax refund/credit of
the input VAT it paid from such year. The Commissioner of Internal Revenue
(CIR) failed to act upon MMC’s application within sixty (60) days from the
dates of filing. MMC was then filed a Petition for Review against the CIR
before the Court of Tax Appeals (CTA) seeking the issuance of tax credit
certificate or refund. The CIR specifically denied the veracity of the amounts
stated in MMC’s VAT returns and application for credit/refund as the same
continued to be under investigation. However, such was not verified
prompting MMC to file a “SUPPLEMENT (To Annotation of Admission)” alleging
that as the reply was not under oath, “an implied admission of its requests
arose” as a consequence thereof. The CTA granted MMC’s Request for
Admissions and denied the CIR’s Motion to Admit Reply. The CTA denied
MMC’s claim for refund of input VAT for failure to prove that it paid the
amounts claimed as such for the year 1991, no sales invoices, receipts or
other documents as required having been presented. Upon appeal of MMC to
the Court of Appeals (CA), it reversed the decision of the CTA and granted
MMC’s claim for refund or issuance of tax credit certificates on the ground
that there was no need for MMC to present the photocopies of the purchase
invoices or receipts evidencing the VAT paid and the best evidence rule is
misplaced since this rule does not apply to matters which have been judicially
admitted.

ISSUE: Whether or not MMC adduced sufficient evidence to prove its claim for
refund of its input VAT for taxable year 1991.

RULING: As export sales, the sale of gold to the Central Bank is zero-rated,
hence, no tax is chargeable to it as purchaser. Zero rating is primarily
intended to be enjoyed by the seller – MMC, which charges no output VAT but
can claim a refund of or a tax credit certificate for the input VAT previously
charged to it by suppliers. For a judicial claim for refund to prosper, however,
MMC must not only prove that it is a VAT registered entity and that it filed its
claims within the prescriptive period. It must substantiate the input VAT paid
by purchase invoices or official receipts. It is required that a photocopy of the
purchase invoice or receipt evidencing the value added tax paid shall be
submitted together with the application. This MMC failed to do.

Illustration: Panday Mining, VAT-registered, sold the following precious metals


during the year:

Gold Silver Bronze

Bangko Sentral ng Pilipinas 1,000 grams 500 grams


200 grams
Manila Precious Metal 500 grams 300 grams
100 grams
Baguio Gold Trading 800 grams 200 grams
100 grams

Only the sale to BSP is Zero-rated while all other sales are subject to 12%
VAT.

4. Sales to international shipping or air transporting companies.

Illustration: Amihan Corporation, VAT-registered, is the supplier of the


following to various international airlines

Korean Airlines Japan


Airlines

Sales price of goods supplies Php4,000,000


Php1,000,000

The above sales are considered export sales subject to 0% VAT because
Korean Airlines and Japan Airlines are international transporting companies.

X.

VAT-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.

VAT-Exempt Transactions and OPT-Exempt Transactions is a status of being


free from business tax burden as may be expressed by law, implied
exemption, or as provided by contract or treaty. These transactions are
engaged into VAT-exempt persons or non-VAT registered taxpayers whose
transactions are specifically stated by the NIRAC as exempt transactions,
which are neither subject to 12% ouput VAT nor subject to Other Percentage
Tax (OPT). These transactions are not entitled to claim any credit for the
actual input VAT during the period. VAT-Exempt Transactions and OPT-Exempt
Transactions may register under optional VAT registration.

Illustration: X, a non-VAT registered business has total business transactions


for the period as follows:

1. Purchases of goods, Php560,00 including Php60,000 VAT.

2. Export sales of processed goods, Php600,000

The computation of business tax liability would be:

Export sales Php600,000


Multiplied by business tax rate none
Business tax liability None

Note: The actual input VAT paid could not be claimed as tax credit/refund. In
this case, the input VAT is treated as cost of the goods sold. The sale is also
exempted from Other Percentage Tax.

Zero-Rated Sales and Exempt Sales Compared


Summary Application

TRANSACTION TAXPAYER VAT RATE RELATED


INPUT VAT

Zero-Rated Sales VAT-Registered 0% Allowed to


claim Input VAT
against Output VAT

Exempt Sales Non-Vat Not allowed


to claim
Registered None Input Vat
(Treated as
cost of sales or
operating expense)

VAT-Exempt Persons

A VAT-exempt person is not accountable for the imposition of output VAT on


its sales, either because his transactions are not taxable transactions or he is
specifically exempt from VAT by specific provision of the Tax Code or by
special laws.

A VAT-exempt person may be exempted from levying of output VAT; however,


he may still be required by his VAT-registered supplier to pay the VAT
component on his purchases.

Specifically, the following are VAT-exempt:

1. Persons engaged in non-VAT transactions including:

a. Those whose sales or receipts are exempt under Sec. 109 (v) of the
NIRC

b. Those whose annual gross sales or receipts do not exceed


P1,919,500 and registered as non-VAT (RA 9337)

c. Marginal income earners (RMC No. 7-2014)

d. Non-taxable entity such as a non-stock and non-profit organization


which has no income but collecting monthly dues from the members
subject to VAT. A non-stock, non-profit private organization becomes a
taxable person if it regularly conducts or pursues a commercial or an
economic activity.

Illustration: The following gross receipts are reported by the Cultural Center of
the Philippines during the taxable year:

Gross Receipts:
Sales of tickets of cultural show Php5,000,000
Leasing of spaces to restaurants Php2,000,000
Sales of goods by CPP gifts shops Php1,500,000

The output VAT of the CCP would be:

Gross Receipts:
Sales of tickets of cultural show Exempt
Leasing of spaces to restaurants Php2,000,000
Sales of goods by CPP gifts shops Php1,500,000
Total Php3,500,000
Multiplied by VAT rate 12%
Ouput VAT Php 420,000

The CPP is not subject to VAT on sales of cultural shows bu taxable on leasing
of its real proeprty or sales of goods by its gifts shops.

2. Persons exempt from VAT under Special Laws:

a. Senior citizens and persons with disability

b. CDA-registered cooperatives (RA6938; RA 8424)

c. Enterprise registered with Special Economic Zones or Free Ports in


the Philippines

d. Regional or Area Headquarters established in the Philippines by


multinational corporations (BIR Ruling 176-88)

e. Inventors as certified by the Filipino Inventors Society (FIS) and duly


confirmed by the Screening Committee, shall be exempt from payment
of license fees, permit fees and other business taxes in the
development of their particular inventions. They are exempt from all
kinds of taxes in the first ten (10) years from the date of the first sale
subject to the rules and regulations of the Department of Finance (RA
7459; Rev. Reg. 19-93)

Illustration: Lakapati Sinagtala is a Filipino inventor recognized by the


FIS. If in the first year of commercial sale, Lakapati's invented products
were sold successfully with a total sales of Php100,000,000 how much
is the VAT on sale of Lakapati?

The total sales of Lakapati are exempt from VAT not only for the first
year but for the first ten (10) years of commercial sale.

3. VAT-exempt under Treaty: under the Vienna Convention on Diplomatic


Relations of 1961, diplomatic agents are exempt from all dues and taxes,
personal or real, national, regional or municipal. They are nevertheless
subject to indirect taxes of a kind which are normally incporated in the price
of goods or services.

Illustration: Abba Bathala is a consular officer of Italy assigned at Italy's


Consular Office in the Philippines. During a period, his total purchases
covered by VAT invoice amounted to Php2,000,000 (at invoice amount). How
much is the VAT refund that Abba Bathala can claim?

Abba Bathala could not claim any VAT refund just because he is covered by
the VAT-exempt treaty and he is not a VAT-registered person.

VAT-Exempt Senior Citizen

Senior citizens are now granted 20% discount and also VAT-exempt on their
purchases of goods and services as long as they can personally show a valid
senior citizen ID card.

Persons with Disability

PWDs are now exempted from paying 12% VAT on certain goods and services
aside from 20% regular discount granted tro them. A person with disability
who is at the same time a senior citizen can only claim one 20% discount and
VAT-exempt at the same time

Special Economic Zone Enterprise

Generally, ECOZONE enterprises (PEZA-registered enterprises) pay 5% TAX


ON GROSS INCOME which is in lieu of all national and local taxes. Such
enterprise is considered exempt from all direct and indirect taxes; thus, VAT-
registered person should not add or shift VAT on their sales to such ECOZONE
enterprises.

Since the ouputs of a PEZA-registered entity are intended for


sale/consumption abroad, these are by nature exempted under the
destination principle.

Illustration: TI, a PEZA-registered MNC produces computer parts in the


Philippines. During the quarter, its total production sent and sold abroad
amounted to Php10,000,000. Is the sale subject to VAT?

No. TI is a PEZA-registered entity hence it is VAT-Exempt.

Transaction under VAT-Exempt and OPT-Exempt

1. Export sales of non-VAT-registered business

As a rule, exports sales of VAT-registered persons are subject to 0% VAT


rate; while export sales of non-VAT registered persons are VAT-Exempt
and OPT-exempt.

Illustration: X Manifacturing is sold the following during the taxable


year:

Domestic Sales Export Sales

Sales Php500,000 Php1,000,000


Related creditable input VAT Php20,000 Php30,000
How much is the business tax payable if X Manufaturing is:

1. VAT-registered

If X Manufacturing is VAT-registered, the VAT payable would be:

Output VAT from:

Domestic Sales (Php500,000 x 12%) Php60,000


Export Sales (Php1,000,000 x 0%) Php 0
Total Output VAT Php60,000
Less Related Creditable Input VAT Php50,000
Net VAT Payable Php10,000

2. Non-VAT registered

If X Manufacturing is non-VAT registered, the business tax payable


would be:

OPT from:

Domestic Sales (Php500,000 x 3%) Php15,000


Export Sales - EXEMPT 0
Business Tax Payable Php15,000

2. Agricultural and marine food products in their original state

These are sales or importations of agricultural and marine food


products in their original state, livestock and poulty of a kind which are
generally used for yielding or producing foods for human consumption,
breeding stock and generic material.

As a basic rule, the importation and sale (in all stages of distribution) of
agricultural and marine food products in their original state are both
exempt VAT and OPT.

A common requirement for exemption of the said agricultural and


marine food products is that they must be sold in their original state.

Illustration: Tandang Farm Inc. reported the following sales of farm


outputs during the taxable year:

Eggs Php1,000,000
Chicken Php2,000,000
Hog Php2,000,000
Total Sales Php5,000,000

The total sales of livestock are exempt from VAT and OPT because they
are all agricultural food products in their original state.
Meaning of Original State: meat, fruit, fish, vegetables and other
agricultural and marine food products are 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.

Polishes and/or husked rice, corn, grits, raw sugar cane and molasses,
ordinary salt, and copra shall be considered in their original state.

Copra is considered as an agricultural food product in original state.


Copra is exempt whether it is sold by the primary producer or owner of
the land where it is produced.

Soy bean meal and fish meal, as well as corn grit which are also used
as food for human consumption are considered agricultural food
products in its original state are exempt from VAT.

Advanced Pachaging such as shrink wrapping in plastics, vacuum


packing, tetra-pak and other similar packaging methods or processes
which do not essentially alter the original state of the products.

Imported Meat after undergoing the following process, is still


considered in its original state (BIR Ruling No. 022-99)

1. Thaw and wash frozen meat


2. Cut into estimated 4x4x8 blocks
3. Boil on big kawans with clear water for about 45 minutes
4. Chop boiled meat into cubes (bite size)
5. Pack on a clean polyethylene bags, seal and label.
6. Blast freeze the meat.

Grounding and forming of 100% beef into patties without further


processing and without adding and preservatives thereto does not alter
the beef as an agricultural food product in its original state; hence, the
importation thereof is exempt from VAT.

Malt (used as raw material in brewing beer) is considered an


agricultural product in its original state.

Dried, deboned, smoked, or slated fish; ordinary rock salt; and fresh
alamang with a little salt for sale into bagoong are considered original
state (VAT Ruling 110-98)

A change in the form or composition of the product resulting from


biological process such as that which occurs in transforming fresh eggs
into penoy and balut does not constitute manufacturing for VAT
purposes.
Importation of Century Eggs: the process of making century eggs is a
simple process to prepare or preserve the same for the market. It is
similar to making penoy, balut and salted eggs. Accordingly, the
importation of century eggs is exempt from the 12% VAT imposed
under Section 107(A) of the NIRC (BIR Ruling 025-2000)

Not In Original State: fresh pineapple pulp that has undergone a


sophisticated process, either for use as a non-food agricultural product
or as agricultural product is no longer in its original state.

Marinated Meat and Fish Products No Longer VAT-Exempt: The BIR rules
that milkfish which has been marinated and/or mixed with other
ingredients can no longer be considered in its original state hence
subject to 12% VAT. Citing the case of Davao Gulf Lumber Corporation
vs. CIR, the Commissioner stated that any exemption from payment of
a tax must be clearly stated in the languages of the law; it cannot be
merely implied therefrom.

Lumber Corporation v. CIR


G.R. No. 117359 July 23, 1998
PANGANIBAN, J

Lessons Applicable: tax exemption should be construed strictissimi


juris against the grantee, equity is not a ground for tax exemption

FACTS: Davao Gulf Lumber Corporation, a licensed forest


concessionaire possessing a Timber License Agreement granted by the
Ministry of Natural Resources (Now DENR), purchased from various oil
companies refined and manufactured oils as well as motor and diesel
fuels for its exploitation and operation.

Selling companies paid and passed the specific taxes imposed under
Sec. 153 and 156 of the 1997 NIRC to petitioner as purchaser who in
turn filed before CIR a Claim for Refund for P120, 825 representing 25%
of the specific taxes actually paid based on Insular Lumber Co. v. CTA
and Sec. 5 of RA 1435 and complied with its procedure.

Then, petitioner filed before CA a Petition for Review: Favored petitioner


to a partial refund P2,923 (excluding those that have prescribed) and
based on the rates deemed paid under RA 1435 (NOT higher rates
actually paid under the NIRC)

Insisting that the basis be the higher rate, petitioner elevated the case
to the CTA who affirmed the CA's decision

ISSUE: W/N the basis should be the higher rates prescribed by Sec. 153
and 156 of the 1997 NIRC
RULING: NO. A tax cannot be imposed unless it is supported by the
clear and express language of a statute; On the other hand, once the
tax is unquestionably imposed, a claim of exemption from tax
payments must be clearly shown and based on language in the law too
plain to be mistaken. Section 5, RA 1435 as a tax exemption, must be
construed strictissimi juris against the grantee.

Supported by CIR v. CA and Atlas Co., CIR v. Rio Tuba Nickel Mining
Corp. and Insular Lumber Co. - all cases where purchases was made
BEFORE 1997 NIRC is in effect.

According to an eminent authority on taxation, there is no tax


exemption solely on the ground of equity.

3. Agricultural and marine food production inputs

Fertilizers, seeds, seedlings, fingerlings, fish, prawn, livestock and


poulty feeds, including ingredients whether locally produced or
imported used in the production of finished feeds are exempt from VAT
and OPT.

EXCEPTION: Special feeds for face horses, fighting cocks, aquarium


fish, zoo animals and other animals generally considered as pets are
subject to VAT and OPT.

Fertilizers are exempt from VAT; however, raw materials used in the
formulation of fertilizers are not exempt. Accordingly, diatmomaceous
earth which is used for the formulation of fertilizer is subject to VAT.
(BIR Ruling 217-88)

Illustration: Idiyanale purchased animal manure as fertilizers for his


mango plants and Tikbalang Horse Feeds for his race horses amounting
to Php10,000 and Php50,000 respectively. The vatable inputs would
only be the purchase of Tikbalang Horse Feeds at Php6,000 (Php50,000
x 12%)

*Non-food Agricultural, Marine and Forest Products

The sale of of these products in their original state by the primary


producer or the owner of the land where the same are produced are
now subject to VAT.

Fresh water (being a naturally occuring inorganic substance found in


nature whether solid, liquid, gaseous or any intermediate state) is a
mineral and not an agricultural product. The sale of water, therefore is
TAXABLE.
The sale of cotton and cotton seeds in their original state is not subject
to VAT.

Illustration: Bulak Industries harvested cotton in its fifty hectares farm


in Tacuring. The total sales of cotton products during the year of
harvest amounted to Php10,000,000. The VAT of this sale is
Php1,2000,000.

Note: The previous tax exemption under Section 109(a) of NIRC


referring to sale of non-food agricultural products; marine and forest
products in their original state by the primary producer of the owner of
the land where the same are produced, and Section 109(b) of the NIRC
referrring to the sale of cotton and cotton seeds in their original state
were deleted by RA 9337, effectively submitting non-food agricultural,
marine and forest products to VAT.

4. Agricultural contract grower's services

Services rendered by agricultural contract growers and milling for other


of palay into rice, corn into grits, and sugar cane into raw sugar cane
are exempt from VAT and OPT.

Agricultural Contract Growers (ACG) are persons producing for others


poultry, livestock or other agricultural and marine food products in
their original state.

The following are usually rendered by ACGs:

a. Toll hatching: receiving eggs from the breeder's farms, sorting,


fumigating, setting, hatching, classifying of day-old broilers, sorting
and delivering to other contract growers

b. Toll processing or toll dressing: receiving of live broilers from


contract growers, weighing, killing, dressing, delivery, cut-ups and
packing for sale.

ACG also includes reforestation contractors pursuant to the


Government Reforestationi Program.

Illustration: Lakan, an ACG, privides the following services to various


farmers with their corresponding service fees received during the year:

Milling of palay into rice Php1,500,000


Milling of corn into grits Php 300,000
Sorting eggs Php 900,000
Dressing and packing live broilers Php1,000,000

Since Lakan is an ACG, its fees received on the above services are
exempt from VAT.

5. Transport of passengers by international carriers

The GROSS RECEIPTS ON TRANSPORT OF PASSENGERS by international


carriers with foreign registry are EXEMPT from VAT.

International air carriers or shipping carriers doing business in the


Philippines on their gross receipts derived from transport of cargo from
the Philippines to another country shall pay a tax equivalent to three
percent (3%) of their QUARTERLY GROSS RECEIPTS. (Sec. 3 RA 10378)

Illustration: Japan Airlines gross receipts on transport of passengers


and cargo from the Philippines are reported as follows:

Gross Receipts - passengers Php50,000,000


Gross Receipts - cargoes Php30,000,000

The gross receipts on transport of passengers are VAT-exempt.

The gross receipts on transport of cargoes are subject to OPT of 3%


(Php900,000)

FOREIGN INTERNATIONAL CARRIERS


Summary Application

Philippines to Other Countries Other Countries to


Philippines
Passengers VAT-Exempt N/A
Cargoes 3%
N/A

6. Importation of supplies by international transports

Importation of fuel, goods, and supplies by persons engaged in


international shipping or air transporting operation are exempt
transactions.

Illustration: Nihon Sea Transport, an international shipping company,


purchased Php1,000,000 fuels and machine oils from Germany for
transport of passenger from the Philippines to Hong Kong.

The said importations of fuels and machine oils from Germany are VAT-
Exempt and OPT-Exempt.

7. Importation of personal and household effects and instruments

Importation of personal and household effects belonging to residents of


the Philippines returning abriad, and non-resident citizens coming to
settle in the Philippines; provided that such goods are exempted from
custom duties under the Tariff and Customs Code of the Philippines are
exempt transactions.

Importations of professional instruments and implements, wearing


apparel, dometic animals and personal household effects (except any
vehicle, vessel, aircraft, machinery, other goods for use in manufacture
and merchandise of any kind in commercial quantity) belonging to
persons coming to settle in the Philippine for their own use and not for
sale are also exempt transactions.

Illustration: Anagolay, a balikbayan, brought with him the following


personal, household and instruments with their corresponding values:

Clothing Php 200,000


Other personal household effects Php 300,000
Car for personal use Php1,000,000

Assume the car has 20% excise tax and the duty tax is Php100,000,
how much input VAT of the above mentioned personal importation?

Value of Car Php1,000,000


Excise tax (Php1,000,000 x 20%) Php
200,000
Duty tax Php 100,000
Total landed cost Php1,300,000
Multiplied by VAT rate 12%
Input VAT Php 156,000

The clothing and other personal household effects are exempt from VAT
and OPT.

8. Medical services, except professional services

Medical, dental, hospital and veterinary services are VAT-exempt.


Hospital, lab services, and medicines used for in-patients in performing
medical procedures by a hospital's special units (e.g. operating and
delivery rooms) are VAT-exempt.

The VAT-exemptiondoes not cover the following medical services:

a. Services rendered by health maintenance organizations

COMMISSIONER OF INTERNAL REVENUE v. PHILIPPINE HEALTH


CARE PROVIDERS, INC. G.R. No. 168129. April 24, 2007

FACTS: On 1987, CIR issued VAT Ruling No. 231-88 stating that
Philhealth, as a provider of medical services, is exempt from the
VAT coverage. When RA 8424 or the new Tax Code was
implemented it adopted the provisions of VAT and E-VAT. On
1999, the BIR sent Philhealth an assessment notice for deficiency
VAT and documentary stamp taxes for taxable years 1996 and
1997. After CIR did not act on it, Philhealth filed a petition for
review with the CTA. The CTA withdrew the VAT assessment. The
CIR then filed an appeal with the CA which was denied.

ISSUES: Whether Philhealth is subject to VAT.

Whether VAT Ruling No. 231-88 exempting Philhealth from


payment of VAT has retroactive application.

RULING: YES. Section 103 of the NIRC exempts taxpayers


engaged in the performance of medical, dental, hospital, and
veterinary services from VAT. But, in Philhealth's letter
requesting of its VAT-exempt status, it was held that it showed
Philhealth provides medical service only between their members
and their accredited hospitals, that it only provides for the
provision of pre-need health care services, it contracts the
services of medical practitioners and establishments for their
members in the delivery of health services.

Thus, Philhealth does not fall under the exemptions provided in


Section 103, but merely arranges for such, making Philhealth not
VAT-exempt. YES. Generally, the NIRC has no retroactive
application except when: where the taxpayer deliberately
misstates or omits material facts from his return or in any
document required of him by the Bureau of Internal Revenue;
where the facts subsequently gathered by the Bureau of Internal
Revenue are materially different from the facts on which the
ruling is based, or where the taxpayer acted in bad faith.

The Court held that Philhealth acted in good faith. The term
health maintenance organization was first recorded in the
Philippine statute books in 1995. It is apparent that when VAT
Ruling No. 231-88 was issued in Philhealth's favor, the term
health maintenance organization was unknown and had no
significance for taxation purposes. Philhealth, therefore, believed
in good faith that it was VAT exempt for the taxable years 1996
and 1997 on the basis of VAT Ruling No. 231-88. The rule is that
the BIR rulings have no retroactive effect where a grossly unfair
deal would result to the prejudice of the taxpayer.

b. Services rendered by medical professionals engaged in the


practiced of their profession who are either VAT-registered or
VAT-registrable.

c. Sale of drugs and medicine by hospital pharmacy or drug store


not included in the hospital bill. (CTA Case No. 5068)

Illustration: San Lorenzo Ruiz Hospital reported the following


medical bills of Macario Lakandula before VAT:

Room Accommodation Php500,000


Medicine used in operation and dialysis Php400,000
Lab Services Php600,000
Operating Services Php300,000
Doctor's Professional Fees, VAT-visiting specialist
Php800,000
Total medical bills Php2,600,000

How much is the output VAT?

Output VAT will only be applied to the doctor's fee and VAT-
visiting specialist hence Php800,000 x 12% = Php96,000

9. Employee's services

Compensation income received by individuals derived from an EE-ER is


exempt from VAT and OPT. Additonal compensation in the form of
commission income received by an employee from his employer is not
subject to VAT.

Illustration: Panday is employed as a faculty member of SALIMBAL. He


receives Php25,000 monthly salary as an instructor and Php3,000
honorarium asa Department Head. The compensation income received
by Panday is not subject to VAT.

10. Inventor's sales of invented products

Shall be EXEMPT from payment of license fees, permit fees, and other
business taxes in the development of their particular inventions. They
are exempt from all kinds of taxes in the first ten years from the date of
the first sale subject to the rules and regulations of the Department of
Finance.

Illustration: Tony Stark invented Binarily Augmented Retro-Framing


(B.A.R.F), an implant located on a pair of glasses that has the ability to
connect to the user’s hippocampus, a part of the brain that is believed
to be the center of all emotion and memory and also allows a user to
alter the traumatic memory and then re-experience it. In its first year,
the total sales of B.A.R.F amounted to Php5,000,000. Tony Stark is
granted tax-exemption by law for the first ten years.

11. Books, newspapers, magazines, etc.

The sale, importation, printing or publication of books and any


newspaper, magazine, review, or bulletin which:

a. Appear at regular intervals


b. with fixed prices for subsciption and sale
c. which is not devoted principally to the publication of advertisements,
are VAT and OPT-exempt.

Bindery services rendered by VAT-registered company for another


entity engaged in VAT-exempt book printing, commercial printing jobs
like the printing of calling cards, office forms, labels, passbooks, et., are
subject to VAT.

Illustration: NB Publishers regularly published the following during


themonth with their corresponding costs of production:

Balita (daily newspaper) Php10,000,000


College textbooks and references Php 5,000,000
Advertising magazine Php 4,000,000
Bindery services to VAT-exempt clients Php 2,000,000

How much is the ouput VAT is NB sold the products and services at a
40% gross profit based on selling price?

The ouput VAT would be:

Advertising magazine Php 4,000,000


Bindery services to VAT-exempt clients Php 2,000,000
Total costs for VAT computation Php 6,000,000

Sales (Php6,000,000/60%) Php10,000,000


Multiplied by VAT rate 12%
Output VAT Php 1,200,000

12. Private educational institutions accrediated by the Government

Private educational isntitutions that render educational services duly


accredited by the DEPED, CHED, and TESDA and those rendered by
government educational institutions are exempt from VAT and OPT.

It does not include seminars, in-service trainings, review classes and


other services rendered by persons who are not accredited by the
DEPED, CHED or TESDA.
The input taxes charged by the suppliers of educationsl institutions
CANNOT BE USED AS TAX CREDIT. Educational institutions are not
among the exempt entities that have the option to register for VAT
purposes (VAT Ruling 39-88)

Importation of braille educational kits by Resources for the Blind that


was donated by a German firm for the empowerment of the
educational status of blind children es exempt from VAt. (BIR Ruling
057-93)

Illustration: Mayari is the owner of Sansinukob School of Sciences


(SSS), a CHED accredited college and Biringan Review Center (BRC),
not accredited review center. The revenues and expenses of the school
and the review center are as follows:

SSS BRC

Revenue Php10,000,000 Php5,000,000


Expenses Php 3,000,000 Php2,000,000
Net Income Php 7,000,000 Php3,000,000

Ouput VAT is Php600,000 (Php5,000,000 x 12%)

13. Regional or area HQ

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 are VAT-Exempt

14. Transactions under international agreement or special laws

Transactions which are exempt under international agreements to


which the Philippines is a signatory or under special laws, except those
under PD 529 (Petroleum Exploration Concessionaires under Petroluem
Act of 1949)

Exempt entitites/persons convered by international agreements or


special law may include the following:

a, Minimum income earners


b. Senior citizens
c. Inventors
d. CDA-registered cooperatives
e. PAGCOR
f. ADB
g.Regional and Area HQ by MNCs
h. Embassies of foreign country (Art. 23, Vienna Convention on
Diplomatic Relations)
i. PEZA-Registered enterprises (RA 7227; RA 7916)
j. Philippine National Red Cross (RA 10530)

15. Sales of duly registered cooperatives

Sales or receipts of cooperatives that are duly registered with the


cooperative development Authority (CDA) are exempt from VAT and
OPT

a. Sales by agricultural cooperatives in good standing with the


CDA 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.

b. Gross receipt from lending activities by credit or multip-


purpose copoeratives in good standing with the CDA; provided,
that the share capital contribution of each member does not
exceed Php15,000 and regardless of the aggregate capital and
net surplus ratable distributed among the members.

As stated by Revenue Regulations 20-2011, duly registered


cooperatives dealing/transacting business with members only shall be
exempt from paying the following taxes for which they are directly
liable:

a. Income tax
b. VAT
c. 3% Percentage Tax
d. Donor's tax on donation duly accredited charitable research
and educational institutions, and re-investment to socio-
economic projects within the area of operation of the
cooperatives
e. Excise tax, Doc Stamp tax,
f. Annual ragistration fee of Php500

16. Sale of low-cost and socialized housing

Sale of real properties not subject to business taxes:

a. Sale of Capital Asset: not primarily held for sale to customers


or held for lease in the ordinary course of trade or business
b. Sale of Utilized for Low-Cost Housing: housing projects
intended for homeless low-income family beneficiaries. The
seller-realtor must be registered and licensed by the Housing and
Land Use Regulatory Board under BP Blg. 220, PD 957 or any
other similaw law, wherein the unit selling price is within the
selling price ceiling per unit of Php750,000 under RA 7279,
otherwise know as the Urban Development and Housing Act of
1992 and other laws such as RA 7835 and RA 8763

c. Sale of Utilized for Socialized Housing

These housing programs and projects shall cover houses and lots
or home lots only undertaken by the government or the private
sector for underprivilieged and homeless citizens. These shall
also include sites and services development, long-term
financing, liberated terms or interest payments, and such other
benefits in accordance with the provisions of RA 7229

d. Sale of Residential Lot valued at P1,919,500 and below

e. Residential house and lot and other residential dwellings


valued at P3,199,200 and below where the instrument of sale or
transfer or disposition was executed on or after November 1,
2005 (as amended by Rev. Reg. No. 16-2011)

Illustration: Assume the following sales of real proeprty made during


the year by Jessica Walters, a real property dealer:

Sale of family home (Jessica's capital asset) Php5,000,000


Sale of residential house and lot Php3,000,000
Sale of residential lot Php1,800,000

All of the above sales of real proeprty are exempt from WAT. The family
home having a sales price of Php5,000,000 is not covered by business
tax because the property is classified as capital asset. The sales of real
proeprty other than sale of family home, are not also covered with
business tax because they are within the exemption threshold.

SALE OF EXEMPT REAL PROPERTY


Summary Application

Real Property Sold Threshold Sales Price


Business Tax
Casual Sale (Capital Asset) Not Applicable
None
Regular Sales (Ordinary Asset)
Residential Lot P1,919,500 or less
Exempt
Residential House and LotP3,199,200 or less Exempt

17. Lease of low-cost residential units.

Lease of residential units with monthly rental per unit not exceeding
Php12,800 exempt from VAT and OPT.

Illustration: Tom Housing leases 20 units of apartments to various


clients for Php8,000 per apartment per month. In this case, the total
gross receipts from rental of apartments are exempt from business tax.