VAT (July 2011)

Value Added Tax (VAT)July 16, 2011 Page 1

Value Added Tax (VAT)

Presented by SGV & Co.

16 July 2011

Value-Added Tax (VAT)16 July 2011 SL - 1

Nature of VAT and Underlying Laws

VATable Transactions General Concepts

VATable Transactions and their VAT Base

Persons Exempt from VAT

VAT Rates

Withholding Value Added Tax

VAT Payable

Input Taxes

Administrative Requirements

Proposed Changes in VAT Laws

Discussion Outline



Nature of VAT and underlying laws


Applicable Law NIRC of 1997Applicable provisions: Sections 105 to 115, Title IV of NIRC of 1997, as amended by Republic Act (RA) 9337

Section 105. Persons Liable. Any person, who in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code.



VAT Nature and Characteristics

Value added is the value that a producer adds to his raw materials

or purchases (other than labor) before selling the new or improved product or service.

An indirect tax (i.e., levied on goods and services; not on persons, and ultimately paid by consumers in the form of higher prices)

A business and excise tax


VAT Nature and Characteristics

VAT is a tax on consumption levied on the sale, barter, exchange or lease of goods or properties and services in the Philippines and on importation of goods into the Philippines.

The seller is the one statutorily liable for the payment of the tax but the amount of the tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services.

In the case of importations, the importer is liable for the VAT.



VATable Transactions General Concepts


Persons Liable (on whom imposed)

1. Any person who, in the course of trade or business, sells, barters, or exchanges goods or properties

(seller or transferor) leases goods or properties (lessor) renders services (service provider)

2. Imports goods (importer) the person who brings goods into the Philippines, whether or not made in the course of trade or business



In the course of trade or business: the regular conduct or pursuit of a commercial or economic activity, including transactions incidental thereto, by any person regardlessof whether or not the person engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity.

Non resident persons who perform services in the Philippines are deemed to be making sales in the course of trade or business, even if the performance of services is not regular.

Definition of In the course of trade or business (Rule of Regularity)


The term incidental means something necessary, appertaining to, or depending upon another which is termed the principal, something incident to the main purpose. [Davis vs Pine Lumber Co., 273 C.A.2d 218, 77 Cal. Rptr. 825; Magsaysay Lines Inc., et.al. vs Commissioner of Internal Revenue (CTA Case No. 4353 dated April 27, 1992)].

Incidental to the principal business



The BIR revoked BIR Ruling DA-563-2006 dated September 19, 2006 issued to Interadent Zahntechnik Phils., Inc. in connection with the decision of the CTA in CS Garments, Inc. vs. CIR (CTA EB Case No. 287).

In said ruling, the BIR ruled that the sale of motor vehicle to officers and executives by a company engaged in the manufacturing and export of custom-made dental products is not subject to VAT since the sale of company cars in not made in the course of trade or business, not being made regularly or even incidental to the main business activity of the company.

RMC No. 15-2011 on Revocation of BIR Ruling DA-563-2006 dated September 19, 2006


(contd):

In the CTA Case, it was held that the sale of motor vehicles to the general managers is subject to VAT, for being a transaction incidental to the main business activity of the company, which is the manufacture of garments for sale abroad, since the said vehicle was purchased and used in the furtherance of the companys business.

In addition, it was noted that once an activity has been identified as a business, any sale made while carrying it on is likely to be made in the course or furtherance of business. Thus, a sale in the course or furtherance of business includes: (1) the disposition of the assets and liabilities of a business, (2) the disposition of a business as a going concern; and (3) anything done in connection with the termination or intended termination of a business.

RMC No. 15-2011 on Revocation of BIR Ruling DA-563-2006 dated September 19, 2006



Sale of Goods: Gross selling price or gross value in money of the goods or properties sold, bartered, [Section 106 (A), Tax Code] or exchanged or deemed sold in the Philippines.

Importation of Goods: Total value used by the Bureau of Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any, and other charges, such tax to be paid by the importer prior to the release of such goods from customs custody. Provided, that where the customs duties are determined on the basis of the quantity or volume of the goods, the value-added tax shall be based on the landed cost plus excise taxes, if any. [Section 107(A), Tax Code]

Sale of Services/Use of properties: Gross receipts derived from the sale or exchange of services, including the use or lease of properties. [Section 108(A), Tax Code]

Tax Base General Rules


RR No. 16-05 - Computation of Output Tax: The amount of tax shall be shown as a separate item in the

invoice or receipt. In all cases where the basis for computing the output tax is

either the gross selling price or the gross receipts, but the amount of VAT is erroneously billed in the invoice, the total invoice amount shall be presumed to be comprised of the gross selling price/gross receipts plus the correct amount of VAT.

Hence, the output tax shall be computed by multiplying the total invoice amount by a fraction using the rate of VAT as numerator and one hundred percent (100%) plus rate of VAT as the denominator.

Accordingly, the input tax that can be claimed by the buyer is the corrected amount of VAT computed in accordance with this formula.

Tax Base General Rules



VATable Transactions and their VAT Base


VAT is imposed and collected on: Every sale, barter or exchange, or Transactions deemed sale

Of taxable goods or properties.Good or Properties: all tangible and intangible objects

which are capable of pecuniary estimation.

VAT on Sale of Goods or Properties



VAT base = the gross selling price or gross value in money of the goods or properties sold, bartered, or exchanged.

Gross selling price means 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 VAT.

Gross selling price shall include:

1. Charges for packaging, delivery & insurance

2. Excise taxes if goods are subject to excise tax

Tax Base Sale of Goods


Allowable deductions from gross selling price Sales Returns and Allowances - deduct from gross sales or

receipts in the month or quarter in which a refund or credit is made for sales previously recorded as taxable sales.

Sales Discount - may only be deducted from gross sales or receipts within the same month/quarter it was given provided:

a. It is determined and granted at the time of sale b. The discount is expressly indicated in the invoice c. Amount thereof should form part of gross sales duly

recorded in the booksd. The granting of the discount does not depend on the

happening of a future event.

Tax Base Sale of Goods



Output TaxFor sale of goods, the VAT shall be based on gross sales. Thus, the following entries may be followed:

a. At the time of billing/sale

Dr Accounts Receivable xxxCr Sales xxx

Output Tax xxx

Journal Entries Output Tax


b. Upon collection of receivable

Dr Cash xxxCr Accounts Receivable xxx

c. Sales returns

Dr Sales Returns and Allowances xxxOutput Tax xxxCr Cash/Accounts Receivable xxx

Journal Entries Output Tax



Includes: The right or the privilege to use a patent, copyright, design

or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right

The right or the privilege to use any industrial, commercial or scientific equipment

The right or the privilege to use motion picture films, films, tapes and discs

Radio, television, satellite transmission and cable television time

Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business

Sale of Goods or Properties


Sale of real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business of the seller shall be subject to VAT

Real estate dealer includes any person engaged in the business of buying, developing, selling, exchanging real properties as principal and holding himself out as a full or part-time dealer in real estate.

Sale of residential lot with gross selling price exceeding P1.5 million, residential house and lot or other residential dwellings with gross selling price exceeding P2.5 million, where the instrument of sale (whether the instrument is nominated as a deed of absolute sale, deed of conditional sale, or otherwise) is executed on or after Nov. 1, 2005 shall be subject to 10% VAT, and starting Feb. 1, 2006 to 12% output VAT.

Tax Base Sale of Real Properties



Sale of real property on installment plan

Means the sale of real property by a real estate dealer, the initial payments of which in the year of sale do not exceed 25% of the gross selling price.

Real estate dealers shall be subject to VAT on installment payments, including interest and penalties, actually and/or constructively received by seller.

Installment sale of residential house and lot or other residential dwellings with gross selling price exceeding P1 million, where the instrument of sale (whether the instrument is nominated as a deed of absolute sale, deed of conditional sale, or otherwise) was executed prior to November 1, 2005, shall be subject to 10% output VAT.



Sale of real property on installment plan In case of installment sale, the seller shall be subject to output

VAT on the installment payments received, including the interests and penalties for late payment, actually and/or constructively received, subject to the provisions of Sec. 4.106-4* of RR 16-2005 as amended.

Correspondingly, the buyer of the property can claim the input tax in the same period that the seller recognized the output tax.

Installment payments, including interests and penalties, actually and/or constructively received starting February 1, 2006 shall be subject to twelve percent (12%) output VAT.

* Section 4.106-4 refers to the definition of gross selling price.




Sale of real property by a real estate dealer on a deferred payment basis not on the installment plan

Means sale of real property, the initial payments of which in the year of sale exceed 25% of the gross selling price

Treat as cash sales which makes the entire selling price taxable in the month of sale.



Initial payments means

Payment or payments which the seller receives before or upon execution of the instrument of sale and payments which he expects or is scheduled to receive in cash or property (other than evidence of indebtedness of the purchaser) during the taxable year when the sale or disposition of the real property was made.

It covers any downpayment made and includes all payments actually or constructively received during the year of sale, the aggregate of which determines the limit set by law.

Exclude amount of mortgage on the real property sold except when such mortgage exceeds the cost or other basis of the property to the seller, in which case, the excess shall be considered part of the initial payments.

Exclude notes or other evidence of indebtedness issued by the purchaser to the seller at the time of the sale.




In the case of sale of real properties on a deferred-payment basis not on the installment plan, the transaction shall be treated as cash sale which makes the entire selling price taxable in the month of sale. Output tax shall be recognized by the seller and input tax shall accrue to the buyer at the time of the execution of the instrument of sale.

Payments subsequent to "initial payments" shall no longer be subject to output VAT, in the case of sale on a deferred payment basis.

Pre-selling of real estate properties by real estate dealers shall be subject to VAT in accordance with the rules prescribed above.



Transmission of property to a trustee Not subject to VAT if the property is to be merely held in trust

for the trustor and/or beneficiary. However, 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 pursuant to Section 4.106-7(a)(1) of these Regulations.

The transfer is a completed gift if the transferor divests himself absolutely of control over the property, i.e., irrevocable transfer of corpus and/or irrevocable designation of beneficiary.




Gross Selling Price Consideration stated in the sales document or the fair market

value, whichever is higher. If the VAT is not billed separately in the document of sale, the

selling price or the consideration stated therein shall be deemed to be inclusive of VAT.

FMV shall mean the higher of: FMV determined by Commissioner (zonal value) FMV shown in schedule of values of the Provincial and

City Assessors (real property tax declaration). In the absence of zonal value, gross selling price refers to the

market value shown in the latest real property tax declaration or the consideration, whichever is higher.



If gross selling price is based on zonal value or market value of property, the zonal or market value shall be deemed exclusive of VAT.

Thus, the zonal value/market value, net of the output VAT, should still be higher than the consideration in the document of sale, exclusive of the VAT.




RR 4-2007


If zonal value/fair market value > consideration/selling price (exclusive of the VAT):

* Appearing in the Contract to Sell / Contract of Sale.

** Zonal Value or FMV at time of execution of Contact to Sell / Contract of Sale at the inception of the Contract.

VAT = x Zonal value or FMV** x 12%Actual Collection of the Consideration (exclusive of the VAT)

Agreed consideration* (exclusive of the VAT)



RR 4-2007 (contd)


Since output VAT (based on the market value of the property) >output VAT (based on consideration/selling price in the sales document, exclusive of the VAT), input VAT will be:

Input VAT = Separately billed output VAT in the sales document issued by the seller

Thus, the output VAT which is based on the market value must be:

billed separately by the seller in the sales document with specific mention that the VAT billed separately is

based on the market value of the property.




Case 1:

Question: What should the VAT base be?

VAT base: 6,000,000

Sale of Real Properties

Selling price in the sales document (exclusive of VAT)

P4,000,000

Zonal value 5,000,000Market value in the latest RPT declaration

6,000,000


Case 2:

Question: What should the VAT base be?VAT base should be:

Note: Selling price did not show VAT separately. So deemed inclusive of VAT.

Sale of Real Properties

Selling price in the sales document

P10,000,000

Zonal value 8,000,000Market value in the latest RPT declaration

6,000,000

1.128,928,571 (highest amount)

10,000,000=



In General:

VAT is imposed on goods brought into the Philippines, whether for use in business or not.

The tax is based on the total value used by the Bureau of Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any, and other charges, such as postage, commission, and similar charges, prior to the release of the goods from customs custody.

In case the valuation used by the BOC in computing customs duties is based on volume or quantity of the imported goods, the landed cost shall be the basis for computing VAT.

VAT on Importations


In General:

Landed cost consists of the invoice amount, customs duties, freight, insurance and other charges. If the goods imported are subject to excise tax, the excise tax shall form part of the tax base.

The same rule applies to technical importation of goods sold by a person located in a Special Economic Zone (PEZA, Subic Special Economic Zone, etc.) to a customer in a customs territory.

No VAT shall be collected on importation of goods which are specifically exempted under Sec. 109 (1) of the Tax Code

The VAT on importation shall be paid by the importer prior to the release of such goods from customs custody.

VAT on Importations



Transfer of Goods by Tax-exempt Persons:

In the case of goods imported into the Philippines by VAT-exempt persons, entities, or agencies which are subsequently sold, transferred or exchanged in the Philippines to non-exempt persons or entities, the latter shall be considered the importers thereof, and shall be liable for the VAT due on such importation. The tax due on such importation shall constitute a lien on the goods, superior to all charges/liens, irrespective of the possessor of said goods.

VAT on Subsequent Sale of Tax-Free Importations


Services: the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration whether in kind or in cash.

Sale or Exchange of Services



VAT base = Gross Receipts

Gross receipts refers to

Total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty,

Including the amount charged for materials supplied with the services and

Deposits applied as payments for services rendered and

Advance payments actually or constructively received during the taxable period

For the services performed or to be performed for another person,

Excluding VAT

Tax Base Sale of Services


"Gross receipts" refers to Excludes:

1) amounts earmarked for payment to unrelated third (3rd) party, or

2) amounts received as reimbursement for advance payment on behalf of another which do not redound to the benefit of the payor.




A payment is a payment to a third (3rd) party if: the same is made to settle an obligation of another person,

e.g., customer or client, to the said third party, which obligation is evidenced by the sales invoice/official

receipt issued by said third party to the obligor/debtor (e.g., customer or client of the payor of the obligation).

An advance payment is an advance payment on behalf of another if: the same is paid to a third (3rd) party for a present or future obligation of said another party which obligation is evidenced by a sales invoice/official

receipt issued by the obligee/creditor to the obligor/debtor (i.e., the aforementioned "another party") for the sale of goods or services by the former to the latter.



Unrelated party' shall not include: taxpayer's employees, partners, affiliates (parent, subsidiary

and other related companies), relatives by consanguinity or affinity within the fourth (4th)

civil degree, and trust fund where the taxpayer is the trustor, trustee or

beneficiary (even if covered by an agreement to the contrary.)




"Constructive receipt" occurs when the money consideration or its equivalent is placed at the control of the person who rendered the service without restrictions by the payor.

Examples:

a. deposit in banks which are made available to the seller of services without restrictions;

b. issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof by the seller as payment for services rendered; and

c. transfer of the amounts retained by the contractee to the account of the contractor.

Constructive Receipt


The BIR, in VAT Ruling No. 186-90 dated August 17, 1990, suggested the following entries:

a. At the time of billing/salesDr Accounts Receivable xxx

Cr Income xxx Deferred Output Tax xxx

b. Upon collection of receivable and to record output VAT

Dr Cash xxx Deferred Output Tax xxxCr. Accounts Receivable xxx

Output Tax xxx

Journal Entries Sale of Services



Includes services performed or rendered by [Section 108(A), Tax Code] :

a) construction and service contractors

b) stock, real estate, commercial, customs and immigration brokers (Amended by RA No. 9010, effective January 1, 2003 and included in RA 9337)

c) lessors of property, whether personal or real



Real estate lessor includes any person engaged in the business of leasing or subleasing real property.

Lease of property shall be subject to VAT regardless of the place where the contract of lease or licensing agreement was executed if the property leased or used is located in the Philippines.

The licensee shall be responsible for the payment of VAT on such rentals and/or royalties in behalf of the non-resident foreign corporation or owner.

Non-resident lessor/owner refers to any person, natural or juridical, an alien, or a citizen who establishes to the satisfaction of the Commissioner of Internal Revenue the fact of his physical presence abroad with a definite intention to reside therein, and who owns/leases properties, real or personal, whether tangible or intangible, located in the Philippines.

VAT on Lessors of Property



VAT base = gross receipts from the lease of properties In a lease contract, the advance payment by the lessee

may be:a) A loan to the lessor from the lessee, orb) An option money for the property, orc) A security deposit to insure the faithful performance of

certain obligations of the lessee to the lessor, ord) Pre-paid rental

Tax Base Lease of Properties


If the advance payment is actually a loan to the lessor, or an option money for the property, or a security deposit for the faithful performance of certain obligations of the lessee, such advance payment is not subject to VAT.

Security deposits in lease contracts are subject to VAT when applied to rental at the time of its application.

If the advance payment constitutes a prepaid rental, then such payment is taxable to the lessor in the month when received, irrespective of the accounting method employed by the lessor.

Tax Base Lease of Properties



Illustration:

What is the VAT Base? P110,000

Consisting of P100,000 gross receipts and P10,000 prepaid rental

Lease of Properties

Gross receipts from the lease of real properties

P100,000

Security Deposits 10,000Prepaid rental 10,000


Includes services performed or rendered by [Section 108(A), Tax Code]: (contd)d) warehousing servicese) lessors or distributors of cinematographic filmsf) persons engaged in milling, processing, manufacturing or

repacking goods for othersg) proprietors, operators, or keepers of hotels, motels,

resthouses, pension houses, inns, resorts, theaters and movie houses

h) proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers

i) dealers in securitiesj) lending investors




Includes services performed or rendered by [Section 108(A), Tax Code]: (contd)k) transportation contractors on their transport of goods or

cargoes, including persons who transport goods or cargoesfor hire and other domestic common carriers by land relative to their transport of goods or cargoes

l) Domestic common carriers by air and sea for their transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines

Note: The above items were amended by RA No. 9337. Previously, only the following were subject to VAT: (a) operators of taxi cabs (b) utility cars for rent or hire driven by the lessees (rent a car companies), tourist buses and (c) other common carriers by land, air and sea relative to their transport of goods or cargoes.



All receipts from service, hire, or operating lease of transportation equipment not subject to the percentage tax on domestic common carriers and keepers of garages imposed under Sec. 117 of the Tax Code shall be subject to VAT.

Common carrier refers to persons, corporations, firms or associations engaged in the business of carrying or transporting passengers or goods or both, by land, water, or air, for compensation, offering their services to the public and shall include transportation contractors.

VAT on Common Carriers



Common carriers by land with respect to their gross receipts from the transport of passengers including operators of taxicabs, utility cars for rent or hire driven by the lessees (rent-a-car companies), and tourist buses used for the transport of passengers shall be subject to the percentage tax imposed under Sec. 117 of the Tax Code, but shall not be liable for VAT.

Note: Previously, under RR No. 7-95, the above provision was stated as: Operators of taxicabs, utility cars for rent or hire driven by lessee, and tourist buses shall be subject to VAT but not to percentage tax imposed under Section 115 of the Code.

VAT on Common Carriers


Includes services performed or rendered by [Section 108(A), Tax Code]: (contd)m) sales of electricity by generation, transmission and/or

distribution companies

Sale or Exchange of ServicesSale or Exchange of Services



RR No. 16-2005

Sale of electricity by generation, transmission, and distribution companies shall be subject to 10% (now 12%) VAT on their gross receipts;

Provided, That sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy sources using technologies such as fuel cells and hydrogen fuels shall be subject to 0% VAT.

VAT on Sale of ElectricityVAT on Sale of Electricity


Gross Receipts for the purpose of computing VAT on the sale of electricity shall refer to the following:

Includes:

a. Total amount charged by generation companies for the sale of electricity and related ancillary services; and/or

b. Total amount charged by transmission companies for transmission of electricity and related ancillary services; and/or

c. Total amount charged by distribution companies and electric cooperatives for distribution and supply of electricity, and related electric service.

Excludes: The universal charge passed on and collected by distribution companies and electric cooperatives.

VAT on Sale of ElectricityVAT on Sale of Electricity



Includes services performed or rendered by [Section 108(A), Tax Code]: (contd)n) franchise grantees of electric utilities, telephone and

telegraph, radio and/or television broadcasting and all other franchise grantees except those under Section 119 of this Code, (Section 119 refers to franchise grantees of radio and/or television broadcasting whose annual gross receipts of the preceding year do not exceed P10 million, and franchise grantees of gas and water utilities).



Services of franchise grantees of telephone and telegraph, radio and/or television broadcasting, toll road operations and all other franchise grantees, except gas and water utilities, shall be subject to VAT in lieu of franchise tax, pursuant to Sec. 20 of RA No. 7716, as amended.

However, franchise grantees of radio and/or television broadcasting whose annual gross receipts of the preceding taxable year do not exceed P10 million shall not be subject to VAT, but to the 3% franchise tax imposed under Sec. 119 of the Tax Code, subject to the optional registration provisions under Sec. 9.236-1(c).

VAT on Franchise GranteesVAT on Franchise Grantees



Franchise grantees of gas and water utilities shall be subject to 2% franchise tax on their gross receipts derived from the business covered by the law granting the franchise pursuant to Sec. 119 of the Tax Code.

Gross receipts of all other franchisees, other than those covered by Sec. 119 of the Tax Code, regardless of how their franchises may have been granted, shall be subject to the 10% VAT (now 12%) imposed under Sec. 108 of the Tax Code. This includes, among others, the Philippine Amusement and Gaming Corporation (PAGCOR) and its licensees or franchisees.

VAT on Franchise GranteesVAT on Franchise Grantees


Includes services performed or rendered by [Section 108(A), Tax Code]: (contd)o) non-life insurance companies (except their crop

insurances) including surety, fidelity, indemnity and bonding companies




Non-life insurance companies including surety, fidelity, indemnity and bonding companies are subject to VAT. They are not liable to the payment of the premium tax under Section 123 of the Code.

"Non-life insurance companies" including surety, fidelity, indemnity and bonding companies, shall include all individuals, partnerships, associations, or corporations, including professional reinsurers defined in Section 280 of PD 612, otherwise known as The Insurance Code of the Philippines, mutual benefit associations and government-owned or controlled corporations, engaging in the business of property insurance, as distinguished from insurance on human lives, health, accident and insurance appertaining thereto or connected therewith, which shall be subject to percentage tax under Sec. 123 of the Tax Code.

Non-Life Insurance CompaniesNon-Life Insurance Companies


The gross receipts on non-life insurance companies shall mean total premiums collected, whether paid in money, notes, credits or any substitute for money.

Non-life insurance premiums are subject to VAT whereas non-life reinsurance premiums are not subject to VAT, the latter being already subjected to VAT upon receipt of the insurance premiums.

Insurance and reinsurance commissions, whether life or non-life, are subject to VAT.

Non-Life Insurance CompaniesNon-Life Insurance Companies



VAT Ruling No. 6-2001 dated February 16, 2001For non-life insurance companies, the computation of VAT on premium should not include DST, fire service tax and local government tax. The BIR shall not consider it a violation of law and regulations for non-life insurance companies if the tax base or the premium on its invoice will be separately indicated to identify the amount of taxes properly pertaining to VAT, DST, fire service tax and local taxes.

VAT on Insurance PremiumsVAT on Insurance Premiums


Pre-need Companies Are corporations registered with the Securities and

Exchange Commission and authorized/licensed to sell or offer for sale pre-need plans, whether a single plan or multi-plan.

They are engaged in business as seller of services providing services to plan holders by managing the funds provided by them and making payments at the time of need or maturity of the contract.

As service providers, the compensation for their services is the premiums or payments received from the plan holders.

Tax base = compensation for their services which is the premiums or payments received from their plan holders.

VAT on Pre-need CompaniesVAT on Pre-need Companies



Includes services performed or rendered by [Section 108(A), Tax Code]: (contd)p) similar services regardless of whether or not the

performance thereof calls for the exercise or use of physical or mental faculties



Effective January 1, 2003, pursuant to R.A. No. 9010 & RR No. 1-2002, as amended by RR No. 3-2003, the following became subject to VAT: persons engaged in the practice of profession or calling by

individuals subject to professional tax under the Local Government Code or R.A. No. 7160 and professional services rendered by general professional partnerships;

actors, actresses, talents, singers and emcees; radio and television broadcasters and choreographers;musical, radio, movie, television and stage directors; professional athletes; customs, real estate, stock, immigration and commercial

brokers;




The list of exemptions under RA No. 9337 (effective Nov. 1, 2005) does not include services rendered by doctors duly registered with PRC and by lawyers duly registered with IBP. These were deleted from the previous list of exemptions.

Thus, services rendered by these professionals are now subject to VAT.

VAT on Doctors and LawyersVAT on Doctors and Lawyers


RMC No. 6-2003 dated January 15, 2003

Profession or calling subject to professional tax under the local government code

refers to profession requiring passage in a government examination before a person can engage in the exercise thereof such as the one which requires license from the PRC or other government agencies, or the practice of law in the Philippines authorized by the Supreme Court.

VAT on ProfessionalsVAT on Professionals



For purposes of RR No. 1-2003, a professional partnership shall be treated as a separate and distinct taxable person from the individual partners composing the partnership.

All gross receipts from sales of services rendered by the partners for and in the name of the partnership shall entirely be taxable against the partnership.

Sales of services made by any of the partners thereof in his personal and individual capacity shall not be attributed to the partnership but shall rather be taxable against such partner in his individual capacity.



Out-of-pocket expenses/advances for clients are not considered professional fees subject to VAT, provided the following conditions are met:

They are mere reimbursements of costs and are chargeable to the client.

The official receipts for the expenses are billed in the name of the client and therefore can be claimed only by the client as an item of deduction.

The partnership advances only the amount for future liquidation by the client.

The collection of out-of-pocket expenses must be recorded as liquidation of advances for and on behalf of clients.




RMC No. 9-2006 dated January 25, 2006

Characteristics of Brokers (and other similar businesses)

Incurs reimbursable expenses and/or advances payments, on behalf of customers, to answer for certain expenses such as arrastre, wharfage, documentation, trucking, handling charges, storage fees, duties and taxes, etc.

In billing Customers for their services, the brokers include in said billing these reimbursable expenses and/or advance payments made.

VAT on Brokers and Others Similarly SituatedVAT on Brokers and Others Similarly Situated


RMC No. 9-2006 dated January 25, 2006 (contd)

These are recorded as RECEIVABLE FOR CASH ADVANCES ON BEHALF OF CUSTOMERS.

However, treatment for tax purposes by the payor (broker) of the advanced payments or reimbursable expenses on behalf of a customer may differ depending on manner of receipting or issuing Receipt for said advanced payments/reimbursable expenses by both the third-party service provider and the broker.




VAT Treatment

If the reimbursable expenses and/or advanced payments for certain expenses (e.g., arrastre, wharfage, documentation, trucking, handling charges, storage fees, duties and taxes, etc.) made by brokers on behalf of their Customers are receipted with the brokers VAT official receipt, the same shall be subject to 12% VAT.

If the said reimbursable expenses and/or advanced payments are lumped/billed together with the brokerage fees in one VAT official receipt issued by the brokers to their Customers, regardless of whether such reimbursable expenses and/or advanced payments have been specifically broken down or itemized in the brokers VAT official receipt, the same shall be subject to 12% VAT.



VAT Treatment (contd)

Any advanced payment for expenses incurred (e.g., transportation, overtime and facilitation fee to facilitate the clearing of goods through customs) for the benefit of brokers shall form part of their gross receipts and shall be subject to 12% VAT even if reimbursed by their Customers.

If, however, the following are met, the reimbursements shall not form part of the gross receipts of the broker and therefore, shall not be subject to VAT on the part of the broker:

Reimbursable expenses and/or advanced payments by the broker on behalf of customers are receipted directly in the name of the Customers by the person performing such service (i.e., third-party service provider);




VAT Treatment (contd)

The subsequent claim by the broker for reimbursement from the customer is covered by the brokers Non-VAT Official Acknowledgment Receipt acknowledging the collection;

The Broker recorded the amount advanced as RECEIVABLE FOR CASH ADVANCES ON BEHALF OF CUSTOMERS with no mention of quantity and description of the services rendered but just the value thereof and the name of the third-party service provider that rendered the service;

Acknowledgment receipt is to be forwarded to the customer together with the attached official receipt issued by the third-party service provider in the name of the customer.



RMC 9-2006 dated January 25, 2006 Reimbursable expenses and/or advanced payments shall not

be subject to VAT on the part of the broker if the following conditions/procedures are complied with:1. The reimbursable expenses and/or advanced payments,

except those incurred for the benefit of the brokers, are receipted separately using NON-VAT Official Acknowledgment Receipts to be issued by the brokers to the Customers upon collection of the reimbursements or advances previously recorded as RECEIVABLE FOR CASH ADVANCES ON BEHALF OF CUSTOMERS, which recording was done upon payment, on behalf of customers, of the advances to the third-party service providers who issued official receipts in the name of the customers and not of the brokers;

Treatment of ReimbursementsTreatment of Reimbursements



RMC 9-2006 dated January 25, 2006 (contd)

2. The third-party service providers to whom the advanced payments or reimbursable expenses of the customers have been paid by the brokers, shall issue receipts in the name of the Customers;

3. The brokers shall record the reimbursable expenses of or the advanced payments on behalf of Customers under the account RECEIVABLE FOR CASH ADVANCES ON BEHALF OF CUSTOMERS

4. For liquidation purposes, the brokers shall attach the original copyof all said official receipts issued by the third-party service providers in the name of the customers to the NON-VAT official acknowledgment receipts of the brokers issued to their Customers upon payment by the latter of the reimbursable expenses.



RMC 9-2006 dated January 25, 2006 (contd) Accordingly, while, in the foregoing scenario, the brokers shall

not be liable for any output tax on the collection of the reimbursable expenses or advanced payments on behalf of their Customers, said Customers, however, may be able to claim input tax for the services of the third-party service providers that are subject to VAT if the same are receipted by the third-party service providers VAT official receipts evidencing the latters reporting of the same for VAT purposes.




Illustration:

X Brokerage Company billed Y Distribution Company in a VAT invoice for the following:

Reimbursable expenses composed of:Arrastre P 100Handling Charges 200Storage fees 300 600

Customs overtime 250Facilitation fees 250Brokerage Fees 1,000Total P 2,100

Question: How much is the amount subject to 12% VAT?

ReimbursementsReimbursements


Case 1:

X Co. issued the following: VAT Statement of Account for the whole amount of P2,100

plus VAT

VAT OR for P2,100 plus VAT, no breakdown between reimbursements and brokers fees.

Answer: Company X VAT base is P2,100. VAT is P252 (P2,100 x 12%)Customer Y Input tax is P252 (P2,100 x 12%)

Why? Because X Company issued a VAT OR for the entire P2,100 plus VAT.




Case 2:

X Co. issued the following: Non-VAT Statement of Account for P2,100 plus VAT

VAT OR for P2,100 plus VAT

Answer: Company X VAT base is P2,100. VAT is P252 (P2,100 x 12%)Customer Y Input tax is P252 (P2,100 x 12%)

Why? It is the VAT OR that matters since this is a sale of service.



Case 3:

X Co. issued the following: Third party VAT ORs in the name of Customer Y for P600

Non-VAT OR for P600

VAT OR for P1,500 (brokerage and other fees) plus VAT.




Case 3: (contd)Answer:

Company X VAT base is P1,500. VAT is P180 (12% x P1,500)

Customer Y Input tax is P252 ([P600 + P1,500] x 12%)

Why? Company X only issued a VAT OR for P1,500 and issued

a non-VAT OR for the 3rd party reimbursements. Customer Y will be able to support the input taxes with:

VAT OR from the broker for P1,500 x 12% or P180

VAT ORs in its name from 3rd party suppliers for P600 x 12% or P72



Case 4:

X Co. provided the following: Third party VAT ORs in the name of Customer Y for the ff:

Arrastre, handling, storage P600 (VAT OR)Facilitation fees 250 (Acknowledgement receipt)

Brokers VAT OR for P1,250 plus VAT




Case 4: (contd)

Answer: Company X VAT base will be P1,500 (include facilitation fees).

Customer Y Input tax is P222 ([P600 + P1,250] x 12%).

Why? For Company X, the facilitation fees are for the benefit of

the broker. This is subject to VAT even if reimbursed. For Customer Y, input taxes claimed will be supported by:

VAT ORs in its name for P600 x 12% or P72 Brokers VAT OR for P1,250 x 12% or P150



Case 5:Co. X issued the following:

VAT OR which shows the following breakdown:Item Amount VAT

Reimbursable expenses:Arrastre P 100 ExemptHandling 200 ExemptStorage 300 Exempt

Customes overtime 250 P 30Facilitation fees 250 30Brokerage fees 1,000 120Total P 2,100 P 180




Case 5: (contd) X Company attached VAT ORs of 3rd party suppliers in the

name of Y for the P600 reimbursable costs consisting of arrastre, handling, storage.



Case 5: (contd)

Answer: (1st view)

Company X

Arguably P2,100 will be subject to VAT. VAT is P2,100 x 12% = P252

Why?

RMC 9-2006 requires the issuance of a non-VAT acknowledgement OR by the broker for the reimbursements. In this example, the broker issued a VAT OR for the P2,100 plus VAT.




Case 5: (contd)Answer: (2nd view)

P180 VAT (12% x P1,500)Why?While RMC 9-2006 requires the issuance of a non-VAT

Acknowledgement Receipt, Sec. 4.113-1(B)(2)(d) of RR 16-2005 and Questions 14 & 15 of RMC 62-2005 provides that if the sale involves goods, properties or services some of which are subject to and some of which are VAT zero-rated or VAT-exempt, the invoice or receipt shall clearly indicate the break-down of the sale price between its taxable, exempt and zero-rated components, and the calculation of the VAT on each portion of the sale shall be shown on the invoice or receipt.



Case 5: (contd) The seller also has the option to issue separate invoices or

receipts for the taxable, exempt, and zero-rated components of the sale.

In light of RMC 9-2006, however, a BIR ruling may need to be secured if the 2nd View will be adopted.




The phrase sale or exchange of services shall 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 or the use of, or the right to use 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 non-resident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person;

6. The supply of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme;

7. The lease of motion picture films, films, tapes, and discs; and 8. The lease or the use of, or the right to use, radio, television,

satellite transmission and cable television time.The lease of properties shall be subject to VAT irrespective of the place where the contract of lease or licensing agreement was executed if the property is leased or used in the Philippines.




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;e.g., Withdrawal of goods from business for personal use of a VAT-registered person

Transaction Deemed Sale


2. Distribution or transfer to:a) Shareholders or investors as share in the profits of the

VAT-registered person Property dividends which constitute stocks in trade

or properties primarily held for sale or lease declared out of retained earnings on or after January 1, 1996 and distributed by the company to its shareholders shall be subject to VAT based on the zonal value or fair market value at the time of distribution, whichever is applicable.

b) Creditors in payment of debt or obligation.




3. Consignment of goods if actual sale is not made within 60 days following the date such goods were consigned; Consigned goods returned by the consignee within the 60-day

period are not deemed sold.4. Retirement from or cessation of business, with respect to all goods

on hand, whether capital goods, stock-in-trade, supplies or materials as of the date of such retirement or cessation, whether or not the business is continued by the new owner or successor. The following circumstances shall, among others, give rise to transactions deemed sale: Change of ownership of the business. There is a change in the

ownership of the business when a single proprietorship incorporates; or the proprietor of a single proprietorship sells his entire business.

Dissolution of a partnership and creation of a new partnership which takes over the business.



RR No. 16-2005

Transmission of property to a trustee shall not be subject to VAT if the property is to be merely held in trust for the trustorand/or beneficiary. (RR 7-95)

However, 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 pursuant to Sec.4.106-7(a)(1) of these Regulations.

The transfer is a completed gift if the transferor divests himself absolutely of control over the property, i.e., irrevocable transfer of corpus and/or irrevocable designation of beneficiary.




The VAT 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:

1. Change of business activity from VAT taxable status to VAT-exempt status.

E.g., 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;

2. Approval of a request for cancellation of registration due to reversion to exempt status.

Changes in or cessation of VAT status


The VAT 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 (contd):

3. Approval or a request for cancellation of registration due to a desire to revert to exempt status after the lapse of 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 (as amended by RA 9337)

Sec. 109 (2): A VAT-registered person may elect that Subsection (1) not apply to its sale of goods or properties or services. Provided, That an election made under this Section shall be irrevocable for a period of 3 years from the quarter the election was made. (Subsection (1) enumerates transactions that are exempt from VAT).




The VAT 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 (contd):

4. 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 but who failed to exceed this amount during the first twelve months of operation.



The VAT shall not apply to goods or properties existing as of the occurrence of the following:1. 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 of the corporation.

(RR No. 10-2011, amending RR No. 16-05)




The VAT shall not apply to goods or properties existing as of the occurrence of the following: (contd)

Exchange of property by corporation acquiring control for the shares of stocks of the target corporation is subject to VAT. However, the exchange of goods or properties including the real estate properties used in the 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.

(RR No. 10-2011, amending RR No. 16-05)



Illustration:

Abel Corp. (transferee) is a merchandising concern and has an inventory of goods for sale amounting to Php 1,000,000. Nel Corp. (transferor), a real estate developer, exchanged its real properties for shares of stocks of Abel Corp. resulting in the acquisition of corporate control.

Tax Implications:

The inventory of goods owned by Abel Corp. is not subject to output tax despite the change in corporate control because the same corporation still owns them.

The exchange of real properties held for sale or lease by NelCorp., for the shares of stocks of Abel Corp., whether resulting in corporate control or not, is subject to VAT.




The VAT shall not apply to goods or properties existing as of the occurrence of the following (contd):

2. Change in the trade name or corporate name of the business

3. 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.



Transactions deemed sale: The Commissioner of Internal Revenue shall determine the

appropriate tax base in deemed sale transactions or where the gross selling price is unreasonably lower than the actual market value.

The gross selling price is unreasonably lower than the actual market value if it is lower by more than 30% of the actual market value of the same goods of the same quantity and quality sold in the immediate locality on or nearest the date of sale.

Nonetheless, if one of the parties in the transaction is the government as defined and contemplated under the Administrative Code, the output VAT on the transaction shall be based on the actual selling price.

Tax Base Deemed Sales



For transactions deemed sale, the output tax shall be based on the market value of the goods deemed sold as of the time of the occurrence of the transactions enumerated in Sec. 4.106-7(a)(1),(2), and (3).

In the case of a sale where the gross selling price is unreasonably lower than the fair market value, the actual market value shall be the tax base.

For retirement or cessation of business, tax base shall be: acquisition cost or the current market price of the goods or

properties, whichever is lower.

Tax Base Deemed Sales





1. Those engaged in transactions exempt from VAT2. Those who entered into transactions incidental to VAT-exempt

activities 3. Those who entered into isolated transactions



In General

VAT exempt transactions refer to the sale of goods or properties and/or services and the use or lease of properties that is not subject to VAT (output tax) and the seller is not allowed any tax credit of VAT (input tax) on purchases.

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.

Exempt Transactions



a. Sale or importation of agricultural and marine food products in their original state, livestock and poultry of a kind generally used as, or yielding or producing foods for human consumption; and breeding stock and genetic materials therefor.

b. 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); Specialty feeds" refer to non-agricultural feeds or food for race horses, fighting cocks, aquarium fish, zoo animals and other animals generally considered as pets.

Exempt Transactions


RMC No. 97-2010 dated December 21, 2010

There are agricultural contract growers which offer toll processing/toll manufacturing (i.e., weighing, killing, dressing, packaging, etc.) as a packaged service to its contract growing.

Toll services are considered VAT-exempt transactions only to services from which growing of animals was contracted.

If such an activity is done independent of growing poultry, livestock or other agricultural and marine food products, such activity is subject to VAT because this is a service not covered by agricultural contract growing.

Exempt Transactions



c. Importation of personal and household effects belonging to residents of the Philippines returning from abroad and non-resident 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;

Exempt Transactions


d. 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 of Internal Revenue, that such persons are actually coming to settle in the Philippines and that the change of residence is bona fide;

Exempt Transactions



e. Services subject to percentage tax under Title V of the Tax Code, such as:

1. Sale or lease of goods or properties or the performance of services of non-VAT-registered persons, other than the transactions mentioned in paragraphs (A) to (U) of Section 109(1) of the Tax Code (as amended by RA No. 9337), the gross annual sales and/or receipts of which does not exceed P1.5 million; Provided, That not later than January 31, 2009 and every 3 years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office.

Exempt Transactions


e. Services subject to percentage tax under Title V of the Tax Code, such as (contd):

2. Services rendered by domestic common carriers by land for the transport of passengers and keepers of garages;

3. Services rendered by international air/shipping carriers

4. Services rendered by franchise grantees of radio and/or television broadcasting whose annual gross receipts of the preceding year do not exceed Ten Million Pesos (P10,000,000), and by franchise grantees of gas and water utilities;

5. Services rendered for overseas dispatch, message or conversation originating from the Philippines (Sec. 120)

Exempt Transactions



e. Services subject to percentage tax under Title V of the Tax Code, such as (contd):6. Services rendered by any person, company or corporation

(except purely cooperative companies or associations) doing life insurance business of any sort in the Philippines;

7. Services rendered by fire, marine or miscellaneous insurance agents of foreign insurance companies;

8. Services of proprietors, lessees or operators of cockpits, cabarets, night or day clubs, boxing exhibitions, professional basketball games, Jai-Alai and race tracks; and

9. Receipts on sale, barter or exchange of shares of stock listed and traded through the local stock exchange or through initial public offering.

Exempt Transactions


f. Services by agricultural contract growers and milling for others of palay into rice, corn into grits, and sugar cane into raw sugar;

g. Medical, dental, hospital and veterinary services except those rendered by professionals;

Exempt Transactions

However, sales of drugs to in-patients of hospitals are considered part of hospital services, which are exempt from VAT. (BIR Ruling DA 122-05 dated April 6, 2005)



h. Educational services rendered by private educational institutions duly accredited by Department of Education (DepEd), the Commission on Higher Education (CHED), the Technical Education and Skills Development (TESDA) and those rendered by government educational institutions.

i. Services rendered by individuals pursuant to an employer-employee relationship;

j. Services rendered by regional or area headquarters established in the Philippines by multinational corporations which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region and do not earn or derive income from the Philippines;

Exempt Transactions


k. 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 the Petroleum Act of 1949);

Exempt Transactions



l. Sales by agricultural cooperatives duly registered and in good standing with the Cooperative Development Authority (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;Sale by agricultural cooperatives to non-members can only be exempted from VAT if the producer of the agricultural products sold is the cooperative itself. If the cooperative is not the producer (e.g., trader), then only those sales to its members shall be exempted from VAT;However, the sale or importation of agricultural food products in their original state is exempt from VAT irrespective of the seller and buyer thereof, pursuant to Subsection (a) hereof.

Exempt Transactions


m.Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered and in good standing with the Cooperative Development Authority

n. Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with and in good standing with the CDA: Provided, That the share capital contribution of each member does not exceed P15,000 and regardless of the aggregate capital and net surplus ratably distributed among the members;

Importation by these entities of machineries and equipment, including related spare parts thereof to be used by them, are subject to VAT.

Exempt Transactions



o. Export sales by persons who are not VAT-registered;p. The following sales of real properties:

1. Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business However, even if the real property is not primarily held for sale to customers or held for lease in the ordinary course of trade or business but the same is used in the trade or business of the seller, the sale thereof shall be subject to VAT being a transaction incidental to the taxpayer's main business.*

* Note: This amendment introduced by RR 4-2007 contradicts the provisions of the Tax Code. Hence, there is basis to debate the validity of this qualification.

Exempt Transactions


2. Sale of real properties utilized for low-cost housing as defined by RA No. 7279, otherwise known as the "Urban Development and Housing Act of 1992" and other related laws such as RA 7835 and RA 7863"Low-cost housing" refers to housing projects intended for homeless low-income family beneficiaries, undertaken by the Government or private developers, which may either be a subdivision or a condominium registered and licensed by the Housing and Land Use Regulatory Board/Housing (HLURB) under BP Blg. 220, PD No. 957 or any other similar law, wherein the unit selling price is within the selling price ceiling per unit of P750,000 under RA No. 7279, otherwise known as the "Urban Development and Housing Act of 1992" and other laws, such as RA 7835 and RA 8763.

Exempt Transactions



3. Sale of real properties utilized for socialized housing as defined under RA No. 7279 and other related laws, such as RA No. 7835 and RA No. 8763, wherein the price ceiling per unit is P225,000 or as may from time to time be determined by the HUDCC and the NEDA and other related laws;

Exempt Transactions


4. Sale of residential lot valued at P1.5 million and below, or house & lot and other residential dwellings valued at P2.5 million and below where the instrument of sale/transfer/ disposition was executed on or after July 1, 2005; Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amounts stated herein shall be adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office (NSO); Provided, further, that such adjustment shall be published through revenue regulations to be issued not later than March 31 of each year. (RR No. 16-2005)

Exempt Transactions



q. Lease of residential units with a monthly rental per unit not exceeding P10,000 regardless of the amount of aggregate rentals received by the lessor during the year; Provided, that not later January 31, 2009 and every three (3) years thereafter, the amount of P10,000 shall be adjusted to its present value using the Consumer Price Index, as published by the NSO;The foregoing notwithstanding, lease of residential units where the monthly per unit exceeds P10,000 but the aggregate of such rentals of the lessor during the year do not exceed P1.5 million shall likewise be exempt from VAT. However, the same shall be subjected to 3% percentage tax.

Exempt Transactions


r. 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;

Exempt Transactions



s. Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts thereof for domestic or international transport operations;

Provided, that the exemption from VAT on the importation and local purchase of passenger and/or cargo vessels shall be limited to those of 150 tons and above including engine and spare parts of said vessels;

Provided, further, that the vessels to be imported shall comply with the age limit requirement, at the time of acquisition counted from the date of the vessels original commissioning, as follows: (i) 15 years old for passenger and/or cargo vessels, (ii) 10 years old for tankers, and (iii) 5 years old for high-speed passenger crafts

The exemption shall be subject to the provisions of the Section 4 of RA 9295 or the Domestic Shipping Development Act of 2004.

Exempt Transactions


t. Importation of life-saving equipment, safety and rescue equipment and communication and navigational safety equipment, steel plates and other metal plates including marine-grade aluminum plates, used for shipping transport operations; Provided, that the exemption shall be subject to the provisions of Section 4 of Republic Act No. 9295, otherwise known as 'The Domestic Shipping Development Act of 2004';

u. Importation of capital equipment, machinery, spare parts, life-saving and navigational equipment, steel plates and other metal plates including marine-grade aluminum plates to be used in the construction, repair, renovation or alteration of any merchant marine vessel operated or to be operated in the domestic trade. Provided, that the exemption shall be subject to the provisions of Section 19 of Republic Act No. 9295, otherwise known as The Domestic Shipping Development Act of 2004';

Exempt Transactions



v. Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations;

Provided that the said fuel, goods and supplies shall be used exclusively or shall pertain to the transport of goods and/or passenger from a port in the Philippines directly to a foreign port or vice versa, without docking or stopping at any other port in the Philippines unless the docking or stopping at any other Philippine port is for the purpose of unloading passengers and/or cargoes that originated from abroad, or to load passengers and/or cargoes bound for abroad;

Provided further that if any portion of such fuel, goods or supplies is used for purposes other than mentioned above, such portion of fuel, goods and supplies shall be subject to 10% (now 12%) VAT.

Exempt Transactions


w. Services of banks, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries, such as money changers and pawnshops, subject to percentage tax under Secs. 121 and 122, respectively, of the Tax Code*.

x. 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 P1. 5 million.Provided, That not later than January 31, 2009 and every 3 years thereafter, the amount should be adjusted to its present value using the Consumer Price Index, as published by the NSO.

* Restored before by RA No. 9238 on January 1, 2004

Exempt Transactions



Optional Registration of VAT-Exempt Persons A VAT registered person may elect that the exemptions in

Section 4.109-1(B) of RR 4-2007 (VAT Exempt Transactions)not apply to his sales of goods or properties or services.

Once the election is made, it shall be irrevocable for a period of 3 years counted from the quarter when the election was made except for franchise grantees of radio and TV broadcasting whose annual gross receipts for the preceding year do not exceed ten million pesos (P10,000,000) where the option becomes perpetually irrevocable.Note: The wording in RA 9337 and RR 16-2005 is such that the person must have already been VAT registered. He can then opt to subject exempt sales to VAT.


1. Any person who is VAT exempt under Section 4.109 B 1 (v) of RR 16-2005 (i.e., P1.5 million and below exemption), who is not required to be VAT registered, may elect to be VAT registered.

2. Any person who is VAT-registered but enters into transactions which are exempt from VAT (mixed transactions) may opt that the VAT apply to his transactions which would have been exempt under Section 109(1) of the Tax Code, as amended. [Sec. 109(2)]

3. Franchise grantees of radio and/or television broadcasting whose annual gross receipts of the preceding year do not exceed ten million pesos (P10,000,000.00) derived from the business covered by the law granting the franchise may opt for VAT registration. This option, once exercised, shall be irrevocable. (Sec. 119, Tax Code)

Any person who elects to register under these subsections (1) and (2) above shall not be allowed to cancel his registration for the next three (3) years.

Optional Registration of VAT-Exempt Persons



Transactions incidental to VAT-exempt activities are also VAT-exempt.

Isolated transactions can be exempt from VAT.

Incidental to VAT exempt activities


VAT Rates



VAT Rates

Taxable Multiple tax rates:

General Rate: 12%

Special Rate: 0%

Exempt


VAT on Sale of Goods or Properties

VAT is imposed and collected on every sale, barter or exchange, or transactions "deemed sale" of taxable goods or properties at the rate of twelve percent 12% of the gross selling price or gross value in money of the goods or properties sold, bartered, or exchanged, or deemed sold in the Philippines.



Zero-rated Sales


Zero-Rated vs. Exempt Sales

Zero-rated sales Exempt

Sales which are subject to VAT at 0% rate.

Sales which are not subject to VAT

Input taxes allocable/ attributable to the zero-rated sale may be claimed as input tax credit

Input taxes allocable/ attributable to the VAT exempt sale cannot be claimed as input tax credit but shall form part of costs.



Types of Zero-Rated (0%) Sales

Automatic zero-rated sales

Effectively zero-rated sales


What is the difference between an automatically zero-rated sale and an effectively zero-rated sale?

An automatically zero-rated sale refers to a sale of goods, properties and services by a VAT-registered seller/supplier that is regarded as either an export sale or a foreign currency denominated sale under Section 106 of the Tax Code of 1997.

An effectively zero-rated sale, on the other hand, refers to the local sale of goods, properties and services by a VAT-registered person to an entity that was granted indirect tax exemption under special laws or international agreements. Since the buyer is exempt from indirect tax, the seller cannot pass on the VAT and therefore, the exemption enjoyed by the buyer shall extend to the seller, making the sale effectively zero-rated.

(RMC 50-2007)




RR 4-2007 (Section 4.106-6) Effectively Zero-rated Sale of Goods and Properties The

term "effectively zero-rated sale of goods and properties" 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 agreement.

RR 4-2007 (Section 4.108-6) Effectively Zero-Rated Sale of Services The term

"effectively zero-rated sales of services" shall refer to the local sale of services by a VAT-registered person to a person or entity who was granted indirect tax exemption under special laws or international agreement.



Automatic vs. Effective Zero-Rating

*The supplier was required to apply for effective zero-rating of their sales in order for the transaction to be zero-rated. Without an approved application, the transaction was merely considered exempt.

Automatic Zero- Rating Effective Zero-Rating

Before RA 9337 (before Nov.1 2005)

No application for zero-rating needed

Application for effective zero-rating needed* except for select sales such as sales to PEZA, sales to BOI registered 100% manufacturer-exporter.

RA 9337 up to before RR 4-2007 (Nov. 1, 2005 to April 5, 2007)

No application for zero-rating needed.

Application for effective zero-rating needed.* (No more exceptions for sales to PEZA, etc.).

RR 4-2007 (April 6, 2007)

No application for zero-rating needed.

No application for effective zero-rating needed.



Zero-Rated Sales of Goods or PropertiesThe following sales of goods or properties by VAT-registered persons shall be subject to zero percent (0%) rate:

a. Export Sales

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, 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 BangkoSentral ng Pilipinas (BSP).


a. Export Sales (contd)

2. The sale of raw materials or packaging materials to a non-resident 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, paid for in acceptable foreign currency, and accounted for in accordance with the rules and regulations of the BSP.

3. The sale of raw materials or packaging materials to an export-oriented enterprise whose export sales exceed seventy percent (70%) of total annual production. Any enterprise whose export sales exceed 70% of the total annual production of the preceding taxable year shall be considered an export-oriented enterprise.

Zero-Rated Sales of Goods or Properties



a. Export Sales (contd)

4. Sale of gold to the BSP.

5. Transactions considered export sales under Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987, and other special laws.

Zero-Rated Sales of Goods or Properties


For purposes of zero-rating export sales of registered export traders shall include commission income.

Exportation of goods on con

Documents

VAT (July 2011)