LECTURE 6:VALUE-ADDED TAX

I. Pro-Forma Computation

Output VAT from regular Domestic Sales and Receipts (limit P 1,919,500) xx
Output VAT from Importation (paid prior to release from Customs) xx
Output VAT from Deemed Sale Transactions xx
Output VAT from Zero-Rated Sales xx
xx
Less:
Input VAT from Purchases of Goods (xx)
Input VAT from Importation (xx)
Input VAT from Purchases of Services (xx)
Input VAT from Deemed Sale Transactions (if not previously claimed) (xx)
Input VAT from Depreciable Capital Goods (xx)
Input VAT from TIV/ Presumptive (xx)
VAT Payable xx

II. Concept of VAT

1. A VAT is a tax levied on the value of the products of an enterprise in the course of its production and
distribution. It is otherwise known as the tax on Mark-ups.
2. It is a percentage tax imposed at every stage of the transfer of goods on sale, exchange, barter, and the
importation of goods, including transaction deemed by law as a sale or leasing of goods or property and the
performance of services in the course of trade or business.
3. It is based on the gross selling price or gross value in money or net sales when there are sales discounts
or sales returns, whichever is applicable, of the goods or property sold, bartered, or exchanged or the gross
receipts dervied from the sale or exchange of services, including the lease of goods or property, or in the case
of imported goods, on the total value of importation or its landed cost plus excise and ad valorem tax and
other charges on importation.

III. Sources of Output VAT

1. Importation
a. All importations are subject to VAT of 12%, except those exempt under Sec. 4 of RR No. 6-97.
b. Importations made by a tax-exempt taxpayer shall, likewise, be exempt from VAT. However, the subsequent
purchaser, transferee or recepient who are not tax-exempt shall pay the VAT on the imported goods as if he
was the importer.
c. The tax base of imported good for VAT purposes include total value of importation or its landed cost plus
excise and ad valorem tax and other charges on importation.

2. Sale of goods
Tax base of VAT on sale of goods or properties

Gross sales xxx (a)

Less:
Sales discounts xxx (b)
Sales returns and allowances xxx (c) Xxx
Net sales Xxx
Add Excise tax, if any xxx (d)
Tax base Xxx
Notes:
a. Gross sales include:
i. Cash sales
ii. Sales on account (open account)
iii. Installment sales
iv. Deemed sales (Consumption, Consignment, Distribution, Dacion en Pago, and Retirment)
v. Other amounts due from buyer such as for packaging, delivery and insurance.
b. Sales discount granted and indicated in the invoice at the time of sale and the grant of which does
not depend upon the happening of future event may be excluded from gross sales within the same
month or quarter it was given.
c. Sales returns and allowances may be deducted from the gross sales for the month or quarter in
which a refund is made or a credit memo is issued.
d. Excise tax (a business tax), if any, is included in the gross sales, while VAT is excluded.

3. Sale of Properties
1. Sale of real property classified as capital asset is not subject to VAT. Such transaction is subject to
capital gains tax of 6% based on sales price or FMV, whichever is higher.
LECTURE 6:VALUE-ADDED TAX

2. In general, sale of real property primarily held in the normal course of business (inventory/ordinary asset) is
subject to VAT, except:
a. Residential lot with selling price of P 1,919,500 and below; and
b. Sale of house and lot and other residential dwellings with selling price at P 3,199,200 and below.

3. Sale of real properties in the course of trade or business

c. On installment plan (initial payments do not exceed 25% of the gross selling price)

Installments received Xxx

Add:
Interest xxx
Other charges xxx Xxx
Tax base Xxx
Note: Upon full payment, if the zonal or market value is higher than the total receipts or collections, the
additional VAT shall be paid accordingly.

d. On cash basis or deferred payment plan (initial payments exceed 25% of the gross selling price)

The tax base shall be the higher between SELLING PRICE stated in the sales document and ZONAL
OR MARKET VALUE.

Notes:

a. If the gross selling price is the zonal or market value of the real property, the zonal or market value shall
be deemed inclusive of the VAT.
b. If the VAT is not billed separately, the selling price stated in the sales document shall be deemed
inclusive of the VAT.

4. Sale of Scrap Materials

1. Sale of scrap such as empty drums, plastic bags, cartons, and wood crates; obsolete inventories and fully
depreciated fixed assets at a minimal prices or lower than the purchase price are subject to VAT.
2. Ordinary assets, other than inventories held for sale, which are originally subject to depreciation are are
likwise subject to VAT, when sold.

5. Sale of Service
a. In general, all kinds of sale, exchange or supply of services rendered in the Philippines are subject to 12%
VAT, except those which are classified and qualified as zero-rated or VAT-exempt.
b. Under the situs of service criteria services performed outside the Philippines, even if undertaken in the
course of business, are BEYOND the scope of VAT.
c. Tax Base:
i. Total amount of money or its equivalent representing the contract price, compensation service fee, rental
or royalty.
ii. Amount charged for materials supplied, with the services and deposits and advance payments actually
or constructively received during the taxable quarter, excluding VAT.

d. VAT in Professional Fees

As a rule, earnings from a practice of profession will be subject to VAT if:
i. The professional is a VAT-registered person; or
ii. A non-VAT registered but his total gross receipts exceed P 1,919,500.

Also, aside from VAT is subject to 10% creditable withholding tax if the aggregate amount per year is
P720,000 and below, and 15% creditable withholding tax if exceeding P720,000.

e. VAT on Service Contractors

i. Subject to 12% VAT
ii. If the contract is with the government, the government shall withhold final withholding VAT of 5%.
iii. Also subject to 2% creditable withholding tax for sale of services and 1% creditable withholding
tax for sale of goods.

f. VAT on Security Agency

i. Agency fees are subject to 12% VAT, excluding the salary of the guards.
ii. Subject to a 2% creditable withholding tax for sale of service based on the agency fee.
iii. If the contract does not separate the agency fees from the salary of the guards, the whole amount will
be subjected to VAT and 2% creditable withholding tax.

g. VAT on Real Estate Brokers

i. The commission income of real estate brokers are subject to VAT of 12% if he is VAT-registered or his
total commission exceeds P1,919,500 per year.
LECTURE 6:VALUE-ADDED TAX

h. VAT on Dealers in Securities

i. Dealers in securities are subject to VAT based on their gross receipts (gross selling price less cost of
securities sold).

j. VAT on Lending Investors

i. Lending investors includes all persons not include banks (depository and savings), non-bank financial
intermediaries, finance companies, and other financial intermediaries not performing quasi-
banking.
ii. Subject to VAT of 12% on their interest incomes.
iii. Does not include banks, other financial intermediaries performing quasi-banking functions and
pawnshops.

k. VAT on Transportation Services

i. Subject to VAT of 12% on:
Transport of goods and cargoes whether by land, air and sea.
Transport of passengers by air and sea.
ii. Transport of passengers by land are subject to 3% OPT.

l. VAT on Lessor of Commercial and Residential Units

i. If the monthly rent per unit does not exceed P12,800, regardless of the aggregate amount, the lessor is
exempted from VAT and OPT.
ii. If the monthly rent per unit exceeds P 12,800, but the aggregate amount does not exceed P1,919,500,
the lessor is only subject to OPT, not to VAT.
iii. If the monthly rent per unit exceeds P 12,800 and the aggregate amount does exceed P1,919,500, the
lessor is only subject to VAT.

6. Deemed Sale Transactions (CCDDR)

a. Transfer, use or consumption not in the course of trade or business of goods or properties originally
intended for sale or for use in the course of trade or business;
b. Consignment of goods if not sold within 60 days following the date of consignment;
c. Distribution or transfer to creditors in payment of debt or dacion en pago;
d. Distribution or transfer to shareholders or investors as share in the profit; and
e. Retirement from or cessation of business or incorporation of single proprietorship with respect to all goods
on hand, whether capital goods, stock in trade, supplies or materials, as of the date of such retirement,
cessation or incorporation,

Notes: The tax base for deemed sale transactions would be the lower of (a) acquisition cost or (b) the
current market price. Where the gross selling price is unreasonably lower than the actual market value,
the appropriate tax base shall be determined by the Commissioner. 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 or quantity sold in the immediate locality on the the nearest
date of sale.

f. Transfer of assets as a result of merger or consolidation are not considered as deemed sale transaction.
However, the unused input tax of the dissolved corporation, as of the date of merger or consolidation, shall
be absorbed by the surviving corporation.

7. Zero-Rated Sales
a. Export Sales
i. The sale and actual shipment of goods from the Philippines to a foreign country.
ii. Sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident local
export-oriented enterprise.
iii. Sale of raw materials or packaging materials to export-oriented enterprises whose export sales
exceed 70% of total annual production.
iv. Sale of gold to the Bangko Sentral ng Pilipinas.
v. Those considered export sales under the Omnibus Investment Code of 1987 (E. O. No. 226) and
other special laws, e.g., sales to diplomatic missions and other agencies and/or instrumentalities
granted tax immunities.
vi. Sale of goods, supplies, equipment and fuel to persons engaged in international shipping or
international air transport operations.

b. Foreign currency denominated sale

LECTURE 6:VALUE-ADDED TAX

i. It means sale to a nonresident of goods (except automobiles and nonessential goods) assembled
or manufactured in the Philippines for delivery to a resident in the Philippines.

c. Effectively zero-rated sales

- Effectively zero-rated sales of goods and properties shall refer to the local sale (constructive export) by a
VAT-registered person to a person or entity who was granted indirect tax exemptions under special laws or
international agreement, such as:
i. Sale to Asian Development Bank (ADB);
ii. Sale to International Rice Research Institute (IRRI);
iii. Sale to duly registered and accredited enterprises with Subic Bay Metropolitan Authority (SBMA);
and
iv. Sale to duly registered and accredited enterprises with Philippine Economic Zone Authority (PEZA).

IV. Sources of Input VAT

1. Importation and Domestic Purchase of Goods
a. Goods for sale
b. Goods for conversion into finished product (including packaging materials)
c. Goods for use as supplies
d. Goods for use as materials supplied in the sale of services
e. Goods for use in trade or business for which depreciation or amortization is allowed
f. Transactions deemed sale (CCDDR)
g. In case of importation, an input tax may be claimed for the importation of goods for business use by a
VAT-registered taxpayer. Input tax paid by a non-VAT person, whether for personal or business use, are
not creditable. Also, input VAT paid by a VAT registered on goods imported for personal use are not
creditable.

2. Purchase of Services
3. Purchase of Capital Goods
Claim for input tax on depreciable goods
a. Applies only to domestic purchase or importation of capital goods subject to depreciation for
income tax purposes.

b. Where the aggregate acquisition cost (exclusive of VAT) of depreciable capital goods during any
calendar month does not exceed P1,000,000, the total input tax is creditable against output tax in
the month acquired (Outright Credit)

c. Where the aggregate acquisition cost (exclusive of VAT) of depreciable capital goods during any
calendar month exceeds P1,000,000, the total input tax is creditable against output tax, as follows:
i. Spread evenly over 60 months (starting in the calendar month acquired) the input tax, if the
estimated useful life of the depreciable capital good is 5 years or more.
ii. Spread evenly over the actual number of months of estimated useful life (starting in the
calendar month acquired) the input tax, if the estimated useful life of the depreciable capital
good is less than 5 years.

d. If the depreciable capital good is sold or transferred within a period of 5 years or prior to the
exhaustion of the amortizable input tax thereon, the entire unamortized input tax on the capital good
sold or transferred can be claimed as input tax credit in the month/quarter when the sale or transfer
was made.

4. Zero-Rated Sales
a. The input VAT may at the option of the taxpayer, be claimed for (a) tax refund, the claim of which shall
be filed and made within 2 years from the close of the quarter when such sales are made, or (b) tax
credit against internal revenue taxes.

5. Presumptive Input VAT

a. Persons or firms who can avail:
i. Processor of sardines, mackerel and milk (SaMaMi)
ii. Manufacturer of refined sugar, cooking oil and packed noodle-based instant meal (ReCoPa)
b. Basis of presumptive input tax - Gross value in money of purchases of primary agricultural and
marine food products used as inputs in the processing or manufacturing of SaMaMi and ReCoPa.
c. Rate of presumptive input tax 4%

6. Transitional Input VAT

a. Persons who can avail:
a. Persons who become liable to VAT for the first time
LECTURE 6:VALUE-ADDED TAX

b. Persons who elect to be VAT-registered

b. Basis of transitional input tax - Beginning inventory of VAT-subject goods, materials and supplies.
c. Transitional input tax allowed - The HIGHER between:
a. 2% of the VAT-subject beginning inventory value for income tax purposes; and
b. Actual VAT paid on such beginning inventory.

7. Standard Input VAT (Sale to Government)

a. The sale to Government or its political subdivision by VAT-registered person shall be subject to 12%
VAT, provided that:
i. The government shall withhold 5% final withholding VAT upon payment to the VAT registered
person;
ii. The VAT-registered person may claim a Standard Input VAT of 7% against its output VAT from
the sale to government. The Actual Input VAT attributable to sales of goods and services to the
government shall not be credited against the Output vat arising from sales to non-government
entities.

V. Excess output or input taxes

a. If at the end of any taxable month or quarter the output tax exceeds the input tax, the difference is VAT
payable (current liability).

b. If the input tax at the end of any taxable quarter (inclusive of input tax carried over from the previous
quarter) exceeds the output tax, the excess input tax (current asset) shall be carried over to the
succeeding taxable month or quarter, provided that any input tax attributable to 0-rated sales by a
VAT-registered person may at his option be refunded or applied for a tax credit certificate.

c. Input taxes on zero-rated sales of goods, properties or services

The input taxes on zero-rated sales of goods, properties or services may at the option of the VAT-
registered person be:
i. Refunded (within 2 years after the close of the quarter when such sales were made); or
ii. Converted into tax credit certificates which may be used in paying other NIRC taxes (the two-
year peremptory period applies); or
iii. Applied against the output tax of domestic sales.

d. Unused input tax of persons who retired

Unused input taxes of persons whose registration has been cancelled due to retirement from or
cessation of business may be converted into tax credit certificate which may be used in payment of other
NIRC taxes within 2 years from the date of cancellation or claim for refund if there be no internal revenue
tax liabilities against which the tax credit certificate may be utilized.

e. Period within which to refund

Refund or tax credit certificate shall be granted within 120 days from the date of submission of complete
documents.
If the Commissioner fully or partially denies the application for VAT refund or issuance of tax credit
certification (TCC) on the expiration of 120-day period, the taxpayer may appeal to the Court of Tax
Appeals within 30 days from the receipt of the denial; otherwise, the decision will become final.

f. Manner of giving refunds

Refunds shall be made upon warrants drawn by the Commissioner of Internal Revenue or by his
authorized representative without the necessity of being countersigned by the COA Chairman.

VI. Administrative Requirements

1. Return and payment of VAT
a. In general - VAT return shall be filed and the tax due thereon be paid within 25 days following the close
of each taxable quarter.
b. VAT-registered persons shall declare and pay VAT on a monthly basis, not later than the 20th day
following the close of each of the first two months of a taxable quarter; taxpayers under the EFPS, on or
before a prescribed due date based on the business industries classification.

2. Persons whose registration has been cancelled

a. Any person whose registration has been cancelled shall file a return and pay the tax due thereon within
25 days from the end of the month the business ceases to operate or when VAT registration has been
officially cancelled.
LECTURE 6:VALUE-ADDED TAX

b. Only one consolidated return shall be filed for the principal place of business or head office and all
branches.

3. Where to file the return and pay the tax - In any one of the following located within the revenue district where
the taxpayer is registered or required to register:
a. Authorized agent bank
b. Revenue collection officer
c. Duly authorized city or municipal treasurer