I.

Concept of VAT
A Value-Added Tax is a tax assessed, levied, and collected on every importation of
goods, whether or not in the course of trade or business, or imposed on each sale,
barter, exchange or lease of goods or properties or on each rendition of services in the
course of trade or business as they pass along the production and distribution chain,
the tax being limited only to the value added to such goods, properties or services by
the seller, transferor or lessor.

Q: What are the characteristics of the VAT?

1. It is a percentage tax imposed at every stage of the distribution process on the sale,
barter, or exchange or lease of goods or properties and on the performance of service
in the course of trade or business or on the importation of goods, whether for business
or non-business.
2. It is a business tax levied on certain transactions involving a wide range of goods,
properties and services, such tax being payable by the seller, lessor or transferor.
3. It is an excise tax or a tax on the privilege of engaging in the business of selling
goods or services or in the importation of goods
4. It is an indirect tax, the amount of which may be shifted to or passed on the buyer,
transferee or lessee of the goods, properties or services.
5. It is an ad valorem tax as its amount or rate is based on gross selling price or gross
value in money or gross receipts derived from the transaction

II. Impact and Incidence of Taxation

i. Impact of taxation is the point on which a tax is originally imposed. In so far as
the law is concerned, the taxpayer is the person who must pay the tax to the
government. He is also termed as the statutory taxpayer-the one on whom the tax
is formally assessed. He is the subject of the tax
ii. Incidence of taxation is that point on which the tax burden finally rests or settle
down. It takes place when shifting has been effected from the statutory taxpayer
to another.
a. Illustration: Value added tax. The seller is required by law to pay tax, but
the burden is actually shifted or passed on to the buyer.
iii. Relationship between impact, shifting, and incidence of a tax
a. The impact is the initial phenomenon, the shifting is the intermediate
process, and the incidence is the result. Thus, the impact in a sales tax (i.e.
VAT) is on the seller (manufacturer) who shifts the burden to the customer
who finally bears the incidence of the tax.
b.Impact is the imposition of the tax; shifting is the transfer of the tax; while
incidence is the setting or coming to rest of the tax.
III. Cross Border Doctrine and Destination Principle
Q: What is the destination principle (cross-border doctrine)?
As a general rule, the value-added tax (VAT) system uses the destination
principle. It means that the destination of the goods determines the taxation or
exemption from VAT. Goods and services are taxed only in the country where they
are consumed.
 Note: (1) This is the reason why export sales of goods are subject 0% while
importations of goods are subject to 12%. Exported goods will be consumed in
wherever country it is exported so it is zero-rated. On the other hand, we consume
imported goods here in the Philippines that is why it is subject to 12% VAT.
(2) In the case of services, consumption takes place where the service is
performed. Note, however, na may exception to the destination principle when it
comes to sale of services. Although the services are performed in the Philippines,
there are certain sales of services that are zero-rated. We will discuss this later when
we get to Section 108(B) or zero-rated sales of services.

e. Destination principle and cross border doctrine

As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional
reach of the tax. Goods and services are taxed only in the country where they are consumed. Thus,
exports are zero-rated, while imports are taxed.

Is there any exception to the destination principle?

SUGGESTED ANSWER: Yes. The law clearly provides for an exception to the destination
principle; that is, for a zero percent VAT rate for services that are performed in the Philippines,
"paid for in acceptable foreign currency and accounted for in accordance with the rules and
regulations of the [BSP]."
The “Cross Border Doctrine” is also known as the destination principle. Hence, actual or
constructive export of goods and services from the Philippines to a foreign country must be zero-
rated for VAT; while, those destined for use or consumption within the Philippines shall be
imposed the twelve percent (12%) VAT.

IV. Rule of Regularity

SEC. 105. Persons Liable. - Any person who, in the course of trade or business, sells barters,
exchanges, leases goods or properties, renders services, and any person who imports goods shall
be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code.
The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the
buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to
existing contracts of sale or lease of goods, properties or services at the time of the effectivity of
Republic Act No. 7716.cralaw

The phrase "in the course of trade or business" means the regular conduct or pursuit of a
commercial or an economic activity, including transactions incidental thereto, by any person
regardless of whether or not the person engaged therein is a nonstock, nonprofit private
organization (irrespective of the disposition of its net income and whether or not it sells
exclusively to members or their guests), or government entity.

The rule of regularity, to the contrary notwithstanding, services as defined in this Code
rendered in the Philippines by nonresident foreign persons shall be considered as being
course of trade or business.
V. Transactions Covered by VAT
COVERED TRANSACTIONS:
Clue: ISaBEL
1. Importation of goods
2. Sale of goods and services in the regular course of business or any activity that are incidental
thereto.
3. Barter
4. Exchange
5. Lease
VI. VAT on sale of Goods or Properties
VAT ON SALE OF GOODS OR PROPERTIES
Rate and Base – 12% of the gross selling price or gross value in money shall be imposed on
the following:
1. Real properties for sale or lease.
2. Right to use patent, copyright, design or model plan, secret formula or process, goodwill,
trademark, trade brand or the like.
3. The privilege to use in the Philippines any industrial, commercial or scientific equipment.
4. The right to use motion picture, films, tapes and discs.
5. Radio, TV, satellite transmission and cable TV time.

Formula: Gross Selling Price X 12% = Output Tax

VII.
Zero-rated Sale of Goods or Properties, and Effectively Zero-rated Sale of Goods or
Properties
III. ZERO RATED SALES OF GOODS AND SERVICES and VAT EXEMPT SALES
a. Nature of Zero Rated Sales

Zero-rated Sales of Goods or Properties. A zero-rated sale of goods or properties by a sale by a

VAT-registered person is a taxable transaction for VAT purposes but the sale does not result in
any output tax.
However, the input tax on the purchases of goods, properties or services related to such zero-rated
sale shall be available as tax credit or refund in accordance with Rev. Regulations No. 16-2005.
(Rev. Regs. No. 16-2005, 1st par.)

b. Zero Rated Sale of Goods (Sec. 106)

The following sales by VAT-registered persons shall be subject to zero percent (0%) rate:
(a) Export Sales- 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
(b)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. Zero Rated Sale of Services (Sec. 108 B)

(1) Processing, manufacturing or repacking goods for other persons doing business outside
the Philippines which goods are subsequently exported, where the services are paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP);

(2) Services other than those mentioned in the preceding paragraph, the consideration for
which is paid for in acceptable foreign currency and accounted for in accordance with the rules
and regulations of the Bangko Sentral ng Pilipinas (BSP);

(3) Services rendered to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively subjects the supply of
such services to zero percent (0%) rate;

(4) Services rendered to vessels engaged exclusively in international shipping; and

(5) Services performed by subcontractors and/or contractors in processing, converting, of

manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total
annual production.

d. Automatic zero-rate vs. Effectively zero-rate

CASES:

CIR vs. Seagate Technology (Phils) GR No. 153866 February 11, 2005

In terms of the VAT computation, zero rating and exemption are the same, but the extent of relief
that results from either one of them is not.
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 the VAT, making such
seller internationally competitive by allowing the refund or credit of input taxes that are
attributable to export sales.Effective zero rating, on the contrary, is intended to benefit the
purchaser who, not being directly and legally liable for the payment of the VAT, will ultimately
bear the burden of the tax shifted by the suppliers.
In both instances of zero rating, there is total relief for the purchaser from the burden of the tax.
But in an exemption there is only partial relief, because the purchaser is not allowed any tax refund
of or credit for input taxes paid.
If at the end of a taxable quarter the output taxes charged by a seller are equal to the input taxes
passed on by the suppliers, no payment is required. It is when the output taxes exceed the input
taxes that the excess has to be paid.If, however, the input taxes exceed the output taxes, the excess
shall be carried over to the succeeding quarter or quarters. 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.
Effectively zero-rated transactions, however, refer to the sale of goods or supply of services to
persons or entities whose exemption under special laws or international agreements to which the
Philippines is a signatory effectively subjects such transactions to a zero rate.Again, as applied to
the tax base, such rate does not yield any tax chargeable against the purchaser. The seller who
charges zero output tax on such transactions can also claim a refund of or a tax credit certificate
for the VAT previously charged by suppliers.

CIR vs. Toshiba Information Equipment GR No. 150154 dated August 9, 2005

Rationale for zero-rating of exports. The Philippine VAT system adheres to the Cross Border
Doctrine, according to which, no VAT shall be imposed to form part of the cost of goods destined
for consumption outside of the territorial border of the taxing authority. [Commissioner of Internal
Revenue v. Toshiba Information Equipment (Phils.), Inc., G. R.. No. 150154, August 9, 2005]

VIII. Transactions deemed sale

f. Transactions deemed sale (Sec. 106 B)

(B) Transactions Deemed Sale. - The following transactions shall be deemed sale:

(1) Transfer, use or consumption not in the course of business of goods or properties originally
intended for sale or for use in the course of business;
(2) Distribution or transfer to:
(a) Shareholders or investors as share in the profits of the VAT-registered persons; or
(b) Creditors in payment of debt;
(3) Consignment of goods if actual sale is not made within sixty (60) days following the date
such goods were consigned; and
(4) Retirement from or cessation of business, with respect to inventories of taxable goods
existing as of such retirement or cessation.

i. Rationale of Imposition

ii. Enumeration – Sec. 4.106-7 RR No. 16-05

iii. Tax Base of Transactions Deemed Sale

RR No. 16-05

(b) The Commissioner of Internal Revenue shall determine the appropriate tax base in cases where
a transaction is deemed a sale, barter or exchange of goods or properties under Sec. 4.106-7
paragraph (a) hereof, or where the gross selling price is unreasonably lower than the actual market
value. The gross selling price is unreasonably lower than the actual market value if it is lower by
more than 30% of the actual market value of the same goods of the same quantity and quality sold
in the immediate locality on or nearest the date of sale.
For transactions deemed sale, the output tax shall be based on the market value of the goods
deemed sold as of the time of the occurrence of the transactions enumerated in Sec. 4.106-
7(a)(1),(2), and (3) of these Regulations. However, in the case of retirement or cessation of
business, the tax base shall be the acquisition cost or the current market price of the goods or
properties, whichever is lower.

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

IX. f