VALUE-ADDED TAX

IMPOSITION OF TAX
• 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
• The value-added tax is an indirect tax and
the amount of tax may be shifted or passed on
to the buyer, transferee or lessee of the goods,
properties or services. This rule shall likewise
apply to existing contracts of sale or lease
of goods, properties or services at the time of
the effectivity of Republic Act No. 7716
• The phrase "in the course of trade or
business" means the regularconduct or pursuit of
a commercial or an economic activity, including
transactions incidental thereto, by any person
regardless of whether or not the person engaged
therein is a non-stock, non-profit private
organization (irrespective of the disposition of its
net income and whether or not it sells exclusively
to members or their guests), or government
entity.
• Meaning of value-added tax. – Value-added
tax (VAT) is a percentage tax imposed at every
stage of the distribution process on the sale,
barter, exchange (including any other
transaction deemed by law as a sales), 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
purposes.
 It is essentially a tax on spending or
consumption levied on certain transactions
involving a wide range of goods, properties, and
services, such tax being payable by the seller,
transferor, lessor or importer.
• Tax imposed on value added to goods or
services. – The tax is so-called because it is
imposed on the value not previously subjected
to the VAT, i.e., on the value added to the
goods or services at each stage of the
distribution chain.
 (1) VAT is a business tax on transactions;
hence, it is still subject to the tax even in the
absence of profit attributable thereto.
(2) Certain sales of goods
and/or services are either zero-rated or
exempted from the VAT. (Sees. 106[A, 2], 108[B],
109[1].)
(3) Any person whose sales or
receipts are exempt under Section 109(1)(V) of
the Tax Code from payment of VAT and who is
not a VAT-registered person shall pay percentage
tax equivalent to 3%. (Sec. 116.)
 (4) Any individual engaged in business or
businesses where the aggregate gross sales or
receipts do not exceed P100,000.00 during any
12-month period shall be principally
for subsistence or livelihood and not in the
course of trade or business, and shall be exempt
from the payment of VAT and from any
percentage tax imposed under the Tax Code,
(see Sec. 9-236.2, Rev. Regs. No. 16-2005,
Consolidated Value- Added Tax Regulations
of 2005, cited as CVR, Appendix T .
 (5) Under the Tax Code, the
performance of service for a consideration is
considered and taxable as a sale. It includes the
use or lease of properties, whether real or
personal, (see Sec. 108[A].) A transaction
subject to the VAT is a "taxable sale."
(6) The dissolution of the co-
ownership and the partition of the properties is
not a sale of goods and services pursuant to
Section 105. (BIR Ruling No. 641-2004,
Dec. 17, 2004.)
 7) Some homeowners' associations of
subdivisions in Metro Manila are collecting fees
from car owners in payment of gate passes/tickets.
The collection by officers of the homeowners‘
association from car owners is an activity
conducted for profit regardless of the disposition
thereof, and thus, the proceeds from said collection
shall be subject to the regular corporate income
tax. Moreover, its income derived from the sale of
goods (e.g., stickers) or services in the course of a
business pursuit is subject to VAT. (BIR Ruling
No. 196 - 2004, April 6, 2004.)
• Transaction entered into in course of trade
or business. – An important requirement
for imposing VAT is that the sale or transaction
sought to be taxed must be entered into by a
person in the course of trade or any business
carried on by such person. A transaction is
characterized as having been entered into by a
person in the course of trade or business if it is
regularly conducted and undertaken in
pursuit of a commercial or economic activity
• VAT is an indirect tax. As such, it can be
shifted to the purchasers/transferees, or
lessees of goods, properties, and services. The
shifting of the VAT to them does not make
them directly liable for the payment of the
VAT; hence, they cannot invoke the exemption
privileges granted to avoid the passed-on-
VAT. The VAT shifted forms additional part of
the cost of goods, properties , and services
purchased. Once shifted, the VAT ceases to be
a tax. (Diaz vs. Secretary of Finance, 654 SCRA
96 [2011], CITTING Hector S. de Leon & Hector
M. de Leon, Jr., NIRC Annotated, Eighth
Edition, Vol. II, p. 3.)
• Thus, for the VAT-registered purchaser, the tax
burden passed on does not constitute cost,
but input tax which is creditable against his
output tax liabilities. This voids the cascading
effect which is characteristic of the former
sales tax system where the sales taxis
necessarily cost to the buyer, and as such
becomes a factor of cost which is a basis of
the marked-up seller price, in turn, to his
customers, and so on and so forth down the
distribution chain.
• In the VAT system, it is only in the case of a
non-VAT purchaser that VAT forms part of cost
of the purchase. (BIR Ruling No. 141 - 99,
Sept. 13, 1999.)
• 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. (Comm.
vs. American Express International, Inc.,
462 SCRA197 [2005].)
• Some basic principles governing VAT — VAT is
ultimately a tax on consumption, even though it
is assessed on many levels of transactions on the
basis of a fixed percentage
(1) It is the end user of consumer goods
or services which ultimately shoulders the
tax, as the liability therefrom is passed on to
the end users by the providers of these goods
or services who, in turn, may credit their own
VAT liability (or input VAT)from the VAT
payments they receive from the final
consumer(or output VAT). The final purchase
by the end consumer represents the final link
in a production chain that itself involves
several transactions and several acts of
consumption.
 (2) The VAT system assures fiscal
adequacy through the collection of taxes
on every level of consumption, yet
assuages the manufacturers or providers
of goods and services by enabling them
to pass on their respective VAT liabilities
to the next link of the chain until finally
the end consumer shoulders the entire
tax liability.
 (3) VAT is not a singular minded tax on
every transactional level. Its assessment bears
direct relevance to the taxpayer's role or link in
the production chain. Hence, as affirmed by
Section 105 of the Tax Code and its subsequent
incarnations , the tax is levied only on the sale,
barter or exchange of goods or services by
persons who engage in such activities, in the
course of trade or business. (Comm. vs.
Magsaysay Lines, Inc., 497 SCRA 63 [2006].
• Shifting of VAT. — The VAT taxpayer may choose to absorb the
VAT and not pass it on to the purchaser or lessee.
(1) The exemption of cooperatives from taxes under
Articles 61 and 62 of the Cooperatives Code (R.A. No. 6938.)is
limited only to taxes directly payable by them. The value-added
tax is an indirect tax payable by the seller and not by the
purchaser of the goods. Being an indirect tax, it can be added to
the cost of goods purchased, not as tax but as additional cost
which the purchaser has to pay to obtain the goods
purchased.(BIR Ruling No. 151, Aug. 9,1991.) Similarly, suppliers
of goods and services to a company which is a holder of a
legislative franchise and subject to a 3% franchise tax based on
gross receipts, "in lieu of any and all taxes on its franchise, rights,
privileges, receipts, revenues and profits and properties used,
"can pass-on VAT to the latter on its purchases of goods and
services in pursuit of its franchise. Indirect taxes like VAT are not
covered by the exemption. (BIR Ruling No. DA-831-09, Dec. 23,
2009.)
 (2) The VAT, as an indirect tax, can be
passed on to VAT- exempt entities (e.g., shipping
companies by their contractors and suppliers
because the former's exemptions are limited
only to direct taxes). (VAT Ruling No. 235, Sept.
13, 1989.)Purchases by non-stock non-profit
organizations are likewise subject to VAT where
there is no showing that they are exempt from
VAT. (VAT Ruling No. 010-09, July 31, 2009.)
 (3) While VAT is an indirect tax and can be
shifted to the lessee, the lessor may elect to
absorb the tax himself. Thus, where a lease
agreement provides that all taxes, government
fees and charges due on the land subject of the
lease are to be paid by the lessor, the latter
cannot legally pass on the VAT to the lessee by
including it in the rental payments. The lessor is
considered to have agreed to absorb the VAT.
(BIR Ruling No.597-04, Nov. 24, 2004.)
 (4) The sale of goods and services to a
government agency(e.g., Department of Budget
and Management) is not exempt from VAT.
Hence, the VAT on the security services
rendered to a government agency may be
passed on to said agency since VAT is an indirect
tax. (VAT Ruling No. 245, Sept. 22, 1989.)
 (5) Pursuant to the Vienna Convention on
Diplomatic Relations: "A diplomatic agent shall
be exempt from all dues and taxes, personal or
real, national, regional or municipal, except:(a)
indirect taxes of a kind which are normally
incorporated in the price of goods or services, x
x x." (Art. 34.) Accordingly, the tax exemption of
an Embassy or its diplomatic agents does not
include exemption from the value-added tax. In
other words, purchases of locally-produced
automobiles by the Embassy shall be subject to
both VAT and excise taxes under Sections106(A)
and 149, respectively, in relation to Section 128.
(VAT Ruling No. 089, March 19, 1992.)
(6) The sale of services by stock transfer agents
to stockbrokers through clearing houses is
subject to VAT pursuant to Section 108(A).
The VAT, being an indirect tax, can be passed on
by the agents to the clearing house (which is
registered as a bank; hence, a non-VAT entity)
and once shifted, forms an additional and
integral part of the cost of goods and/or services
that the non-VAT entity has to shoulder. (VAT
Ruling No. 077,Aug. 21, 1991.)
(7) A foreign contractor, which is organized
under the laws of a foreign country, rendering
services for the construction of the National Power
Corporation (NPC) Gas Turbine Plant Project funded
from a foreign loan agreement, is subject to VAT,
notwithstanding the fact that NPC is tax exempt
under its Charter and their contract stipulated that
NPC will assume the responsibility for taxes due
said foreign contractor. Such a stipulation is binding
only between NPC and the contractor, in their
private capabilities, and the latter's personal liability
to pay its taxes may not be transferred to the
former with binding effect on the BIR.
• However, in case the loan agreement was
made pursuant to the Foreign Borrowings Act
(R.A. No. 4860, as amended by P.D.
No. 150.), the contractor may be accorded VAT
exemption if such agreement contained a
proviso that a contractor shall be exempt from
taxes, including the VAT. Otherwise, VAT
exemption cannot be granted the NPC, for and
in behalf of said contractor, for lack of legal
basis. (VAT Ruling No. 063, June27, 1991.)
• Taxes replaced. — The VAT has been adopted
by virtue of Executive Order No. 2732 (July
25, 1987), issued by the President in the
exercise of her legislative powers effective
January 1, 1988.It replaced the following
taxes:
(1) fixed privilege annual taxes
payable by persons engaged in business;
 (2) percentage taxes on goods, namely:
original sales tax payable by manufacturers and
producers, subsequent sales tax(turnover tax)
payable by subsequent sellers, advance sales tax
and compensating tax payable by importers, and
miller's tax payable by producers of certain
milled agricultural products;
(3) percentage taxes on selected types
of business services (e.g., contractor's tax,
broker's tax); and
(4) excise taxes on certain articles (i.e.,
solvents, matches and video tapes)
• Note: Unlike percentage taxes, VAT cannot be
fixed, determined, computed or ascertained at
the time of the money payment; hence, the
same is not subject to any withholding tax at
source and remittance provisions. (BIR Ruling
No. 083, May 15, 1991.)
It has been held that Executive Order No.
273 satisfies all the constitutional requirements
of a valid tax law. It is uniform and equitable.
(Kapatiran ng mga Naglilingkod sa
Pamahalaan ng Pilipinas, Inc. vs. Tan, 163
SCRA 371, June 30, 1988.)
10. The VAT system. — This is a method of
imposing an ad valorem tax on value added.