TAX-VAT

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Value Added Tax (VAT)

Value-Added Tax (VAT) is a form ofsales tax. It is a tax on consumption

levied on the sale of goods and servicesand on the imports of goods into thePhilippines. It is an indirect tax, which

can be passed on to the buyer.

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Who Are Required To File VAT Returns

Every person or entity who in the course of his trade orbusiness, sells or leases goods, properties and servicessubject to VAT, if the aggregate amount of actual grosssales or receipts exceed One Million Nine HundredNineteen thousand Five Hundred Pesos (P 1,919,500.00)for any twelve month period

A person required to register as VAT taxpayer but failedto register

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Who Are Required To File VAT Returns

A person who imports goods

Professional practitioners

Professional Practitioners (PPs) are formerly classified as non-VAT taxpayersand were exempt from the VAT and Percentage taxes under Section 109 of theTax Code until December 31, 2002.

Prior to this date, they were subject only to Income Tax. Effective January 1,2003, however, by virtue of RA 7716 and 9010, services of ProfessionalPractitioners are also subject to either VAT or 3% Percentage Tax.

Starting 2005 services of Professional Practitioners are subject to VAT if grossprofessional fees exceed P1.5 million for a 12-month period and subject to 3%Percentage Tax if gross professional fees total P1.5 million and below for a 12-

month

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Who Are Considered Professional Practitioners?

"Professional Practitioners" include the following:

Certified Public Accountants

Insurance Agents (Life & Non-life) Other Professional Practitioners required to pass thegovernment examination (Lawyers, Doctors, Engineers,Architects, etc.)

Others (Professional entertainers, Professional Athletes,Licensed Customs Brokers, etc.)

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Frequently Asked Questions about the VAT

1) What is Output Tax"?

Output tax means the VAT due on the sale,lease or exchange of taxable goods or propertiesor services by any person registered or requiredto register under section 236 of the Tax Code.

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2) What is Input Tax"?

Input tax means the VAT paid by a VAT-registered person in the course of his trade orbusiness on importation of goods or localpurchase of goods or services, including lease oruse of property, from a VAT-registered person.It shall also include the transitional input taxdetermined in accordance with Section 111 of theTax Code

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3) What comprises Goods or Properties?

The term "goods or properties" shall mean alltangible and intangible objects, which arecapable of pecuniary estimation and shallinclude:a. Real properties held primarily for sale to

customers or held for lease in the ordinarycourse of trade or business

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b. The right or the privilege to use patent,copyright, design or model, plan, secretformula or process, goodwill, trademark,trade brand or other like property or right

c. The right or the privilege to use in thePhilippines any industrial, commercial orscientific equipment

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d. The right or the privilege to use motionpicture film, films, tapes and discs

e. Radio, television, satellite transmission andcable television time

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4) What comprises "sale or exchange of services"?

The term "sale or exchange of services" meansthe performance of all kinds of services in thePhilippines for others for a fee, remunerationor consideration, including those performed orrendered by the following:

a. Construction and service contractorsb. Stock, real estate, commercial, customsand immigration brokers

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c. Lessors of property, (personal or real)d. Warehousing servicese. Lessors or distributors of cinematographic

filmsf. Persons engaged in milling, processing,

manufacturing or repacking goods for

others

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g. Proprietors, operators or keepers of hotels,motels, resthouses, pension houses, inns,resorts

h. Proprietors or operators of restaurants,refreshment parlors, cafes and othereating places, including clubs and caterers

i. Dealers in securities

j. Lending investors

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k. Transportation contractors on theirtransport of goods or cargoes, including

persons who transport goods or cargoesfor hire and other domestic commoncarriers by land, air and water relative totheir transport of goods or cargoes

l. Services of franchise grantees of telephone

and telegraph, radio and televisionbroadcasting and all other franchisegrantees except those under Section 119 ofthe Tax Code

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m. Services of non-life insurance companies(except their crop insurances), including

surety, fidelity, indemnity and bondingcompanies

n. Similar services regardless of whether ornot the performance thereof calls for the

exercise or use of the physical or mental

faculties

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5) What is included in the phrase Sale orExchange of Services"

The phrase "sale or exchange of services

shallinclude: shall include:

a. The lease or the use of or the right or

privilege to use any copyright, patent, designor model, plan, secret formula or process,goodwill, trademark, trade brand or otherlike property or right

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b. The lease or the use of, or the right to useof any industrial, commercial or scientificequipment

c. The supply of scientific, technical, industrialor commercial knowledge or information

d. The supply of any assistance that is ancillaryand subsidiary to and is furnished as a means

of enabling the application or enjoyment ofany such property, or right or any suchknowledge or information

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e. The supply of services by a nonresidentperson or his employee in connection with theuse of property or rights belonging to, or theinstallation or operation of any brand,machinery or other apparatus purchasedfrom such non-resident person

f. The supply of technical advice, assistance or

services rendered in connection withtechnical management or administration ofany scientific, industrial or commercialundertaking, venture, project or scheme

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g. The lease of motion picture films, films, tapesand discs

h. The lease or the use of or the right to useradio, television, satellite transmission andcable television time

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6) What is a zero-rated sale?

It is a sale, barter or exchange of goods,properties and/or services subject to 0%VAT pursuant to Sections 106 (A) (2) and108 (B) of the Tax Code.

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7) What transactions are considered as zero-ratedsales?

The following services performed in the Philip-pines by VAT-registered persons shall besubject to zero percent (0%) rate:

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a. Processing, manufacturing or repackinggoods for other persons doing businessoutside the Philippines which goods aresubsequently exported where the services arepaid for in acceptable foreign currency andaccounted for in accordance with the rules

and regulations of the Bangko Sentral ngPilipinas (BSP)

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b. Services other than those mentioned in thepreceding paragraph, the consideration forwhich is paid for in acceptable foreigncurrency and accounted for in accordancewith the rules and regulations of the BangkoSentral ng Pilipinas (BSP)

c. Services rendered to persons or entities whose

exemption under special laws or internationalagreements to which the Philippines is asignatory effectively subjects the supply ofsuch services to zero percent (0%) rate

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d. Services rendered to vessels engaged exclu-sively in international shipping

e. Services performed by subcontractors and/orcontractors in processing, converting, ormanufacturing goods for an enterprisewhose export sales exceeds seventypercent (70%) of total annualproduction

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8) What Sales by a VAT-Registered Persons aresubject to 0% rate?

The following sales by VAT-registered personsshall be subject to zero percent (0%) rate:

a. Sale of goods which are directly shipped by

a VAT-registered resident to a place outsidethe Philippines

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c. Foreign currency denominated sales of goods

d. Sales to entities, the exemption of which,under a special law or an internationalagreement with the Government of thePhilippines, effectively zero rates such sales

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9) What transactions are considered as

Transaction Deemed Sales?

The following transactions are considered asdeemed sales:

a. Transfer, use or consumption, not in thecourse of business, of goods or propertiesoriginally intended for sale or for use in thecourse of business

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b. Distribution or transfer to:- Shareholders or investors as share in the

profits of the VAT-registered person; or- Creditors in payment of debt

c. Consignment of goods if actual sale is notmade within sixty (60) days following thedate such goods were consigned

d. Retirement from or cessation of business,with respect to inventories of taxable goodsexisting as of such retirement or cessation

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10) What is VAT-exempt sale?

It is a sale of goods, properties or service andthe use or lease of properties which is not

subject to output tax and whereby the buyeris not allowed any tax credit or input taxrelated to such exempt sale.

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11) What are the VAT-exempt transactions?

a. Sale of non-food agricultural, marine andforest products in their original state by theprimary producer or owner of the landwhere the same were produced

b. Sale of cotton and cotton seeds in theiroriginal state and copra

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c. Sale or importation of agricultural andmarine food products in their original state,livestock and poultry of a kind generallyused as, or yielding or producing foods forhuman consumption and breeding stock andgenetic materials thereof

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d. Sale or importation of fertilizers; seeds,seedlings and fingerlings; fish, prawn, live-

stock and poultry feeds, including ingredientswhether locally produced or imported, usedin the manufacture of finished feeds (exceptspecialty feeds for race horses, fighting cocks,aquarium fish, zoo animals and other animalsgenerally considered as pets)

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e. Sale, Importation or lease of passenger and/orcargo vessels and aircraft, including engine,

equipment and spare parts of said vessel to beused by the importer himself as operator thereof

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f. Importation of personal and household effectsbelonging to residents of the Philippinesreturning from abroad and nonresidentcitizens coming to resettle in the Philippines;Provided, that such goods are exempt fromcustoms duties under the Tariff and CustomsCode of the Philippines

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g. Importation of professional instruments and implements,wearing apparel, domestic animals, personal householdeffects (except any vehicle, vessel, aircraft, machinery,other goods for use in the manufacture and merchandise

of any kind in commercial quantity) belonging to personscoming to settle in the Philippines, for their own use andnot for sale, barter or exchange, accompanying suchpersons, or arriving within ninety (90) days before orafter their arrival, upon the production of evidencesatisfactory to the CIR, that such persons are actuallycoming to settle in the Philippines and that the changeof residence is bona fide

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h. Services subject to percentage tax

i. Services by the agricultural contract growersand milling for others of palay into rice, corninto grits, and sugar cane into raw cane sugar

j. Medical, dental, hospital and veterinary ser-vices except those rendered by professionals

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k. Educational services rendered by private

educational institutions, duly accredited by

the Dept. of Education Culture and Sports

(DECS), and Commission on Higher Educa-tion (CHED), and those rendered by thegovernment educational institutions

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l. Services rendered by individuals pursuantto an employer-employee relationship

m. Services rendered by regional or area head-quarters established in the Philippines bymultinational corporations which act assupervisory communications and coordinating

centers for their affiliates, subsidiaries orbranches in the Asia-Pacific Region and donot earn or derive income from the Phils.

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n. Transactions which are exempt underinternational agreements to which thePhilippines is a signatory, or under speciallaws, except those under the following laws:

P.D. No. 66 - Export Processing Zone Authority(EPZA) registered firms

P.D. No. 529 - Petroleum ExplorationConcessionaires under the Petroleum Act of 1949

P.D. No. 1590 - Philippine Airlines (PAL) relative todomestic transport of goods or cargoes

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o. Sales by agricultural cooperatives dulyregistered with the Cooperative DevelopmentAuthority (CDA) to their members as well assale of their produce, whether in its originalstate or processed form, to non-members;their importation of direct farm inputs,machineries and equipment, including spareparts thereof, to be used directly andexclusively in the production and/orprocessing of their produce

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p. Gross receipts from lending activities by credit or

multi-purpose cooperatives duly registered with theCooperative Development Authority (CDA) whoselending operation is limited to their members

q. Sales by non-agricultural, non-electric and non-creditcooperatives duly registered with the CooperativeDevelopment Authority: Provided, that the sharecapital contribution of each member does not exceedFifteen Thousand Pesos (P 15,000) and regardless of

the aggregate capital and net surplus ratably distri-buted among the members

r. Export sales by persons who are not VAT-registered

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s. Sale of real properties utilized for low-costhousing as defined by R.A. No. 7979, otherwiseknown as the Urban Development Housing Act of1992

and other related laws, such as R.A. No. 7835and R.A. No. 8763 wherein the price ceiling perunit is P1,500,000.00 or as may from timeto time be determined by the Housing and Urban

Development Coordinating Council (HUDCC)

and the National Economic DevelopmentAuthority (NEDA);

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i. Sale of real properties utilized for socializedhousing defined under R.A. No. 8763, wherein theprice ceiling per unit is P225,000.00 or as may fromtime to time be determined by the HUDCC and the

NEDA and other related laws;

ii. Sale by real estate dealers and/or lessors of houseand lot and other residential dwellings valued at

P1,500,000.00 and below the amount shall beadjusted to its present value using the Consumer PriceIndex as published by the National Statistics Office(NSO).

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t. Lease of a residential unit with a monthly rental perunit not exceeding Ten Thousand Pesos (P10,000.00),regardless of the amount of aggregate rentals receivedby the lessor during the year: Provided, that theexemption likewise applies to lease of residential unitswhere the monthly rental per unit exceeds P 10,000.00but the aggregate rentals of the lessor during the yeardo not exceed P 1,500,000.00: the amount of P10,000.00shall be adjusted to its present value using the

Consumer Price Index, as published by the NSO;

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u. Sale, importation, printing or publication ofbooks and any newspaper, magazine, reviewor bulletin which appears at regular intervalswith fixed prices for subscription and sale andwhich is not devoted principally to the publi-cation of paid advertisements

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v. Sale or lease of goods or properties or theperformance of services other than the tran-sactions mentioned in the preceding para-graphs, the gross annual sales and/or receiptsdoes not exceed the amount of P1,500,000.00:

w. Services of banks, non-bank financialintermediaries performing quasi-bankingfunctions, and other non-bank financialintermediaries;

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12) What are the Applicable VAT Rates?

(a) Twelve Percent (12%);

(b) Zero Percent (0%);(c) Seven Percent (7%)

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13) What are the Tax Formula for VAT?

The General Formula for VAT Payable is:

Output Tax P XXXLess: Input Tax XXXVAT Payable P XXX

=====

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14) Withholding Value Added Tax

The Government or any of its political subdivisions,instrumentalities or agencies, including government-

owned and controlled corporations shall, before makingpayment on account of services rendered or for itspurchase of goods from sellers of services of goodswhich are subject to the VAT, deduct and withhold aF inal Withholding VAT at the rate of Seven Percent (7%)of the gross payment.

The contract price of the services rendered by thecontractor shall no longer be declared in the MonthlyVAT Declaration or Quarterly VAT Return

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16. The Formula for Sale of Services

Output Tax (Gross Receipts x 12%) P XXXLess: Input Taxes

VAT paid on local purchases and importation of goodsFor materials, supplied with the sale of service P XXXFor use as supplies in the course of business XXX

For use in the course of trade or business forwhich deduction for depreciation (oramortization is allowed, exceptautomobile, aircraft and yachts) XXX

VAT paid on the purchase of real property XXXVAT paid on purchase of services XXX

Transitional Input Tax XXX XXXVAT Payable P XXX

======

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17. What does Gr oss Receipts

mean?

The term gross receipts means cash or its cashequivalent actually or constructively received(not including the VAT) as:(a) payment on the contract price, compen-

sation, service fee, rental or royalty;(b) payment for materials, supplied with the

services; and(c) Deposits or advanced payments on the

contract for services

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Illustrative Problem - 1

CarCare Shop is a car repair shop furnishing labor only orboth parts and labor. CareCare Shop had the following datafor August 2010 (all inf ormation are exclusive of VAT) :

Amounts received as advances on

car to be repaired and repainted P 11,000Amounts received for cars repaired,repainted, finished and deliveredto owners:

For Labor 175,000For Parts (purchased from a

VAT registered supplier) 33,000Amounts paid to machine shop 44,000Amount paid to suppliers of paints 55,000

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Solution - 1

OUTPUT TAXCash received as advances (P 11,000x 12%) P 1,320Cash received for completed jobs for

Labor (P 175,000 x 12%) 21,000Parts (P 33,000 x 12%) 3,960

Total Output Tax 26,280Less: INPUT TAX

On Parts purchased (P 33,000 x 12%) P 3,960On Machine Shop (P 44,000 x 12%) 5,280

On Paints purchased (P 55,000 x 12%) 6,600 15,840VAT Payable P 10,440

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Val e Added Ta (VAT)

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Solution - 2

OUTPUT TAXOn Professional Fees received [(P 180,000/90%) x 12%] P 24,000On reimbursement received from clients for expenses

chargeable to Clients, billed to Mr. Q (P 6,000 x 12%) 720Total Output Tax 24,720

Less: INPUT TAXOn expenses chargeable to client, billed to Mr. Q P 720Purchase of Computer (P 70,000 x 12%) 8,400Purchase of Office Supplies (P 2,500 x 12%) 300Payment for Utilities (P 15,000 x 12%) 1,800

Payment for other expenses of operations paid toVAT taxpayers (P 3,00 x 12%) 360 11,580

VAT Payable P 13,140

V l Add d T (VAT)

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18. The Formula for Sale of Goods or Properties is:

Output Tax (Gross Sell ing Pr ice x 12%) P XXXLess: Input Taxes

VAT paid on local purchases and importation of goodsFor sale; or P XXXFor conversion into or intended to form

part of a finished product for sale,including packaging materials XXX

For use as supplies in the course of business XXXFor use in the course of trade or business for

which deduction for depreciation (oramortization is allowed, except

automobile, aircraft and yachts) XXXVAT paid on the purchase of real property XXXVAT paid on purchase of services XXXTransitional Input Tax XXX XXX

VAT Payable P XXX======

V l Add d T (VAT)

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Illustrative Problem

Mr. X, a VAT-registered taxpayer, total sales for the month of August2010 was P 1,500,000 (VAT not included). For the same period,purchases (VAT not included), were:

Goods for sale from A Co., a VAT taxpayer P 300,000Goods for sale, from B Co., a Non-VAT taxpayer 200,000Supplies, from C Co., a VAT taxpayer 50,000Services from D Co., a VAT taxpayer 60,000Office equipment, from E Co., a VAT taxpayer 40,000

Real property for use in business, from F Co.,a VAT taxpayer 500,000

Rent paid to G Co., a VAT Taxpayer 50,000

V l Add d T (VAT)

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SolutionOUTPUT TAX Sales (P 1,500,000 x 12%) P 180,000Less: INPUT TAXES

On goods purchased from A Co. (P 300,000 x 12%) 36,000On Supplies purchased from C Co. (P 50,000 x 12%) 6,000

On Services purchased from D Co. (P 60,000 x 12%) 7,200On Office equipment purchased from E Co.

(P 40,000 x 12%) 4,800On Real Property purchased from F Co.

(P 500,000 x 12%) 60,000On Rental paid to G Co. (P 50,000 x 12%) 6,000

Total Input Taxes 120,000VAT Payable P 60,000

V l Add d T (VAT)

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19. What is a Presumptive Input Tax

? Persons engaged in the processing of sardines, mackereland milk, and in the manufacturing of refined sugar,

cooking oil, and packed noodle-based instant meals, shallbe allowed a presumptive input tax, equivalent to four

percent (4%) of the gross value in money of theirpurchases of primary agricultural products which are used

as inputs to their production

V l Add d T (VAT)

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Processing

shall mean pasteurization, canning andactivities which through physical or chemical process

alters the exterior texture or form or inner substanceof a product in such a manner as to prepare it for

special use to which it could not have been put in itsoriginal from and condition

V l Add d T (VAT)

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Illustrative Example

Dyesebel Foods Corp. purchased sardines from fishermenand processes them into canned sardines. During the monthof August 2010, the following sales and purchases (VAT notincluded) were made:

Sales P 400,000Fish from fishermen 100,000Tin cans from Lata Co. 20,000Tomato paste (in cans) 5,000Olive Oil (in bottles) 2,500Pepper from farmers 1,800Paper labels from Tatak Co. 500

V l Add d T (VAT)

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Solution

Output Tax (P 400,000 x 12%) P 48,000

Less: INPUT TAXESActual Input Tax on Purchases

On Tin cans (P 20,000 x 12%) P 2,400On Tomato Paste (P 5,000 x 12%) 600

On Olive Oil (P 2,500 x 12%) 300On Paper Labels (P 500 x 12%) 60

Presumptive Input Tax On Pepper ( 1,800 x 4%) 72 3,432

VAT Payable P 44,566

V l Add d T (VAT)

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20. Transitional Input Tax

A person who becomes liable to VAT or any person whoelects to be a VAT registered person shall, be allowed

input tax on his beginning inventory of goods, materialsand supplies equivalent to two percent (2%) of the value

of such inventory or the actual VAT paid on such goods,materials and supplies, whichever is higher.

The amount allowable shall be credited against the

Output Tax.

Val e Added Ta (VAT)

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21. Example - Transitional Input Tax

Mr. A, owner of a trading firm, initially registered as a non-VAT taxpayerpaying the 3% percentage tax. On the following following year heregistered as a VAT taxpayer because his sales in the previous yearexceeded P 1,500,000. At the beginning of the year he has the following

inventories:

Merchandise inventory. . . . . . . . . . . . . . . . . . . . . . . . .P 450,000Store and Office supplies inventory. . . . . . . . . . . . . . . 100,000

Actual Input Tax Paid on the Inventories. . . . . . . . . P 66,000

How much is the Allowed Transitional Input Tax?


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22. Solution - Transitional Input Tax

Merchandise inventory. . . . . . . . . . . . . . . . . . . . .P 450,000Store and Office supplies inventory. . . . . . . . . . . 100,000Total Inventories of merchandise and supplies P 550,000

Multiply by Transitional Input Tax Rate. . . . . 2%Transitional Input Tax. . . . . . . . . . . . . . . . . . . . .P 11,000Actual Input Tax . . . . . . . . . . . . . . . . . . . . . . . . . P 66,000Allowed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 66,000

=======


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23. Excess Input Tax Carry Over

In cases, where the Total Input Taxes exceed the TotalOutput Tax for a given period, only the amount of inputtaxes shall be applied to the Total Output Tax.

The Excess Input Tax shall be used and applied in thesucceeding taxable period.

Should there be an excess input tax in the first month of a

quarter, and again an excess input tax in the second monthof the same quarter, while the excess input tax of the firstmonth is carried over to the second month, the excess inputtax of the second month is not carried over to the third

th

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