VAT 2011 - de Leon.pdf

TITLE IV

VALUE-ADDED TAX

CHAPTER I

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 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 rendered in the course of trade or business.

ANNOTATION

1. 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 sale), or

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THE N A T I O N A L I N T E R N A L R E V E N U E CODE Sec. 105 A N N O T A T E D

'The Local Government Code (R.A. No. 7160.) defines "business" as "trade or commercial activity regularly engaged in as a means of livelihood or with a view to profit organization." (Sec. 131[d] thereof.)

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.

2. 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 f rom 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 f rom 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 l ivelihood and not in the course of t rade or

business, and shall be exempt f rom 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 "S".)

(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 propert ies, 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.)

105 V A L U E - A D D E D TAX Imposition of Tax

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(7 ) Some homeowners ' associations of subdivisions in Metro Manila are collecting fees from car owners in payment of gate passes/t ickets. The collection by officers of the homeowners ' associat ion from car owners is an activity conducted for profit regardless of the disposition thereof, and thus, the proceeds f rom said collection shall be subject to the regular corporate income tax. Moreover, its income derived f rom the sale of goods (e.g., st ickers) or services in the course of a business pursuit is subject to VAT. (BIR Ruling No. 196-2004, Apri l 6, 2004.)

(8) The assignment by a company engaged in the real estate business, and not in the sell ing or leasing of machinery and equipment for the construct ion of water facilities of machinery of said and equipment as payment of its liabilities, is not subject to VAT, since they do not form part of its inventory and are not primarily held for sale in the ordinary course of trade or business and are, therefore, classif ied as capital assets. (BIR Ruling No. DA 232-06, April 11 , 2006.)

(9) The allocation of condomin ium units to partners of a joint venture or consort ium formed for the purpose of undertaking construction projects as a return on their contributions is not subject to:

(a) income tax, because it is merely a return of contribution and no income is real ized;

(b) VAT because it is not a sale, barter or exchange of real property done in the ordinary course of business; and

(c) documentary stamp tax (DST) under Section 196, because the transfer is without consideration. (BIR Ruling No. DA-572-06, Sept. 22, 2006.)

(10) A sale of lot which is involuntary and only forced upon the seller by virtue of the exercise of the government's power of eminent domain cannot be said to have been conducted in the course of the taxpayer 's trade or business and, therefore, not subject to VAT. (BIR Ruling No. DA 640-06, Oct, 27, 2006.)

3 . 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.


(1) A sale transaction is deemed to be done in the ordinary course of trade or business, and thus subject to VAT, if it was done pursuant to a corporation's incidental powers as appearing in its articles of incorporation. (Ing Barings Securities Philippines, Inc. vs. Com. of Internal Revenue, CTA Case No. 6188, Jan. 14, 2005.)

(2) The act of supplying electricity to Co. G and Co. H, which is not among the ventured activities of Co. F and was not undertaken in the pursuit of Co. F's commercial or economic activity is not subject to VAT. Neither can it be considered incidental thereto since the supply of electricity does not necessarily follow the primary function of manufactur ing yarns and textiles.

Since the billings made by Co. F to its subsidiaries are purely at cost and without any profit and are merely reimbursements, they are not subject to the VAT.

Finally, f rom the start of operat ion of the power plant as well as the reimbursement of expenses, Co. H and Co. G did not recognize input tax for such payments and neither did Co. F pay output tax on the same transact ions. The parties had been consistent in their appreciat ion that the transact ion of supplying electricity and reimbursement and other overhead expenses are not subject to VAT. (BIR Ruling No. DA-384-04, July 13, 2004.)

4. Transactions incidental to pursuit of commercial or eco-nomic activity. Under Sect ion 105, the phrase "in the course of trade or business" includes "transactions incidental" to "the regular conduct or pursuit of a commercia l or economic activity."

BIR Ruling No. DA-563-06 held that the sale of the company's cars made by a company whose regular line of business is manufacturing and export of custom made dental products is not subject to VAT on sales since the sale is not made on a regular basis or even incidental to its regular line of business. This ruling was revoked by Rev. Memo. Cir. No. 15-2011, construing such sale as a transaction incidental to its regular or primary line of business because the cars were purchased and used in furtherance of the company's business, forming part of its capital assets al though not held for sale or lease. Thus, even an isolated transaction involving assets used in business may be subject to VAT if incidental to the pursuit of a commercial or economic activity and, therefore, is considered as entered into "in the course of trade or business."

Sec. 105 V A L U E - A D D E D TAX Imposition of Tax

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5. 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 exempt ion privi leges granted to avoid the passed-on-VAT. The

VAT shifted forms addit ional part of the cost of goods, properties,

and services purchased. Once shifted, the VAT ceases to be a tax.

Thus, for the VAT-registered purchaser, the tax burden passed

on does not consti tute cost, but input tax which is creditable against

his output tax liabilities. This voids the cascading effect which is

characterist ic of the former sales tax system where the sales tax

is necessari ly 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.)

6. As a general rule, the VAT system, uses the destination

principle as a basis for the jurisdict ional reach of the tax. Goods and

services are taxed only in the country where they are consumed.

Thus, exports are zero-rated, whi le imports are taxed. (Comm. vs.

Amer ican Express International, Inc., 462 S C R A 1 9 7 [2005].)

7. Some basic principles governing VAT VAT is ultimately

a tax on consumpt ion, even though it is assessed on many levels

of transact ions on the basis of a f ixed 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].)

8. 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 cooperat ives f rom taxes under Articles 61 and 62 of the Cooperat ives 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, i t can be added to the cost of goods purchased, not as tax but as addit ional 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 f ranchise, rights, privileges, receipts, revenues and profits and propert ies 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 exempt ion. (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 exempt ions are limited only to direct taxes). (VAT Ruling No. 235, Sept. 13, 1989.) Purchases by non-stock non-profit organizat ions are l ikewise subject to VAT where there is no showing that they are exempt from VAT. (VAT Ruling No. 010-09, July 3 1 , 2009.)

(3) Whi le 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.)


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(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 Convent ion 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 exempt ion of an Embassy or its diplomatic agents does not include exempt ion f rom the value-added tax. In other words, purchases of local ly-produced automobi les by the Embassy shall be subject to both VAT and excise taxes under Sections 106(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 Sect ion 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

addit ional and integral part of the cost of goods and/or services

that the non-VAT entity has to shoulder. (VAT Ruling No. 077,

Aug . 2 1 , 1991.)

(7) A foreign contractor, which is organized under the laws of a foreign country, rendering services for the construction of the National Power Corporat ion (NPC) Gas Turbine Plant Project funded f rom 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 responsibil ity for taxes due said foreign contractor. Such a stipulation is binding only between NPC and the contractor, in their private capabil i t ies, 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


2Amended by R.A. No. 7716, the Expanded V A T Law, which took effect on May 28, 1994 after its publication in two newspapers of general circulation, although its implementation was suspended until January 1, 1994 to allow time for registration of business entities and dissemination of information. It would have been enforced on July 1, 1994 but its enforcement was stopped by the Supreme Court when it granted a temporary restraining order on June 30,1994. The law widens the V A T base there-by subjecting to the tax, transactions and services which were previously exempt therefrom and/or paying percentage taxes. The latest amendments were effected by R.A. No. 9337, which became effective on November 1, 2005 and R.A. No. 9361.

contractor, for lack of legal basis. (VAT Ruling No. 063, June 27, 1991.)

9. Taxes replaced. The VAT has been adopted by virtue of Executive Order No. 273 2 (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 compensat ing 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 f ixed, deter-mined, computed or ascertained at the t ime 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.)

10. It has been held that Execut ive Order No. 273 satisfies

all the constitutional requirements of a valid tax law. It is uniform

and equitable. (Kapatiran ng mga Nagl i l ingkod sa Pamahalaan ng

Pilipinas, Inc. vs. Tan, 163 SCRA 3 7 1 , June 30, 1988.)

11. The VAT system. This is a method of imposing an ad valorem tax on value added.

(1) The whole of the sales value of consumer goods,

properties (or services) is taxed by instal lments as the goods

pass along the production and distribution chain involving

successive transactions between businesses but the tax is


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levied at each stage only on the value added at one point. At the manufacturer 's level, the tax is applied on the sale price of the manufacturer.

(2) The value-added tax (VAT) is a multi-stage or multi-point sales tax as it is col lected at each stage or point in the production and distribution process. However, although the tax is levied at all stages, their total value is subject to tax once and once only, so that the amount of tax collected would be equal to that of a single, f irst-stage tax on original sales. This is said to be more equitable than the former sales tax.

The former subsequent turnover tax was also a multi-point sales tax appl icable to all sales subsequent to original sales.

12. Techniques of computing the value-added tax. There are at least three (3), namely:

(1) Addition method. Here, the tax is applied on the value added to a product which includes all payments made at each stage in the form of wages, salaries, rents, interests, profits, and other inputs;

(2) Tax credit method. Under this approach, the value-added tax rate is appl ied on the total sale price without any deduct ion whatsoever; and f rom the tax arrived at (tentative tax), are deducted all previous tax payments on purchases made. In other words, the tax is appl ied only to the value added by the taxpayer, that is, to the excess of his/its sales over his/its purchases f rom other business taxpayers. This is also known as the "invoice method. " There are no tax credits for any tax-exempt business purchaser, and, of course, for the final consumer; and

(3) Cost-deduction or cost-subtraction method. In this case, the value-added tax rate is applied on the difference between the gross sell ing price or gross value of the taxable article and the cost of raw materials utilized by the taxpayer which have been previously subject to tax.

The former single-stage tax on original sales was essentially a gross product type of VAT which used the credit system for calculating the tax from manufacturer, producer, or importer. The Tax Code in Section 105 has adopted the tax credit method in computing the value-added tax due. The former original sales tax was already in the nature of a value-added tax employing the tax credit approach whereby taxes paid on raw materials used in manufacture were credited against the sales

10 THE N A T I O N A L I N T E R N A L R E V E N U E CODE A N N O T A T E D

Sec. 105

tax due. Both the tax credit and cost deduction approaches amount to the same thing, but the tax credit approach entails a separate itemization of the tax on all invoices, and this reduces opportunities for tax evasion.

13. VAT not an entirely new concept of business taxation. VAT is just another form of tax levied on a wide range of goods, properties and services. Specifically, it simply means tax on the value added by every seller, etc. to his purchases, etc. of goods, properties, and services. Since taxes on goods, properties and services are not new, the concept of VAT is not entirely unfamiliar in the Philippines.

(1) Before July 1, 1978, the sales tax imposed on manufacturers was computed by first determining the amount of taxable sales, and second, by multiplying the taxable sales by the appropriate rate of tax. Taxable sales were computed by deducting the cost of raw materials used in manufactur ing finished articles from the sell ing price of such f inished articles. In other words, the excess of the sell ing price over the cost of raw materials represents a very crude form of value added by the manufacturer on such cost of raw materials. 3

Below is an example of how the sales tax which is a crude form of VAT was computed before July 1, 1978.

Suppose a manufacturer purchased raw materials at P60,000. He converted the same into f inished products which he sold for P100,000. The sales tax is computed as fol lows:

Sales P100,000

Less: Cost of raw materials 60,000

Total P40.000

Tax due at 10% P4,000

3"In the Philippines, the value-added system of sales taxation has long been in existence, albeit in a different mode. Prior to 1978, the system was a single-stage tax computed under the 'cost deduction method' and was payable only by the original sellers. The single-stage system was subsequently modified, and a mixture of the 'cost deduction method' and 'tax credit method' was used to determine the value-added tax payable. Under the 'tax credit method,' an entity can credit against or subtract from the V A T charged on its sales or outputs the V A T paid on its purchases, inputs and imports.

It was only in 1987, when President Corazon C. Aquino issued Executive Order No. 273, that the V A T system was rationalized by imposing a multi-stage tax rate of 0% or 10% on all sales using the 'tax credit method."' (Abakada Guro Party-List vs. Ermita, 469 SCRA 10 [2005].)


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This method of comput ing the sales tax is known as the "cost deduct ion method" because the cost of goods sold (P60,000) is deducted f rom the sales price (P100,000) in arriving the value-added on which the tax is computed.

(2) On July 1, 1978, by virtue of Pres. Decree No. 1358, the law was amended by introducing the so-called "tax credit method" of comput ing the sales tax. Subsequently, Pres. Decrees No. 1705 and No. 1773 empowered the President to impose, upon recommendat ion of the Minister of Finance, a value-added tax on second sale of any article, the tax to be computed on the cost-deduct ion method. This power was never exercised by the President; instead, he issued Pres. Decree No. 1991 which imposed in 1985 a 3% turnover tax on all second sales which was later replaced by a turnover tax of 1.5% on all subsequent sales by Pres. Decree No. 2006.

Under the tax credit method, the tax on sales is first

computed by mult iplying total sales by the appropriate rate

of the tax. Then the amount of the tax on purchases on raw

materials which was passed on by the supplier to the seller is

credited against (deducted from) the sales tax and the difference

represents the sales tax (or VAT) payable. Theoretically, both

methods will result in the same amount of tax revenue assuming

the same rate is used on the same goods since the sum of all

the values added at all stages are equal to the retail selling

price of the goods. Below is an illustration of how the tax was

computed under the tax credit method.

Assuming the same amount of sales and purchases in the previous example and a tax rate of 10%, the sales tax is computed under the tax credit method in the following manner:

Sales P100,000

Considering that the tax credit method of calculating the sales tax is one of the essential features of the VAT, the former system of taxing manufacturers may be considered "VAT-like" tax a restricted or limited form of pre-retail VAT imposed only

10% Sales tax P10,000

Purchases P60.000

10% Tax on purchases

Sales tax payable

6,000

P 4,000


Sec. 105

on first sellers, i.e., manufacturers, producers and importers. (BIR Primer on VAT, pp. 2-4.)

14. Types of VAT. The VAT is applied only to the value added by the seller, that is, to the excess of his sales over his purchases. It is collected by the tax credit method. Each business pays the output tax on its taxable sales during the preceding quarter (see Sec. 114[B].) but less a credit for the VAT paid by it on its purchases from VAT-registered persons.

There are three ways (see No. 7.) under which the tax may be

computed by three different methods by subtraction, by credit, or

by addition:

(1) Under the gross product type, only the input tax on

purchases of raw material goods for sale or for conversion

into other f inished goods for sale is al lowed as tax credit in

determining tax liability;

(2) Under the consumption type, all input taxes on all

business purchases, including suppl ies, capital goods or

equipment, and services can be credited; and

(3) Under the income type, which differs f rom the other

types in that the input tax on capital goods al lowed as tax credit

is amort ized over the depreciable life of said goods.

The Tax Code (Sec. 110[A].) adopted the consumpt ion type

and the income type in comput ing and collecting the VAT.

Our VAT system which is invoice-based (see Sec. 113.) is

basically a consumpt ion type VAT and, in general , fol lows the

"destination principle" or "cross-border doctr ine." (see Annota-

tion No. 34 under Sec. 108.)

15. Differences between former crude form of VAT and present VAT. The differences lie in:

(1) Coverage or scope. The present VAT covers all persons engaged in the business of sell ing goods and services, including manufacturers, producers or importers and subsequent sellers, such as wholesale distr ibutors, t raders and retailers, lessors of property, as well as contractors and brokers. Under the former system, the sales tax which was computed under the tax credit system was applicable only to original sellers manufacturers, producers and importers. Subsequent sellers subject to the cumulat ive 1.5% turnover tax were not entitled to claim tax credit for sales taxes passed on to


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them by preceding sellers or suppliers. Sellers of services were subject to percentage on gross receipts at variable rates.

(2) Extent of tax credit allowable. Under the former system, the tax credit was al lowed only to be claimed by manufacturers, producers and importers (original sellers) and it was l imited only to the sales, millers, and excise taxes on purchases of raw materials. Under the present VAT method of taxation that relies on sales invoices or official receipts (see Sec. 110[A, 1], 113[A, B].), not only original sellers but also subsequent sellers are entit led to claim the tax credit on value-added tax paid on purchases of raw materials, supplies, capital equipment and services made in the course of the taxpayer's trade or business. The only tax for which no credit would be al lowed would be that col lected on sales made to households or ult imate consumers, rather than to the business.

(3) Number of rates. The present VAT has only two

rates: 0% and 12% (formerly 10%) in contrast to the former

system where the sales tax consisted of 30%, 20%, 10%, and

0% for original sellers and 1.5% for subsequent sellers. (Ibid.,

pp. 4-5.)

Zero-rated sales are considered taxable sales but subject

to zero-rate.

16. Advantages of VAT. The fol lowing have been given:

(1) It makes the sales tax system more equitable because:

(a) It is imposed only on the value added by the seller, etc. thereby avoiding the cascading effect ("tax on tax" shifted) of the former sales tax system, particularly the subsequent sales tax by avoiding double or multiple taxation of the same goods, properties, or services, the value of which were previously subjected to VAT;

(b) It is general ly applicable to all persons and trans-actions, thereby establishing a wider tax base and spread-ing the burden of paying the tax; and

(c) It is imposed at a uniform rate, thereby equalizing

the tax burden.

(2) It has a built-in self-policing feature which will ensure proper collection of the tax at all stages of distribution (see Sec. 108.), since tax payments are based on the output tax (VAT) and the input tax (tax credits) as supported by receipts,


Sec. 105

thereby providing a more accurate audit trail or evidence for BIR monitoring purposes. Furthermore, it will encourage purchasers to demand accurate receipts to accumulate more tax credits. It will thus minimize tax evasion;

(3) It is simple and consistent, having only two (2) tax rates (0% and 12%) in place of the four (4) tax rates (0%, 10%, 2 0 % and 30%) imposed under the former system depending upon the classification of the articles; and

(4) It is, therefore, easy to administer and to comply wi th,

and expected to generate large revenues.

17. Meaning of certain terms. A s used in the law:

(1) Person refers to any individual, trust, estate, partnership,

corporation, joint venture, cooperative or associat ion.

(2) Taxable person refers to any person liable for the

payment of value-added tax, whether or not registered in

accordance with Section 236.

(3) VAT-registered person refers to any person who is registered as a VAT taxpayer under Sect ion 236. His status as a VAT registered person shall cont inue until the cancel lat ion of such registration.

(4) Taxable sale refers to the sale, barter, exchange, and/

or lease of goods or propert ies including transact ions "deemed

sale" and the performance of service for a considerat ion, all of

which are subject to tax under Sect ions 106 and 108 of the Tax

Code. (Sec. 4 .105-1 , CVR.)

18. Requisites for liability. For VAT to be charged (other than

on imports), the fol lowing condit ions must be satisf ied:

(1) There must be a sale, etc. in the Phil ippines;

(2) The sale, etc. must be of taxable goods, propert ies, or services; and

(3) The sale must be made by a taxable person in the

course or furtherance of his/its business.

19. Persons liable. This is provided in Sect ion 105. Note that while the importation of goods may be for business or non-business use, the sale, etc. of goods, propert ies, and services must be made in the course of trade or business.

(1) Government entit ies and instrumentali t ies including government-owned or control led corporat ions, and nonstock,


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nonprofit organizat ions (par. 3.) are subject to VAT if in the course of trade or business they sell, etc., goods or properties, or render services, or whether for business or not, import goods.

(2) There is no automatic exemption from value-added tax registration requirements of local government units. For as long as a government entity sells, barters, exchanges, leases goods, propert ies or renders services in the course of trade or business, it is required to register as a VAT taxpayer. Accordingly, if the local government falls within the provision of Sect ion 105, it is required to register as a VAT taxpayer; otherwise, it is not. (BIR Ruling No. 060-2000, Nov. 08, 2000.)

(3) The sale by a company, a dealer of scrap materials, of a damaged vessel purchased by it f rom an insurance company, as scrap in the course of its business is subject to the 10% VAT. (Sec. 106[A].) But the sale of the vessel by the insurance company which insured the vessel and acquired custody of the same is not subject to VAT as such sale would only be incidental to its insurance and underwrit ing services. (BIR Ruling No. 224, Nov. 29, 1990.)

(4) Similarly, the sale of scrap vessels by a company engaged as common carrier (which is subject to carrier's tax under Sec. 15 and not subject to VAT) is not subject to VAT because such sale of scrap vessels is merely incidental to the shipping business. But sale of fully depreciated construction equipment by a VAT-registered single proprietor engaged in the construction business and lease of construction equipment which transactions, being inherently related to taxpayer's construction business, are subject to VAT pursuant to Section 106(A). (VAT Ruling No. 025, March 11, 1992.)

Note: The fund-raising activity consisting of the sale of raffle tickets by a religious, charitable, etc. organization (see Sec. 30[E].) is not a business activity contemplated by Section 99. (BIR Ruling No. 238, Dec. 19, 1990.)

(5) A non-stock, non-profit corporation or organization deriving income principally from contributions is exempt from VAT However, if it engages in any of the taxable activities stated in Section 105, it will become liable to VAT. (VAT Ruling No. 048-03, Dec. 1, 2003.) It is exempt only from direct taxes such as income tax, and this exemption cannot be extended to indirect taxes like VAT. Thus, its purchases of goods and


services (as well as importation of goods) from VAT registered (or VAT-registerable) suppliers are subject to VAT. (VAT Ruling No. 005-09 and No. 007-09, April 22, 2009.)

(6) In general, all persons liable to the VAT include those (except those specifically exempt under Sec. 109.) formerly liable to pay the taxes replaced by the VAT. Any person falling under Section 105 is liable for the payment of VAT, whether or not registered in accordance with Section 236.

20. All sellers of goods, properties, and services whose aggregate gross annual sales or receipts exceed P1.5 Million will be covered by the VAT, unless such sales are specifically exempt.

(a) Certain sales of goods and services are either zero-rated or exempted from the VAT. By aggregate gross annual sales is meant the total gross sale of all taxable operat ions and activities of one taxpayer. For example, if a taxpayer is engaged in sell ing taxable goods, and operat ing a repair shop and tailoring shop, the aggregate gross annual sales is the total annual sales of these activities. (BIR Primer on VAT, p. 6.)

(b) A joint venture for the purpose of undertaking construction projects (e.g., residential /commercial development of lots) is not a taxable corporat ion under Sect ion 22(B) of the Tax Code. The assignment by the owner to developer of the latter's share in the developed lots under a memorandum of sharing is not subject to VAT since the owner, by contr ibuting his property neither sells, barters or exchanges goods or properties nor renders any service subject to VAT. But the subsequent disposit ion by the co-venturers of the areas allocated to them shall be subject to creditable withholding tax (CWT) or capital gains tax (CGT, as the case may be, and to VAT and documentary stamp tax under Sect ion 196. The VAT is based on the gross sell ing price (GSP) or the fair market value (FMV) of the propert ies, whichever is higher. (BIR Ruling No. DA-326-08, Oct. 22, 2008.)

(c) Receipt by a condominium corporation of dues f rom its tenant/members used solely for administrat ive expenses do not form part of its gross income. Reimbursement of costs with no mark-up or profit e lement, for utility charges paid on behalf and for the account of the tenants/members shall not form part gross receipt subject to VAT, because they are not charges for sales of goods or services. (BIR Ruling No. DA-336-08, Oct. 23, 2008.)


17

21. "In the course of trade or business." The phrase is restricted to activities or affairs where profit is the purpose or l ivelihood is the motive. (Comm. of Internal Revenue vs Court of Appeals, 242 SCRA 289 [1995].)

(1) The intended transfer of assets of a subsidiary, other than inventories of taxable goods, to a proposed branch, is not in the course of t rade or business; neither is it incidental thereto if the same is just an isolated transaction and does not follow its primary funct ion. (BIR Ruling No. 165-99, Oct. 21, 1999.)

(2) Revenue derived by a non-stock, non-profit domestic corporat ion f rom "membership dues, annual dues and contr ibut ions" is exempt f rom VAT. (BIR Ruling No. 005-00, Jan. 27, 2000.)

(3) A representative office is a non-resident foreign corpo-ration not engaged in any income-generat ing business in the Phil ippines. Since it does not engage in any income-generating activity, it is not subject to income tax, and, consequently, it is exempt f rom the fil ing of the corporate income tax return. It is exempt f rom VAT as it is not engaged in any income-generating activity and it merely enables its overseas head office to maintain some presence in the Phil ippines. The exemption from VAT applies only to the direct output VAT of the representative office and not to the indirect VAT which may be passed on to it by its suppliers of goods and services. (BIR Ruling No. DA-529-09, Sept. 10, 2009.)

The law contemplates "the regular conduct or pursuit of a commercial or an economic activity," regardless of whether or not the entity is profit-oriented and liability attaches even in the absence of profit attr ibutable to the transaction, (see Comm. of Internal Revenue vs. Court of Appeals, 329 SCRA 237 [2000].)

SEC. 106. Value-added Tax on Sale of Goods or Proper-ties.

i A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied:


Sec. 106

(i) Value-added tax collection as a percentage of Gross Domestic Product (GD) of the previous year exceeds two and four-fifth percent (2 4/5%); or

(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%)." (As amended by R.A. No. 9337.)

(1) The term "goods or properties" shall mean all tangible and intangible objects which are capable of pecuniary estimation and shall include:

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

(b) The right or the privilege to use patent, copyright, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right;

(c) The right or the privilege to use in the Philippines of any industrial, commercial or scientific equipment;

(d) The right or the privilege to use motion picture films, films, tapes and discs; and

(e) Radio, television, satellite transmission and cable television time.

The term "gross selling price" means the 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 the value-added tax. The excise tax, if any, on such goods or properties shall form part of the gross selling price.

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

"The philosophy behind these alternative conditions has been explained thus: "1. V A T / G D P > 2.8% The condition set for increasing V A T rate to 12% have economic or fiscal meaning. If V A T / G D P is less than 2.8%, it means that government has weak or no capability of implementing the V A T or that V A T is not effective in the function of the tax collection. Therefore, there is no value to increase it to 12% because such action will also be ineffectual. 2. Nat'l Gov't Deficit/GDP > 1.5% The condition set for increasing V A T when deficit/GDP is 1.5% or less means the fiscal condition of govern-ment has reached a relatively sound position or is towards the direction of a balanced budget position. Therefore, there is no need to increase the V A T rate since the fiscal house is in a relatively healthy position. Otherwise stated, if the ratio is more than 1.5%, there is indeed a need to increase the V A T rate." (Abakada Guro Party List vs. Ermita, 469 SCRA 10 [2005].)


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(a) Export Sales. The term "export sales" means:

(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 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 (BSP);

(2) Sale of raw materials or packaging materials to a nonresident 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 and paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);

(3) Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed sev-enty percent (70%) of total annual production;

(4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP);

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

(6) The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations. (As amended by R.A. No. 9337.)

(b) Foreign Currency Denominated Sale. The phrase "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) Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero-rate.

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


Sec. 106

(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.

(C) Changes in or Cessation of Status of a VAT-registered Person. The tax imposed in Subsection (A) of this Section shall also apply to goods disposed of or existing as of a certain date if under circumstances to be prescribed in rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner, the status of a person as a VAT-registered person changes or is terminated.

(D) Sales Returns, Allowances and Sales Discounts. The value of goods or properties sold and subsequently returned or for which allowances were granted by a VAT-registered person may be deducted from the gross sales or receipts for the quarter in which a refund is made or a credit memorandum or refund is issued. 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 a future event may be excluded from the gross sales within the same quarter it was given.

(E) Authority of the Commissioner to Determine the Appropriate Tax Base. The Commissioner shall, by rules and regulations prescribed by the Secretary of Finance, determine the appropriate tax base in cases where a transaction is deemed a sale, barter or exchange of goods or properties under Subsection (B) hereof, or where the gross selling price is unreasonably lower than the actual market value.

ANNOTATION

1. Rate and base of tax on sale of goods or properties. Every sale, barter, or exchange, or transaction deemed as sale of goods or properties, including goods subject to excise taxes (see


21

Sec. 129, par. 1.) except as provided in Section 109(e, f), is subject to a VAT.

(1) The rate of tax is now 12% based on gross selling price or gross value in money of the goods or properties. However, the sales ment ioned in Section 106(A, 2) are subject to zero percent (0%). Taxable goods include capital goods (see Sec. 110[A, 1, v].) irrespective of the date of acquisit ion of properties. (Sec. 5, Rev. Regs. No. 10-94.) Sale of real properties, including residential house/lot, 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. (see Sec. 4-106-3, CVR.)

(2) Receipts der ived f rom the sale of blocked television

t ime which consists in buying and selling TV airt ime, are not

subject to the VAT, because the activity does not involve the

rendering of any service or engaging in the sale of goods which

means only movable or tangible objects. (BIR Ruling No. 184,

May 4, 1988.) Note: They are now subject to the VAT under

Sect ion 106(A, 1, e).

(3) Under Sect ion 106, there must be a sale, barter, or exchange of goods or properties before any VAT may be levied. So services rendered for a fee even on reimbursement-on-cost basis only and without realizing profit are also subject to VAT. In the case, however, of services rendered by advertising companies, paid for by the taxpayer evidenced by a VAT invoice receipt (see Sec. 110[A, 1].), using its affiliate's dole-out or assistance in view of the taxpayer 's dire or adverse economic condit ions, in the amount equivalent to the latter's advertising expense but the affiliate never received any goods, properties, or service f rom the taxpayer, the subsidy is not subject to VAT; since there is no sale, barter or exchange in the subsidy given. Whi le the reimbursement by the affiliate may be considered as income of the taxpayer, and, therefore, subject to income tax, the same cannot be subject to VAT. (Comm. vs. Sony Phil ippines, Inc., G.R. No. 178697, Nov. 17, 2010.)

(4) In computing the VAT payable or excess input VAT, the basis is the total output tax during the period (month or quarter) less total al lowable input tax during the same period. The allowable input tax includes a carry-over of the excess input tax from the preceding period in addition to those derived from current purchases. Advanced VAT payment and VAT withheld by authorized VAT withholding agent are likewise allowable


Sec. 106

as tax credits from VAT payable/excess input VAT. (A-9, Rev. Memo. Order No. 6-2003.)

(5) The transfer of shares in exchange for shares in another corporation pursuant to Section 40(c)(2) is not subject to VAT pursuant to Section 4.106-8(b)(1) of CVR. (Appendix

"S".)

(6) Inherent in the VAT system is the payment of output tax on sales, etc. minus input taxes (tax credits) on business expenditures, (see Sec. 110.) The only person who does not get a tax credit for the VAT he has paid is the consumer. In practice, VAT is levied on the total transactions of a business and, therefore, the first seller would be claiming a credit for VAT paid on all his purchases.

2. Export sales. They are zero-rated if made by VAT-

registered persons (see Sec. 236.); if the person is not registered,

they are treated as exempt sales. (Sec. 109[O].) It is given as an

incentive to exporters since they are entit led to claim VAT refunds

on their input taxes while their export sales are subject to zero rate

with no need to apply and secure prior approval for VAT zero-rat ing.

(1) X, a domest ic mult inational corporat ion, sold goods

manufactured by it to Y, a foreign corporat ion created and

organized under the laws of Hongkong with a representative

office in the Phil ippines, which, in turn; sells the goods directly

to Z (Duty-Free Phil ippines), a domest ic corporat ion. X directly

delivers the goods to Z. Y pays X the peso equivalent of the

goods and Z pays Y in U.S. dollars in Hongkong.

Under Subsect ion (A, 2, a, 1), the sale of goods by X to

Y, notwithstanding the fact, that Y is a foreign corporat ion, is

subject to the 12% value-added tax. Actual shipment of the

goods from the Phil ippines to a foreign country is a precondit ion

of an export sale fol lowing the destination principle being

adhered to by our VAT System.

As such, the onus of taxation under our VAT system is in

that country where goods, property or services are dest ined

to, used or consumed. This is the reason why under the VAT

law, goods, property or services dest ined to, used or consumed

in the Phil ippines are subject to the 12% VAT whereas those

dest ined, used or consumed abroad are subject to the zero

percent VAT. Hence, it is inconsequential for VAT purposes that

the sale is made to a foreign person if the goods were actually


23

delivered within the Phil ippines. (VAT Ruling 028-2002, April 30, 2002.)

(2) Sales of raw materials or packaging materials to an export-oriented enterprise whose export sales exceed 7 0 % of its total annual production (Subsec. [A, 2, a, 3].) are to be zero-rated provided the seller compl ies with other requirements, like registration with the Board of Investments (BOI) and the Phil ippine Economic Zone Authority (PEZA). A photocopy of the purchase invoice or receipt evidencing the VAT paid shall be submit ted together with the application for refund or tax credit for input tax. The original copy of said invoice-receipt shall be presented for cancel lat ion prior to the issuance of a tax credit certif icate or refund. It is the entirety or totality of the sales to such enterprise that is to be zero-rated, not just the percentage of the sale in proport ion to the actual exports made by such enterprise. (Atlas Consol idated Mining & Dev. Corp. vs. Comm. , 318 SCRA 386 [1999]; Ibid., 534 SCRA 51 [2007].)

(3) Whi le an ecozone is geographical ly within the Philip-pines, it is deemed a separate customs territory and is regarded in law as foreign soil. Sales by suppliers f rom outside the borders of the ecozone to this separate customs territory are deemed as exports and treated as export sales. (Comm. vs. Sekisui Jushi Phil ippines, Inc., 496 SCRA 206 [2006].)

(4) The Omnibus Investments Code of 1987 (Exec. Order No. 226, passed July 17, 1987.) prescribes that the following sales, without actual exportat ion, are considered constructively exported:

(a) Sales to bonded manufacturing warehouses of

export-oriented manufacturers;

(b) Sales to registered Philippine Economic Zone

Authority (PEZA) enterprises;

(c) Sales to registered export traders operating bond-ed trading warehouses supplying raw materials used in the manufacture of export products; and

(d) Sales to diplomatic missions and other agencies

and/or instrumentalit ies granted tax immunities, of locally

manufactured, assembled or repacked products, whether

paid for in foreign currency or not. (Art. 23 thereof.)

Consistent with this policy on constructive export, PEZA accepts and registers as export enterprises even companies


engaged in 100% constructive exportations, enjoying the same incentives and privileges granted to direct exporters such as income tax holidays (ITH) and tax and duty-free importation.

The BIR has ruled that sales of petroleum products to foreign international marine vessels do not fall within the definition of "export sales" as contemplated by law although the transactions transpire in the Philippines since they do not involve exportation as there is no actual shipment to a foreign country. The transactions are subject to excise tax under Section 148. (BIR Ruling No. 148-99, Sept. 17, 1999.)

(5) Section 3 of RMO No. 9-2000 provides that sales of goods, properties, or services made by a VAT-registered supplier to a BOI-registered exporter shall be accorded automatic zero-rat ing, i.e., without necessity of applying for and securing approval of the application for zero-rating as provided in Rev. Regs. No. 7-95. Since the buyer is a BOI-registered enterprise and at the same t ime a VAT-registered taxpayer, while its supplier is l ikewise a VAT-registered company, the sale by the supplier to the buyer is subject to zero-percent (0%) VAT pursuant to Section 3 of RMO No. 9-2000, Dec. 22 , 2000.

(6) Sections 3(1 )(a) of RMC No. 74-99 provides that sales made by a VAT-registered supplier to a PEZA-registered enterprise is subject to zero-percent (0%) VAT pursuant to Section 106(A)(2)(a)(5) and Sect ion 23 of R.A. No. 7916. However, if the VAT registration of the PEZA-registered enterprise is an erroneous registration, it is not entit led to input taxes on its purchases f rom its supplier. (Ibid.)

The law does not dist inguish between goods sold for the personal consumpt ion of special economic zone (SEZ)-registered enterprises, or for use in manufactur ing goods for export; or

(7) The supply of services to the SEZ-registered enter-prises by VAT-registered persons in the Customs Territory is entitled to the benefit of effectively zero-rated VAT, whether or not the SEZ-registered enterprise is export-or iented. The effective VAT zero-rating of sale of services to SEZ-registered enterprises by VAT-registered suppliers in the Customs Territory is premised on the provisions of Section 108(B)(3), in relation to the provisions of R.A. No. 7227 and 7916, and the cross-border doctrine of the VAT System enunciated in VAT Ruling No. 032-98. (VAT Ruling No. 049-03, Dec. 1, 2003.)


25

(8) Sales of goods to the above SEZ-registered enterprises by VAT-registered suppliers in the Customs Territory, being treated in laws as export sales, are entitled to the benefit of the effectively zero-rated VAT, pursuant to Section 106(A)(2)(a)(5). The statute does not dist inguish between goods sold for the personal consumpt ion of SEZ-registered enterprises, or for use in manufactur ing goods for export; or if such goods form part of the f inished products. (Ibid.)

(9) A PEZA-registered 100% export enterprise that is a VAT taxpayer enjoying a six-year income tax holiday (ITH), and is engaged in the sale scrap i tems to local buyers, is subject to VAT because the sale is not considered an export sale and such of activity is "in the ordinary course of trade or business." (BIR Ruling No. DA-603-06, Oct. 10, 2006.) The sale of rejects or scrap i tems that inevitably arise at certain stages of the registered mining activity of a PEZA-registered enterprise is l ikewise subject to VAT. It will cont inue to enjoy exemption from income tax during the ITH and will thereafter be subject to the 5% preferential tax on gross income learned (GIE). (BIR Ruling No. DA-255-07, Apri l 25, 2007.)

Note: Subsect ion (A)(2)(a)(6) is added by R.A. No. 9337.

3. Foreign currency denominated sales which are referred to as "foreign exchange denominated sales or internal exports" in LOI No. 1355 are also zero-rated.

(1) The term "internal export" under P D . No. 1820 and E.O. No. 765 (which are laws prior to E.O. No. 273.) does not apply for VAT purposes, being inconsistent with the term "export sa les" under the VAT law (subsequent law), which is restricted to actual exports and foreign currency denominated sales. Such being the case, the sale of domestic manufacturers for the supply of articles for government projects, f inanced from the proceeds of foreign loans cannot be considered subject to zero percent VAT.

Moreover, although loan agreements between the government and foreign creditors may provide for the exemption from taxes, charges and other levies of local contractors and suppliers for projects utilizing proceeds from said loans, this exemption privilege is extended only to the awardee of the contract (i.e., the contractor) and not to suppliers of such contractors. Hence, the sale of steel pipes to a contractor of a government agency for a waterworks project funded by the


Sec. 106

World Bank cannot be legally considered VAT exempt nor zero-rated. (VAT Ruling No. 062, June 26, 1991.)

(2) Sales of locally manufactured or assembled goods for household and personal use to Filipinos abroad and other non-residents of the Philippines as well as returning Overseas Filipinos under the Internal Export Program of the Government paid for in convertible foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP) shall also be considered export sales. (Sec. 4.100.2[b], Rev. Regs. No. 7-95.)

(3) Goods purchased from local suppliers and subsequently sold by duty-free shops to returning Fil ipinos, balikbayans, or other non-residents, which are paid for in acceptable foreign currency can be considered foreign currency denominated sales subject to 0% VAT. Similarly, goods purchased f rom foreign suppliers and subsequent ly sold by duty-free shops also qualify for VAT zero-rating pursuant to the "destination principle" which provides that goods and services are taxed only in the country where they are consumed. Thus, exports are zero-rated because the consumpt ion is made outside the Philippines. (BIR Ruling No. DA 286-08, Oct. 13, 2008.)

(4) Sales by a domest ic corporat ion (DC) to its non-resident clients for delivery to Phil ippine residents which are paid for in US currency through credit card charging are considered as "foreign currency-denominated sales" and are subject to 0% VAT rate pursuant to subsect ion (A)(2)(b). The unused excess input VAT credits of the DC from its local purchases which are directly attr ibutable or ratably apport ioned to its zero-rated sales, can be claimed for refund or tax credit pursuant to Section 112. (BIR Ruling No. 119-06, Mar. 16, 2006.)

4. Zero-rated sale of goods or properties. Such sale by a VAT-registered person is a taxable transact ion for VAT purposes, but shall not result in any output tax. However, the input tax on purchases of goods, propert ies, or services related to such zero-rated sale shall be available as tax credit or refund. (Sec. 4.106-5, CVR.)

Under Subsect ion (A, 2, c), it is not the person or entity enjoying tax-exemption privilege under special law or international agreement which is given the privilege of enjoying zero-rating under the VAT law, but the sales (by suppliers) to such persons or entities which may be subject to the zero-rate. (BIR Ruling No.


27

077, March 4, 1988.) The fact that the Philippines is a signatory to an international agreement is of no moment where such agreement does not provide for any tax exempt ion.

The fol lowing are examples of zero-rated sales:

(1) Executive Order No. 161 provides that goods sold directly to the Asian Development Bank shall not be subject to sales tax, and services rendered under contracts entered into with the said bank shall not be subject to contractor's tax. In this case, the sale of goods and services to Asian Development Bank are effectively zero-rated. (Ibid.)

(2) Pursuant to Sect ion 2 of Executive Order No. 581 (as amended by Exec. Order No. 587.), the sale of gold to the Central Bank is considered export sale; hence, the sale of gold tail ings is subject to VAT at 0% pursuant to Section 106(A, 2, a), if the seller is a VAT-registered person; otherwise, as exempt, pursuant to Sect ion 109(0) . But the service fee charged to customers for processing their gold tail ings is subject to VAT under Sect ion 108(A). He is subject to income tax on any gain derived f rom the sale to the Central Bank of gold tailings and the service fee for the processing of the same. (BIR Ruling No. 224, Nov. 2, 1989.)

(3) Sect ion 3 of Execut ive Order No. 420 provides that the John Hay Special Economic Zone shall have all the applicable incentives of the Special Economic Zone (SEZ) under Section 12 of R.A. No. 7227 (Bases Conversion and Development Act of 1992) and there applicable incentives granted in the Export Processing Zone, the Omnibus Investment Code of 1987, the Foreign Investment Act of 1991, and new investment laws that may be enacted. (BIR Ruling No. 085-98, June 2, 1998.)

5. Effectively zero-rated sale of goods or properties. It refers to the local sale of goods and properties by a VAT-registered person to a person or entity granted indirect tax exemption under special laws or international agreement.

(1) Although not involving actual export, it is considered as "constructive export," such as sale to export-oriented enterprises, sale to persons engaged in international shipping or air transport operations, foreign currency denominated sale, and sale to tax-exempt persons or entities. Except export sale and foreign currency denominated sale, other cases of zero-rating required prior application and approval by the BIR for effective zero-rating. (Sec. 4.106-6, CVR.)


Sec. 106

(2) Sales of Goods to international organizations and d i p l o m a t s which/who are tax-exempt under special laws or international agreements are effectively zero-rated. (BIR Ruling No. DA-286-08, Oct. 13, 2008.)

(3) The sale of goods and services to persons engaged in international shipping are subject to VAT zero-rating only if the sale pertains to, or is directly attributable to, the transport of goods and passengers from a port in the Phil ippines directly to a foreign port, (see Sec. 4.106-5, CVR; Sec. 106 [A, 2, a, 6].) Products such as projectors, printers, and photocopying machines do not pertain to, or are not directly attributable to, the transport of goods and passengers from a part in the Philippines directly to a foreign port. Hence, their sale of such goods even to persons engaged in international shopping company is subject to 12% VAT. (VAT Ruling No. 008-08, Aug . 11, 2008.)

6. Non-eligibility for VAT zero-rating of automobile sales to ECOZONE entities. Sales of ordinary automobi les to entit ies registered with PEZA, SBMA, Clark Development Authority, and other ECOZONE registered enterprises are not entit led to VAT zero-rating.

"Pursuant to Rule XV, Section 1(D) of the Rules and Regulat ions issued by PEZA to implement the Special Economic Zone Act of 1995 (R.A. No. 7916.), exempt ions f rom the imposit ion of value-added tax are being al lowed only with respect to importat ion of specialized vehicles and other transportat ion equipment that are directly related to the registered activity. For example, a registered construction firm may import special ized vehicles such as pay loaders, graders, etc. without the payment of the value-added tax.

However, exemption does not extend to importat ion of service vehicles since the same are not directly related to its registered activity as a construction contractor. As a matter of policy, PEZA is not giving tax incentives for the procurement of vehicles or transportation equipment that are not directly connected with the firms' registered activities in view of the absence of an effective monitoring system to determine whether these vehicles are indeed being utilized by registered enterprises in the conduct of their registered activities. It appears, therefore, that with the issuance of the aforementioned ruling, the BIR is more liberal in the grant of tax incentives to locators inside the PEZA zone. " (Rev. Memo. Cir. No. 25-99; see BIR Ruling No. 074-99, June 4, 1999.)


29

7. Royalty payments made by a BOI-registered enterprise to a nonresident foreign licensor. The Board of Investments (BOI) Certif ication that the buyer is a manufacturer-exporter whose products are 100% exported, and furnishing a copy of the same to the supplier, are mandatory requirements in order to avail of the automatic VAT zero-rat ing under RMO No. 9-2000. Royalty payments made by a BOI-registered enterprise to a nonresident foreign l icensor are subject to VAT.

(a) Under R M O No. 9-2000, it is required, among others,

that "the supplier must be VAT-registered" in order to qualify

for automatic VAT zero-rat ing treatment. Considering that the

recipient (i.e., mother company) of the royalty is a nonresident

entity, presumably it is not VAT-registered. Hence, said royalty

payment is not covered by RMO No. 9-2000. The said royalty

payment is subject to VAT pursuant to Section 108.

(b) The rationale behind RMO No. 9-2000 is essentially the

same as that of RMC No. 74-99 which treats royalty payments

by PEZA-registered enterprise to a nonresident foreign licensor

as VAT-exempt. The dist inction, however, lies in the fact that

such royalty payments are made VAT-exempt under Section

109(q). On the other hand, there is no equivalent provision

in the Tax Code which exempts a royalty payment made by

a BOI-registered manufacturer/producer (whose products are

100%-exported) to a nonresident foreign licensor. (BIR Ruling

No. 381-2005, Sept. 26, 2005.)

8. Transactions taxable as sales. They are the fol lowing:

(1) Barter or exchange. It is a contract by which the

parties exchange one commodi ty or article of property for

another (see 7 C.J. 931.);

(2) Sales upon previous orders. A contract for the delivery at a certain price of an article which the vendor in the ordinary course of his business manufactures or procures for the general market, whether the same is on hand at the t ime or not, is a contract of sale. (Celestino Co & Co. vs. Coll., 99 Phil. 841.) But if the goods are to be manufactured specially for the customer and upon his special order (i.e., article would not have been made but for the agreement), and not for the general market, it is a contract for a piece of work and not a contract of sale (see Art. 1467, Civil Code; Inchausti and Co. vs. Cromwell , 20 Phil. 345.);


Sec. 106

(3) Leases and hiring agreements with option to buy. In this case, the tax is based on the gross selling price of the property and not on the installments periodically paid to the seller. (BIR Ruling, Feb. 4, 1948; Gen. Cir. No. 444, Dec. 2 1 , 1939; Manila Gas Corp. vs. Calupitan, 66 Phil. 646.) In a case where the court found that the so-called contracts of lease of "neon signs" installed by a taxpayer for his customers were in reality contracts of sale between the taxpayer and his customers, the taxpayer was held liable to pay deficiency sales tax on the neon signs (see Chu Hoi Horn vs. C.T.A., L-22046, Oct. 29, 1968.); and

(4) Transactions deemed sale. These are enumerated in Subsection (B) above. Transfer of goods not in the course of business can take place when the VAT-registered person withdraws goods from his business for his personal use. (Sec. 4.106-7[a, 1], CVR.) Thus, the term "sale" is not l imited to commercial sales; i t extends to transact ions that are "deemed" sales.

9. Circumstances giving rise to "deemed sale" transactions. The fol lowing circumstances shal l , among others, give rise to transactions "deemed sale" for purposes of Sect ion 106(B, 4) :

(1) Change of ownership of 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; and

(2) Dissolution of a partnership and creation of a new partnership which takes over the business. (Sec. 4.106-7[a, 4 ] , Ibid.)

10. Appropriate tax base. The Commiss ioner shal l , by regulations, determine the appropriate tax base in cases where a transaction is deemed a sale, barter or exchange of goods or properties, or where the gross sell ing price is unreasonably lower than the actual market value, (infra.)

11. Change in or cessation of status as a VAT-registered person.

(1) Subject to tax. The value-added tax provided for in Section 106 shall apply to goods or propert ies originally intended for sale or for use in business and capital goods which are existing as of the occurrence of the fol lowing:

(a) Change of business activity f rom value-added taxable status to exempt status. An example is a VAT-


31

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 value-added tax;

(b) Approval of a request for cancellation of registration due to reversion to exempt status;

(c) Approval of a request for cancellation of registration due to a desire to revert to exempt status after the lapse of three (3) consecut ive years f rom the t ime of registration by a person who voluntari ly registered in spite of being exempt under Sect ion 109(2); and

(d) Approval of a request for cancellation of registration of one who commenced business with the expectation of gross sales or receipts exceeding P1.5 million but who fai led to exceed this amount during the first 12 months of operat ion. (Sec. 4.106-8[a] , Ibid.)

(2) Not subject to output tax. The value-added tax shall

not apply to goods or propert ies existing as of the occurrence

of the fol lowing:

(a) Change of control of a corporation by the acquisition

of the control l ing interest of such corporation by another

stockholder or group of stockholders. Example: transfer of

property to a corporat ion in exchange for its shares of stock

under Sect ion 40(C, 2, 6, c);

(b) Change in the trade or corporate name of the

business; and

(c) Merger or consolidation of corporations. The un-used input tax of the dissolved corporation as of the date of merger or consolidation shall be absorbed by the surviving or new corporat ion. (Sec. 4.106-8[b], Ibid.)

12. "Deemed sale "for VAT purposes of merchandise inventories in cases of merger/consolidation of corporations. Pertinent portion of BIR Ruling No. S34-263-97 (Oct. 16, 1997) reads: "Moreover, for value-added tax purposes, the transfer of the respective assets, including tangible and movable properties, by the 10 ABSORBED CORPORATIONS to USWCI pursuant to the merger shall not be subject to the value-added tax, and any unused input tax of each of the 10 ABSORBED CORPORATIONS as of the date of merger, will be absorbed by USWCI as the surviving corporation, pursuant to


Section 5(b)(3) of the Revenue Regulations No. 5-87. (BIR Ruling No. 063-93 dated January 10, 1993; BIR Ruling No. 472-93 dated December 3, 1993.)"

The above BIR ruling has been revoked in Rev. Memo. Cir. No.

19-19 (Feb. 25, 1999) as fol lows:

"It is provided therein that (a) the transferred assets, which include the merchandise inventory of the absorbed corpora-tions, 'shall not be subject to the value-added tax' and (b) that the unused input taxes of the absorbed entities shall be trans-ferred for the use or tax credit to the output tax of the surviving corporation."

The Ruling in question enunciated a twin illegality. The

absorbed corporation, upon the merger, ceases or retires f rom

doing business, so that its merchandise inventory transferred to

the surviving corporat ion, by clear provision of law, is "deemed

sale" for VAT purposes. (Section 106[B][4], Tax Reform Code.) The

unused input taxes of the absorbed corporat ions cannot legally be

transferred to the surviving corporat ion for the latter's use as tax

credits to its output VAT. This could only be used as tax credit to

the VAT payments of the absorbed corporat ions and the same is

not transferable to a party not privy to the contracts f rom where the

input taxes arose. In other words, only the direct buyers of goods/

services to whom the input taxes were 'passed on ' could avail of the

right to tax credit. Under the VAT law, the absorbed entity should

pay the VAT on the merchandise inventory, there being a 'deemed

sale' transact ion, after tax credit ing the corresponding input taxes,

with the right to claim refund, if the input exceeds the output tax.

If the output tax is paid, this may be 'passed on ' to the surviving

corporation for its use as tax credit. BIR Ruling No. S34-263-97 is a

flagrant violation of the VAT law. x x x."

13. The output tax equivalent to 12% based on the market

value of the goods or propert ies deemed sold is imposed at the t ime

of the occurrence of the transactions deemed sale enumerated in

Section 106(B, 1, 2, 3). However, in the case of ret irement f rom or

cessation of business under Sect ion 106(B, 4), the tax base shall

be the acquisit ion cost or the current market price of the goods or

properties whichever is lower. (Sec. 4.106-7[b], CRV.)

14. Selling price/gross selling price or gross value in money. Selling price is the amount of considerat ion in a contract of sale between the buyer and seller or the latest price of the sale which


33

may include cash or property and evidence of indebtedness issued by the buyer, excluding the VAT. (Sec. 4.106-4, CVR.)

Sub-sect ions (A, 1) and (D, 1) of Section 106 define "gross sell ing pr ice" for purposes of determining the VAT.

(1) Gross sell ing price is net of the VAT but shall include as part thereof the excise tax, if any. The Commissioner of Internal Revenue is authorized to determine the appropriate VAT base in the two cases ment ioned in Subsect ion (E).

The gross sell ing price is considered unreasonably lower than the actual market value if it is lower by more than 30% of the actual market value of the same goods or properties of the same quanti ty and quality sold in the immediate locality on or nearest the date of sale. (Sec. 4.106-7[b], CVR.)

(2) The excise tax, if any, on the goods or properties shall form part of the gross sell ing price. (Sec. 106[A, 1].) This implies that the goods or propert ies upon which the VAT is being levied are l ikewise subject to the excise tax. (see Sec. 129.)

In other words, if the sell ing price does not include excise tax, it shall not form part of the gross sell ing price for purposes of comput ing the VAT payable. Thus, the gross selling price of under bond alcohol sold by the distiller to the rectifier-permittee does not include excise tax because the condition of the bond provides that the distiller will pay the excise tax on the finished product which is rectified alcohol. Actual payment of the excise tax on under bond alcohol takes place only upon the transfer of the rectified alcohol f rom the rectifier's tank to the compounder 's tank under B.I.R. supervision. (BIR Ruling No. 260, June 23, 1988.)

Subsequently, the BIR ruled that even if the withdrawal of alcohol be under bond, i.e., without prepayment of the excise tax (see Sec. 137.), still in the computat ion of the 10% VAT due thereon, the gross selling price shall include the excise tax. This is so because under the joint bond filed by the distiller and the rectifier, the latter shall pay the excise tax due on the rectified alcohol. Said alcohol is still subject to excise tax although under Section 137, the tax is payable by the rectifier on the finished product. (BIR Ruling No. 121 , June 25, 1990, revoking BIR Ruling No. 260-88 and reviving BIR Rulings No. 156-88 and 166-88.)

BIR Ruling 121-1990 to the effect that the tax base upon which the VAT due on under bond alcohol shall be computed


Sec. 106

should include the excise tax even if the same has not yet been paid by the distiller was, in turn, revoked by BIR Ruling No. 75 (March 3, 1992) which reinstated BIR Ruling No. 260-88. The main objection to the assessment is that since the excise tax on under bond alcohol was not included in the price invoiced by the seller-distiller, the purchaser cannot claim the corresponding input tax on the compounded liquor. From the end of the seller, since it did not include excise tax in the billing, it could not pass on the 10% value-added tax to the purchaser; thus, the problem of treating/recording a "phantom element" in the selling price arises.

No revenue loss had actually resulted by observing previous BIR Ruling No. 260-88 holding that the gross selling price of under bond alcohol sold by distiller to the rectifier should not include excise tax because the same is not paid by the distiller. Under the "catching-up" effect in the VAT system, where a raw material, which is untaxed, or not fully taxed, forms part of the f inished product, the 12% value-added tax on the untaxed portion of the raw materials will catch-up with the finished product upon sale thereof. This is so because no input tax credit (on the untaxed portion of the raw material) could be claimed against the output tax on the f inished product.

(3) Gross selling price is def ined in Subsect ion (A, 1)

(a) It has been construed as the total amount of money or its equivalent which the purchaser pays to the vendor to receive or get the goods. (San Miguel Corp. vs. Mun. Council of Mandaue, Cebu, L -30761, July 11, 1973.)

(b) It includes not only the actual cost of the production of the goods and the profit added thereto by the vendor to make up its mill or factory of the merchandise, but also upon each and every incidental expense {e.g., freight insurance, etc.) taken into account charged to and paid by the vendee, whether or not the vendor makes addit ional profit on these incidental i tems (American Rubber Co. vs. Coll., L-2565, June 30, 1975, citing J. Aranas, Annotat ions and Jur isprudence on the NIRC, 1970 ed. , p. 219.), even if these amounts are separately billed or invoiced.

Note that what the law taxes is the sale of article, not its manufacture. Manufactur ing is not a business taxable in itself.

(4) Where the considerat ion of a sale is not whol ly in money, as in a part-exchange or barter transact ion, its value


35

is the price (excluding VAT) that would have been charged in an open market sale for purely monetary consideration. (BIR Primer on VAT, p. 8.)

(5) The VAT is based on the gross selling price of the goods sold. The trade practice of giving goods free to customers in order to promote sales efforts in the course of trade or business is not considered a transaction deemed sale. (BIR Ruling No 245, June 6, 1988.)

(6) In the case of the sale, barter or exchange of real property subject to VAT, gross sell ing price shall mean the considerat ion 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 sell ing price or the consideration stated therein shall be deemed to be inclusive of VAT.

The term "fair market va lue" shall mean market whichever is the higher of:

(a) The fair market value as determined by the Commiss ioner (zonal value), or

(b) The fair market value as shown in schedule of values of the Provincial and City Assessors (real property tax declarat ion).

However, in the absence of zonal value, gross selling price refers to the market value shown in the latest real property tax declarat ion or the considerat ion, whichever is higher. If the gross selling price is based on the zonal value or market value of the property, the zonal or market value should be deemed to be exclusive of VAT. Thus, the zonal/ market value, net of the output VAT, should still be higher than the considerat ion in the document of sale, exclusive of VAT. (Sec. 4.106-4, par. 2, CVR.)

(7) The VAT is imposed on the taxable sales of the seller. Accordingly, the output VAT should be based on the gross sales price appearing in the seller's VAT invoice and not the sales price appearing in the VAT invoice of the customer. Corporations are distinct persons; hence, an act of one corporation cannot be legally assigned to another corporation. (VAT Ruling No. 076, Aug. 7, 1991.)

(8) Any person otherwise required to register for VAT purposes who fails to register shall also be liable to VAT on his sale of taxable goods or properties or services as if he were a


Sec. 106

VAT-registered person, but without the input tax credits for the period in which he was not properly registered. (Sec. 9.236-1[b], CRV.)

(9) Since invitation forms, programs and leaflets describing the scope of a convention are without commercial value, they do not have a "gross selling pr ice" upon which the value-added tax could be imposed. Such being the case, they are not subject to VAT pursuant to Section 106. (BIR Ruling No. 5 3 1 , Nov. 8, 1988.)

15. Allowable deductions from gross selling price. They include the selling price of goods or properties returned and not resold; bona fide or regular sales discounts given at the time of sale and are expressly indicated in the invoice and the grant of which does not depend upon the happening of a future event. (Sec. 106[D].)

In case of sales of goods or propert ies, the VAT is based on the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged pursuant to Sect ion 106. While the law allows deduct ion of discounts f rom gross sales, such discounts must not be condit ioned upon the subsequent happening of an event or fulfi l lment of certain condit ions. It then fol lows that discounts given, but the enjoyment of which is condit ioned upon the subsequent happening of an event or the fulf i l lment of certain conditions imposed, may not be deducted f rom gross sales for VAT purposes, e.g., a discount to be given if the purchase price is paid upon delivery or a discount to be given if the buyer pays within seven (7) days after delivery. (VAT Ruling No. 068, July 5, 1991.)

16. Billing of VAT in the invoices. Before, the seller includes an amount intended to cover the VAT as a separate item in the invoice, which VAT shall be based on the gross sell ing price less the amount intended to cover the tax. If not billed separately, or is billed separately but erroneously, the amount intended to cover the VAT shall be considered as part of the gross sell ing price. Thus, if the gross sell ing price is P5.000 with P500 bil led as a separate item in the invoice, the 10% VAT shall be based on P5.000. But if the invoice states the gross sell ing price as "P5,500.00" or "P5.500 with 10% VAT included," or P5.000 with VAT billed separately but erroneously, the gross sell ing price shall be based on P5.500, or P5.000 including the tax billed erroneously.

In any such case, the VAT shall be determined by multiplying the gross selling price by the factor 1/11 or such factor as may be


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prescribed by regulations in case of persons partially exempt under special laws.

Before the amendment by R.A. No. 9337, the tax is computed by multiplying the total amount indicated in the invoice (including the tax) by 1/11 or dividing it by 11. By multiplying the total selling price (with the VAT presumed to have been included) by the factor 1/11, the result is the same as mult iplying the selling price excluding the VAT by the actual VAT rate of 10%. This is usually referred to as the "tax inclusive basis" of calculat ion. 5

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