VAT to Remedies of a Taxpayer (95%)

REVENUE REGULATIONS NO. 16-2011 issued on October 28, 2011 increases the amount of threshold amounts for sale of residential lot, sale of house and lot, lease of residential unit and sale or lease of goods or properties or performance of services covered by Section 109 (P), (Q) and (V) of the Tax Code of 1997, as amended, thereby amending certain provisions of Revenue Regulations No. 16-2005, as amended, otherwise known as the Consolidated Value-Added Tax (VAT) Regulations of 2005. The adjusted threshold amounts, rounded off to the nearest hundred, are as follows:

Section Amount in Pesos (2005)

Adjusted Threshold Amounts (Effective January 1, 2012)

Sec. 109 (P) Residential Lot

1,500,000.00

1,919,500.00

Sec. 109 (P) Residential House and Lot

2,500,000.00

3,199,200.00

Sec. 109 (Q) Lease of Residential Units: Rent

10,000.00

12,800.00

Sec. 109 (V) Sale or lease of goods or properties or the performance of services Other than the transactions mendioned in pars A to U of Sec. 109(1).

1,500.00

1,919,500.00

VALUE-ADDED TAX

(Sections 105 to 115 of the Tax Code, as amended)

I. Nature and Characteristics of VAT

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VAT -is a 12% tax imposed on persons who sell, barters or exchanges goods, properties or services including the leasing of properties.

VALUE-ADDED TAX (Sections 105 to 115 of the TAX CODE, as amended)

TAXATION II Bacomo.Bangos .Casas .Legaspi .Patio.Pocot .Romero.Teves .

[TAXATION II 403 BATCH 2013 EDITION] 2

VAT-is the best example for an indirect tax, which is a tax, imposed on a certain person, the burden of which can be shifted to another person.

Whenever you purchased something from the store you pay VAT, but the statutory taxpayer is not really you. If ever no VAT is remitted by that seller to the government, the government will not go after you. The government will run after the seller who is the statutory taxpayer.

But in the practical side of it, like income tax is a tax on income, without income there can be no income tax. VAT is a tax on the value added. And if you dont add value to what you sell, you dont pay any VAT.

Illustration: A sale of an agricultural product in its original state will not be subject to VAT. (i.e. sale by Mr. Cula to Mr. Nierre)

But when Mr. Nierre processed the banana into banana chips and sold it to Mr. Pilapil, there is already VAT.

Cula Nierre Pilapil Garcia

grower processor retailer consumer

10 10 100 +12

112 200 +24

224

Q: How much VAT will be collected by the government?

A: 12 & 12 = 24

Q: Who is the 1st seller who should shoulder the VAT?

A: Mr. Nierre, for he is the 1st seller of a product who is no longer in its original state. Therefore when he sold the banana chips, there is Php12, which is to be paid to the government by Mr. Nierre.

When this was sold further by Mr. Pilapil to Ms. Garcia, the GSP/GR is Php200, therefore the 12% VAT is Php24. (VAT is to be based on the GSP/GR).This should go to the government as well. But since there was puhonan on the part of Mr. Pilapil before he could sell. He purchased it from Mr. Nierre for Php112, inclusive of VAT, which means that Mr. Pilapil has only to pay Php12 to the government.

VAT on his selling price 24

VAT on his purchased price 12

NET (VAT) 12

VAT- the tax is only on the value that you have added on.

If you have not added value on what you sold, you would not be remitting tax on the government.


Note: The ultimate burden of VAT is always on the end consumer.

In the case of CIR vs. Magsaysay Lines, Inc., et al SC GR No. 146984, July 28, 2006, SC said that in all levels of transaction there is always VAT as a general rule.

-Notice that the entire payment of VAT if you total it, thats the burden of what the consumer has to shoulder.

-Taxes paid to the government in the banana chips transaction:

1st 12 by Mr. Niere. 2nd 12 by Mr. Pilapil. Total of 24 which is actually paid by Ms. Garcia.

Issue: Whether or not VAT Law violates the progressive system of taxation.

Tax rates are classified into the following:

a. progressive tax rates

b. regressive tax rates

c. proportional tax rates

But when you discussed progressive system of taxation it is different from progressive tax rates.

Progressive system of taxation- means that your tax rate increases as your income increases.

VAT is a flat rate of 12%. Although VAT remains stagnant at 12% its effect is actually reversed. The higher the income is the lower the effect of VAT. The lower the income is the higher the effect of VAT.

SC: Low income earners you will be paying products which are still in their original state. Unlike those who belong to the higher income bracket, you will be buying much more expensive food. Although VAT has some regressive effects, it provides for various exemptions as found in Sec. 109 of the Tax Code. The Tax Code also provides zero-rating of several transactions whether it be a sale of service or sale of goods. The transaction or product is subject to VAT but the rate of VAT is 0%. What is multiplied by zero always produces the product of zero.

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CIR vs. Magsaysay Lines, Inc., et al SC GR No. 146984, July 28, 2006

- In this case SC said that VAT is a consumption tax (pervasive tax because it is a consumers tax) imposed on the sale of goods, properties, and services or leased of properties.

Why was it selected by the government instead of the other percentage taxes?

Percentage taxes under the Tax Code:

Simplified Percentage taxes- 3% on gross receipts from services rendered

Common carriers tax- on common carriers by land

Gross receipts tax imposed on banks and non-banks financial intermediaries

A: The reason why VAT is chosen despite it being considered as a regressive tax or of being anti-poor, etc. its because VAT is a built in mechanism in aiding the government (BIR) in tax collection on the regular basis or avoiding tax evasion.


There is a very strict regulation in VAT.

If a seller is a VAT registered taxpayer and the buyer is also a VAT registered taxpayer, then both of the parties will be interested in having the strict requirements complied with, especially on the part of the buyer. Because every seller who is registered under the VAT system is required to register their official receipts and invoices as VAT registered and every buyer who would wish to purchase from a VAT registered seller and such buyer is VAT registered as well. It will compel the seller to issue a VAT official receipt/ VAT invoice. This is in order to allow such buyer to claim the input taxes or the VAT that it has paid. For a seller to be able to pay a lesser VAT than that passed on to its consumer, it must be able to show proof that it is supported by VAT registered receipts/ VAT invoice. For in the absence of such official receipt, the VAT paid on purchases may not be claimed and so it has to pay the entire VAT to the government sans deduction.

We all know that sellers do not want to issue receipts if only they have the liberty not to issue especially the family owned businesses so as not to increase their gross receipts (as the basis of VAT). Absence of these receipts, the BIR would have no idea on how much income your business is now generating. But since we have a buyer who is interested in getting the VAT OR/Invoice, the seller would be compelled to issue receipts. In that way the government is assured that the seller would be declaring its real income generated.

Note: The seller cannot just issue a VAT official receipt for an exempt transaction because the penalty or the consequences for issuing a VAT official receipt even for an exempt transaction is bigger than the actual tax liability that you have. The seller is not only liable to pay the should be tax which is the percentage tax but also the VAT, this is because the buyer would have an evidence of a VAT registered receipts/ VAT invoice to which he could claim a deduction for its purchases.

So, there is that input-output mechanism in VAT assuring the government of good collection of taxes.

VAT considered anti-poor because it is an indirect tax.

Indirect tax- is presumed to put the burden of taxation on the end-users, like VAT.

Another reason why the government imposes VAT is because there is regular collection of taxes from one transaction to the next.

II. Applicable Laws A. Sections 105-115 of Republic Act 8424, amended by Republic Act 9337 (2005)

VAT is the most dynamic tax law. It has been considered as sales tax, VAT, Improved-VAT, Expanded-VAT, and Revised-VAT.

When the President increased the 10% to 12% it did not violate the principle that only the legislative branch of the government can enact a law. E.O. that was issued in 2007, where PGMA then, increased the VAT rate from 10% to 12% was simply a ministerial act of increasing the rate. Republic Act 9337 already provided the parameters/standards when it shall be increased. When these economic standards were met by January 2007, PGMA then issued the E.O. But PNOY now, cannot increase it further to another rate.

B. Revenue Regulations No. 16-05 (Consolidated VAT Regulations) C. Regulations amending RR No. 16-05 (RR Nos. 02-07, 04-07, 07-08)

III. Status in Relation to VAT A person may be subject to VAT or may be exempt. A transaction may be subject to VAT or may be exempt.


Persons Exempt from VAT Transactions exempt from VAT Even if the transaction is vatable but since the person is exempt, then there will be no VAT to be collected.

It is the nature of the transaction which is exempt

Q: Who are required to register under the VAT system?

A: Persons who are required to register under the VAT system are those persons who in the course of trade or business sells, barters, exchanges or transfers goods, properties or sells services or leases properties AND whose gross receipts/sales exceed Php1.5M during any 12 month period.

Reason why they are required to register:

They have to register the issuance of OR/ Invoices will be monitored by the government.

No registration required in the following instances:

If you are into business but your sales do not reach Php1.5M. Even if your sales is more than Php1.5M but you are not into trade or business.

Note: Reckoning point of the Php1.5M is not always the calendar period. It could be any given 12 month period.

A. Persons or transactions are subject to VAT at 12% or 0% - Register for VAT purposes

B. Persons or transactions are exempt from VAT

IV. Persons Liable to VAT There are other taxpayers who are liable to pay VAT even if they are NOT in the course of trade and business but not necessarily required to register under the VAT system.

Eg. If you are an importer, and you want to import a luxury motor vehicle, you are not required to register because it is an isolated transaction but you are charged with the 12% VAT.

So, its not true that if you are required to pay VAT you are also required to register.

A. Seller or Transferor (of goods, properties or services) Including stock, non-stock, non-profit entities engaged in the course of trade or business

in the course of trade or business

-means the regular conduct (on regular basis) or pursuit of a commercial or an economic activity (want for profit), including transactions incidental thereto.

So if the company is registered as a real estate business, so you have to look into if whether the transaction entered into for VAT purposes is an incidental transaction.

Eg. If it is a real estate business, the sale of a motor vehicle is still considered as incidental, the sale of furniture is still incidental. Look into the secondary purposes of the AOI.

-It includes incidental transactions entered into by stock, non-stock and non- profit corporations or taxable partnerships and even government institutions.


Q: What if the non-stock, non-profit institution uses the entire proceeds of the transaction for the purpose for which it was created and no income inures to the benefit of any private individual?

A: Regardless as to how the proceeds was used by these entities. Even if it sells exclusively to members, it is still considered as VATable if it is made in the course of trade or business.

Condominium corporations are generally not subject to VAT. But if they collect fees which are more than the actual charges then they may be subject to VAT, because it may be considered as a regular conduct of a commercial or an economic activity.

Government entities (not the GOCCs mentioned before that are totally subject to income tax, except for a few) are exempt from income tax but are subject to VAT because the exemptions allowed by law only exempts direct taxes. Indirect taxes even the Constitution did not provide for such an exemption. The exemption granted insofar as taxation is concerned is only directed against direct taxes. Seldom is there an exemption for indirect taxes.

To Illustrate: When the government entity enters into a transaction, like for example in project infrastructures, where the seller of the service is the private contractor. The private contractor can actually passed on VAT to the government entity entering into such transaction. Because the private contractor falls among the seller of services and is statutorily liable for VAT, it can pass on VAT to whoever the buyer of services even if its a government entity. Why? Since VAT is an indirect tax. Once it is shifted by the seller of service down to the purchaser or consumer, it already forms part of the purchase price of the buyer if it is not engaged in any trade or business. Its just like us, being the end consumer of Jollibee chicken joy. If for example Jollibee pass on the 12% VAT to us, we no longer consider that 12% pass on to us as a VAT that we can off-set. We will consider that as part of the purchase price. But if the government entity is into trade or business, then the VAT that is passed on will not be part of gross but will be part of its input taxes that can be off-set.

You are the president of a real estate corporation. You donated parcels of land to the government.

Are you subject to donors tax? No.

Is it subject to VAT? Yes, the transfer could be subject to VAT. Persons who are engaged in real estate business and made TRANSFERS of land are subject to VAT.

When you donate properties that are part of your ordinary assets or those properties which are ordinarily held out for sale such real estate business giving out parcels of land. If it so happens that the transferee is a government entity then its not burdened with donors tax. But if the transferee is other than an exempt recipient you would be liable for donors tax of 30% and liable for VAT.

Reason: VAT is imposed not only to sellers but also to TRANSFERORS regardless of the mode of transfer.

What he transferred was a property that could have been subjected to VAT had he sold it. If he sold it to consumers or buyers it could have been subjected to VAT. You cannot deprive something that is due to the government, simply by giving it out.

CIR vs Magsaysay Lines, Inc. et al. SC GR No. 146984, July 28, 2006

o Whenever a company engaged in manufacturing business decides to sell one of its manufacturing plants, it will be considered as part of its incidental transaction, thus subject to VAT. Even if the manufacturing business is not leasing or selling the plant, since its incidentally part of the business, still subject to VAT.

o In this case it was into leasing of the vessel, but the government treated it as not subject of VAT because the sale was not by virtue of simple sale but because it was an involuntary sale. The selling of the vessel was not incidental since it was part of the government privatization program. The selling was involuntary made hence it was just an isolated transaction. So its not subject to VAT.

1. Of goods or properties Q: Is property not goods or vice-versa? Why is there a distinction?


A: The reason why there are GOODS or PROPERTIES is because in the old VAT Law, real properties (i.e. parcels of land, houses, condominium units were not subjected to VAT. Before only goods are subjects of VAT. But with the 1997 VAT Law, real properties are now included.

2. Of services Q: What is the coverage of services, that is subject to VAT? Does it include services performed without the use of mental faculties?

A: Yes. The list in the Tax Code is not exclusive.

Any type of service so long as it is not subjected to another type of tax in the Tax Code will be subject to VAT. But when it says that it is all encompassing, its not automatic that if you will render a service, it will automatically be VAT, because there are other taxes. If it does not fall under any other taxes then its VAT. But it may not be VAT because there is percentage tax. Percentage tax and VAT can never co-exist in one and the same transaction.

When is Percentage tax available? If you render service for example, and the revenue that you generate in any 12 month period does not exceed 1.5 million. Then even if it falls under the definition of sale or exchange of service, its not subject to VAT but to percentage tax.

Define sale of exchange of services

Renato vs. Diaz and Aurora Ma. F. Timbol vs. The Secretary of Finance and The CIR, SC GR No. 193007, July 19, 2011

Toll fees are not taxes. They are just payment for the services rendered by tollway operators used to recover the cost of the infrastructure. So its an exercise of power other than the power of taxation.

CIR vs. SM Prime Holdings, Inc. and First Asia Realty Development Corporation, SC GR No. 183505, Feb. 26, 2010

If the intent of the legislature is to be look at, the showing of films, the gross receipts from admission fees will be subjected to amusement tax. It will not be subject to VAT since it is a specific coverage of amusement tax. There are amusement taxes that are collected by the national government and there are amusement taxes that are collected by the local government. The national government coverage includes PBA games, nightclubs, etc. The local government coverage includes showing of films, cinema tickets, concerts with the rate of 10%.

B. Importer -Importations- bringing of goods from abroad to the Philippines.

An importer need not be in the course of trade or business to be subject to VAT. Even if you are a first time importer, so long as the item that you have imported does not fall under the conditionally free/exempt importation, it will be subject to VAT.

-Importations are generally subject to VAT.

The exception is when it falls under the conditionally free importation under the Tariff and Customs Code. It means that the Tariff and Customs Code, says that the transaction/importation is exempt from customs duties then corollarily it is exempt from VAT. But if it is subject to customs duties then it is automatically subject to VAT.

Example of transactions which are exempt from customs duties: meaning exempt from VAT

Importations made by persons that are exempt under an international law or special law or treaties. If you are a returning resident and you import personal and household effects together with you except motor

vehicles, vessels, aircraft, etc.

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C. Non-resident Persons who perform services in the Philippines Q: If a non-resident person performs services in the Philippines in an isolated case will it be subject to VAT?

A: Yes.

Non-resident persons- include natural (NRC & NRA) and juridical persons (NRFC).

A NRFC, not doing business in the Philippines (therefore it has no business of registering here in the Philippines) entered into a multi-transaction to make repairs here in the Philippines.

Q: Is the transaction subject to VAT, even if it was performed one time or in an isolated case?

A: Yes. If the person rendering service in the Philippines is non-resident, the rule of regularity or the phrase in the course of trade or business does not apply. It is automatically considered that it is made in the course of trade and business.

But if the transaction entered into by the non-resident is a sale of goods or properties, then that transaction must be made in the regular course of trade and business so that it can be subject to VAT.

GR: For VAT, you always look at the regularity of the conduct of trade or business, except importers.

BUT, when it comes to determining the VAT liability of non-resident persons rendering service here in the Philippines, we disregard the rule of regularity. So any service rendered by a NON-RESIDENT PERSON, whether natural or juridical, even if it is an isolated transaction, it will be subject to VAT because the law treats it as done in the course of trade and business.

SEC. 105 NIRC. 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 in the course of trade or business.

V. Transactions Subject to VAT Taxpayer/Person selling is Transaction/Product is VAT to be collected exempt from VAT subject to VAT X subject to VAT exempt from VAT (per se) X

A. Transactions made in the course of Trade or Business Rule of Regularity, exceptions: NRA performing services in Philippines

B. Transactions made Incidental to the Principal Business o Incidental activity- is something which is dependent upon the main business. It is subject to VAT.

It is not restricted in determining whether or not the property sold is the one directly used previously in the operation. Anything that is directly or indirectly used in the business can be considered as incidental when it is sold since it is part of the operation of the business itself because you can see it happening with regularity in the future.

Eg. Spa services. If there are excess/used furniture and it was sold (beyond the 1.5M), then it can be subjected to VAT.

o Isolated transaction-when you consider it as one time transaction that cannot be repeated. Such as selling the business itself, etc. Isolated transaction is NOT subject to VAT.

C. Importations, exceptions Importations are automatically subject to VAT.

Exportations are zero-rated as a rule.

D. Subsequent Sale of Tax-Free Importation Q: Are we looking at an exempt product, exempt transaction or an exempt person?

A: exempt person


Q: If its an exempt product that has been imported and is subsequently sold to another person. Do you think it will generate the VATable transaction?

A: It will not dba. As we said if the product itself is exempt regardless of the status of the taxpayer, it will always be an exempt transaction.

When we say that a previously imported product that has been given an exempt status it was because of the status of the person (i.e. Importer).

If the importation was exempt because the importer was granted himself an exemption from the indirect tax (i.e. VAT) by a special law or international agreement then the exemption would only extend to him. If ever that same product that was imported was later on sold by that importer to another person, there would arise a question of whether it is subject to VAT or not.

True or False. An imported item of a tax exempt person will always be subject to VAT if it is subsequently sold.

If the product is imported from a foreign country to the Philippines and the importer/ recipient is a VAT exempt person, no VAT shall be paid. But once the product shall be subsequently sold to another person, it may be VATable or it may NOT be VATable. It is subject to VAT when the person who subsequently purchased it, is not exempt from VAT.

So you cannot definitely say that it is VATable or not, because this will be considered an importation again. When there is an exempt importation because of the status of the person subsequent sale will be considered as TECHNICAL IMPORTATION (because it is not actually imported).It is not ACTUAL importation because its not bringing in goods to the Philippines, the goods are already in the Philippines. It is just considered as TECHNICAL IMPORTATION because if the importation was made directly to this VATable person, it is supposed to be VATable.

Q: Who is that person who is exempt from VAT in importation?

A: Eg. The ambassador imported a motor vehicle and sold it to another ambassador.

TECHNICAL IMPORTATIONS are still subject to VAT even if there is no actual shipment from abroad down to the President-buyer, otherwise this could be an avenue where VAT evasion could take place. You can simply request these persons who are exempt from VAT to bring in items from abroad where they will post as a buyer and you will subsequently purchase from them. You can request companies within the Economic Zone to buy vehicles that you desire they get it VAT-free; you could purchase it from them VAT-free.

Q: Who pays the VAT? Is it the seller or the buyer?

Q: Is it not an importation issue and in importation it is the buyer who pays the VAT?

From a taxexempt person it is sold to another person who is not exempt from VAT, it is called technical importation which is subject to VAT. Who is the person liable (liable to declare the VAT) for VAT?

A: The buyer becomes the importer. In technical importations it is the buyer who pays the VAT.

E. Transactions Deemed Sale NOT REALLY SALES There is no actual sale which took place but there was a transfer.

VI. Transactions Deemed Sale A. Transfer, Use or Consumption Not in the Ordinary Course of Trade or Business

Q: Would all goods or properties of the corporation that are transferred not in the ordinary course of trade or business be a transaction deemed sale subject to VAT?

A: Whenever the property or goods that has been the subject of the transfer Use or Consumption Not in the Ordinary Course of Trade or Business falls under the category:


1. those properties or goods that forms part of the inventories, stocks in trade; those primarily held out for sale

2. those properties or goods that are used in ordinary trade or business (incidental transactions)

Even if the property is not part of the principal activity, if ever it is sold it will generate VAT. The same way that if it becomes the object of the transaction deemed sale, even if its incidental only it will be subject to VAT.

B. Distribution or Transfer to Shareholders/Investors and Creditors Q: Shareholders, investors and creditors may be transferees of goods or properties, when is it considered as a transaction deemed sale.

A: under transactions deemed sale Shareholders, investors usually received properties as their share in the profits of the corporation. There can be property dividends. When a shareholder/investor receives property dividends instead of cash dividends it may be subject to VAT if it covers the same type of properties with the goods that are given.

So if the seller is in the processing of sardines, it can give property dividends such as the boxes of sardines. Since it is part of the inventory of the corporation it will be subject to VAT in order not to deprived the government. Because had it been sold it would have been subject to VAT. So whenever property dividends is declared it is not at all beneficial than cash dividends. Although cash and property dividends are subject to the same final withholding taxes, 10% RC, RA, NRC 20% NRA-ETB 25% NRA-NETB.

But cash dividends are not subject to VAT.

But if its a property dividends and the property that was given out was a share of the profits falls under the category of inventories, stocks in trade or those used in trade or business, it will not only be subject to the final withholding tax but it will also be subjected to the 12% VAT.

Why do you have to pay VAT? Because if you are not liquid and you want to declare dividends to the stockholders and you want to declare cash in order to avoid the VAT and property dividends, what you naturally do if the corporation is not liquid is to sell the inventories and whatever the proceeds is will be used to pay off cash dividends instead of property and if you sold it, it will be subject to VAT.

In transfers, use or consumption not in the ordinary course of trade or business or in paying off property dividends to shareholders/investors you have to pay VAT generally.

On what amount shall you compute the VAT, if there is no sale that took place?

Its not in all cases that you will have a selling price because properties or goods that have been distributed or has been personally used belongs to the inventory of stocks in trade, you have already the selling price and how much you are selling to the market. But if its your furniture, your fixtures that are not part of your inventory but part of those properties used in trade or business, but is actually nor for sale and you want to distribute it as property dividends then you have to go to the market value of the property.

Take note: Even the regulations provide that in order for you not to avoid the payment of the true VAT due. You have to compare the gross selling price of each other. But if the GSP is unreasonably lower than the market value, then use the market value.

Unreasonably lower than the market value if it lowers more than 30% of the market value.

Why do creditors received goods or properties for

It will be part like dacion en pago.

What happens if the property that you transfer is valued more than your debt?

What if your debt is higher than the value?

Either way if the value of the property is higher or lower the basis for VAT is always the value of the property that was transferred and not the indebtedness.

Because Sec. 106 provides that the 12% VAT shall be based on the GSP of goods, properties, services, etc

C. Consignment of Goods, requisites Q: Are all consignments subject to VAT?


A: it only becomes subject to VAT, if it is unsold and unreturned within 60 days following the consignment. But if its returned then there is no VAT.

Q: Who is liable for the VAT?

A: the consignor (the one who owns the items that are consigned).

D. Retirement From or Cessation of Business, with respect to inventories of taxable goods Would the merger of Company A and Company B, resulting to the surviving company B result to the VAT imposition of the inventories of A, the absolved entity.

Closure of business, when a business closes whatever the inventory thats left will be paid the VAT because the government somehow considers that it had an inchoate right over any 12% VAT that could have been generated from the sale of those inventories.

How about change in business name?

Would merger or consolidation would result to a VATable transaction.

Sec. 40 C Tax Free Transaction or Tax-Free Exchanges

1. Merger or consolidation of properties solely in kind without any cash involved (not subject to income tax, VAT nor documentary stamp tax) the entire transaction is tax-free

2. When a person alone or together not exceeding 4 transfers and thereby acquires controlling interest of at least 51% its not subject to income

But if the merger or consolidation is not solely in kind (there is cash) its when that is subject to VAT.

1. Change in the Business Activity from VAT Taxable Status to VAT-exempt Status Eg. If your business is into the processing of banana chips and would want to convert your business into selling raw bananas then thats from VATable Transaction to Non-VATable Transaction. At the point of transfer whatever existing inventories you have you have to pay VAT, because it is already part of which could have been sold.

What is the basis of the 12% VAT?

The acquisition cost of the inventories or the FMV of whatever has been left at the time of transition from a VATable taxpayer to either a close business or VAT-exempt person

When you revert your VAT status to Exempt Status, this is a transaction deemed sale Even if you are exempt you have the option to register as a VAT taxpayer

2. Approval of a Request for Cancellation of Registration, instances a. Reversion to exempt status b. Desire to revert to exempt status, after the lapse of 3 years of voluntary VAT registration c. Failed expectation to reach Php1.5M

What are the two kinds of VAT rates?

12% and 0% Why do we have 0%? Is it not exempt from Vat? When you say zero-rated VAT, can we call it exempt

transaction? The tax rate is set at zero. When applied to the tax base, such rate obviously results in no tax

chargeable against the purchaser. The seller of such transactions charges no output tax but can claim a refund or a tax credit certificate for the VAT previously charged by the suppliers.

Zero-rated VAT and exempt transaction are different. In exempt sellers, whatever you paid input VAT to your suppliers, you do not recognize it as a VAT. You simply recognize it as part of your cost of purchase.

Zero-rated sale distinguished from exempt transactions: a. A zero-rated sale is a taxable transaction but does not result in an output tax WHILE an exempt

transaction is not subject to the output tax b. The input tax on the purchases of a VAT registered person who has zero-rated sales may be

allowed as tax credits or refunded WHILE the seller in an exempt transaction is not entitled to any input tax on his purchases despite the issuance of a VAT invoice or receipt


c. Persons engaged in transactions which are zero-rated being subject to VAT are required to register WHILE registration is optional for VAT-exempt persons.

12% 0% VAT Exempt transactions Vat Registration X Sales output 12% 0% X Purchase Input 12% 12% X

Does the VAT taxpayer of zero-rated sale pay VAT to the government? So, if it is an export sale which is zero-rated sale transaction, should the seller pay VAT to the government?

So if the transaction entered into by vat registered taxpayer is zero-rated sale of goods or services, it is vatable transaction but will not result into any output tax because the output VAT rate is zero. When you say output VAT, this is the VAT on the sale of your goods or services. Input VAT is opposite.

When you purchase goods or services you pay output VAT to the supplier. You actually pass on the burden to your consumer and pay it to the government.

So far as the 12% and 0% vatable transations, the difference lies that the output vat rate in a 12% transaction is 12% of whatever the gross selling price is. If it is 0%, the government cannot collect any VAT because the output is equal to zero and that the seller cannot pass on the VAT to the consumer.

For exempt, there is no output tax because the transaction is itself exempt from any of the two VAT rates

Input VAT is the VAT that the person has to pay or has to shoulder in purchasing either goods or services

SELLER 1 (output Vat on its sale) seller 2 (input vat and output vat) seller 3 (input and output) Whatever seller 2 purchases from seller 1 will have input vat and output vat goes to government and if seller number 3 also purchases from seller2 will have input vat and output vat, the difference goes to government. A zero- rated transaction will result to zero percent output vat. How about his purchases, will he recognize input vat? At what rate?

12%

EXAMPLE:

SM department store, exporter, USC purchase a furniture at 100,000 . The seller is a vat tax payer and a local manufacturer furniture seller. Three buyers and one seller which is a local manufacturer of furniture. Each of the item cost 100,000 plus value added tax of 12%. The total selling price including vat is 112,000. All the customers will pay 112,000.

For SM how much input tax shall be paid and purchase price? 100,000 purchase price and input vat of 12,000

Will SM recognize 12,000 input vat paid as part of the cost of the furniture bought? NO because SM is a vat registered

Whatever a person purchases and the product that he has purchased will form part of the item that he will later on sell or even used in business basta lang so long as the purchaser is as well a vat registered taxpayer any purchase that he makes must to be segregated of what forms part of the cost of the item exclusive of the vat. The value added tax component of any purchase made by a vat registered person shall never form part of cost. It should always be recognized as input VAT against output vat on sales .

If the purchaser is an EXPORTER engaged in zero-rated transaction, how much is the cost of the furniture? Would there be recognition of input vat?

The cost is 112,000. So there is no difference between a zero-rated taxpayer and 12% taxpayer.

If it is a purchase made by a zero-rated taxpayer still there will be recognition of the input vat of the purchases. So the cost of the exporter will still be 100,000 deductible as expense or part of its inventory. The 12,000 will be input vat. So what will happen to the input vat for which there will never be output vat if all sales to be exported? Diba all are zero percent. So meaning this will be offsetted against zero, do you have the option to make this part of the cost

[TAXATION II 403 BATCH 2013 EDITION] 13 in order to have a higher expense deductible for income tax? Diba you have no output tax so you do not have liability to the government. What if you decide to make it part of the purchase price na lang like cost of the item so that your expenses will be higher meaning to say the income tax will be lower because of a lower taxable income? So which is which having it refunded or making it part of the cost of the purchase price. When you are registered under the vat system whether you are zero-rate or 12% taxpayer, you always recognize the input vat in your purchases, you do not have the option to make it part of your cost of purchases . So whatever you have accumulated as the vat that you have paid in your purchases, if you are engaged in export sales the law provides that you have the option to file a claim for refund within two years from the close of the taxable quarter when the export sales were made (anyway we will discuss that towards the end of this topic).

How about the purchase price of the University of San Carlos?

Since USC is not a vat-registered taxpayer, any purchase that it makes even it had it on the value added tax by the seller will always be considered as cost or purchase price because there is no output tax against which to offset. Everything else will be considered as cost.

Does USC have the option to treat only 100,000 as cost and the 12,000 will be input tax valid claimed for refund of the entire 12,000? Even if it appears to be beneficial on the part of zero-rated taxpayer to claim a refund because claiming a refund would have assuming that it will be refunded. Everything will be given back because it is fully beneficial because 100% will be given back, unlike making it part of the cost or purchase price which is only beneficial in so far as whatever tax rate is available as expenses diba to the extent that it forms part of the expenses it will reduce the taxable income but it will be refunded? No it will only reduce the taxable income and whatever tax rate is applicable meaning if its 30% then its only 30% beneficial to you. But for a school, it is not taxable, it will never be beneficial. Anyway as we said San Carlos as exempt taxpayer cannot refuse to pay the value added tax that is pass on. It is on the ground that San Carlos exemption is only to direct taxes not indirect taxes.

v What is the reason export sales granted zero-rated? To encourage exportation of certain products in the Philippines in order to have inflow of

foreign currency and to strengthen the reserves we have with the legal tender we are issuing. More of these transactions are intended for the economy.

It is based on destination principle, according which; Vat shall only be imposed to where the goods are consumed. Hence, the actual or contructive export of goods and services from the Philippines to a foreign country must be zero-rated for VAT; while those destined for use or consumption within the Philippines shall be imposed the twelve percent (12%) VAT.

Exports are zero-rated whereas imports are taxed v Is destination principle the same with cross boarder doctrine?

Cross border doctrine as the Supreme Court puts it, no VAT shall be imposed to form part of the cost of goods destined for consumption outside the territorial border of the taxing power authority which in our case is the Philippines

Destination principle emphasizes the destination of the goods to where they will be consumed and that cross border doctrine emphasizes the jurisdictional reach of the value added tax system. The VAT is only up to the territorial border of the Philippines. Exports are zero-rated whereas imports are 12% vatable.

In your study diba we have three items subject to 12% VAT, zero-rated VAT and transactions that are exempt from VAT. We dont have an inclusive list of what is subject to vat simply because the general provision says that all exchange and sale of goods or services will be subject to 12% value added tax. What we will focus on is what are the transactions subject to zero-rate and those which are exempt. So any transactions or persons do not fall under exemption or zero-rating then we can say that they are subject to VAT.

ZERO-RATED TRANSACTIONS

Number four is not really an export sale but subject to zero-rate

1. The sales and actual shipment of goods from the Philippines to a foreign country


So can we say that this first type of export sale there is actual shipment from the Philippines to foreign country? If it is not actual shipment from the Philippines to foreign country, it belongs to the other country. REQUIREMENTS: a. There is actual shipment. b. It must be paid for in acceptable foreign currency and accounted for in accordance with the rules

and regulations of the Bangko Sentral ng Pilipinas Example: You made exportation, an actual shipment of goods from the Philippines to foreign country. Your buyer/customer came to the Philippines and paid you directly in US dollars.

Would it fall under zero-rated transaction? What if you sell the dollars to the black market would it be acceptable to the BSP? What do you mean by accounted for in the rules and regulations of BSP? It requires that it course through a bank regulated by BSP. If it is personally paid it cannot be regulated by BSP and not make through a bank. When you say in accordance with the rules and regulations of the BSP, the banks are under the regulations of BSP. The payment is deposited to your bank account. (Atty. Tiu: superficial!)

2. Sale of raw materials or packaging materials to a non-resident buyer for delivery to a resident local-export oriented enterprise How is this different from number 1? Since it is locally delivered to an export oriented enterprise, can it be paid in Philippine peso?

Number 2 is a sale of raw materials, the buyer here is non-resident person but it is to be delivered to a local export oriented enterprise for manufacturing but it is a must that the buyer is a non-resident person. It is also a requirement that it is paid in acceptable foreign currency and accounted for in accordance with the rules and regulations of BSP. EXAMPLE: There is sub-contracting company inside the economic zone. If there is a foreign purchaser who wishes to purchase raw materials but would still require somebody else to have it sub-contracted the processing to another person that is located in the economic zone. There is no use in buying the raw materials here and delivering it to the foreign country and the foreign country delivering it here to the economic zone for further processing. So, that arrangement is a short cut na lang. Delivering it to the one who will process the raw materials or packaging materials. Dba have you noticed, it is not a sale of goods but a sale of raw materials for which locally made. But it is to be delivered to a local export oriented enterprise.

3. Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed seventy percent of total annual production. Total annual production of what year, the year of sale or projected sale? Past sale. Would a sale be zero rated if the payment is made in foreign currency accounted for under the rules of BSP? Are those two items present in a transaction suffice for the transaction to be considered zero-rated?

EXAMPLE: I am a supplier of raw materials I sell to you a domestic enterprise. you pay me in foreign currency through a bank. Is it zero-rated?

CIR vs. Burmeister : The SC said that the mere fact that the payment is made in foreign currency accounted for in accordance with the rules and regulations of the BSP does not automatically make the transaction a zero-rated. Because if it were true then all the transactions in the Philippines between locals made in foreign currency under the rules of BSP then it would be automatically zero-rated. This is not the intent of the law.

4. Sale of gold to the Banko Sentral ng Pilipinas Should the BSP pay in foreign currency for the sale to be zero-rated? Not necessarily.

5. Zero-rated export sales under the Omnibus Investment Code of 1987 and other special law. What falls under this category? Should there be actual export sale to be considered as zero-rated or does it include constructive delivery?


1. Actual exportation made by registered export producers 2. Sale made by registered export producer to registered export producer or to registered export

trader. Its a sale made locally. It is considered actual export sales when these buyers will eventually export abroad. But despite that, it will be considered in category to as constructive export when sold to the fourth enumerated buyers: 2.1 Sales to warehouses, export oriented manufacturers 2.2 Sales to export operating bonded trading houses 2.3 Sales to diplomatic mission entities, agencies granted tax immunities whether paid in local

currency or foreign 2.4 Sales to EPZA

Even if sale is made domestically, it can be considered export if made to these four. 3. Sales made to BOI (bureau of investment) registered companies.

What are the 2 kinds of VAT rates? a. 12% b. Zero-rated

Should the seller register if he is under zero-rated? Yes, must register as a VAT taxpayer.

Diff between zero-rated transaction and vat exempt transaction. In exempt transaction, if all sales are exempt, the seller need not register as a VAT taxpayer. In zero-rated, it is a vatable transaction but will not result to any output tax because the output tax rate or the value added tax rate is zero. When you say output tax, this is the value added tax on the sale of your goods and services. While the opposite is input vat, when you buy goods and services, you pay output vat to the supplier. If zero-rated, the seller cannot pass on the VAT to the consumer. For exempt, there is no output tax because the transaction itself is exempt from any of these 2 rates. How about input vat? The vat that a person has to shoulder in purchasing or services. Should a 12% vat registered taxpayer recognize input vat on its purchase? How about zero-rated? Input Output Seller 1 (12%) Seller2 (zero-rated) X Seller3 (exempt) Manufacturer of furnitures Total selling price: P100 plus VAT P112 (inclusive of VAT) FOR SM (a VAT registered person), how much input tax shall be recognized? Cost- P100,000

Input Tax- P12,000 If the purchaser is an exporter engaged in zero-rated transactions, how much is the cost? And would there be any recognition of input vat? Cost- P100,000 Input Vat- P12,000 But what will happen to the input vat for which there will be never be output vat if all sales will be exported? Do you have the option to make this part form part of the cost to have a higher amount of deduction/expenses to lessen the income tax?

Always recognize as input vat if 12% VAT registered or zero-rated. You do not have the option to make it form part of your cost of your purchases. The law provides that you have option to FILE FOR A REFUND within two years from the close of the taxable quarter when export sales were made. (will be discussed towards the end of this topic DAW ;)

USC- VAT exempt Any purchase that it made, even if added with VAT by the seller will always be considered as cost/purchase price. Because no output tax against which it will be offsetted. Does the USC have the option to treat only the P100,000 as cost and the 12,000 as input tax and file a claim for refund for the 12,000? No. even if it appears to be beneficial on the part of the zero-rated taxpayer to claim a refund, everything will be given back, the 100%. Unlike if youll make it as part of the cost, it will only be beneficial in so far as whatever the tax rate is applicable. As expenses diba, it will reduce the taxable amount. But

[TAXATION II 403 BATCH 2013 EDITION] 16 will it be refunded? No. it will only reduce the tax income and whatever tax rate applicable, lets say 30%, then only 30% beneficial to you. But for a school, which is not taxable, it will never be beneficial.

Cost- P112,000

However, as weve discussed, USC or any other exempt taxpayer cannot refuse to pay VAT on the ground that it is not a vatable person because the exemption only extends to direct taxes, not indirect taxes. What are the reasons why some sales of vat registered person are granted zero rates? Destination principle- provides that goods and services are taxed in the country where they are consumed. Therefore, when goods and services are consumed in the Philippines, theyll be subject to 12% VAT. But if the consumption is abroad, then zero % VAT. Cross border doctrine- No VAT shall be imposed on the cost of goods that are sold beyond the taxing jurisdiction of the Philippines. Emphasizes the jurisdictional reach while the former is focused on the destination or the place where the goods are consumed. Boils down to: exports are zero-rated. Imports are subject to 12%. We do not have any provision that enumerates the transactions subject to VAT. Very generic. If not under zero-rated or exempt, then subject to VAT. 5 examples of VATABLE transactions:

a. Groceries, dept stores b. Restaurants c. Spa d. Airline tickets (if it is a domestic flight) e. Shipping vessel (domestic)

Zero-rated Transactions

(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);

Ex. You sold goods abroad but it so happened that your customer was here and paid you dollars. Is it a zero-rated transaction? What do you mean accounted for according to the rules of BSP? Cannot be regulated if not paid through a bank which is under BSP supervision. So tell your client to deposit it in your bank account.

(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);

How is this diff with number1? Not a sale of goods, but raw materials. The buyer here is a non-resident person but destined to be delivered to a resident local export-oriented enterprise. It is a must that the buyer is a non-resident person. It also requires that payment be under acceptable foreign currency and accounted for in accordance with blah blah blah. (see above)

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

Total annual production in the current production? Projected? Or past sale? Past sale, so as to have reliable figures. Is it required that payment be made in foreign currency? Nope. Would a sale be zero-rated if the payment is made in foreign currency and accounted for in accordance with BSP rules? Would it suffice for a transaction to qualify as zero-rated? CIR vs. Burmeister: does not automatically make a transaction zero-rated. Because if thats the case, then all transactions will be made in this manner, making these transactions zero-rated.


(4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); and Sale of other metals such as platinum? Nope. The law is specific. Only gold. ;)

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

What falls under this category of export sales? a. Actual exportation made by registered export producer b. Sale made by a registered export producer to another registered export producer or a

registered export trader (means to say that its a sale locally) not an actual exportation yet, will be actual if these export producers sell the goods abroad

will be considered as constructive export if sold to the following: 1. Bonded manufacturing warehouses of export oriented manufacturers 2. Sales to export traders operating bonded trading warehouses 3. Sale to diplomatic agencies that has been granted tax immunities whether paid in

foreign currency 4. Export processing zone

c. Sale to BOI (board of investments) Should there be actual export sales?

(6) The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations. (added by R.A. 9337)

If theres stop over here, only that portion from the last destination in the Philippines to the foreign country will be subject to zero-rate. Foreign currency denominated sale- is there actual shipment? 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). Buyer is still a non-resident. But in order to save shipping charges, the buyer opted to have it delivered to a resident, provided that it is paid for in foreign currency and accounted for in accordance with BSP rules. Objects which are excluded: SEC.149- automobiles (4 or more wheeled regardless of seating capacity) EXCEPT buses, trucks, cargo vans, jeep/jeepneys/jeepney substitues, single cab, chassis, and special-purpose vehicles so these are subject to zero-rate; AND SEC.150- all goods commonly or commercially knows as jewelry, whether real or imitation, pearls, precious and semi-precious stones, pefumes and toilet waters, yachts and other vessels intended for pleasure or sports. J Pick-ups are considered automobiles. So if sold on foreign currency, still subject to 12% on top of excise tax.

(7) Sale to persons or entities that are exempted by special law or intl agreement to which the Philippines is

a signatory (in this provision, it includes indirect taxes) -IRRI, PEZA, SBMA, UNICEF

in liue of ALL taxes First, look at the status of the seller. If vat registered, then go to the next step. Does the sale qualify as an export sale? Foreign currency denominated sale? Or sale to a vat exempt person? But if the status of the seller is exempt, not registered as a VAT taxpayer, then whatever transaction he has will be exempt. Purpose of zero-rating, although u cannot pass value added tax to your customers, u can recognize input tax on the purchase price of goods, for which if transactions are export sales, you can apply for 100% refund on whatever input taxes that you paid to your supplier. ;)

Zero-rated Services

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


(2) Services other than those mentioned in the preceding paragraph, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); SEE CIR VS. BURMEISTER (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate; (4) Services rendered to vessels engaged exclusively in international shipping; and (5) Services performed by subcontractors and/or contractors in processing, converting, of manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production. (6) transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country (7) Sale of power or fuel generated through renewable sources of energy such as, but not limited to,

biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy sources using technologies such as fuel cells and hydrogen fuels.

Rendering of repair and maintenance not zero-rated. Because the provision refers to sale of power or fuel only, any other type of services rendered by those corps are not zero-rated.

What do you understand of a VAT Exempt transaction?

Is a VAT exempt transaction the same as a VAT exempt taxpayer? No. So when it is a VAT exempt transaction, either because the transaction itself is not VATABLE or the person who entered into transaction is a VAT exempt, then it will not result to any output tax for the sale or any input tax on the purchase made by the customer.

VAT EXEMPT TRANSACTION vs VAT EXEMPT TAXPAYER

VAT exempt transaction these are the transaction under sec 109 of tax code. Transaction itself is exempt, whatever the status of the taxpayer. So if a seller is a VAT registered taxpayer because the seller has other VATABLE transaction, the transaction is exempt from VAT.

(enumerate)

Agricultural down to transactions not reaching down to transaction not reaching 1.9 Million gross sales or gross receipts during the 12-month person.

VAT EXEMPT TAXPAYER meaning the exemption is directed against the taxpayer himself. Whatever the transaction is entered into, whether VATABLE or NOT, since the exemption itself is granted to the taxpayer, then the transaction will not result to any OUTPUT VAT on sale or INPUT VAT on purchase.

But since the exemption is directed only against the taxpayer, example when theres an importation made by the exempt taxpayer, and subsequently sells the property or goods when its not exempt, then it will be subject to VAT.

EXEMPT TRANSACTIONS: (Please see codals)

1. Sale or importation of agricultural or marine products in its original state, including livestock and poultry

in its original state (enumerate the chemical processes);

Consider a fish, its a marine product; it is smoked and dried. VATABLE OR NOT? Not vatable, because it is still in its original state.

Salt. Vatable or not? Exempt.

[TAXATION II 403 BATCH 2013 EDITION] 19 When the marine or agricultural products undergo the simple processing enumerated including the packaging, they do not take out the product from its original state, therefore these simple processes do not make the items subject to VAT tax. Just take note of what these are. So if a fish is smoked, the chicken is frozen, etc., they are still exempt.

Now iodized salt and rock salt.

Rock salt, its still in its original state, and its dry, then the iodized salt, is no longer in its original state, because there is already some chemical process involved, and so it becomes vatable.

As to sugar, if its refined, its no longer in its original state, thus subject to vat.

How about coffee beans? Still in its original state, exempt from vat.

2. Sale or importation of fertilizers or seed.

So there are three kinds of products that are exempt on its sale or importation:

a. Fertilizers b. Seeds c. Feeds

All feeds are exempt from VAT? No, except for specialty feeds.

Specialty Feeds for race horses (see transcript); Feeds for pets are VATABLE. Now if your pet is a pig, will the food of that pig VATABLE? No, because generally, we do not consider pigs as pets.

Anyway, when you say that your feeds are exempt, if your race horse is consuming the ordinary feeds, still exempt because what is vatable are those feeds with special ingredients, which we call specialty feeds.

3. Let us say you went abroad as tourist and brought in items. Are there items VATABLE or not? Depends.

GR: Importation of items and goods are not VATABLE provided they are for personal and household effects, and exempt from customs duties.

In order to get the exemption, you should be:

a. Resident of the Philippines coming back from a visit abroad b. Even if you are not a resident coming from a vacation abroad, so long as your intention of coming to the

Philippines is to resettle back

So bottom line, these two types of individual must be both settling in the Philippines in order to get the exemption.

4. Importation of professional instruments and implements, wearing apparels, domestic animals, and personal household effects.

(Sec b, 109)

For example, Mr. C is not a citizen and a non resident bringing wearing apparel, instruments, jewelries. Is he exempt or not? Depends, if Mr. Cs coming to the Philippines is for the purpose of settling here.

The provision does not require that the importer or the persons bringing in goods in the Philippines be a resident or a citizen. It means any person, be it a citizen or resident or even alien, so long as they are of the


in intention of settling in the Philippines, as if they are relocating into the Philippines, and not to be a fugitive from justice.

But there are other conditions when these items may be brought in the Philippines. Can it be any day of the year? No, it must be in close proximity with your arrival, at the time you came to the Philippines or 90 days prior to arrival or even after arrival, so long as it is still within 90 days from arrival. So long as it is close to the actual date of your arrival.

5. Items subject to percentage tax

Why cant VAT and percentage tax, co-exist in one transaction? BECAUSE percentage tax and VAT are both sales taxes. Excise tax and VAT can be imposed in one transaction, or one product.

Kinds of percentage taxes:

a. Common Carriers Tax

What types of transactions are subject to this type of tax? Common carriers by land. They are not subject to VAT. So long as the transaction is engage in transporting passengers. If the common carrier is in engage in transporting cargo, they are already subject to VAT. As for the other common carriers engage in the transport of cargoes via another route which is vie sea or via air transportation, they are already subject to VAT, some are zero-rated because some are internationally bound. So only those involve in the transport of passenger by land. Cargoes? VATABLE

b. Gross Receipts Tax

Imposed on what type of entities? Banks and non-banks intermediaries, and the highest rate is 5%. Banks were experimentally subject to VAT sometime in 2004 and 2005 but it reverted to being subjected to gross receipts.

How about pawnshops and money changers? They are operating just like credit institutions or non-bank financial intermediaries, and are subject to gross receipts tax.

How about insurance premiums? Can they collect VAT? Life Insurance is not subject to VAT, non-life, subject to VAT.

How about international calls? You know for a fact the text messaging is subject to VAT. So international calls are not subject to VAT, it is subject to percentage tax, particularly the overseas communications tax (OCT). It remains at 10%. Local calls, 12% VAT.

6. Sale of real properties

Generally, VATABLE.

Exceptions:

I would like you to check on Rev Reg 16-2011, which took effect January 1, 2012. It has raised the threshold limits for VAT from 1.5M to 1.919M. So for those leasing 10,000 of lot, it has now become 12,800. So for those who lease the latter, you can now claim exempt from 12% VAT.

a. When the property is primarily not held for sale. So meaning if the seller is not into real estate business, it may or may not, it just depend if the property is used in business or not.

b. Low cost housing refers to 750k, and it pertains to housing projects. SO meaning, theres a house. Does it refer to house and lot, or can it be lot only? It does not refer to lot only. Not the ceiling price of which not exceeds 750k. If its in excess, the entire price is subject to VAT.

c. Lease of property


Lets say theres a commercial unit, leased out for 10k monthly. Subject to VAT or not? Commercial not , because it only refers to residential.

Ex. 1: ABC Corp is leasing out residential units at 10k per month. Total gross receipts for the entire 2011 are 1.919 million.

Subject to VAT, or not?

No, because the exemption itself is in the transaction. So when the law says leasing of residential unit or not more than 12800, its exempt from VAT regardless of the aggregate amount that the lessor will generate from the transaction.

Ex. 2: Residential units are leased out by XYZ Corp by 15k per month. Total gross receipt for 2011 is 1.4M.

Subject to VAT, or not? In this case, the transaction itself is not exempt from VAT, because it has exceeded the threshold limit of 12800 per month. But because there is another provision on exempt transaction that if the gross receipt would not exceed 1.919M in any given 12 month period, therefore the transactions are not vatable.

Ex. 3: What if DEF Corp owns all of the residential units (10k and 15k per month, depending on the size) and the total gross receipt for 2011 on the lease of these properties is 3.3 million, no other transaction.

Subject to VAT, or not? Should he register for VAT? Here, there is only one owner of the units, and engaged in no other transaction. The rules say that the gross receipts from rentals of residential units not exceeding 12800 per month per unit shall be exempt regardless of the aggregate annual gross receipts. So that means to say you take out those units to be leased out for 15k per month, in considering whether DEF Corp is vatable or not.

So give exclusivity, since 10k per month, regardless of the aggregate annual gross receipts, it is exempt. The other, since even if 15k but aggregate annual gross receipt is less than the threshold limit of 1.919M, then he remains to be exempt from VAT.

DEF Corp will be VATABLE only if and when is engage in other vatable transaction. Lets say if DEF Corp if there is a canteen combined in the company and generates 200k in a year, then 600k + 1.4Million (from lease of res unit for 15/month), that is more than the threshold limit, then not anymore exempt from VAT.

So as we said, when the transaction is exempt, then regardless of the status of the taxpayer or regardless of the gross proceeds, then it will be exempt.

When we say leasing out of residential units, does it include hotel rooms? No. Even boarding houses, dormitories, and the like are exempted.

d. Sale of Residential Lots not exceeding 2.5M (but as per Rev Reg 16-11, the threshold limit is already 3.199M)

e. Socialized housing

Threshold limit is only 225k. Mas sosyal pa ang low cost housing!

Does it pertain to house and lot, or it pertains to lot only? It includes the house and lot.

If you purchased a house and lot worth 225k, and it is registered under socialize housing, vatable or not? Not, as long as it does not exceed 225k.

Socialize housing are housing projects covering house and lot or homelots only.

f. When there is a sale of residential lots not exceeding 1.5 M (as per rev reg 16-11, it is already 1.19M)

Now assuming that you want to purchase a residential lot inside a subdivision owned by PhilInvest, the cut of a parcel of land is 96 square meter and each cut of 96 square meter is 800k, and you want to purchase


two 96 sq meter of land that is adjacent, total is 1.6M. Subject to Vat or not? (But take note sa exam na ang bag-ong threshold limit kay dili na 1.5M) Depends.

As a gen rule, sale of residential lots are subject to VAT when the lot are primarily held out for sale by the real estate seller.

Exception is when the residential lot value does not exceed 1.5M.

Exception to the exception is when two or more adjacent lots are purchased by one and the same buyer with the intention of utilizing the residential lot for one residential unit; it will be subject to VAT. So that means, if you purchase three parcels of land, adjacent, but youre intention really is to give that out to your three children, not for purposes of building one residential unit in those three parcels of land, it will not be subject to VAT, even if the total or aggregate will exceed 1.5M.

So lets summarize that one. If I ask you for the five items that are exceptions to the rule that sale of real properties is subject to VAT, not lease of real properties, and then you do not include leasing of property there. SO there are five exceptions. (Please see and verify the new figures as per Rev Reg 16-11)

1. Property is not primarily held out for sale. 2. Low cost housing not more than 750k 3. Socialize housing item not exceeding 225k 4. Sale of residential lots not exceeding 1.5M (1.19M) 5. Sale of Residential house and lots not exceeding 2.5M (3.199M)

7. Palay something milling self explanatory accdg to Atty. T. 8. Blah blah

Ok, assuming one of your love ones is hospitalized. Upon release from the hospital, charges were as follows:

Operating room charges 100k exempt Medicines from pharmacy inside the hospital 100k depends Laboratory fees 100k exempt Professional fees 100k Vatable Total of 400k.

SHALL VAT be imposed? YES. As to medicines, it depends whether out-patient or in-patient. Because the latter takes part of the hospital services, then it is exempt.

CASE: CIR vs Prof Services, 2009

So we consider whether the patient is in-patient or out-patient. If your beloved, let us say check-up lang and he was prescribed some medicine and he purchased it inside the hospital, subject to VAT? YES, because it will no longer form part of the hospital services, laboratory services, etc. Now what is exempt, are only medical, dental, laboratory, etc. Professional fees of doctors, lawyers, accountants, etc., are subject to VAT. But if the professional fees of these professionals, does not exceed 1.5M (1.9 as per rev reg 16-11), they may forego the registration of under VAT system and pay only the 3% percentage tax. So the 3% percentage tax is the catch all of what are not subject to VAT.

So even if Rev Reg 16-205 clearly provides that if the hospital are claiming or operates a pharmacy or drugstore, the sale of drugs and medicine is subject to VAT, this simply refers to the sale to OUT-PATIENTS, because it has been clarified in the 2009 case of St. Lukes and in a BIR opinion issued on January 8, 2009.

9. Are educational services Vatable? Exempt. Even if educational institution is a not a non-stock, non-profit, meaning its a proprietary institution? Still exempt from VAT?


Now let us look solely on the provisions on the Tax Code. The exemption is educational services of that by private educ inst is exempt.

Does it qualify whether the priv educ ints is non-stock, non-profit, or not?

Even if the educational institution be proprietary or non-stock, nonprofit, its educational services maybe exempt from VAT so long as it is duly accredited under TESDA,CHED, DEPED.

Under the old VAT LAW, TESDA ACCREDITED educational institution are not yet exempt from VAT. But under this amended law, we can see that there are three accrediting bodies. If its not accredited, then not VAT exempt.

How about Govt Educ Institution, are they vatable or not? No, they are not subject to VAT, because the Tax Code is clear that it refers only to private educ inst.

Is there a chance that an educational institution may not be paying tax, assuming its accredited? Say for example USC.May I be liable for VAT? So all income generated by USC are for educational services?

Let us check what you have learned in Tax 1, general principles when we studied the Constitution.

True or false. The income of a non-stock nonprofit institution is exempt from income tax. All income is exempt from income tax. Ans: False.

If a school has a canteen inside, photocopy machine, dormitories, are they exempt from income tax, if the school is non-stock nonprofit? They may or may not be subjected or income tax. For them to be exempt, for example for canteens: first, actually-directly-exclusively for educ purposes, 2nd, operated by the school itself, and 3rd, located within the campus. Then it is exempt, even if it is not a tuition fee income.

What about special deposits in banks by schools, like interest income? Again, it will be exempt so long as it is ADE used for educ services, supported by financial documents accdg to the opinion of Sec of Finance.

So going back. If USC is into leasing real prop, then it is not exempt from income tax, and the proceeds thereof will be subject to VAT. But if the proceeds will not exceed the threshold limit, still exempt from VAT. So you have to weigh in. Put it in perspective. First, is it exempt or vatable. Second, has it exceed the threshold limit. Always remember that for MCQ.

10. Are Regional Headquarters subject to VAT?

2 TYPES:

Regional Area Headquarters- exempt, because they do not earn income and only operating for admin purposes; presence is a coordinating center of other affiliates within the region

Reg Operating Headquarters subject to 12% VAT, because they are operating business; remember they are subject to 10% income tax rate

11. Sale, importation, publication or printing of books exempt. How about magazines, bulletins, newspapers? Subject to requirements. Requirements: 1. Published at regular intervals, at fixed prices 2. For subscription and sale 3. Devoted for paid advertisements How about the sale of E-books? Not subject to VAT exemption, vatable, because it does not take the form of traditional books.


12. Cooperatives, vatable? Depends.

Are sale of electric cooperatives, vatable? YES.

Agricultural cooperatives? Exempt, so long as it is registered and in good standing, with the Cooperatives Development Authority, whether or not the sale of their produce is directly for their members or nonmembers, or whether in its original state or not.

How about the importation of machineries, equipments,and other input farm good, exempt? Yes.

Types of Cooperatives:

a. Agricultural b. Electric c. Lending or credit cooperatives. Subject to vat? Not subject to VAT, so long as they are registered, and in

good standing with the Coopeartive Development Authority.

Ex. CEBU CFI owned by the Garcias.

d. Multi purpose Cooperative Exempt, as long as registered in CDA and in good standing e. Non-agricultural, Non-electric, Nonlending or non-credit, non-multi-purpose exempt, so long as

registered in CDA and the contribution of each member does not exceed 15k, regardless of the aggregate contribution of the member

Ex. Let us say that ABC Corp was incorporated in Jans 2011. It has no idea whether its 12-month gross proceeds will exceed the threshold limit for VAT, so it did not as yet first register for VAT purposes. It made exportations of its manufactured goods. Exempt, vatable, or zero-rated?

So although in both cases, the export sales, whether you are vat registered or not, it will not thus generate output tax payable to the government. The difference is that if two corporations make exportations, one is registered and the other is not, the difference lies in the treatment of the transaction. That which registered under the VAT system can treat the transaction as zero-rated, the other one is exempt, although no output tax, the purchase will be different bec no input vat can be registered to the one who does not register. It can treat the export sale transaction as exempt lang, any purchase in order to generate the raw materials or manufacture, no input vat.

So, diba I called your attention re Zero rated transaction. That before one could claim a zero-rated transaction, one must be vat-registered first. Now if the exportation is made by a non-vat registered, treatment of the transaction is zero-rated.

13. What about transactions that are exempt under international agreement? Is this not in conflict with the provisions on zero-rated transaction?

If XYZ Corp will to ABC Corp, where ABC is granted exemption of VAT pursuant to a special law, where is zero-rating transaction, where is exempt transaction? The transaction of XYZ, or that of ABC?

The sale made by XYZ to ABC is zero-rated; the exempt transaction is that of ABC when it imports goods from other corporations.

For zero-rating, remember that when an entity is granted exemption under international agreement or under a special law, either it is exempt or it is zero-rated. What is covered in zero-rating is that there is the VAT registered seller making a sale to a person or an entity that has been granted indirect tax exemption. So here, ABC Corp is granted indirect tax exemption, so its not liable for VAT. Any seller to ABC shall recognize a transaction as zero-rated, so long as the seller is VAT registered. So we are focusing not on ABC, but on the VAT registered person, and XYZ Corp here shall recognize the transaction to ABC as zero-rated, and XYZs purchase from other entity however will not be zero-rated and there will be input VAT that


will be recognized. Exempt transaction means the transactions made by the person or entity itself that has been granted exemption and so either it makes a sale or purchase, it will be exempt. But for a VAT registered person or entity, it is zero-rated.

14. Sale by international shipping charva

If I remember it right, I also discussed fuels, good, supplies in relation to engaged in international shipping and air transport operation. What is covered now, in this exempt transaction?

So here theres no conflict, because we are looking here at two separate taxpayers.

In zero-rated transaction, when a VAT registered makes a purchase of fuels, equipment and supplies, to an entity that is engaged in international shipping, the transaction is zero-rated. But if this entity that is engaged in international shipping, imports from outside, fuels, goods, it will be exempt from VAT, so long as it is engaged in international shipping.

15. Passnegers, vessels, in ships charva

SO what is covered in the exemption is the importation or sale or lease of passenger or cargo vessel including the implements inside, with the requirement that what is exempt only are those only reaching 150 tons and above, and if it is below that, then it is vatable. There are requirements as to the age of the vessel. Do you know that in the Philippines, our shipping does not purchase a brand new vessel? Bec it is very expensive.

Probably when you read this provision, very self-explanatory lang. Diba, how old the vessel should be?

16. Sales of those entities that does not exceed 1.5M (1.919M)

So we are done with what are exempt transactions.

So lets go with other VAT exempt transactions. What are these?

a. Those incidental to the VAT Exempt transaction

So do not be misled ha, because we said that incidental transactions are VATABLE even if not made in the course or business. But this time, it is exempt because it is an incidental transaction to VAT exempt transaction. Because the principal activity is exempt, with more reason that the incidental activity thereof is exempt.

Isolated transaction, are they exempt? Not.

Isolated Transaction those that can never happen again

This is what you have to put in mind. A real property transaction that is subject to CGT is 99% not subject to VAT. Why? That which is subject to CGT is a capital asset, and VAT is imposed on ordinary asset while in the course of trade or business.

Do you remember the case of shipping vessel, why was it not subject to VAT? Bec the reason for the sale or transaction was that the transaction was isolated. It means to say that it is one of a kind.

Another example accdg to a BIR opinion, is the sale of a trademark of a corporation is not subject to VAT, because it is an isolated case.

b. Sale of properties in a dissolution, etc. c. Change of corporate name, merger, consolidation of properties solely in kind, (Sec 40 C2)

So the persons granted exemptions are those entering incidental transaction, isolated transaction, etc.


1. Now let us say that there is an entity exempt from VAT. Does it have the option to register for VAT? YES. So theres the liberty in choosing to be vatable.

Diba if theres an entity whose gross receipts or proceeds is oly 1.4M. The it is only subject to 3% percentage tax. But it has the option to register for vat, meaning, all its sales will be liable to 12% VAT, but the good side of such registration is that whatever purchases it made, so long as supported by a VAT OR or INVOICE form his supplier will be recognized as input tax. And input tax is also 12% on purchases. If the difference between the output tax and the input tax is lesser than the 3% percentage tax, then it will be beneficial for those under the VAT system, rather then paying the direct percentage tax of 3% which cannot be passed on to your customers. But for lawyers, or professionals, if your proceeds would not reach 1.5M or THE THRESHOLD LIMIT, I think it would be beneficial to go with the 3% percentage tax, rather than paying VAT.

What about its purchases? Would it generate the input tax? Ok, if you will become lawyers, what is your puhununan? Your mental faculties, right. Does it have input tax? Your books while stidyong law, you cannot claim the input tax, bec books are exempt from VAT, not even your fare to school, your tuition fee. Now what is the source of your input tax? Probably the rent of your space, but the salaries of your employees, o input tax. But the VAT between the gap of your professional fees against the VAT on your purchases is very high than the 3% that you will pay as percentage tax.

2. Second item that you can register optionally. 3. How about franchise grantees in your outline?

What are the instances may a VAT exempt entity be allowed to register optionally under the VAT system?

1. When your gross receipts or proceeds will not exceed the threshold limit. 2. If you have mixed transactions, meaning some of your sales are exempt and some are vatable, and still if it

pertains to vatable transaction but did not exceed yet the threshold limit, you may still register under the VAT system. But if you have mixed transactions, and those transactions that are vatable already exceed the threshold limit, it is not anymore an option, but already a mandatory registration. What it meant here, when it is mixed transaction, is that your vatable transaction apart from those exempt must not exempt the threshold limit so that you may have the option to register.

3. Franchise grantees of two types, radio and/or TV broadcasting, so long as the gross receipts of the preceding calendar year do not exceed 10 Million.

What about those franchise grantees of radio or TV broadcasting whose gross receipts exceeds 10M? Mandatorily they have to register under the VAT system. Otherwise, if they do not exceed 10M, they are subject to the regular franchise tax or percentage tax, but they have the option to register under the VAT system.

Say for example these franchise grantees opted to register under the VAT system, can it revert back to being subjected to percentage tax and be non-vatable? The election to be vatable is irrevocable for a period of three years.

The same rule of irrevocability of three years will apply to the three instances to optionally register under the VAT? No.

When you say that the option to register under the VAT system is irrevocable for three years would only apply to those whose gross receipts does not exceed 1.5 Million (now 1.919M)or those having mixed transactions whose gross receipts from vatable transaction do not exceed 1.5M (now 1.919M), they can revert back after three years from the quarter when the choice was made.

But for franchise grantees of radio or TV broadcasting, whose gross receipts of the preceding calendar year do not exceed 10M, ones the option is made, it is perpetually irrevocable. So they will remain to be under the VAT system.

Pero for those franchise grantees of water, gas, electric utilities, etc., they are covered by the VAT system. The option is given only to these radio and TV broadcasting, because in the first place they are the ones who are not vatable so long as the gross receipts do not exceed 10M.


How do you distinguish creditable withholding tax from final withholding tax?

Creditable withholding tax by the term creditable, whatever taxes that have been withheld from your income, it may be credited or offseted against your future tax liability.

Final withholding tax it is the withholding tax that has been withheld with finality. Such consists of the

VAT to Remedies of a Taxpayer (95%)

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