PM Reyes Notes on Taxation 2 - Valued Added Tax (Working Draft)

7/27/2019 PM Reyes Notes on Taxation 2 - Valued Added Tax (Working Draft)

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PM REYES NOTES ON TAXATION II:VALUE-ADDED TAX

PM REYES NOTES ON TAXATION II: VALUE-ADDED TAXBY P IERRE MARTIN DE LEON REYES

This reviewer is a compilation of personal notes in Taxation Two and notes and lectures from Atty. Gruba and Atty. Montero and research andmemoranda made during the author s internship at SyCip Salazar Gatmaitan and Hernandez (SSGH) . References have also been made tothe following books: D E LEON & DE LEON , J R . THE FUNDAMENTALS OF TAXATION (2012); DE LEON & DE LEON , J R . COMPREHENSIVE REVIEW OFTAXATION (2010); VITUG & ACOSTA . TAX LAW AND J URISPRUDENCE (2006); DOMONDON , TAXATION VOLUME II: INCOME TAX (2009); CO-UNTIAN, J R . TAX DIGEST (2009); MAMALATEO , REVIEWER ON TAXATION (2008). This reviewer is best used with S ACADALAN-CASASOLA , NIRC AND OTHER LAWS(2012).

Possessors are granted the right to reproduce and distribute this reviewer as well as the right to convert the work to any medium for thepurpose of preservation and/or continued distribution provided that the author s name remains clearly associated with the wor k and that noalterations of the form and content are made.

Updated 21 March 2013

In general

Q1. Define Value-Added Tax (VAT).

A Value-Added Tax is a tax assessed, levied, andcollected on every importation of goods, whether ornot in the course of trade or business, or imposed oneach sale, barter, exchange or lease of goods orproperties or on each rendition of services in thecourse of trade or business as they pass along theproduction and distribution chain, the tax beinglimited only to the value added to such goods,properties or services by the seller, transferor orlessor.

Q1.1. What is the current VAT rate?

The current VAT rate is 12%.

Q2. What are the characteristics of the VAT?

1. It is a percentage tax imposed at every stage ofthe distribution process on the sale, barter, orexchange or lease of goods or properties and onthe performance os service in the course of tradeor business or on the importation of goods,whether for business or non-business.

2. It is a business tax levied on certain transactionsinvolving a wide range of goods, properties andservices, such tax being payable by the seller,lessor or transferor.

3. It is an excise tax or a tax on the privilege ofengaging in the business of selling goods orservices or in the importation of goods

4. It is an indirect tax, the amount of which may beshifted to or passed on the buyer, transferee orlessee of the goods, properties or services.

5. It is an ad valorem tax as its amount or rate isbased on gross selling price or gross value inmoney or gross receipts derived from thetransaction

Q3. In general, who are liable to pay theVAT?

1. Any person who, in the course of trade orbusiness, sells , barters , exchanges or leases

goods or properties, or renders services

Except : A person, whether or not VAT-registered, whose annual gross sales or receiptsdoes not exceed P1.5 million. 1

2. Any person who imports goods, whether in thecourse of trade or business or not.

(see S ECTION 105, TAX CODE )

Q4. How does the VAT taxpayer determinehis tax liability? 2

The taxpayer determines his tax liability by computingthe tax on the gross selling price or gross receipt(output tax) and subtracting or crediting the earlierVAT on the purchase or importation of goods or onthe purchase of service (input tax) against the taxdue on his own sale.

As otherwise stated by the Supreme Court in CIR V. S EAGATE TECHNOLOGY [FEBRUARY 11, 2005] :

Under the VAT method of taxation, which is invoice-based, an entity can subtract from the VAT chargedon its sales or outputs the VAT it paid on itspurchases, inputs and imports. For example, when aseller charges VAT on its sale, it issues an invoice tothe buyer, indicating the amount of VAT he charged.For his part, if the buyer is also a seller subjected tothe payment of VAT on his sales, he can use theinvoice issued to him by his supplier to get areduction of his own VAT liability.

1 If the annual gross sales or receipts does not exceed P1.5million, he shall be liable instead for the 3% percentage tax onsmall business enterprises (see Section 116, Tax Code).2

This shall be discussed in greater detail under Input Vat


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P IERRE MARTIN DE LEON REYES 2


Q4.1. Differentiate output tax frominput tax

As differentiated by the Supreme Court in CIR V. BENGUET CORPORATION [J ULY 14, 2006]:

Input VAT or input tax represents the actualpayments, costs and expenses incurred by a VAT-registered taxpayer in connection with his purchaseof goods and services. Thus, " input tax " means thevalue-added tax paid by a VAT-registeredperson/entity in the course of his/its trade or businesson the importation of goods or local purchases ofgoods or services from a VAT-registered person.

On the other hand, when that person or entity sellshis/its products or services, the VAT-registeredtaxpayer generally becomes liable for 10% (now

12%) of the selling price as output VAT or output tax.Hence, " output tax " is the value-added tax on thesale of taxable goods or services by any personregistered or required to register under the Tax Code.

Basic Elements

Q5. What are the elements of a VAT-taxablesale? 3

1. Sale of goods and services, lease of propertyincluding deemed sale transactions

2. In the course of trade or business 4 (except

importation5

) and including incidentaltransactions3. The transaction is not a VAT zero-rated or a

VAT-exempt transaction.

Q5.1. What are considered as goods or properties for VAT purposes?

All tangible and intangible objects which are capableof pecuniary estimation, including:

1. Real properties held primarily for sale tocustomers or held for lease in the ordinary course

of business

3 One more element should be added: the annual gross sales or receipts must exceed P1.5 million. Otherwise, it is subject to the3% percentage tax on small business enterprises.4 As opposed to isolated transactions. Note, however, that servicesrendered by non-resident foreign persons shall be considered asbeing rendered in the course of trade or business.5 An importation is VAT-taxable whether made in the course of trade or business or not.

2. The right or privilege to use patent, copyright,design or model, plan, secret formula or process,good will, trademark, trade brand, or other likeproperty or right

3. The right or privilege to use in the Philippines of

any industrial, commercial or scientific equipment4. The right or the privilege to use motion picturefiles, films tapes and discs

5. Radio, television, satellite transmission and cabletelevision line ( see S ECTION 106(A)(1), TAX CODE )

Q5.2. What are transactions deemedsales

1. Transfer of goods or properties not in the courseof business (originally intended for sale or for usein the course of business)

2. Property dividends (transfer to shareholders asshare in the profits of VAT-registered persons orto creditors in payment of debt)

3. Consignment of goods without the sale beingmade within 60 days

4. Retirement from or cessation of business withrespect to inventories of taxable goods existing(see S ECTION 106(B), TAX CODE )

Q5.2.1. San Roque Power entered into apurchase power agreement withNAPOCOR to develop thehydroelectric potential of theLower Agno River. During thetesting period, electricity wastransferred by San Roque toNAPOCOR. Can the transfer beconsidered a sale of electricity?

Yes. In S AN ROQUE P OWER CORP . V. CIR [NOVEMBER25, 2009] , the Supreme Court held that although thetransfer was not a commercial sale, the NIRC doesnot limit the definition of sale to commercialtransactions in the normal course of business.Conspicuously, Section 106(B) of the NIRC, whichdeals with the imposition of VAT, does not limit theterm sale to commercial sales, rather it extends theterm to transactions that are deemed sale. In the said

case, it was undisputed that San Roque transferredto NPC all the electricity that was produced duringthe trial period. The fact that it was not transferredthrough a commercial sale or in the normal course ofbusiness does not deflect from the fact that suchtransaction is deemed as a sale.


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Q5.3. What is meant by in the course of trade or business

In the course of trade or business means theregular conduct or pursuit of a commercial or an

economic activity including transactions incidentalthereto, by any person regardless of whether or notthe person engaged therein is a non-stock, non-profitprivate organization or a government entity. 6

Q5.3.1. Pursuant to the governmentsprivatization program, NDCdecided its shares in the NationalMarine Corp. and 5 vessels.Magsaysay Lines bought theshares and vessels. The CIRcontends that the sale of the 5vessels is incidental to its NDCsVAT registered activity of leasingout personal property and thusVAT-taxable. Is the CIR correct?

No. In CIR V. MAGSAYSAY LINES [J ULY 28, 2006] , theSupreme Court found that any sale, barter orexchange of goods or services not in the course oftrade or business is not subject to VAT. In this case,the sale of the vessels was an isolated transaction,not done in the ordinary course of NDC s businessand is thus not subject to VAT.

Q5.4. Is the profit element required forVAT to be imposed?

No. The term in the course of trade or businessrequires the regular conduct or pursuit of acommercial or an economic activity, regardless ofwhether or not the entity is profit-oriented. ( see CIR V. CA AND COMASERCO [MARCH 30, 2000] )

Q5.4.1. COMASERCO is a non-stock, non-profit organization, affiliated withPhilamlife and organized to performcollection, consultative or technicalservices. The BIR assessedCOMASERCO for deficiency VAT.COMASERCO argues that the servicesrendered to Philamlife were on a no -profit, reimbursement-of-cost- onlybasis and, as such, the services are

6 Note that services rendered by non-resident foreign persons shallbe considered as being rendered in the course of trade or business.

not VAT-taxable. Is COMASERCOcorrect?

No. In CIR V. CA AND COMASERCO [MARCH 30, 2000] , the Supreme Court opined that VAT is a tax

on transactions imposed at every stage of thedistribution process on the sale, barter, exchange ofgoods or property, and on the performance ofservices, even in the absence of profit attributablethereto. The definition of the term in the course of trade or business applies to all transactions. Even anon-stock, non-profit corporation or governmententity is liable to pay VAT for the sale of goods andservices. In this case, even if the services renderedfor a fee were on a reimbursement-on-costarrangement and without realizing profit, thepayments are still subject to VAT.

Q5.4.2. Sony Philippines engaged theservices of several advertisingcompanies. Due to dire economicconditions, Sony InternationalSingapore (SIS) gave Sony Philippinesa dole-out to pay for said advertisingexpenses. Sony Philippines claimedas input VAT credits that VAT paid forthe advertising expenses. The CIRdisallowed this and assessed SonyPhilippines deficiency VAT on thereimbursable received by it from SIS.The CIR contends that thereimbursable was a fee for a VAT-

taxable activity. Is the CIR correct?

No. The Supreme Court held in CIR v. S ONYP HILIPPINES [NOVEMBER 17, 2010] that SonyPhilippines cannot be deemed to have received thereimbursable as a fee for a VAT-taxable activity. Theabsence of a sale, barter or exchange of goods orproperties supports the non-VAT nature of thereimbursable. The Supreme Court distinguished thisfrom CIR V. CA AND COMASERCO [MARCH 30, 2000] where even if there was similarly a reimbursement oncost arrangement between affiliates, there was in factan underlying service. Here, the advertising services

were rendered in favor of Sony Philippines, not SIS. VAT on Importa t ions

Q6. Does VAT apply to every importation?

Yes. The VAT shall be imposed on every importationof goods, whether or not in the course of trade orbusiness. This is unlike VAT on sale of goods orproperties which must be in the course of trade or


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business. Otherwise, the person/transaction shall notbe liable to pay VAT. ( see CIR V. S EAGATETECHNOLOGY [FEBRUARY 11, 2005] ).

Q6.1. Give the tax base of VAT on

importation of goods.The tax base is the total value used by the BOC indetermining tariff and customs duties plus customsduties, excise taxes, if any, and other charges.

Where the customs duties are determined on thebasis of the quantity or volume of the goods, the VATshall be based on the landed cost plus excise taxes,if any.

Q7. What is technical importation?

Technical importation is the subsequent sale,transfer or exchange of imported goods by VAT-exempt persons to non-exempt persons or entities.

Q7.1. What is the legal consequence oftechnical importation?

The non-exempt buyers, transferees, or recipientsshall be deemed the importers of the taxable goodsand shall be liable for the VAT due on suchimportation. ( see S ECTION 107(B), TAX CODE )

VAT-taxable transactio ns

VAT-taxable sale of go ods

Q8. Give the basis of VAT on sale, barter orexchange of goods or properties.

The base is the gross selling price or gross value inmoney of the taxable goods or properties sold,bartered or exchanged.

Q8.1. What is gross selling price inrelation to the VAT?

Gross selling price is the total amount of money or itsequivalent which the purchaser pays or is obligatedto pay to the seller in consideration of the sale, barteror exchange of the goods or properties excluding theVAT. Any excise tax, if any, on such goods orproperties shall form part of the GSP. ( see S ECTION4.106-4, RR 16-2005 [S EPTEMBER 1, 2005] )

Q8.2. What is the basis if theconsideration of a sale is notwholly in money as in a part-exchange or barter transaction?

The base is the price that would have been chargedin an open market sale for purely monetaryconsideration.

VAT-taxable sale of real properties

Q8.3. Is the sale of real propertiessubject to VAT?

Yes as to the sale of real properties held primarily forsale to customers or held for lease in the ordinarycourse of trade or business of the seller.

In the case of sale of real properties on theinstallment plan, the real estate dealer shall besubject to VAT on the installment payments, includinginterest and penalties, actually and/or constructivelyreceived by the seller.( see S ECTION 4.106-3, RR 16-2005 [S EPTEMBER 1, 2005] )

Q8.3.1. What is the gross selling price forthe sale of real properties subjectto VAT?

The gross selling price shall mean the considerationstated in the sales document or the fair market

value,7

whichever is higher. ( see S ECTION 4.106-4, RR 16-2005 [S EPTEMBER 1, 2005] )

Q8.3.2. How is VAT imposed on realproperty transactions?

1. If cash or deferred payment (payment is morethan 25%), then the VAT on the whole amount isalready imposed

2. If installment (less than 25% for a year), then theVAT is imposed on each payment

3. There is no VAT imposed on Section 40(C)(2)exchanges.

Q8.3.3. Assuming a VAT-taxabletransaction, is the advance

7 The fair market value shall mean whichever is the higher of (1)the fair market value as determined by the CIR (zonal value) or (2)the air market value as shown in the schedule of values of theprovincial and city assessors (real property tax declaration). In theabsence of a zonal value, gross selling price shall refer to themarket value shown in the latest real property tax declaration or the consideration, whichever is higher.


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payment in a real estatetransaction subject to VAT?

Of the amounts typically covering an advancepayment, only the pre-paid rent is subject to VAT.

Other forms of advance payment such as optionmoney, security deposit, etc. are not subject to VAT.

Q8.3.4. Is the sale of a residential lot,residential house and lot or otherresidential dwelling subject toVAT?

Yes as to the sale of a residential lot with a GSPexceeding P1,919,500 8 and the sale of a residentialhouse and lot or other residential dwelling with GSPexceeding P3,199,200 9 are subject to VAT.

Installment sale of a residential house and lot or otherresidential dwellings exceeding P1 million 10 shall besubject to VAT.

(See S ECTION 4.106-4, RR 16-2005 [S EPTEMBER 1, 2005], AS AMENDED BY RR 04-07 [FEBRUARY 7, 2007], RR 16-2011 [OCTOBER 27, 2011], RR 3-2013 [FEBRUARY 20, 2012] AND RR 13-2012 [OCTOBER 12, 2012].

Q8.3.5. A bought two adjacentcondominium units which heintended to combine so as to fithis family. Each unit has a GSP of

2 million. The two units wereseparately documented. After 2years, A decided to sell the twounits. A contends that the unitsare exempt from VAT as the GSPdid not exceeding 2.5 million. Is Acorrect?

No. By virtue of the amendment introduced by RR 13-2012 [OCTOBER 12, 2012] , the sale of real propertiessubject to VAT shall include the sale, transfer, ordisposal within a 12-month period of two or moreadjacent residential lots, house and lots, or other

residential dwellings in favor of a buyer. Suchadjacent real properties although covered byseparate titles and/or separate tax declarations, whensold to one and the same buyer, whether covered byone or separate deeds of conveyance, shall be

8 Previously 1.5 million. New figure is based on the amendmentintroduced by RR 16-2011 [May 7, 2004] on the new thresholds for VAT exemptions on the sale of real property.9 Previously 2.5 million.10 This value has not been changed by the amendments.

presumed as a sale of one residential lot, house andlot or residential dwelling.

Q8.3.6. Is the sale of the parking lotincluded in the sale of a

condominium unit?No. The sale of parking lots is a separate and distincttransaction and is not covered by the rules on thethreshold amount not being a residential lot, houseand lot, or a residential dwelling and thus should besubject to VAT regardless of the amount of sellingprice. ( see RR 13-2012 [OCTOBER 12, 2012] )

VAT-taxable sa le of serv ices in c luding lease of proper t ies

Q9. Give the basis of VAT on sale of services

and use or lease of properties?The basis shall be the gross receipts derived from thesale or exchange of services including the use orlease of properties. ( see Section 108(A), Tax Code )

Q9.1. What are gross receipts in relationto the VAT?

Gross receipts means the total amount of money orits equivalent representing the contract price,compensation, service fee, rental or royalty actuallyor constructively received during the taxable quarter

for the services performed or to be performed foranother person.

Q9.2. Is the place of execution of thecontract of lease material on theVAT-taxability of the use or leaseof a property?

No. The use or lease of properties shall be subject toVAT irrespective of the place where the contract oflease or licensing agreement was executed if theproperty is leased or used in the Philippines.

Q9.3. Is the lease of residential unitssubject to VAT?

Yes as to the lease of residential units with a monthlyrental per unit exceeding P12,800, regardless of theamount of aggregate rentals received by the lessor during the year


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Q9.3.1. What is the tax treatment of thelease of residential units, wheresome are leased out for exceeding P12,800 while othersare leased out for more thanP12,800?

The tax treatment shall be as follows:

1. The gross receipts from rentals not exceedingP12,800 per month per unit shall be exempt fromVAT regardless of aggregate gross receipts

2. The gross receipts from rentals exceedingP12,800 shall be subject to VAT if the aggregateannual gross receipts from said units exceedsP1,919,500,000. 11

Q9.4. What is a sale or exchange ofservices?

A sale of exchange of services means theperformance of all kinds of services in the Philippinesfor others for a fee, remuneration or consideration.

(See S ECTION 108(A), T AX CODE for an extensiveenumeration of the type of services including in saiddefinition)

Q9.4.1. Are toll fees collected by tollwayoperators subject to VAT?

Yes. The Supreme Court in DIAZ V. S ECRETARY OFF INANCE [J ULY 10, 2011] answered this issue in theaffirmative. The court held that VAT is imposed onall kinds of services and tollway operations who areengaged in construction, maintaining, and operatingexpressways are no different from lessors ofproperty, transportation contractors, etc. Further, theyalso come under those described as all other franchise grantees which is not confined only tolegislative franchise grantees since the law does notdistinguish. They are also not a franchise granteeunder Section 119 of the Tax Code which would havemade them subject to percentage tax instead. Neitherare the services part of the enumeration under

Section 109 on VAT-exempt transactions.

Q9.4.2. Are the gross receipts derived byoperators or proprietors ofcinema/theater houses fromadmission tickets subject to VAT?

11 Otherwise, the gross receipts will be subject to the 3% taximposed under Section 116 of the T ax Code.

No. The Supreme Court in CIR v. SM P RIMEHOLDINGS [FEBRUARY 26, 2010] held that although theenumeration of services subject to VAT underSection 108 of the 1997 Tax Code is not exhaustive.Among those included in the enumeration is the

lease of motion picture films, films, tapes and discs.This, however, is not the same as the showing orexhibition of motion pictures or films. Hence, sincethe showing or exhibition of motion pictures or films Isnot in the enumeration, such is not a VAT-taxabletransaction.

VAT-exempt t ransact ions

Q10. What are VAT-exempt transactions?

VAT-exempt transactions refer to the sale of goodsor properties and/or services and the use or lease of

properties that is not subject to VAT (output tax) andthe seller is not allowed any tax credit of VAT (inputtax) on purchases.

The person making the exempt sale of goods,properties, or services shall not bill any output tax tohis customers because the said transaction is notsubject to VAT.

Q10.1. Enumerate the exempttransactions 12

S ECTION 109(A) TO (V) provides for the following:

a) Sale or importation of agricultural and marinefood products in their original state. 13

b) Sale or importation of fertilizers; seeds, seedlingsand fingerlings; fish, prawn, livestock and poultryfeeds 14

c) Importation of personal and household effectsbelonging to the residents of the Philippinesreturning from abroad

d) Importation of professional instruments andimplements, wearing apparel, domestic animalsand personal household effects belonging to

12 Those underlined are the notable VAT-exempt transactions.These enumeration is exclusive.13 Such products are still considered in their original state even if they have undergone simple processes of preparation or preservation for the market, such as freezing, drying, salting,broiling, roasting, smoking, or stripping. Polished and/or huskedrice, corn grits, raw cane sugar and molasses, ordinary salt andcopra shall be considered in their original state.14 Does not include specialty feeds for race hourses, fightingcocks, aquarium fish, zoo animals, and other animals generallyconsidered as pets.


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persons coming to settle for the first time in thePhilippines

e) Services subject to percentage taxf) Services by agricultural contract growers and

milling for others of palay into rice, corn into grits

and sugarcane into raw sugarg) Medical, dental, hospital and veterinary servicesexcept those rendered by professionals 15

h) Educational services rendered by privateeducational institutions duly accredited byDEPED, CHED, and TESDA and those bygovernmental educational institutions

i) Services rendered pursuant to an employee-employer relationship

j) Services rendered by regional or areaheadquarters established in the Philippines

k) Transactions which are exempt underinternational agreements to which the Philippinesis a signatory or under special laws

l) Sales by agricultural cooperatives duly registeredwith the Cooperative Development Authority

m) Gross receipts from lending activities by credit ormulti-purpose cooperatives duly registered withthe Cooperative Development Authority whoselending is limited to members

n) Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with theCooperative Development Authority 16

o) Export sales by persons who are not VAT-registered

p) Sales of real properties not primarily held for saleto customers or held for lease in the ordinary

course of trade or business or sales within thelow-cost cap of below 1,919,500 17 for aresidential lot and P3,199,200 18 for a house and lot and other residential dwelling

q) Lease of a residential unit with a monthly rentalnot exceeding P12,800 19

r) Sale, importation, printing or publication of booksand any newspaper, magazine, review or bulletinwhich appears at regular intervals with fixedprices for subscription and sale and is notdevoted principally to publication of paidadvertisements

s) Sale, importation, or lease of passenger or cargo

vessels and aircraft20

15 But see Q10.3 on VAT exemption of doctors registered with thePRC and lawyers registered with the IBP.16 Provided that the share capital contribution of each member does not exceed P15,00017 Previously 1.5 million. Amended by RR 16-2011 [O CTOBER 27, 2011].18 Previously 2.5 million. Amended by RR 16-2011 [O CTOBER 27, 2011].19 Previously P10,000. Amended by RR 16-2011 [O CTOBER 27, 2011].

t) Importation of fuels, goods and supplies bypersons engaged in international shipping or airtransport operations

u) Services of banks, non-bank financialintermediaries performing quasi-banking

functions and other non-bank financialintermediariesv) Sale or lease of goods or properties or

performance of services other than thetransactions mentioned in the precedingparagraphs, the gross annual sales and/orreceipts do not exceed the amount ofP1,919,500. 21 .

Q10.2. Are senior citizens exempt fromthe 12% VAT?

Yes. RA No. 9994 [February 15, 2010] , otherwiseknown as the Expanded Senior Citizens Act of 2010exempts senior citizens from paying 12-percent VATon goods and services.

Q10.3. Are medical services rendered bdoctors registered with the PRCand legal services rendered bylawyers registered with the IBPsubject to VAT?

No. RR 7-2004 [M AY 7, 2004] excludes services bydoctors registered with the PRC and services bylawyers registered with the IBP as well as GPPs for

the sole and exclusive purport of practising law ormedicine from the coverage of VAT on services

Q10.4. Are pawnshops liable to pay VAT?

No. As explained by the Supreme Court inTAMBUNTING P AWNSHOP V . CIR [J ANUARY 21, 2010] : Prior to the passage of the EVAT Law in 1994,pawnshops were treated as lending investors subjectto lending investor s tax. 22 Subsequently, pawnshopswere treated jurisprudentially as VAT-able

20 Includes engine, equipment, and spare parts thereof for domestic or international transport operations.21 Previously 1.5 million. Amended by RR 16-2011 [O CTOBER 27, 2011].22 Note that in FIRST P LANTERS P AWNSHOP VS . CIR [J ULY 30, 2008], the Supreme Court held that First Planters Pawnshop was subjectto VAT as it was a lending investor. It must be noted that thefactual circumstances of the said case pertained to a taxableperiod prior to RA No. 9238. What is important to note in this caseis that the Supreme Court stated that pawnshops should now betreated as non-bank financial intermediaries and, as such, notsubject to VAT.


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Q11.1.1. Illustrate the distinction madeabove.

Assume that VAT-registered person purchasesmaterials from his supplier at P100, P9.6 of which

was passed on to him by his supplier as the latter s12% output VAT. In a zero-rated transaction, thetaxpayer can recover the P9.6 from the BIR eitherthrough a refund or a tax credit. When the taxpayersells his finished product for let s say P120, he is notrequired to pay the output VAT of P2.4 (12% of theP20 value he has added to the P100 material).

In a transaction subject to VAT, however, he mayrecover both the input VAT of P9.6 which he paid tothe supplier and his output VAT of P2.4 by passingboth these costs to the buyer. The buyer then paysP12, the total 12% VAT.

Q11.2. Distinguish zero rating from VAT-exemption.

As differentiated by the Supreme Court in CIR v.CEBU TOYO CORPORATION [FEBRUARY 16, 2005]:

Zero-rated VAT-ExemptIt is a taxable transactionbut does not result in an

output tax

Not subject to the outputtax

The input VAT on thepurchases of a VAT-

registered person withzero-rated sales may beallowed as tax credits or

refunded

The seller in an exempttransaction is not entitled

to any input tax on hispurchases despite the

issuance of a VAT invoiceor receipt;

Persons engaged intransactions which are

zero-rated, being subjectto VAT, are required to

register

Registration is optional forVAT-exempt persons.

Q11.3. Distinguish zero-rated fromeffectively zero-ratedtransactions. 23

As distinguished by the Supreme Court in CIR V. S EAGATE TECHNOLOGY [FEBRUARY 11, 2006]:

Zero-rated Effectively zero-ratedgenerally refers to the

export sale of goods andsupply of services

refers to the sale of goodsor supply of services to

persons or entities whose

23 See enumeration of zero-rated sales of goods in Q11.5.

exemption under speciallaws or international

agreements to which thePhilippines is a signatoryeffectively subjects such

transactions to a zero rate.The tax rate is set at zero.When applied to the tax

base, such rate obviouslyresults in no tax

chargeable against thepurchaser

As applied to the tax base,such rate does not yield

any tax chargeable againstthe purchaser

The seller of suchtransactions charges no

output tax, but can claim arefund of or a tax creditcertificate for the VATpreviously charged by

suppliers

The seller who chargeszero output tax on such

transactions can alsoclaim a refund of or a taxcredit certificate for the

VAT previously charged bysuppliers

intended to be enjoyed bythe seller who is directlyand legally liable for theVAT, making such seller

internationally competitiveby allowing the refund orcredit of input taxes thatare attributable to export

sales.

intended to benefit thepurchaser who, not beingdirectly and legally liable

for the payment of theVAT, will ultimately bear

the burden of the taxshifted by the suppliers.

Q11.4. Enumerate the requisites thatmust be complied with in order tobe entitled to a refund or issuanceof a TCC for input VAT due or paidattributable to zero-rated oreffectively zero-rated sales.

1. There must be zero rated or effectively zero ratedsales;

2. Input taxes were incurred or paid;3. Such input taxes are directly attributable to

zero rated or effectively zero rated sales;4. Input taxes were not applied against any output

VAT liability; and5. The claim for refund was filed within the two year

prescriptive period.(see S ITEL P HILIPPINES CORPORATION V . CIR [CTA CASE NO. 7623, MARCH 3, 2010] )


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Zero-rated sales of goo ds

Q11.5. Enumerate the zero-rated sales ofgoods.

S ECTION 106(A)(2) provides for the following:

a) Export Sales (IF GONE)

a) Sale and actual shipment of goods from thePhilippines to a Foreign country

b) Sale of raw materials or packaging materialsto a Non-resident buyer for delivery to aresident local export-oriented enterprise

c) Sale of raw materials or packaging materialsto Export-oriented enterprise whose exportsales exceed 70% of total annual production

d) Sale of Gold to the BSP

e) Those that are not considered export salesunder the Omnibus Investment Code andother special laws

f) Sale of goods, supplies, and equipment andfuel to persons engaged in Internationalshipping or international air transportoperations.

b) Foreign currency denominated sale the sale toa non-resident of goods assembled ormanufactured in the Philippines for delivery to aresident in the Philippines paid in acceptableforeign currency and accounted for in accordancewith BSP rules and regulations

c) Sales to persons or entities whose exemptionunder special laws and international agreementsto which the Philippines is a signatory subjectssuch sales to 0% rate (effectively zero-ratedtransactions)

Q11.5.1. Explain the VAT treatment ofPEZA-registered enterprisesprior to and after the effectivityof RMC 74-99 [O CTOBER 15, 1999].

Prior to RMC 74-99 :

Whether a PEZA-registered enterprise was exemptor subject to VAT depended on the type of fiscalincentives availed of by the said enterprise. PEZAentities can avail of two alternative or subsequentincentives of income tax holiday (ITH) or 5%preferential tax rate on gross income. If the entityavails of the 5% preferential tax rate, it is exemptfrom all taxes including VAT but if it avails of the ITH,

it shall be exempt from income taxes for a number ofyears but not VAT ( see CIR v. S EKISUI J USHIP HILIPPINES [J ULY 21, 2006] ).

This explains the decisions in CIR V. TOSHIBA

INFORMATION

EQUIPMENT

[AUGUST

9, 2005]

and CIR v.CEBU TOYO CORPORATION [FEBRUARY 16, 2005]

where in both cases the Supreme Court held that thePEZA-registered enterprise is entitled to a VATrefund/credit because it opted to avail itself of theincome tax holiday. Having availed of the income taxholiday and its export sales being a zero-ratedtransaction, the PEZA-registered enterprise wasentitled to refund or credit for its unutilized inputtaxes. In both cases, the transactions were madeprior to the effectivity of RMC 74-99.

After the effectivity of RMC 74-99:

The tax treatment of sales of goods and services ofPEZA-registered enterprises is now based on theprinciples of separate custom territory and crossborder doctrine.

As explained by the Court in the cases of CIR V. S EAGATE TECHNOLOGY [FEBRUARY 11, 2005], CIR v.S EKISUI J USHI P HILIPPINES [J ULY 21, 2006], CIR V. TOSHIBA INFORMATION EQUIPMENT [AUGUST 9, 2005], CIR V. CONTEX [J ULY 2, 2004] :

PEZA-registered enterprises, which wouldnecessarily be located within ecozones, are VAT-

exempt entities not because of Section 24 of RA7926 (which imposes the 5% preferential tax rate ongross income of PEZA-registered enterprises in lieuof all taxes) but rather because of Section 8 of thesame which establishes the fiction that ecozones areforeign territory. As a result, sales made by a supplierin the Customs Territory (national territory of thePhilippines outside the borders of the ecozone) to apurchaser in the ecozone shall be considered asexportation from the Customs Territory. Conversely,sales made by a supplier from the ecozone to apurchaser in the Customs Territory shall beconsidered as an importation into the Customs

Territory.The Philippine VAT system adheres to the cross-border doctrine which means that no VAT shall beimposed to form part of the cost of goods destined forconsumption outside of the territorial border of thetaxing authority. Hence, actual export of goods andservices from the Philippines to a foreign countrymust be free of VAT; while those destined for use orconsumption within the Philippines shall be imposed


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with ten percent (10%) (now 12% VAT). Sales madeby an enterprise within a non-ecozone territory, i.e.,Customs Territory, to an enterprise within an ecozoneterritory shall be free of VAT.

Q11.5.2. Summarize the current taxtreatment of PEZA-registeredenterprises

Currently, the VAT treatments of sale of goods andservices to and by PEZA-registered within andwithout the ecozones are as follows:

1. Any sale of goods, property or services by aVAT-registered supplier from the customs-territory to any Ecozone-registered enterprise regardless of incentive availed is zero-rated onthe part of the VAT-registered seller because

ecozones are foreign soil by fiction and thus thesale is considered an export sale.2. Sales to an ecozone enterprise made by a non-

VAT or unregistered supplier would only beexempt from VAT and the supplier shall not beable to claim credit/refund for its input VATbecause, under Section 109(O) of the Tax Code,

export sales by persons who are not VAT-registered are exempt transactions.

3. If the ecozone-enteprise is an exporter, its inputVAT are subject to refund not because of theincentives it availed but because of the nature of

its transactions (export sales).4. Any sale of goods or property by an ecozone-registered enterprise to a buyer in the customsterritory shall be subject to 12% VAT because itshall be considered an importation. The tax isimposed on the buyer/importer.

5. Any sale of services by an ecozone-registeredenterprise to a buyer in the customs territory shalleither be subject to 12% VAT or to percentagetax depending on the nature of the service. Thetax is imposed on the ecozone-enterprise.

6. Any sale of goods or property between ecozone-registered enterprises (intra-ecozone sales) aretax-exempt.

7. Any sale of services between ecozone-registeredenterprises is exempt from VAT or percentagetax if PEZA-registered enterprise seller is subjectto 5% preferential tax rate and 0% if PEZA-registered enterprise seller is subject to the TaxCode.

SUMMARY OF VAT TREATMENT OF SALES OF GOODS AND SERVICES TO AND BYPEZA-REGISTERED ENTERPRISES WITHIN AND WITHOUT THE ECOZONE 24

Sale of Goods Sale of Services

VAT - registered supplier fromcustoms territory to PEZA -registered enterprise(regardless of whether or notthe PEZA - registered enterpriseis subject to the 5% " in lieu of all tax " regime)

0% VAT 0% VAT

VAT-exempt supplier fromcustoms territory to PEZA-registered enterprise(regardless of whether or not

the PEZA-registered buyer issubject to tax under the NIRC,or to the 5% special tax regime)

VAT exempt VAT exempt

24 Original summary made by Atty. B.P. Panigbatan. Updated and annotated by PM Reyes during 2011 SyCip Internship.


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PEZA-registered enterprise tobuyer from customs territory(local/domestic sales)

12% VAT imposed on buyer inaddition to the import tax andcustoms duties

12% VAT imposed on thePEZA-registered enterpriseseller or to the percentage taxplus normal tax on income.

PEZA - registered enterpriseto another PEZA registeredenterprise (intra-ecozonesales)

VAT exempt Exempt from Vat or anypercentage tax if PEZA -registered enterprise seller issubject to 5% special tax regime

0% VAT if PEZA - registeredenterprise seller is subject toTax Code

Q11.5.3. Benguet Corporation treated itssale of gold to the BSP as export sales

and as such, they are zero-rated. The BIRissued a VAT Ruling affirmed suchtreatment. This was reiterated insubsequent rulings. BIR then disallowedrefund of input VAT contending that asubsequent ruling was issued revokingthe zero-rated status and that this couldretroact because no prejudice wouldresult to Benguet as it can offset itagainst its output and that it can claim thesame as cost. Is the BIR correct?

No. In CIR V. BENGUET CORPORATION [J ULY 14, 2006], the Supreme Court found that (1) Benguet didnot have enough output to offset the input VAT itaccumulated precisely because believing it was zero-rated it did not pass on output VAT and (2) assumingthat that there is a right to refund overpaid income taxwhich would result if additional cost is taken up, only32% of the amount would be recovered and it doesnot solve Benguet s other disa dvantageoussituations.

IN this regard, Supreme Court differentiated VATrating and zero-rating. A taxpayer subject to 10%(now 12%) output VAT on its sales of goods andservices may recover its input VAT costs by passingon said costs as output VAT to its buyers of goodsand services but it cannot claim the same as a refundor tax credit, while a taxpayer subject to 0% on itssales of goods and services may only recover itsinput VAT costs by filing a refund or tax credit withthe BIR. In said case, by p roviding for retroactive

application of the VAT ruling declaring sales of goldto the CB as subject to 10% VAT (12%), Benguet s

application for refund/tax credit was denied. Clearly,the retroactive application is prejudicial to Benguet.

Q11.5.4. Acesite is the operator of HolidayInn Hotel. It leases part of its premises toPAGCOR and caters food and beveragesto its patrons. Acesite contends that thesale of food and beverages to PAGCOR iszero-rated and thus entitling them toclaim a tax refund/credit. Is Acesitecorrect?

Yes. In CIR v. A CESITE P HILIPPINES [FEBRUARY 16, 2007] , the Supreme Court stated that servicesrendered to persons or entities whose exemptionunder special laws or international agreements towhich the Philippines is a signatory effectivelysubjects the supply of such services to zero (0%) rateshall be subject to 0%. Since the law clearly providesfor PAGCOR s exemption, the sale of services of Acesite to PAGCOR is effectively zero-rated. Hence,Acesite may refund the VAT it paid on its sale of foodand beverages to PAGCOR.

Zero-rated sales of services

Q11.6. Enumerate the zero-rated sales ofservices.

S ECTION 108(B) provides for the following:

1. Processing, Manufacturing, or Repacking Goodsfor Other Persons Doing Business outside thePhilippines, which goods are subsequentlyexported, where the services are paid for inacceptable foreign currency and accounted for in


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accordance with the rules and regulations of theBSP

2. Services Other than those mentioned in thepreceding paragraph rendered to a personengaged in business conducted outside the

Philippines or a nonresident person not engagedin business who is outside the Philippines whenthe services were performed, the considerationfor which is paid for in acceptable foreigncurrency and accounted for in accordance withthe rules and regulations of the BSP.

3. Services rendered to person or entities whoseexemption under Special Laws or InternationalAgreements effectively subjects the supply ofsuch services to a 0% rate.

4. Sale of Services to Persons Engaged inInternational Shipping or Air TransportOperations

5. Sale of Services for Export-Oriented Enterprisewhose export sales exceed 70% of total annualproduction

6. Transport of Passengers and Cargo by Air orSeal Vessels from the Philippines to a ForeignCountry

7. Sale of Power Generated through RenewableSources of Energy

Q11.6.1. What is the destination principleand are there any exceptionsthereto?

As a general rule, the value-added tax (VAT) system

uses the destination principle. This means that goodsand services are taxed only in the country where theyare consumed.

Exceptions to the destination principle are found inSection 108(B) of the 1997 Tax Code. They aredeemed exceptions because although the servicesare performed in the Philippines, the sales of suchservices are zero-rated provided the followingrequisites are met:

1. The service is performed in the Philippines2. The service falls under any of the categories

provided in Section 108(B)3. It is paid for in acceptable foreign currency that is

accounted for in accordance with the regulationsof the Bangko Sentral ng Pilipinas

4. The recipient of such services is doing businessoutside the Philippines. 25

25 Note that CIR V. BURMEISTER AND WAIN S CANDINAVIANCONTRACTOR MINDANAO , INC . [J ANUARY 22, 2007] added thisrequisite

Q11.6.2. American Express Philippines(AMEX-P) is a Philippine Branchof AMEX International. AMEX-Pis a servicing unit of AMEX

Hong Kong (AMEX-HK) andfacilitates the collections ofAMEX-HK receivables from cardmembers in the Philippines.AMEX-P claimed a refund for itsinput taxes arising from zero-rated sales of services to AMEX-HK. CIR argues that AMEX-P sservices must be consumedabroad in order to be zero-rated.Is the CIR correct?

No. In AMERICAN EXPRESS INTERNATIONAL V . CIR [J UNE 29, 2005], the Supreme Court opined that whileas a general rule, the VAT system uses thedestination principle as a basis for the jurisdictionalreach of the tax such that goods and services aretaxed only in the country where they are consumed,exceptions to the destination principle are found inSection 108(B) of the 1997 Tax Code. In this case,Amex Phils. facilitated in the Philippines the collectionand payment of receivables belonging to its HongKong-based foreign client, Amex HK, and gettingpaid for it in acceptable foreign currency andaccounted for in accordance with the rules andregulations of the BSP. As such, they are deemedexceptions because although the services areperformed in the Philippines, the sales of suchservices are considered zero-rated.

Q11.6.3. Placer Dome Inc (PDI) owns39.9% of Marcopper. Itundertook to clean-up andrehabilitate the Makalupnit andBoac Rivers in Marinduquewhich was affected by its miningoperations. PDI engaged theservices of Placer DomeTechnical Services Limited (PDCanada), a non-resident foreign

corporation in Canada which, inturn, engaged the services ofPlacer Dom Technical ServicesPhilippines (PD Philippines). PDPhilippines filed for a claim fortax credit/refund and contendsthat its sale of services to PlacerDome Canada was zero-rated.The CIR invokes the destinationprinciple, contending that Placer


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Dome Philippines s ervices,while rendered to a non-residentforeign corporation, are notdestined to be consumedabroad. Is the CIR correct?

No. In CIR V. P LACER DOME [J UNE 8, 2007], theSupreme Court reiterated its ruling in AMERICANEXPRESS INTERNATIONAL V . CIR [J UNE 29, 2005] to theeffect that the services enumerated in Section 108Bconstitute as exceptions to the destination principleand are zero- rated. Since Placer Dome Philippinesservices meet the requirements of Section 108(B)(2),it is zero-rated.

Q11.6.4. A foreign consortium composedof Burmeister Denmark andMitsui Engineering entered intoa contract with NAPOCOR forthe operation and maintenanceof two barges.. The Consortiumappointed Burmeister Denmarkas coordination manager.Burmeister Denmark establishedBurmeister Mindanao whichsubcontracted the operation andmaintenance of the two barges.NAPOCOR paid the foreignconsortium while theconsortium, in turn, paidBurmeister Philippines foreigncurrency inwardly remitted intothe Philippines. The BIR refusedto grant a refund since theservices were not destined forconsumption abroad. Are theservices of BurmeisterPhilippines entitled to zero-ratedstatus?

Yes. In CIR V. BURMEISTER AND WAIN S CANDINAVIANCONTRACTOR MINDANAO , INC. [J ANUARY 22, 2007], they are entitled to zero-rated satus and to the refundbut only for the period covered prior to the filing of theCIR s answer in the CTA. This is so because prior,

Burmeister was able to secure a ruling from the BIRallowing zero-rating of its sales. However, such rulingis valid only until the time that the CIR filed its answerin the CTA which amounted to a revocation of thesaid ruling. The revocation cannot be maderetroactive.

It must be noted, however, that without this specialcircumstance, Burmeister would not have beenentitled to a zero-rated status. This is because the

Consortium which was the recipient of the servicesrendered by Burmeister was deemed doing businesswithin the Philippines. While the Consortium sprincipal members are non-resident foreigncorporations, the Consortium itself is doing business

in the Philippines. Hence, the transactions of BWSCMindanao are not subject to VAT at zero percent.

Q11.6.5. ABC is a business processoutsourcing company and isengaged in the business ofproviding call center servicesfrom the Philippines todomestic and offshorebusinesses. Can ABC claimfor a refund or issuance of aTCC for its excess input taxpaid on domestic purchases ofgoods and services whichwere allegedly attributable toABCs zero -rated sales ofservices?

Yes provided it meets the following requisites:

1. the services must be other than processing,manufacturing or repacking of goods;

2. payment for such services must be in acceptableforeign currency accounted for in accordancewith the BSP rules and regulations; and

3. the recipient of such services is doing businessoutside the Philippines.

In S ITEL P HILIPPINES CORPORATION V . CIR [CTA CASENO. 7623, MARCH 3, 2010] , ACCENTURE VS . COMMISSIONER OF INTERNAL REVENUE [C.T.A. CASENO. 7046, S EP . 22, 2009] , P ARLANCE S YSTEMS VS . COMMISSIONER OF INTERNAL REVENUE [C.T.A. CASENO. 7459, J UL. 9, 2009], business processoutsourcing companies were refused a refund of theirexcess input VAT because their sale of services werenot zero-rated because they failed to prove that theirclients were non-resident foreign corporations doingbusiness outside the Philippines.

Input VAT

Q12. What is the tax credit method inrelation to the VAT?

Under the tax credit method, an entity can creditagainst or subtract from the VAT charged on its sales


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or outputs the VA paid on its purchases, inputs andimports. 26

S ECTION 110(A) provides that any input tax evidencedby a VAT invoice or official receipt on purchase or

importation of goods or for purchase of services shallbe creditable against output tax. 27

Q12.1. Give the three possible scenariosthat may arise in computing theVAT payable.

If at the end of any taxable month or quarter:

Output tax = input tax No VAT payable

Output tax > input tax The excess shall be paid bythe VAT-registered person

Output tax < input tax The excess shall be carriedover to the succeedingquarter or quarters

Note that if input vat results from zero-rated oreffectively zero-rated transactions, any excess overthe output taxes shall be refunded to the taxpayer orcredited against other internal revenue taxes, at thetaxpayer s option.

Q12.2. Section 8 of RA No. 9337,otherwise known as the ExpandedVAT Law, imposes a 70% limitationon the input tax. Thus, a VATtaxpayer can credit his input taxonly up to the extent of 70% of theoutput tax. It was argued that (1)this makes the VAT regressive andunconstitutional and (2) it in effectleads to a retention of taxcollection in the hands of VAT-registered establishments whichviolates the principle that a taxshould be for public purposes.

26 As explained in ABAKADA G URO P ARTY LIST V . ERMITA[SEPTEMBER 1, 2005] , the VAT system was previously a singlestage system under a cost deduction method and was payableonly by the original sellers. Now, the VAT system is a multi-stagesystem a mixture of the cost deduction method and the tax creditmethod.27 Again, input tax is the tax paid by a person, passed on to him bythe seller, when he buys goods. Output tax is the tax due to theperson when he sells goods.

In ABAKADA GURO P ARTY LIST V. ERMITA[SEPTEMBER 1, 2005], the Supreme Court ruledthat as to (1) it is wrong to assume that when theinput tax exceeds 70% of the output tax, the input taxin excess of the 70% remains uncredited. It was

reiterated that the excess input tax is retained in thebusiness books and remains creditable in thesucceeding quarters as explicitly allowed by Section110(B). Further, a VAT-registered person is allowedto apply for the issuance of a TCC for any unusedinput taxes to the extent that such input taxes havenot yet been applied to output taxes. As to (2), theSupreme Court stated that there is no retention ofany tax collection because the taxpayer has alreadypreviously paid the input tax to a seller, and the sellerwill subsequently remit such input tax to the BIR. Theparty directly liable for VAT is the seller. What onlyneeds to be done is for the taxpayer/buyer to apply orcredit these input taxes against his output taxes.

This was affirmed in the motion of reconsidation,. InABAKADA GURO P ARTY LIST V. ERMITA [OCTOBER 18, 2005], the Supreme Court opined that the right tocredit input tax as against output tax is a privilegecreated by law, a privilege that also the law can limit.A person has no vested right in statutory privileges.

Q12.3. Is the source of the money used topay the input tax paid for abusiness expense by a companymaterial to a claim for excess inputVAT?

No. In CIR v. S ONY P HILIPPINES [NOVEMBER 17, 2010] , Sony Philippines claimed as input VAT creditsthe VAT it paid for the advertising expenses usingreimbursables from its affiliate in Singapore. The CIRdisallowed this and assessed Sony Philippinesdeficiency VAT. The Supreme Court held that it isevident under Section 110 of the Tax Code that anadvertising expense duly covered by a VAT invoice isa legitimate business expense. Sony incurred suchadvertising expense. Where the money came from isanother matter all together but will definitely notchange the VAT effect.

Q12.4. Is a taxpayer entitled to a refund ofexcess input tax for rendition ofservices to an entity which the lawexempts from indirect taxes?

Yes. In CIR v. A CESITE P HILIPPINES [FEBRUARY 16, 2007] , the Supreme Court held that given thatPAGCOR was exempt from indirect taxes, the


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transactions between Acesite and PAGCOR wereeffectively zero-rated. As such, Acesite is entitled tothe refund or credit of any excess over the outputtaxes.

Q12.5. Explain the rule on theapportionment of input VAT onmixed transactions and illustrateits application?

S ECTION 4.110-4 OF RR16-2005 [S EPTEMBER 1, 2005] provides that a VAT-registered taxpayer who is alsoengaged in transactions not subject to VAT shall beallowed to recognize input tax credit on transactionssubject to VAT as follows:

1. All the input taxes that can be directly attributedto transactions subject to VAT may be

recognized for input tax creditException : Input taxes that can be directlyattributable to VAT taxable sales to theGovernment or any of its political subdivisions,instrumentalities or agencies shall not be creditedagainst output taxes arising from sales to non-Government entities.

2. If any input tax cannot be directly attributed toeither a VAT-taxable or VAT-exempt transaction,the input tax shall be pro-rated to the VATtaxable and VAT-exempt transactions and onlythe ratable portion pertaining to transactionssubject to VAT may be recognized for input taxcredit.

To illustrate:

ABC Corporation had the following sales during themonth:

Sale to private entities subject to 12% - P100,000Sale to private entities subject to 0% - P100,000Sale of exempt goods - P100,000Sale to gov t subject to 5% FWT - P100,000Total Sales for the month - P400,000

The following input taxes were passed on by its VATsuppliers:

Input tax on taxable goods at 12% - P5,000Input tax on zero-rated sales - P3,000

Input tax on sale of exempt goods - P2,000Input tax on sale to government - P4,000Input tax on depreciable capital - P20,000Not attributable to any specific activity(monthly amortization for 60 months)

The creditable input VAT available for each of therespective type of transactions entered into by ABCCorp are as follows:

1. For the sales subject to 12% VAT (i) actualinput of P5,000 and (ii) ratable portion of P5,000

2. For the sales subject to 0% VAT (i) actual inputVAT of 3,000 and (ii) ratable portion of P5,000

3. For sale of exempt goods no input VAT iscreditable as the transactions are VAT-exempt

4. For the sales to government no input VAT iscreditable as the law imposes a 5% FWTobligation on the government agency-payor.

Q12.5.1. In the above illustration, howwas the ratable portion ofcreditable input VAT for VAT-taxable and zero-rated salescomputed?

For input VAT creditable on VAT-taxable sales:

For input VAT creditable on VAT zero-rated sales


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Withhold ing , Presumptive and Transi t ional Input VAT

Q13. What does the withholding of VATapply?

1. Payments are made to a non-resident whoseservices are considered as VAT-taxable in whichcase the 12% will be withheld by the payor

2. Payments by government agencies, in whichcase the government entity will withhold 5% onits payments.

Q13.1. What is the rule on withholding ofVAT by government agencies?

S ECTION 114(C) provides that the government or anyof its political subdivisions, instrumentalities oragencies, including GOCCs, shall, before makingpayment on account of each purchase of goods orservices subject to VAT, deduct and withhold a finalVAT equivalent to 5% of the gross payment thereofprovided that the payment for lease or use ofproperties or property rights to non-resident ownersshall be subject to 10% withholding tax at the time ofpayment.

Q13.2. Is a party dealing with agovernment entity deprived of itsentitlement to the input VAT itaccumulated considering the VATwithholding tax mechanism?

The 7% difference (12%-5%) is the presumed inputVAT cost of the entity dealing with the governmentagency. If the actual input VAT is below 7%, then thetaxpayer will realize additional income. However, ifthe actual input VAT is above 7%, then the differencebetween the actual input VAT and the 7% isconsidered as additional cost.

Q13.3. LVM Construction Corp. wasengaged by the DPWH for theconstruction of roads and bridges.LVM subcontracted one of theprojects to a Joint Venture. Aftercompletion, the JV demanded fullpayment to which LVM respondedthat they discovered that nodeductions for VAT were made onprevious payments and as suchthey were going to deduct 8.5%

(now 5%) from the payments stilldue. The JV disputed this andargued that all the receipts issuedto LVM would have made JVsubject to VAT and, hence, LVMcould claim such as input tax. CanLVM rightfully deduct the amountrepresenting the withholding VATdue on its transaction with DPWH?

No. In LVM CONSTRUCTION CORPORATION V . S ANCHEZ[DECEMBER 5, 2011], the Supreme Court held that asan entity which dealt directly with the governmentinsofar as the main constract was concerned, LVMwas itself required by law to pay the 8.5% (now 5%)VAT which was withheld by DPWH. Given that the JVcomplied with their own obligation when they paidtheir VAT from their gross receipts and the fact thatthe contract between LVM and the JV did notstipulate any obligation on LVM assuming the VAT,LVM has no basis to withhold payments. Althoughthe burden to pay an indirect tax like the VAT can bepassed on, the liability to pay the same remains withthe seller. IN this case, both LVM and the JV areliable for their respective VAT obligations asrespective sellers.

Q14. What is the rule on transitional inputcredits?

S ECTION 111(A) provides that a person who becomesliable to VAT or any person who elects to be VAT-registered shall, subject to the filing of an inventory,be allowed input tax on his beginning inventory ofgoods, materials and supplies equivalent to 2% of thevalue of such inventory or the actual VAT paid onsuch goods, materials and supplies, whichever ishigher, which shall be creditable against the outputtax.

Q14.1. Fort Bonifacio Development Corp(FBDC) is a real estate developerthat bought from the nationalgovernment a parcel of land whichused to be a military reservation.At the time of the sale, there wasyet no VAT on sales of realproperty. Subsequently, when VATwas already imposed on sales ofreal property, FBDC sold twoparcels of land to Metro PacificCorp. FBDC claimed transitional


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input VAT corresponding to itsinventory of land. The BIRdisallowed the claim. It contendedthat under RR 7-95, real estatedevelopers may avail of thetransitional input tax m only onimprovements on the real propertybelonging to their beginninginventory. (1) Is the FBDC entitledto claim transitional input vat (2) Ifyes, is the transitional input vatapplicable only to improvementsand (3) should there be a previouspayment for the transitional inputVAT to be creditable.

The issues were first resolved in the case of FORT

BONIFACIO DEVELOPMENT CORP . V. CIR [APRIL 2, 2009] and was affirmed in a motion forreconsideration in F ORT BONIFACIO DEVELOPMENTCORP . V. CIR [OCTOBER 2, 2009]. The recent case ofFORT BONIFACIO DEVELOPMENT CORP . V. CIR [S EPTEMBER 4, 2012] simply reaffirmed the doctrineslaid down in the previous cases, which are as follows:

As to (1): Yes, FBDC is entitled to claim transitionalinput VAT by virtue of Section 111(A) (previouslySection 105)

As to (2): No, RR 7-95 cannot limit the applicationand coverage of Section 105 (now Section 111(A) bystating that in the case of real estate dealers, thebasis of the presumptive input tax shall be theimprovements. This is a legislative act beyondauthority of the CIR and the Secretary of Finance.The term goods and properties includes realproperties held primarily for sale to customers or heldfor lease in the ordinary course of business. Thus,FBDC is entitled to claim transitional input VAT basednot only the improvements but also on the value ofthe entire real property and regardless of whether ornot there was actual payment on the purchase priceof the real property or not.

As to (3): No, the transitional input tax operates to thebenefit of newly VAT-registered persons, whether ornot they previously paid taxes in the acquisition oftheir beginning inventory of goods, materials andsupplies.

Q15. What is the rule on presumptive inputtax credits?

Section 111(B) provides that persons or firmsengaged in the processing of sardines, mackerel andmilk, and in the manufacturing or refined sugar,cooking oil and packed noodle-based instant meals,shall be allowed a presumptive input tax, creditable

against the output tax, equivalent to 4% of the grossvalue in money of their purchases of primaryagricultural products which are used as inputs to theirproduction.

VAT Refunds

Q16. What are the requirements for a claimfor VAT refund/credit?

1. The taxpayer is engaged in sales which are zero-rated or effectively zero-rated

2. The taxpayer is VAT-registered

3. The claim must be filed within two years after theclose of the taxable quarter when such saleswere made

4. The input taxes are due or paid;5. The input taxes are not transitional input taxes6. The input taxes have not been applied against

output taxes during and in the succeedingquarters

7. The input taxes claimed are attributable to zero-rated or effectively zero-rated sales

8. In certain types of zero-rated sales, theacceptable foreign currency exchange proceedsthereof had been duly accounted for inaccordance with BSP rules and regulations[Sections 106(A)(2)(a)(1) and (2); Section 106(B);Sections 108(B)(1) and (2)]

9. Where there are both zero-rated or effectivelyzero-rated sales and taxable or exempt sales,and the input taxes cannot be directly andentirely attributable to any of these sales, theinput taxes shall be proportionately allocated onthe basis of sales volume.

(See INTEL TECHNOLOGY P HILIPPINES V . CIR [APRIL27, 2007] )

Q16.1. In claims for VAT refund/credit,what is the reckoning point for thetwo-year prescriptive period?

The reckoning period is from the close of the taxablewhen the relevant sales were made. In CIR V. MIRANTP AGBILAO CORP . [S EPTEMBER 12, 2008] , Mirantgenerated power which it sells to NAPOCOR in whichconnection it secured the services of MitsubishiCorporation of Japan. In the belief that its sale of


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power generation services to the NPC was VAT zero-rated beca use of NAPOCOR s tax exempt status,Mirant filed an application for effective zero-rating.The BIR issued a ruling stating that the supply ofelectricity by Mirant to NAPOCOR shall be subject to

0% VAT. On April 14, 1998, Mirant paid Mitsubishithe VAT component billed by the latter for servicesrendered. Mirant files its quarterly VAT return for the2nd quarter of 1998, where it reflected the input VATpaid to Mitsubishi. Subsequently, on December 20,1999, Mirant filed an administrative claim for refundof unutilized input VAT arising from purchase ofcapital goods from Mitsubishi and its domesticpurchase of goods and services attributable to itszero-rated sales of power-generation services toNAPOCOR. The claim was denied for being filedbeyond the prescriptive period of two years. TheSupreme Court held that Mirant s claim hasprescribed. Unutilized input VAT payments must beclaimed within two years reckoned from the close ofthe taxable quarter when the relevant sales weremade pertaining to the input VAT even if the paymentfor the VAT was made some quarters after that. 28 The fact that there was a pending request for zero-rating cannot be a basis for the late filing of returnand payment of taxes. Further, Mirant cannot availitself of the provisions of either Section 204(C) or 229of the NIRC which, for the purpose of refund,prescribes the payment of the tax as the startingpoint for the two-year prescriptive limit for the filing ofa claim. These provisions apply only to instances oferroneous payment or illegal collection of internal

revenue taxes.

Q16.2. What is the period within which taxrefund/credit of input taxes shallbe made?

S ECTION 112(C) provides that:

1. The CIR shall grant a tax credit certificate/refundfor creditable input taxes within 120 days fromthe date of submission of complete documents insupport of the application.

2. In case of full or partial denial of the claim for taxcredit certificate/refund:a) The taxpayer may appeal to the CTA within

30 days from the receipt of said denial,otherwise the decision shall be come final

28 Note that previously in ATLAS C ONSOLIDATED MINING V . CIR [J UNE 8, 2007] , the rule was that the two-year prescriptive periodfor filing a claim for refund/credit of input VAT on zero-rated saleswas counted from the date of filing of the return

b) If no action on the claim for tax creditcertificate/refund has been taken by the CIRafter the 120 day period in which he mustdecide, the taxpayer may appeal to the CTAwithin 30 days from the lapse of the 120 day

period.Claim for tax refund/credit from VAT

Q16.2.1. Aichi Forging is a VAT-registered corporation engagedin manufacturing andprocessing of steel. Aichi filed atax credit/refund for itsunutilized input tax frompurchases and importationattributed to its zero-rated sales.The CIR and CTA ruled that theadministrative and judicialclaims were filed beyond theperiod allowed by law.Moreover, the CIR puts in issuethe fact that the administrativeclaim and the judicial claim werefiled on the same day. The CIR

Administrative claim filed with the CIR w/in2 years from the close of the taxable

quarter when the relevant sales were made

Filing and Payment

Submission of additional relevantsupporting documents w/in 60 days from

filin of claim

Appeal to CTA Division w/in 30 days fromreceipt of notice of denial or from lapse of

120 days of inaction counted fromsubmission of documents to CIR. The

appeal need not be made within the 2 year prescriptive period.

Follow mode of appeal to CTA En Banc upto SC


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opines that simultaneous filingof the claims contravenes theNIRC which requires the priorfiling of an administrative claim.Is the CIR and CTA correct?

Yes. In CIR V. AICHI FORGING COMPANY OF ASIA [ OCTOBER 6, 2010], the court first reiterated that theunutilized input VAT must be claimed within twoyears after the close of the taxable quarter when thesales were made as laid down in CIR V. MIRANTP AGBILAO CORP . [S EPTEMBER 12, 2008] . Going to theadministrative and judicial claims, the Court ruled thatthe administrative claim was timely filed while the

judicial claim was premature. In this case, applyingthe Administrative Code which states that a year iscomposed of 12 calendar months instead of the CivilCode ( a year is equivalent to 365 days), it is clearthat Aichi timely filed its administrative claim withinthe two-year prescriptive period. On the other hand,the claim of Aichi must be denied for non-observanceof the 120-day period Where the taxpayer did notwait for the decision of the CIR or the lapse of the120-day period, it having simultaneously filed theadministrative and the judicial claims, the filing of thesaid judicial claim with the CTA is premature. Thenon-observance of the 120-day period is fatal to thefiling of a judicial claim. The claim of Aichi that suchnon-observance is not fatal as long as both theadministrative and judicial claim is filed within the 2-year prescriptive period is without legal basis. The 2year prescriptive period refers to applications for

refund/credit filed with the CIR and not to appealsmade to the CTA. Applying the two-year period to

judicial claims would render nugatory Section 112(D)of the NIRC, which already provides for a specificperiod within which a taxpayer should appeal thedecision or inaction of the CIR. The 120-day period iscrucial in filing an appeal with the CTA.

Q16.2.2. How do we reconcile CIR V. MIRANT P AGBILAO CORP . [S EPTEMBER 12, 2008] and CIR V. AICHI FORGING COMPANY OF ASIA [ OCTOBER 6, 2010]?

In both Mirant and Aich i

The 2-year prescriptive period iscounted from the end of thetaxable quarter when the saleswere made.

In Mirant The 2-year prescriptive periodapplies to both the administrativeand judicial claim. Thus, bothclaims must be filed within 2 yearsfrom the end of the taxable quarter

when the sales were madeIn Aich i The 2-year prescriptive period only

applies to the administrative claim.Thus:

1. For the administrative claim, filewithin 2 years from end of thetaxable quarter when sales weremade.

2. For judicial claim, BIR has 120days to decide. If adverse decisionwithin the 120 day period, 30 daysfrom receipt of decision to appealto CTA. If no BIR decision within120 days, 30 days from the 120 th day to appeal to the CTA.

Thus, Ai chi affirmed the Court s ruling in Mirant inthat the 2-year prescriptive period shall be reckonedfrom the end of the taxable quarter when the relevantsales were made but clarified that such prescriptiveperiod applies only to the filing of the administrativeclaim.

Q16.3. For a claim for tax refund/credit, isit sufficient that the applicant wasable to prove entitlement to thegrant of the claim undersubstantive law?

No. In WESTERN MINDANAO P OWER CORP . V. CIR [J UNE 13, 2012], WMPC filed for a claim for refund ofexcess and unutilized input VAT. The CIR objected tothis contending that WMPC was not entitled to suchin view of its failure to comply with invoicingrequirements, particularly the failure of the invoicecovering its zero-rated sales to show the w ord zero -rated. WMPC argues that such was not anindispensable requirement to establish the claim. TheSupreme Court held that in a claim for tax refund ortax credit, the applicant must prove not onlyentitlement to the grant of the claim undersubstantive law. It must also show satisfaction of allthe documentary and evidentiary requirements for anadministrative claim for a refund or tax credit. Hence,the mere fact that petitioner s application for zero -rating has been approved by the CIR does not, byitself, justify the grant of a refund or tax credit. Thetaxpayer claiming the refund must further comply withthe invoicing and accounting requirements mandatedby the NIRC, as well as by revenue regulationsimplementing them. Under the NIRC, a creditableinput tax should be evidenced by a VAT invoice or


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No. In KEPCO P HILIPPINES V . CIR [NOVEMBER 24, 2010], the Supreme Court ruled that the requirementthat the TIN be imprinted and not merely stamped isa reasonable requirement imposed by the BIR.Moreover, the requirement of the appearance of the

words zero -rated on the face of the invoice preventsthe buyers from falsely claiming input VAT from theirpurchases when no VA was actually paid. The failureto adhere to these rules will not only expose thetaxpayer to penalties but should also serve todisallow the claim.

Q17.3. What are the consequences ofissuing erroneous VAT invoices orVAT official receipts?

1. If a person who is not VAT-registered issues aninvoice or receipt showing his TIN, followed by

the w ord VAT , the erroneous issuance shallresult to the following:

a) The Non-VAT person shall be liable to the:

i. percentage taxes applicableii. VAT due on the transactions without

the benefit of any input tax creditiii. 50% surcharge as penalty

b) The VAT shall, if the other requisiteinformation required is shown on the invoiceor receipt, be recognized as an input taxcredit to the purchaser.

2. If a VAT-registered person issues a VAT invoiceor VAT official receipt for a VAT-exempttransaction, but fails to display prominently on theinvoice or receipt the term VAT -exempt Sale, the issuer shall be liable to account for the VATimposed. The purchaser shall be entitled to claiman input tax credit on said purchase.

Q18. What are the rules to follow with regardto the return and payment of VAT?

S ECTION 114(A) provides for the who will file thereturn and pay the VAT and when shall the return befiled and the tax be paid.

1. VAT returns shall be filed by persons liable to payVAT.

2. A quarterly VAT return of the amount of his grosssales or receipts within 25 days after the close ofeach taxable quarter prescribed for eachtaxpayer.

3. The monthly VAT Declarations of taxpayerswhether large or not shall be filed and the taxespaid not later than the 20th day following the endof each month

SECTION

114(B) provides for where the return shallbe filed and the tax paid.

Except as the Commissioner otherwise permits, thereturn shall be filed with and the tax paid to:

1. An authorized agent bank2. Revenue Collection Officer; or3. Duly authorized city or municipal Treasurer in the

Philippines located within the revenue districtwhere the taxpayer is registered or required toregister.

Documents

PM Reyes Notes on Taxation 2 - Valued Added Tax (Working Draft)