Value-Added TaxPrepared by: Marseille David

GENERAL PRINCIPLES

What is Value-Added Tax (VAT)?

A tax on consumption Levied on the sale, barter, exchange or lease of

goods or properties or services in the Philippines and on importation of goods into the Philippines.

CHARACTERISTICS OF VAT

Indirect tax;

Tax on value-added of the taxpayer;

Transparent form of sales tax;

Broad-based tax on consumption of goods, properties or service in the Philippines;

Collected through the tax credit method;

No cascading (tax on tax) under the VAT system;

VAT lost in the early stages may be recovered under the catching-up principle or under the recoupment principle;

Adopts the “tax-inclusive method”;

Follows the “destination principle”.

INPUT TAX

The VAT due from or paid by a VAT registered person in the course of his trade or business of importation of goods or local purchase of goods or services, including lease or use of property, from a VAT-registered person.

IN THE COURSE OF TRADE OR BUSINESS – regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity.

INPUT TAX

Includes the transitional input tax and the presumptive input tax

TRANSITIONAL INPUT TAX PRESUMPTIVE INPUT TAX

Input tax to be credited against the output tax equivalent to two percent (2%) of the value of the beginning inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is higher.

Input tax to be credited against the output tax equivalent to four percent (4%) of the gross value of the purchases of primary agricultural products used as inputs to production by persons or firms engaged in the processing of sardines, mackerel and milk, and in manufacturing refined sugar, cooking oil and packed noodle-based instant meals.

OUTPUT TAX

The VAT due on the sale or lease of taxable goods or properties or services by any person registered or required to register under VAT.

CROSS BORDER DOCTRINE (Destination Principle)

No VAT shall be imposed to form part of the cost of the goods destined for consumption outside the territorial border of the taxing authority.

Goods and services are taxed only in the country where these are consumed.

CLASSIFICATIONS OF TRANSACTIONS UNDER VAT SYSTEM

a. Taxable Transactions

1) Those subject to 12%

2) Those subject to 0%

b. Exempt Transactions

VAT-TAXABLE TRANSACTIONS: 12%1. Sale, barter or exchange of goods or properties;

Real properties held primarily for sale or lease in the ordinary course of business;

Right or privilege to use patent, copyright, design or model, plan secret formula or process, goodwill, trademark, trade brand or other like property or right;

Right or privilege to use in the Philippines of any industrial, commercial or scientific equipment;

Right or privilege to use motion picture films, films, tapes and discs; and

Radio, television, satellite transmission and cable television.

VAT-TAXABLE TRANSACTIONS: 12%2. Transactions deemed sale;

Transfer, use or consumption not in the ordinary course of business of goods or properties originally intended for sale or for use in the course of business;

Distribution or transfer to:

Shareholders or investors as share in the profits of the VAT-registered persons; or

Creditors in payment of debt.

Consignment of goods if actual sale is not made within 60 days following the date such goods were consigned; and

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

VAT-TAXABLE TRANSACTIONS: 12%

3. Importation of goods; and

The 12% rate shall be based on the total value in determining tariff and customs duties, excise taxes and other charges.

Where the duties are based on quantity or volume, the VAT base shall be the landed cost plus excise taxes of the imported goods.

4. Sale of services and use or lease of properties.

SALE or EXCHANGE OF SERVICES – the performance of all kinds of services in the Philippines for a fee, remuneration or consideration, including, but not limited to, services rendered by the following:

VAT-TAXABLE TRANSACTIONS: 12%a) Professionals;

b) Construction contractors;

c) Brokers;

d) Lessors or distributors of cinematographic films;

e) Persons engaged in milling, processing, manufacturing or repacking goods for others;

f) Operators or keepers of hotels, motels, rest-houses, pension houses, inns and resorts;

g) Operators or restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers;

h) Dealers in securities;

i) Lending investors;

j) Common carriers by air and sea, relative to the transport of passengers and cargoes within the Philippines;

VAT-TAXABLE TRANSACTIONS: 12%k) Common carriers by land, relative to the transport of cargoes;

l) Sales of electricity by generation, transmission and distribution companies;

m) Services of franchise grantees of electric utilities, telephone and telegraph, radio and television broadcasting and all other franchise grantees (except radio and/or television broadcasting companies with annual gross receipts of P10,000,000 or less, and electric, gas and water utilities);

n) Non-life insurance companies (except on their crop insurances) including surety, fidelity, indemnity, and bonding companies;

o) Lessors of rights over intangibles;

p) Lessors of rights over any industrial, commercial or scientific equipment;

q) Suppliers of scientific, technical, industrial or commercial knowledge or information;

r) Suppliers of any assistance to the two immediately preceding matters (p&q);

VAT-TAXABLE TRANSACTIONS: 12%

s) Non-resident person or his agent supplying services on any brand, machinery or other apparatus purchased from him;

t) Supplier of technical advice, assistance or services;

u) Lessor of motion picture films, films, tapes and discs;

v) Lessor of rights over radio, television, satellite transmission and cable television time; and

w) Similar service regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties.

ZERO-RATED TRANSACTIONS

ZERO-RATED SALES:

(a) Export sales by VAT-registered persons, as follows:

(a)Sale and actual shipment of goods from the Philippines to a foreign country;

(b)Sale of raw material or packaging materials to a non-resident buyer for delivery to a resident local export-oriented enterprise;

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

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

(e)Those that are considered export sales under E.O. No. 226 (Omnibus Investment Code of 1987) and other special laws; and

(f) Sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations.

ZERO-RATED TRANSACTIONS(b) Foreign currency denominated sale

The sale to a non-resident of goods 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 BSP rules and regulations, except

a) Automobiles (Sec. 149, NIRC); and

b) Non-essential goods (Sec. 150, NIRC).

ZERO-RATED TRANSACTIONS

(c) Sales to persons or entities whose exemption under special laws and international agreements to which the Philippine is a signatory subjects such sales to zero percent (0%) rate, such as entities registered with the following:

1) Subic Bay Metropolitan Authority and Clark Development Authority (R.A. No. 7227);

2) Philippine Economic Zone Authority or PEZA (R.A. No. 7916); and

3) Asian Development Bank (ADB), International Rice Research Institute (IRRI), etc. (under international agreements).

ZERO-RATED TRANSACTIONSZERO-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);

(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;

ZERO-RATED TRANSACTIONS

(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; and

(7) Sale of power of 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.

EFFECTIVELY ZERO-RATED SALES OR SERVICES

Refers to the local sales or services by a VAT-registered person to any person or entity who was granted indirect tax exemption under special laws (e.g. Subic Bay Metropolitan Authority and Clark Development Authority) or international agreements to which the Philippines is a signatory (e.g. Asian Development Bank and International Rice Research Institute).

An application must be filed and approved by the Revenue District Office; otherwise, the transactions shall be considered as exempt transactions without the benefit of input tax credits.

EXEMPT TRANSACTIONSa) Sale or importation of agricultural and marine food products in their original state, livestock and

poultry of or king generally used as, or yielding or producing foods for human consumption; and breeding stock and genetic materials therefore;

b) Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock and poultry feeds, including ingredients, whether locally produced or imported, used in the manufacture of finished feeds (except specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals and other animals generally considered as pets);

c) Importation of personal and household effects belonging to the residents of the Philippines returning from abroad and non-resident citizens coming to resettle in the Philippines: Provided, That such goods are exempt from customs duties under the Tariff and Customs Code of the Philippines;

d) Importation of professional instruments and implements, wearing apparel, domestic animals, and personal household effects (except any vehicle, vessel, aircraft, machinery other goods for use in the manufacture and merchandise of any kind in commercial quantity) belonging to persons coming to settle in the Philippines, for their own use and not for sale, barter or exchange, accompanying such persons, or arriving within ninety (90) days before or after their arrival, upon the production of evidence satisfactory to the Commissioner, that such persons are actually coming to settle in the Philippines and that the change of residence is bona fide;

EXEMPT TRANSACTIONS

e) Services subject to percentage tax under Title V;

f) Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar cane into raw sugar;

g) Medical, dental, hospital and veterinary services, except those rendered by professionals;

h) Educational services rendered by private educational institutions, duly accredited by the Department of Education, Culture and Sports (DECS) and the Commission on Higher Education (CHED), and those rendered by government educational institutions;

i) Services rendered by individuals pursuant to an employer-employee relationship;

j) Services rendered by regional or area headquarters established in the Philippines by multinational corporations which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region and do not earn or derive income from the Philippines;

EXEMPT TRANSACTIONS

k) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under P.D. No. 529;

l) Sales by agricultural cooperatives duly registered with the Cooperative Development Authority to their members as well as sale of their produce, whether in its original state or processed form, to non-members; their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce;

m) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative Development Authority;

n) Sales by non-agricultural, non- electric and non-credit cooperatives duly registered with the Cooperative Development Authority: Provided, That the share capital contribution of each member does not exceed Fifteen thousand pesos (P15,000) and regardless of the aggregate capital and net surplus ratably distributed among the members;

EXEMPT TRANSACTIONS

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

p) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business or real property utilized for low-cost and socialized housing as defined by Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of 1992, and other related laws, residential lot valued at P1,500,000 and below, house and lot, and other residential dwellings valued at P2,500,000 and below; Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amounts herein stated shall be adjusted to their present values using the Consumer Price Index as published by the NSO;

q) Lease of a residential unit with a monthly rental not exceeding P10,000; Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index as published by the National Statistics Office (NS0);

EXEMPT TRANSACTIONSr) Sale, importation, printing or publication of books and any newspaper, magazine review

or bulletin which appears at regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of paid advertisements;

s) Sale, importation or lease of passenger or cargo vessel and aircraft, including engine, equipment and spare parts thereof for domestic or international transport operations;

t) Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations;

u) Services of banks, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries; and

v) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of P1,500,000; Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein shall be adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office (NSO).

DISTINCTION BETWEEN ZERO-RATED SALES AND VAT-EXEMPT SALES

ZERO-RATED SALES The transaction is completely

free of VAT because the tax rate applied on the tax base is zero, hence, the seller charges no output tax

VAT payer can claim and enjoy a credit or refund for the input tax

Still considered as “taxable sales” for the purpose of measuring turnover sales – VAT registration is required

VAT-EXEMPT SALES Exemption only removes the

VAT at the exempt stage

VAT payer cannot claim a credit or refund for the input tax

Not considered as taxable sales; A person who makes only exempt sales is not a taxable person for VAT purposes and may not register for VAT – VAT registration is optional

EXCESS OF OUTPUT TAX AND INPUT TAX OVER THE OTHER

If the output tax exceeds the input tax at the end of any quarter, the excess shall be paid by the VAT-registered person representing his VAT payable to the BIR.

If the input tax exceeds the output tax at the end of any quarter, the excess shall be carried over to the succeeding quarter or quarters, provided that:

The input tax inclusive of input VAT carried over from the previous quarter shall not exceed seventy percent (70%) of the output VAT; and

Any input tax attributable to zero-rated (0%) sales by a VAT-registered person may, at his option be refunded or credited against other internal revenue taxes.

PRESCRIBED PERIOD TO ACT OR DECIDE ON AN APPLICATION FOR TAX

CREDIT OR INPUT TAX

The Commissioner or Internal Revenue is given by law a period of 120 days from the date of submission of the taxpayer’s complete supporting documents to the tax credit application to decide whether or not to grant the refund or credit on input tax.

REMEDY OF TAXPAYER

The taxpayer may appeal to the Court of Tax Appeals within 30 days from receipt of the adverse decision, or within 30 days from the lapse of the prescribed 120-day period in case of inaction by the Commissioner of Internal Revenue.

PERSONS REQUIRED BY LAW TO REGISTER FOR VAT

Any person who, in the course of trade or business, sells, barters or exchanges goods or properties, or engages in the sale or exchange of services shall be liable to register for VAT if:

His gross sales or receipts for the past twelve (12) months, other than those that are exempt, have exceeded P1,500,000; and

There are reasonable grounds to believe that his gross sales or receipts for the next twelve (12) months, other than those that are exempt, will exceed P1,500,000.

INSTANCES WHEN VAT REGISTRATION MAY BE CANCELLED

A VAT-registered person may cancel his registration for VAT if:

He makes written application and can demonstrate to the Commissioner’s satisfaction that his gross sales/receipts for the following twelve (12) months, other than those that are exempt, will not exceed P1,500,000; or

He has ceased to carry on his trade or business, and does not expect to recommence any trade or business within the next twelve (12) months.

The cancellation of registration shall be effective from the first day of the following month.

WITHHOLDING OF VAT IN CERTAIN CASES

The government or any of its political subdivisions, instrumentalities or agencies, including government-owned or controlled corporations shall, before making payment on account of each purchase of goods or services subject to value-added tax, deduct and withhold a final value-added tax equivalent to 5% of the gross payment thereof; provided, that the payment for lease or use of properties or property rights to non-resident owners shall be subject to 10% withholding tax at the time of payment.

The payor or person in control of the payment shall be considered as the withholding agent who shall remit the tax withheld to the BIR within 10 days following the end of the month the withholding was made.