TAXATION LAW II

Value Added Tax

Atty. Rafal Roble
Based on the Syllabus of Arellano University School of Law

I. VAT IN GENERAL

A. Nature and Characteristics

VAT is a tax on consumption levied on the sale, barter, exchange or lease of goods or
properties and services in the Philippines and on importation of goods into the
Philippines.

The seller is the one statutorily liable for the payment of the tax but the amount of the
tax may be shifted or passed on to the buyer, transferee or lessee of the goods,
properties or services. However, in the case of importation, the importer is the one
liable for the VAT.

Case Laws:
CIR vs. Magsaysay
VAT is ultimately a tax on consumption, even though it is assessed on many levels of
transactions on the basis of a fixed percentage.[15] It is the end user of consumer goods
or services which ultimately shoulders the tax, as the liability therefrom is passed on to
the end users by the providers of these goods or services[16] who in turn may credit
their own VAT liability (or input VAT) from the VAT payments they receive from the final
consumer (or output VAT).[17] The final purchase by the end consumer represents the
final link in a production chain that itself involves several transactions and several acts
of consumption. The VAT system assures fiscal adequacy through the collection of taxes
on every level of consumption,[18] yet assuages the manufacturers or providers of goods
and services by enabling them to pass on their respective VAT liabilities to the next link
of the chain until finally the end consumer shoulders the entire tax liability.
CIR vs Seagate Technologies
Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10
percent levied on every importation of goods, whether or not in the course of trade or
business, or imposed on each sale, barter, exchange or lease of goods or properties or
on each rendition of services in the course of trade or business[29] as they pass along
the production and distribution chain, the tax being limited only to the value added[30]
to such goods, properties or services by the seller, transferor or lessor.[31] It is an
indirect tax that may be shifted or passed on to the buyer, transferee or lessee of the
goods, properties or services.[32] As such, it should be understood not in the context

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 of the person or entity that is primarily, directly and legally liable for its payment, but
in terms of its nature as a tax on consumption.[33] In either case, though, the same
conclusion is arrived at.
B. VAT as an Indirect Tax
Case Law:
Context vs. CIR
At this juncture, it must be stressed that the VAT is an indirect tax. As such, the amount
of tax paid on the goods, properties or services bought, transferred, or leased may be
shifted or passed on by the seller, transferor, or lessor to the buyer, transferee or
lessee.17 Unlike a direct tax, such as the income tax, which primarily taxes an
individual’s ability to pay based on his income or net wealth, an indirect tax, such as the
VAT, is a tax on consumption of goods, services, or certain transactions involving the
same. The VAT, thus, forms a substantial portion of consumer expenditures.
Further, in indirect taxation, there is a need to distinguish between the liability for the
tax and the burden of the tax. As earlier pointed out, the amount of tax paid may be
shifted or passed on by the seller to the buyer. What is transferred in such instances is
not the liability for the tax, but the tax burden. In adding or including the VAT due to
the selling price, the seller remains the person primarily and legally liable for the
payment of the tax. What is shifted only to the intermediate buyer and ultimately to
the final purchaser is the burden of the tax.18 Stated differently, a seller who is directly
and legally liable for payment of an indirect tax, such as the VAT on goods or services is
not necessarily the person who ultimately bears the burden of the same tax. It is the
final purchaser or consumer of such goods or services who, although not directly and
legally liable for the payment thereof, ultimately bears the burden of the tax.19
C. Persons Liable

a. In general

(Section 105)

Any person who, in the course of trade or business, sells barters, exchanges,
leases goods or properties, renders services, and any person who imports goods
shall be subject to the value-added tax

Case Law:

CIR vs. CA and CMS:

Contrary to COMASERCO's contention the above provision clarifies that even a

non-stock, non-profit, organization or government entity, is liable to pay VAT
on the sale of goods or services. VAT is a tax on transactions, imposed at every
stage of the distribution process on the sale, barter, exchange of goods or
property, and on the performance of services, even in the absence of profit
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 attributable thereto. The term "in the course of trade or business" requires the
regular conduct or pursuit of a commercial or an economic activity regardless
of whether or not the entity is profit-oriented.

The definition of the term "in the course of trade or business" present law
applies to all transactions even to those made prior to its enactment. Executive
Order No. 273 stated that any person who, in the course of trade or business,
sells, barters or exchanges goods and services, was already liable to pay VAT.
The present law merely stresses that even a nonstock, nonprofit organization
or government entity is liable to pay VAT for the sale of goods and services.

b. Who are required to Register for VAT

b.1. Mandatory Registration

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 if:
i. His gross sales or receipts for the past twelve (12)
months, other than those that are exempt under Sec.
109 (1)(A) to (U) of the Tax Code, have exceeded One
million five hundred thousand pesos (P3,000,000.00); or
ii. There are reasonable grounds to believe that his gross
sales or receipts for the next twelve (12) months, other
than those that are exempt under Sec. 109 (1)(A) to (U)
of the Tax Code, will exceed One million five hundred
thousand pesos (P3,000,000.00).
iii. Moreover, franchise grantees of radio and television
broadcasting, whose gross annual receipt for the
preceding calendar year exceeded P10,000,000.00, shall
register within thirty (30) days from the end of the
calendar year.

b.2. Optional Registration

(1) Any person who is VAT-exempt under Sec. 4.109-
1 (B) (1) (V) not required to register for VAT may, in relation to
Sec. 4.109-2, elect to be VAT-registered by registering with the
RDO that has jurisdiction over the head office of that person, and
pay the annual registration fee of P500.00 for every separate and
distinct establishment.
(2) Any person who is VAT-registered but enters into
transactions which are exempt from VAT (mixed transactions)
may opt that the VAT apply to his transactions which would have
been exempt under Section 109(1) of the Tax Code, as amended.
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 [Sec. 109(2)]
(3) Franchise grantees of radio and/or television
broadcasting whose annual gross receipts of the preceding year
do not exceed ten million pesos (P10,000,000.00) derived from
the business covered by the law granting the franchise may opt
for VAT registration. This option, once exercised, shall be
irrevocable. (Sec. 119, Tax Code)
Any person who elects to register under this subsections (1) and (2)
above shall not be allowed to cancel his registration for the next
three (3) years.
D. Meaning of the Phrase “In the Course of trade of Business”

The phrase 'in the course of trade or business' means the regular conduct or
pursuit of a commercial or an economic activity, including transactions
incidental thereto, by any person regardless of whether or not the person
engaged therein is a nonstock, nonprofit private organization (irrespective of the
disposition of its net income and whether or not it sells exclusively to members
or their guests), or government entity.

The rule of regularity, to the contrary notwithstanding, services as defined in this

Code rendered in the Philippines by nonresident foreign persons shall be
considered as being course of trade or business.
Case Law:

CIR vs. Magsaysay

In Imperial v. Collector of Internal Revenue, G.R. No. L-7924, September 30, 1955 (97
Phil. 992), the term "carrying on business" does not mean the performance of a single
disconnected act, but means conducting, prosecuting and continuing business by
performing progressively all the acts normally incident thereof; while "doing business"
conveys the idea of business being done, not from time to time, but all the time. [J.
Aranas, UPDATED NATIONAL INTERNAL REVENUE CODE (WITH ANNOTATIONS), p. 608-
9 (1988)]. "Course of business" is what is usually done in the management of trade or
business. [Idmi v. Weeks & Russel, 99 So. 761, 764, 135 Miss. 65, cited in Words &
Phrases, Vol. 10, (1984)].

What is clear therefore, based on the aforecited jurisprudence, is that "course of

business" or "doing business" connotes regularity of activity. In the instant case, the
sale was an isolated transaction. The sale which was involuntary and made pursuant to
the declared policy of Government for privatization could no longer be repeated or
carried on with regularity. It should be emphasized that the normal VAT-registered
activity of NDC is leasing personal property.21

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 E. Output Tax vs. Input Tax

Output Tax- means the value-added tax due on the sale or lease of taxable goods or
properties or services by any person registered or required to register under Section
236 of this Code.

Input Tax- means the value-added tax due from or paid by a VAT-registered person in
the course of his trade or business on importation of goods or local purchase of goods
or services, including lease or use of property, from a VAT-registered person. It shall
also include the transitional input tax determined in accordance with Section 111 of this
Code.

a. Sources of Input Tax. (Sec 110 A.)

(1) Any input tax evidenced by a VAT invoice or official receipt issued in
accordance with Section 113 hereof on the following transactions shall be
creditable against the output tax:

(a) Purchase or importation of goods:

(i) For sale; or

(ii) For conversion into or intended to form part of a finished

product for sale including packaging materials; or

(iii) For use as supplies in the course of business; or

(iv) For use as materials supplied in the sale of service; or

(v) For use in trade or business for which deduction for

depreciation or amortization is allowed under this Code, except
automobiles, aircraft and yachts.

(b) Purchase of services on which a value-added tax has been actually

paid.

(2) The input tax on domestic purchase of goods or properties shall be

creditable:

(a) To the purchaser upon consummation of sale and on importation of

goods or properties; and

(b) To the importer upon payment of the value-added tax prior to the
release of the goods from the custody of the Bureau of Customs.

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 However, in the case of purchase of services, lease or use of properties,
the input tax shall be creditable to the purchaser, lessee or licensee
upon payment of the compensation, rental, royalty or fee.

(3) A VAT-registered person who is also engaged in transactions not subject to

the value-added tax shall be allowed tax credit as follows:

(a) Total input tax which can be directly attributed to transactions

subject to value-added tax; and

(b) A ratable portion of any input tax which cannot be directly attributed
to either activity.

b. Excess Output or Input Tax

If at the end of any taxable quarter the output tax exceeds the input tax, the excess
shall be paid by the Vat-registered person. If the input tax exceeds the output tax,
the excess shall be carried over to the succeeding quarter or quarters. any input tax
attributable to the purchase of capital goods or to zero-rated sales by a VAT-
registered person may at his option be refunded or credited against other internal
revenue taxes, subject to the provisions of Section 112.

c. Input tax rules on capital goods:

Where a VAT-registered person purchases or imports capital goods, which are

depreciable assets for income tax purposes, the aggregate acquisition cost of
which (exclusive of VAT) in a calendar month exceeds One Million pesos
(P1,000,000.00), regardless of the acquisition cost of each capital good, shall be
claimed as credit against output tax in the following manner:
(a) If the estimated useful life of a capital good is five (5) years or more

The input tax shall be spread evenly over a period of sixty (60) months and the
claim for input tax credit will commence in the calendar month when the capital
good is acquired. The total input taxes on purchases or importations of this type
of capital goods shall be divided by 60 and the quotient will be the amount to
be claimed monthly.

(b) If the estimated useful life of a capital good is less than five (5) years

The input tax shall be spread evenly on a monthly basis by dividing the input tax
by the actual number of months comprising the estimated useful life of the
capital good. The claim for input tax credit shall commence in the calendar
month that the capital goods were acquired.

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 (c) Where the aggregate acquisition cost (exclusive of VAT) of the
existing or finished depreciable capital goods purchased or imported during any
calendar month does not exceed One million pesos (P 1,000,000.00), the total
input taxes will be allowable as credit against output tax in the month of
acquisition.
II. VATABLE TRANSACTIONS

A. Vatable Sale of Good and Services

a. Definition of Goods and Services

Goods:

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

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

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

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

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

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

Services:

The phrase 'sale or exchange of services' means the performance of all kinds or
services in the Philippines for others for a fee, remuneration or consideration,
including those performed or rendered by construction and service contractors;
stock, real estate, commercial, customs and immigration brokers xxx

b. Vat Base for goods and services (Meaning of Gross Selling Price, Gross Receipts)

Goods:

There shall be levied, assessed and collected on every sale, barter or exchange
of goods or properties, a value-added tax equivalent to twelve percent (12%) of
the gross selling price or gross value in money of the goods or properties sold,
bartered or exchanged, such tax to be paid by the seller or transferor.
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 The term 'gross selling price' means the total amount of money or its equivalent
which the purchaser pays or is obligated to pay to the seller in consideration of the
sale, barter or exchange of the goods or properties, excluding the value-added tax.
The excise tax, if any, on such goods or properties shall form part of the gross selling
price.

Services:

There shall be levied, assessed and collected, a value-added tax equivalent to

twelve percent (12%) of gross receipts derived from the sale or exchange of services,
including the use or lease of properties.

The term 'gross receipts' means the total amount of money or its equivalent
representing the contract price, compensation, service fee, rental or royalty,
including the amount charged for materials supplied with the services and deposits
and advanced payments actually or constructively received during the taxable
quarter for the services performed or to be performed for another person,
excluding value-added tax.

c. Rules on sale of Real Properties:

1. Installment sales- means sale of real property by a real estate dealer, the
initial payments of which in the year of sale do not exceed twenty-five
percent (25%) of the gross selling price.

“Initial payments” means payment or payments which the seller receives

before or upon execution of the instrument of sale and payments which
he expects or is scheduled to receive in cash or property (other than
evidence of indebtedness of the purchaser) during the year when the
sale or disposition of the real property was made. It covers any down
payment made and includes all payments actually or constructively
received during the year of sale, the aggregate of which determines the
limit set by law.
Initial payments do not include the amount of mortgage on the real
property sold except when such mortgage exceeds the cost or other
basis of the property to the seller, in which case, the excess shall be
considered part of the initial payments.
Also excluded from initial payments are notes or other evidence of
indebtedness issued by the purchaser to the seller at the time of the sale.

In the case of sale of real properties on the installment plan, the real
estate dealer shall be subject to VAT on the installment payments,
including interest and penalties, actually and/or constructively received
by the seller.

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 2. Deferred Sale- means sale of real property where the initial payments
exceeded 25% of of the gross selling price. It is considered as cash sale hence
subject to VAT in the month of sale.

3. Rules on Sale of Real Property Used in Business

Sale of real properties not primarily held for sale to customers or held for
lease in the ordinary course of trade or business. However, even if the real
property is not primarily held for sale to customers or held for lease in the
ordinary course of trade or business but the same is used in the trade or
business of the seller, the sale thereof shall be subject to VAT being a
transaction incidental to the taxpayer’s main business.

4. Vat exempt sale of real properties (109 as amended)

“(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 One million five hundred
thousand pesos (₱1,500,000) and below, house and lot, and other
residential dwellings valued at Two million five hundred thousand pesos
(₱2,500,000) and below: Provided, That beginning January 1, 2021, the VAT
exemption shall only apply to sale of real properties not primarily held for
sale to customers or held for lease in the ordinary course of trade or
business, sale of real property utilized for socialized housing as defined by
Republic Act No. 7279, sale of house and lot, and other residential dwellings
with selling price of not more than Two million pesos
(₱2,000,000): Provided, further, That 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 Philippine Statistics Authority
(PSA);

d. Transaction Deemed Sale

There is no actual sale of goods that took place but such transactions are subject
to VAT

In these kinds of transactions, Input VAT was already used by the seller as a
credit against output VAT. However, since there is no output VAT, the state will
be deprived to collect such. This is to avoid a situation where a VAT registered
taxpayer avail for input VAT without being liable for Output VAT.

List:

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 (1) Transfer, use or consumption not in the course of business of goods or
properties originally intended for sale or for use in the course of business.
Transfer of goods or properties not in the course of business can take place
when VAT-registered person withdraws goods from his business for his
personal use;
(2) Distribution or transfer to:

i. Shareholders or investors share in the profits of VAT-registered person;

Property dividends which constitute stocks in trade or properties primarily held

for sale or lease declared out of retained earnings on or after January 1, 1996
and distributed by the company to its shareholders shall be subject to VAT
based on the zonal value or fair market value at the time of distribution,
whichever is applicable.

ii. Creditors in payment of debt or obligation.

(3) Consignment of goods if actual sale is not made within 60 days following the
date such goods were consigned. Consigned goods returned by the
consignee within the 60-day period are not deemed sold;

(4) Retirement from or cessation of business with respect to all goods on hand,
whether capital goods, stock-in-trade, supplies or materials as of the date
of such retirement or cessation, whether or not the business is continued
by the new owner or successor. The following circumstances shall, among
others, give rise to transactions “deemed sale” for purposes of this Section;

i. Change of ownership of the business. There is a change in the

ownership of the business when a single proprietorship incorporates;
or the proprietor of a single proprietorship sells his entire business.

ii. Dissolution of a partnership and creation of a new partnership which

takes over the business.

For transactions deemed sale, the output tax shall be based on the market
value of the goods deemed sold as of the time of the occurrence of the
transactions enumerated in Sec. 4.106-7(a)(1),(2), and (3) of these
Regulations. However, in the case of retirement or cessation of business,
the tax base shall be the acquisition cost or the current market price of the
goods or properties, whichever is lower.

In the case of a sale where the gross selling price is unreasonably lower than
the fair market value, the actual market value shall be the tax base.

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 e. Rules on Certain Services:

1. Common Carriers (Deemed as sale/exchange of service)

(1) transportation contractors on their transport of goods or cargoes,

including persons who transport goods or cargoes for hire and other
domestic common carriers by land relative to their transport of
goods or cargoes;
(2) common carriers by air and sea relative to their transport of
passengers, goods or cargoes from one place in the Philippines to
another place in the Philippines;

Specific Rules:

(b) All receipts from service, hire, or operating lease of transportation

equipment not subject to the percentage tax on domestic common
carriers and keepers of garages imposed under Sec. 117 of the Tax
Code shall be subject to VAT.
“Common carrier” refers to persons, corporations, firms or
associations engaged in the business of carrying or transporting
passengers or goods or both, by land, water, or air, for
compensation, offering their services to the public and shall include
transportation contractors.
Common carriers by land with respect to their gross receipts from
the transport of passengers including operators of taxicabs, utility
cars for rent or hire driven by the lessees (rent-a-car companies),
and tourist buses used for the transport of passengers shall be
subject to the percentage tax imposed under Sec. 117 of the Tax
Code, but shall not be liable for VAT.

(c) Domestic common carriers by air and sea are subject to 10% VAT
on their gross receipts from their transport of passengers, goods or
cargoes from one place in the Philippines to another place in the
Philippines.

2. Lease of Properties

a. Lessors of Property. – All forms of property for lease, whether

real or personal, are liable to VAT subject to the provisions of Sec. 4.109-
1(B)(1)(v) of these Regulations.
“Real estate lessor” includes any person engaged in the business of
leasing or subleasing real property.

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 Lease of property shall be subject to VAT regardless of the place
where the contract of lease or licensing agreement was executed if the
property leased or used is located in the Philippines.

VAT on rental and/or royalties payable to non-resident foreign

corporations or owners for the sale of services and use or lease of
properties in the Philippines shall be based on the contract price agreed
upon by the licensor and the licensee. The licensee shall be responsible for
the payment of VAT on such rentals and/or royalties in behalf of the non-
resident foreign corporation or owner in the manner prescribed in Sec.
4.114-2(b) hereof.
“Non-resident lessor/owner” refers to any person, natural or
juridical, an alien, or a citizen who establishes to the satisfaction of the
Commissioner of Internal Revenue the fact of his physical presence abroad
with a definite intention to reside therein, and who owns/leases properties,
real or personal, whether tangible or intangible, located in the Philippines.
In a lease contract, the advance payment by the lessee may be:
(i) a loan to the lessor from the lessee, or
(ii) an option money for the property, or
(iii) a security deposit to insure the faithful performance of certain
obligations of the lessee to the lessor, or
(iv) pre-paid rental.
If the advance payment is actually a loan to the lessor, or an option
money for the property, or a security deposit for the faithful performance
of certain obligations of the lessee, such advance payment is not subject to
VAT. However, a security deposit that is applied to rental shall be subject to
VAT at the time of its application.
If the advance payment constitutes a pre-paid rental, then such
payment is taxable to the lessor in the month when received, irrespective
of the accounting method employed by the lessor.

Specific Rules:

(a) Lease of residential units with a monthly rental per unit not
exceeding Ten Thousand Pesos (P10,000.00), regardless of the amount of
aggregate rentals received by the lessor during the year; Provided, that not
later than January 31, 2009 and every three (3) years thereafter, the
amount of P10,000.00 shall be adjusted to its present value using the
Consumer Price Index, as published by the NSO;
The foregoing notwithstanding, lease of residential units where the
monthly rental per unit exceeds Ten Thousand Pesos (P10,000.00) but the
aggregate of such rentals of the lessor during the year do not exceed One
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 Million Five Hundred Pesos (P1,500,000.00) shall likewise be exempt from
VAT, however, the same shall be subjected to three percent (3%)
percentage tax.

In cases where a lessor has several residential units for lease, some
are leased out for a monthly rental per unit of not exceeding P10,000.00
while others are leased out for more than P10,000.00 per unit, his tax
liability will be as follows:
1. The gross receipts from rentals not exceeding P10,000.00 per
month per unit shall be exempt from VAT regardless of the
aggregate annual gross receipts.
2. The gross receipts from rentals exceeding P10,000.00 per
month per unit shall be subject to VAT if the aggregate annual
gross receipts from said units only (not including the gross
receipts from units leased for not more than P10,000.00)
exceeds P1,500,000.00. Otherwise, the gross receipts will be
subject to the 3% tax imposed under Section 116 of the Tax
Code.
The term ‘residential units’ shall refer to apartments and houses &
lots used for residential purposes, and buildings or parts or units thereof
used solely as dwelling places (e.g., dormitories, rooms and bed spaces)
except motels, motel rooms, hotels and hotel rooms.
The term ‘unit’ shall mean an apartment unit in the case of
apartments, house in the case of residential houses; per person in the case
of dormitories, boarding houses and bed spaces; and per room in case of
rooms for rent.

TRAIN LAW: 15,000.00

3. Medical Services

Tax Exempt: Medical, Dental, Hospital and veterinary services except those
rendered by professionals.

Laboratory services are exempted. If hospital or clinic operates a pharmacy

and drugstore, the sale of drugs/medicines shall be subject to VAT.
Case Law:
Philippine Health Care vs. CIR

Under the prepaid group practice health care delivery system adopted by
Health Care, individuals enrolled in Health Care's health care program are
entitled to preventive, diagnostic, and corrective medical services to be
dispensed by Health Care's duly licensed physicians, specialists, and other
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 professional technical staff participating in said group practice health care
delivery system established and operated by Health Care. Such medical services
will be dispensed in a hospital or clinic owned, operated, or accredited by Health
Care. To be entitled to receive such medical services from Health Care, an
individual must enroll in Health Care's health care program and pay an annual
fee. Enrollment in Health Care's health care program is on a year-to-year basis
and enrollees are issued identification cards.

From the foregoing, the CTA made the following conclusions:

a) Respondent "is not actually rendering medical service but merely acting as a
conduit between the members and their accredited and recognized hospitals and
clinics."

b) It merely "provides and arranges for the provision of pre-need health care
services to its members for a fixed prepaid fee for a specified period of time."

c) It then "contracts the services of physicians, medical and dental practitioners,

clinics and hospitals to perform such services to its enrolled members;" and

d) Respondent "also enters into contract with clinics, hospitals, medical

professionals and then negotiates with them regarding payment schemes,
financing and other procedures in the delivery of health services."

We note that these factual findings of the CTA were neither modified nor
reversed by the Court of Appeals. It is a doctrine that findings of fact of the CTA,
a special court exercising particular expertise on the subject of tax, are generally
regarded as final, binding, and conclusive upon this Court, more so where these
do not conflict with the findings of the Court of Appeals.9 Perforce, as
respondent does not actually provide medical and/or hospital services, as
provided under Section 103 on exempt transactions, but merely arranges for the
same, its services are not VAT-exempt.

III. VAT ON IMPORTATIONS

This is a VAT imposed on the goods brought to the Philippines whether for
business or not.

a. NIRC Provision

Sec. 107. Value-added Tax on Importation of Goods.—

“(A) In General.— There shall be levied, assessed and collected on every

importation of goods a value-added tax equivalent to twelve percent (12%)
based on the total value used by the Bureau of Customs in determining tariff
and customs duties, plus customs duties, excise taxes, if any, and other

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 charges, such tax to be paid by the importer prior to the release of such
goods from customs custody: Provided, That where the customs duties are
determined on the basis of the quantity or volume of the goods, the value-
added tax shall be based on the landed cost plus excise taxes, if any.

(B) Transfer of Goods by Tax-exempt Persons. - In the case of tax-free

importation of goods into the Philippines by persons, entities or agencies
exempt from tax where such goods are subsequently sold, transferred or
exchanged in the Philippines to non-exempt persons or entities, the
purchasers, transferees or recipients shall be considered the importers
thereof, who shall be liable for any internal revenue tax on such importation.
The tax due on such importation shall constitute a lien on the goods superior
to all charges or liens on the goods, irrespective of the possessor thereof.

b. Exempt Importations under Section 109 of the NIRC

1. 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 therefor.
2. 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);
3. Importation of personal and household effects belonging to the residents of the
Philippines returning from abroad and nonresident 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;
4. Importation of fuel, goods and supplies by persons engaged in international
shipping or air transport operations: Provided, That the fuel, goods, and supplies
shall be used for international shipping or air transport operations;
5. Sale, importation, printing or publication of books and any newspaper, magazine,
review or bulletin which appears at regular intervals with fixed prices or
subscription and sale and which is not devoted principally to the publication of paid
advertisements;
6. Sale, importation or lease of passenger or cargo vessels and aircraft, including
engine, equipment and spare parts thereof for domestic or international transport
operations;
7. Importation of fuel, goods and supplies by persons engaged in international
shipping or air transport operations: Provided, That the fuel, goods, and supplies
shall be used for international shipping or air transport operations;

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 IV. ZERO RATED SALES AND VAT- EXEMPT TRANSACTIONS

a. Nature of Zero Rated Sales

It is a sale by a VAT Registered Person that is taxable for VAT purposes but
the sale does not result in any output tax. However, the input tax on the
purchases of goods, properties or services related to such zero rated sales
shall be available as tax credit against output VAT,

To be subject to zero tax rate, the seller must be VAT registered because if
he is not, the transactions entered by him are exempt from tax.

b. Zero rated sale of goods

1. Export sales
2. Sales to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory
effectively subjects such sales to zero rate.

c. Zero Rated Sales of Services

Transactions Subject to Zero Percent (0%) Rate.— The following services

performed in the Philippines by VAT registered persons shall be subject to
zero percent (0%) rate:

“(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,

rendered to a person engaged in business conducted outside the Philippines
or to a nonresident person not engaged in business who is outside the
Philippines when the services are performed, 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 persons engaged in international shipping or

international air transport operations, including leases of property for use
thereof: Provided, That these services shall be exclusive for international
shipping or air transport operations;

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 “(5) Services performed by subcontractors and/or contractors in processing,
converting, or manufacturing goods for an enterprise whose export sales
exceed seventy percent (70%) of total annual production;

“(6) Transport of passengers and cargo by domestic air or sea vessels from
the Philippines to a foreign country; and

“(7) Sale of power or fuel generated through renewable sources of energy

such as, but not limited to, biomass, solar, wind, hydropower, geothermal,
ocean energy, and other emerging energy sources using technologies such
as fuel cells and hydrogen fuels.

“(8) Services rendered to:

“(i) Registered enterprises within a separate customs territory as provided

under special law; and

“(ii) Registered enterprises within tourism enterprise zones as declared by

the TIEZA subject to the provisions under Republic Act No. 9593 or The
Tourism Act of 2009.
Case Laws:
CIR vs. American Express

VAT Requirements for the Supply of Service

The VAT is a tax on consumption41 "expressed as a percentage of the value

added to goods or services"42purchased by the producer or taxpayer.43 As an
indirect tax44 on services,45 its main object is the transaction46itself or, more
concretely, the performance of all kinds of services47 conducted in the course
of trade or business in the Philippines.48 These services must be regularly
conducted in this country; undertaken in "pursuit of a commercial or an
economic activity;"49 for a valuable consideration; and not exempt under the
Tax Code, other special laws, or any international agreement.50

Without doubt, the transactions respondent entered into with its Hong Kong-
based client meet all these requirements.

First, respondent regularly renders in the Philippines the service of facilitating

the collection and payment of receivables belonging to a foreign company that
is a clearly separate and distinct entity.

Second, such service is commercial in nature; carried on over a sustained period

of time; on a significant scale; with a reasonable degree of frequency; and not
at random, fortuitous or attenuated.

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 Third, for this service, respondent definitely receives consideration in foreign
currency that is accounted for in conformity with law.

Finally, respondent is not an entity exempt under any of our laws or

international agreements.

Services Subject to Zero VAT

As a general rule, the VAT system uses the destination principle as a basis for
the jurisdictional reach of the tax.51Goods and services are taxed only in the
country where they are consumed. Thus, exports are zero-rated, while imports
are taxed.

Confusion in zero rating arises because petitioner equates the performance of

a particular type of service with the consumption of its output abroad. In the
present case, the facilitation of the collection of receivables is different from
the utilization or consumption of the outcome of such service. While
the facilitation is done in the Philippines, the consumption is not. Respondent
renders assistance to its foreign clients -- the ROCs outside the country -- by
receiving the bills of service establishments located here in the country and
forwarding them to the ROCs abroad. The consumption contemplated by law,
contrary to petitioner’s administrative interpretation,52 does not imply that the
service be done abroad in order to be zero-rated.

Consumption is "the use of a thing in a way that thereby exhausts it."53 Applied
to services, the term means the performance or "successful completion of a
contractual duty, usually resulting in the performer’s release from any past or
future liability x x x."54 The services rendered by respondent are performed or
successfully completed upon its sending to its foreign client the drafts and bills
it has gathered from service establishments here. Its services, having been
performed in the Philippines, are therefore also consumed in the Philippines.

Unlike goods, services cannot be physically used in or bound for a specific place
when their destination is determined. Instead, there can only be a
"predetermined end of a course"55 when determining the service "location or
position x x x for legal purposes."56 Respondent’s facilitation service has no
physical existence, yet takes place upon rendition, and therefore upon
consumption, in the Philippines. Under the destination principle, as petitioner
asserts, such service is subject to VAT at the rate of 10 percent.

Respondent’s Services Exempt from the Destination Principle

However, the law clearly provides for an exception to the destination principle;
that is, for a zero percent VAT rate for services that are performed in the
Philippines, "paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the [BSP]."57 Thus, for the supply
of service to be zero-rated as an exception, the law merely requires that first,
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 the service be performed in the Philippines; second, the service fall under any
of the categories in Section 102(b) of the Tax Code; and, third, it be paid in
acceptable foreign currency accounted for in accordance with BSP rules and
regulations.

Indeed, these three requirements for exemption from the destination principle
are met by respondent. Its facilitation service is performed in the Philippines. It
falls under the second category found in Section 102(b) of the Tax Code,
because it is a service other than "processing, manufacturing or repacking of
goods" as mentioned in the provision. Undisputed is the fact that such service
meets the statutory condition that it be paid in acceptable foreign currency duly
accounted for in accordance with BSP rules. Thus, it should be zero-rated.

CIR vs. Burmeister and Wain

The Tax Code not only requires that the services be other than "processing,
manufacturing or repacking of goods" and that payment for such services be
in acceptable foreign currency accounted for in accordance with BSP rules.
Another essential condition for qualification to zero-rating under Section
102(b)(2) is that the recipient of such services is doing business outside the
Philippines. While this requirement is not expressly stated in the second
paragraph of Section 102(b), this is clearly provided in the first paragraph of
Section 102(b) where the listed services must be "for other persons doing
business outside the Philippines." The phrase "for other persons doing
business outside the Philippines" not only refers to the services enumerated
in the first paragraph of Section 102(b), but also pertains to the general term
"services" appearing in the second paragraph of Section 102(b). In short,
services other than processing, manufacturing, or repacking of goods must
likewise be performed for persons doing business outside the Philippines.
This can only be the logical interpretation of Section 102(b)(2). If the provider
and recipient of the "other services" are both doing business in the Philippines,
the payment of foreign currency is irrelevant. Otherwise, those subject to the
regular VAT under Section 102(a) can avoid paying the VAT by simply
stipulating payment in foreign currency inwardly remitted by the recipient of
services. To interpret Section 102(b)(2) to apply to a payer-recipient of services
doing business in the Philippines is to make the payment of the regular VAT
under Section 102(a) dependent on the generosity of the taxpayer. The
provider of services can choose to pay the regular VAT or avoid it by stipulating
payment in foreign currency inwardly remitted by the payer-recipient. Such
interpretation removes Section 102(a) as a tax measure in the Tax Code, an
interpretation this Court cannot sanction. A tax is a mandatory exaction, not a
voluntary contribution.
When Section 102(b)(2) stipulates payment in "acceptable foreign currency"
under BSP rules, the law clearly envisions the payer-recipient of services to be
doing business outside the Philippines. Only those not doing business in the
Philippines can be required under BSP rules to pay in acceptable foreign
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 currency for their purchase of goods or services from the Philippines. In a
domestic transaction, where the provider and recipient of services are both
doing business in the Philippines, the BSP cannot require any party to make
payment in foreign currency.
Services covered by Section 102(b) (1) and (2) are in the nature of export sales
since the payer-recipient of services is doing business outside the Philippines.
Under BSP rules, the proceeds of export sales must be reported to the Bangko
Sentral ng Pilipinas. Thus, there is reason to require the provider of services
under Section 102(b) (1) and (2) to account for the foreign currency proceeds
to the BSP. The same rationale does not apply if the provider and recipient of
the services are both doing business in the Philippines since their transaction
is not in the nature of an export sale even if payment is denominated in foreign
currency.
Further, when the provider and recipient of services are both doing business
in the Philippines, their transaction falls squarely under Section 102(a)
governing domestic sale or exchange of services. Indeed, this is a purely local
sale or exchange of services subject to the regular VAT, unless of course the
transaction falls under the other provisions of Section 102(b).
Thus, when Section 102(b)(2) speaks of "[s]ervices other than those
mentioned in the preceding subparagraph," the legislative intent is that only
the services are different between subparagraphs 1 and 2. The requirements
for zero-rating, including the essential condition that the recipient of services
is doing business outside the Philippines, remain the same under both
subparagraphs.
Significantly, the amended Section 108(b) [previously Section 102(b)] of the
present Tax Code clarifies this legislative intent. Expressly included among the
transactions subject to 0% VAT are "[s]ervices other than those mentioned in
the [first] paragraph [of Section 108(b)] rendered to a person engaged in
business conducted outside the Philippines or to a nonresident person not
engaged in business who is outside the Philippines when the services are
performed, the consideration for which is paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of
the BSP."
In this case, the payer-recipient of respondent’s services is the Consortium
which is a joint-venture doing business in the Philippines. While the
Consortium’s principal members are non-resident foreign corporations, the
Consortium itself is doing business in the Philippines. This is shown clearly in
BIR Ruling No. 023-95 which states that the contract between the Consortium
and NAPOCOR is for a 15-year term, thus:
This refers to your letter dated January 14, 1994 requesting for a clarification
of the tax implications of a contract between a consortium composed of
Burmeister & Wain Scandinavian Contractor A/S ("BWSC"), Mitsui Engineering
& Shipbuilding, Ltd. (MES), and Mitsui & Co., Ltd. ("MITSUI"), all referred to
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 hereinafter as the "Consortium", and the National Power Corporation
("NAPOCOR") for the operation and maintenance of two 100-Megawatt power
barges ("Power Barges") acquired by NAPOCOR for a 15-year term.
Considering this length of time, the Consortium’s operation and maintenance
of NAPOCOR’s power barges cannot be classified as a single or isolated
transaction. The Consortium does not fall under Section 102(b)(2) which
requires that the recipient of the services must be a person doing business
outside the Philippines. Therefore, respondent’s services to the Consortium,
not being supplied to a person doing business outside the Philippines, cannot
legally qualify for 0% VAT.
Respondent, as subcontractor of the Consortium, operates and maintains
NAPOCOR’s power barges in the Philippines. NAPOCOR pays the Consortium,
through its non-resident partners, partly in foreign currency outwardly
remitted. In turn, the Consortium pays respondent also in foreign currency
inwardly remitted and accounted for in accordance with BSP rules. This
payment scheme does not entitle respondent to 0% VAT. As the Court held in
Commissioner of Internal Revenue v. American Express International, Inc.
(Philippine Branch), the place of payment is immaterial, much less is the place
where the output of the service is ultimately used. An essential condition for
entitlement to 0% VAT under Section 102(b)(1) and (2) is that the recipient of
the services is a person doing business outside the Philippines. In this case, the
recipient of the services is the Consortium, which is doing business not
outside, but within the Philippines because it has a 15-year contract to operate
and maintain NAPOCOR’s two 100-megawatt power barges in Mindanao.
The Court recognizes the rule that the VAT system generally follows the
"destination principle" (exports are zero-rated whereas imports are taxed).
However, as the Court stated in American Express, there is an exception to this
rule. This exception refers to the 0% VAT on services enumerated in Section
102 and performed in the Philippines. For services covered by Section
102(b)(1) and (2), the recipient of the services must be a person doing business
outside the Philippines. Thus, to be exempt from the destination principle
under Section 102(b)(1) and (2), the services must be (a) performed in the
Philippines; (b) for a person doing business outside the Philippines; and (c) paid
in acceptable foreign currency accounted for in accordance with BSP rules.
CIR vs. Acesite

1) PAGCOR is exempt from payment of indirect taxes

It is undisputed that P.D. 1869, the charter creating PAGCOR, grants the latter an
exemption from the payment of taxes. Section 13 of P.D. 1869 pertinently
provides:

Sec. 13. Exemptions. –

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 xxxx

(2) Income and other taxes. – (a) Franchise Holder: No tax of any kind or form,
income or otherwise, as well as fees, charges or levies of whatever nature,
whether National or Local, shall be assessed and collected under this Franchise
from the Corporation; nor shall any form of tax or charge attach in any way to
the earnings of the Corporation, except a Franchise Tax of five (5%) percent of
the gross revenue or earnings derived by the Corporation from its operation
under this Franchise. Such tax shall be due and payable quarterly to the National
Government and shall be in lieu of all kinds of taxes, levies, fees or assessments
of any kind, nature or description, levied, established or collected by any
municipal, provincial, or national government authority.

xxxx

(b) Others: The exemptions herein granted for earnings derived from the
operations conducted under the franchise specifically from the payment of any
tax, income or otherwise, as well as any form of charges, fees or levies, shall inure
to the benefit of and extend to corporation(s), association(s), agency(ies), or
individual(s) with whom the Corporation or operator has any contractual
relationship in connection with the operations of the casino(s) authorized to be
conducted under this Franchise and to those receiving compensation or other
remuneration from the Corporation or operator as a result of essential facilities
furnished and/or technical services rendered to the Corporation or operator.

A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption
to taxes with no distinction on whether the taxes are direct or indirect. We are
one with the CA ruling that PAGCOR is also exempt from indirect taxes, like VAT,
as follows:

Under the above provision [Section 13 (2) (b) of P.D. 1869], the term
"Corporation" or operator refers to PAGCOR. Although the law does not
specifically mention PAGCOR’s exemption from indirect taxes, PAGCOR is
undoubtedly exempt from such taxes because the law exempts from taxes
persons or entities contracting with PAGCOR in casino operations. Although,
differently worded, the provision clearly exempts PAGCOR from indirect
taxes. In fact, it goes one step further by granting tax exempt status to persons
dealing with PAGCOR in casino operations. The unmistakable conclusion is that
PAGCOR is not liable for the P30,152,892.02 VAT and neither is Acesite as the
latter is effectively subject to zero percent rate under Sec. 108 B (3). R.A. 8424.

Indeed, by extending the exemption to entities or individuals dealing with

PAGCOR, the legislature clearly granted exemption also from indirect taxes. It
must be noted that the indirect tax of VAT, as in the instant case, can be shifted
or passed to the buyer, transferee, or lessee of the goods, properties, or
services subject to VAT. Thus, by extending the tax exemption to entities or

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 individuals dealing with PAGCOR in casino operations, it is exempting PAGCOR
from being liable to indirect taxes.

The manner of charging VAT does not make PAGCOR liable to said tax

It is true that VAT can either be incorporated in the value of the goods,
properties, or services sold or leased, in which case it is computed as 1/11 of
such value, or charged as an additional 10% to the value. Verily, the seller or
lessor has the option to follow either way in charging its clients and customer.
In the instant case, Acesite followed the latter method, that is, charging an
additional 10% of the gross sales and rentals. Be that as it may, the use of either
method, and in particular, the first method, does not denigrate the fact that
PAGCOR is exempt from an indirect tax, like VAT.

(2) VAT exemption extends to Acesite

Thus, while it was proper for PAGCOR not to pay the 10% VAT charged by
Acesite, the latter is not liable for the payment of it as it is exempt in this
particular transaction by operation of law to pay the indirect tax. Such
exemption falls within the former Section 102 (b) (3) of the 1977 Tax Code, as
amended (now Sec. 108 [b] [3] of R.A. 8424), which provides:

Section 102. Value-added tax on sale of services – (a) Rate and base of tax –
There shall be levied, assessed and collected, a value-added tax equivalent to
10% of gross receipts derived by any person engaged in the sale of services x x
x; Provided, that the following services performed in the Philippines by VAT-
registered persons shall be subject to 0%.

xxxx

(b) Transactions subject to zero percent (0%) rated.—

xxxx

(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 (0%) rate (emphasis
supplied).

The rationale for the exemption from indirect taxes provided for in P.D. 1869
and the extension of such exemption to entities or individuals dealing with
PAGCOR in casino operations are best elucidated from the 1987 case
of Commissioner of Internal Revenue v. John Gotamco & Sons, Inc., where the
absolute tax exemption of the World Health Organization (WHO) upon an
international agreement was upheld. We held in said case that the exemption
of contractee WHO should be implemented to mean that the entity or person
exempt is the contractor itself who constructed the building owned by
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 contractee WHO, and such does not violate the rule that tax exemptions are
personal because the manifest intention of the agreement is to exempt the
contractor so that no contractor’s tax may be shifted to the contractee WHO.
Thus, the proviso in P.D. 1869, extending the exemption to entities or
individuals dealing with PAGCOR in casino operations, is clearly to proscribe any
indirect tax, like VAT, that may be shifted to PAGCOR.

d. Automatic zero rate vs. Effectively zero rate

EFFECTIVELY AUTOMATIC
ZERO-RATED TRANSACTION ZERO-RATED TRANSACTION
Coverage
Local sale of goods, properties, services to Sales by VAT registered taxpayer
purchasers enjoying exemption from
indirect taxes under special laws and
international agreements
Application
VAT registered seller of goods and services Need not file
is required to file and application and
secure approval
Option to offset excess input tax
Not allowed to offset excess input taxes
against other internal revenue tax

Case Law:

CIR vs Seagate:

No doubt, as a PEZA-registered enterprise within a special economic zone,

respondent is entitled to the fiscal incentives and benefits provided for in either
PD 66 or EO 226 which would not subject respondent to internal revenue laws
and regulations for raw materials, supplies, articles, etc or would be entitled to
income tax holiday; additional deduction for labor expense, etc. It shall,
moreover, enjoy all privileges, benefits, advantages or exemptions under both
Republic Act Nos. 7227 (Duty-free importation) and 7844 (Tax Credits). Thus,
respondent enjoys preferential tax treatment. The VAT on capital goods is an
internal revenue tax from which petitioner as an entity is exempt. Although the
transactions involving such tax are not exempt, petitioner as a VAT-registered
person, however, is entitled to their credits.
Zero-rated transactions differ from effectively zero-rated transactions as to
their source. Zero-rated transactions generally refer to the export sale of goods
and supply of services. Effectively zero-rated transactions, however, refer to the
sale of goods or supply of services to persons or entities whose exemption

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 under special laws or international agreements to which the Philippines is a
signatory. In both instances, the transactions are not exempt transactions and
the seller of such transactions charges no output tax, but can claim a refund of
or a tax credit certificate for the VAT previously charged by suppliers. In both
instances of zero rating, there is total relief for the purchaser from the burden
of the tax. But in an exemption there is only partial relief, because the purchaser
is not allowed any tax refund of or credit for input taxes paid.
VAT is a tax on consumption, the amount of which may be shifted or passed on
by the seller to the purchaser of the goods, properties or services. If a special
law merely exempts a party as a seller from its direct liability for payment of the
VAT, but does not relieve the same party as a purchaser from its indirect burden
of the VAT shifted to it by its VAT-registered suppliers, the purchase transaction
is not exempt. Applying this principle to the case at bar, the purchase
transactions entered into by respondent are not VAT-exempt.
Since the purchases of respondent are not exempt from the VAT, the rate to be
applied is zero. Its exemption under both PD 66 and RA 7916 effectively
subjects such transactions to a zero rate, because the ecozone within which it
is registered is managed and operated by the PEZA as a separate customs
territory. This means that in such zone is created the legal fiction of foreign
territory. Under the cross-border principle of the VAT system being enforced by
the BIR, no VAT shall be imposed to form part of the cost of goods destined for
consumption outside of the territorial border of the taxing authority. If exports
of goods and services from the Philippines to a foreign country are free of the
VAT, then the same rule holds for such exports from the national territory --
except specifically declared areas -- to an ecozone

CIR vs. Toshiba

An ECOZONE enterprise is a VAT-exempt entity. Sales of goods, properties,

and services by persons from the Customs Territory to ECOZONE enterprises
shall be subject to VAT at zero percent (0%). P.D. No. 66, creating the Export
Processing Zone Authority (EPZA), is the precursor of RA 7916, as amended,
under which the EPZA evolved into the PEZA. Consequently, the exception
of P.D. 66 from Section 103(q) of the Tax Code of 1977, as amended, extends
likewise to Rep. Act No. 7916, as amended. This Court agrees, however, that
PEZA-registered enterprises, which would necessarily be located within
ECOZONES, are VAT-exempt entities, not because of Section 24 of Rep. Act
No. 7916, as amended, which imposes the five percent (5%) preferential tax
rate on gross income of PEZA-registered enterprises, in lieu of all taxes; but,
rather, because of Section 8 of the same statute which establishes the
fiction that ECOZONES are foreign territory.

The Philippines VAT system adheres to the Cross Border Doctrine, according
to which, no VAT shall be imposed to form part of the cost of goods destined
for consumption outside of the territorial border of the taxing authority.
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 Sales of goods, properties and services by a VAT-registered supplier from
the Customs Territory to an ECOZONE enterprise shall be treated as export
sales. If such sales are made by a VAT-registered supplier, they shall be
subject to VAT at zero percent (0%). In zero-rated transactions, the VAT-
registered supplier shall not pass on any output VAT to the ECOZONE
enterprise, and at the same time, shall be entitled to claim tax credit/refund
of its input VAT attributable to such sales. The rule that any sale by a VAT-
registered supplier from the Customs Territory to a PEZA-registered
enterprise shall be considered an export sale and subject to zero percent
(0%) VAT was clearly established only on 15 October 1999, upon the
issuance of RMC No. 74-99. Prior to the said date, however, whether or not
a PEZA-registered enterprise was VAT-exempt depended on the type of
fiscal incentives availed of by the said enterprise

e. Destination Principle and the Cross Border Doctrine

Case Laws:

CIR vs American Express

However, the law clearly provides for an exception to the destination

principle; that is, for a zero percent VAT rate for services that are performed
in the Philippines, "paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of the [BSP]."57 Thus, for
the supply of service to be zero-rated as an exception, the law merely
requires that first, the service be performed in the Philippines; second, the
service fall under any of the categories in Section 102(b) of the Tax Code;
and, third, it be paid in acceptable foreign currency accounted for in
accordance with BSP rules and regulations.

Indeed, these three requirements for exemption from the destination

principle are met by respondent. Its facilitation service is performed in the
Philippines. It falls under the second category found in Section 102(b) of the
Tax Code, because it is a service other than "processing, manufacturing or
repacking of goods" as mentioned in the provision. Undisputed is the fact
that such service meets the statutory condition that it be paid in acceptable
foreign currency duly accounted for in accordance with BSP rules. Thus, it
should be zero-rated.

CIR vs. Toshiba:

Section 8 of Rep. Act No. 7916, as amended, mandates that the PEZA shall
manage and operate the ECOZONES as a separate customs territory;[23]
thus, creating the fiction that the ECOZONE is a foreign territory.[24] As a
result, sales made by a supplier in the Customs Territory to a purchaser in
the ECOZONE shall be treated as an exportation from the Customs Territory.

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 Conversely, sales made by a supplier from the ECOZONE to a purchaser in
the Customs Territory shall be considered as an importation into the
Customs Territory.

Given the preceding discussion, what would be the VAT implication of sales
made by a supplier from the Customs Territory to an ECOZONE enterprise?

The Philippine VAT system adheres to the Cross Border Doctrine, according
to which, no VAT shall be imposed to form part of the cost of goods destined
for consumption outside of the territorial border of the taxing authority.
Hence, actual export of goods and services from the Philippines to a foreign
country must be free of VAT; while, those destined for use or consumption
within the Philippines shall be imposed with ten percent (10%) VAT.[25]

f. Zero Rated Sales vs. Exempt Sales:

Case Laws:

CIR vs. Cebu Toyo

In principle, the purpose of applying a zero percent (0%) rate on a taxable

transaction is to exempt the transaction completely from VAT previously
collected on inputs. It is thus the only true way to ensure that goods are
provided free of VAT. While the zero rating and the exemption are
computationally the same, they actually differ in several aspects, to wit:

(a) A zero-rated sale is a taxable transaction but does not result in an output
tax while an exempted transaction is not subject to the output tax;

(b) The input VAT on the purchases of a VAT-registered person with zero-
rated sales may be allowed as tax credits or refunded while the seller in an
exempt transaction is not entitled to any input tax on his purchases despite
the issuance of a VAT invoice or receipt.

(c) Persons engaged in transactions which are zero-rated, being subject to

VAT, are required to register while registration is optional for VAT-exempt
persons.

g. Enumerations of Exempt transactions (See 109 as amended, see Codal)

h. Exempt person vs Exempt Transaction

Case Law:

CIR vs. Seagate

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 The object of exemption from the VAT may either be the transaction itself
or any of the parties to the transaction.59

An exempt transaction, on the one hand, involves goods or services which,

by their nature, are specifically listed in and expressly exempted from the
VAT under the Tax Code, without regard to the tax status -- VAT-exempt or
not -- of the party to the transaction.60 Indeed, such transaction is not
subject to the VAT, but the seller is not allowed any tax refund of or credit
for any input taxes paid.

An exempt party, on the other hand, is a person or entity granted VAT

exemption under the Tax Code, a special law or an international agreement
to which the Philippines is a signatory, and by virtue of which its taxable
transactions become exempt from the VAT.61 Such party is also not subject
to the VAT, but may be allowed a tax refund of or credit for input taxes paid,
depending on its registration as a VAT or non-VAT taxpayer.

As mentioned earlier, the VAT is a tax on consumption, the amount of which

may be shifted or passed on by the seller to the purchaser of the goods,
properties or services.62 While the liability is imposed on one person, the
burden may be passed on to another. Therefore, if a special law merely
exempts a party as a seller from its direct liability for payment of the VAT,
but does not relieve the same party as a purchaser from its indirect burden
of the VAT shifted to it by its VAT-registered suppliers, the purchase
transaction is not exempt. Applying this principle to the case at bar, the
purchase transactions entered into by respondent are not VAT-exempt.

Special laws may certainly exempt transactions from the VAT.63 However,
the Tax Code provides that those falling under PD 66 are not. PD 66 is the
precursor of RA 7916 -- the special law under which respondent was
registered. The purchase transactions it entered into are, therefore, not
VAT-exempt. These are subject to the VAT; respondent is required to
register.

Its sales transactions, however, will either be zero-rated or taxed at the

standard rate of 10 percent,64 depending again on the application of the
destination principle.65

If respondent enters into such sales transactions with a purchaser -- usually

in a foreign country -- for use or consumption outside the Philippines, these
shall be subject to 0 percent.66 If entered into with a purchaser for use or
consumption in the Philippines, then these shall be subject to 10 percent,67
unless the purchaser is exempt from the indirect burden of the VAT, in
which case it shall also be zero-rated.

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 Since the purchases of respondent are not exempt from the VAT, the rate
to be applied is zero. Its exemption under both PD 66 and RA 7916
effectively subjects such transactions to a zero rate,68 because the ecozone
within which it is registered is managed and operated by the PEZA as a
separate customs territory.69 This means that in such zone is created the
legal fiction of foreign territory.70 Under the cross-border principle71 of the
VAT system being enforced by the Bureau of Internal Revenue (BIR),72 no
VAT shall be imposed to form part of the cost of goods destined for
consumption outside of the territorial border of the taxing authority. If
exports of goods and services from the Philippines to a foreign country are
free of the VAT,73 then the same rule holds for such exports from the
national territory -- except specifically declared areas -- to an ecozone.

Sales made by a VAT-registered person in the customs territory to a PEZA-

registered entity are considered exports to a foreign country; conversely,
sales by a PEZA-registered entity to a VAT-registered person in the customs
territory are deemed imports from a foreign country.74 An ecozone --
indubitably a geographical territory of the Philippines -- is, however,
regarded in law as foreign soil.75 This legal fiction is necessary to give
meaningful effect to the policies of the special law creating the zone.76 If
respondent is located in an export processing zone77 within that ecozone,
sales to the export processing zone, even without being actually exported,
shall in fact be viewed as constructively exported under EO 226.78
Considered as export sales,79 such purchase transactions by respondent
would indeed be subject to a zero rate.80

V. TRANSITIONAL AND PRESUMPTIVE INPUT TAXES

a. Transitional Input Tax

Taxpayers who became VAT-registered persons upon exceeding the
minimum turnover of P1,500,000.00 in any 12-month period, or who
voluntarily register even if their turnover does not exceed P1,500,000.00
(except franchise grantees of radio and television broadcasting whose
threshold is P10,000,000.00) shall be entitled to a transitional input tax
on the inventory on hand as of the effectivity of their VAT registration,
on the following:
(1) goods purchased for resale in their present condition;
(2) materials purchased for further processing, but which have not
yet undergone processing;
(3) goods which have been manufactured by the taxpayer;
(4) goods in process for sale; or
(5) goods and supplies for use in the course of the taxpayer’s trade
or business as a VAT-registered person.

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 The transitional input tax shall be two percent (2%) of the value of the
beginning inventory on hand or actual VAT paid on such, goods, materials
and supplies, whichever is higher, which amount shall be creditable
against the output tax of VAT-registered person. The value allowed for
income tax purposes on inventories shall be the basis for the
computation of the 2% transitional input tax, excluding goods that are
exempt from VAT under Sec. 109 of the Tax Code.

b. Presumptive Input Tax

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, shall be allowed a presumptive input tax, creditable
against the output tax, equivalent to four percent (4%) of the gross value
in money of their purchases of primary agricultural products which are
used as inputs to their production.
As used in this paragraph, the term processing shall mean pasteurization,
canning and activities which through physical or chemical process alter
the exterior texture or form or inner substance of a product in such
manner as to prepare it for special use to which it could not have been
put in its original form or condition.

Case Law:

Fort Bonifacio vs CIR:

The Supreme Court invalidated a provision of Revenue Regulations (RR) No. 07-95,
which limits the application of the 8-percent transitional-input tax to inventory
consisting of improvements only, and not to the total value of lot inventory, in the
case of real-estate dealers. The court emphasized that the law which RR 07-95
seeks to implement did not make any differentiation between the treatment of a
real-estate dealer from those engaged in other transactions such as, for example,
sellers of commercial goods. Thus, there is no basis for the BIR to make that
differentiation for real-estate dealers in the implementing regulation. The Court
noted that the common standard for the application of the transitional input tax
credit, as enacted by EO 273 and all subsequent tax laws which reinforced or
reintegrated the tax credit, is simply that the taxpayer in question has become liable
to VAT or has elected to be a VAT registered person.
It is apparent that the transitional input tax credit operates to benefit newly VAT-
registered persons, whether or not they previously paid taxes in the acquisition of
their beginning inventory of goods, materials and supplies. During that period of
transition from non-VAT to VAT status, the transitional input tax credit serves to
alleviate the impact of the VAT on the taxpayer. At the very beginning, the VAT-
registered taxpayer is obliged to remit a significant portion of the income it derived
from its sales as output VAT. The transitional input tax credit mitigates this initial
diminution of the taxpayer’s income by affording the opportunity to offset the
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 losses incurred through the remittance of the output VAT at a stage when the
person is yet unable to credit input VAT payments.
As pointed out in Our Decision of April 2, 2009, to give Section 105 a restrictive
construction that transitional input tax credit applies only when taxes were
previously paid on the properties in the beginning inventory and there is a law
imposing the tax which is presumed to have been paid, is to impose conditions or
requisites to the application of the transitional tax input credit which are not found
in the law. The courts must not read into the law what is not there. To do so will
violate the principle of separation of powers which prohibits this Court from
engaging in judicial legislation.
The amendatory provision of Section 105 of the NIRC, as introduced by RA 7716,
states:
Sec. 105. Transitional Input tax Credits. – A person who becomes liable to value-
added tax or any person who elects to be a VAT-registered person shall, subject to
the filing of an inventory as prescribed by regulations, be allowed input tax on his
beginning inventory of goods, materials and supplies equivalent to 8% of the value
of such inventory or the actual value-added tax paid on such goods, materials and
supplies, whichever is higher, which shall be creditable against the output tax.
The term "goods or properties" by the unambiguous terms of Section 100 includes
"real properties held primarily for sale to costumers or held for lease in the ordinary
course of business." Having been defined in Section 100 of the NIRC, the term
"goods" as used in Section 105 of the same code could not have a different
meaning. This has been explained in the Decision dated April 2, 2009, thus:
Under Section 105, the beginning inventory of "goods" forms part of the valuation
of the transitional input tax credit. Goods, as commonly understood in the business
sense, refers to the product which the VAT-registered person offers for sale to the
public. With respect to real estate dealers, it is the real properties themselves which
constitute their "goods." Such real properties are the operating assets of the real
estate dealer.
VI. CLAIM FOR VAT REFUND

a. Grounds

1. Zero-rated or Effectively Zero-rated Sales. - any VAT-registered person,

whose sales are zero-rated or effectively zero-rated may, within two (2)
years after the close of the taxable quarter when the sales were made, apply
for the issuance of a tax credit certificate or refund of creditable input tax
due or paid attributable to such sales, except transitional input tax, to the
extent that such input tax has not been applied against output tax: Provided,
however, That in the case of zero-rated sales under Section 106(A)(2)(a)(1),
(2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign currency
exchange proceeds thereof had been duly accounted for in accordance with
the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided,
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 further, That where the taxpayer is engaged in zero-rated or effectively
zero-rated sale and also in taxable or exempt sale of goods of properties or
services, and the amount of creditable input tax due or paid cannot be
directly and entirely attributed to any one of the transactions, it shall be
allocated proportionately on the basis of the volume of sales.
2. Cancellation of VAT Registration. - A person whose registration has been
cancelled due to retirement from or cessation of business, or due to
changes in or cessation of status under Section 106(C) of this Code may,
within two (2) years from the date of cancellation, apply for the issuance of
a tax credit certificate for any unused input tax which may be used in
payment of his other internal revenue taxes.

b. Period of Grant

In proper cases, the Commissioner shall grant a refund for creditable input taxes
within ninety (90) days from the date of submission of the official receipts or
invoices and other documents in support of the application filed in accordance
with Subsections (A) and (B) hereof: Provided, That should the Commissioner
find that the grant of refund is not proper, the Commissioner must state in
writing the legal and factual basis for the denial.

“In case of full or partial denial of the claim for tax refund, the taxpayer affected
may, within thirty (30) days from the receipt of the decision denying the claim,
appeal the decision with the Court of Tax Appeals: Provided, however, That
failure on the part of any official, agent, or employee of the BIR to act on the
application within the ninety (90)-day period shall be punishable under Section
269 of this Code.

Case Laws:

Context vs. CIR

It may not be amiss to re-emphasize that the petitioner is registered as a NON-

VAT taxpayer and thus, is exempt from VAT. As an exempt VAT taxpayer, it is
not allowed any tax credit on VAT (input tax) previously paid. In fine, even if we
are to assume that exemption from the burden of VAT on petitioner’s purchases
did exist, petitioner is still not entitled to any tax credit or refund on the input
tax previously paid as petitioner is an exempt VAT taxpayer.

Rather, it is the petitioner’s suppliers who are the proper parties to claim the
tax credit and accordingly refund the petitioner of the VAT erroneously passed
on to the latter.

Accordingly, we find that the Court of Appeals did not commit any reversible
error of law in holding that petitioner’s VAT exemption under Rep. Act No. 7227

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 is limited to the VAT on which it is directly liable as a seller and hence, it cannot
claim any refund or exemption for any input VAT it paid, if any, on its purchases
of raw materials and supplies.

Atlas vs. CIR

All were filed within the prescriptive period except for the input VAT on its zero-
rated sales for the first quarter of 1992.

The prescriptive period for filing an application for tax refund/credit of input
VAT on zero-rated sales made in 1990 and 1992 was governed by Section 106(b)
and (c) of the Tax Code of 1977, as amended, which provided that –

SEC. 106. Refunds or tax credits of input tax. – x x x.

(b) Zero-rated or effectively zero-rated sales. – Any person, except those

covered by paragraph (a) above, whose sales are zero-rated may, within two
years after the close of the quarter when such sales were made, apply for the
issuance of a tax credit certificate or refund of the input taxes attributable to
such sales to the extent that such input tax has not been applied against output
tax.

xxxx

(e) Period within which refund of input taxes may be made by the
Commissioner. – The Commissioner shall refund input taxes within 60 days from
the date the application for refund was filed with him or his duly authorized
representative. No refund of input taxes shall be allowed unless the VAT-
registered person files an application for refund within the period prescribed in
paragraphs (a), (b) and (c) as the case may be.

It is true that unlike corporate income tax, which is reported and paid on
installment every quarter, but is eventually subjected to a final adjustment at
the end of the taxable year, VAT is computed and paid on a purely quarterly
basis without need for a final adjustment at the end of the taxable year.
However, it is also equally true that until and unless the VAT-registered taxpayer
prepares and submits to the BIR its quarterly VAT return, there is no way of
knowing with certainty just how much input VAT the taxpayer may apply against
its output VAT; how much output VAT it is due to pay for the quarter or how
much excess input VAT it may carry-over to the following quarter; or how much
of its input VAT it may claim as refund/credit. It should be recalled that not only
may a VAT-registered taxpayer directly apply against his output VAT due the
input VAT it had paid on its importation or local purchases of goods and services
during the quarter; the taxpayer is also given the option to either (1) carry over
any excess input VAT to the succeeding quarters for application against its
future output VAT liabilities, or (2) file an application for refund or issuance of a
tax credit certificate covering the amount of such input VAT.18 Hence, even in
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 the absence of a final adjustment return, the determination of any output VAT
payable necessarily requires that the VAT-registered taxpayer make
adjustments in its VAT return every quarter, taking into consideration the input
VAT which are creditable for the present quarter or had been carried over from
the previous quarters.

Moreover, when claiming refund/credit, the VAT-registered taxpayer must be

able to establish that it does have refundable or creditable input VAT, and the
same has not been applied against its output VAT liabilities – information which
are supposed to be reflected in the taxpayer's VAT returns. Thus, an application
for refund/credit must be accompanied by copies of the taxpayer's VAT return/s
for the taxable quarter/s concerned.

Lastly, although the taxpayer's refundable or creditable input VAT may not be
considered as illegally or erroneously collected, its refund/credit is a privilege
extended to qualified and registered taxpayers by the very VAT system adopted
by the Legislature. Such input VAT, the same as any illegally or erroneously
collected national internal revenue tax, consists of monetary amounts which
are currently in the hands of the government but must rightfully be returned to
the taxpayer. Therefore, whether claiming refund/credit of illegally or
erroneously collected national internal revenue tax, or input VAT, the taxpayer
must be given equal opportunity for filing and pursuing its claim.

CIR vs. Mirant

The claim for refund or tax credit for the creditable input VAT payment made
by MPC embodied in OR No. 0189 was filed beyond the period provided by law
for such claim. Sec. 112(A) of the NIRC pertinently reads:

(A) Zero-rated or Effectively Zero-rated Sales. – Any VAT-registered person,

whose sales are zero-rated or effectively zero-rated may, within two (2) years
after the close of the taxable quarter when the sales were made, apply for the
issuance of a tax credit certificate or refund of creditable input tax due or
paid attributable to such sales, except transitional input tax, to the extent that
such input tax has not been applied against output tax: x x x. (Emphasis ours.)

The above proviso clearly provides in no uncertain terms that unutilized input
VAT payments not otherwise used for any internal revenue tax due the taxpayer
must be claimed within two years reckoned from the close of the taxable quarter
when the relevant sales were made pertaining to the input VAT regardless of
whether said tax was paid or not. As the CA aptly puts it, albeit it erroneously
applied the aforequoted Sec. 112(A), "[P]rescriptive period commences from
the close of the taxable quarter when the sales were made and not from the
time the input VAT was paid nor from the time the official receipt was
issued." Thus, when a zero-rated VAT taxpayer pays its input VAT a year after
the pertinent transaction, said taxpayer only has a year to file a claim for refund
or tax credit of the unutilized creditable input VAT. The reckoning frame would
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 always be the end of the quarter when the pertinent sales or transaction was
made, regardless when the input VAT was paid. Be that as it may, and given that
the last creditable input VAT due for the period covering the progress billing of
September 6, 1996 is the third quarter of 1996 ending on September 30, 1996,
any claim for unutilized creditable input VAT refund or tax credit for said quarter
prescribed two years after September 30, 1996 or, to be precise, on September
30, 1998. Consequently, MPC’s claim for refund or tax credit filed on December
10, 1999 had already prescribed.

To be sure, MPC cannot avail itself of the provisions of either Sec. 204(C) or 229
of the NIRC which, for the purpose of refund, prescribes a different starting
point for the two-year prescriptive limit for the filing of a claim therefor. Secs.
204(C) and 229 respectively provide:

Sec. 204. Authority of the Commissioner to Compromise, Abate and Refund or

Credit Taxes.— The Commissioner may –

xxxx

(c) Credit or refund taxes erroneously or illegally received or penalties imposed

without authority, refund the value of internal revenue stamps when they are
returned in good condition by the purchaser, and, in his discretion, redeem or
change unused stamps that have been rendered unfit for use and refund their
value upon proof of destruction. No credit or refund of taxes or penalties shall
be allowed unless the taxpayer files in writing with the Commissioner a claim for
credit or refund within two (2) years after the payment of the tax or penalty:
Provided, however, That a return filed showing an overpayment shall be
considered as a written claim for credit or refund.

xxxx

Sec. 229. Recovery of Tax Erroneously or Illegally Collected.— No suit or

proceeding shall be maintained in any court for the recovery of any national
internal revenue tax hereafter alleged to have been erroneously or illegally
assessed or collected, or of any penalty claimed to have been collected without
authority, of any sum alleged to have been excessively or in any manner
wrongfully collected without authority, or of any sum alleged to have been
excessively or in any manner wrongfully collected, until a claim for refund or
credit has been duly filed with the Commissioner; but such suit or proceeding
may be maintained, whether or not such tax, penalty, or sum has been paid
under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two
(2) years from the date of payment of the tax or penalty regardless of any
supervening cause that may arise after payment: Provided, however, That the
Commissioner may, even without a written claim therefor, refund or credit any

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 tax, where on the face of the return upon which payment was made, such
payment appears clearly to have been erroneously paid. (Emphasis ours.)

Notably, the above provisions also set a two-year prescriptive period, reckoned
from date of payment of the tax or penalty, for the filing of a claim of refund or
tax credit. Notably too, both provisions apply only to instances of erroneous
payment or illegal collection of internal revenue taxes.

Northern vs. CIR

Section 112 of the National Internal Revenue Code (NIRC) of 1997 provides as
follows:

"SEC. 112. Refunds or Tax Credits of Input Tax. - (A) Zero-rated or Effectively
Zero-rated Sales. - Any VAT-registered person, whose sales are zero-rated or
effectively zero-rated may, within two (2) years after the close of the taxable
quarter when the sales were made, apply for the issuance of a tax credit
certificate or refund of creditable input tax due or paid attributable to such
sales, except transitional input tax, to the extent that such input tax has not
been applied against output tax: xxx" In Commissioner of Internal Revenue vs.
Mirant Pagbilao Corporation (Formerly Southern Energy Quezon, Inc.), the
Supreme Court made the following pronouncement:

"The above proviso clearly provides in no uncertain terms that unutilized input
VAT payments not otherwise used for any internal revenue tax due the taxpayer
must be claimed within two years reckoned from the close of the taxable
quarter when the relevant sales were made pertaining to the input VAT
regardless of whether said tax was paid or not. As the CA aptly puts it, albeit it
erroneously applied the aforequoted Section 112(A), '[P]rescriptive period
commences from the close of the taxable quarter when the sales were made
and not from the close of the taxable quarter when the sales were made and
not from the time the input VAT was paid nor from the time the official receipt
was issued.' Thus, when a zero-rated VAT taxpayer pays its input VAT a year
after the pertinent transaction, said taxpayer only has a year to file a claim for
refund or tax credit of the unutilized creditable input VAT. The reckoning frame
would always be the end of the quarter when the pertinent sales or transaction
was made, regardless when the input VAT was paid." (Emphasis supplied)

It can be gleaned from the foregoing Decision that the two-year prescriptive
period under Section 112(A) of the NIRC of 1997 for the recovery of creditable
input VAT due or paid attributable to zero-rated or effectively zero-rated sales
is to be counted "from the close of the taxable quarter when the relevant sales
were made pertaining to the input VAT regardless of whether said tax was paid
or not." Here, considering the amount of the subject claim refers to the
declared input VAT for the fourth quarter of taxable year 2003, the two-year
prescriptive period should be counted from the close of the said taxable quarter
on December 31, 2003 and shall end on December 31, 2005. And since the
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 subject administrative claim was filed on March 31, 2005, while the instant
judicial claim was filed on May 26, 2005; both the administrative and judicial
claims of petitioner were filed well within the said two-year prescriptive period
under the law. Such being the case, prescription has definitely not set in.

VII. OTHER MATTERS

a. Invoicing Requirements:

A VAT-registered person shall, for every sale, issue an invoice or receipt. In

addition to the information required under Section 237, the following
information shall be indicated in the invoice or receipt:

(1) A statement that the seller is a VAT-registered person, followed by his

taxpayer's identification number (TIN); and

(2) The total amount which the purchaser pays or is obligated to pay to the
seller with the indication that such amount includes the value-added tax.

b. Information needed to be contained:

(1) A statement that the seller is a VAT-registered person, followed by his

TIN;
(2) The total amount which the purchaser pays or is obligated to pay to the
seller with the indication that such amount includes the VAT; Provided, That:
(a) The amount of tax shall be shown as a separate item in the
invoice or receipt;
(b) If the sale is exempt from VAT, the term “VAT-exempt sale” shall
be written or printed prominently on the invoice or receipt;
(c) If the sale is subject to zero percent (0%) VAT, the term “zero-
rated sale” shall be written or printed prominently on the invoice
or receipt;
(d) If the sale involves goods, properties or services some of which
are subject to and some of which are VAT zero-rated or VAT-
exempt, the invoice or receipt shall clearly indicate the break-
down of the sale price between its taxable, exempt and zero-
rated components, and the calculation of the VAT on each
portion of the sale shall be shown on the invoice or receipt. The
seller has the option to issue separate invoices or receipts for
the taxable, exempt, and zero-rated components of the sale.
(3) In the case of sales in the amount of one thousand pesos (P1,000.00) or
more where the sale or transfer is made to a VAT-registered person, the name,
business style, if any, address and TIN of the purchaser, customer or client, shall
be indicated in addition to the information required in (1) and (2) of this Section.

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 c. Consequences of issuing wrong invoice

If a person who is not VAT-registered issues an invoice or receipt

showing his TIN, followed by the word “VAT”, the erroneous
issuance shall result to the following:
(1) The non-VAT person shall be liable to:
(i) the percentage taxes applicable to his transactions;
(ii) VAT due on the transactions under Sec. 106 or 108 of the
Tax Code, without the benefit of any input tax credit; and
(iii) a 50% surcharge under Sec. 248 (B) of the Tax Code;
(2) VAT shall be recognized as an input tax credit to the purchaser
under Sec. 110 of the Tax Code, provided the requisite information
required under Subsection 4.113 (B) of these Regulations is shown
on the invoice or receipt.

If a VAT-registered person issues a VAT invoice or VAT official

receipt for a VAT-exempt transaction, but fails to display
prominently on the invoice or receipt the words “VAT-exempt sale”,
the transaction shall become taxable and the issuer shall be liable
to pay VAT thereon. The purchaser shall be entitled to claim an input
tax credit on his purchase.

d. Filing of VAT Returns

Every person liable to pay the value-added tax imposed under this Title shall file
a quarterly return of the amount of his gross sales or receipts within twenty-
five (25) days following the close of each taxable quarter prescribed for each
taxpayer: Provided, however, That VAT-registered persons shall pay the value-
added tax on a monthly basis: Provided, finally, That beginning January 1, 2023,
the filing and payment required under this Subsection shall be done within
twenty-five (25) days following the close of each taxable quarter.

Any person, whose registration has been cancelled in accordance with Section
236, shall file a return and pay the tax due thereon within twenty-five (25) days
from the date of cancellation of registration: Provided, That only one
consolidated return shall be filed by the taxpayer for his principal place of
business or head office and all branches.

Except as the Commissioner otherwise permits, the return shall be filed with
and the tax paid to an authorized agent bank, Revenue Collection Officer or duly
authorized city or municipal Treasurer in the Philippines located within the
revenue district where the taxpayer is registered or required to register.

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 e. Government Payments

The Government or any of its political subdivisions, instrumentalities or

agencies, including government-owned or -controlled corporations (GOCCs)
shall, before making payment on account of each purchase of goods and
services which are subject to the value-added tax imposed in Sections 106 and
108 of this Code, deduct and withhold the value-added tax imposed in Sections
106 and 108 of this Code, deduct and withhold a final value-added tax at the
rate of five percent (5%) of the gross payment thereof: Provided, That beginning
January 1, 2021, the VAT witholding system under this Subsection shall shift
from final to a creditable system: Provided, further, That the payment for lease
or use of properties or property rights to nonresident owners shall be subject
to twelve percent (12%) withholding tax at the time of payment: Provided,
finally, That payments for purchases of goods and services arising from projects
funded by Official Development Assistance (ODA) as defined under Republic Act
No. 8182, otherwise known as the ‘Official Development Assistance Act of
1996’, as amended, shall not be subject to the final withholding tax system as
imposed in this Subsection. For purposes of this Section, the payor or person in
control of the payment shall be considered as the withholding agent.

f. Power of the CIR to Suspend Business Operations

The Commissioner or his authorized representative is hereby empowered to

suspend the business operations and temporarily close the business
establishment of any person for any of the following violations:

(a) In the case of a VAT-registered Person. -

(1) Failure to issue receipts or invoices;

(2) Failure to file a value-added tax return as required under

Section 114; or

(3) Understatement of taxable sales or receipts by thirty

percent (30%) or more of his correct taxable sales or receipts
for the taxable quarter.

(b) Failure of any Person to Register as Required under Section 236. -

The temporary closure of the establishment shall be for the duration of not
less than five (5) days and shall be lifted only upon compliance with whatever
requirements prescribed by the Commissioner in the closure order.

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