Introduction to

Value-added tax
Definition of VAT

The value-added tax (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.
(Section 4.105-2, RR 16-05)
Value-added tax
Nature and Characteristics

VAT is an indirect tax

- liability to pay is on the seller

- burden may be shifted or passed on to the buyer

Value-added tax
Scope of VAT

The following transactions entered into by any person are subject to VAT:

1. Any sale, barter or exchange of goods and properties, or similar transactions, in the course of
trade or business;

2. Any sale of services, or similar transactions, in the course of trade or business;

3. Any lease of goods and properties, or similar transactions, in the course of trade or business; and

4. Any importation of goods, whether in the course of trade or business or not.

Value-added tax
Persons liable

1. Seller - any person who, in the course of trade or business

• Sells, barters, exchanges, leases goods or properties subject to VAT

• Renders services subject to VAT

2. Importer - any person who imports goods subject to VAT regardless whether:

• Importer is engaged or not engaged in business

• Importation is to be used for business or non-business/personal purpose

Value-added tax
Transactions covered by VAT

VAT covers transactions which are made "in the course of trade or business"

The term “in the course of trade or business” means the regular conduct or pursuit of a commercial or
economic activity, including transactions incidental thereto, by any person regardless of whether or
not the person engaged therein is a non-stock, 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. (Section 4.105-3, RR 16-05)
Value-added tax
Determinants

"In the course of trade or business"

1. Frequency - Regularly conducted

2. Purpose – pursuit of a commercial or economic activity

3. Transactions that are undertaken incidental to the pursuit of a commercial activity are considered
entered "in the course of trade or business”

Non-resident persons who perform services in the Philippines are deemed to be making sales in the
course of trade or business, even if the performance of services is not regular.
Exemptions from
Value-Added Tax
Exemptions from VAT
Categories

1. Exempt persons - persons not liable to VAT

2. Exempt transactions - transaction on certain goods, properties or services which are not sold by
VAT-registered or non-VAT registered persons, regardless of the annual gross sales or receipts
derived therefrom.

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

transactions
Exemptions from VAT
List of VAT-exempt transactions

a. Sale or importation of agricultural and marine food products in their original state, livestock and
poultry of a kind generally used as, or yielding or producing foods for human consumption; and
breeding stock and genetic materials therefor.

Products classified under this paragraph shall be considered in their original state even if they have
undergone the simple processes of preparation or preservation for the market, such as freezing,
drying, salting, broiling, roasting, smoking or stripping, including those using advanced
technological means of packaging, such as shrink wrapping in plastics, vacuum packing, tetra-
pack, and other similar packaging methods.

Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt, and copra
shall be considered in their original state.
Exemptions from VAT
List of VAT-exempt transactions

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

Only livestock and poultry feeds or ingredients that are used exclusively in the manufacture of
finished feeds are exempted from VAT. Thus, the sale or importation of ingredients that may also
be used for the production of food for human consumption is subject to VAT.

c. 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;
Exemptions from VAT
List of VAT-exempt transactions

d. Importation of professional instruments and implements, tools of trade, occupation or

employment, wearing apparel, domestic animals, and personal household effects belonging to
persons coming to settle in the Philippines, or Filipinos or their families and descendants who are
now residents or citizens of other countries, in quantities and of the class suitable to the
profession, rank or position of the persons importing saiid items, for their own use and not for sale,
barter or exchange, accompanying such persons, or arriving within a reasonable time; Provided
the BOC may upon production of satisfactory evidence that such persons are actually coming to
settle in the Philippines and that the goods are brought from their former place of abode, exempt
such goods from payment of duties and taxes, Provided further, that vehicles, vessels, aircrafts,
machineries and other similar goods for use in manufacture, shall not fall within this classification
and shall be therefore subject to duties, taxes and other charges;
Exemptions from VAT
List of VAT-exempt transactions

e. Services subject to percentage tax under Title V;

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

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

h. Educational services rendered by private educational institutions, duly accredited by the

Department of Education (DepEd), the Commission on Higher Education (CHED), the Technical
Education and Skills Development Authority (TESDA) and those rendered by government
educational institutions;

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

Exemptions from VAT
List of VAT-exempt transactions

j. Services rendered by regional or area headquarters established in the Philippines by multinational

corporations which act as supervisory, communications and coordinating centers for their
affiliates, subsidiaries or branches in the Asia-Pacific Region and do not earn or derive income
from the Philippines;

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

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

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

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

Importation by non-agricultural, non-electric and non-credit cooperatives of machineries and

equipment, including spare parts thereof, to be used by them are subject to VAT.

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

Exemptions from VAT
List of VAT-exempt transactions

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 Urban Development and Housing Act of 1992, residential lot valued at P1,500,000 and below,
house and lot and other residential dwellings valued at P3,199,200 and below;

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.

q. Lease of a residential unit with a monthly rental not exceeding P15,000;

Exemptions from VAT
List of VAT-exempt transactions

r. Sale, importation, printing or publication of books and any newspaper, magazine, journal, review
bulletin or any such educational reading material covered by the UNESCO agreement on the
Importation of Educational, Scientific and Cultural Materials, including digital or electronic format
thereof, Provided, that the materials enumerated herein are not devoted principally to the
publication of paid advertisements;

s. Transport of passengers by international carriers;

t. Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment
and spare parts thereof for domestic or international transport operations;

u. Importation of fuel, goods and supplies by persons engaged in international shipping or air
transport operations; Provided, it will be used for international shipping or air transport operations.
Exemptions from VAT
List of VAT-exempt transactions

v. Services of bank, non-bank financial intermediaries performing quasi-banking functions, and other
non-bank financial intermediaries; and

w. Sale or lease of goods and services to senior citizens and persons with disability, as provided
under RA 9994 and 10754, respectively;

x. Transfer of property pursuant to Section 40(C)(2) of the NIRC, as amended;

y. Association dues, membership fees, and other assessments and charges collected by
homeowners associations and condominium corporations;

z. Sale of gold to BSP;

Exemptions from VAT
List of VAT-exempt transactions

aa. Sale of or importation of prescription drugs and medicines for (i) diabetes, high cholesterol, and
hypertension beginning January 1, 2021; and (ii) cancer, mental illness, tuberculosis, and kidney
diseases beginning January 1, 2021

bb. Sale of or importation of capital equipment, its spare parts and raw materials necessary for the
production of personal protective equipment for COVID-19 prevention; all drugs, vaccines and
medical devices specifically prescribed and directly used for the treatment of COVID-19; and
drugs for the treatment of COVID-19 approved by the Food and Drugs Administration for use in
clinical trials, including raw materials directly necessary for the production of such drugs.

The foregoing however will be treated as VAT exempt from January 1, 2021 to December 31,
2023.
Exemptions from VAT
List of VAT-exempt transactions

cc. Sale or lease of goods or properties or the performance of services other than the transactions
mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed
the amount of P3 million

For purposes of the threshold of Php1,919,500.00, the husband and the wife shall be considered
separate taxpayers. However, the aggregation rule for each taxpayer shall apply. For instance, if
a professional, aside from the practice of his profession, also derives revenue from other lines of
business which are otherwise subject to VAT, the same shall be combined for purposes of
determining whether the threshold has been exceeded. Thus, the VAT- exempt sales shall not be
included in determining the threshold.

Self-employed individuals and professionals availing of the 8% tax on gross sales and/or
receipts and other non-operating income, under Sections 24(A)(2)(b) and 24(A)(2)(c)(2)(a) of the
Tax Code shall also be exempt from the payment of twelve (12%) VAT.
Exemptions from VAT
Exempt persons or entities

• No provision in the VAT law expressly exempting certain persons from payment of the VAT since
indirect taxes like VAT are levied on objects or transactions.

• Exemption does not cover VAT on their purchases.

Exemptions from VAT
VAT on transactions purchased by VAT-exempt persons or entities

• VAT-exempt persons or entities cannot claim input VAT on their purchase of VATable transactions.

• The VAT forms part of the cost of purchase of the VAT-exempt persons
VAT on sale of
goods and
properties
Sale of goods and properties
Tax rate and base

There shall be levied, assessed and collected on every sale, barter or exchange of goods or
properties, a VAT of 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.
Sale of goods and properties
Meaning of “goods and properties”

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

1. Real properties held primarily for sale to customers or held for lease in the ordinary course of trade
or business;

2. The right or the privilege to use patent, copyright, design or model, plan, secret formula or
process, goodwill, trademark, trade brand or other life property or right;

3. The right or the privilege to use in the Philippines of any industrial, commercial or scientific
equipment;

4. The right or the privilege to use motion picture films, films, tapes and discs and

5. Radio, television, satellite transmission and cable television time.

Sale of goods and properties
Meaning of “gross selling price”

• 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 VAT.

• Excise tax, if any, on such goods or properties shall form part of the gross selling price.
Sale of goods and properties
Allowable deductions from gross selling price

1. Sales discount

• Determined and granted at the time of sale;

• Grant not dependent upon the happening of a future event;

• Expressly indicated in the invoice; and

• Amount thereof forming part of the gross sales recorded in the books.

2. Sales returns and allowances

• proper credit or refund was made during the month or quarter to the buyer for sales previously
recorded as taxable sales.
Sale of goods and properties
Transactions deemed sale

• No actual sale of goods took place but such transactions are subject to VAT.

• The VAT is based on the market value of the goods deemed sold as of the time of the occurrence of
the transactions or the gross selling price. 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.
Sale of goods and properties
Transactions deemed sale

Example:

ABC Retailer purchased 100 pairs of shoes from its distributors at P50 per pair or a total of P5,000,
exclusive of VAT. ABC Retailer sells the same pair to the public at P80 per pair, exclusive of VAT.
Supposed during the year, management decided to give 1 pair to 10 salesmen. The rest were sold to
the public.

Compute the VAT payable.

Sale of goods and properties
Transactions deemed sale

Answer:

Output tax (P80 x 12% x 100) P960

Input tax (P50 x 12% x 100) 600

VAT payable P360

Sale of goods and properties
Transactions deemed sale

Answer: (Supposed the distribution is not considered as deemed sale)

Output tax (P80 x 12% x 90) P864

Input tax (P50 x 12% x 100) 600

VAT payable P264

Sale of goods and properties
Transactions deemed sale

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

2. Distribution or transfer to shareholders or investors as share in the profits of the VAT-registered

persons, or, 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;

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.
VAT on sale of
services and use of
lease of properties
Sale of services
Tax rate and base

There shall be levied, assessed and collected a value-added tax equivalent to 12% of gross receipts
derived from the sale or exchange of services, including the use or lease of properties.
Sale of services
Meaning of “sale or exchange of services”

It means the performance of all kinds of services in the Philippines for others for a fee, remuneration or
consideration.
Sale of services
Meaning of “gross receipts”

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.
Sale of services
Requirements of taxability of services

1. The service must be performed in the course of trade or business.

2. It must be performed in the Philippines.

3. Consideration must be received actually or constructively.

4. The transaction is not exempt under the Tax Code, special laws or international agreements.
Lease of properties
Applicability of VAT

In general, all forms of lease of properties held primarily for lease to customers in the ordinary course
of trade or business shall be subject to VAT, except:

1. In case of lease of residential units:

a. Where the monthly rental does not exceed P15,000, regardless if the annual rental exceeded
P3 million or not; or

b. Where the monthly rental exceeded P15,000 but the annual rental does not exceed P3 million;

2. In case of lease other properties other than residential units where the aggregate rentals during the
year do not exceed P3 million.
Lease of properties
Advance payments and security deposits

Advance rentals are subject to VAT when received regardless of whether the lessor is using the
accrual or the cash method of accounting.

Security deposits, when received by the lessor, should be treated as a liability at the time of receipt
and will only be recognized as income which is subject to VAT at the time of the application to lease.
Zero-rated sales
Zero-rated sales
Nature of zero-rated sales

A zero-rated sale of goods or properties, and services (by a VAT-registered person) is a taxable
transaction for VAT purposes, but shall not result in any output tax. However, the input tax on
purchases of goods, properties or services related to such zero-rated sale shall be available as tax
credit or refund in accordance with existing regulations.
Zero-rated sales
Type of zero-rated sales

1. Automatic zero-rated

• primarily intended to be enjoyed by the seller who is directly and legally liable for the VAT,
making such seller internationally competitive by allowing the refund or credit of input taxes that
are attributable to export sales;

2. Effectively zero-rated

• The term ‘effectively zero-rated sale of goods and properties’ shall refer to the local sale of
goods and properties by a VAT- registered person to a person or entity who was granted
indirect tax exemption under special laws or international agreement.

• intended to benefit the purchaser who, not being directly and legally liable for the payment of
the VAT, will ultimately bear the burden of the tax shifted by the suppliers.
Zero-rated sales
Examples of automatic zero-rating

1. Export sales [Sec. 4.106-5(a), RR 16-05 ] - Sales of goods, properties or services made by VAT-
registered supplier to a BOI-registered manufacturer/producer whose products are 100%
exported are considered export sales subject to VAT at zero percent (0%) rate [BIR Ruling No.
DA-(015)067-09, February 06, 2009]

2. Sales to PEZA registered companies - Sales of services to PEZA-registered enterprises should

be performed within the ecozone to qualify for 0% VAT rating; otherwise, the same should be
subject to 12% VAT. (DA-(VAT)-008) 019-09

3. Services rendered to persons engaged in business conducted outside the Philippines or to a

nonresident person not engaged in business outside the Philippine, the consideration for which is
paid for in foreign currency accounted for with BSP rules;

4. Services rendered to persons engaged in international shipping or air transport operations

[Sec.108(b)(4), Tax Code]
Zero-rated sales
Examples of effectively zero-rating

1. Sales to persons or entities deemed tax-exempt under special law or international agreement
such as ADB or IRRI. [Section 4.106-5(c), RR 16-05]

ASIAN DEVELOPMENT BANK INTERNATIONAL RICE RESEARCH INSTITUTE

2. Sales to Bureau of Export Trade Promotion (BETP)-accredited exporters who generate at least
70% of their revenues from export sales (BIR Ruling No. 010-2009, May 08, 2009)
Zero-rated sale of
goods
Zero-rated sales of goods or properties
Types of zero-rated sales of goods/properties

A. Export sales - means:

• The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of
any shipping arrangement that may be agreed upon which may influence or determine the
transfer of ownership of the goods so exported and paid for in acceptable foreign currency or
its equivalent in goods or services, and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);

• Sale and delivery of goods to (i) registered enterprises within a separate customs territory as
provided under special laws and (ii) registered enterprises within tourism enterprise zones as
declared by the Tourism Infrastructure and Enterprise Zone Authority (TIEZA) subject to the
provision of The Tourism Act of 2009.

B. 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.
Zero-rated sales of goods or properties
Types of zero-rated sales of goods/properties

The following sales by a VAT-registered taxpayers are considered zero-rated but will be subject to
12% VAT upon satisfaction of the following conditions: (i) the successful establishment and
implementation of an enhanced VAT refund system that grants and pays refund of creditable input tax
within 90 days from the thew filing of the VAT refund application with the BIR; and (ii) cash refund by
December 31, 2019 of all pending VAT refund claims as of December 31, 2017:

• The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or
international air transport operations: Provided, That the goods, supplies, equipment and fuel
shall be used for international shipping or air transport operations.

• Sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident
local export-oriented enterprise to be used in manufacturing, processing, packing or repacking
in the Philippines of the said buyer’s goods and paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the BSP;
Zero-rated sales of goods or properties
Types of zero-rated sales of goods/properties

The following sales by a VAT-registered taxpayers are considered zero-rated but will be subject to
12% VAT upon satisfaction of certain conditions:

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

• Those considered export sales under Executive Order No. 226, otherwise known as the
Omnibus Investment Code of 1987, and other special laws.
Zero-rated sales of
services
Zero-rated sales of services
List of zero-rated sales of services

A. 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 BSP;

B. 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;

C. Services rendered to persons engaged in international shipping or international air transport

operations, including leases of property for use thereof;
Zero-rated sales of services
List of zero-rated sales of services

D. Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country;

E. 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; and

F. Services rendered to (i) registered enterprises within a separate customs territory as provided
under special laws; and (ii) registered enterprises within tourism enterprise zones as declared by
TIEZA subject to the provisions under The Tourism Act of 2009.
Zero-rated sales of services
List of zero-rated sales of services

The following sales by a VAT-registered taxpayers are considered zero-rated but will be subject to
12% VAT upon satisfaction of the following conditions: (i) the successful establishment and
implementation of an enhanced VAT refund system that grants and pays refund of creditable input tax
within 90 days from the thew filing of the VAT refund application with the BIR; and (ii) cash refund by
December 31, 2019 of all pending VAT refund claims as of December 31, 2017:

A. 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
BSP;

B. Services performed by subcontractors and/or contractors in processing, converting, or

manufacturing goods for an enterprise whose export sales exceed 70% of total annual
production;
VAT on
importations
VAT on importation
Definition of terms

Importation - the act of bringing goods and merchandise into a country from a foreign country

Importer - refers to any person who brings goods into the Philippines, whether or not made in the
course of trade or business. It includes non-exempt persons or entities who acquire tax-free imported
goods from exempt persons, entities or agencies.
VAT on importation
Scope of VAT on importation

There shall be levied, assessed and collected on every importation of goods a VAT whether the
importation is for:

1. Sale

2. For use in business, or

3. For personal use

VAT on importation
Tax base and tax rate

A 12% VAT is imposed on the total value used by the Bureau of Customs in determining tariff and
customs duties, plus excise taxes, if any, and other charges which shall be paid prior to the release of
the goods from customs custody.

Where the customs duties are determined on the basis of the quantity or volume of the goods, the
VAT shall be based on the landed cost plus excise tax, if any.

Landed costs consist of invoice amount, customs duties, freight, insurance and other charges. If the
goods imported are subject to excise tax, the excise tax shall form part of the tax base.

The payment of tax shall be made by the importer prior to the release of such goods from customs
custody.
VAT on importation
Tax base and tax rate - Landed cost

• Dutiable value (which includes cost of goods, freight, insurance, other charges and costs to bring
goods herein)

• Other in-land costs such as bank charges, brokerage fee, arrastre charge, wharfage due,
documentary stamp tax, import processing

• Custom duty (it is computed as follows: Dutiable value x Exchange rate x Rate of duty)
VAT on importation
Transfer of goods by tax-exempt persons

When a person who was exempt from the VAT on his importation subsequently sells (transfers or
exchanges) in the Philippines such imported article to a non-exempt person or entity, the purchaser
(transferee or assignee) will be required to pay the VAT.
VAT on importation
Special matters concerning Ecozone Locators

• Ecozones are designated places of economic activity for the production of goods or services for
the export market. By legal fiction, economic zones are considered foreign countries and are
deemed outsides customs territory.

• Thus, the importation of goods into the economic zones by locators is exempt not only from VAT
on importation but also from customs duties.

• The exemption from VAT covers any goods, supplies or machineries brought into the ecozones by
locators.

• The purchase from economic zone such as but not limited to, Subic-Ecozone, Zambo-Ecozone
and Cagayan-Ecozone is subject to VAT on importation.
VAT on purchase of services from NRFC
Tax base and tax rate

A 12% final withholding on VAT (FVAT) is imposed on every purchase of services from non-resident
foreign corporations provided that the services were rendered in the Philippines.

The buyer or the withholding agent shall be liable to withhold the VAT on its purchase and remit the
same to the BIR on or before the 10th of the month following the close of the taxable month.
Sales to
government
entities and
instrumentalities
Sales to government agencies and instrumentalities
Tax base and tax rate

A 12% VAT is imposed on every sale, barter, exchange, or lease of goods and properties, and sale of
services on the gross receipts and/or gross selling price by a VAT-registered person to government
agencies and its instrumentalities.

However, the government or any of its political subdivisions, instrumentalities or agencies, including
government-owned or controlled corporations (GOCCs) shall deduct and withhold 5% final VAT
before making payment on account of each purchase.

Provided however, that payments for purchase of goods and services arising from projects funded by
Official Development Assistance (ODA) shall not be subject to the Final/Creditable Withholding Taxes .

Output and Input VAT

Definition of terms

Output tax - the VAT due on the sale or lease of taxable goods or properties or services by any person
registered or required to register under the Tax Code. Also referred to as “Output VAT”

Input tax - the VAT 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. Also referred to as “Input VAT”

VAT payable - the excess of the output tax over the allowable input tax.
Output and Input VAT
Determination of Tax

Base
Sale of services / lease of goods 12% of gross receipts
Sale of goods 12% of gross selling price less allowable deductions
Importation of goods 12% of total value by BOC

If the price of the services or goods is inclusive of VAT, output/input tax is computed by multiplying 3/28
to the price of the services or goods.

If the price of the services or goods is inclusive of VAT, taxable base is computed by multiplying 25/28 to
the price of the services or goods.
Output and Input VAT
Determination of Tax

Compute the output/input tax of the following

Case A - if VAT exclusive Case B - if VAT inclusive

Sales of goods 1,600,000 1,600,000
Purchase of goods for sale 1,000,000 1,000,000
Output and Input VAT
Determination of Tax

Answer:

Case A - VAT exclusive Case B - VAT exclusive

Sales of goods 1,600,000 1,600,000
Multiply by VAT rate 12% 3/28
Total output tax 192,000 171,429
Total tax base 1,600,000 1,428,571

Case A - VAT exclusive Case B - VAT exclusive

Purchase of goods for sale 1,000,000 1,000,000
Multiply by VAT rate 12% 3/28
Total input tax 120,000 107,143
Total tax base 1,000,000 892,857
Allowable
Allowable input tax credit

A VAT-registered person is entitled to credit input taxes evidenced by VAT invoices or official receipts
issued in accordance with the Tax Code on the following against his/her output tax:

1. Purchase of domestic services in which a VAT has actually been paid;

2. Purchase or importation of goods

3. Transitional input tax

4. Presumptive input tax

5. VAT withheld on services rendered by non-residents and sales to government entities

6. Excess input tax carry-over

Allowable input tax credit
Domestic purchase of services

12% VAT on the domestic purchase of services from a VAT-registered entity.

Example:

- Professional fees of auditors

- Legal services

- Commissions
Allowable input tax credit
Domestic purchase or importation of goods other than capital
goods

12% VAT on the domestic purchase or importation of goods other than capital goods from a VAT-
registered entity.

Example:

- Purchase of office supplies

- Inventories

- Raw materials
Allowable input tax credit
Domestic purchase or importation of capital goods

12% VAT on the domestic purchase from a VAT-registered entity or importation of capital goods.

Example:

- Purchase of land and building

- Furniture and fixtures

- Computer equipment

If the aggregate costs of capital goods, exclusive of VAT, exceeded P1,000,000.00 in a calendar
month, regardless of the acquisition cost of each capital good, the input tax shall be amortized over
the period of its useful life or 60 month, whichever is shorter.
Allowable input tax credit
Domestic purchase or importation of capital goods

The amortization of the input VAT shall only be allowed until December 31, 2021 after which taxpayers
with unutilized input VAT on capital goods purchased or imported shall be allowed to apply the same
as scheduled until fully utilized.

In other words, beginning January 1, 2022, the input tax on the purchase or importation of capital
goods may be claimed as input tax in whole without the need to amortize.
Allowable input tax credit
Domestic purchase or importation of capital goods

Example:

Case C

ABC Corporation bought computer equipment worth P2 million, exclusive of VAT, in Feb. 3, 2021, with
a useful life of 3 yrs. Compute for the input tax credit for the month of Feb, Mar and Apr.

Case D

Supposed ABC Corporation bought the computer equipment on Feb. 3, 2022. What is the input tax
credit allowed for the months of Feb, Mar and Apr 2022?
Allowable input tax credit
Domestic purchase or importation of capital goods

Answer:

The total input tax from the purchase of the computer equipment is P240,000 (P2 million x 12%)

Case C

The input tax credit for Feb, Mar and April 2021 is P6,666.67, respectively (P240,000 / 36 months)

Case D

The input tax for Feb 2022 is P240,000.00 and none for Mar and Apr 2022.
Allowable input tax credit
Domestic purchase or importation of capital goods

If the capital good is sold prior to the exhaustion of the input tax, the entire unamortized input tax on
the capital good sold can be claimed as input tax credit during the month/quarter when the sale was
made.
Allowable input tax credit
Purchase of services from non-residents

12% final withholding on VAT on the gross purchase of services from non-residents performing
services in the Philippines.

Case E

QRS Inc requires the services of LMN Ltd, a corporation domiciled in Japan, in repairing the Angat
Dam. QRS Inc agreed to pay P3.2 million for the services. Supposed LMN Ltd deployed its engineers
to the Philippines to check the condition of the dam. Compute for the VAT.

Case F

Supposed LMN Ltd provided consultancy services via email based on the pictures and videos
provided by QRS Inc. Compute for the VAT.
Allowable input tax credit
Purchase of services from non-residents

Answer:

Case E

Since the services were rendered in the Philippines, QRS Inc should withhold 12% FVAT on its
payments to LMN Ltd or P384,000. The VAT withheld can be used as input tax credit against output
tax.

Case F

QRS Inc is not liable to withhold 12% FVAT on its payments since the services were rendered outside
the Philippines.
Allowable input tax credit
Transitional input tax

A transitional input tax happens on 2 occasions:

1. When a person becomes liable to VAT upon exceeding gross sales/receipt of P3 million; or

2. When a person voluntarily registers as a VAT entity even if the gross sales/receipt does not
exceed P3 million (except franchise grantees of radio and television broadcasting whose
threshold is P10 million)
Allowable input tax credit
Transitional input tax

Transitional input tax are only for beginning inventories, which include the following:

a. Goods purchased for resale

b. Materials purchased for further processing, but which have not yet undergone processing

c. Goods which have been manufactured by the taxpayer

d. Goods in process for sale

e. Goods and supplies for use in the course of trade or business as a VAT-registered person
Allowable input tax credit
Transitional input tax

The allowable transitional input tax shall be the higher between:

1. 2% of the value of the beginning inventory of goods, materials and supplies; or

2. The actual VAT paid on such goods, materials and supplies.

Exempt goods, materials and supplies are not included in the beginning balance in the computation
of the transitional input tax.
Allowable input tax credit
Transitional input tax

Example: Case G

Pa-feels Trading voluntarily registered to VAT on Apr 1 of the current year. The value of its beginning
inventory of goods, materials and supplies is P570,000. The VAT paid on such inventory amount to
P16,000. How much is the transitional input tax?

Answer:
On the beginning inventory (P570,000 x 2%) 11,400
Actual VAT paid 16,000
Transitional input tax (higher) 16,000
Allowable input tax credit
Transitional input tax

Example: Case H

Pa-feels Trading voluntarily registered to VAT on Apr 1 of the current year. The value of its beginning
inventory of goods, materials and supplies is P570,000, of which P60,000 was bought from a VAT-
exempt person. The VAT paid on such inventory amount to P10,000. How much is the transitional
input tax?

Answer:

On the beginning inventory (P510,000 x 2%) 10,200

Actual VAT paid 10,000
Transitional input tax (higher) 10,200
Allowable input tax credit
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.

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.
Allowable input tax credit
Presumptive input tax

Example: Case I

Zaragoza Corp is engaged in the production of Spanish canned sardines. In July, the company
purchased P450,000 of vegetables for the canned sardines, P1,500,000 sardines, processed them
and sold to public amounting to P3,500,000.00 inclusive of VAT. Cost of canning and labeling
materials is P224,000.00 inclusive of VAT. How much is the presumptive input tax? How much is the
VAT payable?
Allowable input tax credit
Presumptive input tax

Answer:

The presumptive input tax is P18,000 (P450,000 x 4%)

Output tax (P3,500,000 x 3/28) 375,000

Less: Creditable input taxes
Presumptive input tax 18,000
Input tax on purchase of materials (P224,000 x 3/28) 24,000
VAT payable 333,000
Allowable input tax credit
Excess input tax carry-over

Excess input tax carry-over is the result of when the allowable input tax exceeded the output tax for
the period.

Example: Case J

Supposed in the previous example (Case I), Zaragoza Corp has an excess input tax carry-over of
P300,000. How much is the VAT payable? What if the excess input tax carry-over is P350,000. How
much is the VAT payable?
Allowable input tax credit
Excess input tax carry-over

If excess input is If excess input is

P300,000 P350,000

Output tax (P3,500,000 x 3/28) 375,000 375,000

Less: Creditable input taxes
Presumptive input tax 18,000 18,000
Input tax on purchase of materials (P224,000 x 3/28) 24,000 24,000
Excess input tax carry-over 300,000 350,000
VAT payable/ Excess input tax carry-over 33,000 -17,000
Allowable input tax credit
Apportionment of Input Tax on Mixed Transactions

VAT-registered person who is also engaged in transactions not subject to VAT shall be allowed to
recognize input tax credit on transactions subject to VAT as follows:

1. All the input taxes that can be directly attributed to transactions subject to VAT may be recognized
for input tax credit; Provided, that input taxes that can be directly attributable to VAT taxable sales
of goods and services to the Government or any of its political subdivisions, instrumentalities or
agencies, including GOCCs shall not be credited against output taxes arising from sales to non-
Government entities;

2. If any input tax cannot be directly attributed to either a VAT taxable or VAT-exempt transaction, the
input tax shall be pro-rated to the VAT taxable and VAT-exempt transactions and only the ratable
portion pertaining to transactions subject to VAT may be recognized for input tax credit.
Allowable input tax credit
Apportionment of Input Tax on Mixed Transactions

The total input tax shall be apportioned by the following formulas:

Taxable sales subject to 12% VAT

x Input tax = Input tax creditable to sales subject to 12% VAT
Total sales

Taxable sales subject to 0% VAT

x Input tax = Refund of excess input tax or tax credit certificate
Total sales

Taxable sales to gov’t

x Input tax = Input tax creditable up to 5%
Total sales

Exempt sales
x Input tax = Expense or cost
Total sales
Allowable input tax credit
Apportionment of Input Tax on Mixed Transactions

Example: Case K

Uno Corporation has the following sales during the month:

Sales to private entities subject to 12% 100,000

Zero-rated sales 100,000
Exempt sales 100,000
Sales to gov’t 100,000
Total sales 400,000
Allowable input tax credit
Apportionment of Input Tax on Mixed Transactions

Example: Case K (continuation)

Uno Corporation has the following input tax passed on by its suppliers

Input tax on goods sold to private entities at 12% 5,000

Inpu tax on goods sold as zero-rated sales 3,000
Input tax on the goods sold as exempt sales 2,000
Input tax on goods sold to gov’t 4,000
Input tax on equipment attributable to any activities
20,000
(useful life of 60 months)

Compute for the input tax attributable to each sale and the total VAT payable.
Allowable input tax credit
Apportionment of Input Tax on Mixed Transactions

Answer: (Input tax)

1. Total input tax attributable to sales subject to 12%

Input tax on goods sold to private entities at 12% 5,000

Add: Allocable input tax not directly attributable to 12%
Taxable sales subject to 12% 100,000
Divided by total sales 400,000
Allocable rate 0.25
Multiply by input tax not directly attributable 20,000 5,000
Total input tax attributable to sales subject to 12% 10,000
Allowable input tax credit
Apportionment of Input Tax on Mixed Transactions

Answer: (VAT Payable)

1. VAT payable on sales subject to 12% VAT

Total output tax (P100,000 x 12%) 12,000

Less: Total input tax attributable to sales subject to 12% VAT 10,000
VAT payable on sales subject to 12% VAT 2,000
Allowable input tax credit
Apportionment of Input Tax on Mixed Transactions

Answer: (Input tax)

2. Total input tax attributable to zero-sales

Input tax on goods sold as zero-rated 3,000

Add: Allocable input tax not directly attributable to 12%
Taxable sales subject to 12% 100,000
Divided by total sales 400,000
Allocable rate 0.25
Multiply by input tax not directly attributable 20,000 5,000
Total input tax attributable to sales subject to 12% 8,000
Allowable input tax credit
Apportionment of Input Tax on Mixed Transactions

Answer: (VAT Payable)

2. No VAT payable on zero-sales

Total output tax (P100,000 x 0%) 0

Less: Total input tax attributable to zero-sales subject to 12% VAT 8,000
Excess input tax (for refund) -8,000
Allowable input tax credit
Apportionment of Input Tax on Mixed Transactions

Answer: (Input tax)

3. Total input tax attributable to exempt sales

Input tax on goods sold as exempt 2,000

Add: Allocable input tax not directly attributable to 12%
Taxable sales subject to 12% 100,000
Divided by total sales 400,000
Allocable rate 0.25
Multiply by input tax not directly attributable 20,000 5,000
Total input tax attributable to sales subject to 12% 7,000
Allowable input tax credit
Apportionment of Input Tax on Mixed Transactions

Answer: (VAT Payable)

3. No VAT payable on exempt sales

Total output tax (P100,000 x 0) 0

Less: Total input tax attributable to exempt sales -7,000
Input tax charged to expense 7,000
Allowable input tax credit
Apportionment of Input Tax on Mixed Transactions

Answer: (Input tax)

4. Total input tax attributable to sales to gov’t

Input tax on goods sold to gov’t 4,000

Add: Allocable input tax not directly attributable to 12%
Taxable sales subject to 12% 100,000
Divided by total sales 400,000
Allocable rate 0.25
Multiply by input tax not directly attributable 20,000 5,000
Total input tax attributable to sales subject to 12% 9,000
Allowable input tax credit
Apportionment of Input Tax on Mixed Transactions

Answer: (VAT Payable)

4. VAT payable on sales to gov’t

Total output tax (P100,000 x 12%) 12,000

Less: Total input tax withheld by gov’t (P100,000 x 5%)* 5,000
VAT payable on sales subject to 12% VAT 7,000

The 5% withheld by the gov’t become a creditable VAT against the output tax of Uno Corporation,
even though the total input tax attributable is P9,000.00