Tax 302 – Business and Transfer Tax

Prepared by: Mark Paul I. Ramos

MODULE 2
Classification of VAT Transactions
VAT on Sale of Goods or Properties

INTRODUCTION
This module tackles the application of Value-Added Taxes on certain
transactions, in particular VAT on sale of goods or properties. This will define what
goods or properties are subject or exempted from VAT, kinds of VAT treatments
applicable, its output taxes on the side of the seller and its input taxes on the side of
the buyer.

INTENDED LEARNING OUTCOMES

ILO 1 – Be knowledgeable on the VAT on sale of goods or properties
ILO 2 – Understanding of VAT principles on certain transactions, and rules on output
tax, input tax and VAT payable
ILO 3 – Application of those VAT principles in computing and problem solving

Tax rate and Tax base

There shall be levied, assessed, and collected on every sale, barter or
exchange of goods or properties, a value-added tax equivalent to 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.

The tax base refers to amount on which the 12% rate of VAT is applied.

Thus, if the seller sells goods (in cash or on account) amounting to P100,000
(excluding the tax), this amount will serve as the tax base in computing the tax.

The amount of value-added tax (output tax on the seller and input tax on the
buyer) is computed as follows:

1. If the amount includes the tax

VAT = P112,000 x (12%/112%) = P12,000
or
VAT = P112,000 x 3/28 = P12,000

2. If the amount does not include the tax

VAT = P100,000 x 12% = P12,000

Common query: For purposes of computing the VAT, when shall we multiply
the tax base by 12% or by 3/28 (or 12%/112%)?

1|Page
 Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos

Answer: The tax base shall be multiplied by 3/28 (or 12%/112%) if the problem
states that the amount is “inclusive of tax”, “total invoice price”, “VAT inclusive” or other
similar terms.

It shall be multiplied by 12% if the problem indicates that the amount is

“taken from the books”, “exclusive of tax”, “VAT/tax not included”, “gross selling price”,
“gross receipts” and other similar items.

Basis in Computing the 12% Output VAT

Sale of Basis
Goods Gross sales
Services Gross sales
(prior to EOPTA – Gross receipts)
Securities Gross income
Real Properties Gross selling price or fair market
value, whichever is higher

Meaning of “goods or properties”

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 life
property or right
c. The right or the privilege of use in the Philippines of any industrial,
commercial, or scientific equipment
d. The right or the privilege to use motion picture films, films, tapes, and discs,
and
e. Radio, television, and satellite transmission and cable television time

Meaning of “gross selling price”

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 (Sec 106, NIRC).

In the case of sale, barter or exchange of real property subject to VAT, gross
selling price shall mean the consideration stated in the sales document or zonal value,
whichever is higher. In the absence of the zonal value, gross selling price refers to the
market value shown in the latest declaration or the consideration, whichever is higher.
2|Page
 Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos

Deduction from gross selling price

The following shall be allowed as deductions from gross selling price in
computing the tax base during the month or quarter:
a. Sales returns and allowances – for which a proper credit was made during
the month or quarter to the buyer for sales previously recorded as taxable
sales
b. Sales discounts – discounts determined and granted at the time of sale,
which are expressly indicated in the invoice, the amount thereof forming part
of the gross sales duly recorded in the books of accounts

Sales discount indicated in the invoice at the time of sale, the grant of which is
not dependent upon the happening of a future event, may be excluded from the gross
sales within the same month/quarter it was given.

Illustration
The following data were taken from the books of Tiberio Company during the month
of April of the current year:
Cash Sales P453,200
Sales on account 565,800
Sales returns and allowances 31,548
Sales discount 35,250

Required: Compute for the gross selling price and the tax base.
Cash Sales 453,200.00
Sales on account 565,800.00
Gross Selling Price 1,019,000.00
Less: Sales returns and allowances 31,548.00
Sales Discount 35,250.00 66,798.00
Tax Base 952,202.00

1. Gross selling price includes all sales made during the period whether cash
sales or sales on account
2. Sales discounts shall only be allowed as deduction from gross selling price if it
is indicated in the sales invoice
3. In the absence of sales returns and allowances and sales discounts, the tax
base shall be the gross selling price

Determination of the tax

The 12% tax shall be computed by multiplying the total amount in the invoice
by 3/28 (or 12%/112%).

The VAT payable is determined by deducting the input tax from the output tax.
Thus, the formula in computing VAT payable is:

3|Page
 Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos

Output Tax xxx

Less: Input Tax xxx
VAT Payable xx
Output tax is defined as 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
the Tax Code (Sec 110, NIRC). It is also called Output VAT.

Input tax refers to value-added tax 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 is also
called Input VAT.

VAT payable refers to the excess of the output tax over the allowable input tax.
In the case of importation, it is the value-added tax due on such importation.

Transitory Provisions (upon effectivity of EOPTA)

- Formula in computing VAT Payable (upon effectivity of EOPTA)
Gross Sales (regardless if sale of goods or services) Pxx
Multiply by VAT rate (in general 12%; unless subject to 0% VAT) 12%
OUTPUT VAT Pxx
Less:
- INPUT VAT on purchases of goods and services xx
- Creditable VAT withheld by the government xx
- Creditable VAT withheld on payments to nonresidents xx
- Creditable VAT on uncollected receivables under EOPTA xx (xx)
VAT Payable under EOPTA Pxx

The EOPTA adopts the accrual basis of recognizing sales for both sales of goods and
services, including transactions to government or any of its political subdivisions,
instrumentalities or agencies, and government-owned or - controlled corporations (GOCCs).
Hence, all references to "gross selling price", "gross value in money", and "gross receipts"
shall now be referred to as the "GROSS SALES", regardless of whether the sale is for goods
under Section 106, or for services under Section 108, of the Tax Code.

GROSS SALES under the EOPTA refers to 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 during the taxable period for the
services performed for another person, which the purchaser pays or is obligated to pay to the
seller in consideration of the sale, barter, or exchange of services that has already been
rendered by the seller and the use or lease of properties that have already been supplied by
the seller, excluding VAT and those amounts earmarked for payment to third (3rd) party or
received as reimbursement for payment on behalf of another which do not redound to the
benefit of the seller as provided under relevant laws, rules or regulations: Provided, that for
long-term contracts for a period of one (1) year or more, the invoice shall be issued on the
month in which the service, or use or lease of properties is rendered or supplied.

4|Page
 Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos

Creditable VAT on uncollected receivables

RR 3-2024 implementing the Vat and Percentage Tax provisions of RA 11976
or the EOPTA provides that a seller of goods or services may deduct the output VAT
pertaining to uncollected receivables from its output VAT on the next quarter, after the
lapse of the agreed upon period to pay: Provided that, the seller has fully paid the VAT
on the transaction: provided further, that the VAT component of the uncollected
receivables has not been claimed as allowable deduction under Section 34(E) of the
Tax Code.

Uncollected Receivable refers to sales of goods and/or services on account that

transpired upon the effectivity of RR 3-2024 which remain uncollected by the buyer
despite the lapse of the agreed period to pay.

To be entitled to VAT credit, the following requisites must be present:

1. The sale or exchange has taken place after the effectivity RR 3-2024;
2. The sale is on credit or on account;
3. There is a written agreement on the period to pay the receivable, ie. credit
term is indicated in the invoice or any document showing the credit term;
4. The VAT is separately shown on the invoice;
5. The sale is specifically reported in the Summary List of Sales covering the
period when the sale was made and not reported as part of "various" sales;
6. The seller declared in the tax return the corresponding OUTPUT VAT;
indicated in the invoice within the period prescribed under existing rules;
7. The period agreed upon, whether extended or not, has elapsed; and
8. The VAT component of the uncollected receivable was not claimed as
deduction from gross income (i.e. bad debt).

In case of recovery of uncollected receivables, the output VAT pertaining

thereto shall be added to the output VAT of the taxpayer during the period of recovery.

The rules pertaining to tax credit of output vat on uncollected receivables do not
amend on the conditions of deductibility of bad debt expenses in the income tax returns
as provided in RR 25-2002.

Transitory Provisions
1. Billed but uncollected sale of services.
For outstanding receivables on services on account that are rendered prior to
the effectivity of RR 3-2024, the corresponding output VAT shall be declared once it
has been collected. In case of collection, the sales and corresponding output vat
therefrom shall be declared in the quarterly vat return when the collection was made
and shall be supported by an Invoice following the transitory provisions contained i n
the regulation intended for invoicing requirements to implement EOPTA or the new
BIR-approved set of invoices, whichever is applicable.

5|Page
 Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos

2. Uncollected Receivables from sale of goods.

Under RR 3-2024, claim of output tax credit on uncollected receivables shall
only apply to transactions that transpired upon the effectivity of RR 3-2024. No output
tax credit shall be allowed for outstanding receivables from sale of goods on account
prior to the effectivity of said regulation.

OUTPUT VAT

Actual Sale Transaction

Zero Rated
(Domestic Deemed Output VAT
Sales (0%)
Sales) Sale

1. Actual Sale
Sales where there are actual exchanges between buyer(s) and a seller(s) in the
ordinary course of trade or business including transactions incidental thereto, by any
person, regardless of whether or not the person engaged therein is a non-stock, non-
profit private organization or government entity (Section 105 of the Tax Code, as
amended), shall be subject to 12% vat, unless exempt under the law.

INCIDENTAL TRANSACTIONS
As discussed in Module 1, "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 non-stock, non-profit private organization or government
entity (Section 105 NIRC; Section 4.105-3 of RR 16-2005).

2. Transactions Deemed Sale

In transactions deemed sale, no actual sale of goods took place, but such
transactions are subject to VAT. The rationale is to recapture the VAT that was already
claimed as input tax.

In a transaction deemed sale, the input VAT was already used by the seller as
a credit against the output VAT. However, since there was no actual sale, no output
VAT is actually charged to customers. Consequently, the State will be deprived of its
right to collect the output VAT. To avoid a situation where a VAT registered taxpayer
avail of input VAT credit without being liable for the corresponding output VAT, certain
transactions should be considered sales even in the absence of actual sale.

6|Page
 Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos

Illustration During the year, Mars Footstep, a shoe store, purchased 100 pairs of
shoes from its distributor. Each pair is worth P784 and sold by the shoe store at
P1,120. During the month, the management decided to give one pair of shoes each to
the ten salesladies. All the other 90 pairs were sold by the store.

Required:
1. VAT Payable by Mars Footstep
Output tax (P1,120 x 100pairs) x 3/28 = P12,000
Less: Input tax (P784 x 100 pairs) x 3/28 = 8,400
VAT Payable P 3,600

2. VAT payable assuming that the distributions of shoes to salesladies

are not deemed sale transactions
Output tax (P1,120 x 90 pairs) x 3/28 = P10,800
Less: Input tax (P784 x 100 pairs) x 3/28 = 8,400
VAT Payable P 2,400

3. For whose advantage are deemed sale transactions – to the taxpayer

or to the government?
It is advantageous to the government because it can recapture
the input taxes that are creditable from output taxes of the other
goods that were sold by the business.

As seen in Solution 1, in transaction deemed sale the output tax

is P12,000 which is based on the entire pairs of shoes.

However, if the distribution of shoes to salesladies are not

considered as deemed sale transactions, the output tax would
only be P10,800 but the input tax remains at P8,400. Hence the
VAT payable to the government will amount only to P2,400
instead of P3,600.

The following transactions are deemed sale for VAT purposes:

1. Transfer, use or consumption not in the ordinary course of business of
goods or properties originally intended for sale or for use in the course of
business. The basis in computing the applicable VAT shall be the fair market
value of the goods consumed.

2. Distribution or transfer to (Basis is market value):

a. Shareholders or investors as share in the profits of the VAT-
registered persons, or
b. Creditors in payment of debt or obligation

7|Page
 Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos

3. Consignment of goods if actual sale is not made within 60 days following

the date such goods were consigned. Those returned by the consignee
within the 60-day period are not deemed sold; and

4. Retirement from or cessation of business, with respect to all goods on hand

(as of the date of retirement or cessation), 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:
a. Change in ownership in the business. There is a change of ownership
in the business when a single proprietor incorporates, or the
proprietor of a single proprietorship sells his entire business
b. Dissolution of a partnership and creation of a new partnership which
takes over the business

On transactions falling under (1), (2), and (3), the output tax shall be based
on the market value of the goods deemed sold.

However, on transactions falling under (4), the tax base shall be the
acquisition cost or the current market price of the goods, whichever is lower.

RR 16-2005 as amended by RR 4-2007 provides that the VAT provided

above shall apply to goods or properties originally intended for sale or use
in the business, and capital goods which are existing as the occurrence of
the following:
1. Change of business activity from VAT taxable status to VAT-exempt status.
An example is a VAT-registered person engaged in a taxable activity
(wholesaler/retailer) who decides to discontinue such activity and engages
instead in any other business not subject to VAT.

2. Approval of a request for cancellation of registration due to reversion to

exempt status.

3. Approval of a request for cancellation of registration due to a desire to revert

to exempt status after the lapse of three (3) consecutive years from the time
of registration by a person who voluntarily registered despite being exempt
under Sec. 109 (2) of the Tax Code.

4. Approval of a request for cancellation of registration of one who

commenced business with the expectation of gross sales or receipts
exceeding P3,000,000, as amended, but who failed to exceed this amount
during the first twelve months of operation.

8|Page
 Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos

Illustration Anthony is engaged in a merchandising business. His sales invoice and

other data during the month of January are shown below:
Cash Sales 770,000.00
Sales return on cash sales 55,000.00
Account sales 495,000.00
Goods consigned:
January 10 of the current year 265,000.00
November 10 of the preceding year 16,500.00
Goods taken for personal use 18,150.00
Goods taken as payment as creditors 25,850.00
Purchases of merchandise 1,008,000.00
Purchase of supplies 89,600.00
Telephone bills on domestic calls 3,360.00

Required: 1. Output Tax

2. Input tax
3. VAT Payable
Solution

Cash sales, net (770,000 – 55,000) 715,000

Account Sales 495,000
Consigned Goods 16,500
Deemed Sale:
Goods for personal use 18,150
Payment for creditors 25,850 44,000
TOTAL 1,270,500
Multiply by 3/28
Output Tax 136,125

Less: Input Tax

Merchandise 1,008,000
Supplies 89,600
Telephone bill 3,360
TOTAL 1,100,960
Multiply by 3/28
Input Tax 117,960
VAT PAYABLE 18,165

VAT on Transaction Deemed Sale shall not be imposed on Goods or Properties

existing as of the Occurrence of the following:
a. Change of control of a corporation by the acquisition of the controlling interest
of such corporation by another stockholder or group of stockholders. The goods
or properties used in business or those comprising the stock-in-trade of the
corporation, having a change in corporate control, will not be considered sold,

9|Page
 Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos

bartered or exchanged despite the change in ownership interest in the said

corporation.

b. Change in the trade or corporate name of the taxpayer

c. Merger or consolidation of corporations. The unused input tax of the dissolved

corporation, as of the date of merger or consolidation, shall be absorbed by the
new or surviving corporation.

3. Zero-rated (0%) transactions

The tax rate imposed on taxable sales of goods or properties is 12% except on
some transactions that are zero-rated (0%).

Zero-rated transactions are still taxable transactions, but the rate has been set
at zero. Although the rate is zero, it is still a rate of tax chargeable against the
purchaser. It does not charge VAT on the output.

Any VAT-registered person, whose sales are zero-rated may, within 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, to the extent that such input
tax has not been applied against output tax.

Note that unutilized creditable input taxes attributable to zero-rated sales can
only be recovered through the application for refund or tax credit.

There is no provision in the Tax Code which provided for another mode of
recovering unapplied input taxes, particularly as deductible expense for income tax
purposes.

To be subject to zero tax rate, however, the seller must be a VAT-registered

person because if he is not VAT-registered, the transactions entered into by him are
exempt from the tax.

The following sales by VAT-registered persons are zero-rated:

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

Purpose of Zero-Rating
The zero-rated seller becomes internationally competitive by allowing the
refund or credit of input taxes that are attributable to export sales (CIR vs Seagate
Technology Phils., G.R. No. 153866, Feb 11, 2005).

10 | P a g e
 Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos

Rationale for Zero-rating of export sales:

The Philippine VAT system adheres to the “Cross Border Doctrine” (also known
as destination principle), according to which, no VAT shall be imposed to form part of
the cost of the goods destined for consumption outside of the territorial border of the
taxing authority [CIR vs Toshiba Information Equipment (Phils.), Inc., G.R. No.
150154, Aug 9, 2005].

Formula:
Gross Sales (regardless of shipping Pxx
arrangements)
Multiply by VAT rate 0%
Output VAT P0
Input VAT (xx)
VAT Payable (refundable) (Pxx)

The input VAT attributable to zero-rated (0%) sale may be:

a. Refunded; or
b. Claimed as deduction/tax credit against output VAT on domestic sales;
or
c. Claimed as tax credit (TCC) against any other internal revenue taxes.

Zero-Rated Sale
The following sales by vat-registered persons shall be subject to 0% vat under the Tax
Code, as amended (RR 21-2021 dated Dec. 3, 2021)

a) Export Sale (Zero-Rated Sale) of GOODS or PROPERTIES shall mean:

1) The sale and actual shipment of goods from the Philippines to a foreign
country, irrespective of any shipping arrangement that may be agreed upon
which may influence or determine the transfer of ownership of the goods so
exported, 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);

a. 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 exclusively
for international shipping or air transport operations;

The sale of goods, supplies, equipment and fuel to persons engaged in

international shipping or international air transport operations is limited
to goods, supplies, equipment and fuel that shall be used in the transport
of goods and passengers from a port in the Philippines directly to a
foreign port, or vice versa, without docking or stopping at any other port
in the Philippines unless the docking or stopping at any other Philippine

11 | P a g e
 Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos

port is for the purpose of unloading passengers and/or cargoes that

originated from abroad or to load passengers and/or cargoes bound for
abroad; Provided, further, that if only a portion of such fuel, goods,
supplies or equipment is used for purposes other than that mentioned in
this paragraph, such portion of fuel, goods, supplies, and equipment
shall be subject to 12% vat.

2) Sales to persons or entities whose exemption from direct or indirect taxes

under special laws or international agreements to which the Philippines is a
signatory effectively subjects such sales to zero rate; and

3) Sale of raw materials, inventories, supplies, equipment, packaging

materials, and goods to a Registered Export Enterprise (REE), to be used
directly and exclusively in its registered project or activity pursuant to
Section 294(E) and 295(D) of RA 11534 (CREATE Act), and Sec. 5, Rule 2
of its IRR for a maximum period of 17 years from the date of registration,
unless otherwise extended under the Strategic Investment Priority Plan
(SIPP). Provided, that the term “registered export enterprise” shall refer to
an export enterprise as defined under Section 4(M) Rule 1 of CREATE Act
IRR, that is also registered business enterprise as defined in Sec 4(W) of
the same IRR. Provided further, that the above described sales to existing
registered export enterprises located inside ecozones and free port zones
shall also be qualified for vat zero-rating (0%) until the expiration of the
transitory period.

Local purchases of goods relating to the following services shall NOT be

considered as “directly and exclusively used” in the registered project or
activity of a registered export enterprise, to wit:
• Janitorial services
• Security services
• Financial services
• Consultancy services
• Marketing and promotion, and
• Services rendered for administrative operations such as Human
Resources, legal, and accounting

This notwithstanding, the registered export enterprise is not precluded from further
proving, with supporting evidence, to the concerned Investment Promotion Agency (IPA) that
any of the local purchase of goods relating to the above-listed services are indeed directly and
exclusively used in its registered project or activity. In all instances, in issuing the VAT zero-
rating certification, the concerned IPA shall be guided by the rule that such local purchases of
goods are directly attributable to the registered project or activity without which such registered
project or activity cannot be carried out. These are costs that are indispensable to the project
or activity, i.e., without which the project or activity cannot proceed, and these include

12 | P a g e
 Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos
expenses that are necessary or required depending on the nature of the registered project or
activity of the export enterprise.

If the purchased goods are used in both the registered project or activity and
administrative operations, the registered export enterprise shall adopt a method to best
allocate the same. If a proper allocation could not be determined, the purchase of such goods
shall be subject to twelve percent (12%) VAT.

The VAT zero-rating ON LOCAL PURCHASES OF GOODS shall be availed of on the

basis of the VAT zero-rating certification issued by the concerned IPA, without prejudice,
however, to the conduct of post audit investigation/verification by the Bureau of Internal
Revenue (BIR) that the goods are, indeed directly and exclusively used by the registered
export enterprise in its registered project or activity.

For this purpose, local suppliers of goods of registered export enterprise shall no longer
be required to apply for approval of VAT zero-rating with the BIR. All applications with
accompanying VAT zero-rating certification issued by the concerned IPA which have been
received but have not yet acted upon by the concerned office of the BIR shall be accorded
VAT zero-rating treatment from the date of filing of such application subject to the conduct of
post audit by the BIR that the goods are indeed directly and exclusively used by the registered
export enterprise in its registered project or activity.

The concerned IPA shall furnish the BIR through the Assessment Service Attention:
Audit Information, Tax Exemption and Incentives Division (AITEID) within twenty (20) days
following the close of each taxable quarter a list of registered export enterprise issued with
VAT zero-rating certification. In order to obtain relevant information, for audit purposes, the
Commissioner of Internal Revenue may prescribe a report template in a separate revenue
issuance.

b) Export Sale (Zero-Rated Sale) of SERVICES shall mean:

1) Services other than processing, manufacturing or repacking of goods,
rendered to a person engaged in business conducted outside the
Philippines or to a non-resident 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);

2) Services to persons or entities whose exemption from direct or indirect taxes

under special laws or international agreements to which the Philippines is a
signatory effectively subjects such sales to zero rate;

3) Sale of services, including provision of basic infrastructure, utilities, and

maintenance, repair and overhaul of equipment, to a Registered Export
Enterprise (REE), to be used directly and exclusively in its registered project
or activity pursuant to Sections 294(E) and 295(D) of CREATE Act, and

13 | P a g e
 Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos

Section 5, Rule 2 of its IRR for a maximum period of seventeen (17) years
from the date of registration, unless otherwise extended under the SIPP;
Provided, That the term "Registered Export Enterprise (REE)" shall refer to
an export enterprise as defined under Section 4(M), Rule 1 of the CREATE
IRR, that is also a Registered Business Enterprise (RBE) as defined in
Section 4(W) of the same IRR: Provided further, That the above-described
sales to existing registered export enterprises located inside ecozones and
freeport zones shall also be qualified for VAT zero-rating under this sub-
item until the expiration of the transitory period;

Sale of VAT-registered suppliers to Registered Export Enterprises (REEs)

enjoying fiscal incentives under the CREATE Act shall be treated as VAT zero-
rated. However, it shall only apply to goods and/or services directly and
exclusively used in the registered project or activity of said registered export
enterprise, for a maximum period of seventeen (17) years from the date of
registration, unless otherwise extended under the Strategic Investment Priority
Plan (SIPP).

The enjoyment of VAT and duty incentives is reckoned from the registered export
enterprise's date of registration and throughout the period as indicated in its
Certificate of Registration.

The term 'date of registration" mentioned herein where the 17-year maximum
period shall be reckoned from shall refer to the date of registration of the
registered project or activity of the registered export enterprise as reflected in the
Certificate of Registration issued by the concerned investment Promotion
Agency (IPA).

4) Services rendered to persons engaged in international shipping or air

transport operations, including leases of property for use thereof. Provided,
that these services shall be exclusively for international shipping or air
transport operations. Thus, the services referred to here.in shall not pertain
to those made to 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, the same being subject to twelve percent
(12%) VAT under Sec. 108 of the Tax Code;

5) Transport of passengers and cargo by domestic air or sea vessels from the
Philippines to a foreign country. Gross receipts of international air or
shipping carriers doing business in the Philippines derived from transport of
passengers and cargo from the Philippines to another country shall be
exempt from VAT; however, they are still liable to a percentage tax of three
percent (3%) based on their gross receipts derived from transport of cargo
from the Philippines to another country as provided for in Sec. 118 of the
Tax Code; and

14 | P a g e
 Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos

6) Sale of power or fuel generated through renewable sources of energy such

as, but not limited to, biomass, solar, wind, hydropower, geothermal and
steam, ocean energy, and other emerging sources using technologies such
as fuel cells and hydrogen fuels: Provided, however, that zero-rating shall
apply strictly to the sale of power or fuel generated through renewable
sources of energy, and shall not extend to the sale of services related to the
maintenance or operation of plants generating said power.

DEFINITION OF TERMS (Based on RMC 24-2021 dated Feb. 24, 2022)

Registered Export Enterprise (REE)

• As defined under Section 4(M), Rule 1 of the CREATE IRR, an export
enterprise refers to any individual, partnership, corporation, Philippine
branch of a foreign corporation, or other entity organized and existing
under Philippine laws and registered with an Investment Promotion
Agency (IPA) to engage in manufacturing, assembling or processing
activity, and services such as information technology (IT) activities and
business process outsourcing (BPO), and resulting in the direct
exportation, and/or sale of its manufactured, assembled or processed
product or IT/BPO services to another registered export enterprise that
will form part of the final export product or export service of the latter, of
at least seventy (70%) of its total production or output. Provided,
however, that the export enterprise is also a registered business
enterprise as defined in Section 4(W) of the same IRR.

Registered Business Enterprise (RBE)

• Refers to any individual, partnership, corporation, Philippine branch of a
foreign corporation, or other entity organized and existing under
Philippine laws and registered with an Investment Promotion Agency
(IPA) excluding service enterprises such as those engaged in customs
brokerage, trucking or forwarding services, janitorial services, security
services, insurance, banking, and other financial services, consumers'
cooperatives, credit unions, consultancy services, retail enterprises,
restaurants, or such other similar services, as may be determined by the
Fiscal Incentive Review Board (FIRB), irrespective of location, whether
inside or outside the zones, duly accredited or licensed by any of the
investment promotion agencies and whose income delivered within the
economic zones shall be subject to taxes under the National Internal
Revenue Code (NIRC) of 1997 (or the Tax Code), as amended.

Direct and Exclusive use in the registered project or activity

• Direct and exclusive use in the registered project or activity refers to raw
materials, supplies, equipment, goods, packaging materials, services,
including provision of basic infrastructure, utilities, and maintenance,
repair and overhaul of equipment, and other expenditures directly
attributable to the registered project or activity without which the
registered project or activity cannot be carried out.

• Only the portion of the expense directly and exclusively used by a

registered export enterprise for its registered project or activity shall
qualify for VAT zero-rating on local purchases, excluding those used for

15 | P a g e
 Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos
administrative purposes. The registered export enterprise concerned
should adopt a method to best allocate goods or services purchased,
e.g. for utilities, use of separate water and power meters for its registered
project or activity or any method that may determine the allocation such
as area usage or ratio of utility expenses between cost of sales and
administrative expenses as reflected in the prior year Audited Financial
Statements. If the goods or services are used in both the registered
project or activity and administration purposes and the proper allocation
could not be determined, the purchase of such goods and services shall
be subject to 12% VAT.

• For this purpose, services for administrative purposes, such as legal.

accounting, and such other similar services, are not considered
expenses directly attributable to and exclusively used in the registered
project or activity.

Illustration The following data reveals the records during the month of Pip
Corporation, a VAT-registered taxpayer:
Domestic sales (invoice amount) 1,064,000
Export Sales FOB shipping point 820,000
Sales of goods to Tirso in Hong Kong, but delivered
to Pipay, a resident (payment was remitted
in dollars by Tirso thru the PNB) 75,000
Purchases of goods sold locally (inclusive of tax) 582,400
Purchases of raw materials on goods exported (net of VAT) 380,000

Required: Compute the VAT payable by Pip Corporation during the month if it decides
to claim as tax credit the input tax corresponding to the export sale.

Solution
Domestic Sales (1,064,000 x 3/28) 114,000
Export sales (820,000 x 0%) -
Foreign currency denominated sales (75,000 x 0%) -
Output Tax 114,000
Less: Input tax
Goods sold locally (582,400 x 3/28) 62,400
Materials on goods exported (380,000 x 12%) 45,600 108,000
VAT Payable 6,000

NOTES:
1. Export sales are zero rated irrespective of any shipping
arrangement that may be agreed upon (FOB shipping point or FOB
destination), which may influence or determine the transfer of
ownership of the goods so exported.
2. Although export sales and foreign currency denominated sales do
not result to any output tax, the input taxes paid on the purchase of

16 | P a g e
 Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos
such goods can be credited against the output tax due for the
taxable month.
3. The transactions such as export sales and foreign currency
denominated sales must be transacted by a VAT registered
taxpayer. If done by non-VAT registered, the sale is exempt from
tax.

Export Sale by a Non-VAT Registered Entity

Export sale by a non-vat registered entity is a vat-exempt transaction. Under Section
109 of the Tax Code, a vat exempt sale refers to sale of goods, properties or services or the
use or lease of properties that is not subject to VAT (output tax) and the seller/supplier is not
allowed any tax credit of VAT (input tax) on purchases related to such exempt transaction.

Gross Sales Pxx

Multiply by VAT rate N/A *VAT-exempt

Output VAT P0
Input VAT (xx) *not allowed

VAT Payable (refundable) -

The vat paid by non-vat registered purchasers of goods or services shall be treated by
the purchaser either as part of its operating expense or cost.

Zero-rated transactions and VAT-exempt transactions

It should be noted that zero-rated transactions are not exempt transactions
because while zero-rated are subject to VAT, exempt transactions are not.

Zero-rated transactions refer to sale, lease, barter or exchange of goods,

properties and/or services subject to VAT at the rate of 0%, while a VAT-exempt
transaction refers to sale, lease, barter or exchange of goods, properties and/or
services that are exempt from VAT (RMC 17-96).

When applied to the tax base or the selling price of the goods or services sold,
such zero rate results in no tax chargeable against the foreign buyer or customer. But,
although the seller in such transactions charges no output tax, he can claim a refund
of the VAT that his suppliers charged him. The seller thus enjoys automatic zero rating,
which allows him to recover the input taxes he paid relating to the export sales, making
him internationally competitive (Panasonic Communications Imaging Corporation of
the Philippines vs. Commissioner of Internal Revenue).

REFUND OF INPUT VAT ON ZERO-RATED (0%) SALE as amended by RA 11976

(EOPTA)

Section 122 of the Tax Code and RR 13-2018 (TRAIN Law) provides that a vat
registered person whose sales of goods, properties or services are zero-rated or
effectively zero-rated may apply for the issuance of a tax refund of input vat attributable
17 | P a g e
 Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos

on such sales. The input vat that may be subject of the claim shall exclude the portion
of the input vat that has been applied against the output vat. The application should
be filed within two (2) years after the close of the taxable quarter when such sales
were made.

Where the taxpayer is engaged in both zero-rated and non-zero rated (12%) or
exempt sale of goods, properties or services, and the amount of creditable input vat
due or paid cannot be directly or entirely attributed to any one of the transactions, only
the proportionate share of input vat allocated to zero-rated sales can be claimed for
refund or issuance of a tax credit certificate (TCC).

In case of taxpayers engaged in the transport of passengers and cargo by air

or sea vessels from the Philippines to a foreign country, the input vat shall be-allocated
ratably between zero rated sales and non-zero rated sales (sales subject to 12% vat
rate, subject to final vat withholding, and vat exempt sales).

EOPTA AMENDMENT

The aforementioned rules as introduced under the TRAIN Law are still
applicable to date. However, RA 11976 or the EOPTA introduced the risk-based
approach to verification of VAT refund claims, specifically under Section 112(C) of the
Tax Code, as amended. The EOPTA also clarified under Section 112(D), the liability
of the taxpayer-claimant and the BIR in case of disallowance by the Commission of
Audit (COA).

RISK-BASED APPROACH TO VERIFICATION OF VAT REFUND CLAIMS (RR 5-

2024)

The EOPT Act introduced the risk-based approach to verification and

processing of VAT refund claims under Section 112(C) of the Tax Code including the
recourse of the taxpayer in case the ninety (90)-day processing period expires and the
BIR has not yet rendered its decision on the claim.

The following rules shall be followed:

A. Classification of Vat Refund based on Risk-Based Approach

VAT refund claims filed pursuant to Section 112(A) of the Tax Code, as
amended, shall be classified into:
1. Low
2. Medium
3. High-risk

Provided, that, medium- and high-risk claims shall be subject to audit or other
verification processes in accordance with the BIR's national audit program for the

18 | P a g e
 Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos

relevant year or with the current policies and procedures applicable to the year of
application of the VAT refund.

B. The scope of verification n accordance with the identified risks as follows:

*Based on initial checking of the documents submitted during check- listing

procedures only. This does not include thorough verification of the supporting
documents for sales and purchases.

Limitations to the Risk-Based Approach Matrix

The following are the limitations to the above matrix:
1. Claims filed by first-time claimants shall be automatically considered as
high-risk and shall remain as such for the succeeding three (3) VAT
refund claims.
2. In case of full denial of a claim, the succeeding claim filed shall be
classified as high-risk
3. For medium-risk claims, verification shall be adjusted to 100% if the
assigned Revenue Officer found at least 30% disallowance of the
amount of VAT refund claim.
4. Claims classified as low-risk for the three (3) consecutive filing of VAT
refund claims shall be subject to mandatory full verification on the fourth
(4th) VAT refund claim regardless of the risk classification.
5. VAT credit/refund claims for any unused input tax pursuant to Section
112(B) of the Tax Code filed by a VAT-registered 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 the Tax Code shall be classified as high-risk and will require
full verification thereof.
6. For taxpayer-claimants fling on a quarterly basis, the risk classification
shall be made for every filing.

19 | P a g e
 Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos

7. Other limitations that may be identified by the Commissioner of Internal

Revenue through revenue issuances

C. Main Risk Factors to the Risk Based Approach Matrix

The following are the main risk factors that will be used as guide by the BIR in
establishing the risk-level of each claim:
1. Amount of VAT refund claim;
2. Frequency of filing VAT refund claims;
3. Tax compliance history; and
4. Other risk factors that may be identified

The BIR may expand the above list into sub-categories and assign weights to
each category to arrive at a more comprehensive and accurate risk classification of
the claim.

D. The verification and processing of VAT refund claims shall be separate from
the regular audit, if any, of internal revenue taxes particularly VAT conducted
by the appropriate BIR office that has jurisdiction over the taxpayer-claimant.
Any findings during the verification of VAT refund claim that has no effect to the
amount to be refunded shall be:
a. Endorsed for further verification and/or consolidation with the existing
audit if the processing is conducted by an Office other than the BIR office
that has jurisdiction over the claimant; or
b. Incorporate to the existing audit for the taxable year covered by the claim
if processed within the same BIR office that has jurisdiction over the
claimant.

E. All documentary requirements mandated by the BIR for purposes of VAT refund
under Section 112 of the Tax Code shall be submitted by the taxpayer
regardless of the identified risk level. These documents will be subject to post-
audit by COA should this result in approval thereof, as contemplated under
Section 112(D) of the Tax Code.

F. Evaluator/s of the VAT refund claim shall include to their respective working
papers the matrix on how the risk level of the claim was arrived at, including
justifications and documentations, if any.

G. The processing offices shall furnish DOF, the BIR Management and COA a
monthly report on the VAT refund claims processed to include the risk level
identified for each taxpayer claimant.

H. BIR may utilize sales and/or purchases data available in the Electronic
Invoicing/Receipting and Sales Transmission System (EIS) pursuant to
Revenue Regulations (RR) Nos. 8-2022 and 9-2022, if applicable

20 | P a g e
 Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos

I. The 90-day period to process and decide shall start from the filing of the
claim/application for VAT refund with complete documentary
requirements up to the release of the payment thereof. Provided, that the
application is considered to have been filed only upon submission of the
invoices or receipts, whichever is applicable, and other documents in support
of the application as prescribed under pertinent revenue issuances.

J. In case of full or partial denial of the claim for VAT 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 (CTA).

K. In case the VAT refund is not acted upon by the Commissioner within the 90-
day period, the taxpayer-claimant may opt to:
a. Appeal to the CTA within the 30-day period after the expiration of the 90
days required by law to process the claim; or
b. Forego the judicial remedy and await the final decision of the
Commissioner on the application of VAT refund claim.

When the BIR failed to render a decision within the 90-day period and the
taxpayer- claimant opted to seek for a judicial remedy within 30-days from such
period, the administrative claim for refund shall be considered moot and shall
no longer be processed.

L. The BIR official, agent or employee who was found to have deliberately caused
the delay in the processing of the VAT refund claim may be subjected to
penalties imposed under Section 269(J) of the Tax Code.

LIABILITY OF THE TAXPAYER-CLAIMANTS AND BIR OFFICIALS/EMPLOYEES

IN CASE OF COA DISALLOWANCES
A. Refund shall be made upon warrants drawn by the Commissioner of Internal
Revenue or by his duly authorized representative without the necessity of being
countersigned by the COA Chairman, the provisions of the Revised
Administrative Code to the contrary notwithstanding.

B. Approved VAT refunds under Section 112 of the Tax Code shall be subject to
post audit by the COA following the risk-based classification above-described.

C. In case of disallowance by the COA, only the taxpayer shall be liable for the
disallowed amount without prejudice to any administrative liability on the part of
any employee of the BIR who may be found to be grossly negligent in the grant
of the refund.

21 | P a g e
 Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos

D. Procedures for the recovery of the disallowed amount will be in accordance with
the procedures or guidelines that may be prescribed by COA for this purpose.

INPUT VAT
Input VAT means the VAT due on or paid by a VAT-registered taxpayer on
importation of goods, or local purchase of goods, properties or services, including
lease or use of properties in the course of his trade or business. It shall also include
the transitional input tax determined in accordance with Section 111 of the Tax Code,
presumptive input tax and deferred input tax from previous period.

Sources of input VAT

1. Local purchases of goods and services
2. Acquisition of capital goods
3. Importation
4. Transitional input VAT
5. Presumptive input VAT
6. Creditable withholding VAT

Local Purchase of goods or services such as purchase of:

a) Goods for sale
b) Goods for conversion into finish product (including packaging materials).
c) Goods for use as supplies
d) Goods for use as materials supplied in the sale of services
e) Goods for use in trade or business for which depreciation or amortization is
allowed (Capital Goods).
f) Real properties for which vat has actually been paid
g) Services for which vat has actually been paid

Transitional input tax on beginning inventories

The following are the situations where a person may claim transitional input tax
on beginning inventories:
1. When he becomes liable to value-added tax upon exceeding the minimum
turnover of P3,000,000 in any 12-month period, or

2. When he voluntarily registers even if his turnover does not exceed

P3,000,000 (except franchise grantees of radio and television broadcasting
whose threshold is P10M)

The following inventories shall be the subject of a transitional input tax:

a. Goods purchased for resale in their present condition
b. Materials purchased for further processing, but which have not yet
undergone processing
c. Goods which have been manufactured by the taxpayer

22 | P a g e
 Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos

d. Goods in process for sale

e. Goods and supplies for use in the course of taxpayer’s trade or business as
a VAT registered person

The amount of transitional input tax to be allowed as tax credit shall be

whichever is higher between:
1. The beginning inventory of goods, materials, and supplies equivalent to 2%
of the value of such inventory, or
2. The actual value added tax paid on such goods, materials, and supplies

Illustration Vatman became subject to VAT on march 1 of the current year. The
value of his beginning inventory of goods, materials and supplies is P567,000. The
VAT paid on such inventory amount to P15,500. How much is the transitional input tax
of Vatman?

On beginning inventory (567,000 x 2%) 11,340

Actual VAT paid 15,500
Transitional input tax (whichever is higher) 15,500

A transitional input tax can only be applied as tax credit against output tax. It
cannot be claimed as tax refund, unless a taxpayer who erroneously or excessively
pays his output tax is still entitled to recover the payments he made either as a tax
credit or a tax refund. In this case, since petitioner still has available transitional input
tax credit, it filed a claim for refund to recover the output VAT it erroneously or
excessively paid for the 1st quarter of 1997. Thus, there is no reason for denying its
claim for tax refund/credit (Fort Bonifacio Devt Corp vs CIR, Jan 22, 2013).

Presumptive input tax

VAT registered persons or firms engaged in the processing of (1) sardines, (2)
mackerel, and (3) milk, and in manufacturing (4) refined sugar, (5) cooking oil, and (6)
packed noodle-based instant meals shall be allowed a presumptive input tax,
creditable against the output tax –
equivalent to 4% of gross value in money of their purchases of
primary agricultural products which are used as inputs to their
production (Sec 111[B], NIRC).

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.

Only VAT registered persons shall be entitled to the transitional and

presumptive tax credits.

23 | P a g e
 Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos

Illustration Coco Say is engaged in purchasing coconut from coconut planters and
process them into canned coconut cooking oil. In September, he made a total
purchase of P300,000, processed them and sold the cooking oil to the public. The
taxable sales, gross of VAT, amounted to P2,128,000. The invoice on the purchases
of canning and labelling materials totalled to P280,000.

Questions:
1. How much is the presumptive input tax?
Answer: The presumptive input tax is P12,000 which is the result of multiplying
the total purchases of primary agricultural products of P300,000 by 4%.

2. How much is the VAT payable?

Answer: The amount of VAT payable is computed as follows:
Output Tax (2,128,000 x 3/28) 228,000
Less: Input taxes
Presumptive input tax 12,000
On materials (280,000 x 3/28) 30,000 42,000
VAT Payable 186,000

Creditable Withholding VAT

Sale of Goods and Services to the Government
Section 114(C) of the Tax Code as amended by the TRAIN law provides, that
beginning January 1, 2021, the vat withholding system shall shift from final to a
creditable vat system wherein the payor shall be considered the withholding agent.
Therefore, the five percent (5%) vat withheld by the government or any of its political
subdivisions, instrumentalities or agencies, including government-owned or controlled
corporations (GOCCs) shall be creditable against the output vat of the seller.
Moreover, the amount of input vat to be recognized by the seller on its sale to the
government shall be the actual amount of vat on purchases. Standard input vat is no
longer computed. Consequently, there is no need to account the difference between
standard input vat and actual input vat. RMC 36-2021 was issued by the BIR on
January 15, 2021 to provide the guidelines on the shifting from Final to a Creditable
System on the Value-Added Tax (VAT) withheld on Sales to Government or Any of Its
Political Subdivisions, Instrumentalities or Agencies, Including Government-Owned or
-Controlled Corporations (GOCCs).

Prior to 2021
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/or
services taxed at twelve percent (12%) vat pursuant to Sections 106 and 108
of the Tax Code, deduct and withheld a Final VAT due at the rate of five percent
(5%) of the gross payment (RR 4-2007 and RR 13-2018).

24 | P a g e
 Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos

The five percent (5%) final VAT withholding rate shall represent the net VAT
payable of the seller. The remaining seven percent (7%) effectively accounts
for the STANDARD INPUT VAT for sales of goods or services to government
or any of its political subdivisions, instrumentalities or agencies including
GOCCs in lieu of the actual input VAT directly attributable or ratably
apportioned to such sales. Should actual input VAT attributable to sales to
government exceeds seven percent (7%) of gross payments, the excess may
form part of the sellers' expense or cost. On the other hand, if actual input VAT
attributable to sale to government is less than seven percent (7%) of gross
payment, the difference must be closed to income.

VAT withheld from Nonresidents

Section 114 (C) of the Tax Code as amended, provides:

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, however, that payments for purchase 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/Creditable
Withholding Taxes.

For purposes of this Section, the payor or person in control of the payment shall
be considered as the withholding agent.

Creditable input tax

An input tax evidenced by VAT invoice or official receipt on the following
transactions shall be creditable against the output tax of a VAT registered person:
1. Purchase or importation of goods
a. For sale, or
b. For conversion into or intended to form part of a finished product for
sale, including packaging materials, or
c. For use as supplies in the course of business, or
d. For use as materials supplied in the sale or service, or
e. For use in trade or business for which deduction for depreciation or
amortization is allowed under the Code.
2. Purchase of real properties for which a VAT has actually been paid
3. Purchase of services in which a VAT has actually been paid
4. Transitional input tax
5. Presumptive input tax
6. A VAT registered person who is also engaged in transactions not subject to
VAT shall be allowed input tax credit as follows:

25 | P a g e
 Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos

a. Total input tax which can be directly attributed to transactions subject

to VAT, and
b. A ratable portion of any input tax which cannot be directly attributed
to either activity.

CARRY-OVER of Excess Input Vat

RR 2-2007 provides that, if the input tax inclusive of the input tax carried over
from the previous quarter exceeds the output tax, the excess input tax shall be carried
over to the succeeding quarter or quarters; Provided, however, that, any input tax
attributable to zero-rated sales by vat registered taxpayer, may at his option be
refunded or applied for a tax credit certificate which may be used in the payment of
internal revenue taxes. The Tax Code, as amended, also provides the following
provisions:

- Section 110(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: Provided, however, that any input tax attributable 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.

- Section 110(C): Determination of Creditable Input Tax

The sum of the excess input tax carried over from the preceding month or
quarter and the input tax creditable to a VAT registered person during the taxable
month or quarter shall be reduced by the amount of claim for refund or tax credit for
value-added tax and other adjustments, such as purchase returns or allowances and
input tax attributable to exempt sale. The claim for tax credit referred to in the foregoing
paragraph shall include not only those filed with the Bureau of Internal Revenue but
also those filed with other government agencies, such as the Board of Investments
and the Bureau of Customs.

Sale of real property subject to VAT

The sale of real property subject to VAT shall be either on cash basis, on
installment basis, or on a deferred payment basis.

The sale of real property is on the installment basis if the initial payments do
not exceed 25% of the selling price. It is on a “deferred payment basis not on the
installment plan” if the initial payments exceed 25% of the gross selling price.

If the sale is on cash basis or on a deferred payment plan, the whole selling
price shall be subject to tax, if it is on the installment plan, the seller or real estate

26 | P a g e
 Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos

dealer shall be subject to VAT on the installment payments, including interest and
penalties.

Installment Payment Basis

In 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. The sale is considered
"Installment Sale" if the "Initial Payments" does not exceed 25% of the selling price.
Correspondingly, the buyer of the property can claim the input vat in the same period
as the seller recognizes the output tax (RR 4-2007).

Initial Payments pertain to all payments which the seller receives on or before
the execution of the instrument of sale, including cash or property received, other than
the purchaser's evidence of indebtedness (exclude notes or other evidence of
indebtedness issued by the purchaser to seller at the time of sale) during the taxable
year when the real property was sold. Also excluded from the initial payment is 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.

INITIAL PAYMENTs:
Down payment Pxx
Collections (year of sale) xx
Add:
Interest xx
Penalties and other charges xx
Excess of mortgage over cost, if any xx xx
Initial Payments Pxx

RR 4-2007 further provides that if the sale of real property is on installment plan
where the zonal value/fair market value is higher than the consideration or selling
price, exclusive of the vat, the vat shall be based on the ratio of actual collection of the
consideration, exclusive of the vat, against the agreed consideration, exclusive of the
vat applied to the zonal/fair market value of the property at the time of the execution
of the Contract to Sell or Contract of Sale at the inception of the sale. Thus, since the
output vat is based on the market value of the property which is higher than the
consideration in the sales document exclusive of the vat, the input vat that can be
claimed by the buyer shall be separately-billed output vat in sales document issued by
the seller. Therefore, the output vat which is based on market value must be billed
separately by the seller in the sales document with specific mention that the vat billed
separately is based on the market value of the property.

Output VAT under Installment Sale:

27 | P a g e
 Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos
FMV is the higher between:
1. Fair market value as determined by the Commissioner/zonal value
2. Fair market value as shown in the schedule of values of the Provincial and City Assessors (real property tax declaration)

Deferred Payment Basis

In case of sale of real properties on the Deferred-Payment Basis [Initial
payments of which in the year of sale exceed twenty-five percent (25%) of gross selling
price, not the installment plan), the transaction shall be treated as cash sale which
makes the entire selling price taxable in the month of sale. Output tax shall be
recognized by the seller and input tax shall accrue to the buyer at the time of the
execution of the instrument of sale.

The exchange of real estate properties held for sale or for lease. for shares of
stocks, whether resulting to corporate control or not, is subject to vat. On the other
hand, if the transferee of the transferred real property by a real estate dealer is another
real estate dealer, in an exchange where the transferor gains control of the transferee
corporation, no output vat is imposable on the said transfer.

The tax implication of cash sale, installment sale and deferred payment basis
as regards the payment of vat payable is summarized below:

Mixed Business Transactions

A Vat registered person may be engaged in a combination of sales subject to
vat, zero-rated vat, and vat exempt transactions. For vat purposes, this is known as
mixed business transactions. The main concern in mixed business transaction is the
allocation or apportionment of input vat.

A vat registered person who is also engaged in transactions not subject to vat
shall be allowed of Input tax credit as follows:

28 | P a g e
 Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos

a. Total input tax which can be directly attributed to transactions subject

to vat; and
b. Ratable Portion of any input tax which cannot be directly attributed to
either activity (allocation shall be on the basis of sales volume)

**The allocated input VAT on exempt sales shall be treated as operating expense
of the seller. It is not deductible from output VAT.

ILLUSTRATION
A taxpayer is engaged in the sale of VAT taxable goods and at the same time is also
engaged in non-VAT business, in the same business establishment. The following
data for the taxable year were provided for purposes of determining the correct amount
of vat payable:
Sales (subject to vat, net) P15,000,000
Sales (subject to other percentage taxes, net) 5,000,000
Purchase of services directly attributable to vatable sales (net) 2,000,000
Purchase of supplies directly attributable to vatable sales (net) 2,000,000
Purchase of supplies from non-vat suppliers, directly attributable
to vatable sales 800,000
Purchase of services attributable to both vatable and non-vatable
sales (gross of vat) 1,120,000
Purchase of supplies attributable to both vatable and non-vatable
sales (net of vat) 1,000,000

Required: Determine the VAT Payable

Output VAT (P15M x 12%) P1,800,000

Input VAT:
Directly attributable to VATable sales (P4M x 12%) (480,000)
Not directly attributable [(P1,120,000 x 12/112) + (1M x 12%)] x 15M/20M (180,000)
VAT Payable P1,140,000

29 | P a g e
 Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos

Spread of VAT on capital goods

Capital goods refer to goods or properties with estimated useful life greater than
one year and which are treated as depreciable assets, used directly or indirectly in the
production or sale of taxable goods or services.

Where a VAT registered person purchases or imports capital goods which are
depreciable assets for income tax purposes, the following rules shall be applied:

1. Input tax on depreciable capital goods, the aggregate acquisition cost of which
(net of VAT) in a calendar month, exceeds P1,000,000 shall be spread evenly
over 60 months or their useful life, whichever the shorter.

2. When the aggregate acquisition cost (exclusive of VAT) of the existing or

finished capital goods purchased or imported during any calendar month does
not exceed P1,000,000, the total input taxes will be allowed as credit against
output tax in the month of acquisition.
The aggregate acquisition cost of depreciable assets in any calendar
month refers to the total price, excluding VAT, agreed upon for one or
more assets acquired and not on the payments actually made during
the calendar month.

3. If the capital goods is sold within five years or prior to exhaustion of input VAT
thereon, the entire unamortized input tax on the capital goods sold can be
claimed as input tax credit during the month/quarter when the sale was made

4. The opinion to apply for refund/tax credit certificate of capital goods has been
withdrawn

Illustration Felicisima had the following data in its books in the month of February:
Case A Case B
Sales 1,900,000 1,800,000
Purchases of goods for sale 1,260,000 600,000
Purchase of machines 1,440,000 900,000
Machine life 6 years 3 years

REQUIRED: Compute the following:

1. VAT payable on each of the independent cases
2. VAT payable in Case A assuming that the life of the machine is 4
years

ANSWERS
1. CASE A
Output tax (1,900,000 x 12%) 228,000
Less: Input Taxes

30 | P a g e
 Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos

Purchases (1,260,000 x 12%) 151,200

Machine [(1,440,000 x 12%) / 60 months] 2,880 154,080
VAT Payable 73,920

CASE B
Output tax (1,800,000 x 12%) 216,000
Less: Input Taxes
Purchases (600,000 x 12%) 72,000
Machine (900,000 x 12%) 108,000 180,000
VAT Payable 36,000

2. Machine’s useful life is 4 years

Output tax (1,900,000 x 12%) 228,000
Less: Input Taxes
Purchases (1,260,000 x 12%) 151,200
Machine [(1,440,000 x 12%) / 48 months] 3,600 154,800
VAT Payable 73,200

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, provided
that 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.

Illustration A manufacturer purchased capital goods on different occasions as

follows:

Month of Amount 12% input Useful No. of monthly Last month of

Purchase (Php) tax life amortization Amortization
(in years)
Jan 2018 8,500,000 1,020,000 6 60 Dec 2022
Feb 2018 8,500,000 1,020,000 4 48 Jan 2022
Outright claim
Mar 2018 750,000 90,000 3 - on Mar 2018
Dec 2021 10,000,000 1,200,000 5 60 Nov 2026
Outright claim
Jan 2022 10,000,000 1,200,000 5 - on Jan 2022

a. For purchase made on January 2018, the amortization shall be for the shorter
period of 5 years only or up to December 2022 although the useful life is 6
years.

31 | P a g e
 Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos

b. For purchase made on February 2018, the amortization shall be for period of 4
years only or up to January 2022 since the useful life of the asset is shorter
than 5 years.

c. For purchase made on December 2021, the amortization shall be for the period
of 5 years or up to November 2026. Taxpayers with unutilized input vat as of
December 31, 2021 shall be allowed to apply the same as scheduled until fully
utilized.

d. For purchase made on January 2022, no amortization shall be made, and the
input VAT shall be claimed on the month of purchase or January 2022.

CONSTRUCTION IN PROGRESS
Construction in progress (CIP) is the cost of construction work which is not yet
completed. CIP is considered, for purposes of claiming input tax, as a purchase of
service, the value of which shall be determined based on the progress billings. Until
such time the construction has been completed, it will not qualify as capital goods, as
herein defined, in which case, input tax credit on such transaction can be recognized
in the month the payment was made: Provided, that an official receipt of payment has
been issued based on the progress billing (RR 13-2018).

In case of contract for the sale of service where only the labor will be supplied
by the contractor and the materials will be purchased by the contractee from other
suppliers, input tax credit on the labor contracted shall still be recognized on the month
the payment was made based on a progress billing while input tax on the purchase of
materials shall be recognized at the time the materials were purchased. Once the input
tax has already been claimed while the construction is still in progress, no additional
input tax can be claimed upon completion of the asset when it has been reclassified
as a depreciable capital asset and depreciated.

Normally, upon completion, a ClP item is reclassified and the reclassified asset
is capitalized and depreciated.

32 | P a g e
 Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos

Module Exercises

TRUE OR FALSE
1. Agricultural and marine food products are 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.
2. Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt,
and copra shall be not considered in their original state, hence, subject to vat.
3. Sale of flowers, in its original state is exempt from vat.
4. Sales of drugs and medicines of pharmacy run by the hospital to outpatients are
subject to VAT.
5. Pharmacy items used in the performance of medical procedures in hospital units such
as in the operating and delivery rooms and by other departments are considered part
of medical services rendered by the hospital, hence, not subject to vat.
6. Agricultural contract growers are subject to vat
7. Gross receipts of duly registered credit/multi-purpose cooperatives from lending
activities to non-members are subject to value added tax.
8. Non-stock, non-profit private organizations which sell exclusively to their members in
the regular conduct or pursuit of commercial or economic activity are exempt from
value added tax.
9. Government entities engaged in commercial or economic activity are generally exempt
from value added tax.
10. The term "goods" for value added tax purposes shall mean all tangible and intangible
objects which are capable of pecuniary estimate and shall include, but not limited to
radio, television, satellite transmission and cable television time.
11. Export sale by a vat registered entity is exempt from vat.
12. Export sale by a non-vat registered entity is subject to vat
13. The input taxes attributable to zero-rated sales may be refunded or credited against
any other internal revenue taxes due from the taxpayer.
14. The input taxes attributable to the purchase of capital goods may be refunded or
credited against any other internal revenue taxes due from the taxpayer.
15. For vat purposes, condominiums, including its allotted parking space, are classified as
other dwellings.

Reference:

Tabag, E.D and Garcia, E. J. (2024), Transfer & Business Taxation

Ampongan, O. E. G. (2021), Transfer, Business & Local Taxation (with Practice Set) 13/e

Bureau of Internal Revenue, Value-Added Tax, https://www.bir.gov.ph/index.php/tax-information/value-

added-tax.html

33 | P a g e