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VAT REVIEWER | ATTY GONZALES | NASH OL 3D 2015

What is VAT?
SEC. 105. The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services.

reasonable and natural classifications for purposes of taxation. To satisfy this requirement it is enough that the statute or ordinance applies equally to all persons, forms and corporations placed in similar situation.

VAT Tax Base and Rate TYPE GOODS SERVICES IMPORTATION BASE Gross Selling Price Gross Receipts Total value used by the BOC RATE 12%, 0% or Exempt 12%, 0% or Exempt 12% or Exempt

Nature and Characteristics of VAT. 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 16-2005] TOLENTINO v CIR
Petitions were for the declaration of unconstitutionality of R.A. 7716, otherwise
known as the Expanded Value-Added Tax Law. The amendment of the law is expressed in the title: AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM, WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION xx. Exemptions previously granted to print media transactions involving printing, publication, importation or sale of news papers are repealed by RA 7716. Issue: WON RA 7716 has singled out the press for discriminatory treatment (within the class of mass media the law discriminates against print media by giving broadcast media favored treatment)? Held: NO. Claims of press freedom and religious liberty. We have held that, as a general proposition, the press is not exempt from the taxing power of the State and that what the constitutional guarantee of free press prohibits are laws which single out the press or target a group belonging to the press for special treatment or which in any way discriminate against the press on the basis of the content of the publication, and R.A. No. 7716 is none of these. With respect to the first contention, it would suffice to say that since the law granted the press a privilege, the law could take back the privilege anytime without offense to the Constitution. The reason is simple: by granting exemptions, the State does not forever waive the exercise of its sovereign prerogative.Indeed, in withdrawing the exemption, the law merely subjects the press to the same tax burden to which other businesses have long ago been subject. Finally, it is contended, for the reasons already noted, that R.A. No. 7716 also violates [Constitution] Art. VI, 28(1) which provides that "The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation." Equality and uniformity of taxation means that all taxable articles or kinds of property of the same class be taxed at the same rate. The taxing power has the authority to make

VAT Payable = OUTPUT TAX INPUT VAT What is the DESTINATION PRINCIPLE? As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional reach of the tax. Goods and services are taxed only in the country where they are consumed. Thus exports are zerorated 0% while imports are taxed. However the law clearly provides for an exception to the destination principle; that is for a zero percent VAT rate for services when the following requirements are met: {MEMORIZE} (1) the service is performed in the Philippines; (2) the service falls under any of the categories provided in Section 108(b) of the Tax Code; and (3) it is paid for in acceptable foreign currency that is accounted for in accordance with the regulations of the Bangko Sentral ng Pilipinas. CIR v AMERICAN EXPRESS
Respondent is a Philippine branch of American Express International, Inc., U.S.A., with office in the Philippines. It is a servicing unit of (Amex-HK) and is engaged primarily to facilitate the collections of Amex-HK receivables from card members situated in the Philippines and payment to service establishments in the Philippines. Amex Philippines is a registered VAT taxpayer. On April 13, 1999, respondent filed with the BIR a letter-request for the refund of its 1997 excess input taxes contending that export sales of services performed in the Philippines by VAT-registered persons shall be subject to 0%

CTA granted the refund but was reversed by the CA stating that respondents services fell under the first type enumerated in Section 4.102-2(b)(2) of RR 7-95, as amended by RR 5-96. More particularly, its "services were not of the same class or of the same nature as project studies, information, or engineering and architectural designs" for non-resident foreign clients; and not "services other than the processing, manufacturing or repacking of goods for persons doing business outside the Philippines." Issue: WON Amexs services were Zero-rated sales and entitled to a refund? Held: YES. Services performed by VAT-registered persons in the Philippines (other than the processing, manufacturing or repacking of goods for persons doing business outside the Philippines), when paid in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP, are zero-rated. Respondent is a VAT-registered person that facilitates the collection and payment of receivables belonging to its non-resident foreign client, for which it gets paid in acceptable foreign currency inwardly remitted and accounted for in conformity with BSP rules and regulations. Certainly, the service it renders in the Philippines is not in the same category as "processing, manufacturing or repacking of goods" and should, therefore, be zero-rated. Respondents role in the consumer credit process primarily consists of gathering the bills and credit card drafts of different service establishments located in the Philippines and forwarding them to the regional operating centers (ROCs) outside the country. Servicing the bill is not the same as billing. For the former type of service alone, respondent already gets paid. Confusion in zero rating arises because petitioner equates the performance of a particular type of service with the consumption of its output abroad. In the present case, the facilitation of the collection of receivables is different from the utilization or consumption of the outcome of such service. While the facilitation is done in the Philippines, the consumption is not. Respondent renders assistance to its foreign clients - the ROCs outside the country -- by receiving the bills of service establishments located here in the country and forwarding them to the ROCs abroad. The consumption contemplated by law, contrary to petitioners administrative interpretation, does not imply that the service be done abroad in order to be zero-rated. Unlike goods, services cannot be physically used in or bound for a specific place when their destination is determined. Instead, there can only be a "predetermined end of a course" when determining the service "location or position x x x for legal purposes." Respondents facilitation service has no physical existence, yet takes place upon rendition, and therefore upon consumption, in the Philippines. Under the destination principle, as petitioner asserts, such service is subject to VAT at the rate of 10 percent. Respondents Services Exempt from the Destination Principle

However, the law clearly provides for an exception to the destination principle; that is, for a zero percent VAT rate for services that are performed in the Philippines, "paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the [BSP]." Thus, for the supply of service to be zero-rated as an exception, the law merely requires that first, the service be performed in the Philippines; second, the service fall under any of the categories in Section 102(b) of the Tax Code; and, third, it be paid in acceptable foreign currency accounted for in accordance with BSP rules and regulations. Performance of Service versus Product Arising from Performance Again, contrary to petitioners stand, for the cost of respondents service to be zero -rated, it need not be tacked in as part of the cost of goods exported. The service rendered by respondent is clearly different from the product that arises from the rendition of such service.

CIR v BURMEISTER AND WAIN


A foreign consortium composed of Burmeister and Wain Scandinavian Contractor A/S (BWSC-Denmark), Mitsui Engineering and Shipbuilding, Ltd., and Mitsui and Co., Ltd. entered into a contract with the National Power Corporation (NAPOCOR) for the operation and maintenance of [NAPOCORs] two power barges. The Consortium appointed BWSC-Denmark as its coordination manager. BWSC-Denmark established respondent (domestic corp) which subcontracted the actual operation and maintenance of NAPOCORs two power barges as well as the performance of other duties and acts which necessarily have to be done in the Philippines. NAPOCOR paid capacity and energy fees to the Consortium in a mixture of currencies. On the other hand, the Consortium pays [respondent] in foreign currency inwardly remitted to the Philippines through the banking system. Respondent registered as a VAT taxpayer and asked for a ruling on the tax implications of the above transactions. The BIR ruling said that their services shall be subject to VAT at zero-rate. Respondent filed for a refund of Tax credits and was granted by the CTA. Issue: WON respondent Burmeisters services were Zero-rated sales and entitled to a refund? Held: NOT ZERO RATED. The Tax Code not only requires that the services be other than "processing, manufacturing or repacking of goods" and that payment for such services be in acceptable foreign currency accounted for in accordance with BSP rules. Another

VAT REVIEWER | ATTY GONZALES | NASH OL 3D 2015

VAT REVIEWER | ATTY GONZALES | NASH OL 3D 2015


essential condition for qualification to zero-rating under Section 102(b)(2) [now 108(b)(2)] is that the recipient of such services is doing business outside the Philippines. If the provider and recipient of the "other services" are both doing business in the Philippines, the payment of foreign currency is irrelevant. Otherwise, those subject to the regular VAT under Section 108(a) can avoid paying the VAT by simply stipulating payment in foreign currency inwardly remitted by the recipient of services. Further, when the provider and recipient of services are both doing business in the Philippines, their transaction falls squarely under Section 108(a) governing domestic sale or exchange of services. Indeed, this is a purely local sale or exchange of services subject to the regular VAT, unless of course the transaction falls under the other provisions of Section 108(b). In this case, the payer-recipient of respondents services is the Consortium which is a joint-venture doing business in the Philippines. While the Consortiums principal members are non-resident foreign corporations, the Consortium itself is doing business in the Philippines. This is shown clearly in the contract between the Consortium and NAPOCOR is for a 15-year term. Considering this length of time, the Consortiums operation and maintenance of NAPOCORs power barges cannot be classified as a single or isolated transaction. Respondent, as subcontractor of the Consortium, operates and maintains NAPOCORs power barges in the Philippines. NAPOCOR pays the Consortium, through its nonresident partners, partly in foreign currency outwardly remitted. In turn, the Consortium pays respondent also in foreign currency inwardly remitted and accounted for in accordance with BSP rules. This payment scheme does not entitle respondent to 0% VAT. Respondents reliance on the ruling in American Express is misplaced. That case involved a recipient of services, specifically American Express International, Inc. (Hongkong Branch), doing business outside the Philippines. [Nevertheless, in seeking a refund of its excess output tax, respondent relied on VAT Ruling No. 003-99, which reconfirmed BIR Ruling No. 023-95 "insofar as it held that the services being rendered by BWSCMI is subject to VAT at zero percent (0%)." Respondents reliance on these BIR rulings binds petitioner. However, upon the filing of petitioners Answer dated 2 March 2000 before the CTA contesting respondents claim for refund, respondents services shall be subject to the regular 10% VAT. Such filing is deemed a revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95.]

There was a leak in the San Antonio Mines in Marinduque owned by (Marcopper), which caused potential environmental damage to the Makulapnit Tunnel and Boac Rivers and the immediate area. To contain the damage and prevent the further spread of the tailing leak, Placer Dome, Inc. (PDI), the part-owner of Marcopper, undertook to perform the clean-up and rehabilitation of the rivers, through a subsidiary. To accomplish this, PDI engaged Placer Dome Technical Services Limited (PDTSL), a non-resident foreign corporation with office in Canada, to carry out the project. In turn, PDTSL engaged the services of Placer Dome Technical Services (Philippines), Inc. (respondent), a domestic corporation. PDTSL and respondent thus entered into an Implementation Agreement which stipulated that PDTSL was to pay respondent "an amount of money, in U.S. funds, equal to all Costs incurred for Implementation Services performed. Respondent is now claiming for refund of the excess input tax. Issue: WON respondent Placer Dome Phils services were Zero-rated sales and entitled to a refund? Held: YES. Same ratio as the case of CIR v American Express. Petitioner (CIR) argues that following Section 4.102-2(b)(2) of Revenue Regulation No. 5-96, there are only two categories of services that are subject to zero percent VAT, namely: services other than processing, manufacturing or repacking for other persons doing business outside the Philippines for goods which are subsequently exported; and services by a resident to a non-resident foreign client, such as project studies, information services, engineering and architectural designs and other similar services. Petitioner explains that the services rendered by respondent were not for goods which were subsequently exported. Likewise, it is argued that the services rendered by respondent were not similar to "project studies, information services, engineering and architectural designs" which were destined to be consumed abroad by non-resident foreign clients. Petitioner also invokes the "destination principle," citing that [r]espondents services, while rendered to a non-resident foreign corporation, are not destined to be consumed abroad. Hence, the onus of taxation of the revenue arising therefrom, for VAT purposes, is also within the Philippines. Yet the Court in American Express debunked this argument, particularly its reliance on the "destination principle" in taxation: As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional reach of the tax. Goods and services are taxed only in the country where they are consumed. Thus, exports are zero-rated, while imports are taxed. Confusion in zero rating arises because petitioner equates the performance of a particular type of service with the consumption of its output abroad . The

CIR v PLACER DOME

consumption contemplated by law, contrary to petitioner's administrative interpretation, does not imply that the service be done abroad in order to be zerorated. Finally, the Court in American Express found support from the legislative record that revealed that consumption abroad is not a pertinent factor to imbue the zero-rating on services by VAT-registered persons performed in the Philippines. Interpellations on the subject in the halls of the Senate also reveal a clear intent on the part of the legislators not to impose the condition of being "consumed abroad" in order for services performed in the Philippines by a VAT-registered person to be zero-rated. We quote the relevant portions of the proceedings:
"Senator Maceda: "One example I could immediately think ofI do not know why this comes to my mind tonightis for tourism or escort services. For example, the services of the tour operator or tour escort just a good name for all kinds of activitiesis made here at the Midtown Ramada Hotel or at the Philippine Plaza, but the payment is made from outside and remitted into the country. "Senator Herrera: What is important here is that these services are paid in acceptable foreign currency remitted inwardly to the Philippines. "Senator Maceda: Yes, Mr. President. Like those Japanese tours which include $50 for the services of a woman or a tourist guide, it is zero-rated when it is remitted here.

COMPARING THE 3 CASES: In CIR v. American Express, Amex Phils. facilitated in the Philippines the collection and payment of receivables belonging to its Hong Kong-based foreign client, Amex HK, and getting paid for it in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP. The Supreme Court ruled that the facilitation services Amex Phils. rendered in the Philippines fell under Section 108(B)(2) of the 1997 Tax Code. In CIR v. Placer Dome, Placer Dome Canada engaged the services of Placer Dome Phils. to perform the clean-up and rehabilitation of the Makalupnit and Boac Rivers in Marinduque. Placer Dome Phils. argued that its sale of services to Placer Dome Canada was a zero-rated transaction under Section 108(B)(2) of the 1997 Tax Code. Citing CIR v. American Express the Supreme Court upheld Placer Dome Phils. argument.

In CIR v. Burmeister and Wain was engaged in the actual operation and management of two power barges in Mindanao. It claimed that its transactions were subject to zero-rating under Section 108(B)(2) of the 1997 Tax Code. The Supreme Court denied Burmeisters claim on the ground that Section 108(B)(2) of the 1997 Tax Code additionally required that the payer-recipient of the services must be doing business outside the Philippines. It ruled in this manner: The Tax Code not only requires that the services be other than processing, manufacturing or repacking of goods and that payment for such services be in acceptable foreign currency accounted for in accordance with BSP rules. Another essential condition for qualification to zero-rating under Section 102(b)(2) is that the recipient of such services is doing business outside the Philippines. While this requirement is not expressly stated in the second paragraph of Section 102(b), this is clearly provided in the first paragraph of Section 102(b) where the listed services must be for other persons doing business outside the Philippines. The phrase for other persons doing business outside the Philippines not only refers to the services enumerated in the first paragraph of Section 102(b), but also pertains to the general term services appearing in the second paragraph of Section 102(b). In short, services other than processing, manufacturing, or repacking of goods must likewise be performed for persons doing business outside the Philippines. [NOTE: In relation to CIR v. American Express and CIR v. Placer Dome discussed above, said cases stated that consumption of the services abroad is not a requirement for zero-rating. However, on the basis of CIR v. Burmeister & Wain the payer-recipient of the services must be doing business outside of the Philippines.]
SEC. 105. Persons Liable. - Any person who, in the course of trade or business, sells barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code. The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716.

VAT is imposed on any person who:

VAT REVIEWER | ATTY GONZALES | NASH OL 3D 2015

VAT REVIEWER | ATTY GONZALES | NASH OL 3D 2015


Sells, barters or exchanges goods or properties in the course of trade or business; or Sells services in the course of trade or business; or Imports goods, whether or not in the course of trade or business. The VAT is a tax on consumption, levied on the sale, barter, exchange or lease of goods or properties and services in the Philippines and the importation of goods into the Philippines. The seller is the one statutorily liable for the payment of the tax, but the amount of the tax may be shifted or passed on to the buyer, transferee or lessee of the goods or properties or services. THE FINAL CONSUMERS CARRY THE BURDEN AS AN ADDED COST TO WHAT THEY PURCHASED. Direct Tax may not be shifted or passed on. Income Tax, Estate Tax Indirect Tax may be shifted or passed on VAT, Other Percentage Taxes BIR RULING 88-243
HDMF is a government financial institution enjoying tax exemption but with the implementation of the VAT, the suppliers have been charging them with the corresponding 10% value-added tax. Section 99 of the Tax Code as amended by Executive Order No. 273, the persons liable for the payment of the value-added tax are not the buyers/purchasers but the sellers/importers of goods and those performing services for a fee. However, since the value-added tax is an indirect tax, it can be shifted to the customer. Once shifted to the customer as addition to the cost of goods sold, it is no longer a tax but an additional cost which the customer has to pay in order to obtain the goods. The shifting of the valueadded tax to you does not make HDMF the person directly liable therefor; hence, they cannot invoke the tax exemption privilege to avoid the passing on or shifting of the VAT.

Authority (CDA), hence, exempt from all national, city, provincial, municipal or barangay taxes, including VAT. In reply, please be informed that your request cannot be granted for lack of legal basis. The exemption of cooperatives from taxes under Article 61 or 62 of the Cooperative Code (RA 6938) is limited only to taxes directly payable by them. The value-added tax is an indirect tax, payable by the seller and not by the purchaser of the goods. (Section 99, Tax Code, as amended) being an indirect tax, it can be added to the cost of goods purchased, not as tax but as additional cost which the purchaser has to pay to obtain the goods purchased. Hence, you cannot invoke your tax exemption privileges to avoid the passing on or shifting of the VAT to you by the manufacturers/suppliers of goods purchased by you.

CIR v GOTAMCO
The question involved in this petition is whether respondent John Gotamco & Sons, Inc. should pay the 3% contractor's tax on the gross receipts it realized from the construction of the World Health Organization office building in Manila. The World Health Organization (WHO for short) is an international organization which has a regional office in Manila. As an international organization, it enjoys privileges and immunities which are defined more specifically in the Host Agreement entered into between the Republic of the Philippines and the said Organization. Section 11 of that Agreement provides, inter alia, that "the Organization, its assets, income and other properties shall be: (a) exempt from all direct and indirect taxes. When the WHO decided to construct a building to house its own offices, as well as the other United Nations offices stationed in Manila, WHO informed the bidders that the building to be constructed belonged to an international organization with diplomatic status and thus exempt from the payment of all fees, licenses, and taxes, and that therefore their bids "must take this into account and should not include items for such taxes, licenses and other payments to Government agencies." The construction contract was awarded to respondent Gotamco. Issue: WON Respondent is liable to pay 3% contractors tax? Held: NO. In context, direct taxes are those that are demanded from the very person who, it is intended or desired, should pay them; while indirect taxes are those that are demanded in the first instance from one person in the expectation and intention that he can shift the burden to someone else. (Pollock vs. Farmers, L & T Co., 1957 US 429, 15 S. Ct. 673, 39 Law. Ed. 759.) The contractor's tax is of course payable by the contractor but in the last analysis it is the owner of the building that shoulders the burden of the tax because the same is shifted by the contractor to the owner as a matter of selfpreservation. Thus, it is an indirect tax. And it is an indirect tax on the WHO because, although it is payable by the petitioner, the latter can shift its burden on the WHO. In the last analysis it is the WHO that will pay the tax indirectly through the contractor and it

BIR RULING 91-151


This refers to your letter requesting exemption from the payment of the value-added tax on your purchase of prime commodities from food manufacturers/suppliers on the ground that you are a cooperative duly registered with the Cooperative Development

certainly cannot be said that 'this tax has no bearing upon the World Health Organization. The Host Agreement specifically exempts the WHO from "indirect taxes."

the tax. What is shifted only to the intermediate buyer and ultimately to the final purchaser is the burden of the tax.

[NOTE: Respondent was not liable because he is passing it on to WHO, an organization specifically exempt from Direct and Indirect Taxes.] CONTEX CORP v CIR
Petitioner is in the business of manufacturing hospital textiles and garments and other hospital supplies for export. Petitioners place of business is at the Subic Bay Freeport Zone (SBFZ). As an SBMA-registered firm, petitioner is exempt from all local and national internal revenue taxes except for the preferential tax. Petitioner purchased various supplies and materials necessary in the conduct of its manufacturing business. The suppliers of these goods shifted unto petitioner the 10% [now 12%] VAT on the purchased items, which led the petitioner to pay input taxes. Acting on the belief that it was exempt from all national and local taxes, including VAT, petitioner filed two applications for tax refund or tax credit of the VAT it paid. Issue: WON Petitioner is entitled to refund making him exempt from VAT? Held: NO. The exemption of Contex Corp. under Rep. Act No. 7227 (SBMA) was limited only to direct taxes and not to indirect taxes such as the input component of the VAT. The Commissioner pointed out that from its very nature, the value-added tax is a burden passed on by a VAT registered person to the end users; hence, the direct liability for the tax lies with the suppliers and not Contex. It must be stressed that the VAT is an indirect tax. As such, the amount of tax paid on the goods, properties or services bought, transferred, or leased may be shifted or passed on by the seller, transferor, or lessor to the buyer, transferee or lessee. Unlike a direct tax, such as the income tax, which primarily taxes an individuals ability to pay based on his income or net wealth, an indirect tax, such as the VAT, is a tax on consumption of goods, services, or certain transactions involving the same. The VAT, thus, forms a substantial portion of consumer expenditures. Further, in indirect taxation, there is a need to distinguish between the liability for the tax and the burden of the tax. As earlier pointed out, the amount of tax paid may be shifted or passed on by the seller to the buyer. What is transferred in such instances is not the liability for the tax, but the tax burden. In adding or including the VAT due to the selling price, the seller remains the person primarily and legally liable for the payment of

What does the term doing business mean?


Sec. 105 The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be considered as being course of trade or business.

Same definition in RR 16-2005 SECTION 4.106-1. CIR v MAGSAYSAY LINES


National Development Company (NDC) decided to sell in one lot its NMC shares and five (5) of its ships. Magsaysay Lines, Inc. offered to buy the shares and the vessels. The sale of a vessel was an "isolated transaction," not done in the ordinary course of NDCs business, and was thus not subject to VAT. Issue: WON the sale by the NDC of five (5) of its vessels to the private respondents is subject to value-added tax (VAT) under the (Tax Code)? Held: NO. This finding is confirmed by the Revised Charter of the NDC which bears no indication that the NDC was created for the primary purpose of selling real property. The conclusion that the sale was not in the course of trade or business, which the CIR does not dispute before this Court, should have definitively settled the matter. Any sale, barter or exchange of goods or services not in the course of trade or business is not subject to VAT.

IMPERIAL v COLLECTOR
Imperial is an owner of a 9 door camarin which is being leased to 3 merchants paying monthly rentals. Imperial is also a Senator and a Minister in a foreign country, the exercise of the duties of which offices required the greater part of his time and his

VAT REVIEWER | ATTY GONZALES | NASH OL 3D 2015

VAT REVIEWER | ATTY GONZALES | NASH OL 3D 2015


absence from the Philippines. Collector of Internal Revenue imposed and collected taxes on the rental earnings. Issue: WON Imperial is liable for real estate dealers tax for the rental payments he received? (Renting out the camarin considered doing business) Held: NO. The term "carrying on business" does not mean the performance of a single disconnected act, but means conducting, prosecuting and continuing business by performing progressively all the acts normally incident thereof; while "doing business" conveys the idea of business being done, not from time to time, but all the time. "Course of business" is what is usually done in the management of trade or business. What is clear therefore, based on the aforecited jurisprudence, is that "course of business" or "doing business" connotes regularity of activity. In the instant case, the sale/rent was an isolated transaction.

Petitioner is a non-stock corporation organized to promote social intercourse among its members, has established within its premises a restaurant and bar which serves food and drinks to its members and their families and friends. It is a social club, and that it would be exempt from the payment of the fixed and percentage taxes in question should it be able to prove that the sales in its restaurant and bar were made strictly on the "cost-plus-expenses-basis". By this formula is meant that the appellee should have charged its patrons for only the procurement costs of the food and drink served, plus an amount merely sufficient to cover the expenses for the operation of its bar and restaurant. Since it has been shown that this method of operation had been pursued by the appellee, it cannot be considered as engaged in business as a keeper of restaurant and bar, and is not therefore subject to the fixed and percentage taxes imposed by Sections 182 and 191 of the National Internal Revenue Code, as amended. Inasmuch as the record also show that appellant admits that the appellee, as a club, has for its objective the promotion of the game of polo, other athletic sport and outdoor recreations, and to give opportunity for social intercourse to its members, and that the establishment or operation of the bar and restaurant is only incidental to the alleged objectives of appellee's existence as a polo club, we hold that the appellee is not a commercial concern, run for profit.

BIR RULING 113-98 microwave backbone


The decision to sell the microwave backbone transmission work is the result of a long and tedious process; and finally the company decided to proceed with the sale due to pressing financial need that must be filled, otherwise, they would face some financial and market competition problems; and that this is purely an isolated transaction and may never reoccur. The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto. The intended sale of your microwave backbone transmission network to another wireless communications carrier is not in the course of your trade or business of selling telecommunication services. Neither is it incidental thereto since the same does not necessarily follow the primary function of selling telecommunication services. Accordingly, since the sale of the microwave backbone transmission network is just an isolated transaction, said sale is not subject to VAT.

RR 16-2005 Sec 4.109-1(B)(1)(p) amended by RR 4-2007 Sec 14


(p) The following sales of real properties are exempt from VAT, namely: (1) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business. However, even if the real property is not primarily held for sale to customers or held for lease in the ordinary course of trade or business but the same is used in the trade or business of the seller, the sale thereof shall be subject to VAT being a transaction incidental to the taxpayers main business.

VAT RULING No. 012-02


MGM is engaged in the business of buying, selling, distributing, marketing at wholesale and retail. It decided to sell its building. Accordingly, as the properties under consideration were neither primarily held for sale to customers nor for lease in the ordinary course of business of MGM, the sale thereof is not subject to value-added tax.

BIR RULING 276-07


United Pulp and Paper Company, Inc. (UPPC) is engaged in paper and packaging business. UPPC, in the course of its business has acquired/constructed several properties and equipment; that one of these properties is a cogeneration plant (Plant), which UPPC has been using to generate some of the power and steam requirements of its operations; and that UPPC is now into discussions with an interested buyer for the sale of the Plant. In connection therewith, you now request confirmation of your opinion that the sale of UPPC's Plant, a real property not primarily held for sale or lease, is exempt from VAT. YES VAT exempt

MANILA POLO CLUB v MEER

"The term 'primary' is defined as first, principal, chief, leading or first in order of time, or development, or intention. Thus, to be held primarily for sale or lease, the property must be held with the chief intention of being sold or leased.

WHEREFORE, premises considered, this Office holds that since your company is engaged in deep sea fishing and its sale of fishing vessels is not in the course of its business but merely incidental to its primary function, the sale of fishing vessels is not subject to VAT.

BIR RULING 024-05


Request confirmation of your opinion that the assignment by PSPC of the Fixed Assets and Inventory of its LPG business to SGLPI in exchange for shares of stock of the latter pursuant to a tax-free exchange transaction under Section 40(C)(2) of the NIRC, and pursuant to a reorganization of Shell's LPG business worldwide, is not subject to valueadded tax (VAT). In the instant case, the transfer by PSPC of the Fixed Assets of its LPG business to SGLPI in exchange for the latter's shares of stock pursuant to a tax-free exchange transaction under Section 40(C)(2) of the Tax Code of 1997 is by reason of a reorganization, a transaction which is not done with regularity and would no longer be repeated. The assignment of the Fixed Assets is not undertaken in the course of PSPC's regular conduct of trade or business or in pursuit of a commercial or an economic activity, nor is it incidental thereto. The Fixed Assets are not held by PSPC for sale or for lease in the ordinary course of trade or business. Furthermore, the Fixed Assets do not constitute PSPC's stock-in-trade or inventory. Consequently, the assignment of the Fixed Assets is not subject to VAT. However, the assignment by PSPC of the Inventory of its LPG business to SGLPI, although the same does not occur in the regular conduct by PSPC of its trade or business and is likewise a transaction which is not done with regularity and would no longer be repeated is nevertheless subject to VAT pursuant to the above-cited Revenue Regulations No. 162005 Sec. 4.106-8. (1) The assignment by PSPC of the Fixed Assets of its LPG business to SGLPI in exchange for the latter's shares of stock under Section 40(C)(2) of the Tax Code of 1997 and pursuant to a reorganization of Shell's LPG business worldwide is not subject to VAT; and (2) The transfer by PSPC of its Inventory which constitutes stock-in-trade and is deemed an ordinary asset is subject to VAT.

ITAD RULING 29-02


P&G International Operations Pte Ltd. (PGIOPL) will not have a permanent establishment in the Philippines pursuant to Articles 5 and 7 of the RP-Singapore tax treaty 1. While PGIOPL is not subject to Philippine income tax, it remains subject to VAT

The Philippines-Singapore tax treaty only covers elimination of double taxation with respect to taxes on income (Article 2, Taxes Covered). Under the Tax Code of 1997, VAT is not an income tax but a form of sales tax, a tax imposed on consumption levied on the sale or supply of goods and services in the Philippines and on imports of goods into the Philippines. As opposed to income tax which is a direct tax, VAT is an indirect tax such that the amount of tax may be shifted or passed on to the buyer; transferee or lessee of goods, properties or services. Therefore, and since PGIOPL sells its goods in the Philippines in the course of its trade or business, it shall be subject to VAT equivalent to 10% of the gross selling price of the subject goods sold to customers in the Philippines (Section 105 & 106, NIRC). While the taxpayer's profits are derived from the conduct of a trade or business in the Philippines, which thus makes it subject to VAT, the manner in which such business is conducted does not give rise to a permanent establishment as that term is described in the treaty, and as earlier elaborated in BIR Ruling No. ITAD-182-00 dated December 6, 2000. The determination of whether a taxpayer is subject to income tax, on one hand, or VAT, on the other, is grounded on different principles, in this case, one contained in a tax treaty, an international agreement, and the other, in the Tax Code, which is a law of domestic origin. Thus, this Bureau has held several times in the past that a taxpayer may be subject to VAT even if its activities do not give rise to a permanent establishment in the Philippines. Accordingly, PGIOPL shall be required to secure a Tax Identification Number (TIN) and register as a VAT taxpayer, but nonetheless remains a non-resident foreign corporation without a permanent establishment in the Philippines. The issuance of a TIN to a non-resident foreign person/corporation is not conclusive as to the presence of a "permanent establishment" in such Contracting State as defined under Article 5 of the RP-Singapore tax treaty. (BIR Ruling No. DA-071-02-05-99) In this regard, Section 4.107-1 of Revenue Regulations No. 7-95 (Consolidated ValueAdded Tax Regulations), in implementing Section 113 and 236 of the Tax Code of 1997, provides that any person who sells, barters, exchanges, leases goods or properties and renders services subject to VAT is required to secure a Taxpayer Identification Number (TIN) and register as a VAT taxpayer.

BIR RULING 218-06


This refers to your letter dated March 20, 2006 stating that your company is engaged in deep sea fishing; that in your operation, you are using vessels for fishing, and that however, when you buy additional vessels for the said operation, you do not recognize the input tax paid since you are a VAT exempt company, as the said input tax forms part of your cost. In connection therewith, you now request for ruling as to whether or not the sale of your fishing vessels, which is an incidental transaction, is subject to value-added tax.

ITAD RULING 93-05

VAT REVIEWER | ATTY GONZALES | NASH OL 3D 2015

VAT REVIEWER | ATTY GONZALES | NASH OL 3D 2015


Qinetiq has no permanent establishment in the Philippines and thus, its income derived from the upgrade of the three Jacinto Class Patrol Vessels (JCPVs) of the Armed Forces of the Philippines (AFP) are not subject to Philippine tax and to the corresponding withholding tax pursuant to the provisions of the Philippines-United Kingdom (RP-UK) tax treaty and to the 10% value-added tax (VAT). JCPVs otherwise known as Weapons System Upgrade upon which the contract is divided into two portions, namely: (1) the "offshore portion" consisting of the delivery, management and delivery in the UK of certain equipment, and (2) the "onshore portion" consisting of functional testing, repair and installation of the equipment The offshore portion was retained by Qinetiq while the onshore portion was subcontracted by Qinetiq to Qinetiq Philippines (QPCI). Ruling: Considering that Qinetiq subcontracted to QPCI the onshore portion of the contract which consist of functional testing, repair and installations performed in the Philippines by the latter and not by the former nor by any of its personnel, Qinetiq is not deemed to have a permanent establishment in the Philippines to which its business profits may be attributed to. Therefore, this Office is of the opinion and so holds that the payments by AFP to Qinetiq are not subject to Philippine income tax and VAT pursuant to Article 7 in relation to Article 5 of the RP-UK tax treaty, and Section 108 of the Tax Code of 1997, respectively. (BIR Ruling No. DA-ITAD 009-03 dated January 16, 2003) On the other hand, since QPCI is a domestic corporation, any income/profit it derives from the subcontracting agreement with Qinetiq are subject to the 10% value-added tax and ordinary corporate income tax pursuant to Sections 108 and 27(A) of the 1997 Tax Code.

(b) The right or the privilege to use patent, copyright, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; (c) The right or the privilege to use in the Philippines of any industrial, commercial or scientific equipment; (d) The right or the privilege to use motion picture films, tapes and discs; and (e) Radio, television, satellite transmission and cable television time. 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.

BIR RULING NO. 174-98


"We are engaged in the capture and sale of fish in their original state which is exempted from VAT. Our sales constitute domestic sales and our buyers are canners who use our products as their raw materials for canning usually intended for export. In addition, we also have direct export sales where our fish in frozen form are shipped to foreign countries. In the course of our fishing (capturing) operations, we have many purchases (supplies, parts, fuel, etc.) wherein our suppliers charge us VAT thereby, giving us considerable amount of input VAT." Based on the foregoing, you are requesting information on how you can apply for the refund or tax credit of the input VAT being charged by your suppliers. In reply, please be informed that your exemption from VAT on your sale of fish under Section 109(d) of the Tax Code of 1997 covers only your direct tax liability, meaning your output VAT on the gross receipts from your sale of fish in their original state. However, you cannot claim exemption from the input VAT being passed on to you by the suppliers on your purchase of supplies, parts, fuels, etc., as forming part of the invoice price because VAT, being an indirect tax, may be shifted or passed on to the buyer of goods and services pursuant to Sec. 105 of the Tax Code of 1997.

VAT ON THE SALE OF GOODS AND PROPERTIES


SEC. 106. Value-Added Tax on Sale of Goods or Properties. (A) Rate and Base of Tax. - There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, value-added tax equivalent to twelve percent (12%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor. (1) 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;

(1) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business
RR 16-2005 SECTION 4.106-3. "Sale of Real Properties". Sale of real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business of the seller shall be subject to VAT. In the case of sale of real properties on the installment plan, the real estate dealer shall be subject to VAT on the installment payments, including interest and penalties, actually and/or constructively received by the seller.

Sale of residential lot exceeding P1,919,500.00, residential house and lot or other residential dwellings exceeding 3,199,200.00, where the instrument of sale (whether the instrument is nominated as a deed of absolute sale, deed of conditional sale or otherwise) is executed on or after July 1, 2005, shall be subject to 12% VAT. Installment sale of residential house and lot or other residential dwellings exceeding P1,000,000.00, where the instrument of sale (whether the instrument is nominated as a deed of absolute sale, deed of conditional sale or otherwise) was executed prior to July 1, 2005, shall be subject to 10% VAT. "Sale of real property on installment plan" means sale of real property by a real estate dealer, the initial payments of which in the year of sale do not exceed twenty-five percent (25%) of the gross selling price. However, in the case of sale of real properties on the deferred-payment basis, not on the installment plan, the transaction shall be treated as cash sale which makes the entire selling price taxable in month of sale. "Sale of real property by a real estate dealer on a deferred payment basis, not on the installment plan" means sale of real property, the initial payments of which in the year of sale exceed twenty-five percent (25%) of the gross selling price. "Initial payments" means payment or payments which the seller receives before or upon execution of the instrument of sale and payments which he expects or is scheduled to receive in cash or property (other than evidence of indebtedness of the purchaser) during the year when the sale or disposition of the real property was made. It covers any down payment made and includes all payments actually or constructively received during the year of sale, the aggregate of which determines the limit set by law. Initial payments do not include the amount of mortgage on the real property sold except when such mortgage exceeds the cost or other basis of the property to the seller, in which case, the excess shall be considered part of the initial payments. Also excluded from initial payments are notes or other evidence of indebtedness issued by the purchaser to the seller at the time of the sale. Pre-selling of real estate properties by real estate dealers shall be subject to VAT in accordance with rules prescribed above. "Real estate dealer" includes any person engaged in the business of buying, developing, selling, exchanging real properties as principal and holding himself out as a full or parttime dealer in real estate. Transmission of property to a trustee shall not be subject to VAT if the property is to be merely held in trust for the trustor and/or beneficiary. However, if the property transferred is one for sale, lease or use in the ordinary course of trade or business and the transfer constitutes a completed gift, the transfer is subject to VAT as a deemed sale transaction pursuant to Sec. 4.106-7(a)(1) of these Regulations. The transfer is a completed gift if the transferor divests himself absolutely of control over the property, i.e., irrevocable transfer of corpus and/or irrevocable designation of beneficiary.

VAT RULING NO. 037-01


Are rental income from lease of "residential dormitory" exempt from 10% VAT, as well as to the 3% percentage tax? Yes Gross receipts from lease of residential units is exempt from the 10% VAT, as follows: "(x) Lease of a residential unit with a monthly rental not exceeding Eight Thousand (P8,000.00) Pesos: . . ." "(x) Lease of residential units with a monthly rental per unit not exceeding Eight Thousand (P12,800.00) Pesos, regardless of the amount of aggregate rentals received by the lessor during the year, . . ." The term 'residential units' shall refer to apartments and houses & lots used for residential purposes, and buildings or parts or units thereof used solely as dwelling places (e.g., dormitories, rooms and bed spaces) except motels, motel rooms, hotels, hotel rooms, lodging houses, inns and pension houses. The term 'unit' shall mean an apartment unit in the case of apartments, house in the case of residential houses; per person in the case of dormitories, boarding houses and bed spaces; and per room in case of rooms for rent. [RR 4-2007]

(b) The right or the privilege to use patent, copyright, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right BIR RULING 129-98
Warner Bros. shall allow Studio Ventures Inc to operate Warner Bros. Studio Stores (Stores) in the Philippines which will use copyrighted characters and the proprietary marks belonging to Warner and its affiliates (WB Intellectual Property), as well as sell products designed and manufactured by or for Warner specifically for sale in the Stores. In consideration of the grant Studio shall pay Warner or its designee royalties equivalent to a percentage of the aggregate gross sales of the Stores in the Philippines The remittance by Studio to Warner of the said royalties shall be subject to the 10% value-added tax pursuant to Section 108(A)(1) of the Tax Code of 1997. Moreover, the VAT on rental and/or royalties payable to non-resident foreign corporations or owners for the sale of services and use or lease of properties in the Philippines shall be based on the contract price agreed upon by the licensor and licensee. The licensee shall be responsible for the payment of VAT on such rentals and/or royalties in behalf of the non-resident foreign corporation or owner by filing a separate VAT declaration/return for this purpose. The duly validated VAT declaration/return is

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sufficient evidence in claiming input tax credit by the licensee. (Secs. 4.102-1(b), Revenue Regulations No. 7-95)

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In reply, please be informed that government entities and instrumentalities, including government-owned or controlled corporations, are subject to VAT. With regard to question No. 2, please be informed that the buying and selling of TV airtime constitutes rendition of services to others for a consideration subject to the 10% value-added tax. As lessor, TV and radio broadcasting station owners are the ones primarily liable to the payment of VAT although they can pass on to PIA the amount of tax as part of cost, pursuant to Section 105. Finally, P.D. No. 1362 allowing broadcasting and television stations to import radio or television equipment, spare parts and allied technical and program materials to be used exclusively in their broadcast operations without prepayment of customs duty and compensating tax (now VAT) in return for the use by the Government of the radio or television time and/or other facilities of the former on the basis of the approved contract or contracts entered into with the Department of Public Information (now PIA), has been repealed.

BIR RULING NO. 104-98


Dae Ryung Ind., Inc. (Philippines) is a PEZA-registered Korean electronics firm and is a wholly-owned subsidiary of Dae Ryung Ind., Inc. (Korea) that it is engaged in the manufacture of printed circuit boards and other telecommunications equipment, such as satellite video receivers, radar detectors and cordless phones. In reply, please be informed that under Section 24 of R.A. No. 7916, otherwise known as the "Special Economic Zone Act of 1993", business and enterprises within the ECOZONE as defined by Section 5 thereof shall, in lieu of paying local and national taxes, be liable to the payment of the five percent (5%) preferential tax rate based on gross income earned The aforementioned 5% preferential tax is a commutation of all the national and local taxes otherwise due from businesses and enterprises operating within the ECOZONE. Such being the case, Dae Ryung Ind., Inc. (Philippines) is considered exempt from all direct and indirect taxes hence, may not legally be passed-on with the value-added tax otherwise due from its foreign licensor vis-a-vis the said royalty payments. A foreign licensor who is a non-VAT registered person, and the aforesaid royalty payments are accordingly exempt from the valued-added tax. Consequently, Dae Ryung Ind., Inc. (Philippines) is also exempt from the obligation to withhold and remit the 10% value-added tax on payments and remittances of the aforesaid royalties which otherwise would be due thereon pursuant to the provisions of Section 110 of the National Internal Revenue Code.

BIR RULING NO. 059-88


Should advertising agencies be taxed at 10% only on their 15% agency commission rather than on the gross receipts which include the 85% due to media/production supplier? YES As regards the basis of the 10% VAT payable by an advertising agency, the Department of Finance has ruled that only 15% of its gross billings, constitute the gross receipts subject to the contractor's tax then payable by said agency since this amount is retained by the agency as its commission from media. Accordingly, and since the 10% VAT is based on gross receipts which means the total amount of money or its equivalent representing the contract price, compensation or service fee said 15% of the gross billings of an advertising agency, likewise, constitutes the gross receipts of said agency for purposes of the 10% VAT.

Note: Destination principle is applied. ECOZONE is considered outside the situs. Sale of a foreign corp to a PEZA is exempt. (e) Radio, television, satellite transmission and cable television time. BIR RULING NO. 014-98
This refers to you letter stating that your members regularly receive broadcast order for airtime from the Philippine Information Agency (PIA); you are inquiring if the VAT requirement applies to PIA regarding government plugs for airing in radio and TV stations. More specifically, you are requesting a ruling on the following: 1. 2. 3. Is the PIA subject to VAT? Are contracts entered into for airtime subject to VAT? If these contracts are under PD 1362, will such contracts be subject to VAT?

BIR RULING NO. 085-88


In reply to your letter, please be informed that effective January 1, 1988, advertising agencies are now subject to the value-added tax of 10% on their gross receipts pursuant to Section 102(a) of the Tax Code as amended by E.O. No. 273

BIR RULING NO. 027-98


Whether or not electric cooperatives, including existing electric cooperatives registered with the National Electrification Administration (NEA) under P.D. No. 269 which fail or opt not to register with the Cooperative Development Authority (CDA) pursuant to R.A. No. 6938, is exempt from VAT on their local purchases of machineries, equipment, including spare parts, which shall be used in the generation of electricity? YES

The exemption from VAT of electric cooperatives duly registered with the CDA or NEA under Section 107 (s) of the Tax Code of 1997 covers only their sales of electricity and importation of machineries and equipment, including spare parts thereof, which shall be used in the generation and distribution of electricity. However, the local purchases by electric cooperatives of machineries, equipment and spare parts shall be subject to VAT even if the same are to be used in the generation of electricity. This is so, because VAT is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. (Section 105, Tax Code.) Accordingly, electric cooperatives should pay the 10% VAT being passed on by the local suppliers on the former's purchases of machineries and equipment. SEC. 106. 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.

Same definition in RR 16-2005 SECTION 4.106-4


RR 16-2005 SECTION 4.106-4. 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 the fair market value whichever is higher. If the VAT is not billed separately in the document of sale, the selling price or the consideration stated therein shall be deemed to be inclusive of VAT. The term 'fair market value' shall mean whichever is higher of: 1) the fair market value as determined by the Commissioner/zonal value, or 2) the fair market value as shown in schedule of values of the Provincial and City Assessors (real property tax declaration). However, in the absence of zonal value/fair market value as determined by the Commissioner, gross selling price refers to the market value shown in the latest real property tax declaration or the consideration, whichever is higher. If the gross selling price is based on the zonal value or market value of the property, the zonal or market value shall be deemed exclusive of VAT. Thus, the zonal value/market value, net of the output VAT, should still be higher than the consideration in the document of sale, exclusive of the VAT. If the sale of real property is on installment plan where the zonal value/fair market value is higher than the consideration/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, appearing in the Contract to Sell/Contract of Sale applied to the zonal value/fair market value of the property at the time of the execution of the Contract to Sell/Contract of Sale at the inception of the contract. Thus, since the output VAT is based on the market value of the property which is higher than the consideration/selling price in the sales document, exclusive of the VAT, the input VAT that can be claimed by the buyer shall be the separately-billed output VAT in the sales document issued by the seller. Therefore, the output VAT which is based on the 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.

Illustration: ABC Corporation sold a parcel of land to XYZ Company on July 2, 2006 for P1,000,000.00, plus the output VAT, with a monthly installment payment of P10,000.00, plus the output VAT. The zonal value of the subject property at the time of sale amounted to P1,500,000.00. Compute for the output tax due on the installment payment. Formula: Actual collection (exclusive of the VAT) x Zonal value x 12% Agreed consideration (exclusive of the VAT) P10,000.00 x P1,500,000.00 = P15,000.00 P1,000,000.00 P15,000.00 x 12% = P1,800.00 ======= Selling price is the amount of consideration in a contract of sale between the buyer and seller or the total price of the sale which may include cash or property and evidence of indebtedness issued by the buyer, excluding the VAT."

For sale of real property- whichever is higher of GSP or FMV FMV is whichever is higher of: 1) Zonal Value 2) Provincial and City Assessors (real property tax declaration) Deemed VAT inclusive NET of VAT
106(A)(2) Zero-Rated Sales of Goods (2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: (a) Export Sales. - The term 'export sales' means: (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 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); (2) 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 Bangko Sentral ng Pilipinas (BSP); (3) Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed seventy percent (70%) of total annual production; (4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); and

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(5) Those considered export sales under Executive Order NO. 226, otherwise known as the Omnibus Investment Code of 1987, and other special laws.

What are Zero-rated Sales? A zero-rated sale by a VAT-registered person is a taxable transaction for VAT purposes, but shall not result in any output tax. Input tax on purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund. (RR 16-2005) Transactions: a) Sale of goods or properties b) Services and use/lease of properties
SECTION 4.106-5. Zero-Rated Sales of Goods or Properties. A zero-rated sale of goods or properties (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 these Regulations. The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: (a) Export sales. "Export Sales" 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); (2) The sale of raw materials or packaging materials to a non-resident 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, paid for in acceptable foreign currency, and accounted for in accordance with the rules and regulations of the BSP; (3) The sale of raw materials or packaging materials to an export-oriented enterprise whose export sales exceed seventy percent (70%) of total annual production; Any enterprise whose export sales exceed 70% of the total annual production of the preceding taxable year shall be considered an export-oriented enterprise. (4) Sale of gold to the BSP; and (5) Transactions considered export sales under Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987, and other special laws.

"Considered export sales under Executive Order No. 226" shall mean the Philippine port F.O.B. value determined from invoices, bills of lading, inward letters of credit, landing certificates, and other commercial documents, of export products exported directly by a registered export producer, or the net selling price of export products sold by a registered export producer to another export producer, or to an export trader that subsequently exports the same; Provided, That sales of export products to another producer or to an export trader shall only be deemed export sales when actually exported by the latter, as evidenced by landing certificates or similar commercial documents; Provided, further, That pursuant to EO 226 and other special laws, even without actual exportation, the following shall be considered constructively exported: (1) sales to bonded manufacturing warehouses of export-oriented manufacturers; (2) sales to export processing zones pursuant to Republic Act (RA) Nos. 7916, as amended, 7903, 7922 and other similar export processing zones; (3) sale to enterprises duly registered and accredited with the Subic Bay Metropolitan Authority pursuant to RA 7227; (4) sales to registered export traders operating bonded trading warehouses supplying raw materials in the manufacture of export products under guidelines to be set by the Board in consultation with the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC); (5) sales to diplomatic missions and other agencies and/or instrumentalities granted tax immunities, of locally manufactured, assembled or repacked products whether paid for in foreign currency or not. (6) The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations; Provided, that the same is limited to goods, supplies, equipment and fuel pertaining to or attributable to 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 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 any portion of such fuel, goods or supplies is used for purposes other than that mentioned in this paragraph, such portion of fuel goods and supplies shall be subject to twelve percent (12%) output VAT starting February 1, 2006. (b) "Foreign Currency Denominated Sale". "Foreign Currency Denominated Sale" means the sale to a non-resident of goods, except those mentioned in Secs. 149 and 150 of the Tax Code, assembled or manufactured in the Philippines for delivery to a resident in the Philippines, paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP. Sales of locally manufactured or assembled goods for household and personal use to Filipinos abroad and other non-residents of the Philippines as well as returning Overseas Filipinos under the Internal Export Program of the government paid for in convertible foreign currency and accounted for in accordance with the rules and regulations of the BSP shall also be considered export sales. (c) Sales to Persons or Entities Deemed Tax-exempt Under Special Law or International Agreement. Sale of goods or property to persons or entities who are tax-exempt under

special laws or international agreements to which the Philippines is a signatory, such as, Asian Development Bank (ADB), International Rice Research Institute (IRRI), etc., shall be effectively subject to VAT at zero-rate. SECTION 4.106-6. Meaning of the term 'Effectively Zero-Rated Sale of Goods and Properties'. 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.

(a) Export Sales. BIR RULING NO. 113-94


Letter requesting for a clarification of the tax consequences in the export of gold ingots in the light of certain provisions of Central Bank Circular No. 1389 dated April 13, 1989 specifically stating "1. Gold in any form, other than panned gold which can only be sold directly to the Central Bank, can be exported without need of any permit or clearance from the Central Bank. "2. Likewise, no taxes are required in the export of the aforementioned commodity." In reply, please be informed that under existing mining practice in the country, gold ingots (or gold bars) are produced only by mining companies engaged in the integrated activity of quarrying and processing mineral ores. Metallic minerals are subject to 5% excise tax based on the actual market value of the gross output thereof at the time of removal, in the case of locally extracted or produced, or the value used by the Bureau of Customs in determining tariff and customs duties, net of excise tax and value-added tax, in the case of importation. In addition to the excise tax on gold ores imposed under Section 151 of the Tax Code, when gold ingots are sold to the Central Bank, these are again subject to 10% VAT based on the gross selling price thereof at the time of sale pursuant to Section 100 of the Tax Code. In other words, sale of gold to the Central Bank is not considered export sale under Section 100 (a) (2) of the same Code as held under VAT Ruling No. 08-92 dated January 23, 1992 which revoked earlier rulings stating the contrary rule. However, if the gold ingots are actually exported by the mining company or by the producer thereof, it is a zero-rated pursuant to Section 100 (a) (2) of the Tax Code.

In reply to your letter, please be informed that metallic minerals are now subject to 5% excise tax based on the actual market value of the gross output thereof at the time of removal, in the case of those locally extracted or produced; or the value used by the Bureau of Customs in determining tariff and customs duties, net of excise tax and valueadded tax, in the case of importation pursuant to Section 151(a)(3) of the Tax Code as amended by Executive Order No. 273. Said products are no longer subject to the royalty tax. Moreover, if the mineral products are exported abroad, the gross sales derived therefrom are exempt from the value-added tax. If the firm is VAT-registered, the export sales are automatically subject to zero rate. (Section 100(a)(1), Tax Code as amended by Executive Order No. 273).

BIR RULING NO. 170-87


In reply to your letter, please be informed that ordinary ice is water transformed into solid forms. Since ordinary ice is an essential article, the same being utilized as a food product for human consumption, it is considered processed food product; hence, subject to the 10% sales tax, pursuant to Section 163 (2)(a) of the Tax Code, as amended by Executive Order No. 36.

REVENUE MEMORANDUM CIRCULAR NO. 07-94 Subject: Value-Added Tax (VAT on Sale of Water).
In BIR Ruling No. 017-88, dated February 1, 1988, it was held that sale of fresh water is exempted from the 10% VAT, pursuant to Section 103(b) of the National Internal Revenue Code, as amended by Executive Order No. 273, otherwise known as the VAT Law, the pertinent portion of which reads as follows: "In reply, please be informed that fresh water comes within the purview of agricultural food products; hence, the sale thereof in all stages of distribution is exempt from the value-added tax pursuant to Section 103(b) of the Tax Code as amended by Executive Order No. 273." In view of the criticisms against the validity of the aforementioned BIR Ruling 017-88 and in light of the policy to strengthen and to improve enforcement of the national internal revenue tax laws, a re-study thereof is imperative. Section 103(b), NIRC, provides: "Sale or importation in their original state of agricultural . . . food products . . ." shall be exempted from VAT. Water is not agricultural product. Rather, it is a mineral. Thus Definition of minerals. "The term 'minerals' shall mean all naturally occurring inorganic substances (found in nature) whether in solid, liquid, gaseous, or any intermediate state." (Sec. 257(b), NIRC, as amended by Batas Pambansa Blg. 84).

BIR RULING NO. 182-88

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VAT REVIEWER | ATTY GONZALES | NASH OL 3D 2015

VAT REVIEWER | ATTY GONZALES | NASH OL 3D 2015


Definition of mineral products. "The term 'mineral products' shall mean things produced and prepared in a marketable state by simple treatment such as washing or drying, but without undergoing any chemical change or process or manufacturing, by the lessee, concessionaire or owner of mineral lands." (ibid). Definition of agriculture. "The cultivation of soil for food products or any other useful or valuable growths of the field or garden . . ." (Bouvier's Law Dictionary, p. 167) Definition of agricultural product. "That which is the direct result of husbandry and the cultivation of the soil. . . ." (ibid) It is clear from the foregoing that the term agricultural product pertains to organic products through cultivation of the soil, whereas the term mineral product pertains to inorganic substances naturally occurring in nature. It follows that water, being a substance naturally occurring in nature, is mineral rather than agricultural product. Accordingly, water, may not legally be classified as agricultural food product within the purview of Section 103(b), NIRC. Hence, sale of water, whether in the form of bottled mineral water or water delivered/supplied to inter-island and ocean-going vessels by persons engaged in the business of supplying water to the aforesaid inter-island and ocean-going vessels, shall be subject to 10% VAT, pursuant to Section 100(a), NIRC. This Circular revokes VAT Ruling No. 017-88, dated February 1, 1988.

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The Philippine VAT system adheres to the cross-border doctrine which means that no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. Hence, actual export of goods and services from the Philippines to a foreign country must be free of VAT; while those destined for use or consumption within the Philippines shall be imposed with ten percent (10%) *now 12%+ VAT. Sales made by an enterprise within a non-ECOZONE territory, i.e., Customs Territory, to an enterprise within an ECOZONE territory shall be free of VAT. Sales of goods, properties and services by a VAT-registered supplier from the Customs Territory to an ECOZONE enterprise shall be treated as export sales. If such sale is made by a VAT-registered supplier, they shall be subject to VAT at 0%. In zero-rated transactions, the VAT-registered supplier shall not pass on any output VAT to the ECOZONE enterprise and at the same time, shall be entitled to claim tax credit/refund of its input VAT attributable to such sales. Meanwhile, sales to an ECOZONE enterprise made by a non-VAT or unregistered supplier would only be exempt from VAT and the supplier shall not be able to claim credit/refund of its input VAT. In this case, Toshiba opted to avail itself of the income tax holiday. Therefore, it was likely that suppliers from the Customs Territory passed on output VAT to respondent Toshiba and the latter incurred input VAT. Toshiba can claim such input VAT as credit/refund.

CIR vs. Toshiba Information Equipment


FACTS: Toshiba Information Equipment is a PEZA-registered and VAT-registered enterprise engaged in the business of manufacturing and exporting electrical and mechanic machinery relating to office automation, information technology and computer hardware and software. Toshiba filed its VAT returns reporting input VAT. It alleged that the said input VAT was from its purchases of capital goods and services which remained unutilized since it had not yet engaged in any business activity or transaction for which it may be liable for output VAT. Toshiba filed for tax refund/tax credit. On a petitioner for review before the CTA, the court ruled in Toshibas favor and granted the refund. On appeal, the CIR contends that Toshiba, being registered with PEZA, is not subject to VAT and the capital goods and services it purchases are considered not used in VAT taxable business. Therefore, Toshiba is not entitled to a refund/ tax credit. ISSUE: Whether Toshiba is entitled to the tax credit/refund? HELD: YES. PEZA-registered enterprises, which would necessarily be located within ECOZONES, are VAT-exempt entities not because of Section 24 of RA 7926 (which imposes the 5% preferential tax rate on gross income of PEZA-registered enterprises in lieu of all taxes) but rather because of Section 8 of the same which establishes the fiction that ECOZONES are foreign territory. As a result, sales made by a supplier in the Customs Territory (national territory of the Philippines outside the borders of the ECOZONE) to a purchaser in the ECOZONE shall be considered as exportation from the Customs Territory. Conversely, sales made by a supplier from the ECOZONE to a purchaser in the Customs Territory shall be considered as an importation into the Customs Territory.

(b) "Foreign Currency Denominated Sale" Sale to a nonresident of goods: Except those mentioned in Sections 149 and 150 (automobiles and nonessential goods like jewelry, perfume, and yachts) Assembled or manufactured in the Philippines for delivery to a resident in the Philippines Paid for in acceptable foreign currency AND accounted for in accordance with the rules and regulations of the BSP. Sales of locally manufactured or assembled goods for household and personal use to Filipinos abroad and other non-residents of the Philippines as well as returning Overseas Filipinos under the Internal Export Program of the government paid for in convertible foreign currency AND accounted for in accordance with the rules and regulations of the BSP shall also be considered export sales. Effectively zero-rated sales:

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. e.g.: a) Sales to enterprises duly registered & accredited with the i) Subic Bay Metropolitan Authority, ii) Philippine Economic Zone Authority (PEZA), b) International agreements to which the Phil. is signatory, such as i) Asian Development Bank (ADB), ii) International Rice Research Institute (IRRI)

Furthermore, the unutilized excess input VAT of Filgifts from its local purchases which are directly attributable or ratably apportioned to its zero-rated sales can be claimed for refund or tax credit pursuant to Section 112 of the Tax Code.

BIR RULING NO. 033-98


Zenitaka is a domestic corporation engaged in providing construction services and most of its clients are export enterprises registered within the Philippine Economic Zone Authority (PEZA) located within the Special Economic Zones (SEZs); that in billing its clients for construction services rendered, Zenitaka passes on the 10% VAT to its clients. Zenitaka does not want to shoulder the payment of the VAT; that to meet the twin objectives of market competitiveness and financial viability, Zenitaka must avail of incentives granted under Philippine laws (e.g., Expanded Value-Added Tax Law) to exporters and export-related industries; and that under the E-VAT Law, export sales of goods and services and sales of goods and services by export related enterprises may qualify as VAT-exempt transactions, zero-rated transactions or effectively zero-rated transactions. ISSUE: WON the sales of construction services to export enterprises registered within the Philippine Economic Zone Authority (PEZA) are effectively zero-rated transactions? Held: YES. Section 4.102-2(b)(3) of Revenue Regulations No. 7-95, as amended by Revenue Regulations No. 6-97, provides that services rendered by VAT-registered persons 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-rate. Effectively zero-rated sale of services shall refer to the sale by a VAT-registered person to a person or entity who was granted indirect tax exemption under special laws, or international agreements. Effectively-zero-rated transactions shall be limited to the local sale of services to persons or entities who enjoy exemptions from indirect taxes under subparagraph (b), Nos. (3), (4) and (5) of Section 4.102-2 of Revenue Regulations No. 7-95, as amended. Such being the case, the domestic sales of construction services by Zenitaka, a VATregistered general contractor to export companies registered within the PEZA, are zerorated. The sale of services by Zenitaka shall not result in any output tax. However, the input tax on its purchases of goods, properties or services related to such zero-rated sale shall be available as a tax credit or refund in accordance with Revenue Regulations No. 795. It shall be understood, however, Zenitaka, shall apply with the Revenue District Officer concerned having jurisdiction over its principal place of business for the effective zero-rating of sales of services to the export enterprises, registered with PEZA within the SEZ, pursuant to Revenue Regulations No. 7-95, as amended. Without an approved application for effective zero-rating, the transaction otherwise entitled to zero-rating shall be considered exempt.

BIR RULING [DA-119-06]


1. That the sales of Filgifts to its nonresident clients for delivery to a resident of the Philippines, which are paid through credit card charging in US Currency, can be considered as "foreign currency denominated sales" and therefore, subject to valueadded tax ("VAT") at zero percent (0%) rate; and 2. That the unutilized excess input VAT of Filgifts from its local purchases which are directly attributable or ratably apportioned to its zero-rated sales can be claimed for refund or tax credit. Filgifts is a domestic corporation and provides online shopping mall wherein clients can purchase gifts, flowers and other similar items online while they are situated outside the Philippines, and deliver the same to their relatives here in the Philippines; and that the clients are billed in US Currency and that all payments are made through credit card charging and the collections received by Filgifts are also in US Currency. RR 16-2005 SEC. 4.106-5. (b) Foreign Currency Denominated Sale. The phrase 'foreign currency denominated sale' means sale to a nonresident of goods, except those mentioned in Sections 149 and 150, assembled or manufactured in the Philippines for delivery to a resident in the Philippines, paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP). In VAT Ruling No. 030-2004: "Therefore, when your non-resident client avails of your online shopping mall services and pays through credit card charging, said sale is a foreign currency denominated sale subject to value-added tax at zero percent (0%) rate." The sales of Filgifts to its nonresident clients for delivery to a resident of the Philippines are being paid for in US Currency through credit card charging, such sales are considered foreign currency denominated sale, and thus subject to value-added tax at zero percent (0%) rate.

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VAT REVIEWER | ATTY GONZALES | NASH OL 3D 2015

VAT REVIEWER | ATTY GONZALES | NASH OL 3D 2015


REVENUE MEMORANDUM CIRCULAR NO. 74-99
The Philippines' Value Added Tax (VAT) law adheres to the "Cross Border Doctrine" of the VAT System, which basically means that no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. Hence, actual export of goods and services from the Philippines to a foreign country must be free of the VAT. Conversely, those destined for use or consumption within the Philippines shall be imposed with the 10% VAT. Accordingly, interpretation of the provisions of the VAT law has been harmonized with the "Cross Border Doctrine". SECTION 3. Tax Treatment Of Sales Made By A VAT Registered Supplier From The Customs Territory, To A PEZA Registered Enterprise. (1) If the Buyer is a PEZA registered enterprise which is subject to the 5% special tax regime, in lieu of all taxes, except real property tax, pursuant to R.A. No. 7916, as amended: (a) Sale of goods (i.e., merchandise). This shall be treated as indirect export hence, considered subject to zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of R.A. No. 7916, in relation to ART. 77(2) of the Omnibus Investments Code. (b) Sale of service. This shall be treated subject to zero percent (0%) VAT under the "cross border doctrine" of the VAT System, pursuant to VAT Ruling No. 032-98 dated Nov. 5, 1998. (2) If Buyer is a PEZA registered enterprise which is not embraced by the 5% special tax regime, hence, subject to taxes under the NIRC, e.g., Service Establishments which are subject to taxes under the NIRC rather than the 5% special tax regime: (a) Sale of goods (i.e., merchandise). This shall be treated as indirect export hence, considered subject to zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of R.A. No. 7916 in relation to ART. 77(2) of the Omnibus Investments Code. (b) Sale of Service. This shall be treated subject to zero percent (0%) VAT under the "cross border doctrine" of the VAT System, pursuant to VAT Ruling No. 032-98 dated Nov. 5, 1998. In the final analysis, any sale of goods, property or services made by a VAT registered supplier from the Customs Territory to any registered enterprise operating in the ecozone, regardless of the class or type of the latter's PEZA registration, is actually qualified and thus legally entitled to the zero percent (0%) VAT. Accordingly, all sales of goods or property to such enterprise made by a VAT registered supplier from the Customs Territory shall be treated subject to 0% VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC, in relation to ART. 77(2) of the Omnibus Investments Code, while all sales of services to the said enterprises, made by VAT registered suppliers from the Customs Territory, shall be treated effectively subject to the 0% VAT, pursuant to Section 108(B)(3), NIRC, in relation to the provisions of R.A. 7916 and the "Cross Border Doctrine" of the VAT system.

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A. Any sale of goods, property or services made by a VAT registered supplier from the Customs Territory* to any registered enterprise operating in the ecozone, REGARDLESS of the class or type of the latters PEZA registration, is actually qualified and thus LEGALLY ENTITLED TO THE 0% VAT. Accordingly, all sales of goods or property to such enterprise made by a VAT registered supplier from the Customs Territory shall be treated SUBJECT TO 0% VAT. Customs Territory means the national territory of the Phil OUTSIDE of the proclaimed boundaries of the ECOZONES. B. By a VAT-Exempt Supplier from the Customs Territory to a PEZA registered enterprise Sale of goods, property and services by VAT-Exempt supplier from the Customs Territory to a PEZA registered enterprise shall be treated EXEMPT FROM VAT, regardless of whether or not the PEZA registered buyer is subject to taxes under the NIRC or enjoying the 5% special tax regime. C. By a PEZA Registered Enterprise 1) Sale of Goods by a PEZA registered enterprise to a buyer from the Customs Territory (ie domestic sales) -- this case shall be treated as a technical IMPORTATION made by the buyer. Such buyer shall be treated as an IMPORTER thereof and shall be imposed with the corresponding VAT. 2) Sale of Services by a PEZA registered enterprise to a buyer from the Customs Territory this is NOT embraced by the 5% special tax regime, hence, such seller shall be SUBJECT TO 12% VAT. 3) Sale of Goods by a PEZA registered enterprise to Another PEZA registered enterprise (ie Intra-ECOZONE Sales of Goods) this shall be EXEMPT from VAT. 4) Sale of Services by ECOZONE enterprise, to Another ECOZONE enterprise (Intra-

ECOZONE enterprise Sale of Service) (a) if PEZA registered seller is subject to 5% special tax regime EXEMPT from VAT (b) if PEZA registered seller is subject to taxes under NIRC (ie not subject to 5% special tax regime) subject to 0% VAT pursuant to cross border doctrine

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VAT REVIEWER | ATTY GONZALES | NASH OL 3D 2015