VALUE ADDED TAX

MONZA ULTIMATE REVIEWER 1. Definition a. It is a form of sales tax. It 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. It is an indirect tax, which may be shifted or passed on to the buyer, transferee or lessee of goods, properties or services. 2. Nature a. It is a Privilege Tax i. It is imposed not on the goods or services as such but on the privilege of selling or importing goods, or rendering services for a fee, remuneration or consideration. b. It is a Percentage Tax i. It is imposed on the sale, barter, exchange or importation of goods or the sale of services or lease/ sale of properties based upon the gross value in money or receipt derived by the manufacturer, producer, importer or seller who is liable for its timely payment. c. It is National Tax i. It is levied at all stages of the production channels. d. It is an Ad Valorem Tax i. It is imposed by law directly not on the thing or services but on the act (sale, importation or performance of service) of the seller, importer, or contractor who is exclusively made liable for its timely payment. It is imposed on the gross selling price or gross receipt derived from the sale, barter, exchange of goods or properties or services or the lease of goods or properties in the course of trade or business. e. It is an Indirect Tax i. The amount of tax may be shifted or passes on to the buyer, transferee, or lessee of the goods properties or services. 3. Characteristics a. It is Indirect b. Equitable i. The law is equipped with a threshold margin (P1, 919,500) c. Regressive i. The Constitution does not really prohibit the imposition of indirect taxes which is essentially regressive. What it simply provides is that Congress shall evolve a progressive system of taxation. d. It is consumption-based e. It is imposed on the value-added in each stage of distribution f. It is a credit-invoice method value-added tax g. It is not a cascading tax. i. Definition: An item is taxed more than once as it makes its way from production to final retail sale. ii. Ratio: VAT is merely added as part of the purchase price and not as a tax because the burden is merely shifted. Thus, there can be no tax on the tax itself. 4. The impact of tax a. The impact is on the seller 5. The incidence of Tax

a. It is on the final consumer, the place at which the tax comes to rest. The tax is shifted to the buyer of the goods, properties, or services.

6. Cross Boarder Doctrine or the Destination Principle a. Under this doctrine, goods and services are taxed only in the country where they are consumed. No VAT shall be imposed to form part of the cost of goods destined outside the territorial border of the taxing authority. Thus, exports are zero-rated, while imports are taxed. b. Actual shipment of the goods from the Philippines to a foreign country is a precondition of an export sale following the destination principle being adhered to by our VAT system. c. VAT is imposed in the country in which the products or services are actually consumed or used. Exports exempt, imports taxable. i. Is there an exception to the Cross Boarder Doctrine 1. Yes. 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." 2. Hence, actual or constructive export of goods and services from the Philippines to a foreign country must be zero-rated for VAT; while, those destined for use or consumption within the Philippines shall be imposed the twelve percent (12%) VAT. 7. Evolution of the present VAT System 8. How the VAT System Works? a. Cost deduction method i. This is a single-stage tax which is payable only by the original sellers. (Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases) This was subsequently modified and a mixture of cost deduction method and tax credit method was used to determine the value-added tax payable. b. Tax credit method (a.k.a invoice method) i. This method relies on invoices, an entity can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports. [Commissioner of Internal Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February 11, 2005] 1. If at the end of a taxable period, the output taxes charged by a seller are equal to the input taxes passed on by the suppliers, no payment is required. It is when the output taxes exceed the input taxes that the excess has to be paid. 2. If however, the input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or quarters. Should the input taxes result from zero-rated or effectively zero-rated transactions or from acquisition of capital goods, any excess over the output taxes shall instead be refunded to the taxpayer or credited against other internal revenue taxes. 9. VAT v. Percentage Tax 10. Basic Formula 11. Elements of VAT System a.