TAXATION II - PREFINALS ATTY.

ARANAS EH403 2019-2020

DISCLAIMER: This material is not for sale. You are free to pass this on to anybody but the authors do not guarantee that the reviewer is 100% correct or error-free
Sources: GoSalTo and KDA Notes, KMA Discussion, PPT presentation, BaReRoViSoTa transcripts.

TN: For introduction to VAT upto VAT zero-rated, please Q: What’s the difference between a statutory
refer to Midterm file. taxpayer and an economic taxpayer?
• Take for example when you purchase from Jollibee.
VAT-Exempt Transactions Your purchases as the buyer is inclusive of VAT, hence,
you are deemed as an economic taxpayer since you
Transactions Exempt From VAT [Sec. 109(B)] actually paid for VAT.
• covers both transactions and persons • However, the BIR will go after Jollibee as the
• transactions that are not subject to VAT even if the statutory taxpayer, since it is the one who should
goods or services are sold by a VAT registered person, remit the VAT collected to the BIR.

TN: For purposes of determining whether an entity

exceeded the 3M threshold, subsidiaries or affiliates,
are deemed different entities. However, for
(geographical) branches (of the sameentity), you have to
consolidate the gross receipts (add everything) for
all branches.

For example, ABC Company, under ni ABC Company they

are different subsidiaries and each has their own gross
sales/receipts, they are treated individually even if they
have the same parent company. XYZ Company has many
branches in the Ph, add everything in determining whether
it breaches the P3M threshold.

For VAT exempt, there is only partial relief since if you FEATURES OF TAX EXEMPT TRANSACTION
deduct the input VAT as a cost/expense in deriving 1. Not included in ascertaining the general threshold
taxable income (income tax), it’s not a peso for peso (WON it exceeds P3,000,000)
deduction, unlike if you deduct it as Input VAT as it • if the taxpayer is into different transactions, one
is (as deduction against output VAT in deriving VAT is VAT exempt and the other is VATable
payable). transactions, those VAT-exempt transactions
• No 12% VAT is being imposed in both exempt and zero- are not included/added in computing the
rated. The difference is the recovery of input VAT P3,000,000 threshold
• If you fall under the VAT zero-rated and you 2. Not liable for VAT or 3% OPT
registered under the VAT system, you can claim 3. No billing of output tax on every VAT exempt
for input VAT on your purchases or the VAT passed transaction
on to you by your supplier. (total relief on the part
of the taxpayer) VAT EXEMPT TRANSACTIONS
• For VAT exempt entities (assuming you are also
not VAT-registered), you don’t have any output (A) Sale or importation of agricultural and marine
VAT nor input VAT. However, if an input VAT is products in their original state, livestock and poultry
passed on to you as the buyer, your only remedy is to of a kind used as, or yielding or producing foods for
claim it as part of your cost or your expenses (in human consumption, breeding stock, and genetic
deriving your taxable income under income tax). materials.
There are three transactions covered under this:
Q: ABC Corporation, a VAT-Registered entity, sold a. Agricultural food products in their original state
fuel to DEF Corporation, a corporation engaged in b. Marine food products in their original state
international shipping but not VAT-registered. c. Livestock and poultry for breeding, genetics, or human
Inadvertently, ABC Corporation shifted 12% VAT to consumption
DEF which was paid by the latter. Thereafter, ABC
remitted the 12% VAT collected to the BIR. May DEF ORIGINAL STATE
Corporation claim for VAT input refund on the 12% • It covers simple processes of preparation or
VAT passed to it considering that it is a VAT exempt preservation for the market, such as freezing,
entity? drying, salting, broiling, roasting, smoking, or
stripping, including those using advanced technological
A: The one who wants to claim VAT refund here is the means of packaging such as shrink wrapping in
buyer and not the seller. In the first place, he cannot plastics, vacuum packing, tetra pack, and other similar
claim a refund because he is not the statutory tax packaging methods. (Sec. 4.109.1, RR 16-05)
payer and he is not a VAT-registered entity. ABC is
the one who can claim the refund and the remedy of DEF Examples: Polished and/or husked rice, corn grits,
is to go after ABC Corp. molasses, copra
• These are exempted because these are our basic
Comments: needs.
• This is not a simple case of claiming for a VAT input • Are dried mangoes still in its original state? No because
refund. This is really a case of erroneous tax return. it has undergone chemical processes already.
This is covered under section 228 of the Tax Code. If
we talk about erroneous tax payment what we have to Products classified under this paragraph shall be
identify is whether it is direct or indirect tax. considered in their original state even if they have
• Sec 228 (Protesting of Assessment) vs. Sec 112 undergone the simple processes of preparation or
(Refunds or Tac Credits of Input Tax) - favorite BAR preservation for the market, such as:
item
• You do not include the VAT exempt transactions FDBRS3
in determining whether the entity exceeded the • Freezing
3Million threshold. • Drying - Dried fish, dried fish, dried squid. Dried
mangoes and strawberries are not VAT-exempt
Example: If Horeb owns a restaurant (P1.5M) and because they have undergone chemical processes and
convenience store (P1.5M), and at the same time, he is an contain anti-oxidants added to the product
operator of a jeepney (P1M). In determining whether he is • Salting - Salted fish
a VATable entity, do not include the gross receipts • Broiling - Inside the oven; source of the heat is top
from the jeepney operations, as this is VAT exempt. and bottom; Uses high heat for a short time
For as long as the receipts do not exceed the 3M, • Roasting - Uses low heat for a long time; Source of
Horeb is not required to register under the VAT heat is only from the bottom
system. But take note, he still has the option to register • Smoking - Smoked fish or tinapa
voluntarily. And in that case, his receipts from the • Stripping - Stripped chicken or deboned bangus (as
restaurant and convenience store will already be subject per BIR ruling)
to VAT. • The means of wrapping the product will have no effect,
the product is still considered in its original state. As
such, the same will still be VAT-exempt.

1|Page UNIVERSITY OF SAN CARLOS

TAXATION II - PREFINALS ATTY. ARANAS EH403 2019-2020
DISCLAIMER: This material is not for sale. You are free to pass this on to anybody but the authors do not guarantee that the reviewer is 100% correct or error-free
Sources: GoSalTo and KDA Notes, KMA Discussion, PPT presentation, BaReRoViSoTa transcripts.

Other Agricultural Products • Skimmed Milk Powder

• Ordinary Salt, Rock Salt, Table Sat - VAT Exempt • Lactose
• Iodized Salt (No longer in its original state since it has • Buttermilk powder
already been enriched with iodine) - Subject to 12% • Whole Milk Powder
VAT (VAT Ruling 059-03) • Palm Olein
• Raw sugar - in its original state; refers to sugar Q: Organico Poultry Supply imports potassium
produced by simple process of conversion of sugar nitrate (fertilizers) from China. They sell the
cane without a need of any of mechanical or similar imported fertilizers to local dealers in the market.
device such as muscovado. Hence, raw sugar refers 1. Are the importations subject to VAT?
only to muscovado sugar. (Revenue Regulation No. 13- • VAT-exempt
2013, R.R. No. 04-2013)
• Refined Sugar - subject to 12% VAT; only raw cane 2. How about if it is importing raw materials for use
sugar and molasses are exempt in the production of fertilizers in the Philippines?
• Bagasse (crushed sugarcane or dried cane residue) - • The importation of raw materials is VATable.
not included in the VAT exemption • Thus, importation of diatomaceous earth which is used
• Rice is exempt in whatever form for formulation of fertilizers is subject to VAT (BIR
• Dried Fish, Copra are exempt Ruling 15-88).

Q: Why is copra exempted when it is not a non-food (C) Importation of personal and household effects
product? belonging to the residents of the Philippines
• Copra will eventually be used to manufacture oil returning from abroad and nonresident citizens
coming to resettle in the Philippines: Provided, That
Q: Berna imported boars (Landrace) and swine such goods are exempt from customs duties under
(Yorkshire) for breeding purposes. She also the Tariff and Customs Code of the Philippines;
imported horses (thoroughbred broodmares) for
sports/racing. Are the importations subject to VAT? Requisites:
• Boars and swines importation - exempt from VAT. 1. The goods must be for personal use, and not for
• The importation of horses is taxable because such sale and for commercial quantity
animals are not generally used as or yielding or 2. The goods must belong to the citizens of the
producing food for human consumption (BIR Philippines (both resident and non-resident)
RULING 039-91) 3. Such personal and household effects must also be
exempt from custom duties
(B) Sale or importation of fertilizers, seeds,
seedlings, and fingerlings, fish, prawn, livestock, Example: Pinoy brought 10 GSchock watches to the
and poultry feeds, including ingredients, whether Philippines is not anymore for personal use because that’s
locally produced or imported, used in the too many (commercial quantity).
manufacture of finished feeds (except specialty
feeds for racehorses, fighting cocks, aquarium fish, For it to be exempted from VAT, it must also be exempted
zoo animals, and other animals generally considered from customs duties. If you are not exempted from
as pets) customs duties then you are subject to VAT. The
*The word ingredients or food ingredients is defined Bureau of Customs is responsible for the
as any single article of food or feeding stuff which implementation of this provision because after all this
enters into the composition of a ration, concentrate, pertains to importation. This is limited only to citizens
or supplement.” (RA 1556, as amended by PD 7, and (whether RC or NRC) of the Philippines.
implemented by AO No. 35, series of 1975)
Q: Is there a specific threshold or amount limitation?
Comments: • None, although under customs law the accompanying
• This exempts the raw material. goods must not exceed around P300k (350k?), but
• This includes ingredients which pertain to the what the BOC usually looks at is whether or not it is of
manufacture of the livestock, fish, prawn, fingerlings, commercial quantity for possible commercial sale here
and poultry feeds. in the Philippines.
• It does not cover ingredients in the manufacture • In that case it can subject to customs duties.
of the fertilizer.
• The feeds must be for poultry, livestock and the (D) Importation of professional instruments and
prawns. Why are these exempted from VAT? They are implements, tools of trade, occupation or
necessary for the production of the fish, poultry employment, wearing apparel, domestic animals,
and livestock. and personal and household effects belonging to
persons coming to settle in the Philippines
Revenue Memorandum Circular No. 55-2014 (including aliens) or Filipinos or their families and
• Sale or importation of ingredients which may also descendants who are now residents or citizens of
be used for the production of food for human other countries, such parties hereinafter referred to
consumption shall be subject to VAT. as overseas Filipinos, in quantities and of the class
• Thus, for sale or importation of livestock and poultry suitable to the profession, rank, or position of the
feeds or ingredients used in the manufacture of persons importing said items, for their own use and
finished feeds to be exempt from VAT, there must be not for barter or sale, accompanying such persons,
a showing that the same is unfit for human or arriving within a reasonable time:
consumption or that the ingredient cannot be
used for the production of food for human Provided, That the Bureau of Customs may, upon the
consumption as certified by the Food and Drug production of satisfactory evidence that such
Administration (FDA). persons are actually coming to settle in the
Philippines and that the goods are brought from
Comments: their former place of abode, exempt such goods from
• When it comes to the ingredients of feeds, it is payment of duties and taxes:
required by this Revenue Memorandum Circular of the
BIR that there must be a DFA Certification that it Provided, further, that vehicles, vessels, aircrafts,
is not fit for human consumption. machineries and other similar goods for use in
• KMA: Ingredients for feeds may still be used for human manufacture, shall not fall within this classification
consumption and there are some of these which are and shall therefore be subject to duties, taxes and
declared for the manufacture of feeds, but when it other charges;
arrives in the factory, they will use it for the • Not only limited to personal and household effects but
manufacture of other food products. It is because of also includes professional instruments and
this scenario that the BIR issued RM Circular No. 55- implements
2014. • Different from (C) because (C) is only limited to the
citizens of the Philippines
Examples of those ingredients that are subject to • This covers both Filipinos and aliens as long as their
VAT: (Revenue Memorandum Circular No. 66-2014) purpose is to settle here in the PH.
• Whey Powder

2|Page UNIVERSITY OF SAN CARLOS

TAXATION II - PREFINALS ATTY. ARANAS EH403 2019-2020
DISCLAIMER: This material is not for sale. You are free to pass this on to anybody but the authors do not guarantee that the reviewer is 100% correct or error-free
Sources: GoSalTo and KDA Notes, KMA Discussion, PPT presentation, BaReRoViSoTa transcripts.

• The revision is more on the introduction of the phrase and shall therefore be subject to duties, taxes and other
“overseas filipino workers”. This is introduced pursuant charges”
to we have the so called dual citizenship.
• There is a provision which states: except any vehicle, Q: Carlo is a driver in Las Vegas who drives a
vessel, aircraft, machinery other goods for use in the Lamborghini and he thereafter comes here in the
manufacture and merchandise of any kind in Philippines to practice his profession as driver. Carlo
commercial quantity.. which is no longer found under then declares that the Lamborgihini is used for his
TRAIN LAW. So it became clearer that a vessel, profession. Will such importation be exempt from
vehicle, aircraft or machinery used in VAT?
manufacturing are automatic VATable even if it • No. It is expressly stated that vehicles, vessels,
not in commercial quantity. aircrafts, machineries, and other similar goods
• Before, it is required that for it to be exempted, it must for use in manufacture shall not fall within the
arrive 90 days before the actual date of arrival or 90 exemption hence subject to VAT.
days thereafter. However, under train law, it is only
within reasonable time. Meaning to say, if it arrived Q: But is it necessary for the BOC to grant exemption
after 30 days, BIR can say that it is no longer within from customs duties to avail for the VAT exemption?
reasonable time. It will really depend on the major • Not necessary, what the BOC will just look at is the
factor is the reason behind the delay. purpose of the person coming for the country – if
• Under train there is a proviso: there must be for settlement or not.
production of satisfactory evidence that such
persons are actually coming to settle in the Q: So it is not like letter C under Sec. 109?
Philippines and that the goods are brought from • Yes, not like par. C
their former place of abode. There must be proof
that the items are for settlement purposes and not for Comments:
business purposes. Why? There are businesses in the • If machinery, not necessarily used for manufacturing
PH which purchase secondhand professional of goods, the next question is, will that be used for
implements from abroad, and then they will report it commercial production? Because if it is used for
as for settlement purposes and record it in the name of commercial production, then that is basically
an individual. Of course, if commercial quantity, it can commercial activity subject to duties and taxes and
be invalidated. It matters na with the BOC. It usually VAT.
requires a declaration or an affidavit on the part • BUT TN AGAIN, that the proviso clearly subjects
of the one importing the implements up to asking machineries to VAT. No need to ascertain if the
for visa as proof that you are not just a tourist. If same for manufacturing or not or if the same is
you intend to settle here in the PH, you must at least used for commercial activity, since such
have a resident visa in the country. BOC is machineries do not fall under the exemption.
primarily responsible in the implementation of this • If effects or items are for commercial transaction,
provision. the applicable duties will apply hence, no longer
exempted from customs and as such no longer
REQUISITES: exempted from VAT.
1. The goods imported are professional instruments
and implements, tools of trade, occupation or “vehicles, vessels, aircrafts, machineries, and other
employment, wearing apparel, domestic animals, similar goods for use in manufacture”
and personal and household effects Machinery
2. It must be for personal use and not for barter or sale • Machinery is not necessarily qualified by the word
3. It must belong to persons (residents or aliens) manufacturing. For as long as it is machinery brought
coming to settle in the Philippines in the Philippines, then the same does not fall under
4. It must be accompanied by such persons or arriving the exemption of Sec. 109(d).
within a reasonable time • Additional information: Duties and taxes are based on
5. It must be exempt from custom duties the value of the thing.
6. There must be proof that the items are for
settlement purposes and not for business purposes Q: What if you really want to import but do not want
— BOC is primarily responsible in the implementation to pay the tax?
• Establish a PEZA company here in the Philippines since
EXCEPTION: PEZA are not subject to customs duties and taxes upon
• Vehicles, vessels, aircrafts, machineries and other their importations.
similar goods for use in manufacture — automatic
subject to VAT Vehicles
• To avoid the tax, what is imported are the parts,
Q: Why is Sec. 109(d) not included or is different “chop-chop” for short – saving mechanism, to lessen
from Sec. 109(c)? the customs duties hence lessening the VAT.
Sec. 109(c) Sec. 109(d)
Covers on personal Covers not only personal and Sec. 109(c) Sec. 109(d)
and household household effects Covers personal and Covers not only personal
effects household effects only and household effects
Aliens are under this provision RC and NRC RC, NRC, RA, NRA
More advantageous because the State wants them Goods arrive together with Goods need not arrive
to citizens because to come and work here. Hence, the person together with the person
everything is they may be enticed by the VAT but the same must arrive
exempted provided exemption within a reasonable time
also exempted from Customs must provide for Customs need not provide
customs duties But remember that those items an exemption an exemption. Only
for commercial use are not checks for the purpose – if
exempt from VAT for settlement in the
Philippines or not
Q: What if for example, Filipino, I have machineries
abroad. I will bring the machinery with me here in (E) Sale or lease of goods or properties or the
the Philippines upon entry will that machinery be performance of services of non-VAT-registered
subject to VAT? persons, other than the transactions mentioned in
• Yes pursuant to Sec. 119(d) of the NIRC because of paragraphs (A) to (AA) of Sec. 109(1) of the Tax
the proviso: “the Bureau of Customs may, upon the Code, the gross annual sales and/or receipts of
production of satisfactory evidence that such persons which does not exceed the amount of Three Million
are actually coming to settle in the Philippines and the Pesos (P3,000,000.00)
goods from payment of duties and taxes; provided • Both percentage tax and VAT cannot co-exist.
further, that vehicles, vessels, aircrafts, machineries, • If such services are already subject to percentage tax,
and other similar goods for use in manufacture shall then such services are exempt of VAT.
not fall within this classification.

3|Page UNIVERSITY OF SAN CARLOS

TAXATION II - PREFINALS ATTY. ARANAS EH403 2019-2020
DISCLAIMER: This material is not for sale. You are free to pass this on to anybody but the authors do not guarantee that the reviewer is 100% correct or error-free
Sources: GoSalTo and KDA Notes, KMA Discussion, PPT presentation, BaReRoViSoTa transcripts.

• There is a specific list of transactions subject to OPT SALE OF MEDICAL DRUGS IN THE PHARMACY (in the
under the law hospital)
• If sold to in-patients, exempt from VAT since it is
EXAMPLES (subject to OPT): part of hospital service
1. Common carriers of passengers by land • If sold to out-patients, subject to VAT
Q: Miguel is an operator of a fleet of a jeep or taxi. • There must be a separate recording as to the sales
Miguel decided to sell his fleet of jeep or taxi to his made to in patients and out-patients
drivers because of the e-jeepney programs
implemented by the government. The sale already DIAGNOSTIC SERVICES (x-ray, ECG, etc.)
exceeds P3M. Will such sale be subject to VAT • If it forms part of the services of the hospital,
considering that what he is selling is an ordinary exempt from VAT
asset hence deemed an incidental transaction? • You went to Hi Precision for an xray that falls under the
• Proceeds of the sale or jeepney, in cases where it will scenario where it is being done by a diagnostic
no longer be used, is still subject to OPT. company/clinic so it is exempted from VAT. If it is
• TN: The sale of the jeepney is an incidental rendered by a professional or consultant, it can
transaction. be VATable because it is now a professional service.
• Taxation of incidental transactions: The tax on
the incidental business follows that of the main VETERINARY SERVICES
line of business. • It is exempt if it is rendered in a hospital for
• Usual rule: If the ordinary transaction is VATable, animals.
then the incidental transaction is VATable. However, in
this case, the ordinary transaction is subject to Example: Chong Hua Medical Arts, you are no longer
OPT, the incidental transaction is also exempt availing the services of the hospital but the services of the
from VAT or subject to OPT. doctor. In one office, there may be 5 doctors, in so far as
taxation is concerned, they’re considered independent
Comments: taxpayers.
• When jeepney operators are registered with the
BIR, they are deemed subject to OPT or Non-VAT If the professional service is rendered while you are being
registered. This is found in the Certificate of admitted to the hospital, that is part of the hospital
Registration (COR) of such business. service, thus, it is exempted from VAT. To be considered
• If we say that the proceeds of the sale of the jeepney as hospital service (VAT exempt), the professional
(incidental transaction) should be subject to VAT, then fee should have been included in the official receipt
we are saying that the operator must cancel his COR not in the name of the doctor but in the name of the
and register for VAT. hospital.

Q. Is this rule absolute? TN: For professional services, subject to VAT if the receipts
• Yes, in this case, insofar as the common carrier is exceeds 3M.
concerned.
2. Life insurance (H) Educational services rendered by private
3. Services rendered by franchise grantees of radio educational institutions, duly accredited by the
and/or television broadcasting whose annual gross Department of Education (DepED), the Commission
receipt of preceding year does not exceed on Higher Education (CHED), the Technical
P10,000,000 Education and Skills Development Authority
4. Overseas communication by telecommunication (TESDA) and those rendered by government
companies – subject to overseas communications educational institutions;
tax • This is not limited to non-stock non-profit.
• It includes any educational institution as long as
Comments: it is duly accredited by DepEd, CHED or TESDA.
• For the previous items (i.e., agricultural and marine • Does not include seminars, in-service training,
food products), exempt from VAT and percentage tax. review classes and other similar services rendered by
• For letter (e), exempt from VAT because they are persons who are not accredited by DepEd, CHED, or
expressly subject to other percentage taxes. TESDA

(F) Services by agricultural contract growers and Q: What if these educational institutions, because
milling for others of palay into rice, corn into grits they cannot impose output tax because they are not
and sugar cane into raw sugar; VATable, purchase from a supplier who passed on
• This is because it is useless because you only exempt VAT to the educational institution. Can they claim it
the product. as input VAT?
• You also have to exempt the service itself. • The educational institution cannot avail of the
tax credit method (input VAT as deduction against
Q: Berna imported boars (Landrace) and swine output VAT, because they have no output VAT in the
(Yorkshire) for breeding purposes. He also imported first place) because it is exempted.
horses (thoroughbred broodmare) for sports and • The recovery will only be up to the cost-
racing. Are the importations subject to VAT? deduction method. It will just form part of the
• The horses for sports is subject to VAT. But the purchase cost/cost of operation of that exempt entity.
boars and swine because they are for breeding, they
are exempt from VAT. (I) Services rendered by individuals pursuant to an
employer-employee relationship;
(G) Medical, dental, hospital and veterinary services • This is not for business purposes. You do not
except those rendered by professionals; subject it to business taxes like VAT.
• “Except those rendered by professionals” – this means
that it is VATable. (J) Services rendered by regional or area
headquarters established in the Philippines by
As to medications, it involves two situations: multinational corporations which act as supervisory,
communications and coordinating centers for their
In-patient Out-patient
affiliates, subsidiaries or branches in the Asia-
We further classify this into two:
Pacific Region and do not earn or derive income from
Not VATable 1. Out-patient in the hospital.
the Philippines;
• This is exempt from VAT
• They are VAT exempt because they do not derive
2. Out-patient who went directly to
their income from the Philippines
the clinic of a particular doctor
or veterinarian • TN: This might be altered under the Trabaho Bill
• This is VATable. This is what is
contemplated under “services (K) Transactions which are exempt under
rendered by a professional,” but international agreements to which the Philippines is
only when the gross receipts of a signatory or under special laws, except those
the doctor exceeds 3M. under Presidential Decree No. 529;

4|Page UNIVERSITY OF SAN CARLOS

TAXATION II - PREFINALS ATTY. ARANAS EH403 2019-2020
DISCLAIMER: This material is not for sale. You are free to pass this on to anybody but the authors do not guarantee that the reviewer is 100% correct or error-free
Sources: GoSalTo and KDA Notes, KMA Discussion, PPT presentation, BaReRoViSoTa transcripts.

• There has to be a specific provision that that VAT-exempt and may be subject to VAT provided
particular transaction indicated in that special law or its gross receipts exceed the P3M threshold or that
international agreement is exempt from VAT. the same multi-purpose cooperative does not meet
• When we say international agreements where the PH the requirements under Sec. 109(n) and does not
is a signatory, this pertains more to special exceed the P3Million threshold.
international organizations like the United Nations.
When the UN transacts with the PH, we do not subject Gross Receipts VAT implications
that to VAT. Or under special laws like PEZA law. From lending activities Exempt
• Members
Q: What is the difference between this and the third • Non-member
type of zero-rated sale of goods? From non-lending activities 12% VAT
• Depends on what the specific provision says. • Members
• If it says it is exempt from VAT, then exempt from VAT. • Non-member
If it says zero-rated, then follow that.
When a multi-purpose cooperative will be subject to VAT
EXCEPTION: PD 529 with respect to their non-lending activities:
• This refers to petroleum explorations, concessionaires, a. If VAT-registered
or sub-contractors. b. If non VAT-registered provided
• Before, there was this law passed giving exemptions • Sales exceed P3M or
form business tax to petroleum explorations. Recently, • Does not fall under the requirements under Sec.
it was removed. 109(n)
➢ Not registered under the CDA
(L) Sales by agricultural cooperatives duly ➢ Share capital of each member exceeds
registered with the Cooperative Development P15,000
Authority to their members as well as sale of their
produce, whether in its original state or processed (N) Sales by non-agricultural, non- electric and non-
form, to non-members; their importation of direct credit cooperatives duly registered with the
farm inputs, machineries and equipment, including Cooperative Development Authority: Provided, That
spare parts thereof, to be used directly and the share capital contribution of each member does
exclusively in the production and/or processing of not exceed Fifteen thousand pesos (P15,000) and
their produce; regardless of the aggregate capital and net surplus
• The exempted person here is an agricultural ratably distributed among the members;
cooperative. • TN: The share of capital contribution of each
• You take into consideration what is exempted here. member must not exceed P15,000 and regardless
of the aggregate capital and net surplus ratably
REQUISITES: distributed among the member.
1. The agricultural cooperative must be registered
to the CDA In summary:
• This is not automatic because you must get a • There are six cooperatives exempted from VAT:
certificate of exemption. Agricultural, Credit or Lending, Multipurpose, any other
• The BIR will also have to check is you are a member type which is non-agricultural, non-credit/ non-
in good standing of the CDA. lending, non-electric.
2. Determine if the sale pertains to members or non- • There is only one coop that is not exempted from
members VAT, that is electric cooperative under the EVAT
a. Sale to Members law. Again, only if it exceeds the threshold.
• Exempt sale covers all type of sales, • KMA: The exemption is not automatic. They must get
whether sale of produce or non-produce. certification. Same with their income taxation. You
b. Sale to Non-members have to ask for certification. There must be an express
• Produce — exempt mention that you are exempt from filing.
• Non-produce — not exempt
TN: For letter (L), (M), and (N), the exemption here is
Exemption also include their importation of direct farm not on the transaction but on the person or entity.
inputs, machineries and equipment, including spare
parts thereof but it must to be used directly and (O) Export sales by persons who are not VAT-
exclusively in the production and/or processing of their registered;
produce. • TN: For the export seller or transferor to avail for
the zero-rated transaction, it must be VAT
(M) Gross receipts from lending activities by credit registered.
or multipurpose cooperatives duly registered with • If the transactions enumerated still qualify under
the Cooperative Development Authority; Sec. 106, but the seller is not VAT registered,
CREDIT COOPERATIVE then this is the fallback provision.
• The main line of business is lending. • Primarily exempted following the cross-border
doctrine. It goes out of the country.
MULTI-PURPOSE COOPERATIVE • Usually, this is a fallback provision when a taxpayer,
• It can engage in lending, sales, investments as who is into export sale, failed to register under the
indicated in its articles of organization as registered in zero-rated transaction in the VAT system:
the CDA. ➢ Export seller + VAT-registered = zero-rated
transactions
What is exempted here is the entity itself but only ➢ Export seller + NOT VAT-registered = can
with respect to its lending activities avail of this fallback provision

Lending or multi-purpose cooperative, requisites (P) Sale of real properties not primarily held for sale
1. Lending or multi-purposes cooperative must be to customers or held for lease in the ordinary course
registered with the CDA of trade or business or real property utilized for low-
2. Certificate of Exemption from the BIR cost and socialized housing as defined by Republic
Act No. 7279, otherwise known as the Urban
Comments: Development and Housing Act of 1992, and other
• TN: It doesn’t matter whether the one who related laws, residential lot valued at One million
borrows is a member or nonmember, the gross nine hundred nineteen thousand five hundred pesos
receipts from lending is still exempt from VAT. (P1,919,500) and below, house and lot, and other
• What is exempted is only the gross receipts from residential dwellings valued at Three million one
lending or credit. hundred ninety nine thousand two hundred pesos
• This is understandable for credit cooperatives but take (P3,199,200) and below: Provided, That not later
note that for multi-purposes, they have a lot of than January 31, 2009 and every three (3) years
activities – it can have lending, convenience store, etc. thereafter, the amount herein stated shall be
As such, the gross receipts of a multi-purpose adjusted to their present values using the Consumer
cooperative from the convenience store is not

5|Page UNIVERSITY OF SAN CARLOS

TAXATION II - PREFINALS ATTY. ARANAS EH403 2019-2020
DISCLAIMER: This material is not for sale. You are free to pass this on to anybody but the authors do not guarantee that the reviewer is 100% correct or error-free
Sources: GoSalTo and KDA Notes, KMA Discussion, PPT presentation, BaReRoViSoTa transcripts.

Price Index, as published by the National Statistics low cost or socialized housing developer) and License to
Office (NSO); Sell. It will also specifically indicate the project, since
FIVE TRANSACTIONS: registration is on a per project basis.
(1) Real Property classified as Capital Asset
• Not primarily held for sale and is subject to Capital (c) Sale of residential lot valued not exceeding
Gains Tax (6% of the FMV or SP whichever is P1,500,000
higher). • If two or more adjacent residential lots are sold
• This is exempt because VAT only applies to assets sold or disposed in favor of one buyer, the sale shall be
in the ordinary course of business exempt from VAT only if the aggregate value of the lots
• Can you be subject to VAT and at the same time CGT? do not exceed P1,500,000 (presumed as a sale of
No. VAT means that you are selling ordinary asset. CGT one residential lot)
talks about one-time sale. • Is there a need to be registered as low cost or
• TN: Even if the real property is not primarily held for socialized? No. So long as the price did not exceed
sale or held for lease in the ordinary course of business, the threshold. If it is a commercial or industrial lot,
but it is used in the trade or business of the seller, its it would be VATable even if it did not exceed the
sale shall be subject to VAT. threshold.
• Before TRAIN law it was P1,919,500
Real Property classified as Ordinary Asset • After TRAIN law, reduced to P1,500,000
• General Rule: VATable if real property is an ordinary
asset and the selling price exceeds P3M. (d) Sale of residential house and lot and other
• Exceptions: residential dwellings valued not exceeding
(a) Utilized for low-cost housing P2,500,000
• There must be proper certification and documentation • Before TRAIN law it was P3,199,200
by HLURB that you are selling a low-cost housing. • After TRAIN law, reduced to P2,500,000
• Price range exceeds P450,000 up to the maximum • “other residential dwellings” include
amount of P3,000,000 Condominium units, threshold still applies (2.5M)

LOW-COST HOUSING Comments:

• Refers to housing intended for homeless low • In the provision for both residential lot and residential
income family beneficiaries, undertaken by the house and lot, the statement “as adjusted in 2011
Government or private developers, which may either using the 2010 Consumer Price Index values” was
be a subdivision or a condominium registered and included. This brings misconception to real estate
licensed by the HLURB under BP Bld. 220, PD No. 957 dealers believing that the lowering of VAT threshold
or any other similar law, wherein the unit selling price (which prejudices them since the coverage for their
is within the selling price per unit as set by the HUDCC VAT exemption is lowered) will not apply to them.
pursuant to RA 7279 • But as between a Law and a Revenue Regulation, the
➢ Tier 1: Above P450,000 to P1,700,000 Law prevails, and the law does not include such phrase.
➢ Tier 2 (aka economic housing): Above • In determining which thresholds will apply, look at the
P1,700,000 to P3,000,000 date of sale whether it was made before or after TRAIN
law.
(b) Utilized for socialized housing
• Must be with proper certification and documentation by (Q) Lease of residential units with a monthly rental
HLURB per unit not exceeding Fifteen Thousand Pesos
• Price range does not exceed P450,000 (P15,000.00);
• Much cheaper than the low-cost housing • It must be a lease of a residential unit and not a
• Beginning January 1, 2021, the VAT exemption will commercial unit
apply if the selling price does not exceed P2,000,000 • If the examiner only says lease of a “unit” of
P15,000/month, you do not immediately assume it to
SOCIALIZED HOUSING be a residential unit. You have to be safe and say that
• Refers to housing programs and projects covering if it’s a residential unit, then it is VAT exempt.
houses and lots/home lots only undertaken by the • If commercial unit, even if lease payment is below
Government or the private sector for the P15,000, exemption will not apply.
underprivileged and homeless citizens which shall • What is contemplated under this provision is an
include sites and services development, long-term operating lease (normal lease set up) and not
financing, liberated terms on interest payments, and finance lease (rent to own). The latter contemplates
such other benefits in accordance with the provisions an installment sale.
of RA 7279, RA 7835 and RA 8763 • Before TRAIN law: not exceeding P12,800
• Also refers to projects intended for underprivileged and • After TRAIN law: not exceeding P15,000
homeless wherein the housing package selling price is
within the lowest interest rates under Unified Home Comment:
Lending Program or any equivalent housing program of • TN: Even if the monthly rental unit exceeds
the Government, the private sector or non-government P15,000 but the aggregate of such rentals during
organizations. the year do not exceed P3M, it shall be exempt
from VAT, but subject to 3% percentage tax.
TN: for both Low-cost housing and Socialized housing, you
do not only look at the Selling Price. There needs to RULES:
have a proper application and a proper certification 1. Determine if residential unit
issued by HLURB stating that you are selling Low- 2. If yes, determine whether the monthly rental exceeds
cost housing or Socialized housing. Once you have P15,000
that certification, you can sell and not be subjected to VAT a. If no — automatically exempted regardless of the
even if you’re selling it above P2,500,000. aggregate amount
b. If yes, determine if the aggregate amount exceeds
Current Price Ceiling set by the HUDCC on Socialized P3,000,000
and Low-Cost Housing (this is a BAR QUESTION • If no — subject to 3% OPT
WAAA) • If yes — subject to 12% VAT
Housing Price Lot Area Floor Area
Category Range MIXED TRANSACTIONS
Socialized P450k and 30 to 50 18 to 30 If the lessor has several residential units for lease,
Housing below sqm sqm some exceeds P15,000 while the others are less
Low Cost- Above P450k 50 to 100 35 to 55 than P15,000 per unit, his tax liability shall be as
Level 1 to P1.7M sqm sqm follows:
Low Cost- Above P1.7M 100 to 150 80 to 120 • Gross receipts from rentals not exceeding P15,000
Level 2 to P3M sqm sqm per month per unit
We just don’t look at the price range, but as to the proper o Exempt from VAT regardless of the aggregate
registration of the developer. Proceed to the HLURB and annual gross receipts
check for the HLURB certification (that it is registered as a o Also exempt from 3% percentage tax

6|Page UNIVERSITY OF SAN CARLOS

TAXATION II - PREFINALS ATTY. ARANAS EH403 2019-2020
DISCLAIMER: This material is not for sale. You are free to pass this on to anybody but the authors do not guarantee that the reviewer is 100% correct or error-free
Sources: GoSalTo and KDA Notes, KMA Discussion, PPT presentation, BaReRoViSoTa transcripts.

• Gross receipts from rentals exceeding P15,000 per REQUISITES:

month per unit (but it can still be exempt from 1. There is sale, importation, printing or publication of
VAT if the total annual receipts does not exceed the following:
P3M in letter BB of Sec 109.) a. Textbooks
o Subject to VAT if the aggregate annual gross b. Newspapers
receipts exceed P3,000,000 c. magazines
o Otherwise, subject to 3% percentage tax 2. The purpose of which is for education, religious, etc and
not for advertisement purposes
Letter (bb): Sale or lease of goods or properties or the 3. It is issued at regular interval with fixed prices for
performance of services other than the transactions subscription
mentioned in the preceding paragraphs, the gross annual TN: Although the item is VAT exempt per se, you have to
sales and/or receipts do not exceed the amount of look at the taxpayer selling the item because if he is
Three Million Pesos (P3,000,000) registered under VAT system, then he can be subject
to VAT
Exempt or Subject to OPT?
• If exempt in Q, you cannot be subject to OPT (exempt Q: But why does National Bookstore subject its sales
from VAT and OPT) of books to VAT?
• But if exempt in BB, you can be subject to OPT under • The provision pertains to sale of books from
Sec 116. publishers which are being used as textbooks in
• Sec 116: Any person whose sales or receipts are schools.
exempt under Section 109 (1) (BB) of the Tax Code
from the payment of value-added tax and who is not a Q: How about Fully Booked?
VAT-registered person shall pay a tax equivalent to • Still no. TN that the stores we see in the malls are the
three percent (3%) of his gross quarterly sales or distributing arms already of the publishers.
receipts.
Q: But can we not argue that books are VAT-exempt
RESIDENTIAL UNITS per se?
• Refer to apartments and houses & lots used for • Yes, you may, but it will be hard for the sellers (i.e.,
residential purposes, and buildings or parts or units National Bookstore) to trace for the input VAT
thereof used solely as dwelling places attributable to each type of sale (i.e., VATable or VAT-
• Does not include: motels, motel rooms, hotels exempt). Hence, the seller would need to allocate its
and hotel rooms, lodging houses, inns and input VAT which would make it a hassle for them.
pension houses (Why the exception? Because it does
not actually involve a lease of unit but a purchase E-BOOKS
of service). • Not VAT exempt as they do not fall under the
categorical exemption in Sec 109; as it is, E-
“UNIT” materials, even if not devoted for advertisement
• Means an apartment unit in case of apartments, house purposes, are not VAT exempt. (2008 BIR Ruling)
in case of residential houses; per person in case of
dormitories, boarding houses and spaces; and per (S) Transport of passengers by international
room in case of rooms for rent. carriers;
REQUISITES:
Q: What about a dormitel? 1. The international carrier must be “doing business
• Check the BIR Certificate of Registration (COR). in the Philippines”
• You can see to which industry the entity belongs. If sole • Duly registered in the Philippines, filing returns in
proprietorship, most likely leasing/rental. But TN, even the Philippines, has landing rights here in the PH
if monthly payment if it is clear that it is a purchase of 2. It must be coming from the Philippines going out
service, you cannot claim VAT exemption. of the country and no stopover
3. It must be subject to common carrier’s tax — 3%
Monthly Aggregate Tax treatment tax on international carriers
Rental/unit annual rentals
Not exceed TN: “International Carriers” — no qualifications if
Not exceed 3,000,000 (<3M) VAT exempt international shipping or international air transport.
15,000 (<15K) Exceed 3,000,000 (letter Q) • The Service aspect (Transport of passengers) is
(>3M) exempt from VAT
VAT exempt • The purpose is to encourage international
Not exceed (letter BB) but carriers to establish flight here in the PH pursuant
Exceed 15,000 3,000,000 (<3M) liable for 3% to open-air policy of the government.
(>15K) OPT (sec. 116)
Exceed 3,000,000 (T) Sale, importation or lease of passenger or cargo
Subject to VAT vessels and aircraft, including engine, equipment
(>3M)
a. VAT exempt and spare parts thereof for domestic or international
(letter Q) transport operations: Provided, however, that the
a. Some not Not exceed b. VAT exempt exemption from VAT on the importation and local
exceed (<15K) 3,000,000 (<3M) (letter BB); but purchase of passenger and/or cargo vessels shall be
liable for 3% subject to the requirements on restriction on vessel
b. Some OPT (sec. 116) importation and mandatory vessel retirement
exceed (>15K) a. VAT exempt program of Maritime Industry Authority (MARINA);
Exceed 3,000,000 • The exemption applies sale and lease of passenger
b. Subject to
(>3M) or cargo vessel, including engine, equipment and
VAT
spare parts for both domestic or international
transport operations
Q: How will the BIR check the leased units?
• Unlike in letter (S) which only exempts international
• There is a list of units to be submitted (sworn
carriers, the exemption here includes domestic
statement, in a tabular landscape format which shows
transport operations
the classification of the unit and monthly lease
• Example: CebuPac purchases an aircraft to travel
payment per unit, and a separate column for the
domestically, the sale is not subject to VAT.
lessee). This is usually attached to the quarterly tax
• The exemption is limited to 150 tons and above,
return of the lessor.
including engine and spare parts.
(R) Sale, importation, printing or publication of
books and any newspaper, magazine review or
bulletin which appears at regular intervals with
fixed prices for subscription and sale and which is
not devoted principally to the publication of paid
advertisements;

7|Page UNIVERSITY OF SAN CARLOS

TAXATION II - PREFINALS ATTY. ARANAS EH403 2019-2020
DISCLAIMER: This material is not for sale. You are free to pass this on to anybody but the authors do not guarantee that the reviewer is 100% correct or error-free
Sources: GoSalTo and KDA Notes, KMA Discussion, PPT presentation, BaReRoViSoTa transcripts.

(U) Importation of fuel, goods and supplies by EXEMPTION FROM (under TRAIN Law):
persons engaged in international shipping or air (1) Hotels and similar lodging entities
transport operations: Provided, That the fuel, goods (2) Theaters and cinemas
and supplies shall be used for international shipping (3) Drugstores
or air transport operations. Thus, said fuel, goods (4) Land, air and sea travel
and supplies shall be used exclusively or shall (5) Medical, dental, laboratory services
pertain to the transport of goods and/or passenger (6) Funeral and Burial
from a port in the Philippines directly to a foreign
port, or vice versa, without docking or stopping at TN: The list above is exclusive.
any other port in the Philippines unless the docking
or stopping at any other Philippine port is for the Previous Issuances:
purpose of unloading passengers and/or cargoes 1.1 Sec 10 of RR No. 7-2010: sale of goods and services
that originated from abroad, or to load passengers to senior citizens shall be exempt from VAT
and/or cargoes bound for abroad: Provided, further, 1.2. Sec 7 of RR No. 5-2017: sale of goods and services
that if any portion of such fuel, goods or supplies is to PWDs shall be exempt from VAT
used for purposes other than that mentioned in this • This VAT exemption is an addition to the 20% Senior
paragraph, such portion of fuel, goods and supplies Citizen’s or PWD’s Discount
shall be subject to twelve percent (12%) VAT; • If both Senior and PWD, only one 20% Discount
• A fallback provision where a person, who is (either Senior or PWD) and VAT exemption can be
engaged in international shipping or air transport availed of.
operations, failed to register under the VAT • What if nag-promo, say 50% off, can we add up the
system to become a zero-rated taxpayer and it 20% Discount to the 50% discount? NO, the Senior or
purchase fuel, goods, or supplies which will be PWD has to choose whichever is higher.
used in its international transport operation going • New provisions under TRAIN law is adherence to
outside of our country. Expanded Senior Citizens Act
• This provision only includes, fuel, goods, and supplies. • If the establishment is not VAT-registered, there is no
How about equipment? It is covered under letter (T). exemption.
• Note that this exemption does not include • So if senior citizen rides a taxi or jeep, they can only
Domestic shipping or air transport operations. get the 20% discount, not the VAT exemption because
• Hence for Domestic shipping or airlines, what is only they are not VATable/VAT registered.
exempted from VAT are those pertaining sale,
importation or lease of passenger or cargo ILLUSTRATION:
vessels and aircraft, including engine, equipment Yummy Inc. is a restaurant offering a birthday promo at
and spare parts thereof. 10%. Mr. A, who is a PWD and at the same time a senior
• Change under TRAIN law: ”Provided, That the fuel, citizen, is celebrating his birthday at Yummy. Total Sales
goods and supplies shall be used for international is P1,120 (VAT inclusive).
shipping or air transport operations.” (Thus, said fuel,
goods and supplies shall be used exclusively or shall Q: How do we apply the VAT-exemption together
pertain to the transport of goods and/or with the 20% discount?
passenger from a port in the Philippines directly
to a foreign port, or vice versa, without docking (A) If the seller is VAT registered:
or stopping at any other port in the Philippines (1) Determine first the gross sale. Sales is VAT-inclusive,
UNLESS the docking or stopping at any other Philippine we multiply it with 3/28 to determine the VAT portion of
port is for the purpose of unloading passengers the sales. Then, subsequently deduct the amount from the
and/or cargoes that originated from abroad, or total sales to get the Gross Sales. Hence:
to load passengers and/or cargoes bound for
abroad)
• Even if the international carrier did not register for VAT
purposes, still VAT exempt.
(2) Between the discounts provided (10% and 20%),
REQUISITES: choose whichever is higher. In this case, it is the 20%
1. There is importation of fuel, goods, and supplies Senior Citizen’s Discount (SCD).
(GSF) by persons engaged in international (3) The 20% discount should be computed based on the
shipping or air transport operations. Gross Sales (or sales excluding VAT).
2. The fuel, goods and supplies are used exclusively
or shall pertain to the transport of goods and/or
passenger 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: (4) Since Mr. A is VAT exempt and subject to 20%
• The docking or stopping at any other Philippines discount, he can only be made to pay P800.
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
TN:
• If such fuel, goods, and supplies are used
otherwise, it shall be subject to 12% VAT.
• Different from the zero-rated transaction. Zero-rated (B) If the seller is not VAT registered:
transaction covers sale of GSEF. Here, it covers • Automatic, total billing of P1,120 and liable for 3%
importation of GSF (no E). percentage tax
• VAT exemption only applies VATable transactions.
(V) Services of banks, non-bank financial
intermediaries performing quasi-banking functions, (1) Apply the 20% SCD to the total billing of P1,120 and
and other non-bank financial intermediaries such as we do not take away the 12% VAT since the seller is not
money changers and pawnshops, subject to VAT registered.
percentage tax under Secs. 121 and 122,
respectively, of the Tax Code;
• Exempt from VAT because they are subject to Gross
Receipts Tax (GRT)
(2) So, the amount to be paid by Mr. A is:
(W) Sale or lease of goods and services to senior
citizens and persons with disabilities, as provided
under Republic Act Nos. 9994 (Expanded Senior
Citizens Act of 2010) and 10754 (An Act Expanding
the Benefits and Privileges of Persons with (3) Since the seller is not VAT registered, it is subject to
Disability), respectively; 3% OPT. It is up to the seller on whether or not to include
the 3% OPT to the amount charged to Mr. A.

8|Page UNIVERSITY OF SAN CARLOS

TAXATION II - PREFINALS ATTY. ARANAS EH403 2019-2020
DISCLAIMER: This material is not for sale. You are free to pass this on to anybody but the authors do not guarantee that the reviewer is 100% correct or error-free
Sources: GoSalTo and KDA Notes, KMA Discussion, PPT presentation, BaReRoViSoTa transcripts.

Thus, if the seller is non-VAT registered the tax Republic Act No. 9904 (Magna Carta for
exemption as provided here cannot be enjoyed by Homeowners and Homeowners’ Association) and
Senior Citizens or PWDs. Republic Act No. 4726 (The Condominium Act),
respectively;
Q: In case of land travels, can the senior citizen say Only two organizations are covered under this provision:
to exempt his fare from 12% VAT? • homeowner’s associations
• No, since common carriers by land is not subject to VAT • condominium corporations
but OPT. Hence, there is no VAT exemption applicable
here since the same is not a VATable transaction. Comments:
• But the 20% discount may still be accorded to the • Other associations are not exempted from VAT
senior citizens with respect to their fares for land unless they get a BIR VAT exempt ruling; they
travels. Don’t get confused. The grant of 20% discount may be exempt from income tax under Sec.30 of the
to the SC is under a different law. NIRC, but not to VAT
• Prior to the TRAIN law, the dues and assessments
(X) Transfer of Property pursuant to Section collected by homeowner’s associations and
40(C)(2) of the Tax Code, as amended; condominium corporations are subject to VAT.
• This is a new provision under the TRAIN law. • This is a new provision. In a case involving recreational
• Merger: A + B = A or B clubs, the SC said that association dues, fees and
• Consolidation: A + B = C other assessments are merely held in trust for
members for the use of the club. They are not
General Rule: The entire amount of gain or loss shall be engaged in business. So exempt from VAT and
recognized upon the sale or exchange of property. Income tax.

Exceptions: No gain or loss shall be recognized if in (Z) Sale of gold to the Bangko Sentral ng Pilipinas;
pursuance of a merger or consolidation. • Before TRAIN Law: Zero-rated
a. A corporation, which is a party to a merger or • After TRAIN Law: VAT-exempt, this was changed
consolidation, exchanges property solely for stock in a because we have many reserves
corporation, which is a party to the merger or
consolidation (ASSET FOR STOCK SWAP); or (AA) Sale of drugs and medicines prescribed for
b. A shareholder exchanges stock in a corporation, diabetes, high cholesterol, and hypertension to
which is a party to the merger or consolidation, solely beginning January 1, 2019 as determined by the
for the stock of another corporation also a party to the Department of Health;
merger or consolidation (STOCK FOR STOCK SWAP); • The list of drugs is published in a joint memorandum
or with the DOH and DOF.
c. A security holder of a corporation, which is a party
to the merger or consolidation, exchanges his (BB) Sale or lease of goods or properties or the
securities in such corporation, solely for stock or performance of services other than the transactions
securities in such corporation, a party to the merger or mentioned in the preceding paragraphs, the gross
consolidation. annual sales and/or receipts do not exceed the
No gain or loss shall also be recognized if property is amount of Three Million Pesos (P3,000,000.00).
transferred to a corporation by a person in exchange • Aside from knowing if it is a taxable transaction, know
for stock or unit of participation in such a corporation also whether the gross sales or gross receipts during
of which as a result of such exchange said person, the taxable year exceeds the threshold. Because if it
alone or together with others, not exceeding four (4) did not exceed the threshold, it is exempted,
persons, gains control of said corporation: Provided, unless it voluntarily registered under the VAT
That stocks issued for services shall not be considered system
as issued in return for property. (ASSET FOR CONTROL
OF THE ENTITY SWAPPED WITH NUMBER OF PERSONS Filing and Payment of VAT
INVOLVED IN THE TRANSACTION)
DEADLINE OF FILING (MONTHLY OR QUARTERLY)
KMA:
• Above enumerated items are not subject to income MONTHLY FILING
tax because there is no gain or loss in the • Manual Filer: On or before the 20th day of the month
transactions. They only involve acquiring following the close of the month.
ownership over another entity. With that, there is • Electronic Filing and Payment System (eFPS)
a presumption, you do not do it in the ordinary Filer: staggered depending on what group:
course of business, hence, not subject to VAT.

Q: Is there sale here?

• Not necessarily a sale wherein there is profit derived.
Rather, more appropriately, there is an exchange.

Q: Is there realized gain here?

• No. One exchanges his property in order to get
controlling shares of stock in a corporation.

Comments: QUARTERLY FILING

• No cash received until the shares of stocks acquired are
• Manual and eFPS Filer: on or before the 25th of
sold by the taxpayer.
the month following the close of the taxable
• Further, this is not VATable because the entities or the
quarter.
person is not into business of having a merger or
consolidation.
• There is still a need for BIR ruling for the
exemption; the grant of exemption is not automatic
even if there is this provision because the BIR still has
to see to it that one claiming really fall under this
exemption.
• Thus, it doesn’t cover all consolidations and mergers.
If you fall here, you are exemption from Income Tax
Comments:
and VAT Tax. You need a certification or ruling from the
• All persons liable to VAT must pay the tax for each of
BIR. Based on the DOUBLE NEXUS DOCTRINE, you
the first and second month of a quarter, based on the
must preset proof that you qualify.
transactions of the month, reflected in a Monthly VAT
Declaration (BIR Form No. 2550M), within 20 days
(Y) Association dues, membership fees, and other
after the end of the month.
assessments and charges collected on a purely
• VAT Payable – output taxes exceed the input taxes
reimbursement basis by homeowners’ associations
and condominium corporations established under

9|Page UNIVERSITY OF SAN CARLOS

TAXATION II - PREFINALS ATTY. ARANAS EH403 2019-2020
DISCLAIMER: This material is not for sale. You are free to pass this on to anybody but the authors do not guarantee that the reviewer is 100% correct or error-free
Sources: GoSalTo and KDA Notes, KMA Discussion, PPT presentation, BaReRoViSoTa transcripts.

• Carry-over to the 2nd month – excess of input taxes • Applies only to VATable purchases without
over the output taxes in the first month. substantiation. No transitional input tax on:
• No carry-over of excess input taxes from the 2nd a. capital goods or fixed assets
month to the 3rd month (coz on the 3rd month, b. Goods that were VAT-exempt under Sec. 109, NIRC
amounts are consolidated for the 3months of the • Transitional input VAT may be applied when a VAT
quarter). exempt taxpayer becomes VAT-registered
• Within 25 days after the end of the quarter, there will (mandatory) or voluntarily registered
be a Quarterly VAT Return (BIR Form No. 2550Q), • Transitional based on the word transition, from non-
reflecting the cumulative transactions of the quarter. VAT before, to VATable entity now. It’s more on an
• VAT shown and paid under the 1st and 2nd months’ incentive on the part of the taxpayer once he is
declarations will be deducted from the output taxes in registered under the VAT system.
the quarterly return.
• Again, for quarterly returns, the amounts are 4% PRESUMPTIVE INPUT TAX
consolidated for the 3 months, but you are allowed to • Of the value of amount paid applied to purchases
deduct your payment for the first 2 months of the of VAT exempt goods used as inputs
quarter. So effectively, on the 3rd month, you’re only manufacturing or processing “certain” food
paying for the VAT payable for the remaining 3rd month products by a VAT registered taxpayer (Sec. 111-B)
of the quarter. • VAT registered persons or firms engaged in the
• The excess of input taxes over the output taxes of the processing of sardines, mackerel and milk, and in
quarter will be carried over to the next quarter. manufacturing refined sugar, cooking oil, and
• Effective January 1, 2023, the filing and payment packed noodle-based instant meals (SM2-NCR)
of the VAT will be on a quarterly basis, which shall • 4% of the gross value in money of their purchases
be 25 days following the close of each taxable quarter. of primary agricultural products which are used
• Reason of change: to synchronize with the deadline as inputs to their production (Sec. 111 (B), NIRC).
for the filing of percentage tax which is also done • Primary agricultural products – agricultural
quarterly. products in their original state (exempted from VAT
• BIR Form No. 2550M – monthly VAT declaration; BIR when purchased from the owner of the land where
Form No. 2550Q – quarterly VAT declaration. produced)
• Manual filer – your BIR form is stamped received and • Original marine products are NOT within the
to be submitted manually to the BIR; eFPS filer – meaning of original agricultural products.
submission is through an eFPS account; electronically • Processing – pasteurization, canning and activities
• Currently the filing of percentage tax is on a quarterly which through physical or chemical process alters the
basis, but remittance is still on a monthly bases. In exterior texture or form or inner substance of a product
2023, filing and paying shall be quarterly. in such a manner as to prepare it for special use to
which it could not have been put in its original form and
eFPS filer Advantage condition.
• You can file earlier but pay later, provided it will
not go beyond the deadline set by law. WITHHOLDING VAT
• To be withheld by the payor (or the buyer)
Example:
If I file on the 10th day of the month, it is not necessary (A) Creditable Withholding VAT
that I should pay too on the same date. The deadline of • Payments for VATable purchase of goods or
the payment will depend on what group you belong (Group services from non-resident supplier/sellers.
A to E, according to industry). On the other hand, if you • Withheld at source by the payor (purchasers within
are a manual filer, follow the pay as you file system. the jurisdiction of the Philippines)
• Payor is either a domestic corporation or a
Q: Can you voluntary register under the VAT system resident person. So if you notice, the payor is the
even if you don’t qualify? economic taxpayer and statutory taxpayer at the same
• Yes. It is irrevocable for 3 years. time, since he actually paid for the VAT, but he is also
the one who should remit it to the BIR since the
Input VAT and Output VAT supplier resides outside the Philippines, the BIR
OUTPUT TAX RATES (charged on the sales of the will have a hard time going after the said seller.
seller) • Seller is a non-resident supplier/seller.
(1) 12% Standard Rate • 12% is withheld even for isolated transaction.
(2) 0% for zero-rated transactions • To be remitted in 10 days to BIR.
• If zero-rated, the withholding payor may still claim the
INPUT TAX RATES (charged on the purchases of the remittance as input tax and avail of tax credit/refund
buyer) • Failure to withhold could mean disallowance of
1. 12% Standard Rate – passed by the supplier to you the corresponding expense that you are trying to
2. 0% claim.
• show a VAT zero rating certificate so that supplier • For example, you have a hotel and you contracted a
will not pass VAT to you foreign architect or designer. Then in that case, you are
• If you are a PEZA registered entity and you supposed to withhold 12% VAT even if it is just an
have local suppliers, show your VAT zero isolated transaction. Pay the fee to the foreign
rating certificate so that supplier will not pass contractor, net of 12% VAT. The 12% VAT you withheld
VAT unto you. Otherwise, your remedy for your will then be remitted to the BIR by the resident payor.
input VAT (since it exceeds the output VAT because
your sales are subject to 0% output VAT) is to claim Q: What’s the rule on goods or properties sold by
for refund non-resident suppliers?
3. 2% Transitional or 12% actual input tax rate • No need to do CWT because it is importation. Thus,
4. 4% Presumptive Tax Rate whether or not in trade of course of business, subject
5. 5% Final Withholding Tax Rate to 12% VAT, except exempt importations.
• This is done by the Bureau of Customs before releasing
TRANSITIONAL INPUT TAX goods or items.
• 2% of the value of beginning inventory, materials,
supplies on hand OR actual value of 12% VAT paid on (B) Final Withholding VAT
the aforementioned items whichever is higher. • FWT – 5% on payment to Government
• You can only claim of the 12% input tax if your • Payor is the government regardless of who is the
purchases are properly substantiated. supplier
• 2% basis of Beginning inventory – value allowed for • VATable sale but the government will not pay the
income tax purposes on inventories, excluding goods entire 12%; it will instead withhold 5% of the
that are exempt from VAT; refer to Financial total billing which is already considered FWT.
statements; no need for substantiation • Since it is already FWT, sales to the government will
• Applied to the value of the goods existing at the date a no longer be added to the sales to other
person commences business, and/or becomes liable customers. They have to be accounted
to VAT; separately. That’s why if you look at the VAT return,
there is a separate line item for VAT withheld to sales

10 | P a g e UNIVERSITY OF SAN CARLOS

TAXATION II - PREFINALS ATTY. ARANAS EH403 2019-2020
DISCLAIMER: This material is not for sale. You are free to pass this on to anybody but the authors do not guarantee that the reviewer is 100% correct or error-free
Sources: GoSalTo and KDA Notes, KMA Discussion, PPT presentation, BaReRoViSoTa transcripts.

to government. Such is no longer included in the ➢ Payment of VAT on VATable importations - prior to
computation for your VAT payable, only shown for release in BOC – if supported by “import entry
disclosure purposes. declaration” by BOC
• Expediency of collection (lifeblood)
• No more credit or deduction on the output tax of WITHHOLDING OF VAT ON PAYMENTS TO
seller (7% is deemed as the standard input VAT). NONRESIDENTS
So diba usually Output VAT – input VAT = VAT payable.
For sales to government, the input VAT to be claimed VATABLE PAYMENTS TO NON-RESIDENTS
by the seller is not the actual input VAT on its • The term “sale or exchange of services” means the
purchases, but rather, a standard input VAT of 7% of performance of all kind of services in the Philippines
its sales to government. The remaining 5% (for a total for others for a fee, renumeration or consideration,
of 12%) is the final withholding VAT of 5%, which was whether in cash or in kind.
already withheld by the government. • The government as well as private corporations,
• The difference between the standard input VAT of 7% individuals, estates and trusts, whether large or non-
and the actual input VAT may be treated as cost or large taxpayers, shall withhold twelve percent (12%)
income. VAT with respect to the following payments:
• Transaction must be VATable. The 5% is not declared ➢ Lease or use of properties or property rights
as part of the seller’s gross sales owned by non-residents;
• In your VAT return you must declare sales to gov under ➢ Other services rendered in the Philippines by
different line item. Not under regular VAT able sales. nonresidents

LEGAL BASIS
• “The government or any of its political subdivisions, Example: Country clubs where designs are made by
instrumentalities or agencies, including government- overseas artists. 2 phases: 1st – Design. 2nd –
owned or controlled corporations (GOCCs) shall, before Construction.
making payment on account of each purchase of goods
and/or of services taxed at twelve (12) percent VAT In this case, the place where service was rendered was
deduct and withhold a final VAT due at the rate important. During the first stage, they did not withhold
of five percent (5%) of the gross payment thereof. 12% VAT. This was questioned by club members. Are we
Provided, that beginning January 1, 2021, the VAT at a disadvantage as we failed to withhold the 12%?
withholding system shall shift from final to You must first ascertain where service was rendered.
creditable system.” (RR 13-2018)
The 2nd phase did not push through as well-known
VAT LIABILITY COMPUTATION designer did not oversee due to the question raised.
• In lieu of the actual input VAT directly attributable or Permanent establishment is essential. If you have a
ratably apportioned to sales to government, the seller permanent establishment in the Philippines like an agent
shall be entitled to 7% of gross payment as standard which does the dealings on your behalf or an office, you
input VAT. are deemed a permanent establishment. This also occurs
➢ Actual input VAT exceeds 7% standard input VAT if service was rendered in the Philippines by your
- excess may form part of seller’s expense or cost employees for MORE THAN 6 months.
➢ Actual input VAT is less than 7% standard input
VAT - difference must be closed to expense/cost In the club, it appointed a resident agent in the
Philippines. The designing was done abroad. The only
thing brought here was the blueprint. The issue here was
having a resident agent.

The next question is if the agent was registered with the

BIR. If yes, BIR can trace it. Because they could not
ascertain such, they examined the contract. This is a
service agreement which can be presented to the BIR.
The contract showed that the name of the resident agent
was not present and was not even signed.

Take not how much was paid for in-shore and off-shore
services. In the above case everything was done
offshore. So no need to withhold because it was
rendered abroad.
The 7% standard input VAT is computed as 7% of the sales
to government. TN that ordinarily, input VAT is based on
purchases, but for purposes of computing standard input SOURCES OF INPUT TAX
VAT, it will be based on the sales. 1. VAT on domestic purchases of capital goods
2. VAT on domestic purchases of services
Sales to Government Illustration: 3. VAT on importation of capital goods
Transaction A: Sales to Gov’t = P100,000; Purchases 4. VAT withheld on royalties
= P42,000 5. Transitional or presumptive input tax
6. Input tax from previous quarter

INPUT TAX ON CAPITAL GOODS

• If aggregate acquisition cost of capital goods, exclusive
of VAT, exceeds P1M in a calendar month, spread
or amortize input VAT over 60 months or useful
*Must be closed to a cost or an expense account. life of asset whichever is shorter
(Actual Input < Standard Input) • If the capital good is sold within 5 yrs – the entire
Actual Input = Standard Input: no issue unamortized input tax on the capital goods sold can be
Actual Input > Standard Input: difference cannot be claimed as input tax credit during the month/quarter
claimed as input tax for VAT purposes, but it will form part when the sale was made
of your cost or expense. • The amortization of the input VAT is an advantage on
the part of the taxpayer because the recognition will be
When to recognize? staggered. However, it created complexity.
• Output VAT – upon sales of goods and services.
• Input VAT – upon: CAPITAL GOODS OR PROPERTIES
➢ Consummation – if purchase of goods or • Refer to goods or properties with estimated useful
properties is supported by VAT invoice; life greater than 1 year and treated as
➢ Payment of compensation, royalty, rent – if depreciable assets used directly or indirectly in the
purchase of service is supported by VAT OR; production or sale of taxable goods or services. (Sec 4,
110-3, RR 16-05)

11 | P a g e UNIVERSITY OF SAN CARLOS

TAXATION II - PREFINALS ATTY. ARANAS EH403 2019-2020
DISCLAIMER: This material is not for sale. You are free to pass this on to anybody but the authors do not guarantee that the reviewer is 100% correct or error-free
Sources: GoSalTo and KDA Notes, KMA Discussion, PPT presentation, BaReRoViSoTa transcripts.

Aggregate acquisition cost – total price, excluding the That is the essence of the VAT system. You have to record
VAT, agreed upon for one or more assets acquired; NOT separately the purchase price of the item you are buying
on the payments actually made from the tax that was passed on to you by the supplier.
This is one way for the BIR to check also if the supplier is
If aggregate acquisition cost of capital good, net of VAT, in properly collecting the VAT and recording it.
a calendar month:
• Exceeds P1M – spread input VAT over 60 months
or useful life of asset, whichever is SHORTER. BIR RULING NO. DA (VAT-021) 121-2010, JULY 9,
• Does not exceed P1M – the total input taxes will be 2010
allowable as credit against output tax in the month of BIR allowed expensing of input VAT, subject to the
acquisition following conditions:
1. The input taxes shifted or passed on by the local VAT
registered suppliers shall NOT be recorded as input
tax in the books.
2. The input taxes shall NOT be reflected/reported
as input tax in its VAT returns.
• P4,000 input tax credit claim shall commence in the 3. The input taxes shifted or passed on is NOT
calendar month with the capital goods were acquired. claimed as tax refund or tax credit.
• The 2M should be exclusive of VAT
• P240,000 is the total input VAT allowed to be deducted Expensing of input VAT is also allowed in the
against output VAT. But deduction should only be following instances:
P4,000 every month as computed. Di xa one-time 1. The claim for refund or credit was denied or
deduction. rejected by the BIR for having been filed beyond
• Assuming useful life is 3 years, then 3years or 48 the 2-year prescriptive period or for non-
months should be the denominator, since the rule is compliance with the invoicing/substantiation
whichever is shorter. requirements
2. Claim for refund or credit is still pending with the BIR
Illustration: but voluntarily withdrawn by the taxpayer
Charlene had the ff data in her books in the month of TN: Secure ruling for the company to treat input VAT as
November: an expense to avoid possible issue with the BIR.
Case A Case B
Sales P2M P1.9M In these cases where the input taxes are claimed as
Purchase of goods for sale 1.5M 500k expense, it is more beneficial on the part of the
Purchase of machines 1.4M 800k government because the tax shield is only up to the tax
rate by which the taxpayer is subjected (remember partial
Machine life 6 years 3 years
relief for VAT exempt entities na napasahan ng input VAT?
Same effect).

TREATMENT OF EXCESS INPUT TAX

Input > Output
Instances:
(a) Zero-rated sales with 0% output tax;
(b) Development stage enterprise;
• Purchases here pertain to normal VATable purchases (c) Purchase during the period > Sales
not referring to capital goods
• Use 60 months instead of 72months (6 years useful
life) since rule is whichever is shorter
• Since machine exceeds 1M, so amortize the input VAT

• Purchases here pertain to normal VATable purchases

not referring to capital goods
• No need to amortize input VAT on machines (capital
goods) since aggregate purchase does not exceed 1M.
So full input VAT will be deducted right away.

APPORTIONMENT OF INPUT ON MIXED

TRANSACTIONS
• Purchases here pertain to normal VATable purchases • When the establishment is engaged in mixed
not referring to capital goods transactions such as when it is engaged in sales
• Use 48 months instead of 60months (5 years as to private persons or firms, to the govt and it is
provided under the law) since rule is whichever is also selling goods which are exempt from VAT,
shorter the total input taxes shall be apportioned by applying
• Since machine exceeds 1M, so amortize the input VAT the ff formulas:

EXPENSING OF INPUT VAT

Q: May input taxes be recognized outright as an
expense for income tax purposes or added to the
acquisition cost upon purchase of capital asset
subject to depreciation?
• Unutilized creditable input taxes attributable to
zero-rated sales can only be recovered through
the application for refund or tax credit. Hence,
unapplied input taxes cannot be treated outright as
deducible expense for income tax purposes. (RMC
57-2013 and BIR Ruling No. 123-2013)

12 | P a g e UNIVERSITY OF SAN CARLOS

TAXATION II - PREFINALS ATTY. ARANAS EH403 2019-2020
DISCLAIMER: This material is not for sale. You are free to pass this on to anybody but the authors do not guarantee that the reviewer is 100% correct or error-free
Sources: GoSalTo and KDA Notes, KMA Discussion, PPT presentation, BaReRoViSoTa transcripts.

VAT Illustrative Problem (5) The input tax to be recognized from purchase of
The Co. has the following sales during the month: capital goods for the month shall be computed as follows:

The P10,750 amortized amount of input VAT shall be

declared by the Co. during the month.

SUBSTANTIATION OF PURCHASES
TRANSITIONAL INPUT TAX
• Shall be supported by an inventory of goods as shown
in a detailed list submitted to the BIR

INPUT TAX FROM PAYMENTS TO NON-RESIDENTS

• Shall be supported by a copy of the Monthly Remittance
Return of Value Added Tax Withheld (BIR Form 1600)
filed by the resident by the resident payor in behalf of
the non-resident evidencing remittance of VAT due
which was withheld by the payor

SUBSTANTIATION OF PURCHASES
o For purchase of services - Official receipt showing
the information required
Purchases with input tax not attributable to any activity o For domestic purchase of goods and properties -
amounts to P5,000,000. Invoice showing the information required
o For the importation of goods - Import entry or
How much is the total input tax from the ff. other equivalent document showing actual payment of
transactions? VAT on the imported goods, government OR bank-
validated return
(1) The input tax attributable to sales to private o For the purchase of real property - Public
entities subject to 12%, for the month, shall be instrument i.e., deed of absolute sale, deed of
computed as follows: conditional sale, contract/agreement to sell, etc.

REQUIREMENTS FOR CLAIMING

Recognize input tax in the appropriate period (date of the
official receipt or invoice)
• Goods — upon issuance of VAT invoices
• Services — upon receipt of payment as evidence of VAT
official receipt

The P850,000 input VAT may be deducted from the total INPUT TAX CREDIT
output VAT to be recognized by the Co. during the month. • To reduce the output tax in determining the VAT
payable for the taxable period;
(2) The input tax attributable to zero-rated sales for • Excess to be carried over to the succeeding taxable
the month shall be computed as follows: periods to reduce the VAT liability for such taxable
periods;
• Claimed as refund or tax credit [Tax Credit
Certificate (TCC)] if arising from any of the following:
➢ Zero-rated sales
The P650,000 input VAT may be deducted from the total ➢ Closure of business
output VAT to be recognized by the Co. during the month. ➢ Change of registration from VAT to non-VAT
KMA: If there is a change from VAT to non-VAT, is the
(3) The input tax attributable to VAT-exempt sales for ending inventory subject to VAT as transaction deemed
the month shall be computed as follows: sale? Yes, if you claimed the input tax pertaining to those
inventories. But if it is claimed as part of cost or expense,
then, it will not be subject to VAT anymore.

Summary:
1. Input taxes that can be directly attributed to
The P500,000 input VAT shall not form part of the
transactions subject to VAT may be recognized
input VAT to be deducted from the total output VAT
for input tax credit
but rather, it shall form part of the expense of the
2. Input tax directly attributable to VATable sales to the
taxpayer.
Government shall not be credited against output tax
under the final withholding VAT system (starting Jan.
(4) The input tax attributable to sales to the
1, 2021, shift to creditable withholding VAT system)
government for the month shall be computed as follows:
3. Input tax directly attributable to VAT-exempt
sales shall not be allowed as a deduction from
output tax, allowed as cost or expense
4. Persons engaged in both zero-rated and non-zero-
rated sales shall allocate the input tax accordingly.
5. Input tax that cannot be directly attributed either to a
VAT taxable or VAT-exemption transaction shall be
prorated.

REQUISITES TO CLAIM FOR VAT REFUND/CREDIT

1. VAT-registered person;
2. Claimed input taxes are directly attributable to
zero rated sale;
The 70,000 standard input VAT shall be the declared in the 3. Duly supported with VAT invoice or VAT official receipt
VAT return for the month. However, the difference (actual with proper content;
> standard) of P180,000 shall form part of the expense of 4. The claimed input tax were not applied against
the taxpayer. output tax nor carried over to succeeding
months/quarters;

13 | P a g e UNIVERSITY OF SAN CARLOS

TAXATION II - PREFINALS ATTY. ARANAS EH403 2019-2020
DISCLAIMER: This material is not for sale. You are free to pass this on to anybody but the authors do not guarantee that the reviewer is 100% correct or error-free
Sources: GoSalTo and KDA Notes, KMA Discussion, PPT presentation, BaReRoViSoTa transcripts.

5. Claim for refund/credit (admin) must be made

within 2 years from close of the taxable quarter
when sales (0%) were made, not when input tax
was paid
.
WHERE TO CLAIM REFUND
(1) BIR Office — large taxpayers;
(2) Revenue District Office;
(3) One Stop Shop Center of DOF

WHEN TO CLAIM REFUND

• Within 2 years
• For purposes of determining the two-year prescription
period for claiming refund, we do not look at the
date of payment but on the taxable quarter when
the sales were made.

SECTION 112
• CIR may grant refund or issue TCC within 90 days (3
months), if denied, appeal to CTA within 30 days
from receipt of adverse decision.
• If the CIR does not act within 90 days, the
taxpayer may appeal to the CTA within 30 days
from the expiration of the 90-day period.

*END (Other topics to follow; KMA will still hold a

make-up class)

14 | P a g e UNIVERSITY OF SAN CARLOS