CHAPTER 2: VALUE ADDED TAX - - - Tax on the value added by every seller to the purchase price or cost in the sale of goods, property, or services in the ordinary course of the business as well as importation of goods into the PH, whether for personal or business use As a rule, sale of goods or services made in the normal course of trade or business are subject to VAT “unless exempt If the sale is exempt from VAT, it may be subject to Other Percentage Taxes except those transactions exempt from business taxes such as those made for subsistence or livelihood VAT exempt transactions are as follows: A. “Sale or importation of agricultural and marine food products in their original state, livestock and poultry of a kind generally used as, or yielding or producing foods for human consumption and breeding stock and genetic materials therefor. - Products classified under this exemption such as meat, fruits and vegetables, shall be considered in their “original state” even if they undergone simple processes of preparation or preservation for the market such as freezing, drying, salting, broiling, roasting, smoking, or stripping including those using advance technological means of packaging such as shrink wrapping in plastics, vacuum packing, tetra-pack and other similar packaging methods Refined Sugar – sugar whose content of sucrose by weight in dry state corresponds to a polarimeter reading of 99.5 and above Sugar Refinery Mill – refers to entity, natural or juridical, engaged in the business of milling sugar cane into raw or in the refining of raw sugar Sale of Marinated Fish - Not exempt from VAT Laws granting exemption from tax are construed strictly against the taxpayer. Exemption from payment of tax must be clearly stated in the language of the law Note: Polished, and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt and copra shall be considered in their original state B. Sale or importation of: - Fertilizers Seeds, seedlings and fingerlings, fish, prawn, livestock, and poultry feeds, including ingredients, whether locally produced or imported, used in the manufacture of finished feeds (except specialty feeds) Specialty Feeds – Non-agricultural feeds or food for race horses, fighting cocks, aquarium fish, zoo animals and other animals generally considered as pets are subject to VAT Raw sugar or raw cane – sugar whose content of sucrose by weight, in the dry state, corresponds to a polarimeter reading of less than 99.5 degrees VAT Exempt Sugar - - Raw sugar cane refers to sugar produced by simple process of conversion of sugar cane without need of any mechanical or similar device Raw cane sugar refers only to muscovado sugar Raw Sugar – sugar whose content of sucrose by weight in dry state corresponds to a polarimeter reading of less than 99.5 For sale or importation of certain feed ingredients (whey powder, skimmed milk powder, lactose, buttermilk powder, whole milk powder and such other feed ingredients and additives which may be determined by competent authority to have possible utilization for human consumption, there must be a showing that the same is unfit for human consumption or that the ingredient cannot be used for the production of food for human consumption as certified by the FDA. C. Importation of personal and household effects belonging to: - The residents of the Philippines returning from abroad; and - Nonresident citizens coming to resettle in the Philippines. Provided, that such goods are exempt from Customs duties under the tariff and Customs Code in the Philippines Kinds of Personal and Household Effects that may be Exempt from Payment of Customs Duties 1. Returned personal and household effects 2. Personal and Household effects purchased abroad D. Importation of professional instruments and implements, tools of trade, occupation or employment, wearing apparel, domestic animals, and personal and household effects belonging to persons coming to settle in the Philippines or Filipinos or their families and descendants who are now residents or citizens of other countries, such parties herein referred to as overseas Filipino, in quantities and of the class suitable to the profession, rank or position of the persons importing said items, for their own use and not for barter or sale, accompanying such persons, or arriving within a reasonable time. - However, if such activity is done independently of growing poultry, livestock or other agricultural and marine food products, the same can be considered as vatable services not covered by agricultural contract growing G. Medical, dental, hospital and veterinary services except those rendered by professionals - - - - E. Services subject to Percentage Tax under Title V of the Tax Code, as amendment (Sections 116127). E. SERVICES BY: Laboratory services are exempted If hospital or clinic operates a pharmacy or drugstore, the sale of drugs and medicine are subject to VAT Hospital bills constitute medical services. Sales made by the drugstore to the inpatients which are included in the hospital bills exempt from VAT Sales of the drug store to the out-patients are taxable because they are not part of medical services of the hospital Services of professional practitioners are subject to VAT if annual gross professional fees exceed 3M (as amended). Otherwise, such professional fees are subject to 3% percentage tax a) “Agricultural contract growers” and b) Milling for others of: Palay into rice Corn into grits; and Sugar cane into raw sugar Purchased inside – Not Agricultural Contract Growers – Persons producing for others’ poultry, livestock or other agricultural and marine food products in their original state b. CPASs Its services growing poultry, livestock or other agricultural and marine food products into marketable poultry, livestock or other marine food products. There are agricultural contract growers which offer toll processing/ toll manufacturing as a packaged service to its toll growing Toll Processing/ Toll Dressing/ Toll Manufacturing - Involves procedures such as weighing, killing, dressing, scalding, cut-ups and packaging - Toll processing services exempt from Vat shall pertain only to services to clients from which growing of animals were contracted - Preparing and packaging hogs/chicken ready for delivery after producing or growing them can be said to be within the purview of agricultural contract growing Purchase outside - VATable Professional Practitioners include: a. Medical Practitioner c. Insurance Agents d. Other Professional Practitioners required to pass the government examination H. Educational services rendered by private educational institutions, duly accredited by the Department of Education (DepEd), the Commission on Higher Education (CHED), the Technical Education and Skills Development Authority (TESDA) and those rendered by government educational institutions - Educational services shall refer to academic, technical or vocational education provided by private educational institutions duly accredited by the DepEd, CHED and TESDA and those rendered by government educational institutions. - It does not include seminars, in-service training, review classes and other similar services rendered by persons who are not accredited by DepEd, CHED or TESDA I. Services rendered by individuals pursuant to an employer-employee relationship J. Services rendered by RHQs established in the Philippines by multinational corporations which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region and do not earn or derive income from the Philippines K. Transaction which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree No. 529. Gross Receipts/ Sales by Electric cooperatives Non-agricultural, nonelectric, nonlending/credit cooperative Contribution per member =< P15,000 Contribution per member > P15,000 Sales by Agricultural Cooperatives Sale of cooperative’s own produce (processed or original state) Other than the cooperative’s own produce (i.e., from “traders”) To Members To NonMembers Exempt Exempt Exempt VAT* *Exempt if referring to agricultural food product at its original state - Sale or importation of agricultural food products in their original state is exempt from VAT irrespective of the seller and buyer M. Gross receipts from “lending activities” by credit or multipurpose cooperatives duly registered with the Cooperative Development Authority” Gross receipts by Credit or Multi-purpose cooperatives From Lending activities From nonlending activities From Members From NonMembers Exempt Exempt VAT VAT N. Sales by non-agricultural, non-electric, and noncredit cooperative duly registered with the Cooperative Development Authority. From NonMembers VAT Exempt Exempt VAT VAT O. Export sales” by persons who are Not VAT-registered Sale by non-VAT reg = Vat Exempt Sale by a VAT reg = Zero-rated sales Note: Zero-rates sales and VAT exempt are different from each other. VAT Exempt are not registered P. Sale of real property SALE OF L. Sales by agricultural cooperatives duly registered with the Cooperative Development Authority From Members VAT 1. Real property not held for sale or lease in the ordinary course of trade of business 2. Real property utilized for socialized housing 3. Real property utilized for lowcost housing 4. Residential lot with SP of not more than P1,919,500 5. Residential house and lot and other residential dwellings with SP of not more than P3,199,200 PRIOR TO 2021 Vat exempt BEGINNING 2021 Vat exempt Vat exempt Vat exempt Removed from the list of VAT exempt sales. However, if the selling price is not more than P3,199,200 for "residential house and lot" and "other residential dwellings", the sale shall be exempt from VAT Subject to vat Vat exempt Vat exempt Vat exempt VAT exempt under RR 82021 issued on June 11, 2021 Sale of Adjacent Lots - If two or more adjacent residential lots are sold or disposed in favor of one buyer, for the purpose of utilizing the lots as one residential lot, the sale shall be exempt from VAT only if the aggregate value do not exceed 1.5M (as amended). Adjacent residential lots, although covered by separate titles and/or separate tax declarations, when sold to one and the same buyer, whether covered by one separate Deed of Conveyance, shall be presumed as sale of one residential lot which be disregarded beginning Jan 1, 2021 Sale of Parking Lot in the Sale of Condominium Units - Exemption from VAT does not include the sale of parking lot which may or may not be included in the sale of condominium is a separate and distinct transaction and is not covered by the rules on threshold amount not being a residential lot, house and lot or a residential dwelling - Should be subject to VAT regardless of the amount of selling price Book, newspaper, magazine, review and bulletin - Covers printed matters in hard copy, and does not apply in electronic format or versions including but not limited to Q. Lease of Residential Unit 1st Criteria: Lease of a residential unit with a monthly rental per unit not exceeding PhP15,000 regardless of the amount of aggregated rentals received by the lessor during the year. - 2nd Criteria: Lease of residential units where the monthly rental per unit exceeds PhP15,000 but the aggregate of such rentals of the lessor during the year do not exceed PhP3,000,000 shall likewise be exempt from VAT, however, the same shall be subject to Percentage tax under Section 116 of the tax code as amended. Corporation’s other transactions (such as printing of brochures, bookbinding, engraving, stereotyping, electrotyping, lithographing of various reference books, trade books, journals and other literary works) are subject to VAT - Taxpayer is required to register its business as a VAT business entity and issue a separate VAT invoice/receipt to record such transactions Prior July 1 2021: 3% From July 1, 2021 to June 30, 2023: 1% Beginning July 1, 2023: 3% S. Transport of passengers by international carriers doing business in the Philippines International Carriers Transport of Passengers, Cargo or goods Originating in the Philippines Subject to Common Carrier’s Tax (3%) Domestic Common Carriers Transport of Within the Philippines Passengers By land Common Carrier’s tax By air VAT or sea Cargo or goods VAT R. Sale, importation, printing or publication of books, and any newspaper, magazine, journal, review bulletin, or any such educational reading material covered by the UNESCO agreement on the importation of educational, scientific and cultural materials, including digital or electronic format thereof. Provided, that the materials enumerated herein are not devoted principally to the publication of paid advertisements. Philippines to abroad 0% VAT 0% VAT 0% VAT T. Sale, importation, or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts thereof for domestic or international transport operations, provided, that the exemption from vat on the importation and local purchase of passenger and/or cargo vessels shall be subject to the requirements on restriction on vessel importation and mandatory vessel retirement program for MARINA U. Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations The P3,000,000 gross annual sales shall comprise of the business’ total revenues from sale of its products, which are either goods or services, including nonrefundable advance deposits/payments for services, net of discounts, sales returns and allowances, covering the fiscal and calendar year. V. Services of banks, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries, such as money changers and pawnshops, subject to percentage tax W. Sale or lease of goods and services to senior citizens and persons with disabilities Computation of VAT Payable X. Transfer of property pursuant to Section 40©(2) of the tax code, as amended. Y. Association dues, membership fees, and other assessments and charges collected on a purely reimbursement Z. Sale of Gold to the BSP. This provision shall take effect only beginning January 1, 2018 or upon the effectivity of RA10963-TRAIN Law AA. Sale or importation of prescription drugs and medicines prescribed for diabetes, high cholesterol, hypertension beginning January 1, 2020 beginning January 1, 2021 - Must be approved by FDA. If not, VATable BB. Sale or importation of the following beginning January 1, 2021 to December 31, 2023: 1. Capital equipment, its spare parts and raw materials, necessary for the production of personal protective equipment (PPE) components such as coveralls, gown, surgical cap, surgical mask, n-95 mask, scrub suits, goggles and face shields, double or surgical gloves, dedicated shoes, and shoe covers, for COVID-19 prevention. 2. All drugs, vaccines and medical devices specifically prescribed and directly used for the treatment of COVID-19; and 3. Drugs for the treatment of COVID-19 approved by the FDA for use in clinical trials, including raw materials directly necessary for the production of such drugs. CC. Under pg BB, Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of P3,000,000. Sources of Output VAT 1. Actual Sale 2. Transaction deemed sales 3. Zero (0%) rated sales 1. ACTUAL SALE (CASH OR DISCOUNT) - Sales where there are actual exchanges between buyers and sellers in the ordinary course of the business Basis of 12% output vat Sale of goods – Gross selling price Sale of services – Gross receipts Sale by a dealer in securities – Gross Income Sale of real properties – the highest amount among selling price, fair value provided by the city/provincial assessor, and the zonal value provided by the CIR Gross Selling Price - - 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 VAT Excise tax, if any, on such goods or properties shall form part of gross selling price Gross Receipts - Toral amount of money or its equivalent representing the total contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits applied as payments for services rendered and advance payments actually or constructively received during the taxable period for the services performed or to be performed for another person, excluding VAT Incidental Transactions - Included in the term “In the ordinary course of trade or business” which means the regular conduct or pursuit of a commercial or an economic activity, by any person regardless whether or not the person engaged therein is a non-stock, non-profit private organization or government entity d. Retirement from or cessation of status as vat registered person with respect to all “goods on hand” (as of the date of retirement or cessation), whether or not the business is continued by the new owner or successor. (considered in VAT computation) 2. TRANSACTIONS DEEMED SALES - - - - Certain transactions which are not usually sale because of the absence of actual exchange between the buyer and the seller, are considered or included in the term sale for value added tax purposes One of the characteristics of VAT is “it is a credit-invoice method value-added tax” which means VAT due/payable is computed by deducting the input VAT from output VAT In transaction deemed sale, the input vat was already used by the seller as a credit against the output vat. However, since there was no actual sale, no output vat is actually charged to customers Consequently, the State will be deprived of its right to collect the output vat To avoid a situation where a vat registered taxpayer avail of input vat credit without being liable for the corresponding output vat, certain transactions should be considered sales even if the absence of actual sales The ff transactions are considered deemed sale a. Transfer, use or consumption not in the ordinary course of business of goods or properties ordinarily intended for sale or use in the course of business. b. Distribution or transfer to: Shareholders or investors as share in the profits of a VAT-registered person; and Distribution or transfer to creditors in payment of debt or obligation c. Consignments of goods if actual sale is not made within sixty days following the date such goods were consigned. Goods returned within the 60-day period are not deemed sold. Change of business activity from VAT taxable status to VAT-exempt status. Approval of a request for cancellation of registration due to reversion to exempt status Approval of a request for cancellation of registration due to a desire to revert to exempt status after the lapse of 3 consecutive years from the time of registration by a person who voluntarily registered despite being exempt under Sec. 109 (2) of the Tax Code. Approval of a request for cancellation of registration of one who commenced business business with the expectation of gross sales or receipts exceeding P3,000,000, as amended, but who failed to exceed this amount during the first twelve months of operation. VAT (Transaction deemed sale) shall not be imposed on goods or properties existing as of the occurrence of the ff: 1. Change of control of a corporation by the acquisition of the controlling interest of such corporation by another stockholder or group of stockholders. The goods or properties used in business or those comprising the stock-intrade of the corporation, having a change in corporate control, will not be considered sold, bartered or exchanged despite the change in the ownership interest in the said corporation. 2. Change in the trade or corporate name of the taxpayer. 3. Merger or consolidation of corporations. The unused input tax of the dissolved corporation, as of the date of merger or consolidation, shall be absorbed by the new or surviving corporation. Bayanihan to Heal as One Act (RA 11469) - Provides that donation of the following items, when made during the period of state of national emergency, for sole and exclusive purpose of combating COVID-19, shall be exempt from donor’s tax 3. ZERO RATED SALES (O%) - - Zero rated sale of goods, properties, and/or services by a vat registered person is a taxable transaction for VAT purposes, but shall not result in any output tax However, the input tax on purchases of goods, properties or services, related to such zero-rated sale, shall be available as tax credit or refund in accordance with existing regulating Purpose of Zero-Rating - Zero-rated seller becomes internationally competitive by allowing the refund or credit of input taxes that are attributable to export sales Rationale for Zero-rating of Export Sales - PH vat system adheres to the “Cross Border Doctrine” (or destination principle), according to which, not VAT shall be imposed to form part of the cost of the goods destined for consumption outside of the territorial border of the taxing authority The INPUT VAT attributable to zero-rated (0%) sale may be: a. Refunded; or b. Claimed as deduction/tax credit against output vat on domestic sales; or c. Claimed as tax credit (TCC) against any other internal revenue taxes Note: The refund of input VAT should be filed within two (2) years after the close of the taxable quarter when such sales were made