tax 2 transcript part 2

8/13/2019 Tax 2 Transcript Part 2

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VALUE-ADDED TAX(Sections 105 115 of the Tax Code, as amended

!" #at$%e and Cha%acte%istics of VAT

- What is VAT?

o It is an indirect tax, the amount of which may be shifted to or passed on the buyer, transferee, or lessee of the goods, properties or services.

- What is the nature of VAT and what are its characteristics? Is it a regressive tax or is it prohibited by the onstitution?

o It!s not prohibited by the onstitution.

o When you say that VAT is imposed on the sale of goods, properties or services, does it include real properties? Are real properties sub"ect to VAT?

Is VAT imposable on the sale of real properties made in the course of business?

#asically, as defined, VAT is a $%& tax imposed on the gross selling price or gross receipts derived from the sale, barter or even exchangeof goods, properties, or services.

'roperties ( only recently, real properties come within the coverage of VAT. #efore, VAT is not imposed on real properties. This is a bigthing because if you have gone into house hunting or even condo hunting, the first $.)* value of a parcel of land used for residential

purposes is totally VAT+exempt. #ut once you reach the border of $.)$* or $.*, you add+on $%& VAT, which is -uite big. If you go condo+hunting, you notice that condominium unit owners are offering you a strategy because under the VAT law, first %.)* of a residential houseand lot including condominium unit not exceeding %.)*, lot only ( $.)*, house and lot or condo unit ( %.)* ( if it reaches more than %.)*,that!s imposable of VAT. %.) below ( that!s VAT+free or VAT+exempt. ow what condominium unit owners are offering is that if the $bedroom condo unit is already %.*, they will offer to sell it at %.)* and $//0 miscellaneous charges and other charges so long as it is notattached to the house and lot or condo unit so you can get rid of the $%& VAT.

What is $%& VAT of %.)*? That is 1//0.

2o, it!s a really big impact on the purchases of consumers. 2upposedly, these real properties should not be imposed of VAT ( supposedlylng because it!s not a consumption. #ut then it!s covered by properties, that is found in 2ecs. $/) 3 $/ of the tax code. We can do nothingabout it except buy small portions of parcel of land. 4ou cannot even escape.

If you purchase % parcels of land at $* each, will you be sub"ect to VAT?

It depends. 4ou can escape the VAT so long as the % parcels of land are not ad"acent to each other. If it!s ad"acent lots ( so a total

of %* ( you pay the VAT because that!s more than $.)*. If it!s not ad"acent, then not sub"ect to VAT because for $* each, it!s notmore than $.)*.

- Is it an indirect tax or direct tax?

o Indirect. Why is it an indirect tax?

2ince in principle, the VAT is designed to be borne by the consumers, and the sellers are merely acting as tax collectors.

Taxation Transcription. Midterms 2011.by USC Law EH 40 C!ass 2012


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o Whose liability is VAT? Is it yours or the supermar5et owner if for example you buy wine, which is sub"ect to VAT, in the supermar5et? Who has the

statutory liability of the VAT?

The supermar5et owner or the seller because VAT is a tax on the sale, barter or exchange of goods, properties or services. Whenever VATis not paid to the government for a sale of something made in the course of business, the government does not run after the consumer, whois supposed to shoulder the burden. The government will have to have a person or a "uridical entity who is liable for it. It!s easier to trac5

down businessman than the purchase or consumer. That!s why the VAT is still a statutory liability of the businessman+seller as a generalrule. Although it is the consumer who will ultimately shoulder the burden because every time a VAT is collected by the government, it isalready assumed that that VAT has been collected from the consumers.

- VAT is a regressive tax. The 'hils. has no regressive system of taxation because regressive system of taxation, which is the opposite of progressive, taxrates increases as the income decreases. VAT is simply a tax which is regressive in nature because the impact of VAT increases as the income of theconsumer decreases. 2o it has a higher impact on low+income earners. Is it violative of the constitutional provision which says that we should develop aprogressive system of taxation?

o 6, because there is a need to collect indirect taxes as well because it fully supplements the income tax. It is a business tax that has long been

there for more than 1/ /r 7/ years.

o VAT by its very nature, is regressive. #ut the onstitution does not really prohibit the imposition of indirect taxes 8which is essentially regressive9.

o What it simply provides is that ongress shall :evolve a progressive system of taxation;.

o but not avoided entirely because it is difficult, if not

impossible, to avoid them.

o egressivity is not a negative standard for courts to enforce. The provision in the onstitution is placed as moral incentives to legislation, not as

"udicially enforceable rights.

- What do you mean by VAT is a tax on consumption?

o In the case of I vs. *agsaysay @ines Inc., the 2 said that VAT is ultimately a tax on consumption even though it is assessed on many levels of

transactions on the basis of a fixed percentage. It is the end+user of the goods or services who ultimately shoulders the tax as the liability therefromis passed on to end+users by the providers of such goods or services.

o 2o the final purchase of the end+consumer represents a final lin5 in the production chain that involves several transactions and several asset

consumptions.

o It simply means that every time there is a passage of the goods, properties or services from one hand to the other in the course of trade or

business, generally, a VAT is imposed.

o #y the word itself, until it rests in the hands of the final consumer who does not intend to sell the product in the course of trade or business.

o 2o if there are $/ production chains or lin5s in the passage of $ and the same product, there will be $/ VATs that will be imposed.

o The reason why it!s called VAT is because it is a tax on every value that the seller adds to it.



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xampleB (Refer to illustration below)A fisherman spent C/ pesos in catching fish. 2old to the mar5et at $// pesos, does it impose of theVAT? 6. / because it is still an agricultural product. 4ou will learn later on that agricultural products in its original stage which has notundergone chemical processes are still exempt from VAT.

The mar5et vendor sells it to *DA sardines for %//, will it be sub"ect to VAT? 6T as yet because it did not undergo the process ofproduction.

#ut if *DA sardines sells it to a wholesaler for 1//, will it be sub"ect to VAT? 42. What!s $%& of 1//? That!s 1. ??????? aren!t thissub"ect to presumptive tax which is 7& of the purchase value???? B8 EEEE9

The wholesaler sells it to a retailer of a supermar5et for 7//, how much will be the VAT? What!s $%& of 7//? 7C.

If the retailer sells it to a hotel chain for )//? 2o $%& of )// is /.

When the hotel sold it to the consumer who dined in the hotel for )/, it is the consumer who shouldered the VAT from the original C/.

In the 'hils., we follow the tax+inclusive sales. 2o whatever you see in the mar5et, assuming it is a vatable good, in the price, there isalready a VAT. The selling price is inclusive of the VAT.

Why is VAT a tax on the value added?

If you reverse it, it!s a tax on the value added for a simple reason that every time in the production chain that it actually paid for the

VAT on what it sold, it can deduct the VAT that it paid for the puhunan.

What the government will only collect from the wholesaler is $% pesos, not really the 7C because every time that you are able to sell

a product, you are allowed to deduct the tax that you have also paid from your purchase. In your purchase of these products fromoriginally 1//, you paid VAT of 1, you were a consumer in so far as the wholesaler is concerned. 4ou are to deduct the 1puhunan input tax against the output tax on your sales because VAT is a value added tax on the sales. Ang lugi is the consumerwho really paid the / pesos VAT.


"is#erman $ Mar%et &endor $ ME'( sardines $)#o!esa!er$ *etai!er- Hote! c#ain$ Cons+mer

,0 100 200 00 400 00 0/ -0- / -0- / 12 /4, 12 /0 12

'S3 $ 44, 0

4, $ 12 0 $ 4, 12


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Why is this a tax on value added?

o #ecause VAT is simply that what you really pay to the government as a statutory taxpayer is simply the VAT on the value

that you have added. Fow much value have you added? $// dba. 4ou purchase something at 1// and you sell it at 7//.What is the VAT on the $//? $%. 2o this $% pesos is what you will pay to the government.

#ut bottomline, it is the consumer who will ultimately shoulder the burden of the tax because the consumer who pays directly to thehotel will have nothing against which to deduct it from because it!s not selling. 8TiuB To be further discussed once we reach output+input tax9

!!" A&&'ica'e La)s

- The applicable law in VAT is still A C7%7 ( the $GGH Tax ode, as amended lengthily by A G11H in %//).

!!!" Stat$s in *e'ation to VAT

- What is the status of every person, whether "uridical or natural, in relation to VAT?

o $. A person in relation to VAT may be sub"ect to VAT at $%& or /& or

o

%. Fe may be exempt from VAT it depends on the status of the person or the type of transaction that he is entering into- Who are re-uired to register for VAT purposes? Are we, as individuals, re-uired to register for VAT purposes?

o very person who, in the course of trade or business, sells, leases goods, properties or services sub"ect to VAT is re-uired to register under the

VAT system if the aggregate amount of his actual or expected gross sales exceed $.)* during any $%+month period.

o 2o are you saying that if you are exempt from VAT, no way will you be allowed to register for VAT?

'ersons or transactions, whether sub"ect to VAT, whether the VAT rate may be /& 8=ero+rated VAT9 or $%&, they!re re-uired mandatorilyto register for VAT purposes. on+registration would mean penalties such as suspension of business operations, etc.

If you belong to an exempt+person who is not liable for VAT or your transactions in the course of your trade or business are not vatable,such as fish vendors selling fishes in its original state, then, you!re not actually re-uired to register for VAT purposes but there are instances

when you have the option to register, meaning it!s an optional registration depending on the benefits that you will get from VAT registration.!V" +e%sons Lia'e to VAT

- Who are the persons liable for VAT?

o A. 2eller or Transferor 8including non+stoc5, non+profit entities engaged in the course of trade or business9

$. of goods or properties

%. of services



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'roblemB If you sell a motor vehicle at least thrice every calendar year, can you be considered as sub"ect to VAT? 2ay for example,

you but a motor vehicle but 1 months after, you get tired of seeing it, you sell it then you buy, you sell it, you buy, you sell it. Are youcovered by the phrase :person sub"ect to VAT;? ven if the motor vehicles that you!re selling are your personal vehicles but yousimply wanted to change it as often as you change your cellphones? What comes within the coverage of a seller or transferor? Whois a seller? Who is a transferor?

o 2eller or transferor engaged in the course of trade or business.

o What do you mean by :in the course of trade or business; for VAT purposes?

It means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidentthereto, by any person regardless of whether or not the person engaged therein is a non+stoc5, non+profitorgani=ation irrespective of the disposition of its net income and whether or not it sells exclusively to members or theirguests, or government entity.

o


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the extent of the tax is far+reaching. ven government entities or non+stoc5, non+profit so long as you can identify thatthese activities are in the course of trade or business. The sale in this case is not in the course of trade or businessbecause the reason for selling was pursuant to the policy of the government to relin-uish its right over the shippingvessels due to the privati=ation policy.

What do you mean by sale or exchange or services? What 5ind of services are sub"ect to VAT? 8TiuB to be discussed next meeting9

o #. Importer

2hould you be engaged in the course of trade or business to become sub"ect to VAT as an importer?

6. The importer, whether an individual or corporation and whether or not made in the course of his trade or business, shall be

liable to pay VAT.

Deceme% , 010

- '262 @IA#@ T6 VATB

o $. 2eller or transferor of goods, properties or services

4ou can call someone who provides service as a seller of services and it should be made in the course of trade or business

WFAT


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DIV * A 2A@ 6K 2VI TFAT I2 2J#NT T6 VAT?

@ease or rent of an officeMcommercial space ( If you!re a lessee and you pay a monthly rental of %/0, you should pay on top of that

rental amount $%& VAT wMc the lessor will have to collect.


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'hils ( all personal household effects that you!re bringing, except vehicle, aircraft machinery, etc, are not sub"ect toVAT or customs duties.

O'6TATI6. If you!re an exporter, will you be sub"ect to vat?

42, but DB 2ub"ect to =ero+percent VAT rate.

What is the reason why importers are sub"ect to VAT regardless of whether or not engaged in trade or business? Why do we have tocharge huge taxes on importations?

ross border doctrineMdestination principle ( Whenever there is a sale of goods or services, it is sub"ect to VAT if made in the course

of trade or business in the 'hils. Any sale of goods or services outside the 'hils. is the beyond the reach of VAT.

We actually frown upon importations because importations decrease foreign currencies bac5ing our local legal tenders and in order

to regulate goods coming in the 'hilippines, we sub"ect them to vat on top of custom duties and also for protection of thelocalMdomestic industries.

o 1. 6+2I


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#ut the rule on regularity exception does not include goods, only services.

ow in vat, there are persons liable for vat, you will have transactions sub"ect to vat. 4ou maybe a person who is not liable for vat but since you have enteredinto a transaction that is vatable, you may have to give up $%& of that value and shoulder the vat.

V" T*A#SACT!#S SU./ECT VAT

- $. Transactions made in the course of trade or business re-uiring rule of regularity except non+resident aliens performing services in the 'hilippines.

- %. Transactions made incidental to the principal business.

o WF4 I2 IT 2J#NT T6 VA@J A


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of trade or business.

- 1. Importations, except those conditionally free importation, meaning exempt if you comply wM documentary re-uirements, free from vat.

o xportation not sub"ect to vat unless it is made in the course of trade or business.

- 7. 2ubse-uent sale of tax+free importation

o Why is a subse-uent sale of an imported product that has entered in the 'hils. tax+free sub"ect to vat? 2ay for example the subse-uent sale is not

made in the ordinary course of trade or business, would it still be sub"ect to vat? orporation A imported a product into the 'hilippines free of tax,now corporation A, founding no use of the property sold it to an individual, not in the course of trade or business, lets "ust say in an isolated case.Why is it considered as a vatable transaction?

There are % cases of subse-uent sale of tax+free importationsB

$. Importation of a tax free product regardless of the status of the importer subse-uently sold or

%. Importation of the product that is taxable but exempt because the status of the importer is tax+exempt and subse-uently sold to a

non+exempt person

W6J@< TF TW6 2J#2PJT 2A@ 2J#NT T6 VAT?

If the original importation refers to the exemption of the product itself, its subse-uent sale would not be sub"ect to vat. The number of

passages or transfers from one person to another will not matter if the exemption is on the product itself ( not sub"ect to vat.

#ut if the exemption of the original importation was due to the status of the importer being tax+free, its subse-uent sale, whether or

not made in the course of trade or business, would be sub"ect to vat. The reason there is to preventMavoid circumvention of the law.If you loo5 into the economic =ones, these corporations are exempt from vat, customs duties on goods, e-uipments, even vehiclescoming into the 'hilippines. If you!d want to purchase a vehicle that is outside of the country and purchase it tax+free, have it beenno provision of this law, you "ust have to simply re-uest these companies within the economic =ones, who are tax+exempt, to importthe vehicle and you will purchase it from them, you avoid the tax. #ut because of this provision, you will be sub"ect to vat becausethe law treats you as a technical importer. The subse-uent sale of these tax+free importations is considered as another importationsub"ect to vat or customs duties.

V!" T%ansactions Deemed Sa'e

- Transactions deemed sale. Why is it sub"ect to vat? Is it really a sale? 6T A@@4.

$. Transfer, Jse or onsumption ot in the 6rdinary ourse of Trade or #usiness

o $. Transfer, use or consumption, not in the course of business, of goods or properties originally intended for sale or for use in the course of

business

xampleB When a vat+registered person withdraws goods from his business for his personal use



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There are movements in your business wMc are not necessarily made in the ordinary course of trade or business. 4ou consume a particularproduct of your business, you use, you transfer, although the consumption, transfer or use is personal and not in the course of trade orbusiness, it maybe considered a transaction sub"ect to vat being a transaction deemed sale if what you are transferring, consuming or usingit is a good or property that is originally intended for sale or for use in the course of trade or business.

Why? #ecause you are depriving the government of collecting value added tax had that property been sold to a third party or a consumer,

so in order to cover up for that deprivation of taxes that could have been collected or due, the government will collect from you vat based onthe mar5et value of the product or inventories.


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Fad this properties not been distributed as dividends and sold to consumers, the government would have collected VAT from thesale, or

Fad the corporation first sold this properties in order to have it converted into cash and later on convert it to cash dividends, thegovernment could have collected VAT.

2o in every business, whenever there are inventoriesMgoods primarily held for sale, the government has already earmar5ed or putattention into those inventories and expects to collect the entire $%& VAT on these items. Anything that has been missing, whether it!s been

disposed of in an outright sale or personally consumed by the owner or distributed as profitsMproperty dividends by the corporation to itsstoc5holders, this does not deviate from the payment of VAT, which the government already expects to collect.

o 2o if there are $// furnitures in the business, )/ items of which are distributed to the owners. The government treats it as a deemed

sale transaction sub"ect to VAT.

If it!s a property dividend you not only pay the withholding tax of $/& for resident citi=ens, %/& for A+T#, %)& for A+T#. 6

top of these income taxes withheld by the corporation, the corporation may also be paying $%& VAT. 2o the best way to distribute dividends, isnot really thru property dividends but cash. #ut if you really have no cash, your option may only have to sell your inventories first then pay cashdividends. #ut still did not avoid $%& VAT.

- %.%


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for $%&.

Fow about if the value of the property is %.)* and the creditor accepted it.

o The base is still the value of the property. Any difference is considered a condonation of indebtednesss sub"ect either to income tax or

donor!s tax.

o K*V at the time of payment since it is the time that it has been sold

Fow about if it!s services you use to pay off the debt?

o If you are 6T primarily engaged in rendering that service

It!s not VAT but income tax

o Kor it to be covered by VAT, it has to be something that the government would have expected to collect VAT

xB Kree ent

6nly if it!s VAT+able in the first place if it is not covered by the exemption li5e the first $/,/// for residential unit.

4ou base it on the valued at the time the exchange too5 place.

1. onsignment of goods

- x. *r. D is into the business of selling clothes and he consigned the TWs to *s. *6

o When is the rec5oning point for the imposition of VAT

egardless of W6 you were able sell the goods, so long as it is not withdrawn by *r. D within /days from consigning it, VAT has to becollected

o Who is deemed the statutory taxpayer?

*r. D because he is the seller. *s. *6 is only the purchaser.

o Fow to avoid payment of VAT in this situation?

8a9 eturn the goods, or

8b9 The consignor withdraws the items before the /+day would lapse and reconsign it again.

- These supermar5etsMdepartment stores are actually holding most items under consignment basis and in order to avoid VAT being collected by thegovernment from the consignor it would have to be returned before the lapse of the /+day

o xB if you consign $// items and on the first day you sold $ item, that item is considered sold. And if /days would lapse and the remaining

items has not been returned, everything is considered sold, the remaining items are considered sold.

- ote that consignment does not involve physical change of the goods consigned 8e.g. flour to bread9Taxation Transcription. Midterms 2011.by USC Law EH 40 C!ass 2012


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o If you convert that, it!s actual usage and it!s considered sold.

7. etirement from or cessation of business

- Ways

o $. ntirely stop business

o %. hange business form 8e.g. from sole proprietorship to partnershipMcorporation9

o 1. *ergeMconsolidate

- If you cease operations or retire your business, why would you be paying VAT when no sale of good actually too5 place?

o Nust li5e any other transactions deemed sale, whenever it concerns of a property that is originally intended for sale to consumers, the

government is already eyeing the collection of VAT for all these items of inventories.

o What is peculiar in retirement or cessation of business is that you are not actually ma5ing any transfer nor distribution, you simply stop business

operation or continue with another type of business operation.

- 6ne of the reason why it!s also imposed with VAT is that these inventories actually form part of your earlier purchases from which you claim tax creditthru the input taxes which if you do not declare any output tax or VAT as if deemed sold it would have deprived the government, not only the VAT of thethose items left at the time of cessation but also depriving the government of the input taxes that you have claimed when you purchased the items. 2o it!sa double whamming for the government.

- There are many types of retirement from or cessation of business that will be considered transactions deemed sale, includingB

o hange of ownership of business 8single proprietorship to corporation9

o


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you have claimed when you purchase these items for sale.

V!!" VAT *ates

- What are the different VAT %atesinvolve in VAT?

o $%& and /&

- When did we increase our VAT rates from $/& to $%&?

o The amendments to the provisions of VAT in C7%7 came about in A G11H which too5 effect Nuly of %//). In that law, G11H, ongress

stipulated that VAT may be increased from $/ to $%& if the D' factors will be met and the increase shall be promulgated by the 'resident. It will beeasy to meet the factors re-uired so less than a year after in Kebruary of %//, 'resident Arroyo increase the tax rate from $/& to $%&.

- Is this not unconstitutional? Is she not venturing into lawma5ing or promulgation of statutes which is not covered by the executive branch of thegovernment? Is this not violative of the non+delegation of the authority to promulgate laws that remains exclusively to ongress?

o oE

o It is only ministerial on the part of the 'resident to increase the rates as provided by the standards and parameters set by ongress in the first

place. Without those standards and parameters, it would have been illegal for 'resident Arroyo to increase the rate from $/ to $%& because the

provision of the law cannot be changed without an act of congress.- What is covered by /& vat? Why do we even consider this 6e%o-%atedor sub"ect to =ero? Why not "ust say exempt from tax? I2 there a differencebetween the two?

o There is a big difference. It may be similar in a sense that whenever a seller of transaction will not collect VAT from the consumers, it will not

pass on VAT to the consumers and in turn will not remit VAT to the government. #ut they are different in the sense that in =ero+rates, whateverpurchases you have and you have paid VAT in your purchases, you recogni=e it as a credit against the =ero.

o 2o later on, you file for a refund. 2o whatever VAT you paid to your supplier, you will recogni=e it as a VAT. I exempt sellers, whatever you

paid input VAT to your suppliers, you do not recogni=e it as a VAT. 4ou simply recogni=e it as part of your cost of purchase.

- What is the dominant transaction sub"ect to /&?

o

xport sales ( in order to encourage inflow of foreign currency.- Why is sale of gold to #2' =ero rated? Why not exempt?

o If you loo5 into the transactions sub"ect to =ero percent you will 5now that there is an underlying reason why they extend favor to these type of

transactions, either we encourage exportation of certain products in the 'hilippines in order to have inflow of foreign currency, in order to strengthenthe reserves we have with the legal tender we are issuing. *ore of these transactions are intended for the economy.

ross #order


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o o VAT shall be imposed to form part of the cost of goods destined for consumption outside the territorial borders of the 'hilippines. IK it is

intended for consumption abroad, no VAT shall be imposed on that item that you are selling for abroad.

o An actual export of item will be considered free from VAT. #ecause if it physically exported outside, it is deemed that consumption is also

outside. #ut if you loo5 into the enumeration of these transactions, you will notice that there are sale delivered in the 'hilippine territory but sub"ect to=ero+rate. #ut there are re-uisites to follow.

- Is cross+border doctrine same as destination principle?

o The essence of both are the same. 6ne underlying principle. Where it is destined for consumption will the VAT be collected. If the consumption

is destined for abroad, no VAT will be imposed but if destined for consumption here in the 'hilippines, then it will be sub"ect to VAT. That is whyservices rendered by non+residents even in an isolated case will be sub"ect to VAT because the consumption of the one who hired the non+resident,consumption will be in the 'hilippines.

o 2light difference is that in cross+border doctrine it mentions of territorial borders, beyond the territorial borders of the taxing "urisdiction of the

'hilippines. In destination principle, so long as goods and services are destined for consumption in another country, then it not be sub"ect to VAT.

o As a general rule, our "urisdiction uses the destination principle or cross+border doctrine as a basis for the "urisdictional reach of the tax. We can

only tax wherein it is consumed in the 'hilippines.

- onsumption sub"ect to VATB It is can be categori=ed to threeB 2ale of goods, property or service.A@ '6'T4

- 2ale of real property not primarily held for sale, is it sub"ect to VAT?

o It will depend on who is selling it. If the seller of the real property is in a realty business 8sellerMlessor9, whenever you sell real property it will be

automatically sub"ect to $%& VAT.

o #ut a real property may be sold by an individual person not into business or a corporation that is into business but not real property business.

- If seller is a person not engaged in trade or business, forget about VAT.

- If the seller is a corportation that is not engaged in realty business, it may be sub"ect to VAT or may not be sub"ect to VAT depending on the use ofproperty and how was it sold.

o Was it sold incidentally or isolated? If isolated, no VAT.

o If incidental, not held for investmentMspeculative purposes but part of that which is used as an office space etc, it may be sub"ect to VAT. It will

be on a case+to+case basis.

- ow, when you say sale of goodsMproperty in the course of trade or business, property here usually we mean property sold by a realty business.

o We have learned last meeting that if the property sold by one engaged in realty business is a residential unit $.)* exempt if residential lot,

%.)* or below still exempt for residential house and lot. Anything beyond this amount is sub"ect to tax.



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- What if the property sold is a commercial lot sold at $*? Is it sub"ect to VAT if seller is in realtyMleasing business?

o 4es. If it is a commercial lot or any type of lot aside from residential, there is no threshold or limit or ceiling for exemption. verything is taxable.

If the one selling is in a realty business.

2VI2

- Kor services, is a domestic common carrier by air or sea sub"ect to VAT? 4es.

o #y land?

If it is with regards to persons, 1& percentage tax. #ut if cargoMgoods, it will be sub"ect to $%&VAT.

- 2ale of electricity?

o It is sub"ect to VAT.

o #ut there are exemptionsMdiscount for senior citi=ens9.

- on+life Insurance companies? Kire insurance? Kidelity insurance?

o on+life ( sub"ect to VAT

o @ife ( not sub"ect to VAT

- What is the difference between effective and automatic =ero+rated transactions?

o Automatic ( the best example is export sale. Denerally the actual exports of goodsMsupplied services abroad

o ffectively =ero rating ( it is as if it is =ero+rated. 4ou associate it with sale of goods or supply of services to those entities which are I the

'hilippines but are granted indirect tax exemptions by special laws or international agreement. @i5e 'LA companies.

DECE7.E* 8, 010

- There are certain transactions entered into by VAT registered persons that are considered as =ero+rated. 2o you have to ta5e note in order for a

transaction to be =ero+rated, the seller has to be VAT registered.

o What did we say earlier as to VAT registration? Who are re-uired to register under the VAT 2ystem?

It is both persons who are

8$9 sub"ect to the $%& vat or

8%9 sub"ect to the /& vat.

If no VAT registration is made and it is an export sale, we cannot that consider that as =ero+rated, it is simply an exempt sale.



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#ut still the effect as we have said, in so far as the passing on of the tax to the consumer is the same. o value added tax will be passed on orshifted to the consumer in both =ero+rated transactions and exempt transactions. 2o it will differ in so far as claiming input taxes 8which at this pointyou are still not very well verse9.

!X" T*A#SACT!#S SU./ECT T 9E*-*ATE

- 2o let!s proceed discussing the different =ero+rated transactions.

9E*-*ATED :DS A#D +*+E*T!ES

- What are the =ero+rated sale of goods under the law 8without reading9?

o $. xport 2ales

o %. Koreign urrency ; mean?


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shipment abroad is the shipment or the sale of raw materials or pac5aging materials to an export oriented enterprise whose export salesexceed H/& of total annual production.

o The sale of raw materials or pac5aging materials to an export+oriented enterprise is considered as a constructive export

because the raw materials or pac5aging materials that you are selling to these 5inds of export oriented enterprises will formpart of the products that will be manufactured and eventually sold abroad by these export+oriented enterprises.

Again, what is an export+oriented enterprise? What do you mean export+oriented enterprise as the recipient of the goods that

you are selling?

o REx&o%t-o%ientedente%&%iseR is one primarily devoted to the production of goods and services for export that demonstrably

contributes foreign exchange to the economy. 8emains unanswered. Thus, made a research9

*ust the sale be made in acceptable foreign currency for it to be considered as =ero+rated transaction? *ust it be accounted for

under the rules of #2'? Dive me an example of an export+oriented enterprise. Is it possible that a certain company outside anyeconomic =ones may be considered as export+oriented enterprise and the sales to it will be =ero+rated?

o xport+oriented enterprises are not limited to corporations that are located within the economic =one. It can be any

corporation located anywhere in the 'hilippines.

o And for these to be met, the =ero+rated transactions, there is no %e;$i%ementthat it must be paid in acceptable foreigncurrency or accounted for by the #2'.

Why? #ecause eventually when it will be sold by the export+oriented enterprise to an outside or foreign buyer, then it willbe covered by no. $ actual export sale.

TFI< . We!ll move on to the other type of export sales. 2ales of raw materials or pac5aging materials to a non+resident buyer.

2o 8*s. Tiu ma5es a summary first9B

8a9 The first that we have identified as an actual export sale is the sale of goods. It is not raw materials.

8b9 The second export sale that we have identified is the sale of raw materials or pac5aging materials to an export+oriented

enterprise in the 'hilippines and eventually will form part of the product that will be sold abroad.

8c9 ow the third type of export sale is the sale of raw materials still or pac5aging materials sold to non+resident buyer.

In the third, is this an actual export sale? 2o are you saying that the delivery of these raw materials or pac5aging materials are

made directly abroad? Who is that non+resident? 2ubcontractors?

o In the third scenario, what we are selling is raw materials or pac5aging materials intended for a buyer abroad but its delivery

is not for shipment abroad but rather delivered to a resident buyer who will convert or use the products as intended by thenon+resident buyer.

o The other % re-uirements for it to considered =ero+rated areB



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8a9 'aid for in acceptable foreign currency or its e-uivalent in goods or services

8b9 And accounted for in accordance with the rules and regulations of the #ang5o 2entral ng 'ilipinas.

K6JTF. 2ale of gold to the #ang5o 2entral ng 'ilipinas.

2o if we sell gold to other ban5s other than #2' or other buyers to #2' considered as =ero+rated transaction? 6.

2ale of silver or other mineral products to #2' =ero+rated? o.

White gold or yellow gold? 8hehehehe9

KIKTF. 2ales of goods, supplies, e-uipment and fuel to persons engaged in international shipping or international air transportoperations.

Again, what is sold? Doods, supplies, e-uipment and fuel.

To whom? To persons engaged in international shipping or international air transport operations.

2o if we sell goods, supplies, e-uipment and fuel to 'A@ or athay 'acific in ebu *actan airport, is that =ero+rated? 4es.

Is there a special re-uirement for it to be considered as =ero+rated?o 4es.

o In order to avail of such =ero+rated sale of goods, supplies, e-uipment and fuel, it must be, the sale must be limited 8when

you say international shipping or international air transport9 to transport of goods and passengers from the port in the'hilippines directly to a foreign port without any stop over or without doc5ing even if it!s a simple stopover. 6therwise, thatportion between 'hilippine ports will not be considered as =ero+rated.

xampleB 4ou sell fuel to 'A@. Klight is ebu+*anila+@A and bac5. Is that =ero+rated? o.

2IOTF. Is there other =ero+rated sales as identified by the regulations? 4es. 2ale under the 6mnibus Investments ode.

If you loo5 into the regulations, there are 1 categories of =ero+rated of goods or propertiesB

o Kirst, export sales.

o 2econd, foreign currency denominated sales.

o Third, sales to persons who are granted indirect tax exemptions by international laws or our own special laws.

We are still in export sales and in export sales we can have actual export sales, constructive indirect export sales or other export

sales. At this point, we have identified alreadyB

o Actual export sales



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o Indirect export sales which is sale of pac5aging materials and raw materials to a non+resident buyer but delivered to a

resident buyer.

o onstructive exports or indirect sale to an export+oriented enterprise.

o Another indirect export is when you sell goods, fuels, supplies and e-uipment to an entity that is engaged exclusively in

international shipping or air transport operations.

o And sale of gold to #2'.

o 6ne more is left which is sale under the 6mnibus Investments ode which is considered as constructive export. Although

sale to export processing =ones can still be covered by those granted indirect tax exemption by a special law which is AHG$.

2o what we will consider under the 6mnibus Investments ode strictly are sales toB

o #onded manufacturing warehouses

o xport traders operating bonded trading warehouses

o 2ales to diplomatic missions and other agencies including sales probably to embassies and consulate officers.

Koreign urrency


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2ale of motor vehicle to a non+resident buyer, delivered to a resident, paid in foreign currency and underwent inward remittance in

accordance with the #2'. Lero+rated? o. It is pertaining only to 7+wheel motor vehicles.

When you say automobiles, it is strictly pertaining to 7+wheel motor vehicles. That excludes %+wheels nor truc5s, buses, vans, etc.

2ales to persons or entities whose exemption under special laws or international agreements to which the 'hilippines is a signatory.

- And the last =ero+rated sale of goods or properties would beB 2ales to persons or entities whose exemption under special laws or internationalagreements to which the 'hilippines is a signatory effectively sub"ects such sales to =ero+rate.

- If you remember in general principles, we have said that whenever a company is granted exemption whether total partial exemption, it does not includeexemption from indirect taxes. Jnless, there is a law which specifically provides for exemption for indirect taxes.

o And these special laws or international agreement for example with the 'hilippines conomic Lone locators or companies inside, they have

been granted indirect tax exemption, granted VAT exemption, under a special law which is A HG$. The general principle would not apply to them.

o Kor this reason, they cannot be passed on with VAT. If the seller is VAT registered, the seller would simply treat the transaction or sale to these

'LA companies as =ero+rated. If the seller is 6+VAT registered, simply treat the sale as exempt.

9E*-*ATED SE*V!CES

- Lero+rated services would it differ from =ero+rated sale of goods? We don!t actually have an actual export of service unless. I mean, how do weactually export service? an it happen? Fow? xample? Jnder the law or regulations, what is covered by the =ero+rated sale of services? Is the servicelimited to the processing, manufacturing, or repac5ing goods?

o @et!s ma5e this easier class. What you find in export sale of goods and in export sale of services are "ust the same. 6ne is categori=ed as sale

of goods, the other is categori=ed as sale of service.

o. $, export sale of goods is a sale on actual shipment of goods. o. $ sale of service is the manufacturing, processing, or repac5ing of goodsfor persons doing business outside the 'hils.

o. % in sale of goods is not the actual shipment of goods but the sale of raw materials. The second sale of service is simply other services notcovered by o. $. 2o it!s "ust the same.

When you loo5 at o. 1 of export sale of goods, you sell raw materials and pac5aging materials to export+oriented enterprise, is it the same as

any of the export sale of services? an you sell services to an export+oriented enterprise and still be considered =ero+rated?

42, in o. ) sale of service, services performed by subcontractors and contractors in processing, converting, or manufacturing goods foran enterprise, whose export sales exceed H/& of its total annual production.

o 2o basically, you can "ust compare both sale of service and sale of goods

o 2ale of power fuels, is that a sale of service? 6r is that a sale of goods?

2A@ 6K 2VI. Why is it classified as a sale of service?



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The sale of power and fuel is considered as "ust simply a sale of electricity by V6. 2ale of power or fuel, why is it considered as

exempt?


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considered as effective =ero+rating such that if you sell to an export+oriented enterprise, you need to see5 for approval from the #I thatyou!re sales of raw materials is considered as =ero+rated.

The difference between exempt sales and =ero+rated salesB

$. If you are =ero+rated, do you need to register with the #I as a vat+taxpayer? 42. 4ou need to because you are selling vatable

transaction. The difference lng is that it!s not $%& vat but =ero+rated. xempt transactions, do you need to register with #I? 6.4ou don!t need to register under the vat system.

%. an you pass+onMshift $%& tax on your sales if you!re =ero+rated? 6. If you sell an international tic5et, do you pass+on vat to

your client or customer? 6, =ero. 4ou pass vat at / ( anything multiplied by =ero is /. In exempt sales, if you sell roasted chic5en,ta5eout, do you pass+on vat? 6. 4ou!re not re-uired to pay vat to the #I.

1. Any one of us will become purchasers of goods or services, even a =ero+rated seller of goods will purchase something and

convert it and sell it as well. ven exempt sellers of goods will have to purchase a raw material, convert it and sell it again.

o If you!re a =ero+rated seller of goods and you purchased your raw materials from someone, will you be passed on with vat? It

can be a yes or a no. If you!re passed+on with vat, will you recogni=e it as an input vat on purchases? 4ou!re registeredunder the vat system, therefore, any vat that has been passed+on to a vat+registered person will always be considered as vatin the boo5s.

o If you!re exempt, such as J2, exempt from vat, if J2 pays vat on a certain table, when it purchased such table, vat was

passed on. Why was it passed on? #ecause the seller of the table is actually selling a vatable goods. Will J2 recogni=e thevat on such table as input vat? 6.

o This is the basic differenceB If you!re =ero+rated, you have to register and when you register and pay vat on your purchases,

recogni=e it as vat. If the table purchased is $$% by a =ero+rated, vat would be $%.

o If the table purchased by J2 is $$%, vat is / because you are not because you!re not registered for vat. If you!re not

registered for vat, you have no right to record any vat in your boo5s. It is a stray account. 2o what you will do with the $$%that you have simply paid in full will be considered as cost of the table.

o #ut the cost of the table for the =ero+rated is only $//, not $%. The $% will be a tax credit ( it!s offsettable against your output

tax. #ut you have ( / output tax. That!s why we have later on claims for refund. 4ou as5 for refund on the $% later on. The $%peso will never reduce your taxable income because you!re only allowed to deduct $// pesos.

o In exempt sales, you cannot as5 for refund. Fow will you use the $%? 6nly in income tax computation because your expense

will be bigger. The $% peso will reduce your taxable income before you compute income tax.

o ven if you!re exempt, say for example, your sales does not reach $.)*, but ambsyoso 5a, you want to register for vat. If you

register for vat, all your sales will be vatable on your purchases. 4ou will have also tax credit. verything will depend on yourregistration. If you register, there!s always vat. If you don!t register, it!s a case for audit by the #I once they find vat in yourboo5s because you!re not supposed to put in vat.



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o Lero+rated is more beneficial because you recogni=ed the $% peso at $//& offsettable against tax. In exempt, the $% is not

$//& recogni=ed because it will only reduce to the extent of 1/& of the $%. 6nly 1/& of the $% is usable because this willundergo the process of being an expense account before it can benefit the company.

o 2ome companies would opt to be vatable. 2ome not if they have the option.

- O*'T TA2ATI62

o $. 2ale or importation of agricultural and marine food products in their original state

2o if you import orwegian salmon. That!s vacuum+pac5ed. It!s already cut. H//M5ilo ( salmon belly nah. It!s pin5, pin5, orange, orange. Is itvatable?


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o VATA#@.

The dried fish in the grocery or rice, etc. is not sub"ect to vat.

Is cotton or cotton seeds sub"ect to vat? 42, even in the raw state of cotton or cotton seeds, it!s already sub"ect to vat.

Fow about copra? 2ub"ect to vat or not? 6. 2o it remains as exempt.

Fow about petroleum products and its raw materials? xempt from vat or sub"ect to vat? 2J#NT T6 VAT. This is one of the

items which have been stric5ed off its exemption.

- lectricity? 6T O*'T. It!s vatable. This is again a service that has been removed from exempt services. lectricity is already sub"ect to vat.

- Fow about legal services? Are lawyers sub"ect to vat? 2o if a lawyer is connected with a multinational corporation as its in+house legal counsel, will thelawyer be liable for vat?

o @egal services are sub"ect to vat, general rule. There are exceptions, such as when there is employer+employee relationship.

o If you!re a lawyer as an in+house legal counsel for a company, your income or compensation or salary from that company is not sub"ect to vat.

o DB If you are a professional with ' license or the I#', etc., you will be sub"ect to vat exceptB

$. If your income is derived from an + relationship, there!s no vat.

%. If your income as a lawyer does not exceed $.)* in any $%+month period, you!re not sub"ect to vat

- Fospital services, is it the same as medical services and professional services of doctors sub"ect to vat? 2ame rules as the lawyers. If a doctor, "ust li5eany other professional, derives income from independent professional services, not from + relationship, it will be sub"ect to vat unless the incomeduring any $%+month period does not exceed $.)*. If it exceeds $.)*, you have to register under the vat system.

- Would your payments, say for example, a friend of yours gets hospitali=ed. In the bill, there!s hospital service including operating room, doctor!sprofessional fees and bills from the pharmacy inside the hospital ( the drugs were used for the operation. Which of those items are sub"ect to vat andwhich are exempt?

o Fospital service fees are not sub"ect to vat including the charges for the drugs and medicines.

- If the hospital operates a pharmacy within, would the sales of medicines be sub"ect to vat?

o It depends.

o In the case of I vs '6K22I6A@ 2VI2 I., TA en banc case, sale of medicines and drugs by a pharmacy inside the hospital may

or may not be sub"ect to vat. If the medicines or drugs are sold to an in+patient and included in the hospital bill, it!s exempt because it will beabsorbed by hospital services and bills. #ut if it!s sold to outsiders or out+patients, it will be sub"ect to vat.

December 15, 2010



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X" T%ansactions Exem&t f%om VAT

A" Section 108 of the Tax Code

- @et!s discuss formally 2ection $/G VAT exemption transactions. What are the transactions exempt from VAT under this provision?

o oteB 8ead codals for this portion to see full provision for each exempt transaction 82ection $/G of I9

o 2ale or importation of agricultural, marine food products in their original state.

2JDAB Is sugar exempt from VAT? @et!s ta5e the general rule first, is sugar exempt from VAT? As a rule? What sugar is in the original stage?lass answersB sugar cane. 8*a!amB that!s not yet sugar. That!s sugar cane9.

Deneral uleB The white sugar that we 5now, the refined sugar is sub"ect to VAT. #ut if its raw cane sugar, the brown sugar, it is

exempt. The raw cane sugar is exempt from value added tax.

There is an entire revenue regulations devoted to the payment of VAT on sugar. It is actually called the :Advance Value Added Tax; that

you pay on every sugar that the sugar miller produces. 2o it is not totally exempt unless it falls under the raw cane sugar or molasses.

IB Fow about ice? It is exempt in whatever form. ither it is palay, rice or cultured rice.

o 2ale or importation of fertili=ers, seeds, seedlings and fingerlings.The next item exempted from VAT isB

Would all sale or importation of fertili=ers and seeds be exempt from VAT?

o.

2o its vatable if it!s not for livestoc5 or poultry. We call this specialty feeds if it!s devoted for those that we do not actually consume.

6


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*ust they be brought in by citi=ens of the 'hilippines? 6.

2o it includes even aliens so long as they intend to settle in the 'hilippines? When should these items be brought in in order to be covered bythe exemption? Jpon arrival, or if it is brought by the person himself? 4ou say if it!s bought in the 'hilippines within G/ days before or G/ daysafter arrival, if the goods or items arrive together with these persons coming to settle in the 'hilippines, is it still exempt?

A2WB When professional instruments, implements, wearing apparels even household effects of 6+ITIL2 are brought in the

'hilippines but for the purpose of 2TT@ID I TF 'FI@I''I2. 2o it!s a relocation or resettlement in the 'hilippines, diba you have tobring in your personal items, these are exempt from VAT with the exemptionB

Vehicle, Aircraft, *achinery, and other goods for commercial purposes

o 2o long as it is brought together with that person or within G/ days prior to arrival or after arrival within G/ days.

o If you want to be exempt from VAT on vehicles, aircrafts, machineries, do not rely on the exemption provided under 2ection $/G. 4our

exemption must be relied upon in another provision which is 2ection $/G still letter, on exemptions granted under International agreementsor special laws.


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That is why, is a ban5 or financial institution sub"ect to VAT? o. To what is it sub"ected to?

o 2pecifically, 2ection $%$, ban5s are sub"ect to gross receipts tax ranging from )& down to /&. That is generally )&.

o ow, it is only in %//7 ( %//), if I am not mista5en that ban5s are sub"ect to VAT on a trial basis at $/&. #ut since it did not wor5 out,

because it is onerous for us or burdensome for us to pay the loan from the ban5, pay interest and be passed on with additional $%& thatwe!re paying. 2o ban5s have been ta5en out from the coverage of VAT and they remain to be sub"ect again bac5 to gross receipts tax onthe interest, commissions or other earning that ban5s derive.

o A. 2ales by agricultural cooperatives duly registered

o #. 2ales by non+agricultural, non+electric and non+credit cooperatives duly registered.

6ther exempt itemsB

Are cooperatives exempt from VAT? Why how many cooperatives that you 5now? Fow many cooperatives can you identify? When you say itsnon+credit and non+electrical it could be any cooperative so long as it!s not credit and not electrical? 6r using the process of exclusion? In so far asyour growing up years is concerned how many cooperatives have you 5nown? In the newspaper?

o Is it only agricultural cooperatives are exempt from VAT? Is it because agricultural items are also exempt from VAT? o.

o 2o we have agricultural cooperatives, credit cooperatives, multi+purpose cooperatives. What else? @et!s not use non. #ecause whenyou say non it "ust simply says that there is..let!s be specificB agricultural cooperatives, credit cooperatives, multi-purpose cooperatives, andone big cooperative that is missing is electrical cooperative (VECO, ER!"CO)#

mployees cooperative, that is multi+purpose.

o These are non+electrical cooperatives, you have electrical cooperatives. on+electrical cooperatives is all others. It may be credit,

agricultural or multi+purpose.

Fow about credit cooperatives. ebu KI ooperatives, it is one of the biggest cooperatives, it started with 'hp %// or less than'hp $/// investment from ) members in $GH/8s9, now it has more than a billion in assets. 2o, you can start a cooperative with a few,extend loans and credits, that is how credit cooperatives start.

ow analy=ing the % successive provisions in 2ection $/G, what cooperatives are sub"ect to VAT and what are exempt from VAT? *ultiple choice which is sub"ect to VAT? Agricultural, credit, electrical? lectrical.

o Why is it sub"ect to VAT? Fow is it mentioned by the law? 2o because it!s non+credit, and it is mentioned together with non+electrical, is

it sub"ect to VAT as well? o.

Why not? This is how it should goB

o Kirst item, agricultural cooperatives are exempt from VAT on their sales or produce either to members or not whether original state or

not. Including VAT exemption or importation of machineries and e-uipment whether directly and exclusively used in the production orprocessing of the items that they produce.



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o 2econd, lively8?9 activities made by credit cooperatives and multi+purpose cooperatives are also exempt from VAT. In both instances,

rather, agricultural, credit and multi+purpose cooperatives, exemption from VAT would be heavily be dependent on its registration with theooperatives


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Why how many head -uarters have been identified before? egional and area head-uarters, egional operating head-uarters.

ow with these two head-uarters be exempt from VAT on its proceeds if there is? 2o which is exempt from VAT?

o 6nly regional AA head-uarters which only access supervisory, communications, and coordinating centers without earning any

income from its operations. 2o if it!s a regional area head-uarter, it is not sub"ect to VAT.

o If it!s regional operating head-uarters, rendering services to its affiliates to the Asia 'acific region, its proceeds will be sub"ect to VAT.

o If you remember regional area head-uarters, they are exempt from income tax, it is exempt from VAT. Why?

#ecause there is supposedly no income+generating activity.

o ow for regional operating head-uarters, it is sub"ect to $/& income tax, it is sub"ect to $%& VAT. While its employees occupying

managerial, technical services or positions will be sub"ect to only $)& compensation tax. 2o it!s one of the technicalities8?9 of a regionaloperating head-uarter.

o Transactions which are exempt under international agreements to which the 'hilippines is a signatory or under special laws.

And I thought that those have been granted by international agreements or special laws are covered by =ero+rated vat transactions.


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Dive me an entity that is exempt as provided by international law? Dive me an example of an entity which is exempt as provided by special law.@et!s ta5e out II, another entity?

It does not say in its original state it simply says transactions. 2hould it be selling products in its original state? 6.

ow give me ) real estate transactions? ecap.

As a general rule, sale of real properties is only sub"ect to VAT if the one selling is engaged in real estate business which is really intoperson+8?9 business. ow if you are selling real property not in the course of business would you be liable for VAT? o.

o Why? #ecause it is sub"ect to apital Dains Tax.

o Would it ever happen that both VAT and DT would be simultaneously imposed on $ real property transaction? 2imply put can VAT

and DT be simultaneously imposed on $ real property transaction? o.

eal property tax classified as capital asset is imposable with DT. 6nly when real property is classified as an ordinary asset,either primarily held for sale or primarily used in business would it be sub"ect to VAT.

ow, the taxability of an ordinary asset and a capital asset is different. In so far as the tax on income is concerned, you havehere the 1/& income tax or the )+1%& if you are an individual but only based on the profits that you are ma5ing. If you are selling acapital asset, it will be sub"ect to & based on gross. And so far as the sales of real estate business is concerned, since you are selling itin the ordinary course of business, you will be sub"ect to VAT.

o Are you ma5ing this sale in the course of trade or business? o.

In so far as the documentation is concerned, you have to pay $.)& documentary stamp tax. If it!s an ordinary, so far as you canavoid selling a property, classified as ordinary asset, you should avoid because it will involve several taxes.

#ut that!s the general rule. ow let!s go to the O'TI62B

o Are there sale made in the course of business involving real property that are not covered by VAT? 4es.

If the property is primarily held for lease and it is subse-uently sold, are you not selling an ordinary asset? 6rdinary asset daw.

$. Those utili=ed for low+cost housing as defined by epublic Act H%HG or Jrban


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F@J# or any similar law, wherein the unit selling price ceiling per unit of 'hpH)/,///. ( J' eviewer %//G.

%. Another exemption is 2ale of residential lot not exceeding 'hp$.)*.

1. umber 1, sale of residential house and lot and other residential dwellings valued at not more than 'hp%.)*.

7. Those utili=ed for sociali=ed housing.

Which is more expensive? 2ociali=ed housing or sociali=ed houses or low+cost houses? 82ociali=ed because it!s social?9

o @ow+cost.

o What is covered by sociali=ed housing? What amount? 'hp %%),///.

o #ecause this regulation and law was made in %//), the amount would not have increased that much. When you say

sociali=ed housing, its value does not exceed 'hp %%),///. 'robably it is "ust a %/s- meter area. @ow+cost housing is muchmore expensive.

2o these are the first 7 transactions of real property sales made in the course of trade or business #JT is 6T sub"ect to VAT.

). @et!s go the fifth. eal property transaction not necessarily a sale but is 6T sub"ect to VATB @etter P.

2o if we have *r. A, #, and < leasing out the following units residential for A and # and commercial for and


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If you are not sub"ect to VAT here, not because you are totally exempt "ust li5e *r. A, but your exemptionwould fall under not reaching the threshold limit, you will be sub"ect to the 1& percentage tax which is thecatch+all for other items in exempt transactions from VAT.

What is a residential unit? When do we say it is a residential unit?


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A 7%" . (1st C 7%" . (nd

'hp $/,/// per unit 'hp %/,/// per unit 'hp $/,/// per unit 'hp %/,/// per unit

$1 esidential Jnits ) esidential Jnits $1 ommercial Jnits ) ommercial Jnits

xempt xempt Vatable Vatable

$/,/// x $1 S $1/,///M month$1/,/// x $% mos.S'hp $,)/,///

%/,/// x ) S $//,/// Mmonth$//,/// x $% mos.S'hp $,%//,///

$/,/// x $1 S$1/,/// M month$1/,/// x $% mos.S'hp $,)/,///

%/,/// x ) S $//,/// Mmonth$//,/// x $% mos.S'hp $,%//,///

A2WB It really does not matter class, in so far as ta5ing up the aggregate amount, it really does not matter whether it!s the

same 5ind of business or not. 2o long asB

o 8$9 It is the same taxpayer and

o 8%9 #oth are taxable transactions which are sub"ect to VAT as a rule.

In the example, %nditem is already taxable to VAT as a rule because it already exceeds the limit of 'hp $/,///. And if it engages

in another vatable transaction, once you combine the amounts, you already have the 'hp $.)* limit. 2o we actually re-uire combining the amounts of vatable transactions in one and the same taxpayer.

ow if you are the owner of $1 residential units at 'hp$/,/// each and the owner of ) residential units at 'hp %/,/// each, willyou be liable for VAT?

If you are the owner of these % types of residential units with different monthly rents, you will still not be liable to VAT. Why?

o #ecause these are of different naturesB

A. one is tota''4 exem&tfrom VAT regardless of the aggregate amount and

#. one is 2ata'e de&endin3 on ho) m$ch the 3%oss %ecei&ts a%e.

And if you combine the values, it does not gel diba? 6ne is vatable, one is exempt. 4ou only concentrate on transactionswhich are sub"ect to VAT whether it reaches $.)* or not.

o 2o I thin5 that!s already clear to you. Any type of services, any type of businesses when it re-uires $.)*, you still follow the

same principle that you have learned.

o 2ale, importation, printing or publication of boo5s and any newspaper, maga=ine 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

There are % remaining items which are exempt from VAT. @et!s go to boo5s first. 2ale, printing and importation of boo5s.



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What type of boo5s?


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consumption abroad, it will be covered with the exemption for VAT.

o 2ale, importation or lease of passenger or cargo vessels and aircraft, including engine, e-uipment and spare parts thereof for domestic or

international transport operations.

Would all sale, importation, or lease of passenger vessels be exempt from VAT? 2o there was no use of discussing the case before whenational


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simple means to say that he is not mandatorily re-uired to register for the VAT system because he is not vatable.

o #ut there are instances when a person sees the benefits of VAT registration because of the VAT on its purchases. an we offset the VAT

purchases against the VAT on sales.

That is the reason why people whose gross receipts do not exceed $.)* opts to register under the VAT system and ma5e their sales vatableand their purchases sub"ect to vat as well.

It also includes persons engaged in mixed transactions, both vatable and non vatable, and chooses to or opt to ma5e everything sub"ect toVAT.

o 6nce this choice is made, is it irrevocable? ven if you wish to revert bac5 to your exempt status? ow once the choice is made by a franchise

grantee to register under the VAT system, is it irrevocable?

After 1 years, it can revert bac5 to its exempt status.

The reason why it!s exempt because franchise grantees with gross receipts of not more than $/* is sub"ect to franchise tax. #ut it can leaveout franchise tax and be covered by the VAT tax because in VAT, there!s offsetting, there is output, there is input.

#ut is it irrevocable for 1 years only? Irrevocable for life or irrevocable for 1 years?

6nce the option is made by franchise grantees to be covered under the VAT system, it becomes irrevocable all throughout the existence of thatterm not period8di gyud 5laro if sa5to ba ni ang underlined..9.

o @et!s move on to the 1 rdoptional registration made by franchise grantees. Who are these franchise grantees who can optionally register under

the VAT system even if they are exempt from VAT? 6n the radio broadcasting option, what about those whose gross receipts exceed $/*, do theyhave to or can they optionally register for VAT? *andatory? Are they exempt? If it exceeds $/* pesos, they are non+vat?

A2WB Those who are granted the option to register under the VAT system because they are exempt from VAT are franchise grantees ofTV and radio broadcasting whose gross receipts do not exceed 'hp$/*. #ut if its! gross receipts are more than $/*, it is not an option anymore, itis sub"ect to VAT.???????

Jan. 4, 2011 Tuesday

- A'B Would all persons exempt from vat have the option to register under the vat system? 2ay for example, *r. O is a farmer and his exclusive or

sole income+generating activity is to sell the mango produce of your farm, no other business. 2uch sale is purely exempt from vat because it is anagricultural product sold in its original state. an you opt to register under the vat system if you thin5 that it!s more beneficial to you?

o 6T A@@ '262 exempt from vat would have the option to register under the vat system.

o In this example, where does the exemption lie? 6n the transaction itself or on the threshold of the proceeds?

6 TF TA2ATI6 IT2@K. 2o whether or not its sales exceed $.)m, it is exempt from vat.

o an it optionally register under the vat system? *andatory registration ( if the transaction is vatable, if the person is sub"ect to vat, he has to

mandatorily register under the vat system. #ut optional registration is for those who are not as yet covered by the vat but may be covered by



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the vat. >LD!#: VAT

- What is a withholding vat?

o A withholding vat is a vat withheld before ma5ing payment on account of each purchase of goods and services which are sub"ect to vat.

- Who withholds the vat, the payor or the payee?

o The 'A46.- Jnli5e in income taxation, when we studied withholding taxes, dba we learned that withholding taxes are simply withheld by the withholding agent and

remitted to the government. In this case naman, we!re not tal5ing of an income of the payee or income+recipient because vat is not an income. It is notdeclared as part of the gross sales for purposes of computing income tax. #ut then we have this mechanism as well in vat that some payors, to someextent, are allowed to withhold the vat and remit it to the #I. There are % casesB

o $. Kinal withholding vat on payments by the government

2o what does the government do?

The government, before ma5ing payment on account of each purchase of goods andMor of services taxed at $%&, deduct and

withhold a final vat.

Would the government withhold the entire vat on the transaction?

6, only up to a final withholding vat of )& of the gross payments.

I@@J2TATI6 or 2AI6B @ets say, the supplies for government offices cost $m. Vat at $%&, which is $%/5. Total invoice amountis $,$%/,///. Vat is at $%/5. Are you saying that the government will only pay the purchase price of $m plus the remaining portion of thevat? Fow much will the government pay to the supplier?

The government will only pay the purchase price of $m plus H& of $m. 2o the supplier will only receive $m plus the difference

between $%/5 and )/5 8)/5 being the )& vat withheld by the government9, and such )/5 will have to be remitted directly to the#I by the government as a withholding agent.



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6nly transactions entered into with the government may give rise to final withholding vat. 2o you will see that in this case, it is thegovernment who is the payor ( the one contracting service or the one purchasing goods or properties from a supplier. Whether thesupplier is government or private, it doesn!t matter. Nust loo5 at the status of who the payor is. If the payor is the government, thegovernment is re-uired to withhold )& of the vat.

The history of )& came from the $/& vat because under the old law, dba, the vat is $/& and the sharing is )+) or half+half. This is oneavenue wherein the government is trying to exert all its effort in maintaining the lifeblood doctrine to the extent that it can withhold andremit at the earliest possible time, even vat. When it was increased to $%& vat, there was no subse-uent law which increases thewithholding vat to &. It!s still at )&.

Transactions that are covered by final withholding vat are only those vatable transactions entered into by the government with itssuppliers. If it!s not the government, there can be no final withholding vat.

Why is it called final withholding vat? What!s the difference between final withholding vat and creditable withholding vat?

Kinal withholding vat withheld by the government is not creditable against the output vat of the seller since it!s final, so it ends

there, unli5e creditable withholding vat.

o %. reditable withholding vat on payments to non+residents

In so far as creditable withholding vat is concerned, what type of transaction is covered?

6n payments to non+residents


!ot'

&pplier

&pplies #000000 #000000

4 "AT #20000 0000

##20000 #00000

50000

65% "AT7BI.

remitted


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We!re tal5ing of vat, so it simply means that both final withholding vat and creditable withholding vat pertains to vatable

transactions. And if you remember 2ec. $/) of the tax code, it says there that the rule on regularity notwithstanding, anytransactions of service rendered in the 'hils. by a non+resident person is sub"ect to vat. 2o this is that which is sub"ect tocreditable withholding vat.

If a non+resident person renders service in the 'hils. ( service may be rental, royalty that is allowed for use in the 'hils., labor (

if any service is rendered, isolated or regular, by a non+resident person in the 'hils., it will be sub"ect to creditable withholdingvat.

Why is it sub"ect to this 5ind of mechanism, the creditable withholding?

It!s because the 'hil. government does not have "urisdiction over non+residents.

onsidering that non+resident persons are not registered under the #I of the 'hils. or under our tax authorities, we do not have

"urisdiction over them. We cannot compel them to remit the output tax on the service that they have rendered in the 'hils.


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considered as creditable withholding vat offsettable directly against the output vat of the domestic corporation who actually paidit.

OA*'@B If we pay $/m abroad, the vat on the $/m is $.%m 8$%&9. We pay $/m. We pay $.%m to the government as

creditable withholding vat. That payment is considered as creditable input vat. #y the time we declare our output vat on our ownregular sales in the 'hils., the $.%m creditable withholding vat paid to the government is credited or deducted against output vat.

2o nothing is actually lost to the domestic corporation. The only problem there is if the domestic corporation is into =ero+ratedtransactions, so =ero output vat dba, always excess input vat 4ou will learn later on that you have only % optionsB carry+over andclaim for refund claim for refund is not favorable since it!s doomed to be denied by the #IU.

VAT .ASE

- What are different bases on which we compute the vat?

o $. Kor the sale of goods ( the Dross 2elling 'rice 8D2'9

What is the definition of the D2' under the law?

It means the total amount of money or its e-uivalent 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. The excise tax, if any, on such goods or propertiesshall form part of the D2'.

2o whenever you tal5 about selling goods or properties, you always tal5 about D2' as the vat base. It is the total amount or itse-uivalent which a purchaser pays or is obligated to pay to the seller for the sale, barter or exchange of goods or properties, exclusiveof vat.

OA*'@B If the selling price is $m. Vat is $.%m. The D2' is the $m. The $.%m is not a component of the D2' because the

definition of D2' is exclusive of vat. 4ou will not compute vat on vat. The basis of vat is D2'.

A6TF OA*'@B The goods that are sold are excisable articles ( meaning sub"ect to excise tax. If the value of the goods

is $m. xcise tax is %//5. What is the D2'?

o

$.%mo 2o are you saying that vat can be imposed against an excise tax?

42.

According to the definition, the excise tax shall form part of the D2', naturally boiling down to vat being imposedon excise tax.

o %. Kor the sale of services ( Dross eceipts 8D9

What is the definition of D?



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It means the total amount of money or its e-uivalent representing the contract price, compensation, service fee, rental or royalty,

including the amount charged for materials supplied with the services and deposits and advance payments actually orconstructively received during the taxable -uarter for the services performed or to be performed for another person, excludingvat, except those amounts earmar5ed for payment to unrelated 1 rdparty or received as reimbursement for advance payment onbehalf of another which do not redound to the benefit of the payor.

2o does D include constructive receipt?

42. Why is constructive receipt already part of D sub"ect to vat?

o It!s because the money consideration or its e-uivalent is already placed at the control of the person who rendered the

service without restrictions by the payor. It!s already within the free disposal or at the control of the seller of the services.

Advance rentals or advance payments, is it part of D?

42.

When you tal5 about D, it!s the sale of service. It!s the value or the contract price of the service.

Fow about security deposits? Is it part of D at the time it is paid?

6, because it!s not within the free disposal of the seller of the services.

I@@J2TATI6B Imagine yourself renting+out an apartment at %/5 per month. 4ou are re-uired to pay % months advance

rentals, 1 months security deposit. In the contract, it is stipulated that the security deposit will be applied against damages foundat the end of the contract and any excess will be returned. 6r it may be stipulated also that any excess will be applied to the lastfew days or months rental of your choice ( whether refunded or not. 2o at the time that you made the 1 months deposit and the% months advance rental, will vat be paid on the total ) months? Will you have to shell+out $%& on the )+month rental?

o 6, because the 1 months security deposit is not within the free disposal of the seller of the services.

A6TF I@@J2TATI6B


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The revenue regulations extended the definition of D. It excludes reimbursements so long as it is substantiated.

o IllustrationB 2o imagine yourself hiring the service of a bro5er and if the bro5er needs to hire a third person for the

execution of some parts of the service and if the bro5er has advanced payment to such third person and the bro5er willsee5 reimbursement from you, so long as it is properly substantiated for vat purposes, your payment to the bro5er will bepartly sub"ect to vat and partly not sub"ect to vat. 6nly the bro5er!s services will be sub"ect to vat. If reimbursement are

properly substantiated ( not sub"ect to vat, it will not form part of the D of the bro5er.o 1. Importation of goods ( @anded ost 8@9

What is @? When is that use as basis for computing vat?

It is used as basis for computing vat in the importation of goods.

Whenever the #ureau of ustoms 8#69 would value an importation using the -uantity or volume of an imported product, its

basis for computing vat would be the @ as appearing in the import entry declaration.

What consists of the @?

@ consists of the invoice amount customs duties freight insurance other charges excise tax 8if any9

2o if you will see the basis of vat on an importation, being the @, we pay the vat on customs duties because part of the @ iscustoms duties and the $%& is computed on the entire invoice paid, insurance, pac5aging, etc.

UT+UT TAX

- 6utput tax is simply theB

o $%& vat on the sale of goodsMservices less sales returns, allowances, discounts

o $%& of total value plus customs duties, excise taxes, other charges 8if imported9

- There is what you call as a contra+account. It!s a direct opposite against the output tax and it!s called the input tax. If there!s out, there!s in, dba.

!#+UT TAX

- What is input tax?

o It means the vat due on or paid by a vat+registered person on importation of goods or local purchases of goods, properties, or services,

including lease or use of properties, in the course of his trade or business. It shall also include the transitional input tax and the presumptiveinput tax.

o 2o it is the vat that is due or paid by a vat+registered person on importation of goods or local domestic purchases of goods, properties or



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services from another vat+registered person, in the course of his trade or business.

o

I@@J2TATI6B an you, for personal use, claim input tax on a purchase that you made, say for example, you purchased a laptop.The laptop cost )/5 ( purchase price. $%& vat ( 5. an you claim input tax of 5? an you recogni=e input tax of 5?

6, becauseB

o $. 4our purchase was not made in the course of trade or business and

o %. 4ou are not a vat+registered person

o TJ 6 KA@2. All of us 8referring to the class, including am %iu9 have encountered paying vat on our purchases. #ut we have the right to

recogni=e an input tax and offset it against our output tax ( all the input taxes that we have actually paid on our purchases.

KA@2, becauseB

$. We are not vat+registered persons. 6nly vat+registered persons have the right to claim input tax.

%. We are not into the course of trade or business.

o The only right we have is to claim it as part of our cost or purchases.

- Krom where can you derive input tax? 2ources of input taxB

o $. $%& actual input tax from

a. @ocal purchase

b. Importation

o %. Transitional input tax

o 1. 'resumptive input tax

o 7. reditable withholding vat

Jan. 5, 2011 Wednesday

- 6utput tax is the tax on the sale of goods, properties or services. 2o it is what a seller recogni=es on his sales. 6n the other hand, that seller haspurchases or will ma5e purchases and any input tax or vat that he has paid to his supplier, he will recogni=e it as an input tax. What the governmentwill receive actually is not the output tax on the sales but the difference between the output tax from the sales of that vat+registered person reduced bythe input tax recogni=ed on the purchase of services or goods by that same vat+registered person. If you remember our introduction on vat, what thegovernment can actually collect is the vat or the tax on whatever the seller has added or mar5ed up as a profit on the products or services that he!sselling. #ut what we actually encounter every time is the vat that is actually paid on the purchase. 2o the bul5 of input taxes by these sellers or vat+



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registered persons is the input tax actually paid on the purchase. #ut there are other sources of input taxes. What are they?

o $. $%& actual input tax from

a. @ocal purchase

b. Importation

When you import goods, you actually have to pay the vat before the goods will be released to you. 2o it!s actually paid inputtaxes.

o %. Transitional input tax

What is that?

This is a transitional input tax credits on beginning inventories.

Any person liable for vat or who elects to be a vat+registered person shall be allowed input tax in his beginning inventory of

goods, materials and supplies on hand, e-uivalent to %& of the value of such inventory or the actual vat paid on such goods,materials and supplies on hand, whichever is higher, which shall be creditable against the output tax.

When a person or entity is allowed to recogni=e a transitional input tax, is he a vatable person or is he a vat+registered person?

42.

2o how many times will a person or entity be allowed to recogni=e transitional input tax?

It depends.

Jnli5e the actual input taxes on local purchases of goods, properties or services and importation of products, which are actually

recogni=ed every time a purchase is made, transitional input tax is only recogni=ed when a person or entity transitions frombeing a vat+exempt person to being a vat+registered person. 2o this may probably happen not only once if he chooses or electsunder the optional registration so long as it is made irrevocable within 1 years.

#ut then again, as a term implies, it!s a vat that is recogni=ed when a person or entity transitions from being exempt to a vatable

person. 2o since this is not really an actual input tax that has been recogni=ed at the time the inventory has been purchased, how is transitional

input tax computed?

%& of the value of such inventory or the actual vat paid on such goods, materials and supplies on hand, whichever is higher.

2o you have % options 8whichever is higher9, the transitional input tax may be based onB

o $. %& of the value of the inventory or

Inventory at what period or at what time?Taxation Transcription. Midterms 2011.by USC Law EH 40 C!ass 2012


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#eginning inventory on hand as of the effectivity of their vat registration

OA*'@B 2o if the business has been operational for $/ years after vat registration, do you really have

to go bac5 to that record $/ years ago and determine what!s the inventory at that point in time?

o 42.

These inventories, materials and supplies have been purchased prior to vat+registration, so what!s the principlebehind the allowance or recognition of transitional input tax? Is it not pre"udicial to the government? Why do wehave to go bac5? Why do we have to recogni=e input taxes on goods that were purchased prior to vatregistration? Why do you thin5 the law allows the recognition of transitional input taxes?

The reason why transitional input tax is allowed is that whenever a person transitions from being a vat+

exempt person to a vatable or vat+registered person, at that point of effectivity, all his inventories on handbecome sub"ect to vat if sold. And if it!s sold, it will generate $%& output tax liability to the government.

And at the time that these inventories that will be sold in the future, at the time these were purchased, noactual input taxes have been recogni=ed because of his exempt+status. 2o in order to compensate for theeffect of vat output tax on a product that no input tax have been actually recogni=ed, the governmentallows the transitional input tax.

These inventories on hand at the time of effectivity are actually be consumed in the near future. Anyadditional purchases during the effectivity of vat+registration will actually already generate input taxes. 2oit!s "ust at the time of transition.

o %. The actual input taxes that have been actually paid during the status of being a vat+exempt person

What is the difference between the % options? When the law says whichever is higher, would

tax 2 transcript part 2

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