INRODUCTION TO THE VALUE ADDED TAX

VALUE ADDED TAX

 Covers all vatable sales of goods, properties services or leases
Vatable sales or receipts are from sources other than:
 Exempt Sales
 Receipts from services specifically subject to percentage tax
VAT taxpayers
 VAT-registered persons
o Subject to VAT even if its annual sales does not exceed threshold
 VAT-registrable persons
o Those whose sales or receipts exceed VAT threshold without registering
as VAT taxpayers.
o Subject to VAT without the benefit of input tax credit
VAT threshold
VAT Threshold Amount Covered taxpayers
General Threshold 3,000,000 Applicable to all taxpayers
other than franchise
grantees of radio and
television
Special Threshold 10,000,000 Applicable only to
franchise grantees of radio
and television

Assessment of the VAT threshold

Illustration 1: Taxpayers with mixed transactions
Cipeda Department Store had the following sales for the last 12-month period:
Fertilizers, seeds,poultry and hog feeds 1,200,000
Fruits and Vegetables 800,000
Groceries 800,000
Clothes, shoes and other apparel 600,000
Furniture 400,000
Total 3,800,000

Fertilizers, seeds, poultry and hog feeds Exempt

Fruits and Vegetables Exempt
Groceries Vatable
Clothes, shoes and other apparel Vatable
 Furniture Vatable

Vatable sales are:

Groceries 800,000
Clothes, shoes and other apparel 600,000
Furniture 400,000
Total 1,800,000

The total vatable sales is below the VAT threshold, thus the business is not required to
register as a VAT taxpayer and may continue paying 3% percentage tax until it exceeds
the threshold.
Illustration 2 Individual with multiple proprietorship businesses
Mr. See had the following gross receipts from his professional practice and his other
businesses in the immediately preceding-12 months
Gross receipts from restaurant businesses 2,200,000
Gross receipts from barbecue stand 200,000
Gross receipts from taxicab operations 1,500,000
Gross receipts from professional practice 900,000
Total 4,800,000

Gross receipts from restaurant businesses Vatable

Gross receipts from barbecue stand* Exempt
Gross receipts from taxicab operations 3% common carrier’s tax
Gross receipts from professional practice Vatable

Gross receipts from restaurant business 2,200,000

Gross receipts from exercise of 900,000
profession
Total Vatable Sales and Receipts 3,100,000

*Gross receipts from barbecue stand is exempt since it involves simple processing

Illustration 3: Corporations with subsidiaries and branches

Black Clover Corp. had the following subsidiaries and branches and their corresponding
recorded 12-month sales:
Subsidiaries:
Asta corporation- 55% owned 3,200,000
Yuno- corporation- 70% owned 1,800,000
Total subsidiary sales 4,000,000
 Branches:

Royal Capital Branch 800,000

Heart Kingdom Branch 700,000
Total Branch Sales 1,500,000

Black Clover reported the following sales:

Sales to Heart Kingdom Branch 400,000
Sales to Asta corporation 300,000
Sales to other customers 900,000
Total parent company sales 1,600,000

Each corporation is a separate taxpayer.

Asta corporation Vat- taxpayer
Yuno Corporation Non-VAT taxpayer
Black Clover Corporation Nom-VAT taxpayer

A branch is not a separate entity with their head office, thus Heart Kingdom and Asta
branch are not separate entities with Black Clover.
Sales to Asta Corporation 300,000
Sales to other customers 900,000
Sales of Royal Capital Branch 800,000
Sales of Heart Kingdom Branch 700,000
Total Vatable sales of Black Clover 2,700,000

Black Clover sales to Royal Capitol is not considered because it is a sale to itself, it is not
a realized sale. Black Clover shall be registered as a non-VAT taxpayer.
Illustration 4: Married individual taxpayers
Mr. and Mrs. Tanaka had the following sales and gross receipts
Mr. Tanaka Mrs. Tanaka Total
Gross receipts from 2,200,000 1,700,000 3,900,000
profession
Sales from sari-sari 1,350,000 1,350,000
store
Total 2,200,000 3,050,000 5,250,000
Each individual is a taxable person and is separately subject to business tax. Aggregation
shall be made for each individual. Mr. Tanaka will pay 3% percentage tax and Mrs.
Tanaka shall pay VAT.
If any sales or receipts cannot be directly attributed to or identified as exclusively earned
or realized by either spouse, the same shall be divided equally between them for the
purpose of determining their respective sales or receipts or the purposes of threshold

Optional VAT Registration

Taxpayers below the threshold can voluntarily register as VAT taxpayers.
Such option is subject to the 3-year lock-in period. The taxpayer is precluded to have his
VAT registration revoked until the lapse of 3 years.
VAT Taxpayers with Mixed Transactions
It must be noted that despite the VAT registration, VAT shall apply only to vatable sales
or receipts. His non-vatable sales or receipts remains the exempt from VAT. The exempt
sales remain to be exempt while the receipts specifically subject to percentage tax are
subject to their specific percentage tax rates. The only exception to this is when the
taxpayer opted to have the VAT apply to this non-vatable sales or receipts.
Recall that the option to subject to exempt sales to VAT is not permanent. It can be
revoked by the taxpayer after the lapse of the 3-year lock in period.
THE VALUE ADDED TAX MODEL
The VAT payable of a VAT taxpayer is computed as:
Output VAT xxx,xxx
Less: Input VAT xxx,xxx
VAT Due xxx,xxx
Less: Tax Credits xxx,xxx
Vat Still Due xxx,xxx

Output VAT
1. Regular Output VAT- 12% VAT imposed on domestic sales or receipts
2. Zero Output VAT-0% VAT imposed on export and other zero-rated sales
The detailed rules on output VAT will be discussed in Chapter 7
Input VAT
Input VAT is the VAT paid by the taxpayer on the domestic purchases from VAT
suppliers or on the importation of goods or services in the course of business.
Despite absence of actual payment of VAT on purchase or import, input VAT may also
be allowed by law as incentives to the taxpayer such as in the case of presumptive input
VAT.
Input VAT has rules on creditability. Not all paid input VAT is creditable against output
VAT. Those allowed to be deductible against output VAT is called "claimable input
VAT", "allowable input VAT" or "creditable input VAT.
VAT DUE
At the end of each month, the input VAT is offset with the output VAT. A positive VAT
due is paid to the BIR. A negative VAT is normally non-refundable but is carried over to
the next succeeding months or quarter.
Output VAT 12,000
Less: Input VAT 8,400
Vat Due 3,600

VAT REPORTING
Period covered BIR Form Deadline
First month of the quarter 2550M 20 days from end of month
Second month of the quarter 2550M 20 days from end of month
For the quarter 2550Q 25 days from end of quarter

Illustration
A VAT taxpayer had the following purchases and sales, exclusive of VAT
January February March
Cash Purchases 700,000 320,000 375,000
Cash Sales 650,000 580,000 500,000

In VAT reporting, the January 2550M would look like:

Output VAT 78,000
Less:Input VAT 84,000
VAT due (6,000)*
*this is not a VAT refundable. It is called input VAT carry-over.

In VAT reporting, the February 2550M would look like:

Output VAT 69,600
Less:Input VAT 44,000
VAT due 25,200
In VAT reporting, the March 2550Q would look like:
Output VAT 207,600
Less:Input VAT 167,400
VAT due 40,200
Less: Tax Credit
Estimated monthly VAT payments 25,200
Vat still due 15,000

Sales subject to special VAT rules

There are sales or receipts that are receipts that are subject to special or unique tax, rules
such as the following:
a. Sales to the Government
b. Zero-rated Sales
c. Exempt sales

Type of sales What is unique?

Sales to the Government Limited claimable input VAT
Zero-rated sales No output VAT but with claimable input
VAT
Exempt sales No output VAT and no claimable input
VAT

Sales to the government including GOCCs

The sales to the government and GOCCs is vatable at 12% normal rate but the law
requires government agencies or GOCCs to withhold a 5% final VAT on their purchases.
The invoice sales or billing to the government or GOCCs will be deducted 5% final VAT
based on sales or receipts. The taxpayer will only collect the balance.
The 5% withheld tax shall be presumed as the actual VAT due of the taxpayer on the
sale. There would be no more VAT payable. Thus the taxpayer has to adjust his
claimable input VAT on that sale because the input VAT is effectively fixed or
standardized by the government at 7%.

Output VAT 12% of sales or receipts

Less: Input VAT Limited to 7%
VAT due 5% of sales or receipts

The 7% claimable input VAT on sales to the government or GOCCs is

referred to as the standard input VAT.
Illustration
During the month, a VAT-registered person made a single sale of goods to a
government agency for P448,000, inclusive of P48,000 output VAT. These goods
were purchased for P336,000, including P36,000 input VAT.

In reporting, Form 2550M would look like:

Output VAT 48,000

Less: Standard Input VAT 28,000
VAT due 20,000
Less: Tax credit- 5% withholding VAT 20,000
VAT due and payable 0

Zero-rated Sales
In principle, foreign consumption like export sales are non-vatable. In our current tax
laws, they are subject to a 0% VAT to VAT taxpayers. With a zero output VAT and a
claimable input VAT, the VAT due would be negative.

As such, the allows taxpayer the privilege to claim the input VAT as a:
a. Tax refund
b. Tax credit
If claimed as tax refund, the taxpayer will be paid back in cash. If claimed as tax credit,
the taxpayer can use it to reduce other internal revenue tax obligations to the BIR.

If the input VAT on zero rated sales is not applied with refund or tax credit, the claimable
input VAT would be added to creditable input VAT deductible against output VAT on
other vatable sales.

Not only export sales are subject to 0% VAT. There are domestic sales or local sales of
goods or services that are considered export sales such as sales to economic zones and
persons engaged international transport operations

Local sales to persons with indirect tax exemption such as international Rice Research
Institute and Asian Development Bank are effectively subject to 0% VAT. This is
referred to as effectively zero-rated sale.

The 0% VAT is applied to these types of sales similar to the treatment and
procedures discussed. Detailed discussion of these exceptional sales will be
discussed in Chapter 8.

Exempt sales
For purpose of the VAT, exempt sales are non-vatable sales such as:
 [Link] sales of goods, services or properties
[Link] specifically subject to percentage tax
Exempt sales will not be subject to output VAT. Consequently, the seller is also not
allowed to credit input VAT. The input VAT traceable to exempt sales is part of costs or
expenses of the seller and is deductible against gross income subject to income tax.

Zero-rated sales Exempt sales

Output VAT None None
Input VAT Creditable Non-creditable (expense)
Types of sales Export or domestic sales Domestic sales
Taxpayers involved VAT taxpayers only VAT or non-VAT
taxpayers

Classification of sales or receipts

1. Sales to the government
2. Zero-rated sales
3. Exempt sales
4. Regular sales

Regular sales are subject to 12% VAT and are allowed full credit of actual input VAT. It
covers all sales of goods, properties or services other than:
a. Sales to the government or GOCCs
b. Zero-rated sales
c. Exempt sales
Summary of VAT rules for each type of sales

Type of sales Output VAT Claimable input VAT due

VAT
Exempt sales None None None

Zero-rated sales Zero Actual if not Negative

claimed as credit or
refund
Sales to 12% of sales/ 7% of sales/receipts None
government receipts
Regular sales 12% of sales/ Actual input VAT Positive or
receipts paid Negative

Classification Rules
1. The sale of goods destined to a non-resident buyer abroad is a zero-rated sale even
if it involves exempt goods
2. The sale of vatable goods or services in the Philippines is normally a regular
vatable sale, except when the sale is:
a. Made to the government or GOC- subject to the final withholding VAT
 b. Considered an export or effectively zero-rated such as sales to VAT
exempt persons-subject to 0% VAT
3. The sale of exempt goods and services to the government or GOCC is still exempt
sales.

Summary of Rules on Sales of Goods:

Domestic Sales Export Sales

Taxable persons VAT-exempt Any person
persons
Sale of exempt 12% VAT 0% VAT 0% VAT
goods
Sale of vatable 12% VAT 0% VAT 0% VAT
goods

Other sales subject to VAT

1. Sales of registrable persons

o The sales of registrable persons are subject to VAT despite their non-
registration as VAT taxpayers but no input VAT credit is allowed.
2. Sales of non-VAT taxpayers who issues VAT receipt or invoice
o Non-VAT taxpayers who illegally charge VAT on their sales shall be
subject to VAT without the benefit of input VAT plus the 50% surcharge
and 3% percentage tax.
3. Exempt sales billed by VAT taxpayers as regular sales
o Exempt sales which are not so clearly indicated as “Exempt” in the VAT
receipts shall be considered as regular sales subject to VAT