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VALUE-ADDED TAXES (VAT)â 1. Define value-added tax (VAT). SUGGESTED ANSWER: A tax which is imposed only on the increase in the worth, merit or importance of goods, properties or services, and not on the total value of the goods or services being sold or rendered.2. What is the nature of VAT? SUGGEST...

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VALUE-ADDED TAXES (VAT) â1. Define value-added tax (VAT). SUGGESTED ANSWER: A tax which is imposed only on the increase in the worth, merit or importance of goods, properties or services, and not on the total value of the goods or services being sold or rendered. 2. What is the nature of VAT ? SUGGESTED ANSWSER: VAT is an indirect tax that may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. As such, it should be understood not in the context of the person or entity that is primarily, directly liable for its payment, but in terms of its nature as a tax on consumption. [Commissioner of Internal Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February 11, 2005 citing various authorities} As an indirect tax on services, its main object is the transaction itself or, more concretely, the performance of all kinds of services conducted in the course of trade or business in the Philippines. These services must be regularly conducted in this country, undertaken in “pursuit of a commercial or an economic activity,” for a valuable consideration, and not exempt under the Tax Code, other special laws, or any international agreement. (Commissioner, of Internal Revenue v. American Express International, Inc. (Philipppine Branch), G. R. No. 152609, June 29, 2005 citing various cases and authorities) VAT is a percentage tax imposed on any person whether or not a franchise grantee, who in the course of trade or business, sells, barters, exchanges, leases, goods or properties, renders services. It is also levied on every importation of goods whether or not in the course of trade or business. The tax base of the VAT is limited only to the value added to such goods, properties, or services by the seller, transferor or lessor. Further, the VAT is an indirect tax and can be passed on to the buyer. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008) ââ3. What is the effect on exemptions of VAT being an indirect tax ? Reason out and illustrate your answer. SUGGESTED ANSWER: If a special law merely exempts a party as a seller from its direct liability for payment of the VAT, but does not relieve the same party as a purchaser from its indirect burden of the VAT shifted to it by its VAT-registered suppliers, the purchase transaction is not exempt. REASON: The VAT is a tax on consumption, the amount of which may be shifted or passed on by the seller to the purchaser of the goods, properties or services. [Commissioner of Internal Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February 11, 2005) Illustration: A VAT exempt seller sells to a non-VAT exempt purchaser. The purchaser is subject to VAT because the VAT is merely added as part of the purchase price and not as a tax because the burden is merely shifted. The seller is still exempt because it could pass on the burden of paying the tax to the purchaser. 4. The VAT is a tax on consumption. Explain the meaning of consumption as used under the VAT system. Give an example. SUGGESTED ANSWER: Consumption is "the use of a thing in a way that thereby exhausts it." Applied to services, the term means the performance or "successful completion of a contractual duty, usually resulting in the performer's release from any past or future liability x x x" Unlike goods, services cannot be physically used in or bound for a specific place when their destination is determined. Instead, there can only be a "predetermined end of a course" when determining the service "location or position x x x for legal purposes." For example the services rendered by a local firm to its foreign client are performed or successfully completed upon its sending to a foreign client the drafts and bills it has gathered from service establishments here. Its services, having been performed in the Philippines, are therefore also consumed in the Philippines. Such facilitation service has no physical existence, yet takes place upon rendition, and therefore upon consumption, in the Philippines. [Commissioner of Internal Revenue v. American Express G.R. No. 152609, 29 June 2005, 462 SCRA 197 cited in Commissioner of Internal Revenue v. Placer Dome Technical Services (Phils.), Inc. G. R. No. 164365, June 8, 2007] â5.

Who are liable for the value-added tax ?

SUGGESTED ANSWER:

a.

Any person who, in the course of his trade or business, 1) Sells, barters, exchanges or leases goods or properties, or 2) renders services, and b. any person who imports goods xxx However, in the case of importation of taxable goods, the importer, whether an individual or corporation and whether or not made in the course of his trade or business, shall be liable to VAT xxx. (Rev. Regs. No. 162005,Sec. 4.105-1, paraphrasing supplied) 6. What are the various VAT methods and systems ? SUGGESTED ANSWER: a. Cost deduction method. This is a single-stage tax which is payable only by the original sellers. [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases citing Deoferio, Jr. V. A. and Mamalateo, V.C., The Value Added Tax in the Philippines (First Edition 2000)] This was subsequently modified and a mixture of “cost deduction method” and “tax credit method” was used to determine the value-added tax payable. (Ibid.) b. Tax credit method. This method relies on invoices, an entity can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports. [ Commissioner of Internal Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February 11, 2005 citing various cases and authorities; Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases) If at the end of a taxable period, the output taxes charged by a seller are equal to the input taxes passed on by the suppliers, no payment is required. It is when the output taxes exceed the input taxes that the excess has to be paid. If however, the input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or quarters. Should the input taxes result from zero-rated or effectively zero-rated transactions or from acquisition of capital goods, any excess over the output taxes shall instead be refunded to the taxpayer or credited against other internal revenue taxes. [Commissioner of Internal Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February 11, 2005 citing various cases and authorities] 7. The VAT being imposed on the increase in worth merit or improvement of the goods or services. How is this done ? SUGGESTED ANSWER: The VAT utilizes the concept of the output and input taxes. 8. Define output tax. SUGGESTED ANSWER: The value-added tax due on the sale or lease or taxable goods, properties or services by any VAT-registered person. 9. Define input tax. SUGGESTED ANSWER: The VAT due on or paid by a VAT-registered person on importation of good or local purchases of goods or services, including lease or use of properties, in the course of his trade or business. (Rev. Regs. No. 4.110-1, 1st par.) 10. What are included in the input tax. SUGGESTED ANSWER: It shall also include: a. the transitional input tax and b. the presumptive input tax xxx. It includes c.input taxes which can be directly attributed to transactions subject to the VAT plus a ratable portion of any input tax which cannot be directly attributed to either the taxable or exempt activity. (Rev. Regs. No. 4.110-1, 1 st par., 2nd sentence,. And 2nd par., paraphrasing, arrangement and numbering supplied ) 11. May the right to credit the input tax be limited by legislation ? SUGGESTED ANSWER: Yes because it is a mere creation of law. Prior to the enactment of multi-stage sales taxation, the sales taxes paid at every level of distribution are not recoverable from the taxes payable. With the

advent of Executive Order No. 273 imposing a 10% multi-stage tax on all sales, it was only then that the crediting of the input tax paid on purchase or importation of goods and services by VAT-registered persons against the output tax was established. This continued with the Expanded VAT Law (R.A. No. 7716), and The Tax Reform Act of 1997 (R.A. No. 8424). The right to credit input tax as against the output tax is clearly a privilege created by law, a privilege that also the law can limit. It should be stressed that a person has no vested right in statutory privileges. (ABAKADA Guro Party List, etc. et al. vs. Ermita, G.R. No. 168207, October 15, 2005, and companion cases, on the motion for reconsideration) 12. What is the concept of transitional input tax credits on beginning inventories ? SUGGESTED ANSWER: Taxpayers who become VAT-registered persons upon exceeding the minimum turnover of P1,500,000.00 in any 12-month period, or who voluntarily register even if their turnover does not exceed P1,500,000.00 (except franchise grantees of radio and television broadcasting whose threshold is P10,000,000.00) shall be entitled to a transitional input tax on the inventory on hand as of the effectivity of their VAT registration, on the following: a. goods purchased for resale in their present condition; b. materials purchased for further processing, but which have not yet undergone processing; c. goods which have been manufactured by the taxpayer; d. goods in process for sale; or e. goods and supplies for use in the course of the taxpayer’s trade or business as a VATregistered person. [Rev. Regs. No. 16-2005, Sec.4.111-1, (a), 1st par., arrangement and numbering supplied] 14. What is the concept of presumptive input tax credits ? SUGGESTED ANSWER: Persons or firms engaged in the processing of sardines, mackerel, and milk, and in manufacturing refined sugar, cooking oil and packed noodle-based instant meals, shall be allowed a presumptive input tax, creditable against the output tax, equivalent to four percent (4%) of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production. As used in this paragraph, the term processing shall mean pasteurization, canning and activities which through physical or chemical process alter the exterior texture or form or inner substance of a product in such a manner as to prepare it for special use to which it could not have been put in its original form or condition. [Rev. Regs. No. 16-2005, Sec.4.111-1, (b)] 15. Does the VAT registration fee violate religious freedom ? SUGGESTED ANSWSER: The VAT registration fee imposed on non-VAT enterprises which includes among others, religious sects which sells and distributes religious literature is not violative of religious freedom, although a fixed amount is not imposed for the exercise of a privilege but only for the purpose of defraying part of the cost of registration. The registration fee is thus more of an administrative fee, one not imposed on the exercise of a privilege, much less a constitutional right. (Tolentino v. Secretary of Finance, et al., and companion cases, 235 SCRA 630)

ââ16. Explain the proper interpretation of the term “In the Course of Trade or Business. SUGGESTED ANSWSER: VAT is not a singular-minded tax on every transactional level. Its assessment bears direct relevance to the taxpayer’s role or link in the production chain. Hence, as affirmed by Section 99 of the Tax Code and its subsequent incarnations, the tax is levied only on the sale, barter or exchange of goods or services by persons who engage in such activities, in the course of trade or business. These transactions outside the course of trade or business may invariably contribute to the production chain, but they do so only as a matter of accident or incident. As the sales of goods or services do not occur within the course of trade or business, the providers of such goods or services would hardly, if at all, have the opportunity to appropriately credit any VAT liability as against their own accumulated VAT collections since the accumulation of output VAT arises in the first place only through the ordinary course of trade or business. (Commissioner of Internal Revenue v. Magsaysay Lines, Inc., et al., G. R. No. 146984, July 28, 2006)

16-A. Pursuant to a government program of privatization, NDC, a VAT-registered entity created for the purpose of selling real property, decided to sell to private enterprise all of its shares in its wholly-owned subsidiary the National Marine Corporation (NMC). The NDC decided to sell in one lot its NMC shares and five (5) of its ships, which are 3,700 DWT Tween-Decker, "Kloeckner" type vessels. The vessels were constructed for the NDC between 1981 and 1984, then initially leased to Luzon Stevedoring Company, also its wholly-owned subsidiary. Subsequently, the vessels were transferred and leased, on a bareboat basis, to the NMC. The NMC shares and the vessels were offered for public bidding. Among the stipulated terms and conditions for the public auction was that the winning bidder was to pay "a value added tax of 10% on the value of the vessels." Magsaysay Lines, Inc., offered to buy the shares and the vessels for P168,000,000.00. The bid was made by Magsaysay Lines, purportedly for a new company still to be formed composed of itself, Baliwag Navigation, Inc., and FIM Limited of the Marden Group based in Hongkong . The bid was approved by the Committee on Privatization, and a Notice of Award was issued to Magsaysay Lines. Is the sale subject to VAT ? SUGGESTED ANSWER: No. The sale is not subject to VAT. In Imperial v. Collector of Internal Revenue, G.R. No. L-7924, September 30, 1955 (97 Phil. 992), the term "carrying on business" does not mean the performance of a single disconnected act, but means conducting, prosecuting and continuing business by performing progressively all the acts normally incident thereof; while "doing business" conveys the idea of business being done, not from time to time, but all the time. [J. Aranas, UPDATED NATIONAL INTERNAL REVENUE CODE (WITH ANNOTATIONS), p. 608-9 (1988)]. "Course of business" is what is usually done in the management of trade or business. [Idmi v. Weeks & Russel, 99 So. 761, 764, 135 Miss. 65, cited in Words & Phrases, Vol. 10, (1984)]. What is clear therefore, based on the aforecited jurisprudence, is that "course of business" or "doing business" connotes regularity of activity. In the instant case, the sale was an isolated transaction. The sale which was involuntary and made pursuant to the declared policy of Government for privatization could no longer be repeated or carried on with regularity. It should be emphasized that the normal VAT-registered activity of NDC is leasing personal property. This finding is confirmed by the Revised Charter of the NDC which bears no indication that the NDC was created for the primary purpose of selling real property. (Commissioner of Internal Revenue v. Magsaysay Lines, Inc., et al., G. R. No. 146984, July 28, 2006) ââ17. Under the Value Added Tax (VAT), the tax is imposed on sales, barter, or exchange or goods and services. The VAT is also imposed on certain transactions “deemed sales.” What are these so-called transactions “deemed sales “ ? SUGGESTED ANSWER: a. Transfer, use or consumption not in the course of business or properties originally intended for sale or for use in the course of business. xxx b.

Distribution or transfer to: 1) Shareholders or investors as share in the profits of the VAT- registered person; xxx or 2) Creditors in payment of debt or obligation c. Consignment of goods if actual sale is not made within sixty (60) days following the date such goods were consigned. Consigned goods returned by the consignee within the 60-day period are not deemed sold. d. Retirement from or cessation of business, with respect to all goods on hand, 1) whether capital goods, stock-in-trade, supplies or materials as of the date of such retirement, or cessation, 2) whether or not the business is continued by the new owner or successor. xxx [Rev. Regs. No. 16-2005, Sec. 4.106-7, paraphrasing, arrangement and numbering supplied] 18. What transactions considered retirement or cessation of business “deemed sale” subject to VAT ? SUGGESTED ANSWER: a. Change of ownership of the business. There is change in the ownership of the business where a single proprietorship incorporates; or 1) the proprietor of a single proprietorship sells his entire business. b. Dissolution of a partnership and creation of a new partnership which takes over the business. [Rev. Regs. No. 16-2005, Sec. 4.106-7 (a), (4) paraphrasing, arrangement and numbering supplied] 19.

What sale of or lease of real properties subject to VAT ?

SUGGESTED ANSWER: Sale of real properties primarily for sale to customers or held for lease in the ordinary course of trade or business of the seller shall be subject to VAT. (Rev. Regs. No. 16-2005, Sec. 4.106-3, 1 st par.) Thus, capital transactions of individuals are not subject to VAT. Only real estate dealers are subject to VAT. 20. On Jan. 10, 2008, X, a domestic corporation engaged in the real estate business, sold a building for P10,000,000.00. Is the sale subject to the value-added tax (VAT)? If so, how much? Explain. SUGGESTED ANSWER: Yes. 12% on the gross selling price because the sale was made in the ordinary course of trade of business of X, a domestic corporation engaged in the real estate business. 21. What sale of real property exempt from VAT ? SUGGESTED ANSWER: The following sales of real properties are exempt from VAT, namely: a. Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business; b. Sale of real properties utilized for low-cost housing as defined by RA No. 7279, otherwise known as the “Urban and Development Housing Act of 1992” and other related laws, such as RA No. 7835 and RA No. 8763. xxx xxx xxx c. Sale of real properties utilized for socialized housing as defined under RA No. 7279, and other related laws wherein the price ceiling per unit is P225,000.00 or as may from time to time be determined by the HUDCC and the NEDA and other related laws. xxx xxx xxx d. Sale of residential lot valued at One Million Five Hundred Thousand Pesos (P1,500,000.00) and below, or house & lot and other residential dwellings valued at Two Million Give Hundred Thousand Pesos (P2,500,000.00) and below where the instrument of sale/transfer/disposition was executed on or after November 1, 2005, provided, That not later than January 31, 2009 and every three (3) years thereafter, the amounts stated herein shall be adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office (NSO); provided, further, that such adjustment shall be published through revenue regulations to be issued not later than March 31 of each year. If two or more adjacent residential lots are sold or disposed in favor of one buyer, for the purpose of utilizing the lots as one residential lot, the sale shall be exempt from VAT only if the aggregate value of the lots do not exceed P1,500,000.00. Adjacent residential lots, although covered by separate titles and/or separate tax declarations, when sold or disposed of to one and the same buyer, whether covered by one or separate Deed of Conveyance, shall be presumed as a sale of one residential lot. [Rev. Regs. No. 4.109-1 (B), (p), paraphrasing and numbering supplied] 22.What is the VAT on services and lease of properties ? SUGGESTED ANSWER: a. There shall be levied, assessed, and collected, b. a value-added tax equivalent to ten percent (10%) of gross receipts c. derived from the sale or exchange of services, 1) including the use or lease of properties. d. Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: 1) Value-added tax collection as a percentage of Gross Domestic product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or 2) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%). [NIRC of 1997, Sec. 108 (A), as amended by R.A. No. 9337, arrangement and numbering supplie...