Chapter 2 - tax PDF

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IMPORTATIONImportation refers to the purchase of goods or services by Philippine resident from non-resident sellers.Types of Consumption Tax on Importation  VAT on importation – for the import of goods  Final withholding VAT – for the purchase of services from non-residentsComparison between the C...

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IMPORTATION Importation refers to the purchase of goods or services by Philippine resident from non-resident sellers. Types of Consumption Tax on Importation  VAT on importation – for the import of goods  Final withholding VAT – for the purchase of services from non-residents Comparison between the Consumption Tax on Importation VAT on importation Final withholding VAT Object consumption Goods Services Imposed upon Importers/ buyers Foreign service providers Statutory taxpayer Importers / buyers Resident purchaser of the service* Nature Direct consumption tax Indirect business tax Tax basis Landed cost Contract price Collecting agency BOC BIR Timing of payment Before withdrawal of goods After the month of payment *Individuals engaged in business and corporations

The VAT on importation is payable to the Bureau of custom and is paid prior to the withdrawal of the goods from the Customs warehouse. The final withholding VAT is 12% of the contract price for services rendered by non-residents. It is remitted to the BIR. IMPORTANT GOODS The importation of goods is either: 1. Exempt importation 2. Vatable importation EXEMPT IMPORTATION A. Importation of exempt goods Certain goods considered basic necessities are not subject to the VAT on importation, such as: 1. Agricultural and marine food products un their original state 2. Fertilizers, seeds, seedlings and fingerlings, fish, prawn, livestock and poultry feeds including ingredients used in the manufacture of finished feeds 3. Books and any newspaper, magazine, review, or bulletin which appear which is not devoted principally to the publication of paid advertisements 4. Passengers or cargo vessels and aircrafts, including engine, equipment and spare parts thereof for domestic or international transport operations B. Importation by VAT-exempt persons 1. International shipping on air transport operator on their import of fuel, goods and supplies 2. Cooperatives of direct farm inputs, machineries and equipment, including spare part thereof, to be used directly and exclusively in the production and or processing of their produce 3. PEZA locators on their import of goods or services

C. Quasi-importation 1. Personal and household effects belonging to residents of the Philippines returning from abroad and non-resident citizens coming to resettle in the Philippines 2. Professional instruments and implements, wearing apparel, domestic animals, and personal household effects belonging to persons coming to settle in the Philippines, for their own use and not for sale, barter or exchange D. Importation which are exempt under special laws and international agreement IMPORTATION OF EXEMPT GOODS The importation of the following exempt goods is not subject to VAT: A. Basic human food and related goods 1. Agricultural or marine food products in original state 2. Livestock and poultry of a kind generally used as, or yielding or producing foods for human consumption 3. Breeding stock and genetic materials therefore B. Books, newspapers and magazine C. Passengers or cargo vessels and aircrafts, including engine, equipment and spare parts

BASIC HUMAN FOOD AND RELATED PRODUCTS Agricultural or marine food products in original state Import exemption is limited to agricultural or marine food products in their original state or those which undergone simple processing. Good that underwent advanced processing are vatable. Examples of exempt agricultural or marine food products in original state: 1. Grapes, apples, oranges and other fruits 2. Vegetables, tea, ginseng 3. Rice, corn, coffee beans and other edible farm products 4. Marine foods such as fish crustaceans 5. Poultry and livestock 6. Milk, eggs, and meat for human consumption

Livestock includes cow, bulls, calves, pigs, sheep, goats and rabbits. Poultry shall include fowl, ducks, geese and turkey. Marine food shall include fish and crustaceans such as, but not limited to, eels, trout, lobster, shrimps, prawns, oysters, mussels and clams (RR16-2005). To be considered in “original state”, the goods must be in their raw for,. However, those that underwent simple processing are also exempt. Meaning of simple processing The term simple processing includes: a. Acts of preparation for the market b. Acts of preservation, or c. Acts of packing including advanced technological means of packaging

Examples of simple acts of preparation: a. Boiling b. Broiling c. Husking d. Roasting e. Stripping f. Grinding Examples of simple acts of preservation: a. Freezing b. Drying c. Smoking d. Salting Packaging is not processing as it does not alter the nature of the products merely involves putting the product in a medium that makes it convenient for handling, storage or marketing. Thus, goods may still be in their original state even if they are packaged using advanced technological means, such as: a. Shrink wrapping in plastics b. Vacuum packing c. Tetra-packing d. Other similar packaging Hence, the following agricultural exempt: With simple act of preparation Husked rice Corn grits Raw cane sugar Roasted beans Ordinary salt Ground meat Copra Boiled eggs Lechon

or marine food products which underwent processing are also With simple act of preservation Sundried fruits Salted meat Smoked fish Dried fish Frozen meat or fish

With acts of packaging Tetra-fresh fruit juice Shrink wrapped meat

Boiled eggs and Lechon Though boiled eggs and lechon are said be cooked in their ordinary sense, the cooking methods used (i.e. boiling or heating) are simple processing. Hence boiled eggs and lechon are exempt. Raw Sugar means the natural sugar extracted from sugarcane through simple mechanical process by pressing the juice; boiled to crystallize; filtered using centrifuge to separate these crystals, and dried, resulting to crystallize brown sugar with sucrose content by weight in dye state corresponding to a polarimeter reading of less than 99.50. Degrees and or whose color is 800 ICU or less. Raw sugar includes muscobado (RR8-2015, May 22, 2015)

The importation of the aforementioned agricultural or marine food products in their original state is exempt from VAT. Processed agricultural or marine food products Processed agricultural or marine food products pertain to those which have undergone changes in their chemical compositions or have undergone complex processing or treatment or are utilizing advanced technologies in their processing. Examples of vatable processed agricultural or marine food products: Refined sugar Canned sardines Flour Wine or vinegar Butter Marinated milk fish Vegetable or coconut oil Soy The important of processed products and those considered not in their original state shall be subject to VAT on importation. Use or purpose dictates vatability Flowers intended as love gift are vatable since they are not food but cauliflower, of course, ia an exempt human food. Cockfighting chickens are vatable since they are primarily intended for human amusement. They are only food when they lose. However, chicken produced for meat or eggs are VAT-exempt human foods. Farm or fishery inputs Marine or agricultural inputs intended for the production of marine or agricultural food products which are ultimately intended for human consumption are also VAT-exempt. The importation of farm or fishery inputs such as, seed, seedlings, breeding stocks and genetic materials are exempt. Likewise, foods of these inputs such as fertilizers and feeds including ingredients manufacture of finished feeds are also VAT-exempt. Products intended as maintenance of crops, livestock or poultry and supplemental implements or agricultural or inputs such as pesticides, herbicides, animal medicines, fishing equipment, fishing boats, tractors, plows, driers, threshers and harvesters are vatable. Zoo animal, race horse, aquarium fish, fighting cocks and pets are not intended for human consumption; hence, vatable. Feeds of these non-food animals called “specialty feeds” are likewise vatable. Ingredients of feeds for animal food intended for ultimate human consumption is VAT-exempt but ingredients for the processing of human food is vatable. Illustration Simaron Company imported the following agricultural implements: Urea Fertilizer P800,000 Cargil corn seeds 400,000 Pesticides 600,000 Herbicides 800,000

1. How much is exempt? 2. How much is subject to VAT on importation? Rules on VAT taxation of poultry and feeds Livestock Importation of X Importaion of feeds for X Importation of feed ingredients for X

Poultry X X X

Pets

NOTE: The importation of ingredient for the processing of foods for human consumption vatable because processed human foods are vatable. Examples of vatable non-food agricultural or marine products: a. Logs, woods, bamboo, orchid, and similar forest products b. Rubber hem, abaca, tabacco, topical herbs, cotton and other non-food crops c. Shells, corals, and other non-food marine products usually used as ornaments d. Race horse, fighting cocks, aquarium fish, zoo animal, and other animals generally considered as pets BOOKS, NEWSPAPERS, MAGAZINE, REVIEW OR BULLETINS The VAT exemption on the importation of these goods is apparently based upon the necessity of education and information. The Philippines constitution requires the state to give priority to education to foster patriotism and nationalism, accelerate social progress, and promote total human liberation and development. (See Sec, 17 Article II, Philippine Constitution) The Philippine constitution also recognizes the vital role of communication and information in nation building. (See Sec. 24 Ibid.) Conditions for exemption of newspaper, magazine review or bulletin: 1. They must appear at regular intervals with fixed prices for subscription. 2. The sale must not be devoted principally to the publication of paid advertisements. Note that exemption does not extend to other school suppliers such as chalk, board markers, pens, notebook; pad paper and office supplies PASSENGER OR CARGO VESSELS AND AIR CRAFTS The VAT exemptions cover the import of passenger or cargo vessels and aircrafts, including engine, equipment and spare parts thereof for domestic or international transport operations. The VAT exemption on the import of these items lapsed under RA 9295 but was reinstated by RA 100378 and was codified under the TRAIN law. This incentive for VAT-exemption is granted by law in an effort to help the modernization of the shipping, transport and tourism industry.

To qualify for exemption, the importation must be subjected to the requirements on restriction on vessel importation and mandatory vessel retirement program of the Marina Industry Authority (MARINA):  Passenger or cargo vessels – 15 years  Tankers – 10 years  High speed passenger crafts – 5 years Illustration Total transportation Group has land, sea and air transport operations. To beef up its operations, it imported 5 units of Daewoo bus, 1 unit of aircraft and 2 cruise ships.

The importation of the airplane ships are exempt but the importation of the buses for land transport is subject to VAT. Note to readers: In mastering the consumption taxes, legal sensitivities must be considered. It Is an established principle of law, that items not included are deemed excluded. Exempt good must be strictly construed to cover only to those listed by the law as discussed herein. Other basic necessities such as medicines, clothing, processed foods, kitchen supplies, school supplies, and the like are not exempt. A familiarization of the list is imperative. IMPORTATION BY VAT0EXEMPT PERSONS Vat-exempt persons are not subject to VAT on importation. The extent of their exemption varies per exempt persons. When an exempt importer subsequently sells his exempt importation to a non-exempt person, the non-exempt buyer shall be subject to VAT on importation. The tax due on such importation shall constitute a lien on the goods, superior to all charges or liens, irrespective of the possessor of said goods (Sec. 4.107-1(c), RR16-2005) VAT-exempt persons under the NIRC: 1. International shipping or air transport operators 2. Agricultural cooperatives 3. Ecozone-locators International shipping or air transport operators The exemption is limited to the importation of fuel, goods and supplies. Although these goods or supplies are physically brought into the Philippines, they are not intended to be consumed herein. They will ultimately be used in international transport. This consumption is a foreign consumption rather than domestic consumption. Illustration 1 Malaysian Ferries is an international shipping carrier. It imported to the Philippines fuel and supplies to be used in its shipping operations.

Note that the fuel, goods, or supplies will be consumed in the high seas or in foreign territories outside the country. The importation is not a domestic consumption but a foreign consumption; hence, it is exempt from VAT.

Illustration 2 Pinoy Airline IMPORTED JET FUEL FROM Iraq at total cost of P50,000,000. 40% of the importation is declared for international air transport operations. 60% of the 50,000,000 importation will be consumed in foreign airspaces. This is not for domestic consumption; hence, it is exempt from VAT. Only the 40% portion which will be used domestically will be subject to the VAT on importation. Illustration 3 Lufta Airline, an international air carrier, imported jet fuel at the total cost of P40,000,000. It subsequently sold P10,000,000 of these to Feel Air, a domestic air a carrier.

Lufta Airline is exempt on its importation of the P10,000,000 worth jet fuel. Since fee air is not an exempt person and that jet fuels are vatable goods, feel Air will be treated as the importer of the P10,000,000 jet fuel and will be subjected to VAT. Lufta Airline is not required to pass the VAT on its sales of the fuel. Agricultural cooperatives The status of agri-coop as VAT-exempt person is limited to importation of direct farm inputs, machineries and equipment, including their spare part (RA 9337) Conditions for exemption: 1. The cooperative must be an agricultural cooperative duly registered and in good standing with the Cooperative Development Authority (CDA). 2. The importation involves direct farm inputs, machineries, equipment and their spare parts to be used directly and exclusively in the production or processing of their produce. Illustration 1 Abra Farmer’s Cooperative imported the following equipment: Tractors and threshers to be used by the cooperative Plows and water pumps to be resold to members Fertilizers and hybrid seeds to be sold by the cooperative Herbicide and pesticides to be used by the cooperative Cars for the use of cooperative directors and officers

P2,000,000 3,000,000 1,000,000 500,000 2,000,000

The following table summarize the tax treatment of the importation: Exempt Tractors and threshers to be used by the cooperative Plows and water pumps to be resold to members Vatable Fertilizers and hybrid seeds to be sold by the cooperative Exempt Herbicide and pesticides to be used by the cooperative Exempt Cars for the use of cooperative directors and officers Vatable Note: 1. The importation of machineries and equipment for the processing or processing needs of the cooperative is exempt; hence, tractors and threshers are exempt from VAT on importation. 2. The importation of fertilizers and seed is exempt to any importer. The importation of herbicides and pesticides which are “direct farm inputs” is exempt to cooperatives. Note that the importation of farmers of herbicides and pesticides is vatable.

3. Although plows and water pumps qualify as machineries, they are not intended for the use of the cooperative; hence, these are also vatable. 4. The cars are vatable because they are not direct farm inputs, machineries, or equipment. Illustration 2 Assume that fertilizer and herbicides in the foregoing illustration is subsequently sold by Abra Farmer’s Cooperative to Jon Juan, member farmer. What is the tax consequence of the sale? Jon Juan shall be treated as importer and shall be subjected to VAT but only to on vatable goods such as herbicides. Since the fertilizer is a VAT-exempt goods, Jon Juan shall not pay VAT on importation thereon. Illustration 3 A credit cooperative imported a computer server from abroad at a cost of P1,500,000. This importation is generally subject to VAT on importation since the exemption does not extend to cooperatives which are not engaged in processing or production. Illustration 4 A mining cooperative imported an ozone generator and an ultrafine ore grinding machine for its gold recovery plant. The importation is generally subject VAT because the cooperative is not an agricultural cooperative. Illustration 5 Arado Coop, a farming cooperative, imported ten tractors and 20 sacks of hybrid seed. Arado Coop subsequently sold four tractors and 5 sacks of hybrid seed to Mr. Laco, a cooperative member. Arado Coop, is exempt from VAT on its importation of farm equipment and seed. Its sales of equipment and seeds to Mr. Laco is not subjected to business tax. Mr. Laco shall be considered an importer but Mr. Laco shall be subject to VAT only on the farm equipment but not on the hybrid seeds. Illustration 6 A cooperative imported frozen meat from China. It subsequently sold all of this to Philippine consumers. The importation of frozen meat, an exempt goods, is an exempt importation for any importer. Hence, the sales by the cooperative to the consumers (i.e., finals consumption) shall not be subjected to VAT. Likewise, the buyers shat not be subject to VAT on importation. Ecozone-locators Ecozone are designed places of economic activity for the production of goods or services for the export market. By legal fiction, economic zones are considered foreign countries and are deemed outside. Customs territory. Thus, the importation of goods into the economic zones by locators is exempt not only from VAT on importation but also from customs duties. The exemption from VAT covers any good, supplies or machineries brought into the ecozones by locators.

Technical importation The rules of VAT on importation apply to technical importation by consumers in a customs territory from persons located in Special Economic Zones (Sec. 4.107-1, RR 16-2005) Customs territory refers to the portion of the Republic of the Philippines outside of designated special economic zones (Ecozones.) (RR2-2005)

“Technical importation” refers to the purchase of non-ecozone Philippines resident from Philippine Ecozone-registered enterprises. By legal fiction, ecozones are considered foreign territories. Hence, the purchase from Economic zones such as but not limited to, Subic-Ecozone, Zamboo-Ecozone and Cagayan-Ecozone is subject to the VAT on importation. Similarly, sales to Ecozones are subjected to zero-rated VAT for VAT taxpayers because Ecozones are considered foreign territories. Likewise, sales to Ecozones are exempt from business tax for non-VAT taxpayers (See Sec. 109(K) and (V), NIRC as amended). Illustration 1 Winshield corporation, a PEZA locator, sold scrap metals to Recycle Industries Corporation, a customs territory buyer (i.e., buyer outside the Ecozone).

Recycle Industries shall pay the VAT on importation directly to the Bureau of Customs (BOC). Winshield Corporation is not required to imposed the VAT on its sales. However, it must be furnished a copy of the receipt issued by the BOC for the VAT payment (See BIR Ruling No. DA-031-2007). Illustration 2 KT, an ecozone locator, imported two machineries for use in the ecozone. It resold one machinery to S3, a fellow PEZA-locator, and resold the other to T4, a person outside the zone. The importation by the locator shall be exempt. The sales S3 shall not be subject to business tax since it is deemed a foreign consumption. S3 also an ecozone locator, shall not likewise be subject to the VAT on importation. However, T4, a non-collector, shall pay VAT on importation on the machinery it purchased from KT. QUASI-IMPORTATION 1. Import of personal and household effects belong to residents of the Philippines returning from abroad or non-resident citizens coming to resettle in the Philippines. 2. Prof...