LEARNING OBJECTIVES

At the end of this chapter, the students should be able to:

1. identify sales of services subject to value-added tax;
2. discuss the requisites for sales of services and lease of properties to be
subject to value-added tax;
3. describe the concept of constructive receipts;
4. identify zero-rated transactions;
5. describe the rules to handle specific activities subject to value-added tax;
6. discuss the concept of VAT on importation;
7. identify transactions subject to advance payment of VAT; and
8. discuss the invoicing requirements of the value-added tax system.
 CONCEPT AND NATURE
It has been repeatedly emphasized that value-added tax is a
business tax which is indirect in character and is imposed on the
(a) seller of goods or properties,
(b) seller of services or lessor of properties, and
(c) importer of goods.
Chapter 3 focused on the various tax regulations, procedures,
and guidelines governing the sale of goods and properties subject to
value-added tax.
This chapter discusses the concepts and principles governing
the two remaining business activities subject to value-added tax,
namely, the sale of services or lease of properties and the
importation of goods.
 SALE OF SERVICES AND USE OR LEASE OF
PROPERTIES SUBJECT TO VAT
(Sec. 108, NIRC, as amended)

The sale of services or lease or use of properties

may fall under three possible value-added tax
classifications as follows:
a. Subject to a 12% VAT
b. Subject to a 0% tax rate
c. VAT-exempt transaction
 Basic Tax Procedure
In handling sales of services or lease of properties
relative to value-added tax, the first basic procedure that
should be undertaken is the proper classification of a
business activity, whether it is subject to
(a) 12% tax rate,
(b) 0% VAT rate, or
(c) exempted from value-added tax.
 Definition
The term "sale or exchange of services"
means the performance of all kinds of services in
the Philippines for others for a fee, remuneration,
or consideration, whether in kind or in cash (Sec.
4.108-2, Rev. Reg. 16-2005, as amended).
 Requisites for the Sale of Services or Lease of
Properties to be Subject to VAT
For the sale or exchange of services or lease of
properties to be subject to value-added tax, following
requisites must be satisfied:
1. The services or the lease of properties must be in the
Philippines.
2. There must be payment in cash or its equivalent.
3. The payor is directly or indirectly benefited.
 Formula to Compute VAT Liability in the Sale of
Services or Lease of Properties
The determination of value-added tax liability
usually involves a series of mathematical computations.
In the sale of services or lease of properties, the amount
of VAT liability is computed as follows:

Output tax xxxxx

Less: Creditable input tax xxxxx
VAT payable (tax credit) xxxxx
 OUTPUT TAX ON THE SALE OF SERVICES
OR LEASE OF PROPERTIES
(Sec. 9, Rev. Reg. 4-2007)
The first element in the computation of VAT
payable is the output value-added tax. In the sale of
services or lease of properties, the output tax is
computed as follows:

Output tax = Tax rate x Tax base

 OUTPUT TAX
Output tax is the value-added tax imposed on the sale
of services or lease of properties. It is also imposed on the
sale of goods or properties and importation of goods. A
person engaged in the sale of services or lease of properties
has to pay output tax subject to the rates provided by law.
In the determination of output tax arising from the sale
of services or lease of properties, there are two basic
elements involved as follows:
a. Tax rate
b. Tax base
TAX RATES ON THE SALE OF SERVICES OR LEASE OF
PROPERTIES
(Sec. 108 (A), NIRC, as amended)
In the computation of both the output tax and the
creditable input tax on the sale of services or lease of
properties, the two following tax rates are applied:
1. Twelve percent (12%)
2. Zero percent (0%)
TAX BASE ON SALE OF SERVICES OR LEASE OF PROPERTIES
(Sec. 11, Rev. Reg. 4-2007, as amended)

The tax base in the sale of services or lease of

properties is the gross receipts. In the sale of goods or
properties, the tax base to compute value-added tax is
the gross selling price. These two technical terms are
not the same.
Definition
The term "gross receipts" refers to the total amount
of money or its equivalent representing the contract price,
compensation, service fee, rental, or royalty, including the
amount charged for materials supplied with the services
and deposits applied as payment for services rendered,
and advance payments actually or constructively received
during the taxable period, excluding value-added tax,
except those amounts earmarked for payment to an
unrelated third party or received as reimbursement for
advance payment on behalf of another, which does not
redound to the benefit of the payor.
 The term "unrelated party" does not include a
taxpayer's employees, partners, affiliates (parent,
subsidiary, and other related companies), relatives by
consanguinity or affinity within the fourth civil degree, and
trust funds where the taxpayer is the trustor, trustee, or
beneficiary, even if covered by an agreement to the
contrary.
Unless otherwise stated, the term "gross receipts"
refers to the amount of money or its equivalent actually or
constructively received by the seller of services or lessor of
properties, excluding amounts received by the seller of
services or lessor of property expressly excluded by law as
part of the gross receipts.
 Exclusion from Gross Receipts
Amounts received by the seller of services or lessor of
property on the items listed below, and included as part of the
total payments of the payor, shall be excluded from the gross
receipts subject to value-added tax:
1. Value-added tax
2. Amount received but earmarked for payment to unrelated
third party
3. Amount received as reimbursement for advance payment on
behalf of another
4. Amount received which does not redound to the benefit of
the payor
 Items Included as Part of the Gross Receipts
Gross receipts include, among others, the following
payments to the service provider wherein the payor is
benefited:
1. Contract price
2. Compensation
3. Service fee
4. Rental or royalty fee
5. Materials supplied for the services
6. Deposit for services
7. Advance payment on the contract for services

Regardless of the term used on the amount

received, the value-added tax is based on the gross
receipts of the sale of services or lease of property
actually or constructively received, exclusive of value-
added tax and other payments where the payor is not
benefited.
 ILLUSTRATION 4.1
Jenny, a VAT-registered service provider, is using the
accrual system of accounting. The following data are
presented for April 2019 (exclusive of VAT):

Services paid in cash P700,000

Services on account 400,000
Total services provided during the period P1,100,000
Query: What is the tax base to compute the output tax?
Answer: The tax base in the vatable service activity is the
gross receipts during the period. The total services provided
by the business amounted to P1,100,000. This amount is the
gross income generated by the business. However, services
worth P400,000 are made on account. This amount does
not represent receipt of cash during April 2019; hence, it is
not included in the computation of the gross receipts. The
tax base, therefore, in this case is P700,000, which will be
used to determine the output tax.
In case the service activity is subject to 12% tax rate,
then the output tax is equal to P84,000 (P700,000 × 12%).
 ILLUSTRATION 4.3
Yvone, a VAT-registered contractor, had a contract
with AA Manufacturing Company for the construction of
its plant facilities at P6,000,000, exclusive of VAT. In June
and July 2019, Yvone billed and collected P2,500,000 and
P3,000,000, respectively, from AA Company.

Required: Determine the gross receipts (tax base) and the

corresponding output tax of Yvone for June and July 2019.
Answer: The gross receipts and the output tax are computed as
follows:
For the month of June
Gross receipts P2,500,000
Multiply by - Tax rate 12%
Output VAT P300,000

For the month of July

Gross receipts P3,000,000
Multiply by - Tax rate 12%
Output VAT P360,000
 CONSTRUCTIVE RECEIPT OF CASH
(Sec. 11, Rev. Reg. 4-2007, as amended)

Gross receipts in the sale of services or lease of

properties represent the total amount of cash received from
the payor representing the payment of services actually or
constructively received exclusive of value-added tax.
The term "actually received" signifies that the cash items or
their equivalent as payment for the services are already in
the hands or within the full control of the service provider.
"Constructive receipt" means that the money consideration
or its equivalent is placed at the control of the person who
rendered the service without restrictions by the payor.
 Instances of Constructive Receipts
The following instances indicate that there is a
constructive receipt of cash:
1. Deposits in banks which are made available to the seller
of services without restrictions
2. Issuance by the debtor of a notice to offset any debt or
obligation and acceptance thereof by the seller as
payment for services rendered
3. Transfer of the amounts retained by the payor to the
account of the contractor
CREDITABLE INPUT TAX ON THE SALE OF SERVICES OR LEASE OF PROPERTIES
(Sec. 4.110-1, Rev. Reg. 16-2005, as amended)

Input tax refers to value-added tax due on or paid by

VAT-registered persons engaged in he sale of services or
lease of properties in the ordinary course of his/her trade or
business. The input tax can either be deductible or non-
deductible from the output tax arising from the sale of
services or lease of properties.
VAT PAYABLE FORMULA ON THE SALE OF SERVICES OR
LEASE OF PROPERTIES WITH ITEMIZED COMPONENTS

The computation of VAT payable on the sale

of services or lease of properties poses some
degree of complexity. To facilitate ease in the
computation, the formula shown below may be of
assistance.
Output tax
Output tax at 12% - amounts received/advanced:
For contract price from private entities xxxxx
For contract price from the government xxxxx
As compensation for labor xxxxx
As service fee xxxxx
As payment for rental or royalty xxxxx
For materials supplied xxxxx
As deposit for services xxxxx
As advance payment xxxxx
As reimbursement of advances xxxxx xxxxx
Output tax at 0% amounts received/advanced:
From zero-rated services xxxxx
From effectively zero-rated services xxxxx xxxxx
Total output tax xxxxx
Less: Creditable input taxes - amounts paid:
For local supplies of materials xxxxx
For importation xxxxx
Standard input tax on services to the government xxxxx
Input tax on capital goods xxxxx
Excess input tax carried forward xxxxx
Input tax on the ratable portion of vatable services xxxxx
Input tax on sub-contracting of labor xxxxx
Input tax on electricity and telephone payment xxxxx
Input tax on other payments with
creditable input taxes xxxxx xxxxx
VAT payable before final withholding tax xxxxx
Less: Final withholding tax of the government xxxxx
VAT payable (tax credit) xxxxx
 SALE OF SERVICES AND USE OR LEASE OF
PROPERTIES SUBJECT TO 12% VALUE-ADDED TAX
(Sec. 4.108-2, Rev. Reg. 16-2005, as amended)

Another important consideration in the

determination of VAT payable on the sale of services or
lease of properties is to properly identify the service
activities subject to 12% VAT rate.
The following persons or entities performing or
rendering service or leasing properties in the Philippines
for a fee shall be subject to 12% value-added tax:
1. Construction and service contractors
2. Stock, real estate, commercial, customs, and immigration
brokers
3. Lessor of property, whether personal or real
4. Persons engaged in warehousing services
5. Lessors or distributors of cinematographic films
6. Persons engaged in milling, processing, manufacturing, or
repacking goods for others
7. Proprietors, operators, or keepers of hotels, motels, rest
houses, pension houses, inns, resorts, theaters, and movie
houses
8. Proprietors or operators of restaurants, refreshment parlors,
9. Dealers in securities
10. Lending investors
11. Transportation contractors on their transport of goods or
cargoes, including persons who transport goods or cargoes for hire
and other domestic common carriers by land relative to their
transport of goods or cargoes
12. Common carriers by air and sea relative to their transport of
passengers, goods,
or cargoes from one place in the Philippines to another place in the
Philippines
13. Sales of electricity by generation, transmission, and/or
distribution companies
14. Franchise grantees of electric utilities, telephone and
telegraph, radio and/or television broadcasting, and all other
franchise grantees, except franchise grantees of radio and/or
television broadcasting companies whose annual gross receipts
of the preceding year do not exceed P10,000,000, and
franchise grantees of gas and water utilities
15. Non-life insurance companies (except their crop
insurances), including surety, fidelity, indemnity, and bonding
companies
16. Similar services regardless of whether or not the
performance thereof calls for the exercise of physical or mental
faculties
 Requisites for the Sale of Services or Lease of
Properties to Be Subject to 12% Output VAT
The sale of services or lease of properties is subject
to 12% value-added tax provided the following requisites
are satisfied:
1. The sale of services is rendered in the Philippines.
2. The properties used or leased are located within the
Philippines irrespective of the place where the contract
or licensing agreement was executed.
3. The sale of services does not arise from an employer-
employee relationship.
4. The sale of services and the use of properties are for
valuable consideration.
5. The services are not among those subject to zero
percent, exempted from value-added tax, or subject to
percentage tax
6. The gross receipts are more than the threshold of
P3,000,000
 ZERO-RATED SALE OF SERVICES
(Sec. 4.108-5, Rev. Reg. 16-2005, as amended)
A zero-rated sale of services by a VAT-registered
person is a taxable transaction for VAT purposes but
shall not result in any output tax. In other words, the
zero-rated sales are vatable sales subject to zero percent
rate. However, the input tax on the purchases of goods,
properties, or services related to such zero-rated sale
shall be available as a tax refund or claimed for the
issuance of tax credit certificate.
The following services performed in the Philippines by a VAT-
registered person shall be subject to 0% VAT rate:
1. Processing, manufacturing, or repacking goods for other
persons doing business outside the Philippines, which goods are
subsequently exported, where the services are paid for in
acceptable foreign currency and accounted for in accordance with
the rules and regulations of the Bangko Sentral ng Pilipinas (BSP).
2. Services other than processing, manufacturing, or repacking
rendered to a person engaged in business conducted outside the
Philippines or to a non-resident person not engaged in business
who is outside the Philippines when the services are performed,
the consideration for which is paid for in acceptable foreign
currency and accounted for in accordance with the rules and
regulations of the BSP
3. Services rendered to persons or entities whose exemption
under special laws or international agreements to which the
Philippines is a signatory effectively subjects the supply of
such services to a 0% tax rate
4. Services rendered to persons engaged in international
shipping or air transport operations, including leases of
property for use thereof, provided, however, that the
services referred to herein shall be exclusively for
international shipping or air transport operations.
5. Services performed by subcontractors and/or contractors
in processing, converting, or manufacturing goods for an
enterprise whose export sales exceed 70% of the total
annual production
6. Transport of passengers and cargo by domestic air or sea
carriers from the Philippines to a foreign country. Gross
receipts of international air carriers or shipping carriers
doing business in the Philippines derived from the
transport of passengers and cargo from the Philippines to
another country shall be exempt from VAT; however, they
are still liable to a percentage tax of 3% based on gross
receipts derived from the transport of cargo from the
Philippines to another country.
7. Sale of power or fuel generated through renewable
sources of energy such as, but not limited to, biomass, solar,
wind, hydropower, geothermal and steam, ocean energy,
and other emerging sources using technologies such as fuel
cells and hydrogen fuels, provided, however, that zero-rating
shall apply strictly to the sale of power or fuel generated
through renewable sources of energy and shall not extend
to the sale of services related to the maintenance or
operation of plants generating said power.
 Services to Process, Manufacture, or Repack Goods
to Persons Doing Business Outside the Philippines
(Sec. 4.108-5 (b)(1), Rev. Reg. 16-2005, as amended)
The amount received from a person doing business
outside the Philippines for the services of processing,
manufacturing, or repacking goods where the goods, once
completely processed, manufactured, or repacked, are
subsequently exported, paid for in acceptable foreign
currency. and accounted in accordance with BSP rules and
regulation shall be subject to 0% value-added tax rate.
 The following requisites should be observed for a service
performed in the Philippines to be subject to a 0% tax rate:
a. The services shall be performed in the Philippines.
b. The services shall be related to processing, manufacturing, and
repacking of goods.
c. The person to whom the services are performed should be doing
business outside the Philippines.
d. The goods processed, manufactured, or repacked should be
subsequently exported by the person providing the services.
e. The services should be paid in acceptable foreign currency. f. The
gross receipts from services should be accounted for in accordance
with the rules and regulations of the BSP.
Services Other than Processing, Manufacturing, or
Repacking to Persons Outside the Philippines
(Sec. 4.108-5 (b)(2), Rev. Reg. 16-2005, as amended)

The services, other than processing, manufacturing,

or repacking of goods, to persons outside the Philippines
(non-resident), whether doing business or not, paid for in
acceptable foreign currency, and accounted for in
accordance with BSP rules and regulation shall be subject
to zero percent value-added tax rate.
 Under this particular zero-rated sale of services, the following
requisites should be satisfied:
a. Services should be performed in the Philippines.
b. Services are rendered to a non-resident person.
c. The consideration is paid in acceptable foreign currency.
d. The transaction is accounted for in accordance with BSP rules
and regulations.
The person to whom the services are performed may or may
not be engaged in business or trade. In case the person is engaged
in business, the business should conduct its operation outside the
Philippines; otherwise, it will be subject to 12% VAT. However, in
the event the person is not engaged in business or trade, he/she
should be outside the Philippines when the services are performed.
 Services to Persons Exempted under Special Laws to
which the Philippines is a Signatory
(Sec. 4.108-5 (b)(3), Rev. Reg. 16-2005, as amended)
The services performed for the following persons or entities
exempted under special laws to which the Philippines is a signatory
shall be subject to zero percent value-added tax rate:
1. Services to enterprises duly registered and accredited with the
Subic Bay Metropolitan Authority (SMBA) pursuant to R.A. No. 7227
2. Services to enterprises duly registered and accredited with the
Philippine Economic Zone Authority (PEZA)
3. Services to the Asian Development Bank (ADB)
4. Services to the International Rice Research Institute (IRRI)
 Under this type of services subject to 0% VAT, the
following guidelines should be considered:
a. The services must be performed in the Philippines.
b. The persons to whom the services are performed need
not be located outside the Philippines.
c. The entities must be one of those expressly allowed by
law.
d. The payment to the seller of services or lessor of
property need not be in acceptable foreign currency.
 Services Rendered to Persons Engaged in the
International Common Carrier Business
(Sec. 4.108-5 (b)(4), Rev. Reg. 16-2005, as amended)
Amounts received from services rendered to persons
engaged in the international common carrier business that
transports passengers, goods, or cargoes from the
Philippines to another place abroad shall be subject to zero
percent value-added tax.
The following guidelines must be observed in services
rendered to persons engaged in the international carrier
business:
a. The services are rendered in the Philippines.
b. The international air carrier or international shipper
must be transporting passengers, goods, or cargoes
originating from the Philippines to another place outside
the Philippines.
c. The amount received representing payment for the
services does need not be in acceptable foreign currency.
However, services rendered to domestic carriers by air
or sea that transport passengers, goods, or cargoes from
one place in the Philippines to another place in the
Philippines shall be subject to 12% value-added tax rate.
Services Performed by a Contractor/Sub-Contractor
to Process, Convert, or Manufacture Goods
(Sec. 4.108-5 (b)(5), Rev. Reg. 16-2005, as amended)
The services performed by a contractor or sub-
contractor to process, convert, or manufacture goods for
another enterprise whose export sales exceed 70% of its
total production shall be subject to a 0% tax rate. In
handling this particular zero-rated service, the following
guidelines must be observed:
a. The services in the form of processing, converting, or
manufacturing are performed within the Philippines.
b. The enterprise to which the services are rendered is
located in the Philippines and does not need to be a
foreign company.
c. The enterprise contracting the services must have
export sales of more than 70% of its total production.
d. The services may not necessarily be paid in acceptable
foreign currency.
Transport of Passengers and Cargoes by Domestic Carriers
(Sec. 4.108-5 (b)(6), Rev. Reg. 16-2005, as amended)

Gross receipts of domestic or Philippine carriers

transporting passengers and cargoes from the Philippines
to a foreign country are subject to 0% output tax. In
contrast, the transport of passengers by international
carriers is exempted from value-added tax.
The tabular presentation about domestic and
international carriers transporting passengers and cargoes
by air or sea is comprehensively presented as follows:
Types of Common Carriers (Air Items Business Tax Input Tax Treatment
and Sea) Transported Treatment

International carrier Passengers VAT-exempt Not applicable

Percentage tax- No input tax on percentage

exempt tax
Cargoes VAT-exempt Not applicable

Percentage tax- No input tax on percentage

Taxable tax
Philippine carrier Passengers
-abroad VAT- zero rate Creditable
-within VAT-12% Creditable
Cargoes
-abroad VAT- zero rate Creditable
-within VAT-12% Creditable
 To have the total perspective on the services of
transporting passengers and cargoes, the gross receipts
of domestic carriers by land only are governed by the
following principles:

Items Transported Applicable Business Tax

Passengers 3% percentage tax

Cargoes and goods 12% value-added tax
 Sale of Power or Fuel Generated through Renewable
Sources of Energy
(Sec. 4.108-5 (b)(7), Rev. Reg. 16-2005, as amended)

Gross receipts derived from the sale of power or fuel

generated through renewable sources of energy such as
biomass, solar, wind, hydropower, geothermal, or ocean
energy are subject to zero percent value-added tax.
However, the sale of electricity by generation,
transmission, and distribution companies shall be subject
to 12% value-added tax based on gross receipts.
 EFFECTIVELY ZERO-RATED SALES OF SERVICES
(Sec. 4.108-6, Rev. Reg. 16-2005, as amended)

The term "effectively zero-rated sales of services"

shall refer to the local sale of services by a VAT-registered
person to a person or entity who was granted indirect tax
exemption under special laws or international agreements.
 Under Revenue Regulations 16-2005, as amended,
effectively zero-rated sales of services shall be limited to
local sales to persons or entities that enjoy exemption
from indirect tax as follows:
a. Services rendered to persons or entities whose
exemption under special laws or international agreements
to which the government is a signatory
b. Services rendered to persons engaged in international
shipping or air transport
c. Services performed by persons to entities whose export
sales exceed 70% of its total production
 VAT-EXEMPT SALES OF SERVICES OR USE OR
LEASE OF PROPERTIES
(Sec. 109, NIRC, as amended)
The following sales of services or lease of properties are
exempted from value-added tax:
1. Services in the ordinary course of trade or business whose
gross annual receipts during the year do not exceed P3,000,000
2. Services subject to percentage tax
3. Services by agricultural contract growers and milling for others
of palay into rice, corn into grits, and sugar cane into raw sugar
4. Services provided by medical, dental, veterinary, and hospitals
except those rendered by professionals
5. Services provided by private and government educational
institutions duly accredited by the Commission on Higher
Education (CHED), Department of Education (DepEd), or
Technical Education and Skills Development Authority (TESDA)
6. Services rendered by individuals where there is an
employee-employer relationship
7. Services rendered by regional or area headquarters
established in the Philippines by multinational corporations
which act as supervisory, communications, and coordinating
centers for their affiliates, subsidiaries, or branches in the
Asia-Pacific Region and do not earn or derive income from the
Philippines
8. Lease of residential units with a monthly rental per unit
not exceeding P15,000. regardless of the amount of the
aggregate rental received by the lessor during the year
9. Lease of residential units with a monthly rental per unit
that exceeds P15,000, but the aggregate of such rentals of
the lessor during the year do not exceed P3,000,000
10. Transport of passengers by international carriers
 RULES ON SELECTED SERVICES SUBJECT TO VAT
(Sec. 4.108-3, Rev. Reg. 16-2005, as amended)
The following specific types of service activities are subject to 12% value-added tax:
1. Lease of property
2. Warehousing services
3. Milling
4. Services of common carriers not subject to percentage tax
5. Sale of electricity
6. Services of dealers in securities and lending investors
7. Services of franchise grantees
8. Services of non-life insurance companies
9. Services of pre-need companies
10. Services of health maintenance organizations
 Lease of Property
(Sec. 4.108-3(a), Rev. Reg. 16-2005, as amended)
Normally, in the lease of property, the lessee makes an
advance payment in a lease contract.
1. The advance payment by the lessee may be any of the
following:
a. A loan to the lessor from the lessee
b. An option money for the property
c. A security deposit to insure the faithful performance of certain
obligations of the lessee to the lessor
d. Prepaid rental
 Specific Guidelines on the Lease of Property
The following guidelines on the lease of property
subject to value-added tax shall be observed:
1. The advance payment of the lessee is not subject to value-
added tax if the amount is actually:
a. a loan to the lessor;
b. an option money for the property; or
c. a security deposit for the faithful performance of certain
obligations of the lessee.
2. Security deposit, when applied to rental, shall be subject
to value-added tax at the time of its application.
3. Advance payment that constitutes a pre-paid rental is
taxable to the lessor in the month received, irrespective
of the accounting method employed by the lessor.
4. Rental and/or royalties payable to non-resident
foreign corporations or owners for the sale of services
and use or lease of properties in the Philippines is
subject to VAT based on the contract price agreed upon
by the licensor and the licensee.
5. The lessee shall be responsible for the payment of
value-added tax on such rentals and/ or royalties on
behalf of the non-resident foreign corporation or owner.
 Warehousing Services
(Sec. 4.108-3(b), Rev. Reg. 16-2005, as amended)
Warehousing services means the rendering of personal
services of a warehouseman for others. The services or activities
of a warehouseman subject to value-added tax include the
following, among others:
1. Engaging in the business of receiving and storing goods of
others for compensation or profit
2. Receiving goods and merchandise to be stored in his/her
warehouse for hire
3. Keeping and storing goods for others as a business and for use
 Miller
(Sec. 4.108-3(c), Rev. Reg. 16-2005, as amended)

A miller is a person engaged in milling for others and is

subject to value-added tax on the sale of services, except
milling of palay into rice, corn into corn grits, and sugarcane
into raw sugar.
Specific Guidelines Applicable to Millers
In determining the value-added tax of a miller, the
following guidelines shall be observed:
1. The value-added tax shall be based on the gross
receipts for the month or quarter if the miller is paid in
cash for his/her services.
2. The value-added tax shall be computed based on the
actual market value if the miller is paid by the milled
product instead of cash.
3. Sales by the owner or the miller of his/her share of
the milled products (except rice, corn grits, or raw
sugar) shall be subject to value-added tax.
 Common Carriers Not Subject to Percentage Tax
(Sec. 4.108-3(d), Rev. Reg. 16-2005, as amended)
All receipts from the service, hiring, or operating lease of
transportation equipment not subject to percentage tax on domestic
common carriers and keepers of garages shall be subject to value-
added tax.
Therefore, the gross receipts of a domestic common carrier can
either be subject to the following:
a. Value-added tax
b. Percentage tax
The basic question to be resolved is:
What type of common carrier is subject to value-added tax or
percentage tax?
 Guidelines in Handling Gross Receipts from
Domestic Common Carriers
The following guidelines must be observed when
handling gross receipts from domestic common carriers:
1. Domestic common carriers by air and sea are subject to
12% value-added tax on their gross receipts from their
transport of passengers, goods, or cargoes from one place
in the Philippines to another place in the Philippines.
2. Common carriers by land with respect to their gross
receipts from the transport of passengers shall be subject
to percentage tax.
 Common carriers by land will include operators of
taxicabs, utility cars for rent or hire driven by the
lessees (rent-a-car companies), and tourist buses used
for the transport of passengers.
3. Common carriers by land with respect to their gross
receipts from the transport of goods or cargoes shall be
subject to value-added tax.
 The only type of domestic common carrier that is not
subject to value-added tax are those that transport passengers
by land.
Type of Domestic Carrier Items Being Kinds of Business
Transported Tax
Common carrier by air Passengers Value-added tax
Goods or cargoes Value-added tax
Common carrier by sea Passengers Value-added tax
Goods or cargoes Value-added tax
Common carrier by land Passengers Percentage tax
Goods or cargoes Value-added tax
 ILLUSTRATION 4.16
Izzy Transport Company is a common carrier bus company
transporting passengers and cargoes from Davao City to Cotabato City
and vice versa. In June 2020, the company's gross receipts amounted
to:
From transporting passengers P800,000
From transporting goods or cargoes 150,000
Required: Determine the amount of value-added tax liability.
Answer. The value-added tax payable of Izzy Transport Company is
computed as follows
Gross receipts on transporting goods or cargoes P150,000
Multiply by VAT rate 12%
VAT payable P18,000
 However, the gross receipts derived from
transporting passengers of P800,000 shall be
subject to 3% percentage tax (common carrier's
tax), which is equal to P24,000.
The total business tax of Izzy Transport
Company is computed as follows:
Value-added tax P18,000
Percentage tax 24,000
Total business tax P42,000
 Sale of Electricity
(Sec. 4.108-3(1), Rev. Reg. 16-2005, as amended)
Sale of electricity by generation, transmission, and distribution
companies shall be subject to 12% value-added tax based on their gross
receipts.
"Generation companies" refer to persons or entities authorized by the
Energy Regulatory Commission (ERC) to operate facilities used in the
generation of electricity.
"Transmission companies" refer to persons or entities that own and
convey electricity through the high voltage backbone system and/or
subtransmission assets (NPC or TRANSCO).
"Distribution companies" refer to persons or entities which operate a
distribution system in accordance with the provisions of R.A. No. 9136.
They shall include any distribution utility such as an electric cooperative
organized pursuant to Presidential Decree No. 269.
 Meaning of "Gross Receipts" on the
Sale of Electricity
The term "gross receipts" on the sale of electricity shall refer to
the following:
a. Total amount charged by generation companies for the sale of
electricity and related ancillary services
b. Total amount charged by transmission companies for of electricity
and related ancillary services
c. Total amount charged by distribution companies and electric
cooperatives for the distribution and supply of electricity and related
services.
The universal charge passed on and collected by distribution
companies and electric cooperatives shall be excluded form the
 Dealers in Securities and Lending Investors
(Sec. 4.108-3(g), Rev. Reg. 16-2005, as amended)
Dealers in securities and lending investors shall be subject to value-
added tax at the rate of 12% based on their gross receipts. The term "gross
receipts" refers to the gross selling price minus the cost of the securities
sold.
For dealers of securities and lending investors, the tax base (gross
receipts) is computed as follows:
Gross selling price xxxxx
Less: Acquisition cost of securities sold xxxxx
Balance xxxxx
Add: Other incidental income xxxxx
Gross receipts xxxxx
 "Dealer in securities" means a merchant of stock or
securities, whether an individual, partnership, or
corporation, with an established place of business, regularly
engaged in the purchase of securities and their resale to
customers, that is, one, who as a merchant, buys securities
and sells them to customers with a view to the gains and
profits that may be derived therefrom.
"Lending investor" includes all persons other than
banks, non-bank financial intermediaries, finance
companies, and other financial intermediaries not
performing quasi- banking functions who practice lending
money for themselves or others at interest.
 Services of Franchise Grantees
(Sec. 4.108-3(h), Rev. Reg. 16-2005, as amended)
The following rules may be observed in handling
services of franchise grantees relative to business taxes:
1. Franchise grantees of telephone, telegraph, telewriter
exchange, wireless, and other communication equipment
services and toll road operations shall be subject to 12%
value-added tax. However, amounts received from
overseas dispatches, messages, or conversations
originating from the Philippines are subject to
percentage tax.
2. Franchise grantees of radio and/or television
broadcasting companies whose annual gross receipts of
the preceding year do not exceed 10,000,000 shall not be
subject to value-added tax; instead, they are subject to
3% percentage tax and subject to the optional registration
under the VAT system.
3. Gross receipts of all other franchises, other than those
covered by Section 119 of the Tax Code, as amended,
regardless of how their franchises may have been granted
shall be subject to 12% value-added tax. This includes,
among others, the Philippine Amusement Gaming
Corporation (PAGCOR) and its licensees or franchisees.
 Services of Non-life Insurance Companies
(Sec. 4.108-3(1), Rev. Reg. 16-2005, as amended)

Non-life insurance companies are subject to value-

added tax of 12% based on their gross receipts. They are
not liable to the payment of the premium tax under Sec.
123 of the Tax Code, as amended. Gross receipts from
non-life insurance companies shall mean the total
premiums collected, whether paid in money, notes,
credits, or any substitutes for money.
For non-life insurance companies, the gross receipts
subject to 12% value-added tax computed as follows:
Non-life insurance premium xxxxx
Non-life reinsurance premium xxxxx
Insurance commission xxxxx
Reinsurance commission xxxxx
Total gross receipts subject to VAT xxxxx

The insurance and reinsurance commissions,

whether life or non-life, are subject to VAT.
 Value-added tax due from a foreign reinsurance company
is to be withheld by the local insurance company and remitted
to the BIR in accordance with applicable rules and regulation.
Non-life insurance companies including surety, fidelity,
indemnity, and bonding companies shall include all individuals;
partnerships; associations; or corporations, including
reinsurers defined in Sec. 280 of PD 612, otherwise known as
The Insurance Code of the Philippines; mutual benefit
associations; and government-owned or -controlled
corporations engaging in the business of property insurance as
distinguished from insurance on human lives, health, accident,
and insurance pertaining thereto or connected therewith
which shall be subject to percentage tax under Sec. 123 of the
 Services of Pre-Need Companies
(Sec. 4.108-30), Rev. Reg. 16-2005, as amended)

Pre-need companies are subject to 12% value-added tax

based on their gross receipts. The term "gross receipts" of pre-
need companies refers to the premiums or payments received from
the plan holders which serve as the compensation for the services
provided by pre-need companies.
Pre-need companies are corporations registered with the
Securities and Exchange Commission and authorized/licensed to
sell or offer for sale pre-need plans, whether a single plan or multi-
plan. They are engaged in business as sellers of services providing
services to plan holders by managing the funds provided by them
and making payments at the time of need or maturity of the
 Services of Health Maintenance Organizations
(Sec. 4.108-30), Rev. Reg. 16-2005, as amended)

Health maintenance organizations (HMOs) are subject

to 12% value-added tax based on their gross receipts.
"Gross receipts" of HMOs shall be the total amount of
money or its equivalent representing the service fee
actually or constructively received during the taxable period
for the services performed or to be performed for another
person, excluding the value- added tax. The compensation
for their services representing their service fee is presumed
to be the total amount received as enrolment fees from
their members, plus other charges received.
 Health maintenance organizations are entities
organized in accordance with the provisions of the
Corporation Code of the Philippines and licensed by the
appropriate government agency which arranges for the
coverage or designated managed care services needed
by plan holders/ members for fixed prepaid
membership fees and for a specified period of time.
VALUE-ADDED TAX ON THE IMPORTATION OF GOODS
(Sec. 107, NIRC, as amended)
There shall be a value-added tax equivalent to 12%
levied, assessed, and collected on every importation of
goods based on the total value used by the Bureau of
Customs (BOC) in determining tariff and custom duties,
plus custom duties, excise tax, if any, and other charges.
Therefore, value-added tax is imposed on goods
brought into the Philippines, whether for use in business
or not. However, no value-added tax shall be collected on
the importation of goods which are specifically exempted
under Section 109 (1) of the Tax Code, as amended.
 Tax Rates and Tax Base
(Sec. 107 (A), NIRC, as amended)
The tax rate on the importation of goods is 12% based on
either
1. Dutiable value (total value) of importation
2. Landed costs
Usually, the tax base on the importation of goods is the dutiable
value plus all charges prior to the release of goods from the BOC.
Query: When do we use the dutiable value (total value) or landed
cost as the tax base on importation?
Answer: The following tax guidelines may be of assistance in
determining the proper tax base on importation:
1. Use dutiable (total) value as the tax base on
importation if the BOC uses the total value in determining
tariff and custom duties.
2. Use landed cost as the tax base on importation if
custom duties are determined on the basis of the
quantity or volume of goods.

"Landed cost" means the invoice price, freight,

insurance, custom duties, excise tax, if any, and other
charges prior to the release of goods from customs
custody.
Other Charges Prior to the Release of Goods from
BOC Custody
Other charges will include the following:
1. Freight
2. Insurance
3. Excise tax
4. Commission
5. Processing fee
6. Postage and stamps
7. Interest and bank charges
8. Wharfage and arrastre charges
9. Customs duties and brokerage fee
 FORMULA TO COMPUTE VAT ON
IMPORTATION
1. If the tax base is the total value:
Dutiable value of importation xxxxx
Add: Custom duties xxxxx
Excise tax, if any xxxxx
Other charges prior to the removal from custody of the BOC xxxxx xxxxx
Tax base on importation xxxxx
Multiply by - Tax rate 12%
Output VAT xxxxx
2. If the tax base is the landed cost:

Invoice amount of importation xxxxx

Add: Custom duties xxxxx
Excise tax, if any xxxxx
Other charges prior to the removal from custody
of the BOC xxxxx xxxxx
Landed costs - Tax base on importation xxxxx
Multiply by-Tax rate 12%
Output VAT xxxxx
 ILLUSTRATION 4.18
Princess imported Christmas decor articles from
Singapore in December 2020 for personal use, which
are subject to customs duty based on volume. The
invoice cost of importation amounted to P500,000.
Prior to the release of goods from customs' custody,
Princess paid the following: customs duty, P8,000;
freight, P6,000; and processing fee, P5,000.
Required: Compute the output value-added tax liability
of Princess on her importation
Answer:The output VAT is computed as follows:
Invoice costs P500,000
Add: Customs duties P8,000
Freight 6,000
Processing fee 5,000 19,000
Landed costs-Tax base P519,000
Multiply by - Tax rate 12%
Output VAT liability P62,280
 The value-added tax on importation shall be paid
by the importer prior to the release of such goods from
customs' custody.
"Importer" refers to any person who brings goods into
the Philippines, whether or not made in the course of
his/her trade or business. It includes non- exempt
persons or entities who acquire tax-free imported
goods from exempt persons, entities, or agencies.
 SALE, TRANSFER, OR EXCHANGE OF IMPORTED GOODS BY TAX-EXEMPT PERSONS
(Section 4.107-1(c), Rev. Reg. 16-2005, as)
amended

In the case of tax-free importation of goods into the

Philippines by persons, entities, or agencies exempt from tax where
such goods are subsequently sold, transferred, or exchanged in the
Philippines to non-exempt persons or entities, the purchaser,
transferees, or recipients shall be considered the importer thereof,
who shall be liable for any internal revenue tax on such importation.
The tax due on such importation shall constitute a lien on the goods
superior to all charges or liens on the goods, irrespective of the
possessor thereof (Sec. 107 (B), NIRC as amended).
 In other words, in the case of goods imported into
the Philippines by VAT-exempt persons which are
subsequently sold or transferred in the Philippines to
non-exempt persons, the latter shall be considered the
importer and shall be liable for the value-added tax on
such importation.
 ILLUSTRATION 4.19
Hyzel Processing Company, a tax-exempt entity,
imported several equipment from Australia in August 2015
to be used for operating activities amounting to
P2,500,000. Hyzel Processing paid freight amounting to
P60,000 but did not pay the value-added tax on its
importation. However, Hyzel Processing sold the
equipment to Yvone Manufacturing Company, a non-
exempt business firm, after the removal of the equipment
from customs custody.
Required: Determine if the importation is subject to value-
added tax.
Answer. The importation of Hyzel Processing Company is not subject
to value-added tax on importation since the company is classified as
tax-exempt.
However, the sale of tax-exempt goods on importation by Hyzel
Processing Company to Yvone Manufacturing Company is subject to
output value-added tax; however, the latter shall be held liable.
The output VAT on importation of Yvone Manufacturing Company is
computed as follows:
Invoice costs P2,500,000
Add: Freight 60,000
Landed costs P2,560,000
Multiply by - Tax rate 12%
Output VAT liability P307,200
 IMPORTATION OF PETROLEUM AND PETROLEUM
PRODUCTS
(Sec. 3, Rev. Reg. 2-2012, as amended)

All petroleum and petroleum products imported

and/or brought directly from abroad to the Philippines,
including those coming through the Freeport and
Economic zones, shall be subject to 12% value-added tax
to be paid by the importer in addition to the excise tax
imposed thereof.
Basic Guidelines in the Subsequent Sale of Petroleum or
Petroleum Products
The subsequent sale, delivery, or exportation of petroleum
or petroleum products shall be handled by observing the
following guidelines:
1. The subsequent sale or transfer of petroleum or petroleum
products shall be subject to a 0% tax rate under the following
instances:
a. The petroleum or petroleum products are subsequently
exported.
b. The petroleum or petroleum products have been sold,
delivered, or transferred to registered enterprises enjoying tax
c. The petroleum or petroleum products have been sold
or transferred to persons engaged in international
shipping or international air transport operation.
2. The subsequent sale or delivery of imported petroleum
or petroleum products to persons not enjoying tax
privileges, whether within or outside the Freeport or
Economic zones, shall be subject to 12% value-added tax.
The input tax applicable to this kind of sale or transfer
shall be deductible from the output value-added tax.
 ADVANCE PAYMENT OF VALUE-ADDED TAX
(Sec. 4.114-1 (B), Rev. Reg. 16-2005, as amended)
The following are subject to the advance payment
of value-added tax:
1. Sale of refined sugar
2. Sale of flour
3. Transport of naturally grown and planted timber
products
4. Sale of jewelry, gold, and other metallic minerals
 Sale of Refined Sugar
(Sec. 4.114-1 (B) 1, Rev. Reg. 16-2005, as amended)
An advance payment of VAT is required for the sale of refined
sugar, and it must be made by the owner or seller to the Bureau of
Internal Revenue (BIR) through an Authorized Agent Bank (AAB),
Revenue Collection Officer (RCO), or designated city/municipal
treasurer. Refined sugar cannot be withdrawn from a sugar refinery or
mill without this advance VAT payment and providing proof of
payment. The VAT amount is calculated at a rate of 12% on the
applicable base price per bag of refined sugar produced. The base
price for this calculation may be adjusted by the Commissioner of the
BIR in consultation with the Chairman of the Sugar Regulatory
Administration when necessary. Cooperative-owned refined sugar may
be exempted under certain conditions, with required documentation.
 Sale of Flour
(Sec. 4.114-1 (B) 2, Rev. Reg. 16-2005, as amended)
The following transactions shall be subject to
advance payment of 12% value-added tax:
1. Sales of flour milled from imported wheat - The value-
added tax shall be paid prior to the release of the wheat,
which is imported and declared for flour milling from the
custody of the BOC.
2. Purchases by flour millers of imported wheat from
traders - The advance value-added tax shall be paid by the
flour miller prior to delivery.
 The amount of advance value-added tax shall be determined by
applying 12% VAT on the tax base. Considering that in the course of the
milling process, not all wheat is turned into flour, the tax base shall be as
follows:

Invoice value at the current exchange rate on the date of payment xxxxx
Add: Estimated customs duties and other charges, except advance VAT xxxxx
First total xxxxx
Add: 5% of first total xxxxx
Second total xxxxx
Multiply by Tax rate xxxxx
Tax base for advance VAT xxxxx
 Transport of Naturally Grown and Planted Timber Products
(Rev. Reg. 13-3007, as amended)

Owners and/or sellers of naturally grown and planted timber

products, whether natural or juridical, who are holders of permits
issued by or agreements entered into with the Department of
Environment and Natural Resources (DENR), are liable to pay the
advance value-added tax on naturally grown and planted timber
products harvested prior to their transport for purposes of
consumating a sale.
Naturally grown and planted timber products harvested from
industrial tree plantations and private lands covered by existing
land titles and approved land applications are also subject to
Sale of Jewelry, Gold, and Other Metallic Minerals
(Rev. Reg. 5-2013, as amended)
Sellers of jewelry, gold, and other metallic minerals are
required to pay in advance the 12% value-added tax based on the
gross selling price through the assigned Revenue Collection
Officer (RCO) of the Revenue District Office (RDO) having
jurisdiction over the place where the subject transaction occurs,
regardless of whether or not said sellers are duly registered with
the BIR. The advance payments shall be credited against the
actual value-added tax for the taxable period for which such
advance payments were remitted to the BIR.
 INVOICING REQUIREMENTS
(Sec. 4.113-1, Rev. Reg. 16-2005, as amended)
A VAT-registered person shall issue the following:
1. A VAT invoice for every sale, barter, or exchange of goods or
properties
2. A VAT official receipt for every lease of goods or properties
and every sale, barter, or exchange of services
Only VAT-registered persons are required to print their TIN
followed by the word "VAT“ in their invoice or official receipts.
The said documents shall be considered VAT invoice or VAT
official receipt.
 The following information shall be indicated in a VAT
invoice or VAT official receipt:

1. A statement that the seller is a VAT-registered person, along

with his/her Taxpayer's Identification Number (TIN);
2. The total amount which the purchaser pays or is obligated to
pay to the seller, with the indication that such amount includes
the value-added tax, provided the following conditions:
a. The amount of tax shall be shown as a separate item in the
invoice or receipt.
b. If the sale is VAT-exempt, the term "VAT-exempt sale" shall be
written or printed prominently on the invoice or receipt.
c. If the sale is subject to zero percent (0%) VAT, the term "zero-
rated sale" shall be written or printed prominently on the invoice
or receipt.
d. If the sale involves goods, properties, or services, some of
which are subject to and some of which are VAT zero-rated or
VAT-exempt, the invoice or receipt shall clearly indicate the
breakdown of the sale price between its taxable, tax-exempt, and
zero-rated components, and the calculation of the VAT on each
portion of the sale shall be shown on the invoice or receipt. The
seller has the option to issue separate invoices or receipts for the
taxable, tax-exempt, and zero-rated components of the sale.
d. If the sale involves goods, properties, or services, some of
which are subject to and some of which are VAT zero-rated or
VAT-exempt, the invoice or receipt shall clearly indicate the
breakdown of the sale price between its taxable, tax-exempt, and
zero-rated components, and the calculation of the VAT on each
portion of the sale shall be shown on the invoice or receipt. The
seller has the option to issue separate invoices or receipts for the
taxable, tax-exempt, and zero-rated components of the sale.
3. In the case of sales in the amount of P1,000 or more where
the sale or transfer is made to a VAT-registered person, the
name, business style, if any, address, and TIN of the purchaser,
customer, or client, shall be indicated in addition to the
information required.
 Invoicing and Recording Transactions Deemed Sale
(Sec. 4.113-2, Rev. Reg. 16-2005, as amended)
The following recording procedures must be observed on
transactions deemed sale:
1. In case of withdrawal of goods or properties from business for
personal use - A memorandum entry in the subsidiary sales journal
to record the withdrawal of goods for personal use shall be
required.
2. In case of distribution or transfer to shareholders in the profits,
distribution of goods to creditors in payment of debt, and
consignment of goods not sold within 60 days - An invoice shall be
prepared at the time of the occurrence of the transaction, which
shall include all the required information in issuing a VAT invoice.
3. In case of retirement from or cessation of a business
with respect to all goods on hand, whether capital
goods, stock-in-trade, supplies, or materials- An
inventory shall be prepared and submitted to the
Revenue District Office (RDO) who has jurisdiction over
the taxpayer's principal place of business not later than
30 days after retirement or cessation from business.
 ILLUSTRATION 4.21
Yvone, at the time of retirement, had 1,000 pieces of
merchandise that were deemed sold at the value of P60,000, with an
output tax of P7,200. After retirement, Yvone sold 5% pieces to
Nicanor for P38,000. In the contract of sale or invoice, Yvone should
state the sales invoice number wherein the output tax on "transactions
deemed sale" was imposed, and the corresponding tax paid on the
500 pieces is P3,600, which is included in the P38,000, or she should
indicate it separately as follows:
Gross selling price P34,400
VAT previously paid on "transactions deemed sale“ 3,600
Total P38,000
 Issuing Erroneous VAT Invoices or VAT Official Receipts
(Sec. 4.113-4, Rev. Reg. 16-2005, as amended)

1. If a non-VAT registered person issues an invoice or receipt

showing his/her TIN followed by the word "VAT," the erroneous
issuance shall result in the following:
a. The non-VAT registered person shall be liable for the
percentage taxes applicable to his/her transactions.
b. The non-VAT registered person shall be liable for VAT due on the
transactions without the benefit of any input tax credit.
c. A 50% surcharge shall be imposed.
 Therefore, the non-VAT registered taxpayer issuing an
invoice under the value added tax system shall be liable to both
value-added tax and percentage tax.
2. If a VAT-registered person issues a VAT invoice or VAT official
receipt for a VAT. exempt transaction but fails to display the
words "VAT-exempt sale" prominently on the invoice or receipt,
the transaction shall be subject to value-added tax.
Unless otherwise stated, if a VAT-registered taxpayer
engaged in a VAT-exempt sale fails to indicate clearly in the
invoice that such is a VAT-exempt sale, he/she shall be liable to
12% output value-added tax. Input tax related to VAT-exempt
sales is considered creditable.
 ILLUSTRATION 4.22
The gross receipts of Angel in any twelve-month
period did not exceed P3,000,000. Hence she is not
subject to the value-added tax system; instead, she is
subject to 3% percentage tax on her gross receipts.
In April 2020, Angel purchased goods amounting to
P150,000, exclusive of VAT, from a VAT-registered
taxpayer. Later, Angel sold all the goods to Princess, a
VAT-registered person, for P280,000 using a vatable
invoice. Subsequently, Princess sold the merchandise for
P420,000 to Hyzel.
Required: Determine the amount of value-added tax
liabilities of Angel and Princess.
Answer: Angel is a non-VAT registered taxpayer but
sold the goods and issued an invoice as if she were a
VAT-registered taxpayer. In effect, she is subject to 12%
value- added tax and 3% percentage tax, plus 50%
surcharge. In addition, she is not entitled to claim any
input tax on her purchases. The total tax liabilities of
Angel is computed as follows:
Value added tax liability:
Output tax (P280,000 12%) P33,600
Less: Input tax - not creditable 0
Value-added tax payable P33,600
Add: Surcharge (P33,600 × 50%) 16,800
Total VAT due P50,400
Percentage tax liability:
Gross receipts (P280,000 × 3%) P8,400
Total amount of tax liabilities (P50,400 + P8,400) P58,800

Princess, on the other hand, is a VAT-registered taxpayer who sold the goods
using a VAT invoice. Her tax liability on the sale is computed as follows:
Output tax (P420,000 x 12%) P50,400
Less: Input tax from Angel 33,600
VAT payable P16,800