Friday, October 31, 2014

VAT Exempt Transactions

Subject to the provisions of subsection (2) hereof, the following transactions shall be exempt from the value-added tax:

1.     "Sale or importation of:
Ø  agricultural and marine food products in their original state,
Ø  livestock and poultry of a kind generally used as, or yielding or producing foods for human consumption; and breeding stock and genetic materials therefor.

"Products classified under this paragraph (such as meat, fruits and vegetables) shall be considered in their original state even if they have undergone the simple processes of preparation or preservation for the market, such as freezing, drying, salting, broiling, roasting, smoking or stripping. Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt, and copra shall be considered in their original state;

Examples of Agricultural & Marine Food Products @ their original state
Polished/husked rice
Corn grits
Crustaceans such as:
Raw cane sugar & molasses
Ordinary salt

§ Livestock or poultry does not include fighting cocks, race horses, zoo animals and other animals generally considered as pets

2.     "Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock and poultry feeds, including ingredients, whether locally produced or imported, used in the manufacture of finished feeds.
(except specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals and other animals generally considered as pets).
Ø  Note:  Importation of raw materials are taxable.  i.e.; importation of diatomaceous earth which is used for the formulation fertilizers are subject to VAT.

3.     "Importation of personal and household effects belonging to the residents of the Philippines returning from abroad and nonresident citizens coming to resettle in the Philippines: Provided, That such goods are exempt from customs duties under the Tariff and Customs Code of the Philippines;

4.     "Importation of professional instruments and implements, wearing apparel, domestic animals, and personal household effects.
Any vehicle, vessel, aircraft, machinery, other goods for use in the manufacture and merchandise of any kind in commercial quantity belonging to persons coming to settle in the Philippines, for their own use and not for sale, barter or exchange, accompanying such persons, or arriving within ninety (90) days before or after their arrival, upon the production of evidence satisfactory to the Commissioner, that such persons are actually coming to settle in the Philippines and that the change of residence is bona fide;

5.     "Services subject to percentage tax under Title V;
6.     "Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar cane into raw sugar;
Ø  Agricultural contract growers refer to those persons producing for others’ poultry, livestock or other agricultural and marine food products in their original state.
Ø  i.e.; a contract for a package of services of receiving eggs from breeder farm, sorting, fumigating, setting, hatching, sexing of day-old broilers, sorting and delivering them to other contract grower.

7.     "Medical, dental, hospital and veterinary services except those rendered by professionals;
Ø  Laboratory services are exempted.  If the hospital or clinic operates a pharmacy or drugstore, the sale of drugs and medicines are subject to VAT.
Ø  Hospital bills constitute medical services.  The sales made by the drugstore to the in-patients which are included in the hospital bills are part of medical bills (not subject to vat).
Ø  The sale of the drug store to the out-patients are taxable because they are NOT PART of medical services of the hospital.

Professional Practitioners
Professional Practitioners (PPs) are formerly classified as non-VAT taxpayers and were exempt from the Value-Added Tax and Percentage taxes under Section 109 of the National Internal Revenue Code (hereinafter referred to as the Code), until December 31, 2002. Prior to this date, they were subject only to Income Tax under Section 24 of the Code. Effective January 1, 2003, however, by virtue of Republic Act Nos. 7716 and 9010, which were implemented by Revenue Regulation Nos. 1-2003 and 3-2003, services of PPs are also subject to either VAT or 3% Percentage Tax. 

Pursuant to Revenue Regulations No. 16-2005, services of Professional Practitioners are subject to VAT if gross professional fees exceed P1,919,500 for a 12-month period and subject to 3% Percentage Tax if gross professional fees total P1,919,500 and below for a 12-month period.

"Professional Practitioners" include the following:
·         Certified Public Accountants
·         Insurance Agents (Life & Non-life)
·         Other Professional Practitioners required to pass the government examination
·         Others 

8.     "Educational services rendered by private educational institutions, duly accredited by the Department of Education (DEPED), the Commission on Higher Education (CHED), the Technical Education And Skills Development Authority (TESDA) and those rendered by government educational institutions;

9.     "Services rendered by individuals pursuant to an employer-employee relationship;

10.  "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;

11.  "Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree No. 529 (Petroleum Exploration Concessionaires under the petroleum act of 1949.

12.  "Sales by agricultural cooperatives duly registered with the Cooperative Development Authority to their members as well as sale of their produce, whether in its original state or processed form, to non-members; their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce.
Agricultural Cooperative
Sale to Members
Sale to Non-Members

Sale of cooperative’s own produce



Other than the cooperative’s own produce (i.e., from Traders)


Subject to Vat

13.  "Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative Development Authority;
Ø  Exemption is not only limited to the gross receipts on loans extended to its members but also to other persons who are not members.

14.  "Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with the Cooperative Development Authority: Provided, That the share capital contribution of each member does not exceed Fifteen thousand pesos (P15,000) and regardless of the aggregate capital and net surplus ratably distributed among the members;
Ø  Importation by non-agricultural, non-electric and noncredit cooperatives of machineries and equipment including spare parts thereof, to be used by them are subject to vat.

15.  "Export sales by persons who are not VAT-registered;
16.  "Sale of real properties
Ø  not primarily held for sale to customers or held for lease in the ordinary course of trade or business,
·         Only sale of real properties held 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.

Ø  Residential lot valued at  P1,919,500 & below (formerly P1.5M).   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 P1,919,500.  Adjacent residential lots, although covered by separate titles and/or separate tax declarations, when sold to one and the same buyer, whether covered by one separate Deed of Conveyance, shall be presumed as sale of one residential lot. (RR 16-2011)

Ø  House & Lot, and Other Residential Dwellings valued at P3,199,200 and below.

Ø  real property utilized for low-cost housing (ceiling price per unit does not exceed P2,000,000) and socialized housing (ceiling price per unit does not exceed P300,000) as defined by Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of 1992, and other related laws,

Provided, that every three (3) years thereafter, the amounts herein stated shall be adjusted to their present values using the Consumer Price Index, as published by the National Statistics Office (NSO);

17.  "LEASE of a RESIDENTIAL UNIT with a monthly rental not exceeding Ten thousand pesos (P12,800) regardless of the amount of aggregated rentals received by the lessor during the year.  Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index as published by the National Statistics Office (NSO); (RR 16-2011).

Ø  LEASE of RESIDENTIAL UNITS where the monthly rental per unit exceeds P12,800 but the aggregate of such rentals of the lessor during the year do not exceed P1,919,500 shall likewise be exempt from VAT, however, the same shall be subjected to the 3% percentage tax.

Ø  In cases where a lessor has SEVERAL RESIDENTIAL UNITS for LEASE, some are leased out for a monthly rental per unit of not exceeding P12,800 while others are leased out for more than P12,800 per unit,  his tax liability will be:
v  The gross receipts from rentals not exceeding P12,800 per month per unit shall be exempt from vat regardless of the aggregate annual gross receipts.

v  The gross receipts from rentals exceeding P12,800 per month per unit shall be subject to vat if the annual gross receipts (from said units only – not including the gross receipts from units leased out for not more than P12,800) exceed P1,919,500.

RESIDENTIAL UNIT shall refer to:
ü  Apartments and houses and lots used for residential purposes;
ü  Buildings or parts or units thereof used solely as dwelling places (i.e., dormitories, rooms, bed spaces) except motels, motel rooms, hotels and hotel rooms.

UNIT shall refer to:
ü  Apartment unit in case of apartments
ü  House in case of residential houses
ü  Per person in case of dormitories, boarding houses and bed spaces; and
ü  Per room in case of rooms for rent

18.  "Sale, importation, printing or publication of books and any newspaper, magazine, review or bulletin which appears at regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of paid advertisements;

19.  "Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts thereof for domestic or international transport operations;
Provided, that the exemption from vat on the importation and local purchase of passenger and/or cargo vessels shall be limited to those of 150 tons and above, including engine and spareparts of said vessel; and the vessel to be imported shall comply with the age limit requirement as follows:
Ø  Passenger and/or cargo – 15 years old
Ø  Tankers – 10 years old
Ø  High speed passenger crafts – 5 years old

Provided, finally, that the exemption shall be subject to the provisions of Sec. 4 of RA 9295, otherwise known as “The Domestic Shipping Development Act of 2004”
Sale of vessels with age of more than 15 years is subject to vat

20.  "Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations;
Provided that the:
Ø  Fuel, goods and supplies shall be exclusively or shall pertain to the transport of goods and/or passenger from a port in the Philippines directly to a foreign port without stopping at any other port in the Philippines.
Ø  Fuel, goods or supplies is used for the purposes other than that mentioned in the preceding paragraph, such portion of fuel, goods and supplies shall be subject to 12% vat.

21.  Importation of life-saving equipment, safety and rescue equipment and communication and navigation safety equipment, steel plates and other metal plates including marine-grade aluminum plates used for shipping transport operations; Provided, that the exemption shall be subject to the provisions of Sec. 19 of RA 9295, otherwise known as “The Domestic Shipping Development Act of 2004” (RR 4-2007).

22.  Importation of capital equipment, machinery and spare parts, life-saving and navigational safety equipment, steel plates and other metal plates including marine-grade aluminum plates used in the construction, repair, renovation or alteration of any merchant marine vessel operated or to be operated in the domestic trade.  Provided, that the exemption shall be subject to the provisions of Sec. 19 of RA 9295, otherwise known as “The Domestic Shipping Development Act of 2004” (RR 4-2007).

23.  "Services of banks, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries (i.e.; money changers and pawnshops); and

24.  "Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of P1,919,500; Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index as published by the National Statistics Office (NSO);

25.  Vat on Purchase of SPECIFIED Goods and Services by a Senior Citizen. 

Wednesday, October 29, 2014

Value-Added Tax

Value-Added Tax

     It is a tax on the value added by every seller to his purchases of goods or services; as well as on importation of goods into the Philippines, whether for personal or business use.  VAT is a tax on consumption levied on the sale, barter, exchange or lease of goods or properties and services in the Philippines and on importation of goods into the Philippines levied at each stage of the production and distribution process (VAT revenue is secured by being collected throughout the  production/distribution process and production decisions do not get distorted due to the tax credit provision on inputs).  Personal end-consumers of products and services cannot recover VAT on purchases, but businesses are able to recover VAT (input tax) on the products and services that they buy in order to produce further goods or services that will be sold to yet another business in the supply chain or directly to a final consumer.  In this way, the total tax levied at each stage in the economic chain of supply is a constant fraction of the value added by a business to its products, and most of the cost of collecting the tax is borne by business, rather than by the state.

VAT is an indirect tax, which may be shifted or passed on to the buyer, transferee or lessee of goods, properties or services.   The Value Added Tax (VAT) Reform Act (Republic Act 9337), more commonly known as the expanded VAT (E-VAT) law, was passed by Congress in May 2005 and amended by RA9361.  After some objections on its legality, it was finally implemented on November 1, 2005.  This law provides for
-                     the expansion of the coverage of the VAT,
-                     reduction in the excise tax on certain petroleum products, and
-                     increase in the corporate income tax rate.

The burden of the tax is borne by the final consumers of VAT-able  goods or services although the producers and suppliers of these goods and services are the ones who have to file their VAT returns to the Bureau of Internal Revenue (BIR).  The VAT system was first adopted in the Philippines in 1988 in place of the sales/turnover tax and a host of other taxes.  At present, a single rate destination principle value added tax equivalent to 12% based on the following:

Nature of Transactions

Tax Base
 Sale of goods or properties

 Gross selling price
Sale of services

Gross receipts

Total landed cost
Dealers in Securities

Gross Income

-   refers to any person who brings goods into the Philippines, whether or not made in the course of trade or business.
-   Importation is not a sale of goods, or sometimes not even a business activity, yet is subject to vat.  This is because vat is a consumption tax levied on sales to be borne by consumers with sellers acting simply as tax collectors.  And, as the origin of importation is from a foreign seller which is outside Philippine jurisdiction, the consumption tax (vat) is instead paid directly by the importer.

 “For subsistence or livelihood”
-   Any business pursued by an individual where the aggregate gross sale or receipts do not exceed P100,000 during the any 12 month period shall be considered principally for subsistence or livelihood and not in the ordinary course of trade or business.

Tuesday, October 28, 2014

Business Taxes on Types of Business

 Business Taxes:

*         Taxes imposed upon onerous transfers such as sale, barter, exchange or importation.
*         Business taxes are in addition to income and other taxes paid unless specifically exempted.  

*  If the Transaction is subject to vat, then it is exempt from percentage tax and vice-versa.  However, it may still be subject to excise tax.

1.    Value-added taxes. 
VAT is a tax on the value added by every seller to the purchase price or cost in the sale or lease of goods, property or services in the ordinary course of trade or business as well as on importation of goods into the Philippines, whether for personal or business use.  It is a business tax.  Without a business pursued in the Philippines (except importation) by the taxpayer, the tax cannot be applied.  “In the course of trade or business” means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit private organization or government entity.  Generally, services rendered in the Philippines by a non-resident foreign person shall be considered as being rendered in the course of trade or business even if the performance is not regular.

2.    Percentage taxes
*  It is a tax imposed on sale, barter, exchange or importation of goods, or sale of services based upon gross sales, value in money of receipts derived by the manufacturer, producer, importer or seller measured by certain percentage of the gross selling price or receipts.

3.    Excise taxes
 * It is a tax imposed on goods manufactured or produced in the Philippines for domestic sales or consumption or for any other disposition, and goods imported.  Specifically, excise taxes are imposed on:

Manufacturers and Importers, of any of the following categories of goods or article:
a.     Distilled spirits such as liquors
b.     Wines
c.     Fermented liquors (i.e., beer)
d.     Cigars
e.     Cigarettes
f.      Automobiles
g.     Manufactured fuel oil (i.e., gasoline bunker fuel oil)
h.     Mineral products (i.e., gold, silver); and
i.      Non-essential goods (i.e., jewelry, perfumes)

*  Classifications:
a. Specific Excise Tax -  Based on weight or volume capacity or any other      physical unit of measurement.
b. Ad-Valorem Excise Tax – Based on selling price or other specified value of    the goods.  

*  Purposes of Imposing Excise Tax
a.     To curtail consumption of certain commodities which are considered as         harmful to the individual or to the community.
b.     To protect domestic industries from competition posed by similar imported    products.

c.     To distribute the tax burden in proportion to benefit derived from a               particular government service.

Sunday, October 26, 2014

Tax Exempt Corporations

Under Section 30 of NIRC:

Sec.         30.          Exemption from Tax on Corporation. – The following organizations shall not be taxed in respect to income received by them as such:

(A)       Labor, agricultural or horticultural organizations not organized principally for                profits.                        

(B)       Mutual savings bank not having a capital stock represented by shares, and                     cooperative bank without capital stock, organized and operated for mutual purposes     and without profit;

(C)       Cemetery company owned and operated exclusively for the benefit of its members;

(D)          Non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or rehabilitation of veterans, no part of its net income or asset shall belong or inure to the benefit of any member, organizer, officer or any specific person;

(F)      Business league, chamber of commerce, or board of trade, not organized for profit     and no part of the net income of which inures to the benefit of any private stockholder or individual;

(G)      Civic league or organization not organized for profit but operated exclusively for         the promotion of social welfare;

           (H)       A non-stock nonprofit educational institution;

(I)       Government educational institution;

(J)       Farmers or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organizations of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and

(K)     Farmers, fruit growers, or like association organized and operated as a sales agent for the  purpose of marketing the products of its members and turning back them the proceeds of sales, less the necessary selling on the basis of the quantity of produced finished by them.

Note:     Notwithstanding the provisions in the preceding paragraphs;
(a)   the income of whatever kind and character of the foregoing               organizations;
(b)   from any of their properties, real or personal or;
(c)   from any of their activities conducted for profit;
(d)   regardless of the disposition made of such income;

(e)   shall be subject to corporation tax.

Multinational Companies

Multinational Companies
Regional Operating headquarters

Regional  Headquarters

Tax rate:    10% of net income

Tax rate:   Exempt

·         Is a branch established in the Philippines which is engaged in any of the following qualifying services:
Ø  General administration and planning.
Ø  Business planning and coordination.
Ø  Sourcing/procurement of raw materials and components.
Ø  Corporate finance advisory services.
Ø  Marketing control and sales promotion.
Ø  Training and personnel management.
Ø  Logistic services.
Ø  Research and development services and project development.
Ø  Technical support and maintenance.
Ø  Data processing and communication.
Ø  Business development.

·         Is a branch established in the Philippines and which headquarters do not earn or derived income from the Philippines and which act as supervisory, communications, and coordinating center for its affiliates, subsidiaries, or branches in the Asia-Pacific region and other foreign markets

OFFSHORE BANKING UNITS (Special Resident Corporation)
§  “OBU” is a branch of a foreign bank located in an offshore financial center (OFC). It may accept deposits and loans from other foreign banks and OBUs, but may not accept deposits from (or make loans to) the residents of the country in which it is located. OBUs are otherwise unrestricted in their legitimate activities, and are free from the monetary controls of the country of location.

Foreign banking institutions can establish and manage offshore banking units. Offshore banking units are allowed to provide all traditional banking services to non-residents in any currency other than Philippine national currency. Banking transactions to residents are limited and restricted.

These RESIDENT foreign corporations are subject to tax on income derived from:
1.       Foreign currency transactions with local commercial banks. -  EXEMPT
2.       Foreign currency transactions with branches of foreign banks authorized by BSP.- EXEMPT
3.       Interest income derived from foreign currency loans granted to residents.  -  10%

“1-3” were previously subject to 10% final tax.  “1 and 2” NOW are tax exempt

§  Income of NON-resident individual and Non-Resident corporations from transactions with OBUs.
Tax Base
Tax Rate
Ø  Income from foreign currency transactions with:
  • Nonresidents
  • OBUs in the Philippines
  • Local commercial bank (including Phil. Branches
of foreign banks)
(used to be 10% final tax) except net income from transactions specified by the Sec. of Finance.

Ø  Interest income from foreign currency loans granted to residents other than OBUs or local commercial banks
10% final tax

Ø  Any income of NON-Resident individual or corporation from OBUs

Tax on Branch Profit Remittance (Except on activities registered with PEZA)

Tax Base
Tax Rate
Any profit remitted by a branch office to its head office.  Total profits applied or earmarked for remittance without deduction for the tax component.
(Resident Corporations)