Sources of Output Tax

SOURCES OF OUTPUT TAX:

·         Actual Sale

o    Domestic

o    Export or Zero Rated Sales

·         Transactions Deemed Sale

1.    ACTUAL SALE

Ø  Gross Sales include (a)Cash sales, (b)Sales on account, (c)installment sales, (d)deemed sales, and (e)other amounts due from buyer as for packaging, delivery, and insurance.

Ø  Excise Tax, if any, is included in the gross sales, while VAT is excluded.

SALES DISCOUNTS, SALES RETURNS AND ALLOWANCES

v  Sales Discount granted and indicated in the invoice at the time of sale and the grant of which does not depend upon the happening of future event may be excluded from gross sales within the same month or quarter it was given.

v  Sales Returns and Allowances may be deducted from gross sales for the month or quarter in which refund is made or a credit memo was issued.

v  SALE OF GOODS OR SERVICES TO PERSONS WITH DISABILITY (RR 1-2009). 

Vat on sale of Goods or services with sales discounts granted by business establishments shall be computed in accordance with the following illustration:

Sales (exclusive of vat)	xx
Less: 20% discount	(xx)
Vatable sale	xx
Add:  12% vat	xx
Total amount to be paid	xx

The foregoing privileges to person with disability shall not be claimed if the said person with disability claims a higher discount as may be granted by a commercial establishment and/or under existing laws or in combination with other discount program/s.  Thus, a person with disability who is at the same time a senior citizen can only claim one 20% discount on a particular sale transaction

v  SALE OF GOODS OR SERVICES TO SENIOR CITIZENS (RR 7-2010). 

EXEMPT FROM VAT (refer to a separate discussion)  

2.    TRANSACTIONS DEEMED SALE

The following transactions are DEEMED SALE for VAT purposes:

	Basis
Transfer, use or consumption not in the ordinary course of business of goods or properties ordinarily intended for sale or use in the course of business.	Market Value
Distribution or transfer to: ·         shareholders or investors as share in the profits of a VAT-registered person. ·         Distribution or transfer to creditors in payment of debt or obligation.	Market Value
Consignment of goods if actual sale is not made within sixty (60) days following the date such goods were consigned. ·         Goods RETURNED WITHIN the 60-DAY PERIOD are not deemed sold.	Market Value
Retirement from or cessation of business, with respect to all goods on hand (as of the date of retirement or cessation) whether or not the business is continued by the new owner or successor.  Goods in hand refer to: ·         Capital goods ·         Stock in-trade ·         Supplies or materials The following circumstances, among others, give rise to transactions deemed sale                       i.    Change of ownership in the business.  There is a change in the ownership in business when: 1.     a single proprietorship incorporates 2.     the proprietor of a single proprietorship sells his entire business.                      ii.    Dissolution of a partnership and creation of a new partnership which takes over the business ·         Change of control of corporation by the acquisition of the controlling interest of such corporation by another shareholder or group of shareholder,	Acquisition Cost or Current Market Price whichever is lower

3.    ZERO RATED SALES

A zero rated sale of goods, properties and/or services (by a VAT registered person) is a taxable transaction for VAT purposes, but shall not result in any output tax. However, the input tax on purchases of goods, properties or services, related to such zero-rated sale, shall be available as tax credit or refund in accordance with existing regulations.

VAT Exempt Transaction

A VAT-exempt transaction, on the other hand, refers to the sale of goods, properties or services or the use or lease of properties that is not subject to VAT (output tax) under Section 109 of the Tax Code of 1997, and the seller/supplier is not allowed any tax credit of VAT (input tax) on purchases related to such exempt transaction.

Zero rated sale versus Exempt sale
Transaction	Taxpayer	VAT rate	Related Input vat
Zero Rated Sale	·         VAT registered	0% regardless of any shipping arrangement	·         Input Vat on goods subjected to 0% vat can claimed as deduction against output vat.
Exempt Sale	·         Non-VAT registered	none	·         The input Vat on goods cannot be claimed as deduction against output vat.

"cross border doctrine" means that no VAT shall be imposed to form part of the cost of goods destined for consumption outside the territorial border of the Philippine taxing authority.

3.1. The following SALES shall be subject to ZERO PERCENT (0%) rate:

a.     Sale of goods which are directly shipped by a VAT-registered resident to a place outside the Philippines (Export Sales).

b.     Sale of goods which are considered as "Deemed" Export sales by a VAT-registered person to certain entities who are also residents of the Philippines:

1.     Sales to Export-Oriented enterprises which the Code considers as export sales at the level of the supplier of raw materials.

Ø  Zero rated ONLY IF “Sale of raw materials or packaging materials to an export oriented-enterprise whose export sales exceed seventy percent (70%) of actual annual production.

2.    Sales of gold to the Bangko Sentral ng Pilipinas.

3.     Sales considered as exportation of goods under a special law such as Executive Order No. 226 (Omnibus Investments Code of 1987) and Republic Act No. 7916 (PEZA Law)

Example:

Ø  Sale to Special Economic Zones (SEZ)

ART. 23 EO 226

That without actual exportation the following shall be considered constructively exported for purposes of this provision:

Ø  sales to bonded manufacturing warehouses of export-oriented manufacturers;

Ø  sales to export processing zones;

Ø  sales to registered export traders operating bonded trading warehouses supplying raw materials used in the manufacture of export products under guidelines to be set by the Board in consultation with the Bureau of Internal Revenue and the Bureau of Customs;

Ø  sales to foreign military bases, diplomatic missions and other agencies and/or instrumentalities granted tax immunities, of locally manufactured, assembled or repacked products whether paid for in foreign currency or not: Provided, further, That export sales of registered export traders may include commission income: and Provided, finally, That exportation of goods on consignment shall not be deemed export sales until the export products consigned are in fact sold by the consignee.

Ø  Sales of locally manufactured or assembled goods for household and personal use to Filipinos abroad and other non-residents of the Philippines as well as returning Overseas Filipinos under the Internal Export Program of the government and paid for in convertible foreign currency inwardly remitted through the Philippine banking systems shall also be considered export sales.

c.     Foreign currency denominated sales of goods.

The phrase means sale to a nonresident of goods (except automobiles and non-essential goods subject to excise taxes) assembled or manufactured in the Philippines, for delivery to a resident in the Philippines, paid for in acceptable foreign currency and accounted for in accordance with rules and regulations.

d.     Sales to entities, the exemption of which, under a special law or an international agreement with the Government of the Philippines, effectively zero rates such sales.

Example:

§  Sale of Goods to Asian Development Bank when made directly, is zero rated under the law which provides “Sales to persons or entities whose exemption under international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate.

3.2. The following SERVICES performed in the Philippines shall be subject to ZERO percent (0%) rate:

a.     "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);

b.     "Services other than those mentioned in the preceding paragraph rendered to a person engaged in business conducted outside the Philippines or to a nonresident 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 Bangko Sentral ng Pilipinas (BSP);

c.     "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 zero percent (0%) rate;

d.     "Services rendered to persons engaged in international shipping or international air transport operations, including leases of property for use thereof;

e.     "Services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production;

f.      "Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country; and

g.     "Sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy sources using technologies such as fuel cells and hydrogen fuels.

Meaning of Output Tax and Input Tax

Output tax means the VAT due on the sale, lease or exchange of taxable goods or properties or services by any person registered or required to register under Section 236 of the Tax Code.

Input tax means the VAT due on or paid by a VAT-registered on importation of goods or local purchase of goods, properties or services, including lease or use of property in the course of his trade or business. It shall also include the transitional input tax determined in accordance with Section 111 of the Tax Code, presumptive input tax and deferred input tax from previous period.

What comprises "GOODS OR PROPERTIES"?

The term "goods or properties" shall mean all tangible and intangible objects, which are capable of pecuniary estimation and shall include, among others:

a.     Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business;

b.     The right or the privilege to use patent, copyright, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right;

c.     The right or privilege to use in the Philippines of any industrial, commercial or scientific equipment;

d.     The right or the privilege to use motion picture films, films, tapes and discs; and

e.     Radio, television, satellite transmission and cable television time.

What comprises "SALE OR EXCHANGE OF SERVICES"?

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, including those performed or rendered by the following:

a.     Construction and service contractors;

b.     Stock, real estate, commercial, customs and immigration brokers;

c.     Lessors of property, whether personal or real;

d.     Persons engaged in warehousing services;

e.     Lessors or distributors of cinematographic films;

f.      Persons engaged in milling, processing, manufacturing or repacking goods for others;

g.     Proprietors, operators or keepers of hotels, motels, rest houses, pension houses, inns, resorts, theatres, and movie houses;

h.     Proprietors or operators of restaurants, refreshment parlors, cafes, and other eating places, including clubs and caterers;

i.      Dealers in securities;

j.      Lending investors;

k.     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;

l.      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;

m.   Sales of electricity by generation, transmission, and/or distribution companies;

n.     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 whose annual gross receipts of the preceding year do not exceed Ten Million Pesos (P10,000,000.00), and franchise grantees of gas and water utilities;

o.     Non-life insurance companies (except their crop insurances), including marine, fire and casualty insurance, surety, fidelity, indemnity and bonding companies, and mutual benefit associations including nonresident foreign persons rendering non0life insurance services in the Philippines; and

p.     Similar services regardless of whether or not the performance thereof calls for the exercise of use of the physical or mental faculties.

The phrase "SALE OR EXCHANGE OF SERVICES" shall likewise include:

a.     The lease of use of or the right or privilege to use any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right;

b.     The lease or the use of, or the right to use of any industrial, commercial or scientific equipment;

c.     The supply of scientific, technical, industrial or commercial knowledge or information;

d.     The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or enjoyment of any such property, or right or any such knowledge or information;

e.     The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such non-resident person;

f.      The supply of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme;

g.     The lease of motion picture films, films, tapes and discs; and

Computation of Valued-Added Tax (VAT) Payable/ (Excess Input Tax)

In the Philippines, the “Tax Credit Approach” is adopted in computing the Vat Payable.  This means that VAT is imposed on the sale first called “Output Vat” and a tax credit is allowed or claimed on the VAT passed-on to his purchase cost of goods or services known as “Input Tax”.  The difference is called “VAT Payable” computed as Follows:

Sale of Goods:
	Gross Sales			xx
	Less:
	Sales discounts		xx
	Sales returns		xx
	Net sales			xx
	Add:
	Excise tax, if any		xx	xx
	Tax Base			xx
	x vat rate			12%
	Output Vat			xx
	Less:  Input vat			(xx)
	VAT Payable/ (Excess input tax)			xx

Sale of Services:
	Cash received (actually and constructively)		xx
	Deposits/Advance payments for future projects		xx
	Materials charged for services		xx
	Gross receipts		xx
	x  vate rate		12%
	Output Vat		xx
	Less:  Input vat		(xx)
	VAT Payable/ (Excess input tax)		xx

¥        Receivables (For Sale of Services), although earned, are not included in the computation of vat payable.

¥

Dealer in Securities and Lending Investors:
	Gross Selling Price		xx
	Less: Acquisition cost of securities sold for the month or quarter		(xx)
	Balance		xx
	Add:  Other income or incidental income		xx
	Gross receipts		xx
	x  vate rate		12%
	Output Vat		xx
	Less:  Input vat		(xx)
	VAT Payable		xx

Requirements for Deductibility of Any Income Payment

Revenue Regulations No. 12-2013 was issued by the BIR amending Section 2.58.5 of revenue Regulations No. 2-98, as amended, Relative to the requirements for Deductibility of Certain Income Payments:

"Sec. 2.58.5. Requirements for Deductibility. - Any income payment which is otherwise deductible under the Code shall be allowed as a deduction from the payor's gross income only if it is shown that the income tax required to be withheld has been paid to the Bureau in accordance with secs. 57 and 58 of the Code.

No deduction will also be allowed notwithstanding payments of withholding tax at the time of the audit investigation or reinvestigation/reconsideration in cases where no withholding of tax was made in accordance with Secs. 57 and 58 of the Code."

Please refer http://www.bir.gov.ph/images/bir_files/old_files/pdf/73009RR%2012-2013.pdf of the full text of the regulations.

Value-Added Tax (VAT) Registration

1. MANDATORY REGISTRATION

1.     Any person or entity who, in the course of his trade or business, sells, barters, exchanges, leases goods or properties and renders services subject to VAT, if the aggregate amount of actual gross sales or receipts exceed P1,919,500 for the past 12 months (other than those that are exempt)   OR there are reasons to believe that the gross sales or receipts for the next 12 months will exceed P1,919,500.

2.     Radio and/or television broadcasting companies whose annual gross receipts of the preceding year exceeds P10,000,000.

3.     A person required to register as VAT taxpayer but failed to register.

Penalty for non-registration of those required to register as VAT?

He shall be liable to pay the tax as if he were a VAT-registered person but he cannot avail the benefits of input tax credit for the period he was not properly registered.

2. OPTIONAL REGISTRATION

Any person who is VAT-exempt or not required to register for VAT may, in relation to Sec. 4.109-2, elect to be VAT-registered by registering with the RDO that has jurisdiction over the head office of that person, and pay the annual registration fee of P500.00 for every separate and distinct establishment.  Any person who elects to register under optional registration shall not be allowed to cancel his registration for the next three (3) years.

Any person who is VAT-registered but enters into transactions which are exempt from VAT (mixed transactions) may opt that the VAT apply to his transactions which would have been exempt under Section 109(1) of the Tax Code, as amended [Sec. 109(2)].

Franchise grantees of radio and/or television broadcasting whose annual gross receipts of the preceding year do not exceed ten million pesos (P10,000,000.00) derived from the business covered by the law granting the franchise may opt for VAT registration. This option, once exercised, shall be irrevocable. (Sec. 119, Tax Code).

The above-stated taxpayers may apply for VAT registration not later than ten (10) days before the beginning of the calendar quarter and shall pay the registration fee unless they have already paid at the beginning of the year. In any case, the Commissioner of Internal Revenue may, for administrative reason deny any application for registration. Once registered as a VAT person, the taxpayer shall be liable to output tax and be entitled to input tax credit beginning on the first day of the month following registration.

3. CANCELLATION OF VAT REGISTRATION

Instances when a VAT-registered person may cancel his VAT registration:

1.     If he makes a written application and can demonstrate to the commissioner's satisfaction that his gross sales or receipts for the following twelve (12) months, other than those that are exempt under Section 109 (A) to (U), will not exceed P1,919,500.00); or

2.     If he has ceased to carry on his trade or business, and does not expect to recommence any trade or business within the next twelve (12) months.

·         The cancellation for registration will be effective from the first day of the following month the cancellation was approved.