Sources of Input Tax

Sources of Input Tax:

Only purchases from Vat suppliers will give rise to input taxes.

 Input taxes may come from the following:

·         Domestic Purchases

·         Importation

·         Presumptive input tax

·         Transitional input tax

·         Standard input tax

1.    Examples of Input Taxes on DOMESTIC or importations include.

Ø  Goods for sale

Ø  Goods for conversion into finish product (including packaging materials).

Ø  Goods for use as supplies

Ø  Goods for use as materials supplied in the sale of services

Ø  Goods for use in trade or business for which depreciation or amortization is allowed.

Ø  Real properties for which Vat has actually been paid

Ø  Services for which Vat has actually been paid

Ø  Transactions deemed sale

Acquisition of CAPITAL GOODS (Depreciable Goods) by a Vat registered person (RR 16-2005)

·         Capital goods or properties

Ø  Refers to goods or properties with estimated useful life of greater than 1 year and which are treated as depreciable assets under the Tax Code, used directly or indirectly in the production or sale of taxable goods or services.

Ø  Depreciated or amortized for income tax purposes.

Ø  Acquired through local purchase or acquisition.

·         Construction in Progress

Ø  It is the cost of construction work which is not yet completed.

Ø  Not depreciated until the asset is placed in service.

Ø  Upon completion, construction in progress is reclassified and the reclassified asset is capitalized and depreciated.

RECOGNITION OF INPUT TAX
AGGREGATE Acquisition cost exceeds P1,000,000 exclusive of vat
	Life ≥5 years	Input tax shall be spread evenly for a period of 60 months to commence in the calendar month when capital good is acquired.
	Life < 5 years	Input Tax shall be spread over such useful life to commence in the calendar month when capital good is acquired.
	Life < 12 months	It is not a capital good subject to depreciation), the spreading of input tax over several months is not done.  The whole acquisition is cost is to be claimed in the month of acquisition.
	Construction in progress	It is a purchase of services.  Input taxes will be recognized in the month payment was made on the progress billing.  In the case where labor will be furnished by the contractor and materials will be purchased by the contractee from other suppliers, input taxes will be recognized on labor when payment is made on the progress billings while input taxes will be recognize on materials at the time the materials are purchased.

NOTE:  If the CAPITAL GOOD IS SOLD within the five (5) year period or prior to exhaustion of Input Vat thereon, the ENTIRE UNAMORTIZED INPUT TAX on the capital goods sold can be claimed as input tax credit during the month or quarter when the sale is made.

AGGREGATE Acquisition cost DOES NOT exceed P1,000,000 exclusive of vat
	Ø  The Total amount of Input Taxes will be allowable as credit against output tax in the month of acquisition

2.    IMPORTATION (for business use or sale locally)

                                      i.         IN GENERAL:

Ø  Based on the total value used by the Bureau of Customs in determining the tariff and customs duties (dutiable value) plus customs duties, excise taxes, if any, and other legitimate charges, prior to removal of goods from the customs custody.

Total value for tariff and customs duties		xxx
Add:
Customs duties	xxx
Excise Tax	xxx
Other charges prior to release**	xxx	xxx
Tax base		xxx
Tax rate		12%
VAT on importation		xxx

                                    ii.        Where the customs duties are determined on the basis of QUANTITY or VOLUME of Goods:

Ø  Based on landed cost which includes invoice cost, freight, insurance, customs duties, excise taxes, if any, and other legitimate charges, prior to removal of goods from the customs custody.

Total landed costs		xxx
Add:
Customs duties	xxx
Excise Tax	xxx
Other charges prior to release**	xxx	xxx
Tax base		xxx
Tax rate		12%
VAT on importation		xxx

Ø  The phrase “other charges prior to release of goods from custom’s custody” refers to legitimate expenses only”.

Ø  The excise tax shall form part of the tax base.

**EXAMPLE OF OTHER CHARGES/FEES PRIOR TO RELEASE

a.	Insurance	g.	Wharfage dues
b.	Freight	h.	Arrastre charges
c.	Postage	i.	Brokerage fees
d.	Commission	j.	Stamps
e.	Interest	k.	Processing fees
f.	Bank charge

                                   iii.        Transfer of goods by TAX EXEMPT persons

Ø  In the case of goods imported into the Philippines by VAT-exempt persons, entities or agencies which are subsequently sold, transferred or exchanged in the Philippines to non-exempt persons or entities, the latter shall be considered the importers thereof and shall be liable for the VAT due on such importation.

3.    PRESUMPTIVE 4% (On Sale of Goods or Properties)

Applicable to persons or firms engaged in:

Processing of:	Manufacturing  of:
·         Sardines	Ø  REFINED sugar
·         Mackerel	Ø  Cooking oil
·         milk	Ø  Packed noodle based instant meals

Ø  Basis:  Gross value in money of purchases of primary agricultural products used as inputs in processing or manufacturing

Ø  Rate:  4%

4.    TRANSITIONAL INPUT TAX

Newly VAT-registered person shall be allowed input tax on his beginning inventory of goods, materials and supplies equivalent to 2% (two percent) of the value of such inventory (as of October 31, 2005) or the actual VAT paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax.

Ø  Persons who can avail

a)    Person who become liable to vat

b)    Persons who elect to be vat registered

Ø  Basis:

·         Beginning inventory of VAT subject GOODS, MATERIALS, and SUPPLIES excluding those that are vat exempt..

Ø  Transitional Input tax Allowed – the HIGHER between

·         2% of the vat subject beginning inventory value for income tax purposes; and

·         Actual vat paid on such beginning inventory.

Applicable ONLY on Vat PAID inventory.

How can the transitional input tax credit be applied?

Newly VAT-registered person shall be allowed input tax on his beginning inventory of goods, materials and supplies equivalent to 2% (two percent) of the value of such inventory (as of October 31, 2005) or the actual VAT paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax.

5.    STANDARD INPUT TAX (5% Final VAT on GOCCs)

Not to be credited against output taxes arising from sales to Non-Government entities

The government or any of its political subdivisions, instrumentalities or agencies, including government-owned or controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods and/or services taxed at twelve percent (12%) VAT pursuant to Sections 106 and 108 of the Tax Code, deduct and withhold a Final VAT due at the rate of five percent (5%) of the gross payment.

The five percent (5%) final VAT withholding rate shall represent the net VAT payable of the seller.  The remaining seven percent (7%) effectively accounts for the standard input VAT for sales of goods or services to government or any of its political subdivisions, instrumentalities or agencies including GOCCs in lieu of the actual input VAT directly attributable or ratably apportioned to such sales.  Should actual input VAT attributable to sales to government exceeds seven percent (7%) of gross payments, the excess may form part of the sellers' expense or cost.  On the other hand, if actual input VAT attributable to sale to government is less than seven percent (7%) of gross payment, the difference must be closed to expense or cost.

The government or any of its political subdivisions, instrumentalities or agencies including GOCCs, as well as private corporation, individuals, estates and trusts, whether large or non-large taxpayers, shall withhold twelve percent (12%) VAT with respect to the following payments:

1.     Lease or use of properties or property rights owned by non-residents; and

2.     Other services rendered in the Philippines by non-residents.

REFUND OF INPUT TAX      (Vat registered Person)
v  Zero-rated Sales	ü  The input tax that may be subject of the claim shall exclude the portion of the input tax that has been applied against the output tax. ü  The application should be made within two (2) years after the close of the taxable quarter when the sales were made.
v  Unused Input Tax of Person who Retired or Ceased Business	ü  The taxpayer should apply for the issuance of tax credit certificate for any unused input tax which he may use in payment of his other internal revenue taxes.  He shall be entitled to a refund if he has no internal revenue tax liabilities. ü  The application should be made within two (2) years from the date of cancellation.
v  Period of Refund	ü  Shall be granted within 120 days from the date of submission of complete documents.
v  Manner of Giving Refund	ü  Refunds shall be made upon warrants drawn by the Commissioner of Internal Revenue or by his authorized representative without the necessity of being countersigned by the COA Chairman

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.