Business Taxation: Value Added Tax (VAT) in the Philippines

Value Added Tax (VAT)

• 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.
• Characteristics:
  • Indirect tax
  • Tax on value added of a taxpayer
  • Transparent form of sales tax
  • Collected through the tax credit method
  • Adopts the "tax inclusive method"

Tax Credit Method

• Also known as invoice method
• Refers to the manner by which the input tax shifted by the seller to the buyer is credited against the buyer's output taxes when he in turn sells the taxable goods, properties, or services

Output Tax and Input Tax

• Output Tax: refers to the VAT due or paid on the taxable sale, barter, or exchange of goods, properties, or services by a seller or transferor
• Input Tax: refers to the VAT due from or paid by a VAT-registered person on importation of taxable goods, or on local purchase of taxable goods, properties, or services, including lease or use of properties, in the course of his trade or business

Computation of VAT

• Total Amount ÷ 1.12 x 12% = VAT

Destination Principle

• Also known as cross-border doctrine
• Means that the destination of the goods determines taxation or exemption from tax
• Example: Export sales of goods are subject to zero percent (0%) rate, while imports of goods are subject to 12% VAT

Elements of a VATable Transaction

• There must be a sale, barter, exchange, or lease (SBEL) in the Philippines
• The sale, barter, exchange, or lease must be of taxable goods, properties, or services
• The sale must be made by a taxable person in the course of his trade or business or furtherance of his profession

VAT Threshold

• The sale or lease of goods or properties or the performance of services is with an annual gross sales and/or receipts of more than Php3,000,000.00

Persons Liable

• Any person who, in the course of his trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to VAT

"In the Course of his 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-private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity

VAT on Sale of Properties

• The properties subject to VAT:
  • Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business
• Tax base of VAT on sale of properties:
  • 12% based on the selling price (gross) in the sales contract

VAT on Sale of Service and Use or Lease of Properties

• The tax base of VAT on sale of service and use or lease of properties:
  • 12% based on the gross receipts derived from the sale or exchange of services, including the use or lease of properties
• Examples of services subject to VAT:
  • Services of real estate brokers, appraisers, consultants, doctors, etc.

Situs (Place of Taxation) of VAT

• Place where the principal office of the business is located

Requisites for the Taxability (VAT) of Real Properties

• The seller executes a deed of sale, including dacion en pago, barter or exchange, assignment, transfer or conveyance or merely contract to sell involving real property
• The real property is located within the Philippines
• The seller or transferor is engaged in the real estate business either as a real estate dealer, developer, or lessor
• The real property is held primarily for sale or for lease in the ordinary course of his trade or business
• The sale is not exempt from VAT under any law

Transactions Deemed Sale

• When there is no actual sale
• Examples:
  • Transfer, use or consumption not in the course of business of goods or properties originally intended for sale or for use in the course of business
  • Retirement from or cessation of business with respect to inventories on hand

Exemptions from VAT

• Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business
• Sale of real properties utilized for socialized housing
• House and lot/other dwellings (condominium) valued at less than Php2,000,000.00
• Lease of residential units with a monthly rent of less than Php15,000.00
• Services rendered by individuals pursuant to an employer-employee relationship
• Condominium dues and association dues
• Sale or lease of goods or properties or the performance of services with an annual gross sales and/or receipts of less than Php3,000,000.00