MGT 147 Value Added Tax (VAT) Notes PDF

NOT for SALE or Distribution November 2024 UPV_Mgt 147_VAT_BreySM 1 NOT for SALE or Distribution November 2024 UPV_Mgt 147_VAT_BreySM 2 NOT for SALE or Distribution November 2024 UPV_Mgt 147_VAT_BreySM 3 NOT for SALE or Distribu...

NOT for SALE or Distribution November 2024 UPV_Mgt 147_VAT_BreySM 1 NOT for SALE or Distribution November 2024 UPV_Mgt 147_VAT_BreySM 2 NOT for SALE or Distribution November 2024 UPV_Mgt 147_VAT_BreySM 3 NOT for SALE or Distribution November 2024 To set our course and thought process, this is the outline of our discussion on VAT Related Transactions. UPV_Mgt 147_VAT_BreySM 4 NOT for SALE or Distribution November 2024 Why do you think that VAT is called as VALUE-ADDED TAX? I am pertaining to the origin of the name. UPV_Mgt 147_VAT_BreySM 5 NOT for SALE or Distribution November 2024 “VAT is ultimately paid by the consumers in the form of higher prices” Why is this so? VAT is an indirect tax. VAT can be shifted to the consumer in the form of higher prices. UPV_Mgt 147_VAT_BreySM 6 NOT for SALE or Distribution November 2024 Remember to connect your lessons: VAT is an indirect tax. Why? VAT can be shifted to the consumer in the form of higher prices. This is a classic example of an escape from taxation called as forward SHIFTING. Additional Notes on SHIFTING: 1. The person on whom the tax is imposed might NOT be the person who actually bears the burden of the tax. Example: Indirect Tax 2. In shifting, what is transferred is NOT the payment of tax or liability for the tax BUT merely the burden of the tax. 3. Once shifted, the tax ceases to be tax and simply becomes part of the price or cost that the buyer must pay to purchase the goods, property or service. 4. The SELLER remains directly and legally liable for the payment of the tax. 5. Shifting is possible when there is an exchange of commodities. UPV_Mgt 147_VAT_BreySM 7 NOT for SALE or Distribution November 2024 RR 16-2005 is often referred to as the VAT Regulations (simply, VAT Regs). UPV_Mgt 147_VAT_BreySM 8 NOT for SALE or Distribution November 2024 “Statutorily” means “legally” liable to pay the tax UPV_Mgt 147_VAT_BreySM 9 NOT for SALE or Distribution November 2024 VAT Exempt Transaction does not mean as a VAT rate, but was presented to classify the category of transactions and the possible VAT implications. UPV_Mgt 147_VAT_BreySM 10 NOT for SALE or Distribution November 2024 UPV_Mgt 147_VAT_BreySM 11 NOT for SALE or Distribution November 2024 To set our course and thought process, this is the outline of our discussion on VAT Related Transactions. UPV_Mgt 147_VAT_BreySM 12 NOT for SALE or Distribution November 2024 UPV_Mgt 147_VAT_BreySM 13 NOT for SALE or Distribution November 2024 Section 106 (A)(1) of the Tax Code defined the term, goods and properties as all tangible and intangible objects which are capable of pecuniary estimation. 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 the privilege to use any industrial, commercial or scientific equipment d) The right or the privilege to use motion picture films, films, tapes and discs e) Radio, television, satellite transmission and cable television time UPV_Mgt 147_VAT_BreySM 14 NOT for SALE or Distribution November 2024 Includes services performed or rendered by [Sec 108 (A), Tax Code, as amended by TRAIN] : a) construction and service contractors b) stock real estate, commercial, customs and immigration brokers (Amended by RA No. 9010, effective January 1, 2003 and included in RA 9337) c) lessors of property, whether personal or real d) providers of 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, theaters and movie houses h) proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterer 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, including electric cooperatives n) franchise grantees of electric utilities, telephone and telegraph, toll road operations, radio and/or television broadcasting and all other franchise grantees except those under Section 119 of this Code, (Section 119 refers to franchise grantees of radio and/or television broadcasting whose annual gross receipts of the preceding year do not exceed P 10 million (subject to Franchise Tax of 3%), and franchise grantees of gas and water utilities). o) non-life insurance companies (except their crop insurances) including surety, fidelity, indemnity and bonding companies p) similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties UPV_Mgt 147_VAT_BreySM 15 NOT for SALE or Distribution November 2024 Although, we say that VAT is a business tax, the imposition of which on IMPORTATIONS is an exception to the rule. Why? Even there is no business activity, or sale of goods, importation can still happen. The basis of imposing the VAT is that, by nature, it is a consumption tax. Concurrently, the origin is from a foreign seller (outside the jurisdiction of the country), thus the VAT (being a consumption tax) is imposed on the importer (i.e., consumer). Additional Notes on Tax Base for VAT purposes: In case the valuation used by the BOC in computing customs duties is based on volume or quantity of the imported goods, the landed cost shall be the basis for computing VAT. Landed cost consists of the invoice amount, customs duties, freight, insurance and other charges. If the goods imported are subject to excise tax, the excise tax shall form part of the tax base for VAT purposes. The VAT on importation shall be paid by the importer prior to the release of such goods from customs custody. UPV_Mgt 147_VAT_BreySM 16 NOT for SALE or Distribution November 2024 Notes: *Basis: Market Value of the goods or distribution of share UPV_Mgt 147_VAT_BreySM 17 NOT for SALE or Distribution November 2024 Notes: 1. On Consignment: Goods returned within the 60-day period are not deemed sold. Thus, are not subject to VAT. 1. On Retirement or Cessation of Business: All goods on hand as of date of cessation, basis should be the acquisition cost or market value, whichever is lower. Reading Assignment: RR No. 16-2005, as amended by RR No. 4-2007 on instances when there is a retirement or cessation of businesses as VAT- registered entity. UPV_Mgt 147_VAT_BreySM 18 NOT for SALE or Distribution November 2024 Based on an Article written by de Vera, using the OECD data, the Philippines’ VAT collections from goods and services rose to P406.1 billion in 2019 from P358.2 billion in 2018, even as their share to total tax revenue declined by less than 2 percentage points to 11.5 percent. Read more: https://business.inquirer.net/327636/oecd-phs-vat-collection-efficiency-lowest-in-asia-pacific#ixzz7NfiTWSs9 UPV_Mgt 147_VAT_BreySM 19 NOT for SALE or Distribution November 2024 UPV_Mgt 147_VAT_BreySM 20 NOT for SALE or Distribution November 2024 To set our course and thought process, this is the outline of our discussion on VAT Related Transactions. UPV_Mgt 147_VAT_BreySM 21 NOT for SALE or Distribution November 2024 UPV_Mgt 147_VAT_BreySM 22 NOT for SALE or Distribution November 2024 On ZERO Rated Sales: If sales are made by a VAT-registered supplier and sales are subject to VAT at zero percent (0%), the VAT-registered supplier shall not pass on any output VAT to the buyer or ECOZONE enterprise, and at the same time, shall be entitled to claim tax credit/refund of its input VAT attributable to such sales. The application for refund within the two (2) years after the close of the taxable quarter when such the sales were made. To discuss in detail under the Other Matters. For the Zero-rating of export sales made by the supplier from the Customs Territory to PEZA, it primarily intends to benefit the exporter (i.e., the supplier from the Customs Territory) who is directly and legally liable for the VAT, making it internationally competitive by allowing it to credit/refund the input VAT attributable to its export sales. On Transaction Exempt from VAT: sales to an ECOZONE enterprise or exports made by a non-VAT or unregistered supplier would only be exempt from VAT and the supplier shall not be able to claim credit/refund of its input VAT. UPV_Mgt 147_VAT_BreySM 23 NOT for SALE or Distribution November 2024 Source: Tabag, E (2021) Transfer and Business Taxation, 2021 edition UPV_Mgt 147_VAT_BreySM 24 NOT for SALE or Distribution November 2024 UPV_Mgt 147_VAT_BreySM 25 NOT for SALE or Distribution November 2024 This is in relation to Seagate and Toshiba Cases wherein it was already decided by the SC that ALL purchases by a PEZA entity are VAT zero-rated. There is no exception. But CREATE is now limiting these transactions to those that are directly and exclusively used by an Ecozone companies for its registered activities. Other concepts to remember: Customs Territory - refers to any areas in the Philippines where customs and tariffs may be imposed (RA 10863) The ECOZONES shall be managed and operated by the PEZA as separate customs territory (Section 8 ECOZONE to be Operated and Managed as Separate Customs Territory, RA No. 7916) “Direct and exclusive use” shall mean as raw materials, inventories, supplies, equipment, goods, services, and other expenditures necessary for the registered project or activity, without which the registered project or activity cannot be carried out. UPV_Mgt 147_VAT_BreySM 26 NOT for SALE or Distribution November 2024 Prior TRAIN: Revenue Memorandum Circular (RMC) No. 74-99 provides all sales of goods, properties, and services made by a VAT-registered supplier from the customs territory to any registered enterprise operating in the ecozone are subject to VAT at 0%, regardless of the latter’s type or class of PEZA registration (e.g., ITH or 5% GIT). However, in the Supreme Court Decision of Coral Bay Nickel Corporation vs. Commissioner of Internal Revenue, (G.R. No. 190506), the SC held that PEZA-registered enterprises are VAT-exempt entities, not because of Section 24 of Republic Act No. 7916, as amended, which imposes the 5% preferential tax rate on gross income of PEZA-registered enterprises, in lieu of all taxes, but rather, because of Section 8 of the same statute which establishes that ecozones are foreign territory (also cited in GR No. 150154, CIR vs. TOSHIBA INFORMATION EQUIPMENT (PHILS.), INC. dated August 9, 2005). UPV_Mgt 147_VAT_BreySM 27 NOT for SALE or Distribution November 2024 UPV_Mgt 147_VAT_BreySM 28 NOT for SALE or Distribution November 2024 UPV_Mgt 147_VAT_BreySM 29 NOT for SALE or Distribution November 2024 UPV_Mgt 147_VAT_BreySM 30 NOT for SALE or Distribution November 2024 To set our course and thought process, this is the outline of our discussion on VAT Exempt Transactions. Section 109 of Tax Code, as amended: A. Sale or importation of agricultural and marine food products in their original state, livestock and poultry of a kind generally used as, or yielding or producing foods for human consumption; and breeding stock and genetic materials therefor. B. 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); C. Importation of personal and household effects belonging to residents of the Philippines returning from abroad and non-resident 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; D. Importation of professional instruments and implements, wearing apparel, domestic animals, and personal household effects (except 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 of Internal Revenue, that such persons are actually coming to settle in the Philippines and that the change of residence is bona fide; E. Services subject to percentage tax under Title V of the Tax Code, as amended; F. Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar cane into raw sugar; UPV_Mgt 147_VAT_BreySM 31 NOT for SALE or Distribution November 2024 Section 109 of Tax Code, as amended (continuation): G. Medical, dental, hospital and veterinary services except those rendered by professionals; ○ Laboratory services are exempted. If the hospital or clinic operates a pharmacy or drug store, the sale of drugs and medicine is subject to VAT. ○ However, sales of drugs to in-patients of hospitals are considered part of hospital services, which are exempt from VAT. (BIR Ruling DA 122-05 dated April 6, 2005) ○ Fees earned by medical practitioners are also discussed in the book (p.250) H. 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; I. Services rendered by individuals pursuant to an employer-employee relationship; J. Services rendered by the 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; K. 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 Petroleum Act of 1949). Please see examples, p. 253 of your textbook. You may also read: https://www.officialgazette.gov.ph/1974/08/06/presidential-decree-no-529-s-1 74/#:~:text=MALACA%C3%91ANG,Manila&text=GRANTING%20TO%20PETROLEUM%20EXPLORATION%20CONCESSIONAIRES,REQUIRED%20F OR%20THEIR%20EXPLORATION%20OPERATIONS. UPV_Mgt 147_VAT_BreySM 32 NOT for SALE or Distribution November 2024 Section 109 of Tax Code, as amended (continuation): L. Sales by agricultural cooperatives duly registered and in good standing with the Cooperative Development Authority (CDA) 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; M. Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered and in good standing with the CDA N. Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with and in good standing with the CDA: Provided, That the share capital contribution of each member does not exceed P15,000 and regardless of the aggregate capital and net surplus ratably distributed among the members; O. Export sales by persons who are not VAT-registered (otherwise, if registered, zero-rated); P. Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business, or sales of real property utilized for low-cost and socialized housing, residential lot valued at P1,919,500 and below, house and lot, and other residential dwellings valued at P3,199,200 and below (subject to adjustment as discussed in p 257 of your textbook). Q. Lease of a residential unit with a monthly rental not exceeding P15,000 regardless of aggregated rentals received during the year. ○ TRAIN Law – if gross receipts from rentals exceed P15,000 per month and the annual gross receipts exceeds P3M, subject to VAT. R. Amended: CREATE Law: Sale, importation, printing or publication of books and any newspaper, magazine, review or bulletin or any educational reading material covered by UNESCO Agreement, ….provided xxx sale is not devoted principally to the publication of paid advertisements (Please read more in p262 of your textbook); S. Transport of Passengers by International carriers doing business in the Philippines UPV_Mgt 147_VAT_BreySM 33 NOT for SALE or Distribution November 2024 Section 109 of Tax Code, as amended (continuation): T. Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts thereof for domestic or international transport operations; U. Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations; V. Services of banks, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries; W. Sale or lease of goods and services to PWDs and Senior Citizens; X. NEW provision - TRAIN Law: Transfer of property pursuant to Section 40 (C)(2) of the Tax Code, as amended (i.e, on tax free exchanges) ○ You may read on: https://www.bir.gov.ph/index.php/legal-matters/tax-free- exchanges.html#:~:text=Tax%2Dfree%20exchanges%20refer%20to,as%20the%20case%20may%20be. Y. NEW Provision – TRAIN Law: Association dues, membership fees and other assessments and charges collected on a purely reimbursement basis by home- owners associations and condominium corporations. Z. NEW Provision – TRAIN Law: Sale of Gold to BSP (subject to 0% VAT prior to 2018) AA. NEW Provision - CREATE Law: sale and importation of prescription drugs and medicines for certain illnesses as enumerated (p. 265 of your textbook) BB. NEW Provision - CREATE Law: sale or importation of goods in relation to Covid-19 (p. 265-266 of your textbook) CC. (Previously presented as BB) 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 P3,000,000 UPV_Mgt 147_VAT_BreySM 34 NOT for SALE or Distribution November 2024 UPV_Mgt 147_VAT_BreySM 35 NOT for SALE or Distribution November 2024 UPV_Mgt 147_VAT_BreySM 36