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Seagate Technology
(Philippines), the case of Panasonic
VALUE-ADDED TAX Communications Imaging Corporation of the
Philippines v. CIR explained value-added tax in
Q. WHAT IS THE NATURE AND CONCEPT OF this wise:
VALUE-ADDED TAXES?
“The VAT is a tax on consumption, an indirect
* VAT is a percentage tax. There is a tax that the provider of goods or services
percentage fixed by law which will be applied to may pass on to his customers.
the gross selling price in order to arrive to the
VAT to be paid. Under the VAT method of taxation, which is
invoice-based, an entity can subtract from the
[CIR v. Seagate Technology (Philippines), GR VAT charged on its sales or outputs the VAT it
No. 153866, 11 Feb. 2005.] is a case on a paid on its purchases, inputs and imports.
claim for tax refund/credit of alleged unutilized
input VAT paid on capital goods for the period For example, when a seller charges VAT on
1 April 1998 to 30 June 1999. It explained the its sale, it issues an invoice to the buyer,
concept of a value-added tax, thus: indicating the amount of VAT he charged.
For his part, if the buyer is also a seller
Viewed broadly, the VAT is a uniform tax subjected to the payment of VAT on his
ranging, at present, from 0 percent to 12% sales, he can use the invoice issued to him
levied on every importation of goods, whether by his supplier to get a reduction of his
or not in the course of trade or business, or own VAT liability.
imposed on each sale, barter, exchange or The difference in tax shown on invoices
lease of goods or properties or on each passed and invoices received is the tax
rendition of services in the course of trade or paid to the government.
business as they pass along the production In case the tax on invoices received
and distribution chain, the tax being limited exceeds that on invoices passed, a tax
only to the value added to such goods, refund may be claimed.”
properties or services by the seller,
transferor or lessor. Q: DEFINE AND DIFFERENTIATE INPUT TAX AND
OUTPUT TAX.
It is an indirect tax that may be shifted or
passed on to the buyer, transferee or lessee of The case of CIR v. Benguet Corporation defined
the goods, properties or services. As such, it “input tax” and “output tax.”
should be understood not in the context of the Input tax Output tax
person or entity that is primarily, directly and Input VAT or input tax When that person or
legally liable for its payment, but in terms of its represents the actual entity sells his/its
nature as a tax on consumption. payments, costs and products or services,
expenses incurred by a the VAT-registered
Situations that may arise: (General Principles) VAT-registered taxpayer generally
taxpayer in connection becomes liable for
1. If at the end of a taxable quarter the with his purchase of 12% of the selling
output taxes charged by a seller are goods and services price as output VAT
equal to the input taxes passed on by or output tax.
the suppliers, no payment is required. Thus, "input tax" Hence, "output tax"
2. If at the end of a taxable quarter, the means the value- is the value-added
output taxes exceed the input taxes, the added tax paid by a tax on the sale of
excess has to be paid by the seller. VAT-registered taxable goods or
3. If the input taxes exceed the output taxes, person/entity in the services by any
the excess shall be carried over to the course of his/its person registered or
succeeding quarter or quarters trade or business on required to register
4. If the input taxes result from zero-rated or the importation of under Section 107
effectively zero-rated transactions or goods or local of the (old) Tax
from acquisition of capital goods any purchases of goods Code.
excess over the output taxes shall be or services from a
refunded to the taxpayer or credited against VAT-registered
other internal revenue taxes. person
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S/Y 2011-2012
Q: HOW CAN A VAT-REGISTERED TAXPAYER X’s purchase has an input tax of 1,500
RECOVER ITS INPUT VAT? (12,500 x 12%) and his re-sale
transaction has an output tax of 1,800
The VAT system of taxation allows a VAT- (15,000 x 12%) The VAT payable by X is
registered taxpayer to recover its input VAT the difference of the output tax and the
either by input tax thus it is 300 (1800-1500)
(1) passing on the 12% output VAT on the (b) How much can X claim as a tax
gross selling price or gross receipts, as the credit?
case may be, to its buyers, or
X may claim the 1,500 input tax on his
(2) if the input tax is attributable to the purchase as a tax credit. This is why it
purchase of capital goods or to zero-rated was deducted from 1,800.
sales, by filing a claim for a refund or tax credit
with the BIR. (c) Can Z claim a tax credit?
Q: UNDER PAR 2, VAT IS AN INDIRECT TAX. * The case of CIR v. Magsaysay Lines, Inc GR
DISTINGUISH BETWEEN LIABILITY FOR THE TAX No. 146984. involved the sale by the National
AND BURDEN OF THE TAX. Development Company of five of its vessels to
Magsaysay Lines, Inc. The issue was whether
* The case of Contex Corporation v. CIR made such sale was within the coverage of VAT. The
a distinction between the two concepts. It Supreme Court found that the sale of the
provided [[Contex Corporation v. CIR, GR No. vessels was not in the ordinary course of trade
151135, 2 July 2004.] or business. As such, the transaction was
outside the coverage of VAT.
At this juncture, it must be stressed that the
VAT is an indirect tax. As such, the amount of
tax paid on the goods, properties or services That the sale of the vessels was not in the
bought, transferred, or leased may be shifted ordinary course of trade or business of NDC
or passed on by the seller, transferor, or lessor was appreciated by both the CTA and the Court
to the buyer, transferee or lessee. of Appeals, the latter doing so even in its first
decision which it eventually reconsidered. We
Unlike a direct tax, such as the income tax, cite with approval the CTA’s explanation on this
which primarily taxes an individual’s ability to point:
pay based on his income or net wealth, an
indirect tax, such as the VAT, is a tax on In Imperial v. Collector of Internal Revenue,
consumption of goods, services, or certain G.R. No. L-7924, September 30, 1955 (97 Phil.
transactions involving the same. The VAT, 992), the term "carrying on business" does not
thus, forms a substantial portion of consumer mean the performance of a single
expenditures. disconnected act, but means conducting,
prosecuting and continuing business by
Further, in indirect taxation, there is a need performing progressively all the acts normally
to distinguish between the liability for the incident thereof; while "doing business"
tax and the burden of the tax. conveys the idea of business being done, not
As earlier pointed out, the amount of tax from time to time, but all the time.
paid may be shifted or passed on by the
seller to the buyer. "Course of business" is what is usually done
o What is transferred in such in the management of trade or business.
instances is not the liability for the
tax, but the tax burden. What is clear therefore, based on the
o In adding or including the VAT due to aforecited jurisprudence, is that "course of
the selling price, the seller remains business" or "doing business" connotes
the person primarily and legally liable regularity of activity. In the instant case, the
for the payment of the tax. What is sale was an isolated transaction. The sale
shifted only to the intermediate buyer which was involuntary and made pursuant
and ultimately to the final purchaser to the declared policy of Government for
is the burden of the tax. privatization could no longer be repeated or
Stated differently, a seller carried on with regularity. It should be
who is directly and legally emphasized that the normal VAT-registered
liable for payment of an activity of NDC is leasing personal property.
indirect tax, such as the VAT
on goods or services is not This finding is confirmed by the Revised
necessarily the person who Charte of the NDC which bears no indication
ultimately bears the burden that the NDC was created for the primary
of the same tax. purpose of selling real property.
It is the final purchaser or
consumer of such goods or The conclusion that the sale was not in the
services who, although not course of trade or business, which the CIR
directly and legally liable for does not dispute before this Court should have
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S/Y 2011-2012
definitively settled the matter. Any sale, barter
or exchange of goods or services not in the ** In the case of CIR v. CA, COMASERCO,
course of trade or business is not subject to being a non-stock non-profit organization,
VAT. contended that it was operating on a
reimbursement-of-cost basis, that its
The decision contained an explanation of VAT, operations were not profit-oriented and not
to wit: “in the course of trade of business,” and that
therefore, it was not liable to pay VAT. The
A brief reiteration of the basic principles Supreme Court held that Section 105 of the
governing VAT is in order. VAT is ultimately 1997 Tax Code was clear and unambiguous in
a tax on consumption, even though it is stating that even non-stock non-profit
assessed on many levels of transactions on organizations were liable to pay VAT on the
the basis of a fixed percentage. sale of goods or services.
It is the end user of consumer goods or
services which ultimately shoulders the tax, ***N.B. Booch Difference of CIR v.
as the liability therefrom is passed on to the Magsaysay v. CIR v. CA, Comaserco:
end users by the providers of these goods
or services who in turn may credit their own SEC. 106. Value-Added Tax on Sale of
VAT liability (or input VAT) from the VAT Goods or Properties. -
payments they receive from the final
consumer (or output VAT). (A) Rate and Base of Tax. - There shall be
The final purchase by the end consumer levied, assessed and collected on every sale,
represents the final link in a production barter or exchange of goods or properties,
chain that itself involves several value-added tax equivalent to twelve percent
transactions and several acts of (12%) of the gross selling price or gross value
consumption. in money of the goods or properties sold,
The VAT system assures fiscal adequacy bartered or exchanged, such tax to be paid by
through the collection of taxes on every the seller or transferor.
level of consumption, yet assuages the
manufacturers or providers of goods and (1) The term 'goods' or 'properties' shall
services by enabling them to pass on their mean all tangible and intangible objects
respective VAT liabilities to the next link of which are capable of pecuniary estimation
the chain until finally the end consumer and shall include:
shoulders the entire tax liability.
Yet VAT is not a singular-minded tax on (a) Real properties held primarily for sale to
every transactional level. Its assessment customers or held for lease in the ordinary
bears direct relevance to the taxpayer’s course of trade or business;
role or link in the production chain.
Hence, as affirmed by Section 99 of the Tax (b) The right or the privilege to use patent,
Code and its subsequent incarnations, the copyright, design or model, plan, secret
tax is levied only on the sale, barter or formula or process, goodwill, trademark, trade
exchange of goods or services by brand or other like property or right;
persons who engage in such activities,
in the course of trade or business. (c) The right or the privilege to use in the
o These transactions outside the Philippines of any industrial, commercial or
course of trade or business may scientific equipment;
invariably contribute to the
production chain, but they do so only (d) The right or the privilege to use motion
as a matter of accident or incident. picture films, tapes and discs; and
o As the sales of goods or services do
not occur within the course of trade (e) Radio, television, satellite transmission and
or business, the providers of such cable television time.
goods or services would hardly, if at
all, have the opportunity to The term 'gross selling price' means the total
appropriately credit any VAT liability amount of money or its equivalent which the
as against their own accumulated purchaser pays or is obligated to pay to the
VAT collections since the seller in consideration of the sale, barter or
accumulation of output VAT arises in exchange of the goods or properties, excluding
the first place only through the the value-added tax. The excise tax, if any, on
ordinary course of trade or business)
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such goods or properties shall form part of the export sales exceed seventy percent (70%) of
gross selling price. total annual production;
* In CIR v. Sony Philippines, Inc., Sony (5) Those considered export sales under
Philippines engaged the services of several Executive Order NO. 226, otherwise known as
advertising companies. the Omnibus Investment Code of 1987, and
other special laws.
Due to Sony Philippines’ dire economic
conditions, Sony International Singapore Q: DISTINGUISH BETWEEN VAT RATING AND
handed Sony Philippines a dole-out to answer ZERO-RATING.
for the expenses payable to the advertising
companies. Sony Philippines was thereafter * The case of CIR v. Benguet Corporation
assessed deficiency VAT for the transaction, explained VAT rating vis-as-vis zero-rating in
i.e., dole-out, between Sony International principle, as well as by way of illustration, to
Singapore and Sony Philippines. The Supreme wit:
Court ruled that the dole-out or subsidy from
the Singaporean company to the Philippine In transactions taxed at a 12% rate (VAT
company neither constituted a sale of rating), when at the end of any given
goods or properties, nor a sale of services. taxable quarter the output VAT exceeds the
Hence, Sony Philippines was not liable to pay input VAT, the excess shall be paid to the
VAT on the same. government; when the input VAT exceeds
the output VAT, the excess would be carried
[CIR v. Sony Philippines, Inc., GR No. 178697, over to VAT liabilities for the succeeding
17 Nov. 2010.] quarter or quarters.
On the other hand, transactions which are
106(A)(2) Zero-Rated Sales of Goods taxed at zero-rate do not result in any
output tax. Input VAT attributable to zero-
(2) The following sales by VAT-registered rated sales could be refunded or credited
persons shall be subject to zero percent against other internal revenue taxes at the
(0%) rate: option of the taxpayer.
(a) Export Sales. - The term 'export sales' To illustrate, in a zero-rated transaction,
means: when a VAT-registered person (“taxpayer”)
purchases materials from his supplier at
(1) The sale and actual shipment of goods P80.00, P7.30 of which was passed on to him
from the Philippines to a foreign country, by his supplier as the latter’s 10% output VAT,
irrespective of any shipping arrangement that the taxpayer is allowed to recover P7.30
may be agreed upon which may influence or from the BIR, in addition to other input VAT he
determine the transfer of ownership of the had incurred in relation to the zero-rated
goods so exported and paid for in acceptable transaction, through tax credits or refunds.
foreign currency or its equivalent in goods or
services, and accounted for in accordance with When the taxpayer sells his finished product in
the rules and regulations of the Bangko Sentral a zero-rated transaction, say, for P110.00, he is
ng Pilipinas (BSP); not required to pay any output VAT thereon. In
the case of a transaction subject to 10%
(2) Sale of raw materials or packaging VAT, the taxpayer is allowed to recover both
materials to a nonresident buyer for delivery to the input VAT of P7.30 which he paid to his
a resident local export-oriented enterprise to be supplier and his output VAT of P2.70 (10% the
used in manufacturing, processing, packing or P30.00 value he has added to the P80.00
repacking in the Philippines of the said buyer's material) by passing on both costs to the
goods and paid for in acceptable foreign buyer. Thus, the buyer pays the total 10%
currency and accounted for in accordance with VAT cost, in this case P10.00 on the product.
the rules and regulations of the Bangko Sentral
ng Pilipinas (BSP); [CIR v. Benguet Corporation, GR Nos. 134587
& 134588, 8 July 2005.]
(3) Sale of raw materials or packaging
materials to export-oriented enterprise whose
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Q: DISTINGUISH BETWEEN VAT EXEMPTION AND not allowed any tax
ZERO-RATING. refund or credit for input
taxes paid.
The case of Contex Corporation v. CIR
enumerated two ways by which a transaction
could have preferential treatment under the Q: Distinguish between zero-rated
VAT system, namely: (1) VAT exemption; and transactions and effectively zero-rated
(2) zero-rating. transactions.
Exemptions from VAT are granted by express The case of CIR v. Seagate Technology
provision of the Tax Code or special laws. (Philippines) addressed this issue. It stated that
Under VAT, the transaction can have the difference is primarily as to their source.
preferential treatment in the following ways:
Zero-Rated Effectively Zero-Rated
Zero-rated Effectively zero-
Vat Exempt Sales (Vat- Zero Rated transactions rated transactions
Exempt) Sales (Zero generally refer to the refer to the sale of
Rating) export sale of goods goods or supply of
Simply put, the VAT is These are sales and supply of services to persons or
removed at the exempt by VAT-registered services. entities whose
stage (e.g. point of the persons which exemption under
sale, barter, etc) are subject to 0% The tax rate is set at special laws or
rate, meaning the zero. international
tax burden is not agreements to which
passed on to the When applied to the the Philippines is a
purchaser. tax base, such rate signatory effectively
A zero-rated sale obviously results in no subjects such
or transaction by tax chargeable against transactions to a zero
a VAT-registered the purchaser. rate.
person, which is
a taxable The seller of such Again, as applied to
transaction for transactions charges the tax base, such
VAT purposes, no output tax, but can rate does not yield
does not result claim a refund of or a any tax chargeable
in any output tax credit certificate for against the
tax (still a taxable the VAT previously purchaser.
transaction) charged by suppliers
The seller who
A VAT-Registered The input VAT on charges zero output
purchaser of VAT-exempt the purchases of tax on such
goods/properties/services a VAT-registered transactions can also
which are exempt from person with zero- claim a refund of or a
VAT is not entitled to any rated sales may tax credit certificate
input tax on such be allowed as for the VAT previously
purchase. tax credits or charged by suppliers.”
refunded
The seller of exempt goods Applying the Effective zero rating,
properties or services shall destination principle to on the contrary, is
not bill any output tax. the exportation of intended to benefit the
Exemption only removes Under zero- goods, automatic purchaser who, not
the VAT at the exempt rating, all VAT is zero rating is being directly and
stage, and it will actually removed from the primarily intended to legally liable for the
increase, rather than zero-rated goods, be enjoyed by the payment of the VAT,
reduce the total taxes activity or firm seller who is directly will ultimately bear the
paid by the exempt firm’s and legally liable for burden of the tax
business or non-retail [In] zero rating, the VAT, making such shifted by the
customers. there is total relief seller internationally suppliers
for the purchaser competitive by
There is only partial relief from the burden allowing the refund or
because the purchase is of the tax credit of input taxes
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that are attributable to that it was subject to 0% VAT on its export
export sales. sales. Later, in his Motion for Reconsideration
of the adverse Court of Tax Appeals decision,
106(A)(2)(a) Export Sales the CIR would argue that Toshiba was not
entitled to its claim for tax refund/credit
Q: What is the cross-border doctrine? because it was VAT-exempt and its export
sales were VAT-exempt transactions (CIR
* According to CIR v. Toshiba Information argued this way because if the export sales
Equipment (Phils.), Inc., the Philippines were VAT exempt, then it would be entitled to
adheres to the cross-border doctrine which claim any credit from input tax)
means that “no VAT shall be imposed to
form part of the cost of goods destined for The Supreme Court ruled that Toshiba was a
consumption outside of the territorial registered VAT entity and its export sales were
border of the taxing authority. subject to 0% VAT.
114(A) In General
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