EVALUACIÓN DEL SISTEMA

6. Destination Principle

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Q: What is the destination principle (cross-border doctrine)?

As a general rule, the value-added tax (VAT) system uses the destination principle. It means that the destination of the goods determines the taxation or exemption from VAT. Goods and services are taxed only in the country where they are consumed.

Note: (1) This is the reason why export sales of goods are subject 0% while importations of goods are subject to 12%. Exported goods will be consumed in wherever country it is exported so it is zero-rated. On the other hand, we consume imported goods here in the Philippines that is why it is subject to 12% VAT.

(2) In the case of services, consumption takes place where the service is performed. Note, however, na may exception to the destination principle when it comes to sale of services. Although the services are performed in the Philippines, there are certain sales of services that are zero-rated. We will discuss this later when we get to Section 108(B) or zero-rated sales of services.

--- 7. Persons liable

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Read Section 105, Tax Code

Q: In general, who are liable to pay the VAT?

1. Any person who, in the course of trade or business, sells, barters, exchanges or leases goods or properties, or renders services

Except: A person, whether or not VAT-registered, whose annual gross sales or receipts does not exceed P1,919,500.¹

2. Any person who imports goods, whether in the course of trade or business or not.

(see SECTION 105, TAX CODE,SECTION 4.105-1,RR 16-2005)

1 If the annual gross sales or receipts does not exceed P1,919,500, he shall be liable instead for the 3% percentage tax on small business enterprises (see Section 116, Tax Code).

Note: RR 16-2011 [October 27, 2011] increased the threshold amounts for sale of residential lot, sale of house and lot, lease of residential unit and sale or lease of goods or properties or performance of services covered by Section 109(P), (Q) and (V) of the Tax Code. These are the changes:

Section Amount in

Pesos (2005)

Adjusted amounts Section 109(P) 1,500,000 1,919,500 Section 109(P) 2,500,000 3,199,200

Section 109(Q) 10,000 12,800

Section 109(V) 1,500,000 1,919,500 I suggest you update your codal with these adjusted amounts. Importante yan lalo na when we talk about exempt transactions.

--- 8. VAT on sale of goods or properties

a) Requisites of taxability of sale of goods or properties

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Read Section 106(A)(1), Tax Code

Q: What are considered as “goods or properties” for VAT purposes?

All tangible and intangible objects which are capable of pecuniary estimation, including:

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

2. The right or privilege to use patent, copyright, design or model, plan, secret formula or process, good will, trademark, trade brand, or other like property or right

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

4. The right or the privilege to use motion picture files, films tapes and discs

5. Radio, television, satellite transmission and cable television line (see SECTION 106(A)(1),TAX CODE)

Q: What is the tax base of VAT on sale of goods or properties?

The 12% VAT is based on the gross selling price (GSP) or gross value in money of the taxable goods or properties sold, bartered or exchanged.

For goods and properties other than real properties

Note: If the consideration of a sale is not wholly in consideration stated in the sales document or the fair market value,² whichever is higher.

(see SECTION 4.106-4, RR 16-2005 [SEPTEMBER 1, 2005])

Note: If the VAT is not billed separately, the selling price stated in the sales document shall be deemed to be inclusive of VAT (RR 16-2005)

Q: What are the requisites of a VAT-taxable sale?

For goods or properties other than real property

2 The fair market value shall mean whichever is the higher of (1) the fair market value as determined by the CIR (zonal value) or (2) the air market value as shown in the schedule of values of the provincial and city assessors (real property tax declaration). In the absence of a zonal value, gross selling price shall refer to the market value shown in the latest real property tax declaration or the consideration, whichever is higher.

exchange of goods or business or exercise of profession in the Philippines

3. The goods or properties are located within the Philippines and are for use or law or international agreement binding upon the government of the Philippines.

Note: (1) The absence of any of the above requisites exempts the transaction from VAT. However, percentage taxes may apply. Actually, the annual gross sales or receipts must exceed P1,199,500.

Otherwise, it is subject to exempts the transaction from VAT. However, percentage taxes may apply.

(2) As to (4) Remember that real properties held primarily for sale to customers are ordinary assets. Hence, the income income would be subject to capital gains tax

(3) As to (6), the threshold amounts are: (1) The sale of a residential lot with a

GSP must exceed

P1,919,500 and (2) the sale of a residential house and lot or other residential dwelling with GSP must exceed P3,199,200.

Otherwise, they are not exempt from VAT

Installment sale of a residential house and lot or other residential dwellings exceeding P1 million³ shall be subject to VAT.

(See SECTION 4.106-4, RR 16-2005 [SEPTEMBER 1, 2005], AS AMENDED BY RR 04-07 [FEBRUARY 7, 2007], RR 16-2011 [OCTOBER 27,

2011], RR 3-2013

[FEBRUARY 20, 2012] AND

RR 13-2012 [OCTOBER 12, 2012].)

Q: How is VAT imposed on real property transactions?

1. If cash or deferred payment, then the VAT on the whole amount is already imposed

2. If installment, then the VAT is imposed on each payment

3. There is no VAT imposed on Section 40(C)(2) exchanges.

Note: (1) In an installment plan, the initial payments do not exceed 25% of the GSP. If the initial payments exceed 25%, the sale is on a deferred payment basis.

(2) In case of installment, the buyer can claim the input tax in the same period as the seller recognized the output tax.

In deferred-payment basis, the output tax shall be recognized by the seller and the input tax shall accrue to the buyer at the time of the execution of the instrument of sale.

Q: Assuming a VAT-taxable transaction, is the advance payment in a real estate transaction subject to VAT?

3 This value has not been changed by the amendments.

Of the amounts typically covering an advance payment, only the pre-paid rent is subject to VAT.

Other forms of advance payment such as option money, security deposit, etc. are not subject to VAT.

Q: A bought two adjacent condominium units which he intended to combine so as to fit his family. Each unit has a GSP of 2 million. The two units were separately documented. After 2 years, A decided to sell the two units. A contends that the units are exempt from VAT as the GSP did not exceeding 2.5 million. Is A correct?

No. By virtue of the amendment introduced by RR 13-2012 [OCTOBER 12, 2012], the sale of real properties subject to VAT shall include the sale, transfer, or disposal within a 12-month period of two or more adjacent residential lots, house and lots, or other residential dwellings in favor of a buyer. Such adjacent real properties although covered by separate titles and/or separate tax declarations, when sold to one and the same buyer, whether covered by one or separate deeds of conveyance, shall be presumed as a sale of one residential lot, house and lot or residential dwelling.

Q: Is the sale of the parking lot included in the sale of a condominium unit?

No. The sale of parking lots is a separate and distinct transaction and is not covered by the rules on the threshold amount not being a residential lot, house and lot, or a residential dwelling and thus should be subject to VAT regardless of the amount of selling price. (see RR 13-2012 [OCTOBER 12, 2012])

--- 9. Zero-rated sales of goods or properties and effectively zero-rated sales of goods or properties

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Read Section 106(A)(2), Tax Code

Q: What are zero-rated transactions?

A VAT zero-rated transaction are sales by VAT-registered persons which are subject to 0% rate, meaning the tax burden is not passed on to the purchaser. A zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT

purposes, shall not result in any output tax.

However, the input tax on his purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund.

Q: Distinguish VAT rating (VAT-taxable transactions) from zero rating (Zero-rated transactions).

As explained by the Supreme Court in CIR V. BENGUET CORPORATION [JULY 14,2006]:

In transactions taxed at a 10% rate (now 12%), when at the end of any given taxable quarter the output VAT exceeds the input VAT, the excess shall be paid to the government; when the input VAT exceeds the output VAT, the excess would be carried over to VAT liabilities for the succeeding quarter or quarters.

On the other hand, transactions which are taxed at zero-rate do not result in any output tax. Input VAT attributable to zero-rated sales could be refunded or credited against other internal revenue taxes at the option of the taxpayer

Note: As an example, assume that VAT-registered person purchases materials from his supplier at P100, P9.6 of which was passed on to him by his supplier as the latter’s 12% output VAT. In a zero-rated transaction, the taxpayer can recover the P9.6 from the BIR either through a refund or a tax credit. When the taxpayer sells his finished product for let’s say P120, he is not required to pay the output VAT of P2.4 (12% of the P20 value he has added to the P100 material).

In a transaction subject to VAT, however, he may recover both the input VAT of P9.6 which he paid to the supplier and his output VAT of P2.4 by passing both these costs to the buyer. The buyer then pays P12, the total 12% VAT.

Q: Distinguish zero rating from VAT-exemption.

As differentiated by the Supreme Court in CIR v.

CEBU TOYO CORPORATION [FEBRUARY 16,2005]:

Zero-rated VAT-Exempt

It is a taxable transaction but does not result in an output tax

Not subject to the output tax

The input VAT on the purchases of a VAT-registered person with zero-rated sales may be allowed as tax credits or refunded

The seller in an exempt transaction is not entitled to any input tax on his purchases despite the issuance of a VAT invoice or receipt;

Persons engaged in transactions which are zero-rated, being subject to VAT, are required to register

Registration is optional

for VAT-exempt

persons.

Q: What are the two types of zero-rated transactions?

1. Automatically zero-rated – which refers to export sale of goods, properties, and supply of services by a VAT-registered person 2. Effectively zero-rated – which refers to the

local sale of goods and properties by a VAT-registered person o a person or entity who was granted direct and indirect tax exemption under special lws or international agreements (RMC No. 50-2007)

Q: Distinguish zero-rated (automatically zero-rated) from effectively zero-rated transactions.

As distinguished by the Supreme Court in CIR V. SEAGATE TECHNOLOGY [FEBRUARY 11,2006]:

Zero-rated Effectively zero-rated

generally refers to the export sale of goods and supply of services

refers to the sale of goods or supply of services to persons or

entities whose

exemption under special laws or international

agreements to which the Philippines is a signatory effectively

subjects such

transactions to a zero rate.

The tax rate is set at zero. When applied to the tax base, such rate obviously results in no tax chargeable against the purchaser

As applied to the tax base, such rate does not yield any tax chargeable against the purchaser transactions can also claim a refund of or a directly and legally liable for the VAT, attributable to export sales. burden of the tax shifted by the suppliers. need for application not expressly

2. Input taxes were incurred or paid;

3. Such input taxes are directly attributable to zero‐

rated or effectively zero‐rated sales;

4. Input taxes were not applied against any output with this, Executive Order 68 [March 27, 2012] provides for the monetization of outstanding VAT TCCs. EO 68 allows qualified VAT-registered taxpayers to receive the cash equivalent of their outstanding TCCs either: (1) Collecting in advance from a trustee bank a discounted cash value of their TCCs or (2) Collect full cash value of their TCC upon a certain maturity date to be determined by the BIR and BOC. DOF Joint Circular 2-2012 provides that the monetization will start in 2012 for TCCs issued prior to 2004 while those issued in 2011 and 2012 will be monetized in 2016. RMO 21-2012 [August 9, 2012]

provides the guidelines, policies and procedures for the implementation of the VAT TCC Monetization Program.

Q: Enumerate the zero-rated sales of goods.

1. Export Sales (IF GONE)

a) Sale and actual shipment of goods from the Philippines to a Foreign country

b) Sale of raw materials or packaging materials to a Non-resident buyer for delivery to a resident local export-oriented enterprise c) Sale of raw materials or packaging materials

to Export-oriented enterprise whose export sales exceed 70% of total annual production d) Sale of Gold to the BSP

e) Those that are not considered export sales under the Omnibus Investment Code and other special laws

f) Sale of goods, supplies, and equipment and fuel to persons engaged in International shipping or international air transport operations.

2. Foreign currency denominated sale – the sale to a non-resident of goods assembled or manufactured in the Philippines for delivery to a resident in the Philippines paid in acceptable foreign currency and accounted for in accordance with BSP rules and regulations 3. Sales to persons or entities whose exemption

under special laws and international agreements to which the Philippines is a signatory subjects such sales to 0% rate (effectively zero-rated transactions)

Note: As to 1(e), “considered export sales under E.O. 226”

includes the sale of goods and services by a VAT-registered person in the customs territory to ecozone and Freeport enterprises so as to make them automatically zero-rated (Section 4.106-5, RR No. 4-2007)

As to 1(f), the goods subject to zero-rating are limited to goods and passengers transported from a port in the Philippines directly to a foreign port, or vice versa, without docking or stopping at any other port in the Philippines.

(Ibid)

Now, I want to discuss the VAT treatment of PEZA-registered enterprises. This has been the subject of much confusion. The cases added more to the confusion. What you have to note in reading the cases is whether it was decided before or after the effectivity of RMC 74-99.

Before RMC 74-99, whether a PEZA-registered enterprise was exempt or subject to VAT depended on the type of fiscal incentives availed of by the said enterprise. PEZA entities can avail of two alternative or subsequent incentives of income tax holiday (ITH) or 5% preferential tax rate on gross income. If the entity avails of the 5%

preferential tax rate, it is exempt from all taxes including VAT but if it avails of the ITH, it shall be exempt from income taxes for a number of years but not VAT (see CIR v. SEKISUI JUSHI PHILIPPINES [JULY 21,2006]).

This explains the decisions in CIR V.TOSHIBA INFORMATION

EQUIPMENT [AUGUST 9, 2005] and CIR v. CEBU TOYO

CORPORATION [FEBRUARY 16, 2005]where in both cases the Supreme Court held that the PEZA-registered enterprise is entitled to a VAT refund/credit because it opted to avail itself of the income tax holiday. Having availed of the income tax holiday and its export sales being a zero-rated transaction, the PEZA-registered enterprise was entitled to refund or credit for its unutilized input taxes. In both cases, the transactions were made prior to the effectivity of RMC 74-99.

Now, after the effectivity of RMC 74-99, the tax treatment of sales of goods and services of PEZA-registered enterprises is now based on the principles of “separate custom territory” and “cross border doctrine.”

As explained by the Court in the cases of CIR V.SEAGATE

TECHNOLOGY [FEBRUARY 11, 2005], CIR v. SEKISUI JUSHI

PHILIPPINES [JULY 21,2006],CIR V.TOSHIBA INFORMATION

EQUIPMENT [AUGUST 9, 2005], CIR V. CONTEX [JULY 2, 2004]:

PEZA-registered enterprises, which would necessarily be located within ecozones, are VAT-exempt entities not because of Section 24 of RA 7926 (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 which establishes the fiction that ecozones are foreign territory. As a result, sales made by a supplier in the Customs Territory (national territory of the Philippines outside the borders of the ecozone) to a purchaser in the ecozone shall be considered as exportation from the Customs Territory. Conversely, sales made by a supplier from the ecozone to a purchaser in the Customs Territory shall be considered as an importation into the Customs Territory.

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

Hence, actual export of goods and services from the Philippines to a foreign country must be free of VAT; while those destined for use or consumption within the Philippines shall be imposed with ten percent (10%) (now 12% VAT). Sales made by an enterprise within a non-ecozone territory, i.e., Customs Territory, to an enterprise within an ecozone territory shall be free of VAT.

This has been further clarified in RMC 50-2007 [July 30-2007].

Q: Summarize the current tax treatment of PEZA-registered enterprises as provided in RMC 74-99 and as further clarified in RMC 50-2007.

1. Any sale of goods, property or services by a VAT-registered supplier from the customs-territory to any Ecozone-registered enterprise – regardless of incentive availed – is zero-rated on the part of the VAT-registered seller because ecozones are foreign soil by fiction and thus the sale is considered an export sale.

2. Sales to an ecozone enterprise 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 for its input VAT because, under Section 109(O) of the Tax Code, export sales by persons who are not VAT-registered are exempt transactions.

3. If the ecozone-enteprise is an exporter, its input VAT are subject to refund not because of the incentives it availed but because of the nature of its transactions (export sales).

4. Any sale of goods or property by an ecozone-registered enterprise to a buyer in the customs territory shall be subject to 12% VAT because it shall be considered an importation. The tax is imposed on the buyer/importer.

5. The sale of service or lease of properties by PEZA-registered enterprises to a customer or lessee from the customs territory shall be exempt from VAT if the service is performed within the ecozone. The lease of properties will be exempt if the property is located within the ecozone. However, if the properties are located outside of the ecozone, payments to such enterprise shall be considered as royalties and subject to final withholding VAT of 12%

Sale of Goods Sale of Services

VAT -

registered supplier from customs territory to

PEZA -

registered enterprise

0% VAT 0% VAT

VAT-exempt supplier from customs territory to

VAT-exempt supplier from customs territory to

In document ANEXOS DEL CAPÍTULO 1 (página 179-182)