Value-Added Tax

September 1, 1987 REVENUE REGULATIONS NO. 05-87 SUBJECT : Value-Added Tax TO : All Internal Revenue Officers and others concerned CHAPTER I Scope of these Regulations SECTION 1 . Scope . Pursuant to the provisions of Section 245 in relation to Section 4, both of the National Internal Revenue Code, as amended, these Regulations are hereby promulgated to implement the provisions of Title IV of the said Code imposing the value-added tax on importation of goods and sale of goods and services. CHAPTER II Definitions of Terms SECTION 2 . Definition of terms . In applying the provisions of these Regulations, the following words and phrases shall have the sense and meaning indicated below: (a) " Code " refers to the National Internal Revenue Code, unless otherwise specified. (b) " Section " refers to a section of the National Internal Revenue Code, unless otherwise specified, (c) " Person " refers to any individual, trust, estate, partnership, corporation, joint venture, cooperative or association. (d) " Taxable person " refers to any person liable for the payment of value-added tax, whether or not registered in accordance with Section 107. (e) " VAT-registered person " refers to any person registered in accordance with Section 107. (f) " VAT-registrable person " refers to any person who is required to register under the provisions of Section 107(a), ( b ) o r (c ), but failed to register. aisa dc (g) " Importer " refers to any person who brings goods into the Philippines, whether or not made in the course of his trade or business. It includes non-exempt persons or entities who acquire tax-free imported goods from exempt persons, entities or agencies. (h) " Taxable sale " refers to the sale, barter or exchange of goods, and similar transactions, including transactions "deemed sale" and the performance of service for a consideration, all of which are subject to tax under Sections 100 and 102. (i) " Export sale " means the sale and shipment or exportation of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported, or foreign currency denominated sales. 'Foreign currency denominated sales' means sales to nonresidents of goods assembled or manufactured in the Philippines, for delivery to residents in the Philippines and paid for in convertible foreign currency remitted through the banking system in the Philippines. (j) " Sale of services " means the performance of all kinds of services for others for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors; stock, real estate, commercial, customs and immigration brokers; lessors of personal property; lessors or distributors of cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods for, others; and similar services, regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. (k) " Gross selling price " means the total amount of money or its equivalent which the purchaser pays or is obligated to pay to the seller in consideration of the sale, barter or exchange of the goods, excluding the value-added tax. The excise tax, if any, on such goods shall form part of the gross selling price. It shall include other charges such as packaging, delivery and insurance, even if these amounts are separately billed or invoiced. (l) " Total invoice amount " refers to the total amount appearing in the invoice or receipt, which includes the gross selling price or gross receipt and the amount intended to cover the value-added tax. (m) " Gross receipts " means the total amount of money or its equivalent representing the contract price, compensation or service fee, including the amount charged for materials supplied with the services and deposits or advance payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding value-added tax. (n) " Constructive receipt " occurs when the money consideration or its equivalent is placed at the control of the person who rendered the service without substantial restrictions by the payor. (o) " Capital goods " refers to goods with estimated useful life greater than one year and which are treated as depreciable assets under Section 29(f), used directly or indirectly in the production or sale of taxable goods or services. acd (p) " Goods " means any movable, tangible objects which is appropriable or transferrable. (q) " Input tax " means the value-added tax paid by a VAT-registered person in the course of his trade or business on importation of goods or local purchases of goods or services from a VAT-registered person. It shall also include the transitional input tax determined in accordance with Section 105 and other transitional input taxes as prescribed by these Regulations. In case tax exempt products of a pioneer enterprise registered with the Board of Investments as of August 1, 1986 are sold domestically to a VAT-registered person, the value-added tax otherwise due on such products shall also be considered as input tax creditable against his output tax. It includes input taxes which can be directly attributed to transactions subject to the value-added tax plus a ratable portion of any input tax which cannot be directly attributed to either the taxable or exempt activity. (r) " Input tax deemed paid " refers to the value-added tax which would have been due and/or paid on domestically sold products of a pioneer enterprise registered with the Board of Investments as of August 1, 1986, if the same had not been exempted or reduced by law. (s) " Output tax " means the value-added tax due on the sale of taxable goods or services by any person registered or required to register under Section 107. (t) " Value-added tax payable " means the excess of output tax over allowable input tax. In the case of importation, it is the VAT due on such importation. (u) " Principal place of business " refers to the place where the head or main office is located as appearing in its Articles of Incorporation. In the case of an individual the principal place of business shall be the place where the head or main office is located and where the books of accounts are kept. (v) " VAT " when used in these Regulations means value-added tax. CHAPTER III Coverage, Basis and Rate of Tax SECTION 3 . Value-added tax on sale of goods and services . Value-added tax is imposed on any sale or transactions "deemed sale" of taxable goods (including capital goods, irrespective of the date of acquisition), or on selected services. Any person otherwise required to register for VAT purposes who fails to register shall also be liable to value-added tax on their sale of taxable goods or services. The sale of goods subject to excise tax is also subject to the value-added-tax, except manufactured oil products (other than lubricating oil, processed gas, grease, wax and petrolatum). The selected services subject to value-added tax shall include those performed or rendered by construction and service contractors; stock, real estate, commercial, customs and immigration brokers; cinematographic film owners, lessors or distributors; lessors of personal property; persons engaged in milling, processing, manufacturing or repacking goods for others; and similar services. SECTION 4 . Transactions " deemed sale ". The following transactions are "deemed sale" pursuant to Section 100(b): (a) Transfer, use or consumption, not in the course of business. Transfer of goods not in the course of business can take place when the VAT-registered person withdraws goods from his business for his personal use; (b) Distribution or transfer to shareholders or investors as share in the profits of the business: (c) Transfer to creditors in payment of debt or obligation; Consignment of goods if actual sale is not made within 60 days following the date such goods were consigned. Consigned goods returned by the consignee within the 60-day period is not deemed sold; and (e) Retirement from or cessation of business or death of an individual with respect to all goods on hand, whether capital goods, stock-in-trade, supplies or materials as of the date of such retirement or cessation, whether or not the business is continued by the new owner or successor, estate or heir. The following circumstances shall, among others, give rise to transactions "deemed sale" for purposes of this Section: (i) Change of ownership of business or incorporation of the business in the case of a single proprietorship; (ii) Dissolution of a partnership and creation of a new partnership which takes over the business; and (iii) Death of an individual who is a VAT-registered person, even if the estate or heirs of the decedent shall continue to operate the business . cd i SECTION 5 . Changes in or cessation of status as a VAT registered person . (a) Subject to tax . The value-added tax provided for in Section 100 shall apply to goods originally intended for sale or for use in business and capital goods which are existing as of the occurrence of the following: (1) Change of business activity from value-added taxable status to exempt status. An example is a VAT-registered person engaged in a taxable activity like wholesaler or retailer who decides to discontinue such activity and engages instead in catering or restaurant business or in any other business not subject to value-added tax; (2) Approval of a request for cancellation of registration due to reversion to exempt status for failure to go beyond P200,000 sales for two consecutive taxable years; (3) Approval of a request for cancellation of registration due to a desire to revert to exempt status after the lapse of two consecutive years from the time of registration by a person who voluntarily registered inspite of being exempt under Section 103(a), ( b) , ( c ) and (f); and (4) Approval of a request for cancellation of registration of one who commenced business with the expectation of gross sales or receipts exceeding P200,000, but who failed to exceed this amount during the first twelve months of operation. (b) Not subject to output tax . The value-added tax shall not apply to goods existing as of the occurrence of the following: (1) Change of control of a corporation by the acquisition of the controlling interest of such corporation by another stockholder or group of stockholders; (2) Change in the trade or corporate name of the business; (3) Merger or consolidation of corporations. The unused input tax of the dissolved corporation as of the date of merger or consolidation shall be absorbed by the surviving or new corporation. 6 . Computation of output tax on sale of domestic goods and services . (a) In general . The output tax on domestic sale of goods during a quarter shall be determined by applying the rate of 10% prescribed in Section 100 on the gross selling price of the goods sold, which may or may not be billed separately in the invoice. If the value-added tax is not billed separately in the invoice, the total invoice amount shall be multiplied by 1 / 11 to arrive at the output tax. If the value-added tax is billed as a separate item in the invoice but the amount billed is erroneous, the tax shall form part of the gross selling price for purposes of determining the total invoice amount, which shall be multiplied by 1 / 11 to arrive at the output tax. Where the gross selling price stated in the invoice is unreasonably lower than the actual market value, the Commissioner shall determine and prescribe the actual market value which shall be the tax base. The gross selling price is unreasonably lower than the actual market value if it is lower by more than 30% of the actual market value of the same goods of the same quantity and quality sold in the immediate locality on or nearest the date of sale. (b) Partially exempt sale of domestic goods and services . In the case of a VAT-registered person engaged in the sale of taxable goods or services who is partially exempted under special law, the rate of 10% shall be applied only on the taxable portion of his sales. Thus, in the case of one whose sales is 50% taxable, the total gross selling price shall be reduced by 50% and the balance shall be the tax base of the 10% value-added tax. However, in cases where the gross selling price and the amount intended to cover the tax are not indicated as separate items in the invoice, the amount intended to cover the tax shall be removed from the total invoice amount during the quarter before the exempt portion of the gross selling price is deducted. The amount intended to cover the tax shall be computed by multiplying the total invoice amount by the factor corresponding to the percent of exemption as follows: Percent of Exemption Factor 0% 1/11 10% 1/12.11 20% 1/13.5 50% 1/21 75% 1/41 (c) Illustrative computations . The computation of the factors and application of the rules prescribed in the preceding subparagraph are illustrated in the following examples: Example 1: 10% exempt; 90% taxable Gross Selling Price = 100% VAT = (100% x 90%) x 10% = 9% Gross Selling Price + VAT = Total Invoice Amount or 100% + 9% = 109% Denominator = 1.09 = 12.11 .09 Factor = 1 12.11 Example 2: 75% exempt; 25% taxable Gross Selling Price = 100% VAT = (100% x 25%) x 10% = 2.5% G.S.P. + VAT = Total Invoice Amount = 100% + 2.5% = 102.5% Denominator = 1.025 = 41 .025 Factor = 1 41 Example 3 : VAT billed separately in invoice . Assume that the sales made by a person who is exempt from taxes under a special law to the extent of 50% is P100,000. The output tax is computed as follows: Taxable Exempt Sales P50,000 P50,000 Tax Rate 10% Exempt Output tax P5,000 0 ====== ====== The sales and the VAT above shall be shown in the invoice as follows: Total sales P100,000 VAT 5,000 Total P105,000 ======== The journal entry of the seller shall be: acd Dr. Accounts Receivable P105,000 Cr. Sales Taxable P50,000 Sales Exempt 50,000 Output Tax 5,000 Example 4 : VAT is not separately billed in the invoice . Assume the same facts as in Example No. (3), except that his total sales billings did not indicate the value-added tax separately, so the total invoice amount is P105,000. In this case the output tax deemed included in the amount of P105,000 should be segregated from the gross selling price. Thus, the amount intended to cover the tax shall be calculated as follows: Total Invoice Amount x 1/21 = Output Tax or P105,000 x 1 = P105,000 x 1 = P5,000 21 21 Total invoice amount P105,000 Less: Output tax (per computation above) 5,000 Gross Selling Price P100,000 ======== Taxable Exempt Gross selling price P50,000 P50,000 Rate of tax 10% Exempt Output tax P5,000 None ====== ====== The journal entry of the seller shall be: Dr. Accounts Receivable P105,000 Cr. Sales Taxable P50,000 Sales Exempt 50,000 Output Tax 5,000 In computing the taxable base during a quarter, the following shall be allowed as deductions from gross selling price or gross receipts: (A) Discounts granted and determined at the time of sale which are expressly indicated in the invoice, and the amount thereof forms part of the gross sales duly recorded in the books of accounts. Discounts conditioned upon the subsequent happening of an event or fulfillment of certain conditions, such as prompt payment or attainment of sales goals, shall not be allowed as deductions. (B) Sales returns and allowances for which a proper credit or refund was made during the quarter to the buyer for sales previously recorded as taxable sales. Example 5 : VAT was separately indicated "A" sold on account 100 pieces of merchandise "X" to "B" with a gross selling price of P5,000 plus VAT of P500, or a total of P5,500 invoiced as follows: Sales Mdse. "X" - 100 pcs. P5,000 VAT at 10% 500 Total P5,500 ====== Afterwards, "B" returned 50 pieces of the merchandise to "A" for being below standard. "A" accepted the return and issued a credit memorandum for 1/2 of the amount invoiced. In this case the credit memorandum should indicate the following separately: To "B" We hereby credit your account for 50 pcs. of merchandise "X" returned as follows: Cost of goods returned P2,500 VAT previously billed 250 Total P2,750 ====== Example 6 : VAT not separately billed . Assuming the same facts in Example 5 above, except that VAT was included but not separately billed in the invoice: Sale of merchandise "X" P5,500 When "B" returns 50 pieces of the merchandise, the credit memorandum shall be: To "B" We hereby credit your account for 50 pieces of merchandise "X" returned by you as follows: 50 pcs. merchandise "X" returned P2,750 The input tax portion is computed as follows: Total amount of credit memorandum x 1 11 or P2,750 x 1 = P250 11 In both cases, "B" should account for the P2,750 as follows: Dr. Accounts Payable P2,750 Cr. Purchase 2,500 Input tax 250 (d) On transactions " deemed sale ". The output tax equivalent to 10% based on the market value of the goods deemed sold shall be imposed as of the time of the occurrence of the transactions enumerated in Section 4 (A), (B), (C) and (D) of these Regulations. However, in the case of retirement from or cessation of business under Section 4 (E) of these Regulations, the tax base shall be the acquisition cost or the current market price of the goods, whichever is lower. cd i (e) Invoicing and recording " deemed sale " transactions . In the case of Section 4 (A) of these Regulations, a memorandum entry in the subsidiary sales journal to record withdrawal of goods for personal use is required. In the case of Section 4 (B), (C), and (D) of these Regulations, an invoice shall be prepared at the time of the occurrence of the transaction, which should include, among others: (1) nature of the transaction; (2) quantity and description of the goods involved; (3) amount (tax base); and (4) the output tax due. The data appearing in the invoice shall be duly recorded in the subsidiary sales journal. The total amount of "deemed sale" shall be included in the return to be filed for the quarter. In the case of retirement from or cessation of business, an inventory shall be prepared and submitted to the Revenue District Officer who has jurisdiction over the taxpayer's principal place of business not later than 30 days after the retirement or cessation from business. An invoice shall be prepared for the entire inventory, which shall be the basis of the entry into the subsidiary sales journal. The invoice need not enumerate the specific items appearing in the inventory, but it must show the total amount. It is sufficient to just make a reference to the inventory regarding the description of the goods. However, the sales invoice number should be indicated in the inventory filed and a copy thereof shall form part of this invoice. If the business is to be continued by the estate, heirs or new owners, the entire amount of output tax on the amount deemed sold shall be allowed as input taxes. If the business is to be liquidated and the goods in the inventory are sold or disposed of to VAT-registered buyers, an invoice or instrument of sale or transfer shall be prepared, citing the invoice number wherein the tax was imposed on the deemed sale. At the same time the tax paid corresponding to the goods sold should be separately indicated in the instrument of sale. Example : "A", at the time of retirement, had 1000 pieces of merchandise which was deemed sold at a value of P20,000 with an output tax of P2,000. After retirement, "A" sold to "B", 500 pieces for P12,000. In the contract of sale or invoice, "A" should state the sales invoice number wherein the output tax on "deemed sale" was imposed and the corresponding tax paid on the 500 pieces is P1,000, which is included in the P12,000, or he should indicate it separately as follows: Gross selling price P11,000 VAT previously paid on "deemed sale" 1,000 Total P12,000 ====== In this case, "B" shall be entitled only to P1,000 as input tax and not 1 / 11 of P12,000. If "A" did not separately indicate the passed-on tax, "B" shall not be allowed any input tax. (f) Basis of tax arising from changes in or cessation of status of a taxpayer as a VAT-registered person . The output tax on goods originally intended for sale or for use in business, including capital goods, existing as of the occurrence of events or causes resulting in changes in or cessation of the status of a taxpayer as a VAT-registered person shall be based on the acquisition cost or the current market price of the goods, whichever is lower. Any unused input taxes as of the date of retirement, change of status or cessation of status as VAT-registered person shall be allowed as credit against any output tax resulting from such change of status and the balance, if any, shall, subject to the filing of an application within two years from date of retirement, cessation or change of status be issued a tax credit certificate which can be used in payment of any internal revenue tax due from him. (g) On sale of services . The output tax on sale of services during a quarter shall be determined by applying the rate of 10% prescribed in Section 102 on the gross receipts which may or may not be billed separately in the invoice or receipt. If the value-added tax is not billed separately in the invoice or receipt, the total invoice amount shall be multiplied by 1 / 11 to arrive at the output tax. If the value-added tax is billed as a separate item in the invoice but the amount billed is erroneous, the tax shall form part of the gross receipts for purposes of determining the total invoice amount, which shall be multiplied by 1 / 11 to arrive at the output tax. Gross receipts shall include not only cash or its equivalent actually received but also those constructively received. The following and similar transactions are examples of constructive receipts: (1) deposit in banks which are made available to the seller of services without restrictions; (2) issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof by the seller as payment for services rendered; and (3) transfer of the amounts retained by the contractee to the account of the contractor. In the above instances, the seller of the service should include the amount constructively received in the quarter when the transaction occurred. A receipt or invoice therefor should be issued as of that date and the transaction entered in the subsidiary sales journal of the seller of the service. Amounts due on contracts completed on or before December 31, 1987, payments of which are receivable on or after January 1, 1988, shall be considered as accrued as of December 31, 1987 for the purpose of the payment of the contractor's tax subject to the following conditions: (i) an information return shall be filed showing the name(s) of the contractee(s) and the amount(s) of the contract price outstanding as of December 31, 1987, and containing a declaration of the obligation to pay the contractor's tax due; (ii) the contractor billed the unpaid amount not later than December 31, 1987, and copy of such billing is attached to the information return required in (i) hereof: aisa dc (iii) the contractor has recorded in his books of accounts for the year 1987 the amount receivable; and (iv) the contractor files not later than January 20, 1988, and on or before the 20th day after each calendar quarter, the regular contractor's tax return for the payment of the contractor's tax on payments received in 1988. Failure to comply with the above-stated conditions shall automatically subject the gross receipts to the value-added tax of 10%. A person engaged in milling for others (except palay into rice, corn into corn grits, and sugarcane into raw sugar) is subject to value-added tax on sale of services. If the miller is paid in cash for his services, the 10% tax shall be based on his gross receipts during the quarter. If he receives a share of the milled products, instead of cash, the 10% value-added tax shall be based on the actual market value of his share in the milled products. Sale by the owner or the miller of his share of the milled products (except rice, corn grits and raw sugar) shall be subject to the value-added tax on sale of goods. T he rental amount received by a finance and leasing company registered under RA 5980 under an agreement qualifying as a "finance lease" or "full payment lease" as defined in Section 2.01/2 of RR 19-86 shall not be subject to the value-added tax. If the lessor is a person other than a finance and leasing company registered RA 5980, the rentals resulting from the lease agreement shall be subject to the value-added tax. All receipts from service, hire or lease of transportation equipment not subject to tax on carriers and keepers of garages, shall be subject to value-added tax. SECTION 7. Value-added tax on importation of goods . (a) In general . The value-added tax at the rate of 10% is imposed on goods brought into the Philippines, whether for use in business or not. The tax shall be based on the total value used by the Bureau of Customs in determining tariff and customs duties, plus customs duties and other charges prior to release from customs custody, such as postage, commissions, etc. In case the valuation used by the Bureau of Customs in computing customs duties is by volume or quantity, the landed cost shall be the basis for computing the value-added tax. 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. The value-added tax shall not apply to goods to be used by the importer himself in the manufacture or preparation of petroleum products (except lubricating oil and grease) subject to excise tax under Section 145. If the imported goods are to be used in the manufacture of lubricating oil or grease, the value-added tax on such raw materials shall be collected from the importer. (b) Applicability and payment . The rates prescribed under Section 101 shall be applicable to all importations entered or withdrawn on or after January 1, 1988, in accordance with the Tariff and Customs Code of the Philippines and its implementing regulations. The value-added tax on importation shall be paid by the importer prior to the release of such goods from customs custody. Delivery of imported goods to a customs bonded warehouse, export processing zone or other authorized withdrawals or temporary importation for re-exportation without payment of the value-added tax shall be governed by the respective laws covering such withdrawals on deliveries. (c) Sale, transfer or exchange of imported goods by tax exempt persons . In the case of goods imported into the Philippines by persons, entities or agencies exempt from tax which are subsequently sold, transferred or exchanged in the Philippines to non-exempt persons or entities, the purchasers, transferees or recipients shall be considered the importers thereof who shall be liable for the vale-added tax on such importation. SECTION 8 . Zero-rating . (a) In general . A zero-rated sale is a taxable transaction for value-added tax purposes. A sale by a VAT-registered person of goods and/or services taxed at zero rate shall not result in any output tax. The input tax on his purchases of goods or services related to such zero-rated sale shall be available as tax credit or refundable in accordance with Section 16 of these Regulations. (b) Zero-rated sales of goods . The following sales by VAT-registered persons are zero-rated: cd i (1) Export sales made directly by a VAT-registered person. Export sales made by any person who is not registered under the provisions of Section 107 shall be treated as exempt sales. Foreign currency denominated sales which are referred to as "foreign exchange denominated sales or internal exports " i n LOI No. 1355 shall be considered as export sales if the following conditions are present: (i) The buyers are Filipinos abroad, returning overseas Filipinos or other non-residents of the Philippines; (ii) The goods are assembled or manufactured in the Philippines for household and personal use; (iii) The goods are paid for in convertible foreign currency inwardly remitted through the banking system in the Philippines; and (iv) The sales do not exceed an aggregate foreign exchange value of US $1,000 or its equivalent in other convertible foreign currencies. (2) Sales to persons or entities whose exemptions are effectively zero-rated under special laws or international agreements to which the Philippines is a signatory. It refers to exemptions expressly granted under special laws or treaties which are extended not only to the grantee but also to its supplier of goods. The following are examples of zero-rated sales: (i) In the case of sale of goods to a U.S. military facility which is exempt from sales tax under the RP-US Military Bases Agreement, the exemption of the grantee extends to the seller and therefore the sale is zero-rated. (ii) Executive Order No. 161 provides that goods sold directly to the Asian Development Bank shall not be subject to sales tax, and services rendered under contracts entered into with the said bank shall not be subject to contractor's tax. In this case, the sale of goods and services to Asian Development Bank are effectively zero-rated. (c) Zero-rated sales of services . The following services rendered by VAT-registered persons are zero-rated: (1) Services in connection with the processing, manufacturing or repacking of goods for persons doing business outside the Philippines, where such goods are actually shipped out of the Philippines to said persons or their assignees and the services are paid for in acceptable foreign currency inwardly remitted and duly accounted for under the regulations of the Central Bank of the Philippines. (2) Services rendered to persons or entities which are effectively zero-rated under special laws or international agreements. In this case, if under the law or agreement, it is not only the entity that is exempt from taxes but also its suppliers, the sales of services to such entity are effectively zero-rated. The example given above with respect to sale or goods to U.S. military facility and the Asian Development Bank shall also apply to those rendering services. (3) Services performed in the Philippines other than those mentioned in subparagraph (1) above which are paid for by the person or entity to whom the service is rendered in acceptable foreign currency inwardly remitted and duly accounted for in accordance with Central Bank regulations. Where the contract involves payment in both foreign and local currency, only the service corresponding to that paid in foreign currency shall enjoy zero-rating. The portion paid for in local currency shall be subject to VAT at the rate of 10%. (d) Application for the imposition of zero rate . Any person claiming that its sales of goods or services are effectively zero-rated under Sections 100 a nd 10 2 shall file an application in a form prescribed therefor with the Commissioner of Internal Revenue justifying the imposition of zero rate on the said transactions. Upon approval, his status as a zero-rated taxpayer shall remain valid until revoked. SECTION 9 . Exemptions . (a) In general . An exemption means that the sale of goods and service is not subject to value-added tax (output tax). The seller is not allowed any tax credit on VAT (input tax) previously paid. The person making the exempt sale of goods or services shall not separately bill any output tax to his customers because the said transaction is not subject to VAT. On the other hand, a VAT-registered purchaser of goods or services which are exempt from Vat is not entitled to any input tax on such purchase. cd As a general rule, persons or transactions taxed under Title V of the Code are exempt from value-added tax. Sale of manufactured products subject to excise tax is also subject to the value-added tax, except the sale of petroleum products, the price of which is controlled by the government and raw materials to be used by the buyer himself in the manufacture of petroleum products (except lubricating oil and grease). (b) Exempt transactions . (1) Sale of nonfood agricultural, marine and forest products in their original state shall be exempt only if sold by the producer himself or the owner of the land where such products were produced. In the hands of a subsequent seller, the sale shall be subject to VAT. (2) Sale or importation of agricultural and marine food products is exempt in all stages of production or distribution if sold in their original state. Livestock and poultry refer to live animals of a kind generally used as, or yielding or producing food for human consumption. Livestock shall include cows, bulls and calves, pigs, sheep, goats and rabbits. Poultry shall include fowls, ducks, geese and turkey. (It does not include fighting cocks, race horses, zoo animals and other animals generally considered as pets.) Marine food products shall include fish and crustaceans, such as eels, trout, lobsters, shrimps, prawns, oysters, mussels and clams. Meat, fruit, fish, vegetables and other agricultural and marine food products shall be considered in their original state even if they have undergone the simple processes of preparation or preservation for the market, such as freezing, drying, salting, smoking or stripping. Polished and/or husked rice, corn grits and raw cane sugar shall be considered as agricultural food products in their original state. Raw cane sugar refers to the crystalized or solidified juice of sugar cane through a milling process, short of the process of being refined, without any addition of chemicals, resulting in muscovado or granulated sugar. It does not include refined sugar, molasses or bagasse. (3) Fertilizers; pesticides and herbicides; chemicals for the formulation of pesticides; seeds, seedlings and fingerlings; fish, animal and poultry feeds; and soya bean and fish meal are exempt on importation and sale in all stages of distribution. (4) Sale of petroleum products subject to excise tax is not subject to value-added tax. However, the sale or importation of lubricating oil, processed gas, grease, wax and petrolatum is subject to value-added tax. (5) Sales or importations of raw materials to be used by the buyer or importer himself in the manufacture of petroleum products subject to excise tax. Raw materials to be used in the manufacture of lubricating oil and grease are not exempt. (6) The printing, publication, importation or sale of books. The printing, publication, importation or sale of newspaper, magazine, review or bulletin, is exempt only if they appear at regular intervals with fixed prices for subscription and sale and that they are not devoted principally to publication of advertisements. (7) The importation of passenger and/or cargo vessel, including engine and spare parts, shall be exempt only if the vessel is more than 10,000 tons and it is to be operated by the importer himself as a coastwise or ocean-going vessel. Subsequent importations of engine and spare parts to be used by the importer himself for the maintenance of such passenger and/or cargo vessel are likewise exempt from the value-added tax. (8) Personal and household effects brought into the Philippines by residents of the Philippines returning from abroad and non-resident citizens coming to resettle in the Philippines shall be exempt from the value-added tax on importation only if such goods accompany them or arrive in the Philippines within ninety days before or after the returnee's arrival and that such goods are exempt from customs duty under the Tariff and Customs Code. (9) Professional instruments and implements, wearing apparel, domestic animals, and personal household effects brought into the Philippines by persons coming to settle for the first time in the Philippines shall be exempt from value-added tax on importation subject to the following conditions: (a) The exemption excludes any vehicle, vessel, aircraft, machinery, goods for use in manufacture and merchandise of any kind in commercial quantity; (b) The goods must belong to the person coming to settle in the Philippines; cd i (c) The goods must be for their own use and not for sale, barter or exchange; (d) The goods must accompany such persons or arriving within ninety days before or after their arrival; (e) They must produce evidence satisfactory to the Commissioner of Internal Revenue that they are coming to settle in the Philippines; and (f) That the change of residence is bona fide (10) Receipts of the following persons subject to percentage tax under Title V are not subject to VAT: (a) Operation of hotels, motels, and others (Sec. 113); (b) Caterers (Section 114); (c) Carriers and keepers of garages (Sec. 115); (d) Dealers in securities and lending investors (Sec. 116); (e) Franchise holders (Sec 117); (f) Operators of communication services, for overseas transmissions originating from the Philippines, such as telephone, telegraph, wireless or other communications (See Sec. 118); (g) Banks and non-bank financial intermediaries (Sec. 119); (h) Financial companies (Sec. 120); (i) Insurance companies (Sec. 121); (j) Agents of foreign insurance companies (Sec. 122); (k) Proprietor, lessee or operator of services subject to amusement taxes (Sec. 123); (l) Winners in horse races of Jai-Alai (Sec. 124); (m) Sellers of goods or services who are exempt under Section 103(w) who have not opted to be VAT-registered (Sec. 112) (11) The milling for others palay into rice, corn into grits and sugar cane into raw sugar by owners of corn mills, conos, kiskisan, threshers or sugar centrals or mills is exempt from value-added tax. The total receipts of the miller whether paid in cash or in kind is exempted from the value-added tax. Agricultural contract growers refer to those producing for others poultry, livestock, or other agricultural and marine food products in their original state. (12) Medical, dental, hospital and veterinary services. Laboratory services are also exempted. If the hospital or clinic operates a pharmacy or drug store, the sale of drugs and medicine, if it exceeds P200,000 during a 12-month period is subject to VAT. (13) Educational services exempted refer to academic, technical or vocational education provided by private educational institutions duly accredited by the Department of Education, Culture and Sports and those rendered by government educational institutions. It does not include seminars, in-service training, review classes and other similar services rendered by persons who are not accredited by the Department of Education, Culture and Sports. (14) Sale of works of art, literary works and musical compositions is exempt only if sold by the artists themselves. If sold by other persons, in the course of business, it shall be subject to the value-added tax. If the services of the artist are engaged for the production of such works, his receipts therefrom are exempt from the value-added tax. (15) The various services exempted under Section 103(o), (p), (q), (r), (s) and (t) are limited only to the performance of such services. If they should engage in other lines of taxable services, they shall be subject to value-added tax on such services. (16) Transactions which are exempt under special laws or international agreements to which the Philippines is a signatory. (17) Export sales by persons who are not VAT-registered. It includes exportations by persons who are otherwise subject to value-added tax but failed to register as such. (18) Those exempted under Section 103(w). For this purpose, the aggregate gross taxable sales derived from all lines of business and every separate or distinct establishment or place where business is conducted should not exceed P200,000 during any 12-month period. New enterprises shall be initially exempted if it does not expect to realize more than P200,000 for the next 12-month period. aisa dc CHAPTER IV Tax Credits SECTION 10 . Credits for input tax . A VAT-registered person shall be entitled to the following tax credits. - (a) Input taxes for: (1) Importation or domestic purchase of goods for sale or for conversion into or intended to form part of a finished product for sale: (2) Importation or domestic purchase of goods for use as supplies in connection with trade or business: (3) Importation or domestic purchase of goods to be used in the manufacture, processing or production of goods for others or an materials supplied in the sale of services; (4) Importation or domestic purchase of capital goods to be used in the trade or business of the VAT-registered person himself; (5) Purchase of services performed in connection with the trade or business of the buyer; (6) Transactions "deemed sale" under Section 100(b); and (7) Purchase of goods from a pioneer enterprise registered with the BOI as of August 1, 1986. (b) Transitional input tax allowed to be carried over as provided in Section 26 (b) (1) of these Regulations. (c) Presumptive input taxes on inventories allowed to be carried over as provided in Section 26 (b)(2), and (3) of these Regulations. 11 . Determination of input tax deductible during a taxable quarter . All input taxes paid by or available to a VAT-registered person during a taxable quarter plus any input tax carried over from the preceding quarter shall be reduced by the applications for refund or applications for issuance of tax credit certificate and other adjustments such as those for purchase returns or allowances in order to arrive at the input tax that can be deducted from output tax. Applications for issuance of tax credit certificate shall include not only those filed with the Bureau of Internal Revenue but also those filed with other government agencies such as the Board of Investments. All VAT-registered persons applying for the issuance of a tax credit certificate shall furnish the Revenue District Officer where his principal place of business is situated a copy of every such application not later than the end of the VAT quarter when such applications were filed. 12 . Apportionment of input taxes between taxable and exempt operations . If a VAT-registered person is also engaged in other activities, the input taxes paid for purchases of goods and services which cannot be directly attributed to either operation shall be allocated between the VAT taxable operation and the other exempt operation. For this purpose, the amount of VAT taxable sales or receipts over the total sales/receipts multiplied by the total input tax paid during the quarter that cannot be directly attributed to either operation shall be the creditable input tax. Example 1 : "A", a VAT-registered person is engaged in the sale of VAT taxable goods and at the same time is also engaged in the restaurant business, which is subject to another kind of tax, in the same business establishment. During the quarter he made sales of goods in the amount of P300,000 plus a value-added tax of P30,000. The sales of the restaurant amounted to P200,000 with a separate percentage tax of P8,000 for a total of P208,000. During the same quarter, repairs on the building amounted to P50,000 plus a value-added tax of P5,000. Supplies purchased for common use amounted to P10,000 plus P1,000 value-added tax. Since the value-added tax of P5,000 and P1,000, or a total of P6,000, cannot be directly attributed to either taxable operation or the non-VAT taxable operation, it should be allocated as follows: Input tax to VAT taxable operation = Sales on VAT Taxable Operations x Total Input Tax (From VAT paid on repairs and on purchase of supplies) Total Sales (VAT Taxable & Non-VAT Taxable) or P300,000 x P6,000 = P3,600 P500,000 The remaining P2,400 is input tax corresponding to the non-VAT taxable operations which is computed as follows: acd P200,000 x P6,000 = P2,400 P500,000 Total input taxes that cannot be directly allocated P6,000 Less: Input taxes on non-VAT taxable operation 2,400 Input taxes to VAT taxable operation P3,600 ====== The input taxes allocated to non-VAT taxable operations should be charged to operations under the following entry: Dr. Repairs P2,000 Supplies 400 Cr. Input Taxes P2,400 The above adjustment is necessary if the total input taxes of P6,000 were previously debited to input taxes. Example 2 : Using the same facts in Example 1, except that only repairs considered as major repairs were incurred in the amount of P100,000 and input tax of P10,000. The input tax of P10,000 should be allocated to VAT taxable and non-VAT taxable operations as follows: Input tax for VAT taxable operation: P300,000 x P10,000 = P6,000 P500,000 The remaining P4,000.00 is input tax to non-VAT taxable operations. If the total amount of P10,000 was previously debited to input taxes, the P4,000.00 should be adjusted as follows: Dr. Equipment P4,000.00 Cr. Input Taxes P4,000.00 13 . Determination of input and output taxes . In the sale of goods and services, the value-added tax thereon may or may not be billed as a separate item in the invoice. If the taxpayer bills the tax as a separate item in the invoice or receipt, the VAT shall be based on the selling price, exclusive of the tax. If the taxpayer does not indicate the tax as a separate item in the invoice, the tax is presumed to have been included in the total amount of the selling price indicated in the invoice. In other words, the consideration for a sale of goods or services shall be the sum of the monetary value of the sale and the tax charged thereon. This is usually referred to as "tax inclusive basis" of calculation because, if the VAT is not billed as a separate item in the invoice or receipt, the selling price or consideration is deemed to include the tax. The output tax shall be computed by multiplying such total selling price by the factor of 1 / 11 . The result shall represent 10% of the selling price, excluding the value-added tax. Whatever treatment is adopted by the seller, the corresponding value-added taxes thereon shall be determined as illustrated hereunder: (1) Value-added tax is separately indicated : "A" sold on account to "B" 100 pieces of merchandise "X" for P1,000 plus VAT of P100 - 100 pieces Merchandise "X" P 1,000 10% VAT 100 Total P1,100 ====== In this case the input tax of "B" is P100. "B" should record in his subsidiary purchase book the purchases in the amount of P1,000 and input taxes amounting to P100. The journal entry shall be: Dr. Purchase P1,000 Input Taxes P100 Cr. Accounts payable P1,100 On the part of "A" he should record in his subsidiary sales book the sales in the amount of P1,000 and output taxes amounting to P100. The journal entry shall be: cdt Dr. Accounts Receivable P1,100 Cr. Sales 1,000 Output Taxes 100 (2) Value-added tax is not separately indicated in the invoice . Using the same facts in No. (1) but the invoice given by "A" to "B" is as follows: 100 pieces Merchandise "X" P1,100 In this case "A" should segregate the amount intended to cover the tax. The amount intended to cover the tax is arrived at by multiplying the total invoice amount by 1 / 11 or: P1,100 x 1/11 = 1,100 x 1 = P100 11 The resulting figure of P100 is the output tax which should be deducted from P1,100 to arrive at the gross selling price of P1,000. The amount of P1,000 shall be recorded as sales and the P100 as output tax in the sales journal. The journal entry shall be: Dr. Accounts Receivable P1,100 Cr. Sales P1,000 Output Taxes 100 On the part of buyer "B", he shall follow the same procedure as "A" in order to determine the input tax and his purchase which will also come out at P100 and P1,000, respectively, which accounts should be entered in his subsidiary purchase journal. The journal entry shall be: Dr. Purchases P1,000 Input Taxes 100 Cr. Accounts Payable P1,100 (3) Value added tax is separately indicated in the invoice, but the tax is not correct . Example : A sold on account to B 100 pieces of Merchandise "X" for P1,200 which he billed as follows: 100 pieces Merchandise "X" at P12 P1,200 Value-added tax 100 Total P1,300 ====== In this case the tax shall be computed by multiplying the total invoice amount of P1,300 by 1 / 11 to arrive at the output tax payable by the vendor "A". P1,300 x 1 = P118.18 11 On the part of buyer "B", he should also compute his input tax on the same basis as the computation of the output tax. He should disregard the amount billed and compute the output tax on the basis of total invoice amount, which in this case is P1,300. The same procedure is followed if the value-added tax billed is more than 10% of the gross selling price. His entry in his purchase journal shall be purchases of P1,181.82 and input tax of P118.18. The journal entry shall be: Dr. Purchases P1,181.82 Input Taxes 118.18 Cr. Accts. Payable P1,300 (4) If the seller is a BOI-registered pioneer enterprise enjoying 75% tax exemption . Example : "A", a pioneer enterprise, 75% exempt, sold to "B" on account 100 pieces of Merchandise "X" for P8,200 which he invoiced as follows: 100 pcs. of Merchandise "X" at P82 P 8,200.00 In this case, "A" shall compute his output tax by multiplying the total invoice price by 1 / 41 : Output Tax = P8,200 x 1 / 41 = P200 "A" 's entry in his sales book shall be: Dr. Accounts Receivable P8,200.00 Cr. Sales - Taxable P2,000.00 Sales - Exempt 6,000.00 Output Taxes 200.00 On the part of buyer "B" he shall also compute his input taxes by multiplying the total invoice price by the factor 1 / 41 and an input tax deemed paid corresponding to the exempt portion of the sale to him by a BOI-registered pioneer enterprise. aisa dc "B" 's entry in his purchase book shall be: Dr. Purchases P8,000 Input tax 200 Cr. Accounts Payable P8,200 The input tax is computed in the same manner as the computation by the seller as follows: Input tax = P8,200 x 1 / 41 = P200 The input tax deemed paid should be entered into the purchase book as a memorandum entry by entering the amount of P600 in the debit column of the account "input tax deemed paid." The input tax deemed paid is computed as follows: Total invoice amount P8,200 Less: Input tax thereon 200 Gross selling price P8,000 Less: Taxable portion 2,000 Exempt portion P6,000 Multiplied by rate of tax 10% Input tax deemed paid on exempt portion P 600 ====== Another method of computing the input tax paid and the input tax deemed paid shall be as follows: Assuming the same facts in the previous example, the input tax paid and deemed paid can be computed as follows: Total invoice amount P8,200 25% Taxable 75% Exempt Formula: 100% + (25% x 10%) = 102.5% 102.5% = P8,200 100% = P8,200 = P8,200 102.5% 25% = 2,000 75% = P6,000 Input tax = P2,000 x 10% = P200 Deemed paid = P6,000 x 10% = 600 Total P800 ====== The journal entries shall be the same as previously illustrated. SECTION 14 . Computation of value-added tax payable or excess tax credits . The value-added tax payable or excess tax credits are computed on a quarterly basis. The total taxable domestic sales of goods and/or services based on the gross sales or receipts, as the case may be, and the output tax thereon are first determined. The creditable input taxes during the quarter are deducted from output tax to arrive at the value-added tax payable or excess tax credits, as the case may be. Example 1. Value-added tax payable : Given: During the quarter the taxpayer made sales of goods amounting to P100,000, plus an output tax of P10,000 for a total of P110,000. He also made sales of services amounting to P20,000 plus output tax of P2,000 for a total of P22,000. During the said quarter he made domestic purchases of P100,000 for goods for sale plus a total input tax of P10,000. He also hired the services of an independent contractor to repair the building used for both lines of activities for which he paid the amount of P15,000 plus P1,500 input tax. His input tax carried over from the previous quarter is P21,500, for which P20,000 is a carry-over input tax for a previous purchase of capital goods. The taxpayer received a credit memorandum for purchases returned during the quarter covering purchases made in the previous quarter amounting to P33,000. P3,000 of which is the adjustment to input taxes. He has also filed a claim for refund of P20,000 input tax on capital goods. cdt The computation of the value-added tax shall be as follows: Output tax On domestic sale of goods P10,000 On domestic sale of services 2,000 Total output tax P12,000 Input tax On domestic purchase of goods P10,000 On domestic services purchase 1,500 Carry over from previous quarter 21,500 Total P33,000 Less: Refunds applied for P20,000 Tax credit certificate applied for n o n e Adjustment for purchase returns 3,000 23,000 Net creditable input tax P10,000 Value-added tax payable P2,000 ======= Example 2: Excess tax credit . Using the same facts as Example 1, except that the taxpayer has not filed a claim for refund during the quarter: Output tax On domestic sale of goods P 10,000 On domestic sale of services 2,000 Total output tax P 12,000 Input tax On domestic purchase of goods P 10,000 On domestic services purchased 1,500 Carry over from previous quarter 21,500 Total P33,000 Less: Refunds applied for n o n e Tax credit certificate applied for n o n e Adjustment for purchase returns 3,000 3,000 Net creditable input tax 30,000 Excess Tax Credit (P18,000) In this example, the excess tax credit, since it was the result of input taxes paid on purchases of capital goods, may be: (1) carried forward and applied against output taxes in the subsequent quarter or quarters; or (2) used in payment of any internal revenue tax of the VAT-registered person upon issuance of a tax credit certificate; or (3) refunded to the VAT registered person, subject to the limitations prescribed in Section 106(c). In the case of Nos. (2) and (3), above, the VAT-registered person has to file a written application with the Bureau of Internal Revenue. casia If the excess was due to input taxes on purchase of goods or services corresponding to zero-rated sales, the VAT-registered person may also treat the excess tax credits in the same manner as above. Input taxes on purchase of goods for resale, goods for use in the course of business (supplies), other than capital goods and on services which constitute necessary and ordinary expenses for maintenance and repairs shall be credited against output taxes during the quarter or succeeding quarters. 15 . Substantiation of claims for input tax credits . (a) In general . Input taxes shall be allowed only if the domestic purchase of goods or services is made in the course of his trade or business and supported by an invoice or receipt showing the information as required in Sections 108(a) and 238. A cash register machine tape issued to a VAT-registered buyer, although it indicates the VAT registration number of the seller, does not constitute valid proof substantiation of tax credits. Input tax on importation . Credits for input tax on importations shall be supported with import entry or other equivalent document showing actual payment, of the VAT on imported goods. (c) Transitional and/or presumptive input tax . credits for transitional and/or presumptive input tax on inventories as of December 31, 1987 shall be supported with inventory of unused tax credits duly accounted for in the taxpayers books of accounts and percentage tax returns, and inventory of goods supported by a detailed list submitted to the BIR. (d) Input tax on deemed sale transactions . Credits for input tax on transactions deemed sale shall be substantiated with inventories as required in Section 6(e) of these Regulations. SECTION 16 . Refunds or tax credits of input tax . (a) Zero-rated sales of goods and services . - Only a VAT-registered person may be given a tax credit certificate or refund of value-added taxes paid corresponding to the zero-rated sales of goods or services, to the extent that such taxes have not been applied against output taxes, upon showing of proof of compliance with the conditions stated in Section 8 of these Regulations. For export sales, the application should be filed with the Bureau of Internal Revenue within two years from the date of exportation. For other zero-rated sales the application should be filed within two years after the close of the quarter when the transaction took place. (b) Capital goods . Only a VAT-registered person may apply for issuance of a tax credit certificate or refund of input taxes paid on capital goods. The refund shall be allowed only to the extent that such input taxes have not been applied against output taxes or other internal revenue taxes. If the applicant is an on-going concern, the application for refund can be made only after the expiration of two successive quarters following the end of the taxable quarter in which the input tax was paid by the VAT-registered person. In this case, if the VAT-registered person bought capital goods in the second quarter he has to wait for the lapse of the third and fourth quarters before he can file his application for refund. If the purchaser of the capital goods is a newly registered person, he can apply for refund of input taxes on capital goods only after the expiration of 180 days from the date of registration or actual commencement of business operation, whichever comes later. For example, "Y" Manufacturing Company was registered for VAT purposes on February 1, 1988. It imported capital equipment which arrived on February 28, 1988. The machinery was installed and it started business operation beginning May 1, 1988. In this case, the 180 days shall be counted from May 1, 1988. Refund of input taxes on capital goods shall be allowed only to the extent that such capital goods are used in VAT taxable business. If it is also used in exempt operations, the input tax refundable shall only be the ratable portion corresponding to the taxable operations. cd Refund or issuance of tax credit certificates for input taxes on capital goods purchased from BOI-registered pioneer enterprises, partially subject to VAT on sale of their registered products, shall be allowed only to the extent of the input taxes paid by the buyer on the VAT-taxable portion. Input taxes deemed paid on the exempt portion of the purchase shall be allowed only as a credit to the output taxes payable. (c ) C ancellation of registratio n. a person whose registration has been cancelled due to retirement from or cessation of business, or due to changes or cessation of status in accordance with Section 5 of these Regulations may, within two years from the date of such cancellation, apply for the issuance of a tax credit certificate, for any input tax credit unused as of the date of cancellation. The application shall be filed with the Revenue District Officer where his principal place of business is situated. 17 . Presumptive tax on beginning inventories . (a) Inventories of persons who are previously exempt for not having exceeded a given turnover who become liable to value-added tax or who elect to become liable to value-added tax . Those who become VAT-registered persons for having exceeded the minimum turnover of P200,000 or who voluntarily register even if their turnover does not exceed P200,000 shall be entitled to presumptive input tax on the inventory on hand as of the beginning of his first taxable quarter for goods purchased for resale in their present condition, materials purchased for further processing, but which have not yet undergone processing, goods which have been manufactured by the taxpayer, goods in process and supplies all of which are for sale or for use in the course of the taxpayer's trade or business as a VAT-registered person. The presumptive input tax shall be 8% of the value of the inventory or actual value-added tax paid, whichever is higher, which amount may be allowed as tax credit against the output tax of the VAT-registered person. (b) Inventories of persons who avail of the optional registration . Persons who, though exempt under Section 103(a), (b ) , ( c), and (f), shall opt to become a VAT-registered person, shall be entitled to presumptive input tax equivalent to 8% of the value of the inventory on hand as of the beginning of his first taxable period for goods purchased for resale in their present condition, materials purchased for further processing but which have not yet undergone processing, finished goods which have been manufactured by him, goods in process and supplies, all of which are for sale or use in the course of the taxpayer's trade or business as a VAT-registered person, or actual value added tax paid on such inventory, whichever is higher. VAT-registered persons also engaged in exempt transaction or services under Section 103(a), (b), (c) and (f) who shall volunteer to be covered by the value-added tax system by filing an application for any of his exempt activities shall be entitled to a presumptive input tax equivalent to 8% of the value of the inventory on hand as of the beginning of the month following the approval of his application consisting of goods for resale in their present condition, materials for further processing, finished goods that have been manufactured by him, goods in process, and supplies, all of which must be directly attributable to the activity that is registered or actual value-added tax paid on such inventory, whichever is higher. With regard to sub-paragraph (a) and this subparagraph, the value allowed for income tax purposes on inventories shall be the basis for the computation of the 8%. The goods referred to in subparagraph (a) of this paragraph shall not apply to goods that are exempt from value-added tax under Sec. 103. Only VAT-registered persons shall be entitled to transitional input tax credits. Persons falling under subparagraph (a) and this subparagraph should file within 20 days their inventories as of the beginning of his first taxable period with same office. For this purpose and in order to set up the presumptive input tax credit, a journal entry should be made as follows: Dr. Input Tax P_______ Cr. Inventory P_______ To set up presumptive input tax on the inventory as of December 31, 1987. CHAPTER V Compliance Requirements SECTION 18 . Registration . (a) Persons first beginning business . Any person engaging in the business of selling goods or services subject to tax under Sections 100 and 102, whose expected sales or receipts on all taxable activities for the next 12 month period shall exceed P200,000 must first register with the Revenue District Officer where his principal place of business is situated before such business is begun. aisa dc On the other hand, if he expects to realize gross annual sales or receipts of P200,000 or less and thus did not register as a VAT-registered person, if at any time after the commencement of his business his gross sales or receipts shall exceed P200,000, he shall register within thirty days after the end of the month when he exceeded P200,000 and shall become liable to VAT in the same manner as prescribed in paragraph (b) hereunder. Only one registration per taxpayer is required, irrespective of whether or not there are branches or other lines of business subject to value-added tax . (b) Persons becoming liable to value-added tax . Any person whose business was previously classified as exempt under Section 103(w) whose gross sales or receipts in any 12-month period shall exceed P200,000 shall register within 30 days after the end of that 12-month period with the Revenue District Officer who has jurisdiction over his principal place of business. He shall become liable to value-added tax on the first day of the month following the close of the 30-day period within which he has to register. (c) Optional registration of persons engaged in exempt transactions . A person whose transactions are exempt under Section 103(a), (b), (c), (f), and (w) can apply to be a VAT-registered person notwithstanding that he is not and will not be liable to be registered. The application should be filed with the Revenue District Officer where his principal place of business is situated not later than ten days before the beginning of a taxable quarter. The application for registration is subject to the approval of the Revenue District Officer. A VAT-registered person who is also engaged in exempt transactions under Section 103(a), (b), (c) and (f) may also voluntarily relinquish his exemption by registering with the Revenue District Officer where his principal place of business is situated his desire to be covered by the value-added tax system in any or all of his exempt transactions. Any person who has voluntarily registered in accordance with this paragraph shall be liable to value-added tax starting with the first day of the month following the approval of his application. Thereafter, all those exempt under Section 103(a), (b), (c), and (f) who voluntarily registered under the VAT system can only revert to exempt status after the lapse of two years from the date of registration. Registration under sub-paragraph (a) to (c) above shall include the branches and other lines of business of the registrant. SECTION 19 . Cancellation of registration . The RDO shall, upon application of any person who ceases to be liable to VAT, cancel the registration of the said person. Some instances where a VAT-registered person may apply for cancellation of registration are: (a) A person has retired from business; (b) A person's business has become exempt in accordance with Section 9(b) of these Regulations; (c) A change of the nature of the business itself from sale of taxable goods and/or services to exempt sales and/or services; (d) A change of ownership, in the case of a single proprietorship; (e) Dissolution of a partnership or corporation; (f) Merger or consolidation with respect to the dissolved corporation (s); (g) A person who has registered prior to planned business commencement, fails to actually start his business; (h) A person whose transactions are exempt from value-added tax under Section 103(a), (b), (c) and (f) who voluntarily registered under the VAT system, who, after the lapse of two years, applies for cancellation of his regulation as such; cdt (i) A VAT-registered person whose gross sales or receipts for two consecutive years did not exceed P200,000; and (j) A VAT-registered person whose gross sales or receipts did not exceed P200,000 during his first 12 months in business. Upon cancellation of registration under (i) and (j), above, the taxpayer shall become liable to the percentage tax imposed in Section 112. A final value-added tax return for the remaining period that he was registered shall be filed within 20 days from the date of cancellation of his registration. For purposes of the 2% percentage tax, the taxpayer shall file quarterly returns corresponding to the quarters of the taxable year adopted by him for income tax purposes. An initial return shall be filed corresponding to the period from the date of cancellation of his registration up to the end of his initial quarter. For example, a group B VAT filer's registration was cancelled on May 20, 1988. In this case he should file a VAT return for the period May 1, 1988 to May 20, 1988. Assuming that he is on a calendar year, he should also file a percentage tax return for the period May 20 to June 30, 1988 and every quarter thereafter. SECTION 20 . Change of address or principal place of business . Whenever a VAT-registered person changes his place of principal business, he should file a notice in the prescribed form within ten days from the date such change was made. If the change of address is within the same revenue district, the notification shall be filed with the Revenue District Officer in that district. However, if the change of address is from one revenue district to another revenue district, the Revenue District Officers in his former and new place of business should both be notified. In the case of change of place of business of branches or creation of a new branch, the Revenue District Officer where his principal place of business is situated shall be notified. CHAPTER VI Invoices and/or Receipts 21 . Invoicing requirements . (a) Invoices and/or receipts . All VAT-registered persons who sell goods or services shall, for every sale, issue an invoice or receipt. The invoice should contain the information prescribed in Section 108 (a) a nd 238 . Only VAT-registered persons can print the VAT registration number in their invoice or receipt. Any invoice bearing the VAT registration number of the seller shall be considered as a "VAT Invoice." Value added tax, whether indicated as a separate item or not in the "VAT Invoice", shall be allowed as input tax credits to those liable to value-added tax. All purchases covered by invoices other than "VAT Invoice" shall not be entitled to input taxes. The output tax may or may not be billed separately in the invoice or receipt. If the tax was not billed separately in the invoice or receipt, the total amount shown in the invoice or receipt shall consist of the gross selling price or gross receipt, as the case may be, and the amount intended to cover the tax. The seller is obligated to bill separately the tax if required to do so by the buyer. If the taxable person is also engaged in exempt operations, he should issue separate invoices or receipts for the taxable and exempt operations. A "VAT Invoice" shall be issued only for sales of goods or services subject to value-added tax imposed in Sections 100 a n d 102. However, a BOI-registered pioneer enterprise can consolidate its sales in the VAT invoice and compute the value-added tax in accordance with Section 6 (b) of these Regulations. The invoice of a BOI-registered enterprise should also indicate the percentage of exemption. The invoice or receipt shall be prepared at least in duplicate, the original to be given to the buyer and the duplicate to be retained by the seller as part of his accounting records. (b) Cash registers . VAT-registered persons who have permits to use cash registers shall be allowed to continue using the same. The provisions of Revenue Regulations No. 4-80 shall continue to be in force insofar as they do not conflict with the provisions of this Section. In addition to the data required to be reflected on the cash register receipts, the VAT registration number of the seller should also be shown. If a buyer, desires that a regular sales invoice be issued in lieu of the cash register tape, the seller should issue such invoice. Exempt sales should be properly identified in the cash register tape. CHAPTER VII Accounting 22 . Bookkeeping requirements . Notwithstanding the provisions of Section 233 and in addition to the regular accounting records required under Section 232, all VAT-registered persons are required to keep a control subsidiary sales and purchase journals in the head office and additional subsidiary sales and purchase journals for every branch or outlet where sales and/or purchases are made. (a) Subsidiary sales journal . The daily sales are recorded in this journal. Depending on the nature of the business, the subsidiary sales journal should at least contain separate columns for the following: 1. Sales Export 2. Sales Zero-rated 3. Sales Exempt 4. Sales Taxable 5. Deemed Sales 6. Output Taxes. In the case of sales where the seller did not bill the tax as a separate item, the entries to the sales journal shall be as follows. Example 1 : The seller sold to "B" 100 pieces of Merchandise "X" which he invoiced as follows: Sold to "B" 100 pieces of Merchandise "X" P2,200 In the above example, the seller has included the tax in the total amount reflected in the invoice. The seller should segregate the tax in order to arrive at the gross selling price which is arrived at as follows: P2,200 x 1 = P200 11 Total amount per invoice P2,200 Output Tax 200 Gross selling price P2,000 ====== The amount of P2,200 will be entered into the debit column of Cash or Accounts Receivable. The amount of P2,000 shall be entered to the Credit Column Taxable Gross Sales and the amount of P200 shall be entered in Output Tax. The journal entry, therefore, is: Dr. Accounts Receivable/Cash P2,200 Cr. Sales - Taxable P2,000 Output Taxes 200 Example 2 : Buyer "B" returned to the seller 50 pieces of Merchandise "X" which was accepted by the seller who issues a credit memorandum to "B" as follows: To "B" We hereby credit your account for P1,100 covering 50 pieces Merchandise "X" returned by you. In this case the seller should make the following entries in his subsidiary sales journal: Dr. Sales Returns and Allowances P1,000 Output Taxes 100 Cr. Accounts Receivable/Cash P1,100 Reference to Credit Memorandum. The amounts entered in the journal entry was arrived at as follows: P1,100 x 1 = P100 11 Total allowed credit P1,100 Less: Output tax 100 Gross sales returned P1,000 ====== The amount of P1,000 shall be entered in the debit column of Sales Returns. The amount of P100 - to the debit of output tax. Either credit side of the Receivable Account or the Cash Account shall be entered with P1,000. In the absence of a credit column this can be entered to the debit column but it shall be a parenthetical entry (P1,100). cdt Subsidiary purchase journal . The daily purchases, both local and imported, and other transactions affecting purchases and input taxes are recorded in this journal. All purchases from VAT-registered persons shall be entitled to input tax credits. All local purchases from other persons who are not VAT-registered shall not be entitled to input tax credits. Depending on the nature of the business, the subsidiary purchase journal should at least provide the following: 1. Purchases of goods for sale. 2. Purchases of supplies. 3. Purchases of raw materials. 4. Purchases of services. 5. Purchases of capital goods. 6. Purchases from non-VAT persons. 7. Input Taxes. 8. Input tax deemed paid. In the case of purchases from VAT-registered persons where the value-added tax was not billed separately by the seller, the entries to the purchase journal shall be as follows: Example 1 : Applying the same example as given in the sales journal, but this time the entries shall be with respect to "B" who is the buyer. "B" shall segregate the value-added tax element in the invoice with a total amount of P2,200 by applying the same procedure to arrive at the amount intended to cover the tax. P2,200 x 1 = P200 11 Total amount of invoice P2,200 Input tax 200 Purchases P2,000 ======= The amount of P2,000 shall be entered into the debit column Domestic Purchase of Goods while the amount of P200 shall be entered into the debit column input Taxes. On the credit side, the amount of P2,200 shall either be entered to the credit column Cash or Accounts Payable, as the case may be. The Journal entry shall be as follows: Dr. Purchases P2,000 Input Taxes 200 Cr. Accounts Payable/Cash P2,200 Example 2 : Using the same facts previously given whereby "B" returned 50 pieces of Merchandise "X", "B" will have the following computations and entries: Dr. Accounts Payable/Cash P1,100 Cr. Purchase Returns P1,000 Input Taxes 100 Reference to Credit Memorandum. The amounts entered in the above journal entry was arrived at as follows: P1,100 x 1 = P100 11 Total allowed credit P1,100 Less: Input tax 100 Purchase returned P1,000 ====== The amount of P1,100 shall be debited to either Cash or Accounts Payable. In the absence of a debit column, it can be entered as a parenthetical entry. The amount of P1,000 shall be credited to Purchase Returns while the amount of P100 shall be credited to Input Tax. The above subsidiary journals should be totalled monthly. CHAPTER VIII Filing of Returns and Payment of Tax 23 . Filing of returns and payment of value added tax . (a) Time for filing of returns . The filing of returns shall be on a staggered basis. All VAT-registered persons shall be divided into three groups to be known as groups A, B, and C, in accordance with the last digit of their VAT registration number. Those whose VAT registration numbers end in 1, 2, 3 and 4 shall be in Group A; 5, 6 and 7, Group B; and 8, 9 and 0, Group C. The taxable quarters of the respective groups shall be as follows: Group 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. A Jan 1-Mar 31 Apr 1-Jun 30 Jul 1-Sep 30 Oct 1-Dec 31 B Feb 1-Apr 30 May 1-Jul 31 Aug 1-Oct 31 Nov 1-Jan 31 C Mar 1-May 31 Jun 1-Aug 31 Sep 1-Nov 30 Dec 1-Feb 28/29 The return shall be filed and the value-added tax paid within twenty days following the close of each taxable quarter. Any person whose registration has been cancelled shall file a final return for the remaining period within twenty days from the date of cancellation of registration. All persons who shall be liable to file value-added tax returns beginning January 1, 1988, shall file their initial returns within twenty days following the close of their respective initial period as set forth hereunder: Group A January 1, 1988 to March 31, 1988 Group B January 1, 1988 to April 30, 1988 Group C January 1, 1988 to May 31, 1988 Thereafter, they shall adhere to the quarters assigned to them as shown in paragraph (a) above. All persons first registered under Section 18 (a), (b) and (c) of these Regulations shall be liable to value-added tax beginning with the first day of the month following their registration. The last digit of their registration number shall determine their quarter. The initial quarter shall commence with the first day of the month following his start of registration and shall end with his assigned quarter, which in no case shall be less than three months. Thus, if a person registers in March 12, 1988 and his registration number ends in 6, he shall belong to Group B. He shall be liable to value-added tax beginning April 1, 1988, and his initial quarter shall end on July 31, 1988. It cannot end on April 30, 1988 it is less than three months. Hence his initial quarter is April 1, 1988 to July 31, 1988. Thereafter, he shall observe the regular three-month quarter prescribed for Group B taxpayers. The initial return must be filed on or before August 20, 1988. (b) Where to file the return . (1) Returns involving cash payment . Returns wherein there is an amount due to be paid in cash shall be filed with any duly accredited bank located in the Revenue District where the filer is registered or required to be registered. If there are no accredited banks within the city or municipality where a taxpayer has his principal place of business, he may file his return with the collection agent or the duly authorized treasurer of that city or municipality or to the Revenue District Officer, if there is one stationed there. He may also file his return with any duly accredited bank outside of the place where his principal place of business is located provided that such bank is located within the geographical jurisdiction of the Revenue District Office where his principal place of business is situated. (2) No Cash payment returns . All returns where no cash payment is involved shall be filed with the Revenue District Officer, Collection Agent or authorized Municipal Treasurer where a filer has his principal place of business. (3) Returns to be paid by tax debit memo . All returns to be paid wholly by tax debit memo shall be filed with the Revenue District Officer, Collection Agent or duly authorized Municipal Treasurer where a filer's principal place of business is situated. All holders of tax credit certificates who desire to use such certificates in payment of their value-added tax payable shall present the certificates to the Receivable Accounts Division if in Metro Manila or to the Chief, Collection Branch, if in the districts outside of Metro Manila for the issuance of a Tax Debit Memo which shall be filed together with the return to the Revenue District Officer, Collection Agent or duly authorized municipal treasurer where his principal place of business is situated. (4) Returns to be paid partly by Tax Debit Memo and partly in cash . All returns to be paid partly by tax debit memo and partly in cash shall be filed with any duly accredited bank in accordance with the provisions of subparagraph (1) above. He should first obtain a tax debit memo in accordance with sub-paragraph (3) above which should be attached to the return that will be filed with the bank. SECTION 24 . Tax on persons exempt from value-added tax . Any person engaged in the sale of goods or services subject to value-added tax but whose gross annual sales or receipts are not subject to VAT under the provision of Section 103(w) because their sales did not exceed P200,000 and who has not opted to register under the provisions of Section 107(d), shall pay a tax equivalent to 2% of his gross quarterly sales or receipts. The return shall be filed and the tax paid in accordance with Section 125. SECTION 25 . Administrative and penal provisions . (a) Suspension of business operations . In addition to other administrative and penal sanctions provided for in the Code and implementing regulations, the Commissioner or his duly authorized representative may order the suspensions or closure of a business establishment for a period of not less than five (5) days for any of the following violations: (1) Failure to issue receipts or invoices. (2) Failure to file value-added tax return as required under the provisions of Section 110. (3) Understatement of taxable sales or receipts by 30% or more of his correct taxable sales or receipt for the taxable quarter. (4) Failure to any person to register as required under the provisions of Section 107. (b) Surcharge, interest and other penalties . The interest on unpaid amount of tax, civil penalties and criminal penalties imposed in Title XI of the Tax Code shall also apply to violations of the provisions of Title IV of the Tax Code. CHAPTER IX Transitory, Effectivity and Repealing Provisions 26 . Transitory Provisions . (a) Fiscal year corporations . Any corporation filing percentage tax returns on a fiscal quarter basis who will be subject to value-added tax shall file, on or before January 20, 1988, a short quarter percentage tax return for the period ending December 31, 1987, after which the initial value-added tax return and succeeding returns shall be filed in accordance with Section 23(a) of these regulations. (b) Transitional input tax credits . (1) Manufacturers, producers and importers . The unused deferred tax credit as of December 31, 1987 shall be allowed as input tax credits to all original sellers subject to the value-added tax for the first time, provided that they have registered in accordance with the provisions of Section 107. For this purpose the amount appearing in their books of accounts and corroborated by the amount reflected in the sales tax return as of December 31, 1987 shall be initially accepted as the transitional input tax credit which shall be carried over as allowable tax credits against output tax less any amount for which an application for the issuance of a tax credit certificate has been filed. In the case of corporations filing their sales tax returns on a fiscal quarter basis, they shall file a short period return for the period ending December 31, 1987 which in addition to their ledger account of deferred tax credit shall be the basis of the transitional input tax credits which will be provisionally allowed. Inventory of goods, not for sale . For goods, other than capital goods, not for sale but purchased for use in the business in their present condition, and which are not intended for further processing, which are on hand as of December 31, 1987, a presumptive input tax equivalent to 8% of the value of the goods shall be allowed, which amount may be credited against the output tax of a VAT-registered person, provided that the tax thereon has not been taken up or claimed as deferred sales tax credit. (3) Inventory of goods for sale . For goods purchased with the object of resale in their present condition, the same presumptive input tax equivalent to 8% of the value of the goods unused as of December 31, 1987 shall be allowed, which amount may also be credited against the output tax of a VAT-registered person, provided that the tax thereon has not been taken up or claimed as deferred sales tax credit. For purposes of sub-paragraphs (2) and (3) above, an inventory as of December 31, 1987 of such goods showing the quantity, description and amount should be filed with the Revenue District Officer not later than January 31, 1988. The value allowed for income tax purposes on inventories shall be the basis for the computation of the 8%. (c) Unused tax credit certificates . All holders of tax credit certificates issued under Ministry of Finance Order No. 19-79 or under the provisions of Executive Order No. 2031 arising from excess tax credits, with outstanding balances as of December 31, 1987 shall surrender them to the Commissioner who shall issue new tax credit certificates which can be used in payment of their value-added tax liabilities. (d) Unused invoices or receipts . All VAT-registered persons who have in their possession invoices or receipts printed prior to January 1, 1988, should submit an inventory of such invoices or receipts indicating the number of unused booklets and the corresponding serial number. The VAT-registered person shall be required to stamp the unused invoices within which he shall use in connection with his VAT taxable transactions with the taxpayer's VAT registration number. Thereafter, any subsequent printing of receipts or invoices should include the taxpayer's VAT registration number. In order that input tax credits provided under paragraph (b) (2) and (3) of this Section shall be allowed, the VAT-registered person should file an inventory as of December 31, 1987 not later than January 31, 1988. To set up the beginning input tax the following entry should be made: Dr. Input Taxes P x x x Cr. Purchases or Cost of Sales P x x x (e) Registration . The following persons who are already engaged in business subject to value-added tax shall apply for registration on or before October 29, 1987: aisa dc 1. Those whose gross sales or receipts for a 12-month period from September 1, 1986 to August 31, 1987 exceed the amount of P200,000; and 2. Those who commenced business after September 1, 1986 who expect to realize gross sales or receipts in excess of P200,000 for any 12-month period up to November 30, 1987. 3. Those who commenced business starting September 1, 1987 up to November 30, 1987 who expect to realize gross sales or receipts in excess of P200,000 for the next 12 months. Sales of exempt goods or services shall not be included in determining the P200,000 limit. SECTION 27 . Repealing Clause . All regulations, rulings orders, or portions thereof which are inconsistent with the provisions of these Regulations are hereby revoked. cdt SECTION 28 . Effectivity . These Regulations shall take effect on January 1, 1988, provided that the provisions of Sections 18 and 20(e) of these Regulations shall take effect immediately upon approval hereof. JAIME V. ONGPIN Secretary of Finance Recommending Approval: BIENVENIDO A. TAN, JR. Commissioner By: VICTOR A. DEOFERIO, JR. Deputy Commissioner (Officer-in-Charge)