VAT Ruling No. 041-91

May 29, 1991 VAT RULING NO. 041-91 Ms. Betty Ong Le Kheng CPA & Attorney-At-Law Suite 202 SRI Building Pasay City, Metro Manila M a d a m : In reply to your letter dated September 4, 1990, please be informed that the present Value-Added Tax law is a carry-over and a replacement of some of the old laws on business taxes, among which was the old sales tax law. (NIRC, as amended by E. O. 273, effective January 1, 1988). Under the old sales tax law, only the original sale, barter or exchange of a taxable article or, in case of importation, only the importation of a taxable article, was subject to sales tax. (Chap. II, Title V, old NIRC) Said law was amended by P.D. 1991, otherwise known as the "Sales Tax Reform Decree of 1985", effective January 1, 1986. As amended, sales taxes were imposed not only on the original sale, barter or exchange of taxable articles or on the importation thereof. Rather, second and subsequent sales thereof were levied with sales taxes. Since the said amendatory law was only prospective in application the same was not made applicable to articles imported prior to its effectivity which remained governed by the old sales tax law (i.e., sales tax law prior to P.D. 1991) under which the sales tax paid on imported articles was final. Hence "Any advance sales taxes paid on articles imported prior to January 1, 1986 shall be considered as a final tax. Any imported article unsold as of December 31, 1985 which are subsequently sold by the importer himself without such article having undergone processing or manufacturing shall be considered as an original sale of a tax-paid article and therefore the corresponding sales tax on original sale shall no longer be imposed. .." (Sec. 4, Rev. Regs. No. 2-86 and 5-86) llcd Effective January 1, 1986 (i.e., upon effectivity of the sales tax law, as amended by P.D. 1991) sales taxes on imported articles ceased to be a final tax. Rather, the sales tax on imported articles intended for resale or for conversion into finished goods intended for resale (called the advance sales tax) was converted into "Deferred Sales Tax Credits" and, also, the sale thereof in the domestic market, by the imported, was made subject to sales tax, provided, the importer-seller can credit against the sales taxes due on his domestic sales, his accumulated deferred sales tax credits, provided, further, that no deferred sales tax credits can be recognized vis-a-vis articles imported prior to January 1, 1986. Otherwise stated, the advance sales taxes paid on articles imported prior to January 1, 1986 were final. Thus, when the same articles were sold beginning January 1, 1986 no further sales tax was levied. Consequently, the advance sales tax paid on its importation did not also qualify as "deferred sales tax credit". Effective January 1, 1988 (i.e., upon the effectivity of the VAT law) even the sales of articles imported prior to January 1, 1986 were levied with 10% Value-Added tax subject to the doctrine of "input tax credit" vis-a-vis the taxes previously paid on the purchase or importation of the goods sold. Thus, under the transitory provisions of the VAT law (Sec. 25, E.O. 273) transitory input tax credits were prescribed. Based on the foregoing, the answers to your queries are as follows: QUERY NO. 1 Is the sale "as is" of imported goods subjected to final tax in 1985 and prior years included in the December 31, 1987 inventory list still subject to value-added tax when sold now? ANSWER. Yes, the sale of goods, even if such goods were imported in 1985 and prior years, hence, subjected already to the old advance sales tax, which was a final tax, remain subject to the 10% VAT, pursuant to Section 99 and 100, NIRC, as amended by E.O. 273. QUERY NO. 2. If no, is the sale considered as VAT-exempt, zero-rated, or non-VAT sale? ANSWER. It is a sale subject to 10% VAT (see Answer No. 1) hence, not embraced by VAT-exemption, the zero-rated VAT, or by non-VAT sale transactions. QUERY NO. 3. Will the ruling be different if the said imported goods were not properly identified in the December 31, 1987 inventory list? ANSWER. No, the answer remains the same, i.e.,sale thereof remains subject to 10% VAT whether or not the same was reported in the taxpayer/importer's inventory list as of Dec. 31, 1987. Please be informed, however, that under Section 26 of the VAT Regulations (Rev. Regs. No. 5-87) vis-a-vis the transitional input tax credits, submission of the said required inventory list as of December 31, 1987 (the transitory date immediately preceding the effectivity of the VAT law) is a requisite for purposes of recognizing transitory input tax credits on such inventories. Hence, in the absence of this requisite, no transitory input tax credit may be recognized vis-a-vis such inventories imported prior to January 1, 1986. QUERY NO. 4. If the sale is subject to VAT, are the said imported goods entitled to the presumptive input tax of 8%,which was not set up and was not availed of in January 1, 1988? ANSWER. Section 25(a)(3), E.O. 273 (transitory input tax proviso) provides, as follows: "A presumptive input tax equivalent to 8% of the value of the inventory as of December 31, 1987, the tax on which was not taken up or claimed as deferred sales tax credit." An example of this proviso are goods imported prior to January 1, 1986, the advance sales tax paid on which was accordingly a final tax (supra) rather recognized as a deferred sales tax credit when sold beginning January 1, 1986 and thereafter, in general , such imported goods are embraced by the transitory input tax proviso under Sec. 25(a)(3) of E.O. 273. Hence, if unsold as of December 31, 1987 its importer-seller/VAT person can recognize a presumptive 8% transitory input tax credit therefor, provided, however, he reported such unsold inventory in his inventory lists as of December 31, 1987. This rule applies whether or not importer failed to take up in his books as of January 1, 1988 the transitory 8% presumptive input tax thereon, as a separate account under Input Taxes. Under this situation, the importer-seller should make a correcting entry in his books of accounts to segregate the amount previously recorded alone under his inventory account into (i) inventory account and (ii) input tax account, (e.g., if the amount recorded in the inventory was P100, it follows 8% thereof pertains to the presumptive input tax while 82% thereof pertains to the inventory. Hence, P8 thereof should be recorded as input tax while P92 thereof should be taken up as inventory.) Very truly yours, JOSE U. ONG Commissioner of Internal Revenue