GUIDE NOTES AND CASES ON VALUE-ADDED TAX practiced in Europe and subsequently adopted in New Zealand
and Canada. Under the present method that relies on invoices, an
VALUE-ADDED TAX
Q: What is the nature of value-added taxes?
* VAT is a percentage tax.
** CIR v. Seagate Technology (Philippines) is a case on a claim for
tax refund/credit of alleged unutilized input VAT paid on capital
goods for the period 1 April 1998 to 30 June 1999. It explained the
concept of a value-added tax, thus:
“Viewed broadly, the VAT is a uniform tax ranging, at present,
from 0 percent to 10 percent [now 12 percent] levied on every
importation of goods, whether or not in the course of trade or
business, or imposed on each sale, barter, exchange or lease of
goods or properties or on each rendition of services in the course
of trade or business as they pass along the production and
distribution chain, the tax being limited only to the value added to
such goods, properties or services by the seller, transferor or
lessor. It is an indirect tax that may be shifted or passed on to the
buyer, transferee or lessee of the goods, properties or services. As
such, it should be understood not in the context of the person or
entity that is primarily, directly and legally liable for its payment,
but in terms of its nature as a tax on consumption. In either case,
though, the same conclusion is arrived at.
The law that originally imposed the VAT in the country, as well as
the subsequent amendments of that law, has been drawn from
the tax credit method. Such method adopted the mechanics and
self-enforcement features of the VAT as first implemented and
TAX 2 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2018-2019
entity can credit against or subtract from the VAT charged on its
sales or outputs the VAT paid on its purchases, inputs and imports.
If at the end of a taxable quarter the output taxes charged by a
seller are equal to the input taxes passed on by the suppliers, no
payment is required. It is when the output taxes exceed the
input taxes that the excess has to be paid. If, however, the input
taxes exceed the output taxes, the excess shall be carried over
to the succeeding quarter or quarters. Should the input taxes
result from zero-rated or effectively zero-rated transactions or
from the acquisition of capital goods, any excess over the output
taxes shall instead be refunded to the taxpayer or credited against
other internal revenue taxes.” (Emphasis supplied.) [CIR v.
Seagate Technology (Philippines), GR No. 153866, 11 Feb. 2005.]
*** Citing CIR v. Seagate Technology (Philippines), the case of
Panasonic Communications Imaging Corporation of the
Philippines v. CIR explained value-added tax in this wise:
“The VAT is a tax on consumption, an indirect tax that the provider
of goods or services may pass on to his customers. Under the VAT
method of taxation, which is invoice-based, an entity can subtract
from the VAT charged on its sales or outputs the VAT it paid on its
purchases, inputs and imports. For example, when a seller
charges VAT on its sale, it issues an invoice to the buyer, indicating
the amount of VAT he charged. For his part, if the buyer is also a
seller subjected to the payment of VAT on his sales, he can use the
invoice issued to him by his supplier to get a reduction of his own
VAT liability. The difference in tax shown on invoices passed and
invoices received is the tax paid to the government. In case the
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 tax on invoices received exceeds that on invoices passed, a tax
refund may be claimed.” [Panasonic Communications Imaging
Corporation of the Philippines v. CIR, GR No. 178090, 8 Feb. 2010.]
**** The case of CIR v. Benguet Corporation defined “input tax”
and “output tax.” “Input VAT or input tax represents the actual
payments, costs and expenses incurred by a VAT-registered
taxpayer in connection with his purchase of goods and services.
Thus, "input tax" means the value-added tax paid by a VAT-
registered person/entity in the course of his/its trade or
business on the importation of goods or local purchases of goods
or services from a VAT-registered person.
On the other hand, when that person or entity sells his/its
products or services, the VAT-registered taxpayer generally
becomes liable for 10% of the selling price as output VAT or output
tax. Hence, "output tax" is the value-added tax on the sale of
taxable goods or services by any person registered or required
to register under Section 107 of the (old) Tax Code.
The VAT system of taxation allows a VAT-registered taxpayer to
recover its input VAT either by (1) passing on the 10% output VAT
on the gross selling price or gross receipts, as the case may be, to
its buyers, or (2) if the input tax is attributable to the purchase of
capital goods or to zero-rated sales, by filing a claim for a refund
or tax credit with the BIR.
Simply stated, a taxpayer subject to 10% output VAT on its sales
of goods and services may recover its input VAT costs by passing
on said costs as output VAT to its buyers of goods and services but
it cannot claim the same as a refund or tax credit, while a taxpayer
subject to 0% on its sales of goods and services may only recover
TAX 2 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2018-2019
its input VAT costs by filing a refund or tax credit with the BIR.”
[CIR v. Benguet Corporation, GR No. 145559, 14 July 2006.]
Sec. 105, Persons Liable
Any person who, in the course of trade or business, sells barters,
exchanges, leases goods or properties, renders services, and any
person who imports goods shall be subject to the value-added tax
(VAT) imposed in Sections 106 to 108 of this Code.
The value-added tax is an indirect tax and the amount of tax may
be shifted or passed on to the buyer, transferee or lessee of the
goods, properties or services. This rule shall likewise apply to
existing contracts of sale or lease of goods, properties or services at
the time of the effectivity of Republic Act No. 7716.
The phrase 'in the course of trade or business' means the regular
conduct or pursuit of a commercial or an economic activity,
including transactions incidental thereto, by any person regardless
of whether or not the person engaged therein is a nonstock,
nonprofit private organization (irrespective of the disposition of its
net income and whether or not it sells exclusively to members or
their guests), or government entity.
The rule of regularity, to the contrary notwithstanding, services as
defined in this Code rendered in the Philippines by nonresident
foreign persons shall be considered as being course of trade or
business.
Q: VAT is an indirect tax. Distinguish between liability for the tax and
burden of the tax.
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 * The case of Contex Corporation v. CIR made a distinction
between the two concepts. It provided:
“At this juncture, it must be stressed that the VAT is an indirect
tax. As such, the amount of tax paid on the goods, properties or
services bought, transferred, or leased may be shifted or passed
on by the seller, transferor, or lessor to the buyer, transferee or
lessee. Unlike a direct tax, such as the income tax, which primarily
taxes an individual’s ability to pay based on his income or net
wealth, an indirect tax, such as the VAT, is a tax on consumption
of goods, services, or certain transactions involving the same. The
VAT, thus, forms a substantial portion of consumer expenditures.
Further, in indirect taxation, there is a need to distinguish
between the liability for the tax and the burden of the tax. As
earlier pointed out, the amount of tax paid may be shifted or
passed on by the seller to the buyer. What is transferred in such
instances is not the liability for the tax, but the tax burden. In
adding or including the VAT due to the selling price, the seller
remains the person primarily and legally liable for the payment of
the tax. What is shifted only to the intermediate buyer and
ultimately to the final purchaser is the burden of the tax. Stated
differently, a seller who is directly and legally liable for payment
of an indirect tax, such as the VAT on goods or services is not
necessarily the person who ultimately bears the burden of the
same tax. It is the final purchaser or consumer of such goods or
services who, although not directly and legally liable for the
payment thereof, ultimately bears the burden of the tax.”
(Emphasis supplied.) [Contex Corporation v. CIR, GR No. 151135,
2 July 2004.]
Q: What is meant by “in the course of trade or business”?
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* The case of CIR v. Magsaysay Lines, Inc. involved the sale by the
National Development Company of five of its vessels to
Magsaysay Lines, Inc. The issue was whether such sale was within
the coverage of VAT. The Supreme Court found that the sale of
the vessels was not in the ordinary course of trade or business. As
such, the transaction was outside the coverage of VAT.
The decision contained an explanation of VAT, to wit: “A brief
reiteration of the basic principles governing VAT is in order. VAT is
ultimately a tax on consumption, even though it is assessed on
many levels of transactions on the basis of a fixed percentage. It
is the end user of consumer goods or services which ultimately
shoulders the tax, as the liability therefrom is passed on to the end
users by the providers of these goods or services who in turn may
credit their own VAT liability (or input VAT) from the VAT
payments they receive from the final consumer (or output VAT).
The final purchase by the end consumer represents the final link
in a production chain that itself involves several transactions and
several acts of consumption. The VAT system assures fiscal
adequacy through the collection of taxes on every level of
consumption, yet assuages the manufacturers or providers of
goods and services by enabling them to pass on their respective
VAT liabilities to the next link of the chain until finally the end
consumer shoulders the entire tax liability.
Yet VAT is not a singular-minded tax on every transactional level.
Its assessment bears direct relevance to the taxpayer’s role or
link in the production chain. Hence, as affirmed by Section 99 of
the Tax Code and its subsequent incarnations, the tax is levied
only on the sale, barter or exchange of goods or services by
persons who engage in such activities, in the course of trade or
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 business. These transactions outside the course of trade or
business may invariably contribute to the production chain, but
they do so only as a matter of accident or incident. As the sales of
goods or services do not occur within the course of trade or
business, the providers of such goods or services would hardly, if
at all, have the opportunity to appropriately credit any VAT
liability as against their own accumulated VAT collections since
the accumulation of output VAT arises in the first place only
through the ordinary course of trade or business.” (Emphasis
supplied.) [CIR v. Magsaysay Lines, Inc., GR No. 146984, 28 July
2006.]
In the case of Mindanao II Geothermal v. CIR , GR No. 193301,
2013, Mindanao II’s business is to covert the steam supplied to it
by PNOC-EDC into electricity and to deliver the electricity to
National Power Corp. In the course of its business, Mindanao
bought and eventually sold a Nissan Patrol (part of Mindanao’s
property, plant and equipment prior to sale). The sale of the
Nissan Patrol is considered as incidental transaction made in the
course of business. An isolated transaction may be considered an
incidental transaction for purposes of imposition of VAT.
** In the case of CIR v. CA, COMASERCO, being a non-stock and
non-profit organization, contended that it was operating on a
reimbursement-of-cost basis, that of business,” and that
therefore, it was not liable to pay VAT. The Supreme Court held
that Section 105 of the 1997 Tax Code was clear and unambiguous
in stating that non-stock non-profit organizations were liable to
pay VAT on the sale of goods or services. [CIR v. CA, GR No.
125355, 30 Mar. 2000.]
Sec. 106, Value-Added Tax on Sale of Goods or Properties
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106(A) Rate and Base of Tax - There shall be levied, assessed and
collected on every sale, barter or exchange of goods or properties,
value-added tax equivalent to Twelve percent (12%) of the gross
selling price or gross value in money of the goods or properties sold,
bartered or exchanged, such tax to be paid by the seller or
transferor.
106(A)(1) The term 'goods' or 'properties' shall mean all tangible
and intangible objects which are capable of pecuniary estimation
and shall include:
(a) Real properties held primarily for sale to customers or
held for lease in the ordinary course of trade or
business;
(b) The right or the privilege to use patent, copyright, design
or model, plan, secret formula or process, goodwill,
trademark, trade brand or other like property or
right;
(c) The right or the privilege to use in the Philippines of any
industrial, commercial or scientific equipment;
(d) The right or the privilege to use motion picture films, tapes
and discs; and 

(e) Radio, television, satellite transmission and cable
television time.
The term '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
or properties, excluding the value-added tax. The excise tax, if any,
on such goods or properties shall form part of the gross selling price.
Q: What is a “sale of goods or properties”?
4
 * In CIR v. Sony Philippines, Inc., Sony Philippines engaged the
services of several advertising companies. Due to Sony
Philippines’ dire economic conditions, Sony International
Singapore handed Sony Philippines a dole-out to answer for the
expenses payable to the advertising companies. Sony Philippines
was thereafter assessed deficiency VAT for the transaction, i.e.,
dole-out, between Sony International Singapore and Sony
Philippines. The Supreme Court ruled that the dole-out or subsidy
from the Singaporean company to the Philippine company neither
constituted a sale of goods or properties, nor a sale of services.
Hence, Sony Philippines was not liable to pay VAT on the same.
[CIR v. Sony Philippines, Inc., GR No. 178697, 17 Nov. 2010.]
106(A)(2) The following sales by VAT-registered persons shall be
subject to zero percent (0%) rate:
Q: Distinguish between VAT exemption and zero-rating.
Q: Distinguish between VAT rating and zero-rating.
* The case of CIR v. Benguet Corporation explained VAT rating vis-
as-vis zero-rating in principle, as well as by way of illustration, to
wit: “In transactions taxed at a 10% rate, when at the end of any
given taxable quarter the output VAT exceeds the input VAT, the
excess shall be paid to the government; when the input VAT
exceeds the output VAT, the excess would be carried over to VAT
liabilities for the succeeding quarter or quarters. On the other
hand, transactions which are taxed at zero-rate do not result in
any output tax. Input VAT attributable to zero-rated sales could
be refunded or credited against other internal revenue taxes at
the option of the taxpayer.
To illustrate, in a zero-rated transaction, when a VAT-registered
person (“taxpayer”) purchases materials from his supplier at
TAX 2 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2018-2019
P80.00, P7.30[39] of which was passed on to him by his supplier
as the latter’s 10% output VAT, the taxpayer is allowed to recover
P7.30 from the BIR, in addition to other input VAT he had incurred
in relation to the zero-rated transaction, through tax credits or
refunds. When the taxpayer sells his finished product in a zero-
rated transaction, say, for P110.00, he is not required to pay any
output VAT thereon. In the case of a transaction subject to 10%
VAT, the taxpayer is allowed to recover both the input VAT of
P7.30 which he paid to his supplier and his output VAT of P2.70
(10% the P30.00 value he has added to the P80.00 material) by
passing on both costs to the buyer. Thus, the buyer pays the total
10% VAT cost, in this case P10.00 on the product.” (Emphasis
supplied.) [CIR v. Benguet Corporation, GR Nos. 134587 & 134588,
8 July 2005.]
* The case of Contex Corporation v. CIR enumerated two ways by
which a transaction could have preferential treatment under the
VAT system, namely: (1) VAT exemption; and (2) zero-rating.
“Exemptions from VAT are granted by express provision of the Tax
Code or special laws. Under VAT, the transaction can have
preferential treatment in the following ways:
(a) VAT Exemption. An exemption means that the sale of goods
or properties and/or services and the use or lease of properties is
not subject to VAT (output tax) and the seller is not allowed any
tax credit on VAT (input tax) previously paid. This is a case wherein
the VAT is removed at the exempt stage (i.e., at the point of the
sale, barter or exchange of the goods or properties).
5
 The person making the exempt sale of goods, properties or
services shall not 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 VAT-exempt goods/properties or services
which are exempt from VAT is not entitled to any input tax on such
purchase despite the issuance of a VAT invoice or receipt.
(b) Zero-Rated Sales. These are sales by VAT-registered persons
which are subject to 0% rate, meaning the tax burden is not
passed on to the purchaser. A zero-rated sale by a VAT-registered
person, which is a taxable transaction for VAT purposes, shall not
result in any output tax. However, the input tax on his purchases
of goods, properties or services related to such zero-rated sale
shall be available as tax credit or refund in accordance with these
regulations.
Under zero-rating, all VAT is removed from the zero-rated goods,
activity or firm. In contrast, exemption only removes the VAT at
the exempt stage, and it will actually increase, rather than
reduce the total taxes paid by the exempt firm’s business or non-
retail customers. It is for this reason that a sharp distinction must
be made between zero-rating and exemption in designating a
value-added tax.” (Emphasis supplied.) [Contex Corporation v.
CIR, GR No.151135, 2 July 2004.]
** CIR v. Seagate Technology (Philippines) differentiated VAT
exemption and zero-rating in this wise:
“In terms of the VAT computation, zero rating and exemption are
the same, but the extent of relief that results from either one of
them is not. [In] zero rating, there is total relief for the purchaser
from the burden of the tax. But in an exemption there is only
partial relief, because the purchaser is not allowed any tax refund
TAX 2 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2018-2019
of or credit for input taxes paid.” [CIR v. Seagate Technology
(Philippines), GR No. 153866, 11 Feb. 2005.]
*** Further still, the case of CIR v. Cebu Toyo Corporation cited
the differences between VAT exemption and zero-rating, thus: “In
principle, the purpose of applying a zero percent (0%) rate on a
taxable transaction is to exempt the transaction completely from
VAT previously collected on inputs. It is thus the only true way to
ensure that goods are provided free of VAT. While the zero rating
and the exemption are computationally the same, they actually
differ in several aspects, to wit:
(a) A zero-rated sale is a taxable transaction but does not result in
an output tax while an exempted transaction is not subject to the
output tax;
(b) The input VAT on the purchases of a VAT-registered person
with zero-rated sales may be allowed as tax credits or refunded
while the seller in an exempt transaction is not entitled to any
input tax on his purchases despite the issuance of a VAT invoice
or receipt;
(c) Persons engaged in transactions which are zero-rated, being
subject to VAT, are required to register while registration is
optional for VAT-exempt persons.” [CIR v. Cebu Toyo Corporation,
GR No. 149073, 16 Feb. 2005.]
Q: Distinguish between zero-rated transactions and effectively zero-
rated transactions.
* The case of CIR v. Seagate Technology (Philippines) addressed
this issue. It stated that: “Although both are taxable and similar in
effect, zero-rated transactions differ from effectively zero-rated
transactions as to their source.
6
 Zero-rated transactions generally refer to the export sale of
goods and supply of services. The tax rate is set at zero. When
applied to the tax base, such rate obviously results in no tax
chargeable against the purchaser. The seller of such transactions
charges no output tax, but can claim a refund of or a tax credit
certificate for the VAT previously charged by suppliers.
Effectively zero-rated transactions, however, refer to the sale of
goods or supply of services to persons or entities whose
exemption under special laws or international agreements to
which the Philippines is a signatory effectively subjects such
transactions to a zero rate. Again, as applied to the tax base, such
rate does not yield any tax chargeable against the purchaser. The
seller who charges zero output tax on such transactions can also
claim a refund of or a tax credit certificate for the VAT previously
charged by suppliers.”
The decision went on to say (under the subheading Zero Rating
and Exemption):
“Applying the destination principle to the exportation of goods,
automatic zero rating is primarily intended to be enjoyed by the
seller who is directly and legally liable for the VAT, making such
seller internationally competitive by allowing the refund or credit
of input taxes that are attributable to export sales. Effective zero
rating, on the contrary, is intended to benefit the purchaser who,
not being directly and legally liable for the payment of the VAT,
will ultimately bear the burden of the tax shifted by the suppliers.”
(Emphasis supplied.) [CIR v. Seagate Technology (Philippines), GR
No. 153866, 11 Feb. 2005.]
106(A)(2)
TAX 2 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2018-2019
(a) Export Sales - The term 'export sales' means:
Q: What is the cross-border doctrine?
* According to CIR v. Toshiba Information Equipment (Phils.), Inc.,
the Philippines adheres to the cross-border doctrine which means
that “no VAT shall be imposed to form part of the cost of goods
destined for consumption outside of the territorial border of the
taxing authority. Hence, actual export of goods and services from
the Philippines to a foreign country must be free of VAT; while
those destined for use or consumption within the Philippines shall
be imposed with ten percent (10%) [now 12%] VAT.” Sales made
by an enterprise within a non-ECOZONE territory, i.e., Customs
Territory, to an enterprise within an ECOZONE territory shall be
free of VAT. [CIR v. Toshiba Information Equipment (Phils.), Inc.,
GR No. 150154, 9 Aug. 2005.]
106(A)(2)(a)
(1) The sale and actual shipment 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 and paid for in acceptable
foreign currency or its equivalent in goods or services, and
accounted for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP);
Q: Give examples of export sales in the form of actual shipment of
goods from the Philippines to a foreign country.
* Toshiba Information Equipment (Phils.), Inc. v. CIR is a claim for
tax refund/credit of alleged unutilized input VAT on local
purchases of goods and services which are attributable to export
7
 sales for the first and second quarters of 1997. [NOTE: This is
different from the Toshiba Case previously cited.]
In the case at bar, the CIR, in the Joint Stipulation of Facts and
Issues, admitted that Toshiba was a registered VAT entity and that
it was subject to 0% VAT on its export sales. Later, in his Motion
for Reconsideration of the adverse Court of Tax Appeals decision,
the CIR would argue that Toshiba was not entitled to its claim for
tax refund/credit because it was VAT-exempt and its export sales
were VAT-exempt transactions.
The Supreme Court ruled that Toshiba was a registered VAT entity
and its export sales were subject to 0% VAT. [Toshiba Information
Equipment (Phils.), Inc. v. CIR, GR No. 157594, 9 Mar. 2010.]
** The case of Intel Technology Philippines, Inc. v. CIR is a claim
for tax refund/credit of alleged unutilized input VAT on local
purchases of goods and services which are attributable to export
sales for the second quarter of 1998. To prove that it was
engaged in the “sale and actual shipment of goods from the
Philippines to a foreign country,” Intel Technology presented
documentary evidence such as summary of export sales, sales
invoices, official receipts, airway bills, and export declarations.
And, to prove that payment was made “in acceptable foreign
currency or its equivalent in goods or services, and accounted
for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP),” a certification of inward remittances
was presented by Intel Technology. The Supreme Court found
that Intel Technology’s evidence sufficiently established that it
was engaged in export sales. [Intel Technology Philippines, Inc.
v. CIR, GR No. 166732, 27 Apr. 2007.]
TAX 2 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2018-2019
106(A)(2)(a)
(2) Sale and delivery of goods to:
(i) Registered enterprises within a separate customs territory as
provided under special laws; and
(ii) Registered enterprises within tourism enterprise zones as
declared by the Tourism Infrastructure and Enterprise Zone
Authority (TIEZA) subject to the provisions under Republic Act No.
9593 or the Tourism Act of 2009.
106(A)(2)(a)
(3) Sale of raw materials or packaging materials to a nonresident
buyer for delivery to a resident local export-oriented enterprise to
be used in manufacturing, processing, packing or repacking in the
Philippines of the said buyer’s goods and paid for in acceptable
foreign currency and accounted for in accordance with the rules and
regulations of the Banko Sentral ng Pilipinas (BSP);
106(A)(2)(a)
(4) Sale of raw materials or packaging materials to export-oriented
enterprise whose export sales exceed seventy percent (70%) of total
annual production;
Q: Give an example of a sale of raw materials to an export-oriented
enterprise.
* Section 106(A)(2)(a)(iii) of the 1997 Tax Code pertains to the sale
of raw materials or packaging materials to an export-oriented
8
 enterprise whose export sales exceed 70% of total annual
production. With respect to the extent of the relief, the Supreme
Court held that:
“Thus, the 0% rate applies to the total sale of raw materials or
packaging materials to an export-oriented enterprise and not just
the percentage of the sale in proportion to the actual exports of
the enterprise.” [Atlas Consolidated Mining and Development
Corporation v. CIR, GR No. 146221, 25 Sept. 2007.]
106(A)(2)(a)
(5) Those considered export sales under Executive Order No. 226,
otherwise known as the Omnibus Investment Code of 1987, and
other special laws. 
 WITH THE BUREAU: PROVIDED, THAT, TO DETERMINE THE
Q: Give an example of export sales under the Omnibus Investment
Code of 1987 and other special laws.
* In Panasonic Communications Imaging Corporation of the
Philippines v. CIR, Panasonic produced and exported paper copiers
and their sub-assemblies, parts, and components. It was
registered with the Board of Investments as a preferred pioneer
enterprise under the Omnibus Investment Code of 1987; it was a
registered VAT enterprise; and its export sales were zero-rated.
[Panasonic Communications Imaging Corporation of the
Philippines v. CIR, GR No. 178090, 8 Feb. 2010.]
106(A)(2)(a)
(6) The sale of goods, supplies, equipment and fuel to persons
engaged in international shipping or international air transport
TAX 2 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2018-2019
operations, PROVIDED, THAT THE GOODS, SUPPLIES, EQUIPMENT
AND FUEL SHALL BE USED FOR INTERNATIONAL SHIPPING OR AIR
TRANSPORT OPERATIONS.
PROVIDED, THAT SUBPARAGRAPHS (3), (4), AND (5) HEREOF SHALL
BE SUBJECT TO THE TWELVE PERCENT (12%) VALUE ADDED TAX
AND NO LONGER BE CONSIDERED EXPORT SALES SUBJECT TO ZERO
PERCENT (0%) VAT RATE UPON SATISFACTION OF THJE FOLLOWING
CONDITIONS:
1. THE SUCCESSFUL ESTABLISHMENT AND IMPLEMENTATION
OF AN ENHANCED VAT REFUND SYSTEM THAT GRANTS
REFUNDS OF CREDITABLE INPUT TAX WITHIN NENETY (90)
DAYS FROM THE FILING OF THE VAT REFUND APPLICATION
EFFECTIVITY OF ITEM NO. 1 ALL APPLICATIONS FILED FROM
JANUARY 1, 2018 SHALL BE PROCESSED AND MUST BE
DECIDED WITHIN NINETY (90) DAYS FROM THE FILING OF
THE VAT REFUND APPLICATION;
2. ALL PENDING VAT REFUND CLAIMS AS OF DECEMBER 31,
2017 SHALL BE FULLY PAID IN CASH BY DECEMBER 31, 2019.
PROVIDED, THAT THE DEPARTMENT OF FINANCE SHALL
ESTABLISH A VAT REFUND CENTER IN THE BUREAU OF
INTERNAL REVENUE (BIR) AND THE BUREAU OF CUSTOMS
(BOC) THAT WILL HANDLE THE PROCESSING AND GRANTING
OF CASH REFUNDS OF CREDITABLE INPUT TAX.
AN AMOUNT EQUIVALENT TO FIVE PERCENT (5%) OF THE
TOTAL VALUE- ADDED TAX COLLECTION OF THE BIR AND
BOC FOR THE IMMEDIATELY PRECEDING YEAR SHALL BE
AUTOMATICALLY APPROPRIATED ANNUALLY AND SHALL BE
TREATED AS A SPECIAL ACCOUNT IN THE GENERAL FUND OR
AS TRUST RECEIPTS FOR THE PURPOSE OF FUNDING,
9
 CLAIMS FOR VAT REFUND;PROVIDED, THAT ANY UNUSED
FUND, AT THE END OF THE YEAR SHALL REVERT TO THE
GENRAL FUND.
PROVIDED, FURTHER, THAT THE BIR AND BOC SHALL BE
REQUIRED TO SUBMIT TO THE CONGRESSIONAL OVERIGHT
COMMITTEE ON THE COMPOREHENSIVE TAX REFORM
PROGRAM (COCCTP) A QUARTERLY REPORT OF ALL
PENDING CLAIMS FOR REFUND AND ANY UNUSED FUND.
(As amended by Train Law)
106(A)(2)(b) Sales to persons or entities whose exemption under
special laws or international agreements to which the Philippines is
a signatory effectively subjects such sales to zero rate.
106(B) Transactions Deemed Sale - The following transactions shall
be deemed sale:
106(B)(1) Transfer, use or consumption not in the course of business
of goods or properties originally intended for sale or for use in the
course of business;
Q: Give an example of a transaction deemed sale under this
provision.
* In San Roque Power Corporation v. CIR, San Roque Power
Corporation was engaged in the supply of electricity to the
National Power Corporation. Such sale of service qualified as a
zero-rated transaction under Section 108(B)(3) of the 1997 Tax
Code. A portion of SRPC’s claim for tax refund/credit for alleged
unutilized input VAT was attributable to a “sale” of electricity to
NPC that was made during the testing period sometime in 2002,
for which SRPC was paid an amount of Php 42.5 million. The issue
TAX 2 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2018-2019
was whether such “sale” qualified for zero-rating. The Supreme
Court held that although the “sale” was not a commercial sale or
in the normal course of business, it was a “transaction deemed
sale” under Section 106(B)(1) of the 1997 Tax Code. It thus
qualified for zero-rating. [San Roque Power Corporation v. CIR, GR
No. 180345, 25 Nov. 2009.]
106(B)(2) Distribution or transfer to:
(a) Shareholders or investors as share in the profits of the VAT-
registered persons; or
(b) Creditors in payment of debt; 

106(B)(3) Consignment of goods if actual sale is not made within
sixty (60) days following the date such goods were consigned; and
106(B)(4) Retirement from or cessation of business, with respect to
inventories of taxable goods existing as of such retirement or
cessation.
* These are: (1) transfer to shareholders/investors as share in the
profits of a VAT-registered person/entity; (2) transfer to creditors
in payment of debt; (3) consignment of goods, if actual sale is not
made within 60 days following the date such goods were
consigned; and (4) retirement from or cessation of business, with
respect to inventories of taxable goods existing as of such
retirement or cessation.
106(C) Changes in or Cessation of Status of a VAT-Registered Person
- The tax imposed in Subsection (A) of this Section shall also apply
to goods disposed of or existing as of a certain date if under
circumstances to be prescribed in rules and regulations to be
promulgated by the Secretary of Finance, upon recommendation of
10
the Commissioner, the status of a person as a VAT-registered person
changes or is terminated.
106(D) Sales Returns, Allowances, and Sales Discounts – The value
of goods or properties sold and subsequently returned or for which
allowances were granted by a VAT-registered person may be
deducted from the gross sales or receipts for the quarter in which a
refund is made or a credit memorandum or refund is issued. Sales
discount granted and indicated in the invoice at the time of sale and
the grant of which does not depend upon the happening of a future
event may be excluded from the gross sales within the same quarter
it was given.
106(E) Authority of the Commissioner to Determine the Appropriate
Tax Base - The Commissioner shall, by rules and regulations
prescribed by the Secretary of Finance, determine the appropriate
tax base in cases where a transaction is deemed a sale, barter or
exchange of goods or properties under Subsection (B) hereof, or
where the gross selling price is unreasonably lower than the actual
market value.
Sec. 107, Value-Added Tax on Importation of Goods
107(A) In General. - There shall be levied, assessed and collected on
every importation of goods a value-added tax equivalent to twelve
percent (12%) based on the total value used by the Bureau of
Customs in determining tariff and customs duties plus customs
duties, excise taxes, if any, and other charges, such tax to be paid
by the importer prior to the release of such goods from customs
custody: Provided, That where the customs duties are determined
on the basis of the quantity or volume of the goods, the value-added
tax shall be based on the landed cost plus excise taxes, If any.
TAX 2 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2018-2019
107(B) Transfer of Goods by Tax-exempt Persons. - In the case of
tax-free importation of goods into the Philippines by persons,
entities or agencies exempt from tax where such goods 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 any internal revenue tax on such importation. The tax due
on such importation shall constitute a lien on the goods superior to
all charges or liens on the goods, irrespective of the possessor
thereof.
Q: Does VAT apply on every importation of goods?
* In explaining value-added tax, CIR v. Seagate Technology
(Philippines) stated that VAT shall be imposed on every
importation of goods, whether or not in the course of trade or
business. This is unlike VAT on sale of goods or properties which
must be in the course of trade or business. Otherwise, the
person/transaction shall not be liable to pay VAT. Pertinent
portion of the decision read:
“Viewed broadly, the VAT is a uniform tax ranging, at present,
from 0 percent to 10 percent [now 12 percent] levied on every
importation of goods, whether or not in the course of trade or
business, or imposed on each sale, barter, exchange or lease of
goods or properties or on each rendition of services in the course
of trade or business as they pass along the production and
distribution chain, the tax being limited only to the value added to
such goods, properties or services by the seller, transferor or
lessor.” [CIR v. Seagate Technology (Philippines), GR No. 153866,
11 Feb. 2005.]
11

Sec. 108, Value-Added Tax on Sale of Services and Use or Lease of
Properties
108(A) Rate and Base of Tax - There shall be levied, assessed and
collected, a value-added tax equivalent to twelve percent (12%) of
gross receipts derived from the sale or exchange of services,
including the use or lease of properties.
The phrase 'sale or exchange of services' means the
performance of all kinds or services in the Philippines 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 property, whether personal
or real; warehousing services; lessors or distributors of
cinematographic films; persons engaged in milling
processing, manufacturing or repacking goods for others;
proprietors, operators or keepers of hotels, motels,
resthouses, pension houses, inns, resorts; proprietors or
operators of restaurants, refreshment parlors, cafes and
other eating places, including clubs and caterers; dealers in
securities; lending investors; transportation contractors on
their transport of goods or cargoes, including persons who
transport goods or cargoes for hire and other domestic
common carriers by land relative to their transport of goods
or cargoes; common carriers by air and sea relative to their
transport of passengers, goods or cargoes from one place in
the Philippines to another place in the Philippines; sale of 

electricity by generation companies, transmission BY ANY
ENTITY, and distribution companies, INCLUDING ELECTRIC
COOPERATIVES; services of franchise grantees of electric
TAX 2 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2018-2019
utilities, telephone and telegraph, radio and television
broadcasting and all other franchise grantees, except those
under Section 119 of this Code; and non-life insurance
companies (except their crop insurances) including surety,
fidelity, indemnity, and bonding companies and similar
services regardless of whether or not the performance
thereof calls for the exercise or use of the physical or mental
facilities. The phrase “ sale or exchange of services” shall
likewise include:
(1) The lease or the use of or the right or privilege to use any
copyright, patent, design or model, plan secret formula or
process, goodwill, trademark, trade brand or other like
property or right;
(2) The lease of the use of, or the right to use of any
industrial, commercial or scientific equipment;

(3) The supply of scientific, technical, industrial or
commercial knowledge or information; 

(4) The supply of any assistance that is ancillary and
subsidiary to and is furnished as a means of enabling the
application or enjoyment of any such property, or right as is
mentioned in subparagraph (2) or any such knowledge or
information as is mentioned in subparagraph (3);
(5) The supply of services by a nonresident person or his
employee in connection with the use of property or rights
belonging to, or the installation or operation of any brand,
machinery or other apparatus purchased from such
nonresident person.
(6) The supply of technical advice, assistance or services
rendered in connection with technical management or
administration of any scientific, industrial or commercial
12
 undertaking, venture, project or scheme; 

(7) The lease of motion picture films, films, tapes and discs; and

(8) The lease or the use of or the right to use radio, television,
satellite transmission and cable television time. 
 utilities, telephone and telegraph, radio and television
Lease of properties shall be subject to the tax herein imposed
irrespective of the place where the contract of lease or licensing
agreement was executed if the property is leased or used in the
Philippines. 
 [NOTE: Section 119 of the Tax Code imposes a percentage tax, in
The term 'gross receipts' means the total amount of money or its
equivalent representing the contract price, compensation, service
fee, rental or royalty, including the amount charged for materials
supplied with the services and deposits and advanced payments
actually or constructively received during the taxable quarter for
the services performed or to be performed for another person,
excluding value-added tax.
Q: What is a “sale of services”?
* In CIR v. Sony Philippines, Inc., Sony Philippines engaged the
services of several advertising companies. Due to Sony
Philippines’ dire economic conditions, Sony International
Singapore handed Sony Philippines a dole-out to answer for the
expenses payable to the advertising companies. Sony Philippines
was thereafter assessed deficiency VAT for the transaction, i.e.,
dole-out, between Sony International Singapore and Sony
Philippines. The Supreme Court ruled that the dole-out or subsidy
from the Singaporean company to the Philippine company neither
constituted a sale of goods or properties, nor a sale of services.
Hence, Sony Philippines was not liable to pay VAT on the same.
[CIR v. Sony Philippines, Inc., GR No. 178697, 17 Nov. 2010.]
TAX 2 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2018-2019
** Quezon City v. ABS-CBN Broadcasting Corporation dealt with
VAT-able sales of “services of franchise grantees of electric
broadcasting and all other franchise grantees except those under
Section 119 of this Code.”
the form of a 3% franchise tax, on radio and television
broadcasting companies whose annual gross receipts do not
exceed Php 10 million. Such franchise holders, however, has the
option of paying 3% franchise tax or 12% VAT. On the other hand,
radio and television broadcasting companies whose annual gross
receipts exceed Php 10 million are governed by Section 108 of the
1997 Tax Code. They are liable to pay VAT, and do not have the
option to choose between paying franchise tax or VAT.]
ABS-CBN, being a broadcasting company with yearly gross
receipts exceeding Php 10 million, was found liable to pay VAT.
[Quezon City v. ABS-CBN Broadcasting Corporation, GR No.
166408, 6 Oct. 2008.]
*** Section 108 of the 1997 Tax Code defines “sale of services” as
“the performance of all kinds of services in the Philippines for
others for a fee, remuneration or consideration,” including
“supply of technical advice, assistance or services rendered in
connection with technical management or administration of any
scientific, industrial or commercial undertaking, venture, project
or scheme.” In the case of CIR v. CA, COMASERCO was a non-stock
non-profit organization engaged in the sale of services of such
nature. However, COMASERCO argued that its sales of services
were not subject to VAT because although it charged a fee for
13
 such sales, the organization was operating on a reimbursement-
of-cost basis and hence, did not derive profit from such sales. The
Supreme Court held that any sale of services for a fee,
remuneration or consideration is subject to VAT, regardless of any
profit derived therefrom. [CIR v. CA, GR No. 125355, 30 Mar.
2000.]
**** “Sale of services” includes “lease of motion picture films,
films, tapes and discs.” In CIR v. SM Prime Holdings, Inc., SM Prime
and First Asia were engaged in the business of operating cinema
houses. At issue was whether cinema operators/proprietors were
liable to pay VAT, on top of the amusement tax imposed by the
1991 LGC. The Supreme Court conceded that the enumeration of
services subject to VAT under Section 108 of the 1997 Tax Code
was not exhaustive. However, “lease of motion picture films,
films, tapes and discs” did not equate to “showing or exhibition of
motion pictures or films.” SM Prime and First Asia were not liable
to pay VAT. [CIR v. SM Prime Holdings, Inc., GR No. 183505, 26
Feb. 2010.]
***** Sonza v. ABS-CBN Broadcasting Corporation differentiated
between services rendered pursuant to an employer-employee
relationship and services rendered by an independent contractor
pursuant to a contractual relationship. Subsumed under the
latter, professionals such as talent and television and radio
broadcasters are liable to pay VAT. [Sonza v. ABS-CBN
Broadcasting Corporation, GR No.138051, 10 June 2004.]
108(B) Transactions Subject to Zero Percent (0%) Rate - The
following services performed in the Philippines by VAT- registered
persons shall be subject to zero percent (0%) rate:
TAX 2 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2018-2019
Q: What is the destination principle? Are there exceptions to the
rule?
* According to CIR v. American Express International, Inc.: “As a
general rule, the VAT system uses the destination principle as a
basis for the jurisdictional reach of the tax. Goods and services are
taxed only in the country where they are consumed. Thus, exports
are zero-rated, while imports are taxed.” The decision proceeded
to define “consumption” as “the use of a thing in a way that
thereby exhausts it.” Applied to services, it means “the
performance or successful completion of a contractual duty,
usually resulting in the performer’s release from any past or
future liability.”
Exceptions to the destination principle are found in Section 108(B)
of the 1997 Tax Code. They are deemed exceptions because
although the services are performed in the Philippines, upon
compliance with certain requirements, the sales of such services
are zero-rated. [CIR v. American Express International, Inc.
(Philippine Branch), GR No. 152609, 29 June 2005.]
108(B)(1) Processing, manufacturing or repacking goods for other
persons doing business outside the Philippines which goods are
subsequently exported, where the services are paid for in
acceptable foreign currency and accounted for in accordance with
the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
108(B)(2) Services other than those mentioned in the preceding
paragraph, rendered to a person engaged in business conducted
outside the Philippines or to a nonresident person not engaged in
business who is outside the Philippines when the services are
performed, the consideration for which is paid for in acceptable
14
foreign currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);
Q: Cite examples of services other than “processing, manufacturing,
or repacking of goods.”
* In CIR v. American Express International, Inc., Amex Phils.
facilitated in the Philippines the collection and payment of
receivables belonging to its Hong Kong-based foreign client, Amex
HK, and getting paid for it in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the
BSP. The Supreme Court ruled that the facilitation services Amex
Phils. rendered in the Philippines fell under Section 108(B)(2) of
the 1997 Tax Code. [CIR v. American Express International, Inc.,
GR No. 152609, 29 June 2005.]
** In CIR v. Placer Dome Technical Services (Phils.) Inc., Placer
Dome Canada engaged the services of Placer Dome Phils. to
perform the clean-up and rehabilitation of the Makalupnit and
Boac Rivers in Marinduque. Placer Dome Phils. argued that its sale
of services to Placer Dome Canada was a zero-rated transaction
under Section 108(B)(2) of the 1997 Tax Code. Citing CIR v.
American Express International, Inc., the Supreme Court upheld
Placer Dome Phils.’ argument. [CIR v. Placer Dome Technical
Services (Philippines), Inc., GR No. 164365, 8 June 2007.]
*** In CIR v. Burmeister and Wain Scandinavian Contractor
Mindanao, Inc., Burmeister was engaged in the actual operation
and management of two power barges in Mindanao. It claimed
that its transactions were subject to zero-rating under Section
108(B)(2) of the 1997 Tax Code. The Supreme Court denied
Burmeister’s claim on the ground that Section 108(B)(2) of the
TAX 2 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2018-2019
1997 Tax Code additionally required that the payer-recipient of
the services must be doing business outside the Philippines. It
ruled in this manner:
“The Tax Code not only requires that the services be other than
‘processing, manufacturing or repacking of goods’ and that
payment for such services be in acceptable foreign currency
accounted for in accordance with BSP rules. Another essential
condition for qualification to zero-rating under Section 102(b)(2)
is that the recipient of such services is doing business outside the
Philippines. While this requirement is not expressly stated in the
second paragraph of Section 102(b), this is clearly provided in the
first paragraph of Section 102(b) where the listed services must
be ‘for other persons doing business outside the Philippines.’
The phrase “for other persons doing business outside the
Philippines” not only refers to the services enumerated in the first
paragraph of Section 102(b), but also pertains to the general term
“services” appearing in the second paragraph of Section 102(b). In
short, services other than processing, manufacturing, or repacking
of goods must likewise be performed for persons doing business
outside the Philippines.”
[NOTE: In relation to CIR v. American Express International, Inc.
and CIR v. Placer Dome Technical Services (Philippines), Inc.
discussed above, said cases stated that consumption of the
services abroad is not a requirement for zero-rating. However,
on the basis of CIR v. Burmeister & Wain Contractor Mindanao,
Inc., the payer-recipient of the services must be doing business
outside of the Philippines.] [CIR v. Burmeister & Wain
Scandinavian Contractor Mindanao, Inc., GR No. 153205, 22 Jan.
2007.]
15
108(B)(3) Services rendered to persons or entities whose exemption
under special laws or international agreements to which the
Philippines is a signatory effectively subjects the supply of such
services to zero percent (0%) rate;
Q: Distinguish between zero-rated transactions [e.g., Sec. 108(B)(1)-
(2)] and effectively zero-rated transactions [e.g., Sec. 108(B)(3)].
* The case of CIR v. Seagate Technology (Philippines) addressed
this issue. It stated that: “Although both are taxable and similar in
effect, zero-rated transactions differ from effectively zero-rated
transactions as to their source.
Zero-rated transactions generally refer to the export sale of
goods and supply of services. The tax rate is set at zero. When
applied to the tax base, such rate obviously results in no tax
chargeable against the purchaser. The seller of such transactions
charges no output tax, but can claim a refund of or a tax credit
certificate for the VAT previously charged by suppliers.
Effectively zero-rated transactions, however, refer to the sale of
goods or supply of services to persons or entities whose
exemption under special laws or international agreements to
which the Philippines is a signatory effectively subjects such
transactions to a zero rate. Again, as applied to the tax base, such
rate does not yield any tax chargeable against the purchaser. The
seller who charges zero output tax on such transactions can also
claim a refund of or a tax credit certificate for the VAT previously
charged by suppliers.”
The decision went on to say (under the subheading Zero Rating
and Exemption): “Applying the destination principle to the
TAX 2 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2018-2019
exportation of goods, automatic zero rating is primarily intended
to be enjoyed by the seller who is directly and legally liable for the
VAT, making such seller internationally competitive by allowing
the refund or credit of input taxes that are attributable to export
sales. Effective zero rating, on the contrary, is intended to benefit
the purchaser who, not being directly and legally liable for the
payment of the VAT, will ultimately bear the burden of the tax
shifted by the suppliers.” (Emphasis supplied.) [CIR v. Seagate
Technology (Philippines), GR No. 153866, 11 Feb. 2005.]
Q: Give examples of effectively zero-rated sales of services pursuant
to special laws.
* In CIR v. Acesite (Philippines) Hotel Corporation, Acesite was the
operator of Holiday Inn Manila Pavilion Hotel. It leased a portion
of its premises to PAGCOR for casino operations. It also catered
food and beverages to PAGCOR’s casino patrons. The issue was
whether Acesite could refund the VAT it paid on its rental income
and sale of food and beverages to PAGCOR. The Supreme Court,
pursuant to PAGCOR’s charter (PD No. 1869 and all amendments
thereto), found that Acesite’s sale of services to PAGCOR was
zero-rated under Section 108(B)(3) of the 1997 Tax Code. [CIR v.
Acesite (Philippines) Hotel Corporation, GR No. 147295, 16 Feb.
2007.]
** In the case of San Roque Power Corporation v. CIR, San Roque
Power Corporation was engaged in the sale of electricity to NPC.
The Supreme Court ruled that SRPC’s sale of service to NPC was
zero-rated, pursuant to NPC’s charter and under Section 108(B)(3)
of the 1997 Tax Code. It explained the rationale for the effective
zero-rating of NPC in this manner:
16
 “It bears emphasis that effective zero-rating is not intended as a
benefit to the person legally liable to pay the tax, such as
petitioner, but to relieve certain exempt entities, such as the NPC,
from the burden of indirect tax so as to encourage the
development of particular industries. Before, as well as after, the
adoption of the VAT, certain special laws were enacted for the
benefit of various entities and international agreements were
entered into by the Philippines with foreign governments and
institutions exempting sale of goods or supply of services from
indirect taxes at the level of their suppliers. Effective zero-rating
was intended to relieve the exempt entity from being burdened
with the indirect tax which is or which will be shifted to it had
there been no exemption. In this case, petitioner is being
exempted from paying VAT on its purchases to relieve NPC of the
burden of additional costs that petitioner may shift to NPC by
adding to the cost of the electricity sold to the latter.” [San Roque
Power Corporation v. CIR, GR No. 180345, 25 Nov. 2009.]
108(B)(4) Services rendered to persons engaged in international
shipping or international air transport operations, including leases
of property for use thereof: PROVIDED, THAT THESE SERVICES SHALL
BE EXCLUSIVELY FOR INTERNATIONAL SHIPPING OR AIR
TRANSPORT OPERATIONS;
108(B)(5) Services performed by subcontractors and/or contractors
in processing, converting, of manufacturing goods for an enterprise
whose export sales exceed seventy percent (70%) of total annual
production;
108(B)(6) Transport of passengers and cargo by air or sea vessels
from the Philippines to a foreign country
TAX 2 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2018-2019
108(B)(7) Sale of power or fuel generated through renewable
sources of energy such as, but not limited to, biomass, solar, wind
hydropower, geothermal, ocean energy, and other emerging
energy sources using technologies such as fuel cells and hydrogen
fuels.
108(B)(8) Services rendered to:
(i) Registered enterprises within a separate customs territory as
provided under special law; and
(ii) Registered enterprises within tourism enterprise zones as
declared by the TIEZA subject to the provisions under Republic Act
No. 9593 or The Tourism Act of 2009.
PROVIDED THAT SUBPARAGRAPHS (B) (1) AND (B) (5) HEREOF
SHALL BE SUBJECT TO THE TWELVE PERCENT (12%) VALUE-ADDED
TAX AND NO LONGER BE SUBJECT TO ZERO PERCENT (0%) VAT RATE
UPON SATISFACTION OF THE FOLLOWING CONDITIONS:
1. THE SUCCESSFUL ESTABLIISHMENT AND
IMPLEMENTATION OF AN ENHANCED VAT REFUND
SYSTEM THAT GRANTS REFUNDS OF CREDITABLE INPUT
TAX WITHIN NINETY (90) DAYS FROM THE FILING OF
THE VAT REFUND APPLICATION WITH THE BUREAU;
PROVIDED, THAT, TO DETERMINE THE EFFECTIVITY OF
ITEM NO. 1 , ALL APPLICATIONS FILED FROM JANUARY
1, 2018 SHALL BE PROCESSED AND MUST BE DECIDED
WITHIN NONETY (90) DAYS FROM THE FILING OF THE
VAT REFUND APPLICATION;
17
 2. ALL PENDING VAT REFUND CLAIMS AS OF DECEMBER
31, 2017 SHALL BE FULLY PAID IN CASH BY DECEMBER
31, 2019.
PROVIDED, THAT THE DEPARTMENT OF FINANCE SHALL
ESTABLISH A VAT REFUND CENTER IN THE BUREAU OF
INTERNAL REVENUE (BIR) AND IN THE BUREAU OF
CUSTOMS (BOC) THAT WILL HANDLE THE PROCESSING AND
GRANTING OF CASH REFUNDS OF CREDITABLE INPUT TAX.
AN AMOUNT EQUIVALENT TO FIVE PERCENT (5%) OF THE
TOTAL VALUE-ADDED TAX COLLECTION OF THE BIR AND THE
BOC FOR THE IMMEDIATELY PRECEDING YEAR SHALL BE
AUTOMATICALLY APPROPRIATED ANNUALLY AND SHALL BE
TREATED AS A SPECIAL ACCOUNT IN THE GENERAL FUND OR
AS TRUST RECEIPTS FOR THE PURPOSE OF FUNDING CLAIMS
FOR VAT REFUND; PROVIDED, THAT ANY UNUSED FUND, AT
THE END OF THE YEAR SHALL REVERT TO THE GENERAL
FUND.
PROVIDED, FURTHER, THAT THE BIR AND BOC SHALL BE
REQUIRED TO SUBMIT TO THE COCCTRP A QUARTERLY
REPORT OF ALL PENDING CLAIMS FOR REFUND AND ANY
UNUSED FUND.
Sec. 109, Exempt Transactions – (1) Subject to the provisions of
Subsection (2) hereof, the following transactions shall be exempt
from the value-added tax:
Q: Distinguish between an exempt transaction and an exempt party.
TAX 2 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2018-2019
* CIR v. Seagate Technology (Philippines) made a distinction
between exempt transaction exempt party in this wise:
“An exempt transaction, on the one hand, involves goods or
services which, by their nature, are specifically listed in and
expressly exempted from the VAT under the Tax Code, without
regard to the tax status -- VAT-exempt or not -- of the party to the
transaction. Indeed, such transaction is not subject to the VAT,
but the seller is not allowed any tax refund of or credit for any
input taxes paid.
An exempt party, on the other hand, is a person or entity granted
VAT exemption under the Tax Code, a special law or an
international agreement to which the Philippines is a signatory,
and by virtue of which its taxable transactions become exempt
from the VAT. Such party is also not subject to the VAT, but may
be allowed a tax refund of or credit for input taxes paid,
depending on its registration as a VAT or non-VAT taxpayer.”
(Emphasis supplied.) [CIR v. Seagate Technology (Philippines), GR
No. 153866, 11 Feb. 2005.]
Q: Give examples of exempt transactions.
109 (A) Sale or importation of agricultural and marine food products
in their original state, livestock and poultry of a kind generally used
as, or yielding or producing foods for human consumption; and
breeding stock and genetic materials thereof.
Products classified under this paragraph 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, broiling, roasting, smoking or stripping. Polished and/or
18
husked rice, corn grits, raw can sugar and molasses, ordinary salt
and copra shall be considered in their original state;
* Misamis Oriental Association of Coco Traders, Inc. v. DOF
interpreted the provisions of the 1977 Tax Code. However, it is
instructive as to the issue of who determines or classifies a certain
product, i.e., whether it is food or non-food. According to the
decision, as between the Bureau of Food and Drug and the Bureau
of Internal Revenue, the classification made by the latter would
prevail. [Misamis Oriental Association of Coco Traders, Inc. v. DOF,
GR No. 108524, 10 Nov. 1994.]
109 (B) Sale or importation of fertilizers; seeds, seedlings and
fingerlings; fish, prawn, livestock and poultry feeds, including
ingredients, whether locally produced or imported, used in the
manufacture of finished feeds (except specialty feeds for race
horses, fighting cocks, aquarium fish, zoo animals and other
animals generally considered as pets;
109 (C) Importation of personal and household effects belonging to
the residents of the Philippines returning from abroad and
nonresident citizens coming to resettle in the Philippines: Provided,
That such goods are exempt from customs duties under the Tariff
and Customs Code of the Philippines;
109 (D) Importation of professional instruments and implements,
TOOLS OF TRADE, OCCUPATION OR EMPLOYMENT, wearing
apparel, domestic animals, and personal household effects
BELONGING TO PERSONS COMING TO SETTLE IN THE PHILIPPINES
OR FILIPINOS OR THEIR FAMILIES AND DESCENDANTS WHO ARE
NOW RESIDENTS OR CITIZENS OF OTHER COUNTRIES, SUCH PARTIES
HEREINAFTER REFERRED TO AS OVERSEAS FILIPINOS, IN
TAX 2 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2018-2019
QUANTITIES AND OF THE CLASS SUITABLE TO THE PROFESSION,
RANK OR POSITION OF THE PERSONS IMPORTING SAID ITEMS, FOR
THEIR OWN USE AND NOT FOR BARTER OR SALE, ACCOMPANYING
SUCH PERSONS, OR ARRIVING WITHIN A REASONABLE TIME;
PROVIDED, THAT THE BUREAU OF CUSTOMS MAY, UPON THE
PRODUCTION OF SATISFACTORY EVIDENCE THAT SUCH PERSONS
ARE ACTUALLY COMING TO SETTLE IN THE PHILIPPINES AND THAT
THE GOODS ARE BOUGHT FROM THEIR FORMER PLACE OF ABODE,
EXEMPT SUCH GOODS FROM PAYMENT OF DUTIES AND TAXES;
PROVIDED, FURTHER, THAT VEHICLES, VESSELS, AIRCRAFTS,
MACHINERIES AND OTHER SIMILAR GOODS FOR USE IN
MANUFACTURE SHALL NOT FALL WITHIN THIS CLASSIFICATION AND
SHALL THEREFORE BE SUBJECT TO DUTIES, TAXES AND OTHER
CHARGES.
109 (E) Services subject to percentage tax under Title V;
109 (F) Services by agricultural contract growers and milling for
others of palay into rice, corn into grits and sugar cane into raw
sugar;
109 (G) Medical, dental, hospital and veterinary services except
those rendered by professionals;
* Section 109(G) of the Tax Code provides that transactions
involving medical, dental, hospital, and veterinary services are
VAT-exempt transactions. In the case of CIR v. Philippine Health
Care Providers, Inc., it was found that Philippine Health Care
Providers, Inc. did not render medical, dental, hospital, and
veterinary services, but merely arranged for the same. Hence, its
services were not VAT-exempt. [CIR v. Philippine Health Care
Providers, Inc., GR No. 168129, 24 Apr. 2007.]
19

109 (H) Educational services rendered by private educational
institutions, duly accredited by the Department of Education
(DEPED), the Commission on Higher Education (CHED), the Technical
Education and Skills Development Authority (TESDA) and those
rendered by government educational institutions;
109 (I) Services rendered by individuals pursuant to an employer-
employee relationship;
* Sonza v. ABS-CBN Broadcasting Corporation differentiated
between services rendered pursuant to an employer-employee
relationship (which is an exempt transaction) and services
rendered by an independent contractor pursuant to a contractual
relationship (which is subject to VAT). The Supreme Court ruled
that Sonza was an independent contractor. As such, he was
subject to VAT on the services that he rendered. [Sonza v. ABS-
CBN Broadcasting Corporation, GR No.138051, 10 June 2004.]
109 (J) Services rendered by regional or area headquarters
established in the Philippines by multinational corporations which
act as supervisory, communications and coordinating centers for
their affiliates, subsidiaries or branches in the Asia-Pacific Region
and do not earn or derive income from the Philippines;
109 (K) Transactions which are exempt under international
agreements to which the Philippines is a signatory or under special
laws, except those under Presidential Decree No. 529;
* In Philippine Amusement & Gaming Corporation v. CIR, the
Supreme Court held that PAGCOR was exempt from payment of
VAT. It cited, among others, the VAT exemption of PAGCOR’s
TAX 2 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2018-2019
transactions by virtue of its charter (PD No. 1869 and all
amendments thereto) in relation to Section 109(K) of the 1997 Tax
Code. [Philippine Amusement & Gaming Corporation v. CIR, GR
No. 172087, 15 Mar. 2011.]
109 (L) Sales by agricultural cooperatives duly registered with the
Cooperative Development Authority to their members as well as
sale of their produce, whether in their original state or processed
form, to non-members; their importation of direct farm inputs,
machineries and equipment, including spare parts thereof, to be
used directly and exclusively in the production and/or processing of
their produce;
109 (M) Gross receipts from lending activities by credit or multi-
purpose cooperatives duly registered with the Cooperative
Development Authority;
109 (N) Sales by non-agricultural, non-electric and non-credit
cooperatives duly registered with the Cooperative Development
Authority; Provided, That the share capital contributions of each
member does not exceed Fifteen Thousand Pesos (P15,000) and
regardless of the aggregate capital and net surplus ratably
distributed among the members;
109 (O) Export sales by persons who are not VAT-registered;
109 (P) Sale of real properties not primarily held for sale to
customers or held for lease in the ordinary course of trade or
business, or real property utilized for low-cost and socialized
housing as defined by Republic Act No. 7279, otherwise known as
the Urban Development and Housing Act of 1992, and other related
laws, residential lot valued at One million five hundred pesos
20
(P1,500,000) and below, house and lot, and other residential
dwellings valued at two million five hundred thousand pesos
(P2,500,000) and below: Provided, THAT BEGINNING JANUARY 1,
2021, THE VAT EXEMPTION SHALL ONLY APPLY TO SALE OF REAL
PROPERTIES NOT PRIMARILY HELD FOR SALE TO CUSTOMERS OR
HELD FOR LEASE IN THE ORDIANRY COURSE OF TRADE OR
BUSINESS; SALE OF REAL PROPERTY UTILIZED FOR SOCIALIZED
HOUSING AS DEFINED BY REPUBLIC ACT NO. 7279, SALE OF HOUSE
AND LOT, AND OTHER RESIDENTIAL DWELLINGS WITH SELLING
PRICE OF NOT MORE THAN TWO MILLION PESOS (P2,000,000):
PROVIDED FURTHER, That every three (3) years thereafter, the
amount herein stated shall be adjusted to ITS present value using
the Consumer Price Index, as published by the PHILIPPINE
STATISTICS AUTHORITY (PSA).
109 (Q) Lease of a residential unit with a monthly rental not
exceeding FIFTEEN THOUSAND PESOS (P 15,000)
109 (R) Sale, importation, printing or publication of books and any
newspaper, magazine, review or bulletin which appears at regular
intervals with fixes prices or subscription and sale and which is not
devoted principally to the publication of paid advertisements;
109 (S) Transport of passengers by international carriers;
109 (T) Sale, importation or lease of passenger or cargo vessels and
aircraft, including engine, equipment and spare parts thereof for
domestic or international transport operations;
109 (U) Importation of fuel, goods and supplies by persons engaged
in international shipping or air transport operations; PROVIDED,
THAT THE FUEL, GOODS, AND SUPPLIES SHALL BE USED FOR
TAX 2 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2018-2019
INTERNATIONAL SHIPPING OR AIR TRANSPORT OPERATIONS;
* In order to be VAT-exempt, the imported fuel, goods and
supplies must be used exclusively for the transport of goods
and/or passengers from a port in the Philippines directly to a
foreign port without stopping at any other port in the Philippines.
If any portion of such fuel, goods or supplies is used otherwise,
such portion shall be subject to VAT. [RR No. 04-07]
109 (V) Services of banks, non-bank financial intermediaries
performing quasi-banking functions, and other non-bank financial
intermediaries;
* Now Section 109(V) of the 1997 Tax Code provides that
transactions involving services rendered by banks, non-bank
financial intermediaries performing quasi-banking functions, and
other non-bank financial intermediaries shall be VAT-exempt.
Note, however, that as a rule, such services are subject to gross
receipts tax.
** The case of First Planters Pawnshop, Inc. v. CIR pertained to a
taxable period prior to the adoption of the present wording of
Section 109(V) of the 1997 Tax Code. However, the decision is
relevant in that it discussed the tax treatment of a pawnshop
business. The Supreme Court held that pawnshops are non-bank
financial intermediaries. [First Planters Pawnshop, Inc. v. CIR, GR
No. 174134, 30 July 2008.]
109 (W) SALE OR LEASE OF GOODS AND SERVICES TO SENIOR
CITIZENS AND PERSONS WITH DISABILITIES, AS PROVIDED UNDER
REPUBLIC ACT NOS. 9994 (EXPANDED SENIOR CITIZENS ACT OF
21
2010) AND 10754 (AN ACT EXPANDING THE BENEFITS AND
PRIVILEGES OF PERSONS WITH DISABILITY), RESPECTIVELY;
109 (X) TRANSFER OF PROPERTY PURSUANT TO SECTION 40(C)2 OF
THE NIRC , AS AMENDED;
109 (Y) ASSOCIATION DUES, MEMBERSHIP FEES, AND OTHER
ASSESSMENTS AND CHARGES COLLECTED BY HOMEOWNERS
ASSOCIATIONS AND CONDOMINIUM CORPORATIONS;
109 (Z) SALE OF GOLD TO THE BANGKO SENTRAL NG PILIPINAS;
109 (AA) SALE OF DRUGS AND MEDICINES PRESCRIBED FOR
DIABETES, HIGH CHOLESTEROL, ABND HYERSTENSION BEGINNING
JANUARY 1, 2019; AND
109 (BB) Sale or lease of goods or properties or the performance of
services other than the transactions mentioned in the preceding
paragraphs, the gross annual sales and/or receipts do not exceed
the amount of THREE million pesos (P3,000,000).
Sec. 110, Tax Credits
110(A) Creditable Input Tax -
(1) Any input tax evidenced by a VAT invoice or official receipt
issued in accordance with Section 113 hereof on the
following transactions shall be creditable against the output
tax:
(a) Purchase or importation of goods:
(i) For sale; or
(ii) For conversion into or intended to form part
TAX 2 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2018-2019
of a finished product for sale including
packaging materials; or
(iii) For use as supplies in the course of business;
or
(iv) For use as materials supplied in the sale of
service; or
(v) For use in trade or business for which
deduction for depreciation or amortization is
allowed under this Code, except
automobiles, aircraft and yachts.
(b) Purchase of services on which a value-added tax has
been actually paid.
(2) The input tax on domestic purchase of goods or properties
shall be creditable:
(a) To the purchaser upon consummation of sale and on
importation of goods or properties; and
(b) To the importer upon payment of the value-added tax
prior to the release of the goods from the custody
of the Bureau of Customs.
Provided, That the input tax on goods purchased or
imported in a calendar month for use on trade or
business for which deduction is allowed under this Code,
shall be spread evenly over the month of acquisition and
the fifty-nine (59) succeeding months if the aggregate
acquisition cost for such goods, excluding the VAT
component thereof, exceeds One Million Pesos
(P1,000,000): Provided, however, That if the estimated
useful life of the capital goods is less than five (5) years,
as used for depreciation purposes, then the input VAT
shall be spread over such a shorter period: PROVIDED
FURTHER THAT THE AMORTIZATION OF THE INPUT VAT
SHALL ONLY BE ALLOWED UNTIL DECEMBER 31, 2021
22
 AFTER WHICH TAXPAYERS WITH UNUTILIZED INPUT VAT
ON CAPITAL GOODS PURCHASED OR IMPORTED SHALL
BE ALLOWED TO APPLY THE SAME AS SCHEDULED UNTIL
FULLY UTILIZED; Provided, finally, That, in the case of
purchase of services, lease or use of properties, the input
tax shall be creditable to the purchaser, lessee or license
upon payment of the compensation, rental, royalty or
fee.
(3) A VAT-registered person who is also engaged in
transactions not subject to the value-added tax shall be
allowed tax credit as follows:
(a) Total input tax which can be directly attributed to
transactions subject to value-added tax; and
(b) A ratable portion of any input tax which cannot be
directly attributed to either activity. 

The term 'input tax' means the value-added tax due from or paid by
a VAT-registered person in the course of his trade or business on
importation of goods or local purchase of goods or services,
including lease or use of property, from a VAT-registered person. It
shall also include the transitional input tax determined in
accordance with Section 111 of this Code.
The term 'output tax' means the value-added tax due on the sale or
lease of taxable goods or properties or services by any person
registered or required to register under Section 236 of this Code.
Q: Distinguish between “input tax” and “output tax.”
* The case of CIR v. Benguet Corporation defined “input tax” and
“output tax.”
TAX 2 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2018-2019
“Input VAT or input tax represents the actual payments, costs and
expenses incurred by a VAT-registered taxpayer in connection
with his purchase of goods and services. Thus, "input tax" means
the value-added tax paid by a VAT-registered person/entity in
the course of his/its trade or business on the importation of
goods or local purchases of goods or services from a VAT-
registered person.
On the other hand, when that person or entity sells his/its
products or services, the VAT-registered taxpayer generally
becomes liable for 10% of the selling price as output VAT or output
tax. Hence, "output tax" is the value-added tax on the sale of
taxable goods or services by any person registered or required
to register under Section 107 of the (old) Tax Code.
The VAT system of taxation allows a VAT-registered taxpayer to
recover its input VAT either by (1) passing on the 10% output VAT
on the gross selling price or gross receipts, as the case may be, to
its buyers, or (2) if the input tax is attributable to the purchase of
capital goods or to zero-rated sales, by filing a claim for a refund
or tax credit with the BIR.
Simply stated, a taxpayer subject to 10% output VAT on its sales
of goods and services may recover its input VAT costs by passing
on said costs as output VAT to its buyers of goods and services but
it cannot claim the same as a refund or tax credit, while a taxpayer
subject to 0% on its sales of goods and services may only recover
its input VAT costs by filing a refund or tax credit with the BIR.”
[CIR v. Benguet Corporation, GR No. 145559, 14 July 2006.]
23
110(B) Excess Output or Input Tax - If at the end of any taxable
quarter the output tax exceeds the input tax, the excess shall be
paid by the Vat-registered person. If the input tax exceeds the
output tax, the excess shall be carried over to the succeeding
quarter or quarters: Provided, however, that any input tax
attributable to zero-rated sales by a VAT-registered person may at
his option be refunded or credited against other internal revenue
taxes, subject to the provisions of Section 112. (As amended by RA
No. 9361.)
110(C) Determination of Creditable Input Tax - The sum of the excess
input tax carried over from the preceding month or quarter and the
input tax creditable to a VAT-registered person during the taxable
month or quarter shall be reduced by the amount of claim for refund
or tax credit for value-added tax and other adjustments, such as
purchase returns or allowances and input tax attributable to
exempt sale. 
 prepare it for special use to which it could not have been put
The claim for tax credit referred to in the foregoing paragraph 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 the Bureau of Customs.
Sec. 111, Transitional/Presumptive Input Tax Credits
111(A) Transitional Input Tax Credits. - A person who becomes liable
to value-added tax or any person who elects to be a VAT-registered
person shall, subject to the filing of an inventory according to rules
and regulations prescribed by the Secretary of finance, upon
recommendation of the Commissioner, be allowed input tax on his
beginning inventory of goods, materials and supplies equivalent for
eight percent (8%) of the value of such inventory or the actual value-
TAX 2 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2018-2019
added tax paid on such goods, materials and supplies, whichever is
higher, which shall be creditable against the output tax.
111(B) Presumptive Input Tax Credits. -
(1) Persons or firms engaged in the processing of sardines,
mackerel and milk, and in manufacturing refined sugar and
cooking oil and packed noodle-based instant meals, shall be
allowed a presumptive input tax, creditable against the
output tax, equivalent to four percent (4%) of the gross
value in money of their purchases of primary agricultural
products which are used as inputs to their production. (As
amended by RA No. 9337.)
As used in this Subsection, the term 'processing' shall mean
pasteurization, canning and activities which through
physical or chemical process alter the exterior texture or
form or inner substance of a product in such manner as to
in its original form or condition.
Sec. 112, Refunds or Tax Credits of Input Tax
112(A) Zero-Rated or Effectively Zero-Rated Sales. - Any VAT-
registered person, whose sales are zero-rated or effectively zero-
rated may, within two (2) years after the close of the taxable
quarter when the sales were made, apply for the issuance of a tax
credit certificate or refund of creditable input tax due or paid
attributable to such sales, except transitional input tax, to the
extent that such input tax has not been applied against output tax:
Provided, however, That in the case of zero-rated sales under
Section 106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2),
the acceptable foreign currency exchange proceeds thereof had
been duly accounted for in accordance with the rules and
24
regulations of the Bangko Sentral ng Pilipinas (BSP): Provided,
further, That where the taxpayer is engaged in zero-rated or
effectively zero-rated sale and also in taxable or exempt sale of
goods of properties or services, and the amount of creditable input
tax due or paid cannot be directly and entirely attributed to any one
of the transactions, it shall be allocated proportionately on the basis
of the volume of sales: Provided, finally, That for a person making
sales that are zero-rated under Section 108(B)(6), the input taxes
shall be allocated ratably between his zero-rated and non-zero-
rated sales.
Q: Distinguish between zero-rated transactions [e.g., Sec. 108(B)(1)-
(2)] and effectively zero-rated transactions [e.g., Sec. 108(B)(3)].
* The case of CIR v. Seagate Technology (Philippines) addressed
this issue. It stated that: “Although both are taxable and similar in
effect, zero-rated transactions differ from effectively zero-rated
transactions as to their source.
Zero-rated transactions generally refer to the export sale of
goods and supply of services. The tax rate is set at zero. When
applied to the tax base, such rate obviously results in no tax
chargeable against the purchaser. The seller of such transactions
charges no output tax, but can claim a refund of or a tax credit
certificate for the VAT previously charged by suppliers.
Effectively zero-rated transactions, however, refer to the sale of
goods or supply of services to persons or entities whose
exemption under special laws or international agreements to
which the Philippines is a signatory effectively subjects such
transactions to a zero rate. Again, as applied to the tax base, such
rate does not yield any tax chargeable against the purchaser. The
TAX 2 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2018-2019
seller who charges zero output tax on such transactions can also
claim a refund of or a tax credit certificate for the VAT previously
charged by suppliers.”
The decision went on to say (under the subheading Zero Rating
and Exemption):
“Applying the destination principle to the exportation of goods,
automatic zero rating is primarily intended to be enjoyed by the
seller who is directly and legally liable for the VAT, making such
seller internationally competitive by allowing the refund or credit
of input taxes that are attributable to export sales. Effective zero
rating, on the contrary, is intended to benefit the purchaser who,
not being directly and legally liable for the payment of the VAT,
will ultimately bear the burden of the tax shifted by the suppliers.”
(Emphasis supplied.) [CIR v. Seagate Technology (Philippines), GR
No. 153866, 11 Feb. 2005.]
Q: What are the requirements for a claim for VAT refund/credit?
* The cases of Intel Technology Philippines, Inc. v. CIR and San
Roque Power Corporation v CIR enumerated the requirements,
thus:
(1) the taxpayer is engaged in sales which are zero-rated or
effectively zero-rated;
(2) the taxpayer is VAT-registered;
(3) the claim must be filed within two years after the close of
the taxable quarter when such sales were made;
(4) the input taxes are due or paid;
(5) the input taxes are not transitional input taxes;
(6) the input taxes have not been applied against output taxes
during and in the succeeding quarters;
25
 (7) the input taxes claimed are attributable to zero-rated or
effectively zero-rated sales;
(8) in certain types of zero-rated sales, the acceptable foreign
currency exchange proceeds thereof had been duly accounted
for in accordance with BSP rules and regulations [Sections
106(A)(2)(a)(1) and (2); Section 106(B); Sections 108(B)(1) and
(2)]; and
(9) where there are both zero-rated or effectively zero-rated
sales and taxable or exempt sales, and the input taxes cannot
be directly and entirely attributable to any of these sales, the
input taxes shall be proportionately allocated on the basis of
sales volume. [Intel Technology Philippines, Inc. v. CIR, GR No.
166732, 27 Apr. 2007; San Roque Power Corporation v. CIR, GR
No. 180345, 25 Nov. 2009.]
Q: In claims for VAT refund/credit, what is the reckoning point for the
two-year prescriptive period?
* In 2007, the Supreme Court promulgated its decision in Atlas
Consolidated Mining and Development Corporation v. CIR which
essentially held that in claims for VAT refund/credit, the
prescriptive period for filing administrative and judicial claims
shall be two years reckoned from the date of filing of the VAT
quarterly return.
A year later, in the highly publicized case of CIR v. Mirant Pagbilao
Corporation, the Supreme Court changed its mind and ruled that
the two-year prescriptive period in claims for VAT refund/credit
must be counted not from the date of filing of the VAT quarterly
return, but from the close of the taxable quarter when the
relevant sales were made. [Atlas Consolidated Mining and
Development Corporation v. CIR, GR Nos. 141104 & 148763, 8
TAX 2 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2018-2019
June 2007; CIR v. Mirant Pagbilao Corporation, GR No. 172129, 12
Sept. 2008.]
112(B) Cancellation of VAT Registration - A person whose
registration has been cancelled due to retirement from or cessation
of business, or due to changes in or cessation of status under Section
106(C) of this Code may, within two (2) years from the date of
cancellation, apply for the issuance of a tax credit certificate for any
unused input tax which may be used in payment of his other internal
revenue taxes.
112(C) Period within which Refund or Tax Credit of Input Taxes Shall
Be Made. - In proper cases, the Commissioner shall grant a refund
or issue the tax credit certificate for creditable input taxes within
NINETY (90) days from the date of submission of THE OFFICIAL
RECEIPTS OR INVOICES AND OTHER DOCUMENTS in support of the
application filed in accordance with subsections (A) AND (B) hereof;
PROVIDED , THAT SHOULD THE COMMISSIONER FIND THAT THE
GRANT OF REFUND IS NOT PROPER, THE COMMISSIONER MUST
STATE IN WRITING THE LEGAL AND FACTUAL BASIS FOR THE DENIAL.
In case of full or partial denial of the claim for tax refund the
taxpayer affected may, within thirty (30) days from the receipt of
the decision denying the claim, appeal the decision with the Court
of Tax Appeals; PROVIDED , HOWEVER, THAT FAILURE ON THE PART
OF ANY OFFICIAL, AGENT, OR EMPLOYEE OF THE BIR TO ACT ON THE
APPLICATION WITHIN THE NINETY (90)-DAY PERIOD SHALL BE
PUNISHABLE UNDER SECTION 269 OF THIS CODE.
Q: When are administrative and judicial claims for VAT refund/credit filed?
BEFORE THE AMENDMENTS UNDER THE TRAIN LAW.
26
 * In 2007, the Supreme Court promulgated its decsion in Atlas 10 December 2003 to BIR Ruling No. DA-489-03 -Taxpayer-
Consolidated Mining and Development Corporation v. CIR which 6 October 2010 claimant need not wait for the lapse
essentially held that claims for VAT refund/credit must be filed within of the 120-day period before it could
the two-year prescriptive period. seek judicial relief with the CTA by
In 2010, the Supreme Court came out with the controversial case of CIR way of Petition for Review
v. Aichi Forging Company of Asia, Inc. which mandated compliance of On or after 6 October Aichi Doctrine - (120+30 day periods
administrative and judicial claims with both the two-year prescriptive 2010 are mandatory and jurisdictional)
period [Section 112(A)] and the 120-30 day period rule [Section 112(C)].
Otherwise, claims would be adjudged as either filed out of time or
prematurely filed. [Atlas Consolidated Mining and Development
Corporation v. CIR, GR Nos. 141104 & 148763, 8 June 2007; CIR v. Aichi 112(D) Manner of Giving Refund. - Refunds shall be made upon
Forging Company of Asia, Inc., GR No. 184823, 6 Oct. 2010.]
warrants drawn by the Commissioner or by his duly authorized
** See the case of CIR v. San Roque Power Corporation, GR No. 187485, representative without the necessity of being countersigned by the
12 February 2013. Chairman, Commission on audit, the provisions of the
Administrative Code of 1987 to the contrary notwithstanding:
Period When Provided, That refunds under this paragraph shall be subject to post
Applicable Doctrine
Administrative Claim Filed audit by the Commission on Audit.
with CIR
Before 8 June 2007 Mirant Doctrine (verba legis rule) – 2- Sec. 113, Invoicing and Accounting Requirements for VAT-
year period should be counted from Registered Persons
the close of the taxable quarter when
the sales were made 113(A) Invoicing Requirements. - A VAT-registered person shall
8 June 2007 to 11 Atlas Doctrine – 2-year period should
issue:
September 2008 be counted from the date of filing of
the return and payment of the output
(1) A VAT invoice for every sale, barter or exchange of goods or
VAT properties; and
On or after 11 Mirant Doctrine (verba legis rule) (2) A VAT official receipt for every lease of goods or properties, and
September 2008 for every sale, barter or exchange of services.
Period When Judicial Applicable Doctrine
Claim Filed with CTA Q: Is there a difference between an invoice and an official receipt?
Before 10 December 120+30 day periods are mandatory
2003 and jurisdictional * CIR v. Manila Mining Corporation defined these terms, to wit: “A
’sales or commercial invoice’ is a written account of goods sold or

TAX 2 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2018-2019 27

 services rendered indicating the prices charged therefor or a list
by whatever name it is known which is used in the ordinary course
of business evidencing sale and transfer or agreement to sell or
transfer goods and services.
A ‘receipt’ on the other hand is a written acknowledgment of the
fact of payment in money or other settlement between seller and
buyer of goods, debtor or creditor, or person rendering services
and client or customer.” [CIR v. Manila Mining Corporation, GR
No. 153204, 31 Aug. 2005.]
** In AT&T Communications Services Philippines, Inc. v. CIR, AT&T
was engaged in the business of providing information,
promotional, supportive, and liaison services to foreign
corporations. It filed a claim for tax refund/credit for alleged
unutilized input VAT on said sales of services and presented sales
invoices to substantiate the same. In giving credence to the sales
invoices (not necessarily official receipts), the Supreme Court said
that:
“Sales invoices are recognized commercial documents to facilitate
trade or credit transactions. They are proofs that a business
transaction has been concluded, hence, should not be considered
bereft of probative value. Only the preponderance of evidence
threshold as applied in ordinary civil cases is needed to
substantiate a claim for tax refund proper.” [AT&T
Communications Services Philippines, Inc. v. CIR, GR No. 182364,
3 Aug. 2010.]
*** On other hand, the case of Kepco Philippines Corporation v.
CIR made a distinction between a VAT invoice and a VAT receipt,
such that only a VAT invoice might be presented to substantiate a
TAX 2 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2018-2019
sale of goods or properties, while only a VAT receipt could
substantiate a sale of services. Pertinent portion of the decision
read:
“In other words, the VAT invoice is the seller’s best proof of the
sale of the goods or services to the buyer while the VAT receipt is
the buyer’s best evidence of the payment of goods or services
received from the seller. Even though VAT invoices and receipts
are normally issued by the supplier/seller alone, the said invoices
and receipts, taken collectively, are necessary to substantiate the
actual amount or quantity of goods sold and their selling price
(proof of transaction), and the best means to prove the input VAT
payments (proof of payment). Hence, VAT invoice and VAT receipt
should not be confused as referring to one and the same
thing. Certainly, neither does the law intend the two to be used
alternatively.” [Kepco Philippines Corporation v. CIR, GR No.
181858, 24 Nov. 2010.]
113(B) Information Contained in the VAT Invoice or VAT Official
Receipt. - The following information shall be indicated in the VAT
invoice or VAT official receipt:
(1) A statement that the seller is a VAT-registered person, followed
by his taxpayer's identification number (TIN);
(2) The total amount which the purchaser pays or is obligated to pay
to the seller with the indication that such amount includes the
value-added tax: Provided, That:
(a) The amount of the tax shall be shown as a separate item
in the invoice or receipt;
(b) If the sale is exempt from value-added tax, the term "VAT-
exempt sale" shall be written or printed prominently on the
invoice or receipt;
(c) If the sale is subject to zero percent (0%) value-added tax,
28
 the term "zero-rated sale" shall be written or printed
prominently on the invoice or receipt;
(d) If the sale involves goods, properties or services some of
which are subject to and some of which are VAT zero-rated or
VAT-exempt, the invoice or receipt shall clearly indicate the
breakdown of the sale price between its taxable, exempt and
zero-rated components, and the calculation of the value-
added tax on each portion of the sale shall be shown on the
invoice or receipt: "Provided, That the seller may issue
separate invoices or receipts for the taxable, exempt, and
zero-rated components of the sale.
(3) The date of transaction, quantity, unit cost and description of the
goods or properties or nature of the service; and
(4) In the case of sales in the amount of one thousand pesos (P1,000)
or more where the sale or transfer is made to a VAT-registered
person, the name, business style, if any, address and taxpayer
identification number (TIN) of the purchaser, customer or client.
* Section 113(B)(2)(c) of the 1997 Tax Code provides that certain
information must be indicated on the VAT invoice or VAT official
receipt, and that “if the sale is subject to zero percent (0%) value-
added tax, the term ‘zero-rated sale’ shall be written or printed
prominently on the invoice or receipt.”
The Bureau of Internal Revenue, the Divisions of the Court of Tax
Appeals, the Court of Tax Appeals En Banc, and the Supreme Court
has conflicting opinions on whether the term “zero-rated sale”
must be written, stamped, or imprinted.
However, as enunciated in recent cases, the term “zero-rated
sale” must be imprinted, and not merely written or stamped.
Otherwise, such claims for VAT refund/credit substantiated by
TAX 2 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2018-2019
non-conforming VAT invoices or VAT official receipts shall be
disallowed. [Panasonic Communications Imaging Corporation of
the Philippines, GR No. 1708090, 8 Feb. 2010; JRA Philippines, Inc.
v. CIR, GR No. 177127, 11 Oct. 2010; Hitachi Global Storage
Technologies Philippines Corporation v. CIR, GR No. 174212, 20
Oct. 2010; Microsoft Philippines, Inc., v. CIR, GR No. 180173, 6
Apr. 2011.]
113(C) Accounting Requirements. - Notwithstanding the provisions
of Section 233, all persons subject to the value-added tax under
Sections 106 and 108 shall, in addition to the regular accounting
records required, maintain a subsidiary sales journal and subsidiary
purchase journal on which the daily sales and purchases are
recorded. The subsidiary journals shall contain such information as
may be required by the Secretary of Finance.
113(D) Consequences of Issuing Erroneous VAT Invoice or VAT
Official Receipt. - "(1) If a person who is not a VAT-registered person
issues an invoice or receipt showing his Taxpayer Identification
Number (TIN), followed by the word "VAT":
(a) The issuer shall, in addition to any liability to other
percentage taxes, be liable to:
(i) The tax imposed in Section 106 or 108 without the
benefit of any input tax credit; and
(ii) A 50% surcharge under Section 248 (B) of this code;
(b) The VAT shall, if the other requisite information required
under Subsection (B) hereof is shown on the invoice or receipt,
be recognized as an input tax credit to the purchaser under
Section 110 of this Code.
(2) If a VAT-registered person issues a VAT invoice or VAT official
receipt for a VAT-exempt transaction, but fails to display
prominently on the invoice or receipt the term "VAT-exempt Sale",
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the issuer shall be liable to account for the tax imposed in Section
106 or 108 as if Section 109 did not apply.
113(E) Transitional Period. - Notwithstanding Subsection (B) hereof,
taxpayers may continue to issue VAT invoices and VAT official
receipts for the period July 1, 2005 to December 31, 2005, in
accordance with Bureau of Internal Revenue administrative
practices that existed as of December 31, 2004."
Sec. 114, Return and Payment of Value-Added Tax
114(A) In General. - Every person liable to pay the value-added tax
imposed under this Title shall file a quarterly return of the amount
of his gross sales or receipts within twenty-five (25) days following
the close of each taxable quarter prescribed for each taxpayer:
Provided, however, That VAT-registered persons shall pay the
value-added tax on a monthly basis. PROVIDED FINALLY THAT
BEGINNING JANUARY 1, 2023, THE FILING AND PAYMENT
REQUIRED UNDER THIS SUBSECTION SHALL BE DONE WITHIN
TWENTY-FIVE (25) DAYS FOLLOWING THE CLOSE OF EACH TAXABLE
QUARTER.
Any person, whose registration has been cancelled in accordance
with Section 236, shall file a return and pay the tax due thereon
within twenty-five (25) days from the date of cancellation of
registration: Provided, That only one consolidated return shall be
filed by the taxpayer for his principal place of business or head office
and all branches.
114(B) Where to File the Return and Pay the Tax. - Except as the
Commissioner otherwise permits, the return shall be filed with and
the tax paid to an authorized agent bank, Revenue Collection Officer
TAX 2 SYLLABUS ASSOCIATE DEAN LILY K. GRUBA S/Y 2018-2019
or duly authorized city or municipal Treasurer in the Philippines
located within the revenue district where the taxpayer is registered
or required to register.
114(C) Withholding of Value-Added Tax. - The Government or any
of its political subdivisions, instrumentalities or agencies, including
government-owned or -controlled corporations (GOCCs) shall,
before making payment on account of each purchase of goods and
services which are subject to the value-added tax imposed in
Sections 106 and 108 of this Code, deduct and withhold a final value-
added tax at the rate of five percent (5%) of the gross payment
thereof: Provided, THAT BEGINNING JANUARY 1, 2021 THE VAT
WITHOLDING SYSTEM UNDE, SHALR THIS SUBSECTION SHALL SHIFT
FROM FINAL TO CREDITABLE SYSTEM; PROVIDED FURTHER THAT
THE PAYMENT FOR LEASE OR USE OF PROPERTIES OR PROPERTY
RIGHTS TO NONRESIDENT OWNERS SHALL BE SUBJECT TO 12%
WITHOLDING TAX AT THE TIME OF PAYMENT; PROVIDED,
HOWEVER, THAT PAYMENTS FOR PURCHASES OF GOODS AND
SERVICES ARISING FROM PROJECTS FUNDED BY OFFICIAL
DEVELOPMENT ASSISTANCE (ODA) AS DEFINED UNDER REPUBLIC
ACT NO. 8182, OTHERWISE KNOWN AS THE “OFFICIAL
DEVELOPMENT ASSISTANCE ACT OF 1996” AS AMENDED, SHALL
NOT BE SUBJECT TO THE FINAL WITHHOLDING TAX SYSTEM AS
IMPOSED IN THIS SUBSECTION. FOR PURPOSES OF THIS SECTION,
THE PAYOR OR PEPRSON IN CONTROL OF THE PAYMENT SHALL BE
CONSIDERED AS THE WITHOLDING AGENT.
The value-added tax withheld under this Section shall be remitted
within ten (10) days following the end of the month the withholding
was made.
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Sec. 115, Power of the Commissioner to Suspend the Business
Operations of a Taxpayer

The Commissioner or his authorized representative is hereby

empowered to suspend the business operations and temporarily
close the business establishment of any person for any of the
following violations:
(a) In the Case of a VAT-registered Person. –
(1) Failure to issue receipts or invoices;
(2) Failure to file a value-added tax return as required
under Section 114; or
(3) Understatement of taxable sales or receipts by thirty
percent (30%) or more of his correct taxable sales or
receipts for the taxable quarter.
(b) Failure of any Persons to Register as Required under Section
236. –
The temporary closure of the establishment shall be for the
duration of not less than five (5) days and shall be lifted only
upon compliance with whatever requirements prescribed by
the Commissioner in the closure order.

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