Value-Added Tax Flashcards
(25 cards)
All the homeowners belonging to ABC Village Homeowners’ Association elected a new set of members of the Board of Trustees for the Association effective January 2019. The first thing that the Board looked into is the need to increase the prevailing association dues. Mr. X, one of the trustees, proposed an increase of 100% to account for the payment of the 12% value-added tax (VAT) on the association dues which
were being collected for services allegedly rendered “in the course of trade or business” by ABC Village
Homeowners’ Association.
(a) What constitutes transactions done “in the course of trade or business” for purposes of applying VAT?
In the course of trade or business as defined by the NIRC refers to the regular conduct or pursuit of commercial or economic activity or any transactions incidental thereto whether or not the person engaged therein is a non-stock or non-profit 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.
(b) Is Mr. X correct in stating that the association dues are subject to VAT? Explain.
NO. Association dues collected by homeowners’ association are not subject to VAT under Sec. 109(Y) of the NIRC as amended by TRAIN Law. (Bar Q&A by J. Dimaampao, 2020)
Melissa inherited from her father a 300-squaremeter lot. At the time of her father’s death on March 14, 1995, the property was valued at P720,000.00. On
February 28, 1996, to defray the cost of the medical expenses of her sick son, she sold the lot for P600.000.00, on cash basis. The prevailing market value of the property at the time of the sale was
P3.000.00 per square meter. Is Melissa liable to pay Value Added Tax (VAT) on the sale of the property? If so, how much and why? If not, why not?
No, Melissa is not liable to pay Vaue Added Tax. Under NIRC, VAT is levied on any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, including digital services. In the instant case, Melisa is not engaged in the trade or business of selling real property and only sold the property to defray cost of the medical expense. It was an isolated transaction therefore, not subject to VAT under Philippine tax law.
On September 17, 2015, Data Realty, Inc., a realestate corporation duly organized and existing under Philippine law, sold to Jenny Vera a condominium unit at Freedom Residences in Malabon City with an area of 32.31 square meters for a contract price of P4,213,000.
The condominium unit had a zonal value amounting to P2,877,000 and fair market value amounting to P550,000.
(a) Is the transaction subject to value-added tax and documentary stamp tax? Explain your answer.
Under the NIRC, the sale of real properties is subject to 12% VAT if:
The seller is engaged in the real estate business, and
The real property sold is an ordinary asset, and
The sale is in the course of trade or business, and
The transaction is not exempt under Section 109 of the NIRC.
In this case:
Data Realty, Inc. is a real estate corporation — this means it is engaged in the real estate business.
The condominium unit is considered an ordinary asset (since it is part of their inventory of real estate for sale).
The contract price is P4,213,000, which is well above the VAT threshold of P1,919,500 (under RR No. 16-2011, effective at that time).
➡️ Therefore, the sale is subject to 12% VAT, based on the gross selling price or fair market value, whichever is higher.
In this case, the contract price of P4,213,000 is higher than both the zonal value (P2,877,000) and FMV (P550,000), so VAT will be based on P4,213,000.
Would your answer be the same if the property was sold by a bank in a foreclosure sale? Explain your
answer.
NO, the sale made by the bank is exempt from VAT. Under the NIRC, Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business are VAT-exempt. the bank is simply disposing of a non-performing asset, not acting as a real estate dealer. Since banks are not in the business of selling real estate, a foreclosed asset is not an ordinary asset — it’s treated as a capital asset. In this case, the property sold is a foreclosed property and is not part of the ordinary asset of the bank.
In June 2013, DDD Corp., a domestic corporation engaged in the business of leasing real properties in the Philippines, entered into a lease agreement of a residential house and lot with EEE, Inc., a non-resident foreign corporation. The residential house and lot will
be used by officials of EEE, Inc. during the visit to the Philippines. The lease agreement was signed by representatives from DDD Corp. and EEE, Inc. in Singapore. DDD Corp did not subject the said lease to VAT believing that it was not a domestic service contract.
Was DDD Corp. correct? Explain.
Under the NIRC, there shall be levied, assessed and collected a value-added tax of 12% of the gross sales derived from the sale or exchange of services including digital services and the lease of properties. The lease of properties shall be subject to the VAT irrespective of the place where the contract of lease was executed for properties leased or used in the Philippines.
Masarap Kumain, Inc. (MKI) is a Value-Added Tax (VAT)-registered company which has been engaged in the catering business for the past 10 years. It has invested a substantial portion of its capital on flat wares, table linens, plates, chairs, catering equipment, and delivery vans. MKI sold its first delivery van, already 10 years old and idle, to Magpapala Gravel and Sand Corp. (MGSC), a corporation engaged in the
business of buying and selling gravel and sand. The selling price of the delivery van was way below its acquisition cost.
Is the sale of the delivery van by MKI to MGSC subject to VAT.
YES, the sale of the delivery van is subject to VAT being a transaction incidental to the catering business which is a VAT-registered activity of MKI. Transactions that are
undertaken incidental to the pursuit of a commercial or economic activity are considered as entered into in the course of trade or business. (Sec. 105, NIRC) A sale of a fully depreciated vehicle that has been used in business is subject to VAT as an incidental transaction, although such sale may be considered isolated. (Mindanao II Geothermal
Partnership v. CIR, G.R. Nos. 193301 &. 194637, 11 Mar. 2013)
The Bureau of Internal Revenue (BIR) issued
Revenue Memorandum Circular (RMC) No. 65- 2012 imposing Value-Added Tax (VAT) on association dues and membership fees collected by condominium corporations from its member condominium-unit owners. The RMC’s validity is challenged before the
Supreme Court (SC) by the condominium corporations.
The Solicitor General, counsel for BIR, claims that association dues, membership fees, and other assessment/charges collected by a condominium corporation are subject to VAT since they constitute income payments or compensation for the beneficial services it provides to its members and tenants.
On the other hand, the lawyer of the condominium corporations argues that such dues and fees are merely held in trust by the condominium corporations exclusively for their members and used solely for administrative expenses in implementing the
condominium corporations’ purposes. Accordingly, the condominium corporations do not actually render services for a fee subject to VAT.
Whose argument is correct? Decide.
The condominium lawyers are correct. When a condominium corporation manages, maintains, and preserves the common areas in the building, it does so only for the benefit of the condominium owners. It cannot be said to be engaged in trade or business, thus, the collection of association dues, membership fees, and other assessments/charges is not a result of the regular conduct or pursuit of a commercial or an economic activity, or any transactions incidental thereto. (BIR v. First E-Bank Tower Condominium Corp., G.R. Nos. 215801 & 218924, 15 Jan. 2020) (Divina, 2024)
Are the following transactions subject to VAT? If yes, what is the applicable rate for each transaction. State the relevant authority/ies for your answer. (2010 BAR)
(a) Construction by XYZ Construction Co. of
concrete barriers for the Asian Development
Bank in Ortigas Center to prevent car bombs
from ramming the ADB gates along ADB Avenue in Mandaluyong City.
Subject to 0% VAT. The Tax Code provides that sale of services to entities exempt from direct and indirect taxes shall be subject to 0% VAT. (Sec. 108(B)(3), NIRC) In this case, the Asian Development Bank is exempt from direct and indirect taxes under a special law. Thus, the sale of services to ADB by a VAT-registered construction company is effectively zero-rated.
Center operated by a domestic enterprise in
Makati that handles exclusively the reservations of a hotel chain which are all located in North America. The services are paid for in US$ and duly accounted for with the Bangko Sentral ng Pilipinas.
Subject to 0% VAT. Under the Tax Code, the sale of services rendered to a person engaged in business outside the Philippines paid in acceptable foreign currency duly accounted for in accordance with the rules of BSP is subject to 0% VAT. (Sec. 108(B)(2), NIRC)
Sale of orchids by a flower shop which raises its flowers in Tagaytay.
Subject to VAT at 12%. While the flowers are agricultural products in its original state, the VAT exemption under Sec. 109 only covers sale of agricultural food products in its original state.
Emiliano Paupahan is engaged in the business of leasing out several residential apartment units he owns. The monthly rental for each unit ranges from P8,000.00 to PI0,000.00. His gross rental income for one year is PI,650,000.00. He consults you on whether
it is necessary for him to register as a VAT taxpayer.
What legal advice will you give him, and why?
I will advise Emiliano that he is not required to register as a VAT taxpayer. His transactions of leasing residential units for an amount not exceeding P15,000.00 per unit per month are exempt from VAT irrespective of the aggregate
amount of rentals received annually.
Greenhills Condominium Corporation incorporated in 2001 is a non-stock, non-profit association of unit owner in Greenhills Tower, San Juan City. To be able to reduce the association dues being collected from the
unit owners, the Board of Directors of the corporation agreed to lease part of the ground floor of the condominium building to DEF Saving Bank for P120,000 a month or P1.44 million for the year, starting January 2007.
Is the non-stock, non-profit association liable for value added tax in 2007? If your answer is in the negative, is it liable for another kind of business tax?
NO. Under the NIRC, sale of goods and services or lease of properties the gross annual sales not exceeding 3M are exempt from VAT. Since the association’s annual gross receipts do not exceed P3 million, it is exempt from the VAT. (Sec. 109(V), NIRC) It is, however, liable to the 3% percentage tax which is imposed on persons exempt from value-added tax on account of failure to reach the P3 million threshold. (Sec. 116, NIRC)
Ikapati Corporation (IC) is a value -added tax (VAT)- registered that sells various kinds of instant noodles. It is recognized as the industry leader, especially after its
spicy bulalo flavor gained immense popularity in December 2021. The success of IC has been attributed to its tax lawyer, Atty. Mahal, who helps IC understand the National Internal Revenue Code (NIRC) to its advantage. To show its appreciation, IC sent Atty. Mahal
1,000 boxes of spicy bulalo instant noodles. Is the transfer of 1,000 boxes of instant noodles to Atty. Mahal subject to VAT? Explain.
YES, the transfer of 1,000 boxes of instant noodles is
subject to VAT. Under Sec. 106(B)(l) of the NIRC, “[t]ransfer,
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” is considered a transaction deemed sale
subject to VAT. While the transfer of 1,000 boxes of instant
noodles to Atty. Mahal is not made in the ordinary course of
business of IC, the 1,000 boxes of instant noodles are goods
ordinarily held for sale by IC. Hence, such transfer is a
transaction deemed sale that is subject to VAT. (
SMZ, Inc., is a VAT-registered enterprise engaged in the general construction business. HP International contracts the services of SMZ, Inc. to construct HP International’s factory building located in the Laguna Techno Park, a special economic zone. HP International
is registered with the Philippine Economic Zone Authority (PEZA) as an ecozone export enterprise, and, as such, enjoys income tax holiday pursuant to the Special Economic Zone Act of 1995. SMZ, Inc., files an application with the Bureau of Internal Revenue (BIR)
for the VAT zero-rating of its sale of services to HP International. However, the BIR denies SMZ, Inc.’s application on the ground that HP International already enjoys income tax holiday.
Is the BIR correct in denying SMZ, Inc.’s application?
Explain your answer.
No, the BIR is not correct. All sales of goods, properties, and services made by a VAT-registered supplier from the Customs Territory to an ecozone enterprise shall be subject to VAT, at 0% rate, regardless of the latter’s type or class of PEZA registration.
(Coral Bay Nickel Corporation v. CIR, G.R. No. 190506, 13 June 2016) Moreover, under Sec. 108 (B)(3) of the 1997 NIRC, as amended, services rendered to persons or entities whose
exemption under special laws effectively subjects the supply of such services to 0% rate are considered zero-rated.
Considering the law does not provide for any
additional qualification or disqualification, the BIR cannot deny the application on the ground that HP International already enjoys income tax holiday. An administrative agency may not enlarge, alter, or restrict a provision of law.
It cannot add to the requirements provided by law. To do so constitutes lawmaking, which is generally reserved for
Congress
For purposes of value-added tax, define, explain or distinguish Zero-rated and effectively zero-rated transactions.
A zero-rated sale of goods or properties covering export sale and effectively zero-rated sale is a taxable transaction for VAT purposes, although the VAT rate applied is 0%. In
other words, a sale by a VAT-registered taxpayer of goods and/or services taxed at 0% shall not result in any output tax.
On the other hand, an effectively zero-rated transaction does not cover export sales. It includes local sale of goods or supply of services by a VAT-registered person or persons or entities who were granted tax exemption under special laws or international agreement to which the Philippines is a signatory.
XYZ Law Offices, a law partnership in the Philippines and a VAT registered taxpayer, received a query by email from Gainsburg Corporation, a corporation organized under the laws of Delaware, but the e-mail
came from California where Gainsburg has an office.
Gainsburg has no office in the Philippines and does no business in the Philippines. XYZ Law Offices rendered its opinion on the query and billed Gainsburg US$1,000 for the opinion. Gainsburg remitted its payment through Citibank which converted the remitted
US$1,000 to pesos and deposited the converted amount in the XYZ Law Offices account.
What are the tax implications of the payment to XYZ Law Offices in terms of VAT and income taxes?
The payment to XYZ Law is subject to 0% VAT and XYZ is entitled to file a claim for refund or tax credit certificate for the input taxes attributable to such zero-rated sale. In this
case, the services were rendered to a nonresident person, engaged in business outside the Philippines, and are paid
for in foreign currency inwardly remitted through the banking system. (Sec. 108(8)(2), NIRC) Thus, the sale of services to Gainsburg is subject to 0% VAT.
Pursuant to Sec. 11 of the “Host Agreement between the United Nations and the Philippine government, it was provided that the World Health Organization (WHO), “its assets, income and other properties shall be: exempt from all direct and indirect taxes.” Precision Construction Corporation (PCC) was hired to construct the WHO Medical Center in Manila. Upon completion of the building, the BIR assessed a 12% VAT on the gross
receipts of PCC derived from the construction of the WHO building. The BIR contends that the 12% VAT is not a direct nor an indirect tax on the WHO but a tax that is primarily due from the contractor and is therefore not covered by the Host Agreement. The WHO
argues that the VAT is deemed an indirect tax as PCC can shift the tax burden to it. Is the BIR correct? Explain.
NO. The BIR’s contention is incorrect. Since World Health
Organization (WHO), the contractee, is exempt from direct
and indirect taxes pursuant to an international agreement
where the Philippines is a signatory, the exemption from
indirect taxes should mean that the entity or person exempt
is the contractor itself because the manifest intention of the
agreement is to exempt the contractor so that no tax may be
shifted to the contractee. (CIR v. John Gotamco & Sons, Inc.,
G.R. No. L-31092, 27 Feb. 1987) The immunity of WHO from
indirect taxes extends to the contractor by treating the sale
of services as effectively zero-rated.
For purposes of value-added tax, define, explain or
distinguish Input and output tax
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 properties from a VATregistered
person. It includes transitional input tax and
presumptive input tax.
In contrast, output tax means the value-added tax due on
the sale or lease of taxable goods, properties or services by
a VAT-registered or VAT-registrable seller
On May 10, 2011, the final withholding tax for certain
income payments to W Corp. was withheld and
remitted to the BIR and the corresponding return
therefor was concomitantly filed on the same date.
Upon discovering that the amount withheld was
excessive, W Corp. filed with the BIR a claim for refund
for erroneously withheld and collected final
withholding income tax on May 3, 2013. A week after,
and without waiting for any decision from the CIR, W
Corp. filed a petition for review before the CTA to make
sure that the petition was filed within the 2-year periodfor claiming refunds. In resisting the claim, the BIR
contended that the claim must be dismissed by the CTA
on the ground of non-exhaustion of administrative
remedies because it did not give the CIR the
opportunity to act on the claim of refund
NO. BIR’s contention is not meritorious. The taxpayer
here had only until May 10, 2013 within which to file its
judicial claim for refund pursuant to Sec. 229 of the NIRC.
The provision requires that the judicial claim be filed before
the expiration of the 2-year prescriptive period, without
having to wait for the BIR’s decision on the earlier filed
administrative claim for refund. Thus, the taxpayer was
only complying with the provisions of the NIRC when it filed
a petition for review one week after filing its administrative
claim for refund.
Assuming that the claim for refund filed by W
Corp. is for excess and/or unutilized input VAT
for the second quarter of 2011, and for which the
return was timely filed on July 25, 2011, would
your answer be the same? Explain
NO. The answer would be different. Since the present
refund case happened prior to the effectivity of the TRAIN
Law, the pronouncement made by the SC in the case of CIR
v. Aichi Forging Company (G.R. No. 184823, 06 Oct. 2010) in
2013 shall apply, that is, the observance of the 120+30 days
period is mandatory and jurisdictional. Thus, counting 120
days from May 3, 2013, the last day for the CIR to act on the
claim for refund fell on August 31, 2013. Only after the
expiration of such 120-day period, and within the 30-day
period, thereafter, may T Corp. appeal such inaction, which
is a “deemed denial” before the CTA.
Explain the procedure for claiming refunds or tax
credits of input Value Added Tax (VAT) for zero-rated
or effectively zero-rated sales under Sec. 112 of the
National Internal Revenue Code (NIRC) from the filing
of an application with the CIR up to the CTA. (
- A written claim for refund must be filed with the
Commissioner within two years from date of
payment of the tax; (Sec. 204, NIRC) - A decision of the Commissioner denying the claim,
is appealable to the CTA Division within 30 days
from receipt thereof or within two (2) years from
date of payment, whichever comes first; (Sec. 229,
NIRC; Sec. 7(a)(l), R.A. No. 1125, as amended by R.A.
No. 9282) - If no decision is made by the Commissioner and the
two (2) year period is about to lapse, the aggrieved
taxpayer must consider the inaction as a denial and
appeal to the CT A Division must be filed before the
lapse of two (2) years reckoned from date of
payment. (Sec. 229, NIRC) (Divina, 2024
For calendar year 2011, FFF, Inc., a VAT-registered
corporation, reported unutilized excess input VAT in
the amount of P1,000,000.00 attributable to its zerorated
sales. Hoping to impress his boss, Mr. G, the
accountant of FFF, Inc., filed with the Bureau of InternalRevenue (BIR) on January31, 2013 a claim for tax
refund/credit of the P1,000,000.00 unutilized excess
input VAT of FFF, Inc. for 2011. Not having received any
communication from the BIR, Mr. G. filed a Petition for
Review with the CTA on March 15, 2013, praying for the
tax refund/credit of the P1,000,000.00 unutilized
excess input VAT of FFF, Inc. for 2011.
Discuss the proper procedure and applicable time
periods for administrative and judicial claims for
refund/credit of unutilized excess input VAT. (2015
BAR)
The administrative claim must be filed the Commissioner
of Internal Revenue (CIR) within the two years from the
close of the taxable quarter when the zero-rated sales were
made. The CIR has 90 days from the date of submission of
complete documents in support of the claim to decide. If the
CIR decides within the 90-day period or the 90-day period
expires without the CIR rendering a decision, the taxpayer
has 30 days to file a petition for review with the CTA
reckoned from the receipt of adverse decision or from the
lapse of the 120-day period. As a general rule, the 30-day
period to appeal is both mandatory and jurisdictional. As an
exception to the general rule, premature filing is allowed
only if filed between December 10, 2003 and October 5,
2010, when BIR Ruling No. DA-489-03 was still in force
prior to the reversal of the aforesaid ruling by the CTA in the
Aichi case on October 6, 2010.
MMM, Inc., a domestic telecommunications company, handles incoming telecommunications services for
non-resident foreign companies by relaying
international calls within the Philippines. To broaden the coverage of its telecommunications services
throughout the country, MMM, Inc. entered into various interconnection agreements with local carriers. The non-resident foreign corporations pay MMM, Inc. in US
dollars inwardly remitted through Philippine banks, in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas. MMM, Inc. filed its Quarterly VAT Returns for 2000. Subsequently, MMM, Inc. timely filed with the BIR an administrative claim for the refund of the amount of P6,321,486.50,
representing excess input VAT attributable to its effectively zero-rated sales in 2000. The BIR ruled to deny the claim for refund of MMM, Inc. because the VAT official receipts submitted by MMM, Inc. to substantiate
said claim did not bear the words “zero-rated” as required under Sec. 4.108-1 of Revenue Regulations (RR) No. 7-95. On appeal, the CTA division and the CTA En Banc affirmed the BIR ruling. MMM, Inc. appealed to the Supreme Court arguing that the NIRC itself did not
provide for such a requirement. RR No. 7- 95 should not prevail over a taxpayer’s substantive right to claim tax
refund or credit. (2015 BAR)
(a) Rule on the appeal of MMM, Inc
The appeal of MMM, Inc. must be denied. MMM, Inc.’s
position that the requirements under RR No. 7-95 should
not prevail over a taxpayer’s substantive right to claim tax
refund or credit is unmeritorious. The Secretary of Finance
has the authority to promulgate the necessary rules and
regulations for the effective enforcement of the provisions
of the NIRC. Such rules and regulations are given weight and
respect by the courts in view of the rule-making authority
given to those who formulate them and their specific
expertise in their respective fields. An applicant for a claim
for tax refund or tax credit must not only prove entitlement
to the claim, but also compliance with all the documentary
and evidentiary requirements. Consequently, the CTA and
the CTA En Banc correctly ruled that the failure to indicate
the words “zero-rated” on the invoices and receipts issued
by a taxpayer would result in the denial of the claim for
refund or tax credit. (Eastern Telecommunications
Philippines, Inc. v. CIR, G.R. No. 163835, 07 July 2010)
