CHAPTER XVII

OUTPUT TAX ON SALE

OF GOODS OR PROPERTIES

Elements of Taxable Sale of Goods or Properties

To be subject to value-added tax, the sale of goods (tangible
or intangible objects that have value) must be: (a) an actual or
deemed sale of goods or properties for a valuable consideration;
(b) under taken in the course of trade or business; (c) for the use
or con sumpt ion in the Philippines; and (d) not exempt from value-
added tax under the Tax Code (Sec. 109, NIRC), special law, or
international a greement.
With respect to sale or exchange of real property, all of the
following requirements must be met: (a) the seller executes a deed
of sale, barter, or exchange, assignment or conveyance, or contract .
to sell, of real property; (b) the real property is located within the
Philippines; (c) the seller or transferor is e~gaged in real estate
business either as a real estate dealer, developer, or lessor; (d) the
real property is held primarily for sale or for lease in the ordinary
course of his trade or business, or at least an ordinary asset used in
I

the trade or business of the VAT taxpayer as an incident to his VAT-

taxable activity; and (e) the sale is not exempt from value-added
tax under Section 109 of the Tax Code, special law, or international
agreement binding upon the government of the Philippines.

Sale of Goods or Properties

By the contract of sale, one of the contracting parties obligates
himself to transfer the ownership of and to deliver a determinate
thing, and the other to pay therefor a price certain in money or its
equivalent (Art. 1458, New Civil Code). A sale is a transfer of good$
or properties to a buyer either for cash or on credit, or partly for cash
and partly for credit. The t erm "sale" includes barter or exc~ange of
goods or properties.

507
 508 REVIEWER ON TAXATION

The value-added tax accrues upon the consummation of sale

of goods or properties, regardless of the terms of payment between
the contractin g parties (Sec. 106, in relation to Secs. 113 and 237,
NIRC). Thus, as soon as the seller issues a VAT invoice (whether the
sale is for cash or on credit), he becomes liable to value-added tax on
such sale.

\ Types of Sales
1. Actual sale. - In actual sale, a VAT-registered person
is the seller and another VAT-registered person is the
buyer. The seller's output tax becomes the buyer's input
tax, which the latter can credit against his output tax on
his taxable sales of goods, properties or services during
th e quarter.
2. Deemed sale. - The following transactions are
considered as deemed sales:

a. 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; !

b. Distribution or transfer to shareholders or investors

as share in the profits of the VAT-registered persons
or to creditors in payment of debt;
c. Consignment of goods, if actual sale is not made
within sixty days following the date such goods were
consigned; and

~
..
d. Retirement from or cessation of business, with

I respect to inventories of taxable goods existing as of

such retirement or cessation.
In deemed sales, the seller is also the buyer and no valuable
consideration is thus paid. For example, if the owner withdraws
goods for personal (non-business) use from his inventory, he derives
a tax advantage from the input tax, which he has already credited
at the time of purchase against his output tax. Since the withdrawal
or transfer of goods results in the use or consumption of such goods
by a person (the seller himself) who is effectively the final consumer, ..
.~·
such withdrawal or transfer is deemed a sale subject to value-added )

'
tax. The rationale of the transaction deemed sale provisions is to
 VALUE-ADDED TAX (VAT) 509
Output Tax on Sale of Goods or Properties

recapture the value-added tax that was claimed as input tax at the
time of purchase.
Sale of vessels by NDC is a deemed sale. - While the subject
sales transaction involving the five vessels may not be considered
a "sale" envisaged in Section 99 (now Sec. 106) of the Tax Code,
which is a general provision, it is, and it should be, considered a
"sale" within t h e purview of Section lOO(b) (now Sec. 106[b]) of the
Tax Code, as implem ented by Section 4 of Revenue Regulations No.
5-87, which enumerates the transactions "deemed sale'' subject to
the 10% value-added tax. Undeniably, when NDC offered for sale, as
one lot and by public bidding, all of its shares of stock in NMC, and '
\
.
the subject five NDC-owned ".K leckner" vessels operated by NMC, to
the private respondents group of private companies, a corresponding
l
~
change in ownership of NMC resulted. As to whether or not this
change of ownership in NMC may have been brought about by the
privatization policy of the government, the law, or Section 4(E)(l)
of Revenue Regulations No. 5-87, does not distinguish. Where the
law does not distinguish, courts should not distinguish (CIR v. CTA
and Magsaysay Lines, et al., CA-G.R. SP No. 29994, March 11,
1997).
However, in Mindanao II Geothermal Partnership v. CIR
(G.R. Nos. 193301 and 194637, March 11, 2013), the Supreme
Court ruled that the sale by the petitioner of its Nissan Patrol to
its executive may be said to be an isolated transaction. However, it
does not follow that an isolated transaction cannot be an incidental
transaction for VAT purposes. A reading of Section 105 of the 1997
Tax Code would show that a transaction "in the course of trade or
business" includes "transactions incidental thereto." The court also
explained its ruling in CIR v. Magsaysay Lines, which involved the
sale of vessels by NDC to Magsaysay Lines; the sale was involuntary
and made pursuant to government's policy of privatization.
3-~J~pxport sale. 1 - (a) The term ~'export sales"means:
,t / (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

1
Sec. 106(A)(2)(a), NIRC, as amended by R.A. No. 10963 (TRAIN), effective
January 1, 2018; See Sec. 2, Rev. Regs. No. 13-2018.
 !!•I
510 I
R EVJEWER ON TAXATION
'

own ership 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);
(2) Sale and delivery of goods to:
(a) Register ed enterprises within a separate
customs te1·ritory as provided under special
laws; and
(b) Registered enterprises within tourism
enterprise zon es as declared by the Tourism
Infrastructure and Enterprise Zone Authority
(TIEZA) subject t o the provisions under
Republic Act No. 9593 or the Tourism Act of
2009 .
.(3) Sale of raw materials or packaging materials to
a non-r esident 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
Bangko Sentral ng Pilipinas (B SP);
(4') Sale of raw materials or packaging materials to
export-oriented enterprise whose export sales exceed
70% of total annual production;
(,5) Those consider ed export sales under E.0. 226,
otherwise known as the Omnibus Investment Code
of 1987, and other special laws; and
(6) The sale of goods, supplies, equipment, and fuel
to persons en gaged in international shipping or
international air transport operations, provided
that the goods supplies, equipment and fuel shall
be u sed for international shipping or air transport
operations. 2

2 See Manila Peninsula Hotel, Inc. v. cm, CTA EB Case No. 1408, January 17,
2017.
 VALUE-ADDED TAX (VAT) 511
Output Tax on Sale of Goods or Properties

The export sales described under items (3), (4), and

(5) above shall be subject to 12% VAT upon the satisfaction
of the following conditions:
a. The successful establishment and implementation
of an enhanced VAT refund system that grants and
pays refunds of creditable input tax within 90 days
from the filing of the VAT refund application with the
Bureau: Provided that, to determine the effectivity
of this item, a ll applications filed from January 1,
2018 shall be processed and decided within 90 days
from the filing of the VAT refund application.
The 90-day period to process and decide shall
start from the filing of the application/claim for
refund up to the release of the payment of the VAT
refund. Provided, That, the claim/application is
considered to have been filed only upon submission of
the official receipts or invoices and other documents
in support of the application as prescribed under
pertinent revenue issuances.
The Secretary of Finance shall provide
transitory rules for the grant of refund under
the enhanced VAT Refund System after the
determination of the fulfillment of the condition by
the Commissioner of Internal Revenue as provided
in the first paragraph of this item; and
b. All pending VAT refund claims as of December 31,
2017 shall be fully paid in cash by December 31,
2019. 3

(b) Foreign Currency Denominated Sale. - The phrase

''foreign currency denominated sale" means sale
to a non-resident of goods, except · those mentioned in
Sections 149 and 150, assembled or manufactured in the
Philippines for delivery to a resident in the Philippines,
paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP).

3
Rev. Regs. No. 26-2018, dated December 27, 2018, amending Rev. Regs. No.
13· 2018, dated March 15, 2018.
 r
,I

512 REVIEWER ON TAXATION

(c) 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.

Goods or Properties
The term ''goods'' means any movable, tangible object, which is
appropriable or transferable, and having intrinsic value. It connotes
any commodity produced and subsequently purchased to satisfy the
cuTrent wants and perceived needs of the buyer (Rev. Regs. No. 5-87,
September 1, 1987).
The term ''goods or properties" means all tangible and
intangible objects, whether real or personal, which are capable of
pecuniary estimation. It includes: (a) real properties, such as
lands and buildings, held primarily for sale to customers or held for
lease in the ordinary course of trade or business, and (b) intangible
prope1·ties (i.e., the right or privilege to use patents, copyrights,
trademarks, etc.; the right or privilege to use in the Philippines
of any industrial, commercial or scientific equipment; the right or
privilege to use motion picture films, films, tapes, and discs; and
radio, television , satellite transmission, and cable television time),
which are capable of pecuniary estimation (Sec. 106, NIRC).

Bar Question (2017)

On September 17, 2015, Data Realty, Inc., a real-estate
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 met ers 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 !>550,000.
(a) Is the transaction subject to value-added tax and
documentary stamp tax? Explain your answer.
(b) Would your answer be the same if the property was sold by
a bank in a foreclosure sale? Explain your answer.

Suggested answer:
(a) Yes. As to the VAT liability, sale of real properties held
primarily for sale to customer or held for lease in the
ordinary course of trade or business is subject to VAT
 VALUE-ADDED TAX (VAT) 513
Output Tax on Sale of Goods or Properties

(Sec. 106[AJ{l)[a], 1997 NIRC, as amended); further,

the contract price, which is the highest compared to the
zonal value and the fair market value, is beyond the
transactional threshold amount for residential dwellings
thereby making the sale transaction VATable. As to the
DST liability, all deeds of sale and conveyances of real
property are likewise subject to DST (Sec. 196, 1997 NIRC,
as amended).
(c) No, the sale made by the bank is exempt from VAT. Banks
are exempt from VAT because they are subject to percentage
tax under Title V of the NIRC (Sec. 109 in relation to Sec.
121 of 1997 NIRC, as amended). The sale, however, will
still be subject to DST because conveyances of real property
are generally subject to DST (Sec. 196, NIRC). .!

·~
For valuable consideration
A tran saction is outside the scope of value-added tax, unless it
is made for a valuable consideration. Consideration may consist of
money, or something of value other than money (e.g., barter of pen
for wristwat ch), or partly money and partly in kind (e.g., exchange
or trade-in of motor vehicle). Transfer of property without valuable
consider ation (e.g., gift) is exempt from value-added tax.

In the course of trade or business

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 non-stock, non-
profit private organization (irrespective of the disposition of its
net income and whether or not it sells exclusively to members or
their guest s), or government entity. The rule of regularity to the
contrary notwithstanding, services rendered in the Philippines by
non-resident foreign persons shall be considered as being rendered
in the course of trade or business (Sec. 105, NIRC).
"Incidental" means depending upon or appertaining to
something else as primary; something necessary appertaining to,
or depending upon another which is termed the principal (Words &
Phrases, 1940, Vol. 20, p. 419).
A transaction will be characterized as having been entered
into by a person in the course of trade or business, if it is regularly
514 REVIEWER ON TAXATION

conducted and undertaken in pursuit of a commercial or economic

activity. 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.

Bar Question (2014)

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,
alrea dy 10 years old and idle to Magpapala Gravel and Sand Corp.
(MGSC), a corporation engaged in the business of buying and selling
gravel a nd 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?

Suggested answer:
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 MK.I. 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. No. 193301; G.R. No. 194637, March
11, 2013).

Goods are consumed or for consumption in the Philippines

Domestic sales in the Philippines and importation of goods
from abroad that are indubitably intended to be used or consumed in
the Philippines are taxable at 12%. Export sales of goods which are
destined to be used or consumed outside the Philippines are subject
to value-added tax at zero percent. Sale of goods by a VAT-registered
person located in the Customs Territory will also be deemed as
export sale and thus zero-rated, if made to a corporation registered
with the Philippine Export Zone Authority (PEZA) or Subic Bay
Metropolitan Authority (SBMA), since the Special Economic Zone or
 VALUE-AoDED TAX (VAT) 515
Output Tax on Sale of Goods or Properties

Freeport zone is considered by fiction of law as a foreign territory. 4

This rule is in conformity with the principle that the VAT is a tax on
consumption of goods in the Philippines.
Manila P eninsula Hotel, Inc. provided room accommodations
and food and beverage services to Delta Air Lines, Inc. (Delta Air),
a foreign corporation licensed to do business in the Philippines
that established a branch office here to engage in international air
transport services. The services rendered to the pilots and cabin
crew of Delta Air did not cross the Philippine Territory. They
could not also be considered as services directly used in connection
with international air transport operation. Furthermore, the
clear import of the Hotel Room Agreement with Delta Air shows
that the hotel's obligation extends to individuals who are mere
accommodation guests of Delta Air, i.e., non-crew employees of
subsidiaries or affiliates of Delta Air and contractors of any of Delta
Air's subsidiaries or affiliates performing work for such subsidiaries -11

and affiliates. Delta Air guests, as per the Agreement, even cover
i,. :
ii'(.·

employees on company business, which business may or may not I

pertain to or is attributable to Delta Air's transport of goods or

passengers. Section 108(B)(4) of the NIRC of 1997, as amended, ' {
;;
should be read in conjunction with the Destination Principle and
Cross Border Doctrine to which the Philippine VAT System adheres.
According to the Destination Principle, goods and services are taxed
only in the country where these are consumed. In connection with
the said principle, the Cross Border Doctrine mandates that no VAT
shall be imposed to form part of the cost of the goods destined for
consumption outside the territorial border of the taxing authority.
Precisely, under our VAT Law, goods, property, or services destined,
used, or consumed in the Philippines are subject to the 12% VAT
whereas those destined, used or consumed abroad are subject to 0%
VAT (Manila Peninsula Hotel, Inc. v. CIR, CTA EB Case No.
1408, January 17, 2017).
VAT on imported goods. - There shall be levied, assessed,
' and collected on every importation of goods a value-added tax
equivalent to 12% based on the total value used by the Bureau of
Customs in determining tariff and customs duties plus customs

4Sec. 4. 106-5, Rev. Regs. No. 4-2007 (February 7, 2007) considers current sales
to ecozone or Freeport zone as automatically zero-rated sales, See Sec. 106-5(e), Rev.
Regs. No. 16-05; RMC 74.99 dated October 15, 1999; see CIR v. Seagate Technology
<Philippines), G.R. No. 153866, February 11, 2005 and CIR v. Toshiba Information
Equipment (Phils.), G.R. No. 150154, August 9, 2005.
 1
516 REVIEWER ON TAXATION

duties, excise taxes, if any, and other charges, such tax to be paid
by the importer prior to the release of such goods from cust.oms
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 (Sec.
107, NIRC).

Bar Question (2005)

An alien employee of the Asian Development Bank (ADB) who
is retiring soon has offered to sell his car to you, which he imported
tax-free for his personal use. The privilege of exemption from tax is
granted to qualified personal use under the ADB Chart er, which is
recognized by the tax authorities. If you decide to purchase the car,
is the sale subject to tax? Explain.

Suggested answer:
Yes. The sale is subject to tax. Section 107(B) of the Tax Code
provides that '1I]n 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 importer thereof,
who shall be liable for any internal revenue tax on such importation."

Absence of Profit or Margin Does Not Make the Performance

of Taxable Services for a Fee Exempt from VAT
Commonwealth Management and Services Corporation
(Comaserco) is a corporation duly organized and existing under
the laws of the Philippines. It is an affiliate of Philippine American
Life Insurance Company (Philamlife), organized by the latter
to perform collection, consultative and other technical services,
including functioning as an internal auditor of Philamlife and its
other affiliates. These services were performed on a "no-profit,
reim~ursement-of-cost only'' basis by Comaserco, which averred
that 1t was not engaged in the business of providing services to
Philamlife and its affiliates. Comaserco was established to ensure
operational orderliness and administrative efficiency of Philamlife
and its affiliates, and not in t he sale of services.
The Supreme Court ruled that contrary to Comaserco's
contention, Section 105 (persons liable) of the Tax Code clarifies
that even a non-stock, non-profit organization or government entity
 VALUE-ADDED TAX (VAT) 517
Output Tax on Sale of Goods or Properties

is liable to pay VAT on the sale of goods or services. VAT is a tax

on t1·ansactions, imposed at every stage of the distribution process
on the sale, barter, exchange of goods or property, and on the
performance of services, even in the absence of profit attributable
thereto. The term "in the course of trade or business" requires the
regular conduct or pursuit of a commercial or an economic activity,
regardless of whether or not the entity is profit-oriented. It is
immaterial whether the primary purpose of a corporation indicates
that it receives payments for services rendered to its affiliates pn
a reimbursement-of-cost basis only, without realizing profit, for
purposes of determining liability for VAT on services rendered.
As long as the entity provides service for a fee, remuneration or
consideration, then the service rendered is subject to VAT. At any
rate, because taxes are the lifeblood of the nation, statutes that allow
exemptions are construed strictly against the grantee and liberally
in favor of the government. 6

'
( '

I
1'

l
.
5
CIR v. CA and Commonwealth Management and Services Corporation, G.R.
No. 125355, March 30, 2000.
 CHAPTER XVIII
OUTPUT TAX ON SALE OF SERVICES

The phrase ''sale or exchange of services" broadly embraces

the performance of all kinds of services in the Philippines for others
for a fee, remuneration, or consideration, by a person, regardless of
whether the performance thereof calls for the exercise or use of the
physical or mental faculties. It means any transaction undertaken
in the course of trade or business which does not constitute sale
of goods and which is not expressly exempt from value-added tax
under the Tax Code or special law. Services of the following persons
are subject to value-added tax: ~~
1. Construction and service contractors;
2. Stock, real estate, commercial, customs, and immigr.ation
brokers;
3. Lessors of property, whether personal or real;
4. Warehousing services;
5. Lessors or distributors of cinematographic films;
6. Persons engaged in milling, processing, manufacturing,
or repacking goods for others;
7. Proprietors, operators, or keepers of hotels, motels, rest
houses, pension houses, inns, resorts;
8. Proprietors or operators of restaurants, refreshment
parlors, cafes, and other eating places, including clubs
and caterers;
9. Dealers in securities;
10. Lending investors;
11. 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;

518
 VALUE ADDED TAX 0/AT) 519
Output Tax on Sale of Services

12. 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;
13. Sales of electricity by generation companies, transmission
by any entity, and distribution companies, including
electric cooperatives;
14. Services offranchise grantees ofelectric utilities, telephone
and telegraph, radio and television broadcasting and all
other franchise grantees except those under Section 119
of this Code;
1,. Non-life insurance companies (except their crop
insurances), including surety, fidelity, indemnity, and
bonding companies; and
1~ Similar services regardless of whether or not the
performance thereof calls for the exercise or use of the
physical or mental faculties (Sec. 108[AJ, NIRC, as
amended by R.A. 10963 [TRAIN], effective January
1, 2018).

Bar Question (2015)

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 1·epresentatives from DDD Crop.
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.

Suggested answer:
DDD Corp. is not correct. Lease of properties shall be subject to
VAT irrespective of the place where the contract of lease was executed
if the property is leased or used in the Philippines (Sec. 108[AJ,
NIRC).

Categories of services
1. Professional/technical consultancy. - The supply
of technical advice, assistance, or services rendered in
connection with technical management or administration
520 REVIEWER ON TAXATION

of any scientific, industrial, or commercial undertaking,

venture, project, or scheme.
2. Transfer of technology. - Transfer of technology
consisting of the supply of scientific, technical, industrial,
or commercial knowledge or information, including
ancillary and subsidiary assistance to and furnished as
a means of enabling the application and enjoyment of the
technology transfer. In this connection, it is important
to differentiate between the service rendered and the
product arising from the performance of the service. The
efforts or activities undertaken (for which the supplier
receives a remuneration or compensation) to produce
scientific, technical, industrial, or commercial knowledge
or information should be distinguished from the product
which may emerge from or be created as a result of such
efforts. The first is a performance of service, which may be
carried on within or outside the Philippines; the second is
an intellectual or other intangible property and the right
to use such property may be exercised either within or
outside the Philippines for a consideration called royalty.
The situs of the former is where the service is performed;
the situs of the latter is the place where the right to use
the property is exercised.
3. Lease or use of intangible property. - Intangible
properties may be groupEld into (a) copyrights, patents,
designs or models, plans, secret formula or processes,
goodwill, trademark, trade brand, or others like property
or right, and (b) right to use radio, television, satellite
transmission, and cable television time.
4. Leaseoruseoftangibleproperty.-Tangibleproperties
may be grouped into (a) industrial, commercial, or scientific
equipment, including the supply of any assistance that is
ancillary and subsidiary to and is furnished as a means of
enabling the application or enjoyment of such properties,
and (b) motion picture films, films, tapes, and discs.
5. Supply of services by a non-resident. - The supply
of services by a non-resident 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 non-resident
person.
 VALUE ADDED TAX (VAT) 521
Output Tax on Sale of Services

Requisites for Taxability of Services

1. The service must be performed or is to be performed in
~he course of trade _or business in t he Philippines, except
in ~he case of serV1ce done in the Philippines by a non-
resident person under Section 105 of the 1997 Tax Code·
'
2. For .a valuable consideration actually or constructively
received; a nd
3. The service is not exempt under the Tax Code special
law, or international agreement. '

Sale of Services
As an insurance broker , Winternitz income comes from
commissions, and not from pr emium payments; hence, the basis
for VAT should be th e commission it receives and not the premium
payments it receives and remits to the insurance company. Such sales
constitute part of the taxable income of the insurance companies,
and not Winternitz, as a broker. Section 301 of P.D. 612 defines
an "insurance broker" as any person who, for compensation,
commission, or another thing of value, acts, or aids in any manner
in soliciting, negotiating, or procuring the making of any insurance
contract or in placing risk or t aking out insurance, on behalf of an
insured other than himself. In Anscor Insurance Brokers v. CIR and
CTA, t he Supreme Court held that an insurance broker is different
from an insurance agent, since the broker acts as a middle between
the insured and the Insurance company and solicits insurance
under no employment from any special company and places orders
of insura nce with the company selected by the insured, or in the
absence of such a selection, by the broker (Winternitz Associates
Insurance Brokers Corp. v. CIR, CTA Case No. 7971, June 9,
2011).
Since National Development Company (NDC) is a VAT-
regist ered person on its sale of services, its transactions incident to
the normal VAT-registered activity of leasing out personal property,
including sale of its own assets (vessels) that are movable, tangible
objects, which are appropriable or transferable are subject to the
10% value-added tax. This finds support in VAT Ruling No. 395-
88 dated August 18, 1988 which stated that NDC operates like
a holding company with various interests/investments in other
companies operating for profit; its functions are purely proprietary.
It is registered as a VAT person engaging in leasing personal
 522 REVIEWER ON TAXATION

property and it does not pay the three percent common carrier's tax.
The terms of the bidding provide that a value-added tax of 10% (now
12%) on the value of the vessels shall be paid by the winning bidder
(Magsaysay Lines, et al. v. CIR, CTA Case No. 4353, April 27,
1992).

Service in the course of trade or business

It is not absolutely necessary that the person who entered
into a contract to perforn1 service for a nother in the course of trade
or business should personally render the service. The service may
be performed by another as a subcontractor. Thus, in the case of
Philippine Healthcare Providers Corporation v. Commissioner
(supra), the Court ruled that petitioner merely acted as a sub-
contractor and did not perform medical services to its members.
All kinds of services performed in the Philippines by a VAT-
registered person for a resident or non-resident person are subject to
value-added tax at the rate of 12% or zero percent. Certain services
performed in the customs territory of the Philippines are subject
to zero percent and services performed outside the Philippines,
including Special Econo1nic Zones and Freeport zones which are
considered as foreign territories by fiction of law (Saura Import &
Export Co. v. Meer, G.R. No. L-2927, February 26, 1951), even if
undertaken in the course of trade or business, are beyond the scope
of the value-added tax and thus exempt from value-added tax.
The place where the service is performed determines the
jurisdiction to impose the value-added tax (situs-of-service
principle). The place of payment is immaterial since t he situs
of the service is determined by the place where such service is
performed.
The word "incidental"means depending upon or appertaining
to something else as primary; something necessary, appertaining
to, or depending upon anoth er, that is termed the principal. The
sale of ND C's vessels was pursuant to the government privatization
program beyond the control of NDC. The sale of the vessels as
such is not necessary to carry out NDC's primary function of
leasing personal properties. The act of selling capital assets does
n ot necessarily follow the act of leasing these assets. The sales
transaction was in isolated case. An isolated transaction does not
·l warrant the imposition thereof of business taxes (Magsaysay
•.'
(

Lines, et al. v. CIR, CTA Case No. 4353, April 27, 1992).
 VALU E ADDED TAX (VAT) 523
Output Tax on Sale of Services

Lease of Properties Owned by Non-residents

A non -r esident person who derives rental income from the
lease of tangible property physically situated in the Philippines or
receives royalties for granting the right to use in the Philippines the
intangible proper ty (e.g. , copyright or patent) belonging to him is a
taxable person. The amount of rentals and royalties remitt ed to the
non-resident lessor or licensor is subject to value-added tax (except
when t he payor is an enterprise registered with the Philippine
Export Zone Authority [PEZA], Subic Bay Metropolitan Authority
[SBMA], Clark Development Authority [CDA] and other r elated
a uthorities under R.A. 7916- and 7227, as amended), irrespective
of the place where the contract of lease or licensing agreement is
executed, if the property is leased or used in the Philippines.
The Tax Code prescribes an ancillary criterion for determining
the destination of the service rendered in the form of lease of tangible
properties, which is the place where the property is leased or used.

Actual or Constructive Receipt

Tax accounting rules for gross receipts within a taxable period
for value-added tax is different from the accrual method of accounting
for income tax purposes. Issuing and/or sending statement of account
to the customer for whom the service was rendered or still to be
performed does not create output tax liability to the seller nor does it
give rise to input tax (creditable by the VAT-registered buyer) until ,!

the consideration is received by the seller.

Actual or constructive receipt of the contract price,
compensation, remuneration, or fee makes the seller of service liable
to value-added tax, even ·if no service has yet been performed by
him. Thus, if a contractor receives upon the execution of the contract
a down payment of 20% of the total contract price, such amount
received is already subject to value-added tax although he does not
start the construction of the project until after the next taxable
quarter.
"Constructive receipt" occurs when the money consideration
or its equivalent is placed under the control of the person who
rendered the service without restrictions by the payor. Examples are
deposit in banks which are made available to the seller of services
without restrictions; issu ance by the debtor of a notice to offset any
debt or obligation and acceptance thereof by the seller as payment
for services rendered; and transfer of the amqunts retained by the
contractee to the account of contractor.
 524 REVIEWER ON TAXATION

Dealer in Securities
A "dealer in securities" is a merchant of stocks or securities,
whether an individual, partnership, or corporation, with an
established place of business, regularly engaged in the purchase of
securities and their resale to customers. He buys securities and sells
them t o customers with a view to the gains and profits that may be
derived ther efrom.
A pre-need company is considered as a dealer in securities
subject to 12% value-added tax on gross income. Its gross receipts
consist of actual receipts of premium on contract price minus
contributions to the trust funds to be set up independently as
mandated by the Securities and Exchange Commission.

Franchise Grantees
A franchise is the privilege of doing that which does not belong
to the citizens of the country generally by common right; it is a right
and privilege acquired by special grants from the public through
the legislature which imposes on the grantee as a consideration
therefore, a duty to the public to see that they are properly used.
Before the effectivity of R.A. 7716 (otherwise known as the
Expanded VAT Law), sale of services by legislative franchise
grant ees were subject to tax prescribed by their respective
franchises. Beginning January 1, 1996, all franchise grantees,
except those subject to franchise tax under Section 119 of the
1997 Tax Code (such as grantees of gas, and water utility firms
and radio and/or television broadcasting companies whose annual
gross receipts for the preceding year do not exceed PlO million),
became subject to value-added tax.

. However, under P.D. 1869, PAGCOR is subject to franchise

tax of five percent of its gross revenues or earnings from its casino
operations, dollar pit operations, regular bingo operations, and

I
'
income from mobile bingo operations operated by it, with agents on
commission basis (RMC 33-2013, April 17, 2013).
' Tollway operators are covered by the VAT because they render
services for a fee. They are just like lessors, warehouse operators, a nd
other groups expressly mentioned in the law. - Under P.D. 11_12
(Toll Operation Decree), tollway operators construct, maintain:
and operate expressways, also called tollways, at the operators
expense. Tollways serve as alternatives to regular public highways
 VALUE ADDED TAX (VAT) 525
Output Tax on Sale of Services

that meander through populated areas and branch out to local

roads. In consideration for constructing tollways at their expense,
the operators are allowed to collect government-approved fees from
motorists using the tollways until such operators could fully recover
their expenses and earn reasonable returns from their investments.
When a tollway operator takes a toll fee from a motorist the fee
' which
is in effect for the latter's use of the tollway facilities over
the operator enjoys private proprietary rights that its contract and
the law recognize. Toll operators are franchisees because franchise
broadly covers government grants of a special right to do an act
or series of acts of public concerns. Also, the VAT law does not
de.fine franchisees as only those who have legislative franchise.
Petitioners contend that toll fees are of public nature and are
therefore not sale of services. This is not correct. The law in the
same manner includes electric utilities, telephone, telegraph, and
broadcasting companies in its list of VAT-covered businesses. Their
services are also of public nature. Moreover, statements made by
individual members of Congress in the consideration of a bill do
not necessarily reflect the sense of that body and are, consequently,
not controlling in the interpretation of law. The. Congressional
will is ultimately determined by the language of the law that the
lawmakers voted on. The toll fee is not a tax. It is not collected
by BIR or by the government. It does not go to the government
coffers. It is not collected for a public purpose. The operation by
the government of a tollway does not change the character of the
road as one for public use. The charging of fees to the public does
not determine the character of the property whether it is for public
dominion or not. The seller remains directly and legally liable
for payment of the VAT, but the buyer bears its burden since the
amount of VAT paid by the former is added to the selling price.
Once shifted, the VAT ceases to be a tax and simply becomes part
of the cost that the buyer must pay in order to purchase the goods,
property, or service. VAT on tollway operations is not really a tax
on the tollway user, but on the tollway operator (Renato Diaz, et
al. v. Secretary of Finance and CIR, G.R. No. 193007, July 19,
2011).
R.A. 9337, effective November 1, 2005, subjects to zero percent
rate all sales of power or sales of fuel, as long as said power/electricity
and fuel are generated or produced from renewable sources of
energy, 1 which means that the seller of power/electricity or fuel

1
See Sec. 108(B)(7), NIBC.
 526 REVfEWl!:R ON TAXA'l'JON

must not only be limited to generation companies, unlike in R.A.

9136 (EPIRA Law), which requires that th e sale of generated power
must be made by a gener ation company (Energy Development
Corporation v. CIR, CTA Case No. 7792, November 19, 2012).

Lending Investor
A "lending investor" is a person , other than a bank, non-
ba nk :financial intermediary, finance compan y, and other financial
intermediary not perfon n ing quasi-banking functions, who makes a
practice of lending money for himself or other s at interest.

Bar Question (1998)

State whether the following transactions are (a) VAT Exempt;
(b) subject to VAT at 10% (now 12%); or (c) subject to VAT at zero
percent:
l. Sale of fres h vegetables by Aling Ining at the Pamilihang
Bayan ng Trece Martirez;
2. SeTvices rendered by Jake's Construction Company,
a contractor to the World Health Organization in the
renovation of its offices in Manila;
3. Sale of tractors and other agricultural implements by
Bungkal Incorporated to local farmers;
4. Sale ofRTW by Cely's Boutique, a Filipino dress designer,
in her dress shop and other outlets;
5. Fees for lodging paid by students to Bahay-Bahayan
Dormitory, a private entity operating a student dormitory
(monthly fee Pl,500).

Suggested answer:
1. VAT exempt. Sale of agricultural products such as fresh
vegetables in their original state, of a kind generally used
as, or p roducing foods for human consumption, is exempt
from VAT(Sec. 109[c), NIRC) (now Sec. 109[1J[AJ, NJRC).
2. VAT at 10%. S ince Jake's Construction Company has
rendered services to the World Health Organization, which
is an entity exempted from taxation under international
agreements to which the Philippines is a signatory, the
supply of services is subject to zero percent rate (Sec.
108[B}{3], NIRC) (now Sec. 109[l]{KJ, NIRC).
 VALUE ADDED TAX (VAT) 527
Output Tax on Sale of Services

3. VAT at 10%. Tractors and other agricultural implements

fall under the definition of goods which include all tangible
objects which are capable of pecuniary estimation (Sec.
106[A}{l}, NIRC), the sales of which are subject to VAT at
10%.
4. This is subject to VAT at 10%. This transaction also falls
under the definition of goods, the sales of which are subject
to VAT at 10%.
5. VAT exempt. The monthly fee paid by each student falls
under the lease of residential units with a monthly rental
per unit not exceeding PB,000 (now P15,000 under R.A.
10963 [TRAIN], effective January 1, 2018), which is
exempt from VAT, regardless of the amount of aggregate
rentals received by the lessor during the year (Sec. 109{x],
NIRC) (now Sec. 109{l}{Q}, NIRC). The term "unit" shall
mean per person in the case of dormitories, boarding
houses, and bed spaces (Sec. 4.103-1, Rev. Regs. No. 7-95).

Bar Question (1992)

Your client, United Market Cooperative, is requesting the
Commissioner of Internal Revenue to exempt it from the payment
of VAT on its purchases of prime commodities from food suppliers/
manufacturers on the ground that it is exempt from all taxes,
including VAT, under R.A. 6938, the Cooperative Code of the
Philippines.
Do you think your client can obtain the necessary exemption
from the BIR? If your answer is in the affirmative, explain the basis
for the grant. If your answer is in the negative, state the basis for
the rejection of th e request .

Suggested answer:
1. An exemption is not necessary. The value-added tax is
not imposed on the purchaser but on the seller, except in
importation of goods.
2. No. The exemption to which the taxpayers are entitled to
refers to those that are levied on the exempt taxpayer or
directly imposed on the exempted goods. The value-added
tax is imposed on the sellers of goods and services, not on
the purchasers.
 528 REVIEWER ON TAXATION

Categories of Exemptions
1. Exe,npt persons - the seller or the buyer is not liable to
value-added tax; or
2. Exempt transactions - transactions in certain goods,
properties, or services, which are not subject to value-
added tax, even if such goods, properties, or services are
sold by a VAT-r egistered person, and regardless of the
annual gross sales or receipts derived therefrom.
A seller who is a VAT-registered person may be exempt from
legal liability to pay the value-added tax. Such exemption may be
express or implied. An express exemption may be granted under
a specific provision of the Tax Code or a special law, which confers
upon such person the exemption from the payment of the value-
added tax. The exemption from value-added tax may be implied;
i.e .. it is intrinsic from the very nature of the entity itself as a non-
taxable person (e.g., government performing essential governmental
functio ns and non-stock, non-profit associations not undertaking
an? taxable transaction).
A person, who is engaged in business of undertaking exempt
lransactions, is not liable to value-added tax. However, if at the
same time, he also undeTtakes taxable transactions, the value of
which does not exceed the prescribed threshold, he is not liable to
pay value-added tax, unless he opts to register as a VAT person.

Exempt Persons vs. Exempt Transactions

The object of exemption from the VAT may either be the
t ransaction itself or any of the parties to the transaction. An exempt
transaction, on the one hand, involves goods or services which, by
their nature, are specifically listed in i,nd 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. As mentioned earlier, the VAT is a tax on consumption,
 VALUE ADDED TAX (VAT) 529
Output Tax on Sale of Services

the amount of which may be shifted or passed on by the seller to the

purchaser of the goods, properties, or services. While the liability
is imposed on one per son , the burden may be passed on to another.
Therefore, if a special law merely exempts a party as a seller from its
direct liability for payment of the VAT, but does not relieve the same
par ty as a purchaser from its indirect burden of the VAT shifted
to it by its VAT-registered suppliers, the purchase transaction is
not exempt (CIR v. Seagate Technology [Philippines], G.R. No.
153866, February 11, 2005).

Transactions with exempt persons

If the law merely exempts an entity as a seller from direct
liability for payment of the value-added tax on his sales and it does
not relieve the same person as a purchaser from the direct burden
of the value-added tax t hat may be shifted to it by a VAT-registered
seller, the purch ase transaction is not exempt from value-added tax.
VAT is an indirect tax, which is shifted by the seller to the
buyer by adding the same to the cash cost and/or selling price. The
tax exemption granted to a rural bank by virtue of Section 15 of
R.A. 7353 exten ds only to those taxes which a rural bank is directly
liable to pay and not to the taxes which are merely passed on to it
as a consequence of the sale (The Region Ban·k [Los Bafios Rural
Bank] v. CIR, CTA Case No. 5378, September 1, 1997).

Scope of exemption
1. Partial exemption - The seller has no output tax
liability on his sales, but the input taxes passed on to him
by his suppliers of goods, properties, or services form part
of his assets or operating expenses.
2. Total exemption - Total relief from value-added tax
is accomplished by subjecting the sales to zero rate, but
the input taxes passed on to him by his suppliers may be
recovered from the BIR through claims for tax credits or
refunds.
Exemption from tax means that the seller is relieved from
the payment of the value-added tax on his taxable transactions for
which h e is directly and legally liable.
The Philippine value-added tax system is replete with
exemptions that not only complicates to a certain degree the
implementation of the value-added tax but also limits the tax base.
530 REVIEWF..R ON TAXATION

"In lieu of' provision exempts PLDT from VAT on

importation of machinery and equ ipment. - The phrase "in
lieu of' means instead of; in place of; or on substitution for (Black
v. Barnes, 46 p. 2d 625, 626, 142 Kan. 381). It does not mean
"in addition to" (Glassman Const. Co. v. Baltimore Brick Co.,
246 Md. 478, 228 A.2d 472, 474, Black's Law Dictionary, 6th Ed.,
1990, p. 787). The "in lieu of' implies the existence of something
for which a substitution is being n1ade. Thus, t he "in lieu of all
other taxes" means that none other than the tax specified however
described, can be demanded. It limits the liability to the specific
tax (State of Tennessee v. Bank of Commerce, 53 F. 735, 736,
Words and Phrases, Vol. 21, p. 474). Thus, the phrase "in lieu of all
taxes" has the effect of exempting from taxation the VAT (which
is covered under the general term "taxes" under Section 12 of R.A.
7082) on the purchases of imported equipment, machineries, and
spare parts made by petitioner by virtue of its paying the three
percent franchise tax pursuant to Section 11 7 of the NIRC and
Section 12 of R.A. 7082. The rationale for the exemption from all
other taxes except the income tax and the real property tax granted
on petitioner upon the payment of the three percent franchise tax is
"that such exemption is part of the inducement for the acceptance
of the franchise and the rendition of public service by the grantee"
(Province of Misamis Oriental v. Cagayan Electric Power and
Light Company, Inc., G.R. No. 45355, January 12, 1990). It is
an elementary rule in statutory construction that the exceptions
in the law will not be enlarged beyond the actual signification of
the words used or extended beyond the limits the words themselves
actually set (De Jesus v. City of Manila, 29 Phil. 73 {1914)). The
exemption from VAT was declared by the BIR in BIR Ruling No.
UN-140-94 dated April 19, 1994 and confirmed by the Department of
Finance ruling dated January 5, 1995 (Philippine Long Distance
Telephone Company v. CIR, CTA Case No. 5106, December 18,
1995).
Generally, the exemption is fundamentally intended to benefit
the purchaser, not the VAT-registered seller. There is no reason to
exempt the seller because h e can charge the value-added tax against
his customer, thereby enabling him to r ecoup what he pays to the
government. A seller may enjoy exemption from value-added tax, not
necessarily under a -special law but because of its intrinsic nature
as an entity that is not subject to value-added tax. However, an
international agreement or special law must include indirect taxes,
such as value-added tax, among the transactions with a purchaser
 VALUE ADDED T AX (VAT) 531
Output Tax on Sale of Services

to make them eligible either for exemption (partial relief) or zero-

rating (complete relief).

Illustrative Cases:
Common carriers
The petitioner is not a common carrier subject to the three
percent common carrier's tax under Section 115 of the Tax Code.
Petitioner is engaged in the hotel business and not in the business
of transporting passenger s as defined in Article 1732 of the New
Civil Code. On the occasion when the petitioner extends transport
services like providing limousine service and the like, it does so only
for its hotel guests and not to the public in general. Respondent is
thus correct in subjecting these revenues to the value-added tax
(Manila Mandarin Hotels v. CIR, CTA Case No. 5046, March
24, 1997).

Hospital services
"Medical services" include various items of services like
general treatment, physical examination, consultation, medication,
dressing, suturing surgical operation, and all that pertains to or
deal with the healing art of the science of medicine (BIR R uling
No. 107-99, November 12, 1999, quoting Cortes v. Pan Oriental
March Co., 7 C.A.R. [2s] 1014).
The sale of drugs and other pharmaceutical items to in-patients
of the hospital is a VAT-exempt transaction within the meaning of
Section 103(1) of the Tax Code. The maintenance and operation of
a pharmacy or drugstore by a hospital is a necessary and essential
(hospital) service or facility rendered by any hospital for its patients
(St. Luke's Medical Center, Inc. v. CTA and CIR, CA-G.R. SP
No. 45892, March 13, 1998). Before a taxpayer may claim that
its sale of drugs or pharmaceutical items is classified as "hospital
services" exempt from VAT, the following must be established: (i)
that the taxpayer operates a hospital; (ii) that said hospital has a
pharmacy or drugstore; and (iii) that the sale of drugs was made by
said hospital drugstore or pharmacy to in-patients of the hospital
being operated by the taxpayer. Under RA. 4226, "hospital" means
a place devoted primarily to the maintenance and operation of
facilities for the diagnosis, treatment and care of individuals suffering
from illness, disease, injury, or deformity, or in need of obstetrical
or other medical and nursing care. A perusal of petitioner's Articles
of Incorporation reveals that petitioner is essentially a non-stock,
532 REVIEWER ON TAXA'l'ION

non-profit educational corporation. They also failed to provide proof

that the discrepancy is due to sales of medicine, equipment, and
supplies to in-patients (Hermano [San] Miguel Febres Cordero
Medical Education Foundation [De La Salle-Health Sciences
Institute), Inc. v. CIR, CTA Case No. 8194, May 15, 2012).

Special law or international agreement

Though Japanese nationals may be considered exempted
from value-added tax pursuant to Section 103(u) of the NIRC, the
exemption refers to its own direct t ax liability by reason of its own
supply of products and services, meaning the out put tax due. This
cannot refer to input taxes passed on to it by its suppliers as forming
part of the invoice price. AVAT-exempt person is exempted for value-
added tax (output tax) but is not entitled to claim input tax credit.
In view ther eof, petitioner is not entitled to the refund of input taxes
because it failed to qualify as an effectively zero-rated VAT person
and even as an exempt taxpayer by virtue of the Exchange of Notes
between the Philippine and Japanese . governments (Kumagai-
Gumi Co., Ltd. [Phil. Branch] v. CIR, CTA Case Nos. 4670,
July 29, 1997 and 4717, May 4, 1998).

Effectively zero-rated transaction

Effectively zero-rated sale of goods or properties shall refer to
the sale by a VAT-registered seller to a person who was granted
indirect tax exemption under a special law or international
agreement. However , the exemption of the entity does not extend
to its personnel and guests with respect to the value-added tax that
may be passed on to them by their suppliers.

Differentiated from Automatically zero-rated transaction

Although both are taxable and similar in effect, zero-rated
transactions differ fr om 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
 VALUE ADDED TAX (VAT) 533
Output Tax on Sale of Services

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.
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. Applying the destination principle to the expor tation of
goods, automatic zero rating is primarily intended to be enjoyed by
the seller who is directly and legally lia ble 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. In
both instances of 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 of or credit
for input taxes paid (CIR v. Seagate Technology [Philippines],
G.R. No. 153866, February 11, 2005).

Application for effective zero-rating

Under Rev. Regs. No. 16-2005 dated . September 1, 2005,
effectively zero-rated sales requiring prior approval by the BIR to
qualify the transaction for effective zero-rating include the following
local sale of goods and properties or services by a VAT-registered
person to a person or entity who was granted indirect tax exemption
under special laws or international agreement:
A. Constructive Export Sale of Goods and Properties - the
following transactions which, although not involving actual
export, are considered as "constructive export":
1. Sale of raw materials or packaging materials to export-
oriented enterprises, whose export sales exceed 70% of
total annual production (Sec. 106{AJ[2][a]{4], NIRC, as
amended by R.A. 10963 [TRAIN], effective January 1,
2018);
2. Sale of goods, supplies, equipment, and fuel to persons
engaged in international shipping, or international
air transport operations, provided the goods, supplies,
equipment, and fuel shall be used for international
534 REVIEWER ON TAXATION

shipping or air transport operations (Sec. 106[A}[2J[a][6},

NIRC, as amended); and
3. Sales to persons or entities whose exemption under: (a)
special laws, e.g. sales to enterprises duly registered and
accredited with the Subic Bay Metropolitan Authority
(SBMA) pursu ant t o R.A. 7227, sales to enterprises duly
r egistered and accredited with the Philippine Economic
Zone Authority (PEZA); or (b) international agreements,
to which the Philippines is a signatory, such as, Asian
Development Bank (ADB), International Rice Research
Institute (IRRI), among others, effectively subjects such
sales to zero-rate (Sec. 106[AJ[2][b], NIRC, as amended).
B. Sale of Services
1. Services r endered to persons or entities whose exemption
under; (a) special laws, e.g., sales to enterprises
duly register ed and accr edited with the Subic Bay
Metropolitan Authority (SBMA) pursuant to R.A. 7227,
sales to enterprises duly registered and accredited with
the Philippine Economic Zone Authority (PEZA); or (b)
international agreements, such as, Asian Development
Bank (ADB), International Rice Research Institute
(IRRI), among others, effectively subjects the supply of
such services to zero percent rate (Sec. 108[BJ[3], NIRC,
as amended);
2. Services rendered to persons engaged in international
shipping or international air transport operations,
including leases of property for use thereof, provided these
services shall be exclusive for international shipping or air
transport operations (Sec. 108[B}[4}, NIRC, as amended);
and
3. Services performed by subcontractors and/or contractors
in processing, converting, or manufacturing goods for an
enterprise whose export sales exceed 70% of total annual
production (Sec. 108[BJ[5], NIRC, as amended).
Note that under R.A. 10963 (TRAIN), transaction numbers (A)
(1), (B)(3) above, export sales under E.O. 226 enumerated below;
and expo~t sales under other special laws are subject to zero percen~
VA! unt? these transactions become subject to 12% VAT upon the
satisfaction of certain conditions, such as the establishment of an
enhanced VAT refund system. ·
 VALUE ADDED TAX (VAT) 535

I
Output Tax on Sale of Services

The concerned taxpayer must seek prior approval or prior

confirmation from the appropriate offices of the BIR (i.e., Large
Taxpayers Service and Assessment Service) so that a transaction is
qualified for effective zero-rating. Without an approved application
for effective zero-rating, the transaction otherwise entitled to zero-
rating shall be consider ed exempt. However, Section 4.106-6 of Rev.

l
I
Regs. No. 16-2005 provided that export sales, including export sales
under E.O. 226, and Foreign Currency Denominated Sale do not
require prior application with th e BIR for effective zero-rating, thus,
automatically zero-rated.

Export Sale of Goods and Properties under Executive Order

t No. 2262
1. Actual export sale - the Philippine port F.O.B. value
determined from invoices, bills of lading, inward letters
of credit, landing certificates, and other commercial
documents, of export products exported directly by a
register ed export producer; or
2. Deemed export sale - the net selling price of export
products sold by a registered export producer to; (a)
another export producer; or (b) an export trader, that
subsequently exports the same. For purposes of zero-
rating, the export sales of registered export traders shall
include commission income. The exportation of goods
on consignment shall not be deemed export sales until
the export products consigned are in fact sold by the
consignee.
Sales of goods, properties,. or services made by a VAT-
registered supplier to a BOI-registered manufacturer/
producer whose products are 100% exported are
considered export sales. A certification to this effect must
be issued by the BOI.
3. Constructive export sale - transactions which,
although not involving actual export, are considered as
"constructive export" under E .O. 226:
(a) Sales to bonded manufacturing warehouses of
export-oriented manufacturers;

2
Sec. 106(A)(2)(a)(5), N1RC.
536 R EVIEWER ON TAXATION

(b) Sales to export processing zones;

(c) Sales to registered export traders operating bonded
trading warehouses supplying raw materials in the
manufacture of export products under guidelines
to be set by the Board in consultation with the
Bureau of Internal Revenue (BIR) and the Bureau
of Customs (BOC); and
(d) Sales to diplomatic missions and other agencies
and/or instrumentalities granted tax immunities,
of locally manufactured, assembled or repacked
products whether paid for in foreign currency or not.
The BIR issued RMO No. 7-2006 on December 15, 2005,
prescribing the regulations to implement the processing of
applications for effective zero-rating covering constructive export
sales of goods and properties under (A)(3) above and services
enumerated under (B) above.
However , when Rev. Regs. No. 4-2007 dated February 7, 2007
was issued, only local sale of goods and properties or services by a
VAT-registered person to a person or entity who was granted indirect
tax exemption under special laws or international agreement were
considered as effectively subject to VAT at zero-rate. The amendment
delet ed these certain words: "e.g. sales to enterprises duly registered
and accredited with the Subic Bay Metropolitan Authority (SBMA)
pursuant to R.A. 7227, sales to enterprises duly registered and
accredited with the Philippine Economic Zone Authority (PEZA),"
which was construed to mean that qualified sales of goods and
proper ties or services by suppliers of entities granted tax incentives
by the concerned government regulatory agencies (i.e., PEZA,
SBMA, etc.) under special laws no longer require prior application
with the BIR to qualify for zero-rating.

Constructive export sales to Ecozones

A PEZA-registered entity is exempt from internal revenue laws
and regulations. This exemption covers both direct and indirect taxes,
stemming from the very nature of the VAT as a tax on consumption,
for which the direct liability is imposed on one person but the indirect
burden is passed on to another. As an exempt entity, it can neither be
directly char ged for the VAT on its sales nor indirectly made to bear,
as added cost to such sales, the equivalent VAT on its purchases.
Since the purchases of a PEZA-registered entity are not exempt
7
t 537
VALUE ADDED TAX (VAT)
Output Tax on Sale of Services

from the VAT, the rate to be applied is zero. Its exemption under
both P.D. 66 and R.A. 7916 effectively subjects such transactions
to a zero rate, because the ecozone within which it is registered is
managed and operated by the PEZA as a separate customs territory.
This means that in such zone is created the legal fiction of foreign
territory. Under the cross-border principle of the VAT system being
enforced by the Bureau of Internal Revenue (BIR), no VAT shall be

t imposed to form part of the cost of goods destined for consumption

outside of the territorial border of the taxing authority. If exports
of goods and services from the Philippines to a foreign country are
free of t he VAT, then the same rule holds for such exports from the

I national territory-except specifically declared areas-to an ecozone.

Sales made by a VAT-registered person in the customs territory to a
PEZA-register ed ent ity are considered exports to a foreign country;
conversely, sales by a PEZA-registered entity to a VAT-registered
person in the cu stoms territory are deemed imports from a foreign
country. An ecozone-indubitably a geographical territory of the
Philippines-is, however, regarded in law as foreign soil. This legal
fiction is necessary to give meaningful effect to the policies of the
special law creating the zone. If an entity is located in an export
processing zon e, within that ecozone, sales to the export processing
zone, even without being actually exported, shall in fact b e viewed
as constructively exported under E.O. 226. Considered as export
sales, such purchase transactions by a PEZA-registered entity
would indeed be subject to a zero rate (CIR v. Seagate Technology
[Philippines], G.R. No. 153866, February 11, 2005).

Bar Question (2017)

SMZ, Inc. is a VAT-registered enterprise engaged in the general
construction business. HP International contracts the services of
SMZ, Inc. to con struct 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 ecozon e export enterprise, and, as such, enjoys income tax
holiday pursuant to the Special Econo1nic 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, lnc.'s application? Explain
Your answer.
 538 REVIEWER ON TAXATION

Suggested answer:
No. 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 zero percent rate, regardless
of the latter's type or class of PEZA registration (Coral Bay Nickel
Corporation v. CIR, G.R. No. 190506, June 13, 2016, citing
CIR v. Toshiba Information Equipment [Phils.], Inc., G.R. No.
150154, August 9, 2005).
Moreover, under Section 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
zero percent 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 (Soriano v. Secretary of Finance, et al., G.R. Nos.
184450, 184508, 184538, 185234, January 24, 2017).

Alternative answer:
The BIR is wrong. Under Section 1O8(B)(3) of the NIRC, the
sale is effectively zero-rated and there is no need to file an application
for zero-rating with the BIR. The BIR is pointing out that HP
International enjoys income tax holiday is of no moment, because a
sale of services to an ecozone enterprise by a supplier from the customs
territory is considered as an effectively zero-rated sale of service in
view of the exemption enjoyed by the PEZA enterprise from indirect
taxes.

Bar Question (2016)

Pursuant to Section 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: a) 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
 VALUE ADDED TAX (VAT) 539
Output Tax on Sale of Services

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.

Suggested answer:
No. 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., 148 SCRA 36 [1987]). The
immunity of WHO from indirect taxes extends to the contractor
by treating the sale of service as effectively zero-rated when the
law provided that ''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
service to zero percent rate" (Sec. 108[B][3], NIRC). Accordingly, the

I BIR is wrong in assessing the 12% VAT from the contractor, Precision
Construction Corporation.

Bar Question (2015)

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 t he VAT official r eceipts submitted by MMM,
Inc. to substantiate said claim did not bear the words "zero-rated"
as required under Section 4.108-1 of Revenue Regulations (RR) No.
7-95. On appeal, the CTA division and the CTA en bane affirmed the
BIR ruling. .
540 R EVIEWER ON TAXATION

MMM, Inc. appealed to the Supreme Court arguing that the

NIRC itself did not provide for such requirement. RR No. 7-95
should not prevail over a taxpayer's substantive right to claim tax
refund or credit.
a. Rule on the appeal of MMM, Inc.
b. Will your answer in (a) be any different ifMMM, Inc. was
claiming refund of excess input VAT attributable to its
effectively zero-rated sales in 2012?

Suggested answer:
b. No, my answer will not be different if the claim for refund is
for effectively zero-rated sales in 2012. The requirement to
print the word ''zero-rated"is no longer by mere regulations
but is now clearly provided by law as follows: '1f the sale
is subject to zero percent value-added tax, the term "zero-
rated sale" shall be written or printed prominently on the
invoice or receipt. Failure to comply with this invoicing
requirement is fatal to a claim for refund of input taxes
attributable to the zero-rated sale (Sec. 113[BJ[2J[c],
NIRC). Moreover, as recently ruled by the Supreme Court,
the subsequent incorporation of Sec. 4.108-1 of RR 7-95 in
Sec. 113 of the NIRC as introduced in R .A. 9337, actually
confirmed the validity of the imprinting requirement on
VAT invoices or official receipts - a case falling under
the principle of legislative approval of administrative
interpretation by reenactment (Northern Mindanao
Power Corp. v. CIR, G.R. No. 185115, February 18,
2015).

Extent of PAGCOR's exemption

In CIR v. Acesite Hotel Corporation,s t he Supreme Court
already settled the issue as to PAGCOR's exemption under P.D. 1869.
It ruled that under PAGCOR's Charter , it is granted exemption from
payment of taxes, except franchise tax, which shall be in lieu of all
kinds of taxes, levies, and fees or assessments of any kind, nature,
or description, levied, established, or collected by any government
authority. The applicability of the tax exemption under Section 13(2)
(b) of P.D. 1869, as amended by R.A. 9487, extends to PAGCOR's
entities or individuals dealing with PAGCOR in casino operations

8
G.R. No. 147295, February 16, 2007.
 VALUE ADDED TAX (VAT) 541
Output Tax on Sale of Services

(i.e., licensees a nd contractees). This has been affirmed by the Court

which ruled: "As the PAOCOR Charter states in unequivocal terms
that exemptions granted for earnings derived from the operations
conducted under the franchise specifically from the payment of any
tax. income, or otherwise, as well as any form of charges, fees, or
levies, shall inure to the benefit of and extend to corporation(s),
association(s), agency(ies), or individual(s) with whom the PAGCOR
or operator has any contractual r elationship in connection with
the operations of the casino(s) authorized to be conducted under
this Franchise, so it must be that all contractees and licensees of
PAGCOR, upon payment of the five percent franchise tax, shall
likewise be exempted from all other taxes, including corporate
income tax realized from the operation of casinos."" Thus, PAGCOR
and its licensees and contractees are exempt from the payment of
VAT~ because PAGCOR's charter, P .D. 1869, is a special law that
grants the latter exemption from taxes and such exemptions extend
or inure to the benefit of its licensees and contractees (Philippine
Amusement and Gaming Corporation v. Bureau of Internal
Revenue, G.R. No. 172087, March 15, 2011). Since Grand Plaza's
transaction with PAGCOR pertains to the latter's casino operations,
PAGCOR's exemption from taxes, specifically from VAT, extends
to its transaction with Grand Plaza. Section 108(B)(3) of the Tax
Code effectively zero rates services rendered to persons or entities
whose exemption under special laws or international agreements to
wh1ch the Philippines is a signatory effectively subjects the supply
of such services to zero percent rate (CIR v. Grand Plaza Hotel
Corporation, CTA EB Case No. 786, October 8, 2012).

Exemption based on location

The exemption or extent of exemption of a pe:rson may depend
upon the location of its business. A Board of Investments (BOl)-
registered firm is granted exemption even if it is located and doing
business within the cu stoms territory. On the other hand, a Special
Economic Zone or Freeport zone is granted exemption because it has
to locate and conduct business within a geographically demarcated
area.

t
4
Bloomherry Resorts and Hotels, Inc. v. BUJ"eau oflnt.ernal Revenue GR No
2 12630. August 10, 2016: BIR Ruling No. 632-17, December 19, 2017. ' . . .
6
See Sec. 109(l)(K}. NIRC.