Adoption of VAT; amendments to tax code

Legal framework and structural transfer

Executive Order No. 273 transfers the provisions of Title IV governing excise taxes to Title VI and replaces them with new provisions imposing VAT.
Executive Order No. 273 establishes the VAT regime within the National Internal Revenue Code by inserting Title IV. VALUE-ADDED TAX with Sections 99 to 112 (including an added Section 112).

Policy and reform objectives

Executive Order No. 273 directs a rationalization of taxing goods and services through a multi-stage value-added tax to replace the tax on original and subsequent sales and the percentage tax on certain services.
Executive Order No. 273 frames VAT as part of the 1986 Tax Reform Program intended to simplify tax administration and make the tax system more equitable.
Executive Order No. 273 amends and revises and renumbers Code provisions and strengthens tax administration by facilitating compliance and improving collection systems.

VAT imposition: who and what

Section 99 imposes VAT on any person who, in the course of trade or business, sells, barters or exchanges goods, renders services, or engages in similar transactions, and on any person who imports goods, making them subject to VAT in Sections 100 to 102.
Section 100(a) levies VAT on every sale, barter or exchange of goods at a rate of 10% of the gross selling price (or gross value in money) of the goods sold, bartered, or exchanged; the tax is paid by the seller or transferor.
Section 101(a) levies VAT on every importation of goods at 10% based on the total value used by the Bureau of Customs to determine tariff and customs duties, plus customs duties, excise taxes (if any), and other charges, with the tax to be paid prior to release from customs custody.
Section 102(a) levies VAT on sale of services at 10% of gross receipts derived by any person engaged in the sale of services, defining “sale of services” broadly to include performance of all kinds of services for others for a fee or consideration, including services of contractors, brokers, lessors of personal property, and other similar services.

VAT on goods, imports, services

Section 100(a) provides a 0% rate for VAT-registered persons for (1) export sales and (2) sales to persons or entities whose exemption under special laws or international agreements effectively subjects such sales to zero rate.
Section 100(b) deems certain transfers and events to be “sale,” including:
- Transfer, use, or consumption not in the course of business of goods originally intended for sale or use in the course of business;
- Distribution or transfer to shareholders or investors as share in profits or to creditors in payment of debt;
- Consignment of goods if actual sale is not made within 60 days after consignment date;
- Retirement from or cessation of business with respect to inventories of taxable goods existing as of such retirement or cessation.
Section 100(c) applies the Section 100(a) tax to goods disposed of or existing as of certain dates where the status as VAT-registered person changes or is terminated, under circumstances to be prescribed in regulations by the Secretary of Finance.
Section 100(d) governs determination of VAT tax base:
- If billed separately in the invoice, VAT is based on gross selling price excluding VAT; excise tax (if any) forms part of gross selling price.
- If not billed separately or billed erroneously, VAT is determined by multiplying gross selling price (including the intended amount to cover VAT or erroneously billed VAT) by the factor 1/11 (or such factor as regulations prescribe for partially exempt persons under special laws).
- Sales returns, allowances, and discounts are handled by deducting returned goods and granting deductions for discounts indicated in the invoice at the time of sale within the same quarter.
- The Commissioner may determine the appropriate tax base by regulations where a transaction is deemed sale under Section 100(b) or where gross selling price is unreasonably lower than actual market value.
Section 101(a) requires import VAT to be paid before release from customs custody, based on customs value plus duties and other charges; if customs duties are quantity/volume-based, VAT is based on landed cost plus excise taxes (if any).
Section 101(b) treats tax-free importations by exempt persons as creating an internal tax liability on the purchaser/transferee/recipient when the goods are sold, transferred, or exchanged to non-exempt persons; such tax due constitutes a lien superior to all charges or liens, regardless of possessor.
Section 102(a) grants 0% VAT for VAT-registered persons for:
- Services performed in the Philippines for persons doing business outside the Philippines where goods are subsequently exported, services are paid for in acceptable foreign currency, inwardly remitted, and accounted for per rules of the Central Bank of the Philippines;
- Other services whose consideration is paid in acceptable foreign currency, inwardly remitted, and accounted for per Central Bank rules;
- Services rendered to persons or entities exempt under special laws or international agreements to which the Philippines is a signatory, effectively subjecting the supply to zero rate.
Section 102(a) defines “gross receipts” as total consideration representing contract price or compensation, including materials supplied with the services and deposits or advances actually or constructively received during the taxable quarter for services performed or to be performed, excluding VAT.
Section 102(b) provides tax base determination:
- If billed separately in the invoice, VAT is based on gross receipts excluding VAT.
- If not billed separately or billed erroneously, VAT is determined by multiplying gross receipts (including the intended amount to cover VAT or erroneously billed VAT) by 1/11.

Exempt transactions and reduced/zero rates

Section 103(a) exempts from VAT the sale of nonfood agricultural, marine and forest products in their original state by the primary producer or the owner of the land where produced.
Section 103(b) exempts the sale or importation in original state of agricultural and marine food products; livestock and poultry generally used as, or yielding or producing food for human consumption; and breeding stock and genetic materials for such.
Section 103(b) allows “original state” treatment even if products undergo simple preservation or preparation processes such as freezing, drying, salting, smoking, or stripping; it specifically treats polished and/or husked rice, corn grits and raw cane sugar as original state for this exemption.
Section 103(c) exempts sale or importation of fertilizers, pesticides and herbicides, chemicals for formulating pesticides, seeds, seedlings and fingerlings, fish/animal/poultry feeds, and soya bean and fish meals.
Section 103(d) exempts sale or importation of petroleum products (except lubricating oil, processed gas, grease, wax and petrolatum) subject to excise tax under Title VI.
Section 103(e) exempts sale or importation of raw materials to be used by the buyer/importer himself in the manufacture of petroleum products (except lubricating oil and grease) subject to excise tax.
Section 103(f) exempts printing, publication, importation, or sale of books and specified newspapers/magazines/reviews/bulletins with regular intervals and fixed prices for subscription and sale, if not devoted principally to advertisements.
Section 103(g) exempts importation of passenger and/or cargo vessels of more than ten thousand tons, including engine and spare parts, to be used by the importer himself as operator.
Section 103(h) exempts importation of personal and household effects of Philippine residents returning from abroad and non-resident citizens coming to resettle in the Philippines if customs duty exemption applies under the Tariff and Customs Code.
Section 103(i) exempts importation of professional instruments/implements, wearing apparel, domestic animals, and personal household effects (except vehicles, vessels, aircraft, machinery, other goods for use in manufacturing, and merchandise of any kind in commercial quantity) of persons coming to settle for the first time in the Philippines, for own use and not for sale, barter, or exchange, accompanying such persons, or arriving within ninety days before or after arrival, upon production of evidence satisfactory to the Commissioner that settlement is actual and bona fide.
Section 103(j) exempts services rendered by persons subject to percentage tax under Title V.
Section 103(k) exempts services by agricultural contract growers and milling for others of palay into rice, corn into grits, and sugar cane into raw sugar.
Section 103(l) exempts medical, dental, hospital and veterinary services.
Section 103(m) exempts educational services rendered by private educational institutions duly accredited by the Department of Education Culture and Sports, and educational services rendered by government educational institutions.
Section 103(n) exempts sale by the artist himself of works of art, literary works, musical compositions, and similar creations, and his services performed for production of such works.
Section 103(o) exempts services performed as actors/actresses, talents, singers, and emcees; radio and television broadcasters; choreographers; and directors of musical/radio/movie/television/stage productions; and services performed as professional athletes.
Section 103(o) also exempts leasing of real property.
Section 103(r) exempts services performed in the exercise of profession or calling (except customs brokers) subject to the occupation tax under the Local Tax Code, and professional services performed by registered general professional partnerships.
Section 103(s) exempts services rendered by individuals pursuant to an employer-employee relationship.
Section 103(t) exempts services rendered by regional or area headquarters established in the Philippines by multinational corporations that act as supervisory, communications, and coordinating centers for affiliates/subsidiaries/branches in the Asia-Pacific Region and do not earn or derive income from the Philippines.
Section 103(u) exempts transactions exempt under special laws or international agreements to which the Philippines is a signatory.
Section 103(v) exempts export sales by persons who are not VAT-registered.
Section 103(w) exempts sales and/or services performed by persons other than those mentioned in preceding exemptions whose annual gross sales/receipts do not exceed the amount prescribed in regulations to be promulgated by the Secretary of Finance, which must be not less than P100,000 higher than P500,000.

VAT tax credits, carry-over, and refunds

Section 104(a) allows credit of “creditable input tax” for input VAT paid on:
- Purchase or importation of goods for sale or for conversion into or intended to form part of finished product for sale, or for use in business, or as supplies in business, or as materials supplied in sale of services, or for trade or business for which depreciation is allowed under Section 29(f);
- Services performed by a VAT-registered person, creditable against output VAT, when invoice/receipt was issued by a VAT-registered person in the manner prescribed in Section 108.
Section 104(a) allows a CAT-registered person engaged in both VAT and non-VAT transactions to claim tax credit for:
- Total input tax directly attributed to VAT transactions; and
- A ratable portion of input tax not directly attributable to either activity.
Section 104(a) defines “input tax” as VAT paid by a VAT-registered person on importation of goods or local purchases of goods or services from VAT-registered persons, and it includes transitional input tax under Section 105 and other transitional input taxes prescribed by regulations.
Section 104(a) treats VAT otherwise due on tax-exempt products or pioneer enterprise registered with the BOI as of August 1, 1986 when sold domestically to a VAT-registered person as input tax creditable against output tax payable.
Section 104(a) defines “output tax” as VAT due on the sale of taxable goods or services by any person registered or required to register under Section 107.
Section 104(b) provides quarterly settlement:
- If output tax exceeds input tax at the end of any taxable quarter, the excess is paid by the VAT-registered person.
- If input tax exceeds output tax, the excess is carried over to succeeding quarters.
- Any input tax attributable to capital goods or to zero-rated sales may be refunded or credited against other internal revenue taxes under Section 106, at the option of the VAT-registered person.
Section 105 grants transitional input tax credits to persons becoming liable to VAT or electing VAT registration, subject to filing an inventory under regulations, equal to 8% of the value of beginning inventory or the actual VAT paid, whichever is higher, creditable against output tax.
Section 106(a) provides refund or tax credit for export sales: a VAT-registered exporter may apply within two years from the date of exportation for a tax credit certificate or refund of input tax attributable to exported goods, to the extent the input tax has not been applied to output tax, upon proof that foreign exchange proceeds have been accounted for under Central Bank rules.
Section 106(b) provides refund or tax credit for zero-rated or effectively zero-rated sales: any person (except exporters covered by Section 106(a)) may apply within two years after the close of the quarter when such sales were made for a tax credit certificate or refund of input tax attributable to such sales, to the extent not applied against output tax.
Section 106(c) provides refund or tax credit for capital goods:
- A VAT-registered person may apply for issuance of a tax credit certificate or refund of input taxes on capital goods imported or locally purchased, to the extent not applied against output tax.
- Refund applications for capital goods may be made only after expiration of 2 succeeding quarters following the quarter of importation or local purchase.
- A VAT-registered person commencing business may apply for refund not earlier than 180 days from date of registration or actual start of business operations, whichever comes later.
- The application must be filed not later than 2 years from the dates prescribed.
Section 106(d) provides treatment for canceled registration due to retirement or cessation or changes in VAT status: within 2 years from cancellation date, the person may apply for a tax credit certificate for unused input tax to use in payment of other internal revenue taxes.
Section 106(e) mandates refund timing: the Commissioner shall refund input taxes within 60 days from filing of the application with the Commissioner or duly authorized representative, and no refund is allowed unless the VAT-registered person filed the application within the applicable periods in Sections 106(a), (b), and (c).
Section 106(f) provides refund mechanics: refunds are made upon warrants drawn by the Commissioner or duly authorized representative without necessity of counter-signature by the Chairman, Commission on Audit, subject to post audit by the Commission on Audit.

VAT registration, invoicing, accounting, notifications

Section 107(a) requires any person subject to VAT under Sections 100 and 102 to register with the appropriate Revenue District Officer; persons with head/main offices and branches register with the officer having jurisdiction over the main/head office location.
Section 107(b) requires persons commencing business expecting VAT-liable gross sales/receipts in excess of the amount prescribed by the Secretary of Finance for the next 12-month period to register within 30 days before the start of business.
Section 107(c) requires persons whose gross sales/receipts in any 12-month period exceed the regulatory threshold for exemption to register within 30 days after the end of the last month of that period; VAT liability applies starting the first day of the month following registration.
Section 107(d) provides optional registration for persons whose transactions are exempt under Section 103(a), (b), (c), (f), and (w); such persons must apply not later than 10 days before the beginning of a taxable quarter.
Section 107(d) allows a VAT-registered person engaged in exempt activities under Section 103(a), (b), (c), and (f) to register any or all exempt activities within the same period provided.
Section 107(d) empowers the Commissioner to deny any application for registration for administrative reasons.
Section 107(d) assigns each VAT-registered person only one registration number, and every person registered under Section 107 is referred to as a VAT-registered person for purposes of the Title.
Section 107(e) requires cancellation of VAT registration when a person ceases to be liable to VAT; cancellation occurs upon filing of an application for cancellation of registration, and persons who opted under Section 107(d) may apply for cancellation under regulations of the Secretary of Finance.
Section 108(a) requires every VAT-registered person to issue an invoice or receipt for every sale, including VAT registration number and the required breakdown where VAT is billed separately, or the total charged if VAT is not billed separately.
Section 108(b) requires VAT taxpayers to maintain, in addition to regular books, a subsidiary sales journal and subsidiary purchase journal with daily entries and information required by the Secretary of Finance.
Section 109(a) requires VAT-registered persons to file a notice of change of principal place of business or branches/offices within 15 days from the date of change with Revenue District Officers covering former and new locations.
Section 109(b) requires registered persons under Section 107 to notify the Revenue District Officer of changes or termination of VAT status.

VAT returns, payment, and closure powers

Section 110(a) requires every person subject to VAT to file a quarterly return of gross sales or receipts and pay the VAT due to a bank duly accredited by the Commissioner located in the revenue district where the taxpayer is registered.
Section 110(a) provides filing/payment alternatives where no accredited agent banks exist within a city or municipality: the return is filed and the amount due is paid to any accredited bank within the district, or to the Revenue District Officer, Collection Agent, or authorized municipal treasurer.
Section 110(a) requires only one consolidated return for all branches and lines of business subject to VAT.
Section 110(a) requires filing even when no VAT is payable: if input tax and any authorized offsets equal or exceed output tax, the taxpayer files the return with the Revenue District Officer/Collection Agent/authorized municipal treasurer where principal place of business is located.
Section 110(b) requires VAT quarterly returns and payment within 20 days after the end of each quarter prescribed for VAT-registered persons under regulations by the Secretary of Finance.
Section 110(b) requires a taxpayer whose VAT registration is cancelled to file a return within 20 days from cancellation.
Section 110(c) empowers the Commissioner to prescribe an initial taxable period for a VAT-registered person for the first return, which may not exceed 5 months.
Section 111 authorizes the Commissioner or authorized representative to suspend business operations and temporarily close the establishment for violations, including:
- Failure to issue receipts or invoices for VAT-registered persons;
- Failure to file VAT return as required under Section 110;
- Understatement of taxable sales or receipts by 30% or more of correct taxable sales/receipts for the taxable quarter;
- Failure of any person to register as required under Section 107.
Section 111 mandates temporary closure for a duration of not less than five (5) days, and lift only upon compliance with requirements prescribed by the Commissioner in the closure order.

Tax on VAT-exempt persons (percentage tax)

Section 112 imposes a tax on persons whose sales or receipts are exempt under Section 103(w) and who are not VAT-registered.
Section 112 sets the tax at two (2) percent of the person’s gross quarterly sales or receipts.

Administrative and collection-related amendments

Section 3 amends Section 6 of the National Internal Revenue Code by constituting the Commissioner of Customs and subordinates as agents for collection regarding imported goods; the head of the appropriate government office and subordinates regarding energy tax; and accredited banks regarding receipt of authorized internal revenue tax payments through banks.
Section 3 subjects officers/employees of duly accredited banks assigned to receive tax payments and transmit returns/documents to the same sanctions and penalties prescribed in Sections 268 and 269.
Section 4 amends Section 16 to require the Commissioner to examine returns and assess the correct amount of tax after a return is filed, with tax or deficiency tax due upon notice and demand.
Section 4 authorizes amendment of filed returns/statements/declarations only through filing an amended return/statement/declaration.
Section 4 directs the Commissioner to assess tax on best evidence obtainable if required reports are not submitted on time or if there is reason to believe reports are false, incomplete, or erroneous.
Section 4 authorizes the Commissioner to make or amend a return from his own knowledge and information obtained through testimony or otherwise when a taxpayer fails to file required returns/documents or willfully or otherwise files false or fraudulent returns/documents; such return shall be prima facie correct.
Section 4 authorizes the Commissioner to order inventory-taking during the taxable year, and to place operations under surveillance when there is reason to believe the taxpayer is not declaring correct income, sales, or receipts; findings may be used as basis for assessing taxes for other months/quarters of the same or different taxable years and are prima facie correct.
Section 4 authorizes minimum gross receipts/sales/taxable base prescriptions as prima facie correct when it is found a person failed to issue receipts/invoices in violation of VAT and invoicing requirements, or when books/records do not correctly reflect declarations.
Section 4 empowers the Commissioner to terminate a taxpayer’s tax period where the Commissioner knows the taxpayer is retiring, leaving the Philippines, removing property, hiding or concealing property, or obstructing collection such that proceedings would be ineffective unless begun immediately; the Commissioner sends notice and requests immediate payment for the declared terminated period and unpaid portion of preceding year/quarter, subject to penalties unless paid within the demand period.
Section 4 authorizes the Commissioner to divide the Philippines into zones/areas and determine fair market value of real properties, with the value for tax computation being the higher of the Commissioner-determined fair market value or the Provincial/City Assessor schedule of values.
Section 4 authorizes the Commissioner to inquire into the bank deposits of a decedent to determine the gross estate, notwithstanding Republic Act No. 1405, and requires waiver of privilege if compromise is sought on clear inability to pay.
Section 4 empowers the Commissioner to require prior accreditation and registration of persons/general professional partnerships or representatives based on competence and moral fitness for preparing and filing returns and for appearing or filing protests/papers with the Bureau; it also allows the Commissioner to create national and regional accreditation boards and issue rules subject to the Secretary of Finance’s approval.
Section 4 empowers the Commissioner to prescribe the manner of compliance with documentary or procedural requirements for submission of financial statements accompanying tax returns.

Renumbered excise and related tax provisions

Section 5 renumbers and amends the Code to a new Section 122 on Tax on agents of foreign insurance companies, providing rules for fire/marine/miscellaneous insurance agents, excluding reinsurance, and requiring owners buying directly in foreign companies to report to the Insurance Commissioner and to the Commissioner of Internal Revenue and pay a 5% tax on premiums paid.
Section 6 renumbers and amends provisions on percentage taxes by creating Section 125 on returns and payment of percentage taxes, generally requiring quarterly returns and payment within 20 days after each taxable quarter, and providing rules for VAT registration cancellation leading to Section 112 tax accrual from cancellation date.
Section 6 empowers regulations on time for filing and manner/time of payment of percentage taxes, including schemes of tax prepayment.
Section 7 renumbers and amends to Section 126 on goods subject to excise taxes, providing that excise taxes apply to domestic manufactured/produced goods and imported goods, and that excise tax imposed under this Title is in addition to VAT imposed under Title IV.
Section 7 classifies excise taxes based on weight/volume or physical unit as specific taxes and those based on selling price or specified value as ad valorem taxes.
Section 8 renumbers and amends to Section 127 on payment of excise taxes on domestic products, requiring payment by manufacturer/producer before removal unless otherwise allowed, with a 15-day payment rule for locally manufactured petroleum products and indigenous petroleum levied under Sections 145 and 151(a)(4), and imposing liability on owners/possessors when removed without payment.
Sections 9 to 18 renumber and amend various excise tax provisions, including taxes on distilled spirits, wines, fermented liquor, cigar and cigarettes, manufactured oils and fuels, saccharine, automobiles, non-essential goods, mineral products, and related rules on removal after payment and storage/withdrawal of petroleum products, with specified tax rates and bases and detailed formula rules for gross selling price and excise tax computation.