Legal basis and regulatory amendments
- The regulations are issued pursuant to Sections 245 and 4 of the National Internal Revenue Code (Code), as amended.
- They are issued in relation to Executive Order No. 273, as amended by Republic Act No. 7716, and further amended by Republic Act No. 8241.
- The regulations implement Sections 102, 103, 105, 107 and 110(c) of Title IV, Sections 112, 115, 115-A and 117 of Title V, and Section 237 of Title IX of the Code.
- They further amend Revenue Regulations No. 7-95, as amended (the Consolidated Value-Added Tax Regulations).
VAT coverage changes and rates
- Section 1 amends Section 4.100-1 of Rev. Regs. No. 7-95: a person required to register for VAT who fails to register is liable to VAT on the sale of taxable goods or properties.
- Section 1 treats VAT coverage for excisable goods as follows: the sale and importation of goods subject to excise taxes under Title VI are subject to VAT except coal and natural gas in whatever form or state, and manufactured petroleum products except lubricating oil, processed gas, grease, wax and petroleum.
- Section 2 amends Section 4.102-1: sale or exchange of services and the use or lease of properties (as defined under Section 102(a) of the Code) are subject to VAT.
- Section 2 defines “sale or exchange of services” as performance of services in the Philippines for others for a fee, remuneration, or consideration, including listed services such as transportation contractors, domestic common carriers, and other enumerated service providers.
- Section 2 sets franchise-specific treatment: radio/TV franchise grantees (with gross annual receipts not exceeding P10,000,000.00) are subject to a 3% franchise tax under Section 117 instead of VAT, subject to optional registration rules under Section 4.107-1(c).
- Section 2 imposes 2% franchise tax on gross receipts derived from electric, gas and water utilities covered by their franchise law.
- Section 3 amends zero-rating rules by listing services performed in the Philippines by VAT-registered persons that are subject to zero percent (0%), including export-related processing/manufacturing/repacking and certain services paid in acceptable foreign currency and accounted for under BSP rules.
VAT exemptions and related special rules
- Section 4 amends Section 4.1031(B) of Rev. Regs. No. 7-95 by expanding the enumerated exempt transactions from VAT.
- Agricultural and marine food products are exempt when sold/imported in their original state, including livestock and poultry of a kind used as, or yielding foods for, human consumption, and breeding stock and genetic materials therefor.
- Original state rule: agricultural and marine food products remain “in original state” even after simple processes of preparation or preservation for market such as freezing, drying, salting, broiling, roasting, smoking, or stripping, including advanced technological packaging methods like shrink wrapping, vacuum packing, tetra-pack, and similar methods.
- Section 4 exempts sale/importation of coal and natural gas (whatever form or state) and petroleum products (except lubricating oil, processed gas, grease, wax and petrolatum) subject to excise taxes under Title VI.
- Section 4 exempts certain percentage-taxed services and other specific service categories, including:
- services of non-VAT registered persons whose gross annual sales/receipts do not exceed P550,000.00, with CPI-based adjustment every year thereafter starting after January 31, 1988;
- domestic common carriers by land, air, or water for passenger transport and keepers of garages under Section 115;
- international air and shipping carriers under Section 115-A;
- franchise grantees of radio/TV (gross annual receipts not exceeding P10,000,000.00) and franchise grantees of electric, gas and water utilities under Section 117;
- life insurance business services in the enumerated manner under Section 121; and other listed exemptions.
- Services by agricultural contract growers and milling for others are exempt, with “agricultural contract growers” defined to include reforestation contractors pursuant to the Government Reforestation Program.
- Medical, dental, hospital and veterinary services are exempt, with the rule that if the hospital or clinic operates a pharmacy or drug store, the sale of drugs and medicine is subject to VAT.
- Educational services rendered by private educational institutions duly accredited by DECS and/or CHED, and those rendered by government educational institutions, are exempt; “educational services” are limited to academic, technical, or vocational education and exclude seminars, in-service training, review classes, and similar services by non-accredited persons.
- Works of art and literary/music creations are exempt when sold by the artist himself; when sold by other persons in the course of business they are subject to VAT.
- International agreements and special laws exemptions apply except specified exceptions for PD No. 66, PD No. 529, and PD 1590 items and other enumerated exclusions.
- Cooperatives: certain cooperative sales are exempt, and the exemption includes specified rules for electric cooperatives and cooperative lending activities.
- Real property exemptions under Section 4 include enumerated cases such as low-cost housing under BP Blg. 220, PD No. 957 or RA No. 7279 with price ceilings of P375,000.00 per unit (CPI adjustment not stated for this particular ceiling in the cited clause), socialized housing under RA No. 7279 with price ceiling of P150,000, and other specified categories including real dealers/lessors’ house-and-lot valued at One Million Pesos (P1,000,000.00) and below with CPI adjustment every year after January 31, 1998.
- Residential lease exemption applies to monthly rental per residential unit not exceeding Eight Thousand Pesos (P8,000.00) with an additional exemption condition where monthly rental exceeds P8,000.00 but aggregate rentals do not exceed P550,000.00; the rental ceiling is CPI-adjusted every year after January 31, 1998.
- Books and periodicals are exempt when sold/imported/printed/published under the enumerated conditions, including that the publication is not devoted principally to paid advertisements.
- Cumulative receipts exemption: sale/lease of goods or properties or performance of services other than covered transactions are exempt when gross annual sales/receipts do not exceed P550,000.00, with CPI-based adjustment every year after January 31, 1988.
- Invoice-receipt consequence: even if a person’s transaction is otherwise not subject to VAT, if the person issues a VAT invoice or receipt, the person is liable to VAT (without input tax credit), and the VAT assessed is not recognized as input tax credit to the purchaser.
Transitional and presumptive input tax credits
- Section 5(a) amends Section 4.105-1(a) for transitional input tax credits on beginning inventories.
- VAT-registered persons upon exceeding the minimum turnover of P550,000.00, or who voluntarily register even if turnover does not exceed P550,000.00, are entitled to transitional input tax on inventory on hand as of the effectivity of VAT registration, excluding franchise grantees of radio and television broadcasting whose threshold is P10,000,000.00.
- Transitional credit covers beginning inventories consisting of goods purchased for resale in present condition, materials purchased for further processing not yet processed, goods manufactured by the taxpayer, and goods in process and supplies for sale or use in the course of business as a VAT-registered person.
- The transitional input tax equals 8% of the value of beginning inventory or the actual VAT paid on such goods/materials/supplies, whichever is higher, and is allowed as a tax credit against the output tax.
- The value allowed for income tax purposes on inventories is used as basis for the 8% transitional input tax, excluding goods exempt from VAT under Section 103 of the Code.
- The P550,000.00 turnover threshold for transitional credits applies only for calendar year 1997; it is adjusted to present value no later than 31st day of January of each succeeding calendar year using the Consumer Price Index published by NSO.
- Section 5(b) provides presumptive input tax credits for:
- processing of sardines, mackerel, and milk, and manufacturing refined sugar and cooking oil, equivalent to 1.5% of the gross value in money of purchases of primary agricultural products used as inputs; and
- public works contractors under government contracts only, equivalent to 1.5% of the contract price in lieu of actual input taxes.
- “Processing” is defined for presumptive credit to include pasteurization, canning, and physical/chemical processes that alter texture/form/inner substance to prepare the product for special use not possible in its original form.
- Transitional and presumptive input tax credits are granted only to VAT-registered persons.
VAT registration, optional registration, and cancellation
- Section 6 amends Section 4.107-1 on VAT registration.
- Registration requirement (general): any person who sells, barters, exchanges, leases goods/properties, and renders services subject to VAT imposed under Sections 100 and 102 must register with the appropriate Revenue District Officer (RDO) using BIR Form No. 1556, and pay an annual registration fee using specified forms depending on whether the RDO is computerized.
- VAT registration fee is One Thousand Pesos (P1,000.00), paid using BIR Form No. 1558 for non-computerized RDOs and BIR Form No. 0605 for computerized RDOs.
- VAT registration is required before the start of business and every year thereafter on or before the 31st day of January.
- Mandatory VAT registration threshold: any person in trade or business is subject to VAT registration if actual or expected gross sales/receipts exceed P550,000.00, with CPI-based present value adjustment every year thereafter.
- First beginning business rule: persons before engaging in VAT-covered business whose expected gross sales/receipts exceed P550,000.00 (CPI-adjusted annually) must register and pay the fee within thirty (30) days before the start of business.
- Persons becoming liable rule: a person whose gross taxable sales/receipts in any 12-month period exceed P550,000.00 (CPI-adjusted annually) must register within thirty (30) days after the end of the last month of that period; VAT liability commences from the first day of the month following registration.
- Franchise grantee exception for registration: radio/TV franchise grantees with gross annual receipts of the preceding calendar year exceeding P10,000,000.00 register within thirty (30) days from the end of the calendar year.
- Optional VAT registration: VAT-exempt persons may opt to register, including those with actual/expected gross sales/receipts not exceeding P550,000.00 (for 12-month period, CPI-adjusted annually) and franchise grantees of radio/TV with gross annual receipts not exceeding P10,000,000.00.
- Once franchise grantees listed for optional registration opt to register as VAT taxpayers, the registration is no longer revocable.
- Optional registration applications must be made not later than ten (10) days before the beginning of the calendar quarter, and once registered the taxpayer is liable to output tax and entitled to input tax credit under Sections 104 and 105 of the Code.
- The Commission may deny applications for registration for administrative reasons.
- Section 8 amends cancellation grounds: VAT-registered persons may apply for cancellation in enumerated cases including:
- registration prior to planned business commencement followed by failure to start;
- voluntary VAT registration despite exempt transactions under Sections 103(a), (b), (c), (d) and (z), with cancellation after two (2) years;
- gross sales/receipts not exceeding P550,000.00 for two (2) consecutive years beginning calendar year 1997, with CPI adjustment thereafter; and
- gross sales/receipts not exceeding P550,000.00 during the first 12 months in business beginning calendar year 1997, with CPI adjustment thereafter.
- Optional registration under Section 4.107-1(c) may be cancelled upon application, but optional registration of a radio/TV franchise grantee with gross annual receipts not exceeding P10,000,000.00 is not revocable.
Non-VAT registration and name-style registration
- Section 7 amends Section 4.107-2 on non-VAT registration.
- Every person not required to be registered as a VAT person but engaged in business must register with the concerned RDO on or before commencement of business or within ten (10) days from commencement/transfer, and must pay an annual non-VAT registration fee of Five Hundred Pesos (P500.00) for every separate or distinct establishment or place of business.
- Payment is made to an accredited bank where each place of business/branch is located; otherwise payment is made with the RDO, collection agent, or authorized municipal treasurer.
- Non-VAT registration must contain the taxpayer’s name or style, place of residence, business, place where carried on, and other information required by the Commissioner in the prescribed form.
- An option allows semi-annual payment: Two Hundred Fifty Pesos (P250.00) on or before 31st day of January for the first semester and on or before 20th day of the first month of the succeeding semester.
- A new taxpayer registering after the first semester pays a registration fee proportional to the remaining semester.
- Required non-VAT registration persons and fee rules include:
- VAT-exempt persons under Section 103(a), (b), (c), (d) and (z) who did not opt to register as VAT taxpayers;
- persons engaged in business or exercising a profession other than those subject to VAT and other percentage taxes under Title V;
- individuals with gross sales/receipts not exceeding One Hundred Thousand Pesos (P100,000.00) during any 12-month period who must register but are not made to pay the P500.00 registration fee;
- non-stock, non-profit organizations/associations with gross sales/receipts not exceeding P550,000.00 (CPI-adjusted annually) who register under the enumerated requirement; and
- cooperatives enumerated under Section 4(B)(r), (s), (t) and (u) that are required to register but are not required to pay the registration fee imposed under Section 14 of these regulations.
- Section 14 amends Section 237 of the Code: every person other than those required to register under Section 107 must register with the RDO or collection agent on or before commencement or within ten (10) days from transfer, and pay an annual registration fee of Five Hundred Pesos (P500.00) for each separate or distinct establishment/place of business.
- The fee is paid to the RDO, collection agent, authorized treasurer, or the Municipality where the place of business/branch is situated, and registration is renewed annually on or before the last day of January.
- Registration must include the registrant’s name or style, place of residence, business, place carried on, and other Commissioner-required information.
- For firms, registration must include names and residences of the various persons constituting the firm.
- The Commissioner may require guarantees or security/collateral based on volume of sales, financial condition, and other relevant factors.
- Cooperatives are exempt from paying the Section 237 registration fee.
Withholding tax and percentage taxes
- Section 9 amends Section 4.100-3 on withholding of creditable VAT: the Government and its instrumentalities/GOCCs must withhold VAT before paying for goods and VATable services provided by sellers/contractors subject to VAT under Sections 100 and 102.
- Withholding rates are 3% of the gross payment for purchases of goods and 6% on gross receipts for services rendered by contractors on every sale or installment payment.
- The withholding is creditable against the VAT liability of the sellers/contractors pursuant to RA No. 7644 as implemented by Rev. Regs. No. 10-93.
- Payments of One Thousand Pesos (P1,000.00) and below per purchase are not subject to withholding tax.
- For Government public works and contractors, the withholding tax rate is 8.5%.
- VAT withheld must be remitted within ten (10) days following the end of the month when withholding was made.
- Section 10 amends Section 4.112-1: persons exempt from VAT under Section 103(z) of the Code who are not VAT-registered must pay a tax equivalent to 3% of gross quarterly sales/receipts.
- Cooperatives are exempt from the 3% gross receipts tax imposed under Section 10.
Percentage tax on carriers and franchise taxes
- Section 11 amends Section 115 of the Code: domestic carriers and keepers of garages must pay a tax equivalent to 3% of their quarter gross receipts.
- The Section 115 percentage tax applies to cars for rent or hire driven by the lessee, transportation contractors (including those transporting passengers for hire), and other domestic carriers by land/air/water, except owners of bancas and owners of animal-drawn two-wheeled vehicle.
- The gross receipts of common carriers derived from incoming and outgoing freight are not subject to local taxes imposed under Republic Act No. 7160 (Local Government Code of 1991).
- Section 11 provides minimum quarterly gross receipts based on vehicle type and passenger capacity:
- jeepney: P2,400.00 (Manila and other cities) and P1,200.00 (Provincial);
- public utility bus: P3,600.00 (not exceeding 30 passengers), P6,000.00 (exceeding 30 but not exceeding 50), and P7,200.00 (exceeding 50);
- taxis: P3,600.00 (Manila and other cities) and P2,400.00 (Provincial);
- car for hire (with chauffeur): P3,000.00; car for hire (without chauffeur): P1,800.00.
- Section 12 adds Section 115-A: international air carriers doing business in the Philippines pay 3% of quarterly gross receipts, and international shipping carriers doing business in the Philippines pay 3% of quarterly gross receipts.
- Section 13 amends Section 117: radio and/or television broadcasting companies with annual gross receipts of the preceding year not exceeding P10,000,000.00 are subject to a 3% franchise tax, and electric, gas and water utilities are subject to a 2% franchise tax on gross receipts.
- Radio and/or television broadcasting companies under Section 117 may opt to register as VAT taxpayers and pay VAT; the option is not revocable once exercised.
- The franchise grantee must file the return and pay the tax due to the Commissioner of Internal Revenue (or duly authorized representative) under Section 125 of the Code, and the return is subject to audit by the Bureau of Internal Revenue.
VAT effectivity for newly covered services and repeal
- Section 15 provides that VAT is levied, assessed, and collected starting JANUARY 1, 1998 on:
- services performed in the exercise of profession or calling subject to professional tax under the Local Government Code or RA No. 7160, and professional services performed by registered general professional partnerships; actors/actresses/talents/singers/emcees; radio/TV broadcasters; choreographers; musical/radio/movie/TV/stage directors; and professional athletes;
- services rendered by banks, non-bank financial intermediaries, finance companies, and other financial intermediaries not performing quasi-banking functions; and
- lease or use of sports facilities and equipment by amateur players under RA No. 6847, except sports facilities/equipment exclusively or mainly for private use of shareholders/members of the club or organization owning/operating them.
- Before inclusion in VAT coverage, the listed services continue to pay the applicable taxes under the existing Code provisions.
- Congress may exclude any covered services from VAT coverage when public interest so requires, taking into account impact on prices; if excluded, the existing applicable tax under the Code continues to be paid for the excluded service.
- Section 16 repeals Republic Act No. 6938 (Cooperative Code of the Philippines) provisions authorizing cooperatives’ exemption from sales or VAT, and repeals all inconsistent laws, orders, issuances, rules, regulations, or parts thereof.