Module 2

INTRODUCTION TO
CONSUMPTION TAXES
Prepared by: Mrs. Nelia I. Tomas, CPA, LPT

BUSINESS AND TRANSFER TAXATION Laws Principles and Applications. 2019 Edition. Rex Banggawan
 LEARNING OBJECTIVES
After completing the lesson, the students will be able to:
1. Understand the concept of a consumption tax.
2. Identify the types of consumption and consumption taxes.
3. Comprehend the destination principle.
4. Describe the nature of the VAT on importation and the nature and types of business tax.
5. Determine the characteristics of the VAT on sales and percentage tax.
 THE CONCEPT OF CONSUMPTION
AND CONSUMPTION TAX
 Consumption refers to the acquisition or utilization of goods or
services by any person.
 The utilization of goods or services may be through purchase,
exchange or other means. This utilization is subject to a tax called
consumption tax.
 Consumption is levied without regard to the purpose of the
purchaser or consumer whether it is for business, personal or charity
use.

Rationale of Consumption Tax

1. Savings formation
2. Rationalization of the Benefit Received Theory
3. Wealth redistribution to society
Consumption tax promotes savings formation.
Income is normally destined toward consumption. Income less
consumption is savings. Sayings is a capital that is useful in funding
projects crucial to economic activities that could spur further economic
development. A tax on consumption promotes savings formation by
limiting the level of consumption.

Consumption tax rationalizes the Benefit Received Theory.

The Benefit Received Theory proposes that those who receive more
benefit from the government should pay more taxes. It is undeniable
that, in one way or another, every resident or citizen, whether rich or
poor, benefits from the government’s public services. Thus, the legal
truism in taxation that receipt of benefit from the government is
conclusively presumed.

A tax on consumption will effectively render everybody taxable.

Therefore, consumption tax is a practical rationalization of the Benefit
Received Theory in taxation.
 Consumption tax helps redistribute wealth to society.
 It is a basic State policy to redistribute wealth to society so everyone
in the State could enjoy the same.
 A tax on consumption will effectively make the rich pay more taxes for
the government.
 In effect, consumption tax supports the redistribution of wealth from
the rich people to the less privileged members of our society.

A caveat to consumption tax

It should not be levied upon basic necessities such as food, education,
health, and shelter or housing. Doing so would be tantamount to killing the
goose that lays the golden egg.

Income tax vs. consumption tax

Income Tax Consumption Tax
Nature Tax upon receipt of income Tax upon usage of income or capital
Scope/coverage A tax to the people A tax to all
Theoretical basis Ability to pay theory Benefit received theory
Types of Consumption Seller Purchaser Types of Consumption Status
Resident Resident Domestic Sales
Domestic Consumption Taxable
Non-resident Resident Importation
Resident Non-resident Exportation Exempt / Effectively
Foreign Consumption
Non-resident Non-resident non-taxable

 Philippine tax laws adhere to the “Destination principle”

 Following the Cross-border doctrine, goods that cross the
border destined for foreign countries are not charged
consumption taxes.
 The NIRC either exempts exports or subject them to a 0%
tax rate.
CONSUMPTION TAX ON DOMESTIC SALES
 The domestic consumption of resident buyers from resident sellers
commonly known as purchase is subject to a consumption tax called
a business tax.

 The object of taxation is the purchase of buyers but the law imposed
the obligation to pay the tax upon sellers.

 Business tax is well-known as an indirect tax.

CONSUMPTION TAX ON IMPORTATION

 The domestic consumption of goods or services from non-resident
commonly known as importation is subject to a consumption tax
called the VAT on importation.

 The VAT is directly levied upon the buyer - importer.

 Income tax vs. consumption tax
VAT on importation Business Tax
Scope of tax Imports from business or non-business Purchases from businesses only
Type of consumption Pure form Relative form
Statutory taxpayer Buyer Seller
The economic taxpayer Buyer Buyer
Nature of imposition Direct Indirect
Basis of tax Total purchase cost Sales or receipts
 Business tax rules on Domestic sales
The seller is The buyer is Subject to business tax?
Business Business YES
Business Not Business YES
Not Business Business NO
Not Business Not Business NO

Value Added Tax rules on importation

The seller is The buyer is Subject to business tax?
Business Business YES
Business Not Business YES
Not Business Business YES
Not Business Not Business YES
TYPES OF CONSUMPTION TAXES
1. Percentage Tax - tax of various rates from 0.60% to 30%
2. Value Added Tax - a consumption tax of 12%
3. Excise Tax - an ad valorem or specific tax, which is
imposed in addition to VAT or percentage tax, only on
certain goods or services.

TYPES OF DOMESTIC CONSUMPTION AS TO TAXABILITY

1. Exempt consumption – consumption of goods or services
not subject to consumption taxes. They are
2. Consumptions specifically subject to percentage tax -
consumption of services that are not subject to VAT but are
imposed with a specific percentage tax.
3. Vatable consumption - consumption that are neither
exempted nor subject to percentage tax.
 Basis of Exemption from Consumption Tax
Basis of Exemption VAT on importation Business Tax
Human necessity The goods imported is a human The goods, services or property sold is
necessity. a human necessity.
Out of scope of tax The importation does not constitute a The seller is not engaged in business.
domestic consumption.
Tax incentive The importation is exempted as a tax The sales or receipts is exempted as a
incentive to certain importers. tax incentive to certain sellers.

International comity The importation is exempted by treaty. The sales or receipt is exempted by
treaty.
 The Structure of the VAT on Importation
VAT on Importation
Import of services or goods
Import of Services Import of goods
Exempt Exempt Exempt
% tax Percentage Tax -
VAT Final withholding VAT VAT on Importation
VALUE ADDED TAX ON IMPORTATION
Prepared by: Mrs. Nelia I. Tomas, CPA, LPT
BUSINESS AND TRANSFER TAXATION Laws Principles and Applications. 2019 Edition. Rex Banggawan
 LEARNING OBJECTIVES
After completing the lesson, the students will be able to
Understand the concept of importation
A
Identify the types of consumption tax on importation
B
Identify the list of importations which are exempt consumption
C
Explain the concept in “original state” for agricultural or marine
D food products

Analyze the concept of landed cost, import VAT computation

E and technical importation

F Determine the scope and applicability of the VAT on importation

G Discuss the concept of qualified exemption

H
Explain the treatment of the VAT on importation
 IMPORTATION
 It refers to the purchase of goods or services by Philippine residents from non-resident sellers.

 Type of Consumption Tax on Importation

1. VAT on importation - for the import of goods
2. Final withholding VAT— for the purchase of services from non-residents

 Comparison between the consumption tax on importation

VAT on Importation Final Withholding VAT
Object consumption Goods Services
Imposed upon Importer / buyers Foreign service providers
Statutory taxpayer Importer / buyers Resident purchaser of the service*
Nature Direct consumption tax Indirect business tax
Tax basis Landed cost Contract price
Collecting agency BOC BIR
Timing of payment Before withdrawal of goods After the month of payment

*Individual engaged in business and corporations

 IMPORT OF GOODS
The importation of goods is either:
1. Exempt importation
2. Vatable importation

EXEMPT IMPORTATION
A. Importation of exempt goods
Certain goods considered basic necessities are not subject to the VAT on importation, such as:
1. Agricultural and marine food products in their original state.
2. Fertilizers, seeds, seedlings and fingerlings, fish, prawn, livestock and poultry feeds, including
ingredients used in the manufacture of finished feeds
3. Books and any newspaper, magazine. review. or bulletin which appear at regular intervals with
fixed prices for Subscription and sale and which is not devoted principally to the publication of
paid advertisements.
4. Passengers or cargo vessels and aircrafts, including engine, equipment and spare parts thereof
for domestic or international transport operations
B. Importation by VA T-exempt persons
1. International shipping or air transport operators on their import of fuel, goods and supplies
2. Cooperatives of direct farm inputs, machineries and equipment, including spare parts thereof, to
be used directly and exclusively in the production and or processing of their produce
3. PEZA locators on their import of goods or services

C. Quasi-importation
1. Personal and household effects belonging to residents of the Philippines returning from abroad
and non-resident citizens coming to resettle in the Philippines
2. Professional instruments and implements, wearing apparel, domestic animals, and personal
household effects belonging to persons coming to settle in the Philippines, for their own use and
not for sale, barter or exchange

D. Importation which are exempt under special laws and international agreement
 IMPORTATION OF EXEMPT GOODS

The importation of the following exempt goods is not subject to VAT:

A. Basic human food and related goods
1. Agricultural or marine food products in original state
2. Livestock and poultry of a kind generally used as, or yielding or producing foods for human
consumption
3. Breeding stock and genetic materials therefore
B. Books, newspapers and magazines
C. passengers or cargo vessels and aircrafts, including engine, equipment and spare parts
 A. HUMAN FOOD AND RELATED PRODUCTS
Agricultural or marine food products in original state
 Import exemption is limited to agricultural or marine food products in their original state or those which
undergone simple processing.
 Goods that underwent advanced processing are vatable.
 Examples of exempt agricultural or marine food products in original state:
1. Grapes, apples, oranges and other fruits
2. Vegetables, tea, ginseng
3. Rice, corn, coffee beans and other edible farm products
4. Marine foods such as fish and crustaceans
5. Poultry and livestock
6. Milk, eggs, and meat for human consumption
 Livestock includes cow, bulls, calves, pigs, sheep, goats and rabbits. Poultry shall include fowls, ducks,
geese and turkey. Marine food shall include fish and crustaceans such as, but not limited to, eels, trout,
lobster, shrimps, prawns, oysters, mussels and clams (RR16-2005).
 To be considered in “original state”, the goods must be in their raw form. However, those that
underwent simple processing are also exempt.
Meaning of simple processing
The term simple processing includes:
a. Acts of preparation for the market
b. Acts of preservation, or
c. Acts of packaging including advanced technological means of packaging

Examples of simple acts of preparation:

a. Boiling d. Roasting
b. Broiling e. Stripping
c. Husking f. Grinding

Examples of simple acts of preservation:

a. Freezing c. Smoking
b. Drying d. Saltmg

Goods may still be in their original state even if they are packaged using advanced technological means,
such as:
a. Shrink wrapping in plastics c. Tetra-packing
b. Vacuum packing d. Other Similar packaging methods
The following agricultural or marine food products which underwent processing are also exempt:
With simple act of preparation With simple act of preservation With acts of packaging
Husked rice Sundried fruit Tetra-packed fresh fruit juice
Corn grits Salted meat Shrink wrapped meat
Raw cane sugar Smoked fish
Roasted beans Dried fish
Ordinary sale Frozen meat or fish
Ground meat
Copra
Boiled eggs
Lechon

Processed agricultural or marine food products

 These pertain to those which have undergone changes in their chemical compositions or have
undergone complex processing or treatment or are utilizing advanced technologies in their processing.
 The importation of processed products and those considered not in their original state shall be subject to
VAT on importation.
 Examples of vatable processed agricultural or marine food products:
Refined sugar Canned sardines Flour
Wine or vinegar Butter Marinated milk fish
Vegetable or coconut oil Soy
Use or purpose dictates VAT ability
 Flowers intended as love gifts are vatable since they are not food but cauliflower is an exempt human food.
 Cockfighting chickens are vatable since they are primarily intended for human amusement. However,
chicken produced for meat or eggs are VAT-exempt human foods.

Farm or fishery inputs

 Marine or agricultural inputs intended for the production of marine or agricultural food products which are
ultimately intended for human consumption are also VAT-exempt.
 The importation of farm or fishery inputs such as seeds, seedlings, breeding and genetic materials are
exempt. Likewise, foods of these inputs such as fertilizers and feeds including ingredients manufacture of
finished feeds are also VAT-exempt.
 Products intended as maintenance of crops, livestock or poultry and supplemental implements of
agricultural or inputs such as pesticides, herbicides, animal medicines, fishing equipment, fishing boats,
tractors, plows, driers, threshers and harvesters are vatable.
 Zoo animals, race horse, aquarium fish, fighting cocks and pets are not intended for human consumption;
hence, vatable. Feeds of these non-food animals called “specialty feeds” is likewise vatable.
 Ingredients of feeds for animal food intended for ultimate human consumption is VAT-exempt but
ingredients for the processing of human food is vatable.
 Illustration 1

Simaron Company imported the following agricultural implements:

Urea Fertilizer P 800,000
Cargil corn seeds 400,000
Pesticides 600,000
Herbicides 800,000

The fertilizer and seeds are exempt. Other farming implements such as pesticides and herbicides
are subject to VAT on importation.
Rules on VAT taxation of poultry and feeds
Livestock Poultry Pets
Importation of X X 
Importation of feeds for X X 
Importation of feed ingredients for X X 

Examples of vatable non-food agricultural or marine products:

a. Logs. wood, bamboo, orchid, and similar forest products
b. Rubber hem, abaca, tobacco, topical herbs, cotton and other non-food crops
c. Shells, corals, and other non-food marine products usually used as ornaments
d. Race horses, fighting cocks, aquarium fish, zoo animals, and other animals generally considered as
pets
B. BOOKS, NEWSPAPERS, MAGAZINE, REVIEW OR BULLETINS
 The VAT exemption on the importation of these goods is apparently based upon the necessity of
education and information.
 The Philippine constitution requires the state to give priority to education to foster patriotism and
nationalism, accelerate social progress, and promote total human liberation and development. (See Sec
17, Article Il, Philippine Constitution)

 The Philippine Constitution also recognizes the vital role of communication and information in nation-
building. (See Sec 24 Ibid)

Conditions for exemption of newspaper, magazine review or bulletin:

1. They must appear at regular intervals with fixed prices for subscription.
2. The sale must not be devoted principally to the publication of paid advertisements.
 C. PASSENGERS OR CARGO VESSELS AND AIRCRAFT
 The VAT exemption covers the import of passengers or cargo vessels and aircrafts, including engine,
equipment and spare parts thereof for domestic or international transport operations.

 To qualify for exemption, the importation must be subject to the requirements on restriction on vessel
importation and mandatory vessel retirement program of the Marina Industry Authority (MARINA):
 Passenger or cargo vessels - 15 years
 Tankers - 10 years
 High speed passenger crafts - 5 years
 Illustration 2

Total Transport Group has land, sea and air transport operations. To beef up its operations, it
imported 5 units of Daewoo bus, 1 unit of aircraft and 2 cruise ships.

The importation of the airplane and ships are exempt but the importation of the buses for land
transport is subject to VAT.
IMPORTATION BY VAT-EXEMPT PERSONS

 VAT-exempt persons are not subject to VAT on importation. The extent of exemption varies per
exempt persons.
 When an exempt importer subsequently sells his exempt importation to a non-exempt person, the
non-exempt buyer shall be subject to VAT on importation. The tax due on such importation shall
constitute a lien on the goods, superior to all charges or liens, irrespective Of the possessor of said
goods (Sec. 4.107-1(c), RR16-2005).

VAT-Exempt Persons under the NIRC:

1. International shipping or air transport operators
2. Agricultural cooperatives
3. Ecozone-locators
International shipping or air transport operators
 The exemption is limited to the importation of fuel, goods and supplies.

 Although these goods or supplies are physically brought into the Philippines, they are not intended to
be consumed herein. They will ultimately he used in international transport. This consumption is a
foreign consumption rather than domestic consumption.
 Illustrations
Illustration 3
Malaysian Ferries is an international shipping carrier. It imported to the Philippines fuel and supplies to be
used in its shipping operations.

The importation is not domestic consumption but a foreign consumption; hence, it is exempt from VAT.

Illustration 4
Pinoy Airline imported jet fuel from Iraq at a total cost of P50,000,000. 40% of the importation is declared for
domestic airline operations while 60% is declared for international air transport operations.

60% of the P50,000,000 importation will be consumed in foreign airspaces. This is not for domestic
consumption; hence, it is exempt from VAT. Only the 40% portion which will be used domestically will be
subject to the VAT on importation.
Agricultural cooperatives
 The status of agri-coop as VAT-exempt person is limited to importation of direct farm inputs,
machineries and equipment, including their spare parts (RA 9337).

Conditions for exemption:

1. The cooperative must be an agricultural cooperative duly registered and in good standing with the
Cooperative Development Authority (CDA).

2. The importation involves direct farm inputs, machineries, equipment and their spare parts to be used
directly and exclusively in the production or processing of their produce.
 Illustration 5
Abra Farmer’s Cooperative imported the following equipment:
Tractors and threshers to be used by the cooperative P 2,000,000
Plows and water pumps to be resold to members 3,000,000
Fertilizers and hybrid seeds to be sold by the cooperative 1,000,000
Herbicides and pesticides to be used by the cooperative 500,000
Cars for the use of cooperative directors and officers 2,000,000

The tax treatment of the importation will be:

Tractors and threshers to be used by the cooperative Exempt
Plows and water pumps to be resold to members Vatable
Fertilizers and hybrid seeds to be sold by the cooperative Exempt
Herbicides and pesticides to be used by the cooperative Exempt
Cars for the use of cooperative directors and officers Vatable
Ecozone-locators
 Ecozones are designated places of economic activity for the production goods or services for the
export market.
 Economic zones are considered foreign countries and are deemed outside Customs territory. Thus, the
importation of goods into the economic zones by locators is exempt not only from VAT on importation
but also from customs duties.
 The exemption from VAT covers any goods, supplies or machineries brought into the ecozones by
locators.

Technical Importation
 This refers to the purchase of non-Ecozone Philippine residents from Philippine Ecozone-registered
enterprises.
 The purchase from Economic zones is subject to the VAT on importation, whereas, the sales to
Ecozones are subject to zero-rated VAT for VAT taxpayers and are exempt from business tax for non-
VAT taxpayers.
 Illustration 6

Winshield Corporation, a PEZA locator, sold scrap metals to Recycle Industries Corporation, a
customs territory buyer (i.e., buyer outside the Ecozone).

Recycle Industries shall pay the VAT on importation directly to the Bureau of Customs (BOC).
Winshield Corporation is not required to impose the VAT on its sales. However, it must be furnished
a copy of the receipt issued by the BOC for the VAT payment (See BIR Ruling No. DA-031-2007, January
19, 2007).
 QUASI-IMPORTATION

1. Import of personal and household effects belong to residents of the Philippines returning from abroad
or non-resident citizens coming to resettle in the Philippines.
2. Professional instruments and implements, wearing apparel, domestic animals, and personal household
effects belonging to persons coming to settle in the Philippines, for their own use and not for sale,
barter or exchange.

Conditions for exemption:

1. The personal and household effects belong to Philippine residents or non-residents intending to
resettle in the Philippines
2. The goods are exempt from Customs duties

 The importation of personal or household effects or professional implements by non-residents intending

to resettle in the Philippines is a foreign consumption not subject to Philippine consumption tax.
 Illustrations
Illustration 7
Mr. Siman was employed abroad as an OFW. He went abroad taking with him personal effects such as
clothes, pieces of personal jewelry and gadgets aggregating P300,000 in value. When his contract ended,
he returned to the Philippines bringing with him the same effects which now have an aggregate value of
P280,000.

The importation (i.e., return) of the personal effects will not be subject to VAT since these are past
purchases which had been subjected to consumption tax when purchased in the Philippines.

Illustration 8
While employed abroad. Mr. Siman purchased an iPhone 6 worth P30,000 for selfie purposes. Mr. Siman
brought the iPhone to the Philippines when his employment contract ended.

The importation of the iPhone shall not be subject to VAT on importation for the same reason that it is not a
present consumption of household effects when it was brought into the Philippines. Furthermore, purchases
abroad by non-residents are not subject to consumption tax in the Philippines. Their subsequent importation
to the Philippines is exempt from VAT on importation.
 Importation of professional instruments and implements, wearing
apparel, domestic animal and personal household effects

Conditions for exemption:

1. The goods belong to persons who come to settle in the Philippines.
2. The goods must accompany the person upon arrival or within 90 days before or after his/her arrival.
3. There must be evidence to show that the change of residence is bona tide.
4. The importation is not a vehicle, machinery or other equipment used in the manufacture or
merchandise of any kind in commercial quantity.
 Illustration 9

Mr. Marquez, a professional boxer, applied for an application to migrate in the Philippines and was
granted by the Philippine government. He brought his boxing gear and household effects including
his personal car to the Philippines.

The importation of professional instruments and household effects are exempt but the importation of
the car is subject to VAT.
 Illustration 10
Kung Fu, a Chinese martial arts master, arrived in the Philippines with an immigration visa. He brought with
him the following which he declared as his personal effects:
10 pieces of brand new iPhone 6 P150,000 each
10 pieces of brand new IBM laptops P80,000 each
5 desktop computers P40,000 each
1 piece of used laptop P30,000
1 piece of used iPhone 4S P20,000
1 piece of used calculator 400
Used clothes, apparel, and travelling bag 7,000

The use laptop, iPhone 4S,calculator, clothes, and apparel are apparently personal effects which are past
consumptions; hence, these are exempt from VAT.

The nature and quantity of the iPhone 6, IBM laptops and desktop computers is clearly inconsistent with the
concept of personal effects. These items are unquestionably for domestic consumption; hence, subject to
VAT.
IMPORTATION EXEMPT UNDER SPECIAL
LAWS OR TREATIES

 Import that are exempted by special laws, treaties or international agreements to which the
Philippine government is a signatory is not subject to the VAT on importation.

THE VAT ON IMPORTATION

Other importation of goods is subject to VAT regardless of whether the:
1. importer is engaged or not engaged in trade or business
2. importer is a VAT or non-VAT business
3. importation is for business or personal use
4. non-resident seller is engaged or not engaged in business

Presumption of vatability
Importation is generally subject to VAT unless it can be proven as exempt under any of those
conditions discussed herein or under a provision of a special law or treaty. The burden of proof in
establishing VAT exemption rests upon the importer.
Tax basis of the VAT on importation
The VAT on importation is computed as 12% of the total landed cost of the importation.

Composition of landed cost:

A. Dutiable value, also called transaction value, refers to the total value used by the Bureau of Customs
in determining customs duties, such as;
1. Cost of the good
2. Freight
3. Insurance
4. Other charges and costs to bring goods herein

B. Other in-land costs

1. Custom duty
2. Excise tax, if any
3. Other in-land costs such as:
a. Bank charge d. Wharfage due
b. Brokerage fee e. Documentary stamp tax
c. Arrastre charge f. Import processing fees
 Illustration 11
MRS Trading Corporation imported goods from abroad for domestic sale. Shown below are the details of the importation:
Peso value of supplier’s invoice P 2,000,000
Other costs incurred to bring goods to Philippine port 70,000
Other charges before withdrawal of goods, including P5,000 facilitation fee paid to a fixer 85,000
Custom duties 10%
Freight of goods from BOC warehouse to MRS warehouse in Makati City 20,000

The custom duties is computed as:

Peso value of supplier’s invoice P 2,000,000
Other costs incurred to bring goods to Philippine port 70,000
Dutiable value P 2,070,000
Rate of duty 10%
Custom duties P 207,000

The VAT on importation is computed as:

Dutiable value P 2,070,000
Other official costs paid before withdrawal of goods from the BOC 80,000
Customs duties 207,000
Total landed costs P 2,357,000
Multiply by: VAT rate 12%
VAT on importation P 282,840
 IMPORT OF SERVICES

The purchase of services from non-residents may be:

1. VAT-exempt
2. Subject to specific percentage tax
3. Subject to final withholding VAT

Import of services is generally subject to a final withholding VAT, except when it is exempted or is
imposed with a percentage tax.

Nature of the Final Withholding VAT

 Our current tax law views the final withholding VAT as a business tax.
 The VAT is deemed imposed upon non-resident service providers.
 The law conclusively presumes that the non-resident sellers are engaged in business even if their
sales transactions are merely casual.
 Since non-residents cannot be obligated to file tax returns due to territorial consideration, the resident
buyer is obligated to “withhold” the VAT and to remit the same to the government. Thus, the term “final
withholding VAT.”
 The VAT is deemed passed-on by the non-resident service provider, which in turn, is withheld by the
resident purchaser of the service.

 As withholding tax, the obligation to withhold the VAT technically exists only if:
1. The service is rendered within the Philippines; and
2. Payor-purchaser of the service is an individual engaged in business or a corporation

 There is no obligation to withhold the VAT if the payor is not a business except for corporate purchasers
of service.

 Moreover, the situs of taxation of services is determined by the place where the service is rendered and
not the place where the output of the service will be ultimately used. Hence, the service must be
rendered within to be subjected to the withholding tax.
 Illustration 12

Eagle Company sought the help of Mr. Putin, a repairman doing business in Australia, to fix its
malfunctioning machinery in the Philippines. The contract was P1,000,000. Eagle Company shall pay
P120,000 (12% x P1M) final withholding VAT to the BIR.

Case 1: If Mr. Putin is not engaged in business in Australia?

The contract price is still subject to the 12% final withholding VAT. Mr. Putin is conclusively presumed
engaged in business.

Case 2: What if Eagle Company is a non-profit institution?

The contract price is still subject to the 12% final withholding VAT. Even non-profit corporations are
required to withhold.

Case 3: What if Eagle Company is an ecozone locator?

The contract price will not be subjected to the 12% final withholding VAT because ecozone locators are
outside the country (i.e., non-residents) by legal fiction.
 VAT-EXEMPT IMPORT OF SERVICES
The following are exempt from the final withholding VAT:
a. Purchase of services from non-residents when the service is rendered
abroad
b. Purchase of services from non-residents when the individual purchaser is
not engaged in business
c. Purchase of services from non-residents by VAT-exempt persons such as
ecozone locators

 In case the service is rendered by non-residents to ecozone locators, the

final withholding VAT is not imposable since ecozone locators are
considered non-residents. The withholding requirement cannot be
imposed with non-residents. Hence, the transaction shall be exempt from
the final withholding VAT. (See BIR ITAD Ruling Nos. 311-14, dated November 4,
2014 and 316-14 dated November 24, 2014)
 IMPORT OF SERVICES SPECIFICALLY SUBJECT TO
PERCENTAGE TAX
 The only import of service that is currently subject to a percentage tax is the direct acquisition of
insurance cover from abroad. The premium payment on insurance policies directly sourced abroad is
subject to a 5% percentage tax. The policyholder shall pay the same to the BIR.

VATABLE IMPORT OF SERVICES

 All other import of services is subject to final withholding VAT.
 The final withholding VAT is computed as 12% of the contract price.
 Unlike income tax, this amount shall not be deducted upon the amount remitted abroad because it is
deemed passed-on by the non-resident provider and “withheld” by the resident payor-withholding agent.
 Example of vatable import of services:
1. Lease or use of properties or property rights owned by non-residents
2. Services rendered to local insurance companies, with respect to reinsurance premiums payable
to non-residents
3. Other services rendered in the Philippines by non-residents
 Illustration 13

Session Food Corporation is a licensed franchisee of Ronald, Inc., a non-resident foreign franchisor.
During the month, Session is due to pay P800,000 royalties.

Requirements:
1. How much is the final withholding VAT due to Ronald Inc.?
2. How much is the amount to be remitted by Session Food Corporation to Ronald Corporation?
 Illustration 14

Phil Mines imported a customized ozone generator from Chen Company in China. Before shipments,
Phil Mines had the machine customized by Guangzu Industries in China for P500,000. The generator
has a total landed cost of P1,200,000 on importation. Chen Company installed the generator at Phil
Mine’s processing plant in the Philippines for P220,000.

Requirements:
1. How much is the VAT on importation payable of Phil Mines due to the BOC?
2. How much is the final withholding VAT payable of Phil Mines due to the BIR?
Payment of the withholding VAT
Using BIR Form 1600, the withholding VAT is remitted
monthly on or before the 10th day of the following month
after the withholding was made, except for taxes withheld
for December Which shall be filed or paid on or before
January 25 of the following year,
 Treatment of the VAT on importation and the
Withholding VAT
Cost of
1. If the resident purchaser is a goods
VAT-registered business, it can imported
claim the VAT on importation or
withholding VAT as input VAT
Input
VAT
03
creditable against its output VAT.
2. If the resident purchaser is a 01
non-VAT business, the VAT on
COGS or
importation or final withholding COS
VAT shall be part of the cost of
purchase of goods or services
and shall be treated as asset or
02
expense.
3. If the purchaser is not engaged
in business, the VAT on
importation is merely added to
the costs of the goods imported.
 Questions to Ponder
1. What is consumption?
2. Compare consumption tax to income tax.
3. What are the types of consumption? Which type pays tax?
4. Discuss the nature of business tax.
5. Enumerate and describe the nature of each type of business tax.
6. Compare the VAT on importation to the business tax.
7. Discuss the characteristics of the VAT on sales.
8. Compare the direct method to the tax credit method in VAT computation.
9. Discuss the characteristics of the percentage tax.
10. Discuss the nature of excise tax.
11. Compare VAT on sales, percentage tax, and excise tax.
 Questions to Ponder
14. What is importation?
15. Is VAT on importation a business tax? Explain.
16. What is meant by the phrase “in original state”?
17. What is landed cost?
18. Distinguish dutiable value from landed cost.
19. Discuss technical importation.
20. Enumerate the current and existing ecozones in the Philippines.
21. Discuss the final withholding VAT, its scope and nature.
22. Discuss the treatment of the VAT on importation and the final withholding VAT.
 Required Readings and Other Learning
Resources

Chapter 1 & 2, pp. 1 to 40:

Banggawan, Rex B. 2019. BUSINESS AND TRANSFER TAXATION Laws Principles and
Applications. Real Excellence Publishing., Pasay Default Barangay, Pasay City, Philippines.
 Learning Activities/Self-Tests

Chapter 1 & 2, pp. 11 to 20; 41 to 53:

Banggawan, Rex B. 2019. BUSINESS AND TRANSFER TAXATION Laws Principles and
Applications. Real Excellence Publishing., Pasay Default Barangay, Pasay City, Philippines.
 Appendix: Course Materials Evaluation
Adopted: BEST PRACTICES AND SAMPLE QUESTIONS FOR COURSE EVALUATION SURVEYS. Retrieved from
https://assessment.provost.wisc.edu/best-practices-and-sample-questions-for-courseevaluation-surveys//.