Vat Input Taxes

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TAXATION FAR EASTERN UNIVERSITY – MANILA

VAT-INPUT TAXES (303) A. Input Tax Defined 1. Meaning of input tax Input tax is the value- added tax due from or paid by a VAT registered person in the course of his trade or business on importation of goods or local purchase of goods, properties or services, including lease or use of properties from a VAT registered person. It shall also include the transitional input tax and the presumptive input tax

2. Four categories of creditable or deductible input taxes a. VAT paid on local purchases (passed on by seller) or on importation (passed on VAT) b. Presumptive input tax c. Transitional input tax d. Standard input tax

3. Persons who can avail of input tax credit The input tax credit on importation of goods or local purchases of goods, properties or services by a VAT registered person shall be creditable: a. To the importer upon payment of VAT prior to the release of goods from custom custody b. To the purchaser of the domestic goods or properties upon consummation of the sale or c. To the purchaser of services or the lease or licensee upon payment of the compensation, rental or royalty or fee

B. Presumptive Input Tax 1.Persons or firms allowed presumptive input tax

Persons or firms engaged in processing of: 1. Sardines 2. Mackerel 3. Milk

Persons or firms engaged in manufacturing of: 1. Refined sugar 2. Cooking oil 3. Packed noodle based instant meals

2. Basis of presumptive input tax

Gross value in money of purchases of primary agricultural products which are used as input to their production

3. Rate of presumptive input tax

4%

4. The term processing means

1. Pasteurization, 2. canning, 3. activities which through physical or chemical process alter the exterior texture or form or inner substance of a product in such manner as to prepare it for special use to which it could not have been put in its original form or condition.

C. Transitional Input Tax 1. Situations where transitional input tax may be allowed a. Taxpayers who became VAT registered persons upon exceeding the minimum turnover of P1,919,500 in any 12 month period b. Taxpayers who voluntarily register even if their turnover does not exceed P1,919,500 (except franchise grantee of radio and / or television broadcasting whose threshold is P10,000,000) 2. Basis of transitional input tax Beginning inventory of goods, materials and supplies (Excluding those that are VAT exempt under Sec. 109) 3. Amount of transitional input tax 2% of the value of the beginning inventory on hand or actual VAT paid on such goods, materials, and supplies whichever is higher. The value allowed for income tax purposes on inventories shall be the basis for the computation of the 2% transitional input tax, excluding goods that are exempt from VAT under sec 109 of the Tax Code.

D. Standard Input Tax 1. Input tax attributable to VAT sales to Government not creditable against output tax on sales to non-government entities Input taxes that can be directly attributable to VAT taxable sales of goods and services to the Government or any of its political subdivisions, instrumentalities or agencies including GOCCs shall not be credited against output taxes arising from sales to nongovernment entities. 2. Government required to withhold

3.3 VAT input taxes

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The government or any of its political subdivisions, instrumentalities or agencies, including GOCCs shall deduct and withhold a final VAT due at the rate of five percent (5%) of the gross payment. 3. Final withholding VAT represents the net VAT payable of the seller The five percent (5%) final withholding VAT rate shall represent the net VAT payable of the seller The certificate or statement to be issued is the certificate of final tax withheld at source (BIR Form No. 2306), a copy of which is to be issued to the payee. 4. Difference between the VAT rate and the withholding VAT rate accounts for the standard input tax The remaining seven percent (7%) effectively accounts for the standard input VAT for sales of goods or services to government or any of its political subdivisions, instrumentalities or agencies including GOCC’s in lieu of the actual input VAT directly attributable or ratably apportioned to such sales. If the actual input VAT attributable to sale to the government exceeds 7% of the gross payment, the excess may form part of the seller’s expense or cost If the actual input VAT attributable to sale to the government is less than 7% of the gross payment, the difference must be closed to expense or cost.

• •

 Standard input tax > Actual input tax; the difference is credit entry expense or cost.  Standard input tax < Actual input tax; the difference is debit entry expense or cost.

E. Determination of Allowable Input Taxes 1. Determination of creditable input tax Input tax carried over from previous period Input tax deferred on capital goods exceeding P1,000,000 from previous quarter Transitional input tax Presumptive input tax Others Total Input taxes on current transactions Total available input taxes Less: Deductions from input taxes Total Allowable input taxes

xxx xxx xxx xxx xxx xxx xxx xxx (xxx) xxx

. 2. Deductions from input taxes a. Input tax claimed as tax credit certificate or refund b. Input tax attributed to VAT-exempt sales c. Input tax attributed to sales to Government

F. Sources of Creditable Input Taxes (Local Purchases or Importation) Passed on VAT 1. Input tax evidenced by a VAT invoice or official receipts issued by a VAT registered person a. Purchases or importation of goods: 1) For sale or 2) For conversion into or intended to form part of a finished product for sale, including packaging materials or 3) For use as supplies in the course of trade or business 4) For use as raw materials supplied in the sale of services. 5) For use in trade or business for which deduction for depreciation or amortization is allowed b. c. d. e. f. g.

Purchase of real properties for which a VAT has actually been paid Purchase of services in which a VAT has actually been paid Transaction deemed sales Presumptive input tax Transitional input tax Transitional input tax credits allowed under the transitory and other provisions of RR 16-2005

2. VAT registered person is also engaged in transaction not subject to VAT A VAT registered person who is also engaged in transactions not subject to VAT shall be allowed to recognize input tax credit on transactions subject to VAT as follows: a. Total input taxes that can be directly attributed to transactions subject to VAT may be recognized for input tax credit; •

Provided, that input taxes that can be directly attributable to VAT taxable sales of goods and services to the Government or any of its political subdivisions, instrumentalities or agencies including GOCCs shall not be credited against output taxes

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arising from sales to non-government entities and b If any input tax cannot be directly attributed to either a VAT taxable or VAT exempt transaction, the input tax shall be pro-rated to the VAT taxable and VAT exempt transactions and only the ratable portion pertaining to transactions subject to VAT may be recognized for input tax credited computed as follows: VAT Sales Total Sales

x Input taxes

G. Claimed for Input Tax on Depreciable Goods (Under RR 16-2005) 1. Where a VAT registered person purchases or imports capital goods, which are depreciable assets for income tax purposes, the aggregate acquisition of which (exclusive of VAT) in a calendar months exceeds P1,000,000, regardless of the acquisition cost of each capital good. a. If the estimated useful life is 5 years or more - input tax shall be spread evenly over a period of 60 months and the claim for input tax credit shall commence in the calendar month when the capital good is acquired. b. If the estimated useful life is less than 5 years - input tax shall be spread evenly on a monthly basis by dividing the input tax by the actual number of months comprising the estimated useful life. The claim of input tax shall commence in the calendar month the capital good is acquired. Provided, further, that the amortization of the input VAT shall only be allowed until December 31, 2021 after which taxpayers with unutilized input VAT on capital goods purchased or imported shall be allowed to apply the same as scheduled until fully utilized. Provided, finally, That in the case of purchase of services, lease or use of properties, the input tax shall be creditable to the purchaser, lessee or licensee upon payment of the compensation, rental, royalty or fee.

2. Where the aggregate acquisition cost (excluding of VAT) of the existing of finished depreciable capital goods purchased or imported during any calendar month does not exceed P1,000,000. The total amount of input taxes will be allowable as credit against output tax in the month of acquisition. Rules on recognition of Input VAT for Capital Goods Aggregate Acquisition for the month >P1,000,000 exclusive of VAT: Life > 1 year

Input Tax shall be spread evenly over such useful life but not to exceed 60 months

Life < 1 year

Not a capital asset. Input tax is not allocated

Aggregate Acquisition Cost for the month
5. Meaning of capital goods or properties. Capital goods or properties refers to goods or properties with estimated useful life greater than one (1) year and which are treated as depreciable assets under the Tax Code, used directly or indirectly in the production or sale of taxable goods or services.

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6. Meaning of construction in progress Construction in progress (CIP) is the cost of construction work which is not yet completed. CIP is not depreciated until the asset is placed in service. Normally, upon completion, a CIP is reclassified and the reclassified asset is capitalized and depreciated. • Input tax on construction in progress a) CIP is considered, for purposes of claiming input tax, as a purchase of service, the value of which shall be determined based on the progress billings. b) Until such time the construction has been completed, it will not qualify as capital goods as defined, in which case, input tax credit on such transaction can be recognized in the month the payment was made; provided, that an official receipt of payment has been issued based on the progress billings.

7 Contract for the sale of service where only the labor will be supplied In case of contract for the sale of service where only the labor will be supplied by the contractor and materials will be purchased by the contractee from other suppliers, input tax credit on the labor contracted shall still be recognized on the month the payment was made based on the progress billings while the input tax on the purchase materials shall be recognized at the time the materials were purchased. 8. Input tax claimed while the construction is in progress Once the input tax has already been claimed while the construction is in progress, no additional input tax can be claimed upon completion of the asset when it has been reclassified as a depreciable capital asset and depreciated.

H. Deductibility of Depreciation Expenses as it Relates to Purchase of Vehicles and Other Expenses Related Thereto, and Taxes Allowed (RR 12-2012) 1. If the depreciable cost exceed P2,400,000: a. No input tax b. No depreciation expense c. No maintenance expense The following guidelines shall be observed in determining whether depreciation expense can be claimed or not on account of Vehicles capitalized by the taxpayer, or in claiming other expenses and input taxes on account of said Vehicle: No deduction from gross income for depreciation shall be allowed unless the taxpayer substantiates the purchase with sufficient evidence, such as official receipts or other adequate records which contain the following, among others: a Specific motor vehicle identification Number, Chassis Number, or other registrable identification numbers of the vehicle. b. The total price of the specific Vehicle subject to depreciation; and c. The direct connection or relation of the Vehicle to the development, management operation, and/or conduct of the trade or business or profession of the taxpayer. 2. Only one vehicle for land transport is allowed for use of an official or employee, the value of which should not exceed Two Million Four Hundred Thousand Pesos (P2,400,000); 3. No depreciation shall be allowed for yachts, helicopters, airplanes and/or aircrafts, and land vehicles which exceed the above threshold amount, unless the taxpayer’s main line of business is transport operations or lease of transportation equipment and vehicles purchased are used in said operations; 4. All maintenance expenses on account of non-depreciable vehicles for taxation purposes are disallowed in its entirely; 5. The input taxes on the purchase of non-depreciable Vehicles and all input taxes on maintenance expenses incurred thereon are likewise disallowed for taxation purposes.

I. Advance Payment of VAT 1. Transactions requiring advance payment of VAT 1) Sale of refined sugar 2) Sale of flour 3) Transport of Naturally Grown and Planted Timber Products (RR No. 13-2007) 4) Sale of jewelry, gold and other metallic minerals (RR No. 5-2013) 2. Advance payment of VAT allowed as tax credit against output tax The advance payments made by the seller/owner of refined sugar, importer or miller of wheat/flour and sellers/ owners of naturally grown and planted timber products shall be allowed as credit against their output tax on the actual gross selling price of refined sugar/flour/timber products. 3. Advance payments may be available for issuance of tax credit certificate (TCC) a) Advance payments which remain unutilized at the end of the taxpayer’s taxable year where the advance payment was made, which is tantamount to excess payment, may, at the option of the owner/seller/taxpayer or importer/miller/taxpayer, be available for the issuance of TCC upon application duly filed with the BIR by the seller/owner or importer/miller within two (2) years from the date

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of filing of the 4th quarter VAT return of the year such advance payments were made, or if filed out of time, from the last day prescribed by law for filing the return. b) Advance VAT payments which have been the subject of an application for the issuance of TCC shall not be allowed as carry-over nor credited against the output tax of the succeeding quarter/year. c) Issuance of TCC shall be limited to the unutilized advance VAT payment and shall not include excess input tax. d) Issuance of TCC for input tax attributable to zero-rated sales shall be covered by a separate application for TCC following the applicable rules.

J. Withholding VAT Transactions

Withholding Agent

Withholding VAT Rate

1. Purchase of goods by Government, political subdivisions, etc.

Government or any of its political subdivisions, instrumentalities or agencies, including government owned or controlled corporations (GOCCs)

5% of gross payment made (final)

2. Purchase of services by Government, political subdivisions, etc.

Government or any of its political subdivisions, instrumentalities or agencies, including government owned or controlled corporations (GOCCs)

5% of gross payment made (final)

3. Payments for services rendered in the Philippines by a non-resident

Government or any of its political subdivisions, instrumentalities or agencies, including government owned or controlled corporations (GOCCs)

12% on payments (final)

Private corporations, individuals, estate and trusts, whether large or non-large taxpayers

4. Purchases of goods or services in the course of trade or business (payeeseller has more than one payor-buyer)

Payor-purchaser in the course of trade of business

5. Purchases of goods or services in the course of trade or business (payeeseller has only one payorbuyer for the whole year)

Payor-purchaser in the course of trade of business

12% of payee’s gross sales or receipts

Payee-seller shall execute: 1. Waiver of the privilege to Claim input tax credit and 2. Notice of availment of the option to pay the tax through the withholding process

12% of payee’s gross sales or receipts

Payee-seller shall execute waiver and notice of availment as in above

Withholding of Value-added Tax. – The Government or any of its political subdivisions, instrumentalities or agencies, including government-owned or -controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods and services which are subject to the valueadded tax imposed in Sections 106 and 108 of this Code, deduct and withhold the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold a final value-added tax at the rate of five percent (5%) of the gross payment thereof: Provided, That beginning January 1, 2021, the VAT witholding system under this Subsection shall shift from final to a creditable system: Provided, further, That the payment for lease or use of properties or property rights to nonresident owners shall be subject to twelve percent (12%) withholding tax at the time of payment: Provided, finally, That payments for purchases of goods and services arising from projects funded by Official Development Assistance (ODA) as defined under Republic Act No. 8182, otherwise known as the ‘Official Development Assistance Act of 1996’, as amended, shall not be subject to the final withholding tax system as imposed in this Subsection. For purpose.es of this Section, the payor or person in control of the payment shall be considered as the withholding agent

K. Remittance of withholding VAT Remittance of withholding VAT The VAT withheld shall be remitted within 10 days following the end of the month the withholding was made

Notes: The TRAIN Law has changed the filing frequency of FWT and EWT returns from monthly to quarterly basis. The deadline is now on the last day of the month following the close of the quarter during which the withholding was made. For example, for the first quarter (i.e. January to March), the filing deadline would fall on the 30th of April.

3.3 VAT input taxes

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L. Refund of Input Tax a. Input Tax on Zero-Rated Sales of Goods or Property, Etc A VAT registered person whose sales of goods, properties or services are zero rated or effectively zero rated may apply for the issuance of a tax credit certificate or refund of input tax attributable to such sales. The input tax that may be subject of the claim shall exclude the portion of input tax that has been applied against output tax. The application should be made within 2 years after the close of the taxable quarter when the sales were made. b. Unused Input Tax of Person Who Retired or Ceased Business A VAT registered person whose registration has been cancelled due to retirement or cessation of business, or due to change in or cessation of status may, within 2 years from the date of cancellation, apply for the issuance of a tax credit certificate for any unused input tax which he may use in payment of his other internal revenue taxes. He shall be entitled to a refund if he has no internal revenue tax liabilities. Rule on Refund or Conversion of Tax Credit Certificate 1. Zero-rated Sales – file application with BIR within 2 years from the end of the taxable quarter. 2. Cancellation of VAT registration- files application with BIR within 2 years from date of cancellation. . c. Period of Refund or Tax Credit of Input Tax Refund or tax credit certificate shall be granted within 90 days from the date of submission of complete documents. In proper cases, the Commissioner shall grant a refund for creditable input taxes within ninety (90) days from the date of submission of the official receipts or invoices and other documents in support of the application filed in accordance with Subsections (A) and (B) hereof: Provided, That should the Commissioner find that the grant of refund is not proper, the Commissioner must state in writing the legal and factual basis for the denial. “In case of full or partial denial of the claim for tax refund, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim, appeal the decision with the Court of Tax Appeals: Provided, however, That failure on the part of any official, agent, or employee of the BIR to act on the application within the ninety (90)-day period shall be punishable under Section 269 of this Code. d. Manner of Giving Refunds Refunds shall be made upon warrants drawn by the Commissioner of Internal Revenue or by his authorized representative without the necessity of being countersigned by the COA chairman.

END Exercises A (Adapted) Instruction: Determine whether the input tax on the following acquisitions during a particular month shall be amortized or credited in full (indicate the amortization period if input tax is amortized. Jan 9 Purchase of 1 unit of generator for review school business to avoid interruption of classes, P500,000, VAT exclusive, estimated life 5 years Credit Feb 2 Purchase of 2 copying machines at P240,000 per unit , VAT exclusive, estimated life 3 years and a sorting machine at P448,000 inclusive of VAT. Credit Mar 1 Purchase of 20 units of computer equipment at P20,000 and 1 unit of generator at P500,000. All prices are VAT exclusive. Estimated life of computers, 3 years; estimated life of generator 5 years. Amortize 36 /60mos. Mar 3 Purchase of 5 units of steel filing cabinets, P30,000 per unit, exclusive of VAT. Estimated life 10years Amortize 36./60 mos Apr 1 Purchase of 1 truck for trucking business use, P2,400,000 . Amortize 60 mos May 2 1,000 km. maintenance. Expenses on depreciable vehicle for land transport, P33,600 VAT Credit inclusive Jun 5 Purchase of car for business use, P1,000,000 exclusive of VAT. Credit Jul 6 1,000 km. maintenance. Expenses on depreciable vehicle for land transport, P11,200 VAT inclusive. Credit Aug 11 Purchase of 1 GMC pickup truck for VP operation use in visiting the factories of the business, Not P4,000,000 exclusive of VAT. allowed Sept 1 1,000 km. maintenance. Expenses on depreciable vehicle for land transport, P44,800 VAT Not inclusive allowed Oct 1 Expenses incurred for the maintenance of depreciable yachts used in the main line of business of transport operator, P112,000 (VAT inclusive). Credit Nov 3 Purchase of 2 buses by a bus operator, at P5,000,000 per bus (VAT exclusive). Estimated life 6 Amortize 60 mos years Exercises B Instruction:Place Y if following person/entity is allowed to claim presumptive input tax otherwise place N. A. Person who processes 1 Purchase of tomatoes, onions, garlic, pepper and other agricultural products used as ingredients in processing sardines. sardines 2 Purchase of fresh sardines to be used in the processing of sardines 3 Purchase of cans and labels from a VAT-registered supplier. 4 Purchase of salt B. Person who process 1 Purchase of fresh olives.

3.3 VAT input taxes

Y N N N

Page 6 of 7

canned vegetables and fruits C. Manufacturer of cooking oil

2 3

Purchase of pineapple Purchase of sugar.

N N

1 2 3 4

Purchase of copra. Purchase of pet bottles. Purchase of labels Purchase of boxes

Y N N N

Exercise C (Adapted) Instruction:Place Y if following person/entity is allowed to claim transitional input tax otherwise place N. 1 Sale of goods purchased by a merchandising business engaged in VAT-subject transactions and whose annual gross sales do not exceed P1,000,000. 2 Services performed by a CPA whose gross annual receipts do not exceed P1,000,000 but voluntarily registers under the VAT system. Before its registration under the VAT system, materials and supplies used in the services were purchased from a VATregistered supplier. 3 Sale of goods purchased by a merchandising business engaged in VAT-subject transactions. Its annual gross sales do not exceed the P3,000,000 and did not register under the VAT system. 4 Sale of goods purchased by a merchandising business engaged in VAT-subject transactions. It is gross annual sales exceed the VAT threshold amount during the year and decides to register under the VAT system. Before its registration under the VAT system, merchandise sold were purchased from a not VAT-registered supplier. 5 Sale of goods purchased by a merchandising business, VAT-registered and engaged in VAT-subject transactions. Its is gross annual sales does not exceed the VAT threshold amount during the year. 4 Sale of goods purchased by a merchandising business who is engaged in VAT-subject transactions, his gross annual receipts exceed the VAT threshold amount during the year but refuses to register under the VAT system 5 Sale of goods purchased by a merchandising business Taxpayer is engaged in VAT-subject transactions who starts a business which he registers under the VAT system

N Y

N N

N N N

Exercise D: Instruction: Determine the VAT on the following transactions made by a VAT registered taxpayer during the month of April. April 2 Sale of construction materials, net of VAT, P220,000 5 Receipt of fee from construction contracts , gross of VAT, P112,000 7 Recorded its sales of materials in its sales journal amounting to, P200,000 19 Sale of hollow blocks, Selling price including erroneous VAT, P110,000 23 Sale of construction materials, exclusive of VAT, P200,000 25 Sale of construction materials, inclusive of VAT, P224,000 Exercise E: (Capital Goods) A VAT taxpayer, made the following purchases of capital goods from VAT registered sellers for use in his business (amounts are net of vat) for the 3rd quarter: Year 20X1 July 10- Machine 1

Estimated life 2 years

July 16- Machine 2 Aug. 8 - Machine 3

6 years 2 years

Cost P200,000 900,000 400,000

Aug. 20 - Machine 4 6 years 500,000 Sept. 14 - Machine 5 7 years 2,000,000 Machine 1 was retired on September 30, 20X1. Required: 1. The input tax in July is___ 2. The input tax in August is___ 3. The input tax in September is___

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