February 7, 2007

REVENUE REGULATIONS NO. 04-07

SUBJECT : Amending Certain Provisions of Revenue Regulations No. 16-2005,

As Amended, Otherwise Known as the Consolidated Value-Added
Tax Regulations of 2005

TO : All Internal Revenue Officers and Others Concerned

SECTION 1. Scope. — Pursuant to the provisions of Sec. 244 and 245 of the
National Internal Revenue Code of 1997, as amended, in relation to Title IV of the same
Tax Code, these Regulations are hereby promulgated to amend certain provisions of
Revenue Regulations (RR) No. 16-2005, as amended, otherwise known as the
Consolidated Value-Added Tax Regulations of 2005.
SECTION 2. VAT on Sale of Goods or Properties . — Sec. 4.106-1 of RR No. 16-
2005 is hereby amended to read as follows:
"SEC. 4.106-1. VAT on Sale of Goods or Properties . — VAT is imposed
and collected on every sale, barter or exchange, or transactions "deemed sale" of
taxable goods or properties at the rate of twelve percent (12%) (starting
February 1, 2006) of the gross selling price or gross value in money of the
goods or properties sold, bartered, or exchanged, or deemed sold in the
Philippines."
SECTION 3. Sale of Real Properties. — Sec. 4.106-3 of RR No. 16-2005 is hereby
amended to read as follows:
"SEC. 4.106-3. Sale of Real Properties. — Sale of real properties held
primarily for sale to customers or held for lease in the ordinary course of trade
or business of the seller shall be subject to VAT.
Sale of residential lot with gross selling price exceeding P1,500,000.00,
residential house and lot or other residential dwellings with gross selling price
exceeding P2,500,000.00, where the instrument of sale (whether the instrument
is nominated as a deed of absolute sale, deed of conditional sale or otherwise)
is executed on or after Nov. 1, 2005, shall be subject to ten percent (10%) output
VAT, and starting Feb. 1, 2006, to twelve percent (12%) output VAT .
Installment sale of residential house and lot or other residential dwellings
with gross selling price exceeding P1,000,000.00, where the instrument of sale
(whether the instrument is nominated as a deed of absolute sale, deed of
conditional sale or otherwise) was executed prior to November 1, 2005, shall be
subject to ten percent (10%) output VAT.
Sale of real property on installment plan means sale of real property by a
real estate dealer, the initial payments of which in the year of sale do not exceed
twenty-five (25%) of the gross selling price.
In case of installment sale, the seller shall be subject to output VAT on
the installment payments received, including the interests and penalties for late
payment, actually and/or constructively received, subject to the provisions of
Sec. 4.106-4 hereof. Correspondingly, the buyer of the property can claim the
input tax in the same period as the seller recognized the output tax.
Installment payments, including interests and penalties, actually and/or
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 constructively received starting February 1, 2006 shall be subject to twelve
percent (12%) output VAT .
Sale of real property by a real estate dealer on a deferred payment basis
not on the installment plan means sale of real property, the initial payments of
which in the year of sale exceed twenty- ve percent (25%) of the gross selling
price.
"Initial payments" means payment or payments which the seller receives
before or upon execution of the instrument of sale and payments which he
expects or is scheduled to receive in cash or property (other than evidence of
indebtedness of the purchaser) during the taxable year when the sale or
disposition of the real property was made. It covers any down payment made
and includes all payments actually or constructively received during the year of
sale, the aggregate of which determines the limit set by law.
Initial payments do not include the amount of mortgage on the real
property sold except when such mortgage exceeds the cost or other basis of the
property to the seller, in which case the excess shall be considered part of the
initial payments.
Also excluded from the initial payments are notes or other evidence of
indebtedness issued by the purchaser to the seller at the time of the sale.
In the case of sale of real properties on a deferred-payment basis not on
the installment plan, the transaction shall be treated as cash sale which makes
the entire selling price taxable in the month of sale. Output tax shall be
recognized by the seller and input tax shall accrue to the buyer at the time of the
execution of the instrument of sale.
Payments subsequent to "initial payments" shall no longer be subject to
output VAT, in the case of sale on a deferred payment basis.
Pre-selling of real estate properties by real estate dealers shall be subject
to VAT in accordance with the rules prescribed above.
Real estate dealer includes any person engaged in the business of
buying, developing, selling, exchanging real properties as principal and holding
himself out as a full or part-time dealer in real estate.
Transmission of property to a trustee shall not be subject to VAT if the
property is to be merely held in trust for the trustor and/or bene ciary. However,
if the property transferred is one for sale, lease or use in the ordinary course of
trade or business and the transfer constitutes a completed gift, the transfer is
subject to VAT as a deemed sale transaction pursuant to Section 4.106-7(a)(1)
of these Regulations. The transfer is a completed gift if the transferor divests
himself absolutely of control over the property, i.e., irrevocable transfer of
corpus and/or irrevocable designation of beneficiary."
SECTION 4. Gross Selling Price. — Sec. 4.106-4 of RR No. 16-2005 is hereby
amended to read as follows:
"SEC. 4.106-4. Meaning of the Term 'Gross Selling Price' . — The term
"gross selling price" means the total amount of money or its equivalent which
the purchaser pays or is obligated to pay to the seller in consideration of the
sale, barter or exchange of the goods or properties, excluding VAT. The excise
tax, if any, on such goods or properties shall form part of the gross selling price.
In the case of sale, barter or exchange of real property subject to VAT,
gross selling price shall mean the consideration stated in the sales document or
the fair market value whichever is higher. If the VAT is not billed separately in
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 the document of sale, the selling price or the consideration stated therein shall
be deemed to be inclusive of VAT . The term 'fair market value' shall mean
whichever is higher of: 1) the fair market value as determined by the
Commissioner/zonal value, or 2) the fair market value as shown in schedule of
values of the Provincial and City Assessors (real property tax declaration).
However, in the absence of zonal value/fair market value as determined by the
Commissioner, gross selling price refers to the market value shown in the latest
real property tax declaration or the consideration, whichever is higher. If the
gross selling price is based on the zonal value or market value of the property,
the zonal or market value shall be deemed exclusive of VAT. Thus, the zonal
value/market value, net of the output VAT, should still be higher than the
consideration in the document of sale, exclusive of the VAT . aSTAIH

If the sale of real property is on installment plan where the zonal

value/fair market value is higher than the consideration/selling price, exclusive
of the VAT, the VAT shall be based on the ratio of actual collection of the
consideration, exclusive of the VAT, against the agreed consideration, exclusive
of the VAT, appearing in the Contract to Sell/Contract of Sale applied to the
zonal value/fair market value of the property at the time of the execution of the
Contract to Sell/Contract of Sale at the inception of the contract. Thus, since the
output VAT is based on the market value of the property which is higher than
the consideration/selling price in the sales document, exclusive of the VAT, the
input VAT that can be claimed by the buyer shall be the separately-billed output
VAT in the sales document issued by the seller. Therefore, the output VAT which
is based on the market value must be billed separately by the seller in the sales
document with speci c mention that the VAT billed separately is based on the
market value of the property.
Illustration:
ABC Corporation sold a parcel of land to XYZ Company on July 2, 2006
for P1,000,000.00, plus the output VAT, with a monthly installment payment of
P10,000.00, plus the output VAT. The zonal value of the subject property at the
time of sale amounted to P1,500,000.00. Compute for the output tax due on the
installment payment.
Formula:
Actual collection (exclusive of the VAT) x Zonal value x
12%
———————————————
Agreed consideration (exclusive of the VAT)
P10,000.00 x P1,500,000.00 = P15,000.00
—————
P1,000,000.00
P15,000.00 x 12% =
P1,800.00
=======
Selling price is the amount of consideration in a contract of sale between
the buyer and seller or the total price of the sale which may include cash or
property and evidence of indebtedness issued by the buyer, excluding the VAT."
SECTION 5. Zero-Rated Sales. — Sec. 4.106-5 of RR No. 16-2005 is hereby
amended to read as follows:
"SEC. 4.106-5. Zero-Rated Sales of Goods or Properties. — . . . .
The following sales by VAT-registered persons shall be subject to zero
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 percent (0%) rate:
(a) Export Sales. — . . . .
(5) Transactions considered export sales under Executive Order No. 226,
otherwise known as the Omnibus Investments Code of 1987, and other special
laws.
"Considered export sales under Executive Order No. 226" shall mean the
Philippine port F.O.B. value determined from invoices, bills of lading, inward
letters of credit, landing certi cates, and other commercial documents, of export
products exported directly by a registered export producer, or the net selling price
of export products sold by a registered export producer to another export
producer, or to an export trader that subsequently exports the same; Provided,
That sales of export products to another producer or to an export trader shall
only be deemed export sales when actually exported by the latter, as evidenced
by landing certi cates or similar commercial documents; Provided, further, That
pursuant to EO 226 and other special laws, even without actual exportation, the
following shall be considered constructively exported: (1) sales to bonded
manufacturing warehouses of export-oriented manufacturers; (2) sales to export
processing zones pursuant to Republic Act (RA) Nos. 7916, as amended, 7903,
7922 and other similar export processing zones; (3) sale to enterprises duly
registered and accredited with the Subic Bay Metropolitan Authority pursuant to
RA 7227; (4) sales to registered export traders operating bonded trading
warehouses supplying raw materials in the manufacture of export products
under guidelines to be set by the Board in consultation with the Bureau of
Internal Revenue (BIR) and the Bureau of Customs (BOC); (5) sales to diplomatic
missions and other agencies and/or instrumentalities granted tax immunities,
of locally manufactured, assembled or repacked products whether paid for in
foreign currency or not.
xxx xxx xxx.
(6) The sale of goods, supplies, equipment and fuel to persons engaged
in international shipping or international air transport operations; Provided, that
the same is limited to goods, supplies, equipment and fuel pertaining to or
attributable to the transport of goods and passengers from a port in the
Philippines directly to a foreign port, or vice versa, without docking or stopping
at any other port in the Philippines unless the docking or stopping at any other
Philippine port is for the purpose of unloading passengers and/or cargoes that
originated from abroad, or to load passengers and/or cargoes bound for abroad;
Provided, further, that if any portion of such fuel, goods or supplies is used for
purposes other than that mentioned in this paragraph, such portion of fuel
goods and supplies shall be subject to twelve percent (12%) output VAT starting
February 1, 2006.
(b) Foreign Currency Denominated Sale. — . . .
xxx xxx xxx.
(c) Sales to Persons or Entities Deemed Tax-exempt Under Special Law
or International Agreement. — Sale of goods or property to persons or entities
who are tax-exempt under special laws or international agreements to which the
Philippines is a signatory, such as, Asian Development Bank (ADB),
International Rice Research Institute (IRRI), etc., shall be effectively subject to
VAT at zero-rate."
SECTION 6. Effectively Zero-Rated. — Sec. 4.106-6 of RR No. 16-2005 is hereby
amended to read as follows:
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 "SEC. 4.106-6. Meaning of the term 'Effectively Zero-Rated Sale of Goods
and Properties'. — The term 'effectively zero-rated sale of goods and properties'
shall refer to the local sale of goods and properties by a VAT-registered person
to a person or entity who was granted indirect tax exemption under special laws
or international agreement."
SECTION 7. Transactions Deemed Sale . — Sec. 4.106-7 of RR No. 16-2005 is
hereby amended to read as follows:
"SEC. 4.106-7. Transactions Deemed Sale. — . . .
xxx xxx xxx.
(b) The Commissioner of Internal Revenue shall determine the
appropriate tax base in cases where a transaction is deemed a sale, barter or
exchange of goods or properties under Sec. 4.106-7 paragraph (a) hereof, or
where the gross selling price is unreasonably lower than the actual market
value. The gross selling price is unreasonably lower than the actual market
value if it is lower by more than 30% of the actual market value of the same
goods of the same quantity and quality sold in the immediate locality on or
nearest the date of sale. Nonetheless, if one of the parties in the transaction is
the government as de ned and contemplated under the Administrative Code,
the output VAT on the transaction shall be based on the actual selling price.
xxx xxx xxx."
SECTION 8. Change or Cessation of Status as VAT-Registered Person . — Sec.
4.106-8 of RR No. 16-2005 is hereby amended to read as follows:
"SEC. 4.106-8. Change or Cessation of Status as VAT-registered Person .
—....
(b) Not subject to output tax
The VAT shall not apply to goods or properties existing as of the
occurrence of the following:
(1) Change of control of a corporation by the acquisition of the
controlling interest of such corporation by another stockholder or group of
stockholders. The goods or properties used in business or those comprising the
stock-in-trade of the corporation, having a change in corporate control, will not
be considered sold, bartered or exchanged despite the change in the ownership
interest in the said corporation.
Illustration: Abel Corporation is a merchandising concern
and has an inventory of goods for sale amounting to Php 1
million. Nel Corporation, a real estate developer, exchanged its real
estate properties for the shares of stocks of Abel Corporation
resulting to the acquisition of corporate control. The inventory of
goods owned by Abel Corporation (Php 1 million worth) is not
subject to output tax despite the change in corporate control
because the same corporation still owns them. This is in
recognition of the separate and distinct personality of the
corporation from its stockholders. However, the exchange of real
estate properties held for sale or for lease, for shares of stocks,
whether resulting to corporate control or not, is subject to VAT,
subject to exceptions provided under Section 4.106-3 hereof. On
the other hand, if the transferee of the transferred real property by
a real estate dealer is another real estate dealer, in an exchange
where the transferor gains control of the transferee-corporation, no
output VAT is imposable on the said transfer.
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 (2) Change in the trade or corporate name of the business;
(3) Merger or consolidation of corporations. The unused input tax of the
dissolved corporation, as of the date of merger or consolidation, shall be
absorbed by the surviving or new corporation."
SECTION 9. VAT on the Sale of Services and Use or Lease of Properties . — Sec.
4.108-1 of RR No. 16-2005 is hereby amended to read as follows:
"SEC. 4.108-1. VAT on the Sale of Services and Use or Lease of
Properties. — Sale or exchange of services, as well as the use or lease of
properties, as de ned in Sec. 108(A) of the Tax Code shall be subject to VAT,
equivalent to twelve percent (12%) of the gross receipts (excluding VAT) starting
February 1, 2006."
SECTION 10. De nitions and Speci c Rules on Selected Services . — Sec. 4.108-3
of RR No. 16-2005 is hereby amended to read as follows:
"SEC. 4.108-3. Definitions and Specific Rules on Selected Services. —
xxx xxx xxx.
(e) Domestic common carriers by air and sea are subject to twelve
percent (12%) VAT on their gross receipts from their transport of passengers,
goods or cargoes from one place in the Philippines to another place in the
Philippines starting Feb. 1, 2006.
(f) Sale of electricity by generation, transmission, and distribution
companies shall be subject to twelve percent (12%) VAT on their gross receipts
starting Feb. 1, 2006; Provided, that sale of power or fuel generated through
renewable sources of energy such as, but not limited to, biomass, solar, wind,
hydropower, geothermal, ocean energy, and other emerging energy sources
using technologies such as fuel cells and hydrogen fuels shall be subject to 0%
VAT.
xxx xxx xxx.
(h) Services of franchise grantees . . . .
Gross receipts of all other franchisees, other than those covered by Sec.
119 of the Tax Code, regardless of how their franchises may have been granted,
shall be subject to the twelve percent (12%) VAT imposed under Sec. 108 of the
Tax Code starting Feb. 1, 2006. This includes among others, the Philippine and
Amusement Gaming Corporation (PAGCOR), and its licensees or franchisees.
xxx xxx xxx.
(i) Non-life insurance companies including surety, delity, indemnity and
bonding companies are subject to VAT. They are not liable to the payment of
the premium tax under Sec. 123 of the Tax Code.
'Non-life insurance companies' including surety, delity, indemnity and
bonding companies, shall include all individuals, partnerships, associations, or
corporations, including professional reinsurers de ned in Sec. 280 of PD 612,
otherwise known as the Insurance Code of the Philippines, mutual bene t
associations and government-owned or controlled corporations, engaging in the
business of property insurance, as distinguished from insurance on human
lives, health, accident and insurance appertaining thereto or connected therewith
which shall be subject to the percentage tax under Sec. 123 of the Tax Code.
The gross receipts from non-life insurance shall mean total premiums
collected whether paid in money, notes, credits or any substitute for money.
Non-life insurance premiums are subject to VAT whereas non-life
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 reinsurance premiums are not subject to VAT, the latter being already subjected
to VAT upon receipt of the insurance premiums . Insurance and reinsurance
commissions, whether life of non-life, are subject to VAT.
(j) Pre-need Companies . . . .
xxx xxx xxx."
SECTION 11. Gross Receipts. — Sec. 4.108-4 of RR No. 16-2005 is hereby
amended to read as follows:
"SEC. 4.108-4. De nition of Gross Receipts . — 'Gross receipts' refers to
the total amount of money or its equivalent representing the contract price,
compensation, service fee, rental or royalty, including the amount charged for
materials supplied with the services and deposits applied as payments for
services rendered and advance payments actually or constructively received
during the taxable period for the services performed or to be performed for
another person, excluding the VAT, except those amounts earmarked for
payment to unrelated third (3rd) party or received as reimbursement for advance
payment on behalf of another which do not redound to the benefit of the payor.
A payment is a payment to a third (3rd) party if the same is made to
settle an obligation of another person, e.g., customer or client, to the said third
party, which obligation is evidenced by the sales invoice/o cial receipt issued
by said third party to the obligor/debtor (e.g., customer or client of the payor of
the obligation).
An advance payment is an advance payment on behalf of another if the
same is paid to a third (3rd) party for a present or future obligation of said
another party which obligation is evidenced by a sales invoice/o cial receipt
issued by the obligee/creditor to the obligor/debtor (i.e., the aforementioned
"another party") for the sale of goods or services by the former to the latter.
For this purpose 'unrelated party' shall not include taxpayer's employees,
partners, a liates (parent, subsidiary and other related companies), relatives by
consanguinity or a nity within the fourth (4th) civil degree, and trust fund
where the taxpayer is the trustor, trustee or bene ciary, even if covered by an
agreement to the contrary. aHcACT

'Constructive receipt' occurs when the money consideration or its

equivalent is placed at the control of the person who rendered the service
without restrictions by the payor. The following are examples of constructive
receipts:
(1.) deposits in banks which are made available to the seller of
services without restrictions;
(2.) issuance by the debtor of a notice to offset any debt or
obligation and acceptance thereof by the seller as payment
for services rendered; and
(3.) transfer of the amounts retained by the payor to the account
of the contractor."
SECTION 12. Zero-Rated Sale of Services. — Sec. 4.108-5(b)(4) of RR No. 16-
2005 is hereby amended to read as follows:
"SEC. 4.108-5. Zero-Rated Sale of Services. —
xxx xxx xxx.
(b) Transactions Subject to Zero Percent (0%) VAT Rate. — . . .
(4) Services rendered to persons engaged in international shipping or air
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 transport operations, including leases of property for use thereof; Provided,
however, that the services referred to herein shall not pertain to those made to
common carriers by air and sea relative to their transport of passengers, goods
or cargoes from one place in the Philippines to another place in the Philippines,
the same being subject to twelve percent (12%) VAT under Sec. 108 of the
Tax Code starting Feb. 1, 2006;
xxx xxx xxx."
SECTION 13. Effectively Zero-Rated Sale of Services. — Sec. 4.108-6 of RR No.
16-2005 is hereby amended to read as follows:
"SEC. 4.108-6. Meaning of the term 'Effectively Zero-Rated Sale of
Services'. The term 'effectively zero-rated sales of services' shall refer to the
local sale of services by a VAT-registered person to a person or entity who was
granted indirect tax exemption under special laws or international agreement."
SECTION 14. VAT-Exempt Transactions. — Sec. 4.109-1(B)(1) of RR No. 16-2005
is hereby amended to read as follows:
"SEC. 4.109-1. VAT-Exempt Transactions. —
xxx xxx xxx.
(B) Exempt transactions. — Subject to the provisions of Sec. 4.109-2
hereof, the following transactions shall be exempt from VAT:
xxx xxx xxx.
(I) Sales by agricultural cooperatives duly registered and in good
standing with the Cooperative Development Authority (CDA) to their members,
as well as sale of their produce, whether in its original state or processed form,
to non-members, their importation 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.
Sale by agricultural cooperatives to non-members can only be exempted
from VAT if the producer of the agricultural products sold is the cooperative
itself. If the cooperative is not the producer (e.g., trader), then only those sales to
its members shall be exempted from VAT ;
It is to be reiterated however, that sale or importation of agricultural food
products in their original state is exempt from VAT irrespective of the seller and
buyer thereof, pursuant to Subsection (a) hereof.
xxx xxx xxx.
(p) The following sales of real properties are exempt from VAT, namely:
(1) Sale of real properties not primarily held for sale to customers or held
for lease in the ordinary course of trade or business.
However, even if the real property is not primarily held for sale to
customers or held for lease in the ordinary course of trade or business but the
same is used in the trade or business of the seller, the sale thereof shall be
subject to VAT being a transaction incidental to the taxpayer's main business.
xxx xxx xxx.
(q) . . . .
The term 'residential units' shall refer to apartments and houses & lots
used for residential purposes, and buildings or parts or units thereof used solely
as dwelling places (e.g., dormitories, rooms and bed spaces) except motels,
motel rooms, hotels, hotel rooms, lodging houses, inns and pension houses.
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 The term 'unit' shall mean an apartment unit in the case of apartments,
house in the case of residential houses; per person in the case of dormitories,
boarding houses and bed spaces; and per room in case of rooms for rent.
xxx xxx xxx.
(t) Importation of life-saving equipment, safety and rescue equipment
and communication and navigational safety equipment, steel plates and other
metal plates including marine-grade aluminum plates, used for shipping
transport operations; Provided, that the exemption shall be subject to the
provisions of Section 4 of Republic Act No. 9295, otherwise known as 'The
Domestic Shipping Development Act of 2004';
(u) Importation of capital equipment, machinery, spare parts, life-saving
and navigational equipment, steel plates and other metal plates including
marine-grade aluminum plates to be used in the construction, repair, renovation
or alteration of any merchant marine vessel operated or to be operated in the
domestic trade. Provided, that the exemption shall be subject to the provisions
of Section 19 of Republic Act No. 9295, otherwise known as ‘The Domestic
Shipping Development Act of 2004';
(v) Importation of fuel, goods and supplies by persons engaged in
international shipping or air transport operations; Provided, that the said fuel,
goods and supplies shall be used exclusively or shall pertain to the transport of
goods and/or passenger from a port in the Philippines directly to a foreign port,
or vice versa, without docking or stopping at any other port in the Philippines
unless the docking or stopping at any other Philippine port is for the purpose of
unloading passengers and/or cargoes that originated from abroad, or to load
passengers and/or cargoes bound for abroad; Provided, further, that if any
portion of such fuel, goods or supplies is used for purposes other than that
mentioned in this paragraph, such portion of fuel, goods and supplies shall be
subject to twelve percent (12%) VAT starting February 1, 2006;
(w) Services of banks, non-bank nancial intermediaries performing
quasi-banking functions, and other non-bank nancial intermediaries, such as
money changers and pawnshops, subject to percentage tax under Secs. 121
and 122, respectively , of the Tax Code; and
(x) Sale or lease of goods or properties or the performance of services
other than the transactions mentioned in the preceding paragraphs, the gross
annual sales and/or receipts do not exceed the amount of One Million Five
Hundred Thousand Pesos (P1,500,000.00). Provided, that not later than January
31, 2009 and every three (3) years thereafter, the amount of P1,500,000.00 shall
be adjusted to its present value using the Consumer Price Index, as published by
the NSO.
For purposes of the threshold of P1,500,000.00, the husband and the
wife shall be considered separate taxpayers. However, the aggregation rule for
each taxpayer shall apply, for instance, if a professional, aside from the practice
of his profession, also derives revenue from other lines of business which are
otherwise subject to VAT, the same shall be combined for purposes of
determining whether the threshold has been exceeded. Thus, the VAT-exempt
sale shall not be included in determining the threshold."
SECTION 15. VAT Registered Person may Elect that Exempt Transactions Under
Sec. 4.109-1 be Registered for VAT Purposes . — Sec. 4.109-2 of RR No. 16-2005 is
hereby amended to read as follows:
"SEC. 4.109-2. Exempt Transactions May be Registered for VAT
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 Purposes. — A VAT-registered person may, in relation to Sec. 9.236-1(c) of these
Regulations, elect that the exemption in S ec. 4.109-1(B) hereof shall not apply to
his sales of goods or properties or services. Once the election is made, it shall be
irrevocable for a period of three (3) years counted from the quarter when the
election was made except for franchise grantees of radio and TV broadcasting
whose annual gross receipts for the preceding year do not exceed ten million
pesos (P10,000,000.00) where the option becomes perpetually irrevocable."
SECTION 16. Input Tax on Depreciable Goods . — Sec. 4.110-3 of RR No. 16-2005
is hereby amended to read as follows:
"SEC. 4.110-3. Claim for Input Tax on Depreciable Goods. — . . .
(a) . . . .
(b) If the estimated useful life of a capital good is less than ve (5) years
— The 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 of a
capital good. The claim for input tax credit shall commence in the month that
the capital goods were acquired. cEAIHa

Where the aggregate acquisition cost (exclusive of VAT) of the existing or

nished depreciable capital goods purchased or imported during any calendar
month does not exceed one million pesos (P1,000,000.00), the total input taxes
will be allowable as credit against output tax in the month of acquisition.
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 Sec. 34(F) of the Tax Code, used directly or indirectly in the production or
sale of taxable goods or services.
The aggregate acquisition cost of depreciable assets in any calendar
month refers to the total price, excluding the VAT , agreed upon for one or more
assets acquired and not on the payments actually made during the calendar
month. Thus, an asset acquired on installment for an acquisition cost of more
than P1,000,000.00, excluding the VAT , will be subject to the amortization of
input tax despite the fact that the monthly payments/installments may not
exceed P1,000,000.00.
xxx xxx xxx.
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 item is reclassi ed and the reclassi ed asset
is capitalized and depreciated.
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.
Until such time the construction has been completed, it will not qualify as
capital goods as herein de ned, in which case, input tax credit on such
transaction can be recognized in the month the payment was made; Provided,
that an o cial receipt of payment has been issued based on the progress
billings.
In case of contract for the sale of service where only the labor will be
supplied by the contractor and the 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 a progress billings
while input tax on the purchase of materials shall be recognized at the time the
materials were purchased.

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 Once the input tax has already been claimed while the construction is still
in progress, no additional input tax can be claimed upon completion of the
asset when it has been reclassi ed as a depreciable capital asset and
depreciated."
SECTION 17. Input Tax on Mixed Transactions. — Sec. 4.110-4 of RR No. 16-2005
is hereby amended to read as follows:
"SEC. 4.110-4. Apportionment of Input Tax on Mixed Transactions. — . . . .
1. All the 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 government-owned or controlled corporations (GOCCs) shall
not be credited against output taxes arising from sales to non-Government
entities.
Claims for VAT refund/Tax Credit Certi cate (TCC) with the Bureau of
Internal Revenue, Board of Investment, and One-Stop-Shop and Duty Drawback
Center of the Dept. of Finance should be deducted from the allowable input tax
that are attributable to zero-rated sales.
2. . . .
Illustration: ERA Corporation has the following sales during the month:
Sale to private entities subject to 12% P100,000.00
Sale to private entities subject to 0% 100,000.00
Sale of exempt goods 100,000.00
Sale to gov't. subjected to
5% final VAT Withholding 100,000.00
—————
Total Sales for the month P400,000.00
=========
The following input taxes were passed on by its VAT suppliers:
Input tax on taxable goods 12% P5,000.00
Input tax on zero-rated sales 3,000.00
Input tax on sale of exempt goods 2,000.00
Input tax on sale to government 4,000.00
Input tax on depreciable capital
good not attributable to any
specific activity (monthly
amortization for 60 months) P20,000.00
========
A. The input tax attributable to sales to private entities subject to 12%, for
the month, shall be computed as follows:
Input tax directly attributable to sale subject to 12% P5,000.00
Ratable portion of the input tax not
directly attributable to any activity:
Taxable sales (12%) x Amount of
Total Sales input tax
not directly
attributable to
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 any activity
P100,000.00 X P20,000.00 — P5,000.00
400,000.00
Total input tax attributable to sales to private entities
for the month — P10,000.00
========
B. The input tax attributable to zero-rated sales for the month shall be
computed as follows:
Input tax directly attributable to zero-rated sale — P 3,000.00
Ratable portion of the input tax not
directly attributable to any activity:
Taxable sales (0% ) x Amount of
Total Sales input tax
not directly
attributable to
any activity
P100,000.00 X P20,000.00 — P5,000.00
400,000.00
Total input tax attributable to zero-rated sales for
the month P8,000.00
=======
C. The input tax attributable to VAT-exempt sales for the month shall be
computed as follows:
Input tax directly attributable to VAT-exempt sale — P 2,000.00
Ratable portion of the input tax not
directly attributable to any activity:
VAT-exempt sales x Amount of
Total Sales input tax
not directly
attributable to
any activity
P100,000.00 X P20,000.00 — P5,000.00
400,000.00
Total input tax attributable to VAT-exempt sales — P7,000.00
=======
D. The input tax attributable to sales to government for the month shall
be computed as follows:
Input tax directly attributable to sale to gov't. P 4,000.00
Ratable portion of the input tax not
directly attributable to any activity:
Taxable sales to government x Amount of
Total Sales input tax
not directly
attributable to
any activity
P100,000.00 X P20,000.00 — P5,000.00
400,000.00

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 Total input tax attributable to sale to gov't. — P9,000.00
The table below shows a summary of the foregoing transactions of ERA
Corporation:

Input VAT
Creditable Excess Unrecoverable
not
Output Input VAT directly Total Input Net VAT Input Input Input
VAT VAT
VAT directly Attributable Input VAT Payable VAT
for for
to any carry-
Attributable VAT refund
Activity over
Sale
Subject to
12%
VAT 12,000 5,000 5,000 10,000 10,000 2,000 0 0 0
Sale
Subject to
0%
VAT 0 3,000 5,000 8,000 8,000 0 0 8,000 0
Sale of
Exempt
Goods 0 2,000 5,000 7,000 0 0 0 0 7,000*
Sale to
Government
subject to
5% Final
withholding
12,000 4,000 5,000 9,000 7,000**5,000*** 0 0 2,000*
VAT
* These amounts are not available for input tax credit but may be
recognized as cost or expense.
** Standard input VAT of 7% on sales to Government as provided in SEC.
4.114-2(a).
*** Withheld by Government entity as Final Withholding VAT.
xxx xxx xxx."
SECTION 18. Determination of the Output Tax and VAT Payable and Computation
of VAT Payable or Excess Tax Credits . — Sec. 4.110-6 of RR No. 16-2005 is hereby
amended to read as follows:
"SEC. 4.110-6. Determination of the Output Tax and VAT Payable and
Computation of VAT Payable or Excess Tax Credits. . . .
There shall be allowed as a deduction from the output tax the amount of
input tax deductible as determined under Sec. 4.110-1 to 4.110-5 of these
Regulations to arrive at VAT payable on the monthly declaration and the
quarterly VAT returns."
SECTION 19. VAT Payable (Excess Output) or Excess Input Tax . — Sec. 4.110-7
of RR No. 16-2005, as last amended by RR No. 2-2007, is hereby further amended to
read as follows:
"SEC. 4.110-7. VAT Payable (Excess Output) or Excess Input Tax.
xxx xxx xxx.
(b.) If the input tax inclusive of input tax carried over from the previous quarter
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 exceeds the output tax, the excess input tax shall be carried over to the
succeeding quarter or quarters; Provided, however, that any input tax
attributable to zero-rated sales by a VAT-registered person may at his option be
refunded or applied for a tax credit certi cate which may be used in the
payment of internal revenue taxes, subject to the limitations as may be provided
for by law, as well as, other implementing rules.
Illustration:
For a given taxable quarter, XYZ Corporation has output VAT of 100 and
input VAT of 110. Since input tax exceeds the output tax for such taxable
quarter, there is an excess input tax at the end of the quarter of 10 which may be
carried over to the next quarter or quarters."
SECTION 20. Invoicing and Recording Deemed Sale Transactions . — Sec. 4.113-2
of RR No. 16-2005 is hereby amended to read as follows:
"SEC. 4.113-2. Invoicing and Recording Deemed Sale Transactions.
xxx xxx xxx.
Example: "A" at the time of retirement, had 1,000 pieces of merchandise
which was deemed sold at a value of P20,000.00 with an output tax of
P2,000.00. After retirement, "A" sold to "B", 500 pieces for P12,000.00. In the
contract of sale or invoice, "A" should state the sales invoice number wherein the
output tax on "deemed sale" was imposed and the corresponding tax paid on
the 500 pieces is P1,000.00, which is included in the P12,000.00, or he should
indicate it separately as follows:
Gross selling price P11,000.00
VAT previously paid on "deemed sale" 1,000.00
—————
Total P12,000.00
In this case, "B" shall be entitled only to P1,000 as input tax and not
12/112 x 12,000."
SECTION 21. Filing of Return and Payment of VAT. — SEC. 4.114-1 is hereby
amended to read as follows:
"SEC. 4.114-1. Filing of Return and Payment of VAT . —
(A) Filing of Return. — . . . .
xxx xxx xxx.
(B) Payment of VAT
I. Advance Payment. — . . . .
1. Sale of Refined Sugar
(a) . . . .
(b) . . . .
(c) Basis for Determining the Amount of Advance VAT
Payment. —
i. Base Price. — The amount of advance VAT payment shall
be determined by applying VAT rate of 12% on the applicable base
price of P850.00 per 50 kg. bag for re ned sugar produced by a
sugar re nery, and P760.00 per 50 kg. bag for re ned sugar
produced by a sugar mill.
ii. Subsequent Base Price Adjustments. —
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 xxx xxx xxx.
(d) . . . .
(e) . . . .
(f) . . . .
2. Sale of Flour
(a) . . . .
(b) . . . .
(c) . . . .
(d) Basis of Determining the Amount of Advance VAT
Payment. —
i. Determination of advance VAT . — The amount of
advance VAT payment shall be determined by applying VAT rate
of 12% on the tax base.
ii. Tax Base. — . . . .
iii. Subsequent tax base adjustments. — . . . .
(e) . . . .
(f) . . . .
(C) . . . .
(D) . . . ."
SECTION 22. Withholding of VAT. — Sec. 4.114-2 of RR No. 16-2005 is hereby
amended to read as follows:
"SEC. 4.114-2. Withholding of VAT on Government Money Payments and
Payments to Non-Residents. —
(a) 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/or of
services taxed at twelve percent (12%) VAT pursuant to Secs. 106 and 108 of
the Tax Code, deduct and withhold a nal VAT due at the rate of ve percent
(5%) of the gross payment thereof. aIcDCH

The ve percent (5%) nal VAT withholding rate shall represent the net
VAT payable of the seller. 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 GOCCs in lieu of the actual input VAT directly attributable or ratably
apportioned to such sales. Should actual input VAT attributable to sale to
government exceeds seven percent (7%) of gross payments, the excess may
form part of the sellers' expense or cost. On the other hand, if actual input VAT
attributable to sale to government is less than seven percent (7%) of gross
payment, the difference must be closed to expense or cost.
(b) The government or any of its political subdivisions, instrumentalities
or agencies including GOCCs, as well as private corporation, individuals, estates
and trusts, whether large or non-large taxpayers, shall withhold twelve percent
(12%) VAT, starting February 1, 2006, with respect to the following payments:
(1) Lease or use of properties or property rights owned by non-residents;
and
(2) Other services rendered in the Philippines by non-residents.
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 xxx xxx xxx."
SECTION 23. Issuance of Tax Credit Certi cates for Unutilized Advance VAT
Payments. — Sec. 8.229-1 is hereby added to the provisions of RR 16-2005, to read as
follows:
"SEC. 8.229-1. Issuance of Tax Credit Certi cate for Unutilized Advance
VAT Payments. —
The advance payments made by the seller/owner of re ned sugar and
importer/miller of wheat/ our shall be allowed as credit against their output tax
on the actual gross selling price of re ned sugar/ our. However, advance
payments which remains unutilized at the end of 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 led with the BIR by the
seller/owner or importer/miller within two (2) years from the date of ling of the
4th quarter VAT return of the year such advance payments were made, or if led
out of time, from the last day prescribed by law for filing the return.
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.
Advanced VAT payments which remained unutilized for more than one
(1) year prior to the effectivity of these regulations may, at the option of the
seller/owner of the re ned sugar or importer/miller of wheat/ our, be the
subject of application for TCC to be led within two (2) years from the date of
ling of the last quarterly VAT return where the unutilized advance VAT
payments appeared, or if led out of time, from the last day prescribed by law
for filing the return.
Issuance of TCC shall be limited to the unutilized advance VAT payment
and shall not include excess input tax. Issuance of TCC for input tax attributable
to zero-rated sales shall be covered by a separate application for TCC following
applicable rules."
SECTION 24. Registration. — Sec. 9.236-1(b) and (c) of RR No. 16-2005 is hereby
amended to read as follows:
"SEC. 9.236-1. Registration of VAT Taxpayers. —
xxx xxx xxx.
(b) Mandatory :
xxx xxx xxx.
Moreover, franchise grantees of radio and television broadcasting, whose
gross annual receipt for the preceding taxable year exceeded P10,000,000.00
shall register within thirty (30) days from the end of the taxable year.
(c) Optional VAT Registration:
xxx xxx xxx.
The above-stated taxpayers may apply for VAT registration not later than
ten (10) days before the beginning of the taxable quarter and shall pay the
registration fee prescribed under sub-paragraph (a) of this Section, unless they
have already paid at the beginning of the year. In any case, the Commissioner of
Internal Revenue may, for administrative reason deny any application for
registration. Once registered as VAT person, the taxpayer shall be liable to
output tax and be entitled to input tax credit beginning on the rst day of the
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 month following registration."
SECTION 25. Registration of Non-VAT or Exempt Taxpayer . — Sec. 9.236-2 of RR
No. 16-2005 is hereby amended to read as follows:
"SEC. 9.236-2. Registration of Non-VAT or Exempt Taxpayer. —. . . .
5) Radio and TV broadcasting whose gross annual receipts do not
exceed ten million pesos (P10,000,000) and which do not opt to be VAT
registered;
6.) PEZA and other ecozone registered enterprises enjoying the
preferential tax rate of 5% in lieu of all taxes;
7.) SBMA and other free port zone-registered enterprises enjoying the
preferential tax rate of 5% in lieu of all taxes."
SECTION 26. Repealing Clause. — The provisions of RR 16-2005 and all other
issuances inconsistent herewith are hereby repealed, modi ed or amended
accordingly. EIaDHS

SECTION 27. Effectivity. — These Regulations shall take effect after fteen (15)
days following its publication in any newspaper of general circulation or in the O cial
Gazette.

(SGD.) MARGARITO B. TEVES

Secretary
Department of Finance

Recommending Approval:

(SGD.) JOSE MARIO C. BUÑAG

Commissioner of Internal Revenue

Published in Manila Bulletin on March 22, 2007.

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