VAT-exempt transaction; VAT-exempt party

The object of exemption from the value-added tax (VAT) may either be the transaction itself or any of the parties to the transaction. (G.R. No. 153866. February 11, 2005)

An exempt transaction, on the one hand, involves goods or services which, by their nature, are specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the tax status -- VAT-exempt or not -- of the party to the transaction. Indeed, such transaction is not subject to the VAT, but the seller is not allowed any tax refund of or credit for any input taxes paid.

It is important to reiterate here that the seller in a VAT-exempt transaction is not entitled to a tax refund or a tax credit for any input taxes paid.

An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code, a special law or an international agreement to which the Philippines is a signatory, and by virtue of which its taxable transactions become exempt from the VAT. Such party is also not subject to the VAT, but may be allowed a tax refund of or credit for input taxes paid, depending on its registration as a VAT or non-VAT taxpayer. (G.R. No. 153866. February 11, 2005)The VAT is a tax on consumption, the amount of which may be shifted or passed on by the seller to the purchaser of the goods, properties or services. While the liability is imposed on one person, the burden may be passed on to another. Therefore, if a special law merely exempts a party as a seller from its direct liability for payment of the VAT, but does not relieve the same party as a purchaser from its indirect burden of the VAT shifted to it by its VAT-registered suppliers, the purchase transaction is not exempt. (G.R. No. 153866. February 11, 2005)

Special laws may certainly exempt transactions from the VAT. However, the Tax Code provides that those falling under Presidential Decree No. (PD) 66 are not. PD 66 is the precursor of Republic Act No. (RA) 7916. If an entity is registered under RA 7916, its purchase transactions are, therefore, not VAT-exempt. These are subject to the VAT and the entity is required to register.

Its sales transactions, however, will either be zero-rated or taxed at the standard rate of 12 percent, depending again on the application of the destination principle.

If a person enters into such sales transactions with a purchaser -- usually in a foreign country -- for use or consumption outside the Philippines, these shall be subject to 0 percent. If entered into with a purchaser for use or consumption in the Philippines, then these shall be subject to 12 percent, unless the purchaser is exempt from the indirect burden of the VAT, in which case it shall also be zero-rated. (G.R. No. 153866. February 11, 2005)

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