Under Philippine law, the National Internal Revenue Code of 1997 (NIRC), as amended by the Tax Reform for Acceleration and Inclusion (TRAIN) Law (Republic Act No. 10963) and the Ease of Paying Taxes Act (Republic Act No. 11976), provides a detailed framework for Value-Added Tax (VAT) in the country. One of the critical aspects of the VAT system is the concept of "transactions deemed sale," which refers to certain transactions that, while not involving actual sales to customers in the traditional sense, are treated as taxable sales for VAT purposes. The intent is to prevent VAT leakage and ensure that input taxes on certain transactions are properly subjected to VAT output.

1. Legal Basis for Transactions Deemed Sale

Under Section 106 of the NIRC, as amended, certain transactions are designated as "deemed sale" and subject to VAT. The Bureau of Internal Revenue (BIR) closely monitors these transactions to ensure compliance. The TRAIN Law enhanced the VAT system, primarily by adjusting VAT-exempt thresholds and simplifying tax compliance. The Ease of Paying Taxes Act further streamlined procedures, although it did not substantively alter the transactions deemed sale.

2. Types of Transactions Deemed Sale Subject to VAT

The NIRC specifies four primary categories of transactions deemed sale:

a. Transfer, Use, or Consumption Not in the Course of Business
This covers instances where goods originally intended for sale are taken out of inventory for purposes other than selling. Examples include:

Goods withdrawn for personal use by the owner or employees.
Merchandise transferred for non-business purposes, such as for charity or promotional gifts.

Such transfers are taxed because the goods have effectively exited the taxable supply chain, and VAT input on these items has already been claimed.

b. Distribution or Transfer to Shareholders, Investors, or Creditors
When a company distributes property or goods to its shareholders, investors, or creditors, it is considered a transaction deemed sale, subject to VAT. This category includes instances such as:

Dividends in the form of goods or property.
Payment of debt or claims with company assets, which equates to disposing of goods or property for non-sales purposes.

This provision ensures that property distributions do not avoid VAT, ensuring equitable tax treatment between cash and in-kind transfers.

c. Consignment of Goods if Not Sold Within 60 Days
Consigned goods are items sent to another party with the intent to sell on the consignor’s behalf. Under the NIRC, if consigned goods are not sold within 60 days, the law presumes they have been disposed of and are thus deemed sold, requiring VAT. This provision:

Prevents indefinite VAT deferral through consignment.
Encourages timely reporting of sales to ensure that VAT liability is recognized promptly.

Consigned goods treated as deemed sold under the 60-day rule remain subject to VAT, even if ultimately returned to the consignor.

d. Retirement from or Cessation of Business
When a VAT-registered business ceases operations or retires from business, its remaining goods and assets are considered transactions deemed sale and subject to VAT. This is because:

Inventory and assets initially acquired for resale or business use exit the VAT system without a subsequent sale.
The deemed sale rule applies to all goods, inventory, or capital assets at the point of cessation, treating them as taxable to capture final VAT.

This provision ensures that companies do not avoid VAT on remaining stock by ceasing operations.

3. Tax Basis for Transactions Deemed Sale

For transactions deemed sale, VAT is computed based on the fair market value or actual acquisition cost of the goods, whichever is applicable. The VAT rate on these transactions is currently set at 12%, as per Section 106(A) of the NIRC.

Acquisition Cost: For goods acquired by the taxpayer, the VAT is based on the acquisition cost.
Market Value: If fair market value exceeds acquisition cost, the higher value is used to ensure that the tax accurately reflects the good’s market worth.

4. VAT Input Deduction and Reporting Requirements

Businesses engaging in transactions deemed sale must ensure they fulfill all reporting obligations, especially in filing VAT returns. Key points include:

Input Tax Deductions: Input VAT incurred on goods in transactions deemed sale can generally be claimed, but only if properly documented and substantiated.
Declaration in VAT Returns: VAT on deemed sales must be declared in the taxpayer’s VAT return within the relevant quarter, with supporting schedules indicating the nature of the transactions and basis for VAT.

Failure to declare or remit VAT on deemed sales can result in penalties, including surcharges, interest, and possible compromise penalties under the NIRC.

5. Compliance and Record-Keeping Requirements

To comply with VAT requirements on transactions deemed sale, businesses must maintain accurate and comprehensive records of all such transactions, including:

Inventory Withdrawals: Detailed records of goods withdrawn from inventory for non-business use.
Shareholder and Creditor Distributions: Documentation of distributions to shareholders or creditors, especially if settled in-kind.
Consignment Logs: Records of goods consigned to third parties, noting dates sent and dates of actual sale or return.
Business Cessation Documentation: Records detailing inventory and asset status upon business cessation, including a final inventory valuation report for VAT assessment.

The TRAIN Law and subsequent regulations underscore the importance of accurate records and tax filings, reinforcing compliance through stringent audits and potential penalties for inaccuracies or under-reporting.

6. Penalties for Non-Compliance

Non-compliance with VAT obligations on transactions deemed sale may lead to various sanctions, including:

Surcharges and Interest: For failure to pay or under-declaration of VAT.
Compromise Penalties: Set by the BIR for cases where settlement is preferred over litigation.
Possible Suspension or Closure of Business: In extreme cases, for repeated violations, as authorized under the Tax Code.

7. Interpretative BIR Rulings and Court Decisions

Interpretative rulings and case law from the Court of Tax Appeals and Supreme Court clarify ambiguities in transactions deemed sale. Recent BIR rulings, post-TRAIN Law, have maintained that deemed sale transactions must be consistently reported to avoid VAT leakage and uphold the fairness of the VAT system.

In summary, under the NIRC as amended, transactions deemed sale are a crucial part of the VAT system in the Philippines, ensuring that certain non-traditional transactions are still captured within the VAT framework. Accurate record-keeping, compliance with reporting requirements, and an understanding of the tax basis are essential for businesses to avoid penalties and fulfill their VAT obligations effectively.