Below is a general overview of the “deemed sale” concept in the Philippines and how it applies—or, in many cases, does not apply—to non-VAT taxpayers upon business closure. Although “deemed sale” is typically associated with VAT-registered taxpayers under the National Internal Revenue Code (NIRC), there are still important points that non-VAT taxpayers should know when winding down a business. This discussion will also include references to pertinent Bureau of Internal Revenue (BIR) issuances and the typical steps involved in the closure process.

1. Introduction

In the Philippine tax system, the concept of “deemed sale” is primarily encountered in the realm of Value-Added Tax (VAT). Under Section 106(C) of the National Internal Revenue Code (NIRC), certain transactions are treated as though a sale has occurred for VAT purposes, even if there is technically no arm’s-length sale. One notable trigger for these “deemed sale” rules is the cessation or retirement of a VAT-registered taxpayer’s business.

For non-VAT taxpayers, many of these specific deemed sale provisions (especially those tied to output VAT) do not apply in the same manner, as non-VAT businesses are not subject to the output-input VAT system. Nonetheless, there are still several legal and practical considerations for non-VAT taxpayers regarding their remaining inventory, assets, and compliance requirements upon closing a business.

2. Legal Framework

NIRC Provisions on Deemed Sale (Section 106(C))
- The legal basis for “deemed sale transactions” is found in Section 106(C) of the NIRC and various BIR Revenue Regulations (RRs) implementing that provision.
- These rules spell out when goods are considered “sold,” even without an actual sale, for the purpose of VAT computation.
Revenue Regulations and BIR Issuances
- The BIR has issued numerous rulings and Revenue Regulations clarifying the scope of deemed sale and the obligations of taxpayers upon business closure.
- However, these are generally aimed at VAT-registered taxpayers. Non-VAT taxpayers will still follow general closure requirements but typically will not be subject to “deemed sale output VAT.”

3. Distinction Between VAT and Non-VAT Taxpayers

3.1 VAT Taxpayers

Who Qualifies: Businesses with gross annual sales or receipts above the VAT threshold (currently PHP 3,000,000), or those who voluntarily register as VAT taxpayers.
Deemed Sale on Closure:
Upon closure (or any cessation of VAT registration), inventory and assets originally intended for sale or use in business are “deemed sold” at their fair market value, triggering the requirement to pay output VAT on such goods if they remain unsold or unutilized at the time of closure.

3.2 Non-VAT Taxpayers

Who Qualifies: Businesses whose gross annual sales or receipts do not exceed the VAT threshold (and are thus subject to either Percentage Tax or exempt altogether), or those who have switched from VAT to non-VAT under certain conditions (e.g., gross sales falling below threshold and opting out).
No Deemed Sale for VAT Purposes:
Since they are not VAT-registered, non-VAT taxpayers do not typically incur output VAT obligations under Section 106(C). Hence, the “deemed sale” concept in the strict VAT sense does not apply to them.

However, non-VAT taxpayers still need to address other final compliance matters (including inventory disposition) so that the BIR can verify the correctness of their final income tax and other business tax liabilities (e.g., Percentage Tax, if applicable).

4. The Concept of “Deemed Sale” in Philippine Tax Law

Definition under the NIRC
- Deemed sale transactions revolve around the idea that certain transfers or dispositions of goods are treated as if sold and thus subject to output VAT.
Main Applications
- Transfer, use, or consumption of goods not in the ordinary course of business.
- Distribution of inventory to shareholders as dividends.
- Distribution to creditors in payment of debt.
- Retirement from or cessation of business.
Why It Exists
- Primarily, to prevent VAT leakage: ensuring that any goods or assets on which input taxes were claimed are subjected to final output tax if these goods exit the VAT system without a normal sale transaction.
Relevance to Non-VAT Taxpayers
- Technically, non-VAT taxpayers do not claim input VAT and do not pay output VAT, so the typical “deemed sale” triggers do not apply.
- Nonetheless, the BIR may use a “deemed sale” style analysis when verifying whether the taxpayer recognized the proper amount of income (and paid the correct income or percentage tax) on the final disposition of remaining inventory or fixed assets.

5. Is There a “Deemed Sale” for Non-VAT Taxpayers Upon Closure?

5.1 Strictly Under Section 106(C) – No

The specific “deemed sale” rule in Section 106(C) applies only to VAT-registered persons. If you are a non-VAT taxpayer, you do not compute and pay output VAT on unsold inventory or fixed assets upon closure.

5.2 Income Tax Implications

Even though you are not subject to VAT, if you dispose of inventory or assets during closure (e.g., a clearance sale or liquidation sale), you must still:
1. Record the revenue (or gain) for income tax purposes.
2. Pay Percentage Tax, if your business is subject to it (e.g., 3% under Section 116 of the NIRC, subject to updates by legislation).
3. Include any gains realized from the disposition of fixed assets in your income tax returns.

5.3 Possible BIR Examination

As part of the closure process, the BIR may verify final inventory and check if the taxpayer has correctly accounted for any disposition of assets or merchandise.
While there is no VAT-based “deemed sale,” the BIR wants to ensure no taxable transaction is omitted.

6. Practical Steps in Closing a Business for Non-VAT Taxpayers

Prepare a Final Inventory
- Before closure, take a final count of any goods, materials, or merchandise still on hand.
- If you plan to sell or transfer these goods, reflect the correct selling price or fair market value in the books for income tax and/or percentage tax purposes.
Settle Outstanding Taxes
- File and pay your last income tax return, which should include revenue from any final liquidation or clearance sale of inventory or assets.
- If you are subject to the Percentage Tax (e.g., 3% monthly/quarterly, depending on regulations), file and pay the final percentage tax return.
Submit Closure Documents to the BIR
- Submit a formal Application for Closure (often done via BIR Form 1905 or other relevant forms) to the Revenue District Office (RDO) where you are registered.
- Attach documentary requirements such as:
  - Board Resolution for closure (if a corporation).
  - Affidavit of cessation.
  - Inventory list of unsold goods or assets, if requested.
  - Books of accounts and tax returns for audit or examination.
Request a Tax Clearance / Cancellation of Registration
- Once the BIR has verified that the taxpayer has no outstanding tax liabilities, it will issue a Tax Clearance or a certificate confirming the cancellation of registration.
- This officially closes your tax accounts.

7. Potential Pitfalls and Liabilities

Omission of Final Sales
- Failing to report the last disposal of inventory or assets can lead to deficiency income tax or deficiency percentage tax assessments.
Improper Record-Keeping
- If the BIR audits your final returns and finds incomplete or inaccurate records, you may face penalties for under-declaration or for failure to keep books properly.
Misclassification
- Ensure you are truly a non-VAT taxpayer (i.e., your gross sales/receipts legitimately fall below the threshold or you are in a specifically exempt activity). If you inadvertently exceed the threshold, the BIR could retroactively assess VAT.
Failure to Formally Close
- Merely stopping business operations is insufficient; you must process the formal closure with the BIR. Otherwise, the BIR continues to expect tax returns (even if zero). Accumulated penalties may arise from non-filing.

8. Frequently Asked Questions (FAQ)

Do I need to pay “deemed sale” VAT on my remaining inventory if I am a non-VAT taxpayer?
- No. The “deemed sale” provision for VAT applies only to VAT-registered taxpayers. Non-VAT taxpayers do not pay output VAT because they do not file VAT returns.
What happens to my remaining inventory if I close my non-VAT-registered business?
- You may sell it, or even distribute it, but you must ensure any income or revenue from such disposition is properly declared for income tax (and possibly percentage tax) purposes.
Is there a final tax on the assets of a non-VAT taxpayer when the business ceases?
- There is no special “final” tax akin to output VAT for non-VAT taxpayers. However, capital gains tax (for certain capital assets) or ordinary income tax (for ordinary assets) may apply, depending on the nature of the asset and the gain/loss.
Do I need to submit an inventory list to the BIR if I am closing as a non-VAT taxpayer?
- The BIR may request an inventory list to ensure that all final transactions are accounted for. Whether it is strictly required depends on the RDO’s practice and your specific circumstances (e.g., if you still have significant unsold inventory).
What form do I file for business closure?
- Typically, you file BIR Form 1905 (Application for Registration Information Update/Correction/Cancellation) for closure of business, among other forms that may be required by your local RDO.

9. Summary and Key Takeaways

Deemed Sale Under VAT:
- This is primarily a concept applicable to VAT-registered taxpayers.
- Under Section 106(C) of the NIRC, unsold goods, assets withdrawn from business, or assets remaining upon business cessation are “deemed sold” for VAT purposes, triggering output VAT.
Non-VAT Taxpayers:
- Since you do not file VAT returns, you will not be subject to “deemed sale” output VAT when closing your business.
- Nonetheless, you must still settle all final income tax, and if applicable, percentage tax for any liquidation or clearance sale of inventory and assets.
Compliance Steps:
1. Final inventory check.
2. Payment of any income or percentage taxes on final transactions.
3. Filing of BIR Form 1905 to cancel registration.
4. Submission of final books of accounts, financial statements, and other documentary requirements for BIR verification.
Consequences of Non-Compliance:
- Possible deficiency tax assessments (income or percentage tax).
- Penalties for late or non-filing of returns.
- Prolonged inability to secure BIR clearance if you fail to formally close your accounts.

In conclusion, while the notion of “deemed sale” under the NIRC is most frequently and directly relevant to VAT-registered taxpayers, non-VAT taxpayers still need to be mindful of the correct income tax and percentage tax treatment of their remaining inventory and business assets upon closure. No output VAT is due if you are not VAT-registered, but the BIR will require proper documentation and final returns reflecting all business transactions up to the date of closure. Properly following BIR procedures for business cessation ensures a clean exit and avoids future tax liabilities.