FIFTEENTH CONGRESS OF THE REPUBLIC 
OF THE PHILIPPINES 
) 
) 
) 
First Regular Session 
SENATE 
S. N'o. 2878 
Introduced by Senator Ralph G. Recto 
Explanatory Note 
'1 ' 
cJUN 14 
1\11 :38 
In 2004, members of the 13th Congress enacted Republic Act No. 9337 or the law 
that expanded the value-added taxation system in the country. This piece of legislation 
increased the VAT to 12% and expanded the tax base to include fuel, electricity and the 
transport industries, among others. 
From its deliberation in Congress and up to its eventual enactment and 
implementation, RA 9337 appears to be one of the most heavily-debated tax measures 
ever to have been brought to the halls of Congress and before the bar of public opinion. 
There was strong opposition to the measure as it was seen to be an additional 
burden to the general public. However, its proponents believed that it was necessary to 
enact such a law owing to the prevailing economic conditions at that time. 
The tax measure is one of the recommended solutions to address a looming fiscal 
crisis brought about by an unprecedented increase in national debt. 
In 2004, the country's debt-to-GOP ratio was at 78.2%, a record high. Debt service, 
including principal and interest payments, was equivalent to 86.1 % of government 
revenues, while infrastructure and other capital expenditures were only 10.87% of 
government expenditures for the same year. 
The country's total foreign borrowing was over P3 trillion while foreign reserves fell. It 
was also at this time when the country was receiving downgrades in credit ratings from 
international credit rating agencies due to the deterioration in public finances. 
To arrest the downward spiral of the national government finances, drastic measures 
need to be implemented to increase revenues. One such measure is the enactment of RA 
9337, which has generated more funds for infrastructure and social services and allowed 
the government to cut down on borrowings for its projects since 2004. 
However, the prevailing conditions in 2004 no longer exist today and an amendment 
to RA 9337 should be in order. 


This bill seeks to authorize the President of the Republic of the Philippines to reduce 
the VAT rate from 12% to 10% if the national debt as a percentage of GOP of the previous 
year does not exceed fifty-six percent (56%). The author believes that nearly seven years 
after the enactment of RA 9337, the VAT rate can be reduced to 10% in order to unburden 
the general public as the existing conditions when the law was passed are no longer 
present at this time. 
In 2010, the debt-to- GOP ratio fell to 55.4%, the lowest since 1998 when the ratio 
was at 53.3% and a far cry from the 78.2% in 2004. The Aquino administration said it is 
committed to cutting the debt-to-GDP ratio to 46% in 2016. Also, forecasts of international 
financial institutions indicate that the peso will strengthen this year. 
The reduction of the VAT rate from 12% to 10% therefore would be a welcome relief 
for the general public now burdened with high prices of commodities brought about by the 
continuing volatility of crude oil prices in the world market. 
It would also put more money in the pockets of our fellow Filipinos who are facing the 
prospect of high inflation rates next year. Nomura International (HK) Ltd. sees an increase 
in inflation rate in the Philippines, peaking to a hig h of 15.4 percent in the second quarter of 
next year. 
The bill also seeks to amend Sec. 109 of the Tax Code by increasing the thresholds 
for VAT exemption stated in paragraphs (P), (Q) and (V) for sale of real properties not 
primarily held for sale or lease in the ordinary course of trade or business, real property 
utilized for low-cost and socialized housing, and residential lot from P1.5 million to P2 
million; lease of residential unit with monthly rental from P10,000 to P13,000; and other 
sale or lease of goods or properties or performance of services from P1.5 million to P3 
million based on the updated Consumer Price Index, as published by the National Statistics 
Office (NSO). 
It likewise seeks to amend Sec. 236 by increasing the threshold for non-VAT 
taxpayers from P1.5 million to P3 million to enable small entrepreneurs to grow before 
being made subject to the ambit of VAT. The author believes that this would greatly benefit 
micro enterprises, which comprise over 90% of all business enterprises in the country. This 
is also envisioned to encourage the establishment of more micro enterprises by exempting 
them from the coverage of VAT and thus lead to the creation of more jobs, as government 
data show that these business vehicles promote employment. As of 2009, micro enterprises 
generated a total of 1,731,082 jobs, according to the Department of Trade and Industry. 
In view of the foregoing, the passage of this measure is sincerely sought. 


FIFTEENTH CONGRESS OF THE REPUBLIC 
OF THE PHILIPPINES 
First Regular Session 
SENATE 
S. No. 2878 
) 
) 
) 
Introduced by Senator Ralph G. Recto 
AN ACT 
'11 
JUN 14 
!~11 :38 
AUTHORIZING THE PRESIDENT OF THE REPUBLIC OF THE PHILIPPINES TO 
LOWER THE RATE OF VALUE ADDED TAX TO TEN PERCENT (10%) AND 
INCREASING THE THRESHOLD FOR CERTAIN NON-VAT TAXPAYERS, 
AMENDING FOR THE PURPOSE SECTIONS 106 (A), 107 (A), 108 (A), 109, AND 
236 OF THE NATIONAL INTERNAL REVENUE CODE OF 1997, AS AMENDED 
BY REPUBLIC ACT 9337 
Be it enacted by the Senate and House of Representatives of the Philippines in 
Congress assembled: 
1 
SECTION. 1. Section 106 paragraph (A) of the National Internal Revenue 
2 
Code of 1997, as amended, is hereby further amended to read as follows: 
3 
"SEC. 106. Value-Added Tax on Sale of Goods or Properties. 
4 
"(AJ Rate and Base of Tax. -
There shall be levied, assessed and 
5 
collected on every sale, barter or exchange of goods or properties, a 
6 
value-added tax equivalent to TWELVE PERCENT (12%) [ten percent 
7 
(10%)] of the gross selling price or gross value in money of the goods or 
8 
properties sold, bartered or exchanged, such tax to be paid by the seller or 
9 
transferor: Provided, That the President, upon the recommendation of the 
10 
Secretary of Finance, shall [,effective January 1, 2006, raise] LOWER the 
11 
rate of value-added tax to TEN PERCENT (10%) IF THE [twelve percent 
12 
(12%), after any of the following conditions has been satisfied: 


1 
"(i) Value-added tax collection as a percentage of Gross Domestic Product 
2 
(GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or 
3 
"(ii)] National govemment DEBT [deficit] as a percentage of GDP of the 
4 
previous year DOES NOT EXCEED FIFTY-SIX PERCENT (56%). 
5 
[exceeds one and one-half percent (1 %%).] 
6 
"(1) Xxx 
7 
"(2) Xxx" 
8 
SEC. 2. Section 107 paragraph (A) of the National Internal Revenue Code of 
9 
1997, as amended, is hereby further amended to read as follows: 
10 
"SEC. 107. Value-Added Tax on Importation of Goods. 
11 
"(A) In General. - There shall be levied, assessed and collected on every 
12 
importation of goods a value-added tax equivalent to TWELVE PERCENT 
13 
(12%) [ten percent (10%)] based on the total value used by the Bureau of 
14 
Customs in determining tariff and customs duties, plus customs duties, 
15 
excise taxes, if any, and other charges, such tax to be paid by the importer 
16 
prior to the release of such goods from customs custody: Provided, That 
17 
where the customs duties are determined on the basis of the quantity or 
18 
volume or the goods, the value-added tax shall be based on the landed 
19 
cost plus excise taxes, if any: Provided, further, That the President, upon 
20 
the recommendation of the Secretary of Finance, shall [, effective January 
21 
1, 2006, raise] LOWER the rate of value-added tax to TEN PERCENT 
22 
(10%) IF THE [twelve percent (12%), after any of the following conditions 
23 
has been satisfied: 
24 
"(i) Value-added tax collection as a percentage of Gross Domestic Product 
25 
(GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or 
2 


1 
"(ii)] National government DEBT [deficit] as a percentage of GOP of the 
2 
previous year DOES NOT EXCEED FIFTY-SIX PERCENT (56%). 
3 
[exceeds one and one-half percent (1 %%).] 
4 
SEC. 3. Section 108 paragraph (A) of the National Internal Revenue Code of 
5 
1997, as amended, is hereby further amended to read as follows: 
6 
"SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of 
7 
Properties. -
8 
U(A)Rate and Base of Tax. -
There shall be levied, assessed and 
9 
col1ected, a value-added tax equivalent to TWELVE PERCENT (12%) [ten 
10 
percent (10%)] of gross receipts derived from the sale or exchange of 
11 
services, including the use or lease of properties: Provided, That the 
12 
President, upon the recommendation of the Secretary of Finance, shall [. 
13 
effective January 1, 2006, raise] LOWER the rate of value-added tax to 
14 
TEN PERCENT (10%) IF THE [twelve percent (12%), after any of the 
15 
following conditions has been satisfied: 
16 
"(i) Value-added tax collection as a percentage of Gross Domestic Product 
17 
(GOP) of the previous year exceeds two and four-fifth percent (2 4/5%); or 
18 
"(ii)] National government DEBT [deficit] as a percentage of GOP of the 
19 
previous year DOES NOT EXCEED FIFTY-SIX PERCENT (56%). 
20 
[exceeds one and one-half percent (1 %%).] 
21 
Xxx" 
22 
SEC. 4. Section 109 of the National Internal Revenue Code of 1997, as 
23 
amended, is hereby further amended to read as follows: 
24 
"SEC. 109. Exempt Transactions. -
25 
"( 1) Subject to the provisions of Subsection (2) hereof, the following 
26 
transactions shall be exempt from the value-added tax: 
3 


1 
"(A) xxx 
2 
"(8) xxx 
3 
"(C) xxx 
4 
"(D) xxx 
5 
"(E) xxx 
6 
"(F) xxx 
7 
"(G) xxx 
8 
"(H) xxx 
9 
"(I) xxx 
10 
"(J) xxx 
11 
"(K) xxx 
12 
"(L) xxx 
13 
"(M) xxx 
14 
"(N) xxx 
15 
"(0) xxx 
16 
"(P) Sale of real properties not primarily held for sale to customers or held 
17 
for lease in the ordinary course of trade or business, or real property utilized for 
18 
low-cost and socialized housing as defined by Republic Act No. 7279, otherwise 
19 
known as the Urban Development and Housing Act of 1992, and other related 
20 
laws, residential lot valued at TWO MILLION PESOS (P2,000,000) [One million 
21 
five hundred thousand pesos (P1 ,500,000)] and below, house and lot, and other 
22 
residential dwellings valued at THREE MILLION TWO HUNDRED THOUSAND 
23 
PESOS (P3,200,000) [Two million five hundred thousand pesos (P2,500,000)] 
24 
and below: Provided, That not later than THREE YEARS AFTER THE 
25 
EFFECTIVITY OF THIS ACT [January 31, 2009] and every three (3) years 
26 
thereafter, the amounts herein stated shall be adjusted to their present values 
4 


1 
using the Consumer Price Index, as published by the National Statistics Office 
2 
(NSO); 
3 
"(Q) Lease of a residential unit with a monthly rental not exceeding 
4 
THIRTEEN THOUSAND PESOS (P13,000) [Ten thousand pesos (P10,000)] 
5 
Provided, That not later than THREE YEARS AFTER THE EFFECTIVITY OF 
6 
THIS ACT [January 31, 2009] and every three (3) years thereafter, the amount 
7 
herein stated shall be adjusted to its present value using the Consumer Price 
8 
Index as published by the National Statistics Office (NSO); 
9 
"(R) xxx 
10 
"(S) xxx 
11 
"(T) xxx 
12 
"(U) xxx 
13 
"(V) Sale or lease of goods or properties or the performance of services 
14 
other than the transactions mentioned in the preceding paragraphs, the gross 
15 
annual sales and/or receipts do not exceed the amount of THREE MILLION 
16 
PESOS (P3,000,000) [One million five hundred thousand pesos (P1,500,000)]: 
17 
Provided, That not later than THREE YEARS AFTER THE EFFECTIVITY OF 
18 
THIS ACT [January 31, 2009] and every three (3) years thereafter, the amount 
19 
herein stated shall be adjusted to its present value using the Consumer Price 
20 
Index, as published by the National Statistics Office (NSO). 
21 
"(2) xxx" 
22 
SEC. 5. Section 236 paragraph (F) subparagraph (2)(a) and paragraph (G) 
23 
subparagraph (1) of the National Internal Revenue Code of 1997, as amended, are 
24 
hereby further amended to read as follows: 
25 
"SEC. 236. Registration Requirements. -
26 
"(A) xxx 
5 


1 
"(8) xxx 
2 
"(C) xxx 
3 
"(0) xxx 
4 
"(E) xxx 
5 
"(F) Cancellation of Registration. -
6 
"(1) xxx 
7 
"(2) Cancellation of Value-added Tax Registration. - A VAT-registered 
8 
person may cancel his registration for VAT if: 
9 
"(a) He makes written application and can demonstrate to the 
10 
Commissioner's satisfaction that his gross sales or receipts for the 
11 
following twelve (12) months, other than those that are exempt under 
12 
Section 109 (A) to (U), will not exceed THREE MILLION PESOS 
13 
(P3,000,000) [One million five hundred thousand pesos (P1 ,500,000)], or 
14 
"(b) xxx 
15 
"(G) Persons Required to Register for Value-Added Tax. -
16 
"(1) Any person who, in the course of trade or business, sells, barters 
17 
or exchanges goods or properties, or engages in the sale or exchange of 
18 
services, shall be liable to register for value-added tax if: 
19 
"(a) His gross sales or receipts for the past twelve (12) months, 
20 
other than those that are exempt under Section 1 09 (A) to (U), have 
21 
exceeded THREE MILLION PESOS (3,000,000) [One million five hundred 
22 
thousand pesos (P1 ,500,000)]; or 
23 
"(b) There are reasonable grounds to believe that his gross sales or 
24 
receipts for the next twelve (12) months, other than those that are exempt 
25 
under Section 109 (A) to (U), will exceed THREE MILLION PESOS 
26 
(P3,000,000) [One million five hundred thousand pesos (P1 ,500,000)]. 
6 


1 
"(2) xxx 
2 
"(H) xxx 
3 
"(I) xxx 
4 
"Xxx" 
5 
SEC. 6. Implementing Rules and Regulations (lRR). - Within sixty (60) 
6 
days upon approval of this Act, the Secretary of Finance, upon recommendation by 
7 
the Commissioner of Internal Revenue, shall issue the IRR for the effective 
8 
implementation of this Act. 
9 
SEC. 7. Separability Clause. - Any portion or provision of this Act that may 
10 
be declared unconstitutional or invalid shall not have the effect of nullifying other 
11 
portions or provisions hereof, as long as such remaining portions or provisions can 
12 
still subsist and be given effect in their entirety. 
13 
SEC. 8. Repealing Clause. All laws, acts, decrees, executive orders, 
14 
issuances, and rules and regulations or parts thereof which are contrary to and 
15 
inconsistent with this Act are hereby repealed, amended or mOdified accordingly. 
16 
SEC. 9. 
Effectivity. - This Act shall take effect fifteen (15) days after its 
17 
complete publication in the Official Gazette or in at least two (2) newspapers of 
18 
general circulation. 
Approved, 
7