VAT on Transactions Deemed Sale: The Four Section 106(B) Triggers

NIRC Section 106(B) treats four situations as a “deemed sale” — output VAT is due even though no cash sale happened. Using business goods for personal purposes, distributing goods to shareholders or creditors, leaving consigned goods unsold after 60 days, and closing a business with inventory still on hand each trigger output VAT. Missing any of them understates VAT and invites a deficiency assessment.

What “deemed sale” means #

A deemed sale is a transaction that Section 106(B) treats as a taxable sale of goods for VAT even though the VAT-registered person did not actually sell anything for cash. The rule stops businesses from escaping VAT by moving goods out of the VAT net through non-sale routes — personal use, distributions, stale consignments, or closure. The output VAT still attaches to the goods. For how output VAT ordinarily accrues on a real sale, see VAT on Sale of Goods: Output Tax Accrual.

The four triggers #

Section 106(B) lists four transactions deemed sale. The statute provides:

“Transactions Deemed Sale. — The following transactions shall be deemed sale: (1) Transfer, use or consumption not in the course of business of goods or properties originally intended for sale or for use in the course of business; (2) Distribution or transfer to: (a) Shareholders or investors as share in the profits of the VAT-registered persons; or (b) Creditors in payment of debt; (3) Consignment of goods if actual sale is not made within sixty (60) days following the date such goods were consigned; and (4) Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirement or cessation.”

— NIRC of 1997, Section 106(B)

The 60-day consignment rule is examined further in Consignment Sale VAT and the 60-Day Rule.

The tax base #

Under RR No. 16-2005, output VAT on a deemed sale is generally based on the market value of the goods at the time of the transaction — except for retirement or cessation of business, where the base is the acquisition cost or current market price, whichever is lower. Because there is no negotiated selling price in a deemed sale, the regulation supplies the base. The EOPT Act (RA 11976) later updated VAT terminology to “gross sales” and shifted VAT to an accrual basis, but it did not repeal or restructure the four deemed-sale categories themselves.

Worked example: closing a business with inventory #

Assume a VAT-registered retailer decides to close and, at cessation, still holds taxable inventory with an acquisition cost of ₱500,000 and a current market price of ₱550,000. Retirement of business is a deemed sale under Section 106(B)(4), and the base is the lower of cost or market price.

The retailer owes ₱60,000 of output VAT on inventory it never sold, simply because it is closing while holding taxable goods. Businesses winding down often overlook this and file a final VAT return that omits the deemed sale — a gap the BIR catches on the closure audit. If the business is deregistering because it fell below the threshold rather than closing entirely, see VAT Deregistration Below the Threshold; for when registration is required in the first place, VAT Registration Threshold in the Philippines.

Frequently asked questions #

What is a transaction deemed sale for VAT? #

A transaction deemed sale is one that NIRC Section 106(B) treats as a taxable sale of goods for VAT purposes even though no ordinary cash sale occurred. Output VAT is imposed on the goods involved, so a VAT-registered person can owe output VAT without having received a payment.

What are the four deemed-sale transactions under Section 106(B)? #

They are: (1) transfer, use, or consumption not in the course of business of goods originally intended for sale or business use; (2) distribution or transfer to shareholders as profit share, or to creditors in payment of debt; (3) consignment of goods not actually sold within 60 days of consignment; and (4) retirement from or cessation of business, as to inventories of taxable goods on hand.

What is the VAT base for a deemed sale? #

Under RR No. 16-2005, output VAT on a deemed sale is generally based on the market value of the goods at the time of the transaction. For retirement or cessation of business, the base is the acquisition cost or current market price of the inventory, whichever is lower.

Does closing a business trigger VAT on remaining inventory? #

Yes. Retirement from or cessation of business is a deemed sale under Section 106(B)(4), so a VAT-registered person that closes shop owes output VAT on the taxable goods still in inventory as of the retirement or cessation, even though those goods were never actually sold.

When does consigned merchandise become a deemed sale? #

When an actual sale of the consigned goods is not made within 60 days following the date the goods were consigned. At that point Section 106(B)(3) deems the consignment a sale, and the consignor must recognize output VAT on the goods even though they have not been sold to a final buyer.

Summary #

VAT is not confined to cash sales: Section 106(B) reaches four non-sale situations — personal use of business goods, distributions to shareholders or creditors, consignments unsold after 60 days, and business closure with inventory — and treats each as a deemed sale carrying output VAT. The base is market value, except at business retirement, where it is the lower of cost or market. Watch these transitions especially when winding a business down, and confirm the deemed-sale rules against RR No. 16-2005 and the BIR website before filing a final return.