BSA 2105 Atty. F.R.

Soriano

VALUE-ADDED TAX

Transactions exempt from VAT

1. Sale or importation of agricultural and marine food products in their original state, livestock and
poultry of a kind generally used as or yielding or producing foods for human consumption; and
breeding stock and genetic materials therefor. (RR 16-2005)
a. Livestock shall include cows, bulls and calves, pigs, sheep, goats and rabbits. Poultry shall
include fowls, ducks, geese and turkey.
(Note: Livestock and poultry does not include fighting cocks, race horses, zoo animals and
other animals generally considered as pets. Thus, the sale or importation thereof shall be
subject to VAT.)
b. Marine food products shall include fish and crustaceans, such as, but not limited to, eels,
trout, lobster, shrimps, prawns, oysters, mussels and clams.
c. Meat, fruit, fish and vegetables and other agricultural and marine food products shall be
considered in their original state even if they have undergone the simple processes of
preparation or preservation for the market, such as, freezing, drying, salting, broiling,
roasting, smoking, or stripping, including those using advanced technological means of
packaging, such as shrink wrapping in plastics, vacuum packing, tetra-pack, and other
similar packing methods.
d. Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt and
copra shall be considered as agricultural food products in their original state. (RR No. 16-
2005)
(Note: Sugar whose content of sucrose by weight, in the dry state, has a polarimeter
reading of 99.5* and above are presumed to be refined sugar, and is therefor subject to
VAT.) Polarimeter is a scientific instrument used to measure the angle of rotation caused
by passing polarized light through an optically active substance.

2. Sale or importation of fertilizers, seeds, seedlings and fingerlings, fish, prawn, livestock and
poultry fees, including ingredients, whether locally produced or imported, used in the manufacture
of finished feeds (except non-agricultural feeds or food for race horses, fighting cocks, aquarium
fish, zoo animals and animals generally considered as pets, known as specialty feeds, the sale or
importation of which is subject to VAT.) (RR No. 16-2005)

3. Importation of personal and household effects belonging to:

a. Residents of the Philippines returning from abroad, and
b. Non-resident citizens of the Philippines coming to resettle in the Philippines.
Provided, that such goods are exempt from customs duties. (RR No. 16-2005)

4. Importation of professional instruments and implements, tools of trade, occupation or employment,

wearing apparel, domestic animals, and personal and household effects belonging to persons
coming to settle in the Philippines or Filipinos or their families and descendants who are now
residents or citizens of other countries, such parties hereinafter referred to as overseas Filipinos, in
quantities and of the class suitable to the profession, rank or position of the persons importing said
items, for their own use and not for barter or sale, accompanying such persons, or arriving within a
reasonable time; Provided, that the Bureau of Customs may, upon the production of satisfactory
evidence that such persons are brought from their former place of abode, exempt such goods from
payment of duties and taxes. (TRAIN Law) (RR No. 13-2018)
(Note: Vehicles, vessels, aircrafts, machineries and other similar goods for use in manufacture,
shall not fall within this classification and shall therefor be subject to duties, taxes and other
charges, including the VAT.) (RR No. 13-2018)

5. Services subject to percentage tax under Title V of the Tax Code, as enumerated below:

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 a. Sale or lease of goods or properties or the performance of services of non-VAT registered
persons, other than the transactions mentioned in paragraphs (A) to (AA) of Sec. 109 (1) of
the Tax Code, the gross annual sales and/or receipts of which do not exceed the amount of
Three Million Pesos (P3,000,000.00). (Sec. 116, NIRC) (RR No. 13-2018)
(Unless otherwise indicated, the section referred to is a provision in the National Internal
Revenue Code.)
b. Services rendered by domestic common carriers by land, for the transport of passengers
and keepers of garages. (Sec. 117)
c. Services rendered by international air or shipping carriers for the transport of goods or
cargo originating in the Philippines and going abroad. (Sec. 118)
d. Services rendered by franchise grantees of radio and/or television broadcasting whose
annual gross receipts of the preceding year do not exceed Ten Million Pesos
(P10,000,000.00), and by franchise grantees of gas and water utilities. (Sec. 119)
e. Services rendered for overseas dispatch, message or conversation originating from the
Philippines. (Sec. 120)
f. Services rendered by any person, company or corporation (except purely cooperative
companies or associations) doing life insurance business of any sort in the Philippines.
(Sec. 123)
g. Services rendered by fire, marine or miscellaneous insurance agents of foreign insurance
companies. (Sec. 124)
h. Services of proprietors, lessees or operators of cockpits, cabarets, night or day clubs,
boxing exhibitions, professional basketball games, Jai-Alai and race tracks. (Sec. 125)
i. Receipts on sale, barter or exchange of shares of stock listed and traded through the local
stock exchange or through initial public offering. (Sec. 127)
(Note: Not mentioned in RR No. 16-2005 are Winnings in horse races under Sec. 126 although
these are also subject to other percentage taxes.)

6. Services rendered by agricultural contract growers and milling for others of palay into rice, corn
into corn grits, and sugar cane into raw sugar.
“Agricultural contract growers” refers to those persons producing for others poultry,
livestock or other agricultural and marine food products in their original state. (RR No. 16-2005)

7. Medical, dental, hospital and veterinary services, except those rendered by professionals. (RR No.
16-2005)
Laboratory services, operating charge and room charges, are exempted. If the hospital or
clinic operates a pharmacy or drug store, the procurement of drugs and medicines from the drug
store or pharmacy for the use or treatment of inpatients is exempt from VAT since it amounts to
availment of service rendered or made available by the hospital. However, if the sale of drugs and
medicines is made to out-patients, the same is subject to VAT.
Services rendered by the surgeon, anesthesiologist or attending physician shall, however,
be subject to VAT, although the professional fee may be included in the hospital bill and
specifically described therein, because in such a case, the hospital merely serves as the collecting
agent of the physician or other medical professional to whom the hospital shall remit the
professional fee. But if the medical professional such as the nurse, is employed at the hospital and
receives his compensation by way of salaries, such salaries are exempt from VAT under No. 9
hereunder because the services are rendered by the nurse pursuant to an employer-employee
relationship.

8. Educational services rendered by private educational institutions duly accredited by the Department
of Education (DepEd), the Commission on Higher Education (CHED) and the Technical Education
and Skills Development Authority (TESDA) and those rendered by government educational
institutions.
“Educational services” shall refer to academic, technical or vocational education provided
by private educational institutions duly accredited by the DepEd, the CHED and TESDA and those
rendered by government educational institutions. It does not include seminars, in-service training,

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 review classes and other similar services rendered by persons who are not accredited by the DepEd,
the CHED and/or the TESDA. Accordingly, such services are subject to VAT. (RR No. 16-2005)

9. Services rendered by individuals pursuant to an employer-employee relationship. (RR No. 16-

2005)
This is so because the said individuals are not engaged in business.

10. Services rendered by regional or area headquarters established in the Philippines by multinational
corporations which act as supervisory, communications and coordinating centers for their affiliates,
subsidiaries or branches in the Asia Pacific Region and do not earn or derive income from the
Philippines. (RR No. 16-2005)

11. Transactions which are exempt under international agreements to which the Philippines is a
signatory or under special laws except those granted under PD No. 529 – Petroleum Exploration
Concessionaires under the Petroleum Act of 1949. (RR No. 16-2005)

12. Sales by agricultural cooperatives duly registered and in good standing with the Cooperative
Development Authority (CDA) to their members, as well as sale of their produce, whether in its
original state or processed form, to non-members; their importation of direct farm inputs,
machineries and equipment, including spare parts thereof, to be used directly and exclusively in the
production and/or processing of their produce. (RR No. 16-2005)
Requisites for exemption from VAT under this provision:
a. The cooperative must be an agricultural cooperative.
b. It must be duly registered and in good standing with the CDA.
c. The sales are to its members, whether or not the cooperative is the producer of the product
sold.
d. In case of sales to non-members, the producer of the agricultural products sold, whether in
their original state or in their processed form, must be the cooperative itself.
(Thus, if the cooperative is not the producer (e.g., it is a trader) of the product sold,
the sale shall be subject to VAT.)
e. In the case of importation of direct farm inputs, machineries and equipment, including
spare parts thereof, the same must be used directly and exclusively in the production and/or
processing of their produce.

13. Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered and in
good standing with the CDA. (RR No. 16-2005)

14. Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with and in good
standing with the CDA; provided that the share capital contribution of each member does not
exceed Fifteen Thousand Pesos (P15,000.00) and regardless of the net aggregate capital and net
surplus ratably distributed among the members. (RR No. 16-2005)
Requisites for the exemption of sales from VAT under this provision:
a. The cooperative making the sale is a non-agricultural, non-electric, or a non-credit
cooperative.
b. It must be duly registered with the CDA.
c. The share capital contribution of each member does not exceed P15,000.00 (regardless of
the net aggregate capital and net surplus ratably distributed among the members).
(Note: If the cooperative that made the sale is an electric cooperative, such sale is subject to
VAT.)

15. Export sales by persons who are not VAT-registered. (RR No. 16-2005)

16. Sale of real properties as follows:

a. Sale of real property not primarily held for sale to customers or held for lease in the
ordinary course of the business.

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 However, even if the real property is not primarily held for sale to customers or
held for lease in the ordinary course of trade or business but the same is used in the trade or
business of the seller, the sale thereof shall be subject to VAT being a transaction incidental
to the taxpayer’s main business. Thus, the sale of a land and building specifically used for
its offices by a taxpayer who is engaged in the sale of residential house and lots shall be
subject to VAT because such land and building are used in the trade or business of the
taxpayer.
b. Sale of real properties utilized for low-cost housing as defined by RA No. 7729, otherwise
known as the “Urban Development and Housing Act of 1992” and other related laws.
“Low cost housing” refers to housing projects intended for homeless low-income
family beneficiaries, undertaken by the Government or private developers, which may
either be a subdivision or a condominium registered and licensed by the Housing and Land
Use Regulatory Board/Housing (HLURB) under BP Blg. 220, PD 957 or any other similar
law, wherein the unit selling price is within the selling price per unit as set by the Housing
and Urban Development Coordinating Council (HUDCC) pursuant to RA No. 7279
otherwise known as the “Urban Development Housing Act of 1992” and other laws.
c. Sale of real properties utilized for special housing as defined under RA No. 7279, and other
related laws, such as RA No. 7835 and RA No. 8763, wherein the selling price per unit is
P450,0000 or as may from time to time be determined by the HUDCC and the NEDA and
other related laws.
“Socialized housing” refers to housing programs and projects covering houses and
lots or home lots only undertaken by the Government or private sector for the
underprivileged and homeless citizens which shall include sites and services development,
long-term financing, liberated terms or interest payments, and such other benefits in
accordance with the provisions of RA No. 7279, otherwise known as the “Urban
Development and Housing Act of 1992” and RA No. 7835 and RA 8763. “Socialized
housing” shall also refer to projects intended for the underprivileged and homeless wherein
the package selling price is within the lowest interest rates under the Unified Home
Lending Program (UHLP) or any equivalent housing program of the Government, the
private sector or non-government organizations.
d. Sale of residential lot valued at One Million Five Hundred Thousand Pesos
(P1,500,000.00) and below, or house and lot other residential dwellings valued at Two
Million Five Hundred Thousand Pesos (P2,500,000.00) and below, as adjusted in 2011
using the Consumer Price Index Values.
If two or more adjacent residential lots are sold or disposed in favor of one buyer,
for the purpose of utilizing the lots as one residential lot, the sale shall be exempt from
VAT only if the aggregate value of the lots do not exceed P1,500,000.00. Adjacent
residential lots, although covered by separate titles and/or separate tax declarations, when
sold or disposed to one and the same buyer, whether covered by one or separate Deed of
Conveyance, shall be presumed as a sale of one residential lot.
Provided, That beginning January 1, 2021, the VAT exemption shall only apply to
sale of real properties not primarily held for sale to customers or held for lease in the
ordinary course of trade or business, sale of real property utilized for socialized housing as
defined by RA No. 7279, sale of house and lot, and other residential dwellings with selling
price of not more than Two Million Pesos (P2,000,000.00): Provided, further, That every
three (3) years thereafter, the amount shall be adjusted to its present value using the
Consumer Price Index, as published by the Philippine Statistics Authority. (PSA) (RR No.
13-2018)

17. Lease of residential units with a monthly rental per unit not exceeding Fifteen Thousand Pesos
(P15,000.00).
The foregoing notwithstanding, lease of residential units where the monthly rental per unit
exceeds Fifteen Thousand Pesos (P15,000.00), but the aggregate of such rentals of the lessor during
the year do not exceed Three Million Pesos (P3,000,000.00) shall likewise be exempt from VAT;
however, the same shall be subject to the three percent (3%) percentage tax under Sec. 116 of the
Tax Code.

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 In cases where the lessor has several residential units for lease, some are leased out for a
monthly rental per unit not exceeding P15,000.00 while the others are leased out for more than
P15,000.00, his tax liability shall be as follows:
a. The gross receipts from rental not exceeding P15,000.00 per month per unit shall be exempt
from VAT regardless of the aggregate annual gross receipts. It is also exempt from the 3%
percentage tax.
b. The gross receipts from rentals exceeding P15,000.00 per month per unit:
(1) Shall be subject to VAT if the aggregate annual gross receipts from said units exceed
P3,000,000.00.
(2) Shall be subject to 3% percentage tax if the gross receipts amount to P3,000,000.00 or
less.
In case of mixed transactions, the abovementioned rule should be observed.
The term “residential units” shall refer to apartments and houses and lots used for
residential purposes, and buildings or parts or units thereof used solely for dwelling places
(e.g., dormitories, rooms and bed spaces) except motels, motel rooms, hotels and hotel
rooms, lodging housed, inns and pension houses.
The term “unit” shall mean an apartment unit in the case of apartments, house in the
case of residential houses; per person in the case of dormitories, boarding houses and bed
spaces; and per room in case of rooms for rent. (RR No. 13-2018)

18. Sale, importation, printing or publication of books and any newspaper, magazine, review or
bulletin, which:
a. Appears at regular intervals;
b. With fixed prices for subscription and sale; and
c. Not devoted principally to the publication of paid advertisements. (RR No. 16-2005)

19. Transport of passengers by international carriers doing business in the Philippines. (TRAIN Law)
(RR No. 13-2018)

20. Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment
and spare parts thereof for domestic or international operations: Provided, however, that the
exemption from VAT on the importation and local purchase of passenger and/or cargo vessel shall
be subject to the requirements on restriction on vessel importation and mandatory vessel retirement
program of Maritime Industry Authority (MARINA). (TRAIN Law) (RR No. 13-2018)

21. Importation of fuel, goods and supplies by persons engaged in international shipping or air
transport operations: Provided, That the fuel, goods and supplies shall be used for international
shipping or air transport operations. Thus, said fuel, goods and supplies shall be used exclusively
or shall pertain to the transport of goods and/or passenger from a port in the Philippines directly to
a foreign port, or vice-versa, without docking or stopping at any other port in the Philippines unless
the docking or stopping at any other Philippine port is for the purpose of unloading passengers
and/or cargoes that originated from abroad, or to load passengers and/or passengers bound for
abroad: Provided, further, that if any portion of such fuel, goods or supplies is used for purposes
other than that mentioned in this paragraph, such portion of fuel, goods and supplies shall be
subject to twelve percent (12%) VAT. (RR No. 13-2018)

22. Services of banks, non-bank financial intermediaries performing quasi-banking functions, and
other non-bank financial intermediaries such as money changers and pawnshops, subject to
percentage tax under Secs. 121 and 122, respectively, of the Tax Code. (TRAIN Law) (RR No. 13-
2018)

23. Sale or lease of goods and services to senior citizens and persons with disabilities, as provided
under RA Nos. 9994 (Expanded Senior Citizens Act of 2010) and 10754 (An Act Expanding the
Benefits and Privileges of Persons with Disability), respectively. (TRAIN Law) (RR No. 13-2018)

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24. Transfer of property pursuant to Sec. 40 (C) (2) of the Tax Code, as amended. (TRAIN Law) (RR
No. 13-2018)

Thus, the following transfers are exempt from VAT:

a. Exchange of property by a corporation which is a party to a merger or consolidation solely
for stock of another corporation, which is a party to the merger or consolidation.
Example:
AA Corporation entered into a merger with BB Corporation. AA Corporation gives
its building to BB Corporation in exchange for the shares of stock of BB Corporation.
b. Exchange of stock by a stockholder of a corporation which is a party to a merger or
consolidation solely for the stock of another corporation which is also a party to the merger
or consolidation.
Example:
AA Corporation entered into a merger with BB Corporation. S, a stockholder of AA
Corporation, exchanges his shares of stock in AA Corporation, for the shares of stock of BB
Corporation.

c. Exchange by a security holder of a corporation which is a party to a merger or consolidation

of his securities (such as bonds) in such corporation solely for stock or securities in another
corporation, a party to the merger or consolidation.
Example:
AA Corporation entered into a merger with BB Corporation. S, who is a security
holder of AA Corporation, exchanges his securities in AA Corporation solely for the shares
of stock (or securities) of BB Corporation.

25. Association dues, membership fees, and other assessments and charges collected on a purely
reimbursement basis by homeowners’ associations and condominium corporations established
under RA No. 9904 (Magna Carta for Homeowners and Homeowners’ Association) and RA 4726
(The Condominium Act), respectively. (TRAIN Law) (RR No. 13-2018)

26. Sale of gold to the Bangko Sentral ng Pilipinas. (TRAIN Law) (RR No. 13-2018)

27. Sale or importation of prescription drugs and medicines for:

a. Diabetes, high cholesterol, and hypertension beginning January 1, 2020; and
b. Cancer, mental illness, tuberculosis, and kidney diseases beginning January 1, 2023.
The exemption from VAT under this subsection shall only apply to the sale or importation
by the manufacturers, distributors, wholesalers and retailers of drugs and medicines included in the
“list of approved drugs and medicines” issued by the Department of Health (DOH) for this
purpose. (RR No. 18-2020)
(Under RR No. 13-2018, importation and prescription drugs and medicines under (b)
above were added.)

28. Sale of goods or properties or the performance of the services other than the transactions mentioned
in the preceding paragraphs (Nos. 1 to 27 of this Handout), the gross annual sales and/or receipts
do not exceed the amount of Three Million Pesos (P3,000,000.00). (TRAIN Law) (RR No. 13-
2018)
Self-employed individuals availing of the 8% tax on gross sales and/or receipts and other
non-operating income, under Sections 24(A)(2)(b) and 24 (A)(2)(c)(2)(a) of the Tax Code shall
also be exempt from the payment of the twelve percent (12%) VAT. (RR No. 13-2018)
Example:
Mr. CC, a self-employed taxpayer, signified his intention to be taxed at 8% in lieu of the
graduated income tax rates and percentage tax under Section 116 (Tax on Persons Exempt from
VAT) in his Income Tax Return in first quarter of 2018. During the year, his gross sales and non-
operating income amounted to P2,800,000. In this case, he will pay an income tax of P204,000
(P2,800,000 less P250,000* x 8% = P204,000). (*The first P250,000 is exempt.) He will also be

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exempt from the payment not only of the percentage tax [per Section 24 (A)(2)(b)] but also of the
VAT (per TRAIN Law).
If the gross sales or receipts of Mr. CC up to September of 2018r amounted to P2,800,000,
but had additional gross sales of P500,000 in October, P5550,000 in November, and P600,000 in
December, then he lost his option to pay the 8% commuted tax rate when his gross sales exceeded
P3,000,000 during the fourth quarter. Accordingly, he shall pay an income tax using the graduated
rates under Section 24(A)(2)(a). The tax base is the taxable income (Gross sales less cost of sales
and deductible expense plus non-operating income.) He will be allowed a tax credit for the
previous quarters’ income tax payments under the 8% income tax rate option. He shall also be
subject to the VAT of 12% prospectively starting November and is required to update his
registration from a non-VAT taxpayer to a VAT-taxpayer on or before November 30, 2018.

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