No. 2.

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Instructors: J.T. Yeo, CPA, JD/K.J. Culajara CPA, JD

Ateneo de Zamboanga University

Accountancy Department
Business Tax

Week 2

A VAT-exempt transaction refers to the sale of goods or properties

and/or services and the use or lease of properties that is not subject to
VAT (output tax) and the seller is not allowed any tax credit of VAT
(input tax) on purchases.

I. EXEMPTIONS FROM VAT

A. Definition of terms
 Exempt persons – there is no provision in the VAT law which
expressly exempts certain persons from payment of the VAT
because indirect taxes such as VAT are levied on objects or
transactions.
 Exempt transactions – transactions on certain goods, properties
or services which are sold by VAT-registered or non-VAT registered
person and regardless of the annual gross sales or receipts
derived therefrom.

B. Exempt transactions
 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;
o Freezing, drying, salting, broiling, roasting, smoking, or
stripping of products would still retain its status as in its
original state.
o Polished and/or husked rice, corn grits, raw cane sugar
and molasses, ordinary salt and copra shall be
considered in its original state.
o If the agricultural food are classified as non-food products
(like cotton and cotton seeds), they are subject to VAT.
 The term “livestock” does not include fighting
cocks, race horses, zoo animals and other animals
generally considered as pets.
 Sale or importation of fertilizers; seeds, seedlings and
fingerlings; fish, prawn, livestock and poultry feeds, including
ingredients whether locally produced or imported, used in the
manufacture of finished feeds (except specialty feeds for race
horses, fighting cocks, aquarium fish, zoo animals and other
animals generally considered as pets).
 Importation of personal and household effects belonging to the
residents of the Philippines returning from abroad and non-
resident citizens coming to resettle in the Philippines:
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Instructors: J.T. Yeo, CPA, JD/K.J. Culajara CPA, JD

Provided, that such goods are exempt from customs duties

under the Tariff and Customs Code of the Philippines.
 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 actually coming to settle in the Philippines and that the
goods are bought from their former place of abode, exempt
such goods from payment of duties and taxes: Provided,
further, That vehicles, vessels, aircrafts, machineries and other
similar goods for use in the manufacture, shall not fall within
this classification and shall therefore be subject to duties,
taxes, and other charges.
 Services subject to percentage tax.
 Services by agricultural contract growers and milling for others
of palay into rice, corn into corn grits and sugar cane into raw
sugar.
o Agricultural contract growers refer to those persons
producing for others poultry, livestock or other
agricultural and marine good products in their original
state.
 Medical, dental, hospital and veterinary services except those
rendered by professionals.
o Laboratory services are exempted. If the hospital or clinic
operates a pharmacy or drugstore, the sale of drugs and
medicine to out-patients are subject to VAT.
 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.
o Educational services do not include seminars, in-service
training, review classes and other similar services
rendered by persons who are not accredited by the
DEPED, CHED or TESDA.
 Services rendered by individuals pursuant to an employer-
employee relationship.
 Services rendered by regional or area headquarters
established in the Philippines by multinational corporations
which act as supervisory, communications and coordinating
centres for their affiliates, subsidiaries or branches in the Asia-
Pacific Region and do not earn or derive income from the
Philippines.

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Instructors: J.T. Yeo, CPA, JD/K.J. Culajara CPA, JD

 Transactions which are exempt under international agreements

to which the Philippines is a signatory or under special laws,
except those under PD No. 529 – Petroleum Exploration
Concessionaries under the Petroleum Act of 1949.
 Sales by agricultural cooperatives duly registered with the
Cooperative Development Authority to their members as well
as the 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.
o Note that sales by agricultural cooperatives to non-
members can only be exempted from VAT if the producer
of the agricultural products sold is the cooperative itself.
If the cooperative is not the producer (e.g. trader), then
only those sales to its members shall be exempted from
VAT.
o To enjoy VAT exemption, the cooperative must:
 Be registered with the Cooperative Development
Authority; and
 Either –
- Sell exclusively to its members, OR
- If it sells to both members and non-members,
the sale must be of its produce whether in its
original or processed state.
 Gross receipts from lending activities by credit or multi-
purpose cooperatives duly registered with the Cooperative
Development Authority.
 Sales by non-agricultural, non-electric, and non-credit
cooperatives duly registered with and good standing with the
Cooperative Development Authority (CDA): Provided, that the
share capital contribution of each member does not exceed
Fifteen Thousand Pesos (P15,000) and regardless of the
aggregate capital net surplus ratably distributed among
members;
o Importation by non-agricultural, non-electric and non-
credit cooperatives of machineries and equipment,
including spare parts thereof, to be used by them are
subject to VAT.
 Export sales by persons who are not VAT-registered.
 Sale of real properties not primarily held for sale to customers
or held for lease in the ordinary course of trade or business or
real property utilized for low-cost and socialized housing as
defined by R.A. No. 7279 (otherwise known as the Urban
Development and Housing Act of 1992) and other related laws
–
o Residential lot valued at P1,500,000 and below;
o House and lot and other residential dwellings valued at
P2,500,000 and below;

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Instructors: J.T. Yeo, CPA, JD/K.J. Culajara CPA, JD

Provided, That beginning January 1, 2021, the VAT exemption

shall only apply to –
o Sale of real properties not held for sale to customers;
o Sale of real properties not held for lease in the ordinary
course of trade or business;
o Sale of real property utilized for socialized housing as
defined by R.A. 7279;
o Sale of house and lot, and other residential dwellings with
selling price of not more than P2,000,000.
 Lease of residential unit with a monthly rental not exceeding
P15,000.
 Transport of passengers by international carriers.
 Sale, importation or lease of passenger or cargo vessels and
aircraft, including engine, equipment and spare parts thereof
for domestic or international transport operations.
 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;
o 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 without
stopping at any port in the Philippines.
o Fuel, goods or supplies is used for purposes other than
that mentioned in the preceding paragraph, such portion
of fuel, goods and supplies shall be subject to VAT.
o It is essential that the importation is for international
shipping or air transport, with the port without docking or
stopping at any port in the Philippines, unless the
docking or stopping is for the purpose or unloading
cargoes and passengers, or loading passengers and
cargoes bound for abroad.
 Services of banks, non-bank financial intermediaries
performing quasi-banking functions, and other non-bank
financial intermediaries such as money changers and
pawnshops; and
 Sale or lease of goods and services to senior citizens and
persons with disability, as provided under R.A. No. 9994
(Expanded Senior Citizens Act of 2010) and 10754 (An Act
Expanding the Benefits and Privileges of Persons with
Disability, respectively);
 Transfer of property pursuant to Section 40(C)(2) of the Tax
Code, as amended.
o Section 40(C)(2) of the Tax Code pertains to tax-free
exchanges.
o Section 40(C)(2) of the Tax Code provides that no gain or
loss shall be recognized if in pursuance of a plan or
merger or consolidation –
 A corporation, which is a party to a merger or
consolidation, exchanges property solely for stock

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Instructors: J.T. Yeo, CPA, JD/K.J. Culajara CPA, JD

in a corporation, which is a party to the merger or

consolidation; or
 A shareholder exchanges stock in a corporation,
which is a party to the merger or consolidation,
solely for the stock of another corporation also a
party to the merger or consolidation; or
 A security holder of a corporation, which is a party
to the merger or consolidation, exchanges his
securities in such corporation, a party to the merger
or consolidation.
 No gain or loss shall also be recognized if the
property is transferred to a corporation by a person
in exchange for stock or unit of participation in such
a corporation of which as a result of such exchange
and said person, alone or together with others, not
exceeding four (4) persons, gains control of said
corporation: Provided, That stocks issued for
services shall not be considered as issued in return
for property.
 Association dues, membership fees, and other assessments
and charges collected by homeowners associations and
condominium corporations.
 Sale of gold to the Bangko Sentral ng Pilipinas.
 Sale of drugs and medicines prescribed for diabetes, high
cholesterol, and hypertension beginning January 1, 2019.
 Sale or lease of goods or properties or the performance of
services other than the transactions mentioned in the
preceding paragraphs, the gross annual sales and/or receipts
do not exceed the amount of P3,000,000.
 Sale to senior citizens and persons with disabilities. (R.A. No.
9994 and R.A. 10754)
 Note: Remember, qualified self-employed individuals and
professionals availing of the 8% income tax on gross sales
and/or receipts are exempt from 12% VAT. (R.R. 13-2018)

C. Final considerations regarding exemptions

 A VAT-registered person may elect that the above exemptions
should not apply to its sale of goods or properties or services:
Provided –
o That once an election has been made, it shall be irrevocable
for a period of three (3) years counted from the quarter
when the election was made;
• Except for franchise grantees of radio and TV
broadcasting whose annual gross receipts for the
preceding year do not exceed P10 million. In their
case, the option becomes perpetually irrevocable.
(R.R. 4-2007)

II. EXEMPTIONS OF SENIOR CITIZENS

A. Who is a senior citizen

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Instructors: J.T. Yeo, CPA, JD/K.J. Culajara CPA, JD

 Any Filipino citizen who is a resident of the Philippines and who is

sixty (60) years old or above;
 May apply to senior citizens with “dual citizenship” status
provided they prove their Filipino citizenship and have at least six
(6) months residency in the Philippines.

B. Sale exempt from VAT and subject to 20% discount

 Medicines, other essential medical supplies, accessories and
equipment to be determined by the Department of Health.
a. Medicines shall refer to both prescription and non-
prescription medicines and articles intended for use in the
diagnosis cure, mitigation, treatment, or prevention of
disease.
a. VAT exemption shall be granted to purchase of vitamins and
mineral supplements;
b. VAT exemption also applies to purchase of eyeglasses,
hearing aids, dentures, prosthetics, artificial bone
replacements like steel, walkers, clutches, wheelchairs,
canes, geriatric diapers, and other
supplies/accessories/equipment.
 Professional fees of attending physicians in all private hospitals,
medical facilities, outpatient clinics and home health care
services’’
 Professional fees of licensed professional health workers
providing home health care services;
 On medical and dental services, diagnostic and laboratory fees in
all private hospitals, medical facilities, outpatient clinics, and
home health care services.
 In actual fare for land transportation in public utility vehicles,
taxis, Asian utility vehicles, shuttle services and public railways;
 Actual transportation fare for domestic air transport services and
sea shipping vessels and the like;
 On utilization of services in hotels and similar lodging
establishments, restaurants and recreation centers.
a. Lodging establishments shall refer to a building, edifice,
structure, apartment or house including tourist inn,
apartelle, motorist hotel and pension house engaged in
catering, leasing or providing facilities to transients, tourists
or travelers. They include tourist inns, apartelles, motorist
hotels, pension houses, etc.
b. For restaurants, the discount and exemption shall be for the
sale of food, drinks, dessert, and other consumable items
served.
c. For recreation centers, the discount shall be for the
utilization of services in the form of fees, charges and rental
for sports facilities or equipment, including golfcart rentals
and green fees or revenues, or venues for ballroom dancing,
yoga, etc.
 On admission fees charged by theaters, cinema houses and
concert halls, circuses, carnivals, and other similar places of

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Instructors: J.T. Yeo, CPA, JD/K.J. Culajara CPA, JD

culture, leisure and amusement, where the discount shall be on

the admission fees charged by the said establishment.
 On funeral and burial services for the death of senior citizens. The
beneficiary or any person who shall shoulder the funeral and
burial expenses of the deceased senior citizen shall claim the
discount upon payment and presentation of his death certificate.