COLLEGE OF BUSINESS AND ACCOUNTANCY

TOPIC:
 VALUE ADDED TAX

LEARNING OBJECTIVES:
At the end of this module, the student should be able to:
 Understand the tax rules concerning value added tax and be able to apply the computational
procedures of VAT.
 Understand the list of VAT-Exempt transactions.

BIBLICAL VALUES INTEGRATION:

Overhearing what they said, Jesus told him, “Don’t be afraid; just believe.”
-Mark 5:36
INTRODUCTION

VALUE ADDED TAX

VAT is a tax on the value added by every seller to the purchase price or cost in the sale or lease of
goods, property or services in the ordinary course of trade or business as well as on importation of goods
into the Philippines, whether for personal or business use. As a rule, sale of goods or services made in the
normal course of trade or business are subject to vat “unless exempt”. Nonetheless, if the sale is exempt
from vat, it may be subject to other percentage taxes except those transactions exempt from business
taxes such as those made for subsistence or livelihood.

BODY

VAT EXEMPT SALES - Sec. 109 of the TAX CODE

 RA 10963 (TRAIN Law); RR 13-2018
 RA 11534 (CREATE Law); RR 4-2021; RR 8-2021; RR 9-2021

The vat exempt transactions provided in the Tax Code are as follows:
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 therefore.

RR 16-2005 provides that products classified under this exemption (such as meat, fruits and
vegetables) 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 packaging
methods.

Examples of Agricultural and Marine Food Products in their original state

Agricultural Marine Livestock Poultry
Polished/husked Fish Cow Fowls
rice Crustaceans such as: Bulls Ducks
Corn grits  Lobster, Calves Geese
Raw cane sugar and Shrimps Pigs Turkeys
molasses copra  Prawns, Sheep
Oysters Goats
 Mussels, Rabbits
Clams
 Trout, Eels
 Note: Livestock or poultry does not include fighting cocks, race horses, zoo animals and
other animals generally considered as pets.

Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt and copra, as
provided in Table above, shall be considered in their original state. For this purpose, notwithstanding the
process/es involved in its production, "raw sugar or raw cane sugar' means sugar whose content of
sucrose by weight, in the dry state, corresponds to a polarimeter reading of less than 99.5 degrees. [Sec.
109, NIRC]

VAT EXEMPT SUGAR

RAW SUGAR CANE refers to sugar produced by simple process of conversion of sugar cane
without need of any mechanical or similar device. Under the revised regulation, raw cane sugar refers
only to muscovado sugar. Thus, only raw sugar cane is exempt from vat under the tax code (RR 4-2015).
The following other definitions were also provided under RR 13-08 as amended by RR 12-2013, RR 4-
2015 and RR 6-2015:

Raw Sugar as sugar whose content of sucrose by weight in dry state, corresponds to a polarimeter
reading of less than 99.5°.

Refined Sugar as sugar whose content of sucrose by weight in d state, corresponds to a

polarimeter reading of 99.5° and above.

Sugar Refinery Mill refers to entity, natural or juridical, engaged in the business of milling sugar
cane into raw or in the refining of raw sugar

Cane Sugar produced from the following shall be presumed, for internal revenue purposes, as
refined sugar:
 Product of a refining process
 Products of a sugar refinery; or
 Product of a production line of a sugar mill accredited by the BIR to be producing and/or capable
of producing sugar with polarimeter reading of 99.5° and above

SALE OF MARINATED FISH (Rev. Ruling 348-11 dated Sept 28, 2011)
Sale of marinated fish is not exempt from vat. Laws granting exemption from tax are construed
strictly against the taxpayer. Exemption from payment of tax must be clearly stated in the language of the
law.

2) 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).

Specially feeds refer to non-agricultural feeds or food for race horses, fighting cocks, aquarium
fish, zoo animals and other animals generally considered as pets are subject to vat.

For the sale or importation of certain feed ingredients (whey powder, skimmed milk powder,
lactose, buttermilk powder, whole milk powder and such other feed ingredients and additives which may
be hereinafter be determined by competent authority to have possible utilization for human
consumption, there must be a showing that the same is unfit for human consumption or that the
ingredients cannot be used for the production of food for human consumption as certified by the Food
and Drug Administration (FDA) [RMC 55 2014 as revised by RMC 66-2014 and RMC 78-2014].
3) Importation of personal and household effects belonging to:
 The residents of the Philippines returning from abroad; and
 nonresident citizens coming to resettle in the Philippines
Provided, that such goods are exempt from customs duties under the Tariff and Customs Code of
the Philippines.

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

employment, wearing apparel, domestic animals, and personal and household effects
belonging to in the Philippines or Filipinos or their families and descendants who to settle
are now residents or citizens of other countries, such parties herein 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, person Customs may, upon the production of
satisfactory evidence, that such persons are actually coming to settle in the Philippines and that
the gods are brought from their former place of abode, exempt such goods from payment of duties
and taxes: Provided, further, vehicles, vessels, aircrafts and machineries and other similar goods
for use in manufacture, shall not fall within this classification and shall therefore be subject to
duties, taxes and other charges

5) Services subject to Percentage Tax under Title V of the Tax Code, as ended (Sections 116-
127).

6) Services By
a) "Agricultural contract growers" and
b) Milling for others of:
• Palay into rice
• Corn into grits; and
• Sugar cane into raw sugar

Section 4.1 09-1 (B)(1 )(f) of RR 16-05 provides, that “Agricultural contract growers" refer
to those persons producing for others poultry, livestock or other agricultural and marine food
products in their original state. Its services growing of poultry, or other agricultural and marine
food products into marketable poultry, livestock or other marine food products. There are
agricultural contract growers which offer toll processing/toll dressing/toll manufacturing as a
packaged service to its toll growing. Toll processing/toll dressing/toll manufacturing involves
procedures such as; weighing, killing. dressing, scalding, cut-ups; and packaging.

However, after careful re-study by the Bureau, it was clarified under RR 97-2010, that "toll
processing services exempt from vat" shall pertain only to services to clients from which growing
of animals were contracted. As such, preparing and packaging hogs/chicken ready for delivery
after producing or growing them can be said to be within the purview of "agricultural contract
growing". However, if such an activity is done independently of growing poultry, livestock or other
agricultural and marine food products, the same can be considered as vatable services not covered
by agricultural contract growing.

7) Medical, dental, hospital and veterinary services except those rendered by professionals.

Laboratory services are exempted. If the hospital or clinic operates a pharmacy or

drugstore, the sale of drugs and medicines are subject to VAT. Hospital bills constitute medical
services. The sales made by the drugstore to the in-patients which are included in the hospital bills
 are part of medical bills exempt from vat. Sales of the drug store to the out-patients are taxable
because they are not part of medical services of the hospital.

Medical practitioners, under the aforementioned regulation, shall likewise include medical
technologists, allied health workers (e.g., occupational therapists, physical therapists, speech the
nurses, etc.) and other medical practitioners who are not under an, employer-employee
relationship with the hospital, clinic or other similar establishments.

Pursuant to RR 16-2005, services of Professional Practitioners are subject to VAT if annual

gross Professional fees exceed P3,000,000. Otherwise, such professional fees are subject to
percentage Tax under Sec. 1 16 of the Tax Code, as amended.

Professional Practitioners include, among others, the following:

 Medical Practitioners
 CPAs
 Insurance Agents (Life & Non-life)
 Other Professional Practitioners required to pass the government examination

8) "Educational services rendered by private educational institutions , duly accredited by the

Department of Education (DepEd), the Commission on Higher Education (CHED), the Technical
Education and Skills Development Authority (TESDA) and those rendered by government
educational institutions.
"Educational services" shall refer to academic, technical vocational education provided by
private educational institutions duly accredited by the DepEd, the CHED and TESDA and those
rendered by government educational institutions and it does not include seminars, in-service
training, review classes and other similar services rendered by persons who are not accredited by
the DepEd, the CHED and/or TESDA. [Sec. 4.109-1 (B)(h), RR 16-2005]

9) Services rendered by individuals pursuant to an employer-employee relationship.

10) "Services rendered by Regional or Area Headquarters (RHQs) 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.

11) Transactions which are exempt under international agreements to which the
Philippines is a signatory or under special laws, except those under Presidential Decree No. 529
(Petroleum Exploration which those Concessionaires under the Petroleum Act of 1949.)
Examples (special laws):
 PD 1869 - PAGCOR Charter
 RA 9367 - Biofuels Act
 RA 10072 - Philippine Red Cross
 RA 9994 - Expanded Senior Citizens Act of 2010
 RA 10754 - Magna Carta for PWDs

12) Sales by agricultural cooperatives duly registered Cooperative Development

Authority 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 product.
Sales by Agricultural Cooperatives To Members To Non-Members
Sale of cooperative’s own produce (Processed or at Exempt Exempt
it’s original state)
Other than the cooperative’s own produce (i.e. from Exempt VAT*
“traders”)
It is to be reiterated however, that sale or importation of agricultural food products in their
original state is exempt from VAT irrespective of the seller and buyer thereof, pursuant to
Subsection (a) [Sec. 4.109-1 (B) (I), RR 4-2007]

13) “Gross receipts from “lending activities” by credit or multi-purpose cooperatives

duly registered with the Cooperative Development Authority”. Exemption is not only limited
to the gross receipts on loans extended to its members but also to other persons who are not
members.

Gross receipts by Credit or Multi-purpose From From Non-

cooperatives Members Members
From lending activities Exempt Exempt
From non-lending activities VAT VAT

14) "Sales by non-agricultural, non-electric and non-credit cooperatives duly registered

with the Cooperative Development Authority, provided fifteen thousand pesos (P15,000) and
regardless of the aggregate that the share capital contribution of each member does not exceed
capital and net surplus ratably distributed among the members Importation by non-agricultural,
non-electric and noncredit cooperatives of machineries and equipment including spare parts
thereof, to be used by them are subject to vat.

15) "Export sales" by persons who are Not VAT-registered

Export sales may be exempt or subject to vat as shown in the figure below:

Business Taxes of Export Sales

Export Sales By a Non-Vat Vat Exempt

Reg

By a Vat Reg. Vat @ 0%(zero rated

sales

16) "SALE OF REAL PROPERTY

The TRAIN Law provides that the vat exemption on sale of real property beginning January 1,
2021 shall only apply to the following:

a. 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 not primarily held for sale or for lease is, in general, vat exempt.
However, if such property is used in the trade or business of the seller, the sale shall be subject to
VAT as an incidental transaction to the seller's main business (RR 4-2007, RR 13-2018). On the
other hand, sale of real properties held primarily for sale to customers or held for lease in the
 ordinary course of trade or business of the seller shall be subject to vat (RR 16-2005 as amended
by RR 13-2012 and RR 13-2018).

b. Sale of real property utilized for socialized housing as defined under RA No. 7279, as amended;
Socialized Housing refers to housing programs and projects covering houses and lots or home
lots only that are undertaken by the government or the private sector for the underprivileged and
homeless citizens, which shall include sites and services development, long-term financing, liberalized
terms on interest payments, and as such other benefits in accordance with the provisions of Republic,'
Act 7279, otherwise known as the "Urban Development and Housing Act of 1992 and RA No. 7835
and RA No. 8763. "Socialized Housing" shall also refer to projects intended for the underprivileged
and homeless wherein the housing package selling price is within the lowest interest rates under the
Unified Home Lending Program (UHLP) or any equivalent to housing program of the Government, the
private sector or non-government organizations.

c. Sale of House and Lot and Other Residential dwellings with selling price of not more than P3 199
200.
Provided, further, that every three (3) years thereafter, the amounts state herein shall be
adjusted to its present value using the Consumer Price Index, as published by the Philippine
Statistics Authority (PSA).

NOTE:
 The provision of the CREATE law, increasing the threshold for vat exempt sale of residential house
and lot and other residential dwellings to P4,200,000 was VETOED by President Duterte.
 SALE OF PARKING LOT IN THE SALE OF CONDOMINIUM UNITS (RR 13-2012)
Exemption from vat does not include the sale of parking lot which may or may not be included in
the sale of condominium units. The sale of parking lot in a condominium is a separate and distinct
transaction and is not covered by the rules on threshold amount not being a residential lot, house
and lot or a residential dwelling. Thus, should be subject to VAT regardless of amount of selling
price." (RR-13-2012).

GUIDE:
1) If the sale of real property was NOT made in the ordinary course of trade or business, the real
property is classified as capital asset, hence, not subject to vat but to capital gains tax.
2) If the sale was made in the ordinary course of trade or business:
 VAT EXEMPT:
a. Sale of residential house and lot and other residential dwellings provided the selling price is
not more than P3,199,200 (RR 8-2021 dated June 11, 2021);
b. Sale of real property utilized for socialized housing

17) Lease of Residential Unit

Lease of a residential unit with a monthly rental per unit not exceeding fifteen thousand pesos
P15,000 regardless of the amount of aggregated rentals received by the lessor during the year (RR
16¬2011; RR 13-2018).

Lease of residential units where the monthly rental per unit exceeds P15,000 but the aggregate
of such rentals of the lessor during the year do not exceed P3,000,000 shall likewise be exempt from
VAT, however, the same shall be subject to Percentage Tax under Section 116 of the Tax Code as
amended (RR 16-2011; RR I 2018).
The Percentage Tax rate under the Section 116 of the Tax Code, as amended by RA 11534
(Create law) shall be as follows:
Prior to July 1, 2021 : 3%
From July 1, 2021 to June 30, 2023 : 1%
 Beginning July 1, 2023 : 3%

Lease of Residential and Commercial Units

Lease of Residential Leaser of Commercial Units

Monthly rental Monthly rental Generally subject to vat

is < P15,000 is > P15,000 regardless of monthly
rental.
Subject to OPT under
Annual receipts Sec. 116 if lessor is non
of the lessor vat registered and
>P3M annual gross receipts
< P3M

Exempt from vat No Yes

Subject to Sec. 116 Subject to Vat

The revised threshold of P15,000 and P3,000,000 shall apply only upon effectivity of
RA10963 (TRAIN Law) beginning January 1, 2018.

In cases where a lessor has several residential units for ease, some are leased out for a
monthly rental per unit of not exceeding P15,000 (as amended) while others are leased out for
more than P15,000 per unit, his tax liability will be:
a) The gross receipts from rentals not exceeding P15,000 per month per unit shall be exempt
from vat regardless of the aggregate annual gross receipts; and
b) The gross receipts from rentals 69TPPSQlin P15,000 per month per unit shall be subject to vat
if the annual gross receipts exceed P3,000,000, as amended, from said units only — not
including the gross receipts from units leased out for not more than P15,000. Otherwise, the
gross receipts shall be subject to Percentage Tax Under Section 116 of the Tax Code (RR 16-
2011; RR 13-2018).

Residential Unit shall refer to:

 Apartments and houses and lots used for residential purposes;
 Buildings or parts or units thereof used solely as dwelling places (i.e., dormitories, rooms, bed
spaces) except motels, motel rooms, hotels and hotel rooms.

UNIT shall refer to:

 Apartment unit in case of apartments
 House in case of residential houses
 Per person in case of dormitories, boarding houses and bed
 Per room in case of rooms for rent

Lease of Residential and Commercial Units

 Lease of Residential Units

Monthly rental Monthly rental

is < P15,000 is > P15,000

Annual receipts of the

lessor >P3M(excluding
gross receipts from units
with monthly rental of
<P15,000)
Exempt from vat
No Yes

Subject to OPT Subject to Vat

18) (As amended under CREATE Law): Sale, importation, printing or publication of books,
and any newspaper, magazine, journal, review bulletin, or any such educational reading material
covered by the United Nations Educational, Scientific and Cultural Organization (UNESCO)
Agreement on the importation of educational, scientific and cultural materials, including the
digital or electronic format thereof. Provided, That the materials enumerated herein are not
devoted principally to the publication of paid advertisements. Provided further, That the materials
enumerated herein are compliant with the requirements set forth by the National Book
Development Board pursuant to R.A. No. 8047 (RR 4-2021).

Under BIR Ruling No. 083-2014, the term "book, newspaper, magazine, review and bulletin"
only covers printed matters in hard copy, and does not apply to electronic format or versions
including but not limited to:
• e-books
• e-journals
• electronic copies
• online library sources
• CDS and software

Furthermore, the activities that exempt from vat under this provision are as follows (1)sale,
(2)Importation, (3)printing; and, (4)publication of books, newspapers, magazines, reviews ani_u,
bulletins or any such educational reading material covered by the UNSESCO. Thus, a corporation's
other transactions (such as the printing of brochures, bookbinding engraving, stereotyping,
electrotyping,, lithographing of various reference books, trade books, journals and other literary
works), are subject to VAT. The taxpayer is required to register its business as a VAT business entity
and issue a separate VAT invoice/receipt to record such transactions.

19) Transport of passengers by International carriers doing business in the Philippines.

 Transport of passengers by international carriers doing business in the Philippines is not
subject to business tax (vat and percentage tax). On the other hand, transport of cargo by
international carriers is not also subject to vat, however, it is subject to percentage tax under Section
118 of the Tax Code, also known as Common Carrier's Tax on International Carriers.

Guide:
• International Carriers (residential foreign corporations):

Transport Of Originating in the Philippines

Passengers Vat exempt
Cargo or goods Subject to Common Carriers Tax Under Sec.
118

• Domestic Common Carriers:

Transport Of Within the Philippines Philippines to abroad
(Sec. 108 (B)(6))
Passengers
• By land Common carriers tax under 0% vat
Sec.117

• By air or sea Vat 0% vat

Cargo or Goods Vat 0% vat

20) Sale, importation or lease of passenger or cargo vessels and aircraft, including
engine, equipment and spare parts thereof for domestic or international transport
operations, provided, that the exemption from vat on the importation and local purchase of
passenger and/or cargo vessels shall be subject to the requirements on restriction on vessel
Importation and mandatory vessel retirement program of MARINA (RR 15-2015; RR 13-2018).

21) Importation of fuel, goods and supplies by persons engage in international shipping
or air transport operations.

Provided that the fuel, goods and supplies shall be used for international shipping on 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 vice
versa, without docking or stopping at any other port in the Philippines, unless the docking or
stopping at any other port in the Philippines is for the purpose of unloading passengers/and or
cargoes that originated from abroad, or to load passengers and/or cargoes 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 or supplies shall be subject to 12%
vat.

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 Sections 121 and 122, respectively of the Tax Code.

23) Sale or lease of goods and services to senior citizens and persons with disabilities , as
provided under RA No. 9994 (Expanded Senior Citizens Act of 2010) and RA No. 10754 (An Act
Expanding the Benefits and Privileges of Persons with Disability (PWD), respectively,
24) Transfer of property pursuant to Section 40(C)(2) of the Tax Code , as amended (Upon
effectivity of RA10963-TRAIN Law only; new provision).

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 No. 4726 (Condominium Act), respectively. This provision shall take effect only beginning
January 1, 2018 or upon the effectivity of RA10963-TRAIN Law (new provision).

26) Sale of Gold to the Bangko Sentral ng Pilipinas (BSP). This provision shall take effect
only beginning January 1, 2018 or upon the effectivity of RA10963-TRAIN Law (subject to 0% vat
prior to 2018).

27) Sale or importation of prescription drugs and medicines prescribed for diabetes, high
cholesterol, hypertension beginning January 1, 2020 " for cancer, mental illness, tuberculosis and
kidney diseases beginning January 1, 2021 (CREATE Law; RR 4-2021). The exemption from VAT
under this subsection shall only apply to the sale or importation by the manufacturers,
distributors, wholesalers and retailer of drugs and medicines included in the Is of approved drugs
and medicines" issued by the Department of Health (DOH) for this purpose.

28) Sale or importation of the following beginning January 1, 2021 to December 31,
2023:
(i) Capital equipment, its spare parts and raw materials, necessary for the production of personal
protective equipment (PPE) components such as coveralls, gown, surgical cap, surgical mask,
n-95 mask, scrub suits, goggles and face shield, double or surgical gloves, dedicated shoes, and
shoe covers, for COVID-19 prevention;
(ii) All drugs, vaccines and medical devices specifically prescribed and directly used for the
treatment of COVID-19; and
(iii) Drugs for the treatment of COVID-19 approved ed by the Food and Drug Administration (FDA)
for use in clinical trials, including raw materials directly necessary for the production of such
drugs.

Provided, That the Department of Trade and Industry (DTI) for shall certify that such
equipment, spare parts or raw materials importation are not locally available or insufficient in
quantity, or not in accordance with the quality or specification required.

Provided further, That for item (ii), within sixty (60) days from the effectivity of the CREATE,
and every three (3) months thereafter, the Department of Health (DOH) shall issue a list of
prescription drugs and medical devices covered by this provision.

Provided finally, That for items (i) and (iii) hereof, on the sale or importation of equipment,
spare parts and raw materials for the production of PPE components as well as the sale or
importation of raw materials directly necessary for the prod or of drugs for the treatment of COVID-
19,.t.he supplier/s or importer shall submit, for the purpose of availing the exemption the following:
1) Certified true copy of "License to Operate", issued to the, the DOH-FDA authorizing the bye
manufacture of medical grade PPE components and drugs for the treatment of COVID- 19; and

2) "Sworn Declaration" from the manufacturer-buyer that the items shall be used for the
manufacture of the PPE components and drugs for the treatment of COVID-19.

The exemption claimed under this subsection shall be subject to post audit by the Bureau of
Internal Revenue (BIR) or the Bureau of Customs (BOC), as may be applicable.
 29) (Originally under paragraph BB). 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.

The P3,000,000 gross annual sales shall comprise of the business' total revenues from sale
of its products, which are either goods or services, including nonrefundable advance
deposits/payments for services, net of discounts, sales returns and allowances, covering the fiscal
or calendar year. Sales incidental to the registered operations of the' business shall also be
included pursuant to Section 105 of the Tax Code, as amended.

REFERENCES:
Transfer and Business Taxation - Train Law updated, 2021 ed., Enrico Tabag

Quicknotes Taxation, Latest ed., Jack De Vera