VAT exempt transactions

Business taxes in general

The two main business taxes are the value added tax (VAT) and the other percentage tax (OPT).

Both taxes impose a fixed rate. However, the rate to use depends on the kind of transaction. The tax basis
is the gross selling price or gross receipts.

The following classifications can be inferred from the provisions on the tax code as to business tax:
1. Specifically listed VAT-Exempt transactions (Sec 109(A) to Sec 109(BB) NIRC)
2. Specifically listed transactions subject to OPT (Sec 117 to Sec 127 NIRC)
3. Transactions subject to 3% OPT for not reaching the 3,000,000 threshold (Sec 109(CC) NIRC)
4. Zero-rated VAT transactions (Sec 106(A)(2) and Sec 108(B) NIRC)
5. VAT Sales to Government

The difficult question is determining the applicable tax. The following rules are important:
1. The determination of the applicable tax is on a transaction by transaction basis.
2. If a specific transaction is listed as VAT Exempt, then it is not subject to either OPT or VAT.
3. If a specific transaction is listed as subject to OPT, then the particular rate applicable to that
transaction is to be used. The transaction is not subject to VAT.

Nature of VAT
From the name, VAT is a tax imposed on the value added to an item.

An item normally goes through multiple conversions and processes before it ends in the hands of a
consumer. Each time an item is converted, value is added. This is the main premise as to why cheap raw
materials can end up becoming expensive goods to the consumer; a manufacturer must recover the cost
of the materials purchased as well as the conversion process.

A simple example would be the construction of a building. Raw ore is extracted from the earth through
mining. Dirt and other impurities must be cleaned out from the ore. The ore may be then sold to steel
mills. It is then smelted to turn into liquid metal, which is often mixed with some other metals to form
stronger steel alloys. The steel may be reshaped into numerous things, such as screws, bolts, or steel
bars. Steel bars may be sold to a construction company. The construction company welds, cuts, or
otherwise uses the bars in the construction of a building. This may necessitate adding cement or other
material around the bars. At each process, additional value is added because the material is converted
into something better usable or having a specific use.

As a result, where no additional value is added, no VAT should be imposed. This is the main essence of
most of the VAT exempt items under the tax code.

VAT Exempt Transactions

A VAT Exempt transaction is specifically listed under Sec 109(A) to Sec 109(BB) of the NIRC. VAT exempt
transactions are neither subject to VAT nor OPT.
Note again, that under the NIRC, the last “VAT exempt” transaction is listed as follows:

SEC. 109. (CC) 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 Three million pesos (P3,000,000.00).

Only transactions other than those listed below will go through the P3,000,000 threshold. Thus, unless
the discussion below provides for a specific threshold, the transactions below are VAT exempt regardless
of amount.

The following are VAT exempt transactions

1. SALE OR IMPORTATION OF AGRICULTURAL AND MARINE FOOD PRODUCTS IN THEIR ORIGINAL
STATE, livestock and poultry of or king generally used as, or yielding or producing foods for human
consumption; and breeding stock and genetic materials therefor.

Products under this paragraph are still 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. Packaging will also be considered as a simple process with
the product remaining in its original state.

The use of heat and complex processes such as chemical treatment or curing is considered as
processing, and therefore no longer in original state.

Marinating and adding flavorings to the food are considered as processing (BIR Ruling No. 348-
2011)

Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt and copra shall
be considered in their original state.

Agricultural products such as flowers are not VAT exempt because they are not food.

2. Services by agricultural contract growers and milling for others of palay into rice, corn into grits
and sugar cane into raw sugar

Similarly to food products in the original state, the conversion of the above products involve
mostly mechanical and not chemical processes. Congress provided VAT exemption for these
products as they are a staple food or food ingredient.

3. 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);

The feeds, including their ingredients, must be unfit for human consumption or that the ingredient
cannot be used for the production of food for human consumption (RMC55-2014).
4. Certain importations:
a. personal and household effects for those who will reside in the Philippines: (residents, or
non-resident citizens looking to become residents again). Provided, that such goods are
exempt from customs duties
b. The following items not for barter or sale, owned by persons coming to settle in the
Philippines, or by overseas Filipinos or their families:
a. professional instruments and implements
b. tools of trade, occupation or employment
c. wearing apparel
d. domestic animals
e. personal and household effects

The goods in (b) must accompany the person upon arrival or within 90 days after.

Imported goods are normally subject to VAT, even if the taxpayer is not engaged in business. The
exceptions above, however, are used as an accommodation for those returning to the Philippines,
especially for those seeking to reside here as they surely will have numerous items to bring with
them to the Philippines.

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

The sale of medicines to in-patients or those confined are VAT exempt, but the sale of medicines
to out-patients are not exempt, except for diabetes and hypertension medicines (see #14b below).

6. Educational services rendered by private educational institutions, duly accredited by the DepED,
CHED, or TESDA, and those rendered by government educational institutions;

Education is a necessity. Thus, as an accommodation, educational services are VAT exempt.

Services that are not accredited are not covered, such as seminars and review classes.

7. Transactions by Cooperatives

In general, under the Cooperative Code of the Philippines, duly registered Cooperatives are VAT
exempt on transactions with members. Transactions with non-members are not exempt.

The NIRC reiterates this exemption but adds the following rules:
a. For agricultural cooperatives, if the cooperative undertakes to have its members produce or
process the goods, the goods are exempt even if sold to nonmembers.
b. For non-agricultural, non- electric and non-credit cooperatives, the share capital contribution
of each member does not exceed Fifteen thousand pesos (P15,000)

Unrelated transactions are not exempt. Under the Cooperative Code, a cooperative is organized
with a primary purpose, such as a credit cooperative which undertakes savings and lending
 services, or a service cooperative which services. Thus, an example of an unrelated transaction
for these two types of cooperatives would be the buy and sale of goods.

8. Export sales by persons who are not VAT-registered;

The purchaser of an export sale would be a nonresident. Remember that VAT is paid by the
purchaser as an addition to the purchase price. Under the inherent limitations, tax power can only
be imposed within the territory.

If the seller is VAT-registered, the export sale is subject to a 0% VAT rate. This is primarily for the
purposes of tracking the input VAT and reporting the goods sold. The effect is the same however:
no business tax will be paid by the purchaser, since the tax imposed is 0.

9. Sales of residential real property.

A residential property is one intended to be resided in as a home and not primarily for business
or agricultural purposes.
The following thresholds are imposed separately from the 3,000,000 threshold.
a. Socialized housing units: (RMC35-2014 and HUDCC Memorandum Circular No. 1 s 2013)
i. House and lot – P450,000
ii. Residential lots – P180,000
b. Low cost housing: P750,000 per unit
c. Residential lot: P1,919,500 per unit*
d. Residential dwelling (i.e. house and lot): P3,199,200 per unit*
*The amounts used are according to a BIR RR 13-2018, although they are in conflict with the Tax Code. The
BIR ruling will be followed for now.

Residential property are essential goods. The thresholds set are the prices for property deemed
reasonably necessary for such a property. Expensive property are not necessities but luxuries and
are subject to business tax.

The threshold is determined on a transaction by transaction basis and is separate from the
3,000,000 threshold. This means that, for transactions exceeding the individual transaction
threshold, the 3,000,000 threshold will still be used to determine whether the transaction is
subject to OPT or VAT.

Illustration
A real estate dealer sold the following residential lots for the year:
1) Lot A, P1,500,000
2) Lot B, P2,000,000
3) Lot C, P1,919,000

Lot A and Lot C are VAT exempt, not having reached the threshold. Lot B is not VAT exempt.
 Since the total VAT exempt transactions do not exceed 3,000,000 for the year, the sale of Lot B is
subject to an Other Percentage Tax and not VAT.

In practice however, due to the large value of individual transactions, almost all real estate dealers
are subject to VAT.

What if the lots are adjacent?

Imagine one 100 square meter lot A:

The real estate dealer decides to market it as two separate lots and get different titles for each
one:

If both lots are sold to the same buyer within 12 months, then the sales will be treated as one
lump sale (RR13-2012).

Thus, if both lots were bought by Charlie in 2020, the two sales will be treated as one. The total
transaction amount will be P2,000,000, and both sales are no longer VAT exempt.

If the lots are sold to different buyers, or are sold in different years, then the threshold will be
computed separately.

UNDER CREATE (effective 2021), the threshold remains the same.

10. Lease of a residential unit with a monthly rental not exceeding ₱15,000

Similarly, the threshold is computed on a unit by unit basis and is taken separately from the
3,000,000 threshold.

11. Transport of passengers by international carriers

A carrier is an entity engaged in the business of transporting people or goods. International

carriers are those owned by foreign corporations. They operate in the Philippines by transporting
people or goods to or from the Philippines.
 Domestic carriers are owned by Philippine corporations. Domestic carriers operate within the
Philippines, but they may also transport people or goods to or from the Philippines.

The following table summarizes the rules on carriers:

TRANSPORT OPERATION
Within PH Going out of PH Going into PH*
Domestic carrier
Passengers by Specifically listed as N/A N/A
land OPT: 3%
All others 3,000,000 3,000,000 threshold VAT Exempt
threshold If subject to VAT, zero-rated**
International
Passengers, N/A VAT Exempt VAT Exempt
air or sea
Cargo, air or N/A Specifically listed as OPT: 3% VAT Exempt
sea
*The idea is the same as export sales by non-VAT registered persons: if the transaction were
subject to VAT, it would have to be paid by a foreign resident, violating territoriality. It is thus VAT
exempt.
**In the unlikely event that a domestic carrier with trips abroad does not reach the 3,000,000
threshold, the other percentage tax is NOT paid by the consumer but shouldered by the business.
Thus, the 3% OPT could be imposed. However, if the carrier is subject to VAT, the transaction
should be zero-rated.

12. Sale or lease of goods and services to senior citizens and persons with disability

This is provided under RA 9994 (Expanded Senior Citizens Act of 2010) and RA 10754 (An Act
Expanding the Benefits and Privileges of Persons With Disability).

Note that under RA 9994, senior citizens are VAT exempt only on the following:
a. Lodging establishment (dormitory, hotel, etc.)
b. Hospital and clinic services
c. Sports and recreation centers
d. Restaurants
e. Land, air and sea travel
f. Medical, dental , diagnostic and laboratory fees, and professional medical fees
g. Funeral or burial services for burial of senior citizens

In addition, senior citizens get a 20% discount on the above services. PWDs also get a 20% discount
on qualified establishment.

13. Sale of gold to the Bangko Sental ng Pilipinas

Originally a zero-rated sale, the TRAIN law reclassified this to VAT exempt.
14. Others:
a. 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
b. Sale of or importation of prescription drugs and medicines for diabetes, high cholesterol,
and hypertension beginning January 1, 2020.

UNDER CREATE (effective 2021), medicines for Cancer, mental illness, tuberculosis, and
kidney diseases are also exempt beginning January 1, 2021.

c. Transactions exempted by treaties or international agreements

d. Associations dues, membership fees, and other assessments and charges collected by
homeowners’ associations and condominium corporations;
e. Sale, importation or lease of passenger or cargo vessels and aircraft, including engine,
equipment and spare parts thereof for domestic or international transport operations
f. 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;
g. Sale, importation, printing or publication of books and any newspaper, magazine, review
or bulletin which appears at regular intervals with fixed prices or subscription and sale
and which is not devoted principally to the publication of paid advertisements
h. UNDER CREATE (effective 2021), drugs, vaccines, equipment and other supplies for
COVID-19