3.2 Vat Exempt Transactions

TAXATION FAR EASTERN UNIVERSITY – MANILA

VAT EXEMPT TRANSACTIONS (302) VAT-Exempt Transaction Under Section 109 a. 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; Examples of Agricultural and Marine Food Products in their Original State Agricultural Polished/husked rice Corn grits Raw cane sugar and Molasses Ordinary salt Copra

Marine Fish Crustaceans such as: Lobsters, shrimps Prawns, oysters Mussels, clams Trout, eels

Livestock Cows Bulls Calves Pigs Sheep Goats Rabbits

Exempt sale of goods Exempt importation

Poultry Fowls Ducks Geese Turkey

. b. 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, acquarium fish, zoo animals and other animals generally considered as pets);

Exempt sale of goods Exempt importation

c. Importation of personal and household effects - belonging to residents of the Philippines returning from abroad and - non-residing citizens coming to resettle in the Philippines; - Provided, that such goods are exempt from custom duties under the Tariff and Customs Code of the Philippines;

Exempt importation

d. 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 brought 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 manufacture, shall not fall within this classification and shall therefore be subject to duties, taxes and other charges; e. Services subject to percentage tax;

Exempt importation

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

Exempt sale of services Exempt sale of services

RR No. 4-2015 (Definition of Raw Sugar and Raw Cane Sugar for VAT purposes) Raw Sugar — refers to sugar whose content of sucrose by weight in dry state, corresponds to a polarimeter reading of less than 99.5 o. Raw Sugar produced each production year shall be classified. for internal revenue purposes, as follows: ''A" is raw sugar which is intended for export to the United States Market. "B" is raw sugar which is intended for the Domestic Market. ''C" is raw sugar which is reserved for, but have not yet matured for release to the Domestic Market. "D" is raw sugar which is intended for export to the World Market. ''E" is reclassified "D" sugar for sale to Food Processors/Exporters operating Customs Bonded Warehouse (CBW) or to an enterprise located within the special processing export zone. 'Raw Cane Sugar —refers to sugar produced by simple process of conversion of sugar cane without need of any mechanical or similar device such as muscovado. For this purpose, raw cane sugar refers only to muscovado sugar. Thus only muscovado is exempt from VAT under Section 109 (1) (A) of the Tax Code. Centrifugal process of producing sugar is not in itself a simple process. Therefore, any type of sugar produced therefrom are not exempt from VAT such as raw sugar and refined sugar. Only raw sugar cane is exempt from vat. Raw sugar as sugar whose content of sucrose by weight in dry state, corresponds to a polarimeter reading of less than 99.5o. Refined sugar as sugar whose content of sucrose by weight in dry state, corresponds to a polarimeter reading of 99.5o 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: 1. Product of a refining process 2. Product of a sugar refinery 3. 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 99.5o and above.

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Nonetheless, sugar produced from sugar production lines accredited by the Bureau to be capable of producing sugar with polarimeter reading of 99.5° or above shall be prima facie presumed to be refined sugar. SECTION 3. Advance VAT. — Refined sugar and raw sugar, shall be subject to advance payment of VAT by the owner/seller before the sugar is withdrawn from any sugar refinery/mill. The amount of advance VAT payment shall be determined by applying the vat rate of 12% on the Base Price applicable base price of P1,400 per 50 kg. bag for refined sugar and P1,000 per 50 kg. bag for all other types of sugar. Exempt from Advance 1. Withdrawal of raw cane sugar payment of VAT (RR 6- 2. Withdrawal of sugar by duly accredited and registered agricultural cooperative of good standing. 2015) 3. Withdrawal of sugar by duly accredited and registered agricultural cooperative which is sold to another agricultural cooperative Withdrawal or transfer The proprietor of a sugar refinery/mill shall not allow the issuance of quedan/warehouse receipts or other evidence of ownership or allow any withdrawal of sugar from its premises without proof of ownership of sugar of payment of advance VAT. Credit for advance In addition to input tax credits under Sec. 110 of the tax code, the advance payment of VAT made by sellers of sugar under RR 6-2015 shall be allowed as credit against the output tax based on the payment actual gross selling price of sugar.

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

Exempt sale of services

Laboratory services are exempted. Hospital bills constitute medical services. If the hospital or clinic operates a pharmacy or drugstore, the sale of drugs and medicines are : 1. Sales made by the drugstore to the in-patients which are included in the hospital bills are part of medical bills exempt from VAT. 2. Sales of the drug store to the out-patients are subject to VAT, because they are not part of medical services of the hospital. (RR 14-2013) Doctor’s fee paid by a patient admitted/confined in a hospital should not be subject to VAT h. Educational services rendered by: - private educational institutions, duly accredited by DepEd, CHED and Technical Education and Skills Development Authority (TESDA), and - those rendered by government educational institutions;

Exempt sale of services

Educational services 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 TESDA i. Services rendered by individuals pursuant to an employer-employee relationship; j. 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 k. Transactions which are exempt - under international agreement to which the Philippines is a signatory or - under special laws except those granted under PD No. 529, Petroleum Exploration Concessionaries under Petroleum Act of 1949; l. Sales by agricultural cooperatives duly registered and in good standing with the 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 produce;

Exempt sale of services Exempt sale of services

Exempt sale of goods Exempt sale of services Exempt sale of goods Exempt importation

Sale by agricultural cooperatives to non-members can only be exempted from VAT if the producer of the agricultural product 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; 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) hereof; Sales by Agricultural Cooperatives To member Sale of cooperative’s own produce Exempt Other than the cooperative’s own produce (i.e. from traders) Exempt *Sale to non-members - Exempt if referring to agricultural food products in its original state.

3.2 VAT exempt transactions

To non-members Exempt VAT*

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m. Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered and in good standing with the Cooperative Development Authority; Gross receipts by Credit or Multi-purpose cooperatives From lending activities From non-lending activities

From members Exempt VAT

Exempt sale of services

From Non-members Exempt VAT

n. Sales by non-agricultural, non-electric and non-credit cooperatives duly registered and in good standing with the Cooperative Development Authority;

Exempt sale of services

- Provided, That the share capital contribution of each member does not exceed P15,000 and regardless of the aggregate capital and net surplus ratably distributed among the members; Gross receipts by From members From non-members Electric cooperatives VAT VAT Non-agricultural, non-electric, non-lending/credit cooperatives Contribution per member < P15,000 Exempt Exempt Contribution per member > P15,000 VAT VAT

Under the IRR, all duly-registered cooperatives enjoy exemption from transactions with insurance companies and banks. Also, cooperatives dealing exclusively with members are exempt from payment of any taxes and fees, including but not limited to, income tax, percentage tax, donor's tax, excise tax, documentary tax, and the annual registration fee of P500. Electric cooperatives are also exempt from payment of Value Added Tax (VAT) on systems loss and VAT on the distribution of electricity to their members. Cooperatives doing business with members and non-members with accumulated reserves and undivided net savings of not more than P10 million are exempted from the same taxes as those that deal with members only. Likewise, business transactions with members of duly registered cooperatives which have accumulated reserves and undivided net savings of more than P10 million are exempted from all national internal revenue taxes for which it is liable. On the other hand, duly registered cooperatives with accumulated reserves and undivided net savings of more than P10 million dealing with non-members shall pay their income taxes and VAT at their full rate, subject to some exemptions. VAT, will not be collected against sales by agricultural cooperatives, including sales to non-members, importation of direct farm inputs, machineries and equipment, including spare parts, to be used directly and exclusively in the production and/or processing of their produce; gross receipts from lending companies by credit or multi-purpose cooperatives; and sales by non-agricultural, non-electric and non-credit cooperatives.

o. Export sales by persons who are not VAT registered; Export sales

Non-VAT registered

VAT registered

Vat Exempt

Vatable sales)

(zero

Exempt sale of goods rated

Export Sales by a VAT Registered Entity Zero Output tax 1. Refunded Input tax 2. Claimed as deduction or tax credit against output 3. Claimed as tax credit against any internal revenue taxes Export Sales by a Non-VAT Registered Entity VAT exempt Output tax Not allowed (charged to cost or expense) Input tax : p. The following sales of real properties are exempt from VAT, namely:

Exempt sale of real properties

1. Sale of real property not primarily held for sale to customer or held for lease in the ordinary course of trade or business. However, even if the real property is not primarily for sale to customers or held for lease in the ordinary course of trade or

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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; 2. Sale of real property utilized for low-cost housing (price ceiling per unit of: Level 1 - P450,000 to P1,700,000; Level 2 P1,700,000 to P3,000,000; (1) 3. Sale of real property utilized for socialized housing (price ceiling for house and lot – P450,000; for lot only – P180,000); 4. Sale of residential lot valued at P1,500,000 and below and house and lot and other residential dwellings valued at P2,500,000 and below.

Provided, That beginnning 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 Republic Act No. 7279, sale of house and lot, and other residential dwellings with selling price of not more than Two million pesos (P2,000,000): Provided, further, That every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price q. Lease of: - residential units - with a monthly rental not exceeding P15,000 - regardless of the amount of the aggregate rentals received by the lessor during the year.

Exempt lease of properties

Residential unit shall refer to 1. Apartment and houses and lots used for residential purposes 2. Buildings or parts or units thereof used solely as dwellings places (i.e., dormitories, rooms, bed spaces) except motels, motel rooms, hotel and hotel rooms. Unit shall refer to 1. Apartment unit in case of apartments 2. House in case of residential houses 3. Per person in case of dormitories, boarding houses and bed spaces 4. Per room in case of rooms for rent Lease of Residential Units Monthly Rental Annual Receipts Tax Monthly rental P3,000,000 VAT exempt Monthly rental P15,000 > P3,000,000 VAT Monthly rental > P15,000 < P3,000,000 VAT exempt** ** Non-VAT registered (Subject to 3% percentage tax) Lease of commercial units, regardless of the amount of monthly rental is subject to VAT unless the lessor is non-VAT registered and annual gross receipts
s. Transport of passengers by international carriers

Exempt sale of goods Exempt sale of services Exempt importation Exempt importation

(RR 15-2015) The transport of passengers by international carriers doing business in the Philippines shall be exempt from value-added tax (VAT), as amended by RA No. 10378. The transport of cargo by international carriers doing business in the Philippines shall be exempt from VAT pursuant to Sections 109(1)(E) of the NIRC, as amended by RA No. 10378. International carriers exempt under Sections 109(1)(S) and 109(1)(E) of the NIRC, as amended, shall not be allowed to register for VAT purposes. t. Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts thereof for domestic or international transport operations.

Exempt sale of goods

(RR 15-2015) 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, however, 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 Maritime Industry Authority (MARINA).

Exempt importation

u. Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations; provided, that

Exempt

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importation

the fuel, goods, and supplies shall be used for international shipping or air transport operations. (RR 15-2015) Importation of fuel, goods and supplies by persons engaged in international shipping and air transport operations; Provided, that the said fuel, goods and supplies shall be used exclusively or shall pertain to the transport of goods and/or passengers 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 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 fuel, goods and supplies shall be subject to 12% VAT; v. 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; and

Exempt sale of services

(W) Sale or lease of goods and services to senior citizens and persons with disability, as provided under Republic Act Nos. 9994 (Expanded Senior Citizens Actof2010) and10754 (An Act Expanding the Benefits and Privileges of Persons With Disability), respectively;

Exempt sale of goods Exempt sale of services Exempt lease of properties Exempt sale of services

(X) Transfer of property pursuant to Section 40(C)(2) of the NIRC, as amended;(persons retiring from business) (Y) Association dues, membership fees, and other assessments and charges collected by homeowners associations and condominium corporations; (Z) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); (AA) Sale of drugs and medicines prescribed for diabetes, high cholesterol, and hypertension beginning January 1, 2019; and (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 Three million pesos (P3,000,000).

Exempt sale of goods Exempt sale of goods Exempt sale of goods Exempt sale of services Exempt lease of properties

Sale or lease of - goods or properties or - the performance of services - other than the transactions mentioned in the preceding paragraphs, - the annual gross annual sales and/or receipts do not exceed the amount of P3,000,000. For the purpose of the threshold of P3,000,000, the husband and wife shall be considered separate taxpayers. However, the aggregation rule for each taxpayer shall apply. For instance, if a professional, aside from the practice of his profession, also derives revenue from other lines of business which are otherwise subject to VAT, the same shall be combined for purposes of determining whether the threshold has been exceeded. Thus, the VAT-exempt sales shall not be included in determining the threshold.

PWD/ Senior Citizen

Discount = (Total Billing Amount - VAT) x 20% Amount Due: Total bill inclusive of VAT Less: VAT Total bill exclusive of VAT Less: 20% discount Total amount Due **

Total Billing Amount No. Of Customers

Xxx (xxx) Xxx (xxx) ** Xxx

Less VAT

x 20%

2. Mandatory Registration under the VAT System Persons required Any person who, in the course of trade or business, sells, barters or exchanges goods or properties or engages in the sale or to mandatorily exchange of services shall be liable to register if: a. His gross sales or receipts for the past twelve (12) months, other than those that are exempt under Sec. 109 (1) (A) to (AA) register of the Tax Code, have exceeded three million pesos (P3,000,000) or b. There are reasonable grounds to believe that his gross sales or receipts for the next twelve (12) months, other than those that are exempt under Sec. 109 (1) (A) to (AA) of the Tax Code, will exceed three million pesos (P3,000,000). 3. Optional Registration of VAT-Exempt Persons a. Persons a. Any person who is VAT exempt under Section 109 (BB) not required to register for VAT may elect to be VAT-registered by allowed VAT registering with the RDO that has jurisdication over the head office of that person, and pay the annual registration fee of P500 for every separate and distinct establishment; registration b. Any person who is VAT-registered but enters into transactions which are exempt from VAT (mixed transactions) may opt

3.2 VAT exempt transactions

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b. Irrevocability of the optional VAT registration

that the VAT apply to his transactions which would have been exempt under Section 109 (1) of the Tax Code; c. Franchise grantees of radio and/or television broadcasting whose annual gross receipts of the preceding year do not exceed P10,000,000 derived from the business covered by the law granting the franchise may opt for VAT registration. This option, once exercised, shall be irrevocable. Once the election is 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 ten million pesos (P10,000,000) where the option becomes perpetually irrevocable.

EXERCISES Exercise A Instruction: Place E if the transaction is VAT exempt. 1 Sale of meat, fish, vegetables and fruits that have undergone the simple process of preparation or preservation such as freezing, drying, salting, broiling, roasting, smoking, stripping including advanced technological means of packing (shrink wrapping in plastics, vacuum packing, tetra-pack and other similar packaging methods). 2 Importation of resettlers of personal and household effects. 3 Growing of poultry, livestock and marine food products into marketable products. 4 Laboratory services and medicines provided by the hospital to the patient. 5 Sale of drugs and medicine by a pharmacy operating in a hospital. 6 Seminars, in service trainings, review classes conducted by the University of the Philippines. 7 Sale of medicine to a senior citizen, person with disability and to students 8 Sale of four adjacent lot with a contract price of P1,000,000 per lot. 9 Sale of parking lot amounting to P900,000. 10 Sale of e-books, e-journals, CDs and software. 11 Transport of goods and cargo by an international carrier. 12 Honorarium given to a director of a company who is at the same time is also a manager of the production department. 13 Services rendered by a regional area headquarters. 14 Importation by non-agricultural, non–electric, and non-credit cooperatives. Exercise B (Adapted) Instruction: Determine the VAT-subject and VAT-exempt amounts: Selling price: Condominium unit Parking lot VAT-subject Vat-exempt

E

E E E

E E E E

A P1,500,000 1, 500,000

B P3,500,000 800,000

C P5,000,000 900,000

P 1,500,000 P 3,000,000

P4,300,000

P5,900,000

Lot E P1,900,000 Buyer 2 P1,900,000

Lot F P2,000,000 Buyer 3 P2,000,000 -

Exercise C Instruction: Determine which is VAT-subject and VAT-exempt from sale of adjacent lots A to F. Lot A Lot B Lot C Lot D Value of the lot P500,000 P700,000 P800,000 P800,000 Sold to Buyer A Buyer A Buyer A Buyer 1 VAT-subject P500,000 P700,000 P800,000 VAT-exempt P800,000

Exercise D Instruction: Determine the VAT-subject and VAT-exempt amounts from the rentals of residential units and commercial units. Residential Commercial Unit Unit Case A-Monthly rental per unit (10 residential units and 10 commercial units) P 10,000 P 10,000 Annual gross rentals P1,200,000 P1,200,000 VAT-subject VAT-exempt P1,700,000 P1,700,000 Case B -Monthlyrental per unit (10 residential units and 10 commercial units) Annual gross rentals VAT-subject VAT-exempt

P 15,000 P1,536,000 P2,500,000

P 15,000 P1,536,000 P2,536,000 -

Case C -Monthlyrental per unit (10 residential units and 10 commercial units) Annual gross rentals VAT-subject VAT-exempt

P 35,000 P1,800,000 P1,900,000

P 15,000 P1,800,000

Case D -Monthlyrental per unit (10 residential units and 10 commercial units) Annual gross rentals VAT-subject VAT-exempt

P 15,000 P4,800,000 P4,300,000 -

P 15,000 P6,800,000 P4,300,000 -

3.2 VAT exempt transactions

P1,900,000

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Exercise E (Adapted) Instruction: Determine the VAT-subject and VAT-exempt amounts: Case A – Gross sales, trading business VAT-subject VAT-exempt Case B –Gross receipts, practice of profession Gross receipts, massage parlor Gross sales, trading business Gross receipts, gym business Gross sales, RTW and bags business Gross rentals, monthly rental for leased units, P10,000 Gross sales, pineapple, coconut and vegetables (farm produce) Gross sales, Milk fish from own fishpond, marinated and vacuum packed. Gross receipts, poultry contract grower services Total VAT-subject VAT-exempt

Husband P3,919,500 P1,919,500

Wife P3,000,000 P2,000,000 -

P1,000,000

P 1,200,000

1,000,000 1,500,000

1,500,000

1,200,000 300,000

P6,919,500 P4,419,500 P1,500,000

Case C- Gross receipts practice of profession Salaries Tuition fees from family owned vocational school registered under TESDA Sale of own published books Total VAT-subject VAT-exempt

1,000,000 1,300,000 P7,000,000 P5,700,000 P1,300,000

P1,000,000 2,000,000 5,000,000 1,000,000 9,000,000

1,000,000 500,000 5,000,000 6,500,000

9,000,000

6,500,000

Exercise F Determine whether or not the VAT can be passed-on and the treatment of the passed-on VAT. 1. 2. 3. 4.

Sale by a VAT registered seller to a VAT-registered trader Sale by a VAT registered seller to a VAT-exempt trader Sale by a VAT-registered seller to IRRI Sale by a VAT-exempt seller to a VAT-subject trader

3.2 VAT exempt transactions

Can pass on VAT? Input tax Cost and expense -

Treatment Yes Yes No No

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