CHAPTER 8

OUTPUT VAT - ZERO-RATED

SALES

CHAPTER 8
OUTPUT VAT - ZERO-RATED
SALES

THE ZERO-RATED VAT

Vat Exemption

Zero-rating

Output VAT

No output VAT

No output VAT

Input Vat
Treatment

Deductible against
gross income

Creditable or
refundable

Extent of tax
relief

Partial

Total

CHAPTER 8
OUTPUT VAT - ZERO-RATED
SALES

Illustration: Difference in Treatment

During the month, Rizal Corporation

purchased goods invoiced at P350,000
excluding P42,000 input tax. It
exported the goods for $12,000 which
is equivalent to P510,000 and incurred
P10,000 in expenses.

Assuming Rizal Corporation is a VAT

taxpayer
The sale shall be subject to a zero-rated VAT. Rizal Corporation
shall compute
its VAT liability as follows:
Output VAT
P
0
Less: Input VAT
42,000
Excess input VAT
(P
42,000)

Rizal Corporation shall compute its taxable income and income tax
due as follows:
Sales
P 510 000
Less: Cost of goods sold, exclusive of VAT
350,000
Gross income
P 160 000
Less: Deductions
10,000
Taxable income
P 150, 000
Multiply by Corporate income tax rate
30%
Income tax due
45,000

Assuming Rizal Corporation is a non VAT

taxpayer
Rizal Corporation shall compute its taxable income and
income tax due as follows
Sales
P 510
000
Less: Cost of goods sold (P350K + P42K]
392,000
Gross income
P 118 000
Less: Deductions
10,000
Taxable income
P 108 000
Multiply by Corporate tax rate
30%
lncome tax due
P 32,400

ZERO-RATED SALES
Zero-rated sales are foreign consumptions
such as export sales and other sales to nonresidents including transactions that are granted
with a zero-rating status by special law or by
international agreement to which the Philippines
is a signatory.

Categories of zero-rated sales

A. Zero-rated sales of goods or properties

1. Export sales
2. Foreign currency denominated
sales
3. Sales to tax-exempt persons or
entities under special laws or
international agreements

A. Zero-rated sales of goods or properties

Under the NIRC as amended, "Export sales" shall
mean:
1. Direct export - sale and actual shipment of goods
from the Philippines to a foreign country, irrespective
of the shipping arrangement.
2. Indirect export - sale of raw materials or
packaging materials to a non-resident buyer for
delivery to a resident local-export oriented enterprise
to be used in manufacturing, processing, packing or
repacking in the Philippines of the said buyers.

EXPORT SALES -

SALES T0 NON-RESIDENTS

Requirement for zero-rating of export sales to

non-residents:
a. The sale must have been paid for or its
equivalent in goods or services.
b. The sale must be accounted for under the rules
of the BSP.

lllustration 1

Export destination
Export for
Hongkong

Terms
FOB destination

Payment
$ 100,000

Export for Thailand

FOB destination

P 450,000

Export to Japan

FOB shipping point

800,000

Guimaras Company made the following export sales during the year:

Illustration 2
XHI Corporation, a VAT-registered export trader, had the following export sales during the month:

Goods Exported

Amount

Traceable Input
VAT

Processed Foods

$ 200,000

P 25,000

Fruits and
vegetables

50,000

P 45,000

3.) Sale to an export-oriented enterprise

- The sale of raw materials or packaging materials
to an export-oriented enterprise whose sales
exceed seventy percent (70%) of total annual
production
production is subject to zero-rated VAT.

4.) Sale of goods to the BSP

Illustration 1
Mang Joseph, a VAT-registered miner, sold to the BSP his gold
production of 2,000 grams of raw gold nuggets with specific gravity
of 1_4.9. The final BSP assay results in the following pay-out before
refining charges:

Gold(74%)
Silver(18%)
Trace Elements
(8%)
Total

Final assay

Price/gram

Price

1,480 grams

P 1, 740.00

P 2, 572, 200

360 grams

43.00

15,480

160 grams
2,000 grams

P 2, 590,680

5. Transactions considered export sales under

E0 226 and other special laws
1. The Philippine F.0.B. value of export products
export products exported directly by export
producer
2. The net selling price of export products sold by a
registered export producer to another export
producer
3. The net selling price of export products sold by a
registered export producer to an export trader that
subsequently exports the same

4. Even without actual exportation, the following shall be

considered constructively exported:
a. Sales to bonded manufacturing warehouses of exportoriented enterprises
b. Sales to export processing zones in pursuant to RA 7916,
7903, 7922 and other similar export processing zones
Examples of Philippine Ecozones:
1. Philippine Economic Zone Authority (PEZA)
2. Cagayan Special Economic Zone
3. Zamboanga Special Economic Zone
4.Clark Special Economic Zone
5. Clark Freeport Zone 6. Poro Point Special
6. Economic and Freeport Zone
7.]ohn Hay Special Economic Zone
8. Aurora Special Economic Zone (ASZ) RA 9490

c. Sales to enterprises duly registered and accredited with the

Subic Bay Metropolitan Authority (RA 7227)
d. Sales to registered export traders operating bonded
manufacturing warehouses supplying raw materials in the
manufacture of export products
e. Sales to diplomatic missions and other agencies and or
instrumentalities granted tax immunities, of locally
manufactured, assembled or repacked products whether or not
paid for in foreign currencies
f. Sale of goods, properties or services to a BOl-registered
manufacturer or producer

FOREIGN CURRENCY DENOMINATED

SALE
- sale to non-residents of goods, (except export
of automobiles and non essential commodities),
assembled or manufactured in the Philippines for
delivery to a resident in the Philippines, paid for in
acceptable foreign currency and accounted for in
accordance with the rules and regulation of the
BSP.

6.) The sale of goods, supplies,

equipment and fuel to persons engaged
in international shipping or
international air transport operations
Illustration
Sibalom Company, a VAT taxpayer, sold supplies to
Pan-Pacific Airlines:
Pan-Pacific Airline Division
Domestic operation
International operation

Amount
P 400,000
500,000

SALES T0 TAX-EXEMPT PERSONS OR

ENTITIES UNDER SPECIAL LAWS OR
INTERNATIONAL AGREEEMENTS
Tax-exempt entities under special laws:
a. Subic Bay Metropolitan Authority (SBMA)-registered enterprises
b. Philippine Economic Zone Authority (PEZA)-registered enterprises
c. Philippine National Red Cross (PNRC) Sec. 5 (c), RA 10072
d. Philippine Amusement and Gaming Corporation (PAGCOR) and its
licensees or contractorsPD1869

Tax-exempt entities under international

agreements:
a. Asian Development Bank (ADB)
b. International Rice Research Institute (IRRI)
c. United Nation (UN) and its various organizations, such as World
Health Organization and UNICEF
d. United States Agency for International Development (USAID) and
its
personnel and contractors (RMC 40-07)
e. Embassies, qualified employees and dependents subject to the
reciprocity rule

The VAT reciprocity exemption on

Embassies and their personnel
Illustration
ABC Corporation, a VAT supplier, sold office supplies and equipment to
the following embassies:
Embassy

Exemption Status

Ukraine Embassy
400,000
Russian Embassy
600,000
Total
P1,000,000

Without reciprocity exemption

With reciprocity exemption

Sales
P

EFFECTIVELYZERO-RA TED SALES OF GOODS

OR PROPERTIES
Requirement for effective zero-rating
Other cases of zero-rated sales other than direct
export and foreign currency denominated sales
shall require prior application with the appropriate
BIR office for effective zero-rating. Without an
approved application for effective zero-rating, the
transaction otherwise entitled to zero-rating shall be
considered exempt. (Sec. 4.106-6, RR16-2005)

Examples of transactions
covered by the zero~rating
application requirement
a. Sales to export-oriented enterprises
b. Sales of goods, supplies, equipment and fuel to persons
engaged in
international shipping or international air transport
operations
c. Sales to BOIregistered enterprises
d. Sale to tax exempt persons such as ecozones, except
senior citizens

Examples of transactions not covered

by the application requirement
a. Direct export
b. Indirect exports (Foreign currency
denominated sales)
c. Sales to Eco zone-registered enterprisesthese are subject to an automatic zerorating treatment [RMC 74-99)

ZERO-RATED SALES OF SERVICES

1.) Sale of services to non-residents
a. Processing, manufacturing or repacking goods for
other persons doing business outside the Philippines,
which goods are subsequently exported
b. Services other than processing, manufacturing or
repacking rendered to a person engaged in business
conducted outside the Philippines or to a
non-resident person not-engaged in business who is
outside the Philippines when the services are performed

Requirement for zero-rating of services

to non-residents:
a. The services must be performed in the
Philippines
b. The services must be paid for in acceptable
foreign currency or its equivalent in good or
services.
c. The payment must be accounted for under the
rules and regulations of the BSP

Illustration 1

Excel Tailoring, a VAT taxpayer, is engaged in sewing business.

During the month, it had the following receipts from sewing
services from various clients:
Item
School uniforms
800,000
Garments Levi's
100,000
Curtains Finesse
1,000,000

Client
Amount
DLSU, a Philippine university

a foreign dressmaker
a foreign textile manufacturer

$
P

Illustration 2
General Consultants, a VAT taxpayer, provides
various services to clients. The detail of each
transaction during the month is shown below:
Client

Place rendered
Amount

A foreign corporate client

200,000
A resident foreign corporation
100,000
A non-resident foreign corporation
1,000,000

Abroad

Philippines

Philippines

2.) Effectively zero-rated sales of services

The term shall be limited to local sale to persons to a person
or entities that enjoy exemption from indirect taxes:
1. Services rendered to persons or entities exempt under
special law or international agreement
Examples of entities with indirect tax exemptions:
a. Asian Development Bank (ADB)
b .International Rice Research Institute (IRRI)
c. Embassies, subject to reciprocity rule
d. Philippine Amusement and Gaming Corporation (PAGCOR)
e. Philippine National Red Cross [PNRC]
f. ECOZONES registered enterprises (RA 7916)

2. Services rendered to persons engaged in

international shipping or air transport operations,
including leases of property for use thereof.
3. Services performed by subcontractor and or
contractors in processing, converting, or
manufacturing goods for an enterprise whose export
sales exceed 70% of total annual production (i.e.
export-oriented enterprise).

Illustration 1
Mr. Johnny, a VAT taxpayer, provides pest control services to
vessels of Philippine Seagulls, a domestic shipping company
engaged in both domestic and international shipping
operations.
Mr. Johnny earned the following during the month from
Philippine Seagulls:
Source of service fees Amount
Domestic transport division
P 400,000
International transport division
600,000
Total
1,000,000

Illustration 2
Berde Residences leases residential units to
certain embassy personnel of foreign
governments:
Foreign embassy personnel
VA T status
Mr. Vladimir Cutin
A Russian with VEIC
Mr. Marco Poroshenco
A Ukrainian without VEIC
20,000
Mrs. Janice Naran
A Mongolian without VEIC
Total
82,000

Rental
P 50,000

12,000

Transport of passengers and cargo by

domestic air or sea carriers from the
Philippines to a foreign country
Illustration 1:
Phinoy Airline had the following receipts during a month:
Incoming ights [Philippines to Abroad)
Outgoing ights (Abroad to Philippines)
Domestic ights (Philippines to Philippines)
Total
P 1,000,000,000

P 200,000,000
300,000,000
500,000,000

Illustration 2
Singapore Ocean Liners, an international sea carrier,
had the following receipts during a month:
Incoming voyage (Philippines to Abroad) P
200,000,000
Outgoing voyage (Abroad to Philippines) 300,000,000

Sale of power or fuel generated through renewable sources

of energy
Types of businesses in the electricity business:
a. Generation companies refers to persons or entities
authorized by the Energy Regulatory Commission (ERC)
to operate a facility used in the production of electricity.
b. Transmission companies refers to any person or
entity that owns and conveys electricity through the
high voltage backbone system and or subtransmission assets.
c. Distribution c0mpanies refers to persons or entities including
a distribution utility such as electric cooperative which operates a
distribution system with the provision of RA 9136 (EPIRA law)

Illustration 1
Northern Electric is a generation company with the
following receipts during a month:
Sale of electricity
12,000,000
Sale of electricity
10,000,000
Sale of electricity
30,000,000
Sale of electricity
15,000,000

generated from hydro plant

generated from solar plant
from coal-powered plant
from natural gas-power plant