TAXATION

FAR EASTERN UNIVERSITY – MANILA

VAT EXEMPT TRANSACTIONS (302)
VAT-Exempt Transaction Under Section 109
Exempt sale of
a. Sale or importation of: goods
- agricultural and marine food products in their original state. Exempt
- livestock and poultry of a kind generally used as, or yielding or producing foods for human consumption; and importation
- breeding stock and genetic materials;
Examples of Agricultural and Marine Food Products in their Original State

Agricultural Marine Livestock Poultry

Polished/husked rice Fish Cows Fowls
Corn grits Crustaceans such as: Bulls Ducks
Raw cane sugar and Molasses Lobsters, shrimps Calves Geese
Ordinary salt Prawns, oysters Pigs Turkey
Copra Mussels, clams Sheep
Trout, eels Goats
Rabbits
.
b. Sale or importation of: Exempt sale of
- fertilizers, seeds, seedlings and fingerlings; goods
- fish, prawn, livestock and poultry feeds, including ingredients, whether locally produced or imported, used in the manufacture of Exempt
finished feeds. importation
- (except specialty feeds for race horses, fighting cocks, acquarium fish, zoo animals and other animals generally considered as
pets);

c. Importation of personal and household effects Exempt

- belonging to residents of the Philippines returning from abroad and importation
- 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;

d. Importation of professional instruments and implements, tools of trade, occupation or employment, wearing apparel, domestic Exempt
animals, and personal and household effects belonging to persons coming to settle in the Philippines or Filipinos or their families importation
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 sale of
services
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
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.
Base Price The amount of advance VAT payment shall be determined by applying the vat rate of 12% on the
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
2015) standing.
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
of ownership of sugar or other evidence of ownership or allow any withdrawal of sugar from its premises without proof
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
payment by sellers of sugar under RR 6-2015 shall be allowed as credit against the output tax based on the
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: Exempt sale of

- private educational institutions, duly accredited by DepEd, CHED and Technical Education and Skills Development Authority services
(TESDA), and
- those rendered by government educational institutions;

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; Exempt sale of
services
j. Services rendered by regional or area headquarters established in the Philippines by multinational corporations: Exempt sale of
- which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific services
Region and
- do not earn or derive income from the Philippines

k. Transactions which are exempt Exempt sale of

- under international agreement to which the Philippines is a signatory or goods
- under special laws except those granted under PD No. 529, Petroleum Exploration Concessionaries under Petroleum Act of 1949; Exempt sale of
services
l. Sales by agricultural cooperatives duly registered and in good standing with the Cooperative Development Authority to their Exempt sale of
members as well as goods
- sale of their produce, whether in its original state or processed form, to non-members; Exempt
-their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and importation
exclusively in the production and/or processing of their produce;

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 To non-members

Sale of cooperative’s own produce Exempt Exempt
Other than the cooperative’s own produce (i.e. from traders) Exempt VAT*
*Sale to non-members - Exempt if referring to agricultural food products in its original state.

3.2 VAT exempt transactions Page 2 of 7

m. Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered and in good standing with the Exempt sale of
Cooperative Development Authority; services

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

From lending activities Exempt Exempt
From non-lending activities VAT VAT

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

- 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; Exempt sale of
Non-VAT registered VAT registered goods
Export sales Vat Exempt Vatable (zero rated
sales)

Export Sales by a VAT Registered Entity

Output tax Zero
Input tax 1. Refunded
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

Output tax VAT exempt
Input tax Not allowed (charged to cost or expense)

:
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

3.2 VAT exempt transactions Page 3 of 7

 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: Exempt lease
- residential units of properties
- with a monthly rental not exceeding P15,000
- regardless of the amount of the aggregate rentals received by the lessor during the year.

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 <P15,000 > P3,000,000 VAT exempt
Monthly rental <P15,000 < 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 <P3,000,000.

r. Sale or importation, printing or publication of books and any newspaper, magazine, review or bulletin which appears at regular Exempt sale of
intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of paid goods
advertisement; Exempt sale of
services
Exempt
importation
s. Transport of passengers by international carriers 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 Exempt sale of
domestic or international transport operations. goods

(RR 15-2015) Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts Exempt
thereof for domestic or international transport operations; Provided, however, that the exemption from VAT on the importation
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).

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

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 the fuel, goods, and supplies shall be used for international shipping or air transport operations. importation

(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 Exempt sale of
intermediaries, such as money changers and pawnshops, subject to percentage tax under Secs. 121 and 122, respectively, of the Tax services
Code; and

(W) Sale or lease of goods and services to senior citizens and persons with disability, as provided under Republic Act Nos. 9994 Exempt sale of
(Expanded Senior Citizens Actof2010) and10754 (An Act Expanding the Benefits and Privileges of Persons With Disability), goods
respectively; Exempt sale of
services
(X) Transfer of property pursuant to Section 40(C)(2) of the NIRC, as amended;(persons retiring from business) Exempt lease
of properties
(Y) Association dues, membership fees, and other assessments and charges collected by homeowners associations and Exempt sale of
condominium corporations; services

(Z) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); Exempt sale of
goods
(AA) Sale of drugs and medicines prescribed for diabetes, high cholesterol, and hypertension beginning January 1, 2019; and Exempt sale of
goods
(BB) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding Exempt sale of
paragraphs, the gross annual sales and/or receipts do not exceed the amount of Three million pesos (P3,000,000). 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 Xxx
Less: VAT (xxx)
Total bill exclusive of VAT Xxx
Less: 20% discount (xxx) **
Total amount Due Xxx

** Total Billing Amount

No. Of Customers 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:
register 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)
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
registration for every separate and distinct establishment;
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 Page 5 of 7

 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.
b. Irrevocability Once the election is made, it shall be irrevocable for a period of three (3) years counted from the quarter when the election
of the optional was made except for franchise grantees of radio and TV broadcasting whose annual gross receipts for the preceding year do not
VAT registration 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 E
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. E
3 Growing of poultry, livestock and marine food products into marketable products. E
4 Laboratory services and medicines provided by the hospital to the patient. E
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. E
12 Honorarium given to a director of a company who is at the same time is also a manager of the production department. E
13 Services rendered by a regional area headquarters. E
14 Importation by non-agricultural, non–electric, and non-credit cooperatives. E

Exercise B (Adapted)
Instruction: Determine the VAT-subject and VAT-exempt amounts:
Selling price: A B C
Condominium unit P1,500,000 P3,500,000 P5,000,000
Parking lot 1, 500,000 800,000 900,000

VAT-subject P 1,500,000 P4,300,000 P5,900,000

Vat-exempt P 3,000,000

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 Lot E Lot F
Value of the lot P500,000 P700,000 P800,000 P800,000 P1,900,000 P2,000,000
Sold to Buyer A Buyer A Buyer A Buyer 1 Buyer 2 Buyer 3
VAT-subject P500,000 P700,000 P800,000 - - P2,000,000
VAT-exempt P800,000 P1,900,000 -

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) P 15,000 P 15,000
Annual gross rentals P1,536,000 P1,536,000
VAT-subject - P2,536,000
VAT-exempt P2,500,000 -

Case C -Monthlyrental per unit (10 residential units and 10 commercial units) P 35,000 P 15,000
Annual gross rentals P1,800,000 P1,800,000
VAT-subject -
VAT-exempt P1,900,000 P1,900,000

Case D -Monthlyrental per unit (10 residential units and 10 commercial units) P 15,000 P 15,000
Annual gross rentals P4,800,000 P6,800,000
VAT-subject P4,300,000 P4,300,000
VAT-exempt - -

3.2 VAT exempt transactions Page 6 of 7

Exercise E (Adapted)
Instruction: Determine the VAT-subject and VAT-exempt amounts:
Husband Wife
Case A – Gross sales, trading business P3,919,500 P3,000,000
VAT-subject - P2,000,000
VAT-exempt P1,919,500 -

Case B –Gross receipts, practice of profession P1,000,000 P -

Gross receipts, massage parlor 1,200,000
Gross sales, trading business 1,000,000
Gross receipts, gym business 1,500,000 -
Gross sales, RTW and bags business 1,500,000
Gross rentals, monthly rental for leased units, P10,000 1,200,000
Gross sales, pineapple, coconut and vegetables (farm produce) 300,000
Gross sales, Milk fish from own fishpond, marinated and vacuum packed. 1,000,000
Gross receipts, poultry contract grower services 1,300,000
Total P6,919,500 P7,000,000
VAT-subject P4,419,500 P5,700,000
VAT-exempt P1,500,000 P1,300,000

Case C- Gross receipts practice of profession P1,000,000 1,000,000

Salaries 2,000,000 500,000
Tuition fees from family owned vocational school registered under TESDA 5,000,000 5,000,000
Sale of own published books 1,000,000
Total 9,000,000 6,500,000
VAT-subject
VAT-exempt 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.
Can pass on VAT? Treatment
1. Sale by a VAT registered seller to a VAT-registered trader Input tax Yes
2. Sale by a VAT registered seller to a VAT-exempt trader Cost and expense Yes
3. Sale by a VAT-registered seller to IRRI - No
4. Sale by a VAT-exempt seller to a VAT-subject trader - No

3.2 VAT exempt transactions Page 7 of 7