Zero rated Transactions (Number 3 and 4)

Zero rated transactions are those which does not result in output VAT but note that
notwithstanding its outcome, a registered taxpayer is entitled to claim input VAT (either as Tax
credit or refund). However, it is equally important to note that an unregistered taxpayer's sale of
zero-rated sales of goods or services is to be treated as VAT Exempt, hence not entitled to Input Tax
Credit or Refund.

I. Zero-Rated Sales of Goods may be subdivided into two:

1. Export sales

2. Effectively zero-rated sales

Export sales deemed zero-rated if the transaction involves the following:

1. Sale of goods to a foreign country which was paid in acceptable foreign currency

2. Sale of raw materials or packaging materials to a non-resident buyer for delivery to a resident
export-oriented enterprise, which was paid in acceptable foreign currency

3. Sale of raw materials or packaging materials to export-oriented enterprises whose export sales
exceed 70% of annual production

4. Export sales under the Omnibus Investment Code and other special laws that apply (e.g. Sales to
bonded manufacturing warehouses of export-oriented manufacturers; Sales to BOI registered
producer whose products are 100% exported)

5. Sale of goods, supplies, equipment, and fuel to persons engaged in international shipping or
international air transport operations with the condition that such sale shall pertain to the
transport of goods and passengers from a Philippine port directly to a foreign port or vice versa,
without docking or stopping ay any port of the Philippines.

Important: Sales under item 2, 3 & 4 are subject to 12% VAT if such sale has fulfilled the conditions
below:

1. Existence or creation of an enhanced VAT refund system that grants refunds of creditable input
taxes within 90 days from the filing of VAT refund application with the Bureau: and

2. All pending VAT refund claims as of 12/31/17 shall be fully paid by 12/31/19
2. Effectively zero-rated sales

Local sales by VAT Registered entities to Tax exempt persons (e.g. Granted exemption from indirect
taxes) under a special law or international agreement, such as the following:

1. Enterprises registered with the SBMA, CDA, PEZA and other export processing zones

2. Asian Development Bank and International Rice Research Institute

3. Sales to diplomatic missions and other agencies or instrumentalities granted tax immunities

4. RHQ of multinational corporations enjoying zero rating of VAT in its purchases

5. Other persons/entities who are entitled to 0% VAT on purchases (e.g. Purchaser is exempt from
the input VAT normally charged by the seller)

II. Zero-rated sales of services

Services rendered within Philippine boundaries by VAT registered persons shall be subject to 0%
VAT rate. Those are as follows:

1. Processing, manufacturing or repacking of goods for persons which goods are subsequently
exported and are paid for in acceptable foreign currency.

2. Services performed by contractors or subcontractors in processing, converting or manufacturing

goods for an enterprise whose export sales exceed 70% of total annual production

3. Services rendered to a person engaged in business outside the Philippines, or to a non- resident
person not engaged in business and who is outside the Philippines, and which are subsequently
paid for in acceptable foreign currency

4. Services rendered to persons who are granted, either by special laws or international
agreements, a 0% rate of the supply of such.

5. Services rendered to persons engaged in international shipping or international air transport

operations, including leases of property for use thereof with the condition that such sale of services
pertain to the unhampered transport of goods and passengers from a PH port to a foreign port or
vice versa.

6. Transport of passengers and cargo by domestic air or sea carriers from the PH to a foreign
country. Note: Due to lack of jurisdiction (Situs), transport of passengers and cargo, whether by sea
or air, from a foreign country to the PH is exempt from business taxes including VAT.
7. Sale of power or fuel generated through renewable sources of energy such as solar, wind,
biomass, geothermal, and ocean energy. But such zero-rating does not apply to the operating and
maintenance requirements related to the generation of such energy

Important: Sales under item 1 & 2 are subject to 12% VAT if such sale has fulfilled the conditions
below:

1. Existence or creation of an enhanced VAT refund system that grants refunds of creditable input
taxes within 90 days from the filing of VAT refund application with the Bureau: and

2. All pending VAT refund claims as of 12/31/17 shall be fully paid by 12/31/19

Illustrative Example 1:
Zero-rated sale of Goods
Now experiencing financial distress die to the delay of her own movie, Natasha Romanoff had
decided to engage in international trade of modern ballpens that is inked with spider's blood. She
us now a VAT-registered export-trader in the Philipines and had the following transactions:

A. Sold 100,000 boxes of ballpen to a Japanese buyer for ¥450,000. Exchange rate is Php. 70 : ¥1
B. Sold 300,000 boxes of remodified and rebranded Panda ballpen to a Chinese buyer for $50,000.
Exchange rate is Php 55 : ¥1
C. Sold 250,000 liters of spider blood to a fellow export-oriented entity whose sales are 70.01%
exported for Php 900,000
D. Sold 100,000 signature ballpen caps to a Chinese imitation entity whose sales are 100% exported
E. On March 15, 2020, her manufacturing plant has discovered that the ink they developed from
spider blood is also capable of being utilized as plane fuel. For this innovation, Philippine Airlines
has procured 1,000,000 liters of spider blood to be used in international air transport operations
for Php 10,000,000

REQUIRED: Total zero-rated sales

Computation
From A. ¥450,000 *. 70 = PHP 315,000
B. $50,000 * PHP 55.00 = PHP 2,750,000
C. PHP 900,000
D. $50,000 * PHP 55.00 = PHP 550,000
E. PHP 10,000,000
Total zero-rated sales = PHP 14,515,000
Illustrative Example 2:
Zero-rated Services

Due to the lethal COVID-19, Dr. Strange has decided to let go of his superhero life and return to his
former job as a medical practitioner. Incorporating his knowledge in Witchcraft, he developed a
vaccine termed 91 DIVOC. The name has been a product of the principal effect of the vaccine which
is to revert the disastrous effects and complications that the virus has brought to the human body.
The vaccine is now being exported and is now on mass production. When buyers procure, it is
required, as a quality control measure, that their own planes handle the delivery. The vaccine itself
is being charged with rare geothermal (35%), solar (25%) and ocean (40%) energies for it to work
and have a 99.59% positive effectivity rate. As online selling became part of the “new normal”, a
number of international resellers has now formed 20% of the total sales. With this innovation, Dr.
Strange envisions that before the October 2020 CPALE takes place, the whole world will be free
from the virus.

The following transactions occurred during the year: (Assume he is a VAT-Registered person)
1. Processing, manufacturing, repacking and exporting of 91 DIVOC worth $90,000,000 for
various international resellers. ($1: PHP 50)
2. Sale of geothermal fuel to a Chinese buyer, $50,000
3. Shipping fee charged to a Japanese buyer, ¥50,000 (¥1 : PHP .78)
4. Services rendered as a subcontractor for a US-based company (export sales exceeded 70%
of annual production) in developing a refined version of the vaccine, $50,000
5. Billed $98,000 to an aircraft of FeedEx, an international shipping business, who landed in,
and eventually blocked, the runway of Dr. Strange’s personal delivery plane

REQUIRED: Total zero-rated sales

From 1. $90,000,000 * PHP 50.00 = PHP 450,000,000

2. $50,000 * PHP 50.00 = PHP 2,500,000
3. ¥50,000 * PHP .78 = PHP 39,000
4. $50,000 * PHP 50.00 = PHP 2,500,000
5. $98,000 * 50.00 = PHP 4,900,000
TOTAL ZERO-RATED SALES = PHP 459,939,000