Chapter 3:

Value Added Tax: VAT Exempt Sales

VAT EXEMPT TRANSACTIONS

Exempt sales are exempt consumption of goods, properties, or services from domestic
sellers.

• The sale shall not be subject to output VAT, and the seller is not allowed any input VAT
credit.
• Seller cannot bill any output VAT to his customers.
• If the seller issues a VAT invoice or receipt, without being VAT-registered, he shall be
liable to the output VAT without the benefit of any input VAT credit.
• VAT taxpayers making exempt sale of goods, properties, or services shall not bill any
output VAT to their customers because the sale is not subject to VAT.
• A non-VAT person making exempt sales shall not be subject to the 3% percentage tax
on the sales.

List of Exempt Sales of Goods, Properties, or Services

(excerpts from the Sec. 109 of the 1997 Tax Code, Revenue Regulations and Memorandum
Circulars issued by the BIR, and from the amendments introduced by the TRAIN)

(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 therefor. "Products classified
under this paragraph shall be considered 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. Polished and/or husked rice, corn
grits, raw sugar or raw cane sugar and molasses, ordinary salt, and copra shall be
considered in their original state. “For this purpose, notwithstanding the process/es
involved in its production, 'raw sugar or raw cane sugar' means sugar whose content of
sucrose by weight, in the dry state, corresponds to a polarimeter reading of less than 99.5
degrees.”

Key Points
1) The following are exempt from VAT:
a. Agricultural or marine food products in their original state
b. Livestock and poultry of a kind generally used as, or yielding or
producing foods for human consumption
c. Breeding stock and genetic materials
2) Agricultural and marine food products are natural objects of human consumption
therefor, taxing these tends to limit the normal processes of life. However, it must
be noted that agricultural and marine food products are only VAT exempt if and
only if they are in their original state when sold or imported.

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 3) Livestock shall include cows, bulls and calves, pigs, sheep, goats, and rabbits.
Poultry shall include fowls, ducks, geese, and turkey. Livestock and poultry as VAT
exempt does not include fighting cocks, race horses, zoo animals, and other animals
generally considered as pets. Marine food products shall include fish and
crustaceans, such as, but not limited to, eels, trout, lobster, shrimps, prawns,
oysters, mussels, and clams. (RR16-2005)
4) Meaning of Original state (RR16-2005)
The term original state means unprocessed. However, an agricultural or marine food
products are still considered in its original state and unprocessed even if is has
undergone the following simple processes of:
a. Preparation or preservation for the market, such as, but not limited to, boiling,
broiling, husking, roasting, stripping, grinding, freezing, drying, salting, and
smoking.
b. Packaging including advanced technological means of packaging, such as, but
not limited to, shrink wrapping in plastics, vacuum packing, tetra-pack, and
other similar packaging methods.
5) Raw sugar or raw cane sugar (VAT exempt) means the natural sugar extracted from
sugarcane through simple mechanical process by pressing to obtain the juice,
boiling to crystallize, and filtering it using centrifuge to separate these crystals from
the dried. This process results to a crystalized brown sugar with sucrose content by
weight in dry state corresponding to a polarimeter reading of less than 99.5 degrees
and whose color is greater than 800 international color units ICU. This definition
includes muscovado sugar. (RR8-2005)
6) Classified as refined sugar are sugars produced through a refined process, therefor,
not VAT exempt.
7) BIR Ruling No. 348-2011 states that marinated, frozen, and vacuum packed
boneless milkfish is subject to 12% value-added tax (VAT) since marinating was not
included in the list of simple process and noting that laws granting exemption from
tax are construed strictissimi juris against the taxpayer and liberally in favor of the
taxing power.
8) The following are examples of agricultural or marine food products that are
considered in their original state, therefor, VAT exempt:
a. Polished or husked rice
b. Corn grits
c. Raw sugar or raw cane sugar
d. Molasses
e. Ordinary salt
f. Copra
g. Roasted coffee beans
h. Dried fish
i. Sundried fruits
j. Ground meat
k. Smoked fish

(B) Sale or importation of fertilizers; seeds, seedlings, and fingerlings; fish, prawn, livestock

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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).

Key Points
1) The following sale or importation of farm or fishery inputs are exempt from VAT:
a. For plants or fruit cultivation- fertilizers, seeds, and seedlings
b. For animal husbandry- feeds and ingredients for livestock and poultry feeds
c. For fishery operations- fingerlings, fish and prawn feeds including ingredients
2) Specialty feeds refers to non-agricultural feeds or food for race horses, fighting
cocks, aquarium fish, zoo animals, and other animals generally considered as pets.
3) It has to be noted, however, that some ingredients of finished feeds may also be
used fro the production of food for human consumption. Therefor, to give effect to
the legislative intent that only livestock and poultry feeds or ingredients used in the
manufacture of finished feeds are exempted from VAT, sale or importation of
ingredients which may also be used for the production of food for human
consumption shall be subject to VAT. Thus, to be able to be exempt from VAT, there
must be a showing that the same is unfit for human consumption or that the
ingredient cannot be used for the production of food for human consumption as
certified by the Food and Drug Administration (FDA). (RMC55-2014)
4) Sale of farm or fishery equipment such as tractors, water pumps, and other farming
inputs such as pesticides and herbicides are VATable.

(C) Importation of personal and household effects belonging to the residents of the
Philippines returning from abroad and nonresident citizens coming to resettle in the
Philippines: Provided, that such goods are exempt from customs duties under the Tariff
and Custom Code of the Philippines.

(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.

[Old provision: (D) Importation of professional instruments and implements, wearing

apparel, domestic animals, and personal household effects (except any vehicle,

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vessel, aircraft, machinery, other goods for use in the manufacture and merchandise
of any kind in commercial quantity) belonging to persons coming to settle in the
Philippines, for their own use and not for sale, barter or exchange, accompanying
such persons, or arriving within ninety (90) days before or after their arrival, upon
the production of evidence satisfactory to the Commissioner, that such persons are
actually coming to settle in the Philippines and that the change of residence is bona
fide]

*C and D of this provision will be discussed on the topic of VAT on Importation

(E) Services subject to percentage tax under Title V.

*E will be discussed on the topic of Other Percentage Taxes

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

[Old provision: (F) Services by agricultural contract growers and milling for others of
palay into rice, corn into grits and sugar cane into raw sugar or raw cane sugar]
Key Point
1) Agricultural contract growers refer to persons producing for others’ poultry,
livestock, or other agricultural and marine food products in their original state.

(G) Medical, dental, hospital and veterinary services except those rendered by
professionals.
Key Points
1) The sale of the above services is not subject to business tax.
2) This provision applies to all health service providers whether rendered by a private,
non-profit, or government hospital.
3) Health services rendered by professionals, such as, nurses and doctors, and the sale
of drugs are VATable.

(H) Educational services rendered by private educational institutions, duly accredited by

the Department of Education (DepEd), the Commission on Higher Education (CHED), the
Technical Education and Skills Development Authority (TESDA) and those rendered by
government educational institutions.
Key Points
1) Education is a necessity, therefore, it shall be exempt from any kind of business tax.
2) This exemption covers government and private schools, proprietary or non-profit,
as long as they have the required accreditations from the government.
3) The exemption does not include seminars, in-service trainings, review classes, and
other similar services rendered by educational institutions that are not accredited
by the DepEd, CHED, and/or TESDA.
4) It shall be noted, however, that only gross receipts from tuition fees, matriculation
fees, and other school related fees shall be exempt.

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 5) Incomes coming from sources, such as, rental income from the building of schools
being rented to commercial tenants, and other similar income of such nature, shall
not be exempt from VAT.

(I) Services rendered by individuals pursuant to an employer-employee relationship.

Key Points
1) Services to an employer under an employer-employee relationship is not a business,
hence, it is exempt from business taxes.
2) Professional practitioners, consultants, talents, TV artists, brokers, and agents are
not employees, therefor, they are subject to business taxes.
3) Members of the Board of Directors’ Fees
a. Previously, RMC 34-2008, states that directors who are not employees of a
corporation (e.g. president of the corporation) are considered engaged in
business, therefor, subject to business tax. However, according to RMC 77-2008,
it was repealed stating that director’s fees are remunerations paid in the
exercise of a right of an owner in the management of a corporation, thus, not
“in the ordinary course of trade or business”.
b. Directors’ Fees are exempt.

(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.
Key Points
1) Regional or area headquarters (RAH or RHQ) shall mean an office whose purpose is
to act as an administrative branch of a multinational company engaged in
international trade which principally serves as a supervision, communications and
coordination center for its subsidiaries, branches or affiliates in the Asia-Pacific
Region and other foreign markets and which does not earn or derive income in the
Philippines, hence, not taxable.
2) Regional Operating Headquarters (ROHQ) shall mean a foreign business entity
which is allowed to derive income in the Philippines by performing qualifying
services to its affiliates, subsidiaries or branches in the Philippines, in the Asia-
Pacific Region and in other foreign markets, hence, is taxable.

(K) Transactions which are exempt under international agreements to which the
Philippines is a signatory or under special laws, except those under Presidential Decree No.
529
*K of this provision will be discussed on the topic of Zero-rated Sales
(L) Sales by agricultural cooperatives duly registered 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
(M) Gross receipts from lending activities by credit or multi-purpose cooperatives duly
registered with the Cooperative Development Authority

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(N) Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with
the Cooperative Development Authority: Provided, That the share capital contribution of
each member does not exceed Fifteen thousand pesos (P15,000) and regardless of the
aggregate capital and net surplus ratably distributed among the members

(O) Export sales by persons who are not VAT-registered

Key Points
1) Export sales means the sale and shipment or exportation of goods in the Philippines
to a foreign country, irrespective of any shipping arrangement that may be agreed
upon which may influence or determine the transfer of ownership of the goods
exported, or foreign currency denominated sales.
2) Foreign currency denominated sales means sales to nonresidents of goods
assembled or manufactured in the Philippines, for delivery to residents in the
Philippines and paid for in convertible foreign currency remitted through the
banking system in the Philippines.
3) The export sales of non-VAT taxpayers are exempt, however, the export sale of VAT
taxpayers are taxable at 0% rate.

(P) Sale of real properties not primarily held for sale to customers or held for lease in the
ordinary course of trade or business1 or real property utilized for low-cost and socialized
housing as defined by Republic Act No. 7279, otherwise known as the Urban Development
and Housing Act of 1992, and other related laws2, residential lot valued at One million five
hundred thousand pesos (P1,500,000) and below, house and lot, and other residential
dwellings valued at Two million five hundred thousand pesos (P2,500,000) and below3.
Provided, that beginning 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 values using
the Consumer Price Index, as published by the Philippine Statistics Authority (PSA).

[Old Provision: (P) Sale of real properties not primarily held for sale to customers or
held for lease in the ordinary course of trade or business, or real property utilized for
low-cost and socialized housing as defined by Republic Act No. 7279, otherwise
known as the Urban Development and Housing Act of 1992, and other related laws,
residential lot valued at One million five hundred thousand pesos (P1,500,000) and
below, house and lot, and other residential dwellings valued at Two million five
hundred thousand pesos (P2,500,000) and below: P1,919,500 and P3,199,200 under
RR 16-11]. Provided, that not later than January 31, 2009 and every three (3) years
thereafter, the amounts herein stated shall be adjusted to their present values using
the Consumer Price Index, as published by the National Statistics Office (NSO)]

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 Key Points
The following sale/lease of real properties are exempt from business taxes:
1) Sale or lease of real properties not primarily held for sale to customers or held for
lease in the ordinary course of business is exempt from business tax. The seller is
not a dealer of real properties, hence, he/she is not engaged in business.1
2) Sale of real properties utilized for low-cost and socialized housing2
"Socialized housing" refers to housing programs and projects covering houses and
lots or homelots only undertaken by the Government or the private sector for the
underprivileged and homeless citizens which shall include sites and services
development, long-term financing, liberalized terms on interest payments, and
such other benefits in accordance with the Urban Development and Housing Act
of 1992, RA 7935, and RA 8763.

Threshold for Sale of “socialized housing” units (RMC35-2014)

a. House and lot package P 450,000
b. Residential lots only P 180,000

"Low-cost housing" refers to housing projects intended for the homeless low-
income family beneficiaries, undertaken by the Government or private developers,
which may either be a subdivision, or a condominium registered and licensed by
the Housing and Land Use Regulatory Board/Housing (HLURB) under BP Blg. 220,
PD No. 957 or any other similar law, wherein the selling price is within the selling
price per unit of P750,000 under RA 7279 and other laws such as RA 7935 and RA
8763
3) Sale of residential lot at one million five hundred thousand pesos (P1,500,000) and
below3
4) Sale of house and lot, and other residential dwellings valued at two million five
hundred thousand pesos (P2,500,000) and below3
5) Beginning January 1, 2021, the VAT exemption shall only apply to
a. sale of real properties not primarily held for sale to customers or held for lease
in the ordinary course of trade or business
b. sale of real property utilized for socialized housing as defined by Republic Act
No. 7279
c. sale of house and lot, and other residential dwellings with selling price of not
more than Two million pesos (P2,000,000).

(Q) Lease of a residential unit with a monthly rental not exceeding Fifteen thousand pesos
(P15,000)

[Old Provision: (Q) Lease of a residential unit with a monthly rental not exceeding
Ten thousand pesos (P10,000): [P12,800 under RR 16-11] Provided, That not later
than January 31, 2009 and every three (3) years thereafter, the amount herein stated
shall be adjusted to its present value using the Consumer Price Index, as published
by the National Statistics Office (NSO)]

(R) Sale, importation, printing or publication of books and any newspaper, magazine,

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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

(S) Transport of passengers by international carriers (income tax of 2.5%)

(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

(U) 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 operation

[Old Provision: (Q) (U) Importation of fuel, goods and supplies by persons engaged
in international shipping or air transport operations]

(V) Services of bank, non-bank financial intermediaries performing quasi-banking

functions, and other non-bank financial intermediaries

Key Points
1) Quasi-Bank shall refer to a non-bank financial institution authorized by the BSP to
engage in quasi-banking functions and to borrow funds from more than nineteen
(19) lenders through the issuance, endorsement or assignment with recourse or
acceptance of deposit substitutes as defined in Section 95 of Republic Act No. 7653
(the "New Central Bank Act") for purposes of relending or purchasing of receivables
and other obligations.
2) 'Quasi-Banking Functions' shall mean borrowing funds, for the borrower's own
account, through the issuance, endorsement or acceptance of debt instruments of
any kind other than deposits, or through the issuance of participation’s, certificates
of assignment, or similar instruments with recourse, trust certificates, or of
repurchase agreements, from twenty or more lenders at any one time, for purposes
of relending or purchasing of receivables and other obligations: Provided, however,
That commercial, industrial, and other non-financial companies, which borrow
funds through any of these means for the limited purpose of financing their own
needs or the needs of their agents or dealers, shall not be considered as performing
quasi-banking functions.

(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 Act of 2010) and 10754
(An Act Expanding the Benefits and Privileges of Persons With Disability), respectively;

Key Point
1) Not all purchases

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(X) Transfer of property pursuant to Section 40(C)(2) of the NIRC, as amended

Key Point
Tax-free exchanges refer to those instances enumerated in Section 40(C)(2) of the
National Internal Revenue Code (NIRC) of 1997 that are not subject to Income Tax,
Capital Gains Tax, Documentary Stamp Tax and/or Value-added Tax, as the case may
be.

In general, there are two kinds of tax-free exchange: (1) transfer to a controlled
corporation; and, (2) merger or consolidation.

In the first instance, no gain or loss shall be recognized if property is transferred to a

corporation by a person in exchange for stock or unit of participation in such
corporation of which as a result of such exchange said person, alone or together with
others, not exceeding four persons, gains control of said corporation.

In the second instance, no gain or loss shall be recognized if in pursuance of a plan of

merger or consolidation --- (a) a corporation, which is a party to a merger or
consolidation, exchanges property solely for stock in a corporation, which is a party to
the merger or consolidation; or, (b) a shareholder exchanges stock in a corporation,
which is a party to the merger or consolidation, solely for the stock of another
corporation also a party to the merger or consolidation; or, (c) a security holder of a
corporation, which is a party to the merger or consolidation, exchanges his securities in
such corporation, solely for stock or securities in another corporation, a party to the
merger or consolidation.

(Y) Association dues, membership fees, and other assessments and charges collected by
other residential dwellings with selling price of 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

(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)

Key Point
1) “SEC. 116. Tax on Persons Exempt from Value-added Tax (VAT). – Any person whose

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sales or receipts are exempt under Section 109 (BB) of this Code from the payment
of value- added tax and who is not a VAT-registered person shall pay a tax
equivalent to three percent (3%) of his gross quarterly sales or receipts: Provided,
That cooperatives, and beginning January 1, 2019, self-employed and professionals
with total annual gross sales and/or gross receipts not exceeding Five hundred
thousand pesos (P500,000) shall be exempt from the three percent (3%) gross
receipts tax herein imposed.”

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