Kimberly Mae R.

Aguidan
BSA IV

Chapter 4: Exempt Sales of Goods, Properties and Services

Exempt Sales
– are exemption of goods, properties or services from domestic sellers
– are not subject to VAT or percentage tax

Hence,
1. VAT Taxpayer making exempt sale – shall not bill any output VAT to his customers
2. Non-VAT person making exempt sale – shall not be subject to 3% percentage tax on sales

Exempt Sales of Goods, Properties or Services

Sale of Agricultural or Marine Food Products in Original State

 simple process of preparation or preservation for the market including advanced
technological means of packaging is exempt
 sale of firewood, charcoal, orchids, flowers and bonsai are vatable because they are
non-food agricultural products
 chicken manure = guano/ vegetable fertilizer – also exempt
 “in original state”
– means unprocessed.
– use of heat and the employment of complex processes e.g. chemical treatment or
curing in a solution is normally considered state altering
– cooked agricultural or marine food products are no longer in their original state.
Hence, vatable.

Sale of Certain Farm or Fishery Inputs

Exemption is qualified and limited:
 For plants or fruit cultivation – fertilizers, seeds and seedlings
 For animal husbandry – livestock, feeds and ingredients for livestock & poultry feeds
 For fishery operations – fingerlings, fish and praw

Sale of Livestock/ poultry feeds or ingredients in the manufacture of feeds

 Used in the manufacture of finished feeds – exempt
 Used for the production or processing of food for human consumption – vatable

Services by agricultural contract growers and milling for others of palay into rice, corn intro grits and
sugar cane into raw sugar
 Agricultural contract growers – refers to persons producing for others poultry, livestock or
other agricultural and marine food products in their original state

HEALTH OR HOSPITAL SERVICES

 Medical, dental, hospital and veterinary services except those rendered by professionals and
sales of drug by a hospital drug store – not subject to business tax

EMPLOYMENT
 Services performed by individuals in pursuant to an employer and employee relationship
– not a business. Hence, exempt from business taxes.
– Professional practitioners, consultants, talents, TV artists, brokers and agents are not
employees, hence, subject to business taxes.
– compensation income – exempt from business tax as employment is not business
Kimberly Mae R. Aguidan
BSA IV

 Director’s Fees
–are not employees of a corporation and are considered engaged in business and hence,
subject to business taxes.
– RMC 77-2008, engagement in business or trade involves the following:
a. Continuity of activity on a going concern basis
b. Objective to earn unrestricted amounts of pecuniary gains or profits
c. Unrestricted offering of the goods or service to any customer or client

REGIONAL OR AREA HEADQUARTER OF A MULTINATIONAL COMPANY

 Services rendered by regional or area headquarters established in the Philippines by
multinational corporations which acts as supervisory, communications and coordinating
centers for their affiliated, subsidiaries or branches in the Asia Pacific Region and do not or
derive income from the Philippines
 A regional or area headquarters – an integral part of the multinational corporation. It is not a
separate business or branch but an administrative office which do not derive income on its
own; hence, not subject to business tax. On the other hand, a regional operating
headquarter (ROHQ) is taxable.

SALE OR LEASE OF AIRCRAFT OR SEA VESSEL, INCLDG ENGINE, EQUIPMENT AND SPARE PARTS
THEREOF FOR DOMESTIC OR INTERATIONAL OPERATION
 Exempt from business tax

EDUCATION
 Related in this category are:
a. Schools
b. Books, newspapers, magazine, review or bulletin
 Education is a necessity, the law exempts school fees from business taxes.
 Exemption – so long as they have the required accreditation from the government
– does not cover 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
 Sale, printing or publications of books and any newspaper, magazine, review or bulleting
which appear at regular intervals with fixed prices for subscription and sale and which is not
devoted principally to the publication of paid advertisements.
 Sale of school supplies and commission income, fees from advertisements, rent from lessees
of vacant spaces, tarpaulins and campaign ads – subject to business tax

SALE OR LEASE OF REAL PROPERTIES UNDER CERTAIN CONDITIONS

 Categories of exempt transactions on real properties
A. Sale of real properties
a. By a person not engaged in the realty business (non-dealer)
b. By a person engage in the realty business which complies with statutory price
ceilings (dealer)
B. Lease of residential dwelling not exceeding P12,800 a unit per month
 Sale of Real Properties
– Sale by a non-dealer (casual sale)
Exempt from business tax; reason – seller is not engaged in business
For vat taxpayers, however, the sales of properties held for use – subject to VAT
even if sale is not regular
Sale of properties considered as capital assets – exempt from VAT
– Sale by a realty dealer, developer or lessor
Kimberly Mae R. Aguidan
BSA IV

Normally subject to business tax except sales of the following residential properties if the
real estate dealer complies with the following price ceilings:
1. Sale of real properties utilized for socialized housing unit:
a. House and lot package – P450, 000
b. Residential lots only – P180 000
2. Sale of real properties utilized for low-cost housing wherein the price ceiling per unit
is P750 000
3. Sale of residential lot valued at P1, 919 500 and below
4. Sale of residential dwelling valued at P3 199 200 and below
Sale of adjacent lots
– within the 12 month period in favor of on buyer shall be treated as one

Lease of residential unit with monthly rental not exceeding P12, 800
 Residential units – refer to apartments and houses and lots used for residential purposes
and building or parts or units thereof used as dwelling places such as dormitories, rooms and
bed spaces, excepts motels, motel rooms, hotels and hotel rooms, lodging houses, inss and
pension houses.
 The term unit shall mean:
1. An apartment unit – in the case of apartment
2. A house – in the case of residential houses
3. Per person – in the case of dorm, boarding house and beds spaces
4. Per room – in the case of rooms for rent
 Purpose of exemption: to provide tax incentive for keeping rentals of housing units low
considering that housing is necessary and natural human consumption

TRANSPORT OR PASSENGERS BY INTERNATIONAL CARRIERS

 Receipts from transport of passengers by international carriers originating from the
Philippines going abroad – exempt from business tax under RA 10378
 International carriers – air/ shipping carriers owned by resident foreign corporations doing
business in the Philippines
1. Receipts from outgoing flights (foreign consumption, service rendered within) – 0% VAT
2. Receipts from incoming flights (foreign consumption, service rendered abroad) – exempt
3. Receipts from domestic flights (domestic consumption) – 12% VAT

SALE OF COOPERATIVES
 With the exception of electric cooperatives, cooperatives of any kinds are exempt from
business tax if they transact business only with members.
 Cooperatives which transact business with non-members are subject to business tax on their
sales with non-members – if accumulated reserves exceeds P10 000 000
 However, regardless of the type of cooperatives, their transactions from unrelated activities
are subject to business taxes just like other entities not considered as business.

EXPORT SALES OF NON-VAT TAXPAYERS

 Exempt from percentage tax
 Taxable – to the VAT but at 0% rate

TRANSACTIONS EXEMPT UNDER INTERNATIONAL AGREEMENTS OR SPECIAL LAWS

 Exempt parties – exempt from VAT and also exempt from the scope of 3% percentage tax
 Examples:
1. PEZA registered enterprises
2. Asian Development Bank
Kimberly Mae R. Aguidan
BSA IV

3. International Rice Research Institute

4. Philippine National Red Cross
5. Embassies of foreign government
6. The Philippine Amusement and Gaming Corporation

INVOIVING REQUIREMENTS FOR EXEMPT SALES

 Must be specifically designated as such by indicating or pre-printing the caption “EXEMPT”
on the invoice or receipt
 Failure to require – makes the sale subject to business tax

OPTIONAL VAT TREATMENT

 VAT- taxpayers but enters into transactions which are exempt VAT – may opt that the VAT
apply to his transactions which would have been exempt. Such option must be made within
10 days before the beginning of the taxable quarter.
 Once election is made, it shall be irrevocable for a period of 3 years counted from the
quarter when the election is made.
Kimberly Mae R. Aguidan
BSA IV

Exercise Drills
1. Vegetables Exempt
2. Cooked rice Vatable
3. Sundried banana Exempt
4. Canned fish Vatable
5. Fruit shake Exempt
6. Boiled eggs Exempt
7. Fresh fruits Exempt
8. Fresh sea foods Exempt
9. Lumber Vatable
10. Orchids and bonsai Vatable
11. Chicken manure Exempt (fertilizer)
12. Bamboo Vatable
13. Bamboo shoots Exempt
14. Cotton seeds Vatable
15. Cotton Vatable
16. Wheat Exempt
17. Cacao Exempt
18. Cocoa Vatable (processed)
19. Cheese Vatable (processed)
20. Charcoal Vatable (non-food)
21. Furniture Vatable
22. Zoo animals Vatable
23. Tobacco Vatable (non-food)
24. Tea Exempt
25. Aquarium fish Vatable
26. Smoked or dried fish Exempt
27. Canned fish Vatable

True or False 1
1. True 6. False (exempt) 11. False (processed)
2. True 7. False 12. False
3. False (except pesticide) 8. False 13. False
4. True 9. True 14. True
5. False 10. True 15. False

True or False 2
1. True (but is subject to 6. False 11. False. Monthly rental not
percentage tax) annual rental.
2. True 7. False 12. False
3. True 8. False (subject to 0% VAT) 13. False. Non-dealers are not
subject to business tax
including VAT.
4. True 9. False (exempt from business 14. True
tax)
5. False (generally vatable, 10. False 15. False
except only on their sale of
books held as inventory)
Kimberly Mae R. Aguidan
BSA IV

Multiple Choice – Theory: Part 1

1. B 6. D 11. C 16. C
2. C 7. C 12. D 17. A
3. A 8. A 13. D 18. C
4. D 9. A 14. A 19. B
5. C 10. A 15. D 20. B

Multiple Choice – Theory: Part 1

1. D 6. D 11. D 16. B
2. A 7. A 12. C 17. D
3. D 8. C 13. B 18. C
4. A 9. D 14. D 19. D
5. D 10. D 15. C 20. C

Multiple Choice – Theory: Part 3

1. C 6. A 11. D
2. A 7. B 12. C
3. D 8. A 13. B
4. D 9. B 14. B
5. B 10. D 15. A

Multiple-Choice – Problems: Part 1

1. B
2. A
3. D. Pesticides and water pump are taxable.
4. D. Both are sellers of agricultural food
products in original state.
5. A. All are agricultural food products (exempt).
6. A.
7. D. Excess fresh sardines and dried fish are
marine food products in original state.
8. B. The sales of vegetables are exempt from
business tax.
9. A. This is a business for mere subsistence.
10. B. (P15,000 + P80,000) = P95,000
11. C. (P220,000 + P250,000) = P470,000
12. A. The importation of vegetables, an
agricultural food product in original state, are
VAT-exempt.
13. A. The sale of vegetables is also exempt from
the VAT.
14. A. The sale of personal asset is exempt.
15. B. A printing press is selling service, hence,
subject to tax on receipts (i.e. collections).
Hence, P150,000 + P400,000 + P80,000 = P
630,000.
16. B. Compensation income is not business
income. Director’s fees is part of compensation
income.
17. B
18. B. The sale of residential lot that do not
exceed P1,919,500 and residential dwelling that
do not exceed P3,199,200 is exempt. The sale of
commercial lot is vatable.
19. A
20. B

Multiple-Choice – Problems: Part 2

1. B. The sale of hospital 6. C 11. B. Note the residential lot
services is exempt, except the exceeds the P1,919,500 price
Kimberly Mae R. Aguidan
BSA IV

sale of medicine. ceiling.

2. C 7. D
3. B 8. A. No exemption exists for
leases of commercial spaces.
4. A 9. B. The lease of residential
unit at an amount not
exceeding P12,800/unit per
month is exempt. Hence, (50
units x P10,000) = P500,000.
5. A 10. B. VAT because the annual
value of the P500,000 monthly
rental exceeds the VAT
threshold.
12. B
13. A
14. A. The aggregation rule
does not apply because there
are two separate buyers. All of
the residential units are sold
below the P3,199,200 price
ceilings.
15. B

Multiple-Choice – Problems: Part 3

1. D
2. B. The unrelated receipt is
subject to business tax.
3. D
4. D
5. B. Note that fares from
passengers on international
voyage or air transport is
exempt.
6. D. VAT taxpayers are subject
to VAT on their export sales but
at zero rate.
7. B. Non-VAT taxpayers are
exempt on export sales.
8. B (P100,000 x 3% for non-
VAT taxpayers)
9. D. (The export sales is also
TAXABLE but at a ZERO-RATE.
The total taxable sales shall be
P100K + P120K = P220K)
10. B. P 100K x 12% + P120K x
0% = P12,000
11. C. (P2,000 x 80%), note that
the P2,000 is exclusive of VAT
12. A. (P1,120/112%) x 80%
13. A. Zero because hospital
services are VAT exempt.
14. A. Zero because rentals of
residence not exceeding
P12,800/month per unit is
exempt.
15. C. (P3,360 – P3,360 x 1/3 x
12%/112% VAT on senior
citizen – P3,360 x 1/3/112% x
20% discount)