Chapter 8 - Output VAT: Zero-rated Sales CHAPTER 8 OUTPUT VAT - ZERO-RATED SALES Chapter Overview and Objectives After this chapter, readers are expected to comprehen 1. The concept of zero-rated sales ; 2. The difference between VAT exemption and zero-rating 3. The concept of export and technical exportation 4, The list of zero-rated sales of goods and zero-rated sales services 5. The requirements for effective zero-rating WHAT ARE ZERO-RATED SALES? Zero-rated sales are basically foreign consumptions (j.e., export sales) ot equivalents of foreign consumptions (foreign currency-denominated salts and constructive exports) and sales conferred with an export sale treatment by special laws and international agreements to which the Philippines is signatory. Foreign consumption like export of goods or services is not charged with consumption taxes. Hence, the export sales of VAT taxpayers are subjectt0# VAT at zero rate. The export sales of a non-VAT taxpayer are exempt from the 3% general percentage tax. py What is the benefit of Zero-rating? zero-rated sale will have a zero out i ible (i , d put VAT but with a deductible ( creditable input VAT. As such, the taxpayer will fully recover the VAT pe i oa is domestic purchases and on importation either by credit t0 #7 lability of the taxpayer with the government or by tax refund. Zero-rated sales vs, Exe Both exempt sales and ea 1 7 th cases, the taxpayer ae “2FO"Tated sales will not have output VAT. In t VAT i e difference lies in the treatm", nonrefundable. It can only be claimed oo ee aes Is non-creditable # return, ly be claimed as deductions in the income Mlustration: Zero-rate uring th excluding equivalent to P510,0 d sales vs, VAT-exe, month, Rizal Corporation purchase jl 350,00 42,000 input tax, It goods invoiced at is Tneyit exported the goods for $12,000. whid 00 and incurred P10,000 in expenses, 262Chapter 8 — Output VAT: Zero-rated Sales Assuming Rizal Corporation is a VAT taxpayer The sale shall be subject to a zero-rated VA its VAT liability as follows: T. Rizal Corporation shall compute output VAT 5 ; : it Vi toeestnput VAT 42.000 (B42,000) The 42,000 excess input VAT on zero-rated sales is claimable in full as a tax credit against other output VAT or claimed as tax credit against any internal revenue tax liability of Rizal Corporation or as tax refund. Assuming Rizal Corporation is subject to a 30% corporate income tax, it 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 245,000 Note: The input VAT cannot be claimed as deduction against gross income in income taxation because it is a tax credit or tax refund. Assuming Rizal Corporation is anon-VAT taxpayer » : The sale fs ceeript fom VAT including percentage tax. Rizal Corporation shall compute its taxable income and income tax due as follows: sales P 510,000 Less: Cost of goods sold (P350K+ P42,000) ~—S0%eT Gross income __ 10.000 Less: Deductions P 108,000 Taxable income 30% Multiply by: Corporate tax rate P_32,400 Income tax due leduction against gross income in income + is only P12,600 [ie, P42,000 x 30% or its income tax due. is cla de Note: The input VAT is claimed as a taxation, Its tax benefits to the comma i) (P45,000 - P32,400)) through a decre result in partial relief jef to the taxpayer. to the taxpayer while zero- Thus, VAT-exempt sales i rated sales result in a total relt 263Chapter 8 - Output VAT: Zero-rated Sales summary: Table of comparison VAT exempt sales Zero-rated sales | VAT No output VAT VAT No output VA’ I VAT treatment Deductible against Creditable or refundable m gross income 7 Extent of tax relief. Partial relief Full relief ER! DS. OF D: There are two types of zero-rated sales of goods: A. Export sales B. Effectively zero-rate sales XPORT SALES Eventually, the term export sales will only include: 1. Direct export 2. Sale to economic zones and tourism enterprise zones 3. Sale of goods or properties, supplies, equipment and fuel to persons | engaged in international shipping or international air transport operations Direct export Direct export is the sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that influences or determines the transfer of ownership’ of the goods ° exported. Required: 1. Paid for in acceptable foreign currency or its equivalent in goods! services 2, Accounted for in accordance with the . he e rules and regulations of " Bangko Sentral ng Pilipinas (BSP) i Mlustration 1 XLT Company sold various goods as follows: Reside i Philippines $15,000 cash Visiting tourist Philippines P 420,000 cash A Filipino employee in Japan Y Japan A business in Indonesia Indonesia ¥ 800,000 cash $10,000 in services ‘The relevant conversion rates were: €1: P60; $1: P52; ¥1: P50 264Chapter 8 — Output VAT: Zero-rated Sales ‘The following are zero-rated sales: Customer Conversion sale to Filipino in Japan ¥800000%50 400,000 Sale to business in Indonesia $10,000 x P52 f Total zero-rated sales pmo aaa ‘The following are subject to 12% VAT: Resident alien $15,000 x P52 P 780,000 Visiting tourist 420,000 Total zero-rated sales 21,200,000 Domes| consumptions are subject to 12% VAT even if they are consumed by non-resident visitors and even if they are paid for in foreign currencies. Mlustration 2 Guimaras Company made the following export sales during the year: Export destination Terms Payment Export for Hong Kong | FOB destination $100,000 cash’ Export for Thailand _| FOB destination P.450,000 cash Export to Japan FOB shipping point ¥ 800,000 cash Export to Indonesia __| Free alongside vessel $10,000 in goods inatic ¢he buyer from the moment goods Under FOB destination, ownership of the goods transfers to the buyer tne 8 dstaon oer ot ee ie emer fot transfers to the buyer from the moment the goods leave the compound of the seller. The following shows the VAT treatment of the foregoing export sales: _VAT taxpayer — _Non-VAT taxpayer _ mpt Export for Hong Kong, zero-rated Scempt Export for Thailand exempt exempt Export for Japan zero-" a exempt Export to Indonesia zero-rate' Note: 1d Japan are paid for in acceptable foreign currencies; 1. The export sales to Hongkong an’ ‘pero-rated VAT. ' , hence, these are subject ene, vie tax law adheres to the destination principle s reiterated in several 1a ‘for consumption abroad regardless ty on goods destin ond rear wherein VAT shld not aD O° ge over the, os, ene exert sles Of the indicated place of logically exempt if not acceptat ear izat ee Topical ve intent of the la” 0 fa ex subject to 12% VAT. 2 265Chapter 8 - Output VAT: Zero-rated Sales Mlustration 3 ; XHI Corporation, a VAT-registered export trader, had the following expory aly during the month: Traceable Goods exported Amount __ _input VAT Processed food $ 200,000 P 25,000 Fruits and vegetables € 50,000 45,000 Both sales are subject to zero-rated VAT. Whereas fruits and vegetables are var. exempt for domestic consumption, they are zero-rated for foreign consumption The input VAT on both exports shall be creditable against output VAT or claimable through refund or tax credit. Query: What if XHI is a non-VAT registered taxpayer? The export sales shall be considered exempt. XHI can claim the input VAT as expense. Export commission and consignment For purposes of zero-rating, the export sales of registered export traders shall include commission income. However, the exportation of goods on consignment shall not be considered export until the export producs consigned abroad are in fact sold by the consignee. Mlustration Filexport Company, a VAT registered export trader, buys goods from domesti€ manufacturers, rebrands them and sells them for foreign customers. Filexpo" also exports goods for other domestic enterprises without export permit at! also makes occasional domestic sales. During the quarter, Filexport Company had the following sales and receipts: 0) 1 —Local sales_ Sales $ 400,000 P 2,000,000 Commission on sales made for other companies Unsold consignments 50,000 450,000 Less than 60 days More than 60 days ae 250,000 Total 150,000 Assume the relevant exchange rate is $1: 52.00, The following shall be subject to 0% VAT and 12%, respectively: 266chapter 8- Output VAT: Zero-rated Sales les —12%VAT_ fommission on sales made $ 400,000 P 2,000,000 for other companies ynsold consignments 50,000 450,000 Less than 60 days More than 60 days : i vatable sales feemeraen oo 150,000 Multiply by: Peso-Dollar rate ,000 P_2,850,000 qero-rated sales in Pesos aaa Itmust be noted that deemed sales rules applies only on domestic consignments not on foreign consignments. conomi: te m. By legal fiction, economic zones including tourism zones are considered foreign territories. Hence, the sales to locators or registered enterprises in these zones are considered technical exportation. Examples of Philippine Ecozones: Philippine Economic Zone Authority (PEZA) Cagayan Special Economic Zone Zamboanga Special Economic Zone Clark Special Economic Zone Clark Freeport Zone Poro Point Special Economic and Freeport Zone John Hay Special Economic Zone Aurora Special Economic Zone (ASZ) ~ RA 9490 PrN Oneene The zero-rating of sales to registered enterprises of economic zones or tourism zones in the TRAIN law was vetoed by the President thereby creating the impression that locators will then be subject to 12% VAT. Since the TRAIN law, did not repeal Section 8 of RA 7916, The Special Economic Zone Act, which provides that special economic zones are to be territory, the DOF maintained operated and managed as separate customs : a the status quo on the zero-rating of sales oF B00, or sayices, heer the sales to PEZA locators will still be zero-rated w Tegulation is passed. -s which are primarily Needle: jag VAT to PEZA locators ; r Ss a ol edits causinj Additional unnecessary workloads t° the BIR an 267Chapter 8 - Output VAT: Zero-rated sales i 1 to per: i uipment an ns ; Te sale of go ing ov internationalaic transport operations international shipping or inte) ational air tré tio i i d fuel sold to persons engaged | lies, equipment an ; 7 eal shipping or air transport operation are generally Used g, consumed outside the Philippines. The sale to these entities is a fore; consumption rather than a domestic consumption; hence, these are Subject to zero-rated VAT. -rating is limited to goods, supplies, equipment and fuel pertaining too, Eee a teeae sar of goods and passengers from a port in the Philippines directly to a foreign port, or vice versa, without docking or stopping at any port in the Philippines unless the docking or stopping is for the purpose of unloading passengers and or cargoes originating from abroad, or to load passengers and/or cargoes bound for abroad. Mlustration ; ne Sibalom Company, a VAT taxpayer, scld supplies to Pan-Pacific Airlines: Pan-Pacific Airline division Amount Domestic operation P 400,000 International operation 500,000 The sale of supplies to the airline's domestic operation is subject to 12% VAT while the sale to the airline's international operation is subject to 0% VAT. ‘ECT! ZERO-RA’ 5A LI This refers to sales to persons or entities whose exemption under speci laws or international agreements to which the Philippines is a signatoY effectively subjects such sales to zero-rate, Examples of entities are granted indirect or international agreements: 1. Asian Development Bank (ADB) 2. International Rice Research Institute aRRI), 3. United Nation (UN) and its various o1 izati inizati i a. World Health Organization On NOMS: Such as b. UNICEF United States Agency for International Development (USAID) and 5, Personnel and contractors (RIMC 40.07) th . Embassies, qualified employees ject co mae ees and dependents - subject Philippine National Red Cross (PNRC) - Sec. 5(0) t jal Jaws tax exemption under special Jaw’ RA 10072 268Chapter 8 — Output VAT: Zero-rated Sales 7. Philippine Amusement and Gami i i licensees or contractors-PD 1869 Corporation (PAGCOR): and ts Because of the indirect tax exem tion, the on i , sl effectively subject to 0% VAT. P e sales of these entities are Requirement for effective Zero-rating Generally, effective zero-rating of sales requires prior application with the appropriate BIR office. 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), An approved application shall be given prospective effect from the date received by the BIR. The same shall be valid until December 31 of the same year and renewable every year thereafter. Where to file application for zero rating? Taxpayers shall file their application with the Audit Information, Tax Exemption and Incentives Division (AITEID) under the Assessment Service. For large taxpayers, applications shall be filed with the Large Taxpayer Audit and Investigation Divisions I and II (LTAID I and II), BIR National Office. The VAT reciprocity exemption on embassies and their personnel Embassies and their qualified employees and dependents of employees do not have indirect tax exemption under The Vienna Convention on Diplomatic Relations, but they may be exempt under the principle of reciprocity. ity rule, foreign governments granting Philippine chases and Aloe indirect tax exemption shall likewise be conferred the same treatment on their embassies or diplomats in the Philippines. Countries granting indirect tax exemption to Philippine embassies and personnel are listed by the DFA (BIR Ruling DA-ITAD-98-08, 100-08, 101-08). iT i lified personnel and qualified i ign embassies and their qual 1 ; Sendai athe latet are issued VAT Exemption Certificates (VEC) or VAT Exemption Identification Cards (VEIC). i ign embassies, personnel or their dependents a Eee VEC a) be fo Ged to the benefit of zero-rating, (See RMO-81- 99 and RMO 22-2004) 269Chapter 8 - Output VAT: Zero-rated Sales tration . i ABC Corporation, a VAT supplier, sold office supplies and equipment th te following embassies: Embass) Exemption status Sales Ukraine Embassy —_ Without reciprocity exemption P 400,000 Russian Embassy With reciprocity exemption 600,000 Total P.,000,000 The P600,000 sales is subject to zero-rated VAT. The P400,000 sales is subject y 12% VAT. PREVIOUSLY ZERO-RATED SALES 1. Foreign currency denominated sale* 2. Sales under the internal export program* 3. Sales to Boy Scout of the Philippines* 4. Sale of gold to BSP - now exempt effective January 1, 2018 “To be subjected to 12% VAT upon successful completion and implementation of an effective VAT refund system The term “Foreign currency denominated sale” means sale to non-residents goods, except export of automobiles and non-essential commodities, assembled ot manufactured in the Philippines for delivery to a resident in the Philippines, paid in acceptable foreign currency and accounted for in accordance with the rules and regulation of the BSP. Sales under the Internal Export Program of the government Sales of for household and personal use # Filipinos abroad and other non-residents of the Philippines as well as returniné converaibh Pinos under the Internal Export Program of the government pad foi? convertible foreign currencies and accounted for in accordance with the rules! ‘regulations of the BSP shall also be considered export sales, ZERO-RATED SALES OF SERVICES Eventually, zero-rated sale 1. Sale of services to no1 2. 3. s of services will only include: n-residents Effectively zero-rated sales of services Services rendered £0 persons engaged in international shipping ores a air transport operations including leases of proP® Transport of passengers an from the Philippines to a fo 4, jens 'd cargoes by domestic air or sea cat! 5. reign country 6. Mnemonic: FEED IN 270Chapter 8 — Output VAT: Zero-rated Sales F SERVICE: 01 Services ciretian Processing, manufacturing or repacking rendered to a Late peas in business conducted outside the Philippines or to a non- resident person not-engaged in business who 7 as when the services are performed 's outside the Philippines E! The term “other services” is not limited only to project studies, information services, and engineering and architectural designs. The term encompasses any other services, 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 goods or services. c. The payment must be accounted for under the rules and regulations of the BSP. Mlustration 1 Excel Tailoring, a VAT taxpayer, is engaged in a sewing business. During the month, it had the following receipts from sewing services to various clients: Item Client Amount School uniforms —DLSU, a Philippine university P 800,000 Garments Levi's, a foreign dressmaker $ 100,000 Curtains Finesse, a foreign textile manufacturer P 1,000,000 The receipt from DLSU is subject to 12% VAT as it is a domestic consumption. The receipt from Levi's is subject to zero-rated VAT. The receipt from Finesse is VAT exempt because it is a foreign consumption but is not paid in foreign currencies. Illustration 2 General Consultants, details of each transaction a VAT taxpayer, provides various services to clients. The during the month are shown below: Client Placerendered Amount 7 ‘Abroad $ 200,000 A foreign corporate client _ Aresident foreign corporation Anon-resident foreign corporation Philippines ¥ = =100,000 Philippines P 1,000,000 since this is a foreign consumption which does not The T-exempt . iNeed: aig 1 i veg bectuse the service is done abroad, not in the Philippines. The ¥100,000 receipt shall be subject tothe 1296 VAT beeause this ls @ domestic consumption, the client being @cesident in the Philippines. 271Chapter 8 — Output VAT: Zero-rated Sales The P1,000,000 receipt is VAT exempt because it is a foreign consumption oa does not qualify for zero-rating since it is not paid for in an acceptaby, orci currency. ELY ZE] 01 Vi The local sale of services to a person or entity who was granted indirect exemption under special laws or international agreements shall likewise te subjected to 0% VAT. Please refer to the list of entities with indirect tax exemption as discusseq under effectively zero-rated sales of goods. Mlustration 1 Johnny Thor, a VAT-taxpayer, provides security and janitorial services to the building of the International Rice Research Institute CIRRI). IRRI paid the taxpayer P200,000 for the services rendered. The P200,000 gross receipt is qualified for VAT zero-rating but Johnny Thor must first secure an approval from the BIR ‘for an effective zero-rating of the receipts. Illustration 2 Berde Residences leases residential l_units to certain embassy personnel of foreign governments: eign embas: ‘sonnel VAT status Rental Mr. Vladimir Cutin A Russian with VEIC P 50,000 Mr. Marco Poroshenco A Ukrainian without VEIC 20,000 Mrs. Janice Naran A Mongolian without VEIC 12.000 Total P_82,000 Rentals from Vladimir Cutin are subject to zero-rated VAT. The rental from Mare) Poroshenco is subject to the regular VAT. The rental from Janice Naran is exe"? from VAT because it is below the P15,000 VAT threshold on residential dwellings Me : 0 Gi TI ‘HIPPIN AIR_ TRANSPORT i Fi PEI TONS, I IDIN( ‘, . for To be considered for zero-rating, the service shall be exclusively * international shipping or air tran: sport: Operations, Mlustration 1 as S2Technologies specialized in aircraft repair maintenance see S2Technologies has two clients: Malay Airlines and Airphil. Malay AitliNeS! international air carrier while Airpilis a domestic carmen 272Chapter 8 — Output VAT: Zero-rated Sales The service fees from Airphil shall be subj r malay Arle shal besuben alt be subject {0 12% VAT. The service fees from Iustration 2 ee on ee ore Pest control services to vessels of 7 ic shipping c i i international shipping operat PPE company engaged in both domestic and Mr. Johnny earned the following during the month from Philippine Seagulls: Source of service fees ‘ e Amount Domestic transport division P 400,000 International transport division 600,000 Total P.1,000,000 The receipts from the domestic transport division constitute a domestic consumption which is subject to the 12% output VAT. The receipts from the international transport division constitute a foreign consumption which is qualified for effective zero-rating. TRANSPORT OF PASSENGERS AND CARGO BY DOMESTIC AIR OR SEA |RRIERS FR ‘HE PHILIPPINES TO A FORE! (OUNTRY The outgoing transport services of domestic air carrier or sea carrier constitute services rendered in the Philippines to non-residents. It is therefore subject to zero-rated VAT. The incoming transport services of domestic air carrier or sea carrier constitute services rendered abroad to non-residents. This is a foreign consumption exempt from VAT. Illustration 1 : rT th: Phinoy Airline had the following receipts during a month: anti ,000,000 Incoming fights (Foreign countries to Philippines) P_ 200 i 300,000,000 Outgoing flights (Philippines to foreign ae 500,000,000 Pomestic flights (Within the Philippines P1,000,000,000 ‘otal consumption exempt from VAT. The outgoing The incoming flight is a foreign nts are subject to 12% VAT. 4 The domestic, Night is subject to zero-rated VAT. The dome Mustration 2 intern ingapore Ocean Liners, an inter during a month: tional sea carrier, had the following receipts jational sea 273Chapter 8- Output VAT: Zero-rated Sales i i ilippines) — P- 200,000,00 i (Foreign countries to Philippir _ uence) soon i ic ition exempt from business incoming voyage is a foreign consumption exer tax Thy preci eaera on transport of passengers is likewise exempt from business toy (RA 10378). The outgoing transport of mails, cargoes, or excess baggage is specifically sue, to 3% percentage tax, not to 0% VAT. Services rendered to this entity are zen. rated. SALE OF POWER OR FUEL GENERATED THROUGH RENEWABLE SO URCES The sale of power or fuel from renewable sources of energy is zero-rated Renewable sources of energy may include, but are not limited to, biomass, solar, wind, hydropower, geothermal and steam, ocean energy, and other emerging sources using technologies such as fuel cells and hydrogen fuels (RA 9513 & RA 9337). The zero-rating treatment is limited to sale of power and does not extendto sale of services related to the maintenance or operation of plants generating said fuel. Types of businesses in the electricity business: a. Generation companies- refer to persons or entities authorized by t® Energy Regulatory Commission (ERC) to operate a facility used in the production of electricity Transmission companies- refer to any person or entity that owns conveys electricity through the high voltage backbone system and or so transmission assets & Distribution companies- refer to persons or entities includité ; ty such as an electric cooperative which operates em with the provision of RA 9136 (EPIRA law) Distribution companies and transmissi ou ission compani just “pass thr entities. (RMC 62-2012, RMC 71-2012, RMC 61-2005). ee distribution syst Mlustration Northern Electric is a i . i ing? months Seneration company with the following receipts du" Sale of electricity generated from hy ii yydro plant Sale of electricity generated from solar aa , aoaGe p00 Sale of electricity from coal-powered plant 30,000,000 Sale of electricity from natural gas-power plant 15,000,000 274Chapter 8 - Output VAT: Zero-rated Sales the P. eit ral ef electrictty from hydro and solar plants are zero-rated. The p45M sales of e’ect icity from coal-powered and natural gas-powered plants are subject to 12% VAT. Pp VICES ee ED TO ECOZONES OR TOURISM ENTERPRISE ZONE: The sales of goods to registered enterprises of economic zone or tourism enterprise zones are also subject to 0% VAT. Illustration Ureshi Enterprise, a VAT taxpayer engaged in electronic repair, was accredited by Texas Instruments Philippines to be its PC board repair provider. Texas Instruments is a PEZA-registered ecozone manufacturer. Ureshi Enterprise also provided electronic repairs on computers owned by several restaurants operating inside the ecozone. Ureshi Enterprise's receipts from Texas Instruments Philippines is zero-rated. Since service establishments like restaurants inside the zones are not registrable enterprises thereto, receipts from them are subject to the 12% VAT. Enhanced VAT Refund System The Department of Finance shall establish a VAT refund center in the BIR and in the BOC that will handle the processing and granting the cash refunds of creditable input VAT within 90 days. All amount equivalent to 5% of the total value-added tax collections of the “BIR and the BOC from the immediately preceding year shall be automatically appropriated annually and shall be treated as a special account in the General Fund or as trust receipts for the purpose of funding claims for VAT refund. Any unused fund at the end of the year shall revert to the General Fund. the BIR who deliberately causes the delay : of Officials, agents or employees shall be subjected to penalties as imposed in the processing of VAT refund by the Tax Code. ZERO-RATED SALES THAT WILL BE SUBJECTED OOM VAT UPON ESTABLISHMENT OF AN ENHANCED VAT REF SYSTEM 4 panced Pending the successful establishment and implement VAT refund system, the following shal still be considered, export sales refund system, ae to 0% VAT: jals materials to a non-resident bayer ~The sale of raw materia re-oriented enterprise to be used in for delivery to a reside kind or repacking, in the Philippines of the manufacturing, processit9. 7 ry in acceptable foreign Currency and said buyer's goods and PON rules and regulations of the BSP. accounted for in accordance inted fo) 275 or packagingChapter 8- Output VAT: Zero-rated Sales 2 3. / aging materials to an exports materials or pac! ent pa ey an ose export sales exceeds 70% of total annual production enter] Those considered export sales under E.0. 226 (The Omnibus Investnen Code of 1987), and other: special laws i i likewise be considered zero-rated sy lowing sales of services shall € r ls ae the successful establishment and implementation of an enhanesg VAT refund system: 1. 2. Processing, manufacturing or repacking goods for other persons doing business outside the Philippines, which goods are subsequently exported Services performed by subcontractors and/or contractors in processing converting, or manufacturing goods for an enterprise whose export sales exceed 70% of total annual production. Sale to dn export-oriented enterprise Any enterprise whose export sales exceed 70% of the coe annual production of the preceding taxable year shall be considered an “export oriented enterprise.” A certification to this effect is issued by the pertinent government agency. Requirement for zero-rating of export sales to non-residents: a. b. The following are considered ex; 1. 2. 3. The sale must have been paid for in acceptable foreign currency oF is equivalent in good or services. ‘The sale must be accounted for under the rules of the BSP. 1 EO 2: ther ial law: port sales under EO 226: The Philippine F.0.B. value of export products exported directly bY export producer The net selling price of export products sold by a registered ex? producer to another export producer The net selling price of export products sold by a registered expot producer to an export trader that subsequent e i ly exports the same _ Even without actual exportation, the following shall be conside™ constructively exported: a. Sales to bonded manufacturin sented fn 8 Warehouses of export-orie™ enterprises b. - a Sales to export processing zones in pursuant to RA 7916 72" 7922 and other similar export processing zones ¢. Sales to enterprises duly registered and accredited with the Bay Metropolitan Authority (RA 7227) 276 subiechapter 8 - Output VAT: Zero-rated Sales d. Sales to registered ex, warehouses supplyin, products e. Sales to diplomatic instrumentalities grante; assembled or repacked currencies f£ Sale of goods, properties or services to a BOl-registered manufacturer or producer Port traders operating bonded manufacturing 6 raw materials in the manufacture of export missions and other agencies and or d tax immunities, of locally manufactured, Products whether or not paid for in foreign By legal fiction, diplomatic missions and instrumentalities with tax immunity are outside the tax jurisdiction of the State. The sale to these entities is akin to a sale to non-residents (ie. foreign consumptions) and is therefore considered as export sale. rties or services to a BOI-1 tered manufacturer cers The sale of goods, properties, or services made by a VAT-registered supplier to a BOl-registered manufacturer/producer whose products are 100% exported are considered export sales. A certification to this effect which is good for one year must be issued by the BOI. 277Chapter 8— Output VAT: Zero-rated Sales is CHAPTER 8: SEL! EST EXERCISE: | i estions ; aa na difference between VAT exemption and zero-rating. 2 Enumerate the sales of goods or properties subject to zero-rated VAT, 3. Enumerate the sales of goods considered export. 4 Enumerate the services subject to zero-rated VAT. “ 5. Enumerate the sales of goods and sales of services which are effectively zero-rated. : : 6. Discuss the requirements for foreign currency denominated sales ang effectively zero-rated sales. True or False 1 irate 1. To be zero-rated, all forms of export sales must be paid for in acceptable foreign currencies. 2. VAT exemption results in total tax relief while zero-rating results in partial tax relief. 3. Input taxes on zero-rated sales are deductible as part of costs or expenses 4. Input taxes on zero-rated sales are claimable as tax credit or tax refund. 5. Asarule, effectively zero-rated sales require prior application with the BIR for zero-rating. 6. Sales to tax-exempt persons will be subject to 12% VAT in default of approved application for zero-rating. 7. The foreign currencies must be inwardly remitted and accounted for undet the rules of the BSP to be zero-rated. 8. The 60-day rule on deemed sales of consignment applies to export sales. 9. The sale of gold to the BSP must be paid for in acceptable foreign currencies to be subject to zero-rating. 10. The sale to a local export oriented enterprise is subject to zero-rating on 1p, Pal fr in acceptable foreign currencies el title over exported goods must pass abroad to be subject to ze!" 12. Export sales that are not paid for i i a saect es th at ate Mot paid for in acceptable foreign currencies The export sales by non-VAT re; ' istered \T but are subject to the 3% percentage tax | Perso" are exempt from VA When the remittance of the foreign currency-denominated sale is not 13. 14, sth ' if 15. An export-oriented enterprise is an erage see considered VAT-2xem True or False 2 1. The direct export by a 7 sapere caPort by an export trader shall be considered an export * 278Chapter 8 — Output VAT: Zero-rated Sales 2, The sale of an export trader to a fell ii i - rated VAT. fellow export trader is subject to zero 3. ane income from export sales by export traders is exempt from 4, The sale to a bonded manufacturing warehouse of an export-oriented enterprise is subject to effective zerc ‘o-rating. 5, The sales of goods or services to export-processing zones are subject to an automatic zero-rating without the need for a BIR application for effective zero-rating. The sales to diplomatic missions are exempt from VAT. The sales to a BOI-registered manufacturer are subject to zero-rated VAT as long as 100% of its annual production is actually exported. 8. The sale of goods or services to a domestic carrier for its international operations is subject to zero-rated VAT. 9. The sale of goods or services to a domestic carrier for its domestic operations is exempt from VAT. The transport of domestic carriers of passengers, baggage and mails from the Philippines to a foreign country is subject to zero-rated VAT. 11. The transport of passengers by an international carrier from the Philippines toa foreign country is exempt. 12. The transport of cargoes, baggage or mails by an international carrier from the Philippines to a foreign country is subject to zero-rated VAT. 13. The sale of locally manufactured goods to overseas Filipinos is subject to an effective zero-rating if paid for in acceptable foreign currencies. 14. Sales to the Asian Development Bank are subject to zero-rated VAT. 15. The sale to embassies with VEC and embassy personnel with VEIC is not subject to the zero-rated VAT. ry 10. Multiple Choice - Theory: Part 1 1. Which statement is correct? ; a. Zero-rated sales are taxable, but will not result in an output VAT. b. Zero-rated sales are non-taxable; hence, these will not result in an output VAT. I ©. VAT zero-rating and VAT exemption are synonymous concepts. d. Allof these i input VAT? 2. Which is correct regarding the treatment of input ; a. Input VAT on ero-rated sales is deductible from gross income. b, eat VAT on zero-rated sales is creditable against output VAT or refundable. Input VAT on zero-rated sale i output VAT. Input yar ea pies is refundable or creditable. 15 is both deductible from gross income and 2 279Chapter 8 - Output VAT: Zero-rated Sales 3. Which of the following requires prior BIR application for effective ery rating? a. Sales to PEZA locators b. Direct export sales ; c. Foreign currency denominated sales d._ Sales to export-oriented enterprises What sale is not subject to zero-rating? a. Saletoasenior citizen 4 pb. Sale to a registered export trader c. Sale to a bonded manufacturing warehouse of an export trader d. Sale to an export processing zone Which is nota constructive export? a. Direct export toa foreign country b. Sale to ecozones c. | Sales to diplomatic missions d._ Sales to export-oriented enterprises Which is non-vatable? a. Sales toa domestic shipping company b. Sales to an international carrier c Sale of goods to a BOI-registered manufacturer which exports 80% of its annual production d. Sales to senior citizens Statement 1: The export of VAT-exempt goods is subject to zero-rated VAT. Statement 2: The domestic sale of VAT-exempt goods is subject 12% VAT- Which is incorrect? a. Statement 1 ¢. Both statements b, Statement 2 4. Neither statement Which is subject to a zero-rated VAT? a. Sale of fruits and ve; b. Sale of fruits and v ©. Sale of fruits and vegetables to ith dis i ta Persons with disabil d. Sales of any goods to the government ee getable to an embassy personnel with VEIC ‘egetables to senior citizens What is the requirement for zero- enterprises? Atleast 70% of productios More than 70% of produ 100% of production mu: More than 100% of pro cctered ating of sales to’ BOl-resiste™ N must be exported ction must be exported st be exported duction must be exported pose 280chapter 8- Output VAT: Zero-rated Sales 40. What is the requirement for Zero-rating of sales to a PEZA-registered enterprise? a The goods must be actually imported b. Export sales must exceed 70 ; % of annual production c. Production must be 100% exported d. None 1 What is the requirement for zero-ra enterprise? a, The goods must be actually imported b. Export sales must exceed 70% of annual production c. Atleast 70% of production must be exported d. Production must be 100% exported ting of sales to an export-oriented 12, Which is not subject to zero-rating? a. Sale under the internal export program of the government b. Export of automobiles to a local export-oriented enterprise ¢. Sale of goods to an international transport operator d. Sale to the USAID 13. Which is correct with constructive export? a. Must be paid for in acceptable foreign currencies b. Must be actually exported ¢. Must be sold to a non-resident d. None of these 14. Which of the following is not subject to zero-rated VAT? a. Sales to diplomatic missions b. Sale of gold to the BSP ¢. Export sales paid for in the local currency d. Allofthese 15. Prior BIR application for effective zero-rating is not required for a. direct export to a foreign country. b. sales to tax exempt persons. - ©. sales to international air transport operations. 4. sales to an export-oriented enterprise. . Which of the following may not qualify as export sale? Export by an export producer Export by an export producer to another export producer Sale to an export trader None of these pose 281Chapter 8 - Output VAT: Zero-rated Sales ich is tructive export? 17. Which is nota cons' aah: warehouse of an a. Sale to a bonded manufacturing CXDOt oi, enterprise b. ie to export processing Zones ¢. Sales to diplomatic missions d. Sale toa foreign customer abroad 18. A non-large taxpayer shall file the application for effective 2ero-ratin yg the es a. Regional director where the taxpayer isregistered, b. Revenue district officer having jurisdiction over their principal paca business : 0 an c. Audit Information, Tax Exemption and Incentive Division d, International Tax Affairs Division 19. An approved application for effective zero-rating is given a. aretrospective effect. b. aprospective effect. c. AandB d. noeffect. 20. An approved application for zero-rating is valid for a. one quarter only. c.3 years. b. 2years d.5 years. Multiple Choice - Theory: Part 2 The sale of services to the following cannot qualify for zero-rating a, Sale toa resident person doing business in the Philippines b. Sale toa non-resident person engaged in business abroad ¢. Sale to a non-resident not engaged in business abroad d. Sale toa resident export-oriented enterprise 2. Statement 1: Services to non-resident at ts are all j zero-rated ifrendered abroad, lectnecnened Statement 2: Services to residents may be subject to zero-rating if pa in acceptable foreign currencies, Which is incorrect? a, Statement 1 b. Statement 2 ¢. Both statements 4. Neither statement 3. Which is correct? val a. All service rendered in the custom's territory is subject to the 12% b. Service rendered to an ecozone entity is subject to 12% VAT- & Service rendered abroad Is subject to 0% VA" Service rendered abroad is exempt from any business tax. 282Chapter 8 ~ Output VAT: Zero-rated Sales 4. 10. Which is subject to Zero-rating? Custom a7 Residontallen Samy b. Nonresident foreign comp, pyaeimes nego c Non-resident alien Abroad P 1,0 2.000 d. Non-resident citizen Abroad ¥ Panbab pee not required in the zero-rating of services rendered to a non- . i eee i performed in the Philippines pn ey e pen it be a resident in the Philippines at the time c. The services must be paid in acceptable foreign currencies d. Cea must be accounted for under the rules and regulations of Sale of services to this entity is subject to the 12% VAT. a. Development Bank of the Philippines b. International Rice Research Institute c. Philippine National Red Cross d. Philippine Amusement and Gaming Corporation Which is not subject to zero-rating? a. Services to an export-oriented enterprise b. Sale of services to a BOI-registered enterprise c. Sale of services to PEZA locators d. Sale of services to embassies with VEC To which of the following is a sale not subject to zero-rated VAT? a. Philippine Amusement and Gaming Corporation b. Philippine National Red Cross c. Ecozone entities d. Government agencies Which is not subject to zero-rating? a. Sale to a domestic air carrier on its international operations b. Sale to a domestic sea carrier on its domestic operations c. Sale to an international air carrier d. Sale to an international sea carrier Which is incorrect with effectively zero-rated sales? ‘The sale must be rendered in the Philippines The sale must be rendered to a person with indirect tax exemption ‘The sale need not be paid for in acceptable foreign currencies ‘The sale must be made by a VAT-exempt person pose 283Chapter 8 — Output VAT: Zero-rated Sales | i -denominated sales? ich is i t with foreign currency- 1 * ete goods must be destined for consumption abroad a | a ttc the goods must pass to the buyer outside Philippine territo The sale must be paid for in acceptable foreign currency | 4 The remittance of the proceeds of the sale must be accounted for Unde Central bank rules , 2 ich is subject to zero-rating? - ; % per oneain transport of passengers by an international carrier b. Outgoing transport of mails, cargoes or baggage by an internationy carrier Outgoing transport of passengers, cargoes, excess baggage or mails bya domestic carrier Incoming transport of passengers, cargoes, excess baggage or mails y adomestic carrier 1 ~ Which of these services is subject to zero-rating? a. Incoming transport by an international sea carrier b. Incoming transport by a domestic sea carrier ¢. Incoming transport by a domestic air carrier d. None of these 1 p Which of these entities is subject to zero-rating on the sale of renewable sources of energy? a. Generation companies b. Transmission companies ¢. Distribution companies d. Allofthese 1 " Which of the following power generation plants is not qualified to 2 227 rating treatment on the sale of electricity? & Geothermal power plant. Solar power plant 5 Hydro powerplant Coal power plane Multiple-Choice - Problems 1 1. Abusiness payer reported the following sale during a period: Domestic sales P20 Deemed sales 100-000 Export sales 300,000 Total : B_600,000 Compute the zero-rated vit sales assumi i ively * taxpayer and anon-VAT taxpayer? N® ‘he seller is respectiv e p 600,000; Po ©. P 600,001 300,000 . 300,000; PO dP 300,000; P300,000 284Chapter 8 - Output VAT: Zero-rated Sales 2. A VAT-registered export trader uurchased i details of the purchase and eaten ee ehased and sold an equipment. The as follows: Export sales P 400,000 Purchases 200,000 Input VAT 12,000 Compute the gross income for taxation purposes. a. P 188,000 c.P 212,000 b. P200,000 4.P 224,000 3. For a taxpayer subject to a 30% tax rate, compute respectively the tax benefits of a P60,000 input VAT deduction and a P 40,000 input VAT credit. a. P 60,000; P40,000 cc. P. 60,000; P12,000 b. P 18,000; P40,000 d. P 18,000; P12,000 4. A Philippine company exported goods for $140,000 to a non-resident customer. The payment; however, was not inwardly remitted. The same was remitted to its home office abroad. Which is correct? a. The sale is a zero-rated sale. b. The sale is an exempt sale. c. The sale is subject to 12% VAT. d. The sale is subject to 3% percentage tax. 5. AVAT-registered taxpayer made the following sales: Uh Hinati Terms China FOB destination $ 10,000 Malaysia FOB destination P-450,000 Hong Kong FOB shipping point ¥ 800,000 Philippines FOB shipping point P 300,000 The applicable exchange rate to the Peso was $1:P42 and ¥1:P0.50. Compute the total zero-rated sales. a. P 420,000 c.P1,270,000 b. P820,000 d.P 1,570,000 6 Compute the output VAT. a PO. te cP 54,000 b. P36,000 d.P-90,000 285Chapter 8 — Output VAT: Zero-rated Sales An exporter entered into the following transactions during the monty, 7. n ex] ‘Type of transaction Amount Unsold portion : 10,000 Export sales 5 ean ond : Export sales 60-day consignment abroad $ 50,000 40% Forex rate = $1: P42.50. the zero-rated sales. acon ° c.P 6,100,000 b. P 4,250,000 d.P 5,525,000 8. Export Co. made the following export and foreign consignments: ‘Type of transaction Amount Export sales 1 P 1,000,000 Export sales 2 $ 80,000 Consignment 1 $ 50,000 Consignment 2 $ 10,000 Export sales 2 pertains to goods owned by another entity where Export (. was granted 10% export commission. Consignment 1 was sold by fortign consignees during the month. Consignment 2 remained unsold 75 days asof the end of the current month. The applicable exchange rate is P43: $1. Compute the total zero-rated sal a. P2,494,000 b. P 2,924,000 les or receipts, ©.P3,494,000 4.P5,590,000 9. APEZA locator sold scraps to adomestic business for $ 12,000. Which is correct? a. The sale is subject to zero-rated VAT. b. The sale is subject to the regular 12% VAT, c. The sal exempt from VAT. d. The sal subject to the VAT on importation to the domestic busines 10. Which is an export-oriented enterprise in 20187 2018 Production Exportcost Production Export cost rt cost cost ofsale a ABCCo. —P200M P120M P 400M P300M b. BCDco. P400m pao Psoom — p.350M & Ego P1soM piggy 180M —-P 126M d. DEF Co, P 250M P125M P300M P300M 286chapter 8 — Output VAT: Zero-rated Sales Multiple-Choice - Problems 2 4. Johnny Company, a maintenance contractor, had th 4 os from the following clients in june 2019; ne merece Receipt from Development Bank of the Philippines P. 1,000,000 Receipts from Oceania, an international carrier i ; 1,200,000 Receipts from International Rice Research Institute 800,000 Compute the total zero-rated sales or receipts. a PO c.P 2,000,000 b. P800,000 d. P 3,000,000 2. ABSP assay report on a sale of gold nuggets discloses the following: Gold content (850 x P1,800/gram) P 1,530,000 Silver content (250 x P38/gram) Total 2.4,539.500 What is the total vatable sales and the output VAT? a. P 1,539,500; P 184,740 b. P1,539,500; P 1,140 c. P9,500;P 1,140 d. P-1,530,000; P183,600 3. Anon-VAT taxpayer had the following sales during the month: Direct export sales $ 2,000 Domestic sales P 250,000 Assuming the exchange rate is P43.20: $1, compute the zero-rated sales. a PO c.P 250,000 b. P86,400 d.P 336,400 4. Carefree, a security service provider, had the following receipts during the month: Receipts from clients inside PEZA - P 3,000,000 Receipts from clients in the customs territory" ~trom the government agencies and GOCCs +900.000 - From the Asian Development Bank tee arO ~ From non-profit clients Soe0000 ~ From private clients ero-rated sales? c. P-4,200,000 d.P 5,200,000 What is the total amount of 2 & P3,000,000 b. P4,000,000 287Chapter 8 — Output VAT: Zero-rated Sales 5. AVAT-registered service provider had the following "ECE om, rendered in the Philippines in February 2018: id for it i rrencis equivalent) Services rendered to non-residents P Bn 000 Services rendered to residents 400,000 Services rendered to non-residents P 800,000 Services rendered to residents 1,200,000 Services rendered to IRRI 200,000 What is the total zero-rated sale? a, P 400,000 c.P- 700,000 b. P500,000 d.P 900,000 Legazpi Corporation had the following sales in March 2020: Sale to an export-oriented enterprise P 2,000,000 Sale to a BOI-registered enterprise 3,000,000 Assuming that the new VAT total effectively zero-rated s: a PO b. P3,000,000 refund system is already in place, compute the ales, cP 3,800,000 d.P 5,000,000 A domestic enterprise made the following sales: Sale to diplomatic missions P 2,000,000 Sale to an ecozone-registered enterprise $ 50,000 Conversion rate = P42.00: $1 Compute the zero-rated sales, a PO cP 2,100, b. P 2,000,000 dP 4.100.000 8. DrimPhil Enterprises aVAT i ie exponen ne taxpayer, sold the following to various Sale to BOI-registered entity with i 00 Sale to BOL-registered enti ith nomen sales esee chapter 8 - Output VAT: Zero-rated Sales Assuming that the BIR and DOF has not yet fully implemented the new VAT refund system, compute the zero-rated sales. a. P 1,500,000 c. P 4,000,000 b. P.2,500,000 d. P 5,000,000 9, APEZA locator made the following sales to entities within the custom territories: Sale of goods to a Philippine firm P 4,000,000 Sale of scrap materials to a Philippine firm $ 100,000 Forex rate: P43.00: $1 What is the zero-rated sales? a PO c. P 4,300,000 b. P 4,000,000 d. P- 8,300,000 10. An electric cooperative sold the following during the month: Sale of electricity from renewable sources of energy P 2,000,000 Sale of electricity generated from coal and natural gas 1,000,000 What is the zero-rated sale of the electric cooperative? a PO c. P 2,000,000 b. P1,000,000 d. P 3,000,000 289