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The P42,000 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 Pineda Corporation or as tax refund.
Assuming Pineda Corporation is subject to a 30% corporate income tax, it shall compute its taxable income and
income tax due as follows:
Sales P510,000
Less: Cost of goods sold, exclusive of VAT 350,000
Gross income 160,000
Less: Deductions 10,000
Taxable income 150,000
Multiply by: Corporate income tax rate 30%
Income tax due P45,000
Note: The input VAT cannot be claimed as deduction against gross income in income taxation because it is a tax
credit or tax refund.
Note: The input VAT is claimed as deduction against gross income in income taxation. Its tax benefits to the
taxpayer is only P12,600 [i.e., P42,000 x 30% or (P45,000 – P32,400)] through a decrease in its income tax due.
Thus, VAT-exempt sales result in partial relief to the taxpayer while zero-rated sales result in a total relief to the
taxpayer.
EXPORT 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 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 so exported.
Required:
1. Paid for in acceptable foreign currency or its equivalent in goods or services
2. Accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP)
Illustration 1
123 Company sold various goods as follows:
Customer/buyer Place delivered Payment
Resident alien Philippines $15,000 cash
Visiting tourist Philippines P420,000 cash
A Filipino employee in Japan Japan ¥800,000 cash
A business in Indonesia Indonesia $10,000 in services
The relevant conversion rates were: €1: P60; $1: P52; ¥1: P50
Illustration 2
Sulapo Company made the following export sales during the year:
Export destination Terms Payment
Export for Hongkong FOB Destination $100,000 cash
Export for Thailand FOB Destination P450,000 cash
Export to Japan FOB shipping point ¥800,000 cash
Export to Indonesia Free alongside vessel $10,000 in goods
The following shows the VAT treatment of the foregoing export sales:
If Sulapo is a
VAT taxpayer Non-VAT taxpayer
Export for Hongkong zero-rated exempt
Export for Thailand exempt exempt
Export to Japan zero-rated exempt
Export to Indonesia zero-rated exempt
Illustration 3
BABAY Corporation, a VAT-registered export trader, had the following export sales during the month:
Goods exported Amount Traceable input VAT
Processed food $200,000 P10,000
Fruits and vegetables € 50,000 20,000
➢ Deemed sales rules applies only on domestic consignments not on foreign consignments
The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or
international air transport operations
➢ 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.
EFFECTIVE ZERO-RATED SALES (Effectively subject to 0% VAT)
Examples refer to sales to persons or entities whose exemption under special laws or international agreement to
which the Philippines is a signatory effectively subjects such sales to zero-rate.
Examples of entities are granted indirect tax exemption under special laws or international agreements:
1. Asian Development Bank (ADB)
2. International Rice Research Institute (IRRI)
3. United Nation (UN) and its various organizations, such as:
a. World Health Organization
b. UNICEF
4. United States Agency for International Development (USAID) and its personnel and contractors
5. Embassies, qualified employees and dependents – subject to the reciprocity rule
6. Philippine National Red Cross (PNRC)
7. Philippine Amusement and Gaming Corporation (PAGCOR)
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.
Under the reciprocity rule, foreign governments granting Philippine embassies and diplomats indirect tax
exemptions shall likewise be conferred the same treatment on their embassies of 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, 101-08).
Qualified foreign embassies and their qualified personnel and qualified dependents of the latter are issued VAT
Exemption Certificates (VEC) or VAT Exemption Identification Card (VEIC).
VAT taxpayers selling to foreign embassies, personnel or their dependents with the VEC or VEIC shall be entitled
to the benefit of zero-rating. (See RMO-81-99 and RMO 22-2004)
Illustration
LEON Corporation, a VAT supplier, sold office supplies and equipment to the following embassies:
Embassy Exemption status Sales
US Embassy Without reciprocity exemption P 200,000
Malaysian Embassy With reciprocity exemption 400,000
Total P 600,000
The P400,000 sales is subject to zero-rated VAT. The P200,000 sales is subject to 12% VAT.
*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 of goods, except export
of automobiles and non-essential commodities, assembled or manufactured in the Philippines for delivery
to a resident in the Philippines, paid for in acceptable foreign currency and accounted for in accordance
with the rules regulation of the BSP.
➢ The term “other services” is not limited only to project studies, information services, and engineering and
architectural designs. The term encompasses any other services.
Illustration 1
Excel Tailoring, a VAT taxpayer, is engaged in a sewing business. During the month, it had the following receipts
from the sewing services to various clients:
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 it is not paid
in foreign currencies.
Illustration 2
General Consultants, a VAT taxpayer, provides various services to clients. The details of each transaction during
the month are shown below:
Please refer to the list of entities with indirect tax exemption as discussed under effectively zero-rated sales of
goods.
Illustration 1
Johnny Thor, a VAT taxpayer, provides security and janitorial services to the building of the International Rice
Research Institute (IRRI). IRRI paid the taxpayer P200,000 for the services rendered.
The P200,000 gross receipts 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 lease residential units to certain embassy personnel of foreign governments:
➢ To be considered for zero-rating, service shall be exclusively for international shipping or air transport
operations.
Illustration
S2Technologies specialized in aircraft repair maintenance services.
S2Technologies has two clients: Malay Airlines and Airphil. Malay Airlines is an international air carrier while Airpil
is a domestic carrier.
The service fees for Airphil shall be subject to 12% VAT. The service fees from Malay Airlines shall be subject to
0%VAT.
Transport of passengers and cargo by domestic air or sea carriers from the Philippines to a foreign country
Incoming flights-exempt
Outgoing flights-zero-rated
Domestic flights-12% VAT
➢ The zero-rating treatment is limited to sale of power and does not extend to sale of services related to the
maintenance or operation of plants generating said fuel.
➢ Zero-rated sales that will be subjected to 12% VAT upon the establishment of an enhanced VAT refund
system
Pending the successful establishment and implementation of an enhanced VAT refund system, the
following shall still be considered export sales subject to 0% VAT.
1. The sale of raw materials or packaging materials to a non-resident buyer for delivery to a resident export-
oriented enterprise to be used in manufacturing, processing, packing, or repacking, in the Philippines of
the said buyer’s goods and paid for in acceptable foreign currency and accounted for in accordance with
the rules and regulations of the BSP.
2. Sale of raw materials or packaging materials to an export-oriented enterprise whose export sales exceeds
70% of total annual production (based on the preceding taxable year)
3. Those considered export sales under E.O 226 (Omnibus Investment Code of 1987)
Sale of services shall likewise be considered zero-rated sales pending the successful establishment of
VAT Refund System.
1. Processing, manufacturing or repacking goods for other persons doing business outside the Philippines,
which goods are subsequently exported
2. 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.
Note: The sale of goods, properties, or services made by a VAT-registered supplier to a BOI-registered
manufacturer/producer whose products are 100% exported are considered export sales.