Module 6 OUTPUT VAT – ZERO-RATED SALES

Module 6
OUTPUT VAT – ZERO-RATED SALES
BOOK: CHAPTER 8

Objectives:

After this chapter, the students are expected to understand:

1. Concept of zero-rated sales
a. Difference between VAT exemption and zero-rating
2. Zero-rated sales of goods
a. Export sales
b. Effectively zero-rated sales

WHAT ARE ZERO-RATED SALES?

Zero-rated sales are basically foreign consumptions (i.e., export sales) or equivalents of foreign
consumptions (foreign currency-denominated sales and constructive exports) and sales conferred
with an export sale treatment by special laws and international agreements to which the
Philippines is a signatory.

Foreign consumption like export of goods or services is not charged with consumption taxes.
Hence, the export sales of VAT taxpayers are subject to a VAT at zero rate. The export sales of a
non-VAT taxpayer are exempt from the 3% general percentage tax.

What is the benefit of Zero-rating?

A zero-rated sale will have a zero output VAT but with a deductible (i.e., creditable) input VAT.
As such, the taxpayer will fully recover the VAT he paid on his domestic purchases and on
importation either by credit to any tax liability of the taxpayer with the government or by tax
refund.

Zero-rated sales vs. Exempt sales

Both exempt sales and zero-rated sales will not have output VAT. In both cases, the taxpayer does
not pay VAT. The difference lies in the treatment of input VAT. The input VAT in the case of
exempt sales is non-creditable and nonrefundable. It can only be claimed as deductions in the
income tax return.

Illustration: Zero-rated sales vs. VAT-exempt sales

During the month, Rizal Corporation purchased goods invoiced at P350,000 excluding P42,000 input
tax. It exported the goods for $12,000 which is equivalent to P510,000 and incurred P10,000 in expenses.
Assuming Rizal Corporation is a VAT taxpayer
The sale shall be subject to a zero-rated VAT. Rizal Corporation shall compute its VAT liability as
follows:
Output VAT P -
Less: Input VAT 42,000
Excess Input VAT P (42,000)
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 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 160,000
Less: Deductions 10,000
Taxable income 150,000
Multiply by: Corporate income tax rate 0
Income tax due P 45,000
Note: The input VAT cannot be claimed as deduction against gross income in income taxation because it
1 is a tax credit or tax refund.
*Banggawan, Business and Transfer Taxation, 2019 Ed., Pasay: Real Excellence Publishing
Module 6 OUTPUT VAT – ZERO-RATED SALES

Assuming Rizal Corporation is a non-VAT taxpayer

The sale is exempt from 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 (P350,000 + P42,000) 392,000
Gross income 118,000
Less: Deductions 10,000
Taxable income 108,000
Multiply by: Corporate income tax rate 0
Income tax due P 32,400
Note: The input VAT is claimed as deduction against gross income in income taxation. Its tax benefits
to the taxpayer is only P12,600 (P42,000 x 30%).
Thus, VAT-exempt sales result in partial relief to the taxpayer while zero-rated sales result in a total
relief to the taxpayer.

Summary: Table of comparison

  VAT exempt sales Zero-rated sales
Output VAT No output VAT No output VAT
Input VAT treatment Deductible against gross income Creditable or refundable
Extent of tax relief Partial relief Full relief

ZERO-RATED SALES OF GOODS

There are two types of zero-rated sales of goods:
A. Export sales
B. Effectively zero-rate sales

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 person 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 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
XLT 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: P.50

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*Banggawan, Business and Transfer Taxation, 2019 Ed., Pasay: Real Excellence Publishing
Module 6 OUTPUT VAT – ZERO-RATED SALES

The following are zero-rated sales:

Customer Conversion Amount
Sale to Filipino in Japan ¥800,000 x P.50 P 400,000
Sale to business in Indonesia $10,000 x P52 520,000
Total zero-rated sales P 920,000

The following are subject to 12% VAT:

Customer Conversion Amount
Resident alien $15,000 x P52 P 780,000
Visiting tourist 420,000
Total vatable sales P 1,200,000

Domestic consumption are subject to 12% VAT even if they are consumed by non-resident visitors and
even if they are paid for in foreign currencies.

Illustration
XHI Corporation, a VAT-registered export trader, had the following export sales during the month:

Goods exported Amount Traceable 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 VAT-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.

Sale to economic zones or tourism zones

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:

1. Philippine Economic Zone Authority (PEZA)
2. Cagayan Special Economic Zone
3. Zamboanga Special Economic Zone
4. Clark Special Economic Zone
5. Clark Freeport Zone
6. Poro Point Special Economic and Freeport Zone
7. John Hay Special Economic Zone
8. Aurora Special Economic Zone (ASZ) - RA 9490

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 Jaw, did not repeal Section 8 of RA 7916, The Special Economic Zone Act,
which provides that special economic zones are to be operated and managed as separate customs
territory, the DOF maintained the status quo on the zero-rating of sales of goods or services.
Accordingly, the sales to PEZA locators will still be zero-rated until a contrary law or regulation
is passed.

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*Banggawan, Business and Transfer Taxation, 2019 Ed., Pasay: Real Excellence Publishing
Module 6 OUTPUT VAT – ZERO-RATED SALES

Needless to say, passing VAT to PEZA locators which are primarily exporters would result in
voluminous claim for refunds or credits causing additional unnecessary workloads to the BIR and
the ecozone locators.

EFFECTIVELY ZERO-RATED SALES .

This refers to sales to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects such sales to zero-rate.

Examples of entities that are granted indirect tax exemption under special laws or international
agreements:
1. Asian Development Bank (ADB)
2. Internatioal 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
(RMC 40-07)
5. Embassies, qualified employees and dependents – subject to the reciprocity rule
6. Philippine National Red Cross (PNRC) – Sec 5 (c), RA 10072
7. Philippine Amusement and Gaming Corporation (PAGCOR) and its licensees or contractors-
PD .1869

Because of the indirect tax exemption, the sales of these entities are effectively subject to 0% VAT.
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 31of the same year and renewable every year thereafter.

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.

Under the reciprocity rule, foreign governments granting Philippine embassies and diplomats
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-98-0a 100-08, 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 Cards (VEIC).

VAT taxpayers selling to foreign embassies, personnel or their dependents with VEC or VEIC
shall be entitled to the benefit of zero-rating. (See RM0-81- 99 and RMO 22-2004).

Illustration
ABC Corporation, a VAT supplier, sold office supplies and equipment to the following embassies:

Embassy Exemption Status Sales

Ukraine Embassy Without reciprocity exemption P 400,000
Russian Embassy With reciprocity exemption 600,000
Total P 1,000,000

The P600,000 sales is subject to zero rated VAT. The P400,000 sales is 12% VAT.
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*Banggawan, Business and Transfer Taxation, 2019 Ed., Pasay: Real Excellence Publishing
Module 6 OUTPUT VAT – ZERO-RATED SALES

ZERO-RATED SALES OF SERVICES

Eventually, zero-rated sales of services will only include:
1. Sale of services to non-residents
2. Effectively zero-rated sales of services
3. Services rendered to persons engaged in international shipping or international air
transport operations including leases of properties thereof
4. Transport of passengers and cargoes by domestic air or sea carriers from the Philippines
to a foreign country
5. Sale of power or fuel generated from renewable sources of energy
6. Services rendered to ecozones or tourism enterprise zones

SALES OF SERVICES TO NON-RESIDENTS

Services other than processing, manufacturing or repacking rendered to a person engaged in
business conducted outside the Philippines or to a nonresident person not engaged in business
who is outside the Philippines when the services are performed

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.

Illustration
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 P800,000
Garments Levi's, a foreign dressmaker $100,000
Curtains Finesse, a foreign textile manufacturer P1,000,000

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.

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*Banggawan, Business and Transfer Taxation, 2019 Ed., Pasay: Real Excellence Publishing