Chapter 8

• Zero-rated sales are basically foreign consumptions

(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.
• A zero-rated sale will have a zero output VAT but with a
deductible (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.
• 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.
• 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.

• Compute for the Business Tax Due & Income Tax Due,
assuming Rizal Corporation is a VAT taxpayer and non-VAT
taxpayer.
a. Zero-rated sales of goods or properties
1. Export sales
2. Foreign currency denominated sales
3. Sales to tax-exempt persons or entities under special laws or
international agreements
b. Zero-rated sales of services
1. Service rendered to persons or entities exempt under special law or
international agreement
2. Services rendered to persons engaged in international shipping or air
transport operations, including leases of property for use thereof
3. 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.
• Direct export
• Indirect export
• Sale of raw materials or packaging materials to an export-
oriented enterprises
• Those considered export sales under Executive Order 226
(The Omnibus Investment Code of 1987), and other
special laws
• Sale of goods or properties, supplies, equipment and fuel
to persons 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
the shipping arrangement.
• Indirect export is 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 buyers.
a. The sale must have been paid for in acceptable foreign
currency or its equivalent in good or services
b. The sale must be accounted for under the rules of the
Bangko Sentral ng Pilipinas
• Guimaras Company made the following export sales
during the year:
Export destination Terms Payment
Export to Hong Kong FOB Destination $100,000
Export to Thailand FOB Destination P450,000
Export to Japan FOB Shipping Point ¥800,000

• Consider the treatment of the tax assuming Guimaras

Company is a VAT or non-VAT taxpayer.
• XHI Corporation, a VAT-registered export trader, had the
following export sales during the month:
Good exported Amount Traceable input VAT
Processed food $200,000 P25,000
Fruit and vegetables € 50,000 45,000
• Sale to an export-oriented enterprises – The sale of raw
materials or packaging materials to an export-oriented
enterprise whose sales exceed seventy percent (70%) of
total annual production is subject to zero-rated VAT.
• Any enterprise whose export sales exceed 70% of the total
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.
1. The Philippines F.O.B. value of export products exported
directly by an export producer
2. The net selling price of export products sold by a
registered export producer to another export producer
3. The net selling price of export products sold by a
registered export producer to an export trader that
subsequently exports the same
4. Even without actual exportation, the following shall be
considered constructively exported:
Constructively exported:
a. Sales to bonded manufacturing warehouses of export-
oriented enterprises
b. Sales to export processing zones in pursuant to RA 7916,
7903, 7922 and other similar export processing zones
c. Sales to enterprises duly registered and accredited with
the Subic Bay Metropolitan Authority (RA 7227)
d. Sales to registered export traders operating bonded
manufacturing warehouses supplying raw materials in
the manufacture of export products
Constructively exported: (cont’d)
a. Sales to diplomatic missions and other agencies and or
instrumentalities granted tax immunities, of locally
manufactured, assembled or repacked products
whether or not paid for in foreign currencies;
b. Sale of goods, properties or services to a BOI-registeresd
manufacturer or producer
• To persons engaged in international shipping or
international air transport operations are generally used
outside Philippine territories.
• Zero-rating is limited to goods, supplies, equipment and
fuel pertaining to or attributable to the transport 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 docking or stopping is for
the purpose of unloading passengers and/or cargoes
originating from abroad, or load passengers and/cargoes
bound for abroad.
• Sibalom Company, a VAT taxpayer, sold supplies to Pan-
Pacific Airlines:
• Pan-Pacific Airline division Amount
• Domestic Operation P 400,000
• International Operation 500,000
• 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.
• A certification to this effect which is good for one year
must be issued by the BOI.
• 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
and regulation of the BSP.
• Sales of locally manufactured or assembled goods for
household and personal use of Filipinos abroad and other
non-residents of the Philippines as well as returning
overseas Filipinos under the Internal Export Program of the
government paid for in convertible foreign currencies and
accounted for in accordance with the rules and
regulations of the BSP shall also be considered export
sales.
• Sales to persons or entities deemed tax-exempt under
special laws or international agreement shall be
effectively subject to VAT at zero-rate.
a. Subic Bay Metropolitan Authority (SBMA)-registered
enterprises
b. Philippine Economic Zone Authority (PEZA)-registered
enterprises
c. Philippine National Red Cross (PNRC) – Sec. 5(c), RA
10072
d. Philippine Amusement and Gaming Corporation
(PAGCOR) and its licensees or contractors – PD 1869
a. Asian Development Bank (ADB)
b. International Rice Research Institute (IRRI)
c. United Nation (UN) and its various organizations:
a. World Health Organization
b. UNICEF
d. United States Agency for International Development
(USAID) and its personnel and contractors (RMC 40-07)
e. Embassies, qualified employees and dependents –
subject to the reciprocity rule
• 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.
• 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
• Refer to the local sale of goods or properties by a VAT-
registered persons to a person or entity who was granted
indirect tax exemption under special laws or international
agreement.
• Other cases of zero-rated sales other than direct export
and foreign currency denominated sales shall require prior
application with the appropriate BIR office for effective
zero-rating. Without an approved application for effective
zero-rating, the transaction otherwise entitled to zero-
rating shall be considered exempt.
a. Sales to export-oriented enterprises
b. Sales of goods, supplies, equipment and fuel to persons
engaged in international shipping or international air
transport operations
c. Sales of BOI-registered enterprises
d. Sales to other tax-exempt persons, except senior citizens
a. Direct export
b. Indirect exports (Foreign currency denominated sales)
c. Sales to Ecozone-registered enterprises – These are
subject to an automatic zero-rating treatment (RMC 74-
99)
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.
1. Sale of services to non-residents
2. Effectively zero-rated sales of services
3. Transport of passengers and cargoes by domestic air or
sea carriers from the Philippines to a foreign country
4. Sale of power or fuel generated from renewable sources
of energy
1. Processing, manufacturing or repacking goods for other
persons doing business outside the Philippines, which
goods are subsequently exported
2. Services other than processing, manufacturing or
repacking rendered to a person engaged in business
conducted outside the Philippines or to a non-resident
person not engaged in business who is outside the
Philippines when the services are performed
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
• 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 UMTC, a Philippine university P800,000
Garments Levi’s, a foreign dressmaker $ 100,000
Curtains Finesse, a foreign textile manufacturer P1,000,000
• General Consultants, a VAT taxpayer, provides various
services to clients. The details of each transaction during
the month are shown below:
Client Place Rendered Amount
A foreign corporate client Abroad $ 200,000
A resident foreign corporation Philippines ¥ 100,000
A non-resident foreign corporation Philippines P1,000,000
• Shall refer to the local sale of services to a person or entity
who was granted indirect tax exemption under special
laws or international agreements.
1. Services rendered to persons or entities exempt under
special law or international agreement
2. Services rendered to persons engaged in international
shipping or air transport operations, including leases of
property for use thereof
3. 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
• 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.
• Mr. Johnny, a VAT-taxpayer, provides pest control services
to vessels of Philippine Seagulls, a domestic shipping
company engaged in both domestic and international
shipping operations. Mr. Johnny earned P400,000 from
domestic transport division and P600,000 from
International transport division.
• Proactive Company, a VAT-taxpayer, is a contractor
providing aircraft maintenance services to Lufthansa, an
international air carrier. Lufthansa paid Proactive
P1,000,000 for its services rendered.
• JDC Enterprise, a VAT-taxpayer, subcontracted canning
services for PhilTuna Corporation, a certified export-
oriented enterprise. PhilTuna paid JDC P2,000,000 contract
price.
• Berde Residences leases residential units to certain
embassy personnel of foreign governments:
Foreign embassy personnel VAT status Rental
Mr. Vladimir Cutin A Russian with VEIC P50,000
Mr. Marco Poroshenco A Ukrainian without VEIC 20,000
Mrs. Janice Naran A Mongolian with VEIC 12,000
Total P82,000