02/04/2023

OUTPUT VAT
ZERO RATED SALES

ZERO RATED SALES

What are Zero-rated Sales?

Zero-rated sales are basically foreign consumptions or equivalent 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.
The export sales of VAT taxpayers are subject to a VAT at a zero rate. (VAT – Zero Rated Sales)
The export sales of a non-VAT taxpayer are exempt from the 3% general percentage tax. (Non-VAT – Exempt Sales)

What Is the benefit of Zero-rating?

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

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ZERO RATED SALES VS EXEMPT SALES

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 VS EXEMPT SALES

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ZERO-RATED SALES
There are two types of zero-rated sales of goods:
1) Export Sales
2) 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 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 so exported.

Required:
1. Paid 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)*

ZERO-RATED SALES

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ZERO-RATED SALES

ZERO-RATED SALES

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 products consigned
abroad are in fact sold by the consignee.*

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ZERO-RATED SALES

ZERO-RATED SALES

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

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ZERO-RATED SALES

SALE TO ECONOMIC ZONES OR TOURISM ZONES

ZERO-RATING STATUS

TRAIN LAW
The zero rating of sales was vetoed by the President thereby creating the impression that the locators will be subject to
12% VAT.
Since the TRAIN law, did not repeal Section 8 of the RA 7916, The Special Economic Zone Act, the sale to PEZA
locators will still be subject to zero-rated until a contrary law or regulation is passed.

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ZERO-RATED SALES

SALE TO ECONOMIC ZONES

OR TOURISM ZONES

ZERO-RATING STATUS

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ZERO-RATED SALES

THE SALE OF GOODS, SUPPLIES, EQUIPMENT AND FUEL TO PERSONS ENGAGED IN INTERNATIONAL
SHIPPING OR INTERNATIONAL AIR TRANSPORT OPERATIONS

Goods, supplies, equipment and fuel sold to persons engaged in international shipping or air transport operation are
generally used or consumed outside the Philippines.
The sale of these entities is a foreign consumption rather than a domestic consumption; hence, these are subject to
zero-rated VAT.*

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ZERO-RATED SALES

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 granted indirect tax exemption under special laws:

1) Asian Development Bank (ABD)
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 contracts
5) Embassies, qualified employees and dependents – subject to reciprocity rule
6) Philippine National Red Cross
7) Philippine Amusement and Gaming Corporation

Because of the indirect tax exemption, the sales of these entities are effectively subject to 0% VAT.

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ZERO-RATED SALES

EFFECTIVELY ZERO-RATED SALES

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.

An approved application shall be given retrospective 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

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ZERO-RATED SALES

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.

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.*

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ZERO-RATED SALES

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ZERO-RATED SALES

PREVIOUSLY ZERO-RATED SALES

1. Foreign currency denominated sales

2. Sales under the internal export program
3. Sales to Boy Scout of the Philippines
4. Sale of gold to BSP – now exempt

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ZERO-RATED SALES

ZERO-RATED SALES OF SERVICES

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

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ZERO-RATED SALES

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 non-resident person not-engaged in business who is outside the Philippines when the
services are performed.

The term outside service not is limited only to project studies, information services, and engineering and architectural
designs. Term 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*

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ZERO-RATED SALES

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ZERO-RATED SALES

EFFECTIVELY ZERO-RATED SALES OF SERVICES

The local sale of services to a person or entity who was granted indirect tax exemption under special laws or
international agreements shall likewise be subjected to 0% VAT.*

Value-Added Tax (VAT) Exemption Identification Card (VEIC)

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ZERO-RATED SALES

SERVICES RENDERED TO PERSONS ENGAGED IN INTERNATIONAL SHIPPING OR AIR TRANSPORT

OPERATION, INCLUDING LEASES OF PROPERTY FOR USE THEREOF

To be considered for zero-rating, the service shall be exclusively for international shipping or air transport operations.*

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ZERO-RATED SALES

TRANSPORT OF PASSENGERS AND CARGO BY DOMESTIC AIR OR SEA CARRIERS FROM THE PHILIPPINES
TO A FOREIGN COUNTRY

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 constitutes services rendered abroad to non-
residents. This is a foreign consumption exempt from VAT.

Domestic Carrier:
Outgoing flights - subject to zero-rated VAT.
Incoming flights – exempt from VAT.

International Carrier:
Outgoing flights - exempt from VAT
Incoming flights – exempt from VAT

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ZERO-RATED SALES

TRANSPORT OF PASSENGERS AND CARGO BY DOMESTIC AIR OR SEA CARRIERS FROM THE PHILIPPINES
TO A FOREIGN COUNTRY

If outgoing transport of mails, cargoes or excess baggage SPT 3%, not 0% VAT.

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ZERO-RATED SALES

SALE OF POWER OR FUEL GENERATED THROUGH RENEWABLE SOURCES OF ENERGY

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.

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.

Types of businesses in the electricity business:

a. Generation companies – refer to persons or entities authorized by the Energy Regulatory Commission (ERC) to
operate a facility used in the production of electricity.
b. Transmission companies – refer to any person or entity that owns and conveys electricity through the high
voltage backbone system and or sub-transmission assets
c. Distribution companies – refer to persons or entities including a distribution utility such as an electric cooperative
which operates a distribution system with the provision of RA 9136.

Distribution companies and transmission companies are just pass-through entities.

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ZERO-RATED SALES

SALE OF POWER OR FUEL GENERATED THROUGH RENEWABLE SOURCES OF ENERGY

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ZERO-RATED SALES

SERVICES RENDERED TO ECOZONES OR TOURISM ENTERPRISE ZONES

The sales of goods to registered enterprises of economic zones or tourism enterprise zones are also subject to 0% VAT.*

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ZERO-RATED SALES

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.

Official, agents or employees of the BIR who deliberately causes the delay in the processing of VAT refund shall be
subjected to penalties as imposed by Tax Code.

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ZERO-RATED SALES

ZERO-RATED SALES THAT WILL BE SUBJECTED TO 12% VAT UPON 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.
3. Those considered export sales under E.O. 226 (The Omnibus Investment Code of 1987) and other special laws

The following sales of services shall likewise be considered zero-rated sales pending the successful establishment
and implementation of an enhanced 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, manufacturing goods for an
enterprise whose export sales exceed 70% of total annual production.

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ZERO-RATED SALES

Sale to an export-oriented enterprise

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.

Sale to export-oriented enterprise

Requirement for zero-rating of export sales to non-residents:
a. The sale must have been paid for in acceptable foreign currency or its equivalent in goods or services.
b. The sale must be accounted for under the rules of the BSP.

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ZERO-RATED SALES

Considered export sales under EO 226 and other special laws

The following are considered export sales under EO 226:
1. The Philippine FOB 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:
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
d. Sales to registered export traders operating bonded manufacturing warehouses supplying raw materials in the
manufacture of export products
e. 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
f. Sale of gods, properties or services to a BOI-registered manufacturer or producer

Sale of goods, properties or services to a BOI-registered manufacturer or producers

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.

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