f. VAT Exempt Persons and Transactions

VAT-EXEMPT TRANSACTIONS

Refer to the sale of goods or properties and/or services and the use or lease of properties that are not subject to VAT (output tax) and the seller is not allowed any tax credit of VAT (input tax) on purchases

The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers because the said transaction is not subject to VAT.

b. Exempt transactions, enumerated.

i. Sale or importation of agricultural and marine food products in their original state, livestock and poultry of a kind generally used as, or yielding or producing foods for human consumption; and breeding stock and genetic materials therefore

Livestock: cows, bulls and calves, pigs, sheep, goats and rabbits

Poultry: fowls, ducks, geese and turkey

Does not include fighting cocks, race horses, zoo animals and other animals generally considered as pets.

Marine food products: fish and crustaceans, such as but not limited to, eels, trout, lobster, shrimps, prawns, oysters, mussels and clams

Meat, fruit, vegetables and other agricultural and marine food products are considered in their original state even if they have undergone the simple process of preparation or preservation for the market: freezing, drying, salting, broiling, roasting, smoking or stripping, shrink wrappings in plastic, vacuum packing, tetra-pack, and other similar packaging methods

Polished and/or husked rice, corn grits and raw cane sugar and molasses, ordinary salt and copra shall be considered as agricultural product in their original state

Sugar whose content of sucrose by weight, in the dry state: parameter reading of 99.5 and above are presumed to be refined sugar

Bagasse is not included in the exemption provided for under this section.

“Raw sugar” refers to sugar produced by the simple process of conversion of sugar cane without need of any mechanical or similar device. Raw sugar refers only to muscovado sugar. (Rev. Regs. 13-13)¹

Centrifugal process of producing sugar is not a simple process, and thus not exempt from VAT. (Rev. Regs. 13- 13)

ii. Sale or importation of fertilizers, seeds, seedlings and fingerlings, fish, prawn, livestock and poultry feeds, including ingredients, whether locally produced or imported, used in the manufacture of finished feeds

(except specialty feeds for race horses, fighting cocks, aquarium fishes, zoo animals and other animals generally considered as pets)

iii. Importation of personal and household effects belonging to residents of the Philippines returning from abroad and non-resident citizens coming to resettle in the Philippines

Such goods are exempt from customs duties under the Customs Modernization and Tariff Act².

iv. Importation of professional instruments and implements, wearing apparel, domestic animals, and personal household effects.

• belonging to persons coming to settle in the Philippines, or Filipinos or their families and descendants who are now residents or citizens of other countries, such parties hereinafter referred to as overseas Filipinos, in quantities and of the class suitable to the profession, rank or position of the persons importing said items;
• For their own use and not for sale, barter or exchange;
• Accompanying such persons or arriving within a reasonable time;
• Upon the production of evidence satisfactory to the CIR that such persons are actually coming to settle in the Philippines;
• The change of residence is bona fide.

vi. Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar into raw sugar

BIR has clarified that toll processing or toll dressing, which are covered by the VAT exemption of services by agricultural contract growers under Section 109(F) of the Tax Code of 1997³, pertain to toll processing services for clients from which growing of animals were contracted.

Thus, the activity of preparing and packaging hogs/chicken ready for delivery after producing or growing is considered within the purview of agricultural contract growing, which is exempt from VAT under Section 109(F) of the Tax Code of 1997, as amended⁴. However, if the toll processing/toll dressing/toll manufacturing service is performed independently from growing poultry, livestock, or other agricultural and marine food products, the activity is not covered by the agricultural contract growing and therefore subject to VAT under Section 108 of the Tax Code of 1997, as amended⁵.(RMC No. 97-10)⁶

vii. Medical, dental, hospital and veterinary services, except those rendered by professionals

Laboratory services are exempted.

If the hospital or clinic operates a pharmacy or drug store, the sale of drugs and merchandise is subject to VAT. However, sales of drugs to in-patients of hospitals are considered part of hospital services, which are exempt from VAT.

A healthcare company which does not actually provide medical and/or hospital services, but merely arranges for the same is not VAT-exempt. (CIR v. Philippine Health Care Providers, Inc., G.R. No. 168129, 24 April 2007)⁷

For an HMO’s taxable services, the VAT base is gross sales, excluding VAT, under Section 108 of the NIRC, as amended by RA 11976. (Maxicare Healthcare Corp. v. CIR, C.T.A Case No. 8441)⁸

viii. Educational services rendered by private educational institutions duly accredited by the DepED, CHED and TESDA and those rendered by government educational institutions

Does not include seminars, in-service training, review classes and other similar services rendered by persons who are not accredited by the DepED, the CHED and/or TESDA

ix. Services rendered by individuals pursuant to an employer-employee relationship

x. Services rendered by regional or area HQ established in the Philippines by multinational corporations which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia Pacific Region and do not earn or derive income from the Philippines

xi. Transactions which are exempt under international agreements to which the Philippines is a signatory, except those under PD 529⁹ (Petroleum Exploration Concessionaires under the Petroleum Act of 1949¹⁰)

xii. Sales by agricultural cooperatives duly registered and in good standing with the CDA to their members, as well as sale for their produce, whether in its original state or processed form, to non-members their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce

Sale by agricultural cooperatives to non-members can only be exempted from VAT if the producer of the agricultural products sold is the cooperative itself. If the cooperative is not the producer (e.g., trader), then only those sales to its members shall be exempted from VAT;

However, the sale or importation of agricultural food products in their original state is exempt from VAT irrespective of the seller and buyer

xiv. Sales by non-agricultural, non-electric and noncredit cooperatives duly registered with and in good standing with the CDA

Share capital contribution of each member does not exceed 15,000 and regardless of the aggregate capital and net surplus ratably distributed among the members

Importation of machineries and equipment, including spare parts thereof, to be used by them are subject to VAT

xvi. The following sales of real properties are exempt from VAT:

• Not primarily held for sale to customers or held for lease in the ordinary course of trade or business
• A subdivision or a condominium registered and licensed by the HLURB
• Undertaken by the government or private developers
• Utilized for socialized housing
• House and lot and other residential dwellings with a selling price not exceeding ₱3,600,000, effective January 1, 2024. (The former thresholds were a residential lot valued at P1,919,500 and below, or house and lot and other residential dwellings valued at P3,199,200 and below, as amended by Revenue Regulations No. 16-11¹¹.)

If two or more adjacent residential lots are sold or disposed in favor of one buyer, for the purpose of utilizing the lots as one residential lot, the sale is not exempt from VAT merely because the aggregate value of the lots does not exceed 1.9195M; another exemption under Sec. 109 of the NIRC must apply. Such adjacent real properties although covered by separate titles and/or separate tax declarations, when sold to one and the same buyer, whether covered by one or separate deeds of conveyance, shall be presumed as a sale of one residential lot, house and lot or residential dwelling. (as amended by Revenue Regulations No. 16-11 and Revenue Regulations No. 13-12¹²)

The sale of parking lots in a condominium is a separate and distinct transaction and is not covered by the rules on threshold amount not being a residential lot, house and lot, or a residential dwelling. Thus, it is subject to VAT regardless of amount of selling price. (Revenue Regulations No. 13-12)

Note: Beginning January 1, 2021, the separate VAT exemption for sale of real properties utilized for low-cost housing ceased to apply. Under Sec. 109(P) of the NIRC, as amended by RA 10963, the VAT exemption applies to sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business, sale of real property utilized for socialized housing as defined by Republic Act No. 7279¹³, and sale of a house and lot or other residential dwelling with a selling price not exceeding ₱3,600,000, effective January 1, 2024, under Revenue Regulations No. 1-2024. The statutory base amount for the residential-dwelling exemption is ₱2,000,000.

xvii. Lease of residential units

Monthly rental: not exceeding P15,000

Gross receipts from rentals exceeding P15,000 per month per unit shall be subject to VAT if the aggregate annual gross receipts from said units only (not including the gross receipts from units leased for not more than P15,000) exceed 3M, otherwise, these gross receipts are subject to 3% percentage tax.

xviii. Sale, importation, printing or publication of books and any newspaper, magazine, review, or bulletin which appears at regular intervals with fixed prices for subscription and sale which is not devoted principally to the publication of paid advertisements

The VAT exemption covers qualifying books, newspapers, magazines, reviews, and bulletins in printed or digital or electronic format, subject to the statutory conditions (NIRC, Sec. 109(1), as amended by RA 12023).¹⁴

xix. Transport of passengers by international carriers doing business in the Philippines (R.A. No. 10378)

The transport of passengers by international carriers is VAT-exempt but subject to percentage tax. The transport of cargo by international carriers is subject to zero-rated VAT. (Rev. Regs. 15-13)¹⁵

xx. Sale, importation, or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts thereof for domestic or international transport operations; Provided, however, that the exemption from VAT on the importation and local purchase of passenger and/or cargo vessels shall be subject to the requirements on restriction on vessel retirement program of Maritime Industry Authority (MARINA). (Rev. Regs. 13-18)¹⁶

xxi. Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations

Shall be used exclusively or shall pertain to the transport of goods and/or passengers from a port in the Philippines directly to a foreign port without stopping at any other port in the Philippines

Provided further, that if any portion of such fuel, goods or supplies is used for purposes other than that mentioned in this paragraph, such portion of fuel, goods and supplies shall be subject to 12% VAT starting February 1, 2006 (Rev. Regs. 04-07)¹⁷

xxii. Services of banks, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries subject to percentage tax

Money changers and pawnshops are treated as non-bank financial intermediaries, hence they are VAT-exempt, but are subject to percentage tax. (Rev. Regs. 04-07) (H. Tambunting Pawnshop, Inc. v. CIR)¹⁸

xxiii. Sale or lease of goods and services to senior citizens and persons with disability, as provided under Republic Act Nos. 9994¹⁹ (Expanded Senior Citizens Act of 2010) and 10754²⁰ (An Act Expanding the Benefits and Privileges of Persons With Disability), respectively;

xxiv. Transfer of property pursuant to Section 40(C)(2) of the NIRC, as amended;

xxv. Association dues, membership fees, and other assessments and charges collected on a purely reimbursement basis by homeowners’ associations and condominium corporations established under Republic Act No. 4726²¹ (The Condominium Act), respectively;

xxvi. Sale of gold to the Bangko Sentral ng Pilipinas (BSP);

xxvii. Sale of drugs and medicines prescribed for diabetes, high cholesterol, and hypertension beginning January 1, 2019 as determined by the Department of Health; and

Sale or importation of prescription drugs and medicines for cancer, mental illness, tuberculosis, and kidney diseases beginning January 1, 2021;

xxviii. Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of Three Million Pesos (P 3,000,000)

For purposes of the threshold of P3,000,000, the husband and wife shall be considered separate taxpayers.

The aggregation rule for each taxpayer shall apply

For instance, if a professional, aside from the practice of his profession, also derives revenue from other lines of business which are otherwise subject to VAT, the same shall be combined for purposes of determining whether the threshold has been exceeded. Thus, the VAT-exempt sales shall not be included in determining the threshold. (Rev. Regs. 04-07)²²

Note: A VAT-registered person may elect that the exemption shall not apply to his sales of goods or services or properties. Said choice is irrevocable for a period of 3 years.

A qualified non-VAT individual whose gross sales or receipts and other non-operating income do not exceed ₱3 million may elect the 8% income-tax rate in lieu of the graduated income-tax rates and the percentage tax under Sec. 116. The election does not itself change the VAT-exemption threshold. (NIRC, Secs. 24(A)(2)(b), 109(1), and 116, as amended by RA 10963; RR No. 13-2018)²³

LIST OF VAT EXEMPT TRANSACTIONS IS EXCLUSIVE

The Court ruled that tollway operations fall within the broadly construed sale or exchange of services under Section 108 of the Code²⁵ and have no applicable exemption under Section 109²⁴. This implies that Section 109 (i.e., VAT exempt transactions) is an exclusive list while Section 108 is not. (Renato v. Diaz, G.R. No. 193007, 25 June 2012)²⁶

INPUT AND OUTPUT TAX