VAT Exemptions: Persons and Transactions

• VAT exemptions can be categorized into exempt people and exempt transactions.

Exempt Persons or Entities

• The VAT law does not explicitly state which persons are exempt.
• Value-added tax is levied on objects or transactions, making it an indirect tax.

Exempt Transactions

• Some transactions are subject to 12% VAT, others are zero-rated, while some are not subject to VAT.
• Exempt transactions include the sale or importation of agricultural and marine food products in their original state.
• This includes livestock and poultry generally used as food for human consumption, as well as breeding stock and genetic materials.
• Original state products include those that undergo simple preparation or preservation processes like freezing, drying, salting, broiling, roasting, smoking, or stripping.
• Polished or husked rice, corn grits, raw cane sugar and molasses, ordinary salt, and copra are examples.
• Sales of non-food agricultural, marine, and forest products in their original state by the primary producer or owner of the land are subject to VAT.
• As are sales of cotton and cotton seeds in their original state.
• Imported boars and swines for breeding are VAT-exempt, while imported horses for sports or games are taxable.
• This is because horses are not generally used as food for human consumption.
• Fertilizers, seeds, seedlings, fingerlings, fish, prawn, livestock, and poultry feeds (including ingredients) are VAT-exempt.
• Specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals, and other animals generally considered as pets are not exempt.
• Both the importation and local sale of fertilizers are exempt, but the importation of raw materials for fertilizer formulation is taxable.
• Importation of personal and household effects is exempt from customs duties for:
• Residents of the Philippines returning from abroad.
• Non-resident citizens coming to resettle in the Philippines.
• Personal and household effects belonging to non-residents coming to resettle in the Philippines are VAT-exempt.
• Professional instruments and implements, tools of trade, wearing apparel, domestic animals, and personal/household effects are VAT-exempt for:
• People settling in the Philippines.
• Filipinos or their families/descendants (overseas Filipinos) returning for their own use.
• Vehicles, vessels, aircrafts, machineries, and similar goods for manufacture are subject to duties and taxes.
• The importation of computers is exempt because professional instruments and implements are exempt from value-added tax, but the importation of the vehicle is taxable.

Services Subject to Percentage Tax (Under Title V of the Tax Code)

• Leasing goods/properties or performing services by non-VAT-registered people with gross annual sales/ receipts not exceeding P3,000,000.
• They are be subject to 8% tax on gross sales/receipts, and non-operating income.
• Franchise grantees of radio and/or television broadcasting with annual gross receipts not exceeding P10,000,000, and gas/water utilities.
• Services of proprietors, lessees, or operators of cockpits, cabarets, night/day clubs, boxing exhibitions, professional basketball games, jai-alai, and race tracks.
• Services from any person, company, or corporation (except purely cooperative companies or associations) doing life insurance business in the Philippines.
• Services of fire, marine, or miscellaneous insurance agents of foreign insurance companies.
• Receipts from sale, barter, or exchange of shares of stock listed/traded through the local stock exchange or initial public offering.
• Services by domestic common carriers on land for passenger transport, and keepers of garages.
• The transport of passengers is subject to Common Carrier's Tax.
• Transport of cargoes is subject to Common Carrier's Tax if directly connected with passenger transport.
• Services of international air or shipping carriers for transporting goods or cargo originating in the Philippines and going abroad.
• Services rendered for overseas dispatch, message, or conversation originating from the Philippines.
• Services by agricultural contract growers and milling for others of palay into rice, corn into grits, and sugar cane into muscovado and raw cane sugar.
• Agricultural contract growers' transactions are exempt from VAT.
• Medical, dental, hospital, and veterinary services, except those rendered by professionals.

Medical Services

• Hospital bills are medical services.
• Drug sales to in-patients included in the hospital bills are part of medical expenses.
• Drug sales to out-patients are taxable because they are not part of medical services.
• Educational services by private institutions accredited by DepED, CHED and TESDA, and government educational institutions.
• Services rendered by individuals according to an employer-employee relationship.
• Services by regional or area headquarters in the Philippines of multinational corporations that act as supervisory or coordinating centers for affiliates and do not earn income in the Philippines.
• Transactions exempt under international agreements to which the Philippines is a signatory or special laws, excluding those under the Petroleum Act of 1949 for Petroleum Exploration Concessionaires.
• Importation covered by the UNESCO Florence Agreement is exempt from VAT.
• Sales by agricultural cooperatives duly registered and in good standing with the CDA to their members, as well as sales of their produce to non-members, are VAT-exempt.
• Their import of direct farm inputs, machineries and equipment for production and/or processing is also VAT-exempt.
• Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered and in good standing with the CDA are VAT-exempt.
• The exemption applies not only to loans to members but also to non-members.
• Sales by non-agricultural, non-electric, and non-credit cooperatives duly registered with the CDA are exempt if the share capital contribution of each member does not exceed P15,000.
• Export sales by non-VAT-registered people are exempt.
• If registered, exports are subject to VAT but are zero-rated.

Sales of Real Properties

• Sales of real properties not primarily held for sale to customers or lease in the ordinary course of trade or business.
• If property is used in the seller’s trade or business, the sale is subject to VAT.
• Sales of real properties utilized for socialized housing
• It refers to housing programs for underprivileged and homeless citizens undertaken by the Government or private sector.
• Selling price is within the lowest interest rates under the Unified Home Lending Program (UHLP).
• Sale of house and lot and other residential dwellings with a value not exceeding P3,199,200.
• Sale of residential lot only are subject to 12% VAT.
• Adjusted to the Consumer Price Index (CPI) every three years.
• If property is utilized for low-cost housing the sale is no longer VAT exempt.
• Sales of residential lots by a realtor, lessor, or real estate developer is subject to VAT regardless of the amount.
• A residential house and lot valued at P3,000,000 and the seller is a realtor, it is exempt because the value does not exceed the P3,199,200 ceiling.
• Lease of residential units with a monthly rental per unit not exceeding P15,000 is VAT-exempt.
• Lease of residential units where the monthly rental per unit exceeds P15,000 but the aggregate of rentals during the year do not exceed P3,000,000, it shall be exempt from VAT but subject to 3% percentage tax.
• Where a lessor has units for lease, where some are leased for less than P15,000 per month and others for more, these rules apply:
• Gross receipts from units not exceeding P15,000 per month are VAT-exempt, also exempt from the 3% percentage tax.
• Gross receipts from rentals exceeding P15,000 per month are subject to VAT if the aggregate annual gross receipts exceed P3,000,000.
• Term 'residential units' refers to apartments and houses used for residential purposes.
• Term 'unit' mean an apartment unit, or a house.
• The sale, importation, printing, or publication of books and any newspaper, magazine, journal, or any educational reading material covered by UNESCO agreement on the importation of education, scientific and cultural materials.
• Magazines can only be exempt if they aren't devoted to the publication of advertisements.
• Transport of passengers by international carriers doing business in the Philippines.
• Sale, import, or lease of passenger or cargo vessels and aircraft, including engine, equipment, and spare parts for domestic or international transport.
• Requires a vessel importation restriction and retirement program by MARINA.
• The law grants exemption only on importations of passenger and/or cargo vessels, tankers, and high-speed passenger crafts.
• Exempt sales of vessels pertain only to those whose age is 15 years old and below.
• Import of fuel, goods, and supplies by people in international shipping or air transport operations is VAT-exempt if used for those purposes.
• It must exclusively pertain to transport from a port in the Philippines directly to a foreign port, or vice versa.
• Services of banks, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries like money changers and pawnshops are subject to percentage tax.
• Sale or lease of goods and services to senior citizens and people with disabilities, as provided under specific Republic Acts.
• Transfer of property pursuant to Section 40(C)(2) of the Tax Code, as amended.
• Association dues, membership fees, and other assessments collected by homeowners' or condominium corporations are VAT-exempt if on a purely reimbursement basis.
• Sale of gold to the Bangko Sentral ng Pilipinas.
• Sale of drugs and medicines prescribed for diabetes, high cholesterol, and hypertension, and sale/import of prescription drugs/medicines for cancer, mental illness, tuberculosis, and kidney diseases.
• Sale or lease of goods/properties or performance of services other than those mentioned in previous paragraphs if gross annual sales/receipts do not exceed Three Million Pesos (P3,000,000).
• Sale or import of specific goods from January 1, 2021 to December 31, 2023:
• Capital equipment, its spare parts, and raw materials necessary for PPE production.
• All drugs, vaccines, and medical devices specifically prescribed and directly used for treating COVID-19.
• Drugs, including raw materials, for treating COVID-19 approved by the FDA for clinical trials.

Senior Citizen VAT Exemptions

• Refers to any Filipino citizen who is a resident of the Philippines and is 60 years old or above.
• The law applies to senior citizens with "dual citizenship" if they prove their Filipino citizenship and have at least six months residency in the Philippines.
• Sales of the following goods and services shall be VAT-exempt and subject to a 20% discount.
• Medicines (including influenza and pneumococcal vaccines) and essential medical supplies determined by the DOH are VAT-exempt and subject to a 20% discount.
• Discounts available on all drug stores, hospital pharmacies, medical and optical clinics.
• Drugs/medicines shall be subject to the guidelines to be issued by the BFAD-DOH, in coordination with Philhealth.
• The term "medicines" refers to both prescription and nonprescription medicines, and articles approved by the BFAD-DOH, and are for use in to the diagnosis, cure, mitigation, treatment or prevention of disease.
• VAT exemption also applies to medically prescribed vitamins and mineral supplements for prevention/treatment of diseases/illness.
• Purchase of eyeglasses, hearing aids, dentures, prosthetics, artificial bone replacements, walkers, clutches, wheelchairs, canes/quad canes, geriatric diapers, other essential supplies, accessories and equipment are VAT exempt for senior citizen.
• The VAT discount shall be based on compensation for services charged from the Senior Citizen, regarding professional fees.
• The VAT exemption shall apply to medical and dental services, diagnostic and laboratory tests requested by a physician.
• Includes land transportation travel in public utility buses (PUBs), public utility jeepneys (PUJs), taxis, Asian utility vehicles (AUVs), shuttle services and public railways, including LRT, MRT, and PNR.
• Domestic air transport services and sea shipping vessels are subject to VAT.
• Hotels and similar lodging establishments, restaurants, and recreation centers are also subject to VAT.
• Admission fees charges for leisure and amusement are also subject to VAT.
• Funeral and burial services for the death of Senior Citizens subject to conditions.

Persons With Disability (PWD) VAT Exemptions

• PWDs are those who have long-term physical, intellectual, or sensory impairments which may hinder their full and effective participation in society on an equal basis with others.
• Twenty percent (20%) discount and exemption from VAT, if applicable, on the following sale of goods and services for the exclusive use and enjoyment or availment of the PWD:
• Purchase of medicines (generic and branded) in all drugstores.
• Medical and dental services including diagnostic and laboratory fees.
• Professional fees of doctors in all government or private hospitals and medical facilities.
• As well as land transportation travel in public utility.
• Hotels are also subject to VAT.
• There is no double discount applied to PWD’s and Senior Citizens.

Background of Value-Added Tax

• VAT became effective in the Philippines on January 1, 1988, via Executive Order No. 273.
• It has replaced and eliminated old business taxes in the Philippines.
• Several traditional business taxes were abolished and replaced by VAT including:
• Sales tax on original sales and subsequent sales tax.
• Contractor's tax and miller's tax.
• Broker's tax and tax on cinematographic film owner, lessor, or distributor.
• Advance sales tax and compensating tax.
• Excise taxes on matches, solvents, and video tapes.
• Taxes on hotels/motels, dealers in securities, and lending investors.
• Caterer's tax.
• The tax on insurance premiums of non-life insurance companies (except crop insurance).
• The tax on franchises, with exception of radio and television broadcasting companies whose gross receipts of the preceding year do not exceed P10,000,000.
• Sales of non-food agricultural, marine, and other forest products in their original state.
• Sales of cotton and cotton seeds in their original state.
• Sales or import of coal and natural gas.
• Sales or import of petroleum products (including raw material for production).
• Sales by artists of works of art, literary works, musical compositions etc.
• Services rendered by doctors of medicine and lawyers.
• Common carriers by air and sea in the transport of passengers.
• Toll road operations.
• Sales of electricity by generation, and transmission and distribution companies.
• Sales by electric cooperatives.

The imposition of value-added tax has effected the following reforms:

• Simplification of the business tax system.
• Improvement of equity.
• Enhancement of efficiency in tax administration.
• VAT is a tax on consumption levied on the sale, barter, exchange, or lease of goods, properties, and services; on imports.
• The seller is the one statutorily liable for the payment of tax but the amount of the tax may be shifted to the buyer.

Scope of VAT

• Any sale, barter, or exchange of goods and properties (including real properties), or similar transactions, in the course of trade or business.
• Any sale of services, or similar transactions, in the course of trade or business.
• Any lease of goods and properties, or similar transactions, in the course of trade or business; and
• Any importation of goods, whether in the course of trade or business or not.
• "Persons" refers to any individual, trust, estate, partnership, corporation, joint venture, cooperative or association.
• “Taxable person" refers to any person liable for the payment of value-added tax, whether or not registered in accordance with the provisions of the National Internal Revenue Code.
• Any business or businesses pursued by an individual where the aggregate gross sales or receipts do not exceed P100,000 during any 12-month period shall be considered principally for subsistence or livelihood and not in the course of trade or business.
• Non-resident persons who perform services in the Philippines are deemed to be making sales in the course of trade or business even if the performance of services is not regular.
• Persons subject to VAT are those whose gross annual sales or receipts during any year exceed P3,000,000, or those whose sales or receipts do not exceed this amount.
• Aperson commencing a new business becomes taxable if he expects to realize an annual gross sales or receipts in excess of P3,000,000 from taxable transactions for the next 12 months.
• If a VAT registered person’s annual gross receipts did not exceed P3,000,000 they are still liable to pay VAT.
• If a non-VAT registered person’s annual gross receipts exceed P3,000,000, they are subject to VAT.
• If a VAT-registered person will just commence new business, they are subject to tax upon start of business operation if annual gross sales receipts are more than P3,000,000,

Husband and Wife

• The husband and the wife shall be considered as separate taxpayers for purposes of the threshold of P3,000,000.
• The aggregation rule for each taxpayer shall apply however if a professional aside from their job adds revenue from other lines of business which are otherwise subject to VAT.
• VAT exempt sales are not included in the threshold.
• Neither Polano nor Polana is subject to VAT. For purposes of the threshold of P3,000,000 their respective gross receipts shall be treated separately.
• The term government consisting of the three branches are not subject to tax because the government should not pay itself.
• Government must pay taxes if it sells goods and services in the course of business.
• No situation can occur, where a person or transaction is subject to value-added tax and % Tax at the same time
• People and transactions can be subject to value-added tax and excise tax at the same time
• If sales do not exceed 100k annually, they are considered to be Marginal Income Earners, and are exempt
• If sales are over 3M annually, they must pay VAT (whether registered, or not)