Tax 302 – Business and Transfer Tax

Prepared by: Mark Paul I. Ramos, CPA, MBA

MODULE 1
Business Taxes – Value-Added Tax

INTRODUCTION
This module introduces the basic principles and foundations of Value-Added Tax.
The main topics that will be covered will include: background of value-added taxes,
reforms introduced by VAT, nature and characteristics of VAT, its scope, ang VAT
threshold. This module also discusses the exemptions from VAT, (e.g. persons or
entities, transactions). Application of VAT to Senior Citizens, Persons with Disabilities,
and others will also be tackled in this course. Discussions will include the changes
applied in effect of the TRAIN Act, CREATE Act, CREATE MORE Act, EOPT Act, and
CMEPA.

INTENDED LEARNING OUTCOMES

ILO 1 – Demonstrate an extensive knowledge on the background, nature, scope, and
characteristics of Value-Added Tax
ILO 2 – Application of the VAT threshold and understand the exemptions relevant to VAT
ILO 3 – Understand VAT related to Senior Citizens and Persons with Disability, Solo
Parents, and National Athletes and Coaches
ILO 4 – Achieve best skills in resolving problems involving VAT

Introduction: Business Taxes

Business taxes are those imposed upon onerous transfers such as sales, barter,
exchange, and importation. It is called as such because without a business pursued in
the Philippines (except importation) by the taxpayer, business taxes cannot be applied.

Business taxes are in addition to income and other taxes paid, unless specifically
exempted.

Unlike an income tax, which is based on the taxpayer’s net taxable income,
business taxes are generally based on gross sales or gross receipts. Hence, irrespective
of the results of business operations (income or loss), taxpayers engaged in trade or
business are still liable to pay for business taxes (either VAT or OPT, plus excise tax, if
applicable).

"In the course of trade or business" means the regular conduct or pursuit of a
commercial or an economic activity, including transactions incidental thereto, by any
person, regardless of whether the person engaged therein is a non-stock, non-profit
private organization or government entity (Sec. 105 NIRC; Sec. 4.105-3 of RR 16-2005).

VAT provisions pertain to those persons whose undertakings are intended to be

pursued on a going concern basis where the end view is to realize unrestricted amounts
of pecuniary gains or profits from those who may avail of the goods they sell or the
services they render (RMC 77-2008). Therefore, isolated transactions are generally not

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 Tax 302 – Business and Transfer Tax
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considered in the ordinary course of trade or business, hence, not subject to business
tax. However, RR 16-2005 provides that services rendered in the Philippines by non-
resident persons shall be considered as being rendered in the course of trade or business
even if the performance is not regular.

Isolated Transaction:
• By residents are considered not in the ordinary course of trade or
business, thus. not subject to VAT.
• By nonresidents (on services rendered in the Philippines) are
considered in the ordinary course of trade or business, thus,
subject to Final withholding VAT.

Types of Transfers
1. Gratuitous transfer (transfer without consideration) – not subject to business
tax but subject to transfer taxes (estate tax or donor’s tax)

2. Onerous transfer (transfer with consideration):

a. In the ordinary course of trade or business including incidental
transactions (subject to business tax and income tax, unless exempt
under the law)
b. Not in the ordinary course of trade or business (not subject to business
tax but may be subject to income tax)

ILLUSTRATION
BASIS: Mindanao Geothermal II vs. CIR GR No.
Pinas Energy Corp. entered into a Built-Operate- 193301 dated March 11, 2013 (refer also to Sec. 105
Transfer (BOT) contract with the PNOC for finance, of the Tax Code, as amended).
engineering, supply, installation, testing, GUIDE: If the asset sold is an ordinary asset, it is
commissioning, operation and maintenance of a generally subject to vat unless exempt under the law.
Mindanao II’s business is to covert the steam
Geothermal Power Plant. During the year, Pinas supplied to it by the PNOC into electricity and to
Energy Corp. sold for P200,000 a fully depreciated deliver the electricity to NPC. In the course of its
vehicle (Nissan Patrol) used in business. business, Mindanao II bought and eventually sold a
Nissan Patrol. Prior the sale, the Nissan Patrol was
part of Mindanao II’s property, plant and equipment.
Question: How much is the business tax, if any? Therefore, the sale of Nissan Patrol is an incidental
Answer: VAT = P200,000 × 12% = P24,000 transaction made in the course of Mindanao II's
business which should be liable for VAT.

Types of Business Taxes

There are three major business taxes in the Philippines, namely:
1. Value added tax (VAT)
2. Other percentage taxes (OPT) or simply Percentage Tax
3. Excise Tax

As a rule, all sale of goods or services made in the normal course of trade or
business are subject to VAT unless exempt under the law. Nonetheless, if the sale is
exempt from vat, it may be subject to Other Percentage Tax (OPT) under Sections 116 to

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127 of the Tax Code. Consequently, transactions already subjected to VAT should no
longer be subject to Percentage Tax. However, such is not the case with respect to excise
taxes. A transaction subjected to either vat or percentage tax may still be subjected to
excise tax as illustrated below:

VAT OPT Excise Tax

SALE of Goods/Properties or Service may be subject to:
1. VAT, in general a X X
2. Exempt from VAT but subject to OPT E a X
3. Exempt from business taxes E E -

Manufacturing/importation and Sale of Sin-Products, Non-

essential goods/services may be subject to:
1. In general, VAT (plus excise tax, if applicable), OR a X a
2. Percentage tax (plus excise tax, if applicable) X a a

A transaction subjected to value added tax must no longer be subjected to

percentage tax. Nonetheless, a business entity or taxpayer may be engaged in
transactions that are subject to vat, exempt from vat and subject to percentage tax
(mixed transactions) at the same time. Therefore, a taxpayer may be subjected to value
added tax and at the same time, percentage tax including excise tax if applicable.

Value-Added Tax Defined

VAT is a tax on the value added by every seller to the purchase price or cost in the
sale or lease of goods, property or services in the ordinary course of trade or business as
well as on importation of goods into the Philippines, whether for personal or business
use. It is a tax on consumption levied on the sale, barter, exchange or lease of goods or
properties and services in the Philippines (cross border doctrine) and on importation of
goods into the Philippines levied at each stage of production and distribution process
(RR 4-2007). "Cross border doctrine" means that no VAT shall be imposed to form part of
the cost of goods destined for consumption outside the territorial border of the Philippine
taxing authority (ATLAS Consolidated Mining vs. CIR, June 8, 2007).

Kinds of VAT
1. VAT on sale of goods or properties
2. VAT on importation of goods
3. VAT on sale of services and use or lease of properties

Background of Value-Added Tax

The value-added tax became effective in the Philippines on January 1, 1988, by
virtue of Executive Order No. 273. Its imposition has replaced and eliminated certain
traditional business taxes in the Philippines.

With the approval of Republic Act Nos. 7716, 8241, 8424, 8761, 9010, 9337 and
other tax laws, more traditional business taxes were abolished and replaced by VAT.

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The following taxes were abolished by the aforementioned laws:

1. Sales tax on original sakes
2. Subsequent sales tax
3. Contractor’s tax
4. Miller’s Tax
5. Broker’s Tax
6. Tax on cinematographic film owner, lessor, or distributor
7. Advance sales tax
8. Compensating tax
9. Excise taxes on matches, solvents, and video tapes
10. Tax on hotels, motels, etc.
11. Tax on dealers in securities
12. Tax on lending investors
13. Caterer’s tax
14. Tax on insurance premiums of non-life insurance companies (except crop
insurance)
15. Tax on franchises, except radio and television broadcasting companies whose
annual gross receipts of the preceding year do not exceed P10,000,000 and
gas and water utilities

The passage of Republic Act No. 9337 has introduced the following transactions
into the value-added tax world. Thus, the following sales of goods and services are now
subject to VAT:
1. Sale of non-food agricultural, marine, and other forest products in their
original state by the primary producer or owner of the land;
2. Sale of cotton and cotton seeds in their original state;
3. Sale or importation of coal and natural gas, in whatever state or form;
4. Sale or importation of petroleum products, including raw materials for their
production;
5. Sale by the artist of his works of art, literary works, musical compositions and
similar creations, or his services performed for the production of such works;
6. Services rendered by doctors of medicine duly registered with the
Professional Regulation Commission and by lawyers duly registered with
Integrated Bar of the Philippines;
7. Common carriers by air and sea relative to their transport of passengers from
one place in the Philippines to another place in the Philippines;
8. Toll road operations;
9. Sale of electricity by generation, transmission, and distribution companies;
and
10. Sale by electric cooperatives as well as importation of machines and
equipments including spare parts.

Reforms introduced by VAT

The imposition of Value-added tax has affected the following reforms:
1. Simplification of business tax system
2. Improvement of equity, and

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3. Enhancement of efficiency in tax administration

Persons Liable (as amended under RA 12023 or the Digital Services Act)
Unless exempt under the law, any person engaged in the course of trade or business is
subject to VAT, such as:
• Sellers of foods or properties
• Lessors of properties
• Sellers of Services, including Digital Service Providers (DSP) as introduced under
RA 12023 or the VAT on Digital Services Act

"IN THE COURSE OF TRADE OR BUSINESS" means the regular conduct or pursuit of a
commercial or economic activity, including transactions incidental thereto, by any
person regardless of whether or not the person engaged therein is a non-stock, non-profit
private organization (irrespective of the disposition of its net income and whether or not
it sells exclusively to members or their guests), or government entity. The rule of
regularity, to the contrary notwithstanding, services rendered in the Philippines by non-
resident foreign persons shall be considered as being in course of trade or business.

Importation
In the case of importation of taxable goods, the importer, whether an individual or
a corporation and whether or not made in the course of his trade or business, shall be
liable to VAT imposed in Section 107 of the Tax Code.

Transfer by a Tax-Exempt Entity to None-Tax Exempt Entity

Section 107(B) of the Tax Code provides that in the case of tax-free importation of
goods into the Philippines by persons, entities, or agencies exempt from tax where such
goods are subsequently sold, transferred or exchanged in the Philippines to non-exempt
persons or entities, the purchasers, transferees or recipients shall be considered the
importers thereof, who shall be liable for any internal revenue tax on such importation.

Nature and Characteristics of VAT

The Value-added tax is a tax on consumption levied on the sale, barter, exchange
or lease of goods or properties and services in the Philippines and on importation of
goods in the Philippines. The seller is the one statutorily liable for the payment of tax but
the amount of the tax may be shifted or passed on to the buyer, transferee or lessee of
the goods, properties or services.

1. It is an indirect tax where tax shifting is always presumed.

The value added tax is an indirect tax and the amount may be shifted or passed on
to the buyer, transferee or lessee of the goods, properties or services (Section 105 Tax
Code; Section 4, RR 16-2005). The seller is the one statutorily liable to pay for the
payment of the tax but the amount of the tax may be shifted or passed on the buyer or
transferee or lessee of the goods, properties or services. This rule shall likewise apply to
existing contracts of sale or lease of goods, properties or services at the time of the
effectivity of RA 9337 (VAT Reform Act). However, in the case of importation, the importer
is the liable for the VAT (RR 16-2005).

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The "burden of the tax" is borne by the final consumers although the producers and
suppliers of these goods and services are the ones who have to file their VAT returns to
the Bureau of Internal Revenue (BIR). Hence, what is transferred or shifted to the
consumers is not the "liability to pay the tax" but the tax burden.

2. It is consumption-based.
VAT is a tax on consumption levied on the sale, barter, exchange or lease of goods
or properties and services in the Philippines and on importation of goods into the
Philippines (RR 16-2005). It is the end user of consumer goods or services which
ultimately shoulders the tax as a liability therefrom is passed on to the end users by the
providers of these goods or services. The VAT, thus, forms a substantial portion of
consumer expenditures.

3. It is imposed on the value added in each stage of production and distribution

process.
The VAT system assures fiscal adequacy through the collection of taxes on every
level of consumption. Each business in the supply chain takes part in the process of
controlling and collecting the tax.

ILLUSTRATION

4. It is a credit-invoice method value-added tax.

VAT payable or the amount of vat to be remitted by taxpayers to the Bureau of
Internal Revenue (BIR) is computed by deducting the input VAT from the output VAT. The
sellers of goods or services passed-on to the end users the liability to pay the tax who in
turn may credit their VAT liability from the VAT payments they received from the final
consumer. This is because VAT is a consumption tax levied on sales to be borne by
consumers with sellers acting simply as tax collectors.

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 Tax 302 – Business and Transfer Tax
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In the Philippines, the "Credit-Invoice Method" or "Tax Credit Approach" is adopted

in computing the VAT Payable. This means that VAT is imposed on the sale first called
"Output VAT" and a tax credit is allowed or claimed on the VAT passed-on to his purchase
or cost of goods or services known as "Input VAT". The excess of output VAT over input
VAT is called "VAT Payable".

Output tax means the VAT due on the sale, lease or exchange of taxable goods or
properties or services by any person registered or required to register under Section 236
of the Tax Code. Input tax means the VAT due on or paid by a VAT-registered on
importation of goods or local purchase of goods, properties or services, including lease
or use of property in the course of his trade or business.

Sec. 4.110-7 of RR 16-2005 as amended by RR2-2007 provides that "if the input tax
inclusive of input tax carried over from the previous quarter exceeds the output tax, the
excess input tax shall be carried over to the succeeding quarter or quarters, provided,
however, that any input tax attributable to zero-rated sales by a VAT-registered person
may at his option be refunded or applied for a tax credit certificate which may be used in
the payment of internal revenue taxes, subject to the limitations as may be provided for
by law, as well as, other implementing rules.

Scope of VAT
The following transactions entered into by any person are subject to VAT:
1. Any sale, barter, or exchange of goods and properties (including real
properties), or similar transactions, in the course of trade or business
2. Any sale of services, or similar transactions, in the course of trade or business
3. Any lease of goods and properties, or similar transactions, in the course of
trade or business, and
4. 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.

The phrase “in the course of trade or business” means the regular conduct or pursuit of a
commercial or an economic activity, including transactions incidental thereto, by any
person regardless of whether or not the person engaged therein is a non-stock non-profit
private organization (irrespective disposition of its net income and whether or not it sells
exclusively to members or their guests), or government entity.

However, any business or businesses pursued by an individua 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.

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Generally, the persons subject to VAT are those whose gross annual sales or receipts during
any year or in any 12-month period exceed P3,000,000 (TRAIN Law; as per EOPT Law, the
threshold will be updated every 3 years based on the Philippine Consumer Index as
published by the PSA) or those whose sales or receipts do not exceed this amount, but
registered under the value-added tax system.

A person 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.

Application of the threshold

For purposes of the threshold of P3,000,000, the husband and wife shall be
considered as separate taxpayers. However, 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 sale shall not be included in determining the threshold.

Government and its political subdivisions

The term government consisting the three branches, namely: executive, legislative
and judiciary which undoubtedly are performing essential government function are not
subject to tax because the government should not tax itself.

However, a government entity is taxable if it sells goods or services in the course of

business. Thus, government entities and instrumentalities, including government-
owned or controlled corporations, are subject to VAT.

Basis of Value Added Tax

Prior to the effectivity of RA 11976 or the Ease of Paying Taxes Act (EOPTA), the basis
of computing the 12% vat are as follows:
• Sale of goods: Gross Sales
• Sale of service/s: Gross Receipts

The EOPTA mandates the use of uniform basis of computing the 12% vat for both
sale of goods and services. The EOPTA requires the use of gross sales as a basis in
computing the vat. However, the basis of computing the vat for importation, sale of real
properties as well dealer in securities were not amended under the EOPTA. Thus, the
basis of computing vat is summarized as follows:
Nature Tax Base
Sale of goods or Gross sales
properties
Sale of services Gross sales
Sale of real property FMV or ZV, whichever is higher
Importation Total landed cost
Dealers in securities Gross income

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VAT REGISTRATION
Under the Tax Code, as amended, vat registration is classified into two (2),
mandatory and optional vat registration.

A. Mandatory Registration
1. Any person or entity who, in the course of his trade or business sells, barters,
exchanges, leases goods or properties and renders services [(including Digital
Service Providers (DSP)] subject to VAT, if the aggregate amount of actual
gross sales or receipts (simply gross sales under EOPTA) exceed P3,000,000
for the past 12 months (other than those that are exempt) or there are reasons
to believe that the gross sales or receipts for the next 12 months will exceed
P3,000,000.

2. Radio and/or television broadcasting

Penalty for non -registration of
companies whose annual gross receipts (gross those required to register.
sales under EOPTA) of the preceding year The taxpayer shall be liable to
exceeds P10,000,000. Mandatory registration pay the tax as if he were a VAT-
registered person but he
applies within 30 days from the end of the cannot avail the benefits of
taxable year to radio/ TV broadcasters hose input tax credit for the period
gross annual gross sales for the taxable year he was not properly registered.
exceeded P10M (RR 4-2007).

3. A person required to register as VAT taxpayer but failed to register.

B. Optional Registration
1. Any person who is VAT-exempt or not required to register for VAT may elect to
be VAT-registered by registering with the RDO that has jurisdiction over the
head office of that person, and pay the annual registration fee for every
separate and distinct establishment. Any person who elects to register under
optional registration shall not be allowed to cancel his registration for the next
three (3) years.

2. Franchise grantees of radio and/or television broadcasting whose annual

gross receipts (gross sales under EOPTA) of the preceding year do not exceed

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ten million pesos (P10,000,000) derived from the business covered by the law
granting the franchise may opt for VAT registration. This option, once
exercised, shall be irrevocable. (Sec. 119, Tax Code).

The above-stated taxpayers may apply for VAT registration not later than ten
(10) days before the beginning of the calendar quarter and shall pay the
registration fee unless they have already paid at the beginning of the year. In
any case, the Commissioner of Internal Revenue may, for administrative
reason deny any application for registration. Once registered as a VAT person,
the taxpayer shall be liable to output tax and be entitled to input tax credit
beginning on the first day of the month following registration.

Cancellation of Registration
Instances when a VAT-registered person may cancel his VAT registration:

1. If he makes a written application and can demonstrate to the commissioner's

satisfaction that his gross sales for the following twelve (12) months, other than
those that are exempt under Section 109 (A) to (U), will not exceed P3,000,000; or

2. If he has ceased to carry on his trade or business, and does not expect to
recommence any trade or business within the next twelve (12) months.

POWER OF THE CIR TO SUSPEND BUSINESS OPERATIONS

Section 115 of the Tax Code provides that the Commissioner of the Internal Revenue
(CIR) or his authorized representative may order suspension or closure of business
establishment for any of the following violations:

1. IN THE CASE OF A VAT-REGISTERED PERSON

a. Failure to issue receipts or invoices
b. Failure to file vat return
c. Understatement of taxable sales by 30% or more of the correct taxable
sales for the taxable quarter

2. FAILURE OF ANY PERSON TO REGISTER as required under Section 236 of the Tax
Code, as amended.

The temporary closure of the establishment shall be for the duration of not less than
five (5) davs and shall be lifted only upon compliance with whatever requirements
prescribed by the Commissioner of Internal Revenue (CIR) in the closure order.

The power of the CIR to suspend shall include blocking of digital services performed
or rendered in the Philippines by a DSP. This shall be implemented by the Department of
Information and Communications Technology (DICT), through the National
Telecommunications Commission (NTC). On the other hand, RMO No. 39-2009 outlines
the procedures for recommending the suspension or temporary closure of businesses
which commit violations stated in Section 115 of the Tax Code. as amended

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VAT REGISTRATION OF DSPs

In general, rules on registration under the Tax Code, including cancellation of VAT
registration, also applies to Digital Service Providers or DSPs (RR 3-2025).

a. Resident DSPs - shall register with the BIR following policies and
procedures under Section 236 of the Tax Code and other existing and
relevant laws, rules and regulations.

b. Non-Resident DSPs - shall register with the BIR within the period
prescribed under Section 236 of the Tax Code through the VAT on Digital
Services (VDS) Portal and submit prescribed information therein.

In registering with the BIR, a nonresident DSP need not have a local representative
in the Philippines. However, it may appoint a resident third-party service provider (an
individual or entity, such as a law firm, accounting firm, or consultancy firm) for purposes
receiving notices, record keeping, filing of tax returns and other reporting obligations. In
this case, the nonresident DSP shall notify the BIR in writing of the same within thirty (30)
calendar days from the date of appointment. For vat purposes, the appointment of a
third-party provider shall not classify the nonresident DSP as a nonresident foreign
corporation doing business in the Philippines.

A Certificate of Registration containing the assigned Taxpayer Identification Number

(TIN) and type of registration shall be issued to the registering nonresident DSP, which
shall be used in all its transactions pertaining to the supply or delivery of digital services
consumed in the Philippines.

DIGITAL SERVICE PROVIDERS (DSPs)

Digital Service shall refer any service that is supplied over the internet or other
electronic network with the use of information technology and where the supply of the
service is essentially automated (Section 108-A of the Tax Code, as amended by
RA12023 of the Vat on Digital Services as implemented under RR 3-2025). Digital
Services shall include:
• Online search engine;
• Online marketplace or e-marketplace;
• Cloud service;
• Online media and advertising;
• Online platform; or
• Digital goods

Digital goods refer to intangible goods that are delivered or transferred in digital form, including sounds, images,
data, facts, or combinations thereof. These include but are not limited to digital content purchases (e.g. downloads of
e-books, music, videos, software, applications, digital media, e-games, online courses: subscriptions-based,
supplies of content (e.g., news, music, streaming media, online gaming, online courses); digital art, supplies of
software services and maintenance (anti-virus software, digital data storage, etc.); licensing of content (e.g., access
to specialized online content such as publications and journals, software, cloud-based systems, etc.);
telecommunication and broadcasting services, and virtual assets.

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Digital services also include cloud and IT infrastructure, such as data storage and web hosting: e- commerce
platforms and payment processing: targeted digital marketing and analytics: communication tools and collaborative
software, e-learning platforms and professional networking: data analytics and Artificial Intelligence for business
insights, cybersecurity and regulatory compliance; masking and encryption services (e.g. virtual private network
services; system maintenance and optimization form digital services; online consultations through digital platform
(ie., website, applications, e-market place); and interactive media, like online gaming and Augmented and/or Virtual
Ready (AR/YR) experiences.

Digital Service Provider (DSP) - a resident or nonresident supplier of digital services to

a consumer who uses digital services subject to VAT in the Philippines.

TYPES OF DSPs:
• Resident DSP - refers to a DSP other than those classified as nonresident DSP.
• Nonresident DSP - A DSP that has no physical presence in the Philippines.

COVERAGE:
A. As to person and subject matter.
1. Persons (individual or juridical, resident or nonresident), who in the course
of trade or business, supply, or deliver digital services (as defined herein),
in the Philippines.
2. It does not cover the sale, supply or delivery of physical goods from a
foreign territory to a consumer, user, or buyer in the Philippines, it being an
importation of goods subject to customs duties, taxes, such as value
added tax (vat) or excise tax, as may be applicable, and other charges
under RA 10863 or the Customs Modernization and Tariff Act, and other
applicable laws, rules and regulations.

B. As to the transactions involved

1. Business-to-business (B2B) Transactions - supply or delivery of digital
services to a natural or juridical persons engaged in business located in
the Philippines, and the Government of the Philippines or any of its political
subdivisions, instrumentalities, or agencies, including Government
Owned and Controlled Corporations (GOCCs); and
2. Business-to-consumer (B2C) transactions - supply or delivery of digital
services to persons not engaged in business in the Philippines.

C. As to tax compliance
1. DSPs directly delivering or supplying digital services to a buyer in the
Philippines; and or
2. DSPs acting as an online marketplace or e-marketplace on the
transactions of nonresident sellers or suppliers that go through its
platform, provided it controls the key aspects of the supply and perform
any of the following:
i. It sets directly or indirectly any of the terms and conditions under
which the supply of digital. services is made; or
ii. It is involved in the ordering or delivery of digital services whether
directly or indirectly.

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TAXABILITY OF DSPs
Generally, VAT shall be levied, assessed. and collected. equivalent to twelve percent
(12%) of the gross sales derived by a DSP from its sale or exchange of services in the
Philippines pursuant to Section 108 of the Tax Code. The phrase "sale or exchange of
services" includes the supply or delivery of digital services by DSPs in the Philippines
(Refer also to pages 582, 592, 609 and 611 for additional discussion regarding DSPs).

LIABILITY OF NONRESIDENT DSPS TO WITHHOLD AND REMIT VAT (This is a new

provision introduced by RA12023- Vat on Digital Services)

A nonresident DSP required to be registered for vat under Section 236(F) of the Tax
Code. as amended, shall be liable for the remittance of vat on digital services that are
consumed in the Philippines if the consumers are non-VAT registered. Provided, that if
the consumers are vat registered, the provision of Section 114(D) of the Tax Code, as
provided below, shall apply:

Section 114(D) - Reverse Charge Mechanism in Digital Services. - A VAT-registered taxpayer shall be liable
to withhold and rerit the value-added tax due on its purchase of digital services consumed in the
Philippines from nonresident digital service providers to the Bureau of Internal Revenue, within ten (10)
days following the end of the month the withholding was made

SUMMARY. Liability of Nonresident DSPs to withhold and remit vat:

• Consumers are non-VAT registered - DSPs shall remit the vat to the BIR.
• Consumers are vat registered - The consumers shall be the one to withheld and remit the vat to
the BIR.

If a VAT-registered nonresident DSP is classified as an online marketplace or e-

marketplace it-shall also be liable to remit the vat on the transactions of nonresident
sellers that go through the platform: Provided, that it controls key aspects of the supply
and performs any of the following:
a) It sets, either directly or indirectly, nay of the terms and conditions under which
the supply of goods is made; or
b) It is involved in the ordering or delivery of goods, whether directly or indirectly.

COMPUTATION OF 12% VAT

Output VAT means the VAT due on the sale, lease or exchange of taxable goods or
properties or services by any vat registered person or non-VAT registered person but
required to register under Section 236 of the Tax Code. It is an ad valorem tax charged on
the selling price of taxable goods or services, and is payable by the customer.

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EXEMPTIONS FROM VAT

Exemptions from VAT may be broadly categorized into:
1. Exempt persons – Persons who are not liable to VAT
2. Exempt transactions – transactions on certain goods, properties or services
which are sold by VAT-registered or non-VAT registered person and regardless
of the annual gross sales or receipts derived therefrom.

Exempt persons or entities

There is no provision in the VAT law which expressly exempts certain persons from
payment of the VAT because indirect taxes such as value-added tax are levied on objects
or transactions.

Exempt transactions
While some value-added tax transactions are subject to 12% tax and others are
zero-rated, there are also transactions which are not subject to VAT. They are as follows:
A. 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;
a. Products considered in their original state:
i. Products which undergone simple processes of preparation or
preservation for the market (freezing, drying, salting, broiling,
roasting, smoking or stripping)
ii. Polished or husked rice
iii. Corn grits
iv. Raw cane sugar and molasses
v. Ordinary salt
vi. Copra

RR 16-2005 provides that products classified under this exemption (such as meat,
fruits and vegetables) shall be considered in their "original state" even if they have
undergone the simple processes of preparation or preservation for the market, such as
freezing, drying, salting, broiling, roasting, smoking or stripping including those using
advanced technological means of packaging, such as shrink wrapping in plastics,
vacuum packing, tetra-pack, and other similar packaging methods.

Examples of Agricultural and Marine Food Products in their original state

Agricultural Marine Livestock Poultry
Polished/husked rice Fish Cows Fowls
Corn grits Crustaceans such as: Bulls Ducks
Raw cane sugar and • Lobster, Calves Geese
molasses shrimps Pigs Turkey
Copra • Prawns, oysters Sheep
• Mussels, clams Goats
• Trout, eels Rabbits
NOTE: Livestock or poultry does not include fighting cocks, race horses, zoo animals, and other
animals generally considered as pets.

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Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary
salt and copra, as provided in the table above, shall be considered in their original state.
For this purpose, notwithstanding the process/es involved in its production, "raw sugar
or raw cane sugar" means sugar whose content of sucrose by weight, in the dry state,
corresponds to a polarimeter reading of less than 99.5 degrees. [Sec. 109, NIRC].

VAT EXEMPT SUGAR

RAW SUGAR CANE refers to sugar produced by simple process of conversion of
sugar cane without need of any mechanical or similar device. Under the revised
regulation, raw cane sugar refers only to muscovado sugar. Thus, only raw sugar cane is
exempt from VAT under the Tax Code (RR 4-2015). The following other definitions were
also provided under RR 13-08 as amended by RR 12-2013, RR 4-2015 and RR 6-2015:
Raw Sugar as sugar whose content of sucrose by weight in dry state, corresponds
to a polarimeter reading of less than 99.5°

Refined Sugar as sugar whose content of sucrose by weight in dry state,

corresponds to a polarimeter reading of 99.5° and above.

Sugar Refinery Mill refers to entity, natural or juridical, engaged in the business of
milling sugar cane into raw or in the refining of raw sugar.

Cane Sugar produced from the following shall be presumed, for internal revenue
purposes, as refined sugar:
• Product of a refining process
• Products of a sugar refinery; or
• Product of a production line of a sugar mill accredited by the BIR to be
producing and/or capable of producing sugar with polarimeter reading of
99.5° and above

SALE OF MARINATED FISH (Revised Ruling 348-11 dated Sept 28, 2011)
Sale of marinated fish is not exempt from VAT. Laws granting exemption from
tax are construed strictly against the taxpayer. Exemption from payment of tax must be
clearly stated in the language of the law.

B. 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 fish, zoo animals and other animals
generally considered as pets)

C. Importation of personal and household effects belonging to

a. Residents of the Philippines returning from abroad, and
b. Non-resident citizens coming to resettle from the Philippines
- Provided that such goods are exempt from customs duties under the Tariff and
Customs Code of the Philippines

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D. Importation of professional instruments and implements, tools of trade,

occupation or employment, wearing apparel, domestic animals, and personal
and 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
barter or sale, accompanying such persons, or arriving within a reasonable
time.
- Provided, that the Bureau of Customs may, upon the production of satisfactory
evidence that such persons are actually coming to settle in the Philippines and
that the goods are brought from their former place of abode;
- Provided further, that vehicles, vessels, aircrafts, machineries and other
similar goods for use in manufacture, shall not fall within this classification
and shall therefore be subject to duties, taxes and other charges.

E. Services subject to percentage taxes under Title V of the Tax Code, as

amended (sections 116-127)

F. Services by agricultural contract growers and milling for others of (1) palay into
rice, (2) corn into grits, and (3) sugar cane into muscovado and raw cane sugar.

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

professionals

Laboratory services are exempted. If the hospital or clinic operates a pharmacy or

drugstore, the sale of drugs and medicines are subject to VAT. Hospital bills
constitute medical services. The sales made by the drugstore to the in-patients which
are included in the hospital bills are part of medical bills exempt from vat. Sales of
the drug store to the out-patients are taxable because they are not part of medical
services of the hospital. Health Management Organizations (HMOs) are subject to
VAT, unless they directly provide medical services to their clients.

Medical practitioners, under the aforementioned regulation, shall likewise include

medical technologists, allied health workers (e.g., occupational therapists, physical
therapists, speech therapists, nurses, etc.) and other medical practitioners who are
not under an employer-employee relationship with the hospital, clinic or HMO and
other similar establishments.

Pursuant to RR 16-2005, services of Professional Practitioners are subject to VAT if

annual gross professional fees exceed P3,000,000. Otherwise, such professional
fees are subject to Percentage Tax under Sec. 116 of the Tax Code, as amended.
Professional Practitioners include, among others, the following:
• Medical practitioners
• CPAs
• Insurance Agents (Life & Non-life)
• Other Professional Practitioners required to pass the government
examination

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H. Educational services, including online courses, online seminars, and online

trainings (as amended by RA 12032 or the VAT on Digital Services Act)
rendered by private educational institutions duly accredited by the (1) DepEd,
(2) CHED, (3) TESDA and those rendered by (4) government educational
institutions; and sale of online subscription-based services to DepEd, CHED,
TESDA, and educational institutions recognized by said government agencies.

I. Services rendered by individuals pursuant to an employer-employee

relationship

J. Services rendered by Regional or Area Headquarters (RHQs) 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

K. Transactions which are exempt under international agreements to which the

Philippines is a signatory or under special laws except those granted under
Petroleum Exploration Concessionaires under Petroleum Act of 1949

Examples of special laws:

• PD 1869 – PAGCOR Charter
• RA 9367 – Biofuels Act
• RA 10072 – Philippine Red Cross
• RA 9994 – Expanded Senior Citizens Act of 2010
• RA 10754 – Magna Carta for PWDs
• RA 11861 – Solo Parent Law

L. Sales by agricultural cooperatives duly registered and in good standing with

the CDA to their members, as well as sale of 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
product

Sales by Agricultural Cooperatives To members To non-members

Sale of cooperative’s own produce Exempt Exempt
(processed or at its original state)
Other than cooperative’s own Exempt VAT
produce (i.e. from traders) (but, exempt if referring to agricultural
food product at its original state)

M. Gross sales from lending activities by credit or multi-purpose cooperatives

duly registered and in good standing with the Cooperative Development
Authority. Exemption is not only limited to the gross sales on loans extended
to its members but also to other persons who are not members.

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Gross receipts by Credit or From From non-

Multi-purpose Cooperative members members
From lending activities Exempt Exempt
From non-lending activities VAT VAT

N. Sales by non-agricultural, non-electric and non-credit cooperatives duly

registered with and in good standing with the CDA; provided, that the share
capital contribution to each member does not exceed P15,000 and regardless
of the aggregate capital and net surplus ratably distributed among the
members. Importation by non-agricultural, non-electric, and non-credit
cooperatives of machineries and equipment including spare parts thereof, to
be used by them are subject to VAT.

Gross receipts / Sales by From From non-

members members
Electric cooperatives VAT VAT
Agricultural cooperatives Item L Item L
“Lending activities” by lending and multi-purpose Item M Item M
cooperatives
Non-agricultural, non-electric, non-lending/credit
cooperatives
• Contribution per member P15,000 or less Exempt Exempt
• Contribution per member above P15,000 VAT VAT

O. Export sales by persons who are not VAT-registered

P. Sales of real properties

The TRAIN Law provides that the VAT exemption on sale of real property
beginning January 1, 2021 shall only apply to the following:

a. 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 not primarily held for sale or for lease is, in general, VAT exempt.
However, if such property is used in the trade or business of the seller, the sale shall
be subject to VAT as an incidental transaction to the seller's main business (RR 4-

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2007, RR 13-2018). On the other hand, sale of real properties held primarily for sale to
customers or held for lease in the ordinary course of trade or business of the seller
shall be subject to VAT (RR 16-2005 as amended by RR 13-2012 and RR 13-2018).

b. Sale of real property utilized for socialized housing as defined under RA

No. 7279, as amended;

Socialized Housing refers to housing programs and projects covering houses and lots
or home lots only that are undertaken by the government or the private sector for the
underprivileged and homeless citizens, which shall include sites and services
development, long-term financing, liberalized terms on interest payments, and as
such other benefits in accordance with the provisions of Republic Act 7279, otherwise
known as the "Urban Development and Housing Act of 1992" and RA No. 7835 and RA
No. 8763. "Socialized Housing" shall also refer to projects intended for the
underprivileged and homeless wherein the housing package selling price is within the
lowest interest rates under the Unified Home Lending Program (UHLP) or any
equivalent housing program of the Government, the private sector or non-government
organizations.

c. Sale of House and Lot and Other Residential dwellings with selling
price of not more than P3,600,000.

RR 1-2024 provides that the adjusted threshold to be used shall be

P3,600,000 as adjusted in January 1, 2024 using the Consumer price index
(CPI). Provided further, that every three (3) years thereafter, the amounts
stated herein shall be adjusted to its present value using the Consumer Price
Index, as published by the Philippine Statistics Authority (PSA), (prior to
January 1, 2024, the threshold is P3,199,200).

NOTE:
• The provision of the CREATE law, increasing the threshold for exempt sale of
residential house and lot and other residential dwellings to P4.200,000 was
VETOED by President Duterte.

• SALE OF PARKING LOT IN THE SALE OF CONDOMINIUM UNITS (RR 13-2012)

Exemption from VAT does not include the sale of parking lot which may or
may not be included in the sale of condominium units. The sale of parking lot
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, should be subject to VAT regardless of amount
of selling price." (RR-13-2012).

GUIDE:
a. If the sale of real property was NOT made in the ordinary course of trade
or business, the real property is classified as capital asset, hence, not
subject to VAT but to capital gains tax.

b. If the sale was made in the ordinary course of trade or business:

• VAT EXEMPT:
a. Sale of residential house and lot and other residential dwellings
provided the selling price is not more than P3,600,000 (RR 1-2024
dated January 1, 2024);

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b. Sale of real property utilized for socialized housing

• SUBJECT TO VAT:
a. Sale of residential house and lot and other residential dwellings if
the selling price is MORE than P3,600,000 (RR 1-2024 dated
January 1, 2024);
b. Sale of residential lot;
c. Sale of commercial lot/units;
d. Other real properties not specifically provided under the law as
VAT-exempt.

Q. Lease of Residential Unit

Lease of residential units with a monthly rental per unit not exceeding P15,000,
regardless of the amount of aggregate rentals received by the lessor during the
year (RR 16-2011; RR 13-2018).

Lease of residential units where the monthly rental per unit exceeds P15,000 but the
aggregate of such rentals of the lessor during the year do not exceed P3,000,000 shall
be exempt from VAT, however, the same shall be subject to Percentage Tax under
Section 116 of the Tax Code as amended (RR 16-2011; RR 13-2018).

The Percentage Tax rate under Section 116 of the Tax Code as amended by RA 11534
(CREATE Law) shall be as follows:
Prior to July 1, 2021 3%
From July 1, 2021 to June 30, 2023 1%
Beginning July 1, 2023 3%

Lease of
Commercial units

Generally
subject to VAT
regardless of
monthly rental.
Subject to OPT
under Sec 116 if
lessor is non-
VAT registered
and annual
gross receipts is
P3M and below.

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The gross receipts (gross sales under EOPTA) from lease of residential units
with monthly rental per unit of not more than P15,000 and more than P15,000
shall not be combined for vat purposes.

In cases where a lessor has several residential units for lease, some are leased
out for a monthly rental per unit of not exceeding P15,000 while others are
leased out for more than P15,000 per unit, his tax liability will be as follows:
a. The gross receipts (gross sales under EOPTA) from rentals exceeding
P15,000 per month per unit shall be exempt from VAT regardless of the
aggregate annual gross receipts. It is also exempt from the percentage
tax.

b. The gross receipts (gross sales under EOPTA) from rentals exceeding
P15,000 per month per unit shall be subject to VAT if the aggregate
annual gross receipts from said units only exceeds P3,000,000 – not
including the gross receipts from units leased out for not more than
P15,000. Otherwise, the gross receipts will be subject to percentage tax
imposed under Section 116 of the Tax Code (RR 16-2011; RR 13-2018)

In case of mixed transactions, the above-mentioned rule should be observed.

The term “residential units” shall refer to apartments and houses and lots
used for residential purposes, and buildings, or parts or units thereof used
solely as dwelling places (e.g. dormitories, rooms and bed spaces) except
motels, motel rooms, hotels and hotel rooms, lodging houses, inns, and
pension houses.

The term “unit” shall mean as apartment unit in the case of apartments; house
in the case of residential houses; per person in the case of dormitories,
boarding houses and bed spaces; and per room in case of rooms for rent.

R. (As amended under CREATE Law): Sale, importation, printing or publication of

books, and any newspaper, magazine, journal, review bulletin, or any such
educational reading material covered by the United Nations Educational,
Scientific and Cultural Organization (UNESCO) Agreement on the importation
of educational, scientific and cultural materials, including the digital or
electronic format thereof.

Provided, that the materials enumerated herein are not devoted principally to
the publication of paid advertisements. Provided further, that the materials
enumerated herein are compliant with the requirements set forth by the
National Book Development Board pursuant to R.A. No. 8047 (RR 4-2021).

Under BIR Ruling No. 083-2014, the term "book, newspaper, magazine, review
and bulletin" only covers printed matters in hard copy, and does not apply to
electronic format or versions including but not limited to:

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• e-books
• e-journals
• electronic copies
• online library sources
• CDS and software

Furthermore, the activities that exempt from vat under this provision are as
follows (1) sale, (2) Importation, (3) printing, and (4) publication of books,
newspapers, magazines, reviews and bulletins or any such educational
reading material covered by the UNESCO. Thus, a corporation's other
transactions (such as the printing of brochures, bookbinding, engraving,
stereotyping, electrotyping, lithographing of various reference books, trade
books, journals and other literary works), are subject to VAT. The taxpayer is
required to register its business as a VAT business entity and issue a separate
VAT invoice/receipt to record such transactions

S. Transport of passengers by international carriers doing business in the

Philippines

T. 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 importation and
mandatory vessel retirement program of Maritime Industry Authority (MARINA)
(RR 15-2015; RR 13-2018)

U. Importation of fuel, goods and supplies by persons engaged in international

shipping or air transport operations

Provided, that the fuel, goods and supplies shall be used for international
shipping or air transport operations. Thus, said fuel, goods and supplies shall
be exclusively or shall pertain to the transport of goods and/or passengers
from a port of the Philippines directly to a foreign port, or vice versa, without
docking or stopping at any other port in the Philippines unless the docking or
stopping at any other Philippine port is for the purpose of unloading
passengers and/or cargoes that originated from abroad, or to load passengers
and/or cargoes bound for abroad: 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 or supplies shall be subject to 12% VAT

V. Services of banks, non-bank financial intermediaries performing quasi-

banking functions, and other non-bank financial intermediaries such as
money changers and pawnshops, subject to percentage tax under Secs 121
and 122, respectively, of the Tax Code, including those rendered through
different digital platforms (as amended under RA 12023 or the VAT on Digital
Services Act)

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NOTE:
• The italicized text reflects the amended wordings introduced by RA12023.
• Digital platforms include Virtual Asset Service Providers (VASPs) registered and classified
by BSP as Non-Bank Financial Institutions. Other VASPs, however, including businesses
involved in the participation and provision of financial services related to issuer's offer
and/or sale of a Virtual Asset shall be subject to the provisions of the law and RR 3-2025.
• Even prior to the effectivity of RA 12023 (VAT on digital services) and RA12066 (CREATE
MORE Act), Nonbank financial intermediaries already include money changers and
pawnshops, subject to percentage tax under Sections 121 and 122, respectively, of the
Tax Code.

W. Sale or lease of good and services to senior citizens and persons with
disabilities, as provided under Republic Act Nos 9994 (Expanded Senior
Citizens Act of 2010) and 10754 (An Act Expanding the Benefits and Privileges
of Persons with Disability), respectively

X. Transfer of property pursuant to Section 40 (C)(2) of the Tax Code, as amended

Y. 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. 9904 (Magna
Carta for Homeowners and Homeowners’ Association) and Republic Act No
4726 (The Condominium Act), respectively

Z. Sale of gold to the Bangko Sentral ng Pilipinas (before effectivity of TRAIN Law
last January 1, 2018, subject to 0% VAT)

AA. Sale or importation of prescription drugs and medicines prescribed for

diabetes, high cholesterol, and hypertension to beginning January 1, 2020;
and cancer, mental illness, tuberculosis, and kidney diseases beginning
January 1, 2021 (CREATE Law; RR 4-2021) as determined by the Department
of Health, and

BB. Sale or importation of the following beginning January 1, 2021 to December

31, 2023, (NO LONGER EXEMPT beginning January 1, 2014):

a. Capital equipment, its spare parts and raw materials,

necessary for the production of personal protective
equipment (PPE) components such as coveralls, gown,
surgical cap, surgical mask, n-95 mask, scrub suits, goggles
and face shield, double or surgical gloves, dedicated shoes,
and shoe covers, for COVID-19 prevention;

b. All drugs, vaccines and medical devices specifically

prescribed and directly used for the treatment of COVID-19;
and

c. Drugs for the treatment of COVID-19 approved by the Food

and Drug Administration (FDA) for use in clinical trials,

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including raw materials directly necessary for the

production of such drugs.

Provided, that the Department of Trade and Industry (DTI) shall certify that
such equipment, spare parts or raw materials for importation are not locally
available or insufficient in quantity, or not in accordance with the quality or
specification required.

Provided further, that for item (b), within sixty (60) days from the effectivity of
the CREATE, and every three (3) months thereafter, the Department of Health
(DOH) shall issue a list of prescription drugs and medical devices covered by
this provision.

Provided finally, that for items (a) and (c) hereof, on the sale or importation of
equipment, spare parts and raw materials for the production of PPE
components as well as the sale or importation of raw materials directly
necessary for the production of drugs for the treatment of COVID-19, the
supplier/s or importer shall submit, for the purpose of availing the exemption,
the following:
1) Certified true copy of "License to Operate", issued to the manufacturer-
buyer by the DOH-FDA authorizing the manufacture of medical grade
PPE components and drugs for the treatment of COVID- 19; and

2) "Sworn Declaration" from the manufacturer-buyer that the items shall

be used for the manufacture of the PPE components and drugs for the
treatment of COVID-19.

The exemption claimed under this subsection shall be subject to post

audit by the Bureau of Internal Revenue (BIR) or the Bureau of Customs
(BOC), as may be applicable.

CC. 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 do not exceed the amount of P3,000,000.

The P3,000,000 gross annual sales shall comprise of the business' total
revenues from sale of its products, which are either goods or services,
including nonrefundable advance deposits/payments for services, net of
discounts, sales returns and allowances, covering the fiscal or calendar year.
Sales incidental to the registered operations of the business shall also be
included pursuant to Section 105 of the Tax Code, as amended.

DD. (This is a NEW provision introduced by RA12066 or the CREATE MORE Act).
Importation of goods by an export-oriented enterprise whose export sales is at
least seventy percent (70%) of the total annual production or sales of the
preceding taxable year: Provided, that such goods are directly attributable to
the export activity if the export-oriented enterprise: Provided, further, that the

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EMB of the DTI shall determine the compliance with the aforementioned
threshold. For this purpose, "directly attributable" shall follow the same
definition under Section 106 of the Tax Code, as provided below:

Directly Attributable - shall refer to goods and services that are incidental to and
reasonably necessary for the export activity of the export-oriented enterprise,
including janitorial, security, financial, consultancy, marketing and promotion
services, and services rendered for administrative operations such as human
resources, legal, and accounting.

VAT EXEMPTION AND DISCOUNTS TO SENIOR CITIZENS AND PWDs

RA9994 – Expanded Senior Citizens Act of 2010

Senior citizen or Elderly - refers to any Filipino citizen who is a resident of the
Philippines, sixty (60) years old or above. It may apply to senior citizens with "dual
citizenship" status provided they prove their Filipino citizenship and have at least six (6)
months residency in the Philippines (RA 9994 otherwise known as "Expanded Senior
Citizens Act of 2010" and its related revenue regulations/ circulars (RR7-2010, RR 8-
2010, RMC 38-2012).

Resident Citizen - a Filipino Citizen with permanent/ legal residence in the

Philippines, and shall include one, who, having migrated to a foreign country, has
returned to the Philippines with a definite intention to reside therein, and whose
immigrant visa has been surrendered to the foreign government.

RA7277 – Magna Carta for PWD as amended by RA 9442 and RA10754

A Person with Disability (PWD) shall refer to an individual suffering from restriction
or different abilities, as a result of mental, physical or sensory impairment to perform an
activity in a manner or within the range considered normal for human being (RR 1-2009).

VAT Exemption and 20% discount

The following items sold to a Senior Citizen and PWD are VAT-exempt and will
entitle them to a minimum discount of 20% (DTI-DSWD Joint Memorandum Circular No.
1 series of 2022):

1. Medicines, including influenza and pneumococcal vaccines, and such other

essential medical supplies, accessories and equipment to be determined by
the Department of Health

On all drug stores, hospital pharmacies, medical and optical clinics and similar
establishments dispensing medicines, the discount for sales of drugs/medicines
shall be subject to the guidelines to be issued by the Bureau of Food and Drugs,
Department of Health (BFAD-DOH), in coordination with the Philippine Health
Insurance Corporation (Philhealth).

For this purpose, the term “medicines” shall refer to both prescription and
nonprescription medicines, and articles approved by the BFAD-DOH, which are

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intended for use in the diagnosis, cure, mitigation, treatment or prevention of disease
in man; but do not include food and devices or their components, parts, or
accessories.

The VAT exemption shall also be granted to the purchase of vitamins and mineral
supplements which are medically prescribed by an attending physician for
prevention and treatment of diseases, illness, or injury whose prescription is in the
name of Senior Citizen and PWDs.

The VAT exemption shall also apply to the purchase of eyeglasses, hearing aids,
dentures, prosthetics, artificial bone replacements like steel, walkers, clutches,
wheelchairs whether manual or electric-powered, canes/quad canes, geriatric
diapers, and other essential medical supplies, accessories and equipment by or for
senior citizens and PWDs.

2. On the professional fees of attending physician/s in all private hospitals,

medical facilities, outpatient clinics and home health care services, where the
discount shall be based on compensation for services charged from the
Senior Citizen and PWD

3. On professional fees of licensed professional health workers providing home

health care services as endorsed by private hospitals or employed through
home health care employment agencies, where the discount shall be based
on the fees charged from the Senior Citizen and PWD

4. On medical and dental services, diagnostic and laboratory fees in all private
hospitals, medical facilities, outpatient clinics, and home health care
services, in accordance with the rules and regulations to be issued by the
DOH, in coordination with Philhealth

a. “Medical services” refers to hospital services, professional services of

physicians and other health care professionals and diagnostic and laboratory
tests that are necessary for the diagnosis or treatment of illness or injury

b. “Dental services” refers to oral examination, cleaning, permanent and

temporary filling extractions and gum treatments, restoration, replacement
or repositioning of teeth, or alteration of the alveolar or periodontium process
of the maxilla and the mandible that are necessary for the diagnosis or
treatment of an illness or injury

The VAT exemption shall apply to medical and dental services, diagnostic and
laboratory tests such as but not limited to X-rays, computerized tomography
scans, and blood tests that are requested by a physician as necessary for the
diagnosis and/or treatment of an illness or injury.

c. “Home health care services” refers to health or supportive care provided to

the Senior Citizen or PWD patient at home by licensed health care
professionals to include but not limited to, physicians, nurses, midwives,
physical therapists and caregivers

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5. On actual fare for land transportation travel in public utility buses (PUBs),
public utility jeepneys (PUJs), taxis, Asian utility vehicles (AUVs), shuttle
services and public railways, including Light Rail Transit (LRT), Mass Rail
Transit (MRT), and Philippine National Railways (PNR)

6. On actual transportation fare for domestic air transport services and sea
shipping vessels and the like, based on the actual fare and advanced booking.

7. On the utilization of services in hotels and similar lodging establishments,

restaurants and recreation centers

a. For hotels and similar lodging establishments, the discount shall for room
accommodation and other amenities offered by the establishment, such as,
but not limited to hotel-based parlors and aromatherapy rooms, workout
gyms, swimming pools, Jacuzzis, KTV bars, internet facilities, food drinks, and
other services offered. The term “hotel” shall include beach and mountain
resorts.

b. For this purpose, the term “hotel/hostel” shall refer to the building, edifice or
premises of a completely independent part thereof, which is used for the
regular reception, accommodation or lodging of travelers and tourists, and
the provision of services incidental thereto, for a fee

c. “Lodging establishment” shall refer to a building, edifice, structure,

apartment or house including tourist inn, apartelle, motorist hotel and
pension house engaged in catering, leasing or providing facilities to
transients, tourists or travelers. The following are considered as lodging
establishments:
i. Tourist Inn – a lodging establishment catering to transients, which
does not meet the minimum requirement of an economy hotel
ii. Apartelle – a building or edifice containing independent and furnished
or semi-furnished apartments, regularly leased to tourists and
travelers for dwelling on a more or less long-term basis and offering
basic services to its tenants, similar to hotels
iii. Motorist hotel – any structure with several separate units, primary
located along the highway, with individual or common parking
spaces, at which motorists may obtain lodging and, in some
instance,, meals
iv. Pension house – a private, or family-operated tourist boarding house,
tourist guest house or tourist lodging house, regularly catering to
tourist and/or traveler, containing several independent table rooms,
providing common facilities, such as toilets, bathrooms/showers,
living and dining rooms and/or kitchen and where a combination of
board and lodging may be provided

d. The term lodging establishment shall also include lodging houses, which
shall mean such establishments are regularly engaged in the hotel business,
but which nevertheless, are not registered, classified and licensed as hotels
by reason of inadequate essential facilities and services. Long term
arrangement for residential purposes is not covered.

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e. For restaurants, the discount and exemption shall be for the sale of food,
drinks, dessert, and other consumable items served by the establishments,
including value meals and promotional meals offered for the consumption of
the general public

For this purpose, the term “restaurant” shall refer to any establishment
offering to the public, regular and special meals or menu, fast food, cooled
food, and short orders. Such eating places may also serve coffee, beverages
and drinks. Food establishments that are not restaurants are not covered,
therefore not allowed to give the 20% discount and VAT exemption.

f. For recreation centers, the discount shall be for the utilization of services in
the form of fees, charges and rental for sports facilities or equipment,
including golfcart rentals and green fees, or revenues, or venues for ballroom
dancing, yoga, badminton courts, bowling lanes, table or lawn tennis, working
gyms, martial arts facilities.

8. On admission fees charged by theaters, cinema houses and concert halls,

circuses, carnivals, and other similar places of culture, leisure and
amusement, where the discount shall be on the admission fees charged by
the said establishment

9. Foods, drinks, desserts and other consumable food items; and

10. On funeral and burial services for the death of Senior Citizens or PWD – the
beneficiary or any person who shall shoulder the funeral and burial expenses
of the deceased Senior citizen or PWD shall claim the discount upon payment
and presentation of his death certificate. Such expenses shall cover the
purchase of casket or urn, embalming, cremation cost and other related
services such as viewing or wake cost, pick-up from the hospital morgue,
transport of the body to intended burial site in the place of origin, but shall
exclude obituary publication and cost of the memorial lot.

The sale to a Senior Citizen or PWD must follow the invoicing requirements
prescribed under Revenue Regulations 16-2006, as further amended by EOPTA. If the
seller uses a Point-of-Sale Machine or a Cash Register Machine in lieu of the regular sales
invoice, the machine tape must properly segregate the exempt sales from the taxable
sales.

The input tax attributable to the exempt sale shall not be allowed as an input tax
credit and must be closed to cost or expense account by the seller.

The exemption herein granted will not cover other indirect taxes that may be
passed on by the seller to a Senior Citizen or PWD buyer such as percentage tax, excise
tax, etc.

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GRANT OF 5% SPECIAL DISCOUNT on BASIC NECESSITIES AND PRIME

COMMODITIES
A special discount of five percent (5%) of the regular retail price of basic
necessities and prime commodities as defined under Section 5 of the Joint Memorandum
Circular (JMC) No. 01, series of 2022 of the DTI-DSWD, shall be granted to Senior Citizens
and PWDs on their purchases thereof, taking into consideration that said purchases shall
be for the personal and exclusive consumption and/or enjoyment of the Senior Citizen
and PWD. The following are the basic necessities and prime commodities as provided
under the Joint MC (JMC):

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OFFLINE AND ONLINE PURCHASES OF SENIOR CITIZENS AND PWDs

The total amount of offline and online purchase of Senior Citizens and Persons
with Disability per calendar week shall not exceed the amount of One Thousand Three
Hundred Pesos (Php1,300.00) without carry-over of the unused amount, unless
otherwise increased agencies. Provided that the purchase of medicine shall no longer be
limited by the as may be determined by the DTI and other relevant Php1,300.00 ceiling as
provided in the DTI-DA- DOE JAO, and as reflected in DTI-DSWD JMC No. 1, series of
2022.

The said amount shall be spent on the above-mentioned commodities

commensurate to his/her personal and exclusive consumption and/or enjoyment within
the calendar week, Provided, that said amount shall be spent on at least four (4) items
identified as BNPCs.

NOTE: The 5% special discount on basic necessities and prime commodities is different
and distinct from the 20% discount.

Basic necessities refer to goods "vital to the needs of consumers, for their sustenance
and existence" while prime commodities are goods that are "essential" to them. Necessities
include rice, corn, root crops, bread, fresh, dried or canned fish and other marine products; fresh
pork, beef and poultry meat; fresh eggs, potable water in bottles and containers; fresh and
processed milk; fresh vegetables and fruits; locally manufactured instant noodles; coffee, coffee
creamer; sugar, cooking oil, salt, laundry soap, detergent, firewood, charcoal, candles,
household liquefied petroleum gas and kerosene.

Prime commodities are goods not considered as basic necessities but are essential to
consumers. Prime commodities shall include flour, dried, processed or canned pork, beef and
poultry meat; dairy products not falling under basic necessities; onions, garlic, vinegar, patis, soy
sauce, toilet soap, fertilizer, pesticides and herbicides; poultry, livestock and fishery feeds and
veterinary products; paper, school supplies, nipa shingles, sawali, cement, clinker, GI sheets,
hollow blocks, plywood, plyboard, construction nails, batteries, electrical supplies, light bulbs
and steel wires.

Purchase of basic necessities and prime commodities are not exempt from
vat (unless expressly provided as exempt under the law) such as:
Subject to
Basic or Prime VAT 5%
Commodity discount
Sugar, coffee Yes Yes
Fresh fruits No Yes
Rice, corn No Yes
Bread Yes Yes
Electrical supplies Yes Yes

RULE FOR RESTAURANTS (RR 7-2010)

The discount shall be for the sale of food, drinks, dessert and other consumable
items served by the establishments, including value meals and promotional meals,

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offered for the consumption of the general public. Condiments and side products fall
within the ambit of *other consumable items served by the establishments”.

The 20% discount and vat exemption for restaurants shall apply to:
• Dine in, take-out, take-home, drive-thru, delivery orders (excluding bulk orders),
called-in or phoned-in orders. Bulk orders are within the context of pre-
contracted or pre-arranged group meals or packages, and hence, not entitled to
20% discount and VAT exemption.

• Set meals, group meals or group walk-ins including purchase of a whole cake and
pizza orders.

• “Pasalubong" food items which are single-serving/solo meal for the personal and
exclusive consumption of the Senior Citizen. However, other "pasalubong* food
items (e.g. box of biscocho, bottles or jars of ginamos, several packets of mango
preserves, etc) which are not for the personal and exclusive consumption of the
Senior Citizen are NOT entitled to 20% discount and VAT exemption. This
limitation extends to "novelty items” or non-consumables sold in restaurants.

NOTE:
➢ Meals primarily prepared and intentionally marketed for children and not for
Senior Citizen's and/or PWD’s personal consumption are not entitled to 20%
discount. (Rule IV, Article 7, Section 3(d) of the Rules and Regulations
implementing RA No. 9994; Section 6 of RR No. 7-2010).

➢ Generally, alcoholic beverages are not subject to the 20% discount and VAT
exemption especially if purchased "in bulk", "in buckets" or "in cases". However,
if served as a single serving drink, its purchase by a Senior Citizen or PWD is
entitled to the 20% discount and VAT exemption. However, alcoholic beverages
purchased in a bar, club or cabaret are exempt from VAT but subject to
amusement tax of 18% under Section 125 of the NIRG, as amended. A Senior
Citizen or PWD may still avail of the 20% discount on the purchase of an alcoholic
drink but the discount shall be limited only to a single serving of an alcoholic
beverage.

➢ Cigarettes/cigars are not the food or essential items deemed subject to the 20%
discount.

➢ Toll fees are not the same as "fares". Hence, it is not subject to the 20% Senior
Citizen or PWD Discount.

Deduction from the Gross Income of the Seller

The seller/establishment may claim the discounts granted (20% and/or 5%) to
SCs and PWDs as deduction from gross income based on the net cost of the goods sold
or services rendered: Provided, however, that the cost of the discount shall be allowed
as deduction from the gross income for the same taxable year that the discount is
granted: Provided, further, that the total amount of the claimed tax deduction net of
value-added tax, shall be included in their gross sales receipts for tax purposes and shall
be subject to proper documentation and to the provisions of the National Internal
Revenue Code (NIRC), as amended.

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No Double Discounts to PWD

If a commercial establishment or law offers another discount, whichever is
chosen by the PWD shall apply unless the other discount can also be availed of.

If the PWD is also a Senior Citizen, he can avail of either discount but not both.

The same benefits and privileges shall be made available to Filipinos who hold
foreign passports but are registered as dual citizens and Filipinos who have reacquired
their Filipino citizenship thru Republic Act No 9225 or the Citizenship Retention and Re-
Acquisition Act of 2003.

The 20% and the 5% discounts may not also be claimed if the SC and PWD claims
a higher discount as may be granted by the commercial establishment and/or under
other existing laws or in combination with other discount program/s. In the purchase of
goods and services which are on promotional discount, the SC/PWD shall avail of either
the promotional discount or the 20%/5% discount, whichever is higher. However, the
discount that must be given to the SC/PWD shall in no case be less than 20%/5%.

Sample Computation of Discount and Amount Due

VAT on the sale of goods and services with sales discounts granted by business
establishments to senior citizens and PWDs shall be computed in accordance with the
following formula:

Sales (inclusive of VAT) 1,120.00

Less: 12% VAT (P1,120 x 12/112) (120.00)
Sales, net of VAT 1,000.00
Less: 20% discount (200.00)
Total amount due 800.00

The amount of gross sales or gross receipts to be reported by the seller shall be
the undiscounted amount of P1,000 (as provided in the illustration above). The discount
granted shall be reported as deduction from the gross income of the seller instead of
deducting the same to the amount of gross sales and/or receipts. The journal entries in
the books of the seller shall be as follows:
Cash 800.00
SC/PWD discount expense 200.00
Sales 1,000.00

If seller is not subject to VAT:

The 20% sales discounts granted by non-VAT sellers (i.e., subject to Percentage
Tax under Sec. 116) shall be computed in accordance with the following formula:

Sales, without VAT 1,000.00

Less: 20% discount (200.00)
Sales, net of discount 800.00

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The amount of gross sales or gross receipts to be reported by the seller shall be
the undiscounted amount of P1,000 (as provided in the illustration above). The discount
granted shall be reported as deduction from the gross income of the seller instead of
deducting the same to the amount of gross sales/receipts.

The journal entries in the books of the seller shall be as follows:

Cash 800.00
SC/PWD discount expense 200.00
Sales 1,000.00

VAT EXEMPTION AND DISCOUNTS TO SOLO PARENTS (RA 11861 and RR 1-2023)

Solo parents that meet all the following conditions under RA 11861, otherwise
known as the Solo Parents Welfare Act, and its implementing rules, RR 1-2023 shall be
qualified for the 10% discount and VAT exemption:

1. Solo Parents has a child/children with the age of six years or under; and
2. Solo Parents is earning less than P250,000 annually.

The 10% discount and VAT exemption shall apply to a qualified Solo Parent’s
purchase of the following goods from drugstores, pharmacies, grocery stores, and
similar establishments, and subject to the guidelines that shall be issued by the
Department of Health (DOH), in coordination with the Food and Drug Administration
(FDA), Philhealth, and the Department of Interior and Local Government (DILG):
a. Baby’s milk
b. Food supplements and micronutrient supplements
c. Sanitary diapers
d. Medicines
e. Vaccines, and
f. Other medical supplements.

To avail the 10% discount and VAT exemption, the Solo Parent shall present his/her Solo
Parent Identification Card (SPIC) and Solo Parent Booklet. The SPIC should know that the Solo
Parent is entitled to the 10% discount and VAT exemption by indicating that the Solo Parent is
earning less than P250,000 annually, and the dorsal side of the SPIC indicates the name/s, birth
date/s, and relation to the Solo Parent of the qualified children and/or dependent/s with the age
of six years or under.

Tax Treatment of the Discount Granted to Solo Parents

All establishments supplying any of the goods identified in the Act may claim
discounts granted to Solo Parents as “deduction” based on the cost of goods sold. By
way of example, if a VAT-registered grocery store sold Infant Milk at an undiscounted
price of P200, the cost of the discount is computed as follows:

Selling price (exclusive of vat) P200

Less: Discount, 10% x P200.00 (20)
Amount Payable by the Solo Parent P 180

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The selling price to be charged must be exclusive of VAT because it is an exempt-

transaction (sale of Infant/Baby's Milk to a qualified Solo Parent). The discount granted
shall be allowed as a deduction income of the seller (treated as an ordinary and
necessary expense falling under the category of itemized deduction) for the same taxable
year that the discount was granted, provided that, the total amount of the claimed
deduction net of VAT, if applicable, shall be included in the gross sales for tax purposes
and shall be subject to proper documentation in accordance with the provisions of the
Tax Code as amended. The entry to record the transaction in the books of the seller
should be as follows:
Cash 180
Solo Parent Discount Expense 20
Sales 200

The input tax attributable to the exempt sale shall not be allowed as an input tax
credit and must be closed to the cost or expense account of the seller.

VAT AND DISCOUNT GRANTED TO NATIONAL ATHLETES AND COACHES UNDER RA

10966, AS AMENDED

Under RR 13-2020 dated May 27, 2020, Qualified National Athletes and Coaches
shall be entitled to twenty percent (20%) sales discount, on sales exclusive of VAT, on
the following establishments relative to the sale of goods and services for their actual
and exclusive use or enjoyment:
a. Transportation services such as:
• Domestic air and sea transportation
• National land transportation privilege
b. Hotels, resorts and other similar lodging establishments
c. Restaurants
d. Medicine and drug purchases
e. Recreation centers
f. Sports equipment purchase
g. Admission fees privilege

All other goods and services sold by the foregoing establishments not otherwise
included in the enumeration, as provided by law, shall not be granted with a discount
privilege, notwithstanding that such goods and services are in relation to the sale of
goods and services for the actual and exclusive use or enjoyment of the qualified
National Athletes and Coaches.

VAT on the sale of goods and services with sales discounts granted by business
establishments shall be computed in accordance with the following formula:

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Establishments granting discounts to qualified National Athletes and Coaches on

their sale of goods and services shall be entitled to deduct the said sales discount from
their gross income, subject to conditions provided under RR 13-2020.

For percentage tax sellers, the amount of sales discounts shall be included for
the purposes of computing the Percentage Tax and shall be included as part of the gross
sales and/or receipts for income taxation purposes. However, the sales discount granted
shall be accounted as deduction from the gross income of the establishment for the
same taxable year that the discount was granted.

The amount of sales discount granted shall be allowed as itemized deduction

from gross income for the same taxable year that the discount was granted provided that
the taxpayer is not availing Optional Standard Deduction (OSD).

The gross selling price and the sales discount must be separately indicated in the
official receipt or sales invoice issued by the establishment for the sale of goods or
services to qualified National Athletes and Coaches.

Only the actual amount of sales discount not exceeding 20% of the gross selling
price or gross receipts can be deducted from the gross income, net of VAT if applicable,
and shall be subject to proper documentation. Provided, however, that if the
establishment granting the discount availed of the OSD or opted to be taxed at 8%
income tax rate, if applicable, the sales discount given cannot be claimed as allowable
deduction from the gross income.

Prohibition on the availment of double discounts

The foregoing privileges shall not be claimed if the National Athletes and Coaches
claims a higher promotional discount as may be granted by the commercial
establishment and/or under other existing laws or in combination with other discount
program(s).

National Athletes and Coaches who are at the same time a senior citizen. or PWD
can only claim a single 20% discount on a particular sale transaction.

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MODULE EXERCISES

a. For 2024 taxable year, determine the applicable business tax of the following:

Lease of Residential Units

Case Monthly Rental Aggregate annual rental Answer
A P 14,000 P 3,200,000
B P 16,000 P 2,800,000
C P 16,000 P 3,000,000
D P 18,000 P 3,200,000

Lease of Commercial Units

Case Monthly Rental Aggregate annual rental Answer
A P 12,000 P 3,200,000
B P 16,000 P 2,800,000
C P 16,000 P 3,000,000
D P 10,000 P 3,500,000

b. Determine whether or not the transaction described below is subject to VAT. Write “V” in
the space provided if the transaction is subject to VAT. Write “X” if the transaction is VAT
exempt or subject to other types of tax.
Case Transaction Answer
A Sale by agricultural cooperatives of their produced to members and non-
members.
B Receipts from lending activities by credit multipurpose cooperatives duly
registered and in good standing with Cooperative Development Authority.
C Importation by non-agricultural, non-electric, non-credit cooperatives of
machineries and equipment to be used by them.
D Publication of magazines devoted principally to the publication of paid
advertisements
E Sale of parking lots in a condominium (SP is not more that P3,000,000)
F Isolated sale of good or service for a gross selling price of P2,800,000
G Export sale by a vat registered exporter not exceeding the vat threshold of
P3,000,000
H Transport of passengers and cargo by air or sea vessels
I Sale of drugs and medicines
J Services of banks, non-bank financial intermediaries performing quasi-
banking functions, and other nonbank financial intermediaries such as
money changers and pawnshops

Reference:

Tabag, E.D and Garcia, E. J. (2025), Transfer & Business Taxation

Ampongan, O. E. G. (2021), Transfer, Business & Local Taxation (with Practice Set) 13/e

Bureau of Internal Revenue, Value-Added Tax, [Link]

information/[Link]

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