FS2526-VAT-27

BSA 2105 F.R. Soriano

VALUE-ADDED TAX

Transactions exempt from VAT

1. 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 therefor. Products classified under this paragraph 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;
Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt and copra shall be
considered in their original state. [Art. 109 (1)(A), NIRC]
a. Livestock shall include cows, bulls and calves, pigs, sheep, goats and rabbits. Poultry shall
include fowls, ducks, geese and turkey.
(Note: Livestock and poultry does not include fighting cocks, race horses, zoo animals and
other animals generally considered as pets. Thus, the sale or importation thereof shall be
subject to VAT.)
b. Marine food products shall include fish and crustaceans, such as, but not limited to, eels,
trout, lobster, shrimps, prawns, oysters, mussels and clams.
c. Meat, fruit, fish and vegetables and other agricultural and marine food products 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
packing methods.
d. Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt and copra
shall be considered as agricultural food products in their original state. (RR No. 16-2005)
(Note: Sugar whose content of sucrose by weight, in the dry state, has a polarimeter reading
of 99.5* and above are presumed to be refined sugar, and is therefore subject to VAT.)
Polarimeter is a scientific instrument used to measure the angle of rotation caused by passing
polarized light through an optically active substance.

2. 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.) [109(1)(B), NIRC]
(*Non-agricultural feeds or food for race horses, fighting cocks, aquarium fish, zoo animals and
animals generally considered as pets, known as specialty feeds, the sale or importation of which is
subject to VAT.) (RR No. 16-2005)

3. Importation of personal and household effects belonging to:

a. Residents of the Philippines returning from abroad, and
b. Non-resident citizens of the Philippines coming to resettle in the Philippines.
Provided, that such goods are exempt from customs duties under the Tariff and Customs Code of the
Philippines. [Sec. 109 (1)(C)], (RR No. 16-2005)

4. 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
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 FS2526-VAT-27
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, exempt such goods from payment of duties and taxes: Provided, further that
vehicles, vessels, aircrafts, machineries and other similar goods for use in manufacture, shall not fall
within this classification and shall therefor be subject to duties, taxes and other charges [Sec. 109(1)
(D), NIRC] including the VAT. (RR No. 13-2018)

5. Services subject to percentage tax under Title V of the Tax Code [Sec. 109(1)(E), NIRC] as
enumerated below:
a. Sale or lease of goods or properties or the performance of services of non-VAT registered
persons, other than the transactions mentioned in paragraphs (A) to (AA) of Sec. 109 (1) of the
Tax Code, the gross annual sales and/or receipts of which do not exceed the amount of Three
Million Pesos (P3,000,000.00). (Sec. 116, NIRC) (RR No. 13-2018)
(Unless otherwise indicated, the section referred to is a provision in the National Internal
Revenue Code.)
b. Services rendered by domestic common carriers by land, for the transport of passengers and
keepers of garages. (Sec. 117)
c. Services rendered by international air or shipping carriers for the transport of goods or
cargo originating in the Philippines and going abroad. (Sec. 118)
d. Services rendered by franchise grantees of radio and/or television broadcasting whose annual
gross receipts of the preceding year do not exceed Ten Million Pesos (P10,000,000.00), and by
franchise grantees of gas and water utilities. (Sec. 119)
e. Services rendered for overseas dispatch, message or conversation originating from the
Philippines. (Sec. 120)
f. Services rendered by any person, company or corporation (except purely cooperative
companies or associations) doing life insurance business of any sort in the Philippines. (Sec.
123)
g. Services rendered by fire, marine or miscellaneous insurance agents of foreign insurance
companies. (Sec. 124)
h. Services of proprietors, lessees or operators of cockpits, cabarets, night or day clubs, boxing
exhibitions, professional basketball games, Jai-Alai and race tracks. (Sec. 125)
i. Receipts on sale, barter or exchange of shares of stock listed and traded through the local
stock exchange or through initial public offering. (Sec. 127)
(Note: Not mentioned in RR No. 16-2005 are Winnings in horse races under Sec. 126 although
these are also subject to other percentage taxes.)

6. Services rendered by agricultural contract growers and milling for others of palay into rice, corn into
corn grits, and sugar cane into raw sugar. [Sec. 109(1)(F), NIRC]
“Agricultural contract growers” refer to those persons producing for others poultry, livestock
or other agricultural and marine food products in their original state. (RR No. 16-2005)

7. Medical, dental, hospital and veterinary services, except those rendered by professionals. [Sec.
109(1)(G)](RR No. 16-2005)
Laboratory services, operating charge and room charges, are exempted. If the hospital or
clinic operates a pharmacy or drug store, the procurement of drugs and medicines from the drug
store or pharmacy for the use or treatment of inpatients is exempt from VAT since it amounts to

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 FS2526-VAT-27
availment of service rendered or made available by the hospital. However, if the sale of drugs and
medicines is made to out-patients, the same is subject to VAT.
Services rendered by the surgeon, anesthesiologist or attending physician shall, however, be
subject to VAT, although the professional fee may be included in the hospital bill and specifically
described therein, because in such a case, the hospital merely serves as the collecting agent of the
physician or other medical professional to whom the hospital shall remit the professional fee. But if
the medical professional such as the nurse, is employed at the hospital and receives his
compensation by way of salaries, such salaries are exempt from VAT under No. 9 hereunder because
the services are rendered by the nurse pursuant to an employer-employee relationship.

8. Educational services rendered by private educational institutions duly accredited by the Department
of Education (DepEd), the Commission on Higher Education (CHED) and the Technical Education
and Skills Development Authority (TESDA) and those rendered by government educational
institutions. [Sec. 109(1)(H), NIRC]
“Educational services” shall refer to academic, technical or vocational education provided by
private educational institutions duly accredited by the DepEd, the CHED and TESDA and those
rendered by government educational institutions. It does not include seminars, in-service training,
review classes and other similar services rendered by persons who are not accredited by the DepEd,
the CHED and/or the TESDA. Accordingly, such services are subject to VAT. (RR No. 16-2005)

9. Services rendered by individuals pursuant to an employer-employee relationship. [Sec. 109 (1)(I),

NIRC]
This is so because the said individuals are not engaged in business.

10. Services rendered by regional or area headquarters 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. [Sec. 109(1)(J), NIRC), (RR No. 16-2005)

11. Transactions which are exempt under international agreements to which the Philippines is a
signatory or under special laws except those granted under PD No. 529. [Sec. 109(1)(K), NIRC]
[Note: PD 529 grants exemptions to Petroleum Exploration Concessionaires under the
Petroleum Act of 1949. (RR No. 16-2005)]

12. Sales by agricultural cooperatives duly registered and in good standing with the Cooperative
Development Authority (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 produce. [Sec. 109(1)(L), NIRC] (RR No. 16-2005)
Requisites for exemption from VAT under this provision:
a. The cooperative must be an agricultural cooperative.
b. It must be duly registered and in good standing with the CDA.
c. The sales are to its members, whether or not the cooperative is the producer of the
product sold.
d. In case of sales to non-members, the producer of the agricultural products sold, whether in
their original state or in their processed form, must be the cooperative itself.
[Thus, if the cooperative is not the producer (e.g., it is a trader) of the product sold, the
sale shall be subject to VAT.]

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 FS2526-VAT-27
e. In the case of importation of direct farm inputs, machineries and equipment, including
spare parts thereof, the same must be used directly and exclusively in the production and/or
processing of their produce.

13. Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered and in
good standing with the CDA. [Sec. 109(1)(M), NIRC], (RR No. 16-2005)

14. 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 of each member does not exceed
Fifteen Thousand Pesos (P15,000.00) and regardless of the net aggregate capital and net surplus
ratably distributed among the members. [Sec. 109(1)(N), NIRC], (RR No. 16-2005)
Requisites for the exemption of sales from VAT under this provision:
a. The cooperative making the sale is a non-agricultural, non-electric, or a non-credit
cooperative.
b. It must be duly registered with the CDA.
c. The share capital contribution of each member does not exceed P15,000.00 (regardless
of the net aggregate capital and net surplus ratably distributed among the members).
(Note: If the cooperative that made the sale is an electric cooperative, such sale is subject to VAT.)

15. Export sales by persons who are not VAT-registered. [Sec. 109(1)(O), NIRC], (RR No. 16-2005)

16. Sale of real properties as follows:

a. Sale of real property not primarily held for sale to customers or held for lease in the ordinary
course of the business. (RR No. 13-2018)
However, even if the real property is not primarily held for sale to customers or held for
lease in the ordinary course of trade or business but the same is used in the trade or business of
the seller, the sale thereof shall be subject to VAT being a transaction incidental to the
taxpayer’s main business. (RR No. 13-2018)
Thus, the sale of a land and building specifically used for its offices by a taxpayer who
is engaged in the sale of residential house and lots shall be subject to VAT because such land
and building are used in the trade or business of the taxpayer.

b. Sale of real properties utilized for socialized housing.

“Socialized housing” refers to housing programs and projects covering houses and lots
or home lots only undertaken by the Government or private sector for the underprivileged and
homeless citizens which shall include sites and services development, long-term financing,
liberated terms or interest payments, and such other benefits in accordance with the provisions
of RA No. 7279, otherwise known as the “Urban Development and Housing Act of 1992” and
RA No. 7835 and RA 8763.
“Socialized housing” shall also refer to projects intended for the underprivileged and
homeless wherein the 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. (RR No. 13-2018)
c. Sale of house and lot and other residential dwellings valued at an amount not exceeding
P3,600,000.00 Sale of residential lot only is subject to 12% VAT.
If two or more adjacent residential dwellings are sold or disposed of in favor of one
buyer for the purpose of utilizing the lots as one residential dwelling, the sale shall be exempt
from VAT only if the aggregate value of the lots do not exceed the threshold of P3,600,000.
Adjacent residential lots, although covered by separate titles and/or separate tax declarations,

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 FS2526-VAT-27
when sold or disposed of to one and the same buyer, whether covered by one or separate Deed
of Conveyance, shall be presumed a sale of one residential lot.
Provided, 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.

17. Lease of residential units with a monthly rental per unit not exceeding Fifteen Thousand Pesos
(P15,000.00). [Sec. 109(1)(Q), NIRC]
The foregoing notwithstanding, lease of residential units where the monthly rental per unit
exceeds Fifteen Thousand Pesos (P15,000.00), but the aggregate of such rentals of the lessor during
the year do not exceed Three Million Pesos (P3,000,000.00) shall likewise be exempt from VAT;
however, the same shall be subject to the three percent (3%) percentage tax under Sec. 116 of the
Tax Code.
In cases where the lessor has several residential units for lease, some are leased out for a
monthly rental per unit not exceeding P15,000.00 while the others are leased out for more than
P15,000.00, his tax liability shall be as follows:
a. The gross sales from rental not exceeding P15,000.00 per month per unit shall be exempt from
VAT regardless of the aggregate annual gross sales. It is also exempt from the 3% percentage
tax.
b. The gross sales from rentals exceeding P15,000.00 per month per unit:
(1) Shall be subject to VAT if the aggregate annual gross sales from rentals from said
units exceed P3,000,000.00.
(2) Shall be subject to 3% percentage tax if the gross sales from rentals amount to
P3,000,000.00 or less.
In case of mixed transactions, the abovementioned 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 for 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 an 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. (RR No. 13-2018)

18. Sale, importation, printing or publication of books and any newspaper, magazine, review or bulletin,
or any such 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: [Sec. 109(1)(R), NIRC]
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 No. 4-2021)

19. Transport of passengers by international carriers doing business in the Philippines. [Sec. 109(1)(S),
NIRC], (RR No. 13-2018)

20. Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and
spare parts thereof for domestic or international operations: Provided, however, that the exemption
from VAT on the importation and local purchase of passenger and/or cargo vessel shall be subject to
the requirements on restriction on vessel importation and mandatory vessel retirement program of
Maritime Industry Authority (MARINA). [Sec. 109(1)(T), NIRC], (RR No. 13-2018)

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 FS2526-VAT-27
21. Importation of fuel, goods and supplies used for international shipping or air transport operations.
Said fuel, goods and supplies shall be used exclusively or shall pertain to the transport of goods
and/or passenger from a port in 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 and supplies shall be subject to twelve percent (12%) VAT. [Sec. 109(1)(U),
NIRC], (RR No. 10-2025)

22. 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. [Sec. 109(1)(V), NIRC], (RR No. 13-2018)

23. Sale or lease of goods and services to senior citizens and persons with disabilities, as provided
under RA Nos. 9994 (Expanded Senior Citizens Act of 2010) and 10754 (An Act Expanding the
Benefits and Privileges of Persons with Disability), respectively. [Sec. 109(1)(W), NIRC], (RR No.
13-2018)

24. Transfer of property pursuant to Sec. 40 (C) (2) of the Tax Code, as amended. [Sec. 109(1)(X),
NIRC], (RR No. 13-2018)
Thus, the following transfers are exempt from VAT:
a. Exchange of property by a corporation which is a party to a merger or consolidation solely
for stock of another corporation, which is a party to the merger or consolidation.
Example:
AA Corporation entered into a merger with BB Corporation. AA Corporation gives its
building to BB Corporation in exchange for the shares of stock of BB Corporation.
b. Exchange of stock by a stockholder of a corporation which is a party to a merger or
consolidation solely for the stock of another corporation which is also a party to the merger or
consolidation.
Example:
AA Corporation entered into a merger with BB Corporation. S, a stockholder of AA
Corporation, exchanges his shares of stock in AA Corporation, for the shares of stock of BB
Corporation.

c. Exchange by a security holder of a corporation which is a party to a merger or

consolidation of his securities (such as bonds) in such corporation solely for stock or securities
in another corporation, a party to the merger or consolidation.
Example:
AA Corporation entered into a merger with BB Corporation. S, who is a security
holder of AA Corporation, exchanges his securities in AA Corporation solely for the shares of
stock (or securities) of BB Corporation.

25. Association dues, membership fees, and other assessments and charges collected on a purely
reimbursement basis by homeowners’ associations and condominium corporations established under
RA No. 9904 (Magna Carta for Homeowners and Homeowners’ Association) and RA 4726 (The
Condominium Act), respectively. [Sec. 109(1)(Y), NIRC], (RR No. 13-2018)

26. Sale of gold to the Bangko Sentral ng Pilipinas. [Sec. 109(1)(Z), NIRC], (RR No. 13-2018)

27. Sale or importation of prescription drugs and medicines for:

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 FS2526-VAT-27

a. Diabetes, high cholesterol, and hypertension beginning January 1, 2020; and

b. Cancer, mental illness, tuberculosis, and kidney diseases beginning January 1, 2021.
The exemption from VAT under this subsection shall only apply to the sale or importation by
the manufacturers, distributors, wholesalers and retailers of drugs and medicines included in the “list
of approved drugs and medicines” issued by the Department of Health (DOH) for this purpose. [Sec.
109(1)(AA), NIRC], (RR No. 4-2021)

28. Sale or importation of the following beginning January 1, 2021 to December 31, 2023:
a. Capital equipment, its spare parts and raw materials, necessary for production of personal
protective equipment (PPE) components such as coveralls, gown, surgical cap, surgical mask,
n-95, scrub suits, goggles and face shields, 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 treatment
of COVID-19; and
c. Drugs for treatment of COVID-19 approved by the Food and Drug Administration (FDA)
for use in clinical trials, 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. [Sec. 109(1)(BB), NIRC], (RR No. 4-2021)

29. Sale of goods or properties or the performance of the services other than the transactions mentioned
in the preceding paragraphs [Sec. 109(1)(A) to (BB), NIRC] or Nos. 1 to 28 of this Handout), the
gross annual sales and/or receipts do not exceed the amount of Three Million Pesos (P3,000,000.00).
[Sec. 109(1)(CC), NIRC], (RR No. 13-2018)
Self-employed individuals availing themselves of the 8% tax on gross sales and/or receipts and
other non-operating income, under Sections 24(A)(2)(b) and 24 (A)(2)(c)(2)(a) of the Tax Code shall
also be exempt from the payment of the twelve percent (12%) VAT. (RR No. 13-2018)
Example:
Mr. CC, a self-employed taxpayer, signified his intention to be taxed at 8% in lieu of the
graduated income tax rates and percentage tax under Section 116 (Tax on Persons Exempt from
VAT) in his Income Tax Return in first quarter of 2018. During the year, his gross sales and non-
operating income amounted to P2,800,000. In this case, he will pay an income tax of P204,000
(P2,800,000 less P250,000* x 8% = P204,000). (*The first P250,000 is exempt.) He will also be
exempt from the payment not only of the percentage tax [per Section 24 (A)(2)(b)] but also of the
VAT (per TRAIN Law).
If the gross sales or receipts of Mr. CC up to September of 2018 amounted to P2,800,000, but
had additional gross sales of P500,000 in October, P550,000 in November, and P600,000 in
December, then he lost his option to pay the 8% commuted tax rate when his gross sales exceeded
P3,000,000 during the fourth quarter. Accordingly, he shall pay an income tax using the graduated
rates under Section 24(A)(2)(a). The tax base is the taxable income (Gross sales less cost of sales
and deductible expense plus non-operating income.) He will be allowed a tax credit for the previous
quarters’ income tax payments under the 8% income tax rate option. He shall also be subject to the
VAT of 12% prospectively starting November and is required to update his registration from a non-
VAT taxpayer to a VAT-taxpayer on or before November 30, 2018.

30. 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 of the enterprise: Provided, further that the
Export Marketing Bureau of the Department of Trade and Industry shall determine the compliance

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with the aforementioned threshold. For this purpose, “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 other services rendered for administrative operations such as human resources, legal, and
accounting. [Sec. 109(1)(DD), NIRC], (RR No. 10-2025)

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