COLLEGE OF BUSINESS AND ACCOUNTANCY
MODULE 9: VALUE-ADDED TAX-EXEMPT TRANSACTIONS
INTRODUCTION
A VAT-exempt transaction refers to the sale of goods or services that are not subject to the 12% Value-Added Tax
(VAT) under the National Internal Revenue Code (NIRC). In this case, the seller does not add VAT to the selling price, and
no input VAT credits can be claimed on purchases related to these exempt activities. This means that even if the seller pays
VAT on the supplies or materials used in their business, they cannot recover or offset that VAT because their sales are
considered VAT-exempt.
VAT exemption is usually granted to reduce the cost of essential goods and services and to support certain
sectors of the economy, such as agriculture, health care, education, and socialized or low-cost housing. These sectors
are given exemption to make their products and services more affordable and accessible to the public.
BODY
VAT EXEMPT SALES - Sec. 109 of the TAX CODE
➢ RA 10963 (TRAIN Law); RR 13-2018
➢ RA 11534 (CREATE Law); RR 4-2021; RR 8-2021; RR 9-2021
The vat exempt transactions provided in the Tax Code are as follows:
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 therefore.
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 • Cow • Bulls Fowls
• Corn grits Crustaceans such as: • Calves • Pigs Ducks
• Raw cane sugar • Lobster, • Sheep • Goats Geese
• Molasses (pulot) Shrimps • Rabbits Turkeys
• Ordinary salt • Prawns,
• Copra Oysters Note: Livestock or poultry
• Mussels, Clams does not include fighting
(original state) • Trout, Eels cocks, racehorses, zoo
animals and other animals
generally considered as pets.
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).
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
SALES OF MARINATED FISH (Rev. Ruling 348-11 dated Sept 28, 2011)
The Bureau of Internal Revenue (BIR) ruled that marinated meat and fish products can no longer be
considered in their original state and are therefore subject to VAT.
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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).
Specialty feeds refer to non-agricultural feeds or food for race horses, fighting cocks, aquarium fish, zoo animals and
other animals generally considered as pets are subject to vat.
Feed Ingredients Possibly for Human Consumption
Certain feed ingredients such as whey powder, skimmed milk powder, lactose, buttermilk powder, whole milk
powder, and similar additives may be subject to VAT unless proven unfit for human consumption.
To qualify for exemption, the seller or importer must secure certification from the Food and Drug Administration
(FDA) confirming that the ingredient cannot be used for human food. (Based on RMC 55-2014, as amended by RMC
66-2014 and RMC 78-2014)
Importation of personal and household effects belonging to:
• The residents of the Philippines returning from abroad; and
• nonresident citizens coming to resettle in the Philippines
Provided, that such goods are exempt from customs duties under the Tariff and Customs Code of the
Philippines.
3) Importation of professional instruments and implements, tools of trade, occupation or employment, wearing
apparel, domestic animals, and personal and household effects belonging to in the Philippines or Filipinos or
their families and descendants who to settle are now residents or citizens of other countries, such parties herein
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, person Customs may, upon the production of satisfactory evidence, that such
persons are actually coming to settle in the Philippines and that the gods are brought from their former place of
abode, exempt such goods from payment of duties and taxes: Provided, further, vehicles, vessels, aircrafts and
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
4) Services subject to Percentage Tax under Title V of the Tax Code, as ended (Sections 116-127).
5) Services By
a) "Agricultural contract growers" and
b) Milling for others of:
• Palay into rice
• Corn into grits; and
• Sugar cane into raw sugar
Section 4.1 09-1 (B)(1 )(f) of RR 16-05 provides, that “Agricultural contract growers" refer to those persons
producing for others poultry, livestock or other agricultural and marine food products in their original state. Its
services growing of poultry, or other agricultural and marine food products into marketable poultry, livestock or other
marine food products. There are agricultural contract growers which offer toll processing/toll dressing/toll
manufacturing as a packaged service to its toll growing. Toll processing/toll dressing/toll manufacturing involves
procedures such as; weighing, killing. dressing, scalding, cut-ups; and packaging.
However, after careful re-study by the Bureau, it was clarified under RR 97-2010, that "toll processing
services exempt from vat" shall pertain only to services to clients from which growing of animals were contracted. As
such, preparing and packaging hogs/chicken ready for delivery after producing or growing them can be said to be
within the purview of "agricultural contract growing". However, if such an activity is done independently of growing
poultry, livestock or other agricultural and marine food products, the same can be considered as vatable services not
covered by agricultural contract growing.
6) 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
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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.
Medical practitioners, under the aforementioned regulation, shall likewise include medical technologists,
allied health workers (e.g., occupational therapists, physical therapists, speech the nurses, etc.) and other medical
practitioners who are not under an, employer-employee relationship with the hospital, clinic or 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. 1 16 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
7) "Educational services rendered by private educational institutions, duly accredited by the Department of
Education (DepEd), the Commission on Higher Education (CHED), the Technical Education and Skills Development
Authority (TESDA) and those rendered by government educational institutions.
"Educational services" shall refer to academic, technical vocational education provided by private
educational institutions duly accredited by the DepEd, the CHED and TESDA and those rendered by government
educational institutions and 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 TESDA. [Sec. 4.109-1 (B)(h), RR
16-2005]
8) Services rendered by individuals pursuant to an employer-employee relationship.
9) "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.
10) Transactions which are exempt under international agreements to which the Philippines is a signatory or under
special laws, except those under Presidential Decree No. 529 (Petroleum Exploration which those Concessionaires
under the Petroleum Act of 1949.)
Examples (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
11) Sales by agricultural cooperatives duly registered Cooperative Development Authority 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 (Processed or at it’s Exempt Exempt
original state)
I
Other than the cooperative’s own produce (i.e. from Exempt VAT*
t is
“traders”)
to
be reiterated however, that sale or importation of agricultural food products in their original state is exempt from VAT
irrespective of the seller and buyer thereof, pursuant to Subsection (a) [Sec. 4.109-1 (B) (I), RR 4-2007]
12) “Gross receipts from “lending activities” by credit or multi-purpose cooperatives duly registered with the
Cooperative Development Authority”. Exemption is not only limited to the gross receipts on loans extended to its
members but also to other persons who are not members.
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Gross receipts by Credit or Multi-purpose From Members From Non-Members
cooperatives
From lending activities Exempt Exempt
From non-lending activities VAT VAT
13) "Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with the Cooperative
Development Authority, provided fifteen thousand pesos (P15,000) and regardless of the aggregate that the share
capital contribution of each member does not exceed capital and net surplus ratably distributed among the members
Importation by non-agricultural, non-electric and noncredit cooperatives of machineries and equipment including
spare parts thereof, to be used by them are subject to vat.
14) "EXPORT SALES" by persons who are NOT VAT-REGISTERED
Export sales may be exempt or subject to vat as shown in the figure below:
Business Taxes of Export Sales
By a Non-Vat Reg Vat Exempt
Export Sales
By a Vat Reg. Vat @ 0% (zero rated sales)
15) "SALE OF REAL PROPERTY
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 4-2007, 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 to housing program of the Government, the private sector or
non-government organizations.
c. Sales of House and Lot and Other Residential dwellings with selling prices of not more than P3 600 000.
Provided, further, that every three (3) years thereafter, the amounts state herein shall be adjusted to its
present value using the Consumer Price Index, as published by the Philippine Statistics Authority (PSA). (Previously
₱3,199,200, adjusted under RR 1-2024 pursuant to the TRAIN Law and CPI adjustment.)
NOTE:
• The provision of the CREATE law, increasing the threshold for vat 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).
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• 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.
16) Lease of Residential Unit
Under the TRAIN Law (RA 10963) effective January 1, 2018, the following VAT rules apply:
a) Rent not exceeding ₱15,000 per month per unit – VAT-exempt regardless of total annual gross receipts.
b) Rent exceeding ₱15,000 per month per unit –
• Subject to 12% VAT if annual gross receipts exceed ₱3,000,000 from those units only.
• Otherwise, subject to 3% Percentage Tax under Section 116 of the Tax Code.
Residential Unit – includes apartments, houses, and buildings used solely as dwellings (e.g., dormitories, rooms,
bed spaces). Excludes motels and hotels.
Unit – refers to each apartment unit, house, person (for dorms/boarding houses), or room (for room rentals).
Lease of Residential and Commercial Units
Lease of Residential Leaser of Commercial Units
Monthly rental is < Monthly rental is > Regardless of rental rate
P15,000 P15,000
Is the lessor’s total annual
Annual receipts of the lessor receipts over ₱3,000,000?
>P3M(excluding gross
receipts from units with
monthly rental of <P15,000)
No Yes
Exempt from vat No Yes
Subject to Sec. Subject to VAT
116 (3% OPT) (12%)
Subject to Sec. Subject to VAT
116 (3% OPT) (12%)
17) (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).
Other Printing Activities Subject to VAT
If a company performs other printing services not covered by the UNESCO Agreement, such as:
• Printing brochures or flyers
• Bookbinding, engraving, stereotyping, or lithographing
• Printing trade books or reference books not classified as educational materials
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These services are subject to 12% VAT.
The taxpayer must:
• Register as a VAT-registered business, and
• Issue a separate VAT invoice or receipt for these taxable transactions.
18) Transport of passengers by International carriers doing business in the Philippines.
Transport of passengers by international carriers doing business in the Philippines is not subject to business tax
(vat and percentage tax). On the other hand, transport of cargo by international carriers is not also subject to vat,
however, it is subject to percentage tax under Section 118 of the Tax Code, also known as Common Carrier's Tax on
International Carriers.
Guide:
• International Carriers (residential foreign corporations):
Transport Of Originating in the Philippines
Passengers Vat exempt
Cargo or goods Subject to Common Carriers Tax Under Sec. 118
• Domestic Common Carriers:
Transport Of Within the Philippines Philippines to abroad (Sec. 108
(B)(6))
Passengers
• By land Common carriers tax under 0% vat
Sec.117
• By air or sea Vat 0% vat
Cargo or Goods Vat 0% vat
19) 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, 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 MARINA (RR 15-2015; RR 13-2018).
20) Importation of fuel, goods and supplies by persons engage in international shipping or air transport operations.
Provided that the fuel, goods and supplies shall be used for international shipping on air transport operations.
Thus, 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 vice versa, without docking or stopping at any
other port in the Philippines, unless the docking or stopping at any other port in the Philippines 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.
21) "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 Sections 121
and 122, respectively of the Tax Code.
22) Sale or lease of goods and services to senior citizens and persons with disabilities, as provided under RA No.
9994 (Expanded Senior Citizens Act of 2010) and RA No. 10754 (An Act Expanding the Benefits and Privileges of
Persons with Disability (PWD), respectively,
23) Transfer of property pursuant to Section 40(C)(2) of the Tax Code, as amended (Upon effectivity of RA10963-TRAIN
Law only; new provision).
24) 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 No. 4726 (Condominium Act), respectively. This provision shall
take effect only beginning January 1, 2018 or upon the effectivity of RA10963-TRAIN Law (new provision).
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25) Sale of Gold to the Bangko Sentral ng Pilipinas (BSP). This provision shall take effect only beginning January 1, 2018
or upon the effectivity of RA10963-TRAIN Law (subject to 0% vat prior to 2018).
26) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the
preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of 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 non-refundable 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.
SUMMARY:
The effect of VAT exemption is felt by both the seller and the buyer. For the seller, it means they are not required to charge
or remit VAT to the Bureau of Internal Revenue (BIR). However, they also cannot claim input VAT credits or refunds for the
VAT they pay on their purchases, which may reduce their profit margins, especially when buying from VAT-registered
suppliers. For the buyer, the advantage is that the price of the goods or services is lower since the 12% VAT is not added.
But if the buyer is a VAT-registered business, they cannot claim any input VAT credit because no VAT was paid in the first
place.
In summary, VAT-exempt transactions mean no VAT is added and no VAT can be claimed back. This benefits consumers
through lower prices, but limits the seller’s ability to recover VAT costs, making it important for businesses to understand
how VAT exemption affects their pricing and profitability.
REFERENCES:
Transfer and Business Taxation - Train Law updated, 2021 ed., Enrico Tabag
Quicknotes Taxation, Latest ed., Jack De Vera
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