CHAPTER 8

OUTPUT VAT – ZERO-RATED SALES

Chapter Overview and Objectives

After this chapter, readers are expected to comprehend:
1. The concept of zero-rated sales
2. The difference between VAT exemption and zero-rating
3. The concept of export and technical exportation
4. The list of zero-rated sales of goods and zero-rated sales services
5. The requirements for effective zero-rating

WHAT ARE ZERO-RATED SALES?

Zero-rated sales are basically foreign consumptions (i.e., export sales) or equivalents of foreign
consumptions (foreign currency-denominated sales and constructive exports0 and sales conferred
with an export sale by special laws and international agreements to which the Philippines is a
signatory.

Foreign consumption like export of goods or services is not charged with consumption taxes.
Hence, the export sales of VAT taxpayers are subject to a VAT at zero rate. The export sales of a
non-VAT taxpayers are exempt from the 3% general percentage tax.

What is the benefit of Zero-rating?

A zero-rated sale will have a zero output VAT but with a deductible (i.e., creditable) input VAT.
As such, the taxpayer will fully recover the VAT he paid on his domestic purchases and on
importation either by credit to any tax liability of the taxpayer with the government or by tax
refund.

Zero-rated sales vs. Exempt sales

Both exempt sales and zero-rated sales will not have output VAT. In both cases, the taxpayer
does not pay VAT. The difference lies in the treatment of input VAT. The input VAT in the case
of exempt sales is non-creditable and nonrefundable. It can only be claimed as deductions in the
income tax return.

Illustration: Zero-rated sales vs. Exempt sales

During the month, Rizal Corporation purchased goods invoiced at P350,000 excluding P42,000
input tax. It exported the goods for $12,000 which is equivalent to P510,000 and incurred
P10,000 in expenses.

Assuming Rizal Corporation is a VAT taxpayer

The sale shall be subjected to a zero-rated VAT. Rizal Corporation shall compute its VAT
liability as follows:
Output VAT P 0
Less: Input VAT 42,000
Excess input VAT (P 42,000)

The P42,000 excess input VAT on zero-rated sales is claimable in full as a tax credit against
other output VAT or claimed as a tax credit against any internal revenue tax liability of Rizal
Corporation or as tax refund.

Assuming Rizal Corporation is subject to a 30% corporate income tax, it shall compute its
taxable income and income tax due as follows:

Sales P 510,000
Less: Cost of goods sold, exclusive of VAT 350,000
Gross income 160,000
Less: Deductions 10,000
Taxable income 150,000
Multiply by: Corporate income tax rate 30%
Income tax due P 45,000

Note: The input VAT cannot be claimed as deduction against gross income in income taxation because it is a tax
credit or tax refund.

Assuming Rizal Corporation is a non-VAT taxpayer

The sale is exempt from VẤT including percentage tax. Rizal Corporation shall compute its
taxable income and income tax due as follows:

Sales P 510,000
Less: Cost of goods sold (P350K÷ P42,000) 392,000
Gross income 118,000
Less: Deductions 10,000
Taxable income 108,000
Multiply by: Corporate income tax rate 30%
Income tax due P 32,400

Note: The input VAT is claimed as a deduction against gross income in income taxation. Its tax benefits to the
taxpayer is only P12,600 [i.e. P42,000 x 30% or (P45,000- P32,400)] through a decrease in its income tax due.

Thus, VAT-exempt sales result in partial relief to the taxpayer while zero- rated sales result in a
total relief to the taxpayer.

Summary: Table of comparison

VAT exempt sales Zero-rated sales

Output VAT No output VAT No output VAT
Input VAT treatment Deductible against gross Creditable or refundable
 income
Extent of tax relief Partial relief Full relief

ZERO-RATED SALES OF GOODS

There are two types of zero-rated sales of goods:
A. Export sales
B. Effectively zero-rate sales

EXPORT SALES
Eventually, the term export sales will only include:
1. Direct export
2. Sale to economic zones and tourism enterprise zones
3. Sale of goods or properties, supplies, equipment and fuel to persons engaged in
international shipping or international air transport operations

Direct export
Direct export is the sale and actual shipment of goods from the Philippines to a foreign country,
irrespective of any shipping arrangement that influences or determines the transfer of ownership
of the goods so exported.

Required:
1. Paid for in acceptable foreign currency or its equivalent in goods or services
2. Accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP)

Illustration 1
XLT Company sold various goods as follows:

Customer/buyer Place delivered Payment

Resident alien Philippines $ 15,000 cash
Visiting tourist Philippines P 420,000 cash
A Filipino employee in Japan Japan ¥ 800,000 cash
A business in Indonesia Indonesia $10,000 in services

The relevant conversion rates were: €1: P60; $1: P52; ¥1: P.50

The following are zero-rated sales:

Customer Conversion Amount

Sale to Filipino in Japan ¥800,000 x P.50 P 400,000
Sale to business in Indonesia $10,000 x P52 520,000
Total zero-rated sales P 920,000

The following are subject to 12% VAT:

Customer Conversion Amount

Resident alien $ 15,000 x P.52 P 780,000
Visiting tourist 420,000
Total zero-rated sales P1,200,000

Domestic consumptions are subject to 12% VAT even if they are consumed by non-resident
visitors and even if they are paid for in foreign currencies.

Illustration 2
Guimaras Company made the following export sales during the year:

Export destination Terms Payment

Export for Hong Kong FOB destination $ 100,000 cash
Export for Thailand FOB destination P 450,000 cash
Export to Japan FOB shipping point ¥ 800,000 cash
Export to Indonesia Free alongside vessel $10,000 in goods

Under FOB destination, ownership of the goods transfers to the buyer from the moment goods
arrived at the buyer's place of business. Under FOB shipping point, ownership of goods transfers
to the buyer from the moment the goods leave the compound of the seller.

The following shows the VAT treatment of the foregoing export sales:

If Guimaras is a
VAT taxpayer Non-VAT taxpayer
Export for Hong Kong zero-rated exempt
Export for Thailand exempt exempt
Export to Japan zero-rated exempt
Export to Indonesia zero-rated exempt

Note:
1. The export sales to Hongkong and Japan are paid for in acceptable foreign currencies;
hence, these are subject to zero-rated VAT.
2. As reiterated in several jurisprudence, our tax law adheres to the destination principle
wherein VAT is held not to apply on goods destined for consumption abroad regardless of
the indicated place of transfer of legal title over the goods. Hence, export sales denominated
in Peso are logically exempt if not acceptable as zero-rated rather than subject to 12% VAT.
There is no positive intent of the law to tax export sales at 12%.

Illustration 3
XHI Corporation, a VAT-registered export trader, had the following export sales during the
month:

Goods exported Amount Traceable input

VAT
Processed food $ 200,000 P 25,000
Fruits and vegetables € 50,000 45,000

Both sales are subject to zero-rated VAT. Whereas fruits and vegetables are VAT exempt for
domestic consumption, they are zero-rated for foreign consumption. The input VAT on both
exports shall be creditable against output VAT or claimable through refund or tax credit.

Query: What if XHI is a non-VAT registered taxpayer?

The export sales shall be considered exempt XHI can claim the input VAT or expense.

Export commission and consignment

For purposes of zero-rating, the export sales of registered export traders shall include
commission income. However, the exportation of goods on consignment shall not be considered
export until the export products consigned abroad are in fact sold by the consignee.

Illustration
Filexport Company, a VAT registered export trader, buys goods from domestic manufacturers,
rebrands them and sells them for foreign customers. Filexports also exports goods for other
domestic enterprises without export permit and also makes occasional domestic sales.

During the quarter, Filexport Company had the following sales and receipts:

Export sales Local sales

Sales $ 400,000 P 2,000,000
Commission on sales made
for other companies 50,000 450,000
Unsold consignments
Less than 60 days 20,000 250,000
More than 60 days 30,000 150,000
Total $ 500,000 P 2,850,000

Assume the relevant exchange rate is $1: 52.00.

The following shall be subject to 0% VAT and 12%, respectively:

0% VAT 12% VAT

Sales $ 400,000 P 2,000,000
Commission on sales made
for other companies 50,000 450,000
Unsold consignments
Less than 60 days - -
More than 60 days - 150,000
Vatable sales $ 450,000 P 2,600,000
Multiply by: Peso-Dollar rate 52.00
Zero-rated sales in Pesos P 23,400,000
It must be noted that deemed sales rules applies only on domestic consignments not on foreign
consignments.

Sale to economic zones or tourism zones

By legal fiction, economic zones including tourism zones are considered foreign territories.
Hence, the sales to locators or registered enterprises in these zones are considered technical
exportation.

Examples of Philippine Ecozones:

1. Philippine Economic Zone Authority (PEZA)
2. Cagayan Special Economic Zone
3. Zamboanga Special Economic Zone
4. Clark Special Economic Zone
5. Clark Freeport Zone
6. Poro Point Special Economic and Freeport Zone
7. John Hay Special Economic Zone
8. Aurora Special Economic Zone (ASZ) - RA 9490l

The zero-rating of sales to registered enterprises of economic zones or tourism zones in the
TRAIN law was vetoed by the President thereby creating the impression that locators will then
be subject to 12% VAT.

Since the TRAIN law, did not repeal Section 8 of RA 7916, The Special Economic Zone Act,
which provides that special economic zones are to be operated and managed as separate customs
territory, the DOF maintained the status quo on the zero-rating of sales of goods or services.
Accordingly, the sales to PEZA locators will still be zero-rated until a contrary law or regulation
is passed.

Needless to say, passing VAT to PEZA locators which are primarily exporters would result in
voluminous claim for refunds or credits causing additional unnecessary workloads to the BIR
and the ecozone locators.

The sale of goods, supplies, equipment and fuel to persons engaged in international
shipping or international air transport operations

Goods, supplies, equipment and fuel sold to persons engaged in international shipping or air
transport operation are generally used or consumed outside the Philippines. The sale to these
entities is a foreign consumption rather than a domestic consumption; hence, these are subject to
zero-rated VAT.

Zero-rating is limited to goods, supplies, equipment and fuel pertaining to or attributable to the
transport of goods and passengers from a port in the Philippines directly to a foreign port, or vice
versa, without docking or stopping at any port in the Philippines unless the docking or stopping
is the purpose of unloading passengers and or cargoes originating from abroad, or to load
passengers and/or cargoes bound for abroad.
Illustration
Sibalom Company, a VAT taxpayer, sold supplies to Pan-Pacific Airlines:

Pan-Pacific Airline division Amount

Domestic operation P400,000
International operation 500,000

The sale of supplies to the airline's domestic operation is subject to 12% VAT while the sale to
the airline's international operation is subject to 0% VAT.

EFFECTIVELY ZERO-RATED SALES

This refers to sales to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects such sales to zero-rate.

Examples of entities are granted indirect tax exemption under special laws or international
agreements:
1. Asian Development Bank (ADB)
2. International Rice Research Institute (IRRI)
3. United Nation (UN) and its various organizations, such as:
a. World Health Organization
b. UNICEF
4. United States Agency for International Development (USAID) and its personnel and
contractors (RMC 40-07)
5. Embassies, qualified employees and dependents -subject - subject to the reciprocity rule
6. Philippine National Red Cross (PNRC) - Sec. 5 (c), RA 10072
7. Philippine Amusement and Gaming Corporation (PAGCOR) and its licenses or
contractors – PD 1869

Because of the indirect tax exemption, the sales of these entities are effectively subject to 0%
VAT.

Requirement for effective zero-rating

Generally, effective zero-rating of sales requires prior application with the appropriate BIR
office. Without an approved application for effective zero-rating, the transaction otherwise
entitled to zero-rating shall be considered exempt (Sec. 4.106-6, RR16-2005).

An approved application shall be given prospective effect from the date received by the BIR. The
same shall be valid until December 31 of the same year and renewable every year thereafter.

Where to file for zero-rating

Taxpayer shall file their application with the Audit Information, Tax Exemption and Incentives
Division (AITEID) under the Assessment Service/ for large taxpayers, application shall be filed
with the Large Taxpayer Audit and Investigation Division I and II (LTAID I and II), BIR
National Office.

The VAT reciprocity exemption on embassies and their personnel

Embassies and their qualified employees and dependents of employees do not have indirect tax
exemption under The Vienna Convention on Diplomatic Relations, but they may be exempt
under the principle of reciprocity.

Under the reciprocity rule, foreign governments granting Philippine embassies and diplomats
indirect tax exemption shall likewise be conferred the same treatment on embassies or diplomats
in the Philippines/ countries granting indirect tax exemption to Philippine embassies and
personnel are listed by the DFA (BIR Ruling DA-ITAD-98-08,100-08, 101-08).

Qualified foreign embassies and their qualified personnel and qualified dependents of the latter
are issued VAT Exemption Certificate (VEC) or VAT Exemption Identification Carda (VEIC).

VAT taxpayers selling to foreign embassies, personnel or their dependents with VEC or VEIC
shall be entitled the benefit of zero-rating. (See RMO-81-99 and RMO 22-2004)

Illustration
ABC Corporation, a VAT supplier, sold office supplies and equipment to the following
embassies:

Embassies Exemption status Sales

Ukraine Embassy Without reciprocity exemption P 400,000
Russian Embassy With reciprocity exemption 600,000
Total P 1,000,000

The P600,000 sales is subject to zero-rated VAT. The P400,000 sales is subject to 12% VAT.

PREVIOUSLY ZERO-RATED SALES

1. Foreign currency denominated sale*
2. Sales under the international export program*
3. Sales to Boy Scout of the Philippines*
4. Sale of gold to BSP – now exempt effective January 1,2018
*To be subjected to 12% VAT upon successful completion and implementation of an effective VAT refund system

The term “Foreign currency denominated sale” means sale to non-residents of goods, except
export of automobiles and non-essential commodities, assembled or manufactured in the
Philippines for delivery to a resident in the Philippines; paid for in acceptable foreign currency
and accounted for in accordance with the rules and regulation of the BSP.

Sale under the Internal Export Program of the government

Sales of locally manufactured or assembles goods for household and personal use
of Filipinos abroad and other non-residents of the Philippines as well as returning overseas
Filipinos under the Internal Export Program of the government paid for in convertible foreign
currencies and accounted for in accordance with the rules and regulations of the BSP shall also
be considered export sales.

ZERO-RATED SALES OF SERVICES

Eventually, zero-rated sales of services will only include:
1. Sale of services to non-residents
2. Effectively zero -rated sales of services
3. Services rendered to persons engaged in international shipping or international air
transport operations including leases of properties thereof
4. Transport of passengers and cargoes by domestic air or sea carrier from the Philippines to
a foreign country
5. Sale of power or fuel generated from renewable sources of energy
6. Services rendered to ecozones or tourism enterprise zones

Mnemonic: FEED IN

SALES OF SERVICES TO NON-RESIDENTS

Services other than processing, manufacturing or repacking rendered to a person engaged in
business conducted outside the Philippines or to a non- resident person not-engaged in business
who is outside the Philippines when the services are performed.

The term "other services" is not limited only to project studies, information services, and
engineering and architectural designs. The term encompasses any other services.

Requirement for zero-rating of services to non-residents:

a. The services must be performed in the Philippines
b. The services must be paid for in acceptable foreign currency or its equivalent in goods or
services.
c. The payment must be accounted for under the rules and regulations of the BSP.

Illustration 1
Excel Tailoring, a VAT taxpayer, is engaged in a sewing business. During the month, it had the
following receipts from sewing services to various clients:

Items Clients Amount

School uniforms DLSU, a Philippine university P 800,000
Garments Levi's, a foreign dressmaker $ 100,000
Curtains Finesse, a foreign textile P 1,000,000
manufacturer

The receipt from DLSU is subject to 12% VAT as it is a domestic consumption. The receipt from
Levi's is subject to zero-rated VAT. The receipt from Finesse is VAT exempt because it is a
foreign consumption but is not paid in foreign currencies.

Illustration 2
General Consultants, a VAT taxpayer, provides various services to clients. The details of each
transaction during the month are shown below:

Clients Place rendered Amount

A foreign corporate client Abroad P 800,000
A resident foreign corporation Philippines $ 100,000
A non-resident foreign corporation Philippines P 1,000,000

The $200,000 is VAT-exempt since this is a foreign consumption which does not qualify for
zero-rating because the service is done abroad, not in the Philippines.

The ¥100,000 receipt shall be subject to the 12% VAT because this is a domestic consumption,
the client being a resident in the Philippines.

The P1,000,000 receipts is VAT exempt because it is a foreign consumption which does not
qualify for zero-rating since it is not paid for in an acceptable foreign currency.

EFFECTIVELY ZERO-RATED SALES OF SERVICES

The local sales of services to a person or entity who has granted indirect tax exemption under
special laws or international agreements shall likewise be subjected to 0% VAT.

Please refer to the list of entities with indirect tax exemption as discussed under effectively zero-
rated sales of goods.

Illustration 1
Johnny Thor, a VAT taxpayer, provides security and janitorial services to the building of the
International Rice Research Institute (IRRI). IRRI paid the taxpayer P200,000 for the services
rendered.

The P200,000 gross receipts is qualified for VAT zero-rating but Johnny Thor must first secure
an approval from the BIR for an effective zero-rating of the receipts.

Illustration 2
Berde Residence leases residential units to certain embassy personnel of foreign governments:

Foreign embassy personnel VAT status Rental

Mr. Vladimir Cutin A Russian with VEIC P 500,000
Mr. Marco Poroshenco A Ukrainian with VEIC 20,000
Mrs. Janice Naran A Mongolian with VEIC ` 12,000
Total P 82,000

Rentals from Vladimir Cutin are subject to zero-rated VAY. The rental from
Marco Poroshenco is subject to the regular VAT. The rental from Janice Naran is exempt from
VAT because it is below the P15,000 VAT threshold on residential dwellings.

SERVICES RENDERED TO PERSONS ENGAGED IN INTERNATIONAL SHIPPING OR

AIR TRANSPORT OPERATONS, INCLUDING LEASES OF PROPERTY FOR USE
THEREOF

To be considered for zero-rating, the service shall be exclusively for international shipping or air
transport operations.
Illustration 1
S2Technologies specialized in aircraft repair maintenance services. S2Technologies has two
clients: Malay Airlines and Airphil. Malay Airlines is an international air carrier while Airphil is
a domestic carrier.

The service fees from Ariphil shall be subject to 12% VAT. The service fees from Malay Airlines
shall be subject to 0% VAT.

Illustration 2
Mr. Johnny, a VAT taxpayer, provides pest control services to vessels of Philippine Seagulls, a
domestic shipping company engaged in both domestic and international shipping operations.

Mr. Johnny earned the following during the month from Philippine Seagulls:

Source of service fees Amount

Domestic transport division P 400,000
International transport division 600,000
Total P 1,000,000

The receipts from the domestic transport division constitute a domestic consumption which is
subject to the 12% VAT. The receipts from the international transport division constitute a
foreign consumption which is qualified for effective zero-rating.

TRANSPORT OF PASSENGERS AND CARGO BY DOMESTIC AIR OR SEA CARRIERS

FROM THE PHILIPPINES TO A FOREIGN COUNTRY

The outgoing transport services of domestic air carrier or sea carrier constitute services rendered
in the Philippines to non-residents. It is therefore subject to zero-rated VAT.

The incoming transport services of domestic air carrier or sea carrier constitute services rendered
abroad to non-residents. This is a foreign consumption exempt from VAT.

Illustration 1
Phinoy Airline had the following receipts during the month:

Incoming flights (Foreign countries to Philippines) P 200,000,000

Outgoing flights (Philippines to foreign countries) 300,000,000
Domestic flights *Within Philippines) 500,000,000
Total P 1,000,000,000

The incoming flights is a foreign consumption exempt from VAT. The outgoing flights is subject
to zero-rated VAT. The domestic flights are subject to 12% VAT.

Illustration 2
Singapore Ocean Liners, an international sea carrier, had the following receipts during a month:
Incoming voyage (Foreign countries to Philippines) P 200,000,000
Outgoing voyage (Philippines to foreign countries) 300,000,000

The incoming voyage is a foreign consumption exempt from business tax. The outgoing voyage
on transport of passengers is likewise exempt from business tax (RA 10378).

The outgoing transport of mails, cargoes, or excess baggage is specifically subject to 3%

percentage tax, not to 0% VAT. Services rendered to this entity are zero-rated.

SALE OF POWER OR FUEL GENERATED THROUGH RENEWABLE SOURCES OF

ENERGY
The sale of power or fuel from renewable sources of energy is zero-rated. Renewable sources of
energy may include, but are not limited to, biomass, solar, wind, hydropower, geothermal and
steam, ocean energy, and other emerging sources using technologies such as fuel cells and
hydrogen fuels (RA 9513 & RA 9337).

The zero-rating treatment is limited to sale of power and does not extend to sale of services
related to the maintenance or operation of plants generating said fuel.

Types of businesses in the electricity business:

a. Generation companies – refer to persons or entities authorized by the Energy Regulatory
Commission (ERC) to operate a facility used in the production of electricity
b. Transmission companies – refer to any person or entity that owns and conveys
electricity through the high voltage backbone system and or sub-transmission assets
c. Distribution companies – refer to persons or entities including a distribution utility such
as an electric cooperative which operates a distribution system with the provision of RA 9136
(EPIRA law)

Distribution companies and transmission companies are just “pass through “ entities. (RMC 62-
2012, RMC 71-2012, RMC 61-2005)

Illustration
Northern Electric is a generation company with the following receipts during a month:

Sales of electricity generated from hydro plant P 12,000,000

Sales of electricity generated from solar plant 10,000,000
Sales from electricity from coal-powered plant 30,000,000
Sales of electricity from natural gas-powered plant 15,000,000

The P22M sales of electricity from hydro and solar plants are zero-rated. The P45 M sales of
electricity from coal-powered and natural gas-powered plants are subject to 12% VAT.

SERVICES RENDERED TO ECOZONES OR TOURISM ENTERPRISE ZONES

The sales of goods to registered enterprises of economic zones or tourism enterprise zones are
also subject to 0% VAT.
Illustration
Ureshi Enterprise, a VAT taxpayer engaged in electronic repair, was accredited by Texas
Instruments Philippines to be its PC board repair provider. Texas Instruments is a PEZQ-
registered ecosone manufacturer. Ureshi Enterprise also provided electronic repairs on
computers owned by several restaurants operating inside the ecozone.

Ureshi Enterprise’s receipts from Texas Instruments Philippines is zero-rated. Since service
establishments like restaurants inside the zones are not registrable enterprises thereto, receipts
from them are subject to the 12% VAT.

Enhanced VAT Refund System

The Department of Finance shall established a VAT refund center in the BIR and in the BOC
that will handle the processing and granting the cash refunds of creditable input VAT within 90
days.

All amount equivalent to 5% of the total value-added tax collections of the BIR and the BOC
from the immediately preceding year shall be automatically appropriated annually and shall be
treated as a special account in the General Fund or as trust receipts for the purpose of funding
claims for VAT refund. Any unused fund at the end of the year shall revert to the General Fund.

Officials, agents or employees of the BIR who deliberately causes the delay in the processing of
VAT refund shall be subjected to penalties as imposed by the Tax Code.

ZERO-RATED SALES THAT WILL BE SUBJECTED TO 12% VAT UPON

ESTABLISHMENT OF AN ENHANCED VAT REFUND SYSTEM
Pending the successful establishment and implementation of an enhanced VAT refund system,
the following shall still be considered export sales subject to 0% VAT:
1. The sale of raw materials or packaging materials to a non-resident buyer for delivery to
a resident export-oriented enterprise to be used in manufacturing, processing, packing or
repacking, in the Philippines of the said buyer’s goods and paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the BSP.
2. Sale of raw materials or packaging materials to an export-oriented enterprise whose
export sales exceeds 70% of total annual production
3. Those considered export sales under E.O.226 (The Omnibus Investment Code of 1987),
and other special laws

The following sales of services shall likewise be considered zero-rated sales pending the
successful establishment and implementation of an enhanced VAT refund system:
1. Processing, manufacturing or repacking goods for other persons doing business outside
the Philippines, which goods are subsequently exported.
2. Services performed by subcontractors and/or contractors in processing converting, or
manufacturing goods for an enterprise whose export sales exceeds 70% of total annual
production.

Sale to an export-oriented enterprise

Any enterprise whose export sales exceeds 70% of the total annual production of the
preceding taxable year shall be considered an “export-oriented enterprise.” A certification to
this effect of issued by the pertinent government agency.

Sale to export-oriented enterprise

Requirement for zero-rating of export sales to non-residents:

a. The sale must have been paid for in acceptable foreign currency or its equivalent in good
or services.
b. The sale must be accounted for under the rules of the BSP.

Considered export sales under EO 226 and other special laws

The following are considered export sales under EO226:

1. The Philippine F.O.B. value of export products exports directly by an export producer
2. The net selling price of export products sold by a registered export producer to another
export producer
3. The net selling price of export products sold by a registered export producer to an export
trader that subsequently exports the same
4. Even without actual exportation, the following shall be considered constructively
exported:
a. Sales to bonded manufacturing warehouses of export-oriented enterprises
b. Sales to export processing zones in pursuant to RA 7916, 7903, 7922 and other similar
export processing zones
c. Sales to enterprises duly registered and accredited with the Subic Bay Metropolitan
Authority (RA 7227)
d. Sales to registered export traders operating bonded manufacturing warehouses supplying
raw materials in the manufacture of export products
e. Sales to diplomatic missions and other agencies and or instrumentalities granted tax
immunities, of locally manufactured, assembled or repacked products whether or not paid for in
foreign currencies
f. Sale of goods, properties or services to a BOI-registered manufacturer or producer

By legal fiction, diplomatic missions and instrumentalities with tax immunity are outside the tax
jurisdiction of the State. The sale to these entities is akin to a sale to non-residents (i.e. foreign
consumptions) and is therefore considered as export sale.

Sale of goods. properties or services to a BOI-registered manufacturer or producers

The sale of goods, properties, or services made by a VAT-registered supplier to a BOI-registered

manufacturer/producer whose products are 100% exported are considered export sales. A
certification to this effect which is good for one year must be issued by the BOI.

CHAPTER 8: SELF-TEST EXERCISES

Discussion Questions
1. Discuss the difference between VAT exemption and zero-rating.
2. Enumerate the sales of goods or properties subject to zero-rated VAT.
3. Enumerate the sales of goods considered export.
4. Enumerate the services subject to zero-rated VAT.
5. Enumerate the sales of goods and sales of services which are effectively zero-rated.
6. Discuss the requirements for foreign currency denominated sales and effectively zero-
rated sales.

True or False 1
1. To be zero-rated, all forms of export sales must be paid for in acceptable foreign currencies.
2. VAT exemption results in total tax relief while zero-rating results in partial tax relief.
3. Input taxes on zero-rated sales are deductible as part of costs or expenses.
4. Input taxes on zero-rated sales are claimable as tax credit or tax refund.
5. As a rule, effectively zero-rated sales require prior application with the BIR for zero-
rating.
6. Sales to tax-exempt persons will be subject to 12% VAT in default of an approved
application for zero-rating.
7. The foreign currencies must be inwardly remitted and accounted for under the rules of the
BSP to be zero-rated.
8. The 60-day rule on deemed sales of consignment applies to export sales.
9. The sale of gold to the BSP must be paid for in acceptable foreign currencies to be
subject to zero-rating.
10. The sale to a local export oriented enterprise is subject to zero-rating only if paid for in
acceptable foreign currencies.
11. Legal title over exported goods must pass abroad to be subject to zero- rating.
12. Export sales that are not paid for in acceptable foreign currencies are subject to the 12%
VAT.
13. The export sales by non-VAT registered person are exempt from VAT but are subject to
the 3% percentage tax.
14. When the remittance of the foreign currency-denominated sale is not accounted for under
BSP rules, the same shall be considered VAT-exempt.
15. An export-oriented enterprise is an entity that exports at least 70
total annual production.

True or False 2
1. The direct export by an export trader shall be considered an export sale subject to 12%
VAT.
2. The sale of an export trader to a fellow export trader is subject to zero-rated VAT.
3. The commission income from export sales by export traders is exempt from VAT.
4. The sale to a bonded manufacturing warehouse of an export-oriented enterprise is subject
to effective zero-rating.
5. The sales of goods or services to export-processing zones are subject to an automatic
zero-rating without the need for a BIR application for effective zero-rating.
6. The sales to diplomatic missions are exempt from VAT.
7. The sales to a BOI-registered manufacturer are subject to zero-rated VAT as long as
100% of its annual production is actually exported.
 8. The sale of goods or services to a domestic carrier for its international operations is
subject to zero-rated VAT.
9. The sale of goods or services to a domestic carrier for its domestic operations is exempt
from VAT.
10. The transport of domestic carriers of passengers, baggage and mails from the Philippines
to a foreign country is subject to zero-rated VAT.
11. The transport of passengers by an international carrier from the Philippines to a foreign
country is exempt.
12. The transport of cargoes, baggage or mails by an international carrier from the
Philippines to a foreign country is subject to zero-rated VAT.
13. The sale of locally manufactured goods to overseas Filipinos is subject to an effective
zero-rating if paid for in acceptable foreign currencies.
14. Sales to the Asian Development Bank are subject to zero-rated VAT.
15. The sale to embassies with VEC and embassy personnel with VEIC is not subject to the
zero-rated VAT.

Multiple Choice - Theory: Part 1

1. Which statement is correct?
a. Zero-rated sales are taxable, but will not result in an output VAT.
b. Zero-rated sales are non-taxable; hence, these will not result in an output VAT.
c. VAT zero-rating and VAT exemption are synonymous concepts.
d. All of these
2. Which is correct regarding the treatment of input VAT?
a. Input VAT on zero-rated sales is deductible from gross income.
b. Input VAT on zero-rated sales is creditable against output VAT or refundable.
c. Input VAT on zero-rated sales is both deductible from gross income and creditable
against output VAT.
d. Input VAT on exempt sales is refundable or creditable.
3. Which of the following requires prior BIR application for effective zero-rating?
a. Sales to PEZA locators
b. Direct export sales
c. Foreign currency denominated sales
d. Sales to export-oriented enterprises
4. What sale is not subject to zero-rating?
a. Sale to a senior citizen
b. Sale to a registered export trader
c. Sale to a bonded manufacturing warehouse of an export trader
d. Sale to an export processing zone
5. Which is not a constructive export?
a. Direct export to a foreign country
b. Sale to ecozones
c. Sales to diplomatic missions
d. Sales to export-oriented enterprises
6. Which is non-vatable?
a. Sales to a domestic shipping company
b. Sales to an international carrier
 c. Sale of goods to a B01-registered manufacturer which exports 80% of its
annual production
d. Sales to senior citizens
7. Statement 1: The export of VAT-exempt goods is subject to zero-rated VAT.
Statement 2: The domestic sale of VAT-exempt goods is subject 12% VAT.

Which is incorrect?
a. Statement 1
b. Statement 2
c. Both statements
d. Neither statement
8. Which is subject to a zero-rated VAT?
a. Sale of fruits and vegetable to an embassy personnel with VEIC
b. Sale of fruits and vegetables to senior citizens
c. Sale of fruits and vegetables to persons with disability
d. Sales of any goods to the government
9. What is the requirement for zero-rating of sales to BOI-registered enterprises?
a. At least 70% of production must be exported
b. More than 70% of production must be exported
c. 100% of production must be exported
d. More than 100% of production must be exported
10. What is the requirement for zero-rating of sales to a PEZA-registered enterprise?
a. The goods must be actually imported
b. Export sales must exceed 70% of annual production
c. Production must be 100% exported
d. None
11. What is the requirement for zero-rating of sales to an export-oriented enterprise?
a. The goods must be actually imported
b. Export sales must exceed 70% of annual production
c. At least 70% of production must be exported
d. Production must be 100% exported
12. Which is not subject to zero-rating?
a. Sale under the internal export program of the government
b. Export of automobiles to a local export-oriented enterprise
c. Sale of goods to an international transport operator
d. Sale to the USAID
13. Which is correct with constructive export?
a. Must be paid for in acceptable foreign currencies
b. Must be actually exported
c. Must be sold to a non-resident
d. None of these
14. 14. Which of the following is not subject to zero-rated VAT?
a. Sales to diplomatic missions
b. Sale of gold to the BSP
c. Export sales paid for in the local currency
d. All of these
 15. Prior BIR application for effective zero-rating is not required for
a. direct export to a foreign country.
b. sales to tax exempt persons.
c. sales to international air transport operations.
d. sales to an export-oriented enterprise.
16. Which of the following may not qualify as export sale?
a. Export by an export producer
b. Export by an export producer to another export producer
c. Sale to an export trader
d. None of these
17. Which is not a constructive export?
a. Sale to a bonded manufacturing warehouse of an export-oriented
enterprise
b. Sale to export processing zones
c. Sales to diplomatic missions
d. Sale to a foreign customer abroad
18. A non-large taxpayer shall file the application for effective zero-rating with the
a. Regional director where the taxpayer is registered
b. Revenue district officer having jurisdiction over their principal place of
business
c. Audit Information, Tax Exemption and Incentive Division
d. International Tax Affairs Division
19. An approved application for effective zero-rating is given
a. a retrospective effect.
b. a prospective effect.
c. A and B
d. no effect.
20. An approved application for zero-rating is valid for
a. one quarter only.
b. 2 years
c. 3 years.
d. 5 years.

Multiple Choice - Theory: Part 2

1. The sale of services to the following cannot qualify for zero-rating
a. Sale to a resident person doing business in the Philippines
b. Sale to a non-resident person engaged in business abroad
c. Sale to a non-resident not engaged in business abroad
d. Sale to a resident export-oriented enterprise
2. Statement 1: Services to non-residents are always subject to zero-rated VAT if rendered
abroad.
Statement 2: Services to residents may be subject to zero-rating if paid for in acceptable
foreign currencies.

Which is incorrect?
a. Statement 1
 b. Statement 2
c. Both statements
d. Neither statement
3. Which is correct?
a. All service rendered in the custom's territory is subject to the 12% VAT.
b. Service rendered to an ecozone entity is subject to 12% VAT:
c. Service rendered abroad is subject to 0% VAT.
d. Service rendered abroad is exempt from any business tax.
4. Which is subject to zero-rating?
Customer Place rendered Amount.
a. Resident alien Philippines € 150,000
b. Non-resident foreign corp. Philippines Ş 10,000
c. Non-resident alien Abroad P 1,000,000
d. Non-resident citizen Abroad ¥ 2,000,000

5. Which is not required in the zero-rating of services rendered to a non-resident?

a. The services must be performed in the Philippines
b. The non-resident alien must be a resident in the Philippines at the time the
services were rendered
c. The services must be paid in acceptable foreign currencies
d. The payment must be accounted for under the rules and regulations of the BSP
6. Sale of services to this entity is subject to the 12% VAT.
a. Development Bank of the Philippines
b. International Rice Research Institute
c. Philippine National Red Cross
d. Philippine Amusement and Gaming Corporation
7. Which is not subject to zero-rating?
a. Services to an export-oriented enterprise
b. Sale of services to a BOI-registered enterprise
c. Sale of services to PEZA locators
d. Sale of services to embassies with VEC
8. To which of the following is a sale not subject to zero-rated VAT?
a. Philippine Amusement and Gaming Corporation
b. Philippine National Red Cross
c. Ecozone entities
d. Government agencies
9. Which is not subject to zero-rating?
a. Sale to a domestic air carrier on its international operations
b. Sale to a domestic sea carrier on its domestic operations
c. Sale to an international air carrier
d. Sale to an international sea carrier
10. Which is incorrect with effectively zero-rated sales?
a. The sale must be rendered in the Philippines
b. The sale must be rendered to a person with indirect tax exemption
c. The sale need not be paid for in acceptable foreign currencies
d. The sale must be made by a VAT-exempt person 00E9d
 11. Which is incorrect with foreign currency-denominated sales?
a. The goods must be destined for consumption abroad
b. Title to the goods must pass to the buyer outside Philippine territory
c. The sale must be paid for in acceptable foreign currency
d. The remittance of the proceeds of the sale must be accounted for under Central
bank rules
12. Which is subject to zero-rating?
a. Outgoing transport of passengers by an international carrier
b. Outgoing transport of mails, cargoes or baggage by an international carrier
c. Outgoing transport of passengers, cargoes, excess baggage or mails by a domestic
carrier
d. Incoming transport of passengers, cargoes, excess baggage or mails by a domestic
carrier
13. Which of these services is subject to zero-rating?
a. Incoming transport by an international sea carrier
b. Incoming transport by a domestic sea carrier
c. Incoming transport by a domestic air carrier
d. None of these
14. Which of these entities is subject to zero-rating on the sale of renewable sources of
energy?
a. Generation companies
b. Transmission companies
c. Distribution companies
d. All of these
21. Which of the following power generation plants is not qualified to a zero-rating
treatment on the sale of electricity?
a. Geothermal power plant
b. Hydro power plant
c. Solar power plant
d. Coal power plant

Multiple-Choice - Problems 1
1. A business payer reported the following sale during a period:

Domestic sales P 200,000

Deemed sales 100,000
Export sales 300.000
Total P 600,000
Compute the zero-rated sales assuming the seller is respectively a VAT taxpayer and a non-
VAT taxpayer?
a. P600,000; PO
b. P 300,000; PO
c. P 600,000; P 300,000
d. P 300,000; P 300,000
2. A VAT-registered export trader purchased and sold an equipment. The details of the
purchase and sale are as follows:
 Export sales P 400,000
Purchases 200,000
Input VAT 12,000

Compute the gross income for taxation purposes.

a. P188,000
b. P200,000
c. P212,000
d. P224,000
3. For a taxpayer subject to a 30% tax rate, compute respectively the tax benefits of a
P60,000 input VAT deduction and a P40,000 input VAT credit.
a. P60,000; P40,000
b. P18,000; P40,000
c. P60,000; P12,000
d. P18,000; P12,000
4. A Philippine company exported goods for Ş140,000 to a non-resident customer. The
payment; however, was not inwardly remitted. The same was remitted to its
home office abroad.

Which is correct?
a. The sale is a zero-rated sale.
b. The sale is an exempt sale.
c. The sale is subject to 12% VAT.
d. The sale is subject to 3% percentage tax.
5. A VAT-registered taxpayer made the following sales:

Sales destination Terms Payment

China FOB destination Ş 10,000
Malaysia FOB destination P 450,000
Hong Kong FOB shipping point ¥ 800,000
Philippines FOB shipping point P 300,000

The applicable exchange rate to the Peso was Ş1:P42 and ¥1:P0.50.

Compute the total zero-rated sales.

a. P420,000
b. P820,000
c. P1,270,000
d. P1,570,000
6. Compute the output VAT.
a. P0
b. P36,000
c. P54,000
d. P90,000
7. An exporter entered into the following transactions during the month:
 Type of transaction Amount Unsold portion
Export sales P 1,000,000 -
Export sales Ş 100,000 -
60-day consignment abroad Ş 50,000 40%

Compute the zero-rated sales.

a. P0
b. P 4,250,000
c. P6,100,000
d. P5,525,000
8. Export Co. Made the following export and foreign consignment:

Type of transaction Amount

Export sales 1 P 1,000,000
Export sales 2 Ş 80,000
Consignment 1 Ş 50,000
Consignment 2 Ş 10,000

Export sales 2 pertains to goods owned by another entity where Export Co. Was granted
10% export commission. Consignment 1 was sold by foreign consignees during the
month. Consignment 2 remained unsold 75 days as of the end of the current month. The
applicable exchange rate is P43:Ş1.

Compute the total zero-rated sales or receipts.

a. P2.494,000
b. P2,924,000
c. P3,494,000
d. P6,590,000
9. A PEZA locator sold scraps to a domestic business for Ş12,000. Which is correct?
a. The sales is subject to zero-rated VAT.
b. The sales is subject to the regular 12% VAT.
c. The sales is exempt from VAT.
d. The sales is subject to VAT on importation to the domestic business.
10. Which is an export-oriented enterprise in 2018?
2017 2018
Production Export cost Production Export cost
Exporter cost of sale cost of sale
a. ABC Co. P 200 M P 120 M P 400 M P 300 M
b. BCD Co. P 400 M P 280 M P 500 M P 350 M
c. CDE Co. P 150 M P 108 M P 180 M P 126 M
d. DEF Co. P 250 M P 125 M P 300 M P 300 M

Multiple Choice – Problem 2

1. Johnny Company, a maintenance contractor, had the following receipts from the
following clients in June 2019:
 Receipts from Development Bank of the Philippines P 1,000,000
Receipts from Oceania, an international carrier 1,200,000
Receipts from International Rice Research Institute 800,000

Compute the total zero-rated sales or receipts.

a. P 0
b. P 800,000
c. P 2,000,000
d. P 3,000,000
2. A BSP assay report on a sale of gold nuggets disclose the following:

Gold content (850 x P 1,800/gram) P 1,530,000

Silver content (250 x P 38/gram) 9,500
Total P 1,539,500

What is the total vatable sales and the output VAT?

a. P 1,539,500 : P 184,740
b. P 1,539,500 : P 1,140
c. P 9,500 : P 1,140
d. P 1,530,000 : P 183,600
3. A non-VAT taxpayer had the following sales during the month:

Direct export sales Ş 20,000

Domestic sales P 250,000

Assuming the exchange rate is P43.20:Ş1, compute the zero-rated sales.

a. P 0
b. P 86,400
c. P 250,000
d. P 336,400
4. Carefree, a security service provider, had the following receipts during the month:

Receipts from clients inside PEZA P 3,000,000

Receipts from clients in the customs territory:
- from the government agencies and GOCCs 1,000,000
- From the Asian Development Bank 1,200,000
- from non-profit clients 1,500,000
- from private clients 2,000,000

What is the total amount of zero-rated sales?

a. P 3,000,000
b. P 4,000,000
c. P 4,200,000
d. P 5,200,000
5. A VAT-registered service provider had the following receipts from services rendered in
the Philippines in February 2018:

Paid in foreign currencies (Peso equivalent)

Services rendered to non-residents P 500,000
Services rendered to residents 400,000

Paid for in the local currency

Services rendered to non-residents P 800,000
Services rendered to residents 1,200,000
Services rendered to IRRI 200,000

What is the total zero-rated sale?

a. P 400,000
b. P 500,000
c. P 700,000
d. P 900,000
6. Legazpi Corporation had the following sales in the March 2020:

Sales to an export-oriented enterprise P 2,000,000

Sales to a BOI-registered enterprise 3,000,000

Assuming that the new VAT refund system is already in place, compute the total
effectively zero-rated sales.
a. P 0
b. P3,000,000
c. P 3,800,000
d. P 5,000,000
7. A domestic enterprise made the following sales:

Sale to diplomatic missions P 2,000,000

Sale to an ecozone registered enterprise Ş 50,000

Conversion rate – P42.00: $1.

Compute the zero-rated sales.

a. P 0
b. P 2,000,000
c. P 2,100,000
d. P 4,100,000
8. DrimPhil Enterprise, a VAT taxpayer, sold the following to various exporters in July
2018:

Sales to BOI-registered entity with domestic sales P 2,000,000

Sales to BOI-registered entity with no domestic sales 2,500,000
Sales to export-oriented enterprise (with 60% export last year) 1,000,000
 Sales to export-oriented enterprise (with 90% export last year) 1,500,000
Total P 7,000,000

Assuming that the BIR and DOF has not yet fully implemented the new VAT refund
system, compute the zero-rated system.
a. P 1,500,000
b. P 2,500,000
c. P 4,000,000
d. P 5,000,000
9. A PEZA locator made the following sales to entities within the custom territories:

Sale of goods to a Philippine firm P 4,000,000

Sale of scrap materials to a Philippine firm $ 100,000

Forex rate : P43.00: $1.

What is the zero-rated sales?

a. P 0
b. P 4,000,000
c. P 4,300,000
d. P 8,3000,000
10. An electric cooperative sold the following during the month:

Sale of electricity from renewable sources of energy P 2,000,000

Sale of electricity generated from coal and natural gas 1,000,000

What is the zero-rated sale of electric cooperative?

a. P 0
b. P 1,000,000
c. P 2,000,000
d. P 3,000,000