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Chap 4 - tax

Bs accountancy (Mindanao State University)

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EXEMPT SALES OF GOODS, PROPERTIES AND SERVICES

EXEMPT SALES
Exempt sales are exempt consumption of goods or services from domestic sellers. Exempt sales are
not subject to VAT and percentage tax.

Hence,
1. VAT taxpayers making exempt sale of goods, properties, or services shall not bill any output
VAT to their customers because the sale is not subject to VAT.
2. A non-VAT person making exempt sales shall not be subject to the 3%percentage tax on the
sales or receipts.

Exempt Sales of Goods or Properties

1. Sale of goods to senior citizens and persons with disability
This covers sale of essential goods only.

2. Sales of exempt goods

a. Agricultural and marine food products in their original state
b. Fertilizers, seed, seedlings and fingerlings, fish, prawn, livestock and poultry feeds,
including ingredients used in the manufacture of finished feeds.
c. Books, newspaper, magazines
d. Medicines prescribed for diabetes and hypertension
e. Passenger or cargo vessels and aircrafts.

3. Sales of goods by cooperatives

Sales by agricultural cooperatives duly registered in good standing with the Cooperative
Development Authority to their members, as well as sales 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.

Sales by non-agricultural, non-electric and non-credit cooperatives duly registered and in good
standing with the CDA.

4. Sales of residential properties

a. Sale of real properties utilized for low-cost housing
b. Sale of real properties utilized for socialized housing
c. Sale of residential lot valued at P1,919,500 and below and other residential dwelling
valued P3,199,200 and below

5. Export sales by non-VAT persons

6. Treaty-exempt sales goods

Sales of goods exempt under international agreement to which the Philippines is a signatory or
under special laws.

7. Tax-free exchange of property

The exchange of properties in pursuant to a plan of merger or consolidation or the transfer of
property that resulted in the initial acquisition of corporate control.

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8. Sale of gold to the Bangko Sentral ng Pilipinas (BSP)

The sale of gold to the BSP is now a VAT-exempt transaction which is previously considered a
zero-rated sale.

(Mnemonic: SECRET Tax-free Gold)

Exempt Sales of services

1. Schools
Educational services rendered by private educational institutional institution duly accredited by
the Department of Education, the Commission on Higher Education and Technical Education
and Skills Development Authority and those rendered by government educational institutions

2. Employees
Services performed by individuals in pursuant to an employer and employee relationship.

3. Agricultural contract growers and millers

Services by agricultural contract growers and milling for others of palay into rice, corn into
corn grits, and sugar cane into raw sugar

4. Residential leasing
Lease of residential unit with monthly rental not exceeding P15,000.

5. Cooperative services
Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered
and in good standing with the Cooperative Development Authority.

6. Hospitals
Medical, dental, hospitals, and veterinary services except those rendered by professionals and
sales of drugs by hospital drug store.

7. Home owner’s association or condominium corporations

Association dues, membership fees, and other assessments and charges collected by
homeowner’s associations and condominium corporations

8. Lease passenger or Cargo vessels and aircrafts, including engine, equipment and
spare parts thereof for domestic or international transport operations

9. Treaty-exempt services
Transactions which are exempt under international agreement to which the Philippines is a
signatory or under special laws

10. Regional area headquarters

Services rendered by regional or area headquarters established in the Philippines by
multinational corporations which acts as supervisory, communication, and coordinating centres
for their affiliates, subsidiaries or branches in the Asia Pacific Region and do not or derive
income from the Philippines.

11. International carriers

Transport of passengers by international carriers (RA 10378)

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12. Printers or publishers

Sale, printing or publication of books and newspaper, magazine, review, or bulletin which
appears at regular intervals with fixed prices for subscription and sale and which is not
devoted principally to the publication of paid advertisements

13. Senior citizens and persons with disability

Sales of basic essential services to senior citizens and persons with disability by service
establishments such as:
a. Restaurant
b. Hotels and lodging establishments
c. Recreation centres, such as theatre, cinema houses, concert halls, carnivals and such
other places of leisure or amusement

(Mnemonic: SEARCH2 VA TRIPS)

Other exempt sales of goods or services

1. Sales of goods or services taxed by special laws
a. Sales of goods or services by Ecozone locators
b. Sales of amusement service by theatres and cinemas

These are subject to tax by special laws are not subject to national business taxes such as VAT
or percentage tax.

2. Sales by persons not engaged in business

The sale goods, real properties or services by persons not engaged in business is not subject
to business taxes.

3. Sale of assets held for use

The sale of assets held for use such as supplies and items of property, plant and equipment
such as: land and building, machineries, office furniture and fixture, and office equipment is
normally exempt from business tax. For VAT-registered taxpayers, however, the sale of these
ordinary assets is considered “incidental transactions” subject to VAT.

NOTE TO READERS
The classification of the business taxpayer must first be determined.
1. If the he is a seller of goods or properties, refer to the list of exempt sales of goods or
properties to see if he is exempt. If not, he is taxable.
2. If he is a seller of service, refer to the list of exempt sales of services to see if he is exempt, if
not, he is taxable.

Tax exemption is highly qualified and disfavoured; hence, deep understanding on the extent and
limits of exemption is highly essential.

EXEMPT SALES OF GOODS OR PROPERTIES, IN DETAIL

(SECRET Tax-free Gold)

SALE OF GOODS TO SENIOR CITIZENS AND PERSONS WITH DISABILITY

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The sale of essential goods to senior citizens (SC) and persons with disability (PWD) such as the
following:

Sale of Goods SC PWD

a. Drugs, vaccines and foods for special medical purpose ✔ ✔
b. Vitamins and mineral supplements ✔ X
c. Accessories and equipment by or for senior citizens, such as eye
glasses, hearing aid, dentures, prosthetics, artificial bone ✔ X
replacements, walkers, crutches, wheelchairs, quad canes,
geriatric diapers, and other essential medical supplies,
accessories and equipment
d. Casket or urn ✔ ✔

Aside from VAT exemption on the sales, senior citizens and PWDs are also legally mandated to be
given 20% discount on the sales of these goods.

Illustration
Special Care Store, is a business catering for the needs of seniors and persons with disabilities. It had
the following sales of goods during the month:

Senior PWDs
citizens
Vitamin supplements P 300,000 P 100,000
Medical drugs 100,000 140,000
Eyes glasses and wheelchairs 80,000 120,000
Household and kitchen supplies 200,000 100,000
Caskets and urn 240,000 120,000
Memorial lot 300,000 200,000

Only the following sales are VAT-exempt:

Senior PWDs
citizens
Vitamin supplements P 300,000 P0
Medical drugs 100,000 140,000
Eyes glasses and wheelchairs 80,000 0
Household and kitchen supplies 0 0
Caskets and urn 240,000 120,000
Memorial lot 0 0
Total P 720,000 P 240,000

Sad to say, medical accessories or equipment and vitamins or mineral supplements are not specifically exempted for
PWDs. Note that the sale of all other goods not specifically included in the enumeration provided by law shall not be
considered exempt notwithstanding that the same are for the exclusive use and enjoyment of SCs or PWDs.

SALE OF EXEMPT GOODS

Agricultural or marine products and inputs

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a. Sale 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;

b. Sale 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 specially feeds;

Sale of Agricultural or Marine Food Products in Original State

The sale of agricultural and marine food products in their original state including those that have
undergone the simple process of preparation or preservation for the market including advanced
technological means of packaging is exempt.

The conditions for exemption to the VAT on importation of agricultural or marine food products in
Chapter 2 likewise apply to the exemption of sales herein from business tax.

Illustration 1: Fruit and vegetable dealer

Mang Pandong owns a meat and fish outlet in the Baguio City public market. He had the following
sales during the month:

Sales of live hogs P120,000

Sale of frozen carcass and meat 240,000
Sales of fresh fishes 150,000
Sales of dried and/or smoked fish 80,000

Mang Pandong is not subject to business tax on all of these sales.

Illustration 2: Farmer
Agricorp is engaged in the farming and horticulture business. It earned the following during a
quarter:
Sale of palay and rice P 100,000
Sales of banana mushrooms 100,000
Sale of firewood and charcoal 150,000
Sale of orchids, flowers, and bonsai 250,000

 Palay, rice, banana, and mushrooms are exempt agricultural food products.
 The sale of firewood, charcoal orchids, flowers, and bonsai are vatable because they are non-
food agricultural products.

Note: It must be emphasized again that the term “vatable” means that the sale is subject to VAT if the taxpayer is VAT-
registered or a VAT registrable person but to a 3% percentage tax if the taxpayer is non-VAT taxpayer.

Illustration 3: Poultry operator

The following relates to the sales of Mr. Birdie, a poultry operator;
Sales of chicken P 400,000
Sale of one-day old chicks 120,000
Sales of eggs for “penoy” and “balot” 180,000
Sales of chicken manure 100,000

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All of these are exempt from the business tax. Obviously, chicken manure is not intended for human
consumption but it is actually a vegetable fertilizer similar to guano; thus, it is also exempt.

Illustration 4: Pet Shop

Raymund, a veterinarian, operates a pet shop. The following were his sales and receipts during the
month:
Sales of pets P 600,000
Sales of animal vitamins, medicines, and feeds 200,000
Receipts from veterinary services 200,000

All of these are subject to business tax. Feeds for pets are vatable. Note also that services provide by
professionals are vatable.

The meaning of “in original state”

As discussed in Chapter 2, the phrase “in original state” means unprocessed. Agricultural or marine
food products are still considered in original state even if they have undergone the simple process of
preparation, preservation, or packaging for the market including advanced technological means of
packaging.

The use of heat and the employment of complex processes such as chemical treatment or curing in a
solution is normally considered state altering.

Interestingly, however, marinating or the process of mixing with ingredients or flavourings is now
considered by the BIR as state altering. The BIR considered a marinated, frozen and vacuum-
packed boneless milkfish (bangus) as processed. (BIR Ruling No. 348-2011) To back their
position, the BIR cited the absence of marinating in the list of simple process noting that the claim of
exemption is considered against the taxpayer.

The term “in original state” may be a contentions concept in practice. Due to this, it is always
suggested to taxpayers to secure BIR ruling on the proper tax treatment of their agricultural or
marine food products.

Readers may consider revisiting the examples of agricultural products considered in original state in
Chapter 2.

Illustration 1
Monte Rey had the following sales in his store:
Sales of meat cuts P 400,000
Sales of hotdogs 100,000
Cup noodles 10,000
Canned sardines and beans 40,000

The sale of meat cuts is exempt. The sales of hotdogs, cup noodles, and canned goods which are
processed foods are vatable.

Illustration 2
Juan, a dealer of sugar made P400,000 worth of muscovado sugar and P600,000 worth of refined
sugar.

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The sale of muscovado sugar which considered raw cane sugar is exempt from business tax. Only the
sale of refined sugar is subject to business tax.

Sale of certain farm or fishery Inputs

Exemption is qualified and limited:
 For plants or fruit cultivation – fertilizers, seeds and seedlings
 For animal husbandry – livestock, feeds and ingredients for livestock and poultry feeds.
 For fishery operations – fingerlings, fish and prawn

Illustration
A farm supply dealer sold the following items:
a. Tractors and water pumps
b. Seeds
c. Organic and inorganic fertilizers
d. Pesticides and herbicides

The sales of seeds and fertilizers are exempt. The sale of farm or fishery equipment such as tractors,
water pumps and other farming inputs such as pesticides and herbicides are vatable by virtue of the
lack of express legal exemption.

Livestock/poultry feeds or ingredients in the manufacture of feeds

The sale of livestock or poultry feeds and ingredients used in the manufacture of finished feeds is
exempt.

However, the sale of ingredients which may also be used for the production or processing of food for
human consumption is vatable.

Thus, for the sale (including importation) of livestock and poultry feeds or ingredients used in the
manufacture of finished feeds to be exempt from VAT, it must be proven that the same is unfit for
human consumption or that the ingredient cannot be used for the production of food for human
consumption as certified by the Food and Drug Administration (FDA) (RMC55-2014, June 17,2014).

Books, newspapers and magazines

The sales of books, newspapers and magazines are exempt from VAT. Remember the criteria for
exemption of magazines under VAT-exempt importation. The same criteria apply here.

Illustration
Jet Bookstore sold the following goods:
Novels P 100,000
Textbooks 300,000
School supplies and notebooks 200,000
Office supplies 180,000
Advertising magazines 20,000

Only the sale of novels and textbooks (i.e., books) are VAT-exempt. The sale of office supplies,
school supplies other than books and advertising magazines are vatable.

Medicines for diabetes, high cholesterol or hypertension

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Starting January 1, 2019, the TRAIN law provides for the for the VAT-exemption on the sale of
medicines prescribed for diabetes, high cholesterol or hypertension, as determined by the
Department of Health (DOH), by manufacturers, distributors, wholesalers and retailers.

Examples;
1. Insulins and analogues
2. Blood glucose lowering drugs, such as biguanides, sulfonylureas, alpha glucosidase inhibitors,
thiazolidines, dipeptidyl peptidase 4 inhibitors, glucagon-like peptide-1 analogues and sodium-
glucose co-transporter 2 inhibitors; and others

Illustration
St. Joseph Medical Store made the following sales during the quarter:

Senior citizens PWDs Others

Vitamin & minerals P 300,000 P 200,000 P 500,000
Insulin 200,000 100,000 400,000
Other medicines 100,000 140,000 300,000
Medical monitoring devices 50,000 20,000 150,000
Medical therapy equipment 80,000 10,000 210,000
Total P 730,000 P 290,000 P 1,560,000

The following are exempt:

Senior citizens PWDs Others
Vitamin & minerals P 300,000 P0 P0
Insulin 200,000 100,000 400,000
Other medicines 100,000 140,000 0
Medical monitoring devices 50,000 0 0
Medical therapy equipment 80,000 0 0
Total P 730,000 P 240,000 P 400,000

Note that the medicines prescribed for diabetes, high cholesterol or hypertension is exempt
regardless of the buyer. The exemption on medical accessories or equipment is limited to senior
citizens.

Passenger or Cargo Vessels and Aircrafts

The sale of passenger or cargo vessels and aircrafts including engines, equipment, and spare parts
thereof for domestic or international transport operations is exempt from VAT.

For ease of discussion, we classify these as exempt goods because, just like other exempt goods,
their VAT exemption applies both on their importation and sales. Readers must note, however, that
the import of medicine for diabetes, high cholesterol or hypertension has no legal exemption on
importation.

SALE OF COOPERATIVES
With the exception of electric cooperatives, cooperatives of any kind are exempt from business tax if
they transact business only with members. Cooperatives which transact business with non- members
are subject to business tax on their sales to non-members if their accumulated reserves exceed P
10,000,000.

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However, regardless of the type of cooperative, their transactions from unrelated activities are
subject to business taxes just like other entities not considered as business.

Illustration 1: Cooperative transacting business only with members

A credit cooperative which transacts business only with members reported the following sales during
the month:
Related activities Unrelated activities
Sales from members P 200,000 P 100,000
Sales from non-members - 20,000
Total P 200,000 P 120,000

The cooperative shall be exempt from business tax on the sales from related activities. However, it
shall be subject to business tax on the P120,000 sales from unrelated activities.

Illustration 2: Cooperative transacting business with non-members

A farming cooperative which transacts business with members and non-members had the following
sales during the month:
Related activities Unrelated activities
Sales from members P 200,000 P 100,000
Sales from non-members 300,000 20,000
Total P 500,000 P 120,000

If the accumulated reserves of the cooperative do not exceed P 10,000,000, the total P 500,000 sales
from related activities is exempt from business tax, but the P 120,000 sales from unrelated activities
is taxable.

If the accumulated reserves of the cooperative exceed P 10,000,000, only the P 200,000 sales from
the members from related activities is exempt from the business tax while all the other sales are
taxable.

SALE OF REAL PROPERTIES UNDER CERTAIN CONDITIONS

Categories of exempt transactions on real properties

a. By a person not engaged in the realty business (non-dealer)
b. By a person engaged in the realty business which complies with statutory price ceilings
(dealer)

Sale by non-dealers of realty

Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course
of business is exempt from the business tax. The reason is that the seller is not engaged in the
business of selling properties.

However, the sale of properties held for use classified as ordinary asset by VAT taxpayers is an
incidental transaction subject to VAT.

The VAT exemption applies to:

a. Real property classified as capital assets of VAT taxpayers
b. Any real properties of non-VAT taxpayers.
c. Any real properties of persons not engaged in business

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Illustration 1
Dr. Atoei, a VAT- registered medical doctor, sold his principal residence for P 12,000,000 and his
medical clinic building for 50,000,000 to purchase a bigger building for his medical practice.

The sale of the principal residence being a capital asset is not subject VAT even if Dr. Atoei is a VAT-
registered taxpayer. The sale of his medical clinic building is subject to VAT as it is an ordinary asset
to his medical practice.

Illustration 2
Mr. Lee Mado, is a non-VAT registered lawyer. He disposed of his law office building for 8,000,000 to
pursue his dream of establishing a beauty parlor.

The sale of Mr. Mado of his office building, despite being an ordinary asset, is not subject to VAT
because he is non-VAT taxpayer.

Illustration 3
Mr. Kannaway, a farmer, sold his rice farm land for P 4,000,000 to finance his acquisition of a fish
pond.

Mr. Kannaway is not engaged in business. His sale of farm land, a capital asset, is not subject to VAT.

Readers must note that the taxation of the sale of properties held for use is absent in the case of non-VAT taxpayers. In
law, the percentage tax is limited to the sale of goods or services in the course of business to the exclusion incidental
transactions. The sale of ordinary assets held for use is not subject to percentage tax.

Sale by realty dealer, developer or lessor

The sale by business engaged in the real estate business is normally subject to business tax.
However, their sales of the residential properties, being essential goods, are exempt if they comply
with the statutory or regulatory price ceilings:
1. Sale of real properties utilized for socialized housing units:
a. House and lot package – P450,000
b. Residential lots only – P180,000 (RMC-2015)
(Per HUDCC Memorandum Circular No. 1 s. 201, October 16, 2013)

2. Sale of real properties utilized for low-cost housing wherein the price ceiling per unit is
P750,000

3. Sale of residential lot valued at P 1,919,500/unit and below

4. Sale of residential dwelling valued at P3,199,200/unit and below

Socialized housing – a housing program and project covering houses and 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 on interest payments and such other benefits under the Urban Development and Housing Act of
1992, RA735 and RA 8763.

Socialized housing shall also refer to projects intended for the underprivileged and homeless wherein the housing
package selling price is within the lower interest rate under the Unified Home Lending Program (UHLP) or any equivalent
housing program of the Government, the private or non-government organizations.

Low-cost housing – Refers to housing projects intended for the homeless low-income family beneficiaries, undertaken
by the Government or private developers, which may either be a subdivision or a condominium registered and licensed by
the Housing and Land Use Regulatory Board/Housing (HLURB) under BP Blg. 220, PD No. 957 or any other similar law,

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wherein the selling price is within the selling price per unit of P750,000 under RA 7279 and other laws such as RA 7935
and RA 8763.

Sales of residential properties within the price ceilings are considered reasonable human necessity
and hence exempt. Those sold above the threshold are not considered necessities due to high price
and are thus vatable.

Note to Readers:
The TRAIN law appears to have reinstated the old thresholds for residential lot and residential dwelling at P1,500,000 and
P2,500,000 respectively. However, RR 13-2018 clarified that the threshold to be used shall be those thresholds as
adjusted in 2011 (i.e., P1,919,500 and P3,199,200).

Under Sec. 4 of the NIRC, as amended, the power to interpret provisions of the tax code and other tax laws is under the
exclusive and original jurisdiction of the CIR, subject to review by the Secretary of Finance. RR 13-2018 is the official
position of the BIR and DOF. Hence, it must be followed regardless of any contrary academic or “expert” opinion.

Yes, the law is superior to regulations but, based on the principle of checks and balance, only the courts can invalidate or
nullify a regulation, it is not by our own judgement or actuation. The P1,919,500 and P3,199,200 thresholds are the rules
to follow in the contemporary time.

Illustration 1
ABC Realty Corporation sold a residential lot at a price of P1,800,000.

This sale is exempt from the business tax the sale conforms to the P1,919,500 sales price ceiling on
sales of residential lot under the law.

Illustration 2
ABC Realty Corporation sold a house and lot at a price of P3,200,000.

The sale is subject to business tax (i.e., VAT) since the sale is above the P3,199,200 price ceiling on
the sale of residential dwellings. Note that because of their volume of sales, realtors are usually
registered as VAT taxpayers.

Illustration 3
Don Pedro, an employee, sold a residential lot for P2,000,000.

The sale is exempt from the business tax even if made above the P1,919,500 price limit because Don
Pedro is not regularly engaged in the realty business.

The residential lot is a capital asset exempt from VAT. It must be emphasized that the sale of real
property classified as a capital asset is subject to the 6% capital gains tax and will not be subject to
the business tax.

Illustration 4
The National Housing Authority, a government agency, sells “low-cost housing units” with a price of P
1,000,000 per unit to qualified applicants.

The sale of the housing shall be subject to tax despite being described as “low-cost housing units”
because it does not comply with the price limit set by law.

Sale of adjacent lots

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For the purpose of the ceiling, the sale of adjacent residential lots, house and lots, and other
residential dwellings within the 12-month period in favour of one buyer shall be treated as one.
(RR13-2012) This rule is intended to counter unwarranted partition of the sale into several deeds to
evade the business tax.

Illustration
A realty developer was supposed to sell a 100m2 lot at a price of P2,000,000. However, the lump sum
sale of the lot would make it subject to business tax. The developer proposed to sell the first 50 m2
lot for P1,000,000 then later the other 50 m2 for another P1,000,000 so that the sale of the lot would
be tax free.

This tax minimization technique is no longer allowed. The sale of the adjacent lots to the same buyer
shall be aggregated for proposes of the threshold. Since the aggregate selling price of the lots
exceeds the price ceiling, both sales are subject to business tax (i.e., VAT). The VAT will be
recognized on the second sale.

This aggregation rule does not apply to sale of parking lots which may or may not be included in the
sale of condominium units because parking lots are not residential in nature. The sale of parking
lot is vatable.

Illustration
Cevar Realty sold a residential house and lot for P1,800,000 together with an adjacent parking lot
separately priced for P200,000 to a buyer.

The P200,000 sales of the parking lot are vatable. The P1.8M sale of the residential lot is exempt.
The aggregation rules does not apply.

EXPORT SALES OF NON-VAT TAXPAYERS

The export sales of non-VAT taxpayers are exempt from percentage tax. Under the law, however, the
export sale of VAT taxpayers is taxable to the value added tax but a 0% rate.

Illustration 1
Ina Bangunan is a non-VAT registered corporate producer of high value corps and agricultural
products for export and domestic sales. It had the following sales during the quarter:
Domestic sales Export sales Total
Sales of Banana P 400,000 P 1,200,000 P 1,600,000
Sales of Kalinga oranges 500,000 1,800,000 2,300,000
Sale of wine and vinegars 40,000 400,000 440,000
Total P 940,000 P 3,400,000 P 4,340,000

The following sales are exempt:

Domestic sales Export sales Total
Sales of Banana P 400,000 P 1,200,000 P 1,600,000
Sales of Kalinga oranges 500,000 1,800,000 2,300,000
Sale of wine and vinegars - 400,000 400,000
Total P 940,000 P 3,400,000 P 4,340,000

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Remember that the domestic sales of agricultural products in original state is an exempt. The export
sales by non-VAT taxpayer are also exempt. The domestic sales of processed agricultural product
such as the wine and vinegar are subject to 3% percentage tax.

Illustration 2
Assume the same information in illustration 1, except that Ina Bangunan is a VAT-registered taxpayer
but did not opt to subjects its exempt sale to VAT.

The following sales are exempt:

Domestic sales Export sales Total
Sales of Banana P 400,000 P - P 400,000
Sales of Kalinga oranges 500,000 - 500,000
Sale of wine and vinegars - - -
Total P 900,000 P - 900,000

The P 40,000 domestic sales of vinegar is subject to 12% VAT. The P3,400,000 total export sales are
foreign consumption subject to 0% VAT.

Illustration 3
Assume the same information in Illustration 1, except that Ina Bangunan is a VAT-registered
taxpayer and opted to subject his exempt sale to VAT.

This is no exempt sales. The P940,000 total domestic sales would be subject to 12% VAT while the
total P 3,400,000 export sale is the subject to 0% VAT.

SALES EXEMPT UNDER TREATIES, INTERNATIONAL AGREEMENTS OR SPECIAL LAWS

There are entities that are granted VAT exemption under special laws or international agreements to
which the Philippines is signatory. Sales to exempt entities are exempt from VAT. (Sec. 109 (K), NIRC
as amended) Likewise, they are also exempt from the scope of the 3% percentage tax. (Sec. 109(V),
Ibid)

Examples of exempt parties under special laws or international laws or international agreements:
1. PEZA registered enterprises
2. Asian Development Bank (ADB)
3. International Rice Research Institute (IRRI)
4. Philippine National Red Cross
5. Embassies of foreign governments
6. The Philippines Amusement and Gaming Corporation

Under the NIRC as amended, sales to these persons are listed under the VAT-exempt transactions.
However, for VAT taxpayers, this VAT exemption is favourably affected by means of a zero-rating
treatment.

Illustration 1
Ureshi Company, a non-VAT taxpayer, supplies the Asian Development bank with office supplies.
During the quarter, ATB made total deliveries of supplies worth P500,000.

Based on the Agreement Between the Asian Development Bank and the Government of the Republic
of the Philippines, ADB’s property and its operations and transactions shall be exempt from all

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taxation and any obligation for the payment, withholding or collection of taxes or duty. Thus, the
sale of Ureshi Company to ADB is exempt from the percentage tax.

The percentage tax under Sec. 109 (BB) or the NIRC, as amended, applies to sales or lease of goods
or properties or the performances of services other than those enumerated therein. The enumeration
includes “transactions which are exempt under international agreements to which the Philippines is a
signatory or under special law”.

Illustration 2
Assuming the same information in the previous illustration, except that Ureshi is a VAT-registered
taxpayer.

The P500,000 sales to ADB will be subject to zero-rated VAT.

TAX-FREE EXCHANGE OF PROPERTY

The TRAIN law added tax-free exchange of property to the list of VAT-exempt transactions, thus the
following exchange of properties are not vatable:

1. Exchange of properties by a corporation in pursuant to a plan of merger or consolidation.

2. Exchange of properties by a person, alone or together with others not exceeding four, which
resulted to the acquisition of control.

Illustration 1
Pursuant to a plan of merger between Zues Company, a VAT registered taxpayer, and T-Rex
Company shall surrender the following assets:

Cash P 500,000
Receivable 800,000
Inventories 1,800,000
Property, plant and equipment 3,000,000
Patent 1,500,000

Zeus Company shall receive 2,000 shares of stocks of T-Rex Company which it plans to distribute to
its shareholders after which it shall cease to exist and operate as a legal entity.

The transfer of all of Zeus Company’s assets including the ordinary assets inventory and property,
plant and equipment shall not be subject to VAT. This exchange will not be subject to the rules on
“deemed sales” which will be discussed in later chapters.

Assuming Zeus is a non-VAT taxpayer, the same shall not be subject to percentage tax. Non-VAT
taxpayers are not subject to percentage tax on the sale as the tax applies only to sales of goods or
services in the ordinary course of business.

Illustration 2
Miss Vanessa, a VAT-registered taxpayer exchange his real estate inventories for the stocks of a
start-up corporation. As a result of this exchange, she obtained 51% voting stake in said corporation.

The transfer of real estate inventory, an ordinary asset, in this case is not subject to VAT since this is
a tax-free exchange of property.

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Assuming Vanessa is a non-VAT registered taxpayer, the transfer of the real estate inventory shall
not be subject to percentage tax since percentage tax applies only to sales of goods or services in the
ordinary course of business, excluding incidental transactions.

SALE OF GOLD TO THE BANGKO SENTRAL NG PILIPINAS (BSP)

The TRAIN law reclassified the sale of gold to the BSP from zero-rated to exempt. Under RA 11256,
the tax applies both to registered small scale miners and registered gold traders.

Illustration 1
Mang Joseph, a non-VAT registered miner, sold to the BSP his gold production of 2,000 grams of raw
gold nuggets with specific gravity of 14.9.

The final BSP assay results in the following pay-out before refining charges:
Final assay Price/gram Price
Gold (74%) 1,480 grams P2,140 P3,167,200
Silver (18%) 360 grams 53 19,080
Trace elements (8%) 160 grams - -
Total 2,000 grams P,186,280

The P3,167,200 sale of gold is exempt. The P19,080 sale of silver is subject to 3% percentage tax.
The BSP shall withhold the 3% percentage tax as final tax.

Illustration 2
Assuming the same information in illustration 1 except that Mang Joseph is a VAT-registered miner.

The P3,167,200 shall still be exempt. The 19,080 sale of silver is subject to 12% VAT. The BSP shall
withhold final VAT on the selling price of the silver. The final withholding by government agencies
and GOCCs on their purchases will be discussed in the future chapters.

Illustration 3
Boss Edong is gold trader. He purchases gold and silver from electronic scrap metal refiners and
small-scale miners. He refined the gold and sold them to the following:

Jewellers BSP Total

Sales of gold P200,000 P800,000 P1,200,000
Sales of silver 100,000 40,000 140,000
Total P300,000 P840,000 P1,340,000

Under RA 11256, the gold sold by traders shall be presumed purchased from small-scale miners.

Whether VAT-registered or non-VAT registered, Boss Edong shall be exempt from VAT or percentage
tax on the P800,000 sales of gold to the BSP. The sales of gold to jewellers and the sale of silver is
vatable. It is subject to 12% VAT if Boss Edong is a VAT taxpayer and to a 3% percentage tax if he is
a non-VAT taxpayer.

The small scale mining industry

RA11256 is a classic example of the taxation power being used as a power to build. Before RA11256, sale of gold to the
BSP is subject to then 2% excise tax (now 4%) and a 5% withholding tax. This taxation resulted in the exodus of gold

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productions from the small scale mines to the black market which is effectively untaxed. The government is at the losing
end, no tax for the BIR and no gold for the National Treasury.

The address this, Congress lifted the income tax, excise tax and business taxes altogether so that gold will again enter
the coffers of the National Treasury. It is a win-win solution. There is no tax for the BIR but there is gold in the treasury
which help strengthen our Gross International Reserve.

EXEMPT SALES OF SERVICES, IN DETAIL

(SEARCH2 VA TRIPS)

EDUCATIONAL SERVICES OF SCHOOLS

Educational services rendered by:

1. Private educational institution duly accredited by the:
a. Department of Education
b. Commission on Higher Education
c. TESDA
2. Government educational institutions

Considering that education is a necessity, the law exempt school fees from business taxes. This
exemption cover government and private schools proprietary or non-profit, so long as they have the
required accreditation from the government.

The exemption does not cover services rendered by educational institutions that are not accredited
by Dep-Ed, CHED or TESDA, such as:
1. Seminars
2. In service trainings
3. Review classes
4. Other similar services.

Illustration 1
Hebron College, a private college accredited by CHED, reported P2,000,000 receipts from tuition fees
during the month. Hebron also reported P100,000 rental income from the building being rented by
commercial tenants.

The tuition fee is exempt. P100,000 rental is an income from unrelated trade to education; hence,
subject to business tax.

Illustration 2
Topnotch Pampanga, an accredited continuing professional education provider, provides professional
seminars, professional reviews and certification programs for graduates and professionals

The receipts of Topnotch Pampanga from the foregoing services is subject to business tax. It is
subject to VAT is it is a VAT-registered taxpayer and 3% percentage tax if non-VAT taxpayer.

EMPLOYMENT
Services performed by individuals in pursuant to an employer and employee relationship

The provision of services to an employer under an employer-employee relationship is not a business.

Hence, it is exempt from business taxes.

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Professional, practitioners, consultants, talents, TV artist, brokers and agents are not employees;
hence, they are subject to business taxes.

Illustration 1
Aljon, an audit practitioner and a part-time teacher earned the following:

Compensation income P1,800,000

Receipts from audit clients 1,200,000

The compensation income is exempt from business tax as employment is not business. Only the
P1,200,000 receipt from professional fees is subject to business tax because the exercise of a
profession is considered business.

Illustration 2
Dr. Almor Ranas arranged with hospital to accept his clients. He entertains clients in the hospital. The
hospital shall bill his professional fees in the name of the hospital. The hospital repays Dr. Ranas his
professional fees less hospital accommodation charges.

The professional fees are not compensation income and are therefore subject to business tax.
Furthermore, medical practitioners are not allowed to claim exemption under the cloak of the hospital
service exemption.

Director’s Fees
Previously under RMC 34-08, directors who are not employees of a corporation are considered
engaged in business and hence, subject to business taxes.

The BIR made a reversal of the rule in RMC 77-2008 declaring that director’s fees are not earned in
the course of business pointing, among others, that director’s fees do not arise from an undertaking
that is intended to be pursued in the course of business.

According to RMC 77-2008, engagement in business or trade involves the following:

a. Continuity of activity on a going concern basis
b. Objective to earn unrestricted amount of pecuniary gains or profits
c. Unrested offering of the goods or services to any customer or client

AGRICULTURAL CONTRACT GROWERS AND MILLERS

Services by agricultural contract growers and milling for others of palay into rice, corn into grits, and
sugar cane into raw sugar

Agricultural contract growers refer to persons producing for other poultry, livestock or other
agricultural and marine for products in their original state.

Illustration 1
John was contracted by Purepork, a distributor of pork and chicken meat products, raise hogs and
chicken. John shall be paid a fixed contract price for the undertaking.

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John is an agricultural grower. The contract price received by John from pure pork is exempt from
business tax. The sale of Pure pork of its meat products is also exempt from business tax.

Illustration 2
Cordilleran Miling Company offers a variety of milling services ranging from palay, corn, cane to raw
sugar, and gold ores. It had the following receipts during the month:

Palay and corn milling fees P600,000

Sugar milling fees 200,000
Ore ball milling fees 400,000

Only those receipts from milling services for the processing of agricultural produce for ultimate
human consumption are specifically exempted, hence, the receipts from the ball milling of gold ore
are taxable.

It must be noted that the exemption is limited to the services of producing or raising for others and
milling of agricultural or marine food products. Agricultural support services, food processing and
food service enterprises are taxable.

Illustration 1
Horacio Company is a general agricultural contractor. It had the following receipts during the month:

Rice and corn milling fees P170,000

Construction fees for a poultry building 500,000
Installation fee for a biogas plant 300,000
Installation fee for a solar-power plant 200,000
Cultivation fees for rice field preparation 50,000
Installation free for a submersible pump 80,000
Total P1,300,000

Only the rice and corn milling fees is exempt, Horacio Company is not a producer of livestock, poultry
or crops for others. Its receipts from agricultural support services is vatable.

Illustration 2
SA Dressing Company operates a chicken dressing plant whereby chicken of farm producers are
brought, slaughtered, cut and dressed for supermarket sales.

Dressing services on agricultural products even if the residual product is in original state is not
agricultural contract growing or milling; this, it is vatable.

Illustration 3
You Lechon Inc. sells charcoal roasted swine, chicken or ducks offered with different menus in its
dining outlets.

You Lechon is subject to VAT even if the goods sold it sells underwent simple processing. It is a
restaurant classified as a seller of service rather than seller of goods. Restaurants are not one of
those exempt sellers of services under SEARCH2 VA TRIPS.

Illustration 4

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Chooks sells roasted swine chicken and ducks alone without the dining space where customers buy
and leave.

Chooks is not a seller of services but a seller of goods. Since it is selling agricultutal product which
underwent simple processing, it shall be exempt.

RESIDENTAL LEASING

Leasing of residential unit with monthly rental not exceeding P15,000

Residential units – refer to apartments and houses and lots used for residential purposes, and
building or parts or units thereof used as dwelling places such as, dormitories, rooms and bed
spaces, except, motels, motel rooms, hotels, and hotel rooms, lodging houses, inns and pension
houses.

The term unit shall mean:

1. An apartment unit – in the case of apartment
2. A house – in the case of residential houses
3. Per person – In the case of dormitories, boarding houses and beds spaces
4. Per room – in the case of rooms for rent

The apparent purpose of this exemption is to provide tax incentive for keeping the rentals of housing
units low considering that housing is a necessary and natural consumption.

Illustration 1
Cohen Homes is a real property lessor with the following properties and receipts

Per unit rental Annualized rent

Apartment houses P20,000 P480,000
Residential houses 12,500 750,000
Boarding houses 2,000 2,400,000
Total annual rent P3,630,000

The following indicates the taxability of these residential dwellings:

Per unit rental Annualized rent Tax status
Apartment houses P20,000 P480,000 Taxable
Residential houses 12,5000 750,000 Exempt
Boarding houses 2,000 2,400,000 Exempt
3,630,000
The residential units rented for P15,000/month and below are exempt from VAT or percentage tax
regardless of the aggregate annual rental receipts.

The rentals of the apartment houses is vatable but since the aggregate rentals did not exceed the
P3M VAT threshold, Cohen pay 3% percentage tax on this receipt.

Illustration 2
Alpine Residence is a real property lessor with the following properties:
Per unit rental Annualized rent
10 Class A residence P20,000 P 2,400,000

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12 Class B residence 16,000 2,304,000

30 Class C residence 15,000 5,400,000
Total rent P 10,104,000

The class C residence are exempt from business tax. Class A and Class B are above the
15,000/monthly hence, vatable. Since the total receipts from Class A and Class B (P4,704,000),
exceeds the P3M VAT threshold, Alpine Residence shall pay VAT on Class A and Class B receipts

Illustration 3
Gensan Travel Lodge has 200 rooms with average occupancy of twenty-four days a month. Gensan
Travel Lodge charges P2,000 for each day of stay. It earns P320,000 average monthly fees.

Hotels inns, and lodges are not residential dwellings hence subject to business tax. The exemption
limit does not apply to them. Since the projected annual receipt of P3,840,000 (P320,000 x 12)
exceeds the P3,000,000 VAT threshold, Gensan Travel Lodge is subject to VAT.

SALE OF SERVICES BY COOPERATIVES

The gross receipts from sale of services by cooperatives such as lending, marketing or multi-purpose
cooperatives is exempt similar to the rules discussed under sales of goods by cooperatives.

HEALTH OR HOSPITAL SERVICES

Medical, dental, hospital and veterinary services except those rendered by professionals
and sales of drugs by hospital drugstores

The sale of the above services is not subject to business tax. This rules applies to all health services
whether rendered by a private, non-profit or government hospital. Health services rendered by
professional, and the sale of drugs are vatable.

Illustration
Betany Hospital, a private hospital, had the following receipts and sales during a month:

Patient service revenue P10,000,000

In-patient sales 1,000,000
Out-patient sales
 Anti-diabetes and hypertension medicines 800,000
 Other medicines 3,000,000
 Check-up fees 200,000
Laboratory services 2,700,000
Rent income on clinic space leased to doctors 500,000
Total P18,200,000

The following receipts and sales are exempt:

Patient service revenue P10,000,000

In-patient sales 1,000,000
Out-patient sales:
 Anti-diabetes and hypertension medicines 800,000
 Check-up fees 200,000

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Laboratory services 2,700,000

Total exempt receipts P14,700,000

Hospital services including laboratory services are exempt. In-patient revenue refers to the sale of
medicines to confined patients. This is not a sale of goods but rather an essential part of the hospital
medical services, hence exempt.

On the other hand, out-patient sale of medicine or the sale to non-confined clients is a taxable sale of
goods but the sale of medicine prescribed for diabetes and hypertension is an exempt of goods.
Check-up or consultation fees charged by the hospital outpatient client is an exempt sale of hospital
services.

Note that the leasing of clinic space is a sale of service that is not part of the listed exempt sales of
services and hence, vatable.

HOME OWNER’S ASSOCIATION OR CONDOMINIUM CORPORATION

The TRAIN law exempted association dues, membership fees and other assessments and charges
collected by homeowner’s or condominium associations cannot be said to be business. However, if it
is being operated as if it sells its services to its members from which it derives a mark-up and profit,
then it is taxable business.

LEASE OF PASSENGERS OR CARGO VESSELS AND AIRCRAFTS, INCLUDING SPARE PARTS

AND EQUIPMENTS THEREOF
Similar to import and sales, the leasing of vessels and aircrafts including spare parts and equipment
thereof are VAT exempt.

Illustration
DXY Enterprise imports, sells and leases air and water and water crafts. During the quarter, it had
the following transactions:
Import Sales Lease rentals
Yacht P2,000,000 P3,000,000 P500,000
Tanker 20,000,000 25,000,000 800,000
Roll-on roll-off boat 4,000,000 6,000,000 600,000
Fishing boat 2,400,000 3,600,000 300,000
Cargo plane 50,000,000 70,000,000 2,500,000
Private jets 40,000,000 50,000,000 4,000,000

The following indicate the taxation of each of the following transactions:

Import Sales Lease rentals
Yacht vatable vatable vatable
Tanker exempt exempt exempt
Roll-on roll-off boat exempt exempt exempt
Fishing boat vatable vatable vatable
Cargo plane exempt exempt exempt
Private jets vatable vatable vatable

Yacht, fishing boat and private jets are not intended for passenger or cargo transport and hence,
vatable.

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TREATY-EXEMPT SALES OF SERVICES

The receipts from services sold to entities which are exempt under treaties or international
agreements to which the Philippine government is a signatory are exempt. Same rules apply similar
to out discussion on the topic under exempt sales of goods.

REGIONAL OR AREA HEADQUARTER OF A MULTINATIONAL COMPANY

Services rendered by regional or area headquarters established in the Philippines by
multinational corporations which acts as supervisory, communications and coordinating
centers for their affiliates, subsidiaries or branches in the Asia Pacific Region and do not
or derive income from the Philippines

A regional or area headquarters (RAH or RHQ) is an integral part of the multinational corporation. It
is not a separate business or a branch, but an administrative office which does not derive income on
its own; hence, it is not subject to business tax. On the other hand, a regional operating
headquarters is taxable.

Illustration 1
A representative office of Institu Company, a corporation established in the Netherlands, is based in
Baguio City. The office coordinates activities of branches and subsidiaries of Institu Company across
Asia. Institu Company subsidize the Philippine office by transferring P2,000,000 monthly to cover
administrative expenses.

The representative office is exempt since it is not a business. The monthly subsidy from Institu
Company are mere advances or reimbursements for office expenses.

Illustration 2
Assume the same information in the preceding problem, except that the Philippine office is a research
office. Research output are sold by the Philippine office to its affiliates and subsidiaries of Institu in
the Philippines and Asia.

In this case, the Philippine office would be subject to a business tax, sales of services for Philippine
affiliates would be vatable. Sales of services for overseas affiliates would be subject to zero-rated
VAT.

TRANSPORT OF PASSENGERS BY INTERNATIONAL CARRIERS

The receipts from the transport of passengers by international carriers originating from the
Philippines going abroad is now exempt from business tax under RA 10378.

International carriers are air carriers or shipping carriers owned by resident foreign corporations
doing business in the Philippines.

Illustration 1
Singapore Airlines, an international carrier, had the following receipts during a month:
From passengers From carriers Total
Outgoing flights P32,000,000 P7,000,000 P39,000,000
Incoming flights 41,000,000 18,000,000 59,000,000
Total P73,000,000 P25,000,000 P98,000,000

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The P32M receipt from outgoing transport of passengers is exempt. The P7M receipt from outgoing
cargoes, excess baggage, or mails is specifically subject to percentage tax under the NIRC.

The P59M receipt from incoming flights is a foreign consumption. This is exempt from Philippine
business tax because the service is rendered abroad.

Illustration 2
JDC Airlines, a domestic carrier with international operations, reports P20,000,000 receipts from
outgoing flights, P10,000,000 from incoming flights, and P90,000,000 from domestic flights during
the month.

The following summarize the business tax treatment:

1. Receipts from outgoing flights (foreign consumption, service rendered within) – 0% VAT
2. Receipts from incoming flights (foreign consumption, service rendered abroad) – Exempt
3. Receipts from domestic flights (domestic consumption) – 12% VAT

Note that airlines and shipping carriers are subject to VAT because their receipts are normally above
the VAT threshold.

SERVICES OF PRINTERS AND PUBLISHERS

The printing or publication of books and any newspaper, magazine, review, or bulletin
which appear at regular intervals with fixed prices for subscription and sale and which is
not devoted principally to the publication of paid advertisement is exempt.

Illustration 1
Cordillera Courier publishes a weekly newspaper. During the month, it had the following receipts:
Sale of newspapers P 500,000
Fees from advertisements 300,000
Rent from leases of vacant spaces 50,000

Only the sale of newspapers is exempt. Advertisement fees and the rent of its vacant space are
subject to business tax.

Illustration 2
Baguio Printing press reported the following receipts from printing services:
Books P300,000
Newspapers 200,000
Tarpaulins and campaign ads 200,000

The receipts from printing of tarpaulins and campaign ads are subject too business tax. The printing
fees from books and newspapers are exempt.

Illustration 3
Jet bookstore reported the following sales during the month:

Sales of books inventories P400,000

Commission income from book publishers 30,000

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The sale of books is an exempt sales of goods. The service of undertaking to sell books for others for
a fee or commission is not among those exempt sales of services; hence, commission income is
vatable.

SALES OF SERVICE TO SEVIOR CITIZENS AND PERSONS WITH DISABILITY

Senior citizens and PWDs

Senior citizens and person with disability are exempt from VAT on the essential services provided by
the following covered establishment:
1. Lodging establishment, such as apartel, dormitory, motorist hotal, tourism inn, pension house
excluding long-term residency arrangements
2. Hospital and clinic
3. Sports and recreation centers
4. Restaurants such as eating places offering regular or special menus to the public
5. Land air and sea travel
6. Medical, dental, diagnostic and laboratory fees and professional medical fees
7. Funeral or burial services for the burial senior citizens

Illustration 1
A medical doctor had the following clients and gross service fees:
Patients Professional fees Medicine sales
Senior citizens P18,000 P70,000
Person with disability 12,000 40,000
Minor patients 10,000 28,000
Adult patients 24,000 42,000

The following are exempt:

Patients Professional fees Medicine sales
Senior citizens P18,000 P70,000
PWD 12,000 40,000
Total P40,00 P110,000

Illustration 2
TLC Lechon, a non-VAT registered, seller or roasted chicken, decided to add a small space for dine-in
service to cater for customer demand. It had the following receipts and sales for the month:
Patients Dine in receipts Take-out receipts
Senior citizens P8,000 P40,000
PWD 2,000 12,000
Other customers 14,000 240,000

The following are exempt:

Patients Dine in receipts Take-out receipts
Senior citizens P8,000 P40,000
PWD 2,000 12,000
Other customers - 240,000

The original take-out sales are sale of goods not service. Since the goods underwent simple process,
they are exempt.

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The dine in receipts are sales of service not sales of goods hence normally taxable but restaurants
receipts from senior citizens and persons which disability are legally exempted hence non-taxable.
The dine-in receipts from other customers shall be subject to 3% percentage tax since TLC Lechon is
a non-VAT taxpayer.

Illustration 3
A senior citizen presented a senior citizen identification card when paying the funeral expenses of his
deceased grandchild.

The VAT exemption including the senior citizen discount can be claimed for the burial of the senior
citizen. The VAT exemption can only be availed by senior citizens or PWDs but not for or by other
persons.

Illustration 4
A beautiful young lady is presenting a senior citizen identification card for the purchased of food for
herself and her friends.

The VAT exemption privilege is reserved by law only to senior citizens or persons with disabilities.
The sale is vatable.

Is sale to senior citizens and PWDs subject to percentage tax?

With the codification of the exemption of sales of essential goods and services to senior citizens and
PWDs in the list of exempt transactions under Sec. 109 of the NIRC, it is now clear that they are
excluded on the scope of the 3% percentage tax under Sec. 116 thereof.

It must be noted therefore that the sale of essential goods and services to services to senior citizens
and PWDs are no longer subject to VAT and percentage tax.

Recording of sales to senior citizens and PEDs

Aside from the VAT exemption, senior citizens and PWDs are entitled to a 20% special discount on
their purchases from qualified establishment as a deduction against gross income subject to the
regular income tax.

The sale to senior citizens and PWDs is recorded as:

Cash/Receivable XXX
Senior citizens/PWD discount XXX
Sales XXX

Illustration 1
A VAT registered restaurant sold food and beverages totalling P2,240 to a senior citizen who
presented a senior citizen identification card. The senior citizen was accompanied by three other non-
senior citizens.

The amount to be billed shall be computed follows:

Invoice price to senior citizen (P2,240 x ¼) P560
Less: Output VAT to senior citizens (P560 x 12/112) 60
Sales to senior citizens P500
Less: senior citizen discount (20%) x P500) 100

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Net amount due from senior citizen P400

Sales to non-senior citizens (2,240 x ¾) 1,680
Total amount to bill P2,080

The bill shall be presented in the VAT invoice or receipt as follows:

Total sales P2,240

Less: VAT on senior citizens 60
Total sales 2,180
Less: senior citizen discount (this is an expense) 100
Amount due P2,080

Details of the bill shall be presented in the VAT invoice or receipt as:

Vatable sales P 1,500

VAT exempt sales (sales to senior citizen) 500
Output VAT amount (P1,500 x 12%) 180
Total sales P 2,180

Illustration 2
Assuming the same facts except that the restaurant is a non-VAT taxpayer, the amount to be billed
shall be:

Totals sales P2,240

Less: senior citizen discount (2,240 x ¼ x 20%) 112
Amount due P2,128

Senior citizen and PWD engaged in business

It must be noted that senior citizens and PWD are given the tax privilege of discounts and exemption
when they purchase essential goods or services. If senior citizens and PWDs own business, they are,
off course, subject to VAT percentage on their sales or receipts similar to other regular business
taxpayers.

SALES OF GOODS OR SERVICES COVERED OR SERVICE COVERED BY SPECIAL LAWS

Certain sales of services are not subject to national business taxes since they are covered by special
laws, such as the following:
1. Sales by ecozone locators
2. Receipts of proprietors of theaters or cinemas

Ecozone locators
Ecozone locators are subject to a special 5% gross income tax, in lieu of all taxes national or local. As
such, they will not be subject to VAT or percentage tax.

Proprietors of theaters or cinemas

The question of whether or not theaters or cinemas are subject to VAT was laid to rest by the
honourable Supreme Court in CIR vs. SM prime Holding and First Asia Realty Development
Corporation (G.R No. 083505, February 26, 2010). Local government (provides and cities) has the
exclusive power to impose business tax on gross receipts of cinemas or theaters. Theaters or
cinemas are therefore not subject to VAT or percentage tax.

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Note that the lease of motion pictures, films, tapes and disc is not the same as exhibition of motion
pictures of films. This is subject to VAT or percentage tax

Illustration
SM Entertainment Corporation leases films from producers. It leased the film “Ang Probinsyana” from
Coco Martina. It also leased the film “Gangnam” from Oppa Entertainment Corporation in Korea. SM
Entertainment realized P200M from the show of the films nationwide.

SM Entertainment Corporation, an exhibitor of films is subject to local amusement tax in the

provinces or cities where its cinemas are situated. It is not subject to VAT or percentage tax. Coco
Martina is vatable on the lease of its films to SM Entertainment. The lease of the film from Oppa
Entertainment in Korea is an import of service subject to the 12% final withholding VAT.

Note to readers
The details of the rules of the special tax incentives conferred by law to senior citizens, persons with disability and special
tax incentives to economic zone locators including local government taxation will be discussed on our third volume
entitled “Local & Preferential Taxation with Practical Integration”.

Invoicing Requirement for Exempt sales

With respect to VAT-taxpayers, exempt sales of goods or services must be specifically designated as
such by indicating or pre-printing the caption “EXEMPT” on the invoice or receipt.

The failure to comply with this requirement shall make the sale vatable. The sale will be subject to
VAT if the taxpayer is a VAT-registered taxpayer and subject to 3% percentage tax if the person is a
non-VAT-registered taxpayer.

Reference: BUSINESS AND TRANSFER TAXATION 2019 edition by Rex Banggawan CPA
MBA

Note: DO NOT REPRODUCE

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