CH 8

What is Value Added Tax (VAT)?

VAT is a tax added to the price of goods, services, or property at every stage of selling. It also applies to imports into the Philippines, even for personal use.

When is a sale subject to VAT?

Sales made in the normal course of business are subject to VAT unless the law says they are exempt.

What happens if a sale is VAT-exempt?

No VAT is charged, and the seller cannot claim input VAT (no tax credit on purchases).

If a transaction is VAT-exempt, can it still be taxed?

Yes, it may still be subject to percentage tax unless it is fully exempt from business taxes.

What does VAT-exempt mean?

It means the sale is not subject to output VAT and the seller cannot claim input VAT.

What are VAT-exempt transactions under the Tax Code?

These are specific sales listed in the law (A to DD) that are not subject to VAT.

What are agricultural and marine food products in their original state?

These are natural food products that have not been changed much, like rice, fish, meat, fruits, and vegetables.

Are processed agricultural products still considered “original state”?

Yes, if only simple processes are done like freezing, drying, salting, roasting, or packaging.

Give examples of agricultural products in original state.

Rice, corn grits, raw sugar, molasses, copra.

Give examples of marine products in original state.

Fish, shrimp, prawns, oysters, clams.

Give examples of livestock.

Cows, pigs, goats, sheep, rabbits.

Give examples of poultry.

Chicken, ducks, geese, turkey.

Are pets and race animals included as livestock?

No, pets, race horses, and fighting cocks are not included.

What kind of sugar is VAT-exempt?

Only raw sugar (muscovado sugar) is VAT-exempt.

What is raw sugar?

Sugar with less than 99.5% sucrose content.

What is refined sugar?

Sugar with 99.5% or more sucrose content (not VAT-exempt).

Is sale of marinated fish VAT-exempt?

No, because it is no longer in its original state.

Why are tax exemptions strictly interpreted?

Because exemptions must be clearly stated in the law, otherwise they are not allowed.

Are fertilizers VAT-exempt?

Yes.

Are seeds, seedlings, and fish feeds VAT-exempt?

Yes, including ingredients used to make feeds.

What are specialty feeds?

Feeds for pets, race horses, fighting cocks, and zoo animals (these are NOT VAT-exempt).

When are feed ingredients VAT-exempt?

Only if proven not fit for human consumption and certified by the FDA.

Are personal effects brought by returning Filipinos VAT-exempt?

Yes, if they are also exempt from customs duties.

Are tools and household items of immigrants VAT-exempt?

Yes, if for personal use and not for sale, and approved by Customs.

Are vehicles and machinery included in VAT exemption for immigrants?

No, they are subject to taxes.

Are services subject to percentage tax also subject to VAT?

No, they are VAT-exempt.

Who are agricultural contract growers?

People who raise animals or produce agricultural goods for others.

Are agricultural contract growing services VAT-exempt?

Yes, but only if related to growing activities.

Are independent processing services VAT-exempt?

No, they are subject to VAT if not part of growing.

Are medical and hospital services VAT-exempt?

Yes, including laboratory services.

Are medicines sold by hospitals VAT-exempt?

Only if included in hospital bills (for in-patients).

Are medicines sold to out-patients VAT-exempt?

No, they are subject to VAT.

Are HMOs VAT-exempt?

No, unless they directly provide medical services.

Are professional services VAT-exempt?

No, if earnings exceed ₱3,000,000, they are subject to VAT.

Who are considered professional practitioners?

Doctors, CPAs, insurance agents, and others who pass government exams.

Are educational services VAT-exempt?

Yes, if provided by accredited schools or government institutions.

Are online courses VAT-exempt?

Yes, if offered by accredited institutions.

Are unaccredited seminars VAT-exempt?

No, they are subject to VAT.

Are employee services VAT-exempt?

Yes, services under employer-employee relationship are exempt.

Are services by RHQs of multinational companies VAT-exempt?

Yes, if they do not earn income in the Philippines.

What transactions are VAT-exempt under special laws?

Transactions under international agreements or laws like PAGCOR, Senior Citizen Act, PWD Act, etc.

Are sales by agricultural cooperatives VAT-exempt?

Yes, especially if selling their own produce.

Are cooperative sales to non-members VAT-exempt?

Yes, if it is their own produce in original state.

Are cooperative sales of products not their own VAT-exempt?

No, those may be subject to VAT.

Are lending activities of cooperatives VAT-exempt?

Yes, even if the borrower is not a member.

Are non-lending activities of cooperatives VAT-exempt?

No, they are subject to VAT.

Are sales by small cooperatives VAT-exempt?

Yes, if each member’s share does not exceed ₱15,000.

Are export sales by non-VAT registered persons VAT-exempt?

Yes.

Are export sales by VAT-registered persons taxed?

Yes, but at 0% VAT.

What happens to input VAT in zero-rated sales?

It can be refunded or used as tax credit.

Can non-VAT exporters claim input VAT?

No, it becomes part of cost or expense.

When is sale of real property VAT-exempt?

If not used in business, or if it qualifies under specific exemptions like socialized housing.

Is sale of socialized housing VAT-exempt?

Yes.

What is the VAT threshold for residential property (2024)?

₱3,600,000 and below is VAT-exempt.

Is sale of parking lot VAT-exempt?

No, it is always subject to VAT.

When is real property subject to VAT?

If used in business and exceeds exemption thresholds.

What tax applies if property is not used in business?

Capital Gains Tax, not VAT.

Is lease of residential units VAT-exempt?

Yes, if rent is ₱15,000 or below per month.

What if rent is above ₱15,000 but income is below ₱3M?

It is exempt from VAT but subject to percentage tax.

What if rent income exceeds ₱3M?

It becomes subject to VAT.

Are commercial unit leases VAT-exempt?

No, generally subject to VAT.

What is considered a residential unit?

Apartments, houses, dorms, and rooms used for living.

What is a “unit” in lease?

It can be a room, apartment, house, or bed space depending on the setup.

What transactions involving books and reading materials are VAT-exempt?

Sale, importation, printing, and publication of books, newspapers, magazines, journals, and similar educational materials covered by UNESCO rules.

Are digital books and online reading materials VAT-exempt?

No, electronic versions like e-books, online libraries, CDs, and software are NOT VAT-exempt.

When are books and publications NOT VAT-exempt?

When they mainly contain paid advertisements or do not follow rules of the National Book Development Board.

Are printing services like brochures and bookbinding VAT-exempt?

No, those are subject to VAT.

Is transport of passengers by international carriers VAT-exempt?

Yes, transport of passengers by international carriers is VAT-exempt.

Is transport of cargo by international carriers VAT-exempt?

Yes, but it is subject to percentage tax (Common Carrier’s Tax).

Is transport of passengers within the Philippines by land subject to VAT?

No, it is subject to percentage tax instead.

Is transport of passengers by air or sea within the Philippines subject to VAT?

Yes, generally subject to VAT.

Is transport of passengers from Philippines to abroad subject to VAT?

No, it is subject to 0% VAT.

Is transport of cargo from Philippines to abroad subject to VAT?

No, it is subject to 0% VAT.

Are vessels and aircraft for transport VAT-exempt?

Yes, sale, importation, or lease of vessels and aircraft (including parts) for transport is VAT-exempt.

Are fuel and supplies for international transport VAT-exempt?

Yes, if used only for international transport.

What happens if fuel or supplies are used for other purposes?

That portion becomes subject to 12% VAT.

Are services of banks and financial intermediaries VAT-exempt?

Yes, they are VAT-exempt but subject to percentage tax.

Are digital financial services included in VAT exemption?

Yes, services done through digital platforms are also included.

Are sales to senior citizens and PWDs VAT-exempt?

Yes, sale or lease of goods and services to them is VAT-exempt.

Is transfer of property under Section 40(C)(2) VAT-exempt?

Yes, it is VAT-exempt.

Are association dues of homeowners VAT-exempt?

Yes, if collected only to reimburse expenses (not for profit).

Is sale of gold to the Bangko Sentral ng Pilipinas VAT-exempt?

Yes, starting January 1, 2018.

Are prescription medicines VAT-exempt?

Yes, if included in the DOH-approved list and for specific diseases like diabetes, cancer, etc.

Are COVID-related medical goods VAT-exempt?

Only from 2021 to 2023; starting 2024, they are no longer VAT-exempt.

When are small businesses VAT-exempt?

If annual gross sales do not exceed ₱3,000,000.

What is included in computing ₱3,000,000 threshold?

Total sales from goods and services, including advance payments, minus discounts and returns.

What are export-oriented enterprises under VAT exemption?

Businesses where at least 70% of sales are exports.

What importations are VAT-exempt for export enterprises?

Goods directly needed for export activities (like admin, marketing, security services).

What does “directly attributable” mean in VAT exemption?

Goods and services that are necessary and related to export operations.

What is the formula for computing VAT payable under EOPTA?

Output VAT minus Input VAT minus creditable VAT = VAT payable.

What is Output VAT?

VAT collected from customers on sales.

What is Input VAT?

VAT paid on purchases of goods and services.

What can be deducted from Output VAT?

Input VAT, VAT withheld by government, VAT withheld on nonresident payments, and VAT on uncollected receivables.

What accounting method is used under EOPTA?

Accrual basis (record sales when earned, not when collected).

What is “gross sales” under EOPTA?

Total amount the buyer pays or promises to pay, excluding VAT and reimbursements.

What is included in gross sales?

Contract price, service fees, rentals, royalties, and materials used in services.

What is NOT included in gross sales?

VAT and reimbursements that do not benefit the seller.

When should invoices be issued for long-term contracts?

In the month when the service or lease is provided.

What deductions are allowed from gross sales?

Sales returns, allowances, and discounts given at the time of sale.

Are future conditional discounts allowed as deductions?

No, only discounts given at the time of sale are allowed.