Bustax Chapter 8 PDF

ZERO RATED SALES VS EXEMPT SALES
Summary: Table of comparison

VAT exempt sales Zero-rated sales
Output VAT No output VAT No output VAT

Input VAT treatment Deductible against gross income Creditable or refundable
Extent of tax relief Partial relief Full relief
ZERO-RATED SALES
There are two types of zero-rated sales of goods:
1) Export Sales
2) 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 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)*
subj to 12% VAT:
R.A P780,000
Visiting P420,000
= 1,200,000
*domestic consumption are subject to VAT even if they are NR and

even paid foreign currencies.
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.*
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
ZERO-RATING STATUS
TRAIN LAW
The zero rating of sales was vetoed by the President thereby creating the impression
that the locators will be subject to 12% VAT.
Since the TRAIN law, did not repeal Section 8 of the RA 7916, The Special Economic
Zone Act, the sale to PEZA locators will still be subject to zero-rated until a contrary
law or regulation is passed.
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 of these entities is a foreign consumption rather than a domestic
consumption; hence, these are subject to zero-rated 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 granted indirect tax exemption under special laws:

1) Asian Development Bank (ABD)
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 contracts
5) Embassies, qualified employees and dependents – subject to reciprocity rule
6) Philippine National Red Cross
7) Philippine Amusement and Gaming Corporation
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.
An approved application shall be given retrospective 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 application for zero rating?

Taxpayers shall file their application with the Audit Information, Tax Exemption and
Incentives Division (AITEID) under the Assessment service. For large taxpayers,
applications shall be filed with the Large Taxpayer Audit and Investigation Divisions 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
diplomas indirect tax exemption shall likewise be conferred the same treatment
on their embassies or diplomas in the Philippines. Countries granting indirect tax
exemption to Philippine embassies and personnel are listed by the DFA.
Qualified foreign embassies and their qualified personnel and qualified dependents
of the latter are issued VAT Exemption Certificates (VEC) or VAT Exemption
Identification Cards (VEIC).
VAT taxpayers selling to foreign embassies, personnel or their dependents with VEC
or VEIC shall be entitled to the benefit of zero-rating.*
PREVIOUSLY ZERO-RATED SALES

1. Foreign currency denominated sales
2. Sales under the internal export program
3. Sales to Boy Scout of the Philippines]
4. Sale of gold to BSP – now exempt
ZERO-RATED SALES OF SERVICES
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 carriers 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
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 outside service not is limited only to project studies, information services,
and engineering and architectural designs. Term 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*
EFFECTIVELY ZERO-RATED SALES OF SERVICES
The local sale of services to a person or entity who was granted indirect tax
exemption under special laws or international agreements shall likewise be
subjected to 0% VAT.*
Value-Added Tax (VAT) Exemption Identification Card (VEIC)
SERVICES RENDERED TO PERSONS ENGAGED IN INTERNATIONAL SHIPPING OR AIR

TRANSPORT OPERATION, 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.*
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 constitutes
services rendered abroad to non- residents. This is a foreign consumption exempt
from VAT.
Domestic Carrier:
Outgoing flights - subject to zero-rated VAT. Incoming flights – exempt from VAT.
International Carrier:
Outgoing flights - exempt from VAT Incoming flights – exempt from VAT
If outgoing transport of mails, cargoes or excess baggage SPT 3%, not 0% VAT.
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.
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. *zero rated
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 *middleman *not zero rated
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. ex. PELCO *not zero rated
Distribution companies and transmission companies are just pass-through entities.

SALE OF POWER OR FUEL GENERATED THROUGH RENEWABLE SOURCES OF ENERGY
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.*
ENHANCED VAT REFUND SYSTEM

The Department of Finance shall establish 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.
Official, 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 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,
manufacturing goods for an enterprise whose export sales exceed 70% of total
annual production.
Sale to an export-oriented enterprise

Any enterprise whose export sales exceed 70% of the total annual production of the
preceding taxable year shall be considered an export-oriented enterprise. A
certification to this effect is issued by the pertinent government agency.
EXCEED 70% = ZERO RATED
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 goods 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 EO 226:
1. The Philippine FOB value of export products exported 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
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 gods, properties or services to a BOI-registered manufacturer or
producer
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.

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ZERO RATED SALES VS EXEMPT SALES

Summary: Table of comparison

Output VAT No output VAT No output VAT

*domestic consumption are subject to VAT even if they are NR and

Export commission and consignment

Examples of Philippine Ecozones

Goods, supplies, equipment and fuel sold to persons engaged in international

EFFECTIVELY ZERO-RATED SALES

Examples of entities granted indirect tax exemption under special laws:

Requirement for effective zero-rating

Where to file application for zero rating?

THE VAT RECIPROCITY EXEMPTION ON EMBASSIES AND THEIR PERSONNEL

PREVIOUSLY ZERO-RATED SALES

SALES OF SERVICES TO NON-RESIDENTS

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

Value-Added Tax (VAT) Exemption Identification Card (VEIC)

SERVICES RENDERED TO PERSONS ENGAGED IN INTERNATIONAL SHIPPING OR AIR

TRANSPORT OF PASSENGERS AND CARGO BY DOMESTIC AIR OR SEA CARRIERS

SALE OF POWER OR FUEL GENERATED THROUGH RENEWABLE SOURCES OF ENERGY

Types of businesses in the electricity business:

c) Distribution companies – refer to persons or entities including a distribution

Distribution companies and transmission companies are just pass-through entities.

SERVICES RENDERED TO ECOZONES OR TOURISM ENTERPRISE ZONES

ENHANCED VAT REFUND SYSTEM

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

Sale to an export-oriented enterprise

Sale to export-oriented enterprise

Considered export sales under EO 226 and other special laws

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

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