COLLEGE OF ACCOUNTANCY

C-AE25 BUSINESS TAXATION

First Semester AY 2023-2024

A. Course Code & Title : C-AE25 BUSINESS TAXATION

B. Module No. & Title : Module 7 – Exempt VAT and Zero-rated VAT
C. Time Frame (Weeks/Hours) : 1 week (3 hours)

D. Overview

This module expounds on the details of Output VAT consisting of Zero-rated VAT and Exempt
from VAT.

E. Desired Learning Outcomes

After studying this module, students should be able to:
a. Determine which transactions are exempt from VAT; and
b. Determine which transactions are zero-rated.

F. Values Integration
In studying this module, it is hoped that you will be able to develop and manifest the following UA Core
Value/s:

✓ Servant Leadership
✓ Integrity
✓ Excellence
✓ Service Orientation
✓ Teamwork
✓ Obedience
✓ Open Communication

G. Interaction/Collaboration
You will be engaging in activities that would make use of:

✓ Google Forms
✓ Group Chat
✓ Other tools _______________

H. Content/Discussion

Review:
Generally, VAT payable is computed by subtracting input VAT from output VAT. There are certain cases
wherein some sales are either exempt or subject to VAT but at zero percent.

VAT-Exempt versus Zero-Rated

In VAT Exempt transactions, the business is not allowed to claim input or input tax credit. In the first
place, there is no output tax to net it off with because the transaction is already exempt. The input tax
is treated as an expense or part of the base amount.

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 COLLEGE OF ACCOUNTANCY
C-AE25 BUSINESS TAXATION
First Semester AY 2023-2024

In a zero-rated sale, there is an output VAT, although it is set at zero percent (0%). Therefore, output
VAT will also be zero and consequently, VAT payable will be negative because input VAT will be allowed
as a deduction against output VAT.

VAT-Exempt Sales of goods, properties, and Services

Exempt sales are exempt consumption of goods or services from domestic sellers. These are not
subjected to VAT and percentage tax.

The following Sale of Goods and Properties are exempt from VAT:

1. Sale of essential goods to senior Citizens and PWD’s.

These include drugs, vaccines, and food for special medical purposes, vitamins and mineral
supplements and accessories and equipment by or for senior citizens, casket or urn.

2. Sale of exempt goods

a. Sales of Agricultural and Marine products in their original state.
b. Fertilizers, seeds, seedlings and fingerlings, fish, prawn, livestock, and poultry feeds,
including ingredients in the manufacture of finished feeds.
c. Books, newspapers or magazines,
d. Medicines prescribed for diabetes and hypertension
e. Passenger or Cargo vessels and aircraft.

Take note of the term “original state”.

Original state means those which were not processed or undergone simple process or preparation or
preservation for the market including advanced technological means of packaging.

3. Sale of Goods by cooperatives- with the exemption of electric cooperatives, transactions with
members-only are exempt from VAT.

4. Sale of residential properties

a. sale of real properties utilized for low-cost housing

b. sale of real properties utilized for social housing
c. sale of residential lot valued at Php1,919,500 and below, and other residential dwelling
valued at Php3,199,200 and below.

residential dwelling - means house and lot

5. Export sales by non-VAT persons

6. Treaty-exempt sale of goods- goods that are included as exempt goods in an international
agreement entered into by the Philippines.

7. Tax-free exchange of properties- for example- the exchange of properties 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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 COLLEGE OF ACCOUNTANCY
C-AE25 BUSINESS TAXATION
First Semester AY 2023-2024

8. Sale of gold to the Bangko Sentral ng Pilipinas

Exempt Sale of Services

1. Educational services rendered by private educational institutions duly accredited by DepEd, CHED, and
TESDA and those rendered by the government educational institutions

2. Services of employees under the employee-employer relationship

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

4. Lease of residential units with monthly rental of Php15,000 or less.

“Regardless of total rent, the threshold is per unit.”

5. Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered in good
standing by the CDA.

6. Medical, dental, hospital, and veterinary services except those rendered by professionals and sale of
drugs by hospital drugstore.

7. Homeowners’ association or condominium dues - fees assessed by homeowners for the use and
maintenance of common areas in subdivisions and condominiums.

8. lease of passenger or cargo vessels and aircraft, including engine equipment, and spare parts thereof
for domestic and international transport operations.

9. Treaty-exempt services- same for treaty exempt goods except these include services.

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

11. International Carriers.

12. Printers or publishers

“Refers to printing or publication of books, newspaper or magazines not devoted principally for
publication of paid advertisements”

13. Sale of basic essential services to senior citizens and PWD’s such as restaurants, hotels, and recreation
centers.

Note: Download RR 4-2021 and RR 8-2021 at www.bir.gov.ph

Zero-Rated Sales

Faculty: LIGAYA T. DAVID Page 3

 COLLEGE OF ACCOUNTANCY
C-AE25 BUSINESS TAXATION
First Semester AY 2023-2024

Zero-rated sales are basically foreign consumption, export sales, or foreign currency-denominated sales and
sales conferred with an export sale treatment by special laws and international agreement to which the
Philippines is a signatory.

Effectively, the zero-rated sale will mean there will be a negative VAT payable because the taxpayer can claim
input VAT.

The negative VAT payable will be treated as a tax credit or tax refund.

Examples of zero-rated sales of Goods

1. Export sales
These include direct export, sale to ecozones and tourism enterprise zones, and sale of goods or
properties, supplies, and equipment and fuel to persons engaged in international shipping or international air
transport operations.

2. Effectively zero-rated sales

Example:
ABC Company has the following exports during the year:
Export destination Terms payment

Hong Kong f.o.b. destination $100,000

Thailand f.o.b. destination P450,000

Japan f.o.b. shipping point 800,000 yen

Indonesia free alongside vessel $10,000 worth in goods

Explanation: if ABC is a non-VAT taxpayer, exempt, otherwise:

Export to Hong Kong zero-rated

Export to Thailand Exempt

Export to Japan zero-rated

Export to Indonesia zero-rated

Examples of ECO zones

1. Philippine Economic Zone Authority or PEZA
2. Cagayan Special Economic Zone
3. Clark Special Economic Zone
4. Clark Freeport Zone

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 COLLEGE OF ACCOUNTANCY
C-AE25 BUSINESS TAXATION
First Semester AY 2023-2024

Zero-rated Sale of Services

1. Sale of services to non-residents

2. Effectively zero-rated sale 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 be subjected to 0% VAT. Examples of entities that are granted
indirect exemptions are:
a. Asian Development Bank
b. International Rice Research Institute
c. United Nations
d. United States Agency for International Development
e. Philippine National Red Cross
f. Philippine Amusement and Gaming Corporation

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 are 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

Note: Download RR 9-2021 and RR 15-2021 at www.bir.gov.ph

Progress check:

Indicate whether the following are exempt or not (VATable)

1 Vegetables
exempt
2 Cooked rice
Vat
3 Sun dried Bananas
exempt
4 Boiled eggs
exempt
5 Fresh Fruits
exempt
6 Lumber Vat
7 Chicken manure
exempt
8 Cheese
rat
9 Tea
exempt

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 COLLEGE OF ACCOUNTANCY
C-AE25 BUSINESS TAXATION
First Semester AY 2023-2024

10 Cotton
rat

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 COLLEGE OF ACCOUNTANCY
C-AE25 BUSINESS TAXATION
First Semester AY 2023-2024

True or False

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 cost or expenses.
4. Input taxes on zero-rated sales are claimable as a tax credit or tax refund
5. As a rule, effectively zero-rated sales require a prior application with the BIR for zero-rating

Evaluation:

1. A sale of goods had the following details of sales and collections during the month

Receivables, beginning 200,000

Gross Sales 400,000

Collections 500,000

Receivables, ending 100,000

Required: how much is subject to business tax

2. In the preceding number how much is subject to business tax if the seller is a seller of services.
3. A farm supply dealer made the following sales during the month

Fertilizers 45,000

Hybrid corn and rice seeds 100,000

Pesticides 150,000

Water pumps and hand tractors 500,000

Total 795,000
Required: How much is subject to business tax?

4. in the preceding number, how much is the output VAT if the seller is VAT registered
5. ABC, a VAT registered company, produces canned sardines and sells excess fish if unprocessed. The
following are data from January 2020:

Canned sardines 850,000

Excess fish 130,000

Dried fish 40,000

Total sales

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 COLLEGE OF ACCOUNTANCY
C-AE25 BUSINESS TAXATION
First Semester AY 2023-2024

Required:
1. How much is exempt sales? ______________
2. How much is output VAT? _______________

6. An exporter entered into the following transaction during the month:

Type of transaction amount unsold portion

Export sales Php1,000,000 0

Export sales $100,000 0

60-day consignment abroad $50,000 40%

Exchange rate: 1$ to Php42.50

Required: How much are the zero-rated sales?

7. A domestic enterprise made the following sales:

Sale to export-oriented enterprise 2 million

sale to BOI- registered enterprise 3 million

Required: how much is the zero-rated sale?

8. A domestic enterprise made the following sales:

Sale to diplomatic missions 2 million

sale to ecozone registered enterprise $3 million (forex 1:42)

Required: how much is the multinational zero-rated sale?

I. References

TRAIN LAW

CREATE ACT

Aduana, N. L. (2016). Simplified and Procedural Handbook on Transfer and Business Taxation.

Ampongan, O. E. (2015). CPA Review in Taxation. Iriga City, Philippines: Ampongan, Omar Erasmo G.

Ampongan, O. E. (2016). Transfer, Business & local Taxation. Iriga City, Philippines: Ampongan, Omar Erasmo
G.

Ballada, W., & Ballada, S. (2015). Transfer and Business Taxation. Manila City, Philippines: Domdane.

Faculty: LIGAYA T. DAVID Page 8

 COLLEGE OF ACCOUNTANCY
C-AE25 BUSINESS TAXATION
First Semester AY 2023-2024

Banggawan, R. B. (2019). Business and Transfer Taxation Laws Principles and Applications. Baguio City,
Philippines: Real Excellence Publishing.

De Leon, H. S., & De Leon, H. M. (2016). The Law on Transfer and Business Taxation (with Illustrations,
Problems, and Solutions). Manila City, Philippines: REX Book Store.

Duncano, D. A. (2017). Easy Guide to taxation for Entrepreneurs. Mandaluyong City: Anvil Publishing, Inc.

Duncano, D. A. (2016). National Internal Revenue Code of 1997 As Amended Updated with Annotations.
Mandaluyong City, Philippines: Anvil Publishing, Inc.

Reyes, V. D. (2013). Philippine Business and Transfer Taxes. Philippines: Philippine Business and Transfer
Taxes.

Reyes, V. D. (2015). Taxation: Law and Accounting for the CPA Reviewees and the Bar Reviewer.

Tabag, E. D., & Garcia, E. J. (2017). Transfer and Business Taxation. Quezon City, Philippines: MaxCor
Publishing House, Inc.

Valencia, E. G., & Roxas, G. F. (2013-2014). Transfer and Business Taxation Principles and Laws with Accounting
Principles. Baguio City, Philippines: Valencia Educational Supply.

Module prepared by : MR. ROCKY D. BAYAS

Reviewed/updated by : LIGAYA T. DAVID

Faculty: LIGAYA T. DAVID Page 9