CHAPTER 4 – EXEMPT SALES OF GOODS,

PROPERTIES, & SERVICES

• LEARNING OBJECTIVES:
1. Master or, at least, familiarize themselves with the list of exempt
sales of goods, properties, or services, and
2. Master the exemption criteria on each type of exempt sales.
 EXEMPT SALES
• Exempt sales are exempt consumption of goods, properties 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 he 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.
Exempt Sales of Goods, Properties, or Services
1. Sale of agricultural and marine food products in their original state.
2. Sale of fertilizers, seeds, seedlings and fingerlings, fish, prawn,
livestock and poultry feeds, including ingredients used in the
manufacture of finished feeds.
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. Educational services rendered by private educational 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.
• Exempt Sales of Goods, Properties, or Services:
5. Services performed by individuals in pursuant to an employer and
employee relationship.
6. Medical, dental, hospitals, and veterinary services except those
rendered by professionals and sales of drugs by a hospital drug
store.
7. Transport of passengers by international carriers (RA10378)
8. 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.
• Exempt Sales of Goods, Properties, or Services:
9. Sales by agricultural cooperatives duly registered in good standing
wit the Cooperative Development Authority (CDU) 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.
10. Gross receipts from lending activities by credit or multi-purpose
cooperatives duly registered and in good standing with the
Cooperative Development Authority.
11. Sales by non-agricultural, non-electric and non-credit cooperatives
duly registered and in good standing with the CDA.
• Exempt Sales of Goods, Properties, or Services:
12. Exempt sales of real properties
1. Sale of real properties not primarily held for sale to customers or
held for lease in the ordinary course of business.
2. Sale of real properties utilized for low-cost housing.
3. Sale of real properties utilized for socialized housing.
4. Sale of residential lot valued at P1,919,500 and below and other
residential dwelling valued at P3,199,200 and below.

13. Lease of residential unit with monthly rental not exceeding

P12,800.
• Exempt Sales of Goods, Properties, or Services:
14. Sale, printing or publication of books and any newspaper, magazine,
review, or bulleting which appears at regular intervals with fixed
price for subscription and sale and which is not devoted principally
to the publication of paid advertisements.
15. Export sales by non-VAT persons.
16. Transactions which are exempt under international agreement to
which the Philippines is a signatory or under special laws.

• To promote mastery and long-term retention of these exempt sales

transactions, please visit the mnemonic for exempt consumption to
Appendix 1.
 AGRICULTURAL OR MARINE FOOD PRODUCTS IN
ORIGINAL STATE
• Related provisions in this category are:
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 specialty
feeds;
c. Services of agricultural contract growers.
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.
 Meaning of “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 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 flavoring 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).
 Meaning of “in original state”
• To back their position, the BIR cited the absence of marinating in the list of
simple processes noting that the claim of exemption is construed against
the taxpayer.
• The term “in original state” may be contentious concept in practice.
• Due to this, it is always suggested to taxpayers to secure a BIR ruling on
the proper tax treatment of their agricultural or marine food products.
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 dealers 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.
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 refers to persons producing for others
poultry, livestock or other agricultural and marine food products in
their original state.
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 rule applies to all health services whether rendered by a private,
non-profit or government hospital.
• Health services rendered by professionals and the sale of drugs are
vatable.
• Hospital services including laboratory services are exempt.
• Only the sale of drugs and medicine from pharmacy or drugstore shall
be subject to business tax.
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.
• Professional practitioners, consultants, talents, TV artists, brokers and
agents are not employees; hence, they are subject to business taxes.
• 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.
Director’s fees
• Previously under RMC 34-08, directors who are not employees f 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 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 amounts of pecuniary gains or profits
c. Unrestricted offering of the goods or service to any customer or
client.
 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 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 (ROHQ) is taxable.
Education
a. Schools
b. Books, newspapers, magazines, reviews or bulletins

• Educational services rendered by private educational institution dully

accredited by the Department of Education (Dep-Ed), the
Commissioner on Higher Education (CHED) and Technical Education
and Skills Development Authority (TESDA) and those rendered by
government educational institutions.
• Considering that education is a necessity, the law exempts school fees
from business taxes.
• This exemption covers government and private schools, proprietary or
non-profit, so long as they have the required accreditation from the
government.
• The exemption does not include seminars, in-service trainings, review
classes and other similar services rendered by educational institutions
that are not accredited by the DepEd, the CHED and/or TESDA.
•Sale, printing, or publication of books and
any newspaper, magazine, review, or
bulleting which appear at regular intervals
with fixed prices for subscription and sale
and which is not devoted principally to the
publication of paid advertisements.
SALE OR LEASE OF REAL PROPERTIES UNDER
CERTAIN CONDITIONS
• Categories of exempt transactions on real properties
A. Sale of 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).

B. Lease of residential dwellings not exceeding P12,800 a unit per

month.
SALE OF REAL PROPERTIES
• Sale by a non-dealer (casual sale)
• Sale by a realty dealer, developer or lessor
• Sale of adjacent lots
Sale by a non-dealer (casual sale)
• Sale of real properties not primarily held for sale to customers or held
for lease in the ordinary course of business is exempt from business
tax. The reason is that the seller is not engaged in business.
• For VAT taxpayers, however, the sales of properties held for use of the
business (ordinary assets) are subject to VAT even if the sale is not
regular.
• However, the sale of properties considered as capital assets are
exempt from VAT.
 Sale by a realty dealer, developer or lessor
• Normally, the sale by a dealer is subject to business tax, except sales of
the following residential properties if the real estate dealer complies with
the following 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 (RMC35-2014)
(Per HUDCC Memorandum Cir No. 1 s. 2013, Oct 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 P1,919,500 and below
4. Sale of residential dwelling valued at P3,199,200 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.
• 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 sector or non-
government organizations.
 Low-cost housing
• Refers to housing projects intended for the homeless low-
income family beneficiaries, undertaken by the
Government of 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, 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.
 SALE OF ADJACENT LOTS
• 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
favor 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.
• The tax minimization technique is no longer allowed. The sale of the
adjacent lots to the same buyer shall be aggregated for purposes 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.
Lease of residential unit with monthly rental
not exceeding P12,800
• 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, hotel, 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 human consumptions.
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.
SUMMARY FOR 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 airliners and shipping carriers are subject to VAT because
their receipts are normally above the VAT threshold.
 Sales 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 P10,000,000.
• 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: Cooperative transacting business with non-
members
• A farming cooperative which transacts business with members and non-members
had the following receipts during the month:
Related activities Unrelated Activities
Receipts from members P200,000 P100,000
Receipts from non-members 300,000 20,000
--------------- --------------
Total P500,000 P120,000
======== =======
• If the accumulated reserves of the cooperative do not exceed P10,000,000, the
total P500,000 receipts from related activities is exempt from business tax, but the
P120,000 receipts from unrelated activities is taxable.
• If the accumulated reserves of the cooperative exceeds P10,000,000, only the
P200,000 receipts from members from related activities is exempt from business
tax while all the other receipts are taxable.
Taxability of cooperatives to VAT on
importation
• Cooperatives are generally subject to VAT on importation with the
exception of those exempt importation as discussed in Chapter 2 –
VAT ON IMPORTATION.
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 at 0% rate.
Transaction exempt under international
agreements or special laws
• There are entities that are granted VAT exemption under special laws
or international agreements to which the Philippines is a signatory.
These are referred to as “exempt parties.”
• Sales to exempt parties 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 agreements:
1. PEZA registered enterprises
2. Asian Development Bank
3. International Rice Research Institute
4. Philippine National Red Cross
5. Embassies of foreign governments
6. The Philippine Amusement and Gaming Corporation
• Under the NIRC as amended, sales to these persons are listed under the VAT-
exempt transactions. However, because of their nature and the legal fiction
surrounding their creation,, this VAT exemption is effected by means of a zero-
rating treatment. This will be explained in detail in Chapter 8 (Output VAT:
Zero-rated Sales. It must be noted therefore that the sales to these exempt
persons by VAT taxpayers are subject to zero-rating treatment.
INVOICING REQUIREMENTS FOR EXEMPT
SALES
• With respect to VAT-taxpayers, exempt sales 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
subject to business tax.
• 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.
 OPTIONAL VAT TREATMENT
• Any person who is VAT-registered but enters into transactions which are
exempt from VAT (mixed transactions) may opt that the VAT apply to his
transactions which would have been exempt.
• Such option must be made within 10 days before the beginning of the
taxable quarter.
• Once the election is made, it shall be irrevocable for a period of 3 years
counted from the quarter when the election was made (Sec. 109 (2) of the
NIRC as amended by RA 9337).
• While this option may provide relief in the detailed monitoring and
segregation of vatable and non-vatable sales, it is generally
disadvantageous to the domestic customers of the taxpayer and could
decrease the business pricing competitiveness.
The Pre-dominance test
• This option is allowed if the main or principal business of the taxpayer
falls within the VAT system.
• The main or principal business of the taxpayer is said to be within the
VAT system if 50% of its gross sales and/or receipts comes from its
business subject to VAT.
Notes on Sales to Senior Citizens and Persons
with Disability
• Senior citizens and persons with disability (PWD) are entitled to a 20%
special discount on their purchases from certain business
establishments such as hotels and similar lodging establishments,
restaurants, recreational centers and other places of culture, leisure
an amusements, hospitals, drugstores, and services such as medical,
dental, domestic air, sea and land transport fares and funeral or burial
services.
• As discussed under Income Taxation, the amount of the discount is
reflected by the establishment as a deduction against gross income
subject to the regular income tax.
Senior Citizens
• The sale to senior citizens and PWDs is recorded as:
Cash/Receivable Pxxx
Senior citizen/PWD discount xxx
Sales Pxxx

Under current tax rules, the sales to senior citizens are exempt from
VAT but the sale to PWDs, net of the discount, are subject to VAT.
The senior citizens and PWDs are subject to other business taxes such
as percentage tax and excise tax.
 Illustration:
• Sales to senior citizens P 50,000 If the business establishment is a
• Sales to PWDs 20,000 VAT taxpayer, the vatable sales shall
be:
• Sales to regular customers 130,000
Sales to senior citizens
Total sales . . . . . . . . . . . . . . .P200,000
(VAT-exempt) P 0
=======
Sales to PWDs, net of
• If the business establishment is a
non-VAT taxpayer, the sales subject discount (P20K x 80%) 16,000
to percentage tax shall be the total Sales to regular customers 130,000
P200,000. Taxable sales P146,000
• Senior citizens and PWDs are not ========
exempt from the percentage tax
and excise tax.
END