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OUTPUT VAT – ZERO-RATED SALESWHAT ARE ZERO-RATED SALES?Zero-rated sales are basically foreign consumptions or equivalents of foreign consumptions (foreign currency-dominated sales and constructive exports) and sales conferred with an export sale treatment by special laws and international agreements...

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OUTPUT VAT – ZERO-RATED SALES WHAT ARE ZERO-RATED SALES? Zero-rated sales are basically foreign consumptions or equivalents of foreign consumptions (foreign currency-dominated sales and constructive exports) and sales conferred with an export sale treatment by special laws and international agreements to which the Philippines is a signatory. Foreign consumption like export of goods or services is not charged with consumption taxes. Hence, the export sales of VAT taxpayers are subject to a VAT at zero rate. The export sales of non-VAT taxpayer are exempt from the 3% general percentage tax. What is the benefit of Zero-rating? A zero-rated sale will have a zero output VAT but with a deductible input VAT. As such, the taxpayer will fully recover the VAT he paid on his domestic purchases and on importation either by credit to any tax liability of the taxpayer with the government or by tax refund. Zero-rated sales vs. Exempt sales Both exempt sales and zero-rated sales will not have output VAT. In both cases, the taxpayer does not pay VAT. The difference lies in the treatment of input VAT. The input VAT in the case of exempt sales in non-creditable and nonrefundable, it can only be claimed as deductions in the income tax return.

Illustration: Zero-rated sales vs. VAT-exempt sales During the month, Rizal Corporation purchased goods invoiced at P350,000 excluding P42,000 input tax. It exported the goods for $12,000 which is equivalent to P510,000 and incurred P10,000 in expenses. Assuming Rizal Corporation is a VAT taxpayer The sale shall be subject to a zero-rated VAT. Rizal Corp. shall compute its VAT liability as follows: Output VAT Less: Input VAT Excess input VAT

P

0 42,000 (P 42,000)

The P42,000 excess input VAT on zero-rated sales is claimable in full as a tax credit against other output VAT or claimed as tax credit against any internal revenue tax liability of Rizal Corporation or as a tax refund.

Assuming Rizal Corporation is subject to a 30%(please stand by for the new update as of 2021) corporate income tax, it shall compute its taxable income and income tax due as follows: Sales Less: Cost of goods sold, exclusive of VAT Gross income Less: Deduction Taxable income Multiply by: Corporate income tax rate Income tax due

P510,000 350,000 P160,000 10,000 150,000 30% P45,000

Note: The input VAT cannot be claimed as deduction against gross income in income taxation because it is tax credit or tax refund.

Assuming Rizal Corporation is a non-VAT taxpayer The sale is exempt from VAT including percentage tax. Rizal Corporation shall compute its taxable income and income tax due as follows: Sales Less: Cost of goods sold (P350K + P42,000) Gross income Less: Deductions Taxable income Multiply by: Corporate tax rate Income tax due

P510,000 392,000 P118,000 10,000 P108,000 30% P32,400

Note: the input VAT is claimed as a deduction against gross income in income taxation. Its tax benefits to the taxpayer is only P12,600 [i.e. P42,000 x30% or (P45,000 – P32,400)] through a decrease in its income tax due.

Thus, VAT-exempt sales result in partial relief to the tax payer while zero-rated sales result in a total relief to the taxpayer.

Output VAT Input VAT treatment Extent of tax relief

VAT exempt sales No output VAT Deductible against gross income Partial relief

Zero-rated sales No output VAT Creditable or refundable Full relief

ZERO RATED SALES OF GOODS There are two type of zero rated sales of goods: A. Export sales B. Effectively zero-rate sales EXPORT SALES Eventually, the term export sales will only include: 1. Direct report 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 the foreign country. Irrespective of any shipping arrangement that influences or determine the transfer of ownership of the goods exported. Required: 1. Paid for in acceptable foreign currency or its equivalent in goods or services 2. Accounted for in accordance with the rules and regulations of the Banko Sentral ng Pilipinas (BSP)

Illustration 1 XLT Company sold various goods as follows: Customer/buyer Place delivered Payment Resident alien Philippines $15,000 cash Visiting tourist Philippines P420,000 cash A Filipino employee in Japan Japan ¥800,000 cash A business in Indonesia Indonesia $10,000 in services The relevant conversion rates were €1: P60; $1: P52; ¥1: P.50 The following are zero-rated sales: Customer Conversion Sale to Filipino to Japan ¥800,000 Sale to business in Indonesia $10,000 xP52 Total zero-rated sales

Amount P400,000 520,000 P920,000

The following are subject to 12% VAT: Customer Conversion Resident alien $15,000 x P.52 Visiting tourist Total zero-rated sales

Amount P780,000 420,000 P1,120,000

Domestic consumptions are subject to 12% VAT even if they are consumed by non-resident visitors and even if they are paid for in foreign currencies. Illustration 2 Guimaras Company made the following export sales during the year: Export destination Export for Hong Kong Export for Thailand Export to Japan Export to Indonesia

Terms FOB destination FOB destination FOB shipping point Free alongside vessel

Payment $100,000 cash P450,000 cash ¥800,000 cash $10,000 in goods

Under FOB destination, ownership of the goods transfer to the buyer from the moment goods arrived at the buyer’s place of business. Under FOB shipping point, ownership of goods transfer to the buyer from the moment the goods leave the compound of the seller.

The following shows the VAT treatment of the foregoing export sales: If Guimaras is a VAT taxpayer Non-VAT taxpayer Export for Hong Kong Zero-rated exempt Export for Thailand exempt exempt Export for Japan Zero-rated exempt Export to Indonesia Zero-rated exempt

Note: 1. The export sales to HongKong and Japan are paid for in acceptable foreign currencies; hence, these are subject to zero-rated VAT. 2. As reiterated in several jurisprudence, our tax law adheres to the destination principle wherein VAT is held not to apply on goods destined for consumption abroad regardless of the indicated place of transfer of legal title over the goods. Hence, export sales denominated in Peso are logically exempt if not acceptable as zero-rated rather than subject to 12% VAT. There is no positive intent of the law to tax export sales at 12%.

Illustration 3 XHI Corporation, a VAT-registered export trader, had the following export sales during the month: Goods exported Processed food Fruits and vegetables

Amount $200,000 €50,000

Traceable input VAT P25,000 45,000

Both sales are subject to zero-rated VAT. Whereas fruits and vegetables are VAT-exempt for domestic consumption, they are zero-rated for foreign consumption. The input VAT on both exports shall be creditable against output VAT or claimable through refund or tax credit.

Query: What if XHI is a non-VAT registered taxpayer? The exports sales shall be considered exempt sales. XHI can claim input VAT as expense. 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. Illustration Filexport Company, a VAT registered export trader, buys goods from domestic manufacturers, rebrands them and sells them for foreign customers. Filexports also exports goods for other domestic enterprises without export permit and also makes occasional domestic sales. During the quarter, Filexport Company had the following sales and receipts: Export sales Local sales Sales $400,000 P2,000,000 Commission on sales made for other companies 50,000 450,000 Unsold consignments Less than 60 days 20,000 250,000 More than 60 days 30,000 150,000 Total $500,000 P2,850,000 Assume the relevant exchange rate is $1: 52.00. The following shall be subject to 0% VAT and 12% respectively:

Sales Commission on sales made For other companies

0% VAT 12% VAT $400,000 P2,000,000 50,000

450,000

Unsold consignments Less than 60 days More than 60 days Vatables sales Multiply by: Peso dollar rate Zero-rated sales in Pesos

150,000 $450,000 P2,600,000 P 52.00 P23,400,000

It must be noted that deemed sales rules applies only on domestic consignments not on foreign consignments. 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 (ASZ) – RA 9490 The zero-rating of sales to registered enterprises of economic zones or tourism zones in the TRAIN law was voted by the president thereby creating the impression that locators will then be subject to 12% VAT. Since the TRAIN law, did not repeal Section 8 of RA 7916. The Special Economic Zone Act, which provides that special economic zones are to be operated and managed as separate customs territory, the DOF maintained the status quo on the zero-rating of sales of goods or services. Accordingly, the sales to PEZA locators will still be zero-rated until a contrary law or regulation is passed. Needless to say, passing VAT to PEZA locators which are primarily exporters would result in voluminous claim for refunds or credits causing additional unnecessary to the BIR and the ecozone locators. 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 to theses entities is a foreign consumption rather than a domestic consumption; hence, these are subject to zero-rated VAT. Zero-rating is limited to goods, supplies, equipment and fuel pertaining to or attributing to the transport of goods and passengers from a port in the Philippines directly to a foreign port, or vice versa, without docking or stopping at any port in the Philippines unless the docking or stopping is for the purpose of unloading passengers and or cargoes origination from abroad, or to load passenger and/or cargoes bound for abroad.

Illustration Sibalom Company, a VAT taxpayer sold supplies to Pan Pacific Airlines: Pan-Pacific Airline division Domestic operation International operation

Amount P400,000 500,000

The sale supplies to the airline’s domestic operation is subject to12% VAT while the sale to the airline’s international operation is subject 0% 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 are granted indirect tax exemption under special laws or international agreements: 1. Asian Development Bank (ADB) 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 contractors 5. Embassies, qualified employees and dependents - subject to the reciprocity rule 6. Philippine National Red Cross (PNRC) 7. Philippine Amusement and Gaming Corporation (PAGCOR) and it licenses or contractors – PD1869 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 zerorating shall be considered exempt. AN approved application shall be given prospective 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 Division 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 Philippines embassies and diplomats indirect tax exemption shall likewise be conferred the same treatment on their embassies or diplomats in the Philippines. Countries granting indirect tax exemption to Philippine embassies and personnel are listed by the DFA (BIR Ruling DA-ITAD-98-08, 100-08,101-08). Qualified foreign embassies and their qualified personnel and qualified dependents of the latter are issued VAT Exemption Certificated (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 be benefit of zero-rating. (See RMO-81-99and RMO 22-2004) Illustration ABC Corporation, a VAT supplier, sold office supplies and equipment to the following embassies: Embassy Ukraine Embassy Russian embassy Total

Exemption status Without reciprocity exemption With reciprocity exemption

Sales P400,000 600,000 P1,000,000

The P600,000 sales is subject to zero-rated VAT. The P400,000 sales is subject to 12%VAT.

PREVIOUSLY ZERO-RATED SALES 1. Foreign currency denominated sale* 2. Sale under the internal export program* 3. Sales to Boy Scout of the Philippines* 4. Sale of gold to BS -now exempt effective January 1,2018 *to subject led to 12% VAT upon successful completion and implementation of an effective VAT refund system

The term “foreign currency denominated sale” means sale to non-residents of goods except export of automobiles and non-essential commodities, assembled or manufactured in the Philippines for delivery to a resident in the Philippines , aid for in acceptable foreign currency and accounted for in accordance with the rules and regulation of the BSP Sales under the Internal Export Program of the government Sales of locally manufactured or assembled goods for households and personal use of Filipino abroad and other non-residents of the Philippines as well as returning overseas Filipino under the Internal Export Program of the government paid for in convertible foreign currency and accounted for in accordance with rules and regulation of the BSP shall also be considered export sales.

ZERO-RATED SALES OR SERVICES Eventually, zero-rated sales of services will only include: 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 resources 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 in the Philippines when the services are performed. The term “other services” is not limited only to project studies, information, services and engineering and architectural designs. The 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. Illustration 1 Excel Tailoring, a VAT taxpayer, is engaged in a sewing business. During the month, it had the following receipts from sewing services to various clients: Item School uniforms Garments Curtains

Client DLSU, a Philippine university Levi’s, a foreign dressmaker Finesse, a foreign textile manufacture

Amount P800,000 $100,000 P1,000,000

The receipt from DLSU is subject to 12% VAT as it is a domestic consumption. The receipt from Levi’s is subject to zero-rated VAT. The receipt from Finesse is VAT exempt because it is a foreign consumption but is not paid in foreign currencies.

Illustration 2 General Consultants, a VAT taxpayer, provides various services to clients. The details of each transaction during the month are shown below: Client A foreign corporate client A resident foreign corporation A non-resident foreign corporation

Place rendered Abroad Philippines Philippines

Amount $200,000 ¥100,000 P1,000,000

The $200,000 is a VAT exempt since this is a foreign consumption which does not qualify for zero-rating because the services is done abroad, not in the Philippines. The ¥100,000 receipt shall be subject to the 12% VAT because this is a domestic consumption, the client being a resident in the Philippines. The P1,000,000 receipt is VAT exempt because it is a foreign consumption which does not qualify for zerorating since it is not paid for in an acceptable foreign currency.

EFFECTIVELY ZERO-RATED SALES OF SERVICES The local sales 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.

Please refer to the list of entities with direct tax exemption as discussed under effectively zero-rated sales of goods. Illustration 1 Johnny Thor, a VAT taxpayer, provides security and janitorial services to the building of the international Rice Research Institute (IRRI). IRRI paid the taxpayer P200,000 for the services rendered. The P200,000 gross receipt is qualified for VAT zero-rating but Johnny Thor must first secure an approval from the BIR from the BIR for an effective zero-rating of the receipts .

Illustration 2 Berde Residences leases residential units to certain embassy personnel of foreign governments: Foreign embassy personnel Mr. Vladimir Cutin Mr. Marco Porsehnco Mrs. Janice Naran Total

VAT sales A Russian with VEC A Ukraine without VEC A Monogolan without VEX

Rental P50,000 20,000 12,000 P82,000

Rental from Vladimir Cutin are subject to zero-rated VAT. The rental from Marco Poroshenco is subject to the regular VAT. The rental from Jenice Naran is exempt from VAT because it is below the P15,000 VAT threshold on residential dwellings.

SERVICES RENNDERED TO PERSINS ENGAGED IN INTERNATIONAL SHIPPING OR AIR TRANSPORT OPERATIONS. INCLUDING LEASES OF PROPERTY FOR USE THEREOF To be considered for zero-rating, the services shall be exclusively for international shipping or air transport operations. Illustration 1 S2Technologies specialized in aircraft repair maintenance services. S2Technologies has two clients: Malay Airlines and Airphil. Malay Airlines is an inte...