Chapter 8 Output VAT ZERO- Rated Sales PDF

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CHAPTER 8-OUTPUT VAT: ZERO-RATED SALESWHAT ARE ZERO-RATED SALES?➢ Zero-rated sales are basically foreign consumptions (i., export sales) or equivalents of foreign consumptions (foreign currency-denominated sales and constructive exports) and sales conferred with an export sale treatment by special l...

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CHAPTER 8-OUTPUT VAT: ZERO-RATED SALES WHAT ARE ZERO-RATED SALES? ➢ Zero-rated sales are basically foreign consumptions (i.e., export sales) or equivalents of foreign consumptions (foreign currency-denominated 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 a 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 (i.e., creditable) 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 is 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, Pineda 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 expenses. Assuming Pineda Corporation is a VAT taxpayer The sale shall be subject to a zero-rated VAT. Pineda Corporation shall compute its VAT liability as follows: Output VAT 0 Less: Input VAT 42,000 Excess: Input VAT (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 Pineda Corporation or as tax refund. Assuming Pineda Corporation is subject to a 30% corporate income tax, it shall compute its taxable income and income tax due as follows: Sales P510,000 Less: Cost of goods sold, exclusive of VAT 350,000 Gross income 160,000 Less: Deductions 10,000 Taxable income 150,000 Multiply by: Corporate income tax rate 30% Income tax due P45,000 Note: The input VAT cannot be claimed as deduction against gross income in income taxation because it is a tax credit or tax refund. Assuming Pineda Corporation is a non-VAT taxpayer The sale is exempt from VAT including percentage tax. Pineda Corporation shall compute its taxable income and income tax due as follows: Sales P510,000 Less: Cost of goods sold (P350,000 + P42,000) 392,000 Gross income 118,000 Less: Deductions 10,000

Taxable income Multiply by: Corporate income tax rate Income tax due

108,000 30% P32,400

Note: The input VAT is claimed as deduction against gross income in income taxation. Its tax benefits to the taxpayer is only P12,600 [i.e., P42,000 x 30% or (P45,000 – P32,400)] through a decrease in its income tax due. Thus, VAT-exempt sales result in partial relief to the taxpayer while zero-rated sales result in a total relief to the taxpayer. Summary: Table of comparison 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 types 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 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 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 for 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) Illustration 1 123 Company sold various goods as follows: Customer/buyer Place delivered Resident alien Philippines Visiting tourist Philippines A Filipino employee in Japan Japan A business in Indonesia Indonesia

Payment $15,000 cash P420,000 cash ¥800,000 cash $10,000 in services

The relevant conversion rates were: €1: P60; $1: P52; ¥1: P50 The following are zero-rated sales: Customer Conversion Sale to Filipino in Japan ¥800,000 x P.50 Sale to business in Indonesia $10,000 x P52 Total zero-rated sales The following are subject to 12% VAT:

Amount P400,000 520,000 P920,000

Customer Resident alien Visiting tourist Total domestic sales

Conversion $ 15,000 x P.52

Amount P 780,000 420,000 P1,200,000

Illustration 2 Sulapo Company made the following export sales during the year: Export destination Terms Payment Export for Hongkong FOB Destination $100,000 cash Export for Thailand FOB Destination P450,000 cash Export to Japan Export to Indonesia

FOB shipping point Free alongside vessel

¥800,000 cash $10,000 in goods

The following shows the VAT treatment of the foregoing export sales: If Sulapo is a VAT taxpayer Non-VAT taxpayer Export for Hongkong zero-rated exempt Export for Thailand exempt exempt Export to Japan Export to Indonesia

zero-rated zero-rated

exempt exempt

Illustration 3 BABAY Corporation, a VAT-registered export trader, had the following export sales during the month: Goods exported Amount Traceable input VAT Processed food $200,000 P10,000 Fruits and vegetables € 50,000 20,000 Both sales are subject to zero-rated Query: What if BABAY is a non-VAT registered taxpayer? The export sales shall be considered exempt. BABAY can claim the 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. ➢ Deemed sales rules applies only on domestic consignments not on foreign consignments Examples of Philippine Ecozones: 1. Philippines Economic Zones 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 sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations

➢ The sale of supplies to the airline’s domestic operation is subject to 12% VAT while the sale to the airline’s international operation is subject to 0% VAT. EFFECTIVE ZERO-RATED SALES (Effectively subject to 0% VAT) Examples refer to sales to persons or entities whose exemption under special laws or international agreement 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) Requirements 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 (Sec 4.106-6, RR16-2005). 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 Assessment Service. For large taxpayers, applications shall be filled with the Large Taxpayer Audit and Investigations 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 Vienne Convention on Diplomatic Relations, but they may be exempt under the principle of reciprocity. Under the reciprocity rule, foreign governments granting Philippine embassies and diplomats indirect tax exemptions shall likewise be conferred the same treatment on their embassies of 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, 101-08). Qualified foreign embassies and their qualified personnel and qualified dependents of the latter are issued VAT Exemption Certificates (VEC) or VAT Exemption Identification Card (VEIC). VAT taxpayers selling to foreign embassies, personnel or their dependents with the VEC or VEIC shall be entitled to the benefit of zero-rating. (See RMO-81-99 and RMO 22-2004) Illustration LEON Corporation, a VAT supplier, sold office supplies and equipment to the following embassies: Embassy Exemption status Sales US Embassy Without reciprocity exemption P 200,000 Malaysian Embassy With reciprocity exemption 400,000

Total The P400,000 sales is subject to zero-rated VAT. The P200,000 sales is subject to 12% VAT.

P 600,000

PREVIOUSLY ZERO-RATED SALES 1. Foreign currency denominated sale* 2. Sales under the internal export program* 3. Sales to Boy Scout of the Philippines* 4. Sale of gold to BSP – now exempt effective January 1, 2018 *To be subjected 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, paid for in acceptable foreign currency and accounted for in accordance with the rules regulation of the BSP. Sales under the International Export Program of the government ➢ Sales of locally manufactured or assembled goods for household and personal use of Filipinos abroad and other non-residents of the Philippines as well as returning overseas Filipinos under the International Export Program of the government paid for in convertible foreign currencies and accounted for in accordance with the rules and regulations of the BSP shall also considered export sales. ZERO-RATED SALES OF SERVICES Eventually, zero-rated sales of services will only include: 1. Sales of service 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 Eco zones 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 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 the sewing services to various clients: Item School uniforms

Client DLSU, a Philippine university

Amount P 800,000

Garment Curtains

Levi’s, a foreign dressmaker Finesse, a foreign textile manufacturer

$ 100,000 P 1,000,000

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 it 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 P 1,000,000

Remarks VAT-exempt 12% VAT VAT-exempt

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 indirect 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 receipts is qualified for VAT zero-rating but Johnny Thor must first secure an approval from the BIR for an effective zero-rating of the receipts. Illustration 2 Berde residences lease residential units to certain embassy personnel of foreign governments: Foreign embassy personnel Mr. Vladimir Cutin Mr. Marco Poroshenco Mrs. Janice Naran Total

VAT status A Russian with VEIC A Ukrainian without VEIC A Mongolian without VEIC

Rental P 50, 000 20,000 12,000 P82, 000

Remarks Zero-rated Regular VAT Exempt from VAT

SERVICES RENDERED TO PERSONS ENGAGED IN INTERNATIONAL SHIPPING OR AIR TRASPORT OPERATIONS, INCLUDING LEASES OF PROPERTY FOR USE THEREOF ➢ To be considered for zero-rating, service shall be exclusively for international shipping or air transport operations. Illustration S2Technologies specialized in aircraft repair maintenance services. S2Technologies has two clients: Malay Airlines and Airphil. Malay Airlines is an international air carrier while Airpil is a domestic carrier.

The service fees for Airphil shall be subject to 12% VAT. The service fees from Malay Airlines shall be subject to 0%VAT. Transport of passengers and cargo by domestic air or sea carriers from the Philippines to a foreign country Incoming flights-exempt Outgoing flights-zero-rated Domestic flights-12% VAT Sale of power or fuel generated through renewable sources of energy ➢ The sale of power or fuel from renewable sources or 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. (RA 9513 & RA 9337). ➢ 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 business 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. 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 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 (EPIRA law). Services Rendered to Ecozones or Tourism Enterprise Zones The sales of goods to registered enterprises of economic zone 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. ➢ Zero-rated sales that will be subjected to 12% VAT upon the 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 exportoriented 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 (based on the preceding taxable year) 3. Those considered export sales under E.O 226 (Omnibus Investment Code of 1987) Sale of services shall likewise be considered zero-rated sales pending the successful establishment of 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, or 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. Requirement: a. The sale must have been paid for in acceptable foreign currency or its equivalent in good or services. b. The sale must be accounted for under the rules of the BSP. 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 (and subsequently exports the same) 3. Even without actual exportation, the following shall be considered constructively exported: ✓ Sales to bonded manufacturing warehouses of export-oriented enterprises ✓ Sales to export processing zones ✓ Sales to enterprises duly registered and accredited with the Subic Bay Metropolitan Authority ✓ Sales to registered export traders operating bonded manufacturing warehouses supplying raw materials in the manufacture of export products ✓ Sales to diplomatic missions ✓ Sale of goods, properties or services to a BOI-registered manufacturer or producer Note: 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....