VAT EXEMPT SALES

A. The sale or importation of agricultural and marine food

products in their original state is VAT-exempt, as well as
livestock and poultry for human consumption or breeding.
This includes basic processed products like freezing, drying,
salting, roasting, and packaging (e.g., vacuum packing and
tetra-pack). Some agricultural products, such as polished rice,
corn grits, raw cane sugar, and copra, are considered in their
"original state" and are VAT-exempt. However, only
muscovado sugar qualifies as VAT-exempt raw cane sugar.
Marinated fish, however, is not VAT-exempt, as tax
exemptions must be explicitly stated by law.

B. The sale or importation of fertilizers, seeds, seedlings,

fingerlings, and feeds for fish, prawn, livestock, and
poultry (including feed ingredients) is VAT-exempt, except
for specialty feeds (e.g., for racehorses, fighting cocks,
aquarium fish, and zoo animals), which are subject to VAT.
Certain feed ingredients, such as whey powder, skimmed milk
powder, lactose, and buttermilk powder, may also be VAT-
exempt if certified by the FDA as unfit for human consumption
or unsuitable for food production.

C. The importation of personal and household effects by

returning Philippine residents and nonresident citizens
resettling in the Philippines is VAT-exempt, provided these
goods are also exempt from customs duties under the Tariff and
Customs Code of the Philippines.

D. The importation of professional instruments, trade tools,

apparel, domestic animals, and personal and household
effects by individuals settling in the Philippines, including
overseas Filipinos and their families, is VAT-exempt if intended
for personal use and not for sale. However, vehicles,
vessels, aircraft, machinery, and similar goods for
manufacturing use do not qualify for this exemption and
remain subject to duties and taxes.

E. Services subject to Percentage Tax under Title V of the Tax

Code, as amended (Sections 116-127). Percentage Taxes are
discussed in Chapter 9 of this book.

F. Services By Agricultural contract growers and Milling are

those who produce poultry, livestock, or other agricultural and
marine food products for others, in their original state, such as
growing and processing for marketable products. This includes
toll processing services like dressing, cutting, and packaging.
Under RR 97-2010, toll processing services are exempt from
VAT only if they are part of an agricultural contract growing
 arrangement. If the processing is done independently (i.e.,
without growing the animals or crops), it is subject to
VAT.

G. Medical, dental, hospital, and veterinary services are

generally exempt from VAT, except when rendered by
professionals. Laboratory services are also exempt.
However, if a hospital or clinic operates a pharmacy, the sale
of drugs and medicines is subject to VAT. Drugstore sales
to in-patients are included in the medical bill and are VAT-
exempt, while sales to out-patients are taxable. Professional
practitioners, such as medical practitioners, CPAs, insurance
agents, and others who must pass government exams, are
subject to VAT if their annual gross professional fees exceed
₱3,000,000. Otherwise, their services are subject to a
percentage tax (Section 116 of the Tax Code).

H. Educational services provided by private institutions

accredited by the Department of Education (DepEd),
Commission on Higher Education (CHED), and Technical
Education and Skills Development Authority (TESDA), as well as
those provided by government educational institutions,
are VAT-exempt.Educational services refer to academic or
vocational education but exclude seminars, in-service training,
review classes, and similar services offered by non-accredited
providers.

I. Services rendered by individuals pursuant to an employer-

employee relationship.

J. Services rendered by Regional or Area Headquarters

(RHQs) established by multinational corporations in the
Philippines are VAT-exempt, provided these RHQs serve as
supervisory, communications, and coordinating centers for their
affiliates, subsidiaries, or branches in the Asia-Pacific Region
and do not earn or derive income from the Philippines.

K. Transactions exempt from VAT under international

agreements or special laws (except those under Presidential
Decree No. 529 for petroleum exploration) include the following
examples of special laws:
PD 1869 –PAGCOR Charter
RA 9367 – Biofuels Act RA 10072 – Philippine Red Cross
RA 9994 – Expanded Senior Citizens Act of 2010
RA 10754 – Magna Carta for Persons with Disabilities
(PWDs)
RA 11861 – Solo Parent Law
These laws provide specific exemptions for transactions related to
their respective sectors.
L. Sales by agricultural cooperatives, registered with the
Cooperative Development Authority, to members and non-
members are exempt from VAT. This includes both the sale
of their own produce (whether in original or processed form)
and the importation of farm inputs, machinery, and equipment
used exclusively for production or processing. Sales of
agricultural food products in their original state are exempt
from VAT, regardless of the seller or buyer. This exemption is
specified in Subsection (a) [Sec. 4.109-1 (B) (I), RR 4-2007].

M. Gross receipts from lending activities by credit or multi-

purpose cooperatives, registered with the Cooperative
Development Authority, are exempt from VAT. This exemption
applies to loans extended to both members and non-members.

N. Sales by non-agricultural, non-electric, and non-credit

cooperatives, registered with the Cooperative Development
Authority, are exempt from VAT as long as the share capital
contribution of each member does not exceed ₱15,000.
However, importation of machinery, equipment, and spare parts
by these cooperatives for use by members is subject to VAT.

O. Export sales by persons who are not vat-registered . Export

sales may be exempt or subject to vat as shown in the figure
below:
P. The VAT exemption on the sale of real property, starting
January 1, 2021, applies to:
1. Real properties not primarily held for sale or lease, as long
as they are not part of the seller's business. If used in the
seller's business, the sale is subject to VAT.
2. Socialized housing, defined under RA 7279 and other related
laws, including housing for the underprivileged and homeless.
3. Sale of house and lot or residential dwellings with a selling
price not exceeding ₱3,600,000 (adjusted every 3 years using
the Consumer Price Index).

However, VAT applies to:

1. Sales of residential house and lot or other residential
dwellings priced above ₱3,600,000.
2. Sales of residential lots, commercial lots, and other real
properties not specifically exempt by law.

The sale of parking lots included with condominium units is not

exempt from VAT and is treated as a separate transaction.
Additionally, the sale of real property outside the ordinary
course of business is considered a capital asset and is subject to
capital gains tax, not VAT.

Q. The lease of a residential unit is exempt from VAT if the

monthly rental does not exceed ₱15,000, regardless of the
total rentals received by the lessor in a year (RR 16-2011; RR
13-2018). If the monthly rental exceeds ₱15,000 but the
aggregate rentals received by the lessor in a year do not
exceed ₱3,000,000, the lease is still exempt from VAT.
However, it will be subject to Percentage Tax.
R. The sale, importation, printing, or publication of books,
newspapers, magazines, journals, and educational
materials covered by the UNESCO Agreement on educational,
scientific, and cultural materials (including digital formats) are
exempt from VAT. However, these materials must not be
primarily devoted to paid advertisements and must comply
with the National Book Development Board's requirements
clarifies that the VAT exemption applies only to printed
materials in hard copy. It does not extend to electronic
formats, including e-books, e-journals, online library sources,
CDs, and software.

The VAT exemption covers:

I. Sale of books, newspapers, magazines, and similar materials.

II. Importation of these materials.
III. Printing and publication of these materials.

However, other related activities like printing brochures,

bookbinding, engraving, stereotyping, electrotyping, and
lithographing are subject to VAT.

S. The transport of passengers by international carriers

operating in the Philippines is not subject to VAT or percentage
tax.
However, the transport of cargo by international carriers is
not subject to VAT, but it is subject to percentage tax under
Section 118 of the Tax Code, known as the Common Carrier's Tax
on International Carriers.
T. The sale, importation, or lease of passenger or cargo
vessels and aircraft, including their parts and equipment
for transport operations, is VAT-exempt. However, the
exemption is subject to compliance with importation restrictions
and the mandatory vessel retirement program of the Maritime
Industry Authority (MARINA), as per RR 15-2015 and RR 13-
2018.

U. The importation of fuel, goods, and supplies by entities in

international shipping or air transport is VAT-exempt,
provided they are used exclusively for international operations.
This applies to transport between a Philippine port and a
foreign port, without stops unless related to international
transport. If any portion is used for other purposes, it will be
subject to 12% VAT.

V. The services of banks, non-bank financial intermediaries

performing quasi-banking functions, and other non-bank
financial intermediaries (e.g., money changers and pawnshops)
are subject to percentage tax under Sections 121 and 122
of the Tax Code, instead of VAT. They are taxed based on their
gross receipts, as specified in the Tax Code.

W. The sale or lease of goods and services to senior citizens

and persons with disabilities (PWDs) is VAT-exempt under
RA No. 9994 and RA No. 10754.

X. The transfer of property under Section 40(C)(2) of the Tax

Code, amended by the TRAIN Law (RA 10963), applies to
property transfers for settling estate taxes or estate dues.
This provision is effective only after the TRAIN Law's
implementation.
Y. Membership fees, assessments, and charges collected on a
purely reimbursement basis by homeowners’ associations
(under RA No. 9904) and condominium corporations (under
RA No. 4726) are exempt from VAT. This provision takes effect
starting January 1, 2021, under the TRAIN Law (RA
10963).

Z. Sale of Gold to the Bangko Sentral ng Pilipinas (Beginning

January 1, 2018 or upon effectivity of RA10963-TRAIN Law. It is
subject to ‘0% vat prior to 2018).

AA. The sale or importation of prescription drugs for

conditions like diabetes, high cholesterol, hypertension,
cancer, mental illness, tuberculosis, and kidney disease is
VAT-exempt starting January 1, 2020 for some conditions, and
January 1, 2021 for others under the CREATE Law. The
exemption applies only to manufacturers, wholesalers,
distributors, and retailers if the drugs are included in the
DOH-approved list (RR 4-2021).

BB. From January 1, 2021, to December 31, 2023, the sale or

importation of the following is VAT-exempt:
 Capital equipment, spare parts, and raw materials needed
for producing personal protective equipment (PPE) such
as masks, gowns, gloves, and face shields for COVID-19
prevention.
 Drugs, vaccines, and medical devices specifically used for
treating COVID-19.
 Drugs for treating COVID-19 approved by the FDA, including
raw materials for clinical trials.

CC. The sale or lease of goods or properties or performance of

services is VAT-exempt if the gross annual sales and/or
receipts do not exceed ₱3,000,000. This includes the total
revenue from the sale of products (goods or services), including
nonrefundable advance deposits/payments for services, minus
discounts, sales returns, and allowances. It also includes incidental
sales related to the business's operations.