EXEMPT SALES OF GOODS, PROPERTIES AND SERVICES

EXEMPT SALES
Exempt sales are exempt consumption of goods 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
the 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 or receipts.

Exempt Sales of Goods or Properties

1. Sale of goods to senior citizens and persons with disability
This covers sale of essential goods only.
2. Sales of exempt goods
a. Agricultural and marine food products in their original state
b. Fertilizers, seed, seedlings and fingerlings, fish, prawn, livestock and poultry feeds, including ingredients used in the
manufacture of finished feeds.
c. Books, newspaper, magazines
d. Medicines prescribed for diabetes and hypertension
e. Passenger or cargo vessels and aircrafts.
3. Sales of goods by cooperatives
Sales by agricultural cooperatives duly registered in good standing with the Cooperative Development Authority 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. Sales by non-agricultural, non-electric and non-credit cooperatives duly
registered and in good standing with the CDA.
4. Sales of residential properties
a. Sale of real properties utilized for low-cost housing
b. Sale of real properties utilized for socialized housing
c. Sale of residential lot valued at P1,919,500 and below and other residential dwelling valued P3,199,200 and below.

Updates:
According to Revenue Regulations No. 1-2024, the standard VAT rate of 12 percent will not be collected for purchases of
house and lot packages and “other residential dwellings” not more than P3.6 million, higher than the previous ceiling of
P3.2 million.

5. Export sales by non-VAT persons

6. Treaty-exempt sales goods
Sales of goods exempt under international agreement to which the Philippines is a signatory or under special laws.
7. Tax-free exchange of property
The exchange of properties in pursuant to a plan of merger or consolidation or the transfer of property that resulted in the
initial acquisition of corporate control.
8. Sale of gold to the Bangko Sentral ng Pilipinas (BSP)
The sale of gold to the BSP is now a VAT-exempt transaction which is previously considered a zero-rated sale.

(Mnemonic: SECRET Tax-free Gold)

Exempt Sales of services

1. Schools
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.
2. Employees
Services performed by individuals in pursuant to an employer and employee relationship.
3. Agricultural contract growers and millers
Services by agricultural contract growers and milling for others of palay into rice, corn into corn grits, and sugar cane into
raw sugar.
4. Residential leasing
Lease of residential unit with monthly rental not exceeding P15,000.
5. Cooperative services
Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered and in good standing with the
Cooperative Development Authority.
 6. Hospitals
Medical, dental, hospitals, and veterinary services except those rendered by professionals and sales of drugs by hospital drug
store.
7. Homeowner’s association or condominium corporations
Association dues, membership fees, and other assessments and charges collected by homeowner’s associations and
condominium corporations.
8. Lease passenger or Cargo vessels and aircrafts, including engine, equipment and spare parts thereof for domestic or
international transport operations
9. Treaty-exempt services
Transactions which are exempt under international agreement to which the Philippines is a signatory or under special laws
10. Regional area headquarters
Services rendered by regional or area headquarters established in the Philippines by multinational corporations which acts as
supervisory, communication, and coordinating centres
for their affiliates, subsidiaries or branches in the Asia Pacific Region and do not or derive income from the Philippines.
11. International carriers
Transport of passengers by international carriers (RA 10378)
12. Printers or publishers
Sale, printing or publication of books and newspaper, magazine, review, or bulletin which appears at regular intervals with
fixed prices for subscription and sale and which is not devoted principally to the publication of paid advertisements.
13. Senior citizens and persons with disability
Sales of basic essential services to senior citizens and persons with disability by service establishments such as:
a. Restaurant
b. Hotels and lodging establishments
c. Recreation centres, such as theatre, cinema houses, concert halls, carnivals and such other places of leisure or
amusement

(Mnemonic: SEARCH2 VA TRIPS)

Other exempt sales of goods or services
1. Sales of goods or services taxed by special laws
a. Sales of goods or services by Ecozone locators
b. Sales of amusement service by theatres and cinemas

These are subject to tax by special laws are not subject to national business taxes such as VAT or percentage tax.
2. Sales by persons not engaged in business
The sale goods, real properties or services by persons not engaged in business is not subject to business taxes.
3. Sale of assets held for use
The sale of assets held for use such as supplies and items of property, plant and equipment such as: land and building,
machineries, office furniture and fixture, and office equipment is normally exempt from business tax. For VAT-registered
taxpayers, however, the sale of these ordinary assets is considered “incidental transactions” subject to VAT.

EXEMPT SALES OF GOODS OR PROPERTIES, IN DETAIL

(SECRET Tax-free Gold)

SALE OF GOODS TO SENIOR CITIZENS AND PERSONS WITH DISABILITY

The sale of essential goods to senior citizens (SC) and persons with disability (PWD) such as the following:

Sale of Goods SC PWD

a. Drugs, vaccines and foods for special medical purpose ✔ ✔
b. Vitamins and mineral supplements ✔ X
c. Accessories and equipment by or for senior citizens, such as eye glasses, hearing aid,
dentures, prosthetics, artificial bone replacements, walkers, crutches, wheelchairs, ✔ X
quad canes, geriatric diapers, and other essential medical supplies, accessories and
equipment
d. Casket or urn ✔ ✔

Aside from VAT exemption on the sales, senior citizens and PWDs are also legally mandated to be given 20% discount on the sales of
these goods.

SALE OF EXEMPT GOODS

Agricultural or marine products and inputs
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.

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 meaning of “in original state”

As discussed in Chapter 2, the phrase “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 the employment of complex processes such as chemical treatment or curing in a solution is normally considered
state altering.

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

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.

Books, newspapers and magazines

The sales of books, newspapers and magazines are exempt from VAT. Remember the criteria for exemption of magazines under VAT-
exempt importation. The same criteria apply here.

Medicines for diabetes, high cholesterol or hypertension

Starting January 1, 2019, the TRAIN law provides for the VAT-exemption on the sale of medicines prescribed for diabetes, high
cholesterol or hypertension, as determined by the Department of Health (DOH), by manufacturers, distributors, wholesalers and
retailers.

Passenger or Cargo Vessels and Aircrafts

The sale of passenger or cargo vessels and aircrafts including engines, equipment, and spare parts thereof for domestic or international
transport operations is exempt from VAT.

For ease of discussion, we classify these as exempt goods because, just like other exempt goods, their VAT exemption applies both on
their importation and sales. Readers must note, however, that the import of medicine for diabetes, high cholesterol or hypertension
has no legal exemption on importation.

SALE 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.

SALE OF REAL PROPERTIES UNDER CERTAIN CONDITIONS

Categories of exempt transactions on 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)

Sale by non-dealers of realty

Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of business is exempt from the
business tax. The reason is that the seller is not engaged in the business of selling properties.

However, the sale of properties held for use classified as ordinary asset by VAT taxpayers is an incidental transaction subject to VAT.

The VAT exemption applies to:

a. Real property classified as capital assets of VAT taxpayers
 b. Any real properties of non-VAT taxpayers.
c. Any real properties of persons not engaged in business

Sale by realty dealer, developer or lessor

The sale by business engaged in the real estate business is normally subject to business tax. However, their sales of the residential
properties, being essential goods, are exempt if they comply with the statutory or regulatory 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 (RMC-2015)
(Per HUDCC Memorandum Circular No. 1 s. 201, October 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 P 1,919,500/unit and below
* Under the TRAIN Law, beginning January 1, 2021, VAT exemption on sale of real properties shall only apply to sale of
real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business, sale of
real property utilized for socialized housing, and sale of house and lot and other residential dwellings with selling price of
not more than PhP2,000,000 as adjusted to Php 3,199,200 in 2011 using 2010 CPI.
4. Sale of residential dwelling valued at P3,199,200/unit and below
Updates: According to Revenue Regulations No. 1-2024, the standard VAT rate of 12 percent will not be collected for
purchases of house and lot packages and “other residential dwellings” not more than P3.6 million, higher than the previous
ceiling of P3.2 million.

Sales of residential properties within the price ceilings are considered reasonable human necessity and hence exempt. Those sold
above the threshold are not considered necessities due to high price and are thus vatable.

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.

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 a 0% rate.

SALES EXEMPT UNDER TREATIES, INTERNATIONAL AGREEMENTS OR SPECIAL LAWS

There are entities that are granted VAT exemption under special laws or international agreements to which the Philippines is signatory.
Sales to exempt entities 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 laws or international agreements:
1. PEZA registered enterprises
2. Asian Development Bank (ADB)
3. International Rice Research Institute (IRRI)
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, for VAT taxpayers, this
VAT exemption is favorably affected by means of a zero-rating treatment.

TAX-FREE EXCHANGE OF PROPERTY

The TRAIN law added tax-free exchange of property to the list of VAT-exempt transactions, thus the following exchange of properties
are not vatable:
1. Exchange of properties by a corporation in pursuant to a plan of merger or consolidation.
2. Exchange of properties by a person, alone or together with others not exceeding four, which resulted to the acquisition of
control.

SALE OF GOLD TO THE BANGKO SENTRAL NG PILIPINAS (BSP)

The TRAIN law reclassified the sale of gold to the BSP from zero-rated to exempt. Under RA 11256, the tax applies both to registered
small scale miners and registered gold traders.

EXEMPT SALES OF SERVICES, IN DETAIL

(SEARCH2 VA TRIPS)
EDUCATIONAL SERVICES OF SCHOOLS
Educational services rendered by:
1. Private educational institution duly accredited by the:
a. Department of Education
b. Commission on Higher Education
c. TESDA
2. Government educational institutions

Considering that education is a necessity, the law exempts school fees from business taxes. This exemption cover government and
private schools proprietary or non-profit, so long as they have the required accreditation from the government. The exemption does not
cover services rendered by educational institutions that are not accredited by Dep-Ed, CHED or TESDA, such as:
1. Seminars
2. In service trainings
3. Review classes
4. Other similar services.

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 artist, brokers and agents are not employees; hence, they are subject
to business taxes.

Director’s Fees
Previously under RMC 34-08, directors who are not employees of 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 to 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 amount of pecuniary gains or profits
c. Unrested offering of the goods or services to any customer or client

AGRICULTURAL CONTRACT GROWERS AND MILLERS

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 refer to persons producing for other poultry, livestock or other agricultural and marine for products in
their original state.

RESIDENTAL LEASING
Leasing of residential unit with monthly rental not exceeding P15,000
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, hotels, and 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 consumption.

SALE OF SERVICES BY COOPERATIVES

The gross receipts from sale of services by cooperatives such as lending, marketing or multi-purpose cooperatives is exempt similar to
the rules discussed under sales of goods by cooperatives.

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 professional, and the sale of drugs are vatable.

HOMEOWNER’S ASSOCIATION OR CONDOMINIUM CORPORATION

The TRAIN law exempted association dues, membership fees and other assessments and charges collected by homeowner’s or
condominium associations cannot be said to be business. However, if it is being operated as if it sells its services to its members from
which it derives a mark-up and profit, then it is taxable business.

LEASE OF PASSENGERS OR CARGO VESSELS AND AIRCRAFTS, INCLUDING SPARE PARTS AND EQUIPMENTS
THEREOF
Similar to import and sales, the leasing of vessels and aircrafts including spare parts and equipment thereof are VAT exempt.

TREATY-EXEMPT SALES OF SERVICES

The receipts from services sold to entities which are exempt under treaties or international agreements to which the Philippine
government is a signatory are exempt. Same rules apply similar to out discussion on the topic under exempt sales of goods.

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 a 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 is taxable.

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.

SERVICES OF PRINTERS AND PUBLISHERS

The printing or publication of books and any newspaper, magazine, review, or bulletin which appear at regular intervals with
fixed prices for subscription and sale and which is not devoted principally to the publication of paid advertisement is exempt.

SALES OF SERVICE TO SENIOR CITIZENS AND PERSONS WITH DISABILITY

Senior citizens and PWDs
Senior citizens and person with disability are exempt from VAT on the essential services provided by the following covered
establishment:
1. Lodging establishment, such as apartel, dormitory, motorist hotel, tourism inn, pension house excluding long-term residency
arrangements.
2. Hospital and clinic
3. Sports and recreation centers
4. Restaurants such as eating places offering regular or special menus to the public.
5. Land air and sea travel
6. Medical, dental, diagnostic and laboratory fees and professional medical fees
7. Funeral or burial services for the burial senior citizens

Is sale to senior citizens and PWDs subject to percentage tax?

With the codification of the exemption of sales of essential goods and services to senior citizens and PWDs in the list of exempt
transactions under Sec. 109 of the NIRC, it is now clear that they are excluded on the scope of the 3% percentage tax under Sec.
116 thereof. It must be noted therefore that the sale of essential goods and services to senior citizens and PWDs are no longer subject
to VAT and percentage tax.

Recording of sales to senior citizens and PWDs

Aside from the VAT exemption, senior citizens and PWDs are entitled to a 20% special discount on their purchases from qualified
establishment as a deduction against gross income subject to the regular income tax. The sale to senior citizens and PWDs is recorded
as:

Cash/Receivable XXX
Senior citizens/PWD discount XXX
Sales XXX
Senior citizen and PWD engaged in business.
It must be noted that senior citizens and PWD are given the tax privilege of discounts and exemption when they purchase essential
goods or services. If senior citizens and PWDs own business, they are, off course, subject to VAT or percentage tax on their sales or
receipts similar to other regular business taxpayers.

SALES OF GOODS OR SERVICES COVERED OR SERVICE COVERED BY SPECIAL LAWS

Certain sales of services are not subject to national business taxes since they are covered by special laws, such as the following:
1. Sales by ecozone locators
2. Receipts of proprietors of theaters or cinemas

Ecozone locators
Ecozone locators are subject to a special 5% gross income tax, in lieu of all taxes national or local. As such, they will not be subject to
VAT or percentage tax.

Proprietors of theaters or cinemas

The question of whether or not theaters or cinemas are subject to VAT was laid to rest by the honorable Supreme Court in CIR vs. SM
Prime Holding and First Asia Realty Development Corporation (G.R No. 083505, February 26, 2010). Local government (provinces
and cities) has the exclusive power to impose business tax on gross receipts of cinemas or theaters. Theaters or cinemas are therefore
not subject to VAT or percentage tax. Note that the lease of motion pictures, films, tapes and disc is not the same as exhibition of
motion pictures of films. This is subject to VAT or percentage tax.

Invoicing Requirement for Exempt sales

With respect to VAT-taxpayers, exempt sales of goods or services 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 vatable. 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.

Reference: BUSINESS AND TRANSFER TAXATION 2019 edition by Rex Banggawan CPA MBA

Note: DO NOT REPRODUCE