Value Added Tax Zero Rating on Goods and Properties Philippines

By: Tax and Accounting Center Philippines

As a rule, sale of goods or properties in the Philippines by a value added tax (VAT) registered or registrable seller is subject to 12% value added tax (VAT).  Such 12% value added tax in the Philippines is passed on by the seller to the buyer on every sale of goods or properties. On the part of the VAT registered buyer, such passed on 12% value added tax could be treated as creditable input tax that it could deduct its value added tax on its monthly and quarterly sales made.

However, the value added tax system in the Philippines provides for the zero-rated sales of goods or properties. Under zero-rated (0% VAT) sales rule, the seller does not impose the 12% value added tax in the Philippines  to the buyer who is within the Philippines or abroad. On the part of the VAT-registered seller, it could make use of the 12% value added tax passed on to them by their suppliers of goods or services, and on importation as follows:

• Carry-over to the next month or quarter until fully utilized;
• Apply for tax credit certificate within two years from the quarter of sale;
• Apply for tax refund within two (2) years from the quarter of sale;

Under Section 106(A)(2)  of the National Internal Revenue Code, as amended, the following are zero-rated sales of goods or properties in the Philippines:

Export Sales of goods or properties

1. The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported and paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);

2. Sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident local export-oriented 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 Bangko Sentral ng Pilipinas (BSP):

3. Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed seventy percent (70%) of total annual production;

4. Sale of gold to the Bangko Sentral ng Pilipinas (BSP);

5. Those considered export sales under Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987, and other special laws; and

6. The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations.

Foreign Currency Denominated Sale of goods or properties

Foreign currency denominated sale in the Philippines means sale to a nonresident of goods, except those mentioned in Sections 149 (automobiles) and 150 (non-essential goods like jewelries) of the Tax Code, as amended, 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 and regulations of the Bangko Sentral ng Pilipinas (BSP).

Zero-rated sales under special laws  or international agreement

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. A typical example of this is the sale of goods by a non-PEZA (Philippine Economic Zone Authority) entity to a PEZA-registered entity who enjoys income tax holiday or to 5% special tax regime.

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may also please send mail at info(@)taxacctgcenter.org, or you may post a question at Tax and Accounting Center Forum and participate therein.