Value Added Tax Zero-rating on Sale of Services Philippines

By: Tax and Accounting Center Philippines

As a rule, gross receipts from services rendered 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 of service in the Philippines. 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 services. 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 108(B) of the National Internal Revenue Code, as amended, the following are value added tax (VAT) zero-rated sales of services in the Philippines by a VAT-registered person:

Processing, manufacturing or repacking goods

Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP).

 Other services to non-residents

Services other than those mentioned in the preceding paragraph rendered to a person engaged in business conducted outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services are performed, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP).

Services to specific VAT exempt persons

Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate.

Services to international shippers

Services rendered to persons engaged. in international shipping or international air transport operations, including leases of property for use thereof.

Services of contractors / subcontractors to exporters

Services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production;

International carriage of passengers on cargoes from Philippines

Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country. Notably, local transport of passengers or cargo by air or sea is subject to 12% VAT while transport of passengers by land is subject to 3% common carriers tax based on gross receipts.

Sale of renewable energy in Philippines

Sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy sources using technologies such as fuel cells and hydrogen fuels.

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.