Zero-Rated VAT Transactions
Updated June 13, 2026
Definition
Zero-rated VAT transactions are sales of goods, properties, or services taxed at a 0% VAT rate under Sections 106(A)(2) and 108(B) of the National Internal Revenue Code. They are within the VAT system, so no output VAT is collected but the seller can credit, or seek a refund of, input VAT on related purchases.
Under Sections 106(A)(2) and 108(B) of the National Internal Revenue Code (NIRC), certain export sales and services are taxed at a VAT rate of 0%. This differs from VAT-exempt transactions because zero-rated sales stay within the VAT system, so sellers can credit input VAT paid on purchases used for these sales, or claim it as a refund under Section 112. The main purpose of zero-rating is to keep Philippine exports competitive by removing VAT from goods and services consumed abroad. Under the destination principle, VAT is meant to fall on consumption in the Philippines. Revenue Regulations No. 16-2005, as amended, provides detailed rules on the treatment and documentation of zero-rated transactions. VAT-registered sellers must write or print "zero-rated sale" on the invoice (NIRC §113(B)).
Why it matters
Zero-rated VAT transactions strongly affect business cash flow and tax compliance obligations. For exporters, understanding these transactions is crucial for maintaining competitive pricing in international markets. The ability to recover input VAT through refunds can free up substantial working capital. Proper classification of zero-rated transactions affects the quarterly VAT return (BIR Form 2550Q). Misclassification can result in a 25% surcharge under Section 248 of the NIRC, plus 12% interest a year on deficiency assessments. For VAT-registered businesses, zero-rated transactions require specific documentation and reporting procedures. Failure to comply with these requirements can disqualify transactions from zero-rating, resulting in 12% VAT liability plus penalties.
How it works
Process
Zero-rated VAT transactions follow a specific process to stay compliant and get the full tax benefit: 1. **Transaction Qualification**: Verify that the sale meets the criteria under Section 106(A)(2) (goods) or Section 108(B) (services) of the NIRC 2. **Proper Documentation**: Issue an invoice with the words "zero-rated sale" written or printed on it 3. **Record Keeping**: Maintain export documents, certificates, or proof of qualification 4. **VAT Return Reporting**: Report zero-rated sales separately in BIR Form 2550Q 5. **Input VAT Claims**: Credit related input VAT against output VAT or apply for a refund within two years after the close of the quarter of the sale
Documentation requirements
- Export Declaration (for goods exports) - Bill of Lading or Airway Bill (for international transport) - Certification from the investment promotion agency, such as PEZA, for sales to registered export enterprises - Bangko Sentral ng Pilipinas documents (for gold sales to the BSP) - Proof of inward remittance in acceptable foreign currency, where the law requires it - Invoice marked "zero-rated sale"
Compliance timeline
- Every sale: Issue an invoice marked "zero-rated sale" - Quarterly: File BIR Form 2550Q within 25 days after the close of the quarter, reporting zero-rated sales - Within two years after the close of the quarter of the sale: Apply for a refund of unused input VAT, if any - After filing a complete refund application: The BIR decides within 90 days
Examples
Export of Manufactured Goods
ABC Electronics exports ₱5,000,000 worth of electronic components to Singapore Sale Value: ₱5,000,000 VAT Rate: 0% Output VAT: ₱0 Input VAT recoverable: ₱480,000 (assuming 12% on ₱4,000,000 purchases) Net VAT benefit: ₱480,000 refund claim The company may credit the input VAT against output VAT on other sales, or apply for a refund within two years after the close of the quarter of the sale (NIRC §112(A))
Sale to Export Processing Zone
XYZ Textiles sells ₱2,000,000 of fabric to a PEZA-registered export enterprise that uses it directly and exclusively in its registered export project Sale Value: ₱2,000,000 VAT Rate: 0% Output VAT: ₱0 Documentation: Invoice marked "zero-rated sale" and the buyer's VAT zero-rating certification Zero-rating applies to local purchases of goods and services directly and exclusively used in the registered project of a registered export enterprise (RA 11534, CREATE)
International Transportation Services
DEF Shipping, a domestic carrier, provides ₱1,500,000 of cargo services from Manila to Hong Kong Service Fee: ₱1,500,000 VAT Rate: 0% Output VAT: ₱0 Required: Bill of lading showing international destination Transport of passengers and cargo by domestic air or sea carriers from the Philippines to a foreign country is zero-rated under Section 108(B) of the NIRC
Sale of Gold to Bangko Sentral ng Pilipinas
Mining company sells ₱10,000,000 worth of gold to BSP Gold Value: ₱10,000,000 VAT Rate: 0% Output VAT: ₱0 Supporting Document: BSP purchase order and delivery receipt Sales of gold to the Bangko Sentral ng Pilipinas are zero-rated export sales under Section 106(A)(2)(a) of the NIRC
Common Mistake: Domestic Sale Claimed as Zero-Rated
Company incorrectly claims zero-rating on ₱3,000,000 domestic sale Correct VAT Due: ₱360,000 (12% of ₱3,000,000) Surcharge: ₱90,000 (25%) Interest: ₱43,200 (12% annual interest for 1 year) Total Liability: ₱493,200 BIR can assess deficiency VAT plus surcharge under Section 248 and interest under Section 249; micro and small taxpayers pay 10% and 6% instead
Common misconceptions
- Myth: Zero-rated and VAT-exempt transactions are the same
- Fact: Zero-rated transactions allow input VAT recovery while exempt transactions do not. Zero-rated remains within the VAT system at 0% rate.
- Myth: All export sales are automatically zero-rated
- Fact: Only sales meeting the conditions in Sections 106(A)(2) and 108(B) are zero-rated, such as actual shipment abroad and payment in acceptable foreign currency where the law requires it. Proper documentation is mandatory.
- Myth: Zero-rated transactions don't need VAT invoices
- Fact: Zero-rated transactions require VAT invoices with the words "zero-rated sale" written or printed on them (NIRC §113(B)).
- Myth: Input VAT refund is automatic for zero-rated sales
- Fact: Input VAT refund requires a formal application (BIR Form 1914) filed within two years after the close of the quarter of the sale, with complete supporting documents and BIR approval (NIRC §112).
Questions people ask
What are zero-rated VAT transactions in the Philippines?
Zero-rated VAT transactions are sales subject to a 0% VAT rate under Sections 106(A)(2) and 108(B) of the NIRC. These include export sales of goods, sales of gold to the BSP, certain services paid for in acceptable foreign currency, international transport by domestic carriers, and sales to registered export enterprises for their registered projects. Unlike exempt transactions, zero-rated sales allow businesses to credit input VAT.
What does zero-rated VAT mean for my business?
Zero-rated VAT means you charge 0% VAT on qualifying sales but can still claim input VAT credits on related purchases. This improves cash flow through input VAT refunds and makes your products more competitive by removing tax burden.
How do I know if my sale qualifies for zero-rating?
Sales qualify for zero-rating if they meet the criteria in Sections 106(A)(2) and 108(B) of the NIRC, including actual export of goods paid for in acceptable foreign currency, sales of gold to the BSP, services to persons doing business outside the Philippines paid for in acceptable foreign currency, international transport by domestic carriers, local purchases by registered export enterprises for their registered projects, and sales to entities whose exemption under special laws or international agreements effectively subjects them to zero rate. Proper documentation is required for each category.
Can I claim input VAT refund on zero-rated sales?
Yes. Input VAT attributable to zero-rated sales can be refunded or credited if you apply within two years after the close of the taxable quarter when the sales were made (NIRC §112(A)). File the application (BIR Form 1914) with supporting documents including export papers, invoices, and proof of input VAT. The Commissioner must decide within 90 days from submission of complete documents (NIRC §112(C), as amended by RA 11976).
What's the difference between zero-rated and VAT-exempt transactions?
Zero-rated transactions are subject to 0% VAT and allow input VAT recovery, while VAT-exempt transactions carry no VAT and give no input VAT credit. Invoices for zero-rated sales must show the words "zero-rated sale", and those for exempt sales "VAT-exempt sale" (NIRC §113(B)).
What documents do I need for zero-rated export sales?
Required documents include the export declaration, bill of lading or airway bill, commercial invoice, an invoice marked "zero-rated sale", and proof of receipt of acceptable foreign currency where required. Keep these for five years from the day after the return deadline for BIR audit purposes (NIRC §235).
How do I report zero-rated sales in my VAT return?
Report zero-rated sales separately from taxable and exempt sales in BIR Form 2550Q, the quarterly VAT return. File within 25 days after the close of each taxable quarter (NIRC §114).
What happens if I incorrectly claim zero-rating?
Incorrect zero-rating results in deficiency VAT of 12% plus a 25% surcharge and 12% annual interest (10% and 6% for micro and small taxpayers). For ₱1,000,000 of sales wrongly zero-rated, the total after one year is ₱120,000 VAT + ₱30,000 surcharge + ₱14,400 interest = ₱164,400 (NIRC §248, §249).
Can service exports be zero-rated?
Yes. Services rendered to a person engaged in business conducted outside the Philippines, or to a nonresident not engaged in business who is outside the Philippines when the services are performed, are zero-rated if paid for in acceptable foreign currency (NIRC §108(B), as amended by RA 11976). Examples include outsourced back-office, consultancy, and software development services for foreign clients.
When should I apply for input VAT refund from zero-rated sales?
Apply when you have input VAT from zero-rated sales that you have not applied against output VAT. The application must be filed within two years after the close of the taxable quarter when the zero-rated sales were made (NIRC §112(A)).
Next steps
Learn more
VAT Calculator Philippines
Export VAT Calculator
Input VAT Refund Calculator
BIR Form 2550Q (Quarterly VAT Return)
BIR Form 1914 (Application For Tax Credits/Refunds)
Summary List Of Sales (Quarterly)
Complete Guide To VAT In The Philippines
How To Apply For VAT Refund
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Sources & References (2)
Primary sources and the laws, regulations, and official issuances this page relies on. Each citation links directly to the issuing authority’s document.
- LawPhil Project (Arellano Law Foundation). “NIRC §106(A)(2)/§108(B) as amended by RA 11534 (CREATE): zero-rated sales.” lawphil.net. NIRC of 1997 (RA 8424), Sec. 106/108, as amended by RA 11534. Accessed .