Official Receipts are a key element of the tax compliance framework in the Philippines!
Founders, owners, managers or employees involved in any form of business in the Philippines, will likely be familiar with the concept of the Official Receipt, more commonly referred to as the OR.
Importantly, the Official Receipt is a key compliance document for a business whether it is providing services or receiving services. The compliance requirements are therefore a two-way system that must be considered by all PH businesses.
In short, if you run or manage a business in the Philippines, you need to understand the rights, obligations and responsibilities when it comes to Official Receipts and BIR compliance in the Philippines!
Given its significant importance for PH businesses, you will find below an entire article dedicated to explaining all you need to know about the Official Receipt and why it is such an important document for PH businesses – including from the perspective of tax compliance!
What is an Official Receipt?
As a business owner, founder or manager, are you familiar with some of the following statements from your accounting, operations or compliance team?
“Where is the Official Receipt from that supplier?”
“Can you please ask that vendor to send us the Official Receipt before the end of this week?”
“Where are the copies of the Official Receipts that we issued to customers last month?”
“We can’t close our books this month until we find those ORs!”
Here are two more questions…
- Why is the Official Receipt such an important topic and document in the Philippines?
2. What’s all the fuss about?
In short, an Official Receipt or OR, is an official document that provides evidence that a sale transaction relating to a service has taken place. If a PH business is providing a service for another business or individual, once that service has been performed and payment made, the business is required to issue an Official Receipt to the beneficiary (or payor) for that service.
On the other hand, if a company is receiving a service from another business or individual, the company should request and ensure that it receives an Official Receipt once payment has been processed.
Below, we outline exactly why the issuing and receiving of an Official Receipt is so important when conducting business in the Philippines.
The Law on Official Receipts
Section 237 of the National Internal Revenue Code of 1997, otherwise known as The Tax Code, is the primary source of the requirement for Philippine taxpayers to issue an Official Receipt upon the sale of a service.
Section 237 provides that “All persons subject to an internal revenue tax shall, for each sale or transfer of merchandise or for services rendered valued at Twenty-five pesos (P25.00) or more, issue duly registered receipts or sales or commercial invoices, prepared at least in duplicate, showing the date of transaction, quantity, unit cost and description of merchandise or nature of service”.
So, as mentioned above, if you are in the business of selling services, you are required, under law to issue an Official Receipt for the sale of any service that exceeds the value of twenty-five Pesos. Clearly, in the case of services, this is quite likely to cover all types of services given the low threshold value.
Since the introduction of Section 237 of The Tax Code, there have been numerous amendments, updates, Regulations, Orders and Circulars issued by the Government and the BIR. Certain of these updates relate to what information is required to be included in an Official Receipt when issued by a business.
For more on these requirements, see the section below entitled “Requirements for Official Receipts”.
Official Receipts v Sales Invoices
In the Philippines, there is an important distinction between the sale of services and the sale of goods. It is therefore important for owners, managers and/or their finance team to clearly identify the revenue model of the business, confirm if it is selling services or goods (or perhaps both in a hybrid model!) and ensure the correct documentation is in place to achieve compliance!
As mentioned above, Official Receipts are required for the sale of a service.
A sales invoice is a different document and is required in the case of a sale of goods. A sales invoice provides evidence that the sale of goods has occurred and that payment has now become due for those goods. Once payment is received, a collection receipt, which is different than an Official Receipt, is then issued to confirm the payment for and sale of the goods.
Let’s use the example of a marketing, branding or creative agency business – a growing industry in the Philippines in 2023.
Under the standard creative agency business model, the agency will generally be providing a service to its clients – not selling goods. In practice, this means that the agency would be relying on its team and their expert skills to develop marketing campaigns and strategies, advise on social media strategies, generate communications campaigns, generate graphic designs and much more – for its clients. There would generally be no selling of physical or tangible goods or products to the clients of the agency.
For more information on the creative agency business model, check out our article on Bookkeeping for Creative Agencies in the Philippines.
Contrast this with an e-commerce retail company where the business is concerned primarily with the sale of physical/tangible goods and products to their customer base. The business would be selling goods and would therefore need to consider the compliance obligations related to the issuing of a sales invoice!
For further and more detailed information on the requirements for Philippine businesses to issue a sales invoices the various compliance obligations, feel free to check out Sales Invoices in the Philippines and What a Business Must Do to Ensure Compliance.
Issuing Official Receipts
Below is a brief example of how the issuing of an Official Receipt would generally work in practice for businesses that sell services in the Philippines:
- The service business will agree with its client a service scope, fee, payment terms and timeline for a particular project or ongoing monthly service that the service business will perform.
- Once the services have been performed (or perhaps, part of the service, depending on the payment terms), the service business will issue an invoice to the client for services rendered.
- The service business will generally book the value of the invoice in the business accounts as an accounts receivable (i.e. money that is due to be paid to the service business). Here’s some more information on Accrual Accounting v Cash Accounting.
- The client will receive the invoice from the service business.
- The client should pay the value of the invoice to the service business within the agreed payment terms.
- Upon receipt of payment for the services rendered, the service business is required to issue an Official Receipt to the client which identifies the details of the payment for that sales transaction. See “Official Receipt Requirements” section below.
- The service business must issue the Official Receipt to the client to ensure compliance with BIR obligations. The client, however, must also obtain an Official Receipt to ensure that they can validate their relevant company expenses when computing income tax payable (see “Official Receipts and Taxable Income” section below).
You may also check out our guide on how to fill out an official receipt and sales invoice.
Authority to Print
The Bureau of Internal Revenue or BIR is concerned with ensuring that receipts are properly issued by taxpaying businesses across the Philippines.
As such, once a taxpayer business has been registered with the BIR, the business must apply to the BIR in order to obtain an Authority to Print Certificate. This is the document that enables a business to generate and issue Official Receipts to customers.
This Authority to Print Certificate can be applied for at the same time as the company applies for its tax registration when submitting via BIR Form 1903. It can also be applied for subsequently and separately, if the need arises, via BIR Form 1906.
Taxpayers in the Philippines who are registering with the BIR for an Authority to Print Official Receipts must ensure that the Official Receipts are physically printed by a BIR accredited printer.
As such, when applying for an Authority to Print, the following information about the BIR Accredited Printer must be provided in the application:
- Name of BIR Accredited Printer
- TIN (Tax Identification Number) of Printer
- Printer’s Accreditation Number
- Printer’s Business Address.
Requirements for Official Receipts
The mandatory requirements for what information must be contained on an Official Receipt has been subject to various issuances, updates and clarifications by the BIR over recent years. Many of these relate to the differences in information between the issuing of manual Receipts and receipts generated by a CRM (cash register machine), POS (point of sales system) or Computerized Software.
There has been a long line of Orders, Regulations and Circulars on this subject area, just a selection of which are outlined below.
- Revenue Memorandum Order (RMO) 12-2013 – this was the key source of information required to be indicated on Official Receipts. However, this information only applied to the issue of manual Official Receipts and excluded taxpayers issuing receipts through cash-register machines, POS machines and the computerized accounting system (CAS). The information list includes the following:
- Taxpayer’s (TP) Registered Name
- TP’s Business Name/style (if any)
- A statement that the taxpayer is VAT or Non VAT registered followed by the Taxpayers Identification Number (TIN) and 4-digit Branch Code
- Business address where ORs will be used
- Date of transaction
- Serial number of the OR printed prominently;
- A space provided for the Name, Address and TIN of the buyer
- Description of the nature of service
- Unit cost
- Total cost
- VAT amount (if transaction is subject to 12% VAT)
- If the VAT taxpayer is engaged in mixed transactions, the amounts involved shall be broken down to: VATable Sales, VAT Amount, Zero Rated Sales, and VAT Exempt Sales;
- For Non-VAT ORs/SIs, and other CIs (VAT or Non-VAT) such as delivery receipts, order slips, purchase orders, provisional receipts, acknowledgment receipts, collection receipts, credit/debit memo, job orders and other similar documents that form part of the accounting records of the taxpayer and/or issued to their customers, the phrase “THIS DOCUMENT IS NOT VALID FOR CLAIM OF INPUT TAX” in bold letters, shall be conspicuously printed at the face of the Non VAT ORs/SIs and other CIs
- Taxpayers whose transactions are not subject to VAT or Percentage Tax shall issue non-VAT principal receipts indicating prominently at the face of such receipts the word “EXEMPT”
- The following information must also be printed at the bottom portion of the OR:
- Name, address and TIN of the accredited printer
- Accreditation number and the date of accreditation of the accredited printer;
- ATP number, OCN, date issued and valid until
- BIR Permit Number (if loose leaf OR)
- Approved inclusive serial numbers of OR
- Security/special markings/features of the accredited printer
- The phrase “THIS INVOICE/RECEIPT SHALL BE VALID FOR FIVE (5) YEARS FROM THE DATE OF THE ATP.”
- Revenue Regulation 10-2015 – This RR outlined the detailed information that should appear on Official Receipts generated through CRM/POS and other invoice/receipt-generating machine/software. The list was subsequently amended by Revenue Regulation 16-2018 (see list below).
- Revenue Memorandum Circular 64-2015 – This RMC was issued to reiterate the information requirements that must be shown on receipts, invoices and other commercial invoices generated from CRM/POS/receipt generating software pursuant to Revenue Regulations (RR) No. 10-2015 and other regulations regarding VAT receipts and invoices. It provides that the following information of the purchaser, customer or client must be indicated on VAT receipts and invoices, in the case of sales amounting to one thousand pesos (P1,000.00) or more and where the sale is made to a VAT registered person:
- Name of purchaser, customer or client,
- Taxpayer identification Number (TlN); and
- Business style (if any)
- Revenue Regulation 16-2018 – this amended the original list of information requirements contained within Revenue Regulation 10-2015 (see above). This RR provided that all taxpayers using CRM, POS machines or other invoice/receipt generating machine/software shall show the information required (under Section 5 of RR 10-2015, as amended), namely:
- Taxpayer’s (TP) Registered Name;
- TP’s Business Name/style (if any)
- A statement that the taxpayer is VAT or NON VAT registered followed by the Taxpayers Identification Number (TlN) and 4-digit branch code
- Machine identification Number (MlN);
- Serial number of the CRM/POS machine;
- Detailed business address where such Official Receipts shall be used/located;
- Date of transaction;
- Serial Number of the OR printed prominently;
- A space provided for the Name, Address and TIN of the buyer;
- Description of the nature of service;
- Unit cost
- Total cost;
- VAT amount (if transaction is subject to 12% VAT);
- lf the VAT taxpayer is engaged in mixed transactions, the amounts involved shall be broken down to: VATable sales, VAT Amount, Zero Rated Sales, and VAT Exempt Sales;
- For Non-VAT ORs, Sales Invoices and Commercial Invoices (VAT or NON-VAT) such as delivery receipts, order slips, purchase orders, provisional receipts, acknowledgment receipts, collection receipts, credit/debit memo, job orders and other similar documents that form part of the accounting records of the taxpayer and/or issued to the customers, the phrase “THIS DOCUMENT lS NOT VALID FOR CLAIM OF INPUT TAX” in bold letters, shall be conspicuously printed at the bottom of the Non VAT ORs/SIs/CIs;
- Taxpayers whose transactions are not subject to VAT or Percentage Tax shall issue Non-VAT principal receipts/invoices indicating prominently at the face of such receipts/invoices the word ‘EXEMPT’;
- The following shall be printed at the bottom portion of the OR:
- address and TIN of the accredited supplier of CRM/POS/Other similar machines/software;
- Accreditation number and the date of accreditation (issued and value until) of the accredited supplier;
- BIR Final Permit To Use (PTU) Number;
- The phrase “THIS INVOICE/RECEIPT SHALL BE VALID FOR FIVE (5) YEARS FROM THE DATE OF THE PERMIT TO USE.”
- Revenue Memorandum Circular 55-2019 – this clarified the definition of “Business Style”, a category of information required to be indicated on Official Receipts. “Business Style” has now been clarified to mean the business name registered with a regulatory body (e.g. SEC) and used by the taxpayer other than its official registered name or company name.
Official Receipts and Taxable Income
Business owners and managers should clearly understand that expenses relating to the purchase of a service will not be considered as an allowable deduction to taxable income if it is not supported by an Official Receipt. In short, the BIR requires that all such expenses be supported and evidenced by an Official Receipt.
Taxable income forms the starting point for the amount of income tax that must be remitted to the government on a quarterly and yearly basis. Of course, the lower the taxable income, the lower the amount of tax that a business will have to remit to the BIR – provided that the tax has been computed accurately and in accordance with BIR requirements.
“Allowable deductions” are specific deductions that a business is entitled to deduct from the gross (total) income payable in order to arrive at the final taxable income amount. Business owners should consult the BIR requirements or indeed, their own accounting and finance department, to understand what type of deductions can be treated as “allowable deductions” under the PH tax compliance framework.
If an Official Receipt cannot be obtained by a business for expenses incurred in relation to the purchase of a service, from a BIR perspective, there is no supporting evidence that such expenses were properly incurred. Such expenses should not, therefore, be applicable for deduction from business income. This means that the business will have a higher level of taxable income and a higher tax liability at the end of the day.
From the above, it should be quite clear just how important it is to obtain an Official Receipt for any services purchased by your business!
Expert Tip: When engaging a new vendor business or service supplier for your business in the Philippines, it is always important to ensure that the vendor/supplier is able and willing to provide your business with an Official Receipt for services rendered. This is sometimes not possible if the vendor/supplier is not actually a BIR registered company – so it is also helpful to enquire about the registration status of the business before commencing with their services!
Official Receipts and VAT Computations
For a service company, Official Receipts are the basis for calculating the level of Value Added Tax to be submitted to the BIR.
VAT is an indirect tax applied to all applicable sales of goods or services in the Philippines. VAT is currently set at 12% in the Philippines. The VAT collected on the sale of goods and services is called Output VAT. VAT paid on the purchase of goods and services is called Input VAT.
In order to understand how much VAT is actually payable on a service, a business will have to rely on their Official Receipts. An Official Receipt should be issued or received for every service transaction entered into by a business in the Philippines. VAT cannot be properly or correctly evidenced, computed or remitted to the government without Official Receipts!
Official Receipts and Withholding Tax Computations
Withholding taxes are taxes that have to be withheld from a payment by a business to its supplier. If, for example, you are required by law to deduct 2% withholding tax from a payment to your supplier, you are legally obligated to file and remit that 2% withholding tax, and at the same time, you must provide the supplier with BIR Form 2307 as proof that withholding tax has been applied.
BIR Form 2307 will then be used by the supplier when applying for a tax credit. The amount withheld will be deducted from the supplier’s tax payable because effectively, she has already remitted the tax in advance through the service payment.
Just as with VAT (see above), a business should rely on their Official Receipts when computing the level of Withholding Tax payable. An Official Receipt should be issued or received for every service transaction entered into by a business in the Philippines. Again, just like VAT, Withholding Tax cannot be properly or correctly evidenced, computed or remitted to the government without Official Receipts.
For more information on your company’s Withholding Tax obligations, check out our recent article on Withholding Tax in the Philippines.
Official Receipts and Audit Season in the Philippines
Audit season comes around every year for companies in the Philippines. Your business should be in a position to validate all transactions and activities undertaken throughout the year!
As part of the audit, business are required to prepare and submit various finance and tax related documents to a number of regulatory bodies, including the BIR and the SEC. The audit enables the Government to ensure that companies are adhering to their corporate and financial obligations.
A company appointed auditor will need all relevant financial documents to perform the audit. The company must therefore, in conjunction with its accountant, retrieve and provide all requested information to the auditor. Included in this will be the collection and provision of all relevant Official Receipts, both issued and received.
The 2022 Financial Year is now coming to a close! This means that Audit Season 2023 is just around the corner – from January 2023 to April 2023 for most PH companies!
The CloudCfo team will shortly be publishing an Explainer on what PH businesses need to consider for Audit Season 2023 and how they can commence preparations as early as possible!
So don’t forget to check back to the CloudCfo Insights Blog over the coming weeks for our Explainer on Audit Season 2023 in the Philippines!
Penalties for Non-Compliance
The Government of the Philippines takes the issuing and collection of Official Receipts seriously. The monitoring of Official Receipts is an important tool the Government has at its disposal to ensure that companies are correctly reporting all service transactions and paying the correct level of taxes. If there are no receipts, it will be difficult to evidence that a sales transaction has occurred. It will also be difficult to claim tax deductible expenses.
As such, here are just some of the BIR penalties related to incorrect/failure to issue receipts:
- For failure to issue receipts – P10,000 for the first offense and P20,000 for the second offense
- For refusal to issue receipts – P25,000 for the first offense and P50,000 for the second offense
- For issuance of receipts that do not truly reflect and/or contain all the information required to be shown therein – P1,000 for the first offense and P2,500 for the second offense
- For possession or use of unregistered receipts or invoices – P10,000 for the first offense and P20,000 for the second offense
Businesses that do not issue receipts can be reported to the BIR through their online facility eComplaint NO OR. Complaints received within the eComplaint service will be reviewed and categorized by the BIR. The complaint will then be referred to the relevant investigating office or the Regional Investigation Division for further action.
CloudCfo – Tax Compliance Services for PH Startups and SMEs
CloudCfo is an outsourced accounting, bookkeeping and finance firm servicing startups and SMEs in the Philippines!
As part of our core accounting and bookkeeping services, we also support companies to navigate the tax compliance framework in the Philippines and help to ensure that they remain compliant with the BIR across all financial transactions into which they might enter!
Talk to the CloudCfo Team today! Visit us at cloudcfo.ph or contact us at firstname.lastname@example.org for more information on how we can help your company achieve full compliance here in the Philippines!