Value Added Tax, or VAT, is a tax applied on the sale of goods and services in the Philippines. When applicable, VAT may be applied to transactions at each stage of a sales cycle – from manufacturer to the final buyer.
Corporations in the Philippines have continuous VAT obligations as VAT filings are due on both a monthly and a quarterly basis during the financial year.
As such, companies, accountants and bookkeepers in the Philippines must ensure to keep on top of their VAT filing requirements and obligations to ensure compliance at all times.
We previously wrote about the different reasons why taxation can be so complex for corporations in the Philippines. In this article, we focus on just one element of the taxation framework – VAT.
We explain what corporations need to understand about VAT in the Philippines. We have also provided examples on how VAT is recorded from an accounting, bookkeeping and tax compliance perspective.
So, let’s get started!
What is VAT?
Value Added Tax, or VAT, is a tax imposed on the sale, exchange or lease of goods, properties and services in the Philippines. VAT is also applied as a tax on the importation of goods into the Philippines.
In other countries, such as Singapore for example, VAT is referred to as a Goods and Sales Tax, or GST.
VAT is considered an indirect tax, as the statutory taxpayer for a transaction – i.e. the one required to file and remit VAT payments to the Bureau of Internal Revenue, or BIR – is the seller. However, it’s the buyer who shoulders the economic burden (i.e. the cost) of the VAT payment on the particular transaction.
Output VAT v Input VAT in the Philippines
Output VAT and Input VAT can be best explained through an everyday example.
If a local retail store business sells goods to a customer, there is likely to be an amount for “VAT” included in the total cost of the goods on the sales receipt. The customer will shoulder the cost of the VAT payable in this transaction. From the retail store’s perspective, this VAT is the Output VAT on the sale of the store’s taxable goods (VAT on sales). The retail store is required to remit this VAT to the BIR.
However, when the retail store purchases its goods from the manufacturer or wholesaler company, the retail store will pay VAT to the manufacturer/wholesaler as part of that transaction. From the retail store’s perspective, this VAT is called Input VAT – as it is a tax paid by the retail store business on its own purchases (VAT on purchases). In this transaction, it will be the manufacturer or wholesaler that is required to remit the VAT to the BIR.
When determining the amount of VAT that the retail store will have to remit to the BIR each month or quarter, the store can use the Input VAT value from its purchases as a type of credit against the Output VAT from its sales. The surplus of Output VAT will then be payable to the BIR.
Simply: Output VAT less Input VAT equals VAT payable to the BIR.
VAT Rate in the Philippines
The VAT Rate in the Philippines is 12%.
The 12% VAT is applied on the taxable gross selling price of goods and properties and on the gross value of receipts from services and lease of properties.
The 12% VAT on the importation of goods is based on the total cost of importation.
There is also a 0% VAT Rate which is applied on export sales and 0% VAT-rated sales (see further below).
VAT-registered corporations in the Philippines are required to issue a VAT Invoice for every sale or lease of goods or properties, or a VAT Official Receipt for every sale of a service.
The VAT Official Receipt or VAT Invoice must clearly show the VAT element as a separate item on the document.
If a particular sale or transaction is either VAT-exempt (see below) or 0% VAT-rated (see below), this should be clearly and visibly stated on the VAT Invoice or VAT Official Receipt.
Under the VAT framework in the Philippines, certain sales can be classified as Zero-Rated or 0% VAT Sales. Such sales will be taxable transactions for VAT purposes, but do not generate any Output VAT. For such sales, a seller is not required to apply the standard 12% VAT rate. However, Input Tax that relates to the particular sales can be applied as a credit against such 0% VAT sales.
Below are just some of the main activities, performed by VAT registered taxpayers, which can be subject to 0% VAT:
- Processing, manufacturing or repacking goods, for other persons doing business outside the Philippines and which are subsequently exported
- Services other than processing, manufacturing or repacking, rendered to a person engaged in business conducted outside the Philippines
- Sale of goods exported outside of the Philippines
- Sale of services exported outside of the Philippines
- Services rendered where international agreement or specific laws provide for 0% VAT on the sale of services.
For a full list of 0% VAT-Rated activities and sales, corporations can refer to the BIR guidance HERE.
VAT Taxpayers in the Philippines
The following entities are required to pay VAT:
- Persons or entities who, in the course of trade or business, sells, exchanges, leases goods or properties or renders services subject to VAT where the aggregate amount of actual gross sales or receipts exceeds Three Million Pesos (Php3,000,000).
- Individuals or businesses that voluntarily registered as VAT taxpayers, even if they did not meet the VAT aggregate amount of P3,000,000 in gross sales or receipts.
- Persons or entities that import goods.
Remember! If a corporation fails to register as a VAT taxpayer (when they should be registered as a VAT taxpayer), they are not exempt from paying VAT. The corporation will still be liable to pay the Output VAT for the period during which it was not registered! Another implication of not registering for or paying VAT is that Input VAT cannot then be credited against the Output VAT!
VAT Exempt versus 0% VAT
VAT exempt sales and zero-rated VAT sales will not give rise to an obligation to pay VAT on the relevant transaction. However, a key difference between the two categories is the treatment of Input VAT.
In exempt sales, the Input VAT cannot be credited against the Output VAT.
In zero-rated VAT sales, Input VAT can be credited against Output VAT.
As mentioned above, companies in the Philippines that do not exceed the aggregate amount of Three Million Pesos (Php3,000,000) in actual gross sales or receipts are not required to remit and file VAT. Such companies are exempt.
However, VAT exemptions are also applied to the particular business activity being performed by a company.
For a comprehensive list of VAT-exempt sales activities in the Philippines, check out the BIR website HERE and look for the section “What are the VAT-exempt transactions?”.
However, as a business, it is important to identify and be clear on the VAT applicability of the goods or services that you are selling. As always, make sure to consult your accountant or bookkeeper here in the Philippines to understand your VAT and tax compliance obligations.
How to Know if your Corporation is VAT Registered?
When you register your business in the Philippines with the BIR, you will receive a Certificate of Registration (Form 2303). This Certificate outlines the corporate taxes that the company is required to pay. It will confirm if the corporation is VAT-registered.
Certain companies may not be VAT registered when the business is first registered. However, a corporation can subsequently apply to become VAT registered. So when reviewing your Certificate of Registration for VAT registration, make sure to enquire if there is any additional documentation confirming a subsequent registration for VAT.
In our recent article on BIR Form 2303 or the Certificate of Registration, we explain all you need to know about this important corporate document.
Accounting for VAT
Below, we use an example of a fictitious company, QRS Co. which shows how VAT is recorded from an accounting, bookkeeping and tax compliance perspective
QRS Co. is a VAT-registered company. In the month of April, its total purchases amounted to P4,480,000 inclusive of P480,000 VAT (Input VAT). Sales for the same month amounted to P5,200,000 (exclusive of VAT).
The Output VAT for the month is computed as P624,000 (P5,200,00*12%). Here is how the VAT transactions would be recorded in QRS Co.’s books:
1. To record the purchase of goods
|Accounts payable||P 4,480,000|
2. To record the sales of goods
|Account Receivables||P 5,824,000|
3. To close the VAT accounts to the VAT payable account
|Output VAT||P 624,000|
|Input VAT||P 480,000|
4. To record the payment of VAT
|VAT payable||P 144,000|
VAT in the Philippines must be filed and paid on a monthly basis through the submission of BIR Form 2550M (Monthly Value-Added Tax Declaration). This must be filed within 20 days from the end of the month to which the VAT applies. Form 2550M will include all of the VAT payable for the particular month.
A VAT Return must also be filed and paid quarterly through BIR Form 2550Q (Quarterly Value-Added Tax Return). This must be filed within 25 days from the end of the relevant quarter. Form 2550Q will include the cumulative VAT amount payable for the quarter.
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