Philippines services
If your business is selling or buying services, you need to understand your rights and responsibilities when it comes to Official Receipts in the Philippines. That’s why we have provided a detailed Explainer. Read on!
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!
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…
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.
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”.
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.
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:
You may also check out our guide on how to fill out an official receipt and sales invoice.
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:
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.
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!
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!
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.
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!
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:
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 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 through our tax preparation services 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 hello@cloudcfo.ph for more information on how we can help your company achieve full compliance here in the Philippines!
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