VAT for Corporations in the Philippines

Value Added Tax (VAT) in business 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.

Companies in the country have continuous VAT obligations as VAT filings are due on a monthly and a quarterly basis during the financial year. Due to this, companies, accountants and bookkeepers must ensure that they stay on top of VAT filing requirements and obligations to ensure tax compliance to corporate taxation laws in the Philippines.

In this article, 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.

What is VAT in the Philippines?

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.

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 (BIR) – is the seller. However, it’s the buyer who shoulders the cost of the VAT payment on the particular transaction.

Input VAT vs Output VAT

Output VAT and Input VAT is best explained through an everyday example.

1. A retail store sells goods to a customer, VAT is typically 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. For the retail store, this VAT is the Output VAT on the sale of the store’s taxable goods (VAT on sales).

The retail store must remit this VAT to the BIR.

1. When the retail store purchases its goods from the manufacturer, the retail store will pay VAT to the manufacturer/wholesaler as part of the transaction. For the retail store, this VAT is called Input VAT because it is a tax paid by the retail store business on its purchases (VAT on purchases).

The manufacturer or wholesaler must remit the VAT to the BIR.

When determining the amount of VAT that the retail store will remit to the BIR monthly or quarterly, 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 BIR.

Simply: Output VAT – Input VAT = VAT payable to the BIR

VAT Rate in the Philippines

The VAT Rate in the Philippines is 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 Invoices

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.

0% VAT-Rated

Under the Philippine VAT framework, 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 these types of sales, the seller is not required to apply the standard 12% VAT rate. However, Input Tax that relates to the particular sales can be used as a credit against such 0% VAT sales.

VAT Taxpayers in the Philippines

The following entities are required to pay VAT:

1. 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).
2. 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.
3. 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.

VAT-Exempt Activities

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. However, VAT exemptions are also applied to particular business activity being performed by a company.

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 know your VAT and tax 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.

How to Compute and Record 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

2. To record the sales of goods

3. To close the VAT accounts to the VAT payable account

4. To record the payment of VAT

VAT Filings

VAT in the Philippines can be filed and paid monthly (BIR Form 2550M) or quarterly (BIR Form 2550Q).

Monthly payments have no prescribed deadline but it must include all VAT payable for that particular month. Quarterly payments, on the other hand, 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.

How Can CloudCFO Help You

CloudCFO is an online tax services company in the Philippines that provides accounting, bookkeeping and tax compliance services for startups and SMEs in the Philippines. Our team of professional finance experts can ensure that your business remains in compliance with the regulatory framework in the Philippines.

Reach out to us today to learn more about our services!