As a consumer, you may be aware of the additional taxes you pay on your purchase of goods and services, as always indicated in the receipts you receive, but you may not have been curious enough to inquire or do a little research about these taxes. Your weekend grocery or restaurant receipt probably includes a tax item on top of the actual costs of what you purchase or avail, and this is normally labeled as — Value-Added Tax (VAT).
Unlike ordinary consumers, companies and businesses are more particular about this form of tax as it greatly affects their tax compliance and accounting tasks. For instance, VAT must be properly imposed and collected in order for them to benefit from the tax credits or offset the tax they pay on their purchases against the tax collected on their sales. Sounds complicated?
Well, in this article, we’ll walk you through the whats, whys, and hows of Value-Added Tax (VAT). Whether you’re a sole proprietor, a corporate entity, or a foreign company doing business in the Philippines, this comprehensive guide will surely provide you with clarity and answer most, if not all, of the questions that may be running in your mind about this form of tax.
Value-Added Tax (VAT)
A Value-Added Tax, or simply VAT, is an indirect tax levied on the sale, barter, exchange, or lease of goods, services, properties (tangible or intangible), and imports. When applicable, it may be applied to transactions at each stage of a sales cycle, i.e., from manufacturer or producer to final consumer.
It is based on a universal taxation system developed by the Frenchman Maurice Laure in 1954. The term “value-added” refers to the value created in a product in the course of processing or manufacturing. In the Philippines, it was adopted in 1988 by virtue of Executive Order (EO) 273, which initially covered a limited number of goods and services and replaced the sales and turnover tax range.
In particular, the Philippine VAT system follows the OECD-model, with tax due reclaimable throughout the production chain until the final consumer. Under this VAT setup, the seller or producer has two options: absorb the VAT or choose to pass it on to the buyers.
In terms of transactions, there are two categories of VAT: input and output VAT. Input VAT, or more generally called “input tax,” is the amount of value added tax that a business pays on the goods and services it purchases from its suppliers for business operations. It is usually used to offset VAT liabilities on sales. On the other hand, an output VAT or “output tax,” is the VAT charged by a business on the goods and services it sells to its customers. By charging an output VAT, a business collects tax on behalf of the government.
VAT Rates in the Philippines
As far as VAT is concerned, there are three (3) prevailing rates in the Philippines — standard rate, zero rate, and VAT-exempt.
Standard VAT Rate
Currently, the standard VAT rate in the Philippines is twelve percent (12%) of the gross selling price or gross value in money of goods and properties and of the gross receipts acquired from the sale or exchange of services, including properties used or leased. For the importation of goods, the rate depends on the tariff, customs duties, excise taxes, and other charges determined by the Bureau of Customs (BOC).
Zero Percent (0%) VAT Rate
Certain sales or exchanges, such as export sales and services, and sales made to individuals or entities exempted under special laws of an international agreement, are classified as zero-rate or 0% VAT. Such are taxable transactions for VAT purposes, but no output VAT to generate. The input tax related to the particular sales or exchanges, however, may be used as a credit against 0% VAT sales.
VAT Exempt
Sales and services, such as those provided by financial intermediaries and sales or importation of medicine for critical illnesses, UNESCO-covered journals and educational materials, fertilizers, seeds, and seedlings, are normally tax-free. Additionally, business entities with actual gross sales or receipts of less than PHP 3,000,000 are also exempt and not required to submit and file VAT.
VAT Registration-Required Taxpayers
As the law mandates, any person or entity who, in the course of his trade or business, performs or intends to perform taxable activities subject to VAT, if the aggregate amount of actual gross sales or receipts exceeds PHP 3,000,000 in a 12-month period, must be VAT-registered. Additionally, any person or entity, whether or not made in the course of trade or business, who imports goods must also be registered.
Foreign individuals or entities doing business in the Philippines are not only required to secure the necessary business licenses and tax registrations but are also required to be VAT-registered as qualified. The services they render in the country are considered as being rendered in the course of trade and business and are thus generally subject to VAT. However, if no registration requirement applies to them, the said services are subject to the standard VAT rate, which is withheld by the resident payer and which may be claimed back as an input VAT by the withholding agent.
VAT Registration Process in the Philippines
When a business or company is registered with the Bureau of Internal Revenue (BIR), it is issued a Certificate of Registration (COR) or BIR Form 2303, which outlines the applicable tax forms and tax types. This confirms that the company is VAT-registered, if required or qualified.
Before registration, however, the company should project the gross revenue and expenses. If the projected gross revenue is PHP 3,000,000 or less, there is an option to choose between VAT and non-VAT. If it is more than the threshold, VAT registration is automatically required.
If a company fails to register as a VAT taxpayer (when it should be registered as a VAT taxpayer), it is not exempt from paying VAT, and it will be liable to pay the output VAT for the period during which it was not yet registered. Additionally, without proper registration, the input VAT cannot be credited against the output VAT.
To update the registration from non-VAT to VAT, the company must accomplish and file the BIR Form 1905 (Application for Registration Information Update, Correction, or Cancellation), together with all other documentary requirements, with the respective Revenue District Office (RDO).
VAT Invoicing
A VAT-registered individual or business entity is required to issue a VAT invoice for every sale, barter, or exchange of goods or properties and a VAT official receipt for every lease of goods or properties, and for every sale, barter, or change of services.
The invoice or receipt, whichever is applicable, must clearly show the VAT element as a separate item on the document, the same way if the transaction is VAT-exempt or 0% VAT-rated. It may be issued physically or electronically, subject to the registration with the BIR.
VAT Return Filing and Tax Payment
VAT returns are filed monthly and quarterly. For monthly returns, the Monthly Value-Added Tax Declaration (2550M) is filed not later than the 20th day following the end of each month. The Quarterly Value-Added Tax Return (2550Q), on the other hand, is filed not later than the 25th day following the end of each taxable quarter, which is synchronized with the income tax quarter of a taxpayer, i.e., either fiscal quarter or calendar quarter.
VAT returns are generally filed and paid at a duly accredited Authorized Agent Bank (AAB) within the jurisdiction of the Revenue District Office (RDO) where the taxpayer is registered. In places where there are no AABs, the returns are filed with the Revenue Collection Officer or duly authorized City or Municipal Treasurer. For taxpayers with branches, only one consolidated return is filed for the principal place of business or head office.
Electronic filing and payment may also be made by taxpayers enrolled in the BIR Electronic Filing and Payment System (eFPS).
VAT-Related Penalties
As previously discussed, any VAT-registered person or entity collects tax on behalf of the government. Thus, if it fails to collect or pay the correct output VAT, it may be penalized. In the Philippines, it is the BIR, as mandated by law, that imposes penalties for certain violations related to the filing and payment for the VAT returns. As a general rule, a deficient tax has to be paid, including the twenty percent (20%) interest per annum.
Additionally, a surcharge equivalent to twenty-five percent (25%) of the amount due has to be paid for violations, such as failure to file the return, wrong venue or out-of-district filing, and failure to pay the full or part of tax shown on the return. The penalty percentage may also increase to fifty percent (50%) in cases of willful neglect and fraud. Read the 9 Common Taxpayers’ Violations and Their Corresponding BIR Penalties [Plus Tips to Easily Avoid Them] to find out more about these violations.
Depending on the violation, a compromise penalty starting from PHP 1,000 to PHP 25,000 may also be settled or face an imprisonment of not less than six (6) months and up to ten (10) years. The BIR Commissioner may also order the temporary closure of the business establishment and its operations for a minimum of five (5) days until compliance.
About FilePino’s BIR Tax Filing Services
FilePino is your one-stop-shop business consulting firm that offers a wide range of business formation and post-formation services that include bookkeeping, accounting, and BIR tax filing services. With our tax filing services, we can prepare your monthly, quarterly, and annual returns, i.e., including VAT, file them online or onsite depending on their applicability, and finally pay your taxes due.
Preparation
We usually start by gathering the documents and accounting records needed for drafting the BIR tax returns. These may include financial documents, such as receipts, invoices, bank statements, and payroll records.
Tax Computation
We then proceed to the calculations of taxes due based on the documents gathered, prevailing tax rates, and the latest tax laws and regulations. Calculations are streamlined using digital tools but are manually scrutinized to ensure accuracy.
Tax Form Completion
Our accountants determine the appropriate BIR tax forms or returns, e.g., Income Tax Return, VAT, Percentage Tax, etc., and accomplish them accurately and properly based on the information gathered from the client or their in-house accounts and results of calculations.
Tax Return Filing and Payment
For BIR’s Electronic Filing and Payment System (eFPS) filers, returns are usually filed online, and payments are made via our clients’ linked online banking accounts. For non-eFPS filers, funds are directly requested from the clients.
Record Keeping
Stamped and duly received BIR tax returns and payment receipts are secured after filing and turned over to the clients for their safekeeping. As per BIR regulations, these must be kept for a certain number of years and prepared in cases of audits.
… and you might just need our assistance.
Ready to outsource bookkeeping, accounting, and tax filing services? Set up a consultation with FilePino today! Call us at (02) 8478-5826 (landline) and 0917 892 2337 (mobile) or send an email to info@filepino.com.