Updated on July 4, 2022
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1. VAT Scope, VAT Rates and VAT Exemptions
In 1988, the Philippines enacted Value Added Tax (VAT). the National Internal Revenue Code’s Title IV principally governs this area (NIRC). Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act in 2021 brought about several adjustments to applicable VAT regulations.
Generally speaking, VAT is imposed on anyone who sells, barters for commodities or services or leases or rents property, as well as anyone who imports things.
A transaction is “in the course of trade or business” if the person engaged in it is engaged in regular commercial or economic activity, including transactions incidental to it, by any person regardless of whether or not the person engaged in it is a non-stock, nonprofit private organization (irregardless of the disposition of its net income and whether or not it sells exclusively to members or their guests) or government entity.
The typical VAT rate is 12 percent of the gross selling price or gross value for most supplies of goods, assets, and services.
In most cases, a final VAT withholding tax of 5% is levied on purchases made by the government or government-controlled enterprises. Zero percent (0%) VAT is also available.
Special business taxes (i.e. other Percentage Tax/OPT) of 3% to 30% may be applied to the sale of particular commodities, properties, or services listed in Title V of the National Internal Revenue Code that are exempt from VAT.
In response to the COVID-19 outbreak, the Philippine Congress implemented fiscal measures to reduce the percentage tax from 3% to 1% commencing in July 2020 and lasting until June 2023.
Food, agricultural products, and immigrant personal property are among the many items excluded from input tax under the country’s VAT law, which applies only to zero-rated sales.
A business owner who sells or provides VAT-exempt goods or services is unable to charge or deduct the VAT they paid on their purchases. Input VAT is a fee an entrepreneur bears in these situations. However, a VAT registered person may chose not to apply exemptions to its sales of goods, assets, or services in certain instances..
With regard to taxes under Philippine VAT, the onus of collection lies with the country of destination, use, or consumption, as defined by the Cross-Border Doctrine (sometimes referred to as the Destination Principle). Since the recipient of export-related sales is not a tax resident of the Philippines, they are normally exempt from taxation.
When it comes to providing cross-border services, the recipient must be a person “doing business outside the Philippines.” A number of courts have ruled that the definition of doing business outside of the Philippines must be evaluated in light of the country’s unique environmental conditions.
That being said, it’s important to keep in mind that the burden of proof falls on those who are claiming an exemption from taxes or a tax refund, as well as that the laws and evidence are often interpreted in favor of the tax authorities.
2. VAT registration and simplifications
Anyone whose annual gross sales or revenues exceed PHP 3,000,000 in the course of their business, or who plans to engage in taxable activities subject to VAT, must register with the VAT authority.
Any person who imports items, whether or not in the course of his or her trade or business
A VAT taxpayer who was required to register but did not do so.
In general, a foreign individual or company conducting business in the Philippines is required to register for business permits, including registration for tax (s). Non-Philippine residents who provide services in the Philippines are considered to be engaged in trade or business and so liable to VAT. Withholding agents can collect input VAT back from resident payers who do not have to register for their services in order to avoid having to pay a higher standard VAT rate.
There aren’t any hard and fast guidelines for simplifying things.
The Philippines does not require a fiscal representative for foreign non-residents (unless for import reasons). The payer will be a withholding agent if VAT liabilities arise.
If our expertise is required, Rödl & Partner Philippines can help.
3. Declaration requirements and penalty regime
You can file and pay your taxes by mail or online.
DECLARATION IN MANUAL FORMAT: In most cases, VAT is paid and filled out by an Authorized Agent Bank that has received the necessary accreditation (AAB). If the taxpayer is required to report (and pay) at a tax authority office, even if no payment is due or there is AAB near their home, they must do so there (e.g. District Revenue Office). The reporting must be completed no later than the 20th day of the month following the reporting period in question (i.e. calendar month).
In addition, on the 25th of the month after the applicable quarter, a quarterly report must be filed – and payments must be made if necessary.
In addition to the above-mentioned reports, the tax authority may want to receive quarterly summaries of purchases and/or sales to aid in cross-referencing and enforcement.
Within ten days of the transaction, a VAT-withholding return must be filed and tax payments made.
In addition to the paperless submission of VAT reports and payments, electronic declarations can also be made online.
A secure platform is provided by the Electronic Filing and Payment System (EFPS) after enrolment. Internet-banking services of an Authorized Agent Bank are used to make any further payments, if any.
Taxes, returns, and registrations might be delayed or paid incorrectly if they are filed or paid late. Interest of 20% per year must be added to the amount of tax that was underpaid. There may also be administrative or criminal sanctions or charges.
As an illustration, the following infractions are subject to a 25 percent surcharge:
Failure to file and pay any tax owing under the terms of the NIRC or other rules and regulations;
Internal Revenue Service officers other than those with whom the return must be submitted;
Paying the tax due but failing to file a return in accordance with the NIRC or other rules and regulations, or failing to pay the full amount of tax due but failing to file a return by the due date;
Inability to make timely payment of the deficiency tax as specified in the notification of assessment;
Failing to collect, pay, or refund withholding tax by the withholding agent.
A person who is not registered for VAT is unable to issue a VAT invoice or receipt.
Willful failure to file a tax return within the time frame specified; or failure to pay a tax bill as required
A dishonest or fraudulent tax return is intentionally submitted.
A compromise penalty ranging from PHP 1,000 to PHP 25,000 or imprisonment (e.g. not less than six months to ten years) may also be imposed for violations of the VAT rule.
Additionally, the Tax Commissioner may order a five-day closure of the business in the event of the following infractions until complete compliance is achieved:
Understatement of taxable sales or receipts by 30 percent or more of the correct taxable sales or receipts for the taxable quarter; Failure to register for VAT; and Failure to produce VAT receipts or invoices (if required).
If the individual circumstances justify, penalties may be waived under the NRIC’s “exceptional circumstances” policy.
4. VAT recovery
Under certain situations, if a taxpayer is registered for VAT purposes in the Philippines, he or she is allowed to declare and deduct Philippine input VAT (i.e. the VAT due or paid on importation of products or local purchases of commodities, assets or services) inside the VAT return.
This transaction may be regarded as a credible input if it is accompanied by a VAT invoice issued by a VAT-registered person for the acquisition of goods, the purchase of property, or official receipt for services. VAT:
Purchasing or bringing in products
For use in trade or business for which deductions for depreciation or amortization are allowed under the tax code;
Real estate purchase for which VAT has been paid; purchase of services for which VAT has been paid. Both of these examples are valid.
Either a transitory or presumptive input tax
There are some cases in which input tax credits are available for transactions that occurred before the taxpayer registered for VAT, as well as for certain agricultural products. There will be a carryover if there is an excess of input VAT over output VAT in a given tax period. The VAT-registered person may also request a refund or a Tax Credit Certificate of a positive input VAT balance within two years of when the sales occurred.
Imports of products, assets, and services that are unrelated to the trade or business in which the VAT-registered person engages are not eligible for input VAT credits.
Those who are registered for VAT must provide a VAT invoice for all transactions involving the sale, barter, or exchange of products, as well as VAT official receipts for all transactions involving the leasing of commodities or properties.
Invoices and receipts can now be generated electronically as of the current date (e.g. via email, computer fax or submission of the printout version). However, the Internal Revenue Service (IRS) requires that all e-invoicing and e-receipt systems be registered.
In the Philippines, a group VAT registration is only possible if a company has a large number of branch offices. In this situation, only one consolidated return must be filed for the primary location of company and all of its branches.