Updated on June 28, 2022
- 1 What is VAT?
- 2 Output VAT v Input VAT in the Philippines
- 3 VAT Rate in the Philippines
- 4 VAT Invoices
- 5 0% VAT-Rated
- 6 VAT Taxpayers in the Philippines
- 7 VAT Exempt versus 0% VAT
- 8 VAT-Exempt Activities
- 9 How to Know if your Corporation is VAT Registered?
- 10 Accounting for VAT
- 11 VAT Filings
- 12 CloudCfo
In the Philippines, a tax known as VAT is levied on the sale of goods and services. It is possible to apply VAT to all stages of the sales cycle, from the manufacturer to final purchaser.
During the financial year, corporations in the Philippines are subject to continuous VAT responsibilities due to the fact that VAT filings are required monthly and quarterly.
As a result, businesses, accountants, and bookkeepers in the Philippines must always be aware of and compliant with their VAT filing duties.
We recently discussed the several reasons why taxation in the Philippines can be so complicated for firms. This article focuses just on VAT, which is a component of the overall taxation scheme.
What firms need to know about the Philippines’ Value Added Tax (VAT). Examples of how VAT is recorded in accounting, bookkeeping, and tax compliance have also been supplied.
We can begin now, shall we?
What is VAT?
Any sale, exchange, or rental of goods, properties, or services in the Philippines is subject to a tax known as Wealth Tax (VAT). Products brought into the country are also subject to VAT.
In Singapore and other countries, a Taxation (GST), or VAT, is commonly referred to.
It is the seller’s responsibility to file and remit VAT payments to the Internal Revenue Service (IRS) because they are the statutory taxpayers for VAT purposes (BIR). However, in this specific transaction, the buyer is responsible for paying the VAT.
Output VAT v Input VAT in the Philippines
The best way to demonstrate Output VAT and Input VAT is to use a real-world example.
Customers who purchase goods from a local retail outlet are likely to see a “VAT” sum added in the total price on the sales receipt. It’s the customer’s responsibility to pay the VAT in this transaction. The retail store’s view of this VAT is that it is the Output VAT on the sale of the store’s taxable products (VAT on sales). This VAT must be paid by the retail store to the BIR.
However, when a retail store buys items from a manufacturer or wholesaler, the retail store must pay the manufacturer/wholesaler VAT as part of the transaction. As a tax paid by the retailer on its own purchases, this VAT is known as “Input VAT” from their point of view (VAT on purchases). VAT must be remitted to the BIR by the manufacturer or wholesaler involved in this transaction.
The retail store can utilize the Input VAT value from its purchases as a credit against the Output VAT from its sales when estimating the amount of VAT it must remit to the BIR each month or quarter. The BIR will subsequently collect the excess of Output VAT.
The VAT due to the BIR is calculated as follows: Output VAT minus Input VAT.
VAT Rate in the Philippines
In the Philippines, the VAT rate is 13%.
Gross receipts from services and property leases are exempt from the VAT, which is charged at a rate of 13% on the taxable gross selling price of products and real estate.
The entire cost of importation is used to calculate the 12% VAT on imported products.
Export sales and sales with a 0% VAT rate are likewise exempt from paying VAT (see further below).
In the Philippines, businesses that are VAT-registered must provide a VAT Invoice or a VAT Official Receipt for each sale or lease of goods or property.
An official VAT receipt or VAT invoice must clearly identify the VAT component as a separate line item.
The VAT Invoice or VAT Official Receipt should clearly and visually declare if a sale or transaction is either VAT-exempt (see below) or 0% VAT-rated (see below).
To learn more about Philippine Sales Invoices and Sales Receipts, take a look at these two recent articles.
Zero-Rated or 0% VAT sales are allowed in the Philippines under the country’s VAT framework. Even though these sales are subject to VAT, there is no Output VAT generated as a result. For some transactions, the regular VAT rate of 12 percent is not applicable. One way to offset sales with 0% VAT is to use the Input Tax related to those sales as a credit.
VAT-registered taxpayers may be eligible for a 0% VAT rate on the following activities:
Involved in producing or repackaging items that are then shipped to customers outside the Philippines
Services other than processing, manufacturing, or repackaging, provided to a person engaged in business outside the Philippines
Exports from the Philippines are sold.
Exports of services from the Philippines
Services that are exempt from VAT under international agreements or specific regulations.
Corporations can consult the BIR advice HERE for a complete list of 0% VAT-Rated operations and sales.
VAT Taxpayers in the Philippines
The following companies are subject to VAT:
The total annual taxable sales or revenues, and see which is greater for any one calendar year by an individual or business (Php3,000,000).
The voluntary taxpayer is subject to VAT even if their gross sales or revenues do not exceed P3,000,000.
Inbound or outbound cargo transportation.
Remember! You must pay VAT regardless of whether or not your business has registered with the tax authority. Even though they were unregistered during that time period, they are still required to pay VAT. To use you input VAT credit to offset your output VAT, you must first pay or register for VAT!
VAT Exempt versus 0% VAT
Sales that are exempt from VAT or have a VAT rate of zero do not obligate the buyer to pay VAT. However, the treatment of Input VAT represents a major distinction between the two categories.
The Input VAT cannot be credited against the Output VAT in sales that are exempt.
Output VAT can be credited back against the Input VAT in zero-rated sales
As previously stated, businesses in the Bahamas that do not have gross sales or receipts totaling more than Php3,000,000 are exempt from remitting and filing VAT. Those businesses are exempt.
However, a company’s specific business activity is also taken into consideration when determining VAT exemptions.
Check out the BIR website HERE and look for the section “What are the VAT-exempt transactions?” for a complete overview of VAT-exempt sales activities in the Philippines.
But as a business, you need to make sure that the items or services you are selling are eligible for VAT. Consult your local Philippine accountant or bookkeeper for more information on your VAT and tax requirements.
How to Know if your Corporation is VAT Registered?
A Registration is issued by the Bureau of Internal Revenue (BIR) when a business in the Philippines is formally registered (Form 2303). The corporation’s tax obligations are detailed in this Certificate. If a VAT registration number is present or not, it will be displayed.
A company may not be registered for VAT when it is just getting established. Businesses can also request that they should all be registered for VAT if they so choose. Make sure to check your Certificate of Registration when applying for VAT registration for additional documentation indicating a subsequent VAT registration.
There is a new in-depth post about the Register on our blog (BIR Form 2303).
Accounting for VAT
The fake QRS Co. is used to demonstrate how VAT is recorded from an accounting, bookkeeping, and tax compliance perspective in the examples that follow.
This company, QRS Co., is VAT registered. In April, it spent P4,480,000, including P480,000 in value-added tax (Input VAT). P5,200,000 in sales were made within the same month (exclusive of VAT).
Using this formula, we arrive at an output VAT of P624,000 (12 percent of P5,200,00). The following is how QRS Co.’s books would record the VAT transactions:
To keep track of purchases
Payables 4,480,000 VAT 480,000 purchases P4,000,000
To keep track of the shipments and purchases of items
Output VAT: P 624,000 Invoicing: P 5,824,000 Sales: P 5,200,000
To transfer the VAT payable account to the VAT payable account by closing the VAT accounts.
VAT P 624,000 was generated.
VAT P 480,000 should be entered.
The amount of tax owed is $144,000.
To keep track of VAT payments
VAT due P 144,000 Cash P 144,000
In order to declare and pay VAT in the Philippines, businesses must use the BIR Form 2550M. (Monthly Value-Added Tax Declaration). This must be filed within 20 days of the end of each month. In order to make things easier for you, Form 2550M will include all of the applicable VAT for the given month on one line.
BIR Form 2550Q, a quarterly tax return known as the VAT Return, must also be filed and paid to the government (Quarterly Value-Added Tax Return). Submission of this is required within 25 days after the end of the quarter. Form 2550Q includes the entire amount of VAT that must be paid for the quarter.
CloudCfo, an offshore auditing firm, offers accounting, auditing, and tax compliance services to small businesses and startups in the Philippines.
Helping you deal with all of the government’s rules and regulations is what our Filipino accountants and bookkeepers are here to do for you.
Let’s get started right now! Get in touch with us by visiting our website at www.cloudcfo.ph or emailing [email protected] if you’d like to learn more.
Anyone reading this should not consider it medical advice of any kind. Do not rely on the information in this article to offer financial, accounting or regulatory guidance. But if you are uncertain or concerned about any of the above topics, you should get advice from a specialist.
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