Value Added Tax (VAT) in the Philippines

• VAT, under Title IV of the National Internal Revenue Code, taxes the value added by sellers to the price of goods, properties, or services, including digital transactions per RA12023.
• Sales made in the normal course of business are generally VAT-subject, unless exempt, in which case other percentage taxes may apply.

Persons Liable (Section 105)

• Any person who sells, barters, exchanges, leases goods/properties, or renders services in the course of trade/business, including digital services, and importers are subject to VAT.
• "In the course of trade or business" refers to regular commercial or economic activity, including incidental transactions, regardless of the entity's nature (non-stock, nonprofit, private, or government).
• VAT is an indirect tax, shifted from the seller to the buyer or lessee.
• Services rendered in the Philippines by nonresident foreign persons are considered in the course of trade or business.
• Digital services by nonresident digital service providers are considered performed/rendered in the Philippines if consumed there.

VAT on Sale of Goods or Properties (Section 106)

• The VAT rate is 12% as of RA 9337 (2004).
• The seller/transferor of goods is liable for VAT, but it's an indirect tax that can be shifted to the buyer.
• The base for VAT is Gross Sales (EOPT), which is the total payment the purchaser is obligated to pay, excluding VAT.
• Excise tax forms part of the gross sales.
• If VAT registered, the seller is liable for VAT at 12%, which is added to the selling price and paid by the buyer.
• The business entity can be subject to both Business Tax (VAT) and Income Tax.
• VAT is based on gross sales, while income tax is based on income after valid deductions.
• Sales returns, allowances, and discounts can be deducted from gross sales in the quarter a refund is made.
• Sales discounts indicated on the invoice at the time of sale can be excluded from gross sales within the same quarter.
• Transactions include sale, barter, or exchange of goods/properties, which are tangible and intangible objects with pecuniary value.
• Real properties held primarily for sale are taxable.
• Rights or privileges to use patents, copyrights, designs, plans, secret processes, goodwill, trademarks, and trade brands are taxable.
• Rights to use industrial, commercial, or scientific equipment in the Philippines are taxable.
• Rights to use motion picture films, tapes, and discs are taxable.
• Radio, television, satellite transmission, and cable television time are taxable.
• Transfers, use, or consumption of goods/properties not in the course of business, if originally intended for sale or use in business, are deemed "sales" and subject to VAT.
• Distribution of goods to shareholders/investors as profit shares or to creditors in payment of debt are taxable.
• Consignment of goods is considered a sale if not sold within 60 days.
• Existing inventories at business retirement are taxable.

Zero Rated Sales

• The rate is 0% (as amended by RR 9 and 21-2021).
• Transactions include export sales, which are the sale and actual shipment of goods from the Philippines to a foreign country.
• Sales to persons or entities with exemptions under special laws or international agreements effectively subject such sales to zero rate are taxable.
• Sales to offshore gaming licensees subject to gaming tax fall under the same classification.

VAT on Importation of Goods (Section 107)

• The rate is 12%.
• The base is the total value used by the Bureau of Customs to determine tariff and customs duties.
• The computation is:
  • Cost of imported item + Dutiable Insurance + Dutiable Freight = Dutiable Value
  • Dutiable Value + Customs Duty + Brokerage Fee + Customs Documentary Stamp = Total Landed Cost
  • Total Landed Cost + Excise Tax = VAT Base
  • VAT Base x 12% = VAT Amount
• Transaction is for Importations.

VAT on Sale of Services, Including Digital Services, and the Use or Lease of Properties (Section 108)

• The rate is 12%.
• The person liable is the seller of the service, and it's an indirect tax that can be shifted to the buyer.
• The base is Gross Sales (EOPT), which includes the total contract price, compensation, service fee, rental, royalty, and charged materials.
• It excludes VAT and amounts earmarked for third-party payment or reimbursement not benefiting the seller.
• For long-term contracts of 1+ years the invoice is issued in the month the service or lease is rendered/supplied.
• Sales allowances and discounts granted by a VAT-registered person may be deducted from gross sales in the quarter a refund is made.
• Sales discounts indicated at the time of sale may be excluded from gross sales within the same quarter.
• Transactions are for the sale or exchange of services, which encompass all kinds of services performed in the Philippines for a fee, remuneration, or consideration
• This includes:
  • construction and service contractors, brokers, lessors, warehousing services, milling, processing, manufacturing, cinematographic films, proprietors/operators of hotels/restaurants, dealers in securities, lending investors, and transportation contractors.
• It also includes sales of electricity, franchise grantees, non-life insurance companies, digital service providers, and others.
• Lease of properties is subject to tax irrespective of where the lease contract was executed if the property is leased/used in the Philippines.

Zero Rated Sales of Services (as amended by RR 9 and 21-2021)

• The rate is 0%.
• Transactions include:
  • Services to entities doing business outside the Philippines.
  • Services to those exempt or subject to zero rate.
  • International transport operations excluding for domestic transport.
  • Export sales exceeding 70% of total annual production.
  • Domestic transport and sale of power or fuel by renewable sources.
  • Services to offshore gaming licensees.

Liability of Persons Providing Digital Services (Sec. 108-A, RA 12023)

• Digital service providers, resident or nonresident, are responsible for assessing, collecting, and remitting VAT on digital services consumed in the Philippines.
• "Digital service" refers to automated services supplied over the Internet and include online search engines, marketplaces, cloud services, online media/advertising, platforms, and digital goods.
• A 'digital service provider' supplies digital services to consumers subject to VAT in the Philippines.

Liability of Nonresident Digital Service Provider

• They must remit VAT on digital services consumed in the Philippines by non-VAT registered consumers and on transactions by nonresident sellers using its platform if it controls key supply aspects.

Exempt Transactions (Section 109)

• Exempt transactions include sale/importation of:
  • Agricultural and marine food products, livestock/poultry, and breeding stock in their original state, fertilizers, seeds, and feeds.
  • Specialty feeds for race horses and pets are not included.
  • Personal/household effects of returning residents/citizens, professional instruments, tools of trade, and wearing apparel.
• Services subject to percentage tax under Title V are exempt.
• Services:
  • Agricultural contract growers and milling, medical/dental/hospital services (except by professionals), accredited private educational institutions, services rendered under an employer-employee relationship, and regional headquarters not earning income in the Philippines.
• Others:
  • Exempt transactions under agreements/special laws, sales by agricultural cooperatives to members, and sales of produce to non-members.
• Sales:
  • Farm inputs, machineries for agricultural production, gross receipts from lending activities by credit cooperatives, and non-agricultural/electric cooperatives.
• Real properties:
  • Not primarily held for sale, low-cost housing, and residential lots below ₱1,500,000, in 2010 value.
  • As of CREATE Law, RR8-2021 to be adjusted to present value using the consumer price index as published by PSA every 3 years.
• Leases:
  • Residential units with monthly rent below ₱15,000.
• Sale/Importation/services:
  • Books, newspapers, magazines, and educational materials covered by UNESCO.
• Transport:
  • International carriers and vessels/aircraft for international/domestic transport
• Other goods and services:
  • Fuel/supplies for international transport and provided by banks and financial intermediaries, or sold/leased to senior citizens/PWDs.
• Those with limited scope:
  • Transfers in NIRC Section 40(C)(2), association/condominium dues (capital return only), and gold sales to Bangko Sentral ng Pilipinas.

Other Exemptions

• Limited durations goods or properties or the performance of services where the annual gross sales and/or receipts do not exceed three million pesos (PhP3,000,000).

Tax Credits (Section 110)

• Input Tax: VAT due from/paid by a VAT-registered person on goods importation/purchase, services, or transitional input tax, excluding lease or the use of property.
• Output Tax: VAT due on the sale/lease of taxable goods/properties/services by a registered person.
• If output tax exceeds input tax, the difference must be paid to the BIR.
• If input tax exceeds output tax, the excess is carried over to the next quarter.
• Input tax is creditable only with a VAT invoice meeting Section 113 requirements.
• Sellers can deduct output VAT on uncollected receivables the next quarter; Provided, VAT has been paid and hasn't been claimed as a deduction.

Transitional/Presumptive Input Tax Credits (Section 111)

• Transitional Input Tax Credits (2%):
  • Persons newly liable for VAT can claim input tax on beginning inventory of goods, materials, and supplies equivalent to 2% of inventory value or actual VAT, whichever is higher.
• Presumptive Input Tax Credits (4%):
  • Applicable to firms processing sardines, mackerel, milk, refined sugar, cooking oil, and noodle-based meals, set at 4% of primary agricultural product purchases.

Refunds or Tax Credits of Input Tax (Section 112)

• Zero-rated VAT persons can apply for a tax credit certificate (TCC) or refund within 2 years after the taxable quarter when the sales were made, after deducting transitional input tax that wasn't applied.
• Refund Eligibility:
  • If the taxpayer is engaged in zero-rated and taxable or exempt sales, the creditable input tax is allocated based on the volume of sales.
• Cancelled Registrations:
  • Persons with cancelled registrations for cessation of business may apply within 2 years for a tax credit or refund of unused input tax.

Timelines

• Creditable input taxes should be refunded within ninety (90) days from the submission date and processed based on the level of risk they pose.

VAT Requirements

• VAT invoice required for every transaction, along with digital sales or commercial invoice in digital sales by nonresidents.
• Must contain VAT registration followed by their Taxpayer's Identification Number, total amount (including VAT), and the tax shown separately, the terms ‘VAT-exempt sale’ or ‘zero-rated sale’ written on the invoice.

Others

• Invoice must breakdown taxable, exempt, and zero-rated components.
• For sales of $1,000+ to VAT-registered purchasers, the VAT invoice must include the purchaser’s business name, address, and TIN.

Accounting Requirements

• All persons under Sections 106/108 must also maintain a subsidiary sales journal and a subsidiary purchase journal

Sanctions

• For issuing erroneous VAT invoice or VAT Official Receipt
• Liable for VAT without tax credits, in addition to the appropriate percentage tax along with 50% surcharge
• Under Section 115 the the BIR Commissioner can suspend business operations of VAT registered persons.