5 Basic Value Added Tax Compliance in the Philippines

In the Philippines, business tax registration could either be a value added tax (VAT) or other percentage tax (OPT) – sometimes termed as non-value added tax (non-VAT). In general, Value Added Tax in the Philippines is for a large scale business, while Other Percentage Tax in the Philippines is for small business operations, unless, the industry itself falls under those other percentage tax by nature irregardless of gross sales or gross receipts.  In this article, let us share you the things that a VAT registered taxpayer in the Philippines should be aware of to fully comply with the requirements of the Bureau of Internal Revenue (BIR).

1. Registration of Books of Accounts

Duly registered books of accounts of a value added taxpayer in the Philippines could be a manual books of accounts, loose-leaf books of accounts or computerized books of accounts.  It is normally composed of the following:

  1. Journal
  2. Ledger
  3. Cash receipts book
  4. Cash disbursements book
  5. Subsidiary sales journal
  6. Subsidiary purchases journal
For manual books of accounts, a value added taxpayer in the Philippines need not secure an annual registration with the Bureau of Internal Revenue (BIR). The rules provides that a VAT taxpayer could secure registration of new volumes of the above books of accounts upon use of all pages thereof.  Without the complete set of the above books of accounts, BIR will penalize you. Finally, such books of accounts must be updated with entries about business transactions. A corresponding penalty is imposed on non-updated books of accounts. More so, that a blank books of accounts is subject to penalty.

2. VAT Official Receipts (OR) or VAT Sales Invoice (SI)

In order to print an official receipt or sales invoice a value added taxpayer should be issued an authority to print (ATP) by the BIR and printing should be undertaken by a printing press duly accredited by the BIR. A VAT-registered taxpayer   shall register a 12% value added tax official receipts or sales invoice – charge invoice or cash invoice. In issuing a 12% VAT official receipt or sales invoice, a value added tax shall be shown separately for transparency reasons. Failure to separate is subject to a compromise penalty of P1,000 per OR or invoice, but not to exceed P50,000 in a year. Non-issuance of OR or invoice is also subject to penalty and may even result to closure of the establishment under the “Oplan Kandado” of the BIR, or even a tax evasion case under the “Run After Tax Evaders (RATE)” program of the BIR.

You do not issue a 12% VAT official receipt or invoice to non-VATable transactions in the Philippines such as a zero-rated sales, VAT-exempt sales, and sales subject to percentage tax because if you do, the 12% VAT shall be imposed on such transaction for the erroneous invoicing. For zero-rated transactions in the Philippines, or VAT-exempt transactions in the Philippines, you may either stamped the phrase “Zero-rated Sale” / “VAT-exempt sale” or you may opt to secure a Zero-rated official receipts or invoice/ VAT-exempt official receipt or invoice. For non-taxable receipts, an Acknowledgement Receipt may suffice and do not issue 12% VAT OR or SI to avoid being imposed 12% VAT in the Philippines.

3. Substantiation of VAT Input Tax claims

In claiming deductions of input VAT in your value added tax returns, see to it that they are substantiated as follows:

  • BIR VAT Official Receipts for local purchases of services;
  • BIR VAT Sales Invoice for local purchases of goods; or
  • Proof of VAT payment with the Bureau of Customs for importation of goods;

The rule is simple – “no substantiation, no deduction of input VAT”. Every peso of input VAT not deducted for failure to properly substantiate is a total peso loss and such loss is not a deductible loss or expense for income tax purposes. You do not benefit for such lapses and no reward is awarded to erring taxpayers.

Please not also the rules on the claim of input taxes arising from capital goods where you have to allocate the input VAT depending on the life of the capital asset. Likewise, please be aware of the input tax treatment on input taxes attributable to VAT-exempt sales, and sales to government. Improper application is risky because of the corresponding tax penalties and implications.

4. Filing of VAT returns in the Philippines

Value added tax returns in the Philippines is filed monthly  and quarterly. Monthly VAT returns uses BIR Form No. 2550M that is due for filing not later that the 20th day of the month following the applicable month. Quarterly VAT return uses BIR Form No. 2550Q that you should file not later than the 25th day of the month following the end of the quarter. Monthly returns considers that output VAT for the month, and input VAT for the month plus carry over input VAT from previous period. Quarterly returns consider the output VAT on sales for the entire quarter, and input VAT for the purchases for the entire quarter along with the input VAT carried over from previous quarter, if any.

5. Filing of Quarterly Summary List of Sales and Purchases

Another big thing for VAT compliance is the submission of quarterly summary list of sales and purchases. This is a mandatory requirement for ALL VAT-registered taxpayers and is a secret weapon of the BIR to catch up VAT taxpayers not declaring sales and purchases. The VAT seller submits summary list of sales and its buyers submits summary list of purchases. If the seller does not report its sales, BIR will know through the buyer’s summary list of purchases, or vice versa, buyer’s under declaration of purchases will be caught up by the BIR through the summary list of sales. Failure to submit quarterly is subject to penalty and is even risky for the interim VAT audit of the BIR over value added taxpayers.

Summary

The above are conceptual presentation for your basic appreciation of the basic value added tax compliance in the Philippines. Every wrong move or even the simplest lapse or misapplication is subject to penalty. You have all the reason and opportunity to educate and learn basic tax compliance for proper application such as through BIR tax seminars and workshops on the topic. Alternatively, you may simply hire a good bookkeeper whom you feel confident to properly handle you basic value added tax compliance in the Philippines.


Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may please send mail at info@taxacctgcenter.org.)


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