Under the tax credit mechanism of the value added tax (VAT) system in the Philippines, the value added tax passed on by VAT registered suppliers to VAT registered buyers are deducted from the output VAT on the later sales of the buyers. In short, input VAT (VAT from purchases) are deducted from output VAT (VAT on sales) in arriving at the VAT due and payable. This however is a general rule and is subject to exemptions because there are instances where input VAT in the Philippines are not deductible from output VAT. In the following instances, an input VAT is treated as a deductible expense for income tax purposes:
1. Input VAT from local purchases of non-VAT registered
For a value added tax registered taxpayer in the Philippines, input VAT is an asset and is accounted for separately. As such, it is deductible against output VAT as stated above. For a non-VAT registered taxpayer, the input VAT is an expense if it related to an expense, or part of the cost of the asset (e.g. equipment) if the same relates to the purchase of an asset. In other words, there is no separate accounting for input VAT in the Philippines for a non-VAT registered taxpayer.
2. Input VAT on exempt transactions
In an exempt transaction, the seller does not impose VAT on the sale of good or services. However, the seller is still being passed on value added tax on its purchases. Such input VAT attributable to exempt transaction are not allowed to be credited against output VAT. Instead, the regulations provide that it shall be treated as an expense for the taxpayer to be allowed to recover the same.
3. Excess of actual input over standard input on sales to government
In government sales, the government buyer withholds the 5% of the 12% value added tax imposed by the seller. The remaining 7% of the 12% value added tax in the Philippines is treated as a standard input VAT. To close the balance of the input VAT in the books of accounts of the VAT registered seller, the same is compared with the actual input VAT attributable to such government sales. If the actual input is higher than the standard input VAT, the excess of actual input VAT over standard input VAT is treated as an expense deductible for income tax purposes.
4. VAT paid on importation of non-VAT registered importers
VAT paid on importation is also a creditable input VAT for a VAT registered taxpayer. Again, this rule does not apply to non-VAT registered taxpayers. For non-VAT registered, VAT paid on importation is a non-creditable input VAT as against input VAT. Instead, it is treated as an expense or part of cost.
5. Input VAT on zero-rated transactions not refunded
Under the rules, input VAT attributable to zero-rated sales are either claimed as creditable input VAT, or applied for VAT refund/tax credit certificate within two (2) years from the year of sale. In one exceptional instance, it was ruled that input VAT from zero-rated sales that did not qualify for VAT refund or tax credit certificate could be claimed as an expense deductible for income tax purposes. This is not a normal rule so we suggest that a BIR ruling be secured prior to availment.
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 firstname.lastname@example.org.)
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