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20
July

Accounting for VAT in the Philippines

By: Garry S. Pagaspas

Value Added Tax (VAT) is imposed upon any person who, in the ordinary course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods. It is an indirect tax and the amount of VAT maybe shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. The BIR has mandated under Revenue Regulations No. 18-2011 that VAT shall be shown separately on the sales invoice (SI) for transactions involving goods, or on the official receipts (OR) for transactions involving services, and failure to follow the same is subject to penalties (say, P1,000.00 per SI/OR). This new mandate makes accounting for VAT a bit easier and fun. I should not say its boring, because some technical rules would thrill your brain cells. The VAT you pay on purchases is normally called “input VAT”, while the VAT you add on sales is normally called “output VAT”. In computing the VAT due and payable to the Bureau of Internal Revenue (BIR), you simply compute as follows:

  • Output tax from sales
  • Less: Creditable input taxes
  • Equals: VAT due and payable

The above formula is just a simple subtraction, but with the varying rules on output VAT, creditable input taxes, and other VAT rules on registration, filing of reports, makes the VAT system one-of-a-kind tax type for taxpayers. For purposes of accounting for VAT in the Philippines, you should note the following accounting areas that I wish to share sample entries. Of course, you can alter or change them to your desired account titles to fit your style for as long as they are comprehensible enough, because BIR did not prescribe the use of specific account titles. For better appreciation, I suggest you read further below with the monthly – BIR Form No. 2550M, and quarterly-BIR Form No, 2550Q.

For illustrative purposes, let us assume  the following transactions or figures, and to emphasize VAT journal entries, let us assume no withholding taxes applies, unless so stated.

Company Seller (VAT-registered) sold Company Buyer (VAT-registered) for P200,000, exclusive of 12% VAT, or a total of P224,000.00. Company Seller’s purchases amounted to P100,000.00, exclusive of 12% VAT or a total of P112,000.00.

I. Sales of goods or properties

In the monthly or quarterly VAT returns, sales of goods is classified into regular sales, zero-rated sales, exempt sales, and sales to government.  Sample accounting entries are as follows:

Regular sales and government sales:

  • Debit: Cash or Account Receivable- P224,000.00
  • Credit: Sales – P200,000.00
  • Credit: Output VAT – P24,000.00

Zero-rated sales or VAT-exempt sales:

  • Debit: Cash or Account Receivable- P200,000.00
  • Credit: Sales – P200,000.00

Please note that VAT is shown separately through the Output VAT. In regular and government sales, VAT is added, while in zero-rated and exempt sales, not output VAT is imposed. The peculiar in government sales is the treatment of input taxes so we will deal with it later. Same is true with respect to zero-rated and exempt transaction because the difference lies in the treatment of input taxes.

II. Purchases of goods or properties, and services

Purchase of goods or properties, and services is a reciprocal of sale on the part of the seller. It could be with VAT for VATable, or without VAT for VAT-exempt or zero-rated transactions. Hereunder are sample entries.

Purchases with 12% VAT:

  • Debit: Expense or Purchases or Asset account – P100,000.00
  • Debit: Input VAT – P12,000.00
  • Credit: Cash or Accounts payable – P112,000.00

Zero-rated sales or VAT-exempt sales:

  • Debit: Expense or Purchases or Asset account – P100,000.00
  • Credit: Cash or Accounts payable – P100,000.00

The only difference on the above sample entries lies on the recognition of the input taxes. For VATable purchases, input VAT is recognized separately because it represents an asset that has to be accounted for.

 III. Setting-up VAT payable or creditable input VAT

For monthly or quarterly filing of VAT returns, you may either have VAT payable or excess creditable input taxes.  For the first two (2) months of the quarter, you  use sales, purchases, and related VAT components for the monthly period only. For the quarterly return, you aggregate figures for the three (3) months of the quarter. Hereunder are the related sample entries:

Setting-up VAT payable:

  • Debit: Output VAT  - P24,000.00
  • Credit: Input VAT – P12,000.00
  • Credit: VAT due and payable – P12,000.00

Setting-up VAT payable is simply closing the Input VAT and Output VAT accounts to VAT due and Payable account. The resulting difference would represent the VAT due and payable. This of course, presumes that the Input VAT are all creditable against output VAT and is not subject to deferred input VAT rules like on capital goods.

Setting-up Creditable input VAT:

  • Debit: Output VAT  - P12,000.0
  • Debit: Creditable input VAT –  12,000.00
  • Credit: Input VAT – P24,000.00

In the above entry, the input VAT is more than the output VAT so the difference  is Creditable input Vat. It is a temporary asset account like input VAT and is used to refer to prior-period purchases with VAT.

Setting-up VAT payable applying prior-period creditable Input VAT:

  • Debit: Output VAT  - P24,000.00
  • Credit: Input VAT – P12,000.00
  • Credit: Creditable input VAT –  Px x x
  • Credit: VAT due and payable – Px x x

IV.  Payment of VAT due and payable

Payment of VAT due and payable is the filing of the VAT returns within 2twenty (20) days from end of month for monthly returns using BIR Form No. 2550M, and within twenty-five (25) days from quarter-end for quarterly returns using BIR Form no. 2550Q.

Filing and Payment of VAT due and payable

  • Debit: VAT due and payable – P12,000.00
  • Credit: Cash – P12,000.00

The above entry is as simple as you pay a normal liability account.

V.  Special VAT rules

As I have mentioned above, special VAT rules makes it more challenging to account for VAT. These rules are mostly applicable on input VAT as to its availability for deduction or credit against output VAT such as in input VAT on capital goods costing P1M having a useful life of more than five years, final withholding of VAT on sales to government, refund of input VAT attributable to zero-rated sales, and expenses, and recording as expense of input VAT attributable to VAT-exempt sales transactions.

The special rules would be a more technical topic to deal with and may just ruin your basic understanding of the above simple sample accounting entries. I intend to discuss more of the special entries in my succeeding article on accounting for VAT. Of course, the above are sample illustrative entries only, and you are free to make enhancements. Account titles may vary depending on the chart of accounts adopted by your company.

RELATED SEMINAR – WORKSHOP

We offer a once-a-month seminar-workshop on all the things you need to know about VAT through our program Value-added Tax, Ins and Outs


(Garry S. Pagaspas is a Resource Speaker with Tax and Accounting Center, Inc. He is a Certified Public Accountant and a degree holder in Bachelor of Laws engaged in active tax practice for more than seven (7) years now and a professor of taxation for more than four (4) years now. He had assisted various taxpayers in ensuring tax compliance and tax management resulting to tax savings rendering tax studies, opinions, consultancies and other related services. For comments, you may please send mail at garry.pagaspas@taxacctgcenter.org.)

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.


Related Services

Bookkeeping Services. With our years of practice and being with the academe, we are confident that we could assist you maintain your books of accounts and prepare your tax returns in the light of the present rules, and regulations. We understand your financials and charges are at reasonable rates.

Tax Management and Compliance Consultancies. With our tax services, we can assist you ensure tax compliance and in the management of such continuing compliance. Proper compliance would bring about tax savings form avoiding being penalized to tax minimization strategies.

Quality Seminars and Trainings. We conduct other seminars, workshops and trainings on BIR tax compliance that you may learn to do your bookkeeping your own or at least develop working knowledge sufficient to supervise the work of your hired bookkeeper. Hereunder are our programs you could choose from:

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Comments

  1. gigi satur says:

    what happens if input VAT is higher than the output VAT?

  2. TaxAcctgCenter says:

    Hi Gigi, we call it Excess input VAT over output and could normally be credited over to next month or quarter.

  3. Dave says:

    Sir, If i will close to expense or loss the available input vat attributable to zero-reted sales, due to failure to meet the required time for refund, would it be deductible for the purposes of income tax computation?

  4. TaxAcctgCenter says:

    Hi Dave. There was a BIR ruling that allowed such treatment but that was exceptional and we do not recommend unless you secure the same ruling with the same import. Nevertheless, you can carry-over such input VAT. Please extend my regards to your Boss Mike A.

  5. Jian says:

    Hi Sir Dave,

    Need your quick help on the following queries:

    1. Is the interest income charged by a company on its excess cash which it lent to other companies subject to VAT?

    2. Do we need to include in the contract price of real properties sold for purposes of determining its vatability and for the purposes of computing the VAT. Meaning po principal plus interest?

    Thanks po. And Kailan po kaya ang seminars ninyo for 2013. Hope makapagpost po kayo ng schedule.

    Regards,

    Jian

  6. Ida says:

    Just a few questions Sir regarding VAT :

    1) Are all sales of real property of Corporations subject to VAT?
    2) Can the input Vat from Government contracts be deducted to the output Vat from a sale to a private entity?

    Where do you usually hold your seminars Sir?

    Regards,
    Ida

  7. Sandra says:

    If the sale is subject to withholding tax, how is the VAT computation?

  8. Pinchy says:

    Very informative and comprehensive. I want to know what is the ideal treatment for claiming input taxes in a business like mine where all my purchases are made in terms payable a month or two after actual goods are received. I pay the goods later and i am only given a receipt upon payment. Consequently, i only claim input taxes when i have the official receipt with me. What is the entry when i receive the goods and plan to claim input later on?i got kinda confused with your example above where there is accounts payable and input tax in one entry. Thanks!

  9. Therese says:

    Good day! What are purchases are creditable input tax? I know COGS is one, but would administrative expenses be included on 2550?
    I’m from Cebu and it would be good if we have seminars such as yours here.
    Thanks!

  10. Jude says:

    Good day sir!

    what is the proper treatment of input tax attributable to capital or depreciable goods? do i need to separately allocate it monthly or just include it in the total amount of capitalized asset subject to depreciation? If i will use the second case, the effect would be that the depreciation expense would offset the input tax that had been allocated if it was treated the first case. thank you!

  11. If you want to hire an accounting service for your business, pick those who are already familiar with the tax system on where your business is located.

  12. Bench says:

    Hi.,Computation of Output VAT confuses me especially on the thresholds to be considered. Please help me to make it easier to analyze whether sale of real estate property is VATable or not. Thanks

  13. Bench says:

    Good day. Our company is engaged on sale of real property, how to compute Output VAT? Thanks. :)

  14. QUIENNE says:

    hi….paanu po vah e compute ang form 1601c? at saka yong computation din po ng 2550m?

  15. Nhiz says:

    Good day po..

    Just want to ask.. When is the proper timing of recognition of input taxes where purchase of goods and/or services in accrual basis?

    1. TaxAcctgCenter says:

      Hi Nhiz. Claiming on books could be under company policy (e.g. upon payment/check voucher or upon invoice/OR) but for VAT purposes, claim the same on the month or quarter of purchase transaction as supported by sales invoice for goods or official receipts for services. Thanks.

      1. Cezar says:

        Good day po.

        I was reading your reply to Nhiz and i would like to have a follow up question.

        Does it mean that input tax should be claimed at the time it was actually purchased regardless of when it is paid under accrual basis? and if so, what would be our supporting document for such claim?

        Thank you po.. :)

  16. TaxAcctgCenter says:

    @Cesar. In supporting input VAT, sales invoice for goods or official receipts for services is normally required. In supporting the expense on books, you may use a statement of account or billing for services or a purchase order and similar documents for goods as these would document the existence of a transaction. Thanks.

  17. Cezar says:

    Ahh… so this means that the correct practice of recording your input tax is at the time it was actually purchased regardless of when it is paid… and for output tax, it is when the sale has been completed regardless of when it is collected? am I right?

    thanks a lot po…

    1. TaxAcctgCenter says:

      @Cesar. Yes, it could be an accounting policy but please always bear in mind the required substantiation in claiming them on VAT returns. Thanks.

  18. Cezar says:

    when you mean substantiation, do u mean po ba na ung mga supporting documents?

    Pero violation po ba sa BIR compliance if the accounting policy is that, Output tax will be based on collections regardless of when goods are sold and Input tax will be based on payments regardless of when the goods purchased are received?

    thanks po.

  19. TaxAcctgCenter says:

    @Cezar. Recording on books is one thing and you can do it based on your preferred accounting policy. Claiming on tax returns is another thing and yes, the substantiation referred to means the required documentation for BIR. For sale of service, output VAT claim is not a violation of BIR but for sale of goods, it is. Same thing on input, you violate BIR if you purchase service and claim input based on billing invoice and not on Official Receipts. For goods, use of invoice as support is not a violation. Thanks.

  20. Cezar says:

    “for sale of service, output VAT claim is not a violation of BIR but for sale of goods, it is.”

    medyo nalito po ako dun…. ibig po ba sabihin na kahit wala kang natanggap na bayad from your customers sa mga binili nila on account from us, required kana magremit ng VAT sa BIR?

    Thank you po

    1. TaxAcctgCenter says:

      @Cesar.Yes, on sale of goods you are liable based on invoices even if uncollected yet.

      1. Cezar says:

        ahhh… that’s clear to me now…

        So on the other hand po, I can claim my input tax based on my goods purchased (with supporting invoices) regardless kung nagbayad na kami o wala pa?

        thank you so much po

  21. TaxAcctgCenter says:

    Yes Cesar. Our pleasure.

  22. Hanna says:

    question lang po, paano po ung treatment kapag sale of services, upon collection po un? nagdeclare kasi ako ng output vat sa return using cost-plus method..mali po ba un?

    1. TaxAcctgCenter says:

      @Hanna. Yes, VAT on services is based on collection. Cost-plus is allowed as a transfer pricing method.

  23. jheng says:

    Good Day,
    In connection with the INPUT VAT on services, if we are going to claim the input VAT upon the receipt of payment, what would be the proper entry on the books upon recording the transaction, i mean upon the receipt of the billing for services rendered?
    Example:Payment of Insurance through a BROKER, The billing is dated August 1, 2013 and on the same date payment was made. The Broker forwarded the payment to the Insurance Company on August 25, and The Insurance Company issued an OR only on September 1 (as shown in the OR).
    Question:
    What would be the entry on the books of the Insurer (payor) on August 1?
    On September 1?

    Thanks a lot! :)

  24. TaxAcctgCenter says:

    @Jheng. You can use an “Input VAT-deferred” upon receipt of invoice or statement of account or billing which would imply that it is not yet creditable at the month or quarter of receipt. It is upon the month of payment they are creditable so you may close the “Input VAT-deferred” to “Creditable Input VAT”. Thanks.

  25. jheng says:

    thank you very much!

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