Overview of Value Added Tax in the Philippines
By: Garry S. pagaspas
Value Added Tax (VAT) in the Philippines is a tax that each and every entreprenuer should be very much aware of. Firstly, it affects all of us consumers. Secondly, it greatly affects business transactions, in a way or another, such as in pricing where goods or services bought and sold contains VAT, maximizing profits when input VAT is minimal, cash flow issues, and more. In reading below, please note the following:
- Input VAT refers to VAT the buyer pays on purchase from VAT registered and only VAT registered buyers are allowed to claim input VAT;
- Output VAT refers to the VAT the seller passed on to the buyer; and,
- VAT due and payable is output VAT less input VAT;
In this article, let us discuss some of its features for better and deeper understanding
VAT is a business tax
As a business tax, it is imposed upon those who are engaged in trade or business, and those in the practice of profession. This simply means that goods or services are imposed VAT if they are made in the ordinary course of trade or business or practice of profession. In general, VAT applies to all sales of goods and services in the ordinary conduct of trade or business or profession, and those which are incidental thereto. Isolated transactions are not subject to VAT as a rule. In short, because you are into trade, business, or practice of profession, then, you are liable to VAT.
VAT is indirect tax passed on to the buyer
In direct tax the person who actually pays the tax is the same person bound to pay the same to the Bureau of Internal Revenue (BIR or Tax Authority), while in indirect tax, the one who actually shoulders the tax is not the one bound to remit the same to the BIR. In VAT, the tax is passed on to the buyer as part of the selling price. You will notice this when you buy goods or services as the invoice or the receipt will state the amount of VAT. In other words, it is the buyer who shoulders the VAT, and the seller is the one who remits the same to the BIR. Should the seller fail to pay, the BIR will not run after the buyer because rules presupposes that VAT is imposed by the seller on all VATable sales of goods or services.
VAT is a tax on value added or mark-up
As to liabilily, VAT liability is based on the amount added to the cost of purchase. This happens because the input VAT from purchases of VAT registered buyers from VAT registered suppliers are deducted from the output VAT on its sales. As such, the seller becomes taxable based on the mark up. This runs very true in a trading business or buy and sell. In manufacturing and service type of business, the concept lives on the input VAT and output VAT combination.
VAT is a consumption tax
The sad fact about VAT is that it is shoulderd by the ultimate consumers – the general Juan dela Cruz or John Doe public. Goods and services intended to be consumed in the Philippines are imposed VAT and any person who consumes the goods or services shoulders all the VAT imposed along the distribution line. It is because, if you do not sell the goods or the service, then, you will not generate output VAT so you shoulder all the input VAT you pay on the purchase.
Notice also that importations are subject to VAT, whether for business or personal use. This is because, they are presumed to be consumed in the Philippines. On the other hand, exportation of goods – actual or technical exportations, are charged 0% (zero rated) so no VAT shall be included in the selling price because they are bound to be consumed outside of the Philippines. The purpose of zero-rating on export transactions is actually for recovery of input VAT passed on to them on purchases of materials and services from VAT rgistered taxpayers for use in the production of such goods or services for export.
Recovery on excess input VAT
Input VAT from VATable purchases are deductible from output VAT, and as such accounted as property or asset of a taxpayer. The Philippine Constitution provides that no person shall be deprived of property without due process of law, so that taxpayers are given options as to the excess input VAT. Under the rules, excess input VAT may be carried over to succeeding months or quarter until fully consumed without expiry. Input VAT from zero-rated sales may be applied for tax refund or tax credit certificates within two (2) years from the quarter of sale. Input VAT attributable to exempt sales of goods or services are allowed to be claimed as expense (input VAT expense) deductible for income tax purposes. Upon liquidation, excess input VAT may likewise be applied for refund or tax credit certificates within two (2) years from dissolution of the taxpayer. Notably, the government recently launched a VAT TCC monetization program where TCCs from VAT will be converted to cash within the five-year period.
Cash flow on transition from non-VAT to VAT
For those previously registered as non-VAT, and for a reason or another becomes VATable such as when it exceeds the VAT registration threshold of P1,919,500 (2012), the rules provides that they could claim a transitional input VAT (TIP) of 2% based on the value of its beginning inventory of goods, materials, and supplies or the actual VAT on such goods, materials, or supplies, whichever is higher. The purpose is for the taxpayer not to be burdened by the payment of VAT on VATable sales immediately following the VAT registration because the input VAT on purchases during the non-VAT period is not claimable as against output VAT. Claimable TIP is the lower of the actual VAT on inventory or 2% of the value of such inventory.
5% assured VAT collection on sales to government
As a revenue measure, the government is assured of at least a collection of the 5% of such 12% VAT imposed on government purchases. This is the essence of the final withholding VAT on government money payments where the government agency or instrumentality is mandated to withhold the 5% upon payment. On the part of the seller, the application of the standard input VAT is intended to nuetralize the impact of the final withholding VAT in relation to the actual input VAT. The difference between standard input VAT and actual input VAT attributable to such government sales is either an input VAT expense or a charge against cost similar to other income in simple language.
VAT transparency mechanism
This feature is the check and balance mechanism that tax evaders must be aware. First, VAT registered seller is mandated to segreggate or show separately the VAT passed on to buyers in the sales invoice or official receipt. The purpse is for the buyer to simply pick out the VAT figure it paid, and failure to segreggate is subject to a compromise penalty. Another mandate for all VAT registered is the mandatory submission of summary list of sales (SLS), summary list of purchases (SLP), and summary of importations. SLS, SLP are reciprocal reports of buyers and sellers the BIR matches to determine if the seller or the buyer correctly reported. Importation details from Bureau of Customs (BoC) are traced to the summary list of importations provided by the importer. Discrepancy in either case are presumed to be underdeclarations, if the taxpayer could not properly substantiate and justify.
Finally, in claims for refunds and tax credit certificates, the BIR will likewise verify if such VAT applied for refund or TCC has been recorded as an asset for transparency on the books of accounts.
Related Articles & Seminar
- Accounting for Value Added Tax in the Philippines
- Once a Month Seminar - 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 email@example.com.)
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.
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