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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

(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

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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  1. maricor says:

    In line with your article, do NON-VAT registered and VAT-EXEMPT suppliers qualifies for Expanded Withholding Tax Deductions if you’re going to settle payment with them?

    EWT is creditable against from what specific tax liability? There is a so-called F2307 issuance. How’s the application by this on the part of the suppliers?

    On the part of the withholding agents, how will they utilize this? Is this also subject for remittance by them? Is this the one they provided in the Monthly Alphalist of Payees?

    Hope my questions are not confusing. You may make revisions to my questions if it does not appear sensibly and supply the corresponding answer. :)

  2. TaxAcctgCenter says:

    Non-VAT or VAT is a separate tax type from expanded withholding tax and has little bearing on the withholding tax applications.

    EWT evidenced by Form 2307 is deductible from income tax liability for the quarter or on an annual basis. It is the payment to the suppliers that are being withheld and the same constitutes as an estimated income tax of suppliers that is collected in advance.

    Yes, withholding agents remit the withheld amounts to the BIR using Form 1601E with Monthly Alphalist of Payees as an attachment. It then issue Form 2307 to suppliers.

  3. [...] 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, [...]

  4. jocelyn juaringon says:

    if the company fails to deduct the expanded withholding tax from its main contractors, up to what extent is the liability on part of the company?

    thank you.

  5. TaxAcctgCenter says:

    the company would be liable to the amount it should have withheld plus penalties. it could not deduct the expense for tax purposes, until the withholding tax has been paid.

  6. Yael says:

    I just wanna ask, currently the company is Non-VAT registered (VAT Exempt) because the line of business is agriculture., now the company plans to sell other than agricultural products., and supposing the sales, other than agricultural products, expected is above the VAT threshold, thus the company requires now to register to VAT? is there any specific regulation for that?

    thank you and more power to your site., it’s very informative.,

  7. TaxAcctgCenter says:

    Hi Yael, VAT threshold does not apply to those exempt transactions by nature such us that of your exemption on agricultural products. Thanks.

  8. Yael says:

    yes, but how about the other products other than agricultural products., example selling of processed foods, which is not in original state anymore., which is considered VATable., thus it required now to register as VAT? or still not? thanks.,

  9. TaxAcctgCenter says:

    Yes, Yael. It will now be subject to the threshold for VAT registration and application.

  10. Yael says:

    thank you very much sir/ma’am..

  11. TaxAcctgCenter says:

    Our pleasure Yael. Thanks.

  12. Yael says:

    Good day!

    Are ALL transactions relating to purchase/ rent of a VAT exempt company to VAT registered should be no VAT (input tax)? example purchase of an equipment of a VAT exempt company to a mall., does it need to remove input tax? i’m just confuse.. thank you.,

  13. Belle says:

    It would depend on the exemption from VAT. Entities exempted from VAT on sales are not exempted on purchases, and entities exempted from VAT on purchases are not exempted on sales. Let us invite you to our seminar on VAT, In and Out as we discuss all you need to know about the VAT system in the Philippines.

  14. Yael says:

    An entity (company) is a non-vat registered because its business selling agricultural products., if the entity shouldered the input tax., does it allowed to become part of cost/ expense the input tax paid?

    Thanks for the invitation ms Belle, i’ll check my schedule if i’m available on November 30.. thank you

  15. jay says:

    hi mam/sir,

    i just want to ask w/ regards to our transactions which was previously exempt from tax that suddenly become taxable because of RMC issued October 31, 2012.what will be its effect/s to our taxes and what should i do? thanks

  16. TaxAcctgCenter says:

    Hi Yael, yes, input VAT attributable to exempt transactions could be claimed as an expense.

  17. TaxAcctgCenter says:

    Hi Jay, as a rule, you apply them on the transaction after the effectivity of the RMC, unless, given retroactive application where taxes on prior periods will have to be accounted.

  18. Mikay says:

    Hi, sir! Good afternoon.

    I have two questions.

    We are a company outsourcing services to Japan via computer.
    1). What do we need to do to be able to avail of the zero tax interest for Sales of our services?

    2). Scenario:
    We offered our services to a company here in the Philippines. There were also other companies who offered their service. When payment for services happened, there was VAT in our receipt but in the others it was Withholding Tax.
    In the case above, what is the difference of Withholding Tax and VAT?

    Thank you very much!

  19. TaxAcctgCenter says:

    Hi Mikay. For zero-rating, you have to show that the client is non-resident of the Philippines, that it is dollar denominated, payment inwardly remitted, and a zero-rated O.R. being issued.

    Withholding tax is for income tax while VAT is for business tax. Let us invite you to our VAT, In and Out seminar that you may learn more and clear our your mind on its application. Thanks.

  20. Rey says:

    Is it true that VAT amount should be indicated in the OR so that you can claim it? What if VAT portion amount indicated is not filled in, can you still claim the input tax? if ever, can we just write the amount of VAT if ever it is not specified in OR cause other stores just indicate the total amount without specifying how much is VAT

  21. Sandra says:

    What are the penalties if you ate a vat regustered practicing professional and you erroneously computed your VAT based on cash receipts (vat inclusive)? For example, total cash receipt of 100k, the outputvat paid is (100k/1.12)*.12 instead of just (100k*.12)

  22. lorie says:

    We are non vat registered company selling rice and rice paddy. can we request our suppliers to exclude vat from our purchases since we will not be using it? thanks.

  23. TaxAcctgCenter says:

    @Lorie. That might not be a good justification to exclude you from VAT. The rule simply provides that the input VAT on exempt transaction is an expense. Thanks.

  24. len says:

    hi, what would be the effect if you are a tax exempt transaction and be registered as VAT registered person… what are the reasons why a person with tax exempt transaction will register as VAT registered…thank you

  25. Ara says:

    Hi, just want to ask if dollar transaction within the Philippines are exempt from 12% vat?We are vat registered company and we are importing products and selling it here in the Philippines. We usually sending our quotation to our clients using USdollar in product pricing and then they paid us in USdollar also. In our quotation we are adding 12%Vat but other client asking why we are charging them 12%Vat in dollar transaction. They said that if the transaction is in dollar it is exempted from 12%vat. Are they correct? Is there any BIR ruling about this matter? Please help us.

  26. jenny says:

    hi.just want to clarify vat standards on governments purchases ( including materials and labor cost).
    Thank you.

  27. thea says:

    hi..i just wanna ask regarding sale of services..Our company is a telecommunications industry-we provide engineering & installation services of a telecommunications equipment..Our services includes, engineering, testing & commissioning, installation materials and delivery to site..Is the installation materials can be a part of Services or will be separately billed???Some of installation materials are material in amount but most of the time immaterial in just confuse..pls help

    1. TaxAcctgCenter says:

      @Thea. We suggest you look at the nature of the contract. If the contract is for the provision of the service and all materials are for the account of your company, then, let it be a sale of service. Thanks.

  28. bhentoooot says:

    Hi, I just want to ask what if Company A receives and pays for the goods that are going to be used by Company B (related party/parent of Company A). Who can claim the input VAT and EWT? thank you! :)

    1. TaxAcctgCenter says:

      @bhentoooot. Input VAT is claimed by the buyer. EWT is an advance tax credits of the seller. Thanks.

  29. […] Overview of Value Added Tax in the Philippines > Tax and Accounting Center Inc. « Tax and Accoun…. […]

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