Manila GMT +8
SyCip Gorres Velayo & Co.
SGV Building II, 6th floor
6760 Ayala Avenue 1226 Makati City Philippines
Indirect tax contacts
Lucil Q. Vicerra +63 (2) 894-8115 lucil.q.vicerra@ph.ey.com
Stephanie V. Nava +63 (2) 894-8319 stephanie.v.nava@ph.ey.com
Victor C. De Dios
+63 (2) 878-7929 victor.c.de.dios@ph.ey.com
Lee Celso R. Vivas +63 (2) 8910307 lee.celso.r.vivas@ph.ey.com
Arlyn A Sarmiento-Sy +63 (2) 891-0307 arlyn.a.sarmiento-sy@ph.ey.com
A. At a glance
Name of the tax
Value-added tax (VAT)
Local name Value-added tax (VAT)
Date introduced 1 January 1988
Trading bloc membership Association of Southeast Asian Nations (ASEAN)
Administered by Department of Finance’s Bureau of Internal Revenue (BIR) (http://www.dof.gov.ph or http://www.bir.gov.ph)
VAT rates
Standard 12%
Other
VAT number format
VAT-registered person
Branch office
VAT return periods
Thresholds
Zero-rated (0%) and exempt
Nine-digit tax identification number (TIN)
Head office’s nine-digit TIN, plus a three-digit branch code
Monthly VAT declarations and quarterly VAT returns
Registration In excess of PHP3 million gross sales or receipts in a 12-month period other than those that are exempt
Recovery of VAT by non-established businesses No
B. Scope of the tax
VAT applies to the following transactions:
• The taxable sale, barter, exchange, use or lease of goods or property by a taxable person
• The taxable sale or exchange of services by a taxable person (see below)
• The taxable importation of goods from outside the Philippines
• Deemed sale transactions (see below)
The taxable sale or exchange of services includes the following:
• Lease or use of a copyright, patent design or model, plan, secret formula or process, goodwill, trademark, trade brand or other similar property
• Lease or use of industrial, commercial or scientific equipment
• Supply of scientific, technical, industrial or commercial knowledge or information
• Supply of assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or enjoyment of industrial, commercial or scientific equipment or scientific, technical, industrial or commercial knowledge or information
• Supply of services by a non-established business or its employee with respect to the use of property or rights belonging to the nonresident, or the installation or operation of a brand, machinery or other apparatus purchased from such nonresident
• Supply of technical advice, assistance or services rendered with respect to the technical man agement or administration of a scientific, industrial or commercial undertaking, venture, proj ect or scheme
• Lease of motion picture, other films, tapes and discs
• Lease or use of or the right to use radio, television, satellite transmission and cable television time
VAT applies to deemed sale transactions such as the following:
• Transfer, use or consumption not in the course of business of goods or property originally intended for sale or use in the course of business
• Distribution or transfer to shareholders or investors as a share in the profits of a taxable person or to creditors in payment of debt
• Consignment of goods if an actual sale is not made within 60 days following the date such goods were consigned
• Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirement or cessation
C. Who is liable
A taxable person is any individual, trust, estate, partnership, corporation, joint venture, coopera tive or association that carries out any of the following activities in the course of a trade or business:
• Sells, barters, exchanges or leases goods or property
• Renders services
• Imports goods
In addition, if the importer is exempt from tax, the purchaser, transferee or recipient of imported goods is liable for VAT, regardless of whether such person is a registered taxable person.
Non-established businesses that perform services in the Philippines are deemed to be making sales in the course of a trade or business even if the services are not performed on a regular basis.
In general, a taxable person with gross sales or receipts that have exceeded or that are expected to exceed PHP3 million over a 12-month period must register as a taxable person.
A radio or TV broadcasting franchisee must register if its gross annual receipts from the franchise exceeded PHP10 million in the preceding calendar year.
A professional person is liable for 12% VAT if its gross receipts or fees for the previous 12 months exceed PHP3 million or will exceed this amount in the next 12 months. A professional that is not registered for VAT is liable for the percentage tax at a rate of 3% if its gross receipts for the previous 12 months were equal to or less than this threshold.
Exemption from registration. The VAT law in the Philippines does not contain any provision for exemption from registration.
Voluntary registration and small businesses. It is possible for a taxable person that is otherwise generally not required to register for VAT to become VAT registered on a voluntary basis.
Any person who elects to register under optional VAT registration shall not be allowed to cancel VAT registration for the next three years.
VAT registration is optional for the following persons:
• A VAT-exempt person with gross sales or receipts that do not exceed PHP3 million
• A radio or television broadcasting franchisee with gross annual receipts from the franchise that did not exceed PHP10 million in the preceding calendar year
A taxable person with mixed transactions may opt for VAT to apply to its otherwise VAT-exempt transactions.
The following persons must register as non-VAT persons:
• A VAT-exempt person that is not registered as a taxable person
• An individual engaged in business with gross sales or receipts of PHP3 million or less in a 12-month period
• Nonstock, nonprofit organizations or associations engaged in trade or business with gross sales or receipts of PHP3 million or less in a 12-month period
• Cooperatives, except electric cooperatives
• Radio and television broadcasters with gross annual receipts of PHP10 million or less that do not opt to be registered for VAT
• Enterprises registered with the Philippine Economic Zone Authority (PEZA) and other eco nomic zones that enjoy a preferential tax rate of 5% instead of paying all taxes
• Enterprises registered with the Subic Bay Metropolitan Authority (SBMA) or with other free port zones that enjoy a preferential tax rate of 5% instead of paying all taxes
Group registration. Group VAT registration is not allowed in the Philippines.
Non-established businesses. A foreign non-established business (or foreign nonresident not engaged in trade or business in the Philippines) is a foreign business that does not have a branch, head quarters or permanent establishment in the Philippines. A foreign non-established business is subject to VAT for services rendered in the Philippines via a withholding process, but it is not required to register for VAT purposes.
Tax representatives. A foreign non-established business is not required to appoint a tax represen tative in the Philippines. Any resident who deals with a non-established business and who has control over payment for the supply must act as the VAT withholding agent.
Reverse charge. Under the reverse-charge provision, a taxable person that receives a supply of goods or services must withhold the VAT due from the supplier and pay the VAT. The reverse charge applies in the circumstances described below.
Withholding tax. A resident must withhold 12% VAT before paying to a nonresident or foreign non-established business the consideration for a nonresident’s lease of properties or for property rights or services rendered in the Philippines. A VAT-registered withholding agent may claim the VAT withheld by it as input tax on its own VAT return, subject to the rule on allocation of input tax among taxable, zero-rated and exempt sales (see Section F). If the withholding agent is a non-VAT taxable person, the VAT paid forms part of the cost of the purchased services and may be treated either as an asset or as an expense, in accordance with general accounting principles.
Under the TRAIN, payments for purchases of goods and services arising from projects funded by Official Development Assistance (ODA) as defined under Republic Act No. 8182, otherwise known as the “Official Development Assistance Act of 1996,” as amended, shall not be subject to the final withholding tax system as imposed in this subsection.
Before paying for each taxable (local) purchase of goods or services, the government must deduct and withhold a final VAT of 5% representing the net VAT payable by the seller, on account of its purchases of goods or services subject to VAT. Under the “Tax Reform for Acceleration and Inclusion” (TRAIN), beginning 1 January 2021, the VAT withholding system shall shift from final to a creditable system. The remaining 7% is the standard input tax (see Section F) for sales of goods or services to the government, instead of the actual input tax directly attributable or apportioned to these sales. If the actual input tax exceeds 7% of the gross payment, the excess may form part of the seller’s expense or cost. If the actual input tax is less than 7% of the gross payment, the difference must be treated as an expense or cost.
Domestic reverse charge. There are no domestic reverse charges in the Philippines.
Digital economy. Taxable persons conducting online business transactions for the sale, barter or exchange of goods and services with gross sales or receipts greater than PHP3 million in a 12month period must register their business with the Revenue District Office having jurisdiction over the place of business, if they have a physical establishment, or otherwise, in the place of their residence in accordance with Revenue Memorandum Circular No. 60-2020, as amended.
The online merchant or retailer is required among others to issue a registered invoice or receipt, either manually or electronically, for every sale, barter, exchange or lease of goods and services. If the customer pays through an online intermediary who controls the collections/payments of customers or markets products/services for its own account and thus considered the retailer/ merchant, they are required to issue the invoice/official receipt for the full amount of the sale to the customer.
Payment gateways such as banks, credit card companies, financial institution and bill paying services are obliged to issue validated bank deposit slips or payment confirmations in the name of the merchant-seller. Freight forwarders and online website administrators are likewise obliged to issue, either electronically or manually, the Department of Finance’s Bureau of Internal Revenue (BIR) registered official receipt for the service fees paid by the merchant or advertisers.
Nonresidents that provide electronically supplied services for both business-to-business (B2B) and business-to-consumer (B2C) supplies are not required to register or account for VAT on sup plies in the Philippines. Instead, the customer is required to self-account for the VAT due via the reverse-charge mechanism. For B2C supplies, the consumer located in the Philippines is required to withhold the VAT due and remit the same directly to the government instead of to the digital supplier. See the Reverse-charge subsection above.
There are no other specific e-commerce rules for imported goods in the Philippines.
Online marketplaces and platforms. Persons who conduct business through online transactions (i.e., online shopping or online retailing, online intermediary service, online advertisement/clas sified ads, and/or online auction, as defined under Revenue Memorandum Circular No. 55-13) are required to register the business at the Revenue District Office having jurisdiction over the principal place of business/head office (or residence in case of individuals) and comply with other registration requirements. The existing laws and revenue issuances on the tax treatment of purchases (local or imported) and sale (local or international) of goods (tangible or intangible) or services shall be equally applied with no distinction on whether or not the marketing channel is the internet/digital media or the typical and customary medium. Failure to comply with the applicable registration requirements may trigger penal provisions.
The Philippines House of Representatives has introduced House Bill 7425 titled “Imposing Value-Added Tax on Digital Transactions in the Philippines” that aims to impose VAT (at the standard rate at 12%) on digital advertising services or sale of goods using an electronic com merce platform, services rendered electronically or through subscription-based services, as well
as imposing VAT on digital service providers. This bill will set a statutory clarification on whether services rendered electronically can be subjected to VAT, as well as expanding the cover age of persons liable to VAT to include nonresident digital service providers (this includes the definition of a digital service provider).
The bill says digital services providers may be defined as follows:
• Third-party seller of goods and services who, through information-based technology or the internet, sells multiple products for its own account, or who acts as an intermediary between a supplier and buyer of goods and services collecting or receiving payment from a buyer on behalf of the supplier and receives a commission thereon
• Platform provider for promotion using the internet to deliver marketing messages to attract buyers
• Host of online auctions through the internet
• Supplier of digital services for a regular subscription fee
• Supplier of goods or electronic and online services delivered through an information technol ogy infrastructure (such as the internet)
These nonresident digital services providers will be required to register for VAT if their gross sales or receipts for the past year exceed PHP3 million.
The bill also defines a digital service as “any service that is delivered or subscribed over the internet or other electronic network and cannot be obtained without the use of information tech nology and where the delivery of the service may be automated.” Digital services include online licensing of software, updates and add-ons; website filters and firewalls; mobile applications, video games and online games; webcast and webinars; and the provision of digital content such as music, files, images, text and information. In addition, online advertising space; electronic marketplaces; search engine services; social networks; internet-based telecommunication, data base and hosting; and online training, publication subscriptions and even payment processing services are on the list.
The bill would exempt from VAT books and other printed material that is sold electronically or online. However, payments to nonresidents for digital services rendered in the Philippines are subject to 12% withholding tax at the time of payment.
The small online sellers with gross receipts or sales of not more than PHP3 million would still be exempt from having to register and charge VAT.
At the time of preparing this chapter, the bill has just been approved on the third and final reading in the lower House of the Congress and will undergo further legislative processes. However, there is no specific date as to when the bill will be passed and approved into law.
Registration procedures. New taxable persons must file an application for registration as a VATregistered taxable person. Corporations and partnerships must fill out BIR Form No. 1903 (Application for Registration) or BIR Form No. 1905 (Application for Registration Information Update) and physically file it with the Revenue District Office (RDO) having jurisdiction at the place where the head office and branch is located together with the required attachments on or before the first sale transaction. New taxable persons are required to pay an annual registration fee of PHP500 at the Authorized Agent Banks (AABs) of the concerned RDO and submit the requirements for authority to print principal and supplementary receipts/invoices and registration of books of accounts. As soon as all the requirements are submitted, the RDO will issue the Certificate of Registration (Form 2303).
Deregistration. A taxable person may cancel its registration for VAT in any of the following cir cumstances:
• The taxable person’s written application to the Commissioner of Internal Revenue (CIR) satis factorily shows that its gross sales or receipts for the following 12 months (other than those that are exempt) will not exceed PHP3 million
• The person has ceased to carry on its trade or business and does not expect to recommence any trade or business in the next 12 months
• A change of ownership in a single proprietorship occurs
• A partnership or corporation is dissolved
• A merger or consolidation of a dissolved corporation occurs
• The person registers before a planned business commencement but fails to start its business
Changes to VAT registration details. In case there has been a change in the taxable person’s VAT registration details, it is their obligation to update their record with the Bureau of Internal Revenue District Office where their business is registered by filing a duly accomplished BIR Form No. 1905, specifying therein any change in tax type and other taxable persons’ details, as the case may be. No specific time limit applies for such notification.
D. Rates
The term “taxable supplies” refers to supplies of goods and services that are liable to a rate of VAT, including the zero rate.
The VAT rates are:
• Standard rate: 12%
• Zero-rate: 0%
The standard rate of VAT applies to all supplies of goods or services unless a specific measure provides for the zero rate or an exemption.
A taxable person that makes zero-rated transactions may use the input tax as credit against VAT liability, or it may file a claim for a refund or apply for a tax credit certificate (TCC).
Examples of goods and services taxable at 0%
• Export sales, including the following:
Sales of goods exported from the Philippines to a foreign country
Sales of raw materials or packaging materials to a nonresident buyer for delivery to a resident exporter for manufacturing, processing, packing or repacking the buyer’s goods in the Philippines
Sales of raw materials or packaging materials supplied to an exporter with export sales exceeding 70% of its annual production. Under the TRAIN, the second and third items will be converted into a regular VAT-able transaction (12% tax rate) upon satisfaction of the following conditions:
The successful establishment and implementation of an enhanced VAT refund system that grants refunds of creditable input tax within ninety (90) days from the filing of the VAT refund application with the Bureau.
• Sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations: provided that the goods, supplies, equipment and fuel shall be used for international shipping or air transport operations
• Processing, manufacturing or repacking goods for other persons doing business outside the Philippines that are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP)
• Services performed by subcontractors and/or contractors in processing, converting or manufac turing goods for an enterprise whose export sales exceed 70% of total annual production. Under the TRAIN, the immediately preceding two items will be similarly charged at the standard rate of VAT upon satisfaction of the following conditions: The successful establishment and implementation of an enhanced VAT refund system that grants refunds of creditable input tax within ninety (90) days from the filing of the VAT refund application with the Bureau.
• Services other than processing, manufacturing or repacking goods rendered to a person engaged in business conducted outside the Philippines or to a non-established business not engaged in business who is outside the Philippines when the services are performed, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP)
• Transport of passengers and cargo by domestic air or sea vessels from the Philippines to a foreign country
• Sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal, ocean energy and other emerging energy sources using technologies such as fuel cells and hydrogen fuels
• Services rendered to persons engaged in international shipping or air transport operations, provided that these services shall be exclusive for international shipping or air transport operations
• Services of contractors or subcontractors in processing or manufacturing goods for exporters with export sales exceeding 70% of annual production
• Local sales of goods, properties and services by a taxable person to a person or entity that was granted indirect tax exemption under special laws or international agreements
The term “exempt” refers to supplies of goods and services that are not liable to VAT and that do not qualify for input tax deduction.
Examples of exempt supplies of goods and services
• The sale or import of the following items:
Agricultural or marine food products in their original state
Livestock or poultry used as, or for producing, foods for human consumption Breeding stock and related genetic materials
Fertilizers, seeds, fingerlings, fish, prawn, livestock or poultry feeds and ingredients used for manufacturing finished feeds that are unfit for human consumption or ingredients that cannot be used for the production of products for human consumption as certified by the Food and Drug Administration (except specialty feeds for racehorses, fighting cocks, zoo animals or pets)
Drugs and medicines prescribed for diabetes, high cholesterol and hypertension from1 January 2020
Drugs and medicines for cancer, mental illness, tuberculosis and kidney diseases from 1 January 2023
Sake or importation of items for COVID-19 prevention or treatment from 1 January 2021 to 31 December 2023. This includes capital equipment, spare parts and raw materials neces sary for PPE component production, as well as drugs, vaccines and medical devices spe cifically prescribed and directly used for COVID-19 treatment, including approved by the FDA for use in clinical trials and necessary raw materials for drug production.
• Import of the following items:
Personal or household effects of residents returning from abroad or nonresident citizens coming to resettle in the Philippines if the items qualify for exemption from customs duties
Professional instruments and implements, tools of trade, occupation or employment, wear ing apparel, domestic animals and personal and household effects belonging to persons coming to live in the Philippines or Filipinos or their families and descendants who are now residents or citizens of other countries (such parties hereinafter referred to as overseas
Filipinos) in quantities and of the class suitable to the profession, rank or position of the persons importing said items, for their own use and not for barter or sale, accompanying such persons, or arriving within a reasonable time. The Bureau of Customs (BOC) upon the production of satisfactory evidence that such persons are actually coming to settle in the Philippines and that the goods are brought from their former place of abode, exempt such goods from payment of duties and taxes. Vehicles, vessels, aircrafts, machineries and other similar goods for use in manufacture, shall not fall within this classification and shall there fore be subject to duties, taxes and other charges
• Services rendered by agricultural contract growers and milling for others of palay (unhusked rice) into rice, corn into grits and sugar cane into raw sugar
• Services subject to percentage taxes
• Domestic common carriers by land (which must be a holder of a valid and current Certificate of Public Convenience to be considered as such) for passenger transport (subject to percentage tax under Section 117 of the Tax Code)
• Garage keepers (subject to percentage tax under Section 117 of the Tax Code)
• International air or shipping carriers (subject to percentage tax under Section 118 of the Tax Code)
• Sales of gold to the Philippines Central Bank (Bangko Sentral ng Pilipinas or BSP)
• Radio or television broadcast franchisees with annual gross receipts of PHP10 million or less (subject to percentage tax under Section 119 of the Tax Code)
• Gas and water utilities’ franchisees (subject to percentage tax under Section 119 of the Tax Code)
• Persons, companies and corporations (not cooperatives or associations) engaged in providing life insurance in the Philippines (subject to percentage tax under Section 123 of the Tax Code)
• Fire, marine or other insurance agents of foreign insurance companies (subject to percentage tax under Section 124 of the Tax Code)
• Proprietors or lessees or operators of cockpits, clubs, boxing, professional basketball, jai-alai and racetracks (subject to percentage tax under Section 125 of the Tax Code)
• Individual employees (services rendered by individuals pursuant to an employer-employee relationship)
• Providers for overseas dispatches, messages or conversations from the Philippines (subject to percentage tax under Section 120 of the Tax Code)
• Sales or exchanges of shares listed and traded at the local exchange or by initial public offering (subject to percentage tax under Section 127(B) of the Tax Code)
• Medical, dental, hospital and veterinary services, except those rendered by professionals
• Educational services of government or accredited private educational institutions
• Services rendered by regional or area headquarters established in the Philippines by multina tional corporations that act as supervisory, communications and coordinating center for their affiliates, subsidiaries or branches in the Asia-Pacific region and do not earn or derive income from the Philippines
• Transactions exempted under international agreements signed by the Philippines or under spe cial laws
• Sales by agricultural cooperatives to members, sales of their produce to nonmembers and the import of direct farm inputs, equipment or spare parts for producing or processing farm produce
• Lending by credit or multipurpose cooperatives
• Sales by nonagricultural or nonelectric or noncredit cooperatives if a member’s capital contri bution cap is PHP15,000
• Sales of the following real properties: Real properties not primarily held for sale, lease or use in the ordinary course of trade or business
Low-cost housing, up to PHP750,000
Socialized housing, up to PHP450,000
Residential lots up to PHP1.5 million
Houses, lots and other residential dwellings, up to PHP2.5 million
• The lease of residential units for rent not exceeding: PHP15,000 a month
• The sale, import, printing or publication of books and newspapers or magazines appearing at regular intervals that have fixed sale prices and that are not devoted principally to publication of paid advertisements
• Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equip ment and spare parts thereof for domestic or international transport operations
• Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations. As long as the fuel, goods and supplies are used for international shipping or air transport operations
• Services of banks, nonbank financial intermediaries performing quasi-banking functions and other nonbank financial intermediaries, such as money changers and pawnshops (subject to percentage tax under Section 122 of the tax code
• Sale or lease of goods or properties or services up to PHP3 million annually
• Transfer of property pursuant to Section 40(C)(2) of the Philippine Tax Code (i.e., tax-free exchang es of property, mergers and acquisitions)
• Sale of goods or services to “senior citizens,” as defined under Republic Act (RA) No. 9994 or the Expanded Senior Citizens Act of 2010
• Sale of goods or services to persons with disability (PWD) under Republic Act (RA) No. 10754 or An Act Expanding the Benefits and Privileges of Persons with Disability
Option to tax for exempt supplies. A VAT registered person may elect that exempt transactions be registered for VAT purposes. Once the election is made, it shall be irrevocable for a period of three years counted from the quarter when the election was made except for franchise grantees of radio and TV broadcasting whose annual gross receipts for the preceding year do not exceed PHP10 million where the option becomes perpetually irrevocable.
E. Time of supply
The time of supply or tax point is the time when the VAT becomes due. The following are the general rules for the time of supply:
• For importations – before the release of the goods (whether or not for business) from customs custody
• For the sale or deemed sale, barter or exchange of taxable goods or properties – at the time of the transaction, regardless of when actual payment is made
• For installment sales of real property – when each actual payment is made or at the constructive receipt date for each installment payment
• For the use or lease of property – when each actual payment is made or at the constructive receipt date for each installment payment
• For supplies of services – when each actual payment is made or at the constructive receipt date for each installment payment
Deposits and prepayments. In general, receipt of a deposit or prepayment creates a tax point if the amount is paid as part of the total payment for a particular supply.
If a prepayment constitutes a prepaid lease rental, it is taxable for the lessor in the month in which the payment is received. However, a security deposit is not subject to VAT until it is applied to the rental.
Continuous supplies of services. For continuous supplies of services, a tax point is created each time a payment is made.
Goods sent on approval for sale or return. Goods sent on approval are not subject to VAT until they are actually sold.
If an actual sale of consigned goods is not made within 60 days after the date on which the goods were consigned, a sale is deemed to take place, unless the consigned goods are returned by the consignee within the 60-day period.
Reverse-charge services. The tax point for reverse-charge services is when the consideration is paid.
Leased assets. For supplies of leased assets, the time of supply is when each actual payment is made or at the consecutive receipt date for each installment payment.
Imported goods. VAT is imposed on goods brought into the Philippines, whether for use in busi ness or not. It is based on the total value used by the BOC in determining tariff and customs duties, plus customs duties, excise tax, if any, and other charges imposed prior to the release of the goods from customs custody. If the valuation used by the BOC in computing customs duties is based on volume or quantity of the imported goods, the landed cost shall be the basis for computing VAT. Landed cost consists of the invoice amount, customs duties, freight, insurance, other charges and excise tax, if any. The VAT on importation shall be paid by the importer prior to the release of such goods from customs custody.
F. Recovery of VAT by taxable persons
A taxable person may recover input tax, which is VAT charged on the person’s import of goods or local purchases of goods or services (including property leases) from another taxable person, in the course of the person’s trade or business. A taxable person may also recover input tax with held from payment to a non-established business for taxable services (i.e., rendered within the Philippines), royalties and rentals. A taxable person generally recovers input tax by deducting it from output tax, which is the VAT charged on the sale or lease of taxable goods or properties or services. If at the end of the tax quarter, a taxable person’s output tax exceeds input tax, the person must pay the excess. If input tax exceeds output tax, the excess is carried over to the next quarter or quarters.
There is no set time limit for a taxable person to reclaim input tax in the Philippines. This means that effectively the input tax (VAT credit) may be carried forward until its complete recovery.
If the input tax inclusive of input tax carried over from the previous quarter exceeds the output tax, the input tax inclusive of input tax carried over from the previous quarter that may be cred ited in every quarter shall not exceed 70% of the output tax. The excess input tax shall be carried over to the succeeding quarter or quarters.
Input tax related to certain transactions may be creditable against output tax if the tax paid is evidenced by a VAT invoice or official receipt issued by a taxable person. The following table lists such transactions.
• Goods purchased or imported for any of the following purposes:
Sale of the goods themselves
Conversion into a finished product for sale or goods intended to form part of a finished product for sale, including packaging materials
Use of supplies in the course of business
Use of raw materials in a supply of services
Use in trade or business for which deduction for depreciation or amortization is allowed
• The purchase of real property on which VAT has been paid
• The purchase of services on which VAT has been paid
• Transactions deemed to be sales
• Transitional input tax of 2% of value of beginning inventory or of the actual VAT paid, which ever is higher
• Presumptive input tax of 4% of the gross value of purchases of primary agricultural products used as inputs in the production of sardines, mackerel, milk, refined sugar, cooking oil and packed noodle-based instant meals
• Transitional input tax credits allowed under the law and regulations
For purposes of the above table, transitional input tax is a form of input tax allowed on transition from non-VAT-registered status to VAT-registered status. It may be credited against output tax when the VAT registration takes effect. Presumptive input tax is a form of fixed input tax allowed to persons or firms engaged in the processing of sardines, mackerel and milk; and in manufactur ing refined sugar, cooking oil and packed noodle-based instant meals. In general, it may be credited against output tax on the consummation of purchases of primary agricultural products (used as inputs to production).
Nondeductible input tax. Input tax may not be recovered on the purchase or importation of goods and services that are not used for business purposes.
Examples of items for which input tax is nondeductible
• Purchases of a non-VAT-registered taxable person from a VAT-registered taxable person that are not related to a taxable business use
• A denied input tax refund claim that does not meet the requirements or elements described above
Examples of items for which input tax is deductible (if related to a taxable business use)
• Purchases of a non-VAT registered taxable person from a VAT-registered taxable person.
• A denied input tax refund claim may be claimed as a deduction from gross income if the loss is actually sustained by the taxable person; sustained during the taxable year; not compensated by insurance or other forms of indemnity; incurred in the taxable person’s trade, profession or business; and evidenced by a closed and completed transaction. In the Philippines, when a claim for input tax is denied by the tax authorities, there may be a basis to treat this as a deduct ible loss instead, as long as the conditions described above are met. Otherwise, the denied input tax (or loss) may be considered nondeductible.
Partial exemption. Input tax that is directly attributed to transactions subject to VAT may be rec ognized for tax credit. However, input tax that is directly attributable to taxable sales of goods and services to the government is not available for credit against output tax related to supplies made to nongovernment entities.
Input tax that is not directly attributable to either taxable or exempt transactions must be prorated monthly between taxable and exempt transactions. Input tax credit is permitted only for the portion of input tax that relates to transactions subject to VAT.
Approval from the tax authorities is not required to use the partial exemption standard method in the Philippines. Special methods are not allowed in the Philippines.
A taxable person making supplies of goods, property and services that are zero-rated (or effec tively zero-rated) may apply for a tax credit certificate (TCC) or a refund of input tax attributable to these sales (except for the portion of the excess input tax that has already been applied against output tax). The default claim shall be a cash refund unless the claimant applies for the issuance of a TCC.
Under Section 112 (A) of the Tax Code, as amended, the request may be made within two years after the close of the tax quarter in which the sales are made.
The Commissioner of Internal Revenue (CIR) must grant the TCC or refund within 90 days after the date of submission of all documents required with respect to the claim. Should the CIR find that the grant of refund is not proper, he must state in writing the legal and factual basis for the
denial. Failure on the part of any official, agent or employee of the BIR to act on the application within the 90-day period shall be punishable.
Capital goods. A taxable person’s purchases or imports of capital or depreciable goods may be claimed as credit against output tax, in accordance with the rules described below.
If the aggregate acquisition cost exceeds PHP1 million in a calendar month, regardless of the unit cost of the capital goods, and if the capital goods have an estimated useful life of five years or more, a claim for input tax credit begins in the month in which the capital goods are acquired and is spread evenly over 60 months. The credit is spread evenly over the actual number of months of the useful life of the asset if its estimated useful life is less than five years.
If the aggregate acquisition cost does not exceed PHP1 million in a calendar month, the total input tax is allowable as a credit against output tax in the month of acquisition.
The amortization of the input tax shall only be allowed until 31 December 2021, after which taxable persons with unutilized input tax on capital goods purchased or imported shall be allowed to apply the same as scheduled until fully utilized.
Refunds. Any input tax attributable to zero-rated sales by a taxable person may at its option be refunded or applied for a TCC.
The administrative claim for VAT refund or TCC must be filed within two years from the close of the taxable quarter when the zero-rated sales and/or effectively zero-rated sales were made.
The application for VAT refund must be accompanied by complete supporting documents as specifically enumerated in existing revenue regulations. The application will be denied if the taxable person fails to submit the complete supporting documents.
The CIR have 90 days from the submission of the complete supporting documents within which to decide whether or not to grant the claim. If the claim is not acted upon by the CIR within the 90 days, such inaction shall be deemed a denial of the claim.
In case of a denial, the taxable person should file a judicial claim with the Court of Tax Appeals (CTA) (i) within 30 days from receipt of the Commissioner’s decision denying the claim (wheth er in full or in part) within the 90-day period, or (ii) from the expiration of the 90-day period if the CIR does not act within the 90-day period. The taxable person is required to observe the 90 plus 30-day rule before lodging a petition for review with the CTA.
Pre-registration costs. Input tax incurred on pre-registration costs in Philippines is not recover able.
Bad debts. Output tax accounted for on supplies that do not get paid by the recipient (i.e., bad debts) cannot be recovered in the Philippines.
Noneconomic activities. Input tax incurred on purchases that are used for noneconomic activities is not recoverable in the Philippines.
G. Recovery of VAT by non-established businesses
Input tax incurred by non-established businesses in the Philippines is not recoverable.
H. Invoicing
VAT invoices. A taxable person must issue a VAT invoice for every sale, barter or exchange of goods or property or a VAT official receipt for every lease of goods or property and for every sale, barter or exchange of services. An authority to print (ATP) receipts or sales invoices must be secured from the tax authorities. The official receipt or invoice shall be valid for five years
from the issuance of the ATP or the full usage of the inclusive serial numbers of the receipts/ invoices reflected in the ATP, whichever comes first.
Credit notes. A VAT credit note may be used to reduce the VAT charged on supply of goods or services. Tax credit and debit notes must show the same information as a VAT invoice or receipt.
Electronic invoicing. Electronic invoicing is allowed in the Philippines, but not mandatory. Within five years from the effectivity of the TRAIN (i.e., 1 January 2018) and upon establishment of a system capable of storing and processing the required data, the Philippine tax authorities requires taxable persons engaged in the export of goods and services, taxable persons engaged in e-com merce, taxable persons under the jurisdiction of the large taxable persons service to issue elec tronic receipts or sales or commercial invoices in lieu of manual receipts or sales or commercial invoices, subject to rules and regulations yet to be issued. However, at the time of preparing this chapter, no rules or guidance has been passed by the Department of Finance regarding the issu ance of electronic invoices and receipts.
Simplified VAT invoices. Simplified VAT invoicing is not allowed in the Philippines. As such, full VAT invoices are required.
Self-billing. Self-billing is not allowed in the Philippines.
Proof of exports. Export sales are subject to the zero rate of VAT if the goods are shipped from the Philippines to a foreign country. The goods must be paid for in acceptable foreign currency (or its equivalent in goods or services), and it must be accounted for in accordance with the rules of the BSP. The sale and shipment of goods must be proven by the following documents:
• VAT invoices that contain the term “zero-rated sale” written or printed on the invoice
• Bills of lading
• Inward letters of credit
• Landing certificates
• Other relevant commercial documents
Foreign currency invoices. If a VAT invoice or official receipt is issued in a foreign currency, all values that are required to be paid must be converted into the domestic currency, which is the Philippine peso (PHP), using an acceptable exchange rate.
Supplies to nontaxable person. There are no special invoicing rules for supplies to private consum ers. As such, the general invoicing requirements described above apply, and full VAT invoices must be issued for all supplies.
Records. Generally, all books, registers, records, vouchers and other supporting papers and documents prescribed by the BIR must be retain by a taxable person.
Records can be held in or outside of the Philippines. However, where records are held outside of the Philippines, they should be readily available to the BIR upon request.
Record retention period. All taxable persons are required to preserve their books of accounts, including subsidiary books and other accounting records, for a period of 10 years reckoned from the day following the deadline in filing a return, or if filed after the deadline, from the date of the filing of the return, for the taxable year when the last entry was made in the books of accounts. This is provided that within the first five years reckoned from the day following the deadline in filing a return, or if filed after the deadline, from the date of the filing of the return, for the taxable year when the last entry was made in the books of accounts, the taxable person shall retain hard copies of the books of accounts, including subsidiary books and other accounting records. Thereafter, the taxable person may retain only an electronic copy of the hard copy (paper) of the books of accounts, subsidiary books and other accounting records in an electronic storage system that complies with the requirements set forth under Section 2-A hereof.
Electronic archiving. Records can be kept and archived electronically. Electronic records used to establish tax compliance should contain sufficient transaction-level detail information so that the details underlying the electronic records can be identified and made available to the BIR upon request.
Furthermore, an electronic storage system may be used by the taxable person in preserving books of accounts and other accounting records such as invoices. Such electronic storage system must ensure an accurate and complete transfer of the images of the hardcopy of the books of accounts, including subsidiary books and other accounting records to an electronic storage media and index, store, preserve, retrieve and reproduce the electronically stored images of the hardcopy of the books of accounts, subsidiary books and other accounting records.
Under the TRAIN, within five years from the effectivity of the TRAIN (from 1 January 2018) and upon the establishment of a system capable of storing and processing the required data. The BIR shall require taxable persons engaged in the export of goods and services, taxable persons engaged in e-commerce and taxable persons under the jurisdiction of the Large Taxable persons Service to issue electronic receipts or sales or commercial invoices in lieu of manual receipts or sales or commercial invoices subject to rules and regulations to be issued by the Secretary of Finance upon recommendation of the Commissioner and after a public hearing shall have been held for this purpose. This is provided that taxable persons not covered by the mandate of this provision may issue electronic receipts or, sales or commercial invoices, in lieu of manual receipts, and sales and commercial invoices. In addition, the machines, fiscal devices and fiscal memory devices shall be at the expense of the taxable persons.
I. Returns and payment
Periodic returns. Taxable persons that use a manual filing system must file monthly VAT declara tions, not later than the 20th day after the end of each month. Taxable persons must also file quarterly VAT returns showing their quarterly gross sales or receipts within 25 days after the close of the tax quarter.
Taxable persons that use the electronic filing are classified according to their business industry and they are given deadlines based on their classification. The due dates for filing range from 21 days to 25 days after the end of the month for each monthly VAT declaration. The return for reporting VAT withholding must be filed, on or before the 10th day of the month following the transaction.
From1 January 2023, the filing and payment of VAT must be done within 25 days following the close of each taxable quarter).
Periodic payments. Taxable persons that use a manual filing system must pay the VAT to an authorized agent bank, not later than the 20th day after the end of each month or with the Revenue Collection Officer (RCO) in cases where there are no authorized agent bank present in the locality where the taxable person is registered.
Taxable persons that use the electronic filing and payment system (eFPS) are classified accord ing to their business industry and they are given deadlines based on their classification. The due dates for payment range from 21 days to 25 days after the end of the month for each monthly VAT declaration. The tax must be paid, on or before the 10th day of the month following the transaction.
Electronic Filing and Payment System also known as eFPS, as mentioned above, is a system developed by the BIR for electronic filing of tax returns, including attachments, if any, and pay ing taxes due thereon, specifically through the internet. This system is available to all taxable persons with an email account and internet access who are registered in the BIR Integrated Tax System (ITS).
Advance payment of VAT is required for the sale of refined sugar and flour. The advance VAT must be paid by the owner or seller to the BIR through an authorized agent bank or revenue col lection officer before any refined sugar or flour can be withdrawn from any refinery or mill. In addition, the VAT on imported goods must be paid before the release of the goods from the Bureau of Customs’ custody.
Electronic filing. Electronic filing of VAT returns is mandatory for certain taxable persons. The taxable persons for which electronic filing is mandatory are as follows:
• Taxable person account management program
• Accredited importer and prospective importer
• National government agencies
• Licensed local contractors
• Enterprises enjoying fiscal incentives
• Top 5,000 individual taxable persons
• Corporations with paid-up capital stock of PHP10 million and above
• Corporations with complete computerized accounting systems
• Government bidders
• Insurance companies and stockbrokers
• Large taxable persons
• Top 20,000 private corporations
For those taxable persons for which electronic filing is not mandatory, they may either use manual filing or can voluntarily use either the Electronic Filing and Payment System (eFPS) or the Electronic Bureau of Internal Revenue Forms (eBIRForms).
Payments on account. Payments on account are not required in the Philippines.
Special schemes. No special schemes are available in the Philippines.
Annual returns. Annual returns are not required in Philippines.
Supplementary filings. Summary List of Sales. Under the Reconciliation of Listing for Enforcement (RELIEF) system, taxable persons with quarterly total sales/receipts (net of VAT), exceeding P2,500,000 are required to submit a Summary List of Sales. The RELIEF supports the third-party information program of the Bureau through the cross referencing of third-party information from the taxable persons’ Summary Lists of Sales and Purchases prescribed to be submitted on a quarterly basis.
Summary List of Sales and Purchases. Taxable persons are also required to submit a quarterly Summary List of Sales and Purchases (SLSP) on disc, specifically the compact disc recordable (CDR) medium. Taxable persons that use a manual filing system must file the quarterly SLSP within 25 days after the close of the tax quarter. Taxable persons that use the electronic filing and payment system must submit the quarterly SLSP within 30 days after the close of the quarter.
Correcting errors in previous returns. The taxable person may file an amended VAT return speci fying the items corrected or changed, provided that the taxable person has not been issued with a Letter of Authority for tax audit. However, this may be subject to penalties, such as but not limited to fines. This also extends the three-year prescriptive period for the BIR to conduct an audit.
Digital tax administration. There are no transactional reporting requirements in the Philippines. However, under the TRAIN, within five years from the effectivity of the TRAIN (from 1 January 2018) and upon the establishment of a system capable of storing and processing the required data, the bureau shall require taxable persons engaged in the export of goods and services, tax able persons engaged in e-commerce and taxable persons under the jurisdiction of the Large Taxable Persons Service to issue electronic receipts or sales or commercial invoices in lieu of
manual receipts or sales or commercial invoices. This is subject to rules and regulations to be issued by the Secretary of Finance upon recommendation of the Commissioner and after a public hearing shall have been held for this purpose. This is provided that taxable persons not covered by the mandate of this provision may issue electronic receipts or, sales or commercial invoices, in lieu of manual receipts, and sales and commercial invoices. In addition, the machines, fiscal devices and fiscal memory devices shall be at the expense of the taxable persons.
J. Penalties
Penalties for late registration. The CIR may suspend or close a business establishment for at least five days for the failure of a person to register for VAT as required by law.
Any person who becomes liable to VAT and fails to register as such shall be liable to pay the output tax as if they are a taxable person, but without the benefit of input tax credits for the period in which he was not properly registered.
In addition to the tax required to be paid, a surcharge penalty equivalent to 25% of the amount due, is applicable, in the following cases:
• Failure to file any return and pay the tax due thereon as required under the provisions of this Code or rules and regulations on the date prescribed
• Unless otherwise authorized by the Commissioner, filing a return with an internal revenue officer other than those with whom the return is required to be filed
• Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment
• Failure to pay the full or part of the amount of tax shown on any return required to be filed under the provisions of this Code or rules and regulations, or the full amount of tax due for which no return is required to be filed, on or before the date prescribed for its payment
In case of willful neglect to file the return within the period prescribed by this Code or by rules and regulations, or in case a false or fraudulent return is willfully made, the penalty to be imposed shall be 50% of the tax or of the deficiency tax, in case any payment has been made on the basis of such return before the discovery of the falsity or fraud.
This is provided that a substantial under declaration of taxable sales, receipts or income, or a substantial overstatement of deductions, as determined by the Commissioner pursuant to the rules and regulations to be promulgated by the Secretary of Finance, shall constitute prima facie evidence of a false or fraudulent return.
Further failure to report sales, receipts or income in an amount exceeding 30% of that declared per return, and a claim of deductions in an amount exceeding 30% of actual deductions, shall render the taxable person liable for substantial under declaration of sales, receipts or income or for overstatement of deductions, as mentioned herein.
There shall also be assessed and collected on any unpaid amount of tax, interest at the rate of 12% per annum, or such higher rate as may be prescribed by rules and regulations, from the date prescribed for payment until the amount is fully paid.
Also, the CIR or its authorized representative is empowered to suspend the business operations and temporarily close the business establishment of any person for the failure of any person to register. The temporary closure of the establishment shall be for the duration of not less than five days and shall be lifted only upon compliance with whatever requirements prescribed by the CIR in the closure order.
Penalties for late payment and filings. Civil penalties (25% or 50%) and 12% interest are assessed on the amount due for the following offenses:
• Failure to file a return and pay the tax due based on the return as required by law and rules
• Filing a return with an internal revenue officer other than the officer with whom the return is required to be filed
• Failure to pay the full or part of the tax due or the deficiency tax within the prescribed period
• Willful neglect to file a return within the prescribed period
• Failure to file certain information returns
• Failure of a withholding agent to collect and remit tax or refund excess withholding tax
In addition to other administrative and penal sanctions, the CIR may suspend or close a business establishment for at least five days for the failure to file a VAT return.
Penalties for errors. Civil penalties (25% or 50%) and 12% interest are assessed on the amount due for the erroneous issuance of a VAT invoice or receipt by a person not registered for VAT.
In addition to other administrative and penal sanctions, the CIR of the BIR may suspend or close a business establishment for at least five days for the failure to issue receipts and invoices, and the understatement of taxable sales or receipts by 30% or more of the correct taxable sales or receipts for the tax quarter.
The conviction of a refusal or failure to indicate separately the output tax on the sale of goods and services on a sales invoice or official receipt, each such act or omission is punished by a fine not less than PHP500,000 but not more than PHP10 million and imprisonment of not less than 6 years but not more than 10 years.
For failure to file, keep or supply a statement, list or information required on the date prescribed shall pay and administrative penalty of P1,000 for each such failure, unless it is shown that such failure is due to reasonable cause and not to wilful neglect.
In addition, there is also an aggregate amount to be imposed for all such failures during a taxable year shall not exceed P25,000.
For failure to notify or late notification of a change in a taxable person’s VAT registration details, under Section 236 of the NIRC, no penalties are outlined. For further details see the subsection Changes to VAT registration details above.
Penalties for fraud. The following are the consequences of issuing an erroneous VAT invoice or VAT official receipt:
(1) If a person who is not a VAT-registered person issues an invoice or receipt showing its TIN, followed by the word “VAT”
(a) The issuer shall, in addition to any liability to other percentage taxes, be liable to:
(i) The tax imposed in Section 106 or 108 without the benefit of any input tax credit
(ii) A 50% surcharge under Section 248(B) of this Code
(b) The VAT shall, if the other requisite information required under Subsection (B) hereof is shown on the invoice or receipt, be recognized as an input tax credit to the purchaser under Section 110 of this Code
(2) If a taxable person issues a VAT invoice or VAT official receipt for a VAT-exempt transaction but fails to display prominently on the invoice or receipt the term “VAT exempt sale,” the issuer shall be liable to account for the tax imposed in Section 106 or 108 as if Section 109 did not apply.
Moreover, the CIR or its authorized representative is empowered to suspend the business opera tions and temporarily close the business establishment of any person for any of the following violations:
(1) In the case of a taxable person:
(a) Failure to issue receipts or invoices
(b) Failure to file a VAT return as required under Section 114
(c) Understatement of taxable sales or receipts by 30% or more of its correct taxable sales or receipts for the taxable quarter
(2) Failure to any person to register as required under Section 236
(a) The temporary closure of the establishment shall be for the duration of not less than five days and shall be lifted only upon compliance with whatever requirements prescribed by the Commissioner in the closure order.
Personal liability for company officers. The company’s authorized representatives, such as but not limited to company directors, may be held personally liable for the errors and omissions made, such as deliberate failure to pay tax, file returns, keep records or supply correct and accurate information in the VAT returns submitted to the BIR. Upon conviction, they can be punished by a fine of not less than PHP10,000 and suffer imprisonment of not less than one year as provided by the Tax Code.
Statute of limitations. The statute of limitations in the Philippines is three years. Internal revenue taxes shall be assessed within three years after the last day prescribed by law for the filing of the return. In the case where a return is filed beyond the period prescribed by law, the three-year period shall be counted from the day the return was filed. A return filed before the last day pre scribed by law for the filing thereof shall be considered as filed on such last day.
In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, tax may be assessed at any time within 10 years from discovery of the falsity, fraud or omission.
Further, taxable persons are allowed to modify, change or amend the return within three years from the date of filing, provided that the taxable person has not received any notice for audit or investigation of such return from the tax authorities.