Value-Added Tax (VAT) in the Philippines

What is VAT?

Value-Added Tax (VAT) is a consumption tax imposed at 12% on the sale of goods and properties, on the sale of services and the lease of properties, and on imports (NIRC §106, §107, §108). Unlike income tax, which is levied on earnings, VAT is collected at each stage of a supply chain, from manufacturer to wholesaler to retailer to consumer. The tax is borne by the final consumer, while VAT-registered businesses collect it and remit it to the Bureau of Internal Revenue (BIR).

How VAT Works

At each stage, a VAT-registered business charges VAT on its sales (output VAT) and credits the VAT it paid on its purchases (input VAT). For example, if a manufacturer buys raw materials for ₱100,000 plus ₱12,000 VAT and sells finished goods for ₱200,000 plus ₱24,000 VAT, it remits ₱12,000 to the BIR, the difference between output VAT (₱24,000) and input VAT (₱12,000). This prevents tax cascading so that VAT falls only on the value added at each stage (NIRC §110).

Who Must Register for VAT?

A person in business must register for VAT if its gross sales for the past 12 months have exceeded ₱3,000,000, or if there are reasonable grounds to believe its gross sales for the next 12 months will exceed that amount (NIRC §236(F), as amended by RA 11976). A business below the threshold may register voluntarily, but cannot cancel that registration for three years. Once registered, a business charges VAT on all taxable sales and files a quarterly VAT return.

Taxable Transactions

VAT applies to the sale of goods and properties, the importation of goods, the sale of services and the lease of properties in the Philippines, including digital services (NIRC §106 to §108). Certain transactions are exempt from VAT under Section 109, such as the sale of agricultural food products in their original state, educational services of accredited schools, and sales of persons whose gross annual sales do not exceed ₱3,000,000.

Input and Output VAT

Output VAT is the VAT a business charges on its sales. Input VAT is the VAT it pays on purchases of goods and services used in its trade or business, evidenced by a VAT invoice. A VAT-registered business credits input VAT against output VAT. If input VAT exceeds output VAT in a quarter, the excess is carried over to the following quarter; refunds are available mainly for input VAT attributable to zero-rated sales (NIRC §110, §112).

VAT on Imports

Imported goods are subject to VAT, which the importer pays to the Bureau of Customs before the goods are released. VAT-registered importers credit this import VAT as input VAT against their output VAT (NIRC §107, §110).

VAT Refunds

Export sales are zero-rated: the exporter charges 0% VAT but may apply for a refund or tax credit certificate of the input VAT attributable to those sales within two years after the close of the taxable quarter when the sales were made (NIRC §112(A)). A business whose VAT registration is cancelled because it stopped operating may apply within two years from cancellation for a refund or credit of its unused input VAT (NIRC §112(B)). The BIR must decide a refund claim within 90 days from submission of the supporting documents (NIRC §112(C)).

VAT Compliance and Filing

VAT-registered businesses file the quarterly VAT return, BIR Form 2550Q, and pay the VAT within 25 days after the end of each quarter (NIRC §114, as amended). The return reports output VAT, input VAT and the net VAT payable or excess input VAT. Late filing or payment adds a 25% surcharge and 12% interest a year (NIRC §248, §249), or 10% and 6% for micro and small taxpayers. Willful evasion can result in criminal prosecution.

VAT vs. Income Tax

VAT and income tax are separate taxes, and a VAT-registered business pays both. Income tax is levied on taxable income (gross income minus allowable deductions), while VAT is computed on gross sales and reduced by creditable input VAT. A VAT-registered business that sells ₱5,000,000 of goods in a year and earns ₱500,000 in net profit owes output VAT on the ₱5,000,000 of sales, less its input VAT, and income tax on its taxable income.