Value Added Tax (VAT) Guidelines: Philippines

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published on 20 April 2022

 

 

This country summary is part of the comprehensive Focus on VAT Fellows: International Value Added Tax (VAT) Guidelines »



1. VAT Scope, VAT Rates and VAT Exemptions

Value Added Tax (VAT) was first introduced in the Philippines in 1988. It is primarily regulated in Title IV of the National Internal Revenue Code (NIRC). Several changes to the applicable VAT regulations were made in 2021 under the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act. 
 
VAT is generally levied on any person who, in the course of trade or business, sells barters, exchanges, leases goods or properties, renders services, and any person who imports goods. 
 
Whether the transaction is made “in the course of trade or business” is determined by the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, nonprofit private organization (irres­pective of the disposition of its net income and whether or not it sells exclusively to members or their guests) or government entity. 
 
The standard VAT rate, which applies to most supplies of goods, properties and services, is 12 percent of the gross selling price or gross value. The purchase of goods, properties or services by the government or govern­ment controlled corporations is generally subject to a 5 percent final withholding tax on VAT. There is also a zero percent (0 percent) VAT rate. 
 
For the sale of specific goods, properties or services stated in Title V of the National Internal Revenue Code which are exempt from VAT a special business tax (i.e. other Percentage Tax/OPT) in the range of 3 percent to 30 percent may be levied on such transactions. The fiscal measures passed by the Philippine Congress to relief businesses in response to the COVID-19 pandemic lower the percentage tax temporarily from 3 percent to 1 percent starting July 2020 until June 2023.
 
The Philippines VAT law states various VAT exemptions that, other than for zero rated sales, do not qualify for an in-put tax deduction, such as, for example food products, agricultural products, personal belongings of immigrants.
 
Entrepreneurs selling VAT exempt goods or providing VAT exempt services neither can charge VAT nor can de­duct the VAT paid on their purchases. In such cases input VAT is considered the cost of an entrepreneur. How­ever, under specific circumstances a VAT registered person may elect not to apply exemptions to its sale of goods or properties or services.
 
According to the Cross-Border Doctrine (also known as Destination Principle) the onus of taxation under the Philippine VAT system is in the country where the goods, property or are destined, used or consumed. Thus, as a general rule export related sales of goods and services with a recipient that is not a tax resident of the Philippines are generally zero rated or VAT exempt. Concerning the performance of cross-border services it is an essential condition that the recipient of the services must be a person “doing business outside the Philippines”. According to various court decisions the specific criterion as to what constitutes doing business outside the Philippines must be judged in the light of its peculiar environmental circumstances. However, it has to be kept in mind that the onus of proof lies with the claimant of the exemption from taxation or tax refund and that the interpretation of the rules and evidence is generally construed in favor of the tax authority. 

 

2. VAT registration and simplifications

The VAT registration is compulsory for:
  • Any person or entity who, in the course of his trade or business, performs or intends to perform taxable activities subject to VAT, if the aggregate amount of actual gross sales or receipts exceeds PHP 3,000,000 in a 12-months period;
  • Any person, whether or not made in the course of his trade or business, who imports goods;
  • A person required to register as VAT taxpayer but failed to register.
 
Generally, a foreign individual or entity doing business in the Philippines is required to apply for business licenses including tax registration(s). Services rendered in the Philippines by non-Philippine residents are con­sidered as being rendered in the course of trade and business and are thus generally subject to VAT. If no registration requirement applies, the services are subject to the standard VAT rate which is withheld by the resident payer and which may be claimed back as input VAT by the withholding agent under the general qualifications.
 
There are no specific simplification rules.
 
Generally a fiscal representative for foreign non-resident person is not required in the Philippines (unless for import reasons). If VAT obligations arise the payer will act as a withholding agent.
 
Rödl & Partner Philippines may support you in such compliance and declaration matters if our expertise is needed.

  

3. Declaration requirements and penalty regime

VAT filing and payment may be made manually or electronically.
 

Manual Declaration: 

VAT is generally paid and filled with a duly accredited Authorized Agent Bank (AAB). If there is no payment to be made or if there is AAB at the place of residence of the taxpayer the reporting (and payment) is made at the nearest office of the tax authority (e.g. District Revenue Office). The reporting shall be made no later than the 20th day of the month following the applicable reporting period (i.e. calendar month). 
 
In addition a quarterly report needs to be filed – and if necessary payments made – in the same way on the 25th day of the month following the applicable quarter. 
 
Other documents that may be filed together with the above mentioned reports may be, inter alia, summary lists of quarterly purchases and/or sales to aid the tax authority in its cross referencing and enforcement measures. 
 
In the case of VAT-withholding the return must be filed and taxes paid no later than the 10th day of the month following the transaction.
 

Electronic Declaration:

Paperless filing of VAT reports and payments may alternatively be completed online. After enrollment the Electronic Filing and Payment System (EFPS) offers a secured platform where tax returns may be filed. The later payment (if any) is conducted through the internet-banking services from the enrolled account of an Authorized Agent Bank. 
 
There are a number of consequences for late or erroneous filing or payment of taxes, returns or registrations. As a general rule the deficient tax has to be paid, including 20 percent interest per annum. In addition, adminis­tra­tive or criminal penalties/charges may apply. 
 
For example, a surcharge equivalent to 25 percent of the amount due has to be paid for the following violations:
  • Failure to file any return (incl. required information) and pay the tax due thereon as required under the provisions of the NIRC or rules and regulations on the date prescribed; 
  • Filing a return with an internal revenue officer other than those with whom the return is required to be filed;
  • Failure to pay the full or part of the amount of tax shown on any return required to be filed under the provi­sions of the NIRC 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;
  • Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment;
  • Failure of the withholding agent to collect, pay or refund withholding tax; or
  • Erroneous issuance of a VAT invoice or receipt by a person not registered for VAT
 
The above stated percentage of the penalty increases to 50 percent in case of: 
  • Willful neglect to file the return within the period prescribed;
  • A false or fraudulent return is willfully made.
 
In addition and depending on the individual violation of the VAT regulation a compromise penalty starting from PHP 1,000 to PHP 25,000 or imprisonment (e.g. not less than 6 months up to 10 years) may apply.
 
The Tax Commissioner may also order to suspend the business operations and temporarily close the business establishment for a minimum of 5 days until fully compliance for the following violations:
  • Failure to issue VAT receipts or invoices;
  • Failure to file a VAT return;
  • Understatement of taxable sales or receipts by 30 percent or more of the correct taxable sales or receipts for the taxable quarter; or
  • Failure to VAT register (if required).
 
The NRIC does not expressly mention any reasonable excuses, but rare cases penalties might be avoided as an exception if the individual circumstances justify.
 

4. VAT recovery

If a taxpayer is registered for VAT purposes in the Philippines the VAT-registered person may declare and deduct Philippine input VAT (i.e. the VAT due on or paid on importation of goods or local purchases of goods, properties or services) within the VAT return on the regular tax procedure under further preconditions.  
 
Subject to the presentation of a VAT invoice for (imported) goods, purchase of properties or official receipt for services issued by a VAT-registered person, the following transaction conducted for the purpose of the registered business may qualify as credible input VAT:
Purchase or importation of goods
  • For sale; 
  • For conversion into or intended to form part of a finished product for sale including packaging materials; 
  • For use as supplies in the course of business;
  • For use as materials supplied in the sale of service; 
  • For use in trade or business for which deduction for depreciation or amortization is allowed under the tax code;
  • Purchase of real property on which Value Added Tax has been actually paid;
  • Purchase of services on which a Value Added Tax has been actually paid.
 

Transitional input VAT/Presumptive input VAT

Under specific circumstances, input tax credits are allowed for transactions prior to the VAT registration of the taxpayer (= Transitional Input VAT) and specific agricultural products (= Presumptive Input VAT). In the event that the Input VAT exceeds the Output VAT the balance will be carried over to the next tax period. Alternatively, within a time period of 2 years when the sales were made the VAT-registered person may ask for a refund or a Tax Credit Certificate of a positive input VAT balance. 
 
Primarily input VAT credits are not allowed for purchases/import of goods, properties and services that are not connected to the trade or business the VAT-registered person operates in. 

 

5. Invoicing

A VAT registered person is required to issue a
  • VAT invoice for every sale, barter or exchange of goods or properties; 
  • VAT official receipt for every lease of goods or properties; and
  • VAT official receipt for every sale, barter or exchange of services.
 
As of date invoices/receipts may be issued electronically (e.g. via email, computer fax or submission of the printout version). However, e-Invoicing/receipt systems need to be registered with the Bureau of Internal Revenue. 

 

6. Others

A group VAT registration is only available in the Philippines if a company owns a number of branch offices. In this case only one consolidated return for the principal place of business and all branches need to be filed.

Contact

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Dr. Marian Norbert Majer

Associate Partner

+ 63 2 8 4791 801
+ 63 2 8 4791 555

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