VATable Transactions

Difficulty: C
Required prior skills: Definition of Business, VAT Exempt Transactions, OPT Transactions

Business taxes in general

The two main business taxes are the value added tax (VAT) and the other percentage tax (OPT).

Both taxes impose a fixed rate. However, the rate to use depends on the kind of transaction. The tax basis
is the gross selling price or gross receipts.

Business taxes in general

The two main business taxes are the value added tax (VAT) and the other percentage tax (OPT).

The following classifications can be inferred from the provisions on the tax code as to business tax:
1. Specifically listed VAT-Exempt transactions (Sec 109(A) to Sec 109(BB) NIRC)
2. Specifically listed transactions subject to OPT (Sec 117 to Sec 127 NIRC)
3. Transactions subject to 3% OPT for not reaching the 3,000,000 threshold (Sec 109(CC) NIRC)
4. VAT transactions in general (Sec 106 to Sec 108, excluding zero-rated VAT below)
5. Zero-rated VAT transactions (Sec 106(A)(2) and Sec 108(B) NIRC, other special laws)
6. VAT Sales to Government (Sec 114(C))

The difficult question is determining the applicable tax. The following rules are important:
1. The determination of the applicable tax is on a transaction by transaction basis. Because the
classification depends on the kind of transaction, then a business may have some transactions
subject to VAT, some transactions subject to OPT, and some transactions that are VAT exempt.

2. If a specific transaction is listed as VAT Exempt, then it is never subject to either OPT or VAT(a
few VAT exempt transactions, however, become subject to VAT after certain conditions are met;
in general though, a VAT exempt transaction will never be subject to business tax) .

3. If a specific transaction is listed as subject to OPT, then the particular rate applicable to that
transaction is to be used. The transaction is never subject to VAT unless specified.

4. If the taxpayer is VAT-registered, then transactions other than VAT-exempt above or specifically
listed as OPT above (#2 and #3) are subject to VAT.

5. If the taxpayer is NOT VAT-registered, AND the transactions are not VAT-exempt or specifically
listed as OPT, the transaction is called a VATable transaction. 1

For VATable transactions, the taxpayer must compute the total VATable transactions throughout
the taxable year. If the total exceeds P3,000,000, all VATable transactions will be subject to VAT.
Otherwise, they will be subject to a 1% OPT*.
* Applicable from July 1, 2020 until June 30, 2023; after this period it will be 3%.

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 6. If the transaction is subject to VAT, there is a question of what the applicable rate of VAT will be.

The following rates are applicable:

a. 12%: this is the default VAT rate, applicable for most or all transactions.
b. 0%: this applies to specific transactions, typically for exports.
c. Sales to government are treated slightly differently. The government will withhold 5% of
the amount and this will be a creditable input VAT.

VATable Transactions
In general, all business transactions are subject to some business tax.

If a business transaction is VAT Exempt, no business taxes are paid on the transaction.
If the transaction is subject to a specific OPT, then only OPT will be paid on the transaction.
If none of the above applies, then the transaction is a vatable transaction. This means it can possibly be
subject to VAT. VATable transactions cover almost all possible business transactions.

Only VATable Transactions can possibly be subject to VAT. They are not automatically subject to VAT.
Two tests are used to determine whether a transaction is subject to VAT:
• The 3,000,000 threshold
• VAT registration

The 3,000,000 threshold

If a taxpayer’s gross annual receipts on VATable transactions exceed P3,000,000, all of its VATable
transactions will be subject to VAT.

Illustration
A non-VAT registered merchandising business has the following:
• Exports, P1,000,000
• Sale of fruit, P500,000
• Sale of junk food, P1,500,000
• Sale of idle land, P2,000,000
• Other merchandise, P1,000,000

The threshold is computed using the following:

Junk food 1,500,000

Other 1,000,000
Total 2,500,000

The exports and sale of fruit are VAT exempt transactions. The sale of idle land is not a business transaction
because it is a merchandising entity.

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Since the total is less than P3,000,000, the merchandise is not subject to VAT.

The P3,000,000 threshold is computed annually. However, note that business taxes are paid quarterly.

VAT Registration
A business has the option of registering for VAT. When it is registered under the VAT system, all of its
VATable transactions are subject to VAT.

If a business exceeds the P3,000,000 threshold within a quarter, it is instead required to register on the
month after it exceeded the threshold. The business will be subject to VAT in the quarter it exceeded the
threshold and in all future quarters. The purpose of registration is to keep proper track of the various
receipts handled by the business.

An official receipt refers to a document issued by a business to evidence that it has received cash from a
customer. An official receipt has requirements as to its form and content as required by the BIR.

A business issues an official receipt whenever it receipts payments from its customers. In turn, a business
is given an official receipt when it makes a payment to its suppliers. These receipts evidence business
transactions which form the basis for the tax due. Payments of VAT made to suppliers are treated as
advance payments of VAT (similar to creditable withholding taxes).

A business has to be VAT registered in order to issue and make use of VAT official receipts. This will allow
the BIR to track down the correct amount of VAT to be paid by the business.

A business can register for VAT in the following cases:

1. VAT registration is mandatory in the following cases:
a. Where the business is newly commenced and it expects to exceed the 3,000,000
threshold within 12 months. The taxpayer will register for VAT at the same time as it
registers its business.
b. Where the business actually exceeds the 3,000,000 threshold, the taxpayer must register
in the month after the threshold was reached.
c. Franchise grantees of radio and television broadcasting with annual gross receipts
exceeding P10,000,000. They must register within 30 days from the end of the calendar
year.
2. Franchise grantees of radio and television broadcasting may register for VAT even without
exceeding the threshold. However, the registration shall be irrevocable.
3. Taxpayers who are below the 3,000,000 threshold may opt to be VAT registered. They can only
be registered within 10 days before the beginning of the taxable quarter.

Taxpayers who voluntarily registered cannot revoke their registration for the next 3 years. However, if the
business is VAT registered from the start of operations (1(a) above) and it failed to exceed the VAT
threshold within 12 months of operations, it may apply to revoke its VAT registration.

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If the taxpayer is VAT registered, it will automatically be subject to VAT on “VATable transactions”
regardless if it reached the P3,000,000 threshold or not.

Illustration
A VAT registered merchandising business has the following data exclusive of VAT:
• Exports, P1,000,000
• Sale of fruit, P500,000
• Sale of junk food, P1,500,000
• Sale of idle land, P2,000,000
• Other merchandise, P1,000,000

The VAT on receipts is computed as follows:

Junk food 1,500,000

Other 1,000,000
Total 2,500,000
Tax rate 12%
Output VAT 300,000

Note that export sales are VATable if made by a VAT registered taxpayer. However, they are considered
“zero-rated” sales subject to a VAT rate of 0%.

General OPT on VATable Transactions

If neither test is fulfilled (VATable transactions do NOT exceed P3,000,000 a year, and the business is not
VAT registered), then ALL VATable transactions of the business are subject to an OPT.

As a result of CREATE, the OPT rate on VATable transactions will be as follows:

• July 1, 2020 until June 30, 2023: 1%
• July 2023 onward: 3%

Prior to CREATE, the OPT rate was 3%.

Continuing on the first illustration above:

Total VATable 2,500,000
Tax rate 1%
25,000

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VAT
If either test is met, then ALL VATable transactions of the business are subject to VAT.

When a transaction is subject to VAT, it can be one of the following:

• “Regular” VAT – a VAT of 12% is imposed on the sale. The VAT is collected by the taxpayer from
the business, then remitted to the BIR
• Zero-rated VAT – a VAT of 0% is imposed on the sale. Essentially, no VAT is imposed although a
VAT official receipt is issued. Only certain transactions are subject to this VAT.
• Sales to Government are treated to a special VAT of 5%, automatically withheld by the
government.

In general, the default rate of VAT is 12%.

Rule on determining the VAT

Under the rules on VAT, the amount of VAT collected on the transaction must be separately indicated on
the official receipt. If it is not separately indicated, then the whole amount received is presumed to be
inclusive of VAT.

Illustration
A VAT registered person had total receipts of P1,120,000. How much is the VAT on his receipts?

Receipts 1,120,000
Divide: 112%
1,000,000
Tax rate 12%
Output VAT 120,000

The term “VAT-exclusive” means the gross receipts (100%) without the VAT. The term “VAT-inclusive”
means the gross receipts (100%) including the VAT (12%). If it cannot be readily determined if the receipt
is exclusive or inclusive of VAT, the receipt will be deemed VAT-inclusive.

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