Introduction to Value-Added Tax (VAT)
Value-Added Tax (VAT) is a type of tax you pay on goods and services you buy, use, or import. In the
Philippines, VAT is generally set at 12% of the sale price, but there are exceptions, including a 0% rate for
some transactions.
Who Has to Pay VAT?
VAT applies to:
● Businesses that sell goods or services.
● People who lease (rent out) properties.
● Importers who bring goods into the Philippines.
This tax is considered indirect, meaning businesses can pass it on to their customers in the final price.
So, when you buy something with VAT, it’s technically the business that collected the tax, but you paid it
through the sale price.
When Does VAT Apply?
VAT applies to activities that are done in the course of trade or business—meaning regular, ongoing
business activities. It even applies to:
● Nonprofit organizations if they engage in activities that bring in money.
● Foreign businesses providing services in the Philippines.
Types of Sales and VAT Rates
1. 12% VAT Rate
● For Regular Sales of Goods and Services: If you’re a business selling products (like a store) or
providing services (like a delivery company), you generally charge 12% VAT on your gross sales.
○ Example: If a clothing store sells a dress for PHP 1,000, the VAT would be 12% of PHP
1,000, which is PHP 120. So, the total price for the customer would be PHP 1,120.
2. 0% VAT Rate
Certain transactions are subject to a 0% VAT rate, meaning they don’t need to charge VAT. These include:
● Export Sales: Goods sold and shipped out of the country.
○ Example: A furniture business in the Philippines sells chairs to a company in Japan.
Since the chairs are shipped to Japan, the sale is subject to 0% VAT.
● Sales to Exempt Entities: Some organizations or foreign entities, by law or international
agreement, are exempt from VAT.
● Sales to Offshore Gaming Licensees: Special companies that provide gaming services to
overseas clients, also have a 0% VAT rate.
Special VAT Rules for Importers
If you import goods, there’s a 12% VAT on the total value, which includes the cost of the goods and any
additional import duties.
● Example: If a business imports electronics with a landed cost of PHP 10,000, and there’s an
additional PHP 2,000 in import duties, then the VAT is calculated on PHP 12,000 (10,000 +
2,000). 12% of PHP 12,000 is PHP 1,440. So, the business pays PHP 1,440 in VAT.
If an item is imported tax-free and later sold to a non-exempt business or individual in the Philippines, the
buyer must pay VAT on it.
“Deemed Sales” (Assumed Sales)
Some transactions are “deemed sales” even if there wasn’t a normal sale. These include:
1. Using business items for personal reasons (e.g., taking home inventory).
2. Transferring items to investors or creditors instead of money.
3. Consigning items to a seller who fails to sell them within 60 days.
○ Example: If a business has gadgets in stock when it closes, they need to pay VAT on
these items as if they’d sold them.
Adjustments to Sales (Returns and Discounts)
If a customer returns an item or gets a discount, the seller can subtract the value of that return or discount
from their gross sales for VAT purposes.
● Example: A store sells a product for PHP 1,200, but the customer returns it. The store can
reduce its total gross sales for the quarter by PHP 1,200 for VAT calculations.
Special Cases for 12% VAT on Previously 0%-Rated Sales
For certain businesses, the VAT rate may change from 0% to 12% if two conditions are met:
1. The government must have a fast, reliable VAT refund system.
2. All VAT refund claims filed before 2018 must have been paid by December 31, 2019.
SEC. 109: Exempt Transactions
In general, VAT is a tax that gets added to the sale of goods and services, but some transactions are
exempt from VAT. Exempt means they don’t have to pay VAT. Here are some main categories that are
exempt:
1. Agricultural and Marine Products
Products like fresh fish, fruits, and vegetables in their original form are exempt. Even if they're
dried, salted, or smoked (like dried fish or smoked meat), they’re still considered in their “original
state” and don’t have VAT.
Example: If a farmer sells raw mangoes at the market, they don’t need to add VAT to the price.
2. Fertilizers, Seeds, and Animal Feeds
Fertilizers and feeds for livestock, poultry, and fish are exempt from VAT, as long as these are
meant for food production.
Example: If a store sells chicken feed to a poultry farm, they won’t add VAT.
3. Personal Goods of Returning Filipinos
Filipinos returning from abroad don’t pay VAT on their personal belongings if these are for
personal use and not for sale, and they’re bringing them home with the intention to resettle.
Example: If a Filipino family brings home furniture from their overseas residence, they don’t need
to pay VAT on it.
4. Professional Tools of Filipinos Coming to Resettle
For example, a doctor bringing their medical tools to the Philippines as they return to live here
won’t pay VAT on them.
5. Medical, Dental, and Educational Services
Medical services (like hospital care), dental services, and educational services are exempt.
However, professional fees of doctors are not included in this exemption. Example: A public
school doesn’t add VAT to student tuition fees.
6. Sale or Lease of Residential Units Below a Certain Value
Residential leases under ₱15,000 per month are VAT-exempt.
Example: If you rent an apartment for ₱12,000/month, there’s no VAT charged on the rent.
There are other specific exemptions, like sales by cooperatives, the sale of certain medicines, importation
of equipment used for COVID-19, and other specific cases.
SEC. 110: Tax Credits
Now, if a business is registered for VAT, it can get input tax credits. This means they can deduct the VAT
they paid on their own purchases from the VAT they collect on their sales.
1. Creditable Input Tax on Purchases
A VAT-registered business can claim back the VAT it paid on purchases for its own business. This
includes purchases of goods to sell, materials for production, and services.
Example: A bakery that buys flour (and pays VAT on it) can later deduct this VAT amount when it
calculates its own VAT liability.
2. Amortization for Expensive Purchases
If a business buys a high-cost item for over ₱1,000,000, it can’t deduct the full VAT paid on that
item right away. Instead, the deduction is spread over five years.
Example: If a restaurant buys a big oven for ₱1,200,000, it will spread out its VAT deductions
over five years.
3. Allocation for VAT and Non-VAT Sales
If a business has some sales that are VAT-exempt and some that are not, it can only claim input
VAT credits related to the VAT-taxable sales. Example: A business that sells both groceries
(VAT-exempt) and electronics (VATable) will only get VAT credit for purchases related to
electronics.
SEC. 111: Transitional and Presumptive Input Tax Credits
This section is about businesses that are new to VAT or deal with certain types of food processing.
1. Transitional Input Tax Credit
When a business first becomes VAT-registered, it can claim a transitional tax credit on its starting
inventory of goods. This credit is 2% of the value of its inventory or the actual VAT paid on it,
whichever is higher.
Example: A new electronics shop can claim a 2% tax credit on its stock of laptops and phones as
it registers for VAT.
2. Presumptive Input Tax Credit for Specific Industries
Certain industries, like canned goods and milk processing, are allowed a tax credit based on a
percentage of the value of their raw materials.
Example: A milk processor can claim a 4% credit on the cost of milk bought from farmers.
SEC. 112: Refunds of Input Tax
VAT-registered businesses can apply for a refund of input taxes in specific situations.
1. Refund for Zero-Rated Sales
If a VAT-registered business makes “zero-rated” sales (sales with 0% VAT, often for export), it can
apply for a refund of the VAT paid on related purchases.
Example: If a garment factory exports clothes, it can get a VAT refund on the fabric it bought for
those exports.
2. Refund for Canceled VAT Registration
If a business stops operating or its VAT registration is canceled, it can apply for a refund on any
unused input tax credits within two years from cancellation.
3. Timeline and Processing for Refunds
Refunds should be processed within 90 days of submitting complete documents, and high-risk
claims may be subject to audit. If the refund request is denied, the business can appeal to the
Court of Tax Appeals within 30 days.
Section 113: Invoicing and Accounting Requirements for VAT-Registered Persons
1. Invoicing Requirements (What VAT-Registered Persons Need to Do)
When a business or person is registered for VAT, they must issue a “VAT invoice” every time they sell
goods, services, or properties. Think of a VAT invoice as a receipt that shows the buyer details of the
transaction, especially how much VAT is involved.
Example: If a bakery sells cakes and it’s registered for VAT, each sale would come with a VAT invoice that
details the cost of the cake and the VAT portion of that cost.
2. Information That Must Be on a VAT Invoice
The VAT invoice needs to include:
● Statement of VAT Registration: It should state that the seller is a VAT-registered business,
including their TIN (Taxpayer Identification Number).
● Total Amount (Including VAT): The invoice should clearly show the total price the buyer has to
pay, including VAT.
Additionally, specific cases apply:
● If the sale is VAT-exempt (certain products or services aren’t taxed), the invoice should say
"VAT-exempt sale."
● If it’s zero-rated (0% VAT rate applies), the term "zero-rated sale" should appear on the invoice.
● If a sale includes both taxed and tax-exempt items, the invoice should show a breakdown of
these different items separately.
Example: Imagine a store selling both taxable goods (like electronics) and VAT-exempt items (like
specific medical supplies). Their invoice should list the electronic items separately from the medical
supplies, with VAT calculated only on the electronics.
3. Details on the Product or Service Sold
The invoice must include the date of sale, the number of items sold, unit price, and a description of what
was sold or the service provided.
4. Sales Over PHP 1,000 to Other VAT-Registered Persons
If a sale totals PHP 1,000 or more and the customer is also VAT-registered, the invoice should include the
buyer’s name, address, and TIN.
5. Accounting Requirements
VAT-registered people must maintain a “sales journal” and a “purchase journal” where daily sales and
purchases are recorded, in addition to their usual accounting records.
Example: A hardware store would keep journals showing every sale (e.g., hammers, nails) and every
purchase (e.g., new stock from suppliers) each day to properly track and report VAT.
6. Consequences of Issuing an Incorrect VAT Invoice
● If a non-VAT-registered person issues a VAT invoice (pretending to be VAT-registered), they
can face penalties, including a 50% surcharge.
● If a VAT-registered person makes mistakes on a VAT-exempt sale (not labeling it as such),
they could still be liable for the tax as if it was taxable.
● If a VAT-registered person issues an incomplete VAT invoice, they’ll still be responsible, but
the buyer may still use the invoice to claim input tax credits if the missing information doesn’t
involve key details (like the sale amount, VAT amount, seller and buyer’s TIN, etc.).
Section 114: Filing VAT Returns and Payments
1. General Filing Requirements
Anyone responsible for paying VAT must file a quarterly report (return) to show their gross sales and pay
the VAT within 25 days after each taxable quarter ends. VAT-registered persons also need to pay monthly.
Example: If a restaurant owner sells PHP 100,000 worth of food in the first quarter, they’ll file a return and
pay the VAT due within 25 days after the end of that quarter.
2. Where to File the Return and Pay the Tax
VAT returns and payments can be submitted either electronically or manually at an authorized bank, a
Revenue District Office, or through approved tax software providers.
3. Withholding VAT
Government agencies, or similar entities, must withhold a portion of VAT (5%) when paying for goods and
services. However, when leasing property from non-residents, they need to withhold 12% VAT.
Additionally, purchases funded by Official Development Assistance (ODA) don’t require this withholding.
Example: If a government agency buys office supplies for PHP 10,000, they will withhold 5% VAT and
pay only PHP 9,500 to the supplier, submitting the withheld 5% as VAT directly.
Section 115: Suspension of Business Operations
The Commissioner of the Bureau of Internal Revenue (BIR) can temporarily shut down a business for
serious VAT violations:
● Not issuing VAT invoices (e.g., not giving customers the required receipt with VAT details).
● Not filing VAT returns (e.g., skipping required quarterly or monthly VAT filings).
● Underreporting taxable sales by 30% or more.
Temporary closure lasts at least five days, and the business can only reopen once they meet all
requirements in the closure order.
Example: If a shop doesn’t file VAT returns or fails to issue VAT invoices regularly, the BIR may close it
down for at least five days. To reopen, the shop must comply with all VAT regulations and prove it’s
following the rules.
SEC. 116. Tax on Persons Exempt from VAT
This section refers to individuals or businesses not registered for VAT but still required to pay a tax on
their gross sales each quarter. Generally, they pay 3% of their total sales each quarter, but from July 1,
2020, to June 30, 2023, this rate was reduced to 1%. Cooperatives, however, are exempt from this tax.
Example: If a small bakery made PHP 100,000 in sales this quarter and is not registered for VAT, it would
pay PHP 3,000 (3% of PHP 100,000) in percentage tax.
SEC. 117. Percentage Tax on Domestic Carriers and Garage Keepers
This applies to businesses providing transportation within the Philippines (like jeepneys, buses, or rented
cars) for passenger services. These businesses pay 3% of their total quarterly sales. However, common
carriers (e.g., bus lines) are not subject to additional local government taxes.
Example: A bus company makes PHP 500,000 in sales this quarter. It will pay PHP 15,000 (3% of PHP
500,000) as percentage tax.
SEC. 118. Percentage Tax on International Carriers
International carriers (airlines or shipping lines) transporting cargo from the Philippines to another country
pay 3% of their gross quarterly sales.
Example: An airline transporting goods internationally made PHP 1,000,000 in sales this quarter from
these services. They’ll pay PHP 30,000 (3% of PHP 1,000,000) in percentage tax.
SEC. 119. Tax on Franchises
Radio and TV broadcasting companies with sales below PHP 10 million, and utilities like gas and water
providers, must pay a tax on their gross sales. Broadcasting companies pay 3%, while utilities pay 2%.
Broadcasting companies can choose to pay VAT instead, but once they opt-in, they can't switch back.
Example: If a local radio station earns PHP 2 million in sales, they will pay PHP 60,000 (3% of PHP 2
million) as percentage tax.
SEC. 120. Tax on Overseas Dispatch, Message, or Conversation
This tax is a 10% tax on the amount billed for overseas calls or messages originating in the Philippines,
paid by the person using the service. Government, diplomatic offices, certain international organizations,
and news agencies are exempt.
Example: If someone makes an international call costing PHP 1,000, they’ll pay PHP 100 (10% of PHP
1,000) as a tax.
SEC. 121. Tax on Banks and Non-Bank Financial Intermediaries
Banks and other financial entities pay tax based on specific types of income, such as 5% on interest
from loans with short-term maturities and 1% on those over five years. Certain types of income, like
dividends, are exempt from this tax.
Example: A bank makes PHP 100,000 in interest income from a loan due in four years. It pays PHP
5,000 (5% of PHP 100,000) as tax.
SEC. 122. Tax on Other Non-Bank Financial Intermediaries
Non-bank financial intermediaries (entities that provide similar services as banks) pay a tax of 5% on
gross receipts from interest, commissions, and similar items.
Example: A lending company earns PHP 200,000 from lending. It will pay PHP 10,000 (5% of PHP
200,000) in tax.
SEC. 123. Tax on Life Insurance Premiums
Life insurance companies pay 2% of the total premiums they collect. However, refunds, reinsurance, and
certain other premium types are exempt.
Example: An insurance company collects PHP 500,000 in premiums. They pay PHP 10,000 (2% of PHP
500,000) as tax.
SEC. 124. Tax on Agents of Foreign Insurance Companies
Agents representing foreign insurance companies (for insuring property in the Philippines) pay double the
tax rate of life insurance (4% instead of 2%). Self-insured policies by the property owners don’t need to
pay this tax but must report it to the Bureau.
SEC. 125. Amusement Taxes
Entertainment venues, such as cockpits, cabarets, night clubs, boxing matches, Jai-Alai, and racetracks,
pay a tax on their gross receipts. The rates vary, from 18% for cockpits and cabarets to 30% for Jai-Alai
and racetracks.
Example: A boxing event that isn't a championship collects PHP 100,000 in sales. The tax is PHP 10,000
(10% of PHP 100,000).
SEC. 125-A. Gaming Tax on Offshore Gaming Licensees
Offshore gaming licensees pay a 5% tax on gross gaming revenues or a minimum guaranteed monthly
revenue, whichever is higher. The tax is remitted monthly, and a third-party auditor ensures accurate
reporting.
SEC. 126. Tax on Winnings
People who win in horse races pay 10% tax on winnings. For special bets like doubles, the tax is 4%.
Example: If someone wins PHP 1,000 from a horse race bet, they pay PHP 100 (10% of PHP 1,000) in
tax.
SEC. 127. Tax on Sale, Barter, or Exchange of Shares of Stock
For every sale of shares traded through the local stock exchange, a 0.6% tax on the gross selling price
applies.
Example: If a person sells shares worth PHP 500,000, the tax is PHP 3,000 (0.6% of PHP 500,000).
SEC. 128. Returns and Payment of Percentage Taxes
Taxpayers liable for percentage taxes file quarterly returns and pay the taxes within 25 days after each
quarter ends. If a business closes, they must report this and settle their taxes within 20 days of closing. If
there are discrepancies in reporting, the Bureau of Internal Revenue may set a minimum gross receipt
amount based on similar businesses to estimate the correct tax amount.
Example: A small store that is not VAT-registered earns PHP 400,000 this quarter. They file a quarterly
return and pay PHP 12,000 (3% of PHP 400,000) within 25 days after the quarter ends.
