Scope and Rates
VAT is an indirect tax imposed on the sale, barter, exchange or goods and/or properties, on the sale of services in the Philippines, and on the importation of goods in the Philippines.
Sale of Goods and Properties
The term “goods or properties” refers to all tangible and intangible objects which are capable of pecuniary estimation and shall include, among others:
- real properties held primarily for sale to customers or held for lease
- the right or the privilege to use patent, copyright, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right
- the right or the privilege to use any industrial commercial or scientific equipment
- the right or the privilege to use motion picture films, films, tapes and discs and
- radio, television, satellite transmission and cable television time.
Also, included in the “sale of goods or properties” are transactions considered as “deemed sale” and subject to 12 percent VAT, such as
- Transfer, use or consumption not in the course of business of goods or properties originally intended for sale or for use in the course of business; e.g., withdrawal of goods from business for personal use of employees.
- Distribution or transfer:
- as property dividends which constitute stocks in trade or properties primarily held for sale or lease declared out of retained earnings and distributed to shareholders and
- to creditors in payment of debt or obligation.
- consignment of goods if 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 goods as of the date of such retirement or cessation of business.
Importation of Goods
VAT is imposed on goods brought into the Philippines, whether for use in business or not, unless specifically exempted. VAT will apply to “technical importation” of goods sold by a person located in the special economic zone to a customer located outside the economic zone.
Sale of Services and Use or Lease of Properties
“Sale or exchange of services" means the performance of all kind of services in the Philippines for others for a fee, remuneration or consideration, whether in kind or in cash, including those performed or rendered, among others, by the following:
- construction and service contractors
- lessors of property, whether personal or real
- lessors or distributors of cinematographic films
- proprietors or operators of hotels, rest houses, pension houses, inns, resorts
- proprietors or operators of restaurants, cafes and other eating places, including clubs and caterers
- dealers in securities
- lending investors
- common carriers by air and sea relative to their transport of passengers, goods or cargoes
- sales of electricity by generation, transmission, and/or distribution companies
- franchise grantees of electric utilities, telephone and telegraph, radio and/or television broadcasting and all other franchise grantees
- non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and bonding companies
- the use of or the right or privilege to use any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right
- the supply of services by a non-resident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person
- the supply of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme
- the lease of motion picture films, films, tapes, and discs; and
- the lease or the use of, or the right to use, radio, television, satellite transmission and cable television time.
The standard rate of VAT is 12 percent of the gross selling price or gross receipts.
The Philippine VAT laws provide for transactions subject to zero-percent rate or VAT exempt.
VAT exempt transactions refer to sale of goods or properties and/or services not subject to VAT (output tax) and the seller is not allowed any tax credit of input VAT. On February 2012, the thresholds of certain VAT exempt transactions were increased, as follows:
- sale of residential lot valued at one million nine hundred nineteen thousand five hundred Philippine pesos (Php1,919,500.00) and below
- sale of house and lot and other residential dwellings valued at Three million one hundred ninety-nine thousand two hundred Philippine pesos (Php3,199,200.00) and below
- lease of residential unit with a monthly rental not exceeding Twelve thousand eight hundred Philippine pesos (Php12,800.00) and
- sale of goods or properties or performance of service, the gross annual sales and/or receipts does not exceed One million nine hundred nineteen thousand five hundred Philippine pesos (Php1,919,500.00).
Other VAT example sales are: educational services; services rendered by individuals pursuant to an employee-employer relationship; services rendered by regional or area headquarters established in the Philippines by multinational corporations; and the sale, importation or lease of passenger or cargo vessels and aircraft including engine, equipment and spare parts for domestic or international transport operations.
A zero-percent (“0 percent”) rated sale of goods or properties, on the other hand, is a taxable transaction for VAT purposes but shall not result in any output tax. Instances of 0 percent rated VAT are:
- services rendered in the Philippines to a non-resident person/entity not engaged in business in the Philippines, wherein the service fee is paid for in foreign currency in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas and
- Sale of power of fuel generated through renewable sources of energy such as but not limited to biomass, solar, wind, hydropower, geothermal, ocean energy, and other energy sources using technologies such as fuel cells and hydrogen fuels.
- Percentage taxes
- percentage tax on domestic carriers and keepers of garages
- percentage tax on international carriers
- tax on franchises
- tax on overseas dispatch, message or conversation originating from the Philippines
- tax on banks and non-bank financial intermediaries
- tax on finance companies
- tax on life insurance premiums
- tax on agents of foreign insurance companies
- amusement taxes
- tax on winning
- tax on sale, barter or exchange of shares of stock listed and traded through the local stock exchange or through Initial Public Offering.
- Excise taxes
- payment of excise taxes on imported articles
- excise tax on alcohol, tobacco, petroleum, mineral products and other miscellaneous items.
- Customs duty.
Any person or entity who, in the course of trade or business, sells, exchanges or leases goods or properties, or renders services, and any person who imports goods, shall be liable to VAT; hence, as a general rule, required to register as a VAT taxpayer. A tax identification number (“TIN”) shall be provided by the Bureau of Internal Revenue (“BIR”) to a taxpayer, which shall be applied for all tax types, including income tax and VAT. There is no separate registration for VAT only.
Persons Required to Register for Value-added Tax
See discussion immediately above. However, if gross sales or receipts per annum is One million nine hundred nineteen thousand five hundred Philippine pesos (P1,919,500.00) or less, the taxpayer may opt to be exempted from VAT, but will then be subject to percentage tax of 3 percent of gross quarterly sales or receipts.
Optional Registration for Value-added Tax of Exempt Person
Any person who is not required to register for VAT may elect to register for VAT, which shall not be cancelled for the next three (3) years.
To deal with their VAT affairs, businesses which are not established in the European Union, must appoint a VAT representative with joint and several liability to the tax authorities.
Persons/entities required to be VAT registered and fails to register will still be liable to output tax as if a VAT-registered person, but without the benefit of input tax credits in the period in which the taxpayer was not properly registered. In addition to other administrative and penal sanctions provided for in the Tax Code and implementing rules and regulations, the Commissioner of Internal Revenue or his duly authorized representative may order the suspension or closure of a business establishment for a period of not less than five (5) days.
No. In order for a taxpayer’s identification number (“TIN”) shall be issued by the Bureau of Internal Revenue, a license to transact business with the Philippines is required. Therefore, effectively overseas company will have an investment entity, such as a branch or subsidiary in the Philippines in order to be issued a TIN and to be considered registered under the VAT system.
Services performed in the Philippines by an overseas company, including lease of properties or royalty, will be subject to withholding VAT.
Under the Philippine VAT system there is no registration solely for VAT. When applicable, the mechanism in the Philippines is withholding VAT on payments to an overseas company.
The appointment of a fiscal representative is not required. In the case of payment to overseas company subject to VAT, the Philippine taxpayer paying for the services shall withhold the VAT.
There is no VAT grouping under the Philippine VAT system.
There is no VAT grouping under the Philippine VAT system.
In general, every taxpayer liable to pay VAT shall file the following returns:
- monthly VAT declaration within twenty (20) days after the end of the month
- quarterly VAT Return [BIR Form No. 2550Q] within twenty-five (25) days following the close of taxable quarter and
- if applicable, Remittance Return of VAT and Other Percentage Taxes Withheld [BIR Form No. 1600] for those required to withhold VAT.
Actual conversion or the prevailing Philippine Dealing System (“PDS”) exchange rate on transaction date, whichever is applicable.
No. Under Philippine laws, only VAT-registered person are entitled to claim creditable input VAT and/or to file a claim for refund on excess input VAT.
No. Not applicable in the Philippines.
Only the following excess input tax may be claimed as refund:
- excess input tax attributable to 0 percent rated sales and
- excess input VAT upon closure or cessation of business. Hence, excess input tax attributable to exempt sales may not be claimed as refund. Finally, excess input tax subject of a refund must be fully substantiated.
International Supplies of Goods and Services
Exports of goods and services are subject to VAT at zero-percent (0 percent) rate.
Importation of goods is subject to 12 percent VAT, as a general rule.
The tax situs of the performance of services is the place where services were performed. Thus, all services performed in the Philippines shall be subject to 12 percent VAT, as a general rule. Services performed outside of the Philippines are not subject to VAT.
A VAT-registered person is required to issue:
- a VAT invoice for every sale, barter or exchange of goods or properties or
- a VAT official receipt for every lease of goods or properties, and for every sale, barter or exchange of services.
A VAT-registered person shall issue:
- a VAT invoice for every sale, barter or exchange of goods or properties and
- a VAT official receipt for every sale or exchange of services, including lease of goods or properties.
The following information shall be indicated in VAT invoice or VAT official receipt:
- a statement that the seller is a VAT-registered person
- the total amount which the purchaser pays or is obligated to pay to the seller with the indication whether or not such amount is subject to VAT hence:
- the amount of tax shall be shown as a separate item in the invoice or receipt
- if the sale is exempt from VAT, the term "VAT-exempt sale" shall be written or printed prominently on the invoice or receipt
- if the sale is subject to zero-percent VAT, the term "zero-rated sale" shall be written or printed prominently on the invoice or receipt and
- if the sale involves goods, properties or services some of which are subject to and some of which are zero-rated or VAT-exempt, the invoice or receipt shall clearly indicate the break-down of the sale price between its taxable, exempt and zero-rated components, and the calculation of the VAT on each portion of the sale shall be shown on the invoice or receipt. The seller has the option to issue separate invoices or receipts for the taxable, exempt, and zero-rated components of the sale.
- The name, address and TIN of the purchaser, customer or client, shall also be indicated in the invoice or official receipt.
Philippine seller of goods can provide e-invoices with prior approval from the Philippine tax authorities.
This option is not available under Philippine laws and regulations.
Transfers of Business
Philippine VAT laws and regulations provide for transaction deemed sale on the transfer, use or consumption of goods or properties not in the course of business but originally intended for sale or for use in the course of business. Philippine tax courts had the occasion to hold that VAT applies to “a supply [sale] in the course or furtherance of business includes: (1) the disposition of the assets and liabilities of a business, (2) the disposition of a business as going concern; and (3) anything done in connection with the termination or intended termination of a business.” Different rules apply to mergers and consolidations which may be exempt from VAT.
Options to Tax
Head Office and Branch transactions
The VAT treatment of the transactions between the foreign head office and its Philippine branch office has been the subject of conflicting point of views. However, the prevailing view considers the transaction between the head office and branch as distinct from the single corporate entity concept and that sale of service may qualify for zero-rated VAT .
No. Relief for bad debts under the Philippine VAT law is unavailable.
The Philippine Tax Code provides that any person who willfully attempts in any manner to evade or defeat any tax imposed under the Tax Code or the payment thereof shall, in addition to other penalties provided by law, upon conviction shall be punished by a fine of not less than Php30,000 but not more than Php100,000 and suffer imprisonment of not less than two (2) years but not more than four (4) years.
In general, the penalties are the following:
- interest is at the rate of 20 percent per annum from the date prescribed for payment until the amount is fully paid
- 25 percent surcharge on basic deficiency tax
- imprisonment – ranging from not less than one year to not more than ten years, depending on the infraction and
- closure of business – temporary/permanent, depending on the infraction.
How often do tax audits take place?
Tax audits by the BIR may be conducted or authorized yearly. As a rule, however, internal revenue taxes may only be assessed within the 3-year prescriptive period. In case of a false or fraudulent return with intent to evade tax or failure to file a return, the tax may be assessed at any time within 10 years after the discovery of the falsity, fraud, or omission. As a general principle, deficiency tax findings of the BIR have the presumption of correctness; hence, the burden to proof is with the taxpayer.
Are there audits done electronically in your country (e-audit)? If so, what system is in use?
Tax audits are still done manually, as generally understood. However, with the implementation of the Electronic Filing and Payment System (commonly referred to as “eFPS”) and the increase in the use of computerized accounting system especially by multinational companies, financial and tax data in electronic form are now more frequently used; e.g., returns electronically submitted to the BIR system. Correspondence and tax audit findings are however still required to be issued and manually received.
Is it possible to apply for formal or informal advance rulings from the (indirect) tax authority?
Yes, application for a formal ruling with the BIR is allowed. However, only actual transactions may be the subject of a confirmatory ruling. Hypothetical transactions are not ruled upon as a matter of policy.
Are rulings and decisions issued by the tax authorities publicly available in your country?
Yes, copies of the rulings may be sourced directly from the National Office of the BIR and/or its website. Decisions of the tax courts, the three divisions of the Court of Tax Appeals and Court of Tax Appeals En Banc, are available from the said courts directly. While Supreme Court decisions may be accessed through its website - http://sc.judiciary.gov.ph .
- Withholding of VAT on sales to Philippine Government: there is a 5 percent withholding VAT mechanism imposed on the sale of goods and/or services to the Philippine government or any of its political subdivisions, instrumentalities or agencies including government owned that is and controlled corporations prior to reporting the sale of goods and/or services as transactions subject to 12 percent VAT
- transitional input VAT
- presumptive input VAT.
VAT regime for construction work and scrap
Yes. For instance, entities located and registered with designated Philippine economic zones may enjoy a 5 percent preferential tax rate on gross income that is in lieu of all other taxes; hence, sales are effectively exempt from VAT.