Q: I have a retail startup that I plan to incorporate and register with the Bureau of Internal Revenue (BIR). My friend advised me that once my business is registered, I will be liable for Value Added Tax (VAT). How does VAT work and what are the things that I should watch out for? – Nelia, by email
A: If you think that your sales as a startup business will not likely exceed P1.9 million ($41,000.97) this year, you may register your business first as a percentage taxpayer. Under the percentage tax system, the process is simply straight forward—you just pay 3% of your monthly gross sales to the BIR.
But when your business starts to grow and your annual sales eventually go beyond P1.9 million ($41,000.97), the process becomes a little bit complicated as you will be required by the BIR to shift to the VAT system.
What is Value Added Tax?
VAT is a tax on consumption levied on the sale of goods and services. It is a form of a sales tax that can be passed on to the buyer. The BIR often picks the VAT for auditing because its very nature leaves a lot of room for discrepancies. And these inconsistencies can be detected through data from a third party, usually the buyer, with whom the business had done transactions.
As a VAT taxpayer, you are mandated to file monthly remittances to the BIR even if you do not have any transaction for the month. Once you have become a VAT taxpayer, there is no turning back in the event your sales fall below P1.9 million the following year.
Non-compliance to VAT requirements—and in some cases, ignorance of it—is the reason why many businesses end up having problems with the BIR years after. Huge penalties and tax charges are the usual consequences of one’s failure to comply with VAT requirements, not to mention the damage it can cause to a company’s reputation.
How is VAT computed?
VAT is computed by getting the difference between the output and input taxes after both have been divided by an absolute factor that represents the 12% VAT.
The output tax refers to sales or revenues, while the input tax refers to expenses and purchases. Both can be computed by dividing them by the factor 9.333, which determines the imputed 12% VAT.
Normally, the output tax should be higher than input tax because your sales should be higher than your expenses, but there will be cases where your input tax may come out higher than the output tax. If your business is operating at a loss for some time and you have incurred more input taxes from expenses than output taxes from sales, you simply carry over the excess of the input taxes to the next period until it is completely exhausted.
Let us say a company has an output tax of P100,000 ($2,154.70 ) and an input tax of P220,000 ($4,746.05) for a given quarter. Since the input tax exceeds the output tax, you do not need to pay any VAT for the quarter but you still need to file and report that your output taxes have been covered by your input taxes.
The unused input tax of P120,000 (P220,000 input minus the P100,000 output) shall be carried over to the next quarter and can be used against the output taxes during that period.
Only sales and expenses appearing in the documents registered with the BIR as VAT invoice, such as official receipts and sales invoices, are qualified for VAT computation. One can check if the supplier is VAT-registered by looking at the heading on the official receipt or sales invoice: the Taxpayer Identification Number (TIN) is followed by the word VAT.
Expenses or purchases that are not supported by VAT official receipts and invoices cannot be considered for computation even if the expenses are valid transactions.
Are there VAT exemptions?
There are certain industries that are exempt from VAT and are classified either as VAT Zero-rated or VAT exempt. Export companies are registered as VAT Zero-rated, which means that they can claim 12% input tax while enjoying zero output. The business can claim the excess as either a tax refund or a credit in the future.
Companies that fall under the VAT exempt category are those engaged in the selling of agricultural products, medical services, educational services, and other industries mentioned in the Tax Code. VAT exempt companies are not VAT registered and do not claim input tax on their expenses and purchases.
It is important for the entrepreneur to qualify certain transactions that may be exempted from VAT. An erroneous issuance of a VAT invoice for an exempt transaction shall be considered valid, according to the Tax Code.
How and when should I file my VAT payments?
When you pay for VAT, you must file the returns with an authorized agent bank within the revenue district where the taxpayer is registered. Deadline for the monthly VAT declaration, using the Form 2550M, is the 20th day following the end of each month for manual filing. Quarterly VAT declaration, using the Form 2550Q, is due within 25 days following the close of the taxable quarter for manual filing.
Entrepreneurs must treat their VAT obligations seriously. Simple negligence could lead to bigger problems in the future in the form of heavier penalties and charges. It could even lead to a horrible case of a technical tax fraud.
Hiring a good bookkeeper, preferably a Certified Accounting Technician (CAT) or a tax retainer, will help the business owner in planning and putting his tax payments in order.