It pays to know just how much value added tax you need to pay to avoid unnecessary charges.
By Henry Ong
Non-compliance with the Value Added Tax Law - and in some cases, ignorance of it - is the reason many small businesses are the usual targets for auditing by the Bureau of Internal Revenue. Huge penalties and tax charges are the usual consequences of one's failure to comply with the VAT Law, not to mention the damage it can cause to a company's reputation.
The 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 of its very nature - it 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.
A neophyte entrepreneur would do well to consider his annual projected sales when deciding whether or not to register as a VAT taxpayer. If his projected sales in the next 12 months would exceed P1.5 million, then the business should be registered as a VAT taxpayer; otherwise, it should be registered as a percentage taxpayer. Under the percentage tax, the business simply pays three percent of its monthly sales to the BIR.
The VAT is computed by getting the difference between the output and input taxes after both were divided by an absolute factor that represents the 12-percent VAT. The output tax refers to sales or revenues, while the input tax to expenses and purchases. Both can be computed by dividing them by the factor 9.333, which determines the imputed 12-percent VAT.
The input tax may come out higher than the output tax when the total expenses and purchases exceed the sales for a particular quarter. In this case, the Tax Code states that the input tax must be limited to 70 percent of the output tax and any excess in the input tax shall be carried over to the succeeding period.
Let's say a company has an output tax of P100,000 and input tax of P120,000 for a given quarter. Since the input tax exceeds the output tax, the 70-percent limit is imposed. The allowable input tax shall be P70,000, which is computed by getting 70 percent of the P100,000 output tax, resulting in a value added tax of P30,000 (P100,000 output minus P70,000 input). The unused input tax of P50,000 (P120,000 input - P70,000 allowable input) shall be carried over to the next 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.
There are cases where the BIR considers inventory as "deemed sale" and therefore are subject to VAT. These happen in transactions involving the transfer or consumption of goods intended for sale or use in the business. One example is the owner's withdrawal of inventory from the warehouse either for personal use or to be given away as gifts. Another example is consignment of goods. If the consigned goods were not sold in 60 days, the BIR would consider such inventory as sold. Yet another instance is the inventory of taxable goods upon retirement or cessation of the business. Such unsold inventory at the time of cessation shall also be deemed sold.
There are certain industries that are exempt from the VAT Law 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 percent 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 don't 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.
Aside from regular accounting records, a subsidiary sales journal (where daily sales are recorded) and a subsidiary purchase journal (where daily purchases are recorded) are required of all persons subject to VAT. These subsidiary journals shall contain the customer and supplier's names, TIN, reference invoice or official receipt numbers, and the amounts for sales or purchases, and input and output taxes.
The VAT payment and return shall be filed with an authorized agent bank within the revenue district where the taxpayer is registered. Deadline for the monthly VAT declaration (using Form 2550M) is the 20th day following the end of each month for manual filing. Quarterly VAT declaration (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 dependable and knowledgeable tax retainer, will help the business owner in planning and putting his tax payments in order.