This is the first part in our three-part series on How to Compute for Value Added Tax (VAT). In this article, we will be covering the computations and briefly mention its effects to your business.
VAT Philippines: The Concept of VAT
VAT Has Two Components:
1. Output VAT, and
2. Input VAT
Here in the Philippines, we are required to include VAT to our sales and pass it on to the customer, generally. We are, therefore, required to remit this VAT (equivalent to 12%) to the Bureau of Internal Revenue (BIR). That is your Output VAT. However, during the course of business, we also incur some expenses. That means VAT was passed on to us already. That is your Input VAT.
So to make things even simpler, Output VAT comes from your revenues, while Input VAT comes from your expenses.
If you will take a look at any receipt, say, from your nearest store. You will see a breakdown at the bottom. It would look something like this photo below.
Notice how the VAT (12%) is separated from the Vatable Amount? In this case, the shop earned Php 50.00 and the Php 5.36 goes directly to the BIR as payment for taxes.
Hopefully this will help clarify the terminologies and application in the course of your business. Below is a spreadsheet of the breakdown with a brief explanation of how VAT (input and output) affects your business and where to properly record them.
The Computation of VAT
Remember, I mentioned that you are required to pay for 12% and that you also already paid for some VAT? That is where the computation and confusion comes in. Tax payable is equivalent to Output VAT minus Input VAT. I included sample spreadsheet computation here to provide more details. Of course this does not represent the business world because there are other things to consider (like valid expenses, withholding taxes, etc.).
One caveat I want to make here now is that not all businesses can use Input VAT (but can claim them) and not all businesses have Output VAT. This will be tackled separately in part 3 of this series. In the meantime, our recommendation is to look at your BIR Certificate of Registration (form 2303) to see if you have VAT listed there. If there is, then this article is for you.