The Ultimate Guide to VAT Exempt Transactions in the Philippines

Starting a business in an emerging market like the Philippines is a great choice. To run it smoothly, you will need to have both knowledge and a clear understanding of taxes. Value Added Tax (VAT) is added to goods and services at many points along their production, so unless the goods and services in your business fall under VAT-exempt transactions, you must pay the standard VAT rate once the threshold is crossed.

How much VAT should you pay? Keep on scrolling as we cover exempt businesses, transactions, certificates, and VAT calculation methods. Clearing this up will help you follow all the VAT rules, pay the right amount of tax, and save money on taxes in the best way possible. A good grasp of taxes will set your Philippine business up for success. Let's jump in!.

VAT Exemption Philippines Explained

Let us take a look at VAT exempt items in the Philippines. Apart from the 12% standard rate, the Bureau of Internal Revenue (BIR) has also set some VAT exempt transactions. The Tax Code Section 109 includes the following VAT exempt items:

• 1. Import and sale of agricultural and food products
• 2. Goods and services for export purposes
• 3. Personal and household items for nonresident citizens or returning foreigners
• 4. Services of educational institutions
• 5. Magazines, books, and newspapers
• 6. Special goods designated for senior citizen use or for persons with disabilities
• 7. Services given by medical doctors, dentists, nurses, and hospital services
• 8. Import and sale of passenger or cargo vessels or aircraft as well as their components
• 9. Sale of essential renewable power generators such as solar panels, wind turbines, and much more.

Zero Rated vs VAT Exempt transactions: Understanding the Difference

Another confusing yet equally important concept to understand is zero-rated transactions. Although both charge 0% VAT from the customer, zero VAT is slightly different from VAT exempt transactions.

Zero-rated transactions refer to specific goods and services that are subject to a 0% VAT rate, as stated in Section 108 (B) of the Philippines Tax Code. This means that although the customer pays no VAT, the supplier still has to pay VAT inputs, which they can then reclaim.

This encourages exports and supports some vital industries. Some examples include export sales, sales of foreign currency denominations, and sales covered by international agreements. In contrast, VAT-exempt transactions are goods or services that are completely excluded from VAT. Neither is the customer charged, nor must the seller pay input VAT.

A few examples are educational services, medical services, and low-cost housing. Therefore, since the supplier does not pay VAT, there is no input VAT recovery for the supplier. This supports social welfare, education, and health services.

Find Your VAT exempt sales: Maximize Profits

Now that we have a clearer understanding, if your business sells VAT exempt items, you must distinguish them from those that are not. This ensures you only pay tax on the appropriate taxable income and leaves more money in the bank! So, before calculating the 12% standard VAT on your goods and services, separate the VAT exempt transactions from your total sales figure. This might leave you thinking about how to compute VAT exempt sales. You can simply use the formula given below:

VAT-exempt Sale = Selling Price / 1.12

For instance, If the selling price is 1,000 pesos and the applicable VAT rate were 12%, the VAT exempt sale would be approximately 892 pesos.

Penalty for Inaccurate VAT Filing

You would be wise to keep accurate records as the BIR takes taxes seriously. They dish out huge penalties for inadequate or delayed VAT filing. The BIR can punish businesses for things like not paying taxes on purpose, filing inaccurate tax returns, not keeping good records, or giving the BIR wrong information. Individuals convicted of such offenses may face fines of at least 10,000 pesos and imprisonment ranging from one to ten years.

Role of VAT Exemption Certificate

The Philippine government offers special deals (exemptions) on VAT to incentivize specific activities and transactions. These exemptions can be especially helpful for businesses that sell mixed taxable and exempt items or exporters.

Thanks to the CREATE Act, for up to 17 years registered exporters can benefit from a VAT exemption for their local purchases of goods and services. The exemption includes raw materials, equipment, supplies, packaging materials, and all processes relevant to export.

Similarly, VAT-registered businesses that engage in mixed transactions can opt to apply tax to otherwise VAT-exempt transactions. The exemption certificate ensures clarity in such cases.

On the other hand, no VAT is added to the purchases for foreign missions (Embassies) and their members so they don’t have to pay VAT on their transactions at all! In short, VAT exemption certificates make things clear. They simplify record-keeping for exporters and businesses with mixed transactions.

Relief for VAT Exempt Business

The Philippines offers VAT exemptions to ease the tax burden on specific businesses. Here's a breakdown of who qualifies:

• 1. Fully exempt businesses that exclusively deal in goods and services listed as VAT-exempt are completely off the hook.
• 2. Small businesses with annual gross sales below 3,000,000 pesos are also VAT-exempt, although they may choose to register voluntarily. This allows them to reclaim input tax credits on purchases.
• 3. Specific transactions in essential businesses such as tuition fees, books, public transportation fares, and real estate transactions also constitute VAT-exempt transactions.

Understanding these exemptions can significantly impact your business. To resolve any room for error, consult with a tax professional to ensure compliance.