Learn the Specific Nuance of VAT and Income Tax

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If you’re a businessman, it’s critical to understand the various taxes that the government can impose on your operations. Apart from an annual income tax, you could be remitting VAT. Noteworthy, it’s not necessary for all businesses to register for VAT, but it is important for you to understand the concept in case you may want to apply it in the future. 

VAT is an indirect tax levied on the consumer as it is incorporated into the price. The seller is responsible for remitting the tax to the BIR with monthly/ quarterly declarations. In contrast, an income tax return is done annually on the direct profits of your company for a specific fiscal year. If you’re an individual earning multiple income streams, it would be best to seek help from tax services in Manila as your documentation may be more complex. For those who wish to know, continue reading this article to learn more about the nuances of VAT and income tax. 

What is VAT All About? 

The VAT or Value-Added Tax was introduced in the country in 1998 as a form of sales tax. The VAT is regulated in Title IV of the National Internal Revenue Code or NIRC. It stipulates there that VAT could be levied on any individual who sells, exchanges, barters, leases goods, renders services, and/or imports goods in the course of business. 

VAT is compulsory for the following: 

  • Any transaction made in the course business with accumulated gross receipts or sales exceeding P3M in 12 months
  • Any person who imports goods regardless of industry
  • Taxpayers who exceed the VAT threshold but failed to register
  • Foreign entities in the Philippines are also required to apply for appropriate licensing 

How is the Current Vat Rate Computed? 

The gross selling price of goods follows a standard VAT rate of 12%. This is applied to most products and services in the market, which are subject to a 5% final withholding tax on VAT when bought. 

Notably, according to expert accounting services in the Philippines, some business transactions may have a 0% to 12%. For instance, those businesses situated in the PEZA or economic zone may enjoy special rates. The BIR stipulates that VAT-registered taxpayers must continually file their declarations to avoid penalties. 

How to Make VAT Declarations? 

If you’re VAT registered, but don’t exceed the P1.5M threshold in the last year or have no taxable transactions in a month, you are still expected to file your returns using the following forms: 

  • BIR Form 2550M (Monthly VAT Declaration): File this no later than the 20th day following the end of the month
  • BIR Form 2550Q (Quarterly VAT Declaration): File this no later than the 25th day following the end of each taxable quarter (the latter must be synchronized with the taxpayer’s income tax quarter). 

What About Income Tax? 

All income-earning individuals are required to pay tax dues on income earned in a fiscal year. The amount you will pay depends on your earnings. Today, income earners who don’t exceed P250,000 annually or earn around P20,000 and below per month will pay zero. 

However, anything earned beyond the threshold is subjected to a graduated income tax rate. Business entities pay an income tax referred to as corporate or company tax. Similarly, partnerships are levied a tax on the share of each partner. Some organizations like charitable institutions could be exempt from paying an income tax. 

How to Compute the Income Tax? 

If your taxable income increases, your tax rate will also increase. This increase is referred to as a progressive or graduated rate. The rates will vary depending on the taxpayer’s characteristics. 

  • P250,000 and less: 0% tax
  • More than P250k to P400k: 20% of the excess over P250k
  • More than P400k to P800k: P30,0000 + 25% of excess over P400k
  • More than P800k to P2m: P130,000 + 30% of excess over P800k
  • More than P2m to P8m: P490k + 32% of excess over P2m
  • More than P8m: P2.41m + 35% over P8m

What BIR Forms to Use to File an ITR? 

All Filipinos and resident aliens who earn an income are required to pay their tax dues and submit an income tax return (ITR) documenting profits and losses every April 15. With the implementation of the TRAIN laws, tax and audit services in the Philippines share that there are 3 new forms you may use based on how you earn an income: 

Form 1700: Applicable for those who have purely employment income

Form 1701: Applicable for mixed-income earners (which may be an employee with an online business or a freelance artist with rental income) or those who chose a Graduated Tax Rate with Itemized Deductions

Form 1701A: Applicable for those with purely business income or income from a profession (for example dentist or doctor). 

Are There Other Important Stuff to Remember? 

Taxable incomes are computed by subtracting expenses and other applicable total deductibles from your total income. Only your net income, along with net gain from sold goods/ services or properties are included in income. Those who are shareholders must include dividends from corporations. Deductions can include business expenses, along with excess input VAT as this can be treated as an expense for income tax purposes. 

If you’re not well versed in taxation and have multiple streams of income with a lot of transactions, it can be confusing to navigate VAT and income tax. Avoid mistakes and potential penalties for the BIR by calling our team of CPAs to stay on top of your tax compliance obligations. We offer accounting services in Pasig and beyond.