Investing in the Philippines: Advantages of VAT or Non-VAT Registration

“To register as VAT or Non-VAT, that is the question.”

To those keen on investing or have already started their business engagements, you picked the Philippines as the right choice. However, tax payments and registration, is going to be one mean stumbling block. Needless to say, it’s probably more challenging than drawing up your business plan.

Don’t fret. This is but a normal reaction or rather, a qualm that you shouldn’t worry much about. Other than having to figure out what kind of tax registration you should opt for, the most important part would be for you to know how to minimize your losses and maximize your investment by incorporating available legal solutions in your business plan. Here are some basic rules to guide you in registering your business with the Bureau of Internal Revenue.

“I am a new entrepreneur and I was told that I have a choice between OPT or VAT. Which is the better of the two?”

For starters, let’s make a distinction between Other Percentage Tax (OPT) and Value Added Tax (VAT).

Other Percentage Tax (OPT or non-VAT as commonly termed) is a business tax imposed on persons or entities who sell or lease goods, properties or services in the course of trade or business whose gross annual sales or receipts do not exceed P1,919,500 (effective 2012), and are not value-added tax (VAT) registered. The rate of 3% is imposed on your annual gross sales or receipts.

Whereas, Value Added Tax (VAT) is a type of sales tax which is levied on consumption on the sale of goods, services or properties, as well as importation, in the Philippines. To simplify, it means that a certain tax rate (0% to 12%) is added up to the selling price of a goods or services sold.

Likewise, in VAT, a seller adds on 12% on every sale because VAT is an indirect tax. For the seller, it is called Output VAT and for the buyer it is Input VAT. At one point, the seller is also a buyer, so he has Output VAT on sales and Input VAT on purchases. Note that Output VAT is an add on so 12% VAT is on top of the amount of sales. VAT payable in computed by a simple deduction, Output VAT less Input VAT. Percentage tax liability is computed by simply multiplying 3% by the gross amount of sales.

If you are a business owner engaged in the sale or lease goods, properties or services, and the nature of your business is subject to VAT, you may register under 3% percentage tax or 12% value added tax depending on the VAT registration threshold of P1,919,500.

By way of example, for 2016, your annual sales amounted to 1,000,000php and as buyer, you made business purchases amounting to 350,000php plus 12% amounting to 42,000.

If you are VAT Registered, your VAT due will be as follows:
Output VAT (1M x 12% VAT) = 120,000
Less Input Vat (350K x 12 %VAT) = 42,000
Tax due will be = 78,000

If you are non-VAT Registered, your tax due will be as follows:
Gross Sales = 1,000,000
Multiplied by 3% OPT
Tax due will be = 30,000

Between 78,000 and 30,000, Non-VAT is more advantageous. However, this is not always the case because what if your purchases for the next year increased but your sales did not reach the threshold amount of 1,919,500?

In the long run, VAT may be more advantageous as your business investments grow. Also, as a business owner, you may avail of 0% or Zero-Rated VAT if you meet the requirements provided under the Tax Code, or are engaged in the export business and met the qualifications, or if your company is registered under the PEZA.

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