When you first start your business, understanding the different taxes that apply to you is essential for proper compliance. Notably, it is not necessary for you to register for VAT, but it’s essential for you to know what it is about, especially how or when you may be affected. VAT is an indirect tax, meaning the consumer is charged the tax while the business remits the money to the BIR monthly and quarterly.
In contrast, income tax, which is based upon the declared profits of your company over the year, along with other income if you have mixed earnings is required annually and taken from your profits. That’s why diligent bookkeeping and accounting are necessary for your business so you don’t make mistakes when filing your tax returns. Learn more about the differences between VAT and income tax in this article.
What is a Value Added Tax (VAT)?
In 1988, the concept of VAT or value added tax was first introduced in the Philippines. VAT is regulated primarily in Title IV of the National Internal Revenue Code or NIRC. VAT is levied generally on any person who exchanges, sells barters, leases goods, renders services, and/or imports goods in the course of trade or business. Hence, it is a form of sales tax applying to the seller’s goods or services during the retail or manufacturing process. But BIR permits sellers to shift this tax onto the buyers or lessee of goods.
VAT is compulsory for the following:
- Any transaction made in the course of trade or business is determined by the pursuit of economic or commercial activity with aggregate gross receipts or sales exceeding P3M in a year
- Taxpayers required to pay VAT but failed to register
- Any person importing goods in all industries
- Foreign entities are also required to apply for appropriate VAT registration
What is the VAT Rate?
The government applies a standard VAT rate of 12% on the gross value or gross selling price. The rate is applied to most of the goods and services available in the market which are subject to a 5% final withholding tax on VAT when bought.
However, some transactions may have a 0% to 12% rate depending on the type of transaction, such as those in the PEZA or economic zone. The BIR says that VAT taxpayers must file their declarations as long as they have an existing VAT registration.
What Forms to Use for VAT?
If you are VAT registered, you are expected to make your declarations even if you don’t exceed the P1.5M threshold for 12 months or if there are no taxable transactions during the month. The forms to use are:
- BIR Form 2550M (Monthly VAT Declaration): must be filed no later than the 20th day following the end of the month
- BIR Form 2550Q (Quarterly VAT Declaration): must be filed no later than the 25th day following the end of each taxable quarter
Notably, the term taxable quarter must be synchronized with the taxpayer’s income tax quarter.
What is an Income Tax?
As its name suggests, income tax is a tax imposed on entities or individuals like you who are called taxpayers. The amount of tax one should pay depends on their respective taxable income or how much their income or profit is.
Corporate tax or company tax refers to income tax on business entities. Partnerships are not generally taxed but are taxed on their own share of the partnership items. Notably, many local charitable organizations and non-profits in the country may be exempt from filing an income tax. .
How is Income Tax Computed?
The income tax is computed generally at a range of tax slabs on the taxable income. In the Philippines, people or entities earning P250,000 and below annually are shielded from paying income taxes. Check out the table below:
- P250,000 and below: 0% tax
- Above P250k to P400k: 20% of the excess over P250k
- Above P400k to P800k: P30,0000 + 25% of excess over P400k
- Above P800k to P2m: P130,000 + 30% of excess over P800k
- Above P2m to P8m: P490k + 32% of excess over P2m
- Above P8m: P2.41m + 35% over P8m
What Forms to Use to File Income Tax?
Income-earning Filipinos and resident aliens are required to file their ITR every April 15 of the following year. Your ITR will summarize income and losses. With the new TRAIN laws, there are 3 forms you may use:
- Form 1700: For those who have purely employment income
- Form 1701: For mixed-income earners (which may be an employee with a business or a freelance writer with rental apartments) or those who chose a Graduated Tax Rate with Itemized Deductions
- Form 1701A: For those with purely business income or income from a profession (example: lawyer or doctor).
What are Other Things to Note About Income Tax?
The taxable income of resident taxpayers in the jurisdiction is generally computed by subtracting your expenses and other deductions from your total income. In general, it is only your net gain from the sale of property and goods for sale that is included in income. The income of shareholders includes the profit distributions from the corporation. Typically, the deductions include all income-producing or business expenses which includes the recovery of the business assets.
It can be confusing to navigate VAT and income tax, especially if you’re not well-versed in taxation laws. Avoid costly penalties from the BIR by working with a CPA. Call our firm for accounting, bookkeeping, auditing, and tax compliance services.
