Should my business pay VAT? A guide for Filipino small business owners

Should my business pay VAT?

Is your business VAT registered? Maybe it’s time to change that. 

There’s been this clamor for years to have the income tax table indexed to inflation. The last time it happened? Never. It was never adjusted for inflation since the revised tax code took effect more than 20 years ago. But finally, people’s spirits have been lifted, with President Duterte mentioning lower income tax rates to come in his first SONA.

Speaking of inflation, there is one item that currently IS indexed to inflation, and has a huge impact not just on the taxes to be paid but also on the complexity of the accounting required: the annual revenue threshold that determines if one has to pay the 3% percentage tax, or the 12% VAT.

Most VAT taxpayers are not aware this threshold is adjusted (upwards) regularly. What would be a P1,500,000 annual threshold back in 2006 is now at P1,919,500, so some VAT taxpayers may now fall below this threshold and can slide down.

[EDIT: RA 10963 or the Tax Reform for Acceleration and Inclusion has increased the VAT threshold to P3,000,000.]

But what about the ability to apply input VAT and offset against output VAT? Is there a similar mechanism under percentage tax? The answer is no. But for most businesses and self-employed professionals, 3% would certainly be better, since the only scenario where VAT system would be preferred is when:

a) The margin in the business is really low.

b) The taxpayer has VAT invoices/receipts for ALL expenses.

Let’s put these into numbers. Say VAT taxpayer has an annual revenue of P1.5 million (excluding VAT) and P1.0 million in expenses (excluding VAT). The output VAT would be: P180,000 (P1.5M x 12%) and input VAT would be P120,000 (P1.0M x 12%) bringing NET VAT to P60,000.

But according to the BIR gov ph’s percentage tax rule. it’s a simple and lower P45,000 (P1.5M x 3%). A P15,000 difference! And that assumes all expenses were paid to VAT-registered suppliers/establishments, which is rarely the case. So if only P800k of expenses are from VAT suppliers, and input VAT is P96,000, and you’re looking a tax bill of P84,000 (P180,000 less P96,000).

And don’t get me started with all the bookkeeping stuff that goes away when one moves away from VAT. Because VAT taxpayers know what I’m referring to.

So what say you? Are you VAT-registered and perhaps now below the threshold? Say hello to percentage tax?

If you’ve decided to move away from VAT, here’s a guide on how to change your tax type to non-VAT: Tax Reform: Changing from VAT to Non-VAT

Looking for a better and more convenient way to file and pay for your small business’s taxes?