Tax Savings on Value Added Tax (VAT) or Percentage Tax Registration

In the previous post – Other Percentage Tax or Value Added Tax registration?, we have discussed the basic things that a new business registrant should be aware of. In this article, let us share some insights on which registration would work at the new business registrant’s advantage.

Perhaps at this point, you already have an overview of the value added tax, and an overview of the other percentage tax in the Philippines. To refresh your thoughts, let us state the following:

  • In VAT, a seller add 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.
  • 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.
Having the above clear understanding, let us proceed. A taxpayer whose business is by nature subject to VAT, may register under 3% percentage tax or 12% value added tax depending on the VAT registration threshold of P1,919,500.  Please note that some business industries involve large percentage of purchases in relation to sales – manufacturing and trading, in general, while some do not require more purchases – service industries.  Let us illustrate.

Company A made a total sale of P1,000,000. It also made purchases of P300,000 plus 12% VAT or P36,000.

Tax due if Company A is VAT registered:

  • Output VAT (P1M x 12%)  P120,000
  • Less: Input VAT                         36,000
  • VAT due                                 P84,000

Tax due if Company A is non-VAT registered

  • Sales                                          P1,000,000.00
  • Multiplied by                                                3%
  • OPT due and payable         P30,000.00

Output VAT is an add on so 12% VAT is on top of the amount of sales. Based on the above, OPT registration is advantageous by P54,000 (P84,000 less P30,000). Of course the difference is not simply because Company A is a non-VAT registered or an OPT taxpayer.

What dictates the difference is the level of purchase. OPT became better because the level of purchases is lower. Had it been higher, then, VAT may have been better. Assuming the purchase is P800,000.00 plus VAT of   P96,000, then, the VAT due is only P24,000 (P120,000 less P96,000). In such instance, the VAT registration is better by P6,000 (P30,000 OPT less P24,000 VAT).

Note: Article posted before TRAIN or R.A. No. 10963 effective Jan. 2018.

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may also please send mail at info(@), or you may post a question at Tax and Accounting Center Forum and participate therein.

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