“Register as VAT or No VAT, that is the question”.
For those interested in investing or who have already started their business commitments, they chose the Philippines as the right choice. However, tax payments and registration will be a big hurdle. Needless to say, it’s probably more challenging than putting together your business plan.
Don’t worry. This is just a normal reaction, or rather a quality you shouldn’t worry too much about. In addition to having to figure out what type of tax registration you should opt for, the most important part would be knowing how to minimize your losses and maximize your investment by incorporating available legal solutions into your business plan. Here are some basic rules to guide you in registering your business with the Internal Revenue Office.
“I am a new entrepreneur and they told me that I have to choose between OPT or IVA. Which is better of the two?”
To begin with, let’s make a distinction between the Tax on Other Percentages (OPT) and the Value Added Tax (VAT).
Other Percentage Tax (OPT or non-VAT, as it is commonly called) is a business tax that is levied on persons or entities that sell or lease goods, property, or services in the course of trade or business whose sales or gross annual receipts do not exceed P1,919,500 (as of 2012), and are not registered for Value Added Tax (VAT). The 3% rate is imposed on your sales or gross annual receipts.
Whereas, Value Added Tax (VAT) is a type of sales tax that is levied on consumption on the sale of goods, services, or property, as well as on importation, in the Philippines. For simplicity, it means that a certain tax rate (0% to 12%) is added to the sales price of a good or service sold.
Likewise, in VAT, a seller adds 12% on each sale because VAT is an indirect tax. For the seller it is called output VAT and for the buyer supported VAT. At any given time, the seller is also a buyer, so he has VAT charged on sales and VAT charged on purchases. Please note that output VAT is an add-on, so the 12% VAT is added to the sales amount. VAT payable computed by simple deduction, charged VAT minus supported VAT. The tax liability percentage is calculated simply by multiplying 3% by the gross amount of sales.
If you are the owner of a company that is engaged in the sale or lease of goods, property or services, and the nature of your company is subject to VAT, you can register with a tax percentage of 3% or a value added tax of 12% according to the VAT registration threshold of 1,919,500 pesos.
By way of example, for 2016, your annual sales amounted to 1,000,000 php and as a buyer you made commercial purchases for 350,000 php plus 12% that amounts to 42,000.
If you are VAT registered, your VAT due will be as follows:
Output VAT (1M x 12% VAT) = 120,000
Less VAT Input (350K x 12% VAT) = 42,000
Tax due will be = 78,000
If you are not registered for VAT, 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, Without 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 quantity limit of 1,919,500?
In the long run, VAT may be more advantageous as your company’s investments grow. Also, as a business owner, you can benefit from 0% or zero rate VAT if you meet the requirements under the Tax Code, or are engaged in the export business and meet the requirements, or if your business is registered under PIECE. .