Value-added tax is the 12% that VAT-registered businesses charge on sales, collect from customers, and remit to the BIR — net of the VAT they themselves paid on purchases. It is a pass-through: the tax follows the sale, not the profit, so a company can owe VAT in a losing year. This guide explains who must charge it, how the 12% is applied and removed, what makes input VAT creditable, and what happens when credits pile up. You can run every example here in our VAT calculator.
The computation in one picture
| One taxable quarter | Amount |
|---|---|
| Gross sales (VAT-exclusive) | ₱500,000 |
| Output VAT (12%) — added on top | ₱60,000 |
| Less: creditable input VAT on purchases | −₱25,000 |
| VAT payable on BIR Form 2550Q | ₱35,000 |
The customer pays ₱560,000 all-in. Of that, ₱500,000 is the seller’s revenue for income-tax purposes — the ₱60,000 output VAT never belongs to the seller.
Who must register: the ₱3M gatekeeper
Registration becomes mandatory the moment gross sales or receipts exceed ₱3 million in any rolling 12-month period — the threshold TRAIN raised and the EOPT Act kept with periodic CPI adjustment. Below it, a seller is non-VAT: the 3% percentage tax on gross sales (or the 8% income-tax option) applies instead, with no VAT invoicing at all.
Registration below the threshold is voluntary — some B2B suppliers do it so corporate customers can claim input VAT — but two guardrails from the Tax Code (§236) apply:
- Three-year lock-in: voluntary VAT registration binds you for three years, even if sales stay thin and the compliance cost outweighs the benefit.
- Incompatible with 8%: a taxpayer who elected the 8% income-tax regime cannot simultaneously register for VAT. Choosing 8% means percentage-tax-style simplicity on the income side — not VAT. Our tax regime comparison guide works through the break-even math.
Inclusive vs exclusive: getting the base right
Everything in VAT starts from the net, VAT-exclusive price. When an amount is already VAT-inclusive (a POS total, a contracted fee “VAT included”), extract the tax rather than adding 12% again:
- Exclusive → add: net ₱100,000 × 12% = ₱12,000 output VAT; customer pays ₱112,000.
- Inclusive → extract: ₱112,000 ÷ 1.12 = ₱100,000 net; the ₱12,000 difference is the output VAT. Equivalently, VAT = amount × 12 ÷ 112.
The classic error is invoicing a VAT-inclusive contract price and then adding 12% on top — overcharging the customer by ₱13,440 on a ₱112,000 contract and over-remitting tax you never collected.
The input-tax credit and what invalidates it
Input VAT on your own purchases offsets output VAT — but only if it is creditable. The BIR disallows the credit when:
- the purchase is not supported by a VAT invoice from a VAT-registered supplier (a non-VAT receipt proves nothing);
- the purchase is for personal use or outside the trade or business;
- the input VAT is attributable to VAT-exempt sales — mixed sellers must apportion input VAT between taxable and exempt activities;
- the supplier’s own declaration is missing — in a BIR audit, input VAT is matched against what your suppliers actually declared.
Zero-rated sellers get the mirror-image benefit: output VAT is 0% while input VAT stays creditable — the mechanics (and the documentation the BIR demands) are covered in our VAT 0% export services guide.
When credits exceed collections: carry-forward vs refund
If a quarter ends with input VAT above output VAT, nothing is payable — and the excess is carried forward to credit against output VAT in the succeeding quarters under Section 110(C), the default TRAIN introduced. A cash refund or tax credit certificate is the exception, not the rule, and is generally limited to defined cases — most importantly unutilized input VAT attributable to zero-rated sales, claimable within two years from the close of the quarter the sales occurred (Section 112). The EOPT Act later softened the old all-or-nothing choice by allowing taxpayers who carried credits forward to still seek refunds in defined circumstances. For most businesses, though, the carry-forward just quietly soaks up future output VAT.
Filing: quarterly 2550Q, 25 days
Since the EOPT Act (RA 11976) took effect, the monthly VAT return is gone: BIR Form 2550Q is filed within 25 days after the end of each taxable quarter, together with the summary lists of purchases and sales. Zero-payable quarters (full input-tax offset) still must be filed — that return is what establishes the carry-forward. Late filing stacks the standard penalties: 25% surcharge, 12% annual interest, plus compromise penalties; our late-filing penalties guide shows how they compound.
Five mistakes that trigger assessments
- Charging “VAT” while non-VAT-registered — the amounts are remittable as if you were registered, without the input-tax credit.
- Adding 12% to an inclusive price (double-charging) or invoicing net-only without separating the VAT.
- Claiming input VAT on non-VAT receipts, personal expenses, or exempt-attributable purchases without allocation.
- Treating output VAT as income in the books — it distorts both income tax and financial statements.
- Skipping zero-payable filings and losing the documented carry-forward trail the BIR requires.
Run your own numbers
Enter a quarter’s sales (inclusive or exclusive) and your creditable input VAT — the calculator shows the 2550Q payable or the Section 110(C) carry-forward instantly.
Open the VAT CalculatorFrequently Asked Questions
Can I register for VAT even if my sales are below ₱3 million?
Yes — registration below the threshold is voluntary, but Section 236(H) locks you into VAT for three years, and a taxpayer who elected the 8% income tax regime cannot simultaneously register for VAT. The lock-in is why voluntary registration needs break-even math first.
What makes an input VAT non-creditable?
Input VAT is not creditable when it comes from a supplier that is not VAT-registered, when it lacks a VAT invoice or official documentation, when it relates to purchases for personal or non-business use, or when it is attributable to VAT-exempt sales. Mixed sellers must allocate input VAT between their taxable and exempt activities.
Do I charge VAT to foreign clients?
Services performed in the Philippines for clients abroad can qualify as zero-rated (0%) under Section 108(B)(2) if all four conditions are met — but zero-rating is not automatic, and it applies only to VAT-registered persons. The output VAT is zero, while the related input VAT becomes creditable or refundable.
Is VAT an expense of my business?
No, on both sides. Output VAT you collect is held in trust for the BIR and is excluded from gross sales for income tax. Creditable input VAT on your purchases is not deducted as a cost — it offsets output VAT instead. Only input VAT that is not creditable (e.g., on exempt sales) becomes part of cost or expense.
What happens if I miss the quarterly VAT deadline?
A surcharge of 25% of the tax due, 12% annual interest, and a compromise penalty stack on late 2550Q filings — the same penalty regime as other BIR returns. Even a zero-payable quarter with excess input VAT must be filed; the carry-forward is established on the return itself.
This guide summarizes the National Internal Revenue Code as amended by TRAIN, CREATE, and the EOPT Act (RA 11976), and BIR issuance patterns as of 2026. It is not tax advice — consult the BIR or a qualified tax professional for specific cases.