Tax Articles

Value Added Tax >> Export

Industry Benchmarking for Improved VAT Administration

Date Added: 2011-04-21

The value added tax (VAT) was first adopted in the Philippines in 1988, replacing 12 different kinds of indirect taxes like the annual fixed taxes, sales tax on manufacturersproducers, turnover tax on subsequent sellers, advance sales taxcompensating tax on importation of goods, millers’ tax, percentage tax on contractors, lessors of property, lessorsdistributors of cinematographic films and excise tax on certain articles. It was initially applicable to domestic sales and importation of goods but in 1996, the VAT’s coverage was expanded to include most types of services. The VAT applied in the Philippines is a consumption type VAT (i.e., in determining their tax liability, firms are allowed to deduct all business purchases, including purchases of capital goods, from their sales). By not placing an additional burden on purchases of capital equipment, the VAT does not unduly cause delays for firms in their modernization and upgrading of plant and equipment. Nor does it discriminate against capital-intensive methods of production. At the same time, it minimizes tax cascading from the turnover tax. Thus, it is neutral with respect to production and distribution methods. As in most countries that have adopted the VAT, the Philippine VAT is levied on the basis of the destination principle (i.e., goods and services are taxed on the basis of where they are consumed rather than where they are produced). As such, imports and domestically produced goods are treated symmetrically, thereby allowing them to compete on equal footing with each other. The VAT rate is 10 percent of the gross selling price in the case of sale of taxable goods, or of gross receipts in case of taxable services.1 Exports are zero rated, which means that exports are allowed to receive credit for the VAT paid on their inputs even as they pay zero output VAT. In principle, therefore, the VAT helps ensure that exports compete on an even playing field with their counterparts in the international market.

External Link