VAT and Sales Tax in Philippines

Value-added tax in the Philippines is governed by Sections 105 through 115 of the National Internal Revenue Code (NIRC), as amended most recently by the Tax Reform for Acceleration and Inclusion Act (TRAIN, Republic Act No. 10963, 2018) and the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE, Republic Act No. 11534, 2021). The Bureau of Internal Revenue (BIR) administers both VAT and the percentage tax that applies to smaller taxpayers who fall below the VAT registration threshold. For broader context on the Philippine tax system, see the Philippines country overview.

What is the standard VAT rate in the Philippines, and who must register?

The standard VAT rate is 12%, applied to the gross selling price of goods, the gross receipts from services, and the transaction value of imports. A business, individual, estate, or trust whose aggregate gross sales or receipts from taxable activities exceed PHP 3 million in any rolling twelve-month period is required to register as a VAT taxpayer with the BIR [1][2]. Registration is accomplished by filing BIR Form 1901 (for individuals) or BIR Form 1903 (for juridical entities) at the Revenue District Office that covers the taxpayer's principal place of business. Once registered, the taxpayer charges output VAT on sales, collects it from customers, and may offset it against input VAT paid on purchases and imports. The net VAT liability -- output less allowable input VAT -- is settled quarterly via BIR Form 2550Q [1][3].

What is the percentage tax, and what happened to the 1% rate under CREATE?

Taxpayers whose annual gross sales or receipts do not exceed PHP 3 million are generally not required to register for VAT. Instead, they are subject to the percentage tax under Section 116 of the NIRC, currently set at 3% of quarterly gross sales or receipts [4]. This 3% rate has a significant recent history: the CREATE Act temporarily reduced it to 1% for the period from July 1, 2020, through June 30, 2023, as a relief measure for micro, small, and medium enterprises during the economic disruption caused by the pandemic [4][5]. The reduction expired automatically on June 30, 2023, reverting to the statutory 3% rate effective July 1, 2023 -- no further legislation was required to trigger the reversion. Taxpayers who remain below the PHP 3 million threshold file a quarterly percentage tax return using BIR Form 2551Q, also due by the 25th day of the month following the end of each quarter. A taxpayer may voluntarily register for VAT even if below the threshold, which can be advantageous when input VAT credits on purchases are significant [2].

Which transactions are zero-rated for VAT?

Zero-rated transactions are technically VAT-able but taxed at 0%, meaning the seller charges no output VAT to the buyer while retaining the right to claim input VAT refunds on related purchases. Under Sections 106(A)(2) and 108(B) of the NIRC, principal zero-rated categories include [1][6]:

• Direct exports -- goods physically shipped out of the Philippines by a VAT-registered exporter;
• Sales to PEZA-registered enterprises and other special economic zones -- goods and services directly or exclusively used in the registered activities of enterprises in Philippine Economic Zone Authority (PEZA) zones, freeport zones, and similar areas qualify for zero-rating, provided the goods or services are consumed within the zone;
• Foreign-currency-denominated services -- services rendered by a Philippine VAT-registered person to a non-resident entity doing business outside the Philippines, paid for in acceptable foreign currency and inward remitted through the banking system;
• International shipping and air transport -- fuel, supplies, and goods for vessels or aircraft engaged in international trade.

For exports, documentary evidence (shipping documents, customs export declarations, bank certificates of inward remittance) is required to substantiate the zero-rating. Zero-rated sellers may apply for a VAT refund or credit on their accumulated input VAT within two years from the close of the taxable quarter when the zero-rated sales occurred [6].

What goods and services are VAT-exempt?

VAT-exempt transactions, listed in Section 109 of the NIRC, are excluded entirely from the VAT system -- sellers neither charge VAT nor may they claim input VAT credits on purchases related to exempt activities. Key exempt categories include [1][2]:

• Agricultural and marine food products in their original state -- including livestock, poultry, and fish used for human consumption; ordinary salt; polished rice; corn grits; raw sugar; and copra. Basic processing steps such as freezing, drying, salting, broiling, roasting, smoking, or stripping do not remove the original-state exemption;
• Agricultural inputs -- fertilizers, seeds, seedlings, fish and livestock feeds (excluding specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals, and similar pets);
• Medicines -- drugs for hypertension, cancer, mental illness, tuberculosis, kidney disease, diabetes, and high cholesterol were exempted under CREATE (2021); the BIR further expanded the list through Revenue Memorandum Circular No. 93-2024 (August 27, 2024), adding 15 more medicines across cancer, hypertension, high cholesterol, and mental illness categories;
• Educational services -- tuition fees and related services rendered by private educational institutions duly accredited by the Department of Education (DepEd), the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as well as by government educational institutions;
• Books and periodicals -- the sale, importation, printing, or publication of books, newspapers, magazines, reviews, or bulletins issued at regular intervals;
• Medical, dental, and hospital services -- services by professionals covered by the professional services exemption, and non-professional hospital services;
• Residential leases -- monthly rentals of PHP 12,800 or less per unit.

How does the new VAT on digital services (RA 12023) work?

Republic Act No. 12023, signed into law on October 2, 2024, extended the Philippine VAT framework to digital services consumed in the Philippines -- including those provided by non-resident digital service providers (NRDSPs) such as streaming platforms, app stores, cloud computing services, online marketplaces, and digital advertising networks [7][8]. The law took effect on June 2, 2025, following implementing regulations issued by the BIR through Revenue Regulations No. 3-2025 and further clarified by Revenue Memorandum Circulars 047-2025 and 058-2025 [8][9].

The 12% VAT rate applies to digital services consumed within the Philippines regardless of where the provider is based. NRDSPs with annual gross sales or receipts from Philippine customers exceeding PHP 3 million (approximately USD 51,000 at prevailing exchange rates) are required to register with the BIR. Registration is completed through the VAT on Digital Services (VDS) Portal or the Online Registration and Update System (ORUS), and NRDSPs receive a Taxpayer Identification Number and BIR Certificate of Registration Form 2303 upon completion [7][8].

B2B transactions: Where the NRDSP supplies digital services to a VAT-registered Philippine business, a reverse-charge mechanism applies -- the Philippine customer withholds the 12% VAT from the payment and remits it directly to the BIR, rather than the foreign provider collecting it [8][9].

B2C transactions: Where the NRDSP supplies directly to Philippine consumers (non-VAT-registered), the NRDSP is directly liable for collecting, filing, and remitting the 12% VAT through the VDS Portal [8].

Exemptions from the digital services VAT mirror the general NIRC exemptions -- online educational services from accredited institutions and digital financial services remain outside the VAT base. The BIR may enforce compliance by instructing platforms to be blocked for NRDSPs that fail to register or remit [7].

How are quarterly VAT returns filed, and what are the deadlines?

VAT-registered taxpayers file a Quarterly VAT Return using BIR Form 2550Q on or before the 25th day of the month following the close of each calendar quarter [3][10]. The quarterly deadlines are: Q1 (January--March) by April 25; Q2 (April--June) by July 25; Q3 (July--September) by October 25; Q4 (October--December) by January 25 of the following year. A nil return must be filed even when no sales were made during the quarter. Monthly VAT returns were eliminated for most taxpayers under Revenue Memorandum Circular No. 5-2023, consolidating obligations into the quarterly Form 2550Q [1].

VAT returns are filed electronically through the BIR's Electronic Filing and Payment System (eFPS) for large taxpayers and mandatory eFPS enrollees, or through eBIRForms for others. Payment of net VAT due follows filing via Authorized Agent Banks or the BIR online payment channels. Late filing carries a 25% surcharge, 12% annual interest on unpaid amounts, and a minimum penalty of PHP 1,000 per unfiled return, capped at PHP 25,000 per year [1][2].

The Philippine VAT framework involves multiple interacting rules -- the threshold, the zero-rating documentation requirements, the percentage tax election, and the new digital-services regime -- that can interact differently depending on a business's transaction mix and registration status. Consulting a qualified tax professional such as a Philippine Certified Public Accountant or a BIR-accredited tax practitioner before structuring cross-border transactions or registering for VAT is strongly recommended.