I. Overview

In the Philippine tax system, Value-Added Tax (VAT) and Expanded Withholding Tax (EWT) are two core mechanisms used by the Bureau of Internal Revenue (BIR) to collect national taxes:

VAT is an indirect tax on consumption imposed on the sale of goods, properties, services, and importation.
EWT is a system of creditable withholding on certain income payments, functioning as an advance collection of income tax.

They operate simultaneously but serve different purposes and are governed mainly by the National Internal Revenue Code (NIRC) of 1997, as amended, and implementing revenue regulations.

II. Value-Added Tax (VAT)

A. Legal Nature and Scope

VAT is imposed under Sections 106–111 of the NIRC. It is:

Transaction-based – imposed on each stage of distribution.
Consumption-oriented – designed to tax the end consumer.
Credit-invoice based – input VAT (on purchases) is credited against output VAT (on sales).

The current standard VAT rate is 12%, imposed on:

Sale, barter, exchange or lease of goods or properties in the Philippines
Sale of services and use or lease of properties
Importation of goods

B. Who Is Required or Allowed to Register for VAT

1. Mandatory VAT Registration

In general, a person (individual or juridical) engaged in trade or business in the Philippines must register as VAT-registered if:

Annual gross sales or receipts exceed the VAT threshold (the NIRC sets a specific amount, which has been periodically adjusted by law).

Other categories are mandatorily VAT-registered regardless of the threshold, for example:

Certain franchise grantees (depending on law at the time concerned)
Certain non-resident persons doing business in the Philippines through a permanent establishment or as required by BIR issuances

Failure to register when required exposes the taxpayer to:

Output VAT liability as if VAT-registered
Inability to claim input VAT
Surcharges, interest, and penalties

2. Optional (Voluntary) VAT Registration

Taxpayers below the VAT threshold may opt to register as VAT taxpayers, subject to BIR approval. Once approved:

They must charge 12% VAT on their sales.
They may claim input VAT on purchases.
Voluntary VAT status is generally irrevocable for a certain period (e.g., three years), meaning the taxpayer usually can’t revert to non-VAT/percentage tax in the short term.

3. Exempt From VAT by Nature

Some taxpayers are not subject to VAT because their transactions are exempt by law, even if they exceed the threshold. Typical examples (subject to detailed statutory conditions) include:

Purely VAT-exempt activities (e.g., certain educational, medical, and financial services)
Certain sales of real properties that are expressly VAT-exempt
Cooperatives on specified transactions

These may instead be subject to percentage tax or no business tax at all, depending on the law.

C. Transactions Subject to 12% VAT

1. Sale of Goods or Properties

VAT applies to the sale, barter, or exchange of:

Tangible movable goods (merchandise, inventory, supplies sold as goods)
Real properties held primarily for sale or lease in the ordinary course of trade or business

Key points:

The place of sale must be in the Philippines.
The gross selling price, excluding VAT, is the tax base for output VAT.
For real property, the tax base is generally the higher of:
- Contract price
- Zonal value
- Fair market value as determined by the assessor

2. Sale of Services and Use or Lease of Properties

VAT applies to services performed in the Philippines, including:

Professional services (lawyers, CPAs, consultants) if VAT-registered
Contractors and subcontractors
Lessors of real or personal property
Hotels, restaurants, and similar establishments
Freight, transportation, and logistics services (subject to specific exemptions)

Tax base: Gross receipts (exclusive of VAT) during the taxable quarter.

3. Importation of Goods

On importation, VAT is collected by the Bureau of Customs along with customs duties:

Base is the total landed cost: customs value + customs duties + excise taxes (if any) + other charges forming part of the landed cost.
Import VAT is typically creditable input VAT for VAT-registered importers.

D. VAT-Exempt Transactions

Section 109 of the NIRC lists transactions exempt from VAT. Common categories:

Sale of agricultural and marine food products in their original state
Educational services rendered by government and government-recognized private educational institutions
Medical, dental, hospital, and veterinary services (with exclusions, such as purely cosmetic services)
Sale of residential real properties not exceeding certain value thresholds, and certain low-cost or socialized housing projects
Lease of residential units below specified monthly rental thresholds
Small businesses whose annual gross sales/receipts do not exceed the VAT threshold (if they do not opt for VAT registration)
Specific financial services and transactions involving foreign currency, securities, and derivatives, as defined by law

For VAT-exempt sales:

The seller does not charge VAT.
The seller cannot claim input VAT attributable to such exempt transactions.
The buyer cannot claim any input VAT (there is none).

E. Zero-Rated (0%) VAT Transactions

Zero-rating applies to taxable (not exempt) transactions, but the applicable VAT rate is 0%. They are crucial for exporters and certain special enterprises.

Typical zero-rated transactions include (subject to strict documentary and substantive conditions):

Export sales of goods, such as:
- Actual shipment of goods from the Philippines to a foreign country
- Sales to certain export-oriented enterprises where law expressly grants zero-rating
Certain foreign currency-denominated sales, if:
- Paid in acceptable foreign currency
- Accounted for in accordance with Bangko Sentral ng Pilipinas rules
- The buyer is a non-resident doing business outside the Philippines
Services rendered to non-resident foreign clients, where:
- The services are performed in the Philippines for a non-resident client
- The payment is in acceptable foreign currency, inwardly remitted
- The services are consumed outside the Philippines
Certain sales to export-enterprise or ecozone-registered entities, depending on the prevailing law/regulations (some supplies may be VAT-exempt instead of zero-rated, due to legislative changes).

Key effect of 0% VAT:

Seller does not charge output VAT (rate is 0%),
But can claim input VAT on purchases related to the zero-rated sale,
And may apply for refund or tax credit of excess input VAT attributable to zero-rated sales, subject to strict rules and deadlines.

F. Mechanics: Output VAT, Input VAT, and VAT Payable

Output VAT
- VAT charged on sales of goods, properties, or services.
- Recorded as a liability.
Input VAT
- VAT paid or incurred on purchases of goods, properties, services, or on importation, used in VAT-taxable business.
- Recorded as an asset (credit).
VAT Payable Formula

VAT Payable = Output VAT – Allowable Input VAT

If Output VAT > Input VAT → Pay the difference.
If Input VAT > Output VAT → Excess input VAT may be:
- Carried over to succeeding quarters; or
- For zero-rated transactions, subject to refund or issuance of tax credit certificate, following BIR procedures.

Input VAT on Capital Goods

Input VAT on purchases of capital goods (machines, equipment) used in operations is generally creditable.
The tax treatment (e.g., amortization vs full claim) depends on the rules in effect at the time of acquisition.

Apportionment of Input VAT

When the taxpayer has both taxable/zero-rated and exempt sales, input VAT must be allocated:

Directly attributable input VAT: assigned to the specific activity (taxable, zero-rated, or exempt).
Common input VAT: apportioned based on ratio of taxable/zero-rated sales to total sales.

Input VAT attributable to exempt sales is non-creditable and treated as part of cost or expense.

G. VAT Invoicing, Receipts, and Record-Keeping

VAT compliance is heavily documentation-based. Fundamental rules:

VAT Official Receipts and Sales Invoices
- VAT-registered taxpayers must issue BIR-registered receipts/invoices:
  - Sales invoice – for sale of goods/real properties
  - Official receipt – for sale of services and lease of properties
Required content typically includes:
- Taxpayer’s name, address, TIN, and the phrase “VAT-registered”
- Serial number, date, and description of goods/services
- Breakdown of VAT:
  - Gross amount (exclusive of VAT)
  - VAT amount
  - Total amount due (inclusive of VAT)
- Separate indication of:
  - VATable sales
  - Zero-rated sales
  - VAT-exempt sales
Electronic Invoicing and Reporting
- Certain taxpayers (e.g., large taxpayers, exporters, other groups identified by BIR) are required or may opt to adopt electronic invoicing/receipting and electronic sales reporting systems, subject to BIR approval and technical requirements.
Books of Accounts and Retention of Records
- Taxpayers must keep books of accounts and supporting documents.
- Records must generally be preserved for at least 10 years, especially if still subject to BIR examination.

H. Filing and Payment of VAT

VAT returns are filed on a quarterly basis for VAT-registered persons, within the period prescribed by Section 114 of the NIRC and relevant regulations (commonly, within 25 days from the close of the taxable quarter).
Payment accompanies the return.
Electronic filing and payment are mandatory for certain taxpayers (e.g., large taxpayers, those required under eFPS/eBIR rules).

Failure to file or pay VAT properly can lead to:

Surcharge (often 25% of basic tax; 50% in cases of fraud or willful neglect)
Interest (per annum rate prescribed by law)
Compromise penalties and possible criminal prosecution in severe cases.

I. VAT Registration Changes and Penalties

Cancellation of VAT Registration

A VAT-registered taxpayer may apply for cancellation if:
- It ceases to engage in trade or business; or
- Its gross sales/receipts have fallen below the threshold for a specified period, and it qualifies under the law for optional cancellation.
The BIR will evaluate and, if approved, change the taxpayer’s status to non-VAT (often percentage tax, if still doing business).
Improper VAT-Exempt or Non-VAT Treatment

If a person who should be VAT-registered misrepresents as non-VAT (e.g., continues to issue non-VAT receipts):
- The BIR may assess unpaid output VAT plus penalties.
- Input VAT may be disallowed.
- Criminal sanctions may be pursued.

III. Expanded Withholding Tax (EWT)

A. Concept and Legal Basis

Expanded Withholding Tax (EWT) is a type of creditable withholding tax under:

Section 57(B) of the NIRC
Implementing regulations (notably Revenue Regulations No. 2-98, as amended)

EWT is not a separate tax; it is an advance collection of income tax on specific income payments. The payor (withholding agent) deducts a portion of the payment and remits it directly to the BIR. The payee gets a tax credit for the amount withheld.

B. Who Are Withholding Agents

The obligation to withhold arises when:

A person is considered a withholding agent under the law or BIR issuances, and
That person makes payments subject to EWT.

Withholding agents typically include:

Individuals and juridical entities engaged in trade or business
Top withholding agents identified by the BIR (e.g., large taxpayers, top corporations, top private individuals)
Government offices and government-owned or controlled corporations for certain income payments

Once designated, the withholding agent must withhold and remit on applicable payments. Failure to do so can make the agent personally liable for the tax that should have been withheld.

C. Income Payments Subject to EWT

The list of income payments subject to EWT is extensive and periodically updated by the BIR. Common categories include:

Professional, Talent and Consulting Fees

Payments to:
- Lawyers
- Accountants
- Doctors (for professional fees paid by juridical entities)
- Engineers, architects, consultants
- Artists, entertainers, speakers, trainers
Subject to creditable withholding tax, typically at varying rates depending on the aggregate annual payments and whether certain thresholds are met.
Contractors and Subcontractors

Payments for:
- Construction
- Repair and maintenance
- Janitorial services
- Security services
- Outsourced services
Rentals
- Rentals of real property (buildings, land, etc.)
- Rentals of personal property (machinery, equipment, vehicles)
Commissions and Fees
- Commissions to agents, brokers, marketing representatives
- Service fees and other similar payments
Purchases of Goods and Services From Regular Suppliers

For certain identified withholding agents (e.g., top withholding agents), regular suppliers of goods and services may be subject to:
- EWT on purchases of goods (e.g., 1% of gross payment, exclusive of VAT)
- EWT on purchases of services (e.g., 2% of gross payment, exclusive of VAT)
Other Income Payments

Various other items may be covered, such as:
- Management fees
- Certain payments to agents in real estate transactions
- Certain payments to partners, etc.

The precise coverage and rates are governed by current BIR regulations and circulars.

D. Basis and Rates of EWT

EWT is usually computed on the gross income payment, exclusive of VAT (if the payee is VAT-registered), except where regulations provide otherwise.

Illustrative examples (rates may change by regulation):

Professional fees – often 5% or 10%, depending on annual gross income from the paying entity.
Rentals of real property – commonly a certain fixed percentage (e.g., 5%).
Purchases of goods from regular suppliers – e.g., 1%.
Purchases of services – e.g., 2%.

Because these rates and details are frequently updated by BIR issuance, one must always refer to the latest applicable regulations for exact percentages and coverage.

E. Timing of Withholding

As a rule, EWT is withheld:

At the time of payment or accrual, whichever comes first, depending on the method mandated for withholding agents.

This means even if no cash has yet been disbursed but the expense is recorded as payable, the withholding obligation may already arise for accrual-basis taxpayers.

F. Compliance Obligations of Withholding Agents

Withholding agents must:

Deduct and Withhold
- Calculate the correct EWT based on applicable rate and tax base.
- Deduct it from the amount payable to the income recipient.
Remit Withheld Taxes
- Remit EWT to the BIR using the appropriate forms:
  - Monthly remittance form (e.g., BIR Form 0619E or equivalent under updated forms); and
  - Quarterly withholding tax return (e.g., BIR Form 1601EQ or equivalent), summarizing EWT for the quarter.
- Observe BIR-prescribed deadlines (monthly and quarterly).
Issue Certificates of Creditable Tax Withheld at Source
- Provide the payee with BIR Form 2307 (or its successor form) that shows:
  - Total income payment
  - Amount of tax withheld
  - Period covered
- Usually issued:
  - Every time withholding is made (or upon request); and
  - At least at the end of each quarter, so payees can recognize and claim the tax credit.
Maintain Records
- Keep registers or schedules of:
  - Income payments subject to withholding
  - Amounts withheld and remitted
  - Copies of BIR returns and proof of payment
  - Copies of issued BIR Form 2307

G. Rights and Obligations of the Payee (Income Recipient)

Recognition of Income
- The payee must still report the full gross income in its income tax return, not only the net amount received.
- EWT does not substitute the payee’s obligation to file an income tax return (except in cases where the law prescribes final withholding tax, which is different from EWT).
Claiming the Tax Credit
- The payee treats EWT as a creditable tax against its income tax due.
- To substantiate the claim, the payee must have duly issued BIR Form 2307 from the withholding agent.
- At year-end, total EWT is summed and offset against the tax liability; any excess EWT (subject to rules) may be:
  - Credited against future income tax; or
  - In some cases, applied for refund or issuance of tax credit certificate, following strict procedures.
Reconciliation and Monitoring
- Payees must monitor the amounts of EWT withheld and reported by their payors to ensure consistency with certificates received.
- Discrepancies can lead to disallowance of credited EWT in BIR audits.

H. Consequences of Failure to Withhold or Remit

For withholding agents:

If they fail to withhold, they may become personally liable for the tax that should have been withheld, plus:
- Surcharge (often 25% or 50% depending on circumstances)
- Interest
- Compromise penalties
If they withhold but fail to remit, they may incur:
- Civil penalties and interest
- Possible criminal liability for withholding taxes and not remitting them to the BIR

For payees:

If income is not properly reported, the BIR may assess additional income tax, penalties, and interest, even if EWT was withheld.

I. Relationship Between VAT and EWT

VAT and EWT often apply to the same transaction, but they operate independently:

Different Nature
- VAT – indirect tax on sales/consumption.
- EWT – advance collection of income tax.
Different Bases
- EWT is generally computed on amount payable excluding VAT.
- VAT is computed on gross selling price or gross receipts (VAT base) irrespective of EWT.
No Offset Between VAT and EWT
- EWT cannot be used to pay VAT, and
- Input VAT cannot be used to pay income tax.
Typical Example

Suppose a VAT-registered professional bills a corporation:
- Professional fee (exclusive of VAT): ₱100,000
- VAT (12%): ₱12,000
- Gross amount billed: ₱112,000
The corporation (withholding agent):
- Computes EWT on ₱100,000 (exclusive of VAT), say at 10% → ₱10,000
- Pays the professional ₱102,000 (₱112,000 – ₱10,000)
- Remits ₱10,000 EWT to BIR
- The professional:
  - Records ₱112,000 gross income (₱100,000 fee + ₱12,000 VAT)
  - Reports ₱12,000 output VAT and claims input VAT separately as applicable
  - Treats ₱10,000 as creditable income tax (using the certificate issued by the client).

J. Common Practical Issues

Incorrect Rates or Failure to Withhold
- Leads to assessments against the withholding agent; payee may lose tax credits.
Mismatched 2307 vs. BIR Records
- During audit, BIR checks whether amounts claimed as EWT credits match those reported by withholding agents.
- Inconsistencies can cause disallowances.
Grossing-Up
- In some arrangements, parties agree that the payee will receive a “net of tax” amount; the payer then grosses up the amount and computes withholding on the grossed-up base.
- The gross-up increases both the income and the EWT credit for the payee.
Classification of Payee
- EWT rates may depend on whether the payee is:
  - Individual vs corporation
  - Resident vs non-resident
  - Regular supplier vs casual supplier
- Proper classification at the outset is crucial.

IV. Summary and Practical Takeaways

VAT is a 12% tax on value added, imposed on taxable sales and importation, with a system of output and input VAT.
VAT registration is generally mandatory once gross sales/receipts exceed the statutory threshold, or when the nature of business makes VAT registration compulsory.
Transactions may be VATable at 12%, zero-rated (0%), or VAT-exempt, each with different implications for input VAT and reporting.
Proper invoicing, documentation, and quarterly VAT filing are fundamental to compliance and defending positions in a tax audit.
Expanded Withholding Tax (EWT) is a mechanism for advance collection of income tax. The payor withholds a percentage from certain payments and remits it to the BIR; the payee uses this as a tax credit.
EWT applies to a broad range of payments (professional fees, rentals, contractors, regular suppliers, commissions, etc.), with rates and coverage set by BIR regulations.
Withholding agents must withhold, remit on time, file the required returns, and issue BIR Form 2307; failure can trigger personal liability, penalties, and even criminal exposure.
VAT and EWT often co-exist in a single transaction but are conceptually and legally distinct: VAT is on consumption; EWT is on income. They are not interchangeable for payment or credit.

For actual transactions, taxpayers should always compare their facts against the current text of the NIRC and the latest BIR regulations and issuances, and seek professional advice when needed, especially where large amounts or complex transactions are involved.