Introduction

In the Philippine tax system, Value-Added Tax (VAT) serves as a crucial indirect tax imposed on the sale of goods and services, as well as on the importation of goods. Governed primarily by Title IV of the National Internal Revenue Code (NIRC) of 1997, as amended by subsequent laws such as Republic Act (RA) No. 10963 (TRAIN Law) and RA No. 11534 (CREATE Law), VAT is levied at a rate of 12% on the gross selling price or gross receipts derived from taxable transactions. Businesses are classified as either VAT-registered or non-VAT registered based on their annual gross sales or receipts, with significant implications for invoicing practices, tax liabilities, and compliance obligations.

Non-VAT registered businesses, often small-scale enterprises or those below the VAT threshold, are exempt from charging and remitting VAT on their sales. However, they frequently interact with VAT-registered suppliers and must navigate the handling of VAT invoices received in the course of their operations. This article provides a comprehensive examination of the legal framework surrounding VAT invoices for non-VAT registered businesses in the Philippines, including definitions, invoicing requirements, tax implications, compliance procedures, and potential penalties. It draws on relevant provisions of the NIRC, Bureau of Internal Revenue (BIR) regulations, and related jurisprudence to offer a thorough understanding of the topic.

Defining Non-VAT Registered Businesses

Under Section 109 of the NIRC, as amended, businesses are considered non-VAT registered if their annual gross sales or receipts do not exceed the VAT threshold, which is currently set at PHP 3,000,000. This threshold was increased from PHP 1,919,500 under the TRAIN Law to promote ease of doing business for micro, small, and medium enterprises (MSMEs). Businesses falling below this threshold are generally exempt from VAT and are instead subject to Percentage Tax under Section 116 of the NIRC, at a rate of 3% on gross sales or receipts, unless they opt for optional VAT registration.

Non-VAT registered entities include sole proprietorships, partnerships, corporations, and other forms of business organizations engaged in the sale of goods or services, provided they meet the exemption criteria. Certain transactions are inherently VAT-exempt regardless of registration status, such as sales of agricultural products in their original state, educational services by non-profit institutions, and medical services by professionals. However, for non-VAT registered businesses, the key distinction lies in their inability to issue VAT invoices and claim input tax credits.

It is important to note that businesses may voluntarily register for VAT even if below the threshold, as per Section 236(G) of the NIRC, to avail of input tax credits and enhance credibility with VAT-registered clients. Once registered, however, they must comply with VAT invoicing and remittance rules, and deregistration is subject to BIR approval.

Invoicing Requirements for Non-VAT Registered Businesses

Non-VAT registered businesses are prohibited from issuing VAT invoices. Instead, they must issue Official Receipts (ORs) or Non-VAT Invoices for their sales of goods or services, as mandated by Revenue Regulations (RR) No. 16-2005, as amended by RR No. 7-2012 and subsequent issuances. These documents serve as evidence of the transaction and must contain essential details to ensure compliance and facilitate tax audits.

Key Elements of Non-VAT Invoices or Official Receipts

Pursuant to BIR regulations, non-VAT invoices or ORs must include the following information:

The word "Official Receipt" or "Invoice" prominently displayed.
Business name, style, and address of the seller.
Taxpayer Identification Number (TIN) of the seller.
Serial number of the receipt or invoice.
Date of transaction.
Quantity, unit cost, and description of goods or services.
Total amount of the sale, excluding VAT.
A statement indicating that the seller is "NON-VAT REGISTERED" or "VAT-EXEMPT."
For sales exceeding PHP 500, the name, address, and TIN of the buyer.

These documents must be printed with BIR authority, obtained through an Application for Authority to Print Receipts and Invoices (ATPRI) via BIR Form No. 1906. Failure to secure such authority can result in penalties. Non-VAT businesses are also required to maintain books of accounts, including sales journals and purchase journals, to record all transactions accurately.

In cases where non-VAT businesses engage in mixed transactions (e.g., some exempt and some potentially taxable if registered), they must segregate invoicing accordingly. However, since they are non-VAT, all sales are treated as exempt or subject to percentage tax, and no VAT is added to the invoice amount.

Handling Received VAT Invoices from Suppliers

Non-VAT registered businesses often purchase goods or services from VAT-registered suppliers, who are required to issue VAT invoices reflecting the 12% VAT component. Under Section 113 of the NIRC, VAT invoices must detail the VAT amount separately from the gross selling price to allow for proper tax crediting by VAT-registered buyers. For non-VAT businesses, however, these received VAT invoices have limited utility beyond serving as proof of purchase for expense deduction purposes in income tax computations.

Accounting for Input VAT

A critical aspect is that non-VAT registered businesses cannot claim input tax credits against output VAT, as they have no output VAT liability. The input VAT paid to suppliers becomes part of the cost of goods or services acquired, effectively increasing the expense base. This is explicitly stated in Section 110 of the NIRC, which limits input tax crediting to VAT-registered taxpayers. As a result, non-VAT businesses absorb the VAT as a business cost, which can impact pricing strategies and profitability.

For income tax purposes, the gross amount paid (inclusive of VAT) may be deducted as an ordinary and necessary business expense under Section 34 of the NIRC, provided it is substantiated by the VAT invoice. Businesses must retain these invoices for at least five years, as per Section 235 of the NIRC, to support deductions during BIR audits.

Special Considerations in Procurement

When procuring from VAT-registered entities, non-VAT businesses should verify the validity of the VAT invoice to avoid issues with expense claims. Invalid invoices, such as those lacking required details or issued without BIR authority, may not qualify as substantiation. Additionally, in government transactions, non-VAT businesses must comply with withholding tax rules under RR No. 2-98, where they may be required to withhold and remit taxes on payments to suppliers.

In cross-border transactions, non-VAT businesses importing goods are subject to VAT on importation under Section 107 of the NIRC, payable to the Bureau of Customs (BOC). This VAT is computed on the landed cost and cannot be credited, becoming part of the import cost.

Tax Implications and Compliance Obligations

Percentage Tax vs. VAT

Non-VAT businesses remit 3% Percentage Tax quarterly via BIR Form No. 2551Q, based on gross sales or receipts. This tax replaces VAT and is simpler to administer, aligning with the policy of easing compliance for smaller entities. However, if gross sales exceed the PHP 3,000,000 threshold during the year, the business must register for VAT within the month following the exceedance, as per Section 236 of the NIRC, and begin issuing VAT invoices.

Record-Keeping and Reporting

Compliance involves meticulous record-keeping. Non-VAT businesses must file annual income tax returns (BIR Form No. 1701 or 1702) and attach summaries of sales and purchases. They are also subject to the Electronic Invoicing/Receipting System (EIS) under RR No. 9-2021, which mandates electronic submission of sales data for monitoring purposes, even for non-VAT entities.

Audits and Assessments

The BIR may conduct audits to verify compliance. Discrepancies in handling VAT invoices, such as claiming unauthorized deductions or failing to issue proper receipts, can lead to deficiency assessments. Jurisprudence, such as in Commissioner of Internal Revenue v. Sony Philippines, Inc. (G.R. No. 178697, November 17, 2010), emphasizes the need for strict substantiation of expenses, including through valid invoices.

Penalties for Non-Compliance

Violations related to invoicing and VAT handling carry significant penalties under Sections 250 to 264 of the NIRC:

Failure to issue receipts or invoices: A fine of not less than PHP 1,000 but not more than PHP 50,000, plus possible imprisonment.
Issuing VAT invoices without authority (for non-VAT businesses): Treated as a willful violation, with fines up to PHP 100,000 and imprisonment.
Failure to file returns or pay taxes: 25% surcharge, plus interest at 12% per annum (reduced from 20% under TRAIN Law).
Criminal penalties for tax evasion, if willful, can include fines up to PHP 100,000 and imprisonment from two to six years.

Administrative penalties may also apply, such as suspension of business operations under RR No. 7-2012.

Conclusion

Handling VAT invoices for non-VAT registered businesses in the Philippines requires a clear understanding of the distinctions between VAT and non-VAT regimes, adherence to invoicing protocols, and recognition of the limitations on tax credits. By complying with BIR regulations, these businesses can minimize risks, optimize costs, and contribute to the integrity of the national tax system. Staying informed of legislative changes, such as potential adjustments to the VAT threshold or invoicing requirements, is essential for sustained compliance.