g. Input and Output VAT

Tax Credit Method

Under such method that relies on invoices, an entity can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports.

If at the end of a taxable quarter the output taxes charged by a seller are equal to the input taxes passed on by the suppliers, no payment is required. However, when the output taxes exceed the input taxes, the excess thereof has to be paid.

If, on the other hand, the input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or quarters.

Excess input VAT attributable to zero-rated or effectively zero-rated transactions may, if the taxpayer elects to claim it and satisfies the statutory requirements, be refunded or credited against other internal revenue taxes; otherwise, it is carried forward. (NIRC, Secs. 110(B) and 112(A); CIR v. Technology, G.R. No. 153866, 11 February 2005)¹

Definition

The term "input tax" means the value-added tax due from or paid by a VAT-registered person in the course of his trade or business on importation of goods or local purchase of goods or services, including lease or use of property, from a VAT-registered person. It shall also include the transitional input tax determined in accordance with Section 111 of the NIRC.

The term "output tax" means the value-added tax due on the sale or lease of taxable goods or properties or services by any person registered or required to register under Section 236 of the NIRC. CIR v. Benguet Corp., (G.R. No. 145559, 2006)

Input VAT or input tax represents the actual payments, costs, and expenses incurred by a VAT-registered taxpayer in connection with his purchase of goods and services. Thus, input tax means the value-added tax due from or paid by a VAT-registered person/entity in the course of his/its trade or business on the importation of goods or local purchases of goods or services from a VAT-registered person.

When that person or entity sells his/its products or services, the VAT-registered taxpayer generally becomes liable for 12% of the selling price as output VAT or output tax. Hence, output tax is the value added tax on the sale of taxable goods or services by any person registered or required to register under the Tax Code.

Sources of input tax – The following are sources of input VAT:

• Purchase or importation of goods:
• For sale;
• For conversion into or intended to form part of a finished product for sale including packaging materials;
• For use as supplies in the course of business;
• For use as materials supplied in the sale of service; or
• For use in trade or business for which deduction for depreciation or amortization is allowed under this Code.
• Purchase of real properties for which a VAT has actually been paid
• Purchase of services in which VAT has actually been paid
• Transactions deemed sale
• Presumptive input tax

The following shall be entitled to a presumptive input tax creditable against the output tax equivalent to one and one-half percent (1½%) of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production of firms engaged in either:

• processing of sardines, mackerel and milk; or
• manufacturing refined sugar and cooking oil.
• Transitional input: An input tax on the beginning inventory of goods, materials and supplies equivalent to eight percent (8%) of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax shall be allowed for:
• A person who becomes liable to VAT; or
• Any person who elects to be a VAT-registered person.

The transitional input VAT shall be subject to the filing of an inventory according to rules and regulations prescribed by the Secretary of finance, upon recommendation of the Commissioner.

Fort Bonifacio Development Corporation v. CIR, (G.R. No. 173425, 2012); Fort Bonifacio Development Corporation v. CIR, (G.R. Nos. 175807, 180035, 18109, 2014)

There is nothing in the NIRC which indicates that prior payment of taxes is necessary for the availment of the transitional input tax credit. All that is required is for the taxpayer to file a beginning inventory with the BIR.

Persons who can avail input of tax credits: The input tax credit on importation of goods or local purchases of goods, properties or services by a VAT-registered person shall be creditable:

• to the importer upon payment of VAT prior to the release of goods from customs duty;
• to the purchaser of the domestic goods or properties upon consummation of the sale; or
• to the purchaser of domestic services or the lessee or licensee upon consummation of the sale, subject to the required VAT invoice and other substantiation requirements. (NIRC, Secs. 110 and 113, as amended by RA 11976)

Updated: However, for input taxes from domestic purchases to be creditable against output tax, they must be supported by VAT-compliant invoices; previously issued official receipts are recognized only to the extent permitted by applicable transitional rules. A summary list of purchases alone is insufficient, Level Up, Inc. v. CIR, G.R. No. 272354, 29 September 2025.

Determination of output/input tax; VAT payable; excess input tax credits

• Determination of output tax In a sale of goods or properties, the output tax is computed by multiplying the gross selling price by the regular rate of VAT. For sales of services, the output tax is computed on gross sales, subject to applicable statutory adjustments (NIRC, Sec. 108, as amended by RA 11976).
• Determination of creditable input tax – see previous discussion.
• Allocation of input tax on mixed transactions – if any input tax cannot be directly attributed to either a VAT taxable or VAT-exempt transaction, the input tax shall be pro-rated to the VAT taxable and VAT-exempt transactions and only the ratable portion pertaining to transactions subject to VAT may be recognized for input tax credit.

Illustration: “A” Corporation has the following sales during the month:

The following input taxes were passed on by its VAT-registered suppliers:

The creditable input tax for the month shall be computed as follows:

The amount of P10,000.00 allocated to 12% and 0% VAT sales shall be considered in the computation of total creditable input tax for the month. Hence, total creditable input tax is P18,000.00.

Updated: To be creditable, input tax on domestic purchases must be substantiated by a VAT-compliant invoice, subject to applicable transitional rules for official receipts, as a summary list of purchases alone is insufficient (NIRC, Sec. 113, as amended by RA 11976; Level Up, Inc. v. CIR, G.R. No. 272354, 29 September 2025).

Determination of the output tax and VAT payable and computation of VAT payable or excess tax credits

– see previous discussion. (Rev. Regs. 16-05)²

Substantiation of input tax credits

Input taxes for the importation of goods or the domestic purchase of goods, properties or services is made in the course of trade or business, whether such input taxes shall be credited against zero-rated sale, non-zero-rated sales, or subjected to the 5% Final Withholding VAT, must be substantiated and supported by the following documents and must be reported in the information returns required to be submitted to the Bureau:

• Importation of goods – import entry or other equivalent document showing actual payment of VAT on the imported goods.
• Domestic purchase of goods and properties – invoice showing the information required under Secs. 113 and 237 of the Tax Code³
• Purchase of real property – public instrument i.e., deed of absolute sale, deed of conditional sale, contract/agreement to sell, etc., together with VAT invoice issued by the seller
• Purchase of services – VAT invoice showing the information required under Secs. 113 and 237 of the Tax Code, as amended by RA 11976, subject to applicable transitional rules for previously issued official receipts.

A cash register machine tape issued to a registered buyer shall constitute valid proof of substantiation of tax credit only if it shows the information required under Secs. 113 and 237 of the Tax Code.

• Transitional input tax – to be supported by an inventory of goods as shown in a detailed list to be submitted to the BIR.
• Input tax on “deemed sale” transactions –invoice required under Sec. 4.113-2 of these Regulations⁴.
• Input tax from payments made to non-residents (such as for services, rentals and royalties) - to be supported by a copy of the Monthly Remittance Return of Value Added Tax Withheld (BIR Form 1600) filed by the resident payor in behalf of the non-resident evidencing remittance of VAT due which was withheld by the payor.
• Advance VAT on sugar - to be supported by the Payment Order showing payment of the advance VAT.

Note: The input tax credit above enumerated shall be creditable as follows:

• Importer of goods – upon payment of VAT prior to the release of goods from customs custody;
• Purchaser of domestic goods or properties – upon consummation of sale; and
• Purchaser of domestic services or lessee or licensee – upon consummation of the sale, subject to a VAT invoice and other substantiation requirements under Secs. 110 and 113 of the Tax Code, as amended by RA 11976. (Rev. Regs. 16-05, as amended)⁵

A taxpayer cannot be permitted to substitute vital and material documents such as VAT official receipts and VAT returns with secondary evidence like financial statements. (Luzon Hydro Corporation v. CIR, G.R. No. 188260, 13 November 2013)⁶