How to compute 12% VAT from a VAT-inclusive price

In the Philippines, most shops show prices with VAT already included. That’s simpler for customers, but it means you have to take the VAT back out to know your real sales and margins. Here’s how, and the mistake that gets it wrong.

The formula

For a price that already includes 12% VAT:

• Price without VAT = price ÷ 1.12
• VAT = price × 12 ÷ 112 (the same as price − price without VAT)

The common mistake: 12% of the price

12% of ₱140 is ₱16.80, but the VAT inside a ₱140 price is only ₱15.00. Taking 12% of the VAT-inclusive price treats the VAT as if it were added on top of ₱140. Use 12 ÷ 112 instead.

Going the other way is simple: to add VAT to a price that doesn’t include it, multiply by 1.12. ₱100 becomes ₱112.

Round once per receipt, not per item

Three items at ₱15 each: taking the VAT out of each one gives ₱1.61 × 3 = ₱4.83. Taking it out of the ₱45 total gives ₱4.82. The one-centavo difference is rounding. Compute VAT on the receipt total and round once, so the numbers on the receipt always add up.

Why it matters for your margins

The VAT you collect isn’t yours; it’s paid to the BIR. If you compute margins on the VAT-inclusive price, every item looks more profitable than it is. Always compute cost and margin against the price without VAT. Our pricing guide shows how to build a VAT-inclusive price from a target margin.

Who charges VAT?

Only VAT-registered businesses charge VAT. Under the current rules, a business must register for VAT once its gross sales go over ₱3,000,000 in any 12-month period, and smaller businesses can choose to register. Businesses that aren’t VAT-registered generally pay percentage tax instead and shouldn’t show VAT on their receipts. Some goods, and sales to senior citizens and persons with disabilities, follow special VAT and discount rules.