How to Allocate Input VAT Between Zero-Rated and Regular Sales: The Ratable Apportionment Rule

When a VAT-registered business sells both zero-rated goods or services and regular (12%-taxable) goods or services in the same period, input tax it cannot directly trace to either type of sale is apportioned ratably — by multiplying the untraceable input tax by each sales category’s share of total sales. This is the ratable apportionment rule under Section 4.110-4 of Revenue Regulations (RR) No. 16-2005, issued under NIRC Section 110. The resulting split matters because only the portion attributed to zero-rated sales is eligible for refund or tax credit under NIRC Section 112.

What is the legal basis for allocating input VAT between sales types? #

Section 110 of the National Internal Revenue Code (NIRC) governs input tax credits, and its implementing rule for mixed transactions is Section 4.110-4 of RR No. 16-2005, titled “Apportionment of Input Tax on Mixed Transactions.” This provision applies to a VAT-registered person engaged in more than one type of sale — regular taxable sales, zero-rated sales, and/or VAT-exempt sales — within the same taxable period, and it sets the method for splitting input tax that a single purchase supports across more than one category of sale.

As summarized by tax law firm BDB Law in its discussion of the rule, Section 4.110-4 of RR No. 16-2005 works in two steps:

“All the input taxes that can be directly attributed to transactions subject to VAT may be recognized for input tax credit… [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.”

That two-step structure — direct attribution first, ratable apportionment only for what’s left over — is the core of the rule discussed throughout this guide. The regulation was later amended by RR No. 4-2007, which retained the apportionment mechanism while adding the separate rule barring input taxes directly attributable to VAT-taxable sales to government entities from being credited against output taxes on private-sector sales.

When must a business apportion input tax instead of directly attributing it? #

Apportionment only kicks in for the input tax a business cannot trace to one specific type of sale — not for the whole input tax pool. A business with mixed sales generally has three buckets of input tax each period:

• Directly attributable to zero-rated sales — for example, raw materials bought specifically for a production run destined for export. Credited/refundable in full against zero-rated sales.
• Directly attributable to regular (taxable) or exempt sales — for example, materials or services used only in the domestic, VATable side of the business, or only in an exempt line. Credited in full against that category (or, if exempt, not credited at all).
• Not directly attributable to any one category — shared costs like factory rent, utilities, general administrative services, or head-office overhead that support the whole operation. This is the only bucket that gets pro-rated under Section 4.110-4.

If a business sells only one type of output — all zero-rated, or all regular taxable — there is nothing to apportion; the entirety of its input tax is attributed to that single category. Apportionment is specifically a mixed-transactions problem.

What is the ratable apportionment formula? #

The formula pro-rates the undistributed input tax by each sales category’s share of total sales for the period, so a business with more zero-rated sales relative to its total sales gets a proportionally larger zero-rated allocation of the shared input tax.

Allocated input VAT (zero-rated) = Undistributed input VAT × (Zero-rated sales ÷ Total sales)

Allocated input VAT (regular) = Undistributed input VAT × (Regular taxable sales ÷ Total sales)

The same ratio, applied to VAT-exempt sales, produces the portion that is neither creditable nor refundable — see the exempt-sales section below.

Worked example: apportioning input VAT for a mixed-sales exporter #

A furniture manufacturer registered for VAT sells to two markets in the same quarter: finished pieces shipped to a US buyer, paid in US dollars and remitted under Bangko Sentral ng Pilipinas rules — a zero-rated export sale under NIRC Section 106(A)(2) — and finished pieces sold to local retailers, taxed at the regular 12% rate. Its quarterly figures:

Step 1 — Compute each category’s share of total sales. Zero-rated share = ₱6,000,000 ÷ ₱10,000,000 = 60% Regular share = ₱4,000,000 ÷ ₱10,000,000 = 40%

Step 2 — Apply the ratio to the undistributed input VAT. Allocated to zero-rated = ₱200,000 × 60% = ₱120,000 Allocated to regular = ₱200,000 × 40% = ₱80,000

Step 3 — Add the ratable allocation to what was already directly attributable.

The ₱230,000 attributed to regular sales is credited against the manufacturer’s output VAT on its local sales in the same BIR Form 2550Q. The ₱420,000 attributed to zero-rated sales does not offset any output VAT, because the export sale carries 0% output VAT — that ₱420,000 is instead the amount the manufacturer may apply to refund or a tax credit certificate under NIRC Section 112, provided it is substantiated and survives BIR review (see Input VAT Substantiation Requirements for the documentation standard each invoice behind that ₱420,000 has to meet).

Why does the zero-rated allocation matter more than the regular-sales allocation? #

The regular-sales allocation simply reduces output VAT payable in the same return, while the zero-rated allocation is the figure that determines the size of a refund or tax credit claim — a claim that then has to pass BIR review under a fixed statutory clock. Because a zero-rated sale carries 0% output VAT, the input tax attributed to it has no output VAT to net against; it can only be recovered as a cash refund or tax credit certificate (TCC) under NIRC Section 112(A), following the 90-day BIR decision period discussed in How the BIR VAT Refund 90-Day Rule Works.

Two additional points affect how much of the apportioned ₱420,000 actually gets refunded in practice:

• Substantiation, not just arithmetic, determines the final amount. The Supreme Court’s decision in Chevron Holdings, Inc. v. Commissioner of Internal Revenue, G.R. No. 215159, confirms that a taxpayer does not need “excess” input VAT over output VAT in the same quarter to claim a refund of the amount attributable to zero-rated sales — the Tax Code only requires that the claimed input tax has not already been applied against output tax. But every peso of the ₱420,000 still has to be backed by a valid VAT invoice; unsubstantiated portions are disallowed regardless of how correctly the ratio was computed.
• Zero-rating status has its own qualification requirements. The apportionment formula assumes the ₱6,000,000 is validly zero-rated in the first place — see VAT Zero-Rating for Exporters for the current documentation an export sale needs to keep that status.

What about input VAT attributable to VAT-exempt sales? #

A business with a three-way sales mix — zero-rated, regular taxable, and VAT-exempt — runs the same ratio across all three categories, but the exempt-sales result is treated completely differently from the other two. Under Section 4.110-4 of RR No. 16-2005, input VAT allocated to VAT-exempt sales is neither creditable against output VAT nor refundable. It is instead absorbed as part of the cost of the exempt goods or services, or claimed as a regular deductible business expense for income tax purposes — the opposite treatment from the zero-rated portion, which stays inside the VAT system as a refund/credit claim. A business that skips this distinction and lumps exempt-sales input VAT into its regular creditable input tax overstates its VAT credit and risks a deficiency assessment on audit.

Frequently asked questions #

What is ratable apportionment of input VAT? #

Ratable apportionment is the method a VAT-registered business with mixed sales (zero-rated, regular taxable, and/or VAT-exempt) uses to allocate input tax that cannot be directly traced to any one type of sale. Under Section 4.110-4 of Revenue Regulations No. 16-2005, the shared input tax is pro-rated based on the ratio of each sales category’s value to total sales for the period.

What is the formula for allocating input VAT to zero-rated sales? #

The ratable portion attributable to zero-rated sales equals the input tax that cannot be directly attributed to any sales category, multiplied by zero-rated sales divided by total sales for the period. The full formula is: Allocated input VAT = Undistributed input tax x (Zero-rated sales / Total sales).

Do I need to apportion input VAT if I can trace every purchase to a specific sale? #

No. Apportionment under Section 4.110-4 of RR No. 16-2005 only applies to input tax that cannot be directly and entirely attributed to a specific type of sale. Purchases you can trace directly to zero-rated, regular, or exempt sales are credited or claimed in full against that category without going through the ratio calculation.

Can input VAT attributable to VAT-exempt sales be credited against output VAT? #

No. Input VAT allocated to VAT-exempt sales under the ratable apportionment rule is not creditable against output VAT at all. It is not refundable either. Under Section 4.110-4 of RR No. 16-2005, that portion is instead treated as part of the cost of the goods or services sold, or as a deductible business expense.

Does the input VAT allocated to zero-rated sales get refunded automatically? #

No. The input VAT attributable to zero-rated sales under the ratable apportionment computation is only the starting point for a claim. It must still be substantiated with valid VAT invoices under NIRC Section 110 and pass the BIR’s refund review under NIRC Section 112(C) before it is actually granted as a refund or tax credit certificate.

How often does a mixed-sales business need to run this allocation? #

Every taxable period in which the business reports more than one type of sale and has shared input tax it cannot directly attribute. In practice this means recomputing the ratio and the allocated amounts each quarter when filing BIR Form 2550Q, since the sales mix and the undistributed input tax pool both change from quarter to quarter.

Summary #

A VAT-registered business with both zero-rated and regular sales cannot lump all of its input tax into one creditable pool — under Section 4.110-4 of RR No. 16-2005, only input tax directly traceable to one sales category is credited or refunded in full, while shared, untraceable input tax is apportioned by each category’s share of total sales. In the worked example, a ₱200,000 shared input VAT pool split 60/40 by sales value added ₱120,000 to the ₱300,000 already directly traced to zero-rated sales — a total ₱420,000 refund-eligible under NIRC Section 112 — and ₱80,000 to the ₱150,000 already traced to regular sales, for a ₱230,000 credit against output VAT. Get the ratio right every quarter, keep the underlying invoices substantiation-ready, and treat any exempt-sales share as a cost rather than a credit. For the foundational input-vs-output VAT mechanics this allocation builds on, see Input VAT vs. Output VAT: How BIR VAT Credits Work; for what happens once the zero-rated-attributable amount is ready to claim, see How the BIR VAT Refund 90-Day Rule Works.