Introduction to Business

Taxes
September 4, 2020
 Business Taxes
● As privilege or excise taxes: Imposed on the privilege of engaging in
business or pursuing an occupation, calling, and profession (De Leon, H.)

● Imposed upon onerous transfers (i.e. sale, deemed sale, exchange,

barter) in the ordinary course of business ("regularity rule").

● The existence of profit is not a precondition to the imposition of business

taxes.
Rules Governing the Imposition of Business Taxes
The following rules or doctrines underpin the imposition
of business taxes in the Philippines:

1. Regularity rule; and

2. Cross-border doctrine or "Destination principle."
 Regularity Rule
"The phrase 'in the course of trade or business' means the
regular conduct or pursuit of a commercial or an economic
activity, including transactions incidental thereto, by any person
regardless of whether or not the person engaged therein is a
nonstock, nonprofit private organization (irrespective of the
disposition of its net income and whether or not it sells exclusively
to members or their guests), or government entity."

(Sec. 105, par. 3)

Illustration: Regularity rule
Case 1: Abner is a CPA providing tax services for a fee to his clients on a
freelance basis.

Question: Are the receipts of Abner from the performance of his services
subject to business taxes?

Answer: Yes. Under the Tax Code, the provision of services is also a
commercial activity within the coverage of business taxes.
Illustrations: Incidental Transactions
Case 1: Patrick is the owner of Disobey, a well-known apparel brand in the
Philippines. During the taxable year, Patrick sold the following goods:

1. Shirts manufactured and sold under the Disobey branding;

2. Scrap cloths from the shirt manufacturing process;
3. A computer previously used in Disobey's accounting office; and
4. His old personal laptop which he subsequently replaced
with the latest Alienware gaming laptop.

Question: Which of the foregoing is subject to business tax?

Illustrations: Incidental Transactions
Answer:

● Item 1, being a regular sale (i.e. in the ordinary course of business) is

subject to business tax.
● Although item 2 involves goods which are not part of the ordinary course
of Disobey's business, the same are subject to business tax since their
sale are transactions incidental to the ordinary course of business.
● Item 3 is also subject for the same reason as item 2.
● Item 4 involves Patrick's personal property (i.e. not business property).
Therefore, the sale of the same shall not be subject to business tax
Illustrations: Incidental Transactions
Case 2: Mr. Ching owns and leases several apartment units. In addition to the
his receipts from rent payments, he also imposes penalties for late rent
payment.

Question: Which of the foregoing amounts fall within the definition of

receipts within the scope of business taxes?
 Exceptions to the regularity rule
Impositions of business tax despite "irregularity":

● Importation of goods (Sec. 107), except those specifically exempted

under Sec. 109(A) to Sec (D) of the NIRC, as amended by the TRAIN
Law.
● Services rendered in the Philippines by nonresidents (Sec. 105, last
par.).
● Other Percentage Taxes ("OPT") on Horse Race Winnings (Sec. 126).
● OPT on sale of shares through Local Stock Exchange or through Initial
Public Offering ("IPO") (Sec. 127).
 Exceptions to the regularity rule
● Exemptions from business tax despite "regularity":
1. Exempt transactions (Sec. 109, except paragraphs E and BB).
2. Privilege stores ("Tiangge")
3. temporary stalls set up for selling a variety of goods or services
during special events for not more than 15 days in a year (RR No.
16-2013, RMC No. 07-2014)
4. Marginal Income Earners ("MIE")
5. unemployed individuals whose business does not realize gross
sales or receipts exceeding P100,000 in any 12-month period (RR
No. 07-2012)
6. Goods or services destined for consumption outside Philippine
Territory ("Cross Border Principle")
 Cross-Border or Destination Principle
1. The destination principle is an international taxation doctrine
providing that business taxes are to be paid in the country where
the goods or services are consumed.

a. Goods are deemed consumed in the place where the buyer is

resident (i.e. where the goods are exported to).

b. Services are deemed consumed in the place where the services

are rendered.
 Application of the Cross- Border Principle
● Sales of goods within the Philippines are generally subject to Philippine
business taxes unless expressly exempted by the Tax Code or other laws.

● Export sales of goods are outside the scope of Philippine business taxes.
However, as an incentive for export-oriented enterprises, the same may be
subject to VAT at zero percent (0%) to VAT-registered exporters.

● Importation of goods are generally subject to Philippine business taxes

unless expressly exempted by the Tax Code or other laws.

○
 Application of the Cross- Border Principle
● Services performed within the Philippines are generally subject to Philippine
business taxes unless expressly exempted by the Tax Code or other laws.

● Services performed outside the Philippines are outside the scope of

Philippine business taxes.

○
 Business Taxes in the Philippines
The following business taxes are imposed as national internal revenue taxes
under Section 21 of the Tax Code, as amended:

1. Value-Added Tax (Title IV);

2. Other Percentage Taxes (Title V); and

3. Excise Taxes on Certain Goods and Services (Title VI).

○
 Value-Added Tax
● Value Added Tax ("VAT") provisions are found in Title IV of the Tax Code.

● VAT, in general, is imposed on every sale of goods and/or services, subject to

the regularity rule.

● VAT is a tax on the value-added (i.e. markup) at each level of production or

distribution. VAT is an ad valorem tax.

● VAT allows for fiscal adequacy.

○
 Value-Added Tax
● VAT is an indirect tax: the amount of VAT may be passed on to the buyer,
transferee or lessee of goods, properties, or services.

● VAT is actually a tax on consumption.

● The collection of VAT from the seller is necessitated by

administrative feasibility.

○
 Other Percentage Taxes
● OPT provisions are found in Title V of the Tax Code.
● OPT are sales taxes of various rates imposed upon the gross sales or
receipts of non-VAT taxpayers.
● OPT are ad valorem taxes.
● OPTare allowed as deductions from gross income (i.e. business
expenses).
● The imposition of VAT and OPT are mutually exclusive (Sec. 109, E).
However, a taxpayer may be subject to both VAT and OPT depending on
their sale transactions.
 Other Percentage Taxes
● For non-VAT registered sellers who are exempt from VAT under Sec.
109(BB) of the Tax Code, Section 116 of the same imposes OPT at the
rate of three precent (3%) of the gross sales or receipts.

● Some OPT are imposed at specific rates for specific transactions as

provided in Sections 117 to 127 of the Tax Code.
 Excise Taxes on Certain Goods and Services
● Excise taxes are allowed as deductions from gross income (i.e.
business expenses).

● Articles subject to excise taxes include alcohol products, sweetened

beverages, cigars and cigarettes, automobiles and mining resources.
-end-
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