CHAPTER 1: INTRODUCTION TO CONSUMPTION TAX

Consumption – refers to acquisition and utilization of goods and services.

- Levied without regard to the purpose of the purchaser
Rationale of Consumption Tax
1. Savings Formation
- Limits the level of consumption, less consumption = more savings
2. Rationalization of the Benefit Received Theory
- more consumption = more tax
3. Wealth redistribution to society
- more income = more consumption, less income = less consumption
A caveat to consumption – not levied upon basic necessities
Income tax vs Consumption Tax
Income Tax Consumption Tax
Nature Tax upon receipt of income Tax upon usage of income
Scope/coverage A tax to the capable A tax to all
Theoretical basis Ability to pay theory Benefit received theory

Types of Consumption
Seller Domestic Consumption Foreign Consumption
(Buyer = resident) (Buyer = Non-resident)
Resident Domestic Sale Exportation
Non-resident Importation Abroad
Taxability Taxable Exempt/Effectively non-taxable

BASIS : DESTINATION PRINCIPLE

- only those to be consumed in the Philippines will be taxable
Domestic Sales – buyer and sellers are both residents. a.k.a. Business Tax (VAT or % tax)
Importation – only the buyer is the resident. Subject to VAT on importation

BUSINESS TAX VS VAT ON IMPORTATION

VAT on Importation Business Tax
Scope of tax Imports from business or non- Purchases from businesses only
business
Type of consumption tax Pure form Relative form
Statutory taxpayer Buyer Seller
Economic taxpayer (burden) Buyer Buyer
Nature of imposition Direct Indirect
Basis of tax Total purchase cost Sales or receipts

Types of Consumption Taxes

1. Percentage Tax – tax usually imposed on services (rating frkm 0.60% to 30%)
2. Value Added Tax (VAT) – consumption that are neither exempted or subject to % tax
3. Excise Tax – an ad valorem or specific tax, imposed in addition to VAT or % tax

STRUCTURE OF VAT ON IMPORTATION

VAT on Importatiom
Import of Service Import of Goods
Exempt Exempt Exempt
% tax Percentage tax -
VAT Final withholding VAT (BIR) VAT on importation (BOC)
STRUCTURE OF THE BUSINESS TAX
Business Tax

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 Sales of Service Sales of Goods
Exempt Exempt Exempt
% tax Those specifically subject to % tax -
VAT Vatable Receipts Vatable Sales

COMPUTATION OF VAT COMPUTATION OF VAT DUE

Inclusive = 112% Output VAT
Exclusive = 100% (Input VAT)
VAT = 12% = VAT due

Excise Tax – imposed as additional to VAT or % tax

- Levied at the point of production or importation
- Imposed before the goods are sold by domestic producers or upon yhe importation of
importers
a. Sin products such as alcohol and cigarettes
b. Non-essential commodities such as automobiles and jewelries
c. Non-essential services such as cosmetic surgery
d. Products which are environmentally degrading in their production or consumption such as
petroleum and minerals

CHAPTER 2: VALUE ADDED TAX ON IMPRTATION

Importation – purchase of goods and services by residents from non-residents
VAT on Importation Final withholding VAT
Object consumption Goods Services
Imposed upon Importers/Buyers Foreign service providers
Statutory taxpayer Importers/Buyers Resident buyer
Nature Direct Indirect
Tax basis Landed cost Contract price
Collecting agency BOC BIR
Timing of payment Before withdrawal of goods After the month of payment

Importation of Exempt Goods

- Certain goods considered basic necessities
a. Agricultural and marine food in original state or those which undergone simple processing
Examples: Fruits, vegetables, tea, ginseng, rice, corn, coffee beans, other edible farm products, marine foods,
poultry and livestock, milk, eggs, and meat for human consumption
Simple processing: boiling, broiling, husking, roasting, stripping, grinding, freezing, smoking, drying, salting,
packaging
Processed (VATABLE): undergone changes in chemical composition or complex processing or treatment
b. Farm or fishery inputs: seeds, seedlings, breeding stocks, genetic material, fertilizers and feeds
Intended for maintenance (VATABLE): pesticides, herbicides, animal medicines, fishing equipment, fishing
boats, tractors, plows, driers, threshers, harvesters
Rules on VAT taxation of poultry and feeds
Livestock Poultry Pets
Importation of ✖️ ✖️ ✔️
Importation of feeds for ✖️ ✖️ ✔️
Importation of feed ✖️ ✖️ ✔️
ingredients for
c. Books, newspapers, magazines, review, or bulletins
Based upon the necessity of education and information

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 Conditions for exemption of newspapers, magazine review or bulletin
1. Appear at regular intervals with fixed price and subscription
2. Sale must not be devoted principally to paid advertisements
d. Passenger or cargo vessels and aircrafts
Lapsed under RA 9295 But reinstated by RA 10378 and codified by TRAIN law
Qualifications for Exemption (retirement program of MARINA)
1. Passenger or cargo vessel – 15 years
2. Tankers – 10 years
3. High speed passenger craft – 5 years
Importation by VAT exempt persons
Sale of goods by VAT-exempt to non-exempt person = TAXABLE upon non-exempt
VAT-exempt Persons under NIRC:
1. International shipping or air transport operators
Limited only to the importation of fuel, goods, and supplies.
2. Agricultural cooperatives
Limited only to the importation of direct farm inputs, machineries and equipment, including their spare
parts
Conditions for exemption
1. Coop must be registered and in good standing with the Cooperative Development Authority
2. Goods subject to limitations
3. Ecozone locators
Designated places of economic activity for the production of goods and services for the export market.
Economic zones are considere foreign countries and deemed outside Customs territory. Exemption
covers any goods because it’s considered foreign consumption.
Technical importation – purchase of residents from ecozones is considered importation and sales to ecozones are
considered exportation.
Quasi-importation
1. Import of personal and household effects
2. Professional instruments and implements, wearing apparel, domestic animals, and personal household
effects
Conditions for exemption
1. Intending to settle or resettle in Philippines
2. For own use and not for sale, barter or exchange
3. The goods are exempt from Custom duties
Importation of professional instruments and implements, wearing apparel, domestic animal and personal
household effects
Conditions for exemption
1. Belongs to person who come to settle in PH
2. Accompany the person upon arrival or within 90 days before or after arrival
3. Evidence that the change of residence is bona fide
4. Importation is not a vehicle, machinery, or other equipment used in the manufacture or merchandise of
any kind in commercial quantity
Tax basis of the VAT on importation
- 12% of the total landed cost – all costs of importation incurred prior to the withdrawal of
the goods from the warehouse of the BOC
Composition of landed cost
A. Dutiable value (Cost of the goods, freight, insurance, other charges to bring goods herein)
B. Other in-land cost
a. Custom duty (dutiable value x exchange rate x rate of duty)
b. Excise tax, if any
c. Other in-land costs, such as:
i. Bank charge
ii. Brokerage fee

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 iii. Arrastre charge
iv. Wharfage due
v. Documentary stamp tax
vi. Import processing fees
Computation:
1. Compute the dutiable value
2. Get the custom duties
3. Sum up dutiable value, custom duties, excise tax, and other in-land cost
4. Multiply by 12% to get the VAT on Importation

Import of Services – purchase of services from non-residents

1. VAT-exempt
2. Subject to specific % tax
3. Subject to Final withholding VAT (general rule)
Nature of the Final Withholding VAT
In principle, domestic consumption of services from abroad should be subject to VAT regardless of the place where
the service is rendered.
FWVAT = Business tax
Presumption: non-resident sellers are engaged in business
Resident buyer is obligated to “withhold” the VAT and remit the same to the government
NOTE: withholding tax obligation exists only for individuals engaged in business
VAT-exempt Import of Services
1. When service is rendered abroad
2. When individual purchaser is not engaged in business
3. Purchased by VAT-exempt person
Import of services subject to % tax
- DIRECT ACQUISITION KF INSURANCE COVER FROM ABROAD. (5% percentage tax) The policyholder shall
pay the same to the BIR
Payment of the withholding VAT
a. Using BIR form 1600
b. Remitted monthly
c. 10th day of the following month after withholding was made, except for taxes withheld for December
which will be filed on or before January 25
Treatment of the VAT on importation and the withholding VAT
1. If the purchaser is VAT-registered – Input VAT = VAT in Importation or final withholding VAT
2. If the purchaser is non-VAT business, VAT on importation or final withholding VAT shall be part of the cost
of purchase and shall be treated as asset or expense
3. If the purchaser is not engaged in business, the VAT on importation is merely added to the costs of the
goods imported.

CHAPTER 3: INTRODUCTION TO BUSINESS TAXATION

NATURE OF BUSINESS TAX
1. Relative consumption tax – imposed only upon businesses
2. Indirect tax – Statutory: Seller Economic: Buyer
3. Privilege tax – no income = no consumption
4. National tax – imposed by the national government

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 COMPARISON OF BUSINESS TAXES
Point of differences VAT % Tax Excise Tax
Timing of imposition Sale Sale Production/importation
Nature Primary tax Primary tax Additional tax
Subject businesses Any business, generally Any business, generally Only producers or
importers of excisable
products or services
Taxpayers Business only Business only Business or non-business
Usual taxpayer Big businesses Small businesses Big or small
Accounting treatment Liability Expense Asset or liability
PROCEDURES OF BUSINESS TAXATION
1. Evaluate if the sales activity qualifies as a business.
a. If not, the activity is exempt from business tax.
b. If yes, the business must register for business tax. Proceed to the succeeding procedures.
2. Identify the taxable person.
a. If individual - include all proprietorship businesses including branches of the individual taxpayer
b. If juridical - include all branches of the corporate taxpayer
3. Determine the activity type:
a. If sales of goods - determine the sales
b. If sales of services - determine the receipts
4. Classify the sales or receipts whether they are:
a. Exempt sales or receipts - pay no business tax
b. Sales or receipts subject to specific percentage tax - pay specific percentage tax
c. Vatable sales or receipts
5. Determine taxpayer registration type.
a. If taxpayer is VAT registered, pay VAT on vatable sales or receipts.
b. If taxpayer is non-VAT registered, pay the 3% general percentage tax then determine the
magnitude of 12-month vatable sales at the end of every month:
i. If it exceeds P3,000,000 - the person shall register as VAT taxpayer; pay VAT
prospectively effective on the succeeding monthly vatable sales or receipts.
ii. If it does not exceed P3,000,000 - the person shall continue paying the 3% general
percentage tax on the vatable sales or receipts.
6. Determine if the goods or service offered is excisable.
a. If yes, pay the applicable excise tax in addition to VAT and or percentage tax.
b. If not, pay only VAT and or percentage tax.
Business – refers to a habitual engagement in a commercial activity involving the sale of goods or services for a
profit.
Habitual engagement – regularity in transactions
Privilege stores – “tiangge” engage in business activity for a cumulative period of not more than 15 days.
Exception to regularity rule – presumption that sale of service by non-resident persons are presumed made in the
course of business “FWHVAT is considered business tax”
Commercial activity – sale of goods and services for profit
Example of persons considered engaged in business:
1. Consultants
2. Sales agents of insurance or real estate including brokers
3. Television or movie talents and artists
4. Cooking instructors
5. Martial art instructors
Rules in Business Taxpayer
1. Each person is a taxable person
2. Husband and wife are separate taxpayers
3. Parent and Subsidiary are separate taxpayers

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 4. Home office and branch offices of same business are taxable as one
5. Proprietorship is bot a juridical entity. Multiple proprietorship are taxable to that individual
INCOME TAX EXEMPTION IS NOT EQUAL T BUSINESS TAX EXEMPTION
TYPES OF BUSINESS TAXPAYERS
1. VAT taxpayer (12% VAT)
2. Non-VAT taxpayer (3% general percentage tax)
BASIS OF BUSINESS TAX PER TYPE OF ACTIVITY
SELLERS OF GOOD OR PROPERTIES SELLERS OF SERVICES
Basis of business tax Gross selling price Gross receipt
Gross selling price – invoice price (accrual basis)
Allowable deductions
1. Discounts made at the point of sale and not subject to contingency
2. Sales returns and allowances
Gross receipt – cash collected as a fee for the service rendered (cash basis)
Constructive receipt – cash equivalent
Agency monies – not part of gross receipts
Insurance proceeds on damaged assets – not considered as gross receipt
Withheld taxes – part of gross receipts
Business with mixed activities – taxable pro rata in gross sales and gross receipt
TYPES OF SALES OR RECEIPTS
Sales of goods Sales of services
Exempt sales Exempt Exempt
% tax - BICAP FLOW
VAT Vatable Vatable
Exempt Sales or receipts
1. Sales of certain basic necessities, such as
a. Agricultural or marine food products
b. Health services of hospitals
c. Educational services of schools
d. Housing or residential properties within price limits
2. Sales exempt by law, treaty, or contracts
a. Sales by cooperatives to members
b. Sales or lease of aircraft or vessels
c. Sales or printing of books, magazines, and newspapers
3. Casual sales or sales by non-business sellers
a. Sales by person not regularly engaged in trade or business
b. Services rendered under E-E relationship
c. Services rendered by Regional Area Headquarters of multinational company
4. Exempt sales of non-VAT registered persons
Vatable sales or receipts – VAT-registered — 12% VAT non-VAT taxpayer — 3% GPT
Types of Percentage tax
a. Specific – BICAP FLOW
b. General – vatable sales and receipts of non-VAT taxpayer
Mandatory Registration as VAT taxpayer — 3,000,000/annual vatable gross sales or receipts (prospectively)
Special threshold – 10,000,000/year for franchise grantees
Optional VAT registration — irrevocable for 3 years
VAT-registered taxpayer are allowed credit for input VAT while non-VAT taxpayers are not allowed to claim input
VAT credit.
DIFFERENCE OF THE CONCEPT OF GROSS RECEIPTS AND SALES BETWEEN VAT AND NON-VAT TAXPAYER
For non-VAT taxpayer – invoice price = gross receipt
For VAT taxpayer – invoice price = 112%, gross receipt = IP / 112%