Chapter 1: CONSUMPTION TAXES

Consumption
➔ The acquisition/utilization of goods or services through purchase, exchange or other means.
➔ This utilization is subject to consumption tax.
➔ Levied without regard to the purpose of purchaser or consumer.
➔ Consumption tax - Tax upon usage of income or capital; a tax to all.

RATIONALE OF CONSUMPTION TAXES

1. Savings Formation
- Income less consumption = savings
- It limits the level of consumption
- People are taxed on what they take out of the limited resources pool through consumption, rather than
what they contribute to the pool using their income.
2. Rationalization of the Benefit Received Theory
- Those who received more should pay more.
3. Wealth Redistribution Theory
- A basic state policy to redistribute wealth to society so everyone in the state could enjoy the same.
- Effectively make the rich pay more taxes to the government.

A caveat to consumption tax (warning)

➢ It should not be levied upon basic necessities. (food, education, health, & shelter/housing).

TYPES OF CONSUMPTION
1. Foreign Consumption
2. Domestic Consumption
- Government can only impose tax upon domestic consumption.
- Tax laws adhere to the destination principle, therefore consumption abroad is not subject to
consumption tax.
- Goods that cross the border destined for foreign countries are not charged by consumption tax. NIRC
either exempts exports or subject them to a 0% tax rate.

TYPES OF DOMESTIC CONSUMPTION

A. Domestic sales
- Purchases from resident sellers.
- Domestic consumption of resident buyers from
resident sellers is subject to consumption tax
called Business Tax (VAT, %, Excise)
- A person must be engaged in business to be
subject to Business Tax.
- Object of taxation: “Purchase of Buyers”
- Due to the difficulty of collecting tax from
numerous buyers, the law imposed the
obligation to pay tax upon sellers. (Application of
Administrative Feasibility principle)
Note: Business Tax on Domestic Sales
➢ Scope of Tax = Purchases from businesses
only
➢ Nature of Imposition = Indirect
➢ Type of Consumption Tax = Relative form
➢ Basis of Tax = Sales or Receipts
➢ Statutory Taxpayer = Seller (named by law to
pay tax)
➢ Economic Taxpayer = Buyer
B. Importation
- purchases from abroad by non-residents
- Domestic consumption of goods and services
from non-resident sellers, subject to VAT on
Importation
- VAT is directly levied upon the buyer - Importer
- Administrative Feasibility cannot be applied.
Note: Importation
➢ Scope of Tax = Imports from business or
non-business
➢ Nature of Imposition = Indirect
➢ Type of Consumption Tax = Pure form
➢ Basis of Tax = Total purchase cost
➢ Statutory Taxpayer = Buyer
➢ Economic Taxpayer = Buyer

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TYPES OF CONSUMPTION TAXES
1. Value Added Tax (VAT) - 12% consumption tax
2. Percentage Tax - SPECIFIC % tax of various rates; GENERAL % tax of 3% on businesses that do not meet
the 3M threshold.
3. Excise Tax - an ad valorem or specific tax on certain goods or services which is imposed in addition to VAT or
Percentage tax.

TYPES OF DOMESTIC CONSUMPTION AS TO TAXABILITY

1. Exempt consumption
2. Consumption specifically subject to percentage tax
3. Vatable consumption

STRUCTURE
❖ Structure of Business Tax ❖ Structure of VAT on Importation
A. Sales of Services A. Import of Services
a. Exempt receipt a. Exempt
b. Receipts specifically subject to % tax b. Subject to % tax
c. Vatable Receipts c. Subject to Final Withholding VAT
B. Sales of Goods B. Import of Goods
a. Exempt sales a. Exempt
b. Vatable sales b. subject to VAT on Importation

VAT ON IMPORTATION vs. VAT ON SALES IN BUSINESS TAX

VAT on Importation VAT on Sales
- It is directly computed on the landed cost or total - Imposed on the added value - amount of
purchase cost markup imposed by sellers on their purchase
- There's no deduction or tax credit on cost.
purchase/landed cost. - Follows a tax credit method wherein a VAT of
12% is imposed on sales and reduced by VAT
paid by the businesses on its purchases.

COMPUTATION FOR VAT DUE:

Output VAT (12% of sales/receipts) XXX
Less: Input VAT (12% VAT paid on purchases) (XXX)
= VAT DUE XXXX

THE EXCISE TAX

➔ An additional imposition to VAT or percentage tax
➔ Levied at the point of production or importation
➔ Normally imposed before the goods are sold by the domestic producers or upon their importation by
importers.
➔ Imposed on the consumption commodities such as:
● Sin products
● Non-essential commodities
● Non-essential services
● Environmentally degrading products

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Chapter 2: VALUE ADDED TAX ON IMPORTATION

Importation
➔ The purchase of goods or services by Philippine residents from non-resident sellers.

TYPES OF CONSUMPTION TAX ON IMPORTATION

A. VAT on Importation B. Final Withholding VAT

Object consumption Goods Services

Imposed upon Importers/Buyers Foreign service providers

Statutory Taxpayer Importers/Buyers Resident purchaser of service (individuals

engaged in business & corporations)

Nature Direct consumption Tax Indirect Business Tax

Tax Basis Landed Cost Contract Price

Collecting Agency BOC BIR

Timing of payment Before withdrawal of goods After the month of payment

IMPORT OF GOODS
Structure on the Importation of Goods

EXEMPT IMPORTATION
A. Importation of Exempt Goods
a. Basic human and related goods
● Agricultural or Marine food products in original state
● Livestock and poultry, used as/producing foods for human consumption
● Breeding stock and genetic materials
b. Books, newspapers, and magazines
c. Passenger or cargo vessels and aircrafts

B. Importation of VAT Exempt persons

- Vat exempt person are not subject to VAT on Importation
- Exempt exporter sells his exempt importation to a non-exempt person, the non exempt buyer shall be
subject to VAT on importation, irrespective of the possessor of said goods.
- VAT Exempt persons under NIRC:
1) International shipping or air transport operators
- Limited to the importation of fuel, goods and supplies
- Subject to foreign consumption hence exempt.
2) Agricultural cooperatives
- Limited to importation of direct farm inputs, machineries and equipment. Including their spare
parts. These are to be used directly and exclusively in the production or processing of their
produce.
- Cooperative must be an agricultural cooperative, registered in CDA.
3) Ecozone Locators
- Economic zones are considered foreign countries, and are outside Customs territory.
- Importation of ecozone locators to the economic zones is exempt from VAT on importation
and Customs duty.
- Covers any goods, supplies or machineries.
- Technical importation is the purchase of non-ecozone Philippine residents from Philippine
ecozone-registered enterprises. Purchases of residents from economic zones are subject to
VAT on importation.

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 - Sales to ecozones are subject to zero-rated VAT for VAT Taxpayers, likewise, sales to
ecozones are exempt from business tax for Non-VAT taxpayers.

C. Quasi-importation
- Conditions for exemption in general:
1) Personal and household effects belong to Philippine residents
2) Personal and household effects of Non-residents intending to resettle in the Philippines.
(foreign consumption)
3) Goods are exempt from custom duties. (goods from past consumption)

Importation of professional instruments and implements, wearing apparel, domestic

animal and personal household effects
1) Goods belong to persons who come to settle in the Philippines.
2) Goods must accompany the person upon arrival or within 90 days before or after
his/her arrival.
3) There must be evidence to show that the change of residence is bona fide.
4) Importation is not a vehicle and/or machinery & other equipment is used in the
manufacture or merchandise of any kind in commercial activity.

D. Exempt under Special Laws & International Agreement

VAT ON IMPORTATION
➔ Applies without regard to the purpose of importation and whether or not the sellers or buyers are engaged in
business.
➔ Importation of goods is subject to VAT regardless of whether the:
a. Importer is engaged or not engaged in trade or business
b. Importer is a VAT or non-VAT registered
c. Importation is for business or personal use
d. Non-resident seller is engaged or not engaged in business
➔ Importation is generally subject to VAT unless proven to be exempt.
➔ Tax basis: 12% on the Landed cost

Composition of Landed Cost

Dutiable Value
Total value of cost of goods XX
Freight XX
Insurance XX
Other charges/cost) XX XXX
Add: Other In-land Cost
Custom duty (dutiable value * exchange rate * rate of duty) XX
Excise Tax, if any XX
Other cost XX XXX
TOTAL LANDED COST XXX
Multiply: 12% VAT Rate on import %
VAT ON IMPORTATION XXXX

Notes:
➔ Other cost composed of:
○ bank charges, brokerage fee, arrastre charge, wharfage due, documentary
stamp tax, import processing fees
➔ Dutiable Value - transaction value, refers to the total value used by the Bureau of
Customs in determining custom duties. It encompasses all costs incurred in bringing
the goods up to the Philippine port prior to any other in-land cost.

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 IMPORT OF SERVICES
Structure on the Importation of Service
VAT EXEMPT
➔ Exempt from the Final Withholding VAT:
A. Purchases of service from non-residents rendered abroad
B. Purchase of Services from non-residents when the purchaser is not engaged in business
C. Purchase of services from non-residents by VAT-exempt persons

SERVICES SPECIFICALLY SUBJECT TO PERCENTAGE TAX

➔ Only service subject to % tax = Direct acquisition of insurance cover from abroad.
➔ Premium payment on insurance policies directly sourced abroad is subject to a 5% percentage tax.
➔ Policy holders shall pay the same to the BIR.

VATABLE IMPORT OF SERVICES

➔ Final withholding VAT is computed as 12% of the contract price
➔ Shall not be deducted upon the amount to be remitted abroad because it is withheld by the resident
payor-withholding agent.
➔ VAT-inclusive it is not deductible
➔ Examples:
● Lease or use of properties or property rights owned by non-residents
● Services rendered to local insurance companies, with respect to reinsurance premiums payable to
non-residents
● Other services rendered in the Philippines by non-residents.
(remember that non-resident corporations are subject to 30% final withholding tax on income)

Payment of the Withholding VAT

- BIR form 1600
- Remitted monthly on/or before the 10th day of the following month after the withholding was made.
- Except for taxes withheld for December which shall be filed or paid on or before January 25 of the
following year.

Treatment of the VAT on Importation and the Withholding VAT

1. Resident purchaser is a VAT-registered business, it can claim the VAT on Importation or
withholding VAT as INPUT VAT creditable against its output VAT.
2. Resident purchaser is a non-VAT business, the VAT on importation or final withholding VAT shall
be part of the cost of purchase of goods and services and shall be treated as asset or expense.
3. Purchaser is not engaged in business, VAT on importation is added to the cost of the goods
imported.

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Chapter 3: BUSINESS TAXATION

Nature of Business Tax

1. Relative Consumption Tax - imposable only when the seller is a business.
2. Indirect Tax - collected from the seller (statutory taxpayer) rather than from the buyer/consumer (the one who
actually pays the tax or the economic taxpayer).
3. Privilege Tax - viewed as a privilege to do business.
4. National Tax - imposed by the national government.

Types of Business Taxes

1. Percentage Tax
2. Value Added Tax
3. Excise Tax

PROCEDURES OF BUSINESS TAXATION

1) Evaluate if the sales activity qualifies as a business
a. YES - must be register for business tax
b. NO - exempt from business tax

2) Identify the taxable persons

a. INDIVIDUAL - all proprietorship businesses including its branches.
b. JURIDICAL - include all branches of the taxpayer

3) Determine the activity type

a. SALES OF GOOD - determine the sales
b. SALES OF SERVICES - receipts

4) Classify the sales or receipts

a. EXEMPT SALES OR RECEIPTS - pay no business tax
b. SUBJECT TO PERCENTAGE TAX - pay specific % tax
c. VATABLE

5) Determine the taxpayer registration type

a. VAT REGISTERED
b. NON-VAT REGISTERED - 3% general % tax
● Vatable sales exceeds 3,000,000 - shall register as VAT Taxpayer and pay prospectively.
● Does not exceed 3,000,000 - continue paying 3% General % Tax.

Note:
➔ Evaluation of the magnitude of vatable sales/receipts is done continuously over a
12-month period.

6) Determine if the goods or service is excisable

a. YES - pay applicable excise tax in addition to VAT or % taxes
b. NO - pay only VAT or % tax

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BUSINESS
➔ Habitual engagement in a commercial activity

Habitual engagement - normally manifested by registration, but non registration is not an excuse to business
taxation.
◆ Casual sale is not a business even if profit is derived from that transaction.
◆ Sales of services by non-resident persons are presumed made in the course of business without
regard as to whether the sale is regular or isolated.
◆ Regular selling of goods or services for a profit is a business, despite the absence of actual profit
from such activity.

Privilege stores
➔ engaged in business activity for a cumulative period of not more than 15 days otherwise they
shall be considered regular taxpayers subject to business and income tax.
➔ Shall not be considered habitually engaged in business considering their limited activity. They
are exempt from business tax but subject to income tax.

Commercial Activity - means engagement in the sale of goods or services for a profit. However, the actual
existence of a profit is not a precondition to business taxation.
Not businesses:
● Government agencies and instrumentalities
● Non-profit organizations or associations
● Employments
● Directorship in a corporation
● Business for mere subsistence - sales/receipts not exceeding 100,000. (Marginal Income
Earners). They are subject to income tax.

BUSINESS TAXPAYERS
Types of Business Taxpayers:
A. VAT Taxpayers - pays 12% VAT
B. Non-VAT Taxpayers - pays 3% general percentage tax

Rules:
1. Each person, natural or juridical, is a taxable person
2. Husband and wife are separate taxpayers
3. Parent company is a separate taxable person and each subsidiary company is a taxable person.
4. Home office and branch offices are one, and not a separate taxable person
5. Multiple proprietorship businesses of the same individual are all taxable to that individual/taxpayer.

BUSINESS ACTIVITIES
Types of Business Activities
A. Sales or exchange of goods or properties
- The tax basis is the Gross Selling Price.

GROSS SELLING PRICE

➔ Total amount of money or its equivalent
➔ Excise tax, if any, on goods or services shall form part of the gross selling price.
➔ Allowable deductions:
1. Discounts at the time of sale (not contingent/future discounts like quota discounts or rebates
and cash discounts)
2. Sales return and allowances

B. Sales or exchange of services or lease of properties

- tax basis is the Gross Receipts

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 GROSS RECEIPTS
➔ Represents: contract price, compensation, service fee, rental or royalties, including amount charged
for materials supplied with the services, deposit applied, and advance payments actually or
constructively received.
➔ Constructive receipt - money or consideration received without restriction by the payor.
➔ Agency money is not part of gross receipts.
➔ Insurance proceeds on damaged assets is not viewed as a sale
➔ Withholding taxes and Out-of-pocket expenses by the one who renders the service form part of the
gross receipts.

TYPES OF SALES OR RECEIPTS

SALES OF GOODS SALES OF SERVICES

EXEMPT SALES Exempt sales Exempt Receipts

SPECIFIC PERCENTAGE TAX BICAP FLOW

VATABLE SALES Vatable sales Vatable Receipts

NOTES:
- The general threshold of 3,000,000 is applicable to all other taxpayers, except franchise grantees of
radio or television.
- Franchise grantees must be registered when their annual receipts exceeds 10,000,000
- Person who is below the VAT threshold, may opt to register as VAT Taxpayer. This option shall be
irrevocable for 3 years. For tv or radio franchise grantees, the option shall be perpetually irrevocable.
- FOR NON-VAT TAXPAYERS amount billed to the customer or client on the sale of goods or services
is respectively the sales or gross receipts.
- FOR VAT TAXPAYERS amount billed to the customer or client (invoice price) on the sale of goods or
services includes the sales/receipts plus output VAT.
● Amount billed / 112% = gross sales or receipts * 12% = Output VAT (gross sales or receipt
plus output VAT = Invoice Price
● Invoice Price * 12% / 112% = output VAT

Business Tax Accounting Period

- The length of the accounting period for business taxes is one quarter or known as taxable quarter.
- Monthly Tax Return
● VAT Taxpayers - BIR Form 2550M
● Non VAT Taxpayer - not applicable
- Quarterly Tax Return
● VAT Taxpayers - BIR Form 2550Q
● Non VAT Taxpayer - BIR Form 2551Q

Business Tax Reporting - VAT Taxpayers

1st Month 2nd Month 3rd Month

Business tax form 2550M 2550M 2550Q

Deadline (counted from

the end of month/quarter) Within 20 days Within 20 days Within 25 days

Business Tax Reporting - Non-VAT Taxpayers (Percentage Taxpayers)

1st Month 2nd Month 3rd Month

Business tax form - - 2551Q

Deadline (counted from - -

the end of month/quarter) Within 25 days
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Short Period Return
➔ Any person who retires from business with due notice to the BIR office where the taxpayer (head office) is
registered or whose VAT registration has been cancelled.
➔ Shall file a final quarterly return and pay the tax due thereon within 25 days from the end of the month
when the business ceased to operate or VAT registration had been officially cancelled.
➔ However, subsequent monthly declarations/quarterly returns are still required to be filed if the results of the
winding up of the affairs/business of the taxpayer reveal taxable transactions.

Timing of VAT registration

1. Persons commencing business with an expectation to exceed the VAT threshold within 12 months shall
simultaneously register as VAT taxpayer with the registration of their new business or trade with the BIR.
2. Persons exceeding VAT thresholds shall register as VAT taxpayer before the end of the month following the
month the threshold is exceeded.
3. Franchise grantees of radio and television broadcasting whose gross annual receipt for the preceding
calendar year exceeded 10,000,000 shall register as VAT taxpayer within 30 days from the end of the
calendar year.
4. Persons who are below the threshold but opt to be registered as VAT taxpayers shall register no later than
10 days before the beginning of the taxable quarter.

VAT treatment of exempt transactions

➔ A VAT-registered taxpayer who enters into a VAT-exempt transaction may also opt that the VAT apply to his
transactions which would have been exempt under Section 109 of the NIRC.

Revocability of VAT registration

1. VAT registration of franchise grantees of radio or television, whether voluntary or mandatory is perpetually
irrevocable. Thus, they continue to be VAT taxpayers until the dissolution of their business.
2. Any person other than franchise grantees who voluntarily registered as VAT taxpayers shall not be allowed
to cancel their registration for the next 3 years.
3. Any person who registered as VAT taxpayers with an expectation to exceed the VAT threshold but failed to
exceed the same within 12 months of operations may apply for cancellation of VAT registration.

Invoicing Requirement for Exempt Sale

➔ With respect to VAT-Taxpayers, exempt sales of goods or services must be specifically designated as such by
indicating or pre-printing the caption “EXEMPT” on the invoice or receipt.
➔ Failure to comply shall make the sale vatable. The sale will then be subject to VAT or 3% general percentage
tax.

9
Chapter 4: EXEMPT SALES OF GOODS, PROPERTIES, & SERVICES

EXEMPT SALES
➔ Are exempt consumption of goods and services from DOMESTIC SELLERS.
➔ Not subject to VAT and percentage tax.
➔ VAT taxpayers shall not bill any output VAT.
➔ Non-VAT persons shall not be subject to 3% percentage tax.

EXEMPT SALES OF GOODS, OR PROPERTIES

(Mnemonic: SECRET Tax-free Gold)

1) Sale of Goods to Senior Citizens and Persons With Disabilities

Sale of Goods SC PWD

a. Drugs, vaccines & foods for special medical purpose Exempt Exempt

b. Vitamins & Mineral Supplements Exempt Not exempt

c. Accessories and equipment for senior citizens Exempt Not exempt

d. Casket or urn Exempt Exempt

2) Sale of Exempt Goods

A. Agricultural or marine products & inputs
- Limited to agricultural or marine food products in their original state
- Use or purpose dictates vatability (should be intended for human consumption)
- Those which undergone simple processing includes:
● Preparation (boiling, broiling, husking, roasting, stripping, & grinding)
● Preservation (freezing, drying, smoking, & salting)
● Packaging (even using advanced technological means)
- Marine or Agricultural inputs intended for the production of marine or agricultural food
products which are intended for human consumption are VAT Exempt.
● Inputs: seeds, seedlings, fingerlings, fish, prawn, livestocks, breeding stocks, genetic
materials, fertilizers, feeds, and its ingredients. (except specialty feeds)
- Ingredients for the processing of human food are vatable.

Note:
➢ The term vatable means the seller is VAT registered or a VAT registrable person.
➢ 3% Percentage Tax if the seller is a NON-VAT person.

B. Books, newspapers, magazine, review or bulletins

- Based upon the necessity of education and information
- Must appear at regular intervals with fixed prices for subscription
- Sales must not be devoted to paid advertisements.

C. Medicines for diabetes, high cholesterol or hypertension

- Exempt regardless of the buyer
- Such as: insulin, analogues, blood glucose lowering drugs
- Exemption on medical accessories and equipment is limited to senior citizens.

D. Passenger or cargo vessels and aircrafts

- Includes engine, equipment and spare parts of domestic or international transport operations.
- Lapsed under RA 9295 but was reinstated by RA 10378 and was codified under the TRAIN
Law
- Must be subject to MARINA requirements on restriction:
● Passengers or cargo vessels = 15 years
● Tankers = 10 years

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 ● High speed passenger crafts = 5 years
- Sale of land transport is subject to VAT.
- Import of medicine for diabetes, high cholesterol or hypertension has no legal exemption on
importation.

3) Sale of Cooperatives (except electric cooperatives)

➔ Exempt from business tax if they transact only with members.
➔ Exemption pertains to transactions related to the activity of a cooperative.
➔ Sale to non-members is exempt from business tax if the accumulation reserve does not exceed
P10,000,000.
➔ Sale to non-members with accumulation reserves exceeding P10,000,000 is subject to business
tax.

4) Sales of residential properties

Sale of properties under certain conditions:
A. Sale by non-dealers of realty
- Sale of properties not primarily held for sale or not held for lease in the ordinary course
of business is exempt.
- Sale of properties held for use classified as ordinary assets by VAT Taxpayers is an
incidental transaction subject to VAT.
- VAT Exemption applies to:
● Real property classified as capital assets of VAT Taxpayers
● Any real properties of Non-VAT taxpayers
● Any real properties of persons not engaged in business.

B. Sale by a realty dealer, developer or lessor (usually registered as VAT Taxpayers)

- Sales of residential properties, being essential goods are exempt, if they comply with the
statutory or regulatory price ceilings:
1. Sale of real properties utilized for socialized housing units
(for the underprivileged and homeless):
a. House and lot package - P450,000
b. Residential lots only - P180,000
2. Sale of real properties utilized for low-cost housing wherein the price ceiling unit is
P750,000
(intended for homeless low income beneficiaries, may either be
subdivision/condominium registered at HLURB)
3. Sale of residential lot valued at P1,919,500/unit and below
4. Sale of residential dwelling valued at P3,199,200/unit and below

Note:
➢ Old thresholds (before TRAIN law) for residential lot and residential dwelling is P1,500,000 &
P2,500,000
➢ Sale of adjacent lots - adjacent residential lots, house and laos, and other residential
dwellings within the 12-month period in favor of 1 buyer shall be treated as one.
➢ Sales of parking lots are vatable.

5) Export sales by non-VAT persons

➔ Export sales of non-VAT taxpayers are exempt from percentage tax.
➔ Export sales of VAT taxpayers is subject to VAT at 0% rate.

6) Treaty-exempt sales of goods

Exempt parties under special laws or international agreements:
1. PEZA Registered enterprises
2. Asian Development Bank (ADB)
3. International Rice Research Institute (IRRI)
4. Philippine National Red Cross
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 5. Embassies of foreign governments
6. Philippine Amusement and Gaming Corporation

7) Tax-free exchange of property

Not subject to business tax:
1. Exchange of properties by a corporation pursuant to a plan of merger or consolidation.
2. Exchange of properties by a person, alone or together with others not exceeding four, which resulted
in the acquisition of control.

8) Sale of gold to the Bangko Sentral ng Pilipinas

➔ Sale of gold: from 0-rated to exempt.
➔ Applies to both registered small scale miners and registered gold traders. (RA 11256)

Note:
➢ Before RA 11256, sale of gold to the BSP was subject to 2% excise tax (now 4%) and a 5%
withholding tax.

EXEMPT SALES OF SERVICES

(Mnemonic: SEARCHH VA TRIPS)

1) Schools
➔ Educational rendered by Government educational institutions Private schools accredited by:
● Department of Education
● Commission on Higher Education
● Technical Education and Skills Development Authority (TESDA)
➔ Exemption does not cover the services not accredited by the above mentioned:
● Seminars
● In-service trainings
● Review classes
● Other similar services

2) Employees
➔ Employer-employee relationship is not a business, hence exempt from business tax.
➔ Directorship (fee) is not subject to business tax.
➔ RMC 34-08: Directors who are not employees of a corporation are considered engaged in business
subject to business taxes. Reversed by BIR in RMC 77-2008 for the reason that directorship is not
engaged.
Engagement in business or trade involves:
● Continuity of activity o a going concern basis
● Objective to earn unrestricted amounts of pecuniary gains/profits
● Unrestricted offering of the goods or service to any customers or client.

3) Agricultural contract growers and millers

➔ Services by agricultural contract growers - parsons producing for others poultry, livestock or other
agricultural and marine food products in their original state.
➔ Milling for others palay into rice, corn into grits, and sugar cane into raw sugar.

4) Residential leasing
➔ Leases of residential units with monthly rental not exceeding 15,000 are exempt.
➔ Used for residential purposes or dwelling places except: motels and motel rooms, hotels and hotel
rooms, lodging houses, inns, and pension houses.

5) Cooperative services
➔ Gross receipts from sale of services by cooperatives such as lending, marketing or multi-purpose
cooperatives is exempt. (rules are similar to sales of goods by cooperatives)

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 6) Hospitals
➔ Exempt: medical, hospital, and veterinary services
➔ Not exempt: those rendered by professionals and sales of drugs by hospital drugstores.
➔ In-patient revenue refers to sale of medicines to confined patients, hence exempt.
➔ Out-patient sale of medicine or the sale to non-confined clients is a taxable sale of goods.
➔ Check-up or consultation fees charged by the hospital out-patient clients is an exempt sale of service.
➔ Medicine for diabetes and hypertension are likewise exempt goods.

7) Homeowner’s association or condominium corporation

➔ Exempt as long as there’s an absence of profit seeking motive as proven by the reimbursement-type
assessment of its members.

8) Lease of passenger or cargo vessels and aircrafts, including engines, equipment and spare parts thereof
food domestic or international transport operations

9) Treaty-exempt services

10) Regional area headquarters

➔ RAH or RHQ is an administrative office which does not derive income on its own
➔ ROHQ is taxable - regional operating headquarters

11) International carriers

➔ Receipts from the transport of passengers by international carriers originating from the Philippines
going abroad are exempt under RA 10378.
➔ International carriers - are air or shipping carriers owned by resident foreign corporations doing
business in the Philippines.
➔ Outgoing transport of passengers is exempt
➔ Incoming flights are foreign consumption.

Domestic carriers with international operations:

1. Receipts from outgoing flights = 0% VAT
2. Receipts from incoming flights = Exempt
3. Receipts from domestic flights = 12% VAT

12) Printers and publishers

➔ Books, newspapers, magazines, review or bulletin which appears at regular intervals with fixed
subscription prices and is not devoted principally to the publication of paid advertisements.
➔ Commission income is vatable.

13) Senior citizens and persons with disability

➔ Exempt from essential services by the following establishments:
1. Lodging establishments, excluding long-term residency arrangements.
2. Hospital and clinic
3. Sports and recreation centers
4. Restaurants
5. Land, air, and sea travel
6. Medical, dental, diagnostic & laboratory fees, and professional fees
7. Funeral or burial services for the burial of senior citizens

Sale to senior citizens and PWD is recorded as:

CASH/RECEIVABLE XXX
SENIOR CITIZEN/PWD DISCOUNT XXX
SALES XXX

SALE OF GOODS OR SERVICES COVERED BY SPECIAL LAWS (not subject to VAT or % tax)
1. Sales by ecozone locator
2. Receipts of proprietors of theaters or cinemas
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Chapter 5: PERCENTAGE TAX

SERVICES SPECIFICALLY SUBJECT TO PERCENTAGE TAX

Mnemonic: BICAP FLOW

1) BANKS AND NON-BANK FINANCIAL INTERMEDIARES PERFORMING QUASI-BANKING FUNCTIONS

Tax Rates on Bank and Quasi-banks

Source of income or receipt % Tax Rate

Gross Receipt Tax

❖ Interest income, commissions & discounts from lending activities, and

income from financial leasing, on the basis of remaining maturities of
instruments from which the receipts were derived:

➢ Maturity period of five years or less 5%

➢ Maturity period of more than 5 years 1%

❖ Dividend and equity shares in the net income of subsidiaries 0%

❖ Royalties, rentals or property, real or personal, profits from exchange and all 7%
other items treated as gross income under Section 32 of the NIRC

❖ Net trading gains within the taxable year on foreign currency, debt securities, 7%
derivatives, and other similar financial instruments under RA 9337

Tax on Other Financial Intermediaries without Quasi-Banking Functions

Source of income or receipt (pawnshops & money changers) % Tax Rate

Gross Receipt Tax

❖ Interest income, commissions & discounts from lending activities, and

income from financial leasing, on the basis of remaining maturities of
instruments from which the receipts were derived:

➢ Maturity period of five years or less 5%

➢ Maturity period of more than 5 years 1%

❖ From all other items treated as gross income under the NIRC 5%

- Known as “Gross Receipt Tax”

- Commercial, industrial and other non-financial companies shall not be considered as performing
quasi-banking functions
- Quasi-banks = Non-bank financial intermediaries performing quasi-banking functions
- Exemption from Gross Receipt Tax: does not apply to the income or revenue realized by the BSP
from its transactions undertaken in pursuit of its legally mandated functions.

Net trading gains within the taxable year on foreign currencies, debts, securities, derivatives and other
financial instruments
➔ Applies to the annual net gains from this category
➔ Figure to be reported in the monthly percentage tax return shall be the cumulative total of the net trading
gain/loss since the start of the taxable year less the figures already reflected in the previous months of
the taxable year.
➔ Net trading loss from this category shall be deductible only to the gains from trading on the same
category.
➔ If the bank has a cumulative net loss at the end of the year, the same cannot be carried over as deduction
against trading gains in the following year.

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Meaning of Gross Income
➔ The term gross income of banks was held to include those items of gross income subject to final tax.
➔ The amount of gross income to be included in gross receipts for purposes of gross receipt tax shall be the
amount of income, gross of the final income tax.

SEC. 32. Gross Income.

➔ General Definition. - Except when otherwise provided in this Title, gross income means all income derived
from whatever source, including (but not limited to) the following items:
1. Compensation for services fees, salaries, wages, commissions, and similar 7. Royalties
items 8. Dividends
2. Gross income of trade or business or the exercise of a profession 9. Annuities
3. Gains derived from dealings in property 10. Prizes &
4. Interests winnings
5. Rents 11. Pensions
6. Partner's distributive share from the net income of the general professional
partnership

Common Rules for Banks, Quasi-Banks and Other Financial Institution

1. Accounting Rules
- Under RR4-2009, the basis o the calculation of gross receipts shall be the generally accepted
accounting principles (GAAP) prescribed by the:
a. Bangko Sentral ng Pilipinas - for banks & quasi-banks
b. Securities and Exchange Commission - other non-bank financial intermediaries

2. Financial lease & Operating lease

- Finance lease is a sale of property whereby the seller earns only interest income on
arrangement.
- Taxable gross receipt on finance leases shall consist only of interest income excluding
collections of principal.
- Operating lease is not a sale and does not transfer ownership over the leased property.
- In operating leases, gross receipt shall include the gross rentals received.

3. Pre-termination of Instruments
- Pre-termination of loans, the maturity period shall be reckoned to end as of the date of
pre-termination for purposes of classifying the transaction and applying the correct rate of tax.

Withholding of Percentage Tax on Banks

➔ Effective August 1, 2014, the BSP shall withhold the percentage tax on banks and non-bank financial
institutions on all its payments to special deposit accounts and reserve liquidity accounts.

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2) INTERNATIONAL CARRIERS ON THEIR TRANSPORT OF CARGOES, EXCESS BAGGAGE & MAILS
Tax Rules on Outgoing Flight or Voyage
Sea or Air Carriers owned by:

Domestic Corporation Foreign Corporation

Passengers Vatable Exempt

Cargoes/Baggages Vatable 3% Specific Percentage Tax

Taxation of Gross Receipts on Flights or Voyages

International Operations
Types of Carriers Domestic Operations
Outgoing Incoming

Domestic Carrier 12% VAT 0% VAT EXEMPT

International Carriers

a. Passengers N/A EXEMPT EXEMPT

b. Goods, mails or cargoes N/A 3% OPT EXEMPT

- Two types of international carriers: International Air Carriers & International Shipping Carriers
- Shall pay 3% Percentage Tax on their quarterly gross receipts, regardless of the place where they
are actually billed.

3) COMMON CARRIERS ON THEIR TRANSPORT OF PASSENGERS BY LAND AND KEEPERS OF

GARAGE
- Know as 3% Common Carrier’s Tax, due quarterly upon the gross receipts
- Businesses engaged in carrying or transporting passengers or goods or both, by land, water, or air,
for compensation, and offering their services to the public.
- This includes: cars for rent or hire driven by the lessee, transportation contractors, persons who
transport passengers for hire and other domestic land carriers on their transport of passengers.
- Except: owners of bacas and animal-drawn two-wheeled vehicles, pedicabs (business for mere
subsistence)

Minimum Presumptive Gross Receipts for Common Carriers and Keepers of Garage:
QUARTERLY MONTHLY
❖ Jeepney for Hire:
➢ Manila and other cities 2,400 800
➢ Provincial 1,200 400

❖ Public Utility Bus

➢ Not exceeding 30 passengers 3,600 1,200
➢ Exceeding 30 but not over 50 passengers 6,000 2,000
➢ Exceeding 50 passengers 7,200 2,400

❖ Taxis
➢ Manila and other cities 3,600 1,200
➢ Provincial 2,400 800

❖ Car for Hire

➢ With chauffeur 3,000 1,000
➢ Without chauffeur 1,800 600

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4) CERTAIN AMUSEMENT PLACES

AMUSEMENT TAXES
Places of boxing exhibition 10%

Places of professional basketball games 15%

Cockpits, cabarets, night or day clubs 18%

Jai-alai and race tracks 30%

- Cinemas and theaters are subject to local amusement tax not subject to VAT.
- Tax shall be payable within 20 days after the end of each quarter.
- Bowling alleys, golf courses, and billiard halls are vatable. (not subject to amusement tax)
- Exempt Receipts on Professional Boxing:
1. World or oriental championship
2. At least one of the contenders is a Filipino Citizen
3. Promoter is a Filipino citizen or a corporation 60% of which is owned by Filipino citizens.
- Proprietor, lessee or operator of the following amusement places shall pay the following respective tax
rates:

5) BROKERS IN EFFECTING SALES OF STOCKS THROUGH THE PHILIPPINE STOCK EXCHANGE AND
CORPORATIONS/SHAREHOLDERS ON INITIAL PUBLIC OFFERINGS
Stock Transaction Tax

Sale, barter or exchange of stocks listed and traded through the Philippine 60% of 1%
Stock Exchange (PSE)

Proportion of shares sold, bartered or exchanged IPO Tax Rate

Up to 25% 4%

Over 25% but not over 33 1/3 2%

Over 33 1/3 1%

❖ Tax on Sale, barter or exchange of stocks listed and traded through the Philippine Stock
Exchange (PSE)
- Known as Stock Transaction Tax, rate 60% of 1% based on gross selling price or gross
value in money of the shares of stocks sold though PSE.
- Applies only on listed stocks without regard as to the type of stocks sold and existence of
gain/loss on the transaction.
- Shall be paid by the seller or transferor and is to be collected by the stockbroker who effected
the sale.
- The stock broker shall remit the tax to the BIR within 5 banking days from the date of
collection.
- The sale of security dealers from the sale of securities whether through PSE or directly
from the buyers and their commission income shall be vatable.

❖ Tax on the Shares of Stock Sold or Exchanged through a Initial Public Offering (IPO)
- Known as IPO Tax.
- The sale, barter, exchange or other disposition through initial public offering of shares of
stocks in a closely held corporation.

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 - IPO Tax is based on the gross selling price or gross value in money in proportion to the
shares sold, bartered or exchanged or otherwise disposed of.
- Follow-through offering is not subject to IPO tax.

Closely-held Corporation - their outstanding capital stock is at least 50% or at least 50 % of all classes of stock
entitled to vote is owned directly or indirectly by not more than 20 individuals.

Determination of the proportion of stocks sold in an IPO

1. Primary offering
- Unissued shares of the closely held corporation to be sold in the IPO
- Formula = primary shares / outstanding shares after IPO
2. Secondary offering
- Issued shares or shares of existing shareholders who wish to sell their shares in the IPO.
- Formula = secondary shares / outstanding shares before IPO

Summary of Rules on Sales of Stocks:

Sales made by: Before IPO During IPO After IPO

Corporate Issuer No Tax IPO tax as primary offering No Tax

Shareholder Investor Capital Gains Tax IPO tax as a secondary Stock Transaction Tax
offering

6) CERTAIN FRANCHISE GRANTEES

Franchise Grantees % Tax Rates
Franchise Tax

1. Radio or Television broadcasting companies whose annual gross receipts do not 3%

exceed 10,000,000.

2. Gas and Water utilities even it exceeds the 10,000,000 threshold 2%

- Generally, franchises are VATABLE.

- There are only two types of franchise subject to specific percentage tax:

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7) LIFE INSURANCE COMPANIES AND AGENTS OF FOREIGN INSURANCE
Life Insurance Non-life Insurance

Direct Premiums 2% Premiums Tax Vatable

Reinsurance Premiums Exempt Exempt

Insurance Companies Vatable Vatable

- Subject to 2% on the premiums collected, whether such premium is paid in money, notes, credits or
any substitute for money.
- Applicable to a person or company/corporation doing life insurance business and insurance
appertaining thereto or connected therewith, except purely cooperative companies/associations.
- Service likewise includes soliciting group insurance, and health and accident insurance policies
underwritten by life insurance companies are subject to Premiums Tax.

Not included in gross receipts of an insurance company:

1. Premiums refunded within 6 months after payment on account of rejection of risk or returned for
other reasons (certainly not receipts)
2. Reinsurance premiums
3. Premiums from life insurance of non-residents received from abroad by branches of domestic
corporations, firms or associations doing business outside the Philippines. (exempt foreign
consumption)
4. Excess of premiums on variable contracts in excess of the amounts necessary to insure the lives
of the variable contract owners. (represents investments rather than premiums)

Types of Insurance Business

a. Direct insurance - 2% premiums tax for life insurance policies; VAT applies for non-life insurance.
b. Reinsurers - reinsurance premiums are exempt from premiums tax.
c. Retrocessionaires - Payment of retrocession premium to a foreign insurer is subject to the
Withholding VAT, because this is a purchase of reinsurance service from a non resident.

Taxation of other receipts of life insurance business

1. Renewal or reinsurance fee, reinstatement fee and penalties - considered incidental to or
connected to insurance policy contracts and are akin to premium, hence subject to 2% premiums tax.
2. Management fees, rental income, or other income from unrelated activities/services - vatable
3. Investment Income - exempt from premiums tax but subject to gross receipt tax. (non-bank financial
intermediaries

Tax on Agents of Foreign Insurance

- Section 124 of NIRC, are subject to tax equal to twice the tax imposed on life insurance premiums.
- Tax on agents of foreign insurance is 4%.

Direct insurance from abroad

- Without the service of an insurance agent, tax shall be 5% of the premiums paid. It shall be the duty
of the owner to report each transaction to the insurance commissioner and to the CIR.

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 8) TELEPHONE COMPANIES ON OVERSEAS COMMUNICATION
Call Origin Call Destination Business Tax

Philippines Philippines 12% VAT

Abroad Philippines 0% VAT

Philippines Abroad 10% Overseas Communication Tax

9) JAI-ALAI AND COCKPIT OPERATORS ON WINNINGS

Winnings from Horse Race or Jai-Alai Amusement Taxes

Winnings in horse race or jai-alai, in general 10%

Winnings from double, forecast/quinella and trifecta bets 4%

Owners of winning race horses 10%

Tax on Winnings
- The tax shall be paid within 20 days from the date it is withheld.
- Tax shall be deducted from the “dividend” corresponding to each winning ticket or the “prize” of each
winning race horse owner and withheld by the operator or person in charge of the horse race before
paying the dividends or prizes to the person entitled thereto.

WITHHOLDING OF PERCENTAGE TAX AT SOURCE

➔ Sales to government or instrumentalities, & GOCC is subject to withholding tax of 3% percentage tax at
source. (tax credit)
➔ Issues to the taxpayer BIR Form 2307
➔ Taxpayer shall attach BIR Form 2307 in filing his monthly percentage tax return.
➔ Same procedure is employed for withholdings made by the BSP.

EXEMPTION FROM PERCENTAGE TAX

1. VAT taxpayers
2. Self-employed and or professionals who opted to the 8% income tax (BIR Form 1701A)
3. Cooperatives

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