Chapter 1 – Introduction to Consumption Taxes

TAX 202
CONSUMPTION
- Acquisition or utilization of goods or services (through purchase, exchange or other means) by
any person.
- Utilization is subject to a tax
CONSUMPTION TAX
- Helps redistribute wealth to society
INCOME TAX VS. CONSUMPTION TAX

Income Tax Consumption Tax

Nature Tax upon receipt of income Tax upon usage of income or
capital
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 Sellers
Seller Buyer
Export
Sales
or Receipt
Purchase
Buyer

Non-Resident Sellers Import

Importer Seller

Philippines Abroad

Type of Consumption Purchaser Status

Domestic Consumption Resident Taxable
Foreign Consumption Non- Resident Exempt/Effectively non-taxable

Destination Principle
- Only goods and services destined for consumption tax while those destined for consumption in
the Philippines are subject to CT while those destined for consumption abroad are not subject to
CT
Chapter 1 – Introduction to Consumption Taxes
TAX 202
Cross-border Doctrine
- Goods that cross the border destined for foreign countries are not charged CT. Due to this, the
government do not impose taxes on exports. The NIRC either exempts exports or subject to a 0%
tax rate.
Types of Domestic Consumption as to source
1. Domestic Sellers – purchases from resident sellers
2. Importation – purchases from abroad by non-residents
CONSUMPTION TAX ON DOMESTIC SALES
- Business Tax – domestic consumption of resident buyers from resident sellers (purchase subject
to a CT) also known as indirect tax
CONSUMPTION TAX ON IMPORTATION
- VAT on Importation – domestic consumption of goods or services from non-resident sellers
commonly known as importation is subject to a CT
- VAT is directly imposed upon the buyer – importer
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 CT Pure form Relative form
Statutory taxpayer Buyer Seller
Economic taxpayer Buyer Buyer
Nature of imposition Direct Indirect
Basis of TAX Total purchase cost Sales or receipts

BUSINESS TAX RULES ON DOMESTIC SALES

The seller is The buyer is Subject to business tax?

Business Business YES
Business Not Business YES
Not Business Business NO
Not Business Not Business NO

VALUE ADDED TAX ON IMPORTATION

The seller is The buyer is Subject to VAT on Importation

Business Business YES
Business Not business YES
Not business Business YES
Not business Not business YES
Chapter 1 – Introduction to Consumption Taxes
TAX 202
TYPES OF CONSUMPTION TAXES
1. Percentage Tax – tax of various rates from 0.60% - 30%
2. Value Added Tax – a CT of 12%
3. Excise Tax – an ad valorem or specific tax, which is imposed in addition to VAT or percentage
tax, only on certain goods or services
TYPES OF DOMESTIC CONSUMPTION AS TO TAXABILITY
1. Exempt Consumption – consumption of goods or services that are not subject to CT
2. Consumptions specifically subject to PT – includes consumption of services that are not subject
to VAT but are imposed with a specific PT
3. Vatable Consumption – includes all other consumption that are neither exempted nor subject to
PT
TYPES OF CONSUMPTION PERTYPE OF DOMESTIC CONSUMPTION

Importation Domestic Sales / Receipts

Exempt Consumption Exempt importation Exempt sales/ receipts
Services subject to % tax Service specifically subject to a Services specifically subject to a
% tax % tax
Vatable consumption Vatable Importation Vatable sales or receipt

BASIS OF EXEMPTION FROM CONSUMPTION TAX

Basis of exemption VAT on Importation Business Tax

Human necessity Goods imported is a human
necessity
Out of scope tax Importation does not constitute a
domestic consumption
Tax incentive Importation is exempted as a tax
incentive to certain importers
International comity Importation is exempted by
treaty
Goods, services or property sold
is a human necessity
Seller is not engaged in business
Sales or receipt is exempted as a
tax incentive to certain sellers
Sales or receipts is exempted by
treaty

SERVICES SPECIFICALLY SUBJECT TO PERCENTAGE TAX

- Taxable consumption of services but subject only to a specific percentage tax rate set by the
NIRC.
- Consumption of these services are not subject to VAT

VATABLE IMPORATION OR SALES

- All other importation or sales of either goods or services that are not exempted or specifically
imposed a percentage tax is vatable
Chapter 1 – Introduction to Consumption Taxes
TAX 202
STRUCTURE OF THE VAT ON IMPORTATION

VAT on Importation
Import of service Import of gooods
Exempt Exempt Exempt
% tax Percentage tax -
VAT Final Withholding VAT VAT on importation

STRUCTURE OF THE BUSINESS TAX

Business Tax
Sales of services Sales of goods
Exempt Exempt receipt Exempt sales
% tax Receipts specifically subject to a -
% tax
VAT Vatable receipts Vatable sales
*12% VAT – if VAT taxpayer; 3% - if non-VAT taxpayer
VAT ON IMPORTATION VS VAT ON SALES IN BUSINESS TAX
VAT on importation
- Directly computed on the landed costs or total purchase costs of importation without any
deduction or tax credit
VAT imposed on sales or receipt
- The VAT on sales or receipt follows a tax credit method wherein a VAT of 12% is imposed on
sales and is reduced by VAT paid by the business on its purchases
- Tax due is computed as follows:
Output VAT (12% of sales or receipts) P xxx,xxx
Less: Input VAT (12% of paid on purchases) (xxx,xxx)
VAT due P xxx,xxx
EXCISE TAX
- Imposed on the consumption of commodities such as:
o Sin product such as alcohol & cigarettes
o Non-essential commodities, such as automobiles and jewelry
o Non-essential services such as cosmetic surgery
o Products which are environmentally degrading in their production or consumption, such
as petroleum and minerals
- Normally imposed before the goods are sold by domestic producers or upon their importation by
taxpayers