SELF-PACED LEARNING MODULE

COLLEGE DEPARTMENT

MODULE 5
Subject:

BUSINESS TAX

AISAT COLLEGE – DASMARIÑAS, INC.

This material has been developed in support to the Senior High School Program
implementation. Materials included in this module are owned by the respective copyright
holders. AISAT College – Dasmariñas, the publisher and author do not represent nor claim
ownership over them.
This material will be reproduced for educational purposes and can be modified for the
purpose of translation into another language provided that the source must be clearly
acknowledged. Derivatives of the work including creating an edited version, enhancement or a
supplementary work are permitted provided all original works are acknowledged and the
copyright is attributed. No work may be derived from this material for commercial purposes and
profit.
 Unit Business Taxes
Module VALUE-ADDED TAX ON SALE OF SERVICES
AE25-BT BUSINESS TAXES Units: 3hrs Page |2

INFORMATION SHEET PR-5.1.1

“VALUE-ADDED TAX ON SALE OF SERVICES”

In general, all kinds of sale, exchange, or supply of services rendered in the Philippines are subject to
12% VAT, except those which are classified and qualified as zero-rated (0%) or VAT- Exempt.
(Section 108 & Section 109, NIRC)

“Sale or exchange of services” in the course of business may be classified as follows:

1. Services performed for a valuable consideration in relation to trade, business or profession,
unless exempted by code or special law.
2. Lease or use of personal properties ( tangible or intangible0 such as rights, privileges, or
properties, or the supply of knowledge or information, assistance or services.

Service VAT Situs

When the provide and recipient of services are both doing business in the Philippines, their transaction
falls squarely under Section 108(a0 of NIRC governing domestic sale or exchange of services subject to
VAT, unless the transaction falls under the provisions of Section 108(B) of NIRC which are subject to )%
or VAT Exempt.

Under situs of service criteria, services performed outside the Philippines, They are VAT exempt.

Illustration

E & T, a domestic electrical service corporation rendered service to the following during the year.

Corporation Service Location Amount Subject to 12% VAT?

SITEL, Philippines Philippines P4,000,000 Yes
TI, Philippines Philippines 6,000,000 Yes
SITEL, Japan Japan 3,000,000 No
AT&T USA 8,000,000 No

Only services rendered within the Philippines are subject to 12% VAT. The service rendered outside the
Philippines are 0% VAT.

The Output VAT of E&T would be

SITEL, Philippines P 4,000,000
TI, Philippines 6,000,000
Total service rendered in the Philippines P10,000,000
VAT rate 12%
Output VAT P 1,200,000

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 1st
PRELIM
5 Meeting JULIETA S. ECHEGOYEN MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Business Taxes
Module VALUE-ADDED TAX ON SALE OF SERVICES
AE25-BT BUSINESS TAXES Units: 3hrs Page |3

PERCENTAGE TAX ON COMMON CARRIERS

Common carrier by land

Transporting good or cargoes 12% VAT
Transporting passengers 3% common carrier’s tax
Common carriers by air or sea
From one point in the Philippines to
another point in the Philippines
Transporting goods or cargoes 12% VAT
Transporting passengers 12% VAT
From one point in the Philippines to
a point outside the Philippines
Transporting goods or cargoes 0% VAT
Transporting passengers 0% VAT

Example 1. B Transport Co is a domestic corporation in overland transportation business in Luzon,

Philippines, transporting people and cargo from southern Philippines to northern Philippines and vice
versa, it had the following gross receipt

For transporting passengers P200,000

For transporting cargoes 50,000
Total P250,000
What were the business taxes involved?

Common carrier’s tax ( P200,000 x 3%) P 6,000

Output VAT (50,000 x 12%) 6,000
Total Business Tax P 12,000

Example 2 C Shipping Co., a domestic corporation, has interisland vessels in the Philippines transporting
passengers and cargoes ( from one point in the Philippines to another point in the Philippines) In One
trip, it had the following gross receipts

For transporting passengers P 500,000

For transporting cargoes 100,000
Total P 600,000
Common carrier’s tax (500,000 x 12%) 60,000
Output VAT ( 1000,000 x 12%) 12,000
Total Business Tax P 72,000

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 1st
PRELIM
5 Meeting JULIETA S. ECHEGOYEN MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Business Taxes
Module VALUE-ADDED TAX ON SALE OF SERVICES
AE25-BT BUSINESS TAXES Units: 3hrs Page |4

THE TAX BASE

THE tax base of the Value-Added Tax (VAT) on sale of services is gross receipts.

The term “gross receipt” means cash or its equivalent actually received or constructively
received (not including the VAT) as:
a) Payments on the contract price, compensation, service fee, rental or royalty
b) Payments for materials supplied with the services
c) Deposits or advanced payments on the contract for services

Constructive Receipt occurs when the money consideration or its equivalent is placed in the
control of the person who rendered the service without restriction by the payor.
Examples
a) Deposits in bank which are available to the seller of services without restrictions;
b) Issuance by the debtor of a notice to offset any debt or obligation and acceptance
thereof by the seller as payment for services rendered;
c) Transfer of amounts retained by the account of the contractor

The tax in on Example.3 Mr. A is a building contractor. In constructing building, he furnished labor and
cash received was paid a contract price of P 1,100,000. VAT not included.
Gross receipts P 1,100,000
Receivables are Output VAT (1,100,000 x 12) P 132,000
not taxable.
Example.4 Mr. B is a building contractor. In constructing building, the contract price
Taxable gross collected, VAT not included were for
receipts include Materials P 3,300,000
gross receipts
Labor 1,000,000
For materials
furnished with Total P 4,400,000
the services. Gross receipts P4,400,000
Output VAT (1,100,000 x 12) P 528,000
Example.5 A building contractor received a payment on a construction in progress
Advances on P2,200,000. In addition, he received P220,000 advance of the contract price, on work still
the contract,
to be done. All amount mentioned are VAT not included.
although not
yet earned, are
already taxable Taxable Gross receipts P2,420,000
gross receipts x VAT 12%
Output VAT P 290,000

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 1st
PRELIM
5 Meeting JULIETA S. ECHEGOYEN MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Business Taxes
Module VALUE-ADDED TAX ON SALE OF SERVICES
AE25-BT BUSINESS TAXES Units: 3hrs Page |5

THE TAX RATE

(a) Twelve percent (12% of the gross receipts:
(b) Zero percent (0%) of the gross receipts from services performed to
certain entities under certain conditions (provided in the law).

THE TAX FORMULA

Output taxes ( seller’s value-added tax on sales )
Less: Input taxes (seller’s value-added taxes on purchases)
Value-added tax payable by the seller.

Example 6. Mr. K is a building contractor. He constructed a building for Mr. L for which he made a final
billing on October 20,2018 at P 6,000.00. VAT not included, for the materials used, and labor applied.
On that billing, he received P5,000,000 cash on the date of billing, with the balance received on October
29. Payments in October 2018 related to construction were:

Materials purchased on October 12, 2018,

Value-added tax not included P 1,000,000
Labor furnished by a sub-contractor, paid on
October 30, VAT not included 800

How much was the value-added tax payable for October,2018?

Solution:
Output Tax ( P6,000,000 x 12%) P 720,000
Less: Input Taxes
On materials purchased
(P 1,000,000 x 12%) P 120,000
On labor purchased
(P800,000 x 12%) 96,000 216,000
Value-added tax payable, October P 504,000

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

MODULE 1st
PRELIM
5 Meeting JULIETA S. ECHEGOYEN MR. WILBERT A. MAÑUSCA
Subject Teacher School Director