Chapter 1 Introduction to Business Taxes

 Meaning of “In the Course of Trade or Business”

The term “in the course of trade or business” means the regular conduct or pursuit
of a commercial or economic activity, including transactions incidental thereto, by
any person regardless of whether or not the person engaged therein is a nonstock,
non-profit 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.

Non-resident persons who perform services in the Philippines are deemed to be

making sales in the course of trade or business, even if the performance of
services is not regular. (Sec. 105, NIRC; RR 16-2005)

“Person” refers to any individual, trust, estate, partnership, corporation, joint

venture, cooperative or association.

A “commercial or economic activity” is an activity where the purpose is profit or

income. However, there are exceptions. Thus:
1. An importation of goods for personal use is subject to the value-added tax.
2. An overseas communications tax, even if not related to business, is
subject to a percentage tax.

The term “regular” involves more than one isolated transaction. It requires
repetition and continuity of action. This rule is subject to exceptions.

There may be isolated transactions which are subject to business taxes. Examples
are:
1. An importation of goods for personal use is subject to value-added tax.
2. A single overseas communication is subject to a percentage tax.
3. A winning in a horse race or jai-alai is subject to a percentage tax.
4. A single sale of shares of stock of a domestic corporation thru a local stock
exchange by one who is not a dealer in securities is subject to a
percentage tax.

 The Major Business Taxes

There are three major business taxes in the National Internal Revenue Code,
namely
1. Excise taxes
2. Percentage taxes
3. Value-added tax

 Excise Taxes
Excise taxes apply to goods manufactured or produced in the Philippines for
domestic sales or consumption or for any other disposition and to things imported.
Excise tax imposed shall be in addition to the value-added tax. (Sec. 129, NIRC)

Two classifications of excise tax

 Specific tax – tax is based on weight or volume capacity or other physical
unit of measurement (e.g. ₱5.00 year2013 excise tax per cigar, inc.4%
yearly).
 Ad valorem tax – tax is based on selling price or other specified value of
the good (e.g. 20% based on the wholesale price or the value of
importation; automobiles ₱600,000-₱1,000,000 selling price, excise tax
10%)

The excise taxes are imposed on

 Manufacturers; or
 Importers,
 Also apply to services* performed in the Philippines (RA 10963) .

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Of any of the following categories of goods or articles (Sec. 141-151, NIRC)

1. Distilled spirits (e.g. whisky, brandy, rum, gin and vodka)
2. Wines (e.g. Sparkling wines/champagnes)
3. Fermented liquors (e.g. beer and ale)
4. Tobacco products (e.g. chewing tobacco)
5. Cigars
6. Cigarettes
7. Manufactured oils and other fuels (e.g. gasoline, kerosene, and diesel fuel
oil)
8. Automobiles
9. Non-essential goods (e.g. jewelry, precious stones, perfumes, and yachts);
and
10. Mineral products (e.g. coal, copper and gold)
11. Sweetened Beverages (RA 10963)
12. Non-essential services* Performance of Services on Invasive Cosmetic Procedures (RA 10963)

* RR 2-2019
Note: Purely electric vehicles shall be exempt from the excise tax on automobiles, hybrid vehicles shall be
subject to fifty percent (50%) of the applicable excise tax rates on automobiles. The BIR shall make a
determination whether the EV or HEV is exempt from excise tax or subject to 50% excise tax, respectively,
on the basis of the Certificate of Non-Coverage (CONC) or Certificate of Conformity (COC) issued by the
DENR-EMB as presented by the manufacturer/assembler/importer. (RR 24-2018) TRAIN LAW

As points of emphases, there are two questions to ask

1. Is the taxpayer a manufacturer or importer?
2. Are the articles in any of the twelve categories of articles subject to excise
taxes?

Illustration 1
Mr. Ante is a manufacturer of cigarettes. Is Mr. Ante subject to excise tax?
Answer: Yes (Manufacturer & the article is included in the twelve)

Illustration 2
Mr. Bueno is an importer of wines. Is Mr. Bueno subject to excise tax?
Answer: Yes (Importer & the article is included in the twelve)

Illustration 3
Mr. Cruz is a dealer, buying and selling of automobiles. Is Mr. Cruz subject to
excise tax?
Answer: No (Neither manufacturer or importer, although the article is included in the twelve)
Illustration 4
Mr. De Guzman is a manufacturer of shoes. Is Mr. De Guzman subject to
excise tax?
Answer: No (Manufacturer but the article is not included in the twelve)

Illustration 5
Mr. Evangelista is an importer of signature clothes. Is Mr. Evangelista subject
to excise tax?
Answer: No (Importer but the article is not included in the twelve)

 Percentage Taxes
The percentage taxes under the National Internal Revenue Code are (Sec.116 -127,
NIRC)
 3% percentage tax on sale of goods, properties or services (1% from July
1, 2020 – June 30, 2023 CREATE Law)
 Common carrier’s tax on domestic and international carriers
 Franchise tax
 Overseas communications tax
 Tax on banks and non-bank financial intermediaries with quasi-banking
activities

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 Tax on other non-bank financial intermediaries

 Tax on life insurance companies, including tax on agents of foreign
insurance companies
 Amusement tax
 Tax on winnings; and
 Stock transactions tax

Except the 3% percentage tax which may be on the sale of goods or properties, or
of services, the percentage taxes are on services.

 Value-Added Tax
The value-added tax is imposed on
 Sale of goods or properties
 Sale of services; and
 Importation of goods

Subject to the basic rules

 That those whose annual gross sales or receipts do not exceed Three
Million Pesos (₱3,000,000) (RA 10963) are exempt from the value-tax, but
subject to the three percent (3%) percentage tax (but see optional
registration under the value-added tax system);
 That those whose annual gross sales or receipts exceed Three Million
Pesos (₱3,000,000) are subject to the value-added tax;
 That those who are subject to the percentage tax are not subject to the
value-added tax;
 That those who are subject to the excise tax shall pay the excise tax with
the value-added tax or with the 3% percentage tax.

Figure 1 Concurrence business taxes on businesses

Case 1. Excise tax alone? No
Case 2. Excise tax with value-added tax? Yes
Case 3. Excise tax with 3% percentage tax?* Yes
Case 4. Excise tax with any other percentage tax? No
Case 5. Value-added tax alone? Yes
Case 6. Percentage tax alone? Yes
Case 7. Value-added tax with any percentage tax? No

*if gross annual sales do not exceed ₱3,000,000

Figure 2 Business taxes on manufacturers, dealers, and importers of goods

Taxpayers Exciseable articles Non-exciseable articles

a) Manufacturers whose
annual gross sales do Excise tax
not exceed ₱3,000,000 3% percentage tax 3% percentage tax

b) Manufacturers whose
annual gross sales Excise tax
exceed ₱3,000,000 Value-added tax Value-added tax

c) Dealers whose annual

gross sales do not
exceed ₱3,000,000 3% percentage tax 3% percentage tax

d) Dealers whose annual

gross sales exceed
₱3,000,000 Value-added tax Value-added tax

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e) Importers Excise tax

Value-added tax Value-added tax

Illustration 6
Mr. Fajardo is a manufacturer of wines whose annual gross sales do not
exceed ₱3,000,000. Is he subject to excise tax? Answer: Yes
Is he subject to value-added tax or percentage tax?
Answer: Percentage tax

Illustration 7
Mr. Gapuz is a manufacturer of clothes whose annual gross sales do not
exceed ₱3,000,000. Is he subject to excise tax?
Answer: No (not included in the twelve categories of articles)
Is he subject to value-added tax or percentage tax?
Answer: Percentage tax

Illustration 8
Mr. Herrera is a manufacturer of cigarettes whose annual gross sales exceed
₱3,000,000. Is he subject to excise tax? Answer: Yes
Is he subject to value-added tax or percentage tax?
Answer: Value-added tax

Illustration 9
Mr. Ignacio is a manufacturer of shoes whose gross sales in a year exceed
₱3,000,000. Is he subject to excise tax?
Answer: No (not included in the twelve categories of articles)
Is he subject to value-added tax or percentage tax?
Answer: Value-added tax

Illustration 10
Mr. Joaquin is an importer of cigarettes. Is he subject to excise tax? Answer:
Yes
Is he subject to value-added tax or percentage tax?
Answer: Value-added tax

Illustration 11
Mr. Kenyo is an importer of signature clothes. Is he subject to excise tax?
Answer: No (not included in the twelve categories of articles)
Is he subject to value-added tax or percentage tax?
Answer: Value-added tax

 Registration of Business
Every taxpayer subject to an internal revenue tax must register with the Bureau of
Internal Revenue and pay an annual registration fee of five hundred pesos
(₱500) using BIR Form No. 0605 for every separate and distinct establishment,
including facility types (sales outlets, places of production, warehouses, and
storage places), where the business is conducted. He shall register each type of
internal revenue tax for which he is obligated. The taxpayers are required to pay
the annual registration fee not later than January 31, every year.

Illustration 12
Mr. Lumibao is a merchant. He has his main store in the City of Manila, a
branch store in Quezon City, and another branch store in Pasay City. How
many payments of registration fee are required? Answer: Three (3)

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 Registration as VAT Taxpayer When Annual Sales Exceed ₱3,000,000

Registration as a value-added taxpayer is required of a person if
 His gross sales or receipts for the past twelve (12) months, other than
those that are exempt under paragraphs (a) to (u) of Section 109, have
exceeded Three Million Pesos (₱3,000,000) or
 There are reasonable grounds to believe that his gross sales or receipts
for the next twelve (12) months, other than those that are exempt under
paragraphs (a) to (u) of Section 109 will exceed Three Million Pesos
(₱3,000,000).

For the consequence of the failure of a vatable person to register as value-added

taxpayer, see discussion in the chapter on value-added tax.

 Optional Registration
Any person who is not required to register for value-added tax because his sales
did not, or is not to expected to, exceed Three Million Pesos (₱3,000,000) a year,
may elect to register under the value-added tax system. When he thus registers,
he becomes subject to all the rules on value-added tax. Such election shall not be
cancelled for the next three (3) years.

 Transfer of Registration
In case a registered person decides to transfer his place of business or his head
office or branch, it shall be his duty to update his registration status by filing an
application for registration information update (BIR FORM 1905) in a prescribed form of the
Bureau of Internal Revenue.

 Cancellation of Registration
A registered person may cancel his registration by filing an application for
registration information (in a prescribed form BIR FORM 1905). For special rule on
cancellation of VAT registration see discussion in the chapter on value-added tax.

 Registration of Invoices and Receipts

A taxpayer who is in a business subject to the value-added tax should have his
invoices and receipts registered with the Bureau of Internal Revenue. Such
invoices and receipts should clearly indicate that he is a value-added tax
registered taxpayer. A taxpayer who is in a business not subject to the value-
added tax should have his invoices and receipts registered with the Bureau of
Internal Revenue. Such invoices and receipts should clearly indicate that he is not
subject to the value-added tax.

A taxpayer who has both a VAT and a non-VAT business may have one set of
invoices only (the VAT invoices and receipts), but in using a VAT invoice or receipt
for the non-VAT sale, the term “VAT-exempt sale” should be written or printed
prominently on the invoice or receipt (Sec. 11, RA 9337). If the words are not written or
printed, the sale becomes subject to the value-added tax. (See other rules on
invoices and receipts in the chapter on value-added tax).

 Registration of Books of Accounts

Every person in business must register a set of books of accounts with the Bureau
of Internal Revenue. This registration is simultaneous with the registration of the
invoices and receipts. The minimum requirements are a General Journal and a
General Ledger.

The general journal is called a book of “original entry.” Day to day business
transactions are recorded in the general journal. The transactions of a day must be
recorded in the general journal at the end of the day, or next day (not later than
twenty-four hours after the transaction).

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The general ledger classifies and summaries the transactions of a period (e.g.
month, year) as recorded in the general journal. For example, the cash receipts
and cash disbursements of a month are “entered” in a general ledger account with
the title “cash”. The cash balance at the end of the month will be reflected in a
report to management or in a financial statement called balance sheet. At the end
of the year, the year-end balance of the cash of the business will be reflected in
the general ledger, and will be reported in the balance sheet. At the end of the
year, the general ledger also summarizes and reflects the year-long income and
expenses of the business, and facilitates the computation of the net income of the
year.

The books of accounts of a business must be preserved for a period of three years
from the date of last entry in the books. While it is the practice of some business to
register a new set of books before the end of a year, for use next year, it is allowed
to use a set of books of accounts as long as it can be used, until it is filled up.
The registration of a new set of manual books of accounts shall only be at the time
when the pages of the previously registered books have all been already
exhausted, provided, that the portions pertaining to a particular year should be
properly labeled or marked by taxpayer. This means that it is not necessary for a
taxpayer to register/stamp a new set of manual books of accounts each and every
year. https://www.bir.gov.ph/index.php/registration-requirements/secondary-registration/registration-of-book-of-accounts.html

 The Tax Return

The data reported in the tax return (e.g. income tax return, value-added tax return,
etc.) must reflect data in the books of accounts. The Bureau of Internal Revenue,
in verifying the data in the tax return which were the basis of the payment of the
tax, will trace the date in the tax return to the books of accounts. For this reason,
the books of accounts should be kept in the office of the taxpayer within the
jurisdiction of the regional office of the Bureau of Internal Revenue where the
return was filed and the tax paid.

 Cessation of Business
The taxpayer should give notice to the Bureau of Internal Revenue should he
decide to discontinue the business that he registered with the Bureau. The reason
for this is that the Bureau will make a last determination if the taxpayer had
correctly paid all the taxes due while he was in business.

REVIEW QUESTIONS
1. When is a transaction subject to business tax?

2. Give instances of a non-business transaction subject to business tax?

3. Discuss the process of business registration?

4. Distinguish VAT from the non-VAT registration of a business?

5. Explain the invoicing requirements for VAT-registered persons?