FINALS

BUSINESS TAXATION

BUSINESS TAXATION

The “business” Concept

General Rule: “Habitual engagement in a commercial activity.

Exception Rule:
1. Business for subsistence (GR or NS ≤ P100, 000/year) = not considered business
2. Sales or services of non-resident aliens/non-resident foreign corporation = considered engage in business.

Nature of Business Taxes

1. Privilege tax- levied upon the right to engage in business (still chargeable even if the business is incurring losses)
2. Consumption tax- levied upon the consumption of goods or services
3. Indirect tax- passed by sellers to buyers

Types of National Business Taxes

1. Percentage Tax
2. Value Added Tax
3. Excise Tax- Manufacturers or importers of sin products or non-essential commodities

SERVICES SPECIFICALLY SUBJECT TO PERCENTAGE TAX

1. COMMON CARRIERS BY LAND AND KEEPERS OF GARAGE- 3% OF GROSS RECEIPTS

2. INTERNATIONAL AIR OR SHIPPING CARRIERS doing business in the Philippines- 3% of quarterly gross receipts on
transport of goods and services only

3. FRANCHISE

a. Radio and/or television broadcasting companies whose annual gross receipts of the preceding year do not
exceed P 10,000,000.00 ------------------------ 3%

b. Gas and Water Utilities ---------------------- 2%

4. OVERSEAS DISPATCH OF MESSAGE OR CONVERSATION ORIGINATING FROM THE PHILIPPINES

Based on the amount paid by the user to the provider of the communication facility for outgoing calls only -----------
------------------------ 10% of the amount paid

EXEMPTIONS:

a. government calls
b. diplomatic services (embassies and consular offices of foreign governments)
 c. International organizations- for messages transmitted by international organization or any of its agencies
based on the Philippines enjoying privileges, exemptions and immunities which the Philippines Government
recognize pursuant to international agreements.
d. News services

5. Banks and non-bank financial intermediaries performing quasi- banking functions

A. Banks and Non-bank financial intermediaries performing quasi- banking functions

1. On interest commissions and discounts from lending activities, income from financial leasing, on the basis
of remaining maturities of instruments from which such receipt were derived.
i. Maturity period is five years or less ------------------------------- 5%
ii. Maturity period is more than 5 years ----------------------------- 1%

2. On dividends and equity shares in net income of subsidiaries ---------- 0%

3. On royalties, rental of properties, real or personal, profits from exchange and all other items treated as gross
income under the income tax law -------------------------------------------------- 7%

4. On net trading gains on foreign currency, debt instruments, derivatives and other similar financial
instruments ------------------------------------------------------------------------------- 7%

B. Tax on Other Non-bank financial intermediaries

1. On interest commissions and discounts from lending activities, income from financial leasing, on the basis
of remaining maturities of instruments from which such receipt were derived.
i. Maturity period is five years or less ------------------------------- 5%
ii. Maturity period is more than 5 years ----------------------------- 1%

2. On interest, commissions, discounts and all other items treated as gross income under the income tax law ---
---------------------------------------------------------------------------------------------------- 5%

6. Life Insurance

i. Non-life insurance companies – subject to VAT

ii. Premium tax of 2% on the total life insurance premium collected whether in money or notes, credits, or any
substitute for money.

Exemptions:

a. Premium refunded within six months after payment on account of rejection of risk or returned for other
reasons to a person insured.
b. Reinsurance premium paid by a company that has already paid the tax.
c. Premiums collected or received by any branch of a domestic corporations, firm or association doing
business in the Philippines on account of any life insurance of an insured who is a non-resident, if any tax
on such premium is imposed by the foreign country where the branch is established.
d. Reinsurance premiums, if the insured of personal insurance resides outside the Philippines, if any tax on
such premium is imposed by the foreign country where the original has been issued or perfected.
 e. Portion of the premium collected or received by insurance companies on variable contracts in excess of the
amount necessary to insure the lives of variable contract owners.

7. Agents of foreign insurance companies

i. For marines, fire or miscellaneous insurance agents authorized to procure insurance to transact on risk
located on the Philippines for companies not authorized to transact business in the Philippines --- 2x tax on
life insurance ---------------------------------------- 10%
ii. If the owner of property or the insured interest directly for himself obtained policies in foreign companies
(This must be duly reported to the Insurance Commissions and the BIR) ------ 5%

8. Amusement Tax

Amusement Place Tax

Place of boxing exhibitions 10%
Place for professional basketball games 15%
Cockpits, cabarets, night or day clubs 18%
Jai-alai and race tracks 30%

Coverage: Income from gross receipt, including income from television, radio and motion picture rights

Exemption on Boxing:

a. World or Oriental Championship (International) titled boxing out in any division

b. At least one contender is a Filipino Citizen
c. Promoter is a Filipino citizen or corporations which is at least 60% owned by Filipino citizens

9. Winnings

Tax
Winnings in horse races or jai-alai 10%
Double forecast, quinella, and trifecta bets 4%
Owner of winning horse 10%

10. Sale, Barter, exchange of shares through the Philippine Stock Exchange

1. On sale, barter, exchange or other disposition of shares listed and traded through a local stock exchange
other than by a dealer in securities -------------- ½ of 1%
2. On sale, barter, exchange or other disposition thru initial public offering (IPO) of shares of stocks of a
closely held corporation in accordance with the percentage of shares sold, bartered or exchanged or
otherwise disposed of to the total outstanding shares of stock after the listing in the listing in the local
stock exchanged.
a. Up to 25% -------------------------------------------------- 4%
b. Over 25% but not over 33.333% ---------------------- 2%
c. Over 33.333% ---------------------------------------------- 1%
VAT-EXEMPT TRANSACTIONS (A/M HERE RIC QT)

1. Agricultural or Marine

a. Food products in original state

b. Agriculture or Marine products inputs
c. Agricultural contract growing

2. Health or Hospital services, except

a. Professional Services
b. Sales of Medicine(outpatient)

3. Education such as

a. Schools
b. Books, newspapers and magazine

4. Residential Properties such as

a. Sales of Properties not in the course of business

b. Sales of residential properties in the course of business subject to price limits
i. Residential Lots
ii. Residential dwellings
iii. Low-cost housing units
iv. Socialize housing units
c. Lease of Residential dwellings

5. Employment

6. Regional Area Headquarters of multinational companies

7. International carriers on transport of passenger

8. Cooperatives

9. Quasi Importation

a. Imports of fuels by persons engaged in international transport operation

b. Import of personal, household or professional implements and effects by non-residents

10. Transactions exempt under treaty

11. Services specifically subject to percentage tax

THE VALUE ADDED TAX

OUTPUT VAT

A. Domestic sales – 12%

1. Actual Sales – 12% of the gross selling price/ gross receipts
“What is meant by gross selling price or gross receipts?”
The price agreed in the sales contract as diminished by:
a) Discounts determined and granted at the time of sales, which are expressly indicated in the invoice,
the amount thereof forming part of the gross sales duly recorded in the books of accounts
b) Sales discounts indicated in the invoice at the time of sale, the grant of which is not dependent
upon the happening of a future event, may be excluded from the gross sales within the same
month/quarter it was given
2. Transactions deemed sales (constructive sales)- 12% of the fair market value as determined by the CIR
a) Consignment of goods which remain unsold within 60 days
b) Transfer, use or consumptions not in the ordinary course of business of goods or properties
originally intended for sale or for use in the ordinary course of business
EXAMPLES:
i. Withdrawal of goods for personal use
ii. Distributions to shareholders or investors as share in the profits
iii. Transfers to creditors in payment of debt or obligations
c) Retirement from or cessation of business with respect to all goods on hand, whether capital goods,
stock in trade, supplies or materials, as of the date of such retirement or cessation
i. Change in business ownership- i.e incorporation of a sole proprietorship and sale of a
business.
ii. Dissolution of a partnership and formation of another to take over the business
d) Cessation of status as VAT taxpayer

The Commissioner of Internal Revenue shall determine the appropriate tax base under the following instances:

a) Transactions deemed sales

b) Barter or exchange of goods
c) The selling price is unreasonably lower than actual market value (lower by more than 30% of the
FMV)

B. ZERO RATED SALES – 0%

Zero rated sales of goods:

1. Actual export to a foreign, irrespective of the agreed shipping arrangement

2. Sales of raw or packaging materials to a non-resident buyer for delivery to a resident local export-
oriented enterprise
3. Sales to export oriented enterprises (exports exceeds 70% of annual production)
4. Export sales under EO 226-in addition to actual export
a) Sale of export producer to another export producer or to an export trader that subsequently
export the same
 b) Even without actual export
i. Sales to bonded manufacturing warehouses of export-oriented manufacturers
ii. Sales to export processing zones (BOI-registered manufacturers or producers)
iii. Sales to registered export traders operating bonded trading warehouses supplying raw
materials in the manufacture of export products
iv. Sales to diplomatic missions and other agencies and or instrumentalities granted tax
immunities of locally manufactured, assembled or repacked products whether paid for
in foreign currency or not
5. Sales to person engage in international shipping or air transport operations (no domestic operations)
6. Sales of locally manufactured or assembled goods for household and personal use to Filipinos abroad
and other non-resident of the Philippines (returning OFWs)
7. Sale of gold to the BSP
8. Sales to persons deemed tax-exempt under special laws or international agreements
a. Subic Bay Metropolitan Authority (SBMA)- registered and accredited entities pursuant to RA
7227
b. Phil Economic Zone Authority (PEZA)- registered and accredited entities
c. Entities exempt under international agreement to which the Philippine is a signatory
- Asian Development Bank (ADB)
-International Rice Research Institute (IRRI)

ZERO-RATED SALES OF SERVICES:

1. Processing, manufacturing and repacking goods for other persons doing business outside the
Philippines, which goods are subsequently exported.
2. Other services rendered to a person engaged in business conducted outside the Philippines or to a non-
resident person not engaged in business who is outside the Philippines when the services are performed
3. Transport of passengers and cargo by domestic air or sea carriers from the Philippines to a foreign
country (Note: resident foreign international air or sea carriers are subject to a 3% percentage tax)
4. Sale of power or fuel generated through renewable sources of energy (biomass, solar, wind,
hydropower, geothermal and steam, ocean energy, and other emerging sources using technologies such
as fuel cells and hydrogen fuels)
5. Services rendered to a persons or entities whose exemptions under special laws or international
agreement to which the Philippines is a signatory
6. Services rendered to a person engaged in international shipping or air transport operation, including
leases of property for use thereof
7. Services performed by subcontractors and/or contractors in processing, converting, or manufacturing
goods for an export-oriented enterprise.
*must be paid in acceptable foreign currencies and accounted for with the rules and regulations of the
BSP.

Note: Regardless of whether the following are actually exported. The sales of the following are not
subjected to zero-rating

1. Automobiles
 2. Non-essential goods
a. Jewelry, peal, precious and semi-precious stones and imitations
b. Perfume and toilet waters
c. Yachts and other vessels for pleasure

INPUT VAT

1. Regular Input VAT – 12% of

a. Domestic purchase from VAT supplier
b. Importation of goods or services for business use -12% withheld VAT for payments to non-residents

When to claim regular input VAT?

- Capital goods – aggregate cost (> P1M, amortize over not less than 60 months, otherwise immediately)

- Non Capital Goods- immediately

2. Transitional input VAT – 2%of BI subject to VAT or actual VAT paid in BI whichever is higher
3. Presumptive input VAT - 4% of agricultural purchases of manufacturers of:
a. Sardines
b. Mackerel
c. Milk
d. Cooking oil
e. Packed Noodles
f. Refined Sugar
4. Deferred Input VAT- unamortized balance of input VAT on purchases of depreciable capital goods
5. Withheld Final VAT- final VAT of 5% of government withheld by the government, any of its political
subdivisions, instrumentalities, including GOCC’s (to be remitted within 10 days following month of
withholding)
6. INPUT VAT Carry-Over- excess of input VAT over output VAT in any period

Treatment of input VAT

1. Input VAT traceable to zero-rated sales are claimable either as:

a. Tax credit or
b. Tax refund

2. Input VAT traceable to exempt sales are part of cost of goods sold

3. Input VAT traceable to sales to the government is compared with to the standard input VAT (7% of gross
payment to the government or GOCC)

a. If actual input VAT > standard input VAT (7% of invoice price to government sales)- deductible expense
 b. If actual input VAT < standard input VAT (7% of invoice price to government sales)- taxable gain

4. Input VAT traceable to regular sales is deducted against output VAT.

a. Net output VAT- VAT payable

b. Net input VAT- deferred input VAT

How to claim of deferred input tax?

● Deferred input VAT from the prior quarter is deductible in the first month of the succeeding quarter
● Deferred input VAT in the first month is deductible in the second month
● Deferred input VAT in the second month is not deductible in the cumulative quarterly VAT return

Advance Input VAT- applicable for manufacturers or processors of refined sugar, flour and timber

DEADLINE OF PAYMENT OF BUSINESS TAXES

A. Value Added Tax

a. Monthly- 20 days end of the month

b. Quarterly- 25 days end of the quarter

B. Percentage Tax

General Rule: within 20 days of each taxable month

Exemptions:

1. Overseas communication tax- 20 days end of quarter

2. Amusement Tax- 20 days end of quarter

3. Tax on winnings- 20 days from date of withheld

4. ½ of 1% stock transaction tax- 5 banking days from date withheld by the broker

5. IPO stock transaction tax (4%,2%;1%) – within 30 days from listing in the local stock exchange

LIST OF TRAIN LAW CHANGES

1) Indirect exports re-classed from 0% to 12%
a) Sales of raw material or packaging materials to a non-resident buyer for delivery to a resident local export-
oriented enterprise.
b) Sale of raw material or packaging materials to a local export-oriented enterprises whose export sales
exceed 70% of total annual production.
c) Export sales under EO 226 and other special law.

2) Provision for the export treatment of goods to registered enterprises within a separate customs territory (PEZA
and TIEZA) is vetoed.
3) Sale of gold to BSP is reclassified from zero-rated to exempt
4) Removal of foreign currency denominated sales from zero-rating.
5) Additions to VAT- exempt transactions.
a) Sales or lease of goods and services to senior citizen and person with disabilities
b) Transfer of property in pursuant to a plan of merger and consolidation (acquisition of control with up to 4
other persons)
i) Property stocks
ii) Stocks for stocks
iii) Security for stocks
c. Association dues, membership dues, and other assessment and charges collected by homeowners
association and condominium corporations.
d. Sale of gold to BSP
e. Sale of drugs and medicines prescribed for diabetes, high cholesterol and hypertension (effective Jan 1,
2019)
6) Reduction of the P3, 199,200 VAT threshold on sale of residential properties to P2M but to be adjusted by
inflation every three years.
7) Increase of lease threshold from P12, 800 to P15, 000 with no CPI adjustments thereafter.
8) Inclusion of the sales of electricity in the definition of the sales or exchange of services.
9) VAT refund period of 120 days to 90 days.
10) Amortization of deferred input VAT shall be only until Dec 31, 2021. Those with existing deferred input VAT
shall amortize the same until fully utilized.
11) Shifts the VAT withholding system from final to creditable (effective January 1, 2021). Payments for goods and
services arising from Official Development Assistance – funded projects shall not be subjected to the final
withholding VAT.
12) Exemption on self-employed individuals and/or gross receipts not exceeding P500, 000 from 3% gross receipts
tax effective Jan 19, 2019 is vetoed. Consequently, they will pay 3% percentage tax.
13) VAT will be paid quarterly every 25 days following the close of each taxable quarter effective Jan 21, 2023.
I. References:
⮚ Banggawan, Rex: Business and Transfer Taxation, 2017 ed
⮚ Bir.gov.com.ph Train Law