BUSINESS TAXATION

Nature of Business Tax

1. Relative Consumption Tax
2. Indirect Tax
3. Privilege Tax
4. National Tax
5. Ad Valorem Tax

Types of Business Tax

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

Taxable Persons
1. Individuals
2. Corporations

Types of Business Registration

1. VAT Taxpayer
2. Non - VAT Taxpayer

Basis of Business Taxation

1. Sellers of goods or properties - Gross Sales
2. Sellers of services or lease of properties - Gross Sales

Types of Sales

Sales of Goods Sales of Services

Exempt Sales Exempt Sales Exempt Sales
Sales subject to Specific - BICAP FLOW
Percentage Tax
Vatable Sales Vatable Sales Vatable Sales

Exempt Sales:
1. Exempt Sales of Goods or Properties (SECRET Tax-free Gold)
● Sales of basic necessities to Senior Citizen and PWDs
● Sales of exempt goods
● Sales of goods by cooperatives
● Sales of residential properties
● Export sales by non-VAT person
● Treaty-exempt sales of goods
● Tax-free exchange of property
● Sales of gold to the BSP

2. Exempt Sales of Services (SEARCH2 VA TRIPS)

● Schools
● Employees
● Agricultural Contact Growers and Millers
● Residential Leasing
● Cooperatives
● Hospitals
● Home owner’s association and condominium corporations
● Lease of passenger or cargo vessels and air crafts, including machineries and spare
parts
● Treaty-exempt services
● Regional or Area Headquarters of multinational companies
 ● International carriers on transport of passengers
● Printers or publishers
● Essential services to senior citizens and PWDs

Other Exempt Sales of Goods or Services (CUNS)

1. Sales of Capital Assets by VAT or Non - VAT businesses
2. Sales of Assets held for Use by non-VAT Taxpayers
3. Sales of goods or services by persons not engaged in business
4. Sales of goods or services subject to special laws

Sales from Services Subject to Specific Percentage Tax (BICAP FLOW)

1. Banks and non-bank financial intermediaries
2. International carriers on transport of cargoes
3. Common carriers by land on transport of people
4. Certain amusement places
5. PSE sales of stocks by non-dealers
6. Certain franchise grantees
7. Life insurance
8. Overseas communication
9. Certain winnings

Special Exemption to the Percentage Tax

1. Cooperatives
2. Self-employed individuals and professionals (SEP) availing of the 8% on gross sales
and/or receipt and other non-operating income.

Compliance
A. 2551Q - within 25 days after end of each taxable quarter
B. Special deadlines
1. 20 days counted from end of each quarter
a. Overseas communication tax - within 20 days after the end of each quarter
b. Amusement tax - within 20 days from the end of the quarter
2. 20 days from specified event
a. Tax on winnings - within 20 days from withholding or deduction of the tax
b. Person retiring in business - within 20 days after closing the business
3. 5 banking days from date of collection - stock brokers on sales of stocks to PSE

VAT Threshold
1. TV or Radio franchise grantees - P10M per year
2. All other taxpayers - P3M vatable sales in the last 12 months, shall be adjusted to its
present values using the consumer price index, as published by the PSA every
three years.

Tax Treatment of Taxpayers

1. Those who are below threshold may register as non-VAT taxpayers subject to the 3%
general percentage tax
2. Those who are above threshold must register to the VAT

Types of VAT Registration

1. Mandatory Registration
2. Voluntary Registration

VALUE - ADDED TAX

Output VAT xx
Less: Input VAT (xx)
VAT Due xx
Less: Tax Credit (xx)
VAT Payable xx
Types of Output VAT
1. 12% VAT - for domestic consumption
2. 0% VAT - for foreign and special consumption

Sources of 12% Output VAT

1. Sales of Vatable Goods
2. Sales of Vatable Services
3. Sales of Vatable Real Properties
4. Transactions deemed sales
● Consignment if not withdrawn in 60 days
● Usage not in the course of business
- Withdrawal of goods for personal use
- Dacion en pago
- Property dividend
- Exchange of property
● Retirement from or cessation of business
● Change of status as VAT taxpayer to a non-VAT taxpayer

Seller’s option on exempt goods: Sellers may opt to apply the 12% VAT on the sales of
exempt goods, such option shall be irrevocable for three years.

Sources of Zero Rated VAT

A. Zero -Rated Sales of Goods

1. Direct exports
2. Sale of goods, supplies, equipment to persons engaged in international
shipping or transport (must be exclusive of international transport use)
3. Sales to persons or entities whose exemption under special law or
international agreement to which the Philippines is a signatory effectively
subject such sales to zero rates
4. Sale of goods to person with indirect tax exemption
B. Zero - Rated Sales of Services
1. Sales of services to non-residents
- Rendered in the Philippines
- Paid for in acceptable foreign currencies
2. Transport of passengers by Domestic air or sea carriers from Philippines to a
foreign country
3. Sale of power or fuel generated through renewable sources of energy
4. Sales to persons exempt under special laws or international agreements
5. Services rendered to persons engaged in international shipping or air
transport operations (must be exclusive on international transport service)

Input VAT
- the VAT paid to purchases including incentives allowed by the law as credit against
Output VAT
- claimed by VAT registered person only

Creditable Input VAT

1. It must be paid in the course of business
2. It must be billed by a VAT supplier
3. Evidenced by a VAT invoice

Sources of Input VAT (TRAPSI)

1. Transitional Input VAT
2. Regular Input VAT
- Purchase of goods
- Purchase of services
 - Purchase of capital goods
3. Amortization of deferred input VAT
4. Presumptive input VAT
5. Input VAT carry-over

Note on 5% creditable withholding VAT on government purchases

● Withholding does not apply to:
- purchases of goods or services arising from projects funded by Official
Development Assistance (ODA)
- payment for lease or use of property or property rights to non-resident
owners
Remittance of 5% creditable withholding VAT shall be within 10 days following the month of
withholding

VAT Tax Credits

1. Estimate VAT payments
2. VAT withheld by government, GOCCs and LGUs
3. Advanced VAT
a. Manufacturers of refined sugar or flours
b. Owners or transporters of timber
4. Others

Compliance
A. Filing of returns
1. 2550Q on or before the 25th day following the end of the quarter
B. Invoicing Requirement
Sales Invoice - for every sale of goods, properties, services, use or lease of
properties

C. Accounting Requirement
1. Maintain the usual regular accounting records
2. Maintain subsidiary sales journal and subsidiary purchase journal
SPECIFIC PERCENTAGE TAX (BICAP FLOW)

1. Banks and non-banks financial intermediaries - Gross Receipt Tax

Remaining Bank Non-bank

maturity

≤ 5 yrs. 5% 5%
Interest
Revenue/ Income > 5 yrs. 1% 1%
Income
Dividends 0% 0%

Others 7% 5%

2. International carriers on transport of cargoes

Passengers - exempt
Excess baggage/ mails/ cargoes - 3%

3. Common carriers by land on transport of people

Common Carriers Passenger Others

Land 3% CCTax vatable

Sea vatable vatable

Air vatable vatable

4. Certain amusement places

a. Places of boxing exhibition - 10%

b. Places of basketball exhibition - 15%
c. CCC (Cockpits, cabarets and clubs) - 18%
d. Jai-alai and Racetracks - 30%

5. PSE sales of stocks by non-dealers

IPO - exempt
Sale by investor - 60% of 1% of GSP (Stock Transaction Tax)
Dealer of securities - vatable

6. Certain franchise grantees

TV/ Radio - 3% Franchise Tax (GR ≤ 10M/ yr), > 10M (Vatable)
Gas or Water - 2% Franchise Tax on sale of gas/ water only

7. Life insurance

Insured - Insurer (2%)

Insurer - Reinsurer (0%)
Insured - Foreign Insurer (Without an agent - 5%)
(With agent - 4%, except when reported to the BIR, 2%)

8. Overseas communication - 10% on outgoing calls

9. Certain winnings - additional amusement tax

Jai-alai and Racetracks - 10% on all winnings, net of cost of winning ticket
Except: combination bets on horses, 4%
● double forecast
● quinella
● trifecta
● exacta
● perfecta
VAT ON IMPORTATION
- the tax on domestic consumption sourced from abroad

Exempt Importation
1. Import of exempt goods
a. Agricultural and marine food products in their original state
b. Fertilizers, seeds, seedlings and fingerlings, fish, prawn, livestock and poultry
feeds, including ingredients used in the manufacture of finished feeds.
c. Books and any newspaper, magazine, review, or bulletin which appear at
regular intervals with fixed prices for subscription and sale and which is not
devoted principally to the publication of paid advertisements
d. Passengers or cargo vessels and aircrafts, including engine, equipment and
spare parts thereof for domestic or international transport operations.
e. critical or needed health care equipment and supplies
f. raw materials to make health equipment
g. prescription drugs and medicine for diabetes, high cholesterol, hypertension,
cancer, mental illness, TB, and kidney diseases)

2. Importation by VAT - exempt persons

a. International shipping or air transport operators on their import of fuel, goods and
supplies.
b. Cooperatives of direct farm inputs, machineries and equipment, including spare parts
thereof, to be used directly and exclusively in the production and/ or processing of
their produce.
c. PEZA locators on their import of goods or services

3. Quasi - importation
a. Personal and household effects belonging to residents of the Philippines returning
from abroad and non-resident citizens coming to resettle in the Philippines
b. Professional instruments and implements, wearing apparel, domestic animals and
personal household effects belonging to persons coming to settle in the Philippines,
for their own use and not for sale, barter or exchange

4. Importation which are exempt under special laws and international agreement

Meaning of simple processing

a. Acts of preparation for the market
b. Acts of preservation
c. Acts of packaging including advanced technological means of packaging

Examples of simple acts of preparation:

a. Boiling
b. Broiling
c. Husking
d. Roasting
e. Stripping’
f. Grinding

Examples of simple acts of preservation:

a. Freezing
b. Drying
c. Smoking
d. Salting

Packaging is not processing as it does not alter the nature of the products. It merely involves
putting the product in a medium that makes it convenient for handling, storage or marketing.
Thus, goods may still be in their original state even if they are packaged using advanced
technological means. such as:
a. Shrink wrapping in plastics
b. Vacuum packing
c. Tetra-packing
d. Other similar packaging methods

Scope of the VAT on Importation

The VAT applies on all other importation not specifically exempted without regard to whether
or not

1. The importer is engaged in business

2. The importer is VAT or non-VAT registered
3. The importation is for business or personal use
4. The non-resident seller is engaged in business

Basis of the VAT on importation - Landed Cost x 12%

Composition of Landed Cost

A. Dutiable value
B. Other in-land costs
1. Custom duty
2. Excise Tax, if any
3. Other in-land costs, such as:
A. Bank charge
B. Brokerage fee
C. Arrastre charge
D. Wharfage dues
E. Documentary stamp tax
F. Import processing fees

Final Withholding VAT - 12% of Contract Price

- The tax on the domestic consumption of services purchased from abroad.

Criteria:
1. Services must be rendered within
2. Service provider must be a non-resident alien or non-resident foreign corporation
3. The payor is a constituted withholding agent
a) An individual engaged in business or practice of a profession, or
b) A corporation
Except: VAT-exempt person
CONSUMPTION TAX

Rationale of Consumption Taxes

1. Savings formation
2. Benefit received theory
3. Wealth redistribution

Types of Consumption

1. Domestic
2. Foreign

Types of Domestic Consumption

1. Sale
2. Importation

Types of Consumption Tax

1. Business Tax
2. VAT on Importation

VAT on Importation vs. Business Tax

Point of Differentiation VAT on Importation Business Tax

Scope of Tax All imports Purchase from business

sellers
Type of Consumption Pure form Relative form
Tax
Statutory Taxpayer Buyer/ Importer Seller
Economic Taxpayer Buyer/ Importer Buyer
Nature of Imposition Direct Indirect
Basis of the tax Total Purchase/ Import cost/ Sales
Landed Cost

Types of Domestic Consumption as to taxability

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

Basis of Exempt Consumption

1. Human necessity
2. Out of the scope of the tax
3. Tax incentives
4. International comity

Types of VAT on Importation

 1. VAT on import of goods
2. Final Withholding VAT on services

VAT on import of goods vs. Final Withholding VAT

Point of Differentiation VAT on Importation Final Withholding VAT

Object of consumption Goods Services
Target taxpayers Importer/ Buyer Non-resident Service
Provider
Statutory taxpayer Importer/ Buyer Resident Purchaser of
Service
Nature Direct Consumption Tax Indirect CT
Basis of tax Landed Cost Contract Price
Timing of payment Before withdrawal of goods After the month of payment
from the BOC
Collecting agency BOC BIR

Types of Business Taxes

1. Percentage Tax
a. Specific Percentage Tax (BICAP FLOW)
b. General Percentage Tax
2. Value added tax
3. Excise tax