Chapter 3

Introduction to Business
Taxation
 Introduction to Business Tax

It must be recalled that the consumption tax on domestic

consumption from resident sellers is relative. The tax
applies only if the seller is engaged in business. It will not
apply if the seller is not engaged in business.
Hence, this consumption tax is called “business tax,
therefore, is a consumption tax payable by persons
engaged in business.
What is Business?
A business is habitual engagement in a commercial
activity involving the sale of goods or services to
customers or clients.
 Essential Requisites of a business:

1.Habitual Engagement
2.Commercial Activity
 Habitual Engagement
There must be regularity in transactions to construe the
presence of a business. Isolated or casual sales are not regular
activity, hence, presumed not made in the ordinary course 0f
business.
Habitual engagement is normally manifested by registration as a
dealer, a service provider, or a practitioner in a particular trade or
profession. However, non-registration does not exonerate one
who is actually engaged in the regular trade or business from
being liable to pay business taxes.
 Application of the Regularity Rule

The following are not considered business for lack of

regularity in their operations:

1. Sale by non-dealers
2.Privilege Stores
 Sales by Non-dealers

Non dealers are those who makes casual sale of goods or

properties. Dealers who sell properties which they are not
engaged in dealing with are also considered sale by non-
dealers. Sales of non-dealers are not subject to business
tax:
Illustration:

Mang Merto is a real property dealer. During period of excess cash liquidity, he
usually purchases shares of stocks of others corporations as investment. He
sells them when cash needs arise.
The acquisition and sale of stocks investments by a realtor is one not made in
the course of the realty business and are not subject to business tax.
If Merto is a security dealer, the transaction would be considered made in the
course of business and hence, subject to business tax.
 Privilege Stores
Privilege Stores, most commonly known as “tiangge”, are stalls or
outlets which are not permanently fixed to the ground during
special events such as festivals and fiestas. (RR16-2013)
A privilege store operators shall not be considered habitually
engaged in business. As such, he is exempt from business tax but is
subject to income tax.
To be considered privilege store, the store should engage in a
business activity for a cumulative period of not more than 15 days.
Otherwise, they shall be considered regular taxpayers subject to
business taxes and income tax.
 Exceptions to Regularity Rule

1. Business principally for subsistence or livelihood

2. Sales of non-residents are presumed made in the course of
business
 Business principally for subsistence or
livelihood
Business principally for subsistence or livelihood, refers to businesses
with gross sales or receipts not exceeding P100,000 per year.

Marginal Income Earner

Refers to individual not deriving compensation income under an
employer-employee relationship but who is self-employed deriving
gross sales or receipt not exceeding P100,000 in any 12-month period.
Examples of Marginal Income Earners:
a. Agricultural growers or producers (farmers or fishermen)
b. Small sari-sari stores
c. Small cariderias or “turo-turos”
d. Drivers or operators of a singles unit tricycles, and
e. Others similarity situated

Marginal income earners do not include licensed professionals,

consultants, artists, sales agents brokers including all others whose
income have been subjected to withholding tax. (RMC 7-2014)
 Sales of non-residents are considered made
“in the course of business”
Under current tax regulations, the sales of non-resident persons are presumed
made in the course of business without regard as to whether the sale is regular or
isolated. Accordingly, sales by non-residents are to be subjected to business tax.
Since import purchase is a form of domestic consumption, it must be subject to
consumption tax. If we view consumption tax as a business tax alone, the seller
has to be presumed engaged in business to be subjected to business taxation.
This rule would have been unnecessary if the demarcation line between VAT on
importation and business tax is well highlighted in the regulations. VAT is usually
viewed as a single type of consumption ta which includes VAT on importation
and VAT on sales which is a business tax. It must be clarified again that these are
different types of taxes.
 Commercial Activity

Commercial activity means engagement in the sale of goods or

service for a profit. The goods or services must be offered to the
public with a motive to earn unrestricted amount of pecuniary
gains. However, the actual existence of a profit during the period is
a not a pre-condition to business taxation. Even if the business
operation results to a loss, business tax still applies.
The following are not business under this rule:
1. Government agencies and instrumentalities- primary motive is
to provide essential public services.
2. Non-profit organizations or associations- provide eleemosynary
services not aimed at generating income.
3. Employment- employees renders services to their employers in
exchange to a periodic compensation.
4. Directorship in a corporation- although not considered as an
employment, it does not involve offering of services to the
public for a profit.
Business Taxpayers
What is a taxable person in business taxation?
The term person refers to any individuals, trust, estate,
partnership, corporation, joint venture, cooperative or association.
Each person, natural or juridical is considered a taxable unit. The
concept of a taxable unit in income taxation applies as well in
business taxation, except that a taxable unit in business taxation is
called a taxable person.
Hence, a general professional partnership which is exempt from
income tax is subject to business tax. Likewise, local water districts
which is legally exempt from income tax is also subject to business
tax.
 Registration of business
Any person who, in the course of trade or business, sells barters,
exchanges goods or properties, or engaged in the sale of services
subject to business tax shall:
a. Registration with the appropriate Revenue District Office (RDO)
using the appropriate BIR form
b. Pay annual registration fee of P500.00 using BIR Form No. 0605 for
every separate or distinct establishment where sales transactions
occur
Any person who maintains a head or main offices and offices in
different places shall register with the RDO which has jurisdiction over
the place where the head office or each branch is located.
Registration Certificate
A certificate of registration shall be issued to the applicant by the concerned BIR office upon
compliance with the requirements for registration.

Posting of Registration Certificate

Every registered taxpayer shall post or exhibit his Registration Certificate (original copy) and duly
validated Registration Fee Return at a conspicuous place in his principal place of business and at each
branch in such a way that is clearly and easily visible to the public.

Types of Business as to Registration

a. VAT- registered taxpayers- pay 12% VAT
b. Non-VAT registered taxpayers- pay the 3% percentage tax

Business Classification as to activities

For purposes of business taxes, businesses registered as VAT or non-VAT taxpayers are classified into
which activities they are involved:
c. Sales or exchange of goods or properties
d. Sales of exchange of services or lease of properties
Sale of Goods as properties
Under the NIRC, the term “Goods or Properties” refer to all tangible and
intangible objects which are capable of pecuniary estimation and shall include,
among others:
1. Real properties held primarily for sale to customers, held for lease or is
used in the ordinary course of trade or business.
2. The right or the privilege to use patent, copyright, design or model, plan,
secret formula or process, goodwill, trademark, trade brand or other
similar properties or rights:
3. The right or privilege to use in the Philippines any industrials, commercial
or scientific equipment;
4. The right or privilege to use motion picture films, films, tapes and discs;
and
5. Radio, television, satellite transaction and cable television time.
Tax bases of Business Taxes
1. For sellers of goods or properties- taxable on gross selling price.
2. For sellers of services or lessors of properties- taxable on gross
receipts.

Gross selling price- refers to the total amount of money or its

equivalent which the purchaser pays or is obligated to pay to the seller
in consideration of the sale, barter or exchange of goods or properties.
The exercise tax, if any on such goods or properties shall form part of
the gross selling price.
The term gross selling price includes sales made in cash, on credit and
on installment basis. This is analogous to the income taxation concept
of gross sales except only on the treatments of contingent discount.
Gross Receipt
Refers to the total amounts of money or its equivalent representing the contract price,
compensation, service fee, rental or royalty, including the amount charged for materials
supplied with the services and deposit applied as payments for services, rendered and advanced
payments actually or constructively received during the taxable period for the services
performed or to be performed for another person, excluding VAT.

Constructive Receipt
Occurs when the money consideration or its equivalent is placed at the control of the person
who renders the services without restriction by the payor. This is added as part of gross receipts.
Examples:
1. Deposit in bank account of the seller made by the buyer in consideration of services
rendered or goods sold.
2. Issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof
the seller as a payment for services rendered.
3. Transfer of the amount retained by the payor to the account of the contractor.
Agency monies
Amounts earmarked for payment to unrelated third party or
received as reimbursement for advanced payment on behalf of
another which do not redound to the benefit of the payor is not
part of gross receipt.

Insurance proceeds on damaged assets

The receipt of insurance proceeds from the destruction of a
company’s business assets is not viewed as sales or receipts for
purposes of business taxation. The compulsory or involuntary
conversion of property into money such in the case of insurance
reimbursement is not viewed as a sale in the ordinary course of
business.
 Difference of the concept of gross receipts and
sales between VAT and non-VAT Taxpayers
For Non-VAT Taxpayers
The amount billed to the customer or client on the sale of goods or services is
the sales or gross receipts respectively.

For VAT-taxpayers
The amount billed to the customer or client (invoice price) on the sale of
goods or services includes the sales or gross receipts plus the 12% output of
VAT.
 Business Tax Accounting Period
The length of accounting period for business taxes is one quarter. This is referred to
as a taxable quarter. The taxable quarter is composed of three months which is
synchronized with the taxable year of the taxpayer for income tax purposes.

Illustration for Calendar Year Taxpayers

Atty. Domingo is registering with the BIR as a self-employed law practitioner.
In income taxation , individuals are limited to use only the calendar accounting
period. Hence, the taxable quarters of Atty. Domingo shall be:
• First Quarter : January 1 to March 31
• Second Quarter : April 1 to June 30
• Third Quarter : July 1 to September 30
• Fourth Quarter : October 1 to December 31
 Business Tax Reporting
Intra-quarter Business Tax Reporting
To minimize the burden of one-time payment of the quarterly business tax,
payment of business tax is spread to the months of the quarter.

Business tax reporting of VAT taxpayers

VAT taxpayers are required to report their receipts or sales in two monthly VAT
returns (BIR Form 2550 M) for the first two months of the quarter and one
quarterly VAT return (BIR Form 2550 Q) on the third and last month of the
quarter.
 Types of Business Tax Returns
VAT Taxpayers Non-VAT Taxpayers

Monthly tax return BIR Form 2550 M BIR Form 2551 M

Quarterly tax return BIR Form 2550 Q BIR Form 2551 Q

Note: All VAT taxpayers file monthly VAT returns and a quarterly VAT return in
every taxable quarter. A percentage taxpayer files either Form 2551 M or Form
2551 Q.
 Deadline of Business Tax Returns
VAT Taxpayers Non-VAT Taxpayers

Monthly tax return Within 20 day from the end of Within 20 days from the end of
month the month

Quarterly tax return Within 25 days from the end of Within 20 days from the end of
the quarter the quarter

Short Period Return

Any person who retires from business with due notice to the BIR office where the taxpayer
(head office) is registered or whose VAT registration has been cancelled shall file a final
quarterly return and pay the tax due thereon within twenty five (25) days from the end of the
month when the business ceases to operate or when the VAT registration has been officially
cancelled.
The Scope of VAT and Percentage Tax
Let us specifically delineate in the following sections the line of demarcation between the
scope of the VAT and the percentage tax. You may wish to refer to the Concept Structure of
Consumption Taxes.

Categories of Business Sales:

1. Exempt sales
2. Sales of services specifically subject to percentage taxes
3. Vatable sales

Exempt Sales
There are certain consumptions or purchases that are exempted by the law from taxation.
Recall again that those purchases made from abroad are called importation while those
purchases made from domestic sellers are sales or receipts in the sellers perspective.

Hence, there are two types of exempt consumption under the NIRC:
4. VAT exempt importation- exempt consumption from abroad.
5. VAT exempt sales- exempt consumption from domestic sellers.
Examples of exempt sales
1. Sales of basic necessities, such as:
a. Agricultural or marine food products
b. Health services of hospitals
c. Educational services of schools
d. Housing or residential properties within price limits
2. Sales exempt by law, treaty or contracts
e. Sales by cooperative to members
f. Sales or lease of aircraft or vessels
g. Sales or printing of books, magazines and newspapers
3. Casual sales or sales of non-business sellers
h. Sale of persons not regularly engaged in trade or business
i. Services rendered under an employer-employee relationship
j. Services rendered by a Regional Area Headquarter of a multinational company
4. Export sales of non-VAT registered persons
It must be recalled again that business tax is a form of consumption tax and that consumption
taxes applies only on domestic consumption. Export sale is a foreign consumption which is
exempt from business tax. For VAT taxpayers, export sale is subject to a 0% VAT.
Sales of services specifically subject to percentage tax
There are services which are specifically designated by the law to be subject to percentage tax.

Service providers specifically subject to percentage tax:

1. Domestic common carriers on their transport of passengers land and keepers of garage.
2. International carriers on their outgoing transport of cargoes, baggage or mails.
3. Franchise grantees of television or radio and gas or water.
4. Franchise grantees of telephone or telegraph on overseas dispatch, message or
conversation originating from the Philippines.
5. Banks and non-banks financial intermediaries performing quasi-banking functions.
6. Other non-bank financial intermediaries without quasi-banking functions.
7. Life insurance companies.
8. Agents of foreign insurance companies.
9. Certain amusement places
10.Operators of jai-alai and race tracks
11.Philippine Stock Exchange (PSE) on the sale, barter or exchange of shares by investors or
corporations conducting initial public offering
Percentage tax rates
The listed services above are subject to percentage taxes at various rates ranging
from ½ of 1% to 30%.

Vatable Sales
Other sales of goods, properties, services or lease of properties, other than those
exempt and specifically subject to percentage tax are vatable.

Meaning of Vatable
The term vatable does not mean that the sale is automatically subject to VAT.
Vatable sales are subject to VAT if the taxpayer is
a. VAT-Registered or
b. VAT-registrable

If the taxpayer is neither VAT-Registered nor VAT-registrable, vatable sales are

subject to the general 3% percentage tax.
 The VAT Threshold
Mandatory registration as VAT taxpayer
Any person who, in the course of trade or business, sells, barters or
exchanges goods or properties or engages in the sale or exchanges
of services shall be liable to register if:
1. His gross sales or receipt for the past 12 months have exceeded
P1,919,500
2. There are reasonable grounds to believe that his gross sales or
receipts for the next 12 months will exceed P1,919,500
It must be recalled that the term person includes individuals, trust,
estate, partnership, corporation, joint venture, cooperative or
association.
Revocability of VAT registration
• The VAT registration, whether voluntary or mandatory, of franchise
grantees of radio or television is perpetually irrevocable. Thus, they continue
to be VAT taxpayers until the dissolution of their business.
• Any person, other than franchise grantees of radio or television, who
voluntarily registered as VAT taxpayers shall not be allowed to cancel his
VAT registration for the next 3 years. This is referred to as the 3-year lock-in
period.
Business whose VAT registration is cancelled will be registered or reverted as
non-VAT taxpayers. They will be subject to the 3% percentage tax on sales or
receipts.

Penalty for registrable persons

Failure to register as a VAT-taxpayer is not an excuse. Registrable persons are
still liable to VAT but without the benefit of input tax credit in the periods in
END!