Business Tax is a form of consumption tax.

Scope A tax to the A tax to all

capable
Supporting Tax Ability to Pay Benefit Received
I. CONSUMPTION TAX
Theory Theory Theory
-occurs when one acquires goods or services by purchase,
exchange or other means.
-tax upon the utilization of goods or services by consumers Types of Consumption:
or buyers. 1. Domestic Consumption – consumption or purchases of
-it is a tax on the purchase or consumption of the buyer Philippine Residents
and not on the sale of the seller. 2. Foreign Consumption – consumption or purchases of
non-residents.
Rationale (Basis) of Consumption Tax:
Destination Principle: goods and services destined for use or
1. It promotes savings formation. consumption in the Philippines are subject to consumption
-Income is to consumption; residual income is tax whereas those destined for use or consumption abroad
savings; savings promotes capital formation and are not imposed with consumption tax.
investment which are crucial to economic
development. Cross-border Doctrine: goods that cross the border which are
Therefore, tax consumption is important to limit destined toward foreign territories should not be charged
consumption to shift part of the income to with consumption taxes.
savings formation.
Summary of tax rules on consumption:
2. It helps in wealth redistribution society.
-It is a basic state policy to redistribute wealth The seller Domestic Foreign
to society so everyone in the State could enjoy is: Consumption Consumption
the same. When rich buy more and spend more (Buyer is Resident) (Buyer is non-
the pay more tax. resident)
Therefore, consumption tax supports the Non- Taxable No Tax
redistribution of wealth from the rich to the
Resident
less privileged members of society.
Resident Taxable Effectively no Tax
3. It supports Benefit Received Theory
-Those who receive benefit from the government
shall pay taxes. Types of Taxable Domestic Consumption:
Therefore, a tax on consumption will effectively 1. Importations - purchase of residents of goods or
make everyone contributes to the support of services from non-residents abroad.
the government. It is a practical application of 2. Sale – purchase of residents of goods, properties or
the theory. services from resident sellers, on a seller’s
perspective.
Income Tax and Consumption Tax Distinguished:
Income Tax Consumption Tax II. CONSUMPTION TAX ON IMPORTATION
Nature Tax upon receipt Tax upon usage of
of income income or capital
 -these taxes are payable without regard of whether the -business tax is made to appear as tax on privilege to do
foreign seller or the resident buyer is engaged or not business, so as a result it is also viewed as “privilege
engaged in the business or whether the importations is taxes” but the rule is merely intended to enforce
for business or personal consumption. compliance.
A. Importation of goods : Value Added Tax (VAT) Table of Comparison
on importation
-every importer of goods shall pay consumption VAT on Business Tax
tax on his importation Importation
-12% of the total import cost of the goods Basis of tax Acquisition Sales or receipts
prior to the withdrawal of the goods from cost
the warehouse of the Bureau of Customs Scope of tax All Consumption
Consumption from businesses
only
Nature of consumption Pure form Relative form
B. Purchaser of service (import of service) : of tax
Withholding VAT Statutory taxpayer Buyer Seller
-every purchaser of service from non-residents Economic taxpayer Buyer Buyer
shall likewise pay VAT on importation of the Nature of imposition Direct Indirect
service.
-12% of the contract price of the service
III. CONSUMPTION TAX ON DOMESTIC
CONSUMPTION FROM RESIDENT SELLERS Table Summary: Consumption Tax Rules on Domestic
Consumption
-the consumption tax on the purchases of Philippine residents
from resident sellers is collected from the seller. Seller Resident Buyer Applicable
consumption tax
-the tax law imposed consumption tax upon the sales Domestic Sellers
of the sellers of goods or receipts of sellers of
- Business Business Business tax
services.
- Business Non-business Business tax
-the sellers are the statutory taxpayers: the buyers are the - Non- Business None
real taxpayers or economic taxpayers. business
- Non- Non-business None
Consumption tax on resident buyers applies to regularly business
engaged businesses only (sellers). That is why Foreign Sellers
consumption tax is called a “business tax”. - Business Business VAT on
importation
-in law, sellers are made directly liable for the payment of the - Business Non-business VAT on
consumption tax. Business would suffer penalties for non- importation
compliance. - Non- Business VAT on
business importation*
 -
Non- Non-business VAT on 2. Top-up on sales
business importation* 3. Tax credit method
*The VAT on importation consistently applies regardless of 4. An explicit consumption tax
whether or not the seller or buyer is engaged in business. 5. Quarterly tax

IV. TYPES OF BUSINESS TAXES Methods of computing VAT

Business taxes are based on sales and receipts. 1. Direct method

Sales – the total amount agreed as
consideration for the sale of goods whether collected or
uncollected. Receipts – the
collections from sale or service.
A. Value added tax (VAT) on sales
-consumption tax that is imposed upon the sale of
goods, properties or services or lease of properties.
2. Tax credit Method
a. Special features of tax credit method
 Invoice-based crediting
 The perfect matching of costs or
expenses with sales is not observed

Characteristics of VAT on sales

1. Tax on value added – is a tax on the value added by
the seller (mark-up) on its purchases in making
sales.