PERCENTAGE TAX

A percentage tax is a national tax measured by a certain percentage of the gross selling price or gross value in money of
goods sold or bartered; or of the gross receipts or earning derived by any person engaged in the sale of services. (CIR vs.
Solid bank Corporation, G,R. No. 148191, November 25, 2003)

THE SCOPE OF THE PERCENTAGE TAX

Coverage Type of % tax Tax rates
Services specifically subject to Specific % tax Various tax rates
percentage tax
Sales of goods or other services not General % tax 3% percentage tax
exempted
Who pays percentage tax?
Type of percentage Tax VAT registered taxpayers Non-VAT taxpayers
Specific percentage tax YES YES
General percentage tax NO YES
Non-VAT taxpayers are those who did not exceed the VAT threshold and who did not register as VAT taxpayers.

SERVICES SPECIFICALLY SUBJECT TO PERCENTAGE TAX

1. Banks and non-bank financial intermediaries
2. International carries on their transport of cargoes, excess baggage and mails only (RA 10378)
3. Common carries on their transport of passengers by land and keepers of garage
4. Certain amusement places
5. Brokers in effecting sales of stocks through the Philippine Stock Exchange and corporations or shareholders on
initial public offerings
6. Certain franchise grantees
7. Life insurance companies and agents of foreign insurance
8. Telephone companies on overseas communication
9. Jai-alai and cockpit operators on winnings

Don’t forget out mnemonic BICAP FLOW.

TAX ON BANKS AND NON-BANK FINANCIAL INTERMEDIARIES PERFORMING QUASIBANKING

FUNCTIONS
“Banks” refers to entities engaged in the lending of fund obtained in the form of deposits. (RA 8792. The general
Banking Law of 2000) “Banks” includes commercial banks, saving banks, mortgage banks, development banks rural
banks, stocks and savings associations, branches and agencies of foreign banks (RA337, The General Act).

The term also includes cooperative banks, Islamic banks and other banks as determined by the monetary board of the
Bangko Sentral ng Pilipinas (BSP) in the classification of banks. (RA 8791)

“Non-bank financial intermediaries” refers to persons or entities whose principal function include lending investing or
placement of funds or evidences of indebtedness or equity deposited with them, acquired by them or otherwise coursed
through them, either for their own account or for the account of others.

This includes all entities regularly engaged in the lending of funds or purchasing of receivables or other obligations with
funds obtained from the public through the issuance, endorsement or acceptance or debt instruments of any kind for their
own account, or through the issuance of certificates, or of purchase agreements, whether any of these means of obtaining
funds from the public is done on a regular basis or only occasionally. (Ibid)

What is Quasi-Banking function?

Refers to the borrowing of funds from twenty (20) or more personal or corporate lenders at any one time, through the
issuance, endorsement or acceptance of debt instruments of any kind, other than deposits, for the borrower’s own account
or through the issuance of certificates of assignment or similar instruments, with recourse, or repurchase agreements for
purposes of relending or purchasing receivables or other similar obligations.

Provided, however, that commercial, industrial and other non-financial companies, which borrows funds through any of
these means for the limited purpose of financing their own needs or the needs if their agents or dealers, shall be not
considered as performing quasi-banking functions.

Non-banking financial intermediaries performing quasi-banking functions re commonly referred to as “Quasi-banks”.

Tax Rates on Bank and Quasi-banks

Source of income or receipt % Tax rate
1. Interest income, commissions and discounts from lending activities, and income from
financial leasing, on the basis of remaining maturities of instruments from which basis
of receipts were derived:
a. Maturity period of five years or less 5%
b. Maturity period of more than five years 1%
2. Dividend and equity share in the net income of subsidiaries 0%
3. On royalties, rentals of property, real or persona; profits from exchange and all other items 7%
treated as gross income under section 32 of the NIRC
4. On net trading gains within the taxable year on foreign currency, debts securities, 7%
derivatives, and other similar financial instruments
Note:
1. The percentage tax on banks, quasi-banks and other non-bank financial institution is commonly known as the
“gross receipt tax”
2. The BSP usually makes a periodic publication of the list of quasi-banks. Non-bank financial intermediaries not
performing quasi-banking functions are subject to a separate set of gross receipt tax rates.

Illustration 1: Basic computation

Orion Bank had the following interest receipts during the month:
Source of Income Total amount
Interest income from loans maturing within 2 years P2,500,000
Interest income from loans maturing more than 2 years but within 5 years 1,000,000
Interest income on loans maturing more than 5 years 1,200,000
Processing fees 300,000
Rent income from foreclosed properties (ROPA) 200,000
Dividends income 50,000

The gross receipt tax of the bank shall be computed as follows:

Tax rates %Tax

Interest on short-term loans:

Up to 2 year loans P2,500,000
More than 2 – 5 year loans 1,000,000
Total 5% P175,000
P3,500,000
Interest on long-term loans:
More than 5 year maturity Dividends 1% 12,000 0
Other items of gross income: P1,200,000 0% 35,000
Processing fees P50,000
Rent income P222,000
Total
Gross receipt tax P300,000
200,000 7%

P500,000
Illustration 2: Meaning of “On the basis of remaining maturities”
In 2019, East Bank had a 10 year loan with a principal amount of P1,000,000 which was issued on March 31,2014. The
loan pays P20,000 monthly interest income on the last day of every month.

The applicable gross receipt tax rate for the monthly interest payments on this loan in 2014 shall be:
Month Remaining maturity Applicable tax rate
January 31, 2019 5 years and 2 months 1%
February 28, 2019 5 years and 1 month 1%
March 31, 2019 Exactly 5 years 5%*
April 30, 2019 4 years and 11 months 5%*
*This tax rate applies on interest income for every month thereafter until maturity The monthly gross
receipt tax on the interest income on this loan shall be:
January February March April
Interest P20,000 P20,000 P20,000 P20,000
income
Gross 1% 1% 5% 5%
receipt tax
rate
Gross P200 P200 P1,000 P1,000
receipt tax
MEANING OF “GROSS INCOME”
The items of gross income referred to in Section 32 of the NIRC. Include only those items of gross income subject to
regular income tax. It can be argued therefore that only those items of gross income subject to the regular tax are
includible as “gross receipts” for purposes of the percentage tax.

Under current jurisprudence, however, the term “gross income” of banks was held to include those items of gross income
subject to final tax. Furthermore, it was also held that the amount of gross income to be included in gross receipts for
purposes of the gross receipt tax shall be the amount of the income, gross of the final income tax.

Illustration
The United Kalinga Unibank received a total of P8,000,000 interest income from short-term deposits with other banks
during the month. The interest was net of the 20% final income tax.

Pursuant to the aforementioned Supreme Court rulings, the gross receipt tax of Unitel Kalinga on the interest income from
deposit shall be computed as:
Gross receipts (8,000,000/80%) P10,000,000
Multiply by: 7%

Gross receipt tax P700,000

Note:
1. The P8,000,000 net receipt is only 80% of the actual gross receipt. Hence, it is grossed up by dividing it with
80%.
 2. The applicable percentage tax rate is 7% not the 5% tax rate since the interest is earned from deposits not from loans.

Net trading within the taxable year on foreign currencies, debts, securities, derivatives and other financial
instruments

The tax clearly applies to the annual net gains from this category. According to RR4-2009, the figure to be reported in the
monthly percentage tax return shall be cumulative total of the net trading gain loss since the start of the taxable year less
the figures already reflected in the previous months of the taxable year.

Net trading loss sustained from this category shall be deductible only to the gains from trading on the same category. The
net trading loss shall not be deductible to other categories of receipts. If the bank has a cumulative net loss at the end of
the year, the same cannot be carried over as deduction against trading gains in the following year.

Illustration 1
A bank had the following income respectively in April 2016 and May 2016:
April May
Interest income from short-term loans P100,000 P100,000
Rentals 50,000 50,000
Net trading (loss) gain (10,000) 20,000

The percentage tax shall be computed as follows:

For the month of April -

Gross receipt tax on interest – short-term (100,000 x 5%) P5,000
Gross receipt tax on rent (P50,000 x 7%) 3,500
Net trading loss -

Gross receipts tax P8,500

Note: the loss cannot be offset against other items of gross receipts.

For the month of May –

Gross receipt tax on interest – short-term (100,000 x 5%) P5,000
Gross receipts tax on rent (50,000 x 7%) 3,500
Net trading gain (P20,000 gain – P10,000 loss) x 7% 700

Gross receipt tax P9,200

Note: the taxable amount of the gain is the cumulative net gain to date.

Illustration 2
A bank had the following data:
December 2015 January 2016
Net trading gains (loss) (P10,000) P20,000

The gross receipt tax in December 2015 shall be nil since there is a loss. The gross receipt tax on the net trading gain for
January 2016 shall be P1,400, computed as P20,000 x 7% the annual net trading loss in 2015 cannot be deducted in 2016.

Note that the treatment specified by the regulation may result in the payment of monthly gross receipt tax even if there is
an annual net trading loss at the end of the year. The regulation is silent on such issue.
However, since the law taxes the annual net gain rather than the monthly net gain, it is understandable that any monthly
gross receipt tax paid under such condition is recoverable by the taxpayer.

Exemption from the gross receipt tax

The gross receipt tax imposed on banks does not apply to the income of or revenue realized by the Bangko Sentral ng
Pilipinas (BSP) from its transactions undertaken in pursuit of its legally mandated functions.

TAX ON OTHER FINANCIAL INTERMEDIARES WITHOUT QUASI-BANKING FUNCTIONS

Source of income or receipt % Tax rate
1. Interest income, commissions and discounts from lending activities, income from financial
leasing, on the basis of remaining maturities of instruments from which the receipts were
derived:
a. Maturity period is five years or less 5%
b. Maturity period is more than five years 1%
2. From all other items treated as gross income under the NIRC 5%
Examples of non-bank financial intermediaries without quasi-banking functions include:
1. Pawnshop
2. Money changers

Common Rules for Banks, Quasi-banks and Other Financial Institutions

1. Accounting rules
2. Finance lease and operating leases
3. Pre-termination of instruments
Accounting rules
Under RR4-2009, the basis of the calculation of gross receipts shall be the generally accepted accounting principle
(GAAP) prescribed by the:
1. Bangko Sentral ng Pilipinas – for banks and quasi-banks
2. Securities and Exchange Commission – for other non-bank financial intermediaries

Both agencies prescribe the Philippine Financial Reporting Standards (PFRS) based upon International Accounting
Standards (IAS) as GAAP.

Finance and operating leases

A finance lease (also known as direct financing lease) is a sale of property whereby the seller earns only interest income
on the arrangement. An operation lease is not a sales and does not transfer ownership over the leased property.

The taxable gross receipt on finance lease shall consist only if interest income excluding the gross rentals received.

Illustration 1: The effective interest method for finance leases

HIM finance Corporation imports machineries from abroad and sells them under a deferred financing scheme. On
February 1, 2019, it sold a machine with an acquisition cost of P257,710 for P300,000 payable in monthly installment of
100,000 starting March 1, 2019. The loan earns 8% effective interest.

The P42,290 excess the contract price over the cost (P300,000-P257,710) is an interest income to be recognized as income
in pursuant to the effective interest method under GAAP.
Date Beginning Interest Income Collection Principal Balance Ending
Balance Reduction
Feb. 1, 2019 P257,701 - - - P257,710
Mar. 1, 2019 257,701 P20,617 100,000 79,383 178,327
Apr. 1, 2019 178,327 14,266 100,000 85,734 92,593
May 1, 2019 92,593 7,407 100,000 92,593 0
Note:
• The interest income is computed as beginning balance of the loan x interest rate.
• The principal reduction is computed as collection less interest income.
• The ending balance is computed as beginning balance less principal reduction.

The interest income in each month is reported as gross receipt in the month realized, not entire P100,000 monthly
collection because it contains recover of the principal.

Illustration 2: Operating Lease

Itogon Industrial Bank foreclosed a property in March. It leased the property to a commercial lease for period of 10 years.
The lease pays P50,000 monthly rental on the property.

The P50,000 monthly rental shall be included in the monthly gross receipts for purposes of the gross receipt tax. Note that
this rental is purely income.

Pre-termination of loans
In the care of pre-termination, the maturity period shall be reckoned to end as of the date of pretermination of purposes of
classifying the transaction and applying correct rate tax.

Illustration
On January 1, 2015, Pinoy Bank loaned P1,000,000 to a client payable within 10 years. The loan pays 10% interest
payable every December 31 with the first interest payment due December 31, 2015.

On June 30, 2021, the client pre-terminated the loan by repaying the principal in full.
Year Remain maturity Interest Tax rate Amount
2015 9 years P100,000 1% P1,000
2016 8 years 100,0001% 1,000
2017 7 years 100,0001% 1,000
2018 6 years 100,0001% 1,000
2019 5 years 100,0005% 5,000
2020 4 years 100,0005% 5,000

Total P14,000
6/30/2021 - P50,000 ?? ??

Upon pre-termination in June 30, 2021, the loan shall be reclassified. The remaining maturities of the loan shall be re-
counted up to the date of pre-termination. The correct gross receipt tax shall be recomputed and adjustment shall be made:
Year Remaining Interest Tax rate Amount
maturity
2015 5.5 years P100,000 1% P1,000
2016 4.5 years 100,000 5% 5,000
2017 3.5 years 100,000 5% 5,000
2018 2.5 years 100,000 5% 5,000
2019 1.5 years 100,000 5% 5,000
2020 <1 year 100,000 5% 5,000
2021 None 50,000 5% 2,500
Total gross receipt tax Less:
Gross receipt reported and tax previously
paid
Gross receipt tax due as recomputed P28,500

14,000

P14,500
*Up to June 30, 2021, the date of pre-termination

The additional gross receipt tax due shall be reflected as separate line item in the Gross Receipt Tax return covering all
transactions of the month in which that pre-termination took place.

Withholding of Percentage Tax on banks

Effective August 1, 2014, the Bangko Sentral ng Pilipinas (BSP) shall withhold the percentage tax on banks and non-bank
financial institutions on all its payments to special deposit accounts and reserve liquidity accounts.
PERCENTAGE TAX ON INTERNATIONAL CARRIERS
International carriers doing business in the Philippines shall pay a tax equivalent to 3% of their quarterly gross receipts
derived from the transport of cargoes, baggage, or mails from the Philippines to another country.

There are two types of international carriers:

1. International air carriers
2. International shipping carriers

The term “international carriers” means air or sea carriers owned by foreign corporation that operate in the Philippines and
transport passengers or cargoes from the Philippines to overseas and vice versa.

The 3% quarterly percentage tax is based on the gross receipts from the transport of cargoes, excess baggage, or mails
regardless of the place where they are actually billed.

Gross receipts shall include, but shall not be limited to, the total amount of money its equivalent representing the contract ,
freight/cargo fees, mail fees, deposits applied as payments, advanced payments, and other service charges and fees
actually or constructively received during the taxable quarter from cargoes and/or mails, originating from the Philippines
in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the passage
documents. Taxation of gross receipts on flights or voyages
International operation
Types of carriers Domestic operation Outgoing Incoming
Domestic carrier 12% VAT 0% VAT Exempt
International carriers

 Passenger N/A Exempt Exempt

 Goods, mails or
cargoes N/A 3% Exempt
Illustration
The Philippine operations of Malaysian Airlines, a foreign air carrier, reported the following gross receipts for the month
of April 2020:

Incoming Outgoing Total

Transportation of passengers P24,000,000 P36,000,000 P60,000,000

Transportation of baggage 8,000,000 11,000,000 19,000,000
Total P32,000,000 P47,000,000 P79,000,000

20% of the outgoing freights was billed was abroad while 40% of the incoming freight was billed in the Philippines.

The percentage tax shall be:

Gross Philippines billings P11,000,000
Multiply by: 3%

Percentage tax due P330,000

Note:
1. Only outbound fares for cargoes, excess baggage or mails are included in the tax base. The place of actual billing
is ignored.
2. The same tax rules apply to international shipping carriers.

The common carrier’s tax herein does not apply to off-line international carriers having a branch/office or sales agent in
the Philippines which sales passage documents for compensation or commission to cover off-line flights or voyage of its
principal or head office, or for other airlines or sea carriers covering flights or voyage originating from Philippines ports or
off-line flights or voyages. These entities may be subject to VAT.

Note on domestic carriers

Domestic sea or air carriers with international operation are vatable on their going shipment of passengers, excess
baggage, cargoes or mails. They are actually subject to a zero-rated VAT on such shipment.

Table of comparison: Tax Rules Outgoing flight or voyage

Sea or air carriers owned by Domestic corporation
Foreign corporation
Passengers Vatable Exempt
Cargoes/baggages Vatable 3% percentage tax

PERCENTAGE TAX ON DOMESTIC CARRIERS AND KEEPERS OF GARAGE

A common carrier is any person, corporation, firm, or association engaged in the business of carrying or transporting
passengers or goods or both, by land, water, or air, for compensation, and offering their services to the public.

For purpose of the percentage tax, common carriers include cars for rent or hire driven by the lessee, transportation
contractors, persons who transport passengers for hire and other domestic land carriers on their transport of passengers,
except owners of bancas and owners of animal-drawn twowheeled vehicles.

The following table summarizes the rules on common carriers

Mode of transportation Passengers Baggage/Mails/Cargoes
By land 3% percentage tax vatable
By water or sea vatable vatable
By air vatable vatable
It must be recalled that the term “vatable” mean subject to VAT if the taxpayer is VAT-registered person or a registrable
person. Otherwise, the 3% general percentage tax applies.

Under the NIRC, the 3% percentage tax is due quarterly upon the gross receipts of common carriers on their transport of
passengers by land. This is called the “common carrier’s tax”. In practice, this quarterly tax is paid is three monthly
payments

The tax base of the quarterly percentage tax is subject to the following minimum presumptive gross receipts.
Minimum presumptive gross receipts for common carriers and keepers of garage
 Quarterly Monthly

Jeepney for hire:

Manila and other cities P2,400 P800

Provincial 1,200 400
Public utility bus:

Not exceeding 30 passengers 3,600 1,200

Exceeding 30 but not 50 6,000 2,000
Exceeding 50 passengers 7,200 2,400
Taxis:

Manila and other cities 3,600 1,200

Provincial 2,400 800
Car for hire:

With chauffeur 3,000 1,000

Without chauffeur 1,800 600
Note: These presumptive gross receipts were set by the NIRC in1997 and are too low compared to current price levels. The
BIR tried to adjust these to the current price level under RR9-2007, but was the same was recommended for suspension
under Senator Committee Report No, 37 (February 11, 2008) since no proper consultation were first conducted before its
implementation.

Illustration 1
Cendong is an operator of five jeepneys and two buses. The monthly receipts of his vehicles were summarized below:
Passengers Cargoes Total
Tricycle P20,000 P20,000
Jeepneys 150,000 - 160,000
Buses 200,000 P10,000 240,000
Total P370,000 40,000 P420,000

P50,000
Assuming Cendong is a VAT –registered business, his monthly percentage tax due shall be:

Gross receipt P350,000

Multiply by: 3%

Percentage tax due P10,500

Note:
• The P50,000 gross receipts from cargoes shall be subject to VAT.
• The P20,000 receipts from tricycle is not subject to tax under the NIRC. It is subject to local contractor’s tax under
the Local Government Code.

Assuming Cendong is a non-VAT-registered business, his monthly percentage tax due shall be:
Gross receipt P400,000
Multiply by: 3%

Percentage tax due P 12,000

Note: The P50,000 vatable gross receipts shall be subject to the 3% general percentage tax rate because
Cendong is not a VAT registered business. The P350,000 receipts shall be subject to the 3% common carrier’s
Illustration 2
Mang Bentong is an operator of a taxi and a car for hire in Cebu City. The taxi reported gross receipts of P26,000 in the
month. The car for hire was indefinitely garaged for repair when its chauffeur bumped it on a bus. The car registered only
P600 receipts in the same month.

The gross percentage tax shall be computed as:

Actual Minimum Taxable
Taxi P26,000 P1,200 P26,000
Car for hire 600 1,000 1,000
Gross receipt P27,000
Multiply by: 3%
Percentage tax due P810

Under RMC 70-2015, transport network companies like Uber and Grab taxi and their partners and suppliers which are
holders of a valid Certificate of Public Convenience may be considered as common carriers qualified to the 3% percentage
tax.

Common carriers are exempt from local taxes

The gross receipts of common carriers derived from their incoming and outgoing freight shall not be subject to the local
taxes under the Local Government Code of 1991.

Exemptions to the common carriers tax

Note that owners of bancas and animal-drawn two-wheeled vehicles are exempt from the percentage tax. The law is silent
regarding pedicabs but these business may qualify as “business for mere subsistence”. Hence, these are also exempt from
business tax.

AMUSEMENT TAXES
Proprietor, lessee or operator of the following amusement places shall pay the following respective tax rates on their
quarterly gross receipts:
Places of boxing exhibitions 10%
Places of professional basketball games 15%
Cockpits, cabarets, night or day clubs 18%
Jai-alai and race tracks 30%
Note that other operators of amusement places such as bowling, alleys, golf courses, and billiards halls are vatable.
Cinemas and theaters is not subject to this national amusement tax because it is exclusively subject to local amusement
tax.

Exempt receipts on professional boxing

The gross receipts from professional boxing are exempt from percentage tax under the following conditions:
1. World or Oriental Championship
2. At least one of the contenders is a Filipino citizen
3. The promoter is a Filipino citizen or a corporation 60% of which is owned by Filipino citizens.

For the purpose of the amusement tax, gross receipts embrace all receipts of the proprietor, lessee or operator of the
amusement places. Said receipts include income from television, radio, and motion picture rights. If any. A person or
entity or association conducting any activity subject to the tax herein imposed shall be similarly liable for said tax with
respect to such portion of the receipts by him or it.

The tax shall be payable within 20 days after the end of each other quarter. The proprietor, lessee, or operator shall make a
true and complete return of the amount of the gross receipts derived during the preceding quarter and pay the tax thereon.
Illustration 1: Places of exhibitions
North Dome, Inc. operates a coliseum which caters to various athletic and artistic competitions or events. During the
quarter, North Dome, Inc. reported receipts from the following events:

Professional non-titled boxing bouts P200,000

Philippine Championship boxing bouts 300,000
Professional basketball games 400,000
Amateur basketball games 500,000
Concert of various musical artists 400,000
Total receipts P1,800,000

The quarterly percentage taxes will be computed as follows:

Non-titled boxing bout P200,000
Philippine titled boxing bout
Total
Multiply by: percentage tax rate
10% P50,000

Professional basketball games P400,000

Multiply by: percentage tax rate 15% 60,000

Total amusement tax P110,000

The gross receipts from amateur basketball games and concerts are vatable. If North Dome is a VAT taxpayer, these are
subject to VAT. Otherwise, these are subject to the 3% general percentage tax.

Illustration 2: Cabaret
Jake is an operator of a disco (cabaret) and bowling alleys. During a particular quarter, it reported the following:
Cabaret Bowling alleys

Gate receipts P200,000 P200,000

Sales of foods and beverages 800,000 150,000

The quarterly percentage tax will be computed as follows:

Gate receipts – cabarets P200,000

Sale of food items 800,000

Total receipts from cabaret business P1,000,000

Multiply by: Amusement tax rates 18%

Amusement tax P180,000

The receipts and sales from the bowling alleys are not specifies by the NIRC to be specifically subject to percentage tax:
hence, vatable.

Illustration 3: Hotel disco

La Venice Hotel, Inc. operates a hotel with a disco and restaurant. The following were its sales and receipts during a
particular quarter:

Room rentals P2,000,000

Parking rentals 100,000
Sales from hotel restaurants 1,200,000
Sales of goods and beverages from disco 1,000,000
Gate receipts from disco 200,000

The quarterly percentage tax will be computed as follows:

Sales of foods and beverages from disco P1,000,000
Gate receipts from disco 200,000

Total amusement receipts P1,200,000

Multiply by: amusement tax rates 18%

Amusement tax P216,000

Only the disco operations and all sales or receipts incidental to it is subject to the amusement tax. The other receipts of La
Venice Hotel are vatable.

Illustration 4
Pegasus Sports Complex, a cockpit operated by Mr. Ken Chi, had the following receipts during the quarter:

Gate receipts P200,000

“Plasada” (10% tongs on winnings on every “sultada) 800,000
Sales of foods and drinks ( Restaurant operated by Pegasus) 400,000
Rent income from concessionaires
(other business operating in the cockpit) 50,000

Total receipts P1,450,000

The total percentage tax due of Pegasus Sports Complex shall be:
Total amusement receipts P1,450,000 Multiply by: Amusement
tax rates 18%

Amusement tax P261,000

If they do not qualify as business for mere subsistence, the concessionaires inside the cockpits shall be subjected to the 3%
percentage tax or VAT.

Illustration 5
Assume that the restaurant in illustration 4 is operated by Mrs. Tinola Kasador a non-VAT taxpayer.

Mrs. Kasador shall pay the 3% general percentage tax on the P400,000 receipts. The same shall not be taxed to Pegasus
Sports Complex. The rental which Mrs. Kasador pays to Pegasus shall be included in Pegasus’ gross receipts which shall
be subject to the 18% amusement tax.

Illegal cockpits
Persons who are engaged in the same operations such as operators of illegal “tupada” cockpit are also taxes at 18% of their
gross receipts.
TAX ON SALE BARTER OR SALES OF SHARES OF STOCK LISTED AND TRADED THROUGH THE
LOCAL STOCK EXCHANGE OR THROUGH INITIAL PUBLIC OFFERING

Tax on sale, barter or exchange or stocks listed and traded through the Philippine Stock Exchange (PSE)

The sale, barter or exchange, including block sale, of listed stocks through the PSE other than by dealers in securities, is
subject to a tax of 60% of 1% based on gross selling price or gross value in money of the shares of stocks sold. This
percentage tax is commonly known as “stock
transaction tax”

The same shall be paid by the seller or transferor and is to be collected by the stock broker who effected the sale. The
stock broker shall remit the tax to the BIR within 5 banking days from the date of collection.

Illustration
Orion Securities effected the sale of the following stocks during a trading day:
Types of stocks Owner Selling price Cost
Through the trading facilities of the PSE:
Preferred stocks Client P3,000,000 P2,900,000
Common stocks Client 2,800,000 3,000,000
Stock options Client 400,000 450,000
Common stocks Orion securities 4,000,000 3,000,000

Directly to buyer:
Common stocks Client P800,000 500,000
Preferred stocks Orion securities 2,000,000 2,100,000
The percentage tax shall be computed from the stocks sold through the PSE as follows:
Type of stocks Owner Selling price
Preferred stocks Client P3,000,000
Common stocks Client 2,800,000
Stock options Client 400,000
Total selling price of stocks
Multiply by:
P6,200,000
Stock transaction tax
60% x 1%

P37,200
Note:
1. The tax applies on listed stocks (domestic or foreign) sold through the PSE. The tax applies without regard to the
type of stocks sold. Recall also from income taxation that the term “stock” includes stock options and warrants.
2. Since this is not an income tax, the tax applies without regard to the existence of any gain or less on the
transaction.
3. The stock transaction tax does not apply to dealers in securities on their sales of stocks inventory. The sale of
security dealers from the sales of securities whether through PSE or directly to buyers and their commission
income shall be vatable.

Under RR-16-2012, only the sale of stocks which meets the 10% minimum public ownership (MPO) in the PSE shall be
subject to the stock transaction tax. However, this rule was rendered useless when the PSE moved to suspend the trading
of stocks which fall below the minimum public float. Due to this, no listed companies which are below the MPO is traded.
Tax on the Shares of Stock Sold or Exchange through an Initial Public Offering (IPO)

The sale, barter, exchange or other disposition through initial public offering of shares of stocks in a closely held
corporation is subject to the following tax rates based on the gross selling price or gross value in money in proportion to
the shares sold, bartered or exchange or otherwise disposed:
Proportion of shares sold, bartered or exchanged Tax rate
Up to 25% 4%
Over 25% but bot over 33 1/3% 2%
Over 33 1/3% 1%
This percentage tax is commonly known as the IPO tax: Note that the IPO tax applies only to the initial public offering of
a closely held corporation.

Meaning of “closely held corporation”

Closely held corporation means any corporation at least 50% in the value of the outstanding capital stock or at least 50%
of all classes of stock entitled to vote is owned directly or indirectly by not more than 20 individuals.

It must be noted that the IPO tax applies only to IPO of closely held corporations as defined above. Be it noted therefore
that the IPO of a corporation which is diversely owned or those whose 50% of capital stock is owned by more than 20
people is not subject to the IPO tax.

Determination of the proportion of stocks sold in an IPO

The determination of the proportion of stocks sold in an IPO depends upon the type of offering:
1. Primary offering – unissued shares of the closely held corporation to be sold in the IPO
2. Secondary offering – issued shares or shares of existing shareholders who wish to sell their share in the IPO

Proportion of share offering

Primary offering = primary share + outstanding shares after IPO
Secondary offering = secondary shares + outstanding shares before IPO

Illustration 1
Queen Corporation is owned by the following shareholders:
Mr. Almanac 25,000 shares
Mr. Boar 20,000 shares
Mr. Cat 40,000 shares
Mr. Donkey 10,000 shares
Mr. Eagle 5,000 shares

Total share 100,000 shares

Queen Corporation conducted an IPO involving 40,000 unissued shares to be sold to the public at P5 per share. Mr. Boar
decided to sell 15,000 of his shares to the public during the IPO at P5 per share.

Proportion of IPO shares

Primary offer percentage = 40,000/(100,000 + 40,000) = 28.57% equivalent to 2% IPO tax Secondary offer percentage =
15,000/100,000 = 15% equivalent to 4% IPO tax
The IPO tax shall be:
Primary offering (40,000 shares x 5x 2%) P4,000
Secondary offer percentage = (15,000 shares x P5 x 4%) P3,000
The IPO tax on the primary offering shall be paid by Queen Corporation, the issuing corporation, while the IPO tax of the
secondary offering shall be paid by Mr. Boar, the selling shareholder.
Illustration 2
Assuming further that the after the IPO, Queen Corporation conducted another block sale of 50,000 of its shares for P5 per
share, Ms. Donkey also sold her 10,000 share after the IPO for P6 per share.

The subsequent sale by Queen Corporation after the IPO is called a “follow through offering” this is no longer subject to
the IPO tax since the tax applies only to the initial listing of closely held corporations.

The sale of Ms. Donkey involving 10,000 shares after the listing of Queen Corporation in the PSE is subject to the usual
60% of 1% stock transaction tax.

Ms. Donkey shall pay a percentage tax of P360 (10,000 x P6 x 60% x 1%).

Summary of rules on Sales of Stocks

Sales made by Before IPO During IPO After IPO
Corporate issuer No tax IPO tax as primary after No tax

Shareholder investor Capital gains tax IPO tax as secondary Stock transaction tax
offering
Note: this table ignores documentary stamp taxes on sales or issue of stocks.

TAX ON FRANCHISE
Generally, franchises are vatable. Exceptionally however, there are only two types of franchise that are specifically subject
to percentage taxes under the NIRC.
Franchise grantees % Tax rates
Radio or television broadcasting companies whose annual gross receipt do not exceed
P10,000,000 3%
Gas and water utilities 2%
The percentage tax on these franchise grantees is referred to as “franchise tax”

VAT registration
Franchise grantees of radio or television broadcasting companies are mandatorily required to register as VAT taxpayer if
they exceed the P10,000,000 gross receipt threshold. Even if below the threshold, they may register as VAT taxpayer,
Once the option is exercised, said option shall be irrevocable. In other words, the VAT registration of these entities is non-
cancellable until the dissolution of their business.

Note that there is no similar provision for franchise grantees of gas and water utilities. Hence, they are subject to
percentage tax even if they exceed the P10M gross receipts threshold.

Illustration 1: Radio franchise grantees

Radio Filipino exceeded the P10,000,000 annual gross receipts last year due to increase in ads income brought about by
the national election. Radio Filipino is only expected to reach its P6,000,000 average annual receipt this year.

Radio Filipino shall be subjected to VAT on all receipts starting this year. Once the P10M threshold is exceeded, TV or
radio broadcasting companies will be perpetually covered by VAT.

Illustration 2: Gas utilities

City Gas Corporation, a gas utility, consistently has gross sales exceeding P10,000,000 every year. During the month, it
had a P12,000,000 sales.

City Gas shall be subject to 2% franchise tax on its P12,000,000 sales.

Illustration 3: Water utilities
Baguio Water District reported a P12,000,000 receipt in a month from water bills of Baguio City residents.

The receipts of local water districts is subject to the 2% franchise tax not to VAT. Note also water is a mineral and is not
an agricultural food product. Local water districts are exempt from income tax but not to business tax.

Vatable franchises
a. Electricity – electricity generation or transmission and distribution by electric cooperatives are vatable
b. Telecommunication – telecom companies are vatable, except on their receipts from outgoing messages
since these are subject to the 10% overseas communication tax.
c. Transportation – transport companies are vatable, exempt receipts of common carriers by land on their
transport of passengers since these common subject to the 3% common carriers tax.
d. Private franchises

TAX ON LIFE INSURANCE PREMIUMS

A person, company or corporation (except purely cooperative companies or associations) doing life insurance business
of any sort in the Philippines is subject to a tax of 2% on the premiums collected, whether such premium is paid in money,
notes, credits or any substitute for money.
A life insurance company is a company which deals with insurance on human lives and insurance appertaining thereto or
connected therewith. The service likewise includes soliciting group insurance, and health and accident insurance policies
which the company is nevertheless authorized to pursue as part of its business activity.

Hence, premiums on the health and accident insurance underwritten by life insurance companies are subject to the
premiums tax. However, premiums on health and accident insurance underwritten by non-life insurance policies are
vatable.

The following shall not be included in gross receipts of an insurance company:

a. Premiums refunded within 6 months after payment on account of rejection of risk or returned for other reasons
b. Re-insurance premiums
c. Premiums from life insurance of non-residents received from abroad by branches of domestic corporation, firm or
association doing business outside the Philippines.
d. Excess of premiums on variable contracts in excess of the amounts necessary to insure the lives of the variable
contract owners

Refunded premiums are certainly not receipts, hence, these are properly excluded from the tax base. Premiums on life-
insurance of non-residents purchased abroad constitute an exempt foreign consumption. Furthermore, the excess of
variable contracts over the life insurance premium represents investments rather than premiums.

Types of insurance business

1. Direct insurance
2. Reinsurers
3. Retrocessionaires

A direct insurance business underwrites insurance policy and negotiates them to policyholders through insurance agents.
To minimize risks, insurers cede or assign parts of their insurance premiums to reinsurers who shall undertake to assume
part of the risks. Reinsurers are thus insurers of insurers. Retrocessionaires are insurers of reinsurers.

Upon collection of the premiums by direct insurers, the 2% premium tax for life insurance policies or VAT for the non-life
insurance policies applies. When insurers cede part of these premiums to reinsurers, it should not be taxed again.
Otherwise, double taxation occurs.

Cooperative companies or association are those conducted by the members thereof with the money collected from among
themselves and solely for their own protection and not for profit.
Except for crop insurance, non-life insurance is vatable. Non-life insurance includes surety, fidelity, indemnity, bonding
companies, marine, fore and casualty insurance.

Illustration 1
Absolute insurance underwrites both life and non-life insurance policies. The following were the premiums collected in a
month:
Life policies Non-life

Cash collections P2,000,000 P1,500,000

Checks 400,000 600,000
Promissory note 500,000 400,000
Total P2,900,000 P2,500,000

The percentage tax will be computed as:

Cash collections P2,000,000
Checks 400,000
Promissory notes 500,000
Total premiums
Multiply by: percentage tax rates P2,900,000
Premiums tax 2%

P58,000
Note:
1. Gross receipts includes collections of cash or money substitutes such as check. Only in the case of life insurance
that a promissory note is exceptionally included as part of gross receipts for the purposes of computing the
premium tax
2. Non-life insurance is vatable. The gross receipts of non-life business do not include promissory note.

Illustration 2
Phinoy Reinsurance, a domestic reinsurance company, reported the following premiums and retrocessions to a foreign
retrocessionaire during the month:
Reinsurance premiums P12,000,000
Less: Retroceded premiums 8,000,000

Retention 4,000,000
Commission from retroceded reinsurance contracts 500,000

Reinsurance premium is exempt from premiums tax as it is already subjected to premium tax to the ceding insurance
company. The payment of retrocession premium to the foreign insurer is subject to the withholding VAT because this a
purchase of reinsurance service from a non-resident. Insurance commission or reinsurance commission whether life or
non-life is vatable.

Illustration 3
Sihra Life Insurance Philippines offers life insurance and variable insurance products. The following relates to its monthly
receipts:
Life plans Variable life plans

Total premiums P2,000,000 P8,000,000

Less: insurance charges - 5,000,000
Credits to client account balances P - P3,000,000

The premiums tax shall be computed as follows:

Life premiums P2,000,000
Insurance charges on variable life plans 5,000,000
Total life insurance premiums P7,000,000
Multiply by: 2%

Premiums tax P140,000

Note: the credits to client account balances constitute client investments.

Taxation of other receipts of life insurance business

1. Renewal or re-insurance fee, re-instatement fee and penalties – these are considered incidental to or connected to
insurance policy contracts and are akin to premium; hence, subject to the 2% premiums tax.
2. Management fees, rental income, or other income from unrelated services – these are vatable.
3. Investment income
If investment income is realized from the investment of premiums earned, it is exempt.

Note that the premiums which have the source of the funds invested had already been subject to 2% premium tax.

If investment income is realized from the investment of funds obtained from others, it is considered income from quasi-
banking; hence, subject to the gross receipt tax imposed on non-banking financial intermediaries.

The investment income that cannot be specifically identified as coming from invested premiums or borrowed funds shall
be apportioned based on total premiums earned for the month and the liability account balance.

Summary of tax rules insurance:

Life insurance Non-life insurance

Direct premiums 2% premiums tax Vatable

Re-insurance premiums Exempt Exempt
Insurance commissions* Vatable Vatable
*covers insurance and reinsurance commissions

RA 10001 has a provision that the 2% premiums tax shall be eliminated within five years from its effectivity, however,
this provision was vetoed by the president.

TAX ON AGENTS OF FOREIGN INSURANCE

Under section 124 of the NIRC, fire, marine or miscellaneous insurance agents authorized under the Insurance Code to
procure policies of insurance on risks located in the Philippines for companies not authorized to transact business in the
Philippines are subject to a tax equal to twice the tax imposed on life insurance premiums.

RA 10001 reduced the tax on life insurance premium from 5% to 2%. Therefore, the tax on agents of foreign insurances is
4% now.

Direct insurance from abroad

If property owners obtain insurance directly from abroad without rhe services of an insurance agent, the tax shall be 5% of
the premium paid. It shall be the duty of the owner to report each transaction to the Insurance Commissioner and to the
Commissioner of Internal Revenue.
Illustration
Mang Pandoy insured his buildings with a foreign insurer. He paid P150,000 premiums during the month.
Mang Pandoy shall report the transaction to the Insurance Commission and the BIR AND PAY P7,500 premiums tax (i.e.,
P150,000 x 5%) to the BIR. This transaction should be subject to the withholding VAT, but the same is specifically
subjected to percentage tax.

TAX ON EVERSEAS DISPATCH, MESSAGE OR CONVERSATION ORIGINATING FROM THE

PHILIPPINES
The overseas dispatch, message or conversation transmitted from the Philippines by telephone, telegraph, telewriter
exchange, wireless and other communication equipment services is subject to a 10% percentage tax. This percentage tax is
commonly referred to as the “overseas communication tax”

The following table summarizes the business tax rules:

Call origin Call destination Business tax
Philippines Philippines 12% VAT
Abroad Philippines 0% VAT
Philippines Abroad 10% overseas communication tax
*subject to zero-rating requirements; if not met, receipt is exempt.

Illustration
Quick Telecommunications had the following receipts during the quarter:
Call origin Call destination Amount collected
Philippines Philippines P20,000,000
Abroad Philippines 8,000,000
Philippines Abroad 5,000,000
The quarterly overseas communication tax shall be computed as:

Gross receipts from outgoing calls P5,000,000

Multiply by: 10%

Percentage tax due P 500,000

Exemptions
The overseas communication tax shall not apply to the outgoing calls of the following:
1. Government – including any of its political subdivisions or instrumentalities
2. Diplomatic services – embassies and consular offices of foreign governments
3. International organizations – those enjoying privileges, exemptions and immunities under international
agreements
4. News services

WINNINGS FROM HORSE RACE OR JAI-ALAI

Winnings from race tracks and jai-alai are subject to the following amusement taxes:
Winnings in horse race or jai-alai, in general 10%
Winning from double, forecast/quinella and trifecta bets 4%
Owners of winning race horses 10%
Note: Types of race winnings
A. Combination bets
1. Double – a bet to select the winners in two specific races
 2. Daily double – a bet to forecast the first winning horse on two consecutive races
3. Forecast – a bet to predict the first and second finisher or particular race
4. Exacta or perfecta – a bet to pick the first two finishers in exact order
5. Quinella – a bet where at least the first two finishers must be picked in either order
6. Trifecta – a bet to predict the first three finishers in a race in exact order
B. Straight wagers
1. Win – the elected horse must finish first
2. Place – the selected horse must come first or second
3. Show – the selected horse must come first, second or third.

Tax on winnings
The pay-out on combination bets is subject to 4% on the net winnings. The pay-out on straights wagers (non-
combination bets) is taxable at 10%.

The tax shall be deducted from the “dividend” corresponding to each winning ticket or the “prize” of each winning race
horse owner and withheld by the operator or person in charge of the horse race before paying the dividends or prizes to the
person entitled thereto. The tax shall be paid within 20 days from date it is withheld.

Illustration 1 : Race track operators

Gamby Hippodrome operates a race track. It had the following dividend for wininng tickets during an event:
Total winning on straight bets
(costs of winning tickets, P10,000) P80,000
Total winnings in daily double, forecast and quinella
(costs of winning tickets =P600) 40,000
A winner of trifecta (cost of ticket = P200) 30,000
Prize of the owner of winning horses 100,000
Total prizes, winnings individuals P250,000

The following tax must have been withheld from these winnings before their release to the winners:

Net winnings in daily double, forecast and quinella

(P40,000 - P600) P39,400
Net winning on trifecta (P30,000-P200) 29,800
Total P2,768
Multiply by: P69,200
4%
Prize of the winning horse
Net winnings on straight bets (80K-P10K) Total

P100,000
70,000

P170,000
Multiply by: 10% 17,000
Total percentage tax on winnings 19,768

Note: these taxes on winnings are separate from the 30% amusement tax to be paid by
the race track on its own quarterly gross receipts.

The net pay-out of Gamby Hippodrome on the prizes or winnings shall be:
Total prizes, winning or dividends P250,000
Less: percentage on tax on winnings 19,768

Net pay-out to winners P230,232

Illustration 2: Net winnings
Mrs. Petra hit the trifecta with pay-out of P58,000 from her P100 ticket. How much will she receive from her winning?

Answer: P58,000 – (58,000 – P100) x4% = P55,684

Illustration 3: Operator of Jai- alai

On a particular event, an operator of jai-alai reported a total receipts of P1,000,000 from Jai-alai bets. There was a total;
P650,000 total winnings of various picks made by bettors. The cost of winning picks was P50,000.

The Jai-alai operator must withhold the following tax on the winnings:
Jai-alai winnings (P650,000 – P50,000) P600,000
Multiply by: 10%

Percentage tax on winnings P60,000

Note: the P1,000,000 gross receipts shall be subject to the 30% amusement tax for the jai-alai operators.

The percentage tax on winnings is an additional amusement tax by nature but is imposed by law on the betting. This is in
addition to those imposed upon the receipts of the operator of the Jai-alai or racetrack. Note that winning from other
amusement places or activities such as cockpit, boxing, basketball, billiards, and bowling competitions are not subject to
tax.

SUMMARY OF SPECIFIC PERCENTAGE TAX

Business or activity Percentage tax Tax rates
Banks and financial intermediaries Gross receipt tax 5%,1%; 7%
Intermediaries carriers International carrier’s tax 3%
Common carriers Common carrier’s tax 3%
Amusement places Amusement tax 10%, 15%, 18%; 30%
Sales of stocks by an investors Stock transaction tax 60% x 1%
Sale of stock during an initial public offering (IPO) IPO tax 4%, 2%, 1%

Franchise Franchise tax 3%

Life insurance Premiums tax 2%, 4%, 5%
Overseas calls Overseas communication tax 10%
Amusement betting Winning tax 10%; 4%
WITHHOLDING OF PERCENTAGE TAX AT SOURCE
The sale to government agencies, and instrumentalities including government-owned and controlled corporation (GOCC)
is subject to a withholding tax of 3% at source.
The government agency, instrumentality or GOCC withholds the 3% percentage tax and issues to the taxpayer BIR form
2307. The tax taxpayer shall attach BIR Form 2307 in filling his monthly percentage tax.

The same procedure is employed for withholdings made by the BSP on gross receipts of banks and quasi-banks on their
special deposit accounts or liquidity reserve accounts.

Illustration 1
During the quarter, Mr. Avila, a non-VAT taxpayer, sold various office supplies to a government agency for P200,000 and
to private customers for P80,000.
The government agency shall pay Mr. Avila the following proceeds net of the 3% final percentage tax.
Sales P200,000
Less: 3% final withholding percentage tax 6,000

Net proceeds to be released to Mr. Avila P194,000

The percentage tax payable for the quarter shall be computed and presented in BIR Form 2551Q as follows:
Sales subjected to government withholding (P194,000/97%) P200,000
Sales to private customers 80,000
Gross sales P280,000
Multiply by: 3%
Percentage tax due P8,400
Less: tax credit (BIR Form 2307) = P200,000 x 3% 6,000
Percentage tax payable P2,400

Note: in effect, the sales not subject to withholding is being taxed; hence, P80,000 x 3%.

Illustration 2
Goodyear Corporation, a non-VAT taxpayer paying the 3% percentage tax, had the following receipts in the quarter:
Taxable sales to government entities P150,000
Taxable sales to private entities 60,000
Exempt sales Total sales

The total creditable percentage tax withheld at source was P4,500.

The percentage tax payable for the month to be presented in BIR Form 2551Q shall be:

Taxable sales to government entities P150,000

Taxable sales to private entities
Total taxable sales
Multiply by: 3%

Percentage tax due P6,300

Less: withheld percentage tax under BIR Form 2307 4,500
Percentage tax payable P1,800

TAX ON OTHER TAXABLE SALES OF NON-VAT TAXPAYERS

The imposable percentage tax on table sales or receipts, other than from services or transactions specifically subject to
percentage tax, of non-VAT registered persons is 3%.

Illustration 1
Diak restaurant had annual receipts of P1.5M. during the month, Dial Restaurant generated P200,000 gross receipts.

Restaurant operation is not among those services or transactions specifically subject to percentage tax. The gross receipts
are vatable but since Diak is below the VAT threshold, Diak Restaurant shall pay the 3% general percentage tax.

Illustration 2
Mr. Black jack is an operator of 40 taxis with annual receipts exceeding P3M and a store with annual sales not exceeding
P3M. the following are the sales and receipts during the month.
Receipts from taxi units P2,000,000
Sales of fruits 100,000
Sales of other merchandise 180,000
Total revenue P2,280,000

The receipt from taxi units is specifically subject to the 3% common carrier’s tax. The sales of fruits (exempt goods) are
exempt from business tax.

The sale of other merchandise is vatable; however, the same shall be subject to the 3% general percentage tax since Black
Jack is a non-VAT taxpayer.

Assuming that the annual sales of merchandise exceed P3M, the sales of merchandise shall be subject to VAT even if Mr.
Black jack is non-VAT registered.

Business with vatable sales exceeding the VAT threshold shall be subject to VAT on such sales. VAT is discussed in
detail in the succeeding chapters.

EXEMPTION FROM PERCENTAGE TAX

The percentage tax does not cover:
1. VAT taxpayers
2. Self-employed and or professionals who opted to the 8% income tax
3. Cooperatives

SE/P under 8% Income Tax

Under income taxation, self-employed individuals and or professionals (SE/P) may pot to be the 8% income tax which is a
bundled tax that covers both income tax and the percentage tax. As such, they are no longer subject to 3% percentage as
the 8% tax in lieu of regular income tax and the 3% general tax.

Individuals paying the 8% income tax shall only file BIR Form 1701A. There is no need to file BIR Form 2551Q.
Note also that the option to be taxed at 8% income tax is not available to self-employed individuals or professionals if the
taxpayer is specifically subject to percentage tax.

Exemption of cooperative from percentage tax

Under the Section 116 of the NIRC of 1997, cooperatives shall be exempt from the 3% percentage tax.

This exemption, however, is not absolute. Sales or receipts of cooperatives outside their registered activities are still
subject to business tax similar to the business tax treatment or government agencies and nonprofit institutions.

Reference: BUSINESS AND TRANSFER TAXATION 2019 edition by Rex Banggawan CPA MBA

Note: DO NOT REPRODUCE