Chapter 5 — Percentage Tax CHAPTER 5 PERCENTAGE TAX Chapter Overview and Objectives After this chapter, readers are expected to master: 1. The scope of the 3% general percentage tax 2. The list of services specifically subject to percentage tax 3. The various tax rates and exceptions on services specifically subject to percentage tax 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 earnings derived by any person engaged in the sale of services. (CIR vs. Solidbank Corporation, G.R. No. 148191, November 25, 2003) THE SCOPE OF THE PERCENTAGE TAX Coverage __[_ Type of % tax Tax rates 1. Services specifically subject | Specific % tax | Various tax rates to percentage tax 2, Sales of goods or other General % tax 3% percentage services not exempted tax 2 Se EE ea VAT registered Non-VAT Type of Percentage Tax taxpayers taxpayers Specific percentage tax a ¥ General percentage tax x L Ze 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 carriers on their transport of cargoes, excess baggage and mails only (RA 10378, 3. Common carriers on pete transport of passengers by land and keepers i of garage Certain amusement places 149Chapter 5 — Percentage Tax 5. Brokers in effecting sales of stocks through ' the Bhilippine Story 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 our mnemonic, BICAP FLOW. ON_BAN! [D__NON-1 K INANCH INTERMEDIARI| PERFORMING QUASI-BANKING FUNCTIONS “Banks” refers to entities engaged in the lending of funds obtained in the form of deposits. (RA 8791, The General Banking Law of 2000) “Banks” includes commercial banks, savings banks, mortgage banks, development banks rural banks, stocks and savings associations, branches and agencies of foreign banks (RA 337, 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 classifications of banks. (RA 8791) “Non-bank financial intermediaries” refers to persons or entities whose principal function include the lending, investing or placement of funds 0° evidences of indebtedness or equity deposited with them, acquired by them ot omerwise coursed through them, either for their own account or for the accoultt of others. This includes all entities regularly engaged inthe lending of funds or purchasif ex receivables or other obligations with funds obtained from the public throug tre Ssuance, endorsement or acceptance of debt instruments of any kind fo oo ven cecount, or through the issuance of certificates, or of repurcha® dena ments, whether any of these means of obtaining funds from the public ona regular basis or only occasionally. (Ibid) one . Quasi-Banking Function? ae function refers to the borrowing of funds from twenty (20) " Sse ene lenders at any one time, through the issua™ ce eee piteepance of debt instruments of any kind, other ee 7 WN acco} i fica! of ‘assignment or similar instruments, wi Sseuated ot eos ligation {°° PUPOSeS of relending or purchecin ene ee ot ei obligations ing or purchasing receivables or other sit! Provided, however, d, + that commerci . il Purpose of financing their own needs pany Of these means for the lim! ° v the needs if their agents or deale™ 150Chapter 5 - Percentage Tax shall not be considered as performing quasi-banking functions (RR8-2008 and PD 1739). Non-bank financial intermediaries performing quasi-banking functions are commonly referred to as “Quasi-banks.” Tax Rates on Bank and Quasi-banks Source of income or receipt % Tax rate 7. Interest income, commissions and discounts from lending activities, and income from financial leasing, on the basis of remaining maturities of instruments from which the 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 shares in the net income of subsidiaries 0% 3. On royalties, rentals of property, real or personal, profits from exchange and all other items treated as 7% ross income under Section 32 of the NIRC 4, On net trading gains within the taxable year on for currency, debt securities, derivatives, and other similar 7™% financial instruments (RA 9337) Note: 1. The percentage tax on banks, quasi-banks and other non-bank financial institution is commonly known as the “grass 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. Mlustration 1: Basic computation Orion Bank had the following interest receipts during the month: Total Source of income amount Interest Income from loans maturing within 2 years P 2,500,000 Interest income from loans maturing more than 2years 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: 151Chapter 5 — Percentage Tax —Taxrates_ __%Tax Interest on short-term loans: Upto 2 year loans P 2,500,000 ‘an 2 to Syearloans ___1,000,000 al man 2iosy P 3,500,000 5% ©» P 175,000 Interest on long-term loans: MorethanS year maturity P 1,200,000 1% 12,000 Dividends P 50,000. 0% 0 Other items of gross income: Processing fees P 300,000 Rent income 20 10 Total P 500,000 7% 35,000 Gross receipt tax P_222,000 Mlustration 2: Meaning of “On the basis of remaining maturities” In 2019, East Bank had a 10-year loan with a principal amount of P 1,000,000 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 Joan 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 Syears SH%* April 30,2019 4 years and 11 months S%* January Februa 1 Interest income P 20,000 iy March Apri Gross receipt tax rate ‘ P 20,000 P 20,000 pp 20,000 Gross receipt tax oe el ae Y Sa eet m—200 B00 Fao pouwol Meaning of “gross income” ‘The items of gross income r those items of gross inco: therefore that only those includible as “gross receij ferred to in Se, me subject to reg items of gross j Pts” for purpos ction 32 of the NIRC include on! ular income tax. It can be argue nome subject to the regular tax ar? © Of the percentage tax. 152Chapter 5 — 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. (C/R vs. Bank of Commerce, GR No. 14936) 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 (CIR vs. Bank of the Philippine Islands, GR No. 147375). Mlustration 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 United Kalinga on the interest income from deposit shall be computed as: Gross receipts (P8,000,000/80%) P 10,000,000 Multiply by: Th Gross receipt tax P_700,000 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 79% not the 5% tax rate since the interest is earned from deposits not from loans. Net trading gains 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 the 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. Mustration 1 Abank had the following income respectively in April 2016 and May 2016: April May Interestine “gin Toans |__P.100,000 | _P 100,000 Rental ne om shoe 50,000 | 50,000 Net trading (Toss) gain (10,000) 20,000 153Chapter 5 - Percentage Tax ‘The percentage tax shall be computed as follows: For the month of April ~ Gross receipt tax on interest ~ short term (P100,000 x 5%) P oan Gross receipt tax on rent (P50,000 x 7%) 500 Net trading loss Gross receipt tax P__8,500 Note: The loss cannot be offset against other items of gross receipts. For the month of May - Gross receipt tax on interest - short-term (P100,000 x 5%) P 5,000 Gross receipt tax on rent (P50,000 x 7%) 3,500 Net trading gain (P20,000 gain - P10,000 loss) x 7% —_200 Gross receipt tax P9200 Note: The taxable amount of the gain is the cumulative net gain to date. Mlustration 2 Abank had the following data: December 2015 | January 2016 Net trading gains (loss) (P 10,000) P 20,000 The gross receipt tax in December 2015 shall be nil since there is a loss. The gross Tereipt tax on the net trading gain for January 2016 shall be P1,400, computed 5 20,000 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 ani it is unders| net gain, i tandable th: nual net gain rather than the monthly such condition is reco at any monthly gross receipt tax paid unde" verable by the taxpayer, Hee Exemption from the gross receipt tax © Bross receipt tax impo: rene ese Posed on banks does no d by the Bangko Sentral ng t apply to the income transactions undertaken in Pursuit of its legally Pilipines (BSP) from i RRNo. 8.2008) mandated functions. (Se 154Chapter 5 — Percentage Tax TAX ON OTHER FINANCIAL INTERMEDIARIES 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: c._ Maturity period is five years or less. 5% d._ 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: a. Pawnshops (RR10-2004, October 18, 2004 and RA 9238) b. 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 principles (GAAP) prescribed by the: a. Bangko Sentral ng Pilipinas - for banks and quasi-banks b. Securities and Exchange Commission for other non-bank financial intermediaries Both agencies prescribe the Philippine Financial Reporting Standards (PERS) based upon International Accounting Standards (IAS) as GAAP. (See Securities Regulation Code Rule 68 and BSP Circular No. 494 Sept. 20, 2005) 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 operating lease is not a sale and does not transfer ownership over the leased property. The taxable gross receipt on finance leases shall consists only of interest income excluding collections of principal. In operating leases, gross receipt shall include the gross rentals received. 155Chapter 5 - Percentage Tax ive it thod for finance leases 1: The effective interest method f RIM anaes Corporation imports sass from ea and sel 7 d i , ” ‘achine rred financing scheme. On February 1 1 Hat ae of P257,710 for P300,000, payable in monthly installment 100,000 starting March 1, 2019.The loan earns 8% effective interest, ‘The P42,290 excess of the contract price over the cost (P300,000 - P257,710), an interest income to be recognized as income in pursuant to the ffecty, interest method under GAAP: Beginning Interest Principal Ending Date ___ Balance. _Income Collection Reduction Feb.1,2019 P 257,710 - - - P 257,710 Mar.1,2019 257,710 P 20,617 P 100,000 79,383 178,327 Apr. 1, 2019 178,327 14,266 100,000 85,734 92,593 May 1, 2019 92,593 7407 100,000 92,593 0 Note: 1. The interest income is com 2. The principal reduction is 3. The ending balance is com puted as beginning balance of the loan x interest rate. computed as collection less interest income. puted as beginning balance less principal reduction. The interest income in each month is reported as gross receipt in the mont realized, not the entire P100,000 monthly collection because it contains recovey of the principal, Mlustration 2: Operating lease ogon Industrial Bank foreclosed a property in March, It leased the property ® a commercial lessee for a period of 10 years. The lex ox pays P50,000 mont rental on the property. The PS0,000 monthly rental shall be included Purposes of the gross in the monthly gross receipts receipt tax. Note that this rental is purely income. Pre-termination of loans ns earn Br pre mination, the maturity period shall be reckoned ‘0 4 and applying the correct aration for Purposes of classifying the trans@“ Mustration On January 1, 2015, p Interest pag Paes Decent Payable every December ay wth & oO . pases 30,2021, the client pre- a) ‘ine mh 0% atk loaned P1,000,000 to a client payable with sali “erminated the loan by repaying the prin’ 156Chapter 5 — Percentage Tax The following are the interest income and the gross receipt taxes paid since the origination of the loan: Remaining _—Year___-_ _maturity_ __Interest___ Taxrate © _Amount_ 2015 Yyears P 100,000 1% P 1,000 2016 8 years 100,000 1% 1,000 2017 7 years 100,000 1% 1,000 2018 6 years 100,000 1% 1,000 2019 5 years 100,000 5% 5,000 2020 4 years 100,000 5% 5.000 Total P= 14,000 6/30/2021 - P 50,0007? 2 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: Remaining _Year __maturity*_ '__Interest__ Taxrate Amount. 2015 S.5years P 100,000 1% P 1,000 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 <1year 100,000 5% 5,000 2021 None 50,000 5% 2. omy Total Gross receipt tax P28; Less: Gross Point tax previously reported and paid 14,000 Gross receipt tax due as recomputed *Up to June 30, 2021, the date of pre-termination shall be reflected as a separate line item in The additi pt tax due edaitional gross rere gall transactions ofthe month in which the the Gross Receipt Tax return coverin re-termination took place. (RR4-2009) Withholding of Percentage Tax on banks oon Effective August 1 stk 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. (BSP Memorandum No. M-201 4-029) 157Chapter 5 — Percentage Tax ER: i i i in the Philippines shall pay a ta ional carriers doing business in d I I Seite 3% of their quarterly gross receipts derived from the ieanspore of cargoes, baggage, or mails from the Philippines to another country. ‘There are two types of international carriers: a. International air carriers b. International shipping carriers The term “international carriers” means air or sea carriers owned by foreign corporations 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 or 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 Domestic | International operation Types of carriers operation Outgoing incomin | Domestic carrier 12% VAT | 0%VAT | Exempt International carriers ~ Passengers NZA 7 E i -__ Goods, mails or cargoes N/A aE oor Fectabt Illustration ‘The Philippine operations of i Malaysian Airli ign air carris tas ‘Transport of passengers P Transport of baggage Total cs Outgoing _ __Total__ 24,000,000 P 36,000,000 _P 60,000,000 232,000,009 158 247,000,000 P_79,000,000Chapter 5 — Percentage Tax 20% of the outgoing freights was bill i . feaghtwas billed inthe Pieie aes © led abroad while 40% of the incoming ‘The percentage tax shall be: Gross Philippine billings P 11,000,000 Multiply by: Percentage tax due ETT 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 sells passage documents for a compensation or commission to cover off-line fights or voyage of its principal or head office, or for other airlines or sea carriers covering flights or voyages originating from Philippine ports or off- line flights or voyages. (RR15-2013) These entities may be subject to VAT. Note on domestic carriers Domestic sea or air carriers with international operation are vatable on their outgoing 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 : Exempt Passengers Vatable ip Cargoes/baggages Vatable [3% percentage tax oration, firm, or association engaged in ting passengers or goods or both, by ‘and offering their services to the A common carrier is any person, Corp the business of carrying or transpor' land, water, or air, for compensation, Public. (Art. 1732, Civil Code) common carriers include cars for rent or A s who transport hire driven by the lessee, transportation contractors, peta a engers for hire and esti arriers on the! t of Pa and carriers on their transport = re and other domestic |: , pf oS eae of bancas and owners of animal-drawn two wheeled vehicles, For purposes of the percentage tax, 159Chapter 5 — Perce! ntage Tax i on carriers: ‘The following table summarizes the rules on comm: Baggage/Mails/Cargoes sport Passengers sine me cman By water or sea vatable Satria By air 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 Bross 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 in 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 Jeepney for hire: Manila and other cities Provincial Public Utility Bus: Not exceeding 30 passengers 3,600 1,200 Exceeding 30 but not 50 6,000 2,000 Exceeding 50 passengers 7, ; Bsceeding ager 200 2,400 Manila and other cities Provincial Car for hire: 2400 With chauffeur Without chauffeur 3008 SD 1,800 600 Note: These presumptive Bross receipts wer ; compared te i re set by the NIRC ii too low sn tw sh eka hse cae Committee Rey 0 Fel as recommended for i senate conducted befor Ne: 37 (February 11, 2008) since no prepa eension under est nducted before its implementation, Proper consultation were 160chapter 5 - Percentage Tax Ilustration 1 cendong is an operator of five jeepneys and two buses. The monthly receipts of his vehicles were summarized below: Passengers _Cargoes__ __Total__ Tricycle P 20,000 - P 20,000 Jeepneys 150,000 P 10,000 160,000 Buses ——200,000 ____40,000 ___240,000 Total P__320,000 P__50,000 P__420,000 ‘Assuming Cendong is a VAT-registered business, his monthly percentage tax due shall be: Gross receipt P 350,000 Multiply by: 3% Percentage tax due P__10,500 Note: 1. The P50,000 gross receipts from cargoes shall be subject to VAT. 2. The P20,000 receipts from tricycle is not subject to tax under the NIRC. Itis subject to the 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 P 400,000 Multiply by: ——% Percentage tax due B_12,000 Note: The P50,000 vatable gross receipts shall be subject to the 396 general percentage ‘ered business. The P350,000 receipts shall tax rate because Cendong is not a VAT-regists be subject to the 3% common carrier's tax. Mlustration 2 ety 3 Mang Bentong is an operator of a taxi and a car for hire in Cebu City. The taxi reported gross receipts of 26,000 in the month. The car for hire was indefinitely garaged for repair when its chauffeur bumped it on @ bus. The car registered only P600 receipts in the same month. The gross percentage tax shall be computed as: Actual _Minimum_ _Taxable— Taxi 726000 P 1.200 P 26,000 Car for hire *s00 _—1.000 —_ 1.000 Gross receipt P 27,000 Multiply by: ____3% ercentage tax due 161Chapter 5— Percentage Tax jes like Uber and Grab Taxi ang 70-2015, transport network compani Jer an¢ Under MG 7°-and cuppliers which are holders of a valid Certieate of Pie een may be considered as common carriers qualified to the 34 percentage tax. on carriers are exempt from local taxes. a : ries receipts of common carriers derived from their incoming ang outgoing freight shall not be subject to the local taxes under the Loca} Government Code of 1991 (RA 7160). tions to the common carriers tax i ne) that ‘owners of bancas and animal-drawn two-wheeled vehicles are exempt from the percentage tax. The law is silent regarding pedicabs but these businesses 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 billiard 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 under the following conditions: 1. World or Oriental Championship 2. 7 least one of the contenders is a Filipino citizen . The promoter is a Filipino citiz i ich is ave eae atte citizen or a corporation 60% of which For the purpose of the amusement tax, gross receipts embrace all receipts the proprietor, lessee or operator of the amusement places, Said receiP® include income from television, radio, and motion picture rights, if any: Person or entity or association conducting any activity subject to the t@* herein imposed shall be simil larly liable for said tz i t to suc portion of the receipts derived by him or it (Sec. 125 MIRC) ae 162Chapter 5 — Percentage Tax The tax shall be payable within 20 days after the end of each 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 P 200,000 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 1,800,000 The quarterly percentage taxes will be computed as follows: Non-titled boxing bout P 200,000 Philippine titled boxing bout ——300,000 Total P 500,000 Multiply by: percentage tax rate 10% P 50,000 Professional basketball games P 400,000 Multiply by: percentage tax rate ___15% saan Total amusement tax Rouen“ basketball games and concerts are vatable. If The i amateur " gross receipts from vese are subject to VAT, Otherwise, these are North Dome is a VAT taxpayer, th Subject to the 3% general percentage tax. Mlustration 2: Cabaret Jake is an operator of a disco (ca quarter, it reported the following: aret) and bowling alleys. During a particular Cabaret Bowling alleys p 200,000 P 200,000 oe 800,000 150,000 Sales of foods and beverages The quarterly percentage tax will be computed as follows: ca P 200,000 te receipts - cabarets __ 800,000 Sale of food items ce P_ 1,000,000 Total receipts from cabaret business 48 Multiply by: Amusement tax rates > 180,000 ‘musement tax 163Chapter 5 — Percentage Tax The receipts and sales from the bowling alleys are not specified by the NIRC to by specifically subject to percentage tax; hence, vatable. Mlustration 3: Hotel disco a | avenice Hotel, Inc. operates a hotel with a disco and restaurant. The following | were its sales and receipts during a particular quarter: | Room rentals P 2,000,000 | Parking rentals 1 one00 Sales from hotel restaurant 200, Sale of foods and beverages from disco 1,000,000 Gate receipts from disco 200,000 | The quarterly percentage tax will be computed as follows: Sale of foods and beverages from disco P 1,000,000 Gate receipts from disco —— 200,000 Total amusement receipts P 1,200,000 Multiply by: Amusement tax rates 18% Amusement tax 2 216,000 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 P 200,000 “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 a (other businesses operating in the cockpit) 50,000 ‘otal receipts 21,450,000 ‘The total percentage tax due of Pegasus Sports Complex shall be: ‘Total amusement receipts Multiply by: Amusement tax rates ee Amusement tax Tone If they do not qualify as business for mere subsisteni je inside the cockpits shall be subject to th ice, the concessionaires '¢ 3% percentage tax or to VAT. Mlustration 5 Assume that the restaurant in Ilustra aura ration 4 is operate anon-VAT taxpayer, ee dl by Mrs. Tinola Kasado" 164Chapter 5 — Percentage Tax 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 taxed at 18% of their gross receipts. T IN_SALE, BAR’ 0 LI RES OF STO ISTED AND TRADED THROUGH THE ICAL STOCK EXCHANGE OR THR‘ INITIAL PUBLIC OFFERING Tax on sale, barter or exchange of 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: Type of stocks Owner Selling price Cost S Preferred stoc Client P3,000,000 P 2,900,000 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 r Common stocks Client P 800,000 500,000 Preferred stocks Orion securities 2,000,000 2,100,000 The percentage tax shall be computed from the stocks sold through the P follows, eof sto Owne Selling price_ Preferred stocks far P 3,000,000 “Ommon stocks client 2,800,000 tock options ient 400,000 “tal selling price of stocks P__6,200,000 165Chapter 5 — Percentage Tax 000 Total selling price of stocks P 6200, Multiply by: 0% x 1% Stock transaction tax PB 37 200 Note: i i is ) sold through the PSB, Ty, : tax applies only on listed stocks (domestic or foreign) : , na applies without regard to the type of stocks sold. Recall also from Income Taxation that the term “stock” includes stock options and bones . Since this is not an income tax, the tax applies without regard to the existence of any gain or loss on the transaction. The stock transaction tax does not apply to dealers in securities on their sales o stocks inventory. The sale of security dealers from the sale of securities whether through PSE or directly to buyers and their commissions 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 Exchanged 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 exchanged or otherwise disposed: Proportion of shares sold, bartered orexchanged | Tax rate Up to 25% 4% Over 25% but not over 33 1/3% 2% Over 33 1/3% 1% This percentage tax is commonly known as the JPO 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 directly or indirectly by not more than 20 individuals. to vote is owned It must be noted that the Corporations as defined abi corporation which is divers: 's owned by more than 20 p IPO tax applies only to 1PO of closely-held ove. Be it noted therefore that the IPO of i ely owned or those whose 50% of capital sto eople is not subject to the IPO tax. 166Chapter 5— Percentage 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: 4. 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 shares in the IPO Proportion of share offering Primary offering = Primary shares + 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 Mrs. Cat 40,000 shares Ms, Donkey 10,000 shares Mr. Eagle 5,000 shares Total shares 100,000 shares Queen Corporation conducted an IPO involving 40,000 unissued shares to be sold to the public at PS per share. Mr. Boar decided to sell 15,000 of his shares to the public during the IPO at PS per share. Proportion of IPO shares , a) Primary offer percentage = 40,000/(100,000+40,000) = 28.57%, equivalent to 2% IPO tax b) Secondary offer percentage = 15,000/100,000 = 15%, equivalent to 4% 1PO tax ‘The IPO tax shall be: Primary offering (40,000 shares x PS x 2%) b__4,000 Secondary offering (15,000 shares x PS x 4%) P_3.000 Tree rer the issuing corporation, while the 1PO tax of the secondary offering shall be paid by Mr. Boar, the selling shareholder. Mustration 2 Assuming further that 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 shares after the IPO for P6 per share. 167Chapter 5 — Percentage Tax ion after the IPO is called a “foy 1 ent sale by Queen Corporation aft E ow, area This is no longer subject to the IPO tax since the tax apni. only to the initial listing of closely held corporations. involvi hares after the listing of Que the sale of Ms, Donkey involving 10,000 sl : 7 eae 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 % x 1%). Summary of Rules on Sales of Stocks L Sales made by Before IPO During IPO Corporate issuer 1PO tax as primary — No tax offer No tax | older investor | Capital | IPO tax as secondary Stock | | Shar gains tax offering transaction tax Note: This table ignores documentary stamp taxes on sale or issue of stocks. TAX ON FRANCHISES Generally, franchises are vatable. Exceptionally however, there are only two types of franchises that are specifically subject to percentage taxes under the NIRC: | _ | Franchise grantees % Tax Rates | | 1. Radio or television broadcasting companies whose annual gross receipts do not exceed P10,000,000 3% 2._ Gas and water utilities 2% The percentage tax on these franchise grantees is referred to as “franchise tax”. VAT registration Franchise grantees of radio Note that there is no similar isi dl Provision for franchise grantees of gas and tater utilities, Hence, they are subject to percentage wae if they exceed the P10M gross receipts threshold, — 7 168Chapter 5— Percentage Tax 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 subject 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. Mlustration 2: Gas utilities City Gas Corporation, a gas utility, consistently had 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 P 12,000,000 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 receipt 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. Note that the franchise tax does not apply to water refilling or purification stations selling bottled mineral water. These are vatable entities on their sales of water. Vatable franchises . a. Electricity - electric 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. « Transportation - Transport companies are vatable, except receipts of common carriers by land on their transport of passengers since these are subject to the 3% common carriers tax. 4. Private franchises 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. 169Chapter S — Percentage Tax A life insurance company is a company which deals with the 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 authorizeg to pursue as part of its business activity. (RMC30-08) Hence, premiums on 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 a. Direct insurance b. Reinsurers c. Retrocessionaires A direct insurance business underwrites insurance policy and negotiates them to policyholders through insurance agents. To minimize risks, insurelS cede or assign parts of their insurance premiums to reinsurers who shall undertake to assume part of the risks, Reinsurers are thus insurers 0! 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 non-life insurance policies applies. Whe" insurers cede part of these premiums to reinsurers, it should not be taxe again. Otherwise, double taxation occurs, 170Chapter 5 — Percentage Tax Cooperative companies or associations 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, fire and casualty insurance. Ilustration 1 Absolute Insurance underwrites both life and non-life insurance policies. The following were the premiums collected in a month: —Non-life_ Cash collections P 2,000,000 P 1,500,000 Checks 400,000 600,000 Promissory note 500,000 ___400,000 Total 2,900,000 P 2,500,000 The percentage tax will be computed as: Cash collections P 2,000,000 Checks 400,000 Promissory notes ——500,000 Total premiums P 2,900,000 Multiply by: percentage tax rates sehen 298 Premiums tax B__ 58,000 Note: 1. Gross receipt includes collections of cash or money substitutes such as check. Only tress recat 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 notes. Mustration 2 . Phinoy Reinsurance, a domestic reinsurance company, reported the following premiams and retrocessions to a foreign retrocessionnaire during the month: Reinsurance premiums P12,000,000 Less: Retroceded premiums = 8.000.000 Retention yen Commissions from retroceded reinsurance contracts 500,000 Reinsurance premium ts exempt from premiums tax as it is already subjected to Premium tax on the ceding insurance company. The payment of retrocession Premium to the foreign insurer is subject to the withholding VAT because this is a a7.Chapter 5 — Percentage Tax purchase of reinsurance service from a non-resident: Insurance commission or, insurance commission whether life or non-life is vatable. Mlustration 3 a. | | Sihra Life Insurance Philippines offers life insurance and variable insurance products. The following relates to its monthly receipts: Variable life —Lifeplans _ ___plans __ Total premiums P 2,000,000 P 8,000,000 Less: Insurance charges 5,000,000 Credits to client account balances P_____- P__ 3,000,000 ‘The premiums tax shall be computed as follows: Life premiums P 2,000,000 Insurance charges on variable life plans —— 5,000,000 Total life insurance premiums P 7,000,000 Multiply by: 2% Premiums tax B___140,000 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 fro i i x m the jums earned, it is exempt. aaa Note that the premiums which have been the source of the funds invested had already been subject to 2% Premium tax. (RMC 20-08) 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-bank financial intermediaries-Chapter 5 — Percentage Tax summary of tax rules on insurance: Aras Republic of the Philippines Re-insuran premium (0%) | Domestic/Resident life insurers Foreign insurers fe premiums tax 5% percentage tax 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 (RR16-2005) 2% premiums tax shall be eliminated RA 10001 has a provision that the this provision was vetoed by within five years from its effectivity. However, the president. NTS OF FOREIGN N : 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 insurance is 4%now. Direct insurance from abroad If property owners obtain insurance directly from abroad without the 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 mmissioner and to the Commissioner of Internal Revenue. Mustration Mang Pandoy insured his buildings with Premiums during the month. a foreign insurer. He paid P150,000 173Chapter 5 - Percentage Tax i Insurance Commission ang the transaction to the : Marg Pa aad premiums tox (Len P150000 x 5%) t0 the BIR. Tyg BIR and pay P7, ion should be subject to the withholding VAT, but the same is specifically transaction subjected to percentage tax. EAS DIS! MESSAGE __O! E PHILIPPINE: ORIGINATING FROM THE PHILIPPINES NVERSATIO) i ited from the i e or conversation transmit Led aT sone ‘elegragti telewriter exchange, wireless and other eee 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: a |_Philippines Abroad 10% overseas communication tax ‘*Subject to zero-rating requirements; fnot met, receipt is exempt. Mlustration Quick Telecommunications had the following receipts during the quarter: {caltOrigin [Cali Destination Amount collected Philippines Philippines P 20,000,000 Abroad Philippines ~~ beines_|__Abroad | 5,000.00 ‘The quarterly overseas communication tax Gross receipts from outgoing calls Multiply by: Percentage tax due —__10% P__500,000 Exemptions {The overseas communication tax shall not app following: 1. Government - including an iti instrumentalities ® ae ae Diplomatic Services ~ governments International org Immunities un News services shall be computed as: P_ 5,000,000 ly to the outgoing calls of the subdivisions 2 embassies and consular 3 anizations ~ those enjoyi der international agre ffices of foreig” ing privileges, ae and exemptions a” ‘ements 174Chapter 5 — Percentage Tax WINNINGS FROM HORSE R, A Winnings from race tracks and j amusement taxes: alai are subject to the following Winnings in horse race or jai-alai, in general 10% Winnings from double, forecast/quinella and trifecta bets 4% Owners of winning race horses 10% Note: Types of race winnings A. Combination bets Double- a bet to select the winners in two specific races Daily double ~ a bet to forecast the first winning horse on two consecutive races Forecast a bet to predict the first and second finisher of a particular race Exacta or perfecta- a bet to pick the first two finishers in exact order 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 arace in exact order ween B. Straight wagers 1. Win-the selected 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 49% on the net winnings. The pay-out on straight 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 the date itis withheld. (Sec. 126, NIRC) Mlustration 1: Race track operators ; Gamby Hippodrome operates a race track. It had the following dividends for winning tickets during an event: ‘Total winnings on straight bets (costs of winning tickets, P10,000) P 80,000 ‘Total winnings in daily double, forecast and quinella (costs of winning tickets = P600) 40.000 Awinner of trifecta (cost of ticket = P200) 30,000 Prize of the owner of winning horses 100.000 Total prizes, winnings or dividends P_250,000 ‘The following tax must have been withheld from these winnings before their release to the winners: 175Chapter 5 - Percentage Tax Net winnings in daily double, forecast and quinella P 39,400 (P40,000-P600) Net winning on trifecta (P30,000-P200) pa Total E Multiply by: —__ 4% P 2,768 Prize of the winning horse P 100,000 Net winnings on straight bets (P80K - P10K) ____ 70,000 Total P 170,000 Multiply by: 10% 17,000 Total percentage tax on winnings P__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, winnings or dividends P 250,000 Less: Percentage tax on winnings 19,768 Net pay-out to winners P__230,232 Illustration 2: Net winnings Mrs. Petra hit the trifecta with 4 pay-out of P58,000 from her P100 ticket. How much will she receive from hi er winning? Answer: P 58,000 - (P58,000 - P100) x 49% = P55,684 Illustration 3: Operator Of jai-alai On @ particular event, an operator of jai-alai reported a total receipts of P1,000,000 from jai-alat bets. There was a total P650,000 total winnings of ‘various picks made by bettors. The ost of winning picks was P50,000. The jai-alai operator must withhold the fol lowing tax on the winnings: Jai-alai winnings ( 650,000 - P 50,000) le P 600,000 Multiply by: . 4 —__10% Percentage tax on winnings P___60,000 — ithe P1,000,000 gross receipts shall be subject to the 30% amusement tax for the jai-alal The percentage tax on winnings is an additional but is imposed by law on the betting. This upon the receipts of the ©perator of the winnings from othe amusement places or basketball, billiards, and bowling amusement tax by nature in addition to those impos lai or racetrack. Note thal activities such as cockpit, boxing Competitions are not subject to tax. 176Chapter 5 - Percentage Tax SUMMARY OF SPECIFIC PERCENTAGE TAXES Percentage tax Tax rates Banks and financial Gross receipt tax 5%,1%; 7% intermediaries International carriers International carrier's 3% tax Common carriers Common carrier’s tax 3% Amusement places Amusement tax. 10%,15%,18%;30% Sales of stocks by an Stock transaction tax 60% x 1% investor Sale of stocks during an IPO Tax 4%, 2%; 1% ial public offering (IPO) Franchise Franchise tax 3% | Life insurance Premiums tax 2%, 4%; 5% Overseas calls Overseas communication tax. 10% Amusement betting Winnings 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 taxpayer shall attach BIR Form 2307 in filing his monthly percentage tax return. 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. Mustration 1 . During the quarter, Mr. Avila, a non-VAT taxpayer, sold various office supplies toa 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 P 200,000 Less: 3% final withholdin tage tax 6.000 g percentage Net proceeds to be released to Mr. Avila P__194,000 177Chapter 5 — Percentage Tax ‘h tage tax payable for the quarter shall be computed and presenteq in ‘The perce BIR Form 2551Q as follows: Sales subjected to government withholding P 200,000 (P194,000/97%) Sales to private customers = 80,000 Gross sales Multiply by: 7 oy mT tage tax due ess Tan credit (BIR Form 2307) = P200,000 x3% ____6,000 Percentage tax payable P___2.400 Note: In effect, the sales not subject to withholding is being taxed; hence, P80,000 x 3%, Mustration 2 Goodyear Corporation, a non-VAT taxpayer paying the 3% percentage tax, had the following receipts in the quarter: Taxable sales to government entities P 150,000 Taxable sales to private entities 60,000 Exempt sales —180,000 Total sales P__390.000 The total creditable percentage tax withheld at source was P4,500. ue Percentage ‘ax payable for the month to be presented in BIR Form 2551Q shall be: Taxable sales to government entities ‘Taxable sales to private entities Prot 50,000 Total taxable sales non Multiply by: fn maar Percentage tax due P 6,300 Less: withheld percentage tax und 4.500 Percentage tax payable UMter BIR Form 2307 see impose TAXABLE SALES OF NON-VAT TAXPAYERS 7 ntage tax i] registered persons is 30, ; ct to percentage tax, of non-VAT Mlustration 1 Diak Restaurant had annus i ale * Restaurant generated P200,000 Bross recone PSM. During the month, 2 178