Chapter 3 — Introduction to Business Taxation CHAPTER 3 INTRODUCTION TO BUSINESS TAXATION Chapter Overview and Objectives , readers are expected to comprehend: ; fee engaged in trade or business and the exceptions ty the rule on regularity of transactions The concept of a business taxpayer The registration requirements on businesses The business classification as to activities and their respective tax base The concept of gross selling price and gross receipt ‘Types of business taxpayers and the VAT threshold The concept of, accounting period for business taxation The differences in business reporting of VAT and non-VAT taxpayers The scope of VAT and percentage tax 0. The concept of “vatable” sales or receipts NATURE OF BUSINESS TAX 1 - 2 3. 4, 5, 6. 7, 8. 9. 1 2. Indirect tax - 3. Privilege tax - Business tax i i business ‘ax Is also viewed as a tax on the Privilege to do 4. National tax ~ Business tax is imposed by the n; ‘ational government. TYPES OF BUSINESS TAXES 1. Percentage Tax 2. Value Added Tax 3. Excise Tax Comparison of busin Point of differences _| Timing of imposition 1ess taxes | —Primary tax Subject businesses ingeneral | excisabte Products —— __| __orservices ‘axpayers Business only | Business or non} business 54an chapter 3 Introduction to Business Taxation sual taxpayers Big businesses ‘Small Big or small businesses businesses Accounting treatment Liability, Expense Asset or Liability EDURE! N 4, Evaluate if the sales activity qualifies as a business. a. Ifnot, the activity is exempt from business tax. b. If yes, the business must register for business tax. Proceed to the succeeding procedures. 2, Identify the taxable person. a. If individual - include all proprietorship businesses including branches of the individual taxpayer b. If juridical - include all branches of the corporate taxpayer 3, Determine the activity type: a. Ifsales of goods - determine the sales b. Ifsales of services - determine the receipts 4, Classify the sales or receipts whether they are: a. Exempt sales or receipts - pay no business tax b. Sales or receipts subject to specific percentage tax - pay specific percentage tax c. Vatable sales or receipts 5. Determine taxpayer registration type. a. Iftaxpayer is VAT registered, pay VAT on vatable sales or receipts. b. If taxpayer is non-VAT registered, pay the 3% general percentage tax then determine the magnitude of 12-month vatable sales at the end of every month: - If it exceeds P3,000,000 - the person shall register as VAT taxpayer; pay VAT prospectively effective on the succeeding monthly vatable sales or receipts. - If it does not exceed P3,000,000 - the person shall continue paying the 3% general percentage tax on the vatable sales or receipts. 6. Determine if the goods or service offered is excisable. a. If yes, pay the applicable excise tax in addition to VAT and or percentage tax. b. Ifnot, pay only VAT and or percentage tax. Note: 1. 2 Businesses normally register initially as non-VAT taxpayers, except when their Projected operation is expected to exceed the P3M annual VAT threshold, For non-VAT registered taxpayer, the evaluation of the magnitude of vatable sales or eceipts is done continuously every month over a 12-month period. The taxpayer Temains a non-VAT taxpayer for as long as its 12-month rolling sales or receipts do Not exceed the P3M annual VAT threshold, — Toyy Chapter 3 - Introduction to Business Taxation Once the taxpay i VAT taxpayer, he remains as becomes or registered as a 8 35 * Pata on vatable sales or receipts until the cancellation of his VA Tegistration, a t HAT IS A BUSINESS? | 7 eee ; pares refers to a habitual engagement in a commercial activity involving the sale of goods or services for a profit. Elements of business; 1. Habitual engagement 2. Commercial activity HABITUAL ENGAGEMENT There must be i i business. Isolated or casual sales are not re, presumed not made in the ordinary course to construe the presence ofa ‘gular activities; hence, these are of business, Habitual engagement is appropriate government a Particular trade or vocal business taxation, normally manifested igencies as a dealer or tion but non-registrat by registration with the as a service provider in a ion is not an excuse to from such activity, Mustration 1 Mrs. Ellerton, a medical practitioner, sold his principal r, perties by a non-realty dealer is q casual hence, itis exempt from business ta, He Mot made inthe esidence for P10M, course of business; Illustration 2 Mang Merto, a realty dealer, them ata Profit. security dealer, the transaction business and hene Mustration 3 Joshua is a proprietor regularly en, month, he reported the following: Sales of merchandise P Sale of personal car waged in trading merchandise 800,000 1,200,000 56—_— Chapter 3— Introduction to Business Taxation The 800,00 sales is subject to business tax. The P1,200,000 sales is outside the merchandising business. The same shall not be subjected to business tax since Joshua is not also a car dealer. privilege stores Privilege stores (most commonly known as “tiangge”) are stalls or outlets not permanently fixed to the ground which are put up during special events such as festivals or fiestas (RR16-2013). To be considered a privilege store, the store should engage in a business activity for a cumulative period of not more than 15 days. Otherwise, they shall be considered regular taxpayers subject to business taxes and income tax. (Ibid) “Privilege store operators” shall not be considered habitually engaged in business considering their limited activity. They are exempt from business tax but is subject to income tax. Ilustration 1 Mang Andro makes key chains and’ wood art for sale to tourists during the annual Panagbenga Festival. He rented a booth from the City of Baguio, the tiangge organizer, and recorded sales of P350,000 over the weeklong festivities. Mang Andro is not considered habitually engaged in business. His P350,000 sales is not subject to business tax, but is subject to income tax. Mustration 2 Danes Bakeshop, an established business enterprise, also rented a booth from the organizer, City of Baguio, to sell its cakes and pastries during the Panagbenga Festival. Danes generated P400,000 sales during the event. e store since it is an established and regularly Danes Bakeshop is not a privileg ‘sales on the event shall be subject to the usual operating business. The P400,000 business tax. tion to th rity rt The sales of services by non-resident persons are presumed made in the course of business without regard as to whether the sale is regular or isolated. Our current tax law views the consumption tax on import of services a business tax. The sales of services by non-residents are subjected to the final withholding tax as previously discussed in Chapter 2. COMMERCIAL ACTIVITY Commercial activity means engat Profit. The goods or services mus' earn unrestricted amount of pecunial gement in the sale of goods or services for a ‘tbe offered to the public with a motive to ry gains. However, the actual existence 57_, Chapter 3 - Introduction to Business Taxation ofa profit during the period is nota pre-condition to business taxation, Even if the business operation results to a loss, business tax still applies, The following are not businesses: Government agencies and instrumentalities Non-profit organizations or associations Employment Directorship in a corporation Business for mere subsistence VR wNe Government agencies and instrumentalities Agencies and instrumentalities provide essential public services. They may charge reasonable fees for services rendered but are not intended to profit butare merely costs reimbursements, Mlustration Non-profit or char A charitable or eleemosynary activity regular ritable : ly pursue i oreanization is not a business because’ of wy, absence orn institution or make profit. '€ purpose to Mlustration Union of Husbands Afraid of Wife (UHAW) is a no institution for the assistance of battered husbands. UHA\ contributions from the public and generatar P400,000 tree se4 P 2,000,000 shop in its fund-raising drive, g Employment The elements of an employer-employee relationship are disc in Chapter 10 of Income Taxation: Laws, Principles and Appl hime author. Employee benefits derived under employment i business tax but only to income tax. Ussed in detail ications by the is Not subject to 58chapter 3~ Introduction to Business Taxation mustration 1 Bernard Bakilan, a certified public accountant, practices his profession in the industry as the Chief Financial Officer of UHAW. During the month, he received 50,000 compensation plus P10,000 fringe benefits. Employment is not a commercial activity as it does not involve sales of services to clients or customers. Hence, the compensation income and the fringe benefits are not subject to business tax. Illustration 2 Jones is a job order employee contracted by the government to provide support services for office job for 6 months. Jones is paid P18,000 a month. Directorship in a corporation Although a director may not be an employee, director's fees, per diems, and allowances are not derived in an economic or commercial activity or rendering of services to clients for a fee. Hence, these are not subject to business tax (RMC77-2008). Ilustration 1 Mr. Agua is an independent director of Aga Corporation receiving director’s fees, per diems, and allowances totaling P15,000 per’ board meeting appearances. Mr, Agua is not subject to business tax. Query: What if Mr. Agua is an employee of Aga Corporation? Mr. Agua’s director's fees shall be part of his compensation income and is not likewise subject to business tax. Mlustration 2 John, a certified public accountant, renders his services to the public for a fee. Is he subject to business tax? The exercise of profession by regularly rendering services to clients for a fee is considered a business subject to business tax. Business principally for subsistence Business principally for subsistence or livelihood refers to businesses with gross sales or receipts not exceeding P100,000 per year. Marginal income earners - refer to individuals not deriving compensation income under an employer-employee relationship but who are self- employed deriving gross sales or receipts not exceeding P100,000 in any 12-month period. 59i ation Chapter 3 - Introduction to Business Taxi i i ers: Examples of marginal income me Subsistential farmers or fisher! small sari-sari stores i inderias or “turo-turos’ smnallcarinderias or “turo- ome drivers or operators of a single unit tricycle, and others similarly situated epose The term marginal income earners do not include licensed Professionals, consultants, artists, sales agents, brokers, including all others whose income have been subjected to withholding tax (RMC 7-2014). to income tax (RR7-2012). These small ‘ot be considered com ‘mercial being merely for personal or family livelihood or subsistence. Examples of persons considered engaged in business: 1. Consultants 2. Sales agents of insurance or real estate including brokers 3. Television or movie talents and artists 4. Cooking instructors 5. Martial art instructors BUSINESS TAXPAYERS The taxable Person in business taxation j ‘s incl estate, Partnership, Corporation, joint ve ee enture, coop, ary IS a separate taxatie Person i ch Subsidiary comp Py IS taxable porgr aS Subsidiary Te ponent offices of the ye business le person Siness © one, not 's nota juridical enti, Its sal he individual oprietor. he same individu; Practitioner, has two other comme; ha er commer, ea MMercial bys esse, 60Chapter 3 - Introduction to Business Taxation , 5 Busi P 1,200,000 P. 800,000 P-700,000 Business 1, Business 2 and the accounting practice are not taxable persons being proprietorship businesses. The sales and receipts of these totaling P2,700,000 shall pe taxable to Mr. Ysmael as the taxable person. Illustration 2 DEF Corporation has its head office in Makati City and two branches in Manila City and Quezon City. The sales outlet has the following sales: Makatihead office Manila Citybranch Quezon City branch P 2,000,000 P 1,800,000 P 1,200,000 The branches are not taxable persons. The sales of the branch offices including the head office shall be taxable to DEF Corporation. The same shall be reported to the BIR RDO in the principal place of business - Makati City. Mustration 3 ‘ABC Company has a branch in Manila City and a subsidiary, XTB Company, in Davao City. ‘ABC Company and its branch are one entity while XTB Subsidiary is a separate entity. The transfer of goods by ABC Company to its Manila City branch is not subject to business tax. The intercompany sales made between ABC Company and its subsidiary, XTB Company, is subject to business tax. XTB Company's transaction with the Manila branch is also a transaction with its parent, hence, taxable. Mlustration 4 Dr. Jones owns a bakery registered as a proprietorship business. He also owns a dinic, also registered as a proprietorship business. His clinic occasionally purchases bread from his grocery. Dr. Jones’ children also bought breads from the bakery. The sales between proprietorship businesses shall not be subject to business tax since the same does not involved another party. The sales made by the bakery to Dr. Jones’ children shall be subject to tax since they are different persons to Mr. Jones. Income tax exemption does not equate to business tax exemption If you still remember, the same concept of a taxable person in income taxation applies in business taxation but income tax exemption does not necessarily mean business tax exemption. 61~~ ; a Chapter 3 - Introduction to Business Taxatiot Hence, the following persons which are exempt taxpayers from lence, i ; are subject to business Be a . General professional partne: 7 - ; ° joint aehire engaged in construction or oil exploration 3. Local water districts : 4. Barangay micro-business enterprise income tay TYPES OF BUSINESS TAXPAYERS A taxable person shall register either as: a. VAT taxpayers b. Non-VAT taxpayers VAT-registered taxpayers pay 129 VAT while non-VAT registered taxpayers pay a 3% general percentage tax. BUSINESS ACTIVITIES The basis of business tax differs on the activities businesses are engaged in, Type of business activities; a. Sales or exchange of goods or Properties b. Sales of exchange of services or lease of properties Sale of Goods ten i sclera pes ash Properties or rights; The right or privilege to use in the Philippines any i scientific equipment; 4. The right or privile 5. Radio, television, s design or model, plan, fe brand or other similar 3, industrial, com mercial or 8¢ to use motion picture 0 films, film: atellite transmission and cable tele 'S, tapes and discs; and vision time, Sale or Exchange of Services Sale or exchange of services shal ean the performance of ay a of P for others for a fee, Femuneration or Consideration, ae 11nd oF in cash, including those perfor Ortendered by the ign ether in Construction and service contactors wing: tack, realestate, commercial, customs and immigration brokers Lessors of property, whether Personal or real Persons engaged in warehousing services Lessors or dis SewnChapter 3— Introduction to Business Taxation 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24, Proprietors, operators, or keepers of hotels, motels, rest houses, pension houses, inns, resorts, theaters and movie houses Proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers Dealers in securities Lending investors Transportation contractors in their transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines Common carriers by air and sea relative to their transport of passengers, goods or cargoes for hire and other domestic common carriers by land relative to their transport of goods or cargoes Sales of electricity by generation, transmission and or distribution companies Franchise grantees of electric utilities, telephone and telegraph, radio and or television broadcasting and all other franchise grantees Non-life insurance including surety, indemnity and bonding companies Similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties ‘The lease of, use of, or the right or privilege to use any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; The lease or the use of, or the right to use any industrial, commercial or scientific equipment; The supply of scientific, technical, industrial or commercial knowledge or information; The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or enjoyment of any such property, or right or any such knowledge or information; The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such non-resident person; The supply of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; The lease of motion picture films, films, tapes and discs; and The lease or the use of or the right to use radio, television, satellite transmission and cable television time. BASIS OF BUSINESS TAX PER TYPE OF ACTIVITY Sellers of goods or properties Sellers of services Basis of business tax Gross selling price Gross receipts 63oY i ion Chapter 3 - Introduction to Business Taxatio! Gross selling price f money or its Equivalen, il ic 's to the total amount o: o q ress copie ae or is obligated to pay to the seller in considerate Se aire or exchange of goods or properties, he. sneise ax, ifany, on such goods or properties shall form part of the gioss sel ling price, It includes sales made in cash, on credit and on installment basis and is analogous to the income taxation concept of “gross sales” except only on the treatments of contingent discounts. Mlustration 1 Abusiness taxpayer had the followin, 8 transactions during the quarter: Cash sales P wi cumeny ianooo Installment sales (P30,000 collected) 100,000 Sales returns and allowances 20.0 Quota discounts tO eee Purchase of goods, including P72,999 VAT noo. Passed on by sellers 672,000 The gross selling price shall be: Cash sales Account sales p epeo00 Installment sales 000 Total sales 1 Less: Returns and allowances “200,000 Gross selling price Note: Quota discounts or rebates are ontingent upon future volume m and are not determinable at the date of sale; ence, these are ne deere °4 PY customers Mlustration 2 HTC Corporation sold various Specialized equipment to a buyep With the following terms: 64Chapter 3— Introduction to Business Taxation List price P 2,000,000 Freight 50,000 Installation fee 20,000 Trade discounts 10% Cash discounts, 2%/30 net 60 days 36,000 ‘The gross selling price shall be computed as: List price P 2,000,000 Less: Trade discounts (10% x P2,000,000) —— 200,000 Net price P 1,800,000 Freight 50,000 Installation fee ——20,000 Gross selling price 21,870,000 Note: Only trade discount is determinable at the date of sale. Cash discounts should not be deducted since these are contingent upon the buyer paying at an early date in the future. Gross receipts "Gross receipts” refers to the total amounts of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits applied as payments for services, rendered and advanced payments actually or constructively received during the taxable period for the services performed or to be performed for another person, excluding VAT. Mlustration 1 Alaundry business had the following transactions during the month: Cash collection for services done P 400,000 Cash collection for services not yet started (advances) 100,000 Receivables on services rendered 600,000 Purchase of goods and services, including of P48,000 VAT passed on by sellers 448,000 The gross receipt shall be: Cash fees P 400,000 Advances by customers 0,000 Gross receipts P_500,000 Illustration 2 $2 Tech, Inc. provides PC board repair services. During the month it billed a total of P4,000,000 out of which clients settled P3,200,000. S2 Tech, Inc. also collected P8,000 interest on its bank deposits and P 14,000 dividend income from its stocks investment. 65os idend income are incideny hence, excluded, Chapter 3 - Introduction to Business Taxation ipt is The interest and divi receipt is P3,200,000. Th maa ee arising ‘from the activities of the business; Constructive receipt i any debt or obligation ang Trabtance thereof ofthe seller as Payment for services rendered 3. Transfer of the amounts retained by the Payor to the account Of the contractor Mlustration iss Leah Mado is a pozo negro contractor. She had the following fees for the month: * P10,000 from Cipher Company, net of the P30,000 debt of Miss Leah from Cipher Company, P 15,000 deposited to Miss Leah's bank account P 20,000 cash share from a genera} Profession, i 000 undistributed share was credited to her capital aecoug nershi, ve Miss Leah’s gross Teceipt shall be: Receipts from Cipher £10,000 + P30,999 P Ses deposited to Leah's bank account TOSS receipts 40,000 518000 the net income o he net j f a general Professio, since Miss Leah jg Not selling seryi The share from Not gross receipt al Partner; hip (GPP) is ‘ices to the Gpp, vue : Agency monies ment to an ‘related th; Pe . pablo La ee Payment on behalf er mothe, & Teceived as redound to the benefit of the Payor are not part OF Bross rect, Which do not Manila Jockey Club, 108 Phil. 92; (2960), “ceipt (See CIR vs. Insurance Proceeds on damaged assets sine Pt Of insurance proceeds from the destructio, usiness asset is not viewed as sales or Teceipts for Purposes bepany’s taxation. The compulsory or involuntary Conversion of pr usiness ‘Such as in the case of insurance reimbursement is Not view, sale inne? ordinary course of business (BR Ruling No. DA-084-2097 ary ps 2007).Chapter 3 — Introduction to Business Taxation Mlustration PC Repair Company received the following amounts during a month: Cash collection from clients P 400,000 Reimbursements for out-of-pocket costs incurred in servicing clients 50,000 Reimbursement for client expenses paid by PC Repair 80,000 Proceeds of fire insurance 400,000 Receipt of bank loan 500,000 Receipt of agency money to be remitted to a sister company 100,000 ‘The gross receipts shall be: Cash collection from clients P 400,000 Reimbursements for out-of-pocket costs incurred to clients 50,000 Gross receipt P__450,000 Note: 1. Out-of-pocket expenses of PC Repair which are reimbursed by the client are actually income which redounds to the benefit of PC Repair. Hence, these are part of gross receipt. 2. Loans and agency money do not redound to the benefit of the taxpayer. The loan is an obligation and is not income. The agency money will be paid or remitted to another party, These are not included in gross receipts. 3. The proceeds of insurance is not a receipt in the ordinary course of business. Withholding taxes Amounts withheld form part of gross receipts because these are in constructive possession and not subject to any reservation, the withholding agent being merely a conduit in the collection process (CIR vs. Citytrust Investment Phils, Inc. GR. No. 139786, September 27, 2006). Illustration A lessor received P 9,500 rentals from a lessee net of 5% withholding tax evidenced by BIR Form 2307. The gross receipt shall be P10,000 computed as (P 9,500 / 95%). Business with Mixed Activities A business which is engaged both in the sales of goods or properties and sales of services shall be subject to business tax on gross selling prices on its sales of goods or properties and on gross receipts on the sales of services. Readers are advised to carefully understand the following section as it is highly critical in understanding and mastering the business tax concept structure, 67~*~ Chapter 3 — Introduction to Business Taxation TYPES OF SALES OR RECEIPTS Sales of goods Sales of Services Exempt sales Exempt sales Exempt recei; ts Receipts specifically . BICAP FLow subject to % tax | Vatable sales Vatable sales Vatable receipts | Exempt sales or receipts are not subject to business the list of services specifically subject to a percent Subject to either 3% general percentage tax or VAT of the business. tax. BICAP FLOW is an acronym for tage tax. Vatable receipts are thos depending on the type of registration re There are sales of goods, properties or services that a business tax (i.e. VAT and pe re exempt from rcentage tax), such as the following: 1. Sales of certain basic necessities, such as: a. agricultural or marine food products b. health services of hospitals educational services of schools d. housing or residential Properties within price limits 2. Sales exempt by law, treaty or contracts a. Sales by cooperatives to members b. Sales or lease of aircraft or vessels © Sales or printing of books, magazines and newspapers 3. Casual sales or sales by non-business sellers a. Sale of persons not regularly engaged in trad ir f le or busines: b. Services rendered under an employer-employee relat aaa c. Services rendered by a Regional Area Headquarter f a multinational company a 4, Export sales of non-VAT registered persons Exempt sales of goods, properties, or services are extensively ¢, i i ‘overed in detail in Chapter 4, ly covered Receipts from services specifically subject to a percenta There are services that are subject to a spe Hic percentage tax, such as the following: 1. Banks and non-bank financial intermediaries performi functions and other non-bank financial intermediari banking functions 2. International carriers on their outgoing transport of cargoes, baggage or mails ME quasi-banking es without quasi. 68