Chapter 3 — Introduction to Business Taxation CHAPTER 3 INTRODUCTION TO BUSINESS TAXATION Chapter Overview and Objectives mprehend ders are expected to Col | arent i business and the exceptions, 1. The concept of being engaged in trade or 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 ee NATURE OF BUSINESS TAX 1. Relative consumption tax - Business tax is a tax on the consumption o! goods or services and is imposable only when the seller is a business 2. Indirect tax - The tax is collected from the seller rather than from the Z 3. 4. 5 6. mi 8. 9. 1 buyer-consumer. 3. Privilege tax - Business tax is also viewed as a tax on the privilege to business. 4. National tax - Business tax is imposed by the national government. TYPES OF BUSINESS TAXES 1. Percentage Tax 2. Value Added Tax 3. Excise Tax Comparison of business taxes Point of differences VAT % tax Excise tax Timing of imposition Sale Sale Production / a = : import __- re Primary tax |" Primarytax | Additional tax Only producers Subject businesses Any business, | Any business, | fenaters of in general in general excisable produc Tone a or services _~ ‘payers Business only | Business only Business or no” —L 1 business 54 Scanned by TapScannerChapter 3 — Introduction to Business Taxation Usual taxpayers Big businesses Small Big or small l businesses businesses \ [Accounting treatment Liability Expense Asset or Liability | , PROCEDURES OF BUSINESS TAXATION 1. 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. . 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 Determine the activity type: a. If sales of goods - determine the sales b. If sales of services - determine the receipts 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 Determine taxpayer registration type. a. If taxpayer 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, Businesses normally register initially as non-VAT taxpayers, except when their Projected operation is expected to exceed the P3M annual VAT threshold. 2, For non-VAT registered taxpayer, the evaluation of the magnitude of vatable sales or Teceipts 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. 55 Scanned by TapScanner oiChapter 3 — Introduction to Business Taxation he remains as such 3. Once the taxpayer becomes or registered as a VAT taxpayer, aM ‘ paying VAT aavaable sales or receipts until the cancellation of his VAT registration WHAT IS A BUSINESS? - e ; Business 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 regularity in transactions to construe the presence of a | business. Isolated or casual sales are not regular activities; hence, these are presumed not made in the ordinary course of business. Habitual engagement is normally manifested by registration with the | appropriate government agencies as a dealer or as a service provider in a particular trade or vocation but non-registration is not an excuse to business taxation. A casual sale transaction is not a business even if profit is derived from the transaction. On the other hand, the regular selling of goods or services fora | profit is a business despite the absence of actual profit from such activity. | Milustration 1 Mrs. Ellerton, a medical practitioner, sold his principal residence for P10M The sale of real properties by a non-realty dealer is a casual sale not made in the | course of business; hence, it is exempt from business tax. | Mlustration 2 Mang Merto, a realty dealer, purchased shares of stocks them sci iroft. as investment and sold The acquisition and sale of stocks investments by are saltor are not hi course of the realty business and are not Subject to business tax. i Ree onte ‘ security dealer, the transaction would be considered made in the of business and hence, subject to business tax. oy Mlustration 3 ae a Sanaa anake engaged in trading merchandise. During the | Sales of merchandise P 800,000 Sale of personal car 1,200,000 | j 56 j Scanned by TapScannerChapter 3 — Introduction to Business Taxation : The P800,00 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. Illustration 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. Illustration 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. Danes Bakeshop is not a privilege store since it is an established and regularly operating business. The P400,000 sales on the event shall be subject to the usual 1 business tax. r 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 means engagement in the sale of goods or services for a profit. The goods or services must be offered to the public with a motive to earn unrestricted amount of pecuniary gains. However, the actual existence 57 Scanned by TapScannerChapter 3 — Introduction to Business Taxation of a profit during the period is nota pre-condition to business taxation. ifthe 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 veene Government agencies and instrumentalities Agencies and instrumentalities provide essential public services. They ina charge reasonable fees for services rendered but are not intended to pro's but are merely costs reimbursements. Tlustration The Professional Regulations Commission (PRC) collected P12,000,000 from Professional license fees during the month. It also earned additional P1,000,000 from rental income on its vacant premises. The P12M receipt is on income by PRC a government agency, in rencerins government service. This is not a commercial activity and is exempt from business tax Leasing, on the other hand, is a commercial activity departing from the nature of government service; hence, itis Subject to business tax. Non-profit or charitable organizations A charitable or eleemosynary activity regularly pursued by an institution o organization Is not a business because of the absence of the purpose to make profit. Mustration Union of Husbands Afraid of Wife (UHAW) is a non-profit social we Institution for the assistance of battered husbands. UHAW received P 2,000.0 contributions from the public and generated P400,000 from the sales of « aift | shop in its fund-raising drive, Employment The elements of an employer-employee relationship are discussed in detal! in Chapter 10 of Income Taxation: Laws, Principles and Applications by the same author. Employee benefits derived under employment is not subject 0 business tax but only to income tax, 58 fetta Coa Estee lagChapter 3 — Introduction to Business Taxation Illustration 1 Bernard Baki erti aes aes public accountant, practices his profession in the P50,000 f Financial Officer of UHAW. During the month, he received ,000 compensation plus P10,000 fringe benefits. ‘ Employment is not ivi ae oe eee eee activity as it does not involve sales of services to p z , the compensation coe ata bates tae Pp income and the fringe benefits are Illustration 2 Jones is a job order employee contract i = i ed by the government to provide support services for office job for 6 months. Jones is paid P18,000 a sacra # 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). Illustration 1 Mr. Agua is an independent director fees, per diems, and allowances appearances. of Aga Corporation receiving director’s totaling P15,000 per board meeting Mr, Agua is not subject to business tax. of Aga Corporation? Query: What if Mr. Agua is an employee ation income and is not Mr. Agua’s director's fees shall be part of his compens: likewise subject to business tax. Illustration 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 sub Business principally for subsist gross sales or receipts not excee subsistence tence or livelihood refers to businesses with ding 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 gales or receipts not exceeding P100,000 in any 12-month period. 59 Scanned by TapScannerinal income earners: Examples of margii shermen a. Subsistential farmers or fis small sari-sari stores small carinderias or “turo-turos” " “A drivers or operators ofa single unit tricycle, an others similarly situated pags jude licensed professionals ot incl thers whose income The term marginal income earners do 1 consultants, artists, sales agen have been subjected to withhol ts, brokers; including all o Iding tax (RM (C 7-2014). Chapter 3 - Introduction to Business Taxation | f fe i rs are exempt from | Although regular in operations, marginal income earne! business tax, but are subject to income tax RR7-2012). These small | ing merely for persona | businesses could not be considere or family livelihood or subsistence. Examples of persons considered engaged in busi 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 .d commercial be! ness: | BUSINESS TAXPAYERS The taxable person in business taxation includes any individual, trust estate, partnership, corporation, joint venture, cooperative or association. Rules: 1. Each person, natural or juridical, Rana Cacti juridical, is a taxable person for purposes of a eae and wife are separate taxpayers. i parent company is a se; beside company and miko id parate taxable person with its subsidiary 4. Home office and eae Pores . inch o} Toe : sept citable person ices of the same business are one, not ‘i propgennnn noua justia entity, Its sales and receipts is subject to yi e individual propriet ee pues of the same individual i all ‘aiabl Pee, prop metorship xpayer. le to that individual as the Illustration 1 Mr. Ysmael, an accounting practitioner, i hi withthe followingreceipts and sales tet Sommer businesses 60 Scanned by TapScanneree Chapter 3 — Introduction to Business Taxation , ; 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 be 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: Manila Ci ; 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. Illustration 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. Illustration 4 Dr. Jones owns a bakery registered asa proprietorship business. He also owns a clinic, 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 Scanned by TapScannerChapter 3 - Introduction to Business Taxation Hence, the following persons which are exempt taxpayers from income ta, are subject to business tax: a 1. General professional partnership . 2. Joint venture engaged in construction or oil exploration 3. Local water districts 4, Barangay micro-business enterprise TYPES OF BUSINESS TAXPAYERS A taxable person shall register either as: a. VAT taxpayers b. Non-VAT taxpayers VAT-registered taxpayers pay 12% 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: i a, Sales or exchange of goods or properties } b. Sales of exchange of services or lease of properties Sale of Goods or Properties Goods or Properties refers to all tangible and intangible objects which are capable of pecuniary estimation and shall include, among others: 1. Real properties held primarily for sale to customers, held for lease ot used in the ordinary course of trade or business; 2. The right or the privilege to use a patent, copyright, design or model, plar secret formula or process, goodwill, trademark, trade brand or other similar Properties or rights; 3. The right or privilege to use in the Philippines any industrial, commercial or | scientific equipment; 4, The'right or privilege to use motion picture films, films, tapes and discs; and 5. Radio, television, satellite transmission and cable television time. Sale or Exchange of Services Sale or exchange of services shall mean the performance of all kind of services in for others for a fee, remuneration or consideration, whether in kind or in cash, including those performed or rendered by the following: Construction and service contactors c Stock, real estate, commercial, customs and immigration brokers Lessors of property, whether personal or real Persons engaged in warehousing services Lessors or distributors of cinematographic films Persons engaged in milling, Processing, for others aA ewre manufacturing or repacking goods 62 Scanned by TapScannerChapter 3- Introduction to Business Taxation 7. Proprietors, operators, or keepers of hotels, motels, rest houses, pension houses, inns, resorts, theaters and movie houses 8. Proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers g. Dealers in securities 10. Lending investors 11. Transportation contractors in their transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines 12. 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 13. Sales of electricity by generation, transm! companies 14, Franchise grantees of electric utilities, telephone and telegraph, radio and or television broadcasting and all other franchise grantees 15, Non-life insurance including surety, indemnity and bonding companies 16. Similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties 17. 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; 18. The lease or the use of, or the right scientific equipment; 19. The supply of scientific, information; 20. 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 owledge or information; property, or right or any such kni 21. 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; 22. 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; 23. The lease of motion picture films, films, tapes and discs; and 24, The lease or the use of or the right to use radio, television, satellite transmission and cable television time. ission and or distribution to use any industrial, commercial or technical, industrial or commercial knowledge or BASIS OF BUSINESS TAX PER TYPE OF ACTIVITY “Sellers of goods or 1 __ properties Sellers of services Basis of business tax Gross selling price Gross receipts 63 Scanned by TapScann:Chapter 3 — Introduction to Business Taxation Gross selling price f money or its equivaley, Gross selling price refers to the total amount o! wale which the prauee pays or is obligated to pay to the eae a eatin of the sale, barter or exchange of goods or properties. = on such goods or properties shall form part of the gross selling price. \t includes sales made in cash, on credit and on installment pees and i analogous to the income taxation concept of “gross sales” except only on the treatments of contingent discounts. Allowable deductions from gross selling price: . 1. Discounts determined and granted at the time of sale, which are expressly indicated in the inyoice, the amount thereof forming part o/ the gross sales and are duly recorded in the books of accounts To be deductible, discounts must not be dependent upon the happening of future event or contingency. 2, Sales returns and allowances for which a proper credit or refund was made during the month or quarter to the buyer on taxable sales Illustration 1 A business taxpayer had the following transactions during the quarter; Cash sales P 400,000 Sales on credit {account sales) 600,000 Installment sales (P30,000 collected) 100,000 Sales returns and allowances 20,000 Quota discounts 10,000 Purchase of goods, including P72,000 VAT passed on by sellers 672,000 ‘The gross selling price shall be: Cash sales P 400,000 Account sales 600,000 Installment sales y Total sales P Less: Returns and allowances manoo Gross selling price Note: Quota discounts or rebates are conti ingent upon future z and are not determinable at the date of sal se volume purchased by customers le; hence, these are not. deductible, Mlustration 2 HTC Corporation sold various specialized equipment to a buyer with the following terms: 64 Scanned by TapScannerChapter 3 — Introduction to Business Taxation ene P 2,000,000 Freight eoaod Installation fee ae Trade discounts Gi 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 P_1,870,000 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. Illustration 1 A laundry 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 ——100,000 E 000 Gross receipts 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 Scanned by TapScannerjae _ ~—— Chapter 3 — Introduction to Business Taxation dividend income are incidenta) id 10. The interest an Thence, excluded. is 10,001 The gross receipt is 3,201 vitios ofthe business: income not arising from the acti Constructive receipt : ; a Constructive receipt occurs when the money Sue on A ban zi is placed at the control of the person who renders the servic 1 by the payor. This is added as part of gross receipts. Examples: 1 Depoatt in a bank account of the seller made by the buye! of services rendered or goods sold 7 2. Issuance by the debtor of a notice to offset any debt or obligation an endered acceptance thereof of the seller as payment for services , 3. tanee of the amounts retained by the payor to the account of the contractor r in consideratio Illustration Miss Leah Mado is a pozo negro contr: month; « P10,000 from Cipher Company, net of the P30,000 debt of Miss Leah from | Cipher Company ¢ P15,000 deposited to Miss Leah's bank account © P 20,000 cash share from a general professional partnership, P 30,00 undistributed share was credited to her capital account actor. She had the following fees for th: Miss Leah's gross receipt shall be: Receipts from Cipher (P10,000 + P30,000) P 40,000 "Fees deposited to Leah's bank account 15,000 Gross receipts P__55,000 The share from the net income of a general professional partnership (GP?) is not gross receipt since Miss Leah is not selling services to the GPP. s Agency monies Amounts earmarked for payment to an unrelated third a 1 party or received as pear ee eas payment on behalf of maces which do not ‘0 the benefit of the payor are not of s Manila Jockey Club, 108 Phil. 821 (1 960) aes Insurance proceeds on damaged assets The receipt of insurance proceeds from the destruction of /'s pens ee is not viewed as sales or receipts for oe Perness pie a compulsory or involuntary conversion of property into money in the case of insurance reimbursement is not viewed as a sale in the ordinary course of busi 2007). iness (BIR Ruling No, DA-084-2007, February 12 66 Scanned by TapScanner———— reer at Chapter 3 — Introduction to Business Taxation Illustration 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 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 10,000 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 Scanned by TapScanner—————————— Chapter 3 — Introduction to Business Taxation TYPES OF SALES OR RECEIPTS iN fe ‘Sales of % of services © Exempt sales ‘Exempt receipts Receipts specifically y BICAP FLOW subject to % tax ; Vatable sales Vatable sales Vatable receipts i ICAP FLOW is an acronym ot subject to business tax. Bl m | j tax. Vatable receipts are tho best 13 Pe dope the type of registratior Exempt sales or receipts are 0‘ n tage tax or VAT depending o” the list of services specifically s subject to either 3% general percent of the business. roperties OF services that are exempt from ntage tax), such as the following: There are sales of goods, P) business tax (i. e. VAT and perce! scessities, such as: 1. Sales of certain basic net oducts a. agricultural or marine food p! b. health services of hospitals c. educational services of schools. d. housing or residential properties \ 2. Sales exempt by law, treaty or contracts 4 a. Sales by cooperatives to members { b.. Sales or lease of aircraft or vessels | c._ Sales or printing of books, magazines and newspapers P’ 3. Casual sales or sales by non-business sellers a. Sale of persons not regularly engaged in trade or business b. Services rendered under an employer-employee relationship Services rendered by a Regional Area Headquarter o! @ multinational company 4. Export sales of non-VAT registered persons within price limits Exempt sales of goods, properties, or i Seca properties, or services are extensively covered '' There are services that are subj ae subject to a specific percentage tax, such as the ob =| i ee eit ecg seb : ane nancial intermediaries without qu@s! . International carriers on thei! ene eir outgoing transport of cargoes, baggage °" 68 Scanned by TapScanner0S ESS'S's_ ae Chapter 3 — Introduction to Business Taxation 3, Domestic common carriers on their transport of passengers on land and keepers of garage 4, Certain amusement places (, Philippine Stock Exchange (PSE) on the sale, barter or exchange of shares by investors or corporations conducting initial public offering 6, Eranchise grantees of television or radio and gas or water 7. Life insurance companies and agents of foreign insurance companies 8. Franchise grantees of telephone or telegraph on overseas dispatch, message or conversation originating from the Philippines 9, Winnings from jai-alai and race tracks Mnemonics: BICAP FLOW The specific percentage tax rates imposed on these sales of services or transactions range from .60% to 30%. These rates apply regardless of the registration type of the taxpayer as VAT or non-VAT taxpayers. This will be extensively covered in detail in Chapter 5. Other sales of goods, properties, services or lease of properties, other than those exempt and specifically subject to percentage tax are vatable. Vatable sales or receipts are subject to the following: 1. 3% general percentage tax - if the taxpayer is non-VAT registered taxpayer 2. Value added tax - if the taxpayer is a VAT taxpayer Types of percentage tax 1. Specific percentage tax ~ those imposed for BICAP FLOW and apply to any taxpayer, whether VAT or non-VAT registered 2. General percentage tax - for vatable sales or receipts of non-VAT taxpayers Mandatory registration as VAT taxpayer Any person who, in the course of trade or business, sells, barters or exchanges goods or properties or engages in the sale or exchange of services shall be liable to register to VAT if: 1. His gross sales or receipts for the past 12 months have exceeded P3,000,000. ‘ 2. There are reasonable grounds to believe that his gross sales or receipts for the next 12 months will exceed P3,000,000. 69 aoe by TapScannerwa Chapter 3 — Introduction to Business Taxation The general threshold: P3,000,000 The P3,000,000 VAT threshold is applicable franchise grantees of radio or television. to all other taxpayers, excep, The special threshold: P10,000,000 Franchise grantees are mandatorily required to register £0 the VAT systen, when their annual receipts exceed P10,000,000- Optional VAT Registration ; , A person who is below the VAT threshold may, at his option, ae as Vat taxpayer. Once made, this option shall be irrevocable for 3 vet For TV or radio franchise grantees, the option shall be perpetually irrevocable. Type of VAT Taxpayers a. VAT-registered taxpayer — a taxpayer who registered under the VAT stem b. VaT-registrable taxpayer - @ taxpayer who exceeded the VAT threshold put did not yet register as @ VAT taxpayer VAT-registered taxpayers are allowed credit for input VAT while non-VAT registered taxpayers are not allowed to claim input VAT credit. Illustration Assume a taxpayer had P600,000 output VAT on its vatable sales and paid 320,000 VAT on its purchases, the VAT liability shall be computed as follows Output VAT P 600,000 P 600,000 Less: Input VAT 320,000 o VAT due 260000 © B_600,000 Summary rules on VAT and Percentage Tax eeortieud 3 bm - = iabaeealg i Exempt sales of goods and services jiness | Sales of services specifically subject No business tax __ Titanate x rate | Vatable sales of goods or services ae Santa | Illustration 1 Mrs, Maranao is starting a business wi ji Seas sorting 2 s with the following projected result of | 70 } Scanned by TapScannerLe Chapter 3 — Introduction to Business Taxation Expected Sales/Receipts Exempt sales P 400,000 Receipts from services subject to percentage tax 1,200,000 Other sales and receipts 1,900,000 Total sales and receipts P.3,500,000 Only vatable sales or receipts shall be considered for the purpose of the VAT threshold. Since the P1,900,000 expected vatable sales or receipts is below the 3,000,000 VAT threshold, Mrs. Maranao may register as a non-VAT taxpayer. Note: 1. Mrs, Maranao shall not pay business tax on exempt sales. 2. The receipts from services specifically subject to percentage tax shall be subject to the particular percentage tax rate that apply to the receipts. 3. Mrs. Maranao shall pay the 3% general percentage tax on the vatable sales and receipts for as long as her vatable sales or receipts do not exceed the VAT threshold. 4, If there is a reasonable expectation that vatable sales or receipts in the next 12 months will exceed the VAT threshold, the taxpayer shall register as VAT-taxpayer. Mlustration 2 Assume the same data in the preceding illustration except that those sales figures were recorded by Mrs. Maranao for the last 12 months and that Mrs. Maranao is registered as a non-VAT taxpayer. Mrs. Maranao shall continue paying the 3% general percentage tax. She will only be required to register to VAT if her vatable sales or receipt exceeded the P3M VAT threshold, DIFFERENCE OF THE CONCEPT OF GROSS RECEIPTS AND SALES BETWEEN VAT AND NON-VAT TAXPAYERS For non-VAT taxpayers ‘ The amount billed to the customer or client on the sale of goods or services is respectively the sales or gross receipts. Illustration 1 Anon-VAT taxpayer billed a client P100,000 for professional services rendered. The client withheld 10% creditable withholding tax (CWT). The taxpayer will be able to collect the following: Professional fees billed P 150,000 Less: 10% CWT ——15.000 Net professional fee collected 135,000 The gross receipt in this case is the amount billed (i.e., P150,000). 71 Scanned by TapScannera “ 7 re Chapter 3 - Introduction to Business Taxation . He also recejye,: peace received P98,000 from the ae oh . ved a CWT certificate showing P2,000 tax withheld by ted as: The sales for purposes of business tax may be compul P 98,000 Net cash received on billing Add: CWT certificate i Sales For VAT-taxpayers , . The amount billed to the customer or client (invoice price) one Ss a goods or services includes the sales or gross receipts plus Put VAT. Illustration 1 - | A VAT taxpayer billed a client P150,000 for professional services rendered. The client withheld 10% creditable withholding tax (CWT). The amount billed shall be presumed inclusive of VAT. The gross receipt shal! be computed as follows. | Gross receipt (P150,000/112%) P 133,929 | Less: Output VAT (P133,929 x 12%) 16.071 Amount billed (invoice price) P__150,000 > The CWT is computed on the gross receipts or sales, exclusive of the output VAT. Hence, the taxpayer will receive the following payment: — Professional fees P 133,929 ' Less: 10% CWT 3393 Net professional fees P 120,536 Plus: Output VAT 16.07 Total cash collected P_ 136,607 Illustration 2 A VAT taxpayer received P102,000 cash plus P " sale of services. Plus P10,000 CWT certificate from th The gross receipt may be computed as: Cash received P Add: CWT certificate Invoice price P 112,0 Less: Output VAT (P112,000 x 12/112) 2 ra Gross receipt p 72 102,000 Scanned by TapScannerChapter 3— Introduction to Business Taxation The same procedure is used in computing sales for the sales of goods. PENS TAX ACCOUNTING PERIOD The length of accounting period for business taxes is one quarter. (Secs. 114(A) and 128(A)1, NIRC). This is referred to as a taxable quarter. The taxable quarter is composed of three months which is synchronized with the taxable year (i.c., calendar or fiscal) of the taxpayer for purposes of income tax. Illustration 1: Calendar year taxpayers Atty. Aloe Vef’a is registering with the BIR as a self-employed law practitioner. Individuals are limited to use only the calendar accounting period. Hence, the taxable quarters of Atty. Aloe shall be: Firstquarter —_; January 1 to March 31 Second quarter ; April 1 to June 30 - Thirdquarter : July 1 to September 30 Fourth quarter : October 1 to December 31 Illustration 2: Fiscal year taxpayers ABC Corporation is reporting under income taxation using a fiscal year ending every August 31. The taxable quarters of ABC Corporation under its fiscal year shall be: First quarter; September 1 to November 30 Second quarter ; December 1 to February 28 or 29 - Thirdquarter ; March 1 to May 31 - Fourth quarter :June 1 to August 31 Remember that corporate taxpayers may opt for either the calendar year or fiscal year accounting period. § BUSINESS TAX REPORTING Types of Business Tax Returns VAT taxpayers __| __Non-VAT taxpayers _| Monthly tax return [-BIRForm2550M__| _Notapplicable | Quarterly tax return BIRForm2550Q | _ BIR Form 2551Q Reporting of VAT taxpayers VAT taxpayers are required to report their receipts or sales in two monthly véstimated VAT returns for the first two months of the quarter and a quarterly VAT return on the third month of the quarter. In effect, VAT taxpayers pay remit VAT monthly. 73 Scanned by TapScanneree Chapter 3 - Introduction to Business Taxation = 3" month ——— 2550Q Business tax form 2550M —antin aE Within 20 days § (Deadline * *counted from the end of the month or quarter The TRAIN law will eventually phase out the monthly estimated VAT payments and VAT payment will transition into 2 full quarterly paymen, effective January 1, 2023. rcentage taxpayers) o file quarterly percentag: ayers pay their ayers (Pel centage taxpayers U ) All percentage tax: Reporting of Non-VAT taxp: The TRAIN law requires per’ tax returns (BIR Form 2551Q percentage taxes on a quarterly basis. Business tax form : [-_2551Q9__ [Deadline* _I - | Within 25 days “counted from the end of the month or quarter IMustration had the following gross sales in the first quarter o: Assume a business taxpayer 2019. january ~ P220,000, February ~ P180,000 and March - 260,000 Assuming the business is a percentage taxpayer: Il report the sales as follows: A percentage taxpayer wil _February. = __March _ Taxable amount - P__660,000 BIR Form to use -None- -None- Form 2551Q ” ‘Assuming the business is a VAT taxpayer: VAT taxpayer will report the receipts as follows: } | —January_ February. March } Sales or receipts Pp_220,000 0,000 P__660,000 iI BIR Form to use Form2550M Form25S0M Form 25509 Note: 1. The reported figures in each month shall bi i “ e the basis of tl 2. The March figure is the total of the three months (i es P220K + PISK : h VAT computed for March will be reduced by VAT payments mad eae months since they are included in this total Es 74 Scanned by TapScannerChapter 3— Introduction to Business Taxation short Period Return Any person who retires from business with due notice to the BIR office where the taxpayer (head office) is registered or whose VAT registration has been cancelled shall file a final quarterly return and pay the tax due thereon within twenty-five (25) days from the end of the month when the business ceased to operate or when the VAT registration had been officially cancelled. Provided, however, that subsequent monthly declarations/quarterly returns are still required to be filed if the results of the winding up of the affairs/business of the taxpayer reveal taxable transactions. TRANSITION TO THE VALUE ADDED TAX The following illustrates the tax treatments of the transition of taxpayers to the VAT system. Illustration 1: VAT threshold monitoring and VAT transition Mr. Quezon had the following vatable receipts from his service business since his start of business in January 1, 2020: Vatable Cumulative Cost and Input —_teceipts __ —Expenses__ __VAT _ Jan.1-Sept.30 P 2,250,000 P 2,250,000 P 1,200,000 P : October 1,000,000 3,250,000 500,000 : November 1,000,000 — 4,250,000 700,000 74,000 December 1,000,000 5,250,000 800,000 62,000 H The 12-month totals of monthly receipts from the current month until 12 months back shall be monitored if it exceeds the P3M VAT threshold. Since his receipts exceeded P3,000,000 by October 2020, he is subject to VAT prospectively starting November 2020. He is mandatorily required to update his registration from a non-VAT to a VAT taxpayer on or before November 30, 2020. Assuming Mr. Quezon opted to the regular tax option for the Year 2020 in his first quarter 1701Q, she shall separately pay the regular income tax computed per individual tax table and the 3% percentage tax under 2551Q. If we compute his regular tax using the income tax table, Mr. Quezon must have paid P205,000 in estimated income tax as of September 30, 2020 using 1701Q. On the other hand, Mr. Quezon must have paid his quarterly percentage tax using Form 2551Q until the end of the quarter ending September 30, 2020. 75 Scanned by TapScannerChapter 3 - Introduction to Business Taxation Required returns ay the follo Mr. Quezon shall file his last 2551Q adjustment return and pay wing percentage tax: Pp 1,000,000 October 2020 gross receipts Multiply by: Percentage tax due Mr. Quezon shall file the following VAT returns and pay the following taxes; BIR Form 2550M for November 2020 P 120,000 Output VAT (1M x 12%) Less: Input VAT oe VAT still due P___46,000 _ BIR Form 25500 for the 4* quarter ending December 31, 2020 Output VAT (1M + 1M) x 12% P 240,000 Less: Input VAT (P74K + P62K) ___ 136.000 VAT due P 104,000 Less: Estimated VAT payments - Nov. 2550M _____ 46,000 VAT still due P__58,000 Year 2020 Income tax due Mr. Quezon’s taxable income for 2020 shall be: Total receipts in 2020 P 5,250,000 Less: Total costs and expenses in 2020 3.200.000 Taxable income P_ 2,050,000 Mr. Quezon shall file and pay the following tax due under Form 1701A: Tax due on P2,050,000 income, per tax table* P Less: Estimated income tax payments (Form 1701Q) onceae Income tax still due “Please check individual income tax table under our Income Taxation book 9) fasting Mr. Quezon opted to the 8% income tax in the first quarter of 2020 's option to the 8% income tax shall be invalidated. He shall be subjected t° 76 Scanned by TapScanner