UNIT 3 - CONSUMPTION TAX ON SALES CHAPTER 3: INTRODUCTION TO BUSINESS TAXATION The concept of business Essential requisites of business The concept of regularity The concept of commercial activity Nature of business taxes Types of business taxes Business taxpayers Registration of business Types of business taxpayers Business classification as to activities Tax bases of business taxes Gross selling price Gross receipts Difference of the concept of gross receipts and sales between VAT and non-VAT registered business Business tax accounting period Business tax reporting Types of business tax returns Deadlines of business tax returns The scope of VAT and percentage tax The meaning of “vatable” The VAT threshold Timing of VAT registration Revocability of VAT registration Comprehensive illustrations ExercisesChapter 3 - Introduction to Business Taxation CHAPTER 3 INTRODUCTION TO BUSINESS TAXATION a Chapter Overview and Objectives After this chapter, readers are expected to comprehend: ara 1. The concept of being engaged in trade or business and the excg, the rule on regularity of transactions tions, 2. The concept of a business taxpayer 3. The registration requirements on businesses 4, The business classification as to activities and their respective tay 5, The concept of gross selling price and gross receipt base ‘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 ——_——— INTRODUCTION TO BUSINESS TAX It must be recalled that the consumption tax on, domestic consumption fn only if the seller is engaged ia jot engaged in business. not apply if the seller Hence, this consumption tax is called “business tax.” Business tax, therefor is a consumption tax payable by persons engaged in business. WHAT IS BUSINESS? A business is habitual engagement in a commercial activity involving sale of goods or services to customers or clients. ESSENTIAL REQUISITES OF A BUSINESS 1, Habitual engagement 2. Commercial activity HABITUAL ENGAGEMENT There must be regularity in transactions to construe the presen® these business. Isolated or casual sales are not regular activities; hence, presumed not made in the ordinary course of business. _—"—_—i——_esef chapter 3 Introduction to Business Taxation it ly manifested sbitual engagement is normally man Hace provider, or a practitioner in a Farin’ Wever, non-registration does not exonerate ee regular trade or business from being liable to pay business taxes. ee Mcfowing are not considered business for lack of regulari operations: oP sale by non-dealers 2. Privilege stores Sale by non-dealers ‘Non-dealers are those who mab se sell properties which they are not regula! considered non-dealers. Sales of non-dealers are no! in their e casual sale of goods or properties. People ly engaged in are also t subject to business tax. Mlustration 1 Mrs. Ellerton, a medical pra by a non-realty dealer is a casual sale not made in the ctitioner, sold his principal residence for P10M. ‘The sale of real properties course of business; hence, Ic is exempt from business tax. lustration 2 lang Merto is a real propé usually purchases shares of them when cash needs arise. erty dealer. During periods of excess cash liquidity, he 3 stocks of other corporations as investment. He sells. mn and sale of stocks investments by a realtor are not made in the ealty business and are not subject to business tax. If Merto were a security dealer, the transaction would be considered made in the course of business and hence, subject to business tax. Mlustration 3 Joshua is a proprietor regularly engaged in trading merchandise. During the month, he reported the following: Sales of merchandise P 800, 000 Sale of personal car 1,200,000 The sale of merchandise is sub iandise is subject to business tax. The sale of the sonal (non-business) handing perana bse) ee lui of te mechan busines The 9 jected to business tax since Joshua is Same shalt usiness tax since Joshua is not engaged in businessyetion to Business Taxation iangge”) are stalls or g now as "tc @ stalls oF ou, Pen om hich are puEUP during special eye festivals or fiestas (RR16-2013)- fees be considered habitually engagey | sprivitege store operators” aie business tax but is subject to incon eee eae bem Joge store the store should engage in a busi, To be consider rrepriod of nt more than 15 days. Otherwise, te shall ened regular taxpayers subject to Business taxes and incon tax. (Ibid) Mang vite makes key chains and wood art for sale to tourists during ty ‘annual Panaghenga Festival. He rented a booth From the City of Baguio, the tiangge organizer, and recorde sales ofP150,000 over the weeklong festivities. ‘Mang Andro is not considered habitually engaged in business. His P150,000 say isnotsubject to business tax, but is subject to Income tax, IMlustration 2 Danes Bakeshop, an established business enterprise, also rented a booth from the organizer, City of Baguio, to cakes and pastries in the Panagbeng: Festival. Danes generated P400,000 sales during the eve Danes Bakeshop, being an established and regularly operating business, shall nt be considered a privilege store, The P400,000 sales on the event shall be subjectio ‘the usual business tax Asceptions tothe Regularity Rule 1, Business principally for subsistence or livelihood 2, Sales by non-residents are presumed made in the course of business Business principally for subsistence or livelihood busines principal for subsistence or lvethood refers to businesses wi ‘oss sales or receipts not exceeding P100,000 per year. ewes income earners = refer to individuals not deriving compens#ti’ Bipares Dia, employer-employee relationship but who ae a sl aay 8Fo0ss sales or receipts not exceeding P100,000 in 58 Chapter 3 ~ Introduction to Business Taxation Examples of marginal income earners: a. agricultural growers or producers (farmers or fishermen) b. ri-sari stores small carinderias or "turo- drivers or operators ofa e. others similarly situated le unit tricycle, and 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). Although regular in operations, marginal income earners are exempt from business tax, but are subject to income tax (RR7-2012). Sales by non-residents are considered made “in the course of business” Under current tax regulations, the sales of non-resident persons are presumed made in the course of business without regard as to whether the sale is regular or isolated. Accordingly, sales by non-residents are to be subjected to "business tax” (ie. VAT, in particular). This rule is merely intended to support the taxation of importation with consumption tax. It is actually a misnomer which confuses the VAT on importation with business tax. In realty, the sale is not the object of taxation but the purchase of the resident buyer. Since import purchase is a form of domestic consumption, it must be subject to consumption tax. If we view consumption tax as a business tax alone, the seller has to be presumed engaged in business to be subjected to business taxation. This rule would have been unnecessary if the distinction between VAT on importation and business tax is highlighted well in the regulations. VAT is usually viewed as a single type of consumption tax which includes VAT on importation and VAT on sales which is a business tax. It must be clarified ‘again that these are different types of taxes. ZoMMERCIAL ACTIVITY Commercial activity means engagement in the sale Broft The goods or services musth offered tothe aoe ene ees ES cam unrestricted amount of pecuniary gains. However, the actual wove of profit during the period is nota pre-condition to businese ree eee "Fhe busines operation results to alos, busines tax stillapplige on vee 59|— Introduction to Business Taxation AL. Government agencies and intrumentaltes-Thelt PHIMAFY motive provide essential public services. ® 2. Non-profit organizations or associations ~ They provide eleemno, services not aimed at generating income. SYMary 3. Employment - Employees renders services t their employers, ‘exchange for a periodic compensation. iy ‘4. Directorship in a corporation — ‘Although not considered ag employment i does not involve offering of services tothe public a (PRC) collected P12,000,000 fr, talso earned additional P1,000 09, is an income by PRC a government agency, in renderi mic nota commercial activity ands exempt fry Teasing, on the other hand, i a commercial activity departing fron itis subject to business tax. The P12M receipt essential government service. business tax. the nature of government service; hence, Mlustration 2 - Union of Husbands Afraid of | institution for the assistance of ‘contributions from the public an ‘shop in its fund-raising drive. The receipt of P2M contribution or donatio snot commercial in nature. However, the selling ofthe gift sh ‘activity which is subject to business tax. The rule appl disposition made of such fund-raising income. | Mustration 3 | Zeus Millan, a certified public accountant i jon in the i je 1, practices his profession in industry as the Chief Financial Officer of UHAW. During the month, he received | 50,000 compensation plus P10,000 fringe benefits. Employment is not 0 commercial activi ie ty as it does not involve sales of services acces sacs the compensation income and the fringe benefis ‘Mustration 4 Be i Is a8 Independent director of Aga Corporation rece f Wife (UHAW) is a non-profit social welfre battered husbands. UHAW received P 2,000,000 id generated P400,000 from the sales of a git not subject to business tax since t jop is a commercial regardless of the iving area? Chapter 3 - Introduction to Business Taxation yr diems, and ‘Arehough a director may not be an emplayee, director's ‘fees, pet 5, Arriances are not derived in an economic or commercial activity or rendering of nan eet are not subject to business tax (RMC77- Services to clients for a fe 2008). ‘The elements of an employer-e Chapter 10 of Income Taxation: author. ployee relationship are discussed in detal 19 lowe, Principles and Applications by the same Mlustration 5 snders his services to the public for a fee. Is John, a certified public accountant, re he subject to business tax? tthe exercise of profession by regularly rendering services to cllnts for a fee is considered a business subject to business tax tration 6 Miss Sarah Babe I surance commission by insurance companies is an insurance agent. She is pai for every policy she is able to ‘An agency is nota contract of employment, but is a contract for the Proven of aoinsee jor a commission. Just like other practicing professionals, agents ay sees ere sence to several clients. Hence, agency is a commercial activity subject to business taxes Other persons considered engaged in business . Consultants Sales agents or brokers on or movie talents and artists 1 2 3 4 5. NATURE OF BUSINESS TAXES 1. Consumption tax ~ Business is a tax on consumption, utilization or purchase of goods, properties or services. 2. Indirect tax - It \posed to the seller rather than to the buyer. zge tax - To secure and enforce compliance, the law made business ippear as a tax on the privilege to do business. VEYPES OF BUSINESS TAXES 1. Value Added Tax 2. Percentage Tax 3, Excise Tax 61‘Shapter 3 — Introduction to Business Taxation BUSINESS TAXPAYERS \Wat is a taxable person in business taxation? The term “person” refers to any individual, trust, estate, Partnership corporation, joint venture, cooperative or association (Sec-4105-1, Reyg. 2005), sidered a taxable unit. The concept oy ‘as well in business taxation excep, .d a taxable “person.” Each person, natural or juridical, isco a taxable unit in income taxation ap} that a taxable unit in business taxation is calle scemption does not necessarily mean exemption from, However, income tax e pusiness tax exemption does not necessarily mean business tax. Similarly, ‘income tax exemption. Hence, a general professional partnership which is exempt from income ta fs subjeet to business tax, Likewise, local water districts which are legaly ‘exempt from income tax are subject to business tax. REGISTRATION OF BUSINESS "Any person who, inthe course of trade or business, sells barters, exchanges Woods or properties, or engages in the sale of services subject to busines ‘shall 4. register with the appropriate Revenue District Office (RDO) using the appropriate BIR form, and b. pay annual registration fee of P500.00 using BIR Form No. 0605 for ‘every separate or distinct establishment where sales tre Any person who maintains a head office or main offices and offices in different places (ie, branch) shall register with the RDO which hes __urisdition over the place where the head office or each branch is located Mlustration ae ae operations with a head office and two branch offices plus# eles) 50 ‘or P1500 total registration fe. The warehouse hence, itis exempt from the reg a as shal pay this registration fee annually thereafter egistration fee. The busines ee ee ide ae not only pertain to a separate oft which the pertain ti te cil taxable person isengagedin. of commercial a chapter 3 Introduction to Business Taxation also owns @ ‘primarily engaged in the practice of his profession. He house for lease and a taxi unit. boat ‘enzel shall register his professional practice as his main offi use and his taxi unit as separate branches. ice and his boarding ho ‘an application for registration shall be filed with the RDO where the Principal place of busines, branch, and storage place or premises locates encement of business or production or qualification as 4 before comm: withholding agent. within 30 days from tl storage. In any case, the Commis: and meritorious reasons, application shall be filed In the case of storage places, ed for fhe date the aforesaid premises have been us istrative ‘sioner of Internal Revenue may, for admini ion. ‘deny or revoke any application for registr “The registration fee shall be paid before the start of such business and every year thereafter on or before the 31* day of January. Payment shall be made to any accredited bank in the Revenue District where the head office or branch is registered. Im places where there are no accredited banks, the same shall be paid to the RDO, collection agent, or duly authorized treasurer of the municipality where each place of business or branch is situated ategistration certificate te of registration sha BIR office upon compliance w issued to the applicant by the concerned requirements for registration. u Posting of registration certificate Every registered taxpayer shall post or exhibit his Registration Certificate (original copy) and duly validated Registration Fee Return at a conspicuous place in his principal place of business and at each branch in such a way that is clearly and easily visible to the public. VEYPES OF BUSINESS AS TO REGISTRATION & VAT -repistered taxpayers - they pay 12% VAT Non-VAT registered taxpayers - they pay the 3% percentage tax Business CLASSIFICATION AS TO ACTIVITIES ‘or purposes of business taxes, businesses registered taxpayers are classified according tothe activities they are innate een VAT 4, Sales or exchange of goods o properties hee antes Sales of exchange of services or lease of properties 63‘Chapter 3 - Introduction to Business Taxation Sale of Goods or Properties Under the NIRC, the term “Goods or Properties” refers to all tan, intangible objects which are capable of pecuniary estimation and sh; among others: 1. Real properties held primarily for sale to customers, held for lease used in the ordinary course of trade or business; ory 2. The right or the privilege to use a patent, copyright, design or modey, secret formula or process, goodwill, trademark, trade brand or other ¢/P2% properties or rights; sin 3. The right or privilege to use inthe Philippines any industrial, commer jn scientific equipment; 4. The right or privilege to use motion picture films, films, tapes and disc, 5. Radio, television, satellite transmission and cable television time. VSale or Exchange of Services ‘Also under the NIRC, the term “Sale or Exchange of Services” shall mean te performance of all kind of services in the Philippines for others for a fe remuneration or consideration, whether in kind or in cash, including those performed or rendered by the following: Construction and service contactors 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, manufacturing or repacking good for others Proprietors, operators, or keepers of hotels, motels, rest hou: houses, inns, resorts, theaters and movie houses 8. Proprietors or operators of restaurants, refreshment parlors, other eating places, including clubs and caterers 9. Dealers in securities 10. Lending investors ane enNe ses, pension cafes and « transport of passengers, good 11. Transportation contractors in th ‘cargoes from one place in the Philippines to another place inthe Phi 12. Common carriers by air and sea relative to their transport of Pas goods or cargoes for hire and other domestic common carriers PY relative to their transport of goods or cargoes igtibuti? 13, Sales of electricity by generation, transmission and or dst companies 14. Franchise grantees of electric utilities, telephone and telegral or television broadcasting and all other franchise grantees 15. Non-life insurance including surety, indemnity and bonding comP™ 16. Similar services regardless of whether or not the performance for the exercise or use of the physical or mental faculties ee EZ _Ez_-_EZ_ ph, radio at Chapter 3 ~ Introduction to Business Taxation 17, The lease of, use of, or the right or privilege to use any copyright, patents design or mode, plan, secret formula or process, goodwill, trademark, trade brand or other like property or righ 18. The lease or the use of, or the right to use any industrial, commercial or scientific equipment 419, The supply of scier information; 20. The supply of any assistance that furnished as a means of enabling knowledge ‘a nonresident person or his employee in fic, technical, industrial or commercial knowledge or ancillary and subsidiary to and is jon or enjoyment of any such 24, Cr rights belonging to, or the |, machinery or other apparatus 22, ince or services rendered in of any scientific, ‘or scheme; 23, and. ‘0 use radio, television, satellite 24, The lease or the transmission and cabl “TAX BASES OF BUSINESS TAXES 1. Sellers of goods or properties - taxable on gross sel 2. Sellers of service or lessors of properties ~ taxable ing price. gross receipts. Gross selling price refers te xy oF its equival which the purchaser pays or is obligated to pay to the seller in consideration hange of goods or properties. The excise tax, if any, part of the gross selling price. nn cash, on credit and on axation concept of "gross 1, Discounts determined express! ated in t the gross sales and are duly recorded in the books of accounts ‘To be deductible, discounts must not be dependent upon the happening of a 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 65P 400,000 600,000 100,000 20,000 10,000 672,000 P 400,000 600,000 ——100.000 B.4,100,000 P 1,100,000 P 2,000,000 50,000 cee a be Casha iscounts, 2%/30 net 60 days 36,000 |The gross selling price shall be computed as: ae P 2,000,000 —— 200,000 P 1,800,000 50,000 oe B.1.870,000 discount is determinable a able at the date of sale. Cash discounts should 24 » Cash discout tego are contingent upon the buyer paying at an early date Inthe Ft rs ~ the total amounts of money or its eau Seeapent. service fee, rental OF Materials supplied with the servi — .: Taxation ter 3— Introduction to Business am and advanced ple period for excluding, ices, rendered servi ayments (OF ceived during the taxa its applied deposits applied as paviictively received ments actually oF COM yr another person, payments performed orto be performed f vat. issinese engaged in selling services had the following transactions during the month: ash collection for services done Pp 490,000 Cash nforservices not yet started (advances) PAA Receivables on services rendered Roce var of goods and services, including of P48,000 ‘VAT passed on by sellers st ‘The gross receipts shall be: P 400,000 Cash fees “Advances by customers 100.000 P__500,000 Gross receipts \Aonstructive receipt i" Consrructive receipe occurs when the money consideration or its equivalent is placed at the control of the person who renders the services without restriction by the payor. This is added as part of gross receipts. Examples: 1. Deposit in a bank account of the seller made by the buyer in consideration of services rendered or goods sold 12, Issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof of the seller as payment for services rendered 3. Transfer of the amounts retained by the payor to the account of the contractor Agency monies Amounts earmarked for payment to an unrelated third i party or received as ‘eimbursement for advanced payment on behalf of another which do not und to the benefit of the payor are not part of Manta Jockey Club, 108 PIL 821 (1960). Pe ee GIR ws. Vinsurance proceeds on damaged assets The receipt of insurance proceeds from the destru business asset is not viewed as sales or receipts for tziation, The compulsory or involuntary conversion of property i Suh sinthe a finance embursement inno ewe ty ene ora siness (BIR Ruling No. DA-084-2007, February. oe ction of a company’s purposes of business 67Chapter 3 — introduction to Business Taxation Mlustration PC Repair Company received the following. amounts during a month; Cash collection from clients ‘ P4000 Reimbursements for out-of pocket costs incurred in i servicing clients 50.9 Reimbursement for client expenses paid by PC Repair 80,009 Proceeds of fire insurance 400,09) Receipt of bank loan 500,09, Receiptofagency money tobe remittedtoasister company 1999) “The gross receipts shal be: P 400,09) Cash collection from clients Reimbursements for out-of pocket costs incurred to clients Gross co wn Not tg eis Rp wh ire tn ct say tt ee aise Popa nc exert ie aioe betta eae ae ee en ar ay omy lb do a party. These are not included in gross receipts. “The proceeds of insurance fs nota receipt in the ordinary course of business. 2 a Abithholding taxes ‘Amounts withheld form part of gross receipts because these are b constructive possession and not subject to any reservation, the withholdy agent being merely a conduit in the collection process (CIR vs. Citnt Invesment Phils, Inc. GR No. 139786, September 27, 2006). 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 servis is respectively the sales or gross receipts. Mlustration 1 Annon-VAT taxpayer billed a client P100,000 fo i ices rene ,000 for professional services re The client withheld 10% creditable withholding tax (CWT) ‘The taxpayer will be able to collect the following: Professional fees billed Less: 10% CWT Sate Net professional fee collected P35.000 The gross receipt inthis cose shall be the amount billed (te, 150000)" sales of goods by non-VAT taxpayers, the sales shal 68 Chapter 3— Introduction to Business Taxation: v Iso received Inastration? received 96,000 from the sales of goods. He 2180 owe showing P2,000 tax: withheld by the customer. 2 CWT certificates -the sales for purposes of business tax may be computed 25: P 99,000 Net cash received on billing ‘Add: OWT certificate 2.000 Sales B_400,000 The amoune the sale of customer or client (invoice price) on rose oer aes th igross receipts plus the 12% output ‘goods or services includes the sales or VAT. Mlustration 1 ‘AVAT taxpayer billed a client P15 client withheld 10% cre sd shall be presumed inclusive of VAT. The gross receipt shall (0,000 for professional services rendered. The holding tax (CWT), ‘The amount bi be computed as follows. Gross receipt (P150,000/112%) Pp 133,929 Less: Output VAT (P133,929 x 129%) 16.071 Amount billed (invoice price) B_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 13.393 Net professional fees P 120,536 ——16.071 P__136,607 The gross receipt may be computed as: Cash received P 102,000 Add: CWT ce 7 Unssoupuvar(ptr2000xrz/uizy 12000 Gross receipt : zee 69© Yong r for the sales of goods, y business taxes is one ’ eferred to as a taxable yar" of three months which is synchroni ‘or fiscal) of the taxpayer for init income -year taxpayers with the BIR as a self-employed law practiti, ne, lyear taxpayers nis reporting under income taxation using a fiscal year 31. ‘of business taxation, the taxable quarters of ABC Corp. cal year shal September 1 to November 30 jecember 1 to February 28 or 29 | june 1 to August 31 taxation, corporate taxpayers may opt for either the calendar year IG INESS TAX REPORTING ‘of one-time payment of the quart taxis spread over the months of the quarter: * t jof VAT taxpayers to report their receipts or sales in 0 M) for the first two months of the (BIR Form 2550 Q) on the third and ‘Chapter 3 - Introduction to Business Taxation Aoasiness tax reporting of Non-VAT taxpayers (Percentage taxpayers) Busineiy, percentage taxpayers file three monthly percentage tas TeneTe or the three months of the quarter. Consequently, there consolidated quarterly return on the third month. 1m quarterly taxis pad in three monthly payments other words taxpayers who are subject to quarterly to file the quarterly percentage tax the monthly percentage tax return (BIR However, there are few percentage percentage tax and are required return(BIR Form 2551 Q) instead of Form 2551 M) Ges of Business Tax Returns aR Form 2550 eareeae | oR Ferm 2550Q | BIR Form 2551 Q uns and a quarterly VAT return in every Form 2551M or Form 25510 Note: All VAT taxpayers fle monthly VAT retu rotile quarter. A percentage taxpayer files either ilustration ‘Assume a business taxpayer had the 2015: January ~ P220,000, February ing gross sales in the first quarter of 0 and March ~ P260,000. ws Kasuming the business isa percentags ‘percentage taxpayer willreportthe sales January —-_February—_ _—March__ ‘roxableamount® 220000 B_4g0.000 B_240.000 BIR Formtouse -‘Form25S1M Form 25S1M Form 2551M salvo receipt te percentage tox shall be based upon these reported flues 1 percentage taxpayer is subject to quarterly percentage tax, it will report the receipts as follows: —March__ B_660.000 Form 25519 January February ‘Taxable amount - 3 BIR Form to use -None- -None- Assuming the business isa VAT taxpayer: ‘VAT taxpayer wil eport the receipts as follows: January -_February_ __March __ Sales orreceipts 220,000 B_180.000 © P_660,000 BIR Form touse Form2550M Form2S50M Form 2550Q n‘Chapter 3 ~ introduction to Business Taxation ‘Note: ‘L,The reported figures in each month shall be the bass ofthe Output VAT, 2 The March igurets the tot ofthe thee months (is, P220K + FLBOK + P2604) TWAT computed for March wil be reduced by VAT payments made In the ig, ‘months since they ae incded nhs total. Tis wl be dcussed in deta 0 Vat reporngin Chater APeadline of Business Tax Returns iareoamapers ‘Non-VAT. oa Monthly tax return leaden th mdf Guar taxrem |Wiin 2 days rom he deentornencat Sitort Period Return Any person who retires from business with due notice to the BIR offi where the taxpayer (head office) is registered or whose VAT registration hhas been cancelled shall file a final quarterly return and pay the tax die 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 Teturns are still required to be filed if the results of the winding up of te affairs /business ofthe taxpayer reveal taxable transactions. Readers are advised to carefully understand the following section as itis highly eritcal in understanding and mastering the business tax system. ‘THE SCOPE OF VAT AND PERCENTAGE TAX Letus specifically delineate in the following sections the line of demarcation between the scope of the VAT and the Percentage Tax. You may wish ® ‘efer to the Concept Structure of Consumption Taxes, Astegores of Business Sale 1. Exempt sales . L E oot leg Specifically subject to percentage taxes | EXEMPT SALES ’ hela fesumptions or purchases that are exempted fot Chapter 3 — Introduction to Business Taxation Hence, there are two types of exempt consumptions under the NIRC: 1, VAT exempt importation - exempt consumption from abroad 2, VAT exempt sales ~ exempt consumption from domestic sellers VAT exempt importations have been discussed in the previous chapter. VAT exempt sales are sales exempt from business taxes. Under Section 109 of the NIRC, as amended, they are not only exempt from VAT but also from percentage tax imposition, Examples of exempt sales |. Sales of basic necessities, such as: a. agricultural or marine food products b. health services of hospitals © educational services of schools 4. 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 trade or business b. Services rendered under an employer-employee relationship © Services rendered by a Regional Area Headquarter of a ‘multinational company 4. Export sales of non-VAT registered persons It must be recalled again that business tax is a form of consumption tax and that consumption taxes apply only to domestic consumption. Export sale is a foreign consumption which is exempt from business tax. For VAT taxpayers, export sale is subject to a0% VAT. Exempt sales of goods, properties, services, or lease of properties will be discussed in detail in Chapter 4. ates or services. ‘SPECIFICALLY SUBJECT TO PERCENTAGE TAX * {There are services which are specifically designated by the law to be subject to percentage tax. Service providers specifically: ‘subject to percentage tax: 1. Domestic common carriers on their tran: on: n their transport of passenger keepers of garage Saiesore International carriers on their ot 2. tr 'tgolng transport of cargoes, baggage or 73jo-and gas or water felegraph on OVerseas dj es of el paring from the Philippines 'sPa ation origin jes performing quasi ete nancial intermediaries Pe ast bay ms pebank financial intermediaries without ues urance companies 5; “Tete offorie insurance companies "Certain amusement places = Operators ofja-alal and race tra one 40. ‘Stock Exchange (PSE) on the sale, b eximag f 2 Philiprnvestorso corporations conducting initial public offering spesalesof specified services by these entities are subject to percentage, e Pees without regard to whether or not the entity is a VATy aerar ee taxpayer. These are discussed extensively in Chapters, me Farag a jaw percentage tne vrs ‘ranging from ¥% of 1% to 30%. oarante sas ; Other sales of goods, properties, services or lease of properties, other tht those exempt and specifically subject to percentage tax are “vatable.” Meaning of “vatable” The term “vatable” does not mean that the sale is automatically subjec'® VAT. Vatable sales are subject to VAT ifthe taxpayer is a. VAT-registered or b. VAT-registrable is If the taxpayer is neither VAT-registered nor VAT-registrable, vatable are subject to the general 3% percentage tax. ‘In Summary: Scope of VAT and Percentage Tax VAT-registered business Non-vaT Dust ‘Exempt sales of goods and services Net Nota Sales of services specifically subject | Percentage tax of | Percent@G’ ys pas various tax rates_| various. 3% perce™ Vatable sales of goods orservices | 199% VAT Chapter 3 Introduction to Business Taxation VfliE Var THRESHOLD 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 if: 1. His gross sales or receipts for the past 12 months have exceeded P 1,919,500. 2. There are reasonable grounds to believe that his gross sales or receipts for the next 12 months will exceed P1,919,500. It must be recalled that the term “person” includes individuals, trusts, estates, partnerships, corporations, joint ventures, cooperatives or associations. ‘The P1,919,500 level of sales or receipts in any 12-month period is referred to as the general "VAT Threshold.” This threshold applies to all other taxpayers other than franchise grantees of radio or television. Franchise grantees of radio or television broadcasting companies are mandatorily required to register as VAT taxpayers if they have an annual receipt exceeding P10,000,000. Optional Registration person who is below the VAT threshold may, at his option, register as VAT taxpayer. Timing of VAT registration 1. Persons commencing business with an expectation to exceed the VAT threshold within 12 months shall simultaneously register as VAT taxpayer with the registration of their new business or trade with the 2. Persons exceeding the VAT threshold shall register as VAT taxpayer within 10 days from the end of the month when the sales or receipts exceeded P1,919,500 (RR7-1995). '. Franchise grantees of radio and television broadcasting, whose gross annual receipt for the preceding calendar year exceeded P10,000,000, shall register as VAT taxpayer within 30 days from the end of the calendar year (RR16-2005). 4. Persons who are below the threshold but opt to be registered as VAT taxpayer shall register not later than 10 days before the beginning of the taxable quarter,(Ibid) 75jness Taxation Chapter 3- Introduction to Business if jon Revocability of VAT registratio or mandatory, of frq L The VAT registration, whether VONMATY 1 vocable Thug. nt . " ision 1S io . . grantees of radio aes OM til the dissolution of their business." i e x ” continue to franchise grantees of radio or television, Who other than VAT taxpayers shall not be allowed to ¢, for the next 3 years. This is referred to as the 3. 2. Any person, voluntarily registered their VAT registration ‘year lock-in period. rt io istered as VA’ Pi ion to 3. eet ‘he reshold but failed to exceed the same Within 1p months of operations may apply for ee ol registration, The three year lock-in period does not apply in this case. Businesses whose VAT registration has been cancelled will be registered oy reverted back as non-VAT taxpayers. They will be subject to the 3% percentage tax on sales or receipts. vPenalty for registrable persons ; Failure to register as a VAT-taxpayer is not an excuse. Registrable persons are still liable to VAT but without the benefit of input tax credit in the periods in which they are not properly registered. /COMPREHENSIVE ILLUSTRATION Allustration 1: Start of operation Mrs. Maranao is starting a business on February 1, 2014 with the following projected result of operations within 12 months: Expected Exempt sales P 400,000 Receipts from services subject to Percentage tax 1 200,000 Other sales and receipts “800.000 Total sales and receipts P.2.400,000 Only vatable sales or receipts shall ic threshold. Since the P800,000 expect) ordered for the purpose of the VAT 1,919,500 VAT threshold, Mrs. Mens Vatable sales or receipts is below th? aon ‘aranao may register as a non-VAT taxpayel: ay Ms Lalivon shall not pay business tax on exempt sali : receipts from services speci = ‘ various percentage tax rates’ “AY Subject to percentage tax shall be subject? 3. Mrs. Maranao shall pay the 3% receipts for as longas her vatable ale y Perce fax on the vatable sles a! We "eceipts do not exceed the VAT thresholdChapter 3—- Introduction to Business Taxation 4, The 12-month period is the immediately preceding 12-month period before the current month under consideration. It is not necessarily the taxable year of the taxpayer: vffastration 2: VAT threshold monitoring and VAT transition ‘Assuming further that Mrs. Maranao had the following actual vatable sales or receipts and input VAT on purchases since her February 1 commencement of. operations: Vatable Cumulative Input VAT on sales/receipts Sales/receipts _Purchases— February 1 to August 31,2014 P 1,500,000 P 1,500,000 P 128,000 September 2014 400,000 1,900,000 22,000 October 2014 300,000 2,200,000 43,000 November 2014 450,000 2,650,000 30,000 December 2014 500,000 3,150,000 28,000 ‘The cumulative sum of the monthly vatable sales or receipts for the last 12 months shall be monitored from the monthly BIR Form 2551M. _-Business tax. from February to August - Percentage tax Mrs. Maranao shall pay 3% percentage tax. The input taxes on purchases of non- VAT taxpayers are part of costs or expenses and are non-creditable. _-Business tax for September - Percentage tax Since, the P1,500,000 cumulative sales as of August 2014 is below the VAT threshold, Mrs, Maranao shall pay P12,000 (P40, 000 x 3%) percentage tax and file BIR Form 2551M for the September sales and receipts. Business tax for October - Percentage tax ‘Also since the P1,900,000 cumulative sales as of September 2014 is below the VAT threshold, Mrs. Maranao shall pay P9,000 (P300,000 x 3%) percentage tax for using BIR Form 2551M for theOctober sales and receipts. /WAT registration Note that Mrs, Maranao exceeded the VAT threshold with a P2.2M sales as of October 31, She must register as a VAT taxpayer before the 10th day of the following month. business tax for November - Value added tax ‘Assuming Mrs. Maranao registered as a VAT taxpayer, she shall compute her VAT payable as follows: Output VAT (450K x 12%) P 54,000 Less: Input VAT. 30,000 VAT payable P_24,000 77Z Taxation Chapter 3 — introduction to Business credit input VAT she paid on her pyr las As a VAT taxpayer, she is allowed tocredin Vat return) ant Pay if Mrs, Maranao shall file BIR Form 2 P24,000 VAT payable thereon. ny shall be patt ay Moses Wah F saividual, her taxable quarter Patterned afte rly VAT return (Bj that of the calendar year. She shall file i aia Pay var, (BIR Fo 2550Q) for December 2014 and pay the followi 0 Output VAT (450K + PSOOK) x 12% — P 114,00 Less: 58,000 Input VAT (P30K + P28K) b VAT paid in prior months (November) __24,000 VAT payable P_32,000 Note: For simplicity, the illustrations ignored the impact of the transitional input Var. This will be discussed in future chapters. Illustrative 3: Non-registration as VAT taxpayer : Assume instead that Mrs, Maranao paid P13,500 percentage tax in November and registered as a VAT taxpayer only on December 2014, Mrs. Maranao shall be subj registration. Registrable per: VAT in the period they are n ject to VAT in November despite the absence of ‘sons are subject to VAT without the benefit of input ‘ot properly registered. Hence, Mrs. Maranao shall be required to Pay the following additional assessment for November: Output VAT (450K x 12%) P 54,000 var duet Pane B54,009 fund or credit for the P13,500 percenta® t to retain the same, ‘The taxpayer shall file a cl laim for ret tax paid. The government has no righ {f claimed as tax credit, the same shall be : taken as deduction against the tax du once approved by the BIR. The VAT Payable shall be computed as follows: Output VAT (450K x 12 ies Input var a P 54,000 VAT due > Less: Percentage tax paid 54,000 VAT still due Ra0s00 78Chapter 3 - Introduction to Business Taxation Note to Readers The detailed practical application of the VAT threshold will be discussed in Chapter 6 after we study in detail the list of exempt sales in Chapter 4 and the lists of services subject to percentage taxes in Chapter 5. The illustrations herein are merely intended to give you a bird's eye view of the scope of VAT and percentage tax and to highlight the necessity of mastering the list of exempt sales and those services specifically subject to percentage tax to be discussed in the succeeding chapters. 79