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Nature of Business Tax

1. Relative consumption tax – Business tax is a tax on consumption of goods or services and imposable
only when the seller is a business.
2. Indirect tax – The tax is collected from the seller rather than from the buyer-consumer.
3. Privilege tax – Business tax is also viewed as a tax on the privilege to do business.
4. National tax – Business tax is imposed by the national government.

Introduction to Types of Business Taxes

1. Percentage Tax

Business Taxation
2. Value Added Tax
3. Excise Tax

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What is a Business? – refers to a habitual engagement in a commercial activity involving the sale of Illustration 2
goods or services for a profit. Mang Metro, a realty dealer, purchased shares of stocks as investment and sold them at a profit.

Elements of business: The acquisition and sale of stocks investments by a realtor are not made in the course of the realty
1. Habitual engagement business and are not subject to business tax. If Merto were a security dealer, the transaction would be
2. Commercial Activity considered made in the course of business and hence, subject to business tax.

Habitual engagement – there must be regularity in transactions to construe the presence of a business. Illustration 3
Isolated or casual sales are not regular activities; hence, these are presumed not made in the ordinary Joshua is a proprietor regularly engaged in trading merchandise. During the month, he reported the
course of business. following:

Illustration 1 Sale of Merchandise P800,000

Mrs. Ellerton, a medical practitioner, sold his principal residence for P10M. Sale of personal car P1,200,000

The sale of real properties by a non-realty dealer is a casual sale not made in the course of business; The 800,000 sale is subject to business tax. The 1,200,000 sales is outside the merchandising business. The
hence, it is exempt from business tax. same shall not be subjected to business tax since Joshua is not also a car dealer.

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Privilege Stores – a.k.a ‘tiangge’ are stalls or outlets not permanently fixed to the ground which are Danes bakeshop is not a privilege store since it is an established and regularly operating business. The
put up during special events such as festivals or fiestas. P400,000 sales on the event shall be subject to the usual business tax.

To be considered a privilege store, the store should engage in a business activity for a cumulative Exception to the regularity rule
period of not more than 15 days. Otherwise, they shall be considered regular taxpayaers subject to The sales of services by non-resident persons are presumed made in the course of business without
business taxes and income tax. regard as to whether the sale is regular or isolated.

Illustration 1 Commercial Activity – engagement in the sale of goods or services for a profit. The goods or services
Mang Andro makes key chains and wood art for sale to tourists during the annual Panagbenga must be offered to the public with a motive to earn unrestricted amount of pecuniary gains. However,
Festival. He rented a booth from the City of Baguio, the tiangge organizer, and recorded sales of the actual existence of a profit during the period is not a pre-condition to business taxation. Even if the
P350,000 over the weeklong festivities. business operation results to a loss, business tax still applies:

Mang Andro is not considered habitually engaged in business. His P350,000 sales is not subject to The following are not businesses:*
business tax, but is subject to income tax. 1. Government agencies and instrumentalities
2. Non-profit organizations or associations
Illustration 2 3. Employment
Danes Bakeshop, an established business enterprise, also rented a booth from the organizer, City of 4. Directorship in a corporation
Baguio, to sell its cakes and pastries during the Panagbenga Festival, Danes generated P400,000 sales 5. Business for mere subsistence
during the event.

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Marginal income earners – individuals not deriving compensation income under an employer – Business Taxpayers – includes any individual, trust, estate, partnership, corporation, joint venture,
employee relationship but who are self – employed deriving gross sales or receipts not exceeding cooperative or association.
P100,000 in any 12-month period.
Rules:*
Examples of marginal income earners: 1. Each person, natural or juridical, is a taxable person for purposes of business taxation
a. Subsistential farmers of fishermen 2. Husband and wife are separate taxpayers
b. Small sari-sari stores 3. A parent company is separate taxable person with its subsidiary company and each subsidiary
c. Small carinderias or turo-turos company is a taxable person.
d. Drivers or operators of a single unit tricycle, and 4. Home office and branch offices of the same business are one, not separate, taxable person.
e. Others similarly situated 5. Proprietorship is not a juridical entity. It sales and receipts is subject to business tax to the individual
proprietor. Multiple proprietorship businesses of the same individual are all taxable to that individual as
The term marginal income earners do not include licensed professionals, consultants, artists, sales the taxpayer.
agents, brokers, including all others whose income have been subjected to withholding tax.
Income tax exemption does not equate to business tax exemption
Examples of persons considered engaged in business: Income tax exemption does not necessarily mean business taxation.
1. Consultants
2. Sales agents of insurance or real estate including brokers The ffg persons which are exempt taxpayers from income tax are subject to business tax:
3. Television or movie talents and artists 1. General professional partnership
4. Cooking instructors 2. Joint venture engaged in construction or oil exploration
5. Martial instructors 3. Local water districts
4. Barangay micro – business enterprise

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Gross Selling price – refers to the total amount of money or its equivalent which the purchaser pays or is
Types of Business Taxpayers
obligated to pay to the seller in consideration of the sale, barter or exchange of goods or properties.
A taxable person shall register either as:
The excise tax, if any, on such goods or properties shall form part of the gross selling price.
a. VAT taxpayers
b. Non-VAT taxpayers
It includes sales made in cash, on credit and installment basis.
VAT-registered taxpayers pay 12% VAT while non-VAT registered taxpayers pay a 1% general
Allowable deductions from gross selling price:*
percentage tax.
1. Discounts determined and granted at the time of sale, which are expressly indicated in the invoice,
the amount thereof forming part of the gross sales and are duly recorded in the books of accounts.
Business Activities
The basis of business tax differs on the activities businesses are engaged in:
To be deductible, discounts must not be dependent upon the happening of a future event or
contingency.
Types of Business activities:
a. Sales or exchange of goods or properties
2. Sales returns and allowances for which a proper credit or refund was made during the month or
b. Sales or exchange of services or lease of properties
quarter to the buyer on taxable sales.

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Agency Monies - amounts earmarked for payment to an unrelated third party or received as
Gross Receipts – refers to the total amounts of money or its equivalent representing the contract price,
reimbursement for advanced payment on behalf of another which do not redound to the benfit of the
compensation, service fee, rental or royalty, including the amount charged for materials supplied with
payor are not part of gross receipt.
the services and deposits applied as payment for services, rendered and advanced payments actually
or constructively received during the taxable period for the services performed or to be performed for
Insurance proceeds on damaged assets – the receipt of insurance proceeds from the destruction of a
another person, excluding VAT.*
company’s business asset is not viewed as sales or receipts for purposes of business taxation. The
compulsory or involuntary conversion of property into money such as in the case of insurance
Constructive Receipt – occurs when the money consideration or its equivalent is placed at the control of
reimbursement is not viewed as a sale in the ordinary course of business.*
the person who renders the service without restrictions by the payor. This is added as part of gross
receipts.
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
Examples:*
collection process.*
1. Deposit in a bank account of the seller made by the buyer in consideration of services rendered or
goods sold.
Business with Mixed Activities
2. Issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof of the
A business which is engaged in both in the sales of goods or properties and sales of services shall be
seller as payment for services rendered.
subject to business tax on gross selling prices on its sales of goods or properties and on gross receipts on
3. Transfer the amounts retained by the payor to the account of the contractor.
the sales of services.

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Receipts from services specifically subject to a percentage tax

1. Banks and non-bank financial intermediaries
2. International carriers on their outgoing transport of cargoes, baggage or mails
3. Domestic common carriers on their transport of passengers on land and keepers of garage
4. Certain amusement places
5. Philippine stock exchange on the sale, barter or exchange of shares by investors or corp conducting
initial public offering
6. Franchise 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
Exempt sales or receipts
1. Sales of certain basic necessities Vatable sales or receipts
2. Sales exempt by law, treaty or contracts
3. Casula sales or sales by non-business sellers Vatable sales or receipts are subject to the following:
4. Export sales of non-VAT registered persons 1. 1% general percentage tax – if the taxpayer is non-VAT registered taxpayer
2. Value-added tax – if the taxpayer is a VAT taxpayer

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Types of percentage tax Type of VAT Taxpayers

1. Specific percentage tax – those imposed for BICAP FLOW and apply to any taxpayer, whether VAT a. VAT- registered taxpayer – a taxpayer who registered under the VAT system
or non-VAT registered. b. VAT-registrable taxpayer – a taxpayer who exceeded the VAT threshold but did not yet register as a
2. General percentage tax – for vatable sales or receipts of non-VAT taxpayers VAT taxpayer.

Mandatory registration as VAT taxpayer VAT – registered taxpayers are allowed credit for input VAT while non-VAT registered taxpayers are not
Any person, who in the course of trade or business, sells barters, or exchanges goods or properties or allowed to claim input VAT credit.*
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 Difference of the concept of gross receipts and sales between VAT and Non-VAT taxpayers
2. There are reasonable ground to believe that his gross sales or receipts for the next 12 months will
exceed P3,000,000. For Non-VAT taxpayers
The amount billed to the customer or client on the sale of goods or services is respectively the sales or
The P3,000,000 VAT threshold is applicable to all other taxpayers, except franchise grantees of radio or gross receipts.*
television. Franchise grantees are mandatorily required to register to the VAT system when their annual
receipts exceed P10,000,000. For VAT taxpayers
The amount billed to the customer or client (invoice price) on the sale of goods or services includes the
Optional VAT Registration sales or gross receipts plus the 12% output VAT.*
A person who is below the VAT threshold may, at his option, register as VAT taxpayer. Once made, this
option shall be irrevocable for 3 years. For TV or Radio Franchise grantees, the option shall be
perpetually irrevocable.

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Business tax accounting period
The length of accounting period for business taxes is one quarter. This is referred to as a taxable
quarter.
The taxable quarter is composed of three months which is synchronized with the taxable year
(calendar or fiscal) of the taxpayer for purposes of income tax.*
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Short Period Return
Any person who retires from business with due notice to the BIR office where the taxpayer is registered or
whose VAT registration has been cancelled shall file a final quarterly return and pay the tax due theron
within 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*
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Reporting of VAT taxpayers
VAT taxpayers are required to report their receipts or sales in two monthly estimated 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
taxpayer pay/remit VAT monthly.
The TRAIN law will eventually phase out the monthly estimated VAT payments and VAT payment will
transition into a full quarterly payments effective January 1, 2023.
Reporting of Non-VAT taxpayers (Percentage taxpayers)
The TRAIN law requires percentage taxpayers to file quarterly percentage tax returns (BIR Form
2551Q). All percentage taxpayers pay their percentage taxes on a quarterly basis.
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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 BIR.
2. Persons exceeding the VAT threshold shall register as VAT taxpayer before the end of the month
following the month the threshold is exceeded.
3. Franchise grantees of radio and television broadcasting, whose gross annual receipt for the
preceding calendar year exceeded 10M shall register as VAT taxpayer within 30days from the end
of the calendar year.
4. Persons who are below the threshold but opt to be registered as VAT taxpayers shall register not later
than 10 days before the beginning of the taxable quarter.
Revocability of VAT Registration
1. The VAT Registration, whether voluntary or mandatory, of franchise grantees of radio or television is
perpetually irrevocable.
2. Any person, other than franchise grantees of radio or television, who voluntarily registered as VAT
taxpayers shall not be allowed to cancel their VAT registrations within 3 years. This is referred to as
the 3-year lock in period.
3. Any person who registered as VAT taxpayers with an expectation to exceed the VAT threshold but
failed , may apply for cancellation of the VAT registration. The 3 year lock in period does not apply.
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End of Discussion. Any Questions?

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