INTRODUCTION TO BUSINESS TAX

What is business?
-means the regular conduct or pursuit of a commercial or economic activity.
Requisites:
1. Activity must be a commercial or economic activity
2. There must be regularity in the activity (except non-resident foreign person)

Major business taxes:

1. VAT
2. Percentage tax
3. Excise Tax
 
INTRODUCTION TO VALUE-ADDED TAX
 
What is Value-added Tax?
- VAT is a tax on the value added to the purchase price or cost in the sale or lease of goods,
property or services in the course of trade or business.
Who are the persons subject to VAT?
1. Seller of goods
2. Seller of services
3. Importer
What are the features of VAT?
1. A privilege tax
2. An indirect tax
3. Creditable
4. An Additional Cost
 
VAT- Registration
Comparison with VAT and Non-VAT
VAT-registered Non-VAT Registered
1.  Allowed to collect output VAT from No output VAT allowed.
customers. The output VAT is a current
liability to be remitted to the BIR
2. Allowed to claim creditable input VAT No input VAT allowed
on purchases from VAT-registered
suppliers.
 
Cancellation of VAT Registration
The registration of any person as a VAT taxpayer may be cancelled if:
1. He makes written application and can demonstrate to the Commissioner’s satisfaction
that his gross sales or receipts for the following 12 months will not exceed P3,000,000.
2. He has ceased to carry on his trade or business and does not expect to recommence any
trade or business within the next 12 months.

Nature and Characteristic

● VAT is a tax on consumption levied on the sale, barter, exchange or lease of goods or
properties and services in the Philippines and on importation of goods into the
Philippines
● Seller is the one statutorily liable for the payment of the tax but the amount of the tax
may be shifted or passed on to the buyer, transferee or lessee of the goods, properties
or services. In the case of importation, the importer is the one liable for the VAT

Nature
1. Form of sale tax
2. Indirect Tax- burden can be shifted by the seller to the buyer
3. Imposed on the
4. Gross Selling Price- If sale, barter, or exchange of goods, properties or
5. Gross receipts- if sale of services, or in the lease or use of properties in the course of
trade or business
6. Total Value or Landed cost- if importation of goods, whether or not in the course of
business.
 
Formula:
Output tax (output VAT)                                    xx,xxx
Less: Input VAT                                                      (xx,xxx)
VAT payable                                                          xx,xxx
 

GIVEN AMOUNT GIVEN AMOUNT

Sales before VAT Sales, gross of VAT

Gross Receipts before VAT Gross Receipts, gross of VAT

Purchases from VAT person, before

Purchases from VAT person, gross of VAT
VAT

Sales, net of VAT Sales, gross of VAT

Purchases from VAT person, net VAT Sales, inclusive of VAT

Sales/Purchases from VAT person, Purchases from VAT person, inclusive of

exclusive VAT

X 12% X 12/112

 
 
 VAT-subject Transactions

Transactions Tax Base

a. Sale of good properties in the course of

Gross Selling price
trade or business

b. Sale of services and lease of properties in

Gross Receipts
the course of trade or business

c. Importation Total landed cost

 
 
“In the course of trade or business” (Rule of Regularity) defined 
● The regular conduct or pursuit of a commercial or an economic activity, including
transactions incidental thereto, by any person regardless of whether or not the person
engaged therein is a non-stock, nonprofit private organization or government entity
● Non-resident persons who perform services in the Philippines are deemed to be making
sales in the course of trade or business, even if the performance of services is not
regular
 
Goods or properties
The term “goods or properties” refers to all tangible and intangible objects which are capable
of pecuniary estimation and shall include, among others: 
● Real properties held primarily for sale to customers or held for lease in the ordinary
course of business
o the right or the privilege to use patent, copyright, design or model, plan, secret
formula or process, goodwill, trademark, trade brand or other like property or
right
 o the right or the privilege to use in the Philippines of any industrial, commercial or
scientific equipment
o the right or the privilege to use motion picture films, film tapes and disc
o radio, television, satellite transmission and cable television time
 
Sale or Exchange of Services
Sale or exchange or services means the performance of all kinds of services in the Philippines
for others for a fee, remuneration or consideration, whether in kind or in cash, including those
performed or rendered by.
1. Construction and service contractors
2. Stock, real estate, commercial, customs and immigration brokers;
3. Lessors of property, whether personal or real
4. Persons engaged in warehousing services;
5. Lessors or distributors of cinematographic films;
6. Persons engaged in milling, processing, manufacturing or repacking goods for others;
7. Proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns,
resorts, theatres and movie houses;
8. Proprietors, operators of restaurants, refreshment parlors, cafes and other eating
places, including clubs and caterers;
9. Dealers of securities
10.Lending investors;
11.Transportation contractors on their transport of goods or cargoes including persons who
transport goods or cargoes for hire and other domestic common carriers by land,
relative to their transport of goods or cargoes;
12.Common carriers by air and sea relative to their transport of passengers, goods or
cargoes from one place in the Philippines to another place in the Philippines.
13.Sales of electricity by generation, transmission, and/or distribution companies
14.Franchise grantees of electric utilities, telep hone and telegraph, raid and/or television
broadcasting and all other franchise grantees, except franchise grantees of radio and/or
television broadcasting whose annual gross receipts of the preceding year do not
exceed P10,000,000, and franchise grantees of gas and water utilities;
15.Non-life insurance companies (except their crop insurance), including surety, fidelity,
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.
 
Computation of VAT payable (Excess Input Tax)
Output tax exceeds input tax at the end of any taxable quarter
Output tax xxx
Less: Input Tax (xxx)
VAT payable xxx

Input tax inclusive of input tax carried over from the previous quarter exceeds output tax
Output tax xxx
Less: Input tax (xxx)
Excess Input tax xxx
 
Computation of the Tax Base and the Applicable Tax Rates
1. Sale of goods
Gross Selling Price
Gross Sales xxx
Less: Sales Returns and xxx
allowances
           Sales discount (xxx) (xxx)
net Sales xxx
Add: Excise tax, if any xxx
Tax base xxx
 
1. Sale of real properties on installment plan (initial payments do not exceed 25% of the
gross selling price)
1. Sale of real properties on cash basis or deferred payment plan (initial payments exceed
25% of the gross selling price)
● Selling price stated in the sales documents or fair market value, whichever is higher

 
Sale of services
              Gross receipts computed as follows:

Cash received (actually and constructively) Xxx

Advance payments for future projects Xxx

Materials charged with the services xxx

Gross receipts xxx

 
Note: Receivables, although earned, are not included.
 Gross receipt for dealer in securities
              Gross receipts computed as follows:
Gross selling price xxx
Less: Acquisition cost of securities sold for (xxx)
the month or quarter
Total xxx
Add: Other or incidental income xxx
Gross receipts xxx
 
Gross receipts on the sale of electricity by generation, transmission and distribution
companies
              Gross receipts shall refer to the following:
● Total amounts charged by generation companies for the sale of electricity and related
ancillary services;
● Total amount charged by transmission companies for transmission of electricity and
related ancillary services
● Total amount charged by distribution companies and electric cooperatives for
distribution and supply of electricity and related electric service. The universal charge
passed on and collected by distribution companies and electric cooperatives shall be
excluded from the computation of the gross receipts
 
Percentage Tax on Common Carriers
VAT or percentage tax of domestic carriers?

Common carrier by land:  

    Transporting goods or cargoes 12% VAT

     Transporting passengers 3% Common Carriers Tax

Common carrier by air or sea:  

From one point in the Philippines to another point in the

 
Philippines

      Transporting goods or cargoes 12% VAT

      Transporting passengers 12% VAT

From one point in the Philippines to a point outside the Philippines  

       Transporting goods or cargoes 0% VAT

       Transporting passengers 0% VAT

OUTPUT TAX
Output VAT
Output tax means the value-added tax on sale or lease of taxable goods or properties or
services by any person registered or required to register.
In a sale of goods or properties, the output tax is computed by multiplying the gross selling
price by the regular rate of VAT.
 
Sources of Output Taxes
a. Sale of goods or properties
1. Actual regular sales
2. Actual zero-rated sales
3. Deemed Sales
b. Sale of services and lease of properties
1. Actual regular sales
2. Actual zero-rated sales

Zero Rated Sales definition and examples

A zero rated sale of goods or properties and services (by a VAT registered person) is a taxable
transaction for VAT purposes, but shall not result in any output tax. However, the input tax on
purchases of goods, properties or services, related to such zero-rated sale shall be available as
tax credit or refund in accordance with the regulations.
 
Examples of Zero rated sales

● Export sales of goods

1. The sale and actual shipment of goods from the Philippines to a foreign country;
irrespective of any shipping arrangement that may be agreed upon which may influence
or determine the transfer of ownership of the goods so exported;
2. Sale of raw materials or packaging materials to a nonresident buyer for delivery to a
resident local export oriented enterprise to be used in manufacturing, processing,
packing or repacking in the Philippines of the said buyer’s goods;
3. Sale of raw materials or packaging materials to export-oriented enterprise whose export
sales exceed 70% of the total annual production;
4. Those considered export sales under the (E.O No. 226), and other special laws.
5. The sale of goods, supplies, equipment and fuel to persons engaged in international
shipping or international air transport operations (new per RA 9337)
6. Foreign currency denominated sales
7. Effectively zero rated sales
 
 ● Sale of services and lease of properties(zero-rated)

1. Processing, manufacturing or repacking of goods for other persons doing business

outside the Philippines which goods are subsequently exported;
2. Services other than processing, manufacturing or repacking rendered to a person
engaged in business conducted outside the Philippines or to a non-resident person not
engaged in business who is outside the Philippines when the services are performed;
3. Services rendered to a persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively subjects the
supply of such services to zero percent rate;
4. Services rendered to persons engaged in international shipping or air transport
operating, including lease of property for use thereof;
5. Services performed by subcontractors and/or contractors in processing, converting, or
manufacturing goods for an enterprise, whose export sales exceed 70% of the total
annual production
6. Transport of passengers and cargo by domestic air or sea carriers from the Philippines to
a foreign country.
7. Sale of power or fuel generated through renewable sources of energy. Provided,
however, that zero-rating shall not extend to the sale of services related to the
maintenance or operation of plants generating said power
 
Considered Export Sales Under Omnibus Investment Code
“Considered export sales under Executive Order No. 226 shall mean”
1. The Philippine port value determined from invoices, bills of lading, inward letters of
credit, landing certificates, and other commercial documents, of export products
exported directly by a registered export producer, or
2. The net selling price of export products sold by a registered export producer to another
export producer, or to an export trader that subsequently exports the same;
 
Sale of export products to another producer or to an export trader shall only be deemed
export sales when actually exported by the latter, as evidenced by landing certificates or
similar commercial documents
 
Pursuant to EO 226 and other special laws, even without actual exportation, the following shall
be considered constructively exported:
1. Sales to bonded manufacturing warehouses of export-oriented manufacturers
2. Sales to export processing zones pursuant to RA 7916, as amended and other similar
export processing zones
3. Sale to enterprises duly registered and accredited with the Subic Bay Metropolitan
Authority pursuant to RA 7227
 4. Sales to registered export traders operating bonded trading warehouses supplying raw
materials in the manufacture or export products under guidelines to be set by the Board
in consultation with the BIR and BOC.
5. Sales to diplomatic missions and other agencies and/or instrumentalities granted tax
immunities, of locally manufactured, assembled or repacked products whether paid for
in foreign currency or not.
 
Effectively Zero-Rated Sales defined
Sales of goods or property or services to persons or entities who are tax-exempt under
international agreements to which the Philippines is signatory, such as, Asian Development
Bank (ADB), International Rice Research Institute (IRRI), etc, shall be effectively subject to VAT
at zero rate.

Deemed Sales Transactions

For transactions deemed sales, the output tax shall be based on the market value of goods
deemed sold as of the time of the occurrence of the transaction. In the case of a sale where
the gross selling price is unreasonably lower than the fair market value, the actual market
value shall be the tax base.
NOTE: The gross selling price is “unreasonably lower” than the fair market value if it is lower
by more than 30% of the actual market value. [Revenue Regulations 16-2005; Revenue
Regulations 4-2007]
1. Transfer, use or consumption not in the course of business of goods or properties originally
intended for sale or for use in the course of business.
● Transfer of goods or properties not in the course of business can take place when VAT-
registered person withdraws goods from his business for personal use
2. Distribution or transfer to:
● Shareholders or investors share in the profits of VAT-registered person

● Property dividends which constitute stocks in trade or property primarily held for sale or
lease declared out of Retained Earnings on or after Jan.1, 1996 and distributed by the
company to its shareholders shall be subject to VAT based on the zonal value or fair
market value at the time of distribution, whichever is applicable.
● Creditors in payment of debt or obligation

3. Consignment of goods if actual sale is not made within 60 days following the date such
goods were consigned
● Consigned goods returned by the consignee within the 60-day period are not deemed
sold
4. Retirement from or cessation of business, with respect to inventories of taxable goods
existing as of such retirement or cessation.
● Change of ownership of the business (when a single proprietorship incorporates or the
proprietor of a single proprietorship sells his entire business
 ● Dissolution of a partnership and creation of a new partnership which takes over the
business
 
NOTE: For retirement or cessation of business, the tax base shall be the acquisition cost or the
current market price of the goods or properties, whichever is LOWER.
 Sale, Transfer, or Exchange of Imported Goods by Tax-Exempt Persons
a. In the case of goods imported into the Philippines by VAT exempt persons, entities, or
agencies which are subsequently sold, transferred or exchanged in the Philippines to non-
exempt persons or entities; the latter shall be considered the importers thereof who shall be
liable for VAT on such importation.
b. The tax due on such importation shall constitute a lien on the goods, superior to all charges
or liens, irrespective of the possessor of said goods.
 
Summary of the differences between sale of goods or properties and sale of services or lease
of properties

Sale of Services or Lease of

Sale of Goods or Properties
Properties

Gross Selling Price (Accrual

a. Tax base Gross receipts (cash basis)
Basis)

a. Actual regular sales a. Actual regular sales

b. Actual zero-rated sales b. Actual zero-rated sales
c. Deemed Sale  
 
VAT EXEMPT TRANSACTIONS
The following are VAT-exempt transactions:
a. sale or importation of agricultural and marine food products in their original state,
livestock and poultry of a kind generally used as, or yielding or producing foods for human
consumption; and breeding stock and genetic materials thereof
1. Livestock: cows, bulls and calves, pigs, sheep, goats and rabbits
2. Poultry: fowls, ducks, geese and turkey
3. Does not include fighting cocks, race horses, zoo animals and other animals generally
considered as pets
4. Marine food products: fish and crustaceans, such as but not limited to, eels, trout,
lobster, shrimps, prawns, oysters, mussels and clams
5. Meat, fruit, vegetables and other agricultural and marine food products are considered
in their original state even if hey undergone the simple process of preparation or
preservation for the market : freezing, drying, salting, broiling, roasting, smoking or
stripping, shrink wrappings in plastic, vacuum packing, tetra-pack, and other similar
packaging methods

b. sale or importation of fertilizers, seeds, seedlings and fingerlings, fish, prawn, livestock
and poultry feeds, including ingredients, whether locally produced or imported, used in the
manufacture of finished feeds (except specialty feeds for race horses, fighting cocks,
aquarium fishes, zoo animals and other animals generally considered as pets)

c. importation of personal and household effects

● belonging to residents of the Philippines returning from abroad and non-resident
citizens coming to resettle in the Philippines
● such goods are exempt from customs duties under the Tariff and Customs Code of the
Philippines
 
d. Importation of professional instruments and implements, wearing apparel, domestic
animals, and personal household effects (except any vehicle, vessel, aircraft, machinery and
other goods for use in the manufacture and merchandise of any kind in commercial
quantity)
● Belonging to persons coming to settle in the Philippines

● For their own use and not for sale, barter or exchange,

● Accompanying such persons or arriving within 90 days before or after their arrival
 ● Upon the production of evidence satisfactory to the CIR that such persons are actually
coming to settle in the Philippines
● The change of residence is bonafide

e. services subject to percentage tax

 
f. services by agricultural contract growers and milling for others of palay into rice, corn into
grits and sugar into raw sugar
 
g. medical, dental, hospital and veterinary services, except those rendered by professionals
● Laboratory services are exempted

● If the hospital or clinic operates a pharmacy or drug store, the sale of drugs and
merchandise is subject to VAT. However, sales of drugs to in-patients of hospitals are
considered part of hospital services, which are exempt from VAT.
 
h. Educational services rendered by private educational institutions duly accredited by the
DepED, CHED and TESDA and those rendered by government educational institutions
● Does not include seminars, in-service training, review classes and other similar services
rendered by persons who are not accredited by the DepED, the CHED and/or TESDA
 
i. Services rendered by individuals pursuant to an employer-employee relationship
 
j. Services rendered by regional or area HQ established in the RP by multinational
corporations which act as supervisory, communications and coordinating centers for their
affiliates, subsidiaries or branches in the Asia Pacific Region and do not earn or derive
income from the Philippines
 
k. Transactions which are exempt under international agreements to which the Philippines is
a signatory, except those under PD 529 [Petroleum Exploration Concessionaires under the
Petroleum Act of 1949]
 
l. sales by agricultural cooperatives duly registered and in good standing with the CDA to
their members, as well as sale for their produce, whether in its original state or processed
form, to non-members their importation of direct farm inputs, machineries and equipment,
including spare parts thereof, to be used directly and exclusively in the production and/or
processing of their produce
 ● Sale by agricultural cooperatives to non-members can only be exempted from VAT if the
producer of the agricultural products sold is the cooperative itself. If the cooperative is
not the producer (e.g., trader), then only those sales to its members shall be exempted
from VAT;
● However, the sale or importation of agricultural food products in their original state is
exempt from VAT irrespective of the seller and buyer
 
m. Gross receipts from lending activities by credit or multi-purpose cooperatives duly
registered and in good standing with the CDA
 
n. Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with
and in good standing with the CDA
● Share capital contribution of each member does not exceed 15,000 and regardless of
the aggregate capital and net surplus ratably distributed among the members
 
o. Export sales by persons who are not VAT-registered
 
p. The following sales of real properties are exempt from VAT:
● Not primarily held for sale to customers or held for lease in the ordinary course of trade
or business
● Sale of real properties utilized for low-cost housing

– A subdivision or a condominium registered and licensed by the HLURB

– Undertaken by the gov’t or private developers
● Utilized for socialized housing

● Residential lot valued at 1,500,000 and below, or house and lot and other residential
dwellings valued at 2,500,000 and below

q. Lease of residential units

● Monthly RENTAL: not exceeding P15,000 regardless of the amount of aggregate rentals
received by the lessor during the year
 
r. Sale, importation, printing or publication of books and any newspaper, magazine, review,
or bulletin
● which appears at regular intervals

● with fixed prices for subscription and sale

● which is not devoted principally to the publication of paid advertisements

 
s. Transport of passengers by international carriers;
 
t. Sale, importation or lease of passenger or cargo vessels and aircraft, including engine,
equipment and spare parts thereof for domestic or international transport operations;
 
u. Importation of fuel, goods and supplies by persons engaged in international shipping or
air transport operations: Provided, That the fuel, goods, and supplies shall be used for
international shipping or air transport operations;
 
v. Services of bank, non-bank financial intermediaries performing quasi-banking functions, and
other non-bank financial intermediaries;
 
w. Sale or lease of goods and services to senior citizens and persons with disability, as
provided under Republic Act Nos. 9994 (Expanded Senior Citizens Act of 2010) and 10754
(An Act Expanding the Benefits and Privileges of Persons With Disability), respectively;
 
x. Transfer of property pursuant to Section 40(C)(2) of the NIRC, as amended;
 
y. Association dues, membership fees, and other assessments and charges collected by
homeowners associations and condominium corporations;
 
z. Sale of gold to the Bangko Sentral ng Pilipinas (BSP);
 
aa. Sale of drugs and medicines prescribed for diabetes, high cholesterol, and hypertension
beginning January 1, 2019; and
 
bb. Sale or lease of goods or properties or the performance of services other than the
transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts
do not exceed the amount of Three million pesos (PhP3,000,000).
 
NOTE: A VAT-registered person may, elect that that the exemption shall not apply to his sales
of goods or services or properties which is irrevocable for a period of 3 years.
 
Zero-Rated vs. VAT-Exempt Transaction
A zero-rated transaction differs from VAT-exempt transaction on the following points:
1. a zero-rated sale is a taxable transaction but does not result in an output tax while an
exempted transaction is not subject to output tax.
2. The input tax on purchases of a VAT-registered person with zero-rated sales may be
allowed as tax credits or refunded while the seller in an exempt transaction is not
entitled to any input tax on his purchases despite the issuance of a VAT invoice or
receipt.
3. Persons engaged in transactions which are zero-rated, being subject to VAT, are
required to register while registration is optional for VAT-exempt persons.