INTRODUCTION TO BUSINESS TAXATION

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.
(statutory payer is not the same with the economic payer)
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.

TYPES OF BUSINESS TAXES

 Percentage Tax
 Value Added Tax
 Excise Tax

WHAT IS A BUSINESS?
It 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
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.
Illustration 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.

Illustration 2
Mang Metro, a realty dealer, purchased shares of stocks as investment and sold them at a
profit.
Realty dealer – seller of real properties
Security dealer – seller of shares of stocks
The acquisition and sale of stocks investments by a realtor are not made in the course of the
realty business and are not subject to business tax.
If Mang Merto were a security dealer, the transaction would be considered made in the course
of business and hence, subject to business tax.

Illustration 3
Joshua is a proprietor regularly engaged in trading merchandise. During the month, he
reported the following:
Sale of Merchandise P800,000
Sale of Personal car P1,200,000
The 800,000 sale is subject to business tax.

The 1,200,000 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 – a.k.a ‘tiangge’ are stalls or outlets not permanently fixed to the ground
which are put up during special events such as festivals or fiestas.
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.

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 ang regularly operating
business. The 400,000 sales on the event shall be subject to the usual business tax.

Exception to the regularity rule

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. (no need to check if the seller is
engaged in business or not, automatic engaged in business)
The sales of services by non-residents are subjected to the final withholding VAT.

COMMERCIAL ACTIVITY
Commercial Activity – 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 of a profit during the period is not a pre-
condition to business taxation. Even if the business operation results to a loss, business tax
still applies.
The following are not businesses:*
1. Government agencies and instrumentalities
2. Non-profit organizations or associations
3. Employment
4. Directorship in a corporation
5. Business for mere subsistence
Business principally for subsistence or livelihood
refers to businesses with gross sales or receipts not exceeding P100,000.
Marginal income earners – individuals not deriving compensation income under an employer–
employee relationship but who are self–employed deriving gross sales or receipts not
exceeding P100,000 in any 12-month period.

Examples of marginal income earners:

1) Subsistential farmers of fishermen
2) Small sari-sari stores
3) Small carinderias or “turo-turos”
4) Drivers or operators of a single unit tricycle, and
5) Others similarly situated

Not marginal income earners

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.
Examples of persons considered engaged in business:
1. Consultants
2. Sales agents of insurance or real estate including brokers
3. Television or movie talents and artists
4. Cooking instructors
5. Martial arts instructors

BUSINESS TAXPAYERS
Business Taxpayers – includes any individual, trust, estate, partnership, corporation, joint
venture, cooperative or association.
Rules:
1. Each person, natural or juridical, is a taxable person for purposes of business taxation
2. Husband and wife are separate taxpayers
3. A parent company is separate taxable person with its subsidiary company and each
subsidiary company is a taxable person.
4. Home office and branch offices of the same business are one, not separate, taxable person.
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 taxpayer.
Income tax exemption does not equate to business tax exemption. Income tax exemption
does not necessarily mean business taxation.

The following persons which are exempt taxpayers from income tax are subject to business tax:
1) General professional partnership (Pass-through entity)
2) Joint venture engaged in construction or oil exploration (Pass-through entity)
3) Local water districts (GOCC)
4) Barangay micro–business enterprise (BMBE)

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.
a. VAT taxpayers – 12% VAT
b. Non-VAT taxpayers
Old NIRC – 3%
TRAIN – 3%
CREATE – 1% up to Jun 30, 2023
Then back to 3%

The basis of business tax differs on the activities businesses are engaged in:
Types of Business activities:
a) Sales or exchange of goods or properties
b) Sales or exchange of services or lease of properties

GROSS SELLING PRICE

Gross Selling price – refers to the total amount of money or its equivalent which the purchaser
pays or is obligated to pay to the seller in consideration of the sale, barter or exchange of
goods or properties.
The excise tax, if any, on such goods or properties shall form part of the gross selling price.

Allowable deductions from gross selling price:

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.
To be deductible, discounts must not be dependent upon the happening of a future
event or contingency. (trade but not cash discount)
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.
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 payment 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.*
Constructive Receipt – occurs when the money consideration or its equivalent is placed at the
control of the person who renders the service without restrictions by the payor. This is added
as part of gross receipts.

Examples of Constructive Receipt:

1) Deposit in a bank account of the seller made by the buyer in consideration of services
rendered or goods sold.
2) 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 the amounts retained by the payor to the account of the contractor.
AGENCY MONIES
- amounts earmarked for payment to an unrelated third party or received as reimbursement
for advanced payment on behalf of another which do not redound to the benefit of the payor
are not part of gross receipt.

INSURANCE PROCEEDS ON DAMAGED ASSETS

– the receipt of insurance proceeds from the destruction of a 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 reimbursement is not
viewed as a sale 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.*

BUSINESS WITH MIXED ACTIVITIES

A business which is engaged in 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.

Goods & Properties - Gross selling price

Services & Lease – Gross receipts

TYPES OF SALES OR RECEIPTS

EXEMPT SALES OR RECEIPTS
1. Sales of certain basic necessities
2. Sales exempt by law, treaty or contracts
3. Casual sales or sales by non-business sellers
4. Export sales of non-VAT registered persons

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

corporation 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

VATABLE SALES OR RECEIPTS

Vatable sales or receipts are subject to the following:
1) 3%/1% 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 ground to believe that his gross sales or receipts for the next 12
months will exceed P3,000,000.

The P3,000,000 VAT threshold is applicable to all other taxpayers, except franchise grantees of
radio or television. Franchise grantees are mandatorily required to register to the VAT system
when their annual receipts exceed P10,000,000.

OPTIONAL VAT REGISTRATION

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.

TYPE OF VAT TAXPAYERS

VAT- registered taxpayer – a taxpayer who registered under the VAT system
VAT-registrable taxpayer – a taxpayer who exceeded the VAT threshold but did not yet
register as a VAT taxpayer.
VAT – registered taxpayers are allowed credit for input VAT while non-VAT registered (VAT
registrable) taxpayers are not allowed to claim input VAT credit.*
SUMMARY RULES ON VAT & PERCENTAGE TAX

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.
 For VAT taxpayers
The amount billed to the customer or client (invoice price) on the sale of goods or
services includes the sales or gross receipts plus the 12% output VAT.
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.
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.

REPORTING
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 thereon 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

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.

PENALTY FOR REGISTRABLE PERSON

• Failure to register as a VAT-taxpayer is not an excuse.
• Registrable person are still liable to VAT but without the benefit of input tax
credit in the periods in which they are not properly registered.