OPT subject transactions 6.

6. If the transaction is subject to VAT, there is a question of what the applicable rate of VAT will be.

Difficulty: B The following rates are applicable:

Required prior skills: Introduction and Concept of business taxation, VAT exempt transactions
Hardest topic: OPT on banks
Business taxes in general
The two main business taxes are the value added tax (VAT) and the other percentage tax (OPT). Both
taxes impose a fixed rate. However, the rate to use depends on the kind of transaction. The tax basis is
the gross selling price or gross receipts.
Business taxes in general
The two main business taxes are the value added tax (VAT) and the other percentage tax (OPT).
a. 12%: this is the default VAT rate, applicable for most or all transactions.
b. 0%: this applies to specific transactions, typically for exports.
c. Sales to government are treated slightly differently. The government will withhold 5% of
the amount and this will be a creditable input VAT.
Nature of OPT
A percentage tax is a tax imposed by a certain percentage (i.e. a fixed rate) on the tax basis. In the case
of Other Percentage Taxes, it is imposed on the gross selling price or on the gross receipts.
Unlike VAT, there is no need for any added value to the product or service.

The following classifications can be inferred from the provisions on the tax code as to business tax:
1. Specifically listed VAT-Exempt transactions (Sec 109(A) to Sec 109(BB) NIRC)
2. Specifically listed transactions subject to OPT (Sec 117 to Sec 127 NIRC)
3. Transactions subject to 3% OPT for not reaching the 3,000,000 threshold (Sec 109(CC) NIRC)
4. VAT transactions in general (Sec 106 to Sec 108, excluding zero-rated VAT below)
5. Zero-rated VAT transactions (Sec 106(A)(2) and Sec 108(B) NIRC, other special laws)
6. VAT Sales to Government (Sec 114(C))
If an item is not VAT exempt, it may be subject to either VAT or OPT.
OPT Transactions
There are transactions specifically listed as being subject to OPT under Sec 117 to Sec 127 NIRC of the
NIRC. These transactions will never be subject to VAT unless a particular condition applies.
Each transaction listed below has a separate rate to be used.

The difficult question is determining the applicable tax. The following rules are important:
1. The determination of the applicable tax is on a transaction by transaction basis. Because the
classification depends on the kind of transaction, then a business may have some transactions
subject to VAT, some transactions subject to OPT, and some transactions that are VAT exempt.
2. If a specific transaction is listed as VAT Exempt, then it is never subject to either OPT or VAT(a
few VAT exempt transactions, however, become subject to VAT after certain conditions are met;
in general though, a VAT exempt transaction will never be subject to business tax) .
1. Domestic Carriers, keepers of garages, and international carriers transporting cargo to another
country.
According to Article 1732 of the Civil Code, “Common carriers are persons, corporations, firms or
associations engaged in the business of carrying or transporting passengers or goods or both, by
land, water, or air, for compensation, offering their services to the public.”
The rules on carriers are summarized below:

3. If a specific transaction is listed as subject to OPT, then the particular rate applicable to that TRANSPORT OPERATION
transaction is to be used. The transaction is never subject to VAT unless specified. Within PH Going out of PH Going into PH
Domestic carrier
4. If the taxpayer is VAT-registered, then transactions other than VAT-exempt above or specifically Passengers by Specifically listed as N/A N/A
listed as OPT above (#2 and #3) are subject to VAT. land OPT: 3%
All others 3,000,000 threshold 3,000,000 threshold VAT Exempt
5. If the taxpayer is NOT VAT-registered, AND the transactions are not VAT-exempt or specifically If subject to VAT, zero-rated
listed as OPT, the transaction is called a VATable transaction. 1 International
Passengers, air N/A VAT Exempt VAT Exempt
or sea
For VATable transactions, the taxpayer must compute the total VATable transactions throughout
Cargo, air or sea N/A Specifically listed as OPT: 3% VAT Exempt
the taxable year. If the total exceeds P3,000,000, all VATable transactions will be subject to VAT.
Otherwise, they will be subject to a 1% OPT*.
“Keepers of garages” would necessarily mean a carrier providing land transportation. The Code
* Applicable from July 1, 2020 until June 30, 2023; after this period it will be 3%.
specifies that only those transporting passengers would be subject to OPT.

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SEC. 117. Percentage Tax on Domestic Carriers and Keepers of Garages. - Cars for rent or hire
driven by the lessee, transportation contractors, including persons who transport passengers for
hire, and other domestic carriers by land, for the transport of passengers [except owners of
bancas] and owners of animal-drawn two wheeled vehicle), and keepers of garages shall pay a
tax equivalent to three percent (3%) of their quarterly gross receipts.
For international carriers (those owned by foreign corporations), they are subject to a 3% OPT
for transport of cargo from the Philippines to another country.
SEC. 118 Percentage Tax on International Carriers.
Xxx on their gross receipts derived from transport of cargo from the Philippines to another
country shall pay a tax of three percent (3%) of their quarterly gross receipts.

This particular OPT is also called the Common Carrier’s Tax. There are no international carriers by land.

For domestic carriers by land, the Code sets a minimum presumed gross receipts. This means that Illustration
if the actual gross receipts for the quarter are lower than the below amounts, the domestic carrier American Airlines had the following transactions:
will pay the 3% OPT based on the below amounts instead: Receipts from transport of passengers:
From Philippines to United States P5,000,000
Jeepney for hire From United States to Philippines P2,000,000
1. Manila and other cities P 2,400 Receipts from transport of cargo:
2. Provincial 1,200 From Philippines to United States P3,000,000
From United States to Philippines P1,600,000
Public utility bus
Not exceeding 30 passengers P 3,600 The following business taxes are imposed:
Exceeding 30 but not exceeding 50 passengers 6,000
Exceeding 50 passengers 7,200 Cargo From PH to US 3,000,000
Multiply: 3%
Taxis OPT 900,000
1. Manila and other cities P 3,600
2. Provincial 2,400 All other transactions by American Airlines above are VAT exempt and subject to no business tax.

Car for hire (with chauffer) P 3,000 2. Radio or television broadcasting franchisees, and gas and water utilities
Car for hire (without chauffer) 1,800 A franchise is an agreement whereby one person (the franchisor) authorizes the grantee
(franchisee) to operate using the former’s logo, tradename, and so on. These taxes are also called
Illustration franchise taxes.
A taxi in Metro Manila had received only P3,000 of gross receipts during the quarter. His other
percentage tax of 3% will be computed using the minimum presumed receipts of P3,600. Under Philippine law, broadcasting companies must request and be granted a franchise by
Congress through the enactment of a law.
Receipts 3,600
Multiply: 3% A radio or television broadcasting franchise grantee is subject to an OPT of 3% if their annual
OPT 108 gross receipts do not exceed P10,000,000.

If the taxi’s actual gross receipts were P4,000, then the 3% OPT will be computed based on P4,000. Take note of the flowchart again:

For all other Domestic Carrier operations within the Philippines (other than domestic transporters
of passengers by land), since they are not listed under either VAT exempt or OPT, they are VATable
transactions. The question then will be whether that carrier is VAT registered or if its VATable
transactions exceed the 3,000,000 threshold.

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Because the determination of whether a transaction is “specifically listed under OPT”, the
question of the 3,000,000 threshold is irrelevant here. For as long as the total receipts of the
broadcasting franchise do not exceed P10,000,000, they are subject to the 3% OPT.
If the receipts exceed P10,000,000, then follow down the flowchart. That means the next question
is whether the business is either VAT registered or their VATable sales exceed P3,000,000.
Illustration:
A radio station had P9,000,000 in annual gross receipts for 2017. It is subject to an OPT of 3%.
If the radio station’s annual gross receipts amounted to P10,500,000, its sales are instead VATable.
Regardless of whether the station is VAT registered, its sales exceed P3,000,000. Thus, it must pay
the VAT.
Optional VAT registration for broadcasting
A broadcasting franchisee may also opt to register under VAT. In such a case, it will pay the VAT;
the 10,000,000 threshold is no longer used. Its VAT registration can never be cancelled, and the
franchisee will never be subject to OPT again.
Gas and water utilities
Gas and water utilities are subject to a 2% OPT on their gross receipts. No threshold is imposed
on utilities.
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3. Overseas Dispatch, Message or Conversation Originating from the Philippines
This refers to the use of communication equipment and services to deliver messages overseas or
to other countries. It is also known as the overseas communication tax.
This was primarily used for telephones, telegraphs, and telewriter exchanges, especially when
sending communications overseas was difficult and costly. Note that the law also covers “wireless
and other communication equipment services.”
This tax is paid by the user of the services, collected by the communication provider and remitted
to the BIR.
The OPT tax rate is 10%.
Messages sent by the following are not subject to the OPT:
a. Government: this is in line with the inherent limitation that the government is exempt
from taxes.
b. Diplomatic services: this refers to embassies and consular offices of foreign governments.
This is in line with the inherent limitation of international comity. Embassies and consular
offices are treated as extensions of foreign states. A state cannot tax another state.
c. International organizations that are exempted by treaties or agreements
d. News services, which messages deal exclusively with the collection of news items for, or
the dissemination of news item
4. Banks and Financial intermediaries performing Quasi-banking functions
“Non-bank financial intermediaries” are entities whose principal function is the lending, investing,
or placement of funds. Banks are financial intermediaries. Under the law, banks are not only
subject to control by the Bangko Sentral ng Pilipinas, but they are also required to be corporations.
Quasi-banking function refers to the borrowing of funds from 20 or more lenders at any one time.
The borrowing is through the issuance, endorsement, or acceptance of debt instruments of any
kind, other than deposits. It may also be through the issuance of certificates of assignment or
similar instruments.
The following tax rates are applicable for income earned by the bank/quasi-bank:
Interest income, commissions and discounts from lending
activities, income from financial leasing, on the basis of
remaining maturity
a. Maturing in 5 years or less 5%
b. Maturing over 5 years 1%
Dividend and equity shares in the net income of subsidiaries* 0%
All other items of gross income** 7%
Net trading gains within the taxable year on foreign currency, 7%
debt securities, derivatives, and other similar financial
instruments**
*This applies only to dividends from subsidiaries.
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 **While this is listed separately in the NIRC, essentially, net trading gains would also be “all other 6. Tax on Premiums of Life Insurance Companies
items of gross income”. Thus, it would be easier to remember them as one item “all other items of Under the Insurance Code, a contract of insurance is “an agreement whereby one undertakes for
gross income” a consideration to indemnify another against loss, damage or liability arising from an unknown or
contingent event.”
The tax rate on interest income depends on the remaining years to maturity.
The “consideration” in the contract is called an insurance premium. The policyholder pays a
Illustration periodic premium to the insurer. In return, either the policyholder, his property, or some other
The bank received the following interest payments in 2021: person shall be covered by the policy. The policyholder generally must have an insurable interest
Loan Interest Rate Date loan released Date of maturity Amount of interest in the property or person covered.
Loan A 10% 2020 2023 200,000
Loan B 8% 2020 2028 80,000 Insurance companies profit because out of a large number of policyholders, only a very small
Loan C 9% 2020 2026 900,000 percentage of them will have valid claims to the payout (called insurance proceeds).
Loan D 11% 2019 2025 110,000
A 2% OPT is imposed on the premiums collected by life insurance companies, whether the
The OPT is computed as follows: premium is paid in cash, in credits, or even in substitutes for money. Life insurance policies are
Loan Years to maturity (from 2021) OPT rate Interest income OPT payable policies covering people: proceeds are paid out in the case of death, regardless of the cause of
Loan A 2 years 5% 200,000 10,000
death.
Loan B 7 years 1% 80,000 800
Loan C 5 years 5% 900,000 45,000
Loan D 4 years 5% 110,000 5,500 Due to the wording of the law, the OPT is imposed on premiums collected by companies offering
Although Loan C was originally for a period of 6 years, by 2021 only 5 years are left. The rate to be used will life insurance, not on the premiums on life insurance themselves.
be 5%.
SEC. 123. Tax on Life Insurance Premiums. - There shall be collected from every person, company
As previously discussed, the bank will still be subject to income tax on these items. or corporation (except purely cooperative companies or associations) doing life insurance
business of any sort in the Philippines
In case the maturity period is shortened thru pre-termination, then the maturity period shall be
reckoned to end as of the date of pre-termination for purposes of classifying the transaction and A life insurance company is a company dealing with the insurance on human lives and insurance
the correct rate of tax shall be applied accordingly. appertaining thereto or connected therewith. An insurance company will ordinarily not offer only
life insurance. It may also offer casualty insurance (which is payable even if the covered person is
5. Other financial intermediaries without quasi-banking functions merely injured, but the cause must specifically be an accident) or health insurance (which is
An example of such a financial intermediary is a pawnshop. It performs lending operations to payable when the covered person suffers specific diseases, even if it doesn’t result on death). On
customers, with various small items such as jewelry being used as collateral. However, it does not the other hand, life insurance is specifically paid out on the death of the insured, and is paid
borrow from 20 or more people at any one time. Neither does a pawnshop regularly issue, accept, regardless of the cause of death.
or endorse debt instruments like bonds or notes.
Accordingly, for as long as the company primarily offers life insurance and is thus a life insurance
The tax rates for such intermediaries are as follows: company, premiums on other insurance collected by said company are also subject to the tax.
Interest income, commissions and discounts
from lending activities, income from financial The following premiums will not be subject to OPT, even if received by a life insurance company:
leasing, on the basis of remaining maturity a. Premiums refunded within 6 months after payment on account of rejection of risk or
a. Maturing in 5 years or less 5% returned for other reasons
b. Maturing over 5 years 1% b. Re-insurance premiums. Insurance companies, in practice, will also insure each other. In
All other items of gross income 5% essence, the insurance company becomes a policyholder of another insurance company.
Part of the risk is passed to another insurance company. The latter, therefore, would also
demand premiums from the former company.

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 The practice is done so as to prevent a total collapse in the case of an extremely large 3. The promoter is a Filipino citizen, or a corporation which is at least 60% owned by Filipinos
event, such as a natural disaster covering the majority of a country. While this is rare,
insurance companies prepare for the possibility. Cabarets are discos, similar to clubs for dancing. If the club or cabaret is part of a larger
establishment, such as a hotel or a bowling alley, the receipts from the club or cabaret are treated
c. Premiums from life insurance of non-residents received by overseas branches. separately from the other services provided by the establishment.
d. Excess of premiums on vatable contracts in excess of the amounts necessary to insure the
lives of the variable contract owners Illustration
The sole proprietor operates a bowling alley which also has a disco. It reported the following:
7. Agents of foreign insurance companies
From the cabaret From the bowling alley
A foreign insurance company would ordinarily cover only foreigners, including foreign companies. Entrance fee 200,000 200,000
However, the latter foreign companies may be performing international operations. They may Sales of food and beverage 800,000 150,000
decide to obtain insurance for their international operations as well.
The OPT is imposed only on the receipts from the cabaret.
If they want to option is to obtain insurance from a foreign insurance company instead of a local
one, they will either obtain the services of a local person or company who will act as an agent of Other businesses may be renting space inside the amusement place, such as a food stand at a
the foreign insurer, or to obtain an international insurance policy directly from the foreign insurer. cockpit. The rent paid to the amusement place owner, lessor or operator will also be subject to
the OPT. The receipts by that food stand would not be subject to the amusement tax because he
The tax is imposed when the foreign insured company is not authorized to transact business in is not the lessor, operator or owner of the amusement place itself.
the Philippines. If the policy is obtained through an agent, the tax rate is 4%:
9. Tax on winnings in horse races
SEC. 124. Tax on Agents of Foreign Insurance Companies. - …shall pay a tax equal to twice the
tax imposed in Section 123… Here, the tax is imposed on the bettors and the horse owners. Racetracks are also subject to
amusement tax above. The amusement tax is imposed on the owner, operator or lessor of the
However, if the insured obtains the policy directly from the foreign insurer, the tax rate is instead racetrack.
5%.
The tax rates are as follows:
SEC. 124. Tax on Agents of Foreign Insurance Companies. - …In all cases where owners of Winnings of bettors 10%
property obtain insurance directly with foreign companies, it shall be the duty of said owners… Winnings from double, forecast/quinella and trifecta bets 4%
shall pay the tax of five percent (5%) on premiums paid, in the manner required by Section 123. Winnings of the horseowners 10%

8. Amusement Taxes The race winnings are explained below:

A. Combination bets (betting on at least two horses)
The proprietors (owners), lessors or operators of the following amusement places will pay an i. Double – selecting winners in two specific races
other percentage tax as follows: ii. Daily double – a bet for the first winning horse on two consecutive races
iii. Forecast – a bet for the first and second finisher in a particular race
Places of boxing exhibitions 10% iv. Exacta or perfecta – a bet to pick the first two finishers in exact order
Places of professional basketball games 15% v. Quinella – a bet where at least the first two finishers must be picked in either order
Cockpits, cabarets, night or day clubs 18% vi. Trifecta – a bet to predict the first three finishers in a race in exact order
Jai-alai and race tracks 30% B. Straight wagers
i. Win – the selected horse must finish in first place
For professional boxing, no OPT is imposed if the following conditions are present: ii. Place – the selected horse must finish in first or second place
1. It is a world or oriental championship match iii. Show – the selected horse must finish in first, second or third place
2. At least one of the contenders is a Filipino citizen

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 For bettors, the tax is imposed on the winnings after deducting the cost of the ticket. All taxes 11. NEW Gaming Tax on Offshore Gaming Licensees
here are withheld from the winnings. This tax was added in 2021 by RA 11590.

Illustration SECTION 125-A Gaming Tax on Services Rendered by Offshore Gaming Licensees
The racetrack had the following dividends for winning tickets during an event: The entire gross gaming revenue or receipts or the agreed predetermined minimum monthly
revenue or receipts from gaming, whichever is higher, shall be levied, assessed, and collected a
Total winnings on straight bets (cost of tickets 10,000) P80,000 gaming tax equivalent to (5%), in lieu of all other direct and indirect internal revenue taxes and
Total winnings in daily double (cost of tickets 600) 40,000 local taxes, with respect to gaming income.
A winner of trifecta (cost of ticket 200) 30,000
Prize for the owner of the winning horse 100,000 The Philippine Amusement and Gaming Corporation or any special economic zone authority or
tourism zone authority or freeport authority may impose regulatory fees on offshore gaming
The tax on the winnings are as follows: licensees which shall not cumulatively exceed two percent (2%) of the gross gaming revenue or
receipts derived from gaming operations and similar related activities of all offshore gaming
Straight Daily double Trifecta Owner licensees or a predetermined minimum guaranteed fee, whichever is higher:
Winnings 80,000 40,000 30,000 100,000
Cost (10,000) (600) (200) Gross gaming revenue or receipts shall mean gross wages less payouts: Provided, finally, That the
Net 70,000 39,400 29,800 100,000 taking of wagers made in the Philippines and the grave failure to cooperate with the third-party
Tax rate 10% 4% 4% 10% auditor shall result in the revocation of the license of the offshore gaming licensee.
7,000 1,576 1,192 10,000
The term ‘offshore gaming licensee’ shall refer to the offshore gaming operator, whether
The tax will be deducted from the winnings before they are paid out to the winners. organized abroad or in the Philippines, duly licensed and authorized, through a gaming license, by
the Philippine Amusement and Gaming Corporation or any special economic zone authority or
10. Sale of shares listed and traded through the local stock exchange tourism zone authority or freeport authority to conduct offshore gaming operations, including the
acceptance of bets from offshore customers, as provided for in their respective charters.
Not all stocks by corporations are listed in the Philippine Stock Exchange. Listed corporations are
called public corporations, because anyone can buy or sell the stocks through the PSE.

This OPT transaction refers to any sale of listed stocks other than by a dealer in security. In the
Philippines, no individual may directly transact in the stock exchange. All transfers of stock are
effected through security dealers, brokers, or other registered middlemen.

When the sale is said to be one by other than by a dealer in security, it means the owner of the
shares being sold is someone other than the dealer. Some dealers will buy or sell shares in their
own name for additional profits. However, when the owner is someone else, the dealer is merely
acting as an agent or middleman; the true seller would be the dealer’s client.

The sale of the stocks refers to sales between stockholders. It does not refer to the first time
issuance of a stock where the issuing corporation is the “seller”. The applicable tax is 0.6% of the
selling price.

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12. First issuance of shares in an Initial Public Offering A summary of the OPT rates are as follows
Business Tax rate
Under RA 11494 Bayanihan to Recover As One Act, signed into law on September 11, 2020, Banks and quasi-banks 5% on interest, maturity 5 yrs or less
this tax has been repealed and is no longer imposed. 1% on interest, maturity over 5 yrs
0% on dividends from subsidiaries
A corporation has what is called authorized share capital. This refers to the maximum possible 7% on all other gross income
shares that may be issued. However, not all shares are issued at once. Other financial intermediary without quasi-banking 5% on interest, maturity 5 yrs or less
1% on interest, maturity over 5 yrs
5% on all other gross income
If a corporation is listed in the stock exchange, the first time a share is issued to the public is called
Int’l carriers transporting passengers to overseas 3%
an Initial Public Offering. Here, the investors pay to the broker who will forward the proceeds to
Domestic carriers transporting passengers by land 3%
the issuing corporation. This is different from the sales above in that this is the first time the
Places of boxing exhibitions 10%
shares are being sold, and that the “seller” is the issuing corporation and not some other person.
Places of professional basketball games 15%
Night club, cabaret, cockpit 18%
The tax rate is imposed on the selling price of the share, depending on the number of shares sold: Jai alai, race tracks 30%
Winnings from race tracks 4% for double, forecast, trifecta
Proportion of shares sold Tax rate 10% for other bets
Up to 25% 4% 10% for owners of winning horse
Over 25%, but not over 33 1/3% 2% Sale of stocks through Phil Stock Exchange 0.6%
Over 33 1/3% 1% Sale of stocks by closeheld corp in an IPO 4%, 2%, 1%
Radio and broadcast franchise with gross receipts 3%
The “proportion” is computed as follows: not more than 10,000,000
Gas and water utilities 2%
Shares sold / Total shares outstanding after IPO Life insurance premiums 2%
Foreign insurance premiums collected thru agent 4%
The tax is imposed only for IPOs of closely-held corporations, which are corporations where at Premiums for foreign insurance directly from 5%
least 50% of the value of the outstanding capital stock is held by 20 individuals or less. insurer
Overseas communications 10%
Illustration
There are currently 100,000 shares. The corporation conducted an IPO issuing another 40,000
shares at P5 per share.

40,000
=
100,000 + 40,000
40,000
28.57% =
140,000

Shares sold 40,000

Multiply: selling price 5
Total 200,000
OPT rate 2%
OPT 4,000

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