Chapter 1— Introduction to Consumption Taxes CHAPTER 1 INTRODUCTION TO CONSUMPTION TAXES Chapter Overview and Objectives Business tax is a form of consumption tax, An understanding of consumption tax is essential to your understanding and appreciation of NOAPYN business taxes. This chapter provides an overview of consumption tax. After this chapter, readers are expected to comprehend: 1. ‘The concept of a consumption tax ‘Types of consumption and consumption taxes The destination principle The nature of the VAT on importation The nature and types of business tax The characteristics of the VAT on sales ‘The characteristics of percentage tax ‘THE CONCEPT OF CONSUMPTION AND CONSUMPTION TAX Consumption refers to the acquisition or utilization of goods or'services by: -any-person. The utilization of goods or services may be through purchase, exchange or. other means. This utilization. is subject to a tax called ‘consumption tax? Consumption is levied without regard to the purpose of the purchaser or consumer whether it is for business, personal or charity use. Rationale of Consumption Tax 1. 2. 3. Consumption tax promotes savings formation. Savings formation : Rationalization of the Benefit Received Theory Wealth redistribution to society Income is normally destined toward consumption. Income less consumption is savings. Savings is a capital that is useful in funding projects crucial to economic activities that could spur further economic development. A tax on consumption promotes savings formation by limiting the level of consumption. sae Consumption tax rationalizes the Benefit Received Theory. ‘The Benefit Received Theory proposes that those who receive more benefit from the government should pay more taxes, It is undeniable that, in one way or another, every resident or citizen, whether rich or poor, benefits 1 CamScannerChapter 1 - Introduction to Consumption Taxes i il truism in’ taxaty ublic services. Thus, the legal on early a aunt hepa the government is conclusively presumed, So how could the government tax everybody? prey baiee rich o* Poor, services as normal part of life. Ths is true even if they dopate at oes At tax on consumption will effectively render everybod taxable ‘Therefore, consumption tax is a practical rationalization of the Benefit Received Theory in taxation. ai il ciety. Ce ition tax helps redistribute wealth to so Itisa basic state policy to redistribute wealth to society so everyone in the State could enjoy the same. On the individual level, there's no question that rich people buy or spend more than poor people. With bigger income and wealth, the rich can afford expensive lifestyles. A tax on consumption will effectively make the rich pay more taxes for the government. In effect, consumption tax supports the redistribution of wealth from the Tich people to the less privileged members of our society. A caveat to consumption tax ‘There is one important caveat to consumption tax however. It should not be levied upon basic necessities such as food, education, health, and shelter or housing. Doing so would be tantamount to killing the goose that lays the Bolden egg. Our current tax system observes this with qualifications, Income tax vs: consumption tax Income tax Consumption tax Nature Tax upon receipt of ‘Tax upon usage of income income or capital ‘Scope/coverage ‘A tax to the capable A tax toall Theoretical basis Ability to pay theory [Benefit received theory” | Note to readers: Your keen appreciation of the fo llowing section is highly critical to your understanding of rules on consu imption taxes in future chapters, CamScannerChapter 1~ Introduction to Consumption Taxes ‘TYPES OF CONSUMPTION Domestic consumption Foreign consumption Seller - Resident sellers Salesor®. Purchase Non-resident BBE oan oi | sellers “Types of consumption _ | x i._Domestic consumption | Resident "Taxable 2. Foreign consumption | Non-resident | Exempt/Bjfectively non-taxable Becaisé taxation is inherently territorial, our goveitiment can only impose tax upon domestic consumption. In observing this, our tax laws adhere to the “Destination principle.” Only goods and services destined. for consumption in-the Philippines are subject to consumption tax while those destined for consumption abroad are not subject to consumption tax. Following the cross-border doctrine, goods that cross the border destined for foreign countries are not charged consumption taxes. Due to this, the government do not impose taxes on exports. The NIRC either exempts exports or subject them to a 0% tax rate. TYPES OF DOMESTIC CONSUMPTION AS TO SOURCE j 4. Domestic sales - purchases from resident sellers 2. Importation pirrchases from abroad by non-residents CONSUMPTION TAX ON DOMESTIC SALES The domestic consumption’ of resident buyers from’ residerit sellers comimonly known as purchase is subject to a consumption tax called a business tax. It is called business tax because the consumption tax is indirectly imposed upon sellers which are businesses. This does not mean, however, that the sellers are the ones being subjected to the tax burden. The object of taxation is the purchase of buyers but owing to the inherent difficulty of collecting tax from numerous buyers compared 3 a ‘CamScannerChapter 1 — Introduction to Consumption Taxes igation to pay the tax upon sel}, lers, the law imposed the obligation to p ae eee: iiaiee ofsellers are just the same purchases of buyers which - the real object of taxation. i i f administrative feasibility This is an. application of the principle of r ‘6 taxation. Due tb this reverse imposition, business tax is well-known as a “indirect tax: CONSUMPTION TAX ON IMPORTATION The domestic consumption of goods’or services from non c commonly known as importation is subject to a consumption tax called the VAT on importation” ‘The VAT is directly levied upon the buyer - importer. The principle of administrative feasibility cannot be applied in this case because seller is non-resident and is out of reach of Philippine’s taxing power. It must be recalled that taxation is territorial; hence, tax obligations, can only be enforced and demanded upon residents - in this case, the buyer. BUSINESS TAX VS. VAT ON IMPORTATION: A DIFFERENTIATION The business tax is imposed only ifthe seller is a business and is based upon the sales of goods or receipts from rendering of services of the seller. That's why this consumption tax came to be known as a “business” tax but itis not actually a tax upon the business because the tax burden is shifted by the business to the buyer who will actually shoulder the tax burden, Business refers to habitual engagement in a commercial activity. It connotes regularity of transaction involving sale of goods or services for a profit. The VAT on importation is imposed upon the total cost of importation regardless of whether or not the non-resident seller is a business. It is therefore a pure form of consumption tax as it does not relatively apply the tax. CamScannerChapter 1 - Introduction to Consumption Taxes: Is the VAT on importation an impasse to administrative feasibility? The answer is no. ‘The government has an in-placed border control. Border control on goods is managed by the Bureau of Customs (BOC). Goods have to be Cleared through the BOC first before they are allowed to enter the Philippines. With this in-placed control mechanism, the VAT on iniportation is conveniently collectible through the BOC. Thus, the law tasked the BOC to collect the tax in behalf of the BIR. Business tax rules on domestic sales othe Seller t= [The buyer tsi |. SL SUbpect to buses ARTES Business Business YES Business Not business TTT STE Ty pg EE Not business) Business? ATT RNG [Not biisitiess "| Not business THT NORE Tee les on ii Th Business Not busines: 4 Busineds Not business rtatic It must be noted that being in business is very essential to business taxation while it is not the case with importation. So long as there is importation of goods or services, the VAT generally applies. TYPES OF CONSUMPTION TAXES 1. Percentage Tax - tax of various rates from 0.60% to 30% 2. Value Added Tax - a consumption tax of 12% 3, Excise Tax —an ad valorem or specific tax, which is imposed in-addition to VAT or percentage tax, only on certain goods or services ‘TYPES OF DOMESTIC CONSUMPTION AS TO TAXABILITY | 1. Exempt consumption ~ “These are consumption of goods..or services that are not subject to consumption taxes. 2. Consumptions specifically subject to percentage tax -~ ‘This includes consumption of services that are not subject to VAT but are imposed witha specific percentage tax. 3. Vatable consumption - ‘This includes all other consumption that are neither exempted nor subject to percentage tax. 5 CamScannerChapter 1 ~ Introduction to Consumption Taxes tion Per Type of Domestic Consumption mpt importation Service specifically Services specifically subject to a.% tax subject to a % tax Vatable importation | Vatable sales or receipt EXEMPT CONSUMPTION Exempt consumptions are neither subject to percentage tax nor value added tax. If they are sourced from abroad, they are exempt from VAT on importation. If sourced from within, they are exempt from business tax. Basis of exemption from consumption tax The goods imported isa | The goods, services or human necessity. property sold is a human necessity, ‘The importation does The seller is not not constitute a engaged in business, domestic consumption. ‘The importation is ‘The sales or receipt is exempted as a tax exempted as a tax incentive to certain incentive to certain importers. sellers, The importation is ‘The sales or receiptis ‘| exempted by treaty, exempted by treaty. Human necessity Certain basic necessities such as natural agricultural or marine food products, agricultural inputs, books, newspapers and magazines, residential properties; and essential services such as residential rentals, educational services of schools; and medical services of hospitals are exempt. Taxation shall not result in killing the goose that lays the golden egg, In principle, these consumables are not taxable, Qut of scope of the consumption tax Note the scope of the following consumption taxes: BeamscannerChapter 1 — Introduction to Consumption Taxes ringing of gi np ay Philippiries Which représents™ i A(lieisales or'receipt ‘cotrrent domestic consumption... '.of persons engaged in business only)« Scope of VAT on importation ‘The VAT on importation applies to current purchase or acquisition of goods or services by a resident person from non-resident persons. Importation which do not reflect current acquisition of goods or services are therefore exempt. ‘An example is when a non-resident person imports to the Philippines his personal, household and professional instruments or effects. This is not a domestic consumption because he is not acquiring these goods, They are already his even before he brought :(imported) the goods into the Philippines. It is therefore exempt from VAT on importation. ‘Scope of Business Taxes Only sales-or receipts of persons engaged in business is subject to business tax. Hence, if the seller of goods or services is not a business, there is no business tax. — Tax incentives Certain importations are not subjected to the VAT on importation for some reasons. Example is the exemption on the importation of vessels or aircraft in an effort of the government to assist.or improve domestic air or sea transport or assist tourism in the Philippines. Certain institutions:are not subjected to business taxes for some reasons. Example is the exemption of cooperatives in a bid for the government to promote cooperative undertaking as it is instrumental in economic developments benefiting most rural poor. | ‘International comity : Importation or sales of goods or services that are agreed to be exempted in an international agreement to which the Philippine government is a signatory are exempt from the VAT on importation and business tax, respectively. a oe SERVICES SPECIFICALLY SUBJECT TO PERCENTAGE TAX Services. specifically subject to percentage tax are taxable consumption of services but subject only to a specific percentage tax rate set by the NIRC. Consumption of these services are not subject to VAT. 7 GB camscannerChapter 1 - Introduction to Consumption Taxes IRTATION OR SALES Moker Paton or sales of either goods orjservices that exempted or specifically imposed a percentage tax is vatable. Readers are highly advised to carefully understand the following structures of consumption tax. are not Oh teak ‘| Yo RANE IS Import of services ‘The import of service is either: - ae Exempt * by Subject to Percentage tax ©. Subject to final withholding VAT The import of services by certain VAT-exempt person is exempt from VAT. Currently, there is only one import of service that is subject to a percentage tax. The import of other services Is..subject, to VAT called the “final withholding VAT." The VAT ts computed 4s 12% of the contract price of the Services and is paid to the BIR, Import of goods ‘The import of goods is either: a. Exempt _ b. Subject to VAT on importation If the import of goods is not exempted, the importation is subject to VAT on importation. The VAT on importation is computed as 12% of the landed cost ‘ of the goodsand is paid to the BOC. CamScannerChapter 1 — Introduction to Consumption Taxes Sales of services The receipt from the sale of services Is either: a. Exempt b. Specifically subject to a percentage tax. c. Vatable Sales of goods. The sales from the sale of goods is either: a. Exempt b. Vatable Vatable sales or receipts.are subject to 12% VAT if the taxpayer is a VAT taxpayer and to a 3% general percentage tax if the taxpayer'isa non-VAT taxpayer. ‘To sum up, readers must note the following: /atable sales or receipts VAT on Importation vs, VAT on Sales in Business Tax ‘The VAT on importation is directly computed on the landed costs or total purchase costs of importation without any deduction or tax credit. ‘The VAT imposed on sales or receipt in business taxation is unique as it is theoretically imposed on the value added - the amount of mark-up imposed by sellers on their purchase costs. The VAT on sales or receipt follows a tax credit method wherein a VAT of 12% is imposed on sales and is reduced by VAT paid by the business on its purchases. The tax due is computed as: Output VAT (12% of sales or receipts) P mete Less: Input VAT (12% VAT paid on purchases) XXX VAT due P___aaxox Input VAT is claimed as tax credit against output VAT when due or paid not when goods are sold. The VAT does not require a perfect matching approach; hence, it is not imposed on the gross profit ‘This feature of the VAT on sales or receipts is unique compared to percentage taxes which is merely computed as a fixed percentage of sales or receipts. 9 QB camscannerChapter 1 = Introduction to Consumption Taxes ‘The Excise Tax Excise tax is imposed on the consumption of ‘commodities such as: a. sin products such as alcohol and cigarettes b. non-essential commodities, such as automobiles and jewelry c. non-essential services, such as cosmetic surgery d. products which are environmentally degrading in their production or consumption, such petroleum and minerals Excise tax is an additional imposition to VAT or percentage tax. Unlike business taxes such as percentage taxes and VAT on sales or receipts which are levied at the point of sales, excise tax levied at the point of production or. importation. The excse tax on exisable goods is normally imposed before the goods are sold by domestic producers or upon their importation by importers. 10 CamScannerChapter 1—Introduction to Consumption Taxes CHAPTER 1; SELF-TEST EXERCISES Discussion Questions What is consumption? Compare consumption tax to income tax. What are the types of consumption? Which type pays tax? Discuss the nature of business tax. Enumerate and describe the nature of each type of business tax. Compare the VAT on importation to the business tax. Discuss the characteristics of the VAT on sales, Compare the direct method to the tax credit method in VAT computation. Discuss the characteristics of the percentage tax. 10. Discuss the nature of excise tax. 11, Compare VAT on sales, percentage tax, and excise tax. PeErousuenp ‘True or False 1 AUR CARER ER ; 1. Consumption tax is a tax levied pon businesses.) YU" 1S 2. Apurchase is a form of consumption. 3. Atax on consumption will effectively causes all residents of the state to pay tax. Consumption is the acquisition or utilization of goods and services. Income tax is based on the taxpayers’ capacity to sacrifice for the support of the government. Ci) uhuuld be Genefis rece ved 6. Consumption tax is more consistent with the “ability to pay” theory rather than the “benefit received” theory. A tax on consumption would support savings initiative. Consumption taxes should not apply to basic necessities. Both domestic consumption and: foreign consumption are subject to consumption tax. 91))) «lomed conwmphor } 40, Non-resident sellers are exempt from consumption taxes on their domestic Sales. aye apolar aly on damestiG taumoiion 11. Resident seilers shall pay consumption tax on foreign consumption. F 12, The sale by non-resident persons abroad is subject to Philippine consumption tax. af 3 TONG { 13, ‘The utilization or consumption of goods or services shall be taxable in their country of origin. Jy Of destrantion } 14. The sale by non-resident persons in the Philippines is exempt from consumption tax. \vlnyect |» jor lo the louyer 15, The sale by resident in the Philippines is subject to consumption tax. ae een cauumption. True or False 2 } 4. The consumption tax for purchases of goods or services from foreign sources shall be payable by the buyer. J 2. Business tax is a form of consumption tax. | 3. Consumption tax!s a form of business tax, Consumption fag 6 0 bvader coatept a1 BeanseannerChapter 1 Introduction to Consumption Taxes 4, Business tax is imposed on the sales of sellers which is the Purch; ‘aSeS made by buyers. ES The WAT on importation is payable only by those regularly engaged in ee orbusiness, P/s'o!¢ yy ol loo im Jr : | 6. Business taxes are paid by sellers while the VAT on importation is paig y the buyers, 7 7. The statutory taxpayer and the economic taxpayer are the same with the ~ _ VATonimportation, 8. Business taxes are usually included in the price of goods and services of; ‘the seller but are remitted by the seller to the government. 9. In business taxes, the statutory taxpayer is not the economic taxpayer, 10. The sales or importation of goods is hot subject to specific percentage tax, 11, When the impact and incidence of taxation rests upon different persons, the taxis an indirect tax, 12, Domestic pay consumption tax to domestic sellers. 13, Importers pay Consumption tax to non-resident sellers, 14. Domestic sellers Pay consumption tax to the government. “| 15. Exporters Pay consumption tax to the government. aaa Multiple Choice - Theory: Part i 1. Which type of consumption a). Domestic consumption b. Foreign consumption eq 95 Both domestic and foreign consumption 4. "Neither domestic nor foreign consumption will pay consumption tax? 2. Which is a tax upon the usage of income? a Savings tax (@Consumption tax b. Investment tax 4. Business tax 3. Which is subject to the VAT on importation? a. . Foreign consumption from resident sellers be Foreign consumption from foreign sellers ¢ Domestic consumption from resident sellers ‘d.) Domestic consumption from forelgn sellers 4. Which is subject to business tax? a. Foreign consumption from resident sellers b, Foreign consumption from foreign sellers ‘c) Domestic consumption from resident sellers d. Domestic consumption from foreign sellers 5. Which isan incorrect statement regarding consumption taxes? ‘a. ) They are always indirect in nature. by They effectively tax everyone in the state. 2 CamScannerChapter 1 ~ Introduction to Consumption Taxes They apply only when the goods or services are destined for consumption within the Philippines. d. Consumption taxes may encourage savings formation. 6. Which is correct regarding consumption tax? a. Itmay help in the redistribution of wealth to society. b. Itis entirely based upon the consumers’ ability to pay. © _Itapplies to both domestic and foreign consumption. d._Itapplies only when the seller is non-resident. 7. Domestic consumption is taxable when the seller is 2. anon-resident b. aresident. c. either a resident or a non-resident. d. botha resident and a non-resident. 8. Foreign consumption shall pay consumption tax ifthe seller is a resident. b. pay consumption tax if the seller is a non-resident. c not pay consumption tax if the seller is a non-resident. d.) not pay consumption tax regardless of the residency of the seller. 9. The tax on domestic consumption is referred to as a. VATonimportation. c,Either Aor B b. Business tax. d.Neither Anor B 10. The tax on domestic consumption from foreign suppliers is 3.) VATonimportation. c.Either Aor B Business tax. Neither A nor B 11. The tax on domestic consumption from resident suppliers is a. VATonimportation. — c Either AorB b. Business tax. d. Neither Anor B 12. Which is not a business tax? a. VATonimportation c Percentage tax “b. VAT on sales d. Excise tax 13. ‘The percentage tax is generally 3% of sales or receipts . c.3% of mark-up b. 3% of purchases 4.12% of mark-up 14, The VAT asa business taxis a, 12% of sales or receipts (€. 12% of mark-up b. 12% of purchases ‘3% of mark-up 13 QB camscannerChapter 1— Introduction to Consumption Taxes Ton it ition is, = o : awetedel c.12% of mark-up \ b,. 12% of purchases 3% of mark-up 16. Which form of consumption is tax-free? a. Sales toa resident bj, - Sales to-a non-resident. c. Importation by an importer engaged in business d. Importation by an importer not engaged in business 17. As to incidence of tax, the VAT on importation is a form of a. Direct tax c. Ad valorem tax b. Indirect tax 4. Specific tax 18. Which of these import consurnptions is tax-free? a, Importation from a seller not engaged in trade or business b. Importation from a seller engaged in trade or business Both AandB 4.) Neither Anor B 19. Which importation is subject ta the VAT on importation? a, Importation by a person engaged in business b. Importation by a person not engaged in business ¢. BothAorB d. Neither A nor B 20. Who is the statutory taxpayer to the VAT on importation? a. Foreign seller c)Both A and B (b.) Domestic buyer d. None of these Multiple Choice Theory: Part2 1, Generally, the tax basis of biisiness tax Is a.) sales or receipts Either Aor B b. purchase cost d. Both Aand B 2. Whois the statutory taxpayer of business taxes? (a) The seller who must be erigaged in trade or business b, The seller, whether or not engaged in trade or business ¢ The buyer who must be engaged in trade or business 4, The buyer, whether or not engaged in trade or business 3. The economic taxpayers of consumption taxes are Sellers who are engaged in trade or business Sellers, whether or not engaged in trade or business Buyers who are engaged in trade or business Buyers, whether or not engaged in trade or business 14 apse ‘CamScannerChapter 1 - Introduction to Consumption Taxes 4, What is the method used to determine the VAT due and payable? a. Direct method c.Tax credit method b. Indirect method d. Withholding method: 5, Which statement is conceptually incorrect? a. The buyer pays the consumption tax on his/her purchase to the seller b. The buyer pays the consumption tax to the government © The seller pays the consumption tax to the government 4. Theseller collects consumption tax for the government 6. Which is correct? a. The sales to foreigners must include a business tax. 'b) The sales to residents must include a business tax. ©. The purchase from abroad must include a business ‘tax. d. Allofthese 7. The deduction from Output VAT is called a. Percentage tax Anput VAT. b. VATdueand payable d.VAT on importation 8. Which isa pure form ofa sales tax? a.) Percentage tax c. Both Aand B B. Value Added Tax d. Neither A nor B 9, Statement 1: A business which pays VAT normally does not pay percentag, tax. Statement 2: A business which pays percentage tax also pays VAT. Which statementis corrett? [a) Statement 1 . Both statements b. Statement 2 d. Neither statement 10. Which of the following business. taxes applies only for domest consumption? a, VAT onsales cc, Excise tax b. Percentage tax (@)All of these 11. Excise taxis paid by a, Sellers b. Buyers ‘c.) Importers or manufacturers Seller or buyer depending on who agreed to pay the excise tax 12. Export sale is (select the incorrect one) a. Exempt from percentage tax {b) Exempt from VAT (J CamScannerChapter 1 - Introduction to Consumption Taxes c.Bxempt from excise tax d. Allofthese cher with VAT or percenta, : Excise tax is always paid toget! ae 13 ment 2 Bee xis pald at the point of sale. Statement: statements false? _ ee SuaneteL (©Both statements b. Statement 2 d: Neither statement 14. Which is imposed with a tax of zero percent (0%)? a. Allexport sales 'b.) Export sales of VAT-registered taxpayers © Import sales of VAT-registered taxpayers d. Export sales of non-VAT registered taxpayers only 15. Which is not subject to excise tax? a. Sin products . b, Non-essential commodities .) Food products d. Mineral products 16. The tax basis of consumption tax on foreign purchase is a.” sales or receipts c.Bither A or B b.) purchase costs 4. Both A and B 17. The consumption tax on domestic purchases is imposed upon the ” ‘sales or receipts c. Either A or B {purchase cost 4:Both A and B 18. Technically, the excise tax on the manufacture of certain articles is payable only when the article is intended for a) Domestic consumption : c. Both Aand B b.. Foreign consumption —d. Neither A nor B 19. Which is correct with the VAT on importation? a. Payable only when the importer is engaged in business b. Payable only when the foreign seller is engaged in business (c.) Payable regardless of the purpose of the importation 4. Payable only when the resident seller is not engaged in business 20, The VAT on domestic sales is an example of a. adirect tax. ca regulatory tax, b. an indirect tax. d.a specific tax, 16 CamScannerChapter 1 - Introduction to Consumption Taxes Multiple Choice -Problem Part 1 1. Free Company, a resident business, renders services to Mr. Eriwin, 2 resident person who is not engaged in business. Identify the statutory taxpayer and the type of consumption tax. “a. Free Company ~ Business tax b. Mr. Erlwin - VAT on importation Mr. Erlwin - Business tax d. Free Company - VAT on importation 2. Baliwag Company, a non-resident business, purchased P200,000 from Cauayan Company, a resident business. Which will pay the consumption tax on this transaction? a CauayanCompany Both Aand B b. BaliwagCompany * d. Neither Anor B 3. Heidenberg Corporation, a resident business, purchased P 100,000 goods from Kiwi Company, a non-resident business. Identify the statutory taxpayer and the type of consumption tax. a. Heidenberg Company ~ Business tax b: Kiwi Company - business tax Heidenberg Company - VAT on importation d._ Kiwi Company - VAT on importation 4. Mr, Cedric, an employee, sold his residential lot to Mrs. Corneto, a real property dealer. Who is subject to consumption tax with respect to this transaction? a Mr.Cedric cAandB b. Mrs. Corneto Neither A nor B 5. Mr. Porma made a casual sale involving a car to Mrs. Tutyal, a resident buyer. Mr. Porma is not a car dealer. Who is subject to consumption tax? a” Mr. Porma ¢. Both Mr. Porma and Mrs. Tutyal b. Mrs. Tutyal d, Neither Mr. Porma nor Mrs. Tutyal 6. Mr. Llama, an employee, imported a pair of shoes from Hongkong. Which consumption tax is he liable to pay? a. Business tax Both b. VATonimportation — d. None 7. Kapederasyon, a charitable non-profit corporation, imports various office supplies from XG Manufacturing Industries in China, Which is correct? ‘Kapederasyon is exempt from VAT on importation. Kapederasyon {s subject to VAT on importation. XG Manufacturing Industries is subject to business tax. XG Manufacturing Industries shall pay the VAT on the importation. an P 7 CamScannerChapter 1 - Introduction to Consumption Taxes 8. Mr. Cavite produces an excisable article for sale in the Philplne market, Which is incorrect with respect to Mr. Cavite's business taxation’ a. Mr. Cavite is subject to either VAT or percentage tax b. Mr. Cavite pays excise tax in addition to VAT or percentage tax ¢. Mr. Cavite pays excise tax in addition to VAT and percentage tax d. Mr. Cavite will pay excise tax without regard to whether he is a VAT or non-VAT taxpayer. 9. A person engaged in business is subject to 3% business tax. He has inventories of goods in his possession costing P77,600 which he intends to sell to earn a mark-up of 25% of cost net of the 3%. business tax. He s! invoice the sale of the P77,600 goods at <*)| 49) ¥ At! = [7.409 a, P100,000 c.P.97,000 4 b. P103,000 d,P 110,000= 10. A business wants to make a P10,000 profit from the sale of an inventory costing P30,000. The business is subject to 3% percentage tax. At what amount shall the business invoice the sale? a, P 41,237 c.P.40,000 b. P41,200 d, P 38,800 } 000 / 11. A person who imports goods or properties will more likely pay a. 23% percentage taxon the importation b,) @12% VAT on the importation either 3% or 12% tax on the importation 4. no consumption tax 12. A person who is not regularly engaged in trade or business made a casual Sale of a property for P100,000. What will be the invoice price of the sale? a.) P100,000 ¢.P112,000 b. P103,000 d. Either B or C 13, Alison is regularly engaged in the sales of goods, He will pay a, Valueadded tax only, (c,Either A or B ‘ b. Percentage tax only. “d. Neither A nor B 14. Mr. Ventura is subject to 3% percentage tax. He made a total collection of 206,000 during a month and paid P103,000 in purchases. Compute his percentage tax. a PO (P6180 Qou.000 x 3). = o b. P3,000 ‘eoizet0 si 15, A business taxpayer purchased goods worth P120,000 from Non-residents and sold goods worth P140,000 for P180,000, What Is the concept of “value added” for VAT purposes? a. P200,000 &P 80,000 120, gov = 12 b. P140,000 60,000 , > G0,00 18 £9 CamScannerChapter 1 = Introduction to Consumption Taxes 16, Inthe immediately preceding problem, what is the basis of percentage tax? a, 200,000 ¢,P120,000 b, P140,000 d,P180,000 ‘Assuming the same data in the above problem, what is the basis of the VAT on Importation? a. P200,000 © P120,000 sv ose act b. P140,000 d. P-80,000 18. Mr. Coroneti imported P300,000 equipment for business use and a P1,200,000 car for personal use. What is the amount subject to the VAT on importation? a PO P 1,200,000 b. P300,000 4,P 1,500,000 © 2m 4 yook< 15M, Multiple Chotce ~ Problem Part 2 Basic Case 1 | 1. Abusiness taxpayer had the following purchases and receipts: Import of goods or services P 190,000 Domestic purchase of goods or services 100,000 | Domestic sales of goods and services 150,000 Export sales of goods or services 50,000 Compute the total amount subject to consumption tax to the business. | a, P500,000 c.P350,000 %) b. 400,000 @.P340,000 2. in the immediately preceding problem, determine the amount subject to consumption tax ifthe taxpayer is not engaged in business a. 490,000 c. P200,000 b. 390,000 ( 4,P 190,000 Basic case 2 3. A VAT-registered taxpayer recorded the following sales and purchases, exclusive of VAT, during the month: Sales P 300,000 ” Purchases 200,000 ; What would be the output VAT? a, P48,000 CP24000 3. 9 (b,) P36,000 4.Piz,000 ~ 4, Whatis the input VAT? a. P48,000 24,000... aS b. P36,000 ‘apiz,o00 9 ¢ 19 CamScannerChapter 1- Introduction to Consumption Taxes * enn. ATpayable? 12,000 > «12,005 b. P24,000 4.P0. 6. Assuming the taxpayer is a non-VAT taxpayer paying 3% percentage tay, the percentage tax shall be a. P12,000 c.P 6,000 , 4,000, b> P9,000 d.P-3,000 Basic Case 3 A business taxpayer recorded the following transactions during the month: Philipines. Abroad =Total Sales 350,000. P 200,000 P550,000 Purchases 150.000 _100.000 250,000 Total 500,000 . P300,000 B800,000 Assuming the taxpayer is a VAT-registered taxpayer 7. Compute the output VAT. a PO ¢.P36,000 as) oo b. P24,000 ‘dP 42,000 , 8. Compute the VAT on importation. . a PO ©P18000 199,000 ¥ lay * |2, 000 B, P.12,000 4d. P32,000 2 Assuming the taxpayer is a non:VAT taxpayer 9. Compute the percentage tax. b P8000 fiir t0s00 Bo, 000 ¥3 k= Joye, 10, Compute the VAT on importation. b. £3000 \eri200 foo,vov x12, = 12,000; Basic Case 4 Sindangan Company, a VAT-registered taxpayer, purchased P400,000 worth of goods and sold the same for P800,000. 11. Assuming that the business operation of Sindangan Company is limited to Philippine residents, what is the total business tax it will report on its sales? a? P-96,000 ¢.P24,000 b. P48,000 APO» 200,000 KZ") = Fo 00, 12, Assuming that the purchases were imports and the’ sales: were exports, compute respectively the business tax and total consumption tax. a. P-96,000;P144,000 cP 24,000; P72,000 for: 144,000 (4,P 0; P48,000 ES tow +0. foreign ORWME py rete fore) FA tome if 20 geo 2 T-Geavomp hon fan ? 0 19, 0% _— GB canscamerChapter 2 — Value Added Tax on Importation CHAPTER 2 VALUE ADDED TAX ON IMPORTATION Chapter Overview and Objectives: After this chapter, readers are expected to comprehen . The concept of importation . The types of consumption tax on importation . The list of importations which are exempt consumption The concept of in “original state” for agricultural or marine food products . The concept of qualified exemption The scope and applicability of the VAT on importation . The concept of landed cost and Import VAT computation . The concept of technical importation ._The treatment of the VAT on importation eeUNe ~penan IMPORTATION | Importation refers to the purchase of goods or services" by Philippine residents from non-resident sellers. ‘Types of Consumption Tax on Importation 1. VATon importation’- for the import of goods 2. Final withholding VAT - for the purchase of services from non-residents Comparison between the Consumption Tax on Importation imy al wi Object consumption Goods Services [Imposed upon Importers /buyers | Foreign service providers Statutory taxpayer Importers /buyers | Resident purchaser of the service* Nature Direct consumption tax | _Indirect business tax Tax basis Landed cost Contract price Collecting agency BOC BIR ‘Timing of payment Before withdrawal of | After the month of payment goods “Individuals engaged in business and corporations The VAT on importation is payable to the Bureau of Custom and is paid prior to the withdrawal of the goods from the Customs warehouse. The final 24 CamScannerChapter 2- Value ‘Added Tax on Importation withholding VAT is 12% of the contract price for services rendered by non- residents, It is remitted to the BIR. IMPORT OF GOODS ‘The importation of goods is either: 1, Exempt importation 2, Vatable importation EXEMPT IMPORTATION ‘ A. Importation of exempt goods Certain pots cinerea asic necessities are not subject to the VAT on importation, such as: 1. Agricultural and marine food products in their original state 2. Fertilizers, seeds, seedlings and.fingerlings, fish, prawn, livestock and poultry feeds, including ingredients used in the manufacture of finished feeds 3, Books «ind any newspaper, magazine, review, or bulletin which appear at regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of paid advertisements Passengers or cargo vessels and aircrafts, including engine, equipment and spare parts thereof for domestic: or international transport operations B. Importation by VAT-exempt persons . 1, International shipping or air transport operators on their import of fuel, goods and supplies : Cooperatives 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 3. PEZA locators on their import of goods or services 2. C. Quasi-importation 1. Personal and household effects belonging to residents of: the Philippines returning from abroad and non-resident citizens coming to resettle in the Philippines Professional instruments and implements, wearing apparel, domestic animals, and personal household effects belonging to persons coming to settle in the Philippines, for their own use and not for sale, barter or exchange S Importation which are exempt under special laws and international agreement ‘i 22. CamScannerChapter 2 — Value Added Tax on Importation IMPORTATION OF EXEMPT GOODS The importation of the following exempt goods is not subject to VAT: A. Basic human food and related goods 1. Agricultural or marine food products in original state 2. Livestock and poultry of a kind generally used as, or yielding or producing foods for human consumption 3. Breeding stock and genetic materials therefore B. Books, newspapers and magazines C Passengers or cargo vessels.and aircrafts, including engine, equipment and spare parts BASIC HUMAN FOOD AND RELATED PRODUCTS Agricultural or marine food products in original state Import exemption is limited to agricultural or marine food products in their original state or those which undergone simple processing. Good that underwent advanced processing are vatable. Examples of exempt agricultural or marine food products in original state: Grapes, apples, oranges and other fruits Vegetables, tea, ginseng Rice, com, coffee beans and other edible farm products Marine foods such as fish and crustaceans Poultry and livestock Milk, eggs, and meat for human consumption AAPWNE Livestock includes cow, bulls, calves, pigs, sheep, goats and rabbits. Poultry shall include fowls, ducks, geese and turkey. Marine food shall include fish and crustaceans such as, but not limited to, eels, trout, lobster, shrimps, prawns, oysters, mussels and clams (RR16-2005). To be considered in “original state”, the goods must be in their raw form. However, those that underwent simple processing are also exempt. Meaning of simple processing. The term simple processing includes: a. Acts of preparation for the market b. Acts of preservation, or © Acts of packaging including advanced technological means of packaging Examples of simple acts of preparation: a. Boiling Roasting b. Broiling e. Stripping . Husking f. Grinding . 23 CB camscannerChapter 2 - Value Added Tax on Importation Examples of simple acts of preservation‘. a. Freezing c. Smoking. b. Drying Salting Packaging is not processing as it does not alter the nature of the products, |t merely involves putting the product in'a'medium. that makes it convenient for handling, storage or marketing, ‘Thus, goods may’ still be iii their original’state even if they are packaged using advanced technological means, such as: a. Shrink wrapping in plastics b. Vacuum packing ¢. Tetra-packing d. . Other similar packaging methods Hence, the following agricultural ot marine food products which underwent Processing are also exempt: Twin cmapleaa op TES aR “preservation: | With acts of packaging. Husked rice Sundried fruits ‘Tetta-packed fresh fruit juice Cor grits Salted meat Shrink wrapped meat Raw cane sugar ‘Smoked fish- Roasted beans Dried fish Ordinary salt Frozen meat or fish Ground meat |Copra Boiled eggs Lechon. Boiled eggs and lechon ‘Though bolled eggs and lechon are said to be cooked in thelr ordinary sense, the cooking methods ‘ised (Le. boiling 6r'Neating) are simple processing, Hence boiled eggs and lechon are exempt * Raw Sugar means the natural sugar extracted from. su mechanical process by pressing the julce; boiled to crystalie; filtered using centrifuge to separate these crystals, and dried, resulting to crystalized brown sugar with sucrose content by weight in dry state corresponding to a polarimeter readiig of less than 99.50 degrees and or whose color Is 800 ICU or less, Raw sugar includes miiscobado. (RR&- 2015, May 22, 2015) igarcane through simple The importation of the aforementioned spicata or marine food products in their original state isjexempt from VA’ 24Chapter 2 — Value Added Tax on Importation Processed agricultural or marine food products Processed agricultural or marine food products pertain to those which have undergone changes in their chemical compositions or have undergone complex processing or treatment or are utilizing advanced technologies in their processing, Examples of vatable processed agricultural or marine food products: Refined sugar. Canned sardines. Flour” Wine or vinegar Butter, Marinated milk fish Vegetable or coconut oil | Soy The importation of processed products and those considered not in their original state shall be subject to VAT on importation. Use or purpose dictates vatability Flowers intended as love gifts are vatable since they are not food but cauliflower, of course, is an exempt human food, Cockfighting chickens are vatable since they are primarily intended for human amusement. They are only food when they lose. However, chicken produced for meat or eggs are VAT-exempt human foods. Farm or fishery inputs Marine or agricultural inputs intended for the production of marine or agricultural food products which are ultimately intended for human consumption are also VAT-exempt. ! ‘The importation of farm or fishery inputs such as seeds, seedlirigs, breeding stocks and genetic materials are exempt. Likewise, foods of these inputs such as fertilizers and feeds including ingredients manufacture of finished feeds are also VAT-exempt! Products intended as maintenance of crops, livestock or poultry and supplemental implements of agricultural or inputs such as pesticides, herbicides, animal medicines, fishing equipment, fishing boats, tractors, plows, driers, threshers and harvesters are vatable. Zoo animals, race horse, aquarium fish, fighting cocks and pets are not intended for human consumption; hence, vatable. Feeds of these non-food animals called "specialty feeds” is likewise vatable. Ingredients of feeds for animal food intended for ultimate human consumption is VAT-exempt but ingredients for the processing of human foodisvatable, =~ 25 QB camscannerChapter 2-Value Added Tax on Importation ei imported the following agricultural implements: 0 Urea Fertilizer COO Cargil corn seeds 600,000 Pesticides ve Herbicides , i that exemption is limited to seeds ‘The fertilizer and seeds are exempt Note d ‘5, ee tad fertilizers. Other farming ‘implements such as pesticides ang herbicides are subject to VAT on importation. Rules on VAT taxation of poultry and feeds Sa seivestock = Importation of x : slmportation of feeds for: cee Ne pasiis, eet % Importation offeed:, |.» X : ¥ 7 ingredients for. -. | Note: The importation of ingredients for the processing of foods for human. consumption is vatable because processed human foods are vatable. Examples of vatable non-food agricultural or marine products: a. Logs, wood, bamboo, orchid, and similar forest products b.. Rubber hem, abaca, tobacco, topical herbs, cotton and other non-food crops, ss tr \ i i c. Shells, corals, and other non-food marine prdducts usually used as ornaments d. Race. horses,. fighting cocks, aquarium fish, z00 animals, and other i, xsi animals generally considered as pets ° BOOKS, (NEWSPAPERS, MAGAZINE, REVIEW OR BULLETINS The VAT exemption on the importation of these goods is apparently based “upon - the»necessity’ of: education» and «information. The ’ Philippine constitution requites the state ‘to give priority to. education to foster patriotism and nationalism, accelerate social progress, and promote total human liberation and development. (Se > Are f oat) pment. (See Sec. 17) Article Il, Philippine ‘The Philippine Constitution also recogn I gnizes the vital role of communication and information in nation-building, (See Sec. 24 Ibid.) Conditions for exemption of newspa i: per, magazine review or bulletin: 1, They must appear at regular intervals with fixed prices for subscription. 2. The sale must not be devoted prit d advertisements. principally to the publication of pal 26 GB camseannerChapter 2—Value Added Tax on Importation Note that exemption does not extend to other school. supplies such as chalk, board markers, pens, notebook; pad paper and office supplies. PASSENGER OR CARGO VESSELS AND AIRCRAFTS ‘The VAT exemption covers the import of passenger or cargo vessels and aircrafts, including engine, equipment and spare parts thereof for domestic or international transport operations, ‘The VAT exemption on the import of these items lapsed under RA 9295 but ‘was reinstated by RA 10378 and was codified under the TRAIN law. ‘This incentive for VAT-exemption is granted by law in an effort to help the modernization of the shipping, transport and tourism industry. To qualify for exemption, the importation must be subject to the requirements on restriction on vessel importation and mandatory vessel retirement program of the Marina Industry Authority (MARINA): - Passenger or cargo vessels - 15 years - Tankers - 10 years - High speed passenger crafts - 5 years Mlustration Total Transport Group has land, sea and air transport operations. To beef up its operations, it imported 5 units of Daewoo bus, 1 unit of aircraft and 2 cruise ships. : The importation of the airplane and ships are exempt but the importation of the buses for land transport is subject to VAT. Note to readers: In mastering the consumption taxes, legal sensitivities must be considered. It is an established principle of law, that items not included are deemed excluded. Exempt goods must be strictly construed to cover only to those listed by the law as discussed herein. Other basic necessities such as medicines, clothing, processed foods, kitchen supplies, school supplies, and the like are not exempt. A familiarization of the list is imperative. VAT-exempt persons are not subject to VAT on importation. The extent of their exemption varies per exempt persons. When an exempt importer subsequently sells his exempt importation to a non-exempt person, the non-exempt buyer shall be subject to VAT on 27 CamScanner¢ Added Tax on Importation Jien on th tion shall constitute @ . ormrespective of the POSSESSOr of saiq Chapter 2 - Valu +h imps importation, The tax due on sucl eno, ‘superior to all charges or liens, goods (Sec. 4107-1(c), RR16-2005) jer the NIRC: VAT-Exempt Persons und NIC grt operators 1, International shipping or air 2. Agricultural cooperatives 3. Ecozone-locators ternational shipping or air tra the ‘azomnptloa isimited to the importation : et rou ae sures, ys e Although these goods or supplies are physically, (Nc Tit ; Philippines, they are not intended to be cons They will ultimately be ad in international transport: This consumption is a foreign consumption rather than domestic consumption. isa nsport operators Mlustration 1 - Malaysian Ferries is an international shipping carrier. It imported to the Philippines fuel and supplies to be used in its shipping operations, Note that the fuel, goods, or supplies will be consumed in the high seas or in foreign territories outside the country. The importation is not a domestic ‘consumption but a foreign consumption; hence, itis exempt from VAT. Mlustration 2 Pinoy Airline imported jet fuel from Iraq at a total cost of P50,000,000. 40% of the importation is declared for domestic airline operations while 60% is declared for international air transport operations. 60% of the P50,000,000 importation will be consumed in foreign airspaces. This is not far domestic consumption; hence, it ls exempt from VAT. Only the 40% portion which will be used domestically will be subject to the VAT on importation. Illustration 3 Lufta Airline, an international air carrier, imported jet fuel at a total cost of 40,000,000. It subsequently sold P10,000,000 of these to a Feel Air, a domestic air carrier. Lufta Airline is exempt on its importation of the P10,000,000 worth jet fuel. Since Fee Air is not an exempt person and that Jet fuels are vatable goods, Feel Air will be treated as the importer of the P10,000,000 jet fuel and will be subjected to VAT. Lufta Airline is not required to pass the VAT on its Sales of the fuel Agricultural cooperatives The status of agri-coop as VAT-exempt person is limited to importation of direct farm inputs, machineries and equipment, including their spare parts (RA 9337) 28 CamScannerChapter 2—Value Added Tax on Importation Conditions for exemption: 1. The cooperative must be an agricultural cooperative duly registered and in good standing with the Cooperative Development Authority (CDA). 2. The importation involves direct farm inputs, machineries, equipment and their spare parts to be used directly and exclusively in the production or Processing of their produce. Mlustration 1 Abra Farmer's Cooperative imported the following equipment: ‘Tractors and threshers to be used by the cooperative P 2,000,000 Plows and water pumps to be resold to members. 3,000,000 Fertilizers and hybrid seeds to be sold by the cooperative | 1,000,000 Herbicides and pesticides to be used by the cooperative 500,000 Cars for the use of cooperative directors and officers 2,000,000 | ‘The following table summarizes the tax treatment of the importation: ‘Tractors and threshers to be used by the cooperative Exempt Plows and water pumps to be resold to members Vatable Fertilizers and hybrid seeds to be sold by the cooperative | Exempt Herbicides and pesticides to be used by the cooperative Exempt Cars for the use of cooperative directors and officers Vatable Note: 1. The importation of machineries and equipment for the processing or processing needs of the. cooperative is exempt; hence, tractors and threshers are exempt from VAT on importation. ‘ 2, The importation of fertilizers and seeds is exempt to any importer. The importation of herbicides and pesticides which are “direct farm inputs" is exempt to cooperatives, Note that the importation of farmers of herbicides and pesticides is vatable. 3. Although plows and water pumps qualify as machineries, they are not intended for the use of the cooperative; hence, these are also vatable. 4, The cars.are vatable because they are not direct farm inputs, machineries, or equipment. Mlustration 2 Assume that fertilizers and herbicides in the foregoing illustration is subsequently sold by Abra Farmer's Cooperative to Jon Juan, member farmer, Whaat is the tax consequence of the sale? Jon Juan shall be treated as importer and shall be subject to VAT but only to on vatable goods such as the herbicides. Since the fertilizer is a VAT-exempt goods, Jon Juan shall not pay VAT on importation thereon, Mlustration 3 A credit cooperative imported a computer server from abroad at a cost of P1,500,000. This importation is generally subject to VAT on importation since the exemption does not extend to cooperatives which are not engaged in processing or production. 29 CamScannerChapter 2 - Value Added Tax on Importation Illustration 4 dan ozone generator and an ultrafine ore re i ly sub A eel ant. The importation is generally subjece ine for its gold recovery pla ai Tr esse the cooperative isnot an agricultural cope iets ¢ caine farming cooperative, imported ten tractors and 20 sacks of hybrid seeds. Arado Coop subsequently sold four tractors and 5 sacks of hybriq ri seeds to Mr Lac, cooperative member. lipment and. VAT on its importation of farm equi nana is aia eal od seeds to Mr. Laco is not subject to business tax. Mp. Laco shall be considered an importer but Mr, Laco shall be subject to VAT only on the farm equipment but not on the hybrid seeds. 6 Keres imported frozen meat from China: It subsequently sold’all of this to Philippine consumers. The importation of frozen meat, an exempt goods, is an exempt importation for any importer. Hence, the sale by the cooperative to the consumers (ie, final consumption) shall not be subject to VAT, Likewise, the buyers shall not be subject. to VAT on importation, Ecozone-locators . Ecozones are designated places of economic activity for the production of Boods or services for the export market. By legal fiction, econotnic zones are considered foreign countries and are deemed outside Customs territory, Thus, the importation of goods into the economic zones by locators {s exempt not only from VAT on importation but also from customs duties. The exemption from VAT covers any goods, supplies or machineries brought into the ecozones by locators. Technical Importation The rules of VAT on importation aj consumers in a customs territory from Zones (Sec. 4.107-1, RR 16-2005). pply to technical importation by Persons located in Special Economic Customs territory refers to the Portion of the Republic of the Philippines Outside of designated special e conomic zones (Ecozones). (RR2-2005) “Technical importation” refers to the purchase of non-Ecozone Philippine residents from Philippine Ecozone-registered enterprises, By legal fiction, €cozones are considered foreign territories. Hence, the purchase from Economic zones such as but not limited to, Subic-Ecozone, Zambo-Ecozone and Cagayan-Ecozone is subjectto the VAT on importation. 30 QB camscanner