BUSINESS AND TRANSFER TAXATION

BUSINESS TAX
BUSINESS TAX

It is a consumption tax payable by persons engaged in

business. A business is habitual engagement in a
commercial activity involving the sale of goods or services
to customers or clients.
BUSINESS TAX

ESSENTIAL REQUISITES OF A BUSINESS

1. Habitual engagement
 There must be regularity in transactions to construe the presence of business.
Isolated or casual sales are not regular activities; hence, these are presumed not
made in the ordinary course of business. It is normally manifested by registration
as a dealer, a service provider, or a practitioner in a particular trade or profession.
BUSINESS TAX

Application of the regularity rule

The following are not considered business for lack of regularity in their operations:
 Sale by non-dealers
Non-dealers are those who make casual sale of goods or properties. People who
sell properties which they are not regularly engaged in are also considered as non-
dealers.
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 Kanor is a real property dealer. During periods of excess cash

liquidity, he usually purchases shares of stocks of other corporations as
investment. He sells them when cash needs arise.

 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 Kanor is a security dealer, the transaction would be considered made in
the course of business and hence, subject to business tax.
BUSINESS TAX

 Privilege stores
These stores are most commonly known as “tiangges”. Privilege stores are stalls or
outlets not permanently fixed to the ground and 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 tax and income tax.
ILLUSTRATION 1

Mang Andres 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 P150,000
over the weeklong festivities.
 Mang Andres is not considered habitually engaged in business. His
P150,000 sales is not subject to business tax, but subject to income
tax.
ILLUSTRATION 2

Goldi’s Bakeshop, an established business enterprise, also rented a

booth in Baguio to sell its cakes and pastries in the Panagbenga. Goldi
generated P400,000 sales during the event.

 Goldi’s Bakeshop, being an established and regularly operating

business, shall not be considered a privilege store. The P400,000
sales on the event shall be subjected to the usual business tax.
BUSINESS TAX

2. Commercial Activity
 It means 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.
BUSINESS TAX

The following are not businesses under this rule:

 Government agencies and instrumentalities
 Non-profit organizations or associations
 Employment
 Directorship in a corporation
ILLUSTRATION 1

The PRC collected P12M from professional license fees during the
month. It also earned additional P1M from rental income on its vacant
premises.
 The P12M receipt is an income by PRC, a government agency, in
rendering essential government service. This is not a commercial
activity and is exempt from business tax. Leasing, on the other hand,
is a commercial activity departing from the nature of government
service; hence, it is subject to business tax.
ILLUSTRATION 2
Union of Husbands Afraid of Wife (UHAW) is a non-profit social
welfare institution for the assistance of battered husbands. UHAW
received P2M contributions from the public and generated P400,000
from the sales of a shop in its fund-raising drive.
 The receipt of the P2M contribution or donation is not subject to
business tax since it is not commercial in nature. However, the
selling of the gift shop is a commercial activity which is subject to
business tax. The rule applies regardless of the disposition made of
such fund-raising income.
ILLUSTRATION 3

Mr. X, a certified public accountant, practices his profession in the

industry as the Chief Financial Officer of UHAW. During the month,
he received P50,000 compensation plus P10,000 fringe benefits.

 Employment is not a commercial activity as it does not involve sales

of services to clients or customers. Hence, the compensation income
and the fringe benefits are not subject to business tax.
ILLUSTRATION 4

Mr. Agua is an independent director of Aga Corporation receiving

director’s fees, per diems, and allowances.

 Although a director may not be an employee, director’s fees, per

diems and allowances are not derived in an economic or commercial
activity or rendering of services to clients for a fee. Hence, these are
not subject to business tax.
ILLUSTRATION 5

John, a certified public accountant, renders his services to the public

for a fee. Is he subject to business tax?

 The exercise of profession by regularly rendering services to clients

for a fee is considered a business subject to business tax.
ILLUSTRATION 6

Ms. Sarah Babe is an insurance agent. She is paid insurance

commission by insurance companies for every policy she is able to
sell.

 An agency is not a contract of employment, but is a contract for the

provision of services for a commission. Just like other practicing
professionals, agents may render their service to several clients.
Hence, agency is a commercial activity subject to business taxation.
BUSINESS TAX

Other persons considered engaged in business:

 Consultants
 Sales agents or brokers
 Television or movie talents and artists
 Cooking instructors
 Martial art instructors
BUSINESS TAX

TAX BASES OF BUSINESS TAXES

 Sellers of goods or properties-taxable on gross selling price
 Sellers of service or lessors of properties-taxable on gross receipts
BUSINESS TAX

 Gross selling price refers to the total amount of money or its

equivalent which the purchase 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.
BUSINESS TAX

 The term “gross selling price” includes sales made in cash, on

credit and on installment basis. This is analogous to the income
taxation concept of “gross sales” except only on the treatments of
contingent discounts.
BUSINESS TAX

Allowable deductions from gross selling price:

 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.
 Sales returns and allowances for which a proper credit or refund was made during
the month or quarter to the buyer on taxable sales.
ILLUSTRATION 1
A business taxpayer had the following transactions during the quarter:
Cash sales P 400,000
Sales on credit 600,000
Installment sales (P30,000 collected) 100,000
Sales returns and allowances 20,000
Quota discounts 10,000
Purchase of goods,
including P72,000 VAT passed on by sellers 672,000
ILLUSTRATION 1
The gross selling price shall be:
Cash sales P 400,000
Sales on credit 600,000
Installment sales (P30,000 collected) 100,000
Total sales P 1,100,000
Less: Returns and allowances 20,000
Gross selling price P 1,080,000

Note: Quota discounts or rebates are contingent upon future volume purchased by customers and are not
determinable at the date of sale; hence, these are not deductible.
ILLUSTRATION 2
HTC Corporation sold various specialized equipment to a buyer with the following
terms:
List price P 2,000,000
Freight 50,000
Installation fee 20,000
Trade discounts 10%
Cash discounts, 2%/30 net 60 days 36,000
 ILLUSTRATION 2
The gross selling price shall be computed as:
List price P 2,000,000
Less: Trade discounts (10% x P2M) 200,000
Net price P 1,800,000
Freight 50,000
Installation fee 20,000
Gross selling price P 1,870,000
Note: only trade discount is determinable at the date of sale. Cash discounts should not be deducted since these are
contingent upon the buyer paying at an early date in the future.
BUSINESS TAX

Gross receipt refers to the total amount 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 payments 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.
BUSINESS TAX

Constructive receipt
It occurs when the money consideration or its equivalent is placed at
the control of the person who renders the services without restriction
by the payor. This is added as part of gross receipts.
BUSINESS TAX

Examples:
 Deposit in a bank account of the seller made by the buyer in
consideration of services rendered or goods sold
 Issuance by the debtor of a notice to offset any debt or obligation
and acceptance thereof of the seller as payment for services rendered
 Transfer of the amounts retained by the payor to the account of the
contractor
BUSINESS TAX

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 the
gross receipt
BUSINESS TAX

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.
ILLUSTRATION 1
PC Repair Company received the following amounts during a month:
Cash collection from clients P 400,000
Reimbursement for out-of-pocket costs
incurred in servicing clients 50,000
Reimbursement for client expenses paid by PC Repair 80,000
Proceeds of fire insurance 400,000
Receipt of bank loan 500,000
Receipt of agency money to be remitted to a sister company 100,000
ILLUSTRATION 1

The gross receipts shall be:

Cash collection from clients P 400,000
Reimbursement for out-of-pocket costs 50,000
Gross receipt P 450,000
BUSINESS TAX

Note:
1. Out-of-pocket expenses of PC Repair which are reimbursed by the
clients are actually income which redounds to the benefit of PC
Repair. Hence, these are part of gross receipt.
2. Loans and agency money do not redound to the benefit of the
taxpayer. The loan is an obligation and is not income. The agency
money will be paid or remitted to another party. These are not included
in gross receipts.