COLLEGE OF BUSINESS AND ACCOUNTANCY

TOPIC:
✓ INTRODUCTION TO BUSINESS TAXES

LEARNING OBJECTIVES:
At the end of this module, the student should be able to:
✓ Understand the tax rules concerning business taxes and be able to apply the computational
procedures of VAT, OPT and Excise.
✓ Differentiate the three business taxes and their purpose and application.

BIBLICAL VALUES INTEGRATION:

"But he said to me, “My grace is sufficient for you, for my power is made perfect in weakness.” Therefore I
will boast all the more gladly of my weaknesses, so that the power of Christ may rest upon me. For the sake
of Christ, then, I am content with weaknesses, insults, hardships, persecutions, and calamities. For when I
am weak, then I am strong."
-2 Corinthians 12:9-10

INTRODUCTION
Introduction Business Taxes
Business taxes are those imposed upon onerous transfers such as sale, barter, exchange and
importation. It is called as such because without a business pursued in the Philippines (except importation)
by the taxpayer, business taxes cannot be applied.

Unlike an income tax, which is based on the taxpayer's net taxable income, business taxes are
generally based on gross sales or gross receipts. Hence, irrespective of the results of business operations
(income or loss), taxpayers engaged in trade are still liable to pay for business taxes (either vat or
percentage tax, plus excise tax, if applicable).

Business taxes are in addition to income and other taxes paid, unless specifically exempted.

BODY
"In the course of trade or business" means the regular conduct or pursuit of a commercial or an
economic activity, including transactions incidental thereto, by any person, regardless of whether the
person engaged therein is a non-stock, non-profit private organization or government entity (Sec. 105
NIRC; Sect. 4.105-3 of RR 16-2005).

Vat provisions pertain to those persons whose undertakings are inte nded to be pursued on a going
concern basis where the end view is to realize unrestricted amounts of pecuniary gains or profits from
those who may avail of the goods they sell or the services they render (RMC 77 -2008). Therefore, isolated
transactions are generally not considered in the ordinary course of trade or business, hence, not subject
to business tax. However, RR 16-2005 provides that services rendered in the Philippines by non-resident
persons shall be considered as being rendered in the course of trade or business even if the performance
is not regular.

Isolated Transactions
By residents are considered not in the ordinary course of trade or business, thus, not subject to vat.

By nonresidents (on services rendered in the Philippines) are considered in the ordinary course of trade
or business, thus, subject to Final withholding vat.

TYPES of TRANSFER:
1. Gratuitous Transfer (transfer without consideration) — not subject to business tax but subject to
transfer taxes (donor's tax or estate tax).

2. Onerous Transfer (transfer with consideration):

a. In the ordinary course of trade or business including incidental transactions:
Subject to (unless exempt under the law):
➢ Business tax; and
➢ Income

b. Not in the course of trade or business - not subject to business tax but may be subject to income
tax.
TYPES OF BUSINESS TAXES
There are three (3) major business taxes in the Philippines, namely:
1. Value added tax (VAT)
2. Other percentage taxes (OPT) or simply Percentage Tax
3. Excise taxes

As a rule, all sale of goods or services made in the normal course of trade or business are subject to
vat unless exempt under the law (refer to Chapter 8 of this book for vat exempt sales). Nonetheless, if the
sale is exempt from vat, it may be subject to Other Percentage Tax under Sections 116 to 127 of the Tax
Code. Consequently, transactions subjected to vat should no longer be subjected to Percentage Tax.
However, such is not the case with respect to excise taxes.

VALUE-ADDED TAX
VAT is a tax on the value added by every seller to the purchase price or cost in the sale or lease of
goods, property or services in the ordinary course of trade or business as well as on importation of goods
into the Philippines, whether for personal or business use. It is a tax on consumption levied on the sale,
barter, exchange or lease of goods or properties and services in the Philippines (cross border doctrine) and
on importation of goods into the Philippines levied at each stage of production and distribution p rocess
(RR 4-2007). "Cross border doctrine" means that no VAT shall be imposed to form part of the cost of goods
destined for consumption outside the territorial border of the Philippine taxing authority (ATLAS
Consolidated Mining vs. CIR, June 8, 2007).

KINDS OF VAT
1. VAT on sale of goods or properties
2. Vat on importation of goods
3. Vat on sale of services and use or lease of properties

Persons Liable
Sale in the Ordinary Course:
Section 4.105-1 of RR 16-2005 provides that any person who, in the course of his trade or business,
sells, barters, exchanges or leases goods or properties, or renders services, and any person who imports
goods, shall be liable to VAT imposed in Sections 106 to 108 of the Tax Code.

Importation:
In the case of importation of taxable goods, the importer, whether an individual or corporation and
whether or not made in the course of his trade or business, shall be liable to VAT imposed in Sec. 107 of
the Tax Code.

TRANSFER BY A TAX-EXEMPT ENTITY TO NONE-TAX EXEMPT ENTITY

Section 107(B) of the Tax Code provides that in the case of tax free importation of goods into the
Philippines by persons, entities, or agencies exempt from tax where such goods are subseq uently sold
transferred or exchanged in the Philippines to non-exempt persons 0; entities, the purchasers, transferees
or recipients shall be considered the importers thereof, who shall be liable for any internal revenue tax on
such importation.
MEANING OF THE TERM “GOODS OR PROPERTIES”

Section 106(A)(1) of the Tax Code defined the term "goods or properties" as all tangible and
intangible objects which are capable of pecuniary estimation and shall include, among others:

1. Real properties held primarily for sale to customers or held for lease in the ordinary course of trade
or business
2. The right or the privilege to use patent, copyright, design or model, plan, secret formula or process,
goodwill, trademark, trade brand or other like property or right
3. The right or the privilege to use any industrial commercial or scientific equipment
4. The right or the privilege to use motion picture films, films, tapes and discs; and
5. Radio, television, satellite transmission and cable television time.
SALE OF SERVICES [Sec. 108(A)]
Sale of services means performance of all kind of services in the Philippines for others for a fee,
remuneration or consideration, whether in kind or in cash. Vat on sale of service is a tax on payments for
services rendered in the exercise of profession or calling. It is an indirect tax and, thus, may be passed on
to the client or customer. It is a tax on service and, as such, it accrues at the time the service fee is collected
(regardless of timing of collection). Such payments may be collected in advance or after the service is
rendered (Refer to Chapter 8 for additional discussions).

SALE OF REAL PROPERTIES

Sale of real properties shall refer to real properties held primarily for sale to customers or held for
lease in the ordinary course of trade or business of the seller. In the case of sale of real properties on the
installment plan, the real estate dealer shall be subject to VAT on the constructively received installment
payments, including interest and penalties, actually and/o r by the seller (Section 104.106-3, RR 16-2005).

Characteristics of Vat
1. It is an indirect tax where tax shifting is always presumed
The value added tax is an indirect tax and the amount may be shifted or passed on to the buyer,
transferee or lessee of the goods, properties or services (Section 105 tax code; Section 4, RR 16 -2005). The
seller is the one statutorily liable to pay for the payment of the tax but the amount of the tax may be shifted
or passed on the buyer or transferee or lessee of the goods, properties or services. This rule shall likewise
apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of
RA 9337 (Vat Reform Act). However, in the case of importation, the importer is the liable for the vat (RR
16-2005).

The "burden of the tax" is borne by the final consumers although the producers and suppliers of
these goods and services are the ones who have to file their VAT returns to the Bureau of Internal Revenue
(BIR). Hence, what is transferred or shifted to the consumers is not the "liability to pay the tax" but the tax
burden.
2. It is consumption-based.
Vat is a tax on consumption levied on the sale, barter, exchange or lease of goods or properties and
services in the Philippines and on importation of goods into the Philippines (RR 16 -2005). It is the end user
of consumer goods or services which ultimately shoulders the tax as a liability therefrom is passed on to
the end users by the providers of these goods or services. The vat, thus, forms a substantial portion of
consumer expenditures.

3. It is imposed on the value-added in each stage of production and distribution process.

The vat system assures fiscal adequacy through the collection of taxes on every level of
consumption. Each business in the supply chain takes part in the process of controlling and collecting the
tax. To illustrate vat on each stage of production, refer to the illustration in the next page.
4. It is a credit-invoice method value-added tax
Vat payable or the amount of vat to be remitted by taxpayers to the Bureau of Internal Revenue
(BIR) is computed by deducting the input vat from the output vat. The sellers of goods or services passed-
on to the end users the liability to pay the tax who in turn may credit their vat liability from the vat
payments they received from the final consumer. This is because vat is a consumption tax levied on sales
to be borne by consumers with sellers acting simply as tax collectors.

In the Philippines, the "Credit-Invoice Method" or "Tax Credit Approach" is adopted in computing
the Vat Payable. This means that VAT is imposed on the sale first called "Output Vat" and a tax credit is
allowed or claimed on the VAT passed-on to his purchase or cost of goods or services known as "Input Tax".
The excess of output vat over input vat is called "VAT Payable".

Output tax means the vat due on the sale, lease or exchange of taxable goods or properties or services
by any person registered or required to register under Section 236 of the Tax Code. Input tax means the
vat due on or paid by a VAT-registered on importation of goods or local purchase of goods, properties or
services, including lease or use of property in the course of his trade or business.

Sec. 4.110-7 of RR 16-2005 as amended by RR2-2007 provides that "if the input tax inclusive of input
tax carried over from the previous quarter exceeds the output tax, the excess input tax shall be carried over
to the succeeding quarter or quarters, provided, however, that any input tax attributable to zero-rated sales
by a VAT-registered person may at his option be refunded or applied for a tax credit certificate which may
be used in the payment of internal revenue taxes, subject to the limitations as may be provided for by law, as
well as, other implementing rules.

Basis of Value Added Tax

The 12% value added tax shall be based on the following:
Nature of Transactions Tax Base
a. Sale of goods or properties Gross selling price
b. Sale of services Gross receipts
c. Importation Total landed cost
d. Dealers in Securities Gross Income

Sale of Goods:
Gross Sales Pxx
Less: Sales discounts xx**
Sales returns xx** xx
Net sales xx
Add: Excise tax, if any xx
Tax Base xx
x Vat rate 12%
Output Vat xx
Less: Input vat (xx)
VAT Payable/ (Excess input tax) Pxx

"Sales Discounts, Returns and Allowances (Sec. 4.106-9 of RR 16-2005)

In computing the taxable base during the month or quarter, the following shall be allowed as deductions from
gross selling price [Section 106(D) of the Tax Code, as amended]:
a) 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 duly recorded in the books of accounts. Sales
discount indicated in the
invoice at the time of sale, the grant of which is not dependent upon the happening of a future event,
may be excluded from the gross sales within the same month/quarter it was given.
b) Sales returns and allowances for which a proper credit or refund was made or a credit memo was
issued during the month or quarter to the buyer for sales previously recorded as taxable sales.

Sale of Services:
Cash received (actually and constructively)*** Pxxx
Deposits/Advance payments for future projects xx
Materials charged for services xx
Gross receipts xx
x Vat rate 12%
Output Vat xx
Less: Input vat xx
VAT Payable/ Excess input tax Pxx
***Receivables (For Sale of Services), although earned, are not included in the computation of vat payable.

Dealer in Securities and Lending Investors:

Gross Selling Price Pxx
Less: Acquisition cost of securities sold for the month/quarter (xx)
Balance xx
Add: Other income subject to basic tax xx
Gross Income xx
x Vat rate 12%
Output Vat xx
Less: Input vat (xx)
VAT Payable Pxx
GROSS SELLING PRICE

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 the goods or properties, excluding VAT. The excise tax, if any, on
such goods or properties shall form part of the gross selling price [Sec. 106(A)(1), NIRC].
 If the vat is not billed separately in the document of sale, the selling price shall be deemed to be inclusive of
vat.

In the case of sale, barter or exchange of real property subject to VAT, gross selling price shall mean the
consideration stated in the sales document or the fair market value, whichever is higher (RR 4-2007; Section 4.106-
4, RR 16-2005).

Fair Market Value

The term shall mean whichever is higher of:
1) the fair market value as determined by the Commissioner or
2) the fair market value as shown in schedule of values of the Provincial and City Assessors (real property tax
declaration). However, in the absence of zonal value as determined toy the Commissioner, gross selling price
refers market value shown in the latest real property tax declaration or the consideration, whichever is
higher (RR 4-2007).

If the gross selling price is based on zonal or market value of propert y, the zonal or market v a l u e s h al l be
deemed exclusive of vat.

GROSS RECEIPTS
Gross receipts refer 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 advance payments actually or constructively received
during the taxable period for the services performed or to be performed for another person, excluding the VAT.

“Constructive receipt” occurs when the money consideration or its equivalent is placed at the control of the
person who rendered the service without restrictions by the payor. The following are examples of constructive
receipts:
a) Deposit in banks which are made available to the seller of services without restrictions.
b) Issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof by the seller as
payment for services rendered; and
c) Transfer of the amounts retained by the payor to the account of the contractor.

VAT REGISTRATION
Under the Tax Code, as amended, vat registration is classified into two (2), mandatory and optional vat
registration.

A. MANDATORY REGISTRATION
1. Any person or entity who, in the course of his trade or business, sells, barters, exchanges, leases goods or
properties and renders services subject to VAT, if the aggregate amount of actual gross sales or receipts
exceed P3,000,000 beginning January 1, 2018 under RA 10963-TRAIN Law for the past 12 months (other
than those that are exempt) or there are reasons to believe that the, gross sales or receipts for the next 12
months will exceed P3,000,000.
 2. Radio and/or television broadcasting companies whose annual gross receipts of the preceding year exceeds
P10,000 ,000. Mandatory registration applies within 30 days from the end of the taxable year to radio/ TV
broadcasters whose gross annual receipt for the taxable, year exceeded P1OM (RR 4-2007).

Penalty for non -registration of those required to register. The taxpayer shall be liable to pay the tax
as if he were a VAT-registered person but he cannot avail the benefits of input tax credit for the period he was
not properly registered.

3. A person required to register as VAT taxpayer but failed to register.

VAT THRESHOLD FOR HUSBAND AND WIFE

For purposes of the threshold of P3,000,000, as amended, the husband and the wife shall be
considered separate taxpayers. However, the aggregation rule for each taxpayer shall apply. For
instance, if a professional, aside from the practice of his profession, also derives revenue from other lines
of business which are otherwise subject to VAT, the same shall be combined for purposes of
determining whether the threshold has been exceeded. Thus, the VAT-exempt sales shall not be
included in determining the threshold.

B. OPTIONAL REGISTRATION
1. Any person who is VAT-exempt or not required to register for VAT may elect to be VAT-registered by
registering with the RDO that has jurisdiction over the head office of that person, and pay the annual
registration fee for every separate and distinct establishment. Any person who elects to register
under optional registration shall not be allowed to cancel his registration for the
next three (3) years.
2. Franchise grantees of radio and/or television broadcasting whose annual gross receipts of the
preceding year do not exceed ten million pesos (P10,000,000) derived from the business covered by the
law granting the franchise may opt for VAT registration. This option, once exercised, shall be
irrevocable. (Sec. 119, Tax Code).

The above-stated taxpayers may apply for VAT registration not later than ten (10) days before the beginning
of the calendar quarter and shall pay the registration fee unless they have already paid at the beginning of the year.
In any case, the Commissioner of Internal Revenue may, for administrative reason deny a, application for
registration. Once registered as a VAT person, the taxpayer shall be liable to output tax and be entitled to input tax
credit beginning on the first day of the month following registration.

CANCELLATION OF REGISTRATION
Instances when a VAT-registered person may cancel his VAT registration:
1. If he makes a written application and can demonstrate to the commissioner's satisfaction that his gross sales
or receipts for the following twelve (12) months, other than those that are exempt under Section 109 (A) to
(U), will not exceed P3,000,000; or
 The cancellation for registration will be effective from the first day of the following month the cancellation
was approved.

2. If he has ceased to carry on his trade or business, and does not expect to recommence any trade or business
within the next twelve (12) months.

Power of the Commissioner to suspend business operations

The Commissioner of the Internal Revenue or his authorized representative may order suspension or
closure of business establishment for a period of not less than 5 days for any of the following violations:

1. Failure to issue receipts or invoices

2. Failure to file vat return
3. "Understatement" of taxable sales or receipts by 30% or more of the correct taxable sales or receipts for the
taxable quarter.
4. Failure of any person to register as required under the law.

COMPUTATION OF VAT PAYABLE

The corresponding liability on value added tax, as discussed in the preceding pages, is generally computed as
follows:

Output Vat (Sales or Receipts x 12%) Pxx

Less: Input Vat (Purchases or Disbursements Goods x 12%) (xx)
Vat Payable (Excess input vat) Pxx

Output vat means the vat due on the sale, lease or exchange of taxable goods or registered properties or
services by any vat registered person or non-vat person but required to register under Section 236 of the Tax Code.
It is an ad valorem tax charged on the selling price of taxable goods or services, and is payable by the customer.

OTHER PERCENTAGE TAXES (OPT)

It is a tax imposed on sale, barter, exchange or importation of goods, or sale of services based upon gross
sales, value in money of receipts derived by the manufacturer, producer, importer or seller measured by certain
percentage of the gross selling price or receipts. Any person who is not a VAT registered person (persons exempt
from VAT under Sec. 109 of the tax code) and is not exempt from business tax (i.e. business undertaking by an
individual with gross sales/receipts 5P100,000 in any twelve-month period) shall be subject to other percentage
taxes.

EXCISE TAXES
In addition to VAT, excise taxes apply to goods manufactured or produced in the Philippines for domestic
sales or consumption or for any other disposition, and goods imported. The goods manufactured or imported under
this category are classified as either "sin products" (such as wines and cigarettes) or "non-essential goods" (such as
automobile and minerals) under the Tax Code.
LIFE APPLICATION:
Good infrastructure, such as roads, telephones, and power, is required for commerce to thrive in the
country. This infrastructure is created by governments or with close government participation. When
governments receive money from taxes, they invest it in infrastructure development, which stimulates
economic activity throughout the country.

The notion of taxes is also significant to companies because governments may reinvest this money in the
economy through loans or other types of funding.

SUMMARY:
To lower your tax responsibilities, it's critical to understand taxation processes and to know exactly when
and how to conduct corporate and personal activities. As a business owner and taxpayer, you usually have
many options for completing a taxable transaction, one of which will result in the lowest lawful tax burden.
Remember that while it's prudent to avoid paying taxes, it's prohibited to do so b y fraud or deception.

VAT is a tax on the value added by every seller to the purchase price or cost in the sale or lease of goods,
property or services in the ordinary course of trade or business as well as on importation of goods into
the Philippines, whether for personal or business use.

OPT is a tax imposed on sale, barter, exchange or importation of goods, or sale of services based upon gross sales,
value in money of receipts derived by the manufacturer, producer, importer or seller measured by certain
percentage of the gross selling price or receipts.

Excise taxes apply to goods manufactured or produced in the Philippines for domestic sales or consumption or for
any other disposition, and goods imported.

REFERENCES:
Transfer and Business Taxation - Train Law updated, 2021 ed., Enrico Tabag

Quicknotes Taxation, Latest ed., Jack De Vera