Business Taxes

In the course of Trade or Business

It refers to the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit organization or government entity. Such person, entity, organization or associations engaged in the course of trade or business shall be held liable to pay business tax.

What are the different kinds of Business Tax?

1. Percentage tax 2. Excise tax 3. Value-added tax

Businesses subject to Percentage Tax

1. 2. 3. 4. Persons exempt from VAT Domestic carriers International carriers Franchise holders of water, gas, telephone and radio companies 5. Overseas communications 6. Banks & non-bank financial intermediaries

7. Finance companies 8. Life insurance companies 9. Agents of foreign insurance companies 10. Amusement places 11. Winnings from racehorse 12. Sale of shares of stock traded through the local stock exchange

Businesses subject to Excise Tax:

Manufacturers and/or Importers: 1. Distilled spirits 2. Wines 3. Fermented liquor 4. Cigars 5. Cigarettes 6. Tobacco products 7. Automobile 8. Manufactured fuels and other oils 9. Mineral products 10. Non-essential goods

Value-Added Tax
Value-added tax (VAT) is a tax on the gross selling price or gross receipt derived from the sale, barter or exchange and lease of goods or properties and rendering of services including importation, in the ordinary course of trade or business. It is an indirect tax, the burden of which may be shifted from one seller, transferor, or lessor to another until such burden is ultimately shouldered by the end-consumer.

Under VAT, transactions are classified:

a. Taxable transactions (1) Those subject to 12% (2) Those subject to 0% b. Exempt transactions

VAT-Taxable Transactions
a. Sale, barter or exchange of goods or properties; b. Transactions deemed sale; c. Importation of goods; and d. Sale of services and use or lease of properties.

Transactions Deemed Sale

1. Transfer, use or consumption not in the course of business of goods or property originally intended for sale or for use in the course of business. 2. Distribution or transfer to: 3. a. shareholders or investors as share in the profits of the VAT registered persons; 4. b. creditors in payment of debt or obligation.

3. Consignment of goods if actual sale is not made within sixty (60) days following the date such goods were consigned; and 4. Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirement or cessation.

Gross selling price in relation to VAT

Gross selling price is the total amount of money or its equivalent which the purchaser pays or its obligated to pay to the seller in consideration of the sale, barter or exchange, excluding the valueadded tax. Any excise tax on the transaction shall form part of the gross selling price.

Sale or Exchange of Services

Sale or exchange of services refers to the performance of all kinds of services for a fee, remuneration or consideration, including those performed or rendered by: 1. Construction and service contractors; 2. Stock, real estate, commercial, customs and immigration brokers; 3. Lessors of property, whether personal or rea; 4. Warehousing services

5. Lessors or distributors of cinematographic films; 6. Persons engaged in milling, processing, manufacturing or repacking goods for others. 7. Proprietors, operators or keepers of hotels, rest houses, pension houses, inns, resorts, theaters and movie houses; 8. Proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers.

9. Dealers in securities; 10. Lending investors; 11. Transportation contractors on their transport of goods and cargoes; 12. Domestic common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines;

13. Sale of electricity by generation, transmission and distribution companies; 14. Franchise grantees of electric utilities, telephone and telegraph, radio and/or television broadcasting and all other franchise grantees; 15. non-life insurance companies including surety, fidelity, indemnity and bonding companies; 16. pre-need companies; 17. Health maintenance organization; and 18. Similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties.

Gross Receipts in relation to VAT

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, supplies and deposits and advance payments actually or constructively received during the taxable year, excluding the value added tax.

Transaction subject to 0% VAT

Zero-rated transaction is a taxable transaction although no output tax results therefrom. Being a taxable transaction, the input tax on the purchase or lease of goods, properties or services related to such zerorated transaction may be claimed as a tax credit or tax refund.

Zero-Rated Sales
a. Export sales by VAT-registered person; b. Foreign currency denominated sale the sale to a non-resident of goods assembled or manufactured in the Philippines for delivery to a resident in the Philippines, paid for in acceptable foreign currency, except: 1.) automobiles (Sec. 149, NIRC); and 2.) non-essential goods (Sec. 150, NIRC)

Zero-Rated Sales
c. Sales to persons or entities whose exemption is subject to special laws and international agreements (BCDA, PEZA, ADB and IRRI)

Zero-Rated Sale of Services

1. Processing, manufacturing or repacking goods for other persons doing business outside the Philippines, which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulation of the BSP; 2. Services other than processing, manufacturing or repacking rendered to a person engaged in business conducted outside the Philippines or to a non-resident person not engaged in business who is outside the Philippines when the services are performed, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP;

3. Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate; 4. Services rendered to persons engaged in international shipping or air transport operations, including leases of property for use thereof; provided, however, that the services referred to herein shall not pertain to those made by common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines;

5. Services performed by subcontrators and/or contractors duly accredited by either the Board of Investments or the Export Development Council in processing, converting, or manufacturing goods for an enterprise whose export sales exceed 70% of the total annual production; 6. Transport of passengers and cargo by domestic air or sea carriers from the Philippines to a foreign country; 7. Sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy sources using technologies such as fuel cells and hydrogen fuels.

Exempt Transactions from VAT

Exempt transactions are those transactions that are not subject to output tax and also cannot claim any input tax as tax credit.

Definition of Terms:
Output tax is the value-added tax due on the sale or lease of taxable goods or properties or services by any person registered or required to register under the VAT system. Input tax is the value-added tax due from or paid by a VAT registered person in the course of his trade or business on importation of goods or local purchase of goods or services, including lease or use of property, from a VAT registered person, including the transitional input tax.

Transitional Input Tax

A person who becomes liable to value-added tax when the minimum turnover of P1,500,000 in any 12 month period has been exceeded or any person who elects to be a VAT-registered person shall, subject to the filing of an inventory according to rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent to 2% of the value of such inventory, or the actual value-added tax paid on such goods, materials and supplies, whichever is higher. The amount allowable shall be creditable against the output tax.

Transitional Input Tax

Real estate developers subject to VAT for the first time are entitled to transitional input tax credit based on the value of their beginning inventory of real properties. Illustration: Starting 2010, Mr. Puno becomes liable to value-added tax. Records show that he has P300,000 worth of merchandise inventory. Actual payments of VAT on purchases from VAT-registered persons amounted to P27,000. Mr. Puno is entitled to transitional input tax of P27,000; the P6,000 (P300,000 x 2%) being lower than the valueadded tax actually paid.

Presumptive Input Tax

Persons or firms engaged in the processing of sardines, mackerel and milk, and in manufacturing refined sugar, cooking oil and packed noodle-based meals, shall be allowed a presumptive input tax, creditable against the output tax, equivalent to 4% of the gross value in money of their purchases of primary agricultural products which are used as inputs of their production. Processing shall mean pasteurization, canning and activities which through physical or chemical process alter the exterior texture of form or inner substance of a product in such manner as to prepare it for special use to which it could not have been put in its original form or condition.

Presumptive Input Tax

Illustration: Mr. Jorge is engaged in the manufacture of refined sugar. For the month, purchases of raw sugar from VAT-exempt persons totaled P330,000. Proceeds from sale of refined sugar amounted to P550,000. Mr. Jorge shall be entitled to a presumptive input tax of P13,200 (P330,000 x 4%)

Treatment of the Excess of Output Tax or Input Tax over the Other
If the output tax exceeds the input tax at the end of any quarter, the excess shall be paid by the VAT registered person representing his VAT payable to the BIR. If the input tax exceeds the output tax at the end of any quarter, the excess shall be carried over to the succeeding quarter or quarters, provided:

1. The input tax inclusive of input VAT carried over from the previous quarter shall not exceed 70% of the output VAT; and 2. Any input tax attributable to zero-rated sales by a VAT registered persons may, at his option, be refunded or credited against other internal revenue taxes.

What is Input-VAT Allocation?

When a taxpayer with a VAT business and a non-VAT business makes a purchase during the month from a VAT-registered person, for use in his VAT and non-VAT business, the input tax on the purchase shall be allocated between the VAT and non-VAT business on the basis of sales during the taxable month pro-rata: a. Ordinary 12% variable purchases-creditable b. Zero-rate purchases-creditable or convertible or refundable c. Exempt purchases- cost or expense

What is Withholding of Creditable Input VAT?

The government, or any of its political subdivision, intrumentalities or agencies, including government-owned or controlled corporations, shall, before making payment on its purchase of goods or services from sellers subject to the VAT, deduct and withheld the VAT at a rate of 5% of the gross payment, which shall be creditable against the VAT liability of the sellers.

Who are required by law to register for VAT?

Any person who, in the course of trade or business, sells, barters or exchanges goods or properties, or engages in the sale or exchange of services shall be liable to register for VAT if his gross sales or receipts for the past 12 months, other than those that are exempt, have exceeded P1,500,000.

What other percentage taxes, aside from VAT are imposed under the NIRC?
a. Tax on persons exempt from VAT (3% on quarterly gross sales or receipts) b. Tax on domestic carriers and keepers of garages (3% on gross receipts) c. Tax on international carriers (3% of gross receipts) d. Tax on franchises (3%, 2%) e. Overseas communication tax (10% on amount paid for every overseas dispatch, message or conversation from the Philippines)

f. Tax on banks and non-bank financial intermediaries g. Tax on finance companies (3% on gross receipts from items of gross income) h. Tax on life insurance premiums (5% on total premiums collected from life insurance business) i. Tax on agents of foreign insurance companies (10% on total premiums)

j. Amusement taxes k. Tax on winnings in horse races l. Tax on sale/exchange of shares of stock listed and traded at the local stock exchange.

Banks and Non-Bank Financial Intermediaries

a. On interest, commissions and discounts from lending activities: maturity period is 5 yrs or less-5% maturity period is more than 5 yrs.-1% b. On dividends and equity shares in net income of subsidiaries- 0% c. On royalties, rentals of property, profits from exchange and all other items treated as gross income- 7%

d. On net trading gains within the taxable year on foreign currency, debt securities, derivatives and other similar financial instruments.

Amusements
a. Cockpits- 18% b. Cabarets, night and day clubs- 18% c. Boxing exhibitions except those wherein world or oriental championship is at stake and at least one of the contenders is a citizen of the Philippines and promoted by a citizen of the Philippines or by a corporation or association at least 60% of the capital is owned by such citizens- 10%

d. Professional basketball games- 15% e. Jai-alai and racetracks- 30%

Shares of stock sold or exchanged through IPO

On the gross selling price or gross value in money derived on every sale, barter, or exchange or other disposition through IPO in closely held corporations in accordance with the proportion of such shares to the total outstanding shares of stock: not over 25%- 4% over 25% but not exceeding 33 1/3%- 2% over 33 1/3%- 1%

Exemption from Percentage Tax

Any business or business pursued by an individual where the aggregate gross sale or receipts do not exceed P100,000 during any 12-month period shall be considered principally for subsistence or livelihood and not in the course of business.

Excise Taxes
Excise taxes apply to goods manufactured or produced in the Philippines for domestic sale or consumption or for any other disposition and to things imported. The excise taxes shall be in addition to the value-added tax.

Two (2) Kinds of Excise Taxes

a. Specific taxes these are excise taxes that are based on weight or volume capacity or any other physical unit of measurement. b. Ad valorem taxes these are excise taxes that are based on selling price or other specified value of the good.

Articles that are subject to Specific Tax

a. Distilled spirits from locally produced materials (is the substance known as ethyl alcohol, ethanol or spirits of wine, and includes whisky, brandy, rum, vodka, and fortified wines with more than 25% alcohol) b. Still wines c. Tobacco products (hand-twisted) d. Cigars (rolls of tobacco) e. Cigarettes packed by hand f. Petroleum products

Articles that are subject to Ad Valorem Tax

a. b. c. d. e. f. Distilled spirits Sparkling wines/champagnes Fermented liquors (beer) Cigarettes packed by machine Automobiles Non-essential goods (jewelry, perfumes, yachts, etc.) g. Minerals, mineral products and quarry resources

Documentary Stamp Tax

Documentary stamp tax is an internal revenue tax imposed upon documents, instruments, loan agreements and papers evidencing the acceptances, assignments, sales, and transfers of the obligation, right, or property incident thereof, and in respect of the transaction so had so accomplished.

Nature of DST
The documentary stamp tax is a tax imposed on the transaction rather than on the document itself. It is an excise tax levied upon the privilege granted to the taxpayer so that he may enter into the transaction in the Philippines.

Does the failure to affix or stamp a document or paper affect the validity of the transaction?
It will not. However, the document or paper shall not be recorded nor shall any copy thereof be admitted or used in evidence in any court until the requisite stamp/s shall have been affixed thereto and cancelled. It shall prohibit any notary public or other officer authorized to administer oaths from adding his acknowledgment to any documents subject to the documentary stamp tax.