Module 7

Introduction to Business Taxes

After this lesson, readers are expected to comprehend and demonstrate knowledge on the
following:

1. Registration of business, inovoices and receipts

2. Distinguished VAT and Non- VAT Businesses

3. Demonstrate the computation of Percentage tax of a business.

INTRODUCTION

What is business?

“Business” or “in the course of trade or business” means the regular conduct or pursuit of a
commercial or economic activity, including transactions incidental thereto, by any person or
government entity. The requisites are:

(a) The activity must be a commercial or economic activity; and

(b) There must be regularity in the activity
A commercial or economic activity is an activity where the purpose is profit or income.

The term “regular” involves more than one isolated transaction. It requires repetition and a
continuity of action.

Illustration 1. Mr. A sold his car at a loss. There is no business tax. There
is no income or profit element in the transaction – hence not an economic
activity. The transaction is isolated – there is no regularity. (even if sold at
a gain.)

The business taxes

There are three major business taxes in the National Internal Revenue
Code, namely:

(a) Excise tax;

(b) Percentage tax; and
(c) Value-added tax.
The excise tax

On whom is the excise tax imposed?

(a) On manufactures and importers of:

(1) Distilled spirits (e.g., liquors);
(2) Wines (e.g., grape wine);
(3) Fermented liquors (e.g., beer);
(4) Tobacco products (e.g., chewing tobacco);
(5) Cigars;
(6) Cigarettes;
(7) Automobiles;
(8) Yachts and other vessels intended for pleasure;
(9) Manufactured fuel oils (e.g., gasoline, diesel fuel oil, bunker oil, etc.);
(10) Mineral products (e.g., gold, silver);
(11) Non-essential goods (e.g., jewelry, perfumes –
 (There is an enumeration in the law); and
(12) Sweetened beverages.

(b) On sellers of services of:

Domestic procedures, surgeries, and body enhancements undertaken for
aesthetic reasons entirely focused on altering and enhancing a patient’s
appearance, improving aesthetic appeal, symmetry and proportion.

(but not reconstructive surgery or repair, reconstruction and restoration of

bodily functions due to congenital disorders, trauma, burns, infections,
disease, and those intended to correct dysfunctional areas of the body).

The percentage taxes

The percentage taxes are on sales of services (enumerated in the National Internal
Revenue Code). The taxes are the following:

(a) 3% percentage tax on sale of goods, properties or services;

(b) Common carrier’s tax on domestic carriers;
(c) Common carrier’s tax on international carriers;
(d) Franchise tax;
(e) Overseas communications tax;
(f) Tax on banks and non-bank financial intermediaries performing quasi-banking
functions;
(g) Tax on other non-bank financial intermediaries;
(h) Tax on insurance companies
(i) Tax on agents of foreign insurance companies;
(j) Amusement tax;
(k) Tax on winning; and
(l) Stock transaction tax.
The value-added tax

The value-added is on:

(a) Sale of goods or properties;

(b) Sale of services;
(c) Importation of goods.

Can there be, on one business:

Excise tax with value-added tax? Yes

Excise tax with the 3% percentage tax? Yes

Excise tax with some other percentage tax? No

Value-added tax with percentage tax? No

Registration of business

Every taxpayer subject to the value-added tax must register with the Bureau of Internal
Revenue as a VAT taxpayer and pay an annual registration fee of for every separate and distinct
establishment, including facility types (sales outlets, places of production, warehouses and
storage places) where the business is conducted.

Every taxpayer not subject to the value-added tax but subject to the excise tax or
percentage tax must register with the Bureau of Internal Revenue and pay an annual registration
fee for every separate and distinct establishment where the business is conducted.

Illustration 2. Mr. F is a merchant. He has his main store in the City of Manila, a branch store in
Quezon City, and another branch store in Pasay City.

There will be three separate registrations and three separate payments of the registration fees.

Registrations for value-added tax

Mandatory registration.

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 will be liable to register for value-
added tax if:

(a) Gross sales or receipts within the year exceeded three million (P3,000,000);
(b) There are reasonable grounds to believe that his gross sales or receipts for the next
twelve (12) months, will exceed three million pesos (P3,000,000).
Illustration 3. With gross sales in any year not exceeding P3,000,000, Mr. A was paying the
percentage tax of 3% on his sales. For 2019, on August 25,2019 his sales were already a total of
P3,200,000. What were the business taxes in 2019?

January 1 to August 31, 2019 – Percentage tax;

September 1, 2019 and thereafter – Value-added tax.

Optional registration.

Any person who is not required to register as a VAT taxpayer because the sales,
barters or exchanges of goods or properties, or the sales or exchanges of services, do not,
or will not, exceed three million pesos (P3,000,000), may opt to register under the value-
added tax system.

The threshold of P3,000,000.

 For purposes of determining the threshold of three million pesos (P3,000,000), the
husband and wife will be considered as separate taxpayers.

If a taxpayer has two or more lines of businesses that would otherwise be subject
to the value-added tax, the gross sales/receipts will be combined for purposes of determining if
the threshold was exceeded. Any VAT exempt sales will not be included in determining the
threshold.

Illustration 4. Mr. A has three lines of business, with gross receipts as follows:

Business 1, VAT exempt business P3,000,000

Business 2, sale of goods P1,800,000

Business 3, sales of services P1,800,000

Must there be a value-added tax?

The gross receipts of Business 1 will not be included in determining if the

taxpayer is subject to the value-added tax. The gross receipts from business 2 and
business 3 will be aggregated. The aggregate exceeds P3,000,000 so that the two business
are subject to the value-added tax.

Cancellation of VAT registration

The registration of any person as a value-added taxpayer may be cancelled if:

(a) He makes written application and can demonstrate to the Commissioner’s

satisfaction that his gross sales or receipts for the following twelve (12)
months will not exceed three million pesos (P3,000,000); or
(b) 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.

When will the cancellation take effect? Answer: The first day of the following
month.
Registration of invoices and receipts

A taxpayer who is in business will have his invoices and receipts registered with the Bureau of
Internal Revenue. If a VAT taxpayer, such invoices and receipts will clearly show that he is a
VAT taxpayer.

Electronic receipts or sales or commercial invoices

What is the provision of the TRAIN LAW on this?

Within five (5) years from the effectivity of that law, and upon the establishment of a system
capable of storing and processing the required data, the Bureau of Internal Revenue will require:

(a) Taxpayers engaged in e-commerce, and

(b) Taxpayers under the Large Taxpayers Service

To issue electronic receipts or sales or commercial invoices in lieu of manual receipts or sales or
commercial invoices.

Taxpayers not covered by this mandate may issue electronic receipts or sales or commercial
invoices in lieu of manual receipts and sales and commercial invoices.