Consumption of either goods or services is subject to consumption taxes.

For tax purposes,

consumption refers to the initial purchase or acquisition of goods or services. Consumption is
either domestic or foreign, be reminded that taxation is inherently territorial so our government
can only impose tax upon domestic consumption.

Types of Consumption Purchaser Status

Domestic Consumption Resident Taxable
Foreign Consumption Non-resident Exempt/Effectively non-taxable

Destination Principle – states that only domestic consumptions are subjected to consumption
taxes.

Types of Domestic consumption subjected to consumption taxes

1. Domestic sale – purchases from resident sellers (Business tax is the consumption tax
applied to domestic purchases (only if the seller is engaged in business)

Elements of Business:
1. Intended for Profit
2. Habitual Engagement
3. Commercial Activity

Types of Consumption Taxes (Business tax)

1. Percentage tax
a. General 3% tax – imposed on vatable sales (Goods/Services) of sellers who are
BUSINESS AND TRANSFER TAXATION
1 not VAT registered / registrable (Sales/Receipts not exceeding 3,000,000
Introduction to Consumption Taxes
threshold)
b. Specific percentage tax – ranges from .6% to 30%, applied on provider of
services specifically specified by law to be subjected to percentage taxes

2. Value Added Tax – imposed on vatable sales (Goods/Services) of sellers who are
Vat Registered or registrable (Sales/Receipts exceeded the 3,000,000 threshold)
3. Excise tax – an additional tax to either VAT or percentage tax on certain goods or
services

2. Importation – domestic purchases from non–resident sellers (VAT on importation is

applied on importation regardless on the status of the non–resident seller whether
engaged or not in business)

Cross Border Doctrine – goods that cross the border destined for foreign countries are not
charged with consumption taxes (effectively 0%)

Note: Ecozones or Tourism enterprise zones – their services are provided to non-
residents

Rationale of Imposing Consumption Taxes

1. Savings Formation
- Consumption taxes are usually imposed upon buyers, thus limit consumption of
goods and services which leads to savings formation
 2. Benefit Received theory
- Consumption tax is a tax to all, with the presumption that individuals are indirectly
benefiting on the public services provided by the government. No one can have the
excuse of not paying for not having direct benefit from the government.

Note: There are exempt consumptions provided by law to mitigate the effect of this
rationale especially for the benefit of the poor (human necessity). This is

3. Wealth Redistribution
- This is the aftermath of consumption taxes rationalizing the Benefit received theory
and Savings formation. Probably the rich will contribute more and summing up the
generated consumption taxes as funds of the government in providing public
services that will surely benefit the general public.

Self –Evaluation (True or False with explanation)

1. Consumption Tax is a tax levied upon businesses.

- False (Business tax is only a type of consumption tax which is applied to resident
sellers which are engaged in business. VAT on importation is also a consumption tax
which is applied on domestic consumption from foreign sellers regardless whether
they are engaged in business or not)

2. A purchase is a form of consumption.

- True (For tax purposes, consumption taxes are applied upon initial purchase
regardless whether the goods are consumed or not)
BUSINESS AND TRANSFER TAXATION
2
Introduction
3. A tax on consumption will effectively causes all residents of thetostate
Consumption
to pay tax. Taxes
- True (As stated in one of the rationales of consumption taxes, that the state in
general is indirectly benefiting from the services to the government and in return
consumption taxes is coined as a tax to all)

4. Consumption is the acquisition or utilization of goods or services.

- True

5. Income tax is based on the taxpayer’s capacity to sacrifice for the support of the
government.
- True (Comparing income and business tax, Income tax is based on Ability to pay
theory while business tax is under the Benefit received theory)

6. Consumption tax is more consistent with “ability to pay” theory rather than the Benefit
Received theory.
- False (Income tax is the one which is based on the Ability to pay theory)

7. A tax on consumption would support savings initiative.

- True (Initially consumption taxes are additional burden on part of the buyer which
limits consumption, that is why promotes savings formation)

8. Consumption taxes should not apply would not apply to basic necessities.
- True (As consumption tax is coined as anti-poor, the government exempted
consumption of basic necessities as well as those which are outside the scope of tax
 as taxation is inherently territorial, and finally those which are granted
exemption/incentives by agreement/treaty.

9. Both Domestic and Foreign consumption are subject to consumption tax.

- False (Only domestic consumption is subjected to consumption tax. Those which are
purchased a domestic seller, business tax is applied only if the seller is engaged in
business, and if from foreign seller Vat on importation is applied regardless on the
nature of the seller.)
-
10. Non – Resident sellers are exempt from consumption taxes on their domestic sales in
the Philippines.
- True (VAT on importation is an absolute and direct tax, it is imposed upon the buyer)

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PPT 01_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.

Destination Principle – only domestic consumptions are taxed

RATIONALITY OF CONSUMPTION TAX BUSINESS AND TRANSFER TAXATION

3
Introduction to Consumption Taxes
1. SAVINGS FORMATION
2. RATIONALIZATION OF BENEFIT RECEIVED THEORY
3. WEALTH REDISTRIBUTION TO SOCIETY

TYPES OF CONSUMPTION
Types of Consumption Purchaser Status
Domestic consumption Resident Taxable
Foreign consumption Non-Resident Exempt/ Effectively non-
taxable

DOMESTIC SALES – purchases from resident sellers

Note: The object of taxation is the purchase of buyers. Thus, sellers are not the ones
being subjected to the tax burden.

IMPORTATION – purchases from non-resident sellers

BUSINESS TAX
- The business tax is imposed only if the seller is a business.
- Consumption tax is not actually a tax upon the business.
- Business refers to a habitual engagement in a commercial activity for a profit.
 BUSINESS TAX VS. VAT ON IMPORTATION

VAT ON IMPORTATION BUSINESS TAX

Scope of tax Imports from business or non- Purchases from businesses only
business

Type of consumption tax Pure form Relative form

Statutory taxpayer Buyer Seller
Economic taxpayer Buyer Buyer
Nature of imposition Direct Indirect
Basis of tax Total purchase cost Sales or receipts

PROBLEM SOLVING
Sindangan Company, a VAT-registered taxpayer, purchases P400,000 worth of goods and sold
the same for P800,000.
A. Assuming that the business operations of Sindangan Company is limited to Philippine
residents, what is the total business tax it will report on its sales?
B. Assuming that the purchases were imports and the sales were exports, compute the
business tax and total consumption tax, respectively.
ANSWERS: A. 96,000 = 800,000 X 12%
BUSINESS AND TRANSFER TAXATION
4 B. Business Tax: 800,000 X 0% = to 0 Consumption
(Export sales by VAT-
Introduction Taxes
registered persons are subject to 0% VAT)
Consumption Tax: VAT on Importation: 400,000 X 12% = 48,000
Business Tax: 800,000 X 0% = 0
48,000
-------------------------------------------------------------------------------------------------------------------------------
Nature of Business Tax
1. Relative Consumption Tax
- Business tax is a type of consumption tax which is only applied if the seller is
engaged in business

2. Indirect Tax
- Recalling one of the cannons of a sound tax system – administrative feasibility. The
seller is named by law (seller being the statutory taxpayer) to remit the taxes
collected from the buyers

Imagine when purchasing goods and services subjected to VAT, we consumers are the
ones remitting the VAT to the Bureau.

Note: Not all business taxes are indirect but in essence/application, they are all indirect
taxes.
Buyer – Economic taxpayer (Impact of taxation)
Seller – Statutory taxpayer (Incidence of taxation)

3. Privilege tax
 - Objects of taxation can be properties and rights/privilege. For business taxes, the
privilege of the seller to conduct business is the one identified to be the object of
taxation, just like income tax which is imposed on the right of a person (natural /
juridical) to earn income and transfer taxes which is imposed on the right to transfer
properties

4. National Tax
- It is imposed by the national government

Types of Business Tax

1. Value Added tax
2. Percentage tax
3. Excise tax

Types of Business Registrants

1. VAT taxpayers – Those who voluntarily registered as VAT taxpayers or those
considered as VAT-registrable person
2. Non-VAT taxpayers – Those who did not register as VAT taxpayers and whose
sales/receipts did not exceed the VAT threshold of P3,000,000

Procedures of Business Taxation

BUSINESS AND TRANSFER TAXATION

5
Introduction to Consumption Taxes

A. Evaluation of the activity if it qualifies as a business or not

- Business Taxation only applies if the domestic seller is engaged in business
B. Identifying the Taxable person
- Relevance on reporting and compliance
- Evaluation of the Vat threshold on vatable sales
Whether individuals or corporations all branches are included for evaluation
C. Determination of the activity
 - This is relevant to the basis of taxation (where the business tax rates shall be
applied)

Provider of goods – Sales

Provider of services – Receipts
- the activity is determined whether it is exempt, services subject to specific
percentage tax or a vatable sale for the proper application of business tax and we
also consider the application and in addition of excise taxes

SELF EVALUATION

1. Once employed, one cannot be considered engaged in business

- Fales (In income tax we have what we call mixed income earner, we apply the
classification and globalization rule. In business taxation we only apply the
classification rule we distinguish only the sales/receipts from business)

2. All sales by a businessman are considered made in the course of business

- False (it depends on the classification of property being sold (ordinary or capital
asset). Only ordinary assets are considered for the purpose of business taxation, that
includes both goods/properties held for sale and held for use in the ordinary course
of trade/business

3. A business involves habitual engagement in a commercial

BUSINESS ANDactivity
TRANSFER TAXATION
6
Introduction
- True (It is important to classify a domestic seller to Consumption
whether engaged Taxes
or not in business
because business tax application is only for those who are engaged in business

4. All casual sales of properties are considered not made in the course of business
- False (Even if the sale is casual, it will depend on the type of asset being sold, for
example real estate businesses probably cannot sell on a daily basis)

5. A business which is not registered is exempt from business taxes

- False (Non – registration is not an excuse for business tax liability)

6. The term gross receipts include client or customer advances for unperformed services.
- True (Advances are initially taxable upon receipt either under income or business
tax)

7. The term gross selling price excludes taxes on the sale

- True (Gross selling price for goods is the tax basis, Invoice price is the term for the
amount which is tax inclusive)

8. The absence of profit motive may preclude an activity from being considered a business
- False (regardless of the disposition of such made income)
 9. Government agencies and instrumentalities and non-profit organizations or association
are generally considered as business
- True (Habitual activity in commercial activity is present not dependent on the motive,
the motive determines whether it will be taxable or not)

10. A taxpayer having a multiple operation can be taxed at same time for specific
percentage tax and VAT
- True (VAT and the 3% general percentage cannot be applied at the same time on
vatable sales. VAT and Specific can be applied at the same time on a taxpayer on
separate operations if vatable and subject to specific percentage tax)

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PPT 02_INTRODUCTION TO BUSINESS TAXES

BUSINESS TAXES Gross sales P100,000 -> basis of B-Tax

Cost of sales (70,000)
Operating expenses (50,000)
Net loss (20,000)

Business taxes are those imposed upon onerous transfers such as sale, barter, exchange, and
importation. Without a business pursued within the Philippines, business taxes cannot be
applied.
BUSINESS AND TRANSFER TAXATION
7
Introduction to Consumption Taxes
Business taxes are generally based on gross sales or gross receipts. Hence, taxpayers are still
liable to business taxes even if the business operations resulted to loss.

FOR SUBSISTENCE OR LIVELIHOOD (MARGINAL INCOME EARNERS)

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

TYPES OF BUSINESS TAXES

1. VALUE ADDED TAX (VAT)
2. GENERAL PERCENTAGE TAX (GPT)
3. EXCISE TAXES

Transactions subjected to VAT should no longer be subjected to other percentage tax.

However, a transaction subjected to VAT or GPT may still be subjected to excise tax.

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 importation
of goods into the Philippines, whether for personal or business use.
 IMPORTATION: transfer made by a tax-exempt person to non-VAT-exempt person (the non-
exempt transferee shall be considered as the importer and shall be liable for the unpaid vat.

CHARACTERISTICS OF VAT
1. It is an indirect tax where tax shifting is always presumed.
2. It is consumption-based.
3. It is imposed on the value added in each stage of production and distribution process.
4. It is a credit-invoice method value added tax.

BASIS OF VAT
NATURE OF TRANSACTION 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

TYPES OF VAT TAXPAYERS

VAT-registered taxpayer – registered under the VAT system

BUSINESS AND TRANSFER TAXATION
8 VAT-registrable taxpayer – did not yet register but exceeded the VAT threshold
Introduction to Consumption Taxes
Assume a taxpayer had P600,000 output VAT on its vatable sales and paid P320,000 VAT on
its purchases, the VAT liability shall be computed as follows:

VAT-registered VAT-registrable

Output VAT 600,000 600,000

Input VAT 320,000 0

VAT due 280,000 600,000

MANDATORY REGISTRATION
1. Any person or entity whose annual gross sales or receipts exceed P3,000,000
2. Radio and/or TV broadcasting company whose annual gross receipts of the preceding
year exceed P10,000,000

VAT THRESHOLD FOR HUSBAND AND WIFE

For purposes of the threshold of P3,000,000, the husband and wife shall be considered as
separate taxpayers.

ILLUSTRATION
 A non-VAT taxpayer billed a client P150,000 for professional services rendered. The client
withheld 10% creditable withholding tax (CWT).

The taxpayer will be able to collect the following:

Professional fees billed P150,000

Less: 10% CWT 15,000

Net professional fee collected P135,000

ILLUSTRATION

A taxpayer billed a client P150,000 for professional services rendered. The client withheld 10%
creditable withholding tax (CWT).

The amount billed shall be presumed inclusive of VAT.

Gross receipt (150,000 ÷ 1.12) 133,929

Output VAT (133929 x 12%) 16,071

Amount billed (Invoice Price) 150,000

BUSINESS AND TRANSFER TAXATION
9 The CWT is computed on the gross receipts, exclusive of the output VAT.
Introduction to Consumption Taxes

Professional fees 133,929

CWT (133,929 x 10%) 13,393

Net professional fees 120,536

Output VAT 16,071

Total cash collected 136,607

GENERAL PERCENTAGE TAX

Any person who is not VAT-registered and whose annual gross sales or receipts do not exceed
P3,000,000 shall be subject to general percentage tax.

EXCISE TAX
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 are classified as either “sin products” or “non-essential goods” under the Tax Code.