Business &

transfer taxation
REX B. BANGGAWAN, CPA, MBA
CHAPTER I:INTRODUCTION TO
CONSUMPTION TAXES
LEARNING OBJECTIVES:
A F T E R T H I S C H A P T E R , S T U D E N T S A R E E X P E C T E D TO C O M P R E H E N D
A N D U N D E R S TA N D T H E K N O W L E D G E O N T H E F O L LO W I N G :

a. T H E CON CEPT OF A CON SUMPT I ON

b . T YPES OF CON SUMPT I ON A N D CON SUMPT I ON TA XES
c . T H E N AT URE OF T H E VAT ON I MPORTAT I ON
d . T H E N AT URE A N D T YPES OF BUSI N ESS TA X
e . T H E CH A RACT ERI ST I CS OF T H E VAT ON SA LES
f. T H E CH A RACT ERI ST I CS OF PERCEN TAG E TA X
CONSUMPTION TAX
What is the concept of consumption tax?
Consumption occurs when one acquires goods or services by purchase, exchange or other means.
A consumption tax is a tax upon the utilization of goods or services by consumers or buyers. It is a tax on the consumption of
the buyer and not on the sale of the seller.
Rationale of Consumption Tax
1. It promotes savings formation.
2. It helps in wealth redistribution to society.
3. It supports the Benefit Received Theory.

Types of Consumption
1. Domestic Consumption
2. Foreign Consumption

Nature of the VAT on importation

Every imports of goods shall pay consumption tax and his importation, called consumption tax, called Value Added Tax.

Types of BusinessTax
 Value Added Tax on Sales
 Percentage Tax
 Excise Tax
CONSUMPTION TAX
Characteristics of the VAT on Sales
• Tax on Value Added
• Top-up on Sales
• Tax audit method
• An explicit consumption tax
• Quarterly tax

Characteristics of PercentageTax
• Tax on sales or gross receipts
• An expensed tax
• An implicit consumption tax
• Monthly or quarterly tax
Consumption tax promotes savings formation
Income is inherently destined toward consumption. The residual income that remains after consumption is
savings. Savings promotes capital formation and investment which are considered crucial to economic
development. A tax on consumption is therefore important to limit consumption to shift part of the income to
savings formation.

Consumption tax helps redistributes wealth to society

It is a basic state policy to redistribute wealth to society so everyone in the State could enjoy the same. Rich people
buy more and spend more since they can afford expensive lifestyles. A tax on consumption will make them pay
more tax. Therefore, consumption tax supports the redistribution of wealth from the rich to the less privileged
members of the society.

Consumption tax supports the Benefit Received Theory

Under the Benefit received theory; those who receive benefit from the government shall pay taxes. Everyone in
the state is receiving benefits from the government; hence, everybody should be tax.

Unarguably, everybody consumes goods and services. A tax on consumption will effectively make everyone
contributes to the support of the government. Consumption tax provides a practical application of the Benefit
Received Theory.
Types of Consumption

1. Domestic consumption – refers to consumption or purchases of Philippine residents.

2. Foreign consumption – refers to consumption or purchases of non-residents.

Because taxation is inherently territorial, only domestic consumption can be subjected to Philippine taxation.
Foreign consumption cannot be taxed.

In observing this territorial limitation, the Philippines follows the “destination principle”. Under the destination
principle, goods and services consumption tax whereas those destined for use or consumption aboard are not
imposed with consumption tax.

Hence, goods that cross the border which are destined toward foreign territories should not be charged with
consumption taxes. This is the cross-border-doctrine of consumption tax.

Summary of tax rules

Domestic consumption Foreign consumption

The seller is (Buyer is resident) (Buyer is non-resident)

Non-resident Taxable No tax

Resident Taxable Effectively no tax
CONSUMPTIONTAX ON IMPORTATION

• The VAT on importation is 12% of the total import cost of the goods prior to the withdrawal of the goods from
the warehouse of the Bureau of Customs.
• Every purchaser of service from non-residents shall likewise pay VAT on importations of the service, called
“Withholding VAT”, of 12% of the contract price of the service.
• These consumption taxes on importations are payable without regard of whether the foreign seller on the
resident buyer is engaged or not engaged in business or whether the importation is for business or personal
consumption.

Table summary: Consumption tax rules on domestic consumption

Seller Resident Buyer Applicable consumption tax
Domestic Sellers
• Business Business Business tax
• Business Non- business Business tax
• Non-business Business None
• Non-business Non-business None
Foreign Sellers
• Business Business VAT on importation
• Business Non-business VAT on importation
• Non-business Business VAT on importation *
• Non-business Non-business VAT on importation *
NATURE AND TYPES OF BUSINESSTAXES
• Business taxes are based on sales or receipts. “Sales” pertains to the total amount agreed as
consideration for the sale of goods whether collected or uncollected. Receipts to collections from
the sale of service.
• The Value Added Tax (VAT) on Sales – is a consumption tax imposed upon the sale of goods,
properties or services or least of properties.

Characteristics of the VAT on sales

• Tax on value added - VAT is tax on the value added by the seller on its purchases in making sales.
• Top-up on sales – is the VAT on sales is required by the law to be included in the price of the goods.
The amount is called “invoice price” of the VAT is not separately indicated in the sales document,
the amount appearing therein is presumed inclusive of VAT.
• Tax credit method – the VAT on sales shall be reduced by the amount of VAT paid by the business
on its purchase. The resulting excess VAT on sales is the amount due to be remitted to the
government. An excess VAT payments on purchases is carried over as deduction against the VAT on
sales in future periods.
• An explicit consumption tax – the amount of VAT is explicitly disclosed in the invoice or official
receipt of the seller. Hence, the buyer knows the amount of VAT he is paying in his purchases.
• Quarterly tax – the VAT return is filed quarterly but is paid on a monthly basis. (Sec. 114(A), NIRC
as amended)
Methods of Computing Tax
1. Direct method
2. Tax credit method

Direct Method – the VAT is computed by applying the VAT rate to the difference of the selling price and the
purchase.

Example:
Sales P500,000
Purchases 400,000
Difference P100,000
VAT x 12%
P12,000
Tax credit method – the VAT rate is composed upon the sales on receipts of the business, called “Output VAT”. The
output VAT is reduced by the VAT paid by the business on its purchases, called “Input VAT”. The excess of the
output VAT over the Input VAT is the VAT due on payable.

Example:
Sales (P500,000 x 12%) P60,000
Purchases (P400,000 x 12%) 48,000
VAT Payable - P12,000
The VAT on sales is payable by VAT-registered businesses. These are usually larger business with annual sales or
gross receipts exceeding P3,000,000.
PERCENTAGETAX
• Percentage tax is a sales of various rates, generally 3% imposed upon the gross sales or gross receipts of non-
VAT registered taxpayers.

Characteristics of the percentage tax

• Tax on sales or gross income – the total amount due from the buyer is considered sales or gross receipts, the
percentage tax is computed directly from this amount.
• An expensed tax – in income taxation, the percentage tax is presented as an expense deductible against the
sales on gross receipts. This treatment gives percentage tax he impression of being a direct tax of the
taxpayers.
• An implicit consumption tax – the percentage tax is inherently factored by sellers in the pricing of their goods
or services. The percentage is actually a consumption tax in the form of a privileged tax.
• Monthly or Quarterly Tax – the percentage tax is monthly for most percentage taxpayers, and quarterly for
certain percentage taxpayers.
The 3& percentage tax is usually payable by non-VAT taxpayers with annual sales or receipts not exceeding
P3,000,000 usually register as non-VAT taxpayers.
Exercise
1. Which type of consumption will pay consumption tax?
a. Domestic consumption c. Both domestic and foreign consumption
b. Foreign consumption d. Neither domestic nor foreign consumption

2. Which is a tax upon the usage of income?

a. Savings tax c. Consumption tax
b. Investment tax d. Business tax

3. Which is subject to the VAT on importation?

a. Foreign consumption from resident sellers c. Domestic consumption from resident sellers
b. Foreign consumption from foreign sellers d. Domestic consumption from foreign sellers

4. Which is subject to business tax?

a. Foreign consumption from resident sellers c. Domestic consumption from resident sellers
b. Foreign consumption from foreign sellers d. Domestic consumption from foreign sellers

5. Which is an incorrect statement regarding consumption taxes?

a. They are always indirect in nature.
b. They effectively tax everyone in the state.
c. They apply only when the goods or services are destined for consumption within the Philippines.
d. Consumption taxes may encourage savings formation.
Exercise
6. Which is correct regarding consumption tax?
a. It may help in the redistribution of wealth to society.
b. It is entirely based upon the consumers' ability to pay.
c. It applies to both domestic and foreign consumption.
d. It applies only when the seller is non-resident.

7. Domestic consumption is taxable when the seller is

a. a non-resident. c. either a resident or a non-resident
b. a resident. d. both a resident and a non-resident.

8. Foreign consumption shall

a. pay consumption tax if the seller is a resident.
b. pay consumption tax if the seller is a non-resident.
c. not pay consumption tax if the seller is a non-resident.
d. not pay consumption tax regardless of the residency of the seller.

9. The tax on domestic consumption is referred to as

a. VAT on importation. C. Either A or B
b. Business tax. d. Neither A nor B
Exercise
10. The tax on domestic consumption from foreign suppliers is
a. VAT on importation. c. Either A or B
b. Business tax. d. Neither A nor B

11. Which of the following business taxes applies only for domestic consumption?
a. VAT on sales b. Percentage tax c. Excise tax d. All of these

12. Excise tax is paid by

a. Sellers c. Importers or manufacturers
b. Buyers d. Seller or buyer depending on who agreed to pay the excise tax

13. Export sale is (select the incorrect one)

a. Exempt from percentage tax c. Exempt from excise tax
b. Exempt from VAT d. All of these

14. Statement 1: Excise tax is always paid together with VAT or percentage tax.
Statement 2: Excise tax is paid at the point of sale.
Which statement is false?
a. Statement c. Both statements
b. b. Statement 2 d. Neither statement
Exercise
15. Which is imposed with a tax of zero percent (0%)?
a. All export sales c. Import sales of VAT-registered taxpayers
b. Export sales of VAT-registered taxpayers d. Export sales of non-VAT registered taxpayers only

16. Free Company, a resident business, renders services to Mr. Erlwin, a resident person who is not engaged in
business. Which of the following is subject to consumption tax?
a. Free Company b. Mr. Erlwin c. Both A and B d. Neither A nor B.

17. Baliwag Company, a non-resident business, purchased P200,000 from Cauayan Company, a resident business.
Which will pay the consumption tax on this transaction?
a. Cauayan Company b. Baliwag Company c. Both A and B d. Neither A nor B.

18. A person engaged in business is subject to 3% business tax. He has inventories of goods in his possession
costing P77,600 which he intends to sell to earn a mark-up of 25% of cost net of the 3% business tax.
He shall invoice the sale of the P77,600 goods at
a. P100,000 b. P103,000 c. P 97,000 d. P 110,000

19. A business wants to make a P10,000 profit from the sale of an inventory costing P30,000. The business is
subject to 3% percentage tax. At what amount shall the business invoice the sale?
a. P 41,237 b. P 41,200 c. P 40,000 d. P 38,800
Exercise
20. A person who is not regularly engaged in trade or business made a casual sale of a property for P100,000. What
will be the invoice price of the sale?
a. P100,000 b. P103,000 c. P112,000 d. Either B or C