Business and Transfer Taxation

Laws, principles and Applications

2019 Edition

Chapter 3
Introduction to Business
Taxation

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Learning Objectives (1 of 2)
• The concept of being engaged in trade or business and the
exceptions to the rule in regularity of transactions
• The concept of a business taxpayer
• The registration requirements on businesses
• The business classification as to activities and their
respective tax base
• The concept of gross selling price and gross receipt

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Learning Objectives (2 of 2)
• Types of business taxpayers and the VAT threshold
• The concept of accounting period for business taxation
• The differences in business reporting of VAT and non-VAT
taxpayers
• The scope of VAT and percentage tax
• The concept of “vatable” sales of receipts

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Business Tax
Nature of Business Tax
• Relative consumption tax – relative because it is
imposable only when the seller is a business, except for
importation of services
• Indirect tax – tax is collected through the seller rather than
the buyer
• Privilege tax – tax on the privilege to do business
• National tax – it is imposed by the national government

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Types of Business Tax
Differences VAT Percentage Tax Excise Tax

1. Timing of imposition Upon sale Upon sale Upon production/import

2. Nature Primary Primary Additional

Only those producers/importers

3. Business subjected Any business Any business
of excisable goods or services

4. Taxpayers Business only Business only Engaged in business and not

Large
5. Usual taxpayers Small businesses Large, small, or non-business
businesses

6. Accounting treatment Liability Expense Asset or liability

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Business Taxation Procedure (1 of 3)
1. Does the sales activity qualifies as a business?
– Yes, the business must register for business tax
– No, the sales activity is exempt from business tax
2. Who is the seller?
– Individual – include all his proprietorship business and
its branches
– Juridical person – include all its corporate branches
3. What is sold?
– Goods – determine the sales
– Services – determine the receipts
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Business Taxation Procedure (2 of 3)
4. What is the classification of the sales or receipts?
– Exempt – pay no business tax
– Subject to specific percentage tax – pay the specific
percentage tax
– VATable – proceed to no. 5
5. Is the seller VAT-registered?
– Yes, pay the 12% VAT on sales or receipts
– No, pay the 3% general percentage tax and determine
the total 12-month VATable sales amount at the end of
every month

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Business Taxation Procedure (3 of 3)
 It exceeds P3,000,000 – register as VAT-taxpayer
and pay 12% VAT prospectively
 It does not exceed P3,000,000 – continue paying
the 3% general percentage tax
6. Are the goods or services sold excisable?
– Yes, pay the additional excise tax
– No, exempt from excise tax
Note: Once the taxpayer is VAT-registered, he continues to pay 12%
VAT on his sales or receipts until the cancellation of his VAT registration

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Taxable Entities under Business Taxation
1. Individuals engaged in business
2. Taxable estate or trust
3. Partnership
4. Corporation
5. Joint venture
6. Cooperative or association

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Rules on Taxability (1 of 2)
1. Each person, whether natural or juridical is taxable for
the purpose of business taxation
2. Husband and wife are separate taxpayers, in case sales
cannot be directly identified to whose spouse it belongs,
it shall be divided equally for the purpose of business
taxation
3. Parent company and subsidiary company are separate
taxpayers
4. Home and branch office is considered as one taxpayer

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Rules on Taxability (2 of 2)
5. Proprietorship is not a juridical person, thus, its sales and
receipts is taxable on the owner
6. Exempt taxpayers from income tax are also subject to
business tax, such as:
 GPP
 Joint venture engaged in construction or oil exploration
 Local water districts
 BMBE

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What is “business”? (1 of 4)
Refers to habitual engagement in a commercial activity
involving the sale of goods or services for a profit
• Habitual Engagement – regularity in transactions or in the
ordinary course of business
– Except privilege store with not more than 15 days of
cumulative period of engaging in business

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What is “business”? (2 of 4)
• Commercial activity – engagement in the sales of goods or
services for profit
– Not considered business
 Government agencies and instrumentalities –
not for profit
 Non-profit organizations
 Employment
 Directorship in corporation –not an employee but
per diems, fees, and allowances are not in
commercial nature

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What is “business”? (3 of 4)
 Business for mere subsistence (i.e. livelihood)
 business with gross sales or receipts not exceeding
P100,000/year
 marginal income earners – self-employed
individuals earning not exceeding P100,000 in any
12-month period

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What is “business”? (4 of 4)
– Considered in business
 Consultants
 Sales agents of insurance or real estate
 Television or movie artists
 Cooking instructors
 Martial art instructors

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Types of business taxpayers
1. VAT taxpayer – pays 12% VAT
2. Non-VAT taxpayer – pays 3% general percentage tax
Business Activities
Sales or exchange or services or lease
Sales or exchange of goods or properties
of properties

Gross selling price, including the excise tax, less:

Recorded discounts at the time of sale expressly Gross receipts, including:
indicated in the invoice which must not be constructively received payments
dependent upon the happening of a future event advance payments
Business tax base
or contingency amounts charged for materials
supplied for the services
Sales returns & allowances which are refunded to withhold taxes
the buyer during the month or quarter

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Tax Basis (1 of 2)
Gross selling price
– Total amount of money or its equivalent which is paid
or to be paid by the purchaser
 Including excise tax, if any
Treatment of discounts and allowances
 Trade discounts – deductible
 Cash discounts – non-deductible
 Sales returns and allowances – deductible

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Tax Basis (2 of 2)
Gross receipts
– Total amount of money collected or its equivalent,
including
 advances actually or constructively received and
 withholding taxes
Not included in gross receipts
– Agency monies
– Insurance proceeds on damaged assets

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Exempt sales or receipts (1 of 2)
Sale of certain basic necessities
1. Agricultural or marine food products
2. Health services of hospitals
3. Educational services of schools
4. Housing or residential properties within price limits
Sales exempt by law, treaty, or contracts
5. Sales by cooperatives to members
6. Sales or lease of aircrafts or vessels
7. Sales or printing of books, magazines and newspapers
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Exempt sales or receipts (2 of 2)
Casual sales or sale by non-business sellers
1. Sale of persons not regularly engaged in trade or
business
2. Services rendered under an employer-employee
relationship
3. Services rendered b a Regional Area Headquarters of
multinational companies
Export sales of non-VAT taxpayers

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SERVICES SUBJECT TO SPECIFIC
PERCENTAGE TAX (1 of 2)
1. Bank and non-bank financial intermediaries performing
quasi-banking functions and non-bank financial
intermediaries without quasi-banking functions
2. International carriers on their outgoing transport of
cargoes, baggage, or mails
3. Common domestic carriers on their transport of
passengers on land and keepers of garage
4. Amusement places
5. PSE on the sale, barter, or exchange or shares by
investors or corporation conducting initial public offering

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SERVICES SUBJECT TO SPECIFIC
PERCENTAGE TAX (2 of 2)
6. Franchise grantees of television, radio, gas, and water
7. Life insurance companies and agents of foreign
insurance companies
8. Overseas dispatch, message, or conversation originating
from Philippines by franchise grantees of telephone or
telegraph
9. Winnings from jai-alai and race tracks
Note: These sales of services or transactions is subject to 0.6% to 30%
specific percentage tax and shall apply regardless whether the seller is
VAT or Non-VAT taxpayer

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REGISTRATION AS VAT TAXPAYER (1 of 2)
Mandatory
• General threshold of P3,000,000
– all persons engaged in business shall register as VAT
taxpayer when his sale of VATable goods or services
exceeds such threshold for the past 12-month period
– there is reasonable grounds to believe that his gross
sales or receipts for the next 12 months will exceed the
said threshold
• Special threshold of P10,000,000
– Franchise grantees shall register as VAT taxpayer
when their annual receipts exceeds said threshold
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REGISTRATION AS VAT TAXPAYER (2 of 2)
Optional
• One who do not exceed threshold may register as VAT
taxpayer at his discretion
– For all taxpayers who made this option – such shall
be irrevocable for 3-year lock-in period, except, those
that voluntarily registered with the expectation of
exceeding the VAT threshold
– For TV or radio franchise grantees – such shall be
irrevocable perpetually, whether voluntary or
mandatory registration

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Timing of Registration as VAT Taxpayer
1. Persons commencing business with the expectation of
exceeding the VAT threshold
2. Persons exceeding the VAT threshold
3. Franchise grantees of radio or television whose gross
annual receipts of the preceding year exceeded
P10,000,000 threshold
4. Persons who voluntarily register as VAT taxpayer despite
not exceeding the P3,000,000 threshold

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Type of VAT taxpayer

VAT-registered VAT-registrabe

One who exceeded the VAT threshold but did not

1. Definition One who registered under VAT system
yet registered

2. Input tax treatment Tax credit Not allowed at tax credit

3. VAT payable 12% VAT 12% VAT

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Business Tax Reporting

Type of Taxpayer Monthly Tax Return Quarterly Tax Return Deadline

For monthly – within 20 days from the

end of the month
1. VAT taxpayer BIR Form 2550 M BIR Form 2550 Q
For quarterly - Within 25 days from the
end of the quarter

2. Non-VAT
Not applicable BIR Form 2551 Q Within 25 days from the end of the quarter
taxpayer

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