MODULE 5

PERCENTAGE TAXES
THE
NATIONAL INTERNAL REVENUE CODE
OF THE PHILIPPINES
[Tax Reform Act of 1997]
Republic Act No. 8424
AN ACT AMENDING THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES

Percentage tax is a business tax imposed on persons, entities, or transactions specified under Sections
116 to 127 of the National Internal Revenue Code of 1997 (also known as Tax Code), as amended, and as
required under special laws.

Generally, all businesses are liable to pay VAT. If ever the business is exempt from VAT, it may still pay
Other Percentage Tax (OPT).

Percentage tax is a national tax.

Coverage: Types of Percentage tax Who pays percentage tax?

Specific percentage tax - various tax rates VAT and Non-VAT registered taxpayers
General percentage tax - the rate is 3% Non-VAT taxpayers

The following are subject to pay Percentage Tax:

a. Persons exempt from VAT
b. Domestic carriers on their transport of passengers by land and keepers of garage.
c. International carriers on their transport of cargoes, excess baggage and mails only (RA10378)
d. Franchise holders of water, gas, telephone and radio companies
e. Telephone companies on overseas communications
f. Banks and Non-bank Financial Intermediaries
g. Finance companies
h. Life Insurance companies
i. Agents of Foreign Insurance Companies
j. Certain amusement places
k. Winnings from racehorse
l. Sale of shares of stock traded thru the local stock exchange.

HOW TO COMPUTE OPT?

UNDER TAX TAX

SECTION BASE RATE
116 Tax on persons exempt from VAT, because their Gross quarterly 3%
annual gross sales/receipts do not exceed sales or receipts
P3,000,000 and are not VAT registered enterprises.
117 Percentage tax on domestic carriers and keepers of Quarterly gross 3%
garage; receipts
Common carriers on their transport of passengers
by land
OPT on international carriers on their transport of Gross quarterly 3%
118 cargoes, excess baggage and mails only from Phils. receipts

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 to another country.
119 Tax on Franchises: (Franchise tax)
-On gas, water utilities Gross receipts 2%
-On radio/telephone, broadcasting corporation Gross receipts 3%
whose gross receipts in the preceding year did not
exceed P10M
120 Tax on overseas dispatch messages or conversation Receipts from such 10%
originating from the Philippines: (Overseas gross quarterly
Communication Tax) services
Exempted from Sec. 120:
1. Diplomatic services
2. International organizations
3. News services
4. Government
121 Tax on banks and non-bank financial Gross receipts from
intermediaries, money changers and pawnshops: the Philippines
a. Maturity period is two years or less 5%
Maturity period is more than 2 years but 3%
less than 5 years
Maturity period is more than 5 years but 1%
less than 7 yrs
Maturity period is more than 7 years 0%
b. On dividends and equity shares in income
of subsidiaries 0%
c. On royalties, rentals of property, real or
personal, profits from exchange and all
other items treated as gross income under 7%
Sec. 32 of the Tax Code.
d. On net trading gains on foreign currency,
debt instruments, and other similar 7%
financial instruments. (RA 9337)
122 Tax on finance companies
-from lending Gross receipts 5%, 3%,
1% & 0%
-from other sources Gross income 5%
123 Tax on life insurance premium Insurance premiums 2%
collected
124 a) Agents of foreign insurance companies Insurance premiums 10%
(fire/marine or miscellaneous insurance collected Now 4%
agent)

b) Owners of property who obtain insurance On premiums paid 5%

directly with foreign companies.
125 Certain amusement places:
1. Cockpits 18%
2. Cabarets, night/day clubs Gross receipts 18%

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 3. Boxing exhibitions 10%
4. Professional basketball games 15%
5. Jai-alai & race tracks 30%

126 Tax on winnings

a. Owners of winning race horses 10% of the
prizes
b. Winner of the prizes in double 4% of the
forecast/quinella & trifecta bet net of
ticket cost
c. Person winning not in double 10% of the
forecast/quinella & trifecta bet net of
tickets
cost
127 Tax on Sale, Barter or Exchange of Shares of Stock: Gross selling price
1. Tax on Sale, Barter or Exchange of Shares of
Stock Listed and Traded Through the Local or gross value in
Stock Exchange. money of the shares 6/10 of 1%
sold, bartered,
exchanged or
otherwise disposed
2. Tax on Shares of Stock Sold or Exchanged On net capital gains 15% -CGT
Through Initial Public Offering.
3. Sale of shares of stock by a dealer of securities Output VAT xxx
Less: Input VAT xxx VAT
VAT payable xxx

When and Where You Can You File?

You can file your BIR Form No. 2551Q with any Authorized Agent Banks (AAB) of the Revenue District
Office (RDO) where you are registered or are conducting business. In case there are no AABs, then this
form shall be filed with the Revenue Collection Officer (RCO) of your RDO.
If you’re the owner of a franchise, you can file a separate return for your head office and for each
branch or you can file a consolidated return for the head office and included branches.
Note, that this is how you do it if you opt to do it the manual way. If you prefer to do it online, check out
this local app that simplifies the whole filing process.

The Deadlines for Filing Form 2551Q are:

Period Deadline

1st Quarter: January to March On or before April 25

2nd Quarter: April to June On or before July 25

3rd Quarter: July to September On or before October 25

4th Quarter: October to December On or before January 25

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How Can Payment Be Made?
Payment can be made manually or electronically. If you’re opting for manual payment, you can do what
was mentioned above. Head to the AAB located in your area that is within the jurisdiction of the RDO or
file your return with the RCO.

Online payment, on the other hand, can be accomplished using GCash Mobile Payment,
Landbank’s Linkbiz Portal or DBP’s Tax Online. Note that you would still have to manually calculate your
corresponding tax dues, as these channels require you to already enter said tax due amount.

What Penalties Will Be Imposed Upon Failure of Filing?

The taxpayer will incur an interest: of 25% plus surcharge plus compromise fee in cases where he/she
 Failed to file and pay their quarterly percentage tax return on or before the deadline
 Filed a return with the wrong person or officer
 Failed to pay the full or part of the amount of tax due; or
 Failed to pay deficiency tax

The taxpayer will incur a surcharge of 25% plus surcharge plus compromise fee in cases where he/she:
 Willfully neglected to file the quarterly percentage tax within the prescribed period; or
 Willfully made a false and fraudulent return.

THE FOLLOWING ARE SUBJECT TO PAY PERCENTAGE TAX:

a. Persons exempt from VAT (Sec. 116, NIRC)

Tax on persons exempt from VAT, because their annual gross sales/receipts do not exceed
P3,000,000 and are not VAT registered enterprises. The rate is 3% of the gross quarterly sales
or receipts. Those who did not avail of optional VAT Registration is also subject to 3%
percentage tax.

b. Domestic carriers on their transport of passengers by land and keepers of garage.

Common carriers are persons, corporations, firms or associations engaged in the business of
carrying or transporting passengers or goods or both, by land, water, or air, for compensation,
offering their services to the public. ( Article 1732, Civil Code)

SEC. 117. Percentage Tax on Domestic Carriers and Keepers of Garages. - Cars for rent or hire
driven by the lessee, transportation contractors, including persons who transport passengers for hire, and
other domestic carriers by land, air or water, for the transport of passengers, except owners of bancas
and owner of animal-drawn two wheeled vehicle, and keepers of garages shall pay a tax equivalent to
three percent (3%) of their quarterly gross receipts.
cral aw

The gross receipts of common carriers derived from their incoming and outgoing freight shall not be
subjected to the local taxes imposed under Republic Act No. 7160, otherwise known as the Local
Government Code of 1991. cral a

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In computing the percentage tax provided in this Section, the following shall be considered the minimum
quarterly gross receipts in each particular case:
Jeepney for hire - Quarterly Monthly
1. Manila and other cities P 2,400 P 800
2. Provincial 1,200 400

Public utility bus -

Not exceeding 30 passengers 3,600 1,200
Exceeding 30 but not exceeding 50 passengers 6,000 2,000
Exceeding 50 passengers 7,200 2,400

Taxis -
1. Manila and other cities P 3,600 1,200
2. Provincial 2,400 800

Car for hire (with chauffer) 3,000 1,000

Car for hire (without chauffer) 1,800 600

Illustration 1-
Cendong is an operator of five jeepneys and two buses. The monthly receipts of his vehicles
were summarized below:
Passenger Cargoes Total
Tricycle P 20,000 - P 20,000
Jeepneys 150,000 P10,000 160,000
Buses 200,000 40,000 240,000
Total P320,000 50,000 P420,000

Assuming Cendong is a VAT-registered business, his monthly percentage tax due shall be:
Gross receipts P350,000
Multiply by 3%
Percentage tax due P 10,500

Note:
1. The P50,000 gross receipts from cargoes shall be subject to VAT.
2. The P20,000 receipts from tricycle is not subject to tax under the NIRC. It is subject to the local contractor’s tax
under the Local Government Code.

Illustration 2-
Mang Bentong is an operator of a taxi and a car for hire in Cebu City. The taxi reported gross
receipts of P26,000 in the month. The car for hire was indefinitely garaged for repair when its
chauffer bumped it on a bus. The car registered only P600 receipts in the same month.

The gross percentage tax shall be computed as:

Actual Minimum Taxable
Taxi P26,000 P1,200 P26,000
Car for hire 600 1,000 1,000
Gross receipts P27,000
Multiply by 3%
Percentage tax due P 810

Under RMC 70-2015, transport network companies like Uber and Grab taxi and their partners
and suppliers which are holders of a valid-Certificate of Public Convenience (CPC) may be
considered as common carriers qualified to the 3% percentage tax.

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 Exemption to the common carriers tax:
1. Owners of bancas
2. Animal-drawn two-wheeled vehicles
3. Pedicabs (the law is silent, but these businesses may qualify as “business for mere
subsistence”)

c. International carriers on their transport of cargoes, excess baggage and mails only (RA10378)
SEC. 118. Percentage Tax on International Carriers. -
(A) International air carriers doing business in the Philippines shall pay a tax of three percent (3%) of their
quarterly gross receipts. cral aw

(B) International shipping carriers doing business in the Philippines shall pay a tax equivalent to three percent
(3%) of their quarterly gross receipts. cral aw

d. Franchise holders of water, gas, telephone and radio companies

SEC. 119. Tax on Franchises. - Any provision of general or special law to the contrary notwithstanding, there
shall be levied, assessed and collected in respect to all franchises on radio and/or television broadcasting
companies whose annual gross receipts of the preceding year does not exceed Ten million pesos (P10,000.00),
subject to Section 236 of this Code, a tax of three percent (3%) and on electric, gas and water utilities, a tax of
two percent (2%) on the gross receipts derived from the business covered by the law granting the franchise:
Provided, however, That radio and television broadcasting companies referred to in this Section shall have an
option to be registered as a value-added taxpayer and pay the tax due thereon: Provided, further, That once the
option is exercised, it shall not be revoked. cral aw

The grantee shall file the return with, and pay the tax due thereon to the Commissioner or his duly authorized
representative, in accordance with the provisions of Section 128 of this Code, and the return shall be subject to
audit by the Bureau of Internal Revenue, any provision of any existing law to the contrary notwithstanding. cral aw

Revenue Memorandum Circular 25-2022.

Online cockfighting operators are subject to five percent franchise tax.
The tax is separate from the five percent franchise tax collected by the Philippine Amusement and Gaming Corporation
(PAGCOR) from e-Sabong licensee.

Operators’ service income sourced from e-sabong operations as well as other incomes from related activities not
covered by Pagcor’s license, meanwhile, “shall be subject to regular income tax, VAT or percentage tax depending on
the threshold, withholding tax and other taxes, as may be deemed appropriate,”

Generally, franchise are vatable. Exceptionally however, there are only two types of franchise
that are specifically subject to percentage taxes under the NIRC.

Franchise Grantees Percentage Tax rates

Radio or television broadcasting company whose annual gross 3%
receipts do not exceed P10,000,000. (If exceeds P10,000,000, vatable. Even if
below the threshold they may register as VAT taxpayer- under optional)
Gas and water utilities 2%

Illustration 1- Radio Franchise grantees

Radio Filipino exceeded the P10,000,000 annual gross receipts last year due to increase in ads
income brought about by the national election. Radio Filipino is only expected to reach its
P6,000,000 average annual receipt this year.

Radio Filipino shall be subject to VAT on all receipts starting this year. Once the P10M threshold is exceeded, TV or
radio broadcasting companies will be perpetually covered by VAT.

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 Illustration 2 – Gas utilities
City Gas Corporation, a gas utility, consistently had gross sales exceeding P10,000,000 every year.
During the month, it had a P12,000,000 sales.

City Gas Corporation shall be subject to 2% franchise tax on its P12,000,000 sales.

Illustration 3 – Water utilities

Baguio Water District reported a P12,000,000 receipt in a month from water bills of Baguio City
residents.

The receipt of local water districts is subject to 2% franchise tax not to VAT. Note also water is a mineral and is not an
agricultural food product. Local water districts are exempt from income tax but not to business tax.

Note that the franchise tax does not apply to water refilling or purification stations selling bottled mineral water.
These are vatable entities on their sale of water.

Vatable franchises
a. Electricity – electric generation or transmission and distribution by electric cooperatives are
vatable.
b. Telecommunication – Telecom companies are vatable, except on their receipts from
outgoing messages since these are subject to the 10% overseas communication tax.
c. Transportation – transport companies are vatable, except receipts of common carriers by
land on their transport of passengers since these are subject to the 3% common carriers tax.
d. Private franchises

e. Telephone companies on overseas communications

SEC. 120. Tax on Overseas Dispatch, Message or Conversation Originating from the Philippines. -
(A) Persons Liable. - There shall be collected upon every overseas dispatch, message or conversation
transmitted from the Philippines by telephone, telegraph, telewriter exchange, wireless and other
communication equipment service, a tax of ten percent (10%) on the amount paid for such services. The tax
imposed in this Section shall be payable by the person paying for the services rendered and shall be paid to
the person rendering the services who is required to collect and pay the tax within twenty (20) days after
the end of each quarter. cral aw

(B) Exemptions. - The tax imposed by this Section shall not apply to:
(1) Government. - Amounts paid for messages transmitted by the Government of the Republic of the Philippines
or any of its political subdivisions or instrumentalities;

(2) Diplomatic Services. - Amounts paid for messages transmitted by any embassy and consular offices of a
foreign government;

(3) International Organizations. - Amounts paid for messages transmitted by a public international organization
or any of its agencies based in the Philippines enjoying privileges, exemptions and immunities which the
Government of the Philippines is committed to recognize pursuant to an international agreement; and

(4) News Services. - Amounts paid for messages from any newspaper, press association, radio or television
newspaper, broadcasting agency, or newstickers services, to any other newspaper, press association, radio or
television newspaper broadcasting agency, or newsticker service or to a bona fide correspondent, which
messages deal exclusively with the collection of news items for, or the dissemination of news item through, public
press, radio or television broadcasting or a newsticker service furnishing a general news service similar to that of
the public press.

The overseas dispatch, message or conversation transmitted from the Philippines by telephone,
telegraph, telewriter exchange, wireless and other communication equipment services is subject

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 to a 10% percentage tax. This percentage tax is commonly referred to as the “overseas
communication tax”.

The following table summarizes the business tax rules:

Call Origin Call Destination Business Tax

Philippines Philippines 12% VAT
Abroad Philippines 0% VAT
Philippines Abroad 10% overseas communication tax

Illustration:
Quick Telecommunications had the following receipts during the quarter:
Call Origin Call Destination Amount Collected
Philippines Philippines P20,000,000
Abroad Philippines 8,000,000
Philippines Abroad 5,000,000

The quarterly overseas communication tax shall be computed as:

Gross receipts from outgoing calls P5,000,000
Multiply by: 10%
Percentage tax P 500,000

Exemptions:
The overseas communication tax shall not apply to the outgoing calls of the following:
a. Government – including any of its political subdivisions or instrumentalities
b. Diplomatic services – embassies and consular offices of foreign governments
c. International organizations – those enjoying privileges exemptions and immunities under
international agreements
d. News services

f. Banks and Non-bank Financial Intermediaries

SEC. 121. Tax on Banks and Non-Bank Financial Intermediaries. - There shall be a collected tax on gross
receipts derived from sources within the Philippines by all banks and non-bank financial intermediaries in
accordance with the following schedule:
(a) On interest, commissions and discounts from lending activities as well as income from financial leasing, on
the basis of remaining maturities of instruments from which such receipts are derived:
Short-term maturity (non in excess of two (2) years) 5%
Medium-term maturity (over two (2) years but
not exceeding four (4) years) 3%
Long-term maturity -
(1) Over four (4) years but not exceeding seven (7) years 1%
(2) Over seven (7) years 0%
(b) On dividends 0%
(c) On royalties, rentals of property, real or personal, profits, from exchange
and all other items treated as gross income under Section 32 of this Code 5% now -(7%)

Provided, however, That in case the maturity period referred to in paragraph (a) is shortened thru pretermination,
then the maturity period shall be reckoned to end as of the date of pretermination for purposes of classifying the
transaction as short, medium or long-term and the correct rate of tax shall be applied accordingly.
Nothing in this Code shall preclude the Commissioner from imposing the same tax herein provided on persons
performing similar banking activities.
cralaw

Banks- refers to entities engaged in the lending of funds obtained in the form of deposits

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Non-bank financial intermediaries – refers to persons or entities whose principal function
include the lending, investing or placement of funds or evidences of indebtedness or equity
deposited with them, acquired by them or otherwise coursed through them, either of their own
account or for the account of others.

Quasi-banking activities" means borrowing funds from twenty or more personal or corporate
lenders at any one time, through the issuance, endorsement or acceptance of debt for the
borrower's own accounts, or through the issuance certificates of assignment or similar
instruments, with recourse, or of repurchase agreements, whether any of these means of
obtaining funds from the public is done on a regular basis or only occasionally.

Examples are savings and loan associations, financing companies and non-bank financial
institutions performing quasi-banking functions, pawnshops, insurance companies, cooperatives
and other financial credit institutions

Tax Rates on Banks and Quasi-Banks

Source of income or receipt % tax rate
1. Interest income, commissions and discounts from lending activities, and income from
financial leasing, on the basis of remaining maturities of instruments from which the receipts
were derived:
a. Maturity period of five years or less 5%
b. Maturity period of more than five years 1%
2. Dividend and equity shares in the net income of subsidiaries 0%
3. On royalties, rentals of property, real or personal, profits from exchange and all other items 7%
treated as gross income under Section 32 of the NIRC)
4. On net trading gains within the taxable year on foreign currency, debt securities, derivatives, 7%
and other similar financial instruments (RA 9337)
Note:
1. The percentage tax on banks, quasi-banks and other non-bank financial institution is commonly known as the
“gross receipt tax”.
2. The BSP usually makes a periodic publication of the list of quasi-banks. Non-bank financial intermediaries not
performing quasi-banking functions are subject to a separate set of gross receipt tax rates.

Illustration: Basic computation

Orion Bank had the following interest receipts during the month:

Source of income Total amount

Interest income from loans maturing within 2 years P2,500,000
Interest income from loans maturing more than 2 years but within 5 years 1,000,000
Interest income on loans maturing more than 5 years 1,200,000
Processing fees 300,000
Rent income from foreclosed properties ()ROPA) 200,000
Dividends income 50,000

The gross receipt tax of the bank shall be computed as follows:

Amount Tax rates % Tax
Interest on short-term loans:
Up to 2 year loans P2,500,000
More than 2 to 5 year loans 1,000,000
P3,500,000 5% P175,000

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 Interest on long-term loans:
More than 5 year maturity P1,200,000 1% 12,000
Dividends 50,000 0% 0
Other items of gross income:
Processing fees P300,000
Rent income 200,000
Total P500,000 7% 35,000
Gross receipt tax P222,000

Illustration 2: Meaning of “On the basis of remaining securities”

In 2019, East Bank had a 10-year loan with a principal amount of P1,000,000 which was issued
on March31, 2014. The loan pays P20,000 monthly interest income on the last day of every
month.

The applicable gross receipt tax rate for the monthly interest payment on this loan in 2014 shall
be:

Month Remaining maturity Applicable tax rate

January 31, 2019 5 years and 2 months 1%
February 28, 2019 5 years and 1 month 1%
March 31, 2019 Exactly 5 years 5%*
April 30, 2019 4 years and 11 months 5%*
*This tax rate applies on interest for every month thereafter until maturity

The monthly gross receipt tax on the interest income on this loan shall be:
Monthly gross receipts January February March April
Interest income P20,000 P20,000 P20,000 P20,000
Gross receipt tax rate 1% 1% 5% 5%
Gross receipt tax P200 P200 P1,000 P1,000

g. Finance companies
SEC. 122. Tax on Finance Companies. - There shall be collected a tax of five percent (5%) on the gross
receipts derived by all finance companies, as well as by other financial intermediaries not performing quasi-
banking functions doing business in the Philippines, from interest, discounts and all other items treated as gross
income under this Code: Provided, That interests, commissions and discounts from lending activities, as well as
income from financial leasing, shall be taxed on the basis of the remaining maturities of the instruments from
which such receipts are derived, in accordance with the following schedule:
Short-term maturity (non in excess of two (2) years) 5%
Medium-term maturity (over two (2) years
but not exceeding four (4) years) 3%
Long-term maturity -
(1) Over four (4) years but not exceeding seven (7) 1%
(2) Over seven (7) years 0%

Provided, however, That in case the maturity period is shortened thru pretermination, then the maturity period
shall be reckoned to end as of the date of pretermination for purposes of classifying the transaction as short,
medium or long-term and the correct rate of tax shall be applied accordingly.
Nothing in this Code shall preclude the Commissioner from imposing the same tax herein provided on persons
performing similar financing activities.
cral aw

Tax on other Financial Intermediaries Without Quasi-Banking Functions

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Examples of non-bank financial intermediaries without quasi-banking functions include:
a. Pawnshops (RR110-2004, October 18, 2004 and RA 9238)
b. Money changers
Source of income or receipt % Tax rate
1. Interest income, commissions and discounts from lending activities, income from financial
leasing, on the basis of remaining maturities of instruments from which the receipts were
derived.
a. Maturity period is five years or less 5%
b. Maturity period is more than five years 1%
2. From all other items treated as gross income under the NIRC 5%

Common rules for banks, Quasi-banks and other Financial Institutions

1. Accounting rules
Under RR4-2009. The basis of the calculation of gross receipts shall be the generally
accepted accounting principles (GAAP) prescribed by the:
a. BSP – for banks and quasi-banks
b. SEC – for other non-bank financial intermediaries

2. Finance and operating leases

A finance lease also known as direct financing lease)-is a sale of property where by the seller
earns only interest income on the arrangement. An operating lease is not a sale and does
not transfer ownership over the leased property.

The taxable gross receipt on finance leases shall consists only of interest income excluding
collections of principal. In operating lease, gross receipt shall include the gross rentals
received.

Illustration 1: The effective interest method for finance leases

HIM Finance Corporation imports machineries from abroad and sells them under a
deferred financing scheme. On February 1, 2019, it sold a machine with an acquisition
cost of P257,710 for P300,000, payable in monthly installment of P100,000 starting
March 1, 2019. The loan earns 8% effective interest.

The P42,290 excess of ten contract price over the cost (P300,000 – P257,710) is an
interest income to be recognized as income pursuant to the effective interest method
under GAAP:

Date Beg. balance Interest income Collection Principal reduction Ending Balance
Feb. 1, 2019 P257,710 P257,710
Mar. 1, 2019 257,720 P20,617 P100,000 79,383 178,327
Apr. 1, 2019 178.327 14,266 100,000 85,734 92,593
May 1, 2019 95,593 7,407 100,000 92,593 0

Note:
1. The interest income is computed as beginning balance of the loan x interest rate.
2. The principal reduction is computed as collection less interest income.
3. The ending balance is computed as beginning balance less principal reduction.

The interest income in each month is reported as gross receipt in the month realized, not the
entire P100,000 monthly collection because it contains recovery of the principal.

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 Illustration 2: Operating lease
Itogon Industrial Bank foreclosed a property in March., It leased the property to a commercial
lessee for a period of 10 years, The lessee pays P50,000 monthly rental on the property.
The P50,000 monthly rental shall be included in the monthly gross receipts for purposes of the gross receipt
tax. Note that this rental is purely income.

3. Pre-termination of loans
In the case of pre-termination, the maturity period shall be reckoned to end as of the date
of pre-termination for purpose of classifying the transaction and applying the correct rate of
tax.

Illustration:
On January 1, 2015, Pinoy Bank loaned P1,000,000 to a client payable within 10 years. The
loan pays 10% interest payable every December 31 with the first interest payment due
December 31, 2015.

On June 30, 2021, the client pre-terminated the loan by repaying the principal in full.

The following are the interest income and the gross receipt taxes paid since the origination
of the loan:

Year Remaining maturity Interest Tax rate Amount

2015 9 years P100,000 1%* P1,000
2016 8 years 100,000 1%* 1,000
2017 7 years 100,000 1%* 1,000
2018 6 years 100,000 1%* 1,000
2019 5 years 100,000 5%** 5,000
2020 4 years 100,000 5%** 5,000
Total 14,000
6/30/2021 - P50,000 ?? ??
*Maturity period is more than 5 years = 1% tax rate
**Maturity period is 5 years or less = 5% tax rate

Upon the termination on June 30, 2021, the loan shall be reclassified. The remaining
maturities of the loan shall be re-counted up to the date of pre-termination. The correct
gross receipt tax shall be recomputed and adjustment shall be made:

Year Remaining maturity* Interest Tax rate Amount

2015 5.5 years P100,000 1% P1,000
2016 4.5 years 100,000 5% 5,000
2017 3.5 years 100,000 5% 5,000
2018 2.5 years 100,000 5% 5,000
2019 1.5 years 100,000 5% 5,000
2020 < 1 year 100,000 5% 5,000
2021 None 50,000 5% 2,500
Total gross receipt P28,500
Less: Gross receipt tax previously reported and paid 14,000
Gross receipt tax due as recounted 14,500
*Up to June 30, 2021, the date of pre-termination (Jan 1, 2015 to June 30, 2021 = 6.5 yrs.) hence, the
remaining maturity dates as of Dec. 31, 2015 is 5.5 years

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 Withholding of Percentage Tax on Banks
Effective August 1, 2014, the BSP shall withhold the percentage tax on banks and non-bank financial
institutions on all its payments to special deposit accounts and reserve liquidity accounts. (BSP Memo No.
MN-2014-029)
2021-6-30
2019-12-31
2-6 -30

h. Life Insurance companies

SEC. 123. Tax on Life Insurance Premiums. - There shall be collected from every person, company or
corporation (except purely cooperative companies or associations) doing life insurance business of any sort in the
Philippines a tax of five percent (5%) (NOW is 2% -under RA10001- AN ACT REDUCING THE TAXES ON LIFE
INSURANCE POLICIES, AMENDING FOR THIS PURPOSE SECTIONS A23 QND 183 OF THE NATIONAL INTERNAL
REVENUE CODE OF 1997,AS AMENDED.) of the total premium collected, whether such premiums are paid in
money, notes, credits or any substitute for money; but premiums refunded within six (6) months after payment
on account of rejection of risk or returned for other reason to a person insured shall not be included in the
taxable receipts; nor shall any tax be paid upon reinsurance by a company that has already paid the tax; nor
upon doing business outside the Philippines on account of any life insurance of the insured who is a nonresident,
if any tax on such premium is imposed by the foreign country where the branch is established nor upon
premiums collected or received on account of any reinsurance , if the insured, in case of personal insurance,
resides outside the Philippines, if any tax on such premiums is imposed by the foreign country where the original
insurance has been issued or perfected; nor upon that portion of the premiums collected or received by the
insurance companies on variable contracts (as defined in section 232(2) of Presidential Decree No. 612), in
excess of the amounts necessary to insure the lives of the variable contract workers. cral aw

Cooperative companies or associations are such as are conducted by the members thereof with the money
collected from among themselves and solely for their own protection and not for profit. cral aw

A life insurance company is a company which deals with the insurance on human lives and
insurance appertaining thereto or connected therewith. The service likewise includes soliciting
group insurance, and health and accident insurance policies which the company is nevertheless
authorized to pursue as part of its business activity (RMC 30-08)

Hence, premiums on health and accident insurance underwritten by life insurance companies
are subject to the premiums tax. However, premiums on health and accident insurance
underwritten by non-life insurance policies are vatable.

The following shall not be included in gross receipts of an insurance accompany:

a. premiums refunded within 6 months after payment on account of rejection of risks or
returned for other reasons. (these are not receipts, hence excluded from tax base.)
b. Re-insurance premiums
c. Premiums from life insurance of non-residents received from abroad by branches of
domestic corporation, firm or association doing business outside the Philippines. (since these
an exempt foreign consumption)
d. Excess of premiums on variable contracts in excess of the amounts necessary to insure the
lives of the variable contract owners (this represents investments rather than premiums)

Type of Insurance Business:

a. Direct insurance – underwrites insurance policy and negotiates them to policyholders
through insurance agents. To minimize risks, insurers cede or assign parts of their insurance
premiums to reinsurers who shall undertake to assume part of the risks.

13
 Upon collection of the premiums by direct insurers, the 2% premium tax for life insurance policies or VAT for non-
life insurance policies applies. When insurers cede part of these premiums to reinsurers, it should not be taxed
again. Otherwise, double taxation occurs.
b. Reinsurers -are thus insurers of insurers.
c. Retrocessionaires – are insurers of reinsurers.
Except for crop insurance, non-life insurance is vatable. Non-life insurance includes surety, fidelity, indemnity,
bonding companies, marine, fire and casualty insurance.

Illustration 1:
Absolute insurance underwrites both life and non-life insurance policies. The following
were the premiums collected in a month:
Life policies Non-life
Cash collections P2,000,000 P1,500,000
Checks 400,000 600,000
Promissory note 500,000 400,000
Total P2,900,000 P2,500,000

The percentage tax will be computed as :

Cash collections P2,000,000
Checks 400,000
Promissory note 500,000
Total premiums P2,900,000
Multiply by: percentage tax rates 2%
Premiums tax P 58,000

Note:
1. Gross receipt includes collections of cash or money substitutes such as check. Only in the case of life
insurance that a promissory note is exceptionally included as part of gross receipts for the purposes of
computing the premium tax.
2. Non-life insurance is vatable, the gross receipts of non-life business do not include promissory notes.

Illustration 2-
Phinoy Reinsurance, a domestic reinsurance company, reported the following premiums and
retrocessions to a foreign retrocessionaire during the month:
Reinsurance premiums P12,000,000
Less: Retroceded premiums 8,000,000
Retention P 4,000,000
Commissions from retroceded reinsurance contracts 500,000

Reinsurance premium is exempt from premiums tax as it is already subjected to premium tax on the ceding insurance
company. The payment of retrocession premium to the foreign insurer is subject to the withholding VAT because this
is a purchase of reinsurance service from a non-resident. Insurance commission or re-insurance commission whether
life or non-life is vatable.

Illustration 3-
Sihra Life Insurance Philippines offers life insurance and variable insurance products. The
following relates to its monthly receipts:

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 Life Plans Variable Life Plans
Total premiums P2,000,000 P8,000,000
Less: Insurance charges - 5,000,000
Credits to client account balances P P 3,000,000

The premiums tax shall be computed as follows:

Life premiums P2,000,000
Insurance charges on variable life plans 5,000,000
Total life insurance premiums P 7,000,000
Multiply by: 2%___
Premiums tax P 140,000

Note: The credits to client account balances constitute client investments.

Taxation of other receipts of life insurance business

1. Renewal or re-insurance fee, re-instatement fee and penalties – these are considered incidental to or
connected to insurance policy contracts and are akin (similar) to premium; hence subject to the 2%
premiums tax.

2. Management fees, rental income, or other income from unrelated services – these are vatable.

3. Investment income
a. If investment income is realized from the investment of premiums earned, it is exempt. (Note that
the premiums which have been the source of the funds invested had already been subjected to 2%
premium tax. (RMC 20-08)

b. If investment income is realized from the investment of funds obtained from others, it is considered
income from quasi-banking; hence, subject to the gross receipt tax imposed on non-bank financial
intermediaries.

c. The investment income that cannot be specifically identified as coming from invested premiums or
borrowed funds shall be apportioned based on total premiums earned for the month and the
liability account balance.

Summary of Tax Rules on Insurance

Republic of the Philippines

Re-insurers
Domestic/Resident
Re-insurance life insurers
premiums (0%)

Foreign Insurers
2% premiums
5% Percentage tax tax

Agent Insured

4% premiums
tax

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 Life Insurance Non-life insurance
Direct premiums 2% premiums tax Vatable
Re-insurance premiums Exempt Exempt
Insurance commissions* Vatable Vatable
*covers insurance and reinsurance commissions (RR16-2005)

i. Agents of Foreign Insurance Companies

SEC. 124. Tax on Agents of Foreign Insurance Companies. - Every fire, marine or miscellaneous
insurance agent authorized under the Insurance Code to procure policies of insurance as he may have
previously been legally authorized to transact on risks located in the Philippines for companies not
authorized to transact business in the Philippines shall pay a tax equal to twice the tax imposed (on
life insurance premium) in Section 123: Provided, That the provision of this Section shall not apply to
reinsurance: Provided, however, That the provisions of this Section shall not affect the right of an owner
of property to apply for and obtain for himself policies in foreign companies in cases where said owner
does not make use of the services of any agent, company or corporation residing or doing business in the
Philippines. In all cases where owners of property obtain insurance directly with foreign companies, it shall
be the duty of said owners to report to the Insurance Commissioner and to the Commissioner each case
where insurance has been so effected, and shall pay the tax of five percent (5%) (NOW is 4% - twice
the tax rate of life insurance premium) on premiums paid, in the manner required by Section 123. cral aw

Direct insurance from abroad

If property owners obtain insurance directly from abroad without the services of an insurance agent, the tax shall be
5% of the premium paid. It shall be the duty of the owner to report each transaction to the Insurance Commissioner
and to the CIR.

Illustration:
Mang Pandoy insured his buildings with a foreign insurer. He paid P150,000 premiums during
the month.
Mang Pandoy shall pay the transaction to the Insurance Commissioner and the BIR and pay P7,500 premiums tax (i.e.
P150,000 x 5%) to the BIR. This transaction should be subject to the withholding VAT, but the same is specifically
subjected to percentage tax.

j. Certain amusement places

SEC. 125. Amusement Taxes. - There shall be collected from the proprietor, lessee or operator of
cockpits, cabarets, night or day clubs, boxing exhibitions, professional basketball games, Jai-Alai and
racetracks, a tax equivalent to:
(a) Eighteen percent (18%) in the case of cockpits;
(b) Eighteen percent (18%) in the case of cabarets, night or day clubs;
(c) Ten percent (10%) in the case of boxing exhibitions: Provided, however, That boxing exhibitions
wherein World or Oriental Championships in any division is at stake shall be exempt from amusement tax:
Provided, further, That at least one of the contenders for World or Oriental Championship is a citizen of
the Philippines and said exhibitions are promoted by a citizen/s of the Philippines or by a corporation or
association at least sixty percent (60%) of the capital of which is owned by such citizens;
(d) Fifteen percent (15%) in the case of professional basketball games as envisioned in Presidential
Decree No. 871: Provided, however, That the tax herein shall be in lieu of all other percentage taxes of
whatever nature and description; and
(e) Thirty percent (30%) in the case of Jai-Alai and racetracks of their gross receipts, irrespective, of
whether or not any amount is charged for admission.

For the purpose of the amusement tax, the term "gross receipts" embraces all the receipts of the
proprietor, lessee or operator of the amusement place. Said gross receipts also include income from
television, radio and motion picture rights, if any. A person or entity or association conducting any activity
subject to the tax herein imposed shall be similarly liable for said tax with respect to such portion of the
receipts derived by him or it.

The taxes imposed herein shall be payable at the end of each quarter and it shall be the duty of the
proprietor, lessee or operator concerned, as well as any party liable, within twenty (20) days after the end
of each quarter, to make a true and complete return of the amount of the gross receipts derived during
the preceding quarter and pay the tax due thereon. cral

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Illustration 1: Places of exhibition
North Dome, Inc. operates a coliseum which caters to various athletic and artistic competitions
or events. During the quarter, North Dome, Inc. reported receipts from the following events:
Professional non-titled boxing bouts P 200,000
Philippine basketball boxing bouts 300,000
Professional basketball games 400,000
Amateur basketball games 500,000
Concert of various musical artists 400,000
Total receipts P1,800,000

The quarterly percentage taxes will be computed as follows:

Non-titled boxing bouts P 200,000
Philippine titled boxing bouts 300,000
Total P 500,000
Multiply by Percentage tax rate 10% P 50,000

Professional basketball games P 400,000

Multiply by: Percentage tax rate 15% 60,000
Total Amusement tax P110,000

Note: The gross receipts from amateur basketball games and concerts are vatable. If North Dome
is a VAT taxpayer, these are subject to VAT. Otherwise, these are subject to 3% general
percentage tax.

Illustration 2- Cabaret
Jake is an operator of a disco (cabaret) and bowling alleys. During a particular quarter, it
reported the following:
Cabaret Bowling alleys
Gate receipts P200,000 P200,000
Sales of foods and beverages 800,000 150,000

The quarterly percentage tax will be computed as follows:

Gate receipts – cabarets P 200,000
Sale of food items 800,000
Total receipts from cabaret business P1,000,000
Multiply by: Amusement tax rate 18%
Amusement tax P 180,000
Note: The receipts and sales from the bowling alleys are not specified by the NIRC to be specifically subject to
percentage tax; hence, vatable

Illustration 3: Hotel disco

La Venice Hotel, Inc. operates a hotel with a disco and restaurant. The following were its sales
and receipts during a particular quarter:
Room rentals P2,000,000
Parking rentals 100,000
Sales from hotel restaurant 1,200,000
Sales of foods and beverages from disco 1,000,000
Gate receipts from disco 200,000

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 The quarterly percentage tax will be computed as followed:
Sales of foods and beverages from disco P 1,000,000
Gate receipts from disco 200,000
Total amusement receipts P 1,200,000
Multiply by: Amusement tax rate 18%
Amusement tax P 216,000

Note: Only the disco operations and all sales or receipts incidental to it is subject to the amusement tax. The
other receipts of La Venice Hotel are vatable.

Illustration 4-
Pegasus Sports Complex, a cockpit operated by Mr. Ken Chi, had the following receipts during
the quarter:
Gate receipts P 200,000
“Plasada: (10% tongs on winnings on every “sultada”) 800,000
Sales of foods and drinks (Restaurant operated by Pegasus) 400,000
Rent income from concessionaires
(Other businesses operating in the cockpit) 50,000
Total receipts P1,450,000

The total percentage tax due of Pegasus Sports Complex shall be:
Total amusement receipts P1,450,000
Multiply by: Amusement tax rates 18%
Amusement tax P 261,000

Note: If they do not qualify as business for mere subsistence, the concessionaires inside the cockpits shall be
subject to the 3% percentage tax or to V AT.

A concessionaire is a person or business that has been given the right to sell something on property owned by
someone else.

Illustration 5-
Assume that the restaurant in Illustration 4 is operated by Mrs. Tinola Kasador, a non-VAT
taxpayer.

Mrs. Kasador shall pay the 3% general percentage tax on the P400,000 receipts. The same shall
not be taxed to Pegasus Sports Complex. The rental which Mrs. Kasador pays to Pegasus shall be
included in Pegasus’s gross receipts which shall be subject to the 18% amusement tax.

Illegal cockpits
Persons who are engaged in the same operations such as operators of illegal “tupada” cockpit
are also taxed at 18% of their gross receipts.

k. Winnings from racehorse

SEC. 126. Tax on Winnings. - Every person who wins in horse races shall pay a tax equivalent to ten
percent (10%) of his winnings or 'dividends', the tax to be based on the actual amount paid to him for
every winning ticket after deducting the cost of the ticket: Provided, That in the case of winnings from
double, forecast/quinella and trifecta bets, the tax shall be four percent (4%). In the case of owners of
winning race horses, the tax shall be ten percent (10%) of the prizes. cral aw

18
The tax herein prescribed shall be deducted from the 'dividends' corresponding to each winning ticket or
the "prize" of each winning race horse owner and withheld by the operator, manager or person in charge
of the horse races before paying the dividends or prizes to the persons entitled thereto. cral aw

The operator, manager or person in charge of horse races shall, within twenty (20) days from the date
the tax was deducted and withheld in accordance with the second paragraph hereof, file a true and correct
return with the Commissioner in the manner or form to be prescribed by the Secretary of Finance, and
pay within the same period the total amount of tax so deducted and withheld. cral aw

Winnings from race tracks and jai-alai are subject to the following amusement taxes:
Winnings in horse race or jai-alai, in general 10%
Winnings from double, forecast/quinella and trifecta bets 4%
Owners of winning race horses 10%

Notes: Types of Winnings

A. Combination bets:
1. Double- a bet to select the winners in two specific races
2. Daily double – a bet to forecast the first winning horse on two consecutive races
3. Forecast – a bet to predict the first and second finisher of a particular race
4. Exacta or perfecta – a bet to pick the first two finishers in exact order
5. Quinella – a bet where at least the first two finishers must be picked in either order
6. Trifecta – a bet to predict the first three finishers in a race in exact order

B. Straight wagers:
1. Win – the selected horse must finish first
2. Place – the selected horse just come first or second
3. Show – the selected horse must come first, second or third

Tax on Winnings
The pay-out on combination nets is subject to 4% on the net winnings. The pay-out on straight
wagers (non-combination bets) is taxable at 10%.

The tax shall be deducted from the “dividend” corresponding to each winning ticket or the “prize” of each winning race
horse owner and withheld by the operator or person in charge of the horse race before paying the dividends or prizes
to the person entitled thereto. The tax shall be paid within 20 days from the date it is withheld. (Sec. 126, NIRC)

Illustration 1: Race track operators

Gamby Hippodrome operates a race track. It had the following dividends for winning tickets
during an event:
Total winnings on straight bets (costs of winning tickets, P10,000) P80,000
Total winnings in daily double, forecast and quinella
(cost of winning tickets, P600) 40,000
A winner of trifecta (cost of ticket= P200) 30,000
Prize of the owner of winning horses 100,000
Total prizes, winnings or dividends P250,000

The following tax must have been withheld from these winnings before their release to the
winners:
Net winnings in daily double, forecast and quinella (P40,000-P600) P 39,400
Net winning on trifecta (P30,000 – P200) 29,800
Total P 69,200
Multiply by: 4% P2,768
Prize of the winning horse P100,000

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 Net winnings on straight bets (P80K-P10K) 70,000
Total P170,000
Multiply by: 10% 17,000
Total percentage tax P19,768

Note: These taxes on winnings are separate from the 30% amusement tax to be paid by the race track on its own
quarterly gross receipts.

The net pay-out of Gamby Hippodrome on the prizes or winnings shall be:
Total prizes, winnings or dividends P250,000
Less: Total percentage tax on winnings P19,768
Net pay-out to winners P230,232

Illustration 2- Net winnings

Mrs. Petra hit the trifecta with a pay-out of P58,000 from her P100 ticket. How much will she
receive from her winnings?
Answer: P58,000 – (P58,000 – P100) x 4% = P55,684

Illustration 3: Operator of Jai-alai

On a particular event, an operator of jai-alai reported total receipts of P1,000,000 from jai-alai
bets. There was a total P650,000 total winnings of various picks made by bettors. The cost of
winning picks was P50,000.

The jai-alai operator must withhold the following tax on the winnings:
Jai-alai winnings (P650,000 – P50,000) P600,000
Multiply by: 10%
Percentage tax on winnings P 60,000

Note:
1. The P1,000,000 gross receipts shall be subject to the 30% amusement tax for the jai-alai operators.
2. Winnings from other amusement places or activities such as cockpit, boxing, basketball, billiards, and
bowling competitions are not subject to tax.

l. Sale of shares of stock traded thru the local stock exchange.

SEC. 127. Tax on Sale, Barter or Exchange of Shares of Stock Listed and Traded Through the
Local Stock Exchange or Through Initial Public Offering. -
(A) Tax on Sale, Barter or Exchange of Shares of Stock Listed and Traded Through the Local
Stock Exchange. - There shall be levied, assessed and collected on every sale, barter, exchange, or
other disposition of shares of stock listed and traded through the local stock exchange other than the
sale by a dealer in securities, a tax at the rate of one-half of one percent (1/2 of 1%) NOW – 60%
OF 1% of the gross selling price or gross value in money of the shares of stock sold, bartered,
exchanged or otherwise disposed which shall be paid by the seller or transferor. This percentage tax
is commonly known as “stock percentage tax.” T

(B) Tax on Shares of Stock Sold or Exchanged Through Initial Public Offering. - There shall be
levied, assessed and collected on every sale, barter, exchange or other disposition through initial public
offering of shares of stock in closely held corporations, as defined herein, a tax at the rates provided
hereunder based on the gross selling price or gross value in money of the shares of stock sold, bartered,
exchanged or otherwise disposed in accordance with the proportion of shares of stock sold, bartered,
exchanged or otherwise disposed to the total outstanding shares of stock after the listing in the local
stock exchange:
Up to twenty-five percent (25%) 4%
Over twenty-five percent (25%) but not over thirty-three This is known as the
and one third percent (33 1/3%) 2% IPO tax which applies

20
 Over thirty-three and one third percent (33 1/3%) 1% only to the IPO of a
Closely held corp.

The tax herein imposed shall be paid by the issuing corporation in primary offering or by the seller in
secondary offering.

For purposes of this Section, the term "closely held corporation" means any corporation at least fifty
percent (50%) in value of outstanding capital stock or at least fifty percent (50%) of the total combined
voting power of all classes of stock entitled to vote is owned directly or indirectly by or for not more than
twenty (20) [Link]

For purposes of determining whether the corporation is a closely held corporation, insofar as such
determination is based on stock ownership, the following rules shall be applied:

(1) Stock Not Owned by Individuals. - Stock owned directly or indirectly by or for a corporation,
partnership, estate or trust shall be considered as being owned proportionately by its shareholders,
partners or beneficiaries.

(2) Family and Partnership Ownerships. - An individual shall be considered as owning the stock owned,
directly or indirectly, by or for his family, or by or for his partner. For purposes of the paragraph, the
'family of an individual' includes only his brothers and sisters (whether by whole or half-blood),
spouse, ancestors and lineal descendants.

(3) Option. - If any person has an option acquire stock, such stock shall be considered as owned by such
person. For purposes of this paragraph, an option to acquire such an option and each one of a series
of options shall be considered as an option to acquire such stock.

(4) Constructive Ownership as Actual Ownership. - Stock constructively owned by reason of the
application of paragraph (1) or (3) hereof shall, for purposes of applying paragraph (1) or (2), be
treated as actually owned by such person; but stock constructively owned by the individual by reason
of the application of paragraph (2) hereof shall not be treated as owned by him for purposes of again
applying such paragraph in order to make another the constructive owner of such stock.

(C) Return on Capital Gains Realized from Sale of Shares of Stocks. -

(1) Return on Capital Gains Realized from Sale of Shares of Stock Listed and Traded in the Local Stock
Exchange.- It shall be the duty of every stock broker who effected the sale subject to the tax imposed
herein to collect the tax and remit the same to the Bureau of Internal Revenue within five (5) banking
days from the date of collection thereof and to submit on Mondays of each week to the secretary of the
stock exchange, of which he is a member, a true and complete return which shall contain a declaration of
all the transactions effected through him during the preceding week and of taxes collected by him and
turned over to the Bureau Of Internal Revenue.

(2) Return on Public Offerings of Share Stock. - In case of primary offering, the corporate issuer shall file
the return and pay the corresponding tax within thirty (30) days from the date of listing of the shares of
stock in the local stock exchange. In the case of secondary offering, the provision of Subsection (C)(1) of
this Section shall apply as to the time and manner of the payment of the tax.

(D) Common Provisions. - Any gain derived from the sale, barter, exchange or other disposition of
shares of stock under this Section shall be exempt from the tax imposed in Sections 24(C), 27(D)(2),
28(A)(8)(c), and 28(B)(5)(c) of this Code and from the regular individual or corporate income tax. Tax
paid under this Section shall not be deductible for income tax purposes.

Illustration
Orion Securities effected the sale of the following stocks during a trading day:
Type of stocks Owner Selling price Cost
Through the trading facilities of the PSE
Preferred stocks Client P3,000,000 P2,900,000
Common stocks Client 2,800,000 3,000,000
Stock options Client 400,000 450,000
Common stocks Orion securities 4,000,000 3,000,000

21
Directly to the buyer:
Common stocks Client P 800,000 P 500,000
Preferred stocks Orion securities 2,000,000 2,100,000

The percentage tax shall be computed from the stocks sold through the PSE as follows:

Type of stocks Owner Selling price

Preferred stocks Client P3,000,000
Common stocks Client 2,800,000
Stock options Client 400,000
Total selling price of stocks P6,200,000
Multiply by: Stock transaction tax rate 60% x 1%
Stock transaction tax P 37,200

Note:
1. The tax applies only on listed stocks (domestic or foreign) sold through the PSE. The tax applies without regard to
the type of stocks sold. Recall also from Income Taxation that the term “stock” includes stock options and
warrants.
2. Since this is not an income tax, the tax applies without regard to the existence of any gain or loss on the
transaction.
3. The stock transaction tax does not apply to dealers in securities on their sale of stock inventory. The sale of
security dealers from the sale of securities whether through PSE or directly to buyers and their commissions
income shall be vatable.

Determination of the proportion of stocks sold in a IPO

The determination of the proportion of stocks sold in an IPO depends upon the type of offering:
a. Primary offering – unissued shares of the closely held corporation to be sold in t he IPO.
b. Secondary offering – issued shares or shares of exiting shareholders who wish to sell their
shares in the IPO.

Proportion of share offering:

Primary offering = Primary shares / outstanding shares after IPO
Secondary offering = Secondary shares / outstanding shares before IPO

Illustration:
Queen Corporation is owned by the following shareholders:
Mr. Almanac 25,000 shares
Mr. Boar 20,000 shares
Mrs. Cat 40,000 shares
Ms. Donkey 10,000 shares
Mr. Eagle 5,000 shares
Total shares 100,000 shares

Queen Corporation conducted an IPO involving 40,000 unissued shares to be sold to the public
at P5 per share. Mr. Boar decided to sell 15,000 of his shares to the public during the IPO at P5
per share.

22
 Proportion of IPO shares
a) Primary offer percentage = 40,000/ (100,000+40,000) = 28.57%, equivalent to 2% of IPO tax
b) Secondary offer percentage = 15,000/100,000 = 15%, equivalent to 4% IPO tax.

The IPO tax shall be:

Primary offering (40,000 shares x P5 x 2%) = P40,000
Secondary offer percentage (15,000 shares x P5 x 4%) = P 3,000

Up to twenty-five percent (25%) 4%

Over twenty-five percent (25%) but not over thirty-three This is known as the
and one third percent (33 1/3%) 2% IPO tax which applies
Over thirty-three and one third percent (33 1/3%) 1% only to the IPO of a
Note: The IPO tax on the primary offering shall be paid by Queen Corporation, the issuing corporation, while the IPO
tax of the secondary offering shall be paid by Mr. Boar, the selling shareholder.

Illustration 2-
Assuming further that after the IPO, Queen Corporation conducted another block sale of 50,000
of its shares for P5 per share. Ms. Donkey also sold her 10,000 shares after the IPO for P6 per
share.

The subsequent sale by Queen Corporation after the IPO is called a “follow-through offering.”
This is no longer subject to the IPO tax since the tax applies only to the initial listing of closely
held corporations.

The sale of Ms. Donkey involving 10,000 shares after the listing of Queen Corporation in the PSE
is subject to the usual 60% of 1% stock transaction tax.

Ms. Donkey shall pay a percentage tax of P360 (10,000 x P6 x 60% x 1%)

Summary of Rules on Sales of Stocks

Sales made by Before IPO During IPO After IPO
Corporate Issuer No tax IPO tax as primary offer No tax
Shareholder investor Capital Gains Tax IPO tax as secondary Stock transaction tax
offering

EXEMPTION FROM PERCENTAGE TAX

The percentage tax does not cover:
a. VAT taxpayers
b. Self-employed and or professionals who opted to the 8% income tax
c. Cooperatives

SE/P under 8% Income Tax

Under income taxation, self-employed individuals and/or professionals (SE/P) may opt to be taxed to the
8% income tax which is a bundled tax that covers both income tax and the percentage tax. As such, they
are no longer subject to 3% percentage tax as the 8% tax is in lieu of regular income tax and the 3%
general percentage tax.

23
Individuals paying the 8% income tax shall only file BIR Form 1701A. There is no need to file BIR Form
2551Q.

Note also that the option to be taxed at 8% income tax is not available to self-employed individuals or
professionals if the taxpayer is specifically subject to percentage tax.

Exemption of Cooperative from Percentage Tax

Under Section 116 of the NIRC of 1997, cooperatives shall be exempt from the 3% percentage tax.
This exemption, however, is not absolute. Sales or receipts of cooperatives outside their registered
activities are still subject to business tax similar to the business tax treatment of government agencies
and nonprofit institutions.

24