Introduction to Business Taxation

Chapter 3
 Nature of business taxes
• Relative Consumption tax
• Indirect tax
• Privilege tax
• National tax
 Types of business taxes
• Value added tax
• Percentage tax
• Excise tax
 Procedures of business taxation
1) Evaluate if sales activity qualifies as business (exempt
or subject to business tax)
2) Identify the taxable person (individual or juridical)
3) Determine activity type (goods or services) – not very
relevant effective January 22, 2024 with the effectivity
of EOPT law
4) Classify sales/receipts (exempt, Specific Percentage
Tax, VATable)
5) Determine tax registration type (VAT or NONVAT)
6) Determine if goods/services offered is excisable
 Procedures of business taxation…(continued)
Note:
1. Businesses normally register initially as non-VAT
taxpayers, except when their projected sales in the first
year will exceed P3M.
2. For NONVAT-registered taxpayer, monitoring of vatable
sales or receipts is done every month over a rolling 12-
month period. They will remain NONVAT-registered if they
don’t exceed P3M over the said period.
3. Once the taxpayer becomes VAT-registered, he remains as
such until cancellation of VAT registration.
4. The amount of VAT threshold herein stated shall be
adjusted to its present value every three (3) years using
the Consumer Price Index (CPI), as published by PSA (EOPT
Law)
 Essential requisites of business
• Habitual engagement
• Commercial activity
 Habitual engagement
• Connotes regularity in transactions
• Isolated or casual sales are not regular or
habitual
• Manifested by registration as dealer, service
provider or practitioner

Note: Non-registration does not exonerate one

who is actually engaged in business from being
liable to pay business taxes
 Non-habitual activities
• Sales by non-dealers (casual sale of goods or
properties)
• Privilege stores (stalls during fiestas/festivals
engaged in business for not more than 15
days)
These transactions are not subject to business
tax but subject to income tax
 Exceptions to the regularity rule
• Sales of non-residents are presumed made in
the course of business without regard as to
whether the sale is regular or isolated.
 Commercial Activity
• Engagement in the sale of goods or service for
profit
• Business tax applies even if operation results
in a loss
 Not considered businesses for
purposes of imposing business tax
• Government agencies and instrumentalities (in the
performance of essential public functions)
• Non-profit organizations or associations (absence of
purpose to make profit)
• Employment (salary/wage is not business income)
• Directorship in a corporation (it is not a commercial
activity)
• Business for mere subsistence (refers to marginal
income earners with gross sales/receipts not exceeding
P100,000 per year)
Examples of marginal income earners
• Subsistence farmers or fishermen
• Small sari-sari stores
• Small carinderias
• Drivers or operators of single unit tricycle
• Others similarly situated
 Additional inputs on marginal income earners

• Marginal income earners do not include

licensed professionals, consultants, artists,
sales agents, brokers & those whose income
have been subjected to withholding tax.
• Although regular in operations, their
sales/receipts are exempt from business tax
 Other persons considered engaged in
business
• Consultants
• Sales agents or brokers
• Television or movie talents and artists
• Cooking instructors
• Martial arts instructors
 Business tax
• Payable ONLY by persons engaged in business
• Does not apply if seller is not engaged in
business
 Business Taxpayers
• Taxable persons who may be individual, trust,
estate, partnership, corporation, joint venture,
cooperative or association
• Income tax exemption does not necessarily
mean exemption from business tax (e.g., General
Professional Partnerships, local water districts, barangay micro
business enterprises)
• Business tax exemption does not necessarily
mean income tax exemption (e.g., casual sales)
 Rules for Business Taxpayers
• Each person, natural or juridical is a taxable
person
• Husband & wife are separate taxpayers
• Parent company is treated separately from
subsidiaries
• Home office & branches are 1 taxpayer
• Proprietorship is not a juridical entity
 Registration of Taxpayers
• Every person subject to any internal revenue tax shall
register, either electronically or manually with the
Revenue District Office (RDO)
• Commencement of business shall be reckoned from
the day when the first sale transaction occurred or
upon the lapse of 30 days from the issuance of
Mayor’s permit, or Certificate of Business
Registration by DTI or Certificate of Registration by
SEC.
• Payment of annual registration fee of P500/business
unit is NO LONGER APPLICABLE effective January 22,
2024
 Registration Certificate
• BIR Form 2303
• Must be posted cons-
picuously in the place of
business
 Types of business taxpayers
• VAT-registered taxpayers – pay 12% VAT
• Non-VAT registered taxpayers – pay 3% PT
(reduced to 1% from July 1, 2020 to June 30,
2023 under CREATE Act)
 Types of Business Activities
• Sales or exchange of good or properties
• Sales or exchange of services or lease of
properties
 Sale of goods or properties
(A) Real properties held primarily for sale to customers or held
for lease in the ordinary course of trade or business;
(B) The right or privilege to use patent, copyright, design or
model, plan, secret formula or process, goodwill,
trademark, trade brand or other like property or right;
(C) The right or the privilege to use in the Philippines of any
industrial, commercial or scientific equipment;
(D) The right or the privilege to use motion picture films, films,
tapes and discs; and
(E) Radio, television, satellite transmission and cable television
time.
 Sale or exchange of services
1. Construction and service contractors;
2. Stock, real estate, commercial, customs and immigration brokers;
3. Lessors of property, whether personal or real;
4. Persons engaged in warehousing services;
5. Lessors or distributors of cinematographic films;
6. Persons engaged in milling, processing, manufacturing or repacking goods for others;
7. Proprietors, operators or keepers of hotels, motels, rest houses, pension houses, inns, resorts, theatres, and movie houses;
8. Proprietors or operators of restaurants, refreshment parlors, cafes, and other eating places, including clubs and caterers;
9. Dealers in securities;
10. Lending investors;
11. Transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire
and other domestic common carriers by land relative to their transport of goods or cargoes;
12. Common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Philippines
to another place in the Philippines;
13. Sale of electricity by generating, transmission by any entity including the National Grid Corporation of the Philippines
(NGCP), and distribution companies including electric cooperatives shall be subject to twelve percent (12%) VAT on their
gross receipts.;
14. Franchise grantees of electric utilities, telephone and telegraph, radio and/or television broadcasting and all other franchise
grantees, except franchise grantees of radio and/or television broadcasting whose annual gross receipts of the preceding
year do not exceed Ten Million Pesos (P10,000,000.00), and franchise grantees of gas and water utilities;
15. Non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and bonding companies
16. Similar services regardless of whether or not the performance thereof calls for the exercise of use of the physical or mental
faculties
17. The lease of use of or the right or privilege to use any copyright, patent, design or model, plan, secret formula or process,
goodwill, trademark, trade brand or other like property or right;
18. The lease or the use of, or the right to use of any industrial, commercial or scientific equipment;
19. The supply of scientific, technical, industrial or commercial knowledge or information;
20. The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or
enjoyment of any such property, or right or any such knowledge or information;
21. The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging
to, or the installation or operation of any brand, machinery or other apparatus purchased from such non-resident person;
22. The supply of technical advice, assistance or services rendered in connection with technical management or administration
of any scientific, industrial or commercial undertaking, venture, project or scheme;
23. The lease of motion picture films, films, tapes and discs; and
24. The lease or the use of or the right to use radio, television, satellite transmission and cable television time.
 Tax bases of business taxes
Sellers of goods or Sellers of service or
properties lessors of properties

Before
January Gross selling price Gross receipts
22, 2024

Starting
January
22, 2024 Gross Sales for BOTH
 Gross sales or gross selling price
• Total amount of money or its equivalent which the
purchaser pays/obligated to pay to the seller of
goods or properties
• Includes sales made in cash, on credit & on
installment basis
• Excise tax, if any, shall form part of gross selling price
• Analogous to gross sales for income taxation
purposes except treatment of contingent discounts
 Allowable deductions from gross
selling price
• Discounts determined and granted at the time
of sale (to be deductible, discounts must not
be dependent upon the happening of a future
event)
• Sales returns and allowances for which proper
credit or refund was made
 Gross receipts
• Money or its equivalent received as payment
for services rendered and advance payments
actually or constructively received
• No longer used effective January 22, 2024
 Constructive receipt
• Occurs when money consideration or its
equivalent is placed at the control of the
person who renders the services without
restriction by the payor (e.g., deposit in bank
account of the seller by buyer; debtor’s notice
to offset debt in consideration of service
rendered & accepted by creditor)
 Agency Monies
• Amounts received for payment to unrelated
third party is not part of the gross receipt of
the recipient
 Insurance proceeds on damaged
assets
• This is NOT viewed as sales or receipts for
purposes of business taxation
 Withholding Taxes
• Form part of the gross receipts for business
taxation purposes (e.g., a professional
received P135,000 net of P15,000 tax withheld
by client. The basis of the business tax should
be P150,000)
 Business with mixed activities
• Subject to business tax on gross selling price on
its sale of goods & on the gross receipts from the
sale of services
• Not an issue anymore effective January 22, 2024
 Categories of Business Sales
• Exempt sales
• Sales of services specifically subject to
percentage taxes (covered in Chapter 5)
• Vatable sales
 Exempt sales
• VAT exempt importation (from abroad)
• VAT exempt sales (domestic)
Exempt sales (DOMESTIC)
 I. Sales of basic necessities
• Agricultural or marine food products
• Health services of hospitals
• Educational services of schools
• Housing or residential properties within price
limits
 II. Sales exempt by law, treaty or
contracts
• Sales by cooperatives to members
• Sales or lease of aircraft or vessels
• Sales or printing of books, magazines and
newspapers
 III. Casual sales or sales of non-
business sellers
• Sale of persons not regularly engaged in trade
or business
• Services rendered under employer-employee
relationship
• Services rendered by Regional Area
Headquarter of multi-national company
IV. Export sales of non-VAT registered
persons
 Sales of services specifically subject to
percentage tax (detail in chapter 5)
Service provider Rate of tax
Domestic common carrier 3%
International carriers on outgoing cargoes 3%
Franchise grantees of television or radio 3%
Water utilities 2%
Franchise grantees of telephone & telegraph 10%
Banks & non banks with quasi banking functions 1%, 5%, 7%
Other non-banks without quasi banking functions 1%, 5%
Life insurance companies 2%
Agents of foreign insurance companies 4%
Certain amusement places 10% - 18%
Jaialai and race tracks 30%
PSE 6/10 of 1%, 1%-4%
 VATABLE SALES
• Sales of goods, properties, services or leases
other than those exempt and specifically
subject to percentage tax
• Subject to VAT if taxpayer is either VAT-
registered or VAT-registrable, if not, then
subject to 3% percentage tax (reduced to 1%
from July 1, 2020 to June 30, 2023)
 Types of Percentage
Tax
• Specific – those imposed on selected
taxpayers engaged in service businesses at
varying rates (60% of 1% to 30%)
• General – applicable to vatable sales/receipts
of non-VAT taxpayers currently at 3% rate
(reduced to 1% from July 1, 2020 to June 30,
2023)
Mandatory Registration of VAT Persons
1) Those w/ sales exceeding P3M in the past 12
months
2) Those w/ reasonable grounds to believe that
their gross sales would exceed P3M in the
next 12 months
 VAT Threshold

Old Law TRAIN Law

General P1,919,500 P3,000,000; provided , that
he amount herein stated
shall be adjusted to its
present value every three
(3) years using the
Consumer Price Index (CPI),
as published by PSA (EOPT
Law)

Franchise grantees of radio

or television P10,000,000 No change
 Optional Registration
• Persons below VAT threshold may opt to
register as VAT taxpayer
• Irrevocable for 3 years if opted to by taxpayer
• For TV or radio franchise grantees, the option
shall be perpetually irrevocable
• Not allowed to self-employed or professionals
who opted for the 8% income tax rate
 Types of VAT Taxpayers
• VAT – registered (VAT taxpayer per BIR record)
• VAT – registrable (Total sales in the 12-month
period exceeded P3M but failed to update
registration with BIR to VAT status. Taxpayer
must pay output VAT without the benefit of
deducting input VAT)
 Difference of the Concept of Gross sales/receipts
between VAT & Non-VAT taxpayers

Non-VAT Taxpayers VAT Taxpayers

Amount billed is the sales Amount billed is the sales

or gross receipt or gross receipt + 12% VAT
 Business Tax Accounting Period
• The length of accounting period for business
taxes is ONE QUARTER synchronized with
taxpayer’s taxable year for income tax
purposes
• Monthly payment is required until 12/31/22
• Individuals can only use calendar period
• Corporate taxpayers may opt for calendar or
fiscal year
 Business tax returns and deadlines
VAT BIR Form Deadline
Monthly until 2550M 20 days from month-end
12/31/22
Quarterly 2550Q 25 days from quarter-end
PERCENTAGE TAX
Quarterly 2551Q 25 days from quarter-end
VAT filing & payment under TRAIN
• The TRAIN Law will eventually phase out the
monthly requirement for VAT filing and will
transition to quarterly VAT filing starting
January 1, 2023
• Deadline will then be 25 days after the end of
the quarter.
 Short return period
• Applicable to VAT persons retiring from
business
• Deadline of filing quarterly return and
payment of tax due is 25 days from end of the
month when business stopped operating
 Transition to VAT
Mr. Quezon had the following vatable receipts from his service business since
the start of his business on January 1, 2024:
Cumulative
Vatable receipts receipts Costs & Expenses Input VAT
1/1 – 9/30 P2,250,000 P2,250,000 P1,200,000 P-
October 1,000,000 3,250,000 500,000 -
November 1,000,000 4,250,000 700,000 74,000
December 1,000,000 5,250,000 800,000 62,000

• The 12-month totals of monthly receipts from the current month until 12
months back shall be monitored if it exceeds the P3M VAT threshold.
• Since receipts exceeded P3M by October 2024, he is subject to VAT
prospectively starting November 2024.
• He is mandatorily required to update his registration from non-VAT to VAT
on or before November 30, 2024.
 Transition to VAT (Taxpayer under graduated tax option)
• Mr. Quezon shall separately pay the regular income tax computed per
individual tax table and the 3% percentage tax.
• Quarterly income tax payment as of the 3rd quarter must be: P205,000
computed as follows:
Receipts P2,250,000 – Costs/expenses 1,200,000 = 1,050,000; Tax on
P800,000 is P102,500 + P62,500 [(1,050,000 – 800,000) x 25%] =
P165,000
• Mr. Quezon must have paid his quarterly percentage tax return until
September 30, 2024.
• For October 2024, Mr. Quezon shall file his last percentage tax return
based on the P1,000,000 receipts for October 2024 (P1,000,000 x 3% =
P30,000)
• For November 2024, Output VAT is P120,000 (P1,000,000 x 12%) – input
VAT of P 74,000 = P46,000 VAT payable
• For the 4th quarter ending December 31, 2024, Output VAT is P2,000,000
x 12% = P240,000 – Total input VAT for the quarter of P136,000 = P
104,000 – VAT payment for November of P46,000 = P58,000 VAT
payable
 Transition to VAT (Taxpayer under 8% option)
Mr. Quezon had the following vatable receipts from his service business since
the start of his business on January 1, 2024:
Cumulative
Vatable receipts receipts Costs & Expenses Input VAT
1/1 – 9/30 P2,250,000 P2,250,000 P1,200,000 P-
October 1,000,000 3,250,000 500,000 -
November 1,000,000 4,250,000 700,000 74,000
December 1,000,000 5,250,000 800,000 62,000
• He shall file & pay percentage tax compliance in November 2024 covering
January – October 2024 (P3,250,000 x 3% = P97,500)
• He shall be liable to income using graduated rates for the entire year of
2024 less amount paid using 8% option. [(Total receipts – P5,250,000 minus
costs of P3,200,000 & percentage tax of P97,500 or a taxable income of
P1,952,500; Tax due on this is P230,625 computed, P390,625 (tax on the
P1,952,500) – P160,000 (income tax payment using the 8% option for 3
quarters)]
• November & December receipts are subject to VAT
 Timing of VAT registration
Taxpayer Timing
Persons expecting to exceed threshold Simultaneous with registration of New
within 12 months Business
Persons exceeding VAT threshold during On or before the end of the month
the year following the month when sales or
receipts exceeded threshold
Franchise grantees of radio and television 30 days from end of calendar year when
broadcasting sales exceeded P10M
Persons below threshold opting to be VAT 10 days before the beginning of the
registered taxable quarter
 Revocability of VAT registration
Taxpayer Revocability
Franchise grantees of radio and television Perpetually irrevocable whether
broadcasting registration is voluntary or mandatory

Persons below threshold opting to be VAT Not allowed to cancel registration for the
registered next 3 years

Persons expecting to exceed threshold May apply for cancellation. Lock-in period
within 12 months of 3 years doesn’t apply

Note: Upon cancellation of VAT registration, they will be subject to percentage tax
generally at 3% (reduced to 1% from July 1, 2020 to June 30, 2023 under CREATE Act)
 Penalty for registrable persons
They are liable to VAT but without the benefit
of input tax credit in the periods in which they
are not properly registered