CHAPTER 3

INTRODUCTION TO BUSINESS TAXATION

Chapter Overview and Objectives

After this chapter, readers are expected to comprehend:

1. The concept of being engaged in trade or business and the exceptions to the rule on
regularity of transactions.
2. The concept of business taxpayers.
3. The registration requirements on business.
4. The business classification as to activities and their respective tax base.
5. The concept of gross selling price and gross receipt.
6. Types of business taxpayers and the VAT threshold.
7. The concept of accounting period for business taxation.
8. The differences in business reporting of VAT and non-VAT taxpayers.
9. The scope of VAT and percentage tax.
10. The concept of “vatable” sales or receipts.

NATURE OF BUSINESS TAX

1. Relative consumption tax – Business tax is a tax on the consumption of goods or
services and is impossible only when the seller is a business.
2. Indirect tax- The tax is collected from the seller rather than from the buyer-consumer.
3. Privilege tax – Business tax is also viewed as a tax on the privilege to do business.
4. National tax – Business tax is imposed by the national government.

TYPES OF BUSINESS TAXES

1. Percentage Tax
2. Value Added Tax
3. Excise Tax
Comparison of Business Taxes
Point of VAT % tax Excise Tax
differences
Timing of Sale Sale Production / import
imposition
Nature Primary Tax Primary Tax Additional Tax
Subject Business Any business, in Any business, in Only producers or
general general importers of
excisable products
or services
Taxpayers Business only Business only Business or noon-
business
Usual Taxpayers Big business Small business Big or Small
business
Accounting Liability Expense Asset or Liability
Treatment

PROCEDURES OF BUSINESS TAXATION

1. Evaluate if the sales activity qualifies as a business.

a. If not, the activity is exempt from business tax.
b. If yes, the business must register for business tax. Proceed to the succeeding
procedures.
2. Identify the taxable person.
a. If individual – include all proprietorship business including branches of the individual
taxpayers.
b. If juridical, include all branches of the corporate taxpayers.
3. Determine the activity type:
a. If sales of goods – determine the sales
b. If sales of services – determine the receipts
4. Classify the sales or receipts whether they are:
a. Exempt sales or receipt – pay no business tax
b. Sales or receipts subject to the specific percentage tax - pay specific percentage tax
c. Vatable sales or receipts
5. Determine taxpayers registration type.
a. If taxpayer is VAT registered, pay VAT on vatable sales receipts.
b. If taxpayers is non-VAT registered, pay the 3% general percentage tax then determine
the magnitude of 12-month vatable sales at the end of every month:
- If exceeds P3,000,000 – the person shall register as VAT taxpayer; pay VAT
prospectively effective on the succeeding monthly vatable sales or receipts.
- If it does not exceed P3,000,000 – the person shall continue paying the 3% general
percentage tax on the vatable sales or receipts.
6. Determine if the goods or services offered is excisable.
a. If yes, pay the applicable excise tax in addition to VAT and or percentage tax.
b. If not, pay only VAT and or percentage tax.

Note:
1. Business normally register initially as non-VAT taxpayers, except when their projected
operation is expected to exceed the P3M annual VAT threshold.
2. For non-VAT registered taxpayer, the evaluation of the magnitude of vatable sales or
receipts is done continuously every month over a 12-month period. The taxpayer remains a
non-VAT taxpayer for as long as its 12-month rolling sales or receipts do not exceed the
P3M annual VAT threshold.
3. Once a taxpayer becomes or registered as a VAT taxpayer, he remains as such paying
VAT on vatable sales or receipts until the cancellation of his VAT registration.

WHAT IS A BUSINESS?
Business refers to a habitual engagement in a commercial activity involving the sale of
goods or services for a profit.

Elements of business:
1. Habitual engagement
2. Commercial activity

HABITUAL ENGAGEMENT
There must be regularity transactions to construe the presence of a business. Isolated or
casual sales are not regular activities; hence, these are presumed not made in the ordinary
course of business.

Habitual engagement is normally manifested by registration with the appropriate

government agencies as a dealer or as a service provider in a particular trade or vacation
but non-registration is not an excuse to business taxation.

A casual sale transaction is not a business even if profit is derived from the transaction. On
the other hand, the regular selling of goods or services for a profit is a business despite the
absence of an actual profit from such activity.

Illustration 1
Mrs. Ellerton, a medical practitioner, sold his principal residence for P10M.

The sale of real properties by a non-realty dealer is a casual sale not made in the course of
business, hence, it is exempt from business tax.
Illustration 2
Mang Merto, a realty dealer, purchased shares of stocks as investment and sold them at a
profit.

The acquisition and sale of stocks investments by a realtor are not made in the course of
realty business and are not subject to business tax. If Merto were a security dealer, the
transaction would be considered made in the course of business and hence, subject to business
tax.

Illustration 3
Joshua is a proprietor regularly engaged in trading merchandise. During the month, he
reported the following:
Sales of merchandise P 800,000
Sales of personal car 1,200,000

The P800,000 sales is subject to business tax. The P1,200,000 sales is outside the
merchandising business. The same shall not be subjected to business tax since Joshua is not
also a car dealer.

PRIVILEGE STORES
Privilege stores (most commonly known as ”tiangge”) are stalls or outlets not permanently
fixed to the ground which are put up during special events such as festivals or fiestas
(RR16-2013).

To be considered a privilege store, the store should engage in a business activity for a
cumulative period of not more than 15 days. Otherwise, they shall be considered regular
taxpayers subject to business taxes and income tax. (lbid)

“Privilege store operators” shall not be considered habitually engaged in business

considering their limited activity. They are exempt from business tax but is subject to
income tax.

Illustration 1
Mang Andro makes key chains and wood art for sale to tourists during the annual
Panagbenga Festival. He rented a booth from the city of Baguio, the tiangge organizer, and
recorded sales of P350,000 over the weeklong festivities.

Mang Andro is not considered habitually engaged in business. His P350,000 sales is not
subject to business tax, but is subject to income tax.

Illustration 2
Danes Bakeshop, an established business enterprise, also rented a booth from the
organizer, City of Baguio, to sell its cakes and pastries during the Panagbenga Festival.
Danes generated P400,000 sales during the event.

Danes Bakeshop is not a privilege store since it is an established and regularly operating
business. The P400,000 sales on the event shall be subject to usual business tax.

Exception to the regularity rule

The sales of services by non-resident persons are presumed made in the course of
business without regard as to whether the sale is regular or isolated. Our current tax law
views the consumption tax on import of services a business tax. The sales of services by
non-residents are subjected to the final withholding tax as previously discussed in Chapter
2.

COMMERCIAL ACTIVITY
Commercial activity means engagement in the sale of goods or services for a profit. The
goods or services must be offered to the public with a motive to earn unrestricted amount
of pecuniary gains. However, the actual existence of a profit during the period is not a pre-
condition to business taxation. Aven if the business operation results to a loss, business tax
still applies.

The following are not a business:

1. Government agencies and instrumentalities
2. Non-profit organizations or associations
3. Employment
4. Directorship in a corporation
5. Business for mere subsistence

Government agencies and instrumentalities

Agencies and instrumentalities provide essential public services. They may charge
reasonable fees for services rendered but are not intended to profit but are merely costs
reimbursements.

Illustration
The Professional Regulations Commission (PRC) collected P12,000,000 from professional
license fees during the month. It also earned additional P1,000,000 from rental income on
its vacant premises.

The P12M receipt is an income by PRC, a government agency, in rendering essential

government service. This is not a commercial activity and is exempt from business tax.
Leasing, on the other hand, is a commercial activity departing from the nature of government
service; hence, it is subject to business tax.
Non-profit or charity organizations
A charitable or eleemosynary activity regularly pursued by an institution or organization is
not a business because of the absence of the purpose to make profit.

Illustration
Union of Husbands Afraid of Wife (UHAW) is a non-profit social welfare institution for the
assistance of battered husbands. UHAW received P2,000,000 from the public and
generated P400,000 from the sales of a gift shop in its fund-raising drive.

The receipt of P2M contribution or donation is not subject business tax since it is not
commercial in nature. However, the selling of the gift shop is a commercial activity which is
subject to business tax. The rule applies regardless of the disposition made of such fund-
raising income.

Employment
The elements of an employer-employee relationship are discussed in detail in Chapter 10
of Income Taxation: Laws, Principles and Applications by the same author. Employee
benefits derived under employment is not subject to business tax but only to income tax.

Illustration 1
Bernard Bakilan, a certified public accountant, practices his profession in the industry as a
Chief Financial Officer of UHAW. During the month, he received P50,000 compensation plus
P10,000 fringe benefits.

Employment is not a commercial activity as it does not involve sales of services to clients or
customers. Hence, the compensation income and the fringe benefits are not subject to
business tax.

Illustration 2
Jones is a job order employee contracted by the government to provide support services
for office job for 6 months. Jones is paid P18,000 a month.

Directorship in a corporation
Although a director may not be an employee, director’s fees, per diems, and allowances are
not derived in an economic or commercial activity or rendering of services to clients for a
fee. Hence, these are not subject to business tax (RMC77-2008).

Illustration 1
Mr. Agua is an independent director of Aga Corporation receiving director’s fees, per diems,
and allowances totaling P15,000 per board meeting appearances.
Mr. Agua is not subject to business tax.

Query: What if Mr. Agua is an employee of Aga Corporation?

Mr. Agua’s director’s fees shall be part of his compensation income and is not likewise
subject to his business tax.

Illustration 2
John, a certified public accountant, renders his services to the public for a fee. Is he subject
to a business tax?

The exercise of profession by regularly rendering services to clients for a fee is considered a
business subject to a business tax.

Business principally for subsistence

Business principally for subsistence or livelihood refers to businesses with gross sales or
receipts not exceeding P100,000 per year.

Marginal income earners - refers to individual not deriving compensation income under an
employer-employee relationship but who are self-employed deriving gross sales or
receipts not exceeding P100,000 in any 12-month period.

Examples of marginal income earners:

a. Subsistential farmers or fisherman
b. small sari-sari stores
c. small carinderias or “turo-turos”
d. drivers or operators of a single unit tricycle, and
e. other similarly situated

The term marginal income earners do not include licensed professionals, consultants,
artists, sales agents, brokers, including all others whose income have been subjected to
withholding tax (RMC7-2014).

Although regular in operations, marginal income earners are exempt from business tax, but
are subject to income tax (RR7-2012). These small businesses could not be considered
commercial being merely for personal or family livelihood or subsidence.
Examples of persons considered engaged in businesses:
1. Consultants
2. Sales agents of insurance or real estate including brokers
3. Television or movie talents and artists
4. cooking instructors
5. Martial art instructors

BUSINESS TAXPAYERS
The taxable person in business taxation includes any individual, trust, estate, partnership,
corporation, joint venture, cooperative and association.

Rules:
1. Each person, natural or juridical, is a taxable person for purposes of business taxation.
2. Husband and wife are separate taxpayers.
3. A parent company is a separate taxable person with its subsidiary company and each
subsidiary company is a taxable person.
4. Home office and branch offices of the same business are one, not separate, taxable
persons.
5. Proprietorship is not a juridical entity. Its sales and receipts is subject to business tax to
the individual proprietor. Multiple proprietorship businesses of the same individual are all
taxable to that individual as the taxpayer.

Illustration 1
Mr. Ysmael, an accounting practitioner, has two other commercial businesses with the
following receipts and sales:

Mr. Ysmael’s practice Business 1 Business 2

P1,200,000 P800,000 P700,000

Business 1, Business 2, and the accounting practice are not taxable persons being
proprietorship businesses. The sales and receipts of these totaling P2,700,000 shall be
taxable to Mr. Ysmael as the taxable person.

Illustration 2
DEF Corporation has its head office in Makati city and two branches in Manila City and
Quezon City. The sales outlet has the following sales:

Makati head office Manila City branch Quezon City branch

P2,000,000 P1,800,000 P1,200,000

The branches are not taxable persons. The sales of the branch offices including the head office
shall be taxable to DEF Corporation. The same shall be reported to the BIR RDO in the
principal place of the business – Makati City.

Illustration 3
ABC Company has a branch in Manila City and a subsidiary, XTB Company, in Davao City.

ABC Company ang its branch are one entity while XTB Subsidiary is a separate entity. The
transfer of goods by ABC Company to its Manila City branch is not subject to the business tax.
The intercompany sales made between ABC Company and its subsidiary, XTB Company, is
subject to business tax. XTB Company’s transaction with the Manila branch is also a
transaction with its parents, hence, taxable.

Illustration 4
Dr. Jones owns a bakery registered as a proprietorship business. He also owns a clinic, also
registered as a proprietorship business. His clinic occasionally purchases bread from his
grocery. Dr. Jones’ children also brought breads from the bakery.

The sales between proprietorship business shall not be subject to business tax since the same
does not involved another party. The sales made by the bakery to Dr. Jones’ children shall be
subject to tax since they are different persons to Dr. Jones.

Income tax exemption does not equate to business tax exemption

If you still remember, the same concept of a taxable person in income taxation applies in
business taxation but income tax exemption does not necessarily mean business tax
exemption.

Hence, the following persons which are exempt taxpayers from income tax are subject to
business tax:
1. General professional partnership
2. Joint venture engaged in construction or oil exploration
3. Local water districts
4. Barangay microbusiness enterprise

TYPES OF BUSINESS TAXPAYERS

A taxable person shall be registered either as:
a. VAT taxpayers
b. Non-VAT taxpayers

VAT-registered tax payers pay 12% VAT while non-VAT registered taxpayers pay a 3%
general percentage tax.
BUSINESS ACTIVITIES
The basis of business tax differs on the activities businesses are engaged in.

Type of business activities:

a. Sales or exchange of goods or properties
b. Sales of exchange of services or lease of properties

Sale of Goods or Properties

Goods or Properties refers to all tangible and intangible objects which are capable of
pecuniary estimation and shall include, among others:
1. Real properties held primarily for sale to customers, held for lease or is used in the
ordinary course of trade or business;
2. The right or the privilege to use a patent, copyright, design or model, plan, secret
formula or process, goodwill, trademark, trade brand or other similar properties or rights;
3. The right or privilege to use in the Philippines any industrial, commercial or scientific
equipment;
4. The right or privilege to use motion picture films, films, tapes and discs; and
5. Radio, television, satellite transmission and cable television time.

Sale or Exchange of Services

Sale or exchange of services shall mean the performance of all kind of services in the
Philippines for others for a fee, remuneration or consideration, whether in kind or in cash,
including those performed or rendered by the following:

1. Construction and service contractors

2. Stock, real state, 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 for others
7. Proprietors, operators, or keepers of hotels, motels, rest houses, pension houses, inns,
resorts, theaters and movie houses.
8. Proprietors or operations of restaurants, refreshment parlors, cafes and other eating
places, including clubs and caterers
9. Dealers in securities
10. Lending investors
11. Transportation contractors in their transport of passengers, goods or cargoes from one
place in the Philippines to another place in the Philippines
12. Common carriers by air and sea relative to their transport of passengers, goods or
cargoes for hire and other domestic common carriers by land relative to their transport of
goods or cargoes
13. sales of electricity by generation transmission and or distribution companies
14. Franchise grantees of electric utilities, telephone and telegraph, radio and or television
broadcasting and all other franchise grantees
15. Non-life insurance including surety, indemnity ang bonding companies
16. Similar services regardless of whether or not the performance thereof calls for the
exercise or 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 any industrial or commercial knowledge or
information;
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 wit 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.

BASIS OF BUSINESS TAX PER TYPE OF ACTIVITY

Sellers of goods or Sellers of
properties services
Basis of business tax Gross selling price Gross receipts

Gross selling price

Gross selling price refers to the total amount of money or its equivalent which the purchaser
pays or is obligated to pay to the seller in consideration of the sale, barter or exchange of
goods or properties. The excise tax, if any, on such goods or properties shall form part of
the gross selling price.

It includes sales made in cash, on credit and on installment basis and is analogous to the
income taxation concept of “gross sales” except only on the treatments of contingent
discounts.
Allowable deductions from gross selling price:
1. Discounts determined and granted at the time of sale, which are expressly indicated in
the invoice, the amount thereof forming part of the gross sales and duly recorded in the
books of accounts.
To be deductible, discounts must not be dependent upon the happening of a future event
or contingency.

2. Sales returns and allowances for which a proper credit or refund was made during the
month or quarter to the buyer on taxable sales.

Illustration 1
A business taxpayer had the following transactions during the quarter:

Cash sales P 400,000

Sales on credit (account sales) 600,000
Installment sales (P30,000 collected) 100,000
Sales returns and allowances 20,000
Quota discounts 10,000
Purchase of goods, including P72,000 VAT
passed on by sellers 672,000

The gross selling price shall be:

Cash sales P 400,000

Account sales 600,000
Installment sales 100,000
Total sales P 1,100,000
Less: Returns and allowances 20,000
Gross selling price P 1,080,000

Note: Quota discounts or rebates are contingent upon future volume purchased by
customers and are not determinable at the date of sale; hence, these are not deductible.

Illustration 2
HTC Corporation sold various specialized equipment to a buyer with the following terms:

List price P 2,000,000

Freight 50,000
Installation fee 20,000
Trade discounts 10%
Cash discounts, 2%/30 net 60 days 36,000
The gross selling price shall be computed as:

List price P 2,000,000

Less: Trade discounts (10% x P2,000,000) 200,000
Net price P 1,800,000
Freight 50,000
Installation fee 20,000
Gross selling price P 1,870,000

Note: Only trade discount is determinable at the date of sale. Cash discounts should not be
deducted since these are contingent upon the buyer paying at an early date in the future.

Gross receipts
Gross receipts refers to the total amounts of money or its equivalent representing the
contract price, compensation, service fee, rental or royalty, including the amount charged
for materials supplied with the services and deposits applied as payments for services,
rendered and advanced payments actually or constructively received during the taxable
period for the services performed or to be performed for another person, excluding VAT.

Illustration 1
A laundry business has the following transactions during the month:

Cash collected for services done P 400,000

Cash collected for services not yet started (advances) 100,000
Receivables on services rendered 600,000
Purchase of goods and services, including of P48,000
VAT passed on by sellers 448,000

The gross receipt shall be:

Cash fees P 400,000

Advances by costumers 100,000
Gross receipts P 500,000

Illustration 2
S2 Tech, Inc. Provides PC board repair services. During the month it billed a total of
P4,000,000 out of which clients settled P3,200,000. S2 Tech, Inc. Also collected P8,000
interest on its bank deposits and P14,000 dividend income from its stocks investment.

The gross receipt is P3,200,000. The interest and dividend income are incidental income not
arising from the activities of the business; hence, excluded.
Constructive receipt
Constructive receipt occurs when the money consideration or its equivalent is placed at the
control of the person who renders the services without restriction by the payor. This is
added as part of gross receipts.

Examples:
1. Deposit in a bank account of the seller made by the buyer in consideration of services
rendered or goods sold
2. Issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof
of the seller as payment for services rendered
3. Transfer of the amounts retained by the payor to the account of the contractor

Illustration
Miss Leah Mado is a pozo negro contractor. She had the following fees for the month:

a. P10,000 from Cipher Company, net of the P30,000 debt of Miss Leah from Cipher
Company
b. P15,000 deposited to Miss Leah’s bank account
c. P20,000 cash share from a general professional partnership, P30,000 undistributed
share was credited to her capital account.

Miss Leah’s gross receipt shall be:

Receipts from Cipher (P10,000 + P30,000) P 40,000

Fees deposited to Leah’s bank account 15,000
Gross receipts P 55,000

The share from the net income of a general professional partnership (GPP) is not gross
receipt since Miss Leah is not selling services to the GPP.

Agency monies
Amounts earmarked for payment to an unrelated third party or received as reimbursement
for advanced payment on behalf of another which do not redound to the benefit of the
payor are not part of gross receipt (See CIR vs. Manila Jockey Club, 108 Phil. 821 (1960)).

Insurance proceeds on damaged assets

The receipt of insurance proceeds from the destruction of a company’s business asset is not
viewed as sales or receipts for purposes of business taxation. The compulsory or
involuntary conversion of property into money such as in the case insurance
reimbursement is not viewed as a sale in the ordinary course of business (BIR Ruling No.
DA-084-2007, February 12, 2007).
Illustration
PC Repair Company received the following amounts during a month:

Cash collection from clients P 400,000

Reimbursements for out-of-pocket costs incurred
in servicing clients 50,000
Reimbursement for client expenses paid by PC Repair 80,000
Proceeds of fire insurance 400,000
Receipt of bank loan 500,000
Receipt of agency money to be remitted to a sister company 100,000

The gross receipts shall be:

Cash collective from clients P 400,000

Reimbursements for out-of-pocket costs incurred to clients 50,000
Gross receipt P 450,000

Note:
1. Out-of-pocket expenses of PC Repair which are reimbursed by the client are actually
income which redounds to the benefit of PC Repair. Hence, these are part of gross receipt.
2. Loans and agency money do not redound to the benefit of the taxpayer. The loan is an
obligation and is not income. The agency money will be paid or remitted to another party.
These are not included in gross receipts.
3. The proceeds of insurance is not a receipt in the ordinary course of business.

Withholding taxes
Amounts withheld form part of gross receipts because these are in constructive possession
and not subject to any reservation, the withholding agent being merely a conduit in the
collection process (CIR vs. Citytrust Investment Phils., Inc. GR. No. 139786, September 27,
2006).

Illustration
A lessor received P9,500 rentals from a lessee net of 5% withholding tax evidenced by BIR
Form 2307.

The gross receipt shall be P10,000 computed as (P9,500 / 95%).

Business with Mixed Activities

A business which is engaged both in the sales of goods or properties and sales of services
shall be subject to business tax on gross selling prices on its sales of goods or properties
and on gross receipts on the sales of services.
 Readers are advised to carefully understand the following section as it is highly critical in
understanding and mastering the business tax concept structure.

TYPES OF SALES OR RECEIPTS

Sales of goods Sales of services
Exempt sales Exempt sales Exempt receipts
Receipts specifically - BICAP FLOW
subject to % tax
Vatable tax Vatable sales Vatable receipts

Exempt sales or receipts are not subject to business tax. BICAP FLOW is an acronym for the
list of services specifically subject to a percentage tax. Vatable receipts are those subject to
either 3% general percentage tax or VAT depending on the type of registration of the
business.

Exempt sales or receipts

There are sales of goods, properties of services that are exempt from business tax (I.e. VAT
and percentage tax), such as the following:

1. Sales of certain basic necessities, such as:

a. agricultural or marine food products
b. health services of hospitals
c. Educational services of schools
d. housing or residential properties within price limits

2. Sales exempt by law, treaty or contracts

a. Sales by cooperative to members
b. Sales or lease of aircraft or vessels
c. Sales or printing of books, magazines and newspapers

3. Casual sales or sales by non-business sellers

a. Sale of persons not regularly engaged in trade or business
b. Services rendered under an employer-employee relationship
c. Services rendered by a Regional Area Headquarter of a multinational company

4. Export sales of non-VAT registered persons

Exempt sales of goods, properties, or services are extensively covered in detail in Chapter
4.

Receipts from services specifically subject to a percentage tax

There are services that are subject to a specific percentage tax, such as the following:
1. Banks and non-bank financial intermediaries performing quasi-banking functions and
other non-bank financial intermediaries without quasi-banking functions.
2. International carriers on their outgoing transport of cargoes, baggage or mails.
3. Domestic common carriers on their transport of passenger on land and keepers of
garage.
4. Certain amusement places
5. Philippine Stock Exchange (PSE) on the sale, barter or exchange of shares by investors
or corporations conducting initial public offering
6. Franchise grantees of television or radio and gas or water
7. Life insurance companies and agents of foreign insurance companies
8. Franchise grantees of telephone or telegraph on overseas dispatch, message or
conversation originating from the Philippines
9. Winnings from jai-alai and race tracks

Mnemonics: BICAP FLOW

The specific percentage tax rates imposed on these sales of services or transactions range
from .60% to 30%. These rates apply regardless of the registration type of the taxpayer as
VAT or non-VAT taxpayers. This will be extensively covered in detail in Chapter 5.

Vatable sales or receipts

Other sales of goods, properties, services or lease of properties, other than those exempt
and specifically subject to percentage tax are vatable.

Vatable sales or receipts are subject to the following:

1. 3% general percentage tax – if the taxpayer is non-VAT registered taxpayer
2. Value added tax – if the taxpayer is a VAT taxpayer

Types of Percentage tax

1. Specific percentage tax – those imposed for BICAP FLOW and apply to any taxpayer,
whether VAT or non-VAT registered
2. General percentage tax – for vatable sales or receipts of non-VAT taxpayers

Mandatory registered as VAT taxpayer

Any person who, in the course of trade or business, sells, barters or exchanges goods or
properties or engages in the sale or exchange of services shall be liable to register to VAT if:
1. His gross sales or receipts for the past 12 months have exceeded P3,000,000.
2. There are reasonable grounds to believe that his gross sales or receipts for the next 12
months will exceed P3,000,000.

The general threshold: P3,000,000

The P3,000,000 VAT threshold is applicable to all other taxpayers, except franchise
grantees of radio or television.

The special threshold: P10,000,000

Franchise grantees are mandatorily required to register to the VAT system when their
annual receipts exceed P10,000,000.

Optional VAT Registration

A person who is below the VAT threshold may, at his option, register as VAT taxpayer. Once
made, this option shall be irrevocable for 3 years. For TV or radio franchise grantees, the
option shall be perpetually irrevocable.

Type of VAT taxpayers

a. VAT-registered taxpayer - a taxpayer who registered under the VAT system
b. VAT-registrable taxpayer – a taxpayer who exceeded the VAT threshold but did not yer
register as a VAT taxpayer

VAT-registered taxpayers are allowed credit for input VAT while non-VAT registered
taxpayers are not allowed to claim input VAT credit.

Illustration
Assume a taxpayer had P600,000 output VAT on its vatable sales and paid P320,000 VAT
on its purchases, the VAT liability shall be computed as follows:

VAT-registered VAT-registrable
Output VAT P 600,000 P 600,000
Less: Input VAT 320,000 0
VAT due P 280,000 P 600,000

Summary rules on VAT and Percentage Tax

 VAT-registered business Non-VAT business
Exempt sales of goods and No business tax No business tax
services
Sales of services specifically Specific % tax rate Specific % tax rate
subject to percentage tax
Vatable sales of goods or 12% VAT 3% percentage tax
services

Illustration 1
Mrs. Maranao is starting a business with the following projected result of operations within
12 months:

Expected Sales/Receipts
Exempt sales P 400,000
Receipts from services subject to percentage tax 1,200,000
Other sales and receipts 1,900,000
Total sales and receipts P 3,500,000

Only vatable sales or receipts shall be considered for the purpose of VAT threshold. Since the
P1,900,000 expected vatable sales or receipts is below the P3,000,000 VAT threshold, Mrs.
Maranao may register as a non-VAT taxpayer.

Note:
1. Mrs. Maranao shall not pay business tax on exempt sales.
2. The receipts from services specifically subject to percentage tax shall be subject to the
particular percentage tax rate that apply to the receipts.
3. Mrs. Maranao shall pay the 3% general percentage tax on the vatable sales and receipts
for as long as her vatable sales or receipts do not exceed the VAT threshold.
4. I there is a reasonable expectation that vatable sales or receipts in the next 12 months
will exceed the VAT threshold, the taxpayer shall register as VAT-taxpayer.

Illustration 2
Assume the same data in the preceding illustration except that those sales figures were
recorded by Mrs. Maranao for the last 12 months and that Mrs. Maranao is registered as a
non-VAT taxpayer.

Mrs. Maranao shall continue paying the 3% general percentage tax. She will only be required
to register to VAT if her vatable sales or receipt exceeded the P3M VAT threshold.

DIFFERENCE OF THE CONCEPT OF GROSS RECEIPT AND SALES BETWEEN VAT

AND NON-VAT TAXPAYERS

For non-VAT taxpayers

The amount billed to the customer or client on the sale of goods or services is respectively
the sales or gross receipts.

Illustration 1
A non-VAT taxpayer billed a client P150,000 for professional services rendered. The client
withheld 10% creditable withholding tax (CWT).

The taxpayer will be able to collect the following:

Professional fees billed P 150,000

Less: 10% CWT 15,000
Net professional fee collected P 135,000

The gross receipt in this case is the amount billed (i.e., P150,000).

Illustration 2
A non-VAT taxpayer received P98,000 from the sales of goods. He also received a CWT
certificate showing P2,000 tax withheld by the customer.

The sales for purposes of business tax may be computed as:

Net cash received on billing P 98,000

Add: CWT certificate 2,000
Sales P 100,000

For VAT-taxpayers
The amount billed to the customer or client (invoice price) on the sale of goods or services
includes the sales or gross receipts plus the 12% output VAT.

Illustration 1
A VAT taxpayer billed a client P150,000 for professional services rendered. The client
withheld 10% creditable withholding tax (CWT).

The amount billed shall be presumed inclusive of VAT. The gross receipt shall be computed
as follows.

Gross receipt (P150,000/112%) P 133,929

Less: Output VAT (P133,929 x 12%) 16.071
Amount billed (invoice price) P 150,000

The CWT is computed on the gross receipts or sales, exclusive of the output VAT. Hence, the
taxpayer will receive the following payment:
Professional fees P 133,929
Less: 10% CWT 13,393
Net professional fees P 120,536
Plus: Output VAT 16,071
Total cash collected P 136,607

Illustration 2
A VAT taxpayer received P102,000 cash plus P10,000 CWT certificate from the sale of
services.

The gross receipt may be computed as:

Cash received P 102,000

Add: CWT certificate 10,000
Invoice price P 112,000
Less: Output VAT (P112,000 x 12/112) 12,000
Gross receipt P 100,000

The same procedure is used in computing sales for the sales of goods.

BUSINESS TAX ACCOUNTING PERIOD

The length of accounting period for business taxes is one quarter. (Secs. 114 (A) and 128
(A)1, NIRC). This is referred to as taxable quarter.

The taxable quarter is composed of three months which is synchronized with the taxable
year (I.e., calendar of fiscal) of the taxpayer for purposes of income tax.

Illustration 1: Calendar year taxpayers

Atty. Aloe Vera is registering with the BIR as a self-employed law practitioner.

Individuals are limited to use only the calendar accounting period. Hence, the taxable
quarter of Atty. Aloe shall be:
- First quarter : January 1 to March 31
- Second quarter : April 1 to June 30
- Third quarter : July 1 to September 30
- Fourth quarter : October 1 to December 31

Illustration 2: Fiscal year taxpayers

ABC Corporation is reporting under income taxation using a fiscal year ending every
August 31.

The taxable quarters of ABC Corporation under its fiscal year shall be:
- First quarter : September 1 to November 30
- Second quarter : December 1 to February 28 or 29
- Third quarter : March 1 to May 31
- Fourth quarter : June 1 to August 31

Remember that corporate taxpayers may opt for either the calendar year or fiscal year
accounting period.

BUSINESS TAX REPORTING

Types of Business Tax Returns

VAT Taxpayers Non-VAT taxpayers
Monthly tax return BIR Form 2550 M Not applicable
Quarterly tax return BIR Form 2550 Q BIR Form 2551 Q

Reporting of VAT taxpayers

VAT taxpayers are required to report their receipts or sales in two monthly estimated VAT
returns for the first two months of the quarter and a quarterly VAT return on the third
month of the quarter. In effect, VAT taxpayers pay remit VAT monthly.

1st month 2nd month 3rd month

Business tax form 2550M 2550M 2550Q
Deadline* Within 20 days Within 20 days Within 25 days
*counted from the end of the month or quarter

The TRAIN law will eventually phase out the monthly estimated VAT payments and VAT
payment will transition into a full quarterly payment effective January 1, 2023.

Reporting of Non-VAT taxpayers (Percentage taxpayers)

The TRAIN law requires percentage taxpayers to file quarterly percentage tax returns (BIR
Form 2551Q). All percentage taxpayers pay their percentage taxes on a quarterly basis.

1st month 2nd month 3rd month

Business tax form - - 2551Q
Deadline* Within 25 days
*counted from the end of the month or quarter

Illustration
Assume a business taxpayer had the following gross sales in the first quarter of 2019:
January – P220,000 , February – P180,000 and March – P260,000.

Assuming the business is a percentage taxpayer:

A percentage taxpayer will report the sales as follows:

January February March

Taxable amount - - P 660,000
BIR Form to use -None- -None- Form 2551Q

Assuming the business is a VAT taxpayer:

A VAT taxpayer will report the receipts as follows:

January February March

Sales or receipts P 220,000 P 180,000 P 660,000
BIR Form to use Form 2550M Form 2550M Form 2550Q

Note:
1. The reported figures in each month shall be the basis of the Output VAT.
2. The March figure is the total of the three months (i.e., P220K + P180K + P260K). The
VAT computed for March will be reduced by the VAT payments made in the first two
months since they are included in this total.

Short Period Return

Any person who retires from business with due notice to the BIR office where the taxpayer
(head office) is registered or whose VAT registration has been cancelled shall file a final
quarterly return and pay the tax due thereon within twenty-five (25) days from the end of
the month when the business ceased to operate or when the VAT registration had been
officially cancelled.

Provided, however, that subsequent monthly declarations/ quarterly returns are still
required to be filled if the results of the winding up of the affairs/ business of the taxpayer
reveal taxable transactions.

TRANSITION TO THE VALUE ADDED TAX

The following illustrates the tax treatments of the transition of taxpayers to the VAT
system.

Illustration 1: VAT threshold monitoring and VAT transition

Mr. Quezon had the following vatable receipt from his service business since his start of
business in January 1, 2020:

Vatable Cumulative Cost and Input

receipts receipts Expenses VAT
Jan. 1–Sept. 30 P 2,250,000 P 2,250,000 P 1,200,000 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 his receipts exceeded P3,000,000 by October 2020, he is subject to VAT prospectively
starting November 2020. He is mandatorily required to update his registration from a non-
VAT to a VAT taxpayer on or before November 30, 2020.

Under the Regular Income Tax Option

Assuming Mr. Quezon opted to the regular tax option for the year 2020 in his first quarter
1701Q, she shall separately pay the regular income tax computed per individual tax table
and the 3% percentage tax under 2551Q.

If we compute his regular tax using the income tax table, Mr. Quezon must have paid
P205,000 in estimated income tax as of September 30, 2020 using 1701Q.

On the other hand, Mr. Quezon must have paid his quarterly percentage tax using Form
2251Q until the end of the quarter ending September 30, 2020.

Required returns

For October 2020

Mr. Quezon shall file his last 2551Q adjustment return and pay the following percentage
tax:

October 2020 gross receipts P 1,000,000

Multiply by: 3%
Percentage tax due P 30,000

For November and December 2020

Mr. Quezon shall file the following VAT returns and pay the following taxes:

- BIR Form 2550M for November 2020

Output VAT (1M x 12%) P 120,000

Less: Input VAT 74,000
VAT still due P 46,000

- BIR Form 2550Q for the 4th quarter ending December 31, 2020

Output VAT (1M + 1M) x 12% P 240,000

Less: Input VAT (P74K + P62K) 136,000
 VAT due P 104,000
Less: Estimated VAT payments – Nov. 2550M 46,000
VAT still due P 58,000

Year 2020 Income tax due

Mr. Quezon’s taxable income for 2020 shall be:

Total receipts in 2020 P 5,250,000

Less: Total cost and expenses in 2020 3,200,000
Taxable Income P 2,050,000

Mr. Quezon shall file and pay the following tax due under Form 1701A:

Tax due on P2,050,000 income, per tax table* P 506,000

Less: Estimated income tax payments (Form 1701Q) 205,000
Income tax still due P 301,000

*Please check individual income tax table under our Income Taxation book.

Under the 8% Commuted tax option

Assuming Mr. Quezon opted to the 8% income tax in the first quarter of 2020, his option to
the 8% income tax shall be invalidated. He shall be subjected to regular income tax for the
entire year 2020 while his payments under the 8% commuted tax shall be treated as tax
credit against his regular income tax due.

He will pay VAT prospectively starting November 2020 and will be assessed percentage tax
for all sales or receipts from January 1, 2020 to October 2020.

As of third quarter 2020, Mr. Quezon must have paid P 160,000 in 8% income tax,
computed as follows:

January to September receipts P 2,250,000

Less: Exempt 250,000
Total P 2,000,000
Multiply by: 8%
Income tax due P 160,000

Assessment of percentage tax in November 2020

The BIR Shall assess Mr. Quezon to pay the following percentage tax under 2551Q:

January to October receipts P 3,250,000

Multiply by: 3%
Percentage tax due P 97,500
It must be emphasized that the percentage tax assessment must cover all sales or receipts
realized prior to his VAT registration, not only the first P3,000,000 of sales or receipts. This
is due to the fact that the VAT applies prospectively effective on the month of registration
not on the excess of sales above P3,000,000.

For November to December 2020

Mr. Quezon shall file the following VAT returns and pay the following taxes:

- BIR Form 2550M for November 2020

Output VAT (1M x 12%) P 120,000

Less: Input VAT 74,000
VAT still due P 46,000

- BIR Form 2550Q for the 4th quarter ending December 31, 2020

Output VAT (1M + 1M) x 12% P 240,000

Less: Input VAT (P74K + P62K) 136,000
VAT due P 104,000
Less: Estimated VAT payments – Nov. 2550M 46,000
VAT still due P 58,000

Year 2020 Income tax du

Mr. Quezon’s taxable income for 2020 shall be:

Total receipts in 2020 P 5,250,000

Less:
Total costs and expenses in 2020 3,200,000
Percentage tax expense 97,500
Taxable income P 1,952,500

Mr. Quezon shall file and pay the following income tax due for 2020 under Form 1701A:

Tax due on P1,952,500 taxable income, per P 475,750

tax table
Less: Estimated income tax payments 160,000
(Form 1701Q)
Income tax still due P 315,750

Illustrative 2: Non-registration as VAT taxpayer

Assume instead that Mr. Quezon paidP13,500 percentage tax in November and registered
as VAT taxpayer only on December 2020.

Mr. Quezon shall be subject to VAT in November despite his failure to update his VAT
registration. Registrable persons are subject to VAT without the benefit of input VAT in the
period they are not properly registered.

Hence, Mr. Quezon shall be required to pay the following additional assessment for
November 2020:

Output VAT (P1M x 12%) P 120,000

Less: Input VAT 0
VAT due P 120,000

Mr. Quezon shall file a claim for refund or credit for the P13,500 percentage tax paid as it is
an erroneous payment of tax considering that VAT should have been paid for that month.

If claimed as tax credit, the same shall be taken as deduction against the tax due once
approved by the BIR.

Assuming the claim for tax credit is approved, the VAT payable shall be computed as
follows:

Output VAT (P1M x 12%) P 120,000

Less: Input VAT 0
VAT due P 120,000
Less: Tax credit 13,500
VAT still due P 106,500

Note to Readers
A mastery of business taxation requires good knowledge in:
1. Identification the business activity of the taxpayer (service or goods)
2. Tax basis (gross sales or gross receipts)
3. Type of the sales or receipts *exempt, specific percentage tax or vatable)

You need to master the list od exempt sales and those services specifically subject to the
percentage tax. These are the exception rules in business taxation.

Timing of VAT Registration

1. Persons commencing business with an expectation to exceed the VAT threshold within
12 months shall simultaneously register as VAT taxpayer with the registration of their new
business or trade with the BIR.
2. Persons exceeding the VAT threshold shall register as VAT taxpayer before the end of
the month following the month the threshold is exceeded.
3. Franchise grantees of radio and television broadcasting, whose gross annual receipt for
the preceding calendar year exceeded P10,000,000 shall register as VAT taxpayer within
30 days from the end of the calendar year (RR16-2005).
4. Persons who are below the threshold but opt to be registered as VAT taxpayer shall
register not later than 10 days before the beginning of the taxable quarter (lbid).

VAT treatment of exempt transactions

A VAT registered taxpayer who enters into a VAT-exempt transactions (i.e., mixed
transactions) may also opt that the VAT apply to his transactions which would have been
exempt under Section 109 of the NIRC.

Essence of voluntary the VAT registration

Other than simplifications of sales monitoring and attracting VAT-registered customers,
there may be no other practical advantage of this option for a purely domestic-based
business but there is nothing wrong in giving our progressive country more than what is
required. This option, however, is beneficial for taxpayers who are into export business so
that their export sales would be zero-rated rather than merely exempt.

The optional VAT registration is not allowed to self-employed and or professional

individuals who opted to the 8% commuted tax under income taxation.

VAT taxpayers shall continue to pay VAT until the cancellation or revocation of their VAT-
registration.

Revocability of VAT Registration

1. The VAT registration, whether voluntary or mandatory, of franchise grantees of radio or
television is perpetually irrevocable. Thus, they continue to be VAT taxpayers until the
dissolution of their business.
2. Any person, other than franchise grantees of radio or television, who voluntarily
registered as VAT taxpayers shall not be allowed to cancel their VAT registration for the
next 3 years. This is referred to as 3-year lock-in period.
3. Any person who registered as VAT taxpayers with an expectation to exceed the VAT
threshold but failed to exceed the same within 12 months of operations may apply for
cancellation of VAT registration. The three-year lock-in period does not apply in this case.

Business whose VAT registration has been cancelled will be registered or reverted back as
non-VAT taxpayers. They will be subject to the 3% percentage tax on sales or receipts.

Penalty for registrable persons

As previously pointed out, failure to register as a VAT-taxpayer is not an excuse.
Registrable persons are still liable to VAT but without the benefit of input tax credit in the
periods in which they are not properly registered.

CHAPTER 3: SELF-TEST EXERCISES

Discussion Questions
1. What is a business?
2. What are the two essential requisites of a business?
3. Discuss the exceptions to the Regulatory rule?
4. What is a taxable person in business taxation?
5. Discuss the registration requirements for businesses
6. What are the two business classifications as to activities? What is the tax base on each
type of business classification
7. Explain the concept of “gross selling price” and the concept of “gross receipts.”
8. Discuss the VAT threshold.
9. What is the accounting period for businesses? Discuss the rules on the businesses
accounting period.
10. Discuss the difference in tax reporting of VAT taxpayers and non-VAT taxpayers.
11. Describe the scope of the VAT and the Percentage Tax.
12. What is meant by the term “vatable”?