Northern Luzon Adventist College
School of Business Education
BUSINESS & TRANSFER TAXATION
BUSINESS TAXATION
10:30-12:00
Monday/Wednesday
Module 1
INTRODUCTION TO CONSUMPTION TAX
Objectives: This module provides an overview of
consumption tax. After reading this module, you
are able to :
Comprehend the concept of consumption tax,
and its types
Learn the meaning of destination principle.
Distinguish and comprehend the nature of VAT
on importation and business tax.
Understand the nature and types of business tax.
Characterizes VAT on sales as well as
percentage taxes.
The Concept of Consumption
Consumption is defined as the use of goods and services by a household. It also
refers to the acquisition or utilization of goods or services by any person through
purchase, exchange or other means.
This utilization is subject to a tax called Consumption tax.
A consumption tax is a broad category of tax that is levied on
the consumption value of goods and services.
A consumption tax is a tax levied on consumption spending on goods and services.
The tax base of such a tax is the money spent on consumption. Consumption
taxes are usually indirect, such as a sales tax or a value-added tax.
A consumption tax essentially taxes people when they spend money.
An income tax taxes people when they earn money or when they get interest,
dividends, capital gains, and so on.
Examples of consumption taxes include retail sales taxes, excise taxes, value
added taxes, taxes on gross business receipts (also known as business
transfer taxes), and import duties (customs duty, tariff, import tax or import tariff)
Rationale of Consumption Tax
Savings Formation. A tax on consumption promotes
savings by limiting the level of consumption.
Rationalization of the Benefit Received Theory. A tax
on consumption will effectively render everybody taxable.
Hence, consumption tax rationalizes the Benefit Received
Theory in Taxation which stresses that “those who receive
more benefit from the government, should pay more taxes.”
Wealth Redistribution to Society. Rich people can afford
to spend more, hence, they pay more taxes. The
consumption tax, in effect, supports the redistribution of
wealth from rich people to the less privileged members of
the society.
Income Tax vs. Consumption Tax
Income Tax Consumption Tax
Nature Tax upon receipt Tax upon usage of
of income income or capital
Scope/
Coverage A tax to the capable A tax to all
Theoretical
basis: Ability to pay theory Benefit received theory
those who have a greater ability to pay those who receive the greatest
benefit
taxes—measured by income and wealth— from the government,
either directly
should pay more. or indirectly, should pay
the most taxes
Types of Consumption as to Source
Foreign
Domestic
Seller: Consumption
Consumption
Buyer=
Buyer=Resident
Nonresident
Status Taxable
Status-Exempt/NT
Resident
Seller Buyer
Sellers
Export
Sales or Purchase
Receipts
Buyer
Importer Seller
Non-resident
Sellers Philippines
Abroad
CONSUMPTION TAX ON DOMESTIC SALES
Because taxation is inherently “territorial”, tax can
only be imposed upon domestic consumption. Hence,
only goods and services destined for consumption in
the Philippines are subject to consumption tax while
those destined for consumption abroad are not
subject to consumption tax. (DESTINATION
PRINCIPLE).
Under the “Cross-border doctrine”, goods that cross
the border destined for foreign countries are not
charged consumption taxes. Hence, the government
does not impose taxes on exports. The NIRC either
exempts exports or subject them to a 0% tax rate.
Types of Consumption as to Source
The domestic consumption of goods or services
of resident buyers from a resident sellers
(purchase) is subject to consumption tax
called as BUSINESS TAX, an indirect tax.
IF THE SELLER IS IF THE BUYER IS Is he (seller) subject
(Resident) (Resident) to Business Tax?
Engaged in business Engaged in business YES
Engaged in business Not engaged in YES
business
Not engaged in Engaged in business NO
business
Not engaged in Not engaged in NO
business business
Types of Consumption as to Source
The domestic consumption of goods or
services from non-resident sellers commonly
known as importation is subject to
consumption tax known as VAT ON
IFIMPORTATION.
THE SELLER IS IF THE BUYER IS Is he (buyer) subject
(Non-resident) (Resident) to VAT on Importation?
Engaged in business Engaged in business YES
Engaged in business Not engaged in YES
business
Not engaged in Engaged in business YES
business
Not engaged in Not engaged in YES
business business
TYPES OF CONSUMPTION TAXES
Percentage Tax- tax of various rates from 0.60%
to 30%
Tax on sale, barter or exchange of shares of stock listed and traded
through the local stock exchange other than sale by a dealer in securities =
6/10 of 1% of gross SP
Amusement tax ( Jai-alai & Race tracks) = 30% of Gross receipts
Value Added Tax – a consumption tax of 12%
Excise Tax – an ad valorem or specific tax, which
is imposed in addition to VAT or percentage tax,
only on certain goods or services. (Tax on alcohol,
petroleum products, sweetened beverages, cosmetic procedure)
TYPES OF DOMESTIC CONSUMPTION AS TO TAXABILITY
Exempt consumption – consumption of goods not
subject to consumption taxes.
Consumptions specifically subject to percentage
tax – consumption of services that are not subject to
VAT but are imposed with a specific percentage
taxes.
Vatable consumption – includes all other
consumptions that are neither exempted nor subject
to percentage tax.
DOMESTIC
IMPORTATION SALES/RECEIPTS
TYPES OF CONSUMPTION PER TYPE OF DOMESTIC CONSUMPTION
Exempt Exempt Exempt
consumption importation sales/receipts
Services subject Service specifically Services
to a % tax subject to a % tax specifically subject
to a % tax
Vatable Vatable Vatable sales or
consumption importation receipts
EXEMPT CONSUMPTION
They are neither subject to percentage tax
nor VAT.
If they are sourced from abroad, they are
exempt from VAT on importation.
If they are sourced from within, they are
exempt from business tax.
Basis of exemption from consumption tax
Basis of VAT on Importation Business Tax
Exemption
Human The goods imported is a human necessity. The goods, services or property
necessity sold is a human consumption. .
(Basic necessities such as natural
agricultural or marine food products,
agricultural inputs, books, newspapers and
magazines, etc.)
Out of scope The importation does not constitute a domestic The seller is not engaged in
of tax consumption. (Importation of personal, household and business. (No business tax if the seller of
professional instruments or effects.) goods or services is not a business.)
Tax The importation is exempted as a tax incentive to The sales or receipts is exempted
incentive certain importers. (Importation of vessels, aircraft to improve as a tax incentive to certain
domestic air or sea transport.) sellers. (Exemptions of Cooperative as an
instrument in economic developments for
rural poor)
International The importation is exempted by treaty The sales or receipts is exempted
comity by treaty
The Structure of VAT on Importation
VAT on Importation
Import of Services Import of Goods
Exempt Exempt Exempt
Percentage tax Percentage tax -
VAT Final withholding tax VAT on importation (12% of
(12% of the contract price the landed cost of the goods and
of the services and is paid to is paid to the Bureau of Customs)
the BIR)
Landed Cost- the cost of the item plus all
shipping costs related to getting the item
from the seller to the buyer.
The Structure of the Business Tax
Business Tax
Sales of Services Sales of Goods
Exempt Exempt receipts
(means exempt to VAT & Percentage tax)
Exempt sales
(means exempt to VAT & Percentage tax)
Receipts specifically subject to a
Percentage tax (generally 3%)
Percentage 1% under CREATE Law – July 1, -
tax 2020 to June 30, 2023
(means subject to a particular
percentage tax and is exempt from VAT
VAT Vatable receipts
Means subject to either VAT (12%) or
Vatable sales
Means subject to either VAT (12%) or
3% percentage tax) 3% percentage tax)
The Excise Tax
It is imposed on commodities such as:
Sin products such as alcohol and cigarettes
Non-essential commodities, such as automobiles and
jewelries
Non-essential services, such as cosmetic surgery
Products which are environmentally degrading in their
production or consumption, such as petroleum and
minerals.
Excise tax is an additional imposition to VAT or
percentage tax. The excise tax on excisable goods is
normally imposed before the goods are sold by domestic
producers upon their importation by importers.