Introduction to

Business Taxes
 01
Outline
The Concept and Nature of Business

02 The Concept and Nature of Business Taxes

(Kinds of Business Tax: VAT, Percentage Tax
and Excise Tax

03 Business Taxpayers

04 Business Activities

05 Procedures of Business Taxation

 What is Business?
• Business, as defined in Local Government Code (LGC) of 1991, pertains to trade
or commercial activity regularly engaged in as a means of livelihood or with a
viewpoint of obtaining profit.
• The primary objective of business therefore, is to earn profit and its co-equal
secondary purpose is the social responsibility to all stakeholders.

• All businesses perform various activities daily. These may be classified as either
business activities or not. Business tax covers only those transactions that are
classified as business activities especially those involving the sale of goods or
services.
Characteristics of Business
• Regular conduct of economic activities
• “In the course of trade or business”
• Regular conduct or pursuit of a commercial or economic activity, including transactions
incidental thereto, by any person, regardless of whether or not the person engaged therein is a
non-stock, nonprofit private organization (irrespective of the disposition of its net income and
whether or not it sells exclusively to members or their guests), or government entity.
• Exception: Sale of service by a nonresident foreign persons – considered as being rendered in
the course of business without regard to the “rule of regularity”.
• Not an isolated transaction: generally not considered in the ordinary course of trade or business,
hence, not subject to business tax except services rendered in the Philippines by a non-resident
foreign person which shall be considered as being rendered in the course of trade or business
even if the performance is not regular.
 Characteristics of Business
2. Business must be a lawful economic activity
• Must be within the lawful commerce of men

3. The purpose of economic activity is for profit

• The term means business in the trade or commercial sense only. It is construed in
its plain and ordinary meaning restricted to activities or affairs where profit is the
purpose or livelihood is the motive.
When an activity is considered a business
activity?

• Habitual engagement; and

• Commercial Activity
 There must be regularity in 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 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 vocation but non-registration is not an excuse
to business taxation.
 Example # 1:
Mrs. Ellerton, a medical practitioner, sold his
principal residence for P10 Million.
 Example # 2:
Mang Merto, a realty dealer, purchased shares of
stocks as investment and sold them at a profit.
Example # 3:
Joshua is a proprietor regulary engaged inn
trading merchandise. During the month, he
reported the following:

Sales of merchandise 800,000

Sale of personal car 1,200,000
Privilege Stores ("tiangge")
• are stalls or outlets not permanently fixed to the gorund which are put during special events such
as festivals or fiestas (RR6-2013).

• 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. (Ibid.)

• "Privilege store operators" shall be considered habitually engaged in business

considering their limited activity. They are exempt from business tax but is subject
to income tax.
Example # 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 activities.
Example # 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.
Exception to the regularity rule

• Services rendered in the Philippines by a non-resident persons shall be

considered as being rendered in the course of trade or business whether the sale
is regular or isolated. Our current tax law views the consumption tax on import
or services a business tax. The sales of services by non-residents are subjected to
the final withholding tax.
 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

Commerical pecuniary gains.

Activity
However, the actual existence of a profit during the
period is not a pre-condition to business taxation.
Even if the business operation results to a loss,
business tax still applies.
Examples of
Government agencies and instrumentalities

MIEs Non-profit organizations or associations

Employment

Directorship in a corporation

Business for mere subsistence

Business for mere subsistence

• refers to businesses with gros sales or receipts not exceeding P100,000 per year.

• Marginal Income Earners - refer to individuals 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
Subsistential farmers or fishermen

MIEs Small sari-sari stores

Small carinderias or "turo-turos"

Drivers or operators of a single unit tricycle,

and

Others similarly situated

 What is Business Tax?
• Business Tax is a tax imposed on the onerous transfer of product, property, and
services such as sale, barter, exchange and importation
• Onerous Transfer means that there is monetary consideration involved in the
transfer of goods and services betwen the owner and the buyer. However, if the
transfer of goods or services is without consideration, (i.e. for free), the transfer is
said to be gratuitous.
• Gratuitious transfer is subject not to business tax, but to Transfer tax.
 What is Business Tax?
• Onerous Transfer
• in the ordinary course of trade or business
• Applicable tax
• Business tax - on the sale itself, regardless of the result of the transaction
• Income tax - on the income derived from the sale, barter or exchange
• not in the ordinary course of trade or business
• may result to imposition of income tax only. Business tax is not applicable if
the onerous transfer was made not in the ordinary course of trade or business
(except in case of importation)
Onerous Transfer subject to Business Tax
• Value-added tax
• Percentage tax
• Excise tax

Gratuitious Transfer subject to Transfer Tax

• Estate tax
• Donor's Tax
COVERAGE OF VALUE-ADDED TAX

• Sale of goods or properties in the ordinary course of

the business
• Sale of services and use of lease of properties in the
ordinary course of the business
• Importation of goods or properties whether or not in
the course of business or trade
COVERAGE OF PERCENTAGE TAX

- generally imposed on services. (Sec. 116-127 of the NIRC):

• Tax on persons exempt from VAT
• Common Carrier's Tax
• Tax on International Carriers
• Franchise Tax
• Overseas Communications Tax
• Tax on Banks and Non-Bank Financial Intermediaries
Performing Quasi-Banking Functions ("GRT")
COVERAGE OF PERCENTAGE TAX

- generally imposed on services. (Sec. 116-127 of the NIRC):

• Tax on Finance Companies
• Tax on Life Insurance Premiums (Premium Tax)
• Tax on Agents of Foreign Insurance Companies
• Amusement Taxes
• Winnings (from Horse Races)
• Stock Transaction Tax
COVERAGE OF EXCISE TAX or "SIN TAXES"
- The excise tax within the context of business tax is imposed on the
following (Sec. 129-151, NIRC):
• Miscellaneous articles, such as automobiles, non-essential goods
like jewelry, perfume and yacht, and sweetened beverages like
soft drinks and sweetened drinks
• Non-essential services such as cosmetic surgery
PROCEDURES OF
BUSINESS TAXATION
• EVALUATE IF THE SALES ACTIVITY QUALIFIES AS A
BUSINESS
• if not, the activity is exempt from business tax
• if yes, the business must register for business tax.
Proceed to the succeeding procedures.
2. IDENTIFY THE TAXABLE PERSON
• if individual - include all the proprietorship
business including branches of the individual
taxpayer
• if juridical - include all branches of the corporate
taxpayer
PROCEDURES OF
BUSINESS TAXATION
3. DETERMINE THE ACTIVITY TYPE:
• if sales of goods - determine the sales
• if sales of services - determine the receipts
4. CLASSIFY THE SALES OR RECEIPTS WHETHER THEY
ARE:
•exempt sales or receipts - pay no business tax
• sales or receipts subject to specific percentage tax -
pay specific percentage tax
• vatable sales or receipts
PROCEDURES OF
BUSINESS TAXATION
5. DETERMINE TAXPAYER REGISTRATION TYPE
• if the taxpayer is VAT registered, pay VAT on vatable sales or receipts
• if taxpayer is non-VAT registered, pay the 1% general percentage tax
(under CREATE Law) then determine the magnitude of 12-month
vatable sales at the end of every month:
⚬ if exceeds P3M - the person shall register as VAT taxpayer; pay
VAT prospectively effective on the succeeding monthly vatable
sales or receipts.
⚬ if it does not exceed P3M - the person shall continue to be paying
the 1% general percentage tax on the vatable sales or receipts.
PROCEDURES OF
BUSINESS TAXATION
6. DETERMINE IF THE GOODS OR SERVICE OFFERED IS
EXCISABLE
• if yes, pay the applicable excise tax in addition to
VAT or percentage tax
• if not, pay only VAT or percentage tax
Business Taxpayers
The taxable person in business
taxation includes any individual,
trust, estate, partnership,
corporation, joint venture,
cooperative or association.
5 Rules to Remember:

1 2
EACH PERSON, NATURAL HUSBAND AND WIFE ARE
OR JURIDICAL, IS A SEPARATE TAXPAYERS.
TAXABLE PERSON FOR
PURPOSES OF BUSINESS
TAXATION
5 Rules to Remember:
Illustration:
3 • ABC Company has a branch n
Manila City and a subsidiary,
A PARENT COMPANY IS A
XTB Company in Davao City.
SEPARATE TAXABLE
PERSON WITH ITS
SUBSIDIARY COMPANY
AND EACH SUBSIDIARY
COMPANY IS A TAXABLE
PERSON
5 Rules to Remember:
Illustration:
4 • DEF Corporation has its head office in
Makati City and two branches in
HOME OFFICE AND
Manila City and Quezon City. The
BRANCH OFFICES OF THE
SAME BUSINESS ARE ONE, sales outlet has the following sales:
NOT SEPARATE, TAXABLE ⚬ Makati head office - P2M
PERSON ⚬ Manila City Branch - P1.8M
⚬ Quezon City Branch - P1.2M
5 Rules to Remember:
5
PROPRIETORSHIP IS NOT A
Illustration:
• Mr. Ysmael, an accounting practitioner,
JURIDICAL ENTITY. ITS
SALE AND RECEIPTS ARE has two other commercial businesses
SUBJECT TO BUSINESS TAX with the following receipts and sales:
TO THE INDIVIDUAL
⚬ Mr. Ysmael's practice - P1.2M
PROPRIETOR. MULTIPLE
PROPRIETORSHIP ⚬ Business 1 - P800k
BUSINESS OF THE SAME ⚬ Business 2 - P700k
INDIVIDUAL ARE ALL
TAXABLE TO THAT
INDIVIDUAL AS THE
TAXPAYER
Types of Business
Taxpayers
A taxable person shall register as:
• VAT taxpayers - pay 12% VAT
• Non-VAT taxpayers - pay a 1% general
percentage tax
Business Activities
The basis of business tax differs on the activities
business are engaged in.

a. sale of exchange of goods or properties

b. sale or exchange of services or lease of
properties
Basis of Business Tax
per Type of Actvity
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, excluding VAT. The excise tax, if
any, on such goods or properties shall form part
of the gross selling price.
 Allowable Discounts
from Gross Selling Price
• 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 are
duly recorded in the books of accounts.
• To be deductible, discounts must not be dependent
upon the happening of a future event or contingency.
 Allowable Discounts
from Gross Selling Price
2. Sales returns and allowances for which a proper credit
of refund was made during the month or quarter to the
buyer on taxable sales.
 Allowable Discounts from
Gross Selling Price
Illustration # 1: A business taxpayer had the following
transactions during the quarter:

Cash Sales P400,000

Sales on credit (account sales) 600,000
Installment sales (P30k collected) 100,000
Sales Returns & Allow. 20,000
Quota discounts 10,000
Purchase of goods, including
P72k VAT passed on by sellers 672,000
Allowable Discounts from
Gross Selling Price
The gross selling price shall be:

Cash Sales P400,000

Sales on credit (account sales) 600,000
Installment sales (P30k collected) 100,000
Total Sales P1,100,000
Less: Sales Returns & Allow. 20,000
Gross Selling Price P1,080,000
 Allowable Discounts from
Gross Selling Price
Illustration # 2: HTC Corporation sold various specialized
equipment to a buyer with the following terms:

List Price P2,000,000

Freight 50,000
Installation fee 20,000
Trade Discounts 10%
Cash Discounts, 2%/30 net 60 days 36,000
 Allowable Discounts from
Gross Selling Price
The gross selling price shall be:

List Price P2,000,000

Less: Trade Disc. (10% x P2M) 200,000
Net Price P 1,800,000
Freight 50,000
Installation Fee 20,000
Gross Selling Price P1,870,000
 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 advanced
payments actually or constructively received during the
taxable period for the services performed or to be
performed or another person excluding VAT.
 Gross Receipts
Illustration: A laundry business had the following
transactions during the month:

Cash collection for services done P400,000

Cash collection for services not yet
started (advances) 100,000
Receivables on services rendered 600,000
Purchase of goods and services,
including of P48k VAT passed on
by sellers 448,000
 Gross Receipts
The gross receipts shall be:

Cash fees P400,000

Advances by customers 100,000
Gross receipts P 500,000
 Constructive Receipts
• 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 the gross receipts.

Examples:
• Deposit in a bank account of the seller made by the buyer in consideration of
services rendered of goods sold
• Issuance by the debtor of a notice to offset any debt or obligation and acceptance
thereof of the seller as payment for services rendered
• Transfer of the amounts received by the payor to the account of the contractor
Constructive Receipts
Illustration: Miss Leah Mado is pozo negro contractor . She
had the following fees for the month:
• P10,000 from Cipher Company, net of the P30,000 debt
of Miss Leah from Cipher Company
• P15,000 deposited to Ms. Leah's bank account
• P20,000 cash share from a general professional
partnership, P30,000 undistributed share was credited to
her capital account
Constructive Receipts
Ms. Leah's gross receipts shall be:

Receipts from Cipher Company

(P10k + P30k) P 40,000
Fees deposited to Leah's bank
account 15,000
Gross Receipts P 55,000
 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 Phil., 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%)

 Mandatory Registration as VAT
taxpayer
Any person who, in the course of trade or business, sells, barters or
exchange goods or properties or engages in the sale or exchnage of
services shall be liable to register to VAT if:

• His gross sales or receipts for the past 12 months have exceeded
P3,000,000
• There are reasonable grounds to believe that his gross sales or
receipts for the next 12 months will exceed P3,000,000.
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.
Business Tax Accounting Period

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

The taxable quarter is composed of three months which is synchronized

with the taxable year (i.e., calendar or fiscal) of the taxpayer for
purposes of income tax.
Business Tax Accounting Period

Calendar Year Taxpayers

Illustration: Atty. Aloe Vera is registering with the BIR as a self-

employed law practitioner.
Individuals are limited to use only the calendar period. Hence the
taxable quarters of Atty. Aloe shal 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
Business Tax Accounting Period

Fiscal Year Taxpayers

Illustration: 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
 Business Tax Reporting
Types of Business Tax Returns:
Reporting of VAT taxpayers
VAT taxpayers are required to report their receipts or sales in two months 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.
Reporting of Non-VAT 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.
Thank you!
Next: Exempt Sales of Goods and Services