BUSINESS TAXES

CONCEPT and NATURE of Business:

Business is the regular conduct of commercial or economic activity where the primary motive is profit or livelihood.

“In the course of business” – a phrase to describe the regular conduct or pursuit of a commercial or economic activity, including transactions incidental thereto, to achieve the purpose for which the business is created. (Sec. 105, NIRC)

Requisites of business activity:

1. Intended for profit – irrespective of the disposition of its net income and whether it sells exclusively to its members or its guests. (Sec. 105, NIRC)

2. Regularly undertaken –not a performance of a single disconnected act to obtain gain. Casual sale – occasional sale of goods or services by a person who is not engaged in business or sale of assets that are not used in business.

3. Financial in character 4. Lawful – not contrary to law, morals, good

Exceptions:

1. Importation of goods for personal use 2. An overseas communication made (related to

business or not) 3. Single service rendered by a non-resident

alien in the Philippines (Sec. 105, NIRC) 4. Single winning in horse race or jai-alai 5. Sale of shares through local stock exchange

by one who is not a security dealer 6. Individual taxpayer whose gross sales/

receipts in any month during a 12-month period do not exceed P100,000.

CONCEPT and NATURE of Business Taxes:

Business tax is a tax imposed on the onerous transfer of product, property and service.

- Business activity in general is subject to business tax.

Kinds of business tax:

1. Value-added tax a) Sale of properties or goods in the ordinary

course of business b) Sale of services in the ordinary course of

business c) Importation of goods or properties whether

2. Percentage tax –generally imposed on services

a) Overseas communication tax b) Franchise tax c) Common carrier’s tax d) Amusement tax e) Tax on winnings f) Stock transaction tax

3. Excise tax a) Manufacturer/importer of the ff:

i. Wines ii. Distilled spirits and fermented liquors iii. Cigars, cigarettes and tobacco iv. Automobiles, fuels and oils, mineral

Registration of business: In general, a business should register before the start of operation. It shall renew its registration annually before the end of January. Upon registration, the person must pay an annual registration fee in the amount of P500 for every separate or distinct establishment or place of business, before the start of such business year thereafter on or before the 31st day of January. (Sec. 236, NIRC)

Exempt from registration fee: 1. Individual earning purely compensation income; 2. Overseas workers; 3. Subsistence livelihood earner;

Classification of Business Transactions (for tax purposes): 1. VAT Taxable Transactions allowed with

creditable Input VAT 2. VAT Taxable Transactions not allowed with

creditable Input VAT 3. Zero-Rated Transactions 4. VAT-exempt transactions; which are exempt

from Other Percentage Tax 5. VAT-exempt transactions; subject to Other

Percentage Tax 6. Transactions with the government units

A. VALUE-ADDED TAX (VAT)

Definition: The value-added tax is a tax on consumption

levied on the sale, barter or exchange or lease of goods or properties or services in the Philippines and on importation of goods into the Philippines.

A tax which is imposed only on the increase in the worth, merit or importance of goods, properties or services, and not on the total value of the goods or services being sold or rendered.

Characteristics: 1. It is a tax on transactions. 2. It is an indirect tax. 3. It is a tax on value added of the taxpayer. 4. It is a transparent form of sales tax. 4. It is a broad-based tax on consumption of

goods, properties or services in the Philippines.

5. It is collected through the tax credit method.

6. It does not cascade (tax on tax). 7. It adopts the “tax-inclusive method.” 8. It follows the Destination Principle/Cross

Border Principle. (Toshiba Information Equipment Inc. Vs.

Destination Principle - VAT is imposed in the country in which the products or services are actually consumed or used.

Impact of tax – is on the seller upon whom the tax has been imposed and who shifts the burden.

Incidence of taxation - customer who finally bears the burden of the tax.

Major Features of the VAT are:

1. VAT replaced the old 15 business taxes. 2. VAT eliminated 67 various tax rates and

Transactions subject to VAT.

1. Sale, barter or exchange of goods and properties in the course of business (including “deemed sale”) in the Philippines.;

2. Sale or exchange of services in the course of trade or business in the Philippines;

3. Lease or use of goods and properties in the course of trade or business in the Phils.; and

4. Importation of goods, whether or not in the course of trade or business.

5. Exportations in the course of trade or business.

The term "in the course of trade or business" means the 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, non-profit 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.

Non-resident persons who perform services in the Philippines are deemed to be making sales in the course of trade or business, even if the performance of services is not regular.

VAT operation illustrated:

(a) Price paid

(b) Input tax

(c) Total

(d) Price charged

(e) Output tax

(f) Total

(g) VAT payable

1st Seller - - - P10 P1.20 P11.20 P1.20

2nd Seller P10 P1.20 P11.20 P40 P4.80 P44.80 P3.60

3rd Seller P40 P4.80 44.80 P60 P7.20 P67.20 P2.40

4th Seller P60 P7.20 67.20 P90 P10.80 P100.80 P3.60

Consumer P90 P10.80 100.80

VAT tax rates:

1. On sale/lease of goods or properties - 12% 2. On rendering of service - 12% 3. On export sale - 0% 4. On importation of goods - 12%

Tax Base:

1. Gross selling price – includes the selling price and all incidental expenses charged by the seller to the buyer except VAT sales returns, discounts and allowances. (see Sec. 106, NIRC)

2. Gross receipts – all money actually or

3. Landed cost – refers to the invoice price of imported goods and all expenses of importation incurred before the release of goods from the custody of the Bureau of Customs.

Method of computing VAT

1. Cost deduction method

Example:

Selling price P100,000 Less: Cost of Sales 90,000 Taxable sales (value added) 10,000

2. Tax credit method

Example:

Output tax (VAT on sales) P 12,000 12% x P100,000

Less: Input tax (VAT paid on purchases) 10,800 12% x P90,000

VAT payable P 1,200

Output tax - the value-added tax due on the sale or lease or taxable goods, properties or services by any person registered or required to register under the VAT System. (Sec. 110A, NIRC)

Sources of Output Taxes: 1. Actual sales 2. Deemed sales 3. Zero-rated sales

Input tax - the VAT due on or paid by a VAT-registered person on importation of good or local purchases of goods or services, including lease or use of properties, in the course of his trade or business. (Rev. Regs. No. 4.110-1, 1st par.)

Input tax shall also include: (read Sec. 110, NIRC) a. passed-on VAT b. presumptive input tax c. transitional input tax

Presumptive Input Tax Credits. -

  Persons or firms engaged in the processing of sardines, mackerel and milk, and in manufacturing refined sugar and cooking oil, shall be allowed a presumptive input tax, creditable against the output tax, equivalent to four percent (4%) of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production.

Transitional Input tax credits-

A person who becomes liable to value-added tax or any person who elects to be a VAT-registered person shall, subject to the filing of an inventory according to rules and regulations prescribed by the Secretary of finance, upon recommendation of the Commissioner, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent for two percent (2%) of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax.

Persons liable

Any person who, in the course of trade or business   (1) sells, barters, exchanges goods or properties, (2) leases goods or properties, (3) renders services; and (4) any person who imports goods. (Sec. 105,

NIRC)

The seller/lessor is the one statutorily liable for the payment of the tax but the amount of the tax may be shifted or passed on to the buyer, transferee or lessee of the goods,

VAT Registration, in General.

– Any person who, in the course of trade or business, sells, barters, exchanges goods or properties, or engages in the sale of services subject to VAT imposed in Sections 106 and 108 of the Code, as amended, shall register the VAT tax type with the BIR district office having jurisdiction over the HO.

Registration for VAT purposes are of two kinds, namely:

1. Mandatory registration, and

Mandatory VAT Registration.

- 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 the VAT tax type if:

1) His gross sales or receipts for the past twelve (12) months, other than those that are exempt under Section 109 (1) (A) to (U) of the Code, as amended, have exceeded One Million Nine Hundred Nineteen Thousand Five Hundred Pesos (P1,919,500.00); or

2) There are reasonable grounds to believe that his gross sales or receipts for the next twelve (12) months, other than those that are exempt under Section 109 (1) (A) to (U) of the Code, as amended, will exceed One Million Nine Hundred Nineteen Thousand Five Hundred Pesos (P1,919,500.00).

Moreover, franchise grantees of radio and television broadcasting, whose gross annual receipt for the preceding calendar year exceeded P10,000,000.00, shall register as VAT taxpayer within thirty (30) days from the end of the taxable year

Non-VAT Registration.

The following are not required to register VAT as a tax type:

1) Those persons subject to other percentage taxes under Title V of the Code, as amended;

2) Those whose transactions are VAT-exempt as

enumerated under Section 109 of the Code, as amended.

3) Marginal Income earners as herein defined.

Optional Registration for VAT- Exempt Persons.

1) Any person who is VAT-exempt under Section 109 (1) (V) of the Code, as amended, i.e., sale or lease of goods or properties or the performance of services other than the transactions mentioned in Section 109 (1) (A) to (U) of the Code, as amended, the gross annual sales and/or receipts do not exceed the amount of One Million Nine Hundred Nineteen Thousand Five Hundred Pesos (P1,919,500.00) not otherwise required to register for VAT may elect to be VAT-registered by registering with the BIR district office that has jurisdiction

2) Any person who is VAT-registered but enters into transactions which are exempt from VAT (mixed transactions) may opt that the VAT apply to his transactions which would have been exempt under Section 109 (1) of the Code, as amended.

3) 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) derived from the business covered by the law granting the franchise may opt for VAT registration. This option, once exercised, shall be irrevocable.

The following compliance activities must be performed by a VAT-registered taxpayer:

1. Pay the annual registration fee of P500.00 for every place of business or establishment that generates sales;

2. Register the books of accounts of the business/occupation/calling, including practice of profession, before using the same;

3. Register the sales invoices and official receipts as VAT-invoices or VAT official receipts for use on transactions subject to VAT.

(If there are other transaction not subject to VAT, a separate set of non-VAT invoices or non-VAT official receipts need to be registered for use on transactions not subject to VAT);

4. Filing of the Monthly Value-added Tax Declaration on or before the 20th day following the end of the taxable month (for manual filers)/on or before the prescribed due dates enunciated in RR No. 16-2005 (for e-filers) using BIR Form No. 2550M and of the Quarterly VAT Return on or before the 25th day following the end of the taxable quarter using BIR Form No. 2550Q.

5. Submit with the RDO/LTDO having jurisdiction over the taxpayer, on or before the deadline set in the filing of the Quarterly VAT Return, the soft copy of the Quarterly Schedule of Monthly Sales and Output Tax (if the quarterly sales exceed P2,500,000.00), and the soft copy of the Quarterly Schedule of Monthly Domestic Purchases and Input Tax/ the soft copy of the Schedule of Transactional/Individual Importation ( if the quarterly total purchases exceed P1,000,000.00), reflecting therein the required data prescribed under existing revenue issuances.

In determining the main or principal business of a taxpayer, we apply the predominance test. Under this test, if more than fifty (50%) of its gross sales and/or gross receipts comes from its business/es subject to VAT, its main/principal business falls within the VAT system making its status as a VAT person. Otherwise, he can not be considered as a VAT person eligible for the election provided for under Section 109(2) of the Tax Code.

VAT Taxable Transactions allowed with creditable Input VAT

- These are transactions of VAT-registered business on items other than those which are VAT-exempt and other than those which are subject to Specific OPT.

1. Sale of goods or properties - Deemed Sale Transactions

2. Sale of services 3. Importation of goods

VAT on Sale of goods or properties

Goods or properties – shall mean all tangible or intangible objects which are capable of pecuniary estimation and shall include:

1. Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business;

2. The right or privilege to use patent, copyright, design or model, plan, secret formula or process, goodwill, trademark, trade brand and other like property or right;

3. The right or privilege to use in the Philippines of any industrial, commercial or scientific equipment;

4. The right or privilege to use motion pictures films, films, tapes, and discs; and

5. Radio, television, satellite transmission and cable television time. (Sec. 106, NIRC)

Requisites for taxability:

• Sale of goods and personal properties

- there is an actual/deemed sale, barter or

- the sale is in the course of trade/business -goods/properties are located in the Phils. -sale is not VAT-exempt

• Sale or exchange of real property

- seller executes deed of sale - real property is located in the Phils. - seller/transferor is a real estate dealer

- real property is an ordinary asset - sale is not VAT-exempt - threshold amount set is met

Sale of residential lot with gross selling price exceeding P1,919,500.00, residential house and lot or other residential dwellings w i t h g r o s s s e l l i n g p r i c e e x c e e d i n g P3,199,200.00, where the instrument of sale (whether the instrument is nominated as a deed of absolute sale, deed of conditional sale or otherwise) is executed on or after Nov. 1, 2005, shall be subject to ten percent (10%) output VAT, and starting Feb. 1, 2006, to twelve percent (12%) output VAT . (R.R. No. 16-2011 and R.R. 13-2012)

Transactions Deemed Sale

a. Transfer, use or consumption not in the course of business or properties originally intended for sale or for use in the course of business. xxx

b. Distribution or transfer to: i) Shareholders or investors as share in the

profits of the VAT- registered person; xxx or

ii) Creditors in payment of debt or obligation

c. Consignment of goods if actual sale is not made within sixty (60) days following the date such goods were consigned. Consigned goods returned by the consignee within the 60-day period are not deemed sold.

d. Retirement from or cessation of business, with respect to all goods on hand,

i) whether capital goods, stock-in-trade,

supplies or materials as of the date of such retirement, or cessation,

ii) whether or not the business is continued by the new owner or successor. xxx [Rev. Regs.

Exempt:

- VAT shall not apply to goods or properties which are originally intended for sale or for use in the course of business existing as of the occurrence of the following as they are mere changes in form and not in substance.

1) Change of control of a corporation   - Change of control of a corporation by the

acquisition of the controlling interest of such corporation by another stockholder or group of stockholders.

Exception to the exemption: exchange of goods or properties (inc. real) for shares of stock is subject to VAT.

2) Change in the trade or corporate name of the

business

3) Merger or consolidation of corporations   - The unused input tax of the dissolved

corporation, as of the date of merger or consolidation, shall be absorbed the surviving or new corp. (R.R. 10-2011)

Changes in or cessation of status of a VAT-registered person wherein VAT still applies:

1) Change of business activity from VAT taxable status to VAT-exempt status

  2) Approval of request for cancellation of VAT registration

due:

a. to reversion to exempt status   b. to desire to revert to exempt status after lapse of

3 consecutive years from the time of registration by a person who voluntarily registered despite being exempt under Sec. 109 (2)

c. failure to meet the specific threshold (P1,919,500.00) by one who commenced business with the expectation of reaching the required gross sales

VAT on Sale of service and use/lease of properties used

“Sale or exchange of services” means the performance of all kinds 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:

a. construction and service contractors; b. stock, real estate, commercial, customs and

immigration brokers;

c. lessors of property, whether personal or real;

d. persons engaged in warehousing services

e. lessors or distributors of cinematographic films;

f. persons engaged in milling, processing, manufacturing or repacking goods for others;

g. proprietors, operators or keepers of hotels, motels, rest-houses, pension houses, inns, resorts; theaters, and movie houses;

h. proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers;

i. dealers in securities; j. lending investors;

k. 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;

l. 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;

m. sales of electricity by generation companies,

transmission, and/or distribution companies;

n. franchise grantees of electric utilities, telephone and telegraph, radio and 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;

o. non-life insurance companies (except their

crop insurances), including surety, fidelity, indemnity and bonding companies; and

p. similar services regardless of whether or not

the performance thereof calls for the exercise or use of the physical or mental faculties. [NIRC of 1997, Sec. 108 (A), as amended by R.A. No. 9337; Rev. Regs. No. 16-2005, Sec. 4,108-2, 1st par., arrangement and numbering supplied]

Requisites for taxability:

- there is sale or exchange of service or lease or use of property;

- service is performed or to be performed in the Philippines and in case of lease, property leased or used must be located in the Philippines;

- the service in the course of the taxpayer’s trade/business/profession;

- service is for valuable consideration - service is not exempt

"Lease of properties shall be subject to the tax herein imposed irrespective of the place where the contract of lease or licensing agreement was executed if the property is leased or used in the Philippines.

"The term 'gross receipts' means the total amount 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 and advanced payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding value-

VAT on Importation of Goods or Properties

- Shall be paid by the importer prior to the release of such goods from customs custody.

Importer – refers to any person who brings goods into the Philippines, whether or not made in the course of trade or business. It includes non-exempt persons/entities who acquire goods from exempt persons/entities.

If importer is tax-exempt, the subsequent purchasers, transferees or recipients of such imported goods shall be considered as importers who shall be liable for the tax on importation.

The tax due on such importation shall constitute a lien on the goods superior to all charges or liens on the goods,

VAT Taxable Transactions not allowed tax credit for input VAT paid

- These transactions are other than those which are VAT-exempt and other than those which are subject to Specific OPT.

1. transactions of Non-VAT business with annual sales or gross receipts exceeding the threshold amount;

2. Issuance of VAT-invoice/receipt for exempt transactions;

Zero-Rated Transactions

Zero-rated sale - It is a sale, barter or exchange of goods, properties and/or services subject to 0% VAT pursuant to Sections 106 (A) (2) and 108 (B) of the Tax Code. It is a taxable transaction for VAT purposes, but shall not result in any output tax. However, the input tax on purchases of goods, properties or services, related to such zero-rated sales, shall be available as tax credit or refund in accordance with RR No. 16-2005.

Commissioner of Internal Revenue v. Seagate Technology (Philippines), G. R. No. 153866, February 11, 2005 and Commissioner, of Internal Revenue

Under a zero-rating scheme, the sale or

exchange of a particular service is completely freed from the VAT, because the seller is entitled to recover, by way of a refund or as an input tax credit, the tax that is included in the cost of purchases attributable to the sale or exchange.

Commissioner, of Internal Revenue v. American Express International, Inc. (Philippine Branch), G. R. No. 152609, June 29, 2005

Zero-rated sale distinguished from exempt transactions:

a. A zero-rated sale is a taxable transaction but does not result in an output tax WHILE an exempt transaction is not subject to the output tax.

b. The input tax on the purchases of a VAT registered person who has zero-rated sales may be allowed as tax credits or refunded WHILE the seller in an exempt transaction is not entitled to any input tax on his purchases despite the issuance of a VAT invoice or

c. Persons engaged in transactions which are zero rated being subject to VAT are required to register WHILE registration is optional for VAT-exempt persons.

Kinds of Zero-Rated Sales

A. As to object of the sale:

1. Zero-rated sales of goods or properties by VAT-registered persons

a. Export Sales [Sec. 106 (A)(2)] i) actual export sale paid for in

acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules

ii) sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident local export-oriented enterprise to be used in manufacturing, processing, packing or repacking in the Philippines of said buyer’s goods and paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulation of BSP.

Export oriented enterprise – enterprise whose export sales exceed 70% of total annual production of the preceding taxable year.

iii) sale of raw materials or packaging materials to an export-oriented enterprise

iv) sale of gold to BSP

v) “considered export sales” under EO No. 266 (Omnibus Investment Code of 1987) and other special laws - shall mean the Philippine port F.O.B. value determined from invoices, bills of lading, inward letters of credit, landing certificates, and other commercial documents, of export products exported directly by a registered export producer, or the net selling price of export products sold by a registered export producer

trader that subsequently exports the same; Provided, That sales of export products to another producer or to an export trader shall only be deemed export sales when actually exported by the latter, as evidenced by landing certificates or similar commercial documents; Provided, further, That without actual exportation the following shall be considered constructively exported for purposes of these provisions:

  - sales to bonded manufacturing warehouses of

export-oriented manufacturers; - sales to export processing zones;

An ECOZONE or a Special Economic Zone has been described as selected areas with highly developed or which have the potential to be developed into agro-industrial, industrial, tourist, recreational, commercial, banking, investment and financial centers whose metes and bounds are fixed or delimited by Presidential Proclamations. 

The national territory of the Philippines outside of the proclaimed borders of the ECOZONE shall be referred to as the Customs Territory.

[Commissioner of Internal Revenue v. Toshiba

Sales to ecozone is considered an export-

sale. Notably, while an ecozone is geographically within the Philippines, it is deemed a separate customs territory and is regarded in law as foreign soil. Sales by suppliers from outside the borders of the ecozone to this separate customs territory are deemed as exports and treated as export sales. These sales are zero-rated or subject to a tax rate of zero percent.

Commissioner of Internal Revenue v. Sekisui Jushi Philippines, Inc., G. R. No. 149671, July 21, 2006

- sales to registered export traders operating bonded trading warehouses supplying raw materials in the manufacture of export products under guidelines to be set by the Board in consultation with the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC);

-sales to diplomatic missions and other agencies and/or instrumentalities granted tax immunities, of locally manufactured, assembled or repacked products whether paid for in foreign currency or not.

vi) sale of goods, supplies, equipment and fuel to persons engaged exclusively in international shipping or international air transport operations.

-limited to goods and passengers transported from a port in the Phils. directly to

a foreign port, without docking or stopping at any other port in the Philippines.

b. Foreign Currency Denominated Sale as provided in Section 106 (A)(2)(b) – sale to a non-resident of goods assembled or manufactured in the Philippines except automobiles and non-essential goods for

c. Sale to persons or entities which is VAT exempt under special laws or international agreements to which the Philippines is a signatory as provided in Section 106 (A)(2)(c) – i.e. ADB and IRRI

2. Zero-rated sales of services by VAT-registered persons

a. Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the

services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the BSP.

  b. Services other than those mentioned in the

preceding paragraph rendered to a person engaged in business conducted outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services are performed the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules

c. Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate.

d. Services rendered to persons engaged in international shipping or international air transport operations, including leases of property for use thereof; Provided, however, that the services referred to herein shall not pertain to those made to common carriers by air and sea relative to

cargoes from one place in the Phil. to another place in the Phil., the same being subject to 12% VAT under Sec. 108.

  e. Services performed by subcontractors and/

or contractors in processing, converting, of manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production.

f. Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country and;

 

g. Sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy sources using technologies such as fuel cells and hydrogen fuels. Zero-rating shall apply strictly to the sale of power or fuel generated through renewable sources of energy, and shall not extend to the sale of services related to the maintenance or operation of plants generating said power.

B. As to how the transaction shall be subject to zero-rating

1. Automatically zero-rated sales 2. Effectively zero-rated salesAutomatically zero-rated sales Effectively zero-rated sales

Generally, refers to export sale of goods or properties and supply of services by a VAT-registered person.

Refer to local sale by a VAT-registered person to a person/entity who was granted indirect tax exemption under special law or international agreements.No need to file application

form and secure BIR approval before the sale.

An application for zero-rating must be filed in and approved by the BIR.

1. Automatically zero-rated sales

a. Sale to registered ecozones and freeport zones enterprises.

2. Effectively zero-rated sales

a. sale to foreign embassies and its personnel are effectively zero-rated provided that:

- sale has been made in their official capacities; and

- zero-rating allowed on the basis of reciprocity duly proved thru authentic documents.

b. PAGCOR (see CIR vs. Acesite Hotel Corp. 16

VAT-exempt transactions; which are exempt from Other Percentage Tax

- These transactions are not subject to Output VAT, also not subject to Other Percentage Tax (OPT), and could not claim any credit for the actual input VAT paid during the period.

The business transactions included under this category are the following:

1. Export sales of non-VAT registered business.

2. Importation of the following:

a. Fuel, goods and supplies by persons engaged in international shipping or air transport operation;

b. Personal and household effects belonging to residents of the Philippines returning from abroad, and non-resident citizens coming to settle in the Philippines; provided, that such goods are exempt from custom duties under the Tariff and Customs Code of the Philippines;

c. Professional instruments and implements, wearing apparel, domestic animals, and personal household effects belonging to persons coming to

3. Sale or importation of

a. Agricultural and marine food products in their original state, livestock and poultry of a kind generally used as, or yielding or producing foods for human consumption; and breeding stock and genetic materials therefor;

b. Fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock and poultry feeds, including ingredients, whether locally produced or imported, used in the manufacture of finished feeds (except specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals and other animals generally considered

c. Books and any newspaper, magazine, review or bulletin not devoted principally to the publication of paid advertisements;

d. Passenger or cargo vessels and aircraft, including engine, equipment and spare parts thereof for domestic or international transport operations (limitations under Section 4 of Republic Act No. 9295, otherwise known as “The Domestic Shipping Development Act of 2004.”)

4. Printing or publication of books and any newspaper, magazine, review or bulletin not devoted principally to the publication of paid advertisements;

5. Services of

a. agricultural contract growers and milling for others of palay into rice, corn into grits and sugar cane into raw sugar;

b. Medical, dental, hospital and veterinary services except those rendered by professionals;

c. Educational services rendered by private educational institutions, duly accredited by the Department of Education (DEPED), the Commission on Higher Education (CHED), the Technical Education And Skills Development Authority (TESDA) and those rendered by

d. individuals pursuant to an employer-employee relationship;

e. regional or area headquarters established in the Philippines by multinational corporations which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region and do not earn or derive income from the Philippines;

f. Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree No.

g. Services of banks, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries;

6. Sales/Receipts of Cooperatives that are duly registered with the Cooperative Development Authority (CDA)

a. by agricultural cooperatives duly registered with the Cooperative Development Authority (CDA) to their members as well as sale of their produce, whether in its original state or processed form, to non-members; their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce;

b. gross receipts from lending activities by credit or multi-purpose cooperatives duly registered and in good standing with the Cooperative Development Authority;

c. by non-agricultural, non-electric and non-credit cooperatives duly registered with the Cooperative Development Authority: Provided, That the share capital contribution of each member does not exceed Fifteen thousand pesos (P15,000) and regardless of the aggregate capital and net surplus ratably distributed among the members;

*Importation by non-agricultural, non-electric and non-credit cooperatives of machineries and equipment, including

7. Sale/lease of real properties (ordinary assets)

a. not primarily held for sale to customers or held for lease in the ordinary course of trade or business, or

b. real property utilized for low-cost and socialized housing;

c. residential lot valued at P 1,919,500 and below, house and lot, and other residential dwellings valued at P3,199,200 and below;

d. lease of residential units with monthly rental

MATRIX OF INTERNAL REVENUE TAXES CONTRIBUTED BY TYPICAL BUSINESS

Transactions Value 100% Custom Duties

10% Excise Tax

12% VAT 30% Income Tax

1. Domestic Purchase 800 (96)

2. Imported goods 250 250 50 (66)

3. Expenses Business taxes (250+50)

200 300

(24)

4. Sales 2,000 240

5. Income before income tax (2,000-800-250-200-300)

450

6. Income tax 135 135

7. Income after tax 315 250 50 54 135

8. Revenue contributed to the government 489

VAT-exempt transactions; subject to Other Percentage Tax

- These transactions are subject to specific Other Percentage Tax (OPT) under Title V of the Tax Code.

Businesses Subject to Other Percentage Taxes:

1. Business with gross annual sales/receipts of not more than P 1,919,500.

2. Domestic carriers and keepers of garages (Sec.117, NIRC)

3. Franchise (Sec. 119) 4. Overseas dispatch or message from the

5. Bank and non-bank financial institutions (R.R. 9-2004)

6. Life insurance companies 7. Tax on agents of foreign insurance companies 8. Amusement places 9. Tax on winnings 10. Sale of shares of stock through the local stock

exchange.

• Common Carriers Tax

DOMESTIC: 3% CCT - Transporting passengers by land 12% VAT - Transporting passengers by air/sea; - Transporting goods/cargoes by

land, air or sea 0% VAT - Transporting passengers,

goods/cargoes by air or sea from the Philippines to other countries

INTERNATIONAL: 3% CCT - International air and shipping

carriers doing business in the Philippines. (Tax Base: RR No. 11-2011) *subject to reciprocity

not subject percentage tax – shipments originating from a place other than the Philippines to a point of destination other than the Philippines

subject to percentage tax pro rata only the first destination - shipments originating from the Philippines to a point outside the Philippines

• Franchise Tax

Franchise – a law that authorizes a person, whether natural or juridical, to do business involving public utility.

Franchise grantees may be subject to percentage tax or value-added tax.

- 2% based on gross receipts of business franchise on electric, gas, and water utilities.

- 3% based on gross receipts of business on radio and/or television companies whose annual gross receipts of the preceding year do not exceed

• Overseas Communication Tax

- it is collected on every overseas communication, dispatch, message or conversation.

- it should be originating from or outgoing from the Philippines

- it is to be paid by the person making the call, communicating or using the facility.

-it is to be collected by the provider of the communication facility and be remitted within 20 days after the end of the quarter.

-tax rate = 10% - the provider/owner of the communication

• Exemption from overseas communication tax:

Amounts paid for messages by –

1. The Government of the Philippines on messages to any of its political subdivisions.

2. Any embassy and consular offices of a foreign government.

3. A public international organization based in the Philippines that enjoys exemptions or immunities with the Philippine government.

4. Any newspaper, press, radio, or television to any newspaper, press, radio, or television with message dealing exclusively with news items for dissemination through press, radio, or television

• Tax on Banks and Non-bank Financial Intermediaries

-collection of percentage tax based on gross receipts from sources within the Philippines

1. Interest, commission and discounts from lending activities as well as income from financial leasing on the basis of remaining maturity of instrument from which such receipts are derived:

maturity period is 5 yrs or less – 5% maturity period is more than 5 yrs – 1%

2. On royalties, rentals of properties, real or personal, profits from exchange and all other items treated as gross income under the income tax law. -7%

3. On net trading on foreign currency, debts instruments, derivatives and other similar financial instruments. – 7%

4. Dividends and equity shares in net income of subsidiaries – 0%

• Tax on Life Insurance Companies

Basis: gross receipts (premiums) collected whether money, notes, credits or any substitute for money by life insurance companies only.

Rate: 5%

• Tax on Agents of Foreign Insurance Companies

-covers policy on fire, marine, or misc insurance underwritten by agents authorized under the Tax Code to procure policies on risks locate in the Philippines.

Rate: 10%

• Amusement Tax

Tax Rates: Boxing exhibition -10% Cockpits, night clubs or cabarets -18% Professional basketball -15% Jai-alai and race tracks -30% Basis: gross receipts - which includes income from television, radio,

and motion pictures rights

Persons liable: operator, proprietor or lessee of amusement places where amusement activities

• Exemption: Boxing exhibition where world or Oriental

championship title in any division is at stake provided one of the contenders is a citizen of the Philippines and said exhibition is promoted by citizen/s of the Philippines or a corporation where 60% of its capital is owned by Filipino citizens.

• Tax on Winnings

- applicable on winnings on horse race or jai-alai only

Base: For the winning individual - amount paid for every ticket less cost of the ticket.

For the owner of the winning race horse – prize -percentage tax shall be withheld from the prize by the

operator or owner of the amusement place.

Rates: Winnings in horse race/jai alai -10% Winnings from double forecast, quinella and trifect bets - 4% Owner of winning horse -10%

• Stock Transaction Tax

- applicable on sale, barter, exchange or trade of shares of stock through the local stock exchange.

Rate: ½ of 1% Basis: gross selling price or the gross value of

money

- the cost of stock and gain or loss on the sale are disregarded.

Transactions with the government units

- withholding percentage tax implies that the percentage tax due from the taxpayer is being withheld by the payor; hence the amount collected by the payee is net of percentage tax.

-withholding of percentage tax basically applies to the Philippine government and its political subdivisions, bureaus, and offices making payments to private individuals, partnership or corporation, which are subject to percentage tax.

Business taxes (withhold) Final VAT of 5% (VAT-registered) Percentage Tax of 3% (Non-VAT subject to

OPT of 3% as the case may be)

Creditable Withholding Income Taxes (CWIT) 1% on purchases of goods 2% on purchases of services

Illustration: Assume that S, a VAT-registered business, sold

merchandise worth P100,000 to the government. The net proceeds would be:

Sales P100,000 Add: VAT 12,000 Total 112,000 Less: Final withholding VAT P5,000 CWIT on sales 1,000 6,000 Net amount P106,000

Since the final withholding VAT is only 5%, the remaining 7% shall effectively account as standard input VAT for sales of goods or services to the government, in lieu of the actual input VAT directly attributable or ratable

EXCISE TAX

Concept and Nature

1. It is a tax imposed on some specific goods/products manufactured or produced in the Philippines for domestic sale or consumption.

2. It is a tax imposed on some specific goods/product imported for local consumption.

Classification:

1. Specific tax – based on weight/volume capacity or any other physical unit of measurement.

2. Ad valorem tax – based on the selling price or any other specified value of goods.

Goods subject to excise tax

1. Alcohol products – distilled spirits, wines, fermented liquors

2. Tobacco products – cigars and cigarettes 3. Manufactured petroleum products – mineral oils,

motor fuels, lubricating oils and greases 4. Automobiles 5. Non-essential products – jewelry (real or

imitation), pearls, precious and semi-precious stones, perfume, toilet waters, yacht, and other vessels intended for pleasure

6. Mineral products – minerals, mineral products or quarry resources

Time of filing and payment:

1. Generally, excise tax is payable upon the removal of the goods from production.

2. Excise tax for metallic or mineral products locally produced is payable within 15 days after the end of the quarter when product is removed.

3. For imported goods, excise tax is payable before the release from the Bureau of Customs.

DOCUMENTARY STAMP TAX

Concept and Nature

1. It is a tax imposed on certain transactions that are supported by documents.

2. It is one form of an excise tax that covers certain types of transaction employed in the Philippines.

3. It is usually affixed on the face of the documents serving as an evidence of the transactions subjected to such tax.

4. Basically, the transaction is the one being taxed and not the document.

Person liable:

1. By the person making, signing, issuing, accepting or transferring the documents.

2. Whenever one party to the taxable document is exempted from tax, the other party who is not exempted shall be liable to pay for the DST.