Tax 21: Business and Transfer Taxation

Mariano Marcos State University

College of Business, Economics and Accountancy
City of Batac, Ilocos Norte

Second Semester
Academic Year 2017-2018

TAX 21: BUSINESS AND TRANSFER TAXATION

Ma. Kristel Kae T. Sacoco, CPA

Consumption Tax
Consumption occurs when one acquires goods or services by purchase, exchange, or other means. A consumption tax is a tax upon the
utilization of goods or services by consumers or buyers. It is a tax on the purchase or consumption of the buyer and not on the sale of the
seller.

Rationale of Consumption Tax

1. It promotes savings formation.
2. It helps in wealth redistribution to society.
3. It supports the Benefit Received Theory.

Comparison between Consumption Tax and Income Tax

Income Tax Consumption Tax
Nature Tax upon receipt of income Tax upon usage of income or capital
Scope A tax to the capable A tax to all
Supporting tax theory Ability to pay theory Benefit received theory

Types of Consumption
1. Domestic consumption- refers to consumption or purchase of Philippine residents
2. Foreign consumption- refers to consumption or purchase of nonresidents

Taxation is inherently territorial, therefore only those domestic consumptions can be subjected to Philippine taxation. In observing the
territorial limitation, the Philippines follows the “destination principle”. Under the destination principle, goods and services destined for use
or consumption in the Philippines are subject to consumption tax whereas those destined for use or consumption abroad are not imposed
with consumption tax.

Hence, goods that cross the border which are destined toward foreign territories should not be charged with consumption taxes. This is
the cross-border doctrine of consumption tax.

Domestic consumption Foreign consumption

(Buyer is a resident) (Buyer is a nonresident
Seller
Nonresident Taxable1 No tax
Resident Taxable2 Effectively no tax*

1 Importation- purchases of residents from nonresidents abroad.

2 Sale- purchases of residents from resident sellers (sale on the seller’s perspective)

* Exportation- subject to 0% VAT

Kinds of Consumption Taxes

1. VAT on Importation (will be discussed after business taxes)
2. Business Taxes

Business Taxes
Business, as defined in the Local 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.

“In the course of trade or business” is a phrase to describe the regular conduct or pursuit of a commercial activity, including transactions
incidental thereto, to achieve the purpose for which the business is created.

The “Business" Concept

General Rule: Habitual engagement in a commercial activity
Exception Rule:
1. Business for subsistence (Gross receipts or Gross sales ≤ P100,000/year) = not considered business
2. Sales or services of non-resident aliens/non-resident foreign corporations = considered engaged in business
Tax 21: Business and Transfer Taxation

Transactions subject to Business Taxes

1. Commercial Activity. The sale of goods and services related to trade, profession, or business in the Philippines are generally
subject to business taxes, except when the law provides that they are exempted from business taxes*

a. Regular sale of goods and services not exempted by law from business tax: sale of goods intended for sale; professional
services and repair services.
b. Sale of ordinary asset used in business, other than business inventory.
The sale of corporation of company cars to its officers is now subject to VAT being incident to the pursuit of its commercial
activity.

*Business for subsistence or livelihood (for marginal income earners)

a. Agricultural growers or producers (farmers or fishermen)
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

Although regular in operations, marginal income earners are exempt from business tax but they are subject to income tax.

2. Service rendered by the nonresident foreign person. Services rendered in the Philippines by nonresident foreign persons shall be
considered as being rendered in the course of business without regard to the “rule of regularity.”

3. Some non-business transactions

a. Sale of shares of stock
b. Overseas communications
c. Horse race winnings

Casual Sale
A casual sale is an occasional sale of goods or services by a person who is not engage in business or sale of assets that are not used in
business. It involves selling of personal properties or belongings not used in business. For tax purposes, casual sales are not subject to
business tax but are subject to income tax.
1. Sale of house and or lot classified as capital asset (not used in business)
2. Sale of personal car and other intangible assets not used in business; and
3. Employment services

Who shall pay Business Taxes?

Business taxes are payable by persons engaged in business. The term “persons” refers to any individual, trust, estate, partnership,
corporation, joint venture, cooperative or association. Each person, natural or juridical is considered a taxable unit. The concept of a
taxable unit in income taxation as well as in business taxation is the same, except that a taxable unit in business taxation is called a
taxable “person.”

However, income tax exemption does not necessarily mean business tax exemption. Similarly, business tax exemption does not
necessarily mean income tax exemption. Hence, a general professional partnership which is exempt from income tax is subject to
business tax.

Nature of Business Taxes

1. Consumption tax- tax on consumption, utilization, or purchase of goods, properties, or services.
2. Indirect tax- tax imposed to the seller rather than to the buyer.
3. Privilege tax- to secure and enforce compliance, the law made business taxes appear as a tax on the privilege to do business

Types of Business Taxes

1. Value-added Tax (VAT)
It is a general consumption tax that requires a 12% additional tax on the sales price of goods and or services by VAT-registered
seller or seller required by law to be under VAT-system.

2. Other Percentage Taxes (OPT)

These are general consumption taxes imposed to non VAT-registered businesses. There are several tax rates of OPT but the
most common is 3%. The tax base of OPT is the gross sales or gross receipts of non-VAT businesses that are not exempt from
OPT.

3. Excise Taxes (ET)

These are taxes imposed on products that are harmful to health (such as alcohol or tobacco), goods that are nonessential, and
products that deplete natural resources (mineral products) that are manufactured or produced in the Philippines. This kind of tax
is also levied on some imported products to protect local industries.
The excise tax is imposed in addition to VAT or OPT.
Tax 21: Business and Transfer Taxation

Business Registration
Any person who, in the course of trade or business, sells, barters, or exchanges goods or properties, or engaged in the sale of services
subject to business taxes shall:
a. Register with the appropriate Revenue District Office (RDO)
b. Pay registration fee of Php 500.00 for every separate or distinct establishment where sales transactions occur before the start of
such business and every year thereafter on or before the 31st day of January.

Any person who maintains a head or main offices in different places shall register with the RDO which has jurisdiction over the place
where the head office or branch is located.

For regulation purposes, the State, through the exercise of its police power, requires a business to be registered first before the
commencement of its economic activities. Noncompliance to business registration renders the business illegal.

A registration certificate shall be issued to the applicant by the concerned BIR office upon compliance with the requirements for
registration. Every registered taxpayer shall post or exhibit his Registration Certificate (original copy) and duly validated Registration Fee
Return at a conspicuous place in his principal place of business and at each branch in such a way that is clearly and easily visible to the
public.

Exempt from Registration

1. Individual earning purely compensation income
2. Overseas workers
3. Self-employed individuals where the gross sales or receipt do not exceed Php 100,000 per year (subsistence livelihood
earner/minimum wage earner)

Upon registration of the business, the taxpayer will indicate in the BIR Form whether his business is subject to VAT or OPT. If the
products of the business are harmful or nonessential, in addition to VAT or OPT, the excise tax shall also be imposed.

VAT or Non-VAT Registration

1. Mandatory VAT Registration
a. The business’ expected annual gross sales or receipts exceed 1,919,500 (old) or 3,000,000 (TRAIN Law)
b. If a taxpayer has realized gross receipts or sales of more than 1,919,500 (old) or 3,000,000 (TRAIN Law) = VAT Registrable

Optional VAT Registration

Persons with taxable business transactions that do that exceed 1,919,500 (old) or 3,000,000 (TRAIN Law) per year have the
option to register under the VAT system. This is subject to three conditions:
a. The taxpayer’s dominant business is covered by the VAT law and has thus registered as VAT taxpayer;
b. Said VAT registered taxpayer has other business transactions which are exempt from VAT, but has opted to register the
same as well to be covered by the VAT system; and
c. The optional VAT registration shall be irrevocable for a period of 3 years from the date of registration.

2. Non-VAT Registration
A taxpayer who did not opt to register under VAT-system must register under non-VAT system when he is a VAT-exempt person
subject to other percentage tax.