TYPES OF BUSINESS TAXES

1. Value Added Tax (VAT) on sales

2. Percentage Tax
3. Excise Tax

THE VALUE ADDED TAX ON SALES

The VAT on sales is a consumption tax imposed upon the sale of goods, properties or services or lease
of properties

Characteristics of the VAT on sales

1. Tax on value added
VAT is a tax on the value added by the seller (mark-up) on its purchases in making sales. It is an
imposition based upon the price increases made by producers and distributors at each level of
production of distribution.
2. Top-up on sales
The VAT on sales is required by the law to be included in the price of the goods a top-up thereto. The
amount which will be billed to the customer shall include both the selling price and the VAT. This
amount is called the “invoice priceI”. If the VAT is not separately indicated in the sales document, the
amount appearing therein in presumed inclusive of VAT.
3. Tax credit method
The VAT on sales shall be reduced by the amount of VAT paid by the business on its purchases. The
resultiung excess VAT on sales is the amount due to be remitted to the government. An excess VAT
payment on purchases is carried-over as deduction against the VAT on sales in future periods.
Note however, that if no VAT is paid on purchases, the VAT on sales effectively becomes the VAT due
of the business.
4. An explicit consumption tax
The amount of VAT is explicitly disclosed in the invoice or official receipt of the seller. Hence, the
buyer knows the amount of VAT he is paying in his purchase.
5. Quarterly tax
The VAT return is filed quarterly but is paid on a monthly basis.

Methods of computing VAT

1. Direct method
2. Tax credit method

Direct method
The VAT is computed by applying the VAT rate to the difference of the selling price and the purchase.

Illustration
A business purchased goods for Php200,000 and sold the same for Php250,000. The business paid
Php24,000 VAT on the purchase of the goods. The business is subject to 12% VAT.

The VAT would simply be computed as:

VAT = 12% x (Php250,000 – Php200,000) = Php6,000

*Though quite simple, this method is not employed in the Philippines.

The Tax Credit Method

The VAT rate is imposed upon the sales or receipts (output) of the business. This is called the “Output
VAT”. The output VAT is then reduced by the VAT paid by the business on its purchases (Input). This
is called the “Input VAT”. The excess of the Output VAT over the Input VAT is the Vat due or payable.

Illustration:
Assuming the same data in the previous illustration, the VAT due or payable shall be computed as:

Output VAT (12% x Php250,000) P 30,000

Less: Input VAT 24,000
VAT due P 6,000

*Tax credit method is the computation method used in the Philippines.

Illustration: VAT on sales

Pelizoy Corporation is a VAT-registered seller of goods. During the month, it purchased goods
for Php1,120,000 inclusive of Php120,000 VAT. Pelizoy also sold goods to a client for
Php1,500,000, exclusive of VAT.

Pelizoy shall bill the goods to the client by passing on output VAT on the sale. Pelizoy shall bill
the sale as follows:

Selling price P 1,500,000

Plus: Output VAT (Php1,500,000 x 12%) 180,000
Invoice price P 1,680,000

The invoice price shall be the amount to be paid by the client.

The VAT due and payable of Pelizoy Corporation shall be determined as follows:

Output VAT (VAT collected on sales) P 180,000

Less: Input VAT (VAT paid on purchases) 120,000
VAT due and payable P 60,000

*Note: If the client is a VAT taxpayer, he shall also claim the Php180,000 passed-on VAT by Pelizoy
Corporation as his Input VAT against his Output VAT on his sales.

VAT Accounting Entries:

Pelizoy shall record the transactions in its books as follows:

Inventories/Purchases P1,000,000
Input VAT 120,000
Accounts Payable/Cash P1,120,000
To record the purchase of goods

Cash/Accounts receivables P1,680,000

Sales P1,500,000
Output VAT 180,000
To record the sales of goods
 Output VAT P 180,000
Input VAT P 120,000
VAT due and payable 60,000
To close the VAT accounts and set-up the VAT payable

VAT due and payable P 60,000

Cash P 60,000
To record the payment of VAT to BIR

PERCENTAGE TAX
Percentage tax is a sales tax of various rates, generally 3%, imposed upon the gross sales or gross
receipts of non-VAT taxpayers.

Characteristics of the percentage tax

1. Tax on sales or gross receipts
The total amount due from the buyer (invoice price) is considered sales or gross receipt. The
percentage tax is computed directly from this amount.
2. An expensed tax
In income taxation, the percentage tax is presented as an expense deductible agains the sales or gross
receipt. This treatment gives percentage tax the impression of being a direct tax or privilege tax of the
sellers.
3. An implicit consumption tax
The percentage tax is inherently factored by sellers in the pricing of their goods or services. The
percentage tax passes to sthe buyer by inclusion to the selling price but the same is not separately
presented in the invoice, hence, not specifically disclosed to the buyer.
4. Monthly or quarterly tax
The percentage tax is payable monthly for most percentage taxpayers and quarterly for certain
percentage taxpayers.

Illustration
During the month, Mr. Alano purchased Php80,000 worth of goods. Php56,000 of this was purchased
from a VAT supplier inclusive of Php6,000 VAT while Php24,000 were purchased from non-VAT
taxpayers. Mr. Alano, a percentage taxpayer, sold and invoiced the goods for Php100,000.

The transactions shall be recorded as follows:

Purchases P 80,000
Cash P 80,000
To record the purchase of goods

Cash P 100,000
Sales P 100,000
To record the sales

Percentage tax expense P 3,000

Cash (P100,000 x 3%) P 3,000
To record the remittance of the percentage tax to BIR

*Note:
 1. The concept of invoice price and selling price to a percentage taxpayer is the same. The invoice
price is recorded as sales.
2. The percentage tax and the input VAT paid on purchases are not separately recognized.
3. The percentage tax is computed directly on the sales and is reported as an expense.
4. The percentage taxes expense is presented as part of “taxes and licenses” and is presented as a
deduction against gross income under the income taxation.

EXCISE TAX
Excise tax is imposed, in addition to VAT or percentage tax, on certain goods manufactured, produced
or imported in the Philippines for domestic sale or consumption.

Excise tax is levied on the production or importation of:

1. sin products, such as tobacco products and alcohol products
2. petroleum products
3. automobiles
4. non-essential commodities like jewelry, perfumes, tolet waters, yachts and sports cars
5. metallic or non-metallic minerals, mineral products, and quarry resources such as coal, coke,
gold, chromite and silver

Illustration (PRE-TRAIN)
Fortune Corporation, a business subject to VAT, manufactures machine-packed cigarette which sells
P20 per pack, excluding VAT. During the month, it produceds 11,000 packs out of which it sold 10,000
packs. It also paid P16,000 VAT on various purchases.

Under the NIRC, the sale of cigarettes at a price above P10.00 per pack shall be subject to an excise tax
of P12.00 per pack.

Fortune Corporation shall pay the following taxes:

Excise tax due at the point of production:

Excise tax (11,000 pack x P12 excise tax per pack) P 132,000

VAT on sale:
Gross selling price (10,000 packs x P20) x 12% P 24,000
Less: Input VAT 16,000
VAT due and payable P 8,000

Note:
1. Under Sec. 106 of the NIRC, excise tax on excisable articles is part of the basis of the Output
VAT. In practice, the selling price fixed is inclusive of all costs such as production costs and
excise tax plus the mark-up of the seller. Hence, output VAT is normally computed directly
from the selling price.
2. If Fortunate is subject to 3% percentage tax, it shall pay the same P120,000 excise tax plus 3%
percentage tax on its sales.
3. The excise tax is an addition to VAT or percentage tax. As such, businesses manufacturing
excisable articles are either subject to VAT and excise tax or percentage tax and excise tax.
4. Refer to the pdf file sent to you via email on the increase of excise tax on cigarettes.

VAT ON IMPORTATION
IMPORTATION
Importation refers to the purchase of goods including services by Philippine residents from non-
resident sellers. Importation is a form of domestic consumption, hence, subjec to consumption tax.

Types of Consumption Tax on Importation

1. The consumption tax on the import of goods is calles VAT on importation
2. The consumption tax on the purchase of services from non-residents is called “Withholding
VAT”
The VAT on importation is payable to the Bureau of Custom whenever there is imporation of goods, the
VAT is paid prior to the withdrawal of the goods from the Customs warehouse. The Withholding VAT is
12% of the payment for services rendered by non-residents.

In both cases, the resident purchaser is the one statutory liable for the payment of the VAT.

Exempt Importations
1. Importation of agricultural and marine food products in their original state

The exemption is limited to agricultural or marine food products in their original state.
The term “in original state” means unprocessed. However, an agricultural or marine foods product is
still considered in its original state and unprocessed even if it undergone simple process of preparation
for the market, preservation, or packaging, including advanced technological means of packaging

Example of exempt processes in their original state

boiling broiling husking roasting stripping grinding
freezing drying salting smoking vacuum packaging
shrink wrapping in plastics tetra-packing

Example
husked rice corn grits raw cane sugar roasted coffee beans
ordinary salt copra dried fish sundried fruits
ground meat smoked fish

Examples of processed agricultural or marine food products:

refined sugar wine or vinegar butter canned sardines or mackerel
vegetable or coconut oil soy
*The imporation of processed products and those considered not in their original state shall be
subject to VAT on importation

Illustration
Hardy Corporation imported the following goods:

Lumber P 500,000
Canned tuna and sardines 800,000
Frozen meat 700,000
Wheat 200,000
Flour 100,000

The importation of frozen meat and wheat is exempt. The importation of non-food agricultural
products like lumber and the importation of processed agricultrual or marine food products like canned
tuna, sardines and flour are subject to VAT on imporation.

2. Importation of fertilizers, seeds, seedlings and fingerlings, fish, prawn, livestock and
poultry feeds, including ingredients used in the manufacture of finished feeds
3. imporation of personal and household effects beloning to residents of the Philippines
returning from abroad and non-resident citizens coming to resettle in the Philippines

Conditions for exemption:

a) the personal and household effects belong to Philippine residents or non-residents
intending to resettle in the Philippines
b) the goods are exempt from customs duties

Illustration 1
Mr. Siman was employed abroad as an OFW. He went abroad bringing with him
personal effects such as clothes, pieces of personal jewelry and gadgets aggregating
Php300,000 in value.
When his contract ended, he returned to the Philippines bringing with him the same
effects which now have aggregate value of Php280,000.

The importation (return) of the personal effects will not be subject to VAT since
these are past purchases which are previously subjected to consumption tax when
purchased in the Philippines.

Illustration 2
While employed abroad, Mr. Siman purchased an iPhone 11 worth P85,000 for
self purposes. Mr. Siman brought the iPhone to the Philippines when his employment
contract ended.

The importation of the iPhone shall not be subject to VAT on imporation for the
same reason that it is not a present consumption of household effects when it was
brought into the Philippines. Furthermore, purchases abroad by non-residents are not
subject to consumption tax in the Philippines. Their subsequent imporation to the
Philippines is exempt from VAT on imporation.

Illustration 3
Mrs. Kookai Ukay, a Philippine resident, purchased used clothing and shoes
abroad to be sold in her “Wagwagan” sales outlets in the Philippines.

The purchase by Philippine residents of goods from abroad is a domestic

consumption. This is subject to the VAT on importation. This rule applies without
regard to the purpose of the importation whether for business or for personal use.

4. imporation of professional instruments and implements, wearing apparel, domestic

animals, and personal household effects belonging to persons coming to settle in the
Philippines, for their own use and not for sale, barter or exchange
5. imporation of books and any newspaper, magazine, review, or bulletin which appear at
regular intervals with fixed prices for subscriptions and sale
6. importation or lease of passenger or cargo vessels and aircrafts
7. importation of capital equipment, machinery, spare parts, life-saving and navigational
equipment, steel plates and other metal plates to be used in the construction, repair,
renovation or alteration of any merchant marine vessel
8. importation of life-saving equipment
9. importation of fuel, goods and supplies by persons engaged in international shipping or
air transport operations
10. imporation of cooperatives of direct farm inputs, machineries and equipment
11. transactions which are exempt under international agreement to which the Philippine is a
signatory
12. importations exempt under special laws