INTRODUCTION TO BUSINESS TAXATION

NATURE OF BUSINESS TAX

1. Relative consumption tax – Business tax on the consumption of goods or services and is
imposable only when the seller is a business.
2. Indirect tax – the tax is collected from the seller rather than from the buyer-consumer,
3. Privilege tax – Business tax is also viewed as a tax on the privilege to do business.
4. National tax – Business tax is imposed by the national government.

TYPES OF BUSINESS TAXES

1. Percentage tax
2. Value Added tax
3. Excise tax

Comparison of business taxes

Point of differences VAT % tax Excise tax
Timing of imposition Sale Sale Production/Import
Nature Primary tax Primary tax Additional tax
Subject business Any business. In Any business, in Only producer or
general general importers of excisable
products or services
Taxpayers Business only Business only Business or nonbusiness

Usual taxpayers Big business Small business Big or small business

Accounting treatment Liability Expense Asset or Liability
PROCEDURES OF BUSINESS TAXATION

1. Evaluate if the sales activity qualifies as a business.

a. If not, the activity is exempt from business tax.
b. If yes, the business must register for business tax. Proceed to the succeeding procedures.
2. Identify the taxable person.
a. If individual – include all proprietorship business including branches of the individual tax
payer
b. If juridical – include all branches of the corporate taxpayer
3. Determine the activity type:
a. If sales of goods – determine the sales
b. If sales of services – determine the receipts
4. Classify the sales or receipts whether they are:
a. Exempt sales or receipts – pay no business tax
b. Sales or receipts subject to specific percentage tax – pay specific percentage tax c.
Vatable sales or receipts
5. Determine taxpayer registration type.
a. If taxpayer is VAT registered, pay VAT on vatable sales or receipts.
b. If taxpayer is non-VAT registered, pay the 3% general percentage tax then determine the
magnitude of 12-month vatable sales at the end of every month
 • If it exceeds P 3,000,000 – the person shall register as VAT taxpayer; pay VAT
prospectively effective on the succeeding monthly vatable sales or receipts.
• If it does not exceed P3,000,000 - the person shall continue paying the 3% general
percentage tax on the vatable sales or receipts.
6. Determine if the goods or service offered is excisable.
a. If yes, pay the applicable excise tax in addition to VAT and or percentage tax.
b. If not, pay only VAT and or percentage tax.

Note:
1. Businesses normally register initially as non-VAT taxpayers, except when their projected operation is expected to
exceed P3M annual VAT threshold.
2. For non-VAT registered taxpayer, the evaluation of the magnitude of vatable sales or receipts is done
continuously every over a 12-month period. The taxpayer remains a non-VAT taxpayer for as long as its 12month
rolling sales or receipts do not exceed the P3M annual VAT threshold.
3. Once the taxpayer becomes or registered as a VAT taxpayer, he remains as such paying VAT on vatable sales or
receipts until the cancellation of his VAT registration.

WHAT IS A BUSINESS?
Business refers to a habitual engagement in a commercial activity involving the sale of goods or
services for a profit.

Element of business:
1. Habitual engagement
2. Commercial activity

HABITUAL ENGAGEMENT
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 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.

A casual sale transaction is not a business even if profit is derived from the transaction. On the other
hand, the regular selling of goods or services for a profit is a business despite the absence of actual
profit from such activity.

Illustration 1
Mrs. Ellerton, a medical practitioner, sold his principal residence for P10M.

The sale of real properties by a non-realty dealer is a casual sale not made in the course of
business; hence, it is exempt from the business tax.

Illustration 2
Mang Merto, a realty dealer, purchased shares of stocks as investment and sold them at profit.

The acquisition and sale of stock investments by a realtor are not made in the course of the realty
business and are not subject to business tax. If Merto were a security dealer, the transaction
would be considered made in the course of business and hence, subject to business tax.
Illustration 3
Joshua is a proprietor regularly engaged in trading merchandise. During the month, he reported the
following:

Sales of merchandise P800,000

Sale of personal car 1,200,000

The 800.000 sales is subject to business tax. The P1,200,000 sales is outside the merchandising
business. The same shall not be subjected to business tax since Joshua is not also a car dealer.

Privilege stores
Privilege stores (most commonly known as “tiangge”) are stalls or outlets not permanently fixed to
the ground which are put up during special event such as festivals or fiestas (RR16-2013).

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 not be considered habitually engaged in business considering their
limited activity, they are exempt from business tax but is subject to income tax.

Illustration 1
Mang Andro makes key chains and wood art for sale to tourists during the Panagbenga Festival. He
rented a booth from the City of Baguio, the tiangge organizer, and recorded sales of P350,000 over
the weeklong festivities.

Mang Andro is not considered habitually engaged in business. His P350,000 sales is not subject to
business tax, but is subject to income tax.

Illustration 2
Danes Bakeshops, 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.

Danes Bakeshop is not a privilege store since it is an extablished and regularly operating business.
The P400,000 sales on the event shall be subject to usual business tax.

Exception to the regularity rule

The sales of services by non-resident persons are presumed made in the course of business
without regard as to whether the sale is regular or isolated. Our current tax law views the
consumption tax on import of services a business tax. The sales of services by non-residents are
subjected to the final withholding tax as previously discussed in Chapter 2.

COMMERCIAL ACTIVITY
Commercial activity 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 pecuniary gains.
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.
The following are not businesses:
1. Government agencies and instrumentalities
2. Non-profit organization or association
3. Employment
4. Directorship in a corporation
5. Business for mere subsistence

Government agencies and instrumentalities

Agencies and instrumentalities provide essential public services. They may charge reasonable fees for
services rendered but are not intended to profit but are merely costs reimbursement.

Illustration
The Professional Regulations Commission (PRC) collected P12,000,000 professional license fees
during the month. It also earned additional P1,000,000 from rental income on its vacant premises.

The P12M receipt is an income by PRC, a government agency, in rendering essential government
services. This is not a commercial activity and is exempt from business tax. Leasing, on the other
hand, is a commercial activity departing from the nature of government service; hence, it is subject
to business tax.

Non-profit or charitable organization

A charitable or eleemosynary activity regularly pursued by an institution or organization is not a
business because of the absence of the purpose to make profit.

Illustration
Union of Husbands Afraid of Wife (UHAW) is non-profit social welfare institution for the assistance of
battered husbands. UHAW received P2,000,000 contributions from the public and generated
P4,000,000 from the sales of the gift shops on its fund-raising drive.

The receipt of P2M contribution of donation is not subject to business tax since it is not
commercial in nature. However, the selling of the gift shop is a commercial activity
which is subject to business tax. The rule applies regardless of the disposition made of such
fund-raising income.

Employment
The elements of an employer-employee relationship are discussed in detail in Chapter 10 of Income
Taxation: Laws, principles and Applications by the same author. Employee benefits derived under
employment is not subject to business tax but only to income tax.

Illustration
Jones is a job order employee contracted by the government to provide support services for office job
for 6 months. Jones is paid P18,000 a month.

Directorship in a corporation
Although a director may not be an employee, director’s fees, per diems, and allowances are not
derived in an economic or commercial activity or rendering of services to clients for a fee. Hence,
these are not subject to business tax (RMC77-2008).
Illustration 1
Mr. Agua is an independent director of Aga Corporation receiving director’s fees, per diems, and
allowances totaling P15,000 per board meeting appearances.

Mr. Agua is not subject to business tax.

Query: What if Mr. Agua is an employee of Aga Corporation?

Mr. Agua’s director’s fees shall be part of his compensation income and is not likewise subject to
business tax.

Illustration 2
John, a certified public accountant, renders his services to clients for a fee. Is he subject to business
tax?

The excise of profession by regularly rendering services to clients for a fee is considered a business
subject to business tax.

Business principally for subsistence

Business principally for subsistence or livelihood refers to business with gross sales or receipts not
exceeding P100,000 per year.

Marginal income earners – refer to individuals not deriving compensation income under an
employeremployee relationship but who are self-employed deriving gross sales or receipts not
exceeding P100,000 in any 12-month period.

Examples of marginal income earners:

a. Subsistential 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.

The term marginal income earners do not include licensed professional consultants, artists, sales
agents, brokers, including all others whose income have been subjected to withholding tax (RMC
72014).

Although regular in operations, marginal income earners are exempt from business tax, but are
subject to income tax (RR7-2012). These small businesses could not be considered commercial
being merely for personal or family livelihood or subsistence.

Examples of persons considered engaged in business:

a. Consultants
b. Sales agents of insurance or real estate including brokers
c. Television or movie talents and artists
d. Martial art instructors
e. Cooking instructors
BUSINESS TAXPAYERS
The taxable person in business taxation includes any individual, trust, estate, partnership,
corporation, joint venture, cooperative or association.
Rules:
1. Each person, natural or juridical, is a taxable person for purposes of business taxation
2. Husband and wife are separate taxpayers.
3. A parent company is a separate taxable person with its subsidiary company and each
subsidiary company is a taxable person.
4. Home office and branch offices of the same business are one, not separate, taxable person.
5. Proprietorship is not a juridical entity. Its sales and receipts is subject to business tax to the
individual proprietor. Multiple proprietorship business of the same individual are all taxable to
that individual as the taxpayer.

Illustration 1
Mr. Ysmael, an accounting practitioner, has two other commercial businesses with the following
receipts and sales:
Mr. Ysmael’s practice Business 1 Business 2
P 1,200,000 P 800,000 P 700,000
Business 1, Business 2 and the accounting practice are not taxable persons being proprietorship
businesses. The sales and receipts of these totaling P 2,700,000 shall be taxable to Mr. Ysmael as the
taxable person.

Illustration 2
DEF Corporation has its head office in Makati City and two branches in Manila City and Quezon City.
The sales outlet has the following sales:

Makati head office Manila City branch Quezon City branch

P2,000,000 P1,800,000 P1,200,000

The branches are not taxable persons. The sales of the branch offices including the head office shall
be taxable to DEF Corporation. The same shall be reported to the BIR RDO in the principal place of
business – Makati City.

Illustration 3
ABC Company has a branch in Manila City and a subsidiary, XTB Company, in Davao City.

ABC Company and its branch are one entity while XTB Subsidiary is a separate entity. The transfer of
goods by ABC Company to its Manila City branch is not subject to business tax. The intercompany
sales made between ABC Company and its subsidiary, XTB Company, is subject to
business tax. XTB Company’s transaction with the Manila branch is also a transaction with its
parent, hence, taxable.

Illustration 4
Dr. Jones owns a bakery registered as a proprietorship business. He also owns a clinic, also registered
as a proprietorship business. His clinic occasionally purchases bread from his grocery. Dr. Jones’
children also bought breads from the bakery.
The sales between proprietorship businesses shall not be subject to business tax since the same does
not involved another party. The sales made by the bakery to Dr. Jones’ children shall be subject to
tax since they are different persons to Mr. Jones.

Income tax exemption does not equate to business tax exemption

If you still remember, the same concept of a taxable person in income taxation applies in business
taxation but not income tax exemption does not necessarily mean business tax exemption.

Hence, the following persons who are exempt taxpayers from income tax are subject to business
tax:
1. General professional partnership
2. Joint venture engaged in construction or oil exploration
3. Local water districts
4. Barangay micro-business enterprise

TYPES OF BUSINESS TAXPAYES

A taxable person shall register either as:
1. VAT taxpayer
2. Non-VAT taxpayers

VAT-registered taxpayers pay 12% VAT while non-VAT registered taxpayers pay a 3% general
percentage tax.

BUSINESS ACTIVITIES
The basis of business tax differs on the activities businesses are engaged in.

Type of business activities:

1. Sales or exchange of goods or properties
2. Sales of exchange of services or lease of properties

Sale of Goods or Properties

Goods or Properties refers to all tangible and intangible objects which are capable of pecuniary
estimation and shall include, among others:
1. Real properties held primarily for sale to customers, held for lease or is used in the ordinary
course of trade or business;
2. The right or the privileges to use a patent, copyright, design or model, plan, properties or
rights;
3. The right or privilege to use in the Philippines any industrial, commercial or scientific
equipment;
4. The right or privilege to use motion picture films, films, tapes and discs; and
5. Radio, television, satellite transmission and cable television.

Sale or Exchange of Services

Sale or exchange of services shall mean the performance of all kind 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:
 1. Construction and service contractors
2. Stock, real estate, commercial, customs and immigration brokers
3. Lessors of property, whether personal or real
4. Persons engaged in warehousing services
5. Lessors or distributors of cinematographic films
6. Persons engaged in milling, processing, manufacturing or repacking goods
7. Proprietors, operators, or keepers of hotels, motels, rest houses, pension houses, inns, resorts,
theaters and movie houses
8. Proprietors or operators of restaurants, refreshment parlors, cafes and other eating places,
including clubs and caterers.
9. Dealers in securities
10.Lending investors
11.Transportation contractors in their transport of passengers, goods or cargoes from one place in
the Philippines to another place in the Philippines
12.Common carriers by air and sea relative to their transport of passengers, goods or cargoes for
hire and other domestic common carries by land relative to their transport of goods or cargoes
13.Sales of electricity by generation, transmission and or distribution companies
14.Franchise grantees of electric utilities, telephone and telegraph, radio and or television
broadcasting and all other franchise grantees
15.Non-life insurance including surety, indemnity and bonding companies
16.Similar services regardless of whether or not the performance thereof calls for the exercise or
use of the physical or mental faculties
17.The lease of, use of, or the right or privilege to use any copyright, patent, design or model,
plan, secret formula or process, goodwill, trademark, trade brand or other like property or
right
18.The lease or the use of, or the right to use any industrial, commercial or scientific equipment;
19.The supply of any scientific, technical, industrial or commercial knowledge or information;
20.The supply of any assistance that is ancillary and subsidiary to and is furnished as a means
enabling the application or enjoyment of any such property, or right or any such knowledge or
information;
21.The supply of services by a non-resident person or his employee in connection with the use of
property or right belonging to, or the installation or operation of any brand, machinery or other
apparatus purchased from such non-resident person;
22.The supply technical advice, assistance or services rendered in connection with technical
management or administration of any scientific, industrial or commercial undertaking, venture,
project or scheme;
23.The lease of motion picture films, films, tapes and discs; and
24.The lease or the use of or the right to use radio, television, satellite transmission and cable
television time.

BASIS OF BUSINESS TAX PER TYPE OF ACTIVITY

Sellers of goods or Sellers of services
properties
Basis of business tax Gross selling price Gross receipts
Gross selling price
Gross selling price refers to the total amount of money or its equivalent which the purchases pays or
is obligated to pay to the seller in consideration of the sale, barter or exchange of goods or
properties. The excise tax, if any, on such goods or properties shall form part of the gross selling
price.
It includes sales made in cash, on credit and on installment basis and is analogous to the income
taxation concept of ”gross sales” except only on the treatments of contingent discount.

Allowable deduction from gross selling price:

1. 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.

2. Sales returns and allowances for which a proper credit or refund was made during the month
or quarter to the buyer on taxable sales.

Illustration 1
A business taxpayer had the following transaction during the quarter:

Cash sales P400,000

Sales on credit (account sales) 600,000
Installment sales (30,000 collected) 100,000
Sales return and allowances 20,000
Quota discounts 10,000
Purchase of goods, including P72,000 VAT passed
on by sellers 672,000

The gross selling price shall be:

Cash sales P400,000
Account sales 600,000
Installment sales 100,000

Total sales P1,100,00

Less: Returns and allowances 20,000

Gross selling price P1,080,000

Note: Quota discounts or rebates are contingent upon future volume purchased by customers and are not determinable at
the date of sale; hence, these are not deductible.

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%

The gross selling price shall be computed as:

List price P2,000,000

Less: Trade discounts (10% x P2,000,000) 200,000

Net price P1,800,000

Freight 50,000
Installation fee 20,000

Gross selling price P1,870,000

Note: Only trade discount is determinable at the date if sale. Cash discounts should not be deducted since these are
contingent upon the buyer paying at an early date in the future.

Gross Receipts
“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 material supplied
with the services and deposits applied as payments for services, rendered and advanced payments
actually or constructively received during the taxable period for the services performed or to be
performed or to be performed for another person, excluding VAT.

Illustration 1
A laundry business had the following transactions during the months:

Cash collection for services done P400,000

Cash collection for services not yet started 100,000
(advances)
Receivables on services rendered 600,000
Purchase of goods and services, including of 448,000 P48,000 VAT
passed on by sellers

The gross receipt shall be:

Cash fees P400,000

Advances by customers 100,000

Gross receipts P500,000

Illustration 2
S2 Tech, Inc. provides PC board repair services. During the month it billed a total of P4,000,000 out
of which clients settled P3,200,000. S2 Tech, Inc. also collected P8,000 interest on its bank deposits
and P14,000 dividend income from its stocks investment.
The gross receipts is P3,200,000. The interest and dividend income are incidental income not arising
from the activities of the business; hence, excluded.

Constructive receipt
Constructive receipt 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 gross
receipts.

Examples:
1. Deposit in a bank account of the seller made by the buyer in consideration of services
rendered or goods sold
2. Issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof of
the seller as payment for the services rendered
3. Transfer of the amounts retained by the payor to the account of the contractor

Illustration
Miss Leah Mado is a pozo negro contractor. She had the following fees for the month:

• P10,000 from Cipher Company, net of the P30,000 debt of Miss Lead from Cipher Company.
• P15,000 deposited to Miss Leah’s bank account.
• P20,000 cash share from a general profession partnership, P30,000 undistributed share was
credited to her capital account.

Miss Leah’s gross receipt shall be:

Receipts from Cipher (10,000 + P30,000) P40,000
Fees deposited to Leah’s bank account 15,000

Gross receipts P55,000

The share from the net income of general professional partnership (GGP) is not gross receipt since Miss Leah is not selling
services to the GGP.

Agency monies
Amounts earmarked for the payment to unrelated third party or received as reimbursement for
advanced payment on behalf of another which do not redound to the benefit of the payor are not
part of gross receipts (See CIR vs. Manila Jockey Club, 108 Phil. 821 (1960))

Insurance proceeds on damaged assets

The receipt of insurance proceeds from the destruction of a company’s business asset is not viewed
as sales or receipts for purposes of business taxation. The compulsory or involuntary conversion of
property into money such as in the case of insurance reimbursement is not viewed as a sale in the
ordinary course of business (BIR Ruling No. DA-084-2007, February 12, 2007)

Illustration
PC Repair Company received the following amounts during a month:

Cash collection from clients P400,000

Reimbursements for out-of-pocket costs incurred
in servicing clients 50,000
Reimbursement for client expenses paid by PC
repair 80,000
Proceeds of fire insurance 400,000
Receipt of bank loan 500,000
Receipt of agency money to be remitted to a
sister company 100,000

The gross receipts shall be:

Cash collection from clients P400,000

Reimbursements for out-of-pocket costs incurred
to clients 50,000
Gross receipt 450,000
Note:
1. Out-of-pocket expenses of PC Repair which are reimbursed by the client are actually
income which redounds to the benefit of PC Repair. Hence, these are part of gross receipt.
2. Loans ad agency money do not redound to the benefit of the taxpayer. The loan is an
obligation and is not income. The agency money will be paid or remitted to another party.
These are not included in gross receipts.
3. The proceeds of insurance is not a receipt in the ordinary course of business.

Withholding taxes
Amount 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 Investments Phils., 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 (9,500 / 95%).

Business with Mixed Activities

A business which is engaged both in the sales of goods or properties and sales of services shall be
subject to business tax on gross selling prices on its sales of goods or properties and on gross
receipts on the sales of services.

Readers are advised to carefully understand the

following section as it is highly critical in understanding
and mastering the business tax concept structure.

TYPES OF SALES OR RECEIPTS

Sales of goods Sales of services

Exempt sales Exempt sales Exempt receipts

Receipts specifically subject to % - BICAP FLOW
tax
Vatable sales Vatable sales Vatable sales
Exempt sales or receipts are not subject to business tax. BICAP FLOW is an acronym for list of services specifically subject
to a percentage tax. Vatable receipts are those subject to either 3% general percentage tax or VAT depending on the
type of registration of the business.

Exempt sales or receipts

There are sales of goods, properties or services that are exempt from business tax (i.e., VAT and
percentage tax), such as the following:
1. Sales of certain basic necessities, such as:
• Agricultural or marine food products
• Health services of hospitals
• Educational services of schools
• Housing or residential properties within price limits
2. Sales exempt by law, treaty or contracts
• Sales by cooperatives to members
• Sales or lease of aircraft or vessels
• Sales or printing of books, magazines and newspapers

3. Casual sales or sales by non-business sellers

• Sale of persons not regularly engaged in trade or business
• Services rendered under an employer-employee relationship
• Services rendered by a Regional Area Headquarter of a multinational company

4. Export sales of non-VAT registered persons

Exempt sales of goods, properties, services extensively covered in detail in Chapter 4

Receipts from services specifically subject to a percentage tax

There are services that are subject to a specific percentage tax, such as the following:
1. Banks and non-bank financial intermediaries performing quasi-banking functions and other
non-bank financial intermediaries without quasi-banking functions
2. International carries on their outgoing transport of cargoes, baggage or mails
3. Domestic common carries on their transport of passengers on land and keepers of garage.
4. Certain amusement places
5. Philippine Stock Exchange (PSE) on the sale, barter or exchange of shares by investors or
corporations conducting initial public offering
6. Franchise grantees of television or radio and gas or water
7. Life insurance companies and agents of foreign insurance companies
8. Franchise grantees of telephone or telegraph on overseas dispatch, message or conversation
origination from the Philippines
9. Winnings from jai-alai and race tracks

Mnemonics: BICAP FLOW

The specific percentage tax rates imposed on these sales of services or transaction range from .60%
to 30%. These rates apply regardless of the registration type of the taxpayer as VAT or non-VAT
taxpayers. This will be extensively covered in detail in Chapter 5.

Vatable sales or receipts

Other sales of goods, properties, services or lease of properties, other than those exempt and
specifically subject to percentage tax are vatable.

Vatable sales or receipts are subject to the following:

1. 3% general percentage tax – if the taxpayer is non-VAT registered taxpayer
2. Value added tax – if the tax payer is VAT taxpayer

Types of percentage tax

1. Specific tax – those imposed for BICAP FLOW and apply to any taxpayer, whether VAT or
nonVAT registered
2. General percentage tax – for vatable sales or receipts of non-VAT taxpayers
Mandatory registration as VAT taxpayer
Any person who, in the course of trade of business, sells, barters or exchanges goods or properties or
engaged in the sale or exchange of services shall be liable to register to VAT if:
1. His gross sales or receipts for the past 12 months have exceeded P3,000,000.
2. There are reasonable ground to believe that his gross sales or receipts for the next 12 months
will exceed P3,000,000.

The general threshold P3,000,000

The P3,000,000 VAT threshold is application to all other taxpayers except franchise grantees of radio
or television.

The special threshold: P10,000,000

Franchise grantees are mandatorily required to register to the VAT system when their annual receipts
exceed P10,000,000.

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. For TV or radio franchise grantees, the option shall be
perpetually irrevocable.

Type of VAT Taxpayers

1. VAT-registered taxpayer – a taxpayer who registered under the VAT system
2. VAT-registrable taxpayer – a taxpayer who exceeded the VAT threshold but did not yet
register as a VAT taxpayer

VAT-registered taxpayers are allowed credit for input VAT while non-VAT registered taxpayers are not
allowed to claim input VAT credit.

Illustration
Assume a taxpayer had P 600,00 output VAT on its vatable sales and paid 320,000 VAT on its
purchases, the VAT liability shall be computed as follows:
 VAT-registered VAT-registrable
Output VAT P600,000 P600,000
Less: Input VAT 320,000 0

VAT due P280,000 P600,000

Summary rules on VAT and Percentage Tax

VAT-registered Non-VAT business
business
Exempt sales of goods and services No business tax No business tax
Sales of services specifically subject to Specific % tax rate Specific % tax rate
percentage tax
Vatable sales of goods or services 12% VAT 3% percentage tax
Illustration 1
Mrs. Maranao is starting a business with the following projected result of operations within 12
months:
Expected
Sales/ Receipts
Exempt sales P400,000
Receipts from services subject to percentage tax 1,200,000
Other sales and receipts 1,900,000

Total sales and receipts P3,500,000

Only vatable sales or receipts shall be considered for the purpose of the VAT threshold. Since the
P1,900,000 expected vatable sales or receipts is below the P3,000,000 VAT threshold, Mrs.
Maranao register as a non-VAT taxpayer.

Note:
1. Mrs. Maranao shall not pay business tax on exempt sales.
2. The receipts from services specifically subject to percentage tax shall be subject to the particular percentage tax
rate that apply to the receipts.
3. Mrs. Maranao shall pay the 3% general percentage tax on the vatable sales and receipts for as long as her
vatable sales or receipts do not exceed the VAT threshold.
4. If there is a reasonable expectation that vatable sales or receipts in the next 12 months will exceed the VAT
threshold, the taxpayer shall register as VAT-taxpayer.

Illustration 2
Assume the same data in the preceding illustration except that those sales figures were recorded by
Mrs. Maranao for the last 12 months and that Mrs. Maranao is registered as a non-VAT taxpayer

Mrs. Maranao shall continue paying the 3% general percentage tax. She will only be required to
register to VAT if her vatabe sales or receipt exceed the P3,000,000 VAT threshold.
DIFFERENCE OF THE CONCEPT OF GROSS RECEIPTS AND SALES BETWEEN VAT AND NON-
VAT TAXPAYERS

For non-VAT taxpayers

The amount billed to a customer or client on the sale of goods or services is respectively the sales or
gross receipts.

Illustration 1
A non-VAT taxpayer billed a client P150,000 for professional services rendered. The client withheld
10% creditable withholding tax (CWT).

The taxpayer will be able to collect the following:

Professional fess billed P150,000
Less:10% CWT 15,000

Net professional fee collected P135,000

The gross receipt in this case is the amount billed (i.e., P150,000)

Illustration 2
A non-VAT taxpayer received 98,000 from the sales of goods. He also received a CWT certificate
showing P2,000 tax withheld by the customer.

The sales for purposes of business tax may be computed as:

Net cash received on billing P98,000
Add: CWT 2,000

Sales P100,000

For VAT-taxpayer
The amount billed to the customer or client (involve price) on the sale of goods or services includes
the sales or gross receipts plus the 12% output VAT.

Illustration 1
A VAT taxpayer billed a client P150,000 for professional services rendered. The client withheld 10%
creditable withholding tax (CWT).

The amount billed shall be presumed inclusive of VAT. The gross receipt shall be computed as
follows:

Gross receipt (P 150,000/112%) P133,929

Add: Output VAT (P 133,929 x 12%) 16,071

Amount billed (invoice price) P150,000

The CWT is computed on the gross receipts or sales, exclusive of the output VAT. Hence, the
taxpayer will receive the following payment:
Professional fees P133,929
Less: 10% CWT 13,393
Net professional fees
Plus: Output VAT P120,536
Total cash collected 16,071

P136,607
Illustration 2
A VAT taxpayer received P102,000 cash plus P10,000 CWT certificate from the sales of services.

The gross receipt may be computed as:

Cash received P102,000
Add: CWT certificate 10,000

Invoice price P112,000

Less: Output VAT (112,000 x 12/112) 12,000

Gross receipt P100,000

BUSINESS TAX ACCOUNTING PERIOD

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

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.

Illustration 1: Calendar year taxpayers

Atty. Aloe Vera is registering with the BIR as a self-employed law practitioner.
Individual are limited to use only the calendar accounting period. Hence, the taxable quarters of atty.
Aloe shall 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 December 31
Illustration 2: Fiscal year taxpayers
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
Remember that corporate tax payers may opt for either the calendar year or fidcal year
accounting period.
BUSINESS TAX REPORTING

Types of Business Tax Returns

Non-VAT
VAT taxpayers taxpayers
Monthly tax return BIR form 2550 M Not applicable
Quarterly tax return BIR Form 2550 Q BIR Form 2551 Q
Reporting of VAT taxpayers
VAT taxpayers are required to report their receipts or sales in two monthly 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 and remit VAT monthly.
1st month 2nd month 3rd month

Business tax form 2550M 2550M 2550Q

Deadline* Within 20 days Within 20 days Within 25 days
*counted from the end of the month or quarter
The TRAIN law will eventually phase out the monthly estimated VAT payments and VAT
payment will transition into a full quarterly payment effective January 1,
2023.
Reporting of NON-VAT taxpayers (Percentage taxpayers)
The TRAIN law requires percentage taxpayers to file quarterly payment tax returns (BIR Form
2551Q). All percentage taxpayers pay these percentage taxes on quarterly basis.
1st month 2nd month 3rd month

Business tax form - - 2551Q

Deadline* Within 25 days
*counted from the end of the month or quarter
Illustration
Assume a business taxpayer had the following gross sales in the first quarter of 2019. January –
P220,000, February – P180,000 and March – P260,000.

Assuming the business is a percentage taxpayer:

A percentage taxpayer will report the sales as follows:
January February March

Taxable amount - - P660,000

BIR Form to use -None- -None- Form 2551Q
Assuming the business is a percentage taxpayer:
A VAT taxpayer will report the sales as follows:
January February March

Sales or receipt P220,000 P180,000 P660,000

BIR Form to use Form 2550M Form 2550M Form 2550Q
Note:
1. The reported figures in each month shall be the basis of the output VAT.
 2. The March figure is the total of the three months (i.e., P220K +P180K+P260K). the VAT computed for March will
be reduced by VAT payments made in the first two months since they are included in this total.

Short Period Return

Any person who retires from business with due notice to the BIR office where the taxpayer (head
office) is registered or whose VAT registration has been cancelled shall file a final quarterly
return and pay the tax due thereon within twenty-five (25) days from the end of the
month when the business ceased to operate or when the VAT registration had been
officially cancelled.

Provided, however, that subsequent monthly declaration/quarterly returns are still required to be filed
if the results of the winding up of the affairs/business of the taxpayer reveal taxable transaction.

TRANSITION TO THE VALUE ADDED TAX

The following illustrates the tax treatments of the transition of taxpayers to the VAT system.

Illustration 1: VAT threshold monitoring and VAT transition

Mr. Quezon had the following vatable receipts from his service business since he started business in
January 1, 2020:
Vatable receipts Cumulative receipts Cost and Expenses Input VAT

Jan.1 – Sept. 30 P2,250,000 P2,250,000 P1,200,000 -

October 1,000,000 3,250,000 500,000 -
November 1,000,000 4,250,000 700,000 74,000
December 1,000,000 5,250,000 800,000 62,000
The 12-month totals of monthly receipts from the current month until 12 months back shall be
monitored if it exceed the P3M VAT threshold.

Since his receipts exceeded P3,000,000 by the October 2020, he is subject to VAT prospectively
starting November 2020. He is mandatorily required to update his registration form a non-VAT to
a VAT taxpayer on or before November 30, 2020.
Under the Regular Income Tax Option
Assuming Mr. Quezon opted to the regular tax option for the Year 2020 in his first quarter 1701Q, he
shall separately pay the regular income tax computed per individual tax table and the 3% percentage
tax under 1551Q.

If we compute his regular tax using the income tax table, Mr. Quezon must have paid P205,000 in
estimated income tax as of September 30, 3202 using 1701Q.

On the other hand Mr. Quezon must have paid his quarterly percentage tax using from 2551Q until
the end of the quarter ending September 30, 2020.

Require returns

For October 2020

Mr. Quezon shall file his last 2551Q adjustment return and pay the following percentage tax:
October 2020 gross receipts P1,000,000
Multiply by: 3%

Percentage tax due P30,000

For November and December 2020

Mr. Quezon shall file the following VAT returns and pay the following taxes:

BIR Form 2550m FOR November 2020

Output VAT (1M x 12%) P120,000

Less: Input VAT 74,000
VAT shall due P46,000

BIR form 2550Q for the 4th quarter ending December 31, 2020
Output VAT (1M + 1M) x12% 240,000
Less: Input VAT (P74K + P62K) 136,000
VAT due P104,000
Less: Estimated VAT payments – Nov. 2550M 46,000
VAT still due P58,000
Year 2020 Income Tax due

Mr. Quezon’s taxable and expenses in 2020 shall be:

Total receipts in 2020 P5,2250,000
Less: Total costs and expenses in 2020 3,200,000
Taxable income P2,050,000

Mr. Quezon shall file and pay the following tax due under Form 1701A:
Tax due on P2,050,000 income, per tax table* P506,000
Less: Estimated income tax payments (Form 1701Q 205,000

Income tax still due P301,000

*Please check individual income tax table under our income taxation book
Under the 8% Commuted Tax Option
Assuming Mr. Quezon opted to the 8% income tax in the first quarter of 2020, his option to the 8%
income tax shall be invalidated. He shall be subjected to regular income tax for the entire Year 2020
while his payments under the 8% commuted tax shall be treated as tax credit against his regular
income tax due.

He will pay VAT prospectively starting November 2020 and will be assessed percentage tax for all
sales or receipts from January 1, 2020 to October 2020.

As of third quarter 2020, Mr. Quezon must have paid P160,000 in 8% income tax, computed as
follows:

January to September receipts P2,250,000

Less: Exempt 250,000
Total P2,000,000
Multiply by: 8%

Income tax due P160,000

Assessment of percentage tax in November 2020

The BIR shall assess Mr. Quezon to pay the following percentage tax under 2551Q:

January to October receipts P3,250,000

Multiply by: 3%

Percentage tax due P97,500

It must be emphasized that the percentage tax assessment must cover all sales or receipts realized
prior to his VAT registration, not only the first P3,000,000 of sales or receipts. This is due to the fact
that the VAT applies prospectively effective on the month of registration not on excess of sales above
P3,000,000.

For November and December 2020

Mr. Quezon shall file the following VAT returns and pay the following taxes:

BIR Form 2550M for November 2020

Output VAT (1M + 12%) P240,000

Less: Input VAT 74,000

VAT still due P46,000

BIR Form 2550Q for the 4th quarter ending December 31, 2020
Output VAT (1M + 1M) x 12% P240,000
Less: Input VAT (P74K + P62K) 136,000
VAT due P104,000
Less: Estimated VAT payments – Nov. 2550M 46,000
VAT still due P58,000
Year 2020 Income tax due

Mr. Quezon’s taxable income for 2020 shall be:

Total receipts in 2020 P5,250,000
Less
Total Costs and expenses in 2020 3,200,000
Percentage tax expense 97,500

Taxable income P1,952,500

Mr. Quezon shall file and pay the following income tax due for 2020 under Form 1701A:

Tax due on P1,952,500 taxable income, per tax table P475,750

Less: Estimated income tax payments (Form 1701Q) 160,000

Income tax still due P315,750

Illustrative 2: Non-registration as VAT taxpayer

Assume instead that Mr. Quezon paid P13,500 Percentage tax in November and registered as a VAT
taxpayer only on December 2020.

Mr. Quezon shall be subject to VAT in November despite his failure to update his VAT registration.
Registrable persons are subject to VAT without the benefits of input VAT in the period they are not
properly registered.

Hence Mr. Quezon shall be required to pay the following additional assessment fot November 2020:
Output VAT (P1M x12%) P120,000
Less: Input VAT 0

VAT due P120,000

Mr. Quezon shall file a claim for refund or credit for the P13,500 percentage tax paid as it is an
erroneous payment of tax considering that the VAT should have been paid for that month.

If claimed as tax credit, the same shall be taken as deduction against the tax due once approved by
the BIR.

Assuming the claim for tax credit is approved, the VAT payable shall be computed as follows:
Output VAT P120,000
(P1M x 12%)
Less: Input 0
VAT
VAT due P120,000
Less: Tax 13,500
credit
VAT still due P106,500
Note to readers
A mastery of business taxation requires good
knowledge in:
1. Identification the business activity of the
tax payer (service of goods)
2. Tax basis (gross sales or gross receipts)
3. Type of the sales or receipts (exempt,
specific, percentage tax or vatable)

You need to master the list exempt sales and

those services specifically subject to percentage
tax. These are the exception rules in business
taxation.
Timing of VAT registration
1. Person commencing business with an expectation to exceed the VAT threshold within 12
months shall simultaneously register as VAT taxpayer with the registration of their new
business or trade with the BIR.

2. Persons exceeding the VAT threshold shall register as VAT taxpayer before the end of the
month following the month the threshold is exceeded.

3. Franchise grantees of radio and television broadcasting, whose gross annual receipt for the
preceding calendar year exceeded P10,000,000, shall register as VAT taxpayer within 30 days
from the end of the calendar year (RR16-2005)

4. Persons who are below the threshold but opt to be registered as VAT taxpayers shall register
not later than 10 days before the beginning of the taxable quarter (Ibid).

VAT treatment of exempt transactions

A VAT-registered taxpayer who enters into a VAT-exempt transaction (i.e., mixed transactions) may
also opt that the VAT apply to his transactions which would have been exempt under Section 109 of
the NIRC.

Essence of voluntary the VAT registration

Other than simplification of sales monitoring and attracting VAT-registered customers, there may be
no other practical advantage of this option for a purely domestic-based business but there is nothing
wrong in giving our progressive country more than what is required. This option, however, is
beneficial for taxpayers who are into export business so that their export sales would be zero-rated
than merely exempt.

The optional VAT registration is not allowed to self-employed and or professional individuals who
opted to the 8% commuted tax under income taxation.

VAT taxpayers shall continue to pay VAT until the cancellation or revocation of their VAT-registration.

Revocability of VAT registration

1. The VAT registration, whether voluntary or mandatory, of franchise grantees of radio or
television is perpetually irrevocable. Thus, they continue to be VAT taxpayers until the
dissolution of their business.

2. Any person, other than franchise grantees of radio or television, who voluntarily registered as
VAT taxpayers shall not be allowed to cancel their VAT registration for the next 3 years. This is
referred to as the 3-year lock-in period.

3. Any person who registered as VAT taxpayers with an expectation to exceed that VAT threshold
but failed to exceed the same within 12 months of operations may apply for cancellation of
VAT registration. The three-year lock-in period does not apply in this case.

Business whose VAT registration has been cancelled will be registered or reverted back as non-VAT
taxpayers. They will be subjected to the 3% percentage tax on sales or receipts.
Penalty for registrable persons
As previously pointed out, failure to register as a VAT-taxpayer is not an excuse. Registrable persons
are still liable to VAT but without the benefit of input tax credit in the periods in which they are not
properly registered.