TYPES OF BUSINESS TAXES

BUSINESS TAXATION
Hannah Joy A. Borja, CPA There are three (3) major business taxes in the
BS Accty – 3 Philippines namely:
1. Value-Added Tax (VAT)
Business Taxes
• imposed upon onerous transfers such 2. Other percentage taxes (OPT) or simply
as sale, barter, exchange and Percentage Tax
importation. It is called as such because
3. Excise taxes
without a business pursued in the
Philippines (except importation) by the As a rule, all sale of goods or services made in
taxpayer, business taxes cannot be the normal course of trade or business are
applied. subject to VAT unless exempt under the law.
• are in addition to income and other Nonetheless, if the sale is exempt from VAT, it
taxes paid, unless specifically may be subject to Other Percentage Tax.
exempted.
Consequently, transactions subjected to VAT
• based on gross sales or receipts.
should no longer be subjected to Percentage
Hence, irrespective of the results of
Tax. However, such is not the case with respect
business operations, taxpayers engaged
to excise taxes. A transaction subjected to
in trade are still liable to pay for
either VAT or Percentage Tax may still be
business taxes
subjected to Excise Tax.
• either VAT or percentage tax, plus
excise tax, if applicable
Types of Transfer
1. Gratuitous Transfer (transfer without
consideration) – not subject to business
tax but subject to transfer taxes (estate
or donor’s tax)
2. Onerous Transfer (transfer with
consideration)
a. In the ordinary course of trade or
business including incidental transactions: A transaction subjected to value added tax must
Subject to (unless exempt under the law) no longer be subjected to percentage tax.
Nonetheless, a business entity or taxpayer may
- business tax; and be engaged in transactions that are subject to
- income tax VAT, Exempt from Vat and subject to
Percentage tax (mixed transactions) at the
b. Not in the ordinary course of trade same time.
or\business – not subject to business tax but
may be subject to income tax. Therefore, a taxpayer may be subjected to
value added tax and at the same time,
Guide: percentage tax including excise tax, if
applicable.
If the asset sold is an ordinary asset, it is
generally subject to VAT unless exempt under Value Added Tax
the law. Mindanao II’s business is to convert
the steam supplied to it by the PNOC into • VAT is a tax on the value added by
electricity and to deliver the electricity to NPC. every seller to the purchase price or cost
In the course of its business, Mindanao II in the sale or lease of goods, property
bought and eventually sold a Nissan Patrol. or services in the ordinary course of
Prior the sale, the Nissan Patrol was part of trade or business as well as on
Mindanao II’s property, plant and equipment. importation of goods into the
Therefore, the sale of Nissan Patrol is an Philippines, whether for personal or
incidental transaction made in the course of business use.
Mindanao II’s business which should be liable • It is a tax on consumption levied on the
for VAT sale, barter, exchange or lease of goods
or properties and services in the
Philippines and on importation of goods
into the Philippines levied at each stage
of production and distribution process.
• “Cross border doctrine” means that no
VAT shall be imposed to form part of the
 cost of goods destined for consumption SALE OF SERVICES
outside the territorial border of the
Philippines taxing authority. • Sale of services means performance of
all kind of services in the Philippines for
Kinds of VAT others for a fee, remuneration or
consideration, whether in kind or in
1. VAT on sale of goods or properties
cash.
2. VAT on importation of goods • VAT on sale of services is a tax on
payments for services rendered in the
3. VAT on sale of services and use or lease exercise of profession or calling.
of properties
• It is an indirect tax and thus, may be
Persons Liable passed on to the client or customer.
• It is a tax on services and, as such, it
accrues at the time the service fee is
collected (regardless of timing of
collection).
• Such payments may be collected in
advance or after the services is
rendered.
SALE OF REAL PROPERTIES

• Sale of real properties shall refer to real

TRANSFER BY A TAX-EXEMPT ENTITY TO properties held primarily for sale to
NON-TAX EXEMPT ENTITY customers or held for lease in the
ordinary course of trade or business of
• In the case of tax-free importation of the seller.
goods into the Philippines by persons,
entities, or agencies exempt from tax • In the case of sale of real properties on
where such goods are subsequently the instalment plan, the real estate
sold, transferred or exchanged in the dealer shall be subject to VAT on the
Philippines to non-exempt persons or instalment payment, including interest
entities, the purchaser, transferees or and penalties, actually and/or
recipients shall be considered the constructively received by the seller
importers thereof, who shall be liable for
any internal revenue tax on such CHARACTERISTICS OF VAT
importation. • It is an indirect tax where tax shifting is
MEANING OF THE TERM “GOODS OR always presumed.
PROPERTIES” • It is consumption-based
• It is imposed on the value-added in each
The term “goods or properties” refers to all stage of production and distribution
tangible and intangible objects which are process.
capable of pecuniary estimation and shall • It is a credit-invoice method value-added
include, among other: tax
BASIS OF VALUE ADDED TAX
1. Real properties hold primarily for sale to
customers of held for lease in the The 12% Value-Added Tax shall be based on
ordinary course of trade or business. the following:
2. The right or the privilege to use patent,
copyright, design or model, plan, secret
formula or process, goodwill, trademark,
trade brand or other like property or
right.
3. The right or the privilege to use any
industrial commercial or scientific
equipment. GROSS SELLING PRICE
4. The right or the privilege to use motion
picture films, films, tapes and disc; and • The total amount of money or its
5. Radio, television, satellite transmission equivalent which the purchaser pays or
and cable television time. is obligated to pay to the seller in
consideration of the sale, barter or
exchange of the goods or properties,
excluding VAT. The excise tax, if any
 on such goods or properties shall form that the gross sales or receipts for the
part of the gross selling price. next 12 months will exceed P3,000,000.
• In the case of sale, barter, or exchange
2. Radio and/or television broadcasting
of real property subject to VAT, gross
companies whose annual gross receipts
selling price shall mean the
of the preceding year exceeds
consideration stated in the sales
P10,000,000. Mandatory registration
document or the fair market value,
applies within 30 days from the end of
whichever is higher.
the taxable year.
• If the VAT is not billed separately in the
document of sale, the selling price shall 3. A person required to register as VAT
be deemed to be inclusive of VAT. taxpayer but failed to register.
GROSS RECEIPTS PENALTY FOR NON-REGISTRATION OF
THOSE REQUIRED TO REGISTER
• Gross receipts refer to the total amount
of money or its equivalent representing • The taxpayer shall be liable to pay the
the contract price, compensation, tax as if he were a VAT-registered
service fee, rental or royalty, including person but he cannot avail the benefits
the amount charged for materials of input tax credit for the period he was
supplied with the services and deposits not properly registered.
applied as payments for services
rendered and advance payments VAT THRESHOLD FOR HUSBAND AND WIFE
actually or constructively received • For purposes of the threshold of
during the taxable period for the P3,000,000, as amended, the husband
services performed or to be performed and the wife shall be considered
for another person, excluding the VAT. separate taxpayers. However, the
Constructive Receipt aggregation rule for each taxpayer shall
apply.
• occurs when the money consideration or
its equivalent is placed at the control of • For instance, if a professional, aside
the person who rendered the services from the practice of his profession, also
without restrictions by the payor. The derives revenue from other lines of
following are examples of constructive business which are otherwise subject to
receipts: VAT, the same shall be combined for
purposes of determining whether the
a. Deposit in banks which are made threshold has been exceeded. Thus,
available to the seller of services without the VAT-exempt sales shall not be
restrictions included in determining the threshold.
b. Issuance by the debtor of a notice to B. OPTIONAL REGISTRATION
offset any debt or obligation and
acceptance thereof by the seller as • Any person who is VAT-exempt or not
payment for services rendered; and required to register for VAT may elect to
be VAT-registered by registering with the
c. Transfer of the amounts retained by the RDO that has jurisdiction over the head
payor to the account of the contractor. office of that person, and pay the annual
VAT REGISTRATION registration fee for every separate and
distinct establishment.
• Under the Tax Code, as amended, VAT • Any person who elects to register under
registration is classified into two (2), optional registration shall not be allowed
mandatory and optional VAT registration. to cancel his registration for the next
three (3) years.
A. MANDATORY REGISTRATION • Franchise grantees of radio and/or
television broadcasting whose annual
1. Any person or entity who, in the course
gross receipts of the preceding year do
of his trade or business, sells, barters,
not exceed P10,000,000 derived from
exchanges, leases goods or properties
the business covered by the law
and renders services subject to VAT, if
granting the franchise may opt for VAT
the aggregate amount of actual gross
registration. This option, once
sales or receipts exceed P3,000,000
exercised, shall be irrevocable.
beginning January 1, 2018 under RATA
109632-TRAIN Law for the past 12 CANCELLATION OF REGISTRATION
months (other than those that are
exempt) or there are reasons to believe Instances when a VAT-registered person may
cancel his VAT registration
 1. If he makes a written application and (such as automobile and minerals)
can demonstrate to the commissioner’s under the Tax Code.
satisfaction that his gross sales or
VAT EXEMPT SALES
receipts for the following twelve (12)
months, other than those that are The VAT exempt transactions provided in the
exempt under Section 109 (A) to (U), will Tax Code are as follows:
not exceed P3,000,000; or
A. “Sale or importation of agricultural and
2. If he has ceased to carry on his trade or marine food products in their original state,
business, and does not expect to livestock and poultry of a kind generally
recommence any trade or business used as, or yielding or producing foods for
within the next twelve (12) months. human consumption and breeding stock
and genetic materials therefor.
The cancellation for registration will be effective
from the first day of the following months the RR 16-2005 provides that products classified
cancellation was approved. under this exemption (such as meat, fruits and
vegetables) shall be considered in their “original
POWER OF THE COMMISSIONER TO
SUSPEND BUSINESS OPERATIONS state” even if they have undergone the simple
processes of preparation or preservation for the
The Commissioner of the Internal Revenue or market, such as freezing, drying, salting,
his authorized representative may order broiling, roasting, smoking or stripping including
suspension or closure of business those using advanced technological means of
establishment for a period of not less than 5 packaging, such as shrink wrapping in plastics,
days for any of the following violations. vacuum packing, tetra-pack, and other similar
packaging methods
1. Failure to issue receipts or invoices
Examples Of Agricultural and Marine Food
2. Failure to file VAT return
Products in Their Original State
3. “Understatement of taxable sales or
receipts by 30% of more of the correct
taxable sales or receipts for the taxable
quarter.
4. Failure of any persons to register as
required under the law.
NOTE: Livestock or poultry does not include
II. OTHER PERCENTAGE TAXES fighting cocks, race horses, zoo animals and
other animals generally considered as pets.
• It is a tax imposed on sale, barter,
exchange or importation of goods, or • Polished and/or husked rice, corn grits,
sale of services based upon gross sales, raw cane sugar and molasses, ordinary
value in money or receipts derived by salt and copra shall be considered in
the manufacturer, producer, importers or their original state.
seller measured by certain percentage • For this purpose, notwithstanding the
of the gross selling price or receipts. process/es involved in its production,
• Any person who is not a VAT registered “raw sugar or raw cane sugar” means
person (persons exempt from VAT under sugar whose content of sucrose by
Sec. 109 of the tax code) and is not weight, in the dry state, corresponds to a
exempt from business tax (i.e. business polarimeter reading of less than 99.5
undertaking by an individual with gross degrees.
sales/receipts ≤ P100,000 in any twelve- VAT EXEMPT SUGAR
month period) shall be subject to other
percentage taxes. RAW SUGAR CANE

III. EXCISE TAXES • refers to sugar produced by simple

process of conversion of sugar cane
• In addition to VAT, excise taxes apply to without need of any mechanical or
goods manufactured or produced in the similar device.
Philippines for domestic sales or
• Under the revised regulation, raw cane
consumption or for any other disposition,
sugar refers only to muscovado sugar.
and goods imported.
Thus, only raw sugar cane is exempt
• The goods manufactured or imported from VAT under the tax code.
under this category are classified as
• Cane Sugar produced from the following
either “sin products” (such as wines and
shall be presumed, for internal revenue
cigarettes) or “non-essential goods”
purposes, as refined sugar:
 o  Product of a refining process goods from payment of duties and
o  Products of a sugar refinery; or taxes:
o  Product of a production line of • Provided, further, vehicles, vessels,
a sugar mill accredited by the aircrafts and machineries and other
BIRT to be producing and/or similar goods for use in manufacture,
capable of producing sugar with shall not fall within this classification and
polarimeter reading of 99.5 and shall therefore be subject to duties,
above. taxes and other charges.

SALE OF MARINATED FISH E. Services subject to Percentage Tax under

Title V of the Tax Code, as amended
• Sale of marinated fish is not exempt (Sections 116-127) as follows:
from VAT. Laws granting exemption from
tax are construed strictly against the 1. Tax on persons exempt from value-added tax
taxpayer. Exemption from payment of (Sec. 116)
tax must be clearly stated in the 2. Percentage tax on domestic carriers and
language of the law. keepers of garages (Sec. 117)
B. Sale or Importation of: 3. Percentage tax on internal carriers (Sec. 118)
Fertilizers 4. Tax on franchises (Sec. 119)
Seeds, seedlings and fingerlings, fish, 5. Tax on overseas dispatch, message or
prawn, livestock and poultry feeds, conversation originating from
including ingredients, whether locally
produced or imported, used in the the Philippines (Sec. 120)
manufacture of finished feeds (except
6. Tax on banks and non-bank financial
specialty feeds.)
intermediaries (Sec. 121)
• Specialty feeds refers to non-agricultural
7. Tax on other non-bank financial
feeds or food for race horses, fighting
intermediaries (Sec. 122)
cocks, aquarium fish, zoo animals and
other animals generally considered as 8. Tax on life insurance premiums (Sec. 123)
pets are subject to VAT
9. Tax on agents of foreign insurance
C. Importation of personal and household companies (Sec. 124)
effects belonging to:
10. Amusement taxes (Sec. 125)
The resident of the Philippines returning
from abroad; and 11. Tax on winnings (Sec. 126); and

Nonresident citizens coming to resettle in 12. Tax on sale, barter or exchange of share of
the Philippines. Provided, that such goods stock listed and traded through the local stock
are exempt from customs duties under the exchange (Sec. 127
Tariff and Customs Code of the Philippines F. SERVICES BY
D. Importation of professional instruments “Agricultural contract growers” and
and implements, tools of trade, occupation
or employment, wearing apparel, domestic Milling for others of:
animals, and personal and household
Palay into rice
effects belonging to persons coming to settle in
the Philippines or Filipinos or their families and Corn into grits; and
descendants who are not residents or citizens
of other countries, such parties herein referred Sugar cane into raw sugar
to as overseas Filipinos, in quantities and of the G. Medical, dental, hospital and veterinary
class suitable to the profession, rank or position services except those rendered by
of the persons importing said items, for their professionals
own use and not for barter or sale,
accompanying such persons, or arriving within • Laboratory services are exempted. If the
a reasonable time. hospital or clinic operates a pharmacy or
drugstore, the sale of drugs and
• Provided, that the Bureau of Customs medicines are subject to VAT.
may, upon the production of satisfactory • Hospital bills constitute medical
evidence that such persons are actually services.
coming to settle in the Philippine and • The sale made by the drugstore to the
that the goods are brought from their in-patients which are included in the
former place of abode, exempt such
 hospital bills are part of medical bills Concessionaires under the Petroleum Act of
exempt from VAT. 1949)
• Sales of the drug store to the outpatients
Examples (special laws):
are taxable because they are not part of
medical services of the hospital. PD 1869 - PAGCOR Charter
• Medical practitioners, under the
aforementioned regulation, shall likewise RA 9367 - Biofuels Act
include medical technologies, RA 10072 - Philippine Red Cross
allied health workers and other medical
practitioners who are not under an RA 9994 - Expanded Senior Citizens Act of
employer-employee relationship with the 2010
hospital, clinic or HMO and other similar RA 10754 - Magna Carta for PWDs
establishments.
L. “Sales by agricultural cooperatives duly
Pursuant to RR 16-2005, services of
registered with the Cooperative
Professional Practitioners are subject to VAT if Development Authority to their members as
annual gross professional fees exceed
well as sale of their produce, whether in its
P3,000,000. Otherwise, such professional fees
original state or processes form, to non-
are subject to Percentage Tax under Section. members, their importation of direct farm
116 of the Tax Code, as amended. Professional
inputs, machineries and equipment,
Practitioners include, among others, the
including spare parts thereof, to be used
following:
directly and exclusively in the production
• Medical practitioners and/or processing of their product.
• CPAs
• Insurance Agents (Life and Non-life)
• Other professional Practitioners required
to pass the government examination.
H. “Educational services rendered by private
educational institutions, duly accredited by
DepEd, CHED, TESDA and those rendered
by government educational institutions. It is to be reiterated however, that sale or
importation of agricultural food products in their
“Educational services” original state is EXEMPT from VAT irrespective
of the seller and buyer thereof
• refer to academic, technical or
vocational education provided by private M. “Gross receipts from “lending activities”
educational institutions duly accredited by credit or multi-purpose cooperatives duly
by the DepEd, the CHED, and TESDA registered with the Cooperative
and those rendered by government Development Authority”
educational institutions and it does not • Exemption is not only limited to the
include seminars, in service training, gross receipts on loans extended to its
review classes and other similar members but also to other persons who
services rendered by persons who are are not members.
not accredited by the DepEd, the CHED
and/or TESDA
I. “Services rendered by individuals
pursuant to an employer-employee
relationship
J. “Services rendered by Regional or Area
Headquarters (RHQs) established in the N. “Sales by non-agricultural, non-electric
Philippines by multinational corporations and non-credit cooperatives duly registered
which act as supervisory, communications with the Cooperative Development Authority,
and coordinating centers for their affiliates, provided, that the share capital contribution
subsidiaries or branches in the Area-Pacific of each member does not exceed fifteen
Region and do not earn or derive income thousand pesos (P15,000) and regardless of
from the Philippines. the aggregate capital and net surplus ratably
K. “Transactions which are exempt under distributed among the members”.
international agreements to which the
Philippines is a signatory or under special
laws, EXCEPT those under Presidential
Decree No. 529 (Petroleum Exploration
 • Importation by non-agricultural, non- interest payments, and as such other
electric and non-credit cooperatives of benefits in accordance with the
machineries and equipment including provisions of Republic Act 7279,
spare parts thereof, to be used by them otherwise known as the “Urban
are subject to VAT. Development and Housing Act of 1992”
and RA No. 7835 and RA No. 8763.

• “Socialized Housing” shall also refer to

projects intended for the underprivileged
and homeless wherein the housing
package selling price is within the lowest
interest rates under the Unified Home
Lending Program (UHLP) or any
equivalent housing program of the
O. “Export sale” by persons who are Not Government, the private sector or non-
VATregistered government organizations.
• Export sales may be exempt or subject
to VAT as shown below: c. Sale of House and Lot and Other Residential
dwellings with selling price of not more than
Two Million Pesos (P2,000,000) as adjusted in
2011 using the 2010 consumer price index
(CPI)
• Based on RR 8-2021 issued by the BIR
on June 11, 2021, the adjusted
threshold to be used shall be
P3,199,200.
P. “SALE OF REAL PROPERTY • Provided, further, that every three (3)
years thereafter, the amounts state
The TRAIN Law provided that the VAT herein shall be adjusted to its present
exemption on sale or real property beginning value using the Consumer Price Index,
January 1, 2021 shall only apply to the as published by the Philippine Statistics
following: Authority (PSA)

a. Sale of real properties NOT primarily held for

sale to customers or held for lease in the
ordinary course of trade or business

• Sale of real property not primarily held

for sale or for lease is, in general, VAT
exempt. However, if such property is
used in the trade or business of the
seller, the sale shall be subject to VAT
as an incidental transaction to the
seller’s main business.

• On the other hand, sale of real

properties held primarily for sale to
customers or held for lease in the
ordinary course of trade or business of
the seller shall be subject to VAT.

b. Sale of real property utilized for socialized

housing as defined under RA No. 7279, as
amended:

• Socialized Housing refers to housing

programs and projects covering houses
and lots or home lots only that are
undertaken by the government or the
private sector for the underprivileged
and homeless citizens, which shall
include sites and services development,
long-term financing, liberalized terms on