Introduction to Business Taxes

KINDS OF TAXES UNDER THE NATIONAL INTERNAL REVENUE CODE

There are many kinds of taxes stated in the NIRC. Other taxes may be set out in other laws, but the NIRC
contains most of them.

A basic comparison of the major taxes can be seen below:

Income Tax Business Taxes Transfer Taxes Excise Tax*

Taxes Regular Income Tax Other Percentage Tax Donor’s tax Alcohol products
MCIT Value Added Tax Estate tax Tobacco products
Final taxes on passive Petroleum
income products
Capital Gains Tax Miscellaneous
articles
Tax object Income earned: thus, Business transaction: The gratuitous The production or
a loss incurs no tax the fact of doing transfer of importation of
business. Thus, even if property specific goods
the transactions ends (transfer with
in a loss, a tax is nothing received
imposed in return)
Tax basis Taxable income or Gross selling price or Net gift or net Varies per item
Gain on sale, as gross receipts estate
applicable
*While classified as a type of business tax, even non-business taxpayers may pay excise tax. The tax is
imposed on the production or importation of goods, and not on the sale.

Business Tax
A business tax is a tax imposed on business transactions. Since business tax is imposed only on business
transactions, it becomes necessary to identify whether the sale is a business transaction.

A business is a habitual engagement in a commercial activity involving the sale of goods or services for a
profit.

There are two elements of business:

1. Habitual engagement
The mere fact a sale was made does not mean the seller is engaged in business. There must be
regularity in transactions (i.e. the seller repeatedly sells similar items). Registration is usually a
manifestation that a person is habitually engaged in business.

An exemption to this rule is the sale of services by non-residents. These services are presumed to
be made in the ordinary course of business and thus are subject to business taxes.

2. Commercial activity

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 The transaction must be engaged for a profit. The transaction may either be the sale of goods or
the provision of services. The actual existence of a profit is not necessary; it is enough that the
transaction is entered into because the taxpayer is seeking to earn a profit.

The following are not businesses:

1. Government agencies and instrumentalities
2. Non-profit organizations
3. Employment. However, a taxpayer may have his own business as an additional source of income,
such as an employee also owning a sari-sari store.
4. Directorship in a corporation.
5. Business for mere subsistence. This means businesses with gross sales or receipts not exceeding
P100,000 a year.

Additionally, the sale of property not used in business, such as home furniture, cannot be considered
business (unless it qualifies for both elements of business).

Nature of business tax

1. Relative consumption tax: it is a tax on the consumption of goods or services, in the sense that
the tax is imposed every time a sale is made, which implies that the goods or services will be
consumed.
2. Indirect tax: the tax is collected from the seller rather than from the buyer-consumer
3. Privilege tax: it is a tax on the privilege to do business. The mere fact of doing business makes the
transaction subject to tax, regardless of whether a profit is made.
4. National tax: it is imposed by the national government

Business Taxes are also called consumption taxes because they are collected whenever a good or service
is bought (and therefore eventually consumed).

Tax base for business taxes

Both taxes impose fixed rates. However, the rate to use depends on the kind of transaction. The tax basis
is the gross selling price or gross receipts.

Gross selling price refers to the total amount of money or its equivalent which the purchaser is obligated
to pay in consideration for the goods or properties. “Gross selling price” is net of discounts at the time of
sale and sales returns of allowances.

Gross receipts refers to the total amount of money or its equivalent representing the fee or price for the
service, including any charges for materials consumed or labor.

An actual receipt is not necessary for the amount to be taxable. Constructive receipts may be taxed. This
refers to money placed within the control (but not the physical possession) of the seller. Examples include:
1. Deposits in a bank account of the seller
2. Issuance of a notice to offset any debts or obligations of the seller

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Business taxes in general
The two main business taxes are the value added tax (VAT) and the other percentage tax (OPT).

The following classifications can be inferred from the provisions on the tax code as to business tax:
1. Specifically listed VAT-Exempt transactions (Sec 109(A) to Sec 109(BB) NIRC)
2. Specifically listed transactions subject to OPT (Sec 117 to Sec 127 NIRC)
3. Transactions subject to 3% OPT for not reaching the 3,000,000 threshold (Sec 109(CC) NIRC)
4. VAT transactions in general (Sec 106 to Sec 108, excluding zero-rated VAT below)
5. Zero-rated VAT transactions (Sec 106(A)(2) and Sec 108(B) NIRC, other special laws)
6. VAT Sales to Government (Sec 114(C))

The difficult question is determining the applicable tax. The following rules are important:
1. The determination of the applicable tax is on a transaction by transaction basis. Because the
classification depends on the kind of transaction, then a business may have some transactions
subject to VAT, some transactions subject to OPT, and some transactions that are VAT exempt.

2. If a specific transaction is listed as VAT Exempt, then it is never subject to either OPT or VAT(a
few VAT exempt transactions, however, become subject to VAT after certain conditions are met;
in general though, a VAT exempt transaction will never be subject to business tax) .

3. If a specific transaction is listed as subject to OPT, then the particular rate applicable to that
transaction is to be used. The transaction is never subject to VAT unless specified.

4. If the taxpayer is VAT-registered, then transactions other than VAT-exempt above or specifically
listed as OPT above (#2 and #3) are subject to VAT.

5. If the taxpayer is NOT VAT-registered, AND the transactions are not VAT-exempt or specifically
listed as OPT, the transaction is called a VATable transaction. 1

For VATable transactions, the taxpayer must compute the total VATable transactions throughout
the taxable year. If the total exceeds P3,000,000, all VATable transactions will be subject to VAT.
Otherwise, they will be subject to a 1% OPT*.
* Applicable from July 1, 2020 until June 30, 2023; after this period it will be 3%.

6. If the transaction is subject to VAT, there is a question of what the applicable rate of VAT will be.

The following rates are applicable:

a. 12%: this is the default VAT rate, applicable for most or all transactions.
b. 0%: this applies to specific transactions, typically for exports.
c. Sales to government are treated slightly differently. The government will withhold 5% of
the amount and this will be a creditable input VAT.

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Business Tax and Income Tax
A business is subject to both income tax and business tax. The two are different taxes imposed for different
purposes and on different tax objects.

An income tax is imposed whenever a business earns a profit, while a business tax is imposed for as long
as a business performs a business transaction.

Illustration
A corporation has the following data:

Sales 2,600,000
Cost of sales 1,500,000
Other allowable deductions 200,000

The corporation is subject to a 1% Other Percentage Tax as follows:

Sales 2,600,000
Multiply: 1%
OPT 26,000

The corporation is also subject to a 25% income tax as follows:

Sales 2,600,000
Cost of sales (1,500,000)
OPT* (78,000)
Other allowable deductions (200,000)
Taxable Income 822,000
Multiply: 25%
Income Tax 205,500

Other Percentage Taxes are recorded as an expense and are deductible for income tax purposes. VAT is
not deductible.

Illustration
An individual engaged in business has the following data:

Sales 2,600,000
Cost of sales 1,900,000
Other allowable deductions 500,000

The corporation is subject to a 1% Other Percentage Tax as follows:

Sales 2,600,000
Multiply: 3%
OPT 26,000

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 Sales 2,600,000
Cost of sales (1,900,000)
OPT* (26,000)
Other allowable deductions (500,000)
Taxable Income 174,000

Business Tax Reporting

Unlike income taxes, business taxes are not filed annually.

OPT
Taxpayers reporting OPT will file a return quarterly. Each quarter is reported separately; there is no
accumulation. The tax return must be filed within 25 days from the end of the quarter.

Illustration
The following non-cumulative data are available. The taxpayer is not VAT-registered.

1st 2nd 3rd 4th

Quarter Quarter Quarter Quarter
Sales 500,000 600,000 450,000 500,000
Cost of sales 220,000 320,000 250,000 300,000

If the taxpayer is subject to OPT on VATable transactions, he will pay OPT as follows:

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

Sales 500,000 600,000 450,000 500,000
Multiply: 1% 1% 1% 1%
5,000 6,000 4,500 5,000

VAT
[STARTING JANUARY 1, 2023]
Starting 2023, VAT will be filed quarterly. This is in line with the provisions of RA 10963 TRAIN as
implemented by RR 13-2018. The BIR issued Revenue Memorandum Circular (RMC) 5-2023 on January 3,
2023 to reiterate this provision as well as clarify on the transitional period for the filing of VAT.

The quarterly return (BIR Form 2550Q) will be filed within 25 days from the end of the quarter. The
computation will cover only transactions for that quarter. Thus, the VAT Payable for the 2nd quarter will
not include the transactions from the 1st quarter.

[PRIOR TO JANUARY 1, 2023]

Prior to 2023, VAT uses both a monthly filing and a quarterly filing. The monthly return (BIR Form 2550M)
will be filed within 20 days from the end of the month, and is used for the first two months of each quarter.
The quarterly return will be filed within 25 days from the end of the quarter.

For the monthly returns, the VAT is computed using only the gross receipts for that month. The quarterly
returns will accumulate the gross receipts for the whole quarter.

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Illustration
The following non-cumulative data are available excluding any VAT. The taxpayer is VAT registered.

January February March April May June

Sales 200,000 250,000 280,000 270,000 300,000 245,000

Presuming sales are subject to the 12% VAT, the output VAT will be computed as follows:

Monthly Monthly Quarterly Monthly Monthly Quarterly

January February March* April May June**
Sales 200,000 250,000 730,000 270,000 300,000 815,000
Multiply: 12% 12% 12% 12% 12% 12%
Output VAT 24,000 30,000 87,600 32,400 36,000 97,800

1st month 200,000 270,000

2nd month 250,000 300,000
3rd month 280,000 245,000
Quarterly Sales 730,000* 815,000**

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1 VATable Transactions
The provisions in the NIRC are as follows:

SEC. 109. Exempt Transactions

(CC) Sale or lease of goods or properties or the performance of services other than the
transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not
exceed the amount of Three million pesos (P3,000,000.00).

Notice that the provision is under “Exempt Transactions”. This is where confusion tends to arise on the
treatment of “exempt transactions”.

Only sales other than the transactions mentioned in the preceding paragraphs (i.e. the other Exempt
Transactions) not exceeding the Three million threshold are covered by this provision.

This must be considered in relation to the next provision:

TITLE V
OTHER PERCENTAGE TAXES
SEC. 116. Tax on Persons Exempt from Value-Added Tax (VAT). - Any person whose sales or receipts are
exempt under Section 109(CC) of this Code from the payment of value-added tax and who is not a VAT-
registered person shall pay a tax equivalent to three percent (3%) of his gross quarterly sales or receipts:
Provided, That cooperatives, shall be exempt from the three percent (3%) gross receipts tax herein
imposed: Provided, further, That effective July 1, 2020 until June 30, 2023, the rate shall be one percent
(1%).

ONLY transactions under Section 109(CC) (i.e.”exempt transactions” other than those listed in Sec 109(A)
to Sec 109(BB)) are subject to this.

This classification is confusing. It is better to not call this group of transactions under Sec 109(CC) as
“VAT Exempt” but instead as “VATable transactions”. Unlike all the other VAT exempt transactions, only
Sec 109(CC) is automatically subject to some business tax, either OPT or VAT.

The transaction must of course be a business transaction in order to fall under any of the provisions
mentioned here. Non-business transactions are not subject to any business tax.

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