Module 2

INTRODUCTION TO BUSINESS TAXATION

This module provides an overview of business taxation. After

reading this module, you are able to:

1. Comprehend the concept of being engaged in trade or business and its

exceptions to the rule on regularity of transactions.

2. Learn the registration requirements on businesses.

3. Distinguish the types of business taxpayers and business classification as to

activities and their respective tax base.

4. Understand the concept of accounting period for business taxation.

5. Internalize the scope of VAT and percentage tax.

 The Nature of Business Tax

Relative consumption tax – Business tax is a tax on

consumption of goods and services and is imposable only
when the seller is a business.

Indirect tax – the tax is collected from the seller rather than
from the buyer-consumer.

Privilege tax – Business tax is viewed as a tax on the

privilege to do business.

National tax – Business tax is imposed by the national

government
Types of Business Tax

Percentage tax

Value Added tax

Excise Tax
 Comparison of Business taxes
Point of Difference VAT Percentage Tax Excise Tax

Timing of Imposition Sale Sale Production/Import

Nature Primary tax Primary tax Additional tax

Only producers or
Subject businesses Any business, in Any business, in importers of
general general excisable products or
services

Taxpayers Business only Business only Business or non-

business

Usual taxpayers Big businesses Small businesses Big or small;

businesses
Accounting treatment Liability Expense Asset or liability
 PROCEDURES OF BUSINESS TAXATION

Point of Difference VAT Percentage Tax Excise Tax

If not the activity is EXEMPT from business tax

1. Evaluate if the sales
activity qualifies as a
business If yes the business must register for business tax.

Include all proprietorship businesses including

If Individual branches of the individual taxpayer.
2. Identify the taxable
person
If juridical Include all branches of the corporate taxpayer

If sales of goods Determine the sales

3. Determine the activity
type If sales of services Determine the receipts

Exempt sales or receipts Pay no business tax

4. Classify the sales or
Sales or receipts subject Pay specific percentage tax
receipts whether they are to specific percentage tax
Vatable sales or receipts Pay the Value Added tax
 PROCEDURES OF BUSINESS TAXATION
Point of Difference VAT Percentage Tax Excise Tax

If VAT registered Pay VAT on vatable sales or receipts

If exceeds P3million- the
person shall register as
VAT taxpayer; pay VAT
Pay the 3% general prospectively effective on
5. Determine taxpayer If non-VAT registered percentage tax, the succeeding monthly
registration type then determine the vatable sales or receipts.
magnitude of 12-
month vatable sales If not exceeding
at the end of every P3million, the person
month: shall continue paying the
3% general percentage tax
on the vatable sales or
receipts.

If Yes Pay the applicable excise tax in addition to VAT

6. Determine the goods or and or percentage tax.
service offered if excisable
If Not Pay only VAT and /or percentage tax.
WHAT IS A BUSINESS?

Refers to a habitual engagement in a commercial activity involving

the sale of goods or services for a profit.

Habitual - means regularity in transactions

Exception to the regularity rule:
Import of services is subject to business tax.
Example: Sale of services by non-residents is presumed made in the
regular course of business, hence are subjected to the final
withholding tax.

• Isolated or Casual sales are not regular activities, even if there is

profit derived, HENCE, not made in the ordinary course of business.
Examples:

1. Medical practitioner sold his -not subject to business tax residential

house for P10 million (not in the ordinary course of business)

2. Proprietor engaged in trading business

Sold merchandise for P800,000 - subject to business tax
Sold personal car for P1,200,000- not subject to business tax

3. A realtor, purchased shares of stock & -his profit is not subject to

sold as investment for profit business tax because it is not in the
ordinary course of business

4. Privilege stores (tiangge) -not subject to business tax

EXCEPT when his business activity exceeds
15 days, subject to business but not income tax
Illustrations:
5. Mang Pandoy makes key chain and wood art for sale to tourists
during the Panagbenga Festival. He rented booth from the City of
Baguio, the Tiangge organizer, and recorded sales of P350,000 over
the weeklong festivities.
 
He is not considered habitually engaged in business. His sales is not
subject to business tax but subject to income tax.
 

6. NLAC Bakeshop, an established business enterprise, rented booth

from the organizer of Sison Town Fiesta, to sell cakes and pastries.
During the fiesta, it generated sales of P400,000.

NLAC Bakeshop is subject to business tax because it is not a privilege

store. It is an established and regularly operating business.
Commercial Activity

It means engagement in the sale of goods or

services for a profit. However, even if the
business incurred a loss, it is still subject to
business tax.
 
Business principally for subsistence or
livelihood refers to businesses with gross sales
or receipts not exceeding P100,000 per year.
Marginal Income Earners

Refers to individuals not deriving compensation income under an employer-

employee relationship but who are self-employed deriving gross sales or
receipts not exceeding P100,000 in any 12-month period. Although regular
in operations, they are exempt from business tax, but are subject to income
tax. These small businesses could not be considered commercial being
merely for personal or family livelihood or subsistence.

Examples:

Subsistential farmers or fishermen

Small sari-sari stores
Small carinderias or turo-turos
Drivers or operators of a single unit tricycle, and
Others similarly situated
 
Persons considered engaged in business: (RMC 7-2014)

Consultants
Sales agents of insurance
Real estate including brokers
TV or movie talents and artists
Cooking instructors
Martial arts instructors
Not considered business:

Government agencies and

instrumentalities
Non-profit organizations or
associations
Employment
Directorship in a corporation
Business for mere subsistence
Business Taxpayers

They are the taxable persons in business

taxation who are:
◦ Individual
◦ Trust
◦ Estate
◦ Partnership
◦ Corporation
◦ Joint venture
◦ Cooperative or association
Rules:

Each person, natural, or juridical, is a taxable person for purposes of business

taxation.

Example:
Mr. Ysmael, an accounting practitioner, has two commercial businesses with the
following receipts and sales:

Mr. Ysmael’s Practice P1,200,000

Business 1 800,000
Business 2 700,000

Business 1, Business 2 and the accounting practice are not taxable persons being
proprietorship businesses. The sales and receipts of these totaling P2,700,000
shall be taxable to Mr. Ysmael as the taxable person.

Husband and wife are separate taxpayer.

Rules:

A parent
company is a separate taxable person with its subsidiary
company and each subsidiary company is a taxable person.

Example: ABC Company has a branch in Manila 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.
Rules:

Home office and branch offices of the same business are one, not
separate taxable person.

Example:
DEF Company has its head office at Makati City and two branches in
Manila City and Quezon City. The sales outlet has the following sales:
Makati Head Office P2,000,000
Manila City branch 1,800,000
Quezon City branch 1,200,000

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.
Rules:

Proprietorship is not a juridical entity. Its sales and receipts are

subject to business tax to the individual proprietor. Multiple
proprietorship businesses of the same individual are all taxable to
that individual as the taxpayer.

Example:
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 business 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 Dr. Jones.
 TYPES OF BUSINESS TAXPAYERS

VAT taxpayer – 12% Non-VAT taxpayer -3%

Sales or exchanges Sales or exchanges Sales or exchanges Sales or exchanges

Business of goods or of services or lease of services or lease of goods or
Activity
properties of properties of properties properties

Basis of Business Tax:

Gross Receipts

Total amount of money or its

equivalent representing the
contract price, compensation,
service fee, rental; or royalty Basis of Business Tax:
including the amount of
materials supplied with the
Gross Selling Price Total amount of money or its
equivalent which the purchaser
services PLUS advanced
pays to the seller in
payments actually or
consideration of the sale, barter
constructively received.
or exchange plus excise tax.
Business with Mixed Activities
Engaged in both the
sales of goods or properties Sales of services
shall be subject to business tax on
Gross SP on its sales of Gross Receipts on the
goods or properties. Sales of services

Sample Computation of Gross Selling Price/Gross Receipts

Gross Selling Price Gross Receipts
Cash sales xxx Cash collection xxx
Account sales xxx Advances by customers xxx
Installment sales xxx Gross receipts xxx
Total sales xxx
Less: Sales returns xxx
Sales allowances xxx xxx
Gross selling price xxx
Types of Sales or Receipts
Sales of Goods Sales of Services
Exempt sales Exempt sales Exempt sales
Subject to Percentage tax - BICAP FLOW
Subject to VAT Vatable Sales Vatable Receipts

Exempt Receipts from services subject to % tax

Sales of basic necessities Banks and non-bank financial intermediaries performing quasi-banking
functions and other non-bank financial intermediaries without quasi-
 Agricultural or marine food products
banking functions.
 Health services of hospitals
International carriers on their outgoing transport of cargoes, baggage
 Educational services of schools
or mails.
 Housing or residential properties within price limits
Sales exempt by law, treaty or contracts Domestic common carriers on their transport of passengers on land and
keepers of garage.
 Sales by cooperatives
 Sales or lease of aircraft or vessels Certain amusement places

 Sales or printing of books, magazines and newspapers Phil. Stock Exchange (PSE) on the sale, barter or exchange of shares by
Casual sales or sales by non-business sellers investors or corporations conducting initial public offerings.
 Sale of persons not regularly engaged in trade or business Franchise grantees of television or radio and gas or water.
 Services rendered under an employer-employee relationship
Life insurance companies and agents of foreign insurance companies.
 Services rendered by a Regional area Headquarter of a
multinational company Franchise grantees of telephone or telegraph on overseas dispatch,
 Export sales of non-VAT registered persons message or conversation originating from the Philippines.

Winnings from Jai-alai and race tracks.

BICAP FLOW
 
 VATABLE SALES OR RECEIPTS
If taxpayer is NonVAT registered - subject to Percentage tax of 3%

If taxpayer is VAT registered – subject to VAT of 12%

Mandatory Registration of VAT

If gross sales or receipts for the past 12 months have exceeded P3 million

If there are reasonable grounds to believe that his gross sales or receipts for the next 12
months will exceed P3million.

General threshold -P3,000,000

Special threshold – annual receipt is P10,000,000- for franchise grantees of TV or radio

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.
Illustration
Mrs. Maranao is starting a business with the following projected result of operations
within 12 months:
Exempt sales P 400,000
Receipts from services subject to percentage tax 1,200,000
Other sales and receipts 1,900,000
Total sales and receipts 3,500,000

Only VATABLE sales or receipts shall be considered for the purpose of VAT threshold.
Since the P1,900,00 expected vatable sales or receipts is below the P3,000,000 VAT
threshold, Mrs. Maranao may 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.
2. 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.
3. 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.
 BUSINESS TAX ACCOUNTING PERIOD
The length of accounting period for business taxes is one quarter. This is referred to as
taxable quarter. The taxable quarter is composed of three (3) months which is
synchronized with the taxable year (calendar or fiscal) of the taxpayer for purposes of
income tax.

Calendar year taxpayers: Fiscal year taxpayers:

If the a company is reporting If the company is reporting
under income taxation using under income taxation using
calendar year ending every fiscal year ending every
Dec. 31, the taxable quarter August 31, the taxable
shall be: quarter shall be:

1st Qtr- Jan. 1–Mar. 31 1st Qtr-Sep. 1 –Nov. 30

2nd Qtr- Apr. 1-Jun 30 2nd Qtr-Dec. 1-Feb. 28 or 29
3rd Qtr- Jul 1- Sep 30 3rd Qtr-Mar. 1- May 31
4th Qtr- Oct. 1- Dec. 31 4th Qtr-Jun 1 - Aug 31
 BUSINESS TAX REPORTING
VAT taxpayers Non-VAT taxpayers
Monthly tax returns BIR Form 2550M Not applicable
Quarterly tax returns BIR Form 2550Q BIR Form 2551Q

Reporting of VAT taxpayers: Reporting of Non-VAT taxpayers:

VAT taxpayers are required to report The TRAIN Law requires percentage
their receipts or sales in two monthly taxpayers to file quarterly
estimated VAT returns for the first two percentage tax returns (BIR Form
months of the quarter and a quarterly 2551Q). All percentage taxpayers
VAT on the third month of the pay their percentage taxes on a
quarter. In effect, VAT taxpayers quarterly basis.
remit VAT monthly.

1st Mo. 2nd Mo. 3rd Mo. 1st Mo. 2nd Mo. 3rd Mo.

Bus. Tax 2550M 2550M 2550Q Bus. Tax - - 2551Q

Form Form
Deadline* Within 20 Within 20 Within 25 Deadline* Within 25
days days days days
*counted from the end of the month or quarter *counted from the end of the month or quarter
Jan. 1, 2023 – no more monthly payment, only quarterly.
 BUSINESS TAX REPORTING
Business taxpayer had the following gross sales in the first quarter
of 2022: Jan. P220,000; Feb. P180,000 and March- P260,000

 If the business is VAT taxpayer he will report the receipts as follows:

January February March

Sales or receipts P220,000 P180,000 P660,000

BIR Form to use Form 2550M Form 2550M Form 2550Q

If the business is a NonVAT taxpayer he will report the receipts as follows:

January February March

Sales or receipts - - P660,000

BIR Form to use None None Form 2551Q

TRANSITION TO THE VALUE ADDED TAX
 The following illustrates the tax vatable receipts from his service business since
his start of business in January 1, 2022:
 Mr. Quezon had the following vatable receipts from his service business since his
start of business in January 1, 2022:

Vatable Cumulative Cost and Input

Receipts Receipts Expenses VAT
Jan 1-Sep 30 2,250,000 2,250,000 1,200,000 -
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 exceeds the P3M VAT threshold.
Since his receipts exceeded P3,000,000 by October 2022 , he is subject to VAT
prospectively starting November 2022. He is mandatorily required to update his
registration from a non-VAT to a VAT taxpayer on or before November 30,
2022.
Required: Compute the Business Tax and Income tax payable of Mr. Quezon. (Review the rules in
Income Taxation – see next slide)
 PURELY SELF-EMPLOYED AND/OR
MIXED INCOME EARNER
PROFESSIONAL (SEP) w/ gross sales/receipts

P3M & below Above P3M Compensation Plus Business/Prof. Income

P3M & below Above P3M

Regular Income
Tax

OR Regular Income
8%** tax on gross Tax
sales/Receipts and
Regular Income Regular Income OR
other operating
Tax Tax 8%** tax on gross
income in excess of Regular Income
P250,000 IN sales/Receipts and
Tax
LIEU of the other operating
graduated tax rate income LIEU of
the graduated tax
and Sec. 116
**Provided, the SEP is rate and Sec. 116
nonVAT registered, not **Provided, the SEP is
engaged in VAT-exempt- nonVAT registered, not
sales transactions; not engaged in VAT-exempt-
subject to OPT other than sales transactions; not
Sec. 116. which is 3%. subject to OPT other than
Sec. 116. which is 3%.
 TRANSITION TO THE VALUE ADDED TAX

A. Under the regular income tax option (Using Income Tax Table)
 Assuming Mr. Quezon opted to the regular tax option for the year 2022 in his first quarter 1701Q, he shall separately pay the regular income tax
computed per individual tax table and the 3% percentage tax under 2551Q.
 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, 2022
using 1701Q.
 On the other hand, Mr. Quezon must have paid his quarterly percentage tax using Form 2551Q until the end of the quarter ending September 30,
2022.

Required returns: Year 2022 Income Tax Due:

For October 2022:
Mr. Quezon shall file his last 2551Q adjustment return and Mr. Quezon’s taxable income for 2022 shall be:
pay the following percentage tax: Total receipts in 2022 5,250,000
October 2022 gross receipts P1, 000,000 Less: Total costs and expenses – 2022 3,200,000
Multiply by: 3% Taxable income 2,050,000
Percentage tax due 30,000
For November and December 2022:
Mr. Quezon shall file the following VAT returns and pay the Mr. Quezon shall file and pay the following taxes
following taxes: under Form 1701A:
BIR Form 2550M for November 2022:
Output VAT (1M x 12%) P120,000 Tax due on P2,050,000 income,
Less: Input VAT 74,000 per tax table 506,000
VAT still due 46,000 Less: Estimated income tax payments
(Form 1701Q) 205,000
BIR Form 2550Q for the 4th Quarter ending December 31, Income Tax still due 301,000
2022: Computation of tax (Jan.-Sep. 2022)
Output VAT ( 1M + 1M ) x 12% 240,000 2,250,000-1,200,000 = 1,050,000
Less: Input VAT (P74,000 + P62,000) 136,000 Tax on 800,000 130,000
250,000 x 30% = 75,000
VAT due 104,000 Total tax 205,000
Less: Estimated VAT payments – November 2550M 46,000
VAT still due 58,000
 TRANSITION TO THE VALUE ADDED TAX

B. Under the 8% Commuted Tax Option

Assuming Mr. Quezon opted to the 8% income tax in the first quarter of 2022, his option to the 8% income tax shall be invalidated., He shall be subjected to
regular income tax of the entire year 2022 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 2022 and he will be assessed percentage tax for all sales or receipts from January 1, 2022 to October 2022.
 As of third quarter, Mr. Quezon must have paid P160,000 in 8% income tax, computed as follows:

January to September receipts 2,250,000 Year 2022 Income Tax Due

Less: Exempt 250,000
Total 2,000,000 Mr. Quezon’s taxable income for 2022 shall be:
Multiply by 8% Total receipts in 2022 5,250,000
Less: Percentage tax expense 97,500
Income tax due 160,000
Taxable income 1,952,500
Oct. 2022 –Percentage tax (2551Q)
January – October 2022 3,250,000
Multiply by 3%
Percentage tax 97,500 Mr. Quezon shall file and pay the following taxes under
Form 1701A:
November & December 2022 (VAT) :
November, 2022 (2550M):
Tax due on P1,952,500 income,
Output VAT (1M x 12%) 120,000 per tax table 475,750
Less: Input VAT 74,000 Less: Estimated income tax payments
VAT still due 46,000 (Form 1701Q) 160,000
December 31, 2022 (2550Q): Income Tax still due 315,750

Output VAT (1M +1M ) x 12% 240,000 Computation of income tax:

Less: Input VAT (P74K + P62K) 136,000 First P 800,000 P130,000
VAT due 104,000 Excess 1,152,500 x 30% 345,750
Less: Estimated VAT payments – Nov. 2550M 46,000 Total 475,750
VAT still due 58,000
Summary: If taxpayer opted to avail:
Regular tax 8% Optional Tax:
1. He shall pay 1. He will pay income
income tax separate tax and not required
from percentage tax to pay percentage
2. He can deduct cost tax.
and expenses to 2. He can not deduct
arrive at taxable cost and expenses
income. to arrive at taxable
income.
 TRANSITION TO THE VALUE ADDED TAX

Non-Registration as VAT taxpayer

Assumed instead that Mr. Quezon paid P13,500 percentage tax in November and registered as a VAT taxpayer only in December 2022.
 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 benefit of input VAT in the period they are not properly registered.
 Hence, Mr. Quezon shall be required to pay the following additional assessment for November 2022:

Output VAT (1M x 12%) 120,000

Timing of VAT Registration
Less: Input VAT 0__
1. Persons commencing business with an
VAT still due 120,000 expectation to exceed the VAT threshold within
12 months shall simultaneously register as VAT
Mr. Quezon shall file a claim for refund or credit for taxpayer with the registration of their new
the P13,500 percentage tax paid as it is an business or trade with the BIR.
erroneous payment of tax considering that VAT 2. Persons exceeding the VAT threshold shall
should have been paid for that month. register as VAT taxpayer before the end of the
If claimed as tax credit, the same shall be taken as month following the month the threshold is
deduction against the tax due once approved by exceeded.
the BIR.
3. Franchise grantees of radio and television
Assuming a claim for tax credit is approved, the VAT broadcasting, whose gross annual receipt for the
payable shall be computed as follows:
preceding calendar year exceeded P10,000,000,
shall register as VAT taxpayer within 30 days
Output VAT (1M x 12%) 120,000 from the end of the calendar year (RR16-2005)
Less: Input VAT 0__ 4. Persons who are below the threshold but opt to
be registered as VAT taxpayer shall register not
VAT due 120,000
later than 10 days before the beginning of the
Less: Tax credit 13,500 taxable quarter.
VAT still due 106,500
IMPORTANT POINTS TO REMEMBER:

VAT treatment of exempt transactions

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

Essence of the VAT registration

No other practical advantage for a purely domestic-based business, to avail of optional VAT registration EXCEPT for
taxpayers who are into export business so that their export sales would be zero-rated rather 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 taxpayer 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.
2. Any person, other than franchise grantees of radio and 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 the 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.

◦ Businesses whose VAT registration has been cancelled will be registered or reverted back as non-VAT taxpayers. They will be
subject to the percentage tax on sales or receipts.

Penalty for registrable persons

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.