The Law on Taxation

Atty. Luis Gerardo C. Manabat C.P.A., F.I.C.D.

De La Salle University
 Module 4

Business Taxes
 BUSINESS TAXES

BUSINESS TAX IS A CLASS OF PRIVILEGE TAXES

Business taxes are to be distinguished from income tax that
income tax is imposed on the privilege to earn income while
business tax is for the privilege of engaging in activities relating
to business or the pursuit of an occupation, calling or
profession, regardless of whether it makes any profit or not.
The term “business” as used in the Tax Code means business
in trade or commercial sense only and not to refer to all
activities or concerns of a taxpayer.
 BUSINESS TAXES

Under the NIRC/Tax Code, the kinds of Business Taxes are:

 Value Added Tax
 Other Percentage Taxes
 Excise Taxes
 Documentary Stamp Taxes

There are other laws that can create or provide for other
business taxes but for purposes of Buslaw III, only the
above will be taken up.
 Module 4

Value Added Taxes

 VALUE ADDED TAXES

Value Added Tax, or VAT, is a consumption tax imposed at

every stage of the distribution process on the sale, barter,
exchange (including transactions that are deemed as a sale),
or lease of goods or properties and rendition of services in
the course of trade or business, or on the importation of
goods, whether such imported goods are for use in business
or not.

In simple terms, VAT is generally a tax on all sale of

goods and services.
 VALUE ADDED TAXES

VAT is based on the gross selling price or gross value in money

of the goods or properties sold, bartered, exchanged or the
gross receipts derived from the sale or exchange of services,
including the lease of goods or properties and the importation
of goods (which uses the landed cost as basis)

The original VAT Law was introduced in 1987 during the Cori
Aquino’s time in order to simplify the old complicated business
tax system by consolidating more than a dozen tax rates into a
single tax rate (12%) and in turn would generate more income
for the country.
 VALUE ADDED TAXES

VAT replaced the following taxes:

 Original Sales Tax – Taxes of manufacturers/producers
 Subsequent Sales Tax – Tax on subsequent sales
 Advanced Sales Tax – Tax on importation for Business
 Compensating Tax – Tax on importation for non-business
 Some Excise Tax
 Miller’s Tax
 Some Percentage Tax
 VALUE ADDED TAXES

HOW DOES IT WORK?

Manufacturer Wholesaler Retailer 1 Retailer 2 Consumer

Cost
Mark-up
Gross Selling Price
Output VAT
Gross Billing

VAT Computation
Output VAT
Less; Input VAT
VAT Due/Payable
 VALUE ADDED TAXES

VAT has provided for 3 kinds of transaction:

 VATable transactions are those transactions subject to the
12% VAT.
 Non-VAT transactions are those which are specifically
excluded or exempted from VAT and as such the rules of
VAT does not apply to these transactions.
 Zero-rated transactions are those, while covered by the
rules of VAT, produces no VAT impact because the rate
applied to it is 0%. However, all the other rules of VAT
would still apply to these transactions.
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VATable Transactions:
Except those specifically exempted, VAT applies to:
 Every sale, barter, exchange or lease of goods or
properties made in the course of trade or business
(including transactions deemed sale) or importation of
goods, whether for business or not.
 Every sale of service made in the course of trade or
business other than services rendered by persons subject
to “other percentage taxes” under Title V of the Tax Code.
 VALUE ADDED TAXES

What comprises “goods or properties”?

 The term "goods or properties" shall mean all tangible and
intangible objects, which are capable of pecuniary estimation
and shall include, among others:
 Real properties held primarily for sale to customers or held for lease in the
ordinary course of trade or business;
 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;
 The right or privilege to use in the Philippines of any industrial, commercial
or scientific equipment;
 The right or the privilege to use motion picture films, films, tapes and
discs; and
 Radio, television, satellite transmission and cable television time.
 VALUE ADDED TAXES

What comprises "sale or exchange of services"?

The term "sale or exchange of services" means the performance of
all kinds 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:
 Construction and service contractors;
 Stock, real estate, commercial, customs and immigration brokers;
 Lessors of property, whether personal or real;
 Persons engaged in warehousing services;
 Lessors or distributors of cinematographic films;
 Persons engaged in milling, processing, manufacturing or repacking
goods for others;
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What comprises "sale or exchange of services"? (continued)

 Proprietors, operators or keepers of hotels, motels, rest houses, pension
houses, inns, resorts, theatres, and movie houses;
 Proprietors or operators of restaurants, refreshment parlors, cafes, and other
eating places, including clubs and caterers;
 Dealers in securities;
 Lending investors;
 Transportation contractors on their transport of goods or cargoes, including
persons who transport goods or cargoes for hire and other domestic common
carriers by land relative to their transport of goods or cargoes;
 Common carriers by air and sea relative to their transport of passengers,
goods or cargoes from one place in the Philippines to another place in the
Philippines;
 VALUE ADDED TAXES

What comprises "sale or exchange of services"? (continued)

 Sale of electricity by generating, transmission by any entity including the
National Grid Corporation of the Philippines (NGCP), and distribution
companies including electric cooperatives shall be subject to twelve percent
(12%) VAT on their gross receipts.;
 Franchise grantees of electric utilities, telephone and telegraph, radio and/or
television broadcasting and all other franchise grantees, except franchise
grantees of radio and/or television broadcasting whose annual gross receipts
of the preceding year do not exceed Ten Million Pesos (P10,000,000.00), and
franchise grantees of gas and water utilities;
 Non-life insurance companies (except their crop insurances), including surety,
fidelity, indemnity and bonding companies; and
 Similar services regardless of whether or not the performance thereof calls for
the exercise of use of the physical or mental faculties.
 VALUE ADDED TAXES

What comprises "sale or exchange of services"? (continued)

 The supply of services by a nonresident person or his employee in connection
with the use of property or rights belonging to, or the installation or operation of
any brand, machinery or other apparatus purchased from such non-resident
person;
 The supply of technical advice, assistance or services rendered in connection
with technical management or administration of any scientific, industrial or
commercial undertaking, venture, project or scheme;
 The lease of motion picture films, films, tapes and discs; and
 The lease or the use of or the right to use radio, television, satellite
transmission and cable television time.
 VALUE ADDED TAXES

Deemed Sale:
 Transfer, use or consumption not in the course of business
of goods and properties originally intended for sale or for
use in the course of business.
 Distribution of goods or properties to shareholders or
investors as share in profit or to creditors in payment of
debts or obligations.
 Consignment of goods if actual sale is not made within
sixty (60) days following the date such goods were
consigned and the goods had not been returned before
this date.
 VALUE ADDED TAXES

Deemed Sale Transactions:

 Retirement from or cessation of business, with respect to
inventories of taxable goods existing as of such retirement
or cessation.

The above transactions, while technically not sales,

barter or trade transactions are viewed by the Tax Code
as if the items distributed, transferred or consumed had
been acquired from the business as a sale. Hence such
transactions will be subjected to VAT.
 VALUE ADDED TAXES

Non-VAT Transactions:(exmpted)
 Sale or importation of agricultural and marine food products in their
original state, livestock and poultry of a kind generally used as, or
yielding or producing foods for human consumption; and breeding
stock and genetic materials therefore;
 Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish,
prawn, livestock and poultry feeds, including ingredients, whether
locally produced or imported, used in the manufacture of finished
feeds (except specialty feeds for race horses, fighting cocks, aquarium
fish, zoo animals and other animals considered as pets);
 Importation of personal and household effects belonging to residents
of the Philippines returning from abroad and non-resident citizens
coming to resettle in the Philippines; Provided, that such goods are
exempt from custom duties under the Tariff and Customs Code of the
Philippines;
 VALUE ADDED TAXES

Non-VAT Transactions:(exmpted)
 Importation of professional instruments and implements, tools of trade,
occupation or employment, wearing apparel, domestic animals, and
personal and household effects ( except vehicles, vessels, aircrafts
machineries and other similar goods for use in manufacture which are
subject to duties, taxes and other charges) belonging to persons
settling in the Philippines or Filipinos or their families who are now
residents or citizens of other countries, such parties hereinafter
referred to as overseas Filipinos, in quantities and of a class suitable to
the profession, rank or position of the persons importing said items, for
their own use and not barter or sale, accompanying such persons, or
arriving within a reasonable time; Provided, That the Bureau of
Customs may, upon the production of satisfactorily evidence that such
persons are actually coming to settle in the Philippines and that the
goods are brought from their place of residence, exempt such goods
from payment of duties and taxes.
 VALUE ADDED TAXES

Non-VAT Transactions:(exmpted)
 Services subject to percentage tax under Title V of the Tax Code, as
amended;
 Services by agricultural contract growers and milling for others of palay
into rice, corn into grits, and sugar cane into raw sugar;
 Medical, dental, hospital and veterinary services except those
rendered by professionals;
 Educational services rendered by private educational institutions duly
accredited by the Department of Education (DepED), the Commission
on Higher Education (CHED) and the Technical Education and Skills
Development Authority (TESDA) and those rendered by the
government educational institutions;
 VALUE ADDED TAXES

Non-VAT Transactions:(exmpted)
 Services rendered by individuals pursuant to an employer-employee
relationship;
 Services rendered by regional or area headquarters established in the
Philippines by multinational corporations which act as supervisory,
communications and coordinating centers for their affiliates,
subsidiaries or branches in the Asia-Pacific Region and do not earn or
derive income from the Philippines;
 Transactions which are exempt under international agreements to
which the Philippines is a signatory or under special laws except those
granted under P.D. No. 529 - Petroleum Exploration Concessionaires
under the Petroleum Act of 1949;
 Export sales by persons who are not VAT-registered;
 VALUE ADDED TAXES

Non-VAT Transactions:(exmpted)
 Sales by agricultural cooperatives duly registered and in good standing
with the Cooperative Development Authority (CDA) to their members,
as well as of their produce, whether in its original state or processed
form, to non-members, their importation of direct farm inputs,
machineries and equipment, including spare parts thereof, to be used
directly and exclusively in the production and/or processing of their
produce;
 Gross receipts from lending activities by credit or multi-purpose
cooperatives duly registered and in good standing with the
Cooperative Development Authority;
 Sales by non-agricultural, non-electric and non-credit cooperatives
duly registered with and in good standing with CDA; Provided, that the
share capital contribution of each member does not exceed Fifteen
Thousand Pesos (P15,000.00) and regardless of the aggregate capital
and net surplus ratably distributed among the members;
 VALUE ADDED TAXES

Non-VAT Transactions:(exmpted)
The following sales of real properties:
 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 properties utilized for low-cost housing as defined by
RA No. 7279, otherwise known as the "Urban Development and
Housing Act of 1992" and other related laws, such as RA No. 7835
and RA No. 8763;
 Sale of real properties utilized for specialized housing as defined
under RA No. 7279, and other related laws, such as RA No. 7835
and RA No. 8763, wherein price ceiling per unit is Php 450,000.00
or as may from time to time be determined by the HUDCC and the
NEDA and other related laws;
 VALUE ADDED TAXES

Non-VAT Transactions:(exmpted)
The following sales of real properties:
 Sale of house and lot and other residential dwellings valued at Two
Million Pesos (P2,000,000.00) and below, as adjusted to
P3,199,200.00 as adjusted by the 2010 Consumer Price Index
values to be adjusted every three (3) years thereafter. (If two or
more adjacent lots are sold or disposed in favor of one buyer, for
the purpose of utilizing the lots as one residential lot, the sale shall
be exempt from VAT only if the aggregate value of the lots do not
exceed One Million Five Hundred Thousand Pesos
(P1,500,000.00). Adjacent residential lots, although covered by
separate titles and/or separate tax declarations, when sold or
disposed to one and the same buyer, whether covered by one or
separate Deed of Conveyance, shall be presumed as a sale of one
residential lot.)[As amended by CREATE Law and RR 8-2021]
 VALUE ADDED TAXES

Non-VAT Transactions:(exmpted)
 Lease of residential units with a monthly rental per unit not exceeding
Fifteen Thousand Pesos (P15,000.00), regardless of the amount of
aggregate rentals received by the lessor during the year; Provided,
that not later than January 31, 2009 and every three (3) years
thereafter, the amount of P10,000.00 shall be adjusted to its present
value using the Consumer Price Index, as published by the Philippine
Statistics Authority (Formerly known as NSO);
 Sale, importation, printing or publication of books and any newspaper,
magazine, review or bulletin which appears at regular intervals with
fixed prices for subscription and sale and which is not devoted
principally to the publication of paid advertisements;
 Transport of passengers by international carriers;
 VALUE ADDED TAXES

Non-VAT Transactions:(exmpted)
 Sale, importation or lease of passenger or cargo vessels and aircraft,
including engine equipment and spare parts thereof for domestic or
international transport perations; Provided, that the exemption from
VAT on the importation and local purchase of passenger and/or cargo
vessels shall be subject to the requirements on restriction on vessel
importation and mandatory vessel retirement program of Maritime
Industry Authority (MARINA);
 VALUE ADDED TAXES

Non-VAT Transactions:(exmpted)
 Importation of fuel, goods and supplies by persons engaged in
international shipping or air transport operations; Provided, that the
said fuel, goods and supplies shall be used exclusively or shall pertain
to the transport of goods and/or passenger from a port in the
Philippines directly to a foreign port, or vice-versa, without docking or
stopping at any other port in the Philippines unless the docking or
stopping at any other Philippine port is for the purpose of unloading
passengers and/or cargoes that originated form abroad, or to load
passengers and/or cargoes bound for abroad; Provided, further, that if
any portion of such fuel, goods or supplies is used for purposes other
that the mentioned in the paragraph, such portion of fuel, goods and
supplies shall be subject to 12% VAT;
 VALUE ADDED TAXES

Non-VAT Transactions:(exmpted)
 Services of banks, non-bank financial intermediaries performing quasi-
banking functions, and other non-bank financial intermediaries, such
as money changers and pawnshops, subject to percentage tax under
Sections 121 and 122, respectively of the Tax Code; and
 Sale or lease of goods and services to senior citizens and persons
with disabilities, as provided under Republic Act Nos. 9994 (Expanded
Senior Citizens Act of 2010) and 10754 (An Act Expanding the Benefits
and Privileges of Persons with Disability), respectively;
 Transfer of property in merger or consolidation (pursuant to Section
40(C)(2) of the Tax Code, as amended);
 VALUE ADDED TAXES

Non-VAT Transactions:(exmpted)
 Association dues, membership fees, and other assessments and
charges collected on a purely reimbursement basis by homeowners’
associations and condominium established under Republic Act No.
9904 (Magna Carta for Homeowners and Homeowner’s Association)
and Republic Act No. 4726 (The Condominium Act), respectively;
 Sale of gold to the Banko Sentral ng Pilipinasn (BSP) (previously zero-
rated transaction);
 Sale of drugs and medicines prescribed for diabetes, high cholesterol,
and hypertension (beginning on January 1, 2019 as determined by the
Department of Health); and
 VALUE ADDED TAXES

Non-VAT Transactions:(exmpted)
 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 (Php 3,000,000.00). Note: Self-employed
individuals and professionals availing of the 8% on gross sales and/or
receipts and other non-operating income, under Sections 24 (A)(2)(b)
and 24 (A)(2)(c)(2) of the NIRC shall also be exempt from the payment
of twelve (12%) VAT.
 VALUE ADDED TAXES

Zero-Rated Transactions:
 Processing, manufacturing or repacking goods for other persons
doing business outside the Philippines which goods are
subsequently exported where the services are paid for in
acceptable foreign currency and accounted for in accordance
with the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP);
 Services other than processing, manufacturing or repacking
rendered to a person engaged in business conducted outside
the Philippines or to a non-resident person engaged in business
who is outside the Philippines when the services are performed,
the consideration for which is paid for in acceptable foreign
currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);
 VALUE ADDED TAXES

Zero-Rated Transactions: (continued)

 Services rendered to persons or entities whose exemption under
special laws or international agreements to which the Philippines
is a signatory effectively subjects the supply of such services to
zero percent (0%) rate;
 Services rendered to persons engaged in international shipping
or air transport operations, including leases of property for use
thereof; Provided, that these services shall be exclusively for
international shipping or air transport operations. (Thus, the
services referred to herein shall not pertain to those made to
common carriers by air and sea relative to their transport of
passengers, goods or cargoes from one place in the Philippines
to another place in the Philippines, the same being subject to
twelve percent (12%) VAT under Sec. 108 of the Tax Code, as
amended);
 VALUE ADDED TAXES

Zero-Rated Transactions: (continued)

 Services performed by subcontractors and/or contractors in
processing, converting, or manufacturing goods for an enterprise
whose export sales exceeds seventy percent (70%) of total
annual production;
 Transport of passengers and cargo by domestic air or sea
carriers from the Philippines to a foreign country. (Gross receipts
of international air carriers and international sea carriers doing
business in the Philippines derived from transport of passengers
and cargo from the Philippines to another country shall be
exempt from VAT; however they are still liable to a percentage
tax of three percent (3%) based on their gross receipts derived
from transport of cargo from the Philippines to another country
as provided for in Sec. 118 of the Tax Code, as amended); and
 VALUE ADDED TAXES

Zero-Rated Transactions: (continued)

 Sale of power or fuel generated through renewable sources of
energy such as, but not limited to, biomass, solar, wind,
hydropower, geothermal and steam, ocean energy, and other
shipping sources using technologies such as fuel cells and
hydrogen fuels; Provided, however that zero-rating shall apply
strictly to the sale of power or fuel generated through renewable
sources of energy, and shall not extend to the sale of services
related to the maintenance or operation of plants generating said
power.
 VALUE ADDED TAXES

Zero-Rated Transactions: (continued)

The Following are also Zero-rated:
 Export Sales
 The sale of raw materials or packaging materials to a non-
resident buyer for delivery to as a resident local export-oriented
enterprise to be used in manufacturing, processing, packing or
repacking in the Philippines of the said buyer's goods, paid for in
acceptable foreign currency, and accounted for in accordance
with the rules and regulations of the BSP;
 The sale of raw materials or packaging materials to an export-
oriented enterprise whose export sales exceed seventy percent
(70%) of total annual production;
 VALUE ADDED TAXES

Zero-Rated Transactions: (continued)

 The sale of raw materials or packaging materials to a non-resident
buyer for delivery to as a resident local export-oriented enterprise to
be used in manufacturing, processing, packing or repacking in the
Philippines of the said buyer's goods, paid for in acceptable foreign
currency, and accounted for in accordance with the rules and
regulations of the BSP;
 The sale of raw materials or packaging materials to an export-
oriented enterprise whose export sales exceed seventy percent
(70%) of total annual production;
 Transactions considered export sales under Executive Order No.
226, otherwise known as the Omnibus Investments Code of 1987,
and other special laws; and
 VALUE ADDED TAXES

Zero-Rated Transactions: (continued)

 The sale of goods, supplies, equipment and fuel to persons
engaged in international shipping or international air transport
operations; Provided, That the goods, supplies, equipment, and fuel
shall be used exclusively for international shipping or air transport
operations; Provided, that the same is limited to goods, supplies,
equipment and fuel that shall be used in the transport of goods and
passengers from a port in the Philippines directly to a foreign port,
or vice-versa without docking or stopping at any other port in the
Philippines unless the docking or stopping at any other Philippine
port is for the purpose of unloading passengers and/or cargoes that
originated from abroad, or to load passengers and/or cargoes
bound for abroad;
 VALUE ADDED TAXES

Zero-Rated Transactions: (continued)

Provided, further, that if any portion of such fuel, goods or supplies
is used for purposes other than the mentioned in this paragraph,
such portion of fuel, goods and supplies shall be subject to twelve
percent (12%) output VAT.
 Sales to Persons or Entities Deemed Tax-exempt under
Special Law or International Agreement
 VALUE ADDED TAXES

Zero-Rated Transactions: (continued)

 Upon the successful establishment and implementation
of an enhanced VAT refund system by the Department
of Finance (DOF), the following transactions will no
longer be subject to zero percent (0%) but rather twelve
percent (12%)
 The sale of raw materials or packaging materials to a non-
resident buyer for delivery to a resident local export-oriented
enterprise to be used in manufacturing, processing, packing or
repacking in the Philippines of the said buyer's goods, paid for
in acceptable foreign currency, and accounted for in
accordance with the rules and regulations of the BSP;
 VALUE ADDED TAXES

Zero-Rated Transactions: (continued)

 The sale of raw materials or packaging materials to an export-
oriented enterprise whose export sales exceed seventy
percent (70%) of total annual production;
 Transactions considered export sales under Executive Order
No. 226, otherwise known as the Omnibus Investments Code
of 1987, and other special laws
 Processing, manufacturing or repacking goods for other
persons doing business outside the Philippines which goods
are subsequently exported where the services are paid for in
acceptable foreign currency and accounted for in accordance
with the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP); and
 VALUE ADDED TAXES

Zero-Rated Transactions: (continued)

 Services performed by subcontractors and/or contractors in
processing, converting, or manufacturing goods for an
enterprise whose export sales exceeds seventy percent (70%)
of total annual production.
 VALUE ADDED TAXES

EOPTA ITEMS RELATING TO VAT

Documentation of VAT
 EOPTA adopted the accrual method in documenting VAT
transactions. This means that VAT is assessed upon
invoice of the transaction.
 Previously, VAT was assessed upon issuance of invoice for
sales of goods and upon issuance of official receipts for
sales of service.
 This adoption of accrual means that regardless of whether
the invoice is paid or not, VAT would be assessed on the
transaction.
 VALUE ADDED TAXES

EOPTA ITEMS RELATING TO VAT

Documentation of VAT
EOPTA did however introduce rules to take into consideration
concerns raised by service providers which are:
 Sales Allowances and Discounts – The law now accepts
that Sales Allowances and Discounts from the Sales of the
taxpayer for the quarter in which the refund or credit
memorandum has been issued.
 VAT on Bad Debts – The law now recognizes that VAT paid
for sales which could not be collected, can now be deducted
from the VAT liability of the taxpayer provided VAT had been
fully paid on the said transaction and the VAT was not
included in the deduction of Bad Debts from Income Tax.
 End of Module 04

ANY QUESTIONS?