MODULE 1

INTRODUCTION TO BUSINESS TAXES

Business is the regular conduct of commercial and economic activity with the primary motive of
profit or livelihood. The secondary concerns of business may fall under the categories of social
responsibility, environmental safety or promotion, and safeguarding or public welfare and
interest.

The primary objective of business, therefore, is to earn profit and its co-equal secondary
objective is the social responsibility to all stakeholders.

All businesses perform various activities daily. These may be classified as either business
activities or not. Business tax covers only those transactions that are classified as business
activities especially those involving the sale of goods or services.

When is an activity considered a business activity?

For an activity to be considered as a business activity, there must be:
1. Habitual Engagement; and
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 form such activity.

For example:
Mrs. Ellerton, a medical practitioner, sold his principal residence for P10 Million.

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 business tax.

Another example:
Mang Merto, a realty dealer, purchased shares of stocks as investment and sold them at a
profit.
The acquisition and sale of stocks 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.

Still another example:

Joshua is a proprietor regularly engaged in trading merchandise. During the month, he
reported the following:
Sales of merchandise 800,000
Sale of personal car 1,200,000

The P800,000 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 during special events 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.

For example:
Mang Andro makes key chains and wood art for sale to tourists dueing the annual Panagbenga
Festival. He rented a booth from the City of Baguio, the tiangge organizer, and recorded sales
of P350,000 over the weeklong activities.

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.

Another Example:
Danes Bakeshop, 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 established and regularly operating
business. The P400,000 sales on the event shall be subject to the usual business tax.

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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 or services a business tax. The sales of services by non-residents
are subjected to the final withholding tax.

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
Public service
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
reimbursements. The government cannot tax itself.

2. Non-profit organizations or associations

Charity
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 a profit.

3. Employment
Doesn’t involve sale of goods and services
Employment is not a commercial activity as it does not involve sales of services to clients
or customers. Compensation income and employee benefits derived under employment
is not subject to business tax but only to income tax.

4. 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).

5. Business for mere subsistence Small businesses

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

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 Marginal income earners – refer 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.

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. Others similarly situated

The term marginal income earners do not include licensed professionals, consultants,
artists, sales agents, brokers, including all others whose income have been subjected to
withholding tax (RMC7-2014).

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

CONCEPT AND NATURE OF BUSINESS TAXES

Business tax is a tax imposed on the onerous transfer of product, property, and services.

Onerous transfer means that there is monetary consideration involved in the transfer of goods
or services between the owner and the buyer. However, if the transfer of goods or services is
without consideration, (i.e. for free), the transfer is said to be gratuitous. Gratuitous transfer is
subject not to business tax, but to Transfer Tax.

Onerous Transfer subject to Business Tax:

1. Value-added Tax
2. Percentage Tax
3. Excise Tax

Gratuitous Transfer subject to Transfer Tax:

1. Estate Tax
2. Donor’s Tax

COVERAGE OF VALUE-ADDED TAX:

The value-added tax is imposed on the following:
1. Sale of goods or properties in the ordinary course of the business
2. Sale of services and use or lease of properties in the ordinary course of the business
3. Importation of goods or properties whether or not in the course of business or trade

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COVERAGE OF PERCENTATE TAX:
The percentage tax is generally imposed on services. The following taxes are among those
percentage taxes mentioned in Sections 116-127, NIRC, as amended:
1. Tax on persons exempt from VAT
2. Common Carrier’s Tax
3. Tax on International Carriers
4. Franchise Tax
5. Overseas communications tax
6. Tax on Banks and Non-Bank Financial Intermediaries Performing Quasi-Banking
Functions (“GRT”)
7. Tax on Finance Companies
8. Tax on Life Insurance Premiums (Premium Tax)
9. Tax on Agents of Foreign Insurance Companies
10. Amusement Taxes
11. Winnings (from Horse Races)
12. Stock Transaction Tax

COVERAGE OF EXCISE TAX

The excise tax within the context of business tax is imposed on the following (Secs. 129-151,
NIRC, as amended):
1. Alcohol products, such as distilled spirits, wines and fermented liquors
2. Tobacco products, such as cigars and cigarettes
3. Petroleum products, such as gas, gasoline, diesel, wax, lubricant oils and greases,
kerosene, naphtha, denatured alcohol, coke, asphalt and bunker fuel oil
4. Mineral products whether as metallic or non-metallic minerals and quarry resources
5. Miscellaneous articles, such as automobiles, non-essential goods like jewelry, perfume
and yacht, and sweetened beverages like soft drinks and sweetened drinks
6. Non-essential services such as cosmetic surgery

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 the proprietorship businesses including branches of the
individual taxpayer
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

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 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 P3,000,000 – 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 to 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 or percentage tax.
b. If not, pay only VAT or percentage tax.

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 sale and receipts are 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

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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.

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

P 2,000,000 P 1,800,000 P 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 ROD 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.

TYPES OF BUSINESS TAXPAYERS

A taxable person shall register either as:
a. VAT taxpayers
b. 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:

a. Sale or exchange of goods or properties
Goods or properties refer 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 or held for lease in the
ordinary course of trade or business;

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 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 in the Philippines of any industrial, commercial
or scientific equipment;
4. The right or the privilege to use motion picture films, films, tapes and discs; and
5. Radio, television, satellite transmission and cable television time.

b. Sale or exchange of services or lease of properties

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 of goods for
others;
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 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;
12. 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;
13. Sales of electricity by generation and distribution companies;
14. 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 PhP10 million, and franchise grantees of gas
and water utilities;
15. Non-life insurance companies (except their crop insurances) including surety,
fidelity, indemnity and bonding companies;
16. Similar services regardless of whether or not the performance thereof calls for
the exercise of or use of the physical and mental faculties;
17. The lease or the 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;

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 18. The lease or the use of, or the right to use of any industrial, commercial or
scientific equipment;
19. The supply of 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 of enabling the application or enjoyment of any such property or right
as is mentioned in item (r) above or any such knowledge or information as is
mentioned in item (s) above;
21. The supply of services by a non-resident 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;
22. 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;
23. The lease of motion picture films, tapes and discs;
24. The lease or the use of, or the right to use, radio, television, satellite
transmission and cable television time;
25. Real estate investment trust, on its disposal of real property and from rental of
such real property; and
26. Tollway operators;
aa. Recreational clubs; and
bb. Condominium corporations and homeowners’ association.

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.