CHAPTER 3 (PART 1):

INTRODUCTION TO BUSINESS TAXATION

Prepared by: Carl Justine T. Maniago, CPA
NATURE OF BUSINESS TAX
A. RELATIVE CONSUMPTION TAX
Business tax is imposable only when the seller is a business.

B. INDIRECT TAX
Tax is collected from the seller rather than the buyer-consumer.

C. PRIVILEGE TAX
It is viewed as a tax on the privilege to do business.

D. NATIONAL TAX
It is imposed by the national government.
TYPES AND COMPARISON OF BUSINESS TAXES

POINT OF VAT PERCENTAGE TAX EXCISE TAX

DIFFERENCES
Timing of Sale Sale Production/Import
imposition
Nature Primary tax Primary tax Additional tax

Subject businesses Any business, in Any business, in Only producers or

general general importers of
excisable products or
services
Taxpayers Business only Business only Business or non-
business
Usual taxpayers Big businesses Small businesses Big/small businesses

Accounting Liability Expense Asset/Liability

treatment
PROCEDURES OF BUSINESS TAXATION
1. Evaluate if the sale 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.

2. Identify the taxable person.

A. If individual, include all proprietorship businesses including branches of
the individual tax payer.
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.
PROCEDURES OF BUSINESS TAXATION
4. Classify the sales of receipts whether they are:
A. Exempt sales or receipts – pay no business tax
B. Sales or receipts subject to specific % tax – pay specific % 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 % tax then
determine the magnitude of 12-month vatable sales at the end of every
month:
- If it exceeds P3M – the person shall register as VAT taxpayer; pay VAT
prospectively effective on the succeeding monthly vatable
sales/receipts.
PROCEDURES OF BUSINESS TAXATION

- If it does not exceed P3M – the person shall continue paying the 3%
general % tax on the vatable sales/receipts.

6. Determine if the goods or services offered is excisable.

A. If yes, pay the applicable excise tax in addition to VAT and or percentage
tax.
B. If not, pay only VAT and or percentage tax.
WHAT IS BUSINESS?

BUSINESS refers to a habitual engagement in a

commercial activity involving the sale of goods or
services for a profit.

ELEMENTS OF BUSINESS:
1. Habitual Engagement
2. Commercial Activity
ELEMENTS OF BUSINESS:
HABITUAL ENGAGEMENT

 There must be regularity in transactions.

 Isolated and casual sales are not regular activities.

 Manifested by registration with the appropriate government agencies as a

dealer or as a service provider in a particular trade or vocation. Non-
registration is NOT an excuse to business tax.

 A casual sale transaction is not a business even if profit is derived from the
transaction. The regular selling of goods or services for a profit is a
business despite the absence of actual profit from such activity.
ELEMENTS OF BUSINESS:
HABITUAL ENGAGEMENT

ILLUSTRATION 1:
Mang Merto, a realty dealer, purchased shares of stocks as investments and
sold them at a profit. Is the activity subject to business tax?

No, sale of stocks investments by a realtor are not made in the course of
realty business.

What if Mang Merto is a security dealer?

Transaction is subject to business tax.

ELEMENTS OF BUSINESS:
HABITUAL ENGAGEMENT

ILLUSTRATION 2:

Joshua is a proprietor regularly engaged in trading merchandise. During the

month, he reported the following:
Sales of merchandise P 800,000
Sale of personal car 1,200,000
Which sale is subject to business tax?

The P800k sales is subject to business tax. P1.2M sales is outside the
merchandising business, hence, not subject to business tax.
ELEMENTS OF BUSINESS:
HABITUAL ENGAGEMENT

PRIVILEGE STORES
 Most commonly known as tiangge.
 Stalls or outlets not permanently fixed to the ground which are put up
during special events such as festivals or fiestas.
 The store is engaged in a business activity for a cumulative period of not
more than 15 days.

PRIVILEGE STORE OPERATORS

 They shall not be considered habitually engaged in business considering their
limited activity.
 Exempt from business tax BUT subject to income tax.
ELEMENTS OF BUSINESS:
HABITUAL ENGAGEMENT

ILLUSTRATION 1:

Mang Andro makes key chains and wood art for sale to tourists during 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.

Is the sales of Mang Andro subject to business tax?

No, Mang Andro is not considered habitually engaged in business.

ELEMENTS OF BUSINESS:
HABITUAL ENGAGEMENT

ILLUSTRATION 2:

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.

Is the P400,000 sales subject to business tax?

Yes, Danes Bakeshop is not a privilege store since it is an established and

regularly operating business.
ELEMENTS OF BUSINESS:
COMMERCIAL ACTIVITY

 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

unrestricted amount of pecuniary gains.

 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

2. Non-profit organizations or associations

3. Employment

4. Directorship in a corporation

5. Business for mere subsistence

1. GOVERNMENT AGENCIES AND INTRUMENTALITIES

 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 reimbursement.

ILLUSTRATION:
The Professional Regulations Commission (PRC) collected P12M from
professional license fees during the month. It also earned additional P1M from
rental income on its vacant premises. Which activity is subject to business tax
and which is not?

P12M receipt is exempt from business tax. Leasing is a commercial activity,

hence P1M is subject to business tax.
2. NON-PROFIT OR CHARITABLE ORGANIZATIONS

 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 profit.

ILLUSTRATION:
Union of Husbands Afraid of Wife (UHAW) is a non-profit social welfare
institution for the assistance of battered husbands. UHAW received P2M
contributions from the public and gathered P400K from the sales of a gift shop in
its fund-raising drive. Which activity is subject to business tax and which is not?

P2M receipt is exempt from business tax. Selling of the gift-shop is a

commercial activity and is subject to business tax.
3. EMPLOYMENT

 Employee benefits derived under employment is not subject to business tax

but only to income tax.

ILLUSTRATION:
Bernard Bakilan, a Certified Public Accountant, practices his profession in
the industry as the Chief Financial Officer of UHAW. During the month, he
received P50K compensation plus P10K fringe benefits. Which activity is subject
to business tax and which is not?

Employment does not involve sales of services to clients or customers.

Compensation income and the fringe benefits are not subject to business tax.
4. DIRECTORSHIP IN A CORPORATION

 Although a director may not be an employee, director’s fee, per diems, and
allowances are not derived in an economic or commercial activity or
rendering of services to clients for a fee.

ILLUSTRATION 1:
Mr. Agua is an independent director if Aga Corporation receiving director’s
fees, per diems, and allowances totaling P15K per board meeting appearances. Is
Mr. Agua subject to business tax?
No.

What if Mr. Agua is an employee of Aga Corporation?

Mr. Agua’s director’s fees shall be part of his compensation income and is
not likewise subject to business tax.
4. DIRECTORSHIP IN A CORPORATION

ILLUSTRATION 2:

John, a Certified Public Accountant, renders his services to the public for a
fee. Is he subject to business tax?

The exercise of profession by regularly rendering services to clients for a

fee is considered a business subject to business tax.
5. BUSINESS PRINCIPALLY FOR SUBSISTENCE

BUSINESS PRINCIPALLY FOR SUBSISTENCE/LIVELIHOOD

 Businesses with gross sales or receipts not exceeding P100k per year.

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 P100K in any 12-month period.
 Examples: subsistential farmers/fishermen, small sari-sari stores, small
carinderias or “turo-turos”, drivers or operators of a single unit tricycle
 It doesn’t include licensed professionals, consultants, artists, sales agents,
brokers.
 Subject to income tax.
BUSINESS TAXPAYERS
RULES:
1. Every 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 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.
BUSINESS TAXPAYERS

ILLUSTRATION 1:
Mr. Ysmael, an accounting practitioner, has two other commercial businesses
with the following receipts and sales:
Mr. Ysmael’s practice P 1, 200,000
Business 1 800,000
Business 2 700,000
Are Mr. Ysmael’s other commercial businesses subject to business tax
separate from his practice of profession?

No, the sales and receipts totaling P2.7M shall be taxable to Mr. Ysmael as
the taxable person.
BUSINESS TAXPAYERS

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 P 2,000,000
Manila City branch 1,800,000
Quezon City branch 1,200,000
Are the two branches subject to business tax separate from the head office?

No, branches are not taxable persons. All the sales shall be reported to the
BIR RDO in the principal place of the business – Makati City.
BUSINESS TAXPAYERS

ILLUSTRATION 3:

ABC Company has a branch in Manila City and a subsidiary, XTB Company, in
Davao City.
A. What if ABC Company transfers goods to Manila City branch? Is the
activity subject to business tax?
B. What if there’s an intercompany sales between ABC Company and XTB
Company? Is this subject to business tax?
C. Will the transaction between XTB Company and the Manila City
branch be subject to business tax?

A. No
B. Yes
C. Yes
BUSINESS ACTIVITIES

The basis of business tax differs on the activities businesses are engaged on.

TYPES OF BUSINESS ACTIVITIES:

1. Sales or exchange of goods or properties

 Refers to all tangible and intangible objects which are capable of pecuniary
estimation.

2. Sales or exchange of services

 Performance of all kind of services in the Philippines for others for a fee,
remuneration or consideration, whether in kind or cash.
BASIS OF BUSINESS TAX PER TYPE OF ACTIVITY:
GROSS SELLING PRICE

 Total amount of money or its equivalent which the purchaser pays or is

obligated to pay to the seller in consideration of the sale, barter or exchange
of goods or properties.
 Excise tax, if any, shall form part of the gross selling price.
 Includes sales made in cash, on credit and on installment basis and is
analogous to the income taxation concept of “gross sales” except only on
treatments of contingent discount.
 Allowable deductions from gross selling price:
 Discounts determined and granted at the time of the sale, which are expressly
indicated in the invoice, in the amount thereof forming part of the gross sales and
are duly recorded in the books of accounts. They must not be dependent upon the
happening of future event or contingency.
 Sales returns and allowances for which a proper credit or refund was made
during the month or quarter to the buyer on taxable sales.
BASIS OF BUSINESS TAX PER TYPE OF ACTIVITY:
GROSS SELLING PRICE

ILLUSTRATION:

HTC Corporation sold various specialized equipment to a buyer with the

following terms:

List price P 2,000,000

Freight 50,000
Installation fee 20,000
Trade discounts 10%
Cash discounts, 2%/30 net of 60 days 36,000

Determine the gross selling price.

BASIS OF BUSINESS TAX PER TYPE OF ACTIVITY:
GROSS SELLING PRICE

ILLUSTRATION:

List price P 2,000,000

Less: Trade discounts (10% x P2M) 200,000
Net price P 1,800,000
Freight 50,000
Installation fee 20,000
Gross selling price P1,870,000
BASIS OF BUSINESS TAX PER TYPE OF ACTIVITY:
GROSS RECEIPTS

 Refers to the total amount of money or its equivalent representing the

contract price, compensation, service fee, rental or royalty, including the
amount charged for materials supplied with the services or deposits applied
as payments for services, rendered and advanced payments actually or
constructively received during the taxable period for the services performed
or to be performed to another person, excluding VAT.
BASIS OF BUSINESS TAX PER TYPE OF ACTIVITY:
GROSS RECEIPTS

ILLUSTRATION:

A laundry business had the following transactions during the month:

Cash collection for the services done P 400,000

Cash collection for services not yet started 100,000
Receivables on services rendered 600,000
Purchases of goods and services 448,000

Determine the gross receipt.

BASIS OF BUSINESS TAX PER TYPE OF ACTIVITY:
GROSS RECEIPTS

ILLUSTRATION:

Cash fees P 400,000

Advances by customers 100,000
Gross receipts P500,000
BASIS OF BUSINESS TAX PER TYPE OF ACTIVITY:
GROSS RECEIPTS

CONSTRUCTIVE RECEIPTS
 Occurs when the money consideration or its equivalent is placed at the
control of the person who renders the services without restriction by the
payor. This is added as part of gross receipts.

 Examples:
 Deposit in a bank account of the seller made by the buyer in consideration of
services rendered or goods sold
 Issuance by the debtor a notice to offset any debt or obligation and acceptance
thereof of the seller as payment for services rendered
 Transfer of the amounts retained by the payor to the account of the contractor
BASIS OF BUSINESS TAX PER TYPE OF ACTIVITY:
GROSS RECEIPTS

ILLUSTRATION:

Miss Leah Mado is a pozo negro contractor. She had the following fees for the
month:

A. P10,000 from Cipher Company, net of P30,000 debt of Miss Leah from
the company
B. P15,000 deposited to Miss Leah’s bank account
C. P20,000 cash share from a general professional partnership, P30,000
undistributed share was credited to her capital account

Compute the gross receipt.

BASIS OF BUSINESS TAX PER TYPE OF ACTIVITY:
GROSS RECEIPTS

ILLUSTRATION:

Receipts from Cipher (10k + P30k) P 40,000

Fees deposited to Leah’s bank account 15,000
Gross receipts P 55,000

The share from the net income of a GGP is not gross receipts since
Miss Leah is not selling services to the GGP.
BASIS OF BUSINESS TAX PER TYPE OF ACTIVITY:
GROSS RECEIPTS

AGENCY MONIES
 Amounts earmarked for payment to an unrelated third party or received as
reimbursement for advanced payment on behalf of another which do not
redound to the benefit of the payor and are not part of gross receipts.

INSURANCE PROCEEDS ON DAMAGED ASSETS

 Not viewed as sales or receipts for purposes of business taxation.
 The compulsory or involuntary conversion of property into money such as in
the case of insurance reimbursement is not viewed as a sale in the ordinary
course of business.
BASIS OF BUSINESS TAX PER TYPE OF ACTIVITY:
GROSS RECEIPTS
ILLUSTRATION:

PC Repair Company received the following amounts during the month:

Cash collection from clients P 400,000
Reimbursements for out-of-pocket costs
incurred in servicing clients 50,000
Reimbursement for client expenses paid
by PC Repair Company 80,000
Proceeds of fire insurance 400,000
Receipt of bank loan 500,000
Receipt of agency money to be remitted to
a sister company 100,000

Compute the gross receipts.

BASIS OF BUSINESS TAX PER TYPE OF ACTIVITY:
GROSS RECEIPTS

ILLUSTRATION:

Cash collection from clients P 400,000

Reimbursements for out-of-pocket costs
incurred to clients 50,000
Gross receipts P450,000