Taxation 2

BUSINESS TRANSACTIONS

Business Transactions
Are also called Commercial Transactions
Refers to the regularity of undertaking for profit
purposes
Generally results to sales for transfer of goods in
the conduct of business or gross receipts for
leasing and rendering service in exchange for a
consideration.

Classification of Business Transactions

1. VAT Taxable Transactions:
a)
b)

Allowed with Input VAT

NOT allowed with Input VAT

2. Zero-VAT Rated Transactions

3. VAT-exempt Transactions:
a)
b)

Exempt from Other Percentage Tax

Subject to Other Percentage Tax

4. Transactions with government units.

1. VAT Taxable Transactions

a) Allowed with Input VAT
Transactions entered into of a VAT-registered business on
its Sales or Gross Receipts and on consumptions or
transfers by VAT-registered business, deemed sales.
Basic Business Tax computation:
Output VAT (12% Sales)
Less:Input VAT (12% Purchases from VAT person)
Net VAT payable (Refund)

xxx
xxx
xxx

Output VAT- 12% of GROSS SALES OR RECEIPTS (applicable)

Input VAT- 12% of its PURCHASES to VAT-registered person or
provider

1. VAT Transactions
a) Allowed with Input VAT
Illustration:
X is a VAT-registered person. During the period, his purchases
of goods for sale before VAT amounted to P750,000. These
purchases were made from another VAT person who shifted
the 12% VAT to X.
If the same goods were all sold by X in the same period for a
total selling price of P850,000, before VAT, the business tax
liability of X would be:
Output VAT (850,000 x 12%)
Less: Input VAT (750,000 x 12%)
Net VAT payable

102,000
90,000
12,000

1. VAT Taxable Transactions

b) NOT Allowed with Input VAT
Transactions entered into of a Non- VAT business wherein its
annual gross sales or receipts exceeds P1,919,500 annually
Illustration:
X, a non-VAT registered business, has total annual sales of
2,000,000. Its total purchases of merchandise from VAT
registered suppliers amounted to 1,344,000, inclusive of 12%
VAT.
Tax Base (Sales) 2,000,000
VAT rate 12%
Business Tax Liability or VAT payable

240,000

1. VAT Taxable Transactions

VAT Taxable transactions that are not allowed to deduct Input
VAT:
1.Non-VAT business with Sales or Gross receipts of more than
1,919,500 per year which are not among the VAT-exempt and not
among those exclusively subject to OPT
2.Non-VAT franchise grantees of radio and television
broadcasting with annual sales of more than 10,000,000
3.Importations which are exempted
4.Local payment of rent of vessel or carriers owned by nonresident foreign entity.

2. ZERO-VAT Rated Transactions

These are sales that are subject to OUTPUT Vat rate of 0%
Mainly from export sales by VAT-registered persons that generate foreign
currency reserves
The actual input VAT on the purchase shall be applied for TCC (Tax Credit
Certificate) or refund of creditable input tax due
Illustration:
Export Sales: 500,000
Input VAT:

36,000

SOLUTION:
Zero- VAT Sales

-0-

Less: Input VAT

36,000

Creditable Input VAT

(36,000)

2. ZERO-VAT Rated Transactions

Zero- Rated transactions are the following:
These are sales that are subject to output VAT rate of 0%
Export sales by VAT-registered persons paid in acceptable foreign currency
Sale of gold to BSP
Foreign currency denominated sales
Effectively Zero-rated sales
Sale of power or fuel through renewable sources of energy (solar, biomass, wind, hydropower,
geothermal)
Sales and services to the following persons or entities:

Registered with SBMA and CDA, Registered with PEZA

Asian Development Bank, International Rice Research Institute
Gross receipts of a domestic corporation for:
Transport from the Philippines to foreign country
Paid in acceptable foreign currency

3. VAT- Exempt and OPT Exempt

Transactions
Not subject to 12% output VAT, Not subject to OPT and Not
entitled to input VAT
Illustration:
Purchases

560,000 with 60,000 VAT

Export Sales

600,000

Computation:
Export Sales

600,000

Zero-rated

0%

Tax Liability

3. VAT- Exempt and OPT Exempt

Transactions
1.

Export Sales of Non-VAT registered business

2.

Importation of the following:

a) Fuel, goods and supplies by international shipping or air transport
companies
b) Personal and household effects belonging to residents of the
Philippines returning from abroad as long as goods are exempted
from custom duties
c) Professional instruments and implements, wearing apparel,
domestic animals and personal household effects for their own use
and not for sale

3.

Sales and Importation of the following:

a) Agricultural and marine food products in their original state
b) Fertilizers, seeds, seedlings, fingerlings and any other products used
for production of finished feeds except special feeds

3. VAT- Exempt and OPT Exempt

Transactions
4.

Printing or publishing books and any newspaper/magazines not devoted

principally to the publication of public advertisements.

5.

Services of:

a)
b)
c)
d)
e)

Agricultural contract growers and milling for others of palay, corn and sugar cane
Private educational institutions that render educational services duly accredited by
DepEd/CHED
Regional or are headquarters established in the Philippines by multinational corporations
which act as a sattellite in this region and do not earn income from the Philippines
Medical, dental, hospital and veterinary, except those services rendered by professionals
Transactions which are exempt under international agreements to which the Philippines is a
signatory

6.

Sales or receipts of cooperatives that are duly registered with the Cooperative
Development Authority (CDA)

7.

Sale/lease of real properties (inventories/ordinary assets)

Is classified as capital asset and not subject to VAT or business tax

3. VAT- Exempt Transactions with Specific

OPT
1.

2.
3.
4.
5.
6.

7.
8.

3% sale or lease of goods or properties of NON-VAT Registered

gross receipts of domestic carriers by land, air and
shipping companies
Franchise of radios and television companies with less
than 10,000,000
annual gross receipts
2%gross receipts for services rendered by franchise of gas and water
utilities
10%gross receipts on overseas dispatch from Philippines
5%on insurance premium
10%on services by fire, marine or miscellaneous insurance
of foreign
insurance companies
30%,18%, 15%, 10%gross receipts for services of proprietors, lessees
or operators of Jai-alai and race tracks, cockpits, night or day clubs,
professional basketball games, boxing exhibitions, winnings, net of
cost of
ticket
% to 4% - sale of stocks on IPO
Banks and non-bank financial intermediaries performing quasi-banking functions

4. Transactions with the Government Units

With Standard Input VAT of 7%
Subject to the following:
1. Final VAT of 5% (if seller is VAT Registered)
2. Percentage Tax of 3% (If seller is Non-VAT registered)
In addition to the above withhold the following Creditable
withholding income taxes (CWIT):
1. 1% on purchase of goods
2. 2% on purchase of services

4. Transactions with the Government Units

Illustration:
A business, VAT- registered, sold merchandise to the government
worth P100,000. The net proceeds would be:
Sales
Add: VAT rate
Total
Less: Final Withholding VAT (100,000 x 5%)
(CWIT 100,000x1%)
Net Proceeds

100,000
12,000
112,000
5,000
1,000

6,000
106,000

Since the Final WVAT is only 5%, the remaining 7% shall effectively account as
standard input VAT ISIV) for sales of goods, in lieu of the actual input VAT
directly attributable to such sales.

4. Transactions with the Government Units

If the Actual Input VAT is Greater than Standard Input
VAT of 7% of gross payments
The excess may form part of the sellers expense or cost.

Illustration:
Assume the following data related to the sale of a VAT-registered
business to the government:
Sales
100,000
Output VAT 12,000
Purchases (all to govt)
Input VAT
8,400
Compute for the VAT Payable.

70,000

4. Transactions with the Government Units

Actual Input VAT is Greater than Standard Input VAT
Output VAT
Less: Actual Input VAT
Standard Input VAT (100,000 x 7%)
Cost of Sale or Other Exp
Net VAT Payable
Less: Final Withholding VAT (100,000 x 5%)
Output VAT Payable

12,000
8,400
(7,000)
1,400

7,000
5,000
5,000
-0-

4. Transactions with the Government Units

Actual Input VAT is Greater than Standard Input VAT
Journal Entries:
1.Purchases 70,000
Input VAT
8,400
Cash
78,400
2.Cash
106,000
Creditable Withholding VAT
Creditable Withholding Tax
Sales
100,000
Output VAT 12,000
3. Output VAT 12,000
Income and Exp Summary
Input VAT
8,400
Creditable Withholding VAT

5,000
1,000

1,400
5,000

4. Transactions with the Government Units

If the Actual Input VAT is Lesser than Standard Input
VAT
The excess is treated as a taxable other income.
Illustration:
Assume the following data related to the sale of a VAT-registered
business to the government:
Sales
Output VAT
Purchases (all to govt)
Input VAT
Compute for the VAT Payable.

100,000
12,000
50,000
6,000

4. Transactions with the Government Units

Actual Input VAT is Lesser than Standard Input VAT
Output VAT
Less: Actual Input VAT
6,000
Standard Input VAT (100,000 x 7%)
7,000
Income and Exp Summ.
(1,000)
Net VAT Payable
Less: Creditable Withholding VAT (100,000 x 7%)
Output VAT Payable

12,000
7,000
5,000
5,000
-0-

4. Transactions with the Government Units

Actual Input VAT is Lesser than Standard Input VAT
Journal Entries:
1.Purchases 50,000
Input VAT
6,000
Cash
56,000
2.Cash
106,000
Creditable Withholding VAT
5,000
Creditable Withholding Tax
1,000
Sales
100,000
Output VAT 12,000
3.Output VAT 12,000
Input VAT
6,000
Creditable Withholding VAT
5,000
Income and Exp Summary
1,000