Chapter 1

Business & Transfer Taxation

Reported by:
Ms. Irma Cielo
BSBA- Major in Entrepreneurial Management
BSMK-3
 What is Business Transfer and Taxation?

A business transfer tax is the value-added tax (VAT) in

many countries around the world. Some governments
charge businesses a fee on every product and service
that's manufactured or consumed in that country; a fee is
paid when raw materials are sold, and another fee is paid
when the finished product is sold.
 CONSUMPTION TAX

 Consumption occurs when one acquires goods or

services by purchase exchange or other means.

 A consumption tax is a tax upon the utilization of goods

or services by consumers or buyers. It is a tax on the
purchase or consumption of the buyer and not on the
sale of the seller.
Rationale of Consumption Tax

1. It promotes savings formation.

2. It helps in wealth redistribution to society.
3. It supports the Benefit Received Theory.

Consumption tax promotes savings formation

Income is inherently destined toward consumption. The residual income

that remains after consumption is savings. Savings promotes capital for
nation and investment which are considered crucial to economic
development. A tax on consumption is therefore important to limit
consumption to shift part of the income to savings formation,
Consumption tax helps redistributes wealth to
society

It is a basic state policy to redistribute wealth to society

so everyone in the State could enjoy the same.

Consumption tax supports the Benefit Received

Theory
 Under the Benefit received theory, those who receive
benefit from the government shall pay taxes.
Everyone in the state is receiving benefits from the
government; hence, everybody should be tax.
 Income Tax and Consumption Tax,
Distinguished

Income taxation is consistent with the Ability to pay theory because it taxes only those who
are capable to pay tax Consumption tax effectively taxes everyone.
TYPES OF CONSUMPTION
1. DOMESTIC CONSUMPTION – refers to consumption or purchase
of Philippines residents

2. FOREIGN CONSUMPTION – refers to consumption of purchases

of non-residents
SUMMARY OF TAX RULES ON
CONSUMPTION
 TYPES OF TAXABLE DOMESTIC
CONSUMPTION
1. Purchase of residents of goods or services from non-residents
abroad. This is commonly known as “ importation”
2. Purchase of residents of goods, properties or services from
residents seller. This transaction is “sale “ on the seller’s
perspective.

CONSUMPTION TAX O IMPORTATION

 Every importer of goods shall pay consumption tax on his
importation.
 Consumption tax is called “ Value Added Tax ( VAT) on
importation.
 The VAT 12% is the total cost import cost of goods from the
withdrawal of warehouse of the Bureau of Customs.
 Every purchase of residents of service from non-residents.(i.e. import
of service) The VAT importation is called the “ Withholding VAT” – is
computed as 12% of contract price of service.

Illustration 1
 Illustration 2

Mr. Enchong hired the services of a foreign power solutions

company to install a solar power in his home in the Philippines
for 500,000.

Mr, Enchong shall pay P60,000 (12% x 500,000) withholding

VAT to the Bureau of Internal Revenue. This applies
regardless of the purpose of the foreign purchase of service
whether for business or for personal purposes.
 Illustration 3
A Philippines firm contracted the services of a
foreign-wed-developer for P 2M. 80% of the
service are rendered abroad while 20% was
rendered in the Philippines.

The Philippines shall pay withholding VAT on the

entire of P2M. The purchase is a domestic
consumption , which must be subject to VAT even
if the service is totally rendered abroad.
CONSUMPTION TAX ON DOMESTIC CONSUMPTION
FROM RESIDENT SELLER

on the purchases of the Philippines residents

from resident sellers is collected from the
seller. Our tax law are imposed the
consumption tax upon the sales of sellers of
goods or receipts sellers of services.
 Illustration
Tugue company, a resident business, purchases P 100,000
worth of goods from Isabela Company, another resident
business. Tugue records the transaction as a purchase
while Isabela records the same as sales. Both Tugue and
Isabela are subject to 3% business tax – a consumption
tax.

Tugue, the buyer shall pay the 100,000 to Isabela. It is not

mandated to pay the consumption tax to the government .
isabela, the seller, is legally required to remit the 3,000
(P100,000 x 3%) consumption tax on its sale (i.e. Tugue ‘s
purchase) to the government.
kinds of taxpayers
1. Statutory taxpayers – sellers

2. Economic taxpayers – buyers are the real taxpayers

Another Illustration
Mr. Aramay is a trader who is subject to a 3% business tax. During
a month, he sold the following:
The business tax (consumption tax) which Mr. Aramay
shall remit to the government shall be P3,000,
computed as 3% of the P100,000 domestic sales (i.e.
domestic consumption) only. Note that export sales
are foreign consumption not subject to the Philippine
consumption tax.
Consumption tax on resident buyers
applies to businesses only
The consumption tax levied on the sales or receipts of
a residents of a resident seller is applicable only when
the seller is regularly engaged in business. The tax
does not apply where the seller is not in business.
That is why this consumption tax is called a “ business
tax”.
 Illustration 1
Mr. Sabiano is regularly engaged is regularly engaged in the buy-
and-sell of use cars. During the month, he sold a used Ford
Expedition for P1,200,000 which he previously purchased from a
friend.
The P1,200,000 sale of the Ford Expedition is business to business
tax.

Illustration 2
Mr. Colyong is regularly engaged in the practice in his
profession as a medical doctor. During the month, he
sold his residential dwelling for P2,000,000.

The P2,000,000 sale of residential dwelling is not

subject to business tax since Mr. Colyong is not
engaged in the business of selling residential dwellings.
Illustration 3
Ms. Cheong is an employee at a private university . During
the month, she received at P40,000 compensation income.
Employment is not engagement in the business. The
P40,000 compensation income not subject to business tax.

The term “ Business Tax “ is a minsnomer

Table of Comparison
Table summary : Consumption tax
rules on domestic consumption
BASIS OF BUSINESS TAXES
1. Sales – for business which sells goods or properties
2. Receipts – for business that sells services

TYPES OF BUSINESS TAXES

1. Value Added Tax (VAT) on sales
2. Percentage Tax
3. Excise Tax

TYPES of BUSINES TAXPAYERS

1. VAT Taxpayers – those required to pay VAT
2. Non-VAT taxpayers – those who pay the percentage tax.

Excise tax is an addition to either VAT or percentage tax, if the taxpayers

produces certain
THE VALUE ADDED TAX ( VAT)
ON SALES
 The VAT on sales is consumption tax imposed upon the sale of
goods properties or services or lease of properties.

Characteristics of the VAT on sales

1. Tax on value added – VAT is a tax on the value

added by the seller (mark-up) on its purchases in
making sales. It is an imposition based upon the
price increase made by producers and distributors
at each level of production or distribution.
2. Top-up on sales – The VAT on sales is required by the law
to be included in the price of the goods as top-up thereto. The
amount which be billed to the customer shall include both the
selling price and the VAT. This amount is called the “invoice
price”. If the VAT is not separately indicate the sales document,
the amount appearing therein is presumed inclusive of VAT.

3. Tax credit method - The VAT shall reduce by the amount of

VAT paid by the business on its purchases. The resulting excess
VAT on sales is the amount due to be remitted to the
government. An excess VAT payment on purchases is carried-
over as deduction against the VAT on sales in future periods.
Note: However that if no VAT is paid no purchases, VAT on
sales effectively becomes the VAT due to the business.
Characteristics of the VAT on sales
4. An explicit consumption - The amount of VAT is explicitly disclosed
in the invoice or official receipt of the seller. Hence, the buyer knows
the amount of VAT he is paying in his purchase.

5. Quarterly Tax – The VAT return is filed quarterly but is paid on a

monthly basis. (Sec. 114 (A), NICR as amended)
Method of Computing VAT
1. Direct method
2. Tax credit method

Direct Method – The value added tax is computed by applying the

VAT rate to the difference of the selling price and the purchase.

Illustration
A business purchased goods for P200,000 and sold the same
P250,000. The business paid P24,000 VAT on the purchase of the
goods. The business is subjected 12% VAT.
The VAT would simply be computed as:
VAT = 125 x ( P250,000 – P200,000) = P 6,000.
The Tax Credit Method
The VAT rate is imposed upon the sales or receipt (output) of the business.
This is called the “ Output VAT”. The output VAT is then reduced by the VAT
paid by the by the business on its purchases (input). This is called the “Input
VAT”. The excess of the Output VAT over the Input VAT is the VAT due or
payable.

Illustration
Assuming the same date in the previous illustration , the VAT due or
payable shall be computed as:
Special features on the tax credit method

1. Invoice-based crediting –

Entitlement for input VAT is to be substantiated with invoices. Because of this,

our VAT system is known as “invoice-based”.

2. Non- observance of the matching of cost or expenses and sales –

Output VAT is recorded when a sale is made. Input VAT is recorded whenever
a purchase is made and not when the goods where sold. The output VAT
and input VAT accounts are simply closed at the end of each month.
Illustration: The VAT on sales
Pelizloy Corporation is a VAT – registered seller of goods. During the
month, It purchased goods for P120.000 VAT. Pelizloy also sold goods
to a clients for P1,500,000, exclusive VAT.
Pelizloy shall be the goods to the clients by passing an output Vat on
the sale.
Pelizloy shall bill the sale as follows:
 VAT Accounting Entries:
Pelizloy shall record the transactions in its books as follows:
VAT Taxpayers
The following business pay VAT:

1. VAT-registered taxpayers
2. VAT- registrable taxpayers

PERCENTAGE TAX - is a sales tax of various rates, generally 3%,

imposed upon the gross sales or gross receipts of non-VAT taxpayers.
 Characteristics of the percentage tax:
1. Tax on sales or gross receipts - the total amount of due from the buyer
(invoice price) is considered sales or gross receipt. The percentage tax is
computed directly from this amount.

2. An expensed tax – In income taxation, the percentage tax is presented as

an expense deductible against the sales or gross receipt. This treatment
gives percentage tax the impression of being a direct tax or privilege tax of
the sellers.

3. An implicit consumption tax – the percentage tax is inherently factored by

sellers in the pricing of their goods or services. The percentage tax passes
to the buyer inclusion to the selling price but the same is not separately
presented in the invoice; hence, not specifically disclosed to the buyer.
The percentage tax is actually a consumption tax in the form of a privilege tax. It
is an indirect tax in the form of a direct tax.

4 Monthly quarterly tax – The percentage tax is payable monthly for most
percentage taxpayers and quarterly for certain percentage taxpayers.
Illustration
During the month, Mr. Alno purchase P80,000 worth of goods. P65,000 of this
was purchased from a VAT supplier inclusive of P6,000 VAT while P24,000
were purchased from non-VAT taxpayers. Mr. Alno , a percentage taxpayers,
sold and invoiced the goods for P100,000.
The transactions shall be recorded as follows:
 Who pays percentage tax?
1. Non-VAT taxpayers
2. Taxpayers who sells services specifically subject to
percentage tax

Non-VAT taxpayers are those with sales or receipts not

exceeding the P 1,919,500 VAT registration threshold
and who did not opt to register as VAT-taxpayers.
 EXCISE TAX
 is imposed, in addition to VAT or percentage tax, on
certain goods manufactured, produced or imported in
the Philippines for domestic sale or consumption.

Excise tax is levied the production or importation of:

1. Sin products, such as tobacco products and alcohol products
2. Petroleum products
3. Automobiles
4. Non-essential commodities like jewelry, perfumes, toilet
waters, yachts and sports cars
5. Metallic or non-metallic mineral, mineral, products, and
quarry resources such as coal, coke ,gold, chromite and silver.
 Illustration
Fortune Corporation, a business subject to VAT,
manufactures machine packed cigarette which sells for P
20 per pack, excluding VAT, During the month, it
produced 11,000 packs out of which it sold 10,000 packs.
It also paid P16,000 VAT on various purchases.
Under the NIRC, the sale of cigarettes at a price above
P10.00 per pack shall be subject to an excise tax of
P12.00 per pack.
Fortune Corporation shall Pay the
following taxes.
Percentage Tax, VAT and Excise Tax apply
only to domestic consumption
• The export sale of non-VAT registered taxpayers is exempt from the
percentage tax.
• Imposed by the law with a 0% VAT. In both cases, there is
effectively no consumption tax.