CHAPTER 14.

PERCENTAGE TAX

PERCENTAGE TAX
A percentage tax is a national tax measured by a certain percentage of the gross
selling price or gross value in money of goods sold or bartered; or of the gross
receipts or earnings derived by any person engaged in the sale of services.

THE SCOPE OF THE PERCENTAGE TAX

Coverage Type of % tax Tax rates
1. Services specifically subject to Specific % tax Various tax rates
percentage tax

2. Sales of goods or other services General % tax

not exempted 3% percentage tax

Who pays percentage tax?

VAT registered Non-VAT
Type of Percentage Tax taxpayers taxpayers

Specific percentage tax ✓ ✓

General percentage tax X ✓

SERVICES SPECIFICALLY SUBJECT TO PERCENTAGE TAX

1. Banks and non-bank financial intermediaries

Tax on Banks and Quasi-banks
Source of income or receipt % Tax rate

a. Interest income, commissions and discounts from

lending activities, and income from financial leasing,
on the basis of remaining maturities of instruments
from which the receipts were derived:
a. Maturity period of five years or less 5%
b. Maturity period of more than five ears 1%
b. Dividend and equity shares in the net income of subsidiaries
0%
c. On royalties, rentals of property, real or personal,
profits from exchange and all other items treated
as gross income under Section 32 of the NIRC 7%
 d. On net trading gains within the taxable year on foreign currency,
debt securities, derivatives, and other similar financial instruments
(RA 9337) 7%

Tax On Other Financial Intermediaries Without Quasi-Banking Functions

Source of income or receipt % Tax
A. Interest income, commissions and discounts from rate
lending activities, income from financial leasing, on the
basis of remaining maturities of instruments from
which the receipts were derived:
5%
a. Maturity period is five years or less

b. Maturity period is more than five years 1%

B. From all other items treated as gross income under the

NIRC 5%

2. International carriers on their transport of cargoes, excess baggage and mails

only
International carriers doing business in the Philippines shall pay a tax equivalent
to 3% of their quarterly gross receipts derived from transport of cargoes,
baggage, or mails from the Philippines to another country.

3. Common carriers on their transport of passengers by land and keepers of

garage
Under the NIRC, the 3% percentage tax is due quarterly upon the receipts of
common carriers on their transport of passengers by land. This called the
"common carrier's tax,"

4. Certain amusement places

AMUSEMENT lessee or operator 0f the following amusement places shall pay
the following respective tax rates on their quarterly gross receipts:

Places 0f boxing exhibitions 10%

Places of professional basketball games 15%

Cockpits, cabarets, night or day clubs 18%
Jai-alai and race tracks 30%

5. Brokers in effecting sales of stocks through the Philippine Stock Exchange and
corporations or shareholders on initial public offerings
Tax on sale, barter or exchange of stocks listed and traded through the
Philippine Stock Exchange (PSE)
 The sale, barter or exchange, including block sale, of listed stocks through the
PSE, other than by dealers in securities, is subject to a tax of 60% of 1% based on
gross selling price or gross value in money of the shares of stocks sold. This
percentage tax is commonly known as "stock transaction tax".

Tax on the Shares of Stock Sold or Exchanged through an Initial Public

Offering (IPO)
The sale, barter, exchange or other disposition through initial public offering of
shares of stocks in a closely held corporation is subject to the following tax rates
based on the gross selling price or gross value in money in proportion to the
shares sold, bartered or exchanged or otherwise disposed:

Proportion of shares sold, bartered or exchanged Tax

rate
Up to 25% 4%
Over 25% but not over 33 1/3% 2%
Over 33 1/3% 1%

6. Certain franchise grantees

Franchise Grantees % Tax Rate
a. Radio or television broadcasting companies whose 3%
annual gross receipts do not exceed P10,000,000
b. Gas and water utilities 2%

7. Life insurance companies and agents of foreign insurance

TAX ON LIFE INSURANCE PREMIUMS
A Person, company or corporation (except purely cooperative companies or
associations) doing life insurance business of any sort in the Philippines is Subject
to a tax of 2% on the premiums collected, whether such premium is paid in
money, notes, credits or any substitute for money
TAX ON AGENTS OF FOREIGN INSURANCE
Twice the rate of life insurance, therefore rate shall be 4%.

Direct insurance from abroad

If property owners obtain insurance directly from abroad without the services of
an insurance agent, the tax shall be 5% of the premium paid.

8. Telephone companies on overseas communication

The overseas dispatch, message, or conversation transmitted from the
Philippines by telephone, telegraph, tele writer exchange, wireless and other
communication equipment services is subject to 10% percentage tax. This
percentage tax is commonly known as the “overseas communication tax”.
 Exemptions:
a. Government-including any of its political subdivisions or instrumentalities
b. Diplomatic services-embassies and consular offices of foreign governments
c. International organizations - those enjoying privileges, exemptions and
immunities under international agreements
d. News services

9. Jai-alai and cockpit operators on winnings

Winnings from race tracks and jai-alai are subject to the following amusement
taxes:

Winnings in horse race or jai-alai, in general 10%

Winnings from double, forecast/quinella and trifecta bets 4%
Owners of winning race horses 10%

TAX ON OTHER TAXABLE SALES OF NON-VAT TAXPAYERS

The imposable percentage tax on taxable sales or receipts, other than services or
transactions specifically subject to percentage tax, of registered persons is 3%.

EXEMPTION FROM PERCENTAGE TAX

The percentage tax does not cover:
1. VAT taxpayers
2. Self-employed and or professionals who opted to the 8% income tax
3. Cooperatives
 VALUE ADDED TAX

THE VALUE ADDED TAX

The VAT covers all vatable sales of goods, properties, services, or lease of properties
by VAT taxpayers.
Vatable sales or receipts are from sources other than:
1. Exempt sales
2. Receipts from services specifically subject to percentage tax

Who are VAT taxpayers?

1. VAT-registered persons
2. VAT-registrable persons
A VAT-registered person will be subject to VAT even if its annual sales do not
exceed the VAT threshold. A registrable person or those whose sales or receipts
exceed the VAT threshold without registering as VAT taxpayers are subject to
VAT without the benefit of an input tax credit.

VAT Threshold
VAT Threshold Amount Taxpayers covered
General P3,000,000 All taxpayers other than franchise grantees
of radio or television
Special P10,000,000 Franchise grantees of radio or television

Optional VAT Registration

Taxpayers below the threshold can voluntarily register as VAT taxpayers. Such
option is subject to the 3-year lock-in period. The taxpayer is precluded to have his
VAT registration revoked until the lapse of 3 years.

VAT Taxpayers with Mixed Transactions

It must be noted that despite the VAT registration, VAT shall apply only to the
vatable sales or receipts. His non-vatable sales or receipts remains exempt from VAT.
The exempt sales remain to be exempt while the receipts specifically subject to
percentage tax are subject to their specific percentage tax rates. The only exception to
this is when the taxpayer opted to have the VAT apply to this non-vatable sales or
receipts.

THE VALUE ADDED TAX MODEL

The VAT payable of a VAT taxpayer is computed as:

Output VAT Pxxxx

Less: Input VAT xxxxx
VAT Due Pxxxx
Less: Tax Credits xxxxx
VAT still due Pxxxx

OUTPUT VAT
Output VAT is the VAT on the vatable sales or receipts. The output VAT is
presumed passed on by the seller on his sales or receipts.

Types of Output VAT

1. Regular Output VAT- 12% VAT imposed on domestic sales or receipts
2. Zero Output VAT- 0% VAT imposed on export and other zero-rated sales

INPUT VAT
Input VAT is the VAT paid by the taxpayer on the domestic purchases VAT
suppliers or on the importation of goods or services in the course of business.
Despite absence of actual payment of VAT on purchase or import, input VA may
also be allowed by law as incentives to the taxpayer such as in the case of
presumptive input VAT.
Input VAT has rules on creditability. Not all paid input VAT is creditable against
output VAT. Those allowed to be deductible against output is called "claimable input
VAT”, "allowable input VAT" or "creditable input VAT”.

VAT DUE
At the end of each month, the input VAT is offset with the output VAT. A positive
VAT due is paid to the BIR. A negative VAT is normally nonrefundable but is carried
over to the next succeeding months or quarter.

CLASSIFICATION OF SALES OR RECEIPTS FOR VAT PURPOSES

Owing to the differences in the rules, there are four types of sales or receipts for
purposes of the VAT:
1. Sales to the government
2. Zero-rated sales
3. Exempt sales
4. Regular sales

Other sales subject to VAT

1. Sales of registrable persons
The sales of registrable persons are subject to VAT despite their
nonregistration as VAT taxpayers but no input VAT credit is allowed.
2. Sales of non-VAT taxpayers who issues VAT invoice or receipt
The sale of non-VAT taxpayers who illegally charge VAT on their sales shall
be subject to VAT without the benefit of input VAT plus the 50% surcharge
and the usual 3% percentage tax.
3. Exempt sales billed by VAT taxpayers as regular sales
 Exempt sales that are billed through a VAT invoice or VAT receipts will be
considered as regular sales. Furthermore, exempt sales which are not so
clearly indicated as "Exempt" in the VAT invoice or VAT receipts shall be
considered as regular sales subject to VAT.

REGULAR OUTPUT VAT

SOURCES OF REGULAR OUTPUT VAT
1. Sale of vatable goods- subject to 12% VAT based on gross selling price
unless unreasonably lower.
2. Sale of vatable services- subject to 12% VAT based on the gross receipts
3. Sale of vatable properties- The sale, barter or exchange of vatable real
properties is subject to VAT on the gross selling price.
Under the regulations, gross selling price" means the higher of the:
a. Consideration or selling price
b. Fair value of the property

Installment reporting of Output VAT on real properties

The output VAT on the sale of real properties may be reported in installment
if the initial payment from such sale if it does not exceed 25% of the selling
price.
4. Transactions deemed sales
List of Transactions deemed sales:
1. Transfer, use, or consumption not in the course of business of goods
or properties originally intended for sale or for use in the course of
business
2. Distribution or transfer to:
a. Shareholders or investors share in the
b. profits of VAT-registered persons
c. Creditors in payment of debt or obligation
3. Consignment of goods if actual sale is not made within 60 days
following the date such goods were consigned
4. Retirement from or cessation of business with respect to all goods on
hand whether capital goods, stock in trade, supplies or materials as of
the date of cessation, whether or not the business is continued by the
new owner or successor
5. Cessation of status as a VAT-registered person

OUTPUT VAT-ZERO-RATED SALES

WHAT ARE ZERO-RATED SALES?
Zero-rated sales are basically foreign consumptions (i.e., export sales) or equivalents
of foreign consumptions (foreign currency-denominated sales and constructive
exports) and sales conferred with an export sale treatment by special laws and
international agreements to which the Philippines is a signatory.
Foreign consumption like export of goods or services is not charged with
consumption taxes. Hence, the export sales of VAT taxpayers are subject to a VAT at
zero rate. The export sales of a non-VAT taxpayer are exempt from the 3% general
percentage tax.

ZERO-RATED SALES OF GOODS

There are two types of zero-rated sales of goods:
A. Export sales
a. Direct exports
b. Sale to economic zones and tourism enterprise zones
Examples of Philippine Ecozones:
1. Philippine Economic Zone Authority (PEZA)
2. Cagayan Special Economic Zone
3. Zamboanga Special Economic Zone
4. Clark Special Economic Zone
5. Clark Freeport Zone
6. Poro Point Special Economic and Freeport Zone
7. John Hay Special Economic Zone
8. Aurora Special Economic Zone (ASZ)
c. Sale of goods or properties, supplies, equipment and fuel to person
engaged in international shipping or international air transport
operations
B. Effectively zero-rate sales
Examples of entities are granted indirect tax exemption under special law or
international agreements:
a. Asian Development Bank (ADB)
b. International Rice Research Institute (IRRI)
c. United Nation (UN) and its various organizations, such as:
1. World Health Organization
2. UNICEF
d. United States Agency for International Development (USAID) and
personnel and contractors
e. Embassies, qualified employees and dependents - subject to reciprocity
rule
f. Philippine National Red Cross (PNRC)
g. Philippine Amusement and Gaming Corporation (PAGCOR) and its
licensees or contractors

ZERO-RATED SALES OF SERVICES

Eventually, zero-rated sales of services will only include:
1. Sale of services to non-residents
2. Effectively zero-rated sales of services
 3. Services rendered to persons engaged in international shipping or
international air transport operations including leases of properties thereof
4. Transport of passengers and cargoes by domestic air or sea carrier from the
Philippines to a foreign county
5. Sale of power or fuel generated from renewable sources of energy
6. Services rendered to Eco zones or tourism enterprise zones

INPUT TAX
Input tax or input VAT refers to the VAT due or paid by a VAT-registered person on
importation or local purchases of goods, properties, or services including lease or use
of properties in the course of his trade or business.

CREDITABLE INPUT VAT

Not all input VAT paid on purchases is creditable or deductible against output VAT.
Requisites of a creditable input VAT:
1. The input VAT must have been paid or incurred in the course of trade or
business.
2. The input VAT is evidenced by a VAT invoice or official receipt.
3. The VAT invoice or receipt must be issued by a VAT-registered person.
4. Input VAT is incurred in relation to vatable sales not from exempt sales.

TYPES OF INPUT VAT

1. Transitional Input VAT- A person who becomes liable to value-added tax or
any person who elects be a VAT-registered person shall be given an initial
input tax credit equivalent to 2% of the beginning inventory of goods,
materials, or supplies or the actual VAT paid thereon whichever is higher
2. Regular Input VAT- The regular input VAT is the 12% VAT paid on:
a. Domestic purchase of goods, services, or properties, or
b. Importation of goods or service
3. Amortization of Deferred Input VAT-Input VAT on Purchase of Capital
Goods or properties

If the monthly aggregate acquisition cost of depreciable capital goods:

-Does not exceed P1,000,000 - The input VAT is claimable in the month
purchase.
-Exceeds P1,000,000 - The input VAT is deferred and amortized over useful
life in months or 60 months (i.e., 5 years), whichever is shorter

Scheduled phase-out of the amortization treatment

Under the TRAIN law, the amortization treatment of deferred input VAT will
be phased out effective January 1, 2022. Previously recognized deferred input
VAT will continue to be amortized even after that date but the deferral
 treatment will be stopped. Input VAT on capital goods will be claimed
outright in the month of purchase effective January 1, 2022.
4. Presumptive Input VAT- persons or firms engaged in the processing of
sardines, mackerel and milk and in the manufacturing of refined sugar,
cooking oil and packed noodle based instant meals, shall be allowed a
presumptive input tax equivalent to 4% of the gross value in money of their
purchases of primary agricultural products which are used in their
productions.
5. Standard Input VAT- The sale of goods and services to the government or
any of its political subdivisions, instrumentalities or agencies, including
government-owned and controlled corporations (GOCCs) is subject to a 5%
final withholding VAT based on the gross payment.
The 5% withheld final VAT shall be deemed the actual VAT payable of the
seller. Due to the final withholding VAT, the sellers to the government,
instrumentalities or agencies including GOCCs can effectively claim only 7%
of sales as input VAT.
6. Input VAT Carry-over- The input VAT carry-over is the excess of the input
VAT over the output VAT in a particular month or quarter. It is the VAT
overpayment that appears after tax credits and payments are deducted
against the net VAT payable.

Rules on Input VAT carry-over

a. The input VAT carry-over of the prior quarter is deductible in the first
month of the current quarter.
b. The input VAT carry-over in the first month of the quarter is deductible in
the second month of the quarter.
c. The input VAT carry-over in the second month of a quarter is not
deductible to the third month of the quarter.
d. The input VAT carry-over of the prior quarter is deductible in the third
month quarterly balance of the present quarter.

EXCLUDED FROM INPUT VAT CARRY-OVER

1. Advanced VAT which have been applied for a tax credit certificate
2. Input VAT attributable to zero-rated claim which have been applied
for a tax refund or tax credit certificate
3. Input VAT attributable to zero-rated sales that expired after the two-
year prescriptive period

RULES ON CLAIM FOR CREDIT OF INPUT VAT

1. specific identification - input VAT that can be traced to a particular sales
transaction is credited against the output VAT of such sales
 2. pro-rata allocation - the amount of input tax due or paid that cannot be
directly and entirely attributed to any one of the sales transactions shall be
allocated proportionately on the basis of sales

TAX CREDITS / PAYMENTS

1. VAT paid in the previous two months -for quarterly VAT returns
2. VAT paid in return previously filed, in the case of amended return
3. Advanced payments made to the BIR
4. Final withholding VAT on sales to the government- 5% of sales withheld by
government
5. Advanced VAT on certain goods
Advanced VAT
The owners or sellers of the following goods are required to pay advanced VAT
before their withdrawal at the point of production:
a. Refined sugar- Base price of advanced VAT: P 1,400 per 50 kg. bag
b. Flour
Base price of advanced VAT
For wheat imported by millers - 75% of the sum of:
a. Invoice value multiplied by the currency exchange rate on the date
payment
b. Estimated customs duties and other charges prior to the release
imported wheat from Custom's custody, except for advanced
VAT,
c. 5% of the sum of a. and b.
In short, the advanced VAT is computed as 12% x 75% x 105% x (a + b).

For wheat purchased by flour millers from wheat traders – 75% of the
sum of:
a. Invoice value
b. Estimated freight
c. And 5% of the sum of a. and b.

c. Naturally grown and planted timber products- The 12% advanced VAT
shall be based on per cubic meter (m3) of each species of naturally grown
timber

TAX STILL DUE

The resultant "Tax still payable" in the VAT return is paid to government as follows:
• 1st month of the quarter - within 20 days from the end of the month
• 2nd month of the quarter - within 20 days from the end of the month
• 3rd month of the quarter - within 25 days from the end of the quarter

INPUT VAT ON ZERO-RATED SALES

The unutilized input VAT arising from zero-rated sales or effectively zero-rated sales
may be claimed as a:
a. tax refund
b. tax credit against other internal revenue taxes
1. A seller of goods had the following details of sales and collection during the
month:
Receivables, beginning 200,000
Gross sales 400,000
Less: collection 500,000
Receivables, end 100,000
What is the amount subject to business tax?

2. In the immediately preceding problem, determine the amount subject to business

tax if the taxpayer is a seller of services?

3. A farm supply dealer made the following sales during the month:
Fertilizer 45,000
Hybrid corn and rice seeds 65,000
Pesticides 120,000
Water pump and hand tractor 240,000
Compute the sales subject to business tax?

4. A farmer sold the following goods in March:

20 sacks rice 45,000
100 sacks corn 90,000
Determine the gross selling price subject to business tax?

5. A sari-sari store registered as a VAT-taxpayer had the following sales:

Sales of newspapers 20,000
Sales of fish and meat 30,000
Sales of fruit and vegetables 10,000
Sales from snacks and soft drinks 15,000
Sales from general merchandise 80,000
The total vatable sales?

6. Tony, VAT-registered taxpayer, reported 200,000 sales in the month of May.

Tony’s annual sales never exceed 1,800,000. Compute Tony’s percentage tax?

7. Radio Bolero had annual sales not exceeding P10 million a year. During the
month, it posted a revenue of P2,000,000 out of which P1,800,000 was collected.
Compute the percentage tax?
8. Titanic, international shipping carrier, had the following receipts on its
Philippine operations:
GROSS RECEIPTS FROM:
PASSENGER BAGGAGE TOTAL
Incoming voyages 2,000,000 1,500,000 3,500,000
Outgoing voyages 3,000,000 1,800,000 4,800,000
How much is the percentage tax?

9. Mutual Feelings Insurance Corporation has the following receipts and

receivables from its life insurance products:
Cash and check collection P1,000,000
Promissory notes 200,000
Compute the premiums tax?

10. Apple, operates a convenience store, from which the gross receipts from sales
and payments on purchases from VAT-registered suppliers, were as follows:
Sales of processed food items ------------------------ P 250,000
Sales of non-food items ------------------------------- 200,000
Purchases of processed food items ------------------- 100,000
Purchases of non-food items -------------------------- 80,000
Salaries of helpers ------------------------------------- 48,000
The percentage tax (tax due) is? (above amounts are net of taxes)

11. Using the preceding number, if A opted to be registered under the VAT scheme,
the VAT payable is

12. A operates a cockpit. Inside the cockpit, he also operates a restaurant. Data for
the particular quarter follow
Gross receipts:
Cockpit operations P500,000
Restaurant operations:
Sale of foods 100,000
Sale of liquor 150,000
The amusement tax due from A is

13. Using the above data, except that the restaurant is not owned by A but is owned
by another person, B, not VAT registered and whose annual gross sales never
exceeded P1,500,000. The amusement tax due from A is

14. Continuing the preceding number, the percentage tax due from B is
15. Boy Putik promoted a world boxing championship in Manila featuring Boy
Negro, a Filipino champion. Gate receipts amounted to P3,000,000 and
additional receipts from television coverage was P2,000,000. The amusement tax
due is

16. Assuming that the above data is not a world championship but a Philippine
national boxing championship, how much is the amusement tax?

17. A non-VAT person reported the following during the year:

Export sale P1,000,000
Importation of goods P500,000
Domestic sales P2,500,000
The zero rated transaction of the business is?

18. The Following are the purchases and payments of a Non-VAT business for the
period which are directly related to the conduct of its business:
- Purchases from VAT person, gross of VAT P550,000
- Purchases from Non-VAT person, net of VAT 55,000
- Payments of services of VAT person, before VAT 66,000
How much is the claimable input VAT?

19. Bus Cit Company reported the following gross receipts for one quarter:
Passengers’ fare P3,000,000
Cargo fare 1,000,000
Total input VAT paid on its purchases during the same period, P90,000. If Bus Cit
is Non-VAT registered, its net business tax liability is