BUSINESS AND TRANSFER TAXATION

INTRODUCTION
TO
CONSUMPTION TAXES
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. Consumption tax promotes savings formation

 Income is inherently destined toward consumption. The residual income that
remains after consumption is savings. Savings promotes capital formation 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.
RATIONALE OF CONSUMPTION TAX

2. Consumption tax helps redistribute wealth to society

 It is a basic state policy to redistribute wealth to society so everyone in the State
could enjoy the same. Rich people buy more and spend more since they can
afford expensive lifestyles. A tax on consumption will make them pay more tax.
Therefore, consumption tax supports the redistribution of wealth from the rich
to the less privileged members of the society.
RATIONALE OF CONSUMPTION TAX

3. 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 receives benefit from the
government; hence, everybody should be taxed.

 Everybody consumes goods and services. A tax on consumption will effectively

make everyone contribute to the support of the government. Consumption tax
provides a practical application of the Benefit Received Theory.
INCOME TAX DISTINGUISHED FROM
CONSUMPTION TAX
Income Tax Consumption tax

Nature Tax upon receipt of Tax upon usage of

income income or capital
Scope A tax to the capable A tax to all

Supporting tax Ability to pay theory Benefit received theory

theory
TYPES OF CONSUMPTION

1. Domestic consumption refers to consumption or

purchases of Philippine residents

2. Foreign consumption refers to consumption or purchases

of non-residents
Because taxation is inherently territorial, only domestic consumption can be subjected to
Philippine taxation. Foreign consumption cannot be taxed.

In observing this territorial limitation, the Philippines follows the “destination principle”. Under
the destination principle, goods and services destined for use or consumption in the Philippines
are subject to consumption tax whereas those destined for use or consumption abroad are not
subject to consumption tax.

Hence, goods that cross the border which are destined toward foreign territories should not
be charged with consumption taxes. This is the cross-border doctrine of consumption tax.
SUMMARY OF TAX RULES ON CONSUMPTION

Domestic Foreign Consumption

The seller is a Consumption (Buyer is a non-
(Buyer is a resident) resident)

Non-resident Taxable No tax

Resident Taxable Effectively

TYPES OF TAXABLE DOMESTIC
CONSUMPTION

1.Purchase of residents of goods or services from non-residents

abroad – this is most commonly known as “importation”
2. Purchase of residents of goods, properties or services from resident
sellers – this transaction is a “sale” on the seller’s perspective.
CONSUMPTION TAX ON IMPORTATION
 Importers of goods shall pay consumption tax on their importation. This consumption tax is
called “Value Added Tax (VAT) on importation”. The VAT on importation is 12% of the total
import cost of the goods paid prior to the withdrawal of the goods from the warehouse of
the Bureau of Customs.
 Every purchaser of service from non-residents (import of service) shall likewise pay VAT on
importation of the service. This VAT on importation is called the “Withholding VAT”. The
withholding VAT is computed as 12% of the contract price of the service.
 These consumption taxes on importations are payable without regard as to whether the
foreign seller or the resident buyer is engaged or not engaged in business or whether the
importation is for business or personal consumption.
ILLUSTRATION 1

Mr. Bonafe, a Philippine resident, imported several goods from a foreign seller. He
incurred the following costs before withdrawal of the goods from the warehouse of
the Bureau of Customs:

 Total costs of importation for personal use P 1,000,000

 Total costs of importation for business use 2,000,000
ILLUSTRATION 1
The VAT on importation shall be computed as 12% of the total import costs as follows:

Total costs of importation for personal use P 1,000,000

Total costs of importation for business use 2,000,000
Total costs of importation 3,000,000
Multiply by VAT percentage 12%
VAT on importation P 360,000
ILLUSTRATION 2

Mr. Lee hired the services of a foreign power solutions company to

install solar power in his home in the Philippines for P500,000.

Mr. Lee shall pay P60,000 (12% x P500,000) withholding VAT to the BIR.
This applies regardless of the purpose of the foreign purchase of service for
business or for personal use.
ILLUSTRATION 3

A Philippine firm contracted the service of a foreign web-developer

for P2M where 80% of the service was rendered abroad while 20%
was rendered in the Philippines.

The Philippine firm shall pay withholding VAT on the entire P2M contract
price. The purchase is a domestic consumption which must be subject to
VAT even if the services were totally rendered abroad.
CONSUMPTION TAX FOR RESIDENT BUYERS
APPLIES TO BUSINESSES ONLY

It must be emphasized, however, that the consumption tax levied on

the sales or receipts 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 consumption tax is called a
“business tax”.
ILLUSTRATION 1

Mr. Tamayo is regularly engaged in the buy-and-sell of used cars.

During the month, he sold a used Ford Expedition which he
previously purchased from a friend for P1,200,000.

The P1,200,000 sale of the Ford Expedition is subject to business tax.

ILLUSTRATION 2

Mr. Espenilla is regularly engaged in the practice of his profession as a

medical doctor. During the month, he sold his residential dwelling for
P2,000,000.

The P2,000,000 sale of his residential dwelling is not subject to business

tax since Mr. Espenilla is not engaged in the business of selling residential
dwellings.
ILLUSTRATION 3

Mrs. Irineo is an employee at a private university. During the month,

she received a P40,000 compensation income.

Employment is not engagement in business. The P40,000 compensation

income is not subject to business tax.
THE TERM “BUSINESS TAX” IS A MISNOMER.
It must be emphasized again that businesses are, in effect, agents of the government
for the collection of consumption taxes from the buyers. Businesses are not the real
taxpayers.

In law, businesses are made directly liable for the payment of the consumption tax.
They would suffer penalties for non-compliance. Business tax is made to appear as
tax on the privilege to do business. As a result, business tax is often viewed as a
“privilege tax”. This however, does not change the very essence of business tax as a
consumption tax.The rule merely intended to enforce compliance.
TABLE OF COMPARISON
VAT on importation Business Tax
Basis of tax Acquisition tax Sales or receipts
Scope of tax All consumption Consumption from
businesses only
Nature of Pure form Relative form
consumption tax
Statutory taxpayer Buyer Seller
Economic taxpayer Buyer Buyer
Nature of imposition Direct Indirect
TABLE SUMMARY : CONSUMPTION TAX RULES
ON DOMESTIC CONSUMPTION
Seller Resident Buyer Applicable
consumption tax
Domestic Sellers

Business Business Business Tax

Business Non- business Business Tax

Non-business Business NONE

Non-business Non-business NONE

TABLE SUMMARY : CONSUMPTION TAX RULES
ON DOMESTIC CONSUMPTION
Seller Resident Buyer Applicable
consumption tax
Foreign Sellers

Business Business VAT on importation

Business Non- business VAT on importation

Non-business Business VAT on importation

Non-business Non-business VAT on importation

*VAT on importation consistently applies regardless of whether or not the seller or the buyer is engaged in
business.
BASIS OF BUSINESS TAXES

1. Sales – for businesses which sells goods or properties

It pertains to the total amount agreed as consideration for the sale of goods
whether collected or uncollected.

2. Receipts – for businesses that sells services

It pertains to collections from the sale of service.
TYPES OF BUSINESS TAXES
1. Value Added Tax (VAT)
It is a tax on consumption levied on the sale, barter, exchange or lease of goods or
properties and services in the Philippines and on importation of goods into the Philippines.
2. Percentage Tax
It is a sale tax of various rates, generally 3%, imposed upon the gross sales or gross receipts
of non-VAT taxpayers.
3. Excise Tax
It is imposed, in addition to VAT or percentage tax, on certain goods manufactured,
produced, or imported in the Philippines for domestic sale or consumption.
VALUE ADDED TAX

VAT is an indirect tax, which may be shifted or passed on to the

buyer, transferee or lessee of goods, properties or services.
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 increases 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 a top-up
thereto. The amount which will 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 indicated
in the sale document, the amount appearing therein is presumed inclusive of VAT.
CHARACTERISTICS OF THE VAT ON SALES
3.Tax credit method
The VAT on sales shall be reduced 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 on purchases, the VAT on sales effectively becomes the VAT due of the business.

4. An explicit consumption tax

The amount of VAT is explicitly disclosed in the invoice or official receipt of the seller. Hence, buyers know the
amount of VAT they are paying on their purchases.

5. Quarterly tax
The VAT return is filed quarterly but is paid on a monthly basis.
METHODS OF COMPUTING VAT

1. Direct Method 2. Tax credit Method

METHODS OF COMPUTING VAT

1. 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 for P250,000. The
business paid P24,000 VAT on the purchase of the goods. The business is subject to
12% VAT.

The VAT would simply be computed as:

VAT = 12% x (P250,000 – P200,000) = P6,000

Though quite simple, this method is not employed in the Philippines.

METHODS OF COMPUTING VAT

2.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 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 data in the previous illustration:
A business purchased goods for P200,000 and sold the same for P250,000. The
business paid P24,000 VAT on the purchase of the goods. The business is subject to
12% VAT.

The VAT due of payable shall be computed as:

Output VAT (12% x P250,000) P 30,000
Less: Input VAT 24,000
VAT due P 6,000
The tax credit method is the computation method used in the Philippines.
SPECIAL FEATURES OF 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 costs 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 are sold. The output VAT and input VAT
accounts are simply closed at the end of each month.
ILLUSTRATION (VAT ON SALES)

Dayag Corporation is a VAT-registered seller of goods. During the month, it

purchased goods for P1,120,000 inclusive of P120,000 VAT. Dayag also sold goods to
a client for P1,500,000, exclusive of VAT.

Dayag shall bill the goods to the client by passing an output VAT on the sale. Dayag shall bill the sales
as follows:
Selling price P 1,500,000
Plus: Output VAT (P1,500,000 x 12%) 180,000
Invoice price P 1,680,000
The invoice price shall be the amount to be paid by the client.
ILLUSTRATION (VAT ON SALES)

Dayag Corporation is a VAT-registered seller of goods. During the month, it

purchased goods for P1,120,000 inclusive of P120,000 VAT. Dayag also sold goods to
a client for P1,500,000, exclusive of VAT.
The VAT due and payable of Dayag Corporation shall be determined as follows:
Output VAT (VAT on sale) P 180,000
Less: Input VAT (VAT on purchase) 120,000
VAT due and payable P 60,000
Note: if the client is a VAT-taxpayer, he shall also claim the P180,000 passed-on VAT by Dayag as his
VAT against his Output VAT on his sales.
VAT ACCOUNTING ENTRIES:
Dayag shall record the transactions in its books as follows:

Inventories/Purchases P 1,000,000
Input VAT 120,000
Accounts Payable/Cash P 1,120,000
To record the purchase of goods

Cash/Accounts Receivables P 1,680,000

Sales P 1,500,000
Output VAT 180,000
To record the purchase of goods
VAT ACCOUNTING ENTRIES:
Output VAT P 180,000
Input VAT P 120,000
VAT due and payable 60,000
To close the VAT accounts and set-up the VAT payable

VAT due and payable P 60,000

Cash P 60,000
To record the payment of VAT to the government

Note: the Input VAT on purchase and Output VAT on sales are specifically monitored by VAT taxpayers on separate accounts.
VAT TAXPAYERS

The following businesses pay VAT:

1.VAT-registered taxpayers
2.VAT-registrable taxpayers
 VAT TAXPAYERS
 Businesses which exceed P1,919,500 (in TRAIN law it is now P3,000,000) in sales or receipts
in any 12-month period are mandatorily required to register as VAT taxpayers. Smaller
businesses with smaller annual sales or receipts may opt to voluntarily register as VAT
taxpayers. VAT registered taxpayers are required to pay VAT even of their annual sales fall
below P1,919,500 (P3,000,000) VAT threshold.

 Registrable taxpayers are those who exceed the P1,919,500 (P3,000,000) threshold in any
12-month period but did not register as VAT taxpayers. Even if not so registered, they are
still subject to VAT.