Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos
MODULE 1
Business Taxes – Value-Added Tax
INTRODUCTION
This module introduces the basic principles and foundations of Value-Added Tax. The
main topics that will be covered will include: background of value-added taxes, reforms
introduced by VAT, nature and characteristics of VAT, its scope, ang VAT threshold. This
module also discusses the exemptions from VAT, (e.g. persons or entities, transactions).
Application of VAT to Senior Citizens, and Persons with Disabilities will also be tackled in this
course. Discussions will include the changes applied in effect of the TRAIN and CREATE Law.
INTENDED LEARNING OUTCOMES
ILO 1 – Demonstrate an extensive knowledge on the background, nature, scope, and
characteristics of Value-Added Tax
ILO 2 – Application of the VAT threshold and understand the exemptions relevant to VAT
ILO 3 – Understand VAT related to Senior Citizens and Persons with Disability
ILO 4 – Achieve best skills in resolving problems involving VAT
Introduction: Business Taxes
Business taxes are those imposed upon onerous transfers such as sales, barter,
exchange, and importation. It is called as such because without a business pursued in the
Philippines (except importation) by the taxpayer, business taxes cannot be applied.
Business taxes are in addition to income and other taxes paid, unless specifically
exempted.
Unlike an income tax, which is based on the taxpayer’s net taxable income, business
taxes are generally based on gross sales or gross receipts. Hence, irrespective of the results
of business operations (income or loss), taxpayers engaged in trade or business are still liable
to pay for business taxes (either VAT or OPT, plus excise tax, if applicable).
Types of Transfers
1. Gratuitous transfer (transfer without consideration) – not subject to business tax
but subject to transfer taxes (estate tax or donor’s tax)
2. Onerous transfer (transfer with consideration):
a. In the ordinary course of trade or business including incidental transactions
(subject to business tax and income tax)
b. Not in the ordinary course of trade or business (not subject to business tax
but may be subject to income tax)
ILLUSTRATION
Pinas Energy Corp. entered into a Built-Operate-Transfer (BOT) contract with the PNOC for
finance, engineering, supply, installation, testing, commissioning, operation and maintenance
1|Page
, Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos
of a Geothermal Power Plant. During the year, Pinas Energy Corp. sold for P200,000 a fully
depreciated vehicle (Nissan Patrol) used in business.
Question: How much is the business tax, if any?
Answer: VAT = P200,000 × 12% = P24,000
Types of Business Taxes
There are three major business taxes in the Philippines, namely:
1. Value added tax (VAT)
2. Other percentage taxes (OPT) or simply Percentage Tax
3. Excise Tax
As a rule, all sale of goods or services made in the normal course of trade or business
are subject to VAT unless exempt under the law. Nonetheless, if the sale is exempt from vat,
it may be subject to Other Percentage Tax (OPT) under Sections 116 to 127 of the Tax Code.
Consequently, transactions already subjected to VAT should no longer be subject to
Percentage Tax. However, such is not the case with respect to excise taxes. A transaction
subjected to either vat or percentage tax may still be subjected to excise tax as illustrated
below:
VAT OPT Excise Tax
SALE of Goods/Properties or Service may be subject to:
1. VAT, in general a X X
2. Exempt from VAT but subject to OPT E a X
3. Exempt from business taxes E E -
Manufacturing/importation and Sale of Sin-Products, Non-
essential goods/services may be subject to:
1. In general, VAT (plus excise tax, if applicable), OR a X a
2. Percentage tax (plus excise tax, if applicable) X a a
A transaction subjected to value added tax must no longer be subjected to percentage
tax. Nonetheless, a business entity or taxpayer may be engaged in transactions that are
subject to vat, exempt from vat and subject to percentage tax (mixed transactions) at the same
time. Therefore, a taxpayer may be subjected to value added tax and at the same time,
percentage tax including excise tax if applicable.
Value-Added Tax Defined
VAT is a tax on the value added by every seller to the purchase price or cost in the
sale or lease of goods, property or services in the ordinary course of trade or business as well
as on importation of goods into the Philippines, whether for personal or business use. It is a
tax on consumption levied on the sale, barter, exchange or lease of goods or properties and
services in the Philippines (cross border doctrine) and on importation of goods into the
Philippines levied at each stage of production and distribution process (RR 4-2007). "Cross
border doctrine" means that no VAT shall be imposed to form part of the cost of goods destined
for consumption outside the territorial border of the Philippine taxing authority (ATLAS
Consolidated Mining vs. CIR, June 8, 2007).
2|Page
, Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos
Kinds of VAT
1. VAT on sale of goods or properties
2. VAT on importation of goods
3. VAT on sale of services and use or lease of properties
Background of Value-Added Tax
The value-added tax became effective in the Philippines on January 1, 1988, by virtue
of Executive Order No. 273. Its imposition has replaced and eliminated certain traditional
business taxes in the Philippines.
With the approval of Republic Act Nos. 7716, 8241, 8424, 8761, 9010, 9337 and other
tax laws, more traditional business taxes were abolished and replaced by VAT.
The following taxes were abolished by the aforementioned laws:
1. Sales tax on original sakes
2. Subsequent sales tax
3. Contractor’s tax
4. Miller’s Tax
5. Broker’s Tax
6. Tax on cinematographic film owner, lessor, or distributor
7. Advance sales tax
8. Compensating tax
9. Excise taxes on matches, solvents, and video tapes
10. Tax on hotels, motels, etc.
11. Tax on dealers in securities
12. Tax on lending investors
13. Caterer’s tax
14. Tax on insurance premiums of non-life insurance companies (except crop
insurance)
15. Tax on franchises, except radio and television broadcasting companies whose
annual gross receipts of the preceding year do not exceed P10,000,000 and gas
and water utilities
The passage of Republic Act No. 9337 has introduced the following transactions into
the value-added tax world. Thus, the following sales of goods and services are now subject to
VAT:
1. Sale of non-food agricultural, marine, and other forest products in their original
state by the primary producer or owner of the land;
2. Sale of cotton and cotton seeds in their original state;
3. Sale or importation of coal and natural gas, in whatever state or form;
4. Sale or importation of petroleum products, including raw materials for their
production;
5. Sale by the artist of his works of art, literary works, musical compositions and
similar creations, or his services performed for the production of such works;
6. Services rendered by doctors of medicine duly registered with the Professional
Regulation Commission and by lawyers duly registered with Integrated Bar of the
Philippines;
3|Page
Prepared by: Mark Paul I. Ramos
MODULE 1
Business Taxes – Value-Added Tax
INTRODUCTION
This module introduces the basic principles and foundations of Value-Added Tax. The
main topics that will be covered will include: background of value-added taxes, reforms
introduced by VAT, nature and characteristics of VAT, its scope, ang VAT threshold. This
module also discusses the exemptions from VAT, (e.g. persons or entities, transactions).
Application of VAT to Senior Citizens, and Persons with Disabilities will also be tackled in this
course. Discussions will include the changes applied in effect of the TRAIN and CREATE Law.
INTENDED LEARNING OUTCOMES
ILO 1 – Demonstrate an extensive knowledge on the background, nature, scope, and
characteristics of Value-Added Tax
ILO 2 – Application of the VAT threshold and understand the exemptions relevant to VAT
ILO 3 – Understand VAT related to Senior Citizens and Persons with Disability
ILO 4 – Achieve best skills in resolving problems involving VAT
Introduction: Business Taxes
Business taxes are those imposed upon onerous transfers such as sales, barter,
exchange, and importation. It is called as such because without a business pursued in the
Philippines (except importation) by the taxpayer, business taxes cannot be applied.
Business taxes are in addition to income and other taxes paid, unless specifically
exempted.
Unlike an income tax, which is based on the taxpayer’s net taxable income, business
taxes are generally based on gross sales or gross receipts. Hence, irrespective of the results
of business operations (income or loss), taxpayers engaged in trade or business are still liable
to pay for business taxes (either VAT or OPT, plus excise tax, if applicable).
Types of Transfers
1. Gratuitous transfer (transfer without consideration) – not subject to business tax
but subject to transfer taxes (estate tax or donor’s tax)
2. Onerous transfer (transfer with consideration):
a. In the ordinary course of trade or business including incidental transactions
(subject to business tax and income tax)
b. Not in the ordinary course of trade or business (not subject to business tax
but may be subject to income tax)
ILLUSTRATION
Pinas Energy Corp. entered into a Built-Operate-Transfer (BOT) contract with the PNOC for
finance, engineering, supply, installation, testing, commissioning, operation and maintenance
1|Page
, Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos
of a Geothermal Power Plant. During the year, Pinas Energy Corp. sold for P200,000 a fully
depreciated vehicle (Nissan Patrol) used in business.
Question: How much is the business tax, if any?
Answer: VAT = P200,000 × 12% = P24,000
Types of Business Taxes
There are three major business taxes in the Philippines, namely:
1. Value added tax (VAT)
2. Other percentage taxes (OPT) or simply Percentage Tax
3. Excise Tax
As a rule, all sale of goods or services made in the normal course of trade or business
are subject to VAT unless exempt under the law. Nonetheless, if the sale is exempt from vat,
it may be subject to Other Percentage Tax (OPT) under Sections 116 to 127 of the Tax Code.
Consequently, transactions already subjected to VAT should no longer be subject to
Percentage Tax. However, such is not the case with respect to excise taxes. A transaction
subjected to either vat or percentage tax may still be subjected to excise tax as illustrated
below:
VAT OPT Excise Tax
SALE of Goods/Properties or Service may be subject to:
1. VAT, in general a X X
2. Exempt from VAT but subject to OPT E a X
3. Exempt from business taxes E E -
Manufacturing/importation and Sale of Sin-Products, Non-
essential goods/services may be subject to:
1. In general, VAT (plus excise tax, if applicable), OR a X a
2. Percentage tax (plus excise tax, if applicable) X a a
A transaction subjected to value added tax must no longer be subjected to percentage
tax. Nonetheless, a business entity or taxpayer may be engaged in transactions that are
subject to vat, exempt from vat and subject to percentage tax (mixed transactions) at the same
time. Therefore, a taxpayer may be subjected to value added tax and at the same time,
percentage tax including excise tax if applicable.
Value-Added Tax Defined
VAT is a tax on the value added by every seller to the purchase price or cost in the
sale or lease of goods, property or services in the ordinary course of trade or business as well
as on importation of goods into the Philippines, whether for personal or business use. It is a
tax on consumption levied on the sale, barter, exchange or lease of goods or properties and
services in the Philippines (cross border doctrine) and on importation of goods into the
Philippines levied at each stage of production and distribution process (RR 4-2007). "Cross
border doctrine" means that no VAT shall be imposed to form part of the cost of goods destined
for consumption outside the territorial border of the Philippine taxing authority (ATLAS
Consolidated Mining vs. CIR, June 8, 2007).
2|Page
, Tax 302 – Business and Transfer Tax
Prepared by: Mark Paul I. Ramos
Kinds of VAT
1. VAT on sale of goods or properties
2. VAT on importation of goods
3. VAT on sale of services and use or lease of properties
Background of Value-Added Tax
The value-added tax became effective in the Philippines on January 1, 1988, by virtue
of Executive Order No. 273. Its imposition has replaced and eliminated certain traditional
business taxes in the Philippines.
With the approval of Republic Act Nos. 7716, 8241, 8424, 8761, 9010, 9337 and other
tax laws, more traditional business taxes were abolished and replaced by VAT.
The following taxes were abolished by the aforementioned laws:
1. Sales tax on original sakes
2. Subsequent sales tax
3. Contractor’s tax
4. Miller’s Tax
5. Broker’s Tax
6. Tax on cinematographic film owner, lessor, or distributor
7. Advance sales tax
8. Compensating tax
9. Excise taxes on matches, solvents, and video tapes
10. Tax on hotels, motels, etc.
11. Tax on dealers in securities
12. Tax on lending investors
13. Caterer’s tax
14. Tax on insurance premiums of non-life insurance companies (except crop
insurance)
15. Tax on franchises, except radio and television broadcasting companies whose
annual gross receipts of the preceding year do not exceed P10,000,000 and gas
and water utilities
The passage of Republic Act No. 9337 has introduced the following transactions into
the value-added tax world. Thus, the following sales of goods and services are now subject to
VAT:
1. Sale of non-food agricultural, marine, and other forest products in their original
state by the primary producer or owner of the land;
2. Sale of cotton and cotton seeds in their original state;
3. Sale or importation of coal and natural gas, in whatever state or form;
4. Sale or importation of petroleum products, including raw materials for their
production;
5. Sale by the artist of his works of art, literary works, musical compositions and
similar creations, or his services performed for the production of such works;
6. Services rendered by doctors of medicine duly registered with the Professional
Regulation Commission and by lawyers duly registered with Integrated Bar of the
Philippines;
3|Page
