Chapter 1.1
Introduction to Business Tax
Business Taxes
Business, as defined in the Local Code (LGC) of 1991, pertains to trade or commercial
activity “regularly engaged in” as a means of livelihood or with a viewpoint of obtaining
profit.
“In the course of trade or business” is a phrase to describe the regular conduct or pursuit
of a commercial activity, including transactions incidental thereto, to achieve the purpose
for which the business is created.
The “Business" Concept
General Rule: Habitual engagement in a commercial activity
Exception Rule:
1. Business for subsistence (Gross receipts or Gross sales ≤ P100,000/year) = not
considered business
2. Sales or services of non-resident aliens/non-resident foreign corporations = considered
engaged in business
Transactions subject to Business Taxes
1. Commercial Activity. The sale of goods and services related to trade, profession, or
business in the Philippines are generally subject to business taxes, except when the law
provides that they are exempted from business taxes*
a. Regular sale of goods and services not exempted by law from business tax: sale
of goods intended for sale; professional services and repair services.
b. Sale of ordinary asset used in business, other than business inventory.
The sale of corporation of company cars to its officers is now subject to VAT
being incident to the pursuit of its commercial activity.
*Business for subsistence or livelihood (for marginal income earners)
a. Agricultural growers or producers (farmers or fishermen)
b. Small sari-sari stores
c. Small carinderias or turo-turos
d. Drivers or operators of a single unit tricycle, and
e. Other similarly situated
Although regular in operations, marginal income earners are exempt from business
tax but they are subject to income tax.
2. Service rendered by the nonresident foreign person. Services rendered in the
Philippines by nonresident foreign persons shall be considered as being rendered in the
course of business without regard to the “rule of regularity.”
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3. Some non-business transactions
a. Sale of shares of stock
b. Overseas communications
c. Horse race winnings
Casual Sale
A casual sale is an occasional sale of goods or services by a person who is not engage in
business or sale of assets that are not used in business. It involves selling of personal
properties or belongings not used in business. For tax purposes, casual sales are not subject
to business tax but are subject to income tax.
1. Sale of house and or lot classified as capital asset (not used in business)
2. Sale of personal car and other intangible assets not used in business; and
3. Employment services
Who shall pay Business Taxes?
Business taxes are payable by persons engaged in business. The term “persons” refers to
any individual, trust, estate, partnership, corporation, joint venture, cooperative or
association. Each person, natural or juridical is considered a taxable unit. The concept of a
taxable unit in income taxation as well as in business taxation is the same, except that a
taxable unit in business taxation is called a taxable “person.”
However, income tax exemption does not necessarily mean business tax exemption.
Similarly, business tax exemption does not necessarily mean income tax exemption. Hence,
a general professional partnership which is exempt from income tax is subject to business
tax.
Nature of Business Taxes
1. Consumption tax- tax on consumption, utilization, or purchase of goods, properties,
or services.
2. Indirect tax- tax imposed to the seller rather than to the buyer.
3. Privilege tax- to secure and enforce compliance, the law made business taxes
appear as a tax on the privilege to do business
Types of Business Taxes
1. Value-added Tax (VAT)
It is a general consumption tax that requires a 12% additional tax on the sales price
of goods and or services by VAT-registered seller or seller required by law to be
under VAT-system.
2. Other Percentage Taxes (OPT)
These are general consumption taxes imposed to non VAT-registered businesses.
There are several tax rates of OPT but the most common is 3%. The tax base of OPT
is the gross sales or gross receipts of non-VAT businesses that are not exempt from
OPT.
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3. Excise Taxes (ET)
These are taxes imposed on products that are harmful to health (such as alcohol or
tobacco), goods that are nonessential, and products that deplete natural resources
(mineral products) that are manufactured or produced in the Philippines. This kind
of tax is also levied on some imported products to protect local industries.
The excise tax is imposed in addition to VAT or OPT.
Business Registration
Any person who, in the course of trade or business, sells, barters, or exchanges goods or
properties, or engaged in the sale of services subject to business taxes shall:
a. Register with the appropriate Revenue District Office (RDO)
b. Pay registration fee of Php 500.00 for every separate or distinct establishment
where sales transactions occur before the start of such business and every year
thereafter on or before the 31st day of January.
Any person who maintains a head or main office in different places shall register with the
RDO which has jurisdiction over the place where the head office or branch is located.
For regulation purposes, the State, through the exercise of its police power, requires a
business to be registered first before the commencement of its economic activities.
Noncompliance to business registration renders the business illegal.
A registration certificate shall be issued to the applicant by the concerned BIR office upon
compliance with the requirements for registration. Every registered taxpayer shall post or
exhibit his Registration Certificate (original copy) and duly validated Registration Fee
Return at a conspicuous place in his principal place of business and at each branch in such
a way that is clearly and easily visible to the public.
Exempt from Registration
1. Individual earning purely compensation income
2. Overseas workers
3. Self-employed individuals where the gross sales or receipt do not exceed Php
100,000 per year (subsistence livelihood earner/minimum wage earner)
Upon registration of the business, the taxpayer will indicate in the BIR Form whether his
business is subject to VAT or OPT. If the products of the business are harmful or
nonessential, in addition to VAT or OPT, the excise tax shall also be imposed.
VAT or Non-VAT Registration
1. Mandatory VAT Registration
a. The business’ expected annual gross sales or receipts exceed 1,919,500 (old) or
3,000,000 (TRAIN Law)
b. If a taxpayer has realized gross receipts or sales of more than 1,919,500 (old) or
3,000,000 (TRAIN Law) = VAT Registrable
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Optional VAT Registration
Persons with taxable business transactions that do that exceed 1,919,500 (old) or
3,000,000 (TRAIN Law) per year have the option to register under the VAT system.
This is subject to three conditions:
a. The taxpayer’s dominant business is covered by the VAT law and has thus
registered as VAT taxpayer;
b. Said VAT registered taxpayer has other business transactions which are exempt
from VAT, but has opted to register the same as well to be covered by the VAT
system; and
c. The optional VAT registration shall be irrevocable for a period of 3 years from
the date of registration.
2. Non-VAT Registration
A taxpayer who did not opt to register under VAT-system must register under nonVAT system when he is a VAT-exempt person subject to other percentage tax.
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