INTRODUCTION TO CONSUMPTION TAXES

BUSINESS TAXES
• Are those imposed upon onerous such as sale, barter, exchange and
importation.
• Are in addition to income and other taxes paid, unless specifically exempted.
• Are generally based on gross sales or gross receipts.
• Irrespective of the results of operations (income or loss), taxpayers engaged
in trade are still liable to pay for business taxes.
• Is a form of consumption tax.
In the course of trade or business
• Means the regular conduct or pursuit of a commercial or an economic
activity, including transactions incidental thereto, by any person,
regardless of whether or not the person engaged is a non-stock, non-
profit private organization or government entity.
• VAT provisions pertain to those persons whose undertaking are
intended to be pursued on a going concern basis to realized pecuniary
gains or profits from those who may avail the goods they sell or the
services they render.
• Services rendered in the Philippines by a non-resident foreign person,
shall be considered in the course of trade or business even if the
performance is not regular.
For subsistence or livelihood
• Any business pursued by an individual where the aggregate gross sale
or receipts do not exceed P100,000 during the any 12 month period
shall be considered principally for subsistence or livelihood and not in
the ordinary course of trade or business. Hence, not subject to
business taxes.
Consumption Tax
• Occurs when one acquires goods or services by purchase, exchange or
other means.
• 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
• It promotes savings formation.
• It helps in wealth redistribution to society.
• It supports the Benefit Received Theory.
RATIONALE OF CONSUMPTION TAX
PROMOTES SAVINGS
• Residual income after
consumption is savings;
• Savings promotes capital
formation and investment;
• Tax on consumption is to limit
consumption to shift part of the
income to savings formation.
WEALTH DISTRIBUTION TO SOCIETY
• Basic policy of the state to
redistribute wealth to society so
everyone could enjoy the same.
• Rich people buy more and spend
more since they can afford
expensive lifestyles.
• Since rich people pay more
consumption tax, so tax supports
redistribution of wealth from the
rich to less privileged members of
the society.
Consumption tax supports the Benefit
Received Theory
• Those who received benefit from the government shall pay taxes.
• Everyone in the state receives benefits from the government, hence,
everybody should be taxed.

• Income tax distinguished from consumption tax

• Income tax Consumption tax
Nature Tax upon receipt of income Tax upon usage of income or
capital
Scope A tax to the capable A tax to all
Supporting
tax theory Ability to pay theory Benefit received theory
Types of consumption
• Domestic consumption
- refers to consumption or purchase of Philippine residents.

Foreign consumption
- refers to consumption or purchases of non-residents.

Business taxation is inherently territorial, only domestic consumption

can be subjected to Philippine Taxation.
Foreign consumption cannot be taxed.
Destination principle
• Goods and services are 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.
• Cross border which are destined toward foreign territories should not
be charged with consumption taxes.
Summary of tax rules on consumption
• Domestic consumption Foreign consumption
• The seller is (Buyer is a resident) (Buyer is a non-resident)
Non-resident Taxable No tax
Resident Taxable Effectively no tax
Types of taxable domestic consumption
• Purchase of residents of goods or services from non-residents
abroad-this is most commonly known as “importation”.
• Purchase of residents of goods, properties or services from resident
sellers-this transaction is a “sale” on the seller’s perpective.
Consumption tax on importation
• Consumption tax is called Value Added Tax (VAT) on importation.
• 12% of the total import cost of the goods paid prior to withdrawal of the
goods from the warehouse of the Bureau of Customs.
• Every purchaser from non-residents (import of service) shall likewise pay
VAT on importation of service.
- it is called “Withholding VAT”.
- 12% of the contract price of the service.
Note: the consumption taxes on importation 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.
CONSUMPTON TAX ON DOMESTIC
CONSUMPTION FROM RESIDENT SELLERS
• The consumption tax on the purchases of Philippine residents from
resident sellers is collected from the seller.
• Our tax law imposed the consumption tax upon the sale of sellers of good
or receipts of sellers of services.
• The buyer is actually taxed because the sales or gross receipts of resident
sellers upon which the taxed is imposed are, by themselves, the purchases
of consumptions of resident buyers.
• The sellers are the ones named by law to pay the tax. The sellers are the
statutory taxpayers. The buyers are the real taxpayers or economic
taxpayers.
Consumption tax for resident buyers
• Is applied to businesses only.
• Consumption tax levied on the sales or receipts of a resident seller
who regularly engaged in business.
• The tax does not apply to seller who is not in business.
• The consumption tax is called business tax.
Business tax is a misnomer (wrong or
inaccurate use of name)
• Businesses are 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.
• Businesses suffer penalties for non-compliance.
• Business tax is to appear as a privilege to do business and is viewed as
“privilege tax”.
TABLE OF COMPARISON
VAT ON
IMPORTATION BUSINESS TAX
Basis of tax Acquisition cost Sales or receipts
Scope of tax All consumption Consumption from
from businesses only
Nature of consumption tax Pure form Relative form
Statutory taxpayer Buyer Seller
The economic taxpayer Buyer Buyer
Nature of imposition Direct Indirect
Table of summary: Consumption tax rules on
domestic consumption
Resident
Seller 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 of 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*

*The VAT on importation consistently applies regardless of whether or

not the seller or the buyer is engaged in business.
BASIS OF BUSINESS TAXES
• SALES – for businesses which sells goods or properties
• RECEIPTS – for businesses that sells services.

“Sales” pertain to the total amount agreed as consideration for the sale
of goods whether collected or uncollected.
“Receipts” pertain to collections from the sale of service.
Types of business taxes
1. Valued Added Tax (VAT) on sales
2. Percentage Tax
3. Excise Tax
Type of business taxpayers
• VAT taxpayers – those required to pay VAT

• Non-VAT taxpayers – those who pay the percentage tax

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

taxpayer produces certain excisable goods such as alcohol or
cigarettes.
VAT on sales
• The VAT on sales is a consumption tax imposed upon the sale of
goods, properties, services, or lease of properties.
Characteristics of the VAT on sales
1. Tax on valued added
2. Top-up on sales
3. Tax credit method
4. An explicit consumption tax
5. Quarterly tax
1. Tax on value added
• A tax value added by the seller (mark-up) on its purchases in making
sales;
• An imposition based upon the price increases made by producers and
distributors at each level of production or distribution.
2. Top-up on sales
• Required by law to be included in the price of the goods as a top-up
thereto.
• Amount billed to customer composed of selling price and VAT is called
“invoice price”
• If the VAT is not separately indicated in the sales docs, the amounts
appearing therein is presumed inclusive of VAT.
Tax credit method
• The VAT on sales shall be reduced by the amount of VAT paid by the
business on purchases.
• An excess VAT payment on purchases is carried-over as deduction
against the VAT on sales in future periods.

• Note: if no VAT is paid on purchases,. The VAT on sales effectively

becomes the VAT due of the business.
An explicit consumption tax
• The amount of VAT is explicitly disclosed in the invoice or official
receipt of the seller.
• Buyer know the amount of VAT they are paying on their purchases.
Quarterly tax
• The VAT return is filed quarterly but is paid on a monthly basis.
Methods of computing VAT
• DIRECT METHOD
-the value added tax is computed by applying the VAT rate to the
difference of the selling price and the purchase.
- though quiet simple, this method is not employed in the Philippines.

(SP – PURCHASE PRICE)X 12%

TAX CREDIT METHOD
• The tax rate is imposed upon the sales or receipt (output) of the
business is called “Output VAT”.
• The output VAT is reduced by the VAT paid by the business on its
purchases which is called “Input VAT”.
• The excess of the Output VAT over the Input VAT is the VAT due or
payable.
SPECIAL FEATURES OF THE TAX CREDIT
METHOD
1. Invoice-based crediting
- entitlement of input VAT is to be substantiated with invoices.

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.
VAT TAXPAYERS
• VAT-registered taxpayers
• VAT-registrable taxpayers
Tax Reform for Acceleration and Inclusion (TRAIN) LAW RA10963
dated December 27, 2017 amending the P1,919,500 VAT threshold to
P3,000,000 VAT threshold under TRAIN Law.
• Businesses which exceed P3,000,000 in sales or receipts in an 12-
motnh 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 if their annual
sales fall below the P3,000,000 VAT threshold.
PERCENTAGE TAX
• Is a sales tax of various rates, generally 3% imposed upon the gross
sale or gross receipts of non-VAT taxpayers.
CHARACTERISTICS OF PERCENTAGE TAX
1. Tax on sales or gross receipts
- total due from the buyer (invoice price) and percentage tax is
computed directly from this amount.

2. An expensed tax
- in income taxation, percentage tax is presented as an expense
deductible against the sales or gross receipt.
- this gives the percentage tax the impression of a direct tax or privilege
tax of the sellers.
CHARACTERISTICS OF PERCENTAGE TAX cont.
3. An implicit consumption tax
- the percentage tax is passed on to the buyer by inclusion in 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 masked as a direct tax.

4. Monthly or quarterly tax

- the percentage tax is payable monthly for most percentage taxpayers and
quarterly for certain percentage taxpayers.
- the percentage tax expense is presented as part of “taxes and licenses” and is
presented as a deduction against gross income under income taxation.
 WHO PAYS PERCENTAGE TAX?
1. Non-VAT taxpayers
- are those with sales or receipts not exceeding the P3,000,000 VAT
registration threshold;
- those who did not opt to register as VAT-taxpayers.
1. Taxpayers who sells services specifically subject to percentage tax.
- certain services specified by the law to be subjected to percentage
taxes at various rates.
- Businesses which have receipts from these services will pay the
corresponding percentage tax on such services even if they are VAT-
registered. (discussed in detail under Percentage Tax)
 IMPORTANCE POINTS TO CONSIDER:

1. The concept of sales between VAT taxpayers and percentage taxpayers

differs:
- for percentage taxpayers, sales or gross receipt is equivalent to the
invoice price;
- for VAT taxpayers, sales or gross receipts plus the 12% VAT comprises
the invoice price.
IMPORTANCE POINTS TO CONSIDER: (cont.)
2. VAT and percentage tax are mutually exclusive.
- Normally, business pay either VAT or percentage tax;
- Business which pay VAT do not pay the percentage tax.
- Similarly, businesses which pay percentage tax do not pay VAT.
- However, a VAT-registered taxpayer may pay both VAT and
percentage tax when it engages in activities which are specifically
designated by the law as subject to percentage tax.
- Moreover, business taxpayers will pay VAT if they erroneously or
intentionally use a VAT invoice or official receipt to bill their VAT-
exempt sales.
 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 ON 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 minerals, mineral products, and quarry
resources such as coal, coke, gold chromite, and silver.
 Percentage tax, VAT and Excise Tax apply to
domestic consumption
• The export sale of a non-VAT registered taxpayer is exempt from
percentage tax.
• The export sale of a VAT-registered taxpayer is imposed by the law with a
0% VAT.
• In both cases, there is effectively no consumption tax.
• When excisable articles are exported without returning to the Philippines
whether exported in their original state or as ingredients or parts of any
manufactured goods or products, any excise tax paid thereon shall be
credited or refunded upon submission of the proof of actual exportation.
 IMPOSABLE TAX PER TYPES OF CONSUMPTION
BUYER/CONSUMER
SELLER OF GOODS RESIDENT NON-RESIDENT
DOMESTIC BUSINESS
VAT-registered business 12% VAT on gross sales 0% VAT on GSP
Non-VAT-registered business 3% percentage tax on
gross sales Exempt
Foreigners 12% VAT on landed cost
of importation Exempt
 IMPOSABLE TAX PER TYPES OF CONSUMPTION
BUYER/CONSUMER
SELLER OF SERVICES RESIDENT NON-RESIDENT
DOMESTIC BUSINESS
VAT-registered business 12% VAT on gross 0% VAT on gross r
receipts receipts*
Non-VAT-registered business 3% percentage tax on
gross receipts Exempt
Foreigners 12% final withholding
VAT** Exempt
*Under the law, the services must be rendered in the Phil., to be subject to 0-rated
VAT & is exempt if the service is rendered abroad.
**this applies regardless of the place (Phil. Or abroad) where the service is
rendered.
 COMPARISON OF THE BUSINESS TAXES
VAT %TAX EXCISE TAX
Tax rate 12% Generally 3% Various ad valorem tax
rates & specific taxes
Basis Mark-up
value-added Sales or receipts Sales value or per unit
of excisable goods or
services.
Comparison of the Business Taxes
Timing of Upon sales or Upon sales or Upon production
imposition collection collection or importation
Generally paid by Bigger Smaller Both big or small
businesses businesses businesses
Export sales Subject to Exempt Exempt
0% VAT (Tax is reimbursable)
Note: 1. The various excise tax rates are enumerated in Sec 141 to Sec
151 of the National Internal Revenue Code (NIRC).
2. Excisable articles produced for foreign markets are also exempt from
excise tax.
SUMMARY (POINTS TO REMEMBER) 1/3
1. TWO TYPES OF CONSUMPTION:
a. Domestic consumption; and
b. Foreign consumption
Note:
1. Only domestic consumption is subject to tax.
2. If goods enter the Philippines, they will be subject to consumption
tax at the point of entry.
3. If goods are exported, they are effectively not subjected to
consumption tax. They are subject to 0% VAT for VAT taxpayers and
exempt from percentage tax for non-VAT taxpayers. They are also
exempt from excise tax.
SUMMARY (POINTS TO REMEMBER) cont. (2/3)
2. There are two types of consumption tax on domestic consumption:
a. VAT on importation, and
b. Business tax
3. There are three types of business tax:
Note:
a. The VAT on importation applies uniformly to all taxpayers.
b. The business tax applies only if the seller is engaged in business.
SUMMARY (POINTS TO REMEMBER) cont. (3/3)
3. There are three types of business tax:
a. VAT on sales
b. Percentage taxes
c. Excise tax
Note:
1. Taxpayers pay either VAT on sales or percentage tax with the excise tax as
an additional tax if they produce excisable articles.
2. The VAT on sales and percentage tax accrues at the point of sales or
collection while excise tax accrues at the point of production.
3. The VAT is based on the value added. It is 12% of sales or receipt less VAT
paid on purchase. The percentage tax is directly computed on the sales
or receipts.
END