Tax Finals Reviewer.docx

CHAPTER 16: NATURE AND CONCEPT OF BUNESS TAXES

Business – to engage in business means to employ or involve oneself in employment, occupation, profession, or commercial activity for gain or livelihood Business – habitually busies or occupies or engages the time, attention, labor and effort of persons as a principal serious concern or interest or for livelihood or profit. Engage – involves some continuity of action. Three major business internal revenue taxes: 1. 2. 3.

VAT Percentage Taxes Excise Taxes

“In the course of trade or business” – means regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto regardless of whether or not the person engaged therein is a non-stock, non-profit private organization or government entity. Any business where the aggregate GS/GR do not exceed P100,000 during any 12-month period shall be considered principally for subsistence or livelihood and not in the course of business. Services rendered in the PH by a non-resident foreign person shall be considered as being rendered in the course of trade or business even if the performance of services is not regular. Non-resident corporations deriving income from services performed abroad are not subject to PH income tax, w/holding tax, and VAT. They are only subject to income tax on income derived from all sources within the PH.

Business Taxes – imposed upon onerous transfers such as sale, barter, or exchange. VAT – tax on consumption levied on the sale, barter, or exchange or lease of goods or properties and services in the Philippines and on importation of goods into the Philippines. VAT – effective tool in the creation of an audit trail which is vital for tax administration and enforcement. Seller – liable for payment of tax but may be shifted or passed on to the buyer, transferee or lessee. In case of importation, importer – liable for VAT. VAT and Excise Tax – may be imposed simultaneously. VAT and Percentage Tax – cannot be imposed at the same time.

CHAPTER 17: VAT ON SALE OF GOODS AND PROPERTY VAT – tax on value added to purchase price or cost in the sale or lease of goods, property or services in the course of trade or business. VAT – an indirect tax that may be shifted or passed on to the buyer, transferee or lessee. Republic Act 9337 or “VAT Reform Act” – every person who, in the course of trade or business, sells, barters, exchanges, leases goods or property or renders services is subject to VAT, if the aggregate of his actual or expected GS/GR exceeds P1,919,500* (the previous threshold amount was P1,500,000). *P,919,500 shall be adjusted to its present value using the Consumer Price Index as published by NSO every 3 years. Such adjustment shall be published to be issued not later than March 31 of each year.

Income received by civic league, organization not organized for profit (non-stock/profit) but operated exclusively for promotion of social welfare and non-government organizations are only exempted from payment of income tax but not VAT. Sale in the course of trade or business includes: 1. 2. 3.

Disposition of assets and liabilities o business; Disposition of business as a going concern; and Anything done in connection with termination or intended termination of business.

Sale of goods or property with VAT: 1. 2. 3. 4.

Real property for sale or for lease in the ordinary course of trade or business Right or privilege to use patent, copyright, design or model, secret formula or process, etc. Right or privilege to use motion picture films, films, tapes and discs Radio, television, satellite transmission and cable television time

Gross Selling Price – total amount of money or its equivalent, which the purchaser pays or is obligated to pay to seller in consideration of sale, barter or exchange or goods or properties, excluding the VAT and including the excise tax (SRA and SD are deducted from GSP to arrive at tax base). Pre-Train: “There shall be levied, assessed and collected on every sale, barter or exchange, or transactions “deemed sale” of taxable goods or property, VAT equivalent to 12% of GSP or gross value in money of goods or property sold, bartered or exchanged, or deemed sold in PH.” Train: “There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, VAT equivalent to 12% of GSP or gross value in money of goods or property sold, bartered or exchanged, such tax to be paid by seller or transferor.”

goods, supplies, equipment and fuel shall be used for int’l shipping or air transport operations.)

Sales by VAT-registered persons subjected to Zero-Rate*: *“Effectively zero-rated sale of goods and properties” – refer to local sale of goods and properties by a VAT-registered person to a person or entity who was granted indirect tax exemptions. 1.

2.

3.

Export sales – means: a. Sale and actual shipment of goods from PH to foreign country irrespective of any shipping arrangement b. Sale of RM or packaging materials to a non-resident buyer for delivery to a resident local export-oriented enterprise to be used in the PH of the said buyer’s goods c. Sale of RM or packaging materials to export-oriented enterprise whose export sales exceed 70% of total annual production d. Sale of gold to BSP if seller is a VAT-registered taxpayer (TRAIN Law reclassifies this as among Exempt Transactions) e. Those considered export sales under Omnibus Investments Code of 1987 Note: C, D, and E are now subject to 12% VAT and no longer be considered export sales subject to zero-rate VAT upon satisfaction of the ff. conditions:  Successful establishment of VAT refund system that grants refunds or creditable input tax within 90 days from the filing of VAT-refund application; and  All pending VAT refund claims as of Dec. 31, 2017 shall be fully paid cash by Dec. 31, 2019.  Provided, that DOF shall establish VAT refund center in BIR and BOC that will handle the processing and granting of cash refunds  An amount equivalent to 5% of total VAT collection of BIR and BOC from immediately preceding year shall automatically appropriated annually and shall be treated as special account in General Fund (unused fund at the end of the year shall revert to GF)  Provided, further, that BIR and BOC shall be required to submit to COCCTRP a quarterly report of all pending claims for refund and unused refund. Foreign currency denominated sale – sale to a non-resident of goods (except automobiles and non-essential goods) assembled o manufactured in PH for delivery to resident in PH (TRAIN Law deleted this) Sale of good or property to persons/entities whose exemption under special law or int’l agreements to PH is a signatory

Even without actual exportation, these shall be considered constructively exported: 1. 2. 3. 4. 5. 6.

Sales to bonded manufacturing warehouses Sales to export processing zones Sales to enterprises duly registered and accredited with Subic Bay Metropolitan Authority Sales to registered export traders operating bonded trading warehouses Sales to diplomatic missions and other agencies Sale of goods, supplies, equipment and fuel to persons engaged in int’l shipping or int’l air transport operations. Provided, the sale is limited to goods, supplies, equipment and fuel to the transport of goods and passengers from port in PH directly to foreign port, or vice versa, without docking or stopping at any other port unless the docking/stopping is for the purpose of unloading/to load passengers and/or cargoes. (TRAIN Law amends this provision: Provided,

No output VAT may be passed on to an ecozone enterprise (PEZA registered enterprises) not because of the 5% preferential tax rate on gross income of the enterprise, but because ecozones are foreign territory. *Exportation from customs territory – sales made by supplier in customs territory to a purchaser in ecozone. *Importation into customs territory – sales made by supplier from ecozone to purchaser in customs territory. VAT system of PH adheres to Cross Border Doctrine:  

Actual export of goods and services from PH to a foreign country must be free of VAT Goods or services destined for use or consumption within PH shall be imposed with 10% VAT

Royalty payments made by a company for technical support services rendered by nonresident foreign corporation are subject to VAT. However, a company registered with PEZA as a resident w/holding agent operating within an economic zone cannot bear the burden of VAT. Sale of fixed assets by an enterprise registered with PEZA and engaged in manufacturing of electronic products is subject to regular income tax (30%), VAT and DST. Although the seller, being a PEZAregistered enterprise, is granted a preferential tax (5%) treatment, tax incentives only apply to the company’s registered activities. VAT-registered IT company is subject to 0% VAT on its sale of electronic gaming machine to a Freeport zone-registered enterprise in case the seller is VAT seller/contractor from customs territory. (Input tax paid attributable to zero-rated sale may be refunded to IT company by showing proof of payment of VAT on equipment it purchased and subsequently to Freeport zone registered enterprise). Freeport zones and Economic zones – considered as separate customs territories. Sales by entities registered with these zones are treated as: 1. 2.

Sales outside the country – if purchaser is also a locator or if the goods are for export to a country other than PH Domestic sales – sales are importations in the hands of purchaser and are thus subject to corresponding custom duties and other taxes on imported products

VAT and excise tax due on all petroleum and petroleum products that are imported and/or brought directly from abroad to PH, including the Freeport and economic zones, shall be paid by importer to BOC. The following are subject to 0% VAT: 1. 2.

Subsequent exportation or sale/delivery of petroleum and/or petroleum products to registered enterprises enjoying tax privileges within Freeport and economic zone Sale of said goods to persons engaged in int’l shipping or int’l air transport business operations

In case of sale/introduction of petroleum/petroleum products by freeport/economic zone registered enterprise into customs territory, to freeport/economic zone not enjoying tax privileges or any sale to entity not enjoying 0% tax rate, the seller shall be liable to 12% VAT. Transactions deemed sale: 1. 2.

3. 4.

Transfer, use or consumption not in the course of business of goods or property but originally intended for sale or for use in the course of business. Distribution or transfer to: a. Shareholders/investors as share in profits of VAT-registered persons b. Creditors in payment of debt or obligation Consignment of goods (actual sale in not made within 60 days following date such goods we consigned) Retirement from or cessation of business

Transfer of assets in exchange for shares is subject to VAT. GSP is unreasonably lower than actual market value – GSP is lower by more than 30% of actual market value of same goods of same quantity and quality sold. In this case, actual MV shall be the tax base. For transactions in which one of the parties is the government, output VAT shall be based on actual selling price. For transactions deemed sale, output tax shall be based on MV of goods deemed sold. In case of retirement or cessation of business, tax base shall be whichever is lower between acquisition and current market price of goods or properties. The following sale of real properties is subject to output VAT: 1. 2.

3. 4.

Sale of residential lot with GSP exceeding P1,919,500 (P1,500,000 before) Sale residential house and lot or other dwellings with GSP exceeding P3,199,200 (P2,500,000 before) where the instrument of sale is executed on or after Jan. 1, 2012 a. Includes sale, transfer or disposal within 12-month period of 2 or more adjacent residential lots, house and lots or other residential dwellings in favor of one buyer from same seller b. Excludes sale of parking lot Installment sale of residential house and lot or other dwellings with GSP exceeding P1,000,000 Real estate investment trust (REIT) shall be subject to VAT on its GS from any disposal of real property

Gross Selling Price – basis of VAT on taxable sale of real property whichever is higher between:  

Selling price stated in sale document; and Fair market value – whichever is higher between FMV as determined by Commissioner (zonal value) or the consideration in the absence of zonal value and FMV as shown in schedule of values of Provincial and City Assessors (real property tax declaration)

Sale of real property on installment plan with zonal or FMV value higher than consideration of sale, the formula to compute VAT on installment payment will be: Actual collection (exclusive of VAT) Agreed consideration (exclusive of VAT)

x

Zonal Value

x

12%

Sale of real property on installment plan – sale of real property by a real estate dealer*, the initial payments of which in the year of sale do not exceed 25% of GSP. *Real estate dealer – any person engaged in business buying, developing, selling, exchanging real properties as principal and holding out as a full or part-time dealer in real estate.  

Seller – subject to output VAT on installment payments received, including interests ad penalties for late payment Buyer – can claim input tax in the same period as seller recognized output tax

Sale of real property by a real estate dealer on deferred payment – sale of real property, the initial payments of which in the year of sale exceed 25% of GSP (treated as cash sale which makes the entire SP taxable in the month of sale).  

Seller – recognize output tax Buyer – accrue input tax

Initial Payments – payments which the seller receives before and upon execution of instrument of sale and payments which the seller is scheduled to receive cash or property during taxable year the the sale or disposition of real property was made.  

Includes: down payment and all payments received during the year of sale Excludes: mortgage on real property (except when such mortgage exceeds cost or other basis or property, in which case the excess shall be considered part of initial payments) and notes or other evidence of indebtedness issued by purchaser to seller at the time of sale

Transfer of property by dissolving corporation to its stockholders by way of liquidating dividend is not subject to income tax, CWT and DST, but a “deemed sale” transaction for VAT purposes. *On the part of stockholder, any liquidating gain shall be treated as capital gain subject to regular income tax rates. (Liquidating Gain = Adjusted cost basis of shares – FMV of property received as LD). Advance VAT – On transport of naturally grown and planted timber products 



Requirement to pay advance VAT: advance VAT shall be paid by owner/seller to BIR through AAB/RCO/deputized city or municipal treasurers before transporting them from place of production or concession Basis for determining amount of advance VAT payment: advance VAT shall be determined by applying VAT rate of 12% on corresponding value per cubic meter of different species of naturally grown and planted timber products

Advance VAT – Sale of refined sugar Raw cane sugar (only those falling under this definition are exempt from VAT or percentage tax) – natural sugar extracted from sugarcane through simple mechanical process of pressing for juice; boiling to crystalize’ filtering using a centrifuge to separate these crystals, and drying, resulting in crystallized

brown sugar (its color is greater than 800 ICU and its content of sucrose by weight in a dry state corresponds to polarimeter reading of less than 99.5°. Includes muscovado which has standard specifications as produced, namely: 1. 2. 3.

Powder class A – polarization of 86° minimum Powder class B – polarization of 77° minimum Lump – polarization of 57° minimum

Refined sugar – refers to sugar other than raw cane sugar; sugar whose content of sucrose by weight in the dry state corresponds to a polarimeter reading 99.5° and above and/or whose color is 800 ICU or less. 



Advance VAT – Sale of flour milled from imported wheat Flour Miller – person who is engaged in milling of imported wheat to produce flour as finished product, where such wheat may be directly imported or purchased from an importer/trader. Wheat Trader – person who is engaged in the importing/buying and selling of imported wheat. 



Requirement to pay advance business taxes: business tax shall be paid in advance by owner/seller before any warehouse receipt or quedans are issued, or before the sugar is withdrawn from any sugar refinery mill. Basis for determining advance tax: advance VAT shall be determined by applying 12% VAT rate on the base price of P1,400 per 50 kg. bag of sugar; advance percentage tax (for those VAT-exempt and not VAT-registered persons) shall be determined by applying 3% to GS/GR, provided that cooperatives shall be exempt from 3% tax.

Exemptions from payment of advance VAT: 1.

2.

Withdrawal of sugar by duly accredited and registered Agricultural Cooperative in Good Standing:  Sugar owned and withdrawn from sugar refinery/miller by an agricultural cooperative in good standing duly accredited and registered with CDA is not subject to advance VAT or percentage tax.  Withdrawal of sugar for sale to non-members is subject to payment of advance VAT/percentage tax if agricultural cooperative is not producer of sugar  Any quedan or evidence of ownership showing the name of cooperative together with another entity is not exempted from payment of advance VAT/percentage tax  To claim exemption, cooperative must be a holder of a valid, current and subsisting Cert. of Tax Exemption Withdrawal of sugar by duly accredited and registered Agricultural Cooperative and sold to another Agricultural Cooperative:  Sale of sugar from agricultural cooperative to another agricultural cooperative is not subject to VAT and advance percentage tax  Seller is not an agricultural producer but merely purchases the sugar from planter or transfers sugar to cooperative through assignment, its sale of resulting sugar to another agricultural cooperative shall be subject to VAT, and its withdrawal shall only be allowed upon payment of advance VAT/percentage tax  Any quedan or evidence of ownership showing the name of cooperative together with another entity is not exempted from payment of advance VAT/percentage tax

Producer – incurs production cost and produces sugar cane to be refined (need not be tiller of land it owns or leases).

Requirement to pay advance VAT: VAT on sale of flour miller shall be paid by flour miller prior to release from BOC’s custody of wheat; VAT on purchase by flour millers shall be paid by flour miller prior to its delivery. Basis for determining the amount of advance VAT payment: a. For wheat imported by flour millers – 75% of the sum of|: Invoice value x currency exchange rate on payment date xxx Customs duties and other charges except for advance VAT xxx 5% of the sum of invoice and customs xxx Total xxx Multiply by 75% Tax base xxx Multiply by VAT rate 12% Advance VAT xxx b. For wheat purchased from traders – 75% of the sum of: Invoice value xxx Estimated freight expenses xxx 5% of the sum of invoice and freight expenses xxx Total xxx Multiply by 75% Tax base xxx Multiply by VAT rate 12% Advance VAT xxx

Advance VAT – Sale of jewelry, gold and other metallic minerals to NRA-NETB or NRFC   

Advance payment of 12% VAT on GSP or advance payment of percentage tax 3% on GS; Advance payment of income tax 5% on gross payment; Actual payment of 2% excise tax based on either actual MV* of gross output at the time of removal or the value used by BOC in computing tariff and duties *Actual MV – refers to the actual consideration paid by buyer to seller.