CHAPTER ONE

Introduction to Business Taxes

 Meaning of “In the Course of Trade or Business”
The term “in the course of trade or business” means the regular conduct or pursuit of a commercial or
economic activity, including transactions incidental thereto, by any person regardless of whether or not the
person engaged therein is a non- stock, non-profit private organization (irrespective of the disposition of its
net income and whether or not it sells exclusively to members or their guests), or government entity.
Non-resident persons who perform services in the Philippines are deemed to be making sales in the course
of trade or business, even if the performance of services is not regular. (Sec. 105, NIRC; RR 16-2005)
“Person” refers to any individual, trust, estate, partnership, corporation, joint venture, cooperative or
association.

A “commercial or economic activity” is an activity where the purpose is profit or income. However, there
are exceptions. Thus:
1.An importation of goods for personal use is subject to the value-added tax.
2.An overseas communications tax, even if not related to business, is subject to a percentage tax.

The term “regular” involves more than one isolated transaction. It requires repetition and continuity of action.
This rule is subject to exceptions.

There may be isolated transactions which are subject to business taxes. Examples are:
1.An importation of goods for personal use is subject to value-added tax.
2.A single overseas communication is subject to a percentage tax.
3.A winning in a horse race or jai-alai is subject to a percentage tax.
4.A single sale of shares of stock of a domestic corporation thru a local stock exchange by one who is not
a dealer in securities is subject to a percentage tax.

 The Major Business Taxes

There are three major business taxes in the National Internal Revenue Code, namely
1.Excise taxes
2.Percentage taxes
3.Value-added tax

EXCISE TAXES
Excise taxes apply to goods manufactured or produced in the Philippines for domestic sales or consumption
or for any other disposition and to things imported. Excise tax imposed shall be in addition to the value-added
tax. (Sec. 129, NIRC)

 Two classifications of excise tax

 Specific tax – tax is based on weight or volume capacity or other physical unit of measurement (e.g.
₱5.00 year2013 excise tax per cigar, inc.4% yearly).
 Ad valorem tax – tax is based on selling price or other specified value of the good (e.g. 20% based
on the wholesale price or the value of importation; automobiles ₱600,000-₱1,000,000 selling price,
excise tax 10%)
The excise taxes are imposed on
1. Manufacturers; or
2. Importers,
3. Also apply to services* performed in the Philippines (RA 10963).

Of any of the following categories of goods or articles (Sec. 141-151, NIRC)

1. Distilled spirits (e.g. whisky, brandy, rum, gin and vodka)
2. Wines (e.g. Sparkling wines/champagnes)
3. Fermented liquors (e.g. beer and ale)
4. Tobacco products (e.g. chewing tobacco)
5. Cigars
6. Cigarettes
7. Manufactured oils and other fuels (e.g. gasoline, kerosene, and diesel fuel oil)
8. Automobiles
9. Non-essential goods (e.g. jewelry, precious stones, perfumes, and yachts); and
10. Mineral products (e.g. coal, copper and gold)
11. Sweetened Beverages (RA 10963)
12. Non-essential services* Performance of Services on Invasive Cosmetic Procedures (RA 10963)
* RR 2-2019
Note: Purely electric vehicles shall be exempt from the excise tax on automobiles, hybrid vehicles shall be
subject to fifty percent (50%) of the applicable excise tax rates on automobiles. The BIR shall make a
determination whether the EV or HEV is exempt from excise tax or subject to 50% excise tax, respectively,
on the basis of the Certificate of Non-Coverage (CONC) or Certificate of Conformity (COC) issued by the
DENR-EMB as presented by the manufacturer/assembler/importer. (RR 24-2018) TRAIN LAW

As points of emphases, there are two questions to ask

1. Is the taxpayer a manufacturer or importer?
2. Are the articles in any of the twelve categories of articles subject to excise taxes?

Illustration 1
Mr. Ante is a manufacturer of cigarettes. Is Mr. Ante subject to excise tax?
Answer: Yes (Manufacturer & the article is included in the twelve)

Illustration 2
Mr. Bueno is an importer of wines. Is Mr. Bueno subject to excise tax?
Answer: Yes (Importer & the article is included in the twelve)

Illustration 3
Mr. Cruz is a dealer, buying and selling of automobiles. Is Mr. Cruz subject to excise tax?
Answer: No (Neither manufacturer or importer, although the article is included in the twelve)

Illustration 4
Mr. De Guzman is a manufacturer of shoes. Is Mr. De Guzman subject to excise tax?
Answer: No (Manufacturer but the article is not included in the twelve)
 Illustration 5
Mr. Evangelista is an importer of signature clothes. Is Mr. Evangelista subject to excise tax?
Answer: No (Importer but the article is not included in the twelve)

PERCENTAGE TAXES
The percentage taxes under the National Internal Revenue Code are (Sec.116 -127,NIRC)
 3% percentage tax on sale of goods, properties or services (1% from July1, 2020
– June 30, 2023 CREATE Law)
 Common carrier’s tax on domestic and international carriers
 Franchise tax
 Overseas communications tax
 Tax on banks and non-bank financial intermediaries with quasi-banking
activities
 Tax on other non-bank financial intermediaries
 Tax on life insurance companies, including tax on agents of foreigninsurance
companies
 Amusement tax
 Tax on winnings; and
 Stock transactions tax
Except the 3% percentage tax which may be on the sale of goods or properties, or of services, the percentage
taxes are on services.

VALUE-ADDED TAX
The value-added tax is imposed on
 Sale of goods or properties
 Sale of services; and
 Importation of goods

Subject to the basic rules

 That those whose annual gross sales or receipts do not exceed Three Million Pesos
(₱3,000,000) (RA 10963) are exempt from the value-tax, but subject to the three
percent (3%) percentage tax (but see optional registration under the value-added
tax system);
 That those whose annual gross sales or receipts exceed Three Million Pesos
(₱3,000,000) are subject to the value-added tax;
 That those who are subject to the percentage tax are not subject to the value-added
tax;
 That those who are subject to the excise tax shall pay the excise tax with the value-
added tax or with the 3% percentage tax.

Figure 1 Concurrence business taxes on businesses
Case 1. Excise tax alone? No
Case 2. Excise tax with value-added tax? Yes
Case 3. Excise tax with 3% percentage tax?* Yes
Case 4. Excise tax with any other percentage tax? No
Case 5. Value-added tax alone? Yes
Case 6. Percentage tax alone? Yes
Case 7. Value-added tax with any percentage tax? No
 *if gross annual sales do not exceed ₱3,000,000

Figure 2 Business taxes on manufacturers, dealers, and importers of goods

Taxpayers Exciseable articles Non-exciseable articles

a) Manufacturers whose
annual gross sales do Excise tax
not exceed ₱3,000,000 3% percentage tax 3% percentage tax
b) Manufacturers whose
annual gross sales Excise tax
exceed ₱3,000,000 Value-added tax Value-added tax
c) Dealers whose annual
gross sales do not
exceed ₱3,000,000 3% percentage tax 3% percentage tax
d) Dealers whose annual
gross sales exceed
₱3,000,000 Value-added tax Value-added tax
e) Importers Excise tax
Value-added tax Value-added tax

Illustration 6
Mr. Fajardo is a manufacturer of wines whose annual gross sales do not exceed
₱3,000,000. Is he subject to excise tax?
Answer: Yes
Is he subject to value-added tax or percentage tax?
Answer: Percentage tax

Illustration 7
Mr. Gapuz is a manufacturer of clothes whose annual gross sales do not exceed ₱3,000,000. Is he
subject to excise tax?
Answer: No (not included in the twelve categories of articles)
Is he subject to value-added tax or percentage tax?
Answer: Percentage tax

Illustration 8
Mr. Herrera is a manufacturer of cigarettes whose annual gross sales exceed
₱3,000,000. Is he subject to excise tax?
Answer: Yes
Is he subject to value-added tax or percentage tax?
Answer: Value-added tax
 Illustration 9
Mr. Ignacio is a manufacturer of shoes whose gross sales in a year exceed ₱3,000,000. Is he
subject to excise tax?
Answer: No (not included in the twelve categories of articles)
Is he subject to value-added tax or percentage tax?
Answer: Value-added tax

Illustration 10
Mr. Joaquin is an importer of cigarettes. Is he subject to excise tax?
Answer: Yes
Is he subject to value-added tax or percentage tax?
Answer: Value-added

Illustration 11
Mr. Kenyo is an importer of signature clothes. Is he subject to excise tax?
Answer: No (not included in the twelve categories of articles)
Is he subject to value-added tax or percentage tax?
Answer: Value-added tax

Registration of Business
Every taxpayer subject to an internal revenue tax must register with the Bureau of Internal
Revenue and pay an annual registration fee of five hundred pesos (₱500) using BIR Form
No. 0605 for every separate and distinct establishment, including facility types (sales outlets,
places of production, warehouses, and storage places),where the business is conducted. He
shall register each type of internal revenue tax for which he is obligated. The taxpayers are
required to pay the annual registration fee not later than January 31, every year.

Illustration 12
Mr. Lumibao is a merchant. He has his main store in the City of Manila, a branch store
in Quezon City, and another branch store in Pasay City. How many payments of
registration fee are required?
Answer: Three (3)

Registration as VAT Taxpayer When Annual Sales Exceed ₱3,000,000

Registration as a value-added taxpayer is required of a person if
 His gross sales or receipts for the past twelve (12) months, other than those that are
exempt under paragraphs (a) to (u) of Section 109, have exceeded Three Million
Pesos (₱3,000,000) or
 There are reasonable grounds to believe that his gross sales or receiptsfor the
next twelve (12) months, other than those that are exempt under paragraphs (a) to
(u) of Section 109 will exceed Three Million Pesos (₱3,000,000).

For the consequence of the failure of a vatable person to register as value-added taxpayer, see discussion in
the chapter on value-added tax.
 Optional Registration
Any person who is not required to register for value-added tax because his sales did not, or is
not to expected to, exceed Three Million Pesos (₱3,000,000) a year, may elect to register under
the value-added tax system. When he thus registers, he becomes subject to all the rules on
value-added tax. Such election shall not be cancelled for the next three (3) years.

Transfer of Registration
In case a registered person decides to transfer his place of business or his head office or branch,
it shall be his duty to update his registration status by filing an application for registration
information update (BIR FORM 1905) in a prescribed form of the Bureau of Internal Revenue.

Cancellation of Registration
A registered person may cancel his registration by filing an application for registration
information (in a prescribed form BIR FORM 1905). For special rule on cancellation of VAT
registration see discussion in the chapter on value-added tax.

Registration of Invoices and Receipts

A taxpayer who is in a business subject to the value-added tax should have his invoices and
receipts registered with the Bureau of Internal Revenue. Such invoices and receipts should
clearly indicate that he is a value-added tax registeredtaxpayer. A taxpayer who is in a business
not subject to the value-added tax should have his invoices and receipts registered with the
Bureau of Internal Revenue. Such invoices and receipts should clearly indicate that he is not
subject to the value-added tax.

A taxpayer who has both a VAT and a non-VAT business may have one set of invoices only
(the VAT invoices and receipts), but in using a VAT invoice or receipt for the non-VAT sale,
the term “VAT-exempt sale” should be written or printed prominently on the invoice or receipt
(Sec. 11, RA 9337). If the words are not written or printed, the sale becomes subject to the value-
added tax. (See other rules on invoices and receipts in the chapter on value-added tax).

Registration of Books of Accounts

Every person in business must register a set of books of accounts with the Bureau of Internal
Revenue. This registration is simultaneous with the registration of the invoices and receipts.
The minimum requirements are a General Journal and a General Ledger.

The general journal is called a book of “original entry.” Day to day businesstransactions are
recorded in the general journal. The transactions of a day must berecorded in the general
journal at the end of the day, or next day (not later than twenty-four hours after the
transaction).

The general ledger classifies and summaries the transactions of a period (e.g. month, year)
as recorded in the general journal. For example, the cash receiptsand cash disbursements
of a month are “entered” in a general ledger account with the title “cash”. The cash balance
at the end of the month will be reflected in a report to management or in a financial statement
called balance sheet. At the end of the year, the year-end balance of the cash of the business
will be reflected in thegeneral ledger, and will be reported in the balance sheet. At the end
of the year, the general ledger also summarizes and reflects the year-long income and
expenses of the business, and facilitates the computation of the net income of the year.

The books of accounts of a business must be preserved for a period of three yearsfrom the
date of last entry in the books. While it is the practice of some business to register a new set
of books before the end of a year, for use next year, it is allowedto use a set of books of
accounts as long as it can be used, until it is filled up.
The registration of a new set of manual books of accounts shall only be at the time when the
pages of the previously registered books have all been already exhausted, provided, that the
 portions pertaining to a particular year should be properly labeled or marked by taxpayer.
This means that it is not necessary for a taxpayer to register/stamp a new set of manual books
of accounts each and every year.

The Tax Return

The data reported in the tax return (e.g. income tax return, value-added tax return, etc.) must
reflect data in the books of accounts. The Bureau of Internal Revenue,in verifying the data
in the tax return which were the basis of the payment of the tax, will trace the date in the
tax return to the books of accounts. For this reason, the books of accounts should be kept in
the office of the taxpayer within the jurisdiction of the regional office of the Bureau of
Internal Revenue where the return was filed and the tax paid.

Cessation of Business
The taxpayer should give notice to the Bureau of Internal Revenue should he decide to
discontinue the business that he registered with the Bureau. The reason for this is that the
Bureau will make a last determination if the taxpayer had correctly paid all the taxes due
while he was in business.

REVENUE MEMORANDUM CIRCULAR No. 29-1019

Section 1. Keeping of Books of Accounts
All corporations, companies, partnerships or persons required by law to pay internal revenue taxes shall use
and keep relevant and appropriate set of bookkeeping records duly authorized by the Secretary of Finance
wherein all transactions and results of operations are shown and from which all taxes due the Government
may readily and accurately be ascertained and determined any time of the year, pursuant to Sec. 232 of R.A.
No. 10963.
Taxpayers may maintain its books of accounts in any of the following manner:
(1) Manual Books of Accounts;
(2) Loose leaf Books of Accounts (with Permit to Use);
(3) Computerized Books of Accounts (with Permit to Use).

Books of Accounts shall be kept at all times in the place of business of the taxpayer. Such books and registers,
together with records, vouchers, and other supporting papers and documents prescribed by the Bureau of
Internal Revenue (BIR), kept by taxpayers shall be preserved intact, unaltered and unmutilated. Keeping of
two or more sets of records or books of accounts is prohibited.
All entries in the Manual Books of Accounts shall be handwritten. Printouts of the accounting records
pasted/glued/inserted onto pages/sheets of the registered Manual Bound Books of Accounts are prohibited and
subject to penalty pursuant to existing revenue issuances.

Section 2. Registration of Books of Accounts

The manual books of accounts shall be registered before the deadline for filing of the first quarterly income
tax return or the annual income tax return whichever comes earlier.
Loose leaf books of accounts/invoices/receipts and other accounting records shall be permanently bound and
presented for registration together with a sworn statement attesting to the correctness of the entries made, and
the number of all invoices, receipts, books of accounts used for the period covered to the RDO/LTAD/ELTRD/
LTD-Cebu/LTD-Davao where the Head Office or Branch is duly registered on or before “15 days the
end of each taxable year" or "within 15 days from the closure of business operations" whichever comes
earlier, unless extended by the Commissioner or his duly authorized representative, upon request of the
taxpayer before the lapse of said period.
Computerized Books of Accounts and other accounting records in electronic format shall be submitted and
registered to the RDO/LTAD/ELTRD/LTD-Cebu/LTD- Davao where the Head Office or Branch is duly
registered within thirty (30) days from the close of each taxable year or "within 30 days from the closure of
business operations" whichever comes earlier, unless extended by the Commissioner or his duly authorized
representative, upon request of the taxpayer before the lapse of said period.

Section 3. Examination of Books of Accounts

Corporations, companies, partnerships or persons whose gross annual sales, earning, receipts or output exceed
Three million pesos (₱3,000,000), shall have their books of accounts audited and examined yearly by
independent Certified Public Accountants.

Section 4. Retention Period

All taxpayers are required to preserve their books of accounts, including subsidiary books and other accounting
records, for a period of ten (10) years reckoned from the day following the deadline in filing a return. Or if
filed after the deadline, from the date of the filing of the return, for the taxable year when the last entry was
made in the books of accounts: Provided that, within the first five (5) years reckoned from the day following
the deadline in filing a return. Or if filed after the deadline, from the date of the filing of the return, for the
taxable year when the last entry was made in the books of accounts, the taxpayer shall retain hardcopies of the
books of accounts, including subsidiary books and other accounting records. Thereafter, the taxpayer may
retain only an electronic copy of the hardcopy (paper) of the books of accounts, subsidiary books and other
accounting records in an electronic storage system which is compliant with the requirements set forth under
Section 2-A of Revenue Regulations No. 5-2014.
This Circular revokes all other issuances inconsistent herewith and shall take effect immediately. All internal
revenue officers and employees are hereby enjoined to give this Circular a wide publicity as possible.