College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)305-0645 Local 137
Big Picture
Week 1-3: Unit Learning Outcomes (ULO): At the end of the unit, you are expected to
a. Explain the concept, and nature of internal revenue taxes.
b. Discuss the concept of business, business registration in the Philippines, and the
concept, nature and types of business taxes.
c. Explain the concepts and kinds of percentage tax.
Big Picture in Focus:
ULOa. Explain the concept and nature of internal revenue taxes.
ULOb. Discuss the concept of business, business registration in the
Philippines, and the concept, nature and types of business taxes.
Metalanguage
In this section, the most essential terms relevant to the study of the nature of internal revenue
taxes and to demonstrate ULOa will be operationally defined to establish a common frame of
refence as to how the texts work in taxation. You will encounter these terms as we go through the
study of internal revenue taxes. Please refer to these definitions in case you will encounter
difficulty in the in understanding educational concepts.
1. Person. This means an individual, a trust, estate or corporation.
2. Taxpayer. This means any person subject to tax imposed by this Title.
3. Business. This refers to an activity with two primary characteristics: (1) habitual
engagement and (2) commercial activity.
4. Habitual Engagement. This refers to an engagement between two parties done on a
regular basis.
5. Commercial Activity. This refers to an activity whose primary purpose of its conduct is
to earn a profit.
6. Non-dealers. These refer to sellers of merchandise that they are not regularly engaged
in. These may also refer to sellers of capital assets. (example: A dealer of securities who
sells his residential lot to his friend. He is considered a non-dealer with respect to his sale
of residential lot. However, he is considered a dealer with respect to his sale of securities.)
7. Privilege stores. These are temporary stalls for the purpose of selling variety of goods
or services for special events such as bazaar or caravan for a cumulative period of not
more than 15 days
8. Marginal income earners. These are self-employed individuals earning gross sales or
receipts not exceeding P100,000 in any 12-month period.
12
College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)305-0645 Local 137
Essential Knowledge
INTRODUCTION TO INTERNAL REVENUE TAXES
This portion discusses the introduction to our internal revenue taxes. These are called as
national taxes because these are levied and administered by the Bureau of Internal Revenue
(BIR). Our Tax Code under Republic Act 8424 (or the Tax Reform Act of 1997) enumerates the
internal revenue taxes under Section 21 as follows:
1. Income Tax. This is a tax imposed on a person’s income, profit and earnings arising from
the conduct of business or practice of profession, those that are indicated as taxable under
the Tax Code, after deducting allowable deductions provided in this Tax Code. Income tax
has three tax schemes, namely:
a. Normal Income Tax. This is a tax imposed on active and some passive income.
This is a progressive tax, which means that the higher the income level of the
taxpayer, the higher is the tax rate. We have a tax table to follow in computing
income tax.
b. Final Tax on certain passive income. This is computed simply by multiplying the
tax rate by the amount of income. Unlike normal income tax, you don’t need to
deduct any expenses in earning such income. Moreover, once the income is
subject to final tax, it is not anymore included in the computation of regular (normal)
income tax. The same goes to the other.
c. Capital Gains Tax. This is a tax imposed on real property classified as capital
asset, and sale of shares not traded through the local stock exchange.
2. Value-added tax. It is a form of business tax. It is a tax on consumption levied on the sale,
barter, exchange or lease of goods or properties and services in the Philippines and on
importation of goods into the Philippines.
3. Other percentage tax. A type of business tax which is imposed on non-VAT registered
taxpayers, as well as those taxpayers engaged in services specifically subject to
percentage tax.
4. Excise tax. A type of business tax which is normally imposed on the production or sale of
non-essential goods and services.
5. Estate Tax and Donor’s Tax. These are transfer taxes imposed on gratuitous transfers.
Estate tax is imposed on donation mortis causa (succession) while donor’s tax is
imposed on donation inter vivos (donation)
6. Documentary Stamp tax. This is a tax on documents, instruments, loan agreements and
papers evidencing the acceptance, assignment, sale or transfer of an obligation, right or
property incident thereto.
7. Such other taxes as are or hereafter may be imposed and collected by the Bureau of
Internal Revenue.
139
College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)305-0645 Local 137
Internal
Revenue
Taxes
Transfer Business Documentary
Income Tax
Taxes Taxes Stamp Tax
Other
Regular Final Income Capital Gains Value-Added
Estate Tax Donor's Tax Percentage Excise Tax
Income Tax Tax Tax Tax
Tax
Figure 1. Summary of Internal Revenue Taxes
CONCEPT OF BUSINESS
Before we proceed with the discussion on business tax, it is highly important that we
should know the concept of business. A business is described as “a habitual engagement in a
commercial activity”. The sales of goods and services related to trade, profession or business
in the Philippines are generally subject to business taxes, except when exempted as provided
by law.
The phrase “in the course of trade or business” means the regular conduct or pursuit
of a commercial or economic activity, including transactions incidental thereto, regardless of
whether or not the business 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 (Sec. 105, NIRC).
Moreover, the rule of regularity, to the contrary notwithstanding, services as defined in
this Code rendered in the Philippines by nonresident foreign persons shall be considered as
being rendered in the course of trade or business (Sec. 105, NIRC). Thus, the sale of goods and
services of nonresident foreign taxpayer is subject to business tax.
However, there are commercial activities not subject to business tax. These are the
following:
1. Sale of goods or services outside the Philippines. Business tax covers domestic
consumption only.
2. Subsistence or livelihood activities. These pertain to marginal income earners whose
source income is enough to sustain their daily living. They are exempted from payment
of business tax but are subject to income tax.
3. Privilege stores. Store owners are also exempted from business tax but are subject to
income tax.
14
College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)305-0645 Local 137
4. Casual sales and sale of non-dealers. They do not fall on the criteria of habitual
engagement. Thus, they are not subject to business tax.
5. Directorship of a corporation. Fees, per diems, allowance, and other income received
by corporate directors of which they are not employees.
6. Employment. An employer-employee relationship is not subject to business tax.
However, the employer needs to withhold tax from the employee on the basis of the
employee’s net taxable compensation income.
7. Government agencies and instrumentalities. Generally, they are exempted because
their main purpose is for public service. However, if they conduct activities intended to
earn profit, they will be subject to business tax. (Please refer to Sec. 105 of NIRC)
8. Non-profit organizations or associations. Like government agencies, they are also
exempted from business tax in general because they are intended to serve the purpose
of their organization. However, if they conduct activities for profit, these will be subject to
business tax. (Please refer to Sec. 105 of NIRC)
9. Transactions exempted by law. These will be further discussed on the succeeding
lessons of this module.
BUSINESS REGISTRATION
Every business establishment is required to be registered to the Bureau of Internal
Revenue under the jurisdiction where it is located before the commencement of its economic
activities. Not doing so will render the business illegal. To properly guide the taxpayers on their
initial registration to the BIR, the following are the documents, procedures and deadline to
observe:
Documentary Requirements
1. BIR Form No. 1901
2. Any identification issued by an authorized government body (e.g. Birth Certificate,
passport, driver’s license, Community Tax Certificate) that shows the name, address and
birthdate of the applicant;
3. Photocopy of Mayor’s Business Permit; or Duly received Application for Mayor’s Business
Permit, if the former is still in process with the LGU; and/or Professional Tax
Receipt/Occupational Tax Receipt issued by the LGU [For Professionals where PTR is
not required (e.i. Consultants, Agents, Artist, Underwriters & the like)]; or DTI Certificate;
4. Proof of Payment of Annual Registration Fee (ARF) (if with existing TIN or applicable after
TIN issuance);
5. BIR Form No. 1906;
6. Final & clear sample of Principal Receipts/ Invoices;
Procedures
a. Accomplish BIR Form 1901 and 1906 and submit the same together with the documentary
requirements with the New Business Registrant Counter of the RDO having jurisdiction
over the place where the head office and branch, respectively.
b. Pay the Annual Registration Fee (P500.00) and/or payment for the BIR Printed
Receipt/Invoice (if taxpayer opted to buy for use) at the New Business Registrant
Counter in the BIR Office. (Note: Cooperatives are exempted of this payment.)
159
College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)305-0645 Local 137
c. The RDO shall then issue the Certificate of Registration (Form 2303) together with the
“Ask for Receipt” notice, Authority to Print, BIR Printed Receipt/Invoice (if applicable) and
eReceipt as proof of payment.
Deadline. All Individuals engaged in trade or business shall accomplish and file the application
on or before the commencement of business, it shall be reckoned from the day when the first sale
transaction occurred or within thirty (30) calendar days from the issuance of Mayor's
Permit/Professional Tax Receipt (PTR) by LGU, whichever comes earlier.
Upon initial registration of the business, the taxpayer will have the option whether the
business will be registered as VAT or non-VAT through the BIR Form 1901 (Application Form). If
the taxpayer opted to register his/her business as VAT, he/she will be subject to 12% VAT. On
the other hand, if he/she choose to register as non-VAT, he/she will pay the 3% OPT. Moreover,
if the products of the business are considered harmful or non-essential, he/she will be subject to
excise tax in addition to VAT or OPT. Furthermore, no business shall be subject to both VAT and
OPT at the same time except when the business is registered as VAT and it is also engaged in
services specifically subject to OPT.
After complying with the necessary documents for registration, a taxpayer will be assigned
a Taxpayer’s Identification Number (TIN) which will be used every time the taxpayer will file and
pay his/her taxes to the BIR. This number consists of 9 digits, the combination of which is unique
to that of the taxpayer. This means that neither two taxpayers will have the same TIN nor a
taxpayer will have two TIN. Moreover, our TIN has additional 3-5 digits placed at the end that
represents the branch code. By default, this is indicated as “00000”. For taxpayers with multiple
businesses, there is no need to secure a unique TIN for each business but rather the TIN of the
taxpayer shall be used for all businesses and each of them will be assigned a branch code. For
example, if a taxpayer has three (3) businesses registered under his/her name, his businesses
will have the TIN of the taxpayer with the branch codes “00000” for the first business, “00001” for
the second and “00002” for the third.
For succeeding business registration, the taxpayer is only required to pay the annual
registration fee of P500.00 to the BIR on or before the 31st of January of the taxable year.
Moreover, if the taxpayer has multiple businesses under his/her name, the registration fee shall
be paid for every separate or distinct establishment where sales transactions occur.
BUSINESS TAX
Below is a diagram that shows the nature and kinds of business tax.
16
College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)305-0645 Local 137
Business Tax
Nature Kinds
Other
Consumption Value-Added
Indirect Tax Excise Tax Percentage Excise Tax
Tax Tax
Tax
Figure 2. Nature and Kinds of Business Tax
A. Nature.
a. Consumption tax. A tax on the purchase of goods or service. Thus, it is a tax
upon the buyer and not upon the seller.
b. Indirect tax. A tax which may be shifted or passed on to the buyer, transferee or
lessee of goods, properties or services.
c. Excise tax. A tax imposed on the exercise of privilege.
B. Types.
a. Value-added tax.
b. Percentage tax.
c. Excise tax.
Self-Help: You can also refer to the sources below to help you
further understand the lesson:
*Bureau of Internal Revenue. (n.d.). Application for Taxpayer Identification Number. Retrieved
May 11, 2020, from https://www.bir.gov.ph/index.php/registration-requirements/primary-
registration/application-for-tin.html
*Official Gazette. (1997, December 11). Republic Act No. 8424: An Act Amending the National
Internal Revenue Code, As Amended, and For Other Purposes. Retrieved May 11, 2020,
from https://www.officialgazette.gov.ph/1997/12/11/republic-act-no-8424/
179
