Intro To Consumption Taxes.ppt

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, nonprofit 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

WEALTH DISTRIBUTION TO SOCIETY

• 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.

• 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 • •

The seller is Non-resident Resident

Domestic consumption Foreign consumption (Buyer is a resident) (Buyer is a non-resident) Taxable No tax 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

Basis of tax Scope of tax Nature of consumption tax Statutory taxpayer The economic taxpayer Nature of imposition

VAT ON IMPORTATION Acquisition cost All consumption Pure form Buyer Buyer Direct

BUSINESS TAX Sales or receipts Consumption from from businesses only Relative form Seller Buyer Indirect

Table of summary: Consumption tax rules on domestic consumption Resident Buyer

Seller 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 Foreign sellers Business Business Business Non-business Non-business Business Non-business Non-business

APPLICABLE CONSUMPTION TAX VAT on importation VAT on importation VAT on importation* 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. 2. 3. 4. 5.

Tax on valued added Top-up on sales Tax credit method An explicit consumption tax 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 12motnh 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 VATregistered. (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 VATexempt 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. 2. 3. 4.

Sin products, such as tobacco products and alcohol products; Petroleum products; Automobiles; 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 RESIDENT NON-RESIDENT

SELLER OF GOODS 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 SELLER OF SERVICES DOMESTIC BUSINESS VAT-registered business

BUYER/CONSUMER RESIDENT NON-RESIDENT

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 Tax rate Basis

VAT 12%

%TAX Generally 3%

EXCISE TAX Various ad valorem tax rates & specific taxes

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.

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