Taxation 2 BUSINESS TRANSACTIONS

Business TransactionsAre also called Commercial TransactionsRefers to the regularity of undertaking for profit purposesGenerally results to sales for transfer of goods in the conduct of business or gross receipts for leasing and rendering service in exchange for a consideration.

Classification of Business TransactionsVAT Taxable Transactions:Allowed with Input VATNOT allowed with Input VATZero-VAT Rated TransactionsVAT-exempt Transactions:Exempt from Other Percentage TaxSubject to Other Percentage TaxTransactions with government units.

VAT Taxable TransactionsAllowed with Input VATTransactions entered into of a VAT-registered business on its Sales or Gross Receipts and on consumptions or transfers by VAT-registered business, deemed sales.Basic Business Tax computation:

Output VAT (12% Sales)xxxLess:Input VAT (12% Purchases from VAT person)xxxNet VAT payable (Refund)xxxOutput VAT- 12% of GROSS SALES OR RECEIPTS (applicable)Input VAT- 12% of its PURCHASES to VAT-registered person or provider

VAT TransactionsAllowed with Input VATIllustration:X is a VAT-registered person. During the period, his purchases of goods for sale before VAT amounted to P750,000. These purchases were made from another VAT person who shifted the 12% VAT to X.If the same goods were all sold by X in the same period for a total selling price of P850,000, before VAT, the business tax liability of X would be:

Output VAT (850,000 x 12%) 102,000Less: Input VAT (750,000 x 12%) 90,000Net VAT payable 12,000

VAT Taxable TransactionsNOT Allowed with Input VATTransactions entered into of a Non- VAT business wherein its annual gross sales or receipts exceeds P1,919,500 annually

Illustration:X, a non-VAT registered business, has total annual sales of 2,000,000. Its total purchases of merchandise from VAT registered suppliers amounted to 1,344,000, inclusive of 12% VAT.

Tax Base (Sales)2,000,000VAT rate12%Business Tax Liability or VAT payable 240,000

VAT Taxable TransactionsVAT Taxable transactions that are not allowed to deduct Input VAT:Non-VAT business with Sales or Gross receipts of more than 1,919,500 per year which are not among the VAT-exempt and not among those exclusively subject to OPTNon-VAT franchise grantees of radio and television broadcasting with annual sales of more than 10,000,000Importations which are exemptedLocal payment of rent of vessel or carriers owned by non-resident foreign entity.

ZERO-VAT Rated TransactionsThese are sales that are subject to OUTPUT Vat rate of 0%Mainly from export sales by VAT-registered persons that generate foreign currency reservesThe actual input VAT on the purchase shall be applied for TCC (Tax Credit Certificate) or refund of creditable input tax dueIllustration:Export Sales: 500,000Input VAT:36,000SOLUTION:Zero- VAT Sales-0-Less: Input VAT36,000Creditable Input VAT (36,000)

ZERO-VAT Rated TransactionsZero- Rated transactions are the following:These are sales that are subject to output VAT rate of 0%Export sales by VAT-registered persons paid in acceptable foreign currencySale of gold to BSPForeign currency denominated salesEffectively Zero-rated salesSale of power or fuel through renewable sources of energy (solar, biomass, wind, hydropower, geothermal)Sales and services to the following persons or entities:Registered with SBMA and CDA, Registered with PEZAAsian Development Bank, International Rice Research InstituteGross receipts of a domestic corporation for:Transport from the Philippines to foreign countryPaid in acceptable foreign currency

VAT- Exempt and OPT Exempt TransactionsNot subject to 12% output VAT, Not subject to OPT and Not entitled to input VATIllustration:Purchases560,000 with 60,000 VATExport Sales600,000

Computation:Export Sales 600,000Zero-rated0%Tax Liability0

VAT- Exempt and OPT Exempt TransactionsExport Sales of Non-VAT registered businessImportation of the following:Fuel, goods and supplies by international shipping or air transport companiesPersonal and household effects belonging to residents of the Philippines returning from abroad as long as goods are exempted from custom dutiesProfessional instruments and implements, wearing apparel, domestic animals and personal household effects for their own use and not for saleSales and Importation of the following:Agricultural and marine food products in their original stateFertilizers, seeds, seedlings, fingerlings and any other products used for production of finished feeds except special feeds

VAT- Exempt and OPT Exempt TransactionsPrinting or publishing books and any newspaper/magazines not devoted principally to the publication of public advertisements.Services of:Agricultural contract growers and milling for others of palay, corn and sugar canePrivate educational institutions that render educational services duly accredited by DepEd/CHEDRegional or are headquarters established in the Philippines by multinational corporations which act as a sattellite in this region and do not earn income from the PhilippinesMedical, dental, hospital and veterinary, except those services rendered by professionalsTransactions which are exempt under international agreements to which the Philippines is a signatorySales or receipts of cooperatives that are duly registered with the Cooperative Development Authority (CDA)Sale/lease of real properties (inventories/ordinary assets)Is classified as capital asset and not subject to VAT or business tax

VAT- Exempt Transactions with Specific OPT3% - sale or lease of goods or properties of NON-VAT Registered gross receipts of domestic carriers by land, air and shipping companiesFranchise of radios and television companies with less than 10,000,000 annual gross receipts2%- gross receipts for services rendered by franchise of gas and water utilities10%-gross receipts on overseas dispatch from Philippines5%-on insurance premium10%-on services by fire, marine or miscellaneous insurance of foreign insurance companies30%,18%, 15%, 10%- gross receipts for services of proprietors, lessees or operators of Jai-alai and race tracks, cockpits, night or day clubs, professional basketball games, boxing exhibitions, winnings, net of cost of ticket% to 4% - sale of stocks on IPOBanks and non-bank financial intermediaries performing quasi-banking functions

Transactions with the Government UnitsWith Standard Input VAT of 7%

Subject to the following:Final VAT of 5% (if seller is VAT Registered)Percentage Tax of 3% (If seller is Non-VAT registered)

In addition to the above withhold the following Creditable withholding income taxes (CWIT):1% on purchase of goods2% on purchase of services

Transactions with the Government UnitsIllustration:A business, VAT- registered, sold merchandise to the government worth P100,000. The net proceeds would be:

Sales100,000Add: VAT rate 12,000Total 112,000Less: Final Withholding VAT (100,000 x 5%)5,000(CWIT 100,000x1%) 1,000 6,000Net Proceeds106,000

Since the Final WVAT is only 5%, the remaining 7% shall effectively account as standard input VAT ISIV) for sales of goods, in lieu of the actual input VAT directly attributable to such sales.

If the Actual Input VAT is Greater than Standard Input VAT of 7% of gross paymentsThe excess may form part of the sellers expense or cost.

Illustration:Assume the following data related to the sale of a VAT-registered business to the government:

Sales100,000Output VAT 12,000Purchases (all to govt) 70,000Input VAT 8,400

Compute for the VAT Payable.Transactions with the Government Units

Actual Input VAT is Greater than Standard Input VAT

Output VAT12,000Less: Actual Input VAT 8,400 Standard Input VAT (100,000 x 7%)(7,000) 7,000 Cost of Sale or Other Exp 1,400Net VAT Payable 5,000Less: Final Withholding VAT (100,000 x 5%) 5,000Output VAT Payable -0-Transactions with the Government Units

Actual Input VAT is Greater than Standard Input VAT

Journal Entries:

Purchases 70,000 Input VAT 8,400Cash 78,400Cash 106,000 Creditable Withholding VAT 5,000 Creditable Withholding Tax 1,000Sales100,000Output VAT 12,000Output VAT 12,000 Income and Exp Summary 1,400Input VAT 8,400Creditable Withholding VAT 5,000Transactions with the Government Units

If the Actual Input VAT is Lesser than Standard Input VATThe excess is treated as a taxable other income.Illustration:Assume the following data related to the sale of a VAT-registered business to the government:

Sales100,000Output VAT 12,000Purchases (all to govt) 50,000Input VAT 6,000

Compute for the VAT Payable.Transactions with the Government Units

Actual Input VAT is Lesser than Standard Input VAT

Output VAT12,000Less: Actual Input VAT6,000 Standard Input VAT (100,000 x 7%) 7,000 7,000 Income and Exp Summ.(1,000)Net VAT Payable 5,000Less: Creditable Withholding VAT (100,000 x 7%) 5,000Output VAT Payable -0-Transactions with the Government Units

Actual Input VAT is Lesser than Standard Input VAT

Journal Entries:

Purchases 50,000 Input VAT 6,000Cash 56,000Cash 106,000 Creditable Withholding VAT 5,000 Creditable Withholding Tax 1,000Sales100,000Output VAT 12,000Output VAT 12,000 Input VAT 6,000Creditable Withholding VAT 5,000 Income and Exp Summary 1,000Transactions with the Government Units

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