Consumption Tax: Concepts and Theories

Consumption Tax Basics

• Consumption tax applies when consumers use goods or services
• Tax is on the buyer's consumption, not the seller's sale
• Consumption happens when goods/services are acquired through purchase or exchange

Rationale for Consumption Tax

• Consumption tax promotes savings and investment
• Savings lead to capital formation and crucial economic development
• It helps redistribute wealth
• Those who spend more due to their lifestyle pay more tax
• It supports the Benefit Received Theory
• Everyone benefits from government, so everyone should pay taxes
• Applied practically,consumption tax ensures contributions to government support
• Should not be levied on basic necessities like food, education, health, and shelter

Income Tax vs. Consumption Tax

• Income Tax: Tax on income receipt
• Consumption Tax: Tax on income or capital usage
• Scope of Income Tax: Tax on those able to pay
• Scope of Consumption Tax: Tax on everyone

Supporting Tax Theories

• Income Tax: Ability to pay theory
• Consumption Tax: Benefit received theory
• Consumption tax effectively taxes everyone

Types of Consumption

• Domestic: Purchase/consumption by Philippine residents
• Foreign: Purchase/consumption by non-residents
• Only domestic consumption is subject to Philippine taxation due to territoriality
• The Philippines follows the "destination principle"
• Goods/services for use in the Philippines are taxed, while those for use abroad are not

Cross-Border Tax Doctrine

• Goods crossing borders to foreign territories are not charged with consumption taxes

Tax Rule Summary

• Non-resident seller, domestic consumption: Taxable
• Non-resident seller, foreign consumption: No tax
• Resident seller, domestic consumption: Taxable
• Resident seller, foreign consumption: Effectively no tax

Taxable Domestic Consumption Types

• Purchase of goods/services from non-residents abroad ("importation")
• Purchase of goods/services from resident sellers ("sale" from seller's perspective)
• Domestic consumption includes import and sale

Consumption Tax on Importation

• Goods importers pay consumption tax, known as "Value Added Tax (VAT)"
• Import VAT is 12% of total import cost before withdrawal from customs
• Service purchases from non-residents also pay VAT ("Withholding Tax")
• Service import VAT is 12% of the contract price

Consumption Tax on Domestic Consumption

• Tax is collected from the seller
• Tax law imposes consumption tax on seller's sales or service receipts
• Sellers are statutory taxpayers, but buyers bear the actual tax burden
• Indirect tax imposition is due to administrative feasibility

Consumption Tax on Resident Buyers

• Applies to consumption tax on sales or receipts of a resident seller
• Only applies when the seller is regularly engaged in business; does not apply when the seller is not in business, hence called "business tax"

"Business Tax" Misnomer

• Businesses are agents collecting consumption taxes from buyers
• Businesses are directly liable for tax payment and penalized for non-compliance
• Business tax appears as a tax on the privilege to do business

Business vs. Privilege Tax

• Business tax is viewed as “privilege taxes” but the essence remains as consumption tax
• The rule intends to enforce compliance

Comparison of taxes

Consumption Tax Rules on Domestic Consumption

Consumption Tax Rules on Foreign Consumption

VAT on Importation

• VAT on importation applies regardless of the seller or buyer's business engagement

Basis of Business Taxes

• Sales: For businesses selling goods/properties
• Receipts: For businesses selling services
• "Sales" is the total agreed amount for goods sold, whether collected or not
• "Receipts" are collections from the sale of service

Business Tax Types

• Value Added Tax (VAT) on sales
• Percentage Tax
• Excise Tax

Business Taxpayer Types

• VAT Taxpayers: Required to pay VAT
• Non-VAT Taxpayers: Pay percentage tax
• Excise tax is an addition to VAT or percentage tax on excisable goods (alcohol, cigarettes)

Value-Added Tax (VAT) on Sales

• VAT on sales is a consumption tax on the sale of goods, properties, services, or property leases

VAT Characteristics

• VAT is on the value added by the seller on its sales
• VAT on sales is required by law to be included in the price of goods as a top-up
• Invoice price includes both selling price and VAT, if VAT is not stated separately, it is included in the price.
• VAT on sales is reduced by the amount of VAT paid by the business on its purchases. Excess purchase VAT is carried over as deduction against future VAT on sales
• The amount of VAT is displayed either on an invoice or an official receipt.
• The VAT return is filed quarterly but is paid on a monthly basis

Methods of Computing VAT

• Direct method computes VAT by applying the VAT rate to the difference between selling price and purchase price
• Tax Credit Method
• VAT rate imposed upon the sales or receipts (output) of the business
• Reduced by the VAT paid by the business on its purchases (input)
• The excess of the Output VAT over the Input VAT is what is due or payable

VAT Taxpayers

• VAT: Registered Taxpayers
• VAT: Registrable Taxpayers

VAT Thresholds

• Businesses exceeding P3,000,000 in sales or receipts in any 12-month period need to register as VAT taxpayers
• Smaller businesses may opt to register voluntarily
• A VAT registered taxpayer need to pay VAT regardless if sales fall under the P3,000,000 threshold
• Taxpayers who are registable and exceed the P3,000,000 threshold are still subject to VAT

Percentage Tax Details

• A sales tax of various rates usually at 3% is imposed on any gross sales or receipts of non-VAT Taxpayers

Characteristics of Percentage Tax

• Computed from invoice price
• In income taxation, the percentage tax is presented as an expense deductible against the sales or gross receipts
• The impression of being a direct tax or privilege tax of the seller will be considered

Implicit Consumption Tax

• Sellers inherently factor in the percentage tax but it is not explicitly disclosed to the buyer
• The percentage tax is actually a consumption tax in the form of a privilege tax. It is an indirect tax include form of a direct tax.
• Payable monthly for most percentage taxpayers and quarterly for certain percentage taxpayers

Who Pays Percentage Tax?

• Non – VAT taxpayer are those with sales or receipts not exceeding the P3,000,000 VAT registration threshold
• Payers who sell services specifically subject to percentage tax

Percentage Tax, VAT and Excise Tax Application

• Percentage Tax, VAT and Excise Tax only apply to domestic consumption
• The export sale of non-VAT registered taxpayers is exempt from percentage tax
• A VAT percentage of 0% will be imposed on the export sale of a VAT-registered taxpayers and there is effectively no consumption tax

Excise Tax on Exportation

• A paid excise tax on excisable articles will be credited or refunded when they are exported in their original state

Imposable Tax per Types of Consumption

Imposable Tax per Types of Services

Comparison of the Business Taxes

Excise Taxes

• Enumerated in Section 141 to Section 151 of the National Internal Revenue Code (NIRC)
• Excisable articles for foreign markets are exempt from excise tax