Understanding Consumption Taxes

Introduction to Consumption Taxes

• Consumption is the purchase or use of goods/services by anyone.
• The use of goods/services, whether by purchase, exchange, or other means, is subject to consumption tax.
• Consumption tax is charged regardless of the purchaser's purpose (business, personal, or charity).

Rationale of Consumption Tax

• Consumption taxes encourage savings, based on the premise that income not spent is saved, providing capital useful for economic development.
• The benefit received theory suggests those benefiting more from government services should pay more taxes.
• Consumption affects everyone, as all people consume goods/services, the consumption tax makes everyone taxable.
• Consumption taxes redistribute wealth because wealthier people spend more.
• Consumption taxes therefore make rich individuals pay more taxes.

Theoretical Basis

• Theoretical basis of taxes include the:
  • coverage
  • ability-to-pay theory
  • benefit-received theory

Income Tax vs Consumption Tax

Destination Principle

• Under the destination principle, the Philippines taxes goods/services for consumption within the country.
• Goods/services for consumption abroad are not taxed.
• The cross-border doctrine means goods crossing borders to foreign countries are not charged consumption taxes.
• The NIRC (National Internal Revenue Code) either exempts exports or taxes them at a 0% rate.

Types of Consumption

• Types of consumption include:
• Domestic consumption:
• Resident purchasers are taxable.
• Foreign consumption:
• Non-residents are exempt or face effectively non-taxable situations.

Types of Domestic Consumption

• As to Source:
• Domestic sales: Purchases from resident sellers.
• Importation: Purchases from non-residents.

Consumption Tax on Domestic Sales

• Domestic consumption by resident buyers from resident sellers is subject to business tax.
• Business tax is an indirect tax.

Consumption Tax on Importation

• Domestic consumption of goods/services from non-resident sellers is subject to VAT on Importation.
• VAT is levied on the buyer-importer because the seller is non-resident and beyond Philippine taxing power.
• Tax obligations can only be enforced on residents/buyers.

Types of Domestic Consumption Based on Taxability

• Exempt consumption includes goods/services not subject to consumption taxes.
• Specific percentage tax includes consumption of services not subject to VAT but taxed at a specific percentage.
• Vatable consumption includes all consumption not exempt or subject to percentage tax

Types of Domestic Consumption (Importation and Sales/Receipts)

Exempt Consumption

• Exempt Consumption is not subject to percentage tax or VAT.
• If sourced from abroad, it is exempt from VAT on importation and exempt from business tax if sourced locally.

Basis of Exemption from Consumption Tax

Out of Scope of Consumption Tax

• The bringing of goods to the Philippines, which represents current domestic consumption
• It’s an example of domestic consumption from businesses only.
• Sales or receipts of persons engaged in business only

VAT on vs Business Tax on Importation

• VAT on importation: The bringing of goods to the Philippines which represents current domestic consumption
• Business tax: The bringing of goods to the Philippines which represents current domestic consumption

Scope of VAT on Importation

• The VAT on importation applies to current purchase/acquisition of goods/services by a resident person from non-resident person
• Importation which do not reflect current acquisition of goods or services are therefore exempt.

Example

• When a non-resident person imports to the Philippines his personal, household and professional instruments or effects, this is not a domestic consumption because he didn't actually acquire those goods.

Scope of Business Taxes

• Only sales or receipts of persons engaged in business is subject to business tax
• If the seller of goods or services aren't a business, there is no business tax.

Tax Incentives

• Certain importations are not subjected to the VAT on importation for some reasons such as exemptions on importation of vessels or aircraft in an effort of the government to assist or improve domestic air or sea transport.
• Certain institutions aren't subject to business taxes, an example of this is the exemption of cooperatives in a bid for the government to promote cooperative undertakings, which are instrumental in economic developments benefitting more rural poor.

Services Specifically Subject to Percentage Tax

• Services specifically subject to percentage tax are taxable consumption of services but subject only to a specific percentage tax rate set by the NIRC. Consumption of these services are not subject to VAT

Import of Goods from abroad

• There are 2 rules for the import of goods:
  • Exempt
  • Subject to VAT on Importation

VAT on Importation

• If import of goods is not exempted:
  • It's subject to VAT on importation.
  • The VAT on importation is computed as 12% of the landed cost of the goods and is paid to the BOC.

Business Tax Structure

Sales of Goods

• The sales from the sale of goods is either Exempt or Vatable

Sales of Services

• The receipt from the sale of services is either: Exempt, Specifically subject to percentage tax, or is Vatable

VAT on Importation vs VAT on Sales in Business Tax

• VAT on importation is directly computed on the landed costs or total purchase costs of importation without any deduction or tax credit.
• VAT imposed on sales or receipt in business taxation is unique as it is theoretically imposed on the value added- the amount of mark-up imposed by sellers on their purchase cost.
• The VAT on sales or receipt follows a tax credit method wherein a VAT of 12% is imposed on sales and is reduced by VAT paid by the business on its purchase.

How the Tax Due is Computer

• The tax is computed as: Output VAT (12% of sales or receipts) Less: Input VAT (12% VAT paid on purchases) VAT Due.

The Excise Tax

• Excise tax is an additional imposition to VAT or percentage tax.
• Unlike business taxes such as percentage taxes and VAT on sales or receipts which are levied at the point of sales, excise tax levied at the point of production or importation.
• The excise tax on excisable goods is normally imposed before the goods are sold by domestic procedures or upon their importation by importers
• Products that typically have excise tax include:
• Sin products such as alcohol and cigarettes
• Non-essential commodities, such as automobiles and jewelry
• Non-essential services, such as cosmetic surgery
• Products which are environmentally degrading in their production or consumption, such petroleum and minerals
• Input VAT is claimed as tax credit against output VAT when due or paid not when goods are sold.
• The VAT does not require a perfect matching approach; it is not imposed on the gross profit.