Tax Exemption for Small Business or Microenterprise

Sometimes saving on taxes is just a matter of knowing what law provides for certain tax incentives and benefits.

In RA 9179, small businesses or microenterprises can avail of tax exemption. This law entitled “The Barangay Micro Business Enterprises Act” was enacted in November 13, 2002 to promote entrepreneurship or encourage the formation and growth of small business or barangay micro business enterprises by providing tax incentive and benefits.  Under this law, a small business is referred to as a Barangay Micro Business Enterprise (BMBE) and refers to any business entity or enterprise engaged in the production, processing or manufacturing of products or commodities, including agro-processing, trading and services, whose total assets including those arising from loans shall not be more than Three Million Pesos (P3,000,000.00). This amount is exclusive of the value of the land on which the office, plant or equipments of a small business are situated.

A small business or microenterprise under this law is exempted from tax for income arising from the operations of the enterprise. In order to avail of such exemption, a small business or micro-enterprise needs to apply for registration with the BMBE Officer or Treasurer of local government unit where the small business is located. The application for registration of the small business shall be processed by the Office of the Treasurer within fifteen (15) days from submission of complete documents, otherwise it shall be deemed approved. Once the application is approved, the Office of the Treasurer shall issue a Certificate of Authority. The Certificate of Authority shall serve as the authority of the small business or microenterprise to operate and be entitled to the benefits and privileges granted. The Certificate of Authority shall be effective for a period of two (2) years, renewable for a period of two (2) years for every renewal.

Not every business owner or entrepreneur knows this tax incentive or exemption granted by our government to encourage entrepreneurship.

Donation versus Sale

  

I have always been asked the question on which is the tax efficient way of transferring capital property or property not used in business. Is it through donation or sale? Well, the answer depends on two factors, namely: i) value of the property and ii) relationship of the donor to the donee.

If the donation is made to a “stranger”, then sale is more tax efficient than donation. This is because the tax rate for donation to a stranger is 30% while the tax rate for sale is 6%. Further, even if donation is not subject to documentary stamp tax and sale is subject to 1.5% documentary stamp tax, nonetheless, the total tax rate for donation is still higher at 30% compare for the total tax rate for sale of 7.5% ( capital gains tax of 6% and documentary stamp tax of 1.5).

For example, if a father donates a house and lot worth PHP 3 million to his son and bride-to-be, then 50% of the donation that pertains to the son shall be subject to the graduated tax rate on donation, while the remaining 50%, pertaining to the donation to the future daughter-in-law shall be subject to 30%, because the donation made by a father-in-law to his daughter-in-law is considered or treated by law as donation to a stranger.

The law defines a “stranger” as a person who is not a brother, sister (whether by whole or half blood), spouse, ancestor and lineal descendants; or relative by consanguinity in the collateral line within the fourth degree of relationship (up to first cousin). Any relative by affinity is therefore considered a “stranger”.

If the transfer of property is made from one person to another person who is not a “stranger”, as defined by law, then donation is more tax efficient than sale, at least up to a certain value of the property.

This is based on the following reasons:

a)     Donation is not subject to documentary stamp tax while sale is. Documentary stamp tax for a sale transaction is equivalent to 1.5% of the selling price or fair market value of property whichever is higher.

b)      Tax rate for sales transaction is 6% while the tax rate for donation is based on graduated rates from 2% to 15% depending on the value of the property. For example, if a property worth PHP 500,000 is being donated, the amount of tax for this donation would be PHP 15,000.00, while the tax rate for sale would have been PHP 37,500, had the transaction been a sale. Donation is thus more tax efficient for this particular case.

Another example, if a property worth PHP 4,500,000.00 is being donated, the amount of tax for this donation would be PHP 354,000.00, while the tax rate for sale would have been PHP 337,500.00,, had the transaction been a sale. Thus under this particular case, sale is more tax efficient.

Below is a tax table that will help you determine the corresponding tax dues if the transaction is a donation. Compare this with the existing tax rate of 7.5% (6% + 1.5%) for a sale transaction.

Tax Rates

Effective January 1, 1998 to present

Net Gift Over	But not Over	The Tax Shall be	Plus	Of the Excess Over
	100,000.00	exempt
100,000.00	200,000.00	0	2%	100,000.00
200,000.00	500,000.00	P 2,000.00	4%	200,000.00
500,000.00	1,000,000.00	14,000.00	6%	500,000.00
1,000,000.00	3,000,000.00	44,000.00	8%	1,000,000.00
3,000,000.00	5,000,000.00	204,000.00	10%	3,000,000.00
5,000,000.00	10,000,000.00	404,000.00	12%	5,000,000.00
10,000,000.00	and over	1,004,000.00	15%	10,000,000.00

Notes:

1.	Rate applicable shall be based on the law prevailing at the time of donation.

Tax Evasion versus Tax Avoidance

Tax Avoidance is legal. Yes, business and property owners can resort to tax avoidance to minimize on taxes or lower taxes due within the means sanctioned by law. While tax evasion is illegal because it is a scheme used outside of those allowed by law.

Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arms length. Tax evasion, on the other hand, is a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.

For example, underdeclaration of sales or gross receipts by a businessman is considered tax evasion while treating a newly purchased office equipment as an expense rather than an asset is considered tax avoidance.

In the case of Commissioner of Internal Revenue versus The Estate of Benigno P. Toda Jr. etc., (G.R. No. 147188, September 14, 2004), it was held that "Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; (2) an accompanying state of mind which is described as being 'evil,' in 'bad faith,' 'willful,' or deliberate and not accidental'; and (3) a course of action or failure of action which is unlawful."

On the other hand, Tax avoidance is the minimization of tax liability by taking advantage of legally available tax planning opportunities while tax evasion entails the reduction of tax liability by using illegal means. (Black's Law Dictionary, Sixth Ed., p. 1460)

It is therefore important for a business owner to know those tax schemes allowed by law to minimize on taxes.