Hear ye, I will ease your burden, but when? (1st of 2 parts)

As Featured on Philstar: Hear ye, I will ease your burdens but when? (1st of 2 parts)

We often hear taxpayers (local and foreign alike) complaining how burdensome Philippine tax compliance is.  Well, the government heard the complaints.  On 5 January 2024 the Philippine President signed the Ease of Paying Taxes (EOPT) Act.  The EOPT Act introduces significant amendments to the National Internal Revenue Code (NIRC) of 1997.  Former Finance Secretary Benjamin E. Diokno had been quoted to say that the Philippines is off to a good start this 2024.  He added that by making the tax system more taxpayer-friendly through simplified tax filings and protecting taxpayers’ rights, the government will achieve the goal of encouraging and improving tax compliance.

Simplified filings are now possible because the EOPT Act allows taxpayers to file returns and pay taxes electronically or manually to the Bureau of Internal Revenue (BIR) or through any authorized agent bank or authorized tax software provider.  Under the current NIRC, filings should be made with the proper BIR offices having jurisdiction over the taxpayers or with the authorized agent banks within their jurisdictions.  In fact, during assessments, a 25% surcharge is imposed in case of filing a return with the wrong venue and the EOPT Act has deleted this surcharge. 

The EOPT Act aims to enact policies and procedures which are appropriate to different types of taxpayers. The EOPT Act provides for the following classification of taxpayers depending on gross sales:

• Micro group – less than Php 3 million
• Small group – Php 3 million to less than Php 20 million
• Medium group – Php 20 million to less than Php 1 billion
• Large group – Php 1 billion and above

Before the EOPT Act, the NIRC did not provide for such classifications except for the criteria to be considered as a large taxpayer with the proviso that the Secretary of Finance may add to or modify such criteria.  The EOPT Act has deleted the criteria and the proviso, simplifying the definition of the large taxpayer as shown above.

Further, in developing an EOPT and digitalization roadmap, the BIR should prioritize micro and small taxpayers in terms of streamlining tax procedures and documentary requirements according to taxpayer size and capacity to comply.  The BIR should also ensure the accessibility of its various services to different taxpayers particularly micro and small taxpayers to improve tax compliance and enhance taxpayer convenience. Nevertheless, the EOPT Act already grants special concessions to micro and small taxpayers including a simplified filing process with a cap of just two pages for their income tax returns. Moreover, it provides an added financial relief by implementing reduced penalty rates in case of tax assessments.

On the matter of preparing tax returns, the EOPT Act introduced the following amendments that will expectedly require significant changes in how taxpayers record, monitor, and/or report transactions and/or the tax payable:

• Repeal of the requirement to withhold before claiming deduction of an income payment for purposes of the income tax – Prior to the EOPT Act, it is a common income tax issue in tax audits to disallow expenses due to non-withholding of taxes. Now, this will no longer be the case.

• Imposition of the obligation to withhold the withholding taxes at the time the income has become payable – Until the EOPT Act, the NIRC has not provided for the timing of withholding taxes.  Only by way of revenue regulations has it been provided that the timing of withholding arises at the time the income payment is paid or payable, or income payment is accrued or recorded as an expense or asset, whichever is applicable in the payor’s books, whichever comes first. 

• Uniform tax base for the imposition of the value-added tax (VAT) on sales of goods and services -  The VAT on sale of services shall now be based on gross sales, similar on how VAT on sale of goods is imposed.  This change not only aligns the taxable bases but also necessitates an earlier recognition of VAT on sales of services, marking a significant shift from previous practices.

• Use of VAT invoice on both sales of goods and services as the acceptable proof to substantiate input VAT claim for both purchases of goods and services.

• Gross sales (no longer gross receipts) or “amount billed” (no longer “amount paid”) or “gross sales or earnings” (no longer “gross sales, receipts, or earnings”) as the tax base of percentage taxes imposed under the following sections of the NIRC.

- Section 116 (Persons Exempt from VAT)

- Section 117 (Domestic Carriers and Keepers of Garages)

- Section 118 (International Carriers)

- Section 119 (Franchises)

- Section 120 (Overseas Dispatch, Message or Conversation Originating from the Philippines)

- Section 128 (provision on returns and payment of percentage taxes)