Uncovering the Hidden Costs of Non-Compliance for Micro and Small Taxpayers

As featured on PhilStar: Uncovering the Hidden Costs of Non-Compliance for Micro and Small Taxpayers

These days, many individuals aspire to launch their own businesses with some choosing to start on a smaller scale. Establishing a small business can be both rewarding and challenging. Entrepreneurs need to focus on building their business while also managing the complexities of tax regulations. Small businesses encounter distinct tax compliance challenges, which vary significantly from those faced by larger corporations in terms of structure, responsibilities and penalties.

In relation to this, the BIR released a new classification of taxpayers, pursuant to the provisions of Section 244 and 245 of the Tax Code, as amended by RA No. 11976, otherwise known as the “Ease of Paying Taxes (EOPT) Act”. The provisions are implemented by Revenue Regulations No. 8-2024, which classifies micro, small, medium and large taxpayers based on gross sales:

1. Micro Taxpayer – a taxpayer whose gross sales for a taxable year are less than P3 million.

2. Small Taxpayer – a taxpayer whose gross sales for a taxable year range from P3 million to less than P20 million.

3. Medium Taxpayer – a taxpayer whose gross sales for a taxable year range from P20 million to less than P1 billion.

4. Large Taxpayer - a taxpayer whose gross sales for a taxable year are P1 billion and above.

Gross sales shall only cover business income from trade or profession, net of VAT and other deductions applicable during the taxable year, excluding compensation income earned under the employer-employee relationship, passive income under Sections 24, 25, 27 and 28 of the Tax Code, and exclusions from gross income under Section 32(B) of the Tax Code.

With the new taxpayer classification, the BIR has introduced lower penalty rates in accordance with the Ability to Pay Theory, fostering a more equitable tax system for micro and small businesses. This change could alleviate the tax burden, ultimately benefiting the broader economy.

In conjunction with the EOPT Act, the BIR issued RR No. 6-2024, which implements the reduced civil penalties for micro and small taxpayers. Below are the changes being introduced through this revenue regulation:

1. Imposition of civil penalty of ten percent (10%) of the amount due, in addition to the tax required to be paid, in the following cases:

a. Failure to file the tax return and pay the corresponding tax due on the date prescribed. However, there will be no penalty imposed on the amendment of tax return if the initial return was filed and paid on or before the date prescribed. Except, in the case of deficiency tax assessment where the tax return was not filed, the penalty is still imposed.

b. Failure to pay the deficiency tax within the deadline stated in the notice of assessment.

c. Failure to pay, in full or in part, the amount tax due on the filed tax return within the date prescribed, or the full amount of tax due for which no return is required to be filed on or before the prescribed date for payment.

In the case of willful neglect to file a return within the prescribed period or for false or fraudulent filing of return, a penalty at the rate of fifty percent (50%) of the tax or deficiency tax shall be imposed. Provided, that a substantial under-declaration of taxable sales or income, which is an amount exceeding thirty percent (30%) of what is declared on the return, or substantial overstatement of deductions, which is an amount exceeding thirty percent (30%) of actual deductions, shall constitute prima facie evidence of false or fraudulent return.

2. Imposition of reduced interest rate by fifty percent (50%) of legal interest rate which is equivalent to six percent 6% on unpaid tax due from covered taxpayers.

3. Imposition of reduced penalty of five hundred pesos (P500) for failure to file an information return, statement or list that keep any record or supply any information as may be required on the date prescribed. Provided that the aggregate amount of penalty for all such failures during a calendar year shall not exceed twelve thousand five hundred pesos (P12,500).

4. Imposition of reduced compromise penalty for criminal violations, not involving fraud, for covered taxpayers at fifty percent (50%) of the applicable rate or amount of compromise under Annex “A” of Revenue Memorandum Order (RMO) No 7-2015 and its subsequent amendments.

This compromise penalty is in lieu of criminal prosecution for violations committed, where payment is based on a compromise agreement. Any difference in the amount from what is stated in the regulation must be approved by the Commissioner of Internal Revenue or their authorized representatives.

Managing tax obligations can be difficult for micro and small taxpayers, but having a good grasp of the responsibilities and the possible penalties for non-compliance is crucial for a business's sustainability.