The digitalization of the tax agencies finds Congress eager “to modernize the labyrinthine tax administration procedures by simplifying tax compliance, removing redundant and obsolete tax requirements, and lifting restrictions that prevent taxpayers from complying with tax laws remotely.”
With a vote of 250 “yes,” zero “no,” and zero abstentions, the 19th Congress approved on Sept. 26 on third and final reading House Bill (HB) 4125, or the proposed Ease of Paying Taxes Act (EoPT). The bill seeks to amend the National Internal Revenue Code, as amended (the Tax Code) and introduce administrative reforms that will ultimately reduce the burden of paying taxes while strengthening taxpayer rights.
The bill is now pending at the Senate.
The salient features of the approved House Bill are as follows.
CRITERIA FOR TAXPAYER CLASSIFICATION
The bill authorizes the Secretary of Finance, upon the recommendation of the Commissioner of Internal Revenue, to establish reasonable criteria for taxpayer classifications. The criteria will consider the taxpayer’s capacity to comply with tax rules and regulations, the amount and type of taxes to be paid, the volume of gross sales and/or receipts, inflation, the volume of business, wage and employment levels, and similar economic and financial factors.
At present, laws and regulations only provide for the classification of large taxpayers. All large taxpayers report to the Large Taxpayer’s Service (LTS) at the Bureau of Internal Revenue (BIR) National Office. A proposed amendment seeks to introduce small and medium taxpayer categories and a corresponding BIR special unit dedicated to servicing them. The proposal seeks to introduce simplified tax returns and processes for smaller taxpayers to ease compliance.
The bill also proposes that withholding of creditable tax at source not be required for taxpayers classified as small.
TAXES CAN BE PAID ANYWHERE
The EoPT bill also makes tax transactions portable by removing the restrictions on payment venues. This applies to all internal revenue taxes (income tax, value-added tax, estate tax, donor’s tax). The proposal removes the requirement that taxes be paid in the BIR office or banks in the tax district of the taxpayer’s residence, principal place of business, or principal office, thereby allowing for flexibility of payment. These amendments pave the way for full digitalization of the taxpayer experience.
SIMPLIFIED VAT RULES
The distinction between sale of goods and sale of services subject to value-added tax (VAT) is removed. Current tax law requires that the sale of services be documented by an official receipt, and the sale of goods by a sales invoice. Consequently, current tax law also makes the time of VAT reporting subject to the type of transaction. On the sale of goods, VAT is reported upon consummation of the sale, as reflected in an invoice. On the other hand, VAT on the sale of services is reported upon payment, supported by an official receipt.
The EoPT bill seeks to provide for a uniform and simplified documentation of transactions subject to VAT, in which the sales invoice is to substantiate transactions involving goods or services. Thus, VAT-registered persons will have to issue only one type of document, the VAT invoice, for every sale, barter, exchange, or lease of goods or property, and for every sale, barter, or exchange of service. Taxpayers will also be required to monitor only the timing of the consummation of the sale. The proposed amendment likewise provides that VAT be chargeable at the time of the issuance of the invoice, regardless of the time that the accrued sale is recorded in the books of account. The EoPT bill also increased the amount involved in the sales transaction that must be evidenced by a sales invoice from P100 to P500.
Additionally, the EoPT bill also proposes to index to inflation the P3-million VAT threshold, which was increased by Republic Act 10963 (the TRAIN Law), on Jan. 31, and every three years thereafter. The reference value for inflation is the consumer price index (CPI) published by the Philippine Statistics Authority.
Taxpayers who are required to pay percentage taxes in lieu of VAT under Section 116 of the Tax Code will also be required to pay and file their tax returns semi-annually, instead of quarterly.
EASING THE REGISTRATION BURDEN
As to the registration requirements, the EoPT bill proposes to remove the requirement of indicating a business style in the taxpayer’s registration with the BIR. The bill likewise seeks to remove the imposition of the annual registration fee currently imposed under Section 236(B) of the Tax Code. The removal of the annual P500 taxpayer registration fee alone is expected to be of value for the smallest of businesses.
The bill also seeks to ensure that registration facilities are available to taxpayers not residing in the country.
Furthermore, the BIR registration of a taxpayer may be canceled simply by filing the registration information update form, as proposed in the EoPT bill. Any audit that the BIR conducts, where a registration has been canceled, will be made based only on a risk assessment evaluation.
The bill also proposes to lower the surcharge for failure to file and pay taxes from the current rate of 25% to 12%. This will substantially ease the burden on taxpayers who were unable to fully comply with their tax obligations.
TAXPAYER’S BILL OF RIGHTS
Finally, the EoPT bill contains a Taxpayer’s Bill of Rights and designates a Taxpayers’ Advocate Office. It proposes the enumeration of additional fundamental rights to further promote fair treatment to taxpayers and puts in place protections against wrongful assessments. Meanwhile, the taxpayers’ advocate office is tasked with ensuring that taxpayer rights are protected, and due assistance is provided.
Altogether, the EoPT bill seems to be a great step towards modernized tax administration. Since the bill simplifies tax compliance and limits face-to-face transactions with the BIR, the cost of compliance will be reduced and will be appreciated especially by small business enterprises and starting professionals.
The approved EoPT House Bill was transmitted to the Senate on Sept. 27. The Senate may still introduce changes to the bill which we hope will further ease tax compliance rules.
Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
Azanith Ann B. Payad is a senior associate from the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.