For years, taxpayers have been wishfully thinking of simple and practical yet comprehensive tax laws and regulations that will encourage compliance. Our legislators have heeded the call, embraced the convenience brought about by digitalization, and introduced changes to make things more convenient for the taxpayer.
To ensure that the taxation process moves forward, R.A. No. 11967, or the Ease of Paying Taxes Act (EoPT), was signed into law on Jan. 5, taking effect on Jan. 22.
With the end goal of easing the payment process, thereby encouraging compliance from taxpayers, the EoPT Law amended the Tax Code. The amendatory provisions notably include the following:
- additional taxpayer classifications, with special concessions provided to micro and small taxpayers;
- timing of the withholding of tax at the time when the income becomes payable;
- use of a uniform document for sellers of goods and services for VAT purposes;
- timing of the recognition of VAT on sale of services;
- risk classification for VAT refund claims.
The law also tasks the Secretary of Finance (SoF), after consulting with the Bureau of Internal Revenue (BIR) and the private sector, with promulgating the implementing rules and regulations (IRR) within 90 calendar days from the EoPT Law’s effectivity. Thereafter, the taxpayers have six months from the effectivity of the IRR to comply with the EoPT Law’s amendments on VAT and other percentage taxes.
Pending the issuance of the IRR, here are some of the questions that taxpayers hope that the regulations will shed light on:
Additional classification of taxpayers
Under the EoPT Law, taxpayers are now classified into Micro, Small, Medium, and Large taxpayers. As micro (gross sales of less than P3 million) and small taxpayers (gross sales of P3 Million to less than P20 million) are given special concessions under the law, some taxpayers, particularly those near the borderline of the threshold amounts, are asking whether they need to wait for an official notice or an official publication of a list from the BIR in order to be classified as a micro or a small taxpayer.
Micro and small businesses comprise 99% of all business establishments (PSA, 2022 Philippine MSME Statistics). How can unregistered taxpayers be classified as micro or small taxpayers? Will the classification as micro or small be left to the voluntary determination of the taxpayer, subject to the subsequent BIR audit?
Timing of tax withholding
As the obligation to deduct and withhold the tax arises at the time the income has become payable, there is a need to clarify the definition of the word “payable,” as there is no statutory provision to fall back on.
For reference, RR No. 02-98 defines “payable” as when the obligation becomes due, demandable, and legally enforceable. Following this definition, apparently, the parties to a contract could expressly agree as to when the collection and payment will be performed for the withholding obligation to attach.
Further, to avoid confusion with the other types of withholding taxes, the regulations may also want to clarify if this new rule on the timing of withholding would also apply to withholding taxes on compensation or to withholding VAT on transactions involving nonresidents.
Uniform VAT documentation
For sellers of services, the EoPT Law requires the use of sales invoices for VAT purposes, the same type of document for sellers of goods. In this regard, the regulations should clarify what will happen to the use or possible disposal of unused official receipts from the sellers of services.
Timing of VAT recognition on sale of services
Another major amendment introduced is the recognition of VAT on sales of services at the time they are rendered. In this matter, clarifications on the following may be made, among others:
- the timing of VAT output recognition for services already rendered prior to the effectivity of the amendment under the EoPT Law, but the collections were received or will be received after the effectivity date;
- the timing of VAT output recognition for taxpayers using the percentage of completion method for revenue accounting; and
iii. the possible recognition of deferred VAT output on advanced billings wherein the services have not yet been rendered.
Risk classification for VAT refund claims
On the procedure for claiming a VAT refund, the EoPT Law provides that such claims will be classified into low risk, medium risk, and high risk based on the size of the claim, tax compliance history, and frequency of filing claims, among others. Those classified as medium and high risk claims will be subject to audit or other verification processes in accordance with the BIR’s national audit program for the relevant year.
Hence, the taxpayers hope that the specific thresholds to be defined by the regulations will be reasonable for the taxpayer to be able to claim the refund that it is entitled to.
As with new legislation, confusion is part of the so-called birth pains. The above are some examples of taxpayer concerns that I hope will be considered in drafting the IRR to make the EoPT rollout less taxing.
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.
Kim M. Aranas is a director of the Tax Advisory & Compliance Practice Area of P&A Grant Thornton. P&A Grant Thornton is one of the leading audits, tax, advisory, and outsourcing firms in the Philippines, with 29 Partners and more than 1000 staff members. We’d like to hear from you! Tweet us: GrantThorntonPH, like us on Facebook: P&A Grant Thornton