The Philippines stands at the brink of a groundbreaking transformation in its tax landscape with the recent enactment of Republic Act No. 11976, widely known as the "Ease of Paying Taxes Act." President Ferdinand R. Marcos Jr.'s endorsement of this legislation heralds a new era in tax administration, aiming to revolutionize the system while safeguarding taxpayer rights and fostering economic growth.
This Act encompasses a series of salient features designed to streamline taxation processes and enhance efficiency. Let's delve into the pivotal aspects of this law:
1. Classification of Taxpayers: RA No. 11976 introduces a structured categorization of taxpayers into micro, small, medium, and large segments. This classification aims to create a more tailored approach to tax procedures, minimizing the burden on individuals or entities while optimizing tax collection.
Classification of Taxpayers for purposes of responsive tax administration
2. Filing and Payment Options: Taxpayers gain the flexibility to file returns and make tax payments either electronically or manually. This versatility extends to channels, allowing submissions directly to the Bureau of Internal Revenue (BIR), authorized agent banks, or recognized tax software providers. Such accessibility simplifies the compliance process and promotes convenience.
RA No. 11976 incorporated the provisions under SEC 22. Definitions as follows:
(KK) The term 'filing of return' shall refer to the act of accomplishing and submitting the prescribed tax return, electronically or manually, to the Bureau of Internal Revenue, or through any authorized agent bank or authorized tax software provider, as a required under this Code or as prescribed under existing rules and regulations.
(LL) The term 'payment of tax' or 'remittance of tax' shall refer to the act of delivering the amount of tax due or withheld, either electronically or manually, to the Bureau of Internal Revenue, or through any authorized agent bank or authorized tax software provider, as required under this Code or as prescribed under existing rules and regulations.
3. Elimination of Additional Requirements for Deductibility of Certain Payments. The Provision below has now been REPEALED by RA No. 11976:
(K) Additional Requirements for Deductibility of Certain Payments. - Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization may be allowed under this Section, shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue in accordance with this Section 58 and 81 of this Code.
4. Inclusion of Overseas Contract Workers in the submission of tax returns. A novel provision has been incorporated into Section 51(A)(2)(e) to solidify the entitlement not to file a tax return. The updated provision reads as follows:
(2) The following individuals shall not be required to file an income tax return:
xxx
(e) An individual citizen of the Philippines who is working and deriving income solely from abroad as an 'Overseas Contract Worker' as provided under Section 23(C) of this Code, or 'Overseas Filipino Worker' as defined under Section 3(G) of Republic Act No. 11641, otherwise known as 'Department of Migrant Workers Act'.
5. Removal of Tax Filing and Payment Distinctions: The Act eliminates the option to file and pay internal revenue taxes to the City or Municipal Treasurer, and REPEALED all the provisions that includes: "duly authorized Treasurer of the city or municipality in which such person has his legal residence or principal place of business in the Philippines, or if there be no legal residence or place of business in the Philippines, with the Office of the Commissioner."
6. Designation of entities authorized for tax withholding. Supplementary clauses pertaining to micro entities, defined as those with gross sales below three million pesos (P3,000,000.00), delineate their exemption from withholding taxes under the recent legislation, outlined as follows:
SEC. 57. Withholding of Tax at Source. -
xxx
(C) Tax-free Covenant Bonds
"xxx Provided, That micro taxpayers are exempt from the obligation to withhold taxes pursuant to Subsection (B) of this Section."
7. Conclude the provision concerning the timeliness of tax withholding. The recent amendment has elucidated and conclusively determined the appropriate timing for tax withholding, specifying that it occurs when the income becomes PAYABLE, as articulated below:
SEC 58. Returns and Payment of Taxes Withheld at Source. -
xxx
(C) Timing of Withholding Taxes. - The obligation to deduct and withhold the tax arises at the time the income has become payable.
8. Carryover of Deducted Taxes to the Next Year is now a Possible Credit. In addition to SEC. 58. Returns and Payment of Taxes Withheld at Source. - (E) Income of Recipient, new provision was incorporated to clarify the claims for tax credit or refund of any creditable income tax, which has been deducted and withheld from income payments, which will be processed only when it is substantiated that the income payment has been declared as part of the gross income, and the actual withholding is duly verified.
Additionally, claims for tax credit of any creditable income tax that was deducted and withheld in a preceding period may still be considered creditable in the subsequent calendar or fiscal year, provided that such income has been declared in the tax return corresponding to the reported income. This provision aims to ensure that tax credit or refund claims are supported by proper documentation and adherence to tax reporting obligations, promoting transparency and accuracy in the tax system.
9. New Provision in Handling Excess Income Tax Credits in Business Closure. A recent addition specifies that if a taxpayer cannot utilize surplus income tax credits due to the closure of their business, they have the option to apply for a refund. The taxpayer is required to submit a refund application, and the Bureau of Internal Revenue will assess and process it within two (2) years from the business closure date. This provision aims to guarantee equitable treatment for taxpayers experiencing the termination or cessation of their business operations.
10. Removal of the Term "GROSS RECEIPTS" in the Tax Code. The recent legislation has eliminated the term "Gross Receipts" from all sections of the National Internal Revenue Code (NIRC), standardizing the reference to income as solely "Gross Sales."
The definition added that "gross sales" includes payments made or obligated to the seller by the purchaser for the sale, barter, or exchange of services that have already been provided by the seller, as well as for the use or lease of properties already supplied by the seller. However, it excludes the value-added tax and amounts designated for payment to a third party, as well as reimbursements received for payments made on behalf of another, provided such reimbursements do not benefit the seller according to relevant laws, rules, or regulations.
The provision also includes a stipulation for long-term contracts lasting one year or more, specifying that invoices should be issued in the month when the service, use, or lease of properties is rendered or supplied. This ensures proper invoicing practices for extended contractual arrangements.
Additionally, a new line has been introduced in the provision related to the VAT Exempt threshold of PHP 3,000,000 annual gross sales, stating that "Provided, That the specified amount will be adjusted to its current values using the consumer price index, as published by the Philippine Statistics Authority (PSA) every three (3) years."
11. New Provision on Sales Allowances and Sales Discount.
Sales Allowances: If a VAT-registered person grants allowances for services rendered, the value of these services may be deducted from the gross sales for the quarter when a refund is made or a credit memorandum or refund is issued. This means that the amount of the allowances is subtracted from the total gross sales for the specific quarter in which the refund or credit is processed.
Sales Discounts: Sales discounts that are granted and explicitly indicated in the invoice at the time of sale are eligible for exclusion from the gross sales. Importantly, this exclusion applies within the same quarter in which the discount was given. It's crucial to note that these discounts should not depend on the occurrence of a future event. Essentially, if a sales discount is specified in the invoice at the time of the sale and is not contingent on a future event, it can be subtracted from the gross sales for that particular quarter.
12. Deductibility of Output VAT on Uncollected Receivables from Subsequent Output VAT. A seller of goods or services is now allowed to deduct the output value-added tax (VAT) related to uncollected receivables in the subsequent quarter, following the expiration of the agreed-upon period for payment. This deduction is contingent upon the seller having fully settled the VAT on the initial transaction.
Conditions for Deduction: The deduction is subject to the condition that the VAT component associated with the uncollected receivables has not been claimed as an allowable deduction under Section 34(E) of the Tax Code. This ensures that the VAT credit is appropriately managed within the given regulatory framework.
Recovery of Uncollected Receivables: In instances where there is a recovery of uncollected receivables, the output VAT connected to such recovery will be added to the taxpayer's output VAT during the recovery period. This implies that the VAT credit initially deducted for uncollected receivables will be reversed and added back to the taxpayer's VAT liability during the period when the receivables are recovered.
13. Streamlining VAT Registration Cancellation and Addition of Cash Refund of Input Taxes. If an individual's VAT registration is canceled due to retirement, cessation of business, or changes in status under Section 106(C) of the Tax Code, that person can, within two (2) years from the date of cancellation, apply for a tax credit certificate or cash refund. This applies specifically to any unused input tax, which can be utilized for the payment of other internal revenue taxes, or the person may opt for a refund of the unused input tax.
In cases where a refund is applicable, the Commissioner is required to grant a refund for creditable input taxes within ninety (90) days from the date of submitting invoices and supporting documents. To streamline the process, VAT refund claims are categorized into low, medium, and high-risk claims based on factors such as the amount of the refund claim, tax compliance history, and frequency of filing VAT refund claims, among others.
Medium- and high-risk claims may undergo audit or verification processes as part of the Bureau of Internal Revenue's national audit program for the relevant year. This ensures compliance and accuracy in the refund process.
If the Commissioner determines that a refund is not warranted, a written explanation detailing the legal and factual basis for the denial must be provided within the ninety (90)-day period. This provision aims to establish a transparent and efficient system for handling VAT registration cancellations and corresponding refund claims.
14. Removal of "VAT Official Receipt" in the Tax Code. Under the new law, the distinction between the VAT invoice and VAT official receipt has been eliminated. This amendment simplifies the documentation process by consolidating the information requirements into a unified VAT invoice, removing the previous differentiation between the invoice and official receipt.
Additionally, a new provision has been added, stating that if a VAT-registered person issues a VAT invoice to another VAT-registered person without including the required information outlined in Subsection (B), the issuer is considered in noncompliance with the invoicing requirement. However, there are specific conditions:
Liability for Noncompliance: The issuer is held accountable for not meeting the invoicing requirements.
Input Tax Credit Allowance: Despite the noncompliance, the VAT issued can still be utilized as input tax credit by the purchaser, as specified in Section 110 of the Tax Code. This allowance is contingent on the lacking information not pertaining to crucial details, including the amount of sales, amount of VAT, names and Taxpayer Identification Numbers of both the purchaser and issuer/seller, description of goods or nature of services, and the date of the transaction.
15. Inclusivity for Non-Resident Taxpayers. Through the development of the Ease of Paying Taxes and Digitalization Roadmap by the BIR, the Act ensures that non-Philippine resident taxpayers have access to registration facilities. This inclusivity promotes a more comprehensive tax framework.
16. Stringent 180-day Resolution of Claims. To fortify taxpayer rights, the Act imposes a stringent 180-day timeframe for the resolution of claims for refund resulting from erroneous or illegal tax collections. The Commissioner is mandated to process and decide on the refund under this provision within one hundred eighty (180) days from the date of submission of complete documents in support of the application.
Furthermore, in the event of a denial, whether in full or in part, the Commissioner is required to provide a clear statement of the legal and/or factual basis for the denial, ensuring transparency in the decision-making process. Failure on the part of any official, agent, or employee of the Bureau of Internal Revenue to process and decide on the application within the specified one hundred eighty (180)-day period is punishable under Section 269 of the Tax Code. This reinforces accountability and timely action in addressing refund claims.
These additional provisions emphasize the commitment to transparency, efficiency, and accountability in the handling of refund claims, providing taxpayers with a clear and expeditious process for resolving issues related to erroneous or illegal tax collections.
17. 5-Year Preservation of Books and Accounts and Other Accounting Records. The new provision specifies a fixed five-year preservation period, calculated from the deadline for filing a return or the date of filing if done after the deadline. The requirement to preserve books of accounts until the last day prescribed by Section 203 has been removed in the new tax code.
18. Annual Registration Fee (ARF) has been REPEALED. With the enactment of the new law, this provision has been removed, signaling a change in the regulatory framework for the imposition of annual registration fees on businesses. The repeal of this provision indicates a shift in the legislative approach to the financial obligations imposed on businesses during the registration process. See BIR Advisory here.
19. Threshold for issuance of receipts has been raised from P100.00 to P500.00. Increasing the mandatory issuance of receipts for each sale and transfer of goods and services from P100 to P500 aims to enhance record-keeping accuracy and transparency in financial transactions. The invoices must include essential details such as the name, (Business Style has been DELETED), Taxpayer Identification Number, date of the transaction, quantity, unit cost, and description of merchandise or nature of service.
The specified amount of P500 shall be adjusted to its present values every three (8) years using the consumer price index, as published by the Philippine Statistics Authority. This adjustment aims to account for inflation and maintain the relevance of the threshold.
Buyer's Requirement and Lower Threshold. The seller is obliged to issue sale or commercial invoices if the buyer requires it, irrespective of the transaction amount. Additionally, if the sales amount per transaction is below the threshold, the seller can issue one (1) invoice for the aggregate sales amount at the end of the day, provided that the aggregate sales amount is at least five hundred pesos (P500).
Mandatory Invoices for VAT-Registered Persons. VAT-registered persons must issue duly registered sale or commercial invoices regardless of the amount of the sale and transfer of merchandise or for services rendered.
20. Simplified Income Tax Returns. Reducing the number of income tax return (ITR) pages from four to two streamlines the filing process, making it more straightforward for taxpayers to comply with their obligations.
Republic Act No. 11976 represents a monumental step towards a more efficient, equitable, and accessible tax system in the Philippines. By embracing digitalization, simplifying processes, and protecting taxpayer rights, this legislation holds the promise of driving economic growth while fostering a fair and transparent tax environment for all stakeholders.
For the copy of our Consolidated and Comparative Summary of REPUBLIC ACT NO. 11976 (Ease of Paying Taxes Act), please click here or the image below.
As a seasoned CPA lawyer with a deep understanding of tax intricacies, Atty. Aureada bring expertise honed through a decade of navigating complex legal landscapes. For personalized and comprehensive legal guidance tailored to your needs, reach out to Atty. Yasser Aureada, CPA at yaureada@aureadacpalawfirm.com or contact him at 09359071258.
Disclaimer: This article offers general conceptual guidance and does not replace expert advice. Consult a tax or legal professional for specific details relevant to your situation.
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