The Ease of Paying Taxes Act to Modernize and Facilitate Tax Compliance

by Janine Karla Aranas,CPA, Jorani Ludovica, and Princess Alvaran

co-author: Dyana Katrina T. Roldan

On 5 January 2024, Republic Act No. 11976 or the “Ease of Paying Taxes Act” was signed into law to modernize taxation, simplify tax compliance, and provide additional safeguards to taxpayers, thereby strengthening the government’s tax collection efforts. Among its notable amendments are the new classification of taxpayers, digitalization of filing and payment processes, improvement of taxpayers’ remedies, and the waiver of annual registration fees for businesses.

Fair Treatment and Compliance of Taxpayers

The new law, which amends provisions of the National Internal Revenue Code (NIRC), exempts Overseas Contract Workers (OCW) and Overseas Filipino Worker (OFW) from filing income tax returns.[1]

Moreover, it recognizes that taxpayers do not have the same capabilities and resources to comply with tax regulations and rules. Hence, for efficient tax administration, it provided a new classification of taxpayers based on gross sales[2]— micro, small, medium, and large.[3] 

Congress has granted special concessions to micro and small taxpayers. They can prepare their income tax return in paper or electronic form, which shall consist of a maximum of two pages. They are entitled to a reduced rate of 10% for civil penalties, if applicable. Deficiency and delinquency interests, along with interests on extended payments, are reduced by 50%. The penalty for failure to file certain information returns under Section 250 of the NIRC has been lowered to ₱500, while violations of Sections 118, 237, and 238 of the NIRC will incur a reduced compromise penalty rate of at least 50%.

The law also promotes tax compliance by pushing for the digitalization in the filing of returns and payment of all internal revenue taxes. All taxpayers may now file and submit their tax returns and payments electronically or manually.[4] The option to file returns and pay to the duly authorized city or municipal treasurer is uniformly omitted across all provisions[5] to encourage taxpayers to avail of the electronic mode of compliance.

Individual taxpayers and withholding agents falling under Sections 57 and 81 of the NIRC may file their returns with any authorized agent bank, Revenue District Office through Revenue Collection Officers, or authorized tax software provider except in cases where the Commissioner otherwise permits.[6]

Value-Added Tax (VAT) and Percentage Tax

The VAT provisions are amended as regards the: (1) terminology of the tax base; (2) basis for the deduction of the tax base; (3) sole issuance of sales invoices; (4) classification of VAT refunds; and (5) penalties in case of erroneous filing of invoice.

 The new law provides that “gross sales” is now the only tax base for both the sale of goods or properties[7] and the sale of services and use or lease of properties.[8] The change of term is consistent with the accrual basis method in financial accounting, which reports revenue when a sales transaction occurs, regardless of when actual payment is received. This amendment does not expand the total tax payable from any given transaction as the whole sales or contract price will still be taxable. In other words, taxes are imposed upon the issuance of a sales invoice and no longer when actual payment is received, which may have the effect of accelerating the payment of taxes.

The tax base may be deducted in some instances. First, subsequently returned goods or properties sold by VAT-registered persons may be removed from the tax base during the quarter in which a refund is made or a credit memorandum or refund is issued.[9] Second, the value of services rendered where VAT-registered persons granted allowances may be deducted from the gross sales during the quarter in which a refund or credit memorandum is made or issued. Lastly, sales discounts, which are granted in the invoice at the time of sale and which are not dependent on the happening of a future event, may be excluded from the gross sales within the same quarter it was given.[10] 

Another key amendment is the mandatory issuance of a sales invoice[11] by a VAT-registered person.[12] The invoice for the sale of services and use or lease of properties for long-term contracts shall be issued in the month within which the service, use, or lease of properties is rendered or supplied.[13]  Being the sole document to be issued, the issuance of VAT receipts and suspension of business operations for failure to issue them are now obsolete. 

Failure to issue a sales invoice prevents input tax from being credited. It exposes the taxpayer to liability for percentage taxes and surcharge.[14] Nonetheless, the new law provides additional leniency in the invoicing requirements. In case the invoice issued by a VAT-registered person to another VAT-registered person lacks the information required on its face, VAT may still be used as input tax credit provided that the lacking information does not pertain to the: (1) amount of sales; (2) amount of VAT; (3) name and Taxpayer Identification Number of both the purchaser and issuer/seller; (4) description of goods or nature of services; and (5) date of the transaction.[15]

The following percentage taxes under the NIRC—Percentage Tax on Persons Exempt from VAT,[16] Percentage Tax on International Carriers,[17] Tax on Franchises,[18] and Tax on Overseas Dispatch, Message, or Conversation Originating from the Philippines[19] — are now based on “gross sales,” on “amount billed”, or on “gross sales or earnings.”[20]  Again, like the change in tax base for the VAT provisions, this change in tax base is consistent with the accrual basis method in financial accounting

Taxpayers’ Remedies

A new subsection in the law specifies that “the obligation to deduct and withhold tax arises at the time the income has become payable.”[21] In case there is an excess amount of withheld income tax, tax refunds or credits may be granted and will be given due course when it is established that the excess is declared as an income payment that is part of the gross income and such excess was withheld.[22] Previously, only revenue regulations provided that the obligation to withhold arises at the time the income payment is paid or payable, or income payment is accrued or recorded as an expense or asset, depending on the payor’s recognition and whichever came first. With the new law, the timing of withholding has been statutorily codified.

Further, a new subsection on [VAT] Tax Credit allows for deductions in the output VAT demandable on the next quarter when a seller of goods or services has uncollected receivables[23] to his or her present output VAT.[24] For credit to be allowed, the seller must have fully paid the VAT on the transaction, and the VAT component of the uncollected receivables has not been claimed as an allowable deduction.[25] 

Additionally, there are now two options for taxpayers to recover unused input tax for those who canceled their registration due to retirement from or cessation of business under Section 106(C) of the NIRC.[26] Before this, the outstanding input tax could only be used to pay or offset other tax liabilities through a tax credit certificate.[27] Now, actual reimbursements or cash refunds are permitted.[28] 

VAT input tax refund claims are now classified into low, medium, and high risk. Claims are classified after an analysis of the tax compliance history and frequency of filing VAT refund claims, among others.[29] The processing of medium and high-risk claims is subject to the auditing and verification processes of the Bureau of Internal Revenue (BIR).[30] To safeguard taxpayers, any BIR agent or employee may be administratively and criminally liable for failure to act on the application for refund within the 90-day period from the date of submission of invoices and other supporting documents.[31]

For all other internal revenue taxes, the BIR Commissioner is given 180 days from the date of submission of complete documents for the application of refund of taxes to process and decide on the same.[32] Should the Commissioner deny, in full or in part, the claim, he or she shall state the legal and/or factual basis. Failure to process and decide on the application within the 180-day period shall be punishable under Section 269 of the NIRC.[33]

For the recovery of tax erroneously or illegally collected, the Commissioner is also required to act on the claim within 180 days.[34] No such suit or proceeding shall be filed unless there is a full or partial denial of the claim for refund or credit or there is a failure by the Commissioner to act on the claim within the prescribed period. In case of full or partial denial or failure to act on the application, the taxpayer has 30 days from receipt of the decision or expiration of the 180-day period to appeal to the Court of Tax Appeals.[35]

Violations committed by government enforcement officers for their deliberate failure to act on applications for refund now include claims for abatement, compromise, refund, and credit.[36]

Another change is the removal of the prescriptive period of two years to file any claim against erroneous or illegal collection of taxes,[37] but resort to administrative remedy is required before availing of judicial remedy.[38]

These provisions benefit taxpayers as they make it easier to claim tax refunds, and ensure accountability of officers who delay in deciding on tax refund applications.

Annual Registration Fees and Invoices

The new law also waives the payment of annual registration fees for businesses. Issuance of duly registered sale or commercial invoices is mandatory for the sale and transfer of merchandise or services rendered valued at ₱500.00 or more, which amount is subject to change every three years based on the consumer price index published by the Philippine Statistics Office. Regardless of amount, the seller must issue an invoice when the buyer requests.  Moreover, the authority to print the invoices is now free of charge. “Business style” is removed from the sales or commercial invoices. 

Conclusion

The amendments aim to strike a balance between alleviating the administrative burden on taxpayers while maintaining the integrity of the government’s tax collection capacity. However, it remains to be seen whether the electronic method of filing and payment could be effectively utilized by the general public.

While the law provides micro and small taxpayers with administrative accommodations and reduced penalty rates, there could also be changes in terms of streamlining tax procedures and documentary requirements that fit their classification. Further improvements on the digital accessibility of BIR’s various services to different taxpayers, especially micro and small taxpayers, could be adopted to better improve tax compliance and enhance taxpayer convenience. Nevertheless, the passage of the amendments is a welcome development. It signals a growing recognition that business owners are willing and ready to fully comply with tax requirements, but are often met with rigid and burdensome processes in the previous tax system.

The Ease of Paying Taxes Act took effect on 22 January 2024.

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[1] Rep. Act No. 11976 (2024), § 51 (E).

[2] § 21 (B).

[3] The gross sales for the following classifications are respectively: less than ₱3,000,000 pesos, ₱3,000,000 to less than ₱20,000,000, ₱20,000,000 to less than ₱1,000,000,000, and ₱1,000,000,000 and above.

§ 21 (B).

[4] § 22 (KK).

[5] § 22 (KK).

[6] §§ 51 (B), 58 (A), Section 77 (A), 81, 90, 101, and 103.

[7] § 106. Previously, “gross selling price.”

[8] § 108. Previously, “gross receipt.”

[9] § 106 (D).

[10] § 106(D).

[11] Sales invoice is a written account of goods sold or services rendered indicating the prices charged therefor, or a list, by whatever name it is known, which is used in the ordinary course of business evidencing sale and transfer of agreement to sell or transfer goods and services.

Rev. Reg. No. 2-73, § 2(C).

[12] Rep. Act No. 11976 (2024), § 113 (A).

[13] § 108(A).

[14] § 113.

[15] § (D)(3).

[16] § 116.

[17] § 117.

[18] § 119.

[19] § 120.

[20] Previously, “gross receipts,” “amount billed,” and “gross sales, receipts, or earnings,” respectively.

[21] § 58 (C).

[22] § 58 (E).

[23] By uncollected receivables these are accounts or transactions which are consummated but payment can no longer be recovered.

[24] § 110 (D).

[25] § 110 (D).

[26] § 112 (B).

[27] In a tax credit, a tax certificate or tax credit memo is issued to the taxpayer, and this can be applied against any sum that may be due and collectible except withholding taxes. This is opposed to tax refunds where there are actual reimbursements. See Ignatius Michael Ingles, Tax Made Less Taxing 498 (2021 ed.). 

[28] § 112 (B).

[29] § 112 (C).

[30] § 112 (C).

[31] § 112(C).

[32] § 204. 

[33] § 204.

[34] § 204.

[35] § 204.

[36] § 269 in relation to § 204.

[37] § 229.

[38] § 229.

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views and opinions of the Firm or any of its partners. This article shall not be construed as official legal advice from the Firm.