Simplified tax regime for micro and small enterprises
Based on the March 2022 Labor Force Survey of the Philippine Statistics Authority, there are more than 17 million informal workers, including tiangge, ambulant and street vendors, plus over 1.3 million sari-sari stores that remain unregistered with the Bureau of Internal Revenue (BIR).
Generally, they fall under the category of micro enterprises. However, under Revenue Regulation No. 11-2000, self-employed individuals with annual gross sales not exceeding P100,000 are classified as marginal income earners. While they may also apply for Barangay Micro Business Enterprises (BMBE) certification to avail of income tax exemption, they are exempted from: P500 annual registration fee; maintaining books of accounts and submitting audited financial statements; issuing official receipts; 12 percent value added tax (VAT) or 3 percent business (percentage) tax; and expanded withholding tax.
Should we increase the income threshold to encourage the informal sector to register with BIR? The P100,000 annual gross sales or P8,333.33 monthly level is even below the average daily sales of a sari-sari store.
Congress must revisit this and legislate a law redefining marginal income earners with higher annual sales or revenue threshold from P100,000 to P1 million, and impose a fixed income tax of P1,000 payable after the first year of operation to encourage them to register with BIR, Social Security System (SSS), Pag-IBIG and Philhealth. In return, they get to file an income tax return, which they can use to open bank accounts, apply for loans and formalize their source of income.
Broadening the taxpayer base must not be confused with the goal of increasing tax collections. Digital transformation must aid and further simplify both registration and compliance.
Further, tax compliance must provide nonfiscal incentives, like access to credit or working capital for marginal income earners.
Under the BMBE Act of 2002, any individual or corporate taxpayer engaged in business may apply for BMBE certification provided their total assets do not exceed P3 million. They are exempted from income tax and minimum wage law and they get access to financial assistance, training and technology transfer.
Note, however, that the exemption is from income tax. Therefore, a BMBE-certified enterprise is still required to file and pay business tax— either 3-percent tax quarterly if the annual gross sales or receipts do not exceed P3 million or 12-percent VAT monthly and quarterly if the annual gross sales or receipts exceed the P3-million threshold.
More than collecting taxes from this sector, the government must provide financial assistance and training programs, and other services to help them grow and sustain their businesses.
Making it easier
So, how do we further simplify tax compliance for micro and small enterprises to formalize or register all them?
First, we need to register all gainfully employed and self-employed individuals, including foreigners and corporations, whether they are exempt from paying income tax or not. The key is to have a comprehensive database based on total population. Maybe BIR can work with the National Economic and Development Authority and use the Philippine Identification System to make sure that 100 percent of them are registered with BIR, and are given a tax identification number.
Also, the BIR can secure databases from other government agencies to compare with or update its taxpayer database, e.g.:Securities and Exchange Commission, SSS, Pag-IBIG, Philhealth, Overseas Workers Welfare Administration, Department of Trade and Industry, Department of Foreign Affairs, Professional Regulatory Commission, Supreme Court, Integrated Bar of the Philippines; Google (for content creators or influencers earning royalty through YouTube); and, Lazada, Shopee, FoodPanda, Grab, Angkas and other digital platforms or orchestrators, including online games and live-streaming apps.
Second, the government must provide fiscal and nonfiscal incentives to encourage them to register, such as:
- tax holiday for the first two years or P1 million income of startups (This can still be included in the proposed Internet Transaction Act);
- generation of tax returns for informal sectors so they can use it to open a bank account or apply for personal/business loan, visa, etc.;
- interest-free working capital or loan for micro enterprises payable in two to three years where they will be given a target profit or cash position to renew their loan or avail of more incentives; priority suppliers or contractors for government procurement or projects; and,
- access to free training seminars, trade expos and inclusion in the database of registered MSMEs, which will be preferred suppliers for both private and public procurements.
Third, allow an optional 10 percent flat tax in lieu of all taxes and remove non value-added and very costly compliance, including books of accounts. The requisite to avail of the flat tax must be the use of electronic invoicing and online submission of profit and loss statements to monitor the sales and performance of the micro and small enterprises.
Once we have addressed the tax gap from the unregistered, we can focus now on undeclared income to broaden the tax base, which is equally important. The full implementation of the electronic invoicing system will be helpful as it captures actual sales of businesses. Effective January 2023, the use of e-invoicing will be mandatory for large taxpayers, ecommerce businesses and exporters.
Immediate priority is to revisit the threshold for large taxpayers, as they contribute more than 60 percent of total collections. If we can double the number of companies classified as large taxpayers, then BIR can clearly and easily focus on compliance using data analytics and industry benchmarking.
Finally, instead of auditing the same companies every year, the BIR must adopt a risk-based audit—that means only high-risk taxpayers must be audited. And the full force of the law must be enforced to tax evaders to serve as a deterrent, i.e., deport foreign or alien individuals, dismiss or permanently disqualify public officials and revoke the CPA license of accountants involved in any tax evasion case.
A simplified tax regime for micro and small enterprises will more likely increase registered individual taxpayers and voluntary compliance without imposing new taxes. While the BIR is completing its digital transformation, it must reallocate its resources and focus on narrowing the tax gap and broadening the taxpayer base to increase voluntary compliance without relying on random audit and investigation, which result in compromises. INQ
This article reflects the personal opinion of the author and not the official stand of the Management Association of the Philippines or MAP. The author is member of the MAP Ease of Doing Business Committee and the founding chair/senior tax advisor of Asian Consulting Group. Feedback via
[email protected] and [email protected].
