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New taxpayer classifications under the Ease of Paying Taxes Law

2024 ushered in a new tax law, the Ease of Paying Taxes or EoPT Law, or Republic Act No. 11976, which introduced a number of reforms, one of which was to classify taxpayers based on their gross sales.

The EoPT Law became effective on Jan. 22, and the Bureau of Internal Revenue (BIR) recently issued the implementing guidelines for classifying taxpayers under Section 21(b) of the National Internal Revenue Code (Tax Code). Revenue Regulations (RR) No. 8-2024 will take effect on April 27, or 15 days from its publication on the BIR website on April 12.

Taxpayers are now classified under four groups, depending on the level of gross sales for a taxable year:

A) Micro Taxpayers are those with gross sales of less than P3 million

B) Small Taxpayers are those with gross sales of between P3 million and less than P20 million

C) Medium Taxpayers are those with gross sales of between P20 million and less than P1 billion

D) Large Taxpayers are those with gross sales of P1 billion and above

For purposes of determining a taxpayer’s classification, RR No. 8-2024 defines gross sales as total sales revenue during the taxable year, net of Value-Added Tax (VAT) and without any other deductions.

The RR specifically provides that gross sales only include business income, or income earned by a taxpayer from the conduct of trade or business or the exercise of a profession. Compensation income earned under an employ-er-employee relationship, passive income under Sections 24, 25, 27 and 28, as well as tax-exempt income under Section 32(B) of the Tax Code, are all excluded from the computation of gross sales. With this clear guideline, taxpay-ers with multiple income sources need not worry about inadvertently falling under a higher classification since gross sales is categorically defined to include only business income.

As a rule, any person, whether an individual or a juridical entity, who wishes to engage in business or the exercise of profession, is required to register for tax purposes. Those taxpayers who will register from April 27 onwards, or upon effectivity of RR No. 8-2024, must indicate their initial classification in the registration form. This means that new taxpayers would have to assess what their classification would be based on the expected or estimated gross sales of their new business.

This initial classification applies from the start of their registration until the taxpayer is reclassified by the BIR based on the gross sales thresholds described above.

RR No. 8-2024 also provides for transitory rules on the classification of taxpayers who were registered prior to April 27.

All taxpayers registered in 2022 and prior years are to be classified based on their gross sales for the taxable year 2022. While the RR did not specify, this presumably will be based on the Audited Financial Statements duly sub-mitted by the taxpayer to the BIR.

If no information on their 2022 gross sales was submitted, taxpayers registered in 2022 and prior years will be initially classified as Micro Taxpayers, unless they are VAT-registered, in which case, they will be classified as Small Taxpayers. These same initial classification rules also apply to taxpayers who were registered in 2023 and in 2024 before the effectivity of RR No. 8-2024.

Similar to new taxpayers registered under RR No. 8-2024, existing taxpayers may be reclassified by the BIR based on the threshold of their gross sales. All taxpayers are to be duly notified by the BIR of the reclassification before it can be effective. The manner or procedure for notifications have yet to be prescribed and will be released in a separate revenue issuance. Previously, taxpayers were notified of their classification or de-classification as a top withholding agent via publication in a newspaper of general circulation or posting in the BIR website. We have yet to see whether this same notification process will be applied to reclassifications of taxpayers under the EoPT Law.

The new classification of taxpayers, together with most of the reforms introduced by the EoPT Law, are a welcome development for taxpayers. It is likewise laudable that the taxpayer classification is expanded into four groups, with the EoPT Law being cognizant of the varying earning levels of taxpayers and widening the gap between a Micro Taxpayer and a Large Taxpayer. The new classifications are especially advantageous to Micro and Small Taxpayers as they are given special concessions such as a simplified income tax return (which is reduced to two pages), reduced 10% rate for civil penalties, and reduction on interest rates and certain fines and compromise penalties.

Now that the implementing rules for the tax reforms introduced by the EoPT Law have been released, taxpayers and tax officials alike can be properly guided. The EoPT Law’s objective of improving tax administration efficiency and en-couraging tax compliance on the part of taxpayers may soon be in full swing. In line with the intention of having a responsive tax administration that will cater to the various classes of taxpayers, I hope that the BIR does not limit itself to the concessions required under the law (two-pager ITR and reduced penalties). I sincerely hope that they allocate resources to formulate programs and other administrative measures that will give this taxpayer classification scheme additional rele-vance, particularly for micro and small taxpayers.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.

 

Dorothy Puguon is a manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of Price water house Coopers global network.

dorothy.jane.puguon@pwc.com