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The carrot and the stick

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The social and economic effects of the pandemic were on a scale so massive that many did not see an end in sight. However, with the development and rollout of the vaccines, restrictions were slowly lifted which allowed our economy to gradually recover. This did not come without a cost. As a result of the COVID-19 response, the government was forced to borrow, which significantly increased the national debt.

To manage the debt, the government sought ways to raise revenue, improve tax administration, and cut unnecessary spending, which resulted in several draft tax bills such as the Ease of Paying Taxes bill to improve tax administration and an Act Imposing Value-Added Tax on Digital Transactions to broaden the tax base. While an expanded tax base is one way to raise revenue, I believe that a reduction may also result in an increase in overall tax collections in the long run. One such example is the Barangay Micro Business Enterprises (BMBE) Act of 2002.

The BMBE Act of 2022 is one of the lesser-known laws enacted to hasten the country’s economic development by encouraging the formation and growth of barangay micro-business enterprises. One of the law’s goals is to integrate those in the informal sector into the mainstream economy by the granting of incentives and other benefits.

TAX INCENTIVESBarangay Micro Business Enterprises (BMBEs) refer to any business entity or enterprise engaged in the production, processing or manufacturing of products or commodities, including agro-processing, trading and services, whose activities are barangay-based and micro in nature and scope. Its total assets must not exceed P3 million.

The “services” covered by the law exclude those rendered by natural persons who are duly licensed by the government in connection with their profession and juridical persons whose services are carried out through licensed professionals (e.g., accountancy services rendered by Certified Public Accountants). As for the P3 million threshold on total assets, this includes those financed by loans but excludes the land on which the particular business entity’s office and equipment are situated.

The key incentives granted under the BMBE Act include exemption from income tax, exemption from the coverage of the minimum wage law, and access to a special credit window for its financing needs. LGUs are also encouraged either to reduce or to exempt the BMBE from local taxes, fees, and charges imposed.

Other tax incentives include exemption from gross receipts tax on interest, commissions, and discounts arising from the loans granted by the Land Bank of the Philippines, Development Bank of the Philippines, People’s Credit and Finance Corp. and Small Business Guarantee and Finance Corp. to duly-registered BMBEs, as well as loans extended by the Government Service Insurance System and Social Security System to their respective member-employees for the purpose of establishing BMBEs.

The income tax exemption of a BMBE shall cover income arising from its operations as a BMBE. It does not apply to passive income such as interest, royalties, prizes and other winnings, dividends, capital gains from the sale of shares or real property, the share of an individual in the net income after tax of an association, a joint account, a joint venture or consortium, or a taxable partnership of which he is a partner, income from the practice of a profession received directly from clients or from the professional partnership of which the individual is a partner, compensation, and all other forms of passive income and income from revenue not effectively connected with or arising from operations of the BMBEs as such.

To avail of the income tax incentive, the BMBE must register with the BIR Regional District Office where the principal place of business is located. In case the BMBE’s income is subject to withholding tax (i.e., income earned from top withholding agents), the BMBE may be exempt upon furnishing its customers with a certified true copy of its BIR registration certificate.

It should be noted, however, that no BMBE is allowed double or multiple availment of income tax exemption privileges. As such, a BMBE cannot simultaneously avail of both BMBE status (exempt from income tax, but liable for other internal revenue tax) and the 8% income tax rate option available to individuals earning business income (in lieu of the graduated income tax rates and percentage tax).

BMBEs are required to file an Annual Information Return, together with an Account Information Form, containing data lifted from the audited financial statements and a sworn statement of assets owned and/or used in business on or before the fifteenth (15th) day of the fourth month following the close of the taxable year. The BIR has also ruled that while BMBEs are exempt from income tax, they are required to file income tax returns.

REGISTRATIONAny person, natural or juridical, may apply for registration as a BMBE. This includes business entities or enterprises, whether operated as a sole proprietorship or a corporation, partnership, cooperative or association, organized under Philippine law.

Initially, the applicant must be registered as a business enterprise with the appropriate government agency (i.e., Securities and Exchange Commission, Department of Trade and Industry, etc.), the BIR, and the appropriate LGU. The applicant’s registration as a BMBE may then be made with the Office of the Treasurer of the concerned city or municipality, who shall then issue a Certificate of Authority.

The Certificate of Authority is effective for a period of two years and renewable for a period of two years at every renewal.

CONCLUSIONOften, registration with the BIR is equated with the payment of taxes. This assumption has discouraged small businesses from formally registering their businesses.

Typically, the standard approach of tax authorities to encourage registration with the BIR is to remind businesses of their obligation to pay taxes and the potential penalties for non-compliance which unnecessarily increases the cost of doing business.

Perhaps instead of the “penalties” approach, incentives such as those under the BMBE Act may instead be promoted to encourage registration coupled with simplifying tax administration, and updating the tax rules to address the concerns of small businesses. As in most cases, the carrot may be better than the stick.

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.

Marvin Joseph Manuel is a manager at the Tax Services department of Isla Lipana & Co., the Philippine member firm of the PwC network.

+63 (2)8845-2728

manuel.marvin.joseph@pwc.com

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