Invoicing policy feared to impact cash flow of MSMEs

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The new invoicing rule introduced in the Ease of Paying Taxes (EOPT) Law could seriously affect the cash flow of micro, small and medium enterprises (MSME) in the services sector, a legal expert warns.

Lawyer Irwin Nidea Jr., a senior partner at Du-Baladad and Associates, said the new invoice system introduced in the EOPT could impact the cash flow of MSME service providers, in the process affecting numerous workers.

In an opinion piece published in Business Mirror, Nidea said that before the EOPT Law, service providers were required to pay value added tax (VAT) to the Bureau of Internal Revenue (BIR) only when they had collected the billings they issued to their clients. But with this new law, every service provider is now required to pay VAT at the time of billing, not at the time of collection.

A problem arises for the MSME when the customer does not pay for the service rendered, said Nidea. The MSME can solve this by deducting the output VAT derived from its uncollected receivables from the output VAT in the subsequent quarter, following the lapse of the agreed-upon payment period.

However, to be eligible for output VAT credit, the enterprise must prove that the sale has taken place after the effectivity of the policy, the sale is on credit, VAT has been fully paid to the BIR, and the VAT component of uncollected receivables has not been claimed as an allowable deduction (bad debts) for income tax purposes, Nidea pointed out.

He said these are strict requirements for a service provider with a very tight cash flow to comply with. “To adopt, many MSMEs will be forced to streamline their operations, apply for a loan to augment their cash, or totally close operations because they cannot sustain their operations under the new tax rule.”

Should this happen, more than 50% of the country’s workers could be affected, Nidea warned.

“I hope our policymakers are aware of the impact of this change on small businesses. After all, they are the main drivers of the economy. The government will benefit from an increased upfront collection of VAT in the short term because of the advance payments of VAT,” the legal expert said. “But it should consider the impact of this policy on the livelihoods of the small Filipino entrepreneurs whose cash flow might dwindle and later die.”

The EOPT Act was signed into law as Republic Act No. 11976 on January 5, 2024 and took effect on January 22, its aim to modernize Philippine tax administration and strengthen taxpayer rights.

One of the significant changes under this law is how it simplifies VAT rules and documentation. The new law provides for a uniform tax base—the gross sales—and the uniform use of documentation—the VAT invoice—for all transactions, whether involving the sale of goods or services, or lease of property.

With this change, the VAT official receipt is removed and an invoice system implemented to accelerate VAT refunds.

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