Which Taxpayer Classification Do You Fall Under?

The new taxpayer classification is one of the amendments introduced by The Ease of Paying Taxes Act

On January 5, 2024, The Ease of Paying Taxes Act was signed into law by President Ferdinand “Bongbong” Marcos Jr. The goal of this law is to modernize the current tax administration as well as strengthen the rights of taxpayers.

“After the comprehensive amendments to tax policy introduced by the previous administration, we now focus our sights on tax administration with the passage of the Ease of Paying Taxes Act,” President Marcos Jr. said in a statement.

“Recognizing the importance of how the government collects taxes, this measure solidifies our commitment to our countrymen towards a dynamic and efficient tax administration which is responsive to the needs of our taxpayers, both individuals and those who are doing business, adapts to the changing times, and ultimately supports our recovery and growth objectives,” he added.

Due to its passage into law, The Ease of Paying Taxes Act introduces a number of tax-related changes. One such change that has been introduced pertains to taxpayer classification. While this may cause concern regarding a taxpayer’s initial classification, the law also clearly states what happens when a taxpayer has to be reclassified.

Taxpayer Classification

According to The Ease of Paying Taxes Act, taxpayers shall be classified as follows:

Micro Taxpayer	Taxpayer with gross sales that are less than PHP 3 million
Small Taxpayer	Taxpayer with gross sales from PHP 3 million but less than PHP 20 million
Medium Taxpayer	Taxpayer with gross sales from PHP 20 million but less than PHP 1 billion
Large Taxpayer	Taxpayer with gross sales from PHP 1 billion and above

The Revenue Regulations (RR) No. 8-2024 of the Bureau of Internal Revenue (BIR) defines gross sales as “total sales revenue, net of VAT, if applicable, during the taxable year, without any other deductions.”

RR No. 8-2024 adds that gross sales cover only business income and includes “income from the conduct of trade or business or the exercise of a profession. It does not include compensation income received under an employer-employee relationship, as well as passive income under Sections 24, 25, 27, and 28 of the Tax Code.

Income included under Section 32(B) of the Tax Code is likewise not included, which includes the following:

Life insurance
Amount received by insured as return of premium
Gifts, bequests, and devises
Compensation for injuries or sickness
Income exempt under treaty
Retirement benefits, pensions, and gratuities
Miscellaneous items such as income derived by foreign government, prizes and awards, 13th month pay and other benefits, and GSIS, SSS, Medicare, and other contributions

Reclassification of a Taxpayer

The taxpayer classification introduced by The Ease of Paying Taxes Act may create some confusion for both newly registered taxpayers as well as those who have an existing registration.

For first time registrants registering upon the effectivity of the aforementioned changes, the law states that they will initially be classified based on what has been declared on the Registration Forms.

For taxpayers who registered in 2022 and the years prior, they will be classified based on their gross sales for taxable year 2022. However, those who registered in 2022 and the years prior but have not submitted the necessary information will be classified as follows:

Non-VAT registered taxpayers will be classified as Micro Taxpayers
VAT-registered taxpayers will be classified as Small Taxpayers

The aforementioned classification likewise applies for those taxpayers who registered in 2023 and 2024 (before the effectivity of the new changes).

The BIR will notify taxpayers who will be reclassified based on the amendments introduced by The Ease of Paying Taxes Act. How affected taxpayers will be notified will be detailed in a separate revenue issuance by the BIR.