Tags: tax burden in the Philippines, small business taxation, BIR and LGU taxes, tax reform for freelancers, local business tax issues
In the heart of every bustling barangay or corner store in the Philippines, a small entrepreneur opens shop each morning—hoping for a good day, enough sales to cover the bills, and perhaps a little extra to take home. Across the nation, freelancers fire up their laptops, chasing contracts and hustling through tight deadlines to support their families. Together, they are the backbone of our economy: micro, small, and self-employed professionals who play a vital role in nation-building.
Yet, despite their contribution, many of these small business owners and professionals face an unfair truth—they are taxed heavily, sometimes even when they are barely making a profit.
This blog post is a call to our public officials, policymakers, and fellow citizens. It’s time to re-evaluate the current taxation structure and advocate for reforms that truly support Filipino entrepreneurship.
The Dual Tax Challenge: National and Local Taxes
The Philippine tax structure for small businesses and professionals presents a unique challenge. While the Bureau of Internal Revenue (BIR) imposes national taxes such as percentage tax or Value-Added Tax (VAT), Local Government Units (LGUs) impose business taxes based on gross sales or receipts. Though these taxes stem from different legal mandates, the impact they create overlaps significantly.
Here lies the problem: both BIR and LGUs compute taxes based on gross income, without deducting operating costs. This results in businesses being taxed regardless of profitability.
A sari-sari store that earns P10,000 a month might spend nearly all of that on inventory and utilities. A freelance graphic designer may receive P50,000 for a project but spend P45,000 on software, marketing, and taxes. Yet, the taxes owed are calculated on the gross figures, not what remains after essential expenses.
This results in a three-fold burden:
1. Inequitable Tax Burden
The current setup does not account for the thin margins and high operational costs of small businesses. While big companies can hire accountants and spread expenses over larger revenue streams, small entrepreneurs struggle to make ends meet—yet pay a similar percentage in taxes. This contradicts the principle of tax equity, where those with greater ability to pay should bear more of the tax load.
2. Discouragement from Formalization
The complexity and cost of compliance with both national and local tax obligations discourage many freelancers, online sellers, and small entrepreneurs from registering their businesses. This defeats the purpose of tax laws, which should encourage businesses to go formal, contribute to the economy, and benefit from legal protections.
When compliance becomes too burdensome, more and more Filipinos choose to remain under the radar, inadvertently fueling the informal economy—and reducing the tax base.
3. Administrative Overload
Aside from the financial burden, small business owners are faced with time-consuming and confusing compliance processes. Separate filing schedules for BIR and LGUs, varying documentary requirements, and the need to physically appear at local offices or tax bureaus create an environment where errors are easy to make—and penalties are quickly imposed.
For entrepreneurs without accountants or full-time administrative staff, this is not just inconvenient—it’s paralyzing.
Why Reform Is Necessary and Timely
The goal of taxation is to fund public services and infrastructure. But for it to be effective, taxation must be:
- Fair – burden distributed based on ability to pay
- Simple – compliance should not require complex knowledge
- Encouraging – the system should support business growth, not stifle it
Our current structure unfortunately misses the mark in these areas, particularly for small-scale players. And while the Ease of Doing Business Act (RA 11032) sought to reduce red tape, the challenge of overlapping taxes remains largely unaddressed.
In a post-pandemic economy where micro and small businesses are still trying to recover, now is the time to revisit our tax policies.
Proposed Reforms for a Fairer System
Let us explore four key reform areas that could transform the playing field for small businesses and professionals:
a. Review and Harmonize the Local Government Code with National Tax Policies
The Local Government Code allows LGUs to levy business taxes based on gross receipts, but this should be harmonized with the national tax system to avoid double taxation on the same income base. A clear policy that distinguishes taxable bases or introduces credits against LGU taxes for BIR-paid taxes could help.
b. Base Local Business Taxes on Net Income or Use Graduated Brackets
Shifting LGU taxation from gross to net income for certain classes of taxpayers—or at least introducing graduated tax brackets for very small businesses—can offer relief to those with tight margins. This method is more equitable and reflects a business's actual capacity to contribute.
c. Simplify Compliance through a Unified Filing System
A consolidated tax filing portal that covers both BIR and LGU tax compliance would save time and reduce confusion. Just as banks offer online payment systems for multiple billers, government agencies can work toward a one-stop digital platform where small taxpayers file once and settle both national and local dues.
d. Provide Tax Thresholds or Exemptions for Low-Earning Entities
Much like the VAT threshold currently exempts businesses earning below a certain amount, a minimum income threshold for LGU taxes would shield the smallest players. This encourages micro-entrepreneurs to register and grow without the immediate pressure of tax dues they can’t afford.
Encouraging Compliance Through Compassionate Policy
Tax compliance isn’t just about enforcement; it’s about trust. When small business owners see that the government understands their challenges and works to ease their burden, they are more likely to comply voluntarily.
On the other hand, if the tax system feels punitive and insensitive to their realities, informal operations become the norm.
Reform is not about cutting revenue—it’s about restructuring it wisely. A broader tax base with higher voluntary compliance from small players could ultimately increase total collections without overburdening anyone.
Supporting Entrepreneurship for National Growth
We often say that small businesses are the "backbone of the economy." But a backbone needs support to remain strong. Entrepreneurs take risks every day. They create jobs, spark innovation, and drive local economies. Our tax system should celebrate and support that—not penalize it.
The Philippines is full of talent, resourcefulness, and entrepreneurial spirit. By making our tax system more inclusive, humane, and fair, we enable that spirit to thrive.
A Call to Action
This is a voice of a burdened taxpayer re-echoed. To our lawmakers, local executives, tax authorities, and fellow Filipinos:
Let’s reimagine our tax system—not just for efficiency, but for empathy. Let’s ensure that those who are striving to build something for themselves, their families, and their communities are not crushed by a tax burden they can’t carry.
Let’s make it easier, not harder, to do honest, decent work.
Because when our small businesses and professionals succeed, the nation succeeds with them.
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