One of the major changes introduced in the TRAIN law was mandatory e-invoicing. Under the law, taxpayers engaged in the export of goods and services, e-commerce, and those considered Large Taxpayers, are required to issue electronic invoices/receipts and to report their sales data to the Bureau of Internal Revenue (BIR) at the point of sale within five years from the effectivity of the TRAIN law, i.e., on or before Jan. 1, 2023. This measure is contingent on the establishment of a system capable of storing and processing the required data.
Though perhaps unfamiliar to many taxpayers, the concept of e-invoicing is not new in the country or elsewhere around the world. Many developed countries had long before incorporated e-invoicing in their reportorial and tax compliance requirements.
In our country, the Electronic Commerce Act, passed in 2000, recognizes electronic documents as functional equivalents of paper documents and grants them the same legal effects as paper documents. Electronic invoices, therefore, are functional equivalents of paper invoices and should be acceptable for the purpose of evidencing sale transactions.
In 2002, the BIR acknowledged the acceptability of e-invoicing when it issued Revenue Memorandum Order (RMO) 29-02. As a directive, the RMO required taxpayers utilizing the e-invoicing system to apply for a complete Computerized Accounting System (CAS) which should be capable of generating hard copies of the invoices anytime. Subsequent to this, Revenue Memorandum Circular (RMC) 71-03 was issued where the BIR defined as well as what constitutes an e-invoice. Under the circular, e-invoicing is a “system developed and maintained by the e-Buyer or e-seller, or both, in issuing an invoice electronically through the Internet. Pursuant to these regulations, taxpayers who wish to employ an electronic invoicing system are required to secure a Permit to Adopt CAS from the BIR.
Notwithstanding these regulations and statutory issuances, e-invoicing remains underutilized in the country not only by local businesses but also by multinationals which have long adopted these systems in their offices overseas.
One of the main reasons why the Philippines has lagged far behind other countries in implementing e-invoicing is the government’s continued reliance on physical documentation or usage of hard copies. For instance, in the case of VAT refunds, the BIR continues to stamp the invoices as proof of the claims for refund; and in tax audits, BIR examiners rely only on printed copies to examine the taxpayer’s compliance with tax rules and regulations. Hand in hand with these practices that focus on physical records, policies and procedures on proper handling of and reliance upon fully digitized records and systems remain inadequate.
However, as digital literacy becomes the norm, given the undeniable advantages of using fully digitalized systems, the BIR has identified the development of the e-invoicing system as part of its Strategic Plan for 2019-2023. The shift to mandatory e-invoicing demonstrates the government’s willingness to embrace and to implement digital transformation in tax administration.
Spearheading the government’s new-found commitment towards digitalization, Finance Secretary Carlos G. Dominguez III cited South Korea’s electronic invoicing program as the best model on which to base the government’s own program. Since 2011, South Korea has been implementing its mandatory electronic tax invoice system for all corporate and certain individual taxpayers. To issue and transmit invoices, a taxpayer may use an Application System Provider set up at the taxpayer’s expense. As an alternative, the South Korean government provides and maintains a web application that taxpayers can use for free to issue and to email e-tax invoices to their customers.
Those who do not have online access have the option either to use the automatic response system (ARS) by telephone or to visit their local tax office for the issue of electronic e-invoices. All tax invoices are then required to be transmitted to the tax authorities immediately after issuance. Under the South Korean program, the taxpayers’ diverse circumstances are clearly considered by providing several options of invoicing that would facilitate efficient implementation in their respective businesses.
Elsewhere in the ASEAN region, Indonesia, Malaysia, and Brunei have implemented e-invoicing systems. In the case of Thailand, a regulation was passed in 2012, allowing some companies to issue electronic tax invoices.
Guided by best practices in e-invoicing, the BIR started studying South Korea’s electronic invoicing system as early as January 2018. According to reports, the government is expected to receive a grant from the Korea International Cooperation Agency (KOICA) to fund the initial phase of the invoicing project, which includes pilot testing. The BIR is also working hand-in-hand with KOICA to conduct feasibility studies for the project. More recently, during the presentation at the Philippine Day Forum in Washington, a Department of Finance official confirmed the pilot testing in 2020 of e-receipts among 100 taxpayers selected by the BIR, as a precursor to its mandatory implementation.
Like any transformation, birth pains and complications are expected. Based on other countries’ experiences, critical issues need to be addressed before e-invoicing becomes fully operational and practical. For instance, will the government provide for a centralized system? Is there a need to engage third-party e-invoice solutions providers, and must they be certified? Will there be extensive training (both in scope and span) to educate the public? How will e-invoicing be harmonized with existing policies and procedures?
On the part of taxpayers, it will also be a challenge to discard processes that have already been in place for years and to learn new ones. Moreover, replacing or updating company in-house systems would entail hefty investments in money and time to ensure its effective operation.
Also, the reliability and security of the e-invoicing system are critical. In fact, cyber security and data privacy are specifically mentioned in the TRAIN law as important compliance points for the system. To build a user-friendly, reliable, and secure electronic system, the BIR and the IT system providers must cooperate to address perceived risks of a system malfunction, glitches, or data privacy intrusion. Since the government has initiated the process, taxpayers should be looking into this and preparing the means and process on how they would be able to assist and comply. Overcoming the challenges would be best achieved through close cooperation among the government, the taxpayers, and their representatives.
The next few years will probably be a test of patience and determination for both the taxpayers and the government in achieving effective e-invoicing in the Philippines. Regardless of anticipated challenges, the move towards digitalization is worth the effort in realizing efficiency in tax administration, reducing costs, and simplifying tax compliance.
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.
Mary Jean C. Balboa is a Director at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of PricewaterhouseCoopers global network.