[Ask The Tax Whiz] How Chiz Escudero’s legislative package aims to empower MSMEs

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The Philippine Tax Whiz discusses the importance of Chiz Escudero’s legislative package to MSMEs in the Philippines

According to the 2023 Philippine MSME statistics report of the Department of Trade and Industry (DTI), micro, small, and medium enterprises (MSMEs) make up 99.63% of all businesses in the Philippines. These businesses are the backbone of the Philippine economy, creating jobs, pushing local growth, and sustaining millions of families in the Philippines. But despite the importance of these MSMEs, many of them continue to face the same old difficulties (i.e. high taxes, limited financing, and red tape) that hinder their growth and competitiveness. 

Senate President Chiz Escudero addressed this in his recently filed legislative package that offers tax incentives and ensures expanded access to financing for MSMEs.

What is in the legislative package for MSMEs? 

Escudero seeks to exempt MSMEs from income tax for three (3) years and deduct from their taxable income an additional amount equivalent to 25% of their labor costs, based on the information currently available to the public. Along with these, he is proposing to slash the optional fixed tax rate on gross sales or receipts to 5% from the current 8%. 

Under the creditable withholding tax (CWT) system, the Senate president is also advocating for the simplification of CWT rates into just two categories (i.e. 1% for the purchase of goods and properties and 2% for the purchase of services). 

Additionally, he is advocating for the reinstatement of the 10-year mandated credit allocation for MSMEs by all lending institutions, aiming to improve financing accessibility for smaller businesses. He believes that this will enable our MSMEs to remain operational, create new opportunities, and potentially expand in the future.

How will it help the MSMEs in the Philippines?

Tax compliance remains a major obstacle for MSMEs in the Philippines, with many smaller business owners struggling under a tax system that is often complex, expensive, and overly burdensome. Senator Escudero’s proposed bill seeks to ease this challenge by introducing a series of targeted tax reforms aimed at reducing compliance costs and encouraging formalization.

One of the key measures in the bill is a three-year income tax exemption for MSMEs. This allows businesses to reinvest their earnings during the high-risk startup phase instead of paying income tax, improving their chances of survival and growth. 

While this provides immediate tax relief, it may not be as beneficial if the measure does not allow operating losses incurred during the exempt period to be carried over and deducted in later years. Unlike the CREATE MORE law, which permits businesses with an income tax holiday (ITH) to claim Net Operating Loss Carry-Over (NOLCO) after an income tax holiday, the proposed exemption could unintentionally forfeit that benefit if not addressed clearly in the bill. As most MSMEs operate at a loss in their early years, preserving the ability to use those losses after the exemption is crucial to ensure the policy delivers lasting support.

To further support job creation, the bill offers a 25% additional deduction on labor expenses. For example, if a business spends ₱1 million on salaries, that amount can be deducted as part of the cost of sales/service or an ordinary allowable itemized deduction. The additional 25% proposed by Escudero may be claimed as a special allowable itemized deduction from the taxable income as an incentive. This results in a total of ₱1.25 million, or a 125% deduction on labor expenses. This effectively lowers the business’s tax burden and encourages hiring and/or higher salaries, wages, and benefits, particularly in labor-intensive sectors like retail and food service. 

Another provision proposes reducing the current 8% gross receipts tax to 5% for self-employed individuals and professionals below a certain income threshold. This simplified tax scheme is popular among sari-sari stores, freelancers, and small online sellers. Lowering the rate gives microenterprises more breathing room, increases their take-home income, and promotes greater tax compliance among informal earners.

Finally, the bill simplifies the creditable withholding tax system by introducing fixed categories, 1% for goods and 2% for services, replacing the current system that uses multiple rates based on transaction type and payee classification. This change streamlines tax administration and reduces confusion for smaller businesses.

Overall, Escudero’s proposed reforms aim to make the tax system more accessible and supportive for MSMEs, encouraging growth, formalization, and job creation across the sector.

With Escudero’s proposed tax relief and credit access reforms, the government signals a clear shift from compliance-focused taxation to MSME empowerment. If passed, this measure could significantly ease the cost of doing business and unlock the full potential of Filipino businesses. 

Disclaimer: The information provided in this article is based on a preliminary proposal and publicly available information as of the time of writing. Final regulations have not yet been confirmed and may be subject to change. Readers are advised to monitor official guidance from the relevant Philippine government agencies.