Surviving the System How Philippine MSMEs Absorb the Compliance Costs Regulation Was Meant to Prevent

Micro, small, and medium enterprises (MSMEs) make up 99.63% of registered business establishments in the Philippines and generate roughly 40% of GDP and 62.4% of employment, yet the same regulatory system that depends on them treats business closure as harder than business formation. This paper walks through the legal sequence a failing sole proprietorship must follow to close cleanly, evaluates the 2026 reform (Revenue Memorandum Circular No. 47-2026) that was meant to ease that process, and works through an illustrative case of a small tapsilog eatery that accumulated roughly ₱52,000 in tax and penalty liability before it could close. It then places that burden inside a wider pattern: income taxed once when earned, and taxed again at 12% each time it is spent on VAT-covered goods, domestic travel, or services — the highest VAT rate in the ASEAN region. The paper closes with the coping strategies MSMEs actually use to survive this environment and the policy gaps that remain even after the 2026 reform. Keywords and subjects MSME Philippines tax compliance business closure BIR VAT Ease of Paying Taxes Act informality small business regulation tax policy