Disclosing tax information in your financial statements

Disclosing tax information in your financial statements by: Lina P. Figueroa

Apologies for disturbing your peace and interrupting your vacation mode. But today, another important Bureau of Internal Revenue (BIR) issuance that is likely to affect your company will start to take effect - Revenue Regulations No. 15-2010, requiring additional tax disclosures on the notes to the financial Statements (FS).

Published in the newspapers last Dec. 13,  the new rule takes effect 15 days later, which is today.

In the regulations, the BIR requires that the notes to the FS accompanying the tax returns should further contain detailed information on taxes, duties, and licenses paid or accrued by the taxpayer during the year, including pending BIR assessments and tax cases in court. These detailed disclosures take the place of the schedule of taxes and licenses that was previously submitted as an attachment to the income tax return (ITR).

Most informed taxpayers and external auditors are hoping that a Revenue Memorandum Circular could be issued before the effectivity date because there are a number of concerns that may need to be clarified. I've checked and none has been posted in the BIR Website as of yesterday.

The most immediate concern is probably which FS will be covered - FS that will be issued on or after December 28, 2010 or FS covering fiscal year ending after this date.

If the intention is to cover the former, it will hit the FS of taxpayers whose fiscal year ended on September 30 and whose annual income tax return is due on Jan. 15, 2011. Of course, it will cover those of prior fiscal periods that have not yet been finalized or submitted.

The regulations specifically enumerated the following items:

1. the amount of VAT output tax declared during the year and the account title and amounts upon which these were based. If there are zero- rated or exempt sales, a statement to that effect and the legal basis therefor;

2. the amount of VAT input taxes claimed broken down into:

     a. beginning of the year
     b. current year's domestic purchases such as: goods for resale, manufacture or further processing; goods other than for resale or manufacture;  capital goods subject to amortization;  services lodged under cost of goods sold; and services lodged under other accounts;
    c. claims for tax credit/refund and other adjustments; and
    d  balance at the end of the year.

3. the landed cost of imports and the amounts of customs duties and tariff paid or accrued thereon;
4. the amount of excise taxes classified per major product category;
5. documentary stamp tax (DST) on loan instruments, shares of stock and other transactions subject to DST;
6. all other taxes, local and national, including real estate taxes, licenses and permit fees lodged under the taxes and licenses account both under the Cost of Sales and Operating Expense accounts;
7. the amounts of withholding taxes categorized into compensation, creditable and final;
8. periods covered and amounts of deficiency  tax assessments, whether protested or not; and
9. tax cases in court or other bodies outside of BIR, at whatever stage, and amounts involved.

We can only guess what the BIR intends to do with these additional disclosures.

You will probably note that most of these information are already declared by the taxpayer in other returns that it has filed with the bureau. As to the pending assessments and tax cases, the BIR has already in place a computerized system to monitor assessment notices issued and their status. Would the BIR just want all these information summarized and available in one document for easy reference? Then, why would it have to  be part of the FS?

Though the preparation of the FS is primarily a management responsibility, the auditor certifies that the FS fairly presents, in all material respects, the financial position of the company, it's financial performance and it's cash flows is accordance with Philippine Financial Reporting Standards.

Hence, audit is conducted to obtain reasonable assurance that the FS is free from material misstatement pursuant to Philippine Standards on Auditing.  By making the disclosures part of the FS, it is evident that the BIR wants these tax disclosures certified too by the auditor. 

If that is the case, the external auditor is expected to audit all these disclosures and vouch for their correctness and completeness. This would definitely require an extended audit procedure and additional time. If we are to follow the tax rules, a tax audit cannot be made on presumptions and estimates because these would translate to liabilities that have to be paid by the taxpayer and for which there are heavy interests and penalties involved. These should be based on facts and to attest to the completeness and correctness of the declarations, a hundred percent audit may have to be done by the auditor. The auditor isn't even required to do a hundred percent vouching under the auditing standards. This is a lot of work which companies have to approve. 

But how would BIR later on deal with a situation where BIR examinations yield different figures from those disclosed in the FS? 

Anyone who has handled BIR examinations would agree that an external auditor's tax audit will not necessarily yield similar results with an audit conducted by the BIR. In fact, even two revenue officers conducting audit on the same taxpayer cannot guarantee to yield the same results for various reasons. One reason is the presence of gray areas in tax regulations that result to differing interpretations on the requirements for compliance. In some cases, the tax rules simply require "adequate" support and confirmation of the adequacy may differ depending on the nature of the transaction and the appreciation of the examiner in the absence of very specific guidelines. 

We therefore expect that, more often than not, the examiners who will do the audit will report that there are inaccurate declarations and underpayments and that the disclosures in the FS, as certified by the auditor, will be deemed "deficient". 

Will this make the auditor a party to the tax case if one will prosper?  Will this affect the auditor 's accreditation as a tax agent?

More than 10 years ago, there is a BIR rule that exempts from tax examination taxpayers who had passed a tax review and certification by an independent accountant or auditor. What will be the reward to the taxpayers for having subjected themselves to tax review? 

I'm pretty sure your auditors will be discussing this requirement with you and the additional work that this will entail as well as additional information that you have to provide. It is just hoped that the clarifications will soon be issued so that the taxpayers and the auditors can determine the procedures that have to be followed for these additional requirements.