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Conduct a tax review as early as now

Conduct a tax review as early as now by: Clarissa R. Hornilla

The last day of filing the income tax return (ITR) which is April 15, brings a collective sigh of relief for most of us in the finance and accounting department.  Together with the spike in the temperature that the height of summer brings, we are now ready to pack our bags and head to the beach for our much awaited summer vacation.  For tax authorities, however, the last day of filing of the annual ITR triggers the start of issuance of tax assessments to taxpayers.

Just as we thought that we are done with our 2009 tax responsibilities, we have to remind ourselves that there are still some areas which we need to look at before we can truly pack our sunscreen and flipflops.

As we all know, the BIR is under pressure to increase its revenue collections. In line with this, it is not surprising to see that a lot of tax assessments have been issued to taxpayers. In fact, the Commissioner has already ordered the issuance of tax audit program for 2009. This signals the start of tax audits and investigations of  taxpayers for their taxable year 2009.Hence, expect Mr. Taxman to deliver to your doorstep the dreaded tax assessment letters soon.

Although there is no preventing the BIR from issuing the assessment letters, you still have time to correct whatever errors or mistakes you have committed in the rush of finalizing your tax returns before the deadline.

However, any corrections must be done before the BIR issues an assessment letter.  Once the dreaded letter arrives at your doorstep, you will lose all rights to amend or correct any mistake in the tax return.

Under Section 6(A) of the Tax Code, the BIR has three (3) years counted from the last day prescribed by law for the filing of the return or date of actual filing of the return, whichever is later, within which to examine the taxpayer’s books and issue deficiency tax assessments.

Hence, if there are errors or certain non-compliance noted, theoretically, taxpayers still have time to amend the returns within three years as long as the BIR has not issued a notice of investigation against them.

Thus, now is the best time for taxpayers to perform a diagnostic tax review to evaluate their overall level of compliance with existing tax rules and regulations.  Taxpayers may do the tax compliance review in house or they may consider seeking assistance of tax experts to do an independent assessment on their compliance.

Let me share with you some of the important focus areas related to the recent filing of annual ITRs which a taxpayer should consider in deciding whether there is a need for them to conduct a tax compliance review.

For Philippine Export Zone Authority (PEZA)- registered firms entitled to ITH and/or the 5% GIT incentives,  it must secure from PEZA on an annual basis a Certificate of Incentive, and to attach the said certification to their annual Income Tax Returns upon filing thereof. (Revenue Memorandum Circular No. 15-07, MOA between the PEZA and the BIR)

BOI-registered firms entitled to income tax holiday must file with the BOI a duly accomplished application form for ITH availment within 30 days from the date of filing of the annual ITR with the BIR or from the last day prescribed by law for the filing of the IT, whichever comes later, together with all the supporting documents required by the BOI. (Revenue Memorandum Circular No. 17-07, MOA between the BOI and the BIR)

BOI-registered firms are likewise required to submit the following: 

     ·   the audited Financial Statements
     ·   the audited segregated income statement of registered and non-registered activities
     ·   in case of multi-registered activities, segregated audited income statement for each of the registered activities
     ·  breakdown of miscellaneous/other/various income, if amount are differen t per ITR
     ·  details of scrap sales, if any, and
     ·  Summary sales.

In case the company is availing of the ITH for the first time, it must also submit:

     ·  Sworn Statement signed by the authorized representative on the actual start of commercial operation of a registered activity, and
     ·   The BoI Certificate of Registration showing ITH entitlement per Specific Terms and conditions.

The Certificate of ITH Entitlement issued by the PEZA/BOI in the previous year  is a required attachment to the current annual ITR to be filed with the BIR, pursuant to MOA between PEZA/BOI and BIR, failure to observe this may result to either penalty or forfeiture of the ITH incentive for the covered taxable year.

As often held by the tax court, exemption from taxation is a privilege that comes with specific requirement; compliance with such rules is a condition precedent to the enjoyment of said privilege. And in line with the BIR authority’s effort to improve collections, it is believed that there is a high probability that the tax authority would consider this requirement in the issuance of tax assessment. 

For some companies, it may also happen that there were adjustments (i.e., accrual of expenses) made by the company or its auditor during the audit. These adjustments may have impact on other tax returns such as withholding taxes, percentage taxes or value added tax returns already filed with the BIR.

For instance, in the taxable year 2009, if the company accrued valid expenses like rentals and professional fees during the audit but after year-end, ideally, such accrued expenses should have been reflected in the books of the company for 2009, however, the related withholding taxes might not have been considered in same period. Internal accountant need to revisit the tax compliance on this aspect.

Note that under existing regulations, the obligation of the payor to deduct and withhold the tax arises at the time the income payment is paid or payable or when the income payment is accrued or recorded as an expense or asset, whichever is applicable in the payor’s books, whichever comes first.

Thus, if the company failed to withhold on the adjustments such as accrued expenses, it may still amend the affected withholding tax returns to avoid the risk of tax assessment in the future.

With this, the Company is advised to do an analysis or review of the effects of these adjustments on the other tax returns it had filed.

What I mentioned above are only some of the areas that could trigger an assessment from the BIR. It may be worthwhile to note that there are still other areas which the taxpayers should take a look at to be able to say that it is fully compliant with the existing rules and regulations.

If you think that you have not done any of the above, it is better if you conduct a tax review as early as now!

This article is not intended to be a substitute for professional advice.  For comments and inquiries, you may e-mail the author at Clarissa.Hornilla@ph.gt.com.  For other tax concerns, please check out our other tax services.