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Tax compliance is management's responsibility

Tax compliance is management's responsibility by: Marivic C. Espano

In line with the various efforts of the Bureau of Internal Revenue (BIR) to seriously enforce tax laws, a new regulation was issued two weeks ago to emphasize that compliance with tax obligations is primarily the responsibility of the taxpayer.

For a corporation, this responsibility rests on its key officers.

Revenue Regulations (RR) No. 3-2010 requires the taxpayer to attach to the annual income tax return a statement affirming that its management is responsible for all information and representations contained in annual income tax return, and that the annual income tax return has been prepared in accordance with the provisions of the tax laws and pertinent regulations and all the taxes and other impositions due and payable have been paid for the reporting period.

The statement shall also state that management is taking responsibility over the financial statements, and affirm that the financial statements accompanying the annual income tax return are in accordance with its books and records accompanying it, and that any disparity between the financial statements and the income tax return has been reported as reconciling items.

Moreover, the said statement shall also state that management is responsible for all the other tax returns filed for the reporting period including, but not limited to, the value-added tax (VAT) and/or percentage tax returns, withholding tax returns, and documentary stamp tax returns.

In the case of a corporation or an entity other than an individual, the President and Managing Partner, the Chief Executive Officer and the Chief Financial officer, or any officer performing similar functions, are required to affix their signatures on the statement. For a foreign corporation with branch office in the Philippines, the statement must be signed by its local manager who is in charge of its operations.

The responsibility of the management of a taxpayer, other than an individual, over the information contained in its tax returns, is actually very much entrenched in our tax laws. For a corporation, it is provided in the Tax Code that the return must be filed by the president, vice-president or other principal officer, and shall be sworn to by such officer and by the treasurer or assistant treasurer. Any return required to be filed contains a written declaration that it is made under penalties of perjury.  For this reason, under the law, a person who willfully files a declaration, return or statement containing information that is not true and correct as to every material matter shall be subject to the penalties prescribed for perjury.

As business gets more complex, the senior executives delegate the responsibility of preparing the tax returns and making payments to the accounting unit or an outsourced third-party provider. Management exercises, in most cases, top level and very limited review functions over the tax returns. From the point of the BIR, these reasons do not justify non-payment or under-reporting of taxes. Taxes shall be assessed together with the applicable interest and penalties.

What purpose does the Statement of Management Responsibility, which is required by the BIR, serve? If for anything else, it reinforces this point to the individuals in the organization who have the power to make decisions with respect to the tax compliance practices of the corporation.  By placing their signatures on the statement, the key officers are recognizing and admitting that they have ultimate responsibility over the tax payments of their corporation.

As to how the key officers ascertain that their corporation’s tax practices are in accordance with the law, this task is always a huge challenge and varies from one organization to another. Definitely though, one would rarely, if at all, find an organization where the key officers personally review the tax returns themselves, much less understand every information declared in the tax returns of their company.

However, it is within the power and authority of these individuals to introduce policies to ensure that the company’s employees, who are actually involved in the preparation and review of the tax returns, are qualified and possess the necessary training in taxation. They can also compel management to conduct an independent review of its tax practices and processes.

If the company pays someone to prepare its tax return, the key officers of the corporation can require management to choose that preparer wisely. For a start, it should determine if the service provider is accredited with the BIR as a tax agent. To be accredited, a tax agent is required to be a certified public accountant or a graduate of another degree with significant experience in taxation. An understanding of the procedures to be followed by the tax preparer must also be undertaken to ensure that information declared in the return is correct and complete, to the extent that the company had submitted.

Given the importance of compliance with its tax obligation, the management of a company must also continuously assess the adequacy of its resources, particularly its ability to keep abreast with changing tax rules. Interestingly, the BIR recently issued a regulation requiring tax agents to undergo continuing education in taxation, acquiring the minimum number of units of training, as a pre-requisite for the renewal of their registration.  Companies may consider adopting the same as a best practice and thus, send their own internal tax preparers to regular trainings.

Tax is clearly a risk area not only for a company, but also for the President, the Chief Executive Officer, and the Chief Financial Offer. Management of corporations must, therefore, institute policies and systems to ensure that its tax practices are compliant with existing laws. 

Achieving this in an environment where tax rules — including interpretations thereof — are constantly fluid, can be especially difficult, making risk for the key officers who will be signing the statement harder to manage.

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