Resolution of the Retention Period and Guidelines on the Preservation of Books of Accounts and Other Accounting Records

The Bureau has issued last September 27, 2013 of Revenue Regulations No. 17-2013 which clarifies the clarifies the retention period and prescribes the guidelines on the preservation of books of accounts and other accounting records. 

With this, Individual and Non-Individual taxpayers are required to preserve their books of accounts, including subsidiary books and other accounting records for a period of ten (10) years counted from the day following the deadline in filing a return or if filed after the deadline, from the date of filing of the return, for the taxable year when the last entry was made in the books of accounts. 

Under the regulation, it is stated that if the taxpayer has any pending protest or claim for tax credit/refund of taxes, and the books and records concerned are material to the case, the taxpayer is required to preserve his/its books of accounts and other accounting records until the case is finally resolved. 

Unless the National Internal Revenue Code (NIRC) or other relevant laws requires a longer period of retention, the independent Certified Public Accountant who audited the records and certified the financial statements of the taxpayer, is the same manner as the taxpayer, has the responsibility to maintain and preserve copies of the audited and certified financial statements for a period of 10 years from the due date of filing the annual Income Tax return or the actual date of filing thereof, whichever comes later.

Taxpayers are required to kept at all times of all books, registers and other records, and vouchers and other supporting papers at the place of business of the taxpayer, subject to inspection by any internal revenue officer, and upon demand, the same must be immediately produced and submitted for inspection for purposes of regular audit or extraordinary audit, requests for exchange of information by a foreign tax authority under Sections 6 and 71 of the NIRC, and in the exercise of the Commissioner’s power to obtain information under Section 5 of the NIRC, along with others. 

Besides, the regulations also stated that the examination and inspection of books of accounts and other accounting records shall be done in the taxpayer’s office or place of business or in the office of the BIR. Any violation of the provisions of these regulations shall be subject to penalties provided in Sections 266, 275 and, other pertinent provisions of the NIRC; and Section 6 of Republic Act 

No. 10021 (the “Exchange of Information on Tax Matters Act of 2009”). 

Reference: Revenue Regulations No. 17-2013.

List of Taxpayers Mandated to Make Use of the Electronic Filing and Payment System (eFPS)

Under RR No. 1-2013 issued by the bureau on January 23, 2013, expands the coverage of taxpayers required to file tax returns and pay taxes through the Electronic Filing and Payment System (eFPS) with details as follows:

a. Large Taxpayers duly notified by the Bureau of Internal Revenue (BIR); 

b. Top 20,000 Private Corporations duly notified by the BIR; 

c. Top 5,000 Individual Taxpayers duly notified by the BIR; 

d. Taxpayers who wishes to enter into contract with government offices; 

e. Corporations with paid-up capital stock of Ten Million Pesos; 

f. PEZA-registered entities and those located within Special Economic Zones; and 

g. Government Offices, in so far as remittance of withheld VAT and business tax is concerned. 

h. National Government Agencies (NGAs) mandatorily required to use the Electronic Tax Remittance Advice (eTRA). 

With the development of the eTRA System, a sub-system of the eFPS, the base of taxpayers mandated to use eFPS is expanded to include all NGAs since the latter make use of the TRA in settlement of their withholding tax liabilities arising from the use of funds being released by the Department of Budget and Management (DBM). Through the eTRA System, the NGAs can access the eFPS, file their tax return electronically and accomplish the eTRA on-line, provided the prescribed enrollment to the eFPS has already been complied with. 

All NGAs, including their branches and extension offices located nationwide which have their own disbursement branches will mandatory use the eFPS in filing the required returns and in paying taxes due upon receiving of the Notification Letter issued by the BIR.

However, taxpayers not stated in the RR No. 1-2013 has the option to apply and make use of the eFPS but for me not advised to do so.

Reference: Revenue Regulations No. 1-2013; RR No. 9-2001; RR 10-2007

Registration of Manual of Books of Accounts

I was one who experienced the confusion and frustration in the registration of manual of books of accounts because of the different rules and procedures adopted by the different Revenue District Offices (RDOs) of the Bureau of Internal Revenue. Some RDOs, required taxpayers to first present the previously registered books of account regardless of whether or not the pages have all been filled up before a new set of books of accounts is registered. While, other district offices, a photocopy of the stamped front page of the previously registered books of account is the document required in order to approve the registration of the new set of books. 

With the misinterpretations on registration procedures, the BIR has issued the Revenue Memorandum Circular No. 82 - 2008 for the proper registration procedures for manual books of accounts based on the existing provisions in the Bookkeeping Regulations. 

The existing rules with respect to the registration of manual books of accounts is with details as follows:

(1) Manual books of accounts previously registered but whose pages are not yet fully exhausted can still be used in the succeeding years without the need of re-registering or re-stamping the same, provided, that the portions pertaining to a particular year should be properly labeled or marked by taxpayer; 

(2) The registration of a new set of manual books of accounts shall only be at the time when the pages of the previously registered books have all been already exhausted. This means that it is not necessary for a taxpayer to register a new set of manual books of accounts each and every year. 

(3) The registration deadline of “January 30 of the following year” as enunciated in RMO 29-2002 applies only to computerized books of accounts and  2 not to manual books accounts. The “15 days after the end of the calendar year” deadline under RMC 13-82 refers to loose-leaf bound books of accounts and not to manual books of accounts; 

(4) Newly Registered taxpayers shall present the Manual Books of Accounts before use to the RDOs where the place of business is located or concerned office under the Large Taxpayer Service for approval and registration; 

(5) Subsidiary manual books of accounts to be used by taxpayers, in addition to the manual books of accounts, required by the National Internal Revenue Code of 1997 and existing rules, shall likewise be registered before use, following the same rules abovementioned; 

(6) It is to be emphasized that the Taxpayer Service Section (TSS) of the RDOs or concerned office under Large Taxpayer Service has no authority to examine whether the previously registered books are complete and/or updated prior to the approval of the registration. 

The aforementioned rules are to be uniformly observed by revenue officers in charge of registration of manual books of accounts. 

Taxpayers should strictly comply with this registration requirement for books of account in order to avoid compromise penalty of P1,000 for failure to register the manual books under the revised schedule of compromise penalties.

Some companies are still registered under manual books of accounts, although they generate accounting records using computer programs or software. Printouts of such records are simply pasted in their registered manual books. The regulations are not clear whether the practice is allowed. But this instances has been questioned by tax examiners. Thus, this is also liable to penalty under the laws and regulations.

The companies and taxpayers are advised to properly register the kind of books that it actually maintains and do the good practice to avoid being exposed to penalties. 

Reference: RMC No. 82-2008; RMO No. 19-2007

Rules on Deductibility of Depreciation on Vehicles, Other Expenses Incurred and Input Taxes on Disallowed Expenses

Under Section 3 of RR 12-2012 mentioned the guidelines that shall be observed in determining whether depreciation expense can be claimed or not on account of Vehicles capitalized by the taxpayer, or in claiming other expenses and input taxes on account of said Vehicle with details as follows:

1. No deduction from gross income for depreciation shall be allowed unless the taxpayer substantiates the purchase with sufficient evidence, such as official receipts or other adequate records which contain the following, among others:

a. Specific Motor Vehicle Identification Number, Chassis Number, or Other registrable identification numbers of the Vehicle;

b. The total price of the specific Vehicle subject to depreciation; and 

c. The direct connection or relation of the Vehicle to the development, management, operation, and/or conduct of the trade or business or profession of the taxpayer;

2. Only one Vehicle for land transport is allowed for the use of an official or employee, the value of which should not exceed Two Million Four Hundred Thousand Pesos (Php 2,400,000.00);

3. No depreciation shall be allowed for yachts, helicopters, airplanes and/or aircrafts, and land vehicles which exceed the above threshold amount, unless the taxpayer's main line of business is transport operations or lease of transportation equipment and the vehicles purchased are used in said operations;

4. All maintenance expenses on account of non-depreciable Vehicles for taxation purposes are disallowed in its entirety;

5. Th input taxes on the purchase of non-depreciable Vehicles and all input taxes on maintenance expenses incurred thereon are likewise disallowed for taxation purposes.

Reference: Revenue Regulation No. 12-2012

Joint Ventures NOT Taxable as Corporations

In general, Joint Ventures are subject to tax  (taxable joint ventures) as taxable corporations. Joint venture refers to commercial undertaking by two or more persons, differing from a partnership in that it relates to the disposition of a single lot of goods or the completion of a single project.

Exception to general rule, under the NIRC of 1997 stated the Joint Ventures NOT Taxable as Corporations such as:

1.       A joint venture or consortium formed for the purpose of undertaking construction projects.

2.       A joint or consortium for engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the government.

Section 3 of RR 20-2012 which took effect on June 2012, states that a joint venture or consortium formed for the purpose of undertaking construction projects NOT as considered as corporation under Section 22 of the National Internal Revenue Code (NIRC) of 1997 as amended should be:

1.     For the undertaking of a construction project; and

2.     Should involve joining or pooling of resources by licensed local contracts; that is, licensed as general contractor by the Philippine Contractors Accreditation Board (PCAB) of the Department of Trade and Industry (DTI).

3.     These local contractors are engaged in construction business; and

4.     The Joint Venture itself must likewise be duly licensed as such by the Philippine Contractors Accreditation Board (PCAB) of the Department of Trade and Industry (DTI)

In addition, Joint ventures involving foreign contractors may also be treated as  NOT taxable corporation only if the member foreign contractor is covered by a special license as contractor by the Philippine Contractors Accreditation Board (PCAB) of the Department of Trade and Industry (DTI); and the construction project is certified by the appropriate Tendering Agency (government office) that the project is a foreign financed/internationally-funded project and that international bidding is allowed under the Bilateral Agreement entered into by and between the Philippine Government and the foreign / international financing institution pursuant to the implementing rules and regulations of Republic Act No. 4566 otherwise known as Contractor’s License Law. 

If the stated requirements is not complete (all of the requirements should be present), the joint venture consortium formed for the purpose of undertaking construction projects shall be considered as taxable 

corporations. 

 

Besides, mere supplier of goods, services or capital to a construction project are NOT considered as tax-exempt joint venture or consortium.

 

The member to a Joint Venture NOT taxable as corporation shall each be responsible in reporting and paying appropriate income taxes on their respective share to the joint ventures profit. 

For Joint Ventures NOT taxable as corporations or exempt joint ventures, the share in a taxable joint venture's net income is treated as inter-corporate dividend which is generally exempt from income tax. In case of individual venturer, it is subject to 10% final tax. The share in a non-taxable joint venture's net income is subject to corporate income tax or Section 24A, in case of individual co-venturer.

All licensed local contactors are mandated or required to enroll themselves to the Bureau of Internal Revenue’s Electronic Filing and Payment System (EFPS). The enrollment should be done at the Revenue District Office (RDO) where the local contractors are registered as taxpayers. 

References: Section 22(B) of National Internal Revenue Code (NIRC) of 1997; Revenue Regulations No. 10-2012

Affiliates and Subsidiaries' Share in Common Purchases are NOT Income to the Purchaser-Company

For practicality, common purchases of goods and services of affiliates and subsidiaries in a group of companies can be consolidated with one company by which the purchaser-company pays in advance the amounts of purchases in full, withholds and remits the applicable withholding tax and issues the withholding tax certificate.Though invoice or official receipt is in the name of the purchaser-company, it only records in its books as expense or asset its actual share in the common purchases. Then as well the other affiliates and subsidiaries recognize assets and expenses only to the amount of their respective shares.

The common purchases are not income to purchaser-company and, so, not subject to income tax and, therefore, to withholding tax.

Besides, withholding and remittance of the purchaser-company for its accounts on payments made to the common suppliers shall establish substantial compliance with the withholding tax requirements under the regulations, RR 2-98 as amended by RR 30-03.

References: Bureau of Internal Revenue (BIR) Ruling No. DA-507-2006, August 22, 2006; http://www.punongbayan-araullo.com (tax brief)

Sale of Real Properties NOT Primary held for Sale to Customers shall NOT be Subject to VAT

Generally, sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business are VAT exempt transactions. If primary held for sale to customers or held for lease in the ordinary course of trade or business shall be subject to VAT.

With this, the real property sold is classified as Capital Asset  subject to 6% Capital Gains Tax based on the Gross Selling Price or Fair Market Value or Zonal Value of the Capital Asset sold whichever is higher. The Gross Selling Price is the total consideration or purchase price agreed and stipulated in the sale or exchange agreement. The Fair Market Value is computed and prepared by the local assessors and found at the Tax Declaration of the real property. The Zonal Value is prepared and established by the Bureau of Internal Revenue for each area or zone in the Philippines.

But, if such property is used in the trade or business of the seller, the sale of shall be subject to VAT as an incidental transaction to the seller's main business.

Reference: RR 16-2005 as amended; RR 4-2007; RR 17-2003 as amended

Value Added Tax (VAT) on Lease of Real Property (Commercial and Residential Units)

In general, all forms of lease of properties held primarily for lease to customers in the ordinary course of trade or business, whether personal or real, shall be subject to 12% Value Added Tax (VAT), except or unless the gross annual receipts of the lessor do not exceed P1,919,500 and is non-vat registered shall be subject to 3% percentage tax under Section 116 of the Tax Code

Gross receipts from lease of commercial units are subject to 12% VAT if the property leased is located in the Philippines regardless of the place where the contract of lease or licensing agreement was executed.

In a lease contract, advance payment by the lessee may be: a loan to the lessor from the lessee, an option money for the property, and a security deposit to insure the faithful performance of certain obligations of the lessee to the lessor are not be subject to VAT. But a security deposit that is applied to rental is subject to VAT at the time of application. A prepaid rental is subject to VAT to the lessor in the month when received, regardless of the accounting method applied by the lessor.

While, the gross receipts from lease of "residential units" are subject to the following rules: If the monthly rental is not more than P12,800 per unit, per month, regardless of the aggregate annual rentals and if the monthly rental is more than P12,800 per unit, per month but the aggregate annual rentals do not exceed P1,919,500 are VAT exempt subject to 3% percentage tax under Section 116 of the Tax Code. However, if the monthly rental exceed P12,800 per unit, per month and the aggregate annual rentals exceed P1,919,500 shall be subject to 12% Value Added Tax (VAT). Provided, every 3 years thereafter, the amount shall be adjusted to its present value using the Consumer Price Index, as published by the NSO; Provided, further, that such adjustment shall be published through revenue regulations to be issued not later than March 31 of each year.

References: Revenue Regulations No. 16-2005 and Revenue Regulations No. 16-2011 which took effect  November 1, 2005 and January 1, 2012, respectively.

Please refer: http://philippinetaxtalk.blogspot.com/2018/06/new-rule-lease-of-residential-units.html of New Rule: Lease of Residential Units Exempt From VAT & Exempt From 3% Percentage Tax.

"De Minimis Benefits" as per Revenue regulation No. 8-2012

The Bureau of Internal Revenue has issued Revenue Regulation No. 8-2012 for further amendments to Revenue Regulations Nos. 2-98 and 3-98, as last amended by Revenue Regulation Nos. 5-2008 and 5-2011, with respect to “De Minimis Benefits” which took effect last January 1, 2012.

In this regulation, an amendment of Uniforms given to employees by the employer not exceeding P5,000 per annum (previously not exceeding P4,000 per annum) is effective January 1, 2012.

“De Minimis Benefits” are facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees.

In fact, the following shall be considered “De Minimis” benefits not subject to income tax and withholding tax of both managerial and rank and file employees: 

1. Monetized unused vacation leave credits of employees not exceeding “10 days” during the year and the monetized value of leave credits paid to government officials and employees.
2. Medical cash allowance to dependents of employees not exceeding P750 per semester or P125 a month.
3. Rice subsidy of not more than P1,500 per month or 1 sack (50 kg.) rice per month.
4. Uniforms given to employees by the employer not exceeding P5,000 per annum (RR 8-2012 effective January 1, 2012).
5. Actual medical benefits given to employees by the employer not exceeding P10,000 per annum.
6. Laundry allowance not exceeding P300 per month.
7. Employees achievement awards (e. g. for length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate with and annual monetary value not exceeding P10,000 under an established written plan which does not discriminate in favour of highly paid employees).
8. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum. (deleted: amounts provided to guests).
9. Daily meal allowance for overtime work not exceeding 25% of daily basic minimum wage.

• The amount of de minimis benefits conforming to the ceiling herein shall not be considered in determining the P30,000 ceiling of other benefits excluded from the gross income under Section 32 (7)€ of the Code.

• Allowances which are fixed in amounts and are regularly received by the employee as part of his monthly compensation income shall not be treated as taxable fringe benefit but as compensation income.

• The Minimum Wage Earner receiving “other benefits” exceeding the P30,000 limit shall be taxable on the “excess benefit”, as well as on his salaries, wages and allowances, just like an employee receiving compensation income beyond the Statutory Minimum Wage.

• Minimum Wage Earner receiving “other income”, such as income from the conduct of trade, business, or practice of profession, except income subject to final tax, in addition to compensation income, are not exempt from income tax on the entire income earned during the taxable year.