THERE is always something exciting about the Christmas season, particularly for employees in the private sector. Millennial employees know this all too well — come Christmas, there is an abundance of memes about 13th month pay making the rounds in social media. For employers, there is likewise an inkling to welcome the new year with a positive mindset. For one, another year means a chance to turn over a new leaf and imbibe a fresh, new perspective to grow corporate operations.
But as with all beginnings, there is a need to first tie any loose ends from the prior year. In tax talk, this means that all reportorial requirements, as enforced by the Bureau of Internal Revenue (BIR), must be complied with as employers' transition to a new calendar year.
While it may look relatively easy, the whole process of ensuring year-end compliance, from reviewing if the correct taxes have been withheld from employees to providing and posting their government-mandated benefits, is far from easy. This is particularly the case for new companies, start-ups and those keen to put up their own business.
13th month pay
One year-end activity that companies in the private sector are duty-bound under the law to provide is 13th month pay. As emphasized under Presidential Decree 851, this mandatory benefit shall be paid to all rank-and-file employees. Such sum must be equivalent to one-twelfth of the basic salary earned by an employee within a calendar year. To guide companies, the Labor department issued an advisory tackling the proper computation of such pay. All rank-and-file employees in the private sector, regardless of position, employment status, and mode of payment of wages, are entitled to receive 13th month pay, provided that they have rendered at least a month in service. To compute, the total basic salary earned by an employee during the year divided by 12 months shall be equivalent to the proportionate pay to be received. Note that the basic salary does not include other allowances or monetary benefits such as unused leave credits, overtime premium, night differential, and the like. However, these salary-related benefits can be part of the 13th month pay if they are stated in an individual or collective agreement, company practice, or policy.
Companies must be wary of deadlines pertaining to such pay. It must be paid to employees on or before December 24 and employers must report compliance not later than Jan. 15, 2022 through the Department of Labor and Employment's Establishment Report System platform.
As withholding tax agents, employers are mandated by law to deduct and remit taxes on behalf of their employees. Therefore, at the end of the calendar year, it is required that employers perform a tax annualization to determine whether the taxes withheld from the employees within the year are correct and the same with the annual income tax due from every employee.
After annualization, any tax refund or payable to the employee must be adjusted on the last payroll of the year or before the filing and payment of its monthly compensation tax returns. The December compensation tax return shall be filed and taxes paid on or before January 15 of the succeeding year.
Provided, however, with respect to non-large and large taxpayers who availed of the EFPS (Electronic Filing and Payment System), the deadline for electronically filing the return and paying the taxes due thereon via EFPS shall be five days later than the deadline set above.
Come year-end, businesses are concerned not just about BIR requirements, but various submissions to comply with reportorial requirements imposed by local government units (LGUs) exercising jurisdiction over their place of business.
Apart from submitting annual withholding tax returns like BIR Forms 1604-C, 1604-F and 1604-E, filed along with an alphabetical list of employees/payees, business owners should also ensure that they renew their business or mayor's permit with the local government unit concerned on or before January 20 of every year. It is also recommended to get annual clearances from statutory agencies Social Security System, Philippine Health Insurance Corp. and Pag-IBIG, to make sure that the employer-employee contributions are updated and posted to the respective agencies.
Inventories make up a bulk of certain companies' balance sheet, as they determine the cost of goods sold in the course of business. So, it is equally essential for such businesses to render proper accounting of inventories of their goods and be in the know about the government issuances and rules pertinent to them. As taxpayers, companies must perform a comprehensive accounting of inventory, as well as reconciliations in amounts should there be differences in amounts recorded in annual income tax returns from those stated in financial statements.
Knowing the reportorial and tax compliance requirements to be filed is essential not just to avoid incurring hefty fines. It is also needed in certain cases to ensure that a business is allowed to continue operations. Hence, measures must be undertaken to ensure such compliance.
Rules change. Thus, it is important to be updated on the latest developments in tax rules as provided under BIR issuances to be able to prepare any necessary or additional requirements. In the case of annualization, for example, there have been many developments introduced under the withholding tax system. Submission of BIR Form 2316 (Certificate of Compensation Payment/Tax Withheld for Compensation Payment With or Without Tax Withheld) will be in electronic copies starting this calendar year 2021 per Revenue Memorandum Circular 117-2021. This is a dream come true for all employers who were required to submit thousands of hard copies in the previous years. As to reportorial requirements, the Corporate Recovery and Tax Incentives for Enterprises (Create) Act now provides that registered business enterprises paying 5-percent tax on gross income earned are exempt from local taxes, without prejudice to fees that may be imposed by LGUs.
Have a checklist
Compliance with different tax laws, procedures and guidelines is important as it provides for transparency, keeps the entire tax system well-oiled and functional, and allows tax authorities to keep tabs on taxpayers' obligations. Compliance can be ensured much like how one performs daily tasks — by keeping a checklist. To help companies, especially newly registered ones, the BIR has provided a checklist of requirements, reports and forms for submissions in its website.
Close the year strong
Ultimately, there is no hard and fast rule on how to effectively monitor and ensure compliance with reportorial requirements. While regulatory compliance is no easy task, reaching out to your trusted experts or to experienced accounting service providers will help lift the burden.
Finishing strong means preparing for it starting day one. To end the year right, businesses must be at the top of their game in the final stretch. This means ensuring that no loose ends in terms of tax regulatory compliance remains, not just to avoid penalties but also to contribute to the overall progressive churn of the tax system.
Let us end 2021 with a bang and start the coming new year right!
As published in The Manila Times, dated 15 December 2021