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Annual and short period audit
At P&A Grant Thornton, we provide annual and short period financial statement audit services that go beyond the normal expectations of our clients. We believe strongly that our best work comes from combining outstanding technical expertise, knowledge and ability with exceptional client-focused service. A team-based approach defined by dedication to partner involvement in all engagements—that’s our service commitment locally and globally. An organization’s financial statements are a reference of choice for a variety of users who are required to make decisions. Whether it is a financial institution, a government agency, creditors, shareholders, or potential buyers, every one of your partners requires financial information that accurately reflects the soundness of your organization.
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Review engagement
A review involves limited investigation with a narrower scope than an audit, and is undertaken for the purpose of providing limited assurance that the management’s representations are in accordance with identified financial reporting standards. Our professionals recognize that in order to conduct a quality financial statement review, it is important to look beyond the accounting entries to the underlying activities and operations that give rise to them.
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Other Related Services
We make it a point to keep our clients abreast of the developments and updates relating to the growing complexities in the accounting world. We offer seminars and trainings on audit- and tax-related matters, such as updates on Accounting Standards, new pronouncements and Bureau of Internal Revenue (BIR) issuances, as well as other developments that affect our clients’ businesses. Participants are entitled to credited units for Continuing Professional Education (CPE), which are required by the Board of Accountancy. CPE is indicative of an individual’s genuine concern for his or her continued growth as a professional. Our team can help in achieving that.
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Tax advisory
Assistance during tax audit/contesting an assessment We assist clients in handling audits by the Bureau of Internal Revenue (BIR), Bureau of Customs (BOC) and local government units (LGUs) in a systematic and efficient manner. We help evaluate the validity of assessments, determine the appropriate documents and analyses to be submitted, prepare protests, and represent clients in meetings and discussions with government agencies. With our knowledge of tax laws and audit procedures, we help safeguard the substantive and procedural rights of taxpayers and prevent unwarranted assessments. Tax opinion and studies We conduct tax studies and provide advice to clients on the tax implications of specific transactions based on relevant laws, regulations, court decisions, rulings, and other relevant issuances. We likewise provide recommendations to address or mitigate tax issues arising from said transactions. Application for tax refund/credit We help clients recover taxes that have been erroneously or excessively paid or withheld through applications for refund or tax credit certificates (TCCs). Applications for refunds or TCCs are recommended for companies that have excess income taxes paid or unutilized creditable withholding taxes as reflected in the final income tax return (ITR), excess unutilized VAT input taxes arising from zero-rated transactions or change in VAT status, unutilized advanced VAT, excise taxes paid on petroleum products sold to tax-exempt entities and international carriers, other national or local taxes erroneously or excessively paid, or penalties imposed without authority.
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Tax compliance
Tax review We evaluate clients’ overall level of compliance with existing laws and regulations; caution them on procedures and practices that expose them to potential tax liabilities; quantify tax exposures, risks and penalties; and advise them on proper course of action and alternative tax-efficient policies and procedures. Tax due diligence review is particularly recommended for companies that are contemplating expansion, mergers and consolidation, acquisitions, change in ownership, or public listing. Expatriate tax services We ensure the proper and efficient compliance of expatriates with their Philippine income tax obligations. Our services include registration and application for Taxpayer Identification Number (TIN), preparation and filing of annual Philippine income tax return, and payment of tax due in the proper venue and within the allowed period. As a value-added service, we respond to Correspondence Audits/Inquiries by the BIR regarding information declared in the tax return. If desired by clients, we also conduct arrival or departure briefings and interviews to apprise the expatriate of his Philippine tax liabilities. Upon a company’s request, we can compute, on an annualized basis, the total withholding tax due from its expatriate during the taxable year and prepare tax equalization and reimbursement calculations in accordance with company policies.
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Corporate services
Assistance for incentives availment We help clients evaluate their qualification for incentives under the Board of Investments, the Philippine Economic Zone Authority, the Subic Bay Metropolitan Authority or other special laws. If clients are qualified, we assist them in applying with the concerned government agency for such incentives. Our assistance covers filing of the application and supporting documents, monitoring the progress of the application, meeting/discussion issues, if any, with regulatory authorities, and securing the approval for such incentives. At the clients’ request, we may also assist in ascertaining their compliance with regulatory requirements (to ensure the continued entitlement to incentives), or in justifying the entitlement to such incentives in the event of a challenge by the BIR or other regulatory agencies. Corporate organization and registration For clients that want to do business in the Philippines, we assist in determining the appropriate and tax-efficient operating business or investment vehicle and structure to address the objectives of the investor, as well as related incorporation issues. We help set up the business and register it with concerned government regulatory agencies, such as the Securities and Exchange Commission, the Bureau of Internal Revenue, the Local Government Unit, the Social Security System and the Bangko Sentral ng Pilipinas. We also assist in notifying and/or securing necessary approvals from government regulatory agencies when there are changes in business activities, business status, or tax-type registration.
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Tax education and advocacy
Tax advocacy We actively participate in consultation and public hearings conducted by the Bureau of Internal Revenue on proposed tax rules and regulations, serving as a bridge between our clients and the BIR. Our advocacy work focuses on clarifying the interpretation of laws and regulations, suggesting measures to increasingly ease tax compliance, and protecting taxpayer’s rights. Tax seminars and training We offer seminars and training on tax-related developments and special issues of interest to taxpayers. Upon request, we provide customized in-house tax training – designed jointly by P&A and the client – that directly addresses the specific issues of the client’s industry and the training needs of its personnel.
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Business risk services
Our business risk services cover a wide range of solutions that assist you in identifying, addressing and monitoring risks in your business. Such solutions include external quality assessments of your Internal Audit activities' conformance with standards as well as evaluating its readiness for such an external assessment. We can also take over your IA function altogether or work alongside you to create more value for your organization. On a higher level, our Enterprise Risk Management methodology can help your organization identify vital strategies and action plans that address key business risks, thereby enabling you to achieve your overall objective of value creation for stakeholders.
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Business consulting services
Our business consulting services are aimed at addressing concerns in your operations, processes and systems. Using our extensive knowledge of various industries, we can take a close look at your business processes as we create solutions that can help you mitigate risks to meet your objectives, promote efficiencies, and beef up controls. This can include analyzing your information technology (IT) applications and infrastructure in order to improve IT governance and strategy, strengthen security, and/or assess business risks and controls related to the use of IT.
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Transaction advisory includes all of our services specifically directed at assisting in investment, mergers and acquisitions, and financing transactions between and among businesses, lenders and governments. Such services include, among others, due diligence reviews, project feasibility studies, financial modelling, model audits and valuation. We are one of the few companies accredited by the Philippine Stock Exchange for the conduct of valuation and issuance of fairness opinions. Our consortium with another Grant Thornton office and a Philippine law office is also one of the fourteen (14) members of the panel of transaction advisers of the Public-Private Partnership Center of the Philippines.
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Our forensic advisory services include assessing your vulnerability to fraud and identifying fraud risk factors, and recommending practical solutions to eliminate the gaps. We also provide investigative services to detect and quantify fraud and corruption and to trace assets and data that may have been lost in a fraud event.
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Accounting services
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Staff augmentation services
Staff Augmentation Services It is a familiar enough scenario: A company suddenly has an urgent need for personnel on a short term, project basis to do accounting or accounting-related work. Considering the short-term nature of the work, it becomes very difficult to find interested candidates. Moreover, companies do not need just anybody, but people with sufficient technical accounting skills. P&A Grant Thornton has a pool of skilled accounting specialists who can fill the gap for companies in such situations. We offer Staff Augmentation services where our staff, under the direction and supervision of the company’s officers, perform accounting and accounting-related work. We have a long list of clients that have benefited from our assistance with the following activities: · Migration from one accounting system to another accounting system · Bank reconciliation for several bank accounts that have not been reconciled for years · Data cleansing, such as reconciliation of balances in subsidiary ledgers of receivables and payables with the general ledger balances · Physical counts of inventories and reconciling the results of the physical count with the accounting records · Count of property and equipment; tagging and reconciliation of the count with the accounting records; and properly setting up the property ledgers · Preparation of schedules and documentary supports and requirements during audits by internal and external parties, including government agencies · Preparation of statements of accounts for certain customers · Acting as accounting personnel while regular accounting staff are on leave This is just a sampling of the services we offer, and we can provide more short-term accounting services on short notice. We can adjust the schedules of our people to fit your work hours and we guarantee high-quality service: Our team is made up of technically competent and properly trained people who are prepared to handle your needs.
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Payroll Processing
More and more companies are beginning to realize the benefits of outsourcing their noncore activities, and the first to be outsourced is usually the payroll function. Payroll is easy to carve out from the rest of the business since it is usually independent of the other activities or functions within the Accounting Department. Payroll processing may look simple, but the process can get complicated, especially as a business expands its manpower. A payroll accountant has to make sure that correct taxes as well as loans of their employees are properly deducted, update the tax status of employees (single, married, no. of dependents, etc.) on a regular basis; monitor work activities during the payroll period (overtimes, sick leaves, vacation leaves, etc.); know which income accounts are taxable or not (de minimis, bonuses within the P82,000 limit, etc.); know the rules and regulations and the latest updates of relevant government agencies (BIR, SSS, Pag-IBIG, PhilHealth, etc.); and ensure that payroll processing and payouts are done on time to avoid employee complaints or dissatisfaction. In addition, the payroll accountant has to ensure that contributions to various government agencies are properly posted to the accounts of the employees. In some companies, payroll processing consumes a significant part of management time: The highest finance or HR officer in the company oftentimes handles management or executive payroll. If payroll is outsourced, the executive officer has better use of his or her time than reviewing or processing the payroll. Moreover, there is the issue of confidentiality – some employees may inadvertently gain access to confidential payroll information when data are lying around during the payroll processing period. Another issue that business owners must watch out for with regard to payroll is fraud. Since the processing of payroll is handled by just one or two trusted persons, oversight may be lax and review may not always be conducted thoroughly, thus fraud happens. P&A Grant Thornton can handle your payroll processing needs so that your management team can focus on your core competencies, enabling you to concentrate on what’s really important to your business . Our team of well-experienced and properly trained professionals can handle your payroll requirements whether you have 10 or 10,000 personnel. In addition to the computation of employees’ pay, P&A Grant Thornton can also provide the following functions under our payroll processing services: Maintain bank accounts exclusively for payroll and payroll-related disbursements Prepare schedules of statutory and internal contributions and obligations File and pay statutory contributions and obligations, manually or electronically Annualize employees’ income tax Provide secure online payslips through our ePayroll facility Handle administration of benefits that needs coordination with government agencies
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Accounting and taxation of short-term leases and lease for low-value assets
Nikkolai F. Canceran
29 Oct 2019
Philippine Financial Reporting Standard (PFRS) 16 is the new accounting standard for lease of assets or arrangements that contain a lease. It became effective on Jan. 1. It replaces Philippine Accounting Standard (PAS) 17, which means that entities reporting under PFRS shall apply this new standard in their lease transactions starting on the effectivity date.
On the other hand, taxation for leases generally remains unchanged since the issuance of Revenue Regulations (RR) No. 19-86 on Jan. 1, 1987 which prescribes the rules to govern the tax treatment of lease agreements.
As we all know, accounting standards and tax rules differ in many instances, and PFRS 16 is no exception. The purpose of this article is to provide a useful reference for taxpayers in knowing and dealing with the differences of accounting and tax rules for leases.
SHORT-TERM LEASE AND LEASE FOR LOW VALUE ASSETS
PFRS 16 defines short-term lease as a lease with a lease term of 12 months or less but taking into consideration the renewal options. On the other hand, lease for low-value assets is a lease for which the underlying asset is of low value (i.e., $5,000 or equivalent for a new similar asset).
ACCOUNTING TREATMENT FOR LESSEE AND LESSOR
Leases of these kind are accounted for in a way that is similar to current operating lease accounting — which means that payments are recognized by the lessee as an expense or cost and revenue by the lessor on a straight-line basis or another systematic basis that is more representative of the pattern of the benefits. Simply put, lease expense or revenue is generally reported equally over the lease term. However, for short-term lease, the lessee has the option to recognize right-of-use asset (ROUA) and a corresponding lease liability instead of the straight-line basis. The discussion on accounting and tax treatment for ROUA and lease liability will be tackled in part 2 of this article.
When the lessee pays advance rental and security deposit, the lessee shall account these as asset at the time of payment. These shall be reported as lease expense/cost in the period when applied to lease. On the part of the lessor, the advance/prepaid rental and security deposit shall be recorded as liability in the period of receipt and shall be reported as lease income in the period when applied to lease.
TAX RULES
RR No. 19-86 defines a lease as an agreement between a lessor and a lessee giving the lessee possession and use of a specific property upon payment of rentals over a period of time (which may be definite or indefinite). The equivalent of short-term lease or lease for low value assets for tax purposes is an operating lease.
Operating lease is defined in RR No. 19-86 as a contract under which the asset is not wholly amortized during the primary period of the lease, and where the lessor does not rely solely on the rentals during the primary period for his profits but looks for the recovery of the balance of his costs and for the rest of his profits from the sale or re-lease of the returned asset of the primary lease period.
LESSEE TAXATION
In an operating lease, the lessee may deduct the amount of rental actually due under the lease agreement during the year. This is subject to 5% expanded withholding tax (EWT).
In addition to the rent actually paid or payable to the lessor, the lessee should also report all the expenses/costs which under the terms of the agreement the lessee is required to pay or for the account of the lessor, as additional rental expense/cost which is also subject to 5% EWT. An example is the real property tax on the leased property if paid by the lessee should be claimed by the lessee as rental expense/cost and not as tax expense.
In case the lessee pays advance/prepaid rentals, if the lessee adopts the accrual basis of accounting, according to tax rules, the lessee should treat the advance/prepaid rentals as an asset subject to 5% EWT at the time of payment. These shall be claimed as deductible at the time of its application to the lease.
If the lessee, on the other hand, adopts the cash basis of accounting, the advance/prepaid rentals are deductible items at the time of payment provided the advance/prepaid rentals do not extend beyond 12 months. Otherwise, advance rentals/prepaid rentals corresponding to the period beyond 12 months shall be accounted for as an asset and will be claimed as deductible items at the time of its application to the lease. For withholding tax purposes, the entire advance/prepaid rentals including those for the period beyond 12 months shall be subject to 5% EWT at the time of payment.
With respect to security deposit for the faithful performance of certain obligations of the lessee, the lessee, whether adopting accrual or cash basis of accounting, should treat the same as an asset and not subject to 5% EWT at the time of payment because of its being in the nature of a conditional deposit. These deposits shall be claimed deductions subject to 5% EWT at the time of its application to the lease.
LESSOR TAXATION
Generally, the taxation of the lessor in operating lease is similar to that of the lessee but with opposite effects.
The lessor should report as taxable income only the rental payments that it is entitled to receive for the year, as provided under the lease agreement. For VAT purposes, the lessor shall report the lease income based on gross receipts or on collection basis.
Costs/expenses related to the leased property that are the responsibility of the lessor, if paid by the lessee, are deemed additional rental income of the lessor which is also subject to VAT (e.g., real property taxed on leased property that are paid by the lessee is reported as part of the lessor’s taxable rental income).
For advance/prepaid rentals, lessor taxation is different from the lessee because these are reported as taxable income of the lessor and also for VAT purposes in the year when received whether the lessor is using the accrual or the cash method of accounting.
Security deposit when received by the lessor, whether the lessor is using the accrual or the cash method of accounting, should be treated as a liability at the time of receipt and will be recognized as income which is subject to VAT at the time of application to lease.
DEALING WITH THE DIFFERENCES
For accounting purposes, the lease income/expense will be averaged on a straight-line basis over the lease term such that the monthly or annual lease income/expense is the same for the entire period of the lease including the rent-free period. For tax purposes, the actual lease income/expense for each period indicated in the lease contract should be reported as lease income/expense for that period. The difference between accounting and tax usually happens when there is escalation of the lease amount over the lease term or when a rent-free period is present.
The monthly/annual difference of lease income/expense shall be accounted for by the lessee and lessor as a temporary difference with the recognition of either deferred tax asset or liability as the case maybe. The reason why the difference is just temporary is that at the end of the lease term the total lease income/expense is equal under accounting and tax purposes.
To illustrate, say for example the lease agreement states that the lease term is for six months, the first month of the term is free, the second month’s lease is P20,000 and shall increase by P20,000 every month.
Shown in the table below the monthly lease income/expense for accounting and tax purposes.
The difference in lease income/expense should be reported in the schedule of reconciliation of net income per accounting books against taxable income of the income tax return.
In the same vein, the difference in the accounting and tax treatment of advance/prepaid rentals for both lessee and lessor is considered a temporary difference with the recognition of either deferred tax asset of liability as the case maybe and the difference shall be reported in the reconciliation schedule of the income tax return.
The study of difference on lease contracts other than short-term leases and low value asset particularly the accounting of ROUA and lease liability and its equivalent tax treatment will be discussed in part 2 of this article next week.
Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
Nikkolai F. Canceran is a director from the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.
As published in BusinessWorld, dated 29 October 2019
