Post review of transaction

Today, we are celebrating Valentine’s Day.

Many people will celebrate with their loved ones by giving flowers or boxes of chocolates, or by arranging dinner dates in restaurants or romantic places – gestures that show our appreciation and care for our loved ones.

All things considered; this love month can also be a time when we can show our care for our company. It can be expressed in terms of how we can manage future tax assessments by conducting a transaction post review after we completely close our books.

By this time, the books of accounts for taxable year ended December 31, 2022 should have already been closed. Note that for taxpayers using a loose-leaf or computerized accounting system, the submission of their books to the BIR should have been completed by January 15 and January 31, respectively.

Thus, for taxpayers whose taxable year ends on December 31st, the next challenge is the preparation of audited financial statements (AFS) and annual income tax return (AITR), which are due for filing and payment on or before April 15.  As a prelude, taxpayers should initiate  post review for transactions that were recorded on their books and amount reported in the tax returns. This exercise will help taxpayers identify any potential oversight or tax exposures that can be addressed at the early stage. Or any correcting entries that should be considered in the finalization of the AFS.   Thus, taxpayers can minimize, if not eliminated, the potential impact on financials in terms of the monetary penalties involved during a tax investigation.

Considering that the Philippines follows the self-assessment for taxation purposes, after the taxpayers calculate or determine their tax liabilities and file the corresponding returns, the Bureau of Internal Revenue (BIR) has the right to examine or audit such returns. We observed that the BIR conducts its tax investigation a year, or sometimes less than a year, after the annual income tax return has been filed. Part of the BIR’s audit procedures is to compare one independent record with other records. Hence, with this type of approach, taxpayers can start to assess whether the reported final balances on the books would match the amount reported on the tax returns duly filed.

As we do the high-level comparison of Revenue and/ or Sales Account, taxpayers should check the sales and/ or revenue if the amounts were fully reported in the value-added tax returns (VAT).   Note, however, for a taxpayer engaged in service, the amount of revenue will not match per books. Since per VAT, the reporting of revenue is under cash-basis.  Hence, a reconciliation should be made to account for the difference between the revenue reported once the AFS and  ITR were finalized in preparation  for future audit of the BIR.

Another post review, it will be for the expense accounts, taxpayers should evaluate whether all the expenses should be subject to withholding tax; and after which if all items identified, the next is to check if these were properly reported in withholding tax on compensation, expanded withholding tax, and final withholding tax and final VAT returns, as the case it may be applicable.

The ideal result when comparing the amount per books and per return is that there should be no differences noted, but this is not the case most of the time. Nevertheless, should there be a discrepancy between the revenue and expenses per book against the tax returns filed, it is not automatic that the taxpayer will be immediately exposed and made liable to remit the tax.

The taxpayer should evaluate whether the difference will require a mere adjustment on the book due either to a wrong entry made/ misposting of transaction, or such difference may require an amendment of the tax return.

As to the amendment of the tax return, it may or may not require additional payment. Nevertheless, taxpayers should not be discouraged to amend their tax returns if there is a due that needs to be remitted. As a responsible taxpayer we give to Caesar what belong Caesar, give to BIR what belongs to BIR.

Previously, when a taxpayer amended its tax return and it resulted in an additional payable, the BIR imposed a 25% surcharge, in addition to the 12% interest and compromise penalty, as provided under Revenue Memorandum Circular (RMC) 21-2018.

But now, under the more recent RMC 43-2022, the 25% surcharge will not be applied on additional tax provided that the taxpayer was able to file the initial tax return on or before the prescribed due date of its filing  I believe that it is a good development that this RMC encourages taxpayers to correct tax liabilities that it was inadvertently remitted.  

Please note, however, that the 25% surcharge still applies for those cases of failure of the taxpayer to file any tax return and pay the tax due thereon as required on the due date. Hence, taxpayers should exercise due diligence and should not miss the filing and payment due dates.

Note that the main objective of the post review is to ensure that the recorded transactions in the books were all captured and reported in the tax returns. Hence, the alleged under declaration of sales or revenue and non-withholding of expenses can be mitigated during the tax audit.

Nonetheless, any errors committed by the taxpayer during its post review could be a basis to correct any practices toward the recording of the transaction on the books and its tax treatment for the current year and prospectively.

With all these tax rules in mind, may we also remember to show our support not just for our loved ones but for our company, as well. Happy Valentine’s Day!

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.

As published in BusinessWorld, dated 14 February 2023