Facing the new year as a compliant taxpayer

Before the world rings in a new year, Filipinos observe unique traditions in their homes, like having 12 round-shaped fruits and wearing polka dots for good luck or preparing a Media Noche feast for the whole family. Another common practice every new year, done by most people in any part of the world, is preparing a list of resolutions to continue good practices, adopt new habits to become better, and most importantly, set goals.  

With every new year, the main goal of a taxpayer, of course, is to have a high level of compliance with the tax rules and regulations and, as much as possible, prevent any tax-related penalties and fines as provided in Section 255 of the National Internal Revenue Code (NIRC). Taking the time to evaluate the events and experiences of the past year and recognize preventive and corrective actions to take in the future can be challenging but a worthwhile learning experience. After all, avoiding non-compliance is better than remediation.  

Here are some of the basic measures taxpayers can utilize to check their compliance. 

Schedule the filing and payment of tax returns and attachments earlier than the mandated deadlines 

Start by checking the taxpayer’s Certificate of Registration (COR) issued by the Bureau of Internal Revenue (BIR) and identifying the tax returns required to be filed monthly, quarterly, and annually. The tax calendar issued by the BIR is a helpful tool in scheduling the filing and payment of tax returns and any related attachments. Be further guided that if the deadline falls on a Saturday, Sunday, or holiday, it shall be moved to the next business day, whether the taxpayer files through the Electronic Filing and Payment System (eFPS), eBIRForm or manually, in pursuance of Revenue Memorandum Circular (RMC) No. 65-2016. 

For eFPS filers, withholding tax and value-added tax (VAT) returns are to be filed on a staggered basis as provided in Revenue Regulation (RR) No. 26-2002. As such, ascertain that the taxpayer belongs to the proper grouping and that such grouping is strictly followed.  

There are taxpayers who erroneously interpret “no tax due” as “no tax return filing required.” This results in open cases and, ultimately, penalties. Let this be a reminder that a taxpayer is required to file a tax return regardless of whether there are transactions on a particular tax type, provided that such tax type is listed per BIR COR. Hence, for tax returns with zero tax due, a nil filing is still required. 

On the other hand, the deadline for filing most of the required attachments falls on the same day as the tax return filing deadline. There are cases where taxpayers receive a notice from the BIR concerning non-filing or late filing of the summary lists and alphalists. It is recommended to readily prepare the summary lists and alphalists in the same period that the respective tax returns are prepared and maintain proofs of filing. 

Verify the completeness and correctness of information reported on tax returns and attachments 

It is not enough to file on time. It is equally important to provide the correct and complete information in the tax returns and attachments. For instance, it is a common misconception that when a quarterly VAT return is filed and paid, the task is already completed. While it is the bulk of the task, let’s not forget to file the required summary lists of sales, purchases, and importations as mandatory attachments to the quarterly VAT returns. 

One of the frequent sources of BIR’s tax assessment is the contents of the summary lists and alphalists. The amounts stated in the summary lists and alphalists must tally with the related tax returns. Further, other information, such as the correct alphanumeric tax code per transaction, taxpayer identification number of the supplier or employee, classification of the purchases and sales as VATable, exempt, or zero-rated, and BIR-registered names of the supplier or employee, to name a few, should be consistently observed.  

Revisit tax treatment of both income and expense items 

As tax rules and regulations are ever-evolving, taxpayers ought to revisit their tax treatment of both income and expense items. Taxpayers may be erroneously treating a sale as zero-rated when it should be VATable. While Section 106 (A) (2) of the NIRC is straightforward on the list of zero-rated sales, RR No. 16-2005 provides a more detailed explanation. Tax provisions like these should be used cautiously because it is the taxpayer's responsibility to prove their applicability, and improper use equates to penalties.  

Checking publications about top withholding agents on the BIR website may have been one of the measures omitted by taxpayers. Remember that once a taxpayer is listed as a top withholding agent, the obligation of the top withholding agent to withhold 1% and 2% EWT shall commence on the first day of the month, following the month of publication. Non-compliance may result in an expanded withholding tax deficiency. 

For instance, RR Nos. 14-2023 and 16-2023 were issued by the BIR, which now imposes creditable withholding taxes on certain income payments by joint ventures/consortiums and electronic marketplace operators, respectively.  

Additionally, a difference between the amounts reported on books and tax returns may occur due to differences in timing recognition and treatment per accounting and taxation. As such, it is advised to periodically reconcile any difference per book and return. 

Observe proper substantiation requirements 

The substantiation requirements must not be sacrificed just because it is a time-, paper-, and storage-consuming task. Failure to observe proper substantiation oftentimes leads to BIR findings. For instance, a number of VAT deficiency assessments on the BIR are either caused by unsupported or improperly supported transactions.  

Section 113 of the NIRC provides for the invoicing requirements of VAT-registered persons, wherein a VAT invoice should be issued for every sale, barter, or exchange of goods or properties and a VAT official receipt for every lease of goods or properties and for every sale, barter, or exchange of services. On top of this, the issued document should contain a statement that the seller is a VAT-registered person, the seller’s taxpayer’s identification number, the total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes VAT, a breakdown of the sales price between its taxable, exempt, and zero-rated components, the date of transaction, quantity, unit cost, and description of the goods or properties or nature of the service. 

Many taxpayers refer to this requirement as burdensome; however, there is something we can look forward to with the passing of Senate Bill No. 2224, also known as the Ease of Paying Taxes Act. This removes the distinction between VAT invoice and a VAT official receipt by completely taking out the latter as proof of input tax for the purchase of services.  

On the other hand, Section 34 (A) (1) (b) of the NIRC provides the substantiation requirements for allowable deductions on gross income for income tax purposes; that is, the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records, the amount of the expense being deducted and the direct connection or relation of the expense being deducted to the development, management, operation, and/or conduct of the trade, business, or profession of the taxpayer.  

Proper documentation and strict implementation of the substantiation requirements will save taxpayers a considerable amount of money in paying fines and penalties.  

It is likely for the public to perceive that the tax rules and regulations in the country are overly complicated, which is something we cannot change instantly. However, we can change and improve our compliance by implementing the basic measures suggested above at a minimum. Essentially, knowing one’s level of tax compliance provides a prudent measure for managing the cash flow for tax payments and re-allocating resources to more productive business activities instead of accumulating cash payments on tax penalties.

As published in Mindanao Times, dated 10 January 2024