Let’s Talk Tax
By Juvy H. De Jesus
Just when things were starting to feel normal again, 2022 came, and along with it a significant surge in COVID-19 cases. This pandemic has changed our lives in many ways. Lives were put on hold, some were overturned, and many people were lost. In the new normal, however, we have proven time and time again the Filipino’s resiliency and adaptability — always finding new ways to persevere and thrive despite challenges.
While some are still trying to pick up the pieces, others have found new opportunities in new business models that have thrived during the new normal. Living during the pandemic has made people realize that some types of business are not as profitable during the pandemic as others. This has led people to shift careers, start new businesses, and even close old businesses altogether. Some had to cut their losses by closing old unprofitable businesses and shifting to other more thriving ventures. But before moving on, there is still the necessity of closing out the old business with the government agencies for which the business was registered. There is a myriad of requirements when it comes to closing a business and some of the more burdensome ones are those involving Bureau of Internal Revenue (BIR) processes.
One common mistake of some taxpayers is thinking that when their businesses stop operating, they are automatically relieved from the obligation to file tax returns. Some taxpayers are unaware that there is a need to formally close their business with the BIR. Until the taxpayer files its business closure with the BIR, even with zero transactions, the taxpayer is still required to file regular tax returns indicated in the Certificate of Registration. Failure to file the tax returns will result in “Open Cases,” which pertain to the list of tax returns in the BIR’s system that are tagged as not filed or not submitted. Resolving these open cases, which would entail payment of penalties, is required before the old business can be formally cleared and closed with the BIR. It is worth noting that these open cases do not prescribe and will continue to accumulate regardless of the years of non-operation, unless the taxpayer properly applies for business closure with the BIR. Under the current rules, the penalty is P1,000 for every unfiled NIL tax return or attachment, provided that the aggregate amount of penalty does not exceed P25,000 during a calendar year. So, if the business stops operating and is not properly closed for a decade or more, the penalty could reach up to P250,000 and more if the taxpayer has tax deficiencies. Business failure is hard enough as it is, but having to deal with surprise onerous penalties is even worse.
Deregistering a business with the BIR requires the filing of a notice of closure or cessation of business to the RDO where it is registered, by accomplishing the prescribed registration updates form and submitting the required documents. Pursuant to Revenue Memorandum Circular No. 57-2020, the streamlined documentary requirements are as follows:
1. BIR Form 1905 (2 originals);
2. Death certificate, in case of death of an individual (1 photocopy);
3. List of ending inventory of goods, supplies, including capital good (1 original);
4. Inventory of unused sales invoices/official receipts (1 original); and
5. Unused sales invoices/official receipts and all other unutilized accounting forms (e.g., vouchers, debit/credit memos, delivery receipts, purchases orders, etc.) including business notices and permits as well as the Certificate of Registration (BIR Form 2303) subject for destruction to be witnessed by BIR personnel and officials (1 original).
And in case the taxpayer is transacting through a representative, the items below are additional requirements:
6. Special Power of Attorney together with a valid government-issued ID of the taxpayer and authorized representative
7. Board resolution indicating the purpose and the name of the authorized representative or Secretary’s Certificate, together with a government-issued ID of the authorized representative
Upon submission of the documents, the taxpayer will be provided with a routing sheet and will be asked to go around the different sections of the BIR (i.e., Client Support Section, Compliance Section, Collection Section, and Assessment Section) to get clearance from each section. The taxpayer will be subjected to tax audit by the BIR to identify any unsettled open cases and tax liabilities. Getting the clearance could take months or years depending on the number of findings of the BIR upon audit.
During the process, the BIR needs to perform the following procedures to stop generating more open cases:
a. “End date” the tax types of the taxpayer;
b. Destroy/shred in the presence of the taxpayer or his authorized representative, the unutilized SI/ORs and other accounting forms, ensuring that the same will no longer be used as originally intended;
c. Return to the taxpayer the destroyed/shredded SI/ORs and other accounting forms for burning and/or proper disposition; and
d. Issue a Tax Clearance (to be released by the BIR district office) to the taxpayer applying for cancellation of TIN within 10 days from termination of its investigations and/or full settlement of the taxpayer’s liabilities, if applicable.
Although the BIR streamlined the requirements in line with the Ease of Doing Business Act (Republic Act No. 11032), the business closure process is still a long and tedious one for many taxpayers. Imagine having to endure the long lines at the BIR office and exposing yourself to the risk of COVID-19, and the necessity of coming back multiple times, in case of deficiencies, just for the sake of business closure compliance. Does this not sound dreadful and unsafe given our current circumstances?
With the ongoing pandemic, the uncertainty looming over the economy, and the prevalence of online platforms, maybe it’s time for the BIR to consider adopting a virtual business closure process, where taxpayers can submit requirements, similar to eAFS, eFPS and the like, not only reduce the burden on business owners who have had to endure the devastating effects of the pandemic, but also to reduce the risk of transmission of the virus. Another idea is adopting a program similar to the Information Systems used by schools and banks where the status of the user’s transactions/applications can be monitored online and where taxpayers may submit deficiency requirements from the comfort of their own home. Whether we like it or not, it seems the COVID-19 pandemic is here to stay for the foreseeable future, and our filing processes should be in step with the progress our society has made in learning how to live in the new normal.
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.
Juvy H. De Jesus is a manager from the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.