Taxwise Or Otherwise
By Maxencio Jr. Rios
If you’re familiar with the saying “The doors that once opened for you and brought light in your life can close anytime and put you in darkness,” you might be able to relate to the corporate dissolution process. The process can seem like a dark, one-way tunnel for the company legally settling its affairs, with the end view of being permanently laid to rest, also known as corporate death. The process is not only time-consuming; it is likewise expensive and tedious.
With the issuance by the Securities and Exchange Commission (SEC) of Memorandum Circular No. 5-Series of 2022 (MC 05-2022), a light has appeared at the end of the tunnel. The MC promulgates a new set of guidelines on corporate dissolution effective March 9, 2022. Its main aim is to standardize the dissolution procedure to comply with the amendments introduced by the Revised Corporation Code. A uniform regulation will, it is hoped, eliminate the complexities that come with dissolution.
MC 05-2022 updated the guidelines on the Voluntary Dissolution of Companies in which creditors are not affected and outlined the instances where the SEC can motu propio dissolve a corporation — Involuntary Dissolution. However, these rules are nowhere near as confusing as the rules for shortening the corporate term via the amendment of a corporation’s Articles of Incorporation (AoI), which is, by far, the most common closure route taken by companies. The latter contemplates two scenarios in Section 1, Part B of MC 05-2022. First, where the proposed expiration of the corporate term is at least one year from the SEC’s approval of the application for amendment; second, where the proposed expiration of the corporate term is less than one year from the approval of the application for amendment.
Skimming through the documentary requirements for submission to the SEC, one glaring but relevant distinction between the two is the requirement to submit a Tax Clearance, which is applicable only in the second scenario.
In a nutshell, the entire closure process generally consists of a series of steps usually commencing at the local government where the company operates, followed by closure with the concerned Revenue District Office (RDO) and lastly, with the SEC. The filing of applications with the Social Institutions (SSS, Pag-IBIG and PhilHealth) may be processed concurrently with the local government and RDO applications.
Given the sequence of closures per government agency, the usual culprit for delaying the dissolution before the SEC is the requirement for a “Certificate of No Outstanding Tax Liability” (Tax Clearance) issued by the RDO as a supporting document. Based on experience, securing a tax clearance usually takes years, considering the mandatory audit of a company’s accounting records for the last three years of operation.
Under the old rules, companies commonly opted to close their business by shortening their corporate term, which required the submission of a tax clearance. But if the proposed date of closure is at least one year from the date of application for closure, the requirement for a tax clearance is waived by the SEC. While this rule is maintained under the new guidelines, a new option was introduced requiring a tax clearance if the proposed date of closure is less than a year from the date of approval of the application.
Notably, Section 2 of Part B of the MC also provides that “the proposed expiration of corporate term for all applications for amendment… shall contemplate a future date.”
Here lie the inconsistencies.
Procedurally, a tax clearance application with the BIR may only be filed once the proposed closure date has lapsed, as supported by a Corporate Board Resolution. Accordingly, a corporation seeking to close under the new option faces two dilemmas. One will be its inability to file its application for tax clearance with the BIR since the actual closure is still a future date. It will have to wait for the proposed date to lapse before applying for a tax clearance. Another dilemma is that by the time the tax clearance is available, the proposed date of closure will have probably lapsed, and thus the SEC will likely reject its application as it is no longer a future date as required by the new issuance.
Previously, the SEC accepted the application for shortening the period even if the proposed date of closure has lapsed or contemplates a past date. The dissolution merely retroacts to the said date. Thus, the BIR’s requirement of a past or lapsed date of closure to commence the tax clearance application appears to run counter to the SEC’s rule on a future date to process the amendment application.
As such, it would be close to impossible to comply with the tax clearance requirement of the SEC under the new option.
Furthermore, the new issuance’s reckoning date of “from approval of the application for amendment” and the requirement of “future date” may also cause issues in availing of the first option since they require corporations to predict the period of SEC processing. This begs the question, what will happen if the proposed date of closure, while at least one year from the filing of the application, is approved at a date which is already less than a year from proposed date? Does this mean that the application falls under the new option and thus requires a tax clearance?
Clearly, additional issuances clarifying the application of the new set of guidelines, particularly on the new option, may be needed to illuminate the seemingly incompatible and clashing requirements of the BIR and SEC.
After all, the last thing any dissolving corporation needs is a complication that will prolong its agony.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Maxencio Jr. Rios is a senior associate at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.