Once in a while, especially in moments of stress, we find ourselves looking back to our childhoods. Back then, life was simple, and one of the few things we worried about was learning the alphabet.
Life gets more complicated as you grow old, when you have to worry about things the Bureau of Internal Revenue (BIR) might punish you for if you fail to comply. One of them is the alphabetical list of employees/payees that accompanies the Annual Information Return.
Under existing regulations, withholding agents should withhold and remit tax to the BIR by filing the required remittance returns (BIR Form 1601E, 1601F, and 1601C). In addition to the withholding tax/remittance returns, withholding agents are also required to submit to the BIR an Annual Information Return (BIR Form 1604E and 1604CF) together with an Alphabetical List of Payees/Employees (Alphalist).
Since the forms are considered “no payment” returns, more often than not, taxpayers tend to overlook their submission.
In December, the BIR issued a reminder in the form of Revenue Memorandum Circular (RMC) No. 100-2017, “Clarifying the Sanctions for the Non-Submission of Alphabetical list of Employees/Payees of Income Payments.” For small or newly established entities with or without an organized system in place, the policy may appear burdensome to comply with, or may seem superfluous.
However, the RMC reiterated the penalties under Revenue Memorandum Order No. 7-2015, i.e., non-filing of alphalist or failure to submit the complete or corrected one would subject the taxpayer to a compromise penalty of P1,000 for each failure to make, file or submit the return, with the aggregate amount to be imposed on such failures not exceeding P25,000 during the calendar year.
Inadvertent failure to file the alphalist does not only entail payment of monetary/compromise penalties, but likewise translates to an “open case” with the BIR. The term open case refers to a pending action against a taxpayer for failure to file a return, or filing a return that was not captured by the BIR’s system. In practice, taxpayers who wish to settle their open cases are directed to comply with their deficiencies, which may consist of filing the corresponding returns and payment of tax due, if any, plus penalty and interest.
Having an open case isn’t as easily resolved by paying penalties and filing returns. The entire process could take weeks, months, or even years if you’re out of luck. Unlike some returns which are closed automatically, open cases involving non-filing of annual information returns are manually reviewed, approved, and inputted in the BIR system. The process is called data-fixing and takes considerable time to sort out. This is also why an open case is one of the factors behind unreasonable delays in processing applications. You wouldn’t want to be caught with an open case for failure to file a return while securing a tax clearance for eligibility to join a public bidding, or renewing your importer accreditation, since the timing would be critical.
This is also a concern for those who fail to close their businesses properly, under the impression that the obligation to file annual returns has expired because operations have shut down. They will be in for a big surprise when they discover a list of open cases against them.
Another important point that deserves attention is the deductibility of expenses for failure to submit or file the alphalist. In the past, RMC 5-2014, specifically Item No. 15, provides that a taxpayer cannot claim the expenses for income tax purposes due to failure to file the prescribed alphalist or failure to re-submit the complete and corrected alphalist after the validation process conducted by the BIR. The policy is onerous and defies logic.
To set the record straight, the BIR issued the current RMC, clarifying that failure to file or re-submit the alphabetical list shall not result in the non-deductibility of the expenses given that taxes were already withheld and remitted.
The correction hinges on the rationale that the preconditions for claiming the deduction for expenses were satisfied upon the proper withholding of tax, filing of the withholding tax/remittance returns and payment/remittance of the taxes withheld.
Alphalists, much like alphabets, are meant to be basic and straightforward. Yet, the similarities end there. In the context of taxation, alphalists are more complex in light of the problem situations they present.
In a world of deadlines, multiple tasks, and a deluge of information, we are bound to forget, neglect or err more often than expected. After all, we are only human, and oversights happen. There is consolation, however, in the thought that we can get by if we focus, systematize, and learn to prioritize concerns that really matter. One of these is filing alphalists on time.
The views or opinions 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.
Reynaldo Q. Marquez, Jr. is an assistant manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.