I have been hearing interesting stories about how some taxpayers are too afraid of receiving tax assessment notices right at their doorsteps. A colleague of mine once told me about a particular instance when a client receptionist asked whether he was an employee of the Bureau of Internal Revenue (BIR). He politely answered “No,” and right after, he was told to proceed to his client’s office. He later learned that it was the client’s way of knowing beforehand whether a possible letter of authority (LoA) or a preliminary assessment notice (PAN) will be served to them by BIR personnel. Though it sounded like a strategy, there is no escaping the fact that, once an LoA or PAN has been released by the BIR, it will always find its way to the hands of the taxpayer. When that time comes, no working day will ever be as busy as the next couple of weeks, months, or even years for the very unfortunate taxpayer. Considering the unwanted consequences, taxpayers often wonder if there is ever a way they could reduce their anxiety over BIR tax assessments. Actually, there is.
We often hear the saying “Prevention is better than cure.” Though this very popular proverb normally relates to a person’s health or well-being, it could also be associated with a taxpayer’s state of affairs. Similar to taking care of our health, taxpayers must also regularly monitor their business operations to avoid or detect any “sickness” that may result in unfavorable tax consequences. How could this be achieved? How about a regular tax health check? A tax compliance review?
Just like an executive health check-up, a company could, by itself or through its tax consultant, conduct a set of procedures that aim to evaluate areas of tax concern. It is important to note, however, that the person conducting the review must at least be knowledgeable of the basic and latest tax laws and regulations to properly execute the procedures and provide as well a sound interpretation of the findings noted.
Although the company may, at its discretion, limit the scope of the review to matters that will only result in a possible material impact on its business, at the minimum, the review procedures must take into consideration the evaluation of possible tax risks on areas that are usually covered in BIR tax assessments. The most common BIR approach on tax risks is to compare amounts as recorded per books versus amounts declared per tax returns. Most deficiency tax assessments, including but not limited to income tax, value-added tax (VAT), or withholding taxes, arise from discrepancies noted from such comparisons. Although it can initially be argued that not all amounts recorded per books are subject to taxes, an early detection of discrepancies in the amounts can help a taxpayer examine whether indeed all the transactions recorded in its books were properly evaluated and subjected to the correct tax treatment. In such case, the taxpayer may take corrective actions in case lapses were discovered either through making the proper adjusting entries in its books or by amending the related tax returns and remitting to the BIR the possible deficiency taxes identified, whichever is applicable.
Another common area of concern which taxpayers should take into consideration when conducting a tax compliance review is the completeness of its accounting records and supporting documents. It is worthy to note that substantiation plays a major role in resolving tax issues in tax assessment cases.
Checking the company’s internal controls on tax filing and payment practices must also be covered in the review procedures. Filing and payment of the tax returns in the time prescribed by the tax laws and regulations is crucial, as it entails significant penalties in case of non-compliance. A one-day delay in the filing of a tax return would result in a 25% surcharge, 20% per annum interest, and compromise penalty ranging from P1,000 to P25,000, depending on the tax payable involved.
The above are only a few samples of common review procedures that a taxpayer may consider when conducting a tax health check. Unfortunately, some taxpayers do not find the necessity of conducting a tax health check, as they believe that being audited by an external auditor is sufficient enough. It has been a common notion for some taxpayers that, since their financial statements had been audited by an independent external auditor, they are already invulnerable in the probing eyes of the tax authority. Truth be told, however, that has never been the case. A financial audit is very much different from a BIR audit. The objective of a financial audit is for an independent external auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with Philippine Financial Reporting Standards. On the other hand, the objective of a BIR audit is for BIR examiners to determine whether a taxpayer, in paying the tax due to the government, complies with the provisions of the tax rules and regulations. Thus, a taxpayer should not rely solely on a financial audit if it seeks to evaluate the level of its overall tax compliance.
Needless to say, the significance of regularly monitoring a company’s adherence to tax laws and regulations could reduce the chance of having a tax assessment dispute with the BIR examiners in the future. Just like it is better to maintain a healthy lifestyle than to wait for a doctor’s medical prescription to correct your unhealthy habits. Or worse, never wait until your illness becomes serious that you may have to undergo a medical operation. In the tax setting, this medical operation could be likened to a full-blown court dispute with the BIR.
Marvin K. Villarama is a senior with the Tax Advisory and Compliance division of P&A Grant Thornton.