Today, we are celebrating Valentine’s Day, which many will celebrate by giving flowers or boxes of chocolate, or by arranging dinner dates or visits to romantic locations. These gestures are meant to show our appreciation and care for loved ones.
All things considered, this love month can also be a time for showing how much we care for our company. We can express this by preparing for future tax assessments via a transaction post review after we close the books.
By this time, the books of account for the taxable year ended Dec. 31 should have been closed. Note that for taxpayers using loose-leaf or computerized accounting systems, the submission of the books to the BIR should have been completed by Jan. 15 and Jan. 31, respectively.
Thus, for taxpayers whose taxable year ends on Dec. 31, the next challenge is the preparation of audited financial statements (AFS) and the annual income tax return (AITR), which are due for filing and payment on or before April 15. As a prelude, taxpayers should initiate post review for transactions that were recorded on the books and the corresponding amounts reported in the tax returns. This exercise will help taxpayers identify any potential oversights or tax exposure that can be addressed early. Correcting entries should be considered in finalizing the AFS. Thus, taxpayers can minimize, if not eliminate, the potential impact on financials in terms of the monetary penalties levied during a tax investigation.
Considering that the Philippines follows self-assessment for tax purposes, after taxpayers calculate or determine their tax liability and file the corresponding returns, the Bureau of Internal Revenue (BIR) has the right to examine or audit such returns. We observed that the BIR conducts its tax investigation a year, or sometimes less than a year, after the annual income tax return is filed. Part of the BIR’s audit procedure is to compare an independent record with other records. Hence, with this type of approach, taxpayers can start to assess whether the reported final balances on the books match the amounts reported on the tax returns duly filed.
As we perform the high-level comparison of the Revenue and/or Sales accounts, taxpayers should check whether the sales and/or revenue amounts were fully reported in the value-added tax (VAT) return. Note, however, that for a taxpayer engaged in services, revenue may reflect a mismatch because VAT reporting of revenue is on a cash basis. Thus, the accounts need to be reconciled to reflect the difference with the revenue reported when the AFS and ITR were finalized in preparation for a future BIR audit.
Another post review should cover expense accounts. Taxpayers need to evaluate whether all expenses should be subject to withholding tax. After all items are identified, the next step is to check whether these were properly reported in the withholding tax on compensation, expanded withholding tax, and final withholding tax and final VAT returns, as the case may be.
The ideal result when comparing the amount per books and per return is that there should be no differences, but this is not the case most of the time. Nevertheless, should there be a discrepancy between the revenue and expenses per book against the tax returns filed, it is not automatic for the taxpayer to immediately be exposed and made liable to remit the tax.
The taxpayer should evaluate whether the discrepancy will require a mere adjustment to the books due either to a wrong entry or misposting of a transaction, or whether such difference will require the amendment of the tax return.
An amendment of the tax return may or may not require an additional payment. Nevertheless, taxpayers should not be discouraged by amending tax returns if there is a due that needs to be remitted. Responsible taxpayers render unto Caesar what belongs Caesar.
Previously, when a taxpayer amended a tax return and it resulted in an additional payable, the BIR would impose a 25% surcharge, in addition to the 12% interest and compromise penalty, as provided for by Revenue Memorandum Circular (RMC) 21-2018.
But the more recent RMC 43-2022 does away with the 25% surcharge on additional tax, provided that the taxpayer was able to file the initial tax return on or before the due date of its filing I believe that it is a good development that encourages taxpayers to correct tax liabilities that were initially reported mistakenly.
Please note, however, that the 25% surcharge still applies to those cases of failure to file any tax return and pay the tax due thereon by the due date. Hence, taxpayers should exercise due diligence and not miss the filing and payment due dates.
Note that the main objective of the post review is to ensure that the recorded transactions on the books were all captured and reported in the tax returns. Hence, the alleged under declaration of sales or revenue and non-withholding of expenses can be mitigated during the tax audit.
Nonetheless, any errors committed by the taxpayer that were caught during post review could be the basis for correcting faulty practices in recording the transaction on the books and determining the tax treatment for the current year and prospectively.
With all these tax rules in mind, may we also remember to show our support not just for our loved ones but for our company, as well. Happy Valentine’s Day!
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.
Richard R. Ibarra is a director of Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.
