Additional disclosures for tax filing in 2011

It is that season again that every taxpayer dreads and every auditor or tax preparer wishes would just pass as briefly as it came. It entails long hours, mugs of coffee, living in an almost vampire state of little sunlight and sleepless nights spent trying to tie up figures. All these would culminate in the long lines that one has to endure for the filing of the annual income tax return (ITR) and the accompanying Audited Financial Statement (AFS) this coming April 15. Add to the already formidable task of accomplishing the return and drafting the AFS, the Department of Finance through the Bureau of Internal Revenue (BIR) has released several regulations requiring additional disclosures and information.

Under Revenue Regulations No. (RR) 03-10, taxpayers are required to submit a statement of management responsibility to their annual ITR. The statement basically establishes that management accepts the responsibility for the AFS and ITR as well as other returns, and that the AFS have been prepared in conformity with generally accepted accounting principles in the Philippines and that disparity in figures has been reported as reconciling items and that the taxpayer has filed and paid all tax liabilities for the reporting period. The Statement of Management’s Responsibility is required to be signed by the individual taxpayer, and for corporations, by the Chairman of the Board, the Chief Executive Officer and Chief Financial Officer or any officer performing similar functions.

In addition to the above document, RR 15-10 which was published in December of 2010 requires that the notes to the AFS accompanying ITR for 2011 should contain information on taxes, duties, and licenses as well as pending BIR assessments and tax cases even tax investigations. These detailed disclosures replace the schedule of taxes and licenses that was formerly required as an attachment to the ITR

The following disclosures are specifically required to be reported as notes in the AFS:

a. Output VAT declared during the year. If there are zero rated sales/receipts and/or exempt sales, a statement to that effect and the legal basis therefore;

b. Input VAT claimed during the year. This includes current year’s domestic purchases/payments, any claim for tax credit/refund;

c. Landed cost of imports and the amount of custom duties and tariff fees;

d. Amount of excise taxes, classified per major product category;

e. DST on loans, shares of stock and other transactions;

f. Schedule of taxes and licenses;

g. Details of withholding taxes categorized into compensation, creditable and final withholding tax;

h. Deficiency tax assessments, whether protested or not;

i. Tax cases, whether under preliminary investigation, litigation or prosecution in courts or bodies outside the BIR;

The BIR stated that the regulation is supposed to assist in monitoring tax compliance, even though most of the disclosures required by the RR have been reported by the taxpayer in tax returns and other information in one form or another. While this may ease the burden on the BIR’s side, what about the taxpayer? Several private sector groups have raised concern and held dialogue with the BIR for the deferment of the regulation citing that the timing would make it hard for taxpayers to comply since most companies have already started drafting their AFS already. Further, since it is part of the AFS that is required to be audited, this becomes added responsibility or even perceived liability of auditors; consequently, potential additional cost to the taxpayer. Despite these however, the BIR has not been swayed and remains firm in enforcing this for this coming filing season.

While taxpayers and tax preparers alike were still reeling from the above regulation, the BIR surprised taxpayers again by issuing RR 02-11 last 01 March2011. This RR requires certain individuals, estates and trusts to file an Annual Information Return (AIR) which discloses information on income subjected to final withholding tax and exclusions from gross income.

Under RR 02-11, individuals, estates and trusts that are required by law to file an ITR are required to file the ITR together with the AIR. Individuals who are not required to file a tax return or qualified for substituted filing, may file an ITR for purposes of loans or foreign travel requirements, but if they do, they have to file the AIR also. On the other hand, the following need to file the AIR only: pure compensation earners whose annual taxable income derived from the Philippines exceeds P500,000; Individuals, estates and trusts whose sole income has been subjected to final withholding tax in excess of P125,000 annually, whether remitted or not to the BIR; and individuals whose sole income is exempt, where the aggregate amount exceeds P500,000 annually. Those receiving compensation from two or more employers are required to file an ITR together with the AIR.

RR 02-11 was supposed to be effective covering income earned for taxable year 2010 but it has been beset by issues and controversies. One of which is the lack of guidelines and clarifications on certain income like whether interests from banks should be included or whether the P500,000 threshold include de minimis benefits. Another more controversial issue raised, however, was regarding the constitutionality of the AIR and its intrusion into the privacy of individuals. 

As of this writing, however, the BIR has issued RR 06-2011 suspending the implementation of RR -2-2011 indefinitely.

I suppose that all these are meant to boost collection and monitoring of the BIR. However, looking at the regulations, it seems to be suggested that the BIR’s problem in meeting its goal lies primarily from taxpayer’s under declaration of income. One would hope then that the additional burden imposed by the regulations would encourage taxpayers to declare their true income; Otherwise, the BIR may be barking on the wrong tree. In the meantime, stock up on your favorite coffee, as there is more work to be done.

(Deanna Yvonne Geraldine A. Florendo is lawyer based in Cebu office and an Assistant Manager for Audit of Manabat Sanagustin & Co., CPAs, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in the Philippines. For comments or inquiries, please email [email protected]or [email protected])