Taxpayers' new guide on the application for change in accounting period

Have you ever experienced buying a nice shirt from your favorite store out of impulse simply because of the shirt’s design and enticing price? But when you went home and put on the shirt, you realized that it would hardly pass through your arms and that you needed a larger size. In this case, you have no other choice but to return to your favorite store and ask for replacement of the shirt. However, you cannot just compel the store to replace the shirt with just one snap unless you follow certain store procedures and requirements (e.g., shirt in good condition, official receipt, returned within 7 days, approval from authorized personnel, etc.). Same is true when a taxpayer wishes to change its accounting period.

Revenue Regulations (RR) No. 3-2011 issued on March 7, 2011 prescribes the guidelines and documentary requirements on the application for change in accounting period. It also streamlines the processing of applications for approval of changes in accounting period to improve the Bureau of Internal Revenue’s (BIR) efficiency and service to the taxpayers.

Accounting period is a fixed period of time, consisting of 12 months, upon the basis of which the taxable income is computed and the income tax imposed. A calendar year (CY) is an accounting period of 12 months that ends on the last day of December; whereas, a fiscal year (FY) ends on the last day of any month other than December. (Virginia P. Lim, Dictionary of Terms and Phrases in Taxation) The term “accounting period” corresponds to the term “taxable year” which determines the time when the taxpayer shall file its annual income tax return (called the final or adjustment return).

Under Section 46 of the National Internal Revenue Code (NIRC) of 1997, as amended, if a taxpayer, other than an individual, changes his accounting period from FY to CY, from CY to FY, or from one FY to another, the net income shall, with the approval of the BIR be computed on the basis of such new accounting period. Whenever a taxpayer changes its accounting period, the taxpayer is required to file with the BIR a separate final or adjustment return for the period between the close of the original accounting period and the date designated as the close of the new accounting period.

The following are the documentary requirements which must be submitted when seeking approval for change in accounting period:

1. Letter Request addressed to the Revenue District Officer (RDO) having jurisdiction over the place of business of the taxpayer, indicating the original accounting period and the proposed new accounting period to be adopted and the reasons for desiring to change the accounting period.

2. Duly filled-up BIR Form No. 1905;

3. Certified true copy of the Securities and Exchange Commission (SEC) approved Amended By-Laws showing the change in accounting period – Pursuant to the Corporation Code, the change in accounting period requires the amendment of the By-Laws, which amendment needs SEC approval;

4. Sworn certification of “non-forum shopping” stating that such request has not been filed or previously acted upon by the BIR National Office, signed by the taxpayer or duly authorized representative; and

5. A sworn undertaking by a responsible officer of the taxpayer, such as a partner, president, general manager, branch manager, treasurer or officer-in-charge, to file a separate final or adjustment return for the period between the close of the original accounting period and the date designated as the close of the new accounting period on or before the 15th day of the fourth month following the end of the period covered by the final/adjustment return. The undertaking shall include a clause stating that failure to comply with such undertaking will result to the invalidation of the approval of the change in accounting period, and will subject the taxpayer to criminal offense for failure to file return, supply correct and accurate information punishable under Section 255 of the NIRC of 1997, as amended.

The request for approval of the change in accounting period should be filed at anytime not less than 60 days prior to the commencement of the proposed new accounting period. With this requirement, the taxpayer should manage the time to get the requisite SEC approval of the amendment in the By-Laws.

The application for change in accounting period together with the documentary requirements mentioned above shall be pre-evaluated by the Officer of the Day in the concerned RDO whether or not it satisfactorily complies with the prescribed guidelines using the Action Sheet-Checklist of Requirements. If found complete and in order, he shall then forward the application together with the supporting documents to the RDO who, in turn, shall thoroughly evaluate the same. Otherwise, a Notice to Comply shall be issued by the RDO to the representative of the applicant corporation. However, if after the lapse of the period given in the Notice to Comply, the applicant fails to submit the documents required, a Notice of Archiving shall be issued by the RDO.

The RDO shall prepare an endorsement letter addressed to the Chief, Legal Division of the Revenue Region having jurisdiction over the RDO. Within five days from receipt of the application together with complete documentary requirements, he shall then transmit his endorsement letter together with complete set of documents to the Legal Division of the Revenue Region for evaluation.

Upon receipt by the chief, Legal Division of the Regional Office of applications for approval of change in accounting period, he shall assign the same to an action officer for evaluation and the appropriate action.

If in order, the Chief, Legal Division shall sign a Memorandum Indorsement (MI) for the Regional Director’s issuance of Certificate Granting the Change in Accounting Period, otherwise, the same shall be returned to the RDO concerned with a memorandum of their review findings and evaluation. The Certificate Granting the Change in Accounting Period shall follow the prescribed format, which was made an integral part of RR No.3-2011.

If the RDO finds the MI in order, he shall cause the issuance of the Certificate Granting the Change in Accounting Period which shall be duly signed by him. Otherwise, the same shall be returned to the Legal Division/RDO with a memorandum of his review findings and evaluation.

The Legal Division of the Revenue Region shall prepare the Certificates in three copies. The original copy of the certificate shall be issued to the taxpayer, which must bear the official dry seal of the BIR to avoid invalidation of the same.

The certification approving the adoption of a new accounting period must be released within 30 working days from the date of receipt of the complete documentary requirements.

Finally, note that only applications which strictly comply with the legal and documentary requirements prescribed above shall be approved by the Regional Director.

In the same way with the replacement of goods, customers must conform to certain procedures and requirements before the store grant their request for replacement. Or perhaps, to minimize events like this from happening, what customers need to do is to strictly follow the rules of proper diet and regular exercise (pun intended).

(Joel H. Jayme is an Assistant Manager for Tax 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])