New forms, new risks?

The Philippines is now considered as one of the fastest growing economies in Asia.  In order to support the growing needs of the country financially, the Bureau of Internal Revenue (BIR) has been exerting effort to increase government internal revenue collections. It has been updating its interpretation of the Tax Code by issuing new regulations and providing clarificatory circulars for the aid of taxpayers.

It has taken advantage of the upcoming filing of annual income tax return (ITR), the deadline of filing of which is now just a few weeks away, by issuing Revenue Regulations (RR) No. 2-2014 dated Jan. 24, 2014.  RR No. 2-2014 provides for a new set of ITRs for the use of individuals and corporations starting with taxable year ending Dec. 31, 2013 and onwards. With respect to corporations, from the previous single BIR Form No. 1702 (Annual ITR for corporations), the said regulation issued three new forms namely: (a) BIR Form No. 1702-RT for corporations subject to regular income tax only; (b) BIR Form No. 1702-EX for corporations granted exemption from income tax; and (c) BIR Form No. 1702-MX for corporations subject to multiple tax regimes. Each corporation should choose which form is appropriate for its business. Ranging from seven to nine pages (with the absence of additional sheets), the new returns now require corporations to disclose more information on their operations. It appears that the BIR is currently developing a database of information of taxpayers. It is to be noted, however, that corporations should file only one annual ITR for each taxable year. 

The three new forms are basically similar with the exception of additional schedules required specifically designed for each form. To avoid the risk of losing sheets, the new forms require corporations to indicate on each sheet their tax identification number (TIN) and registered name. The Philippine Standard Industrial Classification (PSIC) code applicable to the corporation is now required to be indicated on the return.  The new forms also require information regarding the external auditor or accredited tax agent to be indicated on the face of the return. This includes the name and TIN of the external auditor or accredited tax agent, name and TIN of signing partner, and the BIR accreditation number.

Each form contains pre-encoded information to possibly lessen errors in preparing the return like default tax rate per return and applicable alphanumeric tax code. Corporations subject to multiple tax rates are to exert more effort in filling out their ITR since the new forms require a breakdown of the operations of each activity by attaching an additional sheet marked as “Part VII – Mandatory Attachment” for each tax regime. The composition of the required schedules in the new forms is somehow as detailed as to those presented in the audited financial statements (AFS). Note that the AFS is still a required attachment to the annual ITR. Nevertheless, a simplified balance sheet has been provided in the new form for filling up by the corporation. However, there may be a need for corporations to regroup some of their accounts since the new forms do not provide any additional spaces for all types of balance sheet accounts. Moreover, corporations are to indicate their top 20 stockholders including their TIN, capital contribution and percentage of ownership. 

The reason for presenting all these information on the face of the return may primarily be for easier collection of data through optical character recognition since the new forms are now bar-coded. It is unclear, however, if this will work since the new forms released by the BIR are not capable of being edited through the computer. Most likely, the BIR is rushing in developing interactive forms between now and April 15, 2014.

At any rate, even if the BIR has issued new forms with guidelines on how to properly fill out the return (and even instructions on how to compute some line items), corporations will not have the level of comfort that their ITR will be satisfactory to the BIR. There may still be a need for the BIR to issue clarificatory circulars to RR No. 2-2014 to avoid confusion in preparing the ITR. And with more information being disclosed in the ITR, the BIR now has a wider scope to start any scrutiny and any scrutiny may lead to a deficiency tax assessment subject to a penalty of 25 percent surcharge (50 percent if with fraud) plus 20 percent interest per annum (and possible mandatory jail time). And so with the new forms, more disclosures, you could say taxpayers now face new risks.

Jann Christopher A. Canlas is an associate from the tax group of R.G. Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or RGM&Co. For comments or inquiries, please email [email protected] or [email protected].

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