When BIR tax compliance becomes harder
Nobody is perfect even the taxpayers. I am yet to hear a story of taxpayers without any violations in their tax compliance with the BIR. Every taxpayer, including our company, has some tax violations and paid the corresponding penalties. We will tackle taxpayers’ top 5 common mistakes and how to solve each to avoid these violations and penalties.
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1. Failure to register
If you are starting your small dream business, the tendency is someone advised you to not yet register it to the BIR. This is the same advice given to one of our participants in seminars. He has a small business not yet registered in the BIR. His excuse is that it is located far from the national highway and the BIR is unable to find it.
One day, a government agency customer wanted to buy products from his business. The customer asked for the BIR-registered or valid Sales Invoice for the products, but the business owner cannot give it because he was unregistered with the BIR. Hence, his small business lost significant sales due to his mistake of failing to register with the BIR.
Under Sec. 236 of the 1997 Tax Code, as amended, every person subject to any internal revenue tax shall register with the BIR on or before the commencement of business. Further, Revenue Regulation No. 7-2012 defines the commencement of business as follows:
“Commencement of Business” – in the case of pursuit of business or practice of profession, it shall be reckoned from the day when the first sale transaction occurred or within thirty (30) calendar days from the issuance of Mayor’s Permit/Professional Tax Receipt (PTR) by LGU, or Certificate of Registration issued by the Securities and Exchange Commission (SEC), whichever comes earlier.” (Emphasis and italic supplied)
As clearly worded above, in the absence of sales transactions for newly opened business, you have thirty (30) calendar days to register your business in the BIR. Accordingly, you have ample time to prepare and register your business in the BIR. However, the BIR issued Revenue Memorandum Circular No. 57-2020 streamlining the required documentary requirements for new business registration and other applications. Complete your documentary requirements before visiting your Revenue District Office (RDO) for business registration.
Why do you need to register?
- You cannot give your customers valid receipts/invoices because these are subject to the application of Authority to Print (ATP) which is given only to registered taxpayers.
- It is required under the law Tax Code, as amended. Correspondingly, non-registration is a criminal offense that may lead to tax evasion and audit investigation.
- You can have peace of mind. Even if the BIR tax mapping visited your business establishments, you are confident that your business is registered.
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2. Failure to issue Receipts/Invoices
Sec. 237 of the Tax Code, as amended, mandates the issuance of duly registered receipts or sale or commercial invoices for each sale or transfer of merchandise or services rendered valued at One hundred pesos (P100) or more. Thus, the issuance of receipts or invoices to customers is required only if each sale is P100 or more.
However, another requirement in the issuance of receipts or invoices is it must be duly registered. Sec. 238 of the same law requires the application and approval of the Authority to Print (ATP) to authorize the printing of receipts or invoices to be valid. This can be done by submitting application form BIR Form No. 1906 and its complete documentary requirements. Please refer to RMC 57-2020 for the complete list of requirements of the ATP application.
One taxpayer was tax mapped by the BIR. And the business owner was charged with penalties by the Revenue District Office (RDO) due to an alleged Refusal to issue receipts or invoices violation. The BIR Revenue Officer who conducted tax mapping activity found that the business establishment of this business owner did not issue receipts or invoices to his customers based on the current old dates of duplicate copies of receipts or invoices which were issued a long time ago. In other words, the taxpayer has no current dates of issued receipts or invoices at the time of tax mapping of the BIR.
The Revenue Officer is mistaken. Upon inquiry from this taxpayer, the business establishment is selling some product items valued at less than one hundred pesos (P100) each. Thus, based on the above-quoted provisions of Sec. 237 of the Tax Code, as amended, he is not required to issue receipts or invoices for each sale to his customers amounting to less than P100. This is the reason why the taxpayer did not have current dates in the duplicate copies of receipts or invoices. Accordingly, the taxpayer did not violate the law in the mandatory issuance of receipts or invoices; hence, the imposition of penalties has no legal basis to stand on.
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3. Failure of bookkeeping and accounting records
Bookkeeping or maintaining records of business transactions and operations is basic tax compliance with the BIR. This is required or mandatory under Sec. 232 of the Tax Code, as amended. Moreover, Revenue Regulations No. V-1 (RR V-1) The Bookkeeping Regulations prescribes provisions for the bookkeeping compliance of taxpayers.
Below are some of the most Bookkeeping violations of taxpayers and how to address each of these:
- Unregistered books of accounts– Before using any books of accounts to record your business transactions, it must be registered with the BIR through your RDO having jurisdiction over your place of business. For Manual Books of Accounts, this should be registered using the application form BIR Form 1905.
- Not updated books of accounts– Updating books of accounts refers to the recording of business transactions on or before the deadline. Pursuant to RR V-1, the deadline for the recording of business transactions is seven (7) days from the date of transactions were effected. Thus, you have ample time to update your company’s books of accounts to comply with the Bookkeeping regulations.
- Not in the registered place of business– Another important thing to note is that the registered and updated books of accounts must be always in the registered place of business. If you intend to bring your books of accounts to your home, which is away from your registered place of business, to update the recording, make sure to bring it back on time before the BIR conducts tax mapping at your business establishment.
- Not organizing and retaining books and records– Under Revenue Regulation No. 17-2013, as amended by Revenue Regulation No. 5-2014, the retention period for books of accounts, including subsidiary books, and other accounting records is ten (10) years. In the first five (5) years, hard copies of these books and records shall be retained. However, for the remaining five (5) years, taxpayers may retain soft copies only. To put it simply, taxpayers are not allowed to dispose of the books of accounts and records at their own will. Even if the retention period has expired, we strongly suggest not disposing of your company’s books and records in case the BIR conducts a tax evasion audit investigation which has a prescription period of ten (10) years from the date of discovery under Sec. 222 of the Tax Code, as amended.
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4. Failure to file tax returns
There are different kinds of tax returns in the Philippines. And not all of these are applicable to taxpayers. Moreover, the BIR implemented a system of pay-as-you-file taxes. In other words, taxpayers are required to pay their taxes, if any, when they filed their tax returns to the BIR. However, some taxpayers still struggle in the filing and payment of their tax returns.
Here are some of the most common mistakes of taxpayers in the filing and payment of taxes to the BIR:
- Wrong venue filing/payment– Filing tax returns is not simple. You should determine the correct venue for filing your tax returns. Under Revenue Memorandum Circular No. 4-2021 (RMC 4-2021), the BIR prescribes the three (3) modes of filing tax returns for taxpayers; namely: (1) eFPS, (2), eBIRForms, and (3) Manual. Failure to follow these guidelines shall result in penalties for wrong venue violations. Another important to note is the correct venue of payment of taxes. Under the same BIR memorandum, there are two ways to pay your taxes: Manual payment and online payment. Please refer to RMC 4-2021 for the complete guidelines to avoid serious violations and corresponding penalties.
- Not filing applicable tax returns– There were insurance agents who registered in the BIR their self-employed business activity of earning commissions from selling insurance. But they filed only annual income tax returns (AITR) to the BIR every year. As a result, they suffered penalties for failure to file other applicable tax returns. AITR is not the only tax return that should be filed with the BIR. Check your Certificate of Registration (COR) for the applicable tax types you have registered and the corresponding tax returns. Examples include but are not limited to the following: Quarterly Percentage Tax (BIR Form 2551Q), Expanded Withholding Tax (BIR Forms 0619-E, 1601-EQ, and 1604-E), Withholding Tax Compensation (BIR Forms 1601-C and 1604-C), and Annual Registration Fees (BIR Form 0605).
- Late filing/payment of tax returns– Filing and payment of applicable tax returns at the correct venues are not enough. Every tax return has a prescribed deadline for its filing and payment. For example, BIR Form 2551Q is every 25th day of the month following the close of the previous quarter. Do not forget the tax deadline to avoid tax penalties.
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5. Failure to verify BIR letters
Trust but verify. Occasionally, if the BIR has concerns with the tax compliance of the taxpayers, it will send a letter to inform you of your alleged tax violations and the corresponding request for the payment of penalties. In practice, believing immediately what the BIR said in the letter is the worst tax mistake you will make to your business.
Take for example the BIR letter above. In the said letter, the BIR identified the taxpayer as TAMP. Thus, it required the taxpayer to register eFPS AND withhold 1% and 2% from the purchases of the goods and services, respectively, and remit it to the BIR as the taxpayer is now a Top Withholding Agent (TWA).
Upon verification, the requirement for the registration to eFPS is true and correct for TAMP taxpayers. However, the TWA is a serious mistake. Under RR 11-2018, as amended, TAMP is not one of the selection criteria to identify taxpayers as TWA. If you will simply agree to this BIR letter that you are now TWA, you will add unnecessary obligations to your business by withholding 1% and 2% and remitting it to the BIR. And if you fail to do this, your tax deductions will be disallowed by the BIR under Section 34 of the Tax Code, as amended. Hence, you will pay additional taxes to the BIR aside from the correct taxes you have already paid.
What should you do? We strongly recommend filing a written protest to the BIR by explaining that your company is not TWA under the law and rules and regulations issued by the BIR. You can file this protest to the office of the BIR official who issued and signed the letter you have received. And do not forget to send copy furnish of this written protest letter to the higher BIR authorities, like the Commissioner of Internal Revenue, to inform them of the tax irregularities made to your business.
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In summary, these are the only top five (5) common mistakes of taxpayers in BIR tax compliance based on our experience. There are still some tax mistakes that you should be aware of. It is much better to educate yourselves about these mistakes and avoid violations with corresponding penalties rather than waiting for the BIR to inform you of your mistakes which shall result in serious injuries to your business. The choice is yours!
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