The trouble with tax clearance

WITH the current tax season underway, going-concern companies are preoccupied with the preparation and filing of tax returns as well as the corresponding payment of taxes. For corporations planning to dissolve or those that have already ceased operations, the filing of nil tax returns is still required until the official closure is effected.
  
In the Philippine setting, the dissolution of business does not preclude the effects of taxation. Section 235 of the Tax Code provides that corporations and partnerships shall not be dissolved until cleared of any tax liability. Similarly, Section 52 (c) of the Tax Code and Section 120 of the Corporation Code requires a dissolving corporation to secure a certificate of tax clearance from the Bureau of Internal Revenue (BIR) and to submit said certificate to the Securities and Exchange Commission (SEC) upon filing of the application for dissolution.

The taxpayer, therefore, needs the approval of both the SEC and the BIR before the dissolution becomes effective. Note that even if the date of dissolution is immediate, the same will not be effective until the SEC issues the approval of the dissolution, which requires the submission of the duly issued BIR tax clearance. The certificate of tax clearance is a written confirmation from the BIR that a taxpayer has no pending tax liabilities as of the date of issue of the certificate.

For foreign corporations licensed to do business in the Philippines as a branch, regional operating headquarters, or representative office, a Certificate of Withdrawal of License must be secured by filing a petition with the SEC which likewise requires a BIR tax clearance.

A tax clearance is also a requirement for refund of excess taxes of a dissolving entity. It serves as a substantive proof that the taxpayer is cleared of all its tax liabilities, and is therefore entitled to a refund of any taxes paid.

Under Revenue Regulations No. (RR) 11-2008, cancellation of registration with the BIR requires the filing of the Notice of Closure or Cessation of Business to the Revenue District Office (RDO) where the taxpayer is registered by accomplishing the prescribed registration updates form (BIR Form 1905). The supporting documents required are:

• a board resolution authorizing a shortened corporate term in the case of a domestic corporation, or the dissolution of the Philippine entity in the case of branches or representative offices of foreign firms;
• an inventory of goods, supplies, and capital goods;
• a list of unused sales invoices (SI) or official receipts (OR) and all other accounting forms, such as vouchers, debit/credit memos, delivery receipts and purchase orders;
• the surrender of original copies of unused sales invoices or official receipts and all other unused accounting forms; and
• short period return for income tax purposes and the surrender of original copies of all business notices and permits.

The RDO, upon receipt of the above-mentioned requirements shall:

1. “End date” the tax types of the taxpayer;
2. Destruct, in the presence of the taxpayer or his authorized representative, the unutilized SI/ORs and other accounting forms by cutting them crosswise and lengthwise at the middle thereof so that the same shall be divided into four, ensuring that the same will no longer be used as originally intended; and
3. Return to taxpayer the destructed SI/ORs and other accounting forms for burning and/or proper disposition.

To be able to issue a tax clearance, the BIR has to perform a tax audit. Hence, all taxpayers that filed for cancellation of registration due to closure/cessation or termination of business shall be subjected to immediate investigation by the BIR office concerned. This is also to prevent the situation where companies with existing tax liabilities close down their business to avoid or evade the payment of taxes.

Generally, the processing of the tax clearance can take one to three years and can naturally delay the filing of the SEC application. For dormant companies or those with no operations, the period should be shorter as there are few or no transactions to examine. For companies that are operational in the years under investigation (prior to closure), the process for securing a tax clearance may take longer since this will go through the same process as a regular audit and there will be more transactions and taxes to examine.

There is a possibility that deficiency tax assessments may be issued in the course of the examination, which will require more time to resolve and which will further prolong the process of securing a tax clearance. Where the issues are complex and the liabilities are substantial, the taxpayer may decide to challenge the assessments before the Courts and the resolution of the issues by the Court can take four to 10 years.

Should the BIR be satisfied that there are no more open cases or tax liabilities, it will cancel the dissolving taxpayer’s Certificate of Registration and TIN and issue the tax clearance or Certificate of No Outstanding Tax Liability.

It must be emphasized that securing the BIR tax clearance is the most cumbersome process in the dissolution procedure. In order to avoid further delay, taxpayers intending to close their business must ensure that: (a) the open taxable years are supported by complete accounting records arranged by year and easily retrievable; (b) the reportorial requirements are consistently filed; (c) taxes are correctly paid; (c) some employees are maintained to assist in the tax investigation process; and (d) a high level compliance review is performed to explain any discrepancies usually raised during a tax audit.

Charity Mandap

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Punongbayan and Araullo