Retention period of books of accounts and accounting records

The BIR has issued the following clarifications on the retention period of books of accounts and other accounting records under Section 235, in relation to Section 203 of the Tax Code.

Retention period

Pursuant to Section 235 and 203 of the Tax Code, all taxpayers are required to preserve their books of accounts, including subsidiary books and other accounting records, for a period of 10 years reckoned from the day following the deadline in filing a return, or if filed after the deadline, from the date of the filing of the return, for the taxable year when the last entry was made in the books of accounts.

The term “other accounting records” includes the corresponding invoices, receipts, vouchers and returns, and other source documents supporting the entries in the books of accounts, which should likewise be maintained for a period from the date of last entry in the books to which they relate. The term “last entry” means the particular business transaction or an item that is entered or posted last or latest in the books of accounts when the same was closed.

In case a taxpayer has a pending protest or claim for tax credit/refund of taxes, and the books and records concerned are material to the case, the taxpayer is required to preserve his/its books of accounts and other accounting records until the case is finally resolved.

Responsibility of independent Certified Public Accountant

Unless a longer retention period is required under the Tax Code or other relevant laws, the independent certified public accountant (CPA) who audited the records and certified the financial statements of the taxpayer, equally as the taxpayer, has the responsibility to maintain and preserve copies of the audited and certified financial statements for a period of 10 years from the due date of filing the annual income tax return or the actual date of filing thereof, whichever comes later.

Examination of books of accounts

All books, registers and other records, and vouchers and other supporting papers shall be kept at all times at the place of business of the taxpayer, and must be immediately produced and submitted for inspection upon demand by any internal revenue officer. They may also be examined and inspected for purposes of regular audit or extraordinary audit, or requests for exchange of information by a foreign tax authority. The examination and inspection of books of accounts and other accounting records shall be done in the taxpayer’s office or place of business or in the office of the BIR.

(Revenue Regulations No. 17-2013, September 27, 2013)

Tax Brief – October 2013

Punongbayan and Araullo

Doctrine of operative fact

THE ADAGE that "nothing is constant except change" holds most true for tax rules and regulations. We, as taxpayers, have to be constantly vigilant not just of changing rules and regulations but of changing interpretations of old rules and regulations. Most of us are now reeling from the realization that some practices that we hold sacrosanct are actually erroneous interpretations of the Tax Code.

One case in point is the practice relevant to the filing of the judicial claim for refund of input value-added tax (VAT). Prior to Oct. 6, 2010, taxpayers would rush to the Court of Tax Appeals (CTA) to file the judicial claim for refund prior to the lapse of the two-year period believing that the prescriptive period is mandatory and jurisdictional.

However, said practice was struck down by the Supreme Court (SC) in the Aichi case where it declared that the judicial claim for input VAT refund does not follow the two-year prescriptive period but the 120+30-days rule. In the Aichi case, the SC held that the taxpayers must file the judicial claim within 30 days from the issuance of the Bureau of Internal Revenue (BIR) decision or after the lapse of 120 days in case of inaction by the BIR. Thus, the prior practice of filing the judicial claim within the two-year period was held in most cases as either premature or delayed. As a result, a number of pending CTA cases have been denied for failure to observe the 120+30-days rule. This meant loss of millions of pesos for some taxpayers.

The Aichi case was further reiterated in the consolidated cases of San Roque, Taganito and Philex, which were decided by the SC on Feb. 12 this year. As expected, the parties filed a motion for reconsideration.

In its motion, San Roque Power Corp. prayed that the new 120+30-day rule be given only a prospective effect, arguing that the manner by which the BIR and the CTA actually treated the 120+30-days periods prior to the controversial Aichi decision constitutes an operative fact, the effects and consequences of which cannot be erased or undone.

Deciding on the case, the SC denied the motion for reconsideration on Oct. 8, 2013. It held that the doctrine of operative fact does not apply in this case.

Under the general rule, a void law or an administrative act cannot be the source of legal rights or duties. However, the doctrine of operative fact is an exception to the general rule. Under the doctrine, a judicial declaration of invalidity may not necessarily eliminate all the effects and consequences of a void act prior to such declaration.

Prior to the declaration of nullity, such challenged legislative or executive act must have been in force and had to be complied with as they were presumed to be valid. Only the courts can declare a law invalid, and without such declaration, taxpayers would have had no other choice but to follow the existing rules or in this case the practice of filing the judicial claim within the two-year period.

In rejecting the application of the doctrine of operative fact, the SC emphasized that there must be a law or executive issuance that is invalidated by the court for the doctrine to apply. In the present case, however, there is no such law or executive issuance that has been invalidated. What were held erroneous were the BIR and the CTA’s actual practice of not observing and requiring taxpayers to comply with the 120- and 30-day periods.

The SC reiterated that the 120- and 30-day rules are in accordance with Section 112(C) of the Tax Code and must be applied exactly as worded since it is clear, plain, and unequivocal. The taxpayer cannot simply file a petition with the CTA as there will be no decision or deemed denial decision by the BIR Commissioner for the CTA to review.

The SC’s decision emphasized that tax refunds are construed st rictly against the taxpayers. Therefore, taxpayers should now be able to interpret tax laws and regulations and not just rely on the existing practices upheld by the BIR and the CTA. We should now meticulously examine every law and regulation as if we are the SC and anticipate if the current practice runs counter to the strict interpretation of the law. And if we have somehow decided that the current interpretation is incorrect, we must now bravely go where others have not dared tread and pray most heartily that our interpretation will be upheld by the SC. Such daunting burden we all must face every day as we diligently pay our taxes and painstakingly seek our refunds. 

Lea L. Roque

Let’s Talk Tax

Punongbayan and Araullo

Tax consequences of donations

MORE than a week after the devastation left by super typhoon Yolanda (international name: Haiyan), the outpouring of disaster-relief donations from all over the world hasn’t shown any signs of slowing down.

Employers are providing their employees who have relatives in the affected areas with any form of assistance. Individuals and corporations both domestic and foreign are donating goods and cash, in addition to services.

So much help is being sincerely given without expecting anything in return. But, kind-hearted donors should also be mindful of the tax consequences of such donations and the penalties for failing to course the donation through authorized channels.

Many have hoped that the stringent tax rules on donations can be suspended in relation to typhoon Yolanda, but the announcements of the Bureau of Internal Revenue (BIR) have only confirmed that the existing tax rules and procedures should be followed.

ASSISTANCE PROVIDED BY AN EMPLOYER TO ITS EMPLOYEES

Any benefit received by an employee from his employer is generally considered as compensation subject to tax. Only the benefits specifically provided under the laws and regulations issued by the BIR can be exempt. Assistance provided by the employer to its employees due to calamities is not exempted from taxation because they are not included in the exemption list. The BIR has been consistent in its rulings that any kind of assistance given by the employer to its employees due to calamities is not considered as tax-exempt benefits. The employer should either withhold tax from the rank-and-file employee or shoulder the fringe benefits tax in case of managerial/supervisory employees.

DONATIONS IN KIND

Donations are generally subject to donor’s tax at the rate of 30% of the amount of cash or fair market value of the goods. If donations are made to non-strangers (i.e. those related by blood or marriage), the graduated rates from 2% to 15%, with the first Php100,000 exempted, apply.

In all cases, donations by corporations are treated as donations made to a stranger and subject to donor’s tax at the rate of 30%.

Donations, whether from local or foreign entities, or a non-resident non-citizen of the Philippines, can be exempt from donor’s tax if made to or for use of the national government, or any of its agencies which is not conducted for profit or to any political subdivision of the Government, and in favor of any educational, charitable, religious, cultural or social welfare corporation, institution, foundation, trust or philanthropic organization or research institution or organization, which must first be accredited with the Philippine Council for NGO Certification, Inc. (PCNC), and subject to the condition that not more than 30% of said donation shall be used for administration purposes.

In addition, the donor engaged in trade, business or profession is allowed to claim as full deduction the donations made within the taxable year to accredited NGOs, if all of the conditions prescribed under Revenue Regulations No. (RR) 13-98 are complied with. That is, the accredited NGO shall make utilization directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated, and the level of administrative expenses of the accredited NGO, shall, on an annual basis, not exceed 30% of the total expenses for the taxable year. If the requirements are not complied with, the donation can still qualify as limited deduction in amount not in excess of 10% for an individual donor, and 5% for a corporate donor, of the donor’s income derived from trade, business or profession as computed without the benefit of this deduction. Donations made by donor not engaged in trade, business or profession is not deductible.

CLAIM OF LOSSES

T yphoon victims who are engaged in trade, profession or business may avail of tax relief by claiming, as business deductions, casualty losses incurred for properties actually used in the business enterprise that were damaged. The loss of assets not used in the course of business and/or personal in nature shall not be allowed.

To avail of the deduction, they must file their claim of casualty loss within 45 days after the typhoon Yolanda (i.e. on or before Dec. 23) through a Sworn Declaration of Loss with their respective Revenue District Office (RDO).

ADOPTING BARANGAYS AND FAMILIES

Several corporations and organizations have considered adopting specific barangays or families to provide continuous assistance until they are fully recovered and in a position to be self-sustaining. Such programs will require the sponsoring corporation to directly course the assistance to the barangay or family. In such cases, it will be best if government can provide more permanent solutions to address the tax angles. A scheme similar to the Adopt-a-school program can be legislated. In this program, private entities assist, for at least two years, a public school, whether elementary, secondary, or tertiary, but not limited, in areas such as staff and faculty development for training and further education and construction of facilities. The entities shall be entitled to tax credit, and additional deduction from the gross income equivalent to 50% of expenses incurred for such adoption.

Companies should at least devise a scheme for making donations so they can immediately take action when calamities strike without having to think too much of the tax consequences or implications. 

In these trying times, our unity is tested. There is still so much need for assistance for the victims of typhoon Yolanda as well as the earthquake victims in the Visayas. Many organizations have launched their own programs left and right, 24/7 relief operations, medical missions, fund raisings and the list goes on. Yes, there are a lot more discreet ways of giving, but what matters now is that if it is given from the heart.

Ed Warren L. Balauag

Let’s Talk Tax

Punongbayan and Araullo