Learning Session 7_Tax Records Management_Pagayatan

TAX RECORDS MANAGEMENT Atty. Froilyn P. Doyaoen-Pagayatan July 31, 2014 DISCUSSION OUTLINE Relevant laws and regulations Registration and preservation of books of accounts Manual and electronic books of accounts and accounting records Submission of books of accounts and recording records during tax audit and applications for refund Loss and destruction ofbooks of accounts and accounting records Reporting Casualty Losses and Inventory Losses 2 FDP Law RELEVANT LAWS AND REGULATIONS 3 FDP Law RELEVANT LAWS AND REGULATIONS Various Provisions of the Tax Code of 1997 Revenue Regulations No. 007-12: Revenue Regulations on Primary Registration Revenue Regulations No. 17-2013: Preservation of Books of Accounts and Other Accounting Records Revenue Regulations No. 06-06: Functional Currency Other than the Philippine Peso in Books of Accounts Revenue Regulations No. 82-08: Registration of Manual Books of Accounts Revenue Regulations No. 009-09: Electronic Records Revenue Regulations No. 16-06: Submission Electronic Books of Accounts During Tax Audit Revenue Memorandum Order No. 45-2010: Procedures in Dealing with Taxpayers Who Refuse to Produce Requested Documents or Records 4 FDP Law REGISTRATION AND PRESERVATION OF BOOKS OF ACCOUNTS 5 FDP Law REVENUE REGULATIONS NO. 007-12: REVENUE REGULATIONS ON PRIMARY REGISTRATION "Secondary Registration :shall pertain to subsequent registration activities after the issuance of BIR Certificate of Registration (COR) relative to the printing and issuance of official receipts/sales invoices; keeping/registering of books of accounts and other accounting records; applying for certain accreditation requirements and securing other applicable registration-related permits. 6 FDP Law REVENUE REGULATIONS NO. 007-12: REVENUE REGULATIONS ON PRIMARY REGISTRATION Documents to be submitted to complete BIR registration: Application for Authority to Penalize (ATP) Receipts/Invoices Registration of Manual Books of Accounts, or, Application for Permit to use Computerized Accounting System (CAS) or components thereof, if applicable Application for Permit to use Loose Leaf Accounting Records, if applicable Application for Permit to Use CRM/POS Machines, and the like, if applicable 7 FDP Law REVENUE REGULATIONS NO. 007-12: REVENUE REGULATIONS ON PRIMARY REGISTRATION As a general rule, it shall be mandatory for the BIR district office to process and issue simultaneously the COR, ATP and register the books of accounts of business taxpayers immediately after registration and upon complete submission of the requirements within the period prescribed under the existing process provided by the BIR Citizen's Charter. The BIR district office must ensure that taxpayers will be issued their registration certificates/permits (COR, ATP, Books of Accounts) upon commencement of their business. 8 FDP Law CIRS SUBPOENA POWER The CIR has the power to: examine any book, paper, record, or other data; obtain from any person any information such as, but not limited to, costs and volume of production, receipts or sales and gross incomes of taxpayers, and the names, addresses, and financial statements of corporations; summon the person liable for tax or required to file a return, or any officer or employee of such person, or any person having possession, custody, or care of the books of accounts and other accounting records to appear before her or her duly authorized representative at a time and place specified in the summons and to produce such books, papers, records, or other data, and to give testimony(Section 5, Tax Code) 9 FDP Law CIRS SUBPOENA POWER Failure to obey summons:Any person who, being duly summoned to appear to testify, or to appear and produce books of accounts, records, memoranda or other papers, or to furnish information neglects to appear or to produce such books of accounts, records, memoranda or other papers, or to furnish such information, shall, upon conviction, be punished by a fine of not less than P5,000 but not more P10,000 and suffer imprisonment of not less than one (1) year but not more than two (2) years.(Section 266, Tax Code) 10 FDP Law PENAL LIABILITIES Fine of not less than P50,000 but not more than P100,000and imprisonment of not less than two (2) years but not more than six (6) years:offers any taxpayer the use of accounting bookkeeping records for internal revenue purposes not in conformity with the requirements prescribed in the Tax Code; knowingly makes any false entry or enters any false or fictitious name in the books of accounts or records; Keeps two (2) or more sets of such records or books of accounts (Section 257, Tax Code) 11 FDP Law PENAL LIABILITIES Fine of not less than P50,000 but not more than P100,000and imprisonment of not less than two (2) years but not more than six (6) years (cont.): Fails to keep the books of accounts or records mentioned in Section 232 in a native language, English or Spanish, or to make a true and complete translation as required in Section 234 of this Code, or whose books of accounts or records kept in a native language, English or Spanish, and found to be at material variance with books or records kept by him in another language; knowingly uses fake or falsified revenue official receipts, Letters of Authority, certificates authorizing registration, Tax Credit Certificates, Tax Debit Memoranda and other accountable forms; (Section 257, Tax Code) 12 FDP Law REVENUE REGULATIONS NO. 11-89: REGISTRATION OF BOOKS OF ACCOUNTS Registration of Books of Accounts: Persons required to keep books of accounts, internal revenue books, records of receipts, and disbursements, additional registers and other records, for recording their transactions as prescribed in these regulations shall, before using any of the aforesaid books, records, registers, first present them to the Revenue Collection Agent where his principal place of business is located for approval and registration. 13 FDP Law REVENUE REGULATIONS NO. 11-89: REGISTRATION OF BOOKS OF ACCOUNTS Renewal of Registration of Books of Accounts: In the case of renewal of registration of books of accounts, the applicant-registrant shall present to the said revenue collection agent his duly registered books of accounts used during the immediately preceding taxable year as a condition precedent for the registration of his books of accounts for the current taxable year. If it is shown that the said books of accounts used during the said preceding taxable has not been duly registered or no such books of accounts have in fact been used, registration applied for the current books of accounts shall be effected by the said revenue collection agent subject to payment by the applicant-registrant of the corresponding penalty for the said violation. 14 FDP Law REVENUE REGULATIONS NO. V-1: BOOKKEEPING REGULATIONS Keeping of books of accounts reason for requirement: The reason for the requirement to keep books of accounts is stated in the law (Sec. 334, Tax Code) itself, that is, in order that all taxes due the government may readily and accurately be ascertained and determined any time of the year. 15 FDP Law REVENUE REGULATIONS NO. V-1: BOOKKEEPING REGULATIONS Persons Required to Keep Books of Accounts: Persons required by law to pay internal revenue taxes whose gross quarterly sales, earnings, receipt, or output, whether subject to percentage tax or not, exceed five thousand pesos (P5,000), are required to keep books of accounts in accordance with the standard accounting system. The said books of accounts shall consist of journal and a ledger, or their equivalents, and shall contain all information necessary for the accurate determination of the internal revenue taxes due on their businesses. 16 FDP Law REVENUE REGULATIONS NO. 17-2013: PRESERVATION OF BOOKS OF ACCOUNTS AND OTHER ACCOUNTING RECORDS General Requirements: All books, registers, records, vouchers, and other supporting papers and documents prescribed by the BIR and other records kept by taxpayers shall be preserved intact, unaltered and unmutilated. The books shall be kept at all times in the place of business of the taxpayer who shall produce them for examination or deliver them for inspection outside of his place of business upon demand of any internal revenue officer. 17 FDP Law REVENUE REGULATIONS NO. 17-2013: PRESERVATION OF BOOKS OF ACCOUNTS AND OTHER ACCOUNTING RECORDS Period of Limitation Upon Assessment and Collection: Section 203 of the Tax Code provides that internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for filing a return. This provision implies that the records of the taxpayer must be preserved for a period of three (3) years from date of last entry made thereon. 18 FDP Law REVENUE REGULATIONS NO. 17-2013: PRESERVATION OF BOOKS OF ACCOUNTS AND OTHER ACCOUNTING RECORDS Exceptions to the Three (3)-year Limitation of Assessment: Section 222 of the Tax Code provides that in the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be filed without assessment at any time within ten (10) years from discovery of the falsity, fraud or omission. 19 FDP Law REVENUE REGULATIONS NO. 17-2013: PRESERVATION OF BOOKS OF ACCOUNTS AND OTHER ACCOUNTING RECORDS Instances when the accounting records shall be needed beyond the 3-year period of limitation: In the case of a false or fraudulent return with intent to evade tax or of failure to file a return and investigation shall be made within ten (10) years from discovery of the falsity, fraud or omission. Ifthere is a pending tax case, protest or claim for tax credit/refund of taxes and the books and records concerned are material to the case. 20 FDP Law REVENUE REGULATIONS NO. 17-2013: PRESERVATION OF BOOKS OF ACCOUNTS AND OTHER ACCOUNTING RECORDS Instances when the accounting records shall be needed beyond the 3-year period of limitation (cont.): In the periodic examination of the books of accounts and other pertinent records of tax-exempt organizations or grantees of tax incentives to determine if they have been complying with the conditions under which they have been granted tax exemption or tax incentives. 21 FDP Law REVENUE REGULATIONS NO. 17-2013: PRESERVATION OF BOOKS OF ACCOUNTS AND OTHER ACCOUNTING RECORDS Retention Periods: All taxpayers are required to preserve their books of accounts, including subsidiary books and accounting records, for a period of ten (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. Last entry refers to a particular business transaction or an item thereof that is entered or posted last or latest in the books of accounts when the same was closed. 22 FDP Law REVENUE REGULATIONS NO. 17-2013: PRESERVATION OF BOOKS OF ACCOUNTS AND OTHER ACCOUNTING RECORDS Retention Periods (cont.): The term accounting records includes the corresponding invoices, receipts, vouchers and returns and other source documents supporting the entries in the books of accounts.They should also be preserved for a period of ten (10) years counted from the date of last entry in the books to which they relate. 23 FDP Law REVENUE REGULATIONS NO. 17-2013: PRESERVATION OF BOOKS OF ACCOUNTS AND OTHER ACCOUNTING RECORDS POP QUIZ: Company A filed a claim for refund of its excess creditable withholding tax for the year 2001.Due to the tremendous delay in theBIR processes, the claim for refund is still pending evaluation as of the present. Is Company still required to preserve its books of accounts for the year 2001? 24 FDP Law REVENUE REGULATIONS NO. 17-2013: PRESERVATION OF BOOKS OF ACCOUNTS AND OTHER ACCOUNTING RECORDS POP QUIZ: Is Company still required to preserve its books of accounts for the year 2001? ANSWER:Yes.If the taxpayer has any pending protest or claim for tax credit/refund of taxes, and the books and records concerned are material to the case, the taxpayer is still required to preserve his/its books of accounts and other accounting records until the case is finally resolved. 25 FDP Law REVENUE REGULATIONS NO. 17-2013: PRESERVATION OF BOOKS OF ACCOUNTS AND OTHER ACCOUNTING RECORDS Responsibility of Independent CPA: The independent 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 financial statements for a period of ten (10) years from the due date of filing the annual income tax return or the actual date of filing thereof, whichever comes later. 26 FDP Law REVENUE REGULATIONS NO. 06-06:FUNCTIONAL CURRENCY OTHER THAN THE PHILIPPINE PESO IN BOOKS OF ACCOUNTS Functional Currency: is the currency of the primary economic environment in which the reporting entity operates; that is the currency of the environment in which an entity primarily generates and expends cash. Foreign Currency: is a currency which is other than the functional currency of the qualified entity 27 FDP Law REVENUE REGULATIONS NO. 06-06: FUNCTIONAL CURRENCY OTHER THAN THE PHILIPPINE PESO IN BOOKS OF ACCOUNTS POP QUIZ: True or False. It will neverbe the case that the Philippine Peso would be considered Foreign Currency of a domestic corporation. ANSWER:False.The Philippine peso or other currencies will be considered as foreign currency if it is not the functional currency of the qualified entity. 28 FDP Law REVENUE REGULATIONS NO. 06-06: FUNCTIONAL CURRENCY OTHER THAN THE PHILIPPINE PESO IN BOOKS OF ACCOUNTS The taxpayer may use the currency that qualifies as its functional currency based on the following guidelines: The currency that mainly influences sales prices for goods and services (this will often be the currency in which sales prices for its goods and services are denominated and settled); The currency of the country whose competitive forces and regulations mainly determine the sales price of its goods and services; (The currency that mainly influences labor, material and other costs of providing goods or services (this will often be the currency in which such costs are denominated and settled); 29 FDP Law REVENUE REGULATIONS NO. 06-06: FUNCTIONAL CURRENCY OTHER THAN THE PHILIPPINE PESO IN BOOKS OF ACCOUNTS The taxpayer may use the currency that qualifies as its functional currency based on the following guidelines (cont.): The currency in which funds from financing activities are generated; The currency in which receipts from operating activities are usually retained. 30 FDP Law REVENUE REGULATIONS NO. 06-06:FUNCTIONAL CURRENCY OTHER THAN THE PHILIPPINE PESO IN BOOKS OF ACCOUNTS The corporate tax-filer electing to use as functional currency for financial reporting purposes a currency other than the Philippine peso must submit to the Revenue District Office (RDO) or Large Taxpayers District Office (LTDO) or Large Taxpayers Service (LTS), whichever is the BIR office that has jurisdiction over the taxpayer, a copy of the duly received notification sent to the SEC (as provided in SEC Memorandum Circular 1 series of 2006) for the use of such functional currency within 30 days from the filing of the notification to the SEC. 31 FDP Law REVENUE REGULATIONS NO. 06-06: FUNCTIONAL CURRENCY OTHER THAN THE PHILIPPINE PESO IN BOOKS OF ACCOUNTS Change in Functional Currency: In the case of a corporation whose functional currency changes from one currency to another, the taxpayer must submit to the BIR a copy of such SEC duly received notification to change the functional currency (as provided in SEC Memorandum Circular 1 series of 2006) within 30 days from the filing of such notification with the SEC. A taxpayer shall not be allowed to change its functional currency in the middle of the year, or adopt one for a period less than one year. 32 FDP Law REVENUE REGULATIONS NO. 06-06: FUNCTIONAL CURRENCY OTHER THAN THE PHILIPPINE PESO IN BOOKS OF ACCOUNTS POP QUIZ: What are the instances when a taxpayer may change its functional currency in the middle of the year, or adopt one for a period less than one year ?33 FDP Law REVENUE REGULATIONS NO. 06-06: FUNCTIONAL CURRENCY OTHER THAN THE PHILIPPINE PESO IN BOOKS OF ACCOUNTS POP QUIZ: What are the instances when a taxpayer may change its functional currency in the middle of the year, or adopt one for a period less than one year ? ANSWER: In certain exceptional cases like in the case of business combinations such as mergers or consolidations, change in functional currency to cover a period of less than one full year may be permitted. 34 FDP Law REVENUE REGULATIONS NO. 06-06: FUNCTIONAL CURRENCY OTHER THAN THE PHILIPPINE PESO IN BOOKS OF ACCOUNTS Currency to be Used for Income Tax Purposes- The income tax returns (ITRs) of taxpayers which have adopted functional currency (other than Philippine peso) in their financial statements and books of accounts shall still be prepared in Philippine pesos. Thus, all entries in the ITR shall be in Philippine pesos. For purposes of translating the functional currency income and expenses to Philippine Pesos, the translation shall be done on a monthly basis using the average exchange rate during the month (under the Philippine Dealing System or PDS).. 35 FDP Law REVENUE REGULATIONS NO. 06-06: FUNCTIONAL CURRENCY OTHER THAN THE PHILIPPINE PESO IN BOOKS OF ACCOUNTS Currency to be Used for Tax Returns Other than Income Tax: All tax returns other than the ITR shall likewise be filed in Philippine peso currency using historical peso amount or actual conversion/prevailing PDS rate on transaction day, whichever is applicable. 36 FDP Law REVENUE REGULATIONS NO. 06-06: FUNCTIONAL CURRENCY OTHER THAN THE PHILIPPINE PESO IN BOOKS OF ACCOUNTS Submission of Audited Financial Statements: Only the audited financial statements in the qualified functional currency shall be submitted to the BIR. For purposes of the annual income tax return, the taxpayer, however, shall submit together with the duly audited financial statements in qualified functional currency, a supplementary schedule showing the quarterly amounts of functional currency income and expenses with translation to Philippine pesos. 37 FDP Law REVENUE REGULATIONS NO. 06-06: FUNCTIONAL CURRENCY OTHER THAN THE PHILIPPINE PESO IN BOOKS OF ACCOUNTS Books of Accounts to be Maintained: Taxpayers who qualified hereunder should maintain their books in functional currency (if other than the Philippine peso). However, said taxpayers shall also maintain subsidiary ledgers for transactions subject to the other taxes (i.e. aside from income tax), which will be recorded both in functional currency and in Philippine peso using the historical peso amounts or actual conversion/prevailing rate on transaction day, whichever is applicable. Said functional currency books/records must be registered with the BIR in accordance with existing rules on registration of books and may be subject to BIR audit in connection with the audit of tax liabilities. 38 FDP Law REVENUE REGULATIONS NO. 06-06: FUNCTIONAL CURRENCY OTHER THAN THE PHILIPPINE PESO IN BOOKS OF ACCOUNTS Treatment of Gain or Loss on Sale of Investment Under Functional Currency: An investor which invests in functional currency (other than Philippine peso) securities can compute its gain or loss from the sale of said investment using the functional currency. POP QUIZ: compute the capital gain ifCompany A invests in a US dollar bond at US$100,000 when the US$:P rate was US$1:40 and sells the same investment at US$102,000 when the US$:P rate was US$1:50. 39 FDP Law REVENUE REGULATIONS NO. 06-06: FUNCTIONAL CURRENCY OTHER THAN THE PHILIPPINE PESO IN BOOKS OF ACCOUNTS POP QUIZ: compute the capital gain ifCompany A invests in a US dollar bond at US$100,000 when the US$:P rate was US$1:40 and sells the same investment at US$102,000 when the US$:P rate was US$1:50. ANSWER: USDPesos Selling price102,000 5,100,000 Cost100,000 4,000,000 Taxable Gain 2,000 In the above illustration, the taxable gain that should be reported is only $2,000. Thus, in reporting for tax purposes of the $2,000 gain in equivalent or converted Philippine peso denomination, the equivalent peso denomination is the peso equivalent of 2,000 U.S. dollars using the conversion rate on the date of the consummation of the transaction.

40 FDP Law REVENUE REGULATIONS NO. 06-06: FUNCTIONAL CURRENCY OTHER THAN THE PHILIPPINE PESO IN BOOKS OF ACCOUNTS Payment of Taxes in Functional Currency: Taxpayers filing tax returns in the Philippine peso may pay the tax in functional currency computed using the functional currency buying rate of the collecting bank vis--vis the Philippine peso at the time of payment. The collecting bank shall, however, report to the BIR said collection in peso as converted/translated. Despite the permission to pay in functional currency, all figures in the tax returns shall always be in peso. 41 FDP Law REGISTRATION OF MANUALBOOKS OF ACCOUNTS 42 FDP Law REVENUE REGULATIONS NO. 82-08: REGISTRATION OF MANUAL BOOKS OF ACCOUNTS Rules in the Registration of Manual Books of Accounts: Manual books of accounts previously registered but whose pages are not yet fully exhausted can still be used in the succeeding years without the need of re-registering or re-stamping the same, provided, that the portions pertaining to a particular year should be properly labeled or marked by taxpayer. The registration of a new set of manual books of accounts shall only be at the time when the pages of the previously registered books have all been already exhausted. 43 FDP Law REVENUE REGULATIONS NO. 82-08: REGISTRATION OF MANUAL BOOKS OF ACCOUNTS Rules in the Registration of Manual Books of Accounts (cont.): Newly Registered taxpayers shall present the Manual Books of Accounts before use to the RDOs where the place of business is located or concerned office under the Large Taxpayer Service for approval and registration. Subsidiary manual books of accounts to be used by taxpayers, in addition to the manual books of accounts, required by the National Internal Revenue Code of 1997 and existing rules, shall likewise be registered before use. 44 FDP Law REVENUE REGULATIONS NO. 82-08: REGISTRATION OF MANUAL BOOKS OF ACCOUNTS POP QUIZ: Should a taxpayer register a new set of manual books of accounts each and every year? 45 FDP Law REVENUE REGULATIONS NO. 82-08: REGISTRATION OF MANUAL BOOKS OF ACCOUNTS POP QUIZ: Should a taxpayer register a new set of manual books of accounts each and every year? ANSWER:No. The registration of a new set of manual books of accounts shall only be at the time when the pages of the previously registered books have all been already exhausted. This means that it is not necessary for a taxpayer to register a new set of manual books of accounts each and every year. 46 FDP Law MAINTENANCE, RETENTION, AND SUBMISSION OF ELECTRONIC RECORDS 47 FDP Law REVENUE REGULATIONS NO. 009-09: ELECTRONIC RECORDS Electronic Recordkeeping Requirements: A taxpayer shall maintain all records that are necessary for the determination of the correct tax liability. If a taxpayer retains records required to be kept under this regulation in both electronic and hard-copy formats, the taxpayer shall make the records available to the Bureau of Internal Revenue in electronic format upon request of the Commissioner or its authorized representative. 48 FDP Law REVENUE REGULATIONS NO. 009-09: ELECTRONIC RECORDS Electronic Recordkeeping Requirements (cont.): Taxpayers keeping electronic records must also retain source documents. A source document includes items such as sales invoices, purchase invoices, cash register receipts, formal written contracts, credit card receipts, delivery slips, deposit slips, work orders, dockets, cheques, bank statements, tax returns, and could also include emails, and other general correspondence where relevant for tax purposes. 49 FDP Law REVENUE REGULATIONS NO. 009-09: ELECTRONIC RECORDS POP QUIZ: True or False:Source documents could also include emails. 50 FDP Law REVENUE REGULATIONS NO. 009-09: ELECTRONIC RECORDS POP QUIZ: ANSWER:True. Source documents could also include emails and other general correspondence where relevant for tax purposes. 51 FDP Law REVENUE REGULATIONS NO. 009-09: ELECTRONIC RECORDS Electronic Recordkeeping Requirements for Large Taxpayers: It is mandatory for Large Taxpayers to maintain and/or adopt a Computerized Advancement Systems (CAS). All books of accounts and accounting records shall be in electronic formats. All Large Taxpayers who are currently maintaining their books of accounts and accounting records in manual form are required to register their Computerized Accounting Systems not later than December 31, 2009. A Large Taxpayer using commercial and/or customized software to keep books and records electronically is not relieved of the responsibility to keep adequate electronic records because of deficiencies in the software. 52 FDP Law REVENUE REGULATIONS NO. 009-09: ELECTRONIC RECORDS Mandatory Fields: General Ledger: Date, Reference, Brief Description/Explanation, Account Title (Or Account Code if Chart of Accounts Master file 1 is available), Debits General Journal: Date, Reference, Brief Description/Explanation, Account Title (Or Account Code if Chart of Accounts Master file 1 is available), Debits 53 FDP Law REVENUE REGULATIONS NO. 009-09: ELECTRONIC RECORDS Mandatory Fields (cont.): Sales Journal: Date, Customers' TIN, Customers Name (Or Customer Code if Customer Master file 2 is available), Address (Not necessary if Customer Master file is available), Description, Reference/Document No./Sales Invoice, Amount, Discount, Net Sales Purchase Journal: Date, Customers' TIN, Vendors' Name (Or Vendors' Code if Vendor Master file 3 is available), Address (Not necessary if Vendors' Master file is available), Description, Reference/Document No./Sales Invoice, Amount, Discount, VAT Amount (Input tax), Net Purchases 54 FDP Law REVENUE REGULATIONS NO. 009-09: ELECTRONIC RECORDS Mandatory Fields (cont.): Inventory Book: Date, Product Name (Or Product Code if Product Description Master file is available), Description, Unit, Price per unit, Amount 55 FDP Law REVENUE REGULATIONS NO. 009-09: ELECTRONIC RECORDS Electronic Records Maintenance and Location Requirements: Information recorded on rewritable media such as computer hard disks must be backed up on CD-R/DVD-R, tape or other suitable medium Records must be kept at the taxpayer's place of business in the Philippines or another place designated by the Commissioner of Internal Revenue and must, upon request, be made available to Revenue Officers of the BIR for audit purposes during business hours. 56 FDP Law REVENUE REGULATIONS NO. 009-09: ELECTRONIC RECORDS POP QUIZ: Are records kept outside the Philippines and accessed electronically from the Philippines considered to be records in the Philippines? 57 FDP Law REVENUE REGULATIONS NO. 009-09: ELECTRONIC RECORDS ANSWER: No.Records kept outside the Philippines and accessed electronically from the Philippines are NOT considered to be records in the Philippines. However, where records are maintained electronically in a location outside the Philippines, the BIR may accept a copy of the records, provided these are made available in the Philippines in an electronically readable and useable format for BIR officials and they contain adequate details to support the tax returns filed with the BIR. 58 FDP Law REVENUE REGULATIONS NO. 009-09: ELECTRONIC RECORDS POP QUIZ: Are taxpayers allowed to engage the services of a third party to provide custodial and/or management services of the records? 59 FDP Law REVENUE REGULATIONS NO. 009-09: ELECTRONIC RECORDS POP QUIZ: Are taxpayers allowed to engage the services of a third party to provide custodial and/or management services of the records?ANSWER: Yes. A taxpayer may engage the services of a third party to provide custodial and/or management services of the records and shall notify the BIR prior to such arrangement. Such utilization of a third-party shall not relieve the taxpayer of its obligations under the regulations. 60 FDP Law REVENUE REGULATIONS NO. 009-09: ELECTRONIC RECORDS Access and Submission of Electronic Records: Access of the BIR to the electronic records will be provided in one or more of the following manners: The taxpayer may arrange to provide the BIR with the hardware, software and personnel resources to access the electronic records. The taxpayer may arrange for a third-party to provide the hardware, software and personnel resources necessary to access the electronic records. 61 FDP Law REVENUE REGULATIONS NO. 009-09: ELECTRONIC RECORDS Access and Submission of Electronic Records (cont.): The taxpayer may convert the electronic records to a standard record format specified by Revenue Regulations No. 16-2006, including copies of files, on a magnetic medium that is agreed to by the BIR. The original files (unconverted format or files in its native format) should also be submitted along with the copies of the converted files. The taxpayer and the BIR may agree on other means of providing access to the electronic records. 62 FDP Law REVENUE REGULATIONS NO. 009-09: ELECTRONIC RECORDS Effect on Hard-Copy Recordkeeping Requirements: Taxpayersare not relieved of the responsibility to retain hard-copy records that are created or received in the ordinary course of business as required by existing law and regulations. Hard-copy records may be retained on a recordkeeping medium such as microfilm. 63 FDP Law SUBMISSION OF BOOKS OF ACCOUNTS AND RECORDING RECORDS DURING TAX AUDIT AND APPLICATIONS FOR REFUND 64 FDP Law REVENUE REGULATIONS NO. 16-06: SUBMISSION ELECTRONIC BOOKS OF ACCOUNTS DURING TAX AUDIT The electronic books of account may be examined by BIR officials in the course of a tax audit or investigation of the taxpayer. At the time of examination, the retained computerized accounting books/records of the taxpayer must be capable of being retrieved from the computer system and converted to a standard format that would allow efficient examination. Electronic documents submitted for purposes of a tax audit or investigation shall have the legal effect, validity or enforceability as any other document or legal writing 65 FDP Law REVENUE MEMORANDUM ORDER NO. 45-2010: PROCEDURES IN DEALING WITH TAXPAYERS WHO REFUSE TO PRODUCE REQUESTED DOCUMENTS OR RECORDS First Notice: if the taxpayer disregards the Letter of Authority (LA), and the checklist of presentation of the requirements for the audit or access to records request, the RO concerned shall send a first notice to the taxpayer after 10 calendar days from receipt of the LA and checklist of requirements/access to records request, demanding the taxpayer to furnish to the RO the requirements previously requested. 66 FDP Law REVENUE MEMORANDUM ORDER NO. 45-2010: PROCEDURES IN DEALING WITH TAXPAYERS WHO REFUSE TO PRODUCE REQUESTED DOCUMENTS OR RECORDS Second and Final Notice: If the taxpayer ignores the first notice and continues to disregard the demand for the submission of documents, the RO shall issue the second and final notice after 10 calendar days from receipt of the first notice. 67 FDP Law REVENUE MEMORANDUM ORDER NO. 45-2010: PROCEDURES IN DEALING WITH TAXPAYERS WHO REFUSE TO PRODUCE REQUESTED DOCUMENTS OR RECORDS Subpoena Duces Tecum:If the taxpayer still refuses after 10 calendar days from receipt of the second and final Notice to comply with the requirements of the said notice, the RO shall request the issuance of SDT from the BIRs Legal Service (National Office), Legal Division (regional office), or any authorized office, as the case may be. 68 FDP Law REVENUE MEMORANDUM ORDER NO. 45-2010: PROCEDURES IN DEALING WITH TAXPAYERS WHO REFUSE TO PRODUCE REQUESTED DOCUMENTS OR RECORDS Criminal Case: if the taxpayer refuses to comply with the SDT, the concerned BIR legal office shall file a criminal case against the taxpayer for violation of Section 5 in relation to Sections 14 and 266 of the National Internal Revenue Code; and/or initiate a proceeding to cite the taxpayer for contempt under the Revised Rules of Court. 69 FDP Law LOSS OR DESTRUCTION OF BOOKS OF ACCOUNTS AND OTHER ACCOUNTING RECORDS 70 FDP Law LOSS OR DESTRUCTION OF BOOKS OF ACCOUNTS AND OTHER ACCOUNTING RECORDS Under Section 6(B) of the 1997 Tax Code, the CIR has the authority to assess the proper tax based on best evidence obtainable. Assessment based on best evidence obtainable applies when the report or records requested from the taxpayer are not forthcoming (i.e., the records are lost, the taxpayer refuses to submit the records, or the reports submitted are false, incomplete or erroneous) (Revenue Memorandum Circular No. 23-00). 71 FDP Law REPORTING CASUALTY LOSSES AND INVENTORYLOSSES 72 FDP Law REVENUE MEMORANDUM NO. 31-09: REPORTING CASUALTY LOSSES Complete or partial destruction of property arising from a sudden, unexpected or unusual event, such as a typhoon, may be considered as a casualty loss which is deductible from gross income [Section 34(D), Tax Code] subject to the conditions enumerated in RMO No. 31-09. 73 FDP Law REVENUE MEMORANDUM NO. 31-09: REPORTING CASUALTY LOSSES A sworn declaration of the loss must be filed within 45 days after the event. Proof of the elements of the losses such as: Photographs taken before the typhoon and after the typhoon showing extent of the damage Documentary evidence of valuation of the damaged property such as cancelled checks, vouchers, receipts Insurance policy Police report in case of robber/theft during or after typhoon The documents submitted to prove the losses shall be kept by the taxpayer as part of the tax records 74 FDP Law REVENUE MEMORANDUM NO. 6-12 Prescribes the policies and guidelines for the physical/ocular inspection and supervision over the destruction/disposal or verification of casualty loss in cases wherein the goods or assets are located outside the territorial jurisdiction of the BIR district office where the taxpayer is registered. 75 FDP Law REVENUE MEMORANDUM NO. 6-12 The application for inventory or asset disposal/destruction shall be filed with and processed by the concerned BIR district office where the principal place of business of the taxpayer is registered upon complete submission of the prescribed supporting documents and information. Furthermore, no destruction or disposal of any inventory, machinery or equipment shall be made without the presence and supervision of an authorized BIR representative. The BIR representative shall make a report on the result of supervision of disposal, destruction or verification of casualty loss which shall be the basis for the evaluation and preparation of the certificate of deductibility of inventory or asset destroyed/disposed/lost. 76 FDP Law DEDUCTION FOR INVENTORY LOSSES With respect to Inventory losses or write-off, the BIR would normally look for a BIR Certification of the actual destruction of the obsolete inventories and failure to present it may lead to disallowance of the expense. 77 FDP Law DEDUCTION FOR INVENTORY LOSSES In the consolidated case of CIR vs. NIDEC Copal Philippines Corp. and NIDEC Copal Philippines Corp. vs. CIR (CTA Case no. 6577, CTA EB Nos. 250 & 255, dated 1 October 2007), the CTA ruled that a certification from the BIR of the actual destruction of the claimed obsolete inventories is not necessary in order that the cost thereof may be written-off and claimed as deduction. The taxpayer, however, should present competent documentary evidence to establish that the amount claimed as losses actually pertained to destroyed obsolete inventories. 78 FDP Law DEDUCTION FOR INVENTORY LOSSES Thus, while the Certification is not required, it would be prudent on the part of the taxpayer to comply with the notice and witness requirement to prove that the amount claimed as expense actually pertains to the destroyed inventories. 79 FDP Law Questions? Atty. Froilyn Doyaoen-Pagayatan FDP Law 20th Floor, Zuellig Building Makati Avenue corner Paseo de Roxas Avenue Makati City [email protected] 465-9271 80 FDP Law