“Of tax disclosures and financial standards” by Henry M. Tan (January 3, 2011)

Business World (01/03/2011)

2010 was a year of many changes, challenges and opportunities. Everyone, it seems, has been buoyed by a sense of hope and optimism that the country is treading a new path to prosperity.

Fueling the government’s plans, however, will require financial vitality — which puts pressure on the government’s primary revenue collection agencies such as the Bureau of Internal Revenue (BIR) and the Bureau of Customs.

Faced with the task of collecting P860 billion in 2010 and P940 billion this year, the BIR had initiated several measures to meet its collection target.

One such measure is the mandate to BIR examiners to be more vigilant and critical in their review of audited financial statements and tax returns.

Another measure is the requirement of more stringent reporting. Believing that the disclosures currently required under Philippine Financial Reporting Standards (PFRS) could still be improved in order to reflect the information needed by examiners in conducting their office audits and examinations, the Department of Finance issued Revenue Regulations (RR) No. 15-2010 which, in addition to the disclosures already required under the PFRS and other standards and conventions, require that the Notes to Financial Statements shall include information on taxes, duties and license fees paid or accrued during the taxable year, particularly the following:

1. the amount of Value-Added Tax (VAT) output tax declared during the year, as well as the account title and amounts upon which the same was based. If there are zero-rated and/or exempt sales and receipts, a statement to that effect and the legal basis therefore;

2. the amount of VAT input taxes claimed broken down into:

a. beginning of the year;

b. current year’s domestic purchases and payments for:

• i. goods for resale, manufacture or further processing;

• ii. goods other than for resale or manufacture;

• iii. capital goods subject to amortization;

• iv. capital goods not subject to amortization;

• v. services lodged under cost of goods sold; and

• vi. services lodged under other accounts.

c. claims for tax credit/refund and other adjustments; and

d. balance at the end of the year.

3. the landed cost of imports and the amount of customs duties and tariff fees paid or accrued thereon;

4. the amount of excise taxes, classified per major product category, paid on locally produced excisable items and imported excisable items;

5. documentary stamp tax on loan instruments, shares of stock and other transactions subject thereto;

6. all other taxes, local and national, including real estate taxes, license and permit fees lodged under the Taxes and Licenses account, both under the Cost of Sales and Operating Expense accounts;

7. the amount of withholding taxes categorized into:

a. tax on compensation and benefits;

b. creditable withholding tax; and

c. final withholding tax.

8. periods covered and the amounts of deficiency tax assessments, whether protested or not; as well as

9. tax cases and the amounts involved that are under preliminary investigation, litigation and/or prosecution in courts or bodies outside the BIR.

This additional requirement has immediately generated concern and questions among taxpayers and external auditors. Certainly, more guidance and clarification will be needed if companies and auditors are to be able to fully comply.

For instance, the RR requires disclosure of tax assessments and cases, regardless of the probability of these resulting in an actual outflow of resources from the taxpayer. This is not consistent with the accounting standards that require disclosure only if it is probable that the tax assessments/cases will materialize.

Neither is it clear whether the deficiency tax assessments that should be disclosed include all assessments, whether informal, preliminary or final assessments.

Moreover, will the BIR permit the inclusion of a statement regarding the taxpayer’s position on these tax assessments, as well as an evaluation of its merits? Will the BIR allow the taxpayer to indicate whether the tax assessments were protested?

The RR also requires disclosure of the amount of output tax declared in the VAT declarations and returns, and the amounts upon which the same was based. In the case of sale of services, output VAT is based on gross receipts and not on gross sales, which is the amount reported in the audited financial statements. Thus, the balance of the pertinent sales account will not necessarily be the same as the gross receipts used as basis for the output tax declared in the VAT declarations and returns. This disclosure requirement will have to be modified for sellers of services.

Another item that needs clarification is whether there is a need to differentiate the disclosure required under the RR from those required by the PFRS. Would the taxpayer be allowed to present the RR-required information in a separate unaudited schedule that will be filed together with the basic financial statements required under PFRS?

RR No. 15-2010 was published on Dec. 13, 2010 in a newspaper of general publication, and therefore took effect last Dec. 28, 2010.

Given the various concerns and queries on the information required under RR No. 15-2010, we hope the BIR will clarify these concerns and, accordingly, enhance compliance by taxpayers and external auditors.

(Henry M. Tan is a tax partner of SGV & Co.)

This article was originally published in the BusinessWorld newspaper. It is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.