A matter of record

By Saha P. Adlawan-Bulagsak

First Published in Business World (10/30/2013)

LAST week, we wrote about the new Bureau of Internal Revenue (BIR) rule — Revenue Regulations (RR) No. 17-2013 — which extended the period for the preservation of a taxpayer’s books of accounts and other accounting records to 10 years (from the original three years, subject to certain exceptions). We said that while the new retention rules may prove to be tedious, time-consuming, and expensive to taxpayers, this may also be seen as an opportunity for organizations to invest in a reliable records management system and professionals crucial to safeguarding its institutional memory.

This week, we continue with our analysis of RR 17-2013 and look at the records preservation options that taxpayers may wish to consider.

By extending the records retention period to 10 years without any exceptions, it appears that the main consideration for the extended period is to complement the BIR’s 10-year prescriptive period within which to institute collection proceedings in the case of fraud, falsity or omission in the tax returns. This, notwithstanding the well-established doctrine that fraud is never presumed but must be proven, not to mention the fact that the 10-year prescriptive period under Section 222 of Tax Code legally starts to run only after the BIR’s discovery of the fraud, falsity or omission.

It is important for the taxpayers to be knowledgeable about and always comply with existing tax rules and regulations and pay the correct amount of taxes in order to avoid being subjected to a fraud investigation.

Being subjected to a regular BIR audit or examination is already a tedious process, more so in the case of a fraud audit or investigation. A fraud examination likewise triggers reputational risks to an enterprise. Hence, effective and efficient records management, personnel who are competent in tax matters, and records that are evidently compliant with existing tax rules and regulations, will significantly ease and expedite the process.

Arguably, the biggest issue that taxpayers will have to contend with in light of RR 17-2013 is storage and the huge cost that it could entail. Taxpayers may have to tweak their records management systems to better manage the cost while conforming to the BIR rule.

Keeping books of accounts and records in manual or hard copy formats spanning 10 years will require a relatively large physical space for storage. It may be high time for taxpayers to evaluate the costs and benefits of keeping books of accounts and records entirely in electronic format.

Large taxpayers are now required to use and register a computerized accounting system, but there are still many who keep manual or hard copies of other accounting records. In a regular BIR audit, examiners require the submission of printed originals of documents for review. While electronic copies of books of accounts may be inspected during a field audit, proof of transactions such as voucher registers and supporting invoices and receipts, contracts, and the like have to be turned over for BIR perusal.

Under Republic Act No. 8792 or the E-Commerce Act of 2000, an electronic document shall be the functional equivalent of a written document under existing laws for evidentiary purposes. The law specifically provides that electronic documents shall have the “legal effect, validity or enforceability as any other document or legal writing.” However, full faith in electronic documents has yet to be adopted by the BIR, although there have been some strides towards the use and recognition of e-documents.

For example, RR No. 16-2006 dated Aug. 15, 2006, allows the submission of electronic format of books of accounts and records for purposes of a tax audit or investigation that will have the legal effect, validity or enforceability as any other document or legal writing subject, consistent with RA No. 8792. Taxpayers must be able to maintain the integrity and reliability of these documents through time and these can be authenticated for subsequent reference. However, the rules require that these same documents must be retained in original form.

RR No. 9-2009, dated Dec. 23, 2009, also allows the use of alternative storage media. It provides that, for purposes of storage and retention, taxpayers may convert hard copy documents received or produced in the normal course of business to microfilm, microfiche or other storage-only imaging systems and may discard the original hard copy documents, subject to certain conditions and requirements. RR No. 9-2001 also enumerates the documents which may be stored in these media to include, but are not limited to general books of accounts, journals, voucher registers, general and subsidiary ledgers, and supporting records of details, such as sales invoices, purchase invoices, exemption certificates, and credit memoranda. Prior permit from the BIR is, however, required before a taxpayer can use these alternative media storage.

Since specific conditions and requirements have been provided, taxpayers should now evaluate the practicability of these requirements in light of any cost and efficiency advantages to keeping and preserving books of accounts and records in electronic format and other alternative forms of media storage.

More than just storage, organizations must also be able to impose a stronger sense of accountability on its members and stakeholders, insofar as records management is concerned. It must be able to address concerns on continuity, particularly the seamless turnover of documents when responsible officers or employees leave the enterprise.

Ultimately, it boils down to compliance. Whether taxpayers decide to preserve records manually or electronically, improvement of its tax compliance culture must always be the primary concern. At the end of the day, once this culture is ingrained in the organization, operational issues may be resolved with greater ease.

Saha P. Adlawan-Bulagsak is a senior tax director of SGV & Co.

This article 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.