Discussions

BIR AUDIT PROGRAM – POLICIES, GUIDELINES AND PROCEDURES TO BE OBSERVED

Posted on by RGA CPAs and Associates

To enhance taxpayers’ voluntary compliance by encouraging the correct payment of internal revenue taxes through the exercise of the enforcement function of the Bureau, RMO No. 19-2015 has been issued for your reference.

Points discussed with this Revenue Memorandum Order (RMO):

1) AUDIT / INVESTIGATION OF TAXPAYERS

  • Generally, all taxpayers are considered as possible candidates for audit. To cover such audit/investigation of taxpayers, electronic Letters of Authority (eLAs) shall be issued.  The said audit / investigation shall include, but not limited to, the following cases:
  1. Mandatory Cases
  2. Priority Taxpayers/ Industries

2) POLICIES AND PROCEDURES

  • All RDO and RD/LTD, LTAD and ACIR-LTS are equally responsible in ensuring that only returns of taxpayers registered within their jurisdiction and those that match the selection criteria of this Order are selected for issuance of eLAs. Otherwise, they shall be subject to administrative sactions.

Continue reading BIR AUDIT PROGRAM – POLICIES, GUIDELINES AND PROCEDURES TO BE OBSERVED

“Accounting Methods recognized by the Tax Code”

Posted on by RGA CPAs and Associates

The taxable income of a taxpayer shall be computed in accordance with the method of accounting he regularly employs in keeping his books. However, if the taxpayer does not regularly employ a method of accounting which reasonably shows his correct income, the computation of income shall be made in such manner as in the opinion of the Commissioner of Internal Revenue or his -duly authorized representative
that clearly reflects such income.

Here’s the method that can be used:

A. Cash Basis is a method of accounting whereby all items of gross income received during the year shall be accounted for such taxable year and that only expenses actually paid for shall be claimed as deductions during the year. This method of accounting is generally used by taxpayers who do not keep regular books of accounts.

Under this method, income is realized upon receipt of cash or its equivalent including those constructively received (such as deposits for the taxpayer’s account by customers) but not including gifts or donations. Users of cash basis accounting are mostly individuals engaged in business and practice of profession, professional partnerships and professional service organizations.

 

B. Accrual Basis is a method of accounting for income in the period it is earned regardless of whether it has been received or not. In the same manner, expenses are accounted for in the period they are incurred and not in the period they are paid.

Under this method, net income is being measured by the excess of income earned during the period over the expenses incurred. Expenses not being claimed as deductions by taxpayers in the current year when they are incurred cannot be claimed as deduction from
income for the succeeding year.

Thus, a taxpayer who is authorized to deduct certain expenses and other allowable deductions for the current year but failed to do so cannot deduct the same for the next year. The accrual basis of accounting is being used by
taxpayers whose nature of business uses inventories since this method of accounting will correctly reflect income by matching purchases and expenses against sales.

This method is being applied by most medium and large corporations.

 

C. Completion of Contract Basis is an accounting method applicable to contractors in the construction of building, installation of equipment and other fixed assets, or other construction work covering a period in excess of one year.

Under this method, gross income is to be reported in the taxable year in which the contract is fully completed and accepted by the contractee if the taxpayer elected it as a consistent practice to treat such income, provided that such method clearly reflects the net income.

Under this method, all expenditures, are deducted from gross income during the life of the contract which are properly allocated thereto, taking into consideration any materials and supplies charged to the work under the contract but remaining on hand at the time of the completion.

However, pursuant to Republic Act No. 8424 which took effect on January 1, 1998, contractors are no longer allowed to adopt this method of reporting their income derived in whole or in part from long-term contracts.

D. Percentage of Completion Basis is a method applicable in the case of a building, installation or construction contract covering a period in excess of one year whereby gross income derived from such contract may be reported upon the basis of percentage of completion. In determining the percentage of completion of a contract, generally one of the following methods is used:

1. The costs incurred under the contract as of the end of the tax year are compared with the estimated total contract costs; or
2. The work performed on the contract as of the end of the tax year is compared with the estimated work to be performed.

In such case, the return should be accompanied by a certificate of the architect or engineer showing the percentage of completion during the taxable year of the entire work performed under contract. There should be deducted from such gross income all expenditures made during the taxable year on account of the contract, account being taken of the materials and supplies on hand at the beginning and end of the taxable period for use in connection with the work under the contract but not yet so applied.

Beginning January 1, 1998 income from log-term contracts are required to be reported using this method only.

E. Installment Basis is a method considered appropriate when collections extend over relatively long periods of time and there is a strong possibility that full collection will not be made. As customers make installment payments, the seller recognizes the gross profit on sale in proportion to the cash collected.

 

F. Crop Year Basis is a method applicable only to farmers engaged in the production of crops which take more than a year from the time of planting to the process of gathering and disposal. Expenses paid or incurred are deductible in the year the gross income from the sale of the crops are realized.

#referenceRAMO12000

 

 

 

Quick Overview of Company Structure in Setting Up a Company in the Philippines!

Posted on by RGA CPAs and Associates

Overview:

Foreign investors usually start and do business in the Philippines through a Domestic Corporation / a Subsidiary or a Branch Office / Representative Office / Regional Headquarters. Using either entity structure has its advantages and disadvantages. Corporations are more administratively feasible. Branches of a foreign corporation, while more advantageous tax-wise, are always considered fully foreign-owned and cannot be used if the activities to be undertaken are included in the Foreign Investment Negative list (FINL). The FINL mandates percentages Philippine equity participation for businesses requiring the same by law or the Constitution. Corporations, on the other hand, can accommodate the necessary Philippine ownership.

Business incorporation in the Philippines requires a minimum of 5 incorporators, each of whom must be actual persons and who must hold at least a single share in the company. A majority of the incorporators must be Philippine residents. Corporations must have between 5 and 15 directors (or trustees if a non-stock corporation), each of whom must have at least one qualifying share of stock.

Incorporation Structure Options:

  1. Fully foreign-owned Branch Office
  • Branch Office of a foreign company carries out the business activities of the head office and derives income from the host country; (IRR of Republic Act No. 7042, Foreign Investment Act of 1991). It is merely an extension of the head office, thus its liabilities are considered liabilities of the head office

 

  • Capitalization: As a 100% foreign-owned entity, a branch must have a capital of at least US$200,000 unless the branch will be exporting goods or services or generating revenue from abroad amounting to more than 60% of its gross sales it can be fully foreign owned, as it is considered an Export Enterprise under the Foreign Investments Act. Hence, the branch can be registered with as little as P5,000 paid up capital.  However, most banks require P25,000 – P50,000 to open a corporate bank account.

 

  • The filing fee is 1% of the actual inward remittance of the corporation converted into Philippine Currency but not less than P 3,000.00.

 

  • If the company exports goods or services or generates revenue from abroad comprising more than 60% of its gross sales it can be fully foreign-owned and can be considered an Export Enterprise under the Foreign Investments Act. Both branch and domestic corporation options considered Export Enterprises can be registered with as little as P5,000 in paid-up capital. However, most banks require P25,000 – P50,000 to open a corporate bank account

 

  • As to Taxability,

 

  1. Subject to income tax only on Philippine source income
  2. Profits remitted by the branch to its head office are subject to branch profit remittance tax of 15% or 10% depending on certain tax treaties; however, if located in a special economic zone then they are tax exempt.
  3. A branch office is not subject to documentary stamp tax (DST) simply because it does not issue shares of stock
  4. Subject to certain conditions, overhead expenses of the Head Office may be allocated to the Philippine branch office
  5. A branch is not liable to pay the 10% improperly accumulated earnings tax

2. Fully foreign-owned Representative Office

  • Representative or liaison office deals directly with the clients of the parent company but does not derive income from the host country and is fully subsidized by its head office. It undertakes activities such as but not limited to information dissemination and promotion of the company’s product as well as quality control of products. (IRR of Republic Act No. 7042, Foreign Investment Act of 1991)

 

  • This type of company formation can only undertake information dissemination, promote the parent company’s products, and provide quality control of the products. It cannot generate revenue in the Philippines and can only deal with the clients of its parent company
  • Capitalization: One of the requirements in securing a license to do business as a representative office is a proof of initial inward remittance in the amount of US$30,000.00. Every year thereafter, the head office must remit the same amount of US$30,000.00 to cover operating expenses of the representative office.

 

  • The filing fee is 1% of the actual inward remittance of the corporation converted into Philippine Currency but not less than P 3,000.00.

 

  • Taxability: It’s a cost center and is not allowed to earn income in the Philippines, thus exempted from 30% income tax and 12% value added tax. It is however subject to withholding taxes on its income payments and compensation.

3. Fully foreign-owned Domestic Corporation (subsidiary)

  • A subsidiary is a juridical entity separate and distinct from that of its parent company, hence its liabilities are generally not regarded as the liabilities of the parent company.

 

  • Capitalization: A subsidiary with more than 40% foreign equity must also have a minimum paid up capital of at least US$200,000 unless the company will be exporting goods or services or generating revenue from abroad amounting to more than 60% of its gross sales it can be fully foreign owned, as it is considered an Export Enterprise under the Foreign Investments Act. Hence, the company can be registered with as little as P5,000 paid up capital.  However, most banks require P25,000 – P50,000 to open a corporate bank account.

 

  • Filing fee for the registration which will be approximately 0.2% of the subsidiary’s authorized capital stock, plus 1% of such SEC fee for the SEC legal research fees and P210.00 for the registration of the subsidiary’s by-laws.

 

  • Taxability:

 

  1. Subject to income tax on worldwide income
  2. Dividends paid by a Philippine subsidiary to non-resident shareholders is subject to 30% in general or 15% subject to certain conditions or preferential tax treaty rates.
  3. A subsidiary is liable to pay DST on the original issuance of shares of stock at the rate of P2.00 for every P200.00 or fractional part of the par value of the shares of the outstanding shares of stock
  4. The Philippine subsidiary is not entitled to the allocation of overhead expenses of its parent company.
  5. A subsidiary is liable to pay the 10% improperly accumulated earnings tax if earnings exceeded the paid-up capital.

4. 60/40 owned Domestic Corporation or 99% owned Domestic Corporation

  • Registering a corporation requires a minimum of 5 incorporators, each of whom must be actual persons that must hold at least a single share in the company. Majority of the incorporators must be Filipino residents. A Corporation may have between 5 and 15 directors (or trustees if a non-stock corporation), each of whom must hold at least one qualifying share of stock. Majority of the directors (or trustees) must be Philippine residents, but not necessarily citizens. All Domestic Corporations obtain their license from and are registered with the Securities and Exchange Commission.

 

  • Capitalization: for 60/40 Owned Domestic Corporation. Capital requirement will depend on the line of business but in most cases as long as the paid-up capital is not lower than 5,000 pesos.

            For 99% owned Domestic Corporation – this means, it’s considered an Export Enterprise under the Foreign Investments Act.  Hence, the company can be registered with as little as P5,000 paid up capital.

 

  • Filing fee is 1/5 of 1% of the authorized capital stock or the subscription price of the subscribed capital stock whichever is higher but not less than P 2,000.00. LRF – Legal Research Fee equivalent to 1% of filing fee but not less than P10.00

 

  • Taxability: 60/40 Owned Corporation is taxable to it’s income and subject to business tax either 3% of gross income as percentage tax or 12% value added tax on gross income. However, 99% owned Domestic Corporation – export-oriented companies are not subject to 12% value added tax as long as their sales is at least 60% of it’s gross income is for export services. Both are subject to normal corporate income tax rate of 30% of Net Income.

 

The above article is for information only.  Should you need more details and wish to seek an assistance in choosing the best company structure and in the registration process, you can contact us.

 

Updated requirements in securing Tax Clearance for bidding purposes_its getting easier

Posted on by RGA CPAs and Associates

REQUIREMENTS IN SECURING TAX CLEARANCE FOR BIDDING PURPOSES:

 

  1. Duly accomplished Sworn Application;
    2. Delinquency Verification Certificate (DVC) issued by Concerned Regional Office;
  2. Two (2) pieces loose documentary stamp tax worth P15.00 each; and
    4. Confirmation Receipt of the electronic payment of certification fee.

CRITERIA TO BE SATISFIED TO QUALIFY:

  1. ANNUAL REGISTRATION FEE FOR THE CURRENT YEAR PAID;
  2. NO OPEN “STOP FILER” CASES (NOTE: STOP-FILER PERTAINS TO REQUISITE TAX RETURNS NOT FILED BY THE APPLICANT);
  3. NO RECORD OF TAX LIABILITIES/DELINQUENT ACCOUNTS;
  4. NOT TAGGED AS “CANNOT BE LOCATED TAXPAYER”; AND
  5. REGULAR USER OF THE ELECTRONIC FILING AND PAYMENT SYSTEM (EFPS) IN THE FILING OF THE REQUISITE TAX RETURNS AND THE PAYMENT OF THE TAX DUE THEREON

 

(NOTE: NEW APPLICANT MUST BE A USER FOR AT LEAST TWO (2) CONSECUTIVE MONTHS, WHILE RENEWAL OF TAX CLEARANCE MUST BE A CONSISTENT EFPS USER, FROM ENROLLMENT TO DATE OF FILING OF THE APPLICATION)

PROCESSING PERIOD: WITHIN TWO (2) WORKING DAYS FROM RECEIPT OF COMPLETE DOCUMENTS!

ADVISORY ON eBIRFORMS PACKAGE VERSION 6.3

Posted on by RGA CPAs and Associates

Beginning November 6, 2017 eBIRForms System will only accept returns filed thru eBIRForms
Package version 6.3. The use of other earlier versions of the eBIRForms Package will result in
the unsuccessful filing of tax returns through eBIRForms.

For the information, guidance and compliance of all concerned.

Click to access advisory_eBIR%20Forms%206.3.pdf

 

 

Who are the priority in the Audit of BIR?

Posted on by RGA CPAs and Associates

The Bureau of Internal Revenue (BIR) under Revenue Memorandum Order No. 4-2013 dated March 8, 2013, issued policies and  guidelines that shall be observed in the continuing audit of tax returns by the Revenue District Offices:

1) ALL TAXPAYERS are considered as possible candidates for audit.

2) Priority shall be given to the following taxpayers:

a.) Professionals and sole proprietorships whose  –

* income tax due is less than two hundred thousand pesos (P200,000) per year;

* gross revenue is less than forty percent (40%)  compared to the previous year’s reported gross revenue;

* tax payment for each type is less than thirty -five percent (35%) as compared to the previous year’s tax payment;

b) Those engaged in but not limited to the industries as follows:

* Importers/manufacturers/wholesalers/retailers of wrist watches and jewelry.

* Petroleum / gasoline dealers.

* Hotels, motels, pension houses/lodging, houses/inns, dormitories/boarding houses.

* Real estate Industry.

* Schools, particularly for foreigners (e.g. English School for Koreans, review centers).

* Contractors of NGA’S LGU’S and government owned  and controlled corporations.

* Retailers / Wholesalers.

* Restaurants, fast food chains, catering services, bars, coffee shops.

* Hospitals, clinics, medical/dental laboratories.

* Establishments / clinics for beauty enhancement centers.

* Manufacturers /dealers of beauty and health supplements.

* Amusement / entertainment  / event centers.

* Advertising agencies.

* Business processing outsourcing (BPO).

* E-commerce industry.

* Manpower and other recruitment services agencies.

* Other peculiar to the area of jurisdiction of the district office.

c) Those who fall below the established benchmarks of tax compliance; and

d) Those who maintained an ending inventory with value of 100% or more of it’s gross sales.