Year-end reminders: Meeting 2017 with confidence
The emergence of traditional parols and the start of Simbang Gabi signal the onset of the Christmas season. Whether on the streets, parks, churches, off ices or at home, the sight of glittery lights evokes a festive mood.
At the workplace, companies are normally busy with their Christmas parties, except perhaps for accountants, who are celebrating with a different mood. After all, this is the time of the year when bookkeepers make the last push before they can heave a sigh of relief as they close corporate books. Year-end inventory checks are in full swing and adjusting entries are prepared, booked and analyzed. Yes, these activities may be cyclical but a missed accounting entry with possible tax implications is a big no-no in the accounting world.
Let’s take a look at some year-end transactions which may have significant impact on the calculation of the corporate annual income tax, particularly on the aspect of deductions:
1. ACCRUED EXPENSES
Before we consider claiming expense deductions, the “all-events test” principle must be met, i.e., “all events” have occurred which determine the liability; the amount of liability has been determined with reasonable accuracy; and it should meet the economic performance test.
Obligations which are already fixed, i.e., amounts are determinable with reasonable accuracy and already knowable at the closing of books for the taxable year, are considered accrued expenses. On the other hand, mere estimate of expenses which are based on historical experience, contractual terms, company policies and accounting standards are “provisions” and should be taken up as non-deductible expenses with temporary difference implications.
Further, expenses must be incurred within the same period and must have been subjected to the appropriate withholding tax, as applicable.
2. DOUBTFUL ACCOUNTS
Under Section 3 of Revenue Regulations (RR) No. 5-99, the general requirements for a valid bad debts deduction are: (a) There must be an existing indebtedness which must be valid and legally demandable; ( b) It must be connected with the taxpayer’s business; (c) It must be actually charged off in the books as of the end of the taxable year; and (d) It must be actually ascertained to be worthless and uncollectable as of the end of the taxable year.
If the conditions were not met, the amount must be taken up as a non-deductible expense in the income tax calculation resulting in a temporary difference.
3. INVENTORY OBSOLESCENCE
A company provides an allowance for inventory losses whenever net realizable value (NRV) becomes lower than the cost of inventories due to damage, physical deterioration, obsolescence, changes in price levels or other causes. Any change in the taxpayer’s assessment of the valuation of inventories could significantly impact the calculation of such provision and the results of operations. Thus, the allowance account is reviewed on a regular basis to reflect proper valuation in the financial records. The provision is taken up as a non-deductible expense resulting in a temporary difference.
On the other hand, inventory items actually written off may be taken up as deductible expenses provided there is proof of actual disposal or physical destruction such as a Certificate of Destruction issued by the Bureau of Internal Revenue (BIR).
4. FOREIGN EXCHANGE (FOREX) GAINS AND LOSSES
Normal company practice is to restate foreign currencydenominated monetary accounts at year-end. The forex differences resulting from the restatement are recorded as unrealized forex gains or losses in the current year and should be treated as non-taxable or non-deductible expenses resulting in temporary differences.
Only the actual realized forex gains or losses during the taxable year upon collection or payment of the foreign-denominated accounts are taxable or deductible expenses for income tax calculation purposes.
5. RETIREMENT BENEFITS
A company which has established or maintained a pension trust registered with the BIR to provide for the payment of reasonable pensions to its employees, is allowed to deduct: (1) Those expenses transferred or paid into such trust during the taxable year to cover the pension liability accruing during the year; and (2) Contributions for past service costs apportioned in equal parts over a period of 10 consecutive years beginning with the year in which the transfer or payment is made.
6. ENTERTAINMENT, AMUSEMENT AND REPRESENTATION (EAR) EXPENSES
EAR expenses are those incurred by the company in the course of business relative to entertaining or meeting with guests at a dining place, place of amusement, country club, theatre, concert, play, sporting event and similar events or places as contemplated under RR No. 10-2002.
The RR provides a maximum cap for such expenses, in an amount equivalent to the actual EAR expense paid or incurred within the taxable year by the taxpayer, but in no case shall such deduction exceed 0.50% of net sales (i.e., gross sales less sales returns/allowances and sales discounts) for taxpayers engaged in sale of goods or properties and 1% of service revenues for taxpayers engaged in sale of services.
7. HEAD OFFICE CHARGES
The deductibility of head office charges must be supported by a certification issued by the external auditors of the Philippine branch’s head office which contains information on the extent of examination done by the auditors, as well as the nature and amount of allowable overhead expenses.
8. CREDITABLE WITHHOLDING TAX (CWT) CERTIFICATES
Under the withholding tax regulations, creditable taxes withheld by a taxpayer’s customer shall be allowed as a tax credit against the taxpayer’s income tax liability in the taxable year in which the income was earned.
The company must provide the BIR through e-submission a summary of the CWT certificates upon efiling the annual corporate income tax return, and then submit the Digital Versatile Disk — Recordable (DVD-R) containing the soft copies of the scanned CWTs to the BIR 15 days after e-filing, following the required certification and format. For companies that are still doing manual filing, the copies of the CWT certificates must be submitted to the BIR subject to the same requirements as the e-filing taxpayers under RR No. 2-2015.
In addition to all the above, accountants need to review the year-end adjustments, including those proposed by the external auditors, which may qualify as reconciling items with a temporary or permanent impact in the calculation of the company’s income tax due.
The foregoing list is non-encompassing as tax requirements vary depending on the nature of a company’s business, but we hope the guidelines provide helpful reminders to manage most readers’ corporate income tax position for 2016.
And so, while going through your Christmas wish list and New Year resolutions, consider a tax inventory checklist as well. It helps to close the year right and begin the new year with a confident mindset.
The views or opinions in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from the article.