Create law in the calendar year 2020

APRIL is the busiest month for most accountants, if not all, as the deadline for filing of the annual income tax return (AITR) of registered entities falls on or before the 15th day of the 4th month following the close of the taxpayer’s taxable year (April 15) for entities reporting on a calendar year (December 31).

Adding to the heavy workload of accountants are certain recent critical developments affecting the completion of financial statements and audit such as the implementation of a stricter community quarantine status, the nonextension of the April 15 deadline and the enactment of Republic Act 11534 (Create Law).

The Create Law is officially effective on April 11, 2021 (15 days after its publication on March 27), but has retroactive provisions affecting the tax computations in the taxable year 2020.

One of the most relevant provisions of the Create Law that affects the financial statements (FS) and AITR is the reduction of the corporate income tax rate from 30 percent to 25 percent and to as low as 20 percent for qualified domestic corporations. As the April 15 deadline draws near, a number of companies must have already completed the compilation of their financial statements and their respective external auditors have also completed their audit, albeit some may still be at a loss how to treat the effects of Create Law.

The following concerns, thus come to mind with regard to the effect of Create Law to the AFS and AITR:

• Is the Create Law considered substantially enacted as of Dec. 31, 2020; and

• Should the financial statements for 2020 be adjusted to effect the provision of the Create Law such as the tax rate in the computation of provision for income tax expense, income tax payable and deferred tax assets and liabilities?

The Philippine Interpretations Committee (PIC) on Jan. 27, 2021 issued PIC Q&A 2020-07 (PAS 12 Accounting for the Proposed Changes in Income Tax Rates under the Corporate Recovery and Tax Incentives for Enterprises Act Bill and was approved by the Financial Reporting Standards Council (FRSC) on Jan. 29, 2021. The following summarizes the guidelines of the said Q&A:

The Create Bill is not considered substantively enacted as of reporting date, Dec. 31, 2020.

Under PAS 10.22h (Events After the Reporting Period), if the bill is passed into law after the balance sheet date but before the issuance of the audited financial statements, it is treated as a non-adjusting event. Disclosure of the nature of changes and impact to the financial statements is required if the impact is expected to be significant.

On the other hand, if the bill is passed into law after the issue date of the calendar year (CY) 2020 audited FS but prior to the actual filing of the CY 2020 annual ITR, there is no subsequent event that requires related FS disclosure. However, companies may consider disclosing the general key features of the proposed bill and expected financial impact.

The PIC also provided the following impact to the CY 2020 financial statements:

Current and deferred taxes for FS reporting purposes will still be measured using the applicable income tax rates as of Dec. 31, 2020, since the Create bill was not yet enacted/substantively enacted as of such date (there will be difference between the provision for current income tax per CY 2020 FS and the amount of income tax due per CY 2020 ITR).

If the Create bill is enacted prior to CY 2020 audited FS issue date and before the actual filing of the CY 2020 ITR, this is a nonadjusting event but significant effects of changes in tax rates on current and deferred tax assets and liabilities should be disclosed (Companies in this case will have to compute for current and deferred taxes based on adjusted tax rates to determine the impact of the change in the tax rate).

If the Create Bill is enacted after the CY 2020 audited FS issue date but before the actual filing of the CY 2020 ITR, this is no longer a subsequent event, but companies may consider disclosing the general key features of the proposed bill and the expected impact in its audited FS.

With the above consensus reached by the PIC and the FRSC, the enactment of the Create law should not be a cause for the amendment of completed and audited financial statements for the CY 2020, which should be a relief for corporate accountants and external auditors, however, the new BIR Form version 7.9 with customizations to file the 2020 income tax return per the Create Act should be used.

The Create Law, for sure, is a welcome relief to taxpayers and hopefully will provide the country with the envisioned stimulus to jumpstart the economy. For accountants, on the other hand though, this presents a very challenging task especially with logistical restrictions and the time constraint in completing the financials. This grueling tax season nonetheless, shall soon pass.

Floyd Paguio is a member of the Board of Directors of the Association of CPAs in Public Practice and the Chairman and Chief Executive Officer of PDAC & Co. (PrimeGlobal Philippines). The opinion of the writer does not reflect in anyway the opinion of these institutions.