How to avoid unnecessary tax expenses

It is a common practice among Filipinos to consult a doctor or go to the hospital only when the disease has reached a serious stage. This sometimes puts the patient at risk of being diagnosed only when the illness already requires intensive care, or worse, when it is too late to save the patient’s life.

This same human behavior, unfortunately, is mirrored in the corporate behavior of most small and medium companies, and even among some large corporations in the Philippines, in dealing with their tax problems. Many companies approach tax consultants, like our firm, only when the tax problem has already been diagnosed by the Bureau of Internal Revenue (BIR) and is already in the intensive care stage. Under this dire situation, the company usually ends up paying more because, aside from the deficiency basic tax, there is also a 25 percent or 50 percent surcharge, 20 percent interest and compromise penalties, all charged to the taxpayer. These items come unnecessarily as unbudgeted expenses for the company. If not properly handled, this tax issue will certainly affect the financial condition, and even the operation and reputation of the company.

So, how do you avoid these unnecessary tax expenses? Are there ways to prevent huge amounts of tax assessments?

Avoidance of unnecessary tax expenses requires drilling down to the causes of the tax problem. We diagnosed three common causes and, the good news is, there are curative measures.

Accounting records not in order. The condition of the accounting records (i.e. not updated, not in order, etc.) is the usual culprit in many tax problems. A classic example is a company that has been assessed by the BIR because the purchases declared in the tax returns did not match the purchases journal and supporting documents. We all know these items should tie up if done by a good bookkeeper.

One of the advocacies of our firm is to educate companies about the importance of keeping updated and accurate financial records. The importance of proper bookkeeping has been discussed thoroughly in previous editions of this column. Among others, the company’s books become the basis of BIR examinations.

Lack of tax knowledge. Some simple mistakes can be very costly. Most of these mistakes could have been avoided by training the accountant about the basic tax compliance rules. This is more easily achieved by sending him regularly to attend tax seminars for continuing education. For example, withholding on certain income payments such as rental and interest on foreign loans is basic tax compliance, but could be missed if the accountant lacked basic tax knowledge. This failure to withhold will expose the company to two types of tax assessments immediately: deficiency withholding tax and income tax for non-deductibility of the expense.

Companies, especially with voluminous and/or complex transactions, should continuously and consciously send their accountants or accounting personnel to tax seminars. Another way is to hire an internal tax accountant. In the absence of a tax accountant, the company may outsource its tax functions, including the preparation and filing of tax returns. For new contracts and business arrangements, or even significant non-recurring transactions, the company may consult a tax expert to determine the tax implications, preferably prior to securing the contract or commencing the arrangement. In this way, the management will be guided on the tax-efficient structure of the said transaction. Knowing the tax obligations ahead will also avoid nonpayment or late payment of the tax.

Lack of appropriate business processes. Sometimes the accounting system is not properly designed to capture transactions promptly. A good example is when the board of directors declares a cash dividend but the corporate secretary fails to communicate that to the accounting department. Thus, even if the accountant knows that cash dividends to resident citizen stockholders are subject to 10 percent final withholding tax on the date it is payable, the tax may not be remitted on time because the accountant only learns of the dividends when he receives the payment instructions, which in this case are likely to come late. Consequently, the company incurs the 25 percent penalty for late filing and payment, 20 percent annual interest and compromise penalties.

Many unnecessary penalties incurred by companies could have been avoided if the transactions with accounting and tax implications were provided immediately to the accounting department. Such simple business processes could have saved millions from unnecessary tax expenses.

Going back to my analogy about human health, in as much as people need to undergo regular diagnostic tests for early detection of any sickness and to prevent it from worsening, companies also have to undergo regular tax compliance reviews to correct any wrong tax practices, avoid huge amounts of tax assessments, and implement more tax-efficient arrangements. As the saying goes, “prevention is better than cure.”

Wendell D. Gahinhin is a Partner, Tax & Outsourcing, Cebu and Davao Branches of P&A Grant Thornton. P&A Grant Thornton is one of the leading Audit, Tax, Advisory, and Outsourcing firm in the Philippines, with 20 Partners and over 700 staff members.