Traditionally, the Bureau of Internal Revenue (BIR) inventory list is associated with taxpayers in manufacturing and retail businesses, where inventories form part of the cost of goods sold, which is a critical component of major deductions in the income tax return.
However, when BIR issued the Revenue Memorandum Circular (RMC) 57-2015, it significantly broadened the scope, requiring other types of businesses, including those in the real estate and construction industries, to submit an inventory list along with the schedules.
Under the RMC, it provides that all businesses with “tangible asset-rich” balance sheets must submit the annual inventory list along with schedules in the format prescribed by the BIR. Accordingly, a tangible asset-rich balance sheet is defined for businesses where at least 50% of the total assets are composed of their working capital, such as accounts receivable and inventory. This requirement has consequently brought real estate and construction businesses into the fold of compliance if they meet the criteria. If qualified, they must submit the required inventory list and schedule within 30 days after the close of a taxable year.
Moreover, the preparation of the required list and schedules for these industries must conform with the prescribed format, specifically dedicated to real estate and construction, under Annexes B and C of RMC 8-2023, respectively. Non-compliance with these formats will result in the submission being considered as not received by the BIR and subject to penalties.
If we look into the aforementioned annexes, it is clear that the information needed is significantly more data-intensive, as compared to a typical manufacturing or retail business, where taxpayers simply need to report basic details such as the inventory on hand, the valuation method, its unit price, quantity in stock, and total cost. For taxpayers involved with real estate, there is a detailed disclosure of the individual projects involved, contracted sales, and movement of the beginning and ending accounts receivables.
Similarly, for the construction business, taxpayers must provide the detailed information, such as client names per project, the contracted price, the movement of the beginning and ending accounts receivables, billings and collections for the year, the estimated gross profit, the percentage of completion, among others.
Based on my work experience with these industries, gathering and preparing the required information for the list and schedule, while ensuring accuracy, could pose significant challenges, especially when aiming to meet the deadline within the 30th day after the close of the taxable year.
Real estate and construction companies typically have numerous transactions and projects, making it difficult to accurately account for the transactions with clients, track the movement of their accounts receivables, and reconcile their cash collections. Additionally, for construction companies, obtaining the percentage-of-completion reports from the engineers on time is critical for calculating the estimated project costs and profits as part of the schedule. Thus, we cannot discount that preparing and organizing the required information into the required BIR format would really require significant time and effort.
Hence, it is important that these taxpayers should employ a computerized accounting system capable of generating the necessary data and timely report preparation. Additionally, effective coordination among the accounting, operations, and procurement departments is essential to prevent any miscommunication or inconsistent data entry, which could lead to errors and delays in compliance.
Another challenge is that the information available during the preparation and submission to the BIR on January 30 may be based on the unaudited account balances. As such, the reported figures in the schedules could still change due to adjustments made during the finalization of the financial statements (FS). These adjustments may be attributed to client’s adjustments (CAJE), external auditor’s adjustments (PAJE), or a combination of both, aimed at correcting the account balances.
In this light, it is crucial for taxpayers to assess the impact of any changes. If the adjustments are significant, it would be prudent for the taxpayer to refile and amend the previously submitted inventory list and schedule to the BIR. The main goal is to ensure that the submitted inventory list and schedules are accurate and would tie up with the amount in the audited FS and Annual Income Tax Return (ITR) since the BIR uses this information as one of their audit tools during their tax investigation.
Normally, the BIR uses the inventory list and its schedule to identify any discrepancies that might indicate under-declaration of revenue when the BIR cross-checks the amount in the AFS and ITR. It may also include procedures of recalculating and analyzing the relationship between the accounts receivable movements, cash collections, gross profit recognized in the previous and among others. Any discrepancies identified must be adequately explained by the taxpayer. Otherwise, failure to provide a satisfactory explanation could result in the imposition of deficiency taxes.
It is worth noting that some taxpayers choose to pay the administrative penalties of P25,000 for failing to comply with the submission of the inventory list and schedule, as the fine may be relatively low compared to the cost and/or difficulty of preparing the report. However, these taxpayers should be cautious, as the BIR may view such non-compliance as willful. If deemed intentional, this act could be grounds for a mandatory tax audit.
In conclusion, while complying with BIR inventory list and schedule submission requirements may be cumbersome, particularly for the real estate and construction business, taxpayers should explore strategies to automate record-keeping and monitoring processes to efficiently capture the necessary information. Beyond fulfilling this annual statutory submission, the preparation of the list and schedule should offer a valuable opportunity to pinpoint areas for improvements and enhance transparency, ultimately fostering a sustained growth of the business.
As published in BusinessWorld, dated 14 January 2024
