Extended period to keep accounting records

By Raymond M. Gutib, 10 October 2013

The benefits of keeping accurate and orderly financial records cannot be overemphasized. Proper record management allows transparency in the affairs of the business, keeping tabs on revenue and expenses. For tax purposes, good record keeping helps in resolving audit investigations, avoiding the imposition of penalties and fines, and ensuring that the right taxes are paid at the right time.

While maintaining records on file is essential to good business, the frequent question is with regard to the retention period. How long must taxpayers keep accounting records on file? While it may be prudent to keep the records for a considerable time, constraining factors may demand otherwise. In maintaining voluminous records accumulated through time, ample space is required for storage. This may translate to additional storage costs. Moreover, the incessant build up of paper piles poses health and safety hazards due to fire and pest infestations.Under the Tax Code, taxpayers must preserve their accounting records within the three-year period that the Bureau of Internal Revenue (BIR) is allowed to assess taxpayers for internal revenue taxes. The three-year period is counted from the last day prescribed by law for the filing of the return, or if filed beyond the prescribed period, from the day the return is actually filed. The alignment of the records retention period (three years) with the three-year assessment period allows the BIR to exercise its duty to check on taxpayer’s compliance and assess deficiency taxes, as appropriate.

By way of exception, the three-year assessment period may be extended under the following conditions:

  • Where the BIR Commissioner and the taxpayer have agreed in writing to extend the assessment period past the three-year period provided by law (this agreement is documented by the parties through the execution of a waiver of the statute of limitations); or
  • In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, in which case, the assessment period would be any time within ten (10) years after the discovery of the falsity, fraud or omission.Ordinarily, in consideration of the retention period as discussed above, companies would keep their documents and books for an average period of three to five years, unless there is already an ongoing investigation. Based solely on the requirements of the law, in the absence of a BIR audit or fraud, taxpayers should be able to dispose of accounting records after the three-year assessment period has passed.

Quite recently, however, the BIR has gone beyond the three-year retention rule when it issued Revenue Regulations (RR) No. 17-2013. In recognition of the fact that, in certain cases, the BIR’s right to assess deficiency taxes may extend beyond the regular three-year period, the BIR deemed it more beneficial for both the government and taxpayers if records are kept well beyond the three-year retention period required under the law. Under the RR, all taxpayers are now required to preserve their books of accounts, including subsidiary books and other accounting records for a period of 10 years.From the view of this author, the foregoing mandate may appear as a warning to all taxpayers to prepare for a prolonged tax examination process, and quite possibly, findings leading to tax fraud cases.

Interestingly, the RR also cites existing laws relating to the exchange of third-party information for use in possible tax investigations. While we laud the BIR’s campaign to prosecute tax evaders, it may be too much to undertake such measures at the expense of other taxpayers who file tax returns and pay proper taxes in good faith. It could be in the form of criminal charges, civil penalties, deficiency taxes or simply additional costs for storage and warehouse considering that all records must be kept at all times at the taxpayer’s place of business. For some taxpayers, this may already account for a large chunk of their hard-earned revenue.

Ideally, the solution is to have an efficient tax administration system that would allow the swift disposition of tax cases, following the rules of due process, within the normal three-year period such that taxpayers’ records need not be preserved for a longer period. While an efficient tax collection system remains an idealistic notion for now, perhaps the BIR could consider amending this new retention requirement such that taxpayers would only be required to keep accounting records within the three-year assessment window, unless there is already an ongoing investigation, in which case the retention period would be extended until the investigation comes to an end. This would be in keeping with what the Tax Code actually requires and would not restrict the BIR from being able to collect the appropriate deficiency tax from erring taxpayers.

Just last week, taxpayers welcomed a clarification by the BIR as regards the prospective application of an onerous RR issued last July. In Revenue Memorandum Circular No. 63-2013, the BIR confirmed that RR No. 12-2013, which disallows income tax deductions notwithstanding payment of deficiency withholding tax at the time of tax audit/investigation, shall only apply to tax investigations for taxable year 2013 (and presumably, onwards). Somehow, this clarification renews our hope that our tax petitions are not left unheard.

This author hopes that the BIR will again exercise the same prudence and revisit its new retention rule, and perhaps come up with another clarificatory issuance that does not put much burden on taxpayers.

The author is a manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network. 

Views or opinions presented 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 such article; the author will be personally liable for any consequent damages or other liabilities.