By Marion D. Castañeda, 13 August 2014
IN THIS day and age, technology plays an instrumental, if not essential role in our lives. Before the dawn of the digital age, written communication was mainly delivered via postal mail or transmitted through telegram, photographs were recorded on rolls of film, and music was played using vinyl records and, later on, cassette tapes. As technologies have advanced, these three have mostly been replaced by e-mail, diminutive memory cards, and compact discs respectively (although arguably, the last one is now being replaced by online streaming services where music is played over the internet).
It appears that the Bureau of Internal Revenue (BIR) recognizes the positive impact of and the need to keep up with modern technology. In a recently issued amendatory regulation, the BIR amended its rules regarding the preservation of books of accounts and other accounting records.
To recall, less than a year ago, the BIR issued Revenue Regulations (RR) No. 17-2013 requiring taxpayers to preserve their books of accounts, including subsidiary books and other accounting records, for a period of ten years counting either from the deadline to file the return or, if filed after the deadline, from the date of the actual filing of the return. Said regulation also requires the independent Certified Public Accountant (CPA) who audited the records and certified the financial statements of the taxpayer to maintain and preserve copies of the audited and certified financial statements for the same 10-year period.
Under the recently issued RR No. 5-2014, the above requirements still remain. However, after a period of five years reckoned from the filing deadline or date of actual filing of the return, whichever is later, taxpayers now have the option to retain only an electronic copy of the books of accounts, subsidiary books and other accounting records subject to the maintenance of an Electronic Storage System (ESS). This new RR sets out the requirements of an ESS, which are as follows:
• Reasonable controls to ensure the integrity, accuracy, and reliability of the ESS;
• Reasonable controls to prevent and detect unauthorized creation, addition, alteration, deletion or deterioration of electronically stored documents via the ESS;
• An inspection and quality assurance program evidenced by regular evaluations of the ESS;
• A retrieval system that includes an indexing system; and
• The ability to reproduce legible and readable hard copies of the electronically stored documents via the ESS.
If the taxpayer’s ESS fails to meet these requirements, the taxpayer shall be required to maintain and preserve the original hardcopy of its books of accounts, subsidiary books and other accounting records for the entire duration of the ten-year retention period.
To ensure compliance with the above requirements, the RR authorizes the Revenue District Office (RDO) having jurisdiction over the taxpayer to periodically initiate tests of a taxpayer’s ESS. Such tests may include evaluation and review of: (a) the taxpayer’s equipment and software (by actual use of the same); (b) the procedures used by the taxpayer to prepare, record, transfer index, store, preserve, retrieve and reproduce the documents stored using the ESS; and (c) the internal controls, security procedures and documentation associated with the taxpayer’s ESS. According to the RR, these tests do not fall under the purview of “examination” or “inspection” of books and records as contemplated under the Tax Code since they do not involve a determination of tax liability.
After performing the above tests, the authorized revenue examiner has three days to inform the taxpayer of the results of the tests. Should there be any adverse findings, the taxpayer may appeal to the Regional Director within ten days from receipt of said findings. Upon submission of the appeal, the Regional Director shall resolve the same within 30 days.
The ten-year retention period requirement on the part of the independent CPA has also been relaxed under the revised rules. The external auditor can now opt to retain only electronic copies of the audited and certified financial statements. However, the RR also extends this retention requirement to the independent CPA’s audit working papers. Notably, this exceeds the required retention period of audit documentation under auditing standards, which is only for a period of five years from the date of the auditor’s report. This author also cannot help but wonder at the rationale and permissibility of the inclusion of audit working papers in the retention requirement, considering that these working papers are the property of the independent CPA. It does not form part of the accounting records of the audited company which may be subject to examination by the BIR.
Many will welcome this new RR since it can be more practical and sound to keep years-worth of documents electronically, as opposed to storing years-worth of documents in hardcopy, which can fade away over time or be destroyed in unfortunate circumstances. In terms of cost-effectiveness, taxpayers have to evaluate whether retaining an ESS that meets the BIR’s requirements will be cheaper in the long run. Certainly the indexing requirements of an ESS may help ease the retrieval process during a tax audit which could help mitigate administrative costs.
The BIR deserves credit for reconsidering its initial imposition and perhaps heeding the pleas of taxpayers in terms of its previous retention requirements. That said, the issue of whether a ten-year retention period is in keeping with what the Tax Code requires, still remains. Taxation, in itself, is already a big burden for taxpayers. Compliance with tax rules and regulations should not be more burdensome than the taxes themselves.
Marion D. Castañeda is a senior consultant at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.