We are about to end the year in a few days now. For some, this means vacation and time to be with their families. For us accountants, this means closing the books and finalizing those eternal adjusting journal entries. Making these adjustments are important to come up with accurate figures so the business owners can make informed business decisions. But ensuring that the figures make sense in the eyes of tax authorities is another story.
So, we have listed down the top 5 mistakes we usually find during year-end tax compliance so you can avoid them:
1. Unreconciled gross compensation in BIR form 1604CF and the compensation per financial statements
Gross compensation declared in BIR Form 1604CF (and the total of compensation in BIR form 1601c for 12 months) should tie-up with salaries and wages in the financial statements. Any discrepancy might be construed by the Bureau of Internal Revenue (BIR) as deficiency withholding tax on compensation. So make sure to have these reconciled to avoid possible tax exposure during BIR audit.
2. Unreconciled expenses subject to Expanded withholding tax (EWT) declared in BIR form 1601EQ and the expenses in the financial statements
The expenses claimed in the financial statements must tie-up with the expenses subjected to withholding tax in BIR Form 1601EQ. The most common expenses that are subject to EWT are rent expense (subject to 5% EWT), professional fees (subject to 5%/10% EWT for individuals, and 10%/15% if partnerships/corporation except for general professional partnerships). You must also check if you are a Top withholding agent (TWA) since TWAs are required to withhold 1% on purchases of goods and 2% on purchases of services. So, make sure to check the expenses you claim in your financial statements and cross-refer them to the expenses declared in 1601EQ (or in the Alphalist of Payees) to avoid exposure to deficiency withholding tax in case of BIR audit.
3. “If the revenues declared in my financial statements tie-up with the revenues in Value-added tax (VAT) return, then I’m safe, right?” WRONG!
This is one of the most common mistakes we see when we review our clients’ books and taxes. The revenues in the financial statements may not necessarily tie-up with the revenues in the VAT return, especially for a service-oriented business. Remember that for service-oriented businesses, VAT is based on collections, while the financial statements are prepared using the accrual method of accounting (collected and not yet collected).
We have seen huge penalties imposed during the BIR audit because of the simple discrepancy between revenues per VAT return and financial statements. So make sure to have these two reconciled.
4. Unutilized Creditable withholding tax certificates (CWTs) – BIR From 2307
CWTs are very important for every business because we can use CWT Certificates to reduce our income tax due. We’ve seen businesses shelling out huge amounts of money to pay their income tax dues only to find out that they have CWTs to cover their income taxes. Make sure to obtain your CWTs from your customers and use it when preparing your income tax returns.
5. Unused tax assets such as NOLCO, MCIT and Excess input VAT
Again, we have seen businesses paying income tax and VAT, only to find out, right after we reviewed their books and taxes, that they have enough credits to cover their liabilities. Here are the tax assets you can use:
NOLCO or Net operating loss carry-over can be used to reduce your taxable income (within three years).
MCIT or Minimum corporate income tax payments can be used to reduce your income tax due (within three years).
Excess input VAT can be carried over to offset against output tax due.
5% Final withholding VAT can be used to reduce your VAT due. (This is applicable for Companies with government transactions).
These are the top 5 we have noted based on our experience. There might be other areas you need to look into that is peculiar to your industry for tax compliance. If you have questions, feel free to get in touch with us at firstname.lastname@example.org, (02) 7218 0486, 0917 865 9144 or by filling up the contact form below and we’ll reply within one business day.
Disclaimer: The contents of this article may become outdated because of changes in the rules and regulations. It does not substitute the need for professional advice.