Have you been audited by the BIR and your claimed expense was disallowed for improper or inadequate substantiation? Have you applied for a tax refund, and were denied due to an erroneous invoice or receipt? This is not unusual given the state of our tax documentation and compliance. With the advent of the government requirement to use electronic receipts and invoices, we can only hope that these long-running challenges become a thing of the past.
PROPER INVOICING VIS-À-VIS TAX COMPLIANCETo claim a tax deduction or refund, a taxpayer must competently establish the factual and documentary bases of the claim. Section 34(A)[b] of the Tax Code, as amended, expressly requires that no deduction from gross income may be allowed unless the taxpayer can substantiate with sufficient evidence, such as official receipts or other adequate records. This is further emphasized in Sec. 237(A) of the same Code which requires the issuance of duly registered receipts or sale or commercial invoices at the point of sale or transfer of merchandise or service. While the Tax Code allows for other adequate records in support of claimed deductions, the BIR usually relies on invoices or official receipts especially as regards VAT transactions. Hence, dispute about proper substantiation usually involve the official invoice or receipt.
For years, both the BIR and taxpayers struggled to ensure and secure the appropriate documentation to support claims for income and expenses. Despite the ingenuity on both ends in producing, keeping, and retaining the appropriate invoice or receipt, issues continue to hound most taxpayers. While the BIR may rely on the “best evidence rule,” Section 228 of the Tax Code requires factual support and verification as the basis of an assessment. This situation is brought about by the elapsed time between tax assessments and the transaction being examined.
TRAIN LAW AND THE E-RECEIPTING/INVOICING REQUIREMENTTo address issues on compliance and the transparency of business transactions, Section 237 of Republic Act 10963 or the TRAIN Law, introduced the Electronic Invoicing System (EIS) requiring taxpayers in e-commerce, large taxpayers, and exporters within five years from the effectivity of the law, to electronically issue their invoices/receipts, as well as report their sales data to the BIR at the point of sale. It bears noting however, that even if not enumerated as mandatorily covered under the EIS, taxpayers may voluntarily register in lieu of manual receipts.
In its statements, the Department of Finance (DoF) targets the full implementation of this provision by January 2023. The first contingent tapped to undergo the change to e-invoicing is the 100 largest taxpayers.
E-INVOICING SITUATIONER IN THE ASIA PACIFICEIS is not novel in the Asia Pacific. In 2011, South Korea introduced tax electronic invoicing (e-Tax), making it mandatory for most taxpayers in 2014. Under e-Tax, VAT-registered businesses are required to submit their invoices to the tax authorities through the National Tax Service (NTS) either by (1) uploading invoices via the free portal provided by the tax office; (2) using an outsourced, licensed e-invoice service provider; (3) creating their own e-invoices via their accounting system with a digital certificate; (4) using the AVRS telephone system; or, (5) submitting in person at a local tax office. Businesses wishing to issue tax invoices must first obtain a digital certificate. To issue the e-Tax invoice, they will need their customers’ tax registration certificate for matching the invoice to a customer. Thereafter, the tax invoice is sent to the customer by e-mail.
We need to know about South Korea’s e-Tax system because the DoF has repeatedly and consistently referred to it as a model system. In his March 2016 World Bank-Commissioned study, “Can Electronic Tax Invoicing Improve Tax Compliance? A Case Study of the Republic of Korea’s Electronic Tax Invoicing for Value-Added Tax,” Hyung Chul Lee concluded that South Korea’s e-Tax has had a significant positive effect on matters of transparency and the reduction of tax evasion.
Other countries in the region like Vietnam, Taiwan, and Thailand are also gearing for e-invoicing.
What’s next for the DoF, BIR?
EIS in the Philippines is said to include an invoice report sent to the government’s central platform after invoices have been sent to final clients. Therefore, it is like South Korea’s invoice reporting system, which is known as Continuous Transaction Control. In fact, the Korean International Cooperation Agency (KOICA) helped the Philippines to develop its electronic invoice reporting system. The electronic invoice includes sales invoices, receipts, debit and credit notes and other similar accounting documents issued through the internet.
To date, the DoF has yet to issue the relevant revenue regulations and circulars on e-invoicing/receipting. May the rules be carefully designed to minimize the taxpayers’ burden. Specifically, DoF should take due care to make available facilities and avenues through which businesses can easily issue and transfer e-invoice/receipts to their customers for free or at very low cost. The BIR should also consider scrapping paper-based invoicing, separate submission of summary reports/alphalist, and invoice storing requirements. EIS presupposes real-time access to tax information and the capability to detect fraud through electronic systems. Hence, BIR should also recalibrate its assessment procedure, which costs taxpayers time and effort.
While the DoF initially focuses on the top 100 corporations, it should also consider the cost of implementation, especially for MSMEs.
The DoF and BIR should focus on reducing compliance costs by ensuring close collaboration among the tax authorities, the IT governance body on electronic data interchange, and private IT solutions providers, with a view to improving taxpayer services to build and accumulate trust in tax administration. Otherwise, it will just breed taxpayer resistance to reform or encourage a preference for maintaining the informal-economy status quo. Tax authorities must also reward taxpayers for compliance and cooperation with compulsory e-invoicing in the form of improved tax services and cost reduction. If a compulsory e-invoicing system produces tangible benefits to taxpayers, eliminating the uncertainty of counterparty acceptance, it will firmly take root in the system (Lee, 2016).
As 2023 approaches, the DoF and BIR should roll out tax information and guidelines for all stakeholders.
TAXPAYERS: PREPARATION IS THE KEYRegardless of how daunting it may be, taxpayers must accept the fact that this process is mandatory under the law. Therefore, we can expect the new Finance Secretary or BIR Commissioner to implement it.
The COVID crisis has been a game-changer, showing us the importance of digital transformation. Unfortunately, digitalization is neither a walk in the park nor cheap. Hence, preparation is key if taxpayers are to avoid costly and unnecessary implementation bottlenecks. You may consider embarking on the following initial steps:
1. Evaluate existing tax practices — an objective examination of the company’s compliance with existing rules and regulations will help provide guidance and point out areas for improvement.
2. Assess your capacity to go online and electronic, including your readiness to adhere to the Data Privacy Act (DPA).
3. Stay updated on recent DoF and BIR issuances providing guidance in the implementation of EIS. Note that implementation is likely to come in phases. New guidelines may seem inapplicable to you at first, but the time will come when it will affect your business.
4. Talk to your tax consultants and IT solution providers.
5. Ensure that your EIS provider is duly accredited or has experience.
While the government may be on wait-and-see mode in the next few months as the leadership changes, it is better to act now than be sorry later. As taxpayers, let us keep an open mind and stay abreast of the latest developments in tax compliance.
Just as esports are now part of the Southeast Asian Games, it is high time that we also level up our tax system through the proper and careful implementation of EIS.
Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
Kim M. Aranas is a senior manager of Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.