A matter of record By Wilfredo U. Villanueva

Records management programs are generally not an organization’s priority as these usually do not generate income. Policies and practices on how records are kept and handled also vary among companies. In a large enterprise, documents are usually stored separately according to division or section, e.g., Finance, Corporate Planning, Legal, Marketing, and Sales. In some multinational companies, there is an established centralized records management group that not only oversees the indexing, storage and retrieval of files, but safeguards vital information about the organization.

A well-organized records management system contributes to a company’s overall efficiency and productivity, and supports better management decisions. With the recent issuance by the Bureau of Internal Revenue (BIR) of Revenue Regulations (RR) No. 17-2013 extending the period for preserving books of accounts and other accounting records, taxpayers now have all the more reason to come up with an effective records management system that not only enhances service and profit but also minimizes litigation and reputational risks.

RR No. 17-2013 now requires taxpayers to preserve all their books of accounts and accounting records for a period of 10 years. Previously, taxpayers were only mandated to do so until the lapse of the 3-year period within which the BIR can make an assessment; or, if there is a pending tax audit investigation, until such examination has been duly terminated; or upon expiration of the waiver of the statute of limitations that the taxpayer issued in favor of the BIR. Books of accounts include subsidiary books and other accounting records such as invoices, receipts, vouchers, and returns, and other source documents supporting the entries in the books of accounts.

According to the BIR, the longer preservation period will allow the bureau access to the taxpayer’s accounting records should it be investigated on the basis of falsity, fraud or omission in its tax returns. Under Section 222 of the Tax Code, “in case of a false or fraudulent return with intent to evade tax or failure to file a return, the tax may be assessed or proceeding in court for collection of such tax may be filed without assessment, at any time within 10 years after the discovery of the falsity, fraud or omission.” This implies that there may have been instances when the BIR could not pursue a fraud investigation because supporting documents had already been disposed of.

Aside from pursuing “extraordinary audits and assessments,” the extended retention period also gives the BIR more leeway in verifying the books of accounts and other pertinent records of tax-exempt organizations and grantees of tax incentives.
Notably, the independent Certified Public Accountant (CPA) who audited the records and certified the financial statements of the taxpayer is equally responsible to preserve copies of the audited and certified financial statements for 10 years from the due date of filing the annual income tax return, unless a longer retention period is required under the Tax Code or other relevant laws.
While the record-keeping requirements have long existed in our tax books, this is the first time that it has extended the retention period to 10 years, perhaps consistent with its objective to strengthen its enforcement drive.

The new requirement is even more stringent compared with prevailing statutes. Section 52.1-1 of the Securities Regulations Code, for instance, requires securities brokers to maintain certain books and records of their transactions and customers for a period of not less than 6 years, the first 2 years in a place easily accessible for examination by the Securities and Exchange Commission. The Anti-Money Laundering Law requires that records of covered transactions be maintained and safely stored for 5 years from the date of the accounts or transaction.

Meanwhile, the International Organization for Standardization (ISO) does not mandate a minimum period for records retention, but allows companies to come up with their own standards or policies. They must also ensure that such standards are maintained within the organization.

As far as BIR is concerned, books of accounts are to be kept “intact, unaltered and unmutilated” to ensure that all taxes due to the government may be readily and accurately ascertained and determined any time of the year. However, what does this new requirement mean for taxpayers?

First, this will mean additional cost. While RR No. 9-09 allows taxpayers to maintain electronic records, there are strict requirements, including securing BIR approval, before e-records can be honored during a tax audit or investigation. Without the BIR approval for the conversion of hard documents to microfilm or other storage-only imaging systems, tax examiners can only rely on hard copies of original documents. With manual documents as acceptable form of evidence, it is therefore necessary for taxpayers to designate an area within its premises to store its voluminous original records. If space is an issue, then an offsite warehouse may have to be leased to store these documents. Additional measures may also need to be undertaken, such as fire-proofing, pest control and security.

Second, aside from storage, considerable manpower investment may need to be made for the upkeep of the records. Ideally, the point person must be capable not only of analyzing and putting in order the current manual recordkeeping system, but also knowledgeable in using new technology to upgrade the organization’s system.

Third, there is a need to establish an improved system of accountability. Maintaining corporate records should be seen as not just the responsibility of the records group or division, but of the whole enterprise. Records must be kept orderly despite the separation of employees who have these documents in custody. If this is fostered within the organization, then better compliance can be expected.

Indeed, keeping a company’s records for such a long time is no easy task. We have, in fact, seen companies who have started to relax or, at the very least, use technology for their record-keeping policies and practices precisely because of issues on proper storage. So one might ask whether this new requirement of the BIR is a necessary burden. The primary reason for extending the retention period to 10 years seems to be in connection with the ongoing campaign of the BIR to weed out tax cheats. This is, of course, a commendable effort, but then, as some quarters are now saying, it seems to imply that all taxpayers are suspected of unlawfully depriving the government of much-needed tax revenue. They ask: why does everyone need to be subjected to this burden?

A company’s files embody its institutional memory, an asset that, though irreplaceable, is often overlooked. Management decisions are made based on the numerous transactions a company makes daily. Thus, in any case, while the new retention rules may prove to be tedious, time-consuming, and expensive to taxpayers, this may also be seen as an opportunity for organizations to invest in a reliable records management system and professionals crucial to safeguarding this institutional memory.

Wilfredo U. Villanueva is the Deputy Head of the Tax Division of SGV & Co.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.