The persistence of manual bookkeeping

Taxwise or Otherwise

By Revelino R. Rabaja, 12 March 2015

EVEN WITH the latest technology at our fingertips, many businesses, particularly small- and medium-sized enterprises (SMEs), may still maintain manual books of account.

It must be noted that in practice, actual manual recording in the books is no longer done since accounting records are usually maintained and generated in some sort of electronic format,like Excel. Printouts of the accounting records are simply pasted onto the registered manual books of account and are then used to prepare the company’s financial statements. These same books are also presented to external auditors which the latter use for their audit.

The issue is that it remains unclear whether this practice is considered substantially in compliance with the bookkeeping requirements of the Bureau of Internal Revenue (BIR) under Revenue Regulations (RR) V-I or RR V-1.

As one of the oldest known revenue regulations still generally applicable today, the “Bookkeeping Regulations” embodied in RR V-1 were issued in 1947 when the Philippines was still recovering from the devastation of World War II. They govern the keeping of books of account, records, registers, as well as, issuance of invoices, receipts, tickets and other supporting papers and documents by persons subject to internal revenue taxes.

Understandably, at that time, manual books of account were the only means available to taxpayers for recording business transactions.

To keep up with the changing times, various regulations and directives amending RR V-1 were subsequently issued, although for several decades, manual recording of entries remained an acceptable mode of maintaining accounting records.

In 1982, in response to the clamor of multinational companies doing business in the Philippines to allow them to adopt the global accounting system of their foreign parent companies, the BIR issued Revenue Memorandum Circular (RMC) No. 13-82 which authorized the use of loose leaf books of accounts, records, invoices and receipts for recording business transactions.

Soon after though, accountants and computer programmers recognized a downside to storing data: around 2000, when “millennium bug” concerns were at their peak, the need for tedious reconciliation put businesses to the test. Perhaps the challenge posed by the electronic storage of data left taxpayers thinking that manual recording remained a viable and safe option for keeping accounting records, though they kept looking for a more efficient way to do it.

Whatever the doubts, the adoption of information and communications technology (ICT) forges ahead. To promote the universal use of electronic transactions in the public sector, Republic Act (RA) 8792, otherwise known as the Electronic Commerce Act of 2000, was passed, mandating that all government offices, including the BIR, perform government functions by electronic means.

In August 2006, the Department of Finance (DoF) issued Revenue Regulations (RR) No. 16-2006, which laid down guidelines for the submission of books of account and other records in electronic format, specifying among others:

• the manner and format in which such computerized accounting books/records shall be created, retained, filed and issued;
• when and how such computerized accounting books/records have to be signed or authenticated;
• the appropriate control processes and procedures to ensure integrity, security and confidentiality of computerized accounting books/records;
• other attributes required of computerized accounting books/records; and
• the full or limited use of the documents and papers for compliance with the requirements of the BIR.

It’s worth noting that in the regular audit of taxpayers’ books, Revenue District Offices (RDOs) refuse to accept accounting records where printouts of electronically processed entries are pasted on the manual books of accounts, and still demand the presentation of accomplished manual books of account with manually written accounting entries. At times, taxpayers would prefer to pay the penalty instead of engaging a bookkeeper to update the manual books of account since this may take time and may cost them more.

SMEs keeping manual books of account may not be able to afford pricey software systems that handle accounting functions. In order to keep up with the changing times and maintain efficiency, they often use simple computer programs such as Excel spreadsheets to record and store their transactions. In managing sizable chunks of data, manual jotting down of entries no longer proves to be a practical and effective mode of bookkeeping.

Recently, the BIR ordered the mandatory implementation of the Electronic BIR Forms or eBIRForms by issuing RR No. 6-2014. The eBIRForms system was developed to provide taxpayers, particularly the Non-Electronic Filing and Payment System (Non-eFPS) filers, with accessible and convenient service through easy preparation and filing of tax returns. The use of eBIRForms improves the BIR’s tax return data capture and storage, thereby enhancing efficiency and accuracy in the filing of tax returns. The efforts of the BIR to embrace technology and continuously look into efficient measures for easy preparation and filing of tax returns have been commendable. Will freeing taxpayers from having to keep manual books of account follow?

Given the constant influx of technology in business, the BIR should be flexible and consider computer-generated spreadsheets as compliant with RMC 13-82. In essence, computer-generated printouts function in the same manner as manual or registered loose leaf records, thus conforming to the BIR’s objectives of efficiency and accuracy.

It would be timely for the BIR to issue a clarificatory circular allowing taxpayers to use computer-generated printouts as an acceptable method of recording entries in the manual books of account. Such a circular could also apply retroactively to cover Excel-formatted accounting records submitted to the BIR during tax audits of the past taxable years.

The BIR could consider imposing a one-time penalty for those years that books were not manually filled but fully supported by electronic spreadsheet printouts -- a compromise that would be less onerous for SMEs.

Revelino R. Rabaja is a senior manager at the tax services department of Isla Lipana & Co., the Philippine member firm of PricewaterhouseCoopers global network.

A matter of record

LAST week, we wrote about the new Bureau of Internal Revenue (BIR) rule — Revenue Regulations (RR) No. 17-2013 — which extended the period for the preservation of a taxpayer’s books of accounts and other accounting records to 10 years (from the original three years, subject to certain exceptions). We said that 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 its institutional memory.

This week, we continue with our analysis of RR 17-2013 and look at the records preservation options that taxpayers may wish to consider.

By extending the records retention period to 10 years without any exceptions, it appears that the main consideration for the extended period is to complement the BIR’s 10-year prescriptive period within which to institute collection proceedings in the case of fraud, falsity or omission in the tax returns. This, notwithstanding the well-established doctrine that fraud is never presumed but must be proven, not to mention the fact that the 10-year prescriptive period under Section 222 of Tax Code legally starts to run only after the BIR’s discovery of the fraud, falsity or omission.

It is important for the taxpayers to be knowledgeable about and always comply with existing tax rules and regulations and pay the correct amount of taxes in order to avoid being subjected to a fraud investigation.

Being subjected to a regular BIR audit or examination is already a tedious process, more so in the case of a fraud audit or investigation. A fraud examination likewise triggers reputational risks to an enterprise. Hence, effective and efficient records management, personnel who are competent in tax matters, and records that are evidently compliant with existing tax rules and regulations, will significantly ease and expedite the process.

Arguably, the biggest issue that taxpayers will have to contend with in light of RR 17-2013 is storage and the huge cost that it could entail. Taxpayers may have to tweak their records management systems to better manage the cost while conforming to the BIR rule.

Keeping books of accounts and records in manual or hard copy formats spanning 10 years will require a relatively large physical space for storage. It may be high time for taxpayers to evaluate the costs and benefits of keeping books of accounts and records entirely in electronic format.

Large taxpayers are now required to use and register a computerized accounting system, but there are still many who keep manual or hard copies of other accounting records. In a regular BIR audit, examiners require the submission of printed originals of documents for review. While electronic copies of books of accounts may be inspected during a field audit, proof of transactions such as voucher registers and supporting invoices and receipts, contracts, and the like have to be turned over for BIR perusal.

Under Republic Act No. 8792 or the E-Commerce Act of 2000, an electronic document shall be the functional equivalent of a written document under existing laws for evidentiary purposes. The law specifically provides that electronic documents shall have the “legal effect, validity or enforceability as any other document or legal writing.” However, full faith in electronic documents has yet to be adopted by the BIR, although there have been some strides towards the use and recognition of e-documents.

For example, RR No. 16-2006 dated Aug. 15, 2006, allows the submission of electronic format of books of accounts and records for purposes of a tax audit or investigation that will have the legal effect, validity or enforceability as any other document or legal writing subject, consistent with RA No. 8792. Taxpayers must be able to maintain the integrity and reliability of these documents through time and these can be authenticated for subsequent reference. However, the rules require that these same documents must be retained in original form.

RR No. 9-2009, dated Dec. 23, 2009, also allows the use of alternative storage media. It provides that, for purposes of storage and retention, taxpayers may convert hard copy documents received or produced in the normal course of business to microfilm, microfiche or other storage-only imaging systems and may discard the original hard copy documents, subject to certain conditions and requirements. RR No. 9-2001 also enumerates the documents which may be stored in these media to include, but are not limited to general books of accounts, journals, voucher registers, general and subsidiary ledgers, and supporting records of details, such as sales invoices, purchase invoices, exemption certificates, and credit memoranda. Prior permit from the BIR is, however, required before a taxpayer can use these alternative media storage.

Since specific conditions and requirements have been provided, taxpayers should now evaluate the practicability of these requirements in light of any cost and efficiency advantages to keeping and preserving books of accounts and records in electronic format and other alternative forms of media storage.

More than just storage, organizations must also be able to impose a stronger sense of accountability on its members and stakeholders, insofar as records management is concerned. It must be able to address concerns on continuity, particularly the seamless turnover of documents when responsible officers or employees leave the enterprise.

Ultimately, it boils down to compliance. Whether taxpayers decide to preserve records manually or electronically, improvement of its tax compliance culture must always be the primary concern. At the end of the day, once this culture is ingrained in the organization, operational issues may be resolved with greater ease.

Saha P. Adlawan-Bulagsak is a senior tax director 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.

source:  Businessworld