Common best tax practices

Let’s Talk Tax -- By Wendell D. Ganhinhin

Common best tax practices

One of the strategies that unscrupulous taxpayers employ in a bid to become successful in business is not paying the right taxes.
These taxpayers justify such claim by saying that their businesses will not survive if they pay taxes diligently, since their competitors do not pay proper taxes either.
Applying such strategy, these taxpayers maintain at least two books of accounts -- one for the Bureau of Internal Revenue (BIR) and one for management’s use.
The latter supposedly reflects the true income and value of the company.
Indeed, some of these taxpayers have become successful in the past and some of them are still successful today.
In general, companies employing the said strategy did not experience any significant tax problems during the reign of first and second generation of owners since most of them are united and committed to observing the same practice.
At that stage, confidentiality of information is properly kept.
However, problems will arise in the next generation of owners.
The new generation of owners might be active in the business, but some could be passive stockholders who are not directly involved in operations.
These stockholders, particularly the passive owners, will normally demand more transparency regarding the affairs of the business.
They will ask: Is the amount of dividends declared enough? How much is the true value of my shareholdings if it will be sold? Can the internal financial statements be relied upon?
If those questions cannot be answered satisfactorily, internal conflict will likely arise. Several cases could be filed against the management of the company.
Information about noncompliance might be fed to the BIR.
If not handled properly, such dissent might cause the collapse of the company.
Another scenario is when a company wants to tap the stock market to avail of cheap funds for business expansion.
However, some of these companies cannot do so because of the bad condition of their accounting records and huge possible tax exposure.
When a company wants to be listed in the stock exchange, it should expect high demand for transparency and good corporate governance, including a high level of tax compliance.
If existing business owners want to keep their legacy and share it with their progeny, they might consider adopting a number of common best tax practices to ensure transparency and continuity of their business.
Always maintain only one set of accounting records
Accountants say that it is difficult enough to maintain one set of books of accounts.
Hence, it is doubly difficult for a company to maintain two sets of accounting records.
Likewise, it is costly to keep more than one set of books of accounts in terms of needed accounting software and manpower.
Moreover, keeping two sets of books would be prone to a lot of errors.
Also, owners and officers have the burden of keeping these data confidential and avoid any leak of information which can lead to criminal prosecution.
Having more than one set of accounting records is like keeping a time bomb inside the house. For your peace of mind, maintain one set of reliable and accurate accounting records.
Comply with tax laws
Some businessmen say that if you will not cheat on your tax obligations, you will not succeed.
But our country is replete with success stories of companies that complied with tax laws from the very start of their business and have continuously succeeded. In fact, if you survey the top businesses in the country, these are mostly businesses who are top taxpayers and who have paid their taxes honestly.
Noncompliance will result only in unnecessary costs like the 25% penalty for late filing, 20% interest per year and compromise penalties, as well as possible imprisonment.
It will result not only in monetary penalties, but may also damage the reputation of the company.
This, in turn, can sometimes cause its ultimate demise.
Avail of tax exemptions
Study your business operation and determine if it will qualify for registration with incentive giving bodies such as the Philippine Economic Zone Authority or Board of Investments to avail of tax incentives like income tax exemption and lower corporate income tax rates.
Small enterprises can also consider availing tax incentives under the Barangay Micro Business Enterprise Act of 2002.
Tax evasion is a crime, but tax avoidance is legal.
Hence, a taxpayer can always adopt a legal tax avoidance scheme to minimize its taxes.
Know when to consult a tax specialist
If you do not know which tax rules and regulations are applicable to your business, hire a good and reputable tax specialist to either perform tax consulting job or tax compliance review, or both.
The tax function of your accounting department can also be outsourced if you want to avail the expertise and stability of service from an accounting firm.
If you want to know the tax implications of any significant agreements, you can engage a tax specialist so you will not overlook any tax exposures and avoid penalties.
In the old days, we believe that "honesty is the best policy."
In addition to this, advocates of good corporate governance also believe that "transparency is the best policy."
To have a successful and sustainable company, businessmen should learn to incorporate honesty and transparency in their corporate values.
An honest and transparent company is not just every businessman’s responsibility to the tax agency; it should be his legacy to his progeny.
The author is a Director at the Cebu branch of Punongbayan & Araullo.

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