Tax Avoidance 101: Tips on How to Legally Minimize Your Taxes (Part 1)
- Eric J. Magcale, CPA
- Jan 29, 2023
- 3 min read
We have recently launched a survey in EJM Community in Viber on the topics that our members would like to feature in our publication. As a result, we have identified that most of our members are interested in legally managing their taxes to promote optimal benefit to their shareholders/owners and stakeholders while at the same time responsibly doing their role in nation-building by paying the right taxes.
This is the first of our 5-part series in Tax Avoidance 101: Tips on How to Legally Minimize Your Taxes.
The author has written this publication based on his experience as a tax practitioner. Although not all inclusive, the author determines that these tips are the most common ways on how to manage your compliance to its maximum level without affecting your profitability and financial key performance indicators (KPIs).
Tip 1: Good Documentation is the Key!
Yes, you read it right! Maintaining a good document management system is the key to proper tax compliance.
When taxpayers hear tax avoidance (or the legal way of managing taxes), they always think a hundred years forward. Most people think that tax planning and minimization is always about hiring the tough caliber accountant or tax lawyer to support them in this exercise. I am a tax accountant per se, but I disagree in this notion.
A good document and database management system will save you a lot of time in digging the documents and information from your archive when the BIR examiners are already knocking on your door to do their tax assessments. A good document management system makes you efficient in cross-referencing the supporting information from your books to its source.
One of the best practices in accounting document management system is maintaining a soft copy of all your business documents. The author has been engaged in various tax representation engagements of several clients before the BIR and even as an Independent CPA commissioned in the Court of Tax Appeals (CTA). In our stint in these engagements, we have noted that most of the time, soft copies of the documents are normally demanded by the BIR and the CTA.
On another hand, it is also important to keep the original documents at a minimum of 3 years from the close of the taxable year. However, others would keep it between 5 to 10 years depending on the nature of the business and anticipated tax exposures. Keeping a soft copy is good but it is still important to keep your hard copy properly indexed and intact. You can source services from different storage companies to properly safekeep your documents that could be easily retrieved when the BIR or the CTA requires you to present it to them.
Tip 2: Transact only with Parties with Valid BIR Registration and Documents
Taxpayers must also be aware of the technical requirements of the accounting documents before transacting to your customers or suppliers. For example, taxpayers must check if the supplier has a valid BIR Certificate of Registration (COR), invoices and/or receipts before transacting with them. In this way, it is sure that any payments that a taxpayer makes to their supplier will be reported to the BIR and the hassle of getting these expenses disallowed for tax purposes will be avoided.
If you think you can save on cost by transacting with entities with no proper BIR registration and documents, well you are wrong. If assume a supplier says that he will waive the 12% value-added tax (VAT) if you allow them not to issue any invoice or receipts, definitely the cost of the item you purchase is 12% lower than your anticipated price. However, if you sell that item to your customer, you will have no input VAT on your purchases to match the output VAT on your sales transaction. Moreover, you are also exposed to the risk that such cost may be disallowed as a deductible expense for income tax purposes making you pay more income tax between 20% to 25%. Technically, you lose around 32% to 37% when you combine the VAT and income tax impact!
As for your customers, you also need to secure their BIR COR because as VAT registered taxpayers you will have to report their tax identification number and other tax details (like address and official registered business) in the summary list of sales. Failure to report the tax details of your customers is also a violation of the tax rules and may expose you to compromise penalty starting from P1,000 per line detail.
Indeed, you can see that the precursor for tax avoidance is simply within your control. The next articles in this series will provide you more tips on how to manage your taxes without violating the tax rules and regulations.
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