Electronic invoices and receipts: a boon or a curse for taxpayers?

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Have you been audited by the BIR and have your claimed expenses been rejected for incorrect or inadequate justification? Did you apply for a tax refund and were refused due to an incorrect 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 longstanding challenges will be a thing of the past.

CORRECT INVOICING FOR TAX COMPLIANCE
To claim a tax deduction or refund, a taxpayer must competently establish the factual and documentary basis 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 this with sufficient evidence, such as official receipts or other adequate documentation. This is further emphasized in Sec. 237(A) of the same Code which requires the issuance of duly registered receipts or sales or commercial invoices at the point of sale or transfer of goods or services. While the Revenue Code allows other adequate records to support claimed deductions, the BIR generally relies on official invoices or receipts, particularly with respect to VAT transactions. Therefore, a dispute over proper substantiation usually involves the official invoice or receipt.

For years, the BIR and taxpayers have struggled to secure and secure proper documentation to support income and expense claims. Despite the ingenuity of both sides in producing, keeping and preserving the proper invoice or receipt, the problems continue to haunt most taxpayers. While the BIR may rely on the “best evidence rule”, Section 228 of the Internal Revenue Code requires factual support and verification as the basis for an assessment. This situation is caused by the time that has elapsed between the imposition and the transaction under review.

TRAIN ACT AND THE ELECTRONIC RECEIPT/INVOICING REQUIREMENT
To address issues of compliance and transparency in business transactions, Section 237 of Republic Act 10963 or the TRAIN Act introduced the Electronic Invoicing System (EIS) requiring e-commerce taxpayers, large taxpayers, and exporters within five years of the entry into force of the law, to issue their invoices/receipts electronically, as well as to declare their sales data to the BIR at the point of sale. It should be noted, however, that even if not listed as mandatorily covered by EIS, taxpayers can voluntarily enroll instead of manual receipts.

In its statements, the Department of Finance (DoF) aims for full implementation of this provision by January 2023. The first contingent exploited to undergo the switch to electronic invoicing are the 100 largest taxpayers.

ELECTRONIC INVOICING SITUATOR IN ASIA PACIFIC
HIA is not new to the Asia-Pacific region. In 2011, South Korea introduced electronic tax invoicing (e-Tax), making it mandatory for most taxpayers in 2014. Under e-Tax, businesses subject to VAT 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 a subcontracted and licensed electronic billing service provider; (3) create their own electronic invoices through their accounting system with a digital certificate; (4) using the AVRS telephone system; or, (5) submit in person to a local tax office. Companies 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 to match the invoice to a customer. Subsequently, 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 study commissioned by the World Bank, “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 electronic tax has had a significant positive effect on issues of transparency and reducing evasion tax.

Other countries in the region such as Vietnam, Taiwan and Thailand are also preparing for e-invoicing.

What’s next for the DoF, BIR?

The EIS in the Philippines would include a billing report sent to the government’s central platform after bills are sent to end customers. Therefore, it resembles South Korea’s invoice reporting system, known as continuous transaction monitoring. In fact, the Korea International Cooperation Agency (KOICA) has helped the Philippines develop its electronic bill reporting system. Electronic invoice includes sales invoices, receipts, debit and credit notes and other similar accounting documents issued via the Internet.

To date, the DoF has yet to issue the relevant tax regulations and circulars on electronic invoicing/receiving. May the rules be carefully designed to minimize the burden on taxpayers. Specifically, the DoF should ensure that it provides facilities and means by which businesses can easily issue and transfer electronic invoices/receipts to their customers at no or very low cost. BIR should also consider removing paper invoicing, separate submission of summary/alphabetical listing reports, and invoice storage requirements. EIS presupposes real-time access to tax information and the ability to detect fraud through electronic systems. Consequently, the BIR would also have to recalibrate its assessment procedure, which costs taxpayers time and effort.

While the DoF initially focuses on the top 100 companies, 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 between tax authorities, the IT governance body on electronic data interchange and private IT solution providers, with a view to improve taxpayer services to establish and build trust in the tax administration. Otherwise, it will only engender taxpayer resistance to reform or encourage a preference for maintaining the status quo of the informal economy. Tax authorities should also reward taxpayers for their compliance and cooperation with mandatory electronic invoicing in the form of improved tax services and reduced costs. If a mandatory e-invoicing system produces tangible benefits for taxpayers, by removing the uncertainty of accepting consideration, it will become firmly entrenched in the system (Lee, 2016).

As 2023 approaches, the DoF and BIR should disseminate tax information and guidance to all stakeholders.

TAXPAYERS: PREPARATION IS KEY
No matter how daunting it may be, taxpayers need to 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, digitization is neither a walk in the park nor cheap. Therefore, preparation is essential if taxpayers are to avoid costly and unnecessary bottlenecks in implementation. You may consider embarking on the following initial steps:

1. Assess existing tax practices – an objective review of the company’s compliance with existing rules and regulations will help provide guidance and highlight areas for improvement.

2. Assess your ability to go online and electronically, including your willingness to adhere to Data Privacy Act (DPA).

3. Stay up to date on recent DoF and BIR publications providing guidance on implementing EIS. Note that implementation is likely to be phased. New guidelines may seem unenforceable to you at first, but the time will come when they affect your business.

4. Talk to your tax advisors and IT solution providers.

5. Make sure your EIS provider is properly accredited or has experience.

While the government may be in wait-and-see mode over the next few months as leadership changes, it is better to act now than regret later. As taxpayers, let’s keep an open mind and keep up to date with the latest developments in tax compliance.

Just as esports are now part of the Southeast Asian Games, it is high time that we also improve our tax system through the proper and careful implementation of EIS.

Let’s Talk Tax is a weekly column from P&A Grant Thornton that aims to keep the public informed of various tax developments. This article is not intended to be a substitute for competent professional advice.

Kim M. Aranas is a senior executive in the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.

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