According to Greek philosopher Heraclitus, “The only constant in life is change.” In Japanese, business people believe that constant, increasing improvement adds to substantial change over time. “Kaizen” is a Japanese productivity philosophy that means continuing development in personal, family, social, and professional life. The word “kaizen” comes from the two words: “kai,” which means “change,” and “zen,” which means “for the better.”
Government agencies in the Philippines, in their own way, have also adopted the concept of Kaizen. The Bureau of Internal Revenue (BIR), for example, has been improving its administrative issuances, policies, and processes to suit the needs of taxpayers. The BIR has to continuously keep abreast of any changes. It should do more to foresee the pressing economic and social challenges of taxpayers to gain and improve public trust.
Among the BIR improvements introduced is the recently issued Revenue Memorandum Order (RMO) No. 21-2020, which prescribes the policies, guidelines, and procedures for inspecting or supervising the destruction or disposal and determination of deductible expense for the inventory of goods or assets that have been declared waste or obsolete. RMO No. 21-2020 superseded RMO No. 06-2012.
Before the issuance of RMO No. 21-2020, taxpayers faced several challenges in managing their inventory or assets. Certain types of stock or assets are prone to spoilage, deterioration, wastage, obsolescence, and expiration, such as fad products, perishable goods, mobile phones, televisions, computers, and other machinery or equipment. Today, technological advancements and product innovations make a product’s life cycle shorter, just like what happened to the Android phone I bought last year, which is no longer sold in stores.
Also, taxpayers are concerned about their perishable inventory, such as agricultural or marine food products, canned food, pastries, and pharmaceuticals that need urgent destruction, because of the hefty cost of storing so much inventory in a warehouse.
Another challenge is the proximity of the taxpayer’s office or warehouse to the BIR Regional District Office. Such is the case for manufacturing companies, which are located in far-flung areas due to zoning ordinances. Similarly, there are challenges in finalizing the BIR representative’s schedule to witness the disposal or destruction of such inventory or assets, especially now that BIR offices across the country have implemented skeleton-force arrangements due to the COVID-19 pandemic.
Now, the BIR allows a third party to be the Bureau’s authorized representative in witnessing the destruction or disposal of inventory or assets. The third party must be a BIR-accredited tax practitioner or an external auditor. The third party’s presence to witness must come with BIR approval. This development could address concerns about scheduling between taxpayers and BIR representatives. Allowing a third party creates significant time savings and productivity for BIR officials. They can continue to move forward on more crucial tasks, such as assessments and audits.
Another improvement to ease the process of disposal or destruction is allowing the taxpayer to use virtual means subject to the BIR’s approval. Going virtual could address the issue of the taxpayer’s location or proximity. The BIR representative no longer needs to travel far to witness the physical destruction or disposal. It also saves time and increases productivity for BIR officials.
However, taxpayers must be aware of the documents that must be submitted to the BIR before and after the scheduled disposal or destruction. One of these requirements is the inventory list. In 2015, the BIR issued Revenue Memorandum Circular No. 57-2015, requiring taxpayers to submit their enhanced inventory list. In the past, taxpayers may think that providing their enhanced inventory list is of no use to the BIR. Now, taxpayers need to take the submission of the inventory list seriously. If the inventory or asset that was disposed of was not included or reported in the enhanced inventory list, the BIR could have grounds for disallowance.
Another requirement is supporting documents proving the reasons for the disposal or destruction. However, the question is: would the BIR accept internal documents, such as a Board of Directors Resolution or any memorandum issued by the Production Department, which handles inventory management, as long as the reasons are clearly stated?
As for the prompt issuance of the Certificate of Deductibility of Goods/Assets Destructed/Disposed of, the BIR has been mandated to issue the certificate within five days from the date of the taxpayers’ submission of the required documents. RMO No. 21-2020 is stringent on the compliance timeline on the part of the taxpayer. We hope that the BIR will reciprocate with a timely issuance of the certificate.
Interestingly, the BIR has laid out many detailed procedures that taxpayers need but were not addressed in RMO No. 06-2012. The taxpayer has to:
(i) file an Application for Destruction/Disposal of Goods/Assets with corresponding attachments, such as the Sworn Declaration of Goods/Assets as Waste or Obsolete with five other requirements that include the Letter of Intent that the taxpayer is considering availing of the services of a third party as a witness in the process of destruction or disposal and providing the name thereof at least seven days before the scheduled date of the destruction or disposal of the inventory or equipment;
(ii) arrange the inventory or assets to facilitate easy identification and counting, as failure to observe may be grounds for denial;
(iii) guarantee that photography or video documentation procedures are properly observed if the taxpayer is authorized to have the destruction or disposal witnessed by a BIR representative (physical or virtual witnessing) or by a third party;
(iv) coordinate and assist the BIR’s duly authorized representative in verifying the value of the assets and supervising the destruction or disposal; and
(v) submit all required documents.
While RMO No. 21-2020 introduces new and improved guidelines and process, taxpayers still have many questions, such as on the other documents to prove the correctness of the value of the goods or assets to be destroyed or disposed of. Will the BIR require taxpayers to submit copies of all their invoices to prove the value of the goods or assets? Do these documents need to be printed or will scanned copies saved on a compact disc or flash drive suffice?
Moreover, RMO No. 21-2020 explicitly states that “In case the inventories/assets applied for disposal are for any reason or cause, are replaced/substituted by its supplier, or the taxpayer shall become entitled to reimbursement for the partial or equivalent value thereof by an insurance company, the claim for the deductibility of the value thereof shall be denied.” Does the phrase “the value thereof” pertain to the full amount or value of the inventory or assets to be denied as a deduction, or does it pertain only to the amount that is replaced, substituted, or reimbursed? If the BIR’s interpretation is the full amount, will it not override the Tax Code provision that allows the deductibility of losses to the extent not compensated by insurance?
Further, for scrap or salvage value, as may later found to be income from whatever source, RMO No. 21-2020 does not mention whether the scrap or salvage value is subject to value-added tax.
We have discussed some of the questions in taxpayers’ minds if the gaps in RMO No. 21-2020 are left unaddressed. Despite such challenges, we are optimistic. We hope that the BIR will be able to address and clarify such concerns quickly. Taxpayers are elated that the BIR has adopted the Kaizen concept to drastically improve its tax administration.
Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
Mark Anthony Ponte is a tax associate of the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.
As published in BusinessWorld, dated 21 July 2020