Tax Articles

Substantiation of Revenues and Purchases

By: Atty. Rodel C. Unciano

Atty. Rodel C. Unciano Partner   +632 8403-2001 loc.380 This email address is being protected from spambots. You need JavaScript enabled to view it. View Profile

The Bureau of Internal Revenue (BIR) has been very aggressive in its campaign against the issuance of fake receipts where Commissioner Romeo Lumagui Jr. declared an all-out war against all those who profit from propagating a culture of tax evasion using the so-called “ghost receipts”.

As defined, ghost receipts are fake receipts/invoices with no actual transactions. Its main purpose is to reduce the income tax and VAT liabilities of the purchaser by claiming false deductions/expenses and claiming input VAT on the basis of fictitious transactions, ultimately resulting in defrauding the government of taxes. In its Run After Fake Transactions program, Commissioner Lumagui has vowed to identify and file civil, criminal, and administrative cases against sellers and users of commercial invoices and receipts used to support fake transactions to evade payment of internal revenue taxes.

Under the Tax Code, as amended, all persons subject to an internal revenue tax shall, at the point of each sale and transfer of merchandise or for services rendered valued at one hundred pesos (P100) or more, issue duly registered receipts or sale or commercial invoices, showing the date of transaction, quantity, unit cost and description of merchandise or nature of service. There is a proposal to increase this threshold to five hundred pesos (P500.00) under the Ease of Paying Taxes Bill which has already been approved by the Bicameral Conference Committee.

For tax purposes, an income is subject to tax whether or not it is supported with an official receipt or sales invoice. Income from whatever source is subject to tax, and this includes all income including those sourced from unlawful activities and whether or not the same is supported with duly registered receipts or invoices. While receipts or invoices are the primary pieces of evidence to support an income or inflow of wealth, the absence of the same does not exempt the income earner from the appropriate tax.

On the part of the purchaser, the official receipts and sales invoices are the primary documents required to substantiate the deductibility of the related costs and expenses for the purpose of arriving at the net taxable income. But receipts and invoices are not the only acceptable proofs to support deductibility of expenses incurred. Other adequate records are acceptable proofs. Whether these are receipts and/or invoices or other alternative documents, the same should be genuine, that is, they should represent real transactions, not fake ones. Other than providing sufficient supporting documents, the taxpayer should be able to establish the amount of expense being claimed as a deduction and the direct connection or relation of the expense being deducted to the development, management, operation, and/or conduct of the trade, business or profession of the taxpayer.

Similarly, for value-added tax (VAT) compliance, failure to issue the required BIR-registered commercial VAT invoice or official receipt does not justify the exclusion of the revenue or receipt from the obligation to pay VAT on the part of the seller. However, strict compliance is required on the part of the buyer. Substantiation of the transaction with a BIR-registered commercial VAT invoice or official receipt is indispensable for the purpose of claiming input VAT credits. Under the current rules, the invoice or receipt must comply with the invoicing and accounting requirements prescribed under Section 113 of the Tax Code. Non-compliance with the prescribed invoicing requirements under the Tax Code is fatal to the taxpayer’s claim for input tax. Thus, buyers should be vigilant in requiring their suppliers to issue VAT invoices and receipts with the proper information.

Incidentally, under the Ease of Paying Taxes Bill, the issuance of official receipts as proof of sales transaction has been deleted. Under the present Tax Code, a registered invoice shall be issued for every sale, barter, or exchange of goods or properties while an official receipt is the document that should be issued for every lease of goods or properties, and for every sale, barter, or exchange of services. The Ease of Paying Taxes Bill harmonized the rule. The required document to be issued as support for the sale, barter, or exchange of services shall also be the invoice.

So, once the Ease of Paying Taxes Bill becomes a law, there will be no more distinction between the sale of goods and services in so far as the required substantiation requirement is concerned.