Tax Articles

Easing Business Closing Due to Covid-19

By: Atty. Lino Ernie M. Guevara

COVID-19 kills. Not only lives, but business as well.

In a briefing held a month back, the Department of Labor and Employment (DOLE) claimed that more than 2,000 establishments had closed down during the COVID-19 health crisis, displacing almost 70,000 workers. By now, the numbers have surely climbed up. Due to the devastating toll of this deadly pandemic on all types of businesses, from individual entrepreneurs or micro enterprises to the big players, many are struggling whether to continue their operations or decide if it’s time to fold up. Businesses which have temporarily closed shops due to the government-imposed quarantine may no longer be able to flip back their welcome sign saying “Open for Business”. Instead, many will continue to go on lockdown, permanently.

But the decision to close shop does not stop there. Once that bitter decision is made, you have to get down to the equally daunting business of closing down your business, legally. And this could be no simple feat having to contend with at least eight (8) government agencies or instrumentalities to comply with their varying requirements or give the proper notifications to before your business could be formally and legally retired. The procedures and requirements for closure would also depend on the kind of entity that you set up in the first place. Was it merely a single proprietorship registered with the Department of Trade and Industry (DTI)? Or was it a corporation or partnership established through the Securities and Exchange Commission (SEC)? The kind of entity also determines the specific agency you need to deal with.

Aside from these main government agencies that gave “birth” to your business and where it will also be “interred”, so to speak, you also need to deal with other government instrumentalities from the Barangay up to the Municipality or City where your business is located. You also have to cancel your business registrations with and give proper notifications to other government agencies such as the Social Security System (SSS), Philippine Health Insurance Corporation (PhilHealth), Home Development Mutual Fund (Pag-IBIG Fund) as well as DOLE relative to the separated employees. And yes, saving the most challenging for last, you have to retire your business with the Bureau of Internal Revenue (BIR) and secure that treasured Tax Clearance evidencing your entity’s clean bill of tax health.

For this, you need to start with the filing of BIR Form 1905 with the BIR for the cancellation of the Taxpayer Identification Number (TIN) in relation to the dissolution of the corporation or partnership or cessation of registration due to permanent closure of the business of an individual. Revenue Memorandum Circular (RMC) 57-2020 provides an updated list of requirements as follows:

1.BIR Form 1905 (2 originals)
2.List of ending inventory of goods, supplies, including capital goods (1 original)
3.Inventory of unused sales invoices (SIs)/official receipts (ORs) (1 original)
4.Unused SIs/ORs/Accounting forms (e.g., vouchers, debit/credit memo, delivery receipts, purchase orders), including Certificate of Registration (COR), business notices and permits (1)
Note that these will all be subject for destruction to be witnessed by BIR personnel and officials.

Our Tax Code requires that all corporations, partnerships or persons that retire from business shall submit their books of accounts, including the subsidiary books and other accounting records for examination. Entities contemplating dissolution must notify the BIR Commissioner and shall not be dissolved until cleared of any tax liability. In this regard, the BIR’s implementing regulation provides that “(a)ll taxpayers who filed for cancellation of registration due to closure/cessation or termination of business” shall be “subjected to immediate investigation by the BIR office concerned to determine the taxpayer’s tax liabilities”.

For its examination, the BIR usually goes back to the entity’s three (3) unaudited taxable years prior to the closure of business. Thus, some companies opt to just coast through first during this period even without operations and just religiously comply with the nil filing of tax returns before formally applying for business retirement. But for others, waiting is just not a practical option.

The BIR examination relating to your application for retirement ends up like a full-blown audit that other regularly operating companies are subjected to annually. Based on actual experiences, securing a Tax Clearance could take several months but, more often, could run up to several years, especially if the BIR findings amount to millions of pesos being assessed. Imagine a venture closing down due to a major business downturn like this pandemic but will be assessed with that dizzying amount of tax deficiencies. This burden is indeed heavier and costlier than the closing of business itself.

Admittedly, securing a Tax Clearance is the Gordian knot in the dissolution process. It could unduly and unjustifiably delay the dissolution or retirement of the business. In turn, this would negatively impact future business plans of the owner or shareholder, or in some cases, the planned re-organization of the business. It could also scare away taxpayers wanting to comply.

So, it may be timely to evaluate now. Can the retirement procedures by the concerned agencies be expedited and further streamlined given the COVID-19 impact? Most of these are administrative in nature, thus, could easily be revised or amended by the agencies themselves. Can a one-stop shop be set up now by all agencies concerned for this purpose in line with the law on the ease of doing business and anti-red tape? Specifically, can the scope of the tax audit be restricted as to the year covered as well as limiting the coverage of taxes to be examined, especially for businesses closing due to and during this pandemic? Can some form of condonation or any form of limited reliefs be likewise extended to designated or classified entities (i.e., closure due to the pandemic; specified income brackets or covering small and micro enterprises, etc.) similar to those afforded by the BIR to online sellers under RMC 60-2020? Under the latter, they can declare voluntarily their past transactions and pay the taxes due without corresponding penalties within the prescribed deadline. The BIR did this through a mere administrative issuance with no legislation to back it up. Note that unlike regular operating corporations, these entities intending to close now would do so because they are already in the red and left without much option to continue operating. And slapping them with tons of tax deficiencies could both be ill-timed for the taxpayer and unproductive in terms of the BIR’s collection efforts. They simply don’t have the resources to pay, even if they want to.

This pandemic, a time when many businesses are forced to shut down, may be a golden opportunity for our Legislators and implementing regulatory agencies to evaluate our current policies, laws and rules governing dissolution, particularly the aspect of securing a Tax Clearance. The more it will be timely now since any form of relief is critical especially for individual entrepreneurs or micro or small enterprises in the precipice of bankruptcy. It may even be considered as one of the reliefs includible in the Bayanihan 2 bill up for deliberation during Congress’ special session or under such other measures to cope with this crisis.

Closing down one’s business is, to say the least, a painful rite. The government could at least temper the torment by easing and rationalizing its closing, thus, allowing business owners to move on much faster to newer ventures and endeavors to rise up and recover.