[Ask the Tax Whiz] Did Pharmally pay the right taxes?

With P7.5 billion in annual sales for taxable year 2020, should Pharmally Pharmaceutical Corporation pay 12% value-added tax (VAT)? Or is it exempted from paying taxes under the Bayanihan to Recover as One or Bayanihan 2 law?

Pharmally must pay 12% VAT based on its sales. However, it may claim input tax from its purchases, other expenses, and even capital expenditures as long as these are substantiated or supported by VAT invoices or receipts. 

Pharmally is not exempted from paying taxes under Bayanihan 2. Based on that law and on Revenue Regulations No. 28-2020, only importation from June 25, 2020, to December 19, 2020, of the goods identified as critical or essential products needed to contain COVID-19 shall be exempt from VAT, excise tax, and other fees.

Can the Bureau of Internal Revenue (BIR) audit Pharmally considering the billions worth of government contracts it got? Did it declare the correct income? Did it pay the right taxes on the P265-million profit declared in its audited financial statements for 2020?

Yes, the BIR is mandated to assess and collect taxes from all individual and corporate taxpayers, whether government contractors or not, whether domestic or foreign companies doing business in the Philippines.

Only the BIR has access to tax information for Pharmally. While there are speculations, it is insufficient to make an assessment solely based on its audited financial statements.

Once the BIR issues a letter of authority, the bureau will have full access to information regarding Pharmally’s sales, purchases, importations, and other expenses, including its supporting documents like loan and lease agreements, to assess whether all taxes were paid correctly and on time.

What are the other taxes due from Pharmally? Is there any other regulatory compliance needed? Are all companies required to secure tax clearance from the BIR? How do we know if our company is compliant with the BIR?

The certificate of registration (BIR Form 2303) will show the types of taxes Pharmally has to file and pay monthly and/or quarterly. Generally, a wholesaler like Pharmally will have to pay income tax, VAT, expanded withholding tax, and withholding tax on compensation. Also, it has to justify the P239-million appropriations on its retainer earnings to avoid paying 10% improperly accumulated earnings tax or IAET, and provide disclosures on its foreign exchange transactions which resulted in P18 million in deferred taxes. 

As an importer, in addition, it will have to pay duties and other fees to the Bureau of Customs except if the importation was made during the effectivity of Bayanihan 2 or between June 25 and December 19, 2020.

As a registered wholesaler and importer of medicinal and pharmaceutical products, Pharmally is required to register its warehouse and other facilities with the BIR. It is also required to submit its annual inventory schedule and alphalist of sales, purchases, and importations to substantiate its sales and income declarations. 

Not all companies are required to secure tax clearance. Only companies who want to join the government bidding process are required to get tax clearance to comply with PhilGEPS registration. However, companies and even individuals may opt to apply for tax clearance as part of their company policy.

Similar to an external audit, companies must check if they have complied with all tax rules and regulations. As part of our advocacy, the Asian Consulting Group offers a free Annual Tax Health Check to all companies on a first-come, first-served basis to help them assess their tax compliance and prepare for a BIR audit. It will also reduce their tax exposures and any possible tax assessments once the BIR conducts its annual audit and investigation.

Watch out for the next edition of Ask the Tax Whiz and download the TaxWhizPH app for free on Google Play and the App Store. You can also avail of our free tax assistance service by emailing us at consult@acg.ph, using the promo code ACG10RAPPLER. – Rappler.com

Mon Abrea, CPA, MBA, is the co-chair of the Paying Taxes-EODB Task Force. With the TaxWhizPH mobile app as his brainchild, he was recognized as one of the Outstanding Young Persons of the World, an Asia CEO Young Leader, and one of the Ten Outstanding Young Men of the Philippines because of his tax advocacy and expertise. Currently, he is the chairman and CEO of the Asian Consulting Group and trustee of the Center for Strategic Reforms of the Philippines – the advocacy partner of the Bureau of Internal Revenue, Department of Trade and Industry, and Anti-Red Tape Authority on ease of doing business and tax reform. Visit www.acg.ph for more information or email him at mon@acg.ph and download the TaxWhizPH app for free if you have tax questions.