BIR Ruling [DA-222-03]

July 11, 2003 BIR RULING [DA-222-03] 203, 222 & 235; 081-90 Securities and Exchange Commission 11/F, SEC Building, EDSA Greenhills Mandaluyong City Attention: Mr. Ruben C. Ladia Acting Director Prosecution and Enforcement Department Gentlemen : This refers to your letter dated June 1, 1999 requesting for information as to whether or not depository banks are mandated by law, rules or regulations to preserve their customer's records within a certain period of time following closure of their accounts. It is represented that you are presently undertaking an exhaustive investigation against the foreign currency trading activities of Eurocom Business Center, Inc. (Eurocom) and its conduits in the trade, among others, Asia Capital Finance Corporation (ACFC); that based on your investigation, you subpoenaed the managers of ACFC's depository banks; that some appeared at a scheduled hearing but reluctant to submit to the Commission their banking records; that others alleged that ACFC's accounts are already closed and all records pertaining to related transactions with the bank were all shredded or destroyed; and that any material information which this Office shall provide will serve as a lead for the Commission to unearth the responsible person behind ACFC's shrouded existence. In reply, please be informed that Section 21 of Revenue Regulations No. V-1 of the Department of Finance otherwise known as the Bookkeeping Regulations states as follows: "All the books, registers, records, vouchers, and other supporting papers, and documents prescribed in these regulations and other records kept by taxpayers at their option, shall be preserved intact, unaltered, and unmutilated for at least five years (now three years) from the date of the last entry in each book or from the date of the last transaction, and the same shall be kept at all times in the place of business of the taxpayer, who shall produce them for examination or deliver the same or any of them for inspection outside of his place of business upon demand of any internal revenue officer." The above Section has been amended by Section 235 of the Tax Code of 1997 which provides: "SEC. 235. Preservation of Books of Accounts and Other Accounting Records. All the books of accounts, including the subsidiary books and other accounting records of corporations, partnerships, or persons, shall be preserved by them for a period beginning from the last entry in each book until the last day prescribed by Section 203 within which the Commissioner is authorized to make an assessment. The said books and records shall be subject to examination and inspection by internal revenue officers: Provided, That for income tax purposes, such examination and inspection shall be made only once in a taxable year, except in the following cases: (a) Fraud, irregularity or mistakes, as determined by the Commissioner; (b) The taxpayer requests reinvestigation; (c) Verification of compliance with withholding tax laws and regulations; (d) Verification of capital gains tax liabilities; and (e) In the exercise of the Commissioner's power under Section 5(B) to obtain information from other persons in which case, another or separate examination and inspection may be made. . . . " (Emphasis supplied) In relation to Section 235 of the Tax Code of 1997, Section 203 of the same Code provides that "SEC. 203. Period of Limitation Upon Assessment. Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three (3) year period shall be counted from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day." (Emphasis supplied) However, Section 222 of the Tax Code of 1997 provides five (5) exceptions to the three-year period of limitation of assessment. The term, "last entry" as used in Section 235 of the Code, refers to a particular business transaction or an item thereof that is entered or posted last or latest in the books of accounts when the same was closed (BIR Ruling No. 401, S. 1958). For purposes of determining the period of at least three years (then five years) within which the books shall be kept, the same shall be recorded from the date of the last entry in said books. This Office ruled in Unnumbered Ruling dated January 31, 1975 that the destruction of some accounting records, other than books of accounts, even before the expiration of the three-year (then five-year) period prescribed by Section 235 of the Tax Code of 1997 (then Section 337 of the old Tax Code) is not allowed. Under the aforesaid Section, taxpayers are required to preserve their books of accounts, including the subsidiary books and other accounting records for a period of at least 3 years (then 5 years) from the last entry in each book. The requirement is clearly mandatory. The reason for requiring the books of accounts to be preserved is to ensure that all taxes due to the government may be readily and accurately ascertained and determined any time of the year. For this purpose, the right of the Bureau of Internal Revenue to examine and/or inspect books of accounts and other accounting records of taxpayers does not prescribe. However, pursuant to Sections 235 and 222 of the Tax Code of 1997, taxpayers cannot be compelled to preserve the said books and accounting records for a period of over 3 or 10 years, respectively. Accordingly, for taxation purposes, depository banks can dispose its books of accounts, including the subsidiary books and other accounting records, after three years reckoned from the day following the deadline in filing a return or if filed after the deadline, from the date of the filing of the return for the taxable year when the last entry was made in the books of accounts, and not from the recording of the entry or transaction in the books of accounts or other records above indicated. As entries in the books of accounts have to be supported with the corresponding invoices, receipts, vouchers and returns, the said source documents form part of the accounting records and must be preserved for at least three years counted not from the dates of accomplishment or issuance thereof but from the date of last entry in the books to which they relate. However, if there is a pending tax case and the books and records concerned are material to the case, it is desired that said books and records be kept longer than the prescribed period of three years until the case is finally resolved (BIR Ruling No. 081-90 dated May 14, 1990). SHADEC It should be emphasized, however, that pursuant to Section 6 of the Tax Code of 1997, the power of inspection of books of accounts and other accounting records for purposes of examination of returns and assessment of the correct amount of tax due mentioned in Section 235 of the same Code is reserved solely for the Commissioner of Internal Revenue or his duly authorized representative and not the SEC. Please be guided accordingly. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group