Aug 252014

A cornerstone of a sound taxation system is that the tax regulation must be administratively feasible. In as much as generating sufficient revenue for the government becomes a chief consideration, tax legislations should be equally reverent to the importance of softening the blow of said imposition to the taxpayer. 

Essential to tax collection efforts is the preservation and availability of the taxpayers’ books of accounts and other accounting records for the purpose of tax audits. To this end, it can be remembered that the Bureau of Internal Revenue (BIR) made a declaration in Revenue Regulations (RR) No. 17-2013 that it is in the best interest of both the government and the taxpayers that said records are retained for a longer period of 10 years.

Perhaps in an effort to alleviate taxpayer efforts in preserving their books of accounts, the BIR has issued on 30 July 2014, RR No 5-2014, where the BIR has allowed the retention of electronic images as an alternative to keeping hard copies of the accounting records of the taxpayers. Under this RR, during the 10 years required by RR 17-2013 for the retention of records, the taxpayers shall within the first five years thereof, retain hard copies of the books of accounts, including subsidiary books and other accounting records. Thereafter, the taxpayer appears to have the option of retaining only the electronic image copies of the hard copies of the said records.

In ensuring the integrity and security of these electronic images, the BIR has instructed that the same should be kept in an electronic storage system which should contain the following features:

Reasonable controls to ensure the integrity, accuracy, and reliability of the electronic storage system;

Reasonable controls to prevent and detect any unauthorized creation of, addition to, alteration of, deletion of, or deterioration of  electronically stored books of accounts, subsidiary books and other  accounting records;

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An inspection and quality assurance program evidenced by regular evaluations of the electronic storage system, including periodic checks of electronically stored books of accounts, subsidiary books and other accounting records;

A retrieval system that includes an indexing system; and

The ability to reproduce legible and readable hardcopies of electronically stored books of accounts, subsidiary books and other accounting records.

For the guidance of taxpayers, RR 5-2014 provides the benchmark by which to determine the legibility and readability of the electronic image copies of the accounting records to be retained. Legibility, as defined by the BIR, shall mean that the observer must be able to identify all letters and numerals positively and quickly to the exclusion of all other letters and numerals. On the other hand, the above electronic images shall be readable if the observer will be able to recognize a group of letters or numerals as words or complete numbers. The acceptability of the electronically stored images of the taxpayers accounting records shall be conditioned upon the satisfaction of these standards.  

In light of this recent issuance, a few concerns are raised.

First, how will RR 5-2014 be implemented taking into account RR 009-09, which mandate Large Taxpayers using the Computerized Accounting System (CAS) to produce their books of accounts and accounting records in electronic formats? Does RR 5-2014 dispense with the requirements of RR 009-09, for example, on electronic records (including non-image file formats) and their storage system?  Will the Large Taxpayers be allowed to retain hard copies of their books instead?

Second, additional costs would have to be shouldered by the taxpayer in complying with this RR 5-2014.  For the storage of the hard copies of the accounting records, the taxpayer should take into account possible printing costs, storage costs (especially for the rentals for space in case of voluminous records), as well as expenses for the maintenance and preservation of the integrity of these papers. Should the taxpayer maintain electronic image copies of the hard copies, will the requirements of RR 5-2014 entail additional licensing costs for the proprietary computer system and all such other costs necessarily incidental to ensuring the security and integrity of these electronic images?  Likewise, there is also the issue on the chain of custody of these documents in view of the expected personnel movement to and from an organization. With RR 05-2014, taxpayers are all the more encouraged to ensure that turnover protocols should prioritize the proper endorsement of accounting records to the new custodians of these documents.

In the final analysis, a balancing of considerations is suggested.

From a policy standpoint, while it is conceded that the retention period required by the BIR could be instrumental to its campaign of promoting tax compliance, it may be reasonable to revisit the feasibility of this 10-year period requirement. As this regulation is in force, taxpayers who are not under investigation or no longer subject to ordinary assessments in view of the lapse of the prescriptive period for the same, may still have to shoulder additional costs for the preservation of their books for periods even beyond that when they are supposed to have been susceptible to an investigation.

From a taxpayer viewpoint, on the other hand, this regulation can be proactively seen as an opportunity to consider prioritizing effective electronic records management in their business planning. One could say that effective electronic records management could assist in achieving other business objectives.  After all, these records form part of the organizational intelligence of any business. As such, it can be in the best interest of taxpayers to have these records preserved for a considerable length of time for them to have a concrete historical view of their development over the years. Access to these fixed records is necessary to their operational viability and will be helpful in mapping out their future business initiatives.

Moving forward, considering the prevalence of the use of digital formats in the ordinary course of business, RR 05-2014 can be seen as a move toward aligning records management with current practice.  But even in this digital age, the balance between the government’s goal of raising revenue and the taxpayer’s convenience in complying with the same remains to be a matter which cannot be overstressed.

Michael Angelo D. Adrid is a Supervisor from the Tax Group of R.G. Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The view and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or RGM&Co. For comments or inquiries, please email or

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