Grow Your Business

The consensus among traders seems to be that government collects too much taxes from business enterprises, but with little or minimal development or benefit to business to show for it. As one trader who asked not to be identified told Entrepreneur Philippines, “It seems like we just end up paying for the government’s excess and corruption, and that’s very discouraging.”

But even as people often gripe about paying taxes, taxes remain an essential element of a healthy economy—a social obligation they must fulfill. And while people may go to great lengths trying to pay as little tax as possible, it is true—as the saying goes—that taxes will remain as inevitable as death.

Pundits like to point out that tax evasion is one of the country’s most popular sport. Tax evasion is a criminal offense, of course, but tax avoidance is another matter, for there are ways to minimize tax payments legally. To clarify this point, Entrepreneur asked Jack Wong, a tax expert and successful businessman, to come up with a checklist of how to minimize tax payments legally.

Know your taxes
The first step, according to Wong, is to educate people about the different taxes that businesses are expected to pay. “It is imperative that taxpayers understand the accounting principles as adopted by the tax agency,” he explains. “There are provisions identified in our National Internal Revenue Code (NIRC) that specify deductions that could lower the taxes to be paid. Due to poor understanding of the classification of transactions, however, businesses simply pay taxes based on assumptions.”

Wong says that businesses are sometimes overtaxed because they are simply not aware of the different exemptions they can avail of and of what items to declare.

He continues: “Sometimes, a business like a consulting firm declares its gross sales. As an entity that earns on a commission basis, however, it should be taxed only on the commissions it makes, not on its total sales. It is an example of a business that is overtaxed because it is ill-informed, so I would advise consultants to secure the services of an accountant to avoid this.”

Claim all legal exemptions
Indeed, tax planning is a vital part of operating and managing a business, and claiming all legal exemptions and deductions can greatly help.

The accountant who asked to remain anonymous explains: “The general rule in tax planning is that one should find ways and means to reduce taxes legally by using the benefits the NIRC provides, such as the proper use of deductions, the lowering of declared gross income where allowed, and the proper use of tax credits. A good example is how a company can decrease its gross income by only recording income once it is actually received.”

Input costs and VAT
For his part, Wong emphasizes the need to know the input costs one has incurred during the manufacture or sale of an item.

He explains: “Cost of sales is a deductible amount because the government recognizes inputs as deductible from gross sales. Assume that you have an ice cream shop and you sell ice cream for P20 per cone. To determine the right taxable amount, assuming that you are a retailer and not a manufacturer, you must deduct the cost of buying the cone, the cost of buying the ingredients to make the ice cream, etcetera. This will be your cost of sales and you can deduct it.”

Also, not all businesses need to pay value-added tax (VAT). “The Expanded Value Added Tax (E-VAT) law excludes businesses that have annual sales transactions of less than P500,000 from paying the 12 percent VAT rate,” he says. “A business that falls under this category could opt for the percentage tax which amounts to only 3 to 4 percent of its gross sales.”

Know which expenses are deductible
The accountant who prefers to remain unidentified says that finding the right accounting blueprint for a business is crucial to paying only the right amount of taxes.

Hhe explains: “For example, in a manufacturing firm, there are two categories of expenses that, when deducted from our gross figure, would result in reducing the value on which taxes are to be based. The first category would be administrative expenses.”

Administrative expenses, she says, include utilities expense, salary and wages of general staff, association dues and rent of office space, sales and marketing materials, and expenses that support the operation of the head office.

Wong agrees with this view, explaining that administrative expenses have nothing to do with the second category of operations—manufacturing.

“In comparison,” he says, “the manufacturing operations entail a different set of expenses such as electricity cost, and electricity cost, as we know,  increases with greater production. And to produce more items, there is a need to hire more production personnel, maybe more equipment.”

He elaborates: “As the business becomes familiar with the tax policies, it could deduct all expenses from the sales of the firm, therefore reducing the basis for either sales tax or income taxes.”

Other deductions
Wong says that although the usual deductions claimed are business expenses, there are a lot of other deductions available, such as depreciation.

“Some home-based businesses may validly claim that the depreciation of their homes may be claimed under certain conditions and circumstances,” he says.

He adds: “Also, a taxpayer can use tax credits to lower his tax payments. If you have excess input VAT, you can apply for a tax certificate from the Finance Department and use it as a tax deduction against taxes due. This would effectively lower your tax liability.”

Keep your records organized
Business owners would do well to keep their books up-to-date and professionalize their backroom operations, according to the CPA who prefers to remain unidentified. They should keep all expense receipts; record all transactions, no matter how small; follow tax payment calendars; and pay all taxes in time to avoid being penalized.

He explains: “Getting a good grasp of what are deductible expenses is one thing, but keeping and tracking your records is something that’s better done by professional accountants. It’s risky and often foolhardy to engage in bookkeeping without an accountant. This can expose businesspeople to a lot of situations detrimental to them, particularly to unscrupulous tax collectors.”

In sum, death and taxes may both be inevitable, but with enough tax knowledge and savvy, paying taxes doesn’t have to be an altogether unpleasant experience.


WGC TAXMASTER ACCOUNTING
AND BUSINESS SOLUTIONS
3/F Zeta Building, Worldnet Business Center,
191 Salcedo St., Makati City
Telephone: (02) 830-0205
www.taxmaster.com.ph

This article was originally published in the March 2009 issue of Entrepreneur Philippines.