Dissolving a corporation

By: Arnold P. Supilanas
(Published in BusinessWorld on March 11, 2009)

The crisis has forced companies across the globe to find ways to ease the impact of recession. Some are forced to implement work day reductions to cut costs, restructure through merger or consolidation, downsize, or even shut down.

The most painful of options, closing a business, is most tedious in the country. The nod of state agencies — such as the Bureau of Internal Revenue (BIR), the Securities and Exchange Commission (SEC), the Social Security System, the Philippine Health Insurance Corp., Home Development Mutual Fund, and local governments — are required. For firms with special registrations, the nod of specific agencies, such as the Philippine Economic Zone Authority (PEZA), the Board of Investments and the Bangko Sentral ng Pilipinas, is also required.

Each agency has distinct requirements and procedures. In the case of PEZA, the business must submit a letter to the PEZA chief with supporting documents.

For the BIR, the procedures are outlined in Revenue Regulations 11-2008 issued on August 15, 2008. Under the rules, canceling a registration requires the filing of a Notice of Closure or Cessation of Business with the large taxpayers unit or the revenue district office where the taxpayer is registered.

The supporting documents required are a board resolution authorizing a shortened corporate term in the case of a domestic corporation, or the dissolution of the Philippine entity in the case of branches or representative offices of foreign firms; an application for Information Registration Update (BIR Form 1905); an inventory of goods, supplies, and capital goods; a list of unused sales invoices or official receipts and all other accounting forms such as vouchers, debit/credit memos, delivery receipts, purchase orders; the surrender of original copies of unused sales invoices or official receipts and all other unused accounting forms; and the surrender of original copies of all business notices and permits.

Taxpayers seeking the cancellation of their registration are automatically investigated by the BIR for tax liabilities.

This audit is the same as regular audits and governed by the same rules on prescription. Hence, the assessment should be issued within three years from the date of filing of the return and payment of the tax due. It may be prudent for the taxpayer planning to cease operations to review compliance with tax laws and regulations to estimate the tax exposure, and perhaps set aside that amount.

When liabilities are settled, the BIR will cancel the firm’s Certificate of Registration and TIN, and issue the Tax Clearance or Certificate of No Outstanding Tax Liability.

An application for dissolution with the SEC cannot commence until all the requirements, including the tax clearance, are complied with. This is the major cause of delay in most dissolution procedures. In the meantime, the company technically remains a registered non-operating entity. This, however, does not prevent the company from pursuing the liquidation of its properties and inventories, subject to taxes.

The proof of cancellation of business registration and tax clearance are also required if a company to be dissolved wants tax credit certificates (TCC) from the BIR for unutilized input value-added tax. In a recent case, the Court of Tax Appeals ruled that the "registration" of the company must be cancelled first before it can apply for TCCs.

The tax clearance is a mechanism to ensure that no corporation escapes taxes and liabilities simply through dissolution.

Firms planning to close operations must be aware of the tax implications as well as the requirements of government agencies to avoid shelling out money unnecessarily. In these challenging times, every peso counts.