What are the penalties for failing to properly close your business?

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Did you fail to comply with the required procedure of formally closing your business? In this article, we’ll summarize the penalties you might incur and how to properly close your business after such a delay.

Go back to the main article: How to Close a Business in the Philippines: An Ultimate Guide

 

Penalties for Not Closing a Business in the Philippines.

1. Bureau of Internal Revenue (BIR).

a. Open Cases Resulting in Compromise Penalties.

An open case is an action against the taxpayer if he/she failed to file taxes in a given period. (e.g. when you stopped operations of your business and assumed that you no longer needed to file taxes.)

The penalty ranges from Php 1,000 to Php 50,000 per return not filed. This means that at the minimum if you failed to properly close your business for 10 years, you are liable for at least Php 40,000. And that is just for income taxes. If you are registered for other taxes like VAT or OPT, then those must be considered too.

 

b. Tax Audit Resulting in Criminal and Civil Penalties.

In certain cases where you failed to properly report your taxes and the BIR conducted an audit, there shall be imposed a penalty equal to:

  • 25% surcharge based on the unpaid tax; and
  • 12% to 20% annual interest rate based on the unpaid tax.

 

2. Local Government Unit (LGU) -Barangay and City Hall.

Even if your business is non-operational, the local government still expects you to pay the business permits unless you already applied for closure of the business.

Your mayor’s permit, also called your business permit, is paid annually. Failure to do so will subject your business to a 25% surcharge and a 2% monthly interest until you paid the business permits.

 

3. Department of Labor and Employment (DOLE).

Business owners with more than 5 employees are required to register with DOLE. It is important to apply for clearance with the department to serve as proof that you don’t have any pending cases that would otherwise risk you for lawsuits.

 

How to Properly Close a Business to Avoid Additional Penalties.

Preparation of Your Case.

  1. Collect all documents you have on hand related to your business especially permits, certificates, invoices/receipts, email, and SMS conversations related to your intention to close and tax returns filed. This will help you prove that you intend to close your business in a specific period.
  2. Know what process you already completed and collect documents to support such fact (e.g. Barangay Certificate of Closure).
  3. Hire an accountant or a lawyer to help you settle your liabilities.

 

Additional Documents to Help Lower Your Penalties.

1. Affidavit of Non-Operation.

This is a notarized document stating that since the date of your supposed closure, the business has been non-operational. This shall indicate that:

  • You are the owner of the business;
  • The business is no longer operating; and
  • The business has no income starting from the date of non-operation.

Free Download: Sample Template of Affidavit of Non-Operation

 

2. Sworn Statement of Facts.

This notarized document states the relevant facts that happened between the supposed closure (where you stopped operations) and the time of application for proper closure with the relevant government agencies.

The purpose of this document is to serve as complementary evidence that you closed your business in good faith and never intended to violate the law.

Free Download: Sample Template of Sworn Statement of Facts

 

Closing the Business Properly.

After collecting all required documents, proceed with the normal process of applying for proper closure of business starting from the barangay up to the cancellation of the business name with the DTI.

 

About the Author.

Miguel Dar is a CPA and an experienced tax consultant who specializes in tax audits. He provides tax advice to various start-up enterprises and clarified tax concerns of individual taxpayers. This includes assisting clients in registering their businesses, tax and bookkeeping training for start-up businesses, settling open cases, tax planning for future tax compliance and answering tax-related inquiries. Connect with him on Linkedin.