2012 Value Added Tax Audit Program in the Philippines

In an effort to broaden the VAT taxpayer’s base to enhance  taxpayers’ voluntary compliance of value added tax in the Philippines with the end view of increasing the collection, the Bureau of Internal Revenue (BIR) has recently launched a 2012 value added tax (VAT) audit program in the Philippines covering non-large value added taxpayers in the Philippines under Revenue Memorandum Order No. 20-2012 dated August 23, 2012 (RMO No. 20-2012).

In general, BIR conducts an audit of value added taxes in the Philippines on an annual basis, and tax audit of value added taxpayers is mostly coupled with examination of other internal revenue taxes – e.g. annual audit of “all internal revenue taxes” or “income and value added tax”. This present 2012 VAT audit program in the Philippines is a new interim audit policy of the BIR to impose strict compliance with the value added tax regulations in the Philippines and improve collections in the process.

One (1) electronic letter of authority (eLA) shall be issued for each taxable quarter or for two (2) quarters by the Regional Director (RD) upon recommendation of the VAT Audit Head, and only ROs–Assessment who are part of the VAT Audit Team of their respective region shall be authorized to conduct audit and investigation of VAT returns, whether in principal or assisting capacity.

If the taxpayer has been previously selected in the RDO for regular audit of all internal revenue tax liabilities in 2011 or any prior year, significant findings on the audit of VAT should be communicated to the Chief-AD for possible risk identification in the current quarters. If an eLA has been issued under the VAT audit program and subsequently, the taxpayer becomes a candidate for regular audit  in the RDO  based on the selection criteria under the annual audit program, the request for eLA for regular audit should not include the VAT liability.

RMO No. 20-2012 covers the VAT audit or VAT investigation of VAT taxpayers under Revenue Region Nos. 5 – Caloocan, 6 – Manila [excluding taxpayers under Revenue District Office (RDO)  Nos. 35 – Romblon, Romblon, 36 – Puerto Princesa  City, Palawan and 37 – San Jose, Occidental Mindoro], 7 – Quezon City and 8 – Makati City for the 1st and 2nd quarters of 2012 VAT Returns and every quarter thereafter. Selection criteria are as follows:

• Taxpayers whose VAT compliance is below the established  2010 or 2011 industry benchmarks, whichever is available;
• Taxpayers whose VAT returns for the succeeding quarters show a substantial decrease in tax payment (Selection code: QDTP);
• Taxpayers whose VAT returns reflect substantial input taxes from importations and local purchases, such as when the total  purchases claimed exceed 75% of the total sales (Selection code: VILP);
• Taxpayers with no VAT return filed in any quarter or all of the quarters in 2011 (Selection code: NVR);
• Taxpayers who are reporting/filing “No Operations” Returns (Selection code: NOP); [Prior to the selection of the taxpayer, an ocular inspection shall be conducted to verify whether the business exists and to determine if the volume of business transactions warrants the issuance of an electronic Letter of Authority (eLA)]
• Taxpayers with a history of declaring excess input tax carry over for all the quarters of 2011 (Selection code: VTE);
• Taxpayers who have not submitted their Summary List of Sales (SLS) or Purchases (SLP) for any of the quarters of 2011 (Selection code: LSP);
• Taxpayers with substantial sales but showing net loss (Selection code: LOS);
• Taxpayers identified to have significant under-declaration of sales as a result of the Tax Compliance Verification Drive and/or other programs of the Bureau (Selection code: TCVD);
• Taxpayers filing exempt VAT returns due to availment of tax incentives or tax exemptions (Selection code: INC); and
• Such other taxpayers selected by the head of the VAT Audit Team subject to approval by the Regional Director (Selection code: RDD)

However, the following VAT returns shall be excluded from the coverage of this Order:

• Tax credit/refund claims; and
• VAT returns selected for audit by the National Investigation Division under the Enforcement Service  and by the Special Investigation Division  of the Revenue Regional Offices.

Cases covering one (1) quarter and two (2) quarters shall be reported within sixty (60) days and ninety (90) days, respectively, from date of issuance, otherwise, the RO should make a progress report stating the reason for each. The basic audit procedures prescribed in Revenue Audit Memorandum Order (RAMO) No. 1-99 shall be strictly observed by all ROs concerned, including all revenue issuances that have an impact on VAT audit, particularly those that deal on big ticket items of purchases.

In case  there are deficiency VAT liabilities as a result of the audit, the issuance of Preliminary Assessment Notice (PAN) and Final Assessment Notice (FAN) will be in accordance with existing regulations, until such time that other relevant issuances are issued later. Likewise, based on the audit findings or violations uncovered during the audit, the VAT Audit Head may recommend surveillance, closure or other enforcement activity on the taxpayer.

Let this be a good warning to non large value added taxpayer in the Philippines to be strict in monitoring their own tax compliance. There could be a lot more ways to learn and simple ignorance could not shield penalties for violation of such value added tax regulations in the Philippines.

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may please send mail at in**@ta************.org.